1.

Commissioner of Internal Revenue v British Overseas Airways Corporation

GR No. L-65773-74 – April 30, 1987
Facts:
 BOAC is a 100% British Government-owned corporation organized and existing under the
laws of the United Kingdom engaged in the international airline business and is a member-
signatory of the Interline Air Transport Association (IATA). As such it operates air
transportation service and sells transportation tickets over the routes of the other airline
members. During the periods (1959-1963) covered by the disputed assessments, it is
admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was
not granted a Certificate of public convenience and necessity to operate in the Philippines
by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and
partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently,
it did not carry passengers and/or cargo to or from the Philippines, although during the
period covered by the assessments, it maintained a general sales agent in the Philippines.
 Later, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC for
the deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC.
Subsequent investigation resulted in the issuance of a new assessment for the years 1959
to 1967. BOAC paid this new assessment under protest.
 Subsequently, BOAC filed a claim for refund of the amount of P858,307.79, which claim
was denied by the CIR. But before said denial, BOAC had already filed a petition for review
with the Tax Court assailing the assessment and praying for the refund of the amount paid.
 BOAC was then assessed for deficiency income taxes, interests, and penalty for the fiscal
years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional
amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46.
Issue:
 Whether or not the sale of tickets, in the absence of actual transportation, is considered as
taxable income.
Held:
 The source of an income is the property, activity or service that produced the income. For
the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets
in the Philippines is the activity that produces the income. The tickets exchanged hands
here and payments for fares were also made here in Philippine currency. The site of the
source of payments is the Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded by the Philippine government.
In consideration of such protection, the flow of wealth should share the burden of
supporting the government.

2. Commissioner of Internal Revenue v Juliane Baier-Nickel

GR No. 153793 – August 29, 2006
Facts:
 Respondent Juliane Baier-Nickel is the President of JUBANITEX, Inc., a domestic
corporation engaged in textile products. Through JUBANITEX’s General Manager, Marina
Q. Guzman, the corporation appointed and engaged the services of respondent as
commission agent. It was agreed that respondent will receive 10% sales commission on all
sales actually concluded and collected through her efforts.
 Later, respondent received her sales commission income from which JUBANITEX withheld
a corresponding 10% withholding tax, and remitted the same to the Bureau of Internal
Revenue (BIR). Respondent then filed her 1995 income tax return and a tax due.
 Subsequently, Respondent filed a claim to refund representing the payment of the tax due
which allegedly have been mistakenly withheld and remitted by JUBANITEX to the BIR.
Respondent contended that her sales commission income is not taxable in the Philippines
because the same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the Philippines.
 Petitioner, however, maintains that the income earned by respondent is taxable in the
Philippines because the source thereof is JUBANITEX, a domestic corporation located in
the City of Makati. It thus implied that source of income means the physical source where
the income came from. It further argued that since respondent is the President of
JUBANITEX, any remuneration she received from said corporation should be construed as
payment of her overall managerial services to the company and should not be interpreted
as a compensation for a distinct and separate service as a sales commission agent.
Issue:
 Whether or not Respondent’s sales commission income is taxable in the Philippines.
Held:
 The source of an income is the property, activity or service that produced the income. For
the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection, the flow of wealth should share
the burden of supporting the government.
 With respect to rendition of labor or personal service, as in the instant case, it is the place
where the labor or service was performed that determines the source of the income. There
is therefore no merit in petitioner’s interpretation which equates source of income in labor or
personal service with the residence of the payor or the place of payment of the income. The
decisive factual consideration here is not the capacity in which respondent received the
income, but the sufficiency of evidence to prove that the services she rendered were
performed in Germany which, however, she failed.

