Вы находитесь на странице: 1из 156
" " Atty. Dante R. Bravo , B.S.C., L.L.B Dear%Atty.%Bravo, We%would%like%to%thank%you%for% this% opportunity% to%

"

"

Atty.

Dante R.

" " Atty. Dante R. Bravo , B.S.C., L.L.B Dear%Atty.%Bravo, We%would%like%to%thank%you%for% this% opportunity% to%

Bravo, B.S.C., L.L.B

Dear%Atty.%Bravo,

We%would%like%to%thank%you%for% this% opportunity% to% discover% the% sometimes% confusing% but% wholly% practical% and% informative%world%of% taxation% law% under% your% esteemed% tutelage.% % Our% class% feels% blessed% to% come% under% your% guidance% once% again% this% semester.%

come% under% your% guidance% once% again% this% semester.%

We%promise%to%strive%harder%in%meeting%the%quality%of%excellence%you%expect% of% your% students.% Please% continue% to% guide% us% patiently% even% though% we% may%sometimes%fall%short%of%your%expectations.%We%look%forward%to%the%new% challenges%we%will%encounter%this%semester.

Sincerely,

3B

challenges%we%will%encounter%this%semester. Sincerely, 3B

Table&of&Contents

TAXABLE'INCOME'IN'GENERAL

1. Madrigal'vs.'Rafferty'

1

2. Fisher'vs.'Trinidad

3

3. Limpan'Investment'Corporation'vs.'Commissioner'of'Internal'Revenue

4

4. Conwi'vs.'Court'of'Tax'Appeals

5

5. Bañas,'Jr.'vs.'Court'of'Appeals

6

INCOME'TAX'ON'INDIVIDUALS

6. Garrison'vs.'Court'of'Appeals

8

7. Pansacola'vs.'Commissioner'of'Internal'Revenue

10

8. Umali'vs.'Estanislao

12

DEFINITION'OF'CORPORATIONS

9. AFISCO'Insurance'Corporation'v.'Court'of'Appeals

14

10. Pascual'vs.'Commissioner'of'Internal'Revenue

15

11. Obillos'vs.'Commissioner'of'Internal'Revenue

16

12. Oña'vs.'Commissioner'of'Internal'Revenue

18

PASSIVE'INCOME

13.

Commissioner'of'Internal'Revenue'vs.'Manning

20

MINIMUM'CORPORATE'INCOME'TAX'(MCIT)

14. Commissioner'of'Internal'Revenue'vs.'Philippine'Airlines,'Inc.'(PAL)

21

15. The'Manila'Banking'Corporation'vs.'Commissioner'of'Internal'Revenue

22

16. Chamber'of'Real'Estate'and'Builder’s'Associations,'Inc.'(CREBA)'vs.'Romulo,'

24

 

et'al.

INCOME'TAX'ON'RESIDENT'FOREIGN'CORPORATION

 

17. Commissioner'of'Internal'Revenue'vs.'British'Overseas'Airways'Corporation' (BOAC)'and'Court'of'Tax'Appeals

25

18. Commissioner'of'Internal'Revenue'vs.'British'Overseas'Airways'Corporation' (BOAC)'and'Court'of'Tax'Appeals

27

19. Steamship'Company'of'Svendborg'and'Steamship'Company'of'1912'vs.'

29

 

Commissioner'of'Interval'Revenue

20. Bank'of'America'NT'&'SA'vs.'Court'of'Appeals'

31

21. Commissioner'of'Internal'Revenue'vs.'Burroughs'Limited

33

22. Compania'General'de'Tabacos'de'Filipinas'vs.'Commissioner'of'Internal'

35

 

Revenue

INCOME'TAX'ON'NON^RESIDENT'FOREIGN'CORPORATION

 

23.

Commissioner'of'Internal'Revenue'vs.'S.C.'Johnson'and'Son,'Inc.

36

25.

N.V.'Reederij'"Amsterdam"'and'Royal'Interocean'Lines'vs.'Commissioner'of'

39

Internal'Revenue

IMPROPERLY'ACCUMULATED'EARNINGS'TAX'(IAET)

26. The'Manila'Wine'Merchants,'Inc.'vs.'Commissioner'of'Internal'Revenue

40

27. Commissioner'of'Internal'Revenue'vs.'Tuason

42

28. Cyanamid'Philippines,'Inc.'vs.'Court'of'Appeals

43

TAX^EXEMPT'CORPORATIONS

29.

Commissioner'of'Internal'Revenue'vs'G.'Sinco'Educational'Corp

44

GROSS'INCOME

30. Filinvest'Development'Corporation'and'Filinvest'Alabang,'Inc'vs'

45

 

Commissioner'of'Internal'Revenue

31. Commissioner'of'Internal'Revenue'vs.'Court'of'Appeals

46

32. Commissioner'of'Internal'Revenue'vs.'Manning

47

33. Wise'&'Co.,'Inc.'vs.'Meer

49

34. Commissioner'of'Internal'Revenue'vs.'Court'of'Appeals

51

35. Commissioner'of'Internal'Revenue'vs.'Court'of'Appeals

53

36. RE:'Request'of'Atty.'Bernardo'Zialcita'for'Reconsideration'of'the'Action'of'

54

 

37. Commissioner'of'Internal'Revenue'vs.'Mitsubishi'Metal'Corporation

55

DEDUCTIONS;'IN'GENERAL

38. Aguinaldo'Industries'Corporation'vs.'Commissioner'of'Internal'Revenues

56

39. Atlas'Consolidated'Mining'Corporation'vs.'Commissioner'of'Internal'

57

 

Revenue

40. Roxas'vs.'Court'of'Tax'Appeals

59

41. Zamora'v.'Collector'of'Internal'Revenue

61

42. C.'M.'Hoskins'&'Co.'Inc.'v'Commissioner'of'Internal'Revenue'

62

43. Calanoc'vs.'Collector'of'Internal'Revenue

63

44. Kuenzle'&'Streiff'Inc.'vs.''Collector'of'Internal'Revenue

64

45. Paper'Industries'Corporation'of'the'Philippines'vs.'Court'of'Appeals

65

46. Commissioner'of'Internal'Revenue'vs.'Vda'de'Prieto

66

47. Commissioner'of'Internal'Revenue'vs.'Lednicky

67

48. Paper'Industries'Corporation'of'the'Philippines'vs.'Court'of'Appeals

69

49.

71

50. Fernandez'Hermanos,'Inc.'vs.'Commissioner'of'Internal'Revenue

73

51. Basilan'Estates,'Inc.'vs.'Commissioner'of'Internal'Revenue

75

52. Limpan'Investment'Corporation'vs.'Commissioner'of'Internal'Revenue

77

53. Consolidated'Mines,'Inc.'vs.'Court'of'Tax'Appeals'

78

54. 3M'Philippines,'Inc.'vs.'Commissioner'of'Internal'Revenue

80

55. Esso'Standard'Eastern,'Inc.'vs.'Commissioner'of'Internal'Revenue

81

CAPITAL'GAIN'AND'LOSS

56.

Tuason'vs'Lingad

85

57.

'China'Banking'Corporation'vs.'Court'of'Appeals

87

DETERMINATION'OF'GAIN'OR'LOSS'FROM'SALE'OR'TRANSFER'OF'PROPERTY

58.

90

59. Gregory'v.'Helvering

92

SITUS'OF'TAXATION

60. Commissioner'of'Internal'Revenue'vs.'Marubeni'Corporation

93

61. Commissioner'of'Internal'Revenue'vs.'BOAC'

95

62. Commissioner'vs.'CTA'and'Smith'Kline'&'French'Overseas'Co.

97

63. Philippine'Guaranty'Co.,'Inc.'vs.'Commissioner'of'Internal'Revenue

99

64. Howden'and'Co.'Ltd.'vs.'Collector'of'Internal'Revenue

101

65. Philippine'American'Life'Insurance'Co.'Inc.'vs.'Court'of'Tax'Appeals

103

ACCOUNTING'PERIODS'AND'METHODS

66. Consolidated'Mines'Inc.'vs.'Court'of'Tax'Appeals

105

67. Banas.'Jr.'vs.'Court'of'Appeals

106

RETURNS'AND'PAYMENT'OF'TAXES

68. BPI^Family'Savings'Bank'vs.'Court'of'Appeals

108

69. Philam'Asset'Management,'Inc.'vs.'Commissioner'of'Internal'Revenue

110

70. Commissioner'of'Internal'Revenue'vs.'BPI

112

71. Bank'of'the'Philippine'Islands'vs.'Commissioner'of'Internal'Revenue

113

WITHHOLDING'TAX

72. Citibank'vs.'Court'of'Appeals

114

73. Commissioner'of'Internal'Revenue'vs.'Wander'Philippines,'Inc.

115

74. Commissioner'of'Internal'Revenue'vs.'Procter'&'Gamble'Philippine'

116

 

Manufacturing'Corp.

75. Filipinas'Synthetic'Fiber'Corp.'vs.'Court'of'Appeals'

117

CASE

DOCTRINES

CASE'DOCTRINES

TAXABLE'INCOME'IN'GENERAL

1.'Madrigal'vs.'Rafferty'

The' Income' Tax' Law' does' not' look' on' the' spouses' as' individual' partners' in' an' ordinary'partnership.'The'husband'and'wife'are'only'entitled'to'the'exemption'of' directed'at'the'incomes'of'the'wealthy'may'not'be'partially'defeated'by'reliance'on' provisions'in'our'Civil'Code'dealing'with' the'conjugal'partnership'and'having'no' application'to'the'Income'Tax'Law.'

2.'Fisher'vs.'Trinidad

investment.''A'stockholder'who'receives'a'stock'dividend'has'received'nothing'but'a' representation'of'his'increased'interest'in'the'capital'of'the'corporation.'We'believe' that'the'Legislature'when'it'provided'“income'tax”,'intended'only'to'tax'the'income'

3.'Limpan'Investment'Corporation'vs.'Commissioner'of'Internal'Revenue

The'non^collection'was'the'petitioner’s'fault'since'it'refused'to'refused'to'accept'the'

rent,'and'not'due'to'nonpayment'of'lessees.'Hence,'although'the'corporation'did'not'

actually'receive'the'rent,'it'is'deemed'to'have'constructively'received'them.

4.'Conwi'vs.'Court'of'Tax'Appeals

investment.'The'dollar'earnings'of'petitioners'are' the' fruits'of' their'labors'in' the' services.

5.'Bañas,'Jr.'vs.'Court'of'Appeals

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'

among'the'years'in'which'such'installments'are'paid'and'received.

INCOME'TAX'ON'INDIVIDUALS

6.'Garrison'vs.'Court'of'Appeals

An'alien'actually'present'in'the'Philippines'who'is'not'a'mere'transient'or'sojourner'

is'a'resident'of'the'Philippines'for'purposes'of'income'tax.'Whether'he'is'a'transient'

or'not'is'determined'by'his'intentions'with'regards'to'the'length'and'nature'of'his'

DEFINITION'OF'CORPORATIONS

9.'AFISCO'Insurance'Corporation'v.'Court'of'Appeals

The' term' partnership' includes' a' syndicate,' group,' pool,' joint' venture' or' other' operation,'or'venture'is'carried'on.

10.'Pascual'vs.'Commissioner'of'Internal'Revenue

The'sharing'of'returns'does'not'in'itself'establish'a'partnership'whether'or'not'the' persons'sharing'therein'have'a'joint'or'common'right'or'interest'in' the'property.' There' must' be' a' clear' intent' to' form' a' partnership,' the' existence' of' a' juridical' personality'different'from'the'individual'partners,'and'the'freedom'of'each'party'to' transfer'or'assign'the'whole'property.

11.'Obillos'vs.'Commissioner'of'Internal'Revenue

Not' all' co^ownerships' are' deemed' unregistered' partnership.' ' A' co^ownership' owning'properties'which'produce'income'should'not'automatically'be'considered' partners'of'an'unregistered'partnership,'or'a'corporation,'within'the'purview'of'the' income'tax'law.

12.'Oña'vs.'Commissioner'of'Internal'Revenue

For'tax'purposes,'the'co^ownership'of'inherited'properties'is'automatically'converted'

into'an'unregistered'partnership'the'moment'the'said'common'properties'and/or'

the'incomes'derived'therefrom'are'used'as'a'common'fund'with'intent'to'produce'

determined'in'a'project'partition'either'duly'executed'in'an'extrajudicial'settlement'

or'approved'by'the'court'in'the'corresponding'testate'or'intestate'proceeding.'

PASSIVE'INCOME

13.'Commissioner'of'Internal'Revenue'vs.'Manning

A' stock' dividend,' being' one' payable' in' capital' stock,' cannot' be' declared' out' of' outstanding' corporate' stock,' but' only' from' retained' earnings:' 'A' stock' dividend' to'stockholders'in'lieu'of'a'cash'dividend.

MINIMUM'CORPORATE'INCOME'TAX'(MCIT)

14.'Commissioner'of'Internal'Revenue'vs.'Philippine'Airlines,'Inc.'(PAL)

The'tax'paid'by'the'grantee'under'either'of'the'alternatives'provided'in'Sec.'13'of'

P.D.'1590'(basic'corporate'income'tax'based'on'grantee’s'annual'net'taxable'income'

or'franchise'tax'of'2'%'of'the'gross'revenues'derived'by'the'grantee'from'all'sources)'

shall'be'in'lieu'of'all'other' taxes,'duties,'royalties,'registration,'license,'and'other' fees'and'charges'of'any'kind,'nature,'or'description,'imposed,'levied,'established,' assessed,' or' collected' by' any' municipal,' city,' provincial,' or' national' authority' or' government'agency,'now'or'in'the'future.

15.'The'Manila'Banking'Corporation'vs.'Commissioner'of'Internal'Revenue

The'date'of'commencement'of'operations'of'a'thrift'bank'is'the'date'it'was'registered' it'by'the'Monetary'Board'of'the'BSP,'whichever'comes'later.'Thus,'for'purposes'of' ascertaining'when' the'4^year'grace'period'commences' for'non^imposition' of' the' MCIT,'' the'date' the' thrift'bank'was'registered'with' the'SEC'or' the'date'when' the' whichever'comes'later'should'be'considered.

16.'Chamber'of'Real'Estate'and'Builder’s'Associations'(CREBA),''Inc.'vs.'Romulo

taxes'capital'because'capital'is'not'income.'In'other'words,'it'is'income,'not'capital,'

which'is'subject'to'income'tax.'However,'the'MCIT'is'not'a'tax'on'capital.

INCOME'TAX'ON'RESIDENT'FOREIGN'CORPORATION

17.' Commissioner' of' Internal' Revenue' vs.' British' Overseas' Airways' Corporation' (BOAC)'and'Court'of'Tax'Appeals In' order' that' a' foreign' corporation' may' be' regarded' as' doing' business' within' a' State,'there'must'be'continuity'of'conduct'and'intention'to'establish'a'continuous' business,' such' as' the' appointment' of' a' local' agent,' and' not' one' of' a' temporary' character.

18.' Commissioner' of' Internal' Revenue' vs.' British' Overseas' Airways' Corporation' (BOAC)'and'Court'of'Tax'Appeals 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,'

19.' Steamship' Company' of' Svendborg' and' Steamship' Company' of' 1912' vs.' Commissioner'of'Interval'Revenue carriers' which' are' neither' capital' contributions' nor' incurrence' of' liabilities.' It' cannot'be'understood'in'any'other'manner'except'in'the'concept'of'income'to'the' petitioners.' Income' means' “cash' received' or' its' equivalent;”' it' is' the' amount' of'

20.'Bank'of'America'NT'&'SA'vs.'Court'of'Appeals'

absolutely'nothing'equivocal'or'uncertain'about'the'language'of'the'provision.'The'

tax'is'imposed'on'the'amount'sent'abroad,'and'the'law'calls'for'nothing'further.'

21.'Commissioner'of'Internal'Revenue'vs.'Burroughs'Limited

promulgated' in' accordance' with' the' preceding' section' or' any' of' the' rulings' or' circulars'promulgated'by'the'Commissioner'shag'not'be'given'retroactive'application' in' the' following' cases' (a)' where' the' taxpayer' deliberately' misstates' or' omits' material' facts' from'his'return'or'in'any'document'required'of'him'by' the'Bureau' of' Internal'Revenue;' (b)'where' the' facts'subsequently'gathered'by' the'Bureau'of' Internal'Revenue'are'materially'different'from'the'facts'on'which'the'ruling'is'based,' or'(c)'where'the'taxpayer'acted'in'bad'faith.

22.'Compania'General'de'Tabacos'de'Filipinas'vs.'Commissioner'of'Internal'Revenue

INCOME'

TAX' ON' NON^RESIDENT' CORPORATION

FOREIGN'

23.'Commissioner'of'Internal'Revenue'vs.'S.C.'Johnson'and'Son,'Inc.

It'bears'stress'that'tax'refunds'are'in'the'nature'of'tax'exemptions.'As'such'they'are' registered'as'in'derogation'of'sovereign'authority'and'to'be'construed'strictissimi' juris'against' the'person'or'entity'claiming' the'exemption.'The'burden'of'proof'is' upon'him'who'claims'the'exemption'in'his'favor'and'he'must'be'able'to'justify'his' claim'by'the'clearest'grant'of'organic'or'statute'law.'Private'respondent'is'claiming' for'a'refund'of'the'alleged'overpayment'of'tax'on'royalties;'however'there'is'nothing' on'record'to'support'a'claim'that'the'tax'on'royalties'under'the'RP^US'Treaty'is'paid' under'similar'circumstances'as'the'tax'on'royalties'under'the'RP^West'Germany'Tax' Treaty.

24.'Marubeni'Corporation'vs.'Commissioner'of'Internal'Revenue'

The'general'rule'that'a'foreign'corporation'is'the'same'juridical'entity'as'its'branch' following'the'principal'agent'relationship'theory.'It'is'understood'that'the'branch' becomes'its'agent'here.'So'that'when'the'foreign'corporation'transacts'business'in' the'Philippines'independently'of'its'branch,'the'principal^agent'relationship'is'set' aside.'The'transaction'becomes'one'of'the' foreign'corporation,'not'of'the'branch.' Consequently,'the'taxpayer'is'the'foreign'corporation,'not'the'branch'or'the'resident' foreign'corporation.

25.' N.V.' Reederij' "Amsterdam"' and' Royal' Interocean' Lines' vs.' Commissioner' of' Internal'Revenue A'foreign'corporation'not'engaged'in'trade'or'business'within'the'Philippines'and' received' from' all' sources' within' the' Philippines' at' the' rate' of' 35%' of' the' gross' income.'

IMPROPERLY'ACCUMULATED'EARNINGS'TAX'(IAET)

26.'The'Manila'Wine'Merchants,'Inc.'vs.'Commissioner'of'Internal'Revenue

To' determine' the' “reasonable' needs”' of' the' business' in' order' to' justify' an' accumulation' of' earnings,' the' Courts' of' the' United' States' had' developed' the' Immediacy' Test'which' construed' the'words' reasonable' needs' of' the' business' to' mean' the'immediate' needs' of' the' business,'and'it'was'generally' held' that;'if' the' corporation'did'not'prove'an'immediate'need'for'the'accumulation'of'the'earnings' the'penalty'tax'would'apply.'

27.'Commissioner'of'Internal'Revenue'vs.'Tuason

The'importance'of'liability'is'the'purpose'behind'the'accumulation'of'the'income'

and'not'the'consequences'of'the'accumulation.'Thus,'if'the'failure'to'pay'dividends'

needs'of'the'business,'that'purpose'would'not'fall'to'overcome'the'presumption'and'

correctness'of'CIR.

28.'Cyanamid'Philippines,'Inc.'vs.'Court'of'Appeals

the'business'to'avoid'the'surtax'upon'the'shareholders,'it'must'be'shown'that'the'

controlling'intention'of'the'taxpayer'is'manifested'at'the'time'of'the'accumulation,'

not'intentions'subsequently,'which'are'mere'afterthoughts.

TAX^EXEMPT'CORPORATIONS

29.'Commissioner'of'Internal'Revenue'vs'G.'Sinco'Educational'Corp

Mere'provision'for'the'distribution'of'its'assets'to'the'stockholders'upon'dissolution'

does'not'remove'the'right'of'an'educational'institution'from'tax'exemption.'

GROSS'INCOME'^'INCLUSIONS

30.''Filinvest'Development'Corporation'and'Filinvest'Alabang,'Inc'vs'Commissioner'

of'Internal'Revenue

No'taxable'gain'from'an'exchange'of'property'for'shares'of'stock'of'a'corporation'

shall'be'recognized'if'as'a'result'of'the'exchange'the'transferor,'alone'or'together'

with'others,'not'exceeding'four'persons,'gains'control'of'the'corporation.

