COMPILED DIGESTS LINK:

http://docshare.tips/tax-1-digests-ii_5770ca4bb6d87fb5918b9483.html

31. https://www.lawphil.net/judjuris/juri1987/jun1987/gr_l_53961_1987.html

NDC vs. CIR

The NDC entered into contract in Tokyo with several Japanese shipbuilding companies for the
construction of its 12 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 letter of credit. Fourteen (14) promissory notes were signed for the balance by the
NDC guaranteed by Republic of the Philippines.

Pursuant thereto, the remaining payments and the interest thereon were remitted in due time
by the NDC to Tokyo. The NDC remitted to the ship builders in Tokyo the total amount of
US$4,066,580 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
PhP5,115,234.74. The BIR thereupon served on the NDC a warrant of distraint and levy to
enforcce collection of the claimed amount.

Petitioner argues that the Japanese ship builders were not subject to tax under the sec. 37 of
the Tax Code because all the related activities- the signing of the contract, the construction of
the vessels, the payment of the stipulated price, and their delivery to the NDC - were done in
Tokyo.

ISSUE: WON the Tokyo shipbuilders are subject to tax?

HELD:
The law specifies: interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligation of resident, corporate or otherwise. Nothing there
speak of the 'acts or activity' of non-residential corporation in the Philippines, or place where
the contract is signed.

The residence of the obligor who pays the interest rather than the physical location of the
securities, bonds or notes or the place of payment, is the determining factor of the source of
interest income. Accordingly, if the obligor is a resident of the Philippines the interest payment
paid by him can have no other source than within the Philippines. The interest is paid not by
the bond note or other interest-bearing obligations, but by the obligor.
2. https://www.lawphil.net/judjuris/juri1922/oct1922/gr_l-17518_1922.html

