GARRISON, et al. v. COURT APPEALS Gr. No.

L-44501 Doctrine:

19 July 1990

amounting to 2,000 pesos. Upon appeal to Court of Tax Appeals, the said court ruled in favor of the petitioners. However, upon elevation to the Court of Appeals, it reversed the ruling against the petitioners and thus this action. The petitioners argued against the decision on the basis that the mere physical and bodily presence in the country does not qualify them as resident aliens and their stay in the country is only a part as their employment under the U.S Bases in Olongapo. Also they emphasized that their main and only source of income came from the said foreign government employer and it is their intention to return to the United States after termination of the employment. Petitioners also argue that the imposition of income tax upon them would be tantamount to the violation of the provisions set forth by the agreement between the two allies. Issue: 1. 2. Whether or not petitioners are resident aliensYes Whether or not the petitioners are exempted from paying income tax andfiling income tax returns basing on the RP-US agreementNo

Resident Aliens are those, which are not in transient or a sojourner. The latter therefore must pay his income tax to the Republic of the Philippines. A foreigner and even Filipino in the Philippines, who is subject to income tax exemptions is the one burdened to prove such existence of the exemption towards the Government. Facts: The petitioners contend that they are not subject to income tax for they claim to be covered under the income tax exempting clause as provided under the RP-US Military Base Agreement. The petitioners have the following background: 1. John L. Garrison was born in the Philippines and lived in the country until 1945, after he was repatriated to the United States. He stayed in the US for 30 years until he returned in May 6 1965 and has lived in Olongapo City, Philippines ever since with his Filipina wife and children. James W. Robertson was born in 1915 in Olongapo and grew up in this country. He and his family were repatriated to the United States in 1945 and returned to the country in 1958 for an assignment. He has lived in the Philippines until the present. Robert H. Cathay was born in the United States, on April 1917. He first arrived in the Philippines on 1944 as part of the liberation army against the Japanese and stayed until 1950. He returned to the United States in 1950 but on 1951 he went back and stayed in the Philippines until to this day. FelicitasDe Guzman was born in the Philippines in 1935 and her father was a naturalized American Citizen. She was recruited to work in the United States Naval Base, Subic Bay, Philippines. She worked in Hawaii and returned in the Philippines in April 27, 1967 and has not left ever since. EDWARD McGURK came to the Philippines on July 11, 1967 and he stayed in this country continuously up to the present time.

Ratio: 1. The Supreme Court adopted the ruling of the Court of Appeals in which it upheld that indeed the petitioners were resident aliens; hence they are not excused from filing income tax returns. For the Internal Revenue Code requires the filing of an income tax return also by any "alien residing in the Philippines, regardless of whether the gross income was derived from sources within or outside the Philippines.

2.

3.

4.

5.

Under the RP-US base agreement, personnel who are nationals of the United States serving or employed in the Philippines in connection of the maintenance, construction, operation or defense of the bases and reside in the Philippines for the reason of employment, which also must derive their income only from the U.S source, are exempted to pay Income Taxes. The Supreme Court admits that indeed petitioners are United States citizens and are employed for the construction, maintenance, operation or defense of the Naval Bases in Subic. The court also recognizes that petitioners reside in the Philippines by reason of their employment and their income is derived only from U.S sources. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of income tax. Whether he is a transient or not is determined by his intentions with regards to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him as transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose, which in its nature may be promptly accomplished, is a transient. But if his purpose is of such a nature that an extended stay may be necessary to its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. Hence, it is well settled that indeed petitioners are resident aliens. They are not mere sojourners that limit their stay in the country for a particular time and purpose. The defendants stayed and lived in the country for quite some time and as a matter of fact, they have already spent years during their stay in the country. Strictly speaking, Garrison and fellow petitioners are classified as resident aliens. 2. Garrison and co-petitioners still argued their exemptionunder the RP-US Agreement to pay income

The petitioners are all American Citizens and are employed in the United States Naval Base, Olongapo City. Subsequently the Petitioners received separate notices from the District Revenue Officer of Olongapo that they were not able to file their income tax return for the year 1969. But the accused-petitioners refused to pay citing the cause that they are not resident aliens but only special temporary visitors having entered this country under Section 9 (a) of the Philippine Immigration Act of 1940. The accused also claimed exemption from filing the return in the Philippines by virtue of the provisions of Article XII, paragraph 2 of the US-RP Military Bases Agreement. The District Revenue Officer, however, emphasized that even if exempt from paying income tax, said petitioners were, it is contended by the respondents, not excused from filing income tax returns. For the Internal Revenue Code requires the filing of an income tax return also by any alien residing in the Philippines, regardless of whether the gross income was derived from sources within or outside the Philippines. The Court of First Instance of Olongapo City convicted the petitioners for violation of Section 45, of the National Internal Revenue Code, by failing to file their respective Income Tax Returns for the year 1969. They were sentenced to pay a fine

tax and file income tax returns. The Supreme Court held in the negative. The Supreme Court emphasized that such exemption is not absolute. Income derived from the employment under the US bases is exempted but other sources are not exempted. The Court emphasized that in order for the American Nationals to be exempted from the duty to pay income tax, it is incumbent on them to show the Bureau of Internal Revenue that in that taxable year they had derived income exclusively from their employment in connection with the U.S. bases. It is their duty to inform the Government. The duty rests on the U.S. nationals concerned to invoke and prima facie establish their tax-exempt status. It cannot simply be presumed that they earned no income from any other sources than their employment in the American bases and are therefore totally exempt from income tax. Furthermore, the Supreme Court emphasized that such rule also applies to Filipinos who are qualified under a certain exemptions. The duties rest upon them to present these matters to the government and more importantly, even if they are not liable for income tax for that year, no matter how plain or irrefutable such a proposition might be, does not exempt them from the duty to file an income tax return. By: Efren L. Pinol Jr.

ISHWAR JETHMAL RAMNANI v. THE COMMISSIONER OF INTERNALREVENUE NS TRANSPORT SERVICES C.T.A. CASE NO. 5108 13 September 1996 Doctrine: The law on Income Taxation provides a more liberal interpretation of who may be considered a resident alien. Money judgement, which forms part of income, is subject to income tax except for damages and return of capital. Facts: Ishwar Ramnani and his spouse are American citizens who invested in real estate in the Philippines. Choithram Ramnani, as attorney-in-fact, bought two parcels of land and erected buildings and improvements. Through the years, the properties earned income for leasing the same to various companies such as the Ortigas and Co., Ltd. Partnership. The Supreme Court decided in two cases in favor of Ishwar, ordering Choithram and Ortigas to pay spouses Ishwar Ramnani their share in the rental income, fair market value of the property, moral and exemplary damages, and attorneys fee. The Supreme Court further ordered the trial court to determine the fair market value of the property and to execute the judgement. At the Trial Court, parties entered into a tripartite agreement which provides that the total money judgment payable to Ishwar be Php 65,000,000.00. Choithram, through counsel, as payers of the said money judgment, requested the Commissioner of Internal Revenue (CIR) for a clarificatory ruling with regard to the tax implications of such an agreement. The CIR held that Ishwar was a nonresident alien not engage trade or business in the Philippines. As such, the total tax to be withheld is P20,150,000.00, for 30% final income tax on P65M and 1% documentary stamp tax on P65M. Ishwar opposed CIRs ruling and insisted that he is a resident alien. Ishwar filed a Petition for Review with the Supreme Court. Issue: 1. 2. Whether or not petitioners are resident aliens YES Whether or not the money judgment are subject to income tax YES, except the return of capital, damages and attorneys fees.

The Court stated that the essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while Income is the service of wealth. The Court also held that moral and exemplary damages as well as the attorney's fees are not subject to income tax. Hence, the entire Php65M cannot be subject to tax because part therein is return on capital (fair market value of the property and its improvements), moral and exemplary damages and attorneys fees which are not taxable. The Court also held that as a resident alien, Ishwar is also entitled to deductions and personal and additional exemptions. As such, the Court computed the tax payable as follows: Total Money Judgment Less: Capital investment 600,000.00 Moral damages 500,000.00 Exemplary damages 200,000.00 Attorney's fees 6,500,000.00 Gross Income Less: 40% Optional Standard Deductions Net Income Less: Personal Exemptions Net Taxable Income Income Tax Due Less: Income Tax paid on 4/15/94 5% Withholding tax on rentals Income Tax Payable P65,000,000.00

7,800,000.00 P57,200,000.00 22,880,000.00 P34,320,000.00 18,000.00 P34,302,000.00 P10,247,200.00 3,823,021.22 1,243,963.25 P5,180,215.53

By: Connie Beb A. Torralba

Ratio: 1. The law on Income Taxation provides a more liberal interpretation of who may be considered a resident alien. The Supreme Court was convinced that lshwar's stay in the Philippines can no longer be considered as transient. Through the years, Ishwar had been frequently coming to the Philippines and had paying his Community Residence Certificate therein. The Commissioner of Immigration had also changed his status from temporary visitor to immigrant/resident alien. On the other hand, CIR was not able to adduce evidence that Ishwar was a non-resident alien not engage trade or business in the Philippines. With the foregoing therefore, Ishwar, was held as a resident alien for purposes of taxation. 2. What is subject to taxation in this money judgement is the rental income of P24,879,265.00 by 5% withholding tax. The mount of P1,243,963.25 therefore should be withheld by the payors.

AFISCO INSURANCE CORPORATION, et al. v. COURT OF APPEALS 302 SCRA 1 January 25, 1999 Doctrine: A pool formed by local insurance firms in order to facilitate the handling of business contracted with a nonresident foreign insurance company is deemed to be a partnership or an association that is taxable as a corporation. Facts: The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors' All Risk insurance policies, the petitioners entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the MunchenerRuckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form a pool which the petitioners accordingly complied with. On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an "Information Return of Organization Exempt from Income Tax" for the year ending in 1975, on the basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These assessments were protested by the petitioners as they belied the existence of a partnership, claiming that the reinsurance policies were written by them individually and separately, and that their liability was limited to the extent of their allocated share in the original risk thus reinsured. Hence, they claim that the pool did not act or earn income as a reinsurer as its role was limited to its principal function of allocating and distributing the risks arising from the original insurance among the members of the pool, as well as the performance of incidental functions, such as records, maintenance, collection and custody of funds, etc. However, such protest was denied. The CTA and CA upheld the liability of the pool of machinery insurers as an informal partnership taxable as a corporation. Issues: 1. Whether or not the Clearing House or Insurance Pool is a partnership or association subject to tax as a corporation -YES 2. Whether or not the pools remittances to petitioners and Munich of their respective shares of reinsurance premiums were "dividends" subject to tax YES 3. Whether or not the governments right to assess and collect the tax had already prescribed NO Ratio: 1. The pool is taxable as a corporation. The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies (Sec. 22, RA 8424), while the term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on (Evangelista vs. CIR). Thus, the Philippine legislature and NIRC included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations.

Meanwhile, an association implies associates who enter into a joint enterprise for the transaction of business. In this case, the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treatyand surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool.This common fund pays for the administration and operation expenses of the pool. (2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies. (3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share in the business ceded to the pool and in the expenses.Profit motive or business is, therefore, the primordial reason for the pool's formation. If together petitioners have conducted business, profit must have been the object as, indeed, profit was earned. Though the profit was apportioned among the members, this is only a matter of consequence, as it implies that profit actually resulted. 2. The pool's remittances are taxable as dividends.

Petitioners contention that the pools remittances should not be taxed as it would be tantamount to illegal double taxation is untenable. Double taxation means taxing the same person twice by the same jurisdiction for the same thing. In the instant case, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends received by the said companies. Clearly, there is no double taxation here. On petitioners claim of tax exemption based on the 1977 NIRC, such cannot be granted because these were not yet in effect when the income was earned and when the subject information return for the year ending 1975 was filed. Even referring to the 1975 version of the NIRC providing that no tax shall be paid upon reinsurance by any company that has already paid the tax, this still cannot justify the exemption because as previously discussed, the pool is a taxable entity distinct from the ceding companies and the latter cannot individually claim the income tax paid by the former as their own. Also, Section 24(b)(1) of the NIRC pertains to tax on foreign corporations, so that it cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based solely on this provision of the Tax Code, because the same subsection specifically taxes dividends, the type of remittances forwarded to it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of the ceding companies in the entity formed, pursuant to their reinsurance treaties, which required the creation of said pool. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right. Petitioners have failed to discharge this burden of proof. Finally, petitioners cannot claim that Munich is tax-exempt based on the RP-West German Tax Treaty as the deficient taxes were assessed based on the information return it had submitted for the year ending 1975, while the Treaty took effect only later, on December 14, 1984. 3. Thegovernments right to assess and collect the tax has not prescribed. The CA and the CTA categorically found

Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when two or more persons bind themselves to contribute money, property, or Industry to a common fund, with the intention of dividing the profits among themselves.

that the prescriptive period was tolled under then Section 333 of the NIRC,because the taxpayer cannot be located at the address given in the information return filed and for which reason there was delay in sending the assessment. Thus, petitioners argument that the five-year statute of limitations then provided in the NIRC had already lapsed because the subject information return was filed by the pool on April 14, 1976, while the BIR telephoned petitioners on November 11, 1981 to give them notice of its letter of assessment dated March 27, 1981, is untenable. Indeed, whether the government's right to collect and assess the tax has prescribed involves facts which have been ruled upon by the lower courts, and it is axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as in this case, this Court must not overturn the factual findings of the CA and the CTA. Furthermore, petitioners admitted in their MR before the CA that the pool changed its address, so that this falls short of the requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law clearly states that the said period will be suspended only if the taxpayer informs the Commissioner of Internal Revenue of any change in the address. Therefore, the pool is taxable as a corporation, its remittances taxable as dividends, and the government is not barred from collecting these taxes. By: Joanna Kaye B. Remolar

PASCUAL v. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS 166 SCRA 560 18 October 1988

incidents which do not show the character of habituality peculiar to business transactions for the purpose of gain. In the same way, the sharing of profits between Pascual and Dragon cannot be immediately construed as establishing a partnership. Hence, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof. By: Shemelyn G. Bilbao

Doctrine: An isolated transaction where two or more persons contribute funds to buy certain real estate for profit in the absence of any other circumstances showing a contrary intention cannot be considered a partnership. Facts: Mariano Pascual and Renato Dragon bought two parcels of land from Santiago Bernardino on June 1965. On May 1966, they bought again another three parcels of land from Juan Roque. The first two parcels of land were sold by Pascual and Dragon in 1968 to Marenir Development Corporation, realizing a net profit of P165, 224.70, while the other three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on March 1970, realizing a net profit of P60, 000.00. Capital gains taxes were paid by the petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years. However, the petitioners were assessed and required to pay a total amount of P107, 101. 70 by the Acting BIR Commissioner Efren I. Plana, as alleged deficiency corporate income taxes for the years 1968 and 1970. Petitioners asserted that they had availed of tax amnesties way back in 1974. As a reply, respondent Commissioner informed the petitioners that they, as co-owners in real estate transactions, formed an unregistered partnership or joint venture which is taxable as a corporation. An unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them, which is subject to individual income tax. The availment of tax amnesty under P.D. No. 23 relieved the petitioners of their individual income tax liabilities but not from the tax liability of the unregistered partnership. Hence, the petitioners should be required to pay the deficiency income tax assessed. Petitioners filed a petition before the Court of Tax Appeals which then affirmed the decision of the Commissioner of Internal Revenue. The CTA based its ruling on Evangelista vs. Commissioner of Internal Revenue 102 Phil. 140, where an unregistered partnership was formed and was subjected to corporate income tax distinct from that imposed on the partners. The petition was then elevated to the Supreme Court contending that there was no sufficient evidence to show that they have indeed formed an unregistered partnership. Issue: 1. Whether or not petitioners Pascual and Dragon have formed an unregistered partnership which is subject to corporate income tax NO

Ratio: 1. The Supreme Court found the petition meritorious stating that the case of Evangelista, where CTA based its ruling, is significantly different from the case at hand.