31.'Commissioner'of'Internal'Revenue'vs.'Court'of'Appeals

The'three'elements'in'the'impositions'of'income'tax'are.'1)'There'must'be'gain'and'

and'3)'it'is'not'exempted'by'law'or'treaty'from'income'tax.

32.'Commissioner'of'Internal'Revenue'vs.'Manning

The' essence' of' a' stock' dividend'was' the' segregation' out' of' surplus' account' of' a' of' the'corporation'by' the'device'of'capitalizing' the'same,'and' the'issuance' to' the'

33.'Wise'&'Co.,'Inc.'vs.'Meer

A'dividend'is'a'return'upon'the'stock'of'its'stockholders,'paid'to'them'by'a'going' corporation' without' reducing' their' stockholdings,' leaving' them' in' a' position' to' enjoy' future' returns' upon' the' same' stock.' In' other' words,'it'is' earnings' paid' to' him'by' the'corporation'upon'his'invested'capital' therein,'without'wiping' out'his' capital.'Under'the'law'so'long'as'a'gain'is'realized,'it'will'be'taxable'income'whether' sale'of'all'of'its'assets'in'general,'so'long'as'the'distribution'is'made'"in'complete' liquidation'or'dissolution".

GROSS'INCOME'^'EXCLUSIONS

34.'Commissioner'of'Internal'Revenue'vs.'Court'of'Appeals

employees' upon' the' occurrence' of' certain' contingencies,' particularly,' old' age' and' for' no' other' purpose.' Tax^exemption' is' to' be' enjoyed' by' the' income' of' the' pension' trust,'otherwise,' taxation'of' those'earnings'would'result'in'a'diminution' out'of' the' trust' fund.'The'application'of' the'withholdings'system'is'essentially' to' maximize'and'expedite'the'collection'of'income'taxes'by'requiring'its'payment'at' the' source,' therefore,' there'is' no'logic'in'withholding' a' certain' percentage' of'an'

35.'Commissioner'of'Internal'Revenue'vs.'Court'of'Appeals

occasion'of'his'compulsory'retirement'from'the'government'service'is'not'subject' to'withholding' (income)' tax.' It' not' being' part' of' the'gross' salary' or'income' of'a'

36.'RE:'Request'of'Atty.'Bernardo'Zialcita'for'Reconsideration'of'the'Action'of'the'

The$amount$received$by$way$of$commutation$of$his$accumulated$leave$credits$as$a$result$ of$ his$ compulsory$ retirement,$ or$ his$ terminal$ leave$ pay,$ falls$ within$ the$ enumerated$ exclusions$from$gross$income$and$is$therefore$not$subject$to$tax.$Since$terminal$leave$ his$employer$and$who$is$no$longer$working,$then$it$follows$that$the$terminal$leave$pay,$ which$is$the$cash$value$of$his$accumulated$leave$credits,$is$no$longer$compensation$for$ services$rendered.$It$cannot$be$viewed$as$salary.

37.'Commissioner'of'Internal'Revenue'vs.'Mitsubishi'Metal'Corporation

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,$which$ onus$ petitioners$ have$ failed$

under$Section$29$(b)$(7)$(A),$are$entitled$to$exemption$and$which$should$indispensably$

be$the$party$in$interest$in$this$case.

DEDUCTIONS'IN'GENERAL

38.'Aguinaldo'Industries'Corporation'vs.'Commissioner'of'Internal'Revenues

Whenever$a$controversy$arises$on$the$deductibility,$for$purposes$of$income$tax,$of$certain$ is$in$line$with$the$doctrine$in$the$law$of$taxation$that$the$taxpayer$must$show$that$its$ claimed$deductions$clearly$come$within$the$language$of$the$law$since$allowances,$like$ exemptions,$are$matters$of$legislative$grace.

39.'Atlas'Consolidated'Mining'Corporation'vs.'Commissioner'of'Internal'Revenue

The' intention' of' the' taxpayer' often' may' be' the' controlling' fact' in' making' the' determination.' The' answer' to' the' question' as' to' whether' the' expenditure' is' an' allowable'deduction'as'a'business'expense'must'be'determined'from'the'nature'of' the'expenditure'itself,'which'in'turn'depends'on'the'extent'and'permanency'of'the' work'accomplished'by'the'expenditure.

40.'Roxas'vs.'Court'of'Tax'Appeals

Representation' expenses' are' deductible' from' gross' income' as' expenditures' incurred'in'carrying'on'a'trade'or'business'provided'the'taxpayer'proves'that'they' are'reasonable'in'amount,'ordinary'and'necessary,'and'incurred'in'connection'with' his'business.

41.'Zamora'v.'Collector'of'Internal'Revenue

Claims$ for$ deduction$ of$ promotion$ expenses$ or$ entertainment$ expenses$ must$ also$ be$ supported$and$substantiated$by$records$showing$in$detail$the$amount$and$nature$of$the$ expenses$ incurred.$Where$ absolute$ certainty$ is$ usually$ not$ possible,$ the$ CTA$ should$ make$as$close$an$approximate$as$it$can,$bearing$heavily,$if$it$chooses,$upon$the$taxpayer$ whose$inexactness$was$his$own$making.

DEDUCTIONS'^'EXPENSES

42.'C.'M.'Hoskins'&'Co.'Inc.'v'Commissioner'of'Internal'Revenue'

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.

43.'Calanoc'vs.'Collector'of'Internal'Revenue

by' receipts' there'is' no' reason' to' deduct'it' from' the'gross' sales' of' the' charitable' event.

44.'Kuenzle'&'Streiff'Inc.'vs.''Collector'of'Internal'Revenue

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'

DEDUCTIONS'^'INTEREST

45.'Paper'Industries'Corporation'of'the'Philippines'vs.'Court'of'Appeals

Interest$payments$on$loans$incurred$by$a$taxpayer$(whether$BOIJregistered$or$not)$are$

allowed$by$the$NIRC$as$deductions$against$the$taxpayer’s$gross$income.$(Section$30$of$

the$1977$Tax$Code)$Thus,$the$general$rule$is$that$interest$expenses$are$deductible$against$

gross$income$and$this$certainly$includes$interest$paid$under$loans$incurred$in$connection$

with$the$carrying$on$of$the$business$of$the$taxpayer.

46.'Commissioner'of'Internal'Revenue'vs.'Vda'de'Prieto

For$interest$to$be$allowed$as$deduction$from$gross$income,$it$must$be$shown$that$there$be$

indebtedness,$that$there$should$be$interest$upon$it,$and$that$what$is$claimed$as$an$interest$

deduction$should$have$been$paid$or$accrued$within$the$year.

DEDUCTIONS'^'TAXES

47.'Commissioner'of'Internal'Revenue'vs.'Lednicky

The' Construction' and' wording' of' Section' 30' (c)' (1)' (B)' of' the' Internal' Revenue' Act' shows' the'law's'intent' that' the' right' to' deduct'income' taxes' paid' to' foreign' government' from' the' taxpayer's' gross' income' is' given' only' as' an' alternative' or' substitute' to' his' right' to' claim' a' tax' credit' for' such' foreign' income' taxes' under'

section'30'(c)'(3)'and'(4);'so'that'unless'the'alien'resident'has'a'right'to'claim'such'

tax'credit'if'he'so'chooses,'he'is'precluded'from'deducting'the'foreign'income'taxes'

from'his'gross'income.

DEDUCTIONS'^'LOSSES

48.'Paper'Industries'Corporation'of'the'Philippines'vs.'Court'of'Appeals

PICOP’s$claim$for$deduction$is$not$only$bereft$of$statutory$basisS$it$does$violence$to$the$

legislative$intent$which$animates$the$tax$incentive$granted$by$Section$7$(c)$of$R.A.$No.$

5186.$In$granting$the$extraordinary$privilege$and$incentive$of$a$net$operating$loss$carryJ

over$to$BOIJregistered$ pioneer$ enterprises,$the$legislature$ could$ not$ have$intended$to$ run$no$risks$and$suffered$no$losses,$but$had$merely$purchased$another’s$losses.

DEDUCTIONS'–'BAD'DEBTS

Before'a'debt'can'be'considered'worthless,'the'taxpayer'must'also'show'that'it'is' indeed'uncollectible'even'in' the' future.' Furthermore,' the' steps' to'be'undertaken'

by'the'taxpayer'to'prove'that'he'exerted'diligent'efforts'to'collect'the'debts'are:'(1)'

sending' of'statement' of'accounts;' (2)'sending' of'collection'letters;' (3)'giving' the' Thus,'mere'testimony'of'the'Financial'Accountant'of'the'petitioner'explaining'the' worthlessness'of'debts'without'documentary'evidence'to'support'such'testimony'is' nothing'more'than'a'self^serving'exercise'which'lacks'probative'value.

50.'Fernandez'Hermanos,'Inc.'vs.'Commissioner'of'Internal'Revenue

Neither' under' Section' 30' (d)' (2)' of' our' Tax' Code' providing' for' deduction' by' corporations'of'losses'actually'sustained'and'charged'off'during' the' taxable' year'

nor'under'Section'30'(e)'(1)'thereof'providing'for'deduction'of'bad'debts'actually'

ascertained' to'be'worthless'and'charged'off'within' the' taxable'year,'can' there'be' a' partial' writing' off' of' a'loss' or' bad' debt.' For' such'losses' or' bad' debts'must' be' ascertained'to'be'so'and'written'off'during'the'taxable'year,'are'therefore'deductible' in'full'or'not'at'all,'in'the'absence'of'any'express'provision'in'the'Tax'Code'authorizing' partial'deductions.

DEDUCTIONS'^'DEPRECIATION

51.'Basilan'Estates,'Inc.'vs.'Commissioner'of'Internal'Revenue

The' income' tax' law' does' not' authorize' the' depreciation' of' an' asset' beyond' its' acquisition'cost.'Hence,'a'deduction'over'and'above'such'cost'cannot'be'claimed' and'allowed.'The'reason'is' that'deductions' from'gross'income'are'privileges,'not' matters'of'right.'They'are'not'created'by'implication'but'upon'clear'expression'in' the'law.

52.'Limpan'Investment'Corporation'vs.'Commissioner'of'Internal'Revenue

Depreciation'is'a'question'of'fact'and'is'not'measured'by'theoretical'yardstick,'but' Court'in' this'respect'should'not'be'disturbed'when'not'shown' to'be'arbitrary'or' in'abuse'of'discretion'and'petitioner'has'not'shown'any'arbitrariness'or'abuse'of' depreciation'in'its'returns.'

DEDUCTIONS'^'DEPLETION

53.'Consolidated'Mines,'Inc.'vs.'Court'of'Tax'Appeals'

In'computing'net'income'there'shall'be'allowed'as'deduction,'in'the'case'of'mines,' a'reasonable'allowance'for'depletion'thereof'not'to'exceed'the'market'value'in'the' mine' of' the' product' thereof'which' has' been'mined' and' sold' during' the' year' for' which'the'return'is'made.'As'an'income'tax'concept,'depletion'is'wholly'a'creation'of' the'statue'–'solely'a'matter'of'legislative'grace.'Hence,'the'taxpayer'has'the'burden' of'justifying'the'allowance'of'any'deduction'claimed.

DEDUCTIONS'–'RESEARCH'AND'DEVELOPMENT

54.'3M'Philippines,'Inc.'vs.'Commissioner'of'Internal'Revenue

Improper'payments'of'royalty'are'not'deductible'as'legitimate'business'expenses.' Section' 3^C' of' CB' Circular' No.' 393' provides' for' payment' of' royalties' only' on' commodities'manufactured'by'the''licensee'under'the'royalty'agreement'not'on'the'

DEDUCTIONS'–'NON'DEDUCTIBLE'EXPENSES

55.'Esso'Standard'Eastern,'Inc.'vs.'Commissioner'of'Internal'Revenue

The' statutory' test' of' deductibility' where'it'is' axiomatic' that' to' be' deductible' as' a' business'expense,' three' conditions'are'imposed,'namely:' (1)' the'expense'must'

be'ordinary'and'necessary,'(2)'it'must'be'paid'or'incurred'within'the'taxable'year,'

and'(3)'it'must'be'paid'or'incurred'in'carrying'on'a'trade'or'business.'In'addition,'

not'only'must'the'taxpayer'meet'the'business'test,'he'must'substantially'prove'by' evidence' or' records' the' deductions' claimed' under' the' law,' otherwise,' the' same' will'be'disallowed.'The'mere'allegation'of'the'taxpayer'that'an'item'of'expense'is' ordinary'and'necessary'does'not'justify'its'deduction.

CAPITAL'GAINS'AND'LOSSES

56.'Calasanz,'et'al.''vs.'Commissioner'of'Internal'Revenue'

ordinary' asset' if' a' combination' of' the' factors' indubitably' tend' to' show' that' the' activity'was'in'furtherance'of'or'in'the'course'of'the'taxpayer's'trade'or'business.' Thus,'a'sale'of'inherited'real'property'usually'gives'capital'gain'or'loss'even'though' the'property'has'to'be'subdivided'or'improved'or'both'to'make'it'salable.'However,' if'the'inherited'property'is'substantially'improved'or'very'actively'sold'or'both'it' may'be'treated'as'held'primarily'for'sale'to'customers'in'the'ordinary'course'of'the' heir's'business.'

57.'Tuason$vs$Lingad

The$ Tax$ Code’s$ provision$ on$ longJterm$ capital$ gains$ constitutes$ a$ statute$ of$ partial$ exemption.$ In$ view$ of$the$ familiar$ and$ settled$ rule$that$tax$ exemptions$ are$ construed$ in$ strictissimi$juris$ against$the$taxpayer$ and$liberally$in$ favor$ of$the$taxing$ authority,$ otherwise,$all$fair$doubts$will$be$resolved$against$him.

58.$China$Banking$Corporation$vs.$Court$of$Appeals

Hongkong$subsidiary,$the$First$CBC$Capital$(Asia),$Ltd.,$is$not$an$indebtedness,$and$it$ capital$loss$sustained$by$CBC$can$only$be$deducted$from$capital$gains$if$any$derived$by$

DETERMINATION' OF' GAIN' OR' LOSS' FROM' SALE' OR' TRANSFER'OF'PROPERTY

It'is'well'established'that'where'stocks'for'stocks'were'exchanged,'and'distributed' to' the' stockholders' of' the' corporations,' parties' to' the' merger' or' consolidation,' pursuant'to'a'plan'of'reorganization,'such'exchange'is'exempt'from'capital'gains'tax'

pursuant'to'Section'35(c)'(2),'in'relation'to'(c)'(5),'of'the'National'Internal'Revenue'

Code. The' basic' consideration,' of' course,' is' the' purpose' of' the' merger,' as' this' would' determine'whether'the'exchange'of'properties'involved'therein'shall'be'subject'or' not'to'the'capital'gains'tax.'The'criterion'laid'down'by'the'law'is'that'the'merger"' of'escaping'the'burden'of'taxation.

60.'Gregory'v.'Helvering

The'Business'Purpose'Doctrine'is'simply'an'operation'having'no'business'or'corporate'

purpose'^^'a'mere'device'which'put'on'the'form'of'a'corporate'reorganization'as'a'

disguise'for'concealing'its'real'character,'and'the'sole'object'and'accomplishment'of'

which'was'the'consummation'of'a'preconceived'plan,'not'to'reorganize'a'business'or'

any'part'of'a'business,'but'to'transfer'a'parcel'of'corporate'shares'to'the'petitioner.'

The'new'corporation'was'brought'into'existence'for'no'other'purpose;'it'performed,'

as'it'was'intended'from'the'beginning'it'should'perform,'no'other'function.

SITUS'OF'TAXATION

61.'Commissioner'of'Internal'Revenue'vs.'Marubeni'Corporation

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.'These'services'were'rendered'outside'the'taxing'

jurisdiction'of'the'Philippines'and'are'therefore'not'subject'to'contractor's'tax.'

62.'Commissioner'of'Internal'Revenue'vs.'BOAC'

For'purposes'of'income'taxation,'it'is'well'to'bear'in'mind'that'the'"source'of'income"'

but'rather'to'the'"property,'activity'or'service'which'produced'the'income."

63.'Commissioner'vs.'CTA'and'Smith'Kline'&'French'Overseas'Co.

It'is'manifest'that'where'an'expense'is'clearly'related'to'the'production'of'Philippine^ derived'income' or' to'Philippine' operations' (e.g.' salaries' of'Philippine' personnel,' gross'income'acquired'in'the'Philippines'without'resorting'to'apportionment.

64.'Philippine'Guaranty'Co.,'Inc.'vs.'Commissioner'of'Internal'Revenue

The' foreign' insurers'' place' of' business' should' not' be' confused' with' their' place' of' activity.' Section' 24' of' the' Tax' Code' does' not' require' a' foreign' corporation' to' that'the'activity'creating'the'income'is'performed'or'done'in'the'Philippines.'What' is'controlling,' therefore,'is'not' the'place'of'business'but' the'place'of'activity' that' created'an'income.

65.'Howden'and'Co.'Ltd.'vs.'Collector'of'Internal'Revenue

Activity$that$creates$income$should$not$be$confused$with$business$in$the$course$of$

which$an$income$is$realized.$An$activity$may$consist$of$a$single$actS$while$business$

implies$continuity$of$transactions.$An$income$may$be$earned$by$a$corporation$in$the$

Philippines$although$such$corporation$conducts$all$its$businesses$abroad.

66.'Philippine'American'Life'Insurance'Co.'Inc.'vs.'Court'of'Tax'Appeals

J cal$advise,$assistance$or$services$rendered$in$connection$with$the$technical$management$

ACCOUNTING'PERIODS'AND'METHODS

67.'Consolidated'Mines'Inc.'vs.'Court'of'Tax'Appeals

The$use$of$accounting$methods$to$determine$tax$liability$is$dependent$upon$the$cirJ

cumstances$of$the$taxpayerS$those$which$are$prescribed$under$the$NIRC$may$be$used,$

alternatively,$methods$that$would$accurately$determine$the$correct$tax$liability$may$also$

be$used$if$it$is$necessary$as$deemed$by$the$commissioner.

RETURNS'AND'PAYMENT'OF'TAXES

71.'Commissioner'of'Internal'Revenue'vs.'BPI

As'shown'in'the'NIRC'of'1997'Section'76.'The'remedies'of'tax'refund'and'tax'credit'

for'excess'payment'of'taxes'are'alternative'in'nature;'the'choice'of'one'precludes'the'

taxpayer'from'claiming'the'other.'Once'a'remedy'has'been'chosen'by'the'taxpayer'

either'actually'or'constructively,'it'becomes'irrevocable.'

72.'Bank'of'the'Philippine'Islands'vs.'Commissioner'of'Internal'Revenue

The'claim'for'refund'of'taxes'paid'in'excess'prescribes'after'two'years'from'the'day'

of'the'period'bars'the'party'or'taxpayer'the'right'to'claim'the'refund.

WITHHOLDING'TAX

73.'Citibank'vs.'Court'of'Appeals

Taxes'withheld'quarterly'are'in'the'nature'of'payment'of'a'taxpayer'of'possible'tax' obligations.'They'are'installments'on'the'annual'tax'which'may'be'due'at'the'end' of' the' taxable' year.' These' taxes' are' provisional'in' nature' unlike' the'withholding' creditable'only'if'there'are'tax'liabilities'for'that'year,'if'none,'they'are'considered' erroneously'collected'therefore'subject'to'claims'for'refunds.

74.'Commissioner'of'Internal'Revenue'vs.'Wander'Philippines,'Inc.

The'dividends'received' from'a'domestic'corporation'liable'to'tax,'the'tax'shall'be'

15%'of'the'dividends'received,'subject'to'the'condition'that'the'country'in'which'

the'non^resident' foreign'corporation'is'domiciled'shall'allow'a'credit'against' the' tax'due'from'the'non^resident'foreign'corporation'taxes'deemed'to'have'been'paid'

in'the'Philippines'equivalent'to'20%'which'represents'the'difference'between'the'

regular' tax' (35%)' on' corporations'and' the' tax' (15%)' dividends.'Since' the'Swiss' Government'does'not'impose'any' tax'on' the'dividends'to'be'received'by' the'said'

parent'corporation'in'the'Philippines,'the'condition'imposed'under'Section'24'(b)'

75.'Commissioner'of'Internal'Revenue'vs.'Procter'&'Gamble'Philippine'Manufacturing'

Corp. There' is' nothing' in' Section' 902' of' the' U.S.' Internal' Revenue' Code,' as' amended' by'Public'Law'87^834,' the'law'governing' tax'credits'granted' to'U.S.'corporations' on' dividends' received' from' foreign' corporation,' that' would' justify' tax' return' of' the'disputed'15%' to' the'private' respondent.'Furthermore,'as'ably'argued'by' the' petitioner,' the' private' respondent' failed' to' meet' certain' conditions' necessary' in' order'that'the'dividends'received'by'the'non^resident'parent'company'in'the'United' States' may' be' subject' to' the' preferential' 15%' tax' instead' of' 35%.' Among' other' things,' the' private' respondent' failed:' (1)' to' show' the' actual' amount' credited' by' the'U.S.'government'against'the'income'tax'due'from'PMC^U.S.A.'on'the'dividends'

received'from'private'respondent;'(2)'to'present'the'income'tax'return'of'its'mother'

company'for'1975'when'the'dividends'were'received;'and'(3)'to'submit'any'duly'

authenticated' document' showing' that' the'U.S.' government' credited' the' 20%' tax' deemed'paid'in'the'Philippines.

