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Taxation Law I Cases (Finals)

(1) Conwi, et.al. vs. CTA and CIR

G.R. No. L-48532, August 31, 1992

Facts:

Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation, subsidiary of Procter

& Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were assigned to other

subsidiaries of Procter & Gamble outside the Philippines, for which petitioners were paid US dollars as

compensation.

Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso conversion

based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amened ITRs for 1970 and

1971, this time using the par value of the peso as basis. This resulted in the alleged overpayments, refund

and/or tax credit, for which claims for refund were filed.

CTA 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 MemorandumCirculars Nos. 7-71

and 41-71. The refund claims were denied.

Issues:

(1) Whether or not petitioners' dollar earnings are receipts derived from foreign exchange transactions; NO.

(2) Whether or not 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; YES.

Held:

For the proper resolution of income tax cases, 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 years as

payment for their services.

And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338

thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively

enforce its provisions pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71 were

issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE

TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the

authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And

these are presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself.

Petitioners 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.

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(2) Marubeni Corp. vs. CIR

G.R. No. 76573, September 14, 1989

Facts:

Petitioner Marubeni s a foreign corporation duly organized under the existing laws of Japan and duly licensed

to engage in business under Philippine laws.

Marubeni of Japan has equity investments in Atlantic Gulf & Pacific Co. of Manila.

AG&P declared and directly remitted the cash dividends to Marubeni’s head office in Tokyo net of the final

dividend tax and withholding profit remittance tax.

Thereafter, Marubeni, through SGV, sought a ruling from the BIR on whether or not the dividends it received

from AG&P are effectively connected with its business in the Philippines as to be considered branch profits

subject to profit remittance tax.

The Acting Commissioner ruled that the dividends received by Marubeni are not income from the business

activity in which it is engaged. Thus, the dividend if remitted abroad is not considered branch profits subject to

profit remittance tax.

Pursuant to such ruling, petitioner filed a claim for refund for the profit tax remittance erroneously paid on the

dividends remitted by AG& P.

Respondent Commissioner denied the claim. It ruled that since Marubeni is a non resident corporation

not engaged in trade or business in the Philippines it shall be subject to tax on income earned from

Philippine sources at the rate of 35% of its gross income.

On the other hand, Marubeni contends that, following the principal-agent relationship theory,

Marubeni Japan is a resident foreign corporation subject only to final tax on dividends received from a

domestic corporation.

Issue:

Whether or not Marubeni Japan is a resident foreign corporation?

Held:

No. The general rule is a foreign corporation is the same juridical entity as its branch office in the Philippines .

The rule is based on the premise that the business of the foreign corporation is conducted through its branch

office, following the principal-agent relationship theory. It is understood that the branch becomes its agent.

However, when the foreign corporation transacts business in the Philippines independently of its branch, the

principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the

branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign

corporation.

Thus, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office

in Japan which is considered as a separate and distinct income taxpayer from the branch in the Philippines.

(3) OBILLOS, JR vs. COMMISSIONER OF INTERNAL REVENUE

G.R. No. L-68118, October 29, 1985

Facts:

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124

and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four

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children, the petitioners, to enable them to build their residences. The company sold the two lots to

petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to

them would show that they were co-owners of the two lots.

In 1974, or 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 for the total sum of P313,050 (Exh. C and D). 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.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of

Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in

addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax,

P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.

The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or

joint venture.

Issue:

Whether or not petitioner had formed an unregistered partnership?

Held:

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 Court further stressed that 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.

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.

(4) Commissioner of Internal Revenue vs. Suter

G.R. No. L-25532, February 28, 1969

Facts:

A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed by herein respondent William

J. Sutter as the general partner, and Julia Spirig and Gustav Carlson, as the limited partners. The partners

contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership. The firm was duly

registered with the Securities and Exchange Commission and engaged in lawful business. Later, Sutter and

Spirig got married while Carlson sold his share to the spouses. The limited partnership had been filing its

income tax returns as a corporation, without objection by the herein petitioner, CIR, until in 1959 when the

latter, in an assessment, consolidated the income of the firm and the individual incomes of the partners-

spouses Sutter and Spirig resulting in a determination of a deficiency income tax against respondent

Sutter. Respondent Sutter protested the assessment, and requested its cancellation and withdrawal, as not in

accordance with law, but his request was denied. Unable to secure a reconsideration, he appealed to the CTA,

which ruled in favor of Sutter.

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Issue:

Was the partnership dissolved by the marriage of Sutter and Spirig and the subsequent sale of Carlson of his

share to the spouses?

Ruling:

No. The appellant's view, that by the marriage of both partners the company became a single proprietorship,

is erroneous. The capital contributions of partners William J. Sutter and Julia Spirig were separately owned and

contributed by them before their marriage; and after they were joined in wedlock, such contributions

remained their respective separate property under the Spanish Civil Code (Article 1396):

The following shall be the exclusive property of each spouse:

(a) That which is brought to the marriage as his or her own; ....

It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its

own, distinct and separate from that of its partners (unlike American and English law that does not recognize

such separate juridical personality), the bypassing of the existence of the limited partnership as a taxpayer can

only be done by ignoring or disregarding clear statutory mandates and basic principles of our law. The limited

partnership's separate individuality makes it impossible to equate its income with that of the component

members. True, section 24 of the Internal Revenue Code merges registered general co-partnerships

(compañias colectivas) with the personality of the individual partners for income tax purposes. But this rule is

exceptional in its disregard of a cardinal tenet of our partnership laws, and cannot be extended by mere

implication to limited partnerships.

As the limited partnership under consideration is taxable on its income, to require that income to be included

in the individual tax return of respondent Sutter is to overstretch the letter and intent of the law. In fact, it

would even conflict with what it specifically provides in its Section 24: for the appellant Commissioner's stand

results in equal treatment, tax wise, of a general copartnership (compañia colectiva) and a limited partnership,

when the code plainly differentiates the two. Thus, the code taxes the latter on its income, but not the former,

because it is in the case of compañias colectivas that the members, and not the firm, are taxable in their

individual capacities for any dividend or share of the profit derived from the duly registered general

partnership (Section 26, N.I.R.C.; Arañas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).

(5) TAN GUAN vs. THE COURT OF TAX

G.R. No. L-23676, April 27, 1967

Facts:

In 1947, Tan Guan and Sia Lin, Chinamen, organized and registered the Philippine Surplus Company, a general

partnership. A general partnership is exempt from income tax although it is required to file an income tax

return. Profits, whether distributed or not, are considered income of the partners. Acting upon a confidential

report, however, that the company posted fictitious expesnes in its books to avoid taxes, the BIR investigated

in 1954 the books of the partnership and discovered that the expenses were not covered by receipts, that the

names of payees were erased, and that the payees did not report the sums in question in their income tax. The

BIR disallowed expense deductions for the year 1948 amounting to P206,380 for being fictitious. Said sum was

treated as income of the individual partners, and thus, the BIR assessed P50,956.57 as deficiency income tax

against Tan Guan. Tan Guan appealed.

Issue:

Whether the deduction claimed by the company as business income should be allowed, and thus absolve Tan

Guan of the assessed tax liability?

Held:

The Commissioner’s finding on the facts constituting fraud, proven, and found established by the Court of Tax

Appeals, was not rebutted by the taxpayer. Tan Guan did not present any evidence to disprove the findings

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that the expenses are fictitious; considering that the investigation on Tan Guan’s liability was made prior to the

expiration of the 5-year period to preserve and keep receipts as set forth in Section 337 of the Tax Code. As

the determination of the Commissioner is presumed correct, it behooves the taxpayers to rebut such

presumption. For failure to overcome the burden, Tan Guan or the company cannot claim the expenses as

deduction from gross income.

(6) Revenue Regulation No. 9-98

Issued September 2, 1998 prescribes the regulations to implement RA No. 8424 relative to the imposition of

the Minimum Corporate Income Tax (MCIT) on domestic corporations and resident foreign corporations.

Specifically, an MCIT of 2% of the gross income as of the end of the taxable year is imposed upon any domestic

corporations beginning the 4th taxable year immediately following the taxable year in which such corporation

commenced its business operations. The MCIT will be imposed whenever such operation has zero or negative

taxable income or whenever the amount of MCIT is greater than the normal income tax due from such

operation. In the case of a domestic corporation whose operations or activities are partly covered by the

regular income tax system and partly covered under a special income tax system, the MCIT will apply on

operations covered by the regular income tax system.

The Regulations will apply to domestic and resident foreign corporations on their aforementioned taxable

income derived beginning January 1, 1998 pursuant to the pertinent provisions of RA 8424, provided,

however, that corporations using the fiscal year accounting period and which are subject to MCIT on income

derived pertaining to any month or months of the year 1998 will not be imposed with penalties for late

payment of the tax.

(7) Revenue Regulation No. 10-98

Issued September 2, 1998 prescribes the regulations to implement RA No. 8424 relative to the imposition of

income taxes on income derived under the Foreign Currency Deposit and Offshore Banking Systems.

Specifically, interest income which is actually or constructively received by a resident citizen of the Philippines

or by a resident alien individual from a foreign currency bank deposit will be subject to a final withholding tax

of 7.5%. The depository bank will withhold and remit the tax. If a bank account is jointly in the name of a non-

resident citizen, 50% of the interest income from such bank deposit will be treated as exempt while the other

50% will be subject to a final withholding tax of 7.5%. The Regulations will apply on taxable income derived

beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were

made in 1997, only that portion of interest which was actually or constructively received by a depositor

starting January 1, 1998 is taxable.

(8) CIR v. YMCA

GR No. 124043, October 14, 1998

298 SCRA 83

FACTS:

Private Respondent YMCA--a non-stock, non-profit institution, which conducts various programs beneficial to

the public pursuant to its religious, educational and charitable objectives--leases out a portion of its premises

to small shop owners, like restaurants and canteen operators, deriving substantial income for such. Seeing

this, the commissioner of internal revenue (CIR) issued an assessment to private respondent for deficiency

income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding

tax on wages. YMCA opposed arguing that its rental income is not subject to tax, mainly because of the

provisions of Section 27 of NIRC which provides that civic league or organizations not organized for profit but

operate exclusively for promotion of social welfare and those organized exclusively for pleasure, recreation

and other non-profitble businesses shall not be taxed.

ISSUE:

Is the contention of YMCA tenable?

HELD:

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No. Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in

interpretation in construing tax exemptions. Furthermore, a claim of statutory exemption from taxation should

be manifest and unmistakable from the language of the law on which it is based. Thus, the claimed exemption

"must expressly be granted in a statute stated in a language too clear to be mistaken."

(9) Commissioner vs. British Overseas Airways Corp.

GR L-65773-74, 30 April 1987

149 SCRA 395

Facts:

British Overseas Airways Corp. (BOAC) is a 100% Britis Government-owned corporation engaged in

international airline business and is a member of the Interline Air Transport Association, and thus, it operates

air transportation service and sells transportation tickets over the routes of the other airline members. From

1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus did not carry

passengers and/or cargo to or from the Philippines but maintained a general sales agent in the Philippines --

Warner Barnes & Co. Ltd., and later, Qantas Airwayus -- which was responsible for selling BOAC tickets

covering passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency income taxes

against BOAC.

Issue:

Whether the revenue derived by BOAC from ticket sales in the Philippines for air transportation, while having

no landing rights in the Philippines, constitute income of BOAC from Philippine sources, and accordingly,

taxable.

Held:

The source of an income is the property, activity or service that produced the income. For the source of

income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity

within the Philippines. Herein, the sale of tickets in the Philippines is the activity that produced the income.

The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The

situs 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. PD 68, in relation to PD

1355, ensures that international airlines are taxed on their income from Philippine sources. The 2 1/2 %tax on

gross billings is an income tax. If it had been intended as an excise or percentage tax, it would have been

placed under Title V of the Tax Code covering taxes on business.

(10) Revenue Regulation No. 3-98

Issued June 4, 1998 implements Section 33 of the National Internal Revenue Code (NIRC), as amended by RA

No. 8424, relative to the special treatment of fringe benefits granted or paid by the employer to employees,

except rank and file employees, beginning January 1, 1998. The definition of fringe benefits as well as the

determination of the amount subject to the fringe benefits tax are specified in the Regulations.

(11) CIR vs. VISAYAN ELECTRIC CO.

Facts:

Visayan Electric Co. established a pension fund for the benefit of its employees. The fund was later invested

in stocks of San Miguel Brewery, for which dividends had been regularly received. These dividends, however,

were not declared for tax purposes. The Provincial Auditor allowed VEC to declare the dividends as income

for franchise tax purposes, thus tax exempt. The Revenue Examiner, however, argued that the dividend were

subject to corporate income tax.

Issue:

WoN the pension fund invested in stocks is tax exempt?

Held: No.

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• The dividends were not income of VEC. They do not go to the general fund of the company

• The dividends were part of the pension fund which was solely for the benefitof the employees

• To qualify for exemption, the employees’ trust (pension) fund mustrefer to a definite program,

scheme, or plan. It must be set up ingood, actuarially sound, and not to be used or controlled in any

way by the company. It must extend retirement and pension benefits forthe employees

• Unquestionably, the VEC pension fund was created in good faith. It wasmeant for the benefit of the

employees

• However, no sufficient data which would justify the Court to make aconclusive statement that the VEC

pension fund qualifies as a trust under the Tax Code. 1) The requirements for the formation of

employees’ trust fundsfor pension had not been strictly complied with—e.g., the only record evidence of

its creation is the minutes of aboard meeting; 2) No record to show that the fund was actuarially sound

• Absent such data, the dividends are not tax exempt. Reason: Exemptions in tax statutes are

never presumed

(12) CIR vs. Solidbank Corporation

G.R. No. 148191

November 25, 2003

FACTS:

Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting to P1,474,693.44. It

alleged that the total included P350,807,875.15 representing gross receipts from passive income which was

already subjected to 20%final withholding tax (FWT).

The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20% FWT should not form

part of its taxable gross receipts for purposes of computing the tax.

Solidbank, relying on the strength of this decision, filed with the BIR a letter-request for the refund or tax

credit. It also filed a petition for review with the CTA where the it ordered the refund.

The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross receipts because the

FWT was not actually received by the bank but was directly remitted to the government.

The Commissioner claims that although the FWT was not actually received by Solidbank, the fact that the

amount redounded to the bank’s benefit makes it part of the taxable gross receipts in computing the Gross

Receipts Tax. Solidbank says the CA ruling is correct.

ISSUE:

Whether or not the FWT forms part of the gross receipts tax.

HELD:

Yes. 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 tax in order

to ensure its payment. This amount that is used to settle the tax liability is sourced from the proceeds

constitutive of the tax base.

These proceeds are either actual or constructive. Both parties agree that there is no actual receipt by the

bank. What needs to be determined is if there is constructive receipt. Since the payee is the real taxpayer,

the rule on constructive receipt can be rationalized.

The Court applied provisions of the Civil Code on actual and constructive possession. 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. 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 shall

be considered as acquired when ratified by the person in whose name the act of possession is executed.

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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 tantamount to delivery, receipt or remittance. Besides, Solidbank 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, part of which is withheld, that income is included as part of the tax base on

which the gross receipts tax is imposed.

