1. Evangelista vs. CIR (1957)
The pool is a taxable entity distinct from the
Facts:
Petitioners borrowed from their father a certain sum and together with their
personal monies used the same for the purpose of buying real properties.
They appointed their brother to manage the properties with full