Eisner v.
Macomber 252 US 89 "income" as used in the Sixteenth Amendment, or at least to give practical
Eisner vs Macomber Mrs. Macomber owned 2,200 shares in Standard Oil.
Standard Oil declared a 50% stock dividend and she received 1,100 additional
shares, of which about $20,000 in par value represented earnings
accumulated by the company -- recapitalized rather than distributed -- since
the effective date of the original tax law.
The current statute expressly included stock dividends in income, and the
government contended that those certificates should be taxed as income to
Mrs. Macomber as though the corporation had distributed money to her.
Mrs. Macomber sued Mr. Mark Eisner, the Collector of Internal Revenue, for
a refund.
Issue: Whether or not a stock dividend is taxable
Ruling: No.
In the majority opinion, Justice Mahlon Pitney ruled that this stock dividend
was not a realization of income by the taxpayer-shareholder for purposes of
the Sixteenth Amendment: We are clear that not only does a stock dividend
really take nothing from the property of the corporation and add nothing to
that of the shareholder, but that the antecedent accumulation of profits
evidenced thereby, while indicating that the shareholder is richer because of
an increase of his capital, at the same time shows he has not realized or
received any income in the transaction.
The Court noted that in Towne v. Eisner, it had clearly stated that stock
dividends were not income, as nothing of value 82 was received by Towne -
the company was not worth any less than it was when the dividend was
declared, and the total value of Towne's stock had not changed.
Although the Eisner v. Macomber Court acknowledged the power of the
Federal Government to tax income under the Sixteenth Amendment, the
Court essentially said this did not give Congress the power to tax - as income
- anything other than income, i.e., that Congress did not have the power to
re-define the term income as it appeared in the Constitution: Throughout the
argument of the Government, in a variety of forms, runs the fundamental
error already mentioned-a failure to appraise correctly the force of the term
effect to it.
Thus, the Government contends that the tax "is levied on income derived
from corporate earnings," when in truth the stockholder has "derived"
nothing except paper certificates which, so far as they have any effect, deny
him [or "her" - in this case, Mrs. Macomber present participation in such
earnings.
It [the government] contends that the tax may be laid when earnings "are
received by the stockholder," whereas [s]he has received none; that the
profits are "distributed by means of a stock dividend," although a stock
dividend distributes no profits; that under the Act of 1916 "the tax is on the
stockholder's share in corporate earnings," when in truth a stockholder has
no such share, and receives none in a stock dividend; that "the profits are
segregated from his[her] former capital, and [s]he has a separate certificate
representing his [her] invested profits or gains," whereas there has been no
segregation of profits, nor has [s]he any separate certificate representing a
personal gain, since the certificates, new and old, are alike in what they
represent-a capital interest in the entire concerns of the corporation. The
Court ordered that Macomber be refunded the tax she overpaid.
CIR vs. Procter & Gamble 204 SCRA 378
Procter and Gamble Philippine Manufacturing Corporation (hereinafter
referred to as PMCPhiL), a corporation duly organized and existing under and
by virtue of the Philippine laws, is engaged in business in the Philippines and
is a wholly owned subsidiary of Procter and Gamble, U.S.A. herein referred to
as PMC-USA), a non-resident foreign corporation in the Philippines, not
engaged in trade and business therein.
As such PMC-U.s.A. is the sole shareholder or stockholder of PMC Phil., as
PMC-U.S.A. owns wholly or by 100% the voting stock of PMC Phil. and is
entitled to receive 124 income from PMC-Phil. in the form of dividends, if not
rents or royalties.
In addition, PMC-Phil has a legal personality separate and distinct from PMC-
U.S.A.
After taxation it declared a dividend in favor of its sole corporate stockholder
and parent corporation PMC-U.S.A. in the total sum of P17,707,460.00 which
latter amount was subjected to Philippine taxation of 35% or P6,197,611.23
as provided for in Section 24(b) of the Philippine Tax Code which reads in full:
SECTION 1. The first paragraph of subsection (b) of Section 24 of the
National Bureau Internal Revenue Code, as amended, is hereby further
amended to read as follows: (b) Tax on foreign corporations. - 41) Non-
resident corporation. – A foreign corporation not engaged in trade or
business in the Philippines, including a foreign life insurance company not
engaged in the life insurance business in the Philippines, shall pay a tax equal
to 35% of the gross income received during its taxable year from all sources
within the Philippines, as interest (except interest on foreign loans which shall
be subject to 15% tax), dividends, rents, royalties, salaries, wages, premiums,
annuities, compensations, remunerations for technical services or otherwise,
emoluments or other fixed or determinable, annual, periodical or casual
gains, profits, and income, and capital gains: Provided, however, That
premiums shall not include re-insurance premium Provided, further, That
cinematograpy film owners, lessors, or distributors, shall pay a tax of 15% on
their gross income from sources within the Philippines: Provided, still further
That on dividends received from a domestic corporation subject to tax under
this Chapter, the tax shall be 15% of the dividends received, which shall be
collected and paid as provided in Section 53(d) of this Code, subject to the
condition that the country in which the nonresident foreign corporation is
domiciled shall allow a credit against the tax due from the non-resident
foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 125 20% which represents the difference between the regular
tax (35%) on corporations and the tax (15%) on dividends as provided in this
section: Provided, finally That regional or area headquarters established in
the Philippines by multinational corporations and which headquarters do not
earn or derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or
branches in theAsia-Pacific Region shaJl not be subject to tax.
