Tax Consolidated Cases - Post Midterms

8/13/2019 Tax Consolidated Cases - Post Midterms

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#1

FERDINAND MARRCOS II, petitioner, vs COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL

REVENUE and HERMINIA D. DE GUZMAN, respondents.

(G.R. No. 120880, JUNE 5, 1997)

FACTS:

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and examinations of

the tax liabilities and obligations of the late president Ferdinand Marcos as well as that of his families and cronies.

The investigation disclosed that the Marcoses failed to file a written notice of the death of the decedent, estate tax

returns, and several income tax returns from 1982-1986 which were in violation of the NIRC. Criminal charges were

also filed against Imelda Marcos. The CIR also prepared and filed the Estate Tax Return for the estate of the late

president, ITR for the spouses Marcos, and the ITR of Bongbong for the years 1982-1985.

The BIR issued several deficiency estate and income tax assessments. The Commissioner averred that

these assessments were personally and constructively served upon Imelda Marcos through her caretaker Mr.

Martinez at her last known address and to Bongbong through his caretaker, also at his last known address. Formal

assessment notices were also served upon Imelda through Bongbong at his office in the House of Representatives.

A Notice to Taxpayer inviting Imelda to a conference was furnished to her counsel Dean Antonio Coronel but to no

avail. These deficiency tax assessments were not protested administratively by the Marcoses within 30 days from

service of said assessments.

The BIR issued notices of levy on real property against certain parcels of land owned by the Marcoses to

satisfy the alleged estate tax and deficiency income taxes of the spouses Marcos. Copies of these notices were

served upon Imelda, and their counsel of record. The notices of sale at a public auction were posted and there

being no bidder, the lots were declared forfeited in favor of the government. Bongbong filed the instant petition

for certiorari and prohibition under Rule 65 of the Rules of Court, with prayer for TRO and/or writ of prelim

injuction.

ISSUE:

Whether the proper avenues of assessment and collection of said tax obligations were taken by the

respondent Bureau.

Whether notices of levy, notices of sale, and subsequent sale of properties of the late president effected

by BIR are null and void for disregarding the established procedure for the enforcement of taxes upon the estate of

the deceased.

Whether BIR has authority to collect by summary remedy of levying upon, and sale of real properties of

the decedent, estate tax deficiencies, without the cognition and authority of the court sitting in probate over the

supposed will of the dead.

HELD:

It has been repeatedly observed that the enforcement of tax laws and the collection of taxes, is of

paramount importance for the sustenance of the government. Taxes are the lifeblood of the government and

should be collected without unnecessary hindrance. However, such collection should be made in accordance with

the law as any arbitrariness will negate the very reason for government itself.

The ordinary procedure by which to settle claims of indebtedness against the estate of a deceased,

person, as in an inheritance (estate) tax, is for the claimant to present a claim before the probate court so that said


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court may order the administrator to pay the amount thereof. This remedy is allegedly, exclusive, and cannot be

effected through any other means.

In the Philippines, the enforcement and collection of estate tax, is executive in character. Section 3 of the

NIRC states that the powers and duties of the Bureau of Internal Revenue shall comprehend the assessment and

collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures,penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by

the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give effect to and administer the

supervisory and police power conferred to it by this Code or other laws.

Taxes assessed against the estate of a deceased person, after administration is opened, need not be

submitted to the committee on claims in the ordinary course of administration. In the exercise of its control over

the administrator, the court may direct the payment of such taxes upon motion showing that the taxes have been

assessed against the estate.

This liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to

allowing the enforcement of tax obligations against the heirs of the decedent, even after distribution of the

estate's properties.

Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the

heirs even after the distribution of the properties of the decedent. They are exempted from the application of the

statute of non-claims. The heirs shall be liable therefor, in proportion to their share in the inheritance.

The Government has two ways of collecting the taxes in question.

1. By going after all the heirs and collecting from each one of them the amount of the tax proportionate to

the inheritance received.

2. By subjecting said property of the estate which is in the hands of an heir or transferee to the payment

of the tax due the estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105, September 15, 1967.)

The Tax Bureau did not err in proceeding with the levying and sale of the properties allegedly owned by

the late President, on the ground that it was required to seek first the probate court's sanction. There is nothing in

the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement

court's approval of the state's claim for estate taxes, before the same can be enforced and collected.

The mere fact that the decedent has pending cases involving ill-gotten wealth does not affect the

enforcement of tax assessments over the properties indubitably included in his estate.

It is not the Department of Justice which is tasked to determine the amount of taxes due upon the subject

estate, but the Bureau of Internal Revenue, whose determinations and assessments are presumed correct and

made in good faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities inthe performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates

isprima facievalid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The

burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present

proof of error in the assessment will justify the judicial affirmance of said assessment.

The court denied present petition.


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#2

Meralco vs. Savellana

On May 22, 1967, the late Juan G. Maniago (substituted in these proceedings by his wife and children) submitted

to petitioner Commissioner of Internal Revenue confidential denunciation against the Meralco Securities

Corporation for tax evasion for having paid income tax only on 25 % of the dividends it received from the ManilaElectric Co. for the years 1962-1966, thereby allegedly shortchanging the government of income tax due from 75%

of the said dividends.

Petitioner Commissioner of Internal Revenue caused the investigation of the denunciation after which he found

and held that no deficiency corporate income tax was due from the Meralco Securities Corporation on the

dividends it received from the Manila Electric Co. and accordingly denied Maniago's claim for informer's reward on

a non-existent deficiency.

On August 28, 1970, Maniago filed a petition for mandamus, and subsequently an amended petition for

mandamus, in the Court of First Instance of Manila, docketed therein as Civil Case No. 80830, against the

Commissioner of Internal Revenue and the Meralco Securities Corporation to compel the Commissioner to impose

the alleged deficiency tax assessment on the Meralco Securities Corporation and to award to him the

corresponding informer's reward under the provisions of R.A. 2338. Respondent judge granted the said petition

and thereafter, denied the motions for reconsideration filed by all the parties. Hence, this petition by Meralco.

Issue: (1) Whether the respondent judge has jurisdiction over the subject matter of the case

Respondent judge has no jurisdiction to take cognizance of the case because the subject matter thereof clearly

falls within the scope of cases now exclusivelywithin the jurisdiction of the Court of Tax Appeals. Section 7 of

Republic Act No. 1125, enacted June 16, 1954, granted to the Court of Tax Appeals exclusive appellate

jurisdictionto review by appeal, among others, decisions of the Commissioner of Internal Revenue in cases

involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in

relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law

administered by the Bureau of Internal Revenue. The law transferred to the Court of Tax Appeals jurisdiction over

all cases involving said assessments previously cognizable by courts of first instance, and even those already

pending in said courts.The question of whether or not to impose a deficiency tax assessment on Meralco Securities

Corporation undoubtedly comes within the purview of the words "disputed assessments" or of "other mattersarising under the National Internal Revenue. The determination of the correctness or incorrectness of a tax

assessment to which the taxpayer is not agreeable, falls within the jurisdiction of the Court of Tax Appeals and not

of the Court of First Instance, for under the provisions of Section 7 of Republic Act No. 1125, the Court of Tax

Appeals has exclusiveappellate jurisdiction to review, on appeal, any decision of the Collector of Internal Revenue

in cases involving disputed assessments and other matters arising under the National Internal Revenue Code or

other law or part of law administered by the Bureau of Internal Revenue.

Moreover, since the office of the Commissioner of Internal Revenue is charged with the administration of revenue

laws, which is the primary responsibility of the executive branch of the government, mandamus may not he

against the Commissioner to compel him to impose a tax assessment not found by him to be due or proper for that

would be tantamount to a usurpation of executive functions. Petition is granted.