3. Commissioner of Internal Revenue v Japan Airlines

GR No. 60714 – October 4, 1991
Facts:
 Respondent Japan Air Lines Inc. is a foreign corporation engaged in the business of
international air carriage. From 1959 to 1963, JAL did not have planes that lifted or
landed passengers and cargo in the Philippines as it had not been granted then by
the Civil Aeronautics Board (CAB) a certificate of public convenience and necessity
to operate in the Philippines. However, since mid-July, 1957, JAL had maintained
an office in Manila. Said office did not sell tickets but was maintained merely for the
promotion of the company's public relations and to hand out brochures, literature
and other information playing up the attractions of Japan as a tourist spot and the
services enjoyed in JAL planes. JAL also constituted the Philippine Air Lines (PAL),
as its general sales agent in the Philippines. As an agent, PAL, among other things,
sold for and in behalf of JAL, plane tickets and reservations for cargo spaces which
were used by the passengers or customers on the facilities of JAL.
 Later, JAL received deficiency income tax assessment notices and a demand letter
from petitioner Commissioner of Internal Revenue. JAL protested said assessments
alleging that as a non-resident foreign corporation, it was taxable only on income
from Philippine sources as determined under Section 37 of the Tax Code, and there
 being no such income during the period in question, it was not liable for the
deficiency income tax liabilities assessed.
Issue:
 Whether or not proceeds from sales of JAL tickets sold in the Philippines are
taxable as income from sources within the Philippines.
Held:
 The subject matter of the case under consideration is income tax, a direct tax on the
income of persons and other entities "of whatever kind and in whatever form derived from
any source." The absence of flight operations to and from the Philippines is not
determinative of the source of income or the situs of income taxation. The test of taxability
is the `source'; and the source of an income is that activity which produced the income.

4. Commissioner of Internal Revenue v Court of Appeals

GR No. 96016 – October 17, 1991
Facts:
 Efren P. Castaneda retired from the government service as Revenue Attache in the
Philippine Embassy in London. Upon retirement, he received, among other benefits,
terminal leave pay from which petitioner Commissioner of Internal Revenue withheld
P12,557.13 allegedly representing income tax thereon. Castaneda filed a formal written
claim with petitioner for a refund of the P12,557.13, contending that the cash equivalent of
his terminal leave is exempt from income tax. The Court of Tax Appeals found for private
respondent Castaneda and ordered the Commissioner of Internal Revenue to refund
Castaneda the sum of P12,557.13 withheld as income tax.
Issue:
 Whether or not terminal leave pay received by a government official or employee on the
occasion of his compulsory retirement from the government service is subject to withholding
(income) tax.
Held:
 Terminal leave is applied for by an officer or employee who retires, resigns or is separated
from the service through no fault of his own. Not being part of the gross salary or income of
a government official or employee but a retirement benefit, terminal leave pay is not subject
to income tax. The Government recognizes that for most public servants, retirement pay is
always less than generous if not meager and scrimpy. A modest nest egg which the senior
citizen may look forward to is thus avoided.

5. Hospital de San Juan de Dios Inc., v Commissioner of Internal Revenue

GR No. L-31305 – May 10, 1990
Facts:
 The Commissioner of Internal Revenue assessed and demanded from the petitioner the
payment for the deficiency income taxes for 1952 to 1955. Consequently, petitioner
protested against the assessment and requested the Commissioner to cancel and withdraw
it. After reviewing the assessment, the Commissioner advised petitioner that the deficiency
income tax assessment against it was reduced. Still the petitioner, through its auditors,
insisted on the cancellation of the revised assessment. The request was, however, denied.
 Petitioner filed a motion for reconsideration of the CTA decision which found that petitioner
is engaged in both taxable and non-taxable operations. The income derived from the
operations of the hospital and the nursing school are exempt from income tax while the rest
of petitioner's income is subject thereto. Its taxable or non-operating income consists of
rentals, interests and dividends received from its properties and investments. In the
computation of its taxable income for the years 1952 to 1955, petitioner allowed all its
 taxable income to share in the allocation of administrative expenses. Respondent
disallowed, however, the interests and dividends from sharing in the allocation of
administrative expense on the ground that the expenses incurred in the administration or
management of petitioner's investments are not allowable business expenses inasmuch as
they were not incurred in 'carrying on any trade or business' within the contemplation of
Section 30 (a) (1) of the Revenue Code. Consequently, petitioner was assessed deficiency
income taxes for the years in question.
Issue:
 Whether or not the rentals, interests and dividends received by the hospital from its
properties and investments are taxable.
Held:
 Petitioner failed to establish by competent proof that its receipt of interests and dividends
constituted the carrying on of a "trade or business" so as to warrant the deductibility of the
expenses incurred in their realization. No evidence whatsoever was presented by petitioner
to show how it handled its investment, the manner it bought, sold and reinvested its
securities, how it made decisions, and whether it consulted brokers, investment or statistical
services. Neither is there any showing of the extent of its activities in stocks or bonds, and
participation, if any, direct or indirect, in the management of the corporations where it made
investments. In effect, there is total absence of any indication of a business-like
management or operation of its interests and dividends.

