TAN v DEL ROSARIO

TOPIC: SEMI-SCHEDULAR or SEMI-GLOBAL TAX SYSTEMS

FACTS:
 in G.R. No. 109289, the constitutionality of RA 7496, the Simplified Net Income Taxation Scheme (“SNIT”), amending
certain provisions of the National Internal Revenue Code
 in G.R. No. 109446, the validity of SEC 6, Revenue Regulations No. 2-93, promulgated by public respondents
pursuant to said law.
 Petitioners posit that RA 7496 is unconstitutional as it allegedly violates the following provisions of the Constitution:
 ART 6, SEC 26(1) — Every bill passed by the Congress shall embrace only one subject which shall be expressed in
the title thereof.
 ART 6, SEC 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.
 ART 3, SEC 1 — No person shall be deprived of . . . property without due process of law, nor shall any person be
denied the equal protection of the laws.
 Petitioners contended that public respondents exceeded their rule-making authority in applying SNIT to general
professional partnerships.
 Petitioner contends that the title of HB 34314, progenitor of RA 7496, is deficient for being merely entitled,
"Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of their
Profession" (Petition in G.R. No. 109289) when the full text of the title actually reads, An Act Adopting the Simplified
Net Income Taxation Scheme For The Self-Employed and Professionals Engaged In The Practice of Their Profession,
Amending Sections 21 and 29 of the National Internal Revenue Code,' as amended.
 Petitioners also contend it violated due process.
 The Solicitor General espouses the position taken by public respondents.
 The Court has given due course to both petitions.

ISSUE: Whether or not the tax law is unconstitutional for violating due process

HELD: NO
 The due process clause may correctly be invoked only when there is a clear contravention of inherent or
constitutional limitations in the exercise of the tax power. No such transgression is so evident in herein case.
 Uniformity of taxation, like the concept of equal protection, merely requires that all subjects or objects of taxation,
similarly situated, are to be treated alike both in privileges and liabilities.
 Uniformity does not violate classification as long as:
(1) the standards that are used therefor are substantial and not arbitrary
(2) the categorization is germane to achieve the legislative purpose
(3) the law applies, all things being equal, to both present and future conditions, and
(4) the classification applies equally well to all those belonging to the same class.
 What is apparent from the amendatory law is the legislative intent to increasingly shift the income tax system
towards the schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the
present global treatment on taxable corporations.
 The Court does not view this classification to be arbitrary and inappropriate.

ISSUE 2: Whether or not public respondents exceeded their authority in promulgating the RR

HELD: No
 There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal
footing or in significant variance the income tax treatment of professionals who practice their respective professions
individually and of those who do it through a general professional partnership.
 MADRIGAL v RAFFERTY

TOPIC: 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: WON 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.

CIR v TOURS SPECIALIST INC

TOPIC: Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer
which do not belong to them and do not redound to the taxpayer's benefit.

FACTS:
 From 1974 to 1976, Tours Specialists, Inc. had derived income from its activities as a travel agency by servicing the
needs of foreign tourists and travelers and Filipino "Balikbayans" during their stay in this country.
 Some of the services extended to the tourists consist of booking said tourists and travelers in local hotels for their
lodging and board needs; transporting these foreign tourists from the airport to their respective hotels, and from
the latter to the airport upon their departure from the Philippines, transporting them from their hotels to various
embarkation points for local tours, visits and excursions; securing permits for them to visit places of interest; and
arranging their cultural entertainment, shopping and recreational activities.
 In order to ably supply these services to the foreign tourists, TOURS and its correspondent counterpart tourist
agencies abroad have agreed to offer a package fee for the tourists. . Although the fee to be paid by said tourists is
quoted by the petitioner, the payments of the hotel room accommodations, food and other personal expenses of
 said tourists, as a rule, are paid directly either by tourists themselves, or by their foreign travel agencies to the local
hotels and restaurants or shops, as the case may be. • Some tour agencies abroad request the local tour agencies
that the hotel room charges be paid through them. By this arrangement, the foreign tour agency entrusts to Tours,
the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when
billed. The billing hotel sends the bill to Tours. The local hotel identifies the individual tourist, or the particular
groups of tourists by code name or group designation and also the duration of their stay for purposes of payment.
Upon receipt of the bill, Tours then pays the local hotel with the funds entrusted to it by the foreign tour
correspondent agency.
 Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax as independent contractor
by including the entrusted hotel room charges in its gross receipts from services for the years 1974 to 1976.
 In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a compromise penalty
of P500.00.
 During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in charge of the
Accounting Department of Tours, had testified, that the amounts entrusted to it by the foreign tourist agencies
intended for payment of hotel room charges, were paid entirely to the hotel concerned, without any portion thereof
being diverted to its own funds. And that the reason why tourists pay their room charge, or through their foreign
tourists agencies, is the fact that the room charge is exempt from hotel room tax under P.D. 31

