COMMISSIONER OF INTERNAL REVENUE vs. JOHN L. MANNING et al.

The essence of a stock dividend was the segregation out of surplus account of a definite portionof the corporate earnings as part of the permanent capital resources of the corporation by thedevice of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing the profits so capitalized."FACTS: In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into25,000 common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100shares each, by the three respondents. On February 29, 1952, in view of Reese's desire that uponhis death MANTRASCO and its two subsidiaries, MANTRASCO (Guam), Inc. and the PortMotors, Inc., would continue under the management of the respondents, a trust agreement on hisand the respondents' interests in MANTRASCO was executed by and among Reese ,MANTRASCO , the law firm of Ross, Selph, Carrascoso and Janda , and the respondents.On October 19, 1954 Reese died. The projected transfer of his shares in the name of MANTRASCO could not, however, be immediately effected for lack of sufficient funds to cover initial payment on the shares. On February 2, 1955, after MANTRASCO made a partial paymentof Reese's shares, the certificate for the 24,700 shares in Reese's name was cancelled and a newcertificate was issued in the name of MANTRASCO. On the same date, and in the meantime thatReese's interest had not been fully paid, the new certificate was endorsed to the law firm of Ross,Selph, Carrascoso and Janda, as trustees for and in behalf of MANTRASCO. On November 25,1963 the entire purchase price of Reese's interest in MANTRASCO was finally paid in full bythe latter, On May 4, 1964 the trust agreement was terminated and the trustees delivered toMANTRASCO all the shares which they were holding in trust.Bureau of Internal Revenue examination disclosed that (a) as of December 31, 1958 the 24,700shares declared as dividends had been proportionately distributed to the respondents,representing a total book value or acquisition cost of P7,973,660; (b) the respondents failed todeclare the said stock dividends as part of their taxable income for the year 1958.On the basis of their examination, the BIR examiners concluded that the distribution of Reese'sshares as stock dividends was in effect a distribution of the "asset or property of the corporationas may be gleaned from the payment of cash for the redemption of said stock and distributing thesame as stock dividend." On April 14, 1965 the Commissioner of Internal Revenue issuednotices of assessment for deficiency income taxes to the respondents for the year 1958The respondents unsuccessfully challenged the assessments and, failing to secure a favorablereconsideration, appealed to the Court of Tax Appeals. On October 30, 1967 the CTA renderedjudgment absolving the respondents from any liability for receiving the questioned stock dividends on the ground that their respective one-third interest in MANTRASCO remained thesame before and after the declaration of stock dividends and only the number of shares held byeach of them had changed.Commissioner maintains that the full value (P7,973,660) of the shares redeemed from Reese byMANTRASCO which were subsequently distributed to the respondents as stock dividends in1958 should be taxed as income of the respondents for that year, the said distribution being ineffect a distribution of cash. The respondents' interests in MANTRASCO, he further argues,were only .4% prior to the declaration of the stock dividends in 1958, but rose to 33 1/3% each after the said declaration. In submitting their respective contentions, it is the assumption of bothparties that the 24,700 shares declared as stock dividends were treasury shares.ISSUE: Are the shares in question treasury shares? Discuss nature of treasury shares and stock dividends.HELD: Treasury shares are stocks issued and fully paid for and re-acquired by the corporationeither by purchase, donation, forfeiture or other means. Treasury shares are therefore issuedshares, but being in the treasury they do not have the status of outstanding shares. Consequently,although a treasury share, not having been retired by the corporation re-acquiring it, may be reissued or sold again, such share, as long as it is held by the corporation as a treasury share,participates neither in dividends, because dividends cannot be declared by the corporation toitself, nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able toperpetuate their control of the corporation, though it still represents a paid-for interest in theproperty of the corporation. The foregoing essential features of a treasury stock are lacking inthe questioned shares.The manifest intention of the parties to the trust agreement was, in sum and substance, to treatthe 24,700 shares of Reese as absolutely outstanding shares of Reese's estate until they were fullypaid. Such being the true nature of the 24,700 shares, their declaration as treasury stock dividendin 1958 was a complete nullity and plainly violative of public policy. A stock dividend, beingone payable in capital stock, cannot be declared out of outstanding corporate stock, but onlyfrom retained earnings:"'A stock dividend always involves a transfer of surplus (or profit) to capital stock.' Graham andKatz, Accounting in Law Practice, 2d ed. 1938, No. 70. As the court said in United States vs.Siegel, 8 Cir., 1931, 52 F 2d 63, 65, 78 ALR 672: 'A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a cashdividend.' Congress itself has defined the term 'dividend' in No. 115(a) of the Act as meaning anydistribution made by a corporation to its shareholders, whether in money or in other property, outof its earnings or profits. In Eisner v. Macomber, 1920, 252 US 189, 40 S Ct 189, 64 L Ed 521, 9ALR 1570, both the prevailing and the dissenting opinions recognized that within the meaning of the revenue acts the essence of a stock dividend was the segregation out of surplus account of adefinite portion of the corporate earnings as part of the permanent capital resources of thecorporation by the device of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing the profits so capitalized."The respondents, using the trust instrument as a convenient technical device, bestowed untothemselves the full worth and value of Reese's corporate holdings with the use of the veryearnings of the companies. Such package device, obviously not designed to carry out the usualstock dividend purpose of corporate expansion reinvestment, e.g. the acquisition of additionalfacilities and other capital budget items, but exclusively for expanding the capital base of therespondents in MANTRASCO, cannot be allowed to deflect the respondents' responsibilitiestoward our income tax laws. The conclusion is thus ineluctable that whenever the companiesinvolved herein parted with a portion of their earnings "to buy" the corporate holdings of Reese,they

were in ultimate effect and result making a distribution of such earnings to the respondents.All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the respondents. WISE & CO., INC., ET. AL., vs. MEER FACTS: Wise & Co., Inc. et. al (Plaintiff-appellants) were stockholders of Manila Wine Merchants, Ltd., a foreign corporation duly authorized to do business in the Philippines. The Board of Directors of Manila Wine Merchants, Ltd., (HK Co.), recommended to the stockholders that they adopt resolutions necessary to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation, (PH Co.), for the sum of P400,000. The HK Co. made a distribution from its earnings for the year 1937 to its stockholders. As a result of the sale of its business and assets to PH Co., a surplus was realized and the HK Co. distributed this surplus to the shareholders (Appellants included). Philippine income tax had been paid by HK Co. on the said surplus from which the said distributions were made. At a special general meeting of the shareholders of the HK Co., the stockholders by resolution directed that the company be voluntarily liquidated and its capital distributed among the stockholders. The Appellants duly filed Income Tax Returns, on which the defendant, Meer (CIR) made deficiency assessments. Plantiffs paid under written protest and sought recovery. CFI ruled in favor of CIR hence the appeal. SC HELD: CFI judgment affirmed. (Subsequent Motion for Reconsideration by Wise, et. al. denied) ISSUES and RULINGS: 1. ) Appellants contend that the amounts received by them and on which the taxes in question were assessed and collected were ordinary dividends; CIR contends that they were liquidating dividends. SC: The distributions under consideration were not ordinary dividends. Therefore, they are taxable as liquidating dividends. It was stipulated in the deed of sale that the sale and transfer of the HK Co. shall take effect on June 1, 1937. Distribution took place on June 8. They could not consistently deem all the business and assets of the corporation sold as of June 1, 1937, and still say that said corporation, as a going concern, distributed ordinary dividends to them thereafter. 2. ) Are such liquidating dividends taxable income? SC: Income tax law states that Where a corporation, partnership, association, joint-account, or insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is a taxable income or a deductible loss as the case may be. Appellants received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HK Co. which was dissolved and in process of complete liquidation. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the Income Tax Law. When the corporation was dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place. The shareholder who received the consideration for the stock earned that much money as income of his own, which again was properly taxable to him under the Income Tax Law. 3. ) Non-resident alien individual appellants contend that if the distributions received by them were to be considered as a sale of their stock to the HK Co., the profit realized by them does not constitute income from Philippine sources and is not subject to Philippine taxes, "since all steps in the carrying out of this socalled sale took place outside the Philippines." SC: This contention is untenable. The HK Co. was at the time of the sale of its business in the Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the Philippines. The HK Co. was incorporated for the purpose of carrying on in the Philippine Islands the business of wine, beer, and spirit merchants and the other objects set out in its memorandum of association. Hence, its earnings, profits, and assets, including those from whose proceeds the distributions in question were made, the major part of which consisted in the purchase price of the business, had been earned and acquired in the Philippines. As such, it is clear that said distributions were income "from Philippine sources." Commissioner of Internal Revenue vs Court of Appeals and A. Soriano Corp.301 SCRA 152 Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of original issue when the corporation was founded and 134,659 shares as stock dividend declarations. So in 1964 when Soriano died, half of the shares he held went to his wife as her conjugal share (wifes legitime) and the other half (92,577 shares, which is further broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to the estate. For sometime after his death, his estate still continued to receive stock dividends from ASC until it grew to at least 108,000 shares. In 1968, ASC through its Board issued a resolution for the redemption of shares from Sorianos estate purportedly for the planned Filipinization of ASC. Eventually, 108,000 shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted. Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against ASC for deficiency withholding tax-at-source. The CIR explained that when the redemption was made, the estate profited (because ASC would have to pay the estate to redeem), and so ASC would have withheld tax payments from the Soriano Estate yet it remitted no such withheld tax to the government. ASC averred that it is not duty bound to withhold tax from the estate because it redeemed the said shares for purposes of Filipinization of ASC and also to reduce its remittance abroad. ISSUE: Whether or not ASCs arguments are tenable. HELD: No. The reason behind the redemption is not material. The proceeds from a redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano Estate definitely profited from the redemption and such profit is taxable, and again, ASC had the duty to withhold the tax. There was a total of 108,000 shares redeemed from the estate. 25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of the shares are deemed to have been from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in