6. Esso Standard Eastern Inc. v Commissioner of Internal Revenue

GR No. L-28508-9 – July 7, 1989
Facts:
 Petitioner ESSO deducted from its gross income for 1959, as part of its ordinary and
necessary business expenses, the amount it had spent for drilling and exploration of its
petroleum concessions. This claim was disallowed by the respondent Commissioner of
Internal Revenue on the ground that the expenses should be capitalized and might be
written off as a loss only when a "dry hole" should result. ESSO then filed an amended
return where it asked for the refund by reason of its abandonment as dry holes of several of
its oil wells. It also claimed as ordinary and necessary expenses representing margin fees it
had paid to the Central Bank on its profit remittances to its New York head office.
Subsequently, the CIR granted a tax credit but disallowed the claimed deduction for the
margin fees paid.
 In another case, the CIR assessed ESSO a deficiency income tax for the year 1960, plus
18% interest thereon of P66,238.92 for the period from April 18,1961 to April 18, 1964, for a
total of P434,232.92. The deficiency arose from the disallowance of the margin fees of
Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York
head office. ESSO settled the deficiency assessment by applying the tax credit
representing its overpayment on its income tax for 1959 and paying under protest the
additional amount. Subsequently, it claimed a refund for an overpayment on the interest on
its deficiency income tax. It argued that the 18% interest should have been imposed not on
the total deficiency but only on the amount of the difference between the total deficiency
and its tax credit.
 This claim was denied by the CIR, who insisted on charging the 18% interest on the entire
amount of the deficiency tax. ESSO appealed to the CTA and sought the refund which,
however, was denied.
Issue:
 Whether or not the margin fees were deductible from gross income either as a tax or as an
ordinary and necessary business expense.
Held:
 The principle is recognized that when a taxpayer claims a deduction, he must point to some
specific provision of the statute in which that deduction is authorized and must be able to
prove that he is entitled to the deduction which the law allows.
 ESSO has not shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a showing that they are illegal
or ultra vires. This is error. The public respondent is correct when it asserts that "the
paramount rule is that claims for deductions are a matter of legislative grace and do not turn
on mere equitable considerations. The taxpayer in every instance has the burden of
justifying the allowance of any deduction claimed.
 It is clear that ESSO, having assumed an expense properly attributable to its head office,
cannot now claim this as an ordinary and necessary expense paid or incurred in carrying on
its own trade or business.

7. Commissioner of Internal Revenue v Isabela Cultural Corporation

GR No. 172231 – February 12, 2007
Facts:
 ICC, a domestic corporation, received from the BIR an Assessment for deficiency income
tax and for the deficiency expanded withholding tax, inclusive of surcharges and interest,
both for the taxable year 1986.
 The deficiency in income tax arose from the BIR’s disallowance of ICC’s claimed expense
deductions for professional and security services billed to and paid by ICC in 1986 and the
alleged understatement of ICC’s interest income on the three promissory notes due from
Realty Investment, Inc.
 The deficiency expanded withholding tax (inclusive of interest and surcharge) was allegedly
due to the failure of ICC to withhold 1% expanded withholding tax on its claimed deduction
for security services.
 Later, ICC sought a reconsideration of the subject assessments. However, it received a
final notice before seizure demanding payment of the amounts stated in the said notices.
Hence, it brought the case to the CTA which held that the petition is premature because the
final notice of assessment cannot be considered as a final decision appealable to the tax
court. This was reversed by the Court of Appeals holding that a demand letter of the BIR
reiterating the payment of deficiency tax, amounts to a final decision on the protested
assessment and may therefore be questioned before the CTA. This conclusion was
sustained by the Supreme Court.
 Subsequently, the 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 because it was only in the said year when
the bills demanding payment were sent to ICC. Hence, even if some of these professional
services were rendered to ICC in 1984 or 1985, it could not declare the same as deduction
for the said years as the amount thereof could not be determined at that time.
Issue:
 Whether or not the expenses for the professional services that accrued in 1984 and 1985,
should have been declared as deductions from income during the said years.
Held:
 The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the
expense must be ordinary and necessary; (b) it must have been paid or incurred during the
 taxable year; (c) it must have been paid or incurred in carrying on the trade or business of
the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.
 "reasonable accuracy" implies something less than an exact or completely accurate
amount. The propriety of an accrual must be judged by the facts that a taxpayer knew, or
could reasonably be expected to have known, at the closing of its books for the taxable
year.