(13) CIR v Japan Airlines (JAL)

G.R. No. 60714

October 4, 1991

Facts:

JAL is a foreign corporation engaged in the business of International air carriage. Since mid-July of 1957, JAL

had maintained an office at the Filipinas Hotel, Roxas Boulevard Manila. The said office did not sell tickets

but was merely for the promotion of the company. On July 17 1957, JAL constituted PAL as its agent in the

Philippines. PAL sold tickets for and in behalf of JAL. On June 1972, JAL then received deficiency income tax

assessments notices and a demand letter from petitioner for years 1959 through 1963. JAL protested against

said assessments alleging that as a non-resident foreign corporation, it as taxable only on income from

Philippines sources as determined by section 37 of the Tax Code, there being no income on said years, JAL is

not liable for taxes.

Issue:

WON proceeds from sales of JAL tickets sold in the Philippines are taxable as income from sources within the

Philippines.

Held:

The ticket sales are taxable. Citing the case of CIR v BOAC, the court reiterated that the source of an income

is the property, activity or service that produced the income. For the source of income to be considered as

coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines.

The absence of flight operations to and from the Philippines isnot determinative of the source of income or

the situs of income taxation. The test of taxability is the source, and thesource of the income is that activity

which produced theincome. In this case, as JAL constitutes PAL as its agent, thesales of JAL tickets made by

PAL is taxable.

(14) Commissioner vs. Court of Appeals & Efren Castaneda

GR 96016, 17 October 1991

Second Division, Padilla (J): 2 concur, 1 on leave

Facts:

Efren Castaneda retired from government service as Revenue Attache in the Philippine Embassy in

London, England on 10 December 1982 under the provisiions of Section 12 (c) of Commonwealth Act 186, as

amended. Upon retirement, he received, among other benefits, terminal leave pay from which the

Commissioner withheld P12,557.13, allegedly representing income tax thereon. Castaneda claimed for a

refund.

Issue:

Whether terminal leave pay is subject to withholding income tax?

Held:

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Terminal Leave Pay received by a government official or employee is not subject to withholdingincome tax.

In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated.

The Government recognizes that retirement pay for public servants is less than generous, if not meager or

scrimpy. Terminal leave payments are given thus not only at the same time but also foor the same policy

considerations governing retirement benefits. 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.

(15) CIR vs. British Overseas Airways Corporation (BOAC)

G.R. No. L-65773-74

April 30, 1987

Facts:

British Overseas Airways Corp (BOAC) is a 100% British Government-owned corporation engaged

in international airline business and is a member of the Interline Air Transport Association, and thus, it

operates air transportation services and sells transportation tickets over the routes of the other airline

members.

From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus, did not carry

passengers and/or cargo to or from the Philippines but maintained a general sales agent in the Philippines -

Warner Barnes & Co. Ltd. and later, Qantas Airways - which was responsible for selling BOAC tickets covering

passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency income taxes against

BOAC.

Issue:

Whether the revenue derived by BOAC from ticket sales in the Philippines, constitute income of BOAC from

Philippine sources, and accordingly taxable?

Held:

The source of an income is the property, activity, or service that produced the income. For the source of

income to be considered as coming from the Philippines, it is sufficient that the income is derived from

activity within the Philippines. Herein, the sale of tickets in the Philippines is the activity that produced the

income. The tickets exchanged hands here and payment for fares were also made here in the Philippine

currency.

The situs 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. PD 68, in

relation to PD 1355, ensures that international airlines are taxed on their income from Philippine sources.

The 2 1/2% tax on gross billings is an income tax. If it had been intended as an excise tax or percentage tax, it

would have been placed under Title V of the Tax Code covering taxes on business.

(16) E. Rodriguez, Inc. v. Collector

G.R. No. L-23041

July 31, 1969

(Income from dealings in property, Net capital gain (loss)

FACTS:

Some of petitioner’s lands were subject of expropriation under RA No. 333. The court awarded the

expropriation to the Republic of the Phils. Petitioner negotiated with the government thru the Capital City

Planning Commission, resulting in a compromise agreement as follows: Govt will pay petitioner the sum of

around P1.2M for the expropriated property of which around P0.62M were in tax-exempt Government

Bonds. In its income tax return for 1950, Petitioner did not include theP0.62M worth of bonds it received

from the Govt in its computation of profits / losses. The BIR however assessed deficiency tax on this portion

to the amount of around P63K.Petitioner contends that the payment in tax-exempt bonds exempts such

portion from income taxation. It contends that this tax exemption is an inducement offered by the Govt to

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the landowners. Petitioner refers to RA No. 1400 which expressly provides that payment of the Govt shall

not be considered as income of the landowners for income tax purposes.

ISSUE:

WON the P 0.62M portion paid by the Govt in the form of bonds should be included in determining the profit

/ loss of petitioner for income tax?

HELD:

Yes, this portion paid in Bonds should be included for income tax purposes. The income derived from the

sale of land to the Govt is different from the income derived from interests earned or profits earned from

the exchange of the said bonds. The tax exemption only covers the latter. Petitioner must pay income tax on

his profit on the sale of land, whether payment was in the form of cash or bonds. Reference to RA No.

1400merely strengthens this decision because RA No. 333 does not explicitly provide for income tax

exemption, unlike the former. The court reiterated that exemption from taxation is not favored and

presumed, and that tax exemption is strictly construed vs. the taxpayer.

(17) National Development Co. vs. Commissioner

GR L-53961, 30 June 1987

FACTS:

The National Development Co. (NDC) entered into contracts in Tokyo with several Japanese

shipbuilding companies for the construction of 12 ocean-going vessels. Initial payments were made in cash

and through irrevocable letters of credit. When the vessels were completed and delivered to the NDC in

Tokyo, the latter remitted to the shipbilders the amount of US$ 4,066,580.70 as interest on the balance of

the purchase price. No tax was withheld. The Commissioner then held NDC liable on such tax in the total

amount of P5,115,234.74. The Bureau of Internal Revenue served upon the NDC a warrant of distraint and

levy after negotiations failed.

ISSUE:

Whether the NDC is liable for deficiency tax?

HELD:

The Japanese shipbuilders were liable on the interest remitted to them under Section 37 of the Tax Code.

The NDC is not the one taxed. The imposition of the deficiency taxes on the NDS is a penalty for its failure to

withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code.

NDC was remiss in the discharge of its obligation of its obligation as the withholding agent of the

government and so should be liable for its omission.

(18) Reagan vs. Commissioner

GR L-26379, 27 December 1969

FACTS:

William Reagan imported a tax-free 1960 Cadillac car with accessories valued at US $ 6,443.83, including

freight, insurance and other charges. After acquiring a permit to sell the car from the base commander of

Clark Air Base, Reagan sold the car to a certain Willie Johnson Jr. of the US Marine Corps stationed in Sangley

Point, Cavite for US$ 6,600. Johnson sold the same, on the same day to Fred Meneses, a Filipino. As a result

of the transaction, the commissioner rendered Reagan liable for income tax in the sum of P2,970. Reagan

claimed that he was exempt as the transaction occurred in Clark Air Base, “a base outside the Philippines.”

ISSUE:

Whether Reagan was tax-exempt?

HELD:

The Philippines, as an independent and sovereign country, exercises its authority over its entire domain. Any

state may, however, by its consent, express or implied, submit to a restriction of its sovereign rights. It may

11

allow another power to participate in the exercise of jurisdictional right over certain portions of its territory.

By doing so, it by no means follows that such areas become impressed with an alien character. The areas

retain their status as native soil. Clark Air Base is within Philippine territorial jurisdiction to tax, and thus,

Reagan was liable for the income tax arising from the sale of his automobile in Clark. The law does not look

with favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too

plain to be mistaken and too categorical to be misinterpreted. Reagan has not done so, and cannot do so.

(19) CIR vs. General Foods

GR No. 143672

April 24, 2003

FACTS:

Respondent corporation General Foods (Phils), which is engaged in the manufacture of “Tang”, “Calumet”

and “Kool-Aid”, filed its income tax return for the fiscal year ending February 1985 and claimed as deduction,

among other business expenses, P9,461,246 for media advertising for “Tang”.

The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of

P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied.

General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision by

CTA dismissing the company’s appeal.

ISSUE:

W/N the subject media advertising expense for “Tang” was ordinary and necessary expense fully deductible

under the NIRC?

HELD:

No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of the

taxing authority, and he who claims an exemption must be able to justify his claim by the clearest grant of

organic or statute law. Deductions for income taxes partake of the nature of tax exemptions; hence, if tax

exemptions are strictly construed, then deductions must also be strictly construed.

To be deductible from gross income, the subject advertising expense must comply with the following

requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the

taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and

(d) it must be supported by receipts, records or other pertinent papers.

While the subject advertising expense was paid or incurred within the corresponding taxable year and was

incurred in carrying on a trade or business, hence necessary, the parties’ views conflict as to whether or not

it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary.

The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it

failed the two conditions set by U.S. jurisprudence: first, “reasonableness” of the amount incurred and

second, the amount incurred must not be a capital outlay to create “goodwill” for the product and/or private

respondent’s business. Otherwise, the expense must be considered a capital expenditure to be spread out

over a reasonable time.

There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising

expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number of

factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the volume

and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer and the

general economic conditions. It is the interplay of these, among other factors and properly weighed, that will

yield a proper evaluation.

The Court finds the subject expense for the advertisement of a single product to be inordinately large.

Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then Section

29 (a) (1) (A) of the NIRC.

12

Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of

services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The

second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill

for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member. If

the expenditures are for the advertising of the first kind, then, except as to the question of the

reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If,

however, the expenditures are for advertising of the second kind, then normally they should be spread out

over a reasonable period of time.

The company’s media advertising expense for the promotion of a single product is doubtlessly unreasonable

considering it comprises almost one-half of the company’s entire claim for marketing expenses for that year

under review.Petition granted, judgment reversed and set aside.

(20) Collector v Goodrich International Rubber Co.

G.R. No. L-22265

FACTS:

Goodrich claimed for deductions based upon receipts issued, not by entities in which the alleged expenses

had been incurred, but by the officers of Goodrichwho allegedly paid for them.

The Commissioner disallowed deductions in the amount of P50,455.41 (for the year 1951) for bad debts and

P30,188.88 (for year 1952) for representation expenses.

Goodrich appealed from the said assessment to the Court of Tax Appeals (CTA) which allowed the deduction

for bad debts but disallowing the alleged representation expenses. CTA amended its decision allowing the

deduction of representation expenses.

The Government appealed to the SC the alleged bad debts.

ISSUE:

Whether or not these bad debts are properly deducted.

HELD:

The claim for deduction for debt numbers 1-10 is REJECTED. Goodrich has not established either that the

debts are actually worthless or that it had reasonable grounds to believe them to be so.

NIRC permits the deduction of debts “actually ascertained to be worthless within the taxable year” obviously

to prevent arbitrary action by the taxpayer, to unduly avoid tax liability.

The requirement of ascertainment of worthlessness require proof of 2 facts:

1. That the taxpayer did in fact ascertain the debt to be worthless

2. That he did so, in good faith.

Good faith on the part of the taxpayer is not enough. He must also how that he had reasonably investigated

the relevant facts and had drawn a reasonable inference from the information obtained by him. In the case,

Goodrich has not adequately made such showing.

The payments made, after being characterized as bad debts, merely stresses the undue haste with which the

same had been written off. Goodrich has not proven that said debts were worthless. There was no evidence

that the debtors cannot pay them.

SC held that the claim for bad debts are allowed but only up to P22,627.35. (those from Debts 11-18)

(21) Commissioner vs. Lednicky

13

GR L-18169, L-18286, L-21434

31 July 1964

FACTS:

Spouses VE and Maria Valero Lednicky are American citizens residing in the Philippines, and have derived all

their income from Philippine sources since 1947. In 1955, the spouses filed with the US Internal Revenue

agent in Manila their Federal income tax return for 1947, 1951 to 1954 on income from Philippine sources.

From 1956 to 1958, they filed their domesic income tax returns in compliance with local laws. They amended

their tax returns in 1959 to include their taxes paid to the US Federal Government, interests, and exchange

and bank charges. They filed their claims for refund.

ISSUE:

Whether income tax paid to foreign governments can be deducted from the gross income or as a tax credit?

HELD:

The law’s intent is that the right to deduct income taxes paid to foreign government from the laxpayer’s

gross income is given only as an alternative or substitute to his right to claim a tax credit for sich foreign

income taxes; 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. The prupose of the law is to

prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes, by deduction from

gross income and by tax credit. To allow an alien resident to deduct from his gross income whatever taxes he

pays to his own government amounts to confer on the latter power to reduce the tax income of the

Philippine Government. Such result is incompatible with the status of the Philippines as an independent and

sovereign state. Any relief from the alleged double taxation should come from the United States, since its

right to burden the taxpayer is solely predicated on the taxpayer’s citizenship, without contributing to the

production of the wealth that is being taxed.

(22) Esso Standard Eastern vs. Commissioner

GR 28508-9, 7 July 1989

FACTS:

ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the

amount it had spent for drilling and exploration of its petroleum conscessions. The Commissioner disallowed

the claim on the ground that the expenses should be capitalized and might be written off as a loss only when

a “dry hole” should result. Hence, ESSO filed an amended return where it asked for the refund of P323,270

by reason of its abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary and

necessary expenses in the same return amount representing margin fees it had paid to the Central Bank on

its profit remittances to its New York Office.

ISSUE:

Whether the margin fees may be considered ordinary and necessary expenses when paid?

HELD:

For an item to be deductible as a business expense, the expense must ebe ordinary and necessary; it

must be paid or incurred within the taxable year; and it must be paid or incurred in carrying on a trade

orbusiness. In addition, the taxpayrer must substantially prove by evidence or records the deductions

claimed under law, otherwise, the same will be disallowed. There has been no attempt to define “ordinary

and necessary” with precision. However, as guiding principle in the proper adjudication of conflicting claims,

an expenses is considered necessary where the expenditure is appropriate and helpdul in the development

of the taxpayer’s business. It is ordinary when it connotes a payment which is normal in relation to the

business of the taxpayer and the surrounding circumstances. Assuming that the expenditure is ordinary and

necessary in the operation of the taxpayer’s business; the expenditure, to be an allowable deduction as a

business expense, must be determined from the nature of the expenditure itself, and on the extent and

permanency of the work accomplished by the expenditure. Herein, ESSO has not shown that the remittance

to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner

14

merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing

that they are illegal or ultra vires; which is erroneous. Claims for deductions are a matter of legislative grace

and do not turn on mere equitable considerations.

(23) FERNANDEZ HERMANOS, INC. VS. CIR

G.R. No. L-21551

September 30, 1969

FACTS:

Four cases involve two decisions of the Court of Tax Appeal s determining the taxpayer ' s income tax liability

for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of Internal

Revenue, as petitioner and respondent in the cases a quo respectively , appealed from the Tax Court's

decisions , insofar as their respective contentions on particular tax items were therein resolved against

them. Since the issues raised are inter related, the Court resolves the four appeals in this joint decision.

The taxpayer , Fernandez Hermanos, Inc. , is a domestic corporation organized for the principal purpose of

engaging in business as an " investment company " wi th main office at Manila. Upon verification of the

taxpayer's income tax returns for the period in quest ion, the Commissioner of Internal Revenue assessed

against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged

deficiency income taxes for the year s 1950, 1951, 1952, 1953 and 1954, respectively. Said assessments were

the result of alleged discrepancies found upon the examination and verification of the taxpayer's income tax

returns for the said years, summarized by the Tax Court in its decision of June 10, 1963 in CTA Case No. 787.

