TAXATION I

CASE DIGESTS

SUBMITTED BY:
BULAN, BLESSY MAY M.
ESTRADA, BENTEL JELLIE C.
FERNANDEZ, LORELYN
ORAS, PHYLIAN
TINDOC, NOBLIE

SUBMITTED TO: ATTY. CARANTES

INSTRUCTOR

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

MARUBENI CORPORATION, respondent.,
G.R. No. 13737, December 18, 2001
FACTS:
Petitioner assessed respondent for deficiency income, branch profit remittance,
contractor's and commercial broker's taxes after the formers revenue examiners found that
respondent have undeclared income from two contracts in the Philippines, both of which were
completed in 1984. Assessment was based on the ground that subject contracts were for a piece
of work and for the construction and installation of facilities in the Philippines, the entire income
therefrom constituted income from Philippine sources which is subject to internal revenue taxes.
Respondent filed petitions for reviewer before the Court of Tax Appeals(CTA) questioning the
petitioners assessment. CTA ruled that the questioned deficiency taxes were cancelled and
withdrawn because respondent had properly availed of tax amnesty under E.O. Nos. 41 and 64.
Since the said decision was affirmed by the Court of Appeals, petitioner filed this case before the
Supreme Court alleging that respondent is disqualified from availing said tax amnesties because
the latter falls under the exception in section 4(b) of E.O. 41 since respondent filed for income
tax amnesty on October 30, 1986 when CTA Case No. 4109 had already been filed and was
pending before the Court of Tax Appeals. On the other hand, respondent argued that even if it
did not validly avail of the tax amnesty, it is still not liable for the deficiency contractor's tax
because the income from the projects came from the "Offshore Portion" of the contracts wherein
all materials and equipment in the contract under the "Offshore Portion" were manufactured and
completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes.
ISSUES:
1. Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax
Appeals which ruled that respondent's deficiency tax liabilities were extinguished upon
respondent's availment of tax amnesty under Executive Orders Nos. 41 and 64.
2. Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner.
RULING:
1. No. Respondent was not disqualified from availing of the amnesty for income tax under
E.O. No. 41. Section 4 (b) of E.O. No. 41 excepts from income tax amnesty those
taxpayers with income tax cases already filed in court as of the its effectivity. The filing
of income tax cases in court must have been made before and as of the date
of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4
(b) there must have been no income tax cases filed in court against him when E.O. No. 41
took effect. This is regardless of when the taxpayer filed for income tax amnesty,
provided of course he files it on or before the deadline for filing. E.O. No. 41 took effect
on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income,
branch profit remittance and contractor's tax assessments was filed by respondent with

the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on
August 22, 1986, CTA Case No. 4109 had not yet been filed in court. Therefore,
Respondent corporation did not fall under the said exception. The same ruling also
applies to the deficiency branch profit remittance tax assessment. In addition Court
declared that E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general
pardon or intentional overlooking by the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an
absolute forgiveness or waiver by the government of its right to collect what is due it and
to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty,
much like a tax exemption, is never favored nor presumed in law. If granted, the terms of
the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer
and liberally in favor of the taxing authority. For the right of taxation is inherent in
government.
2. No. Respondent was able to present clear and convincing evidence that would establish
that not all its work under the subject contracts were performed in the Philippines but in
fact were completed in Japan in accordance with the provisions of the said contracts. As
provided in the contracts the service of "design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and control of testing and
commissioning, coordination " of the two projects involved two taxing jurisdictions.
These acts occurred in two countries in Japan and the Philippines. While the construction
and installation work were completed within the Philippines, the evidence is clear that
some pieces of equipment and supplies were completely designed and engineered in
Japan. Corollary, contractors tax cannot be levied against respondent for services
rendered in Japan. A contractor's tax is a tax imposed upon the privilege of engaging in
business. It is generally in the nature of an excise tax on the exercise of a privilege of
selling services or labor rather than a sale on products; and is directly collectible from the
person exercising the privilege. Being an excise tax, it can be levied by the taxing
authority only when the acts, privileges or business are done or performed within the
jurisdiction of said authority.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-infact) Respondent.
G.R. No. 153793 August 29, 2006

FACTS:
Respondent, a non-resident German citizen, is the President of JUBANITEX, Inc., a
domestic corporation engaged in manufacturing, importing and exporting, selling and disposing
embroidered textile products. Respondent was also corporation appointed as commission agent,
of the corporation, receiving 10% sales commission on all sales made by her. On April 14, 1998,
respondent filed a claim to refund the amount of P170,777.26 which according to her was
mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended that her
sales commission income is not taxable in the Philippines because the same was a compensation
for her services rendered in Germany and therefore considered as income from sources outside
the Philippines. The Court of Tax Appeals in its decision denied her claim on the ground that the
commissions received by respondent were actually her remuneration in the performance of her
duties as President of JUBANITEX and not as a mere sales agent thereof. The income derived by
respondent is therefore an income taxable in the Philippines because JUBANITEX is a domestic
corporation. On the other hand, the said decision was reversed by the Court of Appeals and ruled
that respondent received the commissions as sales agent of JUBANITEX and not as President
thereof. And since the "source" of income means the activity or service that produce the income,
the sales commission received by respondent is not taxable in the Philippines because it arose
from the marketing activities performed by respondent in Germany. The CIR appealed this case
arguing that the income earned by respondent is taxable in the Philippines because the source
thereof is JUBANITEX, a domestic corporation located in the City of Makati. It thus implied
that source of income means the physical source where the income came from. It further argued
that since respondent is the President of JUBANITEX, any remuneration she received from said
corporation should be construed as payment of her overall managerial services to the company
and should not be interpreted as a compensation for a distinct and separate service as a sales
commission agent. Respondent countered that the income she received was payment for her
marketing services. She contended that income of nonresident aliens like her is subject to tax
only if the source of the income is within the Philippines. Source, according to respondent is
the situs of the activity which produced the income. And since the source of her income was her
marketing activities in Germany, the income she derived from said activities is not subject to
Philippine income taxation.
ISSUE:
1.Whether or not respondents sales commission income is taxable in the Philippines.
2.Whether or not the claim for tax refund should be denied.