8. Aguinaldo Industries v Commissioner of Internal Revenue

GR No. L-29790 – February 25, 1982
Facts:
 Aguinaldo Industries Corporation is a domestic corporation engaged in two lines of
business, namely: (a) the manufacture of fishing nets, a tax-exempt industry, and (b) the
manufacture of furniture.
 Petitioner acquired a parcel of land in Muntinglupa as the site of the fishing net factory.
Later, when another parcel of land in Marikina Heights was found supposedly more suitable
for the needs of petitioner, it sold the Muntinglupa property in which Petitioner derived profit
from this sale which was entered in the books of the Fish Nets Division as miscellaneous
income to distinguish it from its tax-exempt income.
 Upon recommendation the BIR’s examiner, the officer’s remuneration for the sale of the
property was disallowed as deduction from gross income, petitioner asserted in its letter
that said amount should be allowed as deduction because it was paid to its officers as
allowance or bonus pursuant to Section 3 of its by-laws.
 Petitioner argues that the profit derived from the sale of its Muntinglupa land is not taxable
for it is tax-exempt income, considering that its Fish Nets Division enjoys tax exemption as
a new and necessary industry under Republic Act 901.
Issue:
 Whether or not the bonus given to the officers of the petitioner upon the sale of its
Muntinglupa land is an ordinary and necessary business expense deductible for income tax
purposes
Held:
 Bonuses given to the officers out of the sale of corporate land are not deductible as an
ordinary business expense in the absence of showing what role said officers performed to
effectuate said sale. The taxpayer must show that persona services had been rendered and
that the amount was reasonable. In the present case, there is absolutely no evidence of any
service actually rendered by petitioner's officers which could be the basis of a grant to them
of a bonus out of the profit derived from the sale. This being so, the payment of a bonus to
them out of the gain realized from the sale cannot be considered as a selling expense; nor
can it be deemed reasonable and necessary so as to make it deductible for tax purposes.

9. Commissioner of Internal Revenue v Dela Salle University Inc.

CTA EB No. 622 – December 10, 2010
Facts:
 DLSU received a Formal Letter of Demand from the CIR assessing its alleged liabilities on
income tax derived from rental income on restaurants and bookstores, value-added tax
(''VAT'') on business income and documentary stamp taxes ("DST'') on its loan
transactions and lease contracts, inclusive of the applicable surcharge, interest and penalty
for the fiscal years 2001, 2002 and 2003.
 DLSU timely protested the Commissioner’s assessment. The Commissioner's inaction on
its protest prompted DLSU to file a Petition for Review with the CA. In the its Decision, the
Court's Special First Division partially granted DLSU's Petition for Review. The Court in
 Division ordered the cancellation of DST assessment on loan transactions and payment by
DLSU of income tax, VAT and DST deficiencies on its lease contracts, inclusive of 25%
surcharge and 20% delinquency interest for fiscal years 2001, 2002 and 2003.
 Dissatisfied, both the Commissioner and DLSU moved for the Court's Special First Division
to partially reconsider its Decision dated January 5, 2010. In ruling against the
Commissioner, the Court in Division issued a Resolution dated April 6, 2010 denying her
Motion for Partial Reconsideration for lack of merit. However, DLSU's Motion for Partial for
Reconsideration was held in abeyance.
Issue:
 Whether or not DLSU's use of its assets for non-educational or commercial purposes
immediately removed such assets from the exemption coverage under Article XIV, Section
4(3) of the 1987 Philippine Constitution.
Held:
 Article XIV, Section (4)(3) of the 1987 Constitution recognizes the importance of education
in nation building and provides incentives to non-stock and non-profit educational
institutions engaged in educational purposes. Said Article provides that all revenues and
assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties. Upon the
dissolution or cessation of the corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law. Incentives such as or in the form of income tax
exemptions are afforded to nonstock and non-profit educational institutions pursuant to
Section 30(H) of the 1997 NIRC.
 Thus, in the very wordings of the Supreme Court, it is essential to ascertain how the
taxpayer as a non-stock and non-profit educational institution utilizes income earned sought
to be exempted. Revenues, howsoever, generated are covered by the constitutional
exemption provided they will be used for educational purposes or will be held in reserve for
such purposes.