the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits such as stock dividends. It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that the latter is merely redeeming them as such. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund doctrine wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended for the protection of corporate creditors. AFISCO Insurance et al vs. CA/CTA/CIR FACTS: The 41 non-life insurance corporation entered into a Qouta Share Reinsurance Treaty with Munich, nonresident corporation. The reinsurance treaty required petitioners to form a pool. CA ruled that the pool of machinery was a partnership taxable as a corporation, and that the latters collection of premiums on behalf of its members was taxable income. ISSUE: Whether or not the insurance pool be taxable as an incorporation and its remittances be taxable as dividends. RULING: The Philippine legislative included in the concept of corporation those entities that resembled them such as unregistered partnerships and associations. Section 24 covered unregistered partnerships and even associations and joint accounts, which had no legal personalities apart from their individual members. 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. The pool is taxable entity distinct from the individual corporate entities of the insurance companies. The tax on income is different from the tax on dividends received by said companies, thus no double taxation. Bachrach v. Seifert FACTS: The will of E. M. Bachrach provided for the distribution of the considerable property which he had left. The sixth and eighth paragraphs of the provisions of the will provide as follows: Sixth: It is my will and do herewith bequeath and devise to my beloved wife Mary McDonald Bachrach for life all the fruits and usufruct of the remainder of all my estate after payment of the legacies, bequests and gifts provided for above; and she may enjoy such usufruct and use or spend such fruits as she may in any manner wish. Eighth: It is my wish that upon the death of my beloved wife, Mary McDonald Bachrach, all my estate, personal, real and otherwise, and all the fruits and usufruct thereof which during her life pertained to her, shall be divided as follows: One-half thereof shall be given to such charitable hospitals in the Philippines as she may designate; in case she fails to designate, then said sum shall be given to the Chief Executive of these Islands who shall distribute it, share and share alike to all charitable hospitals in the Philippines excluding those belonging to the governments of the Philippines or of the United States; One-half thereof shall be divided, share and share alike by and between my legal heirs, to the exclusion of my brothers. The estate of E. M. Bachrach, as owner of 108,000 shares of stock of the AtokBig Wedge Mining Co., Inc., received from the latter 54,000 shares representing 50% stock dividend on the said 108,000 shares. Mary McDonald Bachrach, as usufructuary or life tenant of the estate, petitioned the lower court to authorize the Peoples Bank and Trust Company as administrator of the estate of E. M. Bachrach, to her the said 54,000 share of stock dividend by endorsing and delivering to her the corresponding certificate of stock, claiming that said dividend, although paid out in the form of stock, is fruit or income and therefore belonged to her as usufructuary or life tenant. Sophie Siefert and Elisa Elianoff, legal heirs of the deceased, opposed said petition on the ground that the stock dividend in question was not income but formed part of the capital and therefore belonged not to the usufructuary but to the remainderman. And they have appealed from the order granting the petition and overruling their objection. ISSUE: Is a stock dividend fruit or income, which belongs to the usufructuary, or is it capital or part of the corpus of the estate, which pertains to the remainderman? HELD: The 108,000 shares of stock are part of the property in usufruct. The 54,000 shares of stock dividend are civil fruits of the original investment. They represent profits, and the delivery of the certificate of stock covering said dividend is equivalent to the payment of said profits. Said shares may be sold independently of the original shares, just as the offspring of a domestic animal may be sold independently of its mother. Bank of America, NT v. Court of Appeals Bank of America received by registered mail an irrevocable letter of credit purportedly issued by Bank of Ayudhya Samyek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of $2,782,000.00 to cover the sale of plastic ropes and agricultural files, with Bank of America as the advising bank and Inter-Resin Industrial Corporation as beneficiary. Bank of America notified Inter-Resin of the letter of credit. Upon request by Inter-Resin for Bank of America to confirm the letter of credit, latter refused although one of its employee explained to Inter-Resin that there was no need for confirmation because the letter of credit is genuine. Inter-Resin therefore twice sought availment under the letter of credit. Bank of America issued P10,219,093 in the first availment upon being satisfied of the documents submitted by Inter-Resin. However, Bank of America stopped the processing of the second availment upon being informed by Bank of Ayudhya that the letter of credit was fraudulent. Further, upon conducting an examination of the vans sent by InterResin, it found out that they contain not ropes but plastic strips, wrappers, rags and waste materials.

Bank of America sued Inter-Resin for recovery of the money it gave under the first availment, considering the letter of credit has been disowned by Bank of Ayudhya. However, the trial court ruled in favor of Inter-Resin which was affirmed by the Court of Appeals. Supreme Court reversed the decision of the lower courts. It ruled that the crucial point of dispute in this case is whether, under the letter of credit, Bank of America has incurred any liability to the beneficiary thereof, an issue that largely is dependent on the banks participation in that transaction: as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner banks letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should have first checked the authenticity of the letter of credit with Bank of Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-Resin finds no real support in the UCP. As advising bank, Bank of America is bound only to check the apparent authenticity of the letter of credit, which it did. Websters explains that the word apparent suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge. May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents therefore were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America, has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. As a negotiating bank, Bank of America has a right of recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon. SC noted that the additional ground raised by Bank of America, i.e. that Inter-Resin sent waste instead of its products, is really of no consequence. In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents. CIR v. Burroughs FACTS :In March 1979, the branch office of Burroughs Ltd. inthe country applied with the Central Bank for authority to remitto its parent company abroad branch profit amounting toP7,647,058.00.On March 14, 1979, it paid the 15% branch profit remittancetax pursuant to Sec. 24 (b) (2) (ii)6. Based on this lawBurroughs Ltd remitted to its head office the amount of P6,499,999.30However on December 24, 1980 Burroughs Ltd. filed a writtenclaim for the refund or tax credit of the amount of P172,058.90representing alleged overpaid branch profit remittance tax.BIR ruledin favor of the refund onJanuary 21, 1980.CIR contends that there should be no refund because Memorandum Circular No. 882 dated March 17, 1982 hadrevoked and/or repealed the BIR ruling of January 21, 1980.Said memorandum circular states-Considering that the 15% branch profit remittance tax isimposed and collected at source, necessarily the tax baseshould be the amount actually applied for by the branch withthe Central Bank of the Philippines as profit to be remittedabroad. Issue : WON Burroughs Limited is entitled to a refund (in theamount of P172,058.90). Held: Yes. In a BIR ruling dated January 21, 1980 by thenActing Commissioner of Internal Revenue Hon. Efren I. Planathe aforequoted provision had been interpreted to mean that"the tax base upon which the 15% branch profit remittance tax... shall be imposed...(is) the profit actually remitted abroadand not on the total branch profits out of which the remittanceis to be made."What is applicable in the case at bar is still the BIR Ruling of January 21, 1980 because Burroughs Ltd. paid the branchprofit remittance tax in question on March 14, 1979 . Memorandum Circular No. 8-82 dated March 17, 1982cannot be given retroactive effect in the light of Section3277 of the National Internal Revenue Code. The prejudice that would result to private Burroughs Ltd. by aretroactive application of Memorandum Circular No. 882 isbeyond question for it would be deprived of the substantialamount of P172,058.90. Compania General de Tobacos de Filipinas vs. ManilaGR L-16619, 29 June 1963 Facts: Compania General de Tabacos de Filipinas (Tabacalera) paid the City of Manila the fixed license feesprescribed by Ordinance 3358 for the years 1954 to 1957. In 1954, City Ordinance 3634 and 3816 werepassed; where the term general merchandise found therein included all articles in Sections 123 to 148 of theTax Code (thus, also liquor under Sedctions 133 to 135). The Tabacalera paid its wholesalers and retailerstaxes. In 1954, the City Treasurer addressed a letter to an accounting firm, expressing the view that liquordealers paying the annual wholesale and retail fixed tax under Ordinance 3358 are not subject to thewholesale aand retail deaklers taxes prescribed by City Ordinances 3634, 3301, and 3816. The Tabacalera,upon learning of said stopped including quarterly sworn declaratons required by the latter ordinances, and in1957, demanded refunde of the alleged overpayment. The claim was disallowed. Issue: Whether there is a distinction between Ordinance 3358 and Ordinances 3634, 3301 and 3816, toprevent refund to the company.

