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Difference between Capital and Income United States Commissioner of Internal Revenue reversed the opinion of the

Attorney-General, and thus decided against the claim of Madrigal.

G.R. No. L-12287 August 7, 1918
After payment under protest, and after the protest of Madrigal had been
VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants, decided adversely by the Collector of Internal Revenue, action was begun by
vs. Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO the city of Manila against Collector of Internal Revenue and the Deputy
CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees. Collector of Internal Revenue for the recovery of the sum of P3,786.08,
alleged to have been wrongfully and illegally collected by the defendants from
Gregorio Araneta for appellants. the plaintiff, Vicente Madrigal, under the provisions of the Act of Congress
Assistant Attorney Round for appellees. known as the Income Tax Law. The burden of the complaint was that if the
income tax for the year 1914 had been correctly and lawfully computed there
MALCOLM, J.: would have been due payable by each of the plaintiffs the sum of P2,921.09,
which taken together amounts of a total of P5,842.18 instead of P9,668.21,
This appeal calls for consideration of the Income Tax Law, a law of American erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with
origin, with reference to the Civil Code, a law of Spanish origin. the result that plaintiff Madrigal has paid as income tax for the year 1914,
P3,786.08, in excess of the sum lawfully due and payable.
The answer of the defendants, together with an analysis of the tax declaration,
Vicente Madrigal and Susana Paterno were legally married prior to January 1, the pleadings, and the stipulation, sets forth the basis of defendants' stand in
1914. The marriage was contracted under the provisions of law concerning the following way: The income of Vicente Madrigal and his wife Susana
conjugal partnerships (sociedad de gananciales). On February 25, 1915, Paterno of the year 1914 was made up of three items: (1) P362,407.67, the
Vicente Madrigal filed sworn declaration on the prescribed form with the profits made by Vicente Madrigal in his coal and shipping business; (2)
Collector of Internal Revenue, showing, as his total net income for the year P4,086.50, the profits made by Susana Paterno in her embroidery business;
1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim (3) P16,687.80, the profits made by Vicente Madrigal in a pawnshop company.
that the said P296,302.73 did not represent his income for the year 1914, but The sum of these three items is P383,181.97, the gross income of Vicente
was in fact the income of the conjugal partnership existing between himself Madrigal and Susana Paterno for the year 1914. General deductions were
and his wife Susana Paterno, and that in computing and assessing the claimed and allowed in the sum of P86,879.24. The resulting net income was
additional income tax provided by the Act of Congress of October 3, 1913, the P296,302.73. For the purpose of assessing the normal tax of one per cent on
income declared by Vicente Madrigal should be divided into two equal parts, the net income there were allowed as specific deductions the following: (1)
one-half to be considered the income of Vicente Madrigal and the other half of P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the
Susana Paterno. The general question had in the meantime been submitted to specific exemption granted to Vicente Madrigal and Susana Paterno, husband
the Attorney-General of the Philippine Islands who in an opinion dated March and wife. The remainder, P271,614.93 was the sum upon which the normal
17, 1915, held with the petitioner Madrigal. The revenue officers being still tax of one per cent was assessed. The normal tax thus arrived at was
unsatisfied, the correspondence together with this opinion was forwarded to P2,716.15.
Washington for a decision by the United States Treasury Department. The
The dispute between the plaintiffs and the defendants concerned the flow. A fund of property existing at an instant of time is called capital. A flow of
additional tax provided for in the Income Tax Law. The trial court in an services rendered by that capital by the payment of money from it or any other
exhausted decision found in favor of defendants, without costs. benefit rendered by a fund of capital in relation to such fund through a period
of time is called an income. Capital is wealth, while income is the service of
ISSUES. wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court
of Georgia expresses the thought in the following figurative language: "The
The contentions of plaintiffs and appellants having to do solely with the fact is that property is a tree, income is the fruit; labor is a tree, income the
additional income tax, is that is should be divided into two equal parts, fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878],
because of the conjugal partnership existing between them. The learned 60 Ga., 93.) A tax on income is not a tax on property. "Income," as here used,
argument of counsel is mostly based upon the provisions of the Civil Code can be defined as "profits or gains." (London County Council vs. Attorney-
establishing the sociedad de gananciales. The counter contentions of General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week.
appellees are that the taxes imposed by the Income Tax Law are as the name Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax, second edition
implies taxes upon income tax and not upon capital and property; that the fact [1915], Chapter IV; Black on Income Taxes, second edition [1915], Chapter
that Madrigal was a married man, and his marriage contracted under the VIII; Gibbons vs. Mahon [1890], 136 U.S., 549; and Towne vs. Eisner, decided
provisions governing the conjugal partnership, has no bearing on income by the United States Supreme Court, January 7, 1918.)
considered as income, and that the distinction must be drawn between the
ordinary form of commercial partnership and the conjugal partnership of A regulation of the United States Treasury Department relative to returns by
spouses resulting from the relation of marriage. the husband and wife not living apart, contains the following:

DECISION. The husband, as the head and legal representative of the household and
general custodian of its income, should make and render the return of the
From the point of view of test of faculty in taxation, no less than five answers aggregate income of himself and wife, and for the purpose of levying the
have been given the course of history. The final stage has been the selection income tax it is assumed that he can ascertain the total amount of said
of income as the norm of taxation. (See Seligman, "The Income Tax," income. If a wife has a separate estate managed by herself as her own
Introduction.) The Income Tax Law of the United States, extended to the separate property, and receives an income of more than $3,000, she may
Philippine Islands, is the result of an effect on the part of the legislators to put make return of her own income, and if the husband has other net income,
into statutory form this canon of taxation and of social reform. The aim has making the aggregate of both incomes more than $4,000, the wife's return
been to mitigate the evils arising from inequalities of wealth by a progressive should be attached to the return of her husband, or his income should be
scheme of taxation, which places the burden on those best able to pay. To included in her return, in order that a deduction of $4,000 may be made from
carry out this idea, public considerations have demanded an exemption the aggregate of both incomes. The tax in such case, however, will be
roughly equivalent to the minimum of subsistence. With these exceptions, the imposed only upon so much of the aggregate income of both shall exceed
income tax is supposed to reach the earnings of the entire non-governmental $4,000. If either husband or wife separately has an income equal to or in
property of the country. Such is the background of the Income Tax Law. excess of $3,000, a return of annual net income is required under the law, and
such return must include the income of both, and in such case the return must
Income as contrasted with capital or property is to be the test. The essential be made even though the combined income of both be less than $4,000. If the
difference between capital and income is that capital is a fund; income is a aggregate net income of both exceeds $4,000, an annual return of their
combined incomes must be made in the manner stated, although neither one partnership and having no application to the Income Tax Law. The aims and
separately has an income of $3,000 per annum. They are jointly and purposes of the Income Tax Law must be given effect.
separately liable for such return and for the payment of the tax. The single or
married status of the person claiming the specific exemption shall be The point we are discussing has heretofore been considered by the Attorney-
determined as one of the time of claiming such exemption which return is General of the Philippine Islands and the United States Treasury Department.
made, otherwise the status at the close of the year." The decision of the latter overruling the opinion of the Attorney-General is as
With these general observations relative to the Income Tax Law in force in the
Philippine Islands, we turn for a moment to consider the provisions of the Civil TREASURY DEPARTMENT, Washington.
Code dealing with the conjugal partnership. Recently in two elaborate
decisions in which a long line of Spanish authorities were cited, this court in Income Tax.
speaking of the conjugal partnership, decided that "prior to the liquidation the
interest of the wife and in case of her death, of her heirs, is an interest FRANK MCINTYRE,
inchoate, a mere expectancy, which constitutes neither a legal nor an Chief, Bureau of Insular Affairs, War Department,
equitable estate, and does not ripen into title until there appears that there are Washington, D. C.
assets in the community as a result of the liquidation and settlement." (Nable
Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and Laxamana vs. SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy
Losano [1918], 16 Off. Gaz., 1265.) of correspondence "from the Philippine authorities relative to the method of
submission of income tax returns by marred person."
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the
property of her husband Vicente Madrigal during the life of the conjugal You advise that "The Governor-General, in forwarding the papers to the
partnership. She has an interest in the ultimate property rights and in the Bureau, advises that the Insular Auditor has been authorized to suspend
ultimate ownership of property acquired as income after such income has action on the warrants in question until an authoritative decision on the points
become capital. Susana Paterno has no absolute right to one-half the income raised can be secured from the Treasury Department."
of the conjugal partnership. Not being seized of a separate estate, Susana
Paterno cannot make a separate return in order to receive the benefit of the From the correspondence it appears that Gregorio Araneta, married and living
exemption which would arise by reason of the additional tax. As she has no with his wife, had an income of an amount sufficient to require the imposition
estate and income, actually and legally vested in her and entirely distinct from of the net income was properly computed and then both income and
her husband's property, the income cannot properly be considered the deductions and the specific exemption were divided in half and two returns
separate income of the wife for the purposes of the additional tax. Moreover, made, one return for each half in the names respectively of the husband and
the Income Tax Law does not look on the spouses as individual partners in an wife, so that under the returns as filed there would be an escape from the
ordinary partnership. The husband and wife are only entitled to the exemption additional tax; that Araneta claims the returns are correct on the ground under
of P8,000 specifically granted by the law. The higher schedules of the the Philippine law his wife is entitled to half of his earnings; that Araneta has
additional tax directed at the incomes of the wealthy may not be partially dominion over the income and under the Philippine law, the right to determine
defeated by reliance on provisions in our Civil Code dealing with the conjugal its use and disposition; that in this case the wife has no "separate estate"
within the contemplation of the Act of October 3, 1913, levying an income tax.
wife may make the return but not both. In all instances the income of husband
It appears further from the correspondence that upon the foregoing and wife whether from separate estates or not, is taken as a whole for the
explanation, tax was assessed against the entire net income against Gregorio purpose of the normal tax. Where the wife has income from a separate estate
Araneta; that the tax was paid and an application for refund made, and that makes return made by her husband, while the incomes are added together for
the application for refund was rejected, whereupon the matter was submitted the purpose of the normal tax they are taken separately for the purpose of the
to the Attorney-General of the Islands who holds that the returns were additional tax. In this case, however, the wife has no separate income within
correctly rendered, and that the refund should be allowed; and thereupon the the contemplation of the Income Tax Law.
question at issue is submitted through the Governor-General of the Islands
and Bureau of Insular Affairs for the advisory opinion of this office. Respectfully,