#3

REPUBLIC OF THE PHILIPPINES VS. COURT OF TAX APPEALS, G.R. NO. G.R. NO. 139050 OCTOBER 2, 2001

Facts:This case is a petition for review under Rule 45 of the Revised Rules of Court assailing the affirmance by the

Court of Appeals of the decision of the Court of Tax Appeal. On 12 December 1992, a shipment of bales of textile

gray cloth arrived at the Manila International Container Port aboard a vessel. The shipment's Inward Foreign

Manifest stated that the bales of cloth were consigned to GQ GARMENTS, Inc. The Clean Report of Findings (CRF)

issued by the Societe Generale de Surveilance (SGS), however, mentioned AGFHA, Incorporated, to be the

consignee of the shipment. Forthwith, the shipping agent, FIL-JAPAN, requested for an amendment of the Inward


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Foreign Manifest so as to correct the name of the consignee from that of GQ GARMENTS, Inc., to that of AGFHA,

Inc. On 22 January 1993, FIL-JAPAN forwarded to AGFHA, Inc., the amended Inward Foreign Manifest which the

latter, in turn, submitted to the MICP Law Division. The MICP indorsed the document to the Customs Intelligence

Investigation Services (CIIS). The CIIS placed the subject shipment, on the ground that GQ GARMENTS, Inc., could

not be located in its given address, and was thus suspected to be a fictitious firm. Forfeiture proceedings of the

Tariff and Customs Code were initiated. AGFHA, Inc., filed a motion for intervention contending that AGFHA, Inc., is

the lawful owner and actual consignee of the subject shipment. The motion for intervention was granted. TheCollector of Customs came up with a draft decision ordering the lifting of the warrant of seizure and detention on

the basis of its findings that GQ GARMENTS, Inc., was not a fictitious corporation and that there was a valid waiver

of rights over the bales of cloth by GQ GARMENTS, Inc., in favor of AGFHA, Inc. The draft decision was submitted to

the Deputy Commissioner for clearance and approval, who, in turn, transmitted it to the CIIS for comment. The CIIS

opposed the draft decision, insisting that GQ GARMENTS, Inc., was a fictitious corporation and that even if it did

exist, its president, John Barlin, had no authority to waive the right over the subject shipment in favor of AGFHA,

Inc. The Deputy Commissioner, relying on the comment of the CIIS, rejected the draft decision of the Collector of

Customs. A joint motion for reconsideration was filed and was given due course. Convinced that the evidence

presented established the legal existence of GQ GARMENTS, Inc., and finding that a resolution passed by the Board

of Directors of GQ GARMENTS, Inc., ratified the waiver of its president, the Collector of Customs in another draft

decision granted the joint motion. The Office of the Commissioner of Customs, however, disapproved the new

draft decision and denied the release of the goods. In deference to the directive of the Commissioner, the District

Collector of Customs ordered the forfeiture of the shipment. On 14 October 1994, AGFHA, Inc., interposed an

appeal to the Office of the Commissioner of Customs. The appeal was dismissed consistently with the

Commissioner's earlier stand that disapproved the Collector of Customs' draft decision. On 5 October 1995,

AGFHA, Inc., filed a petition for review with the Court of Tax Appeals questioning the forfeiture of the bales of

textile cloth. Finding merit in the plea of appellants, the Court of Tax Appeals granted the petition and ordered the

release of the goods to AGFHA, Inc. On 27 December 1996, the Commissioner of Customs then challenged before

the Court of Appeals the decision of the tax court. In its decision, dated 31 May 1999, the Court of Appeals

dismissed the appeal for lack of merit. Then the appellate court ruled that the Bureau of Customs has failed to

satisfy its burden of proving fraud on the part of the importer or consignee.

Issue:Whether or not there is fraud.

Held:The petition was denied and the assailed decision of the Court of Appeals is affirmed. The appeal is notmeritorious. The requisites for the forfeiture of goods under Section 2530(f), in relation to (1) (3-5), of the Tariff

and Customs Code are: (a) the wrongful making by the owner, importer, exporter or consignee of any declaration

or affidavit, or the wrongful making or delivery by the same person of any invoice, letter or paper - all touching on

the importation or exportation of merchandise; (b) the falsity of such declaration, affidavit, invoice, letter or paper;

and (c) an intention on the part of the importer/consignee to evade the payment of the duties due. Petitioner

asserts that all of these requisites are present in this case. It contends that it did not presume fraud, rather the

events positively point to the existence of fraud. Private respondent AGFHA, Inc., on the other hand, maintains

that there has only been an inadvertent error and not an intentional wrongful declaration by the shipper to evade

payment of any tax due. The resolution of this issue would entail a re-evaluation of the attendant circumstances, a

matter that cannot be freely undertaken by the Supreme Court. For it has been a settled rule that the Supreme

Court is not a trier of facts. Findings of the appellate court are generally binding and cannot be disturbed by this

Court unless it is sufficiently shown that there has been no evidence on record to support such findings. The

assessment made by the appellate court carry even more weight when it is consistent with that of the trial

court. Consonantly, the factual determination of the Court of Tax Appeals, when supported by substantial

evidence, will not be reversed on appeal unless it is clear that the said court has committed gross error in the

process. The Collector of Customs, Court of Tax Appeals and the Court of Appeals are unanimous in concluding

that no fraud has been committed by private respondent in the importation of the bales of cloth. The records do

appear to sustain this conclusion. Fraud must be proved to justify forfeiture.It must be actual, amounting to

intentional wrong-doing with the clear purpose of avoiding the tax. Forfeiture is not favored in law nor in

equity. Mere negligence is not equivalent to the fraud contemplated by law.What is here involved is an honest

mistake, not even directly attributable to private respondent, which will not deprive the government of its right to


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collect the proper tax. The conclusion of the appellate court, being consistent with the evidence on record and not

contrary to law and jurisprudence, hardly can be overturned by this Court.

#4

GR. No. 81446 August 18, 1988

BONIFACIA SY PO vs.

HONORABLE COURT OF TAX APPEALS AND HONORABLE COMMISSIONER OF INTERNAL REVENUE

FACTS

In the taxable years 1964 to 1972, the deceased Po Bien Sing was the sole proprietor of Silver Cup Wine Factory,

Talisay, Cebu. He was engaged in the business of manufacture and sale of compounded liquors, using alcohol and

other ingredients as raw materials.

On the basis of a denunciation against Silver Cup allegedly "for tax evasion amounting to millions of pesos" the

then Secretary of Finance Cesar Virata directed the Finance-BIR--NBI team to conduct the corresponding

investigation in a memorandum dated April 2, 1971 . Accordingly, a letter and a subpoena duces tecum dated April13,1971 and May 3,1971, respectively, were issued against Silver Cup requesting production of the accounting

records and other related documents for the examination of the team. Mr. Po Bien Sing did not produce his books

of accounts as requested. This prompted the team with the assistance of the PC Company, Cebu City, to enter the

factory bodega of Silver Cup and seized different brands, consisting of 1,555 cases of alcohol products. The

inventory lists of the seized alcohol products are contained in Volumes I, II, III, IV and V. On the basis of the team's

report of investigation, the respondent Commissioner of Internal Revenue assessed Mr. Po Bien Sing deficiency

income tax for 1966 to 1970 in the amount of P7,154,685.16 and for deficiency specific tax for January 2,1964 to

January 19, 1972 in the amount of P5,595,003.68.

Petitioner protested the deficiency assessments through letters dated October 9 and October 30, 1972 , which

protests were referred for reinvestigation. The corresponding report dated August 13, 1981 recommended the

reiteration of the assessments in view of the taxpayer's persistent failure to present the books of accounts forexamination, compelling respondent to issue warrants of distraint and levy on September 10, 1981.