In the case of Evangelista, there was a clear intention of investing money and deriving profits from the series of real estate transactions. However, in the present case, the purchase and sale of land made by the petitioners were just found to be isolated

OBILLOS, JR. VS. COMMISSIONER OF INTERNAL REVENUE No. L-68118 October 29, 1995 Doctrine: Taxation; The dictum that the power to tax involves the power to destroy should be obviated. Partnership; Mere sharing of gross income from an isolated transaction does not establish a partnership. Facts: This case is about the income tax liability of four (4) brothers and sisters who sold two parcels of land which they had acquired from their father. On March 2, 1973, Jose Obillos, Sr. acquired two (2) lots located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four (4) children, the petitioners, to enable them to build their residence. Under the Torrens titles issued to them, it is presumed that they were co-owners of the two (2) lots. In 1974, or after having held the two (2) lots for more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canda, which they derived profit out of the sale. They treated said profits as a capital gain and paid an income tax on one-half thereof. However, in April, 1980, the Commissioner of Internal Revenue required the four (4) petitioners to pay corporate income tax on the total profit. The Commissioner also assessed other surcharges and accumulated interest. Thus, the petitioners are being held liable for deficiency income taxes and penalties. The Commissioner acted on the theory that the petitioners had formed an unregistered partnership or joint venture. The petitioners contested the assessments. The Tax Court sustained the decision of the Commissioner. Hence, the appeal. Issue: WON the petitioners formed a partnership, thus the profits derived out of the sale of the two lots is subject of corporate income tax. Ratio: No partnership is formed. The Commissioner erred in considering the petitioners as having formed a partnership. To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated. The petitioners had no intention to form a partnership. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture.

In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed. WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs. By: Rino Geronimo J. Sagaral, RN

LORENZO T. OA, AND THE HEIRS OF JULIA BUNALES v THE COMMISSIONER OF INTERNAL REVENUE 45 SCRA 74 25 May 1972 Doctrine: For purposes of the tax on corporations, the National Internal Revenue Code, includes partnerships with the exception only of duly registered general co-partnerships within the purview of the term corporation. Facts: Julia Buales passed away on March 23, 1944, leaving behind her husband, Lorenzo Oa, and their five children. In her intestate proceedings, Lorenzo was appointed administrator of her estate. On April 1949, he submitted the project of partition, but because three of the children were still minors at the time of approval of the partition, Lorenzo filed a petition to be appointed as guardian of the minors. The project of partition shows that the heirs have undivided interest in ten parcels of land, six houses, and an amount collected from the War Damage Commission. This amount was used to rehabilitate the properties owned by them. Although the partition was approved, no actual partition was made. Instead, the properties remained under the management of Lorenzo who used the properties in business by leasing or selling them and investing the income earned in real properties. The incomes were recorded in books of account kept by Lorenzo, with the corresponding shares of each child for the year known. However, the children did not actually receive their shares in the profits, which were kept by Lorenzo as he reinvested them. On the basis of these facts the Commissioner decided that the Oas were in an unregistered partnership and therefore subject to corporate income tax. Issue: 1. Whether or not the Oas are liable for corporate income tax YES, but only from 1955, when the CIR assessed them as a de facto partnership, and not from the moment of the creation of the de facto partnership itself.

For purposes of the tax on corporations, our NIRC includes these partnerships, with the exception only of duly registered general co partnerships within the purview of the term corporation. The income derived from inherited properties may be considered as individual income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the moment their respective known shares are used as part of the common assets of the heirs to be used in making profits, it is but proper that the income of such shares should be considered as the part of the taxable income of an unregistered partnership. The partnership profits distributable to the partners should be reduced by the amounts of income tax assessed against the partnership. Consequently, each of the petitioners in his individual capacity overpaid his income tax for the years in question, but the income tax due from the partnership has been correctly assessed. Since the individual income tax liabilities of petitioners are not in issue in this proceeding, it is not proper for the Court to pass upon the same. By: Darryl June Luigi P. Tape

Ratio: 1. For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for this is simple. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed.

Collector of Internal Revenue v. Batangas Transportation Co. and Laguna-Tayabas Bus Co. 102 Phil 822 Doctrine: The Tax Code defines corporation as including partnership no matter how created or organized, thereby indicating that a joint venture need not be undertaken in any of the standard forms Facts: Respondent companies are two distinct and separate corporations engaged in the business of land transportation by means of motor buses, and operating distinct and separate lines. Joseph Benedict managed the Batangas Transportation, while Martin Olson was the manager of the Laguna Bus. To show the connection and close relation between the two companies, it should be stated that Max Blouse was the President of both corporations and owned about 30 per cent of the stock in each company. During the war, the American officials of these two corporations were interned in Santo Tomas, and said companies ceased operations. After Liberation, sometime in April 1945, the two companies were able to acquire 56 auto buses from the United States Army, and the two companies divided said equipment equally between themselves, registering the same separately in their respective names. Martin Olson resigned as Manager of the Laguna Bus and Joseph Benedict, who was then managing the Batangas Transportation, was appointed Manager of both companies by their respective Board of Directors. The head office of the Laguna Bus in San Pablo City was made the main office of both corporations. The two companies contributed money to a common fund to pay the sole general manager, the accounts and office personnel attached to the office of said manager, as well as for the maintenance and operation of a common maintenance and repair shop. Said common fund was also used to buy spare parts, and equipment for both companies, including tires. Said common fund was also used to pay all the salaries of the personnel of both companies, such as drivers, conductors, helpers and mechanics. At the end of each calendar year, all gross receipts and expenses of both companies were determined and the net profits were divided fifty-fifty, and transferred to the book of accounts of each company, and each company "then prepared its own income tax return from this fifty per centum of the gross receipts and expenditures, assets and liabilities thus transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes thereon separately" disregarding the expenses incurred in the maintenance and operation of each company and of the individual income of said companies. The Collector wrote the bus companies that there was due from them the deficiency income tax and compromise for the years 1946 to 1949, inclusive. The respondent companies appealed the assessment to the Court of Tax Appeals. The theory of the Collector is the Joint Emergency Operation was a corporation distinct from the two respondent companies, as defined in section 84 (b), and so liable to income tax under section 24, both of the National Internal Revenue Code. After hearing, the C.T.A. found and held, citing authorities, that the Joint Emergency Operation or joint management of the two companies "is not a corporation within the contemplation of section 84 (b) of the National Internal Revenue Code much less a partnership, association or insurance company", and therefore was not subject to the income tax under the provisions of section 24 of the same Code, separately and independently of respondent companies; so, it reversed the decision of the Collector. Issue: 1.

1.

The SC held that the tax code defines the term corporation as including partnership no matter how created or organized, thereby indicating that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations.

In this case, while the 2 companies were registered and operating separately, they were placed under one sole management called the Joint Emergency Operation for the purpose of economizing in overhead expenses. Although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said joint management operated the business affairs of the 2 companies as though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in the operation. The joint venture, therefore, falls under the provisions of sec.84(b) of the Internal Revenue Code, and consequently it is liable to income tax provided for corporations. By: Aireen Angeline Ramos - Sawanaka

Whether or not the Joint Emergency Operation organized and operated by the 2 companies is a corporation within the meaning of Sec. 84 of the Revised Internal Revenue Code-- Yes.

Ratio:

VICENTE MADRIGAL AND SUSANA PETERNO v. JAMES J RAFFERTY, COLLECTOR OF INTERNAL REVENUE AND VENANCIO CONCEPCION, DEPUTY OF INTERNAL REVENUE GR NO. L -1228 August 7, 1918 Doctrine: The Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The higher schedule of additional tax directed at the incomes of the wealthy may not be partially defeated by the reliance on provision of Civil Code in dealing with conjugal partnership and has no application to the Income Tax Law. Facts : On February 15, 1915 Vicente Madrigal had filed a sworn declaration in the amount of P296, 302.73 as his total income for the year 1914 with the Collector of the Internal Revenue. Subsequently he claimed that such income was the income of the conjugal partnership existing between himself and his wife, SusanaPaterno. He claimed that in computing and assessing the additional income tax as provided in the Act of Congress of October 3, 1913 should be divided into two equal parts. The income should be composed of one half for Vicente Madrigal as his income and the other half for his wife, Susana Paterno. The issue is brought before the Attorney General of the Philippines for decision. A favorable opinion towards the petitioner was given on March 17, 1915. The Revenue Officer was unsatisfied with the decision of the Attorney General which prompted them to sent a letter to Washington for a decision before the United States Treasury Department. Attached to this letter is the opinion of the Attorney General. The United States Commissioner of Internal Revenue reversed the opinion of the Attorney General and decided against the claim of the Madrigal. After payment under protest, action was filed against the Collector of Internal Revenue in the Court of First Instance for wrongfully and illegally collected the sum of P 3786.06. the burden of the complaint was that if the income tax for the year 1914 had been correctly and lawfully computed there would have been due payable by each of the plaintiff the sum of P2,921.09 which if taken together totaled only P5842.18 instead of P9,668.21. There is an excess payment of P 3786.08 which Vicente Madrigal paid under protest. The defendants based their stand on the details of the income of the spouse which are the following: 1. P362,407.67 the profits made by Vicente Madrigal in the Shipping and coal business 2. P4,086.50 the profit by Susana Paterno in her embroidery business 3. P16,687.80 the profit of Vicente Madrigal in pawnshop company The defendant contentions is that taxes imposed by the Income Tax Law is upon the income not on the capital and property. They alleged that the provision on the conjugal partnership, has no bearing on income considered as income and a distinction must be drawn between commercial partnership and conjugal partnership of spouses . Issue: Whether the Additional Income Tax should be divided into two equal parts because of the conjugal partnership that existed between spouses Vicente Madrigal and Susana Paterno - NO Ratio: 1. Susana Paterno has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ownership of property acquired as income after such income has become capital . Susana Paterno has no absolute right to one half the income of the conjugal partnership

Not being seized of as a separate estate. Susana Paterno cannot make a separate return in order to receive the benefit of exemption which would arise by reason of additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husbands property, the income cannot be considered the separate income of the wife for purpose of the additional tax. Moreover the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership . The spouse are only entitled to the exemption of P8,000.00 specifically granted by law. The higher schedule of additional tax directed at the incomes of the wealthy may not be partially be defeated by reliance on the provision on the Civil Code dealing with conjugal partnership and having no application of the Income Tax Law. The aim and purpose of the Income Tax law must be given effect. Relative to the Income Tax Law we must consider the provision of the Civil Code of the Philippines which deals about the conjugal partnership. In one of the decisions of the court about conjugal partnership it is decided that prior to the liquidation of the interest of the wife and in case of her death , of her heirs It is an interest inchoate, a mere expectancy, which constitute neither a legal nor an equitable estate and does not ripen into a title until there appears that there are assets in the community as a result of liquidation and settlements. ( Manuel and LaxamanavsLosano (1918 ), 16 Off. Gaz, 1265) The separate estate of a married woman within the contemplation of the Income tax law is that which belongs to her solely and separate and apart from her husband and over which her husband has no right of equity . It may consist of lands and chattels. The only occasion for a wife making the return is where she has the income from a sole and separate estate in excess of $3,000.00, but together they have an income in excess of $ 4,000.00 in which the latter event either the husband and wife may make the return but not both. In all Instances the income of husband and wife whether from separate estates or not, is taken as a whole for the purpose of normal tax . Where the wife has income from a separate estate makes return made by her husband, while the income are added together for the purpose of normal tax they are taken separately for the purpose of the additional tax. In this case, however the wife has no separate income within the contemplation of the Income Tax Law. By: Vilner N. Avillon

FREDERICK C. FISHER v. WENCESLAO TRINIDAD, et al. G.R. No. L-17518 30 October 1922 Doctrine: Stock dividends are not deemed as income and the same cannot be considered taxes under that provision of Act No. 2833. Facts: Philippine American Drug Company was a corporation duly organized and existing under the laws of the Philippine Islands, doing business in the City of Manila. Fisher was a stockholder in said corporation. Said corporation, as result of the business for that year, declared a "stock dividend" and that the proportionate share of said stock divided of Fisher was P24,800. Said the stock dividend for that amount was issued to Fisher. For this reason, Trinidad demanded payment of income tax for the stock dividend received by Fisher. Fisher paid under protest the sum of P889.91 as income tax on said stock dividend. Fisher filed an action for the recovery of P889.91. Trinidad demurred to the petition upon the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained and Fisher appealed. To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of the United States as well as the decisions of the supreme court of some of the states of the Union, in which the question, based upon similar statutes, was discussed. Among the most important decisions may be mentioned the following: Towne vs. Eisner, 245 U.S., 418; Doyle vs. Mitchell Bors. Co., 247 U.S., 179; Eisner vs. Macomber, 252 U.S., 189; Dekovenvs Alsop, 205 Ill., 309; 63 L.R.A., 587; Kaufman vs. Charlottesville Woolen Mills, 93 Va., 673. In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in each case it was held that "stock dividends" were capital and not an "income" and therefore not subject to the "income tax" law. The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189) that a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the stock dividend, does not violate the provisions of the Jones Law. The appellee further argues that the statute of the United States providing for tax upon stock dividends is different from the statute of the Philippine Islands, and therefore the decision of the Supreme Court of the United States should not be followed in interpreting the statute in force here. Issue: 1. Whether or not the stock dividend was an income and therefore taxable - NO Ratio: 1. It is well-settled that stock dividends represent undistributed increase in the capital of corporations or firms, joint stock companies, etc., for a particular period. The inventory of the property of the corporation for particular period shows an increase in its capital, so that the stock theretofore issued does not show the real value of the stockholder's interest, and additional stock is issued showing the increase in the actual capital, or property, or assets of the corporation. In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme Court held that mere advance in value does not constitute the "income" specified in the revenue law as "income" of the owner for the year in which the sale of the property was made. Such advance constitutes and can be treated merely as an increase of capital. In the case of Towne vs. Eisner, income was defined in an income tax law to mean cash or its equivalent, unless it is otherwise specified. It does not mean unrealized increments in the value of the property. A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished and their interests are not increased. The proportional interest of

each shareholder remains the same. In short, the corporation is no poorer and the stockholder is no richer than they were before. In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179), Mr. Justice Pitney, said that the term "income" in its natural and obvious sense, imports something distinct from principal or capital and conveying the idea of gain or increase arising from corporate activity. In the case of Eisner vs. Macomber (252 U.S., 189), income was defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets. When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations resulting from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out of the entire investment. The stockholder by virtue of the stock dividend has in fact received nothing that answers the definition of an "income." The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation. There has been no separation or segregation of his interest. All the property or capital of the corporation still belongs to the corporation. There has been no separation of the interest of the stockholder from the general capital of the corporation. The stockholder, by virtue of the stock dividend, has no separate or individual control over the interest represented thereby, further than he had before the stock dividend was issued. He cannot use it for the reason that it is still the property of the corporation and not the property of the individual holder of stock dividend. A certificate of stock represented by the stock dividend is simply a statement of his proportional interest or participation in the capital of the corporation. The receipt of a stock dividend in no way increases the money received of a stockholder nor his cash account at the close of the year. It simply shows that there has been an increase in the amount of the capital of the corporation during the particular period, which may be due to an increased business or to a natural increase of the value of the capital due to business, economic, or other reasons. We believe that the Legislature, when it provided for an "income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is generally used in its common acceptation; that is that the income means money received, coming to a person or corporation for services, interest, or profit from investments. We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." A stock dividend, still being the property of the corporation and not the stockholder, may be reached by an execution against the corporation, and sold as a part of the property of the corporation. In such a case, if all the property of the corporation is sold, then the stockholder certainly could not be charged with having received an income by virtue of the issuance of the stock dividend. Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the stockholders, and are liable for corporate indebtedness. The rule is well established that cash dividend, whether large or small, are regarded as "income" and all stock dividends, as capital or assets. If the ownership of the property represented by a stock dividend is still in the corporation and not in the holder of such stock, then it is difficult to understand how it can be regarded

as income to the stockholder and not as a part of the capital or assets of the corporation. If the holder of the stock dividend is required to pay an income tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. As stock dividends are not "income," the same cannot be considered taxes under that provision of Act No. 2833. For all of the foregoing reasons, Supreme Court held that the judgment of the lower court should be revoked. By: Ahmedsiddique B. Dalam

LIMPAN INVESTMENT CORPORATION v. COMMISSIONER OF INTERNAL REVENUE, ET AL. 17 SCRA 703 26 July 1966 Doctrine: Rental income constructively received should be reported since it is income regardless of its source. Facts: Petitioner Limpan Investment Corporation is a domestic corporation engaged in the business of leasing real properties. Its president and chairman of the board is Isabelo P. Lim. Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes and for which it paid the corresponding taxes therefore. The Bureau of Internal Revenue conducted an investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they discovered and ascertained that petitioner had underdeclared its rental incomes during these taxable years. On the basis of these findings, respondent Commissioner of Internal Revenue issued its letterassessment and demand for payment of deficiency income tax and surcharge against petitioner corporation. Petitioner corporation requested for reconsideration but the Bureau of Internal Revenue denied said request and reiterated its original assessment and demand. Hence, the corporation filed its petition for review before the Tax Appeals court, questioning the correctness and validity of the assessment of respondent Commissioner of Internal Revenue. It disclaimed having received or collected an amount as unreported rental income for 1956 and 1957 explaining that part of it was not declared as income in its 1957 tax return because its president, Isabelo P. Lim, who collected and received from certain tenants rental payments, did not turn the same over to petitioner corporation in said year but did so only in 1959; that a certain tenant deposited in court his rentals over which the corporation had no actual or constructive control. The sole witness for the petitioner, Corporate SecretaryTreasurer, Vicente G. Solis, admitted to some undeclared rents in 1956 and 1957, and that some balances were not collected by the corporation in 1956 because the lessees refused to recognize and pay rent to the new owners and that the corporations president Isabelo Lim collected some rent and reported it in his personal income statement, but did not turn over the rent to the corporation.He also cites lack of actual or constructive control over rents deposited with the court. On the basis of the evidence, the Tax Court upheld respondent Commissioner's assessment and demand for deficiency income tax. Hence, the instant appeal. Issue: 1. Whether or not Limpan Investment Corporation have constructive receipt of rentals thus should be reported as rental income - YES

Ratio: 1. Deposit to the court of rental payment due to the refusal of the lessor to receive the same and was not the fault of its tenant constitutes constructive receipt.