ISSUE: WON amounts received by a local tourist and travel agency included in a package fee from tourists or foreign tour
agencies, intended or earmarked for hotel accommodations form part of gross receipts subject to 3% contractor's tax.

HELD: NO
 Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which
do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law
or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax
Code.
 The room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross
receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The
private respondent never benefited from their payment to the local hotels. As stated earlier, this arrangement was
only to accommodate the foreign travel agencies.
 Another objection raised by the petitioner is to the respondent court's application of Presidential Decree 31 which
exempts foreign tourists from payment of hotel room tax. Section 1 thereof provides: Sec. 1. — Foreign tourists and
travelers shall be exempt from payment of any and all hotel room tax for the entire period of their stay in the
country.
 If the hotel room charges entrusted to Tours will be subjected to 3% contractor's tax as what CIR would want to do
in this case, that would in effect do indirectly what P.D. 31 would not like hotel room charges of foreign tourists to
be subjected to hotel room tax. Although, CIR may claim that the 3% contractor's tax is imposed upon a different
incidence i.e. the gross receipts of the tourist agency which he asserts includes the hotel room charges entrusted to
it, the effect would be to impose a tax, and though different, it nonetheless imposes a tax actually on room charges.
One way or the other, it would not have the effect of promoting tourism in the Philippines as that would increase
the costs or expenses by the addition of a hotel room tax in the overall expenses of said tourists.

EISNER v MACOMBER

TOPIC: Severance Test - Income means something derived from labor or capital. To be “derived” means something of
exchangeable value separated from the capital.

FACTS:
 Mrs. Macomber owned 2,200 share of Standard Oil Company of California stock.
 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.
 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.
 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.
 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?

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 cannot 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 pre-existing
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"
 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"

HELVERING v HORST

TOPIC: Control Test

Brief Summary: Respondent owned negotiable bonds. In 1934 and 1935 he detached interest coupons from them and
gave them to his son.

Synopsis of Rule of Law: The power to dispose of income is the equivalent of ownership of it.

Facts: Respondent, the owner of negotiable bonds, detached from them negotiable interest coupons before their due
date and gave them to his son. His son collected them at maturity in the same year. The Commissioner ruled that the
interest payments were taxable to Respondent. The Board of Tax Appeals sustained the tax and the Court of Appeals
reversed.

Issue: Whether the gift of interest coupons detached from the bonds is the realization of income taxable to the donor?

Held: Justice Stone issued the opinion for the Supreme Court in reversing the Court of Appeals and holding that the
income should be Respondents.

Dissent: Justice Reynolds issued a dissenting opinion joined by the Chief Justice and Justice Roberts, but it is omitted
from the text.
Discussion: The Supreme Court found that Respondent enjoyed the economic benefits of the income as though he was
transferring earnings. He should not be able to avoid including these amounts as income by converting it to a gift for his
son. Similarly, a donor who retains control of trust property is taxable on the income.