For the taxable year ending June 30, 1975 PMC-Phil. realized a
taxable net income of P8,735,125.00 which was subjected to Philippine
taxation at the rate of 25%- 35% or P2,952,159.00, thereafter leaving a net
profit of P5,782,966.00.
As in the 2nd quarter of 1975, PMC-Phil. again declared a dividend in favor of
PMC-U.S.A. at the tax rate of 35% or P6,457,485.00.
In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in
Section24(b) as afore quoted, as the withholding agent of the Philippine
government, with respect to the dividend taxes paid by PMC-U.S.A., filed a
claim with the herein petitioner, Commissioner of Internal Revenue, for the
refund of the 20 percentage-point portion of the 35 percentage-point whole
tax paid, arising allegedly from the alleged "overpaid withholding tax at
source or overpaid withholding tax in the amount of P 4,832,989.00.
There being no immediate action by the BIR on PMC Philippines' letter-claim
the latter sought the intervention of the CfA.
On January 31,1974 the Court of Tax Appeals in its decision ruled in favor of
thePMC.
Issue: The sole issue in this case is whether or not private respondent is
entitled to the preferential 15% tax rate on dividends declared and remitted
to its parent corporation.
Ruling :126 The law pertinent to the issue is Section 902 of the U.S. Internal
Revenue Code,as amended by Public Law 87-834, the law governing tax
credits granted to U.S. corporations on dividends received from foreign
corporations, which to the extent applicable reads: SEC. 902 - CREDIT FOR
CORPORATE STOCKHOLDERS IN FOREIGNCORPORATION. (a) Treatment of
Taxes Paid by Foreign Corporation - For purposes of this subject, adomestic
corporation which owns at least 10 percent of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall- (1) to
the extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (a)] of a year for which
such foreign corporation is not a less developed country corporation, be
deemed to have paid the same proportion of any income, war profits, or
excess profits taxes paid or deemed to be paid by such foreign corporation to
any foreign country or to any possession of the United States on or with
respect to such accumulated profits, which the amount of such dividends
(determined without regard to Section 78) bears to the amount of such
accumulated profits in excess of such income, war profits, and excess profits
taxes (other than those deemed paid); and (2) to the extent such dividends
are paid by such foreign corporation out of accumulated profits [as defined
in subsection (c) (1) (b)] of a year for which such foreign corporation is a less-
developed country corporation, be deemed to have paid the same proportion
of any income, war profits, or 127 excess profits taxes paid or deemed to be
paid by such foreign corporation to any foreign country or to any possession
of the United States on or with respect to such accumulated profits, which
the amount of such dividends bears to the amount of such accumulated
profits. xxxxxxxxx (c) Applicable Rules (1) Accumulated profits defined - For
purpose of this section, the term 'accumulated profits' means with respect to
any foreign corporation. (A) for purposes of subsections (a) (1) and (b) (1), the
amount of its gains, profits, or income computed without reduction by the
amount of the income, war profits, and excess profits taxes imposed on or
with respect to such profits or income by any foreign country .... ; and (B) for
purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or
income in excess of the income, was profits, and excess profits taxes imposed
on or with respect to such profits or income. The Secretary or his delegate
shall have full power to determine from the accumulated profits of what year
or years such dividends were paid, treating dividends paid in the first 20 days
of any year as having been paid from the accumulated profits of the
preceding year or years (unless to his satisfaction shows otherwise), and in
other respects treating dividends as having been paid from the most recently
accumulated gains, profits, or earnings ... 128 To Our mind there is nothing in
the afore cited provision that would justify tax return of the disputed 15% to
the private respondent. Furthermore, as ably argued by the petitioner, the
private respondent failed to meet certain conditions necessary in order that
the dividends received by the non-resident parent company in the United
States may be subject to the preferential 15% tax instead of 35%. Among
other things, the private respondent failed: (1) to show the actual amount
credited by the U.S. government against the income tax due from PMC-U.S.A.
on the dividends received from private respondent; (2) to present the income
tax return of its mother company for 1975 when the dividends were received;
and (3) to submit any duly authenticated document showing that the U.S.
government credited the 20% tax deemed paid in the Philippines.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE
COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO
CORP., respondents.
[G.R. No. 108576. January 20, 1999]
Facts
Petitioner claim that private respondent A. Soriano Corporations
(hereinafter ANSCOR) redemption and exchange of the stocks of its foreign
stockholders cannot be considered as essentially equivalent to a
distribution of taxable dividends under Section 83(b) of the 1939 Internal
Revenue Act
The issue stemmed from ANSCOR’s redemption of common shares from
the Don Adnres Estate on separate dates. 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
companys foreign exchange remittances in case cash dividends are
declared.[29]
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,[30] for the year 1968 and the second quarter of 1969
based on the transactions of exchange and redemption of stocks.[31] 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[32] which were amended by P.D.s 67 and
157.[33] 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.