Held: Generally, the term tax applies to all kinds of exactions which become public funds. Legally,however, a license fee is a legal concept quite distinct from tax: the former is imposed in the exercise ofpolice power for purposes of regulation, while the latter is imposed under the taxing power for the purpose ofraising revenues. Ordinance 3358 prescribes municipal license fees for the privilege to engage in the businessof selling liquor or alcohol beverages; considering that the sale of intoxicating liquor is (potentially) harmfulto public health and morals, and must be subject to supervision or regulation by the State and by cities andmunicipalities authorized to act in the premises. On the other hand, Ordinances 3634 , 3301 and 3816imposed taxes on the sales of general merchandise, wholesale or retail, and are revenue measures enacted bythe Municipal Board of Manila.Both a license fee and a tax may be imposed on the same business or occupation, or for selling the samearticle, without it being in violation of the rule against double taxation. The contrary view of the Treasurer inits letter is of no consequence as the government is not bound by the errors or mistakes committed by itsofficers, specially on matters of law.The company, thus, is not entitled to refund CIR v. CA, CITY TRUST BANKING CORP. FACTS: Respondent corporation Citytrust filed a refund of overpaid taxes with the BIR by which the latter denied on the ground of prescription. Citytrust filed a petition for review before the CTA. The case was submitted for decision based solely on the pleadings and evidence submitted by the respondent because the CIR could not present any evidence by reason of the repeated failure of the Tax Credit/Refud Division of the BIR to transmit the records of the case, as well as the investigation report thereon, to the Solicitor General. CTA rendered the decision ordering BIR to grant the respondent's request for tax refund amounting to P 13.3 million. ISSUE: Failure of the CIR to present evidence to support the case of the government, should the respondent's claim be granted? HELD: Not yet. It is a long and firmly settled rule of law that the Government is not bound by the errors committed by its agents. In the performance of its governmental functions, the State cannot be estopped by the neglect of its agent and officers. Although the Government may generally be estopped through the affirmative acts of public officers acting within their authority, their neglect or omission of public duties as exemplified in this case will not and should not produce that effect. Nowhere is the aforestated rule more true than in the field of taxation. It is axiomatic that the Government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. The errors of certain administrative officers should never be allowed to jeopardize the Government's financial position, especially in the case at bar where the amount involves millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy. Thus, it is proper that the case be remanded back to the CTA for further proceedings and reception of evidence. FERRER VS CIR Facts: Petitioner Antonio Porta Ferrer sold his bakery La Suiza Bakery to Juan Pons for the summer of P100,000.00. Petitioner was the sole proprietor of the said bakery from October 16, 1951 up to September 15, 1955. The assets of the bakery consisted of accounts receivable raw materials, wrapping supplies, firewood, unexpired insurance, good-will, machinery and equipment, and furniture and fixtures, with a total book value of P74,321.91. In selling the bakery, petitioner spent a total of P6,000.00. After deducting the total book value of the assets and the incidental expenses from the gross selling price, petitioner filed his income tax return, showing a net profit of P19,678.09 as having been realized from the sale of the bakery. On the basis of this amount, he paid P2,439.00 as income tax. Petitioner later requested the respondent, Commissioner of Internal Revenue, to refund the sum of P2,030.00, claiming that the bakery was a capital asset which he had held for more than twelve months, so that only 50 per cent of it was taxable under the National Internal Revenue Code considering that the profit from its sale was a long term capital gain. When no action was taken by respondent on his request, petitioner filed a petition for refund in the Court of Tax Appeals. The said Court denied petitioners claim for refund on the ground that the sale of the bakery constitute sale of individual assets, some of which were capital assets while the others were ordinary assets. But since petitioner failed to show what portion of the selling price of the bakery was fairly attributable to each asset, the Tax Court held that it could not ascertain the capital and/or ordinary gains taxes properly payable upon the sale of the business. Hence, this petition. Issues: 1. Whether the Tax Court had jurisdiction over this case; and 2. Whether or not the sale of the bakery was a sale of capital asset or of individual assets comprising the business Held: 1. The Supreme Court ruled in the negative. The rule is well settled that no question will be considered by the appellate court which has not been raised in the court below. When a party deliberately adopts a certain theory, and the case is tried and decided upon the theory in the court below, he will not be permitted to change his theory on appeal, cause to permit him to do so would be unfair to the adverse party. 2. The Supreme Court ruled that the sale of the La Suiza Bakery was a sale of individual assets comprising the business. Parenthetically, it may be noted that tax rates are graduated upwards as the total amount of income increases. But capital assets are generally held for a period in excess of a year. When held for more than a year, the profit or loss realized is reported for tax purposes only in the year that the asset was sold or exchanged even though the increment might have developed over several years or was the result of years of effort. Since the gain is taxed all in one year, a higher rate of tax would necessarily be paid be included; similarly, only a limited amount of any loss than if a part of the gain were reported each year the asset was held. In an attempt to

compensate for this, only a percentage of the gain on such sales is required to can be deducted in the year in which realized. We find that Section 34 (a) (1) of our Tax Code is patterned after Section 117 (a) (1) of the U.S. Internal Revenue Code. In interpreting this latter provision, the United States Circuit Court of Appeals held in the leading case ofWilliams v. McGowan, where it was held that Congress plainly did mean to comminute the elements of a business; plainly it did not regard the whole as "capital assets." In line with this ruling, We hold that the sale of the "La Suiza Bakery" was a sale not of a single asset but of individual assets that made up the business. And since petitioner failed to point out what part of the price he had received could be fairly attributed to each asset, the Tax Court correctly denied his claim. In order to ascertain the capital and/or ordinary gains taxes properly payable on the sale of a business, including its tangible assets, it is incumbent upon the taxpayer to show not only the cost basis of each asset, but also what portion of the selling price is fairly attributable to each asset. CIR vs Soriano Corp Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of original issue when the corporation was founded and 134,659 shares as stock dividend declarations. So in 1964 when Soriano died, half of the shares he held went to his wife as her conjugal share (wifes legitime) and the other half (92,577 shares, which is further broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to the estate. For sometime after his death, his estate still continued to receive stock dividends from ASC until it grew to at least 108,000 shares. In 1968, ASC through its Board issued a resolution for the redemption of shares from Sorianos estate purportedly for the planned Filipinization of ASC. Eventually, 108,000 shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted. Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against ASC for deficiency withholding tax-at-source. The CIR explained that when the redemption was made, the estate profited (because ASC would have to pay the estate to redeem), and so ASC would have withheld tax payments from the Soriano Estate yet it remitted no such withheld tax to the government. ASC averred that it is not duty bound to withhold tax from the estate because it redeemed the said shares for purposes of Filipinization of ASC and also to reduce its remittance abroad. ISSUE: Whether or not ASCs arguments are tenable. HELD: No. The reason behind the redemption is not material. The proceeds from a redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano Estate definitely profited from the redemption and such profit is taxable, and again, ASC had the duty to withhold the tax. There was a total of 108,000 shares redeemed from the estate. 25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of the shares are deemed to have been from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits such as stock dividends. It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that the latter is merely redeeming them as such. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund doctrine wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended for the protection of corporate creditors. NITAFAN VS CIR FACTS: The petitioners seek to enjoin CIR from making deduction of withholding taxesfrom their salaries.Petitioners contend that "any tax withheld from their emoluments orcompensation as judicial officers consti tutes a decrease or diminution of theirsalaries, contrary to the provision of Section 10, Article VIII of the 1987Constit ution mandating that during their continuance in office, their salary shallnot be decreased,' ISSUE: WON appointed and qualified judges (the petitioners) may be exempt frompayment of income tax HELD: No. This petition of the judges is then dismissed. RATIO:To resolve the legal issue raised in this petition the court looked into theintent of the framers of the Constitution who drafted the provision inquestion. The primary task in constitutional construction is to ascertainand thereafter assure the realization of the purpose of the framers and of the people in the adoption of the Constitution. The intent of the 1987 Constitutional Commission was to delete the proposedexpress grant of exemption from pay ment of income tax to members of the Judiciary, so as to "give substance to equality among the three branches of Government" (in the words of Commissioner Rigos). Commissioner Joaquin Bernasalso said that the salaries of members of the Judiciary would be subject to thegeneral income tax applied to all taxpayers. This intent became unclear in the final text of the 1987 Constitution. Having seenthe failure of not including a prohibition on the exemption of any public officer oremployee from payment of income tax, the court has authorized the continuationof the deduction of the withholding tax from the salaries of the members of theSupreme Court, as well as from the salaries of all other members of the Judiciary. CIR VS BRITISH OVERSEAS Facts: British Overseas Airways Corp (BOAC) is a 100% BritishGovernment-owned corporation engaged in international airlinebusiness and is a member of the Interline Air Transport Association, and thus, it operates air transportation services and sells transportation tickets over the routes of the other airline members. From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus, did not carry passengers and/or cargo to or from the Philippines but maintained a general sales agent in the Philippines - Warner