76.'Filipinas'Synthetic'Fiber'Corp.'vs.'Court'of'Appeals'

Since'Sec.'53,'NIRC'(now,'Sec.'57'of'1997'NIRC)'in'relation'to'Sec.'54'(now'Sec.'58)'is'

silent'as'to'when'the'duty'to'withhold'arises,'it'is'necessary'to'look'into'the'nature'

of'the'accrual'method'of'accounting.'Under'the'accrual'basis'method'of'accounting,'

to'receive'the'income,'and'the'amount'can'be'determined'with'reasonable'accuracy.''

Thus,'it'is'the'right'to'receive'income,'and'not'the'actual'receipt,'that'determines'

when'to'include'the'amount'in'gross'income.''

CASE

DIGESTS

Taxable"Income

in General

1

MALCOLM,'J.:

FACTS:

Madrigal&vs.&Rafferty

G.R.$No.$L(12287.$August$7,$1918

Digest'by:'ACASILI,'Carl'Jillson'B.

Vicente'Madrigal'and'Susana'Paterno'were'legally'married'prior'to'January'1,'1914.'The'marriage'was'

contracted'under'the'provisions'of'law'concerning'conjugal'partnerships.'On'February'1915,'Madrigal'

Subsequently,' Madrigal' submitted' a' claim' that' the' said' P296,302.73' did' not' represent' his' income'

for'the'year'1914,'but'was'in'fact'the'income'of'the'conjugal'partnership,'and'that'in'computing'and'

assessing'the'additional'income'tax'provided'by'the'Act'of'Congress'of'October'3,'1913,'the'income'

declared'by'Madrigal'should'be'divided'into'two'equal'parts,'one^half'to'be'considered'the'income'of' Madrigal'and'the'other'half'of'Paterno.'The'general'question'was'submitted'to'the'Attorney^General' Treasury'Department.'The'United'States'Commissioner'of'Internal'Revenue'reversed'the'opinion'of' the'Attorney^General,'and'thus'decided'against'the'claim'of'Madrigal.'

Madrigal'paid'under'protest.'The'Collector'of' Internal'Revenue'ruled'against'Madrigal'so' the'latter'

Deputy'Collector'of'Internal'Revenue'for'the'recovery'of'the'sum'of'P3,786.08,'alleged'to'have'been'

wrongfully'and'illegally'collected'by'the'defendants'under'the'provisions'of'the'Act'of'Congress'known'

as'the'Income'Tax'Law.'The'claim'was'that,'if'the'income'tax'for'the'year'1914'had'been'correctly'and'

lawfully'computed'there'would'have'been'due'payable'by'each'of'the'plaintiffs'the'sum'of'P2,921.09,'

which'taken'together'amounts'of'a'total'of'P5,842.18'instead'of'P9,668.21,'with'the'result'that'plaintiff'

Madrigal'has'paid'as'income'tax'for'the'year'1914,'P3,786.08,'in'excess'of'the'sum'lawfully'due'and'

payable.

ISSUE:

Whether'or'not'the'income'of'Madrigal'and'Paterno'should'be'divided'into'two'equal'parts,'because'of'

the'conjugal'partnership'relations'existing'between'them.

HELD:

through'a'period'of'time'is'called'an'income.'Capital'is'wealth,'while'income'is'the'service'of'wealth.

Paterno,' only' has' an'inchoate' right'in' the' property' of' her' husband'Madrigal' during' the'life' of' the' conjugal'partnership.'She'has'an'interest'in'the'ultimate'property'rights'and'in'the'ultimate'ownership' of'property'acquired'as'income'after'such'income'has'become'capital.'Paterno'has'no'absolute'right'to' one^half'the'income'of'the'conjugal'partnership.'Not'being'seized'of'a'separate'estate,'Paterno'cannot' of'the'additional'tax.'As'she'has'no'estate'and'income,'actually'and'legally'vested'in'her'and'entirely' distinct'from'her'husband’s'property,'the'income'cannot'properly'be'considered'the'separate'income' of'the'wife'for'the'purposes'of'the'additional'tax.'The'Income'Tax'Law'does'not'look'on'the'spouses' as' individual' partners' in' an' ordinary' partnership.' The' husband' and' wife' are' only' entitled' to' the' at'the'incomes'of'the'wealthy'may'not'be'partially'defeated'by'reliance'on'provisions'in'our'Civil'Code' dealing'with'the'conjugal'partnership'and'having'no'application'to'the'Income'Tax'Law.'

2

In'addition,' the' Income'Tax'Law'was'drafted'by' the'Congress'of' the'United'States'and'has'been'by' the'Congress'extended'to'the'Philippine'Islands.'Being'a'law'of'American'origin'and'being'peculiarly' peculiar'force'for'the'Philippines.'It'has'come'to'be'a'well^settled'rule'that'great'weight'should'be'given' to'the'construction'placed'upon'a'revenue'law,'whose'meaning'is'doubtful,'by'the'department'charged' with'its'execution.

3

JOHNSON,'J.

FACTS:

Fisher&v.&Trinidad

No.$17518.$October$30,$1922

Digest'by:'ACASILI,'Carl'Jillson'B.

The' Philippine' American' Drug' Company,' a' domestic' corporation,' in' which' Frederick' Fisher' was' a'

stockholder'declared'a'stock'dividend'for'the'year'1919.'The'proportionate'share'of'said'stock'dividend'

was'P24,800.'The'stock'dividend'for'that'amount'was'issued'to'Fisher.'Trinidad'demanded'the'sum'of'

P889.91'as'income'tax'on'said'stock'dividend;'Fisher'paid'the'said'amount'under'protest.'To'recover'

that'it'failed'to'constitute'a'cause'of'action.'The'demurrer'was'sustained'and'Fisher'appealed.'

ISSUES:&

1.'What'is'an'income?

2.'Whether'or'not'a'stock'dividend'should'be'considered'an'income.

HELD:&

“income”'of'the'owner.'Such'advance'constitutes'and'can'be'treated'merely'as'an'increase'in'capital.' Stock' dividends' represent' undistributed' increase' in' the' capital' of' the' corporation' for' a' particular' period.' They' are' used' to' show' the' increased' interest' or' proportional' share' in' the' capital' of' each' stockholder.'

2.'NO.'For'bookkeeping'purposes,'when'stock'dividends'are'declared,'the'corporation'acknowledges'a'

liability'to'the'stockholders,'equivalent'to'the'aggregate'par'value'of'their'stock,'evidenced'by'a'capital' stock'account.''A'stockholder'who'receives'a'stock'dividend'has'received'nothing'but'a'representation' of' his' increased' interest' in' the' capital' of' the' corporation.'We' believe' that' the' Legislature' when' it' not'believe'that'the'Legislature'intended'that'a'mere'increase'in'the'value'of'the'capital'or'assets'of'a'

If'the'holder'of'the'stock'dividend'is'required'to'pay'an'income'tax'on'the'“stock'dividend”'the'result'

would'be'that'he'has'paid'a'tax'upon'an'income'which'he'never'received.'Such'a'conclusion'is'absolutely'

contradictory'to'the'idea'of'an'income.'An'income'to'be'subject'to'taxation'under'the'law'must'be'an'

actual'income'and'not'a'promised'or'prospective'income.

4

Limpan&Investment&Corporation&vs.&Commissioner&of&Internal&Revenue

G.R.$No.$L(21570.$July$26,$1966

REYES,'J.

FACTS:&

Digest'by:'AGADER,'Charisse'Ann'C.'

its'rental'income'for'years'1956^57'by'around'P20K'and'P81K'respectively.'Petitioner'appeals'on'the'

ground'that'portions'of'these'underdeclared'rents'are'yet'to'be'collected'by'the'previous'owners'and' turned'over'or'received'by'the'corporation.'Petitioner'cited'that'some'rents'were'deposited'with'the' court,' such' that' the' corporation' does' not' have'actual' nor' constructive' control' over' them.'The' sole' witness'for'the'petitioner,'Solis'(Corporate'Secretary^'Treasurer)'admitted'to'some'undeclared'rents'

in'1956'and1957,'and'that'some'balances'were'not'collected'by'the'corporation'in'1956'because'the'

lessees'refused'to'recognize'and'pay'rent'to'the'new'owners'and'that'the'corp’s'president'Isabelo'Lim'

collected'some'rent'and'reported'it'in'his'personal'income'statement,'but'did'not'turn'over'the'rent'to'

the'corporation.'He'also'cites'lack'of'actual'or'constructive'control'over'rents'deposited'with'the'court.

ISSUE: &

rental'income

HELD: &

Yes.'Petitioner'admitted'that'it'indeed'had'undeclared'income'(although'only'a'part'and'not'the'full' amount'assessed'by' the'BIR).'Thus,'it'has'become'incumbent'upon' them' to'prove' their'excuses'by' clear'and'convincing'evidence,'which'it'has' failed' to'do.'When'is' there'constructive'receipt'of'rent?'

With'regard'to'1957'rents'deposited'with'the'court,'and'withdrawn'only'in'1958,'the'court'viewed'the'

corporation'as'having'constructively'received'said'rents.'The'non^collection'was'the'petitioner’s'fault'

since'it'refused'to'refused'to'accept'the'rent,'and'not'due'to'nonpayment'of'lessees.'Hence,'although'

the'corporation'did'not'actually'receive'the'rent,'it'is'deemed'to'have'constructively'received'them.

5

Conwi&vs.&Commissioner&of&Internal&Revenue

G.R.$No.$48532.$August$31,$1992

Digest'by:'AGADER,'Charisse'Ann'C.'

NOCON,'J.

FACTS:

Petitioners'are'employees'of'Procter'and'Gamble'(Philippine'Manufacturing'Corporation,'subsidiary'of'

Procter'&'Gamble,'a'foreign'corporation).During'the'years'1970'and'1971,'petitioners'were'assigned'

to'other'subsidiaries'of'Procter'&'Gamble'outside'the'Philippines,'for'which'petitioners'were'paid'US'

dollars'as'compensation.'

ITRs'for'1970'and'1971,'this'time'using'the'par'value'of'the'peso'as'basis.'This'resulted'in'the'alleged'

CTA' held' that' the' proper' conversion' rate' for' the' purpose' of' reporting' and' paying' the' Philippine' income'tax'on'the'dollar'earnings'of'petitioners'are'the'rates'prescribed'under'Revenue'Memorandum'

Circulars'Nos.'7^71'and'41^71.'The'refund'claims'were'denied.

ISSUE:

Whether'or'not'petitioners’'dollar'earnings'are'receipts'derived'from'foreign'exchange'transactions

HELD:

Petitioners'are'correct'as'to'their'claim'that'their'dollar'earnings'are'not'receipts'derived'from'foreign' exchange,'foreign'exchange'being'“the'conversion'of'an'amount'of'money'or'currency'of'one'country' into'an'equivalent'amount'of'money'or'currency'of'another.”'When'petitioners'were'assigned'to'the' foreign'subsidiaries'of'Procter'&'Gamble,'they'were'earning'in'their'assigned'nation’s'currency'and' were'ALSO'spending'in'said'currency.'There'was'no'conversion,'therefore,'from'one'currency'to'another.'

The'dollar'earnings'of'petitioners'are'the'fruits'of'their'labors'in'the'foreign'subsidiaries'of'Procter'&'

years'as'payment'for'their'services.'

And'in'the'implementation'for'the'proper'enforcement'of'the'National'Internal'Revenue'Code,'Section'

338'thereof'empowers'the'Secretary'of'Finance'to'“promulgate'all'needful'rules'and'regulations”'to'

effectively'enforce'its'provisions'pursuant'to'this'authority,'Revenue'Memorandum'Circular'Nos.'7^71'

and'41^71'were'issued'to'prescribed'a'uniform'rate'of'exchange'from'US'dollars'to'Philippine'pesos'

for' INTERNAL' REVENUE' TAX' PURPOSES' for' the' years' 1970' and' 1971,' respectively.' Said' revenue' circulars'were'a' valid'exercise'of' the'authority'given' to' the'Secretary'of'Finance'by' the'Legislature' which'enacted'the'Internal'Revenue'Code.'And'these'are'presumed'to'be'a'valid'interpretation'of'said' code'until'revoked'by'the'Secretary'of'Finance'himself.'

Petitioners' are' citizens' of' the' Philippines,' and' their'income,' within' or' without,' and'in' these' cases'

wholly'without,'are'subject'to'income'tax.'Sec.'21,'NIRC,'as'amended,'does'not'brook'any'exemption.

6

QUISUMBING,'J.

FACTS:&

Bañas,&Jr.&vs.&Court&of&Appeals&

G.R.$No.$102967,$February$10,$2000

Digest'by:'Alviar,'Joyce'B.

On'February'20,'1976,'Bibiano'V.'Bañas'Jr.'sold'to'AYALA'Corporation,'a'128,265'square'meters'of'land'

located'at'Muntinlupa,'for'P2,308,770.00.'Petitioner'received'an'initial'payment'of'P461,754.00'with'

the'balance'to'be'paid'in'four'equal'consecutive'annual'installments'covered'by'promissory'note.'The' same'day,'petitioner'discounted' the'promissory'note'with'AYALA,' for'its' face'value.'AYALA'issued'9'

checks'to'petitioner,'all'dated'February'20,'1976,'with'the'uniform'amount'of'P205,224.00.

In'his'1976'Income'Tax'Return,'petitioner'reported'only'the'initial'payment'as'income'from'disposition'

of'capital'asset.'In'the'succeeding'years,'until'1979,'petitioner'reported'a'uniform'income'corresponding'

to'the'annual'installment'as'gain'from'sale'of'capital'asset.'

Later,' the' BIR' Regional' Director,' through' its' tax' examiners,' discovered' that' petitioner' had' no'

outstanding'receivable'from'the'1976'land'sale'to'AYALA'and'concluded'that'the'sale'was'cash'and'the'

insisted'that'the'sale'of'his'land'to'AYALA'was'on'installment.

Amnesty'Tax'Return'under'P.D.'1840.'In'both,'petitioner'did'not'recognize'that'his'sale'of'land'to'AYALA'

was'on'cash'basis.'

Petitioner'maintains'that'the'proceeds'of'the'promissory'notes,'were'not'yet'due,'which'he'discounted' to' AYALA' should' not' be' included' as' income' realized' in' 1976.' Petitioner' states' that' the' original' agreement'in'the'Deed'of'Sale'should'not'be'affected'by'the'subsequent'discounting'of'the'bill.'

ISSUES: &

taxpayer'from'immunity'against'prosecution? 2.' Whether' or' not' the' petitioner’s' income' from' the' sale' of' the' land' should' be' declared' as' a' cash' transaction'in'his'tax'return'because'the'buyer'discounted'the'promissory'note,'issued'to'the'seller,'on' the'same'day'of'the'sale?

HELD:

amnesty'return'does'not'ipso'facto'shield'him'from'immunity'against'prosecution.'Tax'amnesty'is'a'

general'pardon'to'taxpayers'who'want'to'start'a'clean'tax'slate.'It'also'gives'the'government'a'chance'to'

collect'uncollected'tax'from'tax'evaders'without'having'to''go'through'the'tedious'process'of'a'tax'case.'

To'avail'of'a'tax'amnesty'granted'by'the'government'and'to'be'immune'from'suit'on'its'delinquencies,'

the'tax'payer'must'have'voluntarily'disclosed'his'previously'untaxed'income'and'must'have'paid'the'

corresponding'tax'on'the'same.'

the'income'tax'due'thereon,'immunity'from'the'penalties,'civil'or'criminal'under'the'NIRC.'Petitioner' is'not'entitled'to'claim'immunity' from'prosecution'under'the'shield'of'the'availing'tax'amnesty.'His'

7

disclosure'in'his'tax'amnesty'return'did'not'include'the'income'from'his'sale'of'land'to'AYALA'on'cash' basis.'Instead'he'insisted'that'such'sale'was'on'installment.'He'did'not'amend'his'income'tax'return.'He' did'not'pay'the'tax'in'which'was'considerably'increased'by'the'income'derived'from'the'discounting.'

He'did'not'meet'the'twin'requirements'of'P.D.'Nos.'1740'and'1840,'declaration'of'his'untaxed'income'

and'full'payment'of'tax'due'thereon.

It'also'bear'noting' that'a' tax'amnesty,'much'like'a' tax'exemption,'is'never' favored'nor'presumed'in' law'and'if'granted'by'statute,'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.''

in'the'year'the'sale'is'made.'But,'if'not'all'of'the'sale'price'is'received'during'such'year,'and'a'statute'

sale'is'to'be'apportioned'between'or'among'the'years'in'which'such'installments'are'paid'and'received.'

In'this'case,'although'the'proceeds'of'a'discounted'promissory'note'is'not'considered'initial'payment,'

still'it'must'be'included'as'taxable'income'on'the'year'it'was'converted'to'cash.'When'petitioner'had'

the' promisorry' notes' covering' the' succeeding' installment' payments' of' the' land' issued' by' AYALA,' discounted'by'AYALA'itself,'on'the'same'day'of'the'sale,'he'lost'entitlement'to'report'the'sale'as'a'sale' on'installment'since,'a'taxable'disposition'resulted'and'petitioner'was'required'by'law'to'report'in'his' returns'the'income'derived'from'the'discounting.'What'petitioner'did'is'tantamount'to'an'attempt'to' circumvent'the'rule'on'payment'of'income'taxes'gained'from'the'sale'of'the'land'to'AYALA'for'the'year'

1976.

Income"Tax

on Individuals

8

NARVASA,'J.

FACTS:&

Garrison&vs.&Court&of&Appeals

G.R.$Nos.$L(44501(05.$July$19,$1990

Digest'by:'ALVIAR,'Joyce'B.

Petitioners,'JOHN'L.'GARRISON,'JAMES'W.'ROBERTSON,'FRANK'W.'ROBERTSON,'ROBERT'H.'CATHEY,' FELICITAS'DE'GUZMAN'and'EDWARD'McGURK'are'United'States'citizens,'entered'this'country'under'

Section'9'(a)'of'the'Philippine'Immigration'Act'of'1940,'as'amended,'and'presently'employed'in'the'

United'States'Naval'Base,'Olongapo'City.'For'the'year'1969'John'L.'Garrison'earned'$15,288.00;'Frank'

Robertson,' $12,045.84;' Robert' H.' Cathey,' $9,855.20;' James' W.' Robertson,' $14,985.54;' Felicitas' de'

Guzman,'$'8,502.40;'and'Edward'McGurk'$12,407.99'.'

returns,'claiming'that'they'are'not'resident'aliens'but'only'special'temporary'visitors,'having'entered'

this'country'under'Section'9'(a)'of'the'Philippine'Immigration'Act'of'1940,'as'amended.'The'accused'

XII,'paragraph'2'of'the'US^RP'Military'Bases'Agreement.'

The'petitioners'contend'that'given'these'facts,'they'may'not'under'the'law'be'deemed'resident'aliens' provision' of' the' Bases' Agreement' since,' as' is' admitted' on' all' sides,' they' are' all' U.S.' nationals,' all' employed'in'the'American'Naval'Base'at'Subic'Bay'(involved'in'some'way'or'other'in'“construction,' maintenance,' operation' or' defense”' thereof),'and' receive' salary' therefrom'exclusively'and' from' no' other'source'in'the'Philippines;'and'it'is'their'intention,'as'is'shown'by'the'unrebutted'evidence,'to' return'to'the'United'States'on'termination'of'their'employment. That'claim'had'been'rejected'by'the'Court'of'Appeals'with'the'terse'statement'that'the'Bases'Agreement'

ISSUE:'

their'respective'income'tax'returns.'

HELD:& &

The' petitioners' are' Resident' Aliens,' however' they' are' exempt' to' pay' income' taxes,' based' on' the' provisions'of'The'Bases'Agreement.'

by'any' “alien' residing'in' the'Philippines,' regardless'of'whether' the'gross'income'was'derived' from' sources'within'or'outside'the'Philippines;”'and'since'the'petitioners,'although'aliens'residing'within' the'Philippines,'had'failed'to'do'so,'they'had'been'properly'prosecuted'and'convicted'for'having'thus' violated'the'Code.