RULING:
1.Yes. Pursuant to the Section 25 of the NIRC, non-resident aliens, whether or not engaged in
trade or business, are subject to Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining the taxability of non-resident
aliens is the incomes "source."
Under Section 1 of Act No. 2833(1920), nonresident aliens are likewise subject to tax on income
"from all sources within the Philippine Islands.Act No. 2833 substantially reproduced the
United States (U.S.) Revenue Law of 1916 as amended by U.S. Revenue Law of 1917. Being a
law of American origin, the authoritative decisions of the official charged with enforcing it in the
U.S. have peculiar persuasive force in the Philippines.
The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from
sources within the U.S. and specifies when similar types of income are to be treated as from
sources outside the U.S. Under the said Code, compensation for labor and personal services
performed in the U.S., is generally treated as income from U.S. sources; while compensation for
said services performed outside the U.S., is treated as income from sources outside the U.S. A
similar provision is found in Section 42 of Philippine NIRC. The Supreme Court of US has said
that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or
(3) the sale of capital assets. If the income is from labor the place where the labor is done should
be decisive; if it is done in this country, the income should be from "sources within the United
States." If the income is from capital, the place where the capital is employed should be decisive;
if it is employed in this country, the income should be from "sources within the United States." If
the income is from the sale of capital assets, the place where the sale is made should be likewise
decisive.
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. The Court reiterates the rule that "source of
income" relates to the property, activity or service that produced the income. With respect to
rendition of labor or personal service, as in the instant case, it is the place where the labor or
service was performed that determines the source of the income. There is therefore no merit in
petitioners interpretation which equates source of income in labor or personal service with the
residence of the payor or the place of payment of the income.
2.The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi jurisagainst the taxpayer. To those therefore, who claim a refund rest the
burden of proving that the transaction subjected to tax is actually exempt from taxation. The
faxed documents presented by respondent did not constitute substantial evidence, or that relevant
evidence that a reasonable mind might accept as adequate to support the conclusion that it was in
Germany where she performed the income producing service which gave rise to the reported
monthly sales in the months of March and May to September of 1995. She thus failed to
discharge the burden of proving that her income was from sources outside the Philippines and

exempt from the application of our income tax law. Hence, the claim for tax refund should be
denied.

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. L-53961 June 30, 1987
FACTS:
Petitioner entered into contracts in Tokyo with several Japanese shipbuilding companies
for the construction of twelve ocean-going vessels. Initial payments were made in cash and
through irrevocable letters of credit. Fourteen promissory notes were signed for the balance by
petitioner and, as required by the shipbuilders, guaranteed by the Republic of the
Philippines. Pursuant thereto, the remaining payments and the interests thereon were remitted in
due time by the NDC to Tokyo. The petitioner remitted to the shipbuilders in Tokyo the total
amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax was
withheld. Respondent then held petitioner liable on withholding tax. The respondent was
sustained by the CTA. Thus, petitioner filed a petition for certiorari before the Supreme Court
arguing that Japanese shipbuilders were not subject to tax because all the related activities were
done in Tokyo.
ISSUES:
1.Whether or not the promissory notes were government securitiesexempt from taxation.
2.Whether or not the petitioner is liable to withholding tax despite the fact that all related
activities were done in Tokyo.
RULING:
1.No. The law invoked by the petitioner as authorizing the issuance of securities is R.A. No.
1407, which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry
such authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such
securities. It is also incorrect to suggest that the Republic of the Philippines could not collect
taxes on the interest remitted because of the undertaking signed by the Secretary of Finance in
each of the promissory notes.There is nothing in the above undertaking exempting the interests
from taxes. Petitioner has not established a clear waiver therein of the right to tax interests. Tax
exemptions cannot be merely implied but must be categorically and unmistakably
expressed. Any doubt concerning this question must be resolved in favor of the taxing power.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders. It was the income of these companies and not the
Republic of the Philippines that was subject to the tax the NDC did not withhold.

2.Yes. Under the Tax code, interest-bearing obligations of residents, corporate or otherwise, shall
be treated as gross income from sources within the Philippines. Petitioner is a domestic
corporation with principal office in Manila. The Court ruled that petitioner should have withheld
the tax because the tax on interest received by foreign corporations not engaged in the trade or
business in the Philippines is not conditioned on the fact that the sale or activity from which the
interest income took place in the Philippines. The residence of the debtor (petitioner) who pays
the interest is the determining factor of the source of interest income. Since petitioner was a
domestic corporation, it follows that the interest payment it made is sourced within the
Philippines and is therefore subject to taxation.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SMART COMMUNICATION, INC., Respondent.
G.R. Nos. 179045-46 ,August 25, 2010
FACTS:
Respondent entered into three Agreements for Programming and Consultancy Services
with Prism, a non-resident Malaysian corporation. Under the agreements, Prism was to provide
programming and consultancy services for the installation of the Service Download Manager
(SDM) and the Channel Manager (CM), and for the installation and implementation of Smart
Money and Mobile Banking Service SIM Applications (SIM Applications) and Private Text
Platform (SIM Application).
On June 25, 2001, Prism billed respondent in the amount of US$547,822.45.Thinking
that these payments constitute royalties, respondent withheld the amount of US$136,955.61
orP7,008,840.43,5 representing the 25% royalty tax under the RP-Malaysia Tax
Treaty.Respondent filed with the Bureau of Internal Revenue (BIR), an administrative claim for
refund of the amount of P7,008,840.43.Respondent in its Petition for Review before CTA,
claimed that it is entitled to a refund because the payments made to Prism are not royalties but
"business profits," pursuant to the definition of royalties under the RP-Malaysia Tax
Treaty. Respondent further averred that since under Article 7 of the RP-Malaysia Tax Treaty,
"business profits" are taxable in the Philippines "only if attributable to a permanent establishment
in the Philippines, the payments made to Prism, a Malaysian company with no permanent
establishment in the Philippines," should not be taxed. Petitioner argued that respondent, as
withholding agent, is not a party-in-interest to file the claim for refund, and that assuming for the
sake of argument that it is the proper party, there is no showing that the payments made to Prism
constitute "business profits." CTA upheld respondents right, as a withholding agent, to file the
claim for refund but entitled only to a partial refund. Although it agreed with respondent that the
payments for the CM and SIM Application Agreements are "business profits," and therefore, not
subject to tax under the RP-Malaysia Tax Treaty, the Second Division found the payment for the
SDM Agreement a royalty subject to withholding tax. CTA En Banc affirmed the Second
divisions ruling hence, petitioner appealed the case maintaining its argument.