Barnes & Co. Ltd. and later, Qantas Airways - which was responsible for selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency income taxes against BOAC. Issue: Whether the revenue derived by BOAC from ticket sales inthe Philippines, constitute income of BOAC from Philippine sources, and accordingly taxable. Held: The source of an income is the property, activity, or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. Herein, the sale of tickets in the Philippines is the activity that produced the income. The tickets exchanged hands here and payment for fares were also made here in the Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. PD 68, in relation to PD 1355, ensures that international airlines are taxed on their income from Philippine sources. The 2 1/2% tax on gross billings is an income tax. If it had been intended as an excise tax or percentage tax, it would have been placed under Title V of the Tax Code covering taxes on business. CIR V. AIR INDIA (TAX) Air India is a foreign corporation and an offline international carrier not engaged in the business or air transportation in the Philippines. air India sells airplane tickets in the Philippines through its general sales agent, Philippine airlines. Said tickets are serviced by Air India outside the Philippines. The Commissioner assessed against Air India an amount representing 2.55 income tax on its gross Philippine billings pursuant to Section24(b)(2) of the Tax Code, as amended, inclusive of the 50% surcharge and interest for willful neglect to file a return as provided under Section 72 of the Code. Air India appealed to the CTA. Issue: Whether the revenue derived by an international air carrier from sales of tickets in the Philippines for air transportation while having no landing rights in the country, constitutes income of said carrier from Philippine sources, and thus, taxable. Based on the doctrine enunciated in BOAC case, the revenue derived by Air India from the sales of airplane tickets, through its agent in the Philippines, must be considered as taxable income, as correctly assessed by the Commissioner. Millares vs. NLRC Facts: Petitioners numbering one hundred sixteen occupied the positions of Technical Staff, Unit Manager, Section Manager, Department Manager, Division Manager and Vice President in the mill site of respondent Paper Industries Corporation of the Philippines (PICOP) in Bislig, Surigao del Sur. In 1992 PICOP suffered a major financial setback allegedly brought about by the joint impact of restrictive government regulations on logging and the economic crisis. To avert further losses, it undertook a retrenchment program and terminated the services of petitioners. Accordingly, petitioners received separation pay computed at the rate of one (1) month basic pay for every year of service. Believing however that the allowances they allegedly regularly received on a monthly basis during their employment should have been included in the computation thereof they lodged a complaint for separation pay differentials. Issue: Whether the allowances are included in the definition of "facilities" in Art. 97, par. (f), of the Labor Code, being necessary and indispensable for their existence and subsistence. Ruling: The allowances are not part of the wages of the employees. Wage is defined in letter (f) as the remuneration or earnings, however designated, capable of being expressed in terms of money, whether fixed or ascertained on a time, task, piece, or commission basis, or other method of calculating the same, which is payable by an employer to an employee under a written or unwritten contract of employment for work done or to be done, or for services rendered or to be rendered and includes the fair and reasonable value, as determined by the Secretary of Labor, of board, lodging, or other facilities customarily furnished by the employer to the employee. CIR vs Atlas Consolidated FACTS: Petitioner is a mining corporation, organized and existing under and by virtue of the laws of the Philippines, operates a concession in Toledo City, Cebu. It actually used and/or consumed tax paid extra gasoline and diesel fuel for the mining operation purchased from Mobil Oil Philippines. Sometime in 1978 petitioner filed with the Commissioner of Internal Revenue a written claim for tax credit. It claimed 25% of the specific taxes paid on said fuel oils pursuant to Sec. 5 of Republic Act No. 1435 in relation to Sec. 142 and 145 of the Tax Code There being no action taken on its claim for refund, petitioner filed before the CTA a judicial claim for refund. The CTA granted the claim for refund and ordered the CIR to refund and/or credit amount The CIR then appealed to the CA. Petitioner that Atlas is not entitled to the tax refund because no additional tax was imposed on it under any city or municipal ordinance as provided under Section 4 of R.A. No. 1435. The CA affirmed the decision of the CTA. Its Motion for reconsideration having failed hence, this recourse. ISSUE: Whether or not in the instant case, the petitioner may raise a new issue for the first time on appeal. HELD: The Supreme Court may review such matters as may be necessary to serve the interest of justice. It has ample authority to review and resolve matters not specifically raised or assigned as error by the parties if it finds that the consideration and determination ofthe same is necessary in arriving at a just resolution of a case. Where the issues already raised also rest on other issues not specifically presented, as long as the latter issues bear relevance and close relation to the former and as long as they arise from matters on record, the Court has the

authority to include them in its discussion of the controversy as well as to pass upon them. Wherefore, the petition is GRANTED. Commissioner vs. Court of AppealsGR 96016, 17 October 1991 Facts: Efren Castaneda retired from government service as Revenue Atrtache in the Philippine Embassy inLondon, England on 10 December 1982 under the provisiions of Section 12 (c) of Commonwealth Act 186, asamended. Upon retirement, he received, among other benefits, terminal leave pay from which theCommissioner withheld P12,557.13, allegedly representing income tax thereon. Castaneda claimed for a refund. Issue: Whether terminal leave pay is subject to withholding income tax. Held: Terminal Leave Pay received by a government official or employee is not subject to withholdingincome tax. In the exercise of sound personnel policy, the Government encourages unused leaves to beaccumulated. The Government recognizes that retirement pay for public servants is less than generous, if notmeager or scrimpy. Terminal leave payments are given thus not only at the same time but also foor the samepolicy considerations governing retirement benefits. Not being part of the gross salary or income of agovernment official or employee but a retirement benefit, terminal leave pay is not subject to income tax. CIR vs CA GR 108576 (Soriano Corp repeat) ISSUE: W/N ANSCOR's redemption of stocks from its stockholder Don Andres, can be considered as "essentially equivalent to the distribution of taxable dividend" making the proceeds taxable. HELD: YES. 1. Tax exemption. The Court held that ANSCOR was not covered by the amnesty it is claiming. 2. Tax dividends. Section 83(b) of the 1939 Revenue Act. Distribution of dividends or assets by corporations. (b) Stock dividends A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend atsuch time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. Redemption - repurchase, a reacquisition of stock by a corporation which issued the stock 89 in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, The application of Sec. 83(b) depends on the special factual circumstances of each case. General rule: A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. Exception: If a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated. Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. The mere issuance is not yet subject to income tax as they are nothing but an "enrichment through increase in value of capital investment." It postpones profits because stocks as capital is no longer available for actual distribution (aka sale). Income in tax law is "an amount of money coming to a person within a specified time, whether as payment for services, interest, or profit from investment." Depending on the circumstances, the proceeds of redemption of stock dividends are essentially distribution of cash dividends, which when paid becomes the absolute property of the stockholder. Having realized gain from that redemption, the income earner cannot escape income tax. For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b) the transaction involves stock dividends and (c) the "time and manner" of the transaction makes it "essentially equivalent to a distribution of taxable dividends." Of these, the most important is the third. 3. Application to this case. ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed come from? If its source is the original capital subscriptions upon establishment of the corporation or from initial capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares are from stock dividend declarations other than as initial capital investment, the proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon. But here, it is undisputed that at the time of the last redemption, the original common shares owned by the estate were only 25,247.5. This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends. As to the 3rd element, the stock dividends that were redeemed were issued just 2 to 3 years earlier. The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate tax scheme. Redemption cannot be used as a cloak to distribute corporate earnings. The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempt- ed by law or treaty from income tax.