What'the'law'requires,'is'merely'physical'or'bodily'presence'in'a'given'place'for'a'period'of'time,'not' the'intention' to'make'it'a'permanent'place'of'abode.' It'is'on' this'proposition,' that'almost'all'of' the'

appellants'were'born'here,'repatriated'to'the'US'and'to'come'back,'in'the'latest'in'1967,'and'to'stay'

in'the'Philippines'up'to'the'present'time,'that'makes'appellants'resident'aliens'not'merely'transients'

or'sojourners'which'residence'for'quite'a'long'period'of'time.'Each'of'the'petitioners'does'indeed'fall'

9

within'the'letter'of'the'codal'precept'that'an'“alien'residing'in'the'Philippines”'and'thus'obliged'“to' This'is'made'clear'by'Revenue'Relations'No.'2'of' the'Department'of'Finance'of'February'10,'1940,' which'lays'down'the'relevant'standards'on'the'matter:

An'alien'actually'present'in'the'Philippines'who'is'not'a'mere'transient'or'sojourner'is'a'resident'of'the' Philippines'for'purposes'of'income'tax.'Whether'he'is'a'transient'or'not'is'determined'by'his'intentions' is' of' such'a'nature' that'an'extended' stay'may'be'necessary' to'its'accomplishment,'and' to' that'end' the'alien'makes'his'home'temporarily'in'the'Philippines,'he'becomes'a'resident,'though'it'may'be'his' intention'at'all'times'to'return'to'his'domicile'abroad'when'the'purpose'for'which'he'came'has'been' consummated'or'abandoned.

Quite'apart'from'the'evidently'distinct'and'different'character'of'the'requirement'to'pay'income'tax'in' by'the'Bases'Agreement'from'payment'of'income'tax'is'not'absolute.'By'the'explicit'terms'of'the'Bases' Agreement,' it' exists' only' as' regards' income' derived' from' their' employment' “in' the' Philippines' in' connection'with' construction,'maintenance,' operation' or' defense' of' the' bases;”'it' does' not'exist'in' respect'of'other'income,'i.e.,' “income'derived' from'Philippine'sources'or'sources'other' than' the'US' sources.”'Obviously,'with'respect'to'the'latter' form'of'income,'i.e.,'that'obtained'or'proceeding' from' “Philippine' sources' or' sources' other' than' the' US' sources,”' the' petitioners,' and' all' other' American' nationals'who'are'residents'of'the'Philippines,'are'legally'bound'to'pay'tax'thereon.'In'other'words,' so'that'American'nationals'residing'in'the'country'may'be'relieved'of'the'duty'to'pay'income'tax'for' any'given'year,'it'is'incumbent'on'them'to'show'the'Bureau'of'Internal'Revenue'that'in'that'year'they' had'derived'income'exclusively' from' their'employment'in'connection'with' the'U.S.'bases,'and'none' whatever' “from' Philippine' sources' or' sources' other' than' the' US' sources.”' They' have' to' make' this' concerned'to'invoke'and'prima'facie'establish'their'tax^exempt'status.'It'cannot'simply'be'presumed' that' they'earned' no'income' from'any' other' sources' than' their'employment'in' the'American' bases' and'are'therefore'totally'exempt' from'income'tax.'The'situation'is'no'different' from'that'of'Filipino' and'other'resident'income^earners'in'the'Philippines'who,'by'reason'of'the'personal'exemptions'and' permissible'deductions'under'the'Tax'Code,'may'not'be'liable'to'pay'income'tax'year'for'any'particular' year;'that'they'are'not'liable'to'pay'income'tax,'no'matter'how'plain'or'irrefutable'such'a'proposition'

10

Pansacola&vs.&Commissioner&of&Internal&Revenue

G.R.$No.$159991$November$16,$2006

QUISUMBING,'J.:

FACTS:

Digest'by:'ARBAS,'Andrei'Christopher'G.

of'P5,950'which'he'claimed'as'the'increased'amounts'of'personal'and'additional'exemptions'under'

Section'35'of' the'NIRC.'BIR'denied'his'claim' for'a'refund'of'P5,950.'The'CTA'also'denied'his'claim' because'according' to' the' tax' court,' “it'would' be'absurd' for' the'law' to'allow' the' deduction' from'a' taxpayer’s'gross'income'earned'on'a'certain'year'of'exemptions'availing'on'a'different'taxable'year.”' Petitioner'sought'reconsideration,'but'the'same'was'denied.

On'appeal,'the'Court'of'Appeals'denied'his'petition'for'lack'of'merit'and'ruled'that'Umali'v.'Estanislao,' relied'upon'by'petitioner,'was'inapplicable'to'his'case.'It' further'ruled'that'the'NIRC'took'effect'on'

January'1,'1998,'thus'the'increased'exemptions'were'effective'only'to'cover'taxable'year'1998'and'

cannot'be'applied'retroactively.

ISSUE:

Whether'or'not'the'exemptions'under'Section'35'of'the'NIRC,'which'took'effect'on'January'1,'1998,'be'

availed'of'for'the'taxable'year'1997.

HELD:

NO.' Since'NIRC' took' effect' on' January' 1,' 1998,' the'increased' amounts' of' personal' and' additional'

exemptions'under'Section'35,'can'only'be'allowed'as'deductions'from'the'individual'taxpayer’s'gross'

of'April'1999'as'mandated'by'Section'51'(C)'(1).'The'NIRC'made'no'reference'that'the'personal'and'

additional'exemptions'shall'apply'on'income'earned'before'January'1,'1998.

As'provided'in'Section'24'(A)'(1)'(a)'in'relation'to'Sections'31'and'22'(P)'and'Sections'43,'45'and'79'

(H)'of'the'NIRC,'the'income'subject'to'income'tax'is'the'taxpayer’s'income'as'derived'and'computed' during'the'calendar'year,'his'taxable'year.'What'the'law'should'consider'for'the'purpose'of'determining' his'correct'taxable'income'and'his'corresponding'allowable'deductions'e.g.'personal'and'additional' deductions,'if'any,'had'already'been'determined'as'of'the'end'of'the'calendar'year. Petitioner’s'reliance'in'Umali'v.'Estanislao'is'misplaced'because'in'that'case'the'adjustment'provided'

by'Rep.'Act'No.'7167'effective'1992'was'made'to'cover'the'past'year'1991,'for'the'reason'that'it'is'a'

that'case,'the'legislative'intent'is'also'clear'in'the'records'of'the'House'of'Representatives’'Journal.'

This'is'not'so'in'the'case'at'bar.'There'is'nothing'in'the'NIRC'that'expresses'any'such'intent.'The'policy' declarations'in'its'enactment'do'not'indicate'it'was'a'social'legislation' that'adjusted'personal'and' additional'exemptions'according' to' the' poverty' threshold'level' nor'is' there'any'indication' that'its'

in'April'1998,'the'increased'amounts'of'personal'and'additional'exemptions'in'Section'35'were'not'yet'

available.'It'has'not'yet'accrued'as'of'December'31,'1997,'the'last'day'of'his'taxable'year.'Petitioner’s'

taxable'income'covers'his'income' for' the'calendar' year'1997.'The'law'cannot'be'given'retroactive' effect.'It'is'established'that'tax'laws'are'prospective'in'application,'unless'it'is'expressly'provided'to'

personal'and'additional'exemptions'under'Section'35'shall'be'given'retroactive'effect.'Conformably'

11

too,'personal'and'additional'exemptions'are'considered'as'deductions'from'gross'income.'Deductions'

for'income'tax'purposes'partake'of'the'nature'of'tax'exemptions,'hence'strictly'construed'against'the'

taxpayer'and'cannot'be'allowed'unless'granted'in'the'most'explicit'and'categorical'language'too'plain'to'

be'mistaken.'They'cannot'be'extended'by'mere'implication'or'inference.'And,'where'a'provision'of'law'

speaks'categorically,'the'need'for'interpretation'is'obviated,'no'plausible'pretense'being'entertained'

to'justify'non^compliance.'All'that'has'to'be'done'is'to'apply'it'in'every'case'that'falls'within'its'terms.'

12

PADILLA,'J.:

FACTS:& '

Umali&vs.&Estanislao

G.R$Nos.$104037$and$104069,$May$29,$1992

Digest'by:'ARBAS,'Andrei'Christopher'G.

Congress'enacted'Rep.'Act'7167,'entitled'“AN'ACT'ADJUSTING'THE'BASIC'PERSONAL'AND'ADDITIONAL'

EXEMPTIONS' ALLOWABLE' TO' INDIVIDUALS' FOR' INCOME' TAX' PURPOSES' TO' THE' POVERTY'

THRESHOLD'LEVEL,'AMENDING'FOR'THE'PURPOSE'SECTION'29,'PARAGRAPH'[L],'ITEMS'(1)'AND'

(2)'[A]'OF'THE'NATIONAL'INTERNAL'REVENUE'CODE,'AS'AMENDED,'AND'FOR'OTHER'PURPOSES.”'

The'said'Act'was'signed'and'approved'by'the'President'on'19'December'1991'and'published'on'14'

January'1992'in'“Malaya”'a'newspaper'of'general'circulation.

On' 26' December' 1991,' respondents' promulgated' Revenue' Regulations' No.' 1^92' prescribing' the'

collection'at'source'of'income'tax'on'compensation'income'paid'on'or'after'January'1,'1992'under'

the'Revised'Withholding'Tax'Tables'which'take'into'account'the'increase'of'personal'and'additional'

exemptions.

Thereafter,' Revenue' Regulations'No.' 6^82'is' amended' by' Revenue' Regulations'No.' 1^86' providing' that' each' employee' shall' be' allowed' to' claim' the' following' amount' of' exemption' with' respect' to' compensation'paid' on' or'after' January' 1,' 1992'effective' on' compensation'income' from' January' 1,'

1992.

to'implement'Rep.'Act'No.' 7167'with' respect' to' taxable'income' of'individual' taxpayers'earned' or'

received'on'or'after'1'January'1991'or'as'of'taxable'year'ending'31'December'1991'and'to'enjoin'the'

respondents'from'implementing'Revenue'Regulations'No.'1^92.

ISSUE: & '

Whether' or' not' the' Rep.' Act' 7167' covers' or' applies' to' compensation' income' earned' or' received'

during'calendar'year'1991.

HELD: &

YES.' The' Court' ruled' that' Rep.' Act' 7167' should' cover' or' extend' to' compensation' income' earned' or' received' during' calendar' year' 1991.' The' Court' considered' the'legislative'intent' of' Congress'in'

enacting'Rep.'Act'7167,'that'although'its'passage'was'delayed'and'it'did'not'become'effective'law'until'

30'January'1992,'the'Bill'provides'for'increased'personal'additional'exemptions'to'individuals'in'view'

of'the'higher'standard'of'living.'It'limits'the'amount'of'income'of'individuals'subject'to'income'tax'to'

enable'them'to'spend'for'basic'necessities'and'have'more'disposable'income.'Further,'it'is'imperative'

The'Court'observed'that'Rep.'Act'7167,'speaks'of'the'adjustments'that'it'provides'for,'as'adjustments'

“to'the'poverty'threshold'level.”'Certainly,'“the'poverty'threshold'level”'is'the'poverty'threshold'level'at'

the'time'Rep.'Act'7167'was'enacted'by'Congress,'not'poverty'threshold'levels'in'futuro,'at'which'time'

there'may'be'need'of'further'adjustments'in'personal'exemptions.'In'the'end,'it'is'the'lower^income'

and'additional'exemptions.'To'that'extent,'the'Act'is'a'social'legislation'intended'to'alleviate'in'part'

the'present'economic'plight'of'the'lower'income'taxpayers.'It'is'intended'to'remedy'the'inadequacy'of'

the'existing'personal'and'additional'exemptions'for'individual'taxpayers.

Thus,' Rep.' Act' 7167,' which' became' effective' on' 30' January' 1992,' the' increased' exemptions' are'

13

literally'available'on'or'before'15'April'1992.'But'these'increased'exemptions'can'be'available'on'15'

April'1992'only'in'respect'of'compensation'income'earned'or'received'during'the'calendar'year'1991.'

Therefore,'Revenue'Regulations'No.'1^92'would,'in'effect,'postpone'the'availability'of'the'increased'

exemptions'to'1'January^15'April'1993,'and'thus,'literally'defer'the'effectivity'of'Rep.'Act'7167'to'1'

January'1993.'

The'implementing'regulations'collide'frontally'with'Rep.'Act'7167'which'states'that'the'statute'“shall'

take'effect' upon'its'approval.”' 'The'law^making'authority' has' spoken'and' the' Court' cannot' refuse' to'apply'the'lawmaker’s'words.'Whether'or'not'the'government'can'afford'the'drop'in'tax'revenues' resulting'from'such'increased'exemptions'was'for'Congress'to'decide.

Sections'1,'3'and'5'of'Revenue'Regulations'No.'1^92'which'provide'for'the'effectivity'of'the'regulation'

were'thereby'set'aside.'They'should'take'effect'on'compensation'income'earned'or'received'from'1'

January'1991.

of Corporations

14

AFISCO&Insurance&Corporation&vs.&Court&of&Appeals

G.R.$No.$112675$January$25,$1999

PANGANIBAN,'J.:

FACTS:

Digest:'AUMENTADO,'Adrian'F.

in' order' to' facilitate' the' handling' of' business' contracted' with' a' nonresident' foreign' reinsurance'

On'appeal,'the'CA'ruled'that'the'pool'of'machinery'insurers'was'a'partnership'taxable'as'a'corporation,' and' that' the'latter’s' collection' of' premiums' on' behalf' of'its'members,' the' ceding' companies,' was' taxable'income.'

ISSUE:

Whether'or'not'the'clearing'house'or'insurance'pool'be'deemed'a'partnership'or'an'association'that'

is'taxable'as'a'corporation'under'the'National'Internal'Revenue'Code?

HELD:

The'Court'in'Evangelista'v.'Collector'of'Internal'Revenue'held'that'the'law'covered'these'unregistered' partnerships'and'even'associations' or'joint'accounts,'which' had' no'legal' personalities'apart' from' their'individual'members.'The' term'partnership'includes'a'syndicate,'group,'pool,'joint'venture'or' or'venture'is'carried'on.

The'ceding'companies'entered'into'a'Pool'Agreement'that'would'handle'all'the'insurance'businesses' covered'under'their'quota^share'reinsurance'treaty'and'surplus'reinsurance'treaty'with'Munich.'The'

following'unmistakably'indicates'a'partnership'or'an'association'covered'by'Section'24'of'the'NIRC:'

(1)'The'pool'has'a'common'fund,'consisting'of'money'and'other'valuables'that'are'deposited'

in' the' name' and' credit' of' the' pool.' This' common' fund' pays' for' the' administration' and' operation'expenses'of'the'pool.

(2)'The'pool'functions'through'an'executive'board,'which'resembles'the'board'of'directors'of'

a'corporation,'composed'of'one'representative'for'each'of'the'ceding'companies.

(3)'True,'the'pool'itself'is'not'a'reinsurer'and'does'not'issue'any'insurance'policy;'however,'

companies'and'Munich,'because'without'it'they'would'not'have'received'their'premiums.'The' ceding'companies'share'in'the'business'ceded'to'the'pool'and'in'the'expenses'according'to'a' the'primordial'reason'for'the'pools'formation.'As'aptly'found'by'the'CTA:

petitioners'admit,'that'their'association'or'co^action'was'indispensable'[to]'the'transaction'of'

15

GANCAYCO,'J.

FACTS:&

Pascual&vs.&Commissioner&of&Internal&Revenue

G.R.$No.$78133$October$18,$1988

Digest:'AUMENTADO,'Adrian'F.

Petitioners'bought'two'(2)'parcels'of'land'from'Santiago'Bernardino,'et'al.'and'at'a'later'date,'they'

petitioners'in'1968'to'Marenir'Development'Corporation,'while'the'three'parcels'of'land'were'sold'

1968'and'1970.'The'corresponding'capital'gains'taxes'were'paid'by'petitioners'in'1973'and'1974'by'

availing'of'the'tax'amnesties'granted'in'the'said'years.'

However,'in'a'letter'of'then'Acting'BIR'Commissioner'Plana,'petitioners'were'assessed'and'required' that'petitioners'as'co^owners'in'the'real'estate'transactions'formed'an'unregistered'partnership'or' joint'venture' taxable'as'a'corporation.'Also,' the'unregistered'partnership'was'subject' to'corporate' individual'income' tax;'and' that' the'availment'of' tax'amnesty'by'petitioners'relieved'petitioners'of' their'individual'income'tax'liabilities'but'did'not'relieve'them'from'the'tax'liability'of'the'unregistered'

ISSUE:&

Whether'or'not'an'unregistered'partnership'or'joint'venture'exists?

HELD:

There'is'no'unregistered'partnership'or'joint'venture.

There'is'no'evidence'that'petitioners'enttered'into'an'agreement' to'contribute'money,'property'or'

instant'case,'petitioners'bought'two'(2)'parcels'of'land'in'1965.'They'did'not'sell'the'same'nor'make'

any'improvements'thereon.'In'1966,'they'bought'another'three'(3)'parcels'of'land'from'one'seller.'It'

was'only'1968'when'they'sold'the'two'(2)'parcels'of'land'after'which'they'did'not'make'any'additional'

or'new'purchase.'The'remaining'three'(3)'parcels'were'sold'by'them'in'1970.'The'transactions'were'

isolated.'The'character'of'habituality'peculiar'to'business'transactions'for'the'purpose'of'gain'was'not'

present.

The'sharing'of'returns'does'not'in'itself'establish'a'partnership'whether'or'not'the'persons'sharing'

therein'have'a'joint'or'common'right'or'interest'in'the'property.'There'must'be'a'clear'intent'to'form'

a'partnership,'the'existence'of'a'juridical'personality'different'from'the'individual'partners,'and'the'

freedom'of'each'party'to'transfer'or'assign'the'whole'property.

There' is' clear' evidence' of' co^ownership' between' the' petitioners.' The' two' isolated' transactions' whereby'they'purchased'properties'and'sold'the'same'a'few'years'thereafter'did'not'thereby'make' considered'to'have'formed'an'unregistered'partnership'which'is'thereby'liable'for'corporate'income' tax,'as'the'respondent'commissioner'proposes.

16

AQUINO,'J.

FACTS:

Obillos&vs.&Commissioner&of&Internal&Revenue

G.R.$No.$L(68118.$October$29,$1985

Digest'by:'AVILA,'Alyssa'Daphne'M.

This'case'is'about'the'income'tax'liability'of'four'brothers'and'sisters'who'sold'two'parcels'of'land'

which'they'had'acquired'from'their'father.

On'March'2,'1973' Jose'Obillos,'Sr.'completed'payment' to'Ortigas'&'Co.,'Ltd.'on' two'lots'located'at' Greenhills,'San'Juan,'Rizal.'The'next'day'he'transferred'his'rights'to'his'four'children,'the'petitioners,' to'enable'them'to'build'their'residences.'Presumably,'the'Torrens'titles'issued'to'them'would'show' that' they'were' co^owners' of' the' two'lots.' In' 1974,' the' petitioners' resold' them' to' the'Walled' City'

thereof'or'of'P16,792.

In'April,'1980,'the'Commissioner'of'Internal'Revenue'required'the'four'petitioners'to'pay'corporate'

He'assessed'P37,018'as'corporate'income' tax,'P18,509'as'50%' fraud'surcharge'and'P15,547.56'as'

petitioner'in'the'sum'of'P33,584'as'a'“'taxable'in'full'(not'a'mere'capital'gain'of'which'½'is'taxable)'

surcharge'and'the'accumulated'interest.

The' Commissioner' acted' on' the' theory' that' the' four' petitioners' had' formed' an' unregistered'

partnership'or'joint'venture'within'the'meaning'of'sections'24(a)'and'84(b)'of'the'Tax'Code.'

ISSUES:

1.'Whether'or'not'the'petitioners'have'formed'a'partnership'under'article'1767'of'the'Civil'Code.

2.'Whether'or'not'the'petitioners'are'liable'under'the'Tax'Code.

HELD:

1.'NO.'To'regard'the'petitioners'as'having'formed'a'taxable'unregistered'partnership'would'result'in'

Their'original'purpose'was' to'divide' the'lots' for'residential'purposes.' If'later'on' they' found'it'not' feasible'to'build'their'residences'on'the'lots'because'of'the'high'cost'of'construction,'then'they'had'no' choice'but'to'resell'the'same'to'dissolve'the'co^ownership.'The'petitioners'were'not'engaged'in'any' the'dissolution'of'the'co^ownership.'