ISSUES:
(1) Whether or not respondent has the right to file the claim for refund; and (2) if respondent has
the right, whether the payments made to Prism constitute "business profits" or royalties.
RULING:
1.Petitoner as withholding agent may file a claim for refund. Under Sections 204(c) and 229 of
the National Internal Revenue Code (NIRC), the person entitled to claim a tax refund is the
taxpayer. However, in case the taxpayer does not file a claim for refund, the withholding agent
may file the claim. In Commissioner of Internal Revenue v. Procter & Gamble Philippine
Manufacturing Corporation, a withholding agent was considered a proper party to file a claim
for refund of the withheld taxes of its foreign parent company. Although such relation between
the taxpayer and the withholding agent is a factor that increases the latters legal interest to file a
claim for refund, there is nothing in the decision to suggest that such relationship is required or
that the lack of such relation deprives the withholding agent of the right to file a claim for refund.
Rather, what is clear in the decision is that a withholding agent has a legal right to file a claim for
refund for two reasons. First, he is considered a "taxpayer" under the NIRC as he is personally
liable for the withholding tax as well as for deficiency assessments, surcharges, and penalties,
should the amount of the tax withheld be finally found to be less than the amount that should
have been withheld under law. Second, as an agent of the taxpayer, his authority to file the
necessary income tax return and to remit the tax withheld to the government impliedly includes
the authority to file a claim for refund and to bring an action for recovery of such claim.
2. The payments for the CM and the SIM Application Agreements constitute "business profits".
Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of any kind
received as consideration for: "(i) the use of, or the right to use, any patent, trade mark, design or
model, plan, secret formula or process, any copyright of literary, artistic or scientific work, or for
the use of, or the right to use, industrial, commercial, or scientific equipment, or for information
concerning industrial, commercial or scientific experience; (ii) the use of, or the right to use,
cinematograph films, or tapes for radio or television broadcasting." These are taxed at the rate of
25% of the gross amount.
Under the same Treaty, the "business profits" of an enterprise of a Contracting State is taxable
only in that State, unless the enterprise carries on business in the other Contracting State through
a permanent establishment. The term "permanent establishment" is defined as a fixed place of
business where the enterprise is wholly or partly carried on. However, even if there is no fixed
place of business, an enterprise of a Contracting State is deemed to have a permanent
establishment in the other Contracting State if it carries on supervisory activities in that other
State for more than six months in connection with a construction, installation or assembly project
which is being undertaken in that other State.
In the instant case, it was established during the trial that Prism does not have a
permanent establishment in the Philippines. Hence, "business profits" derived from Prisms
dealings with respondent are not taxable. The question is whether the payments made to Prism
under the SDM, CM, and SIM Application agreements are "business profits" and not royalties.

The provisions in the agreements are clear. Prism has intellectual property right over the SDM
program, but not over the CM and SIM Application programs as the proprietary rights of these
programs belong to respondent. In other words, out of the payments made to Prism, only the
payment for the SDM program is a royalty subject to a 25% withholding tax. A refund of the
erroneously withheld royalty taxes for the payments pertaining to the CM and SIM Application
Agreements is therefore in order.
COMMISSIONER OF INTERNAL REVENUE vs. FILINVEST DEVELOPMENT
CORPORATION
G.R. No. 163653. July 19, 2011
FACTS:
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI),
respondent Filinvest Development Corporation (FDC) is a holding company which also owned
67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and
FAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor of
the latter parcels of land appraised at P4,306,777,000.00. In exchange for said parcels which
were intended to facilitate development of medium-rise residential and commercial buildings,
463,094,301 shares of stock of FLI were issued to FDC and FAI.
On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR)
to the effect that no gain or loss should be recognized in the aforesaid transfer of real properties.
Acting on the request, the BIR issued Ruling No. S-34-046-97 finding that the exchange is
among those contemplated under Section 34 (c) (2) of the old National Internal Revenue Code
(NIRC) which provides that "(n)o gain or loss shall be recognized if property is transferred to a
corporation by a person in exchange for a stock in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four (4) persons, gains control
of said corporation."
On various dates during the years 1996 and 1997, in the meantime, FDC also extended
advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC)
and Filinvest Capital, Inc. (FCI). On 3 January 2000, FDC and FAI received from the BIR a
Formal Notice of Demand to pay deficiency income and documentary stamp taxes, plus interests
and compromise penalties. The foregoing deficiency taxes were assessed on the taxable gain
supposedly realized by FDC from the Deed of Exchange it executed with FAI and FLI, on the
dilution resulting from the Shareholders Agreement FDC executed with RHPL as well as the
"arms-length" interest rate and documentary stamp taxes imposable on the advances FDC
extended to its affiliates.
Both FDC and FAI filed their respective requests for reconsideration/protest, on the
ground that the deficiency income and documentary stamp taxes assessed by the BIR were bereft
of factual and legal basis. Having submitted the relevant supporting documents pursuant to the
31 January 2000 directive from the BIR Appellate Division, In view of the failure of petitioner
Commissioner of Internal Revenue (CIR) to resolve their request for reconsideration/protest

within the aforesaid period, FDC and FAI filed on 17 October 2000 a petition for review with the
Court of Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC.
CTA ruled that no taxable gain should have been assessed from the subject Deed of
Exchange since FDC and FAI collectively gained further control of FLI as a consequence of the
exchange; that correlative to the CIR's lack of authority to impute theoretical interests on the
cash advances FDC extended in favor of its affiliates, the rule is settled that interests cannot be
demanded in the absence of a stipulation to the effect; that not being promissory notes or
certificates of obligations, the instructional letters as well as the cash and journal vouchers
evidencing said cash advances were not subject to documentary stamp taxes; and, that no income
tax may be imposed on the prospective gain from the supposed appreciation of FDC's
shareholdings in FAC.
CIR filed its answer, claiming that the transfer of property in question should not be
considered tax free since, with the resultant diminution of its shares in FLI, FDC did not gain
further control of said corporation. Likewise calling attention to the fact that the cash advances
FDC extended to its affiliates were interest free despite the interest bearing loans it obtained
from banking institutions, the CIR invoked Section 43 of the old NIRC which, as implemented
by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the power to allocate,
distribute or apportion income or deductions between or among such organizations, trades or
business in order to prevent evasion of taxes." The CIR justified the imposition of documentary
stamp taxes on the instructional letters as well as cash and journal vouchers for said cash
advances on the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94 which
provide that loan transactions are subject to said tax irrespective of whether or not they are
evidenced by a formal agreement or by mere office memo. The CIR also argued that FDC
realized taxable gain arising from the dilution of its shares in FAC as a result of its Shareholders'
Agreement with RHPL.
ISSUE: Whether or not Petitioner CIR is correct is invoking Section 43 of the Old NIRC as
implemented by Revenue Regulations No. 2, Section 179 (b) and (c).
RULING: No. Admittedly, Section 43 of the 1993 NIRC provides that, "(i)n any case of two or
more organizations, trades or businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or indirectly by the same interests, the
Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross income
or deductions between or among such organization, trade or business, if he determines that such
distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or
clearly to reflect the income of any such organization, trade or business." In amplification of the
equivalent provision under Commonwealth Act No. 466, Sec. 179(b) of Revenue Regulation
No. 2 states as follows:
Determination of the taxable net income of controlled taxpayer. (A)
DEFINITIONS. When used in this section
(1) The term "organization" includes any kind, whether it be a sole proprietorship,
a partnership, a trust, an estate, or a corporation or association, irrespective of the