The test of taxability under the exempting clause of Section 83(b) is, whether income was realized through the redemption of stock dividends. The two purposes invoked by ANSCOR are no excuse for its tax liability. First, the alleged "filipinization" plan cannot be considered legitimate as it was not implemented until the BIR started making assessments on the proceeds of the redemption. Records show that despite the existence of enormous corporate profits no cash dividend was ever declared by ANSCOR from 1945 until the BIR started making assessments in the early 1970's. This circum- stance negates the legitimacy of ANSCOR's alleged purposes. ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock dividends would be to impose on such stock an undisclosed lien and would be extremely unfair to intervening purchase. Such argument, however, bears no relevance in this case as no intervening buyer is involved. After considering the manner and the circumstances by which the issuance and redemption of stock dividends were made, there is no other conclusion but that the proceeds thereof are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income" subject to tax. El Oriente, Fabrica De Tabacos, Inc., V. Posadas (1931) FACTS: March 18, 1925: El Oriente, Fabrica de Tabacos, Inc. in order to protect itself against the loss that it might suffer by reason of the death of its manager, A. Velhagen, who had more than 35 years of experience in the manufacture of cigars in the Philippine Islands, and whose death would be a serious loss procured from the Manufacturers Life Insurance Co., of Toronto, Canada, thru its local agent E.E. Elser, an insurance policy on the life of A. Velhagen for $50,000 designated itself as the sole beneficiary. Upon the death of A. Velhagen in the year 1929, El Oriente received all the proceeds of the life insurance policy, together with the interests and the dividends accruing thereon, aggregating P104,957.88. Collector of Internal Revenue assessed and levied the sum of P3,148.74 as income tax on the proceeds of the insurance policy which tax El Oriente paid ISSUE: W/N proceeds of life insurance policies paid to corporate beneficiaries upon the death of the insured are also exempted HELD: YES. reversed and favoring El Oriente In reality, what the plaintiff received was in the nature of an indemnity for the loss which it actually suffered because of the death of its manager and not taxable income CIR vs CA 207 SCRA 487 Facts: GCL is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. As such, it was exempt from income tax. GCL made investments and earned interest income from which waswithheld the fifteen per centum (15%) final withholding tax. GCL filed with CIR a claim for refund for the amounts withheld. GCL disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax. The refund requested having been denied, GCL elevated the matter to the CTA, which ruled in favor of GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest income and ordering a refund of the tax withheld. CA upheld the CTA Decision. CIR seeks a reversal of the decision. Issue: Whether or not GCL is exempt from the final withholding taxon interest income Held: YES. Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose. The tax advantage was conceived in order to encourage the formation and establishment of such private plans for the benefit oflaborers and employees outside of the Social Security Act. It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law. CIR v Henderson (Compensation Income)Arthur Henderson is the president of the AmericanInternational Underwriters for the Phils., Inc., a domesticcorporation engaged in insurance business.The CIR included as part of the spouses personal taxableincome the allowances for rental of the apartment furnished bythe employer-corporation, including utilities, and the allowancefor travel expenses of Mrs. Henderson.The spouses did not live in the apartments and nor did theyavail of the travel expenses. As such, they did not pay for taxescorresponding to the allowances. Hence, the CIR assesseddeficiency income taxes against the spouses. Issue: WON allowances given by an employer, but unavailed of by anemployee, are taxable on the latters personal income. Held: No. No part of the allowances in question redounded tothe benefit of the spouses ultimately or was retained by them.The Hendersons are entitled only to a ratable value of theallowances the reasonable amount they would have spent for house rental and utilities which would be the only part of theallowances at issue subject to their personal tax. The same istrue with the allowances as no part of the allowance for traveling expenses redounded to the benefit of theHendersons. Hence, the traveling allowance is likewise nottaxable Filinvest vs CIR

On November 29, 1996, Filinvest Development Corporation (FDC), Filinvest Alabang, Inc. (FAI) and, Filinvest Land Incorporated (FLI) entered into a Deed of Exchange 2 whereby FDC and FAI both transferred to FLI certain parcels of land with a total appraised value of P4,306,777,000.00 in exchange for 463,094,301 shares of stock in FLI. The transfer is intended to facilitate the development of medium-rise residential and commercial building. As a result of the Deed of Exchange, FDC's ownership over FLI increased by almost 7%. On January 13, 1997, FLI wrote to the Bureau of Internal Revenue (BIR) requesting for a ruling that no gain or loss would be recognized in such transfer of real properties. This was acted upon favorably by the BIR on February 3, 1997, with a ruling that the transaction falls squarely within the Tax Code provision of a tax-free exchange. 3 Meanwhile, FDC extended to its affiliates advances on various dates during the years 1996 and 1997. In November 1996, FDC entered into a Shareholder's Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a joint venture company named Filinvest Asia Corporation (FAC). The latter was tasked to manage 50% ownership interest of FDC in its project with the Philippine Bank of Communications. Pursuant to this agreement, FDC assigned to FAC a portion of its rights in the said project in payment of a subscription amounting to P500.7M worth of shares of stock in FAC. As a result, FDC reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996. On January 3, 2000, FDC received from the BIR a Formal Notice of Demand 4 with accompanying four Assessment Notices, all dated January 3, 2000, informing FDC that after investigation, the following taxes were found due: a deficiency income tax of P150,074,066.27 for 1996, a deficiency documentary stamp tax of P10,425,487.06 for the same year, a deficiency income tax of P5,716,972.03 for 1997, and a deficiency documentary stamp tax of P5,796,699.40, also for 1997. The said deficiency income tax assessments were based upon the examiner's findings that FDC failed to reflect in its income tax returns several interest income, gains on property and, advances to its affiliates. Likewise, FDC was found not to have reflected its taxable income resulting from the exchange of property for shares of stock in FLI. Held: The law is explicit. Section 228 of the Tax Reform Act (R.A. 8424) provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made, otherwise the assessment shall be void. In the same vein, the demand letter calling for payment of the taxpayer's deficiency tax shall state the law, rules and regulations, or jurisprudence upon which the assessment is made. A perusal of the formal demand letter 29 dated January 3, 2000 reveals that the complete details covering the discrepancies as found by the respondent are shown in an accompanying schedule attached to such letter. However, for reasons discussed above, we, still, cannot uphold the respondent's view finding the petitioner liable for deficiency income tax on undeclared interest income. Consequentially, the imposition of delinquency interest has no leg to stand on. CIR vs CA, CTA, GCL G.R. No. 95022 March 23, 1992 Facts:GCL Retirement Plan is an employees' trust maintained by the employer, GCL Inc., toprovide retirement, pension, disability and death benefits to its employees. The Plan assubmitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917.In 1984, Respondent GCL made investsments and earned therefrom interest incomefrom which was witheld the fifteen per centum (15%) final witholding tax imposed byPres. Decree No. 1959, which took effect on 15 October 1984GCL filed with Petitioner a claim for refund in the amounts of P1,312.66 withheld by Anscor Capital and Investment Corp., and P2,064.15 by Commercial Bank of Manila.On 12 February 1985, it filed a second claim for refund of the amount of P7,925.00withheld by Anscor, stating in both letters that it disagreed with the collection of the 15%final withholding tax from the interest income as it is an entity fully exempt from incometax as provided under Rep. Act No. 4917 in relation to Section 56 (b) of the Tax Code.CIR denied the refund, Petitioner elevated the matter to CTA. Issue: Whether GCL is exempted from Income Tax Held:GCL Plan was qualified as exempt from income tax by the Commissioner of InternalRevenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. In so far asemployees' trusts are concerned, the foregoing provision should be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No.1983, which took effect on 22 June 1957.The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision. It is unambiguous.Manifest therefrom is that the tax law has singled out employees' trusts for taxexemption. And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts.Employees' trusts or benefit plans normally provide economic assistance to employeesupon the occurrence of certain contingencies, particularly, old age retirement, death,sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for noother purpose. RE: REQUEST OF ATTY. BERNARDO ZIALCITA, 190 SCRA 851 (TAX) Since terminal leave is applied for by an officer or employee who has already severed his connection with his employer ans who is no longer working, then it follows that TERMINAL LEAVE PAY, which is the cash value of his accumulated leave credits, should not be treated as compensation for services rendered at that time. It cannot be viewed as salary for purposes which would reduce it. There can be no "commutation of salary" when a government retiree applies for terminal leave because he is not receiving it as salary. what applies for is a commutation of leave credits. It is an accumulation of credits intended for old age or separation from the service. Hence, Section 286 of the Revised Administrative Code is not applicable. It cannot be construed as limiting the basis of the computation of terminal pay to monthly salary only. CIR vs. Mitsubishi