Petitioner's denial and explanation of the non-receipt of the remaining unreported income for 1957 is not substantiated by satisfactory corroboration. As noted, Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein. The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as rental income in said year, since it is income just the same regardless of its source. By: Cheerie May N. Sudario

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and JAIME A. SOQUES v.THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE G.R. No. 48532 31 August 1992 ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-LIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO,EDUARDO A. RIALP AND JAIME A. SOQUES v. THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE G.R. No. 48533 31 August 1992

2.

Whether petitioners are exempt to pay tax for such income since there were no remittance/ acceptance of their salaries in UD Dollars into the Philippines- NO

Ratio: 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 considered 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. Even if there was no remittance and acceptance of their salaries and wages in US Dollars into the Philippines, they are still bound to pay the tax. Petitioners forgot that they are citizens of the Philippines, and their income, within or without, and in this case wholly without or outside the Philippines, are subject to income tax. The petitions were denied for lack of merit. By: Zarah M. Amparado

Doctrine: 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. Facts: Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners were assigned, for certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines, during which petitioners were paid U.S. dollars as compensation for services in their foreign assignments. 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. Petitioners argued that since the dollar earnings does not fall within the classification of foreign exchange transaction; there occurred no actual inward remittances therefore NOT included in Central Bank Circular No. 289. CB no. 289 provides for specific instances when the par value of the peso shall not be the conversion rate. Therefore, they can base their conversion using the par value of the peso. The Commissioner of the BIR denied the claim of petitioners stating that the basis must be the prevailing free market rate of exchange and not the par value. CB No. 289 speaks of receipts for export products, receipts of sale of foreign exchange and investment but not income tax. The CTA also held that petitioners dollar earnings are receipts derived from foreign exchange transactions. Issue: 1. Whether or not petitioners dollar earnings are receipts derived from foreign exchange transactions NO

RUDOLPH v. UNITED STATES 370 US 269 ________ Doctrine:

18 June 1962

found was the employer's primary purpose in arranging this trip. In summary, the regulation in pertinent part provides:"Traveling expenses, including meals, lodgings and other incidentals, reasonable and necessary in the conduct of the taxpayer's business and directly attributable to it are deductible, but expenses of a trip'undertaken for other than business purposes' are 'personal expenses' and the meals and lodgings are 'living expenses." If a taxpayer who travels to a destination engages in both 'business and personal activities,' the traveling expenses are deductible only if the trip is 'related primarily' to the taxpayer's business; if 'primarily personal,' the traveling expenses are not deductible even though the taxpayer engages in some business there; yet expenses allocable to the taxpayer's trade or business there are deductible even though the travel expenses to and fro are not.

The test of deductibility to be applied is whether the expenses are "ordinary and necessary" in the carrying on a business. Facts: Petitioners, husband and wife, reside in Dallas, Texas, where the home office of the husband's employer, the Southland Life Insurance Company, is located. By having sold a predetermined amount of insurance, the husband qualified to attend the company's convention in New York City in 1956 and, in line with company policy, to bring his wife with him. The petitioners, together with 150 other employees and officers of the insurance company and 141 wives, traveled to and from New York City on special trains, and were housed in a single hotel during their two and one-half day visit. One morning was devoted to a "business meeting" and group luncheon, the rest of the time in New York City to "travel, sightseeing, entertainment, fellowship, or free time." The entire trip lasted one week. The company paid all the expenses of the convention trip, which amounted to $80,000, petitioners' allocable share being $560. When petitioners did not include the latter amount in their joint income tax return, the Commissioner assessed a deficiency which was sustained by the District Court, and also by the Court of Appeals. The District Court held that the value of the trip, being "in the nature of a bonus, reward, and compensation for a job well done," was income to Rudolph, but, being "primarily a pleasure trip in the nature of a vacation," the costs were personal and nondeductible. Issue: 1. Whether or not the value of the trip to the taxpayer husband properly includible in gross income YES Ratio: Under 61 of the 1954 Code, gross income defines as "all income from whatever source derived," including, among other items, "compensation for services." Certain sections of the 1954 Code enumerate particular receipts which are included in the concept of "gross income,"including prizes and awards (with certain exceptions); while other sections, 101-121, specifically exclude certain receipts from "gross income," including, for example, gifts and inheritances, and meals or lodgings furnished for the convenience of the employer. The Treasury Regulations emphasize the inclusiveness of the concept of "gross income." In light of the sweeping scope of 61, taxing "all gains except those specifically exempted, and its purpose to include as taxable income "any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected," it seems clear that the District Court's findings, if sustainable, bring the value of the trip within the reach of the statute. Petitioners do not claim that the value of the trip is within one of the statutory exclusions from "gross income" For it was surely within the Commissioner's competence to consider as "gross income" a "reward, or a bonus given to . . . employees for excellence in service," which the District Court

By: Russel Q. Ocho

HELVERING, COMMISSIONER OF INTERNAL REVENUE v. BRUUN 309 U.S. 461 March 25, 1940 Doctrine: Realization of gain not need be in cash derived from the sale of an asset. Gain may occur as a result of exchange of property, payment of taxpayers indebtedness, relief of liability, or other profit realized from the completion of a transaction. Facts: The respondent entered into a 99 years of lease with a certain tenant. Sometime in 1929 the tenant demolished and removed the existing old building which has a value of $12,811.43 and constructed a new building has a value of $51, 434.25 which a useful life not more than fifty years. In the lease, the respondent is not bound to compensate the tenant for any improvements he shall incur in the property. However on July 1, 1933 the lease was cancelled due to tenants default of payment of rents and taxes. As a result, the respondent regained the possession of property from the including the building. On 1933, the petitioner Commission assessed that the respondent realized net gain amounting to $51,434.25. However, the respondent alleged that there was no realization of the property since no transaction happened and the improvement of the property created the gain was not severable from the original capital of the landlord. The lower court ruled in favor of the respondent and concluded that there was no realized gain. Issue: 1. Whether or not the petitioner is correct in determining that the respondent realized taxable gain from the forfeiture of leasehold - YES Ratio: 1. The court ruled that the petitioner is correct in assessing the gain realized by the respondent in 1933. The contention of the respondent that the capital asset at the date of the execution of lease will be remained until the term and expiration. The improvements brought by the tenant such as the construction of a building should be treated as a capital gain only. The recapturing the asset is not a gain derived from capital or realized gain within the meaning of the Sixteenth Amendment and cannot be taxed without apportionment is not meritorious. The court ruled that the respondent cannot successfully contend the definition of gross income laid down in Sixteenth Amendment. He only relies on what was said in the case of Hewitt Co. V. Commissioner. It is true that gain is not always taxable as income, but as a settled rule that realization of gain need not be in cash derived from a sale of an asset. Gain may occur as a result of exchange of property, payment of taxpayers indebtedness, relief from a liability or the other profit realized from the completion of a transaction. The fact that the gain is a portion of the value of property received by the tax payer in the transaction does not negative its realization. By: Julybee L. Ines

COMMISSIONER OF INTERNAL REVENUE v. THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORPORATION G.R. No. 108576 20 January 1999 Doctrine: An income taxpayer covers all persons who derive taxable income. The withholding agent is not a taxpayer; he is a mere tax collector. The agent is not liable for the tax as no wealth flowed into him, he earned no income. 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 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 non-resident aliens. Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. ANSCORs authorized capital stock was increased with the same par value. 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. ANSCOR declared stock dividends. On December 30, 1964 Don Andres died. A day after Don Andres died; ANSCOR increased its capital stock to P20Mand in 1966 further increased it to P30M. In the same year, December 1966, stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate and Doa Carmen from ANSCOR, hence increasing their accumulated shareholdings. Doa Carmen requested a ruling from the United States Internal Revenue Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme under the U.S. Revenue Act. In a letter-reply, the IRS opined that the exchange is only a recapitalization scheme and not tax avoidance. Consequently, Doa Carmen exchanged her whole common shares for the newly reclassified preferred shares. The estate of Don Andres in turn, reduced its common shares. After examining ANSCORs books of account and records, Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source. The Bureau of Internal Revenue (BIR) made the corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty. ANSCORs subsequent protest on the assessments was denied in 1983 by petitioner. Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. The Tax Court reversed petitioners ruling. The CA affirmed the ruling of the CTA. Issues: 1. Whether or not the withholding agent, in such capacity, is deemed a taxpayer for it to avail of the amnesty- NO Ratio: 1. It is well-settled that the sale of stock dividends is taxable and 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 profits such as stock dividends. An income taxpayer covers all persons who derive taxable income. In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer, he is the person subject to tax impose by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His liability, as agent, is direct and independent from the taxpayer, because the income tax was still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him, he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax. The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. 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. Hence, the proceeds are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend, it is part of the "entire income" subject to tax. As income, it is subject to income tax which is required to be withheld at source. By: Iryshell P. Boston

WISE & CO., INC., ET AL v. BIBIANO L. MEER 78 Phil. 665 G.R. No. 48231

June 30, 1947

with intent to maintain the corporation as a going concern, or after deciding to quit with intent to liquidate the business. Proceedings actually begun to dissolve the corporation or formal action taken to liquidate it are but evidentiary and not indispensable. "The distinction between a distribution in liquidation and an ordinary dividend is factual; the result in each case depending on the particular circumstances of the case and the intent of the parties. If the distribution is in the nature of a recurring return on stock it is an ordinary dividend. However, if the corporation is really winding up its business or recapitalizing and narrowing its activities, the distribution may properly be treated as in complete or partial liquidation and as payment by the corporation to the stockholder for his stock. The corporation is, in the latter instances, wiping out all or Part of the stockholders' interest in the company . . ." The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on stock in fact, they surrendered and relinquished their stock in return for said distributions, thus ceasing to be stockholders of the Hongkong Company, which in turn ceased to exist in its own right as a going concern during its more or less brief administration of the business as trustee for the Manila Company, and finally disappeared even as such trustee 1. The Income Tax Law, Act No. 2833 section 25 (a), as amended by section 4 of Act. No. 3761, inter alia stipulated: Where a corporation, partnership, association, joint-account, or insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is a taxable income or a deductible loss as the case may be.

Doctrine: A distribution does not necessarily become a dividend by reason of the fact that it is called a dividend by the distributing corporation. The determining element is whether the distribution was in the ordinary course of business and with intent to maintain the corporation as a going concern, or after deciding to quit with intent to liquidate the business. Facts: On May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd., (hereinafter referred to as the Hongkong Company),a foreign corporation duly authorized to do business in the Philippines, recommended to the stockholders of the company that they adopt the resolutions necessary to enable the company to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation formed on May 27, 1937, (hereinafter referred to as the Manila Company), for the sum of P400,000 Philippine currency; that this sale was duly authorized by the stockholders of the Hongkong Company at a meeting held on July 22, 1937. Wise and Co., Inc were stockholders of Manila Wine Merchants, Inc.. The contract of sale between the two companies was executed on the same date. The sale and transfering of business and assets of the Hongkong company to the Manila Company was completed on August 3, 1937 , on which date the Manila Company paid the Hongkong company the P400,000 purchase price. The result of such sale was a surplus realized by the Hongkongcompany which was distributed to the shareholders. The Hongkongcompany has paid Philippines income tax on the entire earnings from which the said distributions were paid. On August 19, 1937, at a special general meeting of the shareholders of the Hongkongcompany, the stockholders by proper resolution directed that the company be voluntarily liquidated and its capital distributed among the stockholdes. Wise and Co.,Inc. [plaintiffs] duly filed Philippine income tax returns. Bibiano L. Meer, collector of Internal Revenue [defendant] subsequently made deficiency assessments against plaintiffs. Issues: 1. Whether or not the amounts received by the plaintiffs and on which the taxes in question were assessed and collected were ordinary dividends or liquidating dividends as contended by the defendant THE AMOUNTS RECEIVED BY THE PLAINTIFFS ARE CONSIDERED TO BE LIQUIDATING DIVIDENDS AND THEREFORE, TAXABLE. 2. Whether or not liquidating dividends were taxable income YES Ratio: 1. A distribution does not necessarily become a dividend by reason of the fact that it is called a dividend by the distributing corporation. "The ordinary connotation of liquidating dividend involves the distribution of assets by a corporation to its stockholders upon dissolution." The determining element therefore is whether the distribution was in the ordinary course of business and

It should be borne in mind that plaintiffs received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HongkongCompany which was dissolved and in process of complete liquidation. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the then existing Income Tax Law. When the corporation was dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place, which was no different in its essence from a sale of the same stock to a third party who paid therefor. In either case the shareholder who received the consideration for the stock earned that much money as income of his own, which again was properly taxable to him under the same Income Tax Law.

By: Naomi M. Dagoy

WISE & CO., INC., ET. AL., vs. MEER G.R. No. 48231 30 June 1947

________________________________________________ Doctrine: There is no controversy about the legal proposition that dividends declared belong to the owner of the stock at the time the dividend is declared. The moment the dividend is declared, it becomes then separate and distinct from the stock and the dividend falls to him who is proprietor of the stock of which it was theretofore incident. The doctrine is that a dividend is considered parcel of the mass of corporate property until declared and therefore incident to and parcel of the stock up to the time it is declared; and before its declaration, will pass with the sale or devise of the stock. Whosoever owns the stock prior to the declaration of a dividend, owns the dividend also. A dividend is defined as "a corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is declared, these corporate profits belong to the corporation, not to the stockholders, and are liable for corporate indebtedness." (Emphasis supplied.) Facts: Wise & Co., Inc. et. al (Plaintiff-appellants) were stockholders of Manila Wine Merchants, Ltd., a foreign corporation duly authorized to do business in the Philippines. The Board of Directors of Manila Wine Merchants, Ltd., (HK Co.), recommended to the stockholders that they adopt resolutions necessary to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation, (PH Co.), for the sum of P400,000. The HK Co. made a distribution from its earnings for the year 1937 to its stockholders. As a result of the sale of its business and assets to PH Co., a surplus was realized and the HK Co. distributed this surplus to the shareholders (Appellants included). Philippine income tax had been paid by HK Co. on the said surplus from which the said distributions were made. At a special general meeting of the shareholders of the HK Co., the stockholders by resolution directed that the company be voluntarily liquidated and its capital distributed among the stockholders. The Appellants duly filed Income Tax Returns, on which the defendant, Meer (CIR) made deficiency assessments. Plaintiffs paid under written protest and sought recovery. CFI ruled in favor of CIR hence the appeal. Issue: 1. Whether or not the Appellants contend that the amounts received by them and on which the taxes in question were assessed and collected were ordinary dividends -CIR contends that they were liquidating dividends. The distributions under consideration were not ordinary dividends. Therefore, they are taxable as liquidating dividends. It was stipulated in the deed of sale that the sale and transfer of the HK Co. shall take effect on June 1, 1937. Distribution took place on June 8. They could not consistently deem all the business and assets of the corporation sold as of June 1, 1937, and still say that said corporation, as a going concern, distributed ordinary dividends to them thereafter. 2. Whether or not such liquidating dividends taxable income -Income tax law states that Where a corporation, partnership, association, joint-account, or insurance company distributes all of its assets in complete liquidation

or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is a taxable income or a deductible loss as the case may be. Appellants received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HK Co. which was dissolved and in process of complete liquidation. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the Income Tax Law. When the corporation was dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place. The shareholder who received the consideration for the stock earned that much money as income of his own, which again was properly taxable to him under the Income Tax Law. 3. Whether or not the Non-resident alien individual appellants contend that if the distributions received by them were to be considered as a sale of their stock to the HK Co., the profit realized by them does not constitute income from Philippine sources and is not subject to Philippine taxes, "since all steps in the carrying out of this so-called sale took place outside the Philippines -This contention is untenable. The HK Co. was at the time of the sale of its business in the Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the Philippines. The HK Co. was incorporated for the purpose of carrying on in the Philippine Islands the business of wine, beer, and spirit merchants and the other objects set out in its memorandum of association. Hence, its earnings, profits, and assets, including those from whose proceeds the distributions in question were made, the major part of which consisted in the purchase price of the business, had been earned and acquired in the Philippines. As such, it is clear that said distributions were income "from Philippine sources. Ratio: We are fully satisfied from the facts and data furnished here by the parties themselves that the dividends in question were paid to plaintiffs, personally or thru their proxies or agents, in the Philippines. But aside from this, from the moment they were declared and a definite fund specified for their payment (all surplus remaining "after providing for return of capital and various expenses") and all of this was done in the Philippines to all legal intents and purposes they earned those dividends in this country. From the record we deduce that the funds and assets of the Manila Wine Merchants, Ltd., from which those dividends proceeded, were in the Philippines where its business was located. So far as the record discloses, its liquidation was effected in terms of Philippine pesos, indicating that it was made here. And this in turn would lead to the deduction that the funds and assets liquidated were here. Motion denied. So ordered.

