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Subject: Insurance Law Title: El Oriente Fabrica de Tabacos, Inc. vs. Juan Posadas, Collector of Internal Revenue, G.R. No. 34774, September 21, 1931 Topic: Insurable Interest in life and health (Section 10) Facts: Insurer: Manufacturers Life Insurance Co., of Toronto, Canada, thru its local agent E.E. Elser Insured: A. Velhagen (manager of El Oriente) Beneficiary: El Oriente Fabrica de Tabacos, Inc. El Oriente, in order to protect itself against the loss that it might suffer by reason of the death of its manager, whose death would be a serious loss to El Oriente procured from the Insurer an insurance policy on the life of the said manager for the sum of 50,000 USD with El Oriente as the designated sole beneficiary. The insured has no interest or participation in the proceeds of said life insurance policy. El Oriente charged as expenses of its business all the said premiums and deducted the same from its gross incomes as reported in its annual income tax returns, which deductions were allowed by Posadas (Collector of Internal Revenue) upon showing by El Oriente that such premiums were legitimate expenses of the business. Upon the death of the manager, El Oriente received all the proceeds of the life insurance policy together with the interest and the dividends accruing thereon, aggregating P104,957.88. Posadas assessed and levied the sum of P3,148.74 as income tax on the proceeds of the insurance policy, which was paid by El Oriente under protest. El Oriente claiming exemption under Section 4 of the Income Tax Law. Issue: Whether or not the proceeds of insurance taken by a corporation on the life of an important official to indemnify it against loss in case of his death, are taxable as income under the Philippine Income Tax Law? Ruling: The Income Tax Law for the Philippines is Act No. 2833, as amended. In chapter I On Individuals, is to be found section 4 which provides that, "The following incomes shall be exempt from the provisions of this law: ( a) The proceeds of life insurance policies paid to beneficiaries upon the death of the insured ... ." The Chapter on Corporations does not provide as above. It is certain that the proceeds of life insurance policies are exempt. It is not so certain that the proceeds of life insurance policies paid to corporate beneficiaries upon the death of the insured are likewise exempt. The situation will be better elucidated by a brief reference to laws on the same subject in the United States. The Income Tax Law of 1916 extended to the Philippine Legislature, when it came to enact Act No. 2833, to copy the American statute. Subsequently, the Congress of the United States enacted its Income Tax Law of 1919, in

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which certain doubtful subjects were clarified. Thus, as to the point before us, it was made clear, when not only in the part of the law concerning individuals were exemptions provided for beneficiaries, but also in the part concerning corporations, specific reference was made to the exemptions in favor of individuals, thereby making the same applicable to corporations. This was authoritatively pointed out and decided by the United States Supreme Court in the case of United States vs. Supplee-Biddle Hardware Co. ( [1924], 265 U.S., 189), which involved facts quite similar to those before us. To quote the exact words in the cited case of Chief Justice Taft delivering the opinion of the court: It is earnestly pressed upon us that proceeds of life insurance paid on the death of the insured are in fact capital, and cannot be taxed as income that proceeds of a life insurance policy paid on the death of the insured are not usually classed as income. Considering, therefore, the purport of the stipulated facts, considering the uncertainty of Philippine law, and considering the lack of express legislative intention to tax the proceeds of life insurance policies paid to corporate beneficiaries, particularly when in the exemption in favor of individual beneficiaries in the chapter on this subject, the clause is inserted "exempt from the provisions of this law," we deem it reasonable to hold the proceeds of the life insurance policy in question as representing an indemnity and not taxable income. The foregoing pronouncement will result in the judgment being reversed and in another judgment being rendered in favor of El Oriente.