A petition for review reached the CTA where the court reversed the ruling
of petitioner. The CA affirmed.
Petitioner contends that the exchange transaction is tantamount to
cancellation under Section 83(b) making the proceeds thereof taxable. It
also argues that the said Section applies to stock dividends which is the
bulk of stocks that ANSCOR redeemed. Further, petitioner claims that
under the net effect test, the estate of Don Andres gained from the
redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-
at-source arising from the two transactions, pursuant to Section 53 and 54
of the 1939 Revenue Act.[39]
ANSCOR, however, avers that it has no duty to withhold any tax either
from the Don Andres estate or from Doa 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,[40] and to (b) subsequently
filipinized ownership of ANSCOR, as allegedly envisioned by Don
Andres.[41] It likewise invoked the amnesty provisions of P.D. 67.
Issue: redemption and exchange of the stocks of its foreign stockholders
cannot be considered as essentially equivalent to a distribution of taxable
dividends
Ruling: Yes The general rule is Section 83(b) of the 1939 NIRC was taken
from Section 115(g)(1) of the U.S. Revenue Code of 1928. [60] It laid down
the general rule known as the proportionate test [61] wherein stock
dividends once issued form part of the capital and, thus, subject to income
tax.[62] Specifically, the general rule states that:
A stock dividend representing the transfer of surplus to capital account
shall not be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence of its
origin may shed light. Under the US Revenue Code, this provision
originally referred to stock dividends only, without any exception. Stock
dividends, strictly speaking, represent capital and do not constitute income
to its recipient.[63] So that the mere issuance thereof is not yet subject to
income tax[64] as they are nothing but an enrichment through increase in
value of capital investment.[65] As capital, the stock dividends postpone the
realization of profits because the fund represented by the new stock has
been transferred from surplus to capital and no longer available for actual
distribution.[66] Income in tax law is an amount of money coming to a
person within a specified time, whether as payment for services, interest,
or profit from investment.[67] It means cash or its equivalent.[68] It is gain
derived and severed from capital,[69] from labor or from both combined[70] -
so that to tax a stock dividend would be to tax a capital increase rather
than the income.[71] In a loose sense, stock dividends issued by the
corporation, are considered unrealized gain, and cannot be subjected to
income tax until that gain has been realized. Before the realization, stock
dividends are nothing but a representation of an interest in the corporate
properties.[72] As capital, it is not yet subject to income tax. It should be
noted that capital and income are different. Capital is wealth or fund;
whereas income is profit or gain or the flow of wealth. [73] The determining
factor for the imposition of income tax is whether any gain or profit was
derived from a transaction.[74]
EXCEPTION
However, if a corporation cancels or redeems stock issued as a dividend at
such time and in such manner as to make the distribution and cancellation
or redemption, in whole or in part, essentially equivalent to the
distribution of a taxable dividend, the amount so distributed in redemption
or cancellation of the stock shall be considered as taxable income to the
extent it represents a distribution of earnings or profit saccumulated after
March first, nineteen hundred and thirteen. (Emphasis supplied).
The exempting clause above quoted was added because corporations found
a loophole in the original provision. They resorted to devious means to
circumvent the law and evade the tax. Corporate earnings would be
distributed under the guise of its initial capitalization by declaring the
stock dividends previously issued and later redeem said dividends by
paying cash to the stockholder. This process of issuance-redemption
amounts to a distribution of taxable cash dividends which was just delayed
so as to escape the tax. It becomes a convenient technical strategy to avoid
the effects of taxation.
Thus, to plug the loophole the exempting clause was added.
Although redemption and cancellation are generally considered capital
transactions, as such, they are not subject to tax. However, it does not
necessarily mean that a shareholder may not realize a taxable gain from
such transactions.[78] Simply put, depending on the circumstances, the
proceeds of redemption of stock dividends are essentially distribution of
cash dividends, which when paid becomes the absolute property of the
stockholder. Thereafter, the latter becomes the exclusive owner thereof
and can exercise the freedom of choice [79] Having realized gain from that
redemption, the income earner cannot escape income tax.[80]
For the exempting clause of Section 83(b) to apply, it is indispensable that:
(a) there is redemption or cancellation; (b) the transaction involves stock
dividends and (c) the time and manner of the transaction makes it
essentially equivalent to a distribution of taxable dividends. Of these, the
most important is the third.
Redemption is repurchase, a reacquisition of stock by a corporation which
issued the stock[89] in exchange for property, whether or not the acquired
stock is cancelled, retired or held in the treasury. [90] Essentially, the
corporation gets back some of its stock, distributes cash or property to the
shareholder in payment for the stock, and continues in business as before.
The redemption of stock dividends previously issued is used as a veil for
the constructive distribution of cash dividends. In the instant case, there
is no dispute that ANSCOR redeemed shares of stocks from a stockholder
(Don Andres) twice (28,000 and 80,000 common shares).