By: Alfcris Reztan S. Perez

EUGENE C. JAMES v. UNITED STATES 366 U.S. 213 15 May 1961 Doctrine: It had been a well-established principle, that unlawful, as well as lawful gains are comprehended within the term 'gross income.' Section II B of the Income Tax Act of 1913 provided that 'the net income of a taxable person shall include gains, profits, and income * * * from * * * the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever * * *.' When the statute was amended in 1916, the one word 'lawful' was omitted. This revealed the obvious intent of Congress to tax income derived from both legal and illegal sources, to remove the incongruity of having the gains of the honest laborer taxed and the gains of the dishonest immune. Facts:

implied, of an obligation to repay and without restriction as to their disposition, 'he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent.' By: Jan Chris Patrick O. Bolasa

The petitioner is a union official who, with another person, embezzled in excess of $738,000 during the years 1951 through 1954 from his employer union and from an insurance company with which the union was doing business. Petitioner failed to report these amounts in his gross income in those years and was convicted for willfully attempting to evade the federal income tax due for each of the years 1951 through 1954 in violation of section 145(b) of the Internal Revenue Code of 1939 and section 7201 of the Internal Revenue Code of 1954. He was sentenced to a total of three years' imprisonment. The Court of Appeals affirmed the conviction. Because of a conflict of the Supreme Court's decision in Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, a case whose relevant facts are concededly the same as those in this case, the court granted certiorari. Issue: Whether or not embezzled funds are to be included in the 'gross income' of the embezzler in the year in which the funds are misappropriated Yes. Ratio: The starting point in all cases dealing with the question of the scope of what is included in 'gross income' begins with the basic premise that the purpose of Congress was to use the full measure of its taxing power. The Court has given a liberal construction to the broad phraseology of the 'gross income' definition statutes in recognition of the intention of Congress to tax all gains except those specifically exempted. The language of section 22(a) of the 1939 Code, 'gains or profits and income derived from any source whatever,' and the more simplified language of section 61(a) of the 1954 Code, 'all income from whatever source derived,' have been held to encompass all accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. A gain constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it. Under these broad principles, petitioner's contention, that all unlawful gains are taxable except those resulting from embezzlement, should fail. When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or

ARTHUR HENDERSON V. COLLECTOR OF INTERNAL REVENUE 1 SCRA 649 28 February 1961 Doctrine: The allowances furnished to the employee by his employer for its convenience are excluded from the taxable income of the taxpayer under the Convenience of the Employer Rule. Facts: The spouses Arthur Henderson and Marie B. Henderson (taxpayers) filed with the BIR returns of annual net income for the years 1948 to 1952. After that Henderson received from the BIR assessment notices and paid the amounts assessed. On November 28, 1953, after investigation and verification, the BIR reassessed the taxpayers' income for the years 1948 to 1952 and demanded payment of the deficiency taxes. In the foregoing assessments, the BIR considered as part of their taxable income the taxpayer-husband's allowances for rental, residential expenses, subsistence, water, electricity and telephone; bonus paid to him; withholding tax and entrance fee to the Marikina Gun and Country Club paid by his employer for his account; and travelling allowance of his wife. Henderson asked for reconsideration of the assessment. Taxpayers claim that as regards the husband-taxpayers allowances for rental and utilities such as water, electricity and telephone, he did not receive the money for said allowances, but they lived in the apartment furnished and paid for by his employer for its convenience; that they had no choice but live in the said apartment furnished by his employer, otherwise they would have lived in a less expensive one. BIR denied the reconsideration of the taxpayers and hence, taxpayers filed in the Court of Tax Appeals (CTA) a petition to review the decision of the Commissioner of Internal Revenue (CIR). The CTA held that the ratable value to him of the quarters furnished constitutes part of taxable income, that since the taxpayers did not receive any benefit from the travelling expense allowance as the trip was a business one, the same could not be considered income, and even if it was considered as such, it is not subject to tax as it was deductible as travel expense. The CTA ordered the CIR to refund the taxpayers. Hence, this petition. Issue: 1. Whether or not the allowances for rental of the apartment furnished by the husband-taxpayers employer-corporation, including utilities such as light, water, telephone, etc. and the allowance for travel expenses given by his employer-corporation to his wife in 1952 part of taxable income- NO

includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rents dividend, securities, or the transaction of any business carried on for gain or profit, or gains, profits, and income derived from any source whatever. The evidence substantially supports the findings of the Court of Tax Appeals. The quarters, therefore, exceeded their personal needs. But the exigencies of the husband-taxpayer's high executive position, not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarters like the ones they had occupied. Although entertaining and putting up houseguests and guests of the husband-taxpayer's employer-corporation were not his predominant occupation as president, yet he and his wife had to entertain and put up houseguests in their apartments. That is why his employer-corporation had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those extra expenses for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartments chosen by the husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in question redounded to their personal benefit or was retained by them. Likewise, the findings of the CTA that the wife-taxpayer had to make the trip to New York at the behest of her husband's employer-corporation to help in drawing up the plans and specifications of a proposed building, is also supported by the evidence. No part of the allowance for travelling expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained by them. The fact that she had herself operated on for tumors while in New York was but incidental to her stay there and she must have merely taken advantage of her presence in that city to undergo the operation. The computation made by the taxpayers is correct. Adding the amount of P29, 573.79, their net income per return, the amounts of P6, 500, the bonus received in 1948, and P4, 800, the taxable ratable value of the allowances, brings up their gross income to P40, 873.79. Deducting there from the amount of P2, 500 for personal exemption, the amount of P38, 373.79 is the amount subject to income tax. The income tax due on this amount is P6, 957.19 only. Deducting the amount of income tax due, P6, 957.19, from the amount already paid, P8, 562.47, the amount of P1, 605.28 is the amount refundable to the taxpayers. Add this amount to P569.33, P1, 294.00, P343.00, and P2, 164.00, refundable to the taxpayers for 1949, 1950, 1951 and 1952, and the total is P5, 986.61. Hence, the CIR is ordered to refund the taxpayers the sum of P5, 986.61. By: Donna Mae H. Padua

Ratio: 1. It is well-settled that the claim of the taxpayer that a certain amount was for managers residential expenses and should not form part of the ratable value subject to income tax, being supported by substantial evidence.

As provided in Section 29, Commonwealth Act No. 466, National Internal Revenue Code, "Gross income"

COMMISSIONER OF INTERNAL REVENUE v. COURT OF APPEALS, THE COURT OF TAX APPEALS AND GCL RETIREMENT PLAN 207 SCRA 487 23 March 1992 Doctrine: The tax imposed under the Tax Code shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees.

plan of an employer for the benefit of some or all of his employees . . . The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out employees' trusts for tax exemption. And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose. It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law. Moreover, the deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates under the old law, therefore, can not be deemed to extent to employees' trusts. Said Decree, being a general law, can not repeal by implication a specific provision, Section 56(b) now 53 [b]) in relation to Rep. Act No. 4917 granting exemption from income tax to employees' trusts. There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place. By: Chiqui A. Lechago

Facts: GCL Retirement Plan (GCL, for brevity) is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917. GCL made investments and earned interest income from which was withheld fifteen percent (15%) final withholding tax imposed by Pres. Decree No. 1959, which took effect on 15 October 1984, GCL filed with Commissioner a claim for refund in the amounts of P1, 312.66 withheld by Anscor Capital and Investment Corp., and P2, 064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second claim for refund of the amount of P7, 925.00 withheld by Anscor, stating in both letters that it disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax as provided under Rep. Act No. 4917 in relation to Section 56 (b) of the Tax Code. The refund requested was denied and the matter was subsequently elevated to the Court of Tax Appeals (CTA) which ruled in favor of GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest income and ordering a refund of the tax withheld. Upon appeal, the Court of Appeals upheld the decision of the CTA. The Commissioner now seeks a reversal of the Decision of respondent Court of Appeals ordering a refund, in the sum of P11, 302.19, to the GCL Retirement Plan representing the withholding tax on income from money market placements and purchase of treasury bills, imposed pursuant to Presidential Decree No. 1959. Issue: 1.

Whether or not the employees trust is exempt from the final withholding tax on interest income from money placements and purchase of treasury bills required by Pres. Decree No. 1959 YES

Ratio: 1.

It is significant to note that the GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967.

In so far as employees' trusts are concerned, Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No. 1983,specifically provides that employee's trusts are exempt from income tax. For emphasis it states, Sec. 56. Imposition of Tax. (a) Application of tax. The taxes imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust. (b) Exception. The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing

COMMISSIONER OF INTERNAL REVENUE v. THE COURT OF APPEALS and EFREN P. CASTANEDA GR No. 96016 17 October 1991 Doctrine: In the exercise of sound personnel policy, the government cannot withhold tax base on the terminal leave pay received by a government officer or employee who retires, resigns or is separated from service through no fault of his own. Facts: On 10 December 1982, private respondent Efren P. Castaneda retired from a government service as a Revenue Attach in the Philippine Embassy in London, England. Upon retirement, Castaneda received, among other benefits, terminal leave pay from which petitioner Commissioner of Internal Revenue withheld P12,557.13 allegedly representing income tax thereon. Private respondent contends that the terminal leave pay he received should be tax exempt. He filed a formal written claim with the Court of Tax Appeals on 16 July 1984 for a refund of the P12,557.13 against petitioner. The Court of Tax Appeals ruled in favor of private respondent and ordered the Commissioner of Internal Revenue to refund Castaneda the sum of P12,557.13 withheld as income tax. Petitioner appealed the above-mentioned Court of Tax Appeals decision to this Court, which was docketed as G.R. No. 80320. In turn, we referred the case to the Court of Appeals for resolution. The case was docketed in the Court of Appeals as CA-G.R. SP No. 20482. On 26 September 1990, the Court of Appeals dismissed the petition for review and affirmed the decision of the Court of Tax Appeals. The Solicitor General, acting on behalf of the Commissioner of Internal Revenue, contends that the terminal leave pay is income derived from employer-employee relationship, citing in support of his stand Section 28 of the National Internal Revenue Code; that as part of the compensation for services rendered, terminal leave pay is actually part of gross income of the recipient and thus it is taxable. Issue: 1. Whether or not terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is subject to withholding (income) tax. -- NO

fault of his own. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. As best defined in the case of Borromeo vs. CSC, terminal leave pay is not part of gross salary or income of a government official or employee but a retirement benefit. In fine, a terminal leave pay cannot be subject to income tax. By: Brenda Grace A. De Los Reyes

Ratio: 1. It is a well settled rule that terminal leave pay received by government official or employee is not subject to withholding (income) tax.

As the court ruled this case, citing the case of Jesus n. Borromeo vs. The Honorable Civil Service Commission, et. Al, 31 July 1991, the Court explained the rationale behind the employee's entitlement to an exemption from withholding (income) tax on his terminal leave pay as follows: . . . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no

RE: REQUEST OF ATTY. BERNARDO ZIALCITA A.M. No. 90-6-015-SC 18 October 1990 Doctrine: The Terminal Leave Pay received by virtue of compulsory retirement which is considered as a "cause beyond the control of the said official or employee" can never be considered a part of his salary subject to the payment of income tax but fags within the enumerated exclusions from gross income and is therefore not subject to tax. Facts: Atty. Bernardo Zialcita, then employee of the Judiciary has rendered government service from March 13, 1962 up to February 15, 1990. The next day, or on February 16, 1990, he reached the compulsory retirement age of 65 years. In view of that retirement, a terminal leave pay was received representing the money value of accrued leave credits which the government usually grants. The claim as received was only net of the withheld income tax by the finance division of the office after deducting the amount of P59,502.33 as withholding tax. Upon knowing the fact, Atty. Zialcita did inform his office and a request was made to resolve his question. In view thereof, the Court en Banc, issued resolution regarding the amount claimed on the occasssion of retirement, disposing of in favor of the retiree employee. On September 18, 1990, the Commissioner of Internal Revenue, as intervenor-movant and through the Solicitor General, filed a motion for clarification and/or reconsideration with this Court. Hence, this final disposition of the case. Issues:

and all its forms and documents required of the members shall be exempt from all types of taxes. Applying the aforesaid provisions, it can be concluded that the amount received by Atty. Zialcita as a result of the conversion of these unused leaves into cash is exempt from income tax. b) The terminal leave pay of Atty. Zialcita may likewise be viewed as a "retirement gratuity received by government officials and employees" which is also another exclusion from gross income as provided for in Section 28(b), 7(f) of the NIRC. A gratuity is that paid to the beneficiary for past services rendered purely out of generosity of the giver or grantor. (Peralta v. Auditor General, 100 Phil. 1051 [1957]) It is a mere bounty given by the government in consideration or in recognition of meritorious services and springs from the appreciation and graciousness of the government. (Pirovano v. De la Rama Steamship Co., 96 Phil. 335, 357 [1954]) 2. The Court said that this case is merely an administrative matter involving an employee of the Court who applied for retirement benefits and who questioned the deductions on the benefits given to him. Hence, the resolution applies only to employees of the Judiciary. If the court extends the effects of the aforementioned resolution to all other government employees, in the absence of an actual case and controversy, it would in principle be rendering an advisory opinion. 3. With respect to the need for a written request for refund, Court ruled that Atty. Zialcita need no longer file a formal request for refund since the Resolution, which principally deals with his case, already binds the intervenor-movant Commissioner of Internal Revenue. However, with respect to other retirees allegedly similarly situated and from whom withholding taxes on terminal leave pay have been deducted, we rule that these retirees should file a written request for refund within two years from the date of promulgation of this resolution. By: Marvin V. Bohol

1. Whether or not the Terminal Leave Pay as received by retired employees is subject to tax NO 2. Whether or not the decision of the court is also applicable to other government employees and to those who have already been retired whose retirement benefits withholding taxes have been deducted NO 3. Whether or not the deducted taxes are refundable even without a written request for refund from the taxpayerretiree NO Ratio: 1. The Court resolved to deny the motion for reconsideration and hereby holds that the money value of the accumulated leave credits of Atty. Bernardo Zialcita are not taxable and the deducted amount be refunded for the following reasons: a) Atty. Zialcita opted to retire under the provisions of Republic Act 660, which is incorporated in Commonwealth Act No. 186. Section 12(c) of CA 186 states: ... Officials and employees retired under this Act shall be entitled to the commutation of the unused vacation leave and sick leave, based on the highest rate received, which they may have to their credit at the time of retirement. Section 28(c) of the same Act, in turn, provides: (c) Except as herein otherwise provided, the Government Service Insurance System, all benefits granted under this Act,

INTERNATIONAL AMARILLA, et al. G.R. No. 162775 Doctrine:

BROADCASTING

CORPORATION

v.