CIR v ISABELA CULTURAL CORP

TOPIC: All Events Test - Accrual method, burden of proof in accrual method, deductibility of ordinary and necessary
trade, business, or professional expenses

FACTS:
 BIR disallowed Isabela Cultural Corp. deductible expenses for services which were rendered in 1984 and 1985 but
only billed, paid and claimed as a deduction on 1986.
 After CA sent its demand letters, Isabela protested.
 CTA found it proper to be claimed in 1986 and affirmed by CA

ISSUE: WON Isabela who uses accrual method can claim on 1986 only

HELD: NO
 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; - qualified by Section 45 of the National Internal
Revenue Code (NIRC) which states that: "[t]he deduction provided for in this Title shall be taken for the taxable
year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the basis
of which the net income is computed
(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.
 Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses
not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as
deduction from income for the succeeding year.
 Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year
but failed to do so cannot deduct the same for the next year.
 The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in opposition
to actual receipt or payment, which characterizes the cash method of accounting.
 Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable
liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.
 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 all-events test requires the right to income or liability be fixed, and the amount of such income or liability be
determined with reasonable accuracy.
 However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer
has at his disposal the information necessary to compute the amount with reasonable accuracy.
 The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied
where a computation may be unknown, but is not as much as unknowable, within the taxable year.
 The amount of liability does not have to be determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "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.
 Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof
of establishing the accrual of an item of income or deduction.
 In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The
expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in connection with
ICC’s tax problems for the year 1984.
 As testified by the Treasurer of ICC, the firm has been its counsel since the 1960’s. - failed to prove the burden

BAIER-NICKEL v CIR

TOPIC: SERVICES

FACTS:
 CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the CTA. Juliane Baier-
Nickel, a non-resident German, is the president of Jubanitex, a domestic corporation engaged in the manufacturing,
marketing and selling of embroidered textile products.
 Through Jubanitex’s general manager, Marina Guzman, the company appointed respondent as commission agent
with 10% sales commission on all sales actually concluded and collected through her efforts.
 In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the 10%
withholding tax of P170, 777.26 and remitted to BIR.
 Respondent filed her income tax return but then claimed a refund from BIR for the P170K, alleging this was
mistakenly withheld by Jubanitex and that her sales commission income was compensation for services rendered in
Germany not Philippines and thus not taxable here.
 She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but decision was
reversed by CA on appeal, holding that the commission was received as sales agent not as President and that the
“source” of income arose from marketing activities in Germany.

ISSUE: WON respondent is entitled to refund

HELD: No.
 Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to the
Philippine income taxation on their income received from all sources in the Philippines.
 In determining the meaning of “source”, the Court resorted to origin of Act 2833 (the first Philippine income tax
law), the US Revenue Law of 1916, as amended in 1917.
 US SC has said that income may be derived from three possible sources only:
(1) capital and/or
(2) labor; and/or
(3) the sale of capital assets.
 If the income is from labor, the place where the labor is done should be decisive; if it is done in this country, the
income should be from “sources within the United States.”
 If the income is from capital, the place where the capital is employed should be decisive; if it is employed in this
country, the income should be from “sources within the United States.”
 If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive.
“Source” is not a place, it is an activity or property.
 As such, it has a situs or location, and if that situs or location is within the United States the resulting income is
taxable to nonresident aliens and foreign corporations.
 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 settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris
against the taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction
subjected to tax is actually exempt from taxation.
 In the instant case, respondent failed to give substantial evidence to prove that she performed the incoming
producing service in Germany, which would have entitled her to a tax exemption for income from sources outside
the Philippines. Petition granted.

CIR v MARUBENI

TOPIC: SERVICES

FACTS:
 CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985 deficiency income,
branch profit remittance and contractor’s taxes from Marubeni Corp after finding the latter to have properly availed
of the tax amnesty under EO 41 & 64, as amended.
 Marubeni, a Japanese corporation, engaged in general import and export trading, financing and construction, is duly
registered in the Philippines with Manila branch office. CIR examined the Manila branch’s books of accounts for
fiscal year ending March 1985, and found that respondent had undeclared income from contracts with NDC and
Philphos for construction of a wharf/port complex and ammonia storage complex respectively.
 On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes. CIR claims that the
income respondent derived were income from Philippine sources, hence subject to internal revenue taxes. On Sept
1986, respondent filed 2 petitions for review with CTA: the first, questioned the deficiency income, branch profit
remittance and contractor’s tax assessments and second questioned the deficiency commercial broker’s
assessment.
 On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that taxpayers who wished
to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct 30, 1986.
 On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under Title 3 and business tax
under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated those who already
availed amnesty under EO 41 should file an amended return to avail of the new benefits. Marubeni filed a
supplemental tax amnesty return on Dec 15, 1986.
 CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes. CA
affirmed on appeal.
ISSUE: WON Marubeni is exempted from paying tax

