MADRIGAL v RAFFERTY

FACTS
In 1915, Vicente Madrigal filed a sworn declaration with the CIR showing a total net
income for the year 1914 the sum of P296K. He claimed that the amount did not
represent his own income for the year 1914, but the income of the conjugal
partnership
existing between him and his wife, Susana Paterno. He contended that since there
exists such conjugal partnership, the income declared should be divided into 2
equal
parts in computing and assessing the additional income tax provided by the Act of
Congress of 1913. The Attorney-General of the Philippines opined in favor of
Madrigal,
but Rafferty, the US CIR, decided against Madrigal.
After his payment under protest, Madrigal instituted an action to recover the sum of
P3,800 alleged to have been wrongfully and illegally assessed and collected, under
the provisions of the Income Tax Law. However, this was opposed by Rafferty,
contending that taxes imposed by the Income Tax Law are taxes upon income, not
upon capital or property, and that the conjugal partnership has no bearing on
income
considered as income.
The CFI ruled in favor of the defendants, Rafferty.
ISSUE
Whether Madrigals income should be divided into 2 equal parts in the assessment
and computation of his tax
HELD
NO. Susana Paterno, wife of Vicente Madrigal, still has an inchoate right in the
property of her husband 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 has no absolute right to
onehalf
the income of the conjugal partnership. Not being seized of a separate estate, she
cannot make a separate return in order to receive the benefit of exemption, which
could arise by reason of the additional tax. As she has no estate and income,
actually
and legally vested in her and entirely separate from her husbands property, the
income cannot be considered the separate income of the wife for purposes of
additional tax.
Income, as contrasted with capital and property, is to be the test. The essential
difference between capital and income is that capital is a fund; income is a flow. A
fund
of property existing at an instant of time is called capital. A flow of services
rendered
by that capital by the payment of money from it or any other benefit rendered by a
fund
of capital in relation to such fund through a period of time is called income. Capital
is
wealth, while income is the service of wealth. A tax on income is not tax on
property.

Fisher vs. Trinidad [G.R. No. L-17518 October 30, 1922]

Post under case digests, Commercial Law at Wednesday, March 21, 2012 Posted by
Schizophrenic Mind
Facts: 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. Fisher was a stockholder in said corporation. Said corporation, as result of
the business for that year, declared a "stock dividend" and that the proportionate
share of said stock divided of Fisher was P24,800. Said the stock dividend for that
amount was issued to Fisher. For this reason, Trinidad demanded payment of income
tax for the stock dividend received by Fisher. Fisher paid under protest the sum of
P889.91 as income tax on said stock dividend. Fisher filed an action for the recovery
of P889.91. Trinidad demurred to the petition upon the ground that it did not state
facts sufficient to constitute cause of action. The demurrer was sustained and Fisher
appealed.
Issue: Whether or not the stock dividend was an income and therefore taxable.
Held: No. Generally speaking, stock dividends represent undistributed increase in
the capital of corporations or firms, joint stock companies, etc., etc., for a particular
period. The inventory of the property of the corporation for particular period shows
an increase in its capital, so that the stock theretofore issued does not show the real
value of the stockholder's interest, and additional stock is issued showing the
increase in the actual capital, or property, or assets of the corporation.
Limpan vs CIR
Facts
Limpan Investment Corp is a domestic corporation engaged in the business of
leasing real properties. Among its real properties are lots and buildings in Manila
and Pasay City acquired from Isabelo Lim and his mother. After filing tax returns for
1956, 1957, the examiners of BIR discovered that the corporation has understated
its rental incomes by 20k and 81k during said years as well as claimed excessive
depreciation amounting to 20k and 16k. The CIR demanded payment for deficiency
tax and surcharge. Petitioners argue that these amounts were either deposited with
the court by the tenants or have yet to be received.
Issue:
W/N there was undeclared income
Held:
Yes, petitioner admitted that it had undeclared more than half of the amount,
therefore it was incumbent upon the corporation to establish the remainder of its
pretensions by clear and convincing evidence which was lacking in this case.
The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income
is no sufficient justification for the non-declaration of said income in 1957 since the
deposit was resorted due to the refusal of petitioner to accept the same, and was

