COMMISSIONER OF INTERNAL REVENUE vs. JOHN L. MANNING et al.

The essence of a stock dividend was the segregation out of surplus account of a definite portionof the corporate earnings as part of the permanent capital resources of the corporation by thedevice of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing the profits so capitalized."FACTS: In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into25,000 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, in view of Reese's desire that uponhis death MANTRASCO and its two subsidiaries, MANTRASCO (Guam), Inc. and the PortMotors, Inc., would continue under the management of the respondents, a trust agreement on hisand 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 paymentof Reese's shares, the certificate for the 24,700 shares in Reese's name was cancelled and a newcertificate was issued in the name of MANTRASCO. On the same date, and in the meantime thatReese's 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 Reese's interest in MANTRASCO was finally paid in full bythe latter, On May 4, 1964 the trust agreement was terminated and the trustees delivered toMANTRASCO all the shares which they were holding in trust.Bureau of Internal Revenue examination disclosed that (a) as of December 31, 1958 the 24,700shares 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 todeclare the said stock dividends as part of their taxable income for the year 1958.On the basis of their examination, the BIR examiners concluded that the distribution of Reese'sshares as stock dividends was in effect a distribution of the "asset or property of the corporationas may be gleaned from the payment of cash for the redemption of said stock and distributing thesame as stock dividend." On April 14, 1965 the Commissioner of Internal Revenue issuednotices of assessment for deficiency income taxes to the respondents for the year 1958The respondents unsuccessfully challenged the assessments and, failing to secure a favorablereconsideration, appealed to the Court of Tax Appeals. On October 30, 1967 the CTA renderedjudgment absolving the respondents from any liability for receiving the questioned stock dividends on the ground that their respective one-third interest in MANTRASCO remained thesame before and after the declaration of stock dividends and only the number of shares held byeach of them had changed.Commissioner maintains that the full value (P7,973,660) of the shares redeemed from Reese byMANTRASCO which were subsequently distributed to the respondents as stock dividends in1958 should be taxed as income of the respondents for that year, the said distribution being ineffect 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 bothparties 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 corporationeither by purchase, donation, forfeiture or other means. Treasury shares are therefore issuedshares, 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 reissued 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 toitself, 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 toperpetuate their control of the corporation, though it still represents a paid-for interest in theproperty of the corporation. The foregoing essential features of a treasury stock are lacking inthe questioned shares.The manifest intention of the parties to the trust agreement was, in sum and substance, to treatthe 24,700 shares of Reese as absolutely outstanding shares of Reese's estate until they were fullypaid. Such being the true nature of the 24,700 shares, their declaration as treasury stock dividendin 1958 was a complete nullity and plainly violative of public policy. A stock dividend, beingone payable in capital stock, cannot be declared out of outstanding corporate stock, but onlyfrom retained earnings:"'A stock dividend always involves a transfer of surplus (or profit) to capital stock.' Graham andKatz, 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 cashdividend.' Congress itself has defined the term 'dividend' in No. 115(a) of the Act as meaning anydistribution made by a corporation to its shareholders, whether in money or in other property, outof its earnings or profits. In Eisner v. Macomber, 1920, 252 US 189, 40 S Ct 189, 64 L Ed 521, 9ALR 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 adefinite portion of the corporate earnings as part of the permanent capital resources of thecorporation 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 untothemselves the full worth and value of Reese's corporate holdings with the use of the veryearnings of the companies. Such package device, obviously not designed to carry out the usualstock dividend purpose of corporate expansion reinvestment, e.g. the acquisition of additionalfacilities and other capital budget items, but exclusively for expanding the capital base of therespondents in MANTRASCO, cannot be allowed to deflect the respondents' responsibilitiestoward our income tax laws. The conclusion is thus ineluctable that whenever the companiesinvolved 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. WISE & CO., INC., ET. AL., vs. MEER FACTS: Wise & Co., Inc. et. al (Plaintiff-appellants) were stockholders of Manila Wine Merchants, Ltd., a foreign corporation duly authorized to do business in the Philippines. The Board of Directors of Manila Wine Merchants, Ltd., (HK Co.), recommended to the stockholders that they adopt resolutions necessary