Tax Digest pp.4-6 (Until Basilan Estates)

TAXATION 1 | B2015 CASE DIGESTS
NATIONAL DEVELOPMENT COMPANY vs. COMMISSIONER OF INTERNAL REVENUE

June 30, 1987 CRUZ, J. Mica Maurinne M. Adao Topic: Passive nco!e" n#eres# nco!e
location of the securities) bonds or notes or the place of payment) is the determining factor of the source of interest income 'ccordingly) if the obligor is a resident of the +hilippines the interest payment paid by him can have no other source than within the +hilippines The interest is paid not by the bond) note or other interest-bearing obligations) but by the obligor
SUMMARY: NDC entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels The balance payment was embodied in a promissory note which earns !" per annum interest NDC remitted to the shipbuilding companies the interest on the balance payment without withholding the necessary ta# so $%& served a warrant of distraint and levy to enforce collection CT' sustained $%& ruling (C affirmed Clearly) the interest remitted to the Japanese shipbuilders on the unpaid balance of the purchase price of the vessels ac*uired by NDC is interest derived from sources within the +hilippines sub,ect to income ta# under the then (ection 2-.b/.1/ of the N%&C
FACTS: The National Development Company .NDC/ entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels The purchase price was to come from the proceeds of bonds issued by the Central $ank %nitial payments were made in cash and through irrevocable letters of credit 1- promissory notes were signed for the balance by the NDC and) as re*uired by the shipbuilders) guaranteed by the &epublic of the +hilippines +ursuant thereto) the remaining payments and the interests thereon were remitted in due time by the NDC to Tokyo The vessels were eventually completed and delivered to the NDC in Tokyo The NDC remitted to the shipbuilders in Tokyo the total amount of 0(5-)677)!86 96 as interest .rate4 !" per annum/ on the balance of the purchase price No ta# was withheld The Commissioner then held the NDC liable on such ta# in the total sum of +!)11!)2:- 9- Negotiations followed but failed The $%& thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount The NDC went to the CT' which sustained $%& ruling e#cept for a slight reduction of the ta# deficiency in the sum of +;66 66) representing the compromise penalty Thus) this petition for certiorari. ISSUE: Whether or not the interest on the b ! n"e #ri"e is s$b%e"t to &ithho!'in( t )* RULIN+: YES RATIO: The Japanese shipbuilders were liable to ta# on the interest remitted to them under (ection :9 of the Ta# Code) thus4
DOCTRINE: 0nder the terms of the law) that the 1overnment2s right to levy and collect income ta# on interest received by foreign corporations not engaged in trade or business within the +hilippines is not planted upon the condition that 2the activity or labor 3 and the sale from which the .interest/ income flowed had its situs2 in the +hilippines The law specifies4 2%nterest derived from sources within the +hilippines) and interest on bonds) notes) or other interest-bearing obligations of residents) corporate or otherwise 2 Nothing there speaks of the 2act or activity2 of non-resident corporations in the +hilippines) or place where the contract is signed
The residence of obligor who pays the interest rather than the physical
(<C :9 Income from sources within the Philippines. .a/ 1ross income from sources within the +hilippines 3 The following items of gross income shall be treated as gross income from sources within the +hilippines4 .1/ Interest. %nterest derived from sources within the +hilippines) and interest on bonds) notes) or other interest-bearing obligations of residents, corporate or otherwise; ### ### ### The petitioner argues that the Japanese shipbuilders were not sub,ect to ta# under the above provision because all the related activities 3 the signing of the contract) the construction of the vessels) the payment of the stipulated price) and their delivery to the NDC 3 were done in Tokyo The law) however) does not speak of activity but of =source)= which in this case is the NDC This is a domestic and resident corporation with principal offices in >anila ??(ee Doctrine The law is clear The residence of the obligor .NDC/ which paid the interest under consideration) petitioner herein) is Calle +ure@a) (ta >esa) >anila) +hilippinesA and as a corporation duly organi@ed and e#isting under the laws of the +hilippines) it is a domestic corporation) resident of the +hilippines .(ec 8-.c/) N%&C / The interest paid by NDC) which is admittedly a resident of the +hilippines) is on the promissory notes issued by it C!e r!,there.ore- the interest re/itte' to the 0 # nese shi#b$i!'ers in 0 # n in 1234- 1231 n' 1235 on the $n# i' b ! n"e o. the #$r"h se #ri"e o. the vesse!s "6$ire' b, NDC is interest 'erive' .ro/ so$r"es &ithin the Phi!i##ines s$b%e"t to in"o/e t ) $n'er the then Se"tion 578b9819 o. the NIRC. There is no basis for saying that the interest payments were obligations of the &epublic of the +hilippines and that the promissory notes of the NDC were government securities e#empt from ta#ation under (ection 2;.b/B-C of the Ta# Code) reading as follows4 (<C 2; Gross Income. #### ### ### ### .b/ Exclusion from gross income. 3 The following items shall not be included in gross income and shall be e#empt from ta#ation under this Title4
### ### ### ( ! Interest on Go"ernment #ecurities. 3 %nterest upon the obligations of the 1overnment of the &epublic of the +hilippines or any political subdivision thereof) but in the case of such obligations issued after appro"al of this $ode, onl% to the extent pro"ided in the act authori&ing the issue thereof. .'s amended by (ection 7) & ' No 82/ The law invoked by NDC as authori@ing the issuance of securities is & ' No 1-69) which in fact is silent on this matter C ' No 182 as amended by C ' No :11 does carry such authori@ation but) like & ' No 1-69) does not e#empt from ta#es the interests on such securities %t is also incorrect to suggest that the &epublic of the +hilippines could not collect ta#es on the interest remitted because of the undertaking signed by the (ecretary of Dinance in each of the promissory notes that4 0pon authority of the +resident of the &epublic of the +hilippines) the undersigned) for value received) hereby absolutely and unconditionally guarantee .sic/) on behalf of the &epublic of the +hilippines) the due and punctual payment of both principal and interest of the above note There is nothing in the above undertaking e#empting the interests from ta#es NDC has not established a clear waiver therein of the right to ta# interests Ta# e#emptions cannot be merely implied but must be categorically and unmistakably e#pressed 'ny doubt concerning this *uestion must be resolved in favor of the ta#ing power Nowhere in the said undertaking do we find any inhibition against the collection of the disputed ta#es %n fact) such undertaking was made by the government in consonance with and certainly not against (ec !:.b/) (ec !- of the N%&C >anifestly) the said undertaking of the &epublic of the +hilippines merely guaranteed the obligations of the NDC but without diminution of its ta#ing power under e#isting laws %t is not the NDC that is being ta#ed The ta# was due on the interests earned by the Japanese shipbuilders %t was the income of these companies and not the &epublic of the +hilippines that was sub,ect to the ta# the NDC did not withhold %n effect) therefore) the imposition of the deficiency ta#es on the NDC is a penalt% for its failure to withhold the same from the
Japanese shipbuilders (uch liability is imposed by (ection !:.c/ of the Ta# Code Philippine Guarant% $o. ". 'he $ommissioner of Internal (e"enue) %n case of doubt) a withholding agent may always protect himself by withholding the ta# due) and promptly causing a *uery to be addressed to the C%& for the determination whether or not the income paid to an individual is not sub,ect to withholding %n case the C%& decides that the income paid to an individual is not sub,ect to withholding) the withholding agent may thereupon remit the amount of a ta# withheld (trict observance of said steps is re*uired of a withholding agent before he could be released from liability 1enerally) the law frowns upon e#emption from ta#ationA hence) an e#empting provision should be construed strictissimi *uris The petitioner was remiss in the discharge of its obligation as the withholding agent of the government and so should be held liable for its omission EF<&<DG&<) the appealed decision is 'DD%&><D
Johnson and (on 0(' royalties based on a percentage of net sales &espondent sub,ected the same to 2!" withholding ta# on royalty payments &espondent later claimed for refund of overpaid withholding ta# on royalties arguing that (C Johnson and (on 0(' is only sub,ect to 16" withholding ta# pursuant to the most-favored nation clause of the &+-0( Ta# Treaty in relation to the &+-Eest 1ermany Ta# Treaty B'rticle 12 .2/ .b/C (C held that the respondent is not entitled to a refund DOCTRINE: The phrase Hpaid under similar circumstancesI under the most favored nation clause B(ec 1:.2/.b/.iii/C of the &+-0( Ta# Treaty refers to the payment of ta#es and not the payment of the sub,ect matter of the ta# i e royalties FACTS: &espondent) (C Johnson and (on) %nc ) a domestic corporation organi@ed and operating under the +hilippine laws) entered into a license agreement with (C Johnson and (on) 0nited (tates of 'merica .0('/) a non-resident foreign corporation based in the 0 ( ' pursuant to which the respondent was granted the right to use the trademark) patents and technology owned by the latter including the right to manufacture) package and distribute the products covered by the 'greement and secure assistance in management) marketing and production from (C Johnson and (on) 0 ( ' The said Jicense 'greement was duly registered with the Technology Transfer $oard of the $ureau of +atents) Trade >arks and Technology Transfer Dor the use of the trademark or technology) respondent was obliged to pay (C Johnson and (on) 0(' royalties based on a percentage of net sales &espondent sub,ected the same to 2!" withholding ta# on royalty payments which respondent paid for the period covering July 1;;2 to >ay 1;;: in the total amount of +1)76:)--: 66 Gn Gctober 2;) 1;;:) respondent filed with the %nternational Ta# 'ffairs Division .%T'D/ of the $%& a claim for refund of overpaid withholding ta# on royalties arguing that) (C Johnson and (on) 0(' is only sub,ect to 16" withholding ta# pursuant to the most-favored nation clause of the &+-0( Ta# Treaty B'rticle 1: +aragraph 2 .b/ .iii/C in relation to the &+-Eest 1ermany Ta# Treaty B'rticle 12 .2/ .b/C &espondent claim for the refund of +;7:)277 66
CIR V. SC 0O:NSON AND SONINC.

