Case Digests

SAN BEDA COLLEGE OF LAW
MENDIOLA, MANILA

Case Digests in
TAXATION LAW II

Submitted to:
ATTY. DANTE R. BRAVO

Submitted by:
Section 3D
ACADEMIC YEAR 2012-2013

November 29, 2012

Taxation Law II Section 3D

ABIOG
ALHAMBRA
BELEY
BIARES
BOHOL
BONAOBRA
CALLEJA
CASIHAN
CORRALES
CORREA
CRON
CRUZ
CUISON
CUNANAN
DAYAG
ESPIRITU
ESTELLA
FRAGANTE
GOJUNCO
MACEDA
MARASIGAN
NAVAL
PASCASIO
RAMOS
RIVERA
RODRIGUEZ
SALAMATIN
SANDOVAL
SITON
TAN
URBINA
UY
VALENCIANO
VELASCO
VILLA

Table of Contents

TAXABLE INCOME IN GENERAL.............................................................................................. 1
Madrigal vs. Rafferty ............................................................................................................................................... 2
Fisher vs. Trinidad ................................................................................................................................................... 4
Limpan Investment Corporation vs. Commissioner of Internal Revenue ........................................ 5
Hernando B. Conwi vs. The Honorable Court of Tax Appeals ................................................................ 7
Bibiano V. Banas, Jr. vs. Court of Appeals ....................................................................................................... 9

INCOME TAX ON INDIVIDUALS ............................................................................................. 11
John L. Garrison vs. Court of Appeals and Republic of the Philippines ........................................... 12
Carmelino F. Pansacola vs. Commissioner of Internal Revenue ........................................................ 18
Reynaldo V. Umali vs. Hon. Jesus P. Estanislao ......................................................................................... 22

DEFINITION OF CORPORATIONS ......................................................................................... 25
Afisco Insurance Corporation et al. vs. Court of Appeals ...................................................................... 26
Mariano P. Pascual a vs. The Commissioner of Internal Revenue ..................................................... 30
Jose P. Obillos Jr. vs. Commisioner of Internal Revenue ....................................................................... 32
Lorenzo T. Oa And Heirs Of Julia Buales vs. The Commissioner of Internal Revenue. ........ 34

PASSIVE INCOME ............................................................................................................................ 38
Commissioner of Internal Revenue vs. John L. Manning et al. ............................................................ 39

MINIMUM CORPORATE INCOME TAX ............................................................................... 42
Commissioner of Internal Revenue vs. Philippine Airlines, Inc ......................................................... 43
The Manila Banking Corporation vs. Commissioner of Internal Revenue ..................................... 45
CREBA vs. Romulo................................................................................................................................................. 47

INCOME TAX ON RESIDENT FOREIGN CORPORATION ....................................... 51
Commissioner of Internal Revenue vs. British Overseas Airways Corporation .......................... 52
Commissioner of Internal Revenue vs. British Overseas Airways Corporation .......................... 54
Steamship Company of Svendborg and Steamship Company Of 1912 vs. Commissioner
of Internal Revenue .............................................................................................................................................. 56
Bank Of America NT & SA vs. Honorable Court Of Appeals ................................................................ 59
Commissioner Of Internal Revenue vs. Burroughs Limited ................................................................ 61
Compania General De Tabacos De Filipinas vs. The Commissioner of Internal Revenue ....... 63
compania General De Tabacos De Filipinas vs. The Commissioner of Internal Revenue ....... 65

INCOME TAX ON NON-RESIDENT FOREIGN CORPORATION .......................... 67
Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. .................................................... 68
Marubeni Corporation vs. Commissioner of Internal Revenue .......................................................... 70

N.V. Reederij vs. Commissioner of Internal Revenue ............................................................................. 72

IMPROPERLY ACCUMULATED EARNINGS TAX ........................................................ 74
Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue ............................................. 75
Commissioner Of Internal Revenue vs. Antonio Tuason, Inc. ............................................................. 78
cyanamid Philippines, Inc. vs. The Court Of Appeals, The Court of Tax Appeals ........................ 80

TAX EXEMPT CORPORATIONS .............................................................................................. 82
The Collector Of Internal Revenue vs. V. G. Sinco Educational Corporation................................. 83

GROSS INCOME ................................................................................................................................ 85
Commissioner of Internal Revenue vs. Filinvest Development Corporation et al. .................... 86
Commissioner of Internal Revenue vs. The Court of Appeals ............................................................. 88
Commissioner of Internal Revenue vs. John L. Manning et al. ............................................................ 90
Wise & Co., Inc., et al. vs. Bibiano L. Meer .................................................................................................... 93
Commissioner of Internal Revenue vs. The Hon. Court of Appeals .................................................. 95
Commissioner of Internal Revenue vs. The Court Of Appeals ............................................................ 98
In RE Request of Atty. Bernardo Zialcita ................................................................................................... 100
Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation ......................................... 102

DEDUCTIONS IN GENERAL .................................................................................................... 105
Aguinaldo Industries (Fishing Nets) vs. Commissioner of Internal Revenue ............................ 106
atlas Consolidated Mining & Development Corporation vs. Commissioner of Internal
Revenue ................................................................................................................................................................... 110
Antonio Roxas, et al. vs. Court of Tax Appeals ......................................................................................... 112
Mariano Zamora vs. Collector of Internal Revenue ............................................................................... 115
C. M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue .................................................... 118
C. F. Calanoc vs. The Collector of Internal Revenue .............................................................................. 121
Kuenzle & Streiff, Inc. vs. The Collector of Internal Revenue ............................................................ 123
Paper Industries Corporation Of The Philippines (PICOP) vs. Court of Appeals ...................... 126
Commissioner of Internal Revenue vs. Consuelo L. Vda. De Prieto. ............................................... 129
Commissioner of Internal Revenue vs. V.E. Lednicky .......................................................................... 132
Paper Industries Corporation Of The Philippines (PICOP) vs. Court of Appeals ...................... 134
Philippine Refining Company vs. Court of Appeals ............................................................................... 137
Fernandez Hermanos, Inc. vs. Commissioner of Internal Revenue ............................................... 139
Basilan Estates, Inc. vs. Commissioner of Internal Revenue ............................................................. 141
Limpan Investment Corporation vs. Commissioner of Internal Revenue ................................... 144
consolidated Mines, Inc. vs. Court of Tax Appeals ................................................................................. 146
3M Philippines, Inc. vs. Commissioner of Internal Revenue ............................................................. 148
Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue .............................................. 150

CAPITAL GAIN AND LOSS ....................................................................................................... 152
Calasanz vs. Commissioner of Internal Revenue .................................................................................... 153
Tuason vs. Lingad ................................................................................................................................................ 156
China Banking Corporation vs. Court of Appeals. .................................................................................. 159

DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF
PROPERTY .......................................................................................................................................... 161
Commissioner of Internal Revenue v. Rufino .......................................................................................... 162
Gregory vs. Helvering ........................................................................................................................................ 164

SITUS OF TAXATION .................................................................................................................. 166
Commissioner of Internal Revenue vs. Marubeni .................................................................................. 167
Commissioner of Internal Revenue vs. British Overseas Airways Corporation ........................ 169
Commissioner of Internal Revenue vs. Court of Tax Appeals ........................................................... 170
The Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue ................................... 172
Alexander Howden and Co., LTD. ,et al. vs. Commissioner of Internal Revenue ....................... 176
Philippine American Life Insurance Co. Inc. vs. Court of Tax Appeals .......................................... 178

ACCOUNTING PERIODS AND METHODS ...................................................................... 180
Consolidated Mines, Inc. vs. Court of Tax Appeals ................................................................................ 181
Bibiano V. Baas, Jr. vs. Court of Tax Appeals ......................................................................................... 184

RETURNS AND PAYMENT OF TAXES ............................................................................. 187
BPI-Family Savings Bank, Inc. vs. Court of Appeals .............................................................................. 188
PHILAM Asset Management, Inc., vs. Commissioner of Internal Revenue .................................. 190
Commissioner of Internal Revenue vs. Bank of the Philippine Islands ........................................ 194
Bank of Philippine Islands vs. Commissioner of Internal Revenue ................................................ 196

WITHHOLDING TAX ..................................................................................................................... 198
Citibank, N.A. vs. Court of Appeals ............................................................................................................... 199
Commissioner of Internal Revenue vs. Wander Philippines, Inc .................................................... 200
Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing
Corporation ............................................................................................................................................................ 201
Filipinas Synthetic Fiber Corporation vs. Court of Appeals ............................................................... 203

Case Digests on TAXATION LAW 1 | P a g e

TAXABLE INCOME IN GENERAL


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

FACTS:

Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The
marriage was contracted under the provisions of law concerning conjugal partnerships (sociedad
de gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on the
prescribed form with the Collector of Internal Revenue, showing, as his total net income for the
year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said
P296,302.73 did not represent his income for the year 1914, but was in fact the income of the
conjugal partnership existing between himself and his wife Susana Paterno, and that in
computing and assessing the additional income tax provided by the Act of Congress of October
3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-
half to be considered the income of Vicente Madrigal and the other half of Susana Paterno. After
payment under protest, and after the protest of Madrigal had been decided adversely by the
Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana
Paterno in the Court of First Instance of the city of Manila against Collector of Internal Revenue
and the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged
to have been wrongfully and illegally collected by the defendants.

ISSUE:

Whether or not Vicentes income tax should be divided into two equal parts, because of the
conjugal partnership existing between him and Susana.

HELD:

NO. Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her
husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the

ultimate property rights and in the ultimate ownership of property acquired as income after such
income has become capital. Susana Paterno has no absolute right to one-half the income of the
conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a
separate return in order to receive the benefit of the exemption which would arise by reason of
the additional tax. As she has no estate and income, actually and legally vested in her and
entirely distinct from her husband's property, the income cannot properly be considered the
separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax
Law does not look on the spouses as individual partners in an ordinary partnership.


Fisher vs. Trinidad
G.R. No. L-17518, October 30, 1922
Johnson, J .
FACTS:
In 1919, the Philippine American Drug Company was a corporation duly organized and existing
under the laws of the Philippine Islands, doing business in the City of Manila. Appellant Fisher
was a stockholder in said corporation. Philippine American Drug Company, as result of the
business for that year, declared a "stock dividend." The proportionate share of said stock divided
of the appellant was P24,800, and the stock dividend for that amount was issued to the appellant.
Thereafter, in the month of March, 1920, the appellant, upon demand of the appellee, paid under
protest, and voluntarily, unto the appellee the sum of P889.91 as income tax on said stock
dividend. For the recovery of that sum (P889.91) the present action was instituted.
ISSUE:
Whether or not "stock dividends" in the present case "income" and taxable as such under the
provisions of section 25 of Act No. 2833.
HELD:
NO. A careful reading of section 25 of Act No. 2833 will show that, while it permitted a tax
upon income, the same provided that income shall include gains, profits, and income derived
from salaries, wages, or compensation for personal services, as well as from interest, rent,
dividends, securities, etc. The appellee emphasizes the "income from dividends." Of course,
income received as dividends is taxable as an income but an income from "dividends" is a very
different thing from receipt of a "stock dividend." One is an actual receipt of profits; the other is
a receipt of a representation of the increased value of the assets of corporation. Having reached
the conclusion, supported by the great weight of the authority, that "stock dividends" are not
"income," the same cannot be taxes under that provision of Act No. 2833 which provides for a
tax upon income. Under the guise of an income tax, property which is not an income cannot be
taxed.

Limpan Investment Corporation vs. Commissioner of Internal Revenue
G.R. No. L-21570, July 26, 1966
Reyes, JBL, J .
FACTS:
Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business
of leasing real properties. Its president and chairman of the board is the same Isabelo P. Lim.
Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net
incomes of P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes
therefor in the sums of P657.00 and P2,220.00. Sometime in 1958 and 1959, the examiners of
the Bureau of Internal Revenue conducted an investigation of petitioner's 1956 and 1957 income
tax returns and, in the course thereof, they discovered and ascertained that petitioner had
underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable years. On
the basis of these findings, respondent Commissioner of Internal Revenue issued its letter-
assessment and demand for payment of deficiency income tax and surcharge against petitioner
corporation.
Petitioner disclaimed having received or collected the amount of P20,199.00, as unreported
rental income for 1956, and the amount of P81,690.00, as unreported rental income for 1957,
explaining that part of said amount totalling P31,380.00 was not declared as income in its 1957
tax return because its president, Isabelo P. Lim, who collected and received P13,500.00 from
certain tenants, did not turn the same over to petitioner corporation in said year.
ISSUE:
Whether or not the deficiency assessment issued by the BIR is correct.
HELD:
YES. Petitioner having admitted, through its own witness (Vicente G. Solis), that it had
undeclared more than one-half (1/2) of the amount (P12,100.00 out of P20,199.00) found by the

BIR examiners as unreported rental income for the year 1956 and more than one-third (1/3) of
the amount (P29,350.00 out of P81,690.00) ascertained by the same examiners as unreported
rental income for the year 1957, contrary to its original claim to the revenue authorities, it was
incumbent upon it to establish the remainder of its pretensions by clear and convincing evidence,
that in the case is lacking.


Hernando B. Conwi, JaimeE. DY-Liaco, Vicente D. Herrera, Benjamin T.
Ildefonso, Alexander Lacson Jr., Adrian O. Miciano, Eduardo A. Rialp, Leandro
G. Santillan, and Jaime A. Soques, petitioners, vs. The Honorable Court of Tax
Appeals and Commisioner of Internal Revenue, respondents
G.R. No. 48532, August 31, 1992

Enrique R. Abad Santos, Hernando B. COnwi, Teddy L. Dimayuga, Jaime E. DY-Liaco,
Melaquiades J. Gamboa,Jr., Manuel L. Guzman, Vicente D. Herrera, Benjamin T.
Ildefonso, Alexander Lacson, Jr., Adrian O. Miciano, Eduardo A. Rialp and Jamine A.
Soques, petitioners,
VS
The Honorable Court of Tax Appeals and Commissioner of Internal Revenue
G.R. No. 48533, August 31, 1992

Justice Nocon

FACTS:

Petitioners are all employees of Proctor and Gamble Philippine Manufacturing
Corporation which is a subsidiary of Proctor and Gamble, a foreign corporation. All the
petitioners are Filipino Citizens. They were assigned for certain perios to other subsidiaries of
Procter and Gamble, outside of the Philippines. During these assignments, they were paid U.S.
dollars as compensation. When the said petitioners paid their taxes for the year 1970, they
computed the tax according to the dollar-to-peso ratio. However, in 1973 petitioners filed
amended tax returns based on the par value of the peso as prescribed in section 48 of R.A. # 265
in relation to Section 6 of Commonwealth Act #699. This said commonwealth Act states that the
par value of the peso to the dollar shall be one half of a United States dollar. This use of the par
value substantially reduces the income tax that was supposed to be due and paid by them. Thus
they claimed for refunds of the supposed over payments,


ISSUE:

Whether or not the par value or the free market value of the peso should be used in computing
for the tax due on the dollar payments made to them.

HELD:
The Supreme Court held that considering that the subject matter of the two cases are for income
taxes for the calendar years of 1970 and 1971, the governing provisions to be considered are the
provisions of the National Internal Revenue Code and its implementing rules and regulations.
Under the Internal revenue code, tax is imposed upon the taxable net income received during
each taxable year from all sources by a citizen of the Philippines whether residing here or
abroad. As such, the petitioners being subject to Philippine income tax, their dollar earnings
which are to be considered as part of their income, should be converted into Philippine pesos in
computing the income tax due there from. Futhermore, Section 21 of the National Internal
Revenue Code states that tax shall be imposed upon the taxable net income received during each
taxable year from all sources by every individual, whether a citizen of the Philippines residing
therein or abroad or an alien residing in the Philippines. To arrive at the correct taxable income,
the prevailing free market value should be used. The contention of the petitioners that since their
dollar earnings are not receipts derived from foreign exchange transactions, under Central Bank
Circular 289 which provides for the specific instances when the par value of the peso shall not be
the conversion used therefore it may be used on their earnings is untenable because the stated
circular does not speak of income tax.


Bibiano V. Banas,Jr., Petitioner vs. Court of Appeals, Aquiline T. Larin, Rodolfo
Tuazon and Procopio Talon, respondents
Justice Quisumbing:

FACTS:

Petitioner Bibiano Banas, sold to Ayala Investment Corporation 128, 265 square meters.
In consideration, Ayala paid P461,754 as initial payment for the total payment of P2,308,770.
The balance as agreed upon shall be paid in four equal consecutive annual installments. However
on the same date of payment of the initial payment, AYALA discounted the promissory not that
is for the payment of the unpaid balance of P1,847,016 and issued 9 checks to the petitioner
payable on the said date. The Commission of Internal Revenue however found that the paymeny
was not an installment basis but as it is a cash sale due to the discounting by AYALA itself of the
promissory note. The Commission found that petitioner Banas was guilty of tax fraud and thus a
criminal case was filed against him.

ISSUE:

With regard to the subject of tax, whether or not the sale of land is a cash transaction or deemed
as on an installment basis.

HELD:
The Supreme Court held that under the facts of the case, the petitioner was indeed guilty
of tax fraud. There was an attempt to circumvent that what occurred between Barias and
AYALA was an installment sale and not a cash sale. This is proven by the fact that it is highly
unlikely that a purchaser such as AYALA would rediscount a promissory note it paid or
executed . The contention of the petitioner that it is entitled to tax amnesty by filing an amende
tax return. However he is not entitled to any tax amnesty because he did not meet the twin
requirement of P.D. 1740 and 1840 which are : 1.) declaration of untaxed income; and 2.) full

payment of tax due thereon. Therefore he is not entitled to tax amnesty and he is still liable for
tax evasion. His case against Larin is correctly dismissed and he is indeed liable to Larin for
moral and exemplary damages for claiming that Larin tried to extort money from him which it
was found to have no factual or evidentiary basis.
For all things considered, the sale of land spoken of is a sale on cash basis and not a sale on
installment as claimed by Banas so as to evade the payment of tax for the income derived from
the cash payment of the sale of the land stated.

INCOME TAX ON INDIVIDUALS


JOHN L. GARRISON, FRANK ROBERTSON, ROBERT H. CATHEY, JAMES
W. ROBERTSON, FELICITAS DE GUZMAN and EDWARD McGURK,
petitioners, vs. COURT OF APPEALS and REPUBLIC OF THE PHILIPPINES,
G.R. Nos. L-44501-05 July 19, 1990
NARVASA, J .:
FACTS:
Petitioner Birth Date/
Place
Grew up in Rreturn to
the US
Entered
Phililippines
Now
JOHN L.
GARRISON
Philippines Birth-
1945: Phil
1945-
1965-US
Repatriated
1945
he entered the
Philippines
through the Clark
Air Base
He lives with his
Filipino wife and their
children at No. 4
Corpus Street, West
Tapinac, Olongapo
City, and they own the
house and lot on which
they are presently
residing. His wife
acquired by inheritance
six hectares of
agricultural land in
Quezon Province.
JAMES W.
ROBERTSON
December
22, 1915 in
Olongapo,
Zambales
Philippines Repatriated
1945
His next arrival in
the Philippines was
in 1958 and he
stayed in this
country from that
time up to the
present.
He is presently residing
at No. 25 Elicao,
Street, East Bajac-
Bajac, Olongapo City,
and his house and lot
are declared in his
name for tax purposes."

FRANK W.
ROBERTSON
Philippines Repatriated
1945
Sometime in 1946
or early 1947 he
had been visiting
the Philippines off
and on in
connection with his
work. In 1962, he
returned once more
to the Philippines
and he has been
residing here ever
since.
He is married to a
Filipino citizen named
Generosa Juico and
they live at No. 3
National Road, Lower
Kalaklan, Olongapo
City. The residential lot
on which they are
presently residing is
declared in his wife's
name for tax purposes,
while the house
constructed thereon
was originally declared
in his name and the
same was transferred in
his wife's name only in
February, 1971
ROBERT H.
CATHEY
Tennessee,
US
his first arrival in
the Philippines, as
a member of the
liberation forces of
the United States,
was in 1944. He
stayed in the
Philippines until
April, 1950, when
he returned to the
United States, and
He stayed in the
Philippines since 1951
up to the present.

he came back to the
Philippines in
1951.
FELICITAS
DE
GUZMAN
Philippines
in 1935
Father:
naturalized
American
Citizan
Worked in
the US
she returned to the
Philippines on or
about April 21,
1967.
She is married to Jose
de Guzman, a Filipino
citizen, and they and
their children live at
No. 96 Fendler Street,
East Tapinac,
Olongapo City. Her
husband is employed in
the United States Naval
Base, Olongapo City,
and he also works as an
insurance manager of
the Traveller's Life."

EDWARD
McGURK
came to the
Philippines on July
11, 1967
he stayed in this
country continuously
up to the present time."

Note: The person who made this digest, made the facts about the petitioners in a table form for
better appreciation of facts. It is advised that you look at the full text if the table cannot be
understood. Thanks.
ALL THE PETITIONERS "are United States citizens, entered this country under Section 9 (a) of
the Philippine Immigration Act of 1940, as amended, and presently employed in the United
States Naval Base, Olongapo City.

ALL SAID PETITIONERS "received separate notices from Ladislao Firmacion, District
Revenue Officer, stationed at Olongapo City, informing them that they had not filed their
respective income tax returns for the year 1969, as required by Section 45 of the National
Internal Revenue Code
1
, and directing them to file the said returns within ten days from receipt
of the notice. But the accused refused to file their income tax returns, claiming that they are not
resident aliens but only special temporary visitors, having entered this country under Section 9
(a) of the Philippine Immigration Act of 1940, as amended. They claimed exemption from filing
the return in the Philippines by virtue of the provisions of Article XII, paragraph 2 of the US-RP
Military Bases Agreement.
2
"
ISSUE:
WON petitioners may not under the law be deemed resident aliens who are required to file
income tax returns.
HELD:
Each of the petitioners does indeed fall within the letter of the codal precept that an "alien
residing in the Philippines" is obliged "to file an income tax return." None of them may be
considered a non-resident alien, "a mere transient or sojourner," who is not under any legal duty

1
The provision alleged to have been violated by the petitioners, Section 45 of the National Internal Revenue Code, as amended,
reads as follows:
SEC. 45. Individual returns. (a) Requirements. (1) The following individuals are required to file an income
tax return, if they have a gross income of at least One Thousand Eight Hundred Pesos for the taxable
year; . . .
(b) If alien residing in the Philippines, regardless of whether the gross income was derived from sources
within or outside the Philippines.
The sanction for breach thereof is prescribed by Section 73 of the same code, to wit:
SEC. 73. Penalty for failure to file return nor to pay tax. Anyone liable to pay the tax, to make a return or to supply
information required under this code, who refuses or neglects to pay such tax, to make such return or to supply such
information at the time or times herein specified each year, shall be punished by a fine of not more than Two Thousand Pesos
or by imprisonment for not more than six months, or
both . .

2
The provision under which the petitioners claim exemption, on the other hand, is contained in the Military Bases Agreement
between the Philippines and the United States,
4
reading as follows:
2. No national of the United States serving in or employed in the Philippines in connection with
construction, maintenance, operation or defense of the bases and reside in the Philippines by reason only
of such employment, or his spouse and minor children and dependents, parents or her spouse, shall be
liable to pay income tax in the Philippines except in regard to income derived from Philippine sources or
sources other than the US sources.


to file an income tax return under the Philippine Tax Code. This is made clear by Revenue
Relations No. 2 of the Department of Finance of February 10, 1940,
9
which lays down the
relevant standards on the matter:
An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for purposes of income tax. Whether he is a transient or not is
determined by his intentions with regards to the length and nature of his stay. A mere
floating intention indefinite as to time, to return to another country is not sufficient to
constitute him as transient. If he lives in the Philippines and has no definite intention as
to his stay, he is a resident. One who comes to the Philippines for a definite purpose
which in its nature may be promptly accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be necessary to its accomplishment, and to that
end the alien makes his home temporarily in the Philippines, he becomes a resident,
though it may be his intention at all times to return to his domicile abroad when the
purpose for which he came has been consummated or abandoned.
The petitioners concede that the foregoing standards have been "a good yardstick," and are in
fact not at substantial variance from American jurisprudence.
10
They acknowledge, too, that
"their exemption under the Bases Agreement relates simply to non-liability for the payment of
income tax, not to the filing of . . . (a return)." But, they argue that there appears to be no logic in
requiring them to file income tax returns which anyhow would serve no practical purpose since
their liability on the amounts stated thereon can hardly be exacted.
By the explicit terms of the Bases Agreement, it exists only as regards income derived from their
employment "in the Philippines in connection with construction, maintenance, operation or
defense of the bases;" it does not exist in respect of other income, i.e., "income derived from
Philippine sources or sources other than the US sources."
So that American nationals residing in the country may be relieved of the duty to pay income tax
for any given year, it is incumbent on them to show the Bureau of Internal Revenue that in that
year they had derived income exclusively from their employment in connection with the U.S.
bases, and none whatever "from Philippine sources or sources other than the US sources." They

have to make this known to the Government authorities. It is not in the first instance the latter's
duty or burden to make unaided verification of the sources of income of American residents. The
duty rests on the U.S. nationals concerned to invoke and prima facie establish their tax-exempt
status. It cannot simply be presumed that they earned no income from any other sources than
their employment in the American bases and are therefore totally exempt from income tax. The
situation is no different from that of Filipino and other resident income-earners in the Philippines
who, by reason of the personal exemptions and permissible deductions under the Tax Code, may
not be liable to pay income tax year for any particular year; that they are not liable to pay income
tax, no matter how plain or irrefutable such a proposition might be, does not exempt them from
the duty to file an income tax return.
WHEREFORE, the petition for review on certiorari is DENIED, and the challenged decision of
the Court of Appeals is AFFIRMED. Costs against petitioners..


CARMELINO F. PANSACOLA vs. COMMISSIONER OF INTERNAL
REVENUE
G.R. No. 159991 November 16, 2006
QUISUMBING, J .:
FACTS:
On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax return for the taxable
year 1997 that reflected an overpayment of P5,950. In it he claimed the increased amounts of
personal and additional exemptions under Section 35 of the NIRC, although his certificate of
income tax withheld on compensation indicated the lesser allowed amounts on these exemptions.
He claimed a refund of P5,950 with the Bureau of Internal Revenue, which was denied. Later,
the Court of Tax Appeals also denied his claim because according to the tax court, "it would be
absurd for the law to allow the deduction from a taxpayers gross income earned on a certain
year of exemptions availing on a different taxable year" Petitioner sought reconsideration, but
the same was denied.
ISSUE:
Could the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be
availed of for the taxable year 1997?
HELD:
Prefatorily, personal and additional exemptions under Section 35 of the NIRC are fixed amounts
to which certain individual taxpayers (citizens, resident aliens) are entitled. Personal exemptions
are the theoretical personal, living and family expenses of an individual allowed to be deducted
from the gross or net income of an individual taxpayer. These are arbitrary amounts which have
been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence,
taking into account the personal status and additional qualified dependents of the taxpayer. They
are fixed amounts in the sense that the amounts have been predetermined by our lawmakers as
provided under Section 35 (A) and (B). Unless and until our lawmakers make new adjustments

on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as
predetermined by Congress.
A careful scrutiny of the provisions of the NIRC specifically shows that Section 79 (D)
3
provides
that the personal and additional exemptions shall be determined in accordance with the main
provisions in Title II of the NIRC(Section 35 (A) and (B))
4

Section 35 (A) and (B) allow the basic personal and additional exemptions as deductions from
gross or net income, as the case maybe, to arrive at the correct taxable income of certain
individual taxpayers. Section 24 (A) (1) (a)
5
imposed income tax on a resident citizens taxable
income derived for each taxable year.
Section 31 defines "taxable income" as the pertinent items of gross income specified in the
NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such
types of income by the NIRC or other special laws. As defined in Section 22 (P), "taxable year"
means the calendar year, upon the basis of which the net income is computed under Title II of
the NIRC. Section 43 also supports the rule that the taxable income of an individual shall be
computed on the basis of the calendar year. In addition, Section 45 provides that the deductions

3
Section 79 (H requires the employer to determine, on or before the end of the calendar year but prior to the
payment of the compensation for the last payroll period, the tax due from each employees taxable compensation
income for the entire taxable year in accordance with Section 24 (A). This is for the purpose of either withholding
from the employees December salary, or refunding to him not later than January 25 of the succeeding year, the
difference between the tax due and the tax withheld.

4
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General.-For purposes of determining the tax provided in Section 24(A) of this Title,there shall be allowed a basic personal
exemption as follows:
x x x x
For each married individual P32,000
x x x x
(B) Additional Exemption for Dependents.There shall be allowed an additional exemption of Eight thousand pesos (P8,000) for
each dependent not exceeding four (4).

5
SEC. 24. Income Tax Rates.
(A) Rates of Income Tax on Individual Citizen
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections
(B), (C), and (D) of this Section, derived for each taxable year from all sources within and without the Philippines by
every individual citizen of the Philippines residing therein;


provided for under Title II of the NIRC shall be taken for the taxable year in which they are
"paid or accrued" or "paid or incurred."
>>>Therefore, as provided in Section 24 (A) (1) (a) in relation to Sections 31 and 22 (P) and
Sections 43, 45 and 79 (H) of the NIRC, the income subject to income tax is the taxpayers
income as derived and computed during the calendar year, his taxable year.
Clearly from the abovequoted provisions, what the law should consider for the purpose of
determining the tax due from an individual taxpayer is his status and qualified dependents at the
close of the taxable year and not at the time the return is filed and the tax due thereon is paid.
Now comes Section 35 (C) of the NIRC which provides,
Sec. 35. Allowance of Personal Exemption for Individual Taxpayer.
x x x x (C) Change of Status. If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the corresponding additional
exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes
twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer
may still claim the same exemptions as if the spouse or any of the dependents died, or as if such
dependents married, became twenty-one (21) years old or became gainfully employed at the
close of such year.
Emphasis must be made that Section 35 (C) of the NIRC allows a taxpayer to still claim the
corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional
dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry, turn
21 years old; or become gainfully employed. It is as if the changes in his or his dependents
status took place at the close of the taxable year.

Consequently, his correct taxable income and his corresponding allowable deductions e.g.
personal and additional deductions, if any, had already been determined as of the end of the
calendar year.
In the case of petitioner, the availability of the aforementioned deductions if he is thus entitled,
would be reflected on his tax return filed on or before the 15th day of April 1999 as mandated by
Section 51 (C) (1).
24
Since the NIRC took effect on January 1, 1998, the increased amounts of
personal and additional exemptions under Section 35, can only be allowed as deductions from
the individual taxpayers gross or net income, as the case maybe, for the taxable year 1998 to be
filed in 1999. The NIRC made no reference that the personal and additional exemptions shall
apply on income earned before January 1, 1998.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated June 5, 2003 and
the Resolution dated September 11, 2003 of the Court of Appeals in CA-G.R. S.P. No. 60475 are
hereby AFFIRMED.


