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G.R. Nos.

L-44501-05 July 19, 1990

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, respondents.

Quasha, Asperilla, Ancheta, Valmonte, Peña & Marcos for petitioners.

NARVASA, J.:

Sought to be overturned in these appeals is the judgment of the Court of Appeals, 1 which affirmed the decision of the Court of First Instance of Zambales at
Olongapo City convicting the petitioners "of violation of Section 45 (a) (1) (b) of the National Internal Revenue Code, as amended, by not filing their respective
income tax returns for the year 1969" and sentencing "each of them to pay a fine of Two Thousand (P2,000.00) Pesos, with subsidiary imprisonment in case of
insolvency, and to pay the costs proportionately.2

The petitioners have adopted the factual findings of the Court of Appeals, 3 viz.:

1. JOHN L. GARRISON "was born in the Philippines and . . . lived in this country since birth up to
1945, when he was repatriated and returned to the United States. He stayed in the United States for
the following twenty years until May 5, 1965, when he entered the Philippines through the Clark Air
Base. The said accused lived in the Philippines since his return on May 6, 1965. 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."

2. JAMES W. ROBERTSON "was born on December 22, 1915 in Olongapo, Zambales and he grew
up in this country. He and his family were repatriated to the United States in 1945. They stayed in
Long Beach, California until the latter part of 1946 or the early part of 1947, when he was re-
assigned overseas, particularly to the Pacific area with home base in Guam. 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 Elicaño, Street, East Bajac-Bajac, Olongapo City, and his house and lot
are declared in his name for tax purposes."

3. FRANK W. ROBERTSON "was born in the Philippines and he lived in this country up to 1945,
when he was repatriated to the United States along with his brother, his co-accused James W.
Robertson. He stayed in the United States for about one year, during which time he resided in
Magnolia Avenue, Long Beach, California. Sometime in 1946 or early 1947, he was assigned to
work in the Pacific Area, particularly Hawaii. At that time 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."

4. ROBERT H. CATHEY was born in Tennessee, United States, on April 8, 1917; 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 came back to the
Philippines in 1951. He stayed in the Philippines since 1951 up to the present."

5. FELICITAS DE GUZMAN "was born in the Philippines in 1935 and her father was a naturalized
American citizen. While she was studying at the University of Sto. Tomas, Manila, she was recruited
to work in the United States Naval Base, Subic Bay, Philippines. Afterwards, she left the Philippines
to work in the United States Naval Base, Honolulu, Hawaii, and she returned to the Philippines on or
about April 21, 1967. The said accused has not left the Philippines since then. 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."

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

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. For
the year 1969 John L. Garrison earned $15,288.00; Frank Robertson, $12,045.84; Robert H. Cathey, $9,855.20;
James W. Robertson, $14,985.54; Felicitas de Guzman, $ 8,502.40; and Edward McGurk $12,407.99 . . .

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, 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. The accused also 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."

The petitioners contend that given these facts, they may not under the law be deemed resident aliens required to file
income tax returns. Hence, they argue, it was error for the Court of Appeals —

1) to consider their "physical or bodily presence" in the country as "sufficient by itself to qualify . . (them) as resident
aliens despite the fact that they were not 'residents' of the Philippines immediately before their employment by the
U.S. Government at Subic Naval Base and their presence here during the period concerned was dictated by their
respective work as employees of the United States Naval Base in the Philippines," and

2) to refuse to recognize their "tax-exempt status . . under the pertinent provisions of the RP-US Military Bases
Agreement."

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 . . .

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.

The petitioners claim that they are covered by this exempting provision of the Bases Agreement since, as is
admitted on all sides, they are all U.S. nationals, all employed in the American Naval Base at Subic Bay (involved in
some way or other in "construction, maintenance, operation or defense" thereof), and receive salary therefrom
exclusively and from no other source in the Philippines; and it is their intention, as is shown by the unrebutted
evidence, to return to the United States on termination of their employment.

That claim had been rejected by the Court of Appeals with the terse statement that the Bases Agreement "speaks of
exemption from the payment of income tax, not from the filing of the income tax returns . ." 5

To be sure, the Bases Agreement very plainly Identifies the persons NOT "liable to pay income tax in the Philippines
except in regard to income derived from Philippine sources or sources other than the US sources." They are the
persons in whom concur the following requisites, to wit:

1) nationals of the United States serving in or employed in the Philippines;

2) their service or employment is "in connection with construction, maintenance, operation or defense of the bases;"

3) they reside in the Philippines by reason only of such employment; and

4) their income is derived exclusively from "U.S. sources."

Now, there is no question (1) that the petitioners are U.S. nationals serving or employed in the Philippines; (2) that
their employment is "in connection with construction, maintenance, operation or defense" of a base, Subic Bay
Naval Base; (3) they reside in the Philippines by reason only of such employment since, as is undisputed, they all
intend to depart from the country on termination of their employment; and (4) they earn no income from Philippine
sources or sources other than the U.S. sources. Therefore, by the explicit terms of the Bases Agreement, none of
them "shall be liable to pay income tax in the Philippines . . ." Indeed, the petitioners' claim for exemption pursuant
to this Agreement had been sustained by the Court of Tax Appeals which set aside and cancelled the assessments
made against said petitioners by the BIR for deficiency income taxes for the taxable years 1969-1972. 6 The
decision of the Court of Tax Appeals to this effect was contested in this Court by the Commissioner of Internal
Revenue, 7 but the same was nonetheless affirmed on August 12, 1986. 8

But even if exempt from paying income tax, said petitioners were, it is contended by the respondents, not excused
from filing income tax returns. For the Internal Revenue Code (Sec. 45, supra) requires the filing of an income tax
return also by any "alien residing in the Philippines, regardless of whether the gross income was derived from
sources within or outside the Philippines;" and since the petitioners, although aliens residing within the Philippines,
had failed to do so, they had been properly prosecuted and convicted for having thus violated the Code.

"What the law requires," states the challenged judgment of the Court of Appeals, "is merely physical or bodily
presence in a given place for a period of time, not the intention to make it a permanent place of abode. It is on this
proposition, taken in the light of the established facts on record to the effect that almost all of the appellants were
born here, repatriated to the US and to come back, in the latest in 1967, and to stay in the Philippines up to the
present time, that makes appellants resident aliens not merely transients or sojourners which residence for quite a
long period of time, coupled with the amount and source of income within the Philippines, renders immaterial, for
purposes of filing the income tax returns as contra-distinguished from the payment of income tax, their intention to
go back to the United States."

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 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 11 —

. . . after having expressly recognized that petitioners need not pay income tax here, 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. The more practical
view, taking into account policy considerations that prompted the Government of the Republic of the
Philippines to exempt the petitioners, as well as other American citizens similarly situated, from the
payment of income tax here, is to recognize the lesser act of filing within the exemption granted. This
is simply being consistent with the reason behind the grant of tax-exempt status to petitioners.

Pointing out further to what they consider "the administrative implementation of that (tax-exemption)
provision (of the Bases Agreement) by both governments for about 22 years (which did not require the filing
of income tax returns by American citizen-employees holding 9-A special visas like petitioners), and to "the
higher plane of political realities which prompted the Philippine Government to partially surrender its inherent
right to tax," petitioners submit that "the particular problem involved in these cases is a matter that has to
find solution and ought to be dealt with in conference tables rather than before the court of law. " 12

Quite apart from the evidently distinct and different character of the requirement to pay income tax in contrast to the
requirement to file a tax return, it appears that the exemption granted to the petitioners by the Bases Agreement
from payment of income tax is not absolute. 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." Obviously, with respect to the latter form of income, i.e., that obtained or
proceeding from "Philippine sources or sources other than the US sources," the petitioners, and all other American
nationals who are residents of the Philippines, are legally bound to pay tax thereon. In other words, 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.

These considerations impel affirmance of the judgments of the Court of Appeals and the Trial Court.

WHEREFORE, the petition for review on certiorari is DENIED, and the challenged decision of the Court of Appeals
is AFFIRMED. Costs against petitioners.

SO ORDERED.
G.R. No. 112675 January 25, 1999

AFISCO INSURANCE CORPORATION, petitioner,


vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMISSIONER OF INTERNAL REVENUE, respondent.

PANGANIBAN, J.:

Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a "pool" in order to
facilitate the handling of business contracted with a nonresident foreign insurance company. May the "clearing
house" or "insurance pool" so formed be deemed a partnership or an association that is taxable as a corporation
under the National Internal Revenue Code (NIRC)? Should the pool's remittances to the member companies and to
the said foreign firm be taxable as dividends? Under the facts of this case, has the goverment's right to assess and
collect said tax prescribed?

The Case

These are the main questions raised in the Petition for Review on Certiorari before us, assailing the October 11,
1993 Decision 1 of the Court of Appeals 2 in CA-GR SP 25902, which dismissed petitioners'
appeal of the October 19, 1992 Decision 3 of the Court of Tax Appeals 4 (CTA) which had previously
sustained petitioners' liability for deficiency income tax, interest and withholding tax. The Court of Appeals ruled:

WHEREFORE, the petition is DISMISSED, with costs against petitioner 5

The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution 6 denying reconsideration.
The Facts

The antecedent facts, 7 as found by the Court of Appeals, are as follows:


The 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 [p]ool. 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.

On January 27, 1986, 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
with [h]olding tax, itemized as follows:

Net income per information return P3,737,370.00

===========
Income tax due thereon P1,298,080.00

Add: 14% Int. fr. 4/15/76

to 4/15/79 545,193.60

——————

TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE

Dividend paid to Munich

Reinsurance Company P3,728,412.00

——————

35% withholding tax at

source due thereon P1,304,944.20

Add: 25% surcharge 326,236.05

14% interest from

1/25/76 to 1/25/79 137,019.14

Compromise penalty-

non-filing of return 300.00

late payment 300.00

——————

TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========

Dividend paid to Pool Members P655,636.00

===========

10% withholding tax at

source due thereon P65,563.60

Add: 25% surcharge 16,390.90

14% interest from

1/25/76 to 1/25/79 6,884.18

Compromise penalty-
non-filing of return 300.00

late payment 300.00

——————

TOTAL AMOUNT DUE & P89,438.68

COLLECTIBLE =========== 8

The CA ruled in the main that the pool of machinery insurers was a partnership taxable as
a corporation, and that the latter's collection of premiums on behalf of its members, the
ceding companies, was taxable income. It added that prescription did not bar the Bureau
of Internal Revenue (BIR) from collecting the taxes due, because "the taxpayer cannot be
located at the address given in the information return filed." Hence, this Petition for Review
before us. 9
The Issues

Before this Court, petitioners raise the following 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. 10

The Court's Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a
corporation, and that the government's right to assess and collect the taxes had not prescribed.

First Issue:

Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals 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. 11 Hence, the pool did not act or earn income as a
reinsurer. 12 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." 13
Petitioners belie the existence of a partnership in this case, because (1) they, the
reinsurers, did not share the same risk or solidary liability, 14 (2) there was no common fund; 15 (3) the
executive board of the pool did not exercise control and
management of its funds, unlike the board of directors of a
corporation; 16 and (4) the pool or clearing house "was not and could
not possibly have engaged in the business of reinsurance from
which it could have derived income for itself." 17
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, 18 particularly in this case
where the findings and conclusions of the internal revenue commissioner were
subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of
reviewing tax cases, and the Court of Appeals. 19 Indeed,
[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-
judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of its authority. 20

This Court rules that the Court of Appeals, in affirming the CTA which had previously
sustained the internal revenue commissioner, committed no reversible error. Section 24 of
the NIRC, as worded in the year ending 1975, provides:
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 (compañias colectivas), general
professional partnerships, private educational institutions, and building and loan associations . . . .

Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such
as unregistered partnerships and associations. Parenthetically, the NIRC's inclusion of such entities in the tax on
corporations was made even clearer by the tax Reform Act of 1997, 21 which amended the Tax Code.
Pertinent provisions of the new law read as follows:
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 . . . .

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.

xxx xxx xxx

Thus, the Court in Evangelista v. Collector of Internal Revenue 22


held that Section 24 covered these
unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members. 23 The Court of Appeals astutely
applied Evangelista. 24
. . . Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v.
Collector of Internal Revenue, supra. The Supreme Court said:

The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. *** (8 Merten's Law of Federal Income Taxation,
p. 562 Note 63)

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." 25 Its requisites are: "(1) mutual contribution to a common stock, and (2) a
26
joint interest in the profits." In other words, a partnership is formed when persons
contract "to devote to a common purpose either money, property, or labor with the
intention of dividing the profits between
themselves." Meanwhile, an association implies associates who enter into a "joint
27

enterprise . . . for the transaction of business." 28

In the case before us, the ceding companies entered into a Pool Agreement 29 or an
association 30 that would handle all the insurance businesses covered under their quota-
share reinsurance treaty 31 and surplus reinsurance treaty with Munich. The following
32

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
This common fund pays for the administration and
of the pool. 33
operation expenses of the pool. 24
(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. 35

(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. As aptly
found by the CTA:
. . . The fact that the pool does not retain any profit or income does not obliterate an antecedent fact,
that of the pool being used in the transaction of business for profit. It is apparent, and petitioners
admit, that their association or coaction was indispensable [to] the transaction of the business, . . . If
together they have conducted business, profit must have been the object as, indeed, profit was
earned. Though the profit was apportioned among the members, this is only a matter of
consequence, as it implies that profit actually resulted. 37

The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the facts


obtaining therein are not on all fours with the present case. In Pascual, there was no
unregistered partnership, but merely a co-ownership which took up only two isolated
transactions. The Court of Appeals did not err in applying Evangelista, which involved a
39

partnership that engaged in a series of transactions spanning more than ten years, as in
the case before us.
Second Issue:

Pool's Remittances are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not dividends
subject to tax. They insist that 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" 40 Moreover, petitioners
41
They add
argue that since Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot be deemed dividends.

that even if such remittances were treated as dividends, they would have been exempt
under the previously mentioned sections of the 1977 NIRC, 42 as well as Article 7 of
paragraph 1 43 and Article 5 of paragraph 5 44 of the RP-West German Tax Treaty. 45

Petitioners are clutching at straws. 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" 46 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. Clearly,
there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, "exemptions
therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or
right." 47 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.
Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the exemptions
claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any company that has already paid
the tax . . ." This 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.

On the other hand, Section 24 (b) (1) 48


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. Although not a signatory to the Pool Agreement, Munich is
patently an associate of the ceding companies in the entity formed, pursuant to their
reinsurance treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies; Munich shared in their income and loss. This is manifest
from a reading of Article 3 49 and 10 50 of the Quota-Share Reinsurance treaty and Articles 3 51 and 10 52 of the Surplus
Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the
doctrine that a tax exemption must be construed strictissimi juris, and the statutory
exemption claimed must be expressed in a language too plain to be mistaken. 53

Finally the petitioners' claim that Munich is tax-exempt based on 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. 54 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. 55
Third Issue:

Prescription

Petitioners also argue that the government's right to assess and collect the subject tax had prescribed. They claim
that the subject information return was filed by the pool on April 14, 1976. On the basis of this return, the BIR
telephoned petitioners on November 11, 1981, to give them notice of its letter of assessment dated March 27, 1981.
Thus, the petitioners contend that the five-year statute of limitations then provided in the NIRC had already lapsed,
and that the internal revenue commissioner was already barred by prescription from making an assessment. 56

We cannot sustain the petitioners. The CA and the CTA categorically found that the
prescriptive period was tolled under then Section 333 of the NIRC, 57 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." 58 Indeed, whether the
government's right to collect and assess the tax has prescribed involves facts which have
been ruled upon by the lower courts. It is axiomatic that in the absence of a clear showing
of palpable error or grave abuse of discretion, as in this case, this Court must not overturn
the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their 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." The Court finds that this falls short of the requirement of Section 333 of the NIRC for the suspension of
the prescriptive period. The law clearly states that the said period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address."

WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated October 11, 1993 and
November 15, 1993 are hereby AFFIRMED. Cost against petitioners. 1âwphi 1.nêt

SO ORDERED.
G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,


vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28, 1966,
they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners
in 1968 toMarenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda
Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount
of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding capital
gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were
assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the
years 1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax
amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable
as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of
the National Internal Revenue Code 1 that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is subject to individual income tax; and that
the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual
income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In
due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision and action taken
by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact formed
by petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the
partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of
this case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for
the conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income
tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT


COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF
OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT


AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID
DOWN BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND
THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13,
Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their own personal funds
they used in buying several real properties. They appointed their brother to manage their properties with full power
to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for several
years and they gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded the
payment of income tax on a corporation, among others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code,
as well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to
the tax on corporations, the issue hinges on the meaning of the terms corporation and partnership as
used in sections 24 and 84 of said Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding 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-partnerships (companies collectives), a tax
upon such income equal to the sum of the following: ...

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participation), associations or insurance companies, but
does not include duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership 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.

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the
issue narrows down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate for
P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number
of lots (24) acquired and transcations undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was
not limited to the conservation and preservation of the aforementioned common fund or even of the
property acquired by petitioners in February, 1943. In other words, one cannot but perceive a
character of habituality peculiar to business transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being
so let, for petitioners do not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign
letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said
properties have been handled as if the same belonged to a corporation or business enterprise
operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Evangelists became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the
set up already adverted to, or on the causes for its continued existence. They did not even try to
offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point. 5

In the present case, 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. Respondent
commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that
petitioners purchased certain parcels of land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by
them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The
remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality
peculiar to business transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances
are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code lays down the
rule for determining when a transaction should be 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-owners
or co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived;

From the above it appears that the fact that those who agree to form a co- ownership share or do not
share any profits made by the use of the property held in common does not convert their venture into
a partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or
not the persons sharing therein have a joint or common right or interest in the property. This only
means that, aside from the circumstance of profit, the presence of other elements constituting
partnership is necessary, such as the clear intent to form a partnership, the existence of a juridical
personality different from that of the individual partners, and the freedom to transfer or assign any
interest in the property by one with the consent of the others (Padilla, Civil Code of the Philippines
Annotated, Vol. I, 1953 ed., pp. 635-636)

It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to their
respective contribution, are not thereby rendered partners. They have no common stock or capital,
and no community of interest as principal proprietors in the business itself which the proceeds
derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are
only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding
as tenants in common, and to divide the profits of disposing of it, the brother and the other not being
entitled to share in plaintiffs commission, no partnership existed as between the three parties,
whatever their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233
Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b)
generally participating in both profits and losses; (c) and such a community of interest, as far as third
persons are concerned as enables each party to make contract, manage the business, and dispose
of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners, though
they may use it for the purpose of making gains; and they may, without becoming partners, agree
among themselves as to the management, and use of such property and the application of the
proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

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.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to
support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby
they purchased properties and sold the same a few years thereafter did not thereby make them partners. They
shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax
amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership
which is thereby liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have been formed,
since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held
liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this
unpaid obligation of the partnership p. 7 However, as petitioners have availed of the benefits of tax amnesty as
individual taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March
30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the
corporate income tax liability in this case, without pronouncement as to costs.

SO ORDERED.
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and
sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had acquired from
their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963 square meters
located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to
build their residences. The company sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo).
Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation
and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit of P134,341.88 or
P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue required
the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares
thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest,
or a total of P71,074.56.

Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a mere
capital gain of which ½ is taxable) and required them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud
surcharge and the accumulated interest.

Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336,
in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the
meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the
instant appeal.

We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code simply
because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the
dictum that the power to tax involves the power to destroy. That eventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners
would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by
reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences
on the lots 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. Castan Tobeñas says:

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad presupone
necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente sin ela; y por razon
del fin objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es solo mantener
en su integridad la cosa comun y favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro Derecho
positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y contrato de
sociedad, la moderna orientacion de la doctrina cientifica señala como nota fundamental de diferenciacion aparte
del origen de fuente de que surgen, no siempre uniforme, la finalidad perseguida por los interesados: lucro comun
partible en la sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part
1, 10 Ed., 1971, 328- 329).

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not
the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must
be an unmistakable intention to form a partnership or joint venture.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small amounts to purchase a two-peso sweepstakes ticket with the
agreement that they would divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an unregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oña vs.

** This view is supported by the following rulings of respondent Commissioner:

Co-owership distinguished from partnership.—We find that the case at bar is fundamentally similar to the De Leon case.
Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-indiviso from their deceased
parents; they did not contribute or invest additional ' capital to increase or expand the inherited properties; they
merely continued dedicating the property to the use to which it had been put by their forebears; they individually
reported in their tax returns their corresponding shares in the income and expenses of the 'hacienda', and they
continued for many years the status of co-ownership in order, as conceded by respondent, 'to preserve its (the
'hacienda') value and to continue the existing contractual relations with the Central Azucarera de Bais for milling
purposes. Longa vs. Aranas, CTA Case No. 653, July 31, 1963).

All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own properties which produce income
should not automatically be considered partners of an unregistered partnership, or a corporation, within the
purview of the income tax law. To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an
income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax
on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Arañas, 1977 Tax Code
Annotated, Vol. 1, 1979 Ed., pp. 77-78).

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the co-heirs used
the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was held that they were
taxable as an unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son purchased a lot and
building, entrusted the administration of the building to an administrator and divided equally the net income, and from Evangelista
vs. Collector of Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property which they
leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had formed an unregistered
partnership.

In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the petitioners
and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.

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

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

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding that petitioners have constituted an
unregistered partnership and are, therefore, subject to the payment of the deficiency corporate income taxes assessed against them by respondent Commissioner
of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958, subject to
the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the costs of the suit,1 as well as the
resolution of said court denying petitioners' motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and
her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila
for the settlement of her estate. Later, Lorenzo T. Oña the surviving spouse was appointed
administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the
administrator submitted the project of partition, which was approved by the Court on May 16, 1949
(See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed
Oña, were still minors when the project of partition was approved, Lorenzo T. Oña, their father and
administrator of the estate, filed a petition in Civil Case No. 9637 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 aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) 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 (t.s.n., p. 46). Of the ten parcels of land aforementioned, two
were acquired after the death of the decedent with money borrowed from the Philippine Trust
Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).

The project of partition also shows that the estate shares equally with Lorenzo T. Oña, the
administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter with
the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).

