Commisioner of Internal Revenue vs Lednicky

FACTS:
This case involves separate petitions by the Commissioner for review of
the corresponding decisions of the Court of Tax Appeals which have been
decided jointly, namely; G.R No. L-18169, G.R. No.L- 18286 and G.R. No. L21434.
The respondents are husband and wife; both are American citizens
residing in the Philippines and have derived all their income from Philippine
resources for the taxable years under question: 1955, 1956, and 1957.
Subsequently, they filed separate amended tax return covering the abovementioned taxable years, claiming deductions representing taxes paid to the
United States on income derived wholly from Philippine sources. The
Commissioner failed to take action on the amended tax returns, hence; the
Lednicky spouse brought suits in the Tax Court which decided in favor of the
respondents.
ISSUE:
Whether citizens of the United States residing in the Philippines who
derives income wholly from sources within the country, may deduct from gross
income the taxes they have paid to the US Government?
RULING:
No. The taxpayers are not entitled to tax deductions because all their
income is derived from Philippine sources. To allow an alien resident to deduct
from his gross income whatever taxes he pays to his own government amounts
to conferring on the latter power to reduce the tax income of the Philippine
government simply by increasing the tax rates on the alien resident. Such a
result is incompatible with the status of the Philippines as an independent and
sovereign State.

Fisher vs Trinidad GR No. L-21186

FACTS:
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 the paid amount, Fisher instituted an action. Trinidad
filed a demurrer to the petition on the ground 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?
RULING:
1. Income is defined as the amount of money coming to a person or corporation
within a specified time whether as payment for services, interest, or profit from
investment.
2. No. 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 of corporations or firms as that used in its common acceptation; that
is money received for services, interest or profit from investments. We do not
believe that the Legislature intended that a mere increase in the value of the
capital or assets of a corporation or firm should be taxed as income.

El Oriente Fabricia de Tabacos vs Juan Posadas GR No. 34774

FACTS:
El Oriente Fabricia de Tobacas, a domestic corporation, procured from
the Manufacturers Life Insurance Co., an insurance policy of A. Velhagen, who
is its manager in order to protect itself from loss by reason of the latters loss.
The plaintiff designated itself as the sole beneficiary. It also charged as an
expense of its business all the said premiums and deducted the same from its
gross income. However, the Collector of Internal Revenue assessed and levied
the sum of P3, 148.74 as income tax on the proceeds of the insurance policy,
which the plaintiff paid under protest but was consequently, overruled by the
defendants. The plaintiff appealed.
ISSUE:
Whether the proceeds of the insurance policy taken by a corporation on
the life of an official or employer to indemnify it against loss in case of his
death are taxable income?
RULING:

No. The Court held that the proceeds of the life insurance policy
represents as an indemnity and not taxable income.

C. M Hoskins vs CIR GR No. L-24059

FACTS:
C. M Hoskins is a domestic corporation engaged in real estate business. It
is owned by C.M Hoskins who is the controlling stockholder and at the same
time, Chairman of the Board of Directors during the taxable year in question.
On Sept. 30, 1957, the petitioner filed its income tax return. However, the
Commissioner of the Internal Revenue disallowed four (4) items of deduction in
the petitioners tax return. The Court of Tax Appeals upheld the disallowance of
the item being paid to C.M Hoskins which represents 50% of the supervision

fee but set aside the disallowance of the other three (3) minor items. The
petitioner appealed the Tax Courts finding.
ISSUE:
Whether or not the payment by the taxpayer to its controlling stockholder
of 50% of its supervision fee is a deductible, ordinary and necessary expense?
RULING:
NO. It did not fall within the purview of ordinary and necessary expense
and it failed to pass the test of reasonable compensation. 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.
The Court ruled that the employers right to fix the compensation of its
officers may be conceded but for income tax purposed the employer cannot
legally claim such bonuses as deductible expenses unless they are shown to be
reasonable. To hold otherwise would open of rampant tax evasion.