+,,, Gon&aga-(e%es, -) -a%son $. .guilar
SUMMARY: &espondent) (C Johnson and (on) %nc ) entered into a license agreement with (C Johnson and (on) 0(' .a non-resident foreign corporation based in the 0 ( ' / pursuant to which the respondent was granted the right to use the trademark) patents and technology owned by the latter including the right to manufacture) package and distribute the products covered by the 'greement and secure assistance in management) marketing and production from (C Johnson and (on) 0 ( ' Dor the use of the trademark or technology) respondent was obliged to pay (C
The Commissioner did not act on the said claim for refund Thus) respondent filed a petition for review before the Court of Ta# 'ppeals CTA: %n favor of respondent CA: 'ffirm CT' ruling in toto ISSUES: Whether the #hr se ;# i' $n'er si/i! r "ir"$/st n"es< in Art. 1=8598b98iii9 o. the RP>US T ) Tre t, re.ers to the # ,/ent o. t ) or the # ,/ent o. ro, !ties Note: 'rt 1:.2/.b/.iii/ of the &+-0( Ta# Treaty reads4
1/ &oyalties derived by a resident of one of the Contracting (tates from sources within the other Contracting (tate may be ta#ed by both Contracting (tates 2/ Fowever) the ta# imposed by that Contracting (tate shall not e#ceed a/ %n the case of the 0nited (tates) 1! percent of the gross amount of the royalties) and b/ %n the case of the +hilippines) the least of4 .i/ 2! percent of the gross amount of the royaltiesA .ii/ 1! percent of the gross amount of the royalties) where the royalties are paid by a corporation registered with the +hilippine $oard of %nvestments and engaged in preferred areas of activitiesA and .iii/ the lowest rate of Philippine tax that ma% be imposed on ro%alties of the same /ind paid under si!i$ar circu!s#ances to a resident of a third #tate.
different ,urisdictions The &+-0( Ta# Treaty contains no similar Kmatching creditL as that provided under the &+-Eest 1ermany Ta# Treaty Fence) the ta# on royalties under the &+-0( Ta# Treaty is not paid under similar circumstances as those obtaining in the &+-Eest 1ermany Ta# Treaty Therefore) the Kmost favored nationL clause in the &+-Eest 1ermany Ta# Treaty cannot be availed of in interpreting the provisions of the &+-0( Ta# Treaty Ar($/ent o. Res#on'ent SC 0ohnson4 The phrase Hpaid under similar circumstancesI does not refer to payment of the ta# but to the sub,ect matter of the ta#) that is) royalties) because the Hmost favored nationI clause is intended to allow the ta#payer in one state to avail of more liberal provisions contained in another ta# treaty wherein the country of residence of such ta#payer is also a party thereto) sub,ect to the basic condition that the sub,ect matter of ta#ation in that other ta# treaty is the same as that in the original ta# treaty under which the ta#payer is liableA thus) the &+-0( Ta# Treaty speaks of Hroyalties of the same kind paid under similar circumstancesI RULIN+: The phrase Hpaid under similar circumstancesI under (ec 1:.2/ .b/.iii/ of the &+-0( Ta# Treaty refers to the payment of ta#es and not the payment of the sub,ect matter of the ta# i e royalties The (C was unable to sustain the position of the CT' and the C' that the phrase Hpaid under similar circumstances in 'rt 1: .2/ .b/ .iii/ of the &+0( Ta# Treaty should be interpreted to refer to payment of royalty) and not to the payment of the ta#) for the reason that the phrase Hpaid under similar circumstancesI is followed by the phrase Hto a resident of a third stateI The CT' held that HEords are to be understood in the conte#t in which they are usedI) and since what is paid to a resident of a third state is not a ta# but a royalty Hlogic instructsI that the treaty provision in *uestion should refer to royalties of the same kind paid under similar circumstances The construction of the CT' and C' is based principally on synta# or sentence structure but fails to take into account the purpose animating the treaty provisions in point To begin with) there is no law or rule pertinent to the payment of royalties which provides for the payment of royalties under dissimilar circumstances The ta# rates on royalties and the circumstances of payment thereof are the same for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such
Ar($/ent o. CIR: 0nder the &+-Eest 1ermany Ta# Treaty) the +hilippine ta# paid on income from sources within the +hilippines is allowed as a credit against 1erman income and corporation ta# on the same income %n the case of royalties for which the ta# is reduced to 16 or 1! percent according to paragraph 2 of 'rticle 12 of the &+-Eest 1ermany Ta# Treaty) the credit shall be 26" of the gross amount of such royalty To illustrate) the royalty income of a 1erman resident from sources within the +hilippines arising from the use of) or the right to use) any patent) trade mark) design or model) plan) secret formula or process) is ta#ed at 16" of the gross amount of said royalty under certain conditions The rate of 16" is imposed if credit against the 1erman income and corporation ta# on said royalty is allowed in favor of the 1erman resident That means the rate of 16" is granted to the 1erman ta#payer if he is similarly granted a credit against the income and corporation ta# of Eest 1ermany The clear intent of the Kmatching creditL is to soften the impact of double ta#ation by
payment Gn the other hand) a cursory reading of the various ta# treaties will show that there is no similarity in the provisions on relief from or avoidance of double ta#ation as this is a matter of negotiation between the contracting parties This dissimilarity is true particularly in the treaties between the +hilippines and the 0nited (tates and between the +hilippines and Eest 1ermany The &+-0( Ta# Treaty is ,ust one of a number of bilateral treaties which the +hilippines has entered into for the avoidance of double ta#ation The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the ta#payer avoid simultaneous ta#ation in two different ,urisdictions >ore precisely) the ta# conventions are drafted with a view towards the elimination of international ,uridical double ta#ation) which is defined as the imposition of comparable ta#es in two or more states on the same ta#payer in respect of the same sub,ect matter and for identical periods The apparent rationale for doing away with double ta#ation is to encourage the free flow of goods and services and the movement of capital) technology and persons between countries) conditions deemed vital in creating robust and dynamic economies %n negotiating ta# treaties) the underlying rationale for reducing the ta# rate is that the +hilippines will give up a part of the ta# in the e#pectation that the ta# given up for this particular investment is not ta#ed by the other country Thus the petitioner correctly opined that the phrase Hroyalties paid under similar circumstancesI in the most favored nation clause of the 0(&+ Ta# Treaty necessarily contemplated Hcircumstances that are ta#relatedI 1iven the purpose underlying ta# treaties and the rationale for the most favored nation clause) the concessional ta# rate of 16 percent provided for in the &+-1ermany Ta# Treaty should apply only if the ta#es imposed upon royalties in the &+-0( Ta# Treaty and in the &+-1ermany Ta# Treaty are paid under similar circumstances This would mean that respondent must prove that the &+-0( Ta# Treaty grants similar ta# reliefs to residents of the 0nited (tates in respect of the ta#es imposable upon royalties earned from sources within the +hilippines as those allowed to their 1erman counterparts under the &+-1ermany Ta# Treaty %f the state of residence does not grant some form of ta# relief to the investor) no benefit would redound to the +hilippines) i e ) increased investment resulting from a
favorable ta# regime) should it impose a lower ta# rate on the royalty earnings of the investor) and it would be better to impose the regular rate rather than lose much-needed revenues to another country The &+-0( and the &+-Eest 1ermany Ta# Treaties do not contain similar provisions on ta# crediting 'rticle 2- of the &+-1ermany Ta# Treaty e#pressly allows crediting against 1erman income and corporation ta# of 26" of the gross amount of royalties paid under the law of the +hilippines Gn the other hand) 'rticle 2: of the &+-0( Ta# Treaty) which is the counterpart provision with respect to relief for double ta#ation) does not provide for similar crediting of 26" of the gross amount of royalties paid Thus) the concessional ta# rate of 16 percent provided for in the &+1ermany Ta# Treaty cannot be applied to the most favored nation clause under the &+-0( Ta# Treaty DISPOSITIVE: C' reversed disallowed +etition for refund by respondent
CIR v. CA
Nov. 20, 1944 Mahoney, J. Dave Anastacio
SUMMARY: Don Andres Soriano formed ANSCOR, of which he owned shares of stock. Don Andres died, and ANSCOR redeemed shares of stock from the estate of Don Andres. The CIR he d ANSCOR ia! e for ta"es. The CTA re#ersed, and CA affirmed the re#ersa . The SC he d that the$ were ia! e. DOCTRINE: The general rule states that: A stock d v dend re!resent ng the trans"er o" sur!lus to ca! tal account shall not #e su#$ect to ta%. Stock di#idends, strict $ s%eakin&, re%resent ca%ita and do not constit'te income to its reci%ient. So that the mere iss'ance thereof is not $et s'!(ect to income ta" as the$ are nothin& !'t an )enrichment thro'&h increase in #a 'e of ca%ita in#estment.) The e%ce!t on !rov des that the rede&!t on or cancellat on o" stock d v dends' de!end ng on the (t &e( and (&anner( t )as &ade' s essent all* e+u valent to a
d str #ut on o" ta%a#le d v dends'( &ak ng the !roceeds thereo" (ta%a#le nco&e( (to the e%tent t re!resents !ro" ts(. The e"ce%tion was desi&ned to %re#ent the iss'ance and cance ation or redem%tion of stock di#idends, which is f'ndamenta $ not ta"a! e, from !ein& made 'se of as a de#ice for the act'a distri!'tion of cash di#idends, which is ta"a! e. +or the e"em%tin& c a'se of Section, ,3-!. to a%% $, it is indis%ensa! e that/ -a. there is redem%tion or cance ation0 -!. the transaction in#o #es stock di#idends and -c. the )time and manner) of the transaction makes it )essentia $ e1'i#a ent to a distri!'tion of ta"a! e di#idends.) ,ACTS: -I don2t think the n'm!ers3other facts are im%ortant at a . +oc's on the redem%tion. Don Andres Soriano, a citi4en and resident of the 5nited States, formed the cor%oration 6A. Soriano 7 Cia8, %redecessor of ANSCOR with a 91,:::,:::.:: ca%ita i4ation di#ided into 1:,::: common shares at a %ar #a 'e of 91::3share. ANSCOR is who $ owned and contro ed !$ the fami $ of Don Andres, who are a non;resident a iens. In 1<3=, Don Andres s'!scri!ed to 4,<>3 shares of the *,::: shares ori&ina $ iss'ed. ANSCOR2s a'thori4ed ca%ita stock was increased to 92,*::,:::.:: di#ided into 2*,::: common shares with the same %ar #a 'e. Of the additiona 1*,::: shares, on $ 1:,::: was iss'ed which were a s'!scri!ed !$ Don Andres, after the other stockho ders wai#ed in fa#or of the former their %re;em%ti#e ri&hts to s'!scri!e to the new iss'es. This increased his s'!scri%tion to 14,<>3 common shares. A month ater, Don Andres transferred 1,2*: shares each to his two sons, ?ose and Andres ?r., as their initia in#estments in ANSCOR. @$ 1<4=, ANSCOR dec ared stock di#idends. Other stock di#idend dec arations were made !etween 1<4< and Decem!er 2:, 1<>3. On Decem!er 3:, 1<>4 Don Andres died. As of that date, the records re#ea ed that he had a tota shareho din&s of 1,*,1*4 shares. *:,4<* of which are ori&ina iss'es and the !a ance of 134,>*< shares as stock di#idend dec arations. Corres%ondin& $, one;ha f of that shareho din&s or <2,*== shares were transferred to his wife, DoAa Carmen Soriano, as her con('&a share. The offer ha f
formed %art of his estate. A da$ after Don Andres died, ANSCOR increased its ca%ita stock to 92:B and in 1<>> f'rther increased it to 93:B. In the same $ear -Decem!er 1<>>., stock di#idends worth 4>,2<: and 4>,2,= shares were res%ecti#e $ recei#ed !$ the Don Andres estate and DoAa Carmen from ANSCOR. Cence, increasin& their acc'm' ated shareho din&s to 13,,,>= and 13,,,>4 common shares each. On Decem!er 2,, 1<>=, DoAa Carmen re1'ested a r' in& from the 5nited States Interna Re#en'e Ser#ice -IRS., in1'irin& if an e"chan&e of common with %referred shares ma$ !e considered as a ta" a#oidance scheme. @$ ?an'ar$ 2, 1<>,, ANSCOR rec assified its e"istin& 3::,::: common shares into 1*:,::: common and 1*:,::: %referred shares. In a etter;re% $ dated +e!r'ar$ 1<>,, the IRS o%ined that the e"chan&e is on $ a reca%ita i4ation scheme and not ta" a#oidance. Conse1'ent $, on Barch 31, 1<>, DoAa Carmen e"chan&ed her who e 13,,,>4 common shares for 13,,,>: of the %referred shares. The estate of Don Andres in t'rn e"chan&ed 11,14: of its common shares for the remainin& 11,14: %referred shares. On -une ./' 0123' !ursuant to a 4oard Resolut on' ANSCOR redee&ed 53'/// co&&on shares "ro& the Don Andres6 estate. @$ No#em!er 1<>,, the @oard f'rther increased ANSCORDs ca%ita stock to 9=*B di#ided into 1*:,::: %referred shares and >::,::: common shares. A#out a *ear later' ANSCOR aga n redee&ed 3/'/// co&&on shares "ro& the Don Andres6 estate' "urther reduc ng the latter6s co&&on sharehold ngs to 01'757. As stated in the @oard Reso 'tions, ANSCOR6s #us ness !ur!ose "or #oth rede&!t ons o" stocks s to !art all* ret re sa d stocks as treasur* shares n order to reduce the co&!an*6s "ore gn e%change re& ttances n case cash d v dends are declared. In 1<=3, after e"aminin& ANSCOR2s !ooks of acco'nt and record Re#en'e e"aminers iss'ed a re%ort %ro%osin& that ANSCOR !e assessed for deficienc$ withho din& ta";at;so'rce, for the $ear
>
1<>, and the 2nd 1'arter of 1<>< !ased on the transaction of e"chan&e and redem%tion of stocks. @IR made the corres%ondin& assessments. ANSCOR2s s'!se1'ent %rotest on the assessments was denied in 1<,3 !$ %etitioner. ANSCOR fi ed a %etition for re#iew with the CTA, the Ta" Co'rt re#ersed the r' in&. CA affirmed the r' in& of the CTA. Cence this %osition. ISSUES/ 8ON ANSCOR6s rede&!t on o" stocks "ro& ts stockholder can #e cons dered as (essent all* e+u valent to the d str #ut on o" ta%a#le d v dend( &ak ng the !roceeds ta%a#le9 YES RU:IN;: It s ta%a#le RATIO: The !one of contention is the inter%retation and a%% ication of Section ,3-!. of the 1<3< Re#en'e Act 3, which %ro#ides/ E Sec. ,3. Distri!'tion of di#idends or assets !$ cor%orations. F -!. Stock di#idends F A stock di#idend re%resentin& the transfer of s'r% 's to ca%ita acco'nt sha not !e s'!(ect to ta". Cowe#er, if a cor%oration cance s or redeems stock iss'ed as a di#idend at s'ch time and in s'ch manner as to make the distri!'tion and cance ation or redem%tion, in who e or in %art, essentia $ e1'i#a ent to the distri!'tion of a ta"a! e di#idend, the amo'nt so distri!'ted in redem%tion or cance ation of the stock sha !e considered as ta"a! e income to the e"tent it re%resents a distri!'tion of earnin&s or %rofits acc'm' ated after Barch first, nineteen h'ndred and thirteen. Sec. ,3-!. of the 1<3< NIRC was taken from the Section 11*-&.-1. of the 5.S. Re#en'e Code of 1<2,. It aid down the &enera r' e known as the %ro%ortionate test wherein stock di#idends once iss'ed form %art of the ca%ita and, th's, s'!(ect to income ta". S%ecifica $, the general rule states that: A stock d v dend re!resent ng the trans"er o" sur!lus to ca! tal account shall not #e su#$ect to ta%. Stock di#idends, strict $ s%eakin&, re%resent ca%ita and do not constit'te income to its reci%ient. So that the mere iss'ance thereof is not $et s'!(ect to income ta" as the$ are nothin& !'t an )enrichment thro'&h increase in #a 'e of ca%ita in#estment.) The e"ce%tion %ro#ides that the redem%tion or cance ation
of stock di#idends, de%endin& on the )time) and )manner) it was made, is essentia $ e1'i#a ent to a distri!'tion of ta"a! e di#idends,) makin& the %roceeds thereof )ta"a! e income) )to the e"tent it re%resents %rofits). The e"ce%tion was desi&ned to %re#ent the iss'ance and cance ation or redem%tion of stock di#idends, which is f'ndamenta $ not ta"a! e, from !ein& made 'se of as a de#ice for the act'a distri!'tion of cash di#idends, which is ta"a! e. Sim% $ %'t, de%endin& on the circ'mstances, the %roceeds of redem%tion of stock di#idends are essentia $ distri!'tion of cash di#idends, which when %aid !ecomes the a!so 'te %ro%ert$ of the stockho der. Thereafter, the atter !ecomes the e"c 'si#e owner thereof and can e"ercise the freedom of choice. Ca#in& rea i4ed &ain from that redem%tion, the income earner cannot esca%e income ta". +or the e"em%tin& c a'se of Section, ,3-!. to a%% $, it is indis%ensa! e that/ -a. there is redem%tion or cance ation0 -!. the transaction in#o #es stock di#idends and -c. the )time and manner) of the transaction makes it )essentia $ e1'i#a ent to a distri!'tion of ta"a! e di#idends.) Redem%tion is re%'rchase, a reac1'isition of stock !$ a cor%oration which iss'ed the stock ,< in e"chan&e for %ro%ert$, whether or not the ac1'ired stock is cance ed, retired or he d in the treas'r$. Gssentia $, the cor%oration &ets !ack some of its stock, distri!'tes cash or %ro%ert$ to the shareho der in %a$ment for the stock, and contin'es in !'siness as !efore. In the case, ANSCOR redeemed shares twice. @'t where did the shares redeemed come fromH If its so'rce is the ori&ina ca%ita s'!scri%tions '%on esta! ishment of the cor%oration or from initia ca%ita in#estment in an e"istin& enter%rise, its redem%tion to the conc'rrent #a 'e of ac1'isition ma$ not in#ite the a%% ication of Sec. ,3-!. 'nder the 1<3< Ta" Code, as it is not income !'t a mere ret'rn of ca%ita . On the contrar$, if the redeemed shares are from stock di#idend dec arations other than as initia ca%ita in#estment, the %roceeds of the redem%tion is additiona wea th, for it is not mere $ a ret'rn of ca%ita !'t a &ain thereon. It is not the stock di#idends !'t the %roceeds of its redem%tion that ma$ !e deemed as ta"a! e di#idends. At the time of the ast redem%tion, the ori&ina common shares owned !$ the estate
were on $ 2*,24=.* <1 This means that from the tota of 1:,,::: shares redeemed from the estate, the !a ance of ,2,=*2.* -1:,,::: ess 2*,24=.*. m'st ha#e come from stock di#idends. In the a!sence of e#idence to the contrar$, the Ta" Code %res'mes that e#er$ distri!'tion of cor%orate %ro%ert$, in who e or in %art, is made o't of cor%orate %rofits s'ch as stock di#idends. The ca%ita cannot !e distri!'ted in the form of redem%tion of stock di#idends witho't #io atin& the tr'st f'nd doctrine. Iith res%ect to the third re1'isite, ANSCOR redeemed stock di#idends iss'ed ('st 2 to 3 $ears ear ier. The time a one that a%sed from the iss'ance to the redem%tion is not a s'fficient indicator to determine ta"a!i it$. It is a m'st to consider the fact'a circ'mstances as to the manner of !oth the iss'ance and the redem%tion. The iss'ance of stock di#idends and its s'!se1'ent redem%tion m'st !e se%arate, distinct, and not re ated, for the redem%tion to !e considered a e&itimate ta" scheme. Redem%tion cannot !e 'sed as a c oak to distri!'te cor%orate earnin&s. ANSCOR in#oked two reasons to ('stif$ the redem%tions F -1. the a e&ed )fi i%ini4ation) %ro&ram and -2. the red'ction of forei&n e"chan&e remittances in case cash di#idends are dec ared. The Co'rt is not concerned with the wisdom of these %'r%oses !'t on their re e#ance to the who e transaction which can !e inferred from the o'tcome thereof. It is the )net effect rather than the moti#es and % ans of the ta"%a$er or his cor%oration). The test of ta"a!i it$ 'nder the e"em%tin& c a'se, when it %ro#ides )s'ch time and manner) as wo' d make the redem%tion )essentia $ e1'i#a ent to the distri!'tion of a ta"a! e di#idend), is whether the redem%tion res' ted into a f ow of wea th. If no wea th is rea i4ed from the redem%tion, there ma$ not !e a di#idend e1'i#a ence treatment. The test of ta"a!i it$ 'nder the e"em%tin& c a'se of Section ,3-!. is, whether income was rea i4ed thro'&h the redem%tion of stock di#idends. The redem%tion con#erts into mone$ the stock di#idends which !ecome a rea i4ed %rofit or &ain and conse1'ent $, the stockho derDs se%arate %ro%ert$. 9rofits deri#ed from the ca%ita in#ested cannot esca%e income ta". As rea i4ed income, the %roceeds of the redeemed stock di#idends can !e reached !$ income ta"ation re&ard ess of the e"istence of an$ !'siness %'r%ose
for the redem%tion. Otherwise, to r' e that the said %roceeds are e"em%t from income ta" when the redem%tion is s'%%orted !$ e&itimate !'siness reasons wo' d defeat the #er$ %'r%ose of im%osin& ta" on income. The iss'ance and the redem%tion of stocks are two different transactions. A tho'&h the e"istence of e&itimate cor%orate %'r%oses ma$ ('stif$ a cor%orationDs ac1'isition of its own shares 'nder Section 41 of the Cor%oration Code, s'ch %'r%oses cannot e"c'se the stockho der from the effects of ta"ation arisin& from the redem%tion. G#en if the said %'r%oses s'%%ort the redem%tion and ('stif$ the iss'ance of stock di#idends, the same has no !earin& whatsoe#er on the im%osition of the ta" herein assessed !eca'se the %roceeds of the redem%tion are deemed ta"a! e di#idends since it was shown that income was &enerated therefrom. The %roceeds thereof are essentia $ considered e1'i#a ent to a distri!'tion of ta"a! e di#idends. As )ta"a! e di#idend) 'nder Section ,3-!., it is %art of the )entire income) s'!(ect to ta" 'nder Section 22 in re ation to Section 21 12: of the 1<3< Code. Boreo#er, 'nder Section 2<-a. of said Code, di#idends are inc 'ded in )&ross income). As income, it is s'!(ect to income ta" which is re1'ired to !e withhe d at so'rce. DIS<OSITI=E: The Co'rt conc 'des that the J3*:,::: of the J41:,::: attri!'ta! e to the s'it is th's ta"a! e income.
E! Oriente v. Pos ' s

#eptember 0+, +,1+ 2alcolm al%cat
SUMMARY: <l Griente procured from the >anufacturers Jife %nsurance) an insurance policy on the life of its manager) ' Melhagen) designating itself as the beneficiary <l Griente paid for the premiums due thereon and charged as e#penses of its business all the said premiums and deducted the same from its gross incomes as reported in its annual income ta# returns)
which deductions were allowed upon a showing that such premiums were legitimate e#penses of its business 0pon the death of ' Melhagen) <l Griente received all the proceeds of the said life insurance policy) together with the interests and the dividends accruing thereon C%& assessed <l Griente for deficiency ta#es because <l Griente did not include as income the proceeds received from the insurance CD% held such as ta#able (C reversed DOCTRINE: %t is certain that the proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured are e#empt %t is not so certain that the proceeds of life insurance policies paid to corporate beneficiaries upon the death of the insured are likewise e#empt $ut at least) it may be said that the law is indefinite in phraseology and does not permit the court une*uivocably to hold that the proceeds of life insurance policies received by corporations constitute income) which is ta#able Jife insurance is like that of fire and marine insurance N a contract of indemnity +roceeds of life insurance) payable upon the death of the insured) are considered as indemnity rather than income to the hairs or beneficiaries who could be corporations or individuals FACTS: <l Griente in order to protect itself against the loss that it might suffer by reason of the death of its manager) ' Melhagen) who had had more than thirty-five .:!/ years of e#perience in the manufacture of cigars in the +hilippines) procured from the >anufacturers Jife %nsurance Co ) of Toronto) Canada) thru its local agent < < <lser) an insurance policy on the life of the said ' Melhagen for the sum of 5!6)666) 0nited (tates currency designating itself as the beneficiary <l Griente paid for the premiums due thereon and charged as e#penses of its business all the said premiums and deducted the same from its gross incomes as reported in its annual income ta# returns) which deductions were allowed upon a showing that such premiums were legitimate e#penses of its business 0pon the death of ' Melhagen in 1;2;) the <l Griente received all the proceeds of the said life insurance policy) together with the interests and the dividends accruing thereon) aggregating +16-);!9 88
C%& assessed <l Griente for deficiency ta#es because <l Griente did not include as income the proceeds received from the insurance
ISSUE: Ehether or not the proceeds of insurance taken by a corporation on the life of an important official to indemnify it against loss in case of his death) are ta#able as income under the +hilippine %ncome Ta# Jaw :ELD: NGT T'O'$J< RATIO: %n Chapter % of the Ta# Code) is to be found section - which provides that) ='he following incomes shall be exempt from the pro"isions of this law) (a! 'he proceeds of life insurance policies paid to beneficiaries upon the death of the insured . . .= (ection 16) as amended) in Chapter %% Gn Corporations) provides that) ='here shall be le"ied, assessed, collected, and paid annuall% upon the total net income recei"ed in the preceding calendar %ear from all sources b% e"er% corporation . . .a tax of three per centum upon such income . . = (ection 11 in the same chapter) provides the e#emptions under the law) but neither here nor in any other section is reference made to the provisions of section - in Chapter % 0nder the view we take of the case) it is sufficient for our purposes to direct attention to the anomalous and vague condition of the law %t is certain that the proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured are e#empt %t is not so certain that the proceeds of life insurance policies paid to corporate beneficiaries upon the death of the insured are likewise e#empt $ut at least) it may be said that the law is indefinite in phraseology and does not permit us une*uivocally to hold that the proceeds of life insurance policies received by corporations constitute income which is ta#able %t will be recalled that <l Griente) took out the insurance on the life of its manager) who had had more than thirty-five years2 e#perience in the manufacture of cigars in the +hilippines) to protect itself against the loss it might suffer by reason of the death of its manager Ee do not believe that this fact signifies that when the plaintiff received +16-);!9 88 from the insurance on the life of its manager) it thereby reali@ed a net profit in this amount %t is true that the %ncome Ta# Jaw) in e#empting individual
<
beneficiaries) speaks of the proceeds of life insurance policies as income) but this is a very slight indication of legislative intention %n reality) what the plaintiff received was in the nature of an indemnity for the loss which it actually suffered because of the death of its manager DISPOSITIVE: The foregoing pronouncement will result in the ,udgment being &<M<&(<D and in another ,udgment being rendered in favor of the plaintiff and against the defendant for the sum of +:)1-8 9- (o ordered) without costs in either instance
CIR v. COA
-anuar% 0,,+,,1 3ar"asa, $.-. #ai (sorr% the pro"isions are long!
affidavit of information denouncing the National Coal 'uthority .NC'/ and the +hilippine National Gil Company .+NGC/ for non- payment of ta#es totalling +2:- >illion on interest earnings of their respective money placements with +N$ since Gctober 1!) 1;8- %nvestigation by the $%& confirmed the reported ta# liabilities) and upon demands thereafter made) NC' and +NGC paid to the $%& the +1!);87)17! and +;:);!!)-9; 12 $%& Commissioner $ienvenido Tan) Jr recommended to the >inister of Dinance payment to (avellano of an informer2s reward e*uivalent to 1!" of the amount of +1!);87)17! 66 paid by NC') or +2):;9);2- 9! (avellano was paid the said amount (avellano was paid his informer2s reward in the +NGC case in the total amount of +1-)6;:):21 8; in - installments CG' rendered CG' Decision No 9-6 disallowing in audit the payment of informer2s reward to (avellano in the NC' case on the ground that payment of an informer2s reward under (ection 281of N%&C is conditioned upon the actual recovery or collection of revenues) and no such revenue or income was actually reali@ed or recovered on any benefit accrued to the government) since 2 government agencies were involved CG' also impugned the propriety of the claim for informer2s reward based on intergovernmental violations 'llowance of claims of the kind would not only place a premium upon violations committed by government agencies but also induce collusion among government offices in order to obtain the informer2s reward Commissioner of %nternal &evenue sought reconsideration of CG' Decision Fe was followed by Tirso (avellano and >rs <vangelista) former Chief of the $%& 'ccounting Division after .C($/ No 8;-6661-16- was directing the withholding of salaries or any amount due them and to several $%& officialsPemployees being held personally liable for the disallowed amount of +11):;9);2- 9! CG' denied reconsideration Consolidated +etitions4 ISSUE AND RULIN+: WON the COA 'e"ision 'is !!o&in( in $'it # ,/ent o. in.or/er?s re& r' to S ve!! no & s v !i'> NO@ CIR: the approval by the Department of Dinance of the claim for informer2s reward is conclusive upon the e#ecutive agencies concerned) respondent CG' included (ection ;6 of the 1overnment 'uditing Code of the
SUMMARY: (avellano furnished $%& with information denouncing NC' and +NCC for non-payment of ta# totaling +2:-> $%& demanded from NC' .+1!>/ and +NGC .+;:>/ 'fter recommendation to >inister of D%ncance) he was given informerLs reward e*uivalent to 1!" .+2> for NC'/ and .1-> for +NGC/ CG' rendered a decision disallowing audit in payment on ground that under section 281 of N%&C such is conditioned upon actual recovery or collection of revenues DOCTRINE: CG'2s disallowance of the informer2s reward on the ground that there was actually no revenue reali@ed or recovered as 2 government agencies were involved overlooks the fact that NC' and +NGC) possess legal personalities separate and distinct from the +hilippine government 'lthough both are 1GCCs) they perform proprietary functions Their revenues do not automatically devolve to the general coffers of the government 0nless transferred to the +hilippine government through the vehicle of ta#ation) no part of their revenues is available for appropriation by the Jegislature for e#penditure in government pro,ectsA such revenues remain said agencies2 in their entirety) to be applied to and e#pended for their own e#clusive purpose Ehen revenues are sub,ected to ta#) the portion thereof corresponding to such ta# becomes) in its own) revenue or the government accruing to the 1eneral Dund
FACTS: Tirso $ (avellano furnished the $%& with a confidential
1:
+hilippinesA there were actual cash collections of +16;);-1)7-- 19 from NC' and +NGC for non-payment of withholding ta#es on interest earnings) which amount had accrued to the 1eneral DundA (ection :17 .now 281/ of the N%&C entitling an informer to a reward for information leading to the collection of internal revenue ta#es is clear and needs no interpretationA NC' and +NGC have separate personalities from the $ureau of %nternal &evenue and 1overnment Tirso S ve!! no4 <#press statutory grant to $%& of the power to allow or disallow claims for payment of ta# informer2s reward is an implied statutory denial of the same power to the CG') which would otherwise transform said respondent into =a super ta# authority= and =undermine and dilute the substance and efficacy of the very entity created and empowered by law to collect ta#es and augment the government2s revenue collecting potentials= There was =actual= collection of ta# by the $%& from the NC' and +NGC because while said agencies are 1GCCs) they derive their income from the e#ercise of proprietary functions) which does not) in and by itself) constitute public funds So!i"itor +ener !: found CG'2s disallowance of the informer2s reward erroneous because government corporations are sub,ect to ta# under the N%&CA having personalities distinct from the government (ection 281 of the N%&C does not make any distinction among ta#payers from whom ta#es are eventually recoveredA it simply prescribes that for an informer to be entitled to the reward) the information he furnishes should result in the recovery of revenues The possibility of collusion is not sufficient basis for disallowance) since collusion cannot be assumed The determination made by the $%& should be binding upon CG' pursuant to the 1overnment 'uditing Code COA: C%& is not an aggrieved party adversely affected by the assailed decisions CG' invokes its constitutionally-vested audit ,urisdiction over all government agencies) to which) it contends) the statutorily granted power of the (ecretary of Dinance under (ection ;6) + D 1--! must yield (avellano is not entitled to the informer2s reward because there was no actual collection of revenues under the benefit-to-the-government ruleA and (avellano2s alleged information did not lead to the discovery of a fraud The payment of informer2s reward as irregular) being predicated upon violations committed by government agencies) and would have the persons named in C($ No 8;- 6661-16- .c/ held liable for participation in illegal or irregular
disbursements of public funds by reason of their respective duties SC:

#ec. ,4 P5 + 6. Pa%ment of rewards. 7hen a reward becomes pa%able b% authorit% of law for information gi"en relati"e to an% offense or for an% act done in connection with the apprehension of the offender, the reward shall, in the absence of special pro"isions, be paid in such manner as shall be prescribed b% executi"e order. 'he final determination b% the proper administrati"e authorit% pursuant to law or an% such order, as to whether or not the persons concerned are entitled to an% reward and the amount thereof, shall be conclusi"e upon the executi"e agencies concerned as regards the liabilit% of the go"ernment.
The final determination by the Department of Dinance) through the recommendation of the $%&) of (avellano2s entitlement to the informer2s reward is) under (ection ;6) conclusive only upon the e#ecutive agencies concerned CG' is not an e#ecutive agency %t is one of the : independent constitutional commissions (pecifically) it is the constitutional agency vested with the =power) authority and duty to e#amine) audit and settle all accounts pertaining to the revenue and receipts of) and e#penditures or uses of funds and property owned or held in trust by the government) or any of its subdivisions) agencies or instrumentalities = To ensure the effective discharge of its functions) it has been empowered) sub,ect to the limitations imposed by 'rticle %O .D/ of the 1;89 Constitution) to define the scope of its audit and e#amination) establish the techni*ues and methods re*uired therefore) and promulgate accounting and auditing rules and regulations) including those for the prevention and disallowance of irregular) unnecessary) e#cessive) e#travagant or unconscionable e#penditures or uses of government funds and properties The final determination made by the Dinance Department cannot bind respondent CG' or foreclose its review thereof in the e#ercise of its constitutional function and duty to ensure that public funds are e#pended and used in conformity with law To hold otherwise would be to ignore the clear mandate and the e*ually clear implications of #ection 1, .rticle I8 (5!of the
+,9: $onstitution pro"iding that)3o law shall be passed exempting an% entit% of the go"ernment of its subsidiar% in an% guise whate"er, or an% in"estment of public funds, from the *urisdiction of the $ommission on .udit.
's held in 5ingcong "s. Guingona, -r., et al) Not only is the CG' vested with the power and authority) but it is also charged with the duty) to e#amine) audit and settle all accounts pertaining to the e#penditures or uses of funds owned by) or pertaining to) the 1overnment or any of its
11
subdivisions) agencies) or instrumentalities That authority e#tends to the accounts of all persons respecting funds or properties received or held by them in an accountable capacity .(ection 27) + D No 1--!/ %n) the e#ercise of its ,urisdiction) it determines whether or not the fiscal responsibility that rests directly with the head of the government agency has been properly and effectively discharged and whether or not there has been loss or wastage of government resources %t is also empowered to review and evaluate contracts 'nd) after an audit has been made) its auditors issue a certificate of settlement to each officer whose account has been audited and settled in whole or in part) stating the balances found due thereon and certified) and the charges or differences arising from the settlement by reason of disallowances) charges or suspensions This is not to say) however) that the disallowance in audit by respondent CG' is in itself final The same may be set aside and nullified by the Cout) if done with grave abuse of discretion The informer2s reward granted to petitioner (avellano is based on (ection :17 .now 281/ of the National %nternal &evenue Code %t reads)
#ec. 09+. Informers reward to persons instrumental in the disco"er% of "iolation of the 3ational Internal (e"enue $ode and in the disco"er% and sei&ure of smuggled goods. (+! ;or "iolation of the 3ational Internal (e"enue $ode. .n% person except an internal re"enue official or emplo%ee, or other public official, or his relati"e within the sixth grade of consanguinit%, who "oluntaril% gi"es definite and sworn information, not %et in the possession of the <ureau of Internal (e"enue, leading to the disco"er% of frauds upon internal re"enue laws or "iolation of an% of the pro"isions thereof, thereb% resulting in the reco"er% of re"enues, surcharges and fees and=or the con"iction of the guilt% part% and=or imposition of an% fine or penalt%, shall be rewarded in the sum e>ui"alent to fifteen per centum of the re"enues, surcharges or fees reco"ered and=or fine or penalt% imposed and collected. 'he same amount of reward shall also be gi"en to an informer where the offender has offered to compromise the "iolation of law committed b% him and his offer has been accepted b% the $ommissioner and in such a case, the fifteen per centum reward fixed herein shall be based on the amount agreed upon in the compromise and collected from the offender; Pro"ided, 'hat should no re"enues, surcharges or fees be actuall% reco"ered or collected, such person shall not be entitled to a reward) Pro"ided, further, 'hat the information mentioned herein shall not refer to a case alread% pending or pre"iousl% in"estigated or examined b% the $ommissioner or an% of his deputies, agents or examiners, or the #ecretar% of ;inance or an% of his deputies or agents) Pro"ided, finall%, 'hat the reward pro"ided herein shall be paid under the regulations issued b% the $ommissioner of Internal (e"enue with the appro"al of the #ecretar% of ;inance.
personalities separate and distinct from the +hilippine government 'lthough both are 1GCCs) they perform proprietary functions Their revenues do not automatically devolve to the general coffers of the government 0nless transferred to the +hilippine government through the vehicle of ta#ation) no part of their revenues is available for appropriation by the Jegislature for e#penditure in government pro,ectsA such revenues remain said agencies2 in their entirety) to be applied to and e#pended for their own e#clusive purpose Ehen revenues are sub,ected to ta#) the portion thereof corresponding to such ta# becomes) in its own) revenue for the government accruing to the 1eneral Dund That the informer2s reward was sought and given in relation to ta# delin*uencies of government agencies provides no reason for disallowance The law on the matter makes no distinction whatsoever between delin*uent ta#payers in this regard) whether private persons or corporations) or public or *uasi-public agencies) it being sufficient for its operation that the person or entity concerned is sub,ect to) and violated) revenue laws) and the informer2s report thereof resulted in the recovery of revenues %t is elementary that where the law does not distinguish) none must be made ?bi lex non distinguit nec nos distinguere debemos. 'lso) mere possibility of collusion to obtain the informer2s reward is not sufficient ground for disallowance Collusion cannot be presumed Fere) there is no showing of collusion between (avellano and any official or employee of the $%& or the Department of Dinance Neither is there any evidence to overcome the presumption of regularity en,oyed by the official acts of the $%& and the Department of Dinance in approving the claim of petitioner (avellano for informer2s reward The delin*uencies of these agencies are not condoned) much less rewarded %t is the person whose information led to the discovery of their transgressions who is being rewarded 'lthough this results in a reduction in the amount of revenues actually received) the net effect is that the government still gains from the remaining amount paid) which otherwise would have been lost to it DISPOSITIVE: consolidated petitions are 1&'NT<D Decisions of CG' set aside
CG'2s disallowance of the informer2s reward on the ground that there was actually no revenue reali@ed or recovered as 2 government agencies were involved overlooks the fact that NC' and +NGC) possess legal
12
R /n ni v. Co//issioner o. Intern ! Reven$e

#eptember +1, +,,@ Ernesto 5. .costa Paolo A. <ernardo
The >otion for &econsideration of the afore*uoted decision filed by the losing parties was subse*uently denied by the (C The &egional Trial Court of +asay was afterwards designated by the (C to e#ecute the ,udgment %t issued an Grder of partial writ of e#ecution4 9 the rent ! in"o/e o. the #ro#erties n' i/#rove/ents .ro/ 123A $# to M , =1- 1225 in the /o$nt o. P57-BA2-=3C.44D and b/ the 1;8! appraised value of the properties in the amount of +22):7-)666 66A +!66)666 66 moral damagesA +266)666 66 e#emplary damages and 16" of said amounts as attorney2s fees) plus 7" legal interest on the totality of the amounts from the time the ,udgment became final until fully paid Gn July 1;) 1;;:) the # rties- pursuant to the (C case aforecited) entere' into tri# rtite (ree/ent setting forth the following terms4 =2 To e#peditiously terminate said proceedings) the parties .e#cluding >oti and Nirmla &amnani/ hereb, set the /one, v !$e o. the s i' 0$'(/ent- in"!$'in( the other /onet r, & r's '$e S#s. Ish& r #rovision !!, t P3C Mi!!ion The final and total monetary awards to (ps %shwar could be more than +7! >illion %t could also be less than said amount Conse*uently) without waiting for the Court2s determination aforesaid) parties agree to suspend hearings on valuation and proceedings in e#ecution of the ,udgment in 1 & No 8!-;- and 1 & No 8!-;7 Thereafter) Commissioner of %nternal &evenue) Jiwayway Min@ons-Chato) issued a $%& ruling (he informed the losing parties that as payors of the +7! >illion) they are constituted as the withholding agents of the :6" final income ta# provided in (ection 22.b/) in relation to (ections !6.a/ and !1.a/ of the Ta# Code The amount to be withheld is Twenty >illion Gne Fundred Difty Thousand .+26)1!6)666 66/ +esos) broken down as follows4 :6" final income ta# on +7!)666)666 66 3 +1;)!66)666 66 1" documentary stamp ta# on +7!)666)666 66 3 7!6)666 66 333333
SUMMARY: (pouses &amnani were parties in a case decided by the (C The (C decided in favor of the spouses and against Choithram C &amnani) >oti C &amnani) Nirmla M &amnani and Grtigas and Co Jtd +artnership Thereafter) both the (pouses and the losing parties entered into an agreement which set the money value of the ,udgment provisionally at +7! million The Commissioner of %nternal &evenue thereafter issued a $%& ruling (he informed the losing parties) that as payors of the +7! >illion) they are constituted as the withholding agents of the :6" final income ta# on the whole +7! million The (pouses &amnani then filed a petition for review with the CT' to set aside the *uestioned $%& ruling DOCTRINE: (estated4 +ayment of a money ,udgment regarding a case as per agreement of the parties constitutes ta#able passive income Berbatim, from the case4 The rest of the income earned by way of money ,udgment per agreement of the parties constitutes ta#able income Bpassive incomeC to the (pouses &amnani sub,ect to the income ta# under (ection 21.f/ of the N%&C) in the same manner as citi@ens of the +hilippines FACTS: (pouses %shwar Jethmal &amnani and (onya Jethmal &amnani .(pouses &amnani/ were parties in a case decided by the (upreme Court .(C/ on >ay 9) 1;;1) The (C in this case decided in favor of the spouses and against Choithram C &amnani) >oti C &amnani) Nirmla M &amnani and Grtigas and Co Jtd +artnership .losing parties/
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Total 3 +26)1!6)666 66 QQQQQQQQQQQ Dor the Commissioner) (ection 22.b/ of the Ta# Code is the applicable provision of ta#ing the receipt of the income by non-resident 'merican citi@en) such as rents) casual gains) profits) and income %nasmuch as the compromise settlement arose from a money ,udgment involving ownership over real property) the income is ta#able in the +hilippines notwithstanding the fact that the recipients thereof) (pouses &amnani) are 'merican citi@ens) as provided in 'rticle 9.1/ of the &+-0( Ts# Treaty where the location of the real property is the situs of income ta#ation and not the residence of the alienator The (pouses &amnani did not agree with $%& &uling so in a letter they re*uested the Commissioner to reconsider the opinions) arguing that4 They are resident aliens contrary to the ruling2s declaration that they are non-resident aliens not doing business in the +hilippinesA The money ,udgment rendered in their favor is the nature of a mere return of capitalPinvestment and hence must not be sub,ect to the income ta# %n an effort to put more teeth to this afore*uoted $%& ruling) the Commissioner served a Earrant of 1arnishment to the <*uitable $anking Corporation) the drawee bank) to distrain and garnish the che*ues issued in favor of (pouses &amnani in the amounts of +16)666)666 66 and +1!)666)666 66 to cover the payment of the final income ta# of +19):-6)666 66 The (pouses &amnani then filed a petition for review with the Court of Ta# 'ppeals They are asking the CT' to set aside the *uestioned $%& ruling declaring them to be non-resident aliens not doing business in the +hilippines and sub,ecting the money ,udgment) e#cluding the award for damages) to the income ta# ISSUES: .1/ EGN petitioners are resident aliensA and B&elevantC .2/ EGN the money ,udgment issued in their favor are sub,ect to income ta# RULIN+: 1 ResA 2 Res RATIO:
Ee agree with the (pouses &amnani that they are a resident alien for income ta# purposes a (ection 26.f/ of the National %nternal &evenue Code .N%&C/ defines a resident alien as an =individual whose residence is within +hilippines and who is not a citi@en thereof= i <vidence adduced during the trial convinced this Court that %shwar &amnani2s stay in the +hilippines can no longer be considered as transient b (ection ! of &evenue &egulations No 2 delineates the distinction between a person who can be considered a resident and one who is not by the following description4 i =(<C ! Definition 3 ' 2non-resident alien individual2 means an individual 3 ii .a/ Ehose residence is not within the philippinesA and iii .b/ Eho is not a citi@en of the +hilippines c 'n alien actually present in the +hilippines who is not a mere transient or so,ourner is a resident of the +hilippines for purposes of the income ta# Ehether he is a transient or not is determined by his intentions with regard to the length and nature of his stay i ' mere floating intention indefinite as to time) to return to another country is not sufficient to constitute him a transient %f he lives in the +hilippines and has no definite intention as to stay) he is a resident ii Gne who comes to the +hilippines for a definite purpose which in its nature may be promptly accomplished is a transient iii $ut if his purpose is of such a nature that an e#tended stay may be necessary for its accomplishment) and to that end the alien makes his home temporarily in the +hilippines) 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 = d %t can be gleaned from the above description that the law on income Ta#ation provides a more liberal interpretation of who may be considered a resident alien e The establishment of a home even temporarily here in the +hilippines for the accomplishment of a purpose even if he has the intention to return to his domicile abroad categori@es an individual as a resident
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There is no doubt that %shwar &amnani is an 'merican citi@en who fre*uently comes to the +hilippines for the most part of the year to oversee his various investments as shown by his passport entries g The then Commissioner of %mmigration even approved the change of his status of admission from temporary visitor to immigrantPresident alien under (ection 1:.e/ of the +hilippine %mmigration 'ct 2 %t is clear from the Grder of Erit of <#ecution that only the amount of +2-)89;)27! 66 represents rental income from the lease of the sub,ect properties and improvements of (pouses &amnani a (pouses &amnani admitted the receipt of rental income amounting to +2-)89;)27! 66 i &ental income is sub,ect to !" withholding ta# Thus) the amount of +2-)89;)27! 66) representing rental income) should be sub,ect to the !" withholding ta# pursuant to (ection !6.b/ of the N%&C) in relation to (ection 1.c/ of &evenue &egulations No 7-8!) as amended ii Drom the facts presented by the (C) it has been established that in 1;77 the (pouses have invested 0(51!6)666 66 or about +766)666 66 .0(51!6)666 66 # +- 66P0(51 66 in 1;77/ in real estate in the +hilippines The amount of +766)666 66) representing the capital %nvested in the real estate business in the +hilippines in 1;77) formed part of the money ,udgment when the court declared and awarded the appraised value of the properties and improvements as of 1;8! in the amount of +22):7-)666 66 Thus) the capital investment of +766)666 66 .0(51!6)666 66/ should NGT therefore form part of the ta#able base for income ta# purposes since this is not income but a mere return on capital iii TF0() The !" withholding ta# on the rental income of +2-)89;)27! 66 or the amount of +1)2-:);7: 2! should be withheld by the losing parties) as payors of the (pouses b The CT' agrees that the moral and e#emplary damages as well as the attorney2s fees are NGT sub,ect to income ta# Fowever) the Commissioner failed to recogni@e that the
capital investment of +766)666 66 should likewise be e#cluded from the computation of the gross income for 1;;: ". The rest o. the in"o/e e rne' b, & , o. /one, %$'(/ent #er (ree/ent o. the # rties "onstit$tes t ) b!e in"o/e to the S#o$ses R /n ni s$b%e"t to the in"o/e t ) $n'er Se"tion 518.9 o. the NIRC- in the s /e / nner s "itiEens o. the Phi!i##ines. d 's a resident alien) the (pouses are also entitled to deductions and personal and additional e#emptions Durthermore) as a resident alien) &amnani is re*uired to file an income ta# return declaring therein the income awarded to him by the Court2s ,udgment) amounting to +!9)266)666 66 in the year he received such income The amount of +!9)266)666 66 less allowable deductions) either itemi@ed or optional standard deductions .-6"/) personal and additional e#emptions if any) shall be the net ta#able income sub,ect to the income ta# under (ection 21.f/ of the N%&C e The income ta# due and payable shall be net of the creditable withholding ta# on rental income amounting to +1)2-:);7: 2! and the income ta# paid on 'pril 1!) 1;;- amounting to +:)82:)621 22 f $ased on the above discussion and in reference to the amounts awarded to herein petitioner by the &egional Trial Court of +asay) the income ta# liability of the (pouses &amnani is computed herein below as follows4 i Total >oney Judgment .1;;:/ +7!)666)666 66 ii Jess4 1/ capital investment +766)666 66 2/ moral damages !66)666 66 :/ e#emplary damages 266)666 66 -/ attorney2s fees 7)!66)666 669)866)666 66 333333 333333 1ross %ncome +!9)266)666 66 Jess4 -6" Gptional (tandard Deductions 22)886)666 66 333333 Net %ncome +:-):26)666 66Jess4 +ersonal <#emptions .&' 9179/ 18)666 66 333333 Net Ta#able %ncome +:-):62)666 66
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QQQQQQQQQQQ %ncome Ta# Due +16)2-9)266 66 Jess4 %ncome Ta# paid on -P1!1;- :)82:)621 22 !" Eithholding ta# onrentals 1)2-:);7: 2! 333333 %ncome Ta# +ayable +!)186)21! !: QQQQQQQQQQQ DISPOSITIVE:The FIR R$!in(s re SET ASIDE. S#o$ses R /n ni re "onsi'ere' resi'ent !ien t ) b!e In the s /e / nner s resi'ent "itiEen $n'er Se"tion 51 8.9 o. the NIRC. The !osin( # rties re hereb, ORDERED TO WIT::OLD the /o$nt o. P1-57=-23B.5C re#resentin( the CG &ithho!'in( t ) on the rent ! o. P57-BA2-=3C.44. S#o$ses R /n ni re !so hereb, ORDERED to # , ''ition ! in"o/e t ) s in the /o$nt o. PC-1B4-51C.C= #!$s interest "o/#$te' .ro/ #ro/$!( tion o. 'e"ision $nti! .$!!, # i'. DISSENTIN+ OPINION4 CONCURRIN+ OPINION4
HAMORA vs. CIR n' CTA