By paragraph M of the statute, its provisions are extended to the Philippine DAVID A. GATES.
Islands, to be administered as in the United States but by the appropriate Acting Commissioner.
internal-revenue officers of the Philippine Government. You are therefore
advised that upon the facts as stated, this office holds that for the Federal In connection with the decision above quoted, it is well to recall a few basic
Income Tax (Act of October 3, 1913), the entire net income in this case was ideas. The Income Tax Law was drafted by the Congress of the United States
taxable to Gregorio Araneta, both for the normal and additional tax, and that and has been by the Congress extended to the Philippine Islands. Being thus
the application for refund was properly rejected. a law of American origin and being peculiarly intricate in its provisions, the
authoritative decision of the official who is charged with enforcing it has
The separate estate of a married woman within the contemplation of the peculiar force for the Philippines. It has come to be a well-settled rule that
Income Tax Law is that which belongs to her solely and separate and apart great weight should be given to the construction placed upon a revenue law,
from her husband, and over which her husband has no right in equity. It may whose meaning is doubtful, by the department charged with its execution.
consist of lands or chattels. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903],
2 Phil., 630; Government of the Philippine Islands vs. Municipality of
The statute and the regulations promulgated in accordance therewith provide Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil.,
that each person of lawful age (not excused from so doing) having a net 634.) We conclude that the judgment should be as it is hereby affirmed with
income of $3,000 or over for the taxable year shall make a return showing the costs against appellants. So ordered.
facts; that from the net income so shown there shall be deducted $3,000
where the person making the return is a single person, or married and not Torres, Johnson, Carson, Street and Fisher, JJ., concur.
living with consort, and $1,000 additional where the person making the return
is married and living with consort; but that where the husband and wife both Test in determining Income/ Doctrines on determination of Taxable
make returns (they living together), the amount of deduction from the Income
aggregate of their several incomes shall not exceed $4,000. Realization Test/ Severance Theory
Eisner vs Macomber
The only occasion for a wife making a return is where she has income from a
Mrs. Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a
sole and separate estate in excess of $3,000, but together they have an
50% stock dividend and she received 1,100 additional shares, of which about
income in excess of $4,000, in which the latter event either the husband or
$20,000 in par value represented earnings accumulated by the company
recapitalized rather than distributedsince the effective date of the original tax unchanged from its previous level. In effect, nothing of substance has
law. occurred."[2]
The current statute expressly included stock dividends in income, and the
government contended that those certificates should be taxed as income to
Mrs. Macomber as though the corporation had distributed money to her. Mrs. Essentially, therefore, [i.e. in light of the fact that stock and cash dividends are
Macomber sued Mr. Mark Eisner, the Collector of Internal Revenue, for a economically equivalent,] the question in Macomber was not whether the
refund. shareholder had gain in an economic sense, but whether in legal or
accounting terms the stock dividend was to be regarded as a taxable event. ...
Economic substance of a stock dividend[edit] Stripped of its Constitutional element, the issue in Eisner v. Macomber in the
The stock dividend in this case was the economic equivalent of a stock split end comes down to a "battle of similarities." Is a stock dividend (as the
a transaction in which the corporation multiplies the total number of shares majority held) "more like" a situation in which a corporation simply
outstanding, but gives the new shares to shareholders in proportion to the accumulates its earnings and makes no distribution at all? Or is it (as Brandeis
number they previously held. For example, if a corporation declares a "two for thought) "more like" the receipt of a cash dividend which is followed by a
one" stock split (and distributes no money or other property to any reinvestment of the cash received in additional shares?
stockholder), a stockholder who held 100 shares at $4 per share will now hold Marvin Chirelstein, Federal Income Taxation, A Law Student's Guide [3]
200 shares with a value of $2 each, which is still $400 in value.
Stock dividends vs. cash dividends[edit] Decision of the Supreme Court[edit]
A shareholder's assets do not grow after this sort of stock dividend. In the majority opinion, Justice Mahlon Pitney ruled that this stock dividend
Metaphorically, the "pie" is still the same sizebut it has been sliced into more was not a realization of income by the taxpayer-shareholder for purposes of
pieces, each piece being proportionately smaller. Of course, the same is true the Sixteenth Amendment:
of a cash dividend: the shareholder gains cash, but the corporation We are clear that not only does a stock dividend really take nothing
represented by his shares has also lost cash, so that these shares implicitly from the property of the corporation and add nothing to that of the
decline in value by an equal amount. shareholder, but that the antecedent accumulation of profits evidenced
A shareholder also makes no "sale or other disposition" of stock after this sort thereby, while indicating that the shareholder is richer because of an
of stock dividend. The taxpayer still owns the same proportionate percentage increase of his capital, at the same time shows he has not realized or
of the corporation he or she owned prior to the stock dividend. Again, this is received any income in the transaction.
also true of a cash dividend. The Court noted that in Towne v. Eisner, it had clearly stated that stock
However, several important factors distinguish a stock and cash dividend. dividends were not income, as nothing of value was received by Towne - the
"Overall, the aim of the tax law is to impose a tax on "dividends" when assets company was not worth any less than it was when the dividend was declared,
representing corporate earnings are transferred to the shareholders. Stock and the total value of Towne's stock had not changed.
dividends, however, merely give the shareholders additional pieces of paper to Although the Eisner v. Macomber Court acknowledged the power of the
represent the same equitable interest; they do not transfer assets or create Federal Government to tax income under the Sixteenth Amendment, the Court
new priorities among the security-holders. The total value of the common essentially said this did not give Congress the power to tax as income
shares, though now spread out over a larger number of units, is left
anything other than income, i.e., that Congress did not have the power to re- Specialists, Inc., earmarked and paid for hotel room charges of tourists,
define the term income as it appeared in the Constitution: travelers and/or foreign travel agencies does not form part of its gross receipts
subject to the 3% independent contractor's tax under the National Internal
Throughout the argument of the Government, in a variety of forms,
Revenue Code of 1977.
runs the fundamental error already mentioneda failure to appraise
correctly the force of the term "income" as used in the Sixteenth
Amendment, or at least to give practical effect to it. Thus, the We adopt the findings of facts of the Court of Tax Appeals as follows:
Government contends that the tax "is levied on income derived from
corporate earnings," when in truth the stockholder has "derived" For the years 1974 to 1976, petitioner (Tours Specialists, Inc.) had derived
nothing except paper certificates which, so far as they have any effect, income from its activities as a travel agency by servicing the needs of foreign
deny him [or "her" in this case, Mrs. Macomber] present tourists and travelers and Filipino "Balikbayans" during their stay in this
participation in such earnings. It [the government] contends that the tax country. Some of the services extended to the tourists consist of booking said
may be laid when earnings "are received by the stockholder," whereas tourists and travelers in local hotels for their lodging and board needs;
[s]he has received none; that the profits are "distributed by means of a transporting these foreign tourists from the airport to their respective hotels,
stock dividend," although a stock dividend distributes no profits; that and from the latter to the airport upon their departure from the Philippines,
under the Act of 1916 "the tax is on the stockholder's share in transporting them from their hotels to various embarkation points for local
corporate earnings," when in truth a stockholder has no such share, tours, visits and excursions; securing permits for them to visit places of
and receives none in a stock dividend; that "the profits are segregated interest; and arranging their cultural entertainment, shopping and recreational
from his [her] former capital, and [s]he has a separate certificate activities.
representing his [her] invested profits or gains," whereas there has
been no segregation of profits, nor has [s]he any separate certificate In order to ably supply these services to the foreign tourists, petitioner and its
representing a personal gain, since the certificates, new and old, are correspondent counterpart tourist agencies abroad have agreed to offer a
alike in what they representa capital interest in the entire concerns of package fee for the tourists. Although the fee to be paid by said tourists is
the corporation. quoted by the petitioner, the payments of the hotel room accommodations,
food and other personal expenses of said tourists, as a rule, are paid directly
The Court ordered that Macomber be refunded the tax she overpaid. either by tourists themselves, or by their foreign travel agencies to the local
hotels (pp. 77, t.s.n., February 2, 1981; Exhs. O & O-1, p. 29, CTA rec.; pp.
Claim of right Doctrine 2425, t.s.n., ibid) and restaurants or shops, as the case may be.
vs. It is also the case that some tour agencies abroad request the local tour
TOURS SPECIALISTS, INC., and THE COURT OF TAX agencies, such as the petitioner in the case, that the hotel room charges, in
APPEALS, respondents. some specific cases, be paid through them. (Exh. Q, Q-1, p. 29 CTA rec., p.
25, T.s.n., ibid, pp. 5-6, 17-18, t.s.n., Aug. 20, 1981.; See also Exh. "U", pp. 22-
Gadioma Law Offices for private respondent. 23, t.s.n., Oct. 9, 1981, pp. 3-4, 11., t.s.n., Aug. 10, 1982). By this
arrangement, the foreign tour agency entrusts to the petitioner Tours
This is a petition to review on certiorari the decision of the Court of Tax Specialists, Inc., the fund for hotel room accommodation, which in turn is paid
Appeals which ruled that the money entrusted to private respondent Tours by petitioner tour agency to the local hotel when billed. The procedure
observed is that the billing hotel sends the bill to the petitioner. The local hotel P 10,534.24
identifies the individual tourist, or the particular groups of tourists by code
name or group designation and also the duration of their stay for purposes of 14% interest computed by quarters
payment. Upon receipt of the bill, the petitioner then pays the local hotel with
the funds entrusted to it by the foreign tour correspondent agency. up to 12-28-79 6,808.47 P 17,342.71

Despite this arrangement, respondent Commissioner of Internal Revenue 1976 deficiency percentage
assessed petitioner for deficiency 3% contractor's tax as independent
contractor by including the entrusted hotel room charges in its gross receipts per investigation P 54,276.42
from services for the years 1974 to 1976. Consequently, on December 6,
1979, petitioner received from respondent the 3% deficiency independent 25% surcharge for late payment 13,569.11
contractor's tax assessment in the amount of P122,946.93 for the years 1974
to 1976, inclusive, computed as follows:

1974 deficiency percentage tax
P 67,845.53
per investigation P 3,995.63
14% interest computed by quarters
15% surcharge for late payment 998.91
up to 12-28-79 28,910.97 P 96,756.50

P 4,994.54
Total amount due P 122,946.93
14% interest computed by quarters
In addition to the deficiency contractor's tax of P122,946.93, petitioner was
up to 12-28-79 3,953.18 P 8,847.72 assessed to pay a compromise penalty of P500.00.
1975 deficiency percentage tax Subsequently on December 11, 1979, petitioner formally protested the
assessment made by respondent on the ground that the money received and
per investigation P 8,427.39 entrusted to it by the tourists, earmarked to pay hotel room charges, were not
considered and have never been considered by it as part of its taxable gross
25% surcharge for late payment 2,106.85 receipts for purposes of computing and paying its constractor's tax.