to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation, (PH Co.), for the sum of P400,000. The HK Co. made a distribution from its earnings for the year 1937 to its stockholders. As a result of the sale of its business and assets to PH Co., a surplus was realized and the HK Co. distributed this surplus to the shareholders (Appellants included). Philippine income tax had been paid by HK Co. on the said surplus from which the said distributions were made. At a special general meeting of the shareholders of the HK Co., the stockholders by resolution directed that the company be voluntarily liquidated and its capital distributed among the stockholders. The Appellants duly filed Income Tax Returns, on which the defendant, Meer (CIR) made deficiency assessments. Plantiffs paid under written protest and sought recovery. CFI ruled in favor of CIR hence the appeal. SC HELD: CFI judgment affirmed. (Subsequent Motion for Reconsideration by Wise, et. al. denied) ISSUES and RULINGS: 1. ) Appellants contend that the amounts received by them and on which the taxes in question were assessed and collected were ordinary dividends; CIR contends that they were liquidating dividends. SC: The distributions under consideration were not ordinary dividends. Therefore, they are taxable as liquidating dividends. It was stipulated in the deed of sale that the sale and transfer of the HK Co. shall take effect on June 1, 1937. Distribution took place on June 8. They could not consistently deem all the business and assets of the corporation sold as of June 1, 1937, and still say that said corporation, as a going concern, distributed ordinary dividends to them thereafter. 2. ) Are such liquidating dividends taxable income? SC: Income tax law states that Where a corporation, partnership, association, joint-account, or insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is a taxable income or a deductible loss as the case may be. Appellants received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HK Co. which was dissolved and in process of complete liquidation. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the Income Tax Law. When the corporation was dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place. The shareholder who received the consideration for the stock earned that much money as income of his own, which again was properly taxable to him under the Income Tax Law. 3. ) Non-resident alien individual appellants contend that if the distributions received by them were to be considered as a sale of their stock to the HK Co., the profit realized by them does not constitute income from Philippine sources and is not subject to Philippine taxes, "since all steps in the carrying out of this socalled sale took place outside the Philippines." SC: This contention is untenable. The HK Co. was at the time of the sale of its business in the Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the Philippines. The HK Co. was incorporated for the purpose of carrying on in the Philippine Islands the business of wine, beer, and spirit merchants and the other objects set out in its memorandum of association. Hence, its earnings, profits, and assets, including those from whose proceeds the distributions in question were made, the major part of which consisted in the purchase price of the business, had been earned and acquired in the Philippines. As such, it is clear that said distributions were income "from Philippine sources." Commissioner of Internal Revenue vs Court of Appeals and A. Soriano Corp.301 SCRA 152 Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of original issue when the corporation was founded and 134,659 shares as stock dividend declarations. So in 1964 when Soriano died, half of the shares he held went to his wife as her conjugal share (wifes legitime) and the other half (92,577 shares, which is further broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to the estate. For sometime after his death, his estate still continued to receive stock dividends from ASC until it grew to at least 108,000 shares. In 1968, ASC through its Board issued a resolution for the redemption of shares from Sorianos estate purportedly for the planned Filipinization of ASC. Eventually, 108,000 shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted. Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against ASC for deficiency withholding tax-at-source. The CIR explained that when the redemption was made, the estate profited (because ASC would have to pay the estate to redeem), and so ASC would have withheld tax payments from the Soriano Estate yet it remitted no such withheld tax to the government. ASC averred that it is not duty bound to withhold tax from the estate because it redeemed the said shares for purposes of Filipinization of ASC and also to reduce its remittance abroad. ISSUE: Whether or not ASCs arguments are tenable. HELD: No. The reason behind the redemption is not material. The proceeds from a redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano Estate definitely profited from the redemption and such profit is taxable, and again, ASC had the duty to withhold the tax. There was a total of 108,000 shares redeemed from the estate. 25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of the shares are deemed to have been from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in

