CHAPTER 1

1. Madrigal vs. Rafferty

The essential difference between capital and income is that capital
is a fund; income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services rendered by that
capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a
period of time is called income. Capital is wealth, while income is
the service of wealth.
FACTS:
Vicente Madrigal and Susana Paterno were legally married prior
to Januray 1, 1914. The marriage was contracted under the
provisions
of
law
concerning
conjugal
partnership
On 1915, Madrigal filed a declaration of his net income for year
1914,
the
sum
of
P296,302.73
Vicente Madrigal was contending that the said declared income
does not represent his income for the year 1914 as it was the income
of his conjugal partnership with Paterno. He said that in computing
for his additional income tax, the amount declared should be
divided
by
2.
The revenue officer was not satisfied with Madrigals explanation
and ultimately, the United States Commissioner of Internal
Revenue
decided
against
the
claim
of
Madrigal.
Madrigal paid under protest, and the couple decided to recover
the sum of P3,786.08 alleged to have been wrongfully and illegally
assessed and collected by the CIR.
ISSUE: Whether or not the income reported by Madrigal on 1915
should be divided into 2 in computing for the additional income
tax.
HELD:
No! The point of view of the CIR is that the Income Tax Law, as
the name implies, taxes upon income and not upon capital and
property.
The essential difference between capital and income is that capital
is a fund; income is a flow. A fund of property existing at an instant
of time is called capital. A flow of services rendered by that capital
by the payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time is
called income. Capital is wealth, while income is the service of

wealth.
As Paterno has no estate and income, actually and legally vested in
her and entirely distinct from her husbands property, the income
cannot properly be considered the separate income of the wife for
the
purposes
of
the
additional
tax.
To recapitulate, Vicente wants to half his declared income in
computing for his tax since he is arguing that he has a conjugal
partnership with his wife. However, the court ruled that the one
that should be taxed is the income which is the flow of the capital,
thus it should not be divided into 2.
Facts: Vicente Madrigal and Susana Paterno were legally married
prior to January 1, 1914, contracted under the provisions of law
concerning conjugal partnerships. In 1915, Madrigal filed a sworn
declaration with the CIR showing that his total net income for the
year 1914 was P296,302.73. Subsequently Madrigal submitted the
claim that the said P296,302.73 did not represent his income for
the year 1914, but was in fact the income of
the conjugal partnership existing between himself and his wife
Susana Paterno, and that in computing and assessing the
additional income tax provided by the Act of Congress of October 3,
1913, the income declared by Vicente Madrigal should be divided
into two equal parts, one-half to be considered the income of
Vicente Madrigal and the other half of Susana Paterno.
After payment under protest, and after the protest of Madrigal had
been decided adversely by the CIR, action was begun by Madrigal
and his wife Paterno in the CFI of Manila against Collector of
Internal Revenue and the Deputy Collector of Internal Revenue.
CFI
decided
against
Madrigal
and
Paterno.
Appellees contend that the taxes imposed by the Income Tax Law
are as the name implies taxes upon income tax and not upon capital
and property; that the fact that Madrigal was a married man, and
his marriage contracted under the provisions governing
the conjugalpartnership, has no bearing on income considered as
income, and that the distinction must be drawn between the
ordinary
form
of
commercial
partnership
and
the conjugal partnership of spouses resulting from the relation of
marriage.
Issue: Whether or not the additional income tax should be divided
into two equal parts because of the conjugal partnership

Held: Income as contrasted with capital or property is to be the

test. The essential difference between capital and income is that
capital is a fund; income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services rendered by that
capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a
period of time is called an income. Capital is wealth, while income
is
the
service
of
wealth.
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in
the property of her husband Vicente Madrigal during the life of
theconjugal partnership. She has an interest in the ultimate
property rights and in the ultimate ownership of property acquired
as income after such income has become capital. Susana Paterno
has no absolute right to one-half the income of
the conjugal partnership. Not being seized of a separate estate,
Susana Paterno cannot make a separate return in order to receive
the benefit of the exemption which would arise by reason of the
additional tax. As she has no estate and income, actually and legally
vested in her and entirely distinct from her husband's property, the
income cannot properly be considered the separate income of the
wife for the purposes of the additional tax. Moreover, the Income
Tax Law does not look on the spouses as individual partners in an
ordinary partnership. The husband and wife are only entitled to the
exemption of P8,000 specifically granted by the law. The
higher schedules of the additional tax directed at the incomes of the
wealthy may not be partially defeated by reliance on provisions in
our Civil Code dealing with the conjugal partnership and having
no application to theIncome Tax Law. The aims and purposes of
the Income Tax Law must be given effect.