Reynaldo V. Umali vs. Hon. Jesus P. Estanislao, Secretary of Finance, and Hon.
Jose U. Ong, Commissioner of Internal Revenue
G.R. No. 104037 May 29, 1992

Rene B. Gorospe et al. vs. Commissioner of Internal Revenue
G.R. No. 104069 May 29, 1992

PADILLA, J .:
FACTS:

Congress enacted Rep. Act 7167, entitled "AN ACT ADJUSTING THE BASIC PERSONAL
AND ADDITIONAL EXEMPTIONS ALLOWABLE TO INDIVIDUALS FOR INCOME TAX
PURPOSES TO THE POVERTY THRESHOLD LEVEL, AMENDING FOR THE PURPOSE
SECTION 29, PARAGRAPH (L), ITEMS (1) AND (2) (A) OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES The said act contained
the provision that it shall take effect upon its approval. It was signed and approved by the
President on 19 December 1991 and published on 14 January 1992 in "Malaya" a newspaper of
general circulation.
Pursuant to the said Republic Act, on 26 December 1991, public respondents promulgated
Revenue Regulations No. 1-92 which provides that each employee shall be allowed to claim the
following amount of exemption with respect to compensation paid on or after January 1, 1992.
Hence petitioner Umali, in G.R. No. 104037, as a taxpayer, filed a petition for mandamus
for himself and in behalf all individual Filipino taxpayers, to COMPEL the respondents to
implement Rep. Act 7167 with respect to taxable income of individual taxpayers earned or
received on or after 1 January 1991 or as of taxable year ending 31 December 1991.
Consolidated with the case is G.R. No. 104069 filed by Gorospe et al. filed a petition for
mandamus and prohibition on their behalf as well as for those other individual taxpayers who
might be similarly situated, to compel the Commissioner of Internal Revenue to implement the
mandate of Rep. Act 7167 adjusting the personal and additional exemptions allowable to

individuals for income tax purposes in regard to income earned or received in 1991, and to
enjoin the respondents from implementing Revenue Regulations No. 1-92.

ISSUES:

1. Whether or not Rep. Act 7167 took effect upon its approval by the President on 19
December 1991, or on 30 January 1992, i.e., after fifteen (15) days following its
publication on 14 January 1992 in the "Malaya" a newspaper of general circulation;

2. Assuming that Rep. Act 7167 took effect on 30 January 1992, whether or not the said law
nonetheless covers or applies to compensation income earned or received during calendar
year 1991.

HELD:

1. The Court ruled that RA 7167 took effect on 30 January 1992, which is after fifteen (15)
days following its publication on 14 January 1992 in the "Malaya." Pursuant to the
express provision of Article 2 of the Civil Code that Laws shall take effect after fifteen
days following the completion of their publication either in the official Gazette or in a
newspaper of general circulation in the Philippines, unless it is otherwise provided, and
the doctrine enunciated in Tanada vs. Tuvera which provides that Publication is
indispensable in every case, but the legislature may in its discretion provide that the usual
fifteen-day period shall be shortened or extended.

2. Court is of the considered view that Rep. Act 7167 should cover or extend to
compensation income earned or received during calendar year 1991.

First, Rep. Act 7167 speaks of the adjustments that it provides for, as adjustments "to the
poverty threshold level." Certainly, "the poverty threshold level" is the poverty threshold
level at the time Rep. Act 7167 was enacted by Congress, not poverty threshold levels in
futuro, at which time there may be need of further adjustments in personal exemptions. It

is the lower-income and the middle-income groups of taxpayers (not the high-income
taxpayers) who stand to benefit most from the increase of personal and additional
exemptions provided for by Rep. Act 7167. To that extent, the act is a social legislation
intended to alleviate in part the present economic plight of the lower income taxpayers.
These exemptions are available upon the filing of personal income tax returns which is,
under the National Internal Revenue Code, done not later than the 15th day of April after
the end of a calendar year. Thus, under Rep. Act 7167, which became effective, on 30
January 1992, the increased exemptions are literally available on or before 15 April 1992
(though not before 30 January 1992). But these increased exemptions can be available on
15 April 1992 only in respect of compensation income earned or received during the
calendar year 1991.
However, the personal exemptions as increased by Rep. Act 7167 cannot be regarded as
available in respect of compensation income received during the 1990 calendar year; the
tax due in respect of said income had already accrued, and been presumably paid, by 15
April 1991 and by 15 July 1991, at which time Rep. Act 7167 had not been enacted. To
make Rep. Act 7167 refer back to income received during 1990 would require language
explicitly retroactive in purport and effect, language that would have to authorize the
payment of refunds of taxes paid on 15 April 1991 and 15 July 1991.

The Court ruled that the personal exemptions as increased by Rep. Act 7167 cannot be
regarded as available only in respect of compensation income received during 1992, as
provided by the implementing Revenue Regulations No. 1-92. Revenue Regulations No.
1-92 would in effect postpone the availability of the increased exemptions to 1 January-
15 April 1993, and thus literally defer the effectivity of Rep. Act 7167 to 1 January 1993.
Thus, the implementing regulations collide frontally with Section 3 of Rep. Act 7167
which states that the statute "shall take effect upon its approval."


DEFINITION OF CORPORATIONS


AFISCO INSURANCE CORPORATION et al. vs. COURT OF APPEALS,
COURT OF TAX APPEALS and COMISSIONER OF INTERNAL REVENUE
G.R. No. 112675 January 25, 1999
PANGANIBAN, J .:

FACTS:

Petitioners are 41 non-life insurance corporations, organized and existing under the laws of the
Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and
Contractors' All Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota
Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a pool. Accordingly, a pool
composed of the petitioners was formed on the same day. On April 14, 1976, the pool of
machinery insurers submitted a financial statement and filed an "Information Return of
Organization Exempt from Income Tax" for the year ending in 1975, on the basis of which it was
assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the amount of
P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on
dividends paid to Munich and to the petitioners, respectively. These assessments were protested
by the petitioners through its auditors Sycip, Gorres, Velayo and Co. The Commissioner of
Internal Revenue denied the protest and ordered the petitioners, assessed as "Pool of Machinery
Insurers," to pay deficiency income tax, interest, and withholding tax.

ISSUES:
1. Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name, was a
partnership or association subject to tax as a corporation;

2. Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were
"dividends" subject to tax; and
3. Whether or not the respondent Commissioner's right to assess the Clearing House had already
prescribed.

HELD:

1. No. The Supreme Court does not agree with petitioners contention that the CA erred in
finding that the pool of clearing house was an informal partnership, which was taxable as
a corporation under the NIRC. They point out that the reinsurance policies were written
by them "individually and separately," and that their liability was limited to the extent of
their allocated share in the original risk thus reinsured. Hence, the pool did not act or earn
income as a reinsurer.
The Court is not persuaded. The opinion or ruling of the Commission of Internal
Revenue, the agency tasked with the enforcement of tax law, is accorded much weight
and even finality, when there is no showing. that it is patently wrong.
Section 24 of the NIRC, as worded in the year ending 1975 provides that A tax is
hereby imposed upon the taxable net income received during each taxable year from all
sources by every corporation organized in, or existing under the laws of the Philippines,
no matter how created or organized thus recognizing the inclusion of those entities that
resembled corporations such as unregistered partnerships and associations.
Moreover, Art. 1767 of the Civil Code recognizes the creation of a contract of
partnership when "two or more persons bind themselves to contribute money, property,
or Industry to a common fund, with the intention of dividing the profits among
themselves."
In the case at bar, the ceding companies entered into a Pool Agreement or an
association that would handle all the insurance businesses covered under their quota-
share reinsurance treaty and surplus reinsurance treaty with Munich. The following
unmistakably indicates a partnership or an association covered by Section 24 of the
NIRC: (1) The pool has a common fund, consisting of money and other valuables that are

deposited in the name and credit of the pool. This common fund pays for the
administration and operation expenses of the pool.

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

(3) True, the pool itself is not a
reinsurer and does not issue any insurance policy; however, its work is indispensable,
beneficial and economically useful to the business of the ceding companies and Munich,
because without it they would not have received their premiums. The ceding companies
share "in the business ceded to the pool" and in the "expenses" according to a "Rules of
Distribution" annexed to the Pool Agreement.
36
Profit motive or business is, therefore,
the primordial reason for the pool's formation.

2. Yes. The Supreme Court held that the pools remittances are taxable. The Court gave no
merit to Petitioners contention that taxing such remittances contravene Sections 24 (b)
(I) and 263 of the 1977 NIRC and "would be tantamount to an illegal double taxation as it
would result in taxing the same taxpayer." Double taxation means taxing the same
property twice when it should be taxed only once. That is, ". . . taxing the same person
twice by the same jurisdiction for the same thing." In the instant case, the pool is a
taxable entity distinct from the individual corporate entities of the ceding companies. The
tax on its income is obviously different from the tax on the dividends received by the said
companies. Hence, there is no double taxation.
Moreover, the exemptions claimed by petitioners in Sections 24 (b) (I) and 263 of the
1977 NIRC and as well as Article 7 of paragraph 1 and Article 5 of paragraph 5 of the
RP-West German Tax Treaty cannot be granted because their entitlement thereto remains
unproven and unsubstantiated. Exemptions from taxes are highly disfavored in law and
he who claims tax exemption must be able to justify his claim or right.
Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC
which they cite are inapplicable, because these were not yet in effect when the income
was earned and when the subject information return for the year ending 1975 was filed.
Notwithstanding, the 1975 version of the counterpart sections of the NIRC, the Court still
cannot justify the exemptions claimed. Section 255 thereof provides that no tax shall ". . .

be paid upon reinsurance by any company that has already paid the tax . . ." It cannot be
applied to the present case because, as previously discussed, the pool is a taxable entity
distinct from the ceding companies; therefore, the latter cannot individually claim the
income tax paid by the former as their own.
Section 24 (b) (1) pertains to tax on foreign corporations; hence, it cannot be claimed by
the ceding companies which are domestic corporations. Nor can Munich, a foreign
corporation, be granted exemption based solely on this provision of the Tax Code,
because the same subsection specifically taxes dividends, the type of remittances
forwarded to it by the pool.
The RP- West German Tax Treaty is likewise unpersuasive, because the internal revenue
commissioner assessed the pool for corporate taxes on the basis of the information return
it had submitted for the year ending 1975, a taxable year when said treaty was not yet in
effect. Although petitioners omitted in their pleadings the date of effectivity of the treaty,
the Court takes judicial notice that it took effect only later, on December 14, 1984.
3. No. Contrary to the contention that the period for the government to assess and collect
the tax had already prescribed the Court sustained the ruling of the lower courts. The CA
and the CTA categorically found that the prescriptive period was tolled under then
Section 333 of the NIRC, because "the taxpayer cannot be located at the address given in
the information return filed and for which reason there was delay in sending the
assessment." Thus even if the subject information return was filed by the pool on April
14, 1976 and the BIR telephoned petitioners on November 11, 1981, to give them notice
of its letter of assessment dated March 27, 1981, the 5 year prescription period is not
applicable since it has been tolled. The law states that the said period will be suspended
only "if the taxpayer informs the Commissioner of Internal Revenue of any change in the
address." Said giving of information cannot be justified by petitioners statement in its
Motion for Reconsideration before the Court of Appeals that the pool changed its
address, for they stated that the pool's information return filed in 1980 indicated therein
its "present address."


Mariano P. Pascual and Renato P. Dragon vs. The Commissioner of Internal
Revenue (CIR) and Court of Tax Appeals (CTA)
166 SCRA 560 [1988]
Gancayco, J.:

FACTS:

On June 22, 1985, Mariano and Renato bought two parcels of land from Santiago
Bernardino and another three on May 28, 1966 from Juan Roque. The first two parcels of land
were then sold to Marenir Development Corporation in 1968 and the other three were sold to
Reyes and Samson in 1970. Mariano and Renato realized profits from these sales paid the
corresponding capital gains taxes by availing of tax amnesties in 1973 and in 1974.
However, in a letter, the CIR assessed and required Mariano and Renato to pay
deficiency corporate income taxes for the years 1968 and 1970. The CIR informed Mariano and
Renato that in the years 1968 and 1970, they formed an unregistered partnership or joint venture
taxable as a corporation and that its income was subject to the taxes prescribed under Section 24
on the National Internal Revenue Code.
The CTA affirmed the CIR reiterating the latters position.

ISSUE:

Whether or not Renato and Mariano indeed formed an unregistered partnership or joint
venture to be taxable in the same manner as a corporation.

HELD:

No. There is no evidence that petitioners entered into an agreement to contribute money,
property or industry to a common fund and that they intended to divide the profits among
themselves. The CIR just assumed these conditions to be present on the basis of the fact that
petitioners purchased certain parcels of land and became the co-owners thereof.

The transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present. An isolated transaction whereby two or
more persons contribute funds to buy real estate for profit in the absence of circumstances
showing a contrary intention cannot be considered a partnership.
The sharing of returns does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical personality different from the individual
partners and the freedom of each party to transfer or assign the whole property.


Jose P. Obillos Jr., Sarah P. Obillos, Romeo P. Obillos and Remedios P. Obillos,
brothers and sisters, vs. Commisioner of Internal Revenue (CIR) and Court of
Tax Appeals (CTA)
139 SCRA 436 [1985]
Aquino, J.:
FACTS:

On March 2, 1973, Jose Sr. completed payment on two lots he bought from Ortigas &
Co., Ltd. The next day he transferred his rights to his children to enable them to build their
residences. Presumably, the Torrens titles issued show petitioners were co-owners of the two
lots.
In 1974, petitioners resold the two lots to Walled City Securities Corp. and Olga Cruz
Canda. They derived profit from the sale and treated it as a capital gain and paid income tax
thereon.
In April 1980, the CIR required the petitioners to pay corporate income tax on the their
total profit in addition to individual income tax on their shares thereof. Petitioners were also held
liable for deficiency income taxes and penalties in addition to capital gains taxes already paid by
them.
The petitioners protested the assessments but the CTA sustained them.

ISSUE:

Whether or not petitioners formed an unregistered partnership or joint venture to be
taxable in the same manner as a corporation.

HELD:

No. Article 1769(3) of the civil Code provides that the sharing of gross income does not
itself establish a partnership, whether or not the persons sharing them have a joint or common
interest in any property from which returns are derived. There must be an unmistakable
intention to form a partnership or joint venture. Petitioners had no such intention. They were not

engaged in any joint venture by reason of the isolated transaction of selling their property and
dividing the proceeds among themselves.
The original purpose was to divide the lots for residential purposes. If later on they found
it not feasible to build their residences because of the high cost of construction, then they had no
choice but to resell the same to dissolve the co-ownership. The division of the profit was merely
incidental to the dissolution of the co-ownership, which was in the nature of things a temporary
state. It had to be terminated sooner or later.


LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B.
OA, MARIANO B. OA, LUZ B. OA, VIRGINIA B. OA and LORENZO
B. OA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. L-19342 May 25, 1972

BARREDO, J .:

FACTS:

Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and
her five children. A civil case was instituted in the Court of First Instance of Manila for the
settlement of her estate. Later, Lorenzo T. Oa the surviving spouse was appointed administrator
of the estate of said deceased. On April 14, 1949, the administrator submitted the project of
partition, which was approved by the Court on May 16, 1949. Because three of the heirs, namely
Luz, Virginia and Lorenzo, Jr., all surnamed Oa, were still minors when the project of partition
was approved, Lorenzo T. Oa, their father and administrator of the estate, filed a petition of the
Court of First Instance of Manila for appointment as guardian of said minors. On November 14,
1949, the Court appointed him guardian of the persons and property of the said minors.

The project of partition shows that the heirs have undivided one-half (1/2) interest in ten parcels
of land with a total assessed value of P87,860.00, six houses with a total assessed value of
P17,590.00 and an undetermined amount to be collected from the War Damage Commission.
Later, they received from said Commission the amount of P50,000.00, more or less. This amount
was not divided among them but was used in the rehabilitation of properties owned by them in
common. Of the ten parcels of land aforementioned, two were acquired after the death of the
decedent with money borrowed from the Philippine Trust Company.

Although the project of partition was approved by the Court on May 16, 1949, no attempt was
made to divide the properties therein listed. Instead, the properties remained under the

management of Lorenzo T. Oa who used said properties in business by leasing or selling them
and investing the income derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners' properties and investments gradually increased
from P105,450.00 in 1949 to P480,005.20 in 1956.

From said investments and properties petitioners derived such incomes as profits from
installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests.
The said incomes are recorded in the books of account kept by Lorenzo T. Oa where the
corresponding shares of the petitioners in the net income for the year are also known. Every year,
petitioners returned for income tax purposes their shares in the net income derived from said
properties and securities and/or from transactions involving them. However, petitioners did not
actually receive their shares in the yearly income. The income was always left in the hands of
Lorenzo T. Oa who, as heretofore pointed out, invested them in real properties and securities.

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and therefore, subject to the corporate income tax,
pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed
against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for
1955 and 1956, respectively. Petitioners protested against the assessment and asked for
reconsideration of the ruling of respondent that they have formed an unregistered partnership.
Finding no merit in petitioners' request, respondent denied it.

ISSUE:

Whether the petitioners be considered as co-owners of the properties inherited by them from the
deceased Julia Buales and the profits derived from transactions involving the same, or, must
they be deemed to have formed an unregistered partnership subject to tax under Sections 24 and
84(b) of the National Internal Revenue Code?


HELD:

The respondent is correct in denying the petitioner. The Tax Court found that instead of actually
distributing the estate of the deceased among themselves pursuant to the project of partition
approved in 1949, "the properties remained under the management of Lorenzo T. Oa who used
said properties in business by leasing or selling them and investing the income derived therefrom
and the proceed from the sales thereof in real properties and securities," as a result of which said
properties and investments steadily increased yearly from P87,860.00 in "land account" and
P17,590.00 in "building account" in 1949 to P175,028.68 in "investment account," P135.714.68
in "land account" and P169,262.52 in "building account" in 1956.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit
themselves to holding the properties inherited by them. Indeed, it is admitted that during the
material years herein involved, some of the said properties were sold at considerable profit, and
that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from these ventures were divided
among petitioners proportionately in accordance with their respective shares in the inheritance.

In these circumstances, it is the SCs considered view that from the moment petitioners allowed
not only the incomes from their respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oa as a common fund in undertaking several
transactions or in business, with the intention of deriving profit to be shared by them
proportionally, such act was tantamount to actually contributing such incomes to a common fund
and, in effect, they thereby formed an unregistered partnership within the purview of the above-
mentioned provisions of the Tax Code.

From the moment of such partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly he becomes
liable individually for all taxes in connection therewith. If after such partition, he allows his
share to be held in common with his co-heirs under a single management to be used with the

intent of making profit thereby in proportion to his share, there can be no doubt that, even if no
document or instrument were executed for the purpose, for tax purposes, at least, an unregistered
partnership is formed.

PASSIVE INCOME

COMMISSIONER OF INTERNAL REVENUE vs. JOHN L. MANNING et al.
G.R. No. L-28398 August 06, 1975

CASTRO, J:

FACTS:

In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into25,000
common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each,
by the three respondents. On February 29, 1952, in view of Reese's desire that upon his death
MANTRASCO and its two subsidiaries, MANTRASCO (Guam), Inc. and the PortMotors, Inc.,
would continue under the management of the respondents, a trust agreement on his and the
respondents' interests in MANTRASCO was executed by and among Reese ,MANTRASCO ,
the law firm of Ross, Selph, Carrascoso and Janda , and the respondents. On October 19, 1954
Reese died. The projected transfer of his shares in the name of MANTRASCO could not,
however, be immediately effected for lack of sufficient funds to cover initial payment on the
shares. On February 2, 1955, after MANTRASCO made a partial payment of Reese's shares, the
certificate for the 24,700 shares in Reese's name was cancelled and a new certificate was issued
in the name of MANTRASCO. On the same date, and in the meantime that Reese's interest had
not been fully paid, the new certificate was endorsed to the law firm of Ross, Selph, Carrascoso
and Janda, as trustees for and in behalf of MANTRASCO. On November 25,1963 the entire
purchase price of Reese's interest in MANTRASCO was finally paid in full by the latter, On May
4, 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO all the
shares which they were holding in trust. Bureau of Internal Revenue examination disclosed that
(a) as of December 31, 1958 the 24,700 shares declared as dividends had been proportionately
distributed to the respondents, representing a total book value or acquisition cost of P7,973,660;
(b) the respondents failed to declare the said stock dividends as part of their taxable income for
the year 1958.On the basis of their examination, the BIR examiners concluded that the
distribution of Reese's shares as stock dividends was in effect a distribution of the "asset or
property of the corporation as may be gleaned from the payment of cash for the redemption of

said stock and distributing the same as stock dividend." On April 14, 1965 the Commissioner of
Internal Revenue issued notices of assessment for deficiency income taxes to the respondents for
the year 1958The respondents unsuccessfully challenged the assessments and, failing to secure a
favorable reconsideration, appealed to the Court of Tax Appeals. On October 30, 1967 the CTA
rendered judgment absolving the respondents from any liability for receiving the questioned
stock dividends on the ground that their respective one-third interest in MANTRASCO remained
the same before and after the declaration of stock dividends and only the number of shares held
byeach of them had changed. Commissioner maintains that the full value (P7,973,660) of the
shares redeemed from Reese by MANTRASCO which were subsequently distributed to the
respondents as stock dividends in1958 should be taxed as income of the respondents for
that year, the said distribution being in effect a distribution of cash. The respondents' interests in
MANTRASCO, he further argues, were only .4% prior to the declaration of the stock dividends
in 1958, but rose to 33 1/3% each after the said declaration. In submitting their respective
contentions, it is the assumption of both parties that the 24,700 shares declared as stock
dividends were treasury shares.

ISSUE:

Are the shares in question treasury shares?

HELD:

Treasury shares are stocks issued and fully paid for and re-acquired by the corporation
neither by purchase, donation, forfeiture or other means. Treasury shares are therefore issued
shares, but being in the treasury they do not have the status of outstanding shares. Consequently,
although a treasury share, not having been retired by the corporation re-acquiring it, may be re-
issued or sold again, such share, as long as it is held by the corporation as a treasury share,
participates neither in dividends, because dividends cannot be declared by the corporation to
itself, nor in the meetings of the corporation as voting stock, for otherwise equal distribution
of voting powers among stockholders will be effectively lost and the directors will be able to
perpetuate their control of the corporation, though it still represents a paid-for interest in the

property of the corporation. The foregoing essential features of a treasury stock are lacking in
the questioned shares. The manifest intention of the parties to the trust agreement was, in sum
and substance, to treat the 24,700 shares of Reese as absolutely outstanding shares of Reese's
estate until they were fully paid. Such being the true nature of the 24,700 shares, their declaration
as treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy.
A stock dividend, being one payable in capital stock, cannot be declared out of outstanding
corporate stock, but only from retained earnings:"'A stock dividend always involves a transfer of
surplus (or profit) to capital stock.' Graham and Katz, Accounting in Law Practice, 2d ed. 1938,
No. 70. As the court said in United States vs. Siegel, 8 Cir., 1931, 52 F 2d 63, 65, 78 ALR 672:
'A stock dividend is a conversion of surplus or undivided profits into capital stock, which is
distributed to stockholders in lieu of a cash dividend.' Congress itself has defined the term
'dividend' in No. 115(a) of the Act as meaning any distribution made by a corporation to its
shareholders, whether in money or in other property, out of its earnings or profits. In Eisner v.
Macomber, 1920, 252 US 189, 40 S Ct 189, 64 L Ed 521, 9ALR 1570, both the prevailing and
the dissenting opinions recognized that within the meaning of the revenue acts the essence of a
stock dividend was the segregation out of surplus account of a definite portion of the corporate
earnings as part of the permanent capital resources of the corporation by the device of
capitalizing the same, and the issuance to the stockholders of additional shares of stock
representing the profits so capitalized.


MINIMUM CORPORATE INCOME TAX


Commissioner of Internal Revenue vs. Philippine Airlines, Inc
G.R. No. 180066

FACTS:

For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL allegedly incurred zero taxable
income, which left it with unapplied creditable withholding tax in the amount
of P2,334,377.95. PAL did not pay any MCIT for the period.
In a letter dated 12 July 2002, addressed to petitioner Commissioner of Internal Revenue (CIR),
PAL requested for the refund of its unapplied creditable withholding tax for FY 2000-2001.
BIR officers and PAL representatives attended a scheduled informal conference, during which
the former relayed to the latter that the BIR was denying the claim for refund of PAL and,
instead, was assessing PAL for deficiency MCIT for FY 2000-2001. The PAL representatives
argued that PAL was not liable for MCIT under its franchise.

ISSUE :

Whether PAL is liable for deficiency MCIT for FY 2000-2001.

HELD:

NO. PHIIPPINE AIRLINES, INC.s franchise clearly refers to "basic corporate income tax"
which refers to the general rate of 35% (now 30%). In addition, there is an apparent distinction
under the Tax Code between taxable income, which is the basis for basic corporate income tax
under Sec. 27 (A) and gross income, which is the basis for the Minimum Corporate Income Tax
under Section 27 (E). The two terms have their respective technical meanings and cannot be used
interchangeably. Not being covered by the Charter which makes PAL liable only for basic
corporate income tax, then Minimum Corporate Income Tax is included in "all other taxes" from
which PHILIPPINE AIRLINES, INC. is exempted.


The CIR also cannot point to the Substitution Theory which states that Respondent
may not invoke the in lieu of all other taxes provision if it did not pay anything at all as basic
corporate income tax or franchise tax. The Court ruled that it is not the fact tax payment that
exempts Respondent but the exercise of its option. The Court even pointed out the fallacy of the
argument in that a measly sum of one peso would suffice to exempt PAL from other taxes while
a zero liability would not and said that there is really no substantial distinction between a zero
tax and a one-peso tax liability. Lastly, the Revenue Memorandum Circular stating the
applicability of the MCIT to PAL does more than just clarify a previous regulation and goes
beyond mere internal administration and thus cannot be given effect without previous notice or
publication to those who will be affected thereby.


The Manila Banking Corporation vs. CIR
G.R. No. 168118

FACTS:

Manila Banking Corporation was engaged in the banking industry til 1987. On May 1987, the
Monetary Board of Bangko Sentral ng Pilipinas (BSP) issued Resolution # 505 {pursuant to the
Central Bank Act (RA 265)} prohibiting Manila Bank from engaging in business by reason of
insolvency. So, Manila Bank ceased operations and its assets and liabilities were placed under
charge of a governor - appointed receiver.

On 1998, Comprehensive Tax Reform Act (RA8424) imposed a minimum corporate
income tax on domestic and resident foreign corporations. Its Implementing law (Revenue
Regulation # 9-98) states that the law allows a 4year period from the time the corporations were
registered with the BIR during which the minimum corporate income tax should not be imposed.

Subsequently, on June 23, 1999, BSP authorized Manila Bank to operate as a thrift
bank.On December 1999, Manila Bank wrote to BIR requesting a ruling on whether it is entitled
to the 4 year grace period under RR 9-98.

On February 2001, BIR issued BIR Ruling 7-2001 stating that Manila Bank is entitled to
the 4year grace period. Since it reopened in 1999, the minimum corporate income tax may be
imposed not earlier than 2002. It stressed that although it had been registered with the BIR
before 1994, but it ceased operations 1987-1999 due to involuntary closure.

Thereafter, Manila Bank, then, filed with BIR for the refund. Due to the inaction of
BIR on the claim, it filed with CTA for a petition for review, which was denied and found that
Manila Banks payment of 33M is correct, since its operations were merely interrupted during
1987-1999. CA affirmed CTA.


ISSUE:

Whether or not Manila Bank is entitled to a refund of its minimum corporate income tax paid to
BIR for 1999.

HELD:

Yes. CIRs contentions are without merit. It contended that based on RR# 9-98, Manila Bank
should pay the minimum corporate income tax beginning 1998 as it did not close its operations
in 1987 but merely suspended it. Even if placed under suspended receivership, its corporate
existence was never affected. Thus falling under the category of an existing corporation
recommencing its banking business operations

Sec. 27 E of the Tax Code provides the Minimum Corporate Income Tax (MCIT) on
Domestic Corporations.

(1) Imposition of Tax- MCIT of 2% of gross income as of the end of the taxable
year, as defined here in, is hereby imposed on a corporation taxable under this title,
beginning on the 4th taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum corporate
income tax is greater than the tax computed under Subsec. A of this section for the
taxable year.

Let it be stressed that RR 9-98 imposed the minimum corporate income tax on
corporations, that the date when business operations commence is the year in which the domestic
corporation registered with the BIR. But under RR 4-95, the date of commencement of
operations of thrift banks, is the date of issuance of certificate by Monetary Board or registration
with SEC, whichever comes later. Clearly then, RR 4-95 applies to Manila banks, being a thrift
bank. Thereby, the 4-year period should be counted from June 1999


CREBA vs. Romulo
G.R. No. 160756

FACTS:
Pet i t i oner Chamber of Real Es t at e and Bui l der s As s oci at i ons , I nc. ( CREB
A) , an as s oci at i on of r eal es t at e developers and builders in the Philippines,
questioned the validity of Section 27(E) of the Tax Code which imposes the
minimum corporate income tax (MCIT) on corporations. Under the Tax Code, a corporation
can become subject to the MCIT at the rate of 2% of gross income, beginning on the
fourth
t a x a b l e y e a r i mme d i a t e l y f o l l o wi n g t h e y e a r i n wh i c h i t commenced
i t s bus i nes s oper at i ons , when s uch MCI T i s greater than the normal corporate
income tax. If the regular income tax is higher than the MCIT, the corporation
does not pay the MCIT. CREBA argued, among others, that the use of gross income as MCIT
base amounts to a confiscation of capital because gross income, unlike net income, is
not realized gain. CREBA also sought to invalidate the provisions of RR No. 2-
9 8 , a s a me n d e d , o t h e r wi s e k n o wn a s t h e Co n s o l i d a t e d Withholding
Tax Regulations, which prescribe the rules and procedures for the collection of CWT on
sales of real properties
c l a s s i f i e d a s o r d i n a r y a s s e t s , o n t h e g r o u n d s t h a t t h e s e regulations:

1. Us e gr os s s el l i ng pr i ce ( GSP) or f ai r mar ket val ue(FMV) as basis for
determining the income tax on the sale of real estate classified
as ordinary assets, instead of the entitys net taxable income as provided for
under the Tax Code;
2. Ma n d a t e t h e c o l l e c t i o n o f i n c o m e t a x o n a p e r transaction
basis, contrary to the Tax Code provision which imposes income tax on net income
at the end of the taxable period;

3. G o a g a i n s t t h e d u e p r o c e s s c l a u s e b e c a u s e t h e
gover nment col l ect s i ncome t ax even when t he net i ncome has not
yet been det er mi ned; gai n i s never assured by mere receipt of the selling price;
and
4. Contravene the equal protection clause because the CWT is being charged upon
real estate enterprises, but not on other business enterprises, more particularly,
those in the manufacturing sector, which do business similar to that of a real
estate enterprise.

ISSUE/S:

(1) Is the imposition of MCIT constitutional?
(2) Is theimposition of CWT on income from sales of real propertiesclassified as
ordinary assets constitutional?