FREDERICK C. FISHER v. WENCESLAO TRINIDAD, GR No. 17518, 1922-10-30

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... ppellant was a stoekohlder
in said corporation; that said corporation, as a... result of the business for that year, declared a
"stock dividend;... proportionate share of said stock dividend of the appellant was P24,800...
the appellant,... upon demand of the appellee, paid, under protest, and involuntarily, unto the
appellee the sum of P889.91 as income tax on said stock dividend.
recovery of that sum (P889.91) the present action was instituted... appellant cites and relies on
some decisions of the Supreme Court of the United States
In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and
in each case it was held that "stock dividends" were capital and not an "income" and therefore
not subject to the "income tax" Jaw.
The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U. S.,
189), 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.
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.
It will be rioted from a reading of the provisions of the two laws above quoted that the writer of
the law of the Philippine Islands must have had before him the statute of the United States. No
important argument can be based upon the slight difference in the wording of the two...
sections.
There is no question that the Philippine
Legislature may provide for the payment of an income tax, but it cannot, under the guise of an
income tax, collect a tax on property which is not an "income." The Philippine Legislature
cannot impose a tax upon "property" under a law which provides for a tax upon "income" only.
The Philippine Legislature has no power to provide a tax upon "automobiles" only, and under
that law collect a tax upon a carreton or bull cart.
A statute providing for an income tax cannot be construed to cover property which is not, in
fact, income. The Legislature cannot, by a... statutory declaration, change the real nature of a
tax which it imposes. A law which imposes an importation tax on rice only cannot be construed
to impose an importation tax on corn.
Issues:
Are the "stock dividends" in the present case "income" and taxable as such under the
provisions of section 25 of Act No. 2833 ?
Ruling:
stock dividends represent undistributed increase in the capital of corporations or firms, joint
stock companies, etc., etc., for a particular period.
used to show the... increased interest or proportional share in the capital of each stockholder.
the inventory of the property of the corporation, etc., for a 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.
The New Standard Dictionary, edition of 1915, defines an income 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."
Webster's International Dictionary defines an income as "the receipts, salary; especially, the
annual receipts of a private person or a... corporation from property."
Bouvier, in his law dictionary, says that an "income" in the federal constitution and income tax
act, is used in its common or ordinary meaning and not in its technical or economic sense.
Mr. Black, in his law... dictionary, says: "An income is the return in money from one's business,
labor, or capital invested ; gains, profit, or private revenue." "An income tax is a tax on the
yearly profits arising from property, professions, trades, and offices."
Gray vs. Darlington (82 U. S., 63), said in speaking of income that mere advance in value in no
sense constitutes the "income"
Such advance constitutes and can be treated merely as an increase of capital.
Mr. Justice Hughes
"income" in an income... tax law, unless it is otherwise specified, to mean cash or its equivalent.
It does not mean choses in action or unrealized increments in the value of the property
Towne vs. Eisner, supra, Mr, Justice Holmes
'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 interests 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 than they were before.
Mr. Justice Pitney
EISNER VS. MACOMBER
"An income may be 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 stock dividends are declared, the corporation or company acknowledges a liability, in
form, to the stockholders
If profits have been made by the... corporation... they create additional bookkeeping liabilities
under the head of "profit and loss,"
None of these, however, gives to the stockholders as a body, much less to any... one of them,
either a claim against the going concern or corporation, for any particular sum of money, or a
right to any particular portion of the asset, or any share unless or until the directors conclude
that dividends shall be made and a part of the company's assets... segregated from the
common fund for that purpose.
The dividend normally is payable in money and when so paid, then only does the stockholder
realize a profit or gain, which becomes his separate property, and thus derive an income from
the capital that he has invested. Until that... is done the increased assets belong to the
corporation and not to the individual stockholders.
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.
it tends rather to postpone said realization, in that the fund represented by the new stock has
been transferred from surplus to assets, and no longer is available for actual distribution.
The essential and controlling fact is... that the stockholder has received nothing out of the
company's assets for his separate use and benefit
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.
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 or individual 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
A certificate of stock represented by the stock dividend is simply a statement of his
proportional... interest or participation in the capital of the corporation.
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 common
acceptation;... 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."
Mr. Justice Pitney, in the case of Eisner vs. Macomber
"That the fudamental relation of 'capital' to 'income' has been much discussed by economists,
the former being likened to the tree or the... land, the latter to the fruit or the crop... the
former depicted as a reservoir supplied from springs; the latter as the outlet stream, to be
measured by its flow during a period of time."
There is a clear distinction between an extraordinary cash dividend, no matter when earned,
and stock dividends declared, as in the present case.
The one is a disbursement to the stockholder of accumulated earnings, and the corporation at
once parts irrevocably with all... interest thereon. The other involves no disbursement by the
corporation. It parts with nothing to the stockholder.
The latter receives, not an actual dividend, but certificate of stock which simply evidences his
interest in the entire capital, including such as by investment of... accumulated profits has been
added to the original capital.
They are not income to him, but represent additions1 to the source of his income, namely, his
invested capital.
Gibbons vs. Mahon
The ownership of that property is in... the corporation, and not in the holders of shares of its
stock.
DeKoven vs. Alsop
Mr. Justice Wilkin said: "A dividend is defined as 'a corporate profit set aside, declared, and
ordered by the directors to be paid to the stockholders on demand or at a fixed time. Until the
dividend is... declared, these corporate
profits belong to the corporation, not to the stockholders, and are liable for corporate
indebtedness.'"
When a cash dividend is declared and paid to the... stockholders, such cash becomes the
absolute property of the stockholders and cannot be reached by the creditors of the
corporation in the absence of fraud. A stock dividend, however, still being the property of the
corporation, and not of the stockholder, it may be reached by... an execution against the
corporation, and sold as a part of the property of the corporation
The rule is well established that cash dividends, whether large or small, are regarded as
"income"... and all stock dividends, as capital or assets.
if the holder of the stock... dividend is required to pay an income 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. An income subject to taxation under the law
must be an actual income... and not a promised or prospective income.
The appellee emphasizes the "income from dividends." Of course, income received as dividends
is taxable as an income, but an income from "dividends" is a very different thing from a receipt
of a "stock dividend." One is... an actual receipt of profits; the other is a receipt of a
representation of the increased value of the assets of a corporation.
Yuck imperyalismo
In- asmuch, however, as appeals may be taken... from this court to the Supreme Court of the
United States, we feel bound to follow the same doctrine announced by that court.
"stock dividends" are not "income," the same cannot be taxed 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.
Principles:
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 common
acceptation; 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."
"That the fudamental relation of 'capital' to 'income' has been much discussed by economists,
the former being likened to the tree or the... land, the latter to the fruit or the crop; the former
depicted as a reservoir supplied from springs; the latter as the outlet stream, to be measured
by its flow during a period of time."
When a cash dividend is declared and paid to the... stockholders, such cash becomes the
absolute property of the stockholders and cannot be reached by the creditors of the
corporation in the absence of fraud. A stock dividend, however, still being the property of the
corporation, and not of the stockholder, it may be reached by... an execution against the
corporation, and sold as a part of the property of the corporation.
The rule is well established that cash dividends, whether large or small, are regarded as
"income"... and all stock dividends, as capital or assets.
if the holder of the stock... dividend is required to pay an income 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. An income subject to taxation under the law
must be an actual income... and not a promised or prospective income.
The appellee emphasizes the "income from dividends." Of course, income received as dividends
is taxable as an income, but an income from "dividends" is a very different thing from a receipt
of a "stock dividend." One is... an actual receipt of profits; the other is a receipt of a
representation of the increased value of the assets of a corporation.
"stock dividends" are not "income," the same cannot be taxed 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.