2. Conwi vs. CTA

Income Tax is an amount of money coming to a person or
corporation within or specified time, whether as payment for
services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. Income can also be
thought of as a flow of the fruits of ones labor. Earning and
spending in the same foreign currency does not involve conversion
hence it does not constitute foreign exchange transaction.

Foreign exchange is defined as the conversion of an amount of

money or currency of one country into an equivalent amount of
money or currency of another.
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 amened
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 MemorandumCirculars Nos. 7-71 and 41-71. The refund
claims were denied.
Issues:
(1) Whether or not petitioners' dollar earnings are receipts derived
from foreign exchange transactions; NO.
(2) Whether or not the proper rate of conversion of petitioners'
dollarearnings for tax purposes in the prevailing free market rate of
exchange and not the par value of the peso; YES.
Held: For the proper resolution of income tax cases, income may
be defined as an amount of money coming to a person or
corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. Income can also be
though of as flow of the fruits of one's labor.

Petitioners are correct as to their claim that their

dollar earnings are
not
receipts
derived
from foreign
exchange transactions. For aforeign exchange transaction is simply
that a transaction inforeign 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 & Gamble. It was a definite amount
of money which came to them within a specified period of time of
two 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.
DENIED FOR LACK OF MERIT.
3. Consolidated Mines, Inc. vs. CTA
Facts:TheCompany,adomesticcorporationengagedinmining,hadfiled
itsincometaxreturnsfor1951,1952,1953and1956.In1957examiners
of the BIR investigated the income tax returns filed by the Company
because its auditor, Felipe Ollada, claimed the refund of the sum of
P107,472.00representingallegedoverpaymentsofincometaxesforthe
year1951.Aftertheinvestigationtheexaminersreportedthat(A)forthe

years1951to1954(1)theCompanyhadnotaccruedasanexpensethe
shareinthecompanyprofitsofBenguetConsolidatedMinesasoperator
oftheCompany'smines,althoughforincometaxpurposestheCompany
hadreportedincomeandexpensesontheaccrualbasis;(2)depletionand
depreciationexpenseshadbeenovercharged;and(3)theclaimsforaudit
andlegalfeesandmiscellaneousexpensesfor1953and1954hadnotbeen
properlysubstantiated;andthat(B)fortheyear1956(1)theCompany
had overstated its claim for depletion; and (2) certain claims for
miscellaneousexpenseswerenotdulysupportedbyevidence.
InviewofsaidreportstheCommissionerofInternalRevenuesentthe
Companyaletterofdemandrequiringittopaycertaindeficiencyincome
taxes for the years 1951 to 1954, inclusive, and for the year 1956.
Deficiencyincometaxassessmentnoticesforsaidyearswerealsosentto
the Company. The Company requested a reconsideration of the
assessment, but the Commissioner refused to reconsider, hence the
CompanyappealedtotheCourtofTaxAppeals.
OnMay6,1961theTaxCourtrenderedjudgmentorderingtheCompany
to pay the amounts of P107,846.56, P134,033.01 and P71,392.82 as
deficiencyincometaxesfortheyears1953,1954and1956,respectively.
However,onAugust7,1961,uponmotionoftheCompany,theTaxCourt
reconsidereditsdecisionandfurtherreducedthedeficiencyincometax
liabilitiesoftheCompanytoP79,812.93,P51,528.24andP71,382.82for
theyears1953,1954and1956,respectively.
Boththe Companyand the Commissioner appealed to this Court. The
CompanyquestionstherateofminedepletionadoptedbytheCourtof
Tax Appeals and the disallowance of depreciation charges and certain
miscellaneous.
Issue:WhethertheCourtofTaxAppealserredwithrespecttotherateof
minedepletion.
Held:TheTaxCodeprovidesthatincomputingnetincomethereshallbe
allowedasdeduction,inthecaseofmines,areasonableallowancefor
depletionthereofnottoexceedthemarketvalueinthemineoftheproduct
thereof which has been mined and sold during the year for which the
returnismade[Sec.30(g)(1)(B)].
Theformulaforcomputingtherateofdepletionis:
CostofMineProperty
=RateofDepletionPerUnitEstimatedoreDepositof
ProductMinedandsold.

