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Convenience-of-the-employer rule Henderson v. Collector, 1 SCRA 649 Facts: Arthur Henderson is the President of the American Intl. Underwriters for the Phils. w/c represents a group of American cos. engaged in the business of general insurance (exc. in life insurance). he receives a basic annual salary of P30,000 and allowance for house rentals and utilities. Although he and his wife are childless and are only two in the family, they lived in a large apartment provided for by his employer. As company president, he and his wife had to entertain and put up houseguests for the company. The BIR now seeks to collect taxes on the allowances for rental and utilities expenses. Held: The exigencies of Henderson'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. Because they had to entertain and put up houseguests, the employer had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those 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 apartment chosen by the employer is of no moment, for no part of the allowance redounded to the benefit of the Hendersons. Neither was there an amount retained by them. Their bills for rental were paid directly by the employer to the creditor.

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Commissioner v. Smith - 324 U.S. 177 (1945) Syllabus An employer gave to its employee as compensation for his services an option to purchase shares of stock at a price not less than the then value of the stock. The option had no value at that time, and the compensation contemplated by the parties was the transfer to the employee of the shares of stock after their value had increased to more than the option price. Held, under 22(a) of the Revenue Act of 1938 and of the Internal Revenue Code, the employee received "compensation for personal service," and hence taxable income in each year in which stock was acquired, through effective exercise of the option in that year, in the amount of the difference between the pt. ion price and the then market value of the stock. Section 22(a) of the Revenue Act defines "gross income" subject to the Act as including "gains, profits, and income derived from salaries, wages, or compensation for personal service . . of whatever kind and in whatever form paid. . . ." Treasury Regulations 101, Art. 22(a)-1 provides: "If property is transferred . . . by an employer to an employee, for an amount substantially less than its fair market value, regardless of whether the transfer is in the guise of a sale or exchange, such . . . employee shall include in gross income the difference between the amount paid for the property and the amount of its fair market value to the extent that such difference is in the nature of (1) compensation for services rendered. . . ." Section 22(a) of the Revenue Act is broad enough to include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected.

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CIR V. BAIER-NICKEL Facts: CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the CTA. Juliane Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic corporation engaged in the manufacturing, marketing and selling of embroidered textile products. Through Jubanitexs general manager, Marina Guzman, the company appointed respondent as commission agent with 10% sales commission on all sales actually concluded and collected through her efforts. In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the 10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax return but then claimed a refund from BIR for the P170K, alleging this was mistakenly withheld by Jubanitex and that her sales commission income was compensation for services rendered in Germany not Philippines and thus not taxable here. She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but decision was reversed by CA on appeal, holding that the commission was received as sales agent not as President and that the source of income arose from marketing activities in Germany. Issue: W/N respondent is entitled to refund Held: No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to the Philippine income taxation on their income received from all sources in the Philippines. In determining the meaning of source, the Court resorted to origin of Act 2833 (the first Philippine income tax law), the US Revenue Law of 1916, as amended in 1917. US SC has said that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. If the income is from labor, the place where the labor is done should be decisive; if it is done in this country, the income should be from sources within the United States. If the income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the income should be from sources within the United States. If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive. Source is not a place, it is an activity or property.

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As such, it has a situs or location, and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations. The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from taxation. In the instant case, respondent failed to give substantial evidence to prove that she performed the incoming producing service in Germany, which would have entitled her to a tax exemption for income from sources outside the Philippines. Petition granted.

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Commissioner v. LoBue, 351 U.S. 243 (1956) In recognition of his "contribution and efforts in making the operation of the Company successful," a corporation gave an employee options to purchase stock in the corporation. The options were nontransferable, and were contingent upon continued employment. After some time had elapsed and the value of the shares had increased, the employee exercised the options and purchased the stock at less than the then current market price. For some of the shares, he gave the employer a promissory note for the option price; but the shares were not delivered until the notes were paid in cash, when the value of the shares had increased. Held: under the Internal Revenue Code of 1939, as amended, the resulting gain to the employee was taxable as income received at the time he exercised the option and purchased the stock, and his taxable gain should be measured as of the time when the options were exercised, and not as of the time when they were granted. Pp. 351 U. S. 244-250. (a) In defining "gross income" as broadly as it did in 22(a) of the Internal Revenue Code of 1939, as amended, Congress intended to tax all gains except those specifically exempted . (b) The only exemption that could possibly apply to these transactions is the gift exemption of 22(b)(3), and these transactions were not "gifts" in the statutory sense. (c) There is no statutory basis for excluding such transactions from "gross income" on the ground that one purpose of the employer was to confer on the employee a "proprietary interest" in the business. (d) The employee received a substantial economic and financial benefit from his employer, prompted by the employer's desire to get better work from the employee, and this is "compensation for personal service" within the meaning of 22(a). (e) In these circumstances, the employee "realized" a taxable gain when he purchased the stock. (f) The employee's taxable gain should be measured by the difference between the option price and the market value of tHE shares as of the time when the options were exercised, and not as of the time when the options were granted. Pp. 351 U. S. 248249. (g) On remand, the Tax Court may consider the question, not previously passed on, whether delivery of a promissory note for the purchase price marked the completion of the stock purchase, and whether the gain should be measured as of that date or as of the date the note was paid. P. 351 U. S. 250.