3. https://www.lawphil.net/judjuris/juri1918/aug1918/gr_l-12287_1918.html

MADRIGAL VS. RAFFERTY- Difference Between Capital and Income

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 Madrigal’s 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 husband’s 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.

34. https://www.lawphil.net/judjuris/juri1992/aug1992/gr_48532_1992.html

CONWI vs CTA 213 SCRA 83

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
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. 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 thought 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 a foreign exchange transaction is simply that — a
transaction in foreign exchange, foreign exchange being "the conversion of an amount of
money or currency of one country into an equivalent amount of money or currency of
another." When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they
were earning in their assigned nation's currency and were ALSO spending in said currency.
There was no conversion, therefore, from one currency to another.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of
Procter & 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.

35. https://www.lawphil.net/judjuris/juri1991/jul1991/gr_78953_1991.html

Javier vs CA
Javier vs CA, GR No L-78953, January 22, 1990

Victoria Javier, wife of the private respondent received from Prudential bank and Trust
Company the amount of USD 999,973.70 remitted by her sister, Mrs. Dolores Vertosa, through
some banks in the US, among which is Mellon Bank,NA.

Mellon Bank filed a complaint against private respondent, his wife and other defendants,
claiming that its remittance of US$1M was a clerical error and should have been US$1,000. On
the ground that the defendants are trustees of an implied trust for the benefit of Mellon Bank
with the clear, immediate and continuing duty to return the said amount from the moment it
was received.

Private respondent filed his income tax return for the taxable year 1977 showing a gross
income of PhP 53,053.38 and a net income of PhP 48.053.88 and stating in the footnote of the
return that “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 now subject to litigation.”

Private respondent wrote the BIR that he was paying the deficiency income assessment for the
year 1976 but denying that he had any undeclared income for the year 1977 and requested that
the assessment for 1977 be made to wait final court decision on the case filed against him for
filing an allegedly fraudulent return.

CIR reply stating that the amount of Mellon Bank erroneous remittance which were depose is
definitely taxable. The Commission also imposed a 50% fraud penalty against Javier.

ISSUE: WON private respondent is liable for the 50% fraud?

HELD:
Under Sec 72 of the Tax Code, a taxpayer who files a false return is liable to pay a fraud penalty
of 50% of the tax due from him 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. The fraud contemplated by
law is actual and not constructive.

In the case at bar, there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the BIR. 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 imposition of the fraud penalty in this case is not justifies by the extant facts because he
did not conceal the facts that he received an amount of money although it was a subject of
litigation.

As ruled by respondent CTA, the 50% surcharge imposed as fraud penalty by the petitioner
against the private respondent in the deficiency assessment should be deleted.

36. https://supreme.justia.com/cases/federal/us/252/189/case.html

EISNER VS. MACOMBER- What is Income?

Income means something derived from labor or capital. To be “derived” means something of
exchangeable value separated from the capital.

FACTS:
1. Mrs. Macomber owned 2,200 share of Standard Oil Company of California stock.
2. In January, 1916, the company declared a stock dividend and Mrs. Macomber received an
additional 1,100 shares of stock. Of these shares, 198.77 shares, par value $19,877, represented
surplus earned by the company after March 1, 1913.
3. The IRS treated the $19,877 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.
4. Mrs. Macomber argued that that provision in the Revenue Act of 1916 was unconstitutional
because it was a direct tax not apportioned per population; since a stock dividend was not
income, a legislative provision subjecting it to income tax was not constitutional under the 16th
Amendment.
5. The District Court held that the stock dividend was not income.
ISSUE: Does Congress have the power under the 16th Amendment to tax shareholders on stock
dividends received? Are stock dividends considered income or capital?