10. Commissioner of Internal Revenue v Dela Salle University Inc.

GR No. 196596 – November 9, 2016
Facts:
 The Bureau of Internal Revenue (BIR) issued to DLSU a Letter of Authority authorizing its
revenue officers to examine the latter's books of accounts and other accounting records for
all internal revenue taxes for the period Fiscal Year Ending 2003 and Unverified Prior
Years. Consequently, BIR issued a Preliminary Assessment Notice to DLSU.
 Subsequently, the BIR through a Formal Letter of Demand assessed DLSU the following
deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (2) value-added tax (VAI) on business income;
and (3) documentary stamp tax (DSI) on loans and lease contracts. The BIR demanded for
payment inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and
2003.
 DLSU protested the assessment. The Commissioner failed to act on the protest; thus,
DLSU filed a petition for review with the CTA Division.
 DLSU, a non-stock, non-profit educational institution, principally anchored its petition on
Article XIV, Section 4 (3) of the Constitution providing that all revenues and assets of non-
stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties.
 Later, the CTA Division partially granted DLSU's petition for review. Both the Commissioner
and DLSU moved for the reconsideration of the January 5, 2010 decision. On April 6, 2010,
 the CTA Division denied the Commissioner's motion for reconsideration while it held in
abeyance the resolution on DLSU's motion for reconsideration.
Issue:
 Whether or not DLSU' s income and revenues proved to have been used actually, directly
and exclusively for educational purposes are exempt from duties and taxes.
Held:
 Income and revenues of non-stock, non-profit educational institution not used actually,
directly and exclusively for educational purposes are not exempt from duties and taxes. To
avail of the exemption, the taxpayer must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income sought to be exempted.
 Although both Ateneo and DLSU claimed that they used their rental income actually,
directly and exclusively for educational purposes by submitting similar evidence, e.g., the
testimony of their employees on the use of university revenues, the report of the
Independent CPA, their income summaries, financial statements, vouchers, etc., the fact
remains that DLSU failed to prove that a portion of its income and revenues had indeed
been used for educational purposes.
 Further, Section 30 of the Tax Code is held without force and effect for being contrary to the
Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purpose.

11. Commissioner of Internal Revenue v Court of Appeals

GR No. 108576 – January 20, 1999
Facts:
 Don Andres Soriano, a citizen and resident of the United States, formed a corporation with
a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of
P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are
all non-resident aliens.
 After Don Andres died, Doña Carmen requested a ruling from the United States Internal
Revenue Service (IRS), inquiring if an exchange of common with preferred shares may be
considered as a tax avoidance scheme under Section 367 of the 1954 U.S. Revenue Act.
Subsequently, ANSCOR reclassified its existing 300,000 common shares into 150,000
common and 150,000 preferred shares. In a letter-reply, the IRS opined that the exchange
is only a recapitalization scheme and not tax avoidance. Consequently, Doña Carmen
exchanged her whole 138,864 common shares for 138,860 of the newly reclassified
preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its common
shares for the remaining 11,140 preferred shares, thus reducing its (the estate) common
shares to 127,727.
 ANSCOR avers that it has no duty to withhold any tax either from the Don Andres estate or
from Doña Carmen based on the two transactions, because the same were done for
legitimate business purposes which are (a) to reduce its foreign exchange remittances in
the event the company would declare cash dividends, and to (b) subsequently "filipinized"
ownership of ANSCOR, as allegedly, envisioned by Don Andres.
 Pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don
Andres estate. The Board further increased ANSCORs capital stock to P75M divided into
150,000 preferred shares and 600,000 common shares. About a year later, ANSCOR again
redeemed 80,000 common shares from Don Andres’ estate; further reducing the latter’s
common shareholdings to 19,727. As stated in the board Resolutions, ANSCORs business
purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in
order to reduce the company’s foreign exchange remittances in case cash dividends are
declared. after examining ANSCORs books of account and records, Revenue examiners
 issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-
source, pursuant to Sections 53 and 54 of the 1939 Revenue Code, for the year 1968 and
the second quarter of 1969 based on the transactions of exchange and redemption of
stocks. The Bureau of Internal Revenue (BIR) made the corresponding assessments
despite the claim of ANSCOR that it availed of the tax amnesty under Presidential Decree
(P.D.) 23 which were amended by P.D.s 67 and 157. However, petitioner ruled that the
invoked decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939
Revenue Act under which ANSCOR was assessed. ANSCORs subsequent protest on the
assessments was denied in 1983 by petitioner.
Issue:
 Whether or not ANSCORs redemption of stocks from its stockholder as well as the
exchange of common with preferred shares can be considered as essentially equivalent to
the distribution of taxable dividend, making the proceeds thereof taxable under the
provisions of the above-quoted law.
Held:
 The three elements in the imposition of income tax are: (1) there must be gain or and profit,
(2) that the gain or profit is realized or received, actually or constructively, and (3) it is not
exempted by law or treaty from income tax. Any business purpose as to why or how the
income was earned by the taxpayer is not a requirement. Income tax is assessed on
income received from any property, activity or service that produces the income because
the Tax Code stands as an indifferent neutral party on the matter of where income comes
from.
 As stated above, the test of taxability under the exempting clause of Section 83(b) is,
whether income was realized through the redemption of stock dividends. The redemption
converts into money the stock dividends which become a realized profit or gain and
consequently, the stockholder's separate property. Profits derived from the capital invested
cannot escape income tax. As realized income, the proceeds of the redeemed stock
dividends can be reached by income taxation regardless of the existence of any business
purpose for the redemption. Otherwise, to rule that the said proceeds are exempt from
income tax when the redemption is supported by legitimate business reasons would defeat
the very purpose of imposing tax on income.

