D.
Estates and Trusts
CIR vs VISAYAN ELECTRIC CO
Facts
- Visayan Electric Co. established a pension fund for the
benefit of its employees
- The fund was later invested in stocks of San Miguel
Brewery, for which dividends had been regularly received.
These dividends, however, were not declared for tax
purposes
- The Provincial Auditor allowed VEC to declare the dividends
as income for franchise tax purposes, thus tax exempt
- The Revenue Examiner, however, argued that the dividend
were subject to corporate income tax
Decision
- The dividends were not income of VEC. They do not go to
the general fund of the company
- The dividends were part of the pension fund which was
solely for the benefit of the employees
- To qualify for exemption, the employees’ trust (pension)
fund must refer to a definite program, scheme, or plan. It
must be set up in good, actuarially sound, and not to be
used or controlled in any way by the company. It must
extend retirement and pension benefits for the employees
- Unquestionably, the VEC pension fund was created in good
faith. It was meant for the benefit of the employees
- There are, however, no sufficient data which would justify
the Court to make a conclusive statement that the VEC
pension fund qualifies as a trust under the Tax Code. 1)
The requirements for the formation of employees’ trust
funds for pension had not been strictly complied with—e.g.,
the only record evidence of its creation is the minutes of a
board meeting; 2) No record to show that the fund was
actuarially sound
- Absent such data, the dividends are not tax exempt.
Reason: Exemptions in tax statutes are never presumed.
CIR vs CA
Facts
- The GCL Retirement Plan is an employees’ trust which
provides retirement, pension, and other benefits
- GCL made investments and earned therefrom interest
income
- This income was assessed 15% withholding final tax
- GCL claims tax exemption, based on Sec 56(b) of Tax Code
—employees’ trusts are exempt from income tax
- CIR denied exemption, based on PD 1959 which deleted
provisions on tax exemption and preferential tax rates
Decision
- PD 1959 is a general law which cannot repeal by implication
Sec 56(b) of Tax Code which is a specific law
- Tax Code clearly exempts employees’ trusts from
withholding tax. The reason for this is to promote the
formation and establishment of employees’ trusts funds for
the benefit of workers
- Employees’ trust fund—an independent and additional
source of protection for the working group. Moreover, it is
established for their exclusive benefit and for no other
purpose
III.A Exempt individuals under tax treaty
REAGAN vs CIR
Facts
- Reagan is an employee of an American firm that provides
technical assistance to the US Air Force in the Philippines
- Reagan imported an automobile to the Philippines and sold
it to Johnson, a US Air Force member. Johnson, in turn, sold
the automobile to a Filipino
- The transaction took place in Clark Field Air Base in
Pampanga
- For the profit realized from the sale, the CIR imposed on
Reagan an income tax
- Reagan decried the imposition, citing the opinion of Justice
Tuason in the Saura Case: “Transactions done in army
 bases within the Philippines are contemplated to have been
conducted on a US soil, thus tax exempt”
Decision
- J. Tuason’s opinion was merely an obiter—not binding—and
was overturned in the 1962 Co Po case
- The Philippines is an independent and sovereign state—its
authority may be exercised over its entire domain, where
there is no portion that is beyond its power
- Although, under the concept of auto-limitation, state may
choose to limit its exercise of sovereignty over certain
parts of its territory
- Still, the auto-limited part remains a native soil—still subject
to authority of the state. Jurisdiction may diminish but does
not disappear
- Clark Air Force is not a foreign territory for purposes for
income tax legislation—this power of taxation by the
Philippines is preserved in the Military Bases Agreement
- The Agreement merely states that a US national serving or
employed in connection with the construction,
maintenance, or operation of the military bases in the
Philippines is tax exempt unless the income is derived from
Philippine source or sources. In the sale of the automobile,
the source was clearly the Philippines. Reagan is liable for
the income tax.
CIR vs ROBERTSON
Facts
- Robertson et al are American citizens (although some of
them were born in the Philippines) employed at the US
Naval Base in Subic Bay
- CIR claims Robertson et al should be imposed income taxes
because they were in the Philippines not solely for
employment. Some of them were retired from the Federal
Civil Service and were living with their respective families
here, while the others owned residential properties here
Decision
- The RP-US Bases Agreement is very clear: to avail oneself of
tax exemption, one must be a national of US, employed in
the naval base, and residing in the Philippines
- Robertson et al meet all said requirements, therefore tax
exempt
III.B Exempt Corporations
CIR vs SINCO
Facts
- The VG Sinco Educational Institution is a non-stock, non-
profit corporation which was established to operate the
Foundation College of Dumaguete
- CIR assessed the College an income tax on the following
grounds: 1) Sinco personally received benefits from it; 2)
Community Publishers, a stockholder, profits from it; 3) It
charges tuition fee; 4) It acquired buildings and other
property which will redound to the benefit of stockholders
after dissolution of the corporation
- Sinco argued that under the NIRC, corporation organized
and maintained exclusively for educational purposes and
no part of its net income inures to the benefit of any
private individual
Decision
- VG Sinco Educational Institution is tax exempt
- The corporation has never distributed any dividends to its
stockholders
- Remuneration for services rendered to the College is
allowed by law. This covers the money given to Sinco (as
salary) and Community Publishers (for services)
- Tuition fee is the only source of income to ensure that the
College will keep its operations going—allowed by law
- That the buildings and other property acquired by the
corporation will benefit the stockholders upon dissolution—
too speculative
CIR vs CA (Oct 14, 1998)
Facts
- YMCA is a non-stock, non-profit corporation which conducts
various programs and activities that are beneficial to the
public. It leased out portions of its premises to small shop
owners and for parking slots
- The CIR assessed against YMCA income tax for the profits it
earned from leasing out portions of its premises
- YMCA claimed exemption for being one of the
organizations listed in Sec 27 of the NIRC and Art VI of the
