TOPIC: GROSS INCOME

97. Hernando B. Conwi v. Court of Tax Appeals

Petitioners are employees Phil. Mfg Corp, subsidiary of P&G, a foreign corporation they were assigned outside the Philippines, for which
petitioners were paid US dollars as compensation.

Petitioners filed their ITRs applying the dollar-to-peso conversion based on the floating rate under BIR Ruling No. 70-027. Later, petitioners
filed amended ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the alleged overpayments, refund
and/or tax credit, for which claims for refund were filed. The refund claims were denied.

Issue: Whether or not petitioners' dollar earnings are receipts derived from foreign exchange transactions ?

Ruling: No. 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 P&G, 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.

98. Vicente Madrigal and his wife, Susana Paterno vs. James J. Rafferty (Collector of Internal Revenue), and Venancio Concepcion
(SUPRA)

THE SAME CASE FOR NUMBER 101.

Sps were legally married and have conjugal partnership. Madrigal filed his total net income for the year is P296,302.73. Madrigal submitted
the the income of the conjugal partnership existing between himself and his wife, and the computing and assessing the additional income
tax provided by the Act of Congress of Oct. 3, 1913, the income declared by Madrigal and the other half of Paterno.

Madrigal and Paterno brought action against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery
of the sum P3,786.08.

Issue: Whether or not the additional income tax should be divided into equal parts because of the conjugal partnership existing between
them?

Ruling: No. Paterno has an inchoate right in the property of her husband Madrigal during the lifetime of the conjugal property. She has
an interest in the ultimate ownership of property acquired as income of the conjugal partnership. Not being seized of the separate estate,
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 or income, actually and legally vested in her and entirely distinct from her husband property, the income cannot properly
be considered the separate income of the wife for the purpose of the additional tax. The income tax law does not look on the spouses as
individual partners in an ordinary partnership.

The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in
our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law.

99. Fisher vs. Trinidad SUPRA

Frederick Fisher was a stockholder of Philippine American Drug Company, a domestic corporation. For the year 1919, he declared a stock
dividend in the amount of P24,800 for which he was subsequently taxed by the respondent Collector of Internal Revenue for the sum of
P889.91 as income tax. Fisher paid under protest and brought an action for recovery. Trinidad demurred which was sustained, hence, this
appeal.

Issue: Whether or not the stock dividend was an income and therefore taxable

Ruling: No. Generally speaking, stock dividends represent undistributed increase in the capital of corporations or firms, joint stock
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 additional stock is issued showing
the increase in the actual capital, or property, or assets of the corporation.

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.

100. James vs. United States

The defendant, Eugene James, was an official in a labor union who had embezzled more than $738,000 in union funds.
He was tried for tax evasion, and claimed in his defense that embezzled funds did not constitute taxable income because, like a loan, the
taxpayer was legally obligated to return those funds to their rightful owner.

Issue: Whether or not the receipt of embezzled funds constitutes income taxable to the wrongdoer, even though an obligation to repay
exists.

Held: The Supreme Court of the US ruled that the receipt of embezzled funds was includable in the gross income of the wrongdoer and
was taxable to the wrongdoer, even though the wrongdoer had an obligation to return the funds to the rightful owner. If a taxpayer receives
income, legally or illegally, without consensual recognition of obligation to repay, that income is automatically taxable.
The Court noted that the Sixteenth Amendment did not limit its scope to "lawful" income, a distinction which had been found in the Revenue
Act of 1913. The removal of this modifier indicated that the framers of the Sixteenth Amendment had intended no safe harbor for illegal
income.

The Court also ruled, however, that Eugene James could not be held liable for the willful tax evasion because it is not possible to willfully
violate laws that were not established at the time of the violation.