The Commissioner and the Company do not agree as to the figures

correspondingtoeitherfactorthataffectstherateofdepletionperunit.
ThefiguresaccordingtotheCommissionerare:
P2,646,878.44(minecost)P0.59189(rateof
=depletionperton)
4,471,892tons(estimatedoredeposit)
whiletheCompanyinsiststheyare:
P4,238,974.57(minecost)P1.0197(rateof
=depletionperton)
4,156,888tons(estimated
oredeposit)
Theyagree,however,thatthe"costofthemineproperty"consistsof(1)
minecost;and(2)expensesofdevelopmentbeforeproduction.
Asanincometaxconcept,depletioniswhollyacreationofthestatute
"solelyamatteroflegislativegrace."Hence,thetaxpayerhastheburdenof
justifyingtheallowanceofanydeductionclaimed.Asinconnectionwith
allothertaxcontroversies,theburdenofprooftoshowthatadisallowance
ofdepletionbytheCommissionerisincorrectorthatanallowancemade
isinadequateisuponthetaxpayer,andthisistruewithrespecttothe
valueofthepropertyconstitutingthebasisofthededuction.Thisburden
ofproofrulehasbeenfrequentlyappliedandavalueclaimedhasbeen
disallowedforlackofevidence.
TheCompany'sbalancesheetforDecember31,1947liststhe"minecost"
ofP2,500,000as"developmentcost"andtheamountofP1,738,974.37as
"suspense account (mining properties subject to war losses)." The
Company claims that its accountant, Mr. Calpo, made these errors,
becausehewasthennewatthejob.Grantingthatwaswhathadhappened,
itdoesnotaffectthefactthatthe,evidenceonhandisinsufficienttoprove
thecostofdevelopmentallegedbytheCompany.Norcanwerelyonthe
statements of Eligio S. Garcia, who was the Company's treasurer and
assistantsecretaryatthetimehetestifiedonAugust14,1959.Headmitted
that he did not know how the figure P4,238,974.57 was arrived at,
explaining:"Ionlyknowthatitisthefigureappearingonthebalance
sheetasofDecember31,1946ascertifiedbytheCompany'sauditors;and
thiswemadeasthebasisofthevaluationofthedepletablevalueofthe
mines."
We, therefore, have to rely on the Commissioner's assertion that the
"development cost" was P131,878.44, broken down as follows:
assessment, P34,092.12; development, P61,484.63; exploration,
P13,966.62;anddiamonddrilling,P22,335.07.

Thequestionastowhichfigureshouldproperlycorrespondto"minecost"
isoneoffact.ThefindingsoffactoftheTaxCourt,wherereasonably
supportedbyevidence,areconclusiveupontheSupremeCourt.
4.CIRvs.ToursSpecialists,Inc.
Gross receipts subject to tax under the Tax Code do not include
monies or receipts entrusted to the taxpayer which do not belong
to them and do not redound to the taxpayers benefit; and it is not
necessary that there must be a law or regulation which would
exempt such monies or receipts within the meaning of gross
receipts under the Tax Code
Facts:
The Commissioner of Internal Revenue filed a petition to review on
certiorari to the CTA decision which ruled that the money entrusted
to private respondent Tours Specialist (TS), earmarked and paid for
hotel room charges of tourists, travellers and/or foreign travel
agencies do not form part of its gross receipt subject to 3%
independent contractors tax.
Tours Specialist derived income from its activities and services as a
travel agency, which included booking tourists in local hotels. To
supply such service, TS and its counterpart tourist agencies abroad
have agreed to offer a package fee for the tourists (payment of hotel
room accommodations, food and other personal expenses). By
arrangement, the foreign tour agency entrusts to TS the fund for
hotel room accommodation, which in turn paid by the latter to the
local hotel when billed.
Despite this arrangement, CIR assessed private respondent for
deficiency 3% contractors tax as independent contractor including
the entrusted hotel room charges in its gross receipts from services
for years 1974-1976 plus compromise penalty.
During cross-examination, TS General Manager stated that the
payment through them is only an act of accommodation on (its)
part and the agent abroad instead of sending several telexes and
saving on bank charges they take the option to send the money to
(TS) to be held in trust to be endorsed to the hotel.
Nevertheless, CIR caused the issuance of a warrant of distraint and
levy, and had TS bank deposits garnished.