HELD:

1) Yes. The imposition of the MCIT is constitutional. An income tax is arbitrary
and confiscatory if it taxes capital, becaus e i t i s i ncome, and
not capi t al , whi ch i s s ubj ect t o income tax. However, MCIT is imposed on gross
income which is computed by deducting from gross sales the capital spent by a corporation in the
sale of its goods, i.e., the cost of goods and other direct expenses from gross sales.
Clearly, the capital is not being taxed. Various safeguards were incorporated into the
law imposition.
Fi r s t l y, r ecogni zi ng t he bi r t h pangs of bus i nes s es and t he reality of the
need to recoup initial major capital expenditures, the MCIT is imposed only on the 4th taxable
year immediately following the year in which the corporation commenced its
operations. Secondly, the law allows the carry-forward of any excess of the MCIT paid over the
normal income tax which shall be credited agai ns t t he nor mal i ncome t ax
f or t he t hr ee i mmedi at el y succeeding years. Thirdly, since certain businesses

may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to
suspend the imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.
(2) Yes. Despite the imposition of CWT on GSP or FMV, the income tax base for sales
of real property classified as ordinary assets remains as the entitys net taxable income as
provided in t he Tax Code, i . e. , gr os s i ncome l es s al l owabl e cos t s and
deductions. The seller shall file its income tax return and credit the taxes withheld by the
withholding agent-buyer against its tax due. If the tax due is greater than the tax withheld,
then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than
the tax withheld, the taxpayer will be entitled to a refund or tax credit. The use of the
GSP or FMV as basis to determine the CWT is for purposes of practicality and
convenience. The knowledge
of t he wi t hhol di ng agent buyer i s l i mi t ed t o t he par t i cul ar transaction in which he
is a party. Hence, his basis can only be the GSP or FMV which figures are reasonably known to
him. Al s o , t h e c o l l e c t i o n o f i n c o me t a x v i a t h e CWT o n a p e r
transaction basis, i.e., upon consummation of the sale, is not contrary to the Tax Code
which calls for the payment of the net income at the end of the taxable period. The taxes
withheld are in the nature of advance tax payments by a taxpayer in order to cancel its possible
future tax obligation. They are installments on the annual tax which may be due at the end
of the taxable year. The withholding agent-buyers act of collecting the tax at the time of the
transaction, by withholding the tax due from the income payable, is the very essence of
the withholding tax method of tax collection. On the alleged violation of the equal
protection clause,
thet a x i n g p o w e r h a s t h e a u t h o r i t y t o m a k e r e a s o n a b l e classificati
ons for purposes of taxation. Inequalities which
r es ul t f r om s i ngl i ng out a par t i cul ar cl as s f or t axat i on, or exempt i on, i nf r i n
ge no cons t i t ut i onal l i mi t at i on. The r eal estate industry is, by itself, a class and
can be validly treated differently from other business
enterprises. Wh a t d i s t i n g u i s h e s t h e r e a l e s t a t e b u s i n e s s f r o m o t h e r man
ufacturing enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the number of transactions

involved. The i ncome f r om t he s al e of a r eal pr oper t y i s bi gger and i t s
frequency of transaction limited, making it less cumbersome for the parties to comply
with the withholding tax scheme. On the other hand, each manufacturing enterprise may have
tens of thousands of transactions with several thousand customers every month involving both
minimal and substantial amounts.


INCOME TAX ON RESIDENT FOREIGN
CORPORATION

Commissioner of Internal Revenue (CIR) vs. British Overseas Airways
Corporation (BOAC)
G.R. No. L-65773-74 April 30, 1987
Melencio-Herrera, J.,:

FACTS:

BOAC, a 100% British Governenment-owned corporation organized and existing under
the laws of the United Kingdom, is engaged in the international airline business. During the
periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for
traffic purposes in the Philippines except for a nine-month period, partly in 1961 and partly in
1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not
carry passengers and/or cargo to or from the Philippines, although during the period covered by
the assessments, it maintained a general sales agent in the Philippines Wamer Barnes and
Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets
covering passengers and cargoes.

For the First Case, CIR issued an assessment for deficiency income taxes for the years
1959 to1967 in the amount P858,307.79. BOAC paid the said amount but under protest. Thus,
BOAC filed a claim for refund before the CIR, which was denied.

For the Second Case, another assessment for deficiency income taxes, interest and
penalty was issued for the years 1968-1969 to 1970-1971 in the amount of P549,327.43. BOAC
requested that the assessment be countermanded and set aside, which was likewise denied.

This prompted BOAC to file a case before the Court of Tax Appeals praying that it be
absolved of liability for deficiency income tax. The CTA ruled in favor of BOAC and held that
the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and
Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute
BOAC income from Philippine sources "since no service of carriage of passengers or freight was

performed by BOAC within the Philippines" and, therefore, said income is not subject to
Philippine income tax.

ISSUE:

Whether or not BOAC is a Resident Foreign Corporation doing business in the
Philippines.

HELD:
Yes. Under Section 20 of the 1977 Tax Code the term Resident Foreign Corporation
applies to a foreign corporation engaged in trade or business within the Philippines or having an
office or place of business therein. The Court is of the opinion that BOAC is a resident foreign
corporation. There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the light of its peculiar environmental
circumstances. In order that a foreign corporation may be regarded as doing business within a
State, there must be continuity of conduct and intention to establish a continuous business, such
as the appointment of a local agent, and not one of a temporary character. BOAC, during the
periods covered by the subject - assessments, maintained a general sales agent in the Philippines,
That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips each trip in the series corresponding to a
different airline company; (3) receiving the fare from the whole trip; and (4) consequently
allocating to the various airline companies on the basis of their participation in the services
rendered through the mode of interline settlement as prescribed by Article VI of the Resolution
No. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions which are
normally incident to, and are in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very
lifeblood of the airline business, the generation of sales being the paramount objective. There
should be no doubt then that BOAC was "engaged in" business in the Philippines through a local
agent during the period covered by the assessments.

Commissioner of Internal Revenue (CIR) vs. British Overseas Airways Corporation (BOAC)
G.R. No. L-65773-74 April 30, 1987
Melencio-Herrera, J.,:

FACTS:
(See previous case)

ISSUE:

Whether or not the revenue from sales of tickets by BOAC in the Philippines constitutes
income from Philippine sources and thus taxable.

HELD:

Yes. For the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activity within the Philippines. In BOAC's case, the
sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged
hands here and payments for fares were also made here in Philippine currency. The site of the
source of payments is the Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of supporting the
government. The absence of flight operations to and from the Philippines is not determinative of
the source of income or the site of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the "source"; and
the source of an income is that activity which produced the income. Unquestionably, the passage
documentations in these cases were sold in the Philippines and the revenue there from was
derived from a business activity regularly pursued within the Philippines. And even if the BOAC
tickets sold covered the "transport of passengers and cargo to and from foreign cities", it cannot
alter the fact that income from the sale of tickets was derived from the Philippines. The word

"source" conveys one essential idea that of origin and the origin of the income herein is the
Philippines.

Furthermore, P.D. No. 69 provides that international carriers shall pay a tax of 2- per cent on
their Gross Philippine billings. P.D. No. 1355 defines Gross Philippine billings as gross revenue
realized from uplifts anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger, excess baggage or mail
provided the cargo or mail originates from the Philippines.


STEAMSHIP COMPANY OF SVENDBORG AND STEAMSHIP COMPANY
OF 1912 vs COMMISSIONER OF INTERNAL REVENUE
C.T.A. EB No. 117(C.T.A. Case No. 6567)
CASTANEDA, JR., J .:
September 12, 2006

FACTS:

Petitioner Maersk-Tabacalera Shipping, Agency (Filipinas), Inc.
(now MAERSK-FIUPINAS, "INC.), referred to as "Maersk", is a corporation duly organized and
existing under and by virtue of the laws of the Republic of the Petitioners Steamship Company of
Svendborg, hereinafter referred to as "Svendborg and Steamship Company of 1912,
referred to as "Steamship of 1912" are foreign corporations organized and existing under the
laws of Denmark and engaged in international shipping with Maersk as the general agent in the
Philippines.

On January 22, 1992, petitioner Maersk received from respondent a demand letter dated January
6, 1992 with various assessment notices for alleged deficiency income taxes and deficiency
withholding taxes for the taxable years 1988 and 1989.a protest letter was timely filed by the
petitioners but the respondent cancelled the deficiency withholding tax assessments against
Maersk for the taxable years 1988 and 1989 leaving the deficiency income tax assessments for
1988 and 1989 in issue. The deficiency is from the petitioners collection of demurrage fees from
importers. The respondent maintains that the demurrage fees collected by Svendborg and
Steamship of 1912 (principals of Maersk) are not as part of gross Philippine billings but are
considered "other income" subject to regular corporate income tax pursuant to Section 25(a)(1)
of the Tax Code [now Section 28(A)(1) of the National Internal Revenue Code of 1997], in
relation to Section 15 of Revenue Regulations No. 2 (Income Tax Regulations), as amended by
Revenue Regulations No. 8-75, quoting Section 2 of Rev. Regs. 8-75.

ISSUE:

Whether or not demurrage fees are considered as income of the petitioners, as international
carriers, that are subject to the 35% regular corporate income tax under Sec. 25(a)(1) of the 1977
National Internal Revenue Code (NIRC) in addition to the 2.5% tax imposed on their Gross
Philippine Billings under Sec. 25(a)(2).

HELD:

Demurrage fees are definitely income or revenue accruing to the international carriers, hence,
"consignees who fail to take delivery of their containerized cargo within the 10-day free period
are liable to pay demurrage charges. Petitioners argue that demurrage fee is a penalty imposed
upon the consignees. No matter how petitioners describe the fees or charges for consignees'
failure to take delivery of their containerized cargoes, demurrage charges consists of an inflow of
funds to the international carriers which are neither capital contributions nor incurrence of
liabilities. It cannot be understood in any other manner except in the concept of income to the
petitioners. The Court in Division is correct when it ruled:
"The words 'income from any source', mentioned in the
foregoing section [Sec. 25(a)(l) of the 1977 NIRC], disclose a
legislative policy to include all income not expressly exempted within
the class of taxable income under our laws. Income means "cash
received or its equivalent;" it is the amount of money coming
to a person within a specific time ... ; it means something
distinct from principal or capital. For, while capital is a fund,
income is a flow. As used in our income tax law, "income" refers to
the flow of wealth {Commissioner of Internal Revenue v. British
Overseas Aitways Corporation 149 SCRA 407). (Emphasis supplied)


It is undeniable that petitioners are rendering service to its client in providing containers for their
use. For the extended use of the containers, petitioners are charging demurrage fees. Although,
petitioners call it a penalty, they are in effect imposing a form of rental or lease fee for the
continued use of the containers. The cash or its equivalent that they receive is a flow of wealth.
Also, demurrage fees are income derived from sources within the Philippines. The subject
demurrage fees were generated within the Philippines, hence, "the containers as well as the
payments exchanged hands here. Thus, the flow of wealth proceeded from, and occurred within
Philippine territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of supporting the
government (Commissioner of Internal Revenue vs. British Overseas Airways
Corporation, supra).


BANK OF AMERICA NT & SA, vs.
HONORABLE COURT OF APPEALS, AND THE COMMISSIONER OF
INTERNAL REVENUE
G.R. No. 10309 and G.R. No. 103106; July 21, 1994
VITUG, J .:

FACTS:
A claim for refund was filed by petitioner with the Bureau of Internal Revenue for the 15%
branch profit remittance tax it has previously paid. Petitioner contends that the 15% profit
remittance tax should not form part of the tax base because based on Section 24(b) (2) (ii) of the
National Internal Revenue Code, it should be assessed on the amount actually remitted abroad.
Respondent then contends that in computing the 15% remittance tax, the tax should be inclusive
of the sum deemed remitted.

ISSUE:
Should the Bank be granted the claim in refund?

HELD:
YES. In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted
abroad." There is absolutely nothing equivocal or uncertain about the language of the provision.
The tax is imposed on the amount sent abroad, and the law (then in force) calls for nothing
further. The taxpayer is a single entity, and it should be understandable if, such as in this case, it
is the local branch of the corporation, using its own local funds, which remits the tax to the
Philippine Government.

The remittance tax was conceived in an attempt to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local branch offices and organizing, on the other
hand, subsidiary domestic corporations where at least a majority of all the latter's shares of stock
are owned by such foreign corporations. Prior to the amendatory provisions of the Revenue
Code, local branches were made to pay only the usual corporate income tax of 25%-35% on net
income (now a uniform 35%) applicable to resident foreign corporations (foreign corporations
doing business in the Philippines). While Philippine subsidiaries of foreign corporations were
subject to the same rate of 25%-35% (now also a uniform 35%) on their net income, dividend
payments, however, were additionally subjected to a 15% (withholding) tax (reduced
conditionally from 35%). In order to avert what would otherwise appear to be an unequal tax
treatment on such subsidiaries vis-a-vis local branch offices, a 20%, later reduced to 15%, profit
remittance tax was imposed on local branches on their remittances of profits abroad. But this is
where the tax pari-passu ends between domestic branches and subsidiaries of foreign
corporations.


COMMISSIONER OF INTERNAL REVENUE vs. BURROUGHS LIMITED
AND THE COURT OF TAX APPEALS
G.R. No. L-66653 June 19, 1986

PARAS, J .:

FACTS:

Burroughs Limited is a foreign corporation authorized to engage in trade or business in
the Philippines through a branch office in Makati. The branch office in Makati applied with the
Central Bank for authority to remit to its parent company abroad, the branch profit mounting to
P7,647,058.00. Thus, pursuant to Sec. 24 (b) (2) (ii), it paid the 15% branch profit remittance tax
amounting to Pl,147,058.70 and remitted to its head office the amount of P6,499,999.30.

Thereafter, the respondent filed a claim for tax refund or refund for the alleged
overpayment of branch profit remittance tax amounting to P172,058.90. The respondent claimed
that the profit remittance tax should be computed on the basis of the amount actually remitted
(P6,499,999.30) and not on the amount before profit remittance tax.

ISSUE:

Whether the tax base upon which the 15% branch profit remittance tax shall be imposed under
the provisions of section 24(b) of the Tax Code, as amended, is the amount applied for
remittance on the profit actually remitted after deducting the 15% profit remittance tax

HELD:

YES. According to Sec 24 (b) of the Tax Code, the 15% branch profit tax shall be imposed on
the branch profits actually remitted abroad and not on the total branch profits out of which the

remittance is to be made. Based on such ruling petitioner should have paid only the amount of
P974,999.89 in remittance tax computed by taking the 15% of the profits of P6,499,999.89 in
remittance tax actually remitted to its head office in the United States, instead of Pl,147,058.70,
on its net profits of P7,647,058.00. Undoubtedly, the respondent has overpaid its branch profit
remittance tax in the amount of P172,058.90


COMPANIA GENERAL DE TABACOS DE FILIPINAS (Philippine Offices) vs.
THE COMMISSIONER OF INTERNAL REVENUE

C.T.A. CASE NO. 4141 November 17, 1993

FACTS:

COMPANIA GENERAL DE TABACOS DE FILIPINAS is a foreign corporation duly
licensed by Philippine laws to engage in business through its branch office. It is seeking a refund
of the alleged overpayment of branch profit remittance tax during the years 1980 to 1985. In
1986 and 1897, the petitioner filed his request for the refund of the alleged overpayment from
1980 to 1983 and 1984 to 1985, respectively. Due to the inaction of the respondent, the petitioner
filed this present petition.

ISSUES:

1. Whether or not the right to claim for refund of payments has already prescribed

2. Whether or not the petitioner is legally entitled to the refund of the total amount of
P1,768,931.05 on alleged excess branch profit remittance taxes paid during the years
1980 to 1985.

HELD:

1. YES. Section 230 of the Tax Code provides that no such suit or proceeding shall be
begun after the expiration of two years from the date of payment of the tax or penalty
regardless of any supervening cause that may arise after payment. It is evident that
payment made prior to April 9, 1985, had already prescribed. The profit remittance tax
corresponding to branch profit for 1980 was paid on February 7, 1984. When this case

was filed on April 9, 1987, more than two years have lapsed from the time the payment
of the tax was made. However, claim for refunds from 191 to 1985 has not prescribed.

2. YES. The tax base upon which the 15% branch profits remittance tax provided for under
Section 24 (b)(2) of the 1977 Tax Code shall be the profit actually remitted abroad and
not on the total branch profits out of which the remittance is to be made. Having found
that the questionable taxes were paid when the applicable ruling is Revenue
Memorandum Circular No. 8-82, "then what should apply as taxable base in computing
the 15% branch profit remittance tax is the amount applied for with the Central Bank as
profit to be remitted abroad. The phrase "any profit remitted abroad" should be construed
to mean the profit to be remitted. Hence, there must be an actual remittance, as
distinguished from profit which is remittable. Considering that the 15% branch profit
remittance tax is imposed and collected at source, necessarily the tax base should be the
amount actually applied for by the branch with the Central Bank of the Philippines as
profit to be remitted abroad.

Only profits remitted abroad by a branch office to its head office which are effectively
connected with its trade or business in the Philippines are subject to the 15% profit
remittance tax. To be "effectively connected" it is not necessary that the income be
derived from the actual operation of taxpayer-corporation's trade of business; it is
sufficient that the income arises from the business activity in which the corporation is
engaged. Moreover, passive income already subjected to the final tax should not again be
subjected to branch profits remittance tax. Since there is no proof of passive income
derived in 1984 and 1985, no refund or credit is due to the petitioner. Consequently,
refund in favor of petitioner is proper in the amount of P152,690.61 representing
overpaid 15% branch profit remittance taxes on dividends, interests and capital gain
received during the years 1981 to 1983.


COMPANIA GENERAL DE TABACOS DE FILIPINAS (Philippine Offices) vs.
THE COMMISSIONER OF INTERNAL REVENUE

C.T.A. CASE NO. 4451 August 23, 1993

FACTS:

COMPANIA GENERAL DE TABACOS DE FILIPINAS is a foreign corporation duly
licensed by Philippine laws to engage in business through its branch office. On May 3, 1988,
petitioner paid the 15% branch profit remittance tax for the years 1985 (partial) and 1986 in the
amount of P3,148,267.96. On July 6, 1988, petitioner filed a claim for refund with respondent in
the amount of P593,948.61, representing alleged overpaid branch profit remittance taxes. . Due
to the inaction of the respondent, the petitioner filed this present petition.

ISSUES:

1. Whether or not the branch profits tax are computed based on the profits actually remitted
abroad or on the total branch profits out of which the remittance is made

2. Whether or not passive income which are already subjected to the final tax are still
included for purposes of computing the branch profits remittance tax

HELD:

1. The 15% branch profit remittance tax is imposed and collected at source, necessarily
the tax base should be the amount actually applied for by the branch with the Central
Bank of the Philippines as profit to be remitted abroad pursuant to Revenue
Memorandum No. 8-82, the rule applicable in this case.


2. NO. Interest and dividends received by a foreign corporation during each taxable year
from all sources within the Philippines shall not be considered as branch profits
unless the same are effectively connected with the conduct of its trade or business.
The phrase "effectively connected" was interpreted to mean income derived from the
business activity in which the corporation is engaged. Moreover, to include passive
income again as subject to branch profit remittance tax under the same Section
24(b)(2)(ii) would be contrary to law. Consequently, refund in favor of petitioner is
proper in the amount of P121,696.34, representing overpaid 15% branch profit
remittance taxes on dividends, interests received.


INCOME TAX ON NON-RESIDENT
FOREIGN CORPORATION


Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc.
G.R. No. 127105. J une 25, 1999
GONZAGA-REYES, J.

FACTS:

An agreement to use the trademark, patents, and technology owned by the later including the
right to manufacture, package and distribute the products covered by the Agreement and secure
assistance in management, marketing and production from SC Johnson and Son USA was
entered into by the Respondent, a domestic corporation and the SC Johnson and Son, USA, a non
resident foreign corporation based in the USA. Royalties were obliged to be paid by the
respondent based on a percentage of net sales and subjected the same to 25% withholding tax on
royalty payments which respondent paid for the period covering July 1992 to May 1993
amounting to P1,603,443.00. After which a claim for refund of overpaid withholding tax on
royalties were filed with the International Tax Affairs Division (ITAD) of the BIR contending
that the antecedent facts attending respondents case fall squarely within the same circumstances
under which said MacGeorge and Gillette rulings were issued. Since the agreement was
approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the
respondent. So, royalties paid by the respondent to SC Johnson and Son, USA is only subject to
10% withholding tax. The Commissioner did not act on said claim for refund. Private respondent
SC Johnson & Son, Inc. then filed a petition for review before the CTA, to claim a refund of the
overpaid withholding tax on royalty payments from July 1992 to May 1993. On May 7, 1996, the
CTA rendered its decision in favor of SC Johnsonand ordered the CIR to issue a tax credit
certificate in the amount of P163,266.00 representing overpaid withholding tax on royalty
payments beginning July 1992 to May 1993.

ISSUE:

Whether or not tax refunds are considered as tax exemptions.


HELD:

It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as
in derogation of sovereign authority and to be construed strictissimi juris against the person or
entity claiming the exemption. The burden of proof is upon him who claims the exemption in his
favor and he must be able to justify his claim by the clearest grant of organic or statute law.
Private respondent is claiming for a refund of the alleged overpayment of tax on royalties;
however there is nothing on record to support a claim that the tax on royalties under the RP-US
Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany
Tax Treaty.


Marubeni Corporation vs. Commissioner of Internal Revenue
G.R. No. 76573.September 14, 1989
FERNAN, C.J.
FACTS:

Marubeni Corporation is a Japanese corporation licensed to do business in the Philippines,
which claimed for a refund or tax credit for the amount which it has allegedly overpaid the BIR.
This was based on the fact that a 10% final dividend tax was withheld from the petitioner and
another 15% profit remittance tax based on the remittable amount after the final 10%
withholding tax were paid to the Bureau of Internal Revenue. Determination whether said
corporation is a resident or a non-resident foreign corporation under Philippine laws is necessary
in order to know if the corporation is entitled for the tax refund or credit.

ISSUE:

Whether or not the petitioner is a resident or non-resident foreign corporation.

HELD:

Under the Tax Code, a resident foreign corporation is one that is engaged in trade or business
within the Philippines. Petitioner contends that precisely because it is engaged in business in the
Philippines through its Philippine branch that it must be considered as a resident foreign
corporation. Petitioner reasons that since the Philippine branch and the Tokyo head office are
one and the same entity, whoever made the investment in AG&P, Manila does not matter at all.
A single corporate entity cannot be both a resident and a non-resident corporation depending on
the nature of the particular transaction involved. Accordingly, whether the dividends are paid
directly to the head office or coursed through its local branch is of no moment for after all, the
head office and the office branch constitute but one corporate entity, the Marubeni Corporation,
which, under both Philippine tax and corporate laws, is a resident foreign corporation because it
is transacting business in the Philippines. Petitioner, being a non-resident foreign corporation
with respect to the transaction in question, the applicable provision of the Tax Code is Section 24

(b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Accordint to the said
provision, petitioner is taxed 35 % of its gross income from all sources within the Philippines.
However, a discounted rate of 15% is given to petitioner on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of
petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % represents the
difference between the regular tax of 35 % on non-resident foreign corporations which petitioner
would have ordinarily paid, and the 15 % special rate on dividends received from a domestic
corporation.


N.V. Reederij AMSTERDAM and Royal Interocean Lines vs. Commissioner
of Internal Revenue
G.R. No. L-46029, June 23, 1988
Gancyco, J.

FACTS:

On two separate occasions, two vessels of petitioner N.B. Reederij "AMSTERDAM,"
called on Philippine ports to load cargoes for foreign destination. The freight fees for these
transactions were paid abroad in the amount of US $98,175.00 in 1963 and US $137,193.00 in
1964. In these two instances, petitioner Royal Interocean Lines acted as husbanding agent for a
fee or commission on said vessels. No income tax appears to have been paid by petitioner N.V.
Reederij "AMSTERDAM" on the freight receipts. Respondent Commissioner of Internal
Revenue, through his examiners, filed the corresponding income tax returns for and in behalf of
the former under Section 15 of the National Internal Revenue Code. Applying the then prevailing
market conversion rate of P3.90 to the US $1.00, the gross receipts of petitioner N.V. Reederij
"Amsterdam" for 1963 and 1964 amounted to P382,882.50 and P535,052.00, respectively.
respondent Commissioner assessed said petitioner in the amounts of P193,973.20 and
P262,904.94 as deficiency income tax for 1963 and 1964, respectively, as "a non-resident foreign
corporation not engaged in trade or business in the Philippines under Section 24 (b) (1) of the
Tax Code. On the assumption that the said petitioner is a foreign corporation engaged in trade or
business in the Philippines, petitioner Royal Interocean Lines filed an income tax return of the
aforementioned vessels computed at the exchange rate of P2.00 to US$1.00 and paid the tax
thereon in the amount of P1,835.52 and P9,448.94, respectively, pursuant to Section 24 (b) (2) in
relation to Section 37 (B) (e) of the National Internal Revenue Code and Section 163 of Revenue
Regulations No. 2.
On the same two dates, petitioner Royal Interocean Lines as the husbanding agent of
petitioner N.V. Reederij "AMSTERDAM" filed a written protest against the abovementioned
assessment made by the respondent Commissioner which protest was denied by said respondent.
Petitioners filed a petition for review with the respondent Court of Tax Appeals praying for the
cancellation of the subject assessment. After due hearing, the respondent court, rendered a

decision modifying said assessments by eliminating the 50% fraud compromise penalties
imposed upon petitioners.

ISSUE:

Whether or not N.V. Reederij AMSTERDAM should be taxed as a foreign corporation
not engaged in trade or business in the Philippines under Sec. 24 (b) (1) of the Tax Code.

HELD:

Yes. Petitioner N.V. Reederij "AMSTERDAM" does not have a branch office in the
Philippines and it made only two calls in Philippine ports, one in 1963 and the other in 1964. In
order that a foreign corporation may be considered engaged in trade or business, its business
transactions must be continuous. A casual business activity in the Philippines by a foreign
corporation, as in the present case, does not amount to engaging in trade or business in the
Philippines for income tax purposes. N.V. Reederij "AMSTERDAM" is a non-resident foreign
corporation, organized and existing under the laws of The Netherlands with principal office in
Amsterdam and not licensed to do business in the Philippines. It is therefore taxable on income
from all sources within the Philippines and the tax is equal to thirty per centum of such amount,
under Section 24(b) (1) of the Tax Code.
A foreign corporation engaged in trade or business within the Philippines, or which has
an office or place of business therein, is taxed on its total net income received from all sources
within the Philippines at the rate of 25% upon the amount but which taxable net income does not
exceed P100,000.00, and 35% upon the amount but which taxable net income exceeds
P100,000.00. On the other hand, a foreign corporation not engaged in trade or business within
the Philippines and which does not have any office or place of business therein is taxed on
income received from all sources within the Philippines at the rate of 35% of the gross income.


IMPROPERLY ACCUMULATED
EARNINGS TAX

Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue
G.R. No. L-26145, February 20, 1984.
Guerrero, J.

FACTS:

Petitioner, a domestic corporation organized in 1937, is principally engaged in the
importation and sale of whisky, wines, liquors and distilled spirits. Respondent caused the
examination of herein petitioners book of account and found the latter of having unreasonably
accumulated surplus of P428,934.32 for the calendar year 1947 to 1957, in excess of the
reasonable needs of the business subject to the 25% surtax imposed by Section 25 of the Tax
Code. The Commissioner of Internal Revenue demanded upon the Manila Wine Merchants, Inc.
payment of P126,536.12 as 25% surtax and interest on the latters unreasonable accumulation of
profits and surplus for the year 1957.
Another basis of respondent in assessing petitioner for accumulated earnings tax is its
substantial investment of surplus or profits in unrelated business: the investment of P27,501.00
made by petitioner in the Acme Commercial Co., Inc., the investments of petitioner in Union
Insurance Society of Canton and Wack Wack Golf Club in the sums of P1,145.76 and P1.00,
respectively, and the U.S.A. Treasury Bonds amounting to P347,217.50. Respondent found that
the accumulated surplus in question were invested to unrelated business which were not
considered in the immediate needs of the Company such that the 25% surtax be imposed
therefrom.
Petitioner appealed to the Court of Tax Appeals. As to the U.S.A. Treasury Bonds
amounting to P347,217.50, the Court of Tax Appeals ruled that its purchase was in no way
related to petitioners business of importing and selling wines, whisky, liquors and distilled
spirits. Respondent Court was convinced that the surplus of P347,217.50 which was invested in
the U.S.A. Treasury Bonds was availed of by petitioner for the purpose of preventing the
imposition of the surtax upon petitioners shareholders by permitting its earnings and profits to
accumulate beyond the reasonable needs of business. Hence, the Court of Tax Appeals modified

respondents decision by imposing upon petitioner the 25% surtax for 1957 only in the amount
of P86,804.38

ISSUES:

(1) Whether or not the purchase of the U.S.A. Treasury bonds by petitioner in 1951 can
be construed as an investment to an unrelated business and hence, such was availed of by
petitioner for the purpose of preventing the imposition of the surtax upon petitioners
shareholders by permitting its earnings and profits to accumulate beyond the reasonable needs of
the business.

(2) And in the affirmative, whether or not the penalty tax of twenty-five percent (25%)
can be imposed on such improper accumulation in 1957 despite the fact that the accumulation
occurred in 1951.

HELD:

(1) Yes. To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the
purchase of the U.S.A. Treasury Bonds in 1951 was an investment within the reasonable needs
of the Corporation. To determine the reasonable needs of the business in order to justify an
accumulation of earnings, the Courts of the United States have invented the so-called
Immediacy Test which construed the words reasonable needs of the business to mean the
immediate needs of the business, and it was generally held that if the corporation did not prove
an immediate need for the accumulation of the earnings and profits, the accumulation was not for
the reasonable needs of the business, and the penalty tax would apply. American cases likewise
hold that investment of the earnings and profits of the corporation in stock or securities of an
unrelated business usually indicates an accumulation beyond the reasonable needs of the
business. The records further reveal that from May 1951 when petitioner purchased the U.S.A.
Treasury shares, until 1962 when it finally liquidated the same, it never had the occasion to use
the said shares in aiding or financing its importation. This militates against the purpose
enunciated earlier by petitioner that the shares were purchased to finance its importation

business. To justify an accumulation of earnings and profits for the reasonably anticipated future
needs, such accumulation must be used within a reasonable time after the close of the taxable
year.
A prerequisite to the imposition of the tax has been that the corporation be formed or
availed of for the purpose of avoiding the income tax (or surtax) on its shareholders, or on the
shareholders of any other corporation by permitting the earnings and profits of the corporation to
accumulate instead of dividing them among or distributing them to the shareholders. If the
earnings and profits were distributed, the shareholders would be required to pay an income tax
thereon whereas, if the distribution were not made to them, they would incur no tax in respect to
the undistributed earnings and profits of the corporation. The touchstone of liability is the
purpose behind the accumulation of the income and not the consequences of the accumulation.
Thus, if the failure to pay dividends is due to some other cause, such as the use of undistributed
earnings and profits for the reasonable needs of the business, such purpose does not fall within
the interdiction of the statute An accumulation of earnings or profits (including undistributed
earnings or profits of prior years) is unreasonable if it is not required for the purpose of the
business, considering all the circumstances of the case.

(2) The rule is now settled in our jurisprudence that undistributed earnings or profits of
prior years are taken into consideration in determining unreasonable accumulation for purposes
of the 25% surtax. In determining whether accumulations of earnings or profits in a particular
year are within the reasonable needs of a corporation, it is necessary to take into account prior
accumulations, since accumulations prior to the year involved may have been sufficient to cover
the business needs and additional accumulations during the year involved would not reasonably
be necessary.


COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ANTONIO
TUASON, INC. and THE COURT OF TAX APPEALS, respondents.
G.R. No. 85749 May 15, 1989
GRIO-AQUINO, J .:

FACTS:

This is a petition for review of a decision of CTA which set aside the petitioner Revenue Commissioner's
assessment of P1,151,146.98 as the 25% surtax on the private respondent's unreasonable accumulation of
surplus for the years 1975-1978.
Respondent Tuason protested the assessment on unreasonable accumulation of surplus for the years 1975-
1978 on the ground that the accumulation of surplus profits during the years in question was solely for the
purpose of expanding its business operations as real estate broker.
No investigation was conducted nor a decision rendered on Antonio Tuazon Inc.'s protest. Meantime, the
Revenue Commissioner issued warrants of distraint and levy to enforce collection of the total amount
originally assessed including the amounts already paid. A writ of injunction was issued by the Tax Court
ordering the Commissioner to refrain from enforcing said warrants of distraint and levy.