2a% 1+, +,@1 Paredes, -. (on
ordinary and necessary e#penses paid or incurred during the ta#able year) in carrying on any trade or business .Mol -) >ertens) Jaw of Dederal %ncome Ta#ation) sec 2! 6:) p :69/ .1/ (ince promotion e#penses constitute one of the deductions in conducting a business) same must testify these re*uirements Claim for the deduction of promotion e#penses or entertainment e#penses must also be substantiated or supported by record showing in detail the amount and nature of the e#penses incurred .N F Man (ocklan) Jr v Comm of %nt &ev A :: $T' !--/ .2/ &epresentation e#penses fall under the category of business e#penses which are allowable deductions from gross income) if they meet the following conditions4 i that to be deductible) said business e#penses must be ordinary and necessary e#penses paid or incurred in carrying on any trade or businessA ii that those e#penses must also meet the further test of reasonableness in amountA iii that when some of the representation e#penses claimed by the ta#payer were evidenced by vouchers or chits) but others were without vouchers or chits) documents or supporting papersA iv that there is no more than oral proof to the effect that payments have been made for representation e#penses allegedly made by the ta#payer and about the general nature of such alleged e#pensesA v that accordingly) it is not possible to determine the actual amount covered by supporting papers and the amount without supporting papers) the court should determine from all available data) the amount properly deductible as representation e#penses FACTS: 1 >ariano Samora) owner of the $ay Miew Fotel and Darmacia Samora) >anila) filed his income ta# returns the years 1;!1 and 1;!2 2 The C%& found that he failed to file his return of the capital gains derived from the sale of certain real properties and claimed deductions which were not allowable : The collector re*uired him to pay the sums of +-:)9!8 !6 and +9)72! 66) as deficiency income ta# for the years 1;!1 and 1;!2 - Samora filed case in CT' *uestioning the deficiency income ta#
SUMMARY: 1 Samora is contesting the deficiency income ta# assessed by the C%& 2 The C%& disallowed half of the promotion e#penses which he deducted in computing his net income : (C held that the disallowance was proper being the promotion e#penses being claimed was not used e#clusively for business purposes but also for personal purposes and the promotion e#pense was not supported by receipts DOCTRINE: 1 %n computing net income) there shall be allowed as deductions all the
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CT' modified the decision appealed from and ordered Samora to pay the reduced total sum of +:6)2!8 66 .+22);86 66 and +9)298 66) as deficiency income ta# for the years 1;!1 and 1;!2) respectively/
Samora contention4 1 CT' erred in disallowing +16)-98 !6 as promotion e#penses incurred by his wife for the promotion of the $ay Miew Fotel and Darmacia Samora a Samora is claiming that his wife incurred +26);!9 66 as promotion e#penses and the whole amount should be allowed as deductions and not only half of it or +16)-98 !6 b The +26);!9 66 was allegedly spent by >rs <speran@a ' Samora .wife of >ariano/) during her travel to Japan and the 0nited (tates to purchase machinery for a new Tiki-Tiki plant) and to observe hotel management in modern hotels 2 CT' erred in disallowing :-T" per annum as the rate of depreciation of the $ay Miew Fotel $uilding but only 2-T" ISSUEIS: 1 EGN the disallowance of a part the promotion e#penses properU 2 EGN the proper rate of depreciation is 2-T"U RATIO: 1 R<() as a general rule, in computing net income, promotion expense is a deductible item, being part of the ordinar% and necessar% expenses in carr%ing on an% trade or business. Pro"ided, promotion expenses or entertainment expenses must also be substantiated or supported b% record showing in detail the amount and nature of the expenses incurred. 2 R<() the proper rate of depreciation is 2-T" RULIN+: 2 %n computing net income) there shall be allowed as deductions all the ordinary and necessary e#penses paid or incurred during the ta#able year) in carrying on any trade or business .Mol -) >ertens) Jaw of Dederal %ncome Ta#ation) sec 2! 6:) p :69/ .1/ (ince promotion e#penses constitute one of the deductions in conducting a business) same must testify these re*uirements Claim for the deduction of promotion e#penses or entertainment e#penses must also be substantiated or supported by record showing in detail the
amount and nature of the e#penses incurred .N F Man (ocklan) Jr v Comm of %nt &ev A :: $T' !--/ .2/ Not all of >rs SamoraLs e#penses came under the category of ordinary and necessary e#pensesA part thereof constituted her personal e#penses i (he went abroad on a combined medical and business trip ii No receipt whatsoever) were submitted to e#plain the alleged business e#penses) or proof of the connection which said e#penses had to the business or the reasonableness of the said amount of +26);!9 66 iii There having been no means by which to ascertain which e#pense was incurred by her in connection with the business of >ariano Samora and which was incurred for her personal benefit) the Collector and the CT' in their decisions) considered !6" of the said amount of +26);!9 66 as business e#penses and the other !6") as her personal e#penses .:/ Ehile in situations like the present) absolute certainty is usually no possible) the CT' should make as close an appro#imation as it can) bearing heavily) if it chooses) upon the ta#payer whose ine#actness is of his own making .-/ &epresentation e#penses fall under the category of business e#penses which are allowable deductions from gross income) if they meet the following conditions4 i that to be deductible) said business e#penses must be ordinary and necessary e#penses paid or incurred in carrying on any trade or businessA ii that those e#penses must also meet the further test of reasonableness in amountA iii that when some of the representation e#penses claimed by the ta#payer were evidenced by vouchers or chits) but others were without vouchers or chits) documents or supporting papersA iv that there is no more than oral proof to the effect that payments have been made for representation e#penses allegedly made by the ta#payer and about the general nature of such alleged e#pensesA v that accordingly) it is not possible to determine the actual amount covered by supporting papers and the amount without supporting papers) the court should determine from all available data) the amount properly deductible as representation e#penses 2 Normally) an average hotel building is estimated to have a useful life of !6 years
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$ut inasmuch as the useful life of the building for business purposes depends to a large e#tent on the4 i suitability of the structure to its use and location) ii its architectural *uality) iii the rate of change in population) iv the shifting of land values) v as well as the e#tent and maintenance and rehabilitation vi %t is allowed a depreciation rate of 2-T" corresponding to a normal useful life of only -6 years .1;!! +F Dederal Ta#es) +ar 1176-V/ Conse*uently) the stand of Samora cannot be sustained
.1/ The e#pense must be ordinary and necessary .2/ %t must be paid or incurred within the ta#able year) and .:/ %t must be paid or incurred in carrying on a trade or business %n addition) not only must the ta#payer 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 ta#payer that an item of e#pense is ordinary and necessary does not ,ustify its deduction FACTS: This case involves 2 CT' cases wherein petitioner <sso (tandard <astern %nc Ls claims for refund of overpaid income ta#es were denied by the CT' - CT' Case 12!14 <((G deducted from its gross income .1%/ for 1;!;) as part of its or'in r, n' ne"ess r, b$siness e)#enses) the amount it had spent for drilling and e#ploration of its petroleum concessions The Commissioner of %nternal &evenue disallowed this claim on the ground that Hthe e#penses should be capitali@ed and might be written off as a loss only when a Kdry holeL should result o %n its amended return) <((G asked for a refund of +:2:)92; 66 for its abandonment as dry holes of several of its oil wells %t also claimed as ordinary and necessary e#penses +:-6)822 6- representing / r(in .ees it had paid to the C$ on its profit remittances to its New Rork head office C%& granted a ta# credit of only +221)6:: 66) disallowing the deduction for margin fees - CT' Case 1!!84 C%& assessed <((G a deficiency income ta# of +:79);;- 66 for year 1;76) plus 18" interest of +77)2:8 ;2 Total Q +-:-)2:2 ;2 This deficiency arose from the disallowance of the margin fees of +1)227)7-9 92 paid by <((G to C$ on its profit remittances o <((G settled the deficiency assessment by applying the ta# credit mentioned above and paying under protest the additional amount %t later claimed the refund of its alleged overpayment on the interest on its deficiency income ta# <((G4 the 18" interest should have been imposed NGT on the total deficiency but only on the difference between the total deficiency and its ta# credit
DISPOSITIVE: %N M%<E F<&<GD) the petition in each of the aboveentitled cases is dismissed) and the decision appealed from is affirmed) without special pronouncement as to costs
ESSO STANDARD v. CIR

-ul% :, +,9, $ru&, -. 5enn
SUMMARY: <((G claims for refund of its overpaid income ta#es for the years 1;!; and 1;76 %t says that the margin fees it paid Central $ank on its profit remittances to its New Rork head office must be considered as an ordinary and necessary business e#pense) deductible from its gross income The C%& disagreed and said that the margin fees are not allowed as deductible business e#penses 0pon appeal) the CT' agreed with the C%& The (C agreed with C%& and CT' and held that margin fees are not ordinary and necessary business e#penses deductible from gross income DOCTRINE: Ehen a ta#payer claims a deduction) he must point to some specific provision of the statute in which that deduction is authori@ed and must be able to prove that he is entitled to the deduction which the law allows 'n item of e#penditure) in order to be deductible under (ection :6.a/.1/ of N%&C must fall s*uarely within its language (T'T0TG&R T<(T GD D<D0CT%$%J%TR4 To be deductible as a business e#pense) : conditions are imposed4
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C%&4 denied <((GLs claim 18" must be on the entire amount of the deficiency ta# C%&4 denied <((GLs claim for refund of overpayment of its 1;!; and 1;76 income ta#es 2argin fees paid to $< could not be considered taxes or allowed as deductible business expenses. <((G appealed to CT' and sought refund of overpayment) claiming that margin fees were deductible from GI either as (+! tax or as (0! an ordinar% and necessar% business expense. <ven if the margin fees were not deductible) there was still an overpayment representing the e#cess interest CT' denied <((GLs claim for refund representing margin fees $0T sustained its claim for e#cess interest The (C upheld the CT'Ls decision re4 e#cess interest <((G appealed the CT' decision denying its claims for refund of the margin fees
ISSUES: 1. EGN &' 266;1 is a police power measure or a revenue measure .%f it is a revenue measure) then the margin fees paid by <((G should be deductible from its 1% under (ec :;W of N%&C/ N police powerX 2 %f margin fees are not ta#es) EGN they are necessary and ordinary business e#penses) deductible from 1% N NGX RULIN+: 1 &' 266; is a police power measure The margin fee was imposed by the (tate not in the e#ercise of its power of ta#ation) but of its police power >argin fees are not ta#es 2 >argin fees are not necessary and ordinary business e#penses deductible form 1% RATIO: 1 <((G4 >argin fees are T'O<( 's seen from the background and legislative history of the >argin Dee Jaw) &' 266; was nothing
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less than a revival of the 19" e#cise ta# on foreign e#change imposed by &' 761 This was a revenue measure proposed by +res Carlos + 1arcia to balance the budget for 1;!;-1;76 The measure was one of the ma,or sources of revenue used to finance the ordinary operating e#penditures of the government - CT' as cited by (C4 Gnly in e#tremely doubtful matters of interpretation does legislative history of an act of Congress become important o There are at least 2 cases where the Court has held that a margin fee is NGT ' T'O but an e#action designed to curb the e#cessive demands upon our international reserve o $altex Phil. ". .cting $ommissioner of $ustoms) ' margin levy on foreign e#change is a form of e#change control or restriction designed to discourage imports and encourage e#ports) and ultimately) Kcurtail any e#cessive demand upon international reserveL in order to stabili@e the currency $y its nature) the margin levy is part of the rate of e#change as fi#ed by the government ' ta# is levied to provide revenue for government operations) while the proceeds of the margin fee are applied to strengthen our countryLs international reserve o $hamber of .griculture ". $<) ' ta# is a levy for the purpose of providing revenue fro government operations) while the proceeds of the 26" retention are applied to strengthen the C$Ls international reserve (C CGNCJ0(%GN4 The margin fee was imposed by the (tate in the e#ercise of its police power and not its power of ta#ation 2 <((G4 if the margin fees are not ta#es) they are nevertheless ordinary and necessary business e#penses deductible from 1% The margin fees were paid for <((GLs remittance as part of its profits to the NR head office (uch remittance was an e#penditure necessary and proper for the conduct of its corporate affairs (C4 (ec :6 .a/ of N%&C is the applicable provision
(ec :6 Deductions form gross income %n computing net income) there shall be allowed as deductions .a/ <#penses4
&' 266;4 'n 'ct to 'uthori@e the Central $ank of the +hilippines to <stablish a >argin Gver $anksL (elling &ates of Doreign <#change
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TAXATION 1 | B2015 CASE DIGESTS .1/ In general C 'll ordinary and necessary e#penses paid or incurred during the ta#able year in carrying on any trade or businessY ### .2/ Expenses allowable to non-resident alien indi"iduals and foreign corporations C %n the case of non-resident alien individual or a foreign corporation) the e#penses deductible are the necessary e#penses paid or incurred in carrying on any business or trade conducted &ithin the Phi!i##ines e)"!$sive!,.
%t will be Kor'in r,? when it connotes a payment which is normal in relation to the business of the ta#payer and the surrounding circumstances The term KordinaryL does not re*uire that the payments be habitual or normal in the sense that the ta#payer makes them often The payment may be uni*ue or non-recurring The right of deduction depends in each case on the particular facts and the relation of the payment to the type of business o CT' did not err when it held that Hthe margin fees are NGT e#penses in connection with the production or earning of <((GLs incomes in the +hil They were e#penses incurred in the disposition of said incomesA e#penses for the remittances of funds after they have already been earned by <((GLs +hilippine branch (ince the margin fees were incurred for the remittance of funds to <((GLs head office in NR) which is a separate and distinct income ta#payer from the +hilippine branch) for its disposal abroad) it can never be said that the margin fees were appropriate and helpful in the de"elopment of E##DEs business in the Philippines exclusi"el% or were incurred for the purposes proper to the conduct of the affairs of <((GLs +hilippine branch e#clusively or for the purpose of reali@ing a profit or minimi@ing a loss in the +hilippines e#clusively <((G failed to show that the remittance to the head office of part of its profits was made in furtherance of its own trade or business %t merely presumed that all corporate e#penses are necessary and appropriate in the absence of a showing that they are illegal or ultra "ires. (uch assumption is wrong The paramount rule is that claims for deductions are a matter of legislative grace and do not turn on mere e*uitable considerationsY The ta#payer in every instance has the burden of ,ustifying the allowance of any deduction claimed CGNCJ0(%GN4 <((G) having assumed an e#pense properly attributable to its head office) cannot now claim this as an ordinary and necessary e#pense paid or incurred in carrying its o&n trade or business
%n .tlas $onsolidated 2ining ". $I(, the (C laid down the rules on the deductibility of business e#penses o Ehen a ta#payer claims a deduction) he must point to some specific provision of the statute in which that deduction is authori@ed and must be able to prove that he is entitled to the deduction which the law allows o 'n item of e#penditure) in order to be deductible under (ection :6.a/.1/ of N%&C must fall s*uarely within its language o (T'T0TG&R T<(T GD D<D0CT%$%J%TR4 To be deductible as a business e#pense) : conditions are imposed4 .-/ The e#pense must be ordinary and necessary .!/ %t must be paid or incurred within the ta#able year) and .7/ %t must be paid or incurred in carrying on a trade or business o %n addition) not only must the ta#payer 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 ta#payer that an item of e#pense is ordinary and necessary does not ,ustify its deduction The terms Kordinary and necessaryL have no ade*uate or satisfactory definitions There are) however) certain guiding principles worthy of serious consideration o Grdinarily) an e#pense will be considered as Kne"ess r,L where the e#penditure is appropriate and helpful in the development of the ta#payerLs business
DISPOSITIVE: CT' decision denying refund affirmed
2:
CB COSKINS #. CIR -DG LGON.
+ n" ,"o vs. C.I.R.

.pril 04, +,@+ $oncepcion, -. ;rancis
a reconsideration) which was partly granted by reducing it to +17)876 :1 1ancayco urged another reconsideration but no action was taken on this re*uest C%& issued a warrant of distraint and levy against the properties of 1ancayco for the satisfaction of his deficiency income ta# liability The municipal treasurer of issued a notice of sale of said property at public auction 1ancayco filed a petition to the CT' but the latter held he is liable for ordered +17)876 :1 There are two 2 civil remedies for the collection of internal revenue ta#es4 .a/ by distraint of personal property and levy upon real propertyA and .b/ by ,udicial action The first may not be availed of e#cept within : years after the =return is due or has been made = 1ancayco2s income ta# return for 1;-; was filed on >ay 16) 1;!6 so the warrant of distraint and levy issued on >ay 1!) 1;!7) was illegal and void The ,udicial action in the Ta# Code may be resorted to within ! years from the date the return has been filed) if there has been no assessment) or within ! years from the date of the assessment made within the statutory period The C%& made three : assessments4 .a/ the original assessment of +;)9;: 72) on >ay 12) 1;!6A .b/ the first deficiency income ta# assessment of >ay 1-) 1;!1) for +2;)!!- 6!A and .c/ the amended deficiency income ta# assessment of 'pril 8) 1;!:) for +17)876 :1 ISSUES: Ehether or not the Darming e#penses are deductible from the net income RATIO: No) they are capital e#penditures) not ordinary and necessary e#penses RULIN+: + n" ,"o r($es that the five-year period for the ,udicial action should be counted from >ay 12) 1;!6) the date of the original assessment) because the income ta# for 1;-;) he says) could have been collected from him since then SC: (aid assessment was) however) not for the deficiency income ta# involved in this proceedings) but for +;)9;: 72) which he paid Fence) there never had been any cause for a ,udicial action against him) and) per force) no statute of limitations to speak of) in connection with said sum of +;)9;: 72 The 2nd assessment cannot apply since it was reconsidered on
SUMMARY: 1ancayco was arguing that his farm e#penses should be deducted from the computation of the net income as an ordinary and necessary e#pense (C held that No evidence has been presented as to the nature of the said =farming e#penses= other than the bare statement of 1ancayco that they were spent for the =development and cultivation of his property= No specification has been made as to the actual amount spent for purchase of tools) e*uipment or materials) or the amount spent for improvement C%& claims that the entire amount was spent e#clusively for clearing and developing the farm which were necessary to place it in a productive state %t is not) therefore) an ordinary e#pense but a capitol e#penditure DOCTRINE: 'n item of e#penditure) in order to be deductible under the Ta# Code as ordinary and necessary business e#penses) must fall s*uarely within the language of the statutory provision (uch section is intended primarily) although not always necessarily) to cover e#penditures of a recurring nature where the benefit derived from the payment is reali@ed and e#hausted within the ta#able year 'ccordingly) if the result of the e#penditure is the ac*uisition of an asset which has an economically useful life beyond the ta#able year) no deduction of such payment may be obtained under the provisions of the statute %n such cases) deduction must be obtained under the provisions of the statute which permit deductions for amorti@ation) depreciation) depletion or loss FACTS: (antiago 1ancayco filed his income ta# return for 1;-; 2 days later) C%&) Collector of %nternal &evenue.C%&/ issued a notice advising him that his income ta# liability for 1;-; is +;)9;: 72) which he paid on >ay 1!) 1;!6 C%& wrote 1ancayco stating that upon investigation) there was still due a deficiency income ta# for 1;-; of +2;)!!- 6! 1ancayco sought
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1ancayco2s re*uest The last assessment is what 1ancayco contested in the amended petition filed by him with the CT' Thus) the five-year period should be counted from 'pril 8) 1;!:) so that the statute of limitations does not bar the present proceedings) instituted on 'pril 12) 1;!7) if it is a ,udicial action + n" ,"o "! i/s a deduction of 2 items) namely4 .a/ for farming e#penses) +29)-!; 66A and .b/ for representation e#penses) +8);:: -! SC: (ection :6 of the Ta# Code partly reads4 .a/ <#penses4 .1/ %n 1eneral 3 'll the ordinar% and necessar% e#penses paid or incurred during the ta#able year in carr%ing on an% trade or business) including a reasonable allowance for salaries or other compensation for personal services actually renderedA traveling e#penses while away from home in the pursuit of a trade or businessA and rentals or other payments re*uired to be made as a condition to the continued use or possession) for the purposes of the trade or business) of property to which the taxpa%er has not ta/en or is not ta/ing title or in which he has no e*uity Gn whether the farming e#penses are such ordinary and necessary e#penses deductible from the net income it was held that4 F3o e"idence has been presented as to the nature of the said Gfarming expensesG other than the bare statement of Ganca%co that the% were spent for the Gde"elopment and culti"ation of his propert%G. 3o specification has been made as to the actual amount spent for purchase of tools, e>uipment or materials, or the amount spent for impro"ement. $I( claims that the entire amount was spent exclusi"el% for clearing and de"eloping the farm which were necessar% to place it in a producti"e state. It is not, therefore, an ordinar% expense but a capitol expenditure. %n computing net income) no deduction shall be allowed in respect of any amount paid out for new buildings or for permanent impro"ements ) or betterments made to increase the "alue of any property or estate H (ection :1 of the Ta# Code provides that4 F(a! General (ule In computing net income no deduction shall in an% case be allowed in respect of (+! Personal, li"ing, or famil% expenses;
(0! .n% amount paid out for new buildings or for permanent impro"ements, or betterments made to increase the "alue of an% propert% or estate; (1! .n% amount expended in restoring propert% or in ma/ing good the exhaustion thereof for which an allowance is or has been made; or xxxH <#penses incident to the ac*uisition of property follow the same rule as applied to payments made as direct consideration for the property Nondeductible e#penses include amounts paid in connection with geological e#plorations) de"elopment and subdividing of real estateA clearing and gradingA restoration of soil) drilling wells) architects2s fees and similar types of e#penditures %ee &'CTR () Disallowance of 1ancayco2s claim for representation e#penses is ,ustified by the record) for) apart from the absence of receipts) invoices or vouchers of the e#penditures in *uestion) he could not specify the items constituting the same) or when or on whom or on what they were incurred DISPOSITIVE: Judgment of the CT' is 'DD%&><D 1ancayco is liable for deficiency ta# of +17)876 :1
Co//issioner o. C$sto/s vs Co$rt o. T ) A##e !s