Commissioner of Internal Revenue vs General Foods

FACTS:
On June 14, 1985, the respondent corporation filed its income tax return
wherein it claimed as a deduction the amount of P9, 461. 246 spent for Tangs
media advertising. On May 31, 1980, the Commissioner disallowed 50% of the
deduction claimed and assessed the respondent deficiency income taxes. The
latter filed a motion for reconsideration but the same was denied. It appealed to
the Court of Tax Appeals but it was dismissed on the ground that such
expenditure is akin to an acquisition of the capital assets and therefore, expenses
related thereto are not business expenses but capital expenditures. The
respondent filed a petition for review at the Court of Appeals which rendered a
decision reversing the decision of the Court of Tax Appeal on the ground that it
was not sufficiently established that the item claimed as a deduction is
excessive.
ISSUE:
Whether or not the subject media advertising expense for Tang incurred
by the respondent was an ordinary and necessary expense fully deductible under
the NIRC?
RULING:
It is necessary but not an ordinary expense. The Court ruled that to be
deductible an advertising expense should not only be necessary but also be
ordinary. The subject media advertising was not an ordinary expense on the
ground that it failed to meet the two conditions: first, reasonableness of the
amount incurred and second, the amount incurred must not be a capital outlay to
create goodwill for the product and/or private respondents business.
Otherwise, the expense must be considered a capital expenditure to be spread
out over a reasonable time.

Commissioner of Internal Revenue vs Melchor Javier

FACTS:
Victoria Javier, wife of the petitioner, received from Prudential Bank and
Trust Company the amount of US $ 999,973.73, remitted by her sister, Mrs.
Dolores Ventosa, through some banks in the US , among which is Mellon Bank.
Mellon Bank filed a complaint with the Court of First Instance against the
petitioner, his wife and other defendants, claiming that its remittance of US $
1,000,000 was a clerical error and should have been US $1,000 only and prays
that the excess should be returned. Subsequently, the petitioner was charged
with estafa for allegedly misappropriating the excess amount.
On March 5, 1978, the respondents filed an income tax return for 1977
and states in its footnote that the taxpayer was a recipient of some money
received from abroad which he presumed to be a gift but turned out to be an
error and is subject of litigation. The Acting Commissioner states the amount
received by the Mellon Bank which the respondents were able to dispose is
definitely taxable. The Commissioner further imposes 50% fraud penalty
against Javier. The latter filed an appeal before the CTA which ruled on his
favor.
ISSUE:
Whether or not private respondent is liable for the 50% fraud penalty?
RULING:
No. There was no actual and intentional fraud through willful and
deliberate misleading of the government agency concerned. The government
was not induced to give up some legal right and place itself at a disadvantage so
as to prevent its lawful agents from proper assessment of tax liabilities because
Javier did not conceal anything. A mistake of law is not fraud.

Commisioner of Internal Revenue vs Isabela Cultural Corporation

FACTS:
On Feb. 23, 1996, the respondent received from the BIR assessment
notices for deficiency income tax and for deficiency expanded withholding tax,
inclusive of surcharges and interest, both for the taxable year of 1986. The
former arose from the BIRs disallowance of the ICCs claimed expense
deductions for professional and security services billed to and paid by the
respondent corporation. The latter was allegedly due to the failure of the
respondent to withhold 1% expanded withholding tax on its claimed
P244,890.00 deductions for security services. The ICC sought reconsideration
of the subject assessment. However, it received a final notice of assessment. In
the CTA, the petition was held as premature because the final notice of
assessment cannot be considered as a final decision appealed to the Tax Court.
This was reversed by the CA and was sustained by the Court. This was
remanded to the CTA for further proceedings. The CTA rendered a decision
cancelling the assessment against ICC. The petitioner filed a petition contending
that since ICC is using the accrual method of accounting, the expenses for the
professional services that accrued in the 1984 and 1986, should have been
declared as deductions from income during the said years and the failure of ICC
to do so bars it from claiming said expense as deduction for the taxable year.

ISSUES:
1. Whether the CA correctly sustained the deduction of the expense for
professional and security services from the ICCs gross income?
2. Whether or not the respondent did not understate its interest income from the
promissory notes from the Realty Investment and that ICC withheld the
required 1% withholding tax from the deductions for security services?
RULING:
1. No. Following the principle that tax exemptions must be construed
strictissimi juris against the tax payer, accrual method of accounting must
largely a question of fact, such that tax payer bears the burden proof
establishing the accrual of income or deduction. However, ICC failed
discharge the burden.

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be
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2.No. No such interest understatement exists and that only simple interest
computation and not a compounded one should have been applied by the BIR.
There is no stipulation between the Realty Investment and the ICC on the
application of compounded interest. Under Art. 1959of the Civil Code, unless
there is a stipulation to the contrary, interest due should not further earn interest.