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223 F.2d 367 reversed and remanded.


Pansacola v. CIR

FACTS: Carmelino F. Pansacola filed his income tax return for the taxable year 1997 that reflected an overpayment of P5,950. In it he claimed the increased amounts of personal and additional exemptions under Section 35 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..." On appeal, the Court of Appeals denied his petition for lack of merit. The appellate court ruled that Umali v. Estanislao, relied upon by petitioner, was inapplicable to his case. 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. ISSUE: WON the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the taxable year 1997. HELD: NO. Prefatorily, personal and additional exemptions under Section 35 of the NIRC are fixed amounts to which certain individual taxpayers (citizens, resident aliens) are entitled. Personal exemptions are the theoretical personal, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers as provided under Section 35 (A) and (B). Unless and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress.

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Section 35 (A) and (B) allow the basic personal and additional exemptions as deductions from gross or net income, as the case maybe, to arrive at the correct taxable income of certain individual taxpayers. Section 24 (A) (1) (a) imposed income tax on a resident citizens taxable income derived for each taxable year. Section 45 provides that 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." Moreover, Section 79 (H) requires the employer to determine, on or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the tax due from each employees taxable compensation income for the entire taxable year in accordance with Section 24 (A). This is for the purpose of either withholding from the employees December salary, or refunding to him not later than January 25 of the succeeding year, the difference between the tax due and the tax withheld. 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. Clearly what the law should consider for the purpose of determining.

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Madrigal v. Rafferty (income tax defined) FACTS: Vicente Madrigal and Susana Paterno were married with CPG as their property relations. Vicente filed his 1914 income tax return but later claimed a refund on the contention that it was the income of the conjugal partnership. Vicente claimed that the income should be divided into two with each spouse filing a separate return. Hence, Vicente claimed that each spouse should be entitled to the P8,000 exemption, which would result in a lower amount of income tax due. HELD: 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. A tax on income is not a tax on property. Income can be defined as profits or gains. Susana, has an inchoate right in the property of her husband during the life of the conjugal partnership. Her interest in the ultimate property rights and in the ultimate ownership of property acquired as income lies after such income has become capital. She has no absolute right to 12 the income of the conjugal partnership. Not being seized of a separate estate, Susana cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the 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 properly be considered the separate income of the wife for purposes of the additional tax.

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CIR v. Citytrust Investment Phils., Inc. FACTS: Now, bereft of any laudable statutory basis, Citytrust and Asianbank simply anchor their argument on Section 4(e) of Revenue Regulations No. 12-80 stating that the rates of taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received. They contend that since the 20% FWT is withheld at source and is paid directly to the government by the entities from which the banks derived the income, the same cannot be considered actually received, hence, must be excluded from the taxable gross receipts. The argument is bereft of merit. HELD: Does the twenty percent (20%) final withholding tax (FWT) on a banks passive income form part of the taxable gross receipts for the purpose of computing the five percent (5%) gross receipts tax (GRT)? YES. China Banking Corporation,[20] this Court further explained that the legislative intent to apply the term in its plain and ordinary meaning may be surmised from a historical perspective of the levy on gross receipts. From the time the GRT on banks was first imposed in 1946 under Republic Act No. 39[21] and throughout its successive reenactments,[22] the legislature has not established a definition of the term gross receipts. Under Revenue Regulations No. 12-80 and No. 17-84, as well as several numbered rulings, the BIR has consistently ruled that the term gross receipts does not admit of any deduction. This interpretation has remained unchanged throughout the various re-enactments of the present Section 121 of the Tax Code. On the presumption that the legislature is familiar with the contemporaneous interpretation of a statute given by the administrative agency tasked to enforce the statute, the reasonable conclusion is that the legislature has adopted the BIRs interpretation. In other words, the subsequent re-enactments of the present Section 121, without changes in the term interpreted by the BIR, confirm that its interpretation carries out the legislative purpose. The concept of a withholding tax on income obviously and necessarily implies that the amount of the tax withheld comes from the income earned by the taxpayer. Since the amount of the tax withheld constitute income earned by the taxpayer, then that amount manifestly forms part of the taxpayers gross receipts. Because the amount withheld belongs to the taxpayer, he can transfer its ownership to the government in payment of his tax liability. The amount withheld indubitably comes from the income of the taxpayer, and thus forms part of his gross receipts.