12. Republic of the Philippines v Spouses Senando Salvador

GR No. 205428 – June 27, 2017
Facts:
 Respondents are the registered owners of a parcel of land with a total land area of 229
square meters. Later, the Republic, represented by the Department of - Public Works and
Highways (DPWH), filed a verified Complaint for the expropriation of 83 square meters of
said parcel of land (subject property), as well as the improvements thereon, for the
construction of the C-5 Northern Link Road Project Phase 2 (Segment 9) from the North
Luzon Expressway (NLEX) to McArthur Highway. Consequently, respondents received two
checks from the DPWH representing 100% of the zonal value of the subject property and the
cost of the one-storey semi-concrete residential house erected on the property.
 The RTC rendered judgment in favor of the Republic condemning the subject property for the
purpose of implementing the construction. It likewise directed the Republic to pay
respondents consequential damages equivalent to the value of the capital gains tax and
other taxes necessary for the transfer of the subject property in the Republic's name.
Issue:
 Whether or not the trial court erred in ordering Petitioner to pay respondents consequential
damages equivalent to the value of the capital gains tax and other taxes necessary for the
transfer of the subject property
Held:
 It is settled that the transfer of property through expropriation proceedings is a sale or·
exchange within the meaning of Sections 24(D) and 56(A) (3) of the National Internal
Revenue Code, and profit from the transaction constitutes capital gain. Since capital gains
tax is a tax on passive income, it is the seller, or respondents in this case, who are liable to
shoulder the tax.
 In fact, the Bureau of Internal Revenue (BIR) has constituted the DPWH as a withholding
agent tasked to withhold the 6% final withholding tax in the expropriation of real property for
infrastructure projects. Thus, as far as the government is concerned, the capital gains tax in
expropriation proceedings remains a liability of the seller, as it is a tax on the seller's gain
from the sale of real property.