1987 Constitution
Decision
- Under the NIRC, YMCA is exempt from the payment of
property tax but not tax exempt from the profits it
earned from leasing out portions of its premise
- A reading from Sec 27 of the NIRC shows that the income
from any property of exempt organization, as well as that
arising from any activity it conducts for profit, is taxable
- Art VI of the Constitution exempts from payment of tax
charitable, religious, educational institutions. Exemption
here applies only to property tax. Besides, YMCA is not a
school or an educational institution
CIR vs CA (Apr 18, 1997)
Facts
- The Institute of Philippine Culture (IPC) is an auxiliary unit of
the Ateneo de Manila University. Occasionally, IPC accepts
sponsorships from foreign international organizations for its
research activities
- The CIR assessed a contractor’s tax against Ateneo,
claiming that it—through IPC—is an independent contractor
selling its research to foreign organizations
Decision
- Ateneo is not an independent contractor and, therefore, tax
exempt
- Ateneo does not sell its services for a fee. The funds it
receives for its research activities are technically not a fee
but a gift, a donation
- Contract of sale requires transfer of ownership. Research
data obtained by IPC remain with Ateneo, not transferred
to the funding agency
- The research activity of Ateneo/IPC is in pursuance of
maintaining its academic integrity and of its university
status
- Ateneo’s motive for doing research is not profits but public
service (for education)
IV. Gross Income. A. Income from Whatever Source
CIR vs BRITISH OVERSEAS AIRWAYS CORP
Facts
- In the period that the CIR assessed against BOAC income
tax, BOAC had no landing rights for traffic purposes in the
Philippines. Consequently, it did not carry passengers
and/or cargo to and from the Philippines
- During the same period, however, BOAC maintained a
general sales agent in the Philippines which was
responsible for selling BOAC tickets covering passengers
and cargoes
- BOAC argued that the proceeds of sales of its passage
tickets in the Philippines do not constitute income from
Philippine sources since BOAC did not perform any service
of cargoes or passengers within the Philippines
Decision
- Gross income: includes gains, profits, and income derived
from salaries, wages, or compensation for personal service
of whatever kind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales,
or dealings in property, whether real or personal, growing
out of the ownership or use of or interest in such property;
also from interests, rents, dividends, securities, or the
transactions of any business carried on for gain or profit, or
gains, profits, and income derived from any source
whatever
- The phrase “income from any source whatever” discloses a
legislative policy to include all income not expressly
 exempted within the class of taxable income under our
laws
EISNER VS MACOMBER
Facts
- Standard Oil, to readjust its capitalization, issued additional
shares sufficient to constitute a stock dividend of 50% of
the outstanding stock. Accordingly, the new stock was
divided among the stockholders
- Macomber, being an owner of the old stock, received
certificates for the additional shares
- Macomber was then imposed tax arising from the income
supposedly derived from the additional shares
Decision
- In income, the essential matter is not a gain accruing to
capital, not a growth or increment of value in the
investment, BUT a gain, a profit, something of
exchangeable value, proceeding from the property,
severed from the capital, however invested or employed,
and coming in, being derived—that is, received or drawn by
the taxpayer for his separate use, benefit, and disposal—
that is income derived from property
- So is stock dividend an income, therefore, taxable?
- Far from being a realization of profits, stock dividend tends
rather to postpone such realization. It merely shows that
the company’s accumulated profits have been capitalized
instead of distributed to the stockholders
- The essential controlling fact is that the stockholder
received nothing out of the company’s assets for his
separate use and benefit
- Macomber not liable to income tax
Situs of Income
CIR vs JAVIER
Facts
- Because of clerical error, $1M was transmitted to Javier’s
account at the Prudential Bank
- In her income tax return, Javier stated in a footnote that she
received $1M by mistake and therefore not subject to tax
- BIR, however, imposed a 50% fraud penalty against Javier
Decision
- Fraudulent return is always considered an evasion of tax,
but a false return is not necessarily so
- It can hardly be said that there was actual and intentional
fraud on the part of Javier to induce the government to not
assess against her tax liabilities
- Javier received money from abroad which she presumed to
be a gift and spent some of it. That it turned out to be an
error or mistake of fact cannot constitute fraud
- Fraud must be intentional, consisting of deception willfully
and deliberately done or resorted to in order to induce
another to give up some legal right
- Javier did no such thing, 50% fraud penalty against should
be deleted
CIR vs JAPAN AIRLINES
Facts
- I957: JAL constituted PAL as its general sales agent in the
Philippines, whereby PAL sold for and in behalf of JAL plane
tickets and reservations for cargo spaces
- 1959-1963: JAL did not have planes that landed or lifted
passengers and cargoes in the Philippines—having had no
CPCN (certificate of public convenience and necessity)
- CIR assessed against JAL deficiency income tax for the years
1959-1963
- JAL protested, claiming it was a non-resident foreign
corporation and, therefore, taxable only on income from
Philippine sources
Decision
- For CIR. The Court adopted the BOAC doctrine: “The source
of an income is the property, activity, or service that
produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient
 that the income is derived from an activity within the
Philippines”
- When JAL constituted PAL as its sales agent, there is no
doubt that JAL is a resident foreign corporation doing
business in the Philippines. Sale of plane tickets, after all, is
the very lifeblood of the airline industry

CIR vs BRITISH OVERSEAS AIRWAYS CORP

Facts: supra

Decision
- BOAC is a resident foreign corporation subject to tax upon
its total net income received from all sources within the
Philippines.
- It was engaged in business in the Philippines through a local
agent during the period covered by the assessments
- The source of an income is the property, activity, or service
that produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient
that the income is derived from an activity within the
Philippines