Facts: On April 17, 1970, Atlas Consolidated Mining and Development Corporation entered into a Loan and Sales Contractwith Mitsubishi Metal Corporation, a Japanese corporation licensed to engage in business in the Philippines, for purposes of the projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced for a period of fifteen (15) years. Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank) for purposes of its obligation under said contract. Its loan application was approved on May 26, 1970 in the equivalent sum of $20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by September 30, 1981. Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter totaling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government. Issue: Whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 of the tax code and, therefore, exempt from withholding tax. Held: The court ruled in the negative. Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its loan application with the former was that the amount being procured would be used as a loan to and in consideration for importing copper concentrates from Atlas. Such an innocuous statement of purpose could not have been intended for, nor could it legally constitute, a contract of agency. The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS, the former being the owner of the $20 million upon completion of its loan contract with EXIMBANK of Japan. It is settled a rule in this jurisdiction that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed, which the petitioners have failed to discharge. Significantly, private respondents are not among the entities which, under Section 29 of the tax code, are entitled to exemption and which should indispensably be the party in interest in this case. Santos vs Servier Phils Facts: Petitioner Ma. Isabel T. Santos was the Human Resource Manager of respondent Servier Philippines, Inc. since 1991 until her termination from service in 1999. On March 26 and 27, 1998, petitioner attended a meeting[3] of all human resource managers of respondent, held in Paris, France. Since the last day of the meeting coincided with the graduation of petitioners only child, she arranged for a European vacation with her family right after the meeting. She, thus, filed a vacation leave effective March 30, 1998.[4] On March 29, 1998, petitioner, together with her husband Antonio P. Santos, her son, and some friends, had dinner at Leondes Bruxelles, a Paris restaurant known for mussels[5] as their specialty. While having dinner, petitioner complained of stomach pain, then vomited. Eventually, she was brought to the hospital known as Centre Chirurgical de LQuest where she fell into coma for 21 days; and later stayed at the Intensive Care Unit (ICU) for 52 days. The hospital found that the probable cause of her sudden attack was alimentary allergy, as she had recently ingested a meal of mussels which resulted in a concomitant uticarial eruption.[6] During the time that petitioner was confined at the hospital, her husband and son stayed with her in Paris. Petitioners hospitalization expenses, as well as those of her husband and son, were paid by respondent.[7] In June 1998, petitioners attending physicians gave a prognosis of the formers condition; and, with the consent of her family, allowed her to go back to the Philippines for the continuation of her medical treatment. She was then confined at the St. LukesMedical Center for rehabilitation.[8] During the period of petitioners rehabilitation, respondent continued to pay the formers salaries; and to assist her in paying her hospital bills. In a letter dated May 14, 1999, respondent informed the petitioner that the former had requested the latters physician to conduct a thorough physical and psychological evaluation of her condition, to determine her fitness to resume her work at the company. Petitioners physician concluded that the former had not fully recovered mentally and physically. Hence, respondent was constrained to terminate petitioners services effective August 31, 1999.[9] As a consequence of petitioners termination from employment, respondent offered a retirement package/ Of the promised retirement benefits amounting to P1,063,841.76, only P701,454.89 was released to petitioners husband, the balance[11] thereof was withheld allegedly for taxation purposes. Respondent also failed to give the other benefits listed above.[12] Petitioner, represented by her husband, instituted the instant case for unpaid salaries; unpaid separation pay; unpaid balance of retirement package plus interest; insurance pension for permanent disability; educational assistance for her son; medical assistance; reimbursement of medical and rehabilitation expenses; moral, exemplary, and actual damages, plus attorneys fees. The case was docketed as NLRC-NCR (SOUTH) Case No. 3006-02520-01. On September 28, 2001, Labor Arbiter Aliman D. Mangandog rendered a Decision[13] dismissing petitioners complaint. The Labor Arbiter stressed that respondent had been generous in giving financial assistance to the petitioner.[14] He likewise noted that there was a retirement plan for the benefit of the employees. In denying petitioners claim for separation pay, the Labor Arbiter ratiocinated that the same had already been integrated in the retirement plan established by respondent. Thus, petitioner could no longer collect separation pay over and above her retirement benefits.[15] The arbiter refused to rule on the legality of the deductions made by respondent from petitioners total retirement benefits for taxation purposes, as the issue was beyond the jurisdiction of the NLRC.[16] On the matter of educational assistance, the Labor Arbiter found that the same may

be granted only upon the submission of a certificate of enrollment.[17] Lastly, as to petitioners claim for damages and attorneys fees, the Labor Arbiter denied the same as the formers dismissal was not tainted with bad faith.[18] Held: Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least ten (10) years; (3) the retiring official or employee is not less than fifty (50) years of age at the time of his retirement; and (4) the benefit had been availed of only once.[43] As discussed above, petitioner was qualified for disability retirement. At the time of such retirement, petitioner was only 41 years of age; and had been in the service for more or less eight (8) years. As such, the above provision is not applicable for failure to comply with the age and length of service requirements. Therefore, respondent cannot be faulted for deducting from petitioners total retirement benefits the amount of P362,386.87, for taxation purposes. Esso Standard Eastern Inc. vs. CIR (G.R. Nos. L-28508-9, July 7, 1989) Facts: In CTA Case No. 1251, Esso Standard Eastern Inc. (Esso) deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the Commissioner of Internal Revenue (CIR) on the ground that the expenses should be capitalized and might be written off as a loss only when a "dry hole" should result. Esso then filed an amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04, representing margin fees it had paid to the Central Bank on its profit remittances to its New York head office. On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the margin fees paid on the ground that the margin fees paid to the Central Bank could not be considered taxes or allowed as deductible business expenses. Esso appealed to the Court of Tax Appeals (CTA) for the refund of the margin fees it had earlier paid contending that the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense. However, Essos appeal was denied. Issues: (1) Whether or not the margin fees are taxes. (2) Whether or not the margin fees are necessary and ordinary business expenses. Held: (1) No. A tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our country's international reserves. The margin fee was imposed by the State in the exercise of its police power and not the power of taxation. (2) No. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. Since the margin fees in question were incurred for the remittance of funds to Esso's Head Office in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in the development of Esso's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of Esso's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Esso in New York, but certainly not in the Philippines. CIR VS GENERAL FOODS Facts: Respondent corporation General Foods (Phils), which is engaged in the manufacture of Tang, Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 1985 and claimed as deduction, among other business expenses, P9,461,246 for media advertising for Tang. The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied. General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision by CTA dismissing the companys appeal. Issue: W/N the subject media advertising expense for Tang was ordinary and necessary expense fully deductible under the NIRC Held: No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of the taxing authority, and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. Deductions for income taxes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed. To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. While the subject advertising expense was paid or incurred within the corresponding taxable year and was incurred in carrying on a trade or business, hence necessary, the parties views conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary ATLAS CONSOLIDATED MINING DEVT CORP vs. CIR FACTS: Petitioner corporation, a VAT-registered taxpayer engaged in mining, production, and sale of various mineral products, filed claims with the BIR for refund/credit of input VAT on its purchases of capital goods and on its zero-rated sales in the taxable quarters of the years 1990 and 1992. BIR did not immediately act on the matter