Article'1769(3)'of'the'Civil'Code'provides'that'“the'sharing'of'gross'returns'does'not'of'itself'establish'

a'partnership,'whether'or'not'the'persons'sharing'them'have'a'joint'or'common'right'or'interest'in'

any'property'from'which'the'returns'are'derived”.'There'must'be'an'unmistakable'intention'to'form'a'

partnership'or'joint'venture.

2.' NO.' Not' all' co^ownerships' are' deemed' unregistered' partnership.' A' co^ownership' owning' properties'which'produce'income'should'not'automatically'be'considered'partners'of'an'unregistered'

17

partnership,'or'a'corporation,'within'the'purview'of'the'income'tax'law.'To'hold'otherwise,'would'be'

to'subject'the'income'of'all'co^ownerships'of'inherited'properties'to'the'tax'on'corporations,'inasmuch'

as'if'a'property'does'not'produce'an'income'at'all,'it'is'not'subject'to'any'kind'of'income'tax,'whether'

the'income'tax'on'individuals'or'the'income'tax'on'corporation.'

18

BARREDO,'J.

FACTS:

Oña&vs.&Commissioner&of&Internal&Revenue

G.R.$No.$L(19342$May$25,$1972

Digest'by:'AVILA,'Alyssa'Daphne'M.

T.'Oña,' the'surviving'spouse'was'appointed'administrator'of' the'estate'of'said'deceased.'Later,' the' administrator'submitted'the'project'of'partition.'The'project'of'partition'shows'that'the'heirs'have'

undivided'one^half'(1/2)'interest'in'ten'parcels'of'land'with'a'total'assessed'value'of'P87,860.00,'six'

houses'with'a'total'assessed'value'of'P17,590.00'and'an'undetermined'amount'to'be'collected'from'

the'War'Damage'Commission.'Later,'they'received'from'said'Commission'the'amount'of'P50,000.00,'

more'or'less.'This'amount'was'not'divided'among'them'but'was'used'in'the'rehabilitation'of'properties'

owned'by'them'in'common.

Although' the' project' of' partition' was' approved' by' the' Court,' no' attempt' was' made' to' divide' the' properties'therein'listed.'Instead,'the'properties'remained'under'the'management'of'Lorenzo'T.'Oña' who' used' said'properties'in' business' by'leasing' or' selling' them'and'investing' the'income' derived' therefrom' and' the' proceeds' from' the' sales' thereof' in' real' properties' and' securities.' As' a' result,' petitioners’'properties'and'investments'gradually'increased.'From'said'investments'and'properties' of'stocks,'dividends,'rentals'and'interests.'Every'year,'petitioners'returned'for'income'tax'purposes' their'shares'in'the'net'income'derived'from'said'properties'and'securities'and/or'from'transactions' involving'them'However,'petitioners'did'not'actually'receive'their'shares'in'the'yearly'income.'The' income'was'always'left'in'the'hands'of'Lorenzo'T.'Oña'who,'as'heretofore'pointed'out,'invested'them' in'real'properties'and'securities.

On' the' basis' of' the' foregoing' facts,' respondent' (Commissioner' of' Internal' Revenue)' decided' that' petitioners' formed'an'unregistered'partnership'and'therefore,'subject'to'the'corporate'income'tax,'

pursuant'to'Section'24,'in'relation'to'Section'84(b),'of'the'Tax'Code.'

ISSUE:

Whether' or' not' the' petitioners' have' formed' an' unregistered' partnership,' and' hence' liable' for' corporate'income'taxes'under'the'Tax'Code.

HELD:

YES.'For' tax'purposes,' the'co^ownership'of'inherited'properties'is'automatically'converted'into'an' unregistered' partnership' the' moment' the' said' common' properties' and/or' the' incomes' derived' their'respective'shares'in' the'inheritance'as'determined'in'a'project'partition'either'duly'executed' in' an' extrajudicial' settlement' or' approved' by' the' court' in' the' corresponding' testate' or' intestate' proceeding.'The'reason'for'this'is'simple.'From'the'moment'of'such'partition,'the'heirs'are'entitled' to'manage' and' dispose' of' as' exclusively' his' own'without' the'intervention' of' the' other' heirs,' and,' accordingly'he'becomes'liable'individually'for'all'taxes'in'connection'therewith.'If'after'such'partition,' he'allows'his'share'to'be'held'in'common'with'his'co^heirs'under'a'single'management'to'be'used' no'document'or'instrument'were'executed'for'the'purpose,'for'tax'purposes,'at'least,'an'unregistered' partnership'is'formed.'This'is'exactly'what'happened'to'petitioners'in'this'case.

The'Tax'Court'found'that'instead'of'actually'distributing'the'estate'of'the'deceased'among'themselves'

pursuant'to'the'project'of'partition,'“the'properties'remained'under'the'management'of'Oña'who'used'

19

said'properties'in'business'by'leasing'or'selling'them'and'investing'the'income'derived'therefrom'and' the'proceed'from'the'sales'thereof'in'real'properties'and'securities,”'as'a'result'of'which'said'properties' and'investments'steadily'increased'yearly.'It'is'thus'incontrovertible'that'petitioners'did'not,'contrary' to' their' contention,' merely' limit' themselves' to' holding' the' properties' inherited' by' them.' In' these' circumstances,'it'is'then'the'considered'view'that'from'the'moment'petitioners'allowed'not'only'the' incomes'from'their'respective'shares'of'the'inheritance'but'even'the'inherited'properties'themselves'to' be'used'by'Oña'as'a'common'fund'in'undertaking'several'transactions'or'in'business,'with'the'intention' such'incomes'to'a'common'fund'and,'in'effect,'they'thereby'formed'an'unregistered'partnership'within' the'purview'of'the'above^mentioned'provisions'of'the'Tax'Code.

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

heirs'in'any'inheritance'to'circumvent'and'render'meaningless'Sections'24'and'84(b)'of'the'National'

Internal'Revenue'Code.

Income

20

CASTRO,'J.

FACTS:

Commissioner&of&Internal&Revenue&vs.&Manning

G.R.$No.$L(28398.$August$6,$1975

Digest'by:'BAUTISTA,'Cecille'Catherine'A.

MANTRASCO'had'an'authorized'capital'stock'of'P2,500,000'divided'into'25,000'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,'a'trust'agreement'on'Reese’s'and'the'respondents’'interests'in'MANTRASCO'was'

and' the' respondents.' On' October' 19,' 1954' Reese' died.' On'November' 25,1963' the' entire' purchase' subsequently' terminated'and' the' trustees'delivered' to'MANTRASCO'all' the'shares'which' they'were'

taxes'to'the'respondents'for'1958.'Commissioner'argues'that'the'full'value'of'the'shares'redeemed'from'

Reese'by'MANTRASCO'which'were'subsequently'distributed'to'the'respondents'as'stock'dividends'in'

1958'should'be'taxed'as'income'of'the'respondents'for'that'year,'the'said'distribution'being'in'effect'a'

distribution'of'cash.

ISSUE:

Whether'or'not'respondents'are'subject'to'income'tax

HELD:&

Yes.'The'intention' of' the' parties' to' the' trust'agreement'was' to' treat' the' 24,700' shares' of'Reese'as' absolutely'outstanding'shares'of'Reese’s'estate'until'they'were'fully'paid.'As'such,'their'declaration'as'

treasury'stock'dividend'in'1958'was'violative'of'public'policy.'A'stock'dividend,'being'one'payable'in'

capital'stock,'cannot'be'declared'out'of'outstanding'corporate'stock,'but'only'from'retained'earnings:'

lieu'of'a'cash'dividend.'The'respondents'conferred'to'themselves'the'full'worth'and'value'of'Reese’s'

corporate'holdings'with'the'use'of'the'very'earnings'of'the'companies.'Such'package'device'cannot'be'

are'subject'to'income'tax.

Income Tax

(MCIT)

21

PERALTA,'J.

FACTS:

CIR&vs.&Philippine&Airlines,&Inc.&(PAL)

G.R.$No.$179800.$$$February$4,$2010

Digest'by:'BAUTISTA,'Cecille'Catherine'A.

PAL' availed' of' the' communication' services' of' the' Philippine' Long' Distance' Company' (PLDT).' For' the' period' January' 1,' 2002' to' December' 31,' 2002,' PAL' allegedly' paid' PLDT' the' 10%' (Overseas'

Communications'Tax)'OCT'in'the'amount'of'P134,431.95'on'its'overseas'telephone'calls.'Subsequently,'

2002'citing'as'legal'bases'Section'13'of'Presidential'Decree'No.'1590'and'BIR'Ruling'No.'97^94'dated'

2003'and'opted'for'zero'basic'corporate'income'tax,'which'was'lower'than'the'2%'franchise'tax,'it'had'

complied'with'the'“in'lieu'of'all'other'taxes”'clause'of'Presidential'Decree'(P.D.)'No.'1590.'Thus,'it'was'

no'longer'liable'for'all'other'taxes'of'any'kind,'nature,'or'description,'including'the'10%'OCT,'and'the'

erroneous'payments'thereof'entitled'it'to'a'refund'pursuant'to'its'franchise.'Petitioner'CIR,'on'the'other'

hand,'insists'that'Section'120'of'the'1997'NIRC,'as'amended,'imposes'10%'OCT'on'overseas'dispatch,'

message'or'conversion'originating'from'the'Philippines,'which'includes'PLDT'communication'services.'

It'further'stated'that'respondent'PAL,'in'order'for'it'to'be'not'liable'for'other'taxes,'in'this'case'the'10%'

OCT,'should'pay'the'2%'franchise'tax,'since'it'did'not'pay'any'amount'as'its'basic'corporate'income'tax.

ISSUE:

Whether'or'not'respondent'PAL'is'entitled'to'the'tax'refund'claimed

HELD:

Yes.' The' Court,' citing' a' similar' case' entitled' Commissioner' of' Internal' Revenue' vs.' PAL,' ruled' that'

Presidential'Decree'1590'granted'Philippine'Airlines'an'option'to'pay'the'lower'of'two'alternatives:'

(a)'“the'basic'corporate'income'tax'based'on'PAL’s'annual'net'taxable'income'computed'in'accordance' with'the'provisions'of'the'National'Internal'Revenue'Code”'or'(b)'“a' franchise'tax'of'two'percent'of' gross'revenues.”'Availment'of'either'of'these'two'alternatives'shall'exempt'the'airline'from'the'payment' of'Section' 13' rebuts' the' argument' of' the' CIR' that' the' “in'lieu' of'all' other' taxes”' proviso'is'a'mere'

incentive'that'applies'only'when'PAL'actually'pays'something.'It'is'clear'that'PD'1590'intended'to'give'

respondent'the'option'to'avail'itself'of'Subsection'(a)'or'(b)'as'consideration'for'its'franchise.'Either'

option'excludes'the'payment'of'other'taxes'and'dues'imposed'or'collected'by'the'national'or'the'local'

government.'PAL'has'the'option'to'choose'the'alternative'that'results'in'lower'taxes.'It'is'not'the'fact'of'

tax'payment'that'exempts'it,'but'the'exercise'of'its'option.”'

22

The&Manila&Banking&Corporation&vs.&Commissioner&of&Internal&Revenue

G.R.$No.$168118$August$28,$2006

'

SANDOVAL^GUTIERREZ,'J.:

FACTS:'

Digest'by:'CABATU,'Ricky'Boy'V.

The'Monetary'Board'of'the'BSP'issued'a'resolution'pursuant'to'Section'29'of'R.A.'No.'265'(the'Central'

Bank'Act),''prohibiting'petitioner'from'engaging'in'business'by'reason'of'insolvency.'Thus,'petitioner'

ceased'operations'that'year'and'its'assets'and'liabilities'were'placed'under'the'charge'of'a'government^

appointed'receiver.

Meanwhile,' R.A.' No.' 8424' (Comprehensive' Tax' Reform' Act' of' 1997)' became' effective.' One' of' the' changes'introduced'by'this'law'is'the'imposition'of'the'minimum'corporate'income'tax'on'domestic'

and'resident'foreign'corporations.'Implementing'this'law'is'Revenue'Regulations'No.'9^98'stating'that'

the'law'allows'a'four'(4)'year'period'from'the'time'the'corporations'were'registered'with'the'Bureau'

of'Internal'Revenue'(BIR)'during'which'the'minimum'corporate'income'tax'should'not'be'imposed.

After'12'years'since'petitioner'stopped'its'business'operations,' the'BSP'authorized'it' to'operate'as'

P33,816,164.00'for'taxable'year'1999.

whether'it'is'entitled'to'the'four'(4)^year'grace'period'reckoned'from'1999.'In'other'words,'petitioner’s'

position'is'that'since'it'resumed'operations'in'1999,'it'will'pay'its'minimum'corporate'income'tax'only'

after'four'(4)'years'thereafter.

BIR'issued'a'BIR'Ruling'stating' that'petitioner'is'entitled' to' the' four' (4)^year'grace'period.'Since'it'

reopened'in'1999,'the'minimum'corporate'income'tax'may'be'imposed'“not'earlier'than'2002,'i.e.'the'

fourth'taxable'year'beginning'1999.”'According'to'the'BIR,'although'TMBC'had'been'registered'with'

the'BIR'before'1994,'yet'it'did'not'have'any'business'from'1987'to'June'1999'due'to'its'involuntary'

closure.'Thus,'TMBC’s'reopening'last'July'1999'is'akin'to'the'commencement'of'business'operations'of'

a'new'corporation,'in'consideration'of'which'the'law'allows'a'4^year'period'during'which'MCIT'is'not'

to'be'applied.'

MCIT'for'taxable'year'1999.

ISSUE:&

Whether'petitioner'is'entitled' to'a'refund'of'its'minimum'corporate'income' tax'paid' to' the'BIR' for'

taxable'year'1999.

HELD:&

Yes.'According'to'Revenue'Regulations'No.'4^95,'the'date'of'commencement'of'operations'of'a'thrift'

was'issued'to'it'by'the'Monetary'Board'of'the'BSP,'whichever'comes'later.

On'the'other'hand,'Revenue'Regulations'No.'9^98,'implementing'R.A.'No.'8424'imposing'the'minimum'

corporate'income'tax'on'corporations,'provides'that'for'purposes'of'this'tax,'the'date'when'business'

operations'commence'is'the'year'in'which'the'domestic'corporation'registered'with'the'BIR.'

SC'held'that'Revenue'Regulations'No.'4^95,'not'Revenue'Regulations'No.'9^98,'applies'to'petitioner,'

being'a'thrift'bank.'It'is,'therefore,'entitled'to'a'grace'period'of'four'(4)'years'counted'from'June'23,'

23

1999'when'it'was'authorized'by'the'BSP'to'operate'as'a'thrift'bank.'Consequently,'it'should'only'pay'its'

minimum'corporate'income'tax'after'four'(4)'years'from'1999.

Thus,'petitioner'is'entitled'to'a'refund. '

24

Chamber&of&Real&Estate&and&Builder’s&Associations&(CREBA),&Inc.&vs.&Romulo,&et&al.

G.R.$No.$16075.$$March$9,$2010

CORONA,'J.:

FACTS:&

Digest'by:'CABATU,'Ricky'Boy'V.

Under'the'MCIT'scheme,'a'corporation,'beginning'on'its'fourth'year'of'operation,'is'assessed'an'MCIT'

of'2%'of'its'gross'income'when'such'MCIT'is'greater'than'the'normal'corporate'income'tax'imposed'

under'Section'27(A).'If'the'regular'income'tax'is'higher'than'the'MCIT,'the'corporation'does'not'pay'

the'MCIT.'Any'excess'of'the'MCIT'over'the'normal'tax'shall'be'carried'forward'and'credited'against'the'

normal'income'tax'for'the'three'immediately'succeeding'taxable'years.

Petitioner'assails' the' validity' of' the'imposition' of'MCIT' on' corporations.' Petitioner'argues' that' the' MCIT'violates'the'due'process'clause'because'it'levies'income'tax'even'if'there'is'no'realized'gain.'It' other'direct'expenses;'other'major'expenditures,'such'as'administrative'and'interest'expenses'which' are'equally'necessary'to'produce'gross'income,'were'not'taken'into'account.'Thus,'pegging'the'tax'base' income,'unlike'net'income,'is'not'“realized'gain.”

ISSUE:&

Whether'or'not'the'imposition'of'the'MCIT'on'domestic'corporations'is'unconstitutional.

HELD:&

because'capital'is'not'income.'In'other'words,'it'is'income,'not'capital,'which'is'subject'to'income'tax.' However,'the'MCIT'is'not'a'tax'on'capital.

The'MCIT'is'imposed'on'gross'income'which'is'arrived'at'by'deducting'the'capital'spent'by'a'corporation'

in'the'sale'of'its'goods,'i.e.,'the'cost'of'goods'and'other'direct'expenses'from'gross'sales.'Clearly,'the'

capital'is'not'being'taxed.

Furthermore,'the'MCIT'is'not'an'additional'tax'imposition.'It'is'imposed'in'lieu'of'the'normal'net'income' tax,'and'only'if'the'normal'income'tax'is'suspiciously'low.'The'MCIT'merely'approximates'the'amount'

of'net'income'tax'due'from'a'corporation,'pegging'the'rate'at'a'very'much'reduced'2%'and'uses'as'the'

base'the'corporation’s'gross'income.

Further,'Revenue'Regulation'9^98,'in'declaring'that'MCIT'should'be'imposed'whenever'such'corporation'

even'if'a'corporation'incurs'a'net'loss'in'its'business'operations'or'reports'zero'income'after'deducting'

its'expenses,'it'is'still'subject'to'an'MCIT'of'2%'of'its'gross'income.'This'is'consistent'with'the'law'which'

imposes'the'MCIT'on'gross'income'notwithstanding'the'amount'of'the'net'income.'But'the'law'also'

states'that'the'MCIT'is'to'be'paid'only'if'it'is'greater'than'the'normal'net'income.'Obviously,'it'may'well'

be'the'case'that'the'MCIT'would'be'less'than'the'net'income'of'the'corporation'which'posts'a'zero'or'

negative'taxable'income.

Income"Tax"on

Resident Foreign

Corporation

25

Commissioner&of&Internal&Revenue&vs.&British&Overseas&Airways&Corporation&(BOAC)& and&Court&of&Tax&Appeals

G.R.No.$L(65773(74.$April$30,$1987

MELENCIO^HERRERA,'J.

FACTS:

Digest'by:'De'Guzman,'Pristine'B.

British' Overseas' Airways' Corporation' (BOAC)' is' a' 100%' British' Government^owned' corporation' organized'and'existing'under'the'laws'of'the'United'Kingdom'It'is'engaged'in'the'international'airline' business'and'is'a'member^signatory'of'the'Interline'Air'Transport'Association'(IATA).'BOAC'did'not' carry'passengers'and/or'cargo'to'or'from'the'Philippines,'although'during'the'period'covered'by'the' assessments,'it'maintained'a'general'sales'agent'in'the'Philippines'^'Wamer'Barnes'and'Company,'Ltd.,' and'later'Qantas'Airways'–'which'was'responsible' for'selling'BOAC'tickets'covering'passengers'and' cargoes.

1959'to'1963.'BOAC'protested.'Investigation'resulted'to'an'assessment'in'the'amount'of'P858,307.79'

refund'in'the'amount'of'P858,307.79'with'the'CIR.'However,'BOAC'did'not'wait'for'the'decision'of'the'

'

amounts'of'P1,000.00'and'P1,800.00'as'compromise'penalties'for'violation'of'Section'46'(requiring'

(NIRC).BOAC'in'a'letter'requested' that' the'assessment' to'countermanded'and'set'aside.'CIR'denied'

to'1970^71'plus'P1,000.00'as'compromise'penalty'under'Section'74'of'the'Tax'Code.'BOAC'asked'for'

2'cases'before'the'CTA'were'consolidated'Tax'Court'rendered'the'assailed'joint'Decision'reversing'the'

CIR.'Its'position'was'that'income'from'transportation'is'income'from'services'so'that'the'place'where'

services'are'rendered'determines'the'source.'It'further'held'that'the'proceeds'of'sales'of'BOAC'passage'

tickets'in'the'Philippines'by'Warner'Barnes'and'Company,'Ltd.,'and'later'by'Qantas'Airways,'during'the'

period'in'question,'do'not'constitute'BOAC'income'from'Philippine'sources'“sinceno'service'of'carriage'

of'passengers'or'freight'was'performed'by'BOAC'within'the'Philippines”'and,'therefore,'said'income'is'

not'subject'to'Philippine'income'tax.

