G.R. No.

L-53961 June 30, 1987

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:
FACTS

NDC entered into contracts in Tokyo with several Japanese shipbuilding companies for the
construction of twelve ocean-going vessels. The purchase price was to come from the
proceeds of bonds issued by the Central Bank. Initial payments were made in cash and through
irrevocable letters of credit. Fourteen promissory notes were signed for the balance by the NDC
and, as required by the shipbuilders, guaranteed by the Republic of the Philippines. Pursuant
thereto, the remaining payments and the interests thereon were remitted in due time by the
NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo. The
NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on
the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC
liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR
thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed
amount. The NDC went to the Court of Tax Appeals. The BIR was sustained by the CTA except
for a slight reduction of the tax deficiency in the sum of P900.00, representing the compromise
penalty.

ISSUE

WON THE NDC IS LIABLE TO PAY THE TAX IMPOSED BY THE CIR.

HELD

YES. The Japanese shipbuilders were liable to tax on the interest remitted to them under
Section 37 of the Tax Code. The petitioner argues that the Japanese shipbuilders were not
subject to tax under the above provision because all the related activities were done in
Tokyo. The law, however, does not speak of activity but of "source," which in this case is the
NDC. This is a domestic and resident corporation with principal offices in Manila. The residence
of the obligor which paid the interest under consideration is Calle Pureza, Sta. Mesa, Manila,
Philippines; and as a corporation duly organized and existing under the laws of the Philippines,
it is a domestic corporation, resident of the Philippines. The interest paid by petitioner, which is
admittedly a resident of the Philippines, is on the promissory notes issued by it. Clearly,
therefore, the interest remitted to the Japanese shipbuilders in Japan in 1960, 1961 and 1962
on the unpaid balance of the purchase price of the vessels acquired by petitioner is interest
derived from sources within the Philippines subject to income tax under the then Section
24(b)(1) of the National Internal Revenue Code.
G.R. No. L-17518 October 30, 1922

FREDERICK C. FISHER, plaintiff-appellant,

vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.

JOHNSON, J.:

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 and the said corporation, as result of the business for that year, declared a
"stock dividend. Fisher has a proportionate share of said stock divided of P24,800. Fisher, upon
demand of the Trinidad, paid under protest, and voluntarily the sum of P889.91 as income tax
on said stock dividend. For the recovery of that sum (P889.91) the present action was instituted.
Trinidad admits the doctrine established in the case of Eisner vs. Macomber that a "stock
dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the stock
dividend, does not violate the provisions of the Jones Law. He further argues that the statute of
the United States providing for tax upon stock dividends is different from the statute of the
Philippine Islands, and therefore the decision of the Supreme Court of the United States should
not be followed in interpreting the statute in force here.

ISSUE

WON THE STOCK DIVIDENDS" ARE CONSIDERED AS "INCOME" AND TAXABLE AS

SUCH UNDER THE PROVISIONS OF SECTION 25 OF ACT NO. 2833

HELD

NO. It becomes necessary in this connection to ascertain what is an "income in order that we
may be able to determine whether "stock dividends" are "income" in the sense that the word is
used in the statute. Perhaps it would be more logical to determine first what are "stock
dividends" in order that we may more clearly understand their relation to "income." Generally
speaking, stock dividends represent undistributed increase in the capital of corporations or
firms, joint stock companies, etc., etc., for a particular period. They are used to show the
increased interest or proportional shares in the capital of each stockholder. In other words, the
inventory of the property of the corporation, etc., 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 additional stock is issued showing the increase in the actual capital, or property, or
assets of the corporation, etc. Having reached the conclusion, supported by the great weight of
the authority, that "stock dividends" are not "income," the same cannot be taxes under that
provision of Act No. 2833 which provides for a tax upon income. Under the guise of an income
tax, property which is not an income cannot be taxed. When the assets of a corporation have
increased so as to justify the issuance of a stock dividend, the increase of the assets should be
taken account of the Government in the ordinary tax duplicates for the purposes of assessment
and collection of an additional tax
G.R. No. L-12287 August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO,

vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION,
Deputy Collector of Internal Revenue,

MALCOLM, J.:

FACTS

Spouses Madrigal were legally married prior contracted under the provisions of law concerning
conjugal partnerships. Vicente Madrigal filed sworn declaration on the prescribed form with the
Collector of Internal Revenue, showing, as his total net income for the year 1914, the sum of
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 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 the protest of Madrigal had been
decided adversely by the Collector of Internal Revenue, action was begun by Vicente Madrigal
and his wife Susana Paterno in the Court of First Instance of the city of Manila against Collector
of Internal Revenue and the 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 from
Vicente Madrigal. The burden of the complaint was that if the income tax for the year 1914 had
been correctly and lawfully computed and unlawfully collected from the plaintiff Vicente
Madrigal, 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

WON THE INCOME REPORTED BY MADRIGAL ON 1915 SHOULD BE DIVIDED INTO 2 IN

COMPUTING FOR THE ADDITIONAL INCOME TAX BECAUSE OF THE CONJUGAL
PARTNERSHIP EXISTING BETWEEN THEM.

HELD

NO. The court held that Sps. Madrigal reported income from conjugal partnership separately
resulting to lower tax due and therefore they should report jointly. 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. Income Tax aims to mitigate the evils arising from inequalities of wealth by a
progressive scheme of taxation, which places the burden on those best able to pay. To carry out
this idea, public considerations have demanded an exemption roughly equivalent to the
minimum of subsistence. With these exceptions, the income tax is supposed to reach the
earnings of the entire non-governmental property of the country. 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.
G.R. No. 48532 August 31, 1992

HERNANDO B. CONWI et. al., petitioners,

vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

NOCON, J.:

FACTS

During the years 1970 and 1971 petitioners were assigned, for certain periods, to other
subsidiaries of Procter & Gamble, outside of the Philippines, during which petitioners were paid
U.S. dollars as compensation for services in their foreign assignments. When petitioners filed
their income tax returns for the year 1970, they computed the tax due by applying the dollar-to-
peso conversion on the basis of the floating rate ordained under B.I.R. Ruling No. 70-027 dated
May 14, 1970. Petitioners in filed with the office of the Commissioner, amended income tax
using the par value of the peso as prescribed in Section 48 of Republic Act No. 265 in relation to
Section 6 of Commonwealth Act No. 265 in relation to Section 6 of Commonwealth Act No. 699
as the basis for converting their respective dollar income into Philippine pesos for purposes of
computing and paying the corresponding income tax due from them. The aforesaid computation
as shown in the amended income tax returns resulted in the alleged overpayments, refund
and/or tax credit. Accordingly, claims for refund of said over-payments were filed with
respondent Commissioner. Without awaiting the resolution of the Commissioner of the Internal
Revenue on their claims, petitioners filed their petitioner for review in the above-mentioned
cases. The Court of Tax Appeals 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. Accordingly, the claim
for refund and/or tax credit of petitioners in the above-entitled cases was denied.

ISSUE

WON THE EXCHANGE RATE UNDER CB CIRCULAR NO. 42 SHOULD BE APPLIED AND
NOT THE EXCHANGE RATE UNDER RMC NOs. 7-71 and 41-71

HELD

NO. Petitioners being subject to Philippine income tax, their dollar earnings should be converted
into Philippine pesos in computing the income tax due therefrom, in accordance with the
provisions of Revenue Memorandum Circular No. 7-71 for 1970 income and Revenue
Memorandum Circular No. 41-71 for 1971 income, which reiterated BIR Ruling No. 70-027, to
wit: For internal revenue tax purposes, the free marker rate of conversion (Revenue Circulars
Nos. 7-71 and 41-71) should be applied in order to determine the true and correct value in
Philippine pesos of the income of petitioners. For the proper resolution of these 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 thought of as flow of the fruits of
one's labor
G.R. No. 78953 July 31, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.

SARMIENTO, J.:

FACTS

Javier received from the Prudential Bank in Pasay City the amount of US$999,973.70 remitted
by her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is
Mellon Bank, N.A. The latter filed a complaint with the Court of First Instance of Rizal against
the petitioner his wife and other defendants, claiming that its remittance of US$1,000,000.00
was a clerical error and should have been US$1,000.00 only, and praying that the excess
amount be returned. The petitioner filed his Income Tax Return for the taxable year 1977
showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in the
footnote of the return that "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. Petitioner
received a letter from the acting Commissioner of Internal Revenue together with income
assessment notices for the years 1976 and 1977, demanding that petitioner pay on or before
December 15, 1980.

