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INCOME TAX CASES

TABLE OF CONTENT:

1. CIR VS JAVIER
2. CONWI VS CA
3. OBILLOS VS CIR
4. CIR V. ST. LUKES MEDICAL CENTER
5. CIR VS ISABELA CORPS
6. CIR VS YMCA
7. SMI-ED PHIL TECH VS CIR
8. REPUBLIC VS ARLENE SORIANO
9. BDO VS REPUBLIC
10. DUMAGUETE CATHEDRAL V CIR
11. BAIER NICKEL VS CIR 2003
12. CIR VS BAIER NICCKEL 2006
13. SANTOS VS SERVIER
14. CIR VS FILINVEST
15. CIR VS GENERAL FOODS
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CIR V. JAVIER: CLAIM OF RIGHT DOCTRINE

YES. Erroneous remittance is gross income as it is considered under the NIRC

1997 as falling within the ambit of income from whatever source derive because
it sis income not expressly excluded/exempted from the class of taxable income.

The imposition of the fraud penalty in this case is not justified by the extant
facts.

There was no actual or intentional fraud thru willful and intentional misleading of the
BIR. The government was not induced to give up some rights or placed at a
disadvantage so as to prevent its lawful agents from proper assessment of tax
liabilities because W did not conceal anything.

His annotation of income was an error or mistake of fact or law not constituting fraud.
Such was practically an investigation for investigation and she had practically laid
cards on the table.

CONWI v. CTA:

Income is "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
thought of as a flow of the fruits of one's labor.

RULING:

1. Whether or not the dollar earnings of the petitioner are receipts derived
from foreign exchange transactions

No, because there was no conversion from one currency to another. A foreign exchange
transaction involves the conversion of an amount or currency of one country into an
equivalent amount of money or curency of another.

In This case, 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.

ISSUE 2 :

What exchange rate should be used to determine the peso equivalent of the foreign earnings of
petitioners for income tax purposes?

Contention of petitioner: they are not included in the coverage of Central Bank Circular No.
289 which provides for the specific instances when the par value of the peso shall not be
the conversion rate used.

their earnings should be converted for income tax purposes using the par value of the
Philippine peso

ISSUE: Whether petitioners are covered by CB circular no. 289, hence the par value of
the peso shall not the be the conversion rate.

RULING:

CB circular no. 289 APPLIES to petitioner, hence the par value of the peso shall not be
the conversion rate used.

The subject matters involved therein are export products, invisibles, receipts of foreign
exchange, foreign exchange payments, new foreign borrowing and
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Investments nothing by way of income tax payments.

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.

Pursuant to section 21 of the NIRC, the citizens of the Philippines shall be taxed for
income derived from within and without the Philippines

As such, their income is taxable even if there were no inward remittances during the time they were
earning in dollars abroad.

OBILLOS V. CIR
Where the father sold his rights over two parcels of land to his four children so
they can build their residence, but the latter after one (1) year sold them and
paid the capital gains, they should not treated to have formed an unregistered
partnership and taxed corporate income on the sale and dividend income tax on
their shares of the profits from the share.
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.
The sharing of gross returns does not of itself establish a joint partnership
whether or not 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

CIR V. ST. LUKES MEDICAL CENTER

Whether St. Lukes is liable for deficiency income tax in 1998 under Section
27(B) of the NIRC.

YES.

Section 27(B) of the NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G).

Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be
construed together without the removal of such tax exemption.

The effect of the introduction of Section 27(B) is to subject the taxable income of
two specific institutions, namely, proprietary non-profit educational institutions
36 and proprietary non-profit hospitals, among the institutions covered by
Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation
to Section 27(A)(1).

To be exempt from income taxes:

Section 30(E) of the NIRC requires that a charitable institution must be

organized and operated exclusively for charitable purposes.

Section 30(G) of the NIRC requires that the institution be operated exclusively
for social welfare.