ISSUE:

The correctness of the Tax Court's rulings with respect to the disputed items of

disallowances enumerated in the Tax Court's summary reproduced?

HELD:

That the circumstances are such that the method does not reflect the taxpayer’s income with reasonable

accuracy and certainty and proper and just additions of personal expenses and other non-deductible

expenditures were made and correct , fair and equitable credit adjustments were given by way of

eliminating non-taxable items.

Proper adjustments to conform to the income tax laws. Proper adjustments for non-deductible items must

be made. The following non-deductibles, as the case may be, must be

added to the increase of decrease in the net worth:

1. Personal living or family expenses

2. Premiums paid on any life insurance policy

3. Losses from sales or exchanges of property between members of the family

4. Income taxes paid

5. Other non-deductible taxes

6. Election expenses and other expense against public policy

7. Non-deductible contributions

8. Gifts to others

9. Estate inheritance and gift taxes

10. Net Capital Loss

15

On the other hand, non- taxable items should be deducted therefrom. These items are necessary

adjustments to avoid the inclusion of what otherwise are non-taxable receipts. They are:

1. inheritance gifts and bequests received

2. non- taxable gains

3. compensation for injuries or sickness

4. proceeds of life insurance policies

5. sweepstakes

6. winnings

7. interest on government securities and increase in net worth are not taxable if they are shown not to

be the result of unreported income but to be the result of the correction of errors in the taxpayer’s

entries in the books relating to indebtedness.

(24) KUENZLE & STREIFF, INC. VS. CIR- TAXABLE ADDITIONAL COMPENSATION

G.R. No. 17648

October 31, 1964

FACTS:

1. Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return, declaring losses.

2. CIR filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said years in the amounts of

P40,455.00, P11,248.00 and P16,228.00, respectively, arising from the disallowance, as deductible expenses,

of the bonuses paid by the corporation to its officers, upon the ground that they were not ordinary, nor

necessary, nor reasonable expenses within the purview of Section 30(a) (1) of the National Internal Revenue

Code.

3. The corporation filed with the Court of Tax Appeals a petition for review contesting the assessments. CTA

favored the CIR, however lowered the tax due on 1954. The corporation moved for reconsideration, but still

lost.

4. The Corporation contends that the tax court, in arriving at its conclusion, acted "in a purely arbitrary

manner", and erred in not considering individually the total compensation paid to each of petitioner's

officers and staff members in determining the reasonableness of the bonuses in question, and that it erred

likewise in holding that there was nothing in the record indicating that the actuation of the respondent was

unreasonable or unjust.

ISSUE:

Whether or not the bonuses in question was reasonable and just to be allowed as a

deduction?

HELD:

No.

RATIO: It is a general rule that `Bonuses to employees made in good faith and as additional compensation for

the services actually rendered by the employees are deductible, provided such payments, when added to

the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The condition

16

precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact

compensation; (2) it must be for personal services actually rendered; and (3) bonuses, when added to the

salaries, are `reasonable ... when measured by the amount and quality of the services performed with

relation to the business of the particular taxpayer. Here it is admitted that the bonuses are in fact

compensation and were paid for services actually rendered. The only question is whether the payment of

said bonuses is reasonable.

There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends

upon many factors, one of them being the amount and quality of the services performed with relation to the

business. Other tests suggested are: payment must be 'made in good faith'; the character of the taxpayer's

business, the volume and amount of its net earnings, its locality, the type and extent of the services

rendered, the salary policy of the corporation'; 'the size of the particular business'; 'the employees'

qualifications and contributions to the business venture'; and 'general economic conditions. However, 'in

determining whether the particular salary or compensation payment is reasonable, the situation must be

considered as a whole.

It seems clear from the record that, in arriving at its main conclusion, the tax court considered, inter alia,

the following factors:

1) The paid officers, in the absence of evidence to the contrary, that they were competent, on the other the

record discloses no evidence nor has petitioner ever made the claim that all or some of them were gifted

with some special talent, or had undergone some extraordinary training, or had accomplished any particular

task, that contributed materially to the success of petitioner's business during the taxable years in question.

2) All the other employees received no pay increase in the said years.

3) The bonuses were paid despite the fact that it had suffered net losses for 3 years. Furthermore the

corporation cannot use the excuse that it is 'salary paid' to an employee because the CIR does not question

the basic salaries paid by petitioner to the officers and employees, but disallowed only the bonuses paid to

petitioner's top officers at the end of the taxable years in question.

(25) Roxas y Cia vs CTA

23 SCRA 276

FACTS:

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary

succession several properties. To manage the above-mentioned properties, said children,namely, Antonio

Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania.At the conclusion of

the WW2, the tenants who have all been tilling the lands in Nasugbu for generationsexpressed their desire

to purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the Government, in

consonance with the constitutional mandate to acquire big landed estates and

apportion them among landless tenants-

farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the

farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the

Government for distribution to actual occupants for a priceof P2,079,048.47 plus P300,000.00 for survey and

subdivision expenses. It turned out however that theGovernment did not have funds to cover the purchase

price, and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to

Roxas y Cia. the amount of P1,500,000.00 as loan.Collateral for such loan were the lands proposed to be sold

to the farmers. Under the arrangement, Roxasy Cia. allowed the farmers to buy the lands for the same price

but by installment, and contracted with theRehabilitation Finance Corporation to pay its loan from the

proceeds of the yearly amortizations paid bythe farmers.

The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from the inclusion as

income of Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of

the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various

17

business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that

Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on installment, the

Commissioner considered the partnership as engaged in the business of real estate, hence,100% of the

profits derived therefrom was taxed. The Roxas brothers protested the assessment but

inasmuch as said protest was denied, they instituted an appeal in the CTA which sustained the assessment.

Hence, this appeal.

ISSUE:

Is Roxas y Cia liable for the payment of deficiency income for the sale of Nasugbu farmlands?

HELD:

NO. The proposition of the CIR cannot be favorably accepted in this isolated transaction with its

peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for

their respective holdings in installment for a period of 10 years, it would nevertheless not make the

vendor Roxas y Cia. a real estate dealer during the 10-year amortization period. It should be borne in mind

thatthe sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only

inconsonance with, but more in obedience to the request and pursuant to the policy of our Government

toallocate lands to the landless. It was the bounden duty of the Government to pay the

agreed compensationafter it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide

them among thefarmers at very reasonable terms and prices. However, the Government could not comply

with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its

way and soldlands directly to the farmers in the same way and under the same terms as would have been

the case hadthe Government done it itself. For this magnanimous act, the municipal council of Nasugbu

passed aresolution expressing the people's gratitude.In fine, Roxas y Cia. cannot be considered a real estate

dealer for the sale in question. Hence, pursuant toSection 34 of the Tax Code the lands sold to the farmers

are capital assets, and the gain derived from thesale thereof is capital gain, taxable only to the extent of

50%.

(26) Commissioner vs. Burroughs Ltd.

GR L-6653, 19 June 1986

Second Division, Paras (J): 4 concur

FACTS:

Burroughs Ltd is a foreign corporation authorized to engage in business in the Philippines. Its branch

office in Makati applied with the Central Bank for authority to remit to its parent company abroad, branch

profits. It paid 15% branch profit remittance tax. The branch, however, later claimed for a refund or credit

contending that the branch profit remittance tax pursuant to a BIR ruling of 21 January 1980. The Court of

Tax Appeals granted the company’s petition. The Commissioner filed a petition for certiorari, claiming

Memorandum Circular 8-82 (17 March 1982) should apply.

ISSUE:

Whether the Memorandum Circular 8-82 should be retroactively applied?

HELD:

Revenue Ruling of 21 January 1980 remains to apply in the case as the company paid the tax on 14

March 1979. Memorandum Circular 8-82 cannot be given retroactive effect in the light of Section 327 (non-

retroactively of rulings) of the tax code. The retroactive application of the Circular would deprive the

company the substantial amount of P172,058.90. The misstates or omits material facts from his return or

any document required of him by the BIR, or where the facts subsequently gathered by the BIR are

materially different from the facts on which the ruling is based, or where the taxpayer acted in bad faith to

allow the retroactive application of the circular.

(27) Plaridel Surety vs. CIR

G. R. No. L-21520

18

FACTS:

Petitioner Plaridel Surety & Insurance Co., is a domestic corporation engaged in the bonding business. On

November 9, 1950, petitioner, as surety, and Constancio San Jose, as principal, solidarily executed a

performance bond in the penal sum of P30,600.00 in favor of the P. L. Galang Machinery Co., Inc., to secure

the performance of San Jose's contractual obligation to produce and supply logs to the latter.

To afford itself adequate protection against loss or damage on the performance bond, petitioner required

San Jose and one Ramon Cuervo to execute an indemnity agreement obligating themselves, solidarily, to

indemnify petitioner for whatever liability it may incur by reason of said performance bond. Accordingly, San

Jose constituted a chattel mortgage on logging machineries and other movables in petitioner's favor1 while

Ramon Cuervo executed a real estate mortgage.2

San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on the performance bond.

On October 1, 1952, the Court of First Instance adjudged San Jose and petitioner liable; it also directed San

Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery. The Court of

Appeals, on June 17, 1955, affirmed the judgment of the lower court. The same judgment was likewise

affirmed by this Court4 on January 11, 1957 except for a slight modification apropos the award of attorney's

fees.

On February 19 and March 20, 1957, petitioner effected payment in favor of Galang Machinery in the total

sum of P44,490.00 pursuant to the final decision.

In its income tax return for the year 1957, petitioner claimed the said amount of P44,490.00 as deductible

loss from its gross income and, accordingly, paid the amount of P136.00 as its income tax for 1957.

The Commissioner of Internal Revenue disallowed the claimed deduction of P44,490.00 and assessed against

petitioner the sum of P8,898.00, plus interest, as deficiency income tax for the year 1957. Petitioner filed its

protest which was denied. Whereupon, appeal was taken to the Tax Court, petitioner insisting that the

P44,490.00 which it paid to Galang Machinery was a deductible loss.

ISSUE:

Whether or not the entire P44,490.00 paid by it was or was not a deductible loss under Sec. 30 (d) (2) of the

Tax Code?

HELD:

The rule is that loss deduction will be denied if there is a measurable right to compensation for the loss, with

ultimate collection reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer

must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had.

In other words, as the Tax Court put it, the taxpayer (petitioner) must exhaust his remedies first to recover

or reduce his loss.

But assuming that there was no reasonable expectation of recovery, still no loss deduction can be had.

section 30(d)(2) of the Tax Code requires a charge-off as one of the conditions for loss deduction:

In case of a corporation, all losses actually sustained and charged-off within the taxable year and not

compensated for by insurance or otherwise.

(28) Collector vs Henderson (Compensation Income)

G.R. No. L-12954, L-13049

FACTS:

Arthur Henderson is the president of the American International Underwriters for the Phils., Inc., a domestic

corporation engaged in insurance business. The CIR included as part of the spouses’ personal taxable income

the allowances for rental of the apartment furnished by the employer-corporation, including utilities, and

the allowance for travel expenses of Mrs. Henderson. The spouses did not live in the apartments and nor did

19

they avail of the travel expenses. As such, they did not pay for taxes corresponding to the allowances. Hence,

the CIR assessed deficiency income taxes against the spouses.

ISSUE:

WON allowances given by an employer, but unavailed of by an employee, are taxable on the latter’s

personal income?

HELD:

No. No part of the allowances in question redounded to the benefit of the spouses ultimately or was

retained by them. The Hendersons are entitled only to a ratable value of the allowances – the reasonable

amount they would have spent for house rental and utilities – which would be the only part of the

allowances at issue subject to their personal tax. The same is true with the allowances as no part of the

allowance for traveling expenses redounded to the benefit of the Hendersons. Hence, the traveling

allowance is likewise not taxable.

(29) Pirovano v CIR (Compensation Income)

G.R. No. L-19865

FACTS:

Sec. 32[B] of the NIRC provides that Gifts, bequests and devises are excluded from gross income liable to tax.

Instead, such donations are subject to estate or gift taxes. However, if the amount is received on account of

services rendered, whether constituting a demandable debt or not (such as remuneratory donations under

Civil Law), the donation is considered taxable income. De la Rama Steamship Co. insured the life of Enrico

Pirovano who was then its President and General Manager. The company initially designated itself as the

beneficiary of the policies but, after Pirovano’s death, it renounced all its rights, title and interest therein, in

favor of Pirovano’s heirs. The CIR subjected the donation to gift tax. Pirovano’s heirs contended that the

grant was not subject to such donee’s tax because it was not a simple donation, as it was made for a full and

adequate compensation for the valuable services by the late Priovano (i.e. that it was remuneratory).

ISSUE:

WON the donation is remuneratory and therefore not subject to donee’s tax, but rather taxable as part of

gross income?

Held:

No. The donation is not remuneratory. There is nothing on record to show that, when the late Enrico

Pirovano rendered services as President and General Manager of the De la Rama Steamship Co. and was

“largely responsible for the rapid and very successful development of the activities of the company", he was

not fully compensated for such services. The fact that his services contributed in a large measure to the

success of the company did not give rise to a recoverable debt, and the conveyances made by the company

to his heirs remain a gift or a donation. The company’s gratitude was the true consideration for the

donation, and not the services themselves.

(30) Tuason v. Lingad (net capital gain)

G.R. No. L-24248

FACTS:

In his 1957 tax return the petitioner as before treated his income from the sale of the small lots

(P119,072.18) as capital gains and included only ½ thereof as taxable income. In this return, the petitioner

deducted the real estate dealer's tax he paid for 1957. It was explained, however, that the payment of the

dealer's tax was on account of rentals received from the mentioned 28 lots and other properties of the

petitioner. On the basis of the 1957 opinion of the Collector of Internal Revenue,

the revenue examiner approved the petitioner's treatment of his income from the sale of the lots in

question. In a memorandum dated July 16, 1962 to the Commissioner of Internal Revenue, the chief of the

BIR Assessment Department advanced the same opinion, which was concurred in by the Commissioner of

20

Internal Revenue. On January 9, 1963, however, the Commissioner reversed himself and considered the

petitioner's profits from the sales of the mentioned lots as ordinary gains.

ISSUE:

Whether the properties in question which the petitioner had inherited and subsequently sold in small lots to

other persons should be regarded as capital assets?

HELD:

NO. RATIO: As thus defined by law, the term "capital assets" includes all the properties of a taxpayer

whether or not connected with his trade or business, except: (1) stock in trade or other property included in

the taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course

of his trade or business; (3) property used in the trade or business of the taxpayer and subject to

depreciation allowance; and (4) real property used in trade or business. If the taxpayer sells or exchanges

any of the properties above enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary

loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a

capital loss. The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve

a different characterization for tax purposes. The following circumstances in combination show

unequivocally that the petitioner was, at the time material to this case, engaged in the real estate business:

(1) the parcels of land involved have in totality a substantially large area, nearly seven (7) hectares, big

enough to be transformed into a subdivision, and in the case at bar, the said properties are located in the

heart of Metropolitan Manila; (2) they were subdivided into small lots and then sold on installment basis

(this manner of selling residential lots is one of the basic earmarks of a real estate business); (3)

comparatively valuable improvements were introduced in the subdivided lots for the unmistakable purpose

of not simply liquidating the estate but of making the lots more saleable to the general public; (4) the

employment of J. Antonio Araneta, the petitioner's attorney-in-fact, for the purpose of developing,

managing, administering and selling the lots in question indicates the existence of owner-realty broker

relationship; (5) the sales were made with frequency and continuity, and from these the petitioner

consequently received substantial income periodically; (6) the annual sales volume of the petitioner from

the said lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and

(7) the petitioner, by his own tax returns, was not a person who can be indubitably adjudged as a stranger to

the real estate business. Under the circumstances, this Court finds no error in the holding below that the

income of the petitioner from the sales of the lots in question should be considered as ordinary income.