place where organized, where operated, or where its trade or business is

conducted, and regardless of whether domestic or foreign, whether exempt or
taxable, or whether affiliated or not.
(2) The terms "trade" or "business" include any trade or business activity of any
kind, regardless of whether or where organized, whether owned individually or
otherwise, and regardless of the place where carried on.
(3) The term "controlled" includes any kind of control, direct or indirect,
whether legally enforceable, and however exercisable or exercised. It is the reality
of the control which is decisive, not its form or mode of exercise. A presumption
of control arises if income or deductions have been arbitrarily shifted.
(4) The term "controlled taxpayer" means any one of two or more
organizations, trades, or businesses owned or controlled directly or indirectly by
the same interests.
(5) The term "group" and "group of controlled taxpayers" means the
organizations, trades or businesses owned or controlled by the same interests.
(6) The term "true net income" means, in the case of a controlled taxpayer, the net
income (or as the case may be, any item or element affecting net income) which
would have resulted to the controlled taxpayer, had it in the conduct of its affairs
(or, as the case may be, any item or element affecting net income) which would
have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as
the case may be, in the particular contract, transaction, arrangement or other act)
dealt with the other members or members of the group at arms length. It does not
mean the income, the deductions, or the item or element of either, resulting to the
controlled taxpayer by reason of the particular contract, transaction, or
arrangement, the controlled taxpayer, or the interest controlling it, chose to make
(even though such contract, transaction, or arrangement be legally binding upon
the parties thereto).
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to
place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by
determining, according to the standard of an uncontrolled taxpayer, the true net
income from the property and business of a controlled taxpayer. The interests
controlling a group of controlled taxpayer are assumed to have complete power to
cause each controlled taxpayer so to conduct its affairs that its transactions and
accounting records truly reflect the net income from the property and business of
each of the controlled taxpayers. If, however, this has not been done and the
taxable net income are thereby understated, the statute contemplates that the
Commissioner of Internal Revenue shall intervene, and, by making such
distributions, apportionments, or allocations as he may deem necessary of gross
income or deductions, or of any item or element affecting net income, between or
among the controlled taxpayers constituting the group, shall determine the true net

income of each controlled taxpayer. The standard to be applied in every case is

that of an uncontrolled taxpayer. Section 44 grants no right to a controlled
taxpayer to apply its provisions at will, nor does it grant any right to compel the
Commissioner of Internal Revenue to apply its provisions.
(C) APPLICATION Transactions between controlled taxpayer and another
will be subjected to special scrutiny to ascertain whether the common control is
being used to reduce, avoid or escape taxes. In determining the true net income of
a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to
the case of improper accounting, to the case of a fraudulent, colorable, or sham
transaction, or to the case of a device designed to reduce or avoid tax by shifting
or distorting income or deductions. The authority to determine true net income
extends to any case in which either by inadvertence or design the taxable net
income in whole or in part, of a controlled taxpayer, is other than it would have
been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer
dealing at arms length with another uncontrolled taxpayer.
As may be gleaned from the definitions of the terms "controlled" and "controlled
taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDC
and its affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from owning
significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC
extended substantial sums of money as cash advances to its said affiliates for the purpose of
providing them financial assistance for their operational and capital expenditures seemingly
indicate that the situation sought to be addressed by the subject provision exists. From the tenor
of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's
power to distribute, apportion or allocate gross income or deductions between or among
controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s
under scrutiny. For as long as the controlled taxpayer's taxable income is not reflective of that
which it would have realized had it been dealing at arm's length with an uncontrolled taxpayer,
the CIR can make the necessary rectifications in order to prevent evasion of taxes.
Despite the broad parameters provided, however, the Court finds that the CIR's powers of
distribution, apportionment or allocation of gross income and deductions under Section 43 of the
1993 NIRC and Section 179 of Revenue Regulation No. 2 does not include the power to impute
"theoretical interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of the
1993 NIRC, after all, the term "gross income" is understood to mean all income from whatever
source derived, including, but not limited to the following items: compensation for services,
including fees, commissions, and similar items; gross income derived from business; gains
derived from dealings in property;" interest; rents; royalties; dividends; annuities; prizes and
winnings; pensions; and partners distributive share of the gross income of general professional
partnership. While it has been held that the phrase "from whatever source derived" indicates a
legislative policy to include all income not expressly exempted within the class of taxable
income under our laws, the term "income" has been variously interpreted to mean "cash received
or its equivalent", "the amount of money coming to a person within a specific time" or
"something distinct from principal or capital." Otherwise stated, there must be proof of the actual

or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or allocated by the CIR.
Therefore, of the record yielded no evidence of actual or possible showing that the
advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the
CIR. For all its harping upon the supposed fact that FDC had resorted to borrowings from
commercial banks, the CIR had adduced no concrete proof that said funds were, indeed, the
source of the advances the former provided its affiliates
ARTHUR HENDERSON vs. COLLECTOR OF INTERNAL REVENUE
1 SCRA 649
FACTS:
Arthur Henderson is the President of the American International Underwriters for the
Philippines which represents a group of American companies engaged in the business of general
insurance. Henderson receives a basic annual salary of P30,000 and allowance for house rentals
and utilities. Although he and his wife are childless and are only two in the family, they lived in
a large apartment provided for by his employer. The spouses Artuhur Henderson and Marie B.
Henderson filed with the Bureau of Internal Revenue returns of annual net income for the years
1948 to 1952. The Bureau of Internal Revenue considered as part of their taxable income the
taxpayer-husband's allowances for rental, residential expenses, subsistence, water, electricity and
telephone; bonus paid to him; withholding tax and entrance fee to the Marikina gun and Country
Bluc paid by his employer for his account; and travelling allowance of his wife. On 26 and 27
January 1954 the taxpayers asked for reconsideration of the foregoing assessment. The claim that
as regards the husband-taxpayer's allowances for rental and utilities such as water, electricity and
telephone, he did not receive the money for said allowances, but that they lived in the apartment
furnished and paid for by his employer for its convenience and that they had no choice but live in
the said apartment furnished by his employer, otherwise they would have lived in a less
expensive one
After hearing conducted by the Conference Staff of the Bureau of Internal Revenue the
Staff recommended to the Collector of Internal Revenue that the assessments made be sustained
except that the amount of P200 as entrance fee to the Marikina Gun and Country Club paid for
the husband-taxpayer's account by his employer in 1948 should not be considered as part of the
taxpayers' taxable income for that year. On 15 February 1956 the taxpayers filed in the Court of
Tax Appeals a petition to review the decision of the Collector of Internal Revenue. On 26 June
1957 the Court rendered judgment holding "that the inherent nature of petitioner's (the husbandtaxpayer) employment as president of the American International Underwriters as president of
the American International Underwriters of the Philippines, Inc. does not require him to occupy
the apartments supplied by his employer-corporation. Consequently, on 7 October1957 the
Collector of Internal Revenue filed a notice of appeal in the Court of Tax Appeals and on 21
October1957, within the extension of time previously granted by this Court.