not the fault of its tenants; hence, petitioner is deemed to have constructively
received such rentals in 1957.
The payment by the sub-tenant should have been reported as rental income in said
year as it in still income regardless of the source.
Conwi, et.al. vs. CTA and CIR
Post under case digests, Taxation at Thursday, January 26, 2012 Posted by
Schizophrenic Mind
Facts: Petitioners are employees of Procter and Gamble (Philippine Manufacturing
Corporation, subsidiary of Procter & Gamble, a foreign corporation).During the years
1970 and 1971, petitioners were assigned to other subsidiaries of Procter & Gamble
outside the Philippines, for which petitioners were paid US dollars as compensation.
Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the
dollar-to-peso conversion based on the floating rate under BIR Ruling No. 70-027. In
1973, petitioners filed amened ITRs for 1970 and 1971, this time using the par
value of the peso as basis. This resulted in the alleged overpayments, refund and/or
tax credit, for which claims for refund were filed.
CTA held that the proper conversion rate for the purpose of reporting and paying
the Philippine income tax on the dollar earnings of petitioners are the rates
prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. The refund
claims were denied.
Issues:
(1) Whether or not petitioners' dollar earnings are receipts derived from foreign
exchange transactions; NO.
(2) Whether or not the proper rate of conversion of petitioners' dollar earnings for
tax purposes in the prevailing free market rate of exchange and not the par value of
the peso; YES.
Held: For the proper resolution of income tax cases, income may be defined as an
amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless
otherwise specified, it means cash or its equivalent. Income can also be though of
as flow of the fruits of one's labor.
Petitioners are correct as to their claim that their dollar earnings are not receipts
derived from foreign exchange transactions. For a foreign exchange transaction is
simply that a transaction in foreign exchange, foreign exchange being "the
conversion of an amount of money or currency of one country into an equivalent
amount of money or currency of another." When petitioners were assigned to the
foreign subsidiaries of Procter & Gamble, they were earning in their assigned
nation's currency and were ALSO spending in said currency. There was no
conversion, therefore, from one currency to another.

The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which came to
them within a specified period of time of two years as payment for their services.
And in the implementation for the proper enforcement of the National Internal
Revenue Code, Section 338 thereof empowers the Secretary of Finance to
"promulgate all needful rules and regulations" to effectively enforce its provisions
pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71
were issued to prescribed a uniform rate of exchange from US dollars to Philippine
pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971,
respectively. Said revenue circulars were a valid exercise of the authority given to
the Secretary of Finance by the Legislature which enacted the Internal Revenue
Code. And these are presumed to be a valid interpretation of said code until revoked
by the Secretary of Finance himself.
Petitioners are citizens of the Philippines, and their income, within or without, and in
these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended,
does not brook any exemption.
DENIED FOR LACK OF MERIT.

Baas Jr. v. Court of Appeals [G.R. No. 102967. February 10, 2000]
Petitioner entered into a deed of sale purportedly on installment. He discounted the
promissory note covering the future installments for purposes of taxation.
ISSUE
Whether or not the promissory note should be declared cash transaction for
purposes of taxation.
RULING
YES. A negotiable instrument is deemed a substitute for money and for value.
According to Sec. 25 of NIL: value is any consideration sufficient to support a
simple contract. An antecedent or pre-existing debt constitutes value; and is
deemed such whether the instrument is payable on demand or at a future time.
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.
PANSACOLA v. CIR
Facts: Petitioner Pansacola filed his income tax return for the taxable year 1997 that
reflected an overpayment of P5950. In it he claimed the increased amounts of
personal and additional exemptions, although his certificate of income tax withheld

on compensation indicated the lesser allowed amounts on these exemptions. He

claimed a refund which was denied. The CTA also denied the claim, saying that it
would be absurd to allow the deduction from a taxpayers gross income earned on a
certain year of exemptions availing on a different taxable year. Petitioners recon
was denied. CA denied his appeal, hence the petition.
Issue: Could exemptions under Sec. 35 of NIRC which took effect on January 1, 1998
be availed of for taxable year 1997?
Held: No. What the law considers 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.
The NIRC took effect on January 1, 1998, hence the increased amounts of personal
and additional exemptions can only be allowed as deductions from the individual
taxpayers gross or net income for the taxable year 1998 to be filed in 1999. The
NIRC made no reference that the increase shall apply on income earned prior to
1998. Nor was there any provision that the it has a retroactive effect.
The reliance of petitioner on RA 7167 on adjustment of personal and
additional exemptions according to poverty threshold is misplaced. Said law is a
social legislation, unlike the one in the case at bar.

