Conwi, et.al. vs.

CTA and CIR

Facts: Petitioners are employees of Procter and Gamble
(Philippine Manufacturing Corporation, subsidiary of Procter &
Gamble, a foreign corporation).During the years 1970 and
1971, petitioners were assigned to other subsidiaries of
Procter & Gamble outside the Philippines, for which petitioners
were paid US dollars as compensation.
Petitioners filed their ITRs for 1970 and 1971, computing tax
due by applying the dollar-to-peso conversion based on the
floating rate under BIR Ruling No. 70-027. In 1973, petitioners
filed amened ITRs for 1970 and 1971, this time using the par
value of the peso as basis. This resulted in the alleged
overpayments, refund and/or tax credit, for which claims for
refund were filed.
CTA held that the proper conversion rate for the purpose of
reporting and paying the Philippine income tax on the dollar
earnings of petitioners are the rates prescribed under
RevenueMemorandum Circulars Nos. 7-71 and 41-71. The
refund claims were denied.
Issues: (1) Whether or not petitioners' dollar earnings are
receipts derived from foreign exchange transactions; NO.
(2) Whether or not the proper rate of conversion of
petitioners' dollar earnings for tax purposes in the prevailing
free market rate of exchange and not the par value of the
peso; YES.
Held: For the proper resolution of income tax cases, income
may be defined as an amount of money coming to a person or
corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. Income can also be
though of as flow of the fruits of one's labor.
Petitioners are correct as to their claim that their dollar
earnings are not receipts derived from foreign exchange
transactions. For a foreign exchange transaction is simply that
a transaction in foreign exchange, foreign exchange being
"the conversion of an amount of money or currency of one
country into an equivalent amount of money or currency of
another." When petitioners were assigned to the foreign
subsidiaries of Procter & Gamble, they were earning in their
assigned nation's currency and were ALSO spending in said
currency. There was no conversion, therefore, from one
currency to another.
The dollar earnings of petitioners are the fruits of their labors
in the foreign subsidiaries of Procter & Gamble. It was a
definite amount of money which came to them within a
specified period of time of two years as payment for their
services.
And in the implementation for the proper enforcement of the
National Internal Revenue Code, Section 338 thereof
empowers the Secretary of Finance to "promulgate all needful
rules and regulations" to effectively enforce its provisions
pursuant to this authority, Revenue Memorandum Circular
Nos. 7-71 and 41-71 were issued to prescribed a uniform rate
of exchange from US dollars to Philippine pesos for INTERNAL
REVENUE TAX PURPOSES for the years 1970 and 1971,
respectively. Said revenue circulars were a valid exercise of
the authority given to the Secretary of Finance by the
Legislature which enacted the Internal Revenue Code. And
these are presumed to be a valid interpretation of said code
until revoked by the Secretary of Finance himself.
Petitioners are citizens of the Philippines, and their income,
within or without, and in these cases wholly without, are
subject to income tax. Sec. 21, NIRC, as amended, does not
brook any exemption. DENIED FOR LACK OF MERIT.

Commissioner vs. BOAC 149 SCRA 395 GR No. L65773-74 April 30, 1987
"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: Petitioner CIR seeks a review of the CTA's decision
setting aside petitioner's assessment of deficiency income
taxes against respondent British Overseas Airways
Corporation (BOAC) for the fiscal years 1959 to 1971.
BOAC is a 100% British Government-owned corporation
organized and existing under the laws of the United
Kingdom, and is engaged in the international airline
business. During the periods covered by the disputed
assessments, it is admitted that BOAC had no landing
rights for traffic purposes in the Philippines. 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 CTA sided
with BOAC citing that the proceeds of sales of BOAC
tickets do not constitute BOAC income from Philippine
sources since no service of carriage of passengers or
freight was performed by BOAC within the Philippines and,
therefore, said income is not subject to Philippine income
tax. The CTA position was that income from transportation
is income from services so that the place where services
are rendered determines the source.
ISSUE: Are the revenues derived by BOAC from sales of
ticket for air transportation, while having no landing rights
here, constitute income of BOAC from Philippine sources,
and accordingly, taxable?
HELD: Yes. 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 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 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.

MADRIGAL VS. RAFFERTY- Difference Between Capital

and Income
FACTS: Vicente Madrigal and Susana Paterno were
legally married prior to Januray 1, 1914. The marriage
was contracted under the provisions of law concerning
conjugal
partnership

 On 1915, Madrigal filed a declaration of his net

income for year 1914, the sum of P296,302.73
Vicente Madrigal was contending that the said
declared income does not represent his income for the
year 1914 as it was the income of his conjugal
partnership with Paterno. He said that in computing for
his additional income tax, the amount declared should
be
divided
by
2.
The revenue officer was not satisfied with Madrigals
explanation and ultimately, the United States
Commissioner of Internal Revenue decided against the
claim
of
Madrigal.
Madrigal paid under protest, and the couple decided
to recover the sum of P3,786.08 alleged to have been
wrongfully and illegally assessed and collected by the
CIR.