Laws/ References:
1) 16th Amendment - "The Congress shall have power to lay and collect taxes on income, from
whatever source derived, without apportionment among the several States, and without regard
to any census or enumeration."
2) Revenue Act of 1916 - a "stock dividend shall be considered income, to the amount of its
cash value."
3) Brushaber v Union Pacific - in this case, the Supreme Court stated that the 16th Amendment
"did not extend the taxing power to new subjects, but merely removed the necessity which
otherwise might exist for an apportionment among the State of taxes laid on income."
Macomber, 1 USTC ¶32, page 1079. Thus, the item must be income in order for Congress to tax
it.
4) The Court suggested that "income," which is not defined in the 16th Amendment, was
something derived from capital or labor, or from both.

HELD:
The Supreme Court affirmed the District Court holding for the taxpayer that a stock dividend is
not income. The Revenue Act of 1916 provision subjecting stock dividends to tax was held
unconstitutional.

If a stock dividend is not considered income, it can not be subject to income tax under the 16th
Amendment. In applying the 16th Amendment, it is important to distinguish between capital
and income, as only income is subject to income tax.

A stock dividend reflects the corporation transferring an amount from "surplus" (retained
earnings) to "capital stock." Such a transaction is merely a bookkeeping entry and "affects only
the form, not the essence, of the "liability" acknowledged by the corporation to its own
shareholders ... it does not alter the preexisting proportionate interest of any stockholder or
increase the intrinsic value of his holding or of the aggregate holdings of the other stockholders
as they stood before" (Macomber, p. 1081). An increase to the value of capital investment is
not income. Nothing of value has been taken from the corporation and given to the shareholder
as is the case with a cash dividend.

In addition, since the shareholder receives no cash, in order to pay any tax on a stock dividend,
he might have to convert the stock into cash - he has no wherewithal to pay from the nature of
the transaction. "Nothing could more clearly show that to tax a stock dividend is to tax a capital
increase, and not income, than this demonstration that in the nature of things it requires
conversion of capital in order to pay the tax" (Macomber, p. 1082).

37. https://www.lawphil.net/judjuris/juri1964/jul1964/gr_l-18169_1964.html

CIR. Vs LEDNICKY
11 SCRA 603
FACTS:

 Resp spouses V.E. Lednicky and Maria Valero Lednicky are American Citizens residing in the
Philippines and derived their income from Philippine sources for the taxable years in question
1957 – Sps filed their ITR for 1956 reporting a gross income P1,017,287.65 and a net income of
P733,809.44 on which P317,395.40 was assessed after deducting P4,805.59 as withholding tax.
Sps paid 326,247.41 on April 1957
March 1959 – Sps filed an amended ITR for 1956. They claimed a deduction of P205,939.24
paid
in 1956 to US gov’t. Respondents requested refund of 112,437.90
CIR failed to answer the claim for refund, resps filed their petition with the Tax Court
G.R. No. L-18169 formerly CTA case 570[different case/year] is also a claim for refund in the
amount of P150,269.00 as alleged overpaid income tax for 1955

FACTS:
 In Feb 1956 Sps filed ITR for 1955 = gross income of P1,7771,124.63 and net
income of P1,052,550.67
 1956 – sps filed an amended ITR
 Back in 1955, sps filed with the US Internal Revenue Agent in Manila their federal
ITR for the years 1947,1951-54 on income from Phil sources on a cash basis
 1958 – Sps amended their Phil ITR for 1955 to include the deductions of US
Federal income taxes, interest accrued up to May 15, 1955, and exchange and
bank charges
 CTA case 570 was filed
 G.R. No. 21434 formerly CTA Case No. 783, facts are similar but refer to Lednickys’ OTR for
1957 filed in Feb 1958
o In 1959 sps filed amended return for 1957 claiming deductions representing taxes paid to US
Gov’t.
* Tac xourt held that the taxes may be deducted because the Sps did not signify in their ITRa
desire to
avail themselves of the benefits of paragraph 3(B) of Sec. 30

ISSUE: WON a citizen of the US residing in Phils who derives income wholly from sources
within the Phils may deduct from his gross income the income taxes he has paid to US gov’t for
the
taxable year?