The warrants were admittedly received by petitioner on October 14, 1981, which petitioner deemed respondent's

decision denying her protest on the subject assessments. Hence, petitioner's appeal on October 29,1981.

ISSUE:

Whether or not the assessment has valid and legal basis?

HELD

Yes.

In the instant case, the persistent failure of the late Po Bien Sing and the herein petitioner to present their books

of accounts for examination for the taxable years involved left the Commissioner of Internal Revenue no otherlegal option except to resort to the power conferred upon him under Section 16 of the Tax Code. The applicable

legal provision is Section 16(b) of the National Internal Revenue Code of 1977 as amended. It reads:

Sec. 16. Power of the Commissioner of Internal Revenue to make assessments.

xxx xxx xxx

b) Failure to submit required returns, statements, reports and other documents. - When a report

required by law as a basis for the assessment of an national internal revenue tax shall not be forthcoming

within the time fixed by law or regulation or when there is reason to believe that any such report is false,


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incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax on the best

evidence obtainable.

In case a person fails to file a required return or other document at the time prescribed by law, or

willfully or otherwise, files a false or fraudulent return or other documents, the Commissioner shall make or

amend the return from his own knowledge and from such information as he can obtain through testimony

or otherwise, which shall be prima facie correct and sufficient for all legal purposes.

The law is specific and clear. The rule on the "best evidence obtainable" applies when a tax report required by lawfor the purpose of assessment is not available or when the tax report is incomplete or fraudulent. Tax assessments

by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In

the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of

Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in

favor of the correctness of tax assessments.

#5

BACHE & CO. PHIL. INC. vs. JUDGE VIVENCIO RUIZ, RODOLFO DE LEON and ARTURO LOGRONIO

GR No. L-32409 February 27, 1971

Facts:

On February 24, 1970, Commissioner of Internal Revenue Misael Vera wrote a letter to Judge Vivencio Ruiz

requesting the issuance of search warrant against Bache & Co. Phil. Inc. for violation of Sec. 46 (a) of the NIRC, as

well as Sections 53, 72, 73, 208 and 209, and to authorize Examiner Rodolfo de Leon to make and file the

application for the said search warrant.

De Leon, together with his witness, Arturo Logronio, went to the CFI Rizal bringing the letter request and

documents. At the time, Judge Vivencio Ruiz was hearing a case so he instructed his Deputy Clerk of Court to take

the depositions of De Leon and Logronio. The stenographer read to Judge Ruiz the stenographic notes and the

Judge Asked Logronio to take oath and warned him that f his deposition was false, he could be charged of Perjury.

Judge Ruiz, thereafter, signed the application for search warrant and Search Warrant 2-M-70 was issued

accordingly.

3 days later, BIR agents seized the search warrant at the office of Bache & Co. Phil. Inc. in Makati. The agents

proceeded and yielded 6 boxes of documents. Based on these documents, the BIR assessed Bache & Co. for a sum

of P 294,394,729.97 as tax assessment for that taxable year. Bache & Co. brought the matter to the Supreme

Court.

ISSUE:

Whether the search warrant is valid.

DECISION:

No, it is invalid for the following reasons:

1. The respondent Judge failed to personally examine the complainant and his witness.

The examination of the complainant and the witnesses he may produce is required by Art. 3, Section 1, par. 3 of

the Constitution and by Sections 3 and 4 of Rule 126 of the Rules of Court, should be conducted by the Judge

himself and not by others.


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Personal examination by the judge of the complainant and his witnesses is necessary to enable him to determine

the existence and non-existence of a probable cause pursuant to the aforementioned Constitutional provision and

Rules of Court, both of which prohibit the issuance of warrants except upon probable cause.

In this case, no personal examination at all was conducted by the respondent judge of the complainant and his

witness. The participation of the judge in the proceedings which led to the issuance of the search warrant was thus

limited to the stenographers readings of the notes to a few words of warning against perjury and to administeringthe oath to the complainant and his witness. This cannot be considered a personal examination.

2. The search warrant was issued for more than one specific offense.

Search warrant No. 2-M-70 was issued for violation of Sec. 46(a) of the NIRC in relation to all other pertinent

provisions thereof, particularly Sections 53, 72, 73, 208 and 209. The search warrant in question was issued for at

least 4 distinct offenses under the Tax Code. Section 3 of the Rules of Court provides that no search warrant shall

issue but upon probable cause in connection with one specific offence. The court added thereto a paragraph

directing that no search warrant shall issue for more than one specific offense.

3. The search warrant does not particularly describe the things to be seized.

The documents and papers sought to be seized did not particularly describe the things to be seized since it tends

to defeat the major objective of the Bill of Rights which is the elimination of general warrants, for the language

used was so all embracing as to include all conceivable records of Bach & Co. Phil. Inc. which if seized, could

probably render its business inoperative.

SC granted the petition and held that the search warrant was null and void.

#6

CIR vs. CA, CTA and FORTUNE TOBACCO CORP.

FactsFortune Tobacco Corporation ("Fortune Tobacco"), engaged in the manufacture of different brands of cigarettes,

registered "Champion," "Hope," and "More" cigarettes. BIR classified them as foreign brands since they were listed

in the World Tobacco Directory as belonging to foreign companies. However, Fortun changed the names of 'Hope'

to 'Hope Luxury' and 'More' to 'Premium More,' thereby removing the said brands from the foreign brand

category.

A 45% Ad Valorem taxes were imposed on these brands. Then Republic Act No. 7654 was enacted55% for locally

manufactured foreign brand while 45% for locally manufactured brands. 2 days before the effectivity of RA 7654,

Revenue Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the BIR saying since there is no showing

who the real owner/s are of Champion, Hope and More, it follows that the same shall be considered locally

manufactured foreign brand for purposes of determining the ad valorem tax - 55%. BIR sent via telefax a copy of

RMC 37-93 to Fortune Tobacco addressed to no one in particular. Then Fortune Tobacco received, by ordinary

mail, a certified xerox copy of RMC 37-93. CIR assessed Fortune Tobacco for ad valorem tax deficiency amounting

to P9,598,334.00.

Fortune Tobacco filed a petition for review with the CTA. CTA upheld the position of Fortune. CA affirmed.

Issue

Whether it was necessary for BIR to follow the legal requirements when it issued its RMC

Held


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The SC ruled in the affirmative. CIR may not disregard legal requirements in the exercise of its quasi-legislative

powers which publication, filing, and prior hearing. When an administrative rule is merely interpretative in nature,

its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the

law itself has already prescribed. BUT when, upon the other hand, the administrative rule goes beyond merely

providing for the means that can facilitate or render least cumbersome the implementation of the law but

substantially increases the burden of those governed, the agency must accord, at least to those directly affected, a

chance to be heard, before that new issuance is given the force and effect of law. RMC 37-93 cannot be viewedsimply as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most importantly, been made

in order to place "Hope Luxury," "Premium More" and "Champion" within the classification of locally

manufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654 which subjects

mentioned brands to 55% the BIR not simply interpreted the law; verily, it legislated under its quasi-legislative

authority. The due observance of the requirements of notice, of hearing, and of publication should not have been

then ignored.

#7

G.R. No. L-66653 June 19, 1986

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BURROUGHS LIMITED AND THE COURT OF TAX APPEALS

Facts:

Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines through

its branch office. Said branch office applied to remit to its parent company abroad, branch profit amounting to

P7,647,058. Thus, on March 14, 1979, it paid a 15% branch profit remittance tax pursuant to Sec. 24 (b) (2) (ii), as

interpreted in a BIR Ruling dated January 21, 1980, and remitted to its head office the amount of P6,499,999.30.

Claiming that the 15% profit remittance should have been based on the amount actually remitted

(P6,499,999.30) and not on the amount before profit remittance tax (P7,647,058), Burroughs filed a claim for

refund or tax credit in the amount of P172,058.90 representing alleged overpaid branch profit remittance tax.