Issue:
W/N amounts received by a local tourist and travel agency included
in a package fee from tourists or foreign tour agencies, intended or
earmarked for hotel accommodations form part of gross receipts
subject to 3% contractors tax
Held:
No. Gross receipts subject to tax under the Tax Code do not include
monies or receipts entrusted to the taxpayer which do not belong to
them and do not redound to the taxpayers benefit; and it is not
necessary that there must be a law or regulation which would
exempt such monies or receipts within the meaning of gross
receipts under the Tax Code. Parenthetically, the room charges
entrusted by the foreign travel agencies to the private respondents
do not form part of its gross receipts within the definition of the Tax
Code. The said receipts never belonged to the private respondent.
The private respondent never benefited from their payment to the
local hotels. This arrangement was only to accommodate the
foreign travel agencies.
The well-settled doctrine is that the findings of facts of the CTA are
binding on this Court and absent strong reasons for this Court to
delve into facts, only questions of law are open for determination.
The factual findings of the CTA are binding upon this Court and
can only be disturbed on appeal if not supported by substantial
evidence.
In the instant case, we find no reason to disregard and deviate
from the findings of facts of the CTA.
In context, DIRECT TAXES are those that are demanded from the
very person who, it is intended or desired, should pay them; while
INDIRECT TAXES are those that are demanded in the first
instance from one person in the expectation and intention that he
can shift the burden to someone else.
Accordingly, the significance of PD 31 is clearly established in
determining whether or not hotel room charges of foreign tourists
in local hotels are subject to the 3% contractor's tax. As CTA aptly
stated:

...If the hotel room charges entrusted to petitioner will be

subjected to 3% contractor's tax as what respondent would want
to do in this case, that would be in effect do indirectly what PD 31
would not like hotel room charges of foreign tourists to be
subjected to hotel room tax. Although respondent may claim that
the 3% contractor's tax is imposed upon a different incidence, i.e.,
the gross receipts of petitioner tourist agency which he asserts
includes the hotel room charges entrusted to it, the effect would be
to impose a tax, and though different, it nonetheless imposes a tax
actually on room charges. One way or the other, it would not have
the effect of promoting tourism in the Philippines as that would
increase the costs or expenses by the addition of a hotel room tax
in the overall expenses of said tourists.
The Court finds to exclude from gross receipts money entrusted by
foreign tour operators to Tours Specialists to pay the hotel
accommodation of tourists booked in various local hotels. The
Court declared that Tours Specialists did not own such entrusted
funds and thus, the funds were not subject to the 3% contractor's
tax payable by Tours Specialists.
5. CIR vs. Javier
FACTS:
1977: Victoria Javier, wife of Javier-respondent, received $999k
from Prudential Bank remitted by her sister Dolores through
Mellon
Bank
in
US.
Around 3 weeks after, Mellon Bank filed a complaint with CFI
Rizal against Javier claiming that its remittance of $1M was a
clerical error and should have been $1k only and praying that the
excess be returned on the ground that the Javiers are just trustees
of an implied trust for the benefit of Mellon Bank.
CFI charged Javier with estafa alleging that they misappropriated
and
converted
it
to
their
own
personal
use.
A year after, Javier filed his Income Tax Return for 1977 and
stating in the footnote that the taxpayer was recipient of some
money received abroad which he presumed to be a gift but turned
out to be an error and is now subject of litigation
The Commissioner of Internal Revenue wrote a letter to Javier
demanding him to pay taxes for the deficiency, due to the
remittance.
Javier replied to the Commissioner and said that he will pay the

deficiency but denied that he had any undeclared income for 1977
and requested that the assessment of 1977 be made to await final
court decision on the case filed against him for filing an allegedly
fraudulent return.
Commissioner replied that the amount of Mellon Banks
erroneous remittance which you were able to dispose is definitely
taxable and the Commissioner imposed a 50% fraud penalty on
Javier.

ISSUE: Whether or not Javier is liable for the 50% penalty.