Nothwithstanding the said condition to be exempt, An institution under

Section 30(E) or (G) does not lose its tax exemption if it earns income from its
for-profit activities. The only consequence is that the income of whatever
kind and character of a charitable institution from any of its activities
conducted for profit, regardless of the disposition made of such income,
shall be subject to tax.

Such income from for-profit activities, under the last paragraph of Section 30, is
merely subject to income tax, previously at the ordinary corporate rate but now
at the preferential 10% rate pursuant to Section 27(B.
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In this case, St. Luke fails to meet the requirements under Section 30(E) and
(G) of the NIRC to be completely tax exempt from all its income. Hence, its
income from for-profit activities is subject to the 10% preferential tax rate.

St. Lukes is therefore liable for deficiency income tax in 1998 under Section
27(B) of the NIRC.

However, it is not liable for surcharges and interest on such deficiency

income tax.

Good faith and honest belief that one is not subject to tax is due to the previous
interpretation of the government agencies tasked to implement tax law, are
sufficient justification to delete the imposition of surcharges and interest.

St. Lukes has good reasons to rely on the letter dated 6 June 1990 by the BIR,
which opined that St. Lukes is a corporation for purely charitable and social
welfare purposes and thus exempt from income tax.

CIR v. ISABELA CULTURAL CORPORATION

Issue: Whether the professional fees of SGV & Co. for auditing the financial statements
of ICC for the year 1985 can be validly claimed as expense deductions in 1986.

No because under the accrual method of accounting, as provided by sec 45 of the

NIRC ( qualifying the requisite paid and incurred during the taxable year for the
expenses to be deducted), expenses not being claimed as deductions by a taxpayer in
the current year when they are incurred cannot be claimed as deduction from income
for the succeeding year.

The accrual of income and expense is permitted when the all-events test has been
met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the
availability of the reasonable accurate determination of such income or liability.

In this case, ICC failed to present evidence showing that even with only "reasonable
accuracy," as the standard to ascertain its liability to SGV & Co. in the year 1985, it
cannot determine the professional fees which said company would charge for its
services.

The arguments that they did not know the amount during 1984 and 1985 service
expense incurred, and that the bills arrived late are not meritorious because what is
needed is only reasonable accuracy so they could include it in their deductions.
Further, they could have inquired and checked the services contract.

COMMISSIONER OF INTERNAL REVENUE v. COURT OF APPEALS (YMCA CASE)

Whether or not the income derived from rentals of real property owned by YMCA subject to
income tax

Yes. Since the last par. Of Sec 27 of the NIRC unequivocally subjects to tax the rent income of the
tax exempt corporations like YMCA from its rental property, [the Court is duty-bound to abide strictly by
its literal meaning and to refrain from resorting to any convoluted attempt at construction.
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A reading of said paragraph shows that the income from any property of exempt organizations, as
well as that arising from any activity it conducts for profit, is taxable. The phrase any of their activities
conducted for profit does not qualify the word properties. This makes income from the property of the
organization taxable, regardless of how that income is used -- whether for profit or for lofty non-profit
purposes.

Applying the above rule in this case, the leased facilities to small shop owners is considered income
from its property and the operation of the parking lot which likewise used its property is ana activity for
profit. Hence, they cannot be exempt from taxation.

SMI-ED PHILIPPIEN ETCHNOLOGY VS CIR

1. Jurisdiction of the Court of Tax Appeals( APPELATE IN NATURE)

"Assessment" refers to the determination of amounts due from a person obligated to make
payments. In the context of national internal revenue collection, it refers the determination of the
taxes due from a taxpayer under the National Internal Revenue Code of 1997.