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. Oña 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 as can be gleaned from the following year-end balances:

Year Investment Land Building

Account Account Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83


1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

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 (see p. 3 of
Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of account
kept by Lorenzo T. Oña 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 (Exhibit
3, supra; t.s.n., pp. 25-26). However, petitioners did not actually receive their shares in the yearly
income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always left in the hands of Lorenzo T. Oña
who, as heretofore pointed out, invested them in real properties and securities. (See Exhibit 3, t.s.n.,
pp. 50, 102-104).

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. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
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 (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).

The original assessment was as follows:

1955

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00


25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00


25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of
the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so
that the questioned assessment refers solely to the income tax proper for the years 1955 and 1956
and the "Compromise for non-filing," the latter item obviously referring to the compromise in lieu of
the criminal liability for failure of petitioners to file the corporate income tax returns for said years.
(See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-
OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM
TRANSACTIONS THEREFROM (sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED


PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY
INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE LOANS
RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT


OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE
PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE
DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court of
Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from the deceased
Julia Buñales 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? (2)
Assuming they have formed an unregistered partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common and the loans granted to them upon
the security of the said properties, with the result that as far as their respective shares in the inheritance are
concerned, the total income thereof should be considered as that of co-owners and not of the unregistered
partnership? And (3) assuming again that they are taxable as an unregistered partnership, should not the various
amounts already paid by them for the same years 1955 and 1956 as individual income taxes on their respective
shares of the profits accruing from the properties they owned in common be deducted from the deficiency corporate
taxes, herein involved, assessed against such unregistered partnership by the respondent Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in
interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as early
as May 16, 1949, and presumably petitioners have been holding their respective shares in their inheritance since
those dates admittedly under the administration or management of the head of the family, the widower and father
Lorenzo T. Oña, the assessment in question refers to the later years 1955 and 1956. We believe this point to be
important because, apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he considered
them as having formed an unregistered partnership. At least, there is nothing in the record indicating that an earlier
assessment had already been made. Such being the case, and We see no reason how it could be otherwise, it is
easily understandable why petitioners' position that they are co-owners and not unregistered co-partners, for the
purposes of the impugned assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the fact that
they were not similarly assessed earlier by the Bureau of Internal Revenue.

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. Oña 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. And all these became possible because, admittedly, petitioners never actually received any share of the
income or profits from Lorenzo T. Oña and instead, they allowed him to continue using said shares as part of the
common fund for their ventures, even as they paid the corresponding income taxes on the basis of their respective
shares of the profits of their common business as reported by the said Lorenzo T. Oña.

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. Oña, 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 Our 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. Oña 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 tantamonut 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.

It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners
rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the
partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs,
obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow that such
status as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is
easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding
said shares under the common management of the administrator or executor or of anyone chosen by them and
engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any
inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the appellants
therein to be unregistered co-partners for tax purposes, that their common fund "was not something they found
already in existence" and that "it was not a property inherited by them pro indiviso," but it is certainly far fetched to
argue therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already indicated, for tax purposes, the co-ownership of
inherited properties is automatically converted into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the
heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly
executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding.
The reason for this is simple. 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. This is exactly what happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The sharing
of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived," and, for that matter, on any other
provision of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated the
concept of partnerships under the Civil Code from that of unregistered partnerships which are considered as
"corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto
Concepcion, now Chief Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships," which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in confirmity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes
of the tax on corporation. Again, pursuant to said section 84(b),the term "corporation" includes,
among others, "joint accounts,(cuentas en participacion)" and "associations", none of which has a
legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of the partnerships therein
referred to. In fact, as above stated, "duly registered general co-partnerships" — which are
possessed of the aforementioned personality — have been expressly excluded by law (sections 24
and 84[b]) from the connotation of the term "corporation." ....

xxx xxx xxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term "partnership" it includes
not only a partnership as known in common law but, as well, a syndicate, group,
pool, joint venture, or other unincorporated organization which carries on any
business, financial operation, or venture, and which is not, within the meaning of the
Code, a trust, estate, or a corporation. ... . (7A Merten's Law of Federal Income
Taxation, p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. ... . (8 Merten's Law of Federal Income Taxation,
p. 562 Note 63; emphasis ours.)

For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject to the income tax for corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-
24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by
appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes
in question, of their inherited properties from those acquired by them subsequently, We consider as justified the
following ratiocination of the Tax Court in denying their motion for reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered partnership, the
holding should be limited to the business engaged in apart from the properties inherited by
petitioners. In other words, the taxable income of the partnership should be limited to the income
derived from the acquisition and sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is admitted that the inherited properties
and the income derived therefrom were used in the business of buying and selling other real
properties and corporate securities. Accordingly, the partnership income must include not only the
income derived from the purchase and sale of other properties but also the income of the inherited
properties.

Besides, as already observed earlier, the income derived from inherited properties may be considered as individual
income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but
the moment their respective known shares are used as part of the common assets of the heirs to be used in making
profits, it is but proper that the income of such shares should be considered as the part of the taxable income of an
unregistered partnership. This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court. Pertinently,
the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court that the herein
petitioners have formed an unregistered partnership and, therefore, have to be taxed
as such, it might be recalled that the petitioners in their individual income tax returns
reported their shares of the profits of the unregistered partnership. We think it only
fair and equitable that the various amounts paid by the individual petitioners as
income tax on their respective shares of the unregistered partnership should be
deducted from the deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner in Support of Their
Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the partnership must be
reduced by the amounts of income tax paid by each petitioner on his share of partnership profits.
This is not correct; rather, it should be the other way around. The partnership profits distributable to
the partners (petitioners herein) should be reduced by the amounts of income tax assessed against
the partnership. Consequently, each of the petitioners in his individual capacity overpaid his income
tax for the years in question, but the income tax due from the partnership has been correctly
assessed. Since the individual income tax liabilities of petitioners are not in issue in this proceeding,
it is not proper for the Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as
individual income tax cannot be credited as part payment of the taxes herein in question. It is argued that to sanction
the view of the Tax Court is to oblige petitioners to pay double income tax on the same income, and, worse,
considering the time that has lapsed since they paid their individual income taxes, they may already be barred by
prescription from recovering their overpayments in a separate action. We do not agree. As We see it, the case of
petitioners as regards the point under discussion is simply that of a taxpayer who has paid the wrong tax, assuming
that the failure to pay the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to
be reimbursed what he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery of the excess income
taxes in the case of herein petitioners has already lapsed, it would not seem right to virtually disregard prescription
merely upon the ground that the reason for the delay is precisely because the taxpayers failed to make the proper
return and payment of the corporate taxes legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above suspicion in their conduct vis-a-vis their tax
obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with costs
against petitioners.
EN BANC

G.R. No. L-12287 August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,


vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy Collector of
Internal Revenue, defendants-appellees.

Gregorio Araneta for appellants.


Assistant Attorney Round for appellees.

MALCOLM, J.:

This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to the Civil
Code, a law of Spanish origin.

STATEMENT OF THE CASE.

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. The general question had in the meantime been submitted to the Attorney-General of the
Philippine Islands who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue officers
being still unsatisfied, the correspondence together with this opinion was forwarded to Washington for a decision by
the United States Treasury Department. The United States Commissioner of Internal Revenue reversed the opinion
of the Attorney-General, and thus decided against the claim of Madrigal.

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 from the
plaintiff, Vicente Madrigal, under the provisions of the Act of Congress known as the Income Tax Law. The burden
of the complaint was that if the income tax for the year 1914 had been correctly and lawfully computed there would
have been due payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of a total of
P5,842.18 instead of P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the
result that plaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due
and payable.

The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the stipulation,
sets forth the basis of defendants' stand in the following way: The income of Vicente Madrigal and his wife Susana
Paterno of the year 1914 was made up of three items: (1) P362,407.67, the profits made by Vicente Madrigal in his
coal and shipping business; (2) P4,086.50, the profits made by Susana Paterno in her embroidery business; (3)
P16,687.80, the profits made by Vicente Madrigal in a pawnshop company. The sum of these three items is
P383,181.97, the gross income of Vicente Madrigal and Susana Paterno for the year 1914. General deductions
were claimed and allowed in the sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of
assessing the normal tax of one per cent on the net income there were allowed as specific deductions the following:
(1) P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the specific exemption granted to
Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sum upon which the
normal tax of one per cent was assessed. The normal tax thus arrived at was P2,716.15.

The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the Income Tax
Law. The trial court in an exhausted decision found in favor of defendants, without costs.
ISSUES.

The contentions of plaintiffs and appellants having to do solely with the additional income tax, is that is should be
divided into two equal parts, because of the conjugal partnership existing between them. The learned argument of
counsel is mostly based upon the provisions of the Civil Code establishing the sociedad de gananciales. The
counter contentions of appellees are that the taxes imposed by the Income Tax Law are as the name implies taxes
upon income tax and not upon capital and property; that the fact that Madrigal was a married man, and his marriage
contracted under the provisions governing the conjugal partnership, has no bearing on income considered as
income, and that the distinction must be drawn between the ordinary form of commercial partnership and the
conjugal partnership of spouses resulting from the relation of marriage.

DECISION.

From the point of view of test of faculty in taxation, no less than five answers have been given the course of history.
The final stage has been the selection of income as the norm of taxation. (See Seligman, "The Income Tax,"
Introduction.) The Income Tax Law of the United States, extended to the Philippine Islands, is the result of an effect
on the part of the legislators to put into statutory form this canon of taxation and of social reform. The aim has been
to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation, which places the burden
on those best able to pay. To carry out this idea, public considerations have demanded an exemption roughly
equivalent to the minimum of subsistence. With these exceptions, the income tax is supposed to reach the earnings
of the entire non-governmental property of the country. Such is the background of the Income Tax Law.

Income as contrasted with capital or 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 an income. Capital is wealth, while income is the service of
wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in
the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the
fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a
tax on property. "Income," as here used, can be defined as "profits or gains." (London County Council vs. Attorney-
General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See
further Foster's Income Tax, second edition [1915], Chapter IV; Black on Income Taxes, second edition [1915],
Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and Towne vs. Eisner, decided by the United States
Supreme Court, January 7, 1918.)

A regulation of the United States Treasury Department relative to returns by the husband and wife not living apart,
contains the following:

The husband, as the head and legal representative of the household and general custodian of its income, should
make and render the return of the aggregate income of himself and wife, and for the purpose of levying the income
tax it is assumed that he can ascertain the total amount of said income. If a wife has a separate estate managed by
herself as her own separate property, and receives an income of more than $3,000, she may make return of her
own income, and if the husband has other net income, making the aggregate of both incomes more than $4,000, the
wife's return should be attached to the return of her husband, or his income should be included in her return, in
order that a deduction of $4,000 may be made from the aggregate of both incomes. The tax in such case, however,
will be imposed only upon so much of the aggregate income of both shall exceed $4,000. If either husband or wife
separately has an income equal to or in excess of $3,000, a return of annual net income is required under the law,
and such return must include the income of both, and in such case the return must be made even though the
combined income of both be less than $4,000. If the aggregate net income of both exceeds $4,000, an annual return
of their combined incomes must be made in the manner stated, although neither one separately has an income of
$3,000 per annum. They are jointly and separately liable for such return and for the payment of the tax. The single
or married status of the person claiming the specific exemption shall be determined as one of the time of claiming
such exemption which return is made, otherwise the status at the close of the year."

With these general observations relative to the Income Tax Law in force in the Philippine Islands, we turn for a
moment to consider the provisions of the Civil Code dealing with the conjugal partnership. Recently in two elaborate
decisions in which a long line of Spanish authorities were cited, this court in speaking of the conjugal partnership,
decided that "prior to the liquidation the interest of the wife and in case of her death, of her heirs, is an interest
inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen into title
until there appears that there are assets in the community as a result of the liquidation and settlement." (Nable
Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)

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. The husband and wife are only entitled to the exemption of P8,000 specifically granted by the law. The
higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by
reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the
Income Tax Law. The aims and purposes of the Income Tax Law must be given effect.

The point we are discussing has heretofore been considered by the Attorney-General of the Philippine Islands and
the United States Treasury Department. The decision of the latter overruling the opinion of the Attorney-General is
as follows:

TREASURY DEPARTMENT, Washington.

Income Tax.

FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.

SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of correspondence "from the
Philippine authorities relative to the method of submission of income tax returns by marred person."

You advise that "The Governor-General, in forwarding the papers to the Bureau, advises that the Insular
Auditor has been authorized to suspend action on the warrants in question until an authoritative decision on
the points raised can be secured from the Treasury Department."

From the correspondence it appears that Gregorio Araneta, married and living with his wife, had an income
of an amount sufficient to require the imposition of the net income was properly computed and then both
income and deductions and the specific exemption were divided in half and two returns made, one return for
each half in the names respectively of the husband and wife, so that under the returns as filed there would
be an escape from the additional tax; that Araneta claims the returns are correct on the ground under the
Philippine law his wife is entitled to half of his earnings; that Araneta has dominion over the income and
under the Philippine law, the right to determine its use and disposition; that in this case the wife has no
"separate estate" within the contemplation of the Act of October 3, 1913, levying an income tax.

It appears further from the correspondence that upon the foregoing explanation, tax was assessed against
the entire net income against Gregorio Araneta; that the tax was paid and an application for refund made,
and that the application for refund was rejected, whereupon the matter was submitted to the Attorney-
General of the Islands who holds that the returns were correctly rendered, and that the refund should be
allowed; and thereupon the question at issue is submitted through the Governor-General of the Islands and
Bureau of Insular Affairs for the advisory opinion of this office.

By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be administered as in
the United States but by the appropriate internal-revenue officers of the Philippine Government. You are
therefore advised that upon the facts as stated, this office holds that for the Federal Income Tax (Act of
October 3, 1913), the entire net income in this case was taxable to Gregorio Araneta, both for the normal
and additional tax, and that the application for refund was properly rejected.
The separate estate of a married woman within the contemplation of the Income Tax Law is that which
belongs to her solely and separate and apart from her husband, and over which her husband has no right in
equity. It may consist of lands or chattels.

The statute and the regulations promulgated in accordance therewith provide that each person of lawful age
(not excused from so doing) having a net income of $3,000 or over for the taxable year shall make a return
showing the facts; that from the net income so shown there shall be deducted $3,000 where the person
making the return is a single person, or married and not living with consort, and $1,000 additional where the
person making the return is married and living with consort; but that where the husband and wife both make
returns (they living together), the amount of deduction from the aggregate of their several incomes shall not
exceed $4,000.

The only occasion for a wife making a return is where she has income from a sole and separate estate in
excess of $3,000, but together they have an income in excess of $4,000, in which the latter event either the
husband or wife may make the return but not both. In all instances the income of husband and wife whether
from separate estates or not, is taken as a whole for the purpose of the normal tax. Where the wife has
income from a separate estate makes return made by her husband, while the incomes are added together
for the purpose of the normal tax they are taken separately for the purpose of the additional tax. In this case,
however, the wife has no separate income within the contemplation of the Income Tax Law.

Respectfully,

DAVID A. GATES.
Acting Commissioner.

In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax Law was drafted
by the Congress of the United States and has been by the Congress extended to the Philippine Islands. Being thus
a law of American origin and being peculiarly intricate in its provisions, the authoritative decision of the official who is
charged with enforcing it has peculiar force for the Philippines. It has come to be a well-settled rule that great weight
should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the department
charged with its execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2 Phil.,
630; Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of Nueva
Segovia [1915], 32 Phil., 634.) We conclude that the judgment should be as it is hereby affirmed with costs against
appellants. So ordered.
G.R. No. L-17518 October 30, 1922

FREDERICK C. FISHER, plaintiff-appellant,


vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.

Fisher and De Witt and Antonio M. Opisso for appellants.


Acting Attorney-General Tuason for appellee.

JOHNSON, J.:

The only question presented by this appeal is: Are the "stock dividends" in the present case "income" and taxable as
such under the provisions of section 25 of Act No. 2833? While the appellant presents other important questions,
under the view which we have taken of the facts and the law applicable to the present case, we deem it
unnecessary to discuss them now.

The defendant demurred to the petition in the lower court. The facts are therefore admitted. They are simple and
may be stated as follows:

That during the year 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; that he appellant was a stockholder in
said corporation; that said corporation, as result of the business for that year, declared a "stock dividend"; that the
proportionate share of said stock divided of the appellant was P24,800; that the stock dividend for that amount was
issued to the appellant; that 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. The defendant demurred to the petition upon
the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained and the
plaintiff appealed.

To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of the United States as
will as the decisions of the supreme court of some of the states of the Union, in which the questions before us,
based upon similar statutes, was discussed. Among the most important decisions may be mentioned the following:
Towne vs. Eisner, 245 U.S., 418; Doyle vs. Mitchell Bors. Co., 247 U.S., 179; Eisner vs. Macomber, 252 U.S., 189;
Dekoven vs Alsop, 205 Ill., 309; 63 L.R.A., 587; Kaufman vs. Charlottesville Woolen Mills, 93 Va., 673.

In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in each case it was
held that "stock dividends" were capital and not an "income" and therefore not subject to the "income tax" law.

The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189) that a "stock
dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the stock dividend, does not
violate the provisions of the Jones Law. The appellee further argues that the statute of the United States providing
for tax upon stock dividends is different from the statute of the Philippine Islands, and therefore the decision of the
Supreme Court of the United States should not be followed in interpreting the statute in force here.

For the purpose of ascertaining the difference in the said statutes ( (United States and Philippine Islands), providing
for an income tax in the United States as well as that in the Philippine Islands, the two statutes are here quoted for
the purpose of determining the difference, if any, in the language of the two statutes.

Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the collection of an "income tax."
Section 2 of said Act attempts to define what is an income. The definition follows:

That the term "dividends" as used in this title shall be held to mean any distribution made or ordered to
made by a corporation, . . . which stock dividend shall be considered income, to the amount of its cash
value.

Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section 25 of said Act attempts to
define the application of the income tax. The definition follows:
The term "dividends" as used in this Law shall be held to mean any distribution made or ordered to be made
by a corporation, . . . out of its earnings or profits accrued since March first, nineteen hundred and thirteen,
and payable to its shareholders, whether in cash or in stock of the corporation, . . . . Stock dividend shall be
considered income, to the amount of the earnings or profits distributed.

It will be noted from a reading of the provisions of the two laws above quoted that the writer of the law of the
Philippine Islands must have had before him the statute of the United States. No important argument can be based
upon the slight different in the wording of the two sections.

It is further argued by the appellee that there are no constitutional limitations upon the power of the Philippine
Legislature such as exist in the United States, and in support of that contention, he cites a number of decisions.
There is no question that the Philippine Legislature may provide for the payment of an income tax, but it cannot,
under the guise of an income tax, collect a tax on property which is not an "income." The Philippine Legislature can
not impose a tax upon "property" under a law which provides for a tax upon "income" only. The Philippine
Legislature has no power to provide a tax upon "automobiles" only, and under that law collect a tax upon
a carreton or bull cart. Constitutional limitations, that is to say, a statute expressly adopted for one purpose cannot,
without amendment, be applied to another purpose which is entirely distinct and different. A statute providing for an
income tax cannot be construed to cover property which is not, in fact income. The Legislature cannot, by a
statutory declaration, change the real nature of a tax which it imposes. A law which imposes an important tax on rice
only cannot be construed to an impose an importation tax on corn.

It is true that the statute in question provides for an income tax and contains a further provision that "stock
dividends" shall be considered income and are therefore subject to income tax provided for in said law. If "stock
dividends" are not "income" then the law permits a tax upon something not within the purpose and intent of the law.

It becomes necessary in this connection to ascertain what is an "income in order that we may be able to determine
whether "stock dividends" are "income" in the sense that the word is used in the statute. Perhaps it would be more
logical to determine first what are "stock dividends" in order that we may more clearly understand their relation to
"income." Generally speaking, stock dividends represent undistributed increase in the capital of corporations or
firms, joint stock companies, etc., etc., for a particular period. They are used to show the increased interest or
proportional shares in the capital of each stockholder. In other words, the inventory of the property of the
corporation, etc., 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, etc.

To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose of opening and
conducting a drug store, with assets of the value of P2,000, and each contributes P1,000. Their entire assets are
invested in drugs and put upon the shelves in their place of business. They commence business without a cent in
the treasury. Every dollar contributed is invested. Shares of stock to the amount of P1,000 are issued to each of the
incorporators, which represent the actual investment and entire assets of the corporation. Business for the first year
is good. Merchandise is sold, and purchased, to meet the demands of the growing trade. At the end of the first year
an inventory of the assets of the corporation is made, and it is then ascertained that the assets or capital of the
corporation on hand amount to P4,000, with no debts, and still not a cent in the treasury. All of the receipts during
the year have been reinvested in the business. Neither of the stockholders have withdrawn a penny from the
business during the year. Every peso received for the sale of merchandise was immediately used in the purchase of
new stock — new supplies. At the close of the year there is not a centavo in the treasury, with which either A or B
could buy a cup of coffee or a pair of shoes for his family. At the beginning of the year they were P2,000, and at the
end of the year they were P4,000, and neither of the stockholders have received a centavo from the business during
the year. At the close of the year, when it is discovered that the assets are P4,000 and not P2,000, instead of selling
the extra merchandise on hand and thereby reducing the business to its original capital, they agree among
themselves to increase the capital they agree among themselves to increase the capital issued and for that purpose
issue additional stock in the form of "stock dividends" or additional stock of P1,000 each, which represents the
actual increase of the shares of interest in the business. At the beginning of the year each stockholder held one-half
interest in the capital. At the close of the year, and after the issue of the said stock dividends, they each still have
one-half interest in the business. The capital of the corporation increased during the year, but has either of them
received an income? It is not denied, for the purpose of ordinary taxation, that the taxable property of the
corporation at the beginning of the year was P2,000, that at the close of the year it was P4,000, and that the tax rolls
should be changed in accordance with the changed conditions in the business. In other words, the ordinary tax
should be increased by P2,000.

Another illustration: C and D organized a corporation for agricultural purposes with an authorized capital stock of
P20,000 each contributing P5,000. With that capital they purchased a farm and, with it, one hundred head of cattle.
Every peso contributed is invested. There is no money in the treasury. Much time and labor was expanded during
the year by the stockholders on the farm in the way of improvements. Neither received a centavo during the year
from the farm or the cattle. At the beginning of the year the assets of the corporation, including the farm and the
cattle, were P10,000, and at the close of the year and inventory of the property of the corporation is made and it is
then found that they have the same farm with its improvements and two hundred head of cattle by natural increase.
At the end of the year it is also discovered that, by reason of business changes, the farm and the cattle both have
increased in value, and that the value of the corporate property is now P20,000 instead of P10,000 as it was at the
beginning of the year. The incorporators instead of reducing the property to its original capital, by selling off a part of
its, issue to themselves "stock dividends" to represent the proportional value or interest of each of the stockholders
in the increased capital at the close of the year. There is still not a centavo in the treasury and neither has withdrawn
a peso from the business during the year. No part of the farm or cattle has been sold and not a single peso was
received out of the rents or profits of the capital of the corporation by the stockholders.

Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle for the sum of P10,000. At
the end of the first year, by reason of business conditions and the increase of the value of both real estate and
personal property, it is discovered that the value of the farm and the cattle is P20,000. A, during the year, has
received nothing from the farm or the cattle. His books at the beginning of the year show that he had property of the
value of P10,000. His books at the close of the year show that he has property of the value of P20,000. A is not a
corporation. The assets of his business are not shown therefore by certificates of stock. His books, however, show
that the value of his property has increased during the year by P10,000, under any theory of business or law, be
regarded as an "income" upon which the farmer can be required to pay an income tax? Is there any difference in law
in the condition of A in this illustration and the condition of A and B in the immediately preceding illustration? Can the
increase of the value of the property in either case be regarded as an "income" and be subjected to the payment of
the income tax under the law?

Each of the foregoing illustrations, it is asserted, is analogous to the case before us and, in view of that fact, let us
ascertain how lexicographers and the courts have defined an "income." The New Standard Dictionary, edition of
1915, defines an income as "the amount of money coming to a person or corporation within a specified time whether
as payment or corporation within a specified time whether as payment for services, interest, or profit from
investment." Webster's International Dictionary defines an income as "the receipt, salary; especially, the annual
receipts of a private person or a corporation from property." Bouvier, in his law dictionary, says that an "income" in
the federal constitution and income tax act, is used in its common or ordinary meaning and not in its technical, or
economic sense. (146 Northwestern Reporter, 812) Mr. Black, in his law dictionary, says "An income is the return in
money from one's business, labor, or capital invested; gains, profit or private revenue." "An income tax is a tax on
the yearly profits arising from property , professions, trades, and offices."

The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653), said in speaking of
income that mere advance in value in no sense constitutes the "income" specified in the revenue law as "income" of
the owner for the year in which the sale of the property was made. Such advance constitutes and can be treated
merely as an increase of capital. (In re Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa., 414.)

Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and now Secretary of State of
the United States, in his argument before the Supreme Court of the United States in the case of Towne vs.
Eisner, supra, defined an "income" in an income tax law, unless it is otherwise specified, to mean cash or its
equivalent. It does not mean choses in action or unrealized increments in the value of the property, and cites in
support of the definition, the definition given by the Supreme Court in the case of Gray vs. Darlington, supra.

In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said: "Notwithstanding the
thoughtful discussion that the case received below, we cannot doubt that the dividend was capital as well for the
purposes of the Income Tax Law. . . . 'A stock dividend really takes nothing from the property of the corporation, and
adds nothing to the interests of the shareholders. Its property is not diminished and their interest are not increased. .
. . The proportional interest of each shareholder remains the same. . . .' In short, the corporation is no poorer and
the stockholder is no richer then they were before." (Gibbons vs. Mahon, 136 U.S., 549, 559, 560; Logan County vs.
U.S., 169 U.S., 255, 261).

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking for the court, said that the
act employs the term "income" in its natural and obvious sense, as importing something distinct from principal or
capital and conveying the idea of gain or increase arising from corporate activity.

Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the court said: "An
income may be defined as the gain derived from capital, from labor, or from both combined, provided it be
understood to include profit gained through a sale or conversion of capital assets."

For bookkeeping purposes, when stock dividends are declared, the corporation or company acknowledges a
liability, in form, to the stockholders, equivalent to the aggregate par value of their stock, evidenced by a "capital
stock account." If profits have been made by the corporation during a particular period and not divided, they create
additional bookkeeping liabilities under the head of "profit and loss," "undivided profits," "surplus account," etc., or
the like. None of these, however, gives to the stockholders as a body, much less to any one of them, either a claim
against the going concern or corporation, for any particular sum of money, or a right to any particular portion of the
asset, or any shares sells or until the directors conclude that dividends shall be made a part of the company's assets
segregated from the common fund for that purpose. The dividend normally is payable in money and when so paid,
then only does the stockholder realize a profit or gain, which becomes his separate property, and thus derive an
income from the capital that he has invested. Until that, is done the increased assets belong to the corporation and
not to the individual stockholders.

When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have
been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money
or in kind, should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets,
and no longer is available for actual distribution. The essential and controlling fact is that the stockholder has
received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his
original investment, together with whatever accretions and accumulations resulting from employment of his money
and that of the other stockholders in the business of the company, still remains the property of the company, and
subject to business risks which may result in wiping out of the entire investment. Having regard to the very truth of
the matter, to substance and not to form, the stockholder by virtue of the stock dividend has in fact received nothing
that answers the definition of an "income." (Eisner vs. Macomber, 252 U.S., 189, 209, 211.)

The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in
the capital of the corporation. There has been no separation or segregation of his interest. All the property or capital
of the corporation still belongs to the corporation. There has been no separation of the interest of the stockholder
from the general capital of the corporation. The stockholder, by virtue of the stock dividend, has no separate or
individual control over the interest represented thereby, further than he had before the stock dividend was issued.
He cannot use it for the reason that it is still the property of the corporation and not the property of the individual
holder of stock dividend. A certificate of stock represented by the stock dividend is simply a statement of his
proportional interest or participation in the capital of the corporation. For bookkeeping purposes, a corporation, by
issuing stock dividend, acknowledges a liability in form to the stockholders, evidenced by a capital stock account.
The receipt of a stock dividend in no way increases the money received of a stockholder nor his cash account at the
close of the year. It simply shows that there has been an increase in the amount of the capital of the corporation
during the particular period, which may be due to an increased business or to a natural increase of the value of the
capital due to business, economic, or other reasons. We believe that the Legislature, when it provided for an
"income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is generally used in
its common acceptation; that is that the income means money received, coming to a person or corporation for
services, interest, or profit from investments. We do not believe that the Legislature intended that a mere increase in
the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such property
can be reached under the ordinary from of taxation.

Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the difference between "capital"
and "income": "That the fundamental relation of 'capital' to 'income' has been much discussed by economists, the
former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir
supplied from springs; the latter as the outlet stream, to be measured by its flow during a period of time." It may be
argued that a stockholder might sell the stock dividend which he had acquired. If he does, then he has received, in
fact, an income and such income, like any other profit which he realizes from the business, is an income and he may
be taxed thereon.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends
declared, as in the present case. The one is a disbursement to the stockholder of accumulated earnings, and the
corporation at once parts irrevocably with all interest thereon. The other involves no disbursement by the
corporation. It parts with nothing to the stockholder. The latter receives, not an actual dividend, but certificate of
stock which simply evidences his interest in the entire capital, including such as by investment of accumulated
profits has been added to the original capital. They are not income to him, but represent additions to the source of
his income, namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a person is in the
same position, so far as his income is concerned, as the owner of young domestic animal, one year old at the
beginning of the year, which is worth P50 and, which, at the end of the year, and by reason of its growth, is worth
P100. The value of his property has increased, but has had an income during the year? It is true that he had taxable
property at the beginning of the year of the value of P50, and the same taxable property at another period, of the
value of P100, but he has had no income in the common acceptation of that word. The increase in the value of the
property should be taken account of on the tax duplicate for the purposes of ordinary taxation, but not as income for
he has had none.

The question whether stock dividends are income, or capital, or assets has frequently come before the courts in
another form — in cases of inheritance. A is a stockholder in a large corporation. He dies leaving a will by the terms
of which he give to B during his lifetime the "income" from said stock, with a further provision that C shall, at B's
death, become the owner of his share in the corporation. During B's life the corporation issues a stock dividend.
Does the stock dividend belong to B as an income, or does it finally belong to C as a part of his share in the capital
or assets of the corporation, which had been left to him as a remainder by A? While there has been some difference
of opinion on that question, we believe that a great weight of authorities hold that the stock dividend is capital or
assets belonging to C and not an income belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it
was held that stock dividends in such cases were regarded as capital and not as income (Gibbons vs. Mahon, 136
U.S., 549.)

In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the title of a corporation,
and the interest of its members or stockholders in the property of the corporation, is familiar and well settled. The
ownership of that property is in the corporation, and not in the holders of shares of its stock. The interest of each
stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the
corporation, during its existence, under its charter, and to a like proportion of the property remaining, upon the
termination or dissolution of the corporation, after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs.
Equitable Life Assurance Society, 160 N. Y., 19.) In the case of Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr.
Justice Wilkin said: "A dividend is defined as a corporate profit set aside, declared, and ordered by the directors to
be paid to the stockholders on demand or at a fixed time. Until the dividend is declared, these corporate profits
belong to the corporation, not to the stockholders, and are liable for corporate indebtedness.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends
declared. The one is a disbursement to the stockholders of accumulated earning, and the corporation at once parts
irrevocably with all interest thereon. The other involves no disbursement by the corporation. It parts with nothing to
the stockholders. The latter receives, not an actual dividend, but certificates of stock which evidence in a new
proportion his interest in the entire capital. When a cash becomes the absolute property of the stockholders and
cannot be reached by the creditors of the corporation in the absence of fraud. A stock dividend however, still being
the property of the corporation and not the stockholder, it may be reached by an execution against the corporation,
and sold as a part of the property of the corporation. In such a case, if all the property of the corporation is sold, then
the stockholder certainly could not be charged with having received an income by virtue of the issuance of the stock
dividend. Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness. The rule is well established that cash dividend, whether
large or small, are regarded as "income" and all stock dividends, as capital or assets (Cook on Corporation, Chapter
32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs. Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of Law,
2d ed., p. 738.)

If the ownership of the property represented by a stock dividend is still in the corporation and to in the holder of such
stock, then it is difficult to understand how it can be regarded as income to the stockholder and not as a part of the
capital or assets of the corporation. (Gibbsons vs. Mahon, supra.) the stockholder has received nothing but a
representation of an interest in the property of the corporation and, as a matter of fact, he may never receive
anything, depending upon the final outcome of the business of the corporation. The entire assets of the corporation
may be consumed by mismanagement, or eaten up by debts and obligations, in which case the holder of the stock
dividend will never have received an income from his investment in the corporation. A corporation may be solvent
and prosperous today and issue stock dividends in representation of its increased assets, and tomorrow be
absolutely insolvent by reason of changes in business conditions, and in such a case the stockholder would have
received nothing from his investment. In such a case, if the holder of the stock dividend is required to pay an income
tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a
conclusion is absolutely contradictory to the idea of an income. An income subject to taxation under the law must be
an actual income and not a promised or prospective income.

The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the provisions of the Jones
Law. That may be admitted. He further argues that the Act of Congress (U.S. Revenue Act of 1918) expressly
authorized the Philippine Legislatures to provide for an income tax. That fact may also be admitted. But a careful
reading of that Act 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.

In all of the foregoing argument we have not overlooked the decisions of a few of the courts in different parts of the
world, which have reached a different conclusion from the one which we have arrived at in the present case.
Inasmuch, however, as appeals may be taken from this court to the Supreme Court of the United States, we feel
bound to follow the same doctrine announced by that court.

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. When the assets of a
corporation have increased so as to justify the issuance of a stock dividend, the increase of the assets should be
taken account of the Government in the ordinary tax duplicates for the purposes of assessment and collection of an
additional tax. For all of the foregoing reasons, we are of the opinion, and so decide, that the judgment of the lower
court should be revoked, and without any finding as to costs, it is so ordered.
G.R. No. L-21570 July 26, 1966

LIMPAN INVESTMENT CORPORATION, petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

Vicente L. San Luis for petitioner.


Office of the Solicitor General A. A. Alafriz, Assistant Solicitor General F. B. Rosete, Solicitor A. B. Afurong and Atty.
V. G. Saldajeno for respondents.

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

Appeal interposed by petitioner Limpan Investment Corporation against a decision of the Court of Tax Appeals, in its
CTA Case No. 699, holding and ordering it (petitioner) to pay respondent Commissioner of Internal Revenue the
sums of P7,338.00 and P30,502.50, representing deficiency income taxes, plus 50% surcharge and 1% monthly
interest from June 30, 1959 to the date of payment, with cost.

The facts of this case are:

Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business of leasing real
properties. It commenced actual business operations on July 1, 1955. Its principal stockholders are the spouses
Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and control ninety-nine per cent (99%) of its total paid-up
capital. Its president and chairman of the board is the same Isabelo P. Lim. 1äwphï1.ñët

Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of which were
acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de 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 and had
claimed excessive depreciation of its buildings in the sums of P4,260.00 and P16,336.00 covering the same period.
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, computed as follows:

90-AR-C-348-58/56
Net income per audited return P 3,287.81

Add: Unallowable deductions:

Undeclared Rental Receipt


(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00

Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . . 4,260.00 P24,459.00


Net income per investigation P27,746.00

Tax due thereon P5,549.00


Less: Amount already assessed 657.00
Balance P4,892.00

Add: 50% Surcharge 2,446.00


DEFICIENCY TAX DUE P7,338.00
90-AR-C-1196-58/57

Net income per audited return P11,098.00


Add: Unallowable deductions:

Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00

Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00


Net income per investigation P109,126.00

Tax due thereon P22,555.00


Less: Amount already assessed 2,220.00
Balance 20,335.00

Add: 50% Surcharge 10,167.50


DEFICIENCY TAX DUE P30,502.50

Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the above
assessment but the latter denied said request and reiterated its original assessment and demand, plus 5%
surcharge and the 1% monthly interest from June 30, 1959 to the date of payment; hence, the corporation filed its
petition for review before the Tax Appeals court, questioning the correctness and validity of the above assessment
of respondent Commissioner of Internal Revenue. It disclaimed having received or collected the amount of
P20,199.00, as unreported rental income for 1956, or any part thereof, reasoning out that 'the previous owners of
the leased building has (have) to collect part of the total rentals in 1956 to apply to their payment of rental in the land
in the amount of P21,630.00" (par. 11, petition). It also denied having received or collected the amount of
P81,690.00, as unreported rental income for 1957, or any part thereof, 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 but
did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals amounting to P10,800.00, over
which the corporation had no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought not
be declared as rental income.

Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent Commissioner of its
buildings in the above assessment are unfair and inaccurate.

Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer, Vicente G. Solis, who admitted
that it had omitted to report the sum of P12,100.00 as rental income in its 1956 tax return and also the sum of
P29,350.00 as rental income in its 1957 tax return. However, with respect to the difference between this omitted
income (P12,100.00) and the sum (P20,199.00) found by respondent Commissioner as undeclared in 1956,
petitioner corporation, through the same witness (Solis), tried to establish that it did not collect or receive the same
because, in view of the refusal of some tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco
Vda. de Lim, the former owners, on one hand, and the same Isabelo P. Lim, as president of petitioner corporation,
on the other, had verbally agreed in 1956 to turn over to petitioner corporation six per cent (6%) of the value of all its
properties, computed at P21,630.00, in exchange for whatever rentals the Lims may collect from the tenants. And,
with respect to the difference between the admittedly undeclared sum of P29,350.00 and that found by respondent
Commissioner as unreported rental income, (P81,690.00) in 1957, the same witness Solis also tried to establish that
petitioner corporation did not receive or collect the same but that its president, Isabelo P. Lim, collected part thereof
and may have reported the same in his own personal income tax return; that same Isabelo P. Lim collected
P13,500.00, which he turned over to petitioner in 1959 only; that a certain tenant (Go Tong deposited in court his
rentals (P10,800.00), over which the corporation had no actual or constructive control and which were withdrawn
only in 1958; and that a sub-tenant paid P4,200.00 which ought not be declared as rental income in 1957.
With regard to the depreciation which respondent disallowed and deducted from the returns filed by petitioner, the
same witness 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.

Isabelo P. Lim was not presented as witness to corroborate the above testimony of Vicente G. Solis.

On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the investigation of the
1956 and 1957 income tax returns of petitioner corporation, testified for the respondent that he personally
interviewed the tenants of petitioner and found that these tenants had been regularly paying their rentals to the
collectors of either petitioner or its president, Isabelo P. Lim, but these payments were not declared in the
corresponding returns; and that in applying rates of depreciation to petitioner's buildings, he adopted Bulletin "F" of
the U.S. Federal Internal Revenue Service.

On the basis of the evidence, the Tax Court upheld respondent Commissioner's assessment and demand for
deficiency income tax which, as above stated in the beginning of this opinion, petitioner has appealed to this Court.

Petitioner corporation pursues, the same theory advocated in the court below and assigns the following alleged
errors of the trial court in its brief, to wit:

I. The respondent Court erred in holding that the petitioner had an unreported rental income of P20,199.00
for the year 1956.

II. The respondent Court erred in holding that the petitioner had an unreported rental income of P81,690.00
for the year 1957.

III. The respondent Court erred in holding that the depreciation in the amount of P20,598.00 claimed by
petitioner for the years 1956 and 1957 was excessive.

and prays that the appealed decision be reversed.

This appeal is manifestly unmeritorious. 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.

With respect to the balance, which petitioner denied having unreported in the disputed tax returns, the excuse that
Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and only later transferred or
disposed of the ownership of the buildings existing thereon to petitioner corporation, so as to justify the alleged
verbal agreement whereby they would turn over to petitioner corporation six percent (6%) of the value of its
properties to be applied to the rentals of the land and in exchange for whatever rentals they may collect from the
tenants who refused to recognize the new owner or vendee of the buildings, is not only unusual but uncorroborated
by the alleged transferors, or by any document or unbiased evidence. Hence, the first assigned error is without
merit.

As to the second assigned error, petitioner's denial and explanation of the non-receipt of the remaining unreported
income for 1957 is not substantiated by satisfactory corroboration. As above noted, Isabelo P. Lim was not
presented as witness to confirm accountant Solis nor was his 1957 personal income tax return submitted in court to
establish that the rental income which he allegedly collected and received in 1957 were reported therein.

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 to 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 in 1957 should have been reported as rental income in said
year, since it is income just the same regardless of its source.
On the third assigned error, suffice it to state that this Court has already held that "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 (Commissioner of Internal Revenue vs. Priscila Estate, Inc., et al., L-18282, May 29, 1964), and petitioner
has not shown 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 this Court pronounced as having strong persuasive
effect in this 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 (M. Zamora vs. Collector of internal Revenue &
Collector of Internal Revenue vs. M. Zamora; E. Zamora vs. Collector of Internal Revenue and Collector of Internal
Revenue vs. E. Zamora, Nos. L-15280, L-15290, L-15289 and L-15281, May 31, 1963), the foregoing error is devoid
of merit.

Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs against petitioner-appellant,
Limpan Investment Corporation.
G.R. No. 48532 August 31, 1992

HERNANDO B. CONWI, JAIME E. DY-LIACCO, 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 COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 48533 August 31, 1992

ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-LIACCO,


MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO,
ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioners.

NOCON, J.:

Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals, promulgated
September 26, 19771 denying petitioners' claim for tax refunds, and order the Commissioner of Internal Revenue to
refund to them their income taxes which they claim to have been erroneously or illegally paid or collected.

As summarized by the Solicitor General, the facts of the cases are as follows:

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing
Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is a
subsidiary of Procter & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the
years 1970 and 1971 petitioners were assigned, for certain periods, to other subsidiaries of Procter
& Gamble, outside of the Philippines, during which petitioners were paid U.S. dollars as
compensation for services in their foreign assignments. (Paragraphs III, Petitions for Review, C.T.A.
Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. Case No. 2511 filed
their income tax returns for the year 1970, they computed the tax due by applying the dollar-to-peso
conversion on the basis of the floating rate ordained under B.I.R. Ruling No. 70-027 dated May 14,
1970, as follows:

From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;

From February 21 to December 31, 1970 at the conversion rate of P6.25 to U.S.
$1.00

Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in converting their
dollar income for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973,
petitioners in said cases filed with the office of the respondent Commissioner, amended income tax
returns for the above-mentioned years, this time using the par value of the peso as prescribed in
Section 48 of Republic Act No. 265 in relation to Section 6 of Commonwealth Act No. 265 in relation
to Section 6 of Commonwealth Act No. 699 as the basis for converting their respective dollar income
into Philippine pesos for purposes of computing and paying the corresponding income tax due from
them. The aforesaid computation as shown in the amended income tax returns resulted in the
alleged overpayments, refund and/or tax credit. Accordingly, claims for refund of said over-payments
were filed with respondent Commissioner. Without awaiting the resolution of the Commissioner of
the Internal Revenue on their claims, petitioners filed their petitioner for review in the above-
mentioned cases.
Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A. Case No.
2511 on July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.

Upon joint motion of the parties on the ground that these two cases involve common question of law
and facts, that respondent Court of Tax Appeals heard the cases jointly. In its decision dated
September 26, 1977, the respondent Court of Tax Appeals 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. Accordingly,
the claim for refund and/or tax credit of petitioners in the above-entitled cases was denied and the
petitions for review dismissed, with costs against petitioners. Hence, this petition for review
on certiorari. 2

Petitioners claim that public respondent Court of Tax Appeals erred in holding:

1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.

2. That 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; and

3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes into Philippine
pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate used.

Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as follows:

At the outset, it is submitted that the subject matter of these two cases are Philippine income tax for
the calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No. 2594) and, therefore,
should be governed by the provisions of the National Internal Revenue Code and its implementing
rules and regulations, and not by the provisions of Central Bank Circular No. 42 dated May 21, 1953,
as contended by petitioners.

Section 21 of the National Internal Revenue Code, before its amendment by Presidential Decrees
Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974, respectively, imposed a
tax upon the taxable net income received during each taxable year from all sources by a citizen of
the Philippines, whether residing here or abroad.

Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their employment.
Thus, in their tax returns for the period involved herein, they gave their legal residence/address as
c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes "A" to "A-8" and Annexes "C" to "C-
8", Petition for Review, CTA Nos. 2511 and 2594).

Petitioners being subject to Philippine income tax, their dollar earnings should be converted into
Philippine pesos in computing the income tax due therefrom, in accordance with the provisions of
Revenue Memorandum Circular No. 7-71 dated February 11, 1971 for 1970 income and Revenue
Memorandum Circular No. 41-71 dated December 21, 1971 for 1971 income, which reiterated BIR
Ruling No. 70-027 dated May 4, 1970, to wit:

For internal revenue tax purposes, the free marker rate of conversion (Revenue
Circulars Nos. 7-71 and 41-71) should be applied in order to determine the true and
correct value in Philippine pesos of the income of petitioners. 3

After a careful examination of the records, the laws involved and the jurisprudence on the matter, We are inclined to
agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue and thus vote to deny the
petition.