October 27, 2006

2. Whether or not IBC is estopped from reneging on its agreement with respondents to pay for the taxes on said retirement benefits YES Ratio: 1. Revenue Regulation No. 12-86, the implementing rules of the foregoing provisions, provides: (b) Pensions, retirements and separation pay. Pensions, retirement and separation pay constitute compensation subject to withholding tax, except the following: (1) Retirement benefit received by official and employees of private firms under a reasonable private benefit plan maintained by the employer, if the following requirements are met: (i) The retirement plan must be approved by the Bureau of Internal Revenue; (ii) The retiring official or employees must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and (iii) The retiring official or employee shall not have previously availed of the privilege under the retirement benefit plan of the same or another employer. Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least 10 years; (3) the retiring official or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit had been availed of only once. The retirement plan must be approved by the BIR. In this case, the retirees were qualified to retire optionally from their employment with the IBC, under the CBA. However, there is no evidence on record that the CBA had been approved or was ever presented to the BIR, hence, the retirement benefits of respondents are taxable. 2. The well-entrenched rule is that estoppel may arise from a making of a promise if it was intended that the promise should be relied upon and, in fact, was relied upon, and if a refusal to sanction the perpetration of fraud would result to injustice. Under Section 80 of the NIRC, petitioner, as employer, was obliged to withhold the taxes on said benefits and remit the same to the BIR. Section 80. Liability for Tax. (A) Employer. The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld under this Chapter. If the employer fails to withhold and remit the correct amount of tax as required to be withheld under the provision of this Chapter, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable in respect to such failure to withhold and remit. In the instant case, the IBC did not withhold the taxes due on the retirement benefits and in fact, obliged itself to pay the taxes due thereon. This was done to induce the retirees to avail of the optional retirement scheme. Respondents received their retirement benefits from the petitioner, in three staggered installments without any tax deduction for the simple reason that petitioner had remitted the same to the BIR with the use of its own funds conformably with its agreement with the retirees. It was only when respondents demanded the payment of their salary differentials that petitioner alleged, for the first time, that it had failed to present the 1993 CBA to the BIR for approval,

For the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least 10 years; (3) the retiring official or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit had been availed of only once. Facts: On various dates, petitioner, Intercontinental Broadcasting Corporation (IBC), employed at its Cebu station the respondents, Amarilla, Quiones, Lagahit and Otadoy. In the meantime, the four employees retired from the company and received, on staggered basis, their retirement benefits under the 1993 Collective Bargaining Agreement between the petitioner and the bargaining unit of its employees. In the meantime, a salary increase was given to all employees of the company, current and retired. However, when the four retirees demanded theirs, petitioner refused and instead informed them via a letter that their differentials would be used to offset the tax due on their retirement benefits in accordance with the National Internal Revenue Code (NIRC). The four retirees thus lodged a complaint with the National Labor Relations Commission (NLRC) questioning said withholding. They averred that that their retirement benefits were exempt from income tax; and IBC had no authority to withhold their salary differentials. For its part, the IBC averred that the retirement benefits received by employees from their employers constitute taxable income. While retirement benefits are exempt from taxes under the NIRC, the law requires that such benefits received should be in accord with a reasonable retirement plan duly registered with the BIR after compliance with the requirements enumerated therein. Since its retirement plan in the 1993 Collective Bargaining Agreement (CBA) was not approved by the Bureau of Internal Revenue (BIR), the retirees were liable for income tax on their retirement benefits. The Labor Arbiter rendered judgment in favor of the retirees and the NLRC affirmed the said judgment. The IBC appealed to the Court of Appeals. However, the Court of Appeals dismissed the petition and held that the salary differentials of the respondents are part of their taxable gross income, considering that the CBA was not approved, much less submitted to the BIR. However, petitioner could not withhold the corresponding tax liabilities of respondents due to their existing CBA, providing that such retirement benefits would not be subjected to any tax deduction, and that any such taxes would be for its account. Issues: 1. Whether or not the retirement benefits of respondents are part of their gross income - YES

rendering such retirement benefits not exempt from taxes; consequently, they were obliged to refund to it the amounts it had remitted to the BIR in payment of their taxes. Petitioner used this failure as an afterthought, as an excuse for its refusal to remit to the respondents their salary differentials. Patently, petitioner is estopped from doing so. It cannot renege on its commitment to pay the taxes on respondents retirement benefits on the pretext that the new management had found the policy disadvantageous. By: Emmanuel A. Cacal

Commissioner of Internal Revenue V. MitsubishiMetal Corp. G.R. 54908 22 January 1990 Doctrine: Laws granting exemption from tax are construed strictissimiJuris against the taxpayer and liberally in favor of the taxing power. Facts: Atlas consolidated mining and development corporation entered into a construct by loan with Mitsubishi metal corporation, a Japanese corporation licensed to engage business in the Philippines. Under the said contract, Mitsubishi agree to extend loan to Atlas in the amount of $20,000,000.00 Atlas in return, under took to sell Mitsubishi all copper produced for a period of 15 years. Mitsubishi thereafter applied for a loan with the Exportimport bank of Japan, controlled and financed by the Japanese Government for an approved amount total of $20,000,000.00 For the condition that Mitsubishi corporation would use the amount as a loan to Atlas as a consideration for importing copper concentrates from Atlas pursuant to that contract, the corresponding tax thereon in the amount of PI,971,595.01 was withheld and duly remitted to the government. Private respondent, tiled a claim for tax credit requesting the amount remitted be applied against their existing and future tax appeals in its decision that Mitsubishiexecuted a waiver and disclaimer of interest in the claim for tax credit in favor of Atlas. Petitioner not having acted on the claim, tiled a petition for review with respondent court. The petition was grounded on the claim that Mitsubishi was a mere agent of Eximbank. Such government status of the bank is the basis for private respondents claim for exemption. Issue: 1. Whether or not interest income from the loans extended to Atlas by Mitsubishi corporation is excludible from gross income tax. - NO

By: Michael John M. Gestopa

Ratio: Settled is the rule that when a contract of loan is completed, the money ceases to be the property of the former owner and becomes the sole property of the obligor. Technically, it is Mitsubishi who lend money to Atlas and not the Eximbank which is controlled and owned by the Japanese Government. Therefore; exemption under this code cannot be claim in this case as exemption from gross income taxation. Laws granting exemption from tax are construed strictly against the tax payer and liberally in favor of the taxing power. The burden of proof rest upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed.

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, v. MOSE DUBERSTEIN ET AL. ALDEN D. STANTON ET AL., PETITIONERS, v. UNITED STATES OF AMERICA 363 U.S. 278___ 13 June 1960 Doctrine: The value of property acquired by gift is excluded from gross income. Facts: Duberstein ran the Duberstein Iron & Metal Company. He often gave business tips to a guy named Berman who ran a similar company. Berman made money from the tips, and was so grateful he gave Duberstein a brand new car as a present. Berman's company deducted the cost of the car as a business expense, but Duberstein did not include the value of the car in his gross income. The IRS claimed that Duberstein was required to include the value of the car as gross income. Duberstein objected. Duberstein considered the car to be a gift. The Tax Court found for the IRS. Duberstein appealed. The Appellate Court reversed. The IRS appealed. The IRS argued that the car was obviously intended by Berman to be payment for the business advice Duberstein gave him. Duberstein argued that Berman was under no legal obligation to provide the car, therefore it must be a gift. In a separate case, Stanton was working for the Trinity Church. He resigned, and in appreciation for his years of years of service (or maybe just to get rid of him and keep him quiet), the Church gave Stanton $20k. The IRS claimed that Stanton needed to include the $20k in his gross income. Stanton objected. Stanton considered the $20k to be a gift. The Trial Court found for Stanton. The IRS appealed. The IRS argued that the $20k was payment for Stanton's services. Stanton argued that the Church was under no legal obligation to provide the $20k, therefore it must be a gift. The Appellate Court reversed. Stanton appealed. The US Supreme Court combined both cases. Issues: 1. Whether or not the car is a gift excludable from gross income NO 2. Whether or not a gratuity is a gift excludable from gross income IT DEPENDS ON THE INTENTION OF THE TRANSFEROR Ratio: 1. The US Supreme Court found that Duberstein's car was not a gift because it was given to him either as compensation for the customer references he gave to Berman or to encourage Duberstein to give more references in the future.

The Court remanded on Stanton to ask the question whether the $20k was really a gift, or was a payout in order to encourage Stanton to resign. If it was, then it is compensation, not a gift. 2. The basic rule illustrated in this case is that in order to be considered a gift, the item must be given with no expectation of getting something in return, or in response to receiving something of value. Gifts are the result of "detached and disinterested generosity", while payments are given as an "involved and intensely interested" act. In other words, it is the intention of the transferor that is controlling as to whether a transfer is a gift. That's a question of fact for a jury to decide. The court rejected IRS's suggestion to establish the presumption that if there is an economic relationship between the person who gives the gift and the recipient, then the transfer of property is attributable to the economic relationship, even though there is a personal relationship as well. By: Arsenio Empuerto Caballero Jr.

OGILVIE ET AL., MINORS v. UNITED STATES 519 U.S. 79 9 October 1996

reprehensible conduct and the jury's need to punish and to deter it. The Government concludes that these punitive damages fall outside the statute's coverage, and the court agreed with the Governments interpretation of the statute. In Commissioner vs Schleier, 515 US 323, the court came to resolving the statute's ambiguity in the Government's favor. The case did not involve damages received in an ordinary tort suit, but rather it involved liquidated damages and backpay received in a settlement of a lawsuit charging a violation of the Age Discrimination in Employment Act (ADEA). ADEA liquidated damages are not covered, they are punitive in nature. They are not designed to compensate ADEA victims. That the statute covers pain and suffering damages, medical expenses, and lost wages in an ordinary tort case and excluded from income. The court concludes that punitive damages are not covered because they are an element of damages and not "designed to compensate victims. Hence, they are punitive in nature. Also, the court finds the Government's reading more faithful to the history of the statutory provision as well as the basic tax related purpose that the history reveals in which it excludes compensatory damages that restore a victims lost, nontaxable capital. The court asked why Congress might have wanted the exclusion to have covered these punitive damages, and they found no very good answer. Those damages are not a substitute for any normally untaxed personal (or financial) quality, good, or "asset." They do not compensate for any kind of loss. Petitioners make three arguments to the contrary.However, they are not persuasive to defeat the Governments interpretation. His first argument does not overcome the courts interpretation of the provision in Schleier, nor does it change the provision's history. Second, petitioners argue that the purposes might have led Congress to exclude lost wages from income would also have led Congress to exclude punitive damages.The court says that it is one of degree. Tax generosity presumably has its limits. The element of punitive award does not exist in the case, and the damages at issue are not all compensatory but entirely punitive. Lastly, petitioner relied upon a later enacted law. However, Congress' primary focus was upon what to do about nonphysical personal injuries, not upon the provision's coverage of punitive damages under pre-existing law. By: Mymannah Lou O. Dimacaling

Doctrine: Amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness are excluded from gross income. The damages are not taxable. Facts: The petitioners in this case are the husband and two children of a woman who died of toxic shock syndrome in 1983. They received a jury award of $1,525,000 actual damages and $10 million punitive damages in a tort suit brought by Kelly (petitioner) based on Kansas law against the maker of the product that caused the death of Betty O Gilvie (Kellys wife). Kelly paid federal income tax insofar as the proceeds represented punitive damages, but immediately he sought for a refund. Petitioners concerns are legal entitlement to that refund. The litigation represents the consolidation of two cases brought in the same Federal District Court: the husbands suit against the Government for a refund, and the Government suit against the children to recover the refund that the Government had made to the children earlier procedurally speaking. The Federal District Court held on the merits that the language found under26 U.S.C. 104(a)(2),excluded from the gross income the amount of any damages received . . . on account of personal injury or sickness". The statutory phrase also includes punitive damages which entitle Kelly to acquire and the children to keep, their refund. However, the Court of Appeals for the Tenth Circuit, the Fourth, Ninth and Federal Circuits reversed the District Courts decision. It held that the exclusionary provision does not cover punitive damages. Issue: 1. Whether or not the provision applies to punitive damages received by the petitioners in a tort suit for personal injuries - NO

Ratio: "amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness." 26 U.S.C. 104(a)(2) (1988 ed.) (emphasis added). The punitive damages received by the petitioners were not received "on account of" personal injuries. Therefore, the provision, stated above, does not apply and the damages are taxable. On the Government's side, the provision is applicable only to those personal injury lawsuit damages that were awarded by reason of, or because of, the personal injuries. They would make the section inapplicable to punitive damages, where those damages are not compensation for injury but instead are private fines levied by civil juries to punish reprehensible conduct and to deter its future occurrence. Moreover, the Government says that such damages were not "received . . . on account of" the personal injuries. But, such damages were awarded "on account of "a defendant's

MARRITA MURPHY AND DANIEL J. LEVEILLE, v. INTERNAL REVENUE SERVICE AND UNITED STATES OF AMERICA No. 05-5139 03 July 2007 Doctrine: Compensatory award is part of the gross income when received not on the account of personal physical injuries, and therefore is not exempt from taxation. Facts: Marrita Murphy filed a complaint with the Department of Labor alleging that her former employer, the New York Air National Guard (NYANG), in violation of various whistleblower statutes, had blacklisted her and provided unfavorable references to potential employers after she had complained to state authorities of environmental hazards on a NYANG airbase. The Secretary of Labor determined the NYANG had unlawfully discriminated and retaliated against Murphy, ordered that any adverse employment references to the taxpayer in Office of Personnel Management files be withdrawn, and remanded her case to an Administrative Law Judge for findings on compensatory damages. On remand Murphy submitted evidence that she had suffered both mental and physical injuries as a result of her blacklisting. A physician testified Murphy had sustained somatic and emotional injuries. Upon finding Murphy had also suffered from other physical manifestations of stress including anxiety attacks, shortness of breath, and dizziness, the ALJ recommended compensatory damages totaling $70,000, of which $45,000 was for emotional distress or mental anguish, and $25,000 was for injury to professional reputation from having been blacklisted. None of the award was for lost wages or diminished earning capacity. On her tax return for 2000, Murphy included the $70,000 award in her gross income pursuant to 61 of the IRC. See 26 U.S.C. 61(a) (*G+ross income means all income from whatever source derived). As a result, she paid $20,665 in taxes on the award. Murphy later filed an amended return in which she sought a refund of the $20,665 based upon 104(a)(2) of the IRC, which provides that gross income does not include ... damages... received ... on account of personal physical injuries or physical sickness. United States Court of Appeals for the District of Columbia Circuit held that the taxation of emotional distress awards by the federal government is unconstitutional. However, that decision was vacated, or rendered void,http://en.wikipedia.org/wiki/Murphy_v._IRS - cite_note2 by the Court on December 22, 2006. Hence, rehearing of the case was conducted. Issues: 1. Whether or not the compensation award received by Murphy is part of her gross income and therefore not exempt to taxation. YES Whether or not the tax imposed is a direct tax. NO

cause of action giving rise to the recovery *was+ based upon tort or tort type rights. Murphy contends 104(a)(2), even as amended, excludes her particular award from gross income. First, she asserts her award was based upon tort type rights in the whistle-blower statutes the NYANG violated-a position the Government does not challenge. Second, she claims she was compensated for physical injuries, which claim the Government does dispute. Murphy no doubt suffered from certain physical manifestations of emotional distress, but the record clearly indicates the Board awarded her compensation only for mental pain and anguish and for injury to professional reputation. Although the Board cited her psychologist, who had mentioned her physical ailments, in support of Murphy's description of her mental anguish, we cannot say the Board, notwithstanding its clear statements to the contrary, actually awarded damages because of Murphy's bruxism and other physical manifestations of stress. At best-and this is doubtful-at best the Board and the ALJ may have considered her physical injuries indicative of the severity of the emotional distress for which the damages were awarded, but her physical injuries themselves were not the reason for the award. The Board thus having left no room for doubt about the grounds for her award, we conclude Murphy's damages were not awarded by reason of, or because of, *physical+ personal injuries.Therefore, 104(a)(2) does not permit Murphy to exclude her award from gross income. Damages received for emotional distress are not listed among the examples of income in 61 and, the Congress amended 104(a) of the Internal Revenue Code to narrow the exclusion to amounts received on account of personal physical injuries or physical sickness from personal injuries or sickness, and explicitly to provide that emotional distress shall not be treated as a physical injury or physical sickness, thus making clear that an award received on account of emotional distress is not excluded from gross income under 104(a)(2). The court held that for the 1996 amendment of 104(a) to make sense, gross income in 61(a) must, it does, include an award for nonphysical damages such as Murphy received, regardless whether the award is an accession to wealth. 2. The court held that the tax upon the award is an excise and not a direct tax subject to the apportionment requirement of Article I, Section 9 of the Constitution. Only three taxes are definitely known to be direct: (1) a capitation, (2) a tax upon real property, and (3) a tax upon personal property. On the other hand, excises cover duties imposed on importation, consumption, manufacture and sale of certain commodities, privileges, particular business transactions, vocations, occupations and the like. More specifically, excise taxes include, in addition to taxes upon consumable items, taxes upon the sale of grain on an exchange, the sale of corporate stock, doing business in corporate form, gross receipts from the business of refining sugar, the transfer of property at death, gifts, and income from employment. The court find it more appropriate to analyzebased upon the precedents this case and therefore to ask whether the tax laid upon Murphy's award is more akin, on the one hand, to a capitation or a tax upon one's ownership of property, or, on the other hand, more like a tax upon a use of property, a privilege, an activity, or a transaction Even if It assume one's human capital should be treated as personal property, it does not appear that this tax is upon ownership; rather, as the Government points out, Murphy is taxed only after she receives a compensatory award, which makes the tax seem to be laid upon a transaction.