Umali vs. Estanislao May 29, 1992

Facts: Congress enacted Republic Act 7167 amending the NIRC (adjusting the basic
and additional exemptions allowable to individuals for income tax purposes to the
poverty threshold level). The said Act was signed and approved by the President on
19 December 1991 and published on 14 January 1992 in "Malaya" a newspaper of
general circulation. On 26 December 1991, the CIR promulgated Revenue
Regulations No. 1-92 stating that the regulations shall take effect on compensation
income from January 1, 1992. Petitioners filed a petition for mandamus to compel
the CIR to implement RA 7167 in regard to income earned or received in 1991, and
prohibition to enjoin the CIR from implementing the revenue regulation.
Issue:
Assuming that Rep. Act 7167 took effect on 30 January 1992 (15 days
after its publication in Malaya), whether or not the said law nonetheless covers or
applies to compensation income earned or received during calendar year 1991.
Ratio: The Court is of the considered view that Rep. Act 7167 should cover or extend
to compensation income earned or received during calendar year 1991. Sec. 29,
par. [L], Item No. 4 of the National Internal Revenue Code, as amended, provides:
Upon the recommendation of the Secretary of Finance, the President shall
automatically adjust not more often than once every three years, the personal and
additional exemptions taking into account, among others, the movement in
consumer price indices, levels of minimum wages, and bare subsistence levels.
The exemptions were last adjusted in 1986. The president could have adjusted it in
1989 but did not do so. The poverty threshold level refers to the level at the time
Rep. Act 7167 was enacted by Congress. The Act is a social legislation intended to
alleviate in part the present economic plight of the lower income taxpayers.

Rep. Act 7167 says that the increased personal exemptions shall be available after
the law shall have become effective. These exemptions are available upon the filing
of personal income tax returns, 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. The personal exemptions as increased by
Rep. Act 7167 are not 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 (The law does not state retroactive application). The
personal exemptions as increased by Rep. Act 7167 cannot be regarded as available
as to compensation income received during 1992 because it would in effect
postpone the availability of the increased exemptions to 1 January-15 April 1993.
The implementing regulations collide with Section 3 of Rep. Act 7167 which states
that the statute "shall take effect upon its approval.
The revenue regulation should take effect on compensation income earned or
received from 1 January 1991. Since this decision is promulgated after 15 April
1992, those taxpayers who have already paid are entitled to refunds or credits.

AFISCO INSURANCE CORP. et al. vs. COURT OF APPEALS

FACTS:
The petitioners are 41 non-life domestic insurance corporations. They issued risk
insurance policies for machines. The petitioners in 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,
which they complied with.
In 1976, the pool of machinery insurers submitted a financial statement and filed an
Information Return of Organization Exempt from Income Tax for 1975. On the
basis of this, the CIR assessed a deficiency 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.
The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals
dismissed their appeal.
The CA ruled in that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latters collection of premiums on behalf of its members,
the ceding companies, was taxable income.
ISSUE/S:
Whether or not the pool is taxable as a corporation.
HELD:

1) Yes: Pool taxable as a corporation

Argument of Petitioner: 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 risks thus reinsured. Hence, the pool did not act or earn income
as a reinsurer. Its role was limited to its principal function of allocating and
distributing the risk(s) arising from the original insurance among the signatories to
the treaty or the members of the pool based on their ability to absorb the risk(s)
ceded[;] as well as the performance of incidental functions, such as records,
maintenance, collection and custody of funds, etc.
Argument of SC: According to Section 24 of the NIRC of 1975:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- 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, but not including duly
registered general co-partnership (compaias colectivas), general professional
partnerships, private educational institutions, and building and loan associations
xxx.
Ineludibly, the Philippine legislature included in the concept of corporations those
entities that resembled them such as unregistered partnerships and associations.
Interestingly, the NIRCs inclusion of such entities in the tax on corporations was
made even clearer by the Tax Reform Act of 1997 Sec. 27 read together with Sec.
22 reads:
SEC. 27. Rates of Income Tax on Domestic Corporations. -(A) In General. -- Except as otherwise provided in this Code, an income tax of
thirty-five percent (35%) is hereby imposed upon the taxable income derived during
each taxable year from all sources within and without the Philippines by every
corporation, as defined in Section 22 (B) of this Code, and taxable under this Title as
a corporation xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx
xxx
(B) The term corporation shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or consortium agreement under a
service contract without the Government. General professional partnerships are
partnerships formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or
business.
Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24
covered these unregistered partnerships and even associations or joint accounts,
which had no legal personalities apart from their individual members.