13. Power Sector Assets and Liabilities Management v Commissioner of Internal Revenue
GR No. 198146 – August 8, 2017
Facts:
 PSALM) is a government-owned and controlled corporation created under RA 9136, also
known as the Electric Power Industry Reform Act of 2001 (EPIRA). The principal purpose of
PSALM is to manage the orderly sale, disposition, and privatization of the National Power
Corporation (NPC) generation assets, real estate and other disposable assets, and
Independent Power Producer (IPP) contracts with the objective of liquidating all NPC
financial obligations and stranded contract costs in an optimal manner.
 PSALM conducted public biddings for the privatization of two of its Power Plants. Later, the
NPC received a letter from the Bureau of Internal Revenue (BIR) demanding immediate
payment of the deficiency value-added tax (VAT) for the sale of said Power Plants.
 In compliance with the MOA, PSALM remitted under protest to the BIR. Subsequently,
PSALM filed with the Department of Justice (DOJ) a petition for the adjudication of the
dispute with the BIR to resolve the issue of whether the sale of the power plants should be
subject to VAT. The DOJ ruled in favor of PSALM.
Issue:
 Whether or not the sale of the Power Plants are subject to tax.
Held:
 The sale of the power plants was an exercise of a governmental function mandated by law
for the primary purpose of privatizing NPC assets in accordance with the guidelines
imposed by the EPIRA law.
 In the case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay),
the Court ruled that the sale of the vessels of the National Development Company (NDC) to
Magsaysay Lines, Inc. is not subject to VAT since it was not in the course of trade or
business, as it was involuntary and made pursuant to the government's policy of
privatization.
 Similarly, the sale of the power plants in this case is not subject to VAT since the sale was
made pursuant to PSALM' s mandate to privatize NPC assets, and was not undertaken in
the course of trade or business. In selling the power plants, PSALM was merely exercising
a governmental function for which it was created under the EPIRA law.

14. Dumaguete Cathedral Credit Cooperative v Commissioner of Internal Revenue

GR No. 182722 – January 22, 2010
Facts:
 Petitioner is a credit cooperative duly registered with and regulated by the Cooperative
Development Authority (CDA). It was established to (1) increase the income and
purchasing power of the members; (2) to pool the resources of the members by
encouraging savings and promoting thrift to mobilize capital formation for development
activities; and (3) to extend loans to members for provident and productive purposes.
 Later, the Bureau of Internal Revenue (BIR) issued a Letters of Authority authorizing
Officers of the Revenue Region to examine petitioner’s books of accounts and other
accounting records for all internal revenue taxes for the taxable years 1999 and 2000.
 Subsequently, petitioner received two Pre-Assessment Notices for deficiency withholding
taxes for taxable years 1999 and 2000 which were protested by petitioner. The deficiency
withholding taxes cover the payments of the honorarium of the Board of Directors, security
and janitorial services, legal and professional fees, and interest on savings and time
deposits of its members.
Issue:
 Whether or not it is liable to pay the deficiency withholding taxes on interest from savings
and time deposits of its members
Held:
 Petitioner is not liable to pay the assessed deficiency withholding taxes on interest from the
savings and time deposits of its members, as well as the delinquency interest of 20% per
annum.
 Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to
foster the creation and growth of cooperatives as a practical vehicle for promoting self-
reliance and harnessing people power towards the attainment of economic development
and social justice. Thus, to encourage the formation of cooperatives and to create an
atmosphere conducive to their growth and development, the State extends all forms of
assistance to them, one of which is providing cooperatives a preferential tax treatment.
 This exemption extends to members of cooperatives. It must be emphasized that
cooperatives exist for the benefit of their members. In fact, the primary objective of every
cooperative is to provide goods and services to its members to enable them to attain
increased income, savings, investments, and productivity.