This basically an income tax case. For the proper resolution of these 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. 4 Income can also be though of as flow
of the fruits of one's labor. 5

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." 6 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.

Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner fell under
Section 2(f)(g) and (m) of C.B. Circular No. 42. 7

The issue now is, what exchange rate should be used to determine the peso equivalent of the foreign earnings of
petitioners for income tax purposes. Petitioners claim that since the dollar earnings do not fall within the
classification of foreign exchange transactions, there occurred no actual inward remittances, and, therefore, 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. They conclude that their earnings should be converted for
income tax purposes using the par value of the Philippine peso.

Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products, receipts of sale
of foreign exchange or foreign borrowings and investments but not income tax. He also claims that he had to use
the prevailing free market rate of exchange in these cases because of the need to ascertain the true and correct
amount of income in Philippine peso of dollar earners for Philippine income tax purposes.

A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein are export products, invisibles, receipts of foreign
exchange, foreign exchange payments, new foreign borrowing and
investments — nothing by way of income tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not apply to them, the
par value of the peso should be the guiding rate used for income tax purposes.

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 yeas as payment for their
services.

Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:

Sec. 21. Rates of tax on citizens or residents. — A tax is hereby 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, determined in
accordance with the following schedule:

xxx xxx xxx

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. 9

Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 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. 12

Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US dollars
into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that they 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.
Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange
prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for respondent Commissioner
to refund any taxes to petitioner as said Revenue Memorandum Circulars, being of long standing and not contrary to
law, are valid. 13

Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the government" and
one of the duties of a Filipino citizen is to pay his income tax.

WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent Court of Tax Appeals of
petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is AFFIRMED. Costs against
petitioners.

SO ORDERED.

Narvasa, C.J., Padilla and Regalado, JJ., concur.

Melo, J., took no part.

Footnotes

1 Judge Amante Filler, ponente, concurred in by Judge Constantino C. Roaquin.

2 Rollo, pp. 98-100.

3 Id., pp. 100-101.

4 Fisher vs. Trinidad, 43 Phil. 973.

5 Madrigal vs. Rafferty, 38 Phil. 414.

6 Janda vs. Lepanto Consolidated Mining Co., 99 Phil. 197, 204.

7 Sec. 2. — The following are foreign exchange transactions and as required by Central Bank
Circular No. 20 are subject to prior licensing by or on behalf of the Central Bank:

xxx xxx xxx

(f) Any transaction by which a resident performs any service for a non-resident other than tourists or
temporary visitors. If the proper license is obtained, the former shall demand and obtain payment for
such service within ninety days in U.S. dollars or in any other foreign currency acceptable to the
Central Bank;

(g) Any transaction by which a resident performs for another resident service rendered in a business
or profession of the latter located outside the Philippines. If proper license is obtained, the former
shall demand and obtain payment of the fair value of such service within ninety days from the date of
the performance of the aforesaid service, in U.S. dollar or in any other foreign currency acceptable to
the Central Bank;

xxx xxx xxx

(m) Any other transactions involving international financial implications.

8 Pursuant to the provisions of Republic Act No. 265, the Monetary Board, by unanimous vote and
with the approval of the President of the Philippines, and in accordance with existing executive and
international agreement to which the Republic of the Philippines is a party, hereby promulgates the
following regulations on foreign exchange transactions.

Sec. 1. Eighty (80) per cent of all receipts from the leading export products, i.e., exports whose
annual average value exceeded $75 million in the base period 1966-68, shall be surrendered to the
Central Bank at the par value. The par value shall not apply to the remaining twenty (20) per cent,
which shall be held to authorized agent banks at the prevailing free market rate. For purposes of this
section, the following are considered as the leading export products: logs, centrifugal sugar, copra
and copper (ore or concentrates).

Sec. 2. The par value likewise shall not apply to all receipts from all other export products as well as
from invisibles, which shall be sold to authorized agents of the Central Bank of the Philippines at the
prevailing free market rate.

Sec. 3. All receipts of foreign exchange by resident persons, firms, companies or corporations shall
represent not less than the full value of the transactions involved. All such receipts shall be sold to
authorized agents of the Central Bank of the Philippines by the recipients within three business days
following the receipt of such foreign exchange and must be received in currencies prescribed to form
part of the international reserve. Resident persons, firms, companies or corporations shall not delay
taking ownership of their foreign exchange earnings except when such delay is customary.

Sec. 4. The par value likewise shall not apply to all foreign exchange payments, which shall be
negotiated at the prevailing free market rate, except for outstanding foreign obligations and letters of
credit covered by forward exchange contracts. Only authorized agent banks may sell foreign
exchange for imports and invisible disbursements.

Sec. 5. Authorized agent banks may sell foreign exchange for imports except those falling under UC,
SUC and NEC categories, without prior specific approval of the Central Bank. Such imports may be
financed by letters of credit, or under D/A and open account arrangements subject or rules to be
promulgated by the Monetary Board. Monthly ceiling on foreign currency letters of credit and special
time deposit requirements (STD) are hereby lifted. Existing STDS shall be released as they mature.

Sec. 6. The sale of foreign exchange for current invisible payments by authorized agent banks shall
be allowed, without prior specific approval of the Central Bank, provided that amounts of more than
$100.00 are substantiated by documentary evidence attesting to the veracity of the purpose and the
amount applied for, and provided further that travel, remittance for educational expenses and
student maintenance, maintenance of dependents abroad of Philippine residents, remittance of
profits, dividends, and interests, royalties, film and other rentals shall be subject to the regulations to
be promulgated by the Monetary Board.

Sec. 7. New foreign borrowing and investments, and transfer of assets by emigrants shall be subject
to regulations to be promulgated by the Monetary Board.

Sec. 8. The free market rate shall not be administratively fixed but shall be determined through
transactions in the foreign exchange market on a day-to-day basis. The authorities shall not
intervene in the market except to the extent necessary to compensate for excessive fluctuations but
shall not operate against the trend in the market.

Sec. 9. All provisions of existing circulars, memorandum and regulations of the Central Bank
governing transactions in foreign exchange inconsistent with the provisions hereafter are hereby
revoked.

Sec. 10. Strict observance of the provisions of this Circular is hereby enjoined, and any person, firm,
company or corporation, whether residing and/or located in the Philippines or not, who, being bound
to the observance of said provisions, or of such other rules, terms and conditions, or directives which
may be issued by the Central Bank in the implementation of this Circular, shall fail or refuse to
comply with or abide by, or shall violate the same, shall be subject to the penal sanctions of the
Central Bank Act.
Sec. 11. This Circular shall take effect immediately.

FOR
THE
MONE
TARY
BOAR
D:
(SGD)
G.S.
LICAR
OS
Govern
or

February 21, 1970.

9 Section 338, National Internal Revenue Code (1970), as amended; Philippine Lawyer's
Association vs. Agrava, 105 Phil. 173.

10 SUBJECT: Prescribing a uniform rate for U.S. Dollars to Philippine Pesos for Internal Revenue
Tax Purposes.

TO: All Internal Revenue Officers and other concerned:

For the Purpose of establishing a uniform rate of exchange to U.S. dollars to Philippine pesos for
internal revenue tax purposes for the year 1970, the following schedule of exchange rates are
hereby prescribed for reference and guidelines of all concerned;

Schedule of Exchange Rates

1. In all cases of transactions involving remittances and acceptance of U.S. dollars occurring during
the period from January 1 to February 20, 1970, the official rate of exchange of P3.90 to $1.00 shall
be used.

2. In the case of transactions involving remittances or acceptance of U.S. dollars occurring after
February 20, 1970 the following rules shall govern:

(a) In the case of regular or habitual transactions involving remittances and


acceptances of U.S. dollars, such as salaries, royalty payments and the like, the
uniform rate of P6.25 to U.S. $1.00 shall be used; provided however, that in the case
of transactions involving the computation of advance sales or compensating taxes,
the rates used by the Bureau of Customs at the time of the payment of such taxes
shall prevail.

(b) In the case of an isolated or casual transaction involving remittances or


acceptance of U.S. dollars, such as dividends, occasional sales of property and the
like the exchange rate quoted by the Foreign Exchange Department of the Central
bank of the Philippines prevailing at the time of such remittances or acceptance shall
be used.

Enforcement and Publicity

All internal revenue officers and others charged with the enforcement of internal revenue laws are
enjoined to enforce the provisions of this circular accordingly and to give as wide a publicity as
possible.
(Sgd.) MISAEL P.
VERA
Commissioner of
Internal Revenue

APPROVED
(Sgd.) CESAR VIRATA
Secretary of Finance

11 SUBJECT: Prescribing a uniform exchange rate of U.S. dollars to Philippine pesos for internal
revenue tax purposes.

TO: All Internal Revenue Officers and others concerned:

For the purpose of establishing a uniform rate of exchange to U.S. dollars or other foreign currencies
to Philippine pesos for internal revenue tax purposes for the year 1971, the following schedule of
exchange rates are hereby prescribed for reference and guidelines of all concerned:

Schedule of Exchange Rates

In all cases of transactions involving remittances and acceptance of U.S. dollars and other foreign
currencies occurring during the year 1971, the following rules shall govern:

(a) In the case of regular or habitual transactions involving remittances or


acceptances of US dollars or other foreign currencies such as salaries, wages, fees
or other renominations for personal services, royalties, rents, interests or other fixed
or determinable annual or periodical income, the uniform rate of P6.25 to U.S. $1.00
shall be used.

(b) In the case of transactions involving the computation of advance sales or


compensating taxes, the rate of exchange used by the Bureau of Customs at the
time of the payment of such taxes shall prevail.

(c) In the case of an isolated or casual transaction involving remittances of


acceptances of U.S. dollars or other foreign currencies such as dividends, interests,
capital gains or other gains from occasional sales of property and the like, the
exchange rate quoted by the Foreign Exchange Department of the Central Bank of
the Philippines prevailing at the time of such remittances or acceptance shall be
used.

(d) Where the currency involved is other than U.S. dollars, the foreign currency shall
first be converted to U.S. dollars at the prevailing rate of exchange between the two
currencies. The resulting amount shall then be converted to Philippine pesos in
accordance with the above-promulgated rules.

All internal revenue officers and others charged with the enforcement of internal revenue
laws are enjoined to enforce the provisions of this circular accordingly and to give it as wide
a publicity as possible.

(SGD.) MISAEL P.
VERA
Commissioner of
Internal Revenue

APPROVED:
(SGD.) CESAR VIRATA
Secretary of Finance
United States Supreme Court
COMMISSIONER v. GLENSHAW GLASS CO.(1955)

No. 199

Argued: February 28, 1955Decided: March 28, 1955

Money received as exemplary damages for fraud or as the punitive two-thirds portion of a treble-
damage antitrust recovery must be reported by a taxpayer as "gross income" under 22 (a) of the
Internal Revenue Code of 1939. Pp. 427-433.

(a) In determining what constitutes "gross income" as defined in 22 (a), effect must be given to
the catchall language "gains or profits and income derived from any source whatever." Pp.
429-430.
(b) Eisner v. Macomber, 252 U.S. 189 , distinguished. Pp. 430-431.
(c) The mere fact that such payments are extracted from the wrongdoers as punishment for
unlawful conduct cannot detract from their character as taxable income to the recipients. P.
431.
(d) A different result is not required by the fact that 22 (a) was re-enacted without change after
the Board of Tax Appeals had held punitive damages nontaxable in Highland Farms Corp., 42
B. T. A. 1314. Pp. 431-432.
(e) The legislative history of the Internal Revenue Code of 1954 does not require a different
result. The definition of gross income was simplified, but no effect upon its present broad
scope was intended. P. 432.
(f) Punitive damages cannot be classified as gifts, nor do they come under any other
exemption in the Code. P. 432.
211 F.2d 928, reversed.

[ Footnote * ] Together with Commissioner of Internal Revenue v. William Goldman Theatres. Inc.,
which was a separate case decided by the Court of Appeals in the same opinion.

Solicitor General Sobeloff argued the cause for petitioner. With him on the brief were Assistant
Attorney General Holland, Charles F. Barber, Ellis N. Slack and Melva M. Graney. [348 U.S. 426, 427]

Max Swiren argued the cause for the Glenshaw Glass Company, respondent. With him on the brief
were Sidney B. Gambill and Joseph D. Block.

Samuel H. Levy argued the cause for William Goldman Theatres, Inc., respondent. With him on the
brief was Bernard Wolfman.

MR. CHIEF JUSTICE WARREN delivered the opinion of the Court.

This litigation involves two cases with independent factual backgrounds yet presenting the identical
issue. The two cases were consolidated for argument before the Court of Appeals for the Third Circuit
and were heard en banc. The common question is whether money received as exemplary damages
for fraud or as the punitive two-thirds portion of a treble-damage antitrust recovery must be reported
by a taxpayer as gross income under 22 (a) of the Internal Revenue Code of 1939. 1 In a single
opinion, 211 F.2d 928, the Court of Appeals affirmed the Tax Court's separate rulings in favor of the
taxpayers. 18 T. C. 860; 19 T. C. 637. Because of the frequent recurrence of the question and
differing interpretations by the lower courts of this Court's decisions bearing upon the problem, we
granted the Commissioner of Internal Revenue's ensuing petition for certiorari. 348 U.S. 813 .

The facts of the cases were largely stipulated and are not in dispute. So far as pertinent they are as
follows:

Commissioner v. Glenshaw Glass Co. - The Glenshaw Glass Company, a Pennsylvania corporation,
manufactures glass bottles and containers. It was engaged in protracted litigation with the Hartford-
Empire Company, which manufactures machinery of a character used by Glenshaw. Among the
claims advanced by Glenshaw [348 U.S. 426, 428] were demands for exemplary damages for
fraud 2 and treble damages for injury to its business by reason of Hartford's violation of the federal
antitrust laws. 3 In December, 1947, the parties concluded a settlement of all pending litigation, by
which Hartford paid Glenshaw approximately $800,000. Through a method of allocation which was
approved by the Tax Court, 18 T. C. 860, 870-872, and which is no longer in issue, it was ultimately
determined that, of the total settlement, $324,529.94 represented payment of punitive damages for
fraud and antitrust violations. Glenshaw did not report this portion of the settlement as income for the
tax year involved. The Commissioner determined a deficiency claiming as taxable the entire sum less
only deductible legal fees. As previously noted, the Tax Court and the Court of Appeals upheld the
taxpayer.

Commissioner v. William Goldman Theatres, Inc. - William Goldman Theatres, Inc., a Delaware
corporation operating motion picture houses in Pennsylvania, sued Loew's, Inc., alleging a violation of
the federal antitrust laws and seeking treble damages. After a holding that a violation had occurred,
William Goldman Theatres, Inc. v. Loew's, Inc., 150 F.2d 738, the case was remanded to the trial
court for a determination of damages. It was found that Goldman had suffered a loss of profits equal
to $125,000 and was entitled to treble damages in the sum of $375,000. William Goldman Theatres,
Inc. v. Loew's, Inc., 69 F. Supp. 103, aff'd, 164 F.2d 1021, cert. denied, 334 U.S. 811 . Goldman
reported only $125,000 of the recovery as gross income and claimed that the $250,000 [348 U.S. 426,
429] balance constituted punitive damages and as such was not taxable. The Tax Court agreed, 19
T. C. 637, and the Court of Appeals, hearing this with the Glenshaw case, affirmed. 211 F.2d 928.

It is conceded by the respondents that there is no constitutional barrier to the imposition of a tax on
punitive damages. Our question is one of statutory construction: are these payments comprehended
by 22 (a)?

The sweeping scope of the controverted statute is readily apparent:

"SEC. 22. GROSS INCOME.


"(a) GENERAL DEFINITION. - `Gross income' includes gains, profits, and income derived from
salaries, wages, or compensation for personal service . . . of whatever kind and in whatever
form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings
in property, whether real or personal, growing out of the ownership or use of or interest in such
property; also from interest, rent, dividends, securities, or the transaction of any business
carried on for gain or profit, or gains or profits and income derived from any source whatever. .
. ." (Emphasis added.) 4
This Court has frequently stated that this language was used by Congress to exert in this field "the full
measure of its taxing power." Helvering v. Clifford, 309 U.S. 331, 334 ; Helvering v. Midland Mutual
Life Ins. Co., 300 U.S. 216, 223 ; Douglas v. Willcuts, 296 U.S. 1, 9 ; Irwin v. Gavit, 268 U.S. 161, 166
. Respondents contend that punitive damages, characterized as "windfalls" flowing from the culpable
conduct of third parties, are not within the scope of the section. But Congress applied no limitations
as to the source of taxable receipts, nor restrictive [348 U.S. 426, 430] labels as to their nature. And the
Court has given a liberal construction to this broad phraseology in recognition of the intention of
Congress to tax all gains except those specifically exempted. Commissioner v. Jacobson, 336 U.S.
28, 49 ; Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 87 -91. Thus, the fortuitous gain
accruing to a lessor by reason of the forfeiture of a lessee's improvements on the rented property was
taxed in Helvering v. Bruun, 309 U.S. 461 . Cf. Robertson v. United States, 343 U.S. 711 ; Rutkin v.
United States, 343 U.S. 130 ; United States v. Kirby Lumber Co., 284 U.S. 1 . Such decisions
demonstrate that we cannot but ascribe content to the catchall provision of 22 (a), "gains or profits
and income derived from any source whatever." The importance of that phrase has been too
frequently recognized since its first appearance in the Revenue Act of 1913 5 to say now that it adds
nothing to the meaning of "gross income."

Nor can we accept respondent's contention that a narrower reading of 22 (a) is required by the
Court's characterization of income in Eisner v. Macomber, 252 U.S. 189, 207 , as "the gain derived
from capital, from labor, or from both combined." 6 The Court was there endeavoring to determine
whether the distribution of a corporate stock dividend constituted a realized gain to the shareholder,
or changed "only the form, not the essence," of [348 U.S. 426, 431] his capital investment. Id., at 210. It
was held that the taxpayer had "received nothing out of the company's assets for his separate use
and benefit." Id., at 211. The distribution, therefore, was held not a taxable event. In that context -
distinguishing gain from capital - the definition served a useful purpose. But it was not meant to
provide a touchstone to all future gross income questions. Helvering v. Bruun, supra, at 468-469;
United States v. Kirby Lumber Co., supra, at 3.

Here we have instances of undeniable accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion. The mere fact that the payments were extracted from the
wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable
income to the recipients. Respondents concede, as they must, that the recoveries are taxable to the
extent that they compensate for damages actually incurred. It would be an anomaly that could not be
justified in the absence of clear congressional intent to say that a recovery for actual damages is
taxable but not the additional amount extracted as punishment for the same conduct which caused
the injury. And we find no such evidence of intent to exempt these payments.

It is urged that re-enactment of 22 (a) without change since the Board of Tax Appeals held punitive
damages nontaxable in Highland Farms Corp., 42 B. T. A. 1314, indicates congressional satisfaction
with that holding. Re-enactment - particularly without the slightest affirmative indication that Congress
ever had the Highland Farms decision before it - is an unreliable indicium at best. Helvering v.
Wilshire Oil Co., 308 U.S. 90, 100 -101; Koshland v. Helvering, 298 U.S. 441, 447 . Moreover, the
Commissioner promptly published his nonacquiescence in this portion of the Highland Farms
holding 7 and has, [348 U.S. 426, 432] before and since, consistently maintained the position that these
receipts are taxable. 8 It therefore cannot be said with certitude that Congress intended to carve an
exception out of 22 (a)'s pervasive coverage. Nor does the 1954 Code's 9 legislative history, with its
reiteration of the proposition that statutory gross income is "all-inclusive," 10 give support to
respondent's position. The definition of gross income has been simplified, but no effect upon its
present broad scope was intended. 11 Certainly punitive damages cannot reasonably be classified as
gifts, cf. Commissioner v. Jacobson, 336 U.S. 28, 47 -52, nor do they come under any other
exemption provision in the Code. We would do violence to the plain meaning of the statute and
restrict a clear legislative attempt to [348 U.S. 426, 433] bring the taxing power to bear upon all receipts
constitutionally taxable were we to say that the payments in question here are not gross income. See
Helvering v. Midland Mutual Life Ins. Co., supra, at 223.

Reversed.
MR. JUSTICE DOUGLAS dissents.
Ermenegildo CESARINI et al., Plaintiffs,
v.
UNITED STATES of America, Defendant.
No. C 67-65.

United States District Court N. D. Ohio, W. D.


February 17, 1969.

Murray & Murray, Sandusky, Ohio, for plaintiffs.

Mitchell Rogovin, Asst. Atty. Gen., David A. Wilson, Jr. and Daniel L. Power, *4 Dept. of Justice, Washington, D.
C., for defendant.

YOUNG, District Judge.

This is an action by the plaintiffs as taxpayers for the recovery of income tax payments made in the calendar year
1964. Plaintiffs contend that the amount of $836.51 was erroneously overpaid by them in 1964, and that they are
entitled to a refund in that amount, together with the statutory interest from October 13, 1965, the date which they
made their claim upon the Internal Revenue Service for the refund.

Plaintiffs and the United States have stipulated to the material facts in the case, and the matter is before the Court
for final decision. The facts necessary for a resolution of the issues raised should perhaps be briefly stated before
the Court proceeds to a determination of the matter. Plaintiffs are husband and wife, and live within the jurisdiction
of the United States District Court for the Northern District of Ohio. In 1957, the plaintiffs purchased a used piano
at an auction sale for approximately $15.00, and the piano was used by their daughter for piano lessons. In 1964,
while cleaning the piano, plaintiffs discovered the sum of $4,467.00 in old currency, and since have retained the
piano instead of discarding it as previously planned. Being unable to ascertain who put the money there, plaintiffs
exchanged the old currency for new at a bank, and reported the sum of $4,467.00 on their 1964 joint income tax
return as ordinary income from other sources. On October 18, 1965, plaintiffs filed an amended return with the
District Director of Internal Revenue in Cleveland, Ohio, this second return eliminating the sum of $4,467.00 from
the gross income computation, and requesting a refund in the amount of $836.51, the amount allegedly overpaid as
a result of the former inclusion of $4,467.00 in the original return for the calendar year of 1964. On January 18,
1966, the Commissioner of Internal Revenue rejected taxpayers' refund claim in its entirety, and plaintiffs filed the
instant action in March of 1967.