HELD: No.
The court held that there was no actual and intentional fraud
through willful and deliberate misleading of the BIR in the case.
Javier even noted that the taxpayer was recipient of some money
received abroad which he presumed to be a gift but turned out to be
an
error
and
is
now
subject
of
litigation
(the ff are not expressly written in the case, in fact the doctrine I
just found it elsewhere but this is relevant to the topic rather than
the
issue
in
the
case)
o Claim of right doctrine- a taxable gain is conditioned upon the
presence of a claim of right to the alleged gain and the absence of a
definite and unconditional obligation to return or repay.
o In this case, the remittance was not a taxable gain, since it is still
under litigation and there is a chance that Javier might have the
obligation to return it. It will only become taxable once the case has
been settled because by then whatever amount that will be
rewarded, Javier has a claim of right over it.
FACTS: In 1977, Victoria Javier received a $1 Million remittance in
her bank account from her sister abroad, Dolores Ventosa. Melchor
Javier, Jr., the husband of Victoria immediately withdrew the said
amount and then appropriated it for himself.
Later, the Mellon Bank, a foreign bank in the U.S.A. filed a
complaint against the Javiers for estafa. Apparently, Ventosa only

sent $1,000.00 to her sister Victoria but due to a clerical error in

Mellon Bank, what was sent was the $1 Million.
Meanwhile, Javier filed his income tax return. In his return, he
place a footnote which states:
Taxpayer was recipient of some money received from abroad which
he presumed to be a gift but turned out to be an error and is now
subject of litigation.
The Commissioner of Internal Revenue (CIR) then assessed Javier
a tax liability amounting to P4.8 Million. The CIR also imposed a
50% penalty against Javier as the CIR deemed Javiers return as a
fraudulent return.
ISSUE: Whether or not Javier is liable to pay the 50% penalty.
HELD: No. It is true that a fraudulent return shall cause the
imposition of a 50% penalty upon a taxpayer filing such fraudulent
return. However, in this case, although Javier may be guilty of
estafa due to misappropriating money that does not belong to him,
as far as his tax return is concerned, there can be no fraud. There is
no fraud in the filing of the return. Javiers notation on his income
tax return can be considered as a mere mistake of fact or law but
not fraud. Such notation was practically an invitation for
investigation and that Javier had literally laid his cards on the
table. The government was never defrauded because by such
notation, Javier opened himself for investigation.
It must be noted that the fraud contemplated by law is actual and
not constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in order to
induce another to give up some legal right.
6. Roxas vs. CTA
FACTS:
Antonio, Eduardo and Jose Roxas, brothers and at the same time
partners of the Roxas y Compania, inherited from their
grandparents several properties which included farmlands. The
tenants expressed their desire to purchase the farmland. The
tenants, however, did not have enough funds, so the Roxases agreed
to a purchase by installment. Subsequently, the CIR demanded

from the brothers the payment of deficiency income taxes resulting

from the sale, 100% of the profits derived therefrom was taxed. The
brothers protested the assessment but the same was denied. On
appeal, the Court of Tax Appeals sustained the assessment. Hence,
this petition.
ISSUE:
Is Roxas liable?
RULING:
No. It should be borne in mind that the sale of the farmlands to the
very farmers who tilled them for generations was not only in
consonance with, but more in obedience to the request and
pursuant to the policy of our Government to allocate lands to the
landless.
In order to maintain the general publics trust and confidence in the
Government this power must be used justly and not treacherously.
It does not conform with the sense of justice for the Government to
persuade the taxpayer to lend it a helping hand and later on
penalize him for duly answering the urgent call.
In fine, Roxas cannot be considered a real estate dealer and is not
liable for 100% of the sale. Pursuant to Section 34 of the Tax Code,
the lands sold to the farmers are capital assets and the gain derived
from the sale thereof is capital gain, taxable only to the extent of
50%.

farmers, persuaded the Roxas brothers to part with their

landholdings
-

The brothers agreed to sell 13,500 hec to the govt for P2.079Mn,
plus 300K survey and subdivision expenses
Unfortunately, the govt did not have funds