2a% 0,, +,:+ 2a/alintal, -. Bictor
SUMMARY: +hilippine 'cetylene imported a gas tank from the 0nited (tates %t was assessed by the Commissioner of Customs a special import ta# The company paid in protest 0pon appeal to the CT') the company was held to be entitled to a refund The (C reversed DOCTRINE: (ection 7 of &' 1:;- is ambiguous This being the case) the statutory construction principle that ta# e#emptions are held strictly against the ta#payer) and if not e#pressly mentioned in the law must be within its purview by clear legislative intent is applicable
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FACTS: +hilippine 'cetylene Company .the company/ is engaged in the manufacture of o#ygen) acetylene and nitrogen) and the packaging of J+1 in cylinders and tanks (ometime in 1;!9) the company imported from the 0nited (tates a custom-built J+1 tank %t was then assessed by the Commissioner of Customs .the commissioner/ + :)78: as special import ta# The company paid in protest 'ccording to the manager of the company) the gas tank is simply a large cylinder which is used as a container for J+1 obtained from the Calte# refinery in $atangas and transported to the companyLs plant in >anila The J+1 does not undergo any chemical change and is sold to consumers in the same state) e#cept that the gas is pumped into smaller containers to be sold 0pon appeal to the CT') the CT' held that the company is entitled to a refund Thus) the commissioner appealed to the (C ISSUES: EGN +hilippine 'cetylene is an industry e#empt from special import ta# under (ection 7 of &' 1:;-2 -Z NG EGN the ambiguity of (ection 7 should be construed in favor of +hilippine 'cetyleneLs e#emption -Z NG .relevant/ RULIN+: +hilippine 'cetylene is not e#empt from the special import ta# RATIO: 1 The (C upheld the contention of the commissioner) which it *uoted verbatim %t goes as follows4 %n the e#empting provisions of &' 1:;-) the e#empted items are divided into separate and distinct enumerations The first group of e#empted industries refers e#clusively to those falling under the new and necessary industries as defined in &epublic 'ct No ;61 %n the second) the term =industries= is classed together with the terms miners) mining enterprises) planters and farmers %f Congress really intended to
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give the term =industries= its ordinary and general meaning and thus grant ta# e#emption to all ventures and trades falling under the said ordinary and general definition) it should have eliminated the words =new and necessary industries2 and 2mining enterprises= since these two ventures are already covered by the term =industries= in its ordinary and general meaning Gn the other hand) the fact that the language of the law specifically segregates new and necessary industries under &epublic 'ct No ;61 among those entitled to the ta# e#emption) in effect) restricts the meaning and scope of the word =industries I 2 (ection 7 of &' 1:;- is ambiguous This being the case) the statutory construction principle that ta# e#emptions are held strictly against the ta#payer) and if not e#pressly mentioned in the law must be within its purview by clear legislative intent is applicable 's such) +hilippine 'cetylene has to pay the special import ta# DISPOSITIVE: CT' reversed Costs against +hilippine 'cetylene
+OODRIC: INTERNATIONAL RUFFER CO. v. COLLECTOR OF INTERNAL REVENUE

$'. $ase 3o. @9 Iuciano, 3oel $hristian D. I am not sure of this is the correct $'. case.
The ta# provided for in section one of this 'ct shall not be imposed against the importation into the +hilippines of machinery andPor raw materials to be used by new and necessary industries as determined in accordance with &epublic 'ct numbered Nine Fundred and GneA A machinery) e*uipment) accessories and spare parts) for the use of industries) miners) mining enterprises planters and farmersA
SUMMARY: 1oodrich has this policy of re*uiring its staff to be members of athletic and social clubs for the purpose of establishing contracts with prospective customers and to entertain customers Dor its ta#able year 1;!2) 1oodrich declared as deductibles Hrepresentation e#penses I These e#penses are comprised of athletic and social clubs dues and entertainment e#penses C%& disallowed the deduction and assessed 1oodrich with deficiency income ta# 1oodrich appealed DOCTRINE: Eith respect to club dues) it has been held that where a corporation re*uires its officers to be members of social or athletic clubs to promote its business) and the club dues are paid by corporation) such dues are D<D0CT%$J< as ordinary and necessary business e#penses
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's regards the portion of the representation e#penses pertaining to entertainment e#penses) it has been sufficiently proven that said e#penses were incurred to entertain 1oodrichLs customers 3D'E) 'his is an .2E35E5 5E$I#ID3; I canEt find the original decision as of the time of this writing FACTS: I reconstituted the facts based from this 1-page amended decision since I ha"e not read the original decision. %t appears that 1oodrich re*uired the members of its staff to be members of athletic and social clubs for the purpose of establishing contracts with prospective customers and to entertain customers 1oodrich claims that the e#penses incurred from these activities as &<+&<(<NT'T%GN <O+<N(<( ' portion of these e#penses pertain to club dues and the rest to entertainment e#penses 1oodrich declared these e#penses for 1;!2 .amounting to +:6)1:8 88/ are deductible from its ta#able income Fence) 1oodrich deducted the said amount Fowever) the C%& disallowed this deduction and assessed 1oodrich with a deficiency ta# of +8)-:; 0UNE B- 123= DECISION OF T:E CTA: 1 The CT' reversed 1oodrichLs assessment for 1;!1 2 $ut affirmed the 1;!2 assessment : Thus) 1oodrich was ordered to pay deficiency income ta# for 1;!2 .+8)-:;/ +OODRIC:?S MOTION FOR RECONSIDERATION4 1oodrich filed an >& as regards the affirmance of the 1;!2 assessment %t contends that the finding is not supported by evidence ISSUE4 EGN the said e#penses are deductible RULIN+: R<(X :ELD: (emember that the (EP(E#E3'.'ID3 E8PE3#E# are composed of) a. $lub dues b. Entertainment expenses
CJ0$ D0<( '&< D<D0CT%$J< Eith respect to club dues) it has been held that where a corporation re*uires its officers to be members of social or athletic clubs to promote its business) and the club dues are paid by corporation) such dues are D<D0CT%$J< as ordinary and necessary business e#penses <NT<&T'%N><NT <O+<N(<( '&< 'J(G D<D0CT%$J< 's regards the portion of the representation e#penses pertaining to entertainment e#penses) it has been sufficiently proven that said e#penses were incurred to entertain 1oodrichLs customers 1oodrich) as a matter of policy) re*uired its officers to be members of social clubs) for purposes of establishing contracts with prospective customers) particularly those who own automobiles The officers entertained 1oodrichLs customers at these clubs and the e#penses incurred were reimbursed to the former %t was also established that said e#penses were incurred and actually paid in 1;!2 DISPOSITIVE: Dispositive portion of the June 8) 1;7: decision is amended 1oodrich not liable for deficiency income ta#
CIR v. P ! n" - 0r.

Dctober 0,, +,@@ (egala, -. 2an&ano) I onl% put the ruling with respect to the prescription issue as to ma/e this digest concise.
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SUMMARY: +alanca Jr received shares of stocks from his deceased father and was assessed for estate ta#es Fe paid his ta# due but incurred interests thereon for delin*uent payment Fe paid the delin*uency interests The following year) he applied as deductions to his gross income the delin*uency interests he has paid Dor the second time he was assessed estate and inheritance ta#es on the same shares of stocks +alanca again paid interests for delin*uency 'gain) he applied the delin*uency interests as deductions on his gross income (ince at that time he has already paid his income ta#es) he was asking for a refund of the e#cess ta#es he has paid The issue here is whether interests on ta#es for delin*uent payment may be considered as interests on indebtedness as to be allowed as deduction under (ection :6.b/ .1/ of the Ta# Code The (C ruled) in this case) that although ta#es and indebtedness are the two different things) interests paid on delin*uency payments may be considered as interests paid on indebtedness DOCTRINE4 Ehile the distinction between =ta#es= and =debts= was recogni@ed in this ,urisdiction) the variance in their legal conception does not e#tend to the interests paid on them) at least insofar as (ection :6 .b/ .1/ of the National %nternal &evenue Code is concerned FACTS: -(ometime in July) 1;!64 the late Don Carlos +alanca) (r donated in favor of his son) +alanca Jr ) 12)!66 shares of stock in Ja Tonde[a) %nc Dor failure to file a return on the donation +alanca Jr was assessed the sums of +;9)7;1 2:) +2-)--2 81 and P7A-B3B.A4 as gift ta#) 2!" surcharge and interest) respectively) which he paid on June 22) 1;!! ->arch 1) 1;!74 the +alanca Jr filed with the $ureau of %nternal &evenue his income ta# return for the calendar year 1;!!) claiming) a deduction for interest amounting to +;)967 -! and reporting a ta#able income of +7!);82 12 Gn the basis of this) he was assessed the sum of P51-4C5.21 as income ta# which he paid -November 16) 1;!74 the +alanca Jr filed an amended return for the calendar year 1;!!) claiming additional deduction in the amount of P7A-B3B.A4 representing interest paid on the donee2s gift ta#) thereby
reporting a ta#able net income of +18)11: -2 and a ta# due thereon in the sum of P=-13A.44 -The claim for deduction was based on the provisions of (ection :6.b/ .1/ of the Ta# Code) which authori@es the deduction from gross income of interest # i' &ithin the t ) b!e ,e r on in'ebte'ness ' claim for the refund of alleged overpaid income ta#es for the year 1;!! amounting to P1A-BBC.41) which is the difference between the amount of P51-4C5.41 and of P=-13A.44) was filed together with this amended return $%& denied the claim for refund ->eanwhile) the $ureau of %nternal &evenue considered the transfer of 12)!66 shares of stock of Ja Tonde[a %nc to be a transfer in contemplation of death pursuant to (ection 88.b/ of the National %nternal &evenue Code Conse*uently) the C%& assessed against the +alanca the sum of +1;1)!;1 72 as estate and inheritance ta#es on the transfer of said 12)!66 shares of stock The amount of +19)662 9- paid by the +alanca Jr as gift ta#) including interest and surcharge was applied to his estate and inheritance ta# liability Gn the ta# liability of +1;1)!;1 72) the petitioner paid the amount of P34-CB1.B4 s interest .or 'e!in6$en",. -'ugust 12) 1;!84 the +alanca Jr filed an amended income ta# return for the calendar year 1;!!) claiming) in addition to the interest deduction of +;)697 -! appearing in his original return) a deduction in the amount of P34-CB1.B4) representing interest on the estate and inheritance ta#es on the 12)!66 shares of stock) thereby reporting a net ta#able income for 1;!! in the amount of +!)-66 :2 and an income ta# due thereon in the sum of +-28 66 'ttached to this amended return was a letter wherein +alanca Jr re*uested the refund of +26)72- 61 which is the difference between the amounts of +21)6!2 61 he paid as income ta# under his original return and of +-28 66 -C%& now seeks the reversal of the CT'2s ruling (pecifically) the issue with CT'2s determination that the amount paid by +alanca for interest on his delin*uent estate and inheritance ta# is deductible from the gross income for that year under (ection :6 .b/ .1/ of the &evenue Code) and) that said +alanca2s claim for refund has not prescribed CIR?s Ar($/ent: ' ta# is not an indebtedness Debts are due to the government in its corporate capacity) while ta#es are due to the government in its sovereign capacity ' debt is a sum of money due upon contract
2*
e#press or implied or one which is evidenced by a ,udgment Ta#es are imposts levied by government for its support or some special purpose which the government has recogni@ed %n view of this distinction) C%& submits that the deductibility of =interest on indebtedness= from a person2s income ta# under (ection :6.b/ .1/ cannot e#tend to =interest on ta#es I ISUES: 1. WON n interest # i' 'e!in6$ent # ,/ent o. est te n' inherit n"e t ) " n be "onsi'ere' s n interest on in'ebte'ness s to be !!o&e' s 'e'$"tion on P ! n" ?s (ross in"o/e* YES. Ehile =ta#es= and =debts= are distinguishable legal concepts) in certain cases as in the case at bar) on account of their nature) the distinction becomes inconse*uential The term =debt= is properly used in a comprehensive sense as embracing not merely money due by contract) but whatever one is bound to render to another) either for contract or the re*uirements of the law Ehere statutes impose a personal liability for a ta#) the ta# becomes at least in a broad sense) a debt (ome 'merican authorities hold that Dederal ta#es are debts %n our ,urisdiction) the rule is settled that although ta#es already due have not) strictly speaking) the same concept as debts) they are obligations that may be considered as such %n $ommissioner of Internal (e"enue "s. Prieto ) the (C e#plicitly announced that while the distinction between =ta#es= and =debts= was recogni@ed in this ,urisdiction) the variance in their legal conception does not e#tend to the interests paid on them) at least insofar as (ection :6 .b/ .1/ of the National %nternal &evenue Code is concerned Thus) 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 %t is here conceded that the interest paid by +alanca was in conse*uence of the late payment of her donor2s ta#) and the same was paid within the year it is sought to be deducted (ection :6.b/ .1/ of the Ta# Code reads4
(ec :6 Deductions from gross income 3 %n computing net income there shall be allowed as deductions 3 ### ### ### =%nterest4 .1/ %n general 3 The amount of interest paid within the ta#able year on indebtedness) e#cept on indebtedness incurred or continued to purchase or carry obligations the interest upon which is e#empt from ta#ation as income under this Title
The term =indebtedness= as used in the Ta# Code of the 0( containing similar provisions as in the above-*uoted section has been defined as the unconditional and legally enforceable obligation for the payment of money 7ithin the meaning of that definition, it is apparent that a tax ma% be considered an indebtedness %t follows that the interest paid by +alanca Jr for the late payment of his donor2s ta# is deductible from his income under section :6 .b/ of the Ta# Code Gf course) what was involved in the Prieto case was the donor2s ta# while the present suit pertains to interest paid on the estate and inheritance ta# This difference submits no appreciable conse*uence to the rationale of this Court2s previous determination that interests on ta#es should be considered as interests on indebtedness within the meaning of (ection :6.b/ .1/ of the Ta# Code This interpretation upon the said section was predicated on the congressional intent) not on the nature of the ta# for which the interest was paid 5. WON the "! i/ .or re.$n' h s !re ', #res"ribe'* NO- CIRJs "ontention on #res"ri#tion is $nten b!e.
DISPOSITIVE: (C affirmed the CT' and ruled in favor of +alanca Jr
CIR v. V' . 'e Prieto