During one of the hearings in this case, a witness, Serafina Sazon, Certified The petitioner premises the issue raised on the following assumptions:
Public Accountant and in charge of the Accounting Department of petitioner,
had testified, her credibility not having been destroyed on cross examination, Firstly, the ruling overlooks the fact that the amounts received, intended for
categorically stated that the amounts entrusted to it by the foreign tourist hotel room accommodations, were received as part of the package fee and,
agencies intended for payment of hotel room charges, were paid entirely to therefore, form part of "gross receipts" as defined by law.
the hotel concerned, without any portion thereof being diverted to its own
funds. (t.s.n., Feb. 2, 1981, pp. 7, 25; t.s.n., Aug. 20, 1981, pp. 5-9, 17-18). Secondly, there is no showing and is not established by the evidence. that the
The testimony of Serafina Sazon was corroborated by Gerardo Isada, General amounts received and "earmarked" are actually what had been paid out as
Manager of petitioner, declaring to the effect that payments of hotel hotel room charges. The mere possibility that the amounts actually paid could
accommodation are made through petitioner without any increase in the room be less than the amounts received is sufficient to destroy the validity of the
charged (t.s.n., Oct. 9, 1981, pp. 21-25) and that the reason why tourists pay ruling. (Rollo, pp. 26-27)
their room charge, or through their foreign tourists agencies, is the fact that the
room charge is exempt from hotel room tax under P.D. 31. (t.s.n., Ibid., pp. 25- In effect, the petitioner's lone issue is based on alleged error in the findings of
29.) Witness Isada stated, on cross-examination, that if their payment is made, facts of the respondent court.
thru petitioner's tour agency, the hotel cost or charges "is only an act of
accomodation on our (its) part" or that the "agent abroad instead of sending The well-settled doctrine is that the findings of facts of the Court of Tax
several telexes and saving on bank charges they take the option to send Appeals are binding on this Court and absent strong reasons for this Court to
money to us to be held in trust to be endorsed to the hotel." (pp. 3-4, delve into facts, only questions of law are open for determination. (Nilsen v.
t.s.n. Aug. 10, 1982.) Commissioner of Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA
444 [1967]; Raymundo v. De Joya, 101 SCRA 495 [1980]). In the recent case
Nevertheless, on June 2, 1980, respondent, without deciding the petitioner's of Sy Po v. Court of Appeals, (164 SCRA 524 [1988]), we ruled that the factual
written protest, caused the issuance of a warrant of distraint and levy. (p. 51, findings of the Court of Tax Appeals are binding upon this court and can only
BIR Rec.) And later, respondent had petitioner's bank deposits garnished. (pp. be disturbed on appeal if not supported by substantial evidence.
49-50, BIR Rec.)
In the instant case, we find no reason to disregard and deviate from the
Taking this action of respondent as the adverse and final decision on the findings of facts of the Court of Tax Appeals.
disputed assessment, petitioner appealed to this Court. (Rollo, pp. 40-45)
As quoted earlier, the Court of Tax Appeals sufficiently explained the services
The petitioner raises the lone issue in this petition as follows: of a local travel agency, like the herein private respondent, rendered to foreign
customers. The respondent differentiated between the package fee offered
WHETHER AMOUNTS RECEIVED BY A LOCAL TOURIST AND TRAVEL by both the local travel agency and its correspondent counterpart tourist
AGENCY INCLUDED IN A PACKAGE FEE FROM TOURISTS OR FOREIGN agencies abroad and the requests made by some tour agencies abroad to
TOUR AGENCIES, INTENDED OR EARMARKED FOR HOTEL local tour agencies wherein the hotel room charges in some specific cases,
ACCOMMODATIONS FORM PART OF GROSS RECEIPTS SUBJECT TO 3% would be paid to the local hotels through them. In the latter case, the
CONTRACTOR'S TAX. (Rollo, p. 23) correspondent court found as a fact ". . . that the foreign tour agency entrusts
to the petitioner Tours Specialists, Inc. the fund for hotel room
accommodation, which in turn is paid by petitioner tour agency to the local =========
hotel when billed." (Rollo, p. 42) The following procedure is followed: The
billing hotel sends the bill to the respondent; the local hotel then identifies the Oct. 1976 P 71,134.80
individual tourist, or the particular group of tourist by code name or group
designation plus the duration of their stay for purposes of payment; upon Nov. 1976 409,019.17
receipt of the bill the private respondent pays the local hotel with the funds
entrusted to it by the foreign tour correspondent agency. Dec. 1976 142,761.55

Moreover, evidence presented by the private respondent shows that the

amounts entrusted to it by the foreign tourist agencies to pay the room
charges of foreign tourists in local hotels were not diverted to its funds; this 622,915.51
arrangement was only an act of accommodation on the part of the private
respondent. This evidence was not refuted.

In essence, the petitioner's assertion that the hotel room charges entrusted to
Grand Total P 904,995.29
the private respondent were part of the package fee paid by foreign tourists to
the respondent is not correct. The evidence is clear to the effect that the
amounts entrusted to the private respondent were exclusively for payment of =========
hotel room charges of foreign tourists entrusted to it by foreign travel
agencies. It is not true therefore, as stated by respondent, that there is no evidence
proving the amounts earmarked for hotel room charges. Since the BIR
As regards the petitioner's second assumption, the respondent court stated: examiners could not have manufactured the above figures representing
"advances for hotel room accommodations," these payments must have
certainly been taken from the records of petitioner, such as the invoices, hotel
. . . [C]ontrary to the contention of respondent, the records show, firstly, in the
bills, official receipts and other pertinent documents. (Rollo, pp. 48-49)
Examiners' Worksheet (Exh. T, p. 22, BIR Rec.), that from July to December
1976 alone, the following sums made up the hotel room accommodations:
The factual findings of the respondent court are supported by substantial
evidence, hence binding upon this Court.
July 1976 P 102,702.97
With these clarifications, the issue to be threshed out is as stated by the
Aug. 1976 121,167.19
respondent court, to wit:
Sept. 1976 53,209.61
. . . [W]hether or not the hotel room charges held in trust for foreign tourists
and travelers and/or correspondent foreign travel agencies and paid to local
host hotels form part of the taxable gross receipts for purposes of the 3%
contractor's tax. (Rollo, p. 45)
P 282,079.77
The petitioner opines that the gross receipts which are subject to the 3% commission in the total amount of money it handles and goes to the funds
contractor's tax pursuant to Section 191 (Section 205 of the National Internal thereof as its own property which it may legally disburse for its own purposes.
Revenue Code of 1977) of the Tax Code include the entire gross receipts of a The 5% does not belong to the club. It is merely held in trust for distribution as
taxpayer undiminished by any amount. According to the petitioner, this prizes to the owners of winning horses. It is destined for no other object than
interpretation is in consonance with B.I.R. Ruling No. 68-027, dated 23 the payment of prizes and the club cannot otherwise appropriate this portion
October, 1968 (implementing Section 191 of the Tax Code) which states that without incurring liability to the owners of winning horses. It cannot be
the 3% contractor's tax prescribed by Section 191 of the Tax Code is imposed considered as an item of expense because the sum used for the payment of
of the gross receipts of the contractor, "no deduction whatever being allowed prizes is not taken from the funds of the club but from a certain portion of the
by said law." The petitioner contends that the only exception to this rule is total bets especially earmarked for that purpose.
when there is a law or regulation which would exempt such gross receipts
from being subjected to the 3% contractor's tax citing the case In view of all the foregoing, I am of the opinion that in the submission of the
of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (108 Phil. returns for the amusement tax of 10% (now it is 20% of the "gross receipts",
821 [1960]). Thus, the petitioner argues that since there is no law or regulation provided for in Section 260 of the National Internal Revenue Code), the 5% of
that money entrusted, earmarked and paid for hotel room charges should not the total bets that is set aside for prizes to owners of winning horses should
form part of the gross receipts, then the said hotel room charges are included not be included by the Manila Jockey Club, Inc.
in the private respondent's gross receipts for purposes of the 3% contractor's
tax. The Collector of the Internal Revenue, however had a different opinion on the
matter and demanded payment of amusement taxes. The Court of Tax
In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. Appeals reversed the Collector.
(supra), the Commissioner appealed two decisions of the Court of Tax Appeals
disapproving his levy of amusement taxes upon the Manila Jockey Club, a We affirmed the decision of the Court of Tax Appeals and stated:
duly constituted corporation authorized to hold horse races in Manila. The
facts of the case show that the monies sought to be taxed never really The Secretary's opinion was correct. The Government could not have meant
belonged to the club. The decision shows that during the period November to tax as gross receipt of the Manila Jockey Club the 1/2% which it directs
1946 to 1950, the Manila Jockey Club paid amusement tax on its commission same Club to turn over to the Board on Races. The latter being a Government
but without including the 5-1/2% which pursuant to Executive Order 320 and institution, there would be double taxation, which should be avoided unless the
Republic Act 309 went to the Board of Races, the owner of horses and statute admits of no other interpretation. In the same manner, the Government
jockeys. Section 260 of the Internal Revenue Code provides that the could not have intended to consider as gross receipt the portion of the funds
amusement tax was payable by the operator on its "gross receipts". The which it directed the Club to give, or knew the Club would give, to winning
Manila Jockey Club, however, did not consider as part of its "gross receipts" horses and jockeys admittedly 5%. It is true that the law says that out of the
subject to amusement tax the amounts which it had to deliver to the Board on total wager funds 12-1/2% shall be set aside as the "commission" of the race
Races, the horse owners and the jockeys. This view was fully sustained by track owner, but the law itself takes official notice, and actually approves or
three opinions of the Secretary of Justice, to wit: directs payment of the portion that goes to owners of horses as prizes and
bonuses of jockeys, which portion is admittedly 5% out of that 12-1/2%
There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the commission. As it did not at that time contemplate the application of "gross
total bets registered by the Totalizer. This portion represents its share or receipts" revenue principle, the law in making a distribution of the total wager
funds, took no trouble of separating one item from the other; and for favorable judgment on the same grounds sustained by said Court in
convenience, grouped three items under one common denomination. connection with the 5% of the total wager funds in the herein-mentioned first
case; they were not receipts of the Club.
Needless to say, gross receipts of the proprietor of the amusement place
should not include any money which although delivered to the amusement We resolved the issue in the following manner:
place has been especially earmarked by law or regulation for some person
other than the proprietor. (The situation thus differs from one in which the We think the reasons for upholding the Tax Court's decision in the first case
owner of the amusement place, by a private contract, with its employees or apply to this one. The ten-peso contribution never belonged to the Club. It was
partners, agrees to reserve for them a portion of the proceeds of the held by it as a trust fund. And then, after all, when it received the ten-peso
establishment. (See Wong & Lee v. Coll. 104 Phil. 469; 55 Off. Gaz. [51] contribution, it at the same time contributed ten pesos out of its own pocket,
10539; Sy Chuico v. Coll., 107 Phil., 428; 59 Off. Gaz., [6] 896). and thereafter distributed both amounts as prizes to horse owners. It would
seem unreasonable to regard the ten-peso contribution of the horse owners as
In the second case, the facts of the case are: taxable receipt of the Club, since the latter, at the same moment it received
the contribution necessarily lost ten pesos too.
The Manila Jockey Club holds once a year a so called "special Novato race",
wherein only "novato" horses, (i.e. horses which are running for the first time As demonstrated in the above-mentioned case, gross receipts subject to tax
in an official [of the club] race), may take part. Owners of these horses must under the Tax Code do not include monies or receipts entrusted to the
pay to the Club an inscription fee of P1.00, and a declaration fee of P1.00 per taxpayer which do not belong to them and do not redound to the taxpayer's
horse. In addition, each of them must contribute to a common fund (P10.00 benefit; and it is not necessary that there must be a law or regulation which
per horse). The Club contributes an equal amount P10.00 per horse) to such would exempt such monies and receipts within the meaning of gross receipts
common fund, the total amount of which is added to the 5% participation of under the Tax Code.
horse owners already described herein-above in the first case.
Parenthetically, the room charges entrusted by the foreign travel agencies to
Since the institution of this yearly special novato race in 1950, the Manila the private respondent do not form part of its gross receipts within the
Jockey Club never paid amusement tax on the moneys thus contributed by definition of the Tax Code. The said receipts never belonged to the private
horse owners (P10.00 each) because it entertained the belief that in respondent. The private respondent never benefited from their payment to the
accordance with the three opinions of the Secretary of Justice herein-above local hotels. As stated earlier, this arrangement was only to accommodate the
described, such contributions never formed part of its gross receipts. On the foreign travel agencies.
inscription fee of the P1.00 per horse, it paid the tax. It did not on the
declaration fee of P1.00 because it was imposed by the Municipal Ordinance Another objection raised by the petitioner is to the respondent court's
of Manila and was turned over to the City officers. application of Presidential Decree 31 which exempts foreign tourists from
payment of hotel room tax. Section 1 thereof provides:
The Collector of Internal Revenue required the Manila Jockey Club to pay
amusement tax on such contributed fund P10.00 per horse in the special Sec. 1. Foreign tourists and travelers shall be exempt from payment of any
novato race, holding they were part of its gross receipts. The Manila Jockey and all hotel room tax for the entire period of their stay in the country.
Club protested and resorted to the Court of Tax Appeals, where it obtained
The petitioner now alleges that P.D. 31 has no relevance to the case. He The Court of Tax Appeals, however, held that the said case is not controlling in
contends that the tax under Section 191 of the Tax Code is in the nature of an this case, since the Host Agreement specifically exempts the WHO from
excise tax; that it is a tax on the exercise of the privilege to engage in business "indirect taxes." We agree. The Philippine Acetylene case involved a tax on
as a contractor and that it is imposed on, and collectible from the person sales of goods which under the law had to be paid by the manufacturer or
exercising the privilege. He sums his arguments by stating that "while the producer; the fact that the manufacturer or producer might have added the
burden may be shifted to the person for whom the services are rendered by amount of the tax to the price of the goods did not make the sales tax "a tax
the contractor, the latter is not relieved from payment of the tax." (Rollo, p. 28) on the purchaser." The Court held that the sales tax must be paid by the
manufacturer or producer even if the sale is made to tax-exempt entities like
The same arguments were submitted by the Commissioner of Internal the National Power Corporation, an agency of the Philippine Government, and
Revenue in the case of Commissioner of Internal Revenue v. John Gotamco to the Voice of America, an agency of the United States Government.
& Son., Inc. (148 SCRA 36 [1987]), to justify his imposition of the 3%
contractor's tax under Section 191 of the National Internal Revenue Code on The Host Agreement, in specifically exempting the WHO from "indirect taxes,"
the gross receipts John Gotamco & Sons, Inc., realized from the construction contemplates taxes which, although not imposed upon or paid by the
of the World Health Organization (WHO) office building in Manila. We rejected Organization directly, form part of the price paid or to be paid by it.
the petitioner's arguments and ruled:
Accordingly, the significance of P.D. 31 is clearly established in determining
We agree with the Court of Tax Appeals in rejecting this contention of the whether or not hotel room charges of foreign tourists in local hotels are subject
petitioner. Said the respondent court: to the 3% contractor's tax. As the respondent court aptly stated:

"In context, direct taxes are those that are demanded from the very person . . . If the hotel room charges entrusted to petitioner will be subjected to 3%
who, it is intended or desired, should pay them; while indirect taxes are those contractor's tax as what respondent would want to do in this case, that would
that are demanded in the first instance from one person in the expectation and in effect do indirectly what P.D. 31 would not like hotel room charges of foreign
intention that he can shift the burden to someone else. (Pollock v. Farmers, L tourists to be subjected to hotel room tax. Although, respondent may claim that
& T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. ed. 759). The contractor's tax is the 3% contractor's tax is imposed upon a different incidence i.e. the gross
of course payable by the contractor but in the last analysis it is the owner of receipts of petitioner tourist agency which he asserts includes the hotel room
the building that shoulders the burden of the tax because the same is shifted charges entrusted to it, the effect would be to impose a tax, and though
by the contractor to the owner as a matter of self-preservation. Thus, it is an different, it nonetheless imposes a tax actually on room charges. One way or
indirect tax. And it is an indirect tax on the WHO because, although it is the other, it would not have the effect of promoting tourism in the Philippines
payable by the petitioner, the latter can shift its burden on the WHO. In the last as that would increase the costs or expenses by the addition of a hotel room
analysis it is the WHO that will pay the tax indirectly through the contractor tax in the overall expenses of said tourists. (Rollo, pp. 51-52)
and it certainly cannot be said that 'this tax has no bearing upon the World
Health Organization.'" WHEREFORE, the instant petition is DENIED. The decision of the Court of
Tax Appeals is AFFIRMED. No pronouncement as to costs.
Petitioner claims that under the authority of the Philippine Acetylene Company
versus Commissioner of Internal Revenue, et al., (127 Phil. 461) the 3% SO ORDERED.
contractor's tax falls directly on Gotamco and cannot be shifted to the WHO.
G.R. No. 78953 July 31, 1991 2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner
(private respondent herein), received from the Prudential Bank and Trust
COMMISSIONER OF INTERNAL REVENUE, petitioner, Company in Pasay City the amount of US$999,973.70 remitted by her sister,
vs. Mrs. Dolores Ventosa, through some banks in the United States, among which
APPEALS, respondents.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with
Elison G. Natividad for accused-appellant. the Court of First Instance of Rizal (now Regional Trial Court), (docketed as
Civil Case No. 26899), against the petitioner (private respondent herein), his
wife and other defendants, claiming that its remittance of US$1,000,000.00
was a clerical error and should have been US$1,000.00 only, and praying that
SARMIENTO, J.:p the excess amount of US$999,000.00 be returned on the ground that the
defendants are trustees of an implied trust for the benefit of Mellon Bank with
Central in this controversy is the issue as to whether or not a taxpayer who the clear, immediate, and continuing duty to return the said amount from the
merely states as a footnote in his income tax return that a sum of money that moment it was received.
he erroneously received and already spent is the subject of a pending litigation
and there did not declare it as income is liable to pay the 50% penalty for filing 4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an
a fraudulent return. Information with the then Circuit Criminal Court (docketed as CCC-VII-3369-
P.C.) charging the petitioner (private respondent herein) and his wife with the
This question is the subject of the petition for review before the Court of the crime of estafa, alleging that they misappropriated, misapplied, and converted
portion of the Decision 1 dated July 27, 1983 of the Court of Tax Appeals (CTA) to their own personal use and benefit the amount of US$999,000.00 which
in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta, they received under an implied trust for the benefit of Mellon Bank and as a
in his capacity as Commissioner of Internal Revenue," which orders the result of the mistake in the remittance by the latter.
deletion of the 50% surcharge from Javier's deficiency income tax assessment
on his income for 1977. 5. That on March 15, 1978, the petitioner (private respondent herein) filed his
Income Tax Return for the taxable year 1977 showing a gross income of
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the P53,053.38 and a net income of P48,053.88 and stating in the footnote of the
Commissioner's Motion for Reconsideration 3 and Motion for New Trial 4 on the return that "Taxpayer was recipient of some money received from abroad
deletion of the 50% surcharge assessment or imposition. which he presumed to be a gift but turned out to be an error and is now
subject of litigation."
The pertinent facts as are accurately stated in the petition of private
respondent Javier in the CTA and incorporated in the assailed decision now 6. That on or before December 15, 1980, the petitioner (private respondent
under review, read as follows: herein) received a letter from the acting Commissioner of Internal Revenue
dated November 14, 1980, together with income assessment notices for the
years 1976 and 1977, demanding that petitioner (private respondent herein)
xxx xxx xxx
pay on or before December 15, 1980 the amount of P1,615.96 and
P9,287,297.51 as deficiency assessments for the years 1976 and 1977 From this, it can hardly be said that there was actual and intentional fraud,
respectively. . . . consisting of deception willfully and deliberately done or resorted to by
petitioner (private respondent) in order to induce the Government to give up
7. That on December 15, 1980, the petitioner (private respondent herein) some legal right, or the latter, due to a false return, was placed at a
wrote the Bureau of Internal Revenue that he was paying the deficiency disadvantage so as to prevent its lawful agents from proper assessment of tax
income assessment for the year 1976 but denying that he had any undeclared liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic)
income for the year 1977 and requested that the assessment for 1977 be SCRA 519), because petitioner literally "laid his cards on the table" for
made to await final court decision on the case filed against him for filing an respondent to examine. Error or mistake of fact or law is not fraud. (Insular
allegedly fraudulent return. . . . Lumber vs. Collector, L-7100, April 28, 1956.). Besides, Section 29 is not too
plain and simple to understand. Since the question involved in this case is of
8. That on November 11, 1981, the petitioner (private respondent herein) first impression in this jurisdiction, under the circumstances, the 50%
received from Acting Commissioner of Internal Revenue Romulo Villa a letter surcharge imposed in the deficiency assessment should be deleted. 7
dated October 8, 1981 stating in reply to his December 15, 1980 letter-protest
that "the amount of Mellon Bank's erroneous remittance which you were able The Commissioner of Internal Revenue, not satisfied with the respondent
to dispose, is definitely taxable." . . . 5 CTA's ruling, elevated the matter to us, by the present petition, raising the
main issue as to:
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax FRAUD PENALTY? 8
Appeals on December 10, 1981.
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did
The respondent CTA, after the proper proceedings, rendered the challenged not appeal the decision which held him liable for the basic deficiency income
decision. We quote the concluding portion: tax (excluding the 50% surcharge for fraud)." However, he submitted in the
same memorandum "that the issue may be raised in the case not for the
We note that in the deficiency income tax assessment under consideration, purpose of correcting or setting aside the decision which held him liable for
respondent (petitioner here) further requested petitioner (private respondent deficiency income tax, but only to show that there is no basis for the imposition
here) to pay 50% surcharge as provided for in Section 72 of the Tax Code, in of the surcharge." This subsequent disavowal therefore renders moot and
addition to the deficiency income tax of P4,888,615.00 and interest due academic the posturings articulated in as Comment 10 on the non-taxability of
thereon. Since petitioner (private respondent) filed his income tax return for the amount he erroneously received and the bulk of which he had already
taxable year 1977, the 50% surcharge was imposed, in all probability, by disbursed. In any event, an appeal at that time (of the filing of the Comments)
respondent (petitioner) because he considered the return filed false or would have been already too late to be seasonable. The petitioner, through
fraudulent. This additional requirement, to our mind, is much less called for the office of the Solicitor General, stresses that:
because petitioner (private respondent), as stated earlier, reflected in as 1977
return as footnote that "Taxpayer was recipient of some money received from xxx xxx xxx
abroad which he presumed to be gift but turned out to be an error and is now
subject of litigation."
The record however is not ambivalent, as the record clearly shows that private an honest doubt as to whether or not the "mistaken remittance" was subject to
respondent is self-convinced, and so acted, that he is the beneficial owner, tax.
and of which reason is liable to tax. Put another way, the studied insinuation
that private respondent may not be the beneficial owner of the money or First, this Honorable Court will take judicial notice of the fact that so-called
income flowing to him as enhanced by the studied claim that the amount is "million dollar case" was given very, very wide publicity by media; and only one
"subject of litigation" is belied by the record and clearly exposed as a who is not in his right mind would have entertained the idea that the BIR would
fraudulent ploy, as witness what transpired upon receipt of the amount. not make an assessment if the amount in question was indeed subject to the
income tax.
Here, it will be noted that the excess in the amount erroneously remitted by
MELLON BANK for the amount of private respondent's wife was $999,000.00 Second, as the respondent Court ruled, "the question involved in this case is
after opening a dollar account with Prudential Bank in the amount of of first impression in this jurisdiction" (See p. 15 of Annex "A" of the Petition).
$999,993.70, private respondent and his wife, with haste and dispatch, within Even in the United States, the authorities are not unanimous in holding that
a span of eleven (11) electric days, specifically from June 3 to June 14, 1977, similar receipts are subject to the income tax. It should be noted that the
effected a total massive withdrawal from the said dollar account in the sum of decision in the Rutkin case is a five-to-four decision; and in the very case
$975,000.00 or P7,020,000.00. . . . 11 before this Honorable Court, one out of three Judges of the respondent Court
was of the opinion that the amount in question is not taxable. Thus, even
In reply, the private respondent argues: without the footnote, the failure to declare the "mistaken remittance" is not
xxx xxx xxx
Third, when the private respondent filed his income tax return on March 15,
The petitioner contends that the private respondent committed fraud by not 1978 he was being sued by the Mellon Bank for the return of the money, and
declaring the "mistaken remittance" in his income tax return and by merely was being prosecuted by the Government for estafa committed allegedly by
making a footnote thereon which read: "Taxpayer was the recipient of some his failure to return the money and by converting it to his personal benefit. The
money from abroad which he presumed to be a gift but turned out to be an basic tax amounted to P4,899,377.00 (See p. 6 of the Petition) and could not
error and is now subject of litigation." It is respectfully submitted that the said have been paid without using part of the mistaken remittance. Thus, it was not
return was not fraudulent. The footnote was practically an invitation to the unreasonable for the private respondent to simply state in his income tax
petitioner to make an investigation, and to make the proper assessment. return that the amount received was still under litigation. If he had paid the tax,
would that not constitute estafa for using the funds for his own personal
The rule in fraud cases is that the proof "must be clear and convincing" benefit? and would the Government refund it to him if the courts ordered him
(Griffiths v. Comm., 50 F [2d] 782), that is, it must be stronger than the "mere to refund the money to the Mellon Bank? 12
preponderance of evidence" which would be sufficient to sustain a judgment
on the issue of correctness of the deficiency itself apart from the fraud penalty. xxx xxx xxx
(Frank A. Neddas, 40 BTA 672). The following circumstances attendant to the
case at bar show that in filing the questioned return, the private respondent Under the then Section 72 of the Tax Code (now Section 248 of the 1988
was guided, not by that "willful and deliberate intent to prevent the National Internal Revenue Code), a taxpayer who files a false return is liable
Government from making a proper assessment" which constitute fraud, but by to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax
in case payment has been made on the basis of the return filed before the In the case at bar, there was no actual and intentional fraud through willful and
discovery of the falsity or fraud. deliberate misleading of the government agency concerned, the Bureau of
Internal Revenue, headed by the herein petitioner. The government was not
We are persuaded considerably by the private respondent's contention that induced to give up some legal right and place itself at a disadvantage so as to
there is no fraud in the filing of the return and agree fully with the Court of Tax prevent its lawful agents from proper assessment of tax liabilities because
Appeals' interpretation of Javier's notation on his income tax return filed on Javier did not conceal anything. Error or mistake of law is not fraud. The
March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad petitioner's zealousness to collect taxes from the unearned windfall to Javier is
which he presumed to be a gift but turned out to be an error and is now highly commendable. Unfortunately, the imposition of the fraud penalty in this
subject of litigation that it was an "error or mistake of fact or law" not case is not justified by the extant facts. Javier may be guilty of swindling
constituting fraud, that such notation was practically an invitation for charges, perhaps even for greed by spending most of the money he received,
investigation and that Javier had literally "laid his cards on the table." 13 but the records lack a clear showing of fraud committed because he did not
conceal the fact that he had received an amount of money although it was a
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50%
return was discussed in this manner: surcharge imposed as fraud penalty by the petitioner against the private
respondent in the deficiency assessment should be deleted.
. . . The fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or WHEREFORE, the petition is DENIED and the decision appealed from the
resorted to in order to induce another to give up some legal right. Negligence, Court of Tax Appeals is AFFIRMED. No costs.
whether slight or gross, is not equivalent to the fraud with intent to evade the
tax contemplated by law. It must amount to intentional wrong-doing with the SO ORDERED.
sole object of avoiding the tax. It necessarily follows that a mere mistake
cannot be considered as fraudulent intent, and if both petitioner and c. Income from whatever source
respondent Commissioner of Internal Revenue committed mistakes in making The late LINO GUTIERREZ substituted by ANDREA C. VDA. DE
entries in the returns and in the assessment, respectively, under the inventory GUTIERREZ, ANTONIO D. GUTIERREZ, GUILLERMO D. GUTIERREZ,
method of determining tax liability, it would be unfair to treat the mistakes of SANTIAGO D. GUTIERREZ and TOMAS D. GUTIERREZ,petitioners,
the petitioner as tainted with fraud and those of the respondent as made in vs.
Fraud is never imputed and the courts never sustain findings of fraud upon
circumstances which, at most, create only suspicion and the mere Rosendo J. Tansinsin, Sr., Rosendo Tansinsin, Jr. and Juan C. Nabong, Jr.for
understatement of a tax is not itself proof of fraud for the purpose of tax petitioners.
evasion. 15 Office of the Solicitor General for respondent.