Determining the proper category of tax that should have been paid is not an assessment.
It is incidental to determining whether there should be a refund

GENERAL RULE: The power and duty to assess national internal revenue taxes are lodged with the BIR.
EXCEPTION: RA NO. 1125 also vests the CTA with jurisdiction over the BIRs inaction on a taxpayers
refund claim, there may be instances when the Court of Tax Appeals has to take cognizance of cases that
have nothing to do with the BIRs assessments or decisions

The Court of Tax Appeals has no power to make an assessment at the first instance. On matters such as
tax collection, tax refund, and others related to the national internal revenue taxes, the Court of Tax
Appeals jurisdiction is appellate in nature. However, because Republic Act No. 1125 also vests the
Court of Tax Appeals with jurisdiction over the BIRs inaction on a taxpayers refund claim, there may be
instances when the Court of Tax Appeals has to take cognizance of cases that have nothing to do with
the BIRs assessments or decisions. If the BIR fails to act on the request for refund, the taxpayer may
bring the matter to the Court of Tax Appeals.

In an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may
determine whether there are taxes that should have been paid in lieu of the taxes paid.
Determining the proper category of tax that should have been paid is not an assessment.
It is incidental to determining whether there should be a refund.

A Philippine Economic Zone Authority (PEZA)-registered corporation that has never

commenced operations may not avail the tax incentives and preferential rates given to PEZA-
registered enterprises. Such corporation is subject to ordinary tax rates under the National
Internal Revenue Code of 1997.

2. WHETEHR OR Not PETITIONER IS ENTITLED TO THE BENEFITS GIVEN TO PEZA-

REGISTERED ENTERPRISES.

No. Petitioner is not entitled to benefits given to PEZA-registered enterprises, including the
5% preferential tax rate under Republic Act No. 7916 or the Special Economic Zone Act of 1995.
This is because it never began its operation.

Said benefits under Republic Act No. 7916, are available only to businesses operating within the
Ecozone.60 A business is considered in operation when it starts entering into commercial
transactions that are not merely incidental to but are related to the purposes of the business.

In this case, petitioner never started its operations since its registration on June 29,
199863 because of the Asian financial crisis.64 Petitioner admitted this.65 Therefore, it cannot avail
the incentives provided under Republic Act No. 7916.
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It is not entitled to the preferential tax rate of 5% on gross income in lieu of all taxes. Because
petitioner is not entitled to a preferential rate, it is subject to ordinary tax rates under the
National Internal Revenue Code of 1997

III

Whether Petitioners sale of its properties is subject to Capital Gains Tax?

ANSWER:
Yes. Petitioners sales of its properties are subject to CGT.

Under sec 39 (A) (1) Capital Assets is defined as property held by the taxpayer whether or not connected
with his business or trade, but does not include as follows:
1. STOCK in TRADE of the taxpayer or other property of a kind which would properly be included in
the inventory of the property of the taxpayer if on hand at the close of the taxable year,
2. The property held by the taxpayer primarily for the purpose of sale to customers in the ordinary
course of his trade or business
3. Property used in the trade or business of a character which is subject to the allowance for
depreciation provided in subsec F sec 34
4. Real property used in trade or business of the taxpayer

In this case, properties involved include petitioners buildings, equipment, and machineries. They
are not among the exclusions enumerated in Section 39(A)(1) of the National Internal Revenue
Code of 1997. None of the properties were used in petitioners trade or ordinary course of
business because petitioner never commenced operations. They were not part of the inventory.
None of them were stocks in trade. Based on the definition of capital assets under Section 39 of
the National Internal Revenue Code of 1997, they are capital assets.

5. ON WHETHER THE MACHINES AND EQUIPMENTS OF RESPONDENT, BEING CLASSIFIED AS

CAPITAL ASSETS, be subjected to CGT?

NO. only the presumed gain from the sale of petitioners land and/or building may be subjected
to the 6% capital gains tax. The income from the sale of petitioners machineries and equipment
is subject to the provisions on normal corporate income tax.

Under Sec 24(D) Capital gains from sale of real property, 6% based on the gross selling price
or current FMV as determined by sec 6 e of this code whichever is higher is imposed upon
Captal gains presumed to have been realized from the sale, exchange or other disposition of
real property located in the Philippines classified as capital assets.