Plaintiffs make three alternative contentions in support of their claim that the sum of $836.51 should be refunded to
them. First, that the $4,467.00 found in the piano is not includable in gross income under Section 61 of the Internal
Revenue Code. (26 U.S.C. § 61) Secondly, even if the retention of the cash constitutes a realization of ordinary
income under Section 61, it was due and owing in the year the piano was purchased, 1957, and by 1964, the statute
of limitations provided by 26 U.S.C. § 6501 had elapsed. And thirdly, that if the treasure trove money is gross
income for the year 1964, it was entitled to capial gains treatment under Section 1221 of Title 26. The Government,
by its answer and its trial brief, asserts that the amount found in the piano is includable in gross income under
Section 61(a) of Title 26, U.S.C., that the money is taxable in the year it was actually found, 1964, and that the sum
is properly taxable at ordinary income rates, not being entitled to capital gains treatment under 26 U.S.C. §§ 1201 et
seq.

After a consideration of the pertinent provisions of the Internal Revenue Code, Treasury Regulations, Revenue
Rulings, and decisional law in the area, this Court has concluded that the taxpayers are not entitled to a refund of
the amount requested, nor are they entitled to capital gains treatment on the income item at issue.

The starting point in determining whether an item is to be included in gross income is, of course, Section 61(a) of
Title 26 U.S.C., and that section provides in part:
"Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not
limited to) the following items: * * *" (Emphasis added.)

Subsections (1) through (15) of Section 61(a) then go on to list fifteen items specifically included in the
computation *5 of the taxpayer's gross income, and Part II of Subchapter B of the 1954 Code (Sections 71 et seq.)
deals with other items expressly included in gross income. While neither of these listings expressly includes the type
of income which is at issue in the case at bar, Part III of Subchapter B (Sections 101 et seq.) deals with items
specifically excluded from gross income, and found money is not listed in those sections either. This absence of
express mention in any of the code sections necessitates a return to the "all income from whatever source" language
of Section 61(a) of the code, and the express statement there that gross income is "not limited to" the following
fifteen examples. Section 1.61-1(a) of the Treasury Regulations, the corresponding section to Section 61(a) in the
1954 Code, reiterates this broad construction of gross income, providing in part:

"Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income
realized in any form, whether in money, property, or services. * * *" (Emphasis added.)

The decisions of the United States Supreme Court have frequently stated that this broad all-inclusive language was
used by Congress to exert the full measure of its taxing power under the Sixteenth Amendment to the United States
Constitution. Commissioner of Internal Revenue v. Glenshaw Glass Co., 348 U.S. 426, 429, 75 S. Ct. 473, 99 L. Ed.
483 (1955); Helvering v. Clifford, 309 U.S. 331, 334, 60 S. Ct. 554, 84 L. Ed. 788 (1940); Helvering v. Midland
Mutual Life Ins. Co., 300 U.S. 216, 223, 57 S. Ct. 423, 81 L. Ed. 612 (1937); Douglas v. Willcuts, 296 U.S. 1, 9, 56 S.
Ct. 59, 80 L. Ed. 3 (1935); Irwin v. Gavit, 268 U.S. 161, 166, 45 S. Ct. 475, 69 L. Ed. 897 (1925).

In addition, the Government in the instant case cites and relies upon an I.R.S. Revenue Ruling which is undeniably
on point:

"The finder of treasure-trove is in receipt of taxable income, for Federal income tax purposes, to the extent of its
value in United States currency, for the taxable year in which it is reduced to undisputed possession." Rev.Rul. 61,
1953-1, Cum.Bull. 17.

The plaintiffs argue that the above ruling does not control this case for two reasons. The first is that subsequent to
the Ruling's pronouncement in 1953, Congress enacted Sections 74 and 102 of the 1954 Code, § 74
expressly including the value of prizes and awards in gross income in most cases, and § 102 specifically exempting the
value of gifts received from gross income. From this, it is argued that Section 74 was added because prizes might
otherwise be construed as non-taxable gifts, and since no such section was passed expressly taxing treasure-trove, it
is therefore a gift which is non-taxable under Section 102. This line of reasoning overlooks the statutory scheme
previously alluded to, whereby income from all sources is taxed unless the taxpayer can point to an express
exemption. Not only have the taxpayers failed to list a specific exclusion in the instant case, but also the
Government has pointed to express language covering the found money, even though it would not be required to
do so under the broad language of Section 61(a) and the foregoing Supreme Court decisions interpreting it.

The second argument of the taxpayers in support of their contention that Rev. Rul. 61, 1953-1 should not be
applied in this case is based upon the decision of Dougherty v. Commissioner, 10 T.C.M. 320, P-H Memo. T.C., ¶
51,093 (1951). In that case the petitioner was an individual who had never filed an income tax return, and the
Commissioner was attempting to determine his gross income by the so-called "net worth" method. Dougherty had
a substantial increase in his net worth, and attempted to partially explain away his lack of reporting it by claiming
that he had found $31,000.00 in cash inside a used chair he had purchased in 1947. The Tax Court's opinion deals
primarily with the factual question of whether or not Dougherty actually did find this money in a chair, finally
concluding that he did not, and from this *6 petitioners in the instant case argue that if such found money is clearly
gross income, the Tax Court would not have reached the fact question, but merely included the $31,000.00 as a
matter of law. Petitioners argue that since the Tax Court did not include the sum in Dougherty's gross income until
they had found as a fact that it was not treasure trove, then by implication such discovered money is not taxable. This
argument must fail for two reasons. First, the Dougherty decision precedes Rev.Rul. 61, 1953-1 by two years, and thus
was dealing with what then was an uncharted area of the gross income provisions of the Code. Secondly, the case
cannot be read as authority for the proposition that treasure trove is not includable in gross income, even if the
revenue ruling had not been issued two years later.[1]

In partial summary, then, the arguments of the taxpayers which attempt to avoid the application of Rev.Rul. 61,
1953-1 are not well taken. The Dougherty case simply does not hold one way or another on the problem before this
Court, and therefore petitioners' reliance upon it is misplaced. The other branch of their argument, that found
money must be construed to be a gift under Section 102 of the 1954 Code since it is not expressly included as are
prizes in Section 74 of the Code, would not even be effective were it being urged at a time prior to 1953, when the
ruling had not yet been promulgated. In addition to the numerous cases in the Supreme Court which uphold the
broad sweeping construction of Section 61(a) found in Treas.Reg. § 1.61-1(a), other courts and commentators
writing at a point in time before the ruling came down took the position that windfalls, including found monies,
were properly includable in gross income under Section 22(a) of the 1939 Code, the predecessor of Section 61(a) in
the 1954 Code. See, for example, the decision in Park & Tilford Distillers Corp. v. United States, 107 F. Supp. 941,
123 Ct.Cl. 509 (1952);[2] and Comment, "Taxation of Found Property and Other Windfalls," 20 U.Chi.L.Rev. 748,
752 (1953).[3] While it is generally true that revenue rulings may be disregarded by the courts if in conflict with the
code and *7 the regulations, or with other judicial decisions, plaintiffs in the instant case have been unable to point
to any inconsistency between the gross income sections of the code, the interpretation of them by the regulations
and the courts, and the revenue ruling which they herein attack as inapplicable. On the other hand, the United
States has shown a consistency in letter and spirit between the ruling and the code, regulations, and court decisions.

Although not cited by either party, and noticeably absent from the Government's brief, the following Treasury
Regulation appears in the 1964 Regulations, the year of the return in dispute:

"§ 1.61-14 Miscellaneous items of gross income.

"(a) In general. In addition to the items enumerated in section 61(a), there are many other kinds of gross income * *
*. Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced
to undisputed possession." (Emphasis added.)

Identical language appears in the 1968 Treasury Regulations, and is found in all previous years back to 1958. This
language is the same in all material respects as that found in Rev.Rul. 61-53-1, Cum. Bull. 17, and is undoubtedly an
attempt to codify that ruling into the Regulations which apply to the 1954 Code. This Court is of the opinion that
Treas.Reg. § 1.61-14(a) is dispositive of the major issue in this case if the $4,467.00 found in the piano was "reduced
to undisputed possession" in the year petitioners reported it, for this Regulation was applicable to returns filed in
the calendar year of 1964.

This brings the Court to the second contention of the plaintiffs: that if any tax was due, it was in 1957 when the
piano was purchased, and by 1964 the Government was blocked from collecting it by reason of the statute of
limitations. Without reaching the question of whether the voluntary payment in 1964 constituted a waiver on the part
of the taxpayers, this Court finds that the $4,467.00 sum was properly included in gross income for the calendar
year of 1964. Problems of when title vests, or when possession is complete in the field of federal taxation, in the
absence of definitive federal legislation on the subject, are ordinarily determined by reference to the law of the state
in which the taxpayer resides, or where the property around which the dispute centers is located. Since both the
taxpayers and the property in question are found within the State of Ohio, Ohio law must govern as to when the
found money was "reduced to undisputed possession" within the meaning of Treas. Reg. § 1.61-14 and Rev.Rul. 61-
53-1, Cum.Bull. 17.
In Ohio, there is no statute specifically dealing with the rights of owners and finders of treasure trove, and in the
absence of such a statute the commonlaw rule of England applies, so that "title belongs to the finder as against all
the world except the true owner." Niederlehner v. Weatherly, 78 Ohio App. 263, 69 N.E.2d 787 (1946), appeal
dismissed, 146 Ohio St. 697, 67 N.E.2d 713 (1946). The Niederlehner case held, inter alia, that the owner of real estate
upon which money is found does not have title as against the finder. Therefore, in the instant case if plaintiffs had
resold the piano in 1958, not knowing of the money within it, they later would not be able to succeed in an action
against the purchaser who did discover it. Under Ohio law, the plaintiffs must have actually found the money to have
superior title over all but the true owner, and they did not discover the old currency until 1964. Unless there is
present a specific state statute to the contrary,[4]*8 the majority of jurisdictions are in accord with the Ohio
rule.[5] Therefore, this Court finds that the $4,467.00 in old currency was not "reduced to undisputed possession"
until its actual discovery in 1964, and thus the United States was not barred by the statute of limitations from
collecting the $836.51 in tax during that year.

Finally, plaintiffs' contention that they are entitled to capital gains treatment upon the discovered money must be
rejected. While the broad definition of "capital asset" in Section 1221 of Title 26 would on its face cover both the
piano and the currency, Section 1222 (3) defines long-term capital gains as those resulting from the "sale or
exchange of a capital asset held for more than 6 months." Aside from the fact that the piano for which plaintiffs
paid $15.00 and the $4,467.00 in currency found within it are economically dissimilar, neither the piano nor the
currency have been sold or exchanged. The benefits of capital gains treatment in the taxing statutes are not allowed
to flow to every gain growing out of a transaction concerning capital assets, but only to gains from the "sale or
exchange" of capital assets, Dobson v. Commissioner of Internal Revenue, 321 U.S. 231, 64 S. Ct. 495, 88 L. Ed.
691 (1944) and the terms "sale" and "exchange" are to be given ordinary meaning in determining whether capital
gains treatment is proper. Pounds v. United States, 372 F.2d 342 (5th Cir. 1967). It has been held that a "sale" in the
ordinary sense of the word is a transfer of property for a fixed price in money or its equivalent. Grinnell Corp. v.
United States, 390 F.2d 932 (Ct.Cl.1968). Applying the ordinary meaning of the words sale or exchange to the facts
of this case, it is readily apparent that neither transaction has occurred, the plaintiffs not having sold or exchanged
the piano or the money. They are therefore not entitled to capital gains treatment on the $4,467.00 found inside the
piano, but instead incurred tax liability for the sum at ordinary income rates. Since it appears to the Court that the
income tax on these taxpayers' gross income for the calendar year of 1964 has been properly assessed and paid, this
taxpayers' suit for a refund in the amount of $836.51 must be dismissed, and judgment entered for the United
States. An order will be entered accordingly.
Hornungv.Commissioner of Internal Revenue
Download PDFCheck if overturned

United States Tax CourtJan 27, 1967

47 T.C. 428 (T.C. 1967)Copy Citation

HOYT, Judge:

Respondent determined an income tax deficiency against petitioner in the amount of $3,163.76 for
the taxable year 1962. Petitioner having conceded an issue relating to a travel expense deduction,
the questions remaining for decision are:

(1) Whether the value of a 1962 Corvette automobile which was won by petitioner for his performance
in a professional football game should be included in his gross income for the taxable year 1962.

(2) Whether the value of the use of 1962 Thunderbird automobiles furnished to the petitioner by the
Ford Motor Co. should be included in his gross income for the taxable year 1962.

(3) Whether petitioner's gross income for 1962 should include the value of a fur stole received by
petitioner's mother from his employer.

FINDINGS OF FACT

The stipulated facts are found accordingly and adopted as our findings.

Petitioner is a cash basis taxpayer residing in Louisville, Ky. For the taxable year 1962, petitioner filed
his Federal individual income tax return (Form 1040) with the district director of internal revenue,
Louisville, Ky. Petitioner is a well-known professional football player who was employed by the Green
Bay Packers in 1962. Prior to becoming a professional, petitioner attended the University of Notre
Dame and was an All-American quarterback on the university football team.

Issue 1. The Corvette

Sport Magazine is a publication of the McFadden-Bartell Corp., with business offices in New York
City. Each year Sport Magazine (hereinafter sometimes referred to as Sport or the magazine) awards
a new Corvette automobile to the player selected by its editors (primarily by its editor in chief) as the
outstanding player in the National Football League championship game. This award was won by John
Unitas of the Baltimore Colts in 1958 and 1959 and by Norm Van Brocklin of the Philadelphia Eagles
in 1960. A similar annual award is made to outstanding professional athletes in baseball, hockey, and
basketball. The existence of the award is announced several days prior to the sporting event in
question, and the selection and announcement of the winner is made immediately following the
athletic contest. The Corvette automobiles are generally presented to the recipients at a luncheon or
dinner several days subsequent to the sporting event and a photograph of the athlete receiving the
car is published in the magazine, together with an article relating to his performance during the
particular athletic event. The Corvette awards are intended to promote the sale of Sport Magazine
and their cost is deducted by the publisher for Federal income tax purposes as promotion and
advertising expense.
The Corvette which is to be awarded to the most valuable player in the National Football League
championship game is generally purchased by the magazine several months prior to the date the
game is played, and it is held by a New York area Chevrolet dealer until delivered to the recipient of
the award. In some years when the game is played in New York the magazine has had the car on
display at the stadium on the day of the game.

On December 31, 1961, petitioner played in the National Football League championship game
between the Green Bay Packers and the New York Giants. The game was played in Green Bay, Wis.
Petitioner scored a total of 19 points during this game and thereby established a new league record.
At the end of this game petitioner was selected by the editors of Sport as the most valuable player
and winner of the Corvette, and press releases were issued announcing the award. At approximately
4:30 on the afternoon of December 31, 1961, following the game, the editor in chief of Sport informed
petitioner that he had been selected as the most valuable player of the game. The editor in chief did
not have the key or the title to the Corvette with him in Green Bay and petitioner did not request or
demand immediate possession of the car at that time but he accepted the award.

The Corvette which was to be awarded in connection with this 1961 championship game had been
purchased by Sport in September of 1961. However, since the game was played in Green Bay, Wis.,
the car was not on display at the stadium on the day of the game, but was in New York in the hands
of a Chevrolet dealership. As far as Sport was concerned the car was "available" to petitioner on
December 31, 1961, as soon as the award was announced. However, December 31, 1961, was a
Sunday and the New York dealership at which the car was located was closed. Although the National
Football League championship game is always played on a Sunday, Sport is prepared to make prior
arrangements to have the car available in New York for the recipient of the award on that Sunday
afternoon if the circumstances appear to warrant such arrangements — particularly if the game is
played in New York. Such arrangements were not made in 1961 because the game was played in
Green Bay, and, in the words of Sport's editor in chief, "it seemed a hundred-to-one that * * * [the
recipient of the award] would want to come in [to New York] on New Year's Eve to take possession"
of the prize.

On December 31, 1961, when petitioner was informed that he had won the Corvette, he was also
informed that a luncheon was to be held for him in New York City on the following Wednesday by the
publisher of Sport, at which luncheon his award would be presented. At that time petitioner consented
to attend the luncheon in order to receive the Corvette. There was no discussion that he would obtain
the car prior to the presentation ceremony previously announced. The lunch was held as scheduled
on Wednesday, January 3, 1962, in a New York restaurant. Petitioner attended and was
photographed during the course of the presentation of the automobile to him. A photograph of
petitioner sitting in the car outside of the restaurant was published in the April 1962 issue of Sport,
together with an article regarding his achievements in the championship game and the Corvette prize
award. Petitioner was not required to attend the lunch or to pose for photographs or perform any
other service for Sport as a condition or as consideration for his receipt of the car.

The fair market value of the Corvette automobile received by petitioner was $3,331.04. Petitioner
reported the sale of the Corvette in his 1962 Federal income tax return in Schedule D attached
thereto as a short-term gain as follows: Kind of property Date Date Gross sales Depreciation acquired
sold price allowed Cost Gain

1962 Corvette gift — Sport Magazine .. 1962 1962 3,331.04 0.00 0.00 None NOTE: Section 74(b) provides an
exclusion from gross income any amount received as a prize or award if
(1) Such prize or award was made primarily in recognition of past achievements of the recipient in religious,
charitable, scientific, educational, artistic, literary, or civic fields.
(2) Recipient was selected without any action on his part to enter the contest or proceeding.

(3) Recipient is not required to render substantial future services as a condition to receiving the prize
or award.

Petitioner did not include the fair market value of this car in his gross income for 1962, or for any
other year. McFadden-Bartell Corporation deducted its cost as a promotion and advertising expense.

Issue 2. The Thunderbird

When petitioner was discharged from the Army in late July of 1962 he contacted a friend of his who
had a job with Ford Motor Co. and asked if the friend could arrange to provide a car for petitioner to
drive while in Green Bay. During 1962 the Ford Motor Co. through a dealership in Green Bay
furnished petitioner a 1962 Thunderbird automobile. Title to this car was retained by Ford, and the
automobile was replaced with a new one after a few months. Petitioner drove the two successive
Thunderbirds a total of approximately 3,000 miles during 1962 and paid for the insurance and all
operating expenses.

Petitioner had sold his prize Corvette in Kansas City 4 or 5 months after he received it.

When petitioner was given the Thunderbird to use he did not have any arrangement or obligation to
be photographed in the car, nor was he asked to make any personal appearances at Ford
dealerships or to make any special effort to be seen by the public driving the car. However, petitioner
was asked if he "would come in and say hello to the kids at Milwaukee Punt, Pass and Kick Contest,"
a contest for children regularly sponsored by Ford Motor Co. which petitioner and "a few of the ball
players" would regularly attend. The Ford Motor Co. has also furnished Thunderbirds to other
members of the Packer team for their use in and around Green Bay.

Petitioner did not recognize or report gross income with respect to his use of the Thunderbirds during
1962. The fair rental value of petitioner's use of the Thunderbirds during 1962 was determined by
respondent to be $600.

Issue 3. The Mink Stole

A few days after the Packers won the title to the Western Division of the National Football League in
1961 the players were informed that the Green Bay Packers, Inc., their employer, would give a fur
stole to the wife, friend, or mother of each player on the team. Since petitioner was not married at the
time, the Packers' head coach suggested that in his case the fur stole be given to his mother.
Petitioner's mother received the fur stole before the end of 1961; she had it in her possession in
Green Bay during the week prior to the championship game on December 31, 1961.

We take judicial notice that this division title was won prior to the Dec. 31, 1961, championship
game in which the Packers played the winners of the Eastern Division.

The cost of all of the fur stoles purchased by the Green Bay Packers, Inc., to be given away as
described above was entered in the corporation's general journal on December 31, 1961, as
"Miscellaneous Player Expense." The Green Bay Packers, Inc., employs the accrual method of
accounting. No deduction was claimed by the Green Bay Packers, Inc., on its 1961 corporate income
tax return for this expense. It was treated on said return under the heading "other unallowable
deductions," and was described as "Awards to players' wives, etc."
The cost of these stoles to the Packers was $395 per stole, less an 8-percent discount. A total of 36
stoles were ordered and the invoices for all but 9 of these were dated subsequent to January 1, 1962.
The invoice for the other 9 was dated December 29, 1961.

Petitioner reported no gross income in any year with respect to the receipt by his mother of the fur
stole in 1961. The fur stole had a fair market value of $395.

Respondent determined that petitioner's taxable income for 1962 was understated by reason of his
failure to include therein ordinary income in the amount of $4,331.04 as reflected by the fair market
value of the following items:

1962 Corvette .................................. $3,331.04 Personal use of 1962 Thunderbird ............... 600.00 Fur coat
....................................... 400.00 --------- Total ...................................... 4,331.04

ULTIMATE FINDINGS OF FACT

The dominant motive and purpose of McFadden-Bartell in awarding the Corvette to petitioner was to
promote and benefit their business of publishing Sport Magazine. Petitioner has failed to carry his
burden of proving that the free use of Thunderbird automobiles provided by Ford Motor Co. to
petitioner in 1962 was not taxable income or that the value thereof was other than as determined by
respondent.

OPINION Issue 1. The Corvette

Petitioner alleged in his petition that the Corvette was received by him as a gift in 1962. However, at
trial and on brief, he argues that the car was constructively received in 1961, prior to the taxable year
for which the deficiency is being assessed. If this contention is upheld, the question of whether the
car constituted a reportable item of gross income need not be considered. This argument is based
upon the assertion that the announcement and acceptance of the award occurred at approximately
4:30 on the afternoon of December 31, 1961, following the game.

It is undisputed that petitioner was selected as the most valuable player of the National Football
League championship game in Green Bay on December 31, 1961. It is also undisputed that petitioner
actually received the car on January 3, 1962, in New York. Petitioner relies upon the statement at the
trial by the editor in chief of Sport that as far as Sport was concerned the car was "available" to
petitioner on December 31, 1961, as soon as the award was announced. It is therefore contended
that the petitioner should be deemed to have received the value of the award in 1961 under the
doctrine of constructive receipt.

The amount of any item of gross income is included in gross income for the taxable year in which
received by the taxpayer unless such amount is properly accounted for as of a different period. Sec.
451(a). It is further provided in section 446(c) that the cash receipts method, which the petitioner
utilized, is a permissible method of computing taxable income. The doctrine of constructive receipt is
developed by regulations under section 446(c) which provides as follows:

All section references are to the Internal Revenue Code of 1954 unless otherwise indicated.