ISSUE: Whether or not the allowances for rental of the apartment furnished by the husbandtaxpayer's employer-corporation, including utilities such as light, water, telephone, etc. and the
allowance for travel expenses given by his employer-corporation to his wife in 1952 part of
taxable income?
RULING: The evidence presented at the hearing of the case substantially supports the findings
of the Court of Tax Appeals. The taxpayers are childless and are the only two in the family. The
quarters, that they occupied at the Embassy Apartments consisting of a large sala, three
bedrooms, dining room, two bathrooms, kitchen and a large porch, and at the Rosaria
Apartments consisting of a kitchen, sala dining room, two bedrooms and a bathroom, exceeded
their personal needs. But the exigencies of the husband-taxpayer's high executive position, not to
mention social standing, demanded and compelled them to live in a more spacious and
pretentious quarters like the ones they had occupied. Although entertaining and putting up
houseguests and guests of the husband-taxpayer's employer-corporation were not his
predominant occupation as president, yet he and his wife had to entertain and put up houseguests
in their apartments. That is why his employer-corporation had to grant him allowances for rental
and utilities in addition to his annual basic salary to take care of those extra expenses for rental
and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did
not have to live in the apartments chosen by the husband-taxpayer's employer-corporation is of
no moment, for no part of the allowances in question redounded to their personal benefit or was
retained by them. Their bills for rental and utilities were paid directly by the employercorporation to the creditors. Nevertheless, as correctly held by the Court of Tax Appeals, the
taxpayers are entitled only to a ratable value of the allowances in question, and only the amount
of P4,800 annually, the reasonable amount they would have spent for house rental and utilities
such as light, water, telephone, etc., should be the amount subject to tax, and the excess
considered as expenses of the corporation.
The judgment under review is modified as above indicated. The Collector of Internal
Revenue is ordered to refund to the taxpayers the sum of P5,986.61, without pronouncement as
to costs.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY vs.
COMMISSIONER OF INTERNAL REVENUE
G.R. No. 157264. January 31, 2008
FACTS:
Petitioner, the Philippine Long Distance Telephone Company (PLDT), claiming that it
terminated in 1995 the employment of several rank-and-file, supervisory, and executive
employees due to redundancy; that in compliance with labor law requirements, it paid those
separated employees separation pay and other benefits; and that as employer and withholding
agent, it deducted from the separation pay withholding taxes in the total amount of
P23,707,909.20 which it remitted to the Bureau of Internal Revenue (BIR), filed on November
20, 1997 with the BIR a claim for tax credit or refund of the P23,707,909.20, invoking Section
28(b)(7)(B) of the 1977 National Internal Revenue Code which excluded from gross income

[a]ny amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer
due to death, sickness or other physical disability or for any cause beyond the control of
the said official or employee.2 (Underscoring supplied)
As the BIR took no action on its claim, PLDT filed a claim for judicial refund before the
Court of Tax Appeals (CTA). In its Answer, respondent, the Commissioner of Internal Revenue,
contended that PLDT failed to show proof of payment of separation pay and remittance of the
alleged withheld taxes. PLDT thus filed a Petition for Review before the Court of Appeals
which, by Decision of February 11, 2002, dismissed the same.
ISSUE: Whether or not PLDT is correct in arguing that taxes withheld from separation benefits
and paid to the BIR constitute erroneous payment of taxes and should therefore, be
refunded/credited to the taxpayer/withholding agent, regardless of whether or not separation pay
was actually paid to the concerned employees.
RULING: No. Tax refunds, like tax exemptions, are construed strictly against the taxpayer and
liberally in favor of the taxing authority, and the taxpayer bears the burden of establishing the
factual basis of his claim for a refund.
Under Section 28 (b)(7)(B) of the National Internal Revenue Code of 1977 (now Section
32(B)6(b) of the National Internal Revenue Code of 1997), it is incumbent on PLDT as a
claimant for refund on behalf of each of the separated employees to show that each employee did
x x x reflect in his or its own return the income upon which any creditable tax is required
to be withheld at the source. Only when there is an excess of the amount of tax so
withheld over the tax due on the payee's return can a refund become possible.
A taxpayer must thus do two things to be able to successfully make a claim for the tax
refund: (a) declare the income payments it received as part of its gross income and (b)
establish the fact of withholding. On this score, the relevant revenue regulation provides
as follows:
"Section 10. Claims for tax credit or refund. - Claims for tax credit or refund of
income tax deducted and withheld on income payments shall be given due course
only when it is shown on the return that the income payment received was
declared as part of the gross income and the fact of withholding is established by
a copy of the statement duly issued by the payer to the payee (BIR Form No.
1743.1) showing the amount paid and the amount of tax withheld
therefrom."23 (Underscoring supplied)
In fine, PLDT must prove that the employees received the income payments as part of
gross income and the fact of withholding. Even the "newly discovered evidence" that PLDT
seeks to offer does not suffice to establish its claim for refund, as it would still have to comply
with Revenue Regulation 6-85 by proving that the redundant employees, on whose behalf it filed
the claim for refund, declared the separation pay received as part of their gross

income. Furthermore, the same Revenue Regulation requires that "the fact of withholding is
established by a copy of the statement duly issued by the payor to the payee (BIR Form No.
1743.1) showing the amount paid and the amount of tax withheld therefrom."

COMMISSIONER OF IR VS CENTRAL LUZON DRUG CORP

GR 148512

June 26, 2006

FACTS:
This is a petition for review under Rule 45 of Rules of Court seeking the nullification of
CA decision granting respondents claim for tax equal to the amount of the 20% that it extended
to senior citizens on the latters purchases pursuant to Senior Citizens Act. Respondent deducted
the total amount of Php219,778 from its gross income for the taxable year 1995 whereby
respondent did not pay tax for that year reporting a net loss of Php20,963 in its corporate income
tax. In 1996, claiming that the Php219,778 should be applied as a tax credit, respondent claimed
for refund in the amount of Php150, 193.
ISSUE:
Whether or not the 20% discount granted by the respondent to qualified senior citizens
may be claimed as tax credit or as deduction from gross sales?
RULING:
Tax credit is explicitly provided for in Sec4 of RA 7432. The discount given to Senior
citizens is a tax credit, not a deduction from the gross sales of the establishment concerned. The
tax credit that is contemplated under this Act is a form of just compensation, not a remedy for
taxes that were erroneously or illegally assessed and collected. In the same vein, prior payment
of any tax liability is a pre-condition before a taxable entity can benefit from tax credit. The
credit may be availed of upon payment, if any. Where there is no tax liability or where a private
establishment reports a net loss for the period, the tax credit can be availed of and carried over to
the next taxable year.

CARLOS SUPERDRUG CORP., ET. AL. vs. DSWD

G.R. No. 166494 June 29, 2007

FACTS:
Petitioners are domestic corporations and proprietors operating drugstores in the
Philippines. Meanwhile, AO 171 or the Policies and Guidelines to Implement the Relevant
Provisions of Republic Act 9257, otherwise known as the Expanded Senior Citizens Act of
2003 was issued by the DOH, providing the grant of twenty percent (20%) discount in the
purchase of unbranded generic medicines from all establishments dispensing medicines for the
exclusive use of the senior citizens.

DOH issued Administrative Order No 177 amending A.O. No. 171. Under A.O. No. 177,
the twenty percent discount shall not be limited to the purchase of unbranded generic medicines
only, but shall extend to both prescription and non-prescription medicines whether branded or
generic. Thus, it stated that [t]he grant of twenty percent (20%) discount shall be provided in the
purchase of medicines from all establishments dispensing medicines for the exclusive use of the
senior citizens.