For corporations, the National Internal Revenue Code of 1997 treats the sale of land and
buildings, and the sale of machineries and equipment, differently. Domestic corporations are
imposed a 6% capital gains tax only on the presumed gain realized from the sale of lands
and/or buildings. The National Internal Revenue Code of 1997 does not impose the 6% capital
gains tax on the gains realized from the sale of machineries and equipment. Section 27(D)(5) of
the National Internal Revenue Code of 1997 provides:

Moreover, under SEC. 27. Rates of Income tax on Domestic Corporations. - A final tax of six
percent (6%) is hereby imposed on the gain presumed to have been realized on the sale,
exchange or disposition of lands and/or buildings As burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning of the tax laws (Commissioner of Internal
Revenue v. Fortune Tobacco Corporation)

Based on the wordings of sec 24 and 27, it is clear that the 6% CGT applies only to sale
exchange or sale of lands and /or buildings, NOT equipments. Since what the respondent wants
to be subjected to the 6% in this case are the machines and equipments and not buildings, they
cannot be taxed under the provision of sec 24 and 27;rather by the provision on normal
corporate income tax.

REPUBLIC VS Arlene Soriano

1. FACTS:
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Petitioner Republic of the Philippines, represented by the Department of Public Works and
Highways (DPWH), filed a Complaint3 for expropriation against respondent Arlene R. Soriano,
the registered owner of a parcel of land consisting of an area of 200 square meters
the property sought to be expropriated shall be used in implementing the construction of the
North Luzon Expressway (NLEX)- Harbor Link Project (Segment 9) from NLEX to MacArthur
Highway, Valenzuela CitY

CAUSE OF ACTION: RTCS DECISION relied on NPC vs Angas

1. Whether or not petitioner is not entitled to 6% per annum on the amount of JC of the subject
property

ANSWER:

NO. The payment of just compensation for the expropriated property amounts to an effective
forbearance on the part of the State and hence the applicable interest is 12% per annum as held in the
case of Republic vs CA which overturned the ruling in NPC vs Angas that 6% is the applicable rate. The
said 12% per annum is to be computed from the time the property was taken until the full amount of
just compensation was paid in order to eliminate the issue of the constant fluctuation and inflation of
the value of the currency over time.

2. Whether interest should be paid?

Ans. No because there was no delay.

The records of this case reveal that petitioner did not delay in its payment of just compensation as it had
deposited the pertinent amount in full due to respondent on January 24, 2011, or four (4) months before
the taking thereof, which was when the RTC ordered the issuance of a Writ of Possession and a Writ of
Expropriation on May 27, 2011.

3. Whether or not the award of consequential damages is proper?

No because the entire property was bought. As a rule, consequential damages are awarded if as a
result of expropriation, the owner suffers from an impairment or decrese in the value of the
remaining property.

In this case, the entire property of the respondent was bought,hence no consequential damages.

4. TRANSFER TAXES LIABILITY IN THE NATURE OF CGT AND DSTnecessary for the transfer of the
subject property from the name of the respondent to petitioner republic

PARTLY MERITORIOUS:

CGT SELLER

DST: DEPENDS

1. Whether or not the CAPITAL GAINS TAX is the liability of the seller.

Yes. pursuant to sec 24(D) and 56(A) (3) of the 1997 NIRC, since CGT is a passive income, it is the
seller, not the buyer, who generally would shoulder the tax.

As far as the government is concerned, therefore, the capital gains tax remains a liability of the
seller since it is a tax on the seller's gain from the sale of the real estate.
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2. Who is liable for the DST? Documentary Stamp tax?

As a general rule, ANY of the parties to a transaction shall be liable for the full amount of the
documentary stamp tax due, unless they agree among themselves on who shall be liable for the
same.

In this case, there is no agreement as to the party liable for the documentary stamp tax due on
the sale of the land to be expropriated. But while petitioner rejects any liability for the same, this
Court must take note of petitioners Citizens Charter,28 which functions as a guide for the
procedure to be taken by the DPWH in acquiring real property through expropriation under RA
8974. The Citizens Charter, issued by petitioner DPWH itself on December 4, 2013, explicitly
provides that the documentary stamp tax, transfer tax, and registration fee due on the transfer
of the title of land in the name of the Republic shall be shouldered by the implementing agency
of the DPWH, while the capital gains tax shall be paid by the affected property owner.