A "fraudulent return" is always an attempt to evade a tax, but a merely "false BENGZON, J.P., J.:
return" may not be, Rick v. U.S., App. D.C., 161 F. 2d 897, 898. 16
Lino Gutierrez was primarily engaged in the business of leasing real property Alms to indigent family 15.00
for which he paid estate broker's privilege tax. He filed his income tax returns Capital expenditures:
for the years 1951, 1952, 1953 and 1954 on the following dates:
Electrical fixtures and supplies 100.00
Year Date Filed Transportation and other expenses to watch laborers in construction work
1951 March 1, 1952 516.00
1952 February 28, 1953 Realty tax not paid by former owner of property acquired by Gutierrez 350.00
1953 February 22, 1954 Litigation expenses to collect rental and eject lessee 702.65
1954 February 23, 1955 Other disallowed deductions:
and paid the corresponding tax declared therein.
Fines and penalties for late payment of taxes 64.48
On July 10, 1956 the Commissioner (formerly Collector) of Internal Revenue 1952
assessed against Gutierrez the following defiency income tax:
Personal expenses:
1951 . . . . . . . . . . . . . . P 1,400.00
1952 . . . . . . . . . . . . . . 672.00 Car expenses, salary of driver and car depreciation P1,454.37
1953 . . . . . . . . . . . . . . 5,161.00 Contribution to Lydia Samson and G. Trinidad 52.00
1954 . . . . . . . . . . . . . . 4,608.00 Officers' jewels and aprons donated to Biak-na-Bato Lodge No. 7, Free
Total . . . . . . . . . . . . . . Masons 280.00
P 11,841.00 Luncheon of Homeowners' Association 5.50
========== Ticket to opera "Aida" 15.00
The above defiency tax came about by the disallowance of deductions from 1953
gross income representing depreciation, expenses Gutierrez allegely incurred
in carrying on his business, and the addition to gross income of receipts which Personal expenses:
he did not report in his income tax returns. The disallowed business expenses
which were considered by the Commissioner either as personal or capital Car expenses, salary of driver, car depreciation P 1,409.24
expenditures consisted of: Cruise to Corregidor with Homeowners' Association 43.00
Contribution to alms to various individuals 70.00
1951 Tickets to operas 28.00
Capital expenditures:
Personal expenses:
Cost of one set of Comments on the Rules of Court by Moran P 145.00
Transportation expenses to attend funeral of various persons P 96.50 1954
Repair of car and salary of driver 59.80
Expenses in attending National Convention of Filipino Businessmen in Baguio Personal expenses:
Car expenses, salary of driver and car depreciation P 1,413.67 including the said property was bought in Japanese military notes, converting
Furniture given as commission in connection with business transaction the buying price to its equivalent in PhilippineCommonwealth peso by the use
115.00 of the Ballantyne Scale of Values. At P1.30 Japanese military notes per
Cost of iron door of Gutierrez' residence 55.00 Commonwealth peso, the acquisition cost of P35,000.00 Japanese military
Capital expenditures: notes was valued at P26,923.00 PhilippineCommonwealth peso. Accordingly,
the Commissioner determined a profit of P3,476.92 after restoring to Gutierrez'
Painting of rental apartments P 908.00 gross income the P5,231.80 deductionfor loss.
Carpentry and lumber for rental apartments 335.83
Tinsmith and plumbing for rental apartments 605.25 In another transaction, Gutierrez sold a piece of land for P1,200.00. Alleging
Cement, tiles, gravel, sand and masonry for rental apartments 199.48 the said property was purchased for P1,200.00, he reported no profit
Iron bars, venetian blind, water pumps for rental apartments 1,340.00 hereunder. However, after verifying the deed of acquisition, the Commissioner
Relocation and registration of property used in taxpayer's business discovered the purchase price to be only P800.00. Consequently, he
1,758.12 determined a profit of P400.00 which was added to the gross income for
He also claimed the depreciation of his residence as follows: 1953.1wph1.t