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes
deprivation of private property. Compelling drugstore owners and establishments to grant the
discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of only
5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores
will be justly compensated for the discount.

ISSUE:
Whether or not the State, in promoting the health and welfare of a special group of
citizens, can impose upon private establishments the burden of partly subsidizing a government
program.

RULING:
Yes. The law grants a twenty percent discount to senior citizens for medical and dental
services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls,

circuses, carnivals, and other similar places of culture, leisure and amusement; fares for domestic
land, air and sea travel; utilization of services in hotels and similar lodging establishments,
restaurants and recreation centers; and purchases of medicines for the exclusive use or enjoyment
of senior citizens. As a form of reimbursement, the law provides that business establishments
extending the twenty percent discount to senior citizens may claim the discount as a tax
deduction.

The law is a legitimate exercise of police power which, similar to the power of eminent
domain, has general welfare for its object. Police power is not capable of an exact definition, but
has been purposely veiled in general terms to underscore its comprehensiveness to meet all
exigencies and provide enough room for an efficient and flexible response to conditions and
circumstances, thus assuring the greatest benefits. Accordingly, it has been described as the
most essential, insistent and the least limitable of powers, extending as it does to all the great
public needs. It is [t]he power vested in the legislature by the constitution to make, ordain, and
establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with
penalties or without, not repugnant to the constitution, as they shall judge to be for the good and
welfare of the commonwealth, and of the subjects of the same.

For this reason, when the conditions so demand as determined by the legislature, property
rights must bow to the primacy of police power because property rights, though sheltered by due
process, must yield to general welfare. Police power as an attribute to promote the common good
would be diluted considerably if on the mere plea of petitioners that they will suffer loss of
earnings and capital, the questioned provision is invalidated. Moreover, in the absence of
evidence demonstrating the alleged confiscatory effect of the provision in question, there is no
basis for its nullification in view of the presumption of validity which every law has in its favor.

Given these, it is incorrect for petitioners to insist that the grant of the senior citizen
discount is unduly oppressive to their business, because petitioners have not taken time to
calculate correctly and come up with a financial report, so that they have not been able to show
properly whether or not the tax deduction scheme really works greatly to their disadvantage. The
Court is not oblivious of the retail side of the pharmaceutical industry and the competitive
pricing component of the business. While the Constitution protects property rights, petitioners
must accept the realities of business and the State, in the exercise of police power, can intervene
in the operations of a business which may result in an impairment of property rights in the
process.

Banas Jr. vs CA
GR No. 102967
FACTS:
On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment
Corporation (AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for two
million, three hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed
of Sale provided that upon the signing of the contract AYALA shall pay four hundred sixty-one
thousand, seven hundred fifty-four (P461,754.00) pesos. The balance of one million, eight
hundred forty-seven thousand and sixteen (P1,847,016.00) pesos was to be paid in four equal
consecutive annual installments, with twelve (12%) percent interest per annum on the
outstanding balance. AYALA issued one promissory note covering four equal annual
installments. Each periodic payment of P461,754.00 pesos shall be payable starting on February
20, 1977, and every year thereafter, or until February 20, 1980.
The same day, petitioner discounted the promissory note with AYALA, for its face value of
P1,847,016.00, evidenced by a Deed of Assignment signed by the petitioner and AYALA.
AYALA issued nine (9) checks to petitioner, all dated February 20, 1976, drawn against Bank of
the Philippine Islands with the uniform amount of two hundred five thousand, two hundred
twenty-four (P205,224.00) pesos.
In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from
disposition of capital asset.
On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo
Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976.
They discovered that petitioner had no outstanding receivable from the 1976 land sale to
AYALA and concluded that the sale was cash and the entire profit should have been taxable in
1976 since the income was wholly derived in 1976.
ISSUE:
Whether respondent court erred in finding that petitioners income from the sale of land
in 1976 should be declared as a cash transaction in his tax return for the same year (because the
buyer discounted the promissory note issued to the seller on future installment payments of the
sale, on the same day of the sale)?
RULING:
As a general rule, the whole profit accruing from a sale of property is taxable as income
in the year the sale is made. But, if not all of the sale price is received during such year, and a
statute provides that income shall be taxable in the year in which it is "received," the profit from
an installment sale is to be apportioned between or among the years in which such installments

are paid and received. Section 43 and Sec. 175 says that among the entities who may use the
above-mentioned installment method is a seller of real property who disposes his property on
installment, provided that the initial payment does not exceed 25% of the selling price. They also
state what may be regarded as installment payment and what constitutes initial payment. Initial
payment means the payment received in cash or property excluding evidences of indebtedness
due and payable in subsequent years, like promissory notes or mortgages, given of the purchaser
during the taxable year of sale. Initial payment does not include amounts received by the vendor
in the year of sale from the disposition to a third person of notes given by the vendee as part of
the purchase price which are due and payable in subsequent years. Such disposition or
discounting of receivable is material only as to the computation of the initial payment. If the
initial payment is within 25% of total contract price, exclusive of the proceeds of discounted
notes, the sale qualifies as an installment sale, otherwise it is a deferred sale.
Although the proceeds of a discounted promissory note is not considered part of the
initial payment, it is still taxable income for the year it was converted into cash. The subsequent
payments or liquidation of certificates of indebtedness is reported using the installment method
in computing the proportionate income to be returned, during the respective year it was realized.
Non-dealer sales of real or personal property may be reported as income under the installment
method provided that the obligation is still outstanding at the close of that year. If the seller
disposes the entire installment obligation by discounting the bill or the promissory note, he
necessarily must report the balance of the income from the discounting not only income from the
initial installment payment.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs. THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO
CORP., Respondents., G.R. No. 108576.January 20, 1999
FACTS:
ANSCOR is wholly owned and controlled by the family of Don Andres, who are all nonresident aliens. On September 12, 1945, ANSCORs authorized capital stock was increased
to P2,500,000.00 divided into 25,000 common shares with the same par value. Of the additional
15,000 shares, only 10,000 was issued which were all subscribed by Don Andres. This increased
his subscription to 14,963 common shares. By 1947, ANSCOR declared stock dividends. On
December 30, 1964 Don Andres died. As of that date, the records revealed that he has a total
shareholdings of 185,154 shares - 50,495 of which are original issues and the balance of 134,659
shares as stock dividend declarations. Correspondingly, one-half of that shareholdings or
92,577 shares were transferred to his wife, Dona Carmen Soriano, as her conjugal share. The
other half formed part of his estate. A day after Don Andres died, ANSCOR increased its capital
stock to P20M and in 1966 further increased it toP30M. In the same year (December 1966),
stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres
estate and Dona Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to