(31) Calasanzv.CIR (tax as capital gain/tax as ordinary income?)

G.R. No. L-24248

Facts:

Petitioner inherited agricultural land. Wanting to liquidate the same, she developed the area into a

subdivision, divided the same into lots, made improvements such as roads, gutters, drainage, and lighting,

and subsequently sold individual lots to the public for profit. CIR claims that petitioner is a real-estate dealer

and thus required to pay real estate tax as well as a deficiency income tax on profits derived from sale of lots

based on rates of ordinary income. Argument of petitioner: inherited land is capital asset. Inheritance had to

be improved in order to be liquidated in the only possible and advantageous way. It would be difficult to sell

the entire estate and thus has to be subdivided. Counter argument of respondent: petitioner involved in a

series of real-estate transactions for profit thus can be considered “doing business” owing to continuity and

frequency of said transactions. Thus, converting the investment property to a business property.

Issue:

WON petitioner is a real-estate dealer; WON the gains realized from the sale of the lots are taxable in full as

ordinary income or capital gains taxable at capital gain rates?

Held:

Real-estate dealer. Tax as ordinary income.

Ratio:

21

See Sec. 39(a)(1) of the NIRC. Statutory definition is negative in nature. If the asset is not among the

exceptions, it is a capital asset. Conversely, assets falling within the exceptions are ordinary assets. And

necessarily, any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain

depending on the kind of asset involved in the transaction. Though the Tuasan case offered guidelines in

determining whether property was sold in the regular course of business or whether it was sold as a capital

asset, there is no rigid rule and each must, in the last analysis, rest upon its own peculiar facts and

circumstances. In this case: (1) Business element of development very apparent, land originally devoted to

rice/fruit trees. (2) Existence of contracts receivables – installment basis of payments suggesting the number,

continuity and frequency of the sales. (3) Another factor: lots were advertised for sale to the public,

commission sales paid out. Petitioner’s defense of “sale for the purpose of liquidation” rebutted. US

jurisprudence has rejected the liquidation test in determining whether or not a tax payer is carrying on a

trade or business. “The liquidation sale may be conducted in the most advantageous manner to the seller

and he will not lose the benefits of the capital gain provision of the statute unless he enters the real estate

business and carries on the sale in the manner in which such a business is ordinarily conducted. In that

event, the liquidation constitutes a business and a sale in the ordinary course of such a business and the

preferred tax status is lot.” “Property initially classified as a capital asset may thereafter be treated as an

ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance

of or in the course of the taxpayer’s trade or business. Thus, a sale of inherited real property usually gives

capital gain or loss even though the property has to be subdivided or improved or both to make it

saleable. However, if the inherited property is substantially improved or very actively sold or both it may

be treated as held primarily for sale to customers in the ordinary course of the heir’s business.”

(32) CIR v. Rufino (Merger/Consolidation)

G.R. No. L-33665-68

FACTS:

Corporation engaged in the theater/amusement business. Old corporation’s charter was about to end. New

corporation formed to absorb assets of the first and continue operations. Because of a prohibition in the old

Corporation Law, it was necessary for the Old and New corporation to enter into a merger that involved a

Deed of Assignment that mandated transfer of assets of the old corporation to the new corporation in

exchange for New corporation stocks to be issued to the shareholders of the Old corporation. Actual transfer

of property was not made on the date of the merger. BIR questions the series of transactions leading to the

merger claiming that it was not undertaken for bona fide business purposes but merely to avoid liability for

the capital gains tax on the exchange of the old for the new shares of stock.

ISSUE:

Was there a valid merger which would allow the exchange to be exempt from capital gains tax?

HELD:

Yes.

Ratio:

The Court finds no impediment to the later exchange of property for stock between the two corporations

retroacting to the day of the merger. It was necessary for the old corporation to surrender its assets first to

the new corporation before the latter could issue its own stock to the shareholders of the old corporation.

The said issuance required a resolution from a special stockholders meeting in order to make the Deed of

Assignment valid. The basic consideration is the purpose of the merger since this would determine

whether the exchange of properties involved would be subject or not to capital gains tax. The criterion

laid down by law is that the merger must be undertaken for a bona fide business purpose and not solely

for the purpose of escaping the burden of taxation. If the operation of the merger “is one having no

business or corporate purpose – a mere devise which put on the form of a corporate reorganization as a

disguise for concealing its real character, and the sole object and accomplishment of which was the

consummation of a preconceived plan to transfer a parcel of corporate shares to the petitioner, a

corporation is created but is nothing more than a contrivance. It was brought into existence for no other

purpose; it performed, as it was intended from the beginning it should perform, no other function. When

22

that limited function had been exercised, it immediately was put to death.” – this would be a devious form

of conveyance masquerading as a corporate reorganization and nothing else. No such intention is apparent

in the instant case. It is clear that the purpose of the merger was to continue the business of the old

corporation, whose corporate life was about to expire, through the new corporation to which all the assets

and obligation of the former had been transferred. Strong factor in favor of this: no dissolution of new

corporation right after the merger. On the contrary, the New Corporation continued to operate the places of

amusement originally owned by the old corporation.

(33) Commisioner v. Manning (Disguised Dividend)

G.R. No. L-28398

FACTS:

MANTRASCO had 25,000 common shares, wherein 24,700 of which was owned by Reese. The rest of the

shares were owned by private respondents. A trust agreement was executed between them, the manifest

intention of which was to make respondents the sole owners of Reese’s interest in MANTRASCO upon his

death. When Reese died, MANTRASCO made partial payment of Reese’s shares and a new certificate was

issued in the favor of MANTRASCO. Thereafter, MANTRASCO’s stockholders issued a Resolution declaring

that the 24,700 be reverted to the capital account of the company as a stock dividend to be distributed to

respondent. Eventually, all the shares were paid and distributed to private respondents. BIR claims that the

distribution of Reese’s share as stock dividend was in effect a distribution of the “asset or property” of the

corporation as may be gleamed from the payment of cash for the redemption of said stock and upon

distribution of the same to respondents; hence, taxable as income of respondents. On the other hand,

respondents claim that their respective shares remained the same before and after the declaration of the

stock dividends and only the number of shares held by them had changed, therefore, they are not liable for

taxes. Both parties were on the assumption that the stock dividends were treasury shares.

HELD:

They were not treasury shares. Treasury shares are stocks issued and fully paid for and reacquired by the

same corporation either by purchase, donation, forfeiture or other means. Although they are issued shares,

they do not have the status of outstanding shares being in the treasury. Such share, as long as it is held by

the corporation as such, participates neither as dividends, because dividends cannot be declared by the

corporation to itself, nor in the meetings of the corporation as a voting stock, for otherwise equal voting

powers among stockholders will be effectively lost and the directors will be able to perpetuate their control

of the corporation. These essential features of a treasury stock are lacking in the questioned shares. The

intention of the parties to the trust agreement was to treat the 24,700 shares of Reese as absolutely

outstanding shares of Reese’s estate until they were fully paid. Such being their nature, their declaration as

treasury stock was a complete nullity, being 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. When

the companies involved parted of their earnings to “buy” the corporate holdings of Reese, they were in

ultimate effect making a distribution of such earnings to the respondents. All these amounts are subject to

income tax.

(34) Basilan Estates v. Commissioner

G.R. No. L-22492

FACTS:

The Commissioner assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for 1953 and P86,876.85

as 25% surtax on unreasonably accumulated profits as of 1953. On non-payment of the assessed amount, a

warrant of distraint and levy was issued but the same was not executed because Basilan Estates, Inc.

succeeded in getting the Deputy Commissioner of Internal Revenue to order the Director of the district in

Zamboanga City to hold execution and maintain constructive embargo instead. Because of its refusal to

waive the period of prescription, the corporation's request for reinvestigation was not given due course, and

notice was served the corporation that the warrant of distraint and levy would be executed. Basilan Estates,

Inc. filed before the CTA a petition for review of the Commissioner's assessment, alleging prescription of the

period for assessment and collection; error in disallowing claimed depreciations, travelling and

23

miscellaneous expenses; and error in finding the existence of unreasonably accumulated profits and the

imposition of 25% surtax thereon. CTA found that there was no prescription and affirmed the deficiency

assessment in toto. Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to 1949 on

the basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by

increasing it to conform with the increase in cost for their replacement. Accordingly, from 1950 to 1953 it

deducted from gross income the value of depreciation computed on the reappraised value. The

Commissioner found that the reappraised assets depreciated in 1953 were the same ones upon which

depreciation was claimed in 1952. And for the year 1952, the Commissioner had already determined, with

taxpayer's concurrence, the depreciation allowable on said assets to be P36,842.04, computed on their

acquisition cost at rates fixed by the taxpayer. Hence, the Commissioner pegged the deductible depreciation

for 1953 on the same old assets at P36,842.04 and disallowed the excess thereof in the amount of

P10,500.49.

ISSUE:

WON the depreciation of an asset beyond its acquisition cost is allowed?

HELD:

NO. The claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no justification in the

law. The determination of the Commissioner disallowing said amount, affirmed by the Court of Tax

Appeals, is sustained. Depreciation is the gradual diminution in the useful value of tangible property

resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value

of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation

commences with the acquisition of the property and its owner is not bound to see his property gradually

waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings

the value of the property invested is kept unimpaired, so that at the end of any given term of years, the

original investment remains as it was in the beginning. It is not only the right of a company to make such a

provision, but it is its duty to its bond and stockholders, and, in the case of a public service corporation, at

least, its plain duty to the public. Accordingly, the law permits the taxpayer to recover gradually his capital

investment in wasting assets free from income tax. The income tax law does not authorize the depreciation

of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and

allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not

created by implication but upon clear expression in the law. Moreover, the recovery, free of income tax, of

an amount more than the invested capital in an asset will transgress the underlying purpose of a

depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition cost, but

also some profit. Recovery in due time thru depreciation of investment made is the philosophy behind

depreciation allowance; the idea of profit on the investment made has never been the underlying reason for

the allowance of a deduction for depreciation.

(35) Hospital de San Juan de Dios v. Pasay (Exemption under the Constitution)

G.R. No. L-31305

FACTS:

The appellant (hospital) was organized as a charitable institution. Due to electrical Section 5, Ordinance No.

7, series of 1945, the City Engineer conducts inspections on buildings, including the building used by the

hospital. For this, the Pasay City government charged inspection fees. Under the ordinance, charitable and

religious institutions are exempt from paying the said fees. However, fees were charged from the hospital.

The trial court admitted that while the hospital was organized as a charitable institution, it is actually

managed and operated for profit.

ISSUE:

Whether or not the hospital is a charitable institution?

HELD:

It is a charitable institution. The general rule that a charitable institution does not lose its charitable

character and its consequent exemption from taxation merely because recipients of its benefits who are able

24

to pay are required to do so, where funds derived in this manner are devoted to the charitable purposes of

the institution, applies to hospitals. A hospital owned and conducted by a charitable organization, devoted

for the most part to the gratuitous care of charity patients, is exempt from taxation as a building used for

"purposes purely charitable", notwithstanding it receives and cares for pay patients, where any profit thus

derived is applied to the purposes of the institution. An institution established, maintained, and operated for

the purpose of taking care of the sick, without any profit or view to profit, but at a loss, which is made up by

benevolent contributions, the benefits of which are open to the public generally, is a purely public charity

within the meaning of a statute exempting the property of institutions of purely public charity from taxation;

the fact that patients who are able to pay are charged for services rendered, according to their ability, being

of no importance upon the question of the character of the institution.

(36) Hospital de San Juan de Dios vs. CIR

G.R. No. L-31305

FACTS:

Petitioner is a charitable institution. It declared its income taxes for the years 1952-1955. Respondent CIR, in

1959, assessed and demanded from the petitioner, payment of P51,462 as deficiency income taxes for the

said years. The petitioner protested against the assessment and requested the Commissioner to cancel and

withdraw it. However, respondent instead reduced the deficiency income tax assessment to only

P16,852.41. Petitioner contends that the expenses incurred by them for handling its funds or income

consisting solely of dividends and interests, were expenses incurred in "carrying on any trade or business,"

hence, deductible as business or administrative expenses. Petitioner filed a motion for reconsideration of

the CTA decision. When its motion was denied, it filed this petition for review.

ISSUE:

Whether or not the dividends and interests, were expenses incurred in "carrying on any trade or business,"

are deductible as business or administrative expenses?

HELD:

The Court held, Sec. 30. Deductions from Gross Income, provides, in computing net income there shad be

allowed as deduction — (A) Expenses: (i) In General.— All the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for

salaries or other compensation for personal services actually rendered.

The Court of Tax Appeals found that the interests and dividends received by the petitioner "were merely

incidental income to petitioner's main activity, which is the operation of its hospital and nursing schools

[hence] the conclusion is inevitable that petitioner's activities never went beyond that of a passive investor,

which under existing jurisprudence do not come within the purview of carrying on any 'trade or business'."

(pp. 47-48, Rollo) That factual finding is binding on this Court. And, as the principle of allocating expenses is

grounded on the premise that the taxable income was derived from carrying on a trade or business, as

distinguished from mere receipt of interests and dividends from one's investments, the Court of Tax Appeals

correctly ruled that said income should not share in the allocation of administrative expenses.

(37) Cyanamids Phil v. CA (Other taxes: improperly accumulated earnings tax)

G.R. No. 108067

FACTS:

Petitioner, Cyanamid is a corporation organized under Philippine laws. It is a wholly owned subsidiary of

American Cyanamid Co. based in Maine, USA. The CIR demanded the payment of deficiency income tax,

which included a 25% surtax for the undue accumulation of earnings. Petitioner claimed that CIR’s

assessment representing the 25% surtax on its accumulated earnings had no legal basis for the following

reasons: (a) it accumulated its earnings and profits for reasonable business requirements to meet working

capital needs and retirement of indebtedness; (b) it is a wholly owned subsidiary of American Cyanamid

Company, a publicly owned corporation whose shares of stock are listed and traded in the NY Stock

Exchange. Hence, no individual shareholder of petitioner could have evaded or prevented the imposition of

25

individual income taxes by petitioner’s accumulation of earnings and profits, instead of distribution of the

same.

Issue:

WON Cyanamid is liable for 25% surtax on improperly accumulated earnings?

Held:

Yes. Under sec. 25 of the NIRC of 1977, if any corporation is formed or availed of for the purpose of

preventing the imposition of the tax upon its shareholders through permitting its gains and profits to

accumulate instead of being divided or distributed, there is levied and assessed against such corporation a

tax equal to 25% of the undistributed portion of its accumulated profits. The provision also lists down

specific exceptions, under which the petitioner does not fall. When corporations do not declare dividends,

income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper

accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so

that the said earnings by shareholders could, in turn, be taxed. Furthermore, to determine whether profits

are accumulated for the reasonable needs of the business to avoid the surtax upon shareholders, it must be

shown that the controlling intention of the taxpayer is manifested at the time of accumulation, not

intentions declared later as an afterthought. The accumulated profits must be used within a reasonable

time. In the instant case, petitioner did not establish by clear and convincing evidence that such

accumulation of profit was for the immediate needs of the business.