#eptember 14, +,@4 -. Gutierre& 5a"id -erome 2arcelo
SUMMARY: Consuelo donated real property to her - children (he was delin*uent in paying her corresponding donorLs ta#) hence she had to pay an additional +!!);98 7! Thus she claimed this amount as a deduction for
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her %T& for the same year The C%& did not allow the deduction CT'4 C%& decision reversed (C4 CT' affirmed DOCTRINE: Dor interest to be deductible from gross income) it must be shown that there is 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 The term =debt= for the purposes of ta# deductions) is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another) either by contract) or by law such as ta#es FACTS: December -) 1;-!- the respondent Consuelo J Mda de +rieto conveyed by way of gifts to her - children real property with a total assessed value of +8;2)-;9 !6 'fter the filing of the gift ta# returns) the Commissioner of %nternal &evenue appraised the real property donated for gift ta# purposes at +1)2:1)278 66) and assessed the total sum of +119)967 !6 as donor2s gift ta#) interest and compromises due Gf the total sum of +119)967 !6 paid by Consuelo on 'pril 2;) 1;!-) the sum of +!!);98 7! represents the total interest on account of delin*uency in paying on time This sum of +!!);98 7! was claimed as deduction by Consuelo in her income ta# return for 1;!+etitioner C%&) however) disallowed the claim and as a conse*uence of such disallowance assessed Consuelo +21)-16 :8 as deficiency income ta# due on the aforesaid +!!);98 7!) including interest up to >arch :1) 1;!9) surcharge and compromise for the late payment Consuelo challenged the C%& ruling with the CT' CTA: C%& decision reversed Deduction of +!!);98 7! is valid Note4 Dor interest to be deductible) it must be shown that there is 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 %t is here conceded that the interest paid by Consuelo was in conse*uence of the late payment of her donor2s ta#) and the same was paid within the year it is sought to be declared The only *uestion to be determined) as stated by the parties) is whether or not such interest was paid upon an indebtedness within the contemplation of the Ta# Code part on deductions to gross income
ISSUE n' RULIN+: WON the +!!);98 7!) which is the interest on account of delin*uency in paying the donorLs ta#) can be claimed as deduction in the income ta# return YES RATIO: The relevant law provides4
(<C :6 5eductions from gross income 3 %n computing net income there shall be allowed as deductions 3 .b/ %nterest4 .1/ In general 3 The amount of interest paid within the ta#able year on indebtedness) e#cept on indebtedness incurred or continued to purchase or carry obligations the interest upon which is e#empt from ta#ation as income under this Title
The term =indebtedness= as used in the Ta# Code of the 0( containing similar provisions as in the above-*uoted section has been defined as an unconditional and legally enforceable obligation for the payment of money Drom that definition) it is apparent that a ta# may be considered an indebtedness 's ruled by this court in (ambrano ". CT'4 K'lthough ta#es already due have not) strictly speaking) the same concept as debts) they are) however) obligations that may be considered as such L The term =debt= is properly used in a comprehensive sense as embracing not merely money due by contract but whatever one is bound to render to another) either for contract) or the re*uirement of the law Ehere statute imposes a personal liability for a ta#) the ta# becomes) at least in a broad sense) a debt ' ta# is a debt for which a creditor2s bill may be brought in a proper case %t follows that the interest paid by Consuelo for the late payment of her donor2s ta# is deductible from her gross income under section :6.b/ above *uoted The above conclusion finds support in the established ,urisprudence in the 0( after whose laws on %ncome Ta# Jaw ours has been patterned %n that ,urisdiction) the uniform ruling is that interest on ta#es is interest on indebtedness and is deductible To sustain the proposition that the interest payment in *uestion is not deductible for the purpose of computing respondent2s net income) petitioner C%& relies heavily on section 86 of &evenue &egulation 2 promulgated by the DGD) which provides that the word \ta#es2 means ta#es proper and no deductions should be allowed for amounts representing interest) surcharge) or penalties incident to delin*uency The court below) however) held section 86 as inapplicable to this case because while it implements sections :6.c/ of the Ta# Code governing deduction of ta#es) Consuelo seeks to come under
2=
section :6.b/ of the same Code providing for deduction of interest on indebtedness Ee find the lower court2s ruling to be correct Contrary to petitioner2s belief) the portion of section 86 of &evenue &egulation 2 under consideration has been part and parcel of the development to the law on deduction of ta#es in the 0( Thus) >ertens in his treatise says4 =+enalties are to be distinguished from ta#es and they are not deductible under the heading of ta#s = %nterest on state ta#es is not deductible as ta#es This notwithstanding) courts in that ,urisdiction) however) have invariably held that interest on deficiency ta#es are deductible) not as ta#es) but as interest (ection 86 of &evenue &egulation 2) merely incorporated the established application of the ta# deduction statute in the 0() where deduction of =ta#es= has always been limited to ta#es proper and has never included interest on delin*uent ta#es) penalties and surcharges To give to the *uoted portion of section 86 of our %ncome Ta# &egulations the meaning that the petitioner gives it would run counter to the provision of section :6.b/ of the Ta# Code and the construction given to it by 0( courts 's already stated) section 86 implements only section :6.c/ of the Ta# Code) or the provision allowing deduction of ta#es) while herein Consuelo seeks to be allowed deduction under section :6.b/) which provides for deduction of interest on indebtedness %n conclusion) we are of the opinion and so hold that although interest payment for delin*uent ta#es is not deductible as ta# under (ection :6.c/ of the Ta# Code and section 86 of the %ncome Ta# &egulations) the ta#payer is not precluded thereby from claiming said interest payment as deduction under section :6.b/ of the same Code DISPOSITIVE: The decision sought to be reviewed is affirmed) without pronouncement as to costs
documentary and science stamp ta#es and also the deficiency income ta# assessment for 1;99 These werenLt formally acted upon but instead CIR issued a warrant of distraint on personal property and a warrant of levy on real property against +%CG+ in effect denying +%CG+Ls protests CTA modified C%& holding +%CG+ liable for the reduced aggregate amount which represented :!" transaction ta#) documentary and science stamp ta# and deficiency income ta# CA reduced +%CG+Ls liability but still held them liable SC held them liable but held that +%CG+ is entitled to deductions for interest payments on loans DOCTRINE: (ection :6 of the 1;99 Ta# Code provides that interest payments on loans incurred by a ta#payer are allowed by the N%&C as deductions against the ta#payerLs gross income Thus) the general rule is that interest e#penses 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 ta#payer FACTS: +aper %ndustries Corporation of the +hilippines .+%CG+/ is a +hilippine corporation registered with the $oard of %nvestments .$G%/ 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 +%CG+ received from C%& two letters of assessment and demand for the following4 - Deficiency transaction ta# and documentary and science stamp ta# - Deficiency income ta# for 1;99 The two amounted to +88)97:)2!! 66 +%CG+ protested the assessment of deficiency transaction ta# and documentary and science stamp ta#es and also the deficiency income ta# assessment for 1;99 These werenLt formally acted upon but instead CIR issued a warrant of distraint on personal property and a warrant of levy on real property against +%CG+ in effect denying +%CG+Ls protests +%CG+ appealed to CT' CTA modified C%& holding +%CG+ liable for the reduced aggregate amount of +26)1::)972 :: which represented :!" transaction ta#) documentary and science stamp ta# and deficiency income ta# $oth parties appealed CA reduced +%CG+Ls liability to +7)::8):!- 96 which represented :!" transaction ta# in a reduced rate) 26" interest per
PAPER INDUSTRIES vs. CA

5ecember +, +,,6 ;eliciano, -. Iuisa SUMMARY: +aper %ndustries Corporation of the +hilippines .+%CG+/ received from C%& two letters of assessment and demand for deficiency transaction ta# and documentary and science stamp ta# and eficiency income ta# for 1;99 +%CG+ protested the assessment of deficiency transaction ta# and
2,
annum on the deficiency income ta# for a period of : years and a surcharge of 16" C' e#empted +%CG+ from payment of documentary and science stamp ta# and compromise penalty ISSUES: 1 EGN +%CG+ is liable for4 a :!" transaction ta# b %nterest and surcharge on unpaid transaction ta# c Documentary and science stamp ta# 2 EGN +%CG+ is entitled to deductions against income of4 a .&<J<M'NT/ %nterest payments on loans for the purchase of machinery and e*uipment b Net operating losses incurred by the &ustan +ulp and +aper >ills %nc c Certain claimed financial guarantee e#penses RULIN+: .1/ +icop is liable for the thirty-five percent .:!"/ transaction ta# in the amount of +:)!98)!-: !1 .2/ +icop is not liable for interest and surcharge on unpaid transaction ta# .:/ +icop is e#empt from payment of documentary and science stamp ta#es in the amount of +:66)666 66 and the compromise penalty of +:66 66 .-/ +icop is entitled to its claimed deduction of +-2)8-6)1:1 66 for interest payments on loans for) among other things) the purchase of machinery and e*uipment .!/ +icop2s claimed deduction in the amount of +--)1;7)167 66 forthe operating losses previously incurred by &++>) is disallowed for lack of merit .7/ +icop2s claimed deduction for certain financial guarantee e#penses in the amount +1)2:9)-21 66 is disallowed for failure ade*uately to prove such e#penses .9/ +icop has understated its sales by +2):;1)7-- 66 and overstated its cost of sales by +76-)618 66) for 1;99 .8/ +icop is liable for the corporate development ta# of five percent .!"/ of its ad,usted net income for 1;99 in the amount of +2)-:-):79 9! RATIO: WON PICOP IS LIAFLE FOR =CG TRANSACTION TAK L ,es +icop issued commercial paper consisting of serially numbered promissory notes with the total face value of +22;)87-)666 66 and a maturity period of one .1/ year These promissory notes were purchased by various commercial banks and financial institutions Gn these promissory notes) +icop paid interest in the aggregate amount of +-!)991)8-; 66
%n respect of these interest payments) the C%& re*uired +icop to pay the thirty-five percent .:!"/ transaction ta# $ased on +D 11!- which stated4 (ec 1;!-C Ta# on certain interest 3 There shall be levied) assessed) collected and paid on every commercial paper issued in the primary market as principal instrument) a transaction ta# e*uivalent to thirty-five percent .:!"/ based on the gross amount ofinterest thereto as defined hereunder) which shall be paid by the borrowerPissuer4 +rovided) however) that in the case of a long-term commercial paper whose maturity e#ceeds more than one year) the borrower shall pay the ta# based on the amount of interest corresponding to one year) and thereafter shall pay the ta# upon accrual or actual payment .whichever is earlier/ of the unta#ed portion of the interest which corresponds to a period not e#ceeding one year The transaction ta# imposed in this section shall be a final tax to be paid b% the borrower and shall be allowed as a deductible item for purposes of computing the borrower2s ta#able income $oth the CT' and the Court of 'ppeals sustained the assessment of transaction ta# +icop reiterates its claim that it is e#empt from the payment of the transaction ta# by virtue of its ta# e#emption under & ' No !187) as amended) known as the %nvestment %ncentives 'ct Ee agree with the CT' and the Court of 'ppeals that +icop2s ta# e#emption under & ' No !187) as amended) does not include e#emption from the thirty-five percent .:!"/ transaction ta# %n the first place) the thirty-five percent .:!"/ transaction ta# is an income ta#) that is) it is a ta# on the interest income of the lenders or creditors %n 7estern 2inolco $orporation " $ommissioner of Internal (e"enue it was stated that H'he 16J transaction tax is imposed on interest income from commercial papers issued in the primar% mone% mar/et <eing a tax on interest, it is a tax on income I Transaction ta# is an income ta# and as such)in any event) falls outside the scope of the ta# e#emption granted to registered pioneer enterprises by (ection 8 of & ' No !187) as amended +icop was the withholding agent) obliged to withhold thirty- five percent .:!"/ of the interest payable to its lenders and to remit the amounts so withheld to the $ureau of %nternal &evenue .=$%&=/ 's a withholding agent) +icop is made personall% liable for the thirty- five percent .:!"/ transaction ta# and if it did not actually withhold thirty-five percent .:!"/ of the interest monies it had paid to its lenders) +icop had only itself to blame
2<
Ee conclude that +icop was properly held liable for the thirty-five percent .:!"/ transaction ta# due in respect of interest payments onits money market borrowings WON PICOP is !i b!e .or interest n' s$r"h r(e on $n# i' tr ns "tion t ) L NO C%& prays that +icop be held liable for a twenty-five percent .2!"/ surcharge and for interest at the rate of fourteen percent .1-"/ per annum from the date prescribed for its payment %n so praying) the C%& relies upon (ection 16 of &evenue &egulation 9-99 which provided for these penalities C%& points to section !1 .e/ of the 1;99 Ta# code as its source of authority for assessing a surcharge and penalty interest of :!" transaction ta# due from +icop %t will be seen that (ection !1 .c/ .1/ and .e/ .1/ and .:/) of the 1;99 Ta# Code) authori@e the imposition of surcharge and interest only in respect of a =tax imposed b% this 'itle )= that is to say) 'itle II on=Income 'ax = %t will also be seen that (ection 92 of the 1;99 Ta# Code imposes a surcharge only in case of failure to file a return or list = re>uired b% this 'itle)= that is) 'itle II on =Income 'ax = The thirty-five percent .:!"/ transaction ta# is) however) imposed in the 1;99 Ta# Code by #ection 0+4 (b! thereof which #ection is embraced in 'itle B on ='axes on <usiness= of that Code Thus) while the thirty-five percent .:!"/ transaction ta# is in truth a tax imposed on interest income earned by lenders or creditors purchasing commercial paper on the money market) the relevant provisions) i e ) (ection 216 .b/) were not inserted in Title %% of the 1;99 Ta# Code The end result is that the thirty-five percent .:!"/ transaction ta# is not one of the ta#es in respect of which (ection !1 .e/ authori@ed the imposition of surcharge and interest and (ection 92 the imposition of a fraud surcharge %t is not without reluctance that we reach the above conclusion on the basis of what may well have been an inadvertent error in legislative draftsmanship) a type of error common enough during the period of >artial Jaw in our country Nevertheless) we are compelled to adopt this conclusion Ee consider that the authority to impose what the present Ta# Code calls .in (ection 2-8/ ci"il penalties consisting of additions to the ta# due) must be e#pressly given in the enabling statute) in language too clear to be mistaken The grant of that authority is not lightly to be assumed to have been made to administrative officials) even to one as highly placed as the (ecretary of Dinance The state of the present law tends to reinforce our conclusion that (ection !1 .c/ and .e/ of the 1;99 Ta# Code did not authori@e the imposition of a surcharge and penalty interest for failure to pay the thirty-
five percent .:!"/ transaction ta# imposed under (ection 216 .b/ of the same Code %n other words) (ection 2-9 .a/ of the current N%&C supplies what did not e#ist back in 1;99 when +icop2s liability for the thirty-five percent .:!"/ transaction ta# became fi#ed Ee do not believe we can fill that legislative lacuna by ,udicial fiat There is nothing to suggest that (ection 2-9 .a/ of the present Ta# Code) which was inserted in 1;8!) was intended to be given retroactive application by the legislative authority WON PICOP is !i b!e .or 'o"$/ent r, n' s"ien"e st /# t ) L YES +icop issued sometime in 1;99 long-term subordinated convertible debenture bonds with an aggregate face value of +166)666)666 66 The proceeds of the debenture bonds were in fact utili@ed to finance the $G%registered operations of +icop The C%& assessed documentary and science stamp ta#es) amounting to +:66)666 66) on the issuance of +icop2s debenture bonds %t is claimed by +icop that its ta# e#emption includes e#emption from the documentary and science stamp ta#es imposed under the N%&C C%& stresses that the ta# e#emption under the %nvestment %ncentives 'ct may be granted or recogni@ed only to the e#tent that the claimant +icop was engaged in registered operations The borrowing of funds from the public) in the submission of the C%&) was not an activity included in +icop2s registered operations CT' adopted the view of the C%& Court of 'ppeals took a less rigid view of the ambit of the ta# e#emption granted to registered pioneer enterprises %t reasoned out that #ince the mone% raised thereb% was to be used in its registered operation, PI$DP should en*o% the incenti"es granted to it by & ' !187) one of which is the e#emption from payment of all ta#es under the National %nternal &evenue Code) e#cept income ta#es) otherwise the purpose of the incenti"es would be defeated. 5ocumentar% and science stamp taxes on debenture bonds are certainl% not income taxes (C agrees with C' Ta# e#emptions are) to be sure) to be =strictly construed)= that is) they are not to be e#tended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the e#emption Ee consider that the actual dedication of the proceeds of the bonds to the carrying out of +icop2s registered operations constituted a sufficient ne#us with such registered operations so as to e#empt +icop from stamp ta#es ordinarily imposed upon or in connection with issuance of such bonds 'lso) after commencement of the present litigation before the CT') the $%& took the position that the ta# e#emption granted by & ' No
3:
!187) as amended) does include e#emption from documentary stamp ta#es on transactions entered into by $G%-registered enterprises (imilarly) in $%& &uling No 61:) dated 7 Debruary 1;8;) the Commissioner held that a registered pioneer enterprise producing polyester filament yarn was entitled to e#emption =from the documentary stamp ta# on BitsC sale of real property in >akati up to December :1) 1;8; = WON PICOP is entit!e' to 'e'$"t ( inst "$rrent in"o/e interest # ,/ents on !o ns .or the #$r"h se o. / "hiner, n' e6$i#/ent L YES %n 1;7;) 1;92 and 1;99) +icop obtained loans from foreign creditors in order to finance the purchase of machinery and e*uipment needed for its operations %n its 1;99 %ncome Ta# &eturn) +icop claimed interest payments made in 1;99) amounting to +-2)8-6)1:1 66) on these loans as a deduction from its 1;99 gross income The C%& disallowed this deduction upon the ground that) because the loans had been incurred for the purchase of machinery and e*uipment) the interest payments on those loans should have been capitali@ed instead and claimed as a depreciation deduction taking into account the ad,usted basis of the machinery and e*uipment .original ac*uisition cost plus interest charges/ over the useful life of such assets $oth the CT' and the Court of 'ppeals sustained the position of +icop and held that the interest deduction claimed by +icop was proper and allowable Mia (ection :6 of the 1;99 Ta# Code) interest payments on loans incurred by a ta#payer are allowed by the N%&C as deductions against the ta#payerLs gross income Thus) the general rule is that interest e#penses 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 ta#payer %n the instant case) the C%& does not dispute that the interest payments were made by +icop on loans incurred in connection with the carr%ing on of the registered operations of Picop Neither does the C%& deny that such interest payments were legall% due and demandable under the terms of such loans) and in fact paid by +icop during the ta# year 1;99 The C%& has been unable to point to any provision of the 1;99 Ta# Code or any other (tatute that re*uires the disallowance of the interest payments made by +icop The C%& invokes (ection 9; of &evenue &egulations No 2 Ee read the above provision of &evenue &egulations No 2 as referring to so called =theoretical interest= (uch =theoretical= or imputed interest does not arise from a legally demandable interest-bearing
obligation incurred by the ta#payer who however wishes to find out Gne thing that (ection 9; *uoted above makes clear is that interest which does constitute a charge arising under an interest-bearing obligation is an allowable deduction from gross income C%& argues finally that to allow +icop to deduct its interestpayments against its gross income would be to encourage fraudulent claims to double deductions from gross income +icop has not claimed to be entitled to double deduction of its 1;99 interest payments The C%& has neither alleged nor proved that +icop had previously ad,usted its cost basis for the machinery and e*uipment purchased with the loan proceeds by capitali@ing the interest payments here involved Ee conclude that the CT' and the Court of 'ppeals did not err in allowing the deductions of +icop2s 1;99 interest payments on its loans for capital e*uipment against its gross income for 1;99 WON PICOP is entit!e' to 'e'$"t ( inst "$rrent in"o/e net o#er tin( !osses in"$rre' b, R$st n P$!# n' P #er Mi!!s L NO +icop entered into a merger agreement with the &ustan +ulp and +aper >ills) %nc .=&++>=/ and &ustan >anufacturing Corporation .=&>C=/ 0nder this agreement) the rights) properties) privileges) powers and franchises of &++> and &>C were to be transferred) assigned and conveyed to +icop as the surviving corporation &++> and &>C were) like +icop) $G%-registered companies %mmediately before merger effective date) &++> had over preceding years accumulated losses in the total amount of +81)1!;);6- 66 %n its 1;99 %ncome Ta# &eturn) +icop claimed +--)1;7)167 66 of &++>2s accumulated losses as a deduction against +icop2s 1;99 gross income 0nder our law) and outside the special realm of $G%-registered enterprises) there is no such thing as a carry-over of net operating loss To the contrary) losses must be deducted against current income in the taxable %ear when such losses were incurred >oreover) such losses may be charged off onl% against income earned in the same taxable %ear when the losses were incurred & ' No !187 introduced the carry-over of net operating losses as a "er% special incenti"e 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 e#pected during the early years of the enterprise and to permit the enterprise to offset such
31
losses against income earned by it in later years after successful establishment and regular operations To promote its economicdevelopment goals) the &epublic foregoes or defers ta#ing the income of the pioneer enterprise until after that enterprise has recovered or offset its earlier losses Ee consider that the statutory purpose can be served only if the accumulated operating losses are carried over and charged off against income subse*uently earned and accumulated b% the same enterprise engaged in the same registered operations %n the instant case) to allow the deduction claimed by +icop would be to permit one corporation or enterprise) +icop) to benefit from the operating losses accumulated by another corporation or enterprise) &++> &++> far from benefiting from the ta# incentive granted by the $G% statute) in fact gave up the struggle and went out of e#istence and its former stockholders ,oined the much larger group of +icop2s stockholders WON PICOP IS ENTITLED TO DEDUCT A+AINST CURRENT INCOME CERTAIN CLAIMED FINANCIAL +UARANTEE EKPENSES L NO %n its %ncome Ta# &eturn for 1;99) +icop also claimed a deduction in the amount of +1)2:9)-21 66 as financial guarantee e#penses This deduction is said to relate to chattel and real estate mortgages re*uired from +icop by the +hilippine National $ank .=+N$=/ and D$+ as guarantors of loans incurred by +icop from foreign creditors C%& disallowed this claimed deduction upon the ground of insufficiency of evidence This disallowance was sustained by the CT' and the Court of 'ppeals Ee consider that entitlement to +icop2s claimed deduction of +1)2:9)-21 66 was not ade*uately shown and that such deduction must be disallowed DISPOSITIVE: >GD%D%<D .see ruling part/
not deductible from their income DOCTRINE: The wording of section :6 .c/ .1/ .$/ of the %nternal &evenue 'ct shows the lawLs intent that the right to deduct income ta#es paid to foreign government form the ta#payerLs gross income is given only as an alternative or substitute to his right to claim a ta# credit for such foreign income ta#es under sec :6.c/ .:/ and .-/) so that unless the alien resident has a right to claim such ta# credit if he so chooses) he is precluded from deducting foreign income ta#es from his gross income FACTS: (pouses Jednicky are A/eri" n "itiEens resi'in( in the Phi!i##ines ) and have 'erive' !! their in"o/e .ro/ Phi!i##ine so$r"es during the ta#able years in *uestion %n 1;!7) they filed their income ta# return for 1;!7) but later on filed an amended ta# return) which claimed deductions of t )es # i' to the US (overn/ent s .e'er ! in"o/e t ) .or the s /e ,e r. They re*uested a refund for such alleged deductions Ehen the C%& failed to answer) they filed a case with the Ta# Court 'nother case was filed) wherein in 1;!! they filed a ta# return) and also later amended it to a lesser net income Fowever) C%& assessed a deficiency which was paid by spouses They then filed with the 0( %nternal &evenue 'gent in >anila their federal income ta# return on income from +hilippine sources on a cash basis 'gain) this amounts were added to their prayer for deductions 'gain in 1;!9) they filed returns) and later amended them to include ta#es paid to the 0( government on income derived wholly from +hilippine sources They sought refund once again ISSUES: EGN a citi@en of the 0( residing in the +hilippines) may deduct from his gross income the income ta#es he has paid to the 0( government
CIR V LEDNICMY
-ul% 1+, +,@ (e%es -<I (ods
SUMMARY: (pouses) resident aliens who derived income solely within the +hilippines) are claiming deductions from their gross income the federal ta#es that they paid to the 0( The (C held that these amounts are
32
for the ta#able year on the strength of se" =4 8">19= o. the Phi!i##ine Intern ! Reven$e Co'e. The Ta# Court held that they may be deducted because s#o$ses 'i' not ;si(ni.,< in their in"o/e t ) ret$rn 'esire to v i! the/se!ves o. the bene.its o. # r = 8F97 o. s$bse"tion. The ta# credit is limited under par .' and $/! of the same subsection RULIN+: No) he cannot RATIO: The wording of section :6 .c/ .1/ .$/ of the %nternal &evenue 'ct shows the lawLs intent that the right to deduct income ta#es paid to foreign
3
government form the ta#payerLs gross income is given only as an alternative or substitute to his right to claim a ta# credit for such foreign income ta#es under sec :6.c/ .:/ and .-/) so that unless the alien resident has a right to claim such ta# credit if he so chooses) he is precluded from deducting foreign income ta#es from his gross income The wording that such deduction shall be allowed in case of a ta#payer who does not signify his desire to have the benefits of par :) assumes that the ta#payer may also signify his desire to claim a ta# credit and waive the deduction Fad the law intended that foreign income ta#es be deducted from gross income in any event) regardless of the ta#payerLs right to claim credit) it is the right to credit that should be conditioned upon the waiving of the deduction) and the right to reduction under subsection .c-1-$/ would have been made absolute The purpose of the law is to prevent the ta#payer from claiming twice the benefits of his payment of foreign ta#es) by deduction from gross income and by ta# credit Gn the argument that the spouses would be sub,ect to double ta#ation) the (C said that double ta#ation is obno#ious only when the ta#payer is ta#ed twice for the benefit of the same governmental entity) but in this case the +hilippine government would only receive the proceeds of one ta# The court said that between the 0() where income was not earned and the ta#payer does not reside) and the +hilippines) where the income was earned and the ta#payer resides) ,ustice and e*uity demand that the ta# on the income should accrue to the benefit of the +hilippines 'ny relief from double ta#ation should come from the 0() since the 0( did not contribute to the production of wealth that is being ta#ed The court also said that the interpretation of the spouses would also place a resident alien with only domestic sources of income in an e*ual or better position than one who has both domestic and foreign sources of income) a situation which is unfair and short of logic 'lso) to allow such interpretation would confer on the other government the power to reduce the income ta# to the +hilippines by increasing the ta# rates on the alien resident %t would be tantamount to subordinating our ta#es to a foreign government) which is incompatible with the status of the +hilippines as an independent and sovereign state DISPOSITIVE: Decisions of CT' reversed) disallowance of refunds affirmed
SGC. 3:. Ded'ction from &ross income. F In com%'tin& net income there sha !e a owed as ded'ctions F -a. ... -!. ... -c. Ta"es/ -1. In &enera . F Ta"es %aid or accr'ed within the ta"a! e $ear, e"ce%t F -A. The income ta" %ro#ided for 'nder this Tit e0 -@. Income, war;%rofits, and e"cess %rofits ta"es im%osed !$ the a'thorit$ of an$ forei&n co'ntr$0 !'t this ded'ction sha !e a owed in the case of a ta"%a$er who does not si&nif$ in his ret'rn his desire to ha#e to an$ e"tent the !enefits of %ara&ra%h -3. of this s'!section -re atin& to credit for forei&n co'ntries.0 -C. Gstate, inheritance and &ift ta"es0 and -D. Ta"es assessed a&ainst oca !enefits of a kind tendin& to increase the #a 'e of the %ro%ert$ assessed. 4 9ar. -c. -3. Credits a&ainst ta" for ta"es of forei&n co'ntries. F If the ta"%a$er si&nifies in his ret'rn his desire to ha#e the !enefits of this %ara&ra%h, the ta" im%osed !$ this Tit e sha !e credited with F -A. ...0 -@. A ien resident of the 9hi i%%ines. F In the case of an a ien resident of the 9hi i%%ines, the amo'nt of an$ s'ch ta"es %aid or accr'ed d'rin& the ta"a! e $ear to an$ forei&n co'ntr$, if the forei&n co'ntr$ of which s'ch a ien resident is a citi4en or s'!(ect, in im%osin& s'ch ta"es, a ows a simi ar credit to citi4ens of the 9hi i%%ines residin& in s'ch co'ntr$0 * 9ar. -c. -4. Limitation on credit. F The amo'nt of the credit taken 'nder this section sha !e s'!(ect to each of the fo owin& imitations/ -A. The amo'nt of the credit in res%ect to the ta" %aid or accr'ed to an$ co'ntr$ sha not e"ceed the same %ro%ortion of the ta" a&ainst which s'ch credit is taken, which the ta"%a$erDs net income from so'rces within s'ch co'ntr$ ta"a! e 'nder this Tit e !ears to his entire net income for the same ta"a! e $ear0 and -@. The tota amo'nt of the credit sha not e"ceed the same %ro%ortion of the ta" a&ainst which s'ch credit is taken, which the ta"%a$erDs net income from so'rces witho't the 9hi i%%ines ta"a! e 'nder this Tit e !ears to his entire net income for the same ta"a! e $ear.
33
M5TIGRRGN O. COLLGCTOR -RA+ANAN.
FERNANDEH :ERMANOS V. CIR