2.

Ratio: 1.

Murphy's compensatory award was not received on account of personal physical injuries, and therefore is not exempt from taxation pursuant to 104(a)(2) of the IRC since the award is part of her gross income,

The Supreme Court held in Commissioner v. Schleier, 515 U.S. 323 (1995), that before a taxpayer may exclude compensatory damages from gross income pursuant to 104(a)(2), he must first demonstrate that the underlying

In Tyler v. United States, 281 U.S. 497, (1930) (A tax laid upon the happening of an event, as distinguished from its tangible fruits, is an indirect tax which Congress, in respect of some events undoubtedly may impose); also in Simmons v. United States, (tax upon receipt of money is not a direct tax). Assuming without deciding that a tax levied upon all the uses to which property may be put, or upon the exercise of a single power indispensable to the enjoyment of all others over it, would be in effect a tax upon property. Murphy did not receive her damages pursuant to a business activity, and the court therefore does not view this tax as an excise under that theory. On the other hand, as noted above, the Supreme Court several times has held a tax not related to business activity is nonetheless an excise. And the tax at issue here is similar to those. By: Annabelle G. Delima

NIPPON LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC. v. COMMISSIONER OF INTERNAL REVENUE CTA Case No. 6142 4 February 2002 Doctrine: "Gains" as the term is used therein in Section 32(B)(7)(g) of the Tax Code cannot include interest since it clearly refers to gains from the sale of bonds, debentures and other certificates of indebtedness. Facts: Petitioner is a domestic corporation engaged in the business of life insurance. Petitioner invests regularly in government securities through negotiated purchases with several banks in the secondary market in compliance with the requirements as required under the Insurance Code of the Philippines to invest in and purchase certain government securities in the course of its operations. These investments consist of bonds or other evidences of debt of the Philippine Government, its political subdivisions or instrumentalities, or of governmentowned or controlled corporations and entities. On December I, I997, Petitioner purchased from Citibank N.A. a I0-year Fixed Rate Treasury Bond with a face value of P20 Million. The Bureau of Treasury issued the Bond originally to Citibank on November 27, 1997 at face value and an interest coupon rate of 22.875% payable semi-annually, i.e. on May 27 and November 27 each year for 10 years. At the time of the purchase, the Bond offered a yield rate of 22.82375%, which is lower than the Bond's fixed interest rate of 22.875%. Accordingly, Petitioner had to purchase the Bond from Citibank at a premium, or at a price higher than the Bond's face value. Petitioner's total cash outlay to acquire the Bond amounted to P20,076,022.89. Petitioner held on to the Bond from December I, 1997 up to June I5, I999. On three separate occasions during this period, or on May 27, 1998, November 27, I998 and May 27, 1999, Petitioner collected interest income on the Bond amounting to P1,830,000.00 for each income payment, net of P457,5 00.00, representing the 20% final tax withheld and remitted by the Bureau of Treasury to the BIR pursuant to Section 27 (D)(1) of the NIRC. Thus, Petitioner received a total of P5,490,000.00 as interest income on the Bond, net of P1,372,500.00 final withholding tax. On June 16, 1999, Petitioner sold the Bond to HSBC at a premium, because on the date of the sale, the Bond offered a yield rate of 14.625%. Petitioner received P27,152,761.15 from HSBC on the sale. On the basis of the foregoing transactions, the total amount of taxes allegedly withheld from Petitioner's income on the Bond and remitted by the Bureau of Treasury to the BIR for the years 1998 and 1999 is P2,223,386.82. On October 25, 1999, the BIR issued BIR Ruling No. 166-99, providing that the interest income, yield or gain derived from bonds, debentures or certificates of indebtedness as deposit substitutes, which are ordinarily subject to 20% final tax under Section 27 (D)(l) of the NIRC, should exclude the interest income, yield or gain from the gross income if the bonds, debentures or the certificate of indebtedness have maturities of more than five (5) years. On January 7, 2000, BIR Ruling No. 016-00 was issued, with the BIR reiterating its stand that if the maturity period of the bonds issued through the Bureau of Treasury will be more than five (5) years, the gains that may be derived therefrom

by the bondholders shall accordingly be exempt from the 20% final withholding tax. The BIR stated further that: "Since the law speaks of the exclusion from gross income of all gains derived from long-term investments, it follows that embraced thereunder are income, yield or interest, which are all synonymous with gains, whether discounted or at premium. Thus, the exemption applies to interest/coupon or profit from the principal of such long-term regular or SDT bonds complying with the statutory period." Thus, on March 17, 2000, on the basis of the foregoing rulings, Petitioner filed an administrative claim for the refund of the amount of P2,223,386.82 allegedly representing taxes erroneously withheld from its income from investment in Fixed Rate Treasury Bond for the years 1998 and 1999. Issue: Whether or not the term "gains", as used in Section 32(B)(7)(g) of the NIRC, encompasses all forms of "income" derived from bonds, debentures and other certificates of indebtedness with a maturity of more than 5 years, including the interest income and yield derived from such long-term certificates of indebtedness, considering the connotation of the term "gains" in relation to the financial treatment of bonds, debentures and other certificates of indebtedness NO Ratio: We take the view that "gains" as the term is used therein in Section 32(B)(7)(g) of the Tax Code cannot include interest since it clearly refers to gains from the sale of bonds, debentures and other certificates of indebtedness. Initially, it must be pointed out that whereas the term "gains" includes "interest" as a general rule, this rule cannot be applied to Section 32(B)(7)(g) of the Tax Code which particularly refers to "Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness" in its title and "Gains realized from the sale or exchange or retirement of bonds, debentures and other certificate of indebtedness with a maturity of more than five (5) years" in its body. Stated otherwise, Section 32(B)(7)(g) of the Tax Code specifically refers to gains from the sale of bonds, debentures and other certificates of indebtedness as contradistinguished from the term "gains" in its general sense, which is synonymous to income. There is a clear distinction between interest from bonds and gain from the sale of bonds. It is only the "Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years" that is excluded from gross income and thus exempt from income tax under Section 32(B)(7)(g) of the Tax Code. Such gains from sale or exchange or retirement of bonds, debentures or other certificate of indebtedness fall within the general category of "Gains derived from dealings in property", as distinguished from interest from bonds, debentures or other certificate of indebtedness, which fall within the general category of "Interests" under Section 32(A) of the Tax Code. By: Aileen A. Bangahon

BLAS GUTIERREZ, AND MARIA MORALES v. HONORABLE COURT OF TAX APPEALS, AND THE COLLECTOR OF INTERNAL REVENUE 101 Phil 743 31 May 1957 Doctrine: The compensation or income derived from the expropriation of property located in the Philippines is an income from sources within the Philippines and subject to the taxing jurisdiction of the place. Facts: Blas Gutierrez and Maria Morales was the registered owner of an agricultural land located in Mabalacat Pampanga. The Republic of the Philippines, at the request of the U.S. Government and pursuant to the terms of the Military Bases Agreement of March 14, 1947, instituted condemnation proceedings in the Court of the First Instance of Pampanga, docketed, as Civil Case No. 148, for the purpose of expropriating the lands for the expansion of the Clark Field Air Base, which project is necessary for the mutual protection and defense of the Philippines and the United States. At the commencement of the action, the Republic of the Philippines, therein plaintiff deposited with the Clerk of the Court of First Instance of Pampanga the sum which was provisionally fixed as the value of the lands sought to be expropriated. After due hearing, the Court of First Instance of Pampanga rendered decision wherein it fixed as just compensation which values were based on the reports of the Commission on Appraisal whose members were chosen by both parties and by the Court. In order to avoid further litigation expenses and delay inherent to an appeal, the parties entered into a compromise agreement modifying in part the decision rendered by the Court in the sense of fixing the compensation for all the lands, without distinction, which compromise agreement was approved by the Court. The Collector of Internal Revenue demanded of the petitioners the payment as alleged deficiency income tax for the year inclusive of surcharges and penalties and included the amount paid by the Republic in assessing taxes on Morales gross income. The counsel for petitioner sent a letter to the Collector of Internal Revenue arguing that due compensation from property expropriated was not "income derived from sale, dealing or disposition of property" referred to by section 29 of the Tax Code and therefore not taxable. This request was denied by the Collector of Internal Revenue, contending that section 29 is intended to be broad enough in its construction to subsume income from any source as taxable.

definition of gross income laid down by Section 29 of the Tax Code of the Philippines. There is no question that the property expropriated being located in the Philippines, compensation or income derived therefrom ordinarily has to be considered as income from sources within the Philippines and subject to the taxing jurisdiction of the Philippines. Section 29 is clear that gross income includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales or dealings in property, whether real or personal, growing out of ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profit, or gains, profits, and income derived from any source whatsoever. Moreover, section 37 speaks of income from sources within the Philippines which states that the following items of gross income shall be treated as gross income from sources within the Philippines: (5) SALE OF REAL PROPERTY. Gains, profits, and income from the sale of real property located in the Philippines; These words disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains. By: Carlo Finionni M. Serra

Issue: 1. Whether or not compensation from expropriation is taxable as part of gross income YES Ratio: 1. The acquisition by government of private property through expropriation proceedings, said property being justly compensated, is embraced within the meaning of the term sale or disposition of property, and the proceeds of the transaction clearly fall within the

COMMISSIONER OF INTERNAL REVENUE v. MARUBENI CORPORATION G.R. No. 137377 18 December 2001

Doctrine: Contractual Tax, being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district.

Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the deficiency tax because the income from the projects came from the Offshore Portion as opposed to Onshore Portion. It claims all materials and equipment in the contract under the Offshore Portion were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes. CIR argues that since the two agreements are turn-key, they call for the supply of both materials and services to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the materials provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines. Accordingly, respondents entire receipts fro m the contracts, including its receipts from the Offshore Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractors tax. Contractors tax is a tax imposed upon the pr ivilege of engaging in business. It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district. Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines because some of them were completed in Japan and in fact subcontracted in accordance with the provisions of the contracts. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside Philippines taxing jurisdiction and are therefore not subject to contractors tax. Petition denied.

Facts: Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and the construction business. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila. Commissioner of Internal Revenue, petitioner found out that the respondent to have undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the National Development Company (NDC) in connection with the construction and installation of a wharf/port complex .The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex.On March 1, 1986, petitioners revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractors and commercial brokers taxes. Respondent questioned this assessment. Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and that the gross income from the two projects. Each contract was for a piece of work and since the projects called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject to internal revenue taxes. Issue:

By: Ryanne Jane Karla C. Congreso

1.

Whether or notrespondents entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine source and should be subjected to contractual tax- NO

Ratio: Before going into respondents arguments, it is necessary to discuss the background of the two contracts. Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In the contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos Portion and financed either by OECF or by suppliers credit. The Japanese Yen Portion I corresponds to the Foreign Offshore Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore Portion. Marubeni has already paid the Onshore Portion, a fact that CIR does not deny.

COMMISIONER OF INTERNAL REVENUE v. BRITISH OVERSEAS AIRWAYS CORPORATION AND COURT OF TAX APPEALS 149 SCRA 395 30 APRIL 1987

hands here and payments for fares were also made here in Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity, which produced the income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines. Even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines.

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

Facts: BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). As such it operates air transportation service and sells transportation tickets over the routes of the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines, although during the period covered by the assessments, it maintained a general sales agent in the Philippines -Wamer Barnes and Company, Ltd., and later Qantas Airways - which was responsible for selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal deficiency income taxes against BOAC. Revenue assessed

By: Zehan Loren E. Tocao

BOAC requested that the assessment be countermanded and set aside. However, the CIR not only denied the BOAC request for refund but also re-issued a deficiency income tax assessment. This prompted BOAC to file before the Tax Court praying that it be absolved of liability for deficiency income tax. Hence, this Petition for Review on certiorari of the Decision of the Tax Court. Issue: 1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable YES Ratio: 1. The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged

COMMISSIONER OF INTERNAL REVENUE vs. CTA and SMITH KLINE & FRENCH OVERSEAS G.R. No. L-54108 January 17, 1984 Doctrine: The grant of refund is founded on the assumption that the tax refund is valid, that is, the facts stated therein are true and correct. Facts: This case is about the refund of a 1971 income tax amounting to P324,255. 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 income tax return, Smith Kline declared a net taxable income of P1,489,277 (Exh. A) and paid P511,247 as tax due. Among the deductions claimed from gross income was P501,040 ($77,060) as its share of the head office overhead expenses. However, in its amended return filed on March 1, 1973, there was an overpayment of P324,255 "arising from under deduction of home office overhead" (Exh. E). It made a formal claim for the refund of the alleged overpayment. Such contention was based on the respondents independent auditor, Peat, Marwick, Mitchell and Co., an authenticated share the effect that the Philippine share in the unallocated overhead expenses of the main office for the year ended December 31, 1971 was actually $219,547 (P1,427,484). It further stated in the certification that the allocation was made on the basis of the percentage of gross income in the Philippines to gross income of the corporation as a whole. By reason of the new adjustment, Smith Kline's tax liability was greatly reduced from P511,247 to P186,992 resulting an overpayment of P324,255. Hence, without awaiting the action of the CIR, the respondent filed a petition for review with the Court of Tax Appeals, which the latter ordered the Commissioner to refund the overpayment or grant a tax credit. Issue: 1. 2. Whether or not there is an overpayment made by Smith Kline - YES; Whether or not the contract (service agreement) which the respondent entered into is more binding than its reliance to avail the section 37(b) of the Tax Code and 160 of the regulations.

2. In this particular case, Smith Kline submits that the contract between itself and its home office cannot amend tax laws and regulations. The matter of allocated expenses which are deductible under the law cannot be the subject of an agreement between private parties nor can the Commissioner acquiesce in such an agreement. The respondent likewise submits that it has presented ample evidence to support its claim for refund. To this end, it has presented before the Tax Court the authenticated statement of Peat, Marwick, Mitchell and Company to show that since the gross income of the Philippine branch was P7,143,155 for 1971 as per audit report prepared by Sycip, Gorres, Velayo and Company, and the gross income of the corporation as a whole was $6,891,052, Smith Kline's share at 15.94% of the home office overhead expenses was P1,427,484. Clearly, the weight of evidence bolsters its position that the amount of P1,427,484 represents the correct ratable share, the same having been computed pursuant to section 37(b) and section 160. The Court holds that that the amended 1971 is in conformity with the law and regulations. By: Jennifer D. Morales

Ratio: 1. YES- There was an overpayment made by Smith Kline. The respondent had to amend its return because it is of common knowledge that audited are generally completed three or four months after the close of the accounting period. There being no financial statements yet when the certification of January 11, 1972 was made the treasurer could not have correctly computed Smith Kline's share in the home office overhead expenses in accordance with the gross income formula prescribed in section 160 of the Revenue Regulations. What the treasurer certified was a mere estimate.