HELD/RATIO:
 SC: CIR correct that the construction and wording of Sec. 30c(1)B of the Internal Revenue Act
shows the law’s intent that the right to deduct income taxes paid to foreign government from
the
taxpayer’s gross income is given only as an alternative or substitute to his right to claim a tax
credit for such foreign income taxes

o (B) – Income, war-profits, and excess profits taxes imposed by the authority of any
foreign country; but this deduction shall be allowed in the case of a taxpayer who does
not signify in his return his desire to have any extent the benefits of paragraph (3) of this
subsection (relating to credit for foreign countries)

So that unless the alien resident has a right to claim such tax credit if he so chooses, he is
precluded from deducting the foreign income taxes from his gross income.

For it is obvious that in prescribing that such deduction shall be allowed in the case of a
taxpayer
who does not signify in his return his desire to have any extent benefits of paragraph 3, the
statute assumes that the taxpayer in question may signify his desire to claim a tax credit and
waive the deduction; otherwise, the foreign taxes would always be deductible and their
mention in
the list on non-deductible items in Sec. 30c might as well have been omitted or at least
expressly
limited to taxes on income from sources outside the Philippine Islands

Had the law intended that foreign income taxes could be deducted from gross income in any
event, regardless of the taxpayer’s right to claim a tax credit, it is the latter right that should be
conditioned upon the taxpayer’s waiving the deduction. No danger of double credit/taxation.

oDouble taxation becomes obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity

oThe Philippine government only receives the proceeds of one tax. Justice and equity demand
that the tax on the income should accrue to the benefit of the Philippines

o Any relief from the alleged double taxation should come from the US since the former’s
right to burden the taxpayer is solely predicated in is citizenship, without contributing to
the production of wealth that is being taxed

o 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 the power to reduce the tax income
of the Philippine government simply by increasing the tax rates on the alien resident.

37 https://www.lawphil.net/judjuris/juri2007/feb2007/gr_172231_2007.html

CIR V. ISABELA CULTURAL CORP

GR 17223
February 12, 2007

FACTS:
Isabela Cultural Corporation (ICC), a domestic corporation received an assessment
notice for deficiency income tax and expanded withholding tax from BIR. It arose from the
disallowance of ICC’s claimed expense for professional and security services paid by ICC; as
well as the alleged understatement of interest income on the three promissory notes due from
Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the failure
of ICC to withhold 1% e-withholding tax on its claimed deduction for security services.
ICC sought a reconsideration of the assessments. Having received a final notice of assessment,
it brought the case to CTA, which held that it is unappealable, since the final notice is not a
decision. CTA’s ruling was reversed by CA, which was sustained by SC, and case was
remanded to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for
professional and security services were properly claimed, it said that even if services were
rendered in 1984 or 1985, the amount is not yet determined at that time. Hence it is a proper
deduction in 1986. It likewise found that it is the BIR which overstate the interest income, when
it applied compounding absent any stipulation.

Petitioner appealed to CA, which affirmed CTA, hence the petition.

Issue: Whether or not the expenses for professional and security services are deductible.

Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that
it must have been paid or incurred during the taxable year. This requisite is dependent on the
Method of accounting of the taxpayer. In the case at bar, ICC is using the
accrual method of accounting.

Hence, under this method, an expense is recognized when it is incurred. Under a Revenue
Audit Memorandum, when the method of accounting is accrual, expenses not being claimed as
deductions by a taxpayer in the current year when they are incurred cannot be claimed in the
succeeding year.

The accrual of income and expense is permitted when the all-events test has been met. This
test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the
reasonable accurate determination of such income or liability. The test does not demand that
the amount of income or liability be known absolutely, only that a taxpayer has at its disposal
the information necessary to compute the amount with reasonable accuracy.
From the nature of the claimed deductions and the span of time during which the firm was
retained, ICC can be expected to have reasonably known the retainer fees charged by the firm.
They cannot give as an excuse the delayed billing, since it could have inquired into the amount
of their obligation and reasonably determine the amount.

CIR vs. Isabela Cultural Corporation

Isabela Cultural Corp.(ICC for brevity) , a domestic corporation received from BIR assessment
notice no. FAS-1-86-90000680 (680 for brevity) for deficiency income tax in the amount of PhP
333,196.86 and assessment notice no. FAS-1-86-90-000681 (681 for brevity) for deficiency
expanded withholding tax in the amount of PhP 4,897.79, inclusive of surcharge and interest
both for the taxable year 1986. The deficiency income tax of PhP 333,196 arose from BIR
disallowance of ICC claimed expenses deductions for professional and security services billed to
and paid by ICC in 1986.