Furthermore, 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 may be considered a partnership because it contains
the following elements: (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)
While, the pool itself is not a reinsurer and does not issue any policies; 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 pursuant to the agreement with Munich. Profit motive or business is,
therefore, the primordial reason for the pools formation.
PASCUAL v. Commissioner of InternalRevenue #10 BUSORG
FACTS:
On June 22, 1965, petitioners bought two (2)parcels of land from Santiago
Bernardino, et al.and on May 28, 1966, they bought anotherthree (3) parcels of land
from Juan Roque. Thefirst two parcels of land were sold by petitionersin 1968 to
Marenir Development Corporation,while the three parcels of land were sold
bypetitioners to Erlinda Reyes and Maria Samsonon March 19,1970. Petitioner
realized a netprofit in the sale made in 1968 in the amount of P165, 224.70, while
they realized a net profit of P60,000 in the sale made in 1970. Thecorresponding
capital gains taxes were paid bypetitioners in 1973 and 1974 .Respondent
Commissioner informed petitionersthat in the years 1968 and 1970, petitioners
asco-owners in the real estate transactions formedan unregistered partnership or
joint venturetaxable as a corporation under Section 20(b)and its income was subject
to the taxesprescribed under Section 24, both of theNational Internal Revenue Code;
that theunregistered partnership was subject tocorporate income tax as
distinguished fromprofits derived from the partnership by themwhich is subject to
individual income tax.
ISSUE:
Whether petitioners formed an unregisteredpartnership subject to corporate income
tax(partnership vs. co-ownership)
RULING:
Article 1769 of the new Civil Code lays down therule for determining when a
transaction shouldbe deemed a partnership or a co-ownership.Said article
paragraphs 2 and 3, provides:(2) Co-ownership or co-possession does not itself
establish a partnership, whether such co-ownersor co-possessors do or do not share
any profitsmade by the use of the property; (3) Thesharing of gross returns does not
of itself establish a partnership, whether or not thepersons sharing them have a
joint or commonright or interest in any property from which thereturns are
derived;The sharing of returns does not in itself establish a partnership whether or
not thepersons sharing therein have a joint or commonright or interest in the

property. There must bea clear intent to form a partnership, theexistence of a

juridical personality different fromthe individual partners, and the freedom of
eachparty to transfer or assign the whole property.In the present case, there is clear
evidence of co-ownership between the petitioners. There isno adequate basis to
support the propositionthat they thereby formed an unregisteredpartnership. The
two isolated transactionswhereby they purchased properties and sold thesame a
few years thereafter did not therebymake them partners. They shared in the
grossprofits as co- owners and paid their capital gainstaxes on their net profits and
availed of the taxamnesty thereby. Under the circumstances, theycannot be
considered to have formed anunregistered partnership which is thereby liablefor
corporate income tax, as the respondentcommissioner proposes. And even
assuming for the sake of argumentthat such unregistered partnership appears
tohave been formed, since there is no suchexisting unregistered partnership with a
distinctpersonality nor with assets that can be heldliable for said deficiency
corporate income tax,then petitioners can be held individually liable aspartners for
this unpaid obligation of thepartnership.
Obillos vs. Commissioner (139 SCRA 436)
Facts: The Supreme Court, applying Art. 1769 of the Civil Code, said that the sharing
of gross returns does not itself establish a joint partnership whether or the persons
sharing them have a joint or common right or interest in the property from which
the returns are derived. There must, instead, be an unmistakable intention to form
that partnership or joint venture. A sale of a co-ownership property at a profit does
not necessarily establish that intention.
This is about the tax liability of 4 brothers & sisters who sold 2 parcels of land which
they had acquired from their father. In 1973, Jose Obillos Sr bought 2 parcels of land
from Ortigas & Co & transferred his rights to his 4 children to enable them to build
their residences. In 1974, the 4 children resold the lots to Walled City Securities
Corp & earned profit. CIR assessed the 4 children with corporate income tax.
HELD: It is error to hold that petitioners (Obillos) have formed a taxable
unregistered partnership simply because they contributed in buying the lots, resold
the same & divided the profit among themselves. They are simply co-owners. They
were not engaged in any joint venture by reason of the isolated transaction. The
original purpose was to divide the lots for residential purposes. The division of the
profit was merely incidental to the dissolution of the co-ownership.