ISSUE: Whether or not the income reported by Madrigal

on 1915 should be divided into 2 in computing for the
additional income tax.

HELD: No! The point of view of the CIR is that the

Income Tax Law, as the name implies, taxes upon
income and not upon capital and property.
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.
As Paterno 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 the
purposes
of
the
additional
tax.
To recapitulate, Vicente wants to half his declared
income in computing for his tax since he is arguing that
he has a conjugal partnership with his wife. However,
the court ruled that the one that should be taxed is the
income which is the flow of the capital, thus it should
not be divided into 2.

LIMPAN INVESTMENT VS. CIR- Actual vs

Constructive Receipt
Limpan Investment Company deemed to have
constructively received rental payments in 1957 when
they were deposited in court due to its refusal to
receive them.
FACTS:
BIR assessed deficiency taxes on Limpan Corp, a
company that leases real property, for under-declaring

its rental income for years 1956-57 by around P20K

and
P81K
respectively.
Petitioner appeals on the ground that portions of
these underdeclared rents are yet to be collected by
the previous owners and turned over or received by the
corporation.
Petitioner cited that some rents were deposited with
the court, such that the corporation does not have
actual
nor
constructive
control
over
them.
The sole witness for the petitioner, Solis (Corporate
Secretary- Treasurer) admitted to some undeclared
rents in 1956 and1957, and that some balances were
not collected by the corporation in 1956 because the
lessees refused to recognize and pay rent to the new
owners and that the corps 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.
ISSUE: Whether or not the BIR was correct in assessing
deficiency taxes against Limpan Corp. for undeclared
rental income
HELD: Yes. Petitioner admitted that it indeed had
undeclared income (although only a part and not the
full amount assessed by BIR). Thus, it has become
incumbent upon them to prove their excuses by clear
and convincing evidence, which it has failed to do.
When is there constructive receipt of rent? With regard
to 1957 rents deposited with the court, and withdrawn
only in 1958, the court viewed the corporation as
having constructively received said rents. The noncollection was the petitioners fault since it refused to
refused to accept the rent, and not due to nonpayment
of lessees. Hence, although the corporation did not
actually receive the rent, it is deemed to have
constructively received them.
Republic v. dela Rama (Actual v. Constructive receipt)

FACTS: The BIR assessed deficiency income tax

against the estate of the late Esteban dela Rama for
the cash dividends it allegedly received but failed to
include in its income tax return. The cash dividends
were declared by the Dela Rama Steamship Co in favor
of the decedent and were applied as payment of the
latters account with the former.
ISSUE: Whether crediting of accounts in the books of
the company constituted a constructive receipt by the
estate or the heirs of Esteban de la Rama of the
dividends, and this dividend was an income of the
estate and was, therefore, taxable?
HELD: NO
If the debts to which the dividends were applied really
existed and legally demandable and chargeable
against
the
deceased,
there
was constructive receipt of the dividends. If there were
no such debts, then there was no constructive
receipt. The existence and validity of the first debt
was in dispute and no proof was adduced to show the
existence and validity of the debt. As to the
second debt, the alleged debtor Hijos dela Rama, Inc.
was an entity separate and distinct from the
deceased. Hence,
its debts
could not
be

charged against the estate. Appellant cites the case of

Herbert v. Commissioner of Internal Revenue
, 81 F. (2d) 912 as authority that the crediting
of dividends against accounts constitutes payment and
constructive receipt of the dividends. The citation of
authority misses the point in issue. In that case the
existence of the indebtedness of Leon S. Herbert to the
corporation that declared the dividends and against
which indebtedness the dividends were applied, was
never put in issue, and was admitted. In the instant
case, the existence of the obligations has been
disputed and, as the trial court found, has not been
proved. It having been shown in the instant case that
there was no basis for the assessment of the income
tax, the assessment itself and the sending of notices
regarding the assessment would neither have basis,
and so that assessment and the notices produced no
legal effect that would warrant the collection of the tax.
Collector v Henderson
(Compensation Income)
Facts: Arthur Henderson is the president of the
American International Underwriters for the Phils., Inc.,
a domestic corporation engaged in insurance business.
The CIR included as part of the spouses personal
taxable income the allowances for rental of the
apartment furnished by the employer-corporation,
including utilities, and the allowance for travel
expenses of Mrs. Henderson. The spouses did not live
in the apartments and nor did they avail of the travel
expenses. As such, they did not pay for taxes
corresponding to the allowances. Hence, the CIR
assessed deficiency income taxes against the spouses.
In fine, not being part of the gross salary or income of a
government official or employee but a retirement benefit, terminal
leave pay is not subject to income tax.