ISSUE:

Whether or not private respondent Antonio Tuason, Inc. accumulated surplus and is liable for the 25%
surtax on undue accumulation of surplus for the years 1975 to 1978.

HELD:

YES. The Commissioner "conclusively presumed" that when the corporation accumulated (instead of
distributing to the shareholders) a surplus of over P3 million from its earnings in 1975 up to 1978, the
purpose was to avoid the imposition of the progressive income tax on its shareholders.
According to the private respondent, surplus profits were set aside by the company to build up sufficient
capital for its expansion program which included the construction in 1979-1981 of an apartment building,
and the purchase in 1980 of a condominium unit which was intended for resale or lease. However, while
these investments were actually made, the Commissioner points out that the corporation did not use up its
surplus profits. It allegation that P1,525,672.74 was spent for the construction of an apartment building in
1979 and P1,752,332.87 for the purchase of a condominium unit in Urdaneta Village in 1980 was refuted

by the Declaration of Real Property on the apartment building which shows that its market value is only
P429,890.00, and the Tax Declaration on the condominium unit which reflects a market value of
P293,830.00 only.
All presumptions are in favor of the correctness of petitioner's assessment against the private respondent.
It is incumbent upon the taxpayer to prove the contrary (Mindanao Bus Company vs. Commissioner of
Internal Revenue, 1 SCRA 538). Unfortunately, the private respondent failed to overcome the presumption
of correctness of the Commissioner's assessment.
It is plain to see that the company's failure to distribute dividends to its stockholders in 1975-1978 was for
reasons other than the reasonable needs of the business, thereby falling within the interdiction of Section
25 of the Tax Code of 1977.


CYANAMID PHILIPPINES, INC., petitioner, vs. THE COURT OF APPEALS,
THE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondent.
G.R. No. 108067 January 20, 2000
QUISUMBING, J .:
FACTS:

Petitioner disputes the decision of the CA which affirmed the decision of the CTA, ordering petitioner to
pay respondent CIR the amount of P3,774,867.50 as 25% surtax on improper accumulation of profits for
1981.
Petitioner, through its external accountant, Sycip, Gorres, Velayo & Co., claimed, among others, that the
surtax for the undue accumulation of earnings was not proper because the said profits were retained to
increase petitioner's working capital and it would be used for reasonable business needs of the company.
The CIR in a letter addressed to SGV & Co., refused to allow the cancellation of the assessment notices.
During the pendency of the case, however, both parties agreed to compromise the 1981 deficiency income
tax assessment. However, the surtax on improperly accumulated profits remained unresolved.
Petitioner contends that it did not declare dividends for the year 1981 in order to use the accumulated
earnings as working capital reserve to meet its "reasonable business needs". The law permits a stock
corporation to set aside a portion of its retained earnings for specified purposes (citing Section 43,
paragraph 2 of the Corporation Code of the Philippines).
The CIR rejected petitioner's argument that "the accumulated earnings tax does not apply to a publicly-
held corporation" citing American jurisprudence to support its position. The reference finds no
application in the case at bar because under Section 25 of the NIRC as amended by Section 5 of P.D. No.
1379 [1739] (dated September 17, 1980), the exceptions to the accumulated earnings tax are expressly
enumerated, to wit: Bank, non-bank financial intermediaries, corporations organized primarily, and
authorized by the Central Bank of the Philippines to hold shares of stock of banks, insurance companies,
or personal holding companies, whether domestic or foreign.

ISSUE:

Whether or not the respondent court erred in holding that the petitioner is liable for the accumulated
earnings tax for the year 1981.


HELD:

NO. The provision discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by
the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to
compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be
taxed.
The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank
financial intermediaries; (c) insurance companies; and (d) corporations organized primarily and
authorized by the Central Bank of the Philippines to hold shares of stocks of banks. Petitioner does not
fall among those exempt classes. Besides, the rule on enumeration is that the express mention of one
person, thing, act, or consequence is construed to exclude all others. Laws granting exemption from tax
are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is
the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to
prove that it is, in fact, covered by the exemption so claimed, a burden which petitioner here has failed to
discharge.
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current
liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working capital.
In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax upon
shareholders, it must be shown that the controlling intention of the taxpayer is manifest at the time of
accumulation, not intentions declared subsequently, which are mere afterthoughts. Furthermore, the
accumulated profits must be used within a reasonable time after the close of the taxable year. In the
instant case, petitioner did not establish, by clear and convincing evidence, that such accumulation of
profit was for the immediate needs of the business.
With petitioner's failure to prove the CIR incorrect, clearly and conclusively, this Court is constrained to
uphold the correctness of tax court's ruling as affirmed by the Court of Appeals.


TAX EXEMPT CORPORATIONS

THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs. V. G. SINCO
EDUCATIONAL CORPORATION, respondent.
G.R. No. L-9276. October 23, 1956.
BAUTISTA ANGELO, J .:

FACTS:

Vicente G. Cinco established and operated an educational institution known as Foundation
College of Dumaguete. The Department of Education required that schools and colleges
recognized by the government should be incorporated, thus V.G. Singco Educational Institution
was organized. This corporation was non-stock and was capitalized by V. G. Sinco and members
of his immediate family. This corporation continued the operations of Foundation College of
Dumaguete.
The Collector of Internal Revenue (C.I.R.) assessed against the college an income tax in the
aggregate sum of P5,364.77, which was paid by the college. The corporation commenced an
action for the refund of this amount alleging that it is exempt from income tax under section 27
(e) of the National Internal Revenue Code. The C.I.R. maintains that part of the net income
accumulated by the corporation inured to the benefit of V. G. Sinco, president and founder of the
corporation, and therefore the is not entitled to the exemption prescribed by the law.

ISSUE:

Whether V.G. Sinco Educational Institution is exempt from income tax.

HELD:

Yes. V.G. Sinco is a non-profit institution and since its organization it has never distributed any
dividend or profit to its stockholders. Of course, part of its income went to the payment of its
teachers or professors and to the other expenses of the college incident to an educational
institution but none of the income has ever been channeled to the benefit of any individual

stockholder. Whatever payment is made to those who work for a school or college as a
remuneration for their services is not considered as distribution of profit as would make the
school one conducted for profit.
It is not denied that the corporation charges tuition fees and other fees for the different services it
renders to the students and in fact it is its only source of income, but such fact does not in itself
make the school a profit-making enterprise that would place it beyond the purview of the law.


GROSS INCOME

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FILINVEST
DEVELOPMENT CORPORATION et al., respondents.
G. R. No. 163653 July 19, 2011
PEREZ, J .:

FACTS:

Filinvest Development Corporation (FDC) is a holding company which owned 80% of the
outstanding shares of respondent Filinvest Alabang, Inc. (FAI) and 67.42% of the outstanding
shares of Filinvest Land, Inc. (FLI). FDC and FAI entered into a Deed of Exchange with FLI
whereby the former both transferred in favor of the latter parcels of land appraised at
P4,306,777,000.00. In exchange for said parcels which were intended to facilitate development
of medium-rise residential and commercial buildings, 463,094,301 shares of stock of FLI were
issued to FDC and FAI.
FDC also extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central
Corporation (DSCC) and Filinvest Capital, Inc. (FCI).
BIR assessed deficiency taxes on the taxable gain supposedly realized by FDC from the Deed of
Exchange it executed with FAI and FLI, on the dilution resulting from the Shareholders
Agreement FDC executed with RHPL as well as the arms-length interest rate and
documentary stamp taxes imposable on the advances FDC extended to its affiliates.

ISSUES:

1. Whether a taxable gain should be had from the Deed of Exchange between FAI and FLI.
2. Whether interest should be imputed on the advances made by FDC to its affiliates.

HELD:

1. No. Section 34 (c) (2) of the 1993 NIRC provides that gain or loss will not be recognized in
case the exchange of property for stocks results in the control of the transferee by the

transferor, alone or with other transferors not exceeding four persons. Rather than isolating
the same as proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's
4,226,629,000 outstanding shares should, therefore, be appreciated in combination with the
420,877,000 new shares issued to FAI which represents 9.96% control of said transferee
corporation. Together FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000 shares
(9.96%) clearly add up to 3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares.
Since the term "control" is clearly defined as "ownership of stocks in a corporation
possessing at least fifty-one percent of the total voting power of classes of stocks entitled to
one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of property for stocks
between FDC FAI and FLI clearly qualify as a tax-free transaction under paragraph 34 (c)
(2) of the same provision.
2. No. The term gross income is understood to mean all income from whatever source
derived. While it has been held that the phrase "from whatever source derived" indicates a
legislative policy to include all income not expressly exempted within the class of taxable
income under our laws, the term "income" has been variously interpreted to mean "cash
received or its equivalent", "the amount of money coming to a person within a specific time"
or "something distinct from principal or capital." There must be proof of the actual or, at the
very least, probable receipt or realization by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or allocated by the CIR.
The record yielded no evidence of actual or possible showing that the advances FDC
extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For
all its harping upon the supposed fact that FDC had resorted to borrowings from commercial
banks, the CIR had adduced no concrete proof that said funds were, indeed, the source of
the advances the former provided its affiliates. Testimonial evidence show that said
advances: (a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their
operational and capital expenditures; and, (b) were all temporarily in nature since they were
repaid within the duration of one week to three months and were evidenced by mere journal
entries, cash vouchers and instructional letters.


COMMISSIONER OF INTERNAL REVENUE vs. THE COURT OF
APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP
G.R. No. 108576 January 20, 1999
MARTINEZ, J.:

FACTS:

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a
report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to
Sections 53 and 54 of the 1939 Revenue Code, for the year 1968 and the second quarter of 1969
based on the transactions of exchange and redemption of stocks. The Bureau of Internal Revenue
(BIR) made the corresponding assessments despite the claim of ANSCOR that it availed of the
tax amnesty under Presidential Decree
(P.D.) 23 which were amended by P.D.'s 67 and 157. However, petitioner ruled that the invoked
decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act
under which ANSCOR was assessed. ANSCOR's subsequent protest on the assessments was
denied in 1983 by petitioner.
.
ISSUE:

Whether or not ANSCOR is to be assessed for deficiency tax?

HELD:

Yes. Profits derived from the capital invested cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be reached by income taxation regardless of the
existence of any business purpose for the redemption. Otherwise, to rule that the said proceeds
are exempt from income tax when the redemption is supported by legitimate business reasons
would defeat the very purpose of imposing tax on income. Such argument would open the door
for income earners not to pay tax so long as the person from whom the income was derived has
legitimate business reasons. In other words, the payment of tax under the exempting clause of

Section 83(b) would be made to depend not on the income of the taxpayer, but on the business
purposes of a third party (the corporation herein) from whom the income was earned. This is
absurd, illogical and impractical considering that the Bureau of Internal Revenue (BIR) would be
pestered with instances in determining the legitimacy of business reasons that every income
earner may interposed. It is not administratively feasible and cannot therefore be allowed.


COMMISSIONER OF INTERNAL REVENUE vs. JOHN L. MANNING et al.
G.R. No. L-28398 August 06, 1975
CASTRO, J:

FACTS:

In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into25,000
common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each,
by the three respondents. On February 29, 1952, in view of Reese's desire that upon his death
MANTRASCO and its two subsidiaries, MANTRASCO (Guam), Inc. and the PortMotors, Inc.,
would continue under the management of the respondents, a trust agreement on his and the
respondents' interests in MANTRASCO was executed by and among Reese ,MANTRASCO ,
the law firm of Ross, Selph, Carrascoso and Janda , and the respondents.On October 19, 1954
Reese died. The projected transfer of his shares in the name of MANTRASCO could not,
however, be immediately effected for lack of sufficient funds to cover initial payment on the
shares. On February 2, 1955, after MANTRASCO made a partial paymentof Reese's shares, the
certificate for the 24,700 shares in Reese's name was cancelled and a newcertificate was issued in
the name of MANTRASCO. On the same date, and in the meantime thatReese's interest had not
been fully paid, the new certificate was endorsed to the law firm of Ross,Selph, Carrascoso and
Janda, as trustees for and in behalf of MANTRASCO. On November 25,1963 the entire purchase
price of Reese's interest in MANTRASCO was finally paid in full bythe latter, On May 4,
1964 the trust agreement was terminated and the trustees delivered toMANTRASCO all the
shares which they were holding in trust. Bureau of Internal Revenue examination disclosed that
(a) as of December 31, 1958 the 24,700 shares declared as dividends had been proportionately
distributed to the respondents,representing a total book value or acquisition cost of P7,973,660;
(b) the respondents failed todeclare the said stock dividends as part of their taxable income for
the year 1958.On the basis of their examination, the BIR examiners concluded that the
distribution of Reese'sshares as stock dividends was in effect a distribution of the "asset or
property of the corporationas may be gleaned from the payment of cash for the redemption of
said stock and distributing thesame as stock dividend." On April 14, 1965 the Commissioner of
Internal Revenue issuednotices of assessment for deficiency income taxes to the respondents for

the year 1958The respondents unsuccessfully challenged the assessments and, failing to secure a
favorablereconsideration, appealed to the Court of Tax Appeals. On October 30, 1967 the CTA
rendered judgment absolving the respondents from any liability for receiving the questioned
stock dividends on the ground that their respective one-third interest in MANTRASCO remained
thesame before and after the declaration of stock dividends and only the number of shares held
byeach of them had changed.Commissioner maintains that the full value (P7,973,660) of the
shares redeemed from Reese by MANTRASCO which were subsequently distributed to the
respondents as stock dividends in1958 should be taxed as income of the respondents for
that year, the said distribution being ineffect a distribution of cash. The respondents' interests in
MANTRASCO, he further argues,were only .4% prior to the declaration of the stock dividends
in 1958, but rose to 33 1/3% eachafter the said declaration. In submitting their respective
contentions, it is the assumption of bothparties that the 24,700 shares declared as stock dividends
were treasury shares.

ISSUE:

Are the shares in question treasury shares?

HELD:

Treasury shares are stocks issued and fully paid for and re-acquired by the corporationeither by
purchase, donation, forfeiture or other means. Treasury shares are therefore issuedshares, but
being in the treasury they do not have the status of outstanding shares. Consequently,although a
treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or
sold again, such share, as long as it is held by the corporation as a treasury share,participates
neither in dividends, because dividends cannot be declared by the corporation toitself, nor in the
meetings of the corporation as voting stock, for otherwise equal distribution of voting powers
among stockholders will be effectively lost and the directors will be able toperpetuate their
control of the corporation, though it still represents a paid-for interest in theproperty of the
corporation. The foregoing essential features of a treasury stock are lacking inthe questioned
shares.The manifest intention of the parties to the trust agreement was, in sum and substance, to

treatthe 24,700 shares of Reese as absolutely outstanding shares of Reese's estate until they were
fullypaid. Such being the true nature of the 24,700 shares, their declaration as treasury stock
dividendin 1958 was a complete nullity and plainly violative of public policy. A stock
dividend, beingone payable in capital stock, cannot be declared out of outstanding corporate
stock, but onlyfrom retained earnings:"'A stock dividend always involves a transfer of surplus (or
profit) to capital stock.' Graham andKatz, Accounting in Law Practice, 2d ed. 1938, No. 70. As
the court said in United States vs.Siegel, 8 Cir., 1931, 52 F 2d 63, 65, 78 ALR 672: 'A stock
dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to
stockholders in lieu of a cashdividend.' Congress itself has defined the term 'dividend' in No.
115(a) of the Act as meaning anydistribution made by a corporation to its shareholders, whether
in money or in other property, outof its earnings or profits. In Eisner v. Macomber, 1920, 252 US
189, 40 S Ct 189, 64 L Ed 521, 9ALR 1570, both the prevailing and the dissenting opinions
recognized that within the meaning of the revenue acts the essence of a stock dividend was the
segregation out of surplus account of adefinite portion of the corporate earnings as part of the
permanent capital resources of thecorporation by the device of capitalizing the same, and the
issuance to the stockholders of additional shares of stock representing the profits so capitalized


WISE & CO., INC., ET AL., plaintiffs-appellants, vs.
BIBIANO L. MEER, Collector of Internal Revenue, defendant-appellee.
G.R. No. 48231 June 30, 1947
HILADO, J.:

FACTS:

On July 22, 1937 Manila Wine Merchants, Ltd. (Hongkong Company) sold its business
and assets to Manila Wine Merchants, Inc., a Phil. Corporation formed on May 27, 1937 (Manila
Company) for P 400,000. Pursuant to a resolution by its Board of Directors purporting to declare
a dividend, the Hongkong Company made a distribution from its earnings for the year 1937 to its
stockholders. As a result of the sale of its business and assets to Manila Company, a surplus was
realized and the Hongkong Company distributed this surplus to the shareholders. Hongkong
Company has paid Philippine income tax on the entire earnings from which the said distributions
were paid. Thereafter, at a special general meeting, the stockholders of Hongkong Company
directed that the company be voluntarily liquidated and its capital distributed among the
stockholders.

Plaintiffs duly filed Philippine income tax returns on which defendant subsequently made
the deficiency assessments. Plaintiffs duly paid the said amounts demanded by defendant under
written protest, which was overruled in due course; that the plaintiffs have since July 1, 1939
requested from defendant a refund of the said amounts which defendant has refused and still
refuses to refund.

ISSUES:

Whether or not the amounts received by the CIR were liquidating dividends and not
ordinary dividend. If they are liquidating dividends, whether or not they are taxable under the
Philippine laws.

HELD:

The distributions in the instant case were not ordinary dividends but payments for
surrendered or relinquished stock in a corporation in complete liquidation, sometimes called

liquidating dividends. When in the deed of July 22, 1937, by authority of its stockholders, the
Hongkong Company thru its authorized representative declared and agreed that the aforesaid sale
and transfer shall take effect as of June 1, 1937, and distribution from its assets to those same
stockholders made after June 1, 1937, although before July 22, 1937, must have been considered
by them as liquidating dividends.

The amounts thus distributed among the plaintiffs were not in the nature of a recurring
return on stock in fact, they surrendered and relinquished their stock in return for said
distributions, thus ceasing to be stockholders of the Hongkong Company, which in turn ceased to
exist in its own right as a going concern during its more or less brief administration of the
business as trustee for the Manila Company, and finally disappeared even as such trustee.

The distinction between a distribution in liquidation and an ordinary dividend is factual;
the result in each case depending on the particular circumstances of the case and the intent of the
parties. If the distribution is in the nature of a recurring return on stock it is an ordinary dividend.
However, if the corporation is really winding up its business or recapitalizing and narrowing its
activities, the distribution may properly be treated as in complete or partial liquidation and as
payment by the corporation to the stockholder for his stock.

On the second issue, said distributions were taxable alike to Wise and Co., Inc. and to the
other plaintiffs. The Income Tax Law, Act No. 2833 section 25 (a), as amended by section 4 of
Act. No. 3761 stated that where a corporation, partnership, association, joint-account, or
insurance company distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporation, is a taxable
income or a deductible loss as the case may be.

Partial source of the foregoing provision was section 201 (c) of the U.S. Revenue Act of
1918, approved February 24, 1919, provided that Amounts distributed in the liquidation of a
corporation shall be treated as payments in exchange for the stock or share, and any gain or profit
realized thereby shall be taxed to the distributee as other gains or profits.


COMMISSIONER OF INTERNAL REVENUE, petitioner vs. THE HON.
COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL
RETIREMENT PLAN, represented by its Trustee-Director, respondents.
G.R. No. 95022 March 23, 1992

MELENCIO-HERRERA, J.:

FACTS:

Private Respondent GCL Retirement Plan (GCL) an employees' trust maintained by the
employer GCL Inc., to provide retirement, pension, disability and death benefits to its
employees, was approved and qualified as exempt from income tax by Petitioner Commissioner
of Internal Revenue in accordance with Rep. Act No. 4917. Subsequently, Respondent GCL
made investsments and earned therefrom interest income from which was witheld 15% final
witholding tax imposed by Pres. Decree No. 1959. Respondent GCL filed with Petitioner a claim
for refund withheld by Anscor Capital and Investment Corp., and Commercial Bank of Manila.
On 12 February 1985, stating that it disagreed with the collection of the 15% final withholding
tax from the interest income as it is an entity fully exempt from income tax as provided under
Rep. Act No. 4917 in relation to Section 56 (b) 3 of the Tax Code. The refund requested having
been denied, Respondent GCL elevated the matter to respondent the CTA, which ruled in favor
of GCL holding that employees' trusts are exempt from the 15% final withholding tax on interest
income and ordering a refund of the tax withheld. Upon appeal, respondent Court of Appeals
upheld the CTA Decision.

Rep. Act No. 1983, amending Sec. 56 (b) of the National Internal Revenue Code, provides that
employees' trusts were exempt from income tax. This exemption and preferential tax treatment
were carried over in Pres. Decree No. 1739, which law also subjected interest from bank deposits
and yield from deposit substitutes to a final tax of twenty per cent (20%). Subsequently,
however, Pres. Decree No. 1959 was issued, amending the aforestated provisions.


Petitioner submits that the deletion of the exempting and preferential tax treatment provisions
under PD 1739 is a clear manifestation that the single 15% (now 20%) rate is impossible on all
interest incomes from deposits, deposit substitutes, trust funds and similar arrangements,
regardless of the tax status or character of the recipients thereof and that when Pres. Decree No.
1959 was promulgated, employees' trusts ceased to be exempt and thereafter became subject to
the final withholding tax. GCL contends that the tax exempt status of the employees' trusts
applies to all kinds of taxes, including the final withholding tax on interest income. That
exemption, according to GCL, is derived from Section 56(b) and not from Section 21 (d) or 24
(cc) of the Tax Code, as argued by Petitioner.

ISSUE:

whether or not the GCL Plan is exempt from the final withholding tax on interest income from
money placements and purchase of treasury bills required by Pres. Decree No. 1959.

HELD:

the GCL Plan was qualified as exempt from income tax by the Commissioner of Internal
Revenue in accordance with Rep. Act No. 4917. Moreover, the provision should be taken in
relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No. 1983,
specifically exempting employee's trusts from income tax.The tax-exemption privilege of
employees' must be distinguished from any other kind of property held in trust. It is manifest that
the tax law has singled out employees' trusts for tax exemption.

The raison de'etre behind the creation of employees' trusts is that Employees' trusts or benefit
plans normally provide economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or disability. It provides security
against certain hazards to which members of the Plan may be exposed. It is an independent and
additional source of protection for the working group, established for their exclusive benefit and
for no other purpose. It was conceived in order to encourage the formation and establishment of
such private Plans for the benefit of laborers and employees outside of the Social Security Act.

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in a diminution accumulated income and
reduce whatever the trust beneficiaries would receive out of the trust fund, which runs afoul of
the very intendment of the law.

The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential
tax rates under the old law, therefore, cannot be deemed to extent to employees' trusts. being a
general law, it cannot repeal by implication a specific provision, Section 56(b) now 53 [b]) in
relation to Rep. Act No. 4917 granting exemption from income tax to employees' trusts. . A
subsequent statute, general in character as to its terms and application, is not to be construed as
repealing a special or specific enactment, unless the legislative purpose to do so is manifested.
This is so even if the provisions of the latter are sufficiently comprehensive to include what was
set forth in the special act.

The final withholding tax collected from income in respect of which employees' trusts are
declared exempt. The application of the withholdings system to interest on bank deposits or
yield from deposit substitutes is essentially to maximize and expedite the collection of income
taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-
exempt status from income, there is no logic in withholding a certain percentage of that income
which it is not supposed to pay in the first place.


COMMISSIONER OF INTERNAL REVENUE, petitioner vs. THE COURT OF
APPEALS and EFREN P. CASTANEDA, respondents.
G.R. No. 96016 October 17, 1991

PADILLA, J.:

FACTS:

Private respondent Efren P. Castaneda retired from the government service as Revenue Attache
in the Philippine Embassy in London, England. Upon retirement, he received, among other
benefits, terminal leave pay from which petitioner Commissioner of Internal Revenue withheld
P12,557.13 allegedly representing income tax thereon. Castaneda filed a formal written claim
with petitioner for a refund contending that the cash equivalent of his terminal leave is exempt
from income tax. To comply with the two-year prescriptive period within which claims for
refund may be filed, Castaneda filed with the Court of Tax Appeals a Petition for Review,
seeking the refund of income tax withheld from his terminal leave pay. The Court of Tax
Appeals found for private respondent Castaneda and ordered the Commissioner of Internal
Revenue to refund Castaneda the sum of P12,557.13 withheld as income tax. On appeal, the
Court of Appeals affirmed the decision of the Court of Tax Appeals.

ISSUE:

Whether or not terminal leave pay received by a government official or employee on the
occasion of his compulsory retirement from the government service is subject to withholding
(income) tax.

HELD:

Terminal leave pay received by a government official or employee is not subject to withholding
(income) tax. The rationale behind the employee's entitlement to an exemption from withholding
(income) tax on his terminal leave pay is that commutation of leave credits, more commonly

known as terminal leave, is applied for by an officer or employee who retires, resigns or is
separated from the service through no fault of his own. In the exercise of sound personnel policy,
the Government encourages unused leaves to be accumulated. The Government recognizes that
for most public servants, retirement pay is always less than generous if not meager and scrimpy.
Terminal leave payments are given not only at the same time but also for the same policy
considerations governing retirement benefits. Hence, not being part of the gross salary or income
of a government official or employee but a retirement benefit, terminal leave pay is not subject to
income tax.


In RE Request of Atty. Bernardo Zialcita
AM 90-6-015-SC, 18 October 1990
Gutierrez Jr.

FACTS:

Amounts were claimed by Atty. Bernardo F. Zialcity on the occasion of his retirement. On 23
August 1990, a resolution was issued by the Court En Banc stating that the terminal leave pay of
Atty. Zialcita received by virtue of his compulsory retirement can never be considered a part of
his salary subject to the payment of income tax but falls under the phrase other benefits
received by retiring employees and workers, within the meaning of Section 1 of PD 220 and
is thus exempt from the payment of income tax. That the money value of his accrued leave
credits is not part of his salary is buttressed by Section 3 of PD 985, which it makes it clear that
the actual service is the period of time for which pay has been received, excluding the period
covered by terminal leave. The Commissioner filed a motion for reconsideration.

ISSUE:

Whether terminal leave pay is exempt from tax; as well as other amounts claimed herein.

HELD:

Applying Section 12 (c) of Commonwealth Act 186, as incorporated into RA 660, and Section
28 (c) of the former law, the amount received by Atty. Zialcita as a result of the conversion of
unused leave credits, commonly known as terminal leave, is applied for by an officer or
employee who retires, resigns, or is separated from the service through no fault of his own. Since
the terminal leave is applied for after the severance of the employment, terminal pay is no longer
compensation for services rendered. It cannot be viewed as salary. Further, the terminal leave
pay may also be considered as a retirement gratuity, which is also another exclusion from gross
income as provided for in Section 28 (b), 7 (f) of the Tax Code.


The August 23 Resolution (AM 90-6-015-SC), however, specifically applies only to employees
of the Judiciary who retire, resign or are separated through no fault of their own. The resolution
cannot be made to apply to other government employees, absent an actual case or controversy, as
that would be in principle an advisory opinion.


COMMISSIONER OF INTERNAL REVENUE vs. MITSUBISHI METAL
CORPORATION
G.R. No. 80041 January 22, 1990
Regalado J:

FACTS:

The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development
Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with
Mitsubishi Metal Corporation(Mitsubishi, for brevity), a Japanese corporation licensed to engage
in business in the Philippines, for purposes of the projected expansion of the productive capacity
of the former's mines in Toledo,
Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in
the amount of $20,000,000.00, United States currency, for the installation of a new concentrator
for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates
produced from said machine for a period of fifteen (15) years. It was contemplated that
$9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from
Japan.

Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for
short) obviously for purposes of its obligation under said contract. Its loan application was
approved on May 26, 1970 in the sum of 4,320,000,000.00, at about the same time as
the approval of its loan for 2,880,000,000.00 from a consortium of Japanese banks. The total
amount of both loans is equivalent to $20,000,000.00 in United States currency at the then
prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval
of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the
amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas,
and that Mitsubishi had to payback the total amount of loan by September 30, 1981.

Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the
former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding

15%tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and
Section 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential Decree
No.131, and duly remitted to the Government.

On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum
of P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was
later noted by respondent Court of Tax Appeals in its decision that on August 27, 1976,
Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor of
Atlas.

ISSUES:

1. Whether or not the interest income from the loans extended to Atlas by Mitsubishi is
excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and,
therefore, exempt from withholding tax.
2. Whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the
creditor whose investments in the Philippines on loans are exempt from taxes under the code.

HELD:

The loan and sales contract between Mitsubishi and Atlas does not contain any direct or
inferential reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as
creditor in the contract of loan and Atlas as the seller of the copper concentrates. From the
categorical language used in the document, one prestation was in consideration of the other. The
specific terms and the reciprocal nature of their obligations make it implausible, if not vacuous to
give credit to the cavalier assertion that Mitsubishi was a mere agent in said transaction. The
contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not
appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by
other considerations aliunde.


The application for the loan was approved on May 20, 1970, or more than a month after the
contract between Mitsubishi and Atlas was entered into on April 17,1970. It is true that under the
contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in
consideration for importing copper concentrates from Atlas, but all that this proves is the
justification for the loan as represented by Mitsubishi, a standard banking practice for evaluating
the prospects of due repayment. There is nothing wrong with such stipulation as the parties in a
contract are free to agree on such lawful terms and conditions as they see fit. Limiting the
disbursement of the amount borrowed to a certain person or to a certain purpose is not unusual,
especially in the case of Eximbank which, aside from protecting its financial exposure, must see
to it that the same are in line with the provisions and objectives of its charter. Respondents
postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from
making loans except to Japanese individuals and corporations. We are not impressed. The
allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank,
assuming the truth thereof, is too tenuous and conjectural to support the proposition that
Mitsubishi is a mere conduit. Furthermore, the remittance of the interest payments may also be
logically viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. Whatever
arrangement was agreed upon by Eximbank and Mitsubishi as to the manner or procedure for the
payment of the latter's obligation is their own concern. It should also be noted that Eximbank's
loan to Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis contract with
Atlas merely states that the "interest on the amount of the loan shall be the actual cost beginning
from and including other dates of releases against loan."

It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that
laws granting exemption from tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The
burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the
exemption so claimed, which on us petitioners have failed to discharge.


DEDUCTIONS IN GENERAL

AGUINALDO INDUSTRIES (FISHING NETS) vs. COMMISSIONER OF
INTERNAL REVENUE
G.R. No. L-29790; February 25, 1982
Plana J:

FACTS:

Aguinaldo Industries Corporation is a domestic corporation engaged in two lines of business,
namely: (a) the manufacture of fishing nets, a tax-exempt industry, and (b) the manufacture of
furniture Its business of manufacturing fishing nets is handled by its Fish Nets Division, while
the manufacture of Furniture is operated by its Furniture Division. For accounting purposes, each
division is provided with separate books of accounts as required by the Department of Finance.
Under the company's accounting method, the net income from its Fish Nets Division,
miscellaneous income of the Fish Nets Division, and the income of the Furniture Division are
computed individually.

