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In 1915, Vicente Madrigal filed a sworn declaration with the CIR showing a total net
income for the year 1914 the sum of P296K. He claimed that the amount did not represent his
own income for the year 1914, but the income of the conjugal partnership existing between him
and his wife, Susana Paterno. He contended that since there exists such conjugal partnership, the
income declared should be divided into 2 equal parts in computing and assessing the additional
income tax provided by the Act of Congress of 1913. The Attorney-General of the Philippines
opined in favor of Madrigal, but Rafferty, the US CIR, decided against Madrigal.
After his payment under protest, Madrigal instituted an action to recover the sum of P3,800
alleged to have been wrongfully and illegally assessed and collected, under the provisions of the
Income Tax Law. However, this was opposed by Rafferty, contending that taxes imposed by the
Income Tax Law are taxes upon income, not upon capital or property, and that the conjugal
partnership has no bearing on income considered as income.
The CFI ruled in favor of the
defendants, Rafferty.
Whether Madrigals income should be divided into 2 equal parts in the assessment and
computation of his tax
HELD NO. Susana Paterno, wife of Vicente Madrigal, still has an inchoate right in the property of
her husband during the life of the conjugal partnership. She has an interest in the ultimate
property rights and in the ultimate ownership of property acquired as income after such income
has become capital. Susana has no absolute right to onehalf the income of the conjugal
partnership. Not being seized of a separate estate, she cannot make a separate return in order to
receive the benefit of exemption, which could arise by reason of the additional tax. As she has no
estate and income, actually and legally vested in her and entirely separate from her husbands
property, the income cannot be considered the separate income of the wife for purposes of
additional tax.
Income, as contrasted with capital and property, is to be the test. 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 tax on property.

Good will is the reputation of good name of an establishment. If the good will, that is, the good
reputation of the business is acquired in the course of its management and operation, it does form
part of the capital with which it was established. It is an intangible moral profit which is subject to
income tax.
William Anderson purchased the business of Erlanger & Galinger. He incorporated the partnership
with an authorized capital of P600,000 (all of which were subscribed by Anderson). Anderson paid
P70,000 and the amount left (totalling P530,000) was entered in an underwriting account.
A good will account was opened by Anderson. In 1918, he sold to Simon Feldstein 500 of his
shares which amounted to P150,000 but in the course of their transactions incurred losses. In view
of the said losses, Anderson deducted P125,000 from his taxable income which was approved by
the BIR.
Juan Posadas, Commissioner of Internal Revenue attempted to collect a tax (P300,000) at which
Anderson was assessed the goodwill of the business. Anderson agreed to eliminate the goodwill
by debiting the sum in his capital account and crediting it to the good will account.

It appears, that with the P100,000 paid by Feldstein on account of his purchasing 500 shares, the
loss (P125,000) has been recovered and it is but just that the P125,000 be restored as taxable
CFI Manila decided and held that P155,000 (which represents proceeds of the sale of the Goodwill
Account) and that P125,000 (representing the recovered loss) is not subject to income tax.
1. Whether or not goodwill account is subject to income tax
2. Whether or not the amount of P125,000 subject to income tax.
1. YES. Good will is the reputation of good name of an establishment. If the good will, that is, the
good reputation of the business is acquired in the course of its management and operation, it does
form part of the capital with which it was established. It is an intangible moral profit, susceptible of
valuation in money, acquired by the business by reason of the confidence reposed in it by the
public, due to the efficiency and honesty shown by the manager and personnel thereof in
conducting the same on account of the courtesy accorded its customers, which moral profit, once
it is valuated and used, becomes a part of the assets.
In the case, the good will of P155,000 created by Anderson has been beneficial not only to him but
also to Feldstein. Aside from the benefit, he also realized a gain of P70,838 from the sale of the
500 shares to Feldstein. When you add these two amounts, it totals to P161,250 which is more
than what the CIR is trying to collect from Anderson.
2. YES. It is subject to income tax.* (no legal explanation given by the Court)
In the case, the loss of P125,000 suffered by Anderson (by reason of the sale of said 500 shares)
has been recovered, and it is but just that the sum of P125,000, deducted from the profits by
reason of losses suffered temporarily on the capital, be restored.


Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to
the taxpayer which do not belong to them and do not redound to the taxpayers benefit; and it is
not necessary that there must be a law or regulation which would exempt such monies or receipts
within the meaning of gross receipts under the Tax Code
The Commissioner of Internal Revenue filed a petition to review on certiorari to the CTA decision
which ruled that the money entrusted to private respondent Tours Specialist (TS), earmarked and
paid for hotel room charges of tourists, travellers and/or foreign travel agencies do not form part
of its gross receipt subject to 3% independent contractors tax.
Tours Specialist derived income from its activities and services as a travel agency, which included
booking tourists in local hotels. To supply such service, TS and its counterpart tourist agencies
abroad have agreed to offer a package fee for the tourists (payment of hotel room
accommodations, food and other personal expenses). By arrangement, the foreign tour agency
entrusts to TS the fund for hotel room accommodation, which in turn paid by the latter to the local
hotel when billed.

Despite this arrangement, CIR assessed private respondent for deficiency 3% contractors tax as
independent contractor including the entrusted hotel room charges in its gross receipts from
services for years 1974-1976 plus compromise penalty.
During cross-examination, TS General Manager stated that the payment through them is only an
act of accommodation on (its) part and the agent abroad instead of sending several telexes and
saving on bank charges they take the option to send the money to (TS) to be held in trust to be
endorsed to the hotel.
Nevertheless, CIR caused the issuance of a warrant of distraint and levy, and had TS bank
deposits garnished.
W/N amounts received by a local tourist and travel agency included in a package fee from tourists
or foreign tour agencies, intended or earmarked for hotel accommodations form part of gross
receipts subject to 3% contractors tax
No. Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted
to the taxpayer which do not belong to them and do not redound to the taxpayers benefit; and it
is not necessary that there must be a law or regulation which would exempt such monies or
receipts within the meaning of gross receipts under the Tax Code. Parenthetically, the room
charges entrusted by the foreign travel agencies to the private respondents do not form part of its
gross receipts within the definition of the Tax Code. The said receipts never belonged to the
private respondent. The private respondent never benefited from their payment to the local
hotels. This arrangement was only to accommodate the foreign travel agencies.


Facts: Fernandez Hermanos Inc. is a domestic corporation organized for the principal purpose of
engaging in business as an investment company. The CIR disallowed the following deductions:
1. losses in Mati Lumber Co in 1950
2. losses or bad debts in Palawan Manganese Mines Inc in 1951
3. losses in Balamban Coal Mines in 1950 and 1951
4. losses in Hacienda Dalupiri and Hacienda Samal from 1950-1954
Held: The Supreme Court discussed the allowance or disallowance of each in the following
1. Allowed. These losses represent the shares of stock (worth P8,050) petitioner acquired from
Mati in Jan. 1, 1948. The petitioner was correct in writing off and claiming as a deduction in 1950
the amount on the ground that the lumber company had ceased operations and became insolvent
in that year. The CIR was incorrect in arguing that since the company still owned a sawmill and
some equipment, the shares of stock still had value. The proper assessment would be to treat as
income for the year in which petitioner gets the proceeds from the liquidation of those assets.
2. Disallowed. These losses represent part of the loans extended by the petitioner to its 100%
owned subsidiary. Petitioner advanced financial assistance to Palawan from 1945 to 1952. By way