Burroughs filed a petition for the recovery of the aforementioned amount of P172,058.81 with the CTA which

ordered the Commissioner of Internal Revenue to grant a tax credit in favor of Burroughs.

Hence, the instant petition is filed. The CIR contends that Burroughs is no longer entitled to a refund because

Memorandum Circular No. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of January 21,

1980 which circular states that the 15% branch profit remittance tax should be based on the amount actuallyapplied for by the branch.

Issue:

Whether the tax base upon which the 15% branch profit remittance tax imposed under the provisions of Section

24(b) of the Tax Code, as amended, is the profit actually remitted abroad and not the amount actually applied for?

Held:

Yes, the 15% branch profit remittance tax shall be imposed on the profit actually remitted abroad and

not on the amount actually applied for. The pertinent provision of the National Revenue Code is Sec. 24

(b) (2) (ii) which states:

Sec. 24. Rates of tax on corporations....

(b) Tax on foreign corporations. ...

(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a branch to its head

office shall be subject to a tax of fifteen per cent (15 %) ...

In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting Commissioner of

Internal Revenue Hon. Efren I. Plana the aforequoted provision had been interpreted to mean that "the

tax base upon which the 15% branch profit remittance tax ... shall be imposed...(is) the profit actually

remitted abroad and not on the total branch profits out of which the remittance is to be made.


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Applying, therefore, the aforequoted ruling, the claim of private respondent that it made an

overpayment in the amount of P172,058.90 which is the difference between the remittance tax actually

paid of Pl,147,058.70 and the remittance tax that should have been paid of P974,999,89 is well-taken.

The contention of CIR that respondent is no longer entitled to a refund because Memorandum Circular No. 8-82

dated March 17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980 is without merit. What is

applicable in the case at bar is still the Revenue Ruling of January 21, 1980 because private respondent Burroughs

Limited paid the branch profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82dated March 17, 1982 cannot be given retroactive effect in the light of Section 327 of the National Internal

Revenue Code which provides for non-retroactivity of rulings. Hence, the assailed decision of CTA is hereby

affirmed.

#8

ABS-CBN BROADCASTING CORPORATION vs. COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL

REVENUE

G.R. No. L-52306

October 12, 1981

Facts: ABS-CBN Broadcasting Corporation was engaged in the business of telecasting local as well as foreign films

acquired from foreign corporations not engaged in trade or business within the Philippines, for which it paid

rentals after withholding income tax of 30% of one-half of the film rentals. On 12 April 1961, in implementation of

Section 24 (b) of the National Internal Revenue Code, the Commissioner of Internal Revenue issued General

Circular V-334. Pursuant to the foregoing, the company dutifully withheld and turned over to the Bureau of

Internal Revenue the amount of 30% of one-half of the film rentals paid by it to foreign corporations not engaged

in trade or business within the Philippines. The last year that the company withheld taxes pursuant to the

foregoing Circular was in 1968. On 27 June 1968, RA 5431 amended Section 24(b) of the Tax Code increasing the

tax rate from 30% to 35% and revising the tax basis from such amount referring to rents. etc. to gross income.

On 8 February 1971, the Commissioner of Internal Revenue issued Revenue Memorandum Circular 4-71, revoking

General Circular V-334, and holding that the latter was erroneous for lack of legal basis, because the tax therein

prescribed should be based on gross income without deduction whatever. On the basis of the new Circular, the

Commissioner issued against the company a letter of assessment and demand dated 16 April 1971, but allegedly

released by it and received by the Commissioner on 12 April 1971, requiring them to pay deficiency withholdingincome tax on the remitted film rentals for the years 1965 through 1968 and film royalty as of the end of 1968 in

the total amount of P525,897.06. On 5 May 1971, the company requested for a reconsideration and withdrawal of

the assessment.

However, without acting thereon, the Commissioner, on 6 April 1976, issued a warrant of distraint and levy over

the companys personal as well as real properties. The company then filed its Petition for Review with the Court of

Tax Appeals (CTA Case 2809) whose Decision, dated 29 November 1979, affirmed the assessment by the

Commissioner of Internal Revenue of a deficiency withholding income tax against the company for the years 1965

to 1968 for a total amount of P525,897.06 (P75,895.24, P99,239.18, P128,502.00 and P222,260.64), plus the

surcharge and interest which have accrued thereon incident to delinquency, pursuant to Section 51(e) of the

National Internal Revenue Code, as amended; with the costs against the company. Hence, the Petition for Review

on Certiorari.

The Supreme Court reversed the judgment of the Court of Tax Appeals, and set aside the questioned assessment;

without costs.

Issue: Whether respondent can apply General Circular No. 4-71 retroactively and issue a deficiency assessment

against petitioner in the amount of P 525,897.06 as deficiency withholding income tax for the years 1965, 1966,

1967 and 1968


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Held: In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by Republic Act No. 6110 on August 9,

1969, it provides:

Sec. 338-A. Non-retroactivity of rulings. Any revocation, modification, or reversal of and of the rules

and regulations promulgated in accordance with the preceding section or any of the rulings or circulars

promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the

relocation, modification, or reversal will be prejudicial to the taxpayers, except in the following cases: (a)where the taxpayer deliberately mis-states or omits material facts from his return or any document

required of him by the Bureau of Internal Revenue: (b) where the facts subsequently gathered by the

Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c)

where the taxpayer acted in bad faith.

It is clear from the foregoing that rulings or circulars promulgated by the Commissioner of Internal Revenue have

no retroactive application where to so apply them would be prejudicial to taxpayers. The prejudice to petitioner of

the retroactive application of Memorandum Circular No. 4-71 is beyond question. It was issued only in 1971, or

three years after 1968, the last year that petitioner had withheld taxes under General Circular No. V-334. The

assessment and demand on petitioner to pay deficiency withholding income tax was also made three years after

1968 for a period of time commencing in 1965. Petitioner was no longer in a position to withhold taxes due from

foreign corporations because it had already remitted all film rentals and no longer had any control over them

when the new Circular was issued. And in so far as the enumerated exceptions are concerned, admittedly,

petitioner does not fall under any of them.

Respondent claims, however, that the provision on non-retroactivity is inapplicable in the present case in that

General Circular No. V-334 is a nullity because in effect, it changed the law on the matter. The Court of Tax Appeals

sustained this position holding that: "Deductions are wholly and exclusively within the power of Congress or the

law-making body to grant, condition or deny; and where the statute imposes a tax equal to a specified rate or

percentage of the gross or entire amount received by the taxpayer, the authority of some administrative officials

to modify or change, much less reduce, the basis or measure of the tax should not be read into law."

The principle of legislative approval of administrative interpretation by re-enactment clearly obtains in this case. It

provides that "the re-enactment of a statute substantially unchanged is persuasive indication of the adoption by

Congress of a prior executive construction.

#9

NATIONAL DEVELOPMENT COMPANY vs. COMMISSIONER OF INTERNAL REVENUE

G.R. NO. L-53961, JUNE 30, 1987

FACTS: The NDC entered into contracts with several Japanese shipbuilding companies for the construction of

twelve ocean-going vessels. The purchase price was to come from the proceeds of bonds issued by the Central

Bank. Initial payments were made in cash and through irrevocable letters of credit. Fourteen promissory notes

were signed for the balance by the NDC, guaranteed by the Republic if the Philippines. The remaining payments

and interests thereon were remitted in due time by the NDC to Tokyo. No tax was withheld. The Commissioner

then held NDC liable on such tax. Negotiations followed but failed. The BIR thereon served n NDC a warrant of

distraint and levy to enforce collection of the claimed amount. The NDC went to the CTA but the BIR was

sustained.