Banco De Oro vs Republic

1. W/N peace bonds are deposit substitutes and therefore subject to 20% WT

No because the petitioner failed to adequately show that there was borrowing from the public.

Under the NIRC, the definition of deposit substitutes was amended with the addition of the qualifying
phrase for public- borrowing from 20 or more individuals or corporate lenders at any one time.
From this, the number of lenders therefore is determinative of whether a debt instrument should be
considered as deposit substitute which would be subject to FWT

In this case, theres only one lender to whom the BTr issued the bonds. Hence they failed to establish
that there was borrowing from the public.

However, there was a qualification made in the above decision that had there been a simultaneous sale
of the bionds from Btr and RCBC/ Code NGO and from RCBC/CODE NGO to the undisclosed investors, the
total number of those exceeded 20, the PEACE bond would have been considered as deposit
substitutes.

Dumaguete Cathedral vs CIR

Petitioner thus posits that the savings and time deposits of members of cooperatives are not included in the
enumeration, and thus not subject to the 20% final tax.

petitioner cites BIR Ruling No. 551-888[23] and BIR Ruling [DA-591-2006][24] where the BIR ruled that interests
from deposits maintained by members of cooperative are not subject to withholding tax under Section 24(B)(1) of
the NIRC. Petitioner further contends that pursuant to Article XII, Section 15 of the Constitution[25] and Article 2 of
Republic Act No. 6938 (RA 6938) or the Cooperative Code of the Philippines,[26] cooperatives enjoy a preferential
tax treatment which exempts their members from the application of Section 24(B)(1) of the NIRC.

Respondents Arguments

As a counter-argument, respondent invokes the legal maxim Ubi lex non distinguit nec nos distinguere
debemos (where the law does not distinguish, the courts should not distinguish). Respondent maintains that Section
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24(B)(1) of the NIRC applies to cooperatives as the phrase similar arrangements is not limited to banks, but
includes cooperatives that are depositaries of their members. Regarding the exemption relied upon by
petitioner, respondent adverts to the jurisprudential rule that tax exemptions are highly disfavored and
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. In this connection,
respondent likewise points out that the deficiency tax assessments were issued against petitioner not as a taxpayer
but as a withholding agent.

ISSUE: whether or not it is liable to pay the deficiency withholding taxes on interest from savings and time deposits
of its members for the taxable years 1999 and 2000, as well as the delinquency interest of 20% per annum.

RULING:

The petitioner Dumaguete Cathedral is not liable to pay the deficiency withholding taxes on interest
savings and time deposits of its members as well as the delingquency interest.

NIRC states that FWT of 20% is imposed upon the amount of interest on currency bank deposit and
yield or any other monetary benefit from the deposit substitutes and from trust funds and similar
arrangements for individuals under section 24B 1 and domestic ocorporations under sec 27 D1.

In this case, considering that the members deposits with the cooperatives are not currency bank
deposits nor deposit substitutes, the foregoing provisions therefore do not apply to members of
cooperatives.

Furthermore, art 2 of 6398 retained in RA 9520 , art 61 now expressly states that transactions of members with
the cooperatives are not subject to any taxes and fees including but not limited to final taxes on members deposits.

BAIER NICKEL vs CIR

Issue: whether or not respondent Baier is entitled to refund?

The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,[32] a previous case for refund of
income withheld from respondents remunerations for services rendered abroad, the Court in a Minute
Resolution dated February 17, 2003,[33]sustained the ruling of the Court of Appeals that respondent is
entitled to refund the sum withheld from her sales commission income for the year 1994. This ruling has
no bearing in the instant controversy because the subject matter thereof is the income of respondent for
the year 1994 while, the instant case deals with her income in 1995. Otherwise, stated, res judicata has no
application here.