Petitioner received from Acting Commissioner of Internal Revenue Romulo Villa a letter dated
October 8, 1981 stating in reply to his December 15, 1980 letter-protest that "the amount of
Mellon Bank's erroneous remittance which you were able to dispose, is definitely taxable."The
Commissioner also imposed a 50% fraud penalty against Javier.

ISSUE

WHETHER OR NOT JAVIER IS LIABLE TO PAY THE 50% PENALTY FOR FILING A
FRAUDULENT ON THE GROUND THAT HE DID NOT DECLARE THE SUM OF MONEY
THAT HE ERRONEOUSLY RECEIVED AND ALREADY SPENT AS INCOME

HELD

NO. Under the then Section 72 of the Tax Code, a taxpayer who files a false return is liable to
pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment
has been made on the basis of the return filed before the discovery of the falsity or fraud. In the
case at bar, there was no actual and intentional fraud through willful and deliberate misleading
of the government agency concerned, the Bureau of Internal Revenue, headed by the herein
petitioner. 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. Error or mistake of law is not fraud. The petitioner's
zealousness to collect taxes from the unearned windfall to Javier is highly commendable.
G.R. No. 108576 January 20, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO
CORP., respondents
MARTINEZ, J.:
FACTS

Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings of
185,154 shares. Broken down, the shares comprise of 50,495 shares which were of original
issue when the corporation was founded and 134,659 shares as stock dividend declarations. So
in 1964 when Soriano died, half of the shares he held went to his wife as her conjugal shareand
the other half went to the estate. For sometime after his death, his estate still continued to
receive stock dividends from ASC until it grew to at least 108,000 shares.

In 1968, ASC through its Board issued a resolution for the redemption of shares from Sorianos
estate purportedly for the planned Filipinization of ASC. Eventually, 108,000 shares were
redeemed from the Soriano Estate. In 1973, a tax audit was conducted. Eventually, the
Commissioner of Internal Revenue (CIR) issued an assessment against ASC for deficiency
withholding tax-at-source. The CIR explained that when the redemption was made, the estate
profited because ASC would have to pay the estate to redeem, and so ASC would have
withheld tax payments from the Soriano Estate yet it remitted no such withheld tax to the
government.ASC averred that it is not duty bound to withhold tax from the estate because it
redeemed the said shares for purposes of Filipinization of ASC and also to reduce its
remittance abroad.

ISSUE

WON THE ASC IS BOUND TO WITHOLD TAX FROM THE ESTATE ON THE GROUND THAT
IT REDEEMED THE SAID SHARES FOR PURPOSES OF FILIPINIZATION.

HELD

YES. The reason behind the redemption is not material. The proceeds from a redemption is
taxable and ASC is duty bound to withhold the tax at source. The Soriano Estate definitely
profited from the redemption and such profit is taxable, and again, ASC had the duty to withhold
the tax. There was a total of 108,000 shares redeemed from the estate. 25,247.5 of that was
original issue from the capital of ASC. The rest (82,752.5) of the shares are deemed to have
been from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in
the absence of evidence to the contrary, the Tax Code presumes that every distribution of
corporate property, in whole or in part, is made out of corporate profits such as stock dividends.
It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that
the latter is merely redeeming them as such. The capital cannot be distributed in the form of
redemption of stock dividends without violating the trust fund doctrine.
BIR Ruling No. 029-98 dated March 19, 1998

INCOME TAX; Income tax paid or accrued (now incurred) by a company within a taxable
year not allowed as deduction - (a) BIR is prohibited from issuing further comments on
Questions Nos. 1, 2, 3, 7 and 8 issued by the Energy Regulatory Board in relation to ERB Case
No. 93-118 entitled "Meralco vs. Energy Regulatory Board, et. al." in so far as the rate fixing
issue is concerned considering that the issues are all sub judice pending before the Court of
Appeals. With regard to the question of whether the appraisal increase of property, plant and
equipment of electric utilities is taxable, the general rule is that, mere increase in the value of
property without actual realization, either through sale or other disposition, is not taxable.
However, if by reason of appraisal, the cost basis of property is increased and the resulting
basis is used as the new tax base for purposes of computing the allowable depreciation
expense, the net difference between the original cost basis and new basis due to appraisal is
taxable under the economic benefit principle.