The issuance of stock dividends and its subsequent redemption must be
separate, distinct, and not related, for the redemption to be considered a
legitimate tax scheme.[100] Redemption cannot be used as a cloak to
distribute corporate earnings.[101] Otherwise, the apparent intention to
avoid tax becomes doubtful as the intention to evade becomes manifest. It
has been ruled that:
The three elements in the imposition of income tax are: (1) there must be
gain or profit, (2) that the gain or profit is realized or received, actually or
constructively,[108] 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.[109]
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 stockholders
separate property.[110] 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. Such argument would open the door for income earners not to
pay tax so long as the person from whom the income was derived has
legitimate business reasons. In other words, the payment of tax under the
exempting clause of Section 83(b) would be made to depend not on the
income of the taxpayer but on the business purposes of a third party (the
corporation herein) from whom the income was earned. This is absurd,
illogical and impractical considering that the Bureau of Internal Revenue
(BIR) would be pestered with instances in determining the legitimacy of
business reasons that every income earner may interposed. It is not
administratively feasible and cannot therefore be allowed.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
G.R. No. L-65773-74 April 30, 1987
Facts
The Tax Court held that the proceeds of sales of BOAC passage tickets in
the Philippines by Warner Barnes and Company, Ltd., and later by Qantas
Airways, during the period in question, 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. Thus, in the dispositive portion of its Decision, the Tax Court
ordered petitioner to credit BOAC with the sum of P858,307.79, and to
cancel the deficiency income tax assessments against BOAC in the amount
of P534,132.08 for the fiscal years 1968-69 to 1970-71.
This came about after BOAC received multiple assessments for tax
deficiency.
Issue: Is the income of BOAC taxable or can it be considered as income
from Philippine sources?
Ruling:
Yes.
BOAC, during the periods covered by the subject - assessments,
maintained a general sales agent in the Philippines, That general sales
agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets;
(2) breaking down the whole trip into series of trips — each trip in the
series corresponding to a different airline company; (3) receiving the fare
from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered
through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." 4 Those activities were in
exercise of the functions which are normally incident to, and are in
progressive pursuit of, the purpose and object of its organization as an
international air carrier. In fact, the regular sale of tickets, its main
activity, is the very lifeblood of the airline business, the generation of sales
being the paramount objective. There should be no doubt then that BOAC
was "engaged in" business in the Philippines through a local agent during
the period covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in the
preceding taxable year from all sources within the Philippines. 5
"In order that a foreign corporation may be regarded as doing business
within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent,
and not one of a temporary character.
Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from salaries,
wages or compensation for personal service of whatever kind and in
whatever form paid, or from profession, vocations, trades, business,
commerce, sales, or dealings in property, whether real or personal, growing
out of the ownership or use of or interest in such property; also from
interests, rents, dividends, securities, or the transactions of any business
carried on for gain or profile, or gains, profits, and income derived from any
source whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales
of transport documents. "The words 'income from any source whatever'
disclose a legislative policy to include all income not expressly exempted
within the class of taxable income under our laws." Income means "cash
received or its equivalent"; it is the amount of money coming to a person
within a specific time ...; it means something distinct from principal or
capital. For, while capital is a fund, income is a flow. As used in our income
tax law, "income" refers to the flow of wealth.
The records show that the Philippine gross income of BOAC for the fiscal
years 1968-69 to 1970-71 amounted to P10,428,368 .00. 7
The source of an income is the property, activity or service that produced
the income. 8 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.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS and EFREN P. CASTANEDA, respondents.
G.R. No. 96016 October 17, 1991
Facts
Castaneda (respondent) retired from the govt service as Revenue Attache
in the Philippine Embassy in London, England on 1982. Included in his
retirement benefit is the terminal leave pay for which the CIR claim is part
of his income tax.
Respondent filed a formal written claim for refund contending that the said
terminal leave pay is exempt from income tax. Respondent also filed before
the CTA a petition for review.
The CTA ruled in respondents favor. On appeal, the CA dismissed and
affirmed the CTA’s decision
Acting on behalf of the CIR, the OSG contends that terminal leave pay is
income derived from ER-EE relationship and is part of gross income.
Issue: Is terminal leave pay taxable or part of gross income therefor
taxable?
Ruling: no. It is a benefit (retirement)
The Court has already ruled that the terminal leave pay received by a
government official or employee is not subject to withholding (income) tax.
In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service
Commission, et al., G.R. No. 96032, 31 July 1991, the Court explained
the rationale behind the employee's entitlement to an exemption from
withholding (income) tax on his terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as 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. (Manual on Leave
Administration Course for Effectiveness published by the Civil Service
Commission, pages 16-17). In the exercise of sound personnel policy, the
Government encourages unused leaves to be accumulated. 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. Terminal
leave payments are given not only at the same time but also for the same
policy considerations governing retirement benefits.
In fine, 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.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L. MANNING,
W.D. McDONALD, E.E. SIMMONS and THE COURT OF TAX
APPEALS, Respondents.
[G.R. No. L-28398. August 6, 1975.]