ISSUE:

HELD:

or'“engaging'in”'or'“transacting”'business.'The'term'implies'a'continuity'of'commercial'dealings'and' arrangements,'and'contemplates,'to'that'extent,'the'performance'of'acts'or'works'or'the'exercise'of' some'of'the'functions'normally'incident'to,'and'in'progressive'prosecution'of'commercial'gain'or'for'the' purpose'and'object'of'the'business'organization.'“In'order'that'a'foreign'corporation'may'be'regarded' as' doing' business' within' a' State,' there' must' be' continuity' of' conduct' and' intention' to' establish' a' continuous'business,'such'as'the'appointment'of'a'local'agent,'and'not'one'of'a'temporary'character.' BOAC,'during'the'periods'covered'by'the'subject'^'assessments,'maintained'a'general'sales'agent'in'the'

Philippines,'That'general'sales'agent,'from'1959'to'1971,'“was'engaged'in'(1)selling'and'issuing'tickets;'

(2)'breaking'down'the'whole'trip'into'series'of'trips'^'each'trip'in'the'series'corresponding'to'a'different'

26

airline' company;' (3)' receiving' the' fare' from' the'whole' trip;'and' (4)' consequently'allocating' to' the' various'airline'companies'on'the'basis'of'their'participation'in'the'services'rendered'through'the'mode'

of'interline'settlement'as'prescribed'by'Article'VI'of'the'Resolution'No.'850'of'the'IATA'Agreement.”'

Those'activities'were'in'exercise'of'the'functions'which'are'normally'incident'to,'and'are'in'progressive' pursuit'of,'the'purpose'and'object'of'its'organization'as'an'international'air'carrier.'In'fact,'the'regular' sale'of'tickets,'its'main'activity,'is'the'very'lifeblood'of'the'airline'business,'the'generation'of'sales'being' the'paramount'objective.'There'should'be'no'doubt'then'that'BOAC'was'“engaged'in”'business'in'the' Philippines' through'a'local'agent'during' the'period'covered'by' the'assessments.'Accordingly,'it'is'a' resident'foreign'corporation'subject'to'tax'upon'its'total'net'income'received'in'the'preceding'taxable' year'from'all'sources'within'the'Philippines.

'

27

Commissioner&of&Internal&Revenue&vs.&British&Overseas&Airways&Corporation&(BOAC)& and&Court&of&Tax&Appeals

G.R.No.$L(65773(74.$$April$30,$1987

MELENCIO^HERRERA,'J.

FACTS:

Digest'by:'DE'GUZMAN,'Pristine'B.

British' Overseas' Airways' Corporation' (BOAC)' is' a' 100%' British' Government^owned' corporation' organized'and'existing'under'the'laws'of'the'United'Kingdom'It'is'engaged'in'the'international'airline' business'and'is'a'member^signatory'of'the'Interline'Air'Transport'Association'(IATA).'BOAC'did'not' carry'passengers'and/or'cargo'to'or'from'the'Philippines,'although'during'the'period'covered'by'the' assessments,'it'maintained'a'general'sales'agent'in'the'Philippines'^'Wamer'Barnes'and'Company,'Ltd.,' and'later'Qantas'Airways'–'which'was'responsible'for'selling'BOAC'tickets'covering'passengers'and' cargoes.

1959'to'1963.'BOAC'protested.'Investigation'resulted'to'an'assessment'in'the'amount'of'P858,307.79'

refund'in'the'amount'of'P858,307.79'with'the'CIR.'However,'BOAC'did'not'wait'for'the'decision'of'the'

'

amounts'of'P1,000.00'and'P1,800.00'as'compromise'penalties'for'violation'of'Section'46'(requiring'

(NIRC).BOAC'in'a'letter'requested'that'the'assessment'to'countermanded'and'set'aside.'CIR'denied'

to'1970^71'plus'P1,000.00'as'compromise'penalty'under'Section'74'of'the'Tax'Code.'BOAC'asked'for'

2'cases'before'the'CTA'were'consolidated'Tax'Court'rendered'the'assailed'joint'Decision'reversing'the'

CIR.'Its'position'was'that'income'from'transportation'is'income'from'services'so'that'the'place'where' services'are'rendered'determines'the'source.'It'further'held'that'the'proceeds'of'sales'of'BOAC'passage' tickets'in'the'Philippines'by'Warner'Barnes'and'Company,'Ltd.,'and'later'by'Qantas'Airways,'during' the'period'in'question,'do'not'constitute'BOAC'income' from'Philippine'sources'“sinceno'service'of' carriage'of'passengers'or'freight'was'performed'by'BOAC'within'the'Philippines”'and,'therefore,'said' income'is'not'subject'to'Philippine'income'tax.

ISSUE:&

Whether'proceeds'from'the'sale'of'BOAC'tickets'in'the'Philippines'by'Warner'Barnesand'Company,'

Ltd'are'considered'income'from'sources'within'the'Philippines

HELD:

Yes,'proceeds'from'the'sale'of'BOAC'tickets'in'the'Philippines'by'Warner'Barnes'andCompany,'Ltd.'are'

considered'income'from'sources'within'the'Philippines'hence'taxable'by'the'Philippine'government.'

personal'service'of'whatever'kind'and'in'whatever'form'paid,'or'from'profession,'vocations,'trades,' business,' commerce,' sales,' or' dealings' in' property,' whether' real' or' personal,' growing' out' of' the' ownership'or'use'of'or'interest'in'such'property;'also'from'interests,'rents,'dividends,'securities,'or'

from'any'source'whatever'(Sec.'29[3])

28

“The'phrase'‘income'from'any'source'whatever’'discloses'a'legislative'policy'to'include'all'income'not' expressly'exempted'within'the'class'of'taxable'income'under'our'laws.”'Income'means'“cash'received' activity' or' service' that'produced' the'income.' For' the' source' of'income' to'be'considered'as'coming' BOAC’s'case,'the'sale'of'tickets'in'the'Philippines'is'the'activity'that'produces'the'income.'The'tickets' exchanged'hands'here'and'payments'for'fares'were'also'made'here'in'Philippine'currency.'The'site'of' Philippine'territory,'enjoying'the'protection'accorded'by'the'Philippine'government.'Inconsideration' the'site'of'income'taxation.'Admittedly,'BOAC'was'an'off^line'international'airline'at'the'time'pertinent' to'this'case.'The'test'of'taxability'is'the'“source”;'and'the'source'of'an'income'is'that'activity' 'which' produced' the'income.'Unquestionably,' the' passage' documentations'in' these' cases'were' sold'in' the' Philippines' and' the' revenue' therefrom' was' derived' from' an' activity' regularly' pursued' within' the' Philippines.'And'even'if'the'BOAC'tickets'sold'covered'the'“transport'of'passengers'and'cargo'to'and' from'foreign'cities”,'it'cannot'alter'the'fact'that'income'from'the'sale'of'tickets'was'derived'from'the' Philippines.'The'word'“source”'conveys'one'essential'idea,'that'of'origin,'and'the'origin'of'the'income' herein'is'the'Philippines.

29

Steamship&Company&of&Svendborg&and&Steamship&Company&of&1912&vs.&Commissioner&

of&Interval&Revenue

CTA$EB$No.$117,$September$12,$2006

CASTANEDA,'JR.,'J.

FACTS:&

Digest'by:'DESTURA,'Kristina'Bianca'D.

Petitioner' Maersk^Tabacalera' Shippine,' Agency' (Filipinas),' Inc.' (Now' MAERSK^FILIPINAS,' INC.),' hereinafter'referred'to'as'“Maersk”,'is'a'corporation'duly'organized'and'existing'under'the'laws'of'the'

of'Svendborg'(SVENDBORG)'and'Steamship'Company'of'1912'(STEAMSHIP)'are'foreign'corporations'

organized'and'existing'under'the'laws'of'Denmark'and'engaged'in'international'shipping'with'Maersk'

as'the'general'agent'in'the'Philippines.'

On' January' 22,' 1992'Maersk' received' from' respondent' CIR' a' demand'letter' together'with' various'

years'1988'and'1989'in'the'aggregate'amount'of'P8,882,466.81.

Petitioners' duly' protested' the' said' demand' and' assessment.' In' a' decision' dated' August' 8,' 2002' Petitioners,'Svendborg'and'Steamship'were' ordered' to'collect'demurrage' fees' from'importers.'The' Demurrage.'The'demurrage'fee'is'a'fee'collected'for'the'inbound'cargoes'of'importers.'The'demurrage' signatory.'

CTA'Division.'

ISSUE:' '

Whether'or'not,'demurrage'fees'are'considered'as'income'of'the'petitioners,'as'international'carriers,' that'are'subject' to' the'35%'regular'corporate'income' tax'under'Sec.'25' (a)(1)'of' the'1977'NIRC'in'

addition'to'the'2.5%'tax'imposed'on'their'gross'Philippine'Billings'under'Sec.'25(a)(2).'

HELD: &

Petitioners' are' considered' as' resident' foreign' corporations' doing' business' in' the' Philippines.' As' a' resident' foreign' corporation,' petitioner'were' not'able' to' show' that' they'are' beyond' the' scope' of'

Section'25'(a)'of'the'NIRC'which'imposes'35%'regular'corporate'income'tax'on'the'net'income'of'all'

resident'foreign'corporations.'

Neither'did'the'provision'of'Sec.'25'(a)(2)'in'relation'to'Sec.'25'(a)(1)'preclude'the'imposition'upon'

international'carriers'such'as'petitioner'of'the'35%'regular'corporate'income'tax'and'citing'the'decision'

of'the'CTA'division,'to'construe'otherwise'would'be'to'provide'an'exemption'where'no'exemption'is'

intended.'Settled'is'the'rule'that'exemptions'from'taxation'are'construed'in'strictissimi'juris'against'

the'taxpayer.'

neither'capital'contributions'nor'incurrence'of'liabilities.'It'cannot'be'understood'in'any'other'manner'

30

except'in'the'concept'of'income'to'the'petitioners.'Income'means'“cash'received'or'its'equivalent;”'it'is'

Furthermore,'the'demurrage'fees'are'income'derived'from'sources'within'the'Philippines,'they'were'

31

VITUG,'J.

FACTS:&

Bank&of&America&NT&&&SA&vs.&Court&of&Appeals

G.R.$No.$103092$July$21,$1994

'

Digest'by:'DESTURA,'Kristina'Bianca'D.

Petitioner'is'a'foreign'corporation'duly'licensed'to'engage'in'business'in'the'Philippines'with'Philippine'

15%'tax.

recovery'of'the'amount'of'P1,041,424.03.

Section'24(b)'(2)'(ii)'of'the'National'Internal'Revenue'Code,'in'the'language'it'was'worded'in'1982'(the'

taxable'period'relevant'to'the'case'at'bench),'provided,'in'part:

Sec.'24.'Rates'of'tax'on'corporations.'.'.'.

(b)'Tax'on'foreign'corporations.'.'.'.

cent'(15%)'.'.'.'.”

the'above'provision'should'be'assessed'on'the'amount'actually'remitted'abroad,'which'is'to'say'that'

otherwise,'holds'the'position'that,'in'computing'the'15%'remittance'tax,'the'tax'should'be'inclusive'of'

the'sum'deemed'remitted.

Supreme'Court,'which'referred'it'to'the'Court'of'Appeals'which'the'latter'set'aside'the'decision'of'the'

Court'of'Tax'Appeals.'Hence,'this'petitions'for'review.

ISSUE:& &

tax'base.

HELD:& &

the'mechanism'of'withholding'of'taxes'at'source'operates'to'ensure'collection'of'the'tax,'and'which' respondent'claims' the'base'on'which'the'tax'is'computed'is'the'amount' to'be'paid'or'remitted,'the'

thereof'which'shall'be'collected'and'paid'as'provided'in'Sections'53'and'54'of'the'Tax'Code.'Thus:

Dividends' received' by' an' individual' who' is' a' citizen' or' resident' of' the' Philippines' from' a'

total'amount'thereof,'which'shall'be'collected'and'paid'as'provided'in'Sections'53'and'54'of'

this'Code.'

32

accordance'with'the'tax'withholding'device'provided'in'Sections'53'and'54'of'the'Tax'Code.'The'statute'

be'collected'and'paid'as'provided'in'Sections'53'and'54'of'this'Code.”'Where'the'law'does'not'qualify'

imposed'and'collected'at'source'and'necessarily'the'tax'base'should'be'the'amount'actually'applied'for' of'plain'words.'

is'absolutely'nothing'equivocal'or'uncertain'about'the'language'of'the'provision.'The'tax'is'imposed'

on'the'amount'sent'abroad,'and'the'law'calls'for'nothing'further.'The'taxpayer'is'a'single'entity,'and'it'

should'be'understandable'if,'such'as'in'this'case,'it'is'the'local'branch'of'the'corporation,'using'its'own'

local'funds,'which'remits'the'tax'to'the'Philippine'Government.

The' remittance' tax' was' conceived' in' an' attempt' to' equalize' the' income' tax' burden' on' foreign' subsidiary'domestic'corporations'where'at'least'a'majority'of'all'the'latter’s'shares'of'stock'are'owned' by' such' foreign' corporations.' In' order' to'avert'what'would' otherwise'appear' to' be'an' unequal' tax' the'tax'pari^passu'ends'between'domestic'branches'and'subsidiaries'of'foreign'corporations.

33

Commissioner&of&Internal&Revenue&v.&Burroughs&Limited

G.R.$No.$L(66653;$June$19,$1986

PARAS,'J.:

FACTS:

Submitted'by:'ERIGA,'Ronald'Fredric'H.

Burroughs'Limited'is'a'foreign'corporation'authorized'to'engage'in'trade'or'business'in'the'Philippines.'

amount'of'P6,499,999.30'computed'as'follows:'

Amount'applied'for'remittance 'P7,647,058.00 remittance'tax' 1,147,058.70' Net'amount'actually'remitted 'P6,499,999.30'

ISSUE:'

Wheather'or'not'Burroughs'should'be'granted'tax'credit.'YES.

HELD:

The'pertinent'provision'of'the'National'Revenue'Code'is'Sec.'24'(b)'(2)'(ii)'which'states:'

Sec.'24.'Rates'of'tax'on'corporations

(b)'Tax'on'foreign'corporations.'

In'a'Bureau'of'Internal'Revenue'ruling'dated'January'21,'1980'by'then'Acting'Commissioner'of'Internal'

Revenue'Hon.'Efren'I.'Plana'the'aforequoted'provision'had'been'interpreted'to'mean'that'“the'tax'base'

CIR' contends' that' respondent'is' no'longer' entitled' to' a' refund' because'Memorandum' Circular'No.'

8^82'dated'March'17,'1982'had'revoked'and/or'repealed'the'BIR'ruling'of'January'21,'1980.'The'said'

collected'at'source,'necessarily'the'tax'base'should'be'the'amount'actually'applied'for'by'the'branch'

Petitioner’s' aforesaid' contention'is' without'merit.'What'is' applicable'in' the' case' at' bar'is' still' the'

Revenue'Ruling'of'January'21,'1980'because'private'respondent'Burroughs'Limited'paid'the'branch'

1982'cannot'be'given'retroactive'effect'in' the'light'of'Section'327'of' the'National' Internal'Revenue' of'any'of'the'rules'and'regulations'promulgated'in'accordance'with'the'preceding'section'or'any'of'the' rulings'or'circulars'promulgated'by'the'Commissioner'shag'not'be'given'retroactive'application'if'the' where'the'taxpayer'deliberately'misstates'or'omits'material'facts'from'his'return'or'in'any'document'

34

required'of'him'by'the'Bureau'of'Internal'Revenue;'(b)'where'the'facts'subsequently'gathered'by'the' Bureau'of'Internal'Revenue'are'materially'different'from'the'facts'on'which'the'ruling'is'based,'or'(c)'

where'the'taxpayer'acted'in'bad'faith.'(ABS^CBN'Broadcasting'Corp.'v.'CTA,'108'SCRA'151^152)'

The'prejudice'that'would'result'to'private'respondent'Burroughs'Limited'by'a'retroactive'application'of'

Memorandum'Circular'No.'8^82'is'beyond'question'for'it'would'be'deprived'of'the'substantial'amount'

of' P172,058.90.' And,' insofar' as' the' enumerated' exceptions' are' concerned,' admittedly,' Burroughs' Limited'does'not'fall'under'any'of'them.'

35

Compania&General&De&Tabacos&De&Filipinas&v.&Commissioner&of&Internal&Revenue

CTA$Case$Nos.$4141.$August$23,$1993$and$CTA$Case$No.$4451$November$17,$1993

FACTS:

Submitted'by:'ERIGA,'Ronald'Fredric'H.

Compania'General,'a' foreign'corporation'duly'licensed'by' the'Philippine'laws' to'engage'in'business' and'collected'at'source.'Hence,'the'tax'base'should'be'the'amount'actually'applied'for'by'the'branch'in'

pursuance'to'Revenue'Memorandum'No.'8^82.

ISSUE:

HELD:

May'3,'1988'after'the'effectivity'of'Revenue'Memorandum'Circular'No.'8^82,'what'should'apply'as'the'

The'case'in'question' Is'readily'distinguishable' from'the'Burroghs'Limited'case,'where'the'Supreme'

was'paid'on'March'14,'1979.'The'High'added'that'Memorandum'Circular'No.'8^82'dated'March'17,'

1982'cannot'be'given'retroactive'effect'in'the'light'of'Section'327'of'the'NIRC.

Income"Tax"on

Non-Resident Foreign

Corporation

36

Commissioner&of&Internal&Revenue&vs.&S.C.&Johnson&and&Son,&Inc.

G.R.$No.$127105.$June$25,$1999

GONZAGA^REYES,'J.

FACTS:&

Digest'by:'ESCANER,'Michael'Joseph'L.

Respondent'is'a'domestic'corporation' organized'and' operating'under' the'Philippine'Laws,'entered' into'a'licensed'agreement'with'the'SC'Johnson'and'Son,'USA,'a'non^resident'foreign'corporation'based' in'the'USA'pursuant'to'which'the'respondent'was'granted'the'right'to'use'the'trademark,'patents'and' technology'owned'by'the'later'including'the'right'to'manufacture,'package'and'distribute'the'products' covered'by'the'Agreement'and'secure'assistance'in'management,'marketing'and'production'from'SC' Johnson'and'Son'USA.

For' the' use' of' trademark' or' technology,' respondent' was' obliged' to' paySC' Johnson' and' Son,' USA'

royalties'based'on'a'percentage'of'net'sales'and'subjected'the'same'to'25%'withholding'tax'on'royalty'

payments'which'respondent'paid'for'the'period'covering'July'1992'to'May'1993'in'the'total'amount'of'

P1,603,443.00.

claim'for'refund'of'overpaid'withholding'tax'on'royalties'arguing'that,'the'antecedent'facts'attending' respondents' case' fall' squarely' within' the' same' circumstances' under' which' said' MacGeorge' and' Gillette' rulings'were'issued.'Since' the'agreement'was'approved' by' the' Technology' Transfer'Board,'

the'preferential'tax'rate'of'10%'should'apply'to'the'respondent.'So,'royalties'paid'by'the'respondent'

to'SC'Johnson'and'Son,'USA'is'only'subject'to'10%'withholding'tax.'The'Commissioner'did'not'act'on'

the'CTA,'to'claim'a'refund'of'the'overpaid'withholding'tax'on'royalty'payments'from'July'1992'to'May'

1993.'On'May'7,'1996,'the'CTA'rendered'its'decision'in'favor'of'SC'Johnsonand'ordered'the'CIR'to'issue'

payments'beginning'July'1992'to'May'1993.

ISSUE:&

Whether'or'not'tax'refunds'are'considered'as'tax'exemptions.

HELD:&

It'bears'stress'that'tax'refunds'are'in'the'nature'of'tax'exemptions.'As'such'they'are'registered'as'in'

derogation'of'sovereign'authority'and'to'be'construed'strictissimi'juris'against'the'person'or'entity'

claiming'the'exemption.'The'burden'of'proof'is'upon'him'who'claims'the'exemption'in'his'favor'and'

he'must'be'able'to'justify'his'claim'by'the'clearest'grant'of'organic'or'statute'law.'Private'respondent'is'

claiming'for'a'refund'of'the'alleged'overpayment'of'tax'on'royalties;'however'there'is'nothing'on'record'

to'support'a'claim'that'the'tax'on'royalties'under'the'RP^US'Treaty'is'paid'under'similar'circumstances'

as'the'tax'on'royalties'under'the'RP^West'Germany'Tax'Treaty.

37

Marubeni&Corporation&vs.&Commissioner&of&Internal&Revenue

G.R.$No.$76573.September$14,$1989

FERNAN,'C.J.

FACTS:&&

Digest'by:'ESCANER,'Michael'Joseph'L.

for'a'refund'or'tax'credit'for'the'amount'which'it'has'allegedly'overpaid'the'BIR.'To'determine'whether'

corporation'is'a'resident'or'a'non^resident'foreign'corporation'under'Philippine'laws.