138,867 and 138,864 common shares each. On June 30, 1968, pursuant to a Board Resolution,
ANSCOR redeemed 28,000 common shares from the Don Andres estate. By November 1968,
the Board further increased ANSCORs capital stock to P75M divided into 150,000 preferred
shares and 600,000 common shares. About a year later, ANSCOR again redeemed 80,000
common shares from the Don Andres estate, further reducing the latters common shareholdings
to 19,727. In 1973, after examining ANSCORs books of account and records, Revenue
examiners issued a report proposing that ANSCOR be assessed for deficiency withholding taxat-source, for the year 1968 and the second quarter of 1969 based on the transactions of
exchange and redemption of stocks.
ISSUE:
Whether or not ANSCORs redemption of stocks from its stockholder can be considered
as essentially equivalent to the distribution of taxable dividend, making the proceeds thereof
taxable under the provisions law.
DECISION:
Stock dividends represent capital and do not constitute income to its recipient. So that the
mere issuance thereof is not yet subject to income tax as they are nothing but an enrichment
through increase in value of capital investment. 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. It means cash or its equivalent. It is gain derived and severed from capital,
from labor or from both combined- so that to tax a stock dividend would be to tax a capital
increase rather than the income. In a loose sense, stock dividends issued by the corporation, are
considered unrealized gain, and cannot be subjected to income tax until that gain has been
realized. As capital, it is not yet subject to income tax. The determining factor for the imposition
of income tax is whether any gain or profit was derived from a transaction. However, 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. 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 under
Section 22 in relation to Section 21 of the 1939 Code. Moreover, under Section 29(a) of said
Code, dividends are included in gross income. As income, it is subject to income tax which is
required to be withheld at source.

G.R. No. 165617.February 25, 2011

SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S.
ALVAREZ, Petitioners,
vs.
BPI FAMILY SAVINGS BANK, INC., Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 165837
BPI FAMILY SAVINGS BANK, INC., Petitioner,
vs.
SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S.
ALVAREZ, Respondents.
FACTS:
On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director,
Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the amount of P9,853,000.00 from
BPI Family Savings Bank with a 714-square meter lot covered by Transfer Certificate of Title
No. T-79193 in the name of Moises C. Alvarez and Paulita S. Alvarez, as collateral. For nonpayment of the loan, the mortgage was extrajudicially foreclosed and the property was sold to the
bank as the highest bidder. On August 7, 1996, a Certificate of Sale was issued in favor of the
bank and the same was registered on October 1, 1996. Before the expiration of the one-year
redemption period, the mortgagors notified the bank of their intention to redeem the property.
Accordingly, the total amount due is P15,704,249.12 which includes the capital gains tax and
documentary stamp tax.
ISSUE:
Whether or not the foreclosing mortgagee should pay capital gains tax upon execution of
the certificate of sale, and if paid by the mortgagee, whether the same should be shouldered by
the redemptioner.
DECISION:
In the issue of capital gains tax, court ruled in favor of petitioners-mortgagors argument
that there is no legal basis for the inclusion of this charge in the redemption price. Under
Revenue Regulations No. 13-85 every sale or exchange or other disposition of real property
classified as capital asset under Section 34(a) of the Tax Code shall be subject to the final capital
gains tax. The term sale includes pacto de retro and other forms of conditional sale. Section 2.2
of Revenue Memorandum Order No. 29-86 states that these conditional sales "necessarily
include mortgage foreclosure sales whether judicial and extrajudicial foreclosure sales." Further,
for real property foreclosed by a bank the capital gains tax and documentary stamp tax must be
paid before title to the property can be consolidated in favor of the bank. However under
Section 63 of Presidential Decree No. 1529 if no right of redemption exists, the certificate of title
of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser.
But where the right of redemption exists, the certificate of title of the mortgagor shall not be
cancelled, but the certificate of sale and the order confirming the sale shall be registered In the

event the property is redeemed, the certificate or deed of redemption shall be filed with the
Register of Deeds. It is therefore clear that in foreclosure sale, there is no actual transfer of the
mortgaged real property until after the expiration of the one-year redemption. The mortgagor is
given the option whether or not to redeem the real property. The issuance of the Certificate of
Sale does not by itself transfer ownership. Under RR No. 4-99 issued on March 16, 1999, further
amends RMO No. 6-92 relative to the payment of Capital Gains Tax and Documentary Stamp
Tax on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance
companies it provides that:
SEC. 3. CAPITAL GAINS TAX.
(1) In case the mortgagor exercises his right of redemption within one year from the
issuance of the certificate of sale, no capital gains tax shall be imposed because no capital
gains has been derived by the mortgagor and no sale or transfer of real property was
realized. x x x
(2) In case of non-redemption, the capital gains [tax] on the foreclosure sale imposed
under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on
the bid price of the highest bidder but only upon the expiration of the one-year period of
redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and
shall be paid within thirty (30) days from the expiration of the said one-year redemption
period.
SEC. 4. DOCUMENTARY STAMP TAX.
(1) In case the mortgagor exercises his right of redemption, the transaction shall only be
subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of
1997 because no land or realty was sold or transferred for a consideration.
(2) In case of non-redemption, the corresponding documentary stamp tax shall be levied,
collected and paid by the person making, signing, issuing, accepting, or transferring the
real property wherever the document is made, signed, issued, accepted or transferred
where the property is situated in the Philippines.
Considering that herein petitioners-mortgagors exercised their right of redemption before
the expiration of the statutory one-year period, petitioner bank is not liable to pay the capital
gains tax due on the extrajudicial foreclosure sale. There was no actual transfer of title from the
owners-mortgagors to the foreclosing bank. Hence, the inclusion of the said charge in the total
redemption price was unwarranted and the corresponding amount paid by the petitionersmortgagors should be returned to them

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
UNITED COCONUT PLANTERS BANK, Respondent.
G.R. No. 179063.October 23, 2009

FACTS:
Respondent United Coconut Planters Bank (UCPB) granted loans of P68,840,000.00
and P335,000,000.00 to George C. Co, Go Tong Electrical Supply Co., Inc., and Tesco Realty
Co. that the borrowers caused to be secured by several real estate mortgages. When the latter
later failed to pay their loans, on December 31, 2001 a notary public for Manila held a public
auction sale of the mortgaged properties. UCPB made the highest winning bid
ofP504,785,000.00 for the whole lot. The notary public submitted the Certificate of Sale to the
Executive Judge of Regional Trial Court of Manila for his approval. On March 1, 2002 the
executive judge finally signed the certificate of sale and approved its issuance to UCPB as the
highest bidder. On July 5, 2002 the bank paid creditable withholding taxes of P28,640,700.00
and documentary stamp taxes of P7,160,165.00 in relation to the extrajudicial foreclosure sale.
Petitioner Commissioner of Internal Revenue , however, charged UCPB with late payment of the
corresponding DST and CWT, citing Section 2.58 of Revenue Regulation 2-98, which stated that
the CWT must be paid within 10 days after the end of each month, and Section 5 of Revenue
Regulation 06-01, which required payment of DST within five days after the close of the month
when the taxable document was made, signed, accepted or transferred. These taxes accrued upon
the lapse of the redemption period of the mortgaged properties. The CIR pointed out that the
mortgagor, a juridical person, had three months after foreclosure within which to redeem the
properties.
ISSUE:
Whether or not the three-month redemption period for juridical persons should be
reckoned from the date of the auction sale.
DECISION:
.
Under Section 2.58 of Revenue Regulation 2-98, the CWT return and payment become
due within 10 days after the end of each month, except for taxes withheld for the month of
December of each year, which shall be filed on or before January 15 of the following year. On
the other hand, under Section 5 of Revenue Regulation 06-01, the DST return and payment
become due within five days after the close of the month when the taxable document was made,
signed, accepted, or transferred. The BIR confirmed and summarized the above provisions under
Revenue Memorandum Circular 58-2008 in this manner: If the property is an ordinary asset of
the mortgagor, the creditable expanded withholding tax shall be due and paid within ten days