the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits such as stock dividends. It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that the latter is merely redeeming them as such. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund doctrine wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended for the protection of corporate creditors. AFISCO Insurance et al vs. CA/CTA/CIR FACTS: The 41 non-life insurance corporation entered into a Qouta Share Reinsurance Treaty with Munich, nonresident corporation. The reinsurance treaty required petitioners to form a pool. CA ruled that the pool of machinery was a partnership taxable as a corporation, and that the latters collection of premiums on behalf of its members was taxable income. ISSUE: Whether or not the insurance pool be taxable as an incorporation and its remittances be taxable as dividends. RULING: The Philippine legislative included in the concept of corporation those entities that resembled them such as unregistered partnerships and associations. Section 24 covered unregistered partnerships and even associations and 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 pool is taxable entity distinct from the individual corporate entities of the insurance companies. The tax on income is different from the tax on dividends received by said companies, thus no double taxation. Bachrach v. Seifert FACTS: The will of E. M. Bachrach provided for the distribution of the considerable property which he had left. The sixth and eighth paragraphs of the provisions of the will provide as follows: Sixth: It is my will and do herewith bequeath and devise to my beloved wife Mary McDonald Bachrach for life all the fruits and usufruct of the remainder of all my estate after payment of the legacies, bequests and gifts provided for above; and she may enjoy such usufruct and use or spend such fruits as she may in any manner wish. Eighth: It is my wish that upon the death of my beloved wife, Mary McDonald Bachrach, all my estate, personal, real and otherwise, and all the fruits and usufruct thereof which during her life pertained to her, shall be divided as follows: One-half thereof shall be given to such charitable hospitals in the Philippines as she may designate; in case she fails to designate, then said sum shall be given to the Chief Executive of these Islands who shall distribute it, share and share alike to all charitable hospitals in the Philippines excluding those belonging to the governments of the Philippines or of the United States; One-half thereof shall be divided, share and share alike by and between my legal heirs, to the exclusion of my brothers. The estate of E. M. Bachrach, as owner of 108,000 shares of stock of the AtokBig Wedge Mining Co., Inc., received from the latter 54,000 shares representing 50% stock dividend on the said 108,000 shares. Mary McDonald Bachrach, as usufructuary or life tenant of the estate, petitioned the lower court to authorize the Peoples Bank and Trust Company as administrator of the estate of E. M. Bachrach, to her the said 54,000 share of stock dividend by endorsing and delivering to her the corresponding certificate of stock, claiming that said dividend, although paid out in the form of stock, is fruit or income and therefore belonged to her as usufructuary or life tenant. Sophie Siefert and Elisa Elianoff, legal heirs of the deceased, opposed said petition on the ground that the stock dividend in question was not income but formed part of the capital and therefore belonged not to the usufructuary but to the remainderman. And they have appealed from the order granting the petition and overruling their objection. ISSUE: Is a stock dividend fruit or income, which belongs to the usufructuary, or is it capital or part of the corpus of the estate, which pertains to the remainderman? HELD: The 108,000 shares of stock are part of the property in usufruct. The 54,000 shares of stock dividend are civil fruits of the original investment. They represent profits, and the delivery of the certificate of stock covering said dividend is equivalent to the payment of said profits. Said shares may be sold independently of the original shares, just as the offspring of a domestic animal may be sold independently of its mother. Bank of America, NT v. Court of Appeals Bank of America received by registered mail an irrevocable letter of credit purportedly issued by Bank of Ayudhya Samyek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of $2,782,000.00 to cover the sale of plastic ropes and agricultural files, with Bank of America as the advising bank and Inter-Resin Industrial Corporation as beneficiary. Bank of America notified Inter-Resin of the letter of credit. Upon request by Inter-Resin for Bank of America to confirm the letter of credit, latter refused although one of its employee explained to Inter-Resin that there was no need for confirmation because the letter of credit is genuine. Inter-Resin therefore twice sought availment under the letter of credit. Bank of America issued P10,219,093 in the first availment upon being satisfied of the documents submitted by Inter-Resin. However, Bank of America stopped the processing of the second availment upon being informed by Bank of Ayudhya that the letter of credit was fraudulent. Further, upon conducting an examination of the vans sent by InterResin, it found out that they contain not ropes but plastic strips, wrappers, rags and waste materials.