#EP'E2<E( 14, +,@, 'eehan/ee. -.
SUMMARY: Dernande@ Fermanos %nc was assessed by the C%& with deficiency Dernande@ claimed for several deductions) one of which was the losses incurred as regards the money it gave to +alawan >anganese The C%& disallowed the deductions The (C discussed the disputed items in seriatim DOCTRINE: 8to#i": !osses9 %t has been held that the voluntary advances made without e#pectation of repayment do not result in deductible losses FACTS: Dernande@ Fermanos) %nc ) is a domestic corporation organi@ed for the principal purpose of engaging in business as an =investment company= with main office at >anila The Commissioner of %nternal &evenue assessed against the ta#payer as alleged deficiency income ta#es for the years 1;!6-1;!- Dernande@ claimed several deductions) one of which was the losses or bad debt as regards the funds it gave to +alawan >anganese >ines) which were disallowed by the C%& The Ta# Court sustained the Commissioner2s disallowances while overruled the others Fence) both Dernande@ and the Commissioner appealed the decision ISSUES: EGN the disallowances should be allowed RATIO: Court discussed the disallowances in seriatim 1 (e allowances=disallowances of losses
.llowance of losses in 2ati Iumber $o. (+,64! - There was ade*uate basis for the writing off of the stock as worthless securities 'ssuming that the Company would later somehow reali@e some proceeds from its sawmill and e*uipment) which were still e#isting as claimed by the Commissioner) and that such proceeds would later be distributed to its stockholders such as the ta#payer) the amount so received by the ta#payer would then properly be reportable as income of the ta#payer in the year it is received ((EIEB.3'! 5isallowance of losses in or bad debts of Palawan 2anganese 2ines, Inc. .1;!1/ N +alawan >anganese >ines) %nc ) the controlling stockholders of which are also the controlling stockholders of petitioner corporation) re*uested financial help from petitioner which the latter granted The two entered into and >G' i %n giving advances to +alawan >anganese >ine %nc ) petitioner did not e#pect to be repaid 1 The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 1!" of the net profits of +alawan >anganese >ines) %nc %n other words) if there were no earnings or profits) there was no obligation to repay those advances 2 %t has been held that the voluntary advances made without e#pectation of repayment do not result in deductible losses : No bad debt could arise where there is no valid and subsisting debt ii The funds given were not loans but investments 1 This fact e#plains the liberality with which the ta#payer made such large advances to the subsidiary) despite the latter2s admittedly poor financial condition iii The Ta# Court correctly held that the subsidiary company was still in operation in 1;!1 and 1;!2
34
and the ta#payer continued to give it advances in those years) and) therefore) the alleged debt or investment could not properly be considered worthless and deductible in 1;!1) as claimed by the ta#payer Durthermore) neither under (ection :6 .d/ .2/ of our Ta# Code providing for deduction by corporations of losses actually sustained and charged off during the ta#able year nor under (ection :6 .e/ .1/ thereof providing for deduction of bad debts actually ascertained to be worthless and charged off within the ta#able year) can there be a partial writing off of a loss or bad debt) as was sought to be done here by the ta#payer Dor such losses or bad debts must be ascertained to be so and written off during the ta#able year) are therefore deductible in full or not at all) in the absence of any e#press provision in the Ta# Code authori@ing partial deductions c 5isallowance of losses in <alamban $oal 2ines (+,64 and +,6+! - the losses =are deductible in 1;!2) when the mines were abandoned) and not in 1;!6 and 1;!1) when they were still in operation = and e .llowance of losses in Kacienda 5alupiri (+,64 to +,6 ! and Kacienda #amal (+,6+-+,60! - Facienda Dalupiri was operated by petitioner for business and not pleasure %t was mainly a cattle farm) although a few race horses were also raised %t does not appear that the farm was used by petitioner for entertainment) social activities) or other non-business purposes Therefore) it is entitled to deduct e#penses and losses in connection with the operation of said farm
the ta#payer2s claim that the depreciable assets or buildings in *uestion had a useful life only of 16 years so as to ,ustify its 16" depreciation per annum claim) such finding being supported by the record 1. 'axable increase in net worth (+,64-+,6+! C a The principle underlying the ta#ability of an increase in the net worth of a ta#payer rests on the theory that such an increase in net worth) if unreported and not e#plained by the ta#payer) comes from income derived from a ta#able source %n this case) the increase in the net worth of petitioner for 1;!6 to the e#tent of +:6)6!6 66 was not the result of the receipt by it of ta#able income %t was merely the outcome of the correction of an error in the entry in its books relating to its indebtedness to the >anila %nsurance Company
Gain reali&ed from sale of real propert% (+,64! C The discrepancy in Dernande@L reported ta# as regards the properties ac*uired was properly accounted for by the improvements made on the property .llowance of losses in Kacienda 5alupiri (+,6:! C the contention on this item revolves mainly on the accounting method employed by Dernande@ The hybrid method which was used was ,ustified because the company was engaged in more than one trade 5isallowance of amorti&ation of alleged Gcontractual rights.G
@.
a. +alawan ceded its assets to Dernande@ as partial

settlement of its indebtedness
!. Dernande@ determined the cost of the mines by adding the

value of the contractual rights and the value of its mining claims C%& disallowed the deduction
5isallowance of excessi"e depreciation of buildings (+,64-+,6 ! the ta#payer did not submit ade*uate proof of the correctness of
3*
The law in point is (ection :6.g/ .1/ .$/ of the &evenue Code) before its amendment by &epublic 'ct No 27;8) which provided in part4
and Cuervo DOCTRINE: Deductible Joss The rule is that loss deduction will be denied if there is a measurable right to compensation for the loss) with ultimate collection reasonably clear (o where there is reasonable ground for reimbursement) the ta#payer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had %n other words) as the Ta# Court put it) the ta#payer .+laridel/ must e#haust his remedies first to recover or reduce his loss FACTS: 1 +etitioner +laridel (urety ] %nsurance Co is a domestic corp engaged in the bonding business +laridel) as surety) and Constancio (an Jose) as principal) e#ecuted a bond in favor of +J 1alang >achinery Co to secure (an JoseLs contractual obligation to produce and supply logs to +J 1alang 2 's additional security) +laridel re*uired (an Jose and one &amon Cuervo to e#ecute an indemnity agreement 'ccordingly) (an Jose constituted a chattel mortgage on its logging machineries and other movables in +laridel2s favor while &amon Cuervo e#ecuted a real estate mortgage : (an Jose was not able to deliver the logs to +J 1alang %n 1;!:) the CD% ad,udged (an Jose and +alridel liable %t also directed Cuervo to reimburse +laridel for whatever amount it would pay +J 1alang The C' affirmed the CD%Ls decision +laridel paid +--)-;6 to +J 1alang in 1;!9 - Dor its income ta# return for the year 1;!9) +laridel claimed the amount of +--k from its gross income ! The C%& disallowed the claimed deduction and assessed +laridel an income deficiency ta# ISSUE: 1 EGN the amount paid to +J 1alang is a deductible loss -NG RATIO: 1 $reakdown4 Gf the sum of +--)-;6 66) the amount of +:6)766 66 3 which is the principal sum stipulated in the performance bond 3 is being claimed as loss deduction under (ec :6 .d/ .2/ of the Ta# Code and +16)666 66 3 which is the interest that had accrued
=.g/ 5epletion of oil and gas wells and mines 4 =.1/ In general 3 .$/ in the case of mines) a reasonable allowance for depletion thereof not to e#ceed the market value in the mine of the product thereof) which has been mined and sold during the year for which the return and computation are made The allowances shall be made under rules and regulations to be prescribed by the (ecretary of Dinance4 Pro"ided) That when the allowances shall e*ual the capital invested) no further allowance shall be made = DISPOSITIVE: 'CCG&D%N1JR) the ,udgment of the Court of Ta# 'ppeals) sub,ect of the appeals in Cases Nos J-21!!1 and J-21!!9) as modified by the crediting of the losses of +:7)922 -2 disallowed in 1;!1 and 1;!2 to the ta#payer for the year 1;!: as directed in paragraph 1 .c/ of this decision) is hereby affirmed The ,udgment of the Court of Ta# 'ppeals appealed from in Cases Nos J-2-;92 and J-2-;98 is affirmed in toto No costs (o ordered
PLARIDEL vs. CIR

5ec ++, +,@: -ustice <eng&on tecs/at
SUMMARY: +laridel (urety e#ecuted a bond in favor of Constancio (an Jose to secure his obligation to +J 1alang >achinery 's additional security) +laridel also re*uired (an Jose and one Cuervo to e#ecute an indemnity agreement in favor or +laridel (urety (an Jose failed to perform his obligation %n the suit filed by +J 1alang) +laridel was ad,udged solidarily liable with (an Jose in favor of +J 1alang Dor that year) +laridel deducted the amount it paid from its gross income The C%& ad,udged it an income deficiency ta# The Court held that the amount paid to +l 1alang was not a deductible loss since the amount was recoverable from (an Jose
3>
7.
on the principal sum 3 is now being claimed as interest deduction under (ec :6 .b/ .1/ Joss is deductible only in the ta#able year it actually happens or is sustained Fowever) if it is compensable by insurance or otherwise) deduction for the loss suffered is postponed to a subse*uent year) which) to be precise) is that year in which it appears that no compensation at all can be had) or that there is a remaining or net loss) i e ) no full compensation +laridel effected payment to 1alang >achinery pursuant to a final decision in 1;!9 Fowever) under the same court decision) (an Jose and Cuervo were obligated to reimburse +laridel for whatever payments it would make to 1alang >achinery Clearly) +laridel2s loss is compensable otherwise .than by insurance/ %t should follow) then) that the loss deduction can not be claimed in 1;!9 The r$!e is th t !oss 'e'$"tion &i!! be 'enie' i. there is /e s$r b!e ri(ht to "o/#ens tion .or the !oss- &ith $!ti/ te "o!!e"tion re son b!, "!e r. So &here there is re son b!e (ro$n' .or rei/b$rse/ent- the t )# ,er /$st seeN his re'ress n' / , not se"$re !oss 'e'$"tion $nti! he est b!ishes th t no re"over, / , be h '. In other &or's- s the T ) Co$rt #$t itthe t )# ,er 8P! ri'e!9 /$st e)h $st his re/e'ies .irst to re"over or re'$"e his !oss. %n the case at bar) +laridel did not e#haust its remedies Fowever) even assuming that there was no reasonable e#pectation of recovery) still no loss deduction can be had (ec :6 .d/ .2/ of the Ta# Code re*uires a charge-off as one of the conditions for loss deduction4 %n the case of a corporation) all losses actually sustained and charged-off within the ta#able year and not compensated for by insurance or otherwise ' re*uisite of a charge-off is found under (ection 2:.f/ of the 0( %nternal &evenue Code of 1;:; which states4 H%n the case of a corporation) losses sustained during the ta#able year and not compensated for by insurance or otherwise I +laridel) who had the burden of proof failed to adduce evidence that there was a chargeoff in connection with the +--)-;6 663or +:6)766 66 3 which it paid to 1alang >achinery %n connection with the claimed interest deduction of +16)666 66) the (olicitor 1eneral correctly points out that this *uestion was never raised before the Ta# Court The alleged interest deduction
not having been properly litigated as an issue before the Ta# Court) it is now too late to raise and assert it before this Court RULIN+: The amount paid to +l 1alang is not a deductible loss DISPOSITIVE: 'ppealed decision is affirmed
C:INA FANMIN+ VS. CA