CIR VS. CA AND CASTANEDA- Retirement Benefit,

Terminal Leave Pay is Not Subject to Income Tax
In fine, not being part of the gross salary or income of a
government official or employee but a retirement benefit,
terminal leave pay is not subject to income tax.

FACTS: Private respondent Efren P. Castaneda retired

from the government service in 1982. Upon retirement,
he received, among other benefits, terminal leave pay
from which petitioner Commissioner of Internal
Revenue withheld P12,557.13 allegedly representing
income
tax
thereon.
Castaneda filed a formal written claim with petitioner
for a refund of the P12,557.13, contending that the
cash equivalent of his terminal leave is exempt from
income tax. To comply with the two-year prescriptive
period within which claims for refund may be filed,
Castaneda filed on 16 July 1984 with the Court of Tax
Appeals a Petition for Review, seeking the refund of
income tax withheld from his terminal leave pay.
The Court of Tax Appeals decided in favor of Castaneda
and ordered the CIR 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. In turn, we referred the case to

the Court of Appeals for resolution. On 26 September
1990, the Court of Appeals dismissed the petition for
review and affirmed the decision of the Court of Tax
Appeals. Hence, the present recourse by the
Commissioner of Internal Revenue.

The Solicitor General, acting on behalf of the

Commissioner of Internal Revenue, contends that the
terminal leave pay is income derived from employeremployee relationship, citing in support of his stand
Section 28 of the NIRC.

ISSUE: 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.

HELD: The Court has already ruled that the terminal

leave pay received by a government official or
employee is not subject to withholding (income) tax. In
the recent case of Jesus N. Borromeo vs. The Hon. Civil
Service Commission, et al., G.R. No. 96032, 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 fault of his own.
(Manual
on
Leave
Administration
Course
for
Effectiveness
published
by
the
Civil
Service
Commission, pages 16-17). 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.

G.R. No. 78780. July 23, 1987. 152 SCRA 284

David G. Nitafan, Wenceslao M. Polo, and Maximo A.
Savellano, Jr., petitioners, vs. Commissioner Of
Internal Revenue, respondents.
Facts: Petitioners, the duly appointed and qualified
Judges presiding over Branches 52, 19 and 53,
respectively, of the Regional Trial Court, National
Capital Judicial Region, all with stations in Manila, seek
to prohibit and/or perpetually enjoin respondents, the
Commissioner of Internal Revenue and the Financial

Officer of the Supreme Court, from making any

deduction of withholding taxes from their salaries.

Issue: Whether or not the investment should be

classified as a capital loss.

Issue: Whether or not members of the Judiciary are

exempt from income taxes.

Held: Yes. Section 29.d.4.B of the NIRC contains

provisions on securities becoming worthless. It conveys
that capital loss normally requires the concurrence of 2
conditions:
a.
there is a sale or exchange
b.
the thing sold or exchanges is a capital asset.

Ruling: Yes. The Court held that the salaries of Justices

and Judges are properly subject to a general income
tax law applicable to all income earners and that the
payment of such income tax by Justices and Judges
does not fall within the constitutional protection
against decrease of their salaries during their
continuance in office and the ruling that "the
imposition of income tax upon the salary of judges is a
diminution thereof, and so violates the Constitution" in
Perfecto vs. Meer, as affirmed in Endencia vs. David
must be declared discarded. The framers of the
fundamental law, as the alter ego of the people, have
expressed in clear and unmistakable terms the
meaning and import of Section 10, Article VIII, of the
1987 Constitution that they have adopted.
China Banking Corporation v CA
Facts: China Banking Corporation made a 53% equity
investment (P16,227,851.80) in the First CBC Capital
a Hongkong subsidiary engaged in financing and
investment with deposit-taking function.
It was shown that CBC has become insolvent so China
Banking wrote-off its investment as worthless and
treated it as a bad debt or as an ordinary loss
deductible from its gross income.
CIR disallowed the deduction on the ground that the
investment should not be classified as being worthless.
It also held that assuming that the securities were
worthless, then they should be classified as a capital
loss and not as a bad debt since there was no
indebtedness between China Banking and CBC.

When securities become worthless, there is strictly no

sale or exchange but the law deems it to be a loss.
These are allowed to be deducted only to the extent of
capital gains and not from any other income of the
taxpayer. A similar kind of treatment is given by the
NIRC on the retirement of certificates of indebtedness
with interest coupons or in registered form, short sales
and options to buy or sell property where no sale or
exchange strictly exists. In these cases, The NIRC
dispenses with the standard requirements.
There is ordinary loss when the property sold is not a
capital asset.
In the case, CBC as an investee corporation, is a
subsidiary corporation of China Banking whose shares
in CBC are not intended for purchase or sale but as an
investment. An equity investment is a capital asset of
the investor. Unquestionably, any loss is a capital loss
to the investor.
Additional notes:
*The loss cannot be deductible as bad debt since the
shares of stock do not constitute a loan extended by it
to its subsidiary or a debt subject to obligatory
repayment by the latter.