PHIL GUARANTY CO., INC. v. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS 13 SCRA 775 Doctrine: The power to tax is an attribute of sovereignty. It is a power emanating from necessity. Facts: The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts, on various dates, with foreign insurance companies not doing business in the Philippines. Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the premiums on insurance it has originally underwritten in the Philippines, in consideration for the assumption by the latter of liability on an equivalent portion of the risks insured. Said reinsurance contracts were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the Philippines. The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was required to keep a register in Manila where the risks ceded to the foreign reinsurers where entered, and entry therein was binding upon the reinsurers. A proportionate amount of taxes on insurance premiums not recovered from the original assured were to be paid for by the foreign reinsurers. The foreign reinsurers further agreed, in consideration for managing or administering their affairs in the Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5% of the reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance contracts were to be arbitrated in Manila. Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the following premiums: 1953 . . . . . . . . . . . . . . . . . . . . . 1954 . . . . . . . . . . . . . . . . . . . . . P842,466.71 721,471.85 30 April 1965

TOTAL AMOUNT DUE & COLLECTIBLE . . . . 1954 Gross premium per investigation . . . . . . . . . Withholding tax due thereon at 24% . . . . . . 25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . Compromise for non-filing of withholding income tax return . . . . . . . . . . . . . . . . . . . . . TOTAL AMOUNT DUE & COLLECTIBLE . . . .

P230,673.00 ==========

P780.880.68 P184,411.00 P184,411.00 100.00

P234,364.00 ==========

Petitioner protested the assessment on the ground that reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines are not subject to withholding tax. Its protest was denied and it appealed to the Court of Tax Appeals. The CTA ordered petitioner to pay CIR P202,192 and P173,153 as withholding income taxes for the years 1953 and 1954. Issue: 1. Whether or not the reinsurance premiums in question did not constitute income from sources within the Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did they have office here - NO Whether or not the reinsurance premiums are not income from sources within the Philippines because they are not specifically mentioned in Section 37 of the Tax Code - NO Whether or not the reliance of petitioner in good faith on the rulings of the Commissioner of Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in question relieved it of the duty to pay the corresponding withholding tax thereon - NO

2.

3.

Ratio: 1. Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the Philippines. The word "sources" has been interpreted as the activity, property or service giving rise to the income. The reinsurance premiums were income created from the undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc., against liability for loss under original insurances. Such undertaking, as explained above, took place in the Philippines. These insurance premiums, therefore, came from sources within the Philippines and, hence, are subject to corporate income tax.

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it filed its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus: 1953 Gross premium per investigation . . . . . . . . . Withholding tax due thereon at 24% . . . . . . 25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . P768,580.00 P184,459.00 46,114.00

Compromise for non-filing of withholding 100.00 income tax return . . . . . . . . . . . . . . . . . . . . . .

The foreign insurers' place of business should not be confused with their place of activity. Business should not be continuity and progression of transactionswhile activity may consist of only a single transaction. An activity may occur outside the place of business. Section 24 of the Tax Code

does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income. Section 37 is not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein should be treated as income from sources within the Philippines but it does not require that other kinds of income should not be considered likewise. The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide. Considering that the reinsurance premiums in question were afforded protection by the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the state. This defense of petitioner on relying on CIR rulings may free it from the payment of surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate if from liability to pay such withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents. By: Marvic Vonn B. Guillermo

ALEXANDER HOWDEN & CO. LTD.,H.G. CHESTER & OTHERS, ET AL., petitioners vs. THE COMMISSIONER OF INTERNAL REVENUE,respondent. GR. NO. L-19392 Doctrine: The source of an income is the property,activity or service that produced the income. Facts: In 1950 the Commonwealth Insurance Co.,a domestic corporation entered into reinsurance contracts with 32 British Insurance Companies and one of those was Alexander Howden& Co.,LTD,not engaged in trade or business in the Philippines,whereby they agreed to cede to them portion of the premiums on insurances on fire,marine,and other risks it has underwritten in the Philippines and which was prepared and signed by the foreign insurers in England and sent later to Manila where Commonwealth Insurance Co.,signed them. In 1951,Commonwealth remitted P798,297.47 to Alexander Howden&Co.,LTD as insurance premiums and in April 1952,Commonwealth filed an income tax return of P798,297.47 with accrued interest of P4,985.77 as the Howdens' gross income for Calendar Year 1951 and paid the BIR of P66,112.00 income tax thereon. And on May 12,1954,Alexander Howden&Co,LTD filed a claim for refund of the P66,112.00 and was reduced to P65,115.00 and agreed to the payment of P977.00 as income tax on the P4,985.77 accrued interest. Issues: 1. Whether or not the reinsurance premiums in question came from sources within the Philippines-YES 2. Whether or not reinsurance premiums in question being taxable-YES Ratio: 1. The source of an income is the property,activity or service that produced the income. The reinsurance premiums remitted to appellants by virtue of the reinsurance contracts accordingly had their source of undertaking to indemnify the Commonwealth Insurance Co.,against liability and the activity that produce the reinsurance premiums took place in the Philippines because firstly, the reinsured, the liabilities insured and the risks originally underwritten by Commonwealth Insurance Co., upon which the insurance premiums and indemnity were based,were all situated in the Philippines. Secondly,contrary to appellants' view,the reinsurance contracts were perfected in the Philippines and lastly, the parties to the reinsurance contracts in question evidently intended Philippine law to govern. Under Section 54 in relation to Section 53 of the tax code particularly subsection (b) of Section 53 subjects to withholding tax the interest ,dividends,rents,salaries,wages, premiums, annuities, compensations, remunerations,emoluments, profits and income of any non-resident alien individual not having office or place of business therein. And Section 54 by 14 April 1965

reference applies to foreign corporations not engaged in trade or business in the Philippines. The court disagree the proposition of the appellants as they maintain that reinsurance premiums are not premiums contemplated by subsection (b) of Section 53 and are not items of income subject to withholding tax. The appellants ' contention was bereft of merit and since Section 53 subjects to withholding tax specified income such as premiums and since Section 53 and 54 were substantially re-enacted by Republic Act 1065,1291,1505 and 2343 when administrative rulings prevailed, it should be given the force of law under the principle of legislative approval by reactment. But when Congress enacted R.A.3825, as an amendment to Sections 24 and 54 of the tax code, exempting from income tax and withholding tax,reinsurance premiums received by foreign corporations not engaged in trade or business in the Philippines and R.A. 3825 in effect took out from Sections 24 and 54 something which formed apart of the subject matter therein, thereby affirming the taxability of reinsurance premiums prior to the aforestated amendment. By: Perjorie Y. Enriquez

2.

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, INC., ET AL., v. HON. COURT OF TAX APPEALS, AND THE COMMISSIONER OF INTERNAL REVENUE CA-G.R. SP No. 31283 25 April 1995 Doctrine: The test of taxability is the source, and the source of an income is that activity which produced the income.

Issues: 1. Whether or not compensation for advisory services admittedly performed abroad by the personnel of a nonresident foreign corporation not doing business in the Philippines are subject to Philippine withholding income tax YES Whether or not respondent CIR is barred by prescription, laches, estoppel, or equitable considerations in cancelling the previous approval of petitioners claim for refund more than 5 years thereafter, after it has determined, after investigation, that the advisory services were rendered or performed abroad by the personnel of AIGI, a non-resident foreign corporation not doing business in the Philippines NO Whether or not respondent tax court can amend its decision on a motion for reconsideration by respondent Commissioner, ordering petitioner PHILAMLIFE to pay Php643,125.00 with interest at 20% per annum until paid on the presumption that it has utilized the tax credit memo already issued and without evidence being presented of actual usage of the tax credit memo YES

2. Facts: Petitioner Philippine American Life Insurance Co., Inc. (PHILAMLIFE), a domestic corporation entered into a Management Services Agreement with American International Reinsurance Co., Inc. (AIRCO), a non-resident foreign corporation with principal place of business in Pembroke, Bermuda whereby, effective January 1, 1972, for a fee of not exceeding $250,000.00 per annum, AIRCO shall perform for PHILAMLIFE various management services. On September 30, 1978, AIRCO merged with petitioner American International Group, Inc. (AIGI) with the latter as the surviving corporation and successor-in-interest in AIRCOs Management Services Agreement with PHILAMLIFE. On November 18, 1980, respondent Commission of Internal Revenue (CIR) issued in favour of PHILAMLIFE Tax Credit Memo in the amount of Php643,125.00 representing erroneous payment of withholding tax at source on remittances to AIGI for services rendered abroad in 1979. On the basis of the said issuance of tax credit, PHILAMLIFE, through a letter dated March 21, 1981, filed with CIR a claim for refund of the second erroneous tax payment of Php643,125.00 which was made on December 16, 1980. Another letter dated July 6, 1982 was sent wherein PHILAMLIFE alleged that the claim for refund of the amount paid in 1980 is exactly the same subject matter as in the previous claim for refund in 1979. Without waiting for CIR to resolve the claim, petitioners filed with the Court of Tax Appeals (CTA) on July 29, 1982 the petition docketed as CTA Case No. 3540, seeking said refund. During pendency of said case, respondent denied PHILAMLIFEs claim for refund of Php643,125.00 as withholding tax at source for 1980. Respondent also cancelled the tax credit memo in the amount of Php643,125.00 previously issued to PHILAMLIFE on November 18, 1980 and requested the latter to pay the amount of Php643,125.00 as deficiency withholding tax at source for 1979 plus increments. Without protesting the assessment, petitioners filed a petition with CTA on June 14, 1985, docketed as CTA Case No. 3943, seeking the annulment of said assessment. After trial on the merits, respondent tax court rendered the decision dated March 10, 1993 denying both petitions for review and subsequent motions for reconsiderations. Both parties filed motion for reconsideration on the March 10, 1993 decision wherein the respondent tax court issued a resolution dated May 19, 1993 which modified the dispositive portion of the said decision ordering the PHILAMLIFE to pay respondent the amount of Php643,125.00 with interest at the rate of twenty per centum (20%) per annum from March 9, 1981 until paid.

3.

Ratio: 1. In our jurisprudence, the test of taxability is the source, and the source of an income is that activity which produced the income. It is not the presence of any property from which one derives rentals and royalties that is controlling, but rather as expressed under the expanded meaning of royalties in Section 37 (a) of National Internal Revenue Code, it includes royalties for the supply of scientific, technical, industrial, or commercial knowledge or information; and the technical advice, assistance or services rendered in connection with the technical management and administration of any scientific, industrial or commercial undertaking, venture, project or scheme.

The Management Services Agreement falls under the expanded meaning of royalties as it provides for the supply of a non-resident foreign corporation of technical and commercial information, knowledge, advice, assistance or services in connection with technical management or administration of an insurance business a commercial undertaking. Therefore, the income derived for the services performed by AIGI for PHILAMLIFE under the said agreement contract shall be considered as income from services within the Philippines. AIGI, being a non-resident foreign corporation not engage in trade and business in the Philippines shall pay tax equal to 35% of the gross income received during each taxable year from all sources within the Philippines as interest, dividends, rents, royalties (including remuneration for technical services), salaries, premiums, annuities, emoluments, or other fixed or determinable annual, periodical or casual gains, profits and income. On the second issue, this Court believes that the rule on prescription of assessment and the filing of formal protest will not apply. Pursuant to Section 229 of NIRC, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of tax penalty regardless of any supervening cause that may arise after payment. Although counting from the original date of payment of the tax on December 3, 1979, the filing of the instant Petition for Review on June 14, 1985

would appear to have been filed out of time, nevertheless, justice and equity demand that the period during which respondent approved the herein claim for refund up to the time it was subsequently cancelled should be deducted from the counting of the two years prescriptive period. By deducting the period when Petitioner received the tax credit memo on March 9, 1981 to May 15, 1985 when the same was cancelled by the respondent only one year and four months had elapsed from the two year period of prescription when petitioner filed CTA 3943 on June 4, 1985. In like manner, CIRs failure to raise before the CTA the issue relating to the real party in interest to claim the refund cannot, and should not, prejudice the government. It is axiomatic that the government can never be in estoppel, particularly in matters involving taxes. The errors or omissions of certain administrative officers should never be allowed to jeopardize the governments financial position. On the third issue, this Court finds no error on the part of respondent tax court in amending its March 10, 1993 decision acting upon timely motion for reconsiderations filed by both petitioner and respondent. Said decision having not attained its finality, the same may still be amended, corrected or modified by the respondent court. Moreover, it has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of tax Appeals which, by nature of its function, is dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority or discretion, the decision of respondent court, affirming the decision of the Court of Tax Appeals, must consequently be upheld. By: Michael Evans Castromayor Pastor

COMMISSIONER OF INTERNAL REVENUE V. JULIANE BAIERNICKEL G.R. No.153793 29 August 2006 Doctrine: Source of income means the physical source where the income came from; relates to the property, activity or service that produced the income itself. Facts: Juliane Baier-Nickel respondent is a non-resident alien, a German citizen and the President of JUBANITEX Inc., a domestic corporation engaged in manufacturing, marketing on wholesale only, buying or otherwise importing and exporting, selling and disposing embroidered textile products. The corporations JUBANITEX general manager Marina Q. Guzman, the corporation appointed and engaged the services of respondent as commission agent. It was agreed by the parties that respondent will receive 10% sales commission on all sales actually concluded and collected through her efforts. In 1995 respondent received the amount of P1,707,772.64 representing her sales commission income from which JUBANITEX withheld the corresponding 10% withholding tax and remitted the same to the Bureau of Internal Revenue (BIR). On October 17, 1997 respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26. On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 and alleged that to have been mistakenly withheld and remitted by JUBANITEX to the BIR. The respondent contended that the sales commission she had received is not taxable in the Philippines because the same compensation for her services in Germany and therefore considered as income from sources outside the Philippines. On April 15, 1998 respondent filed a petition for review with the CTA contending that the BIR has taken no action with regards to her claim for refund. On June 28, 2000, the CTA rendered a decision denying her claim for refund because the income derived by the respondent is an income taxable in the Philippines because JUBANITEX is a domestic corporation. On the petition with the Court of Appeals by the respondent Juliane Baier-Nickel it reversed the decision of the CTA, directing to grant to grant the petitioner a tax refund in the amount of P170,777.26. Petitioner filed a motion for reconsideration but was denied. Issue: Whether or not the respondents sales commission is taxable in the Philippines. Ratio: In general a nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay for an aggregate period of more than one hundred and eighty (180) daysduring any

calendar year shall be deemed a nonresident alien doing business in the Philippines. Pursuant to the foregoing provisions of the NIRC, nonresident aliens, whether or not engaged in trade or business, are subject to the Philippine income taxation on their income received from all sources within the Philippines. The key word in determining the taxability of non-resident aliens is the incomes source. The important factor which determines the source of income of personal services is not the resident of the payor, or the place where the contract for service is entered into or the place of payment, but the place where the services were actually rendered. The court rule that source of income relates to the property, activity or service that produced the income itself. In the instant case, it is the place where the service was performed that determines the source of income. The respondent presented evidence of faxed documents containing certain instructions or orders that she performed, but these documents do not shoe whether the instructions or orders faxed were collected sales in Germany. The documents that the respondent filed as evidence did not constitute substantial evidence that it was in Germany where she performed the income producing service which gave rise to the reported monthly sales in the months of March and May to September of 1995. Respondent failed to discharge the burden of proving that her income was from sources outside the Philippines and exempt from the application of our income tax law. The claim for tax refund is denied. The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel, a previous case for refund of income withheld from respondents remunerations for services rendered abroad, the Court in a Minute Resolution dated February 17, 2003, sustained the ruling of the Court of Appeals that respondent is entitled to refund the sum withheld from her sales commission income for the year 1994. This ruling has no bearing in the instant controversy because the subject matter thereof is the income of respondent for the year 1994 while, the instant case deals with her income in 1995. WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002 Resolution of the Court of Appeals are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of Tax Appeals which denied respondents claim for refund of income tax paid for the year 1995 is REINSTATED. By: Faye G. Alfafara

QUILL CORP. v. NORTH DAKOTA 504 US 298 Doctrine:

May 26, 1992

Physical presence on the part of the taxpayer/business owner in a certain State must exist in order to be taxed by the concern State. Facts: Quill Corporation is an office supply retailer. Quill had no physical presence in North Dakota (neither a sales force, nor a retail outlet), but it had a licensed computer software program that some of its North Dakota customers used for checking Quill's current inventories and placing orders directly. It solicits business through catalogs and flyers, advertisements in national periodicals, and telephone calls. It delivers all of its merchandise to its North Dakota customers by mail or common carrier from out of State locations. North Dakota sent a notice to Quill Corp. that it owed use tax (a companion tax to the sales tax) payments for purchases that North Dakota residents had made through Quill Corp.s catalogue. Issue: 1. Whether or not Interstate Internet purchases should be subject to the same sales tax as goods bought in retail stores - NO

Ratio: 1. The Supreme Court sided with Quill, ruling that a taxpayer must have a physical presence in a State in order to require collection of sales or use tax for purchases made by In-State customers. Physical presence means offices, branches, warehouses, employees, etc. The existence of customers alone (i.e. economic presence) did not create sufficient nexus under the Commerce Clause for North Dakota to impose a sales tax collection burden on Quill Corp.. If an online retailer has a physical presence in a particular State, it must collect sales tax from customers in that State. However, the court explicitly stated that Congress can overrule the decision through legislation. By: Emmanuel D. Cajilog

SUPREME TRANSLINER, INC., MOISES C. ALVAREZ AND PAULITA S. ALVAREZ v. BPI, INC. GR. NO. 165617 25 February 2011

expiration of the one year redemption period as provided in No. 3135 and title thereto is consolidated in the name of the mortgagee in case of non redemption. Revenue Regulations No. 4-99 issued on March 16, 1999 relative to the payment of Capital Gains Tax on Extra judicial foreclosure sale of capital assets initiated by banks, finance and insurance companies states that: (Section 3) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. In case of non redemption, the capital gains on the foreclosure sale shall become due based on the bid price of the highest bidder but only upon the expiration of the one year period of redemption and shall be paid within thirty days from the expiration of the said one year redemption period. Thus, considering that herein petitioners-mortgagors exercised their right of redemption before the expiration on the statutory on year period, the bank is not liable to pay the capital gains tax on the extra judicial foreclosure sale. There was no actual transfer of title from the owners-mortgagors to the foreclosing bank. Hence, the inclusion of the said charge in the total redemption price was unwarranted and the corresponding amount paid by the petitioner -mortgagors should be returned to them.