-ul% +,, 0444 -. Bitug 2abel .frica
SUMMARY: +etitioner wished to e#clude from its ta# return the investment it made to the Dirst C$C Capital who has become bankrupt China $anking argued that the investment became bad debt The Commissioner) CT' and the (C disallowed such e#clusion on the ground that is not an ordinary loss and not sub,ect to repayment DOCTRINE: 1 The e*uity investment in shares of stock held by the China $anking is not an indebtedness) and it is a capital) not an ordinary) asset 2 'ssuming that the investment indeed became worthless) the loss sustained is a capital) not an ordinary) loss : The capital loss sustained by China $anking can only be deducted from capital gains if any derived by it during the same ta#able year that the securities have become worthless FACTS: 1 China $anking Corporation made a !:" e*uity investment in the Dirst C$C Capital .'sia/ Jtd a %nvestment made in the year 1;86 b Dirst C$C Capital is a Fongkong subsidiary engaged in financing and investment with Hdeposit-takingI function c China $ankingLs investment amounted to +hp 17) 229) 8!1 86 .consisting of 167)666 shares with a par value of +hp 166Pshare/
3=
' regular e#amination of the financial books ] investment portfolios of China $anking was conducted by $ankgo (entral in 1;87 a %t was shown that Dirst C$C Capital has become insolvent b China $anking then wrote-off as worthless its investment in Dirst C$C Capital in its 1;89 %T& i Eith the approval of $angko (entral ii Treated it as a bad debt or as an ordinary loss deductible from its gross income The Commissioner disallowed the deduction a 'ssessed China $anking for ta# deficiency of +hp 8)!::):28 6b 1rounds for disallowing the deduction i The investment should not be classified as being worthless ii <ven if the license of Dirst C$C Capital as a Hdeposit-tapingI has been revoked) it can still e#ercise its financing and investment activities iii <ven if we assume that the securities became worthless) they should be classified as capital loss instead of a bad 1 This is due to the reason that there is no indebtedness to speak of between China $anking ] its subsidiary The CT' sustained the decision of the Commissioner Claim of China $anking a $ases that the shares of stock have become worthless i +rofit and Joss 'ccount for the Rear-<nd .Dec :1) 1;89/ ii &ecommendation of $angko (entral that the e*uity investment be written-off due to the insolvency of the subsidiary
ISSUES: EGN the shares of stock in *uestion may be deductedU RATIO: No RULIN+: 1 <*uity investment
Definition4 is a capital) not ordinary) asset of the investor the sale or e#change of which results in either a capital gain or a capital loss b The gain or loss is ordinary when the property sold or e#changed is not a capital asset c Capital asset N defined in (ec :: .1/ of N%&C (hares of stock a Drom the above premises) it can be concluded that shares of stock) like other securities stated in (ec 26 .t/ of N%&C) would be ordinary asset only to a dealer in securities or a person engaged in the purchase and sale of) or an active trader .for his own account/ b %f the shares of stock are held by way of an investment) the shares to him would be capital assets Gn loss sustained by the holder of the securities a %f securities are capital assets to him) loss is treated as a capital loss as if incurred from a sale or e#change transaction b 2 conditions that must concur to result a capital gainPcapital loss i There is a sale or e#change ii The thing sold or e#changed is a capital asset c. Ehen securities become worthless no sale or e#change loss from the sale or e#change of capital assets d Capital losses are allowed to be deducted only to the e#tent of capital gains Case at bar a Dirst C$C Capital .investee/ is a subsidiary corporation of China $anking b China $ankingLs shares in the investee are not intended for purchasePsale $0T as an investment i <ffect4 loss is a capital loss c The shares of stock involved is not a bad debt i They are not sub,ect to obligatory repayment N an element of a bad debt ii $asis4 (ec ::) N%&C
DISPOSITIVE: The petition is denied The decision of the C' disallowing the claimed deduction of +hp 17) 229) 8!1 86 is affirmed
3,
COLLECTOR v. +OODRIC:
FACTS:
00 5ecember +,@: $- $oncepcion 5an .morin
SUMMARY: C%& assessed 1oodrich for deficiency income ta#es for 1;!1 and 1;!2 These were based on the disallowed deductions claimed by &espondent for several alleged bad debts for 1;!1) and alleged representation e#penses in 1;!2 1oodrich appealed the assessments to the CT') which rendered a decision on 8 June 1;7: allowing the deduction of bad debts but disallowing the deduction of alleged representation e#penses &espondent filed a >otion for &econsideration and New Trial The CT') on 1; November 1;7:) amended its decision and allowed the deduction for representation e#penses The C%& appealed to the (C The (C held that only 8 of the alleged bad debts were deductible since they were the only ones shown to be worthlessA the others were not allowed 's for the alleged representation e#penses) the Court held that the &espondents failed to produce receipts proving that the e#penses were actually incurredA hence) these deductions must not be allowed DOCTRINE: Ehen an event subse*uently occurs that is inconsistent with an earlier deduction) which appears to be properly applied) the ta#payer is liable for deficiency in ta#es 's regards bad debts4 To be entitled to deduction of bad debts) two facts must be proven4 1/ that the ta#payer did in fact ascertain the debt to be worthless in the year for which deduction is soughtA and 2/ that in so doing) he acted in good faith The Court further e#plained that good faith is not enough The claimant must also show that he had Hreasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him I 's regards representation e#penses4 The claimant must be able to show receipts which prove that the e#penses were actually incurred in payment to the entities that issued the same
+etitioner C%& assessed &espondent 1oodrich %nternational &ubber Company for deficiency income ta#es for the years 1;!1 and 1;!2 in the sums 1- 128 and 8 -:;) respectively These assessments were based on disallowed deductions claimed by 1oodrich4 several alleged bad debts for 1;!1 .total of !6 -!! -1/ and representation e#penses allegedly incurred in 1;!2 .total of :6 1:8 88/ The breakdown of bad debts are4 1 2 : ! 7 9 8 ; +ortilloLs 'uto (eat Cover Misayan &apid Transit $ataan 'uto (eat Cover Tres 'migos 'uto (upply + C Teodoro Grdinance (ervice) + ' Grdinance (ervice) + C National Jand (ettlement 'dministration National Coconut Corporation 7:6 :1 19 816 27 :9: :1 1 ::6 :1 7!6 :87 -2 9;7 27 : 626 97 7-- 9 1 !6! 89 - !:6 7 -! :7 1- 18
16 %nterior Calte# (ervice (tation 11 (an Juan 'uto (upply 12 +'C(' 1: +hilippine Naval +atrol
3<
1- (urplus +roperty Commission 1! 'lvere@ 'uto (upply 17 Jion (hoe (tore 19 &ui@ Fighway Transit 18 <s*uire 'uto (eat Cover
299 78 28! 72 1 787 ;: 2 :!6 : !:7 ;TGT'J4 !6 -!! -1
Ehether or not &espondent is entitled to its claims of deduction for alleged representation e#penses
RATIO: 1 Gnly those which 1oodrich was able to show as worthless should be allowed No The CT' should have not allowed deduction
RULIN+: 1 's for the bad debts) the Court e#amined each item in the list The first ten were re,ected4 ' PortilloEs .uto #eat $o"er N debt incurred in 1;!6 and was written off as bad debt that same year after debtor paid 96A debtor paid full balance in 1;!2 Bisa%an (apid 'ransit N debt incurred in 1;!6 and was charged off as bad debt in 1;!1 after debtor paid 29! 21A no other payment was made since debtor became insolvent) but no proof was introduced <ataan .uto #eat $o"er N balance of a debt of -9- 1: contracted in 1;-;A debtor paid 166 in 1;!1 and the balance was charged off as bad debt that same yearA in 1;!2) debtor paid an additional !6 'res .migos .uto #uppl% N outstanding account since 1;-; and has not been collected P $. 'eodoro - 9!1 ;1 in 1;-;A debtor paid 161 ;1 in 1;!1) which left a balance of 7!6 which was charged off as bad debt in that same yearA in 1;!2) debtor paid 1!6
The breakdown of alleged representation e#penses are4 1 2 : ! <#penses at <lks Club >anila +olo Club 'rmy and Navy Club >anila 1olf Club Eack Eack 1olf Club) Casino <spa[ol) etc 16 ;!; 21 - ;-9 :! 2 812 ;! - -98 -! 7 ;-6 ;2 TGT'J4 :6 1:8 88 1oodrich appealed the assessments to CT' Gn 8 June 1;7:) the appellate court rendered a decision allowing the deduction of bad debts) but disallowing the alleged representation e#penses 1oodrich filed a >otion for &econsideration and New Trial and the CT') on 1; November 1;7:) amended its decision and allowed the deductions for representation e#penses The C%& then appealed the decision to the (C ISSUES: 1 Ehether or not the debts had been properly deducted as bad debts for the year 1;!1
<
4:
Drdinance #er"ice, P .. N outstanding account of government agency in 1;-; was 819 !!A in 1;!1) debtor paid -:1 1: and the balance of :87 -2 was written off as bad debt that same year Drdinance #er"ice, P $. N in 1;!6) account was 9;7 27A account was written off as bad debt in 1;!1A in 1;!2) debtor paid in full 3ational Iand #ettlement .dministration N outstanding account in 1;-; was 9 6-1 !1A in 1;!1) debtor paid - 626 9! leaving a balance of : 626 97 that was written off as bad debt that same yearA office was under li*uidation) and the $oard of Ji*uidators promised to pay when funds become available 3ational $oconut $orporation N outstanding account since 1;-;A written off as bad debt in 1;!1A while under li*uidation) its $oard of Ji*uidators promised to pay upon availability of fundsA in 1;71) debt was fully paid Interior $altex #er"ice #tation N account was 2 96! 89 in 1;!6A debtor made partial payments so that as of December 1;!1) balance was 1!6! 89A debtor pad 266 in 1;!2) 11: 26 in 1;!-) 9!6 in 1;71) and :66 in 1;72A account had been written off as bad debt in 1;!1
inference from the information thus obtained by him I %n the instant case) &espondent has failed to show thisA 1oodrich has not shown evidence that the debtors could not pay the debts N that they were worthless The Court also found the fact that payments were made after some of the accounts had been characteri@ed as bad debts shows the undue haste with which they had been written off The Court also notes that &espondent failed to attach to its income ta# returns a statement showing the propriety of the deductions therein made for the alleged bad debts) making its omission a violation of &evenue &egulations No 2) (ection 162 Gn the other hand the last eight were) according to the Court) properly written off4 V #an -uan .uto #uppl% N account contracted in 1;!6A &espondentLs counsel failed to secure payment in November 1;!6) a suit for collection was filed but debtor did not appear at the hearing of the caseA ,udgment rendered in favour of the creditor in 1;!1 but the corresponding writ of e#ecution was returned unsatisfied for no properties could be attached or levied upon P.$#. .together with > Philippine 3a"al Patrol) N #urplus Propert% $ommission) and G .l"are& .uto #uppl%/ N these accounts were 2 or : years old in 1;!1A &espondent failed to collect the amounts despite letters of demandA considering the small amounts involved) 1oodrich was ,ustified in feeling that the unsuccessful efforts therefore e#erted to collect the same sufficed to warrant their being written off Iion #hoe #tore .together with ^ (ui& Kighwa% 'ransit) and & Es>uire .uto #eat $o"er/ N up to 1;!1) when they were written off) counsel had sent 19 letters of demand to Iion) 17 to (ui&) and 7 to Es>uireA in 1;!1 debtors made the following partial payments4 1 6!6 .Iion/) -66 .(ui&/) and :66 .Es>uire/A subse*uent to
The Court held that 1oodrich was not able to establish that these debts were actually worthless or that it had reasonable grounds to be so in 1;!1 Ehat the law provides is the deduction of debts Hactually ascertained to be worthless within the ta#able yearI This is to prevent arbitrary action by ta#payer and unduly avoid ta# liability The Court held that to be entitled to deduction of bad debts) two facts must be proven4 1/ that the ta#payer did in fact ascertain the debt to be worthless in the year for which deduction is soughtA and 2/ that in so doing) he acted in good faith The Court further e#plained that good faith is not enough The claimant must also show that he had Hreasonably investigated the relevant facts and had drawn a reasonable
41
write-off) additional small payment were madeA counsel for &espondent investigated their ability to pay and found that they were in strained financial condition and had no attachable or leviable property .Iion was burned twice in 1;-8 and 1;-; and later went out of business after operating on limited scale after the incidentsA (ui& had more debts than assets/ The deduction of these eight accounts) aggregating 22 729 :!) as bad debts should be allowed 2 The claim for the deduction of alleged representation e#penses is based upon the receipts issued) not by the entities in which the alleged e#penses had been incurred) but by the officers of 1oodrich who allegedly paid them The Court held that this claim must be re,ected %f these e#penses had really been incurred) 1oodrich would have been able to produce the receipts issued by the entities to which the payments had been made These issued by officers merely attest to their claim that they had incurred and paid said e#pensesA they do not establish payment of e#penses to the entities in which the same are said to have been incurred The CT' erred in allowing the deduction thereof
the said amount) so a warrant of distraint and levy was issued $asilan <states then filed a petition for review before the CT') alleging that the period of assessment and collection has already prescribed) that there was error in disallowing claimed depreciations) traveling and miscellaneous e#penses) as well as in finding the that there was unreasonably accumulated profits and the imposition of 2!" surta# thereon The CT' found that there was no prescription and affirmed the deficiency assessment Thus) $asilan appealed to the (C The (C modified the ,udgment appealed from to the e#tent that petitioner is allowed its deductions for travelling and miscellaneous e#penses) but affirmed insofar as the petitioner is liable for deficiency income ta# for 1;!: and 2!" surta# on the unreasonably accumulated profit DOCTRINE: 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 amorti@ation of the value of intangible assets) the use of which in the trade or business is definitely limited in duration Depreciation commences with the ac*uisition of the property and its owner is not bound to see his property gradually waste) without making provision out of earnings for its replacement %t 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 %t 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 The income ta# law does not authori@e the depreciation of an asset beyond its ac*uisition cost Fence) 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 e#pression in the law FACTS: Gn >ar 2-) 1;!-) $asilan <states %nc filed its income ta# returns for 1;!: and paid an income ta# of +8628 $ased on e#aminerLs report) the C%& assessed $asilan <states a deficiency income ta# of +:;12 for 1;!: and +87)897 8! as 2!" surta# on unreasonably accumulated profits The latter did not pay the said amount) so a warrant of distraint and levy was issued Fowever) this was not e#ecuted because $asilan <states was able to
DISPOSITIVE: +etition partly granted The alleged representation e#penses totally disallowed The claim for bad debts allowed up to the sum of 22 729 :! only No pronouncements as to costs
FASILAN ESTATES INC V. CIR

#eptember 6, +,@: <eng&on, -. #. -. Iora (note) I /ept the doctrinal part re) depreciation in "erbatim!
SUMMARY: Gn >ar 2-) 1;!-) $asilan <states %nc filed its income ta# returns for 1;!: and paid its income ta# $ased on e#aminerLs report) the C%& assessed $asilan <states a deficiency income ta# for 1;!: as well as 2!" surta# on unreasonably accumulated profits The latter did not pay
42
convince the Deputy Commissioner of %nternal &evenue to order the Director of the district in Samboanga City to ,ust maintain constructive embargo $asilan <state re*uested for reinvestigation but this did not push through due to its refusal to waive the period of prescription Thus) it was served a notice that the warrant of distraint and levy would be e#ecuted $asilan <states then filed a petition for review before the CT') alleging that the period of assessment and collection has already prescribed) that there was error in disallowing claimed depreciations) traveling and miscellaneous e#penses) as well as in finding the that there was unreasonably accumulated profits and the imposition of 2!" surta# thereon The CT' found that there was no prescription and affirmed the deficiency assessment Thus) $asilan appealed to the (C ISSUES: 1 Ehether the Commissioner has the right to collect deficiency income ta# that has prescribed 2 Ehether depreciation shall be determined on the ac*uisition cost or on the reappraised value of the assets : Ehether the disallowance of items claimed as deductible was proper - Ehether there was unreasonably accumulated profits ! Ehether the petitioner is e#empt from the penalty ta# under &' 182: amending (ec 2! of the Ta# Code RATIO: 1 The Commissioner collected the deficiency before the time of prescription 2 The income ta# law does not authori@e the depreciation of an asset beyond its ac*uisition cost 3. NG Ta#payerLs stand on the issue is sustained - R<( There was unreasonable accumulation ! NG The unreasonable accumulation was in 1;!:A the e#emption mentioned above was amended more than : years after the period covered by the assessment RULIN+: 1 Petitioner4 Claimed that it did not receive notice of the assessment of the deficiency ta#) or if it did) the receipt was beyond the !-year prescriptive period +etitionerLs defense is an annotation on the notice Hno accompanying letter 11P2!I) which is supposed to indicate that they
received the notice after >ar 2- 1;!;) the last date of the !-year period within which deficiency ta# could be assessed .because the original ta# returns were filed ! years earlier/ SC4 Does not accept petitionerLs interpretation) considering the presumption of regularity in the performance of official functions The notice of assessment showed that it was made on Deb 27) 1;!;) which is within the !-year prescription period >oreover) there were other evidences which establish that notice of assessment was already sent4 letters from the Commissioner and the &egional Director saying that the notice of assessment was already sent) as well as an indorsement of the case of the Chief of the Jaw Division where it was alleged that notice was already sent <ven if the notice was received late by the petitioner) under (ec ::1 of the Ta# Code which re*uires ! years within which to assess deficiency ta#es) Hthe assessment is deemed made when notice to this effect is released) mailed or sent by the Collector to the ta#payer and it is not re*uired that the notice be received by the ta#payer within the aforementioned five-year periodI 2 Petitioner4 Claimed deductions for the depreciation of its assets up to 1;-; based on their ac*uisition costs %t increased the depreciable value of the assets as of Jan 1) 1;!6 to conform wP the increase in cost for their replacement Thus) from 1;!6-1;!:) it made deductions from the gross income the value of depreciation that was computed on the reappraised value CIR4 Dound that the reappraised assets depreciated in 1;!: were the same as those claimed in 1;!2 Dor 1;!2) the depreciation allowable on said assets were determined to be +:7)8-2 6- computed on their ac*uisition cost at rates fi#ed by the ta#payer The Commissioner pegged the deductible depreciation for 1;!: on the same old assets at +:7)8-2 6- and disallowed the e#cess thereof in the amount of +16)!66 -; SC4 The *uestion for resolution is whether depreciation shall be determined on the ac*uisition cost or on the reappraised value of the assets
43
HDepreciation 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 amorti@ation of the value of intangible assets) the use of which in the trade or business is definitely limited in duration Depreciation commences with the ac*uisition of the property and its owner is not bound to see his property gradually waste) without making provision out of earnings for its replacement %t 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 %t 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 I H'ccordingly) the law permits the ta#payer to recover gradually his capital investment in wasting assets free from income ta# +recisely) (ection :6 .f/ .1/ allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated I HThe income ta# law does not authori@e the depreciation of an asset beyond its ac*uisition cost Fence) 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 e#pression in the law I H>oreover) the recovery) free of income ta#) of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance Dor then what the ta#payer would recover will be) not only the ac*uisition cost) but also some profit &ecovery in due time thru depreciation of investment made is the philosophy behind depreciation allowanceA the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation I The claim for depreciation beyond +:7)8-2 6- or in the amount of +16)!66 -; has no ,ustification in the law The determination) therefore) of the C%& disallowing said amount) affirmed by the CT') is sustained 3. (everal of petitionerLs e#penses were disallowed because they could not be e#plained nor were they supported by documents
Petitioner4 The petitionerLs accountant e#plained that these e#penses were trip and travel e#penses of the president) but did not have receipts because these were burned during the $asilan fire These were also not included when it sent its records to >anila because ! years had already lapsed when these e#penses were incurred SC4 (ustained petitionerLs arguments because under (ec ::9 of the Ta# Code) receipts and papers supporting such e#penses need only be kept by the ta#payer for a period of ! years from the last entry
4. CIR4 Dound that petitioner had violated of (ec 2! of the Ta# Code
when it unreasonably accumulated profits as of 1;!: in the amount of +:-9)!69 61) based on certain circumstances Petitioner?s r($/ents4 1 Tried to show that when the surplus was being considered) the e#aminer failed to account the possible e#penses for cultivation) labor) fertilitation) drainage) irrigation) repair) etc 2. 'rgued that since it has +!76)919 -- as its e#penses for the year 1;!:) a surplus of +:-9)!69 61 is not unreasonably accumulated 3. Tried to show that investments were made with $asilan Coconut +roducers Cooperative 'ssociation and $asilan Fospital 4. ^uestioned why the e#aminer covered the period from 1;-8-1;!: when the ta#able year on review was 1;!: *. Contended that the large amounts withdrawn by or advanced to the stockholders were advances made in furtherance of the business purposes SC?s res#onse4 1. %n 1;-8) the money was supposed to go to future pro,ects) but in 1;!: the money was ,ust reverted to the general fund This reversion made the 1overnment consider it for ta# purposes Ehile an e#planation was made saying that the fund was spent in facilities and industriali@ation of the companyLs industry) the (C said that this was not sufficient e#planation) *uoting ,urisprudence4 =%n order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surta# upon shareholders) the controlling intention of the ta#payer is that which
44
2.
3. 4. *.
is manifested at the time of the accumulation) not subse*uently declared intentions which are merely the products of afterthought = There is no need to have such a large amount at the beginning of the following year because during the year) current assets are converted into cash and with the income reali@ed from the business as the year goes) these e#penses may well be taken care of 0nreasonable accumulation was even more pronounced because as of Dec :1) 1;!: already +!;)9;- 92 was spent 3 yet as of that date there was still a surplus of +:-9)!69 61 No error in the applied process because previous accumulations should be considered in the determination of unreasonable accumulations for the year concerned H's correctly held by the CT') while certain e#penses of the corporation were credited against these amounts) the unspent balance was retained by the stockholders without refunding them to petitioner at the end of each year These advances were in fact indirect loans to the stockholders indicating the unreasonable accumulation of surplus beyond the needs of the business I
Petitioner4 Eanted to avail of the e#empting proviso in (ec 2! of the %&C as amended by &' 182:) approved June 22) 1;!9 wherein accumulated profits or surplus if invested in any dollar-producing or dollar-earning industry or in the purchase of bonds issued by the Central $ank) may not be sub,ect to the 2!" surta# SC4 The unreasonable accumulation was in 1;!:A the e#emption mentioned above was amended more than : years after the period covered by the assessment
DISPOSITIVE: Judgment modified to the e#tent that petitioner is allowed its deductions for travelling and miscellaneous e#penses) but affirmed insofar as the petitioner is liable for +2)166 79 as deficiency income ta# for 1;!: and +87)897 9! as 2!" surta# on the unreasonably accumulated profit of +:-9)!69 61
4*

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Tax Digest pp.4-6 (Until Basilan Estates)

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