Facts
In 1952, MANTRASCO had an authorized capital stock of P2,500,000 divided
into 25,000 common shares; 24,700 of which were owned by Reese, and the
rest were owned by the respondents with 100 shares each. On Feb. 29, 1952,
Reese executed a trust agreement with the law firm of Ross, Selph,
Carrascoso and Janda as trustees. The agreement provides that during the life
of the owner, the shares shall remain in the name of and shall be voted upon
by the owner; that upon the death of the owner, the shares shall be
transferred to the company, and the company shall transfer such shares into
the trustees, who shall hold the same until the company pays in full; that the
trustees shall vote, subject to the provisions of the agreement; that the estate
and heirs of the owner shall receive the fair value of the shares at the date of
the owner's death. On October 19, 1954, Reese died. On February 2, 1955,
after making partial payment, the certificate was cancelled and a new one
issued in the name of MANTRAS CO. On December 22,1958, a resolution was
passed reverting the 24,700 shares in the treasury to capital and declaring
the same as stock dividend. Full payment of Reese's interest was made in
1963. On September 14, 1962, BIR examined the books of MANTRASCO, and
found out that 24,700 shares were declared as dividends, with a book value
of P, 7,973,660, and such were not included by respondents in their gross
income. On April 14, 1965, the Commissioner issued 90 notices of assessment
for deficiency income taxes to respondent. CTA absolved the respondents on
the ground that the respondents' respective 1/3 interest in the corporation
remained the same; hence, CIR appealed. Both parties agree that distribution
of assets of a corporation is taxable, but stock dividend is not. However, they
differ on the nature of the questioned shares. Respondents maintain that
their interest remained the same, while petitioner argues that their
respective interest increased from 0-4% to 331/3% after the declaration.
Whether or not the shares declared as dividend are treasury shares, such that
those were properly reverted to capital and distributed as stock dividend
which is not subject to tax The said shares were not, on December 22, 1958
or at any time before or after that date, treasury shares. Treasury shares are
stocks issued and fully paid for and reacquired by the corporation either by
purchase, donation, forfeiture or other means. Treasury shares are therefore
issued shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not having
been retired by the corporation re-acquiring it, may be re-issued or sold
again, such share, as long as it is held by the corporation as a treasury share,
participates neither in dividends, because dividends cannot be declared by
the corporation to itself, nor in the meetings of the corporation as voting
stock, for otherwise equal distribution of voting powers among stockholders
will be effectively lost and the directors will be able to perpetuate their
control of the corporation, though it still represents a paid-for interest in the
property of the corporation. The foregoing essential features of a treasury
stock are lacking in the questioned shares. The manifest intention of the
parties to the trust agreement was, in sum and substance, to treat the 24,700
shares of Reese as absolutely outstanding shares of Reese's estate until they
were fully paid. Such being the true nature of the 91 24,700 shares, their
declaration as treasury stock dividend in 1958 was a complete nullity and
plainly violative of public policy. A stock dividend, being one payable in capital
stock, cannot be declared out of outstanding corporate stock, but only from
retained earnings.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. SOLIDBANK CORPORATION, respondent.
[G.R. No. 148191. November 25, 2003]
Notes:
Under the Tax Code, the earnings of banks from passive income are subject
to a twenty percent final withholding tax (20% FWT). This tax is withheld
at source and is thus not actually and physically received by the banks,
because it is paid directly to the government by the entities from which the
banks derived the income. Apart from the 20% FWT, banks are also subject
to a five percent gross receipts tax (5% GRT) which is imposed by the Tax
Code on their gross receipts, including the passive income.
Since the 20% FWT is constructively received by the banks and forms part
of their gross receipts or earnings, it follows that it is subject to the 5%
GRT. After all, the amount withheld is paid to the government on their
behalf, in satisfaction of their withholding taxes. That they do
not actually receive the amount does not alter the fact that it is remitted
for their benefit in satisfaction of their tax obligations.
Stated otherwise, the fact is that if there were no withholding tax system
in place in this country, this 20 percent portion of the passive income of
banks would actually be paid to the banks and then remitted by them to
the government in payment of their income tax. The institution of the
withholding tax system does not alter the fact that the 20 percent portion
of their passive income constitutes part of their actual earnings, except
that it is paid directly to the government on their behalf in satisfaction of
the 20 percent final income tax due on their passive incomes.
Facts
[Respondent] alleges that the total gross receipts in the amount
of P1,474,691,693.44 included the sum of P350,807,875.15 representing
gross receipts from passive income which was already subjected to 20%
final withholding tax.
On January 30, 1996, [the Court of Tax Appeals] rendered a decision in
CTA Case No. 4720 entitled Asian Bank Corporation vs. Commissioner of
Internal Revenue[,] wherein it was held that the 20% final withholding tax
on [a] banks interest income should not form part of its taxable gross
receipts for purposes of computing the gross receipts tax.
On June 19, 1997, on the strength of the aforementioned decision,
[respondent] filed with the Bureau of Internal Revenue [BIR] a letter-
request for the refund or issuance of [a] tax credit certificate in the
aggregate amount of P3,508,078.75, representing allegedly overpaid gross
receipts tax for the year 1995, computed as follows:
A petitioner for review was also filed with the CTA to toll the running of
the two year prescriptive period (refunds)
The CTA ruled in favor of respondent and likewise the CA held the same.