Filipinas Synthetic Fiber Corporation vs CA, CTA and Commisioner of

Internal Revenue GR Nos. 118498 and 1234377
FACTS:
On Dec 27, 1979 the petitioner received a letter of demand from the
Commissioner of Internal Revenue, assessing it for deficiency withholding tax
at source inclusive of interest and compromise penalties. The bulk of the
deficiency withholding tax assessment consisted of interest and compromise
penalties for alleged late payment of withholding taxes due on interest loans,
royalties and guarantees for fees paid by the petitioner to non-resident. The

assessment was protested by the petitioner but such was denied by the
respondent on the ground that the liability to withhold and pay income tax
withheld at source from certain payment due to a foreign corporation is at the
time of accrual and not at the time of actual payment or remittance thereof.
On June 28, 1985, petitioner brought a petition for review before the
Court of Tax Appeals which renders a decision against it. With the denial
motion for reconsideration, the petitioner appealed to the Court of Appeals
which affirmed in toto the appealed decision.
ISSUE:
Whether the liability to withhold tax at source on income payments to
non- resident foreign corporation arises upon remittance of the amounts due to
foreign creditors or upon the accrual thereof?
RULING:
The liability to withheld tax at source on income payments to nonresident foreign corporations arises upon the accrual of the amounts due to
foreign creditors. In the case at bar, the Court concurred in the finding by the
CTA that there was a definite liability, a clear and imminent certainty that at the
maturity of the loan contracts, the foreign corporation was going to earn income
in an ascertained amount, so much so that the petitioner already deducted a
business expense the said amount as interest due to the foreign corporation. This
is allowed under the law, petitioner having adopted the accrual method of
accounting in reporting its income.

Madrigal vs Rafferty GR No. L-12287

FACTS:
Vicente Madrigal and Susana Paterno were legally married prior to
January 1, 1914. Their marriage was governed by the provisions of the law
concerning conjugal partnerships. On February 1915, Madrigal filed a sworn
declaration showing that his total net income for the year 1914 was P296,
302.73 representing the income of the conjugal partnership. Madrigal assailed
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 subject matter was brought to the AttorneyGeneral of the Philippine Islands who ruled in favor of the petitioner. It was
subsequently brought to the United States Commissioner of Internal Revenue
who reversed the opinion of the Attorney-General, and thus decided against the
claim of Madrigal. The petitioner paid under protest. The Collector of Internal
Revenue ruled against the petitioner who later filed an action in Court of First
Instance for the recovery of some sum alleged to have been wrongfully
collected by the defendant under the Act of Congress.
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?
RULING:
No. The Income Tax Law does not look on the spouses as individual
partners in an ordinary partnership. The husband and wife are only entitled to
the exemption of P8, 000 specifically granted by the law. The higher schedules
of the additional tax directed at the incomes of the wealthy may not be partially
defeated by reliance on provisions in our Civil Code dealing with the conjugal
partnership and having no application to the Income Tax Law.

Conwi vs CTA G.R. Nos 48532-33

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.
Petitioners filed their ITRs for 1970 and 1971, computing tax due by
applying the dollar-to-peso conversion based on the floating rate under BIR
Ruling No. 70-027. In 1973, petitioners filed amended ITRs for 1970 and 1971,
this time using the par value of the peso as basis. This resulted in the alleged
overpayments, refund and/or tax credit, for which claims for refund were filed.
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?
RULING:
No. A foreign exchange transaction is a transaction in 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. The petitioners were
assigned to the foreign subsidiaries Procter & Gamble wherein they were
earning in their assigned nations currency and were also spending in said
currency. There was no conversion, therefore, from one currency to another.

Manila Wine Merchants Inc. vs CIR GR No. L-26145

FACTS:
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.
When the business began to flourish, they increased their capital to 1
Million Pesos, again with the 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?
RULING:
YES, Manila Wine Merchants is liable to surtax under the Tax Code. The
findings of the CTA that the purchase were in no way related to the business of
the petitioner and thus construed as an investment beyond the reasonable needs
of the business is binding upon the Court.
Under the Immediacy Test, the words reasonable needs of the business
means the immediate needs of the business. It has been generally held that if the
corporation did not prove an immediate need for the accumulation of the
earnings and profits, the accumulation was not for the reasonable needs of the
business, and the penalty tax would apply. The touchstone of liability is the
purpose behind the accumulation of the income and not the consequences of the
accumulation.

CIR vs Mitsubishi Metal Corporation GR Nos. L-54908 and 80041

FACTS:
Private respondent Atlas Consolidated Mining and Development
Corporation entered into a Loan and Sales Contract with Mitsubishi Metal
Corporation for purposes of the projected expansion of the productive capacity
of the Atlas mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to
extend a loan to Atlas in the amount of $20,000,000.00 for the installation of a
new concentrator for copper production. Atlas, in turn undertook to sell to

Mitsubishi all the copper concentrates produced from said machine for a period
of fifteen (15) years.
Mitsubishi thereafter applied for a loan equivalent to $20,000,000. 00
with the Export-Import Bank of Japan to comply with its obligation under said
contract subject to the condition that Mitsubishi would use the amount as a loan
to Atlas and as a consideration for importing copper concentrates from Atlas,
and that Mitsubishi had to pay back the total amount of loan by September 30,
1981.
Pursuant to the contract between Atlas and Mitsubishi, interest payments
were made by the former for the years 1974 and 1975. The corresponding 15%
tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24
(b) (1) and Section 53 (b) (2) of the NIRC and duly remitted to the Government.
On March 1976, private respondents filed a claim for tax credit
requesting that the sum of P1,971,595.01 be applied against their existing and
future tax liabilities. Not having acted upon the claim for tax credit, respondents
filed a petition for review on the ground that Mitsubishi was a mere agent of
Eximbank, which is a financing institution owned, controlled and financed by
the Japanese Government. Such governmental status of Eximbank, if it may be
so called, is the basis for private respondents claim for exemption from paying
the tax on the interest payments on the loan as earlier stated pursuant to Sec. 29
(b) (7) (A) of the NIRC.
ISSUE:
Whether or not the interest income from the loans extended to Atlas by
Mitsubishi is excludible from gross income taxation pursuant to Section 29 b)
(7) (A) and, therefore, exempt from withholding tax.
RULING:
NO. The loans and contracts are strictly between Mitsubishi and Atlas.
The subject of the 15% withholding tax is not the interest income paid by
Mitsubishi to Exim Bank but the interest income earned by the former from its
loan to Atlas. Hence, private respondents are not even among the entities which,
under Section 29 (b) (7) (A), are entitled to exemption and which should
indispensably be the party in interest in this case.
Further, it has been settled that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is the exception. The burden of

proof rests upon the party claiming exemption to prove that it is in fact covered
by the exemption so claimed, which onus petitioners have failed to discharge.
Commissioner of Internal Revenue vs British Overseas Airways
Corporation
FACTS:
British Overseas Airways Corporation (BOAC) is a 100% British
Government-owned corporation organized and existing under the laws of the
United Kingdom. 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.
On May 7, 1968 CIR assessed BOAC with P2,498,358.56 for deficiency
income taxes covering the years 1959 to 1963. BOAC protested. Investigation
resulted to an assessment in the amount of P858,307.79 covering the years 1959
to 1967. BOAC paid this new assessment under protest. BOAC filed a claim for
refund in the amount of P858,307.79 with the CIR. However, BOAC did not
wait for the decision of the CIR, filed petition for review with the tax court.
Thereafter, CIR denied claim for refund.
On November 17, 1971 CIR assessed BOAC with deficiency income
taxes ,interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in the
aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and
P1,800.00 as compromise penalties for violation of Section 46 (requiring the
filing of corporation returns) penalized under Section 74 of the National Internal
Revenue Code (NIRC).BOAC in a letter requested that the assessment to
countermanded and set aside. CIR denied the request and reissued the
deficiency income tax assessment for P534,132.08 for the years1969 to 1970-71
plus P1,000.00 as compromise penalty under Section 74 of the Tax Code.
BOAC asked for reconsideration but CIR denied the same. BOAC filed a 2nd
petition for review with the tax court. The 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 or not during the fiscal years in question BOAC is a resident
foreign corporation doing business in the Philippines or has an office or place of
business in the Philippines.
Whether proceeds from the sale of BOAC tickets in the Philippines by
Warner Barnes and Company, Ltd are considered income from sources within
the Philippines
RULING:
1. Yes. The Court rule that 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 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.
2. Yes. 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.
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.

Santos vs Servier Philippines Inc and NIRC GRN No. 16377

FACTS:
Ma. Isabela Santos was the Human Resource Manager of the respondent
Servier Philippines Inc since 1991 until her termination from service in 1999
due to her inability to resume from work. A retirement package was offered with
a retirement package. However, the retirement benefits amounting to P1,
063,841.76, only P701, 454.89 were released to the petitioners husband, the
balance thereof was allegedly for taxation purposes. The respondent also failed
to award other retirement benefits as promised.
ISSUE:

Whether or not the retirement benefits are taxable?