ISSUE: Whether or not the petitioner were not subject to tax under Sec. 37 of the Tax Code because all related

activities were done in Tokyo.

HELD: No, the Japanese shipbuilders were liable to tax on the interest remitted to them under Sec. 37 of the Tax

Code, thus:


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Sec. 37. Income from sources within the Philippines.(a) Gross income from sources within the

Philippines.The following items of gross income shall be treated as gross income from sources within

the Philippines:

(1) Interest, - Interest derived from sources within the Philippines, and interest on bonds, notes, or otherinterestbearing obligations of residents, corporate or otherwise;

The law does not speak of activity but of source, which in this case is theNDC. This is a domestic and resident

corporation with principal offices in Manila.

#10

FREDERICK C. FISHER,plaintiff-appellant, vs. WENCESLAO TRINIDAD, Collector of Internal Revenue,defendant-

appellee.G.R. No. L-17518 October 30, 1922

FACTS:

In 1919, the Philippine American Drug Company declared a stock dividend. The proportionate share of

said stock dividend of the appellant was P24,800 which was thereafter issued to him.

In March 1920, the appellant, upon demand of the Collector of Internal Revenue, paid under protest, and

voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend.

To recover the said sum, appellant instituted the present action. The defendant demurred to the petition

upon the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained and

the plaintiff appealed.

ISSUE:

Are the said stock dividends considered income and taxable as such under the provisions of Section 25

of Act No. 2833?

HELD:

No, stock dividends are not considered income and are not taxable as such.

Generally speaking, stock dividends represent undistributed increase in the capital of corporations or

firms, joint stock companies, etc., etc., for a particular period. They are used to show the increased interest or

proportional shares in the capital of each stockholder. In other words, the inventory of the property of the

corporation, etc., for particular period shows an increase in its capital, so that the stock theretofore issued doesnot show the real value of the stockholder's interest, and additional stock is issued showing the increase in the

actual capital, or property, or assets of the corporation, etc.

The New Standard Dictionary, edition of 1915, defines an income as "the amount of money coming to a

person or corporation within a specified time whether as payment or corporation within a specified time whether

as payment for services, interest, or profit from investment." Webster's International Dictionary defines an income

as "the receipt, salary; especially, the annual receipts of a private person or a corporation from property." Mr.

Black, in his law dictionary, says "An income is the return in money from one's business, labor, or capital invested;

gains, profit or private revenue." "An income tax is a tax on the yearly profits arising from property, professions,

trades, and offices."

Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and now Secretary

of State of the United States, in his argument before the Supreme Court of the United States in the case of Towne

vs. Eisner, supra, defined an "income" in an income tax law, unless it is otherwise specified, to mean cash or its

equivalent. It does not mean choses in action or unrealized increments in the value of the property, and cites in

support of the definition, the definition given by the Supreme Court in the case of Gray vs. Darlington, supra.

If the ownership of the property represented by a stock dividend is still in the corporation and to in the

holder of such stock, then it is difficult to understand how it can be regarded as income to the stockholder and not

as a part of the capital or assets of the corporation. (Gibbsons vs. Mahon, supra.) The stockholder has received

nothing but a representation of an interest in the property of the corporation and, as a matter of fact, he may

never receive anything, depending upon the final outcome of the business of the corporation. The entire assets of

the corporation may be consumed by mismanagement, or eaten up by debts and obligations, in which case the

holder of the stock dividend will never have received an income from his investment in the corporation. A


12/25

corporation may be solvent and prosperous today and issue stock dividends in representation of its increased

assets, and tomorrow be absolutely insolvent by reason of changes in business conditions, and in such a case the

stockholder would have received nothing from his investment.

In such a case, if the holder of the stock dividend is required to pay an income tax on the same, the result

would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely

contradictory to the idea of an income. An income subject to taxation under the law must be an actual income and

not a promised or prospective income.The Supreme Court held that the judgment of the lower court should be revoked.

#11

VICENTE MADRIGAL and his wife SUSANA PATERNO, plaintiffs-appellants, vs JAMES J. RAFFERTY, Collector of

Internal Revenue, and VENANCIO CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees.

FACTS:

Vicente Madrigal and Susana Paterno were married under the provisions of law concerning conjugal

partnership. Vicente filed a sworn declaration that his total income for 1914 was PhP 296,302.73 but he later

submitted a claim that said amount was the income for the conjugal partnership. He averred that the pursuant to

the Act of Congress of Oct 3, 1913, this income should be divided into two equal parts, as the income of Vicente

and the other of Susana.

The Attorney General of the Philippines held with Madrigal. The Revenue Officers forwarded the opinion

to Washington for a decision by the United States Treasury Department. The US Commissioner reversed the

opinion of the Attorney General deciding against Madrigals claim.

After payment under protest, Madrigal filed in the CFI Manila an action against the Collector of Internal

Revenue and the Deputy Collector of Internal Revenue. Madrigal alleged that he paid an excessive amount as

income tax. The defendants set forth the basis for the taxprofits made by Madrigal in his coal and shopping

business; profits made by Susana in her embroidery business; and profits made by Madrigal in a pawnshop

company.

ISSUE:

Whether the income tax should be divided into two equal parts because of the conjugal partnership

existing between Madrigal and Susana.

Whether the taxes imposed by the Income Tax Law taxes upon income tax and not upon capital and

property.

HELD:

The Income Tax Law of the United States extended tot eh Philippine Islands, is the result of an effect on

the part of the legislators to put into statutory form this canon of taxation and of social reform. The aim has been

to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation. This places the burden

on those best able to pay. The income tax is supposed to reach the earnings of the entire non-governmental

property of the country.

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 thorough a period of

time is called an income. Capital is wealth, while income is the service of wealth. Property is a tree, income is the


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fruit; labor is a tree, income the fruit; capital is a tree, income the fruit. A tax on income is not a tax on property.

Income can be defined as profits or gains.

#12

Conwi vs. CTA

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing Corporation, with

offices at Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is a subsidiary of Procter & Gamble, a

foreign corporation based in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners were assigned, for

certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines, during which petitioners

were paid U.S. dollars as compensation for services in their foreign assignments. When they filed their income tax

returns for the year 1970, theyve computed the tax by applying the dollar-to-peso conversion based on the

floating rate provided by the BIR. However, on 1973, they filed an amended tax return using the par value of the

peso provided by Sec.40 of RA 265. They claim for a refund due to overpayment. In its decision, the respondent

Court of Tax Appeals held that the proper conversion rate for the purpose of reporting and paying the Philippine

income tax on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars

Nos. 7-71 and 41-71 and denied the petition.

Petitioners claim that public respondent Court of Tax Appeals erred in holding:

1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.

2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing free market

rate of exchange and not the par value of the peso; and

3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes into Philippine

pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate used.

The Commissioner of the BIR denied the claim of petitioners stating that the basis must be the prevailing free

market rate of exchange. The CTA also held that petitioners dollar earnings are receipts derived from foreign

exchange transactions.

Issue: Whether the petitioners dollar earnings are receipts derived from foreign exchange transactions.

Whether the same is exempt from tax.

Held:

1. Income may be defined as an amount of money coming to a person or corporation within a specified time,

whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or

its equivalent. Income can also be though of as flow of the fruits of one's labor. Petitioners are correct as to their

claim that their dollar earnings are not receipts derived from foreign exchange transactions. For a foreign exchange

transaction is simply that a transaction in foreign exchange, foreign exchange being "the conversion of an

amount of money or currency of one country into an equivalent amount of money or currency of another." When

petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned

nation's currency and were ALSO spending in said currency. There was no conversion, therefore, from one

currency to another.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It

was a definite amount of money which came to them within a specified period of time of two yeas as payment for

their services.