1952 . . . . . . P 992.22 The understatement of profit from the sale of real estate may be explained
1953 . . . . . . 942.61 thus: In 1953 and 1954 Gutierrez sold four other properties upon which he
1954 . . . . . . 895.45 made substantial profits.2Convinced that said properties were capital assets,
The following are the items of income which Gutierrez did not declare in his he declared only 50% of the profits from their sale. However, treating said
income tax returns: properties as ordinary assets (as property held and used byGutierrez in his
business), the Commissioner taxed 100% of the profits from their disposition
1951 pursuant to Section 35 of the Tax Code.

Income of wife (admitted by Gutierrez) P 2,749.90. Having unsuccessfully questioned the legality and correctness of the aforesaid
1953 assessment, Gutierrez instituted on February 17, 1958, the Commissioner
issued a warrant of distraint and levy on one of Gutierrez' real properties but
Overstatement of purchase price of real estate P 8,476.92 desisted from enforcing the same when Gutierrez filed a bond to assure
Understatement of profits from sale of real estate 5,803.74 payment of his tax liability.
In a decision dated January 28, 1962, the Court of Tax Appeals upheld in toto
Understatement of profits from sale of real estate P 5,444.24 the assessment of the Commissioner of Internal Revenue. Hence, this appeal.
The overstatement of purchase price of real estate refers to the sale of two
pieces of property in 1953. In 1943 Gutierrez bought a parcel of land situated On October 18, 1962, Lino Guttierrez died and he was substituted by Andrea
along Padre Faura St. in Manila for P35,000.00. Sometime in 1953, he sold C. Vda. de Gutierrez, Antonio D. Gutierrez, Santiago D. Gutierrez, Guillermo
the same for P30,400.00. Expenses of sale amounted to P631.80. In his D. Gutierrez and Tomas D. Gutierrez, his heirs,as party petitioners.
return he claimed a loss of P5,231.80. 1 However, the Commissioner,
The issues are: (1) Are the taxpayer's aforementioned claims for deduction to his personal and social activities rather than to his business of leasing real
proper and allowable? (2) May the Ballantyne Scale of Values be applied estate. Likewise, the procurement and installation of an iron door to is
indetermining the acquisition cost in 1943 of a real property sold in 1953, for residence is purely a personal expense. Personal, living, or family expenses
income tax purposes? (3) Are real properties used in the trade or business of are not deductible. 4
the taxpayer capital or ordinary assets? (4) Has the right of the Commissioner
of Internal Revenue to collect the deficiency income tax for the years 1951 and On the other hand, the cost of furniture given by the taxpayer as commission
1952 prescribed? (5) Has the right of the Commissioner of Internal Revenue to in furtherance of a business transaction, the expenses incurred in attending
collect by distraint and levy the deficiency income tax for 1953 prescribed? If the National Convention of Filipino Businessmen, luncheon meeting and
not, may the taxpayer's rea lproperty be distrained and levied upon without cruise to Corregidor of the Homeowners' Association were shown to have
first exhausting his personal property? 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
We come first to question whether or not the deductions claimed by Gutierrez transaction and are deductible.
are allowable. Section 30(a) of the Tax Code allows business expenses tobe
deducted from gross income. We quote: The record shows that Gutierrez was an officer of the Junior Chamber of
Commerce which sponsored the National Convention of Filipino Businessmen.
SEC. 30. Deductions from gross income. In computing net income there He was also the president of the Homeowners' Association, an organization
shall be allowed as deductions established by those engaged in the real estate trade. Having proved that his
membership thereof and activities in connection therewith were solely to
Expenses: enhance his business, the expenses incurred thereunder are deductible as
ordinary and necessary business expenses.
In general. All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including With respect to the taxpayer's claim for deduction for car expenses, salary of
a reasonable allowance for salaries or other compensation for personal his driver and car depreciation, one-third of the same was disallowed by the
services actually rendered; travelling expenses while away from home Commissioner on the ground that the taxpayer used his car and driver both for
in the pursuit of a trade or business; and rentals or other payments personal and business purposes. There is no clear showing, however, that the
required to be made as a condition to be continued use of possession, car was devoted more for the taxpayer's business than for his personal and
for the purposes of the trade or business, or property to which the business needs. 5 According to the evidence, the taxpayer's car was utilized
taxpayer has not taken or is not taking title or in which he has no both for personal and business needs. We therefore find it reasonable to allow
equity. as deduction one-half of the driver's salary, car expenses and depreciation.

To be deductible, therefore, an expense must be (1) ordinary and necessary; The electrical supplies, paint, lumber, plumbing, cement, tiles, gravel, masonry
(2) paid or incurred within the taxable year; and, (3) paid or incurred in and labor used to repair the taxpayer's rental apartments did not increase the
carrying on a trade or business. 3 value of such apartments, or prolong their life. They merely kept the
apartments in an ordinary operating condition. Hence, the expenses incurred
The transportation expenses which petitioner incurred to attend the funeral of therefor are deductible as necessary expenditures for the maintenance of the
his friends and the cost of admission tickets to operas were expenses relative taxpayer's business.
condemned, by law and their commission is made punishable by fines or
Similarly, the litigation expenses defrayed by Gutierrez to collect apartment forfeitures, to allow them to be deducted from the wrongdoer's gross income,
rentals and to eject delinquent tenants are ordinary and necessary expenses reduces, and so in part defeats, the prescribed punishment..9
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 As regards the alms to an indigent family and various individuals, contributions
accounts. to Lydia Yamson and G. Trinidad and a donation consisting of officers' jewels
and aprons to Biak-na-Bato Lodge No. 7, the same are not deductible from
The following are not deductible business expenses but should be integrated gross income inasmuch as their recipients have not been shown to be among
into the cost of the capital assets for which they were incurred and depreciated those specified by law. Contributions are deductible when given to the
yearly: (1) Expenses in watching over laborers in construction work. Watching Government of the Philippines, or any of its political subdivisions for
over laborers is an activity more akin to the construction work than to running exclusively public purposes, to domestic corporations or associations
the taxpayer's business. Hence, the expenses incurred therefor should form organized and operated exclusively for religious, charitable, scientific, athletic,
part of the construction cost. (2) Real estate tax which remained unpaid by the cultural or educational purposes, or for the rehabilitation of veterans, or to
former owner of Gutierrez' rental property but which the latter paid, is an societies for the prevention of cruelty to children or animals, no part of the net
additional cost to acquire such property and ought therefore to be treated as income of which inures to the benefit of any private stockholder or individual.
part of the property's purchase price. (3) The iron bars, venetian blind and 10
water pump augmented the value of the, apartments where they were
installed. Their cost is not a maintenance charge, 6 hence, not deductible.. 7 We come to the question of whether or not the Ballantyne Scale of Values can
(4) Expenses for the relocation, survey and registration of property tend to be applied to tax cases.
strengthen title over the property, hence, they should be considered as
addition to the costs of such property. (5) The set of "Comments on the Rules Sometime in 1943 Gutierrez bought a piece of real estate in Manila for a price
of Court" having a life span of more than one year should be depreciated of P35,000.00. In 1953 he sold said property for P30,400.00, thereby incurring
ratably during its whole life span instead of its total cost being deducted in one a loss which he claimed as deduction in his income tax return for 1953. The
year. Commissioner of Internal Revenue, convinced that the purchase price of the
property in 1943 was in Japanese military notes, converted said purchase
Coming to the claim for depreciation of Gutierrez' residence, we find the same price into Philippine Commonwealth pesos by the use of the Ballantyne Scale
not deductible. A taxpayer may deduct from gross income a reasonable of Values. As a result, the Commissioner found Gutierrez to have profited,
allowance for deterioration of property arising out of its use or employment in instead of lost in the sale.
business or trade. 8 Gutierrez' residence was not used in his trade or
business. Firstly, Gutierrez maintains that the purchase price was paid for in
Commonwealth pesos. On the other hand the Commissioner insists that
Gutierrez also claimed for deduction the fines and penalties which he paid for inasmuch as the prevailing currency in the City of Manila in 1943 was the
late payment of taxes. While Section 30 allows taxes to be deducted from Japanese military issue, the transaction could have been in said military notes.
gross income, it does not specifically allow fines and penalties to be so The evidence offered by Gutierrez, consisting of the testimony of his son to
deducted. Deductions from gross income are matters of legislative grace; what the effect that it was he who carried the bundle of Commonwealth pesos and
is not expressly granted by Congress is withheld. Moreover, when acts are Japanese military notes when his father purchased the property, did not
convince the Tax Court. No cogent reason to alter the court a quo's finding of table of values rather than adopt an arbitrary scale. It may not be amiss to
fact in this regard has been given. There is no definite showing that Gutierrez state in this connection that the Ballantyne Scale of Values is not being used
paid for the property in Commonwealth pesos. Considering that in 1943 the herein as the authority to impose the tax, but only as a medium of computing
medium of exchange in Manila was the Japanese military notes, the use of the tax base upon which the tax is to be imposed.
which the Japanese Military Government enforced with stringent measures,
we are inclined to concur with the finding that the purchase price was in It is furthermore proffered by the taxpayer that in determining gain or loss, the
Japanese military notes. We are specifically mindful of the fact that Gutierrez real value of the Commonwealth peso at the time the property was purchased
sold the property in 1953 for only P30,400.00 at a time when the price of real and the value of the Republic peso at the time. the same property was sold
estate in the City of Manila was much greater than in 1943. should be considered. The Commonwealth peso and the Republic peso are
the same currency, with the same intrinsic value, sanctioned by the same
It is further contended by Gutierrez that the money he used to pay for the authorities. Both are legal tender and accepted at face value regardless of
purchase of the property in question came from the proceeds of merchandise fluctuation in their buying power. The 1941 Commonwealth peso when used to
acquired prior to World War II but which he sold after Manila was occupied by buy in 1963 or in 1965 is accorded the same value: one peso.
the Japanese military forces, hence, the purchase price should be deemed to
have been made in Commonwealth pesos inasmuch as the aforesaid In his income tax returns for 1953 and 1954, Gutierrez reported only 50% of
merchandise was purchased in Commonwealth pesos. This contention, if true, profits he realized from the sale of real properties during the years 1953 and
strengthens our conclusion that the real estate in question was bought in 1954 on the ground that said properties were capital assets. Profits from the
Japanese military notes. For, at the time Gutierrez sold his merchandise, the sale of capital assets are taxable to the extent of 50% thereof pursuant to
prevailing currency in the City of Manila was the Japanese military money. Section 34 of the Tax Code.
Consequently, the proceeds therefrom, which were used to buy the real estate
in question, were Japanese military notes. Section 34 provides:

Gutierrez assails the use of the Ballantyne Scale of Values in converting the SEC. 34. Capital gains and losses. (a) Definitions. As used in this title
purchase price of the real estate in question from Japanese military notes to
Philippine Commonwealth pesos on the ground that (1) the Ballantyne Scale Capital assets. The term "capital assets" means property held by the
of Values was intended only for transactions entered into by parties voluntarily taxpayer (whether or not connected with his trade or business), but does not
during the Japanese occupation, wherein a portion of the contract was left include stock in trade of the taxpayer or other property of a kind which would
unperformed until liberation of the Philippines by the Americans; (2) that such properly be included in the inventory of the taxpayer if on hand at the close of
Scale of Values cannot be the basis of a tax, for it is not a law. the taxable year, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property used in
In determining the gain or loss from the sale of property the purchase price the trade or business, of a character which is subject to the allowance for
and the selling price ought to be in the same currency. Since in this case the depreciation provided in subsection (f) of section thirty; or real property used in
purchase price was in Japanese military notes and the selling price was in our the trade or business of the taxpayer.
present legal tender, the Japanese military notes should be converted to the
present currency. Since the only standard scale recognized by courts for the xxx xxx xxx
purpose is the Ballantyne Scale of Values, we find it compelling to use such
Percentage taken into account. In the case of a taxpayer, other than a Commissioner argues that the running of the prescriptive period to collect
corporation, only the following percentages of the gain or loss recognized commences from the time of assessment. Inasmuch as the tax for 1951 and
upon the sale or exchange of capital asset hall be taken into account in 1952 were assessed only on July 10, 1956, less than five years lapsed when
computing net capital gain, net capital loss, and net income: he filed his answer on March 5, 1958.

One hundred per centum if the capital asset has been held for not The period of limitation to collect income tax is counted from the assessment
more than twelve months; of the tax as provided for in paragraph (c) of Section 332 quoted below:

Fifty per centum if the capital asset has been held for not more than SEC. 332(c). Where the assessment of any internal revenue tax has been
twelve months. made within the period of limitation above prescribed such tax may be
collected by distraint or levy or by a proceeding in court, but only if begun (1)
Section 34, before it was amended by Republic Act 82 in 1947, considered as within five years after the assessment of the tax, or (2) prior to the expiration
capital assets real property used in the trade or business of a taxpayer. of any period for collection agreed upon in writing by the Collector of Internal
However, with the passage of Republic Act 82, Congress classified "real Revenue and the taxpayer before the expiration of such five-year period. The
property used in the trade or business of the taxpayer" is ordinary asset. The period so agreed upon may be extended by subsequent agreements in writing
explanatory note to Republic Act 82 says "... the words "or real property made before the expiration of the period previously agreed upon.
used in the trade or business of the taxpayer" have been included among the
non-capital assets. This has the effect of withdrawing the gain or loss from the Inasmuch as the assessment for deficiency income tax was made on July 10,
sale or exchange of real property used in the trade or business of the taxpayer 1956 which is 7 months and 25 days prior to the action for collection, the right
from the operation of the capital gains and losses provisions. As such real of the Commissioner to collect such tax has not prescribed.
property is used in the trade or business of the taxpayer, it is logical that the
gain or loss from the sale or exchange thereof should be treated as ordinary The next issue relates to the prescription of the right of the Commissioner of
income or loss. 11 Accordingly, the real estate, admittedly used by Gutierrez in Internal Revenue to collect the deficiency tax for 1954 by distraint and levy.
his business, which he sold in 1953 and 1954 should be treated as ordinary
assets and the gain from the sale thereof, as ordinary gain, hence, fully The pertinent provision of the Tax Code states:
taxable. 12
SEC. 51(d). Refusal or neglect to make returns; fraudulent returns, etc. In
With regard to the issue of the prescription of the Commissioner's right to cases of refusal or neglect to make a return and in cases of erroneous, false,
collect deficiency tax for 1951 and 1952, Gutierrez claims that the counting of or fraudulent returns, the Collector of Internal Revenue shall, upon the
the 5-year period to collect income tax should start from the time the income discovery thereof, at any time within three years after said return is due or has
tax returns were filed. He, therefore, urges us to declare the Commissioner's been made, make a return upon information obtained as provided for in this
right to collect the deficiency tax for 1951 and 1952 to have prescribed, the code or by existing law, or require the necessary corrections to be made, and
income tax returns for 1951 and 1952 having been filed in March 1952 and on the assessment made by the Collector of Internal Revenue thereon shall be
February 28, 1953, respectively, and the action to collect the tax having been paid by such person or corporation immediately upon notification of the
instituted on March 5, 1958 when the Commissioner filed his answer to the amount of such assessment.
petition for review in C.T.A. Case No. 504. On the other hand, the
On February 23, 1955 Gutierrez filed his income tax return for 1954 and on Add: Disallowed deductions for salary of
February 24, 1958 the Commissioner of Internal Revenue issued a warrant of driver and car expenses 29.90
distraint and levy to collect the tax due thereunder. Gutierrez contends that the P29,501.81
Commissioner's right to issue said warrant is barred, for the same was issued Less: Allowable deductions:
more than 3 years from the time he filed his income tax return. On the other Expenses in attending National
hand, the Commissioner of Internal Revenue maintains that his right did not Convention of Filipino Businessmen P 121.35
lapse inasmuch as from the last day prescribed by law for the filing of the 1954 Repair of rental apartments 802.65 924.00
return to the date when he issued the warrant of distraint and levy, less than 3 Net income
years passed. The question now is: should the counting of the prescriptive P30,425.71
period commence from the actual filing of the return or from the last day Less: Personal exemption 3,600.00
prescribed by law for the filing thereof? Amount subject to tax
We observe that Section 51(d) speaks of erroneous, false or fraudulent Tax due thereon P 5,668.00
returns, and refusal or neglect of the taxpayer to file a return. It also provides Less tax already paid 3,981.00
for two dates from which to count the three-year prescriptive period, namely, Deficiency income tax due
the date when the return is due and the date the return has been made. We P 1,687.00
are inclined to conclude that the date when the return is due refers to cases ==========
where the taxpayer refused or neglected to file a return, and the date when the 1952
return has been made refers to instances where the taxpayer filed erroneous, Net income per investigation P21,632.22
false or fraudulent returns. Since Gutierrez filed an income tax return, the Add: Disallowed deductions:
three-year prescriptive period should be counted from the time he filed such Salary of driver P 260.67
return. From February 23, 1955 when the income tax return for 1954 was filed, Car expenses 401.51
to February 24, 1958, when the warrant of distraint and levy was issued, 3 Car depreciation 65.00 727.18
years and 2 days elapsed. The right of the Commissioner to issue said P22,359.40
warrant of distraint and levy having lapsed by two days, the warrant issued is Less Allowable deduction:
null and void. Luncheon, Homeowners' Association 5.50
Net income
The above finding has made academic the question of whether or not the P22,364.90
warrant of distraint and levy can be enforced against the taxpayer's real Less: Personal exemption 3,600.00
property without first exhausting his personal properties. Amount subject to tax
In resume the tax liability of Lino Gutierrez for 1951, 1952, 1953 and 1954 Tax due thereon P 3,324.00
may be computed as follows: Less tax already paid 2,476.00
Deficiency income tax due
1951 848.00
Net income per investigation P29,471.81 ==========
1953 Less tax already paid 5,964.00
Net income per investigation P69,180.91 Deficiency income tax due
Add: Disallowed deductions: P 4,020.00
Salary of driver P 140.00 ==========
Car expenses 406.00 S U M MAR Y
Car depreciation 58.50 604.50 1951 . . . . . . . . . . . . . . . . P 1,687.00
P69,785.40 1952 . . . . . . . . . . . . . . . . 848.00
Less: Allowable deduction: 1953 . . . . . . . . . . . . . . . . 5,374.00
Cruise to Corregidor with Homeowners' 1954 . . . . . . . . . . . . . . . . 4,020.00
Association 42.00 TOTAL . . . . . . . . . .
Net Income P 11,929.00
P69,828 40 =========
Less: Personal exemption 3,600.00 WHEREFORE, the decision appealed from is modified and Lino Gutierrez
Amount subject to tax and/or his heirs, namely, Andrea C. Vda. de Gutierrez, Antonio D. Gutierrez,
P66,228.40 Santiago D. Gutierrez, Guillermo D. Gutierrez and Tomas D. Gutierrez, are
Tax due thereon P15,179.00 ordered to pay the sums of P1,687.00, P848.00, P5,374.00, and P4,020.00,
Less tax already paid 9,805.00 as deficiency income tax for the years 1951, 1952, 1953 and 1954,
Deficiency income tax due respectively, or a total of P11,929.00, plus the statutory penalties in case of
P 5,374.00 delinquency. No costs. So ordered.
1954 Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes,
Net income per investigation P43,881.92 Dizon, Makalintal and Zaldivar, JJ., concur.
Add: Disallowed deductions: Regala, J., took no part.
Salary of driver P 140.00
Car expenses 414.18 James vs US
Car depreciation 72.65 626.83 Facts[edit]
P44,508.75 The defendant, Eugene James, was an official in a labor union who had
Less: Allowable deductions: embezzled more than $738,000 in union funds, and did not report these
Furniture given in connection with business transaction P 115.00 amounts on his tax return. He was tried for tax evasion, and claimed in his
Repairs of rental apartments 2,048.56 2,163.56 defense that embezzled funds did not constitute taxable income. His argument
Net income was that just as the receipt of loan proceeds is not taxable to the borrower
P42,345.19 (because of the borrower's corresponding obligation to repay the loan), the
Less: Personal exemption 3,000.00 person who embezzles money should not be treated as having received
Amount subject to tax income, since that person is legally obligated to return those funds to their
P39,345.19 rightful owner. Indeed, Eugene James pointed out, the Supreme Court had
Tax due thereon P 9,984.00 previously made such a determination in Commissioner v. Wilcox, 327 U.S.
404 (1946). However, this defense was unavailing in the trial court, where manufactures machinery of a character used by Glenshaw. Among the claims
Eugene James was convicted and sentenced to three years in prison. advanced by Glenshaw