(38) CIR v. Procter & Gamble (taxation of NRFC’s)

G.R. No. 66838

FACTS:

Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA (PMC-USA), a

nonresident foreign corporation in the Philippines, not engaged in trade and business therein. PMC-USA is

the sole shareholder of PMC Philippines and is entitled to receive income from PMC Philippines in the form

of dividends, if not rents or royalties. For the taxable years 1974 and 1975, PMC Philippines filed its income

tax return and also declared dividends in favor of PMCUSA. In 1977, PMC Philippines, invoking the tax-

sparing provision of Section 24 (b) as the withholding agent of the Philippine Government with respect to

dividend taxes paid by PMC-USA, filed a claim for the refund of 20 percentage point portion of the 35

percentage whole tax paid with the Commissioner of Internal Revenue.

ISSUE:

Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared and remitted to

its parent corporation?

HELD:

The submission of the Commissioner that PMC Philippines is but a withholding agent of the government and

therefore cannot claim reimbursement of alleged overpaid taxes, is completely meritorious. The real party in

interest is PMC-USA, which should prove that it is entitled under the US Tax Code to a US Foreign Tax Credit

equivalent to at least 20 percentage points spared or waived as otherwise considered or deemed paid by the

Government. Herein, the claimant failed to show or justify the tax return of the disputed 15% as it failed to

show the actual amount credited by the US Government against the income tax due from PMC-USA on the

dividends received from PMC Philippines; to present the income tax return of PMC-USA for 1975 when the

dividends were received; and to submit duly authenticated document showing that the US government

credited the 20% tax deemed paid in the Philippines.

(39) ZAMORA vs CIR

G.R. No. L-15290

FACTS:

Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, filed his income tax returns. The CIR

found that he failed to file his return of the capital gains derived from the sale of certain real properties and

26

claimed deductions which were not allowable. The collector required him to pay deficiency income tax. On

appeal by Zamora, the CTA reduced the amount of deficiency income tax.

Zamora appealed, alleging that the CTA erred in dissallowing P10,478.50, as promotion expenses incurred by

his wife for the promotion of the Bay View Hotel and Farmacia Zamora (which is ½ of P20,957.00, supposed

business expenses).

Zamora alleged that the CTA erred in disallowing P10,478.50 as promotion expenses incurred by his wife for

the promotion of the Bay View Hotel and Farmacia Zamora. He contends that the whole amount of

P20,957.00 as promotion expenses, should be allowed and not merely one-half of it, on the ground that,

while not all the itemized expenses are supported by receipts, the absence of some supporting receipts has

been sufficiently and satisfactorily established.

ISSUE:

w/n CTA erred in allowing only one half of the promotion expenses. NO

HELD:

Section 30, of the Tax Code, provides that in computing net income, there shall be allowed as deductions all

the ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or

business. Since promotion expenses constitute one of the deductions in conducting a business, same must

satisfy these requirements. Claim for the deduction of promotion expenses or entertainment expenses must

also be substantiated or supported by record showing in detail the amount and nature of the expenses

incurred.

Considering, as heretofore stated, that the application of Mrs. Zamora for dollar allocation shows that she

went abroad on a combined medical and business trip, not all of her expenses came under the category of

ordinary and necessary expenses; part thereof constituted her personal expenses. There having been no

means by which to ascertain which expense was incurred by her in connection with the business of Mariano

Zamora and which was incurred for her personal benefit, the Collector and the CTA in their decisions,

considered 50% of the said amount of P20,957.00 as business expenses and the other 50%, as her personal

expenses. We hold that said allocation is very fair to Mariano Zamora, there having been no receipt

whatsoever, submitted to explain the alleged business expenses, or proof of the connection which said

expenses had to the business or the reasonableness of the said amount of P20,957.00.

In the case of Visayan Cebu Terminal Co., Inc. v. CIR., it was declared that representation expenses fall

under the category of business expenses which are allowable deductions from gross income, if they meet

the conditions prescribed by law, particularly section 30 (a) [1], of the Tax Code; that to be deductible, said

business expenses must be ordinary and necessary expenses paid or incurred in carrying on any trade or

business; that those expenses must also meet the further test of reasonableness in amount. They should

also be covered by supporting papers; in the absence thereof the amount properly deductible as

representation expenses should be determined from available data.

(40) PAPER INDUSTRIES vs CA

G.R. No. 106949-50

FACTS:

On various years (1969, 1972 and 1977), Picop obtained loans from foreign creditors in order to finance the

purchase of machinery and equipment needed for its operations. In its 1977 Income Tax Return, Picop

claimed interest payments made in 1977, amounting to P42,840,131.00, on these loans as a deduction from

its 1977 gross income.

The CIR disallowed this deduction upon the ground that, because the loans had been incurred for the

purchase of machinery and equipment, the interest payments on those loans should have been capitalized

instead and claimed as a depreciation deduction taking into account the adjusted basis of the machinery and

equipment (original acquisition cost plus interest charges) over the useful life of such assets.

27

Both the CTA and the Court of Appeals sustained the position of Picop and held that the interest deduction

claimed by Picop was proper and allowable. In the instant Petition, the CIR insists on its original position.

ISSUE:

Whether Picop is entitled to deductions against income of interest payments on loans for the purchase of

machinery and equipment.

HELD:

YES. Interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by the

NIRC as deductions against the taxpayer's gross income. The basis is 1977 Tax Code Sec. 30 (b). Thus, the

general rule is that interest expenses are deductible against gross income and this certainly includes interest

paid under loans incurred in connection with the carrying on of the business of the taxpayer. In the instant

case, the CIR does not dispute that the interest payments were made by Picop on loans incurred in

connection with the carrying on of the registered operations of Picop, i.e., the financing of the purchase of

machinery and equipment actually used in the registered operations of Picop. Neither does the CIR deny

that such interest payments were legally due and demandable under the terms of such loans, and in fact

paid by Picop during the tax year 1977.

The contention of CIR does not spring of the 1977 Tax Code but from Revenue Regulations 2 Sec. 79.

However, the Court said that the term “interest” here should be construed as the so-called "theoretical

interest," that is to say, interest "calculated" or computed (and not incurred or paid) for the purpose of

determining the "opportunity cost" of investing funds in a given business. Such "theoretical" or imputed

interest does not arise from a legally demandable interest-bearing obligation incurred by the taxpayer

who however wishes to find out, e.g., whether he would have been better off by lending out his funds and

earning interest rather than investing such funds in his business. One thing that Section 79 quoted above

makes clear is that interest which does constitute a charge arising under an interest-bearing obligation is an

allowable deduction from gross income.

Only if sir asks: (For further discussion of CIR’s contention)

It is claimed by the CIR that Section 79 of Revenue Regulations No. 2 was "patterned after" paragraph 1.266-

1 (b), entitled "Taxes and Carrying Charges Chargeable to Capital Account and Treated as Capital Items" of

the U.S. Income Tax Regulations, which paragraph reads as follows:

(B) Taxes and Carrying Charges. — The items thus chargeable to capital accounts are —

(11) In the case of real property, whether improved or unimproved and whether productive or

nonproductive.

(a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds).

The truncated excerpt of the U.S. Income Tax Regulations quoted by the CIR needs to be related to the

relevant provisions of the U.S. Internal Revenue Code, which provisions deal with the general topic of

adjusted basis for determining allowable gain or loss on sales or exchanges of property and allowable

depreciation and depletion of capital assets of the taxpayer:

Present Rule. The Internal Revenue Code, and the Regulations promulgated thereunder provide that

"No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as,

under regulations prescribed by the Secretary or his delegate, are chargeable to capital account with

respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes

orcharges as so chargeable."

At the same time, under the adjustment of basis provisions which have just been discussed, it is

provided that adjustment shall be made for all "expenditures, receipts, losses, or other items"

properly chargeable to a capital account, thus including taxes and carrying charges; however, an

exception exists, in which event such adjustment to the capital account is not made, with respect to

28

taxes and carrying charges which the taxpayer has not elected to capitalize but for which a deduction

instead has been taken.

The "carrying charges" which may be capitalized under the above quoted provisions of the U.S. Internal

Revenue Code include, as the CIR has pointed out, interest on a loan "(but not theoretical interest of a

taxpayer using his own funds)." What the CIR failed to point out is that such "carrying charges" may, at the

election of the taxpayer, either be (a) capitalized in which case the cost basis of the capital assets, e.g.,

machinery and equipment, will be adjusted by adding the amount of such interest payments or alternatively,

be (b) deducted from gross income of the taxpayer. Should the taxpayer elect to deduct the interest

payments against its gross income, the taxpayer cannot at the same time capitalize the interest payments. In

other words, the taxpayer is not entitled to both the deduction from gross income and the adjusted

(increased) basis for determining gain or loss and the allowable depreciation charge. The U.S. Internal

Revenue Code does not prohibit the deduction of interest on a loan obtained for purchasing machinery and

equipment against gross income, unless the taxpayer has also or previously capitalized the same interest

payments and thereby adjusted the cost basis of such assets.

(41) CIR vs VDA DE PRIETO

G.R. No. L-13912

FACTS:

On December 4, 1945, the respondent conveyed by way of gifts to her four children, namely, Antonio,

Benito, Carmen and Mauro, all surnamed Prieto, real property with a total assessed value of P892,497.50.

After the filing of the gift tax returns on or about February 1, 1954, the petitioner Commissioner of Internal

Revenue appraised the real property donated for gift tax purposes at P1,231,268.00, and assessed the total

sum of P117,706.50 as donor's gift tax, interest and compromises due thereon. Of the total sum of

P117,706.50 paid by respondent on April 29, 1954, the sum of P55,978.65 represents the total interest on

account of deliquency. This sum of P55,978.65 was claimed as deduction, among others, by respondent in

her 1954 income tax return. Petitioner, however, disallowed the claim and as a consequence of such

disallowance assessed respondent for 1954 the total sum of P21,410.38 as deficiency income tax due on the

aforesaid P55,978.65, including interest up to March 31, 1957, surcharge and compromise for the late

payment.

Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there

should be interest upon it, and that what is claimed as an interest deduction should have been paid or

accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the

late payment of her donor's tax, and the same was paid within the year it is sought to be declared.

To sustain the proposition that the interest payment in question is not deductible for the purpose of

computing respondent's net income, petitioner relies heavily on section 80 of Revenue Regulation No. 2

(known as Income Tax Regulation) promulgated by the Department of Finance, which provides that "the

word `taxes' means taxes proper and no deductions should be allowed for amounts representing interest,

surcharge, or penalties incident to delinquency." The court below, however, held section 80 as inapplicable

to the instant case because while it implements sections 30(c) of the Tax Code governing deduction of taxes,

the respondent taxpayer seeks to come under section 30(b) of the same Code providing for deduction of

interest on indebtedness.

ISSUE:

Whether or not such interest was paid upon an indebtedness within the contemplation of section 30 (b) (1)

of the Tax Code?

RULING:

Yes. According to the Supreme Court, although interest payment for delinquent taxes is not deductible as tax

under Section 30(c) of the Tax Code and section 80 of the Income Tax Regulations, the taxpayer is not

precluded thereby from claiming said interest payment as deduction under section 30(b) of the same Code.

SEC. 30 Deductions from gross income. — In computing net income there shall be allowed as deductions —

29

(b) Interest:

(1) In general. — The amount of interest paid within the taxable year on indebtedness, except on

indebtedness incurred or continued to purchase or carry obligations the interest upon which is

exempt from taxation as income under this Title.

The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as in the

above-quoted section has been defined as an unconditional and legally enforceable obligation for the

payment of money.

To give to the quoted portion of section 80 of our Income Tax Regulations the meaning that the petitioner

gives it would run counter to the provision of section 30(b) of the Tax Code and the construction given to it

by courts in the United States. Such effect would thus make the regulation invalid for a "regulation which

operates to create a rule out of harmony with the statute, is a mere nullity." As already stated, section 80

implements only section 30(c) of the Tax Code, or the provision allowing deduction of taxes, while herein

respondent seeks to be allowed deduction under section 30(b), which provides for deduction of interest on

indebtedness.

(42) LIMPAN INVESTMENT v CIR

G.R. No. L-21570

FACTS:

BIR assessed deficiency taxes on Limpan Corp, a companythat leases real property, for underdeclaring its

rental incomefor years 1956-57 by around P20K and P81K respectively.Petitioner appeals on the ground that

portions of theseunderdeclared rents are yet to be collected by the previousowners and turned over or

received by the corporation.Petitioner cited that some rents were deposited with the court,such that the

corporation does not have actual nor constructivecontrol over them.The sole witness for the petitioner, Solis

(Corporate Secretary-Treasurer) admitted to some undeclared rents in 1956 and1957, and that some

balances were not collected by thecorporation in 1956 because the lessees refused to recognizeand pay rent

to the new owners and that the corp’s presidentIsabelo Lim collected some rent and reported it in his

personalincome statement, but did not turn over the rent to thecorporation. He also cites lack of actual or

constructive controlover rents deposited with the court.

ISSUE:

WON the BIR was correct in assessing deficiency taxes against Limpan Corp. for undeclared rental income?

HELD:

Yes. Petitioner admitted that it indeed had undeclaredincome (although only a part and not the full amount

assessedby BIR). Thus, it has become incumbent upon them to provetheir excuses by clear and convincing

evidence, which it hasfailed to do.Issue: When is there constructive receipt of rent?With regard to 1957

rents deposited with the court, andwithdrawn only in 1958, the court viewed the corporation ashaving

constructively received said rents. The non-collectionwas the petitioner’s fault since it refused to refused to

acceptthe rent, and not due to non-payment of lessees. Hence,although the corporation did not actually

receive the rent, it isdeemed to have constructively received them.

(43) Commissioner v. CTA and Smith Kline & French Overseas

127 SCRA 9

FACTS:

This case is about the refund of a 1971 income tax amounting to P324+k. Smith Kline and French Overseas

Company, a multinational firm domiciled in Philadelphia, Pennsylvania, is licensed to do business in the

Philippines. It is engaged in the importation, manufacture and sale of pharmaceuticals, drugs and chemicals.

In its 1971 original ITR, Smith Kline declared a net taxable income of P1.4+M and paid P511+k as tax due.

Among the deductions claimed from gross income was P501+k as its share of the head office overhead

expenses. However, in its amended return filed on March 1, 1973, there was an overpayment of P324+k

arising from under deduction of home office overhead. It made a formal claim for the refund of the alleged

overpayment.

30

In October, 1972, Smith Kline received from its international independent auditors an authenticated

certification to the effect that the Philippine share in the unallocated overhead expenses of the main office

for the year ended December 31, 1971 was actually P1.4+M.On April 2, 1974, without awaiting the action of

the Commissioner of Internal Revenue on its claim, Smith Kline filed a petition for review with the CTA. The

CTA ordered the CIR to refund the overpayment or grant a tax credit to Smith Kline. The Commissioner

appealed to the SC.

ISSUE:

Whether or not Smith Kline incurred taxable income from sources within the Philippines?