2. Petitioners forget that they are citizens of the Philippines, and their income, within or without, and in these

cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption. Since

petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange prescribed

under the aforestated Revenue Memorandum Circulars, there is no reason for respondent Commissioner to refund

any taxes to petitioner as said Revenue Memorandum Circulars, being of long standing and not contrary to law, are

valid. Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the

government" and one of the duties of a Filipino citizen is to pay his income tax. WHEREFORE, the petitioners are

denied for lack of merit.


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#13

COMMISSIONER OF INTERNAL REVENUE VS. MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, G.R. No.

78953, July 31, 1991

Facts: In 1977, Victoria Javier, wife of Javier-respondent, received $999k from Prudential Bank remitted by hersister Dolores through Mellon Bank in US. Around 3 weeks after, Mellon Bank filed a complaint with CFI Rizal

against Javier claiming that its remittance of $1M was a clerical error and should have been $1k only and praying

that the excess be returned on the ground that the Javiers are just trustees of an implied trust for the benefit of

Mellon Bank. CFI charged Javier with estafa alleging that they misappropriated and converted it to their own

personal use. A year after, Javier filed his Income Tax Return for 1977 and stating in the footnote that the

taxpayer was recipient of some money received abroad which he presumed to be a gift but turned out to be an

error and is now subject of litigation. The Commissioner of Internal Revenue wrote a letter to Javier demanding

him to pay taxes for the deficiency, due to the remittance. Javier replied to the Commissioner and said that he will

pay the deficiency but denied that he had any undeclared income for 1977 and requested that the assessment of

1977 be made to await final court decision on the case filed against him for filing an allegedly fraudulent return.

Commissioner replied that the amount of Mellon Banks erroneous remittance which you were able to dispose is

definitely taxable and the Commissioner imposed a 50% fraud penalty on Javier.

Issue:Whether or not a taxpayer who merely states as a footnote in his income tax return that a sum of money

that he erroneously received and already spent is the subject of a pending litigation and there did not declare it as

income is liable to pay the 50% penalty for filing a fraudulent return.

Held: The Petition was denied and the appealed decision was affirmed. The Supreme Court held that there was no

actual and intentional fraud through wilful and deliberate misleading of the BIR in the case. The government was

not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from

proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud.

The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly commendable.

Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be

guilty of swindling charges, perhaps even for greed by spending most of the money he received, but the records

lack a clear showing of fraud committed because he did not conceal the fact that he had received an amount of

money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surchargeimposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment should be

deleted. Javier even noted that the taxpayer was recipient of some money received abroad which he presumed to

be a gift but turned out to be an error and is now subject of litigation. In this case, the remittance was not a

taxable gain, since it is still under litigation and there is a chance that Javier might have the obligation to return it.

It will only become taxable once the case has been settled because by then whatever amount that will be

rewarded, Javier has a claim of right over it. A taxable gain is conditioned upon the presence of a claim of right to

the alleged gain and the absence of a definite and unconditional obligation to return or repay.

#14

[G.R. No. 124043. October 14, 1998]

COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MENSCHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC.,

FACTS

Private Respondent YMCA is a non-stock, non-profit institution, which conducts various programs and activities

that are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable

objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion of its

premises to small shop owners, like restaurants and canteen operators, and P44,259.00 from parking fees


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collected from non-members. On July 2, 1984, the commissioner of internal revenue (CIR) issued an assessment to

private respondent, in the total amount of P415,615.01 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, filed a letter dated

October 8, 1985. In reply, the CIR denied the claims of YMCA.

ISSUEIs the income derived from rentals of real property owned by the Young Mens Christian Association of the

Philippines, Inc. (YMCA) subject to income tax under the National Internal Revenue Code (NIRC) and the

Constitution?

HELD

Yes. 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 imposed by the same Code. Because the

last paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its rental property,

the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted

attempt at construction. As previously stated, a reading of said paragraph ineludibly shows that the income from

any property of exempt organizations, as well as that arising from any activity it conducts for profit, is taxable. The

phrase any of their activities conducted for profit does not qualify the word properties. This makes income

from the property of the organization taxable, regardless of how that income is used -- whether for profit or for

lofty non-profit purposes.

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. However, the Court notes that not a

scintilla of evidence was submitted by private respondent to prove that it met the said requisites.

#15

CIR vs. V.E. Lednicky and Maria Valero Lednicky

GR No. L-18169 July 31, 1964

Facts:

V.E. and Maria Valero Lednicky are husband and wife, respectively, both American Citizens residing in the

Philippines and have derived all their income from the Philippine sources for the taxable years in question. They

filed their Income Tax Return for 1956, reporting a gross income of P1, 017,287.65 and a net income of

P733,809.44. They amended their ITR and claimed a deduction of P205, 939. 24 paid in the U.S. as federal income

tax for 1956 and thus, they requested a refund of P112,437.90. BIR failed to act upon the request for refund so the

spouses brought the matter to the CTA. CTA ruled for the spouses, holding that they are entitled for refund. BIR

appealed to the SC.

ISSUE:

Whether a citizen of the U.S. residing in the Philippine who derives income whole from sources within Philippines

may deduct from his gross income the income taxes he paid to the U.S. for the taxable year based on Sec. 30 (C-1)

of the Tax Code.

DECISION:

We agree with appellant Commissioner that the Construction and wording of Section 30 (c) (1) (B) of the Internal

Revenue Act shows the law's intent that the right to deduct income taxes paid to foreign government from the


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taxpayer's gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign

income taxes under section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such tax credit if

he so chooses, he is precluded from deducting the foreign income taxes from his gross income. For it is obvious

that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return

his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign

countries), the statute assumes that the taxpayer in question also may signify his desire to claim a tax credit and

waive the deduction; otherwise, the foreign taxes would always be deductible, and their mention in the list of non-deductible items in Section 30(c) might as well have been omitted, or at least expressly limited to taxes on income

from sources outside the Philippine Islands.

Much stress is laid on the thesis that if the respondent taxpayers are not allowed to deduct the income taxes they

are required to pay to the government of the United States in their return for Philippine income tax, they would be

subjected to double taxation. What respondents fail to observe is that double taxation becomes obnoxious only

where the taxpayer is taxed twice for the benefit of the same governmental entity.

In the present case, while the taxpayers would have to pay two taxes on the same income, the Philippine

government only receives the proceeds of one tax. As between the Philippines, where the income was earned and

where the taxpayer is domiciled, and the United States, where that income was not earned and where the

taxpayer did not reside, it is indisputable that justice and equity demand that the tax on the income should accrue

to the benefit of the Philippines. Any relief from the alleged double taxation should come from the United States,

and not from the Philippines, since the former's right to burden the taxpayer is solely predicated on his citizenship,

without contributing to the production of the wealth that is being taxed.

Finally, to allow an alien resident to deduct from his gross income whatever taxes he pays to his own government

amounts to conferring on the latter the power to reduce the tax income of the Philippine government simply by

increasing the tax rates on the alien resident. Every time the rate of taxation imposed upon an alien resident is

increased by his own government, his deduction from Philippine taxes would correspondingly increase, and the

proceeds for the Philippines diminished, thereby subordinating our own taxes to those levied by a foreign

government. Such a result is incompatible with the status of the Philippines as an independent and sovereign

state.

SC reversed the decision of CTA and disallowed the refunds claimed by the spouses Lednicky.

#16

CIR vs Isabela Cultural Corporation

Facts

Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for deficiency income tax

and expanded withholding tax from BIR. It arose from the disallowance of ICCs claimed expense for professional

and security services paid by ICC; as well as the alleged understatement of interest income on the three

promissory notes due from Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to

the failure of ICC to withhold 1% e-withholding tax on its claimed deduction for security services.

ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it brought the case

to CTA, which held that it is unappealable, since the final notice is not a decision. CTAs ruling was reversed by CA,

which was sustained by SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruled that

the deductions for professional and security services were properly claimed, it said that even if services were

rendered in 1984 or 1985, the amount is not yet determined at that time. Hence it is a proper deduction in 1986. It

likewise found that it is the BIR which overstate the interest income, when it applied compounding absent any

stipulation.

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


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Issue

Whether the expenses for professional and security services are deductible.

Held

The SC ruled in the negative. One of the requisites for the deductibility of ordinary and necessary expenses is that

it must have been paid or incurred during the taxable year. This requisite is dependent on the method ofaccounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting. Hence, under this

method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum, when the method of

accounting is accrual, expenses not being claimed as deductions by a taxpayer in the current year when they are

incurred cannot be claimed in the succeeding year.

The accrual of income and expense is permitted when the all-events test has been met. This test requires: 1) fixing

of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such

income or liability. The test does not demand that the amount of income or liability be known absolutely, only that

a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy

From the nature of the claimed deductions and the span of time during which the firm wa s retained, ICC can be

expected to have reasonably known the retainer fees charged by the firm. They cannot give as an excuse the

delayed billing, since it could have inquired into the amount of their obligation and reasonably determine the

amount.

#17

G.R. No. L-12954 February 28, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner, vs. ARTHUR HENDERSON, respondent.

x---------------------------------------------------------x

G.R. No. L-13049 February 28, 1961

ARTHUR HENDERSON, petitioner, vs. COLLECTOR OF INTERNAL REVENUE, respondent.

Facts:

Arthur and Marie Henderson (later referred to as taxpayers) filed with the Bureau of InternalRevenue (BIR) returns of annual net income for the years 1948 to 1952. In due time, the taxpayers

received from the BIR assessment notices and paid the amounts assessed. In November 1953, BIR

reassessed the taxpayers income for the years 1948 to 1952 and demanded payment of the deficiency

taxes.

In the foregoing assessments, BIR considered as part of their taxable income the taxpayer-husbands

allowances for rental, residential expenses, subsistence, water, electricity and telephone; bonus paid to

him; withholding tax and entrance fee to the Marikina Gun and Country Club paid by his employer for his

account; and travelling allowance of his wife. The taxpayers claimed that as regards the husband-

taxpayer's allowances for rental and utilities such as water, electricity and telephone, he did not receive

the money for said allowances, but that they lived in the apartment furnished and paid for by his

employer; that only the amount of P3,900 for each year, which is the amount they would have spent for

rental of an apartment including utilities, should be taxed; and that as regards the wife-taxpayer's

travelling allowance of P3,247.40 in 1952, it should not be considered as part of their income because she

merely accompanied him in his business trip as his secretary and, at the behest of her husband's

employer.

The Commissioner of Internal Revenue (CIR) denied the taxpayers request for reconsideration,

except as regards the assessment of their income tax due for the year 1948, which was modified and

demanded payment of the deficiency taxes of P4,370.24 for 1948, P3,662.23 for 1949, P3,023 for 1950,

P2,058 for 1951 and P4,108 for 1952, plus surcharge and interest.

As their request for refund was not acted upon by the CIR, the taxpayers filed a petition for review in

the Court of Tax Appeals which rendered judgment holding that the inherent nature of petitioners


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(husband-taxpayer) employment as president of the American International Underwriter does not require

him to occupy apartments supplied by his employer-corporation; that, however, only the amount of

P4,800 annually, the ratable value to him of the quarters furnished constitutes as part of taxable income;

that since the taxpayers did not receive any benefit out of the P3,247.40 traveling expense allowance

granted in 1952 to the wife-taxpayer and that she merely undertook the trip abroad at the behest of her

husband's employer, the same could not be considered as income; and that even if it were considered as

such, still it could not be subject to tax because it was deductible as travel expense; and ordering the CIRto refund to the taxpayers the amount of P5,109.33 with interest.

As the motions for reconsideration of both the taxpayers and the CIR were denied, the instant

petitions were filed. The taxpayers claimed that the CTA erred in considering the amounts of P1,400 and

P1,849.32 for managers residential expense in 1948 as taxable income despite the fact that they were of

the same nature as the rentals for the apartment. On the other hand, the CIR claimed that the evidence

was not sufficient to support the findings and conclusions of the CTA.

Issue: Whether the allowances for rental apartment furnished by the husband-taxpayers employer-

corporation, including utilities such as light, water, telephone, etc. and the allowance for travel expenses

given by his employer-corporation to his wife in 1952 part of taxable income?

Held:

Section 29, Commonwealth Act No. 466, National Internal Revenue Code, provides:

"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 professions, vocations, trades,

businesses, 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 interest, rents dividend, securities, or the

transaction of any business carried on for gain or profit, or gains, profits, and income derived from any

source whatever.

The evidence presented at the hearing of the case substantially supports the findings of the Court of Tax

Appeals. The taxpayers are childless and are the only two in the family. The quarters, therefore, that they occupied

at the Embassy Apartments consisting of a large sala, three bedrooms, dining room, two bathrooms, kitchen and a

large porch, and at the Rosaria Apartments consisting of a kitchen, sala dining room, two bedrooms and a

bathroom, exceeded their personal needs. But the exigencies of the husband-taxpayer's high executive position,

not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarterslike the ones they had occupied. That is why his employer-corporation had to grant him allowances for rental and

utilities in addition to his annual basic salary to take care of those extra expenses for rental and utilities in excess of

their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartments

chosen by the husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in

question redounded to their personal benefit or was retained by them. Their bills for rental and utilities were paid

directly by the employer-corporation to the creditors. Nevertheless, as correctly held by the Court of Tax Appeals,

the taxpayers are entitled only to a ratable value of the allowances in question, and only the amount of P4,800

annually, the reasonable amount they would have spent for house rental and utilities such as light, water,

telephone, etc., should be the amount subject to tax, and the excess considered as expenses of the corporation.

Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had to make the trip to New York at the

behest of her husband's employer-corporation to help in drawing up the plans and specifications of a proposed

building, is also supported by the evidence.

On the taxpayers appeal, an examiner of the Bureau of Internal Revenue who examined the books of account

of the American International Underwriters for the Philippines, Inc., testified that he total amount of P3,249.32

was reflected in its books as "living expenses of Mr. and Mrs. Arthur Henderson in the quarters they occupied in

1948;" and that "the amount of P1,400 was included as manager's residential expense while the amount of

P1,849.32 was entered as profit and loss account." Acting head of the accounting department of the American

International Underwriters for the Philippines, Inc., also testified that rentals, utilities, water, telephone and

electric bills of executives of the corporation were entered in the books of account as "subsistence allowances and

expenses;" that there was a separate account for salaries and wages of employees and officers; and that expenses

for rentals and other utilities were not charged to salary accounts. Hence, the taxpayers' claim is supported by the


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evidence. The total amount of P3,249.32 "for manager's residential expense" in 1948 should be treated as rentals

for apartments and utilities and should not form part of the ratable value subject to tax.

The judgment under review is modified and the Collector of Internal Revenue is ordered to refund to the taxpayers

the sum of P5,986.61.