Its elements are: (1) there must be a final judgment or order; (2) the court that rendered the judgment
must have jurisdiction over the subject matter and the parties; (3) it must be a judgment on the merits; (4)
there must be between the two cases identity of parties, of subject matter, and of causes of action. [34]

The instant case, however, did not satisfy the fourth requisite because there is no identity as to the subject
matter of the previous and present case of respondent which deals with income earned and activities
performed for different taxable years.
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These two cases have no identity:

2003 : subject matter: income of respondent for the year 1994
2006:subject matter: Income in 1995

First case: 2003 : ENTITLED TO REFUND; for the sum withheld from here sales commission income for
the year 1994.

Commissions paid for marketing services rendered abroad for a Philippine

company is considered foreign-source income. The source of the income is the
property, activity or service that produced the income. Place where services are
rendered determine taxation.

The fact that recipient of commission income is President and majority stockholder
of the Philippine company does not alter the source of income.

There are only two ways by which the President and other members of the Board
can be granted compensation apart from reasonable per diems: (1) when there is a
provision in the by-laws fixing their compensation; and (2) when the stockholders
agree to give it to them. If none of these conditions are present, commission
income cannot be automatically attributed to petitioners position in the company
(Juliane Baier-Nickel vs. CIR, GR No. 156305, Feb. 17, 2003)

SECOND CASE : 2006 : CLAIM FOR REFUND DENIED

Documents faxed to Philippine company bearing instructions as to sizes, designs

and fabrics to be used in finished products and sample sales orders relayed to
clients abroad DO NOT CONSTITUTE SUBSTANTIAL EVIDENCE to show
services were performed abroad. Said documents must show that instructions or
orders ripened into concluded or collected sales in Germany (CIR v. Baier-Nickel,
GR No. 153793, Aug 29, 2006).
Hence she failed to discharge the burden of proving that her income was from
sources outside the Philippines and exempt from the Phil. Income tax law.

SANTOS VS SERVIER PHILIPPINES

FACTS:

Petitioner Ma. Isabel T. Santos was the Human Resource Manager of respondent Servier
Philippines, Inc. since 1991 until her termination from service in 1999.
Got dismissed due to illness
Received retirement fee afterwards, however paid incomplete. Hence this case

Held:
1. Whether the benefits received by petitioner from the respondent represent her retirement
benefits under the Plan

YES because there is a prohibition against the payment of both the retirement benefits and the
separation pay provided in the retirement plan.

The general rule is that the retirement benefit and separation pay are not mutually exclusive. This means
that an employees receipt of the retirement benefit plans does nto bar him from receiving a separation
fee. However, this is not the case when the retirement plan or the CBA collective bargaining agreement
provides otherwise, as in this case. Section 2, Article XII of the Retirement Plan provides for the No
duplication of benefits.

Therefore, petitioner is entitled only to either the separation pay under the law or retirement benefits
under the Plan, and not both.

2. whether these benefits are taxable

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YES because the age and length of service requirements to be exempt to be exempt from tax are not
present. The petitioner, in this case, at the time of such retirement, was only 41 years of age; and had
been in the service for more or less eight (8) years.

Therefore, petitioners retirement benefits are taxable.

as deductions by a taxpayer in the current year when they are incurred cannot be claimed in the
succeeding year.

The accrual of income and expense is permitted when the all-events test has been met. This test
requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate
determination of such income or liability. The test does not demand that the amount of income or
liability be known absolutely, only that a taxpayer has at its disposal the information necessary to
compute the amount with reasonable accuracy.

From the nature of the claimed deductions and the span of time during which the firm was retained, ICC
can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an
excuse the delayed billing, since it could have inquired into the amount of their obligation and
reasonably determine the amount.

CIR vs Filinvest

FACTS:

Filinvest Development Corporation (FDC) extended advances in favor of its affiliates and supported the
same with instructional letters and cash and journal vouchers. The Bureau of Internal Revenue (BIR)
assessed Filinvest for deficiency income tax by unilaterally imputing an arm's length interest rate on
its advances to affiliates. Filinvest dispute this by saying that the CIR lacks the authority to impute
theoretical interest and that the rule is that interests cannot be demanded in the absence of
stipulation to that effect.