A special arrangement was made with the Rehabilitation Finance

Corporation to advance to Roxas y Cia the amount of P1.5Mn as
loan

Under the arrangement, Roxas y Cia. allowed the farmers to buy

the lands for the same price but by installment, and contracted with
the RFC to pay its loan from the proceeds of the yearly
amortizations paid by the farmers

In 1953 and 1955, Roxas y Cia. derived from said installment

payments a net gain of P42,480.83 and P29,500.71. 50% of said net
gain was reported for income tax purposes as gain on the sale of
capital asset held for more than one year pursuant to Sec. 34 of the
Tax Code

b.
-

Residential house and lot at Wright St., Malate, Manila

After the marriage of Antonio and Eduardo, Jose lived in the
house where he paid rentals of 8K/year to Roxas y Cia

Facts:

Don Pedro Roxas and Dona Carmen Ayala, both

Spanish, transmitted to their grandchildren by hereditary
succession the following properties:

c.

a.

Agricultural lands with a total area of 19,000 hectares in

Nasugbu, Batangas

Tenants who have been tilling the lands expressed their desire to
purchase from Roxas y Cia, the parcels which they actually occupied

To manage the properties, Antonio Roxas, Eduardo Roxas and

Jose Roxas, the children, formed a partnership called Roxas y
Compania

The govt, in line with the constitutional mandate to acquire big

landed estates and apportion them among landless tenants-

On 1958, CIR demanded from Roxas y Cia the payment of real

estate dealer's tax for 1952 amtg to P150.00 plus P10.00
compromise penalty for late payment, and P150.00 tax for dealers
of securities plus P10.00 compromise penalty for late payment.

Shares of stocks in different corporations

Basis: house rentals received from Jose, pursuant to Art. 194 of

the Tax Code stating that an owner of a real estate who derives a
yearly rental income therefrom in the amount of P3,000.00 or
more is considered a real estate dealer and is liable to pay the
corresponding fixed tax

The Commissioner further assessed deficiency income taxes

against the brothers for 1953 and 1955, resulting from the inclusion
as income of Roxas y Cia of the unreported 50% of the net profits
derived from the sale of the Nasugbu farm lands to the tenants, and
the disallowance of deductions from gross income of various
business expenses and contributions claimed by Roxas y Cia and
the Roxas brothers

The brothers protested the assessment but was denied, thus

appealing to the CTA

CTA decision: sustained the assessment except the demand for the
payment of the fixed tax on dealer of securities and the
disallowance of the deductions for contributions to the Philippine
Air Force Chapel and Hijas de Jesus' Retiro de Manresa

Issue: Should Roxas y Cia be considered a real estate dealer

because it engaged in the business of selling real estate

The fact that there were hundreds of vendees and them being paid
for their respective holdings in installment for a period of ten years,
it would nevertheless not make the vendor Roxas y Cia. a real estate
dealer during the 10-year amortization period

the sale of the Nasugbu farm lands to the very farmers who tilled
them for generations was not only in consonance with, but more in
obedience to the request and pursuant to the policy of our
Government to allocate lands to the landless

It was the duty of the Government to pay the agreed compensation

after it had persuaded Roxas y Cia. to sell its haciendas, and to
subsequently subdivide them among the farmers at very reasonable
terms and prices. But due to the lack of funds, Roxas y Cia.
shouldered the Government's burden, went out of its way and sold
lands directly to the farmers in the same way and under the same
terms as would have been the case had the Government done it
itself

The power of taxation is sometimes called also the power to

destroy. Therefore it should be exercised with caution to minimize
injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly

Therefore, Roxas y Cia. cannot be considered a real estate dealer

for the sale in question. Hence, pursuant to Section 34 of the Tax
Code the lands sold to the farmers are capital assets, and the gain
derived from the sale thereof is capital gain, taxable only to the
extent of 50%

Ruling: NO, being an isolated transaction

Real estate dealer: any person engaged in the business of

buying, selling, exchanging, leasing or renting property on his own
account as principal and holding himself out as a full or part-time
dealer in real estate or as an owner of rental property or
properties rented or offered to rent for an aggregate amount of
three thousand pesos or more a year:
Section 194 of the Tax Code, in considering as real estate dealers
owners of real estate receiving rentals of at least P3,000.00 a year,
does not provide any qualification as to the persons paying the
rentals

As to the deductions
a.