Previously, petitioner acquired a parcel of land in Muntinglupa, Rizal, as site of the fishing net
factory. This transaction was entered in the books of the Fish Nets Division of the Company.
Later, when another parcel of land in Marikina Heights was found supposedly more suitable for
the needs of petitioner, it sold the Muntinglupa property, Petitioner derived profit from this sale
which was entered in the books of the Fish Nets Division as miscellaneous income to distinguish
it from its tax-exempt income.

For the year 1957, petitioner filed two separate income tax returns one for its Fish Nets
Division and another for its Furniture Division. After investigation of these returns, the
examiners of the Bureau of Internal Revenue found that the Fish Nets Division deducted from its
gross income for that year the amount of P61,187.48 as additional remuneration paid to the
officers of petitioner. The examiner further found that this amount was taken from the net profit
of an isolated transaction (sale of aforementioned land) not in the course of or carrying on of

petitioner's trade or business. (It was reported as part of the selling expenses of the land in
Muntinglupa, Rizal, the details of said transaction being as follows:
Selling price of land P432,031.00
DEDUCT:
Purchase price of land P71,120.00
Registration, documentary stamps
and other expenses 191.05
Relocation survey 450.00
P71,761.05
ADD SELLING EXPENSES
Commission 51,723.72
Documentary stamps 2,294.05
Topographic survey 450.00
Officer's remuneration 61,187.48 186,416.30
NET PROFIT P 244,416.70

Upon recommendation of aforesaid examiner that the said sum of P61,187.48 be disallowed as
deduction from gross income, petitioner asserted in its letter of February 19, 1958, that said
amount should be allowed as deduction because it was paid to its officers as allowance or bonus
pursuant to Section 3 of its by-laws which provides as follows:
From the net profits of the business of the Company shall be deducted for allowance of the
President 3% for the first Vice President 1 %, for the second Vice President for the

members of the Board of Directors 10% to he divided equally among themselves, for the
Secretary of the Board for the General Manager for two Assistant General Managers.

In this connection, petitioner explains that to arrive at the aforesaid 20% it gets 20'7o of the
profits from the furniture business and adds (the same) to 20 of the profit of the fish net venture.
The P61,187.48 which is the basis of the assessment of P17,133.00 does not even represent the
entire 20%, allocated as allowance in Section 3 of its by-laws but only 20% of the net profit of
the non-exempt operation of the Fish Nets Division, that is, 20,%, of P305,869.89, which is the
sum total of P305,802.18 representing profit from the sale of the Muntinglupa land, P45.21
representing interest on savings accounts, and P90.00 representing dividends from investment of
the Fish Nets Division.

ISSUE:

Whether or not the bonus given to the officers of Aguinaldo upon the sale of its Muntinglupa
land is an ordinary and necessary business expense deductible for income tax purposes?

HELD:

No. In general, only those ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business, including a reasonable allowance for personal services
actually rendered can be claimed as a deductible. The bonus given to the officers of the
Aguinaldo Industries as their share of the profit realized from the sale of the land cannot be
deemed a deductible expense for tax purposes, even if the aforesaid sale could be considered as a
transaction for Carrying on the trade or business of the Aguinaldo Industries and the grant of the
bonus to the corporate officers pursuant to Aguinaldo Industries's by-laws could, as an intra-
corporate matter, be sustained. Evidence show that the sale was effected through a broker who
was paid by Aguinaldo Industries a commission for his services. On the other hand, there is
absolutely no evidence of any service actually rendered by Aguinaldo Industries's officers which
could be the basis of a grant to them of a bonus out of the profit derived from the sale. This being
so, the payment of a bonus to them out of the gain realized from the sale cannot be considered as

a selling expense; nor can it be deemed reasonable and necessary so as to make it deductible for
tax purposes. Thus, the extraordinary and unusual amounts paid by Aguinaldo to these directors
in the guise and form of compensation for their supposed services as such, without any relation
to the measure of their actual services, cannot be regarded as ordinary and necessary expenses
within the meaning of the law.


ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION,
petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. L-26911 January 27, 1981
DE CASTRO, J .:

FACTS:

The case arose from the deficiency in the income tax assessments made by the Commissioner of
Internal Revenue (CIR) of Atlas Consolidated Mining and Development Corporation, a
Philippine registered company, engaged in mining industry covering its income tax for the years
1957 and 1958. According to the CIR, Atlas is not entitled to the exemption for the income tax
for the year 1957 because the exemption covered under RA 909 Sec 4 only pertains to gold
mines. On the other hand, the deficiency income tax for the year 1958 covers the disallowance
of items claimed by Atlas deductible form its gross income. In reply, Atlas contended that the
amount it paid as annual public relations expenses is a deductible expense from gross income
under Sec 30 (a) (1) of the NIRC. Said amount was paid for the services of a public relations
firm which was based in New York City.

ISSUE:

Whether or not the expenses paid to the public relations firm for the services rendered by them,
labeled as stockholders relation service fee, is a business expense which is allowed to be
deduction based from Sec 30 (a) (1) of the NIRC.

HELD:

NO. The expenditure paid to the firm as compensation for services carrying on the selling
campaign in an effort to sell Atlas additional capital stock is not an ordinary expense. Said
expense is not deductible from Atlas gross income in 1958 because expenses relating to
recapitalization and reorganization of the corporation, cost of obtaining stock subscription and

commission or fees paid for the sale of stock reorganization are capital expenditures. The
expense was incurred only to create a favorable image of the corporation in order to gain or
maintain in the public and its stockholders patronage. This does not make it deductible as
business expense.

Litigation expenses incurred in the defense or protection of title to its mining properties are
likewise capital expenditures. Those are not deductible because they constitute a part of the cost
of the property. Expenditures to promote the sales of additional capital stock or the cost,
commissions and fees for obtaining stock subscriptions are still capital expenses. An item of
expenditure in order to be deductible under Sec 30 (a) (1) of the NIRC must fall squarely upon
its provision, which states, all ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business will be allowed deduction.


ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own
respective behalf and as judicial co-guardians of JOSE ROXAS, petitioners, vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. L-25043 April 26, 1968
BENGZON, J.P., J .:

FACTS:

Among the properties inherited by the Roxas brothers are the following: an agricultural land
located in Nasugbu, Batangas; a residential house and lot located in Malate, Manila and shares of stocks
in different corporations. A partnership was formed by Antonio, Eduardo and Jose called Roxas y
Compania to manage the abovementioned properties.

The tenants of Nasugbu who had been tilling the land expressed their desire to purchase from
Roxas y Cia the parcels of land which they are occupying. Pursuant to the agrarian reform laws, the
Roxas brothers were persuaded to part with their landholdings. The Philippine government for
distribution to the actual occupants acquired substantial portions of the land. Considering that the
government do not have sufficient fund, a special agreement was made for the Rehabilitation Finance
Corporation (RFC) to advance P1.5 Million to Roxas y Cia as a loan, the collateral of which is the land
proposed to be sold to the tenants. Roxas y Cia allowed the tenants to buy the land by installment and
contracted with RFC to pay its loan from the proceeds of the yearly amortization paid by the tenants. Net
gains were derived by Roxas y Cia for the years 1953 and 1955, 50% of which was reported for income
tax purposes as gain on the sale of capital asset held for more than one year pursuant to Sec. 34 of the Tax
Code.

As to the residential house, Jose who had been staying in the old house paid P8,000 a year as
rentals to Roxas y Cia. The Commissioner of Internal Revenue (CIR) then demanded from the latter
payment of real estate dealers tax based from the fact that he was receiving house rentals from Jose. The
CIR based it from Sec 194 of the Tax Code which states that an owner of a real estate who derives yearly
rental income therefrom in the amount of P3,000 or more is considered a real estate dealer and is liable to
pay corresponding fixed tax.


Moreover, the CIR assessed deficiency income taxes against the Roxas brothers resulting from
the inclusion as income of Roxas y Cia of the unreported 50% of the net profits for 1953 and 1955, and
the disallowance of deductions from gross income of various business expenses and contributions. The
CIR considered the partnership as engaging in a real estate business hence, 100% of their profit was
taxed.

ISSUES:

1. Whether or not the gain derived from the sale of the Nasugbu farm land is 100% taxable being an
ordinary gain.

2. Whether or not the deductions for business expenses and contributions are deductible.

HELD:

1. NO. Considering that Roxas y Cia cannot be considered a real estate dealer for the sale in
question, Section 34 of the Tax Code provides that the lands sold to the farmers are CAPITAL
ASSETS, and the gain derived from the sale thereof is CAPITAL GAIN, taxable only to the
extent of 50%. The sale of the Nasugbu farm lands to the tenants was not only in consonance but
more in obedience to the request and pursuant to the government policy to allocate land to the
landless. It does not conform with the sense of justice for the government to persuade the
taxpayer to lend a helping hand and later on penalize him for duly answering the urgent call.

2. The following contributions were disallowed:

- Christmas funds of the Pasay City Police, Pasay City firemen and Baguio City Police because
the funds were not spent for public purposes but as Christmas gifts to the families of the
members of said entities. Under Section 39(h) of the Tax Code, a contribution to a
government entity is deductible when used exclusively for public purposes.

- Philippine Heralds fund for Manila neediest families because such entity is not a corporation
or associated as contemplated in Sec 30(h) of the Tax Code. The contributions were not
made to Philippine Herald but to a group of civic spirited citizens organized by Philippine
Herald solely for charitable purposes.

- Our Lady of Fatima chapel at the Far Eastern University because said university gives
dividends to its stockholders. The chapel was not shown to belong to the Catholic or any
religious organization.


G.R. No. L-15290 May 31, 1963
MARIANO ZAMORA, petitioner, vs. COLLECTOR OF INTERNAL
REVENUE and COURT OF TAX APPEALS, respondents.et al
PAREDES, J.:

These are 4 cases regarding deficiency income taxes allegedly incurred by the Zamoras.

Cases Nos. L-15290 and L-15280:

Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his
income tax returns the years 1951 and 1952. The Collector of Internal Revenue 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 CTA reduced the sum due Zamora and on
appeal, petitioner alleged that the CTA erred in disallowing the promotion expenses incurred by
his wife for promotion of the above businesses, depreciation of the Bayview Hotel Bldg, and in
applying the Ballantyne scale of values for determining the cost of his Manila property. The CIR,
on the other hand, claimed that the CTA erred in reducing the amounts and giving credence to
the uncorroborated testimony of Mariano Zamora that he bought the said real property in
question during the Japanese occupation, partly in Philippine currency and partly in Japanese war
notes.

Cases Nos. L-15289 and L-15281

Mariano Zamora and his deceased sister Felicidad Zamora, bought a piece of land located
in Manila on May 16, 1944, for P132,000.00 and sold it for P75,000.00 on March 5, 1951. They
also purchased a lot located in Quezon City for P68,959.00 on January 19, 1944, which they sold
for P94,000 on February 9, 1951. The CTA ordered the estate of the late Felicidad Zamora
(represented by Esperanza A. Zamora, as special administratrix of her estate), to pay the sum of
P235.50, representing alleged deficiency income tax and surcharge due from said estate.

First issue disallowance of the entire promotion expenses incurred by Mrs. Zamora

Petitioner: The CTA erred in disallowing P10,478.50 as promotion expenses incurred by his wife
for the promotion of the BayView Hotel and Farmacia Zamora. He contends that the whole
amount of P20,957.00 as promotion expenses should be allowed and not merely one-half of it. on
the ground that, while not all the itemized expenses are supported by receipts, the absence of
some supporting receipts has been sufficiently and satisfactorily established - to purchase
machinery for a new Tiki-Tiki plant, and to observe hotel management in modern hotels.

Respondents: Mrs. Zamora obtained only the sum of P5,000.00 from the Central Bank and that
in her application for dollar allocation, she stated that she was going abroad on a combined
medical and business trip, which facts were not denied by Mariano Zamora. The alleged
expenses were not supported by receipts. Mrs. Zamora could not even remember how much
money she had when she left abroad in 1951, and how the alleged amount of P20,957.00 was

spent. There having been no means by which to ascertain which expense was incurred by her in
connection with the business of Mariano Zamora and which was incurred for her personal
benefit, the respondents considered 50% of the said amount of P20,957.00 as business expenses
and the other 50%, as her personal expenses.

Held: The 50% allocation is very fair to Zamora, there being no receipt to explain the alleged
business expenses as well as the personal expenses that might have been incurred. While in
situations like the present, absolute certainty is usually no possible, the CTA should make as
close an approximation as it can, bearing heavily, if it chooses, upon the taxpayer whose
inexactness is of his own making. Section 30, of the Tax Code, provides that in computing net
income, and there shall be allowed as deductions all the ordinary and necessary expenses paid or
incurred during the taxable year, in carrying on any trade or business. Since promotion expenses
constitute one of the deductions in conducting a business, same must testify these requirements.
Claim for the deduction of promotion expenses or entertainment expenses must also be
substantiated or supported by record showing in detail the amount and nature of the expenses
incurred (N.H. VanSocklan, Jr. v. Comm. of Int. Rev.; 33 BTA 544). In the case of Visayan
Cebu Terminal Co., Inc. v. Collector of Int. Rev., it was declared that representation expenses
fall under the category of business expenses which are allowable deductions from gross income,
if they meet the conditions prescribed by law, particularly section 30 (a) [1], of the Tax Code;
that to be deductible, said business expenses must be ordinary and necessary expenses paid or
incurred in carrying on any trade or business; that those expenses must also meet the further test
of reasonableness in amount; 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 expenses.

Second issue disallowance/reduction of the rate of depreciation of Bayview Hotel (from 3.5%
to 2.5%)

Petitioner: Contends that: 1) the Ermita district is becoming a commercial district, 2) the hotel
has no room for improvement, and 3) the changing modes in architecture, styles of furniture and
decorative designs, "must meet the taste of a fickle public". Also, the reference to Bulletin F, a
publication by the IRS, should have been first proved as law to be subject of judicial notice.

Held: The CTA was approximately correct in holding that the rate of depreciation must be 2.5%.
An average hotel buildings estimated useful life is 5 years, but inasmuch as it also depends on
the use and location, change in population and other, it is allowed a deprecation rate of 2.5%
which corresponds to a useful life of 40 years. It is true that Bulletin F has no binding force, but
it has a strong persuasive effect considering that the same has been the result of scientific studies
and observation for a long period in the United States after whose Income Tax Law ours is
patterned." Verily, courts are permitted to look into and investigate the antecedents or the
legislative history of the statutes involved (Director of Lands v. Abaya, et al., 63 Phil. 559).

Third issue- the undeclared capital gains derived from the sales in 1951 of certain real properties
in Malate, Manila and in Quezon City, acquired during the Japanese occupation.


Held: The CTAs appraisal in this case is correct. Consequently, the total undeclared income of
petitioners derived from the sales of the Manila and Quezon City properties in 1951 is
P17,111.75 (P1,750.00 plus P15,361.75), 50% of which in the sum of P8,555.88 is taxable, the
said properties being capital assets held for more than one year. The cost basis of property
acquired in Japanese war notes is the equivalent of the war notes in genuine Philippine currency
in accordance with the Ballantyne Scale of values, and that the determination of the gain derived
or loss sustained in the sale of such property is not affected by the decline at the time of sale, in
the purchasing power of the Philippine currency. It was found by the CTA that the purchase
price of P132,000.00 was not entirely paid in Japanese War notes but thereof or P66,000.00
was in Philippine currency. This being the case, the Ballantyne Scale of values, which was the
result of an impartial scientific study, adopted and given judicial recognition, should be applied.
As the value of the Japanese war notes in May, 1944 when the Manila property was bought, was
1 of the genuine Philippine Peso (Ballantyne Scale), and since the gain derived or loss
sustained in the disposition of this property is to reckoned in terms of Philippine Peso, the value
of the Japanese war notes used in the purchase of the property, must be reduced in terms of the
genuine Philippine Peso to determine the cost of acquisition. It, therefore, results that since the
sum of P66,000.00 in Japanese war notes in May, 1944 is equivalent to P5,500.00 in Philippine
currency (P66,000.00divided by 12), the acquisition cost of the property in question is
P66,000.00 plus P5,500.00 or P71,500.00 and that as the property was sold for P75,000.00 in
1951, the owners thereof Mariano and Felicidad Zamora derived a capital gain of P3,500.00or
P1,750.00 each. For the Quezon City property, the CTA was correct in giving credence to
Zamoras testimony that the same was purchased in Philippine currency, because it is quite
incredible that real property with an assessed value of P46,910.00 should have been sold in
Japanese war notes with an equivalent value in Philippine currency of only P17,239.75. Thus, the
gain derived from the sale isP15,361.75, after deducting from the selling price the cost of
acquisition in the sum of P68,959.00 and the expense of sale in the sum of P9,679.25.


C. M. HOSKINS & CO., INC. vs. COMMISSIONER OF INTERNAL
REVENUE.
G.R. No. L-24059 November 28, 1969
TEEHANKEE, J.

FACTS:

Petitioner, a domestic corporation engaged in the real estate business as brokers,
managing agents and administrators, filed its income tax return for its fiscal year ending
September 30, 1957 showing a net income of P92,540.25 and a tax liability due thereon of
P18,508.00, which it paid in due course. Upon verification of its return, respondent
Commissioner of Internal Revenue disallowed four items of deduction.
The Court of Tax Appeals upheld respondent's disallowance of the principal item of
petitioner's having paid to Mr. C. M. Hoskins, its founder and controlling stockholder the amount
of P99,977.91 representing 50% of supervision fees earned by it and set aside respondent's
disallowance of three other minor items.
Petitioner questions in this appeal the Tax Court's findings.

ISSUE:

Whether or not the payment by the taxpayer to its controlling stockholder of 50% of its
supervision fees or the amount of P99, 977.91 is a deductible ordinary and necessary expense
and should be treated as a distribution of earnings and profits of the taxpayer.

HELD:

No, payment by the taxpayer to its controlling stockholder of 50% of its supervision fees
or the amount of P99, 977.91 is not a deductible ordinary and necessary expense and should be
treated as a distribution of earnings and profits of the taxpayer.
Petitioner was founded by Mr. C. M. Hoskins in 1937, with a capital stock of 1,000
shares at a par value of P1.00 each share; that of these 1,000 shares, Mr. C. M. Hoskins owns
996 shares (the other 4 shares being held by the other four officers of the corporation), which
constitute exactly 99.6% of the total authorized capital stock; that during the first four years of its
existence, Mr. C. M. Hoskins was the President, but during the taxable period in question, that is,

from October 1, 1956 to September 30, 1957, he was the chairman of the Board of Directors and
salesman-broker for the company, he received a salary of P3,750.00 a month, plus a salary bonus
of about P40,000.00 a year; that he was also a stockholder and officer of the Paradise Farms, Inc.
and Realty Investments, Inc., from which petitioner derived a large portion of its income in the
form of supervision fees and commissions earned on sales of lots.
If such payment of P99, 977.91 were to be allowed as a deductible item, then Hoskins
would receive on these three items alone (salary, bonus and supervision fee) a total of
P184,977.91, which would be double the petitioner's reported net income for the year of
P92,540.25.
The fact that such payment was authorized by a standing resolution of petitioner's board
of directors, since "Hoskins had personally conceived and planned the project" cannot change the
picture. There could be no question that as Chairman of the board and practically an absolutely
controlling stockholder of petitioner, holding 99.6% of its stock, Hoskins wielded tremendous
power and influence in the formulation and making of the company's policies and decisions.
There is no fixed test for determining the reasonableness of a given bonus as
compensation. This depends upon many factors, one of them being 'the amount and quality of the
services performed with relation to the business. Other tests suggested are: payment must be
'made in good faith'; 'the character of the taxpayer's business, the volume and amount of its net
earnings, its locality, the type and extent of the services rendered, the salary policy of the
corporation'; 'the size of the particular business'; 'the employees' qualifications and contributions
to the business venture'; and 'general economic conditions'. However, in determining whether the
particular salary or compensation payment is reasonable, the situation must be considered as
whole. Ordinarily, no single factor is decisive, it is important to keep in mind that it seldom
happens that the application of one test can give satisfactory answer, and that ordinarily it is the
interplay of several factors, properly weighted for the particular case, which must furnish the
final answer. Petitioner's case fails to pass the test.
Lastly, the court must not lose sight of the fact that the question of allowing or
disallowing as deductible expenses the amounts paid to corporate officers by way of bonus is
determined by respondent exclusively for income tax purposes. Concededly, he has no authority
to fix the amounts to be paid to corporate officers by way of basic salary, bonus or additional
remuneration a matter that lies more or less exclusively within the sound discretion of the

corporation itself. But this right of the corporation is, of course, not absolute. It cannot exercise it
for the purpose of evading payment of taxes legitimately due to the State.


C. F. CALANOC vs. THE COLLECTOR OF INTERNAL REVENUE
G.R. No. L-15922 November 29, 1961
LABRADOR, J .

FACTS:

To solicit and receive contributions for the orphans and destitute children of the Child
Welfare Workers Club of the Social Welfare Commission, CF Calanoc financed and promoted a
boxing and wrestling exhibition. The CIR found that the gross sales generated by the exhibition
amounted to P26, 553.00; the expenditures incurred was P25, 157.62; and the net profit was only
P1, 375.30. Upon examination of the receipts, the CIR also found the following items of
expenditures: (a)P461.65 for police protection; (b) P460.00 for gifts; (c) P1,880.05 for parties;
and (d)several items for representation. Calanoc remitted to SWC P1, 375.30 only. Based on its
findings, the CIR assessed Calanoc an amusement tax of P7,378.57.

ISSUE:

Whether or not Calanocs expenses were excessive and not justified thus resulting to the
assessment of an amusement tax.

HELD:

Expenses were excessive and not justified, not deductible. Calanoc denied having
received the stadium fee P1, 000, which was not included in the receipts. And that even if he did,
he could not be made to pay almost seven times the amount as amusement tax. Evidence was
submitted, however, that the said stadium fee of P1, 000, was paid by the O-SO Beverages
directly to the stadium management for advertisement privileges on the day of the exhibition.
Since the fee was paid by the concessionaire, Calanoc had no right to include the P1, 000
stadium fee among the items of his expenses. It results, therefore, that P1, 000 went into
Calanocs pocket unaccounted. Furthermore petitioner admitted that he could not justify the
other expenses, such as those for police protection and gifts. He claims further that

the accountant who prepared the statement of receipts was already dead and could no longer be
questioned on the items contained in said statement. Most of the items of expenditures
contained in the statement submitted to the CIR were either exorbitant or not supported by
receipts. The payment of P461.65 for police protection was illegal as it was a consideration given
by Calanoc to the police for the performance by the latter of the functions required of them to be
rendered by law. The expenditures of P460 for gifts, P1, 880.05 for parties, and other items for
representation were rather excessive, considering that the purpose of the exhibition was for a
charitable cause.


KUENZLE & STREIFF, INC. vs. THE COLLECTOR OF INTERNAL
REVENUE
G.R. Nos. L-12010 and L-12113 October 20, 1959
BAUTISTA ANGELO, J .

FACTS:

Petitioner is a domestic corporation engaged in the importation of textiles, hardware,
sundries, chemicals, pharmaceuticals, lumbers, groceries, wines and liquor; in insurance and
lumber; and in some exports. In the income tax returns for the years 1950, 1951 and 1952 it filed
with respondent, petitioner deducted from its gross income certain items representing salaries,
directors' fees and bonuses of its non-resident president and vice-president; bonuses of its
resident officers and employees; and interests on earned but unpaid salaries and bonuses of its
officers and employees. The income tax computed in accordance with these returns was duly
paid by petitioner.
After disallowing the deductions of the items representing director's fees, salaries and
bonuses of petitioner's non-resident president and vice-president; the bonus participation of
certain resident officers and employees; and the interests on earned but unpaid salaries and
bonuses, respondent assessed and demanded from petitioner the payment of deficiency income
taxes.
Respondent modified the same by allowing as deductible all items comprising directors'
fees and salaries of the non-resident president and vice-president, but disallowing the bonuses
insofar as they exceed the salaries of the recipients, as well as the interests on earned but unpaid
salaries and bonuses. Petitioner having taken the case on appeal to the Court of Tax Appeals, the
latter modified the assessment of respondent as stated in the early part of this decision.
Both parties have appealed, petitioner from that portion which holds that the measure of
the reasonableness of the bonuses paid to its non-resident president and vice-president should be
applied to the bonuses given to resident officers and employees in determining their deductibility
and so only so much of said bonuses as applied to the latter should be allowed as deduction, and
respondent from that portion of the decision which allows the deduction of so much of the
bonuses which is in excess of the yearly salaries paid to the respective recipients thereof.


ISSUE:

Whether or not the compensation and the bonuses paid to the employees is reasonable.

HELD:

The law involved here is Section 30 (a)(1) and (b)(1) of the National Internal Revenue
Code, the pertinent provisions of which we quote:
SEC. 30. Deductions from gross income. In computing net income there shall be
allowed as deductions
(a) Expenses:
(1) In general. All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered;
(b) Interest:
(1) In general. The amount of interest paid within the taxable year on indebtedness,
except on indebtedness incurred or continued to purchase or carry obligations the interest
upon which is exempt from taxation as income under this Title.
It would appear that all ordinary and necessary expenses paid or incurred in carrying on a
trade or business, including a reasonable allowance for salaries or other compensation for
personal services actually rendered, may be allowed as deductions in computing the taxable
income during the year. Here it is admitted. The only question in dispute being how much of said
bonuses may be considered reasonable in order that it may be allowed as deduction.
It should be noted that petitioner gave to its non-resident president and vice president for
the years 1950 and 1951 bonuses equal to 133-1/2% of their annual salaries and bonuses equal to
125-2/3% for the year 1952, whereas with regard to its resident officers and employees it gave
them much more on the alleged reason that they deserved them because of their valuable
contribution to the business of the corporation which has made it possible for it to realize huge
profits during the aforesaid years. And the Court of Tax Appeals ruled that while the bonuses
given to the non-resident officers are reasonable considering their yearly salaries and the services
actually rendered by them, the bonuses given to the resident officers and employees are,
however, quite excessive, the court saying on this point that "there is no special reason for

granting greater bonuses to such lower ranking officers than those given to Messrs. Kuenzle and
Streiff."
It is a general rule that "Bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees are deductible, provided such
payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the
services rendered". The condition precedents to the deduction of bonuses to employees are: (1)
the payment of the bonuses is in fact compensation; (2) it must be for personal services actually
rendered; and (3) the bonuses, when added to the salaries, are reasonable when measured by the
amount and quality of the services performed with relation to the business of the particular
taxpayer".
There is no fixed test for determining the reasonableness of a given bonus as
compensation. While it may be admitted that the resident officers and employees had performed
their duty well and rendered efficient service and for that reason were given greater amount of
additional compensation in the form of bonuses than what was given to the non-resident officers.
The reason for this is that, in the opinion of the management itself of the corporation, said non-
resident officers had rendered the same amount of efficient personal service and contribution to
deserve equal treatment in compensation and other emoluments with the particularity that their
liberation yearly salaries had been much smaller.
The contention of respondent that the trial court erred also in allowing the deduction
bonuses in excess of the yearly salaries of their respective recipients predicated upon his own
decision that the deductible amount of said bonuses should be only equal to their respective
yearly salaries cannot also be sustained.
As regards the amount of interests disallowed, we also find the ruling of the trial court
justified. There is no dispute that these items accrued on unclaimed salaries and bonus
participation of shareholders and employees. Under the law, in order that interest may be
deductible, it must be paid "on indebtedness". It is therefore imperative to show that there is
an existing indebtedness which may be subjected to the payment of interest. Here the items
involved are unclaimed salaries and bonus participation which in our opinion cannot constitute
indebtedness within the meaning of the law because while they constitute an obligation on the
part of the corporation, it is not the latter's fault if they remained unclaimed


G.R. Nos. 106949-50 December 1, 1995
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP),
petitioner, vs. COURT OF APPEALS, COMMISSIONER OF INTERNAL
REVENUE and COURT OF TAX APPEALS, respondents.

G.R. Nos. 106984-85 December 1, 1995
COMMISSIONER INTERNAL REVENUE, petitioner, vs. PAPER INDUSTRIES
CORPORATION OF THE PHILIPPINES, THE COURT OF APPEALS and THE
COURT OF TAX APPEALS, respondents.

FELICIANO, J .:

FACTS:

Petitioner Paper Industries Corporation of the Philippines (PICOP) is a Philippine
corporation registered with the Board of Investments (BOI) as a preferred pioneer enterprise with
respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with
respect to its integrated plywood and veneer mills. Petitioner received from the Commissioner of
Internal Revenue (CIR) two (2) letters of assessment and demand (a) one for deficiency
transaction tax and for documentary and science stamp tax; and (b) the other for deficiency
income tax for 1977, for an aggregate amount of P88,763,255.00.
PICOP protested the assessment of deficiency transaction tax and documentary and
science stamp taxes as well as the deficiency income tax assessment for 1977. These protests
were not formally acted upon by respondent CIR. Subsequently, the CIR issued a warrant of
distraint on personal property and a warrant of levy on real property against PICOP, to enforce
collection of the contested assessments; in effect, the CIR denied PICOP's protests. Thereupon,
PICOP went before (CTA) appealing the assessments. After trial, the CTA rendered a decision
dated 15 August 1989, modifying the findings of the CIR and holding PICOP liable for the
reduced aggregate amount of P20,133,762.33. Both parties went to the Supreme Court on
separate petitions for review, where it was later on referred to the Court of Appeals. The Court of
Appeals denied the appeal of the CIR and modified the judgment against PICOP holding it liable
for transaction tax and absolved it from payment of documentary and science stamp tax and
compromise penalty. It also held PICOP liable for deficiency of income tax.


ISSUES:

Whether or not PICOP is liable for transaction tax, documentary, science stamp tax and
deficiency income tax.

HELD:

On the first issue, the Supreme Court ruled in the affirmative. In the instant Petition,
PICOP reiterates its claim that it is exempt from the payment of the transaction tax by virtue of
its tax exemption under R.A. No. 5186, as amended, known as the Investment Incentives Act,
which in the form it existed in 1977-1978, read in relevant part as follows: "SECTION 8.
Incentives to a Pioneer Enterprise. In addition to the incentives provided in the preceding
section, pioneer enterprises shall be granted the following incentive benefits: (a) Tax Exemption.
Exemption from all taxes under the National Internal Revenue Code, except income tax, from the
date of investment is included in the Investment Priorities Plan to the following extent: x x x.
The Supreme Court holds that that PICOP's tax exemption under R.A. No. 5186, as
amended, does not include exemption from the thirty-five percent (35%) transaction tax. In the
first place, the thirty-five percent (35%) transaction tax is an income tax, that is, it is a tax on the
interest income of the lenders or creditors as held by the Supreme Court in the case of Western
Minolco Corporation v. Commissioner of Internal Revenue. The 35% transaction tax is an
income tax on interest earnings to the lenders or placers. The latter are actually the taxpayers.
Therefore, the tax cannot be a tax imposed upon the petitioner. In other words, the petitioner who
borrowed funds from several financial institutions by issuing commercial papers merely withheld
the 35% transaction tax before paying to the financial institutions the interest earned by them and
later remitted the same to the respondent CIR. The tax could have been collected by a different
procedure but the statute chose this method. Whatever collecting procedure is adopted does not
change the nature of the tax. It is thus clear that the transaction tax is an income tax and as such,
in any event, falls outside the scope of the tax exemption granted to registered pioneer
enterprises by Section 8 of R.A. No. 5186, as amended. PICOP was the withholding agent,
obliged to withhold thirty-five percent (35%) of the interest payable to its lenders and to remit
the amounts so withheld to the Bureau of Internal Revenue ("BIR"). As a withholding, agent,
PICOP is made personally liable for the thirty-five percent (35%) transaction tax 10 and if it did

not actually withhold thirty-five percent (35%) of the interest monies it had paid to its lenders,
PICOP had only itself to blame.
On the second issue, the Supreme Court ruled in the negative. The CIR assessed
documentary and science stamp taxes, amounting to P300,000.00, on the issuance of PICOP's
debenture bonds. Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to
be extended beyond the ordinary and reasonable intendment of the language actually used by the
legislative authority in granting the exemption. The issuance of debenture bonds is certainly
conceptually distinct from pulping and paper manufacturing operations. But no one contends that
issuance of bonds was a principal or regular business activity of PICOP; only banks or other
financial institutions are in the regular business of raising money by issuing bonds or other
instruments to the general public. The Supreme Court considers that the actual dedication of the
proceeds of the bonds to the carrying out of PICOP's registered operations constituted a
sufficient nexus with such registered operations so as to exempt PICOP from taxes ordinarily
imposed upon or in connection with issuance of such bonds. The Supreme Court agrees with the
Court of Appeals on this matter that the CTA and the CIR had erred in rejecting PICOP's claim
for exemption from stamp taxes.
On the third issue, the Supreme Court ruled in the affirmative. PICOP did not deny the
existence of discrepancy in their Income Tax Return and Books of Account owing to
their procedure of recording its export sales (reckoned in U.S. dollars) on the basis of a
fixed rate, day to day and month to month, regardless of the actual exchange rate and
without waiting when the actual proceeds are received. In other words, PICOP recorded
its export sales at a pre-determined fixed exchange rate. That pre-determined rate was
decided upon at the beginning of the year and continued to be used throughout the
year. Because of this, the CIR has made out at least a prima facie case that PICOP had
understated its sales and overstated its cost of sales as set out in its Income Tax
Return. For the CIR has a right to assume that PICOP's Books of Accounts speak the
truth in this case since, as already noted, they embody what must appear to be
admissions against PICOP's own interest.


THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
CONSUELO L. VDA. DE PRIETO, respondent.

G.R. No. L-13912 September 30, 1960

GUTIERREZ DAVID, J.:

FACTS:

On December 4, 1945, the respondent conveyed by way of gifts to her four children, namely,
Antonio, Benito, Carmen and Mauro, real property with a total assessed value of P892,497.50. After the
filing of the gift tax returns, the petitioner Commissioner of Internal Revenue appraised the real property
donated for gift tax purposes at P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift
tax, interest and compromises due thereon. Of the total sum of P117,706.50 paid by respondent, the sum
of P55,978.65 represents the total interest on account of deliquency. This sum of P55,978.65 was claimed
as deduction, among others, by respondent in her 1954 income tax return. Petitioner, however, disallowed
the claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of
P21,410.38 as deficiency income tax due on the aforesaid P55,978.65, including interest, surcharge and
compromise for the late payment.

Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that
there should be interest upon it, and that what is claimed as an interest deduction should have been paid or
accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the
late payment of her donor's tax, and the same was paid within the year it is sought to be declared.

ISSUE:

Whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1)
of the Tax Code.

HELD:

The pertinent provision provides:

SEC. 30 Deductions from gross income. In computing net income there shall be allowed as
deductions

x x x x x x x x x

(b) Interest:

(1) In general. The amount of interest paid within the taxable year on indebtedness, except on
indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt
from taxation as income under this Title.

The term "indebtedness" as used in the Tax Code of the United States containing similar provisions
as in the above-quoted section has been defined as an unconditional and legally enforceable obligation for
the payment of money. Within the meaning of that definition, it is apparent that a tax may be considered
an indebtedness. In the case of Santiago Sambrano vs. Court of Tax Appeals and Collector of Internal
Revenue (101 Phil., 1; 53 Off. Gaz., 4839), the Court held:

"Although taxes already due have not, strictly speaking, the same concept as debts, they are,
however, obligations that may be considered as such."

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 requirement of the law.
Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt.

The Supreme Court held that the interest paid by herein respondent for the late payment of her
donor's tax is deductible from her gross income under section 30(b) of the Tax Code above quoted. To
sustain the proposition that the interest payment in question is not deductible for the purpose of
computing respondent's net income, petitioner relies heavily on section 80 of Revenue Regulation No. 2
which provides that "the word `taxes' means taxes proper and no deductions should be allowed for
amounts representing interest, surcharge, or penalties incident to delinquency."

To give to the quoted portion of section 80 of our Income Tax Regulations the meaning that the
petitioner gives it would run counter to the provision of section 30(b) of the Tax Code and the
construction given to it by courts in the United States. Such effect would thus make the regulation invalid
for a "regulation which operates to create a rule out of harmony with the statute, is a mere nullity."
Section 80 implements only section 30(c) of the Tax Code, or the provision allowing deduction of taxes,
while herein respondent seeks to be allowed deduction under section 30(b), which provides for deduction
of interest on indebtedness.

It was held that the interest payment for delinquent taxes is not deductible as tax under Section
30(c) of the Tax Code and section 80 of the Income Tax Regulations, the taxpayer is not precluded
thereby from claiming said interest payment as deduction under section 30(b) of the same Code.


G.R. Nos. L-18169, L-18262 & L-21434 July 31, 1964

COMMISSIONER OF INTERNAL REVENUES, petitioner, vs. V.E.
LEDNICKY and MARIA VALERO LEDNICKY, respondents.

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

FACTS:

Spouses VE and Maria Valero Lednicky are American citizens residing in the
Philippines, and have derived all their income from Philippine sources since 1947. In 1955, the
spouses filed with the US Internal Revenue agent in Manila their Federal income tax return for
1947, 1951 to 1954 on income from Philippine sources. From 1956 to 1958, they filed their
domesic income tax returns in compliance with local laws. They amended their tax returns in
1959 to include their taxes paid to the US Federal Government, interests, and exchange and bank
charges. They filed their claims for refund.

ISSUE:

Whether income tax paid to foreign governments can be deducted from the gross income
or as a tax credit.

HELD:

The laws intent is that the right to deduct income taxes paid to foreign government from
the tax payers gross income is given only as an alternative or substitute to his right to claim a
tax credit for such foreign income taxes; so that unless the alien resident has a right to claim such
tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his
gross income. The purpose of the law is to prevent the taxpayer from claiming twice the benefits
of his payment of foreign taxes, by deduction from gross income and by tax credit. To allow an
alien resident to deduct from his gross income whatever taxes he pays to his own government
amounts to confer on the latter power to reduce the tax income of the Philippine Government.
Such result is incompatible with the status of the Philippines as an independent and sovereign
state. Any relief from the alleged double taxation should come from the United States, since its

right to burden the taxpayer is solely predicated on the taxpayers citizenship, without
contributing to the production of the wealth that is being taxed.


PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP),
petitioner, vs. COURT OF APPEALS, COMMISSIONER OF INTERNAL
REVENUE and COURT OF TAX APPEALS, respondents.

G.R. Nos. 106949-50 December 1, 1995

COMMISSIONER INTERNAL REVENUE, petitioner, vs. PAPER INDUSTRIES
CORPORATION OF THE PHILIPPINES, THE COURT OF APPEALS and THE COURT OF
TAX APPEALS, respondents.

G.R. Nos. 106984-85 December 1, 1995

FELICIANO, J .:

FACTS:
Petitioner Paper Industries Corporation of the Philippines (PICOP) is a Philippine corporation
registered with the Board of Investments (BOI) as a preferred pioneer enterprise with respect to its
integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated
plywood and veneer mills. Petitioner received from the Commissioner of Internal Revenue (CIR) two (2)
letters of assessment and demand (a) one for deficiency transaction tax and for documentary and science
stamp tax; and (b) the other for deficiency income tax for 1977, for an aggregate amount of
P88,763,255.00.
PICOP protested the assessment of deficiency transaction tax and documentary and science
stamp taxes as well as the deficiency income tax assessment for 1977. These protests were not formally
acted upon by respondent CIR. Subsequently, the CIR issued a warrant of distraint on personal property
and a warrant of levy on real property against PICOP, to enforce collection of the contested assessments;
in effect, the CIR denied PICOP's protests. Thereupon, PICOP went before (CTA) appealing the
assessments. After trial, the CTA rendered a decision dated 15 August 1989, modifying the findings of
the CIR and holding PICOP liable for the reduced aggregate amount of P20,133,762.33. Both parties
went to the Supreme Court on separate petitions for review, where it was later on referred to the Court of
Appeals. The Court of Appeals denied the appeal of the CIR and modified the judgment against PICOP
holding it liable for transaction tax and absolved it from payment of documentary and science stamp tax
and compromise penalty. It also held PICOP liable for deficiency of income tax.


ISSUES:
(1) Whether or not PICOP is liable for transaction tax?
(2) Whether or not PICOP is liable for documentary and science stamp tax?
(3) Whether or not PICOP is liable for deficiency income tax?

HELD:
(1) YES. PICOP reiterates its claim that it is exempt from the payment of the transaction tax by
virtue of its tax exemption under R.A. No. 5186, as amended, known as the Investment Incentives Act,
which in the form it existed in 1977-1978, read in relevant part as follows: "SECTION 8. Incentives to a
Pioneer Enterprise. In addition to the incentives provided in the preceding section, pioneer enterprises
shall be granted the following incentive benefits: (a) Tax Exemption. Exemption from all taxes under the
National Internal Revenue Code, except income tax, from the date of investment is included in the
Investment Priorities Plan to the following extent: x x x.
The Supreme Court holds that that PICOP's tax exemption under R.A. No. 5186, as amended,
does not include exemption from the thirty-five percent (35%) transaction tax. In the first place, the thirty-
five percent (35%) transaction tax is an income tax, that is, it is a tax on the interest income of the lenders
or creditors as held by the Supreme Court in the case of Western Minolco Corporation v. Commissioner
of Internal Revenue. The 35% transaction tax is an income tax on interest earnings to the lenders or
placers. The latter are actually the taxpayers. Therefore, the tax cannot be a tax imposed upon the
petitioner. In other words, the petitioner who borrowed funds from several financial institutions by
issuing commercial papers merely withheld the 35% transaction tax before paying to the financial
institutions the interest earned by them and later remitted the same to the respondent CIR. The tax could
have been collected by a different procedure but the statute chose this method. Whatever collecting
procedure is adopted does not change the nature of the tax. It is thus clear that the transaction tax is an
income tax and as such, in any event, falls outside the scope of the tax exemption granted to registered
pioneer enterprises by Section 8 of R.A. No. 5186, as amended. PICOP was the withholding agent,
obliged to withhold thirty-five percent (35%) of the interest payable to its lenders and to remit the
amounts so withheld to the Bureau of Internal Revenue ("BIR"). As a withholding, agent, PICOP is made
personally liable for the thirty-five percent (35%) transaction tax 10 and if it did not actually withhold
thirty-five percent (35%) of the interest monies it had paid to its lenders, PICOP had only itself to blame.

(2) NO. The CIR assessed documentary and science stamp taxes, amounting to P300,000.00, on
the issuance of PICOP's debenture bonds. Tax exemptions are, to be sure, to be "strictly construed," that
is, they are not to be extended beyond the ordinary and reasonable intendment of the language actually

used by the legislative authority in granting the exemption. The issuance of debenture bonds is certainly
conceptually distinct from pulping and paper manufacturing operations. But no one contends that issuance
of bonds was a principal or regular business activity of PICOP; only banks or other financial institutions
are in the regular business of raising money by issuing bonds or other instruments to the general public.
The Supreme Court considers that the actual dedication of the proceeds of the bonds to the carrying out of
PICOP's registered operations constituted a sufficient nexus with such registered operations so as to
exempt PICOP from taxes ordinarily imposed upon or in connection with issuance of such bonds. The
Supreme Court agrees with the Court of Appeals on this matter that the CTA and the CIR had erred in
rejecting PICOP's claim for exemption from stamp taxes.

(3) YES. PICOP did not deny the existence of discrepancy in their Income Tax Return and Books
of Account owing to their procedure of recording its export sales (reckoned in U.S. dollars) on the basis
of a fixed rate, day to day and month to month, regardless of the actual exchange rate and without waiting
when the actual proceeds are received. In other words, PICOP recorded its export sales at a pre-
determined fixed exchange rate. That pre-determined rate was decided upon at the beginning of the year
and continued to be used throughout the year. Because of this, the CIR has made out at least a prima
facie case that PICOP had understated its sales and overstated its cost of sales as set out in its Income Tax
Return. For the CIR has a right to assume that PICOP's Books of Accounts speak the truth in this case
since, as already noted, they embody what must appear to be admissions against PICOP's own interest.


PHILIPPINE REFINING COMPANY (now known as UNILEVER
PHILIPPINES [PRC], INC), petitioner, vs. COURT OF APPEALS, COURT OF
TAX APPEALS, and THE COMMISSIONER OF INTERNAL REVENUE,
respondents.

G.R. No. 118794 May 8, 1996

REGALADO, J .:

FACTS:
Philippine Refining Company (PRC) was assessed deficiency tax as a result of the disallowance
of bad debts (P713,070.93) and interest expense (P2,666,545.49). Upon petition by PRC, the Court of Tax
Appeals reversed the disallowance of interest expense but maintained the disallowance of bad debts
amounting to P395,324.27 (thereby allowing as deduction the difference of P317,746.66 only). According
to the CTA, mere testimony of the Financial Accountant of PRC explaining the worthlessness of said
debts is nothing more than a self-serving exercise which lacks probative value, that there was no iota of
documentary evidence (collection letters sent, report from investigating field men, letter of referral to
their legal department, police report/affidavit that the owners were bankrupt due to fire that engulfed their
stores or that the owner has been murdered, etc.) to give support to the testimony of an employee of PRC,
that mere allegations cannot prove the worthlessness of such debts, thus the disallowance of the 13 debts
amounting to P395,324.27.

ISSUE:
Whether or not the disallowance of bad debts was proper?

HELD:
YES. For debts to be considered as worthless, and thereby qualify as bad debts, making them
deductible, the taxpayer should show that: (1) there is a valid and subsisting debt; (2) the debt must be
actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be
charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer.
Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed
uncollectible even in the future. Furthermore, there are steps outlined to be undertaken by the taxpayer to
prove that he exerted diligent efforts to collect the debts, viz: (1) sending of statement of accounts; (2)

sending of collection letters; (3) giving the account to a lawyer for collection; (4) filing a collection case
in court.
PRC did not satisfy the requirements of worthlessness of a debt as to the disallowed bad debts.
It appears that the only evidentiary support given by PRC for its aforesaid claimed dections was the
explanation or justification posited by its financial adviser or accounted which were not supported by any
documentary evidence.
Moreover, PRCs claim that it has the facilities in ascertaining the collectability or uncollectibility
of its debts is presumptuous and uncalled for. The CTA is a highly specialized body specifically created
for the purpose of reviewing tax cases. Because of this recognized expertise, the findings of the CTA will
not ordinarily be reviewed absent a showing of gross error or abuse on its part.


FERNANDEZ HERMANOS, INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
TEEHANKEE, J .:
FACTS:
Sometime in 1945, Palawan Manganese Mines, Inc., the controlling stockholders of which
are also the controlling stockholders of petitioner corporation, requested financial help from
petitioner to enable it to resume it mining operations in Coron, Palawan. The request for
financial assistance was readily and unanimously approved by the Board of Directors of
petitioner, and thereafter a memorandum agreement was executed on August 12, 1945,
embodying the terms and conditions under which the financial assistance was to be extended.
Pursuant to the agreement, petitioner gave to Palawan Manganese Mines, Inc. yearly advances
starting from 1945, which advances amounted to P587,308.07 by the end of 1951. Despite these
advances and the resumption of operations by Palawan Manganese Mines, Inc., it continued to
suffer losses. By 1951, petitioner became convinced that those advances could no longer be
recovered. While it continued to give advances, it decided to write off as worthless the sum of
P353,134.25. This amount "was arrived at on the basis of the total of advances made from 1945
to 1949 in the sum of P438,981.39, from which amount the sum of P85,647.14 had to be
deducted, the latter sum representing its pre-war assets. Petitioner decided to maintain the
advances given in 1950 and 1951 in the hope that it might be able to recover the same, as in fact
it continued to give advances up to 1952. From these facts, and as admitted by petitioner itself,
Palawan Manganese Mines, Inc., was still in operation when the advances corresponding to the
years 1945 to 1949 were written off the books of petitioner.

ISSUE:

Is the said amount deductible as bad debt?

HELD:

No. It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner
did not expect to be repaid. It is true that some testimonial evidence was presented to show that

there was some agreement that the advances would be repaid, but no documentary evidence was
presented to this effect. The memorandum agreement signed by the parties appears to be very
clear that the consideration for the advances made by petitioner was 15% of the net profits of
Palawan Manganese Mines, Inc. In other words, if there were no earnings or profits, there was no
obligation to repay those advances. It has been held that the voluntary advances made without
expectation of repayment do not result in deductible losses.
As already stated, petitioner gave advances to Palawan Manganese Mines, Inc., without
expectation of repayment. Petitioner could not sue for recovery under the memorandum
agreement because the obligation of Palawan Manganese Mines, Inc. was to pay petitioner 15%
of its net profits, not the advances. No bad debt could arise where there is no valid and subsisting
debt.
Again, assuming that in this case there was a valid and subsisting debt and that the debtor
was incapable of paying the debt in 1951, when petitioner wrote off the advances and deducted
the amount in its return for said year, yet the debt is not deductible in 1951 as a worthless debt. It
appears that the debtor was still in operation in 1951 and 1952, as petitioner continued to give
advances in those years. It has been held that if the debtor corporation, although losing money or
insolvent, was still operating at the end of the taxable year, the debt is not considered worthless
and therefore not deductible.

BASILAN ESTATES, INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF
TAX APPEALS, respondents.
BENGZON, J.P., J.:

FACTS:
A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with principal
offices in Basilan City, filed on March 24, 1954 its income tax returns for 1953 and paid an
income tax of P8,028. On February 26, 1959, the Commissioner of Internal Revenue, per
examiners' report of February 19, 1959, assessed Basilan Estates, Inc., a deficiency income tax of
P3,912 for 1953 and P86,876.85 as 25% surtax on unreasonably accumulated profits as of 1953
pursuant to Section 25 of the Tax Code.
Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to 1949 on the basis
of their acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by
increasing it to conform with the increase in cost for their replacement. Accordingly, from 1950
to 1953 it deducted from gross income the value of depreciation computed on the reappraised
value.
In 1953, the year involved in this case, taxpayer claimed the following depreciation
deduction:
Reappraised assets P47,342.53
New assets consisting of hospital building and
equipment 3,910.45
Total depreciation

P51,252.98

Upon investigation and examination of taxpayer's books and papers, the Commissioner of
Internal Revenue found that the reappraised assets depreciated in 1953 were the same ones upon
which depreciation was claimed in 1952. And for the year 1952, the Commissioner had already
determined, with taxpayer's concurrence, the depreciation allowable on said assets to be
P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer. Hence, the
Commissioner pegged the deductible depreciation for 1953 on the same old assets at P36,842.04
and disallowed the excess thereof in the amount of P10,500.49.
ISSUE:
Whether depreciation shall be determined on the acquisition cost or on the reappraised value of
the assets.
HELD:
It shall be based on acquisition cost. Depreciation shall be based on acquisition cost. It is the
gradual diminution in the useful value of tangible property resulting from wear and tear and
normal obsolescense. The term is also applied to amortization of the value of intangible assets,
the use of which in the trade or business is definitely limited in duration. Depreciation
commences with the acquisition of the property and its owner is not bound to see his property
gradually waste, without making provision out of earnings for its replacement. It is entitled to see
that from earnings the value of the property invested is kept unimpaired, so that at the end of any
given term of years, the original investment remains as it was in the beginning. It is not only the
right of a company to make such a provision, but it is its duty to its bond and stockholders, and,
in the case of a public service corporation, at least, its plain duty to the public. Accordingly, the
law permits the taxpayer to recover gradually his capital investment in wasting assets free from
income tax.4 Precisely, Section 30 (f) (1) which states:
(1)In general. A reasonable allowance for deterioration of property
arising out of its use or employment in the business or trade, or out of its not
being used: Provided, That when the allowance authorized under this subsection
shall equal the capital invested by the taxpayer . . . no further allowance shall be
made. . . .

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


LIMPAN INVESTMENT CORPORATION, petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE, ET AL., respondents.
G.R. No. L-21570 July 26, 1966

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

FACTS:

Petitioner is a domestic corporation engaged in the business of leasing real properties
with Isabelo Lim as its president, chairman of the board and principal stockholder.
Petitioner corporation duly filed its income tax returns for the years 1956 and 1957,
reporting therein net incomes of P3,287.81 and P11,098.36, respectively, for which it paid the
corresponding taxes therefore in the sums of P657.00 and P2,220.00.
Subsequently, the examiners of the Bureau of Internal Revenue conducted an
investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof,
discovered and ascertained that petitioner had underdeclared its rental incomes by P20,199.00
and P81,690.00 during these taxable years and had claimed excessive depreciation of its
buildings in the sums of P4,260.00 and P16,336.00 covering the same period.
Petitioner alleged in its petition that the rates of depreciation applied by respondent
Commissioner to its buildings in the assessment in question are unfair and inaccurate. And
through its Secretary-Treasurer Vicente G. Solis petitioner tried to establish that some of its
buildings are old and out of style hence, they are entitled to higher rates of depreciation than
those adopted by respondent in his assessment.

ISSUE:

Whether the depreciation in the amount of P20,598.00 claimed by petitioner for the years
1956 and 1957 was excessive


HELD:

The Supreme Court ruled in the Affirmative.
Depreciation is a question of fact and is not measured by theoretical yardstick, but should
be determined by a consideration of actual facts, and the findings of the Tax Court in this respect
should not be disturbed when not shown to be arbitrary or in abuse of discretion.
In the case at bar, petitioner has failed to show any arbitrariness or abuse of discretion in
the part of the Tax Court in finding that petitioner claimed excessive depreciation in its returns. It
appearing that the Tax Court applied rates of depreciation in accordance with Bulletin "F" of the
U.S. Federal Internal Revenue Service, which the Supreme Court pronounced as having strong
persuasive effect under Philippine jurisdiction, for having been the result of scientific studies and
observation for a long period in the United States, after whose Income Tax Law ours is
patterned.


CONSOLIDATED MINES, INC., petitioner, vs.COURT OF TAX APPEALS
and COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. Nos. L-18843 and L-18844 August 29, 1974

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CONSOLIDATED MINES,
INC., respondent.
G.R. Nos. L-18853 and L-18854 August 29, 1974

MAKALINTAL, C.J .:p

FACTS:

The Company, a domestic corporation engaged in mining, had filed its income tax returns
for 1951, 1952, 1953 and 1956. In 1957 examiners of the Bureau of Internal Revenue conducted
an investigation on the said income tax returns filed by the Company where it was discovered
that (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in
the company profits of Benguet Consolidated Mines as operator of the Company's mines,
although for income tax purposes the Company had reported income and expenses on the accrual
basis; (2) depletion and depreciation expenses had been overcharged; and (3) the claims for audit
and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly
substantiated; and that (B) for the year 1956 (1) the Company had overstated its claim for
depletion; and (2) certain claims for miscellaneous expenses were not duly supported by
evidence.
The Tax Court, upon appeal, rendered judgment ordering the Company to pay the
amounts of P79,812.93, P51,528.24 and P71,382.82 as deficiency income taxes for the years
1953, 1954 and 1956, respectively. The Tax Court nullified the assessments for the years 1951
and 1952 on the ground that they were issued beyond the five-year period prescribed by Section
331 of the National Internal Revenue Code.
The Company used the accrual method of accounting in computing its income. One of its
expenses is the amount-paid to Benguet as mine operator, which amount is computed as 50% of
"net income." The Company deducts as an expense 50% of cash receipts minus disbursements,

but does not deduct at the end of each calendar year what the Commissioner alleges is "50% of
the share of Benguet" in the "accounts receivable." However, it deducts Benguet's 50% if and
when the "accounts receivable" are actually paid. It would seem, therefore, that the Company has
been deducting a portion of this expense (Benguet's share as mine operator) on the "cash &
carry" basis.

ISSUE:

Whether or not the accounting system used by the Company is valid with respect to the
rate of depletion.

HELD:

The Supreme Court ruled in the negative.
As an income tax concept, depletion is wholly a creation of the statute "solely a matter
of legislative grace." Hence, the taxpayer has the burden of justifying the allowance of any
deduction claimed. As in connection with all other tax controversies, the burden of proof to show
that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is
inadequate is upon the taxpayer, and this is true with respect to the value of the property
constituting the basis of the deduction. This burden-of-proof rule has been frequently applied and
a value claimed has been disallowed for lack of evidence.
The Company's balance sheet for December 31, 1947 lists the "mine cost" of P2,500,000
as "development cost" and the amount of P1,738,974.37 as "suspense account (mining properties
subject to war losses)." The Company claims that its accountant, Mr. Calpo, made these errors,
because he was then new at the job. Granting that was what had happened, it does not affect the
fact that the, evidence on hand is insufficient to prove the cost of development alleged by the
Company.


3M PHILIPPINES, INC., vs. COMMISSIONER OF INTERNAL REVENUE
G.R. No. 82833 September 26, 1988
GRINO-AQUINO, J.:

FACTS:

Petitioner 3M Philippines, Inc. is a subsidiary and exclusive importer, manufacturer,
wholesaler, and distributor in the Philippines of the Minnesota Mining and Manufacturing
Company or 3M-St. Paul, a non-resident foreign corporation with principal office in St. Paul,
Minnesota, USA. It entered into a Service Information and Technical Assistance Agreement
and a Patent and Trademark License Agreement with the latter under which the former agreed
to pay a technical service fee of 3% and a royalty of 2% of its net sales. The agreements were
submitted to, and approved by, the Central Bank of the Philippines. In its income tax return for
the fiscal year ending October 31, 1974, the petitioner claimed the following deductions as
business expenses: a) royalties and technical service fees of P 3, 050, 646; and b) pre-operational
cost of tape coater of P 97, 485.08. The CIR allowed a deduction of P 797, 046.09 only on the
first item as technical service fee and royalty for locally manufactured products, but disallowed
the sum of P 2, 323, 599.02 alleged to have been paid by the petitioner to 3M-St. Paul as
technical service fee and royalty on P 46, 471, 998 worth of finished products imported by the
petitioner from the parent company, on the ground that the fee and royalty should be based only
on locally manufactured goods. The improper deduction was treated by respondent as a disguised
dividend or income. On the second item, respondent allowed P19, 544.77 or 1/5 of petitioners
capital expenditure of P 97, 046.09 for its tape coater which was installed in 1973 because such
expenditure should be amortized for a period of 5 years, hence, payment of the disallowed
balance of P 77, 740.38 should be spread over the next 4 years. CIR ordered petitioner to pay a
total of P1, 191, 566.80 deficiency income tax plus interest.

ISSUE:

Whether or not deductions of business expenses in the form of royalty payments by
licensee to its foreign licensors should be allowed.


HELD:

No. The pertinent legal provisions in this case are Section 29(a)(1) of the Internal
Revenue Code and Circular No. 393 of the Central Bank. Because remittances to foreign
licensors of technical service fees and royalties are made in foreign exchange, CB Circular No.
393 dated December 7, 1973 was promulgated by the Central Bank as an exchange control
regulation to conserve foreign exchange and avoid unnecessary drain on the countrys
international reserves. Section 3-C of the circular provides that royalties shall be paid only on
commodities manufactured by the licensee under the royalty agreement. Although the Tax Code
allows payments of royalty to be deducted from gross income as business expenses, it is CB
Circular No. 393 that defines what royalty payments are proper. Hence, improper payments of
royalty are not deductible as legitimate business expenses. Circulars issued by the Central Bank
in the exercise of its authority under the Central Bank Act, and which have been duly published
in the Official Gazette, have the force and effect of law. They are binding on everybody, the
petitioner, as much as the public respondent.

ESSO STANDARD EASTERN, INC. vs. THE COMMISIONER OF
INTERNAL REVENUE
G.R.Nos. L-28508-9 July 7, 1989
CRUZ, J.:

FACTS:

Petitioner Esso Standard Eastern Inc. deducted from its gross income for 1959, as part of
its ordinary and necessary business expenses, the amount it had spent for the drilling and
exploration of its petroleum concessions. This claim was disallowed by the public respondent
CIR on the ground that the expenses should be capitalized and might be written off as a loss only
when a dry hole should result. Esso then filed an amended return where it asked for the refund
of P323, 279.00 by reason of its abandonment as dry holes of several of its oil wells. Also
claimed as ordinary and necessary expenses in the same return was the amount of P340, 822.04,
representing margin fees it had paid to the Central Bank on its profit remittances to its New York
head office. The CIR granted the tax credit of only P221, 033.00, disallowing the claimed
deduction for the margin fees paid on the ground that the margin fees paid to the Central Bank
could not be considered taxes or allowed as deductible business expenses. Esso appealed to the
CTA for the refund of the margin fees it had earlier paid contending that the margin fees were
deductible from gross income either as a tax or as an ordinary and necessary business expense.
However, Essos appeal was denied.

ISSUES:

1. Whether or not the margin fees are taxes.
2. Whether or not the margin fees are necessary and ordinary business expenses.
HELD:

1. No. A tax is levied to provide revenue for government operations, while the proceeds
of the margin fee are applied to strengthen our countrys international reserves. The

margin fee was imposed by the State in the exercise of its police power and not the
power of taxation.
2. No. Ordinarily, an expence will be considered necessary where the expenditure is
appropriate and helpful in the development of the taxpayers business. It is ordinary
when it connotes a payment which is normal in relation to the business of the
taxpayer and the surrounding circumstances. Since the margin fees in question were
incurred for the remittance of funds to Essos Head Office in New York, which is a
separate and distinct income taxpayer from the branch in the Philippines, for its
disposal abroad, it can never be said therefore that the margin fees were appropriate
and helpful in the development of Essos business in the Philippines exclusively or
were incurred for purposes proper to the conduct of the affairs of Essos branch in the
Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss
in the Philippines exclusively.


CAPITAL GAIN AND LOSS


CALASANZ V. COMMISSIONER OF INTERNAL REVENUE
G.R. No. L-26284, October 9, 1986

FACTS:

Petitioner Calasanz inherited from her father Mariano de Torres an Agricultural land located in
Cainta, Rizal. In order to liquidate her inheritance, Ursula Calasanz had the land surveyed and
subdivided into lots. Improvements, such as good roads, concrete gutters, drainage and lighting
system, were introduced to make the lots saleable. Soon after, the lots were sold to the public at a
profit. In their joint income tax return for the year 1957 filed with the Bureau of Internal
Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized from the sale
of the subdivided lots, and reported fifty per centum thereof or P15,530.03 as taxable capital
gains. Upon an audit and review of the return thus filed, the Revenue Examiner adjudged
petitioners engaged in business as real estate dealers required them to pay the real estate dealer's
tax and assessed a deficiency income tax on profits derived from the sale of the lots based on the
rates for ordinary income. On appeal, the Tax Court upheld the respondent Commissioner except
for that portion of the assessment regarding the compromise penalty for the reason that the same
cannot be collected in the absence of a valid and binding compromise agreement.

ISSUES:

Whether petitioners are real estate dealers liable for real estate dealers fixed tax; and whether
the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains
taxable at capital gain rates.