prompting the petitioner to file a petition for review before the CTA. The latter denied the claims on the grounds that for zero-rating to apply, 70% of the company's sales must consists of exports, that the same were not filed within the 2-year prescriptive period (the claim for 1992 quarterly returns were judicially filed only on April 20, 1994), and that petitioner failed to submit substantial evidence to support its claim for refund/credit. The petitioner, on the other hand, contends that CTA failed to consider the following: sales to PASAR and PHILPOS within the EPZA as zero-rated export sales; the 2-year prescriptive period should be counted from the date of filing of the last adjustment return which was April 15, 1993, and not on every end of the applicable quarters; and that the certification of the independent CPA attesting to the correctness of the contents of the summary of suppliers invoices or receipts examined, evaluated and audited by said CPA should substantiate its claims. ISSUE: Did the petitioner corporation sufficiently establish the factual bases for its applications for refund/credit of input VAT? HELD: No. Although the Court agreed with the petitioner corporation that the two-year prescriptive period for the filing of claims for refund/credit of input VAT must be counted from the date of filing of the quarterly VAT return, and that sales to PASAR and PHILPOS inside the EPZA are taxed as exports because these export processing zones are to be managed as a separate customs territory from the rest of the Philippines, and thus, for tax purposes, are effectively considered as foreign territory, it still denies the claims of petitioner corporation for refund of its input VAT on its purchases of capital goods and effectively zero-rated sales during the period claimed for not being established and substantiated by appropriate and sufficient evidence. Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the sovereign authority, and should be construed in strictissimi juris against the person or entity claiming the exemption. The taxpayer who claims for exemption must justify his claim by the clearest grant of organic or statute law and should not be permitted to stand on vague implications. Pirovano v CIR FACTS: De la Rama Steamship Co. insured the life of Enrico Pirovanowho was then its President and General Manager. Thecompany initially designated itself as the beneficiary of thepolicies but, after Pirovanos death, it renounced all its rights,title and interest therein, in favor of Pirovanos heirs.The CIR subjected the donation to gift tax. Pirovanos heirscontended that the grant was not subject to such donees taxbecause it was not a simple donation, as it was made for a fulland adequate compensation for the valuable services by thelate Priovano (i.e. that it was remuneratory). Issue: WON the donation is remuneratory and therefore not subject todonees tax, but rather taxable as part of gross income. Held: No. The donation is not remuneratory. There is nothingon record to show that, when the late Enrico Pirovanorendered services as President and General Manager of theDe la Rama Steamship Co. and was largely responsible for the rapid and very successful development of the activities of the company", he was not fully compensated for such services.The fact that his services contributed in a large measure to thesuccess of the company did not give rise to a recoverable debt,and the conveyances made by the company to his heirsremain a gift or a donation. The companys gratitude was thetrue consideration for the donation, and not the servicesthemselves. COMMISSIONER V. PALANCA18 SCRA 496REGALA, October 29, 1966 FACTS -July 1950, Don Carlos Palanca, Sr., donated to hisson Carlos Jr., shares of stock in La Tondea, Inc.amounting to 12,500 shares. Carlos Jr. failed to file areturn on the donation within the statutory period so Carlos Jr. was assessed P97,691.23 (gift tax) , P24,442.81 (25% surcharge), P47,868.70 (interest),which he paid on June 22, 1955.-March 1,1956, Carlos Jr. filed with BIR his ITR for1955 claiming a deduction for interest of P9,706.45 and reporting a taxable income of P65,982.12. Hewas assessed P21,052.01 as income tax.-November 1956, Carlos Jr. filed an amended return for 1955 , claiming an additional deduction of P47,868.70 (allegedly the interest paid on thedonees gift tax based on Sec.30(b)(1) of the Tax Code) so taxable income is P18,113.42 (notP65,982.12) and tax due thereon in sum of P3,167.00. He claimed for a refund of P17,885.01 (P21,052.01 - P3,167.00) BIR denied-Carlos Jr. reiterated claim for refund, BIR denied-BIR considered the donation by Carlos Sr. as atransfer in contemplation of death so Carlos Jr. wasassessed P191,591.62 as estate and inheritancetaxes. Carlos paid P17,002.74 on June 22, 1955 asgift tax (includes interest and surcharge) which wasapplied to his estate and inheritance tax liability.Petitioner paid P60,581.80 as interest fordelinquency.-August 1958, Carlos Jr. filed again an amended ITRfor 1955 claiming the following:As interest deductions: P9,706.45 (as in the origina lITR) + P60,581.80 (interest on the estate and inheritance taxes); Net Taxable income: P5,400.32;Income tax due: P428.00; claimed a refund of P20,624.01 (P21,052.01 P428) . Even before BIRruled on his claim, Carlos Jr. filed petition for reviewbefore CTA-CTA: BIR refund Carlos P20,624.01 ISSUES 1. WON there is a difference between indebtednessand taxes to determine the deductible interest(WON Palanca could claim interest deductions basedon tax liability)2. WON claim for refund of Palanca already expired HELD1. NO. Distinction became inconsequential. Intereston taxes should be considered as interests of indebtedness Ratio. While the distinction between taxes anddebts was recognized in this jurisdiction, thevariance in their legal conception does not extend tothe interests paid on them, at least insofar asSec.30(b)(1) of the NIRC 1 is concerned (whichauthorizes deduction from gross income of interestpaid within the taxable year on indebtedness). Reasoning. CIR argues that Carlos Jr. cannot deductthe interest due to its tax liabilities from his grossincome since it is not interest ON INDEBTEDNESS butinterest on TAX (liabilities).-however, in CIR v. PRIETO (wherein deductions

of interest on donors tax was allowed) it was held thatthe term indebtedness was defined as theunconditional and legally enforceable obligation forthe payment of money. It Thus, it is apparent that atax may be considered an indebtedness PRC/UNILEVER vs. CA FACTS:This is an appeal by certiorari from the decision of respondent Court of Appeals 1 affirming the decision of the Court of Tax Appeals which disallowed petitioner's claim for deduction as bad debts of several accounts in the total sum of P395,324.27, and imposing a 25% surcharge and 20% annual delinquency interest on the alleged deficiency income tax liability of petitioner. Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00. The assessment was timely protested by petitioner on April 26, 1989, on the ground that it was based on the erroneous disallowances of "bad debts" and "interest expense" although the same are both allowable and legal deductions. Respondent Commissioner, however, issued a warrant of garnishment against the deposits of petitioner at a branch of City Trust Bank, in Makati, Metro Manila, which action the latter considered as a denial of its protest. ISSUE: WON all bad debts should be treated as deductions. RULING:This pronouncement of respondent Court of Appeals relied on the ruling of this Court in Collector vs. Goodrich International Rubber Co., 6 which established the rule in determining the "worthlessness of a debt." In said case, we held that for debts to be considered as "worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer should show that (1) there is a valid and subsisting debt. (2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz.: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court. On the foregoing considerations, respondent Court of Appeals held that petitioner did not satisfy the requirements of "worthlessness of a debt" as to the thirteen (13) accounts disallowed as deductions. AGUINALDO INDUSTRIES (FISHING NETS) vs. COMMISSIONER OF INTERNAL REVENUE Facts:Aguinaldo Industries Corporation is a domestic corporation engaged in two linesof business, namely: (a) the manufacture of fishing nets, a tax-exempt industry,and the manufacture of furniture. The business of manufacturing fishing nets ishandled by its Fish Nets Division, while the manufacture of Furniture is operated by its Furniture Division. For accounting purposes, each division is providedwith separate books of accounts.Previously, Aguinaldo Industries acquired a parcel of land in Muntinglupa, Rizal, as site of the fishing net factory. This transaction was entered in the booksof the Fish Nets Division of the Company. Later, when another parcel of land inMarikina Heights was found supposedly more suitable for the needs of Aguinaldo Industries, it sold the Muntinglupa property, Aguinaldo Industries derived profitfrom this sale which was entered in the books of the Fish Nets Division as miscellaneous income to distinguish it from its tax-exempt income.For the year 1957, Aguinaldo Industries filed two separate income tax returns onefor its Fish Nets Division and another for its Furniture Division. After investigation of these returns, the examiners of the BIR found that the Fish Nets Division deducted from its gross income for that year the amount of 61k as additional remuneration paid to the officers of Aguinaldo Industries.The examiner recommended the disallowance of the 61k deduction because he found that this amount was taken from the net profit of an isolated transaction (sale ofaforementioned land) not in the course of or carrying on of Aguinaldo Industries's trade or business. It appears from the books that such deduction was claimedas part of the selling expenses of the land in Muntinglupa, Riza.Aguinaldo Industries insists that said amount should be allowed as deduction because it was paid to its officers as allowance or bonus pursuant to Section 3 ofits by-laws which provides as follows:From the net profits of the business of the Company shall be deducted for allowance of the President 3%, for the first Vice President 1 %, for the second Vice Predent for the members of the Board of Directors 10% to he divided equally among themselves, for the Secretary of the Board for the General Manager for two Assistant General Managers.### Issue:WON the bonus given to the officers of Aguinaldo upon the sale of its Muntinglupa land is an ordinary and necessary business expense deductible for income tax purposes?### Held:No. In general, only those ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonableallowance for personal services actually rendered can be claimed as a deductible.The bonus given to the officers of the Aguinaldo Industries as their share of the profit realized from the sale of the land cannot be deemed a deductible expense for tax purposes, even if the aforesaid sale could be considered as a transaction for Carrying on the trade or business of the Aguinaldo Industries and the gr

C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue Facts: Hoskins, a domestic corporation engaged in the real estate business as broker, managing agents and administrators, filed its income tax return (ITR) showing a net income of P92,540.25 and a tax liability of P18,508 which it paid. CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the disallowance of an item which was paid to Mr. C. Hoskins representing 50% of supervision fees earned and set aside the disallowance of the other 3 items. Issue: Whether or not the disallowance of the 4 items were proper.