1. ISSUE: Whether or not CIR can unilaterally impute theoretical interest on the advances made
by Filinvest to its affiliates

RULING:

No. Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross
income under Section 50 of the Tax Code, the same does not include the power to impute
theoretical interests even with regard to controlled taxpayers' transactions. This is true even if the
CIR is able to prove that interest expense (on FDC's own loans) was in fact claimed by FDC.

The rule is that 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.

In this case, 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. No proof was
shown that FDCs commercial borrowings from commercial banks is the source of the advances it
extended to its affiliates.

Moreover, the witness in this case, clarified that the subject advances were sourced from the
corporation's rights offering in 1995 as well as the sale of its investment in Bonifacio Land in 1997.
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More significantly, said witness testified 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.

Hence, no factual basis for the imputation of theoretical interests on the subject advances and
assess deficiency income taxes thereon.

(2) Whether or not FDC met all the requirements for non-recognition of taxable gain under Sec. 34 (c) (2)
(now Sec. 40 (C) (2) of the NIRC and therefore, is not taxable.

(2) Yes. It was admitted in the stipulation of facts that the following are the requisites for the non-
recognition of gain or loss under sec 34 C 2

(a) the transferee is a corporation;

(b) the transferee exchanges its shares of stock for property/ies of the transferor;
(c) the transfer is made by a person, acting alone or together with others, not exceeding four persons;
and,
(d) as a result of the exchange the transferor, alone or together with others, not exceeding four, gains
control of the transferee.

In this case, there is no dispute the FDC and FLI complied with these requisites as in fact recognized by
BIR in the deed of exchange executed by the FDC and FLI and the reiteration of the same in the ruling
upon the request for clarification by the CFI.

Moreover, In this case, the exchange did not result to a decrease of the ownership of FDC in FLI rather
combining the interests of FDC and FAI result to 70.99% of FLIs outstanding shares. Since the term
"control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty-one
percent (51%) of the total voting power of classes of stocks entitled to one vote then the said
exchange clearly qualify as a tax-free transaction under paragraph 34 (c) (2) of the same provision.

Therefore, both FDC and FAI cannot be held liable for deficiency income tax on said transfer.

CIR VS. GENERAL FOODS

Was the media advertising expense for Tang paid or incurred by respondent corporation
for the fiscal year ending February 28, 1985 necessary and ordinary, hence, fully
deductible under the NIRC? Or was it a capital expenditure, paid in order to create
goodwill and reputation for respondent corporation and/or its products, which should
have been amortized over a reasonable period?

Held:
The advertisement expense was necessary but not ordinary because it failed to
meet the conditions set by the US jurisprudence, to wit as follows:

1. reasonableness of the amount incurred and

2. the amount incurred must not be a capital outlay to create goodwill for the
product and/or private respondents business.
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As to the first requisite, theres no clear cut to reasonableness, but the type of business,
the amount of earnings, the nature of the expenditures and the intention of the taxpayer
and the general economic condition may yield to proper in evaluation.
In this case, the amount P9,461,246 of the subject expense is unreasonable because it is
double the general and administrative expense of the taxpayer and almost half of its total
marketing expense. The amount is inordinately large for the advertisement of the single
product.

As to the second requisite, Respondent corporation incurred the subject advertising expense
in order to protect its brand franchise. We consider this as a capital outlay since it created
goodwill for its business and/or product.

Advertising is generally of two kinds:

(1) advertising to stimulate the current sale of merchandise or use of services and
(2) advertising designed to stimulate the future sale of merchandise or use of services.

The second type involves expenditures incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayers trade or business and should be spread out over a
reasonable period of time.

In this case, the advertising of the petitioner is under the second kind because the subject
media expense was incurred in order to protect respondent corporations brand franchise, which
is analogous to the maintenance of goodwill or title to ones property. This is a capital
expenditure which should be spread out over a reasonable period of time.[9]