HELD :

The CTA decision is affirmed. The property initially classified as a capital asset may thereafter
be treated as an ordinary asset if a combination of the factors indubitably tend to show that the
activity was in furtherance of or in the course of the taxpayer's trade or business. Section 34[a]
[1] of the National Internal Revenue Code broadly defines capital assets as property held by the

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

If the asset is not among the exceptions, it is a capital asset; conversely, assets falling within the
exceptions are ordinary assets. A Sale of inherited real property usually gives capital gain or loss
even though the property has to be subdivided or improved or both to make it salable. However,
if the inherited property is substantially improved or very actively sold or both it may be treated
as held primarily for sale to customers in the ordinary course of the heir's business.

The activities of petitioners are indistinguishable from those invariably employed by one
engaged in the business of selling real estate. One strong factor against petitioners' contention is
the business element of development which is very much in evidence. Petitioners did not sell the
land in the condition in which they acquired it. While the land was originally devoted to rice and
fruit trees, it was subdivided into small lots and in the process converted into a residential
subdivision and given the name Don Mariano Subdivision. Extensive improvements like the
laying out of streets, construction of concrete gutters and installation of lighting system and
drainage facilities, among others, were undertaken to enhance the value of the lots and make
them more attractive to prospective buyers. The audited financial statements submitted together
with the tax return in question disclosed that a considerable amount was expended to cover the
cost of improvements. As a matter of fact, the estimated improvements of the lots sold reached
P170,028.60 whereas the cost of the land is only P 4,742.66. There is authority that a property
ceases to be a capital asset if the amount expended to improve it is double its original cost, for
the extensive improvement indicates that the seller held the property primarily for sale to
customers in the ordinary course of his business.


Another distinctive feature of the real estate business discernible from the records is the
existence of contracts receivables, which stood at P395,693.35 as of the year ended December
31, 1957. The sizable amount of receivables in comparison with the sales volume of P446,407.00
during the same period signifies that the lots were sold on installment basis and suggests the
number, continuity and frequency of the sales. Also of significance is the circumstance that the
lots were advertised for sale to the public and that sales and collection commissions were paid
out during the period in question. Thus, the SC held that in the course of selling the subdivided
lots, petitioners engaged in the real estate business and accordingly, the gains from the sale of the
lots are ordinary income taxable in full.


TUASON V. LINGAD
G.R. No. L-24248, July 31, 1974

FACTS:

In 1948 the petitioner inherited from his mother several tracts of land, among which were two
contiguous parcels situated on Pureza and Sta. Mesa streets in Manila. When the petitioner's
mother was yet alive she had these two parcels subdivided into twenty-nine lots. Twenty-eight
were allocated to their then occupants who had lease contracts with the petitioner's predecessor at
various times from 1900 to 1903, which contracts expired on December 31, 1953. The 29th lot
(hereinafter referred to as Lot 29), with an area of 48,000 square meters, more or less, was not
leased to any person. It needed filling because of its very low elevation, and was planted to
kangkong and other crops. There was no difficulty encountered in selling the 28 small lots as
their respective occupants bought them on a 10-year installment basis. Lot 29 could not however
be sold immediately due to its low elevation.

Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into small
lots and paved with macadam roads. The small lots were then sold over the years on a uniform
10-year annual amortization basis. In 1953 and 1954 the petitioner reported his income from the
sale of the small lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. On
May 17, 1957 the Collector of Internal Revenue upheld the petitioner's treatment of his gains
from the said sale of small lots, against a contrary ruling of a revenue examiner.

In his 1957 tax return the petitioner as before treated his income from the sale of the small lots
(P119,072.18) as capital gains and included only thereof as taxable income. In this return, the
petitioner deducted the real estate dealer's tax he paid for 1957. It was explained, however, that
the payment of the dealer's tax was on account of rentals received from the mentioned 28 lots
and other properties of the petitioner. On the basis of the 1957 opinion of the Collector of
Internal Revenue, the revenue examiner approved the petitioner's treatment of his income from
the sale of the lots in question. In a memorandum dated July 16, 1962 to the Commissioner of
Internal Revenue, the chief of the BIR Assessment Department advanced the same opinion,
which was concurred in by the Commissioner of Internal Revenue.

On January 9, 1963, however, the Commissioner reversed himself and considered the petitioner's
profits from the sales of the mentioned lots as ordinary gains. On January 28, 1963 the petitioner
received a letter from the Bureau of Internal Revenue advising him to pay deficiency income tax
for 1957. The petitioner's motion for reconsideration of the deficiency assessment was denied,
and so he went up to the Court of Tax Appeals, which however rejected his posture in a decision
dated January 16, 1965, and ordered him, in addition, to pay a 5% Surcharge and 1% monthly
interest "pursuant to Sec. 51(e) of the Revenue Code."

ISSUE:

Whether subject properties which the petitioner had inherited and sold in small lots to other
persons should be regarded as capital assets

HELD:

Under the law, the term "capital assets" includes all the properties of a taxpayer whether or not
connected with his trade or business, except: (1) stock in trade or other property included in the
taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his
trade or business; (3) property used in the trade or business of the taxpayer and subject to
depreciation allowance; and (4) real property used in trade or business. 1 If the taxpayer sells or
exchanges any of the properties above-enumerated, any gain or loss relative thereto is an
ordinary gain or an ordinary loss; the gain or loss from the sale or exchange of all other
properties of the taxpayer is a capital gain or a capital loss. Under section 34(b) (2) of the Tax
Code, if a gain is realized by a taxpayer (other than a corporation) from the sale or exchange of
capital assets held for more than twelve months, only 50% of the net capital gain shall be taken
into account in computing the net income. In the case at bar, after a thoroughgoing study of all
the circumstances relevant to the resolution of the issue raised, the Court is of the view, and so
holds, that the petitioner's thesis is bereft of merit.


When the petitioner obtained by inheritance the parcels in question, transferred to him was not
merely the duty to respect the terms of any contract thereon, but as well the correlative right to
receive and enjoy the fruits of the business and property which the decedent had established and
maintained. Moreover, the record discloses that the petitioner owned other real properties which
he was putting out for rent, from which he periodically derived a substantial income, and for
which he had to pay the real estate dealer's tax (which he used to deduct from his gross income).
In fact, as far back as 1957 the petitioner was receiving rental payments from the mentioned 28
small lots, even if the leases executed by his deceased mother thereon expired in 1953. Under the
circumstances, the petitioner's sales of the several lots forming part of his rental business cannot
be characterized as other than sales of non-capital assets.

The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve
a different characterization for tax purposes. The following circumstances in combination show
unequivocally that the petitioner was, at the time material to this case, engaged in the real estate
business: (1) the parcels of land involved have in totality a substantially large area, nearly seven
(7) hectares, big enough to be transformed into a subdivision, and in the case at bar, the said
properties are located in the heart of Metropolitan Manila; (2) they were subdivided into small
lots and then sold on installment basis (this manner of selling residential lots is one of the basic
earmarks of a real estate business); (3) comparatively valuable improvements were introduced in
the subdivided lots for the unmistakable purpose of not simply liquidating the estate but of
making the lots more saleable to the general public; (4) the employment of J. Antonio Araneta,
the petitioner's attorney-in-fact, for the purpose of developing, managing, administering and
selling the lots in question indicates the existence of owner-realty broker relationship; (5) the
sales were made with frequency and continuity, and from these the petitioner consequently
received substantial income periodically; (6) the annual sales volume of the petitioner from the
said lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in
1957; and (7) the petitioner, by his own tax returns, was not a person who can be indubitably
adjudged as a stranger to the real estate business. Under the circumstances, the Court finds no
error in the holding that the income of the petitioner from the sales of the lots in question should
be considered as ordinary income.


CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS,
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
G.R. No. 125508 July 19, 2000
VITUG, J .:

FACTS:

Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment
in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and
investment with "deposit-taking" function. First CBC Capital (Asia), Ltd., later became
insolvent. With the approval of Bangko Sentral, petitioner wrote-off as being worthless its
investment in First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a
bad debt or as an ordinary loss deductible from its gross income.

Respondent Commissioner of internal Revenue disallowed the deduction and assessed
petitioner for income tax deficiency. The disallowance of the deduction was made on the ground
that the investment should not be classified as being "worthless" and that, although the
Hongkong Banking Commissioner had revoked the license of First CBC Capital as a "deposit-
taping" company, the latter could still exercise, however, its financing and investment activities.
Assuming that the securities had indeed become worthless, respondent Commissioner of Internal
Revenue held the view that they should then be classified as "capital loss," and not as a bad debt
expense there being no indebtedness to speak of between petitioner and its subsidiary.

The tax court sustained the Commissioner, holding that the securities had not indeed
become worthless and ordered petitioner to pay its deficiency income tax for 1987. The CA
upheld the CTA.

ISSUE:

Whether or not the shares of stock in question have become worthless.


HELD:

NO. Subject to certain exceptions, the tax on income is imposed on the net income
allowing certain specified deductions from gross income to be claimed by the taxpayer. Among
the deductible items allowed by the National Internal Revenue Code ("NIRC") are bad debts
and losses.
An equity investment is a capital asset of the investor the sale or exchange of which
results in either a capital gain or a capital loss. The gain or the loss is ordinary when the
property sold or exchanged is not a capital asset.
Thus, shares of stock would be ordinary assets only to a dealer in securities or a
person engaged in the purchase and sale of, or an active trader (for his own account) in,
securities. In the hands, however, of another who holds the shares of stock by way of an
investment, the shares to him would be capital assets. When the shares held by such investor
become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets.
The loss sustained by the holder of the securities, which are capital assets, is to be treated as a
capital loss as if incurred from a sale or exchange transaction.
A capital gain or a capital loss normally requires the concurrence of two conditions for it
to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset.
When securities become worthless, there is strictly no sale or exchange but the law deems the
loss anyway to be "a loss from the sale or exchange of capital assets
Capital losses are allowed to be deducted only to the extent of capital gains, i.e.,
gains derived from the sale or exchange of capital assets, and not from any other income of
the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary
corporation of petitioner bank whose shares in said investee corporation are not intended for
purchase or sale but as an investment. Unquestionably then, any loss therefrom would be a
capital loss, not an ordinary loss, to the investor.


DETERMINATION OF GAIN OR LOSS
FROM SALE OR TRANSFER OF
PROPERTY


CIR v. RUFINO
L-33665-68 February 27, 1987

FACTS:

The private respondents were the majority stockholders of the defunct Eastern Theatrical Co. It
had an original capital stock of P500,000.00, which was increased in 1949 to P2,000,000.00,
divided into 200,000 shares at P10.00 per share, and was organized to engage in the business of
operating theaters, opera houses, places of amusement and other related business enterprises,
more particularly the Lyric and Capitol Theaters in Manila. The President of this corporation
(hereinafter referred to as the Old Corporation) during the year in question was Ernesto D.
Rufino.They are also the majority and controlling stockholders of another corporation, the
Eastern Theatrical, Inc. This corporation is engaged in the same kind of business as the Old
Corporation. The General-Manager of this corporation (hereinafter referred to as the New
Corporation) at the time was Vicente A. Rufino.
In a special meeting of stockholders of the Old Corporation on December 17, 1958, to provide
for the continuation of its business after the end of its corporate life, and upon the
recommendation of its board of directors, a resolution was passed authorizing the Old
Corporation to merge with the New Corporation by transferring all its business, assets, goodwill,
and liabilities to the latter, which in exchange would issue and distribute to the shareholders of
the Old Corporation one share for each share held by them in the said Corporation.
It was expressly declared that the merger of the Old Corporation with the New Corporation was
necessary to continue the exhibition of moving pictures at the Lyric and Capitol Theaters even
after the expiration of the corporate existence of the former, in view of its pending booking
contracts, not to mention its collective bargaining agreements with its employees.
The aforesaid transfer was eventually made by the Old Corporation to the New Corporation,
which continued the operation of the Lyric and Capitol Theaters and assumed all the obligations
and liabilities of the Old Corporation beginning January 1, 1959.
The Bureau of Internal Revenue examined later, resulting in the petitioner declaring that the
merger of the aforesaid corporations was not undertaken for a bona fide business purpose but

merely to avoid liability for the capital gains tax on the exchange of the old for the new shares of
stock. Accordingly, he imposed the deficiency assessments against the private respondents.

ISSUE:
Whether or not the merger is valid and exempt from capital gains tax.

HELD:

The Court of Tax Appeals did not err in finding that no taxable gain was derived by the private
respondents from the questioned transaction. There was a valid merger although the actual
transfer of the properties subject of the Deed of Assignment was not made on the date of the
merger. The Court finds no impediment to the exchange of property for stock between the two
corporations being considered to have been effected on the date of the merger. That, in fact, was
the intention, and the reason why the Deed of Assignment was made retroactive to January 1,
1959. Such retroaction provided in effect that all transactions set forth in the merger agreement
shall be deemed to be taking place simultaneously on January 1. 1959, when the Deed of
Assignment became operative. The certificates of stock subsequently delivered by the New
Corporation to the private respondents were only evidence of the ownership of such stocks.
Although these certificates could be issued to them only after the approval by the SEC of the
increase in capitalization of the New Corporation, the title thereto, legally speaking, was
transferred to them on the date the merger took effect, in accordance with the Deed of
Assignment. Our ruling then is that the merger in question involved a pooling of resources aimed
at the continuation and expansion of business and so came under the latter and intendment of the
National Internal Revenue code, as amended by the above-cited law, exempting from the capital
gains tax exchanges of property effected under lawful corporate combinations.
The basis consideration, of course, is the purpose of the merger, as this would determine whether
the exchange of properties involved therein shall be subject or not to the capital gains tax. The
criterion laid down by the law is that the merger "must be undertaken for a bona fide" business
purpose and not solely for the purpose of escaping the burden of taxation."


Gregory vs. Helvering,
239 U.S. 465 : 55S. CT. 266

FACTS:
Mrs. Evelyn Gregory was the owner of all the shares of a company called United Mortgage
Company (United). United Mortgage in turn owned 1,000 shares of stock of a company called
Monitor Securities Corporation (Monitor).On September 18, 1928, Mrs. Gregory created a
new company called Averill Corporation (Averill). Three days after she created Averill, she
had United transfer its Monitor stock to Averill and she had Averill issue all Averill shares to
herself (not to United).Mrs. Gregory now owned 100% of United, which no longer owned
Monitor shares, and 100% of Averill, which only owned 1,000 shares of Monitor.On September
24, Mrs. Gregory dissolved Averill and had all its assets the 1,000 Monitor shares
distributed to herself. On the same day, she sold the Monitor shares to a third party for
$133,333.33, but claiming cost of $57,325.45, she claimed that she should be taxed on a capital
net gain on $76,007.88.
On her 1928 Federal income tax return, Mrs. Gregory treated the transaction as a tax-free
corporate reorganization under section 112 of the Revenue Act of 1928, the tax statute applicable
at that time. Indeed, the legal form of this convoluted set of transactions arguably appeared to
qualify under the literal language of the statute.However, the Commissioner of Internal Revenue
argued that in terms of economic substance there really was no business reorganization that
Mrs. Gregory, who controlled all three corporations, was simply following a legal form to make
it appear to be a reorganization so that she could dispose of the Monitor shares without having
to pay a substantial income tax on the gain that otherwise would have been deemed to have been
realized. The Commissioner determined that Mrs. Gregory had understated her 1928 income tax
by over $10,000.

ISSUE:

Whether or not the Exemption should be granted:


HELD:

It is earnestly contended on behalf of the taxpayer that since every element required by [the
statute] is to be found in what was done, a statutory reorganization was effected; and that the
motive of the taxpayer thereby to escape payment of a tax will not alter the result or make
unlawful what the statute allows. It is quite true that if a reorganization in reality was effected
within the meaning of [the statute], the ulterior purpose mentioned will be disregarded. The legal
right of a taxpayer to decrease the amount of what otherwise would be his [or her] taxes, or
altogether avoid them, by means which the law permits, cannot be doubted. But the question for
determination is whether what was done, apart from the tax motive, was the thing which the
statute intended. The reasoning of the court below [i.e., the reasoning of the Court of Appeals] in
justification of a negative answer leaves little to be said.
When [the statute] speaks of a transfer of assets by one corporation to another, it means a transfer
made 'in pursuance of a plan of reorganization' of corporate business; and not a transfer of assets
by one corporation to another in pursuance of a plan having no relation to the business of either,
as plainly is the case here. Putting aside, then, the question of motive in respect of taxation
altogether, and fixing the character of the proceeding by what actually occurred, what do we
find? Simply an operation having no business or corporate purpose-a mere device which put on
the form of a corporate reorganization as a disguise for concealing its real character, and the sole
object and accomplishment of which was the consummation of a preconceived plan, not to
reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the
petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing
more than a contrivance to the end last described. It was brought into existence for no other
purpose; it performed, as it was intended from the beginning it should perform, no other
function. When that limited function had been exercised, it immediately was put to death.
In these circumstances, the facts speak for themselves and are susceptible of but one
interpretation. The whole undertaking, though conducted according to the terms of [the statute],
wasin fact an elaborate and devious form of conveyance masquerading as a corporate
reorganization, and nothing else.]he transaction upon its face lies outside the plain intent of the
statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory
provision in question of all serious purpose.

SITUS OF TAXATION


CIR vs. MARUBENI
G.R. No. 137377 December 18, 2001

FACTS:

Marubeni, a Japanese corporation, engaged in general import and export trading, financing and
construction, is duly registered in the Philippines with Manila branch office. CIR examined the
Manila branchs books of accounts for fiscal year ending March 1985, and found that respondent
had undeclared income from contracts with NDC and Philphos for construction of a wharf/port
complex and ammonia storage complex respectively.
On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency
taxes. CIR claims that the income respondent derived were income from Philippine sources,
hence subject to internal revenue taxes. On Sept 1986, respondent filed 2 petitions for review
with CTA: the first, questioned the deficiency income, branch profit remittance and contractors
tax assessments and second questioned the deficiency commercial brokers assessment.
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that
taxpayers who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax
amnesty return on Oct 30, 1986. On Nov 17, 1986, EO 64 expanded EO 41s scope to include
estate and donors taxes under Title 3 and business tax under Chap 2, Title 5 of NIRC, extended
the period of availment to Dec 15, 1986 and stated those who already availed amnesty under EO
41 should file an amended return to avail of the new benefits. Marubeni filed a supplemental tax
amnesty return on Dec 15, 1986. CTA found that Marubeni properly availed of the tax amnesty
and deemed cancelled the deficiency taxes. CA affirmed on appeal.

ISSUE:

W/N Marubeni is exempted from paying tax


HELD:

Yes, Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable
for the deficiency tax because the income from the projects came from the Offshore Portion as
opposed to Onshore Portion. It claims all materials and equipment in the contract under
the Offshore Portion were manufactured and completed in Japan, not in the Philippines,
and are therefore not subject to Philippine taxes.
(BG: Marubeni won in the public bidding for projects with government corporations NDC and
Philphos. In the contracts, the prices were broken down into a Japanese Yen Portion (I and II)
and Philippine Pesos Portion and financed either by OECF or by suppliers credit. The Japanese
Yen Portion I corresponds to the Foreign Offshore Portion, while Japanese Yen Portion II and
the Philippine Pesos Portion correspond to the Philippine Onshore Portion. Marubeni has already
paid the Onshore Portion, a fact that CIR does not deny.)
CIR argues that since the two agreements are turn-key, they call for the supply of both materials
and services to the client, they are contracts for a piece of work and are indivisible. The situs of
the two projects is in the Philippines, and the materials provided and services rendered were all
done and completed within the territorial jurisdiction of the Philippines. Accordingly,
respondents entire receipts from the contracts, including its receipts from the Offshore Portion,
constitute income from Philippine sources. The total gross receipts covering both labor and
materials should be subjected to contractors tax (a tax on the exercise of a privilege of selling
services or labor rather than a sale on products).
Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in
the Philippines because some of them were completed in Japan (and in fact subcontracted) in
accordance with the provisions of the contracts. All services for the design, fabrication,
engineering and manufacture of the materials and equipment under Japanese Yen Portion I were
made and completed in Japan. These services were rendered outside Philippines taxing
jurisdiction and are therefore not subject to contractors tax.


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX

G.R. No. L-65773-74 April 30, 1987

FACTS:

British overseas airways corp. (BOAC) a wholly owned British Corporation, is engaged in
international airlines business. From 1959to 1972, it has no loading rights for traffic purposes in
the Philippines but maintained a general sales agent in the Philippines which was responsible for
selling, BOAC tickets covering passengers and cargoes the CIR assessed deficiency income
taxes against.

ISSUE:

Is BOAC liable to pay taxes?

HELD:

Yes. The source of income is the property, activity of service that produces the income.
For the source of income to be considered coming from the Philippines, it is sufficient that the
income is derived from the activity coming from the Philippines. The tax code provides that for
revenue to be taxable, it must constitute income from Philippine sources. In this case, the sale of
tickets is the source of income. The situs of the source of payments is the Philippines.


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF TAX APPEALS and SMITH KLINE & FRENCH OVERSEAS CO.
(PHILIPPINE BRANCH), respondents.
G.R. No. L-54108 January 17, 1984

FACTS:

Smith Kline & French Overseas Company is a multinational firm domiciled in Philadelphia,
licensed to do business in the Philippines. It is engaged in the importation, manufacture, and sale
of pharmaceutical drugs and chemicals.

In 1971, it declared a net taxable income of P1.4 M and paid P511k as tax due. It claimed its
share of the head office overhead expenses (P501k) as deduction from gross income. In its
amended return, it claimed that there was an overpayment of tax (P324k) arising from under-
deduction of the overhead expense. This was certified by international independent auditors, the
allocation of the overhead expense made on the basis of the percentage of gross income in the
Philippines to gross income of the corporation as a whole.

In 1974, without waiting for the action of the CIR, Smith filed a petition for review with the
CTA. CTA ordered CIR to refund the overpayment or grant Smith a tax credit. CIR appealed to
the SC.

ISSUE: Whether Smith is entitled to a refund YES

HELD:

The governing law is found in Sec. 37 (b). Revenue Regulation No. 2 of the DOF contains a
similar provision, with the additional line that the ratable part is based upon the ratio of gross
income from sources within the Philippines to the total gross income (Sec. 160). Hence, where
an expense is clearly related to the production of Philippine-derived income or to Philippine

operations, that expense can be deducted from the gross income acquired in the Philippines
without resorting to apportionment.

However, the overhead expenses incurred by the parent company in connection with finance,
administration, and research & development, all of which directly benefit its branches all over
the world, fall under a different category. These are items which cannot be definitely allocated
or identified with the operations of the Philippine branch. Smith can claim as its deductible
share a ratable part of such expenses based upon the ration of the local branchs gross income to
the total gross income of the corporation worldwide.

CIRs Contention

The CIR does not dispute the right of Smith to avail of Sec. 37 (b) of the Tax Code and Sec. 160
of the RR. But he maintains that such right is not absolute and that there exists a contract
(service agreement) which Smith has entered into with its home office, prescribing the amount
that a branch can deduct as its share of the main offices overhead expenses. Since the share of
the Philippine branch has been fixed, Smith cannot claim more than the said amount.

Smiths Contention

Smith, on the other hand, submits that the contract between itself and its home office cannot
amend tax laws and regulations. The matter of allocated expenses deductible under the law
cannot be the subject of an agreement between private parties nor can the CIR acquiesce in such
an agreement.

SC ruled for Smith Kline and said that its amended return conforms with the law and regulations.


The Philippine Guaranty Co., INC., petitioner vs. The Commissioner of Internal
Revenue and The Court of Tax Appeals, respondents

GR No L- 22074 April 30, 1965

Bengzon, J.P., J.:

FACTS:
Petitioner Philippine Guaranty Company, Inc. moves for the reconsideration of the Supreme
Courts decision holding it liable for the payment of income tax which it should have withheld
and remitted to the Bureau of Internal Revenue in the total sum of P375,345.00.

The grounds raised in the instant motion all spring from petitioner's view that the Court of
Tax Appeals as well as the Supreme Court, found it "innocent of the charges of violating,
willfully or negligently, subsection (c) of Section 53 and Section 54 of the National Internal
Revenue Code." Hence, it cannot subsequently be held liable for the assessment of P375,345.00
based on said sections.

Petitioner argues that it could not be expected to withhold the tax, for as early as August
18, 1953 the Board of Tax Appeals held in the case of Franklin Baker that the reinsurance
premiums in question were not subject to withholding. Moreover, it maintains that the
Commissioner of Internal Revenue, in reply to the query of its accountants and auditors, issued
an opinion subscribing to the ruling in the Franklin Baker case. Further, petitioner contends that
as agent of the Government it was released from liability for the tax after it was advised by the
Commissioner of Internal Revenue that the reinsurance premiums involved were not subject to
withholding, relying on the provisions of the second paragraph of Section 200 of the Income Tax
Regulations.

ISSUE:
1. Whether or not the petitioner, having been exempted from payment of the
surcharge, is likewise is exempted from paying the tax due.


2. Is the petitioner personally liable under Section 53 (c) of the Tax Code for income
tax withheld under Section 54 of the said Code as implemented by the Income Tax Regulations?

3. Is the Secretary of Finance empowered to promulgate the Income Tax Regulations
setting forth the conditions for withholding tax liability?

HELD:

1. The premise of movants' reasoning cannot be accepted. On the contrary, movant was
found to have violated Section 53(c) by failing to file the necessary withholding tax return and to
pay tax due. Still, finding that movant's violation was due to a reasonable cause namely, reliance
on the advice of its auditors and opinion of the Commissioner of Internal Revenue, no surcharge
to the tax was imposed.

It will be noted that the first half of Section 72 of the Tax Code covers failure to file a return,
willingly and/or due to negligence, in which case the surcharge is, 50%. In the second part of the
law it covers failure to make and file a return "not due to willful neglect," in which case only
25% surcharge should be added. As a further concession to the taxpayer the above-quoted
section provides that if "it is shown that the failure to file it was due to a reasonable cause, no
such addition shall be made to the tax."

It would, therefore, be incorrect for movant to state that it was found "innocent of the
charges of violating, willfully or negligently, sub-section (c) of Section 53 and Section 54. For,
precisely, the mere fact that it was exempted from paying the penalty necessarily implies
violation of Section 53(c). Violating Section 53(c) is one thing; imposing the penalty for such
violation under Section 72 is another. If it is found that the failure to file is due to a reasonable
cause, then exemption from surcharge sets in but never exemption from payment of the tax due.

Since movant failed to pay the tax due, in the sum of P375,345.00, this Court ordered it to pay
the same. Simply because movant was relieved from paying the surcharge for failure to file the

necessary returns, it now wants us to absolve it from paying even the tax. This, we cannot do.
The non-imposition of the 25% surcharge does not carry with it remission of the tax.

2. Section 53 (c) makes the withholding agent personally liable for the income tax
withheld under Section 54. The law sets no condition for the personal liability of the withholding
agent to attach. The reason is to compel the withholding agent to withhold the tax under all
circumstances. In effect, the responsibility for the collection of the tax as well as the payment
thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the Government and the taxpayer. With respect
to the collection and/or withholding of the tax, he is the Government's agent. In regard to the
filing of the necessary income tax return and the payment of the tax to the Government, he is the
agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent
especially because under Section 53 (c) he is held personally liable for the tax he is duty bound
to withhold; whereas, the Commissioner of Internal Revenue and his deputies are not made liable
by law.

Section 200 of the Income Tax Regulations relaxes the application of the stringent provisions of
Section 53 of the Tax Code. Accordingly, it grants exemption from tax liability, and in so doing,
it lays down steps to be taken by the withholding agent, namely: (1) that he withholds the tax
due; (2) that he promptly addresses a query to the Commissioner of Internal Revenue for
determination whether or not the income paid to an individual is subject to withholding; and (3)
that the Commissioner of Internal Revenue decides that such income is not subject to
withholding. Strict observance of said steps is required of a withholding agent before he could be
released from liability. Generally, the law frowns upon exemption from taxation, hence, an
exempting provision should be construed strictis simi juris.

The facts in this case do not support a finding that movant complied with Section 200. For, it has
not been shown that it withheld the amount of tax due before it inquired from the Bureau of
Internal Revenue as to the taxability of the reinsurance premiums involved. As a matter of fact,
the Court of Tax Appeals found that "upon advice of its accountants and auditors, petitioner did

not collect and remit to the Commissioner of Internal Revenue the withholding tax." This finding
of fact of the lower court, unchallenged as it is, may not be disturbed.

3. It may be illuminating to mention here, however, that the Income Tax Regulations was
issued by the Secretary of Finance upon his authority, "to promulgate all needful rules and
regulations of the effective enforcement" of the provisions of the Tax Code. The mission,
therefore, of Section 200, quoted above, is to implement Section 53 of the Tax Code for no other
purpose than to enforce its provisions effectively. It should also be noted, that Section 53
provided for no exemption from the duty to withhold except in the cases of tax-free covenant
bonds dividends.

The requirement in Section 200 that the withholding agent should first withhold the tax
before addressing a query to the Commissioner of Internal Revenue is not without meaning for it
is in keeping with the general operation of our tax laws: payment precedes defense. The
legislature, in adopting such measures in our tax laws, only wanted to be assured that taxes are
paid and collected without delay. For taxes are the lifeblood of government. Also, such measures
tend to prevent collusion between the taxpayer and the tax collector. By questioning a tax's
legality without first paying it, a taxpayer, in collusion with Bureau of Internal Revenue officials,
can unduly delay, if not totally evade, the payment of such tax.

WHEREFORE, the motion for reconsideration is denied.


Alexander Howden and Co., LTD., H. G. Chester and others, ET AL.,petitioners,
vs. The Collector (Now Commissioner) of Internal Revenue, respondent

G.R. No. L-19392 April 14, 1965

Bengzon, J.P.,J.:

FACTS:

Commonwealth Insurance Co. (CIC), a domestic corporation, entered into reinsurance contracts
with 32 British companies not engaged in business in the Philippines represented by herein
Plaintiff. CIC remitted to Plaintiff reinsurance premiums and, on behalf of Plaintiff, paid income
tax on the premiums. Plaintiff filed a claim for a refund of the paid tax, stating that it was
exempted from withholding tax reinsurance premiums received from domestic insurance
companies by foreign insurance companies not authorized to do business in the Philippines.
Plaintiffs stated that since Sec. 53 and 54 were substantially re-enacted by RA 1065, 1291 and
2343, said rulings should be given the force of law under the principle of legislative approval by
re-enactment.

ISSUE:

Whether or not the tax should be withheld.

HELD:

No. The principle of legislative enactment states that where a statute is susceptible of the
meaning placed upon it by a ruling of the government agency charged with its enforcement and
the legislature thereafter re-enacts the provisions without substantial changes, such action is
confirmatory to an extent that the ruling carries out the legislative purpose. This principle is not
applicable for the aforementioned sections were never re-enacted. Only the tax rate was
amended. The administrative rulings invoked by the CIR were only contained in unpublished
letters. It cannot be assumed that the legislature knew of these rulings. Finally, the premiums

remitted were to Indemnify CIC against liability. This took place within the Philippines, thus
subject to income tax.


Philippine American Life Insurance Co. Inc. vs. Court of Tax Appeals
CA-G.R. SP No. 31283. April 25, 1995
TAYAO-JAGUIROS, J P:

FACTS:

Herein petitioner PHILAMLIFE, is a domestic corporation in the Philippines, entered into
a contract of management with American International Reinsurance Co. Inc. (AIRCO), a foreign
corporation, whereby it was stipulated that the latter would be paid $250,000 annually for
management services rendered for PHILAMLIFE. In relation to an erroneous withholding tax
from source 1979, the Commissioner of Internal revenue issued to PHILAMLIFE a tax credit in
the amount of Php. 643,000. Thereafter, PHILAMLIFE sought to claim said amount for a second
erroneous payment for source 1980. While the claim was pending before the CTA, petitioner
filed a claim for refund before the Court of Appeals. On the other hand, the BIR canceled the tax
credit memo it previously issued to petitioner. Thus the demand for payment of the said tax
liability was issued to PHILAMLIFE/ AIRCO.
Petitioner now alleges, that said tax liability is not proper seeing as the income taxed was
that of AIRCOs, and is not subject to Philippine withholding tax.