15. Ing Bank v Commissioner of Internal Revenue

GR No. 167679 – July 22, 2015
Facts:
 ING Bank, is the Philippine branch of Internationale Nederlanden Bank N.V., a foreign
banking corporation incorporated in the Netherlands It is duly authorized by the Bangko
Sentral ng Pilipinas to operate as a branch with full banking authority in the Philippines.
 ING Bank received a Final Assessment Notice. The Final Assessment Notice also
contained the Details of Assessment and Assessment Notices issued by the Bureau of
Internal Revenue. The Final Assessment Notice covered the following deficiency tax
assessments for taxable years 1996 and 1997.
 Consequently, ING Bank paid the deficiency assessments for the 1996 compromise
penalty, 1997 deficiency documentary stamp tax and 1997 deficiency final. ING Bank,
however, protested the other deficiency tax assessments which includes the deficiency
documentary stamp tax on special savings accounts, deficiency onshore tax, and deficiency
withholding tax on compensation.
 After trial, the Court of Tax Appeals Second Division rendered its Decision granting a partial
cancellation of some of the deficiency taxes. It held that the assessments for 1996 and
1997 deficiency withholding tax on compensation, 1996 deficiency onshore tax and 1996
 and 1997 deficiency documentary stamp tax on special savings accounts are subjected to
tax.
 ING Bank prayed that the court (SC) issue a resolution taking note of its availment of the
tax amnesty, and confirming its entitlement to all the immunities and privileges under
Section 6 of Republic Act No. 9480, particularly with respect to the payment of deficiency
documentary stamp taxes on its special savings accounts for the taxable years 1996 and
1997 and deficiency tax on onshore interest income derived under the foreign currency
deposit system for taxable year 1996.
Issue:
 Whether or not the Court of Tax Appeals En Banc erred in holding petitioner liable for
Special Saving Accounts are subject to documentary stamp tax, deficiency onshore tax,
and compensation for the accrued bonuses.
Held:
 An expense, whether the same is paid or payable, shall be allowed as a deduction only if it
is shown that the tax required to be deducted and withheld therefrom [was] paid to the
Bureau of Internal Revenue. An expense is accrued and deducted for tax purposes when
(1) the obligation to pay is already fixed; (2) the amount can be determined with reasonable
accuracy; and (3) it is already knowable or the taxpayer can reasonably be expected to
have known at the closing of its books for the taxable year.
 The documentary stamp tax and onshore income tax are covered by the tax amnesty
program under Republic Act No. 9480 and its Implementing Rules and Regulations.
Moreover, as to the deficiency tax on onshore interest income, it is worthy to state that
petitioner ING Bank was assessed by respondent Commissioner of Internal Revenue, not
as a withholding agent, but as one that was directly liable for the tax on onshore interest
income and failed to pay the same.
 The tax on compensation income is withheld at source under the creditable withholding tax
system wherein the tax withheld is intended to equal or at least approximate the tax due of
the payee on the said income. It was designed to enable (a) the individual taxpayer to meet
his or her income tax liability on compensation earned; and (b) the government to collect at
source the appropriate taxes on compensation. Taxes withheld are creditable in nature.
Thus, the employee is still required to file an income tax return to report the income and/or
pay the difference between the tax withheld and the tax due on the income. For over
withholding, the employee is refunded. Therefore, absolute or exact accuracy in the
determination of the amount of the compensation income is not a prerequisite for the
employer’s withholding obligation to arise.

16. Commissioner of Internal Revenue v Court of Appeals & YMCA

GR No. 124043 – October 14, 1998
Facts:
 Private respondent, a welfare, educational and charitable non-profit corporation, earned an
income from leasing out a portion of its premises to small shop owners, like restaurants and
canteen operators, and from parking fees collected from non-members. Consequently, the
commissioner of internal revenue (CIR) issued an assessment to private respondent
including surcharge and interest for deficiency income tax, deficiency expanded withholding
taxes on rentals and professional fees and deficiency withholding tax on wages. Private
respondent formally protested the assessment and, as a supplement to its basic protest
contending that the leasing of private respondent's facilities to small shop owners, to
restaurant and canteen operators and the operation of the parking lot are reasonably
incidental to and reasonably necessary for the accomplishment of the objectives of the
private respondents.
Issue:
 Whether or not the Rental Income of the YMCA is taxable.
Held:
 In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the
income of exempt organizations (such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code. Because the last paragraph of
said section unequivocally subjects to tax the rent income of the YMCA from its real
property, the Court is duty-bound to abide strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at construction. It is axiomatic that where the language
of the law is clear and unambiguous, its express terms must be applied.
 Laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be
granted the exemption it claims under the aforecited provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually,
directly, and exclusively for educational purposes.
 The cases relied on by private respondent do not support its cause. YMCA of Manila v.
Collector of Internal Revenue and Abra Valley College, Inc. v. Aquino are not applicable,
because the controversy in both cases involved exemption from the payment of property
tax, not income tax.

17. Vicente Madrigal v James Rafferty

GR No. L-12287 – August 7, 1918
Facts:
 Vicente Madrigal and Susana Paterno were legally married under the provisions of law
concerning conjugal partnerships. Later, 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. Subsequently Madrigal submitted the claim that the said amount 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 1913, the
income declared by Vicente Madrigal should be divided into two equal parts.
Issue:
 Whether or not the income tax should be divided into two equal parts, because of the
conjugal partnership existing between them.
Held:
 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. Income, as here used, can be defined as
"profits or gains.
 The husband, as the head and legal representative of the household and general custodian
of its income, should make and render the return of the aggregate income of himself and
wife, and for the purpose of levying the income tax it is assumed that he can ascertain the
total amount of said income. As the wife 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.