Doctrine: In cases where the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. Facts: Supreme Transliner, Inc. represented by its managing Director, Moises C. Alvarez and Paulita Alvarez obtained a loan from BPI Family Savings Bank with a piece of land as collateral. When the petitioner-mortgagor was not able to pay the loan, the mortgage was extra-judicially foreclosed and the same was sold to the respondent bank as the highest bidder in the public auction. Before the expiration of the one year redemption period, the mortgagors notified the bank of its intention to redeem the property. Then a statement of account was prepared by the bank indicating the total amount due under the mortgage loan agreement. The petitioner- mortgagor paid it. However, they specifically prayed later on the return of all asset -acquired expenses, one of it was the capital gain tax. Issue: Whether or not the capital gains tax was rightly included in the redemption price Ratio: NO. Under the Revenue Regulations No. 13-85, every sale or exchange or other disposition of real property classified as capital asset under Section 34 (a) of the Tax Code shall be subject to the final capital gains tax. The term includes pacto de retro and other forms of conditional sale. Further, for real property to foreclosed by a bank on or after September 3, 1986, the capital gains tax and documentary stamp tax must be paid before title to the property can be consolidated in favor of the bank. Under Section 63 of presidential Decree No. 1529 otherwise known as the Property Registration Decree, if no right of redemption exists, the certificate of title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. But where the right of redemption exists, the certificate of title of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming thereof made by the Register of Deeds upon the certificate of title. In the event the property is redeemed, the certificate or deed of redemption shall be filed with the Register of Deeds on the certificate of title. It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property until after the

By: Delight S. Calimot

M.E. HOLDING CORPORATION vs. THE HON. COURT OF APPEALS, COURT OF TAX APPEALS, and THE COMMISSIONER OF INTERNAL REVENUE GR No 160193 March 3, 2008 Doctrine: The claims for tax refund/credit are in the nature of claims for exemption.

It ought to be noted, however, that on February 26, 2004, RA 9257, or The Expanded Senior Citizens Act of 2003, amending RA 7432, was signed into law, ushering in, upon its effectivity on March 21, 2004, a new tax treatment for sales discount purchases of qualified senior citizens of medicines. Sec. 4(a) of RA 9257 provides: SEC. 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following: (a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens, x xx; xxxx The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended. (Emphasis supplied.) Conformably, starting taxable year 2004, the 20% sales discount granted by establishments to qualified senior citizens is to be treated as tax deduction, no longer as tax credit. By: Jennifer Mae C. Calma

Facts: This case involves Republic Act No. (RA) 7432, otherwise known as An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other Purposes,passedonApril 23, 1992. It granted, among others, a 20% sales discount on purchases of medicines by qualified senior citizens. On April 15, 1996, petitioner M.E. Holding Corporation (M.E.) filed its 1995 Corporate Annual Income Tax Return, claiming the 20% sales discount it granted to qualified senior citizens. M.E. treated the discount as deductions from its gross income purportedly in accordance with Revenue Regulation No. (RR) 2-94, Section 2(i) of the Bureau of Internal Revenue (BIR) issued on August 23, 1993. Sec. 2(i) states: Section 2. DEFINITIONS. For purposes of these regulations: xxxx i. Tax Credit refers to the amount representing the 20% discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation services, hotels and similar lodging establishments, restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and amusement, which discount shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes. The deductions M.E. claimed amounted to PhP 603,424. However, it filed the return under protest, arguing that the discount to senior citizens should be treated as tax credit under Sec. 4(a) of RA 7432, and not as mere deductions from M.E.'s gross income as provided under RR 2-94.

Sec. 4(a) of RA 7432 states: SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following: a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of transportation services, hotels and similar lodging establishments, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit; Issue: 1. Whether or not the 20% sales discount granted by establishments to qualified senior citizens is to be treated as tax deduction or as tax credit.

Ratio:

CARMELINO F. PANSACOLA, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondents G.R. No. 159991 November 16, 2006 Doctrine: Tax laws are prospective in application, unless it is expressly provided to apply retroactively. Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language. Facts: The petitioner Carmelino F. Pansacola filed his income tax return for the taxable year 1997 on April 13, 1998 that reflected an overpayment of P5,950. He claimed the increased amounts of personal and additional exemptions under Section 354 of the NIRC, although his certificate of income tax withheld on compensation indicated the lesser allowed amounts on these exemptions. He claimed a refund of P5,950 with the Bureau of Internal Revenue, which was denied. Later, the Court of Tax Appeals also denied his claim because according to the tax court, "it would be absurd for the law to allow the deduction from a taxpayers gross income earned on a certain year of exemptions availing on a different taxable year" Petitioner sought reconsideration, but the same was denied. On appeal, the Court of Appeals denied his petition for lack of merit. It further ruled that the NIRC took effect on January 1, 1998, thus the increased exemptions were effective only to cover taxable year 1998 and cannot be applied retroactively. Petitioner alleges that the Court of Appeals erred in ruling that the increased exemptions were meant to be applied beginning taxable year 1998 and were to be reflected in the taxpayers returns to be filed on or before April 15, 1999. Petitioner argues that the personal and additional exemptions are of a fixed character based on Section 35 (A) and (B) of the NIRC and that as ruled by the court, these personal and additional exemptions are fixed amounts to which an individual taxpayer is entitled. He contends that unlike other allowable deductions, the availability of these exemptions does not depend on the taxpayers profession, trade or business for a particular taxable period. Petitioner reasons that such ruling would postpone the availability of the increased exemptions and literally defer the effectivity of the NIRC to January 1, 1999. Petitioner insists that the increased exemptions were already available on April 15, 1998, the deadline for filing income tax returns for taxable year 1997, because the NIRC was already effective. Issue: 1. Whether or not the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the taxable year 1997?

authorized for such types of income by the NIRC or other special laws. As defined in Section 22 "taxable year" means the calendar year, upon the basis of which the net income is computed under Title II of the NIRC. It also supports the rule that the taxable income of an individual shall be computed on the basis of the calendar year. In addition, the deductions provided for under Title II of the NIRC shall be taken for the taxable year in which they are "paid or accrued" or "paid or incurred. Therefore, as provided in Section 24 (A) (1) (a) in relation to Sections 31 and 22 (P) and Sections 43, 45 and 79 (H) of the NIRC, the income subject to income tax is the taxpayers income as derived and computed during the calendar year, his taxable year. The law cannot be given retroactive effect. It is established that tax laws are prospective in application, unless it is expressly provided to apply retroactively. I n the NIRC, we note, there is no specific mention that the increased amounts of personal and additional exemptions under Section 35 shall be given retroactive effect. Conformably too, personal and additional exemptions are considered as deductions from gross income. Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language too plain to be mistaken. They cannot be extended by mere implication or inference. And, where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms. Accordingly, the Court of Appeals and the Court of Tax Appeals were correct in denying petitioners claim for refund. By: Sixto D. Jimenez III

Ratio: At the time petitioner filed his 1997 return and paid the tax due thereon in April 1998, the increased amounts of personal and additional exemptions in Section 35 were not yet available. It has not yet accrued as of December 31, 1997, the last day of his taxable year. Petitioners taxable income covers his income for the calendar year 1997. Section 31 defines "taxable income" as the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any,

HIGGINS V COMMISSIONER OF INTERNAL REVENUE 312 US 212 3 February 2009 Doctrine: All ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business are deductible. Facts: Petitioner lived in Paris, France and maintained a New York office for managing a personal portfolio. He hired a staff and rented office space. Taxpayer, Petitioner, had extensive investments in real estate and securities. Petitioner's financial affairs were conducted through his New York office pursuant to his personal detailed instructions. His residence was in Paris, France, where he had a second office. By cable, telephone and mail, petitioner kept a watchful eye over his securities. While he sought permanent investments, changes, redemptions, maturities and accumulations caused limited shifting in his portfolio. These were made under his own orders. The offices kept records, received securities, interest and dividend checks, made deposits, forwarded weekly and annual reports and undertook generally the care of the investments as instructed by the owner. Purchases were made by a financial institution. Petitioner did not participate directly or indirectly in the management of the corporations in which he held stock or bonds. The method of handling his affairs under examination had been employed by petitioner for more than thirty years. No objection to the deductions had previously been made by the Government. Petitioner contends that elements of continuity, constant repetition, regularity and extent differentiate his activities from the occasional like actions of the small investor. His activity is and the occasional action is not carrying on business. On the other hand, the respondent urges that mere personal investment activities never constitute carrying on a trade or business, no matter how much ones time or of ones employees time they may occupy. When he filed taxes, Higgins deducted the costs of salaries and expenses in looking after his properties as a business expense. The IRS denied the deduction claiming that Higgins activities were not trade or business and so were not deductible under the tax code. He appealed to Tax Court but decision of IRS was affirmed finding out that rental income from Higgins rental properties did not count as business, but that the money he made from buying and selling stocks did not, since there was no way to apportion which expenses came from the rentals and which came from the stock trading, non of it should be deductible. Issue: 1. Whether or not the expenses be deducted as business expenses NO Ratio: 1. of Justice Reed issued the opinion for the Supreme Court The United States in affirming the lower courts holding that the expenses are not deductible because he was not carrying on a business.

The Supreme Court found that there was no sufficient evidence to establish that petitioner was carrying on a business. Rather, he was managing his personal portfolio. Size of a portfolio is not a factor into considering whether or not something is a business. To determine whether the activities of a taxpayer are carrying on a business, requires an examination of the facts in each case. As the Circuit Court of Appeals observed, all expenses of every business transaction are not deductible. Only those are deductible which relate to carrying on a business. The Bureau of Internal Revenue has this duty of determining what is carrying on a business, subject to reexamination of the facts by the Board of Tax Appeal and ultimately to review on the law by the courts on which jurisdiction is conferred. The Commissioner and the Board appraised the evidence here as insufficient to establish petitioner's activities as those of carrying on a business. The petitioner merely kept records and collected interest and dividends from his securities, through managerial attention for his investments. No matter how large the estate or how continuous or extended the work required may be, such facts are not sufficient as a matter of law to permit the courts to reverse the decision of the Board. Its conclusion is adequately supported by this record, and rests upon a conception of carrying on business similar to that expressed by this Court for an antecedent section. The petitioner makes the point that his activities in managing his estate, both realty and personalty, were a unified business. Since it was admittedly a business in so far as the realty is concerned, he urges, there is no statutory authority to sever expenses allocable to the securities. But we see no reason why expenses not attributable, as we have just held these are not, to carrying on business cannot be apportioned. It is not unusual to allocate expenses paid for services partly personal and partly business. By: Crystal Mae C. Bajao

COMMISSIONER OF INTERNAL REVENUE V. WODEHOUSE 337 U.S. 369 13 June 1949 Doctrine: Sums received by a nonresident alien author not engaged in trade or business within the United States were required by law to be included in his gross income for federal tax purposes. Facts: Pelham G. Wodehouse was a British subject residing in France. He was a nonresident alien of the United States not engaged in trade or business within the United States and not having an office or place of business therein during either the taxable year 1938 or 1941. He was a writer of serials, plays, short stories and other literary works published in the United States. The Curtis Publishing Company accepted for publication in the Saturday Evening Post the respondent's unpublished novel "The Silver Cow. The said company paid $40,000 to Reynolds Agency reserving to the former the American serial rights in the story. The respondent received $5,000 from Doubleday, Doran & Company for the book rights in this story. Hearst's International Cosmopolitan Magazine, through the respondent's same agent, paid the respondent $2,000 for "all American and Canadian serial rights in 23 July 1941. On the same year, Curtis, trough the same agent, paid the respondent $40,000 for the "North American serial rights' to respondent's novel entitled 'Money in the Bank." The Commissioner of Internal Revenue gave the respondent notice of tax deficiencies assessed against him for the taxable years 1923, 1924, 1938, 1940 and 1941. In these assessments, among other items, the Commissioner claimed deficiencies in the respondent's income tax payments based upon his above-described 1938 and 1941 receipts. The respondent, on the other hand, not only contested the additional taxes assessed against him, which were based upon the full amounts of those receipts, but he asked also for the refund to him of the amounts which had been withheld, for income tax purposes, from each such payment. The Tax Court entered judgment against the respondent for additional taxes for 1938, 1940 and 1941, in the respective amounts of $11,806.71, $8,080,83 and $1,854,85. Issue: 1. Whether or not the sums received by the respondent in 1938 and 1941 as a nonresident alien not engaged in trade or business were required by the Revenue Acts of the United States to be included in his gross Income for federal tax purposes YES Ratio: 1. It has long been required that sums received by a nonresident alien author not engaged in trade or business within the United States be included in his gross income for federal tax purposes.

discloses this policy and, at least from a revenue standpoint, no reason has appeared for changing it. Since the early days of income tax levies, rentals and royalties paid for the use of or for the privilege of using in the United States, patents, copyrights and other like property have been taxed to nonresident aliens and for many years at least a part of the tax has been withheld at the source of the income. To exempt this type of income from taxation in 1938 or 1941, in the face of this long record of its taxation, would require clearness and positiveness of legislative determination to change the established procedure that is entirely absent here. In Helvering v. StockholmsEnskilda Bank,certain sums had received by a foreign corporation from the United States Government in the form of interest upon a refund of an overpayment by that corporation of its income taxes. The U.S. Supreme Court held that such interest, in turn, constituted taxable gross income derived by the foreign corporation from a source within the United States, because it amounted to interest upon an interest-bearing obligation of a resident of the United States within the meaning of the Act. Under the Revenue Act of 1934, the income of a nonresident alien individual was taxed at the same rates as was the income of a resident citizen but his taxable gross income was limited wholly to that which he had received "from sources within the United States. The Act of 1934 thus sought to include as taxable gross income any income which a nonresident alien individual received as royalties for the privilege of using any copyrights in the United States and also sought to tax his income from the sale of any personal property which he had produced outside the United States but had sold within the United States. In the instant case, it is undisputed that the respondent was paid for his serial rights over his literary works published in the United States. He cannot interpose the defense that said proceeds were not required to be included in his taxable gross income because the controlling Revenue Acts did not attempt to tax nonresident alien individuals. The law is clear that it shall tax the income of nonresident aliens which the latter had received from sources within the United States.

By: Marc Ferdinand D. Alquiza

Such receipts have been an appropriate and readily collectible subject of taxation. A review of the statutes, regulations, administrative practices and court decisions