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v Solidbank Corporation (G.R. No. 148191) Facts: Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting to P1,474,693.44. It alleged that the total included P350,807,875.15 representing gross receipts from passive income which was already subjected to 20%final withholding tax (FWT). The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20% FWT should not form part of its taxable gross receipts for purposes of computing the tax. Solidbank, relying on the strength of this decision, filed with the BIR a letter-request for the refund or tax credit. It also filed a petition for review with the CTA where the it ordered the refund. The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross receipts because the FWT was not actually received by the bank but was directly remitted to the government. The Commissioner claims that although the FWT was not actually received by Solidbank, the fact that the amount redounded to the banks benefit makes it part of the taxable gross receipts in computing the Gross Receipts Tax. Solidbank says the CA ruling is correct. Issue: Whether or not the FWT forms part of the gross receipts tax. Held: Yes. In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed. The payor, a separate entity, acts as no more than an agent of the government for the collection of tax in order to ensure its payment. This amount that is used to settle the tax liability is sourced from the proceeds constitutive of the tax base. These proceeds are either actual or constructive. Both parties agree that there is no actual receipt by the bank. What needs to be determined is if there is constructive receipt. Since the payee is the real taxpayer, the rule on constructive receipt can be rationalized. The Court applied provisions of the Civil Code on actual and constructive possession. Article 531 of the Civil Code clearly provides that the acquisition of the

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right of possession is through the proper acts and legal formalities established. The withholding process is one such act. There may not be actual receipt of the income withheld; however, as provided for in Article 532, possession by any person without any power shall be considered as acquired when ratified by the person in whose name the act of possession is executed. In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer ratifies the very act of possession for the government. There is thus constructive receipt. The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are tantamount to delivery, receipt or remittance. Besides, Solidbank admits that its income is subjected to a tax burden immediately upon receipt, although it claims that it derives no pecuniary benefit or advantage through the withholding process. There being constructive receipt, part of which is withheld, that income is included as part of the tax base on which the gross receipts tax is imposed.

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IBC v. AMARILLA The issues are (1) whether the retirement benefits of respondents are part of their gross income[no]; and (2) whether petitioner is estopped from reneging on its agreement with respondent to pay for the taxes on said retirement benefits. [yes] [1] 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. Article VIII of the 1993 CBA provides for two kinds of retirement plans - compulsory and optional. Respondents were qualified to retire optionally from their employment with petitioner. However, there is no evidence on record that the 1993 CBA had been approved or was ever presented to the BIR; hence, the retirement benefits of respondents are taxable. [2] 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, 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.

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UNITED AIRLINES, INC., Petitioner vs. COURT OF APPEALS, ANICETO FONTANILLA, in his personal capacity and in behalf of his minor son MYCHAL ANDREW FONTANILLA, Respondents. FACTS: Aniceto Fontanilla bought from United Airlines, through the Philippine Travel Bureau in Manila, three Visit the U.S.A. tickets from himself, his wife and his minor son, Mychal, to visit the cities of Washington DC, Chicago and Los Angeles. All All flights had been confirmed previously by United Airlines. Having used the first coupon to DC and while at the Washington Dulles Airport, Aniceto changed their itinerary, paid the penalty for rewriting their tickets and was issued tickets with corresponding boarding passes with the words: Check-in- required. They were then set to leave but were denied boarding because the flight was overbooked. The CA ruled that private respondents failure to comply with the check-in requirement will not defeat his claim as the denied boarding rules were not complied with applying the laws of the USA, relying on the Code of Federal Regulation Part on Oversales of the USA. ISSUE: WON the CA is correct in applying the laws of USA. HELD: No. According to the doctrine of lex loci contractus, the law of the place where a contract is made or entered into governs with respect to its nature and validity, obligation and interpretation shall govern. This has been said to be the rule even though the place where the contract was made is different from the place where it is to be performed. Hence, the court should apply the law of the place where the airline ticket was issued, where the passengers are residents and nationals of the forum and the ticket is issued in such State by the defendant airline. Therefore, although, the contract of carriage was to be performed in the United States, the tickets were purchased through petitioners agent in Manila. It is true that the tickets were "rewritten" in D.C., however, such fact did not change the nature of the original contract of carriage entered into by the parties in Manila. Still taxable in manila.