Bank of America sued Inter-Resin for recovery of the money it gave under the first availment, considering the letter of credit has been disowned by Bank of Ayudhya. However, the trial court ruled in favor of Inter-Resin which was affirmed by the Court of Appeals. Supreme Court reversed the decision of the lower courts. It ruled that the crucial point of dispute in this case is whether, under the letter of credit, Bank of America has incurred any liability to the beneficiary thereof, an issue that largely is dependent on the banks participation in that transaction: as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner banks letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should have first checked the authenticity of the letter of credit with Bank of Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-Resin finds no real support in the UCP. As advising bank, Bank of America is bound only to check the apparent authenticity of the letter of credit, which it did. Websters explains that the word apparent suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge. May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents therefore were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America, has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. As a negotiating bank, Bank of America has a right of recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon. SC noted that the additional ground raised by Bank of America, i.e. that Inter-Resin sent waste instead of its products, is really of no consequence. In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents. CIR v. Burroughs FACTS :In March 1979, the branch office of Burroughs Ltd. inthe country applied with the Central Bank for authority to remitto its parent company abroad branch profit amounting toP7,647,058.00.On March 14, 1979, it paid the 15% branch profit remittancetax pursuant to Sec. 24 (b) (2) (ii)6. Based on this lawBurroughs Ltd remitted to its head office the amount of P6,499,999.30However on December 24, 1980 Burroughs Ltd. filed a writtenclaim for the refund or tax credit of the amount of P172,058.90representing alleged overpaid branch profit remittance tax.BIR ruledin favor of the refund onJanuary 21, 1980.CIR contends that there should be no refund because Memorandum Circular No. 882 dated March 17, 1982 hadrevoked and/or repealed the BIR ruling of January 21, 1980.Said memorandum circular states-Considering that the 15% branch profit remittance tax isimposed and collected at source, necessarily the tax baseshould be the amount actually applied for by the branch withthe Central Bank of the Philippines as profit to be remittedabroad. Issue : WON Burroughs Limited is entitled to a refund (in theamount of P172,058.90). Held: Yes. In a BIR ruling dated January 21, 1980 by thenActing Commissioner of Internal Revenue Hon. Efren I. Planathe 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 abroadand not on the total branch profits out of which the remittanceis to be made."What is applicable in the case at bar is still the BIR Ruling of January 21, 1980 because Burroughs Ltd. paid the branchprofit remittance tax in question on March 14, 1979 . Memorandum Circular No. 8-82 dated March 17, 1982cannot be given retroactive effect in the light of Section3277 of the National Internal Revenue Code. The prejudice that would result to private Burroughs Ltd. by aretroactive application of Memorandum Circular No. 882 isbeyond question for it would be deprived of the substantialamount of P172,058.90. Compania General de Tobacos de Filipinas vs. ManilaGR L-16619, 29 June 1963 Facts: Compania General de Tabacos de Filipinas (Tabacalera) paid the City of Manila the fixed license feesprescribed by Ordinance 3358 for the years 1954 to 1957. In 1954, City Ordinance 3634 and 3816 werepassed; where the term general merchandise found therein included all articles in Sections 123 to 148 of theTax Code (thus, also liquor under Sedctions 133 to 135). The Tabacalera paid its wholesalers and retailerstaxes. In 1954, the City Treasurer addressed a letter to an accounting firm, expressing the view that liquordealers paying the annual wholesale and retail fixed tax under Ordinance 3358 are not subject to thewholesale aand retail deaklers taxes prescribed by City Ordinances 3634, 3301, and 3816. The Tabacalera,upon learning of said stopped including quarterly sworn declaratons required by the latter ordinances, and in1957, demanded refunde of the alleged overpayment. The claim was disallowed. Issue: Whether there is a distinction between Ordinance 3358 and Ordinances 3634, 3301 and 3816, toprevent refund to the company.

Held: Generally, the term tax applies to all kinds of exactions which become public funds. Legally,however, a license fee is a legal concept quite distinct from tax: the former is imposed in the exercise ofpolice power for purposes of regulation, while the latter is imposed under the taxing power for the purpose ofraising revenues. Ordinance 3358 prescribes municipal license fees for the privilege to engage in the businessof selling liquor or alcohol beverages; considering that the sale of intoxicating liquor is (potentially) harmfulto public health and morals, and must be subject to supervision or regulation by the State and by cities andmunicipalities authorized to act in the premises. On the other hand, Ordinances 3634 , 3301 and 3816imposed taxes on the sales of general merchandise, wholesale or retail, and are revenue measures enacted bythe Municipal Board of Manila.Both a license fee and a tax may be imposed on the same business or occupation, or for selling the samearticle, without it being in violation of the rule against double taxation. The contrary view of the Treasurer inits letter is of no consequence as the government is not bound by the errors or mistakes committed by itsofficers, specially on matters of law.The company, thus, is not entitled to refund CIR v. CA, CITY TRUST BANKING CORP. FACTS: Respondent corporation Citytrust filed a refund of overpaid taxes with the BIR by which the latter denied on the ground of prescription. Citytrust filed a petition for review before the CTA. The case