P40 tickets to a banquet given in honor of Sergio Osmena and

P28 San Miguel beer given as gifts to various persons
representation expenses

Representation expenses: deductible from gross income as

expenditures incurred in carrying on a trade or business

In this case, the evidence does not show such link between the
expenses and the business of Roxas y Cia

b.

Contributions to the Pasay police and fire department and other

police departments as Christmas funds

Contributions to the Christmas funds are not deductible for the

reason that the Christmas funds were not spent for public purposes
but as Christmas gifts to the families of the members of said entities

Under Section 39(h), a contribution to a government entity is

deductible when used exclusively for public purposes

As to the contribution to the Manila Police trust fund, such is an

allowable deduction for said trust fund belongs to the Manila
Police, a government entity, intended to be used exclusively for its
public functions.

c.

Contributions to the Philippines Herald's fund for Manila's

neediest families

The contributions were not made to the Philippines Herald but to

a group of civic spirited citizens organized by the Philippines
Herald solely for charitable purposes

There is no question that the members of this group of citizens do

not receive profits, for all the funds they raised were for Manila's
neediest families. Such a group of citizens may be classified as an
association organized exclusively for charitable purposes
mentioned in Section 30(h) of the Tax Code

d.

Contribution to Our Lady of Fatima chapel at the FEU

University gives dividends to its stockholders

Located within the premises of the university, the chapel in

question has not been shown to belong to the Catholic Church or
any religious organization

The contributions belongs to the Far Eastern University,

contributions to which are not deductible under Section 30(h) of
the Tax Code for the reason that the net income of said university
injures to the benefit of its stockholders
7. Fisher vs. Trinidad
Facts: Philippine American Drug Company was a corporation duly
organized and existing under the laws of the Philippine Islands,

doing business in the City of Manila. Fisher was a stockholder in

said corporation. Said corporation, as result of the business for that
year, declared a "stock dividend" and that the proportionate share
of said stock divided of Fisher was P24,800. Said the stock dividend
for that amount was issued to Fisher. For this reason, Trinidad
demanded payment of income tax for the stock dividend received
by Fisher. Fisher paid under protest the sum of P889.91 as income
taxon said stock dividend. Fisher filed an action for the recovery of
P889.91. Trinidad demurred to the petition upon the ground that it
did not state facts sufficient to constitute cause of action. The
demurrer was sustained and Fisher appealed.
Issue: Whether or not the stock dividend was an income and
therefore taxable.
Held: No.
Generally
speaking, stock dividends
represent
undistributed increase in the capital of corporations or firms,
jointstock companies, etc., etc., for a particular period.
The inventory of the property of the corporation for particular
period shows an increase in its capital, so that the stock theretofore
issued does not show the real value of the stockholder's interest,
and additionalstock is issued showing the increase in the actual
capital, or property, or assets of the corporation.

In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme
Court held that mere advance in value does not constitute the
"income" specified in the revenue law as "income" of the owner for
the year in which the sale of the property was made. Such advance
constitutes and can be treated merely as an increase of capital.
In the case of Towne vs. Eisner, income was defined in an income
tax law to mean cash or its equivalent, unless it is otherwise
specified. It does not mean unrealized increments in the value of
the property. A stock dividend really takes nothing from the
property of the corporation, and adds nothing to the interests of the
shareholders. Its property is not diminished and their interest are
not increased. The proportional interest of each shareholder
remains the same. In short, the corporation is no poorer and the
stockholder is no richer then they were before.