Petitioner claims that although the 20% FWT on respondents interest
income was not actually received by respondent because it was remitted
directly to the government, the fact that the amount redounded to the
banks benefit makes it part of the taxable gross receipts in computing the
5% GRT. Respondent, on the other hand, maintains that the CA correctly
ruled otherwis
Issue: WON the 20% final withholding tax on [a] banks interest income
forms part of the taxable gross receipts in computing the 5% gross receipts
tax.
Ruling:
agree with petitioner. In fact, the same issue has been raised recently
in China Banking Corporation v. CA,[11] where this Court held that the
amount of interest income withheld in payment of the 20% FWT forms part
of gross receipts in computing for the GRT on banks.
Two different taxes the FWT and the GRT
The 5% GRT[15] is included under Title V. Other Percentage Taxes of the
Tax Code and is not subject to withholding. The banks and non-bank
financial intermediaries liable therefor shall, under Section
125(a)(1),[16] file quarterly returns on the amount of gross receipts and pay
the taxes due thereon within twenty (20) [17] days after the end of each
taxable quarter.
The 20% FWT,[18] on the other hand, falls under Section 24(e)(1) [19] of Title
II. Tax on Income. It is a tax on passive income, deducted and withheld at
source by the payor-corporation and/or person as withholding agent
pursuant to Section 50,[20] and paid in the same manner and subject to the
same conditions as provided for in Section 51.[21]
A perusal of these provisions clearly shows that two types of taxes are
involved in the present controversy: (1) the GRT, which is a percentage tax;
and (2) the FWT, which is an income tax. As a bank, petitioner is covered
by both taxes.
A percentage tax is a national tax measured by a certain percentage of the
gross selling price or gross value in money of goods sold, bartered or
imported; or of the gross receipts or earnings derived by any person
engaged in the sale of services.[22] It is not subject to withholding.
An income tax, on the other hand, is a national tax imposed on the net or
the gross income realized in a taxable year.[23] It is subject to withholding.
In a withholding tax system, the payee is the taxpayer, the person on whom
the tax is imposed; the payor, a separate entity, acts as no more than an
agent of the government for the collection of the tax in order to ensure its
payment. Obviously, this amount that is used to settle the tax liability is
deemed sourced from the proceeds constitutive of the tax base. [24] These
proceeds are either actual or constructive. Both parties herein agree that
there is no actual receipt by the bank of the amount withheld. What needs
to be determined is if there is constructive receipt thereof. Since the payee
-- not the payor -- is the real taxpayer, the rule on constructive receipt can
be easily rationalized, if not made clearly manifest.[25]
Respondent argues that only items of income actually received should be
included in its gross receipts. It claims that since the amount had already
been withheld at source, it did not have actualreceipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that the
acquisition of the right of possession is through the proper acts and legal
formalities established therefor. The withholding process is one such
act. There may not be actual receipt of the income withheld; however, as
provided for in Article 532, possession by any person without any power
whatsoever shall be considered as acquired when ratified by the person in
whose name the act of possession is executed.
In our withholding tax system, possession is acquired by the payor as the
withholding agent of the government, because the taxpayer ratifies the
very act of possession for the government. There is
thus constructive receipt. The processes of bookkeeping and accounting for
interest on deposits and yield on deposit substitutes that are subjected to
FWT are indeed -- for legal purposes -- tantamount to delivery, receipt or
remittance.[35] Besides, respondent itself admits that its income is
subjected to a tax burden immediately upon receipt, although it claims that
it derives no pecuniary benefit or advantage through the withholding
process.There being constructive receipt of such income -- part of which is
withheld -- RR 17-84 applies, and that income is included as part of the tax
base upon which the GRT is imposed.
Issue: Given that a tax is imposed upon total receipts and not upon net
earnings,[73] shall the income withheld be included in the tax base upon
which such tax is imposed? In other words, shall interest
income constructively received still be included in the tax base for
computing the GRT?
Ruling: Yes.
amounts withheld form part of gross receipts, because these are
in constructive possession and not subject to any reservation, the
withholding agent being merely a conduit in the collection process.
the interest income that had been withheld for the government became
property of the financial institutions upon constructive possession
thereof. Possession was indeed acquired, since it was ratified by the
financial institutions in whose name the act of possession had been
executed. The money indeed belonged to the taxpayers; merely holding it
in trust was not enough.[75]
The government subsequently becomes the owner of the money when the
financial institutions pay the FWT to extinguish their obligation to the
government. As this Court has held before, this is the consideration for the
transfer of ownership of the FWT from these institutions to the
government.[76] It is ownership that determines whether interest income
forms part of taxable gross receipts.[77] Being originally owned by these
financial institutions as part of their interest income, the FWT should form
part of their taxable gross receipts.
CIR v BPI
G.R. No. 147375
2006
Facts
As a domestic corporation, the interest earned by respondent Bank of the
Philippine Islands (BPI) from deposits and similar arrangements are
subjected to a final withholding tax of 20%. Consequently, the interest
income it receives on amounts that it lends out are always net of the 20%
withheld tax. As a bank, BPI is furthermore liable for a 5% gross receipts
tax on all its income.