HELD: Yes.
1. On date of effectivity
 CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in Sec 4b of EO 41:
“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty herein granted: xxx b)
Those with income tax cases already filed in Court as of the effectivity hereof;”
 Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a case had already
been filed and was pending before the CTA and Marubeni therefore fell under the exception. However, the
point of reference is the date of effectivity of EO 41 and that the filing of income tax cases must have been made
before and as of its effectivity.
 EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA on Sept 26,
1986. When EO 41 became effective, the case had not yet been filed. Marubeni does not fall in the exception
and is thus, not disqualified from availing of the amnesty under EO 41 for taxes on income and branch profit
remittance.
 The difficulty herein is with respect to the contractor’s tax assessment (business tax) and respondent’s
availment of the amnesty under EO 64, which expanded EO 41’s coverage. When EO 64 took effect on Nov 17,
1986, it did not provide for exceptions to the coverage of the amnesty for business, estate and donor’s taxes.
Instead, Section 8 said EO provided that:
“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with this
amendatory Executive Order shall remain in full force and effect.”
  Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of effectivity. The
general rule is that an amendatory act operates prospectively. It may not be given a retroactive effect unless it is
so provided expressly or by necessary implication and no vested right or obligations of contract are thereby
impaired.

2. On situs of taxation
 Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the deficiency tax
because the income from the projects came from the “Offshore Portion” as opposed to “Onshore Portion”. It
claims all materials and equipment in the contract under the “Offshore Portion” were manufactured and
completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes.
 (BG: Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In the
contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos Portion and
financed either by OECF or by supplier’s credit. The Japanese Yen Portion I corresponds to the Foreign Offshore
Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore
Portion. Marubeni has already paid the Onshore Portion, a fact that CIR does not deny.)
 CIR argues that since the two agreements are turn-key, they call for the supply of both materials and services to
the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the
Philippines, and the materials provided and services rendered were all done and completed within the territorial
jurisdiction of the Philippines. Accordingly, respondent’s entire receipts from the contracts, including its receipts
from the Offshore Portion, constitute income from Philippine sources. The total gross receipts covering both
labor and materials should be subjected to contractor’s tax (a tax on the exercise of a privilege of selling services
or labor rather than a sale on products).
 Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines
because some of them were completed in Japan (and in fact subcontracted) in accordance with the provisions of
the contracts. All services for the design, fabrication, engineering and manufacture of the materials and
equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered
outside Philippines’ taxing jurisdiction and are therefore not subject to contractor’s tax. Petition denied.

CIR v BRITISH OVERSEAS AIRWAYS

TOPIC: SERVICES - "The source of an income is the property, activity or service that produced the income. For such
source to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the
Philippines."

FACTS:
 Petitioner CIR seeks a review of the CTA's decision setting aside petitioner's assessment of deficiency income taxes
against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1971. BOAC is a 100%
British Government-owned corporation organized and existing under the laws of the United Kingdom, and is
engaged in the international airline business.
 During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic
purposes in the Philippines. 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 —
Wamer Barnes and Company, Ltd., and later Qantas Airways — which was responsible for selling BOAC tickets
covering passengers and cargoes.
 The CTA sided with BOAC citing that the proceeds of sales of BOAC tickets do not constitute BOAC income from
Philippine sources since no service of carriage of passengers or freight was performed by BOAC within the
Philippines and, therefore, said income is not subject to Philippine income tax.
 The CTA position was that income from transportation is income from services so that the place where services are
rendered determines the source.

ISSUE: Are the revenues derived by BOAC from sales of ticket for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and accordingly, taxable?
HELD: Yes
 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.