following the end of the month in which the redemption period expires. Moreover, the payment
of the documentary stamp tax and the filing of the return thereof shall have to be made within
five days from the end of the month when the redemption period expires. UCPB had, therefore,
until July 10, 2002 to pay the CWT and July 5, 2002 to pay the DST. Since it paid both taxes on
July 5, 2002, it is not liable for deficiencies. Thus, the Court finds no reason to reverse the
decision of the CTA. For purposes of reckoning the one-year redemption period in the case of
individual mortgagors, or the three-month redemption period for juridical persons/mortgagors,
the same shall be reckoned from the date of the confirmation of the auction sale which is the date
when the certificate of sale is issued.

CIR vs. ISABELA CULTURAL CORPORATION

G.R. NO. 172231, February 12, 2007
FACTS:
Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice
for deficiency income tax and expanded withholding tax from BIR. It arose from the
disallowance of ICCs claimed expense for professional and security services paid by ICC; as
well as the alleged understatement of interest income on the three promissory notes due
from Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the
failure of ICC to withhold 1% e-withholding tax on its claimed deduction for security services.
ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it
brought the case to CTA, which held that it is unappealable, since the final notice is not a
decision. CTAs ruling was reversed by CA, which was sustained by SC, and case was remanded
to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for professional
and security services were properly claimed, it said that even if services were rendered in 1984
or 1985, the amount is not yet determined at that time. Hence it is a proper deduction in 1986. It
likewise found that it is the BIR which overstate the interest income, when it applied
compounding absent any stipulation.
Petitioner appealed to CA, which affirmed CTA; hence the petition.
Issue:
Whether or not the expenses for professional and security services are deductible.

RULING:
No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must
have been paid or incurred during the taxable year. This requisite is dependent on the method of
accounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting.
Hence, under this method, an expense is recognized when it is incurred. Under a Revenue Audit

Memorandum, when the method of accounting is accrual, expenses not being claimed as
deductions by a taxpayer in the current year when they are incurred cannot be claimed in the
succeeding year.
The accrual of income and expense is permitted when the all-events test has been met. This test
requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable
accurate determination of such income or liability. The test does not demand that the amount of
income or liability be known absolutely, only that a taxpayer has at its disposal the information
necessary to compute the amount with reasonable accuracy.
From the nature of the claimed deductions and the span of time during which the firm was
retained, ICC can be expected to have reasonably known the retainer fees charged by the firm.
They cannot give as an excuse the delayed billing, since it could have inquired into the amount
of their obligation and reasonably determine the amount.
CIR vs. GENERAL FOODS
GR No. 143672 April 24, 2003

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, P9,461,246.00 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:
Whether or not the subject media advertising expense for Tang was ordinary and necessary
expense fully deductible under the NIRC

RULING:
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.
The Commissioner maintains that the subject advertising expense was not ordinary on the
ground that it failed the two conditions set by U.S. jurisprudence: first, reasonableness of the
amount incurred and second, the amount incurred must not be a capital outlay to create
goodwill for the product and/or private respondents business. Otherwise, the expense must be
considered a capital expenditure to be spread out over a reasonable time.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an
advertising expense. There being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the type and size of business in which
the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure
itself; the intention of the taxpayer and the general economic conditions. It is the interplay of
these, among other factors and properly weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement of a single product to be inordinately
large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible
under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of
merchandise or use of services and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves expenditures incurred, in whole or in
part, to create or maintain some form of goodwill for the taxpayers trade or business or for the
industry or profession of which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the reasonableness of amount,
there is no doubt such expenditures are deductible as business expenses. If, however, the
expenditures are for advertising of the second kind, then normally they should be spread out over
a reasonable period of time.
The companys media advertising expense for the promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half of the companys entire claim for
marketing expenses for that year under review. Petition granted, judgment reversed and set
aside.

C.M. HOSKINS & CO, INC. v CIR

G.R. No 143672, April 24, 2003
FACTS:
Petitioner, a domestic corporation engaged in the real estate business as brokers,
managing agents and administrators, filed its income tax return for its fiscal year ending
September 30, 1957 showing a net income of P92,540.25 and a tax liability due thereon of
P18,508.00, which it paid in due course. Upon verification of its return, CIR, disallowed four
items of deduction in petitioner's tax returns and assessed against it an income tax deficiency in
the amount of P28,054.00 plus interests. The Court of Tax Appeals upon reviewing the
assessment at the taxpayer's petition, upheld respondent's disallowance of the principal item of
petitioner's having paid to Mr. C. M. Hoskins, its founder and controlling stockholder the amount
of P99,977.91 representing 50% of supervision fees earned by it and set aside respondent's
disallowance of three other minor items.
Petitioner questions in this appeal the Tax Court's findings that the disallowed payment to
Hoskins was an inordinately large one, which bore a close relationship to the recipient's
dominant stockholdings and therefore amounted in law to a distribution of its earnings and
profits.
ISSUE:
Whether the 50% supervision fee paid to Hoskin may be deductible for income tax purposes.
RULING:
NO. It is a general rule that 'Bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees are deductible, provided such
payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the
services rendered. The conditions precedent to the deduction of bonuses to employees are: (1)
the payment of the bonuses is in fact compensation; (2) it must be for personal services actually
rendered; and (3) the bonuses, when added to the salaries, are 'reasonable when measured by the
amount and quality of the services performed with relation to the business of the particular
taxpayer.
There is no fixed test for determining the reasonableness of a given bonus as
compensation. This depends upon many factors, one of them being the amount and quality of the
services performed with relation to the business.' Other tests suggested are: payment must be
'made in good faith'; 'the character of the taxpayer's business, the volume and amount of its net
earnings, its locality, the type and extent of the services rendered, the salary policy of the
corporation'; 'the size of the particular business'; 'the employees' qualifications and contributions
to the business venture'; and 'general economic conditions. However, 'in determining whether the
particular salary or compensation payment is reasonable, the situation must be considered as
whole. Ordinarily, no single factor is decisive. . . . it is important to keep in mind that it seldom
happens that the application of one test can give satisfactory answer, and that ordinarily it is the
interplay of several factors, properly weighted for the particular case, which must furnish the
final answer."