Sec. 1.446-1(c)(1)(i), Income Tax Regs.

Generally, under the cash receipts and disbursements method * * * all items which constitute gross
income (whether in the form of cash, property, or services) are to be included for the taxable year in
which actually or constructively received. * * *
The regulations under section 451 elaborate on the meaning of constructive receipt:

Sec. 1.451-2(a), Income Tax Regs.

Income although not actually reduced to a taxpayer's possession is constructively received by him in
the taxable year during which it is credited to his account, set apart for him, or otherwise made
available so that he may draw upon it at any time, or so that he could have drawn upon it during the
taxable year if notice of intention to withdraw had been given. However, income is not constructively
received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. * * *

The probable purpose for development of the doctrine of constructive receipt was stated as follows
in Ross v. Commissioner, 169 F.2d 483, 491 (C.A. 1, 1948):

The doctrine of constructive receipt was, no doubt, conceived by the Treasury in order to prevent a
taxpayer from choosing the year in which to return income merely by choosing the year in which to
reduce it to possession. Thereby the Treasury may subject income to taxation when the only thing
preventing its reduction to possession is the volition of the taxpayer. * * *

However, it was held in the Ross case, at page 496, that the doctrine of constructive receipt could be
asserted by a taxpayer as a defense to a deficiency assessment even though the item in controversy
had not been reported for the taxable year of the alleged constructive receipt:

if these items were constructively received when earned they cannot be treated as income in any
later year, * * * and, in the absence of misstatement of fact, intentional or otherwise, the petitioner
cannot be estopped from asserting that the items were taxable only in the years in which
constructively received.

The basis of constructive receipt is essentially unfettered control by the recipient over the date of
actual receipt. Petitioner has failed to convince us that he possessed such control on December 31,
1961, over the receipt of the Corvette. The evidence establishes that the Corvette which was
presented to petitioner on January 3, 1962, was in the possession of a Chevrolet dealer in New York
City on December 31, 1961. At the time the award was announced in Green Bay, the editor in chief
of Sport had neither the title nor keys to the car, and nothing was given or presented to petitioner to
evidence his ownership or right to possession of the car at that time.

Moreover, since December 31, 1961, was a Sunday, it is doubtful whether the car could have been
transferred to petitioner before Monday even with the cooperation of the editor in chief of Sport. The
New York dealership at which the car was located was closed. The car had not been set aside for
petitioner's use and delivery was not dependent solely upon the volition of petitioner. The doctrine of
constructive receipt is therefore inapplicable, and we hold that petitioner received the Corvette for
income tax purposes in 1962 as he originally alleged in his petition and as he reported in his 1962
income tax return.

We now must tackle the more basic question involving the Corvette which is whether the value of the
car should be included in petitioner's gross income for the taxable year of receipt. Petitioner's
offensive strategy on this issue is two-pronged. He contends (1) that the car was received as a gift
and therefore properly excluded from gross income under section 102(a), and (2) that the car was
received as a nontaxable prize or award under section 74.

SEC. 74. PRIZES AND AWARDS.


(a) GENERAL RULE. — Except as provided in subsection (b) and in section 117 (relating to
scholarships and fellowship grants), gross income includes amounts received as prizes and
awards.
(b) EXCEPTION. — Gross income does not include amounts received as prizes and awards
made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or
civic achievement, but only if —

(1) the recipient was selected without any action on his part to enter the contest or proceedings;
and

(2) the recipient is not required to render substantial future services as a condition to receiving the
prize or award.
It is our opinion that certainly the donor's motive here precludes a determination that Sport made a
gift of the Corvette to petitioner in 1962. It is clear that there was no detached and disinterested
generosity. It also seems clear that the enactment of section 74 has had the desirable effect of
eliminating the theory of gift exclusions from the field of prizes and awards. The Supreme Court has
stated in Commissioner v. Duberstein, 363 U.S. 278, 290 (1960), with regard to gift exclusions that:

If there is fear of undue uncertainty or overmuch litigation, Congress may make more precise its
treatment of the matter by singling out certain factors and making them determinative of the matter,
as it has done in one field of the "gift" exclusion's former application, that of prizes and
awards.12 [Footnote omitted.]

Petitioner undeniably received an award for his outstanding performance in the National Football
League championship game. Under the provisions of section 74, gross income includes amounts
received as prizes and awards unless section 117 (relating to scholarships and fellowship grants), or
the exception set forth in subsection (b) is applicable. Therefore, petitioner is precluded from
effectively arguing that the award constituted a gift, and he can only hope to score on his argument
that the award qualifies as an exception under section 74(b). In making this argument, petitioner shifts
into a shotgun formation, contending that his accomplishments in the championship football game
constitute educational, artistic, scientific, and civic achievements within the meaning of section 74(b).
We believe that petitioner should be caught behind the line of scrimmage on this particular offensive
maneuver.

In construing the terms used in section 74(b), we are cognizant of the Supreme Court's recent
reaffirmation of the principle that the words of revenue acts should be interpreted in their ordinary,
everyday sense unless the internal structure of the statute or the legislative purpose indicates the
propriety of a departure from a literal reading. See Malat v. Riddell, 383 U.S. 569 (1966). Petitioner
relies primarily upon the opinions and beliefs of the editor in chief of Sport to establish the applicability
of section 74(b).

In the opinion of this witness, the game of football is educational because it is taught in accredited
colleges as part of certain physical education courses. Moreover, being a star football player is said to
be an artistic achievement since such status "calls for a degree of artistry." Finally, since the skills of
a football player are based upon techniques which encompass certain "scientific" principles, it is
contended that petitioner's ability to excel in the execution of these techniques is a scientific
achievement worthy of recognition by means of the award presented by Sport. Petitioner also argues
that the award was made in recognition of civic achievement due to the alleged interest of the
President of the United States in petitioner's application for leave from the Army to allow participation
in the championship game.

The record contains the following statements by the editor in chief of Sport describing some of the
"scientific" principles of football:
"The players have large notebooks that they have at the beginning of the practice season that
contain intricate plays. You have to be somewhat of a mathematician to digest them. * * *
*******
"Part of the training, at least related to football, professional football, is that the athlete must know
a certain number of plays a year; must know how to play his position in many different ways; must
be able to look at a film of another team and decide how to play against his particular opponent;
must look at his own films and know what he has done right and what he has done wrong, and
whether he has blocked off the wrong shoulder or something like that. He must know what his
teammates are doing in relation to a formation, in relation to specific plays.
"This is all in the area of technique, and is quite complicated, and in a sense I think scientific."

We believe that the words "educational," "artistic," "scientific," and "civic" as used in section 74(b)
should be given their ordinary, everyday meaning in the context of defining certain types of personal
achievement. Legislative history supports our belief. For example, the Senate report states that the
provisions of section 74(b) are intended to exempt from taxation such awards as the Nobel prize.
See S. Rept. No. 1622, to accompany H.R. 8300 (Pub.L. 591), 83d Cong., 2d Sess., p. 178 (1954).

The legislative history of section 74 has been judicially interpreted as indicating that "only awards for
genuinely meritorious achievements were to be freed from taxation." Simmons v. United States, 308
F.2d 160, 163 (C.A. 4, 1962). It was further stated in Simmons that all of the types of achievements
singled out in section 74(b) resemble each other in general character since "they all represent
activities enhancing in one way or another the public good." This interpretation is consistent with our
view that the field of activity here in question, professional football, is not an activity which is
"educational," "artistic," "scientific," or "civic" in the traditional, ordinarily understood, and intended
sense of these words.

We feel confident that Congress had no intention of allowing professional football to constitute a type
of activity for which proficiency could be recognized with an exempt award under section 74(b).
Professional football cannot be viewed as an "educational," "artistic," "scientific," or "civic" field of
endeavor as those terms are used in the statute no matter how fond of the sport we may be. The
crucial question for qualification under section 74(b) is the nature of the activity
awarded. Simmons v. United States, 308 F.2d 160 (C.A. 4, 1962). Had Congress intended to except
prizes or awards for recognition of athletic prowess or achievement it could readily and easily have
done so; as provided now however, no such exception can be read into the statutory language used.
We hold that the value of the Corvette should have been included in petitioner's gross income for
1962. To hold otherwise would be a distortion of the commonly understood meaning of the words in
controversy when read in the overall context of section 74.

Issue 2. The Thunderbird

Respondent has determined that $600, the fair rental value of petitioner's successive use of two 1962
Thunderbirds furnished by the Ford Motor Co., should have been included in petitioner's 1962 gross
income. Petitioner argues that the free use of the cars was a gift or loan to him. Petitioner was not
obligated to perform any special services for the Ford Motor Co. in return for the privilege of using the
cars, and there was no employment contract involved. In this situation, it is contended that the free
use of the Thunderbirds did not constitute taxable income. Petitioner paid for all the operating
expenses of the cars and the insurance.

We agree with petitioner's position that a taxable benefit does not arise every time an item of personal
property is loaned to another. It should be noted, however, that respondent is not attempting to levy a
tax on the value of a Thunderbird but only on the estimated rental value for the period of use. Thus,
retention of title to the Thunderbirds by the Ford Motor Co. is irrelevant to the instant controversy.

Petitioner attempts to distinguish a loan from a gift so that each may constitute an alternative ground
for avoiding taxation. It is clear that the cars were in effect loaned to petitioner. But this factor does
not determine the taxability of the economic benefit arising from the free use of the cars.

The more serious attack directed against respondent's determination is based on the exclusion of
gifts from gross income under section 102. Thus, if it could be found that the use of the Thunderbirds
arose from a gift within the meaning of section 102, petitioner would escape taxation on the value of
such use.

In deciding whether petitioner received a gift with respect to the use of the cars, we are governed by
the principles enunciated in Commissioner v. Duberstein, 363 U.S. 278 (1960). According
to Duberstein, the most critical consideration in making this determination is the transferor's
"intention." The Duberstein case, at page 286, contains the following statement on this subject:

We take it that the proper criterion, established by decision here, is one that inquires what the basic
reason for his [the transferor's] conduct was in fact — the dominant reason that explains his action in
making the transfer. * * *

The Court in Duberstein then proceeded to analyze applicable case law with respect to what types of
motives or intentions of a transferor are indicative of a gift transfer qualifying under section 102. This
analysis has been concisely summarized in DeJong v. Commissioner, 309 F.2d 373, 379 (C.A. 9,
1962), affirming 36 T.C. 896 (1961), as follows:

The value of a gift may be excluded from gross income only if the gift proceeds from a "detached and
disinterested generosity" or "out of affection, admiration, charity or like impulses" and must be
included if the claimed gift proceeds primarily from "the constraining force of any moral or legal duty"
or from "the incentive of anticipated benefit of an economic nature." * * *

The determination of the gift issue when approached with the Duberstein rationale is essentially
dependent upon "the application of the fact-finding tribunal's experience with the mainsprings of
human conduct to the totality of the facts of each case." Commissioner v. Duberstein, supra at 289.

The burden of proof to establish that the respondent's determination was wrong rests on petitioner.
Due to the lack of evidence pertaining to the circumstances surrounding the loan of the Thunderbirds,
we can only speculate about the reasons of the Ford Motor Co. for authorizing the loan. While it is
possible that Ford was motivated by detached and disinterested generosity, it seems more likely that
officials of the Ford Motor Co. believed that the use of Thunderbirds by well-known and readily
recognizable football stars of national renown would constitute valuable implied personal
endorsements favorable to the sales image of Thunderbirds. This speculation is further supported by
the fact that the Ford Motor Co. also furnished Thunderbirds to certain other members of the Packer
team. Therefore, in the complete absence of any evidence to the contrary, it is logical to conclude that
the Ford Motor Co. was motivated by commercial considerations in furnishing Thunderbirds to
petitioner free of charge.
We feel that this factual determination is "based in the sort of informed experience with human affairs
that fact-finding tribunals should bring to this task." Commissioner v. Duberstein, supra at 292. The
burden on the taxpayer to introduce facts to establish the existence of a gift has not been met.

The petitioner has been unsuccessful in his attempt to persuade us that the free use of the
Thunderbirds was a gift or is specifically excluded from taxation by any applicable section of the
Code. We must still decide, however, whether an economic benefit of the type here received is
includable in gross income under the particular circumstances of this case.

Respondent argues that petitioner received an economic benefit solely because of his status as a
football celebrity, and that the measure of the economic benefit is the rental value of petitioner's use
of the cars. This is the amount of money that the average man on the street would have to expend to
obtain the same use. Thus, for all practical purposes, petitioner was enriched in an amount equal to
what the normal person pays for renting Thunderbirds.

Section 61(a) provides that gross income includes "all income from whatever source derived." The
Supreme Court in Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), and General Investors
Co. v. Commissioner, 348 U.S. 434 (1955), construed the phrase "gains or profits and income derived
from any source whatever," which constituted part of the definition of gross income in section 22(a) of
the Internal Revenue Code of 1939, as encompassing punitive damages for fraud and antitrust
violations involved in Glenshaw Glass and insider profits involved in General Investors.

Certain language in the preceding two cases supports the proposition that gross income is an all-
inclusive concept. In Glenshaw Glass, at pages 431-433, the Court stated:

Here we have instances of undeniable accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion. * * *

* * * We would do violence to the plain meaning of the statute and restrict a clear legislative attempt to
bring the taxing power to bear upon all receipts constitutionally taxable were we to say that the
payments in question here are not gross income. * * *

The Court utilized similar language in General Investors, at page 436:

As in Glenshaw, the taxpayer realized the money in question free of any restrictions as to use. The
payments in controversy were neither capital contributions nor gifts. * * * In accordance with the
legislative design to reach all gain constitutionally taxable unless specifically excluded, we conclude
that the petitioner is liable for the tax * * *

The elimination of the words "gains or profits" from the definition of gross income in the 1954 Code
has not affected the importance of Glenshaw Glass and General Investors. In referring to the
significance of this deletion in view of the legislative history of section 61(a), the Court in Glenshaw
Glass, at page 432, made the following comment:

Nor does the 1954 Code'sfn9 legislative history, with its reiteration of the proposition that statutory
gross income is "all-inclusive,"fn10 give support to respondents' position. The definition of gross
income has been simplified, but no effect upon its present broad scope was intended. fn11 * * *
[Footnotes omitted.]

We hold that the free use of the Thunderbirds constituted income to petitioner within the meaning of
section 61. The rationale of Glenshaw Glass and General Investors seems equally applicable to the
present situation. Petitioner received a valuable benefit which was fully realized by him in a business
context.

This case is clearly distinguishable from the bargain purchase line of cases where the benefit is often
not realized until the subsequent sale of the property at which time the bargain element may be
ascertained with accuracy and accordingly taxed. See Palmer v. Commissioner, 302 U.S. 63
(1937); Commissioner v. LoBue, 351 U.S. 243 (1956). There is no possibility of postponing the
incidence of taxation on the benefit received by petitioner in furtherance of sound tax administration
goals; the benefit of using the cars was realized in 1962 and it must be taxable in the year of receipt
or it will never be taxed. In receiving the free use of the Thunderbirds to use as he saw fit, petitioner
received additions to gross income. See William A. Brown, 47 T.C. 399 (1967).

It seems clear that a person may receive a taxable benefit even though it is not "earned" in the sense
that special duties in return for the benefit are required. Due to petitioner's unique status as a football
celebrity, his endorsement of commercial products is obviously valuable to various business interests.
His 1962 income tax return evidences that fact. In our view, the essence of the transaction was the
endorsement element. The Ford Motor Co. received the intangible benefits of petitioner's implied
personal endorsement of Thunderbirds by authorizing the free use of the cars. Petitioner benefited by
this arrangement in an amount equal to the rental value of his use of the Thunderbirds. Thus, there
was consideration for entering into the arrangements on either side. In such a commercial context,
we think that respondent's determination should be upheld, particularly since petitioner produced no
evidence to indicate a contrary conclusion.

The fact that petitioner could only realize the benefit by doing what was valued by the Ford Motor Co.,
using the Thunderbirds, is certainly unusual. However, this factor should not determine the taxability
of the benefit. The rent-free occupancy of a house has often been held to be income to the occupier
despite the fact that the benefit could only be realized by actually living in the house.
See Chandler v. Commissioner, 119 F.2d 623 (C.A. 3, 1941); Paulina duPont Dean, 9 T.C. 256
(1947), and Charles A. Frueauff, 30 B.T.A. 449 (1934).

It is our considered opinion, therefore, for all of the foregoing reasons, that petitioner should have
included the value of the use of the Thunderbirds in his gross income for the taxable year 1962.
Respondent has determined that value as $600, and petitioner has not produced evidence to
overcome the presumption of correctness of that determination.

Issue 3. The Mink Stole

Respondent has determined that petitioner's gross income for 1962 should have included the fair
market value of a fur stole received by petitioner's mother from the Green Bay Packers, Inc. If for no
other reason, due to our factual finding that petitioner's mother actually received the stole before the
end of 1961, and because petitioner utilized the cash receipts method of computing income, we must
hold that the receipt of the fur stole did not constitute income to petitioner in 1962. Since petitioner's
taxable year 1961 is not before us, we are precluded from further consideration of this issue.
Marrita MURPHY and Daniel J. Leveille, Appellants
v.
INTERNAL REVENUE SERVICE and United States of America, Appellees.
No. 05-5139.

United States Court of Appeals, District of Columbia Circuit.


Argued April 23, 2007.

Decided July 3, 2007.

*171 David K. Colapinto argued the cause for appellants. With him on the briefs were Stephen M. Kohn and Michael D. Kohn.
Richard R. Renner was on the brief for amici curiae No FEAR Coalition, et al. in support of appellants.
Gilbert S. Rothenberg, Attorney, U.S. Department of Justice, argued the cause for appellees. With him on the brief were Jeffrey A.
Taylor, U.S. Attorney, Richard T. Morrison, Deputy Assistant Attorney General, and Kenneth L. Greene and Francesca U. Tamami,
Attorneys. Bridget M. Rowan, Attorney, entered an appearance.
Before: GINSBURG, Chief Judge, and ROGERS and BROWN, Circuit Judges.
Opinion for the Court filed by Chief Judge GINSBURG.

On Rehearing
GINSBURG, Chief Judge:
Marrita Murphy brought this suit to recover income taxes she paid on the compensatory damages for emotional distress and loss of
reputation she was awarded in an administrative action she brought against her former employer. Murphy contends that under §
104(a)(2) of the Internal Revenue Code (IRC), 26 U.S.C. § 104(a)(2), her award should have been excluded from her gross income
because it was compensation received "on account of personal physical injuries or physical sickness." She also maintains that, in any
event, her award is not part of her gross income as defined by § 61 of the IRC, 26 U.S.C. § 61. Finally, she argues that taxing her
award subjects her to an unapportioned direct tax in violation of Article I, Section 9 of the Constitution of the United States.
We reject Murphy's argument in all aspects. We hold, first, that Murphy's compensation was not "received . . . on account of personal
physical injuries" excludable from gross income under § 104(a)(2). Second, we conclude gross income as defined by § 61 includes
compensatory damages for non-physical injuries. Third, we hold that a tax upon such damages is within the Congress's power to tax.

I. Background
In 1994 Marrita Leveille (now Murphy) filed a complaint with the Department of Labor alleging that her former employer, *172 the New
York Air National Guard (NYANG), in violation of various whistle-blower statutes, had "blacklisted" her and provided unfavorable
references to potential employers after she had complained to state authorities of environmental hazards on a NYANG airbase. The
Secretary of Labor determined the NYANG had unlawfully discriminated and retaliated against Murphy, ordered that any adverse
references to the taxpayer in the files of the Office of Personnel Management be withdrawn, and remanded her case to an
Administrative Law Judge "for findings on compensatory damages."
On remand Murphy submitted evidence that she had suffered both mental and physical injuries as a result of the NYANG's blacklisting
her. A psychologist testified that Murphy had sustained both "somatic" and "emotional" injuries, basing his conclusion in part upon
medical and dental records showing Murphy had "bruxism," or teeth grinding often associated with stress, which may cause permanent
tooth damage. Noting that Murphy also suffered from other "physical manifestations of stress" including "anxiety attacks, shortness of
breath, and dizziness," and that Murphy testified she "could not concentrate, stopped talking to friends, and no longer enjoyed `anything
in life,'" the ALJ recommended compensatory damages totaling $70,000, of which $45,000 was for "past and future emotional distress,"
and $25,000 was for "injury to [Murphy's] vocational reputation" from having been blacklisted. None of the award was for lost wages or
diminished earning capacity.
In 1999 the Department of Labor Administrative Review Board affirmed the ALJ's findings and recommendations. See Leveille v. N.Y.
Air Nat'l Guard, 1999 WL 966951, at *2-*4 (Oct. 25, 1999). On her tax return for 2000, Murphy included the $70,000 award in her
"gross income" pursuant to § 61 of the IRC. See 26 U.S.C. § 61(a) ("[G]ross income means all income from whatever source derived").
As a result, she paid $20,665 in taxes on the award.
Murphy later filed an amended return in which she sought a refund of the $20,665 based upon § 104(a)(2) of the IRC, which provides
that "gross income does not include . . . damages . . . received . . . on account of personal physical injuries or physical sickness." In
support of her amended return, Murphy submitted copies of her dental and medical records. Upon deciding Murphy had failed to
demonstrate the compensatory damages were attributable to "physical injury" or "physical sickness," the Internal Revenue Service
denied her request for a refund. Murphy thereafter sued the IRS and the United States in the district court.
In her complaint Murphy sought a refund of the $20,665, plus applicable interest, pursuant to the Sixteenth Amendment to the
Constitution of the United States, along with declaratory and injunctive relief against the IRS pursuant to the Administrative Procedure
Act and the Due Process Clause of the Fifth Amendment. She argued her compensatory award was in fact for "physical personal
injuries" and therefore excluded from gross income under § 104(a)(2). In the alternative Murphy asserted taxing her award was
unconstitutional because the award was not "income" within the meaning of the Sixteenth Amendment. The Government moved to
dismiss Murphy's suit as to the IRS, contending the Service was not a proper defendant, and for summary judgment on all claims.
The district court denied the Government's motion to dismiss, holding that Murphy had the right to bring an "action[] for declaratory
judgments or . . . [a] mandatory injunction" against an "agency by its official title," pursuant to § 703 of the *173 APA, 5 U.S.C. §
703. Murphy v. IRS, 362 F. Supp. 2d 206, 211-12, 218 (2005). The court then rejected all of Murphy's claims on the merits and
granted summary judgment for the Government and the IRS. Id.
Murphy appealed the judgment of the district court with respect to her claims under § 104(a)(2) and the Sixteenth Amendment.
In Murphy v. IRS, 460 F.3d 79 (2006), we concluded Murphy's award was not exempt from taxation pursuant to § 104(a)(2), id. at
84, but also was not "income" within the meaning of the Sixteenth Amendment, id. at 92, and therefore reversed the decision of the
district court. The Government petitioned for rehearing en banc, arguing for the first time that, even if Murphy's award is not income,
there is no constitutional impediment to taxing it because a tax on the award is not a direct tax and is imposed uniformly. In view of the
importance of the issue thus belatedly raised, the panel sua sponte vacated its judgment and reheard the case. See Consumers Union
of U.S., Inc. v. Fed. Power Comm'n, 510 F.2d 656, 662 (D.C.Cir.1975) ("[R]egarding the contents of briefs on appeal, we may also
consider points not raised in the briefs or in oral argument. Our willingness to do so rests on a balancing of considerations of judicial
orderliness and efficiency against the need for the greatest possible accuracy in judicial decisionmaking. The latter factor is of particular
weight when the decision affects the broad public interest.") (footnotes omitted); see also Eli Lilly & Co. v. Home Ins. Co., 794 F.2d
710, 717 (D.C.Cir.1986) ("The rule in this circuit is that litigants must raise their claims on their initial appeal and not in subsequent
hearings following a remand. This is a specific application of the general waiver rule, which bends only in `exceptional circumstances,
where injustice might otherwise result.'") (quoting Dist. of Columbia v. Air Florida, Inc., 750 F.2d 1077, 1085 (D.C.Cir.1984)) (citation
omitted). In the present opinion, we affirm the judgment of the district court based upon the newly argued ground that Murphy's award,
even if it is not income within the meaning of the Sixteenth Amendment, is within the reach of the congressional power to tax under
Article I, Section 8 of the Constitution.