of payment, Palawan was to give petitioner 15% of net profits. Whether Palawan was able to pay
the loans or not because it continued to operate at a loss is immaterial. Petitioner cannot properly
claim as a loss the advances given to Palawan in 1951 for that year. There can be no partial
writing off as a loss or bad debt under the Tax Code. Those losses or bad debts ascertained within
the taxable year are deductible in full or not at all. Petitioner continued to give Palawan advances
even beyond 1951. It was only in 1956 when Palawan decided to cease operations.
3. Disallowed. These losses represent sums spent by the petitioner for the operation of its
Balamban coal mines in 1950 and 1951. The petitioner should have treated them as losses in
1952 when the mines were abandoned and not in 1950 and 1951 on the ground that the mines
made no sales of coal during those years.
4. Allowed. These losses represent sums spent by petitioner for the operation of the 2 haciendas.
The amounts were properly reported as deductions for the correct years. The only reason why the
CIR disallowed them was on the ground that the farms were operated solely for pleasure or as a
hobby and not for profit. But the Supreme Court is not convinced, and being for business, the
petitioner may properly deduct the same.


Lino Gutierrez was primarily engaged in the business of leasing real property for which he paid
real estate brokers privilege tax. The Collector assessed against Gutierrez deficiency income tax
amounting to P11,841.
The deficiency tax came about by the disallowance of deductions from gross income representing
depreciation expenses Gutierrez allegedly incurred in carrying on his business. The expenses
consisted of:
Transportation expenses incurred to attend the funeral of his friends,
Procurement and installation of an iron door,
Cost of furniture given by the taxpayer in furtherance of a business transaction,
Membership fees in organizations established by those engaged in the real estate trade,
Car expenses, salary of his driver and car depreciation,
Repairing taxpayers rental apartments,
Litigation expenses,
Depreciation of Gutierrez residence,
Fines and penalties for late payment of taxes,
10. Alms given to in indigent family and a donation consisting of officers jewels and aprons to
Biak-na-Bato Lodge No. 7.
Whether or not claims for deduction are proper and allowable.
To be deductible, an expense must be:

Ordinary and necessary

Paid or incurred within the taxable year

Paid or incurred in carrying on a trade or business.

1. Transportation expenses which petitioner incurred to attend the funeral of his friends and the
cost of admission tickets to operas - expenses relative to his personal and social activities rather
than to his business of leasing real estate.
2. Procurement and installation of an iron door to - purely a personal expense. Personal, living, or
family expenses are not deductible.
3. Cost of furniture given by the taxpayer as commission in furtherance of a business transaction the expenses incurred in attending the National Convention of Filipino Businessmen, luncheon
meeting and cruise to Corregidor of the Homeowners' Association were shown to have been made
in the pursuit of his business. Commissions given in consideration for bringing about a profitable
transaction are part of the cost of the business transaction and are deductible.
4. Membership and activities in connection therewith were solely to enhance his business
-Gutierrez was an officer of the Junior Chamber of Commerce which sponsored the National
Convention of Filipino Businessmen. He was also the president of the Homeowners' Association, an
organization established by those engaged in the real estate trade. Having proved that his, the
expenses incurred are deductible as ordinary and necessary business expenses.
5. Car expenses, salary of his driver and car depreciation 1/3 of the same was disallowed by the
Commissioner on the ground that the taxpayer used his car and driver both for personal and
business purposes. There is no clear showing, however, that the car was devoted more for the
taxpayer's business than for his personal and business needs. According to the evidence, the
taxpayer's car was utilized both for personal and business needs. It is reasonable to allow as
deduction 1/2 of the driver's salary, car expenses and depreciation.
6. Those used to repair the taxpayer's rental apartments - did not increase the value of such
apartments, or prolong their life. They merely kept the apartments in an ordinary operating
condition. Hence, the expenses incurred are deductible as necessary expenditures for the
maintenance of the taxpayer's business.
7. Litigation expenses - defrayed by Gutierrez to collect apartment rentals and to eject delinquent
tenants are ordinary and necessary expenses in pursuing his business. It is routinary and
necessary for one in the leasing business to collect rentals and to eject tenants who refuse to pay
their accounts.
8. Depreciation of Gutierrez' residence - not deductible. A taxpayer may deduct from gross income
a reasonable allowance for deterioration of property arising out of its use or employment in
business or trade. Gutierrez' residence was not used in his trade or business.
9. Deduction the fines and penalties which he paid for late payment of taxes - while Section 30
allows taxes to be deducted from gross income, it does not specifically allow fines and penalties to
be so deducted.
Deductions from gross income are matters of legislative grace; what is not expressly granted by
Congress is withheld. Moreover, when acts are condemned, by law and their commission is made
punishable by fines or forfeitures, to allow them to be deducted from the wrongdoer's gross
income, reduces, and so in part defeats, the prescribed punishment.
10. Alms to an indigent family and various individuals, contributions to Lydia Yamson and G.
Trinidad and a donation consisting of officers' jewels and aprons to Biak-na-Bato Lodge No. 7 - not
deductible from gross income inasmuch as their recipients have not been shown to be among
those specified by law. Contributions are deductible when given to the Government of the
Philippines, or any of its political subdivisions for exclusively public purposes, to domestic
corporations or associations organized and operated exclusively for religious, charitable, scientific,
athletic, cultural or educational purposes, or for the rehabilitation of veterans, or to societies for
the prevention of cruelty to children or animals, no part of the net income of which inures to the
benefit of any private stockholder or individual.