For the four (4) quarters of the year 1996, BPI computed its 5% gross
receipts tax payments by including in its tax base the 20% final tax on
interest income that had been withheld and remitted directly to the
Bureau of Internal Revenue (BIR).
On 30 January 1996, the CTA rendered a decision in Asian Bank
Corporation v. Commissioner of Internal Revenue, [5]holding that the 20%
final tax withheld on a banks interest income did not form part of its
taxable gross receipts for the purpose of computing gross receipts tax.
BPI wrote the BIR a letter dated 15 July 1998 citing the CTA Decision
in Asian Bank and requesting a refund of alleged overpayment of taxes
representing 5% gross receipts taxes paid on the 20% final tax withheld at
source.
Following its own doctrine in Asian Bank, the CTA rendered a
Decision,[6] holding that the 20% final tax withheld did not form part of the
respondents taxable gross receipts and that gross receipts taxes paid
thereon are refundable.
Inaction by the BIR on this request prompted BPI to file a Petition for
Review against the Commissioner of Internal Revenue (Commissioner)
with the CTA
On appeal, the Court of Appeals promulgated a Decision[7] affirming the
CTA
It cited this Courts decision inCommissioner of Internal Revenue v. Tours
Specialists, Inc.,[8] in which we held that the 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 taxpayers
benefit in concluding that it would be unjust and confiscatory to include
the withheld 20% final tax in the tax base for purposes of computing the
gross receipts tax since the amount corresponding to said 20% final tax was
not received by the taxpayer and the latter derived no benefit therefrom.
The Court of Appeals also held that Section 4(e) of Revenue Regulations
No. 12-80 mandates the deduction of the final tax paid on interest income
in computing the tax base for the gross receipts tax. Section 4(e) provides,
thus:
… The rates of taxes to be imposed on the gross receipts of such financial
institutions shall be based on all items of income actually received. Mere
accrual shall not be considered, but once payment is received on such
accrual or in case of prepayment, then the amount actually received shall
be included in the tax base of such financial institutions, as provided
hereunder. …
Petitioner claim that (1) the term gross receipts must be applied in its
ordinary meaning; (2) there is no provision in the Tax Code or any special
laws that excludes the 20% final tax in computing the tax base of the 5%
gross receipts tax; (3) Revenue Regulations No. 12-80, Section 4(e), is
inapplicable in the instant case; and (4) income need not actually be
received to form part of the taxable gross receipts.
Issue: whether the 20% final tax withheld on a banks passive income
should be included in the computation of the gross receipts tax.
Ruling: Yes.
The Tax Code does not provide a definition of the term gross
receipts.[13] Accordingly, the term is properly understood in its plain and
ordinary meaning[14] and must be taken to comprise of the entire receipts
without any deduction.[15]
Furthermore, Section 119 (a)[20] of the Tax Code expressly includes interest
income as part of the base income from which the gross receipts tax on
banks is computed. This express inclusion of interest income in taxable
gross receipts creates a presumption that the entire amount of the interest
income, without any deduction, is subject to the gross receipts tax.[21]
However, we agree with the Commissioner that BPIs asserted right under
Section 4(e) of Revenue Regulations No. 12-80 presents a misconstruction
of the provision. While, indeed, the provision states that [t]he rates of taxes
to be imposed on the gross receipts of such financial institutions shall
be based on all items of income actually received, it goes on to distinguish
actual receipt from accrual, i.e., that [m]ere accrual shall not be
considered, but once payment is received on such accrual or in case of
prepayment, then the amount actually received shall be included in the tax
base of such financial institutions x x x.
Section 4(e) recognizes that income could be recognized by
the taxpayer either at the time of its actual receipt or its
accrual,[24] depending
on the accounting method used by the taxpayer,[25]
but establishes the rule
that, for purposes of gross receipts tax, interest income is taxable upon
actual receipt of the income, as opposed to the time of its accrual. Section
4(e) does not exclude accrued interest income from gross receipts but
merely postpones its inclusion until actual payment of the interest to the
lending bank, thus mandating that [m]ere accrual shall not be considered,
but once payment is received on such accrual or in case of prepayment,
then the amount actually received shall be included in the tax base of such
financial institutions x xx.[26]
Even if Section 4(e) had been properly construed, it still cannot be the basis
for deducting the income tax withheld since Section 4(e) has been
superseded by Section 7 of Revenue Regulations No. 17-84, which states,
The provision categorically provides that if the recipient of interest
subjected to withholding taxes is a financial institution, the interest shall
be included as part of the tax base upon which the gross receipts tax is
imposed.