HELD:

The governing law is found in section 37 of the old NIRC which reads:

Xxx (b) Net income from sources in the Philippines. — From the items of gross income specified in subsection

(a) of this section there shall be deducted the expenses, losses, and other deductions properly apportioned

or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely

be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net

income from sources within the Philippines.

Revenue Regulations No. 2 of the Department of Finance contains the following provisions on the

deductions to be made to determine the net income from Philippine sources: SEC. 160. Apportionment of

deductions. — From the items specified in section 37(a), as being derived specifically from sources within the

Philippines there shall be deducted the expenses, losses, and other deductions properly apportioned or

allocated thereto and a ratable part of any other expenses, losses or deductions which can not definitely be

allocated to some item or class of gross income. The remainder shall be included in full as net income from

sources within the Philippines. The ratable part is based upon the ratio of gross income from sources within

the Philippines to the total gross income.

"Example: A non-resident alien individual whose taxable year is the calendar year, derived gross income

from all sources for 1939 of P180,000, including therein:

Interest on bonds of a domestic corporation P9,000

Dividends on stock of a domestic corporation 4,000

Royalty for the use of patents within the Philippines 12,000

Gain from sale of real property located within the Philippines 11,000

————

Total P36,000

========

that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of the

gross income was from sources without the Philippines, determined under section 37(c).

The expenses of the taxpayer for the year amounted to P78k.. Of these expenses the amount of P8k is

properly allocated to income from sources within the Philippines and the amount of P40k is properly

allocated to income from sources without the Philippines.

The remainder of the expense, P30k cannot be definitely allocated to any class of income. A ratable part

thereof, based upon the relation of gross income from sources within the Philippines to the total gross

income, shall be deducted in computing net income from sources within the Philippines. Thus, there are

deducted from the P36k of gross income from sources within the Philippines expenses amounting to P14k

[representing P8k properly apportioned to the income from sources within the Philippines and P6k a ratable

part (1/5) of the expenses which could not be allocated to any item or class of gross income]. The remainder,

P22k, is the net income from sources within the Philippines.

Thus, it is manifest that where an expense is clearly related to the production of Philippine-derived income

or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines),

that expense can be deducted from the gross income acquired in the Philippines without resorting to

apportionment.

31

The overhead expenses incurred by the parent company in connection with finance, administration, and

research and development, all of which directly benefit its branches all over the world, including the

Philippines, fall under a different category however. These are items which cannot be definitely allocated or

identified with the operations of the Philippine branch. For 1971, the parent company of Smith Kline spent

$1,077,739. Under section 37(b) of the Revenue Code and section 160 of the regulations, Smith Kline can

claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross

income to the total gross income, worldwide, of the multinational corporation.

The weight of evidence bolsters Smith Kline’s position that the amount of P1.4+M represents the correct

ratable share, the same having been computed pursuant to section 37(b) and section 160. Therefore, it is

entitled to a refund.

(44) BANK OF AMERICA NT & SA VS. CA- REMITTANCE TAX

G.R. No. L-21570

FACTS:

Bank of America is a foreign corporation licensed to engage in business in the Philippines through a branch in

Makati. Bank of America paid 15% branch profit remittance tax amounting to PhP7.5M from its REGULAR

UNIT OPERATIONS and another 405K PhP from its FOREIGN CURRENCY DEPOSIT OPERATIONS. The tax was

based on net profits after income tax without deducting the amount corresponding to the 15% tax. Bank of

America thereafter filed a claim for refund with the BIR for the portion the corresponds with the 15% branch

profit remittance tax. BOA’s claim: “BIR should tax us based on the profits actually remitted (45M), and NOT

on the amount before profit remittance tax (53M)... The basis should be the amount actually remitted

abroad.” CIR contends otherwise and holds that in computing the 15% remittance tax, the tax should be

inclusive of the sum deemed remitted.

ISSUES:

Whether or not the branch profit remittance tax should be base on the amount actually remitted?

HELD:

The Court held in the affirmative. The Court said for the branch profit remittance tax should be base on the

amount actually remitted, 1. It should be based on the amount actually committed, NOT what was applied

for; 2. There is nothing in Section 24which indicates that the 15% tax/branch profit remittance is on the total

amount of profit; where the law does NOT qualify that the tax is imposed and collected at source, the

qualification should not be read into law; and, 3. Rationale of 15%: To equalize/ share the burden of income

taxation with foreign corporations.

(45) COMMISSIONER OF INTERNAL REVENUE VS. AMERICAN AIRLINES

G.R. No. 67938

FACTS:

American Airlines, is a corporation duly organized under the laws of the US. It is an off-line international

carrier without any flight originating from the Philippines. However, by virtue of BOI Certificate of Authority

No. 267 and a license issued by the SEC, a liaison office was established by it in this country for passenger

and flight information and reservation and to render ticketing services. In 1979, CIR assessed American

Airlines for deficiency income tax, interest and compromise penalty for the year 1974. American Airlines

received from the CIR a letter of demand with an assessment which was computed on American Airlines’

gross Philippine billings. American Airlines protested. CIR denied the request. American Airlines filed a

petition for review with the CTA contending that it was not doing business in the Philippines and that selling

tickets is not an activity subject to the assessed tax on gross Philippine billings. CTA reversed the decision of

CIR, and held that the acts of an international air carrier in maintain an office in the Philippines for

promotion and information purposes; and the receipt of payments for passage tickets sold in the Philippines

from passengers from the Philippines do not make such international air carrier engaged in business in the

Philippines. Hence, this appeal by the CIR to the SC.

32

ISSUE:

Whether an off-line international carrier without flight operations in the Philippines but rendering ticketing

services is liable to pay the 2.5% tax on its gross Philippine billings pursuant to Section 24(b)(2) (Now Section

28(A)(3))?

HELD:

YES. For the source of income to be considered as coming from the Philippines, it is sufficient that the

income is derived from activities within this country. The sale of tickets in the Philippines is an activity that

produces income. The absence of flight operations within Philippine territory cannot alter this fact. True,

Section 37(a) (Now Section 32) of the Tax Code, which enumerates items of gross income from sources

within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of

real property, and (6) sale of personal property, does not mention income from the sale of tickets of

international transportation. However, that does not render it less an income from within the Philippines.

Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs that the

types of income listed therein be treated as income from sources within the Philippines.

The 2.5% tax on gross Philippine billings imposed under Section 24(b)(2) (Now Section28(A)(3)) is an

income tax levied on the presumed gain of the airline companies. It ensures that international airlines are

taxed on the income they derive from Philippine sources. The revenues from the sale of tickets having been

derived from Philippine sources, there is no cogency to the contention that said airlines are not subject to

the aforestated tax. The inexorable conclusion, therefore, is that respondent American Airlines, Inc., being a

resident foreign corporation engaged in business in the Philippines and deriving income from Philippine

sources, the assessment of the deficiency tax against it was correct and valid.

(46) CHINA BANKING CORP. VS. COURT OF APPEALS

G.R. No. 146749

FACTS:

Chinabank (CBC) paid as gross receipts tax on its passive investment incomes during the second quarter of

1994. In 1996, the CTA ruled in Asian Bank vs. CIR that the 20% final withholding tax (FWT) on a bank’s

passive interest income does not form part of its taxable gross receipts. CBC filed with the CIR a claim for tax

refund or credit from the gross receipts tax (GRT) that CBC paid. Citing the Asian Bank case, CBC argued that

it was not liable for the sums withheld by the BSP as final withholding tax on CBC’s passive interest income.

The CIR, on the other hand, argued that the FWT on a bank’s interest income forms part of its gross receipts

in computing the GRT. The Commissioner contended that the term “gross receipts” means the entire income

or receipt, without any deduction. The CTA ruled in favour of CBC and held that the 20% FWT on interest

income does not form part of CBC’s taxable gross receipts. The CA affirmed.

ISSUE:

Whether the 20% FWT on interest income should form part of the CBC’s taxable gross receipts?

HELD:

YES. the amount of interest income withheld in payment of the 20% final withholding FWT receipts tax on

banks. There are two related legal concepts that come into play in the resolution of the first issue raised in

the instant case. First is the meaning of the term “gross receipts.” Second is the determination of the

circumstance when interest income becomes part of gross receipts for tax purposes. As commonly

understood, the term “gross receipts” means the entire receipts without any deduction. Deducting any

amount from the gross receipts changes the result, and the meaning, to net receipts. Any deduction from

gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes

an exception. Under RR Nos. 12-80 and 17-84, as well as in several numbered rulings, the BIR has

consistently ruled that the term “gross receipts” does not admit of any deduction. This interpretation has

remained unchanged throughout the various re-enactments of the present Section 121 of the Tax Code. The

only conclusion that can be drawn is that the legislature has adopted the BIR’s interpretation, following the

principle of legislative approval by re-enactment.

33

Under Section 27(D)(4) of the Tax Code, dividends received by a domestic corporation from another

corporation are not subject to the corporate income tax. Such intracorporate dividends are some of the

passive incomes that are subject to the 20% final tax, just like interest on bank deposits. Intracorporate

dividends, being already subject to the final tax on income, no longer form part of the bank’s gross income

under Section 32 of the Tax Code for purposes of the corporate income tax. However, Section 121

expressly states that dividends shall form part of the bank’s gross receipts for purposes of the GRT on

banks.

In addition, Section 8 of RR No. 12-80 expressly states that interest income, even if subject to the FWT and

excluded from gross income for income tax purposes, should still form part of the bank’s taxable gross

receipts. Thus, interest earned by banks, even if subject to the final tax and excluded from taxable gross

income, forms part of its gross receipts for GRT purposes. The interest earned refers to the gross interest

without deduction since the regulations do not provide for any deduction. The gross interest, without

deduction, is the amount the borrower pays, and the income the lender earns, for the use by the borrower

of the lender’s money. The amount of the final tax plainly comes from the interest earned and is

consequently part of the bank’s taxable gross receipts. Hence, CBC’s claim for refund must fail.

(47) COMMISSIONER vs. PALANCA

18 SCRA 496

FACTS:

July 1950, Don Carlos Palanca, Sr., donated to his son Carlos Jr., shares of stock in La Tondeña, Inc.

amounting to 12,500 shares. Carlos Jr. failed to file a return on the donation within the statutory period so

Carlos Jr. was assessed P97,691.23 (gift tax), P24,442.81 (25% surcharge), P47,868.70 (interest), which he

paid on June 22, 1955. March 1,1956, Carlos Jr. filed with BIR his ITR for 1955 claiming a deduction for

interest of P9,706.45 and reporting a taxable income of P65,982.12. He was assessed P21,052.01 as income

tax. November 1956, Carlos Jr. filed an amended return for 1955, claiming an additional deduction of

P47,868.70 (allegedly the interest paid on the donee’s gift tax based on Sec.30(b)(1) of the Tax Code) so

taxable income is P18,113.42 (not P65,982.12) and tax due thereon in sum of P3,167.00. He claimed for a

refund of P17,885.01 (P21,052.01 - P3,167.00)– BIR denied. Carlos Jr. reiterated claim for refund, BIR denied.

BIR considered the donation by Carlos Sr. as a transfer in contemplation of death so Carlos Jr. was assessed

P191,591.62 as estate and inheritance taxes. Carlos paid P17,002.74 on June 22, 1955 as gift tax (includes

interest and surcharge) which was applied to his estate and inheritance tax liability. Petitioner paid

P60,581.80 as interest for delinquency. August 1958, Carlos Jr. filed again an amended ITR for 1955 claiming

the following: As interest deductions: P9,706.45 (as in the original ITR) + P60,581.80 (interest on the estate

and inheritance taxes); Net Taxable income: P5,400.32; Income tax due: P428.00; claimed a refund of

P20,624.01 (P21,052.01 – P428) . Even before BIR ruled on his claim, Carlos Jr. filed petition for review

before CTA. CTA: BIR refund Carlos P20,624.01

ISSUES:

1. WON there is a difference between “indebtedness” and “taxes” to determine the deductible interest

(WON Palanca could claim interest deductions based on tax liability)?

2. WON claim for refund of Palanca already expired?

HELD:

1. NO. Distinction became inconsequential. Interest on taxes should be considered as interests of

indebtedness.

Ratio.

While the distinction between “taxes” and “debts” was recognized in this jurisdiction, the variance in their

legal conception does not extend to the interests paid on them, at least insofar as Sec.30(b)(1) of the NIRC1

is concerned (which authorizes deduction from gross income of interest paid within the taxable year on

indebtedness).

34

Reasoning. CIR argues that Carlos Jr. cannot deduct the interest due to its tax liabilities from his gross

income since it is not interest ON INDEBTEDNESS but interest on TAX (liabilities). However, in CIR v. PRIETO

(wherein deductions of interest on donor’s tax was allowed) it was held that the term “indebtedness” was

defined as the unconditional and legally enforceable obligation for the payment of money. It Thus, it is

apparent that a tax may be considered an indebtedness.

2. NO.

Ratio. Where the claim for refund was filed with the CTA even before it had been denied by the BIR, then

the 30-day prescription period under Sec.11, RA 1124(25) did not even commence to run. Where the tax

account was paid by installment, then the computation of the two-year prescriptive period under Sec. 306 of

the Tax Code should be from the date of the last installment.

Reasoning. CIR argued that under Sec.11(may appeal to CTA within 30-days from receipt of decision

or ruling), claim for refund already prescribed because outside 30-day period. Under Sec.306 of Tax

Code (No suit/proceeding shall be begun for recovery of tax erroneously or illegally collected after the

expiration of 2years from the date of payment of the tax penalty) CIR claims that under Palanca’s withheld

tax and under Receipt dated May 11, 1956, amounts paid by Carlos Jr. may no longer be refunded as it was

filed in court only on August 13, 1958 (beyond 2yr period). On 30-day period: did not even commence when

case was filed because there was no final decision from BIR yet when Carlos Jr. filed case with CTA. On 2yr

period: Palanca paid on installment. His last payment was on August 14, 1956. Therefore, since the period of

counting should be from time of last installment, he still filed claim on time on August 13, 1958!

Disposition. WHEREFORE, the decision appealed from is affirmed in full, without pronouncements on

costs.

(48) COMMISSIONER OF INTERNAL REVENUE vs. A. SORIANO Y CIA. and THE COURT OF TAX APPEALS

G.R. No. L-24893

March 26, 1971

FACTS:

A. Soriano y Cia (Taxpayer) owned a piece of land located in Intramuros,

City of Manila, on which it proposed to construct an office building, wherein he contracted Architect J. M.

Zaragoza in 1960, and entered into a pile-driving contract that same year with the construction firm of A. M.

Oreta & Co.(Contractor). The pile-driving was actually done in 1960. After these preparations and before the

construction of the building itself could start, the Taxpayer sold the property to J. M. Tuason & Co. on April

13, 1960 under a contract that required it to meet certain specifications. The balance was paid only on June

16, 1961. In the same year, the Taxpayer completed payment to the architect, Mr.

Zaragoza, of the latter's fees for services rendered, the same consisting of the unpaid balance plusreimburse

ment for disbursements made by the latter in connection with the Intramuros property.

On April 17, 1961, the Taxpayer filed its 1960 Income Tax Return and in due time paid the income tax due.

However, he filed two amended returns for the 1960 ITR. The first amendment (1961) was due to the

inclusion of expenses allegedly incurred for pile-driving and architect's fees which the Taxpayer claimed

were part of the cost of its Intramuros property sold. The second amended return (1963) included a

refundable amount based on expenses already included in the previous amended Income Tax Return, plus

another item of expense paid as architect's fees on March 15, 1961, upon the claim that all said expenses

formed part of the cost of the Intramuros property aforesaid. A request for the refund of the total amount

was also made.