Issue[edit] Page 348 U. S. 428

The Supreme Court was called upon to determine whether the receipt of
embezzled funds constitutes income taxable to the wrongdoer, even though were demands for exemplary damages for fraud [Footnote 2] and treble damages
an obligation to repay exists. for injury to its business by reason of Hartford's violation of the federal antitrust
laws. [Footnote 3] In December, 1947, the parties concluded a settlement of all
Holding[edit] pending litigation by which Hartford paid Glenshaw approximately $800,000.
The Supreme Court ruled that under section 22(a) of the Internal Revenue Through a method of allocation which was approved by the Tax Court, 18 T.C.
Code of 1939 and section 61(a) of the Internal Revenue Code of 1954, the 860, 870-872, and which is no longer in issue, it was ultimately determined that, of
receipt of embezzled funds was includable in the gross income of the the total settlement, $324,529.94 represented payment of punitive damages for
wrongdoer and was taxable to the wrongdoer, even though the wrongdoer had fraud and antitrust violations. Glenshaw did not report this portion of the
an obligation to return the funds to the rightful owner. settlement as income for the tax year involved. The Commissioner determined a
deficiency, claiming as taxable the entire sum less only deductible legal fees. As
CIR vs GLENSHAW GLASS previously noted, the Tax Court and the Court of Appeals upheld the taxpayer.

This litigation involves two cases with independent factual backgrounds, yet Commissioner v. William Goldman Theatres, Inc. -- William Goldman Theatres,
presenting the identical issue. The two cases were consolidated for argument Inc., a Delaware corporation operating motion picture houses in Pennsylvania,
before the Court of Appeals for the Third Circuit, and were heard en banc. The sued Loew's, Inc., alleging a violation of the federal antitrust laws and seeking
common question is whether money received as exemplary damages for fraud or treble damages. After a holding that a violation had occurred, William Goldman
as the punitive two-thirds portion of a treble damage antitrust recovery must be Theatres, Inc. v. Loew's Inc., 150 F.2d 738, the case was remanded to the trial
reported by a taxpayer as gross income under 22(a) of the Internal Revenue court for a determination of damages. It was found that Goldman had suffered a
Code of 1939. [Footnote 1] In a single opinion, 211 F.2d 928, the Court of Appeals loss of profits equal to $125,000, and was entitled to treble damages in the sum of
affirmed the Tax Court's separate rulings in favor of the taxpayers. 18 T.C. 860; 19 $375,000. William Goldman Theatres, Inc. v. Loew's, Inc., 69 F.Supp.
T.C. 637. Because of the frequent recurrence of the question and differing 103, aff'd 164 F.2d 1021, cert. denied, 334 U.S. 811. Goldman reported only
interpretations by the lower courts of this Court's decisions bearing upon the $125,000 of the recovery as gross income, and claimed that the $250,000
problem, we granted the Commissioner of Internal Revenue's ensuing petition for
certiorari. 348 U.S. 813. Page 348 U. S. 429

The facts of the cases were largely stipulated, and are not in dispute. So far as balance constituted punitive damages, and, as such, was not taxable. The Tax
pertinent, they are as follows: Court agreed, 19 T.C. 637, and the Court of Appeals, hearing this with
the Glenshaw case, affirmed. 211 F.2d 928.
Commissioner v. Glenshaw Glass Co. -- The Glenshaw Glass Company, a
Pennsylvania corporation, manufactures glass bottles and containers. It was
engaged in protracted litigation with the Hartford-Empire Company, which
It is conceded by the respondents that there is no constitutional barrier to the Bruun, 309 U. S. 461.Cf. Robertson v. United States, 343 U. S. 711; Rutkin v.
imposition of a tax on punitive damages. Our question is one of statutory United States, 343 U. S. 130; United States v. Kirby Lumber Co., 284 U. S. 1.
construction: are these payments comprehended by 22(a)? Such decisions demonstrate that we cannot but ascribe content to the catchall
provision of 22(a), "gains or profits and income derived from any source
The sweeping scope of the controverted statute is readily apparent: whatever." The importance of that phrase has been to frequently recognized since
its first appearance in the Revenue Act of 1913 [Footnote 5] to say now that it
"SEC. 22. GROSS INCOME." adds nothing to the meaning of "gross income."

"(a) GENERAL DEFINITION. 'Gross income' includes gains, profits, and income Nor can we accept respondents' contention that a narrower reading of 22(a) is
derived from salaries, wages, or compensation for personal service . . . of required by the Court's characterization of income in Eisner v. Macomber, 252 U.
whatever kind and in whatever form paid, or from professions, vocations, trades, S. 189, 252 U. S. 207, as "the gain derived from capital, from labor, or from both
businesses, commerce, or sales, or dealings in property, whether real or personal, combined." [Footnote 6] The Court was there endeavoring to determine whether
growing out of the ownership or use of or interest in such property; also from the distribution of a corporate stock dividend constituted a realized gain to the
interest, rent, dividends, securities, or the transaction of any business carried on shareholder, or changed "only the form, not the essence," of
for gain or profit, or gains or profits and income derived from any source
whatever. . . ." Page 348 U. S. 431

(Emphasis added.) [Footnote 4] his capital investment. Id. at 252 U. S. 210. It was held that the taxpayer had
"received nothing out of the company's assets for his separate use and
This Court has frequently stated that this language was used by Congress to exert benefit." Id. at 252 U. S. 211. The distribution, therefore, was held not a taxable
in this field "the full measure of its taxing power." Helvering v. Clifford, 309 U. S. event. In that context -- distinguishing gain from capital -- the definition served a
331, 309 U. S. 334; Helvering v. Midland Mutual Life Ins. Co., 300 U. S. 216, 300 useful purpose. But it was not meant to provide a touchstone to all future gross
U. S. 223; Douglas v. Willcuts, 296 U. S. 1, 296 U. S. 9; Irwin v. Gavit, 268 U. S. income questions. Helvering v. Bruun, supra, at 309 U. S. 468-469; United States
161, 268 U. S. 166. Respondents contend that punitive damages, characterized v. Kirby Lumber Co., supra, at 284 U. S. 3.
as "windfalls" flowing from the culpable conduct of third parties, are not within the
scope of the section. But Congress applied no limitations as to the source of Here, we have instances of undeniable accessions to wealth, clearly realized, and
taxable receipts, nor restrictive over which the taxpayers have complete dominion. The mere fact that the
payments were extracted from the wrongdoers as punishment for unlawful
Page 348 U. S. 430 conduct cannot detract from their character as taxable income to the recipients.
Respondents concede, as they must, that the recoveries are taxable to the extent
labels as to their nature. And the Court has given a liberal construction to this that they compensate for damages actually incurred. It would be an anomaly that
broad phraseology in recognition of the intention of Congress to tax all gains could not be justified in the absence of clear congressional intent to say that a
except those specifically exempted. Commissioner v. Jacobson, 336 U. S. 28, 336 recovery for actual damages is taxable, but not the additional amount extracted as
U. S. 49; Helvering v. Stockholms Enskilda Bank, 293 U. S. 84, 293 U. S. 87-91. punishment for the same conduct which caused the injury. And we find no such
Thus, the fortuitous gain accruing to a lessor by reason of the forfeiture of a evidence of intent to exempt these payments.
lessee's improvements on the rented property was taxed in Helvering v.
It is urged that reenactment of 22(a) without change since the Board of Tax exemption provision in the Code. We would do violence to the plain meaning of
Appeals held punitive damages nontaxable in Highland Farms Corp., 42 B.T.A. the statute and restrict a clear legislative attempt to
1314, indicates congressional satisfaction with that holding. Reenactment --
particularly without the slightest affirmative indication that Congress ever had Page 348 U. S. 433
the Highland Farms decision before it -- is an unreliable indicium, at
best. Helvering v. Wilshire Oil Co., 308 U. S. 90, 308 U. S. 100-101; Koshland v. bring the taxing power to bear upon all receipts constitutionally taxable were we to
Helvering, 298 U. S. 441, 298 U. S. 447. Moreover, the Commissioner promptly say that the payments in question here are not gross income. See Helvering v.
published his nonacquiescence in this portion of the Highland Farms holding, Midland Mutual Life Ins. Co., supra, at 300 U. S. 223.
[Footnote 7] and has,
Page 348 U. S. 432
before and since, consistently maintained the position that these receipts are
taxable. [Footnote 8] It therefore cannot be said with certitude that Congress MR. JUSTICE HARLAN took no part in the consideration or decision of this case.
intended to carve an exception out of 22(a)'s pervasive coverage. Nor does the
1954 Code's [Footnote 9] legislative history, with its reiteration of the proposition * Together with Commissioner of Internal Revenue v. William Goldman Theaters,
that statutory gross income is "all-inclusive," [Footnote 10] give support to Inc., which was a separate case decided by the Court of Appeals in the same
respondents' position. The definition of gross income has been simplified, but no opinion.
effect upon its present broad scope was intended. [Footnote 11] Certainly punitive
damages cannot reasonably be classified as gifts, cf. Commissioner v.
Jacobson, 336 U. S. 28, 336 U. S. 47-52, nor do they come under any other