II. Analysis
We review the district court's grant of summary judgment de novo, Flynn v. R.C. Tile, 353 F.3d 953, 957 (D.C.Cir.2004), bearing in
mind that summary judgment is appropriate only "if there is no genuine issue as to any material fact and if the moving party is entitled to
judgment as a matter of law," Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 91 L. Ed. 2d
202 (1986). Before addressing Murphy's claims on their merits, however, we must determine whether the district court erred in holding
the IRS was a proper defendant.
A. The IRS as a Defendant
The Government contends the courts lack jurisdiction over Murphy's claims against the IRS because the Congress has not waived that
agency's immunity from declaratory and injunctive actions pursuant to 28 U.S.C. § 2201(a) (courts may grant declaratory relief "except
with respect to Federal taxes") and 26 U.S.C. § 7421(a) ("no suit for the purpose of restraining the assessment or collection of any tax
shall be maintained in any court by any person"); and insofar as the Congress in 28 U.S.C. § 1346(a)(1) has waived immunity from civil
actions seeking tax refunds, that provision on its face applies to "civil action[s] against the United States," not against the IRS. In reply
Murphy argues only that the Government forfeited the issue of sovereign immunity because it did not cross-appeal the
district *174 court's denial of its motion to dismiss. See FED. R.APP. P. 4(a)(3). Notwithstanding the Government's failure to cross-
appeal, however, the court must address a question concerning its jurisdiction. See Occidental Petroleum Corp. v. SEC, 873 F.2d
325, 328 (D.C.Cir.1989) ("As a preliminary matter . . . we must address the question of our jurisdiction to hear this appeal").
Murphy and the district court are correct that § 703 of the APA does create a right of action for equitable relief against a federal agency
but, as the Government correctly points out, the Congress has preserved the immunity of the United States from declaratory and
injunctive relief with respect to all tax controversies except those pertaining to the classification of organizations under § 501(c) of the
IRC. See 28 U.S.C. § 2201(a); 26 U.S.C. § 7421(a). As an agency of the Government, of course, the IRS shares that
immunity. See Settles v. U.S. Parole Comm'n, 429 F.3d 1098, 1106 (D.C.Cir.2005) (agency "retains the immunity it is due as an arm
of the federal sovereign"). Insofar as the Congress in 28 U.S.C. § 1346(a)(1) has waived sovereign immunity with respect to suits for
tax refunds, that provision specifically contemplates only actions against the "United States." Therefore, we hold the IRS, unlike the
United States, may not be sued eo nomine in this case.
B. Section 104(a)(2) of the IRC
Section 104(a) ("Compensation for injuries or sickness") provides that "gross income [under § 61 of the IRC] does not include the
amount of any damages (other than punitive damages) received . . . on account of personal physical injuries or physical sickness." 26
U.S.C. § 104(a)(2). Since 1996 it has further provided that, for purposes of this exclusion, "emotional distress shall not be treated as a
physical injury or physical sickness." Id. § 104(a). The version of § 104(a)(2) in effect prior to 1996 had excluded from gross income
monies received in compensation for "personal injuries or sickness," which included both physical and nonphysical injuries such as
emotional distress. Id. § 104(a)(2) (1995); see United States v. Burke, 504 U.S. 229, 235 n. 6, 112 S. Ct. 1867, 119 L. Ed.
2d 34 (1992) ("[section] 104(a)(2) in fact encompasses a broad range of physical and nonphysical injuries to personal interests").
In Commissioner v. Schleier, 515 U.S. 323, 115 S. Ct. 2159, 132 L. Ed. 2d 294 (1995), the Supreme Court held that
before a taxpayer may exclude compensatory damages from gross income pursuant to § 104(a)(2), he must first demonstrate that "the
underlying cause of action giving rise to the recovery [was] `based upon tort or tort type rights.'" Id. at 337, 115 S. Ct. 2159. The
taxpayer has the same burden under the statute as amended. See, e.g., Chamberlain v. United States, 401 F.3d 335, 341 (5th
Cir.2005).
Murphy contends § 104(a)(2), even as amended, excludes her particular award from gross income. First, she asserts her award was
"based upon . . . tort type rights" in the whistle-blower statutes the NYANG violated — a position the Government does not challenge.
Second, she claims she was compensated for "physical" injuries, which claim the Government does dispute.
Murphy points both to her psychologist's testimony that she had experienced "somatic" and "body" injuries "as a result of NYANG's
blacklisting [her]," and to the American Heritage Dictionary, which defines "somatic" as "relating to, or affecting the body, especially as
distinguished from a body part, the mind, or the environment." Murphy further argues the dental records she submitted to the IRS
proved she has suffered permanent damage to her teeth. Citing Walters v. Mintec/International, 758 F.2d 73, 78 (3d Cir.1985),
and Payne v. Gen. Motors Corp., 731 F.Supp. *175 1465, 1474-75 (D.Kan.1990), Murphy contends that "substantial physical problems
caused by emotional distress are considered physical injuries or physical sickness."
Murphy further contends that neither § 104 of the IRC nor the regulation issued thereunder "limits the physical disability exclusion to a
physical stimulus." In fact, as Murphy points out, the applicable regulation, which provides that § 104(a)(2) "excludes from gross income
the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness," 26 C.F.R. § 1.104-
1(c), does not distinguish between physical injuries stemming from physical stimuli and those arising from emotional trauma; rather, it
tracks the pre-1996 text of § 104(a)(2), which the IRS agrees excluded from gross income compensation both for physical and for
nonphysical injuries.
For its part, the Government argues Murphy's focus upon the word "physical" in § 104(a)(2) is misplaced; more important is the phrase
"on account of." In O'Gilvie v. United States, 519 U.S. 79, 117 S. Ct. 452, 136 L. Ed. 2d 454 (1996), the Supreme Court
read that phrase to require a "strong[] causal connection," thereby making § 104(a)(2) "applicable only to those personal injury lawsuit
damages that were awarded by reason of, or because of, the personal injuries." Id. at 83, 117 S. Ct. 452. The Court specifically
rejected a "but-for" formulation in favor of a "stronger causal connection." Id. at 82-83, 117 S. Ct. 452. The Government therefore
concludes Murphy must demonstrate she was awarded damages "because of" her physical injuries, which the Government claims she
has failed to do.
Indeed, as the Government points out, the ALJ expressly recommended, and the Board expressly awarded, compensatory damages
"because of" Murphy's nonphysical injuries. The Board analyzed the ALJ's recommendation under the headings "Compensatory
damage for emotional distress or mental anguish" and "Compensatory damage award for injury to professional reputation," and noted
such damages compensate "not only for direct pecuniary loss, but also for such harms as impairment of reputation, personal
humiliation, and mental anguish and suffering." Leveille, 1999 WL 966951 at *2. In describing the ALJ's proposed award as
"reasonable," the Board stated Murphy was to receive "$45,000 for mental pain and anguish" and "$25,000 for injury to professional
reputation." Although Murphy may have suffered from bruxism or other physical symptoms of stress, the Board focused upon Murphy's
testimony that she experienced "severe anxiety attacks, inability to concentrate, a feeling that she no longer enjoyed `anything in life,'
and marital conflict" and upon her psychologist's testimony about the "substantial effect the negative references had on [Murphy]." Id. at
*3. The Board made no reference to her bruxism, and acknowledged that "[a]ny attempt to set a monetary value on intangible damages
such as mental pain and anguish involves a subjective judgment," id. at *4, before concluding the ALJ's recommendation was
reasonable. The Government therefore argues "there was no direct causal link between the damages award at issue and [Murphy's]
bruxism."
Murphy responds that it is undisputed she suffered both "somatic" and "emotional" injuries, and the ALJ and Board expressly cited to
the portion of her psychologist's testimony establishing that fact. She contends the Board therefore relied upon her physical injuries in
determining her damages, making those injuries a direct cause of her award in spite of the Board's labeling the award as one for
emotional distress.
*176 Although the pre-1996 version of § 104(a)(2) was at issue in O'Gilvie, the Court's analysis of the phrase "on account of," which
phrase was unchanged by the 1996 Amendments, remains controlling here. Murphy no doubt suffered from certain physical
manifestations of emotional distress, but the record clearly indicates the Board awarded her compensation only "for mental pain and
anguish" and "for injury to professional reputation." Id. at *5. Although the Board cited her psychologist, who had mentioned her
physical aliments, in support of Murphy's "description of her mental anguish," we cannot say the Board, notwithstanding its clear
statements to the contrary, actually awarded damages because of Murphy's bruxism and other physical manifestations of stress. Id. at
*3. At best — and this is doubtful — at best the Board and the ALJ may have considered her physical injuries indicative of the severity
of the emotional distress for which the damages were awarded, but her physical injuries themselves were not the reason for the award.
The Board thus having left no room for doubt about the grounds for her award, we conclude Murphy's damages were not "awarded by
reason of, or because of, . . . [physical] personal injuries," O'Gilvie, 519 U.S. at 83, 117 S. Ct. 452. Therefore, § 104(a)(2) does not
permit Murphy to exclude her award from gross income.[*]
C. Section 61 of the IRC
Murphy and the Government agree that for Murphy's award to be taxable, it must be part of her "gross income" as defined by § 61(a) of
the IRC, which states in relevant part: "gross income means all income from whatever source derived." The Supreme Court has
interpreted the section broadly to extend to "all economic gains not otherwise exempted." Comm'r v. Banks, 543 U.S. 426, 433, 125
S. Ct. 826, 160 L. Ed. 2d 859 (2005); see also, e.g., James v. United States, 366 U.S. 213, 219, 81 S. Ct. 1052, 6 L.
Ed. 2d 246 (1961) (Section 61 encompasses "all accessions to wealth") (internal quotation mark omitted); Comm'r v. Glenshaw
Glass Co., 348 U.S. 426, 430, 75 S. Ct. 473, 99 L. Ed. 483 ("the Court has given a liberal construction to ["gross income"] in
recognition of the intention of Congress to tax all gains except those specifically exempted"). "Gross income" in § 61(a) is at least as
broad as the meaning of "incomes" in the Sixteenth Amendment.[*]See Glenshaw Glass, 348 U.S. at 429, 432 n. 11, 75 S. Ct.
473 (quoting H.R.Rep. No. 83-1337, at A18 (1954), reprinted in 1954 U.S.C.C.A.N. 4017, 4155); Helvering v. Bruun, 309 U.S. 461,
468, 60 S. Ct. 631, 84 L. Ed. 864 (1940).
Murphy argues her award is not a gain or an accession to wealth and therefore not part of gross income. Noting the Supreme Court has
long recognized "the principle that a restoration of capital [i]s not income; hence it [falls] outside the definition of `income' upon which
the law impose[s] a tax," O'Gilvie, 519 U.S. at 84, 117 S. Ct. 452; see, e.g., Doyle v. Mitchell Bros. Co., 247 U.S. 179, 187-
88, 38 S. Ct. 467, 62 L. Ed. 1054 (1918); S. Pac. Co. v. Lowe, 247 U.S. 330, 335, 38 S. Ct. 540, 62 L. Ed.
1142 (1918), Murphy contends a *177 damage award for personal injuries — including nonphysical injuries — should be viewed as a
return of a particular form of capital — "human capital," as it were. See Gary S. Becker, HUMAN CAPITAL (1st ed.1964); Gary S.
Becker, The Economic Way of Looking at Life, Nobel Lecture (Dec. 9, 1992), in NOBEL LECTURES IN ECONOMIC SCIENCES 1991-
1995, at 43-45 (Torsten Persson ed., 1997). In her view, the Supreme Court in Glenshaw Glass acknowledged the relevance of the
human capital concept for tax purposes. There, in holding that punitive damages for personal injury were "gross income" under the
predecessor to § 61, the Court stated:
The long history of . . . holding personal injury recoveries nontaxable on the theory that they roughly
correspond to a return of capital cannot support exemption of punitive damages following injury to
property. . . . Damages for personal injury are by definition compensatory only. Punitive damages, on the
other hand, cannot be considered a restoration of capital for taxation purposes.
348 U.S. at 432 n. 8, 75 S. Ct. 473. By implication, Murphy argues, damages for personal injury are a "restoration of capital."
As further support, Murphy cites various administrative rulings issued shortly after passage of the Sixteenth Amendment that concluded
recoveries from personal injuries were not income, such as this 1918 Opinion of the Attorney General:

Without affirming that the human body is in a technical sense the "capital" invested in an accident policy,
in a broad, natural sense the proceeds of the policy do but substitute, so far as they go, capital which is
the source of future periodical income. They merely take the place of capital in human ability which was
destroyed by the accident. They are therefore "capital" as distinguished from "income" receipts.
31 Op. Att'y Gen. 304, 308; see T.D. 2747, 20 Treas. Dec. Int. Rev. 457 (1918); Sol. Op. 132, I-1 C.B. 92, 93-94 (1922)
("[M]oney received . . . on account of . . . defamation of personal character . . . does not constitute income within the meaning of the
sixteenth amendment and the statutes enacted thereunder"). She also cites a House Report on the bill that became the Revenue Act of
1918. H.R.Rep. No. 65-767, at 9-10 (1918) ("Under the present law it is doubtful whether amounts received . . . as compensation for
personal injury . . . are required to be included in gross income"); see also Dotson v. United States, 87 F.3d 682, 685 (5th Cir.1996)
(concluding on basis of House Report that the "Congress first enacted the personal injury compensation exclusion . . . when such
payments were considered the return of human capital, and thus not constitutionally taxable `income' under the 16th amendment").
Finally, Murphy argues her interpretation of § 61 is reflected in the common law of tort and the provisions in various environmental
statutes and Title VII of the Civil Rights Act of 1964, all of which provide for "make whole" relief. See, e.g., 42 U.S.C. § 1981a; 15
U.S.C. § 2622. If a recovery of damages designed to "make whole" the plaintiff is taxable, she reasons, then one who receives the
award has not been made whole after tax. Section 61 should not be read to create a conflict between the tax code and the "make
whole" purpose of the various statutes.
The Government disputes Murphy's interpretation on all fronts. First, noting "the definition [of gross income in the IRC] extends broadly
to all economic gains," Banks, 543 U.S. at 433, 125 S. Ct. 826, the Government asserts Murphy "undeniably had economic gain
because she was better off financially after receiving the damages award than she was prior to receiving it." Second, the Government
argues that the case law Murphy cites does *178 not support the proposition that the Congress lacks the power to tax as income
recoveries for personal injuries. In its view, to the extent the Supreme Court has addressed at all the taxability of compensatory
damages, see, e.g., O'Gilvie, 519 U.S. at 86, 117 S. Ct. 452; Glenshaw Glass, 348 U.S. at 432 n. 8, 75 S. Ct. 473, it was
merely articulating the Congress's rationale at the time for not taxing such damages, not the Court's own view whether such damages
could constitutionally be taxed.
Third, the Government challenges the relevance of the administrative rulings Murphy cites from around the time the Sixteenth
Amendment was ratified; Treasury decisions dating from even closer to the time of ratification treated damages received on account of
personal injury as income. See T.D. 2135, 17 Treas. Dec. Int. Rev. 39, 42 (1915); T.D. 2690, Reg. No. 33 (Rev.), art. 4, 20 Treas. Dec.
Int. Rev. 126, 130 (1918). Furthermore, administrative rulings from the time suggest that, even if recoveries for physical personal
injuries were not considered part of income, recoveries for nonphysical personal injuries were. See Sol. Mem. 957, 1 C.B. 65 (1919)
(damages for libel subject to income tax); Sol. Mem. 1384, 2 C.B. 71 (1920) (recovery of damages from alienation of wife's affections
not regarded as return of capital, hence taxable). Although the Treasury changed its position in 1922, see Sol. Op. 132, I-1 C.B. at 93-
94, it did so only after the Supreme Court's decision in Eisner v. Macomber, 252 U.S. 189, 40 S. Ct. 189, 64 L. Ed.
521 (1920), which the Court later viewed as having established a definition of income that "served a useful purpose [but] was not meant
to provide a touchstone to all future gross income questions." Glenshaw Glass, 348 U.S. at 430-31, 75 S. Ct. 473. As for Murphy's
contention that reading § 61 to include her damages would be in tension with the common law and various statutes providing for "make
whole" relief, the Government denies there is any tension and suggests Murphy is trying to turn a disagreement over tax policy into a
constitutional issue.
Finally, the Government argues that even if the concept of human capital is built into § 61, Murphy's award is nonetheless taxable
because Murphy has no tax basis in her human capital. Under the IRC, a taxpayer's gain upon the disposition of property is the
difference between the "amount realized" from the disposition and his basis in the property, 26 U.S.C. § 1001, defined as "the cost of
such property," id. § 1012, adjusted "for expenditures, receipts, losses, or other items, properly chargeable to [a] capital account," id. §
1016(a)(1). The Government asserts, "The Code does not allow individuals to claim a basis in their human capital"; accordingly,
Murphy's gain is the full value of the award. See Roemer v. Comm'r, 716 F.2d 693, 696 n. 2 (9th Cir.1983) ("Since there is no tax
basis in a person's health and other personal interests, money received as compensation for an injury to those interests might be
considered a realized accession to wealth") (dictum).
Although Murphy and the Government focus primarily upon whether Murphy's award falls within the definition of income first used
in Glenshaw Glass,[*] coming within that definition is not the only way in which § 61(a) could be held to encompass *179 her award.
Principles of statutory interpretation could show § 61(a) includes Murphy's award in her gross income regardless whether it was an
"accession to wealth," as Glenshaw Glass requires. For example, if § 61(a) were amended specifically to include in gross income
"$100,000 in addition to all other gross income," then that additional sum would be a part of gross income under § 61 even though no
actual gain was associated with it. In other words, although the "Congress cannot make a thing income which is not so in fact," Burk-
Waggoner Oil Ass'n v. Hopkins, 269 U.S. 110, 114, 46 S. Ct. 48, 70 L. Ed. 183 (1925), it can label a thing income and tax it,
so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and
9. See Penn Mut. Indem. Co. v. Comm'r, 277 F.2d 16, 20 (3d Cir.1960) ("Congress has the power to impose taxes generally, and if
the particular imposition does not run afoul of any constitutional restrictions then the tax is lawful, call it what you will") (footnote
omitted). Accordingly, rather than ask whether Murphy's award was an accession to her wealth, we go to the heart of the matter, which
is whether her award is properly included within the definition of gross income in § 61(a), to wit, "all income from whatever source
derived."
Looking at § 61(a) by itself, one sees no indication that it covers Murphy's award unless the award is "income" as defined by Glenshaw
Glass and later cases. Damages received for emotional distress are not listed among the examples of income in § 61 and, as Murphy
points out, an ambiguity in the meaning of a revenue-raising statute should be resolved in favor of the taxpayer. See, e.g., Hassett v.
Welch, 303 U.S. 303, 314, 58 S. Ct. 559, 82 L. Ed. 858 (1938); Gould v. Gould, 245 U.S. 151, 153, 38 S. Ct. 53, 62
L. Ed. 211 (1917); see also United Dominion Indus., Inc. v. United States, 532 U.S. 822, 839, 121 S. Ct. 1934, 150 L. Ed.
2d 45 (2001) (Thomas, J., concurring); id. at 839 n. 1, 121 S. Ct. 1934 (Stevens, J., dissenting); 3A NORMAN J. SINGER,
SUTHERLAND STATUTES & STATUTORY CONSTRUCTION § 66:1 (6th ed.2003). A statute is to be read as a whole, however, see,
e.g., Alaska Dep't of Envtl. Conservation v. EPA, 540 U.S. 461, 489 n. 13, 124 S. Ct. 983, 157 L. Ed. 2d 967 (2004), and
reading § 61 in combination with § 104(a)(2) of the Internal Revenue Code presents a very different picture — a picture so clear that we
have no occasion to apply the canon favoring the interpretation of ambiguous revenue-raising statutes in favor of the taxpayer.
As noted above, in 1996 the Congress amended § 104(a) to narrow the exclusion to amounts received on account of "personal physical
injuries or physical sickness" from "personal injuries or sickness," and explicitly to provide that "emotional distress shall not be treated
as a physical injury or physical sickness," thus making clear that an award received on account of emotional distress is not excluded
from gross income under § 104(a)(2). Small Business Job Protection Act of 1996, Pub.L. 104-188, § 1605, 110 Stat. 1755, 1838. As
this amendment, which narrows the exclusion, would have no effect whatsoever if such damages were not included within the ambit of
§ 61, and as we must presume that "[w]hen Congress acts to amend a statute, . . . it intends its amendment to have real and substantial
effect," Stone v. INS, 514 U.S. 386, 397, 115 S. Ct. 1537, 131 L. Ed. 2d 465 (1995), the 1996 amendment of § 104(a)
strongly suggests § 61 should be read to include an award for damages from nonphysical harms. [*] Although it is unclear whether § 61
covered *180 such an award before 1996, we need not address that question here; even if the provision did not do so prior to 1996, the
presumption indicates the Congress implicitly amended § 61 to cover such an award when it amended § 104(a).
We realize, of course, that amendments by implication, like repeals by implication, are disfavored. United States v. Welden, 377 U.S.
95, 103 n. 12, 84 S. Ct. 1082, 12 L. Ed. 2d 152 (1964); Cheney R.R. Co. v. R.R. Ret. Bd., 50 F.3d 1071, 1078 (D.C.Cir.
1995). The Supreme Court has also noted, however, that the "classic judicial task of reconciling many laws enacted over time, and
getting them to `make sense' in combination, necessarily assumes that the implications of a statute may be altered by the implications
of a later statute." United States v. Fausto, 484 U.S. 439, 453, 108 S. Ct. 668, 98 L. Ed. 2d 830 (1988); see also FDA v.
Brown & Williamson Tobacco Corp., 529 U.S. 120, 133, 120 S. Ct. 1291, 146 L. Ed. 2d 121 (2000) ("[T]he meaning of one
statute may be affected by other Acts, particularly where Congress has spoken subsequently and more specifically to the topic at
hand"); Almendarez-Torres v. United States, 523 U.S. 224, 237, 118 S. Ct. 1219, 140 L. Ed. 2d 350 (1998) (suggesting
later enacted laws "depend[ing] for their effectiveness upon clarification, or a change in the meaning of an earlier statute" provide a
"forward looking legislative mandate, guidance, or direct suggestion about how courts should interpret the earlier
provisions"); cf. Franklin v. Gwinnett County Pub. Sch., 503 U.S. 60, 72-73, 112 S. Ct. 1028, 117 L. Ed. 2d 208 (1992)
(amendment of Title IX abrogating States' Eleventh Amendment immunity validated Court's prior holding that Title IX created implied
right of action); id. at 78, 112 S. Ct. 1028 (Scalia, J., concurring in judgment) (amendment to Title IX was an "implicit
acknowledgment that damages are available").
This "classic judicial task" is before us now. For the 1996 amendment of § 104(a) to "make sense," gross income in § 61(a) must, and
we therefore hold it does, include an award for nonphysical damages such as Murphy received, regardless whether the award is an
accession to wealth. Cf. Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 786 & n. 17, 120 S. Ct.
1858, 146 L. Ed. 2d 836 (2000) (determining meaning of "person" in False Claims Act, which was originally enacted in 1863,
based in part upon definition of "person" in Program Fraud Civil Remedies Act of 1986, which was "designed to operate in tandem with
the [earlier Act]").
D. The Congress's Power to Tax
The taxing power of the Congress is established by Article I, Section 8 of the Constitution: "The Congress shall have power to lay and
collect taxes, duties, imposts and excises." There are two limitations on this power. First, as the same section goes on to provide, "all
duties, imposts and excises shall be uniform throughout the United States." Second, as provided in Section 9 of that same Article, "No
capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken." See
also U.S. CONST. art. I, § 2, cl. 3 ("direct taxes shall be apportioned among the several states which may be included within this union,
according to their respective numbers").[*]*181 We now consider whether the tax laid upon Murphy's award violates either of these two
constraints.
1. A Direct Tax?
Over the years, courts have considered numerous claims that one or another nonapportioned tax is a direct tax and therefore
unconstitutional. Although these cases have not definitively marked the boundary between taxes that must be apportioned and taxes
that need not be, see Bromley v. McCaughn, 280 U.S. 124, 136, 50 S. Ct. 46, 74 L. Ed. 226 (1929); Spreckels Sugar Ref.
Co. v. McClain, 192 U.S. 397, 413, 24 S. Ct. 376, 48 L. Ed. 496 (1904) (dividing line between "taxes that are direct and
those which are to be regarded simply as excises" is "often very difficult to be expressed in words"), some characteristics of each may
be discerned.
Only three taxes are definitely known to be direct: (1) a capitation, U.S. CONST. art. I, § 9, (2) a tax upon real property, and (3) a tax
upon personal property. See Fernandez v. Wiener, 326 U.S. 340, 352, 66 S. Ct. 178, 90 L. Ed. 116 (1945) ("Congress may
tax real estate or chattels if the tax is apportioned"); Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601, 637, 15 S. Ct. 912, 39
L. Ed. 1108 (1895) (Pollock II).[**] Such direct taxes are laid upon one's "general ownership of property," Bromley, 280 U.S. at
136, 50 S. Ct. 46; see also Flint v. Stone Tracy Co., 220 U.S. 107, 149, 31 S. Ct. 342, 55 L. Ed. 389 (1911), as
contrasted with excise taxes laid "upon a particular use or enjoyment of property or the shifting from one to another of any power or
privilege incidental to the ownership or enjoyment of property." Fernandez, 326 U.S. at 352, 66 S. Ct. 178; see also Thomas v.
United States, 192 U.S. 363, 370, 24 S. Ct. 305, 48 L. Ed. 481 (1904) (excises cover "duties imposed on importation,
consumption, manufacture and sale of certain commodities, privileges, particular business transactions, vocations, occupations and the
like"). More specifically, excise taxes include, in addition to taxes upon consumable items, see Patton v. Brady, 184 U.S. 608, 617-
18, 22 S. Ct. 493, 46 L. Ed. 713 (1902), taxes upon the sale of grain on an exchange, Nicol v. Ames, 173 U.S. 509, 519, 19
S. Ct. 522, 43 L. Ed. 786 (1899), the sale of corporate stock, Thomas, 192 U.S. at 371, 24 S. Ct. 305, doing business in
corporate form, Flint, 220 U.S. at 151, 31 S. Ct. 342, gross receipts from the "business of refining sugar," Spreckels, 192 U.S. at
411, 24 S. Ct. 376, the transfer of property at death, Knowlton v. Moore, 178 U.S. 41, 81-82, 20 S. Ct. 747, 44 L. Ed.
969 (1900), gifts, Bromley, 280 U.S. at 138, 50 S. Ct. 46, and income from employment, see Pollock v. Farmers' Loan & Trust
Co., 157 U.S. 429, 579, 15 S. Ct. 673, 39 L. Ed. 759 (1895) (Pollock I) (citing Springer v. United States, 102 U.S.
586, 26 L. Ed. 253 (1881)).
Murphy and the amici supporting her argue the dividing line between direct and indirect taxes is based upon the ultimate incidence of
the tax; if the tax cannot be shifted to someone else, as a capitation cannot, then it is a direct tax; but if the burden can be passed along
through a higher price, as a sales tax upon a consumable good can be, then the tax is indirect. This, she argues, was the distinction
drawn when the Constitution was ratified. See *182 Albert Gallatin, A Sketch of the Finances of the United States (1796), reprinted in 3
THE WRITINGS OF ALBERT GALLATIN 74-75 (Henry Adams ed., Philadelphia, J.P. Lippincott & Co. 1879) ("The most generally
received opinion . . . is, that by direct taxes . . . those are meant which are raised on the capital or revenue of the people; by indirect,
such as are raised on their expense"); THE FEDERALIST No. 36, at 225 (Alexander Hamilton) (Jacob E. Cooke ed., 1961) ("internal
taxes[ ] may be subdivided into those of the direct and those of the indirect kind . . . by which must be understood duties and excises on
articles of consumption"). But see Gallatin, supra, at 74 ("[Direct tax] is used, by different writers, and even by the same writers, in
different parts of their writings, in a variety of senses, according to that view of the subject they were taking"); EDWIN R.A. SELIGMAN,
THE INCOME TAX 540 (photo. reprint 1970) (2d ed.1914) ("there are almost as many classifications of direct and indirect taxes are
there are authors"). Moreover, the amici argue, this understanding of the distinction explains the different restrictions imposed
respectively upon the power of the Congress to tax directly (apportionment) and via excise (uniformity). Duties, imposts, and excise
taxes, which were expected to constitute the bulk of the new federal government's revenue, see Erik M. Jensen, The Apportionment of
"Direct Taxes": Are Consumption Taxes Constitutional?, 97 COLUM. L.REV. 2334, 2382 (1997), have a built-in safeguard against
oppressively high rates: Higher taxes result in higher prices and therefore fewer sales and ultimately lower tax revenues. See THE
FEDERALIST No. 21, supra, at 134-35 (Alexander Hamilton). Taxes that cannot be shifted, in contrast, lack this self-regulating feature,
and were therefore constrained by the more stringent requirement of apportionment. See id. at 135 ("In a branch of taxation where no
limits to the discretion of the government are to be found in the nature of things, the establishment of a fixed rule . . . may be attended
with fewer inconveniences than to leave that discretion altogether at large"); see also Jensen, supra, at 2382-84.
Finally, the amici contend their understanding of a direct tax was confirmed in Pollock II, where the Supreme Court noted that "the
words `duties, imposts, and excises' are put in antithesis to direct taxes," 158 U.S. at 622, 15 S. Ct. 912, for which it cited THE
FEDERALIST No. 36 (Hamilton). Pollock II, 158 U.S. at 624-25, 15 S. Ct. 912. As it is clear that Murphy cannot shift her tax burden
to anyone else, per Murphy and the amici, it must be a direct tax.
The Government, unsurprisingly, backs a different approach; by its lights, only "taxes that are capable of apportionment in the first
instance, specifically, capitation taxes and taxes on land," are direct taxes. The Government maintains that this is how the term was
generally understood at the time. See Calvin H. Johnson, Fixing the Constitutional Absurdity of the Apportionment of Direct Tax, 21
CONST. COMM. 295, 314 (2004). Moreover, it suggests, this understanding is more in line with the underlying purpose of the tax and
the apportionment clauses, which were drafted in the intense light of experience under the Articles of Confederation.
The Articles did not grant the Continental Congress the power to raise revenue directly; it could only requisition funds from the
States. See ARTICLES OF CONFEDERATION art. VIII (1781); Bruce Ackerman, Taxation and the Constitution, 99 COLUM. L.REV. 1,
6-7 (1999). This led to problems when the States, as they often did, refused to remit funds. See Calvin H. Johnson, The Constitutional
Meaning of "Apportionment of Direct Taxes," 80 TAX NOTES 591, 593-94 (1998). The Constitution redressed this problem by giving
the new *183 national government plenary taxing power. See Ackerman, supra, at 7. In the Government's view, it therefore makes no
sense to treat "direct taxes" as encompassing taxes for which apportionment is effectively impossible, because "the Framers could not
have intended to give Congress plenary taxing power, on the one hand, and then so limit that power by requiring apportionment for a
broad category of taxes, on the other." This view is, according to the Government, buttressed by evidence that the purpose of the
apportionment clauses was not in fact to constrain the power to tax, but rather to placate opponents of the compromise over
representation of the slave states in the House, as embodied in the Three-fifths Clause.[*]See Ackerman, supra, at 10-11. See
generally SELIGMAN, supra, at 548-55. As the Government interprets the historical record, the apportionment limitation was "more
symbolic than anything else: it appeased the antislavery sentiment of the North and offered a practical advantage to the South as long
as the scope of direct taxes was limited." See Ackerman, supra, at 10. But see Erik M. Jensen, Taxation and the Constitution: How to
Read the Direct Tax Clauses, 15 J.L. & POL. 687, 704 (1999) ("One of the reasons [the direct tax restriction] worked as a compromise
was that it had teeth — it made direct taxes difficult to impose — and it had teeth however slaves were counted").
The Government's view of the clauses is further supported by the near contemporaneous decision of the Supreme Court in Hylton v.
United States, 3 U.S. (3 Dall.) 171, 1 L. Ed. 556 (1796), holding that a national tax upon carriages was not a direct tax, and thus not
subject to apportionment. Justices Chase and Iredell opined that a "direct tax" was one that, unlike the carriage tax, as a practical
matter could be apportioned among the States, id. at 174 (Chase, J.); id. at 181 (Iredell, J.), while Justice Paterson, noting the
connection between apportionment and slavery, condemned apportionment as "radically wrong" and "not to be extended by
construction," id. at 177-78.[*] As for Murphy's reliance upon Pollock II, the Government contends that although it has never been
overruled, "every aspect of its reasoning has been eroded," see, e.g., Stanton v. Baltic Mining Co., 240 U.S. 103, 112-13, 36 S.
Ct. 278, 60 L. Ed. 546 (1916), and notes that in Pollock II itself the Court acknowledged that "taxation on business, privileges, or
employments has assumed the guise of an excise tax," 158 U.S. at 635, 15 S. Ct. 912. Pollock II, in the Government's view, is
therefore too weak a reed to support Murphy's broad definition of "direct tax" and certainly does not make "a tax on the conversion of
human capital into money . . . problematic."
Murphy replies that the Government's historical analysis does not respond to the contemporaneous sources she and the amici
identified showing that taxes imposed upon individuals are direct taxes. As for Hylton, Murphy argues nothing in that *184 decision
precludes her position; the Justices viewed the carriage tax there at issue as a tax upon an expense, see 3 U.S. (3 Dall.) at 175
(Chase, J.); see also id. at 180-81 (Paterson, J.), which she agrees is not a direct tax. See Pollock II, 158 U.S. at 626-27, 15 S. Ct.
912. To the extent Hylton is inconsistent with her position, however, Murphy contends her references to the Federalist are more
authoritative evidence of the Framers' understanding of the term.
Murphy makes no attempt to reconcile her definition with the long line of cases identifying various taxes as excise taxes, although
several of them seem to refute her position directly. In particular, we do not see how a known excise, such as the estate tax, see,
e.g., New York Trust Co. v. Eisner, 256 U.S. 345, 349, 41 S. Ct. 506, 65 L. Ed. 963 (1921); Knowlton, 178 U.S. at 81-83, 20
S. Ct. 747, or a tax upon income from employment, see Pollock II, 158 U.S. at 635, 15 S. Ct. 912; Pollock I, 157 U.S. at 579, 15
S. Ct. 673; cf. Steward Mach. Co. v. Davis, 301 U.S. 548, 580-81, 57 S. Ct. 883, 81 L. Ed. 1279 (1937) (tax upon
employers based upon wages paid to employees is an excise), can be shifted to another person, absent which they seem to be in
irreconcilable conflict with her position that a tax that cannot be shifted to someone else is a direct tax. Though it could be argued that
the incidence of an estate tax is inevitably shifted to the beneficiaries, we see at work none of the restraint upon excessive taxation that
Murphy claims such shifting is supposed to provide; the tax is triggered by an event, death, that cannot be shifted or avoided. In any
event, Knowlton addressed the argument that Pollock I and II made ability to shift the hallmark of a direct tax, and rejected it. 178 U.S.
at 81-82, 20 S. Ct. 747. Regardless what the original understanding may have been, therefore, we are bound to follow the
Supreme Court, which has strongly intimated that Murphy's position is not the law.
That said, neither need we adopt the Government's position that direct taxes are only those capable of satisfying the constraint of
apportionment. In the abstract, such a constraint is no constraint at all; virtually any tax may be apportioned by establishing different
rates in different states. See Pollock II, 158 U.S. at 632-33, 15 S. Ct. 912. If the Government's position is instead that by "capable
of apportionment" it means "capable of apportionment in a manner that does not unfairly tax some individuals more than others," then it
is difficult to see how a land tax, which is widely understood to be a direct tax, could be apportioned by population without similarly
imposing significantly non-uniform rates. See Hylton, 3 U.S. (3 Dall.) at 178-79 (Paterson, J.); Johnson, Constitutional Absurdity,
supra, at 328. But see, e.g., Hylton, 3 U.S. (3 Dall.) at 183 (Iredell, J.) (contending land tax is capable of apportionment).
We find it more appropriate to analyze this case based upon the precedents and therefore to ask whether the tax laid upon Murphy's
award is more akin, on the one hand, to a capitation or a tax upon one's ownership of property, or, on the other hand, more like a tax
upon a use of property, a privilege, an activity, or a transaction, see Thomas, 192 U.S. at 370, 24 S. Ct. 305. Even if we assume
one's human capital should be treated as personal property, it does not appear that this tax is upon ownership; rather, as the
Government points out, Murphy is taxed only after she receives a compensatory award, which makes the tax seem to be laid upon a
transaction. See Tyler v. United States, 281 U.S. 497, 502, 50 S. Ct. 356, 74 L. Ed. 991 (1930) ("A tax laid upon the
happening of an event, as distinguished from its tangible fruits, is an indirect tax which Congress, in respect of some events . . .
undoubtedly may impose"); Simmons v. United States, 308 F.2d 160, 166 (4th Cir.1962) (tax upon receipt *185 of money is not a
direct tax); cf. Penn Mut., 277 F.2d at 20. Murphy's situation seems akin to an involuntary conversion of assets; she was forced to
surrender some part of her mental health and reputation in return for monetary damages. Cf. 26 U.S.C. § 1033 (property involuntarily
converted into money is taxed to extent of gain recognized).
At oral argument Murphy resisted this formulation on the ground that the receipt of an award in lieu of lost mental health or reputation is
not a transaction. This view is tenable, however, only if one decouples Murphy's injury (emotional distress and lost reputation) from her
monetary award, but that is not beneficial to Murphy's cause, for then Murphy has nothing to offset the obvious accession to her wealth,
which is taxable as income. Murphy also suggested at oral argument that there was no transaction because she did not profit. Whether
she profited is irrelevant, however, to whether a tax upon an award of damages is a direct tax requiring apportionment; profit is relevant
only to whether, if it is a direct tax, it nevertheless need not be apportioned because the object of the tax is income within the meaning
of the Sixteenth Amendment. Cf. Spreckels, 192 U.S. at 412-13, 24 S. Ct. 376 (tax upon gross receipts associated with business of
refining sugar not a direct tax); Penn Mut., 277 F.2d at 20 (tax upon gross receipts deemed valid indirect tax despite taxpayer's net
loss).
So we return to the question: Is a tax upon this particular kind of transaction equivalent to a tax upon a person or his
property? Cf. Bromley, 280 U.S. at 138, 50 S. Ct. 46 (assuming without deciding that a tax "levied upon all the uses to which
property may be put, or upon the exercise of a single power indispensable to the enjoyment of all others over it, would be in effect a tax
upon property"). Murphy did not receive her damages pursuant to a business activity, cf. Flint, 220 U.S. at 151, 31 S. Ct.
342; Spreckels, 192 U.S. at 411, 24 S. Ct. 376, and we therefore do not view this tax as an excise under that theory. See Stratton's
Independence, Ltd. v. Howbert, 231 U.S. 399, 414-15, 34 S. Ct. 136, 58 L. Ed. 285 (1913) ("The sale outright of a mining
property might be fairly described as a mere conversion of the capital from land into money"). On the other hand, as noted above, the
Supreme Court several times has held a tax not related to business activity is nonetheless an excise. And the tax at issue here is
similar to those.
Bromley, in which a gift tax was deemed an excise, is particularly instructive: The Court noted it was "a tax laid only upon the exercise
of a single one of those powers incident to ownership," 280 U.S. at 136, 50 S. Ct. 46, which distinguished it from "a tax which falls
upon the owner merely because he is owner, regardless of the use or disposition made of his property," id. at 137, 50 S. Ct. 46. A
gift is the functional equivalent of a below-market sale; it therefore stands to reason that if, as Bromley holds, a gift tax, or a tax upon a
below-market sale, is a tax laid not upon ownership but upon the exercise of a power "incident to ownership," then a tax upon the sale
of property at fair market value is similarly laid upon an incidental power and not upon ownership, and hence is an excise. Therefore,
even if we were to accept Murphy's argument that the human capital concept is reflected in the Sixteenth Amendment, a tax upon the
involuntary conversion of that capital would still be an excise and not subject to the requirement of apportionment. But see Nicol, 173
U.S. at 521, 19 S. Ct. 522 (indicating pre-Bromley that tax upon "every sale made in any place . . . is really and practically upon
property").
*186 In any event, even if a tax upon the sale of property is a direct tax upon the property itself, we do not believe Murphy's situation
involves a tax "upon the sale itself, considered separate and apart from the place and the circumstances of the sale." Id. at 520, 19 S.
Ct. 522. Instead, as in Nicol, this tax is more akin to "a duty upon the facilities made use of and actually employed in the
transaction." Id. at 519, 19 S. Ct. 522. To be sure, the facility used in Nicol was a commodities exchange whereas the facility used
by Murphy was the legal system, but that hardly seems a significant distinction. The tax may be laid upon the proceeds received when
one vindicates a statutory right, but the right is nonetheless a "creature of law," which Knowlton identifies as a "privilege" taxable by
excise. 178 U.S. at 55, 20 S. Ct. 747 (right to take property by inheritance is granted by law and therefore taxable as upon a
privilege);[*]cf. Steward, 301 U.S. at 580-81, 57 S. Ct. 883 ("[N]atural rights, so called, are as much subject to taxation as rights of
less importance. An excise is not limited to vocations or activities that may be prohibited altogether. . . . It extends to vocations or
activities pursued as of common right.") (footnote omitted).
2. Uniformity
The Congress may not implement an excise tax that is not "uniform throughout the United States." U.S. CONST. art. I, § 8, cl. 1. A "tax
is uniform when it operates with the same force and effect in every place where the subject of it is found." United States v.
Ptasynski, 462 U.S. 74, 82, 103 S. Ct. 2239, 76 L. Ed. 2d 427 (1983) (internal quotation marks omitted); see
also Knowlton, 178 U.S. at 84-86, 106, 20 S. Ct. 747. The tax laid upon an award of damages for a nonphysical personal injury
operates with "the same force and effect" throughout the United States and therefore satisfies the requirement of uniformity.

III. Conclusion
For the foregoing reasons, we conclude (1) Murphy's compensatory award was not received on account of personal physical injuries,
and therefore is not exempt from taxation pursuant to § 104(a)(2) of the IRC; (2) the award is part of her "gross income," as defined by
§ 61 of the IRC; and (3) the tax upon the award is an excise and not a direct tax subject to the apportionment requirement of Article I,
Section 9 of the Constitution. The tax is uniform throughout the United States and therefore passes constitutional muster. The judgment
of the district court is accordingly
Affirmed.