ISSUE:

Whether or not, in determining the income tax due from the Taxpayer for the year 1960 in connection with

the profit it had realized from the sale of its Intramuros property on April 13, 1960, said Taxpayer is entitled

to deduct, as part of the cost, from the gross selling price the service fee for pile-driving and architect's fee?

35

HELD:

YES. In determining the income tax due from the Taxpayer for the year 1960 in connection with the profit it

had realized from the sale of its Intramuros property on April 13, 1960, said Taxpayer is entitled to deduct, as

part of the cost, from the gross selling price the service fee for pile-driving and architect's fee.

RATIO:

The expenses in question constitute capital expenditures which the owner or Taxpayer was entitled to

consider as part of the total cost of its property in determining the amount of the profit it had realized in the

sale thereof to J. M. Tuason & Co. The payment of these questioned items was made only in 1961 does not

alter the fact that the contracts from which the obligation to pay arose were entered into in 1960 and the

services contracted for were rendered in the same year. The obligation to pay for said services, therefore,

clearly dated back to 1960. Thus, expenditures for replacements, alterations, improvements or additions

which either prolong the life of the property or increase its value are capital in nature and that the

expenditures referred to above increased the value of the property, the same must be considered as capital

expenditures that formed part of the cost of the Taxpayer's Intramuros property.

(49) FILIPINAS SYNTHETIC FIBER CORP. V CA

G.R. No. 118498 & 124337

FACTS:

Filipinas Synthetic Fiber Corp., a domestic corporation received on December 27, 1979 a letter of demand

from the Commissioner of Internal Revenue assessing it for deficiency withholding tax at source in the total

amount of P829,748.77 inclusive of interest and compromise penalties, for the period from the fourth

quarter of 1974 to the fourth quarter of 1975. The assessment was seasonably protested by petitioner

through its auditor, SGV and Company. Respondent denied the protest on May 14, 1985 on the following

ground: “For Philippine internal revenue tax purposes, the liability to withhold and pay income tax withheld

at source from certain payments due to a foreign corporation is at the time of accrual and not at the time of

actual payment or remittance thereof.”

On June 28, 1985, petitioner brought a petition for review before the Court of Tax Appeals, the said court

came out with its decision on June 15, 1993, which is against the petitioner.

With the denial of its motion for reconsideration, petitioner appealed the CTA disposition to the Count

of Appeals, which affirmed in toto the appealed decision. So, petitioner found its way to this count via

petition for review on certiorari.

ISSUE:

Whether the liability to withhold tax at source on income payments to non-resident foreign corporation

arises upon remittance of the amounts due to the foreign creditors, or upon accrual thereof

HELD:

The Supreme Court held that since Sec. 53, NIRC (now, Sec. 57 of 1997 NIRC) in relation to Sec. 54 (now Sec.

58) is silent as to when the duty to withhold arises, it is necessary to look into the nature of the accrual

method of accounting, which was used by therein petitioner corporation. Inasmuch as under the accrual

basis, income is reportable when all the events have occurred to fix taxpayer’s right to receive the income

and the amounts can be determined with reasonable accuracy, hence, it is the right to receive income, and

not the actual receipt thereof, that determines when the amount is includible in gross income. Thus, the

duty of the withholding agent to withhold the corresponding tax arises at the time of such accrual. The

withholding agent/corporation is then obliged to remit the tax to the Government since it already and

properly belongs to the Government. If a withholding agent who is personally liable for income tax withheld

at source fails to pay said withholding tax, an assessment for said deficiency withholding tax would,

therefore, be legal and proper.

(50) SAN CARLOS MILLING CO., INC. vs. CIR

G.R. No. 103379

36

FACTS:

Petitioner domestic corp. had for the taxable year 1982 a total income tax overpayment of P781,393.00

reflected on a creditable income tax in its annual final adjustment return. The application of the amount for

the 1983 tax liabilities remained unutilized in view of petitioner’s net loss for the year and still yet had a

credible income tax of P4,470.00 representing the 3% of 15% withholding tax on the storage credits.

Accordingly the final adjustment income tax return for the taxable year 1983 reflected the amount of

P781,393.00 carried over as tax credit and P4,470.00 creditable income tax.

In May 17, 1984 letter to the respondent, petitioner signified its intention to apply the total creditable

amount of 785,869.00 against its 1984 tax dues consistent with the provision of Sec. 86 coupled with a

comforting alternative request for a refund or tax credit of the same.

Respondent disallowed the proffered automatic credit scheme but treated the request as an ordinary claim

for refund/tax credit under Sec. 292 in relation to Sec. 295 of the Tax Code and accordingly subjected the

same for verification/investigation.

No sooner than the respondent could act on the claim petitioner filed a petition for review on July 18, 1984

and before this Court could formally hear the case, petitioner filed a supplemental petition on March 11,

1986, after having unilaterally effected a set-off of its creditable income tax vis-à-vis income tax liabilities,

earlier denied by the respondent.

On February 28, 1990, the CTA dismissed the petition and held that prior investigation by and authority from

the CIR were necessary before a taxpayer could avail of the provisions of Sec. 69 of the Tax Code. A motion

for reconsideration was then filed but was denied thereafter, petitioner appealed the adverse decision of

the CTA to the CA. On December 23, 1991, respondent court dismissed the appeal. Hence, this recourse.

ISSUE:

Whether or not the option for either a refund or automatic tax credit scheme does not ipso facto confer on

the taxpayer the right to avail the same?

HELD:

As for corporations and partnerships taxable as corporations, no automatic crediting of the overpaid income

tax against taxes due in the succeeding quarters of the following year is allowed.

Once a taxpayer opts for either a refund or the automatic tax credit scheme, and signified his option in

accordance with the regulation, this does not ipso facto confer on him the right to avail of the same

immediately. An investigation, as a matter of procedure, is necessary to enable the Commissioner to

determine the correctness of the petitioner’s returns, and the tax amount to be credited.

It seems however that automatic crediting of excess tax payment against the quarterly income taxes due for

the succeeding year of individuals, estates and trusts is allowed. As regards automatic crediting, Revenue

Reg. No. 7-93 provides that should there still be payment after crediting is made against the quarterly

income taxes due for the entire succeeding taxable year, then, such excess payment may be claimed as a

refund.

(51) Commissioner vs. Michel J. Lhuiller Pawnshop

G.R. No. 150947

July 15, 2006

FACTS:

Revenue Memorandum Orders were issued imposing a 5% lending investor’s tax on pawnshops. Pursuant to

this, the BIR issued an assessment against Michel J. Lhuillier Pawnshop, Inc. demanding payment of

deficiency percentage tax. Lhuillier filed an administrative protest, contending, inter alia, that pawnshops are

different from lending investors, which are subject to the 5% percentage tax under the specific provision of

37

the Tax Code. Its protest having been inacted upon, Lhuillier filed with the CTA which declared the RMO’s in

question null and void insofar as they classify pawnshops as lending investors subject to 5% percentage tax.

ISSUE:

Whether or not pawnshops are included in the term lending investors for the purpose of imposing the 5%

percentage tax under then Section 116 of the NIRC?

HELD:

The Court held in the negative. While it is true that pawnshops are engaged in the business of lending

money, they are not considered “lending investors” for the purpose of imposing the 5% percentage taxes

since: (1) prior to its amendment the NIRC, pawnshops and lending investors were subjected to different tax

treatments: (2) Congress never intended pawnshops to be treated in the same way as lending investors,

since the amendment of the NIRC treated both tax subjects differently; (3) Under the maxim expressio unius

est exclusion alterius, the mention of one thing implies the exclusion of another thing not mentioned, Sec.

116 subjects to percentage tax dealers in securities and lending investors only.

(52) CIR VS. ANSCOR

G.R. No. 113703

FACTS:

Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A. Soriano Y Cia",

predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par

value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all

nonresident aliens.

In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. In 1945, ANSCOR's

authorized capital stock was increased to P2,500,000.00 divided into 25,000 common shares with the same

par value. Don Andres' increased his subscription to 14,963 common shares. A month later, Don Andres

transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in ANSCOR.

Both sons are foreigners.

From 1947-1963, ANSCOR declared stock dividends. On December 30, 1964 Don Andres died. As of that

date, the records revealed that he had a total shareholdings of 185,154 shares. Correspondingly, one-half of

that shareholdings or 92,577 shares were transferred to his wife, Doña Carmen Soriano, as her conjugal

share. The other half formed part of his estate.

A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to

P30M. Stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate

and Doña Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864

common shares each.

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don

Andres' estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M. About a

year later, ANSCOR again redeemed 80,000 common shares from the Don Andres' estate. As stated in the

Board Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially retire said

stocks as treasury shares in order to reduce the company's foreign exchange remittances in case cash

dividends are declared.

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report

proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54

of the 1939 Revenue Code for the year 1968 and the second quarter of 1969 based on the transactions of

exchange and redemption of stocks.

ISSUE:

38

Whether or not ANSCOR's redemption of stocks from its stockholder as well as the exchange of common

with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend"

making the proceeds thereof taxable.

HELD:

YES. The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act

38 which provides:

Sec. 83. Distribution of dividends or assets by corporations. — (b) Stock dividends — A stock dividend

representing the transfer of surplus to capital account shall not be subject to tax. 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 profits accumulated after March first,

nineteen hundred and thirteen.

Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928. It laid

down the general rule known as the proportionate test wherein stock dividends once issued form part of the

capital and, thus, subject to income tax. Specifically, the general rule states that: A stock dividend

representing the transfer of surplus to capital account shall not be subject to tax.

Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the

mere issuance thereof is not yet subject to income tax as they are nothing but an "enrichment through

increase in value of capital investment."

The exception provides that the redemption or cancellation of stock dividends, depending on the "time" and

"manner" it was made, is essentially equivalent to a distribution of taxable dividends," making the proceeds

thereof "taxable income" "to the extent it represents profits". The exception was designed to prevent the

issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being

made use of as a device for the actual distribution of cash dividends, which is taxable.

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. Having

realized gain from that redemption, the income earner cannot escape income tax. 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."

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. In the case, ANSCOR redeemed shares twice. But where did

the shares redeemed come from? If its source is the original capital subscriptions upon establishment of the

corporation or from initial capital investment in an existing enterprise, its redemption to the concurrent

value of acquisition may not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not income

but a mere return of capital. On the contrary, if the redeemed shares are from stock dividend declarations

other than as initial capital investment, the proceeds of the redemption is additional wealth, for it is not

merely a return of capital but a gain thereon.

It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. At

the time of the last redemption, the original common shares owned by the estate were only 25,247.5 91 This

means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000

less 25,247.5) must have come from stock dividends. In the absence of evidence to the contrary, the Tax

Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate

39

profits such as stock dividends. The capital cannot be distributed in the form of redemption of stock

dividends without violating the trust fund doctrine.

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The

time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine

taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the

redemption. 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. Redemption cannot be used as a

cloak to distribute corporate earnings.

ANSCOR invoked two reasons to justify the redemptions — (1) the alleged "filipinization" program and (2)

the reduction of foreign exchange remittances in case cash dividends are declared. The Court is not

concerned with the wisdom of these purposes but on their relevance to the whole transaction which can be

inferred from the outcome thereof. It is the "net effect rather than the motives and plans of the taxpayer or

his corporation". The test of taxability under the exempting clause, when it provides "such time and manner"

as would make the redemption "essentially equivalent to the distribution of a taxable dividend", is whether

the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there may not

be a dividend equivalence treatment.

The test of taxability under the exempting clause of Section 83(b) is, whether income was realized through

the redemption of stock dividends. The redemption converts into money the stock dividends which become

a realized profit or gain and consequently, the stockholder's separate property. Profits derived from the

capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock

dividends can be reached by income taxation regardless of the existence of any business purpose for the

redemption. Otherwise, to rule that the said proceeds are exempt from income tax when the redemption is

supported by legitimate business reasons would defeat the very purpose of imposing tax on income.

The issuance and the redemption of stocks are two different transactions. Although the existence of

legitimate corporate purposes may justify a corporation's acquisition of its own shares under Section 41 of

the Corporation Code, such purposes cannot excuse the stockholder from the effects of taxation arising from

the redemption.

Even if the said purposes support the redemption and justify the issuance of stock dividends, the same has

no bearing whatsoever on the imposition of the tax herein assessed because the proceeds of the redemption

are deemed taxable dividends since it was shown that income was generated therefrom.

The proceeds thereof are essentially considered equivalent to a distribution of taxable dividends. As "taxable

dividend" under Section 83(b), it is part of the "entire income" subject to tax under Section 22 in relation to

Section 21 120 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in

"gross income". As income, it is subject to income tax which is required to be withheld at source.

(53) Republic vs. Meralco

GR 141314

15 November 2002

FACTS:

On 23 December 1993, Meralco filed with the Energy Regulatory Board (ERB) an application for the revision

of its rate schedules. On 28 January 1994, the ERB issued an order granting a provisional increase of

P0.184/kwh subject to the condition that in event that the board finds that Meralco is entitled to a lesser

increase in rates, all excess amounts collected shall be refunded or credited to its customers. Subsequently,

ERB rendered its decision adopting the audit of the Commission on Audit (COA) and authorized Meralco to

implement a rate adjustment of P0.017/kwh, but ordered the refund of the excess amount of P0.167/kwh

collected from the billing cycles of February 1994 to February 1997, holding that income tax should not be

treated as operating expense, and applying the net average investment method in the computation of the

rate base. On appeal, the Court of Appeals set aside the ERB decision insofar as it directed the reduction of

40

the rates by P0.167/kwh and the refund to Meralco’s customers. Motions for reconsideration were denied.

Hence, the petition before the Supreme Court.

ISSUE:

Whether the net average investment method or the trending method should be used in determining the tax

base?

HELD:

The administrative agency is not bound to apply any one particular formula or method simply because the

same method has been previously used and applied. What constitutes a reasonable return for the public

utility is necessarily determined and controlled by its peculiar environmental milieu. The reasonableness of

the net average investment method is borne by the records of the case. By using the said method, the ERB

and COA considered for determination of the rate base the value of the properties and equipment used by

Meralco in proportion to the period that the same were actually used during the period in question. If the

“trending method” is to be applied, the public utility may easily manipulate the valuation of its property

entitled to a return (tax base) by simply including a highly capitalized asset in the computation of the rate

base even if the same was used for a limited period if time during the test year.

(54) Gancayco vs. CIR

G.R. No. L-13325

April 20, 1961

FACTS:

Gancayco was issued a notice of tax liability by the CIR. The question whether the sum of P16,860.31 is due

from Gancayco as deficiency income tax for 1949 hinges on the validity of his claim for deduction of two (2)

items, namely: (a) for farming expenses, P27,459.00; and (b) for representation expenses, P8,933.45.

ISSUE:

WON the farming and representation expenses are deductible from his gross income?

HELD:

Farming expenses are not deductible, not being an ordinary expense, but a capital expenditure.