Held: NOT deductible. It did not pass the test of reasonableness which is: General rule, bonuses to employees made in good faith and as additional compensation for services actually rendered by the employees are deductible, provided such payments, when added to the salaries do not exceed the compensation for services rendered. Hospital De San Juan De Dios, Inc., vs.Commissioner Of Internal Revenue Facts: Petitioner is engaged in both taxable and non-taxable operations. The income derived from the operations of the hospital and the nursing school are exempt from income tax while the rest of petitioner's income are subject thereto. Its taxable or non-operating income consists of rentals, interests and dividendS received from its properties and investments. In the computation of its taxable income for the years 1952 to 1955, petitioner allowed all its taxable income to share in the allocation of administrative expenses. Respondent, Commissioner of Internal Revenue disallowed, however, the interests and dividends from sharing in the allocation of administrative expense on the ground that the expenses incurred in the administration or management of petitioner's investments are not allowable business expenses inasmuch as they were not incurred in 'carrying on any trade or business within the contemplation of Section 30 (a) (1) of the Revenue Code. Consequently, petitioner was assessed deficiency income taxes for the years in question The petitioner protested against the assessment and requested the Commissioner to cancel and withdraw it. After reviewing the assessment, the Commissioner advised petitioner that the deficiency income tax assessment against it was reduced to only P16,852.41. Still the petitioner, through its auditors, insisted on the cancellation of the revised assessment. The request was, however, denied. Petitioner sought a review of the assessment by the Court of Tax Appeals (hereafter CTA). The CTA upheld the Commissioner holding that the expenses incurred by the petitioner for handling its funds or income consisting solely of dividends and interests, were not expenses incurred in "carrying on any trade or business," hence, not deductible as business or administrative expenses. Petitioner filed a motion for reconsideration of the CTA decision. When its motion was denied, it filed this petition for review. Issue: Whether or not the dividends and interests are expenses incurred in carrying on any trade or business, hence, deductible as business expense under Section 30 (A) (I) of the Revenue Code Held: The Supreme Court ruled in the negative. The Court of Tax Appeals found that petitioner failed to establish by competent proof that its receipt of interests and dividends constituted the carrying on of a trade or business so as to warrant the deductibility of the expenses incurred in their realization. Petitioner could have easily required any of its responsible officials to testify on this regard but it failed to do so. Under these circumstances and coupled with the fact that the interests and dividends here in question are merely incidental income to petitioner's main activity, which is the operation of its hospital and nursing schools, the conclusion becomes inevitable that petitioner's activities never go beyond that of a passive investor, which under existing jurisprudence do not come within the purview of carrying on any "trade or business". That factual finding is binding on this Court. And, as the principle of allocating expenses is grounded on the premise that the taxable income was derived from carrying on a trade or business, as distinguished from mere receipt of interests and dividends from one's investments, the Court of Tax Appeals correctly ruled that said income should not share in the allocation of administrative expenses. Hospital de San Juan De Dios, Inc., according to its Articles of Incorporation, was established for purposes "Which are benevolent, charitable and religious, and not for financial gain". It is not carrying on a trade or business for the word "business" in its ordinary and common use means "human efforts which have for their end living or reward; it is not commonly used as descriptive of charitable, religious, educational or social agencies" or "any particular occupation or employment habitually engaged in especially for livelihood or gain" or "activities where profit is the purpose or livelihood is the motive." Republic v. Manila Electric Company Facts: The facts are brief and undisputed. On December 23, 1993, MERALCO filed with the ERB an application for the revision of its rate schedules. The application reflected an average increase of 21 centavos per kilowatthour (kwh) in its distribution charge. The application also included a prayer for provisional approval of the increase pursuant to Section 16(c) of the Public Service Act and Section 8 of Executive Order No. 172. On January 28, 1994, the ERB issued an Order granting a provisional increase of P0.184 per kwh, subject to the following condition: In the event, however, that the Board finds, after hearing and submission by the Commission on Audit of an audit report on the books and records of the applicant that the latter is entitled to a lesser increase in rates, all excess amounts collected from the applicants customers as a result of this Order

shall either be refunded to them or correspondingly credited in their favor for application to electric bills covering future consumptions. Held: Regulation of rates to be charged by public utilities is founded upon the police power of the State and statutes prescribing rules for the control and regulation of public utilities are a valid exercise thereof. When private property is used for a public purpose and is affected with public interest, it ceases to be juris privati only becomes subject to regulation. Submission to regulation may be withdrawn by the owner by discontinuing use but as long as the use of the property is continued, the same is subject to public regulation. In regulating rates charged by public utilities, the State protects the public against arbitrary and excessive rates while maintaining the efficiency and quality of services rendered. However, the power to regulate rates does not give the State the right to prescribe rates which are so low as to deprive the public utility of a reasonable return on investment. Thus, the rates prescribed by the State must be one that yields a fair return omn public utility upon the value of the property performing the service and one that is reasonable to the public for the services rendered. The fixing of just and reasonable rates involves a balancing of the investor and the consumer interests. ChinaBanking vs CA FACTS: China Banking Corporation (China Bank) extended several loans to Native West International Trading Corporation (Native West) and to So Ching, Native West's president. Native West in turn executed promissory notes in favor of China Bank. So Ching, with the marital consent of his wife, Cristina So, additionally executed two mortgages over their properties, viz., a real estate mortgage executed on July 27, 1989 covering a parcel of land situated in Cubao, Quezon City, under TCT No. 277797, and another executed on August 10, 1989 covering a parcel of land located in Mandaluyong, under TCT No. 5363. The promissory notes matured and despite due demands by China Bank neither private respondents Native West nor So Ching paid. Pursuant to a provision embodied in the two mortgage contracts, China Bank filed petitions for the extra-judicial foreclosure of the mortgaged properties before Notary Public Atty. Renato E. Taguiam for TCT No. 277797, and Notary Public Atty. Reynaldo M. Cabusora for TCT No. 5363, copies of which were given to the spouses So Ching and Cristina So. After due notice and publication, the notaries public scheduled the foreclosure sale of the spouses' real estate properties on April 13, 1993. Eight days before the foreclosure sale, however, private respondents filed a complaint with the Regional Trial Court for accounting with damages and with temporary restraining order against petitioners alleging several grounds, including Violation of Article 1308 of the Civil Code. On April 7, 1993, the trial court issued a temporary restraining order to enjoin the foreclosure sale. ISSUE: Whether or not there was a correct application of payment in this case. RULING: An important task in contract interpretation is the ascertainment of the intention of the contracting parties which is accomplished by looking at the words they used to project that intention in their contract, i.e., all the words, not just a particular word or two, and words in context, not words standing alone. Indeed, Article 1374 of the Civil Code, states the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly." Applying the rule, we find that the parties intent is to constitute the real estate properties as continuing securities liable for future obligations beyond the amounts of P6.5 million and P3.5 million respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage contracts. Thus, while the "whereas" clause initially provides that "the mortgagee has granted, and may from time to time hereafter grant to the mortgagors . . . credit facilities not exceeding six million five hundred thousand pesos only (P6,500,000.00)" yet in the same clause it provides that "the mortgagee had required the mortgagor(s) to give collateral security for the payment of any and all obligations heretofore contracted/incurred and which may thereafter be contracted/incurred by the mortgagor(s) and/or debtor(s), or any one of them, in favor of the mortgagee" which qualifies the initial part and shows that the collaterals or real estate properties serve as securities for future obligations. The first paragraph which ends with the clause, "the idea being to make this deed a comprehensive and all embracing security that it is" supports this qualification. CIR vs Isabela Facts: When the Bureau of Internal Revenue disallowed Isabela Cultural Corporations claimed deductions for the years1984-1986 in their 1986 taxes for expense deductions, to wit:(1) Expenses for auditing services for the year ending 31 December 1985;(2) Expenses for legal services for the years 1984 and 1985; and(3) Expense for security services for the months of April and May 1986. As such, the former charged the latter for deficiency income taxes. Isabela Cultural Corporation contests the assessment. Issues and Ruling: 1. For a taxpayer using the accrual method, when do the facts present themselves in such a manner that thetaxpayer must recognize income or expense?The accrual of

income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such incomeor liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayerhas at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test issatisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computationmay be unknown, but is not as much as unknowable, within the taxable year