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

Efren Castaneda retired from govt service as Revenue Attache in the Philippine Embassy, London,
England. Upon retirement, he received benefits such as the terminal leave pay. The Commissioner
of Internal Revenue withheld P12,557 allegedly representing that it was tax income.
Castaneda filed for a refund, contending that the cash equivalent of his terminal leave is exempt
from income tax.
The Solicitor General contends that the terminal leave is based from an employer-employee
relationship and that as part of the services rendered by the employee, the terminal leave pay is
part of the gross income of the recipient.
CTA -> ruled in favor of Castaneda and ordered the refund.
CA -> affirmed decision of CTA. Hence, this petition for review on certiorari.
Whether or not terminal leave pay (on occasion of his compulsory retirement) is subject to income
NO. As explained in Borromeo v CSC, the rationale of the court in holding that terminal leave pays
are subject to income tax is that:
. . 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 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.
A terminal leave pay is a retirement benefit which is NOT subject to income tax.

Facts: Filinvest Development Corporation filed a claim for refund or in the alternative the issuance
of a tax credit certificate (TCC) with the Commissioner of Internal Revenue (CIR) representing
excess creditable withholding taxes for taxable years 1994, 1995, 1996.
The CIR did not resolve the claim for refund and the two-year prescriptive period was about to
lapse which prompted the petitioner to file a petition for review before the Court of Tax Appeals
(CTA). In the petition, it prayed for refund or in the alternative the issuance of TCC amounting
P3,173,868.00.The amount of P1,004,236.00 representing excess/unutilized creditable withholding
taxes for 1994 was no longer included as it was already barred by prescription.
Eventually, CTA dismissed the petition for review. Motion for review was filed before the Court of
Appeals which was dismissed so as the motion for reconsideration, denied.
Then here comes the petition before the Supreme Court which was also denied but later in the
motion for reconsideration it was at last granted. The petitioner alleged among others that the CA
erred in relying on CTA cases where they cited in its decision as jurisprudential basis to support its
Issue: Whether or not decisions of the CTA are jurisprudential basis for coming up a decision.
Held: The SC ruled that the CA was wrong in relying decisions of the CTA as jurisprudential basis
By tradition and in our system of administration, the Supreme Court has the last word on what the
law is, and that its decisions applying or interpreting the laws or the Constitution form part of the
legal system of the country, all other courts should take their bearings from the decisions of this
The principle of stare decisis et non quieta movere, as embodied in ART 8 of the CIVIL CODE of
the Philippines, enjoins adherence to judicial precedents. It requires our courts to follow a rule
already established in a final decision of the SC. That decision becomes a judicial precedent to be
followed in subsequent cases by all courts in the land.