Representation expenses are partially deductible only to the extent receipts were presented. Section 30 of

the Tax Code partly reads: (a) Expenses: (1) In General — All the ordinary and necessary expenses

paid or incurred during the taxable year in carrying on any trade or business , including a reasonable

allowance for salaries or other compensation for personal services actually rendered; traveling expenses

while away from home in the pursuit of a trade or business; and rentals or other payments required to be

made as a condition to the continued use or possession, for the purposes of the trade or business, of

property to which the taxpayer has not taken or is not taking title or in which he has no equity.

(55) THE COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

ENRIQUE AVELINO, respondent.

G.R. No. L-14847 September 19, 1961

FACTS:

An assessment was made based on the networth method upon an investment in the sum of P60,000 made

by Enrique Avelino in the National Livestock Produce Corporation, organized in June 1947. He having filed no

income tax return for such year, said amount was considered as his unreported income therefor. Upon the

other hand, Enrique Avelino maintained that said sum of P60,000 had been lent to him by a naturalized

Filipino, named Severino Sayque, who returned to China in 1948 or 1949 and has not been heard from since

then. The only issue is thus whether or not such defense has been sufficiently established. The

Commissioner decided the issue in the negative, but the Court of Tax Appeals held otherwise, and,

accordingly, rendered the aforementioned decision, the review of which is now sought by the Government.

41

ISSUE:

Whether or not respondent incurred deficiency income tax?

HELD:

We find ourselves unable to share this view. To begin with, the relation of paternity and filiation between

the then Senate President and Enrique Avelino was not sufficient for Sayque to trust the latter. Secondly,

Enrique Avelino was a mere rancher in his father's farm. As such rancher, he had no salary, and was provided

only with "a house to live in and other expenses". He had no income except the P400 monthly salary of his

wife as a PRATRA (now PRISCO) employee. He had, and has, no money or property whatsoever. Under these

circumstances, it is not reasonable to believe that Sayque, who hardly knew Enrique Avelino, would be so

naive or reckless as to "trust" him to the extent, not only of lending him P60,000.00, without a mortgage by

way of guarantee, but, also, of entrusting to him the management of a corporation in which he (Sayque) had

invested P40,000 in his own name.

(56) GENERAL INSURANCE AND SURETY CORPORATION, petitioner-appellant,

vs.

COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

G.R. No. L-29895 April 30, 1973

FACTS:

Petitioner assailed the decision of the Court of Tax Appeals sustaining the imposition of the 25% surcharge in

the amount of P2,171.90 by respondent Commissioner of Internal Revenue for its failure to comply with the

requirement as to the filing of the returns on the withholding taxes due on the salaries of its employees in

accordance with the National Internal Revenue Code. As a basis for its attack on the decision, it would point

to that portion of the statutory provision that would free a taxpayer from the imposition of the 25%

surcharge on a showing of a "reasonable cause" for such omission.

ISSUE:

Whether or not good faith can exculpate petitioner from the imposition of 25% surcharge?

HELD:

There is no denial, as petitioner could not very well deny, that under the law there is a duty cast upon it to

make the proper returns for taxes deducted and withheld. When it failed to do so, the law is equally clear as

to its being subject to the 25% surcharge unless it could demonstrate that there was reasonable cause that

would exculpate it for such an omission. In the brief for petitioner such a statutory requirement was sought

to be satisfied thus: "The facts and circumstances surrounding the present case clearly established the fact

that petitioner was not able to file the withholding tax return involved on their prescribed due dates, it was

due only reasonable and excusable cause, consisting of the facts that such withholding tax law was new and

not everybody was already familiar with it then, and also because of inadvertence and oversight on the part

of the petitioner's accountant, aside from the pressure of work he had to attend, the period to submit the

same passed unnoticed without his having filed said returns." Such an approach while vigorously pressed

can hardly elicit approval from this Tribunal.

(57) MISAEL P. VERA, as Commissioner of Internal Revenue, petitioner,

vs.

Hon. Judge PEDRO C. NAVARRO, et.al., respondents.

G.R. No. L-27745

October 18, 1977

FACTS:

Elsie M. Gaches died on March 9, 1966 without a child. The deceased, however, left a last will and testament

in which she made relevant disposition of her estate. On March 11, 1966, the herein respondent Judge

Bienvenido Tan, Sr. (hereinafter referred to as "Judge Tan") filed with the Court of First instance of Pasig,

Rizal a petition for the probate of the aforesaid will On April 21, Judge Tan was appointed as executor of the

testate estate of Elsie M. Gaches without a bond. In a letter, dated November 4, 1966, the Commissioner

42

advised Judge Tan to Pay to the Bureau of Internal Revenue the sum of P1,398,436.30 as estate tax and

P7,140,060.69 as inheritance tax, the investigation of his office having allegedly disclosed that the next value

of the testate estate was P10,212,899.20. Judge Tan disputed the correctness of the assessment in a letter

sent to the Commissioner.

ISSUE:

Whether or not inheritance tax should be paid first before the probate court may authorize the delivery of

the hereditary share pertaining to each of an heir?

HELD:

Under the provisions Of Section 1, Rule 90 of the Rules of Court, the distribution of a decedent's assets may

only be ordered under any of the following three circumstances, namely, (1) when the inheritance tax,

among others, is paid; (2) who bond a suffered bond is given to meet the payment of the tax and all the

other options of the nature enumerated in the above-cited provision; or (3) when the payment of the said

tax and at the other obligations mentioned in the said Rule has been provided for one of these thru cannot

as the satisfaction of the when tax due from the estate is were present when the question orders were

issued in the case at bar.

(58) COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

COURT OF APPEALS, COURT OF TAX APPEALS and ALHAMBRA INDUSTRIES, INC., respondents.

G.R. No. 117982 February 6, 1997

FACTS:

ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in the manufacture and sale of cigar and

cigarette products. On 7 May 1991 private respondent received a letter dated 26 April 1991 from the

Commissioner of Internal Revenue assessing it deficiency Ad Valorem Tax (AVT) in the total amount of Four

Hundred Eighty-Eight Thousand Three Hundred Ninety-Six Pesos and Sixty-Two Centavos (P488,396.62),

inclusive of increments, on the removals of cigarette products from their place of production during the

period 2 November 1990 to 22 January 1991. Private respondent thru counsel filed a protest against the

proposed assessment with a request that the same be withdrawn and cancelled.

In its Decision of 1 December 1993 the Court of Tax Appeals ordered petitioner to refund to private

respondent the amount of Five Hundred Twenty Thousand Eight Hundred Thirty-Five Pesos and Twenty-Nine

Centavos (P520,835.29) representing erroneously paid ad valorem tax for the period 2 November 1990 to 22

January 1991.

ISSUE:

Whether or not private respondent's reliance on a void BIR ruling conferred upon the latter a vested right to

apply the same in the computation of its ad valorem tax and claim for tax refund?

HELD:

We cannot sustain petitioner. The deficiency tax assessment issued by petitioner against private respondent

is without legal basis because of the prohibition against the retroactive application of the revocation of BIR

rulings in the absence of bad faith on the part of private respondent.

The present dispute arose from the discrepancy in the taxable base on which the excise tax is to apply on

account of two incongruous BIR Rulings: (1) BIR Ruling 473-88 dated 4 October 1988 which excluded the VAT

from the tax base in computing the fifteen percent (15%) excise tax due; and, (2) BIR Ruling 017-91 dated 11

February 1991 which included back the VAT in computing the tax base for purposes of the fifteen percent

(15%) ad valorem tax.

It is to be noted that Section 127 (b) of the Tax Code as amended applies in general to domestic products

and excludes the value-added tax in the determination of the gross selling price, which is the tax base for

purposes of the imposition of ad valorem tax. On the other hand, the last paragraph of Section 142 of the

43

same Code which includes the value-added tax in the computation of the ad valorem tax, refers specifically

to cigar and cigarettes only. It does not include/apply to any other articles or goods subject to the ad

valorem tax. Accordingly, Section 142 must perforce prevail over Section 127 (b) which is a general provision

of law insofar as the imposition of the ad valorem tax on cigar and cigarettes is concerned.

Moreover, the phrase unless otherwise provided in Section 127 (b) purports of exceptions to the general rule

contained therein, such as that of Section 142, last paragraph thereof which explicitly provides that in the

case of cigarettes, the tax base for purposes of the ad valorem tax shall include, among others, the value-

added tax.

(59) COMMISSIONER OF INTERNAL REVENUE

vs.

PHILAM ACCIDENT INSURANCE COMPANY, INC., et.al.

G.R. No. 141658

March 18, 2005

FACTS:

Respondents are domestic corporations licensed to transact insurance business in the country. From August

1971 to September 1972, respondents paid the Bureau of Internal Revenue under protest the 3% tax

imposed on lending investors by Commonwealth Act No. 466. On 31 January 1973, respondents sent a

letter-claim to petitioner seeking a refund of the taxes paid under protest.

The CTA held that respondents are not taxable as lending investors because the term "lending investors"

does not embrace insurance companies.

ISSUE:

Whether or not insurance companies in considered as lending investors, hence, subject to the 3% lending

investors' tax?

HELD:

The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the

taxpayer is clearly subject to the tax being levied against him. Unless a statute imposes a tax clearly,

expressly and unambiguously, what applies is the equally well-settled rule that the imposition of a tax

cannot be presumed. Where there is doubt, tax laws must be construed strictly against the government and

in favor of the taxpayer. This is because taxes are burdens on the taxpayer, and should not be unduly

imposed or presumed beyond what the statutes expressly and clearly import.

In this case, petitioner does not dispute that respondents are in the insurance business. Petitioner merely

alleges that the definition of lending investors under CA 466 is broad enough to encompass insurance

companies. Petitioner insists that because of Section 194(u), the two principal activities of the insurance

business, namely, underwriting and investments, are separately taxable.

Section 194(u) of CA 466 states:

(u) "Lending investor" includes all persons who make a practice of lending money for themselves or others

at interest.

xxx

As can be seen, Section 194(u) does not tax the practice of lending per se. It merely defines what lending

investors are. The question is whether the lending activities of insurance companies make them lending

investors for purposes of taxation.

We agree with the CTA and Court of Appeals that it does not. Insurance companies cannot be considered

lending investors under CA 466, as amended.

44

(60) TAGAYTAY-TAAL TOURIST DEVELOPMENT CORPORATION, petitioner,

vs.

COURT OF APPEALS (SPECIAL NINTH DIVISION) and THE CITY OF TAGAYTAY, respondents.

G.R. No. 106812 June 10, 1997

FACTS:

This instant petition for review on certiorari seeks to reverse the decision 1

of respondent Court of Appeals in

CA-G.R. CV No. 24933 entitled "City of Tagaytay vs. Tagaytay-Taal Tourist Development Corporation"

promulgated on November 11, 1991 and the Resolution of the Court of Appeals dated August 24, 1992

denying petitioner's motion for reconsideration.

The Court of Appeals' decision sought to be reviewed affirmed the decision of the Regional Trial Court of

Cavite, Branch XVIII, dated December 5, 1989 2 granting respondent City's unnumbered "Petition for Entry of

New Certificate of Title," and ordering the issuance in its name of new certificates of title over certain

properties in acquired through public auction to satisfy petitioner's alleged real estate tax delinquency.

ISSUE:

Whether or not respondent City had the right to levy real estate tax over the subject properties?

HELD:

The Regional Trial Court of Cavite, sitting as a land registration or cadastral court, could not have ordered the

issuance of new certificates of title over the properties in the name of respondent City if the delinquency

sale was invalid because said properties are actually located in the municipality of Talisay, Batangas, not in

Tagaytay City. Stated differently, respondent City could not have validly collected real taxes over properties

that are outside its territorial jurisdiction.

(61) PETRONILA C. TUPAZ, petitioner,

vs.

HONORABLE BENEDICTO B. ULEP Presiding Judge of RTC Quezon City, Branch 105, and PEOPLE OF THE

PHILIPPINES, respondents.

G.R. No. 127777

October 1, 1999

FACTS:

Petitioner was charged with nonpayment of deficiency corporate income tax for the year 1979, which tax

return was filed in April 1980. On July 16, 1984, the Bureau of Internal Revenue (BIR) issued a notice of

assessment. Petitioner contends that the July 16, 1984 assessment was made out of time.

Petitioner avers that while Sections 318 and 319 of the NIRC of 1977 provide a five (5) year period of

limitation for the assessment and collection of internal revenue taxes, Batas Pambansa Blg. 700, enacted on

February 22, 1984, amended the two sections and reduced the period to three (3) years. As provided under

B.P. Blg. 700, the BIR has three (3) years to assess the tax liability, counted from the last day of filing the

return, or from the date the return is filed, whichever comes later. Since the tax return was filed in April

1980, the assessment made on July 16, 1984 was beyond the three (3) year prescriptive period.

Petitioner submits that B.P. Blg. 700 must be given retroactive effect since it is favorable to the accused.

Petitioner argues that Article 22 of the Revised Penal Code, regarding the allowance of retroactive

application of penal laws when favorable to the accused shall apply in this case.

ISSUE:

Whether or not Article 22 of the Revised Penal Code, regarding the allowance of retroactive application of

penal laws when favorable to the accused shall apply in this case?

HELD:

45

At the outset, it must be stressed that "internal revenue taxes are self-assessing and no further assessment

by the government is required to create the tax liability. An assessment, however, is not altogether

inconsequential; it is relevant in the proper pursuit of judicial and extra judicial remedies to enforce taxpayer

liabilities and certain matters that relate to it, such as the imposition of surcharges and interest, and in the

application of statues of limitations and in the establishment of tax liens."

An assessment contains not only a computation of tax liabilities, but also a demand for payment within a

prescribed period. The ultimate purpose of assessment is to ascertain the amount that each taxpayer is to

pay. An assessment is a notice to the effect that the amount therein stated is due as tax and a demand for

payment thereof. Assessments made beyond the prescribed period would not be binding on the taxpayer.

Art. 22 of the Revised Penal Code finds no application in this case for the simple reason that the provisions

on the period of assessment cannot be considered as penal in nature.

(62) 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:

In 1973, after examining ANSCOR’s books of account and record Revenue examiners issued a report

proposing that ANSCOR be assessed for deficiency withholding tax-at-source, for the year 1968 and the 2nd

quarter of 1969 based on the transaction of exchange and redemption of stocks. BIR made the

corresponding assessments. ANSCOR’s subsequent protest on the assessments was denied in 1983 by

petitioner. ANSCOR filed a petition for review with the CTA, the Tax Court reversed petitioners ruling. CA

affirmed the ruling of the CTA. Hence this position.

ISSUE:

Whether or not a person assessed for deficiency withholding tax under Sec. 53 and 54 of the Tax Code is

being held liable in its capacity as a withholding agent.

HELD:

An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner

for deficiency withholding tax, as such, it is being held liable in its capacity as a withholding agent and not in

its personality as taxpayer. A withholding agent, A. Soriano Corp. in this case, cannot be deemed a taxpayer

for it to avail of a tax amnesty under a Presidential decree that condones “the collection of all internal

revenue taxes including the increments or penalties on account of non-payment as well as all civil, criminal,

or administrative liabilities arising from or incident to voluntary disclosures under the NIRC of previously

untaxed income and/or wealth realized here or abroad by any taxpayer, natural or juridical.” The Court

explains: “The withholding agent is not a taxpayer, he is a mere tax collector. Under the withholding system,

however, the agent-payer becomes a payee by fiction of law. His liability is direct and independent from the

taxpayer, because the income tax is still imposed and due from the latter. The agent is not liable for the tax

as no wealth flowed into him, he earned no income.”