#18

COMMISSIONER OF INTERNAL REVENUE vs. CARLOS LEDESMA, JULIETA LEDESMA, VICENTE GUSTILO. JR. and

AMPARO LEDESMA DE GUSTILO

G.R. No. L-17509

January 30, 1970

Facts: Respondents, Carlos Ledesma, Julieta Ledesma and the spouses Amparo Ledesma and Vicente Gustilo, Jr.,

purchased from their parents, Julio Ledesma and Florentina de Ledesma, the sugar plantation known as Hacienda

Fortuna. After their purchase of the plantation, herein respondents took over the sugar cane farmingon the

plantation. The respondents shared equally the expenses of production, on the basis of their respective one-third

undivided portions of the plantation. The San Carlos Milling Co., Ltd. issued to respondents separate quedans for

the sugar produced, based on the quota under the plantation audits respectively issued to them. In their individual

income tax returns for the year 1949 the respondents included as part of their income their respective net profits

derived from their individual sugar production from the Hacienda Fortuna, as herein-above stated. Respondents

organized themselves into a general co-partnership under the firm name Hacienda Fortuna, for the production

of sugar cane for conversion into sugar, palay and corn and such other products as may profitably be produced on

said hacienda, which products shall be sold or otherwise disposed of for the purpose of realizing profit for the

partnership.

The Collector assessed it for corporate income tax to which the respondents opposed to. Respondents averred

that they were operating merely as co-owners of the plantation known as Hacienda Fortuna, so that the case of

the Hacienda Fortuna was really one of co-ownership and not that of an unregistered co-partnership which was

subject to corporate tax.

Issue: Whether the collector is correct in assessing income of Hacienda Fortuna as corporation

Held: The provision of law that is relevant to this question is, that portion of Section 24 of the National Internal

Revenue Code which reads as follows:

Sec. 24. Rate of tax on corporation. (a) Tax on domestic corporations. In general, there shall be levied,

collected, and paid annually upon the total net income received in the preceding taxable year from all

sources by every corporation organized in, or existing under the laws of, the Philippines, no matter how

created or organized, but not including duly registered general co-partnerships domestic life insurance

companies and foreign life insurance companies doing business

The Court of Tax Appeals made a finding that the respondents had actually operated the "Hacienda Fortuna" as a

general partnership from January 1, 1949, and that when its articles of general partnership were registered on July

14, 1949 that registration had the effect of giving the partnership the status of a registered co-partnership which

places it under the purview of Section 24 of the Tax Code as exempt from the payment of corporate income tax

during the entire taxable year of 1949.

The Bureau of Internal Revenue, in the exercise of its powers relative to the collection of internal revenue taxes,

fees and charges, may make, and has in fact issued, administrative rules and rulings in connection with the

enforcement of the provisions of the National Internal Revenue Code. There are rulings of the Bureau of Internal

Revenue where the "status-at-the-end-of-the-taxable-year" rule has been applied in determining the taxpayer's

income tax liability during the taxable year.


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The Court of Tax Appeals, in its decision, has pointed out that as early as 1924 the Bureau of Internal Revenue had

applied the "status-at-the-end-of-the-taxable-year" rule in determining the income tax liability of a partnership,

such that a partnership is considered a registered partnership for the entire taxable year even if its articles of co-

partnership are registered only at the middle of the taxable year, or in the last month of the taxable year. We

agree with the Court of Tax Appeals that the ruling is a sound one, and it is in consonance with the purpose of the

law in requiring the registration of partnerships. The policy of the law is to encourage persons doing business

under a partnership agreement to have the partnership agreement, or the articles of partnership, registered in themercantile registry, so that the public may know who the real partners of the partnership are, the capital stock of

the partnership, the interest or contribution of each partner in the capital stock, the proportionate share of each

partner in the profits, and the earnings or salaries of the partner or partners who render service for the

partnership.

#19

MARIANO P. PASCUAL AND RENATO P. DRAGON vs. THE COMMISSIONER OF INTERNAL REVENUE AND COURT

OF TAX APPEALS

G.R. NO. 78133, OCTOBER 18, 1988

FACTS: Petitioners bought 2 parcels of land on 1965 and another 3 parcels of land on 1966. The first 2 parcels of

land were sold by petitioners on 1968, while the 3 parcels of land were sold on 1970. Petitioners realized a net

profit on the both sales. The corresponding capital gains taxes were paid by petitioners by availing tax amnesties

granted in 1973 and 1974. However, Acting BIR Commissioner Plana assessed and required petitioners to pay

alleged deficiency corporate income taxes. Petitioners protested said assessment but in a reply by respondent

Commissioner, it was alleged that petitioners as co-owners in the real estate transactions formed an unregistered

partnership or joint venture taxable as a corporation under Sec. 20 (b) and its income was subject to the taxes

prescribed under Sec. 24 if the NIRC. On review, the CTA affirmed the decision of the respondent Commissioner.

ISSUE: Whether or not the Commissioner erred in holding that petitioners formed an unregistered partnership

subject to corporate income tax.

HELD: Yes, the Commissioner erred in his decision because there is no evidence that petitioners entered into an

agreement to contribute money, property or industry to a common fund, and that they intended to divide theprofits among themselves. Respondent Commissioner and / or his representatives just assumed these conditions

to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners

thereof. The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein

have a joint or common right or interest in the property. The two isolated transactions whereby they purchased

properties and sold the same few years thereafter did not thereby make them partners.

#20

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and sisters,

petitioners vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.G.R. No. L-

68118 October 29, 1985

FACTS:

Jose Obillos, Sr. completed payment to Ortigas & CO., Ltd. On two lots located at Greenhills, San Juan,

Rizal. The next day, he transferred his rights to his four children, the petitioners, to enable them to build their

residences. Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots.

After having held the two lots for more than a year, the petitioners resold them to the Walled City

Securities Corporation and Olga Cruz Canda. They derived from the sale a total profit of P134,341.88 or P33,584 for

each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

One day after the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue

(CIR) required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to


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individual income tax on their shares thereof. He assessed P37,018 as corporate income tax and considered the

share of the profits of each petitioner in the sum of P33,584 as taxable in full (not a mere capital gain of which is

taxable). The commissioner acted on the theory that the four petitioners had formed an unregistered partnership

or joint venture within the meaning of Sections 24(a) and 84(b) of the Tax Code.

Petitioners contested the assessments. CTA sustained the same; hence, this appeal.

ISSUE:

W/N the co-ownership is taxable?HELD:

No, the co-ownership is not taxable. It is error to consider the petitioners as having formed a partnership

under Article 1767 of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots,

resold the same and divided the profit among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive

taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be

obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To

consider them as partners would obliterate the distinction between a co-ownership and a partnership. The

petitioners were not engaged in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible

to build their residences on the lots because of the high cost of construction, then they had no choice but to resell

the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-

ownership which was in the nature of things a temporary state. It had to be terminated sooner or later.

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a

partnership, whether or not the persons sharing them have a joint or common right or interest in any property

from which the returns are derived". There must be an unmistakable intention to form a partnership or joint

venture.

The Supreme Court reversed and set aside the judgment of the Tax Court.

#21

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

(G.R. No 148187, April 16, 2008)

FACTS:

Philex Mining Corporation entered into an agreementwith Baguio Gold Mining to manage and operate

the Sto. Nino mine, located in Atok and Tublay, Benguet Province. The parties agreement was named as "Power of

Attorney". Philex Mining made advances of cash and property for projects in accordance with their agreement.

The mine suffered continuing losses over the years an Philex withdrew as manager of the mine. Mine operations

stopped.

The parties executed a "Compromise with Dation in Payment" wherein Baguio Gold admitted an indebtedness to

petitioner and agreed to pay the same in three segments. Subsequently, the parties executed an "Amendment to

Compromise with Dation in Payment" where the parties changed Baguio Golds indebtedness to petitioner which

included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. This time, Baguio

Gold undertook to pay petitioner in two segments. The parties then ascertained that Baguio Gold had a remaining

outstanding indebtedness to petitioner.

In its 1982 annual income tax return, Philex deducted from its gross income money as "loss on settlement of

receivables from Baguio Gold against reserves and allowances." However, the BIR disallowed the amount as

deduction for bad debt and assessed petitioner a deficiency income tax


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Philex protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt

deduction were satisfied, (a) there was

Documents

Tax Consolidated Cases - Post Midterms