was submitted for decision based solely on the pleadings and evidence submitted by the respondent because the CIR could not present any evidence by reason of the repeated failure of the Tax Credit/Refud Division of the BIR to transmit the records of the case, as well as the investigation report thereon, to the Solicitor General. CTA rendered the decision ordering BIR to grant the respondent's request for tax refund amounting to P 13.3 million. ISSUE: Failure of the CIR to present evidence to support the case of the government, should the respondent's claim be granted? HELD: Not yet. It is a long and firmly settled rule of law that the Government is not bound by the errors committed by its agents. In the performance of its governmental functions, the State cannot be estopped by the neglect of its agent and officers. Although the Government may generally be estopped through the affirmative acts of public officers acting within their authority, their neglect or omission of public duties as exemplified in this case will not and should not produce that effect. Nowhere is the aforestated rule more true than in the field of taxation. It is axiomatic that the Government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. The errors of certain administrative officers should never be allowed to jeopardize the Government's financial position, especially in the case at bar where the amount involves millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy. Thus, it is proper that the case be remanded back to the CTA for further proceedings and reception of evidence. FERRER VS CIR Facts: Petitioner Antonio Porta Ferrer sold his bakery La Suiza Bakery to Juan Pons for the summer of P100,000.00. Petitioner was the sole proprietor of the said bakery from October 16, 1951 up to September 15, 1955. The assets of the bakery consisted of accounts receivable raw materials, wrapping supplies, firewood, unexpired insurance, good-will, machinery and equipment, and furniture and fixtures, with a total book value of P74,321.91. In selling the bakery, petitioner spent a total of P6,000.00. After deducting the total book value of the assets and the incidental expenses from the gross selling price, petitioner filed his income tax return, showing a net profit of P19,678.09 as having been realized from the sale of the bakery. On the basis of this amount, he paid P2,439.00 as income tax. Petitioner later requested the respondent, Commissioner of Internal Revenue, to refund the sum of P2,030.00, claiming that the bakery was a capital asset which he had held for more than twelve months, so that only 50 per cent of it was taxable under the National Internal Revenue Code considering that the profit from its sale was a long term capital gain. When no action was taken by respondent on his request, petitioner filed a petition for refund in the Court of Tax Appeals. The said Court denied petitioners claim for refund on the ground that the sale of the bakery constitute sale of individual assets, some of which were capital assets while the others were ordinary assets. But since petitioner failed to show what portion of the selling price of the bakery was fairly attributable to each asset, the Tax Court held that it could not ascertain the capital and/or ordinary gains taxes properly payable upon the sale of the business. Hence, this petition. Issues: 1. Whether the Tax Court had jurisdiction over this case; and 2. Whether or not the sale of the bakery was a sale of capital asset or of individual assets comprising the business Held: 1. The Supreme Court ruled in the negative. The rule is well settled that no question will be considered by the appellate court which has not been raised in the court below. When a party deliberately adopts a certain theory, and the case is tried and decided upon the theory in the court below, he will not be permitted to change his theory on appeal, cause to permit him to do so would be unfair to the adverse party. 2. The Supreme Court ruled that the sale of the La Suiza Bakery was a sale of individual assets comprising the business. Parenthetically, it may be noted that tax rates are graduated upwards as the total amount of income increases. But capital assets are generally held for a period in excess of a year. When held for more than a year, the profit or loss realized is reported for tax purposes only in the year that the asset was sold or exchanged even though the increment might have developed over several years or was the result of years of effort. Since the gain is taxed all in one year, a higher rate of tax would necessarily be paid be included; similarly, only a limited amount of any loss than if a part of the gain were reported each year the asset was held. In an attempt to

compensate for this, only a percentage of the gain on such sales is required to can be deducted in the year in which realized. We find that Section 34 (a) (1) of our Tax Code is patterned after Section 117 (a) (1) of the U.S. Internal Revenue Code. In interpreting this latter provision, the United States Circuit Court of Appeals held in the leading case ofWilliams v. McGowan, where it was held that Congress plainly did mean to comminute the elements of a business; plainly it did not regard the whole as "capital assets." In line with this ruling, We hold that the sale of the "La Suiza Bakery" was a sale not of a single asset but of individual assets that made up the business. And since petitioner failed to point out what part of the price he had received could be fairly attributed to each asset, the Tax Court correctly denied his claim. In order to ascertain the capital and/or ordinary gains taxes properly payable on the sale of a business, including its tangible assets, it is incumbent upon the taxpayer to show not only the cost basis of each asset, but also what portion of the selling price is fairly attributable to each asset. CIR vs Soriano Corp Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of original issue when the corporation was founded and 134,659 shares as stock dividend declarations. So in 1964 when Soriano died, half of the shares he held went to his wife as her conjugal share (wifes legitime) and the other half (92,577 shares, which is further broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to the estate. For sometime after his death, his estate still continued to receive stock dividends from ASC until it grew to at least 108,000 shares. In 1968, ASC through its Board issued a resolution for the redemption of shares from Sorianos estate purportedly for the planned Filipinization of ASC. Eventually, 108,000 shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted. Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against ASC for deficiency withholding tax-at-source. The CIR explained that when the redemption was made, the estate profited (because ASC would have to pay the estate to redeem), and so ASC would have withheld tax payments from the Soriano Estate yet it remitted no such withheld tax to the government. ASC averred that it is not duty bound to withhold tax from the estate because it redeemed the said shares for purposes of Filipinization of ASC and also to reduce its remittance abroad. ISSUE: Whether or not ASCs arguments are tenable. HELD: No. The reason behind the redemption is not material. The proceeds from a redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano Estate definitely profited from the redemption and such profit is taxable, and again, ASC had the duty to withhold the tax. There was a total of 108,000 shares redeemed from the estate. 25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of the shares are deemed to have been from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits such as stock dividends. It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that the latter is merely redeeming them as such. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund doctrine wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended for the protection of corporate creditors. NITAFAN VS CIR FACTS: The petitioners seek to enjoin CIR from making deduction of withholding taxesfrom their salaries.Petitioners contend that "any tax withheld from their emoluments orcompensation as judicial officers consti tutes a decrease or diminution of theirsalaries, contrary to the provision of Section 10, Article VIII of the 1987Constit ution mandating that during their continuance in office, their salary shallnot be decreased,' ISSUE: WON appointed and qualified judges (the petitioners) may be exempt frompayment of income tax HELD: No. This petition of the judges is then dismissed. RATIO:To resolve the legal issue raised in this petition the court looked into theintent of the framers of the Constitution who drafted the provision inquestion. The primary task in constitutional construction is to ascertainand thereafter assure the realization of the purpose of the framers and of the people in the adoption of the Constitution. The intent of the 1987 Constitutional Commission was to delete the proposedexpress grant of exemption from pay ment of income tax to members of the Judiciary, so as to "give substance to equality among the three branches of Government" (in the words of Commissioner Rigos). Commissioner Joaquin Bernasalso said that the salaries of members of the Judiciary would be subject to thegeneral income tax applied to all taxpayers. This intent became unclear in the final text of the 1987 Constitution. Having seenthe failure of not including a prohibition on the exemption of any public officer oremployee from payment of income tax, the court has authorized the continuationof the deduction of the withholding tax from the salaries of the members of theSupreme Court, as well as from the salaries of all other members of the Judiciary. CIR VS BRITISH OVERSEAS Facts: British Overseas Airways Corp (BOAC) is a 100% BritishGovernment-owned corporation engaged in international airlinebusiness and is a member of the Interline Air Transport Association, and thus, it operates air transportation services and sells transportation tickets over the routes of the other airline members. From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus, did not carry passengers and/or cargo to or from the Philippines but maintained a general sales agent in the Philippines - Warner

Barnes & Co. Ltd. and later, Qantas Airways - which was responsible for selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency income taxes against BOAC. Issue: Whether the revenue derived by BOAC from ticket sales inthe Philippines, 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. Herein, the sale of tickets in the Philippines is the activity that produced the income. The tickets exchanged hands here and payment for fares were also made here in the Philippine currency. The situs 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. PD 68, in relation to PD 1355, ensures that international airlines are taxed on their income from Philippine sources. The 2 1/2% tax on gross billings is an income tax. If it had been intended as an excise tax or percentage tax, it would have been placed under Title V of the Tax Code covering taxes on business. CIR V. AIR INDIA (TAX) Air India is a foreign corporation and an offline international carrier not engaged in the business or air transportation in the Philippines. air India sells airplane tickets in the Philippines through its general sales agent, Philippine airlines. Said tickets are serviced by Air India outside the Philippines. The Commissioner assessed against Air India an amount representing 2.55 income tax on its gross Philippine billings pursuant to Section24(b)(2) of the Tax Code, as amended, inclusive of the 50% surcharge and interest for willful neglect to file a return as provided under Section 72 of the Code. Air India appealed to the CTA. Issue: Whether the revenue derived by an international air carrier from sales of tickets in the Philippines for air transportation while having no landing rights in the country, constitutes income of said carrier from Philippine sources, and thus, taxable. Based on the doctrine enunciated in BOAC case, the revenue derived by Air India from the sales of airplane tickets, through its agent in the Philippines, must be considered as taxable income, as correctly assessed by the Commissioner.