The implied repeal of Section 4(e) is undeniable. Section 4(e) imposes the
gross receipts tax only on all items of income actually received, as opposed
to their mere accrual, while Section 7 of Revenue Regulations No. 17-84
includes all interest income (whether actual or accrued) in computing the
gross receipts tax.[27] Section 4(e) of Revenue Regulations No. 12-80 was
superseded by the later rule, because Section 4(e) thereof is not restated in
Revenue Regulations No. 17-84.[28] Clearly, then, the current revenue
regulations requires interest income, whether actually received or merely
accrued, to form part of the banks taxable gross receipts.[29]
Note: Receipt of income may be actual or constructive. We have held that
the withholding process results in the taxpayers constructive receipt of the
income withheld,
In our withholding tax system, possession is acquired by the payor as the
withholding agent of the government, because the taxpayer ratifies the
very act of possession for the government. There is
thus constructive receipt. The processes of bookkeeping and accounting for
interest on deposits and yield on deposit substitutes that are subjected to
FWT are indeedfor legal purposestantamount to delivery, receipt or
remittance.[31] (Emphasis supplied.)
COMMISSIONER OF INTERNAL REVENUE Versus JULIANE BAIER-
NICKEL
G.R. No. 153793
Facts
Repsondent, a german citizen is the president of Jubanitex corporation, a
domestic corporation engaged in the textile industry. It was agreed
through the general of said company that respondent will receive 10% sales
commission on sales actually concluded.
On 1995 respondent received 1.7million representing her sales commission
with 10% of said value declared as Withholding tax and the same remitted
to the BIR.
Respondent filed her income tax reporting the taxable income of 1.7million
and tax due of 170k.
This led in 1998 for respondent to file a claim to refund the amount of 170k
for having been mistakenly withheld and remitted by JUBANITEX to the
BIR
Respondent claim that the income is not taxable since the services was
rendered in Germany hence an income from sources outside the
Philippines
Respondent filed an action with the CTA when the BIR did not act on the
refund claim. It held that the commissions received by respondent were
actually her remuneration in the performance of her duties as President of
JUBANITEX and not as a mere sales agent thereof. The income derived by
respondent is therefore an income taxable in the Philippines because
JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of
the CTA, holding that respondent received the commissions as sales agent
of JUBANITEX and not as President thereof. And since the source of
income means the activity or service that produce the income, the sales
commission received by respondent is not taxable in the Philippines
because it arose from the marketing activities performed by respondent
in Germany.
Petitioner 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.
Respondent, on the other hand, claims that the income she received was
payment for her marketing services. She contended that income of
nonresident aliens like her is subject to tax only if the source of the income
is within the Philippines. Source, according to respondent is the situs of
the activity which produced the income. And since the source of her income
were her marketing activities in Germany, the income she derived from
said activities is not subject to Philippine income taxation.
Issue: WON the income taxable.
Ruling: No.
Both the petitioner and respondent cited the case of Commissioner of
Internal Revenue v. British Overseas Airways Corporation in support of
their arguments, but the correct interpretation of the said case favors the
theory of respondent that it is the situs of the activity that determines
whether such income is taxable in the Philippines. The conflict between
the majority and the dissenting opinion in the said case has nothing to do
with the underlying principle of the law on sourcing of income. In fact, both
applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue. The divergence in opinion centered on whether the sale of tickets
in the Philippines is to be construed as the activity that produced the
income, as viewed by the majority, or merely the physical source of the
income, as ratiocinated by Justice Florentino P. Feliciano in his
dissent. The majority, through Justice Ameurfina Melencio-Herrera,
as ponente, interpreted the sale of tickets as a business activity that gave
rise to the income of BOAC. Petitioner cannot therefore invoke said case to
support its view that source of income is the physical source of the money
earned. If such was the interpretation of the majority, the Court would
have simply stated that source of income is not the business activity of
BOAC but the place where the person or entity disbursing the income is
located or where BOAC physically received the same. But such was not the
import of the ruling of the Court. It even explained in detail the business
activity undertaken by BOAC in the Philippines to pinpoint the taxable
activity and to justify its conclusion that BOAC is subject to Philippine
income taxation.
The Court reiterates the rule that source of income relates to the property,
activity or service that produced the income. 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 petitioners 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.
Notes:
The following discussions on sourcing of income under the Internal
Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources only: (1)
capital and/or (2) labor; and/or (3) the sale of capital assets. While the three
elements of this attempt at definition need not be accepted as all-inclusive,
they serve as useful guides in any inquiry into whether a particular item
is from sources within the United States and suggest an investigation into
the nature and location of the activities or property which produce the
income.
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.
Much confusion will be avoided by regarding the term source in this
fundamental light. It 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 intention of Congress in the 1916 and subsequent statutes was to
discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the source, or situs of the
activities or property which produce the income. The result is that, on the
one hand, nonresident aliens and nonresident foreign corporations are
prevented from deriving income from the United States free from tax, and,
on the other hand, there is no undue imposition of a tax when the activities
do not take place in, and the property producing income is not employed
in, this country. Thus, if income is to be taxed, the recipient thereof must
be resident within the jurisdiction, or the property or activities out of which
the income issues or is derived must be situated within the jurisdiction so
that the source of the income may be said to have a situs in this country.

The underlying theory is that the consideration for taxation is protection

of life and property and that the income rightly to be levied upon to defray
the burdens of the United States Government is that income which is
created by activities and property protected by this Government or
obtained by persons enjoying that protection. [16]

The important factor therefore which determines the source of income of

personal services is not the residence of the payor, or the place where the
contract for service is entered into, or the place of payment, but the place
where the services were actually rendered.[17]