ISSUE:

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


HELD:

The Supreme Court ruled in the affirmative, it is subject to withholding tax. The pertinent
provision in the NIRC with regard to this issue is Section 37 (a) (4), whereby gross income
derived from rentals and royalties is subject to withholding tax. Petitioner contends that it is not
subject to such classification as it does not have property in the Philippines by which rentals and
royalties may be derived. However, upon a careful perusal of the law in this case shows that such
classification is apt so as to subject petitioner to withholding tax.
Although as in the case at bar it is true that AIRCO (now AIGI by way of merger) has no
properties in the Philippines, agreement with PHILAMLIFE necessary for the latter companys
efficient operation and growth with AIRCO deriving income from said agreement, AIRCO is
well within the ambit of Section 37 (a) (7) of the NIRC.
In our jurisprudence, the principal and binding test of taxability is the source, and the source of
an income is that activity... which produced the income. It is not the presence of any property
from which one derives rentals and royalties that is controlling, but rather as expressed under the
expanded meaning of royalties, it includes royalties for the supply of scientific, technical,
industrial or commercial knowledge or
information; and the technical advise, assistance or services rendered in connection with
the technical management and administration of any scientific, industrial or commercial
undertaking, venture, project or scheme.


ACCOUNTING PERIODS AND
METHODS

CONSOLIDATED MINES, INC., petitioner, vs. COURT OF TAX APPEALS
and COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. Nos. L-18853 & L-18854 August 29, 1974
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CONSOLIDATED
MINES, INC., respondent
G.R. Nos. L-18843 and L-18844 August 29, 1974, G.R. Nos. L-18853 & L-18854 August 29,
1974
MAKALINTAL, C.J.:
FACTS:
The Company, a domestic corporation engaged in mining, had filed its income tax returns for
1951, 1952, 1953 and 1956. In 1957 examiners of the Bureau of Internal Revenue investigated
the income tax returns filed by the Company because on August 10, 1954, its auditor, Felipe
Ollada claimed the refund of the sum of P107,472.00 representing alleged overpayments of
income taxes for the year 1951. After the investigation the examiners reported that (A) for the
years 1951 to 1954 (1) the Company had not accrued as an expense the share in the company
profits of Benguet Consolidated Mines as operator of the Company's mines, although for income
tax purposes the Company had reported income and expenses on the accrual basis. In this
amended decision the Tax Court subscribed to the theory of the Company that Benguet
Consolidated Mining Company, hereafter referred to as Benguet, had no right to share in
"Accounts Receivable," hence one-half thereof may not be accrued as an expense of the
Company for a given year. The Company used the accrual method of accounting in computing
its income. One of its expenses is the amount-paid to Benguet as mine operator, which amount is
computed as 50% of "net income." The Company deducts as an expense 50% of cash receipts
minus disbursements, but does not deduct at the end of each calendar year what the
Commissioner alleges is "50% of the share of Benguet" in the "accounts receivable." However, it
deducts Benguet's 50% if and when the "accounts receivable" are actually paid. It would seem,
therefore, that the Company has been deducting a portion of this expense (Benguet's share as
mine operator) on the "cash & carry" basis. The amount of the "Accounts Receivable" was less

than that of the previous year, and the Company, therefore, appears to have deducted, as expense,
compensation to Benguet bigger (than what the Commissioner claims is due) by one-half of the
difference between the year's "Accounts Receivable" and the previous year's "Accounts
Receivable," thus apparently understating its income to that extent.
ISSUE:
The question is whether or not the accounting system used by the Company justifies such a
treatment of this item; and if not, whether said method used by the Company, and characterized
by the Commissioner as a "hybrid method," may be allowed under the aforequoted provisions of
our tax code.
HELD:
According to par. X, the 50-50 sharing should be on "net profits;" and "net profits" shall be
computed "by deducting from gross income all operating expenses and all disbursements of any
nature whatsoever as may be made in order to carry out the terms of the agreement." The term
"gross profit" was not defined. In the accrual method of accounting "gross income" would
include both "cash receipts" and "Accounts Receivable." But the term "gross income" does not
carry a definite and inflexible meaning under all circumstances, and should be defined in such a
way as to ascertain the sense in which the parties have used it in contracting. According to par.
VIII the "division of net profits shall be based on the receipts and expenditures." The term
"expenditures" we have already analyzed. As used, receipts" means "money received." The same
par. VIII uses the term "expenditures, advances and disbursements." "Disbursements" means
"payment," while the word "advances" when used in a contract ordinarily means money
furnished with an expectation that it shall be returned. It is thus clear from par. VIII that in the
computation of "net profits" (to be divided on the 90%-10% sharing arrangement) only "cash
payments" received and "cash disbursements" made by Benguet were to be considered. On the
presumption that the parties were consistent in the use of the term, the same meaning must be
given to "net profits" as used in par. X, and "gross income," accordingly, must be equated with
"cash receipts." The language used by the parties show their intention to compute Benguet's 50%
share on the excess of actual receipts over disbursements, without considering "Accounts
Receivable" and "Accounts Payable" as factors in the computation. Benguet then did not have a

right to share in "Accounts Receivable," and, correspondingly, the Company did not have the
liability to pay Benguet any part of that item. And a deduction cannot be accrued until an actual
liability is incurred, even if payment has not been made.
Here we have to distinguish between (1) the method of accounting used by the Company in
determining its net income for tax purposes; and (2) the method of computation agreed upon
between the Company and Benguet in determining the amount of compensation that was to be
paid by the former to the latter. The parties, being free to do so, had contracted that in the method
of computing compensation the basis were "cash receipts" and "cash payments." Once
determined in accordance with the stipulated bases and procedure, then the amount due Benguet
for each month accrued at the end of that month, whether the Company had made payment or
not. To make the Company deduct as an expense one-half of the "Accounts Receivable" would,
in effect, be equivalent to giving Benguet a right which it did not have under the contract, and to
substitute for the parties' choice a mode of computation of compensation not contemplated by
them.
Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct
in not accruing said one-half as a deduction. The Company was not using a hybrid method of
accounting, but was consistent in its use of the accrual method of accounting. The first issue
raised by the Company is with respect to the rate of mine depletion used by the Court of Tax
Appeals. The Tax Code provides that in computing net income there shall be allowed as
deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the
market value in the mine of the product thereof which has been mined and sold during the year
for which the return is made


BIBIANO V. BAAS, JR., petitioner, vs. COURT OF APPEALS, AQUILINO T.
LARIN, RODOLFO TUAZON AND PROCOPIO TALON, respondents.
G.R. No. 102967 February 10, 2000
QUISUMBING, J .:

FACTS:
On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment Corporation
(AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for two million, three
hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of Sale
provided that upon the signing of the contract AYALA shall pay four hundred sixty-one
thousand, seven hundred fifty-four (P461,754.00) pesos. The balance of one million, eight
hundred forty-seven thousand and sixteen (P1,847,016.00) pesos was to be paid in four equal
consecutive annual installments, with twelve (12%) percent interest per annum on the
outstanding balance. AYALA issued one promissory note covering four equal annual
installments. Each periodic payment of P461,754.00 pesos shall be payable starting on February
20, 1977, and every year thereafter, or until February 20, 1980. The same day, petitioner
discounted the promissory note with AYALA, for its face value of P1,847,016.00, evidenced by
a Deed of Assignment signed by the petitioner and AYALA. AYALA issued nine (9) checks to
petitioner, all dated February 20, 1976, drawn against Bank of the Philippine Islands with the
uniform amount of two hundred five thousand, two hundred twenty-four (P205,224.00) pesos.
ISSUE:
Whether respondent court erred in finding that petitioner's income from the sale of land
in 1976 should be declared as a cash transaction in his tax return for the same year (because the
buyer discounted the promissory note issued to the seller on future installment payments of the
sale, on the same day of the sale)
HELD:
As a general rule, the whole profit accruing from a sale of property is taxable as income
in the year the sale is made. But, if not all of the sale price is received during such year, and a

statute provides that income shall be taxable in the year in which it is "received," the profit from
an installment sale is to be apportioned between or among the years in which such installments
are paid and received.
Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned
installment method is a seller of real property who disposes his property on installment, provided
that the initial payment does not exceed 25% of the selling price. They also state what may be
regarded as installment payment and what constitutes initial payment. Initial payment means the
payment received in cash or property excluding evidences of indebtedness due and payable in
subsequent years, like promissory notes or mortgages, given of the purchaser during the taxable
year of sale. Initial payment does not include amounts received by the vendor in the year of sale
from the disposition to a third person of notes given by the vendee as part of the purchase price
which are due and payable in subsequent years.

Such disposition or discounting of receivable is
material only as to the computation of the initial payment. If the initial payment is within 25% of
total contract price, exclusive of the proceeds of discounted notes, the sale qualifies as an
installment sale, otherwise it is a deferred sale.

Although the proceed of a discounted promissory
note is not considered part of the initial payment, it is still taxable income for the year it was
converted into cash. The subsequent payments or liquidation of certificates of indebtedness is
reported using the installment method in computing the proportionate income

to be returned,
during the respective year it was realized. Non-dealer sales of real or personal property may be
reported as income under the installment method provided that the obligation is still outstanding
at the close of that year. If the seller disposes the entire installment obligation by discounting the
bill or the promissory note, he necessarily must report the balance of the income from the
discounting not only income from the initial installment payment.
Where an installment obligation is discounted at a bank or finance company, a taxable
disposition results, even if the seller guarantees its payment, continues to collect on the
installment obligation, or handles repossession of merchandise in case of default. When
petitioner had the promissory notes covering the succeeding installment payments of the land
issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement
to report the sale as a sale on installment since, a taxable disposition resulted and petitioner

was required by law to report in his returns the income derived from the discounting. What
petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes
gained from the sale of the land to AYALA for the year 1976.


RETURNS AND PAYMENT OF TAXES

BPI-FAMILY SAVINGS BANK, Inc., vs. COURT OF APPEALS, COURT OF
TAX APPEALS and the COMMISSIONER OF INTERNAL REVENUE.
G.R. No. 122480. April 12, 2000
PANGANIBAN, J.:

FACTS:

Petitioner BPI-Family Savings Banks Annual Income Tax Return for the year 1989 that it had a
total refundable amount of P297,492 inclusive of the P112, 491.00 being claimed as tax refund in
the present case. However, petitioner declared in the said 1989 Income Tax Return that the
amount of P297, 492.00 will be applied as tax credit to the succeeding taxable year. On October
11, 1991, petitioner filed a written claim for refund for the amount of P112, 491 with the CIR,
alleging that it did not apply the 1989 refundable amount of P297, 492 (which includes the P112,
491) to its 1990 Annual Income Tax Return or other tax liabilities due to business losses it
incurred the same year. Without waiting for the CIR to act on the claim for refund, petitioner
filed a petition for review with the respondent Court of Tax Appeals, seeking the refund of the
amount of P112, 491.00.
The respondent Court of Tax appeals dismissed petitioners petition on the ground that the latter
failed to present as evidence its Corporate Annual Income Tax return for 1990 to establish the
fact that petitioner had not yet credited the P297, 492.00 (which includes the P112, 491) to its
1990 income tax liability.
Petitioner filed a motion of reconsideration but was denied by respondent court. Hence, this
petition.

ISSUE:

Whether or not petitioner is entitled to the refund of P112, 491.00, representing excess creditable
withholding tax paid for the taxable year 1989.


HELD:

The Court ruled in the affirmative. Pursuant to Section 69 of the 1986 Tax Code which states that
a corporation entitled to a refund may opt either (1) to obtain such refund or (2) to credit said
amount for the succeeding taxable year.
Petitioner presented evidence to prove its claim that it did not apply the amount as a tax credit.
A copy of the Final Adjustment Return for 1990 was attached to petitioner's Motion for
Reconsideration filed before the CTA. A final adjustment return shows whether a corporation
incurred a loss or gained a profit during the taxable year. In this case, that Return clearly showed
that petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not have applied the
amount in dispute as a tax credit.
The BIR did not controvert the veracity of the said return. It did not even file an opposition to
petitioner's Motion and the 1990 Final Adjustment Return attached thereto. Petitioner also calls
the attention of this Court, as it had done before the CTA, to a Decision rendered by the Tax
Court in CTA Case No. 4897, involving its claim for refund for the year 1990. In that case, the
Tax Court held that "petitioner suffered a net loss for the taxable year 1990 . . . ." Respondent,
however, urges this Court not to take judicial notice of the said case.
Respondents' reasoning underscores the weakness of their case. For if they had really believed
that petitioner is not entitled to a tax refund, they could have easily proved that it did not suffer
any loss in 1990. Indeed, it is noteworthy that respondents opted not to assail the fact appearing
therein that petitioner suffered a net loss in 1990 in the same way that it refused to
controvert the same fact established by petitioner's other documentary exhibits
Technicalities and legalisms, however exalted, should not be misused by the government to keep
money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If
the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it
apply the same standard against itself in refunding excess payments of such taxes. Indeed, the
State must lead by its own example of honor, dignity and uprightness.


PHILAM ASSET MANAGEMENT, INC., vs. COMMISSIONER OF
INTERNAL REVENUE
G.R. Nos. 156637/162004. December 14, 2005
PANGANIBAN, J.:

FACTS:

Before us are two consolidated petitions for review seeking to review and reverse the decision of the
Court of Appeals.
G.R. No. 156637
Petitioner, formerly Philam Fund Management, acts as an investment manager of Philippine
Fund, Inc. (PFI) and Philam Bond Fund, Inc. (PBFI). Being an investment manager, petitioner provides
management and technical services to PFI and PBFI and is likewise PFIs and PBFIs principal distributor
which takes charge of the sales of said companies shares to prospective investors. Both PFI and PBFI
agree to pay the petitioner a monthly management fee from which PFI and PBFI withhold the amount
equivalent to five percent (5%) creditable tax.
On April 3, 1998, petitioner filed its Annual Corporate Income Tax Return for the taxable year 1997
representing a net loss of P2,689,242.00. It failed to utilize the creditable tax withheld of P522,092.00
representing the tax withheld by PFI and PBFI on professional fees.
On September 11, 1998, Petitioner filed an administrative claim for refund with the BIR in the amount of
P522,092.00 representing unutilized excess tax credits for 1997. Thereafter a written request was filed for
the early resolution of Petitioners claim for refund. Respondent did not act on petitioners claim.

G.R. No. 162004
On April 13, 1999, petitioner filed its Annual ITR with the BIR for the taxable year 1998
declaring a net loss of P1,504,951.00. Likewise, petitioner had an unapplied creditable withholding tax in
the amount of P459,756.07, which amount had been previously withheld in that year by petitioners
withholding agents, PFI, PBFI, and Philam Strategic Growth Fund, Inc. (PSGFI).
In the next succeeding year, petitioner had a tax due in the amount of P80,042.00, and a creditable
withholding tax in the amount of P915,995.00. Petitioner likewise declared in its 1999 tax return the
amount of P459,756.07, which represents its prior excess credit for taxable year 1998.

On November 14, 2000, Petitioner filed a written administrative claim for refund with respect to the
unapplied creditable withholding tax of P459,756.07. According to petitioner, the amount of P80,042.00,

representing the tax due for the year 1999 has been credited from its P915,995.00 creditable withholding
tax for taxable year 1999, thus leaving its 1998 creditable withholding tax in the amount of P459,756.07
still unapplied.

The claim for refund yielded no action on the part of the BIR so petitioner filed a Petition for Review
before the CTA on December 26, 2000, asserting that it is entitled to the refund of P459,756.07. On May
2, 2002, the CTA rendered a decision denying petitioners Petition for Review.

The Court of Appeals, in both cases denied the petitioners claim for refund of petitioners excess
creditable taxes withheld. Hence, these petitions.

ISSUE:

Whether petitioner is entitled to refund of its creditable taxes withheld for the years 1997 and 1998.

HELD:

The Petition in GR No. 156637 is meritorious, but that in GR No. 162004 is not.
Section 69 reappeared in the NIRC (or Tax Code) of 1997 as Section 76, which reads:

Section 76. Final Adjustment Return. -- Every corporation liable to tax under Section 24
shall file a final adjustment return covering the total net income for the preceding calendar or
fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable net income of that year the corporation shall either:

(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income
taxes paid, the refundable amount shown on its final adjustment return may be credited against the
estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.

GR No. 156637
Section 76 offers two options to a taxable corporation whose total quarterly income tax payments
in a given taxable year exceeds its total income tax due. These options are (1) filing for a tax refund or

(2) availing of a tax credit. Failure to signify ones intention in the FAR does not mean outright barring of
a valid request for a refund, should one still choose this option later on. A tax credit should be construed
merely as an alternative remedy to a tax refund under Section 76, subject to prior verification and
approval by respondent. In the present case, respondent denied the claim of petitioner for a refund of
excess taxes withheld in 1997, because the latter (1) had not indicated in its ITR for that year whether it
was opting for a credit or a refund; and (2) had not submitted as evidence its 1998 ITR, which could have
been the basis for determining whether its claimed 1997 tax credit had not been applied against its 1998
tax liabilities. Requiring that the ITR or the FAR of the succeeding year be presented to the BIR in
requesting a tax refund has no basis in law and jurisprudence. In the present case, although petitioner did
not mark the refund box in its 1997 FAR, neither did it perform any act indicating that it chose a tax
credit. On the contrary, it filed on September 11, 1998, an administrative claim for the refund of its
excess taxes withheld in 1997. In none of its quarterly returns for 1998 did it apply the excess creditable
taxes. Under these circumstances, petitioner is entitled to a tax refund of its 1997 excess tax credits in the
amount of P522,092.
G.R. No. 162004.
As to the second case, Section 76 also applies. Amended by RA No. 8424, otherwise known as the Tax
Reform Act of 1997, it now states:

SEC. 76. Final Adjustment Return. -- Every corporation liable to tax under Section 27
shall file a final adjustment return covering the total taxable income for the preceding calendar or
fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable income of that year, the corporation shall either:

(A) Pay the balance of tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.

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


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

According to petitioner, it neither chose nor marked the carry-over option box in its 1998 FAR. In
other words, petitioner argues that it is still entitled to a refund of its 1998 excess income tax payments.
This argument does not hold water. The subsequent acts of petitioner reveal that it has effectively
chosen the carry-over option.

First, the fact that it filled out the portion Prior Years Excess Credits in its 1999 FAR means that it
categorically availed itself of the carry-over option. In fact, the line that precedes that phrase in the BIR
form clearly states Less: Tax Credits/Payments. Second, the resulting redundancy in the claim of
petitioner for a refund of its 1998 excess tax credits on November 14, 2000 cannot be countenanced. It
cannot be allowed to avail itself of a tax refund and a tax credit at the same time for the same excess
income taxes paid. Besides, disallowing it from getting a tax refund of those excess tax credits will not
enervate the two-year prescriptive period under the Tax Code. That period will apply if the carry-over
option has not been chosen. Furthermore, tax refunds are to be construed strictly against the taxpayer.
Petitioner has failed to meet the burden of proof required in order to establish the factual basis of its claim
for a tax refund.


Commissioner of Internal Revenue, petitioner, vs. Bank of the Philippine Islands,
respondent.
G.R. NO. 178490, July 7, 2009
CHICO-NAZARIO, J .:

FACTS:

On 15 April 1999, BPI filed with the BIR its final adjusted Corporate Annual Income Tax Return
for the taxable year ending 31 December 1998. For the same taxable year 1998, BPI already paid
the income tax payments for the first three quarters and received various incomes from third
persons and it additionally acquired foreign tax credit which had carried over excess tax credit
from the prior year. Subsequently, BPI opted to carry over its 1998 tax credit to the succeeding
taxable year ending 31 December 1999.
For the taxable year ending 31 December 2000, respondent BPI declared in its Corporate Annual
ITR: (1) zero taxable income; (2) excess tax credit carried over from 1998 and 1999, amounting
to P46,922,851.00; and (3) even more excess tax credit, gained in 2000, in the amount
of P25,207,939.00. BPI, however, failed to indicate in its ITR its choice of whether to carry over
its excess tax credits or to claim the refund of or issuance of a tax credit certificate for the
amounts thereof. BPI filed with petitioner Commissioner of Internal Revenue (CIR) an
administrative claim for refund representing its excess creditable income tax for 1998. The CIR
failed to act on the claim for tax refund of BPI. Hence, BPI filed a Petition for Review before
the CTA which ruled that since BPI had opted to carry over its 1998 excess tax credit to 1999
and 2000, it was barred from filing a claim for the refund of the same.
BPI filed a Motion for Reconsideration of the foregoing Decision, but the CTA denied the same
which prompted BPI to appeal to the Court of Appeals which rendered its Decision, reversing
that of the CTA and holding that BPI was entitled to a refund of the excess income tax it paid for
1998.

ISSUE:


Whether or not the Court of Appeals erred in holding that the IRREVOCABILITY RULE
under Section 76 of the tax code does not operate to bar petitioner from asking for a refund.

HELD:

The Court finds merit in the petition.
Section 79 of the NIRC of 1985 was reproduced as Section 76 of the NIRC of 1997, with the
addition of one important sentence, which laid down the irrevocability rule:
Section 76. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file
a final adjustment return covering the total net income for the preceding calendar or fiscal year.
If the sum of the quarterly tax payments made during the said taxable year is not equal to the
total tax due on the entire taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income
taxes paid, the refundable amount shown on its final adjustment return may be credited against
the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable
years. Once the option to carry-over and apply the excess quarterly income tax against income
tax due for the taxable quarters of the succeeding taxable years has been made, such option shall
be considered irrevocable for that taxable period and no application for tax refund or issuance of
a tax credit certificate shall be allowed therefor.
The Court categorically declared that: Section 76 remains clear and unequivocal.
Once the carry-over option is taken, actually or constructively, it becomes irrevocable. It
mentioned no exception or qualification to the irrevocability rule. Hence, the controlling factor
for the operation of the irrevocability rule is that the taxpayer chose an option; and once it had
already done so, it could no longer make another one. Consequently, after the taxpayer opts to
carry-over its excess tax credit to the following taxable period, the question of whether or not it
actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in
stating that once the option to carry over has been made, no application for tax refund or
issuance of a tax credit certificate shall be allowed therefor.


Bank of Philippine Islands, petitioner, vs. Commissioner of Internal Revenue,
respondent.
C.A. G.R. SP NO. 38304, April 14, 2000
AQUINO, J p.;

FACTS:

Petitioner is the successor-in-interest of the Family Bank and Trust Company whose corporate
existence has ended on 30 June 1995. From January 1 to June 30, 1985, FBTC earned incomes
from rentals and interest from treasury notes purchased from the Central Bank. Pursuant to the
Expanded Withholding Tax Regulations, the lessees of FBTC withheld 5% on said rentals while
the Central Bank withheld 15% on the interest on the treasury notes. These withheld income
taxes were remitted to the BIR including the prior years excess credit.
On April 10, 1986, the FBTC filed its income tax return with the BIR showing a net loss and a
refundable amount representing the creditable income tax withheld at source from January 1 to
June 30, 1985. On October 7, 1986, petitioner BPI as successor-in-interest of FBTC filed a letter
claim dated October 10, 1986 with the BIR asking for refund of Php2,320,138.34 however BIR
only refunded the amount of Php2,146,072.57 (prior years excess credits).
BIR refused to refund the withheld income taxes on rentals and interests thus prompted petitioner
BPI to file a petition for review with the CTA which dismissed the petition on the ground of
prescription.

ISSUE:

Whether or not petitioners claim for refund of the withheld income taxes has already prescribed.

HELD:

The Court ruled in favor of CTAs decision that the claim has already prescribed.
Section 46 of the Tax Code provides for the requirement of every corporation, subject to tax,
except foreign corporation not engaged in trade or business in the Philippines, to render, in

duplicate, a true and accurate quarterly income tax return and final and adjustment return in
accordance with the provisions of the Code. Such filing under Sec. 70 of the same Code states
that the corporate quarterly declaration shall be filed within 60 days following the close of each
of the first three quarters of the taxable year. The final adjustment return shall be filed on or
before the 15
th
day of April or on or before the 15
th
day of the fourth month following the close
of the fiscal year, as the case may be.
The Court shares the opinion of the BIR and CTA that the law required FBTC as a dissolving
corporation to file its income tax return within 30 days after the cessation of its business or 30
days after the approval of the merger. Unfortunately, petitioner was late by 151 days and was
therefore, clearly time-barred.


WITHHOLDING TAX

Citibank, N.A. vs. Court of Appeals
G.R. No. 107434 October 10, 1997
Panganiban, J.

FACTS:
Pursuant to Section 1(c) of the Expanded Withholding Tax Regulations promulgated by
the Bureau of Internal Revenue, petitioners tenants withheld and paid to the BIR taxes on the
rent due to the petitioner. During the years 1979 and 1980, petitioner reported net losses of its
income without availing of the tax credit represented by the rental income withheld under the
Expanded Withholding Tax Regulation. Subsequently, petitioner filed a claim for refund of the
aforementioned amounts, which was denied by the Commissioner of Internal Revenue but was
afterward granted by the Court of Tax Appeals and the Court of Appeals.

ISSUE:
Is a creditable withholding tax refundable?

HELD:
The withholding tax system was devised for two main reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; and second, to ensure
the collection of the income tax, which could otherwise be lost or substantially reduced through
failure to file the corresponding returns. A third reason may be added: to improve the
government's cash flow.
Taxes withheld are in the nature of payment by a taxpayer in order to extinguish his
possible tax obligation. They are installments on the annual tax which may be due at the end of
the taxable year. The amount of the creditable withholding tax depends upon the income tax
return at the end of the taxable year. Thus, they are provisional in nature. Consequently,
petitioner, who has reported loss in income for the years 1979 and 1980, is not liable for income
tax in those years. Taxes withheld during the course of the taxable year, while collected legally
under the revenue regulation, became untenable and took on the nature of erroneously collected
taxes at the end of the taxable year. As said tax on the nature of erroneously collected taxes, they
are refundable.

Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of
Tax Appeals
G.R. No. L-68375 April 15, 1988
Bidin, J.

FACTS:
Private respondent is a domestic corporation and is a wholly-owned subsidiary of Glaro
S.A. Ltd., a Swiss corporation not engaged in trade business in the Philippines. In the taxable
years 1975 and 1976, respondent filed its withholding tax returns based on the 35% withholding
tax rate. Subsequently, respondent filed for a tax refund and/or tax credit claiming that it is only
liable to only 15% withholding tax, pursuant to Section 24 (b) (1) of the Tax Code. Petitioner
contends that respondent is not entitled to the 15% tax rate. It is further contended that it is Glaro
the taxpayer, and not Wander, a mere withholding agent for and in behalf of the Philippine
Government, which should be legally entitled to receive the refund.

ISSUE:
Is respondent entitled to the refund?

HELD:
Respondent is entitled to the refund. Petitioner is primarily a wholly owned subsidiary of
Glaro. The fact that it became a withholding agent of the government, which was not by choice
but by compulsion under Section 53 (b) of the Tax Code, cannot be considered as a renunciation
of its responsibility to its mother company. The compulsory withholding of taxes as provided
under Section 53 (b) of the Tax Code is merely a device to insure the collection of taxes on
incomes derived from sources in the Philippines by aliens who are outside its taxing jurisdiction.
Thus respondent, as the Philippine counterpart, is the proper entity who should receive the refund
or credit of overpaid withholding tax on dividends paid or remitted by Glaro.


G.R. No. L-66838 April 15, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PROCTER &
GAMBLE PHILIPPINE MANUFACTURING CORPORATION & THE
COURT OF TAX APPEALS, respondents.

PARAS, J :

FACTS:

Procter and Gamble Philippine Manufacturing Corporation declared dividends payable to
its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) from which
dividends the thirty-five percent (35%) withholding tax at source was deducted.

In 1977, private respondent filed with petitioner Commissioner of Internal Revenue a
claim for refund or tax credit.There being no responsive action on the part of the Commissioner,
it filed a petition for review with CTA. In 1984, the CTA rendered a decision ordering petitioner
Commissioner to refund or grant the tax credit.

On appeal by the Commissioner, the Court reversed the decision of the CTA.

ISSUE:

Whether or not a withholding agent in the Philippines is legally entitled to refund.

HELD:

The BIR should not be allowed to defeat an otherwise valid claim for refund by raising
this question of alleged incapacity for the first time on appeal before this Court. This is clearly a
matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim
for refund, is likely to run away, as it were, with the refund instead of transmitting such refund or
tax credit to its parent and sole stockholder. It is commonplace that in the absence of explicit
statutory provisions to the contrary, the government must follow the same rules of procedure
which bind private parties. It is, for instance, clear that the government is held to compliance

with the provisions of Circular No. 1-88 of this Court in exactly the same way that private
litigants are held to such compliance, save only in respect of the matter of filing fees from which
the Republic of the Philippines is exempt by the Rules of Court.


G.R. Nos. 118498 & 124377 October 12, 1999
FILIPINAS SYNTHETIC FIBER CORPORATION, petitioner, vs. COURT OF
APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
PURISIMA, J.:

FACTS:

Filipinas Synthetic Fiber Corp., a domestic corporation received on December 27, 1979 a letter
of demand from the Commissioner of Internal Revenue assessing it for deficiency withholding
tax at source in the total amount of P829,748.77 inclusive of interest and compromise penalties,
for the period from the fourth quarter of 1974 to the fourth quarter of 1975. The assessment was
seasonably protested by petitioner through its auditor, SGV and Company. Respondent denied
the protest on May 14, 1985 on the following ground: For Philippine internal revenue tax
purposes, the liability to withhold and pay income tax withheld at source from certain payments
due to a foreign corporation is at the time of accrual and not at the time of actual payment or
remittance thereof.

On June 28, 1985, petitioner brought a petition for review before the Court of Tax Appeals, the
said court came out with its decision on June 15, 1993, which is against the petitioner.

With the denial of its motion for reconsideration, petitioner appealed the CTA disposition to the
Count of Appeals, which affirmed in toto the appealed decision. So, petitioner found its way to
this count via petition for review on certiorari.

ISSUE:

Whether the liability to withhold tax at source on income payments to non-resident foreign
corporation arises upon remittance of the amounts due to the foreign creditors, or upon accrual
thereof


HELD:

The Supreme Court held that since Sec. 53, NIRC (now, Sec. 57 of 1997 NIRC) in relation to
Sec. 54 (now Sec. 58) is silent as to when the duty to withhold arises, it is necessary to look into
the nature of the accrual method of accounting, which was used by therein petitioner corporation.
Inasmuch as under the accrual basis, income is reportable when all the events have occurred to
fix taxpayers right to receive the income and the amounts can be determined with reasonable
accuracy, hence, it is the right to receive income, and not the actual receipt thereof, that
determines when the amount is includible in gross income. Thus, the duty of the withholding
agent to withhold the corresponding tax arises at the time of such accrual. The withholding
agent/corporation is then obliged to remit the tax to the Government since it already and properly
belongs to the Government. If a withholding agent who is personally liable for income tax
withheld at source fails to pay said withholding tax, an assessment for said deficiency
withholding tax would, therefore, be legal and proper.

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