ISSUE:&

Whether'or'not'the'petitioner'is'a'resident'or'non^resident'foreign'corporation.

HELD:&

Under' the' Tax' Code,' a' resident' foreign' corporation' is' one' that' is' “engaged' in' trade' or' business”' within' the' Philippines.' Petitioner' contends' that' precisely' because' it' is' engaged' in' business' in' the' Philippines'through'its'Philippine'branch'that'it'must'be'considered'as'a'resident'foreign'corporation.' entity,'whoever'made'the'investment'in'AG&P,'Manila'does'not'matter'at'all.'A'single'corporate'entity' cannot'be'both'a'resident'and'a'non^resident'corporation'depending'on'the'nature'of'the'particular' but'one'corporate'entity,'the'Marubeni'Corporation,'which,'under'both'Philippine'tax'and'corporate' laws,'is'a'resident'foreign'corporation'because'it'is'transacting'business'in'the'Philippines.'Petitioner,' being'a'non^resident' foreign'corporation'with'respect' to' the' transaction'in'question,' the'applicable' provision'of' the'Tax'Code'is'Section'24'(b)' (1)'(iii)'in'conjunction'with' the'Philippine^Japan'Treaty'

of'1980.'Accordint'to'the'said'provision,'petitioner'is'taxed'35'%'of'its'gross'income'from'all'sources'

within'the'Philippines.'However,'a'discounted'rate'of'15%'is'given'to'petitioner'on'dividends'received'

from'a'domestic'corporation'(AG&P)'on'the'condition'that'its'domicile'state'(Japan)'extends'in'favor' of'petitioner,'a' tax'credit'of'not'less' than'20'%'of' the'dividends'received.'This'20'%'represents' the'

difference'between'the'regular'tax'of'35'%'on'non^resident'foreign'corporations'which'petitioner'would'

have'ordinarily'paid,'and'the'15'%'special'rate'on'dividends'received'from'a'domestic'corporation.

38

N.V.&Reederij&“Amsterdam”&and&Royal&Interocean& Lines&vs.&Commissioner&of&Internal&Revenue

G.R.$No.$L(46029$June$23,$1988

GANCAYCO,'J.:

FACTS:& &

Digest'by:'GARCIA,'Vianne'Marie'O.

From'March'27'to'April'30,'1963,'M.V.'Amstelmeer'and'from'September'24'to'October'28,'1964,'MV'

“Amstelkroon,'“'both'of'which'are'vessels'of'petitioner'N.B.'Reederij'“AMSTERDAM,”'called'on'Philippine' ports'to'load'cargoes'for'foreign'destination.'The'freight'fees'for'these'transactions'were'paid'abroad'

in'the'amount'of'US'$98,175.00'in'1963'and'US'$137,193.00'in'1964.'In'these'two'instances,'petitioner'

Royal'Interocean'Lines'acted'as'husbanding'agent'for'a'fee'or'commission'on'said'vessels.'No'income'

tax'appears'to'have'been'paid'by'petitioner'N.V.'Reederij'“AMSTERDAM”'on'the'freight'receipts.

the'former'under'Section'15'of'the'National'Internal'Revenue'Code.'Applying'the'then'prevailing'market'

conversion'rate'of'P3.90'to'the'US'$1.00,'the'gross'receipts'of'petitioner'N.V.'Reederij'“Amsterdam”'for'

1963'and'1964'amounted'to'P382,882.50'and'P535,052.00,'respectively.'On'June'30,'1967,'respondent'

income' tax' for' 1963' and' 1964,' respectively,' as' “a' non^resident' foreign' corporation' not' engaged'in'

trade'or'business'in'the'Philippines'under'Section'24'(b)'(1)'of'the'Tax'Code.

On' the' assumption' that' petitioner' is' a' foreign' corporation' engaged' in' trade' or' business' in' the'

aforementioned'vessels'computed'at'the'exchange'rate'of'P2.00'to'US1.00'and'paid'the'tax'thereon'

in'the'amount'of'P1,835.52'and'P9,448.94,'respectively,'pursuant'to'Section'24'(b)'(2)'in'relation'to'

Section'37'(B)'(e)'of'the'National'Internal'Revenue'Code'and'Section'163'of'Revenue'Regulations'No.'

2.'On'the'same'two'dates,'petitioner'Royal'Interocean'Lines'as'the'husbanding'agent'of'petitioner'N.V.'

respondent'Commissioner'which'protest'was'denied.' praying' for' the' cancellation' of' the' subject' assessment.' After' due' hearing,' the' respondent' court,'

rendered'a'decision'modifying'said'assessments'by'eliminating'the'50%'fraud'compromise'penalties'

denied'by'the'respondent'court.

Hence,'this'petition'for'review.

ISSUE:&

'

Whether' or' not' petitioner' is' a' non^resident' foreign' corporations,' thus' taxable' on' income' from' all' sources' within' the' Philippines,' as' interest,' dividends,' rents,' salaries,' wages,' premiums,' annuities' income.'

HELD: &

The' petition' is' devoid' of' merit.' Petitioner' N.V.' Reederij' “AMSTERDAM”' is' a' foreign' corporation'

Philippines'and'it'made'only'two'calls'in'Philippine'ports,'one'in'1963'and'the'other'in'1964.'In'order'

that'a'foreign'corporation'may'be'considered'engaged'in'trade'or'business,'its'business'transactions' must'be'continuous.'A'casual'business'activity'in' the'Philippines'by'a' foreign'corporation,'as'in' the' present' case,' does' not' amount' to' engaging' in' trade' or' business' in' the' Philippines' for' income' tax' purposes.

39

A'corporation'is'itself'a'taxpaying'entity'and'speaking'generally,'for'purposes'of'income'tax,'

corporations'and'(2)'non^resident'foreign'corporations.'(Sec.'24(b)'(1)'and'(2).'Tax'Code.)'A'

resident'foreign'corporation'is'a'foreign'corporation'engaged'in'trade'or'business'within'the' resident'foreign'corporation'is'a'foreign'corporation'not'engaged'in'trade'or'business'within' A'domestic'corporation'is'taxed'on'its'income'from'sources'within'and'without'the'Philippines,' but' a' foreign' corporation'is' taxed' only' on'its'income' from' sources' within' the' Philippines.'

(Sec.'24(a),'Tax'Code;'Sec.'16,'Rev.'Regs.'No.'2.)'However,'while'a'foreign'corporation'doing'

business'in'the'Philippines'is'taxable'on'income'solely'from'sources'within'the'Philippines,'it' is'permitted'to'deductions'from'gross'income'but'only'to'the'extent'connected'with'income' earned' in' the' Philippines.' (Secs.' 24(b)' (2)' and' 37,' Tax' Code.)' On' the' other' hand,' foreign' corporations' not' doing' business'in' the' Philippines' are' taxable' on'income' from' all' sources' within' the' Philippines,' as' interest,' dividends,' rents,' salaries,' wages,' premiums,' annuities'

such'gross'income.'(Sec.'24'(b)'(1),'Tax'Code.)

At'the'time'material'to'this'case,'certain'corporations'were'given'special'treatment,'namely,' building' and' loan' associations' operating' as' such' in' accordance' with' Section' 171' of' the' Corporation'Law,'educational'institutions,'domestic'life'insurance'companies'and'for”'foreign' life'insurance' companies' doing' business'in' the' Philippines.' (Sec.' 24(a)'&' (c),' Tax' Code.)' It' bears'emphasis,'however,'that'foreign'life'insurance'companies'which'were'not'doing'business' in'the'Philippines'were'taxable'as'other'foreign'corporations'not'authorized'to'do'business'in'

the'Philippines.'(Sec.'24(c)'Tax'Code.)

Now' to' the' case'at' bar.' Petitioner'N.V.'Reederij' “Amsterdam”'is'a' non^resident' foreign' corporation,' licensed'to'do'business'in'the'Philippines.'As'a'non^resident'foreign'corporation,'it'is'thus'a'foreign' of' business' therein.' (Sec.' 84(h),'Tax' Code.)'As' stated'above,'it'is' therefore' taxable' on'income' from' all'sources'within'the'Philippines,'as'interest,'dividends,'rents,'salaries,'wages,'premiums,'annuities,' amount,' under' Section' 24(b)' (1)' of' the' Tax' Code.' The' accent' is' on' the' words' of^^`such' amount.”' Accordingly,'petitioner'N.'V.'Reederij'“Amsterdam”'being'a'non^resident'foreign'corporation,'its'taxable' income' for'purposes'of'our'income' tax'law'consists'of'its'gross'income' from'all'sources'within' the' Philippines.

of'business'therein,'is'taxed'on'its'total'net'income'received'from'all'sources'within'the'Philippines'at'

the'rate'of'25%'upon'the'amount'but'which'taxable'net'income'does'not'exceed'P100,000.00,'and'35%'

upon' the'amount'but'which' taxable'net'income'exceeds'P100,000.00.''On' the'other'hand,'a' foreign' or'place'of'business'therein'is'taxed'on'income'received'from'all'sources'within'the'Philippines'at'the'

rate'of'35%'of'the'gross'income.'

The' transactions'involved'in' this'case'are' for' the' taxable' years'1963'and'1964.'Under'Rep.'Act'No.'

market'conversion'rate'during'those'years'was'P3.90'to'US'$1.00.

Accumulated

Earnings Tax

(IAET)

40

The&Manila&Wine&Merchants,&Inc.&vs.&Commissioner&of&Internal&Revenue

G.R.$No.$L(26145,February$20,$1984

FACTS:& &

Digest'by:'GARCIA,'Vianne'Marie'O.'

Manila'Wine'Merchants'organized'in'1937'was'engaged'in'the'importation'and'sale'of'whiskey,'wines,'

liquor'and'distilled'spirits.'Its'original'paid'up'capital'was'Php'500,000.'At'one'point,'they'reduced'to'

their'capital'to'Php'250,000'with'the'approval'of'the'SEC'but'this'reduction'was'never'implemented.'

approval'of'SEC'in'1958.'Wine'Merchants'invested'in'several'companies'including'Acme'Commercial,'

Co.,'Union'Insurance'of'Canton'and'bought'shares'in''Wack'Wack'Golf'and'Country'Club.'Wine'Merchants'

also'acquired'USA'Treasury'Bills'valued'at'around'347,000'Pesos.'

The'CIR'examined'the'books'of'Manila'Wine'Merchants'and''found'that'it'had'unreasonably'accumulated' a'surplus'of'Php'428,000' from'1947^1957'in'excess'of' the' reasonable'needs'of'business'subject' to'

the'surtax'of'2%'imposed'by'Section'25'of'the'Tax'Code'then'demanded'payment'of'the'IAET.'Wine'

Merchants'appealed'to'the'CTA.' For' the' CTA,' the' purchase' of' shares' in' Wack' Wack,' Union' Insurance' and' Acme' Commercial' were'

harmless'and'not'subject'to'25%'surtax.'However,'the'purchase'of'the'Treasury'Bills'was'in'no'way'

related'to'the'business'of'importing'and'selling'wines'and'ordered'Manila'Wine'Merchants'to'pay'IAET'

on'the'Treasury'Bills.'Manila'Wine'Merchants'appealed'to'the'CTA.

ISSUE:& &

Whether'or'not'Manila'Wine'Merchants'unreasonably'accumulated'earnings'in'excess'of'the'reasonable'

needs'of'business,'thus'making'it'liable'to'surtax'under'the'Tax'Code?

HELD: &

Sec.'29'(A)''^'Imposition'of'Improperly'Accumulated'Earnings'Tax'

(A)' In'General.' ^' In'addition' to' other' taxes'imposed' by' this'Title,' there'is'hereby'imposed' for'each' taxable' year'on' the'improperly''accumulated'' taxable''income''of''each''corporation''described''in'' Subsection''B''hereof,''an''improperly'accumulated'earnings' tax'equal' to' ten'percent' (10%)'of' the' improperly'accumulated'taxable'income.'

Tax'on'improper'accumulation'of'surplus'is'essentially'a'penalty'tax. The' ' provision' ' discouraged' ' tax' ' avoidance' ' through' ' corporate' ' surplus' ' accumulation.' ' When' corporations'do'not'declare'dividends,'income'taxes'are'not'paid'on'the'undeclared'dividends'received' by'the'shareholders.'The'tax'on'improper'accumulation'of'surplus'is'essentially'a'penalty'tax'designed' to'compel'corporations'to'distribute'earnings'so'that'the'said'earnings'by'shareholders'could,'in'turn,' be'taxed.

'“Immediacy'Test”'may'be'used'to'determine'the'“reasonable'needs”'of'the'business.

To'determine'the'“reasonable'needs”'of'the'business'in'order'to'justify'an'accumulation'of'earnings,'the'

Courts'of'the'United'States'had'developed'the'Immediacy'Test'which'construed'the'words'reasonable'

needs'of'the'business'to'mean'the'immediate'needs'of'the'business,'and'it'was'generally'held'that;'if'

accumulation'was'not'for'the'reasonable'needs'of'the'business,'and'the'penalty'tax'would'apply.'

Touchstone'of'liability'is'the'purpose'behind'the'accumulation'of'the'income'and'not'the'consequences'

of'the'accumulation.

A'prerequisite'to'the'imposition'of'the'tax'has'been'that'the'corporation'be'formed'or'availed'of'for'the'

purpose'of'avoiding'the'income'tax'(or'surtax)'on'its'shareholders,'or'on'the'shareholders'of'any'other'

41

shareholders''would''be''required''to''pay''an''income''tax''thereon'whereas,'if'the'distribution'were'

corporation.'The'touchstone'of'liability'is'the'purpose'behind'the'accumulation'of'the'income'and'not'

the'consequences'of'the'accumulation.'Thus,'if'the'failure'to'pay'dividends'is'due'to'some'other'cause,'

purpose'does'not'fall'within'the'interdiction'of'the'statute.

Taxpayer’s'intention'at'the'time'of'accumulation'is'controlling. avoid'the'surtax'upon'shareholders,'the'controlling'intention'of'the'taxpayer'is'that'which'is'manifested' at' the' time' of'accumulation'not' subsequently'declared'intentions,'which'are'merely' the'product' of' coupled'with'action'taken'towards'its'consummation'are'essential.

42

GRIÑO^AQUINO,'J.:

FACTS:

Commissioner&of&Internal&Revenue&vs.&Tuason

G.R.$No.$85749$May$15,$1989

Digest'by:'HATOL,'Michelle'Marie'U.

CTA'set'aside'petitioner’s'revenue'commissioner’s'assessment'of'1.1'M'as'the'25%'surtax'on'private'

respondent’s'unreasonable'accumulation'of'surplus'for'the'year'1975^1978.'

during'the'years'in'question'was'solely'for'the'purpose'of'expanding'its'business'operations'as'a'real'

issued'restraining'the'commissioner'and/or'his'reps'from'enforcing'the'warrants'of'distraint'and'levy.'

Writ'of'injunction'was'issued'by'tax'court.''Due'to'the'reversal'of'CTA'of'the'commissioner’s'decision,'

CIR'appeals'to'the'SC.

ISSUES:

1.'Whether'or'not'private'respondent'is'a'holding'company'and/or'investment'company?

2.'Whether'or'not'Antonio'accumulated'surplus'for'years'75^78

3.'Whether'or'not'Tuason'Inc.'is'liable'for'the'25%'surtax'on'undue'accumulation'of'surplus'for'75^78

HELD:&

Yes'to'all.'Antionio'is'liable'for'the'25%'surtax'assessed.

companies,'whether' domestic' or' foreign,'is' formed' or'availed' of' for' the' purpose' of' preventing' the' imposition'of'the'tax'upon'its'shareholders'or'members'or'the'shareholders'or'members'of'another' divided'or'distributed,'there'is'levied'and'assessed'against'such'corporation,'for'each'taxable'year,'a' which'shall'be'in'addition'to'the'tax'imposed'by'section'twentyfour,'and'shall'be'computed,'collected' and'paid'in'the'same'manner'and'subject'to'the'same'provisions'of'law,'including'penalties,'as'that'tax.

facie'evidence'of'a'purpose'to'avoid'the'tax'upon'its'shareholders'or'members.'Similar'presumption'

per'centum'in'value'of'its'outstanding'stock'is'owned,'directly'or'indirectly,'by'one'person.

In' this' case,' Tuason' Inc,' a' mere' holding' company' for' the' corporation' did' not' involve' itself' in' the' derived'its'income'mostly'from'interest,'dividends,'and'rentals'realized'from'the'sale'of'realty.

build'an'apartment'in'urdaneta'but'there’s'a'large'discrepancy'bet.'The'market'value'and'the'alleged'

investment'cost.

The' importance' of' liability' is' the' purpose' behind' the' accumulation' of' the' income' and' not' the' consequences'of'the'accumulation.'Thus,'if'the'failure'to'pay'dividends'were'for'the'purpose'of'using' fall'to'overcome'the'presumption'and'correctness'of'CIR.

43

QUISIMBING,'J

FACTS:

Cyanamid&Philippines,&Inc,&vs.&Court&of&Appeals

G.R.$No.$108067.$January$20,$2000

Digest'by:'HATOL,'Michelle'Marie'U.

Petitioner' is' a' corporation' organized' under' Philippine' laws' and' is' a' wholly' owned' subsidiary' of' American' Cyanamid' Co.' based' in' Maine,' USA.' It' is' engaged' in' the' manufacture' of' pharmaceutical'

protested'the'assessments'particularly'the'25%'surtax'for'undue'accumulation'of'earnings.'It'claimed'

reasonable'business'needs'of'the'company.'The'CIR'refused'to'allow'the'cancellation'of'the'assessments,' petitioner'appealed'to'the'CTA.'It'claimed'that'there'was'not'legal'basis'for'the'assessment'because'

capital'needs'and'retirement'of'indebtedness'2)'it'is'a'wholly'owned'subsidiary'of'American'Cyanamid'

Company,'a' foreign'corporation,'and'its'shares'are'listed'and' traded'in' the'NY'Stock'Exchange.'The' CTA'denied'the'petition'stating'that'the'law'permits'corporations'to'set'aside'a'portion'of'its'retained' did'not'fall'within'such'purposes.'It'found'that'there'was'no'need'to'set'aside'such'retained'earnings'as' working'capital'as'it'had'considerable'liquid'funds.'Those'corporations'exempted'from'the'accumulated'

earnings'tax'are'found'under'Sec.'25'of'the'NIRC,'and'that'the'petitioner'is'not'among'those'exempted.'

ISSUE:&

HELD:

the'surtax'upon'the'shareholders,'it'must'be'shown'that'the'controlling'intention'of'the'taxpayer'is'

manifested'at'the'time'of'the'accumulation,'not'intentions'subsequently,'which'are'mere'afterthoughts.'

instant'case,'petitioner'did'not'establish'by'clear'and'convincing'evidence'that'such'accumulated'was'

for'the'immediate'needs'of'the'business.

To' determine' the' reasonable' needs' of' the' business,' the' United' States' Courts' have' invented' the' “Immediacy' Test”' which' construed' the' words' “reasonable' needs' of' the' business”' to' mean' the' immediate'needs' of' the'business,'and'it'is'held' that'if' the'corporation'did'not'prove'an'immediate'

and'the'penalty'tax'would'apply.'(Law'of'Federal'Income'Taxation'Vol'7)'The'working'capital'needs'

of'a'business'depend'on'the'nature'of'the'business,'its'credit'policies,'the'amount'of'inventories,'the'

rate'of'turnover,'the'amount'of'accounts'receivable,'the'collection'rate,'the'availability'of'credit'and'

ration'between'the'current'assets'to'current'liabilities.'Unless,'rebutted,'the'presumption'is'that'the'

assessment'is'correct.'With'the'petitioner’s'failure'to'prove'the'CIR'incorrect,'clearly'and'conclusively,'

the'Tax'Court’s'ruling'is'upheld.

Corporations

44

Commissioner&of&Internal&Revenue&vs&G.&Sinco&Educational&Corp.

G.$R.$No.$L(9276.$October$23,$1956

BAUTISTA'ANGELO,'J.''''''''''

FACTS:

Digest'by:'JHOCSON,'Maria'Alexandria'B.