The deficiency expanded withholding tax of PhP4,897.79 was allegedly due to the failure of ICC
to withhold 1% expanded withholding tax on its claimed PhP244,890 deduction for security
services.
Court of Tax Appeal and Court of Appeal affirmed that the professional services were rendered
to ICC in 1984 and 1985, the cost of the service was not yet determinable at that time, hence, it
could be considered as deductible expenses only in 1986 when ICC received the billing
statement for said service. It further ruled that ICC did not state its interest income from the
promissory notes of Realty Investment and that ICC properly withheld the remitted taxes on the
payment for security services for the taxable year 1986.

Petitioner contend that since ICC is using the accrual method of accounting, the expenses for
the professional services that accrued in 1984 and 9185 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 (1): WON CA is correct in sustaining the deduction of the expenses for professionals and
security services form ICC gross income?

HELD: NO
Revenue Audit Memorandum Order No.1-2000 provides that under the accrual method of
accounting, expenses not being claimed as deductions by a tax payer in the current year when
they are incurred cannot be claimed as deductions from the income for the succeeding year.

ISSUE (2): WON CA correctly held that ICC did not understate its interest income from the
promissory notes of Realty Investment, Inc; that ICC withheld the required 1% withholding tax
from the deduction for security services.
HELD: Sustaining the finding of the CTA and CA that no such understatement exist and that only
simple interest computation and not a compounded one should have been applied by the
BIR. There is no indeed no stipulation between the latter and ICC on the application of
compound interest.
Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due
should not further earn interest.

39. https://www.lawphil.net/judjuris/juri1961/feb1961/gr_l-12954_1961.html

COLLECTOR VS. HENDERSON- Rental and Travel Allowance are not Part of Taxable Income

Rental allowances and travel allowances by a company are not part of taxable income.

FACTS:

• Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the BIR.
Arthur is president of American International Underwriters for the Philippines, Inc., which is a
domestic corporation engaged in the business of general non-life insurance, and represents a
group of American insurance companies engaged in the business of general non-life insurance.

• The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR
included as part of taxable income: 1) Arthur’s allowances for rental, residential expenses,
subsistence, water, electricity and telephone expenses 2) entrance fee to the Marikina Gun and
Country Club which was paid by his employer for his account and 3) travelling allowance of his
wife

• The taxpayers justifications are as follows:

1) as to allowances for rental and utilities, Arthur did not receive money for the allowances.
Instead, the apartment is furnished and paid for by his employer-corporation (the mother
company of American International), for the employer corporation’s purposes. The spouses had
no choice but to live in the expensive apartment, since the company used it to entertain guests,
to accommodate officials, and to entertain customers. According to taxpayers, only P 4,800 per
year is the reasonable amount that the spouses would be spending on rental if they were not
required to live in those apartments. Thus, it is the amount they deem is subject to tax. The
excess is to be treated as expense of the company.
2) The entrance fee should not be considered income since it is an expense of his employer, and
membership therein is merely incidental to his duties of increasing and sustaining the business
of his employer.

3) His wife merely accompanied him to New York on a business trip as his secretary, and at the
employer-corporation’s request, for the wife to look at details of the plans of a building that his
employer intended to construct. Such must not be considered taxable income.

• The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent
expense and travel expenses were still held to be taxable. The Court of Tax Appeals ruled in
favor of the taxpayers, that such expenses must not be considered part of taxable income.
Letters of the wife while in New York concerning the proposed building were presented as
evidence.

ISSUE: Whether or not the rental allowances and travel allowances furnished and given by the
employer-corporation are part of taxable income?

HELD: NO. Such claims are substantially supported by evidence.

These claims are therefore NOT part of taxable income. No part of the allowances in question
redounded to their personal benefit, nor were such amounts retained by them. These bills were
paid directly by the employer-corporation to the creditors. The rental expenses and subsistence
allowances are to be considered not subject to income tax. Arthur’s high executive position and
social standing, demanded and compelled the couple to live in a more spacious and expensive
quarters. Such ‘subsistence allowance’ was a SEPARATE account from the account for salaries
and wages of employees. The company did not charge rentals as deductible from the salaries of
the employees. These expenses are COMPANY EXPENSES, not income by employees which are
subject to tax.

40. https://www.lawphil.net/judjuris/juri1970/jan1970/gr_17509_1970.html
41. https://www.lawphil.net/judjuris/juri1988/oct1988/gr_78133_1988.html
42. https://www.lawphil.net/judjuris/juri1985/oct1985/gr_l68118_1985.html