(b) BIR is not following American Laws on taxation because we have our tax laws, including
rules and regulations implementing our tax laws. However, under the doctrine of precedent, a
court may apply American Laws or Court Decisions.

(c) The amendments introduced by EO No. 37 to then Section 21(c)(2) of the Tax Code of 1997
provides that dividend received by a citizen or resident alien from a domestic corporation is
subject to income tax at the rate of 15% in 1986, 10% effective January 1, 1987, 5% effective
January 1, 1988 and 0% effective January 1, 1989. However, Sec. 22 (a) and (b) of the same
Code provides that dividends received by a non-resident alien individual, whether engaged or
not in trade or business in the Philippines, from a domestic corporation is subject to final
withholding tax of 30% of such dividend income.

(d) For purposes of computing the taxable income of domestic corporation derived form within
and without the Philippines, the allowable deductions are limited to those provided under
Section 29 of the Tax Code of 1997 for taxable year 1997 and prior years but for taxable year
1998, Section 34 of the Tax Code of 1997 governs.

(e) Pursuant to then Section 117 of the Tax Code of 1997, as amended by RA 8241, the 2%
franchise tax of electric, gas and water utilities is based on gross receipts derived from the
business covered by the law granting the franchise.
G.R. No. 172231 February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.

YNARES-SANTIAGO, J.:

FACTS

ICC received from the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency income
tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79 inclusive of surcharges and
interest, both for the taxable year 1986. The deficiency expanded withholding tax
of P4,897.79 was allegedly due to the failure of ICC to withhold 1% expanded withholding tax on
its claimed P244,890.00 deduction for security services. CTA rendered a decision canceling and
setting aside the assessment notices issued against ICC. It held that the claimed deductions for
professional and security services were properly claimed by ICC in 1986. Likewise, the CTA
found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction for
security services as shown by the various payment orders and confirmation receipts it
presented as evidence. Petitioner filed a petition for review with the Court of Appeals, which
affirmed the CTA decision, holding that although the professional services (legal and auditing
services) were rendered to ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only in 1986
when ICC received the billing statements for said services. CIR filed the instant petition
contending that since ICC is using the accrual method of accounting, the expenses for the
professional services that accrued in 1984 and 1985, 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
expenses as deduction for the taxable year 1986.

ISSUE

WON THE DEDUCTION OF THE EXPENSES FOR PROFESSIONAL AND SECURITY

SERVICES OF 1984-1985 ARE VALID DEDUCTIONS FROM ICCS GROSS INCOME FOR
1986

HELD

NO. The accrual of income and expenses is permitted when all-events test has been met. It
requires: (1) the fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability. The all-events test requires the
right to income or liability be fixed, and the amount of such income or liability be determined with
reasonable accuracy. However, the test does not demand that the amount of income or liability
be known absolutely, only that a taxpayer has at his disposal the information necessary to
compute the amount with reasonable accuracy. The accrual method presents largely a
question of fact and that the taxpayer bears the burden of establishing the accrual of an
expense or income. However, ICC failed to discharge this burden. As to when the firms
performance of its services in connection with the 1984 tax problems were completed, or
whether ICC exercised reasonable diligence to inquire about the amount of its liability, or
whether it does or does not possess the information necessary to compute the amount of said
liability with reasonable accuracy, are questions of fact which ICC never established. It simply
relied on the defense of delayed billing by the firm and the company, which under the
circumstances, is not sufficient to exempt it from being charged with knowledge of the
reasonable amount of the expenses for legal and auditing services. Furthermore, professional
fees of SGV & Co. for auditing the financial statements of ICC for the year 1985 cannot be
validly claimed as expense deductions in 1986. This is so because ICC failed to present
evidence showing that even with only "reasonable accuracy," as the standard to ascertain its
liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said
company would charge for its services.