In' June,' 1949,' Vicente' G.' Sinco' established' and' operated' an' educational' institution' known' as' Foundation' College' of' Dumaguete.' Sinco' would' have' continued' operating' said' college' were' it' not' for' the' requirement' of' the'Department' of'Education' that'as' far'as' practicable' schools'and' colleges'

recognized'by'the'government'should'be'incorporated,'and'so'on'September'21,'1951,'the'V.'G.'Sinco'

Educational' Institution'was'organized.'This'corporation'was'non^stock'and'was'capitalized'by'V.'G.' Sinco'and'members'of'his'immediate'family.'This'corporation'continued'the'operations'of'Foundation' College'of'Dumaguete

'Invoking'section'27'(e)'of'the'National'Internal'Revenue'Code,'the'Appellee'claims'that'it'is'exempt'from'

the'payment'of'the'income'tax'because'it'is'organized'and'maintained'exclusively'for'the'educational'

of'V.'G.'Sinco,'president'and'founder'of'the'corporation,'and'therefore'the'Appellee'is'not'entitled'to'the'

exemption'prescribed'by'the'law.

ISSUES:&

Whether'or'not'appellee'is'entitled'to'the'exemption'provided'by'law

HELD:&

Yes.' Invoking' section' 27' (e)' of' the' National' Internal' Revenue' Code,' the' Appellee' claims' that' it' is' exempt' from' the'payment'of' the'income' tax'because'it'is'organized'and'maintained'exclusively' for' On'the'other'hand,'the'Appellant'maintains'that'part'of'the'net'income'accumulated'by'the'Appellee' is'not'entitled' to' the'exemption'prescribed'by' the'law.'While' the'acquisition'of'additional' facilities,' institution' upon'its' dissolution.' It' has' been' held' that' the'mere' provision' for' the' distribution' of'its' assets'to'the'stockholders'upon'dissolution'does'not'remove'the'right'of'an'educational'institution'from' of'the'assets'is'a'contingency'too'remote'to'have'any'material'bearing'upon'the'question'where'the' association'is'admittedly'not'a'scheme'to'avoid'taxation'and'its'good'faith'and'honesty'or'purpose'is' not'challenged.

Gross Income

45

Filinvest&Development&Corporation&and&Filinvest&Alabang,&Inc&vs&Commissioner&of& Internal$Revenue

CTA$Case$No.$6182.$September$10,$2002.

'''''''

FACTS:

Digest'by:'JHOCSON,'Maria'Alexandria'B.

Petitioner'FDC,'FAI'and'FLI'entered'into'a'Deed'of'Exchange'whereby'FDC'and'FAI'agreed'to'transfer' to' FLI' certain' parcel' of' land.' The' reduction' of' FDC’s' proportionate' equity' interest' in' FLI' resulted' from'an'increase'in' the' total'number'of'outstanding'shares'of'FLI'brought'about'by' the'issuance'of'

additional'shares'necessitated'by'the'exchange.'As'of'the'date'of'the'Deed,'FDC'directly'owned'80%'of'

the'outstanding'shares'of'FAI,'the'remaining'20%'being'held'by'FLI.'Through'its'805'ownership'of'FAI,'

FDC’s'ownership'interest'in'FLI'increased'through'FAI’s'acquisition'of'9.96%'of'the'outstanding'shares'

of'FLI'after'the'exchange.'Thereafter,'FDC'entered'into'a'joint'venture'agreement'with'RHPL'resulting' in' FAC.' Pursuant' to' the' Shareholders’' Agreement' between' FDC' and' RHPL,' the' equity' participation'

of'FDC'and'RHPL'in'FAC'was'60%'and'40%,'respectively.'In'payment'of'its'subscription'in'FAC,'FDC'

executed'a'Deed'of'Assignment'transferring'to'FAC'a'portion'of'FDC’s'rights'and'interests'in'the'Project'

to'the'extent'of'P500.7'million.'FAI'received'a'Formal'Notice'of'Demand'with'Assessment'Notice'from'

ISSUE:'

Whether'or'not'income'tax'may'be'imposed'on'the'prospective'gain'from'appreciation'in'the'value'of'

FDC’s'shareholdings'in'FAC'but'not'yet'realized'through'sale'or'conversion'of'said'shareholding?

HELD:&

No.'Section'34(c')(2)'of'the'Tax'Code'provides:'“No'gain'or'loss'shall'also'be'recognized'if'property'is'

transferred'to'a'corporation'by'a'person'in'exchange'for'shares'of'stock'in'such'corporation'of'which'as' a'result'of'such'exchange'said'person,'alone'or'together'with'others,'not'exceeding'four'persons,'gains' control'of'said'corporation:'Provided,'that'stocks'issued'for'services'shall'not'be'considered'as'issued' in'return'of'property.”'No'taxable'gain'from'an'exchange'of'property'for'shares'of'stock'of'a'corporation' shall' be' recognized'if'as'a' result' of' the'exchange' the' transferor,'alone' or' together'with' others,' not'

exceeding'four'persons,'gains'control'of'the'corporation.'Prior'to'the'exchange'FDC'held'67.42%'of'the'

total'voting'stocks'of'FLI'while'FAI,'initially,'did'not'hold'any'stock'at'all.'After'the'exchange,'new'shares'

of'stock'were'issued'and'as'a'result,'FDC'owned'61.03%'and'FAI'had'9.96%'of'stockholdings.'Evidently,'

the'exchange'of'properties'between'FDC'and'FAI'with'FLI'resulted'in'the'further'control'of'FDC'and'FAI' as'far'as'stock'ownership'of'FLI'is'concerned.'The'seeming'reduction'of'the'number'of'shares'owned'by'

FDC'after'the'exchange'does'not'affect'the'so^called'control'requirement'in'Section'34(c')(2)'of'the'Tax'

Code.'The'transaction'of'FDC'and'FAI'with'FLI'should'not'be'treated'separate'and'distinct'from'each' other,'but'instead'they'must'be'viewed'together.'It'is'not'required'that'each'of'the'several'transferors' individually'gains'control'or'individually'increases'their'interest.'What'is'important'is'that'each'of'the' transferor,'numbering'not'more'than'four,'collectively'increases'his'equity'in'the'transferee'corporation'

by'51%'or'more.'As'it'is,'the'total'number'of'shares'of'FDC'and'FAI,'if'sum'up'together'is'70.99%,'which'

is'more'than'the'51%'contemplated'by'law'to'have'the'so^called'control'in'the'corporation.'With'all'the'

elements'having'been'complied'with,'we'conclude'that'Section'34(c')(2)'is'on'all'fours'applicable'to'the'

subject'exchange.'Hence,'any'gain'or'loss'derived'thereat'is'not'recognized'it'being'a'tax^'free'exchange.

46

Commission&of&Internal&Revenue&vs.&Court&of&Appeals

G.R$No.$108576.$$January$20,$1999

MARTINEZ,'J:

FACTS:

Digested'by:'JULIAN,'Nicole'Alora'G.

In'1930,'Andres'Soriano,'a'citizen'and'resident'of'U.S'formed'Anscor'with'capital'of'1M'divided'into'10,'

000.00'common'shares.'Anscor'is'wholly'owned'and'controlled'by'the'family'of'Don'Andres,'who'are'

all'non^'resident'aliens.'In'1945,'Don'Andres'transferred'1,'250'shares'to'his'two'sons'as'their'initial'

investment.'1947,'Anscor'declared'stock'dividend'and'also'between'1949'and'1963.'Don'Andres.'Died'

in'1964'and'Left'a'shareholding'of'185,'154'shares.'By'a'Board'Resolution,'Anscor'redeemed'108,'000'

common'shares'from'the'estate'of'Don'Andres.'Revenue'examiners,'in'1973'issued'a'report'that'Anscor'

tax'amnesty'under'PD'23.

ISSUE:

Whether'on'or'Anscor'redemption'of'stocks'from'its'stockholder'as'well'as'the'exchange'of'common' with' preferred' shares' can' be' considered' as' essentially' equivalent' to' the' distribution' of' taxable'

dividend”'making'the'proceeds'thereof'taxable'under'the'provisions'of'1939'Revenue'Act.

HELD:

Not' being' taxpayers' but' a' tax' agent' on' behalf' of' the' government,' Anscor' is' not' protected' by' the'

amnesty'under'the'Decree.'The'implementing'rules'of'PD'23'are'very'explicit'to'wit.'Tax'liabilities'with'

or'without'assessment,'on'withholding'tax'at'source'provided'under'Sec.'53'and'54'of'the'NIRC.'Anscor'

gain'and'or'is'realized'or'received'actually'or'constructively,'and'3)'it'is'not'exempted'by'law'or'treaty'

from'income'tax.

The'redemption'made'by'anscor'converts'into'money' the'stock'dividends'which'become'a'realized' of' the' redeemed' stock' dividends' can' be' reached' by'income' taxation' regardless' of' the' existence' of' any'business'purpose' for'the'redemption.'To'rule'that'said'proceeds'are'exempt' from'tax'when'the' redemption'is' supported' by'legitimate' business' reasons'would' open' doors' for'income'earners' not' to'pay'tax'so'long'as'the'person'from'whom'the'income'was'divided'has'legitimate'business'reasons.

dividends'is'hereby'considered'as'essentially'equivalent'to'distribution'taxable'dividends'for'which'it'

is'liable'for'the'withholding'tax^at^source.

47

CASTRO,'J:

FACTS:

Commissioner&of&Internal&Revenue&vs.&Manning

G.R.$No.$L(28398.$August$6,$1975

Digested'by:'JULIAN,'Nicole'Alora'G.

In'1952'the'MANTRASCO'had'an'authorized'capital'stock'of'P2,500,000'divided'into'25,000'common'

shares;'24,700'of'these'were'owned'by'Julius'S.'Reese,'and'the'rest,'at'100'shares'each,'by'the'three'

respondents.'On'February'29,'1952,'in'view'of'Reese’s'desire'that'upon'his'death'MANTRASCO'and'

its' two' subsidiaries,' MANTRASCO' (Guam),' Inc.' and' the' Port' Motors,' Inc.,' would' continue' under' the' management' of' the' respondents,' a' trust' agreement' on' his' and' the' respondents’' interests' in' and'Janda','and'the'respondents.

On'October' 19,' 1954'Reese' died.' The' projected' transfer' of' his' shares'in' the' name' of'MANTRASCO' the' shares.'On' February' 2,' 1955,'after'MANTRASCO'made'a' partial' payment' of'Reese’s' shares,' the' the'name'of'MANTRASCO.'On'the'same'date,'and'in'the'meantime'that'Reese’s'interest'had'not'been'

trustees'for'and'in'behalf'of'MANTRASCO.'On'November'25,'1963'the'entire'purchase'price'of'Reese’s'

terminated'and'the'trustees'delivered'to'MANTRASCO'all'the'shares'which'they'were'holding'in'trust.

Bureau'of'Internal'Revenue'examination'disclosed'that'(a)'as'of'December'31,'1958'the'24,700'shares'

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' to' declare' 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’s'shares' as'stock'dividends'was'in'effect'a'distribution'of'the'“asset'or'property'of'the'corporation'as'may'be' gleaned'from'the'payment'of'cash'for'the'redemption'of'said'stock'and'distributing'the'same'as'stock'

dividend.”'On'April'14,'1965'the'Commissioner'of'Internal'Revenue'issued'notices'of'assessment'for'

The' respondents' unsuccessfully' challenged' the' assessments' and,' failing' to' secure' a' favorable' reconsideration,' appealed' to' the' Court' of' Tax' Appeals.' On' October' 30,' 1967' the' CTA' rendered' judgment'absolving'the'respondents'from'any'liability'for'receiving'the'questioned'stock'dividends'on' the'ground'that'their'respective'one^third'interest'in'MANTRASCO'remained'the'same'before'and'after' the'declaration'of'stock'dividends'and'only'the'number'of'shares'held'by'each'of'them'had'changed.

Commissioner' maintains' that' the' full' value' (P7,973,660)' of' the' shares' redeemed' from' Reese' by' MANTRASCO' which' were' subsequently' distributed' to' the' respondents' as' stock' dividends' in' 1958' should' be' taxed' as' income' of' the' respondents' for' that' year,' the' said' distribution' being' in' effect' 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'both'parties'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.

48

HELD:& Treasury' shares' are' stocks' issued' and' fully' paid' for' and' re^acquired' by' the' corporation' either' by' purchase,' donation,' forfeiture' or' other' means.' ' Treasury' shares' are' therefore' issued' shares,' 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're^issued'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'to'itself,''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'to'perpetuate'their'control'of'the'corporation,''though'it' still'represents'a'paid^for'interest'in'the'property'of'the'corporation.''The'foregoing'essential'features' of'a'treasury'stock'are'lacking'in'the'questioned'shares.'

The'manifest'intention'of'the'parties'to'the'trust'agreement'was,'in'sum'and'substance,'to'treat'the'

24,700'shares'of'Reese'as'absolutely'outstanding'shares'of'Reese’s'estate'until'they'were'fully'paid.'

Such'being'the'true'nature'of'the'24,700'shares,'their'declaration'as'treasury'stock'dividend'in'1958'

was'a'complete'nullity'and'plainly'violative'of'public'policy.'A'stock'dividend,'being'one'payable'in' capital'stock,'cannot'be'declared'out'of'outstanding'corporate'stock,'but'only'from'retained'earnings:'' Accounting'in'Law'Practice,'2d'ed.'1938,'No.'70.'As' the'court'said'in'United'States'vs.'Siegel,'8'Cir.,' into'capital'stock,'which'is'distributed'to'stockholders'in'lieu'of'a'cash'dividend.’'Congress'itself'has' v.'Macomber,'1920,'252'US'189,'40'S'Ct'189,'64'L'Ed'521,'9'ALR'1570,'both' the'prevailing'and' the' dissenting' opinions' recognized' that'within' the'meaning' of' the' revenue' acts' the' essence' of' a' stock' part'of'the'permanent'capital'resources'of'the'corporation'by'the'device'of'capitalizing'the'same,'and'

The' respondents,' using' the' trust' instrument' as' a' convenient' technical' device,' bestowed' unto' themselves'the' full'worth'and'value'of'Reese’s'corporate'holdings'with'the'use'of'the'very'earnings' of'the'companies.'Such'package'device,'obviously'not'designed'to'carry'out'the'usual'stock'dividend' purpose' of' corporate' expansion' reinvestment,' e.g.' the' acquisition' of' additional' facilities' and' other' capital'budget'items,'but'exclusively'for'expanding'the'capital'base'of'the'respondents'in'MANTRASCO,' conclusion'is'thus'ineluctable'that'whenever'the'companies'involved'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'

49

HILADO,'J.

FACTS:

Wise&&&Co.,&Inc.&vs.&Meer

G.R.$No.$48231.$June$30,$1947

Digest'by:'MAGAT,'Kristianne'S.'

During'the'year'1937,'plaintiffs'were'stockholders'of'Manila'Wine'Merchants,'Ltd.,'a'foreign'corporation'

duly'authorized'to'do'business'in'the'Philippines.'On'May'27,'1937,'the'Board'of'Directors'of'Manila'

Wine'Merchants,'Ltd.,'(Hongkong'Company),'recommended'to'the'stockholders'of'the'company'that' they'adopt'the'resolutions'necessary'to'enable'the'company'to'sell'its'business'and'assets'to'Manila'

Wine'Merchants,'Inc.,'a'Philippine'corporation'formed'on'May'27,'1937,'(Manila'Company),'for'the'sum'

of'P400,000'Philippine'currency.'This'sale'was'duly'authorized'by'the'stockholders'of'the'Hongkong'

Company'at'a'meeting'held'on'July'22,'1937'and'the'contract'of'sale'between'the'two'companies'was'

and'assets' of' the'Hongkong'Company' to' the'Manila' Company'were'adopted' on'August' 3,' 1937,' on'

which'date'the'Manila'Company'were'adopted'on'August'3,'1937,'on'which'date'the'Manila'Company'

paid'the'Hongkong'company'the'P400,000'purchase'price.'

Pursuant' to' a' resolution' by'its' Board' of'Directors' purporting' to' declare' a' dividend,' the'Hongkong' Company'made' a' distribution' from'its' earnings' for' the' year' 1937' to'its' stockholders,' plaintiffs' on' which'Hongkong'Company'has'paid'Philippine'income'tax'on'the'entire'earnings'from'which'the'said'

distributions'were'paid.'After'deducting'the'said'dividend'of'June'8,'1937,'the'surplus'of'the'Hongkong'

Company'resulting'from'the'active'conduct'of'its'business'was'P74,182.12.'As'a'result'of'the'sale'of'its'

business'and'assets'to'the'Manila'Company,'the'surplus'of'the'Hongkong'Company'was'increased'to'a'

total'of'P270,116.59.'

On'August'19,'1937,'at'a'special'general'meeting'of'the'shareholders'of'the'Hongkong'Company,'the'

stockholders'by'proper'resolution'directed'that'the'company'be'voluntarily'liquidated'and'its'capital' distributed' among' the' stockholders.' The' stockholders' at' such'meeting' appointed' a'liquidator'who' expiration'of'three'moths'from'that'date.

assessments'against'plaintiffs.'Plaintiffs'duly'paid'the'amounts'demanded'by'defendant'under'written'

protest,'which'was'overruled'in'due'course'and'they'have'since'July'1,'1939'requested'from'defendant'

a'refund'of'the'amounts'paid'which'defendant'has'refused'and'still'refuses'to'refund.

ISSUES:

Whether'or'not'the'sums'received'from'the'Hongkong'Company'is'taxable'in'the'Philippines.

HELD:

The'distributions'involved'herein'were'not'ordinary'dividends'but'payments' for'stock'surrendered' and'relinquished'by'the'shareholders'to'the'dissolved'corporation,'or'so^called'liquidating'dividends,' hence,' we' declare' that' under' section' 25' (a)' of' the' former' Income' Tax' Law,' as' amended,' said' distributions'were' taxable'alike' to'Wise'and' Co.,' Inc.'and' to' the' other' plaintiffs.'We' hold' that' both'

the'proviso'of'section'10'(a)'of'said'Income'Tax'Law'and'section'198'of'Regulations'No.'81'refer'to'

ordinary'dividends,'not'to'distributions'made'in'complete'liquidation'or'dissolution'of'a'corporation'

as'amended,'which'as'aforesaid'expressly'provides'for'the'taxability'of'such'gain'as'income,'whether'

the'stockholder'happens'to'be'an'individual'or'a'corporation.'

50

as'generally'understood'and'used,'refers'to'the'recurrent'return'upon'stock'paid'to'stockholders'by'a' going'corporation'in'the'ordinary'course'of'business,'which'does'not'reduce'their'stockholdings'and' leaves' them'in'a'position' to'enjoy' future' returns'upon' the'same'stock.'However,'when'section'201'

section'201'(a)'was'not'intended'to'apply'to'distributions'made'to'stockholders'in'the'liquidation'of'

a'corporation,'but'that'it'was'intended'that'such'distributions'should'be'governed'by'section'201'(c),'

treated'as'payments'in'exchange'for'stock,”'and'that'any'gain'realized'thereby'should'be'taxed'to'the' each'its'natural'meaning'and'due'effect.'

Such' distributions' under' the'law'were' subject' to' both' the' normal' and' the' additional' tax' provided' for.' A' dividend'is' a' return' upon' the' stock' of'its' stockholders,' paid' to' them' by' a' going' corporation' without'reducing'their'stockholdings,'leaving'them'in'a'position'to'enjoy'future'returns'upon'the'same' stock.'In'other'words,'it'is'earnings'paid'to'him'by'the'corporation'upon'his'invested'capital'therein,' without'wiping'out'his'capital.'On'the'other'hand,'when'a'solvent'corporation'dissolves'and'liquidates,' it'distributes'to'its'stockholders'not'only'any'earnings'it'may'have'on'hand,'but'it'also'pays'to'them' their'invested'capital,'namely,'the'amount'which'they'had'paid'in'for'their'stocks,'thus'wiping'out'their' interest'in'the'company.

As'provided'in'Regulations'No.'81,'in'all'cases'where'a'corporation'distributes'all'of'its'property'or'

assets'in'complete'liquidation'or'dissolution,'the'gain'realized'from'the'transaction'by'the'stockholder'

amount'received'by'the'stockholder'in'liquidation'is'less'than'the'cost'or'other'basis'of'the'stock,'a'

deductible'loss'is'sustained.'

This'regulation'would'seem'to'support'the'contention'that'the'distributions'in'question,'at'least'those' taxable.' Placing' the'above^quoted' section' of'Regulations'No.' 81' side' by' side'with' section' 25' (a)' of' the'amended'Income'Tax'Law'then'in' force,'we'notice'that'while'the'regulation'limits'the'taxability' corporation,'“section'25'(a)'of'the'law,' far' from'so'limiting'its'taxability,'provides'that'the'gain'thus' of'its'assets'in'general,'so'long'as'the'distribution'is'made'“in'complete'liquidation'or'dissolution”.'The' regulation'makes'the'gain'taxable'as'a'dividend,'while'the'law'makes'it'a'taxable'income.'An'inevitable'

51

Commissioner&of&Internal&Revenue&vs.&Court&of&Appeals