RULING:
Yes. For the retirement benefits to be exempt from withholding tax, the
taxpayer is burdened to prove the concurrence of the following: a) a reasonable
private benefit plan maintained by the employer; b) the retiring official or
employer has been in the service of the same employer for atleast ten (10) years;
c) the retiring official or employee is not less than fifty (50) years of age of his
retirement; and d) the benefit had been availed of only once.
However, the above provision is not applicable in this case, for failure to
comply with the age and length of service requirements.

Eisner vs Macomber 252 U.S 189

FACTS:

Mrs. Macomber owned 2,200 shares of Standard Oil Company of

California stock. On January 1916, the company declared a stock dividend. Mrs.
Macomber received an additional 1,100 shares of stock out of which 198.77, par
value $19,877, represented surplus earned by the company after March 1, 1913.
The IRS treated the said amount as taxable income under the Revenue Act of
1916 which provided that a stock dividend was considered income to the
amount of its cash value. Mrs. Macomber argued that the provision in the
Revenue Act was unconstitutional because it was a direct tax not apportioned
per population. The District Court held that the stock dividend was not income.
ISSUE:
Whether or not stock dividends are taxable income?
RULING:
No. A stock dividend reflects the corporation transferring an amount from
surplus (retained earnings) to capital stock. Such transaction is merely a
bookkeeping entry and affects only the form not the essence of the liability
acknowledges by the corporation to its own shareholders. It does not alter the
preexisting proportionate interest of any of its stockholder or increase the
intrinsic value of his holding or of his aggregate holdings of the other
stockholders as they stood before. An increase to the value of the capital
investment is not an income. Nothing of value has been taken from the
corporation and given to the shareholder as is the case with cash dividend.

Intercontinental Broadcasting Corporation vs Amarilla, et. Al GR No.

162775
FACTS:
Petitioner employed the following persons at its Cebu station: Candido C.
Quiones, Jr.; on February 1, 1975;[3] Corsini R. Lagahit, as Studio Technician,
also on February 1, 1975; Anatolio G. Otadoy, as Collector, on April 1, 1975;
and Noemi Amarilla, as Traffic Clerk, on July 1, 1975. On March 1, 1986, the
government sequestered the station, including its properties, funds and other
assets, and took over its management and operations from its owner, Roberto
Benedicto. However, in December 1986, the government and Benedicto entered
into a temporary agreement under which the latter would retain its management
and operation. On November 3, 1990, the Presidential Commission on Good
Government (PCGG) and Benedicto executed a Compromise Agreement, where
Benedicto transferred and assigned all his rights, shares and interests in
petitioner station to the government.
The four (4) employees retired from the company and received, on
staggered basis, their retirement benefits under the 1993 Collective Bargaining
Agreement (CBA) between petitioner and the bargaining unit of its employees.
When a salary increase took effect P1, 500.00 salary increase was given to all
employees of the company, current and retired, effective July 1994. However,
when the four retirees demanded theirs, petitioner refused and instead informed
them via a letter that their differentials would be used to offset the tax due on
their retirement benefits in accordance with the National Internal Revenue Code
(NIRC).
ISSUES:
1. Whether the retirements of the respondents are part of their gross income?
2. Whether the petitioner is estopped from reneging on its agreement with
respondent to pay for the taxes on said retirement benefits?
RULING:

1. Yes. For the retirement benefits to be exempt from withholding tax, the
taxpayer is burdened to prove the concurrence of the following: a) a reasonable
private benefit plan maintained by the employer; b) the retiring official or
employer has been in the service of the same employer for at least ten (10)
years; c) the retiring official or employee is not less than fifty (50) years of age
of his retirement; and d) the benefit had been availed of only once. More so,
there is no evidence on record that the 1993 CBA had been approved or was
ever presented to the BIR. Hence, the retirement benefits of the respondents are
taxable.
2. Yes. The agreement to pay the taxes on the retirement benefits had been
agreed upon by the parties and relied upon by the respondents. Such agreement
is not contrary to law or to public morals. For petitioner to renege on its contract
simply because its new management had found the same disadvantageous
would amount to a breach of contract. The well-entrenched rule is that estoppel
may arise from a making a promise if it was intended that the promise be relied
upon and in fact, was relied upon and if a refusal to sanction the perpetration of
fraud would result to injustice. The mere omission by the promisor to do
whatever he promises is sufficient forbearance to give rise to a promissory
estoppel.