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179), Mr.
Justice Pitney, said that the term "income" in its natural and
obvious sense, imports something distinct from principal or capital
and conveying the idea of gain or increase arising from corporate
activity.
In the case of Eisner vs. Macomber (252 U.S., 189), income was
defined as the gain derived from capital, from labor, or from both
combined, provided it be understood to include profit gained
through a sale or conversion of capital assets.
When a corporation or company issues "stock dividends" it shows
that the company's accumulated profits have been capitalized,
instead of distributed to the stockholders or retained as surplus
available for distribution, in money or in kind, should opportunity
offer. The essential and controlling fact is that the stockholder has
received nothing out of the company's assets for his separate use
and benefit; on the contrary, every dollar of his original investment,
together with whatever accretions and accumulations resulting
from employment of his money and that of the other stockholders
in the business of the company, still remains the property of the
company, and subject to business risks which may result in wiping
out of the entire investment. The stockholder by virtue of
the stock dividend has in fact received nothing that answers the
definition of an "income."
The stockholder who receives a stock dividend has received nothing
but a representation of his increased interest in the capital of the
corporation. There has been no separation or segregation of his
interest. All the property or capital of the corporation still belongs
to the corporation. There has been no separation of the interest of
the stockholder from the general capital of the corporation. The
stockholder, by virtue of the stock dividend, has no separate
orindividual control over the interest represented thereby, further
than he had before the stock dividend was issued. He cannot use it
for the reason that it is still the property of the corporation and not
the property of the individual holder of stock dividend. A certificate
ofstock represented by the stock dividend is simply a statement of
his proportional interest or participation in the capital of the
corporation. The receipt of a stock dividend in no way increases the
money received of a stockholder nor his cash account at the close of
the year. It simply shows that there has been an increase in the
amount of the capital of the corporation during the particular

period, which may be due to an increased business or to a natural

increase of the value of the capital due to business, economic, or
other reasons. We believe that the Legislature, when it provided for
an "income tax," intended to tax only the "income" of corporations,
firms or individuals, as that term is generally used in
its commonacceptation; that is that the income means money
received, coming to a person or corporation for services, interest, or
profit from investments. We do not believe that the Legislature
intended that a mere increase in the value of the capital or assets of
a corporation, firm, or individual, should be taxed as "income."
A stock dividend, still being the property of the corporation and not
the stockholder, may be reached by an execution against the
corporation, and sold as a part of the property of the corporation. In
such a case, if all the property of the corporation is sold, then the
stockholder certainly could not be charged with having received an
income by virtue of the issuance of the stock dividend. Until the
dividend is declared and paid, the corporate profits still belong to
the corporation, not to the stockholders, and are liable for corporate
indebtedness. The rule is well established that cash dividend,
whether large or small, are regarded as "income" and
all stockdividends, as capital or assets

If the ownership of the property represented by a stock dividend is

still in the corporation and not in the holder of such stock, then it is
difficult to understand how it can be regarded as income to the
stockholder and not as a part of the capital or assets of the
corporation. If the holder of the stock dividend is required to pay
anincome tax on the same, the result would be that he has paid a
tax upon an income which he never received. Such a conclusion is
absolutely contradictory to the idea of an income.
As stock dividends are not "income," the same cannot be considered
taxes under that provision of Act No. 2833. For all of the foregoing
reasons, SC held that the judgment of the lower court should be
REVOKED.

8. Limpan Investment Corp vs. CIR

Facts
Limpan Investment Corp is a domestic corporation engaged in the
business of leasing real properties. Among its real properties are
lots and buildings in Manila and Pasay City acquired from Isabelo
Lim and his mother. After filing tax returns for 1956, 1957, the
examiners of BIR discovered that the corporation has understated
its rental incomes by 20k and 81k during said years as well as
claimed excessive depreciation amounting to 20k and 16k. The CIR
demanded payment for deficiency tax and surcharge. Petitioners
argue that these amounts were either deposited with the court by
the tenants or have yet to be received.
Issue:
W/N there was undeclared income
Held:
Yes, petitioner admitted that it had undeclared more than half of
the amount, therefore it was incumbent upon the corporation to
establish the remainder of its pretensions by clear and convincing
evidence which was lacking in this case.

The withdrawal in 1958 of the deposits in court pertaining to the

1957 rental income is no sufficient justification for the nondeclaration of said income in 1957 since the deposit was resorted
due to the refusal of petitioner to accept the same, and was not the
fault of its tenants; hence, petitioner is deemed to have
constructively received such rentals in 1957.
The payment by the sub-tenant should have been reported as rental
income in said year as it in still income regardless of the source.
Limpan Investment Company deemed to have constructively
received rental payments in 1957 when they were deposited in court
due to its refusal to receive them.
FACTS:

BIR assessed deficiency taxes on Limpan Corp, a company that

leases real property, for under-declaring 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 SecretaryTreasurer) 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 corps 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:
Whether or not the BIR was correct in assessing deficiency taxes
against Limpan Corp. for undeclared rental income
HELD:
Yes. Petitioner admitted that it indeed had undeclared income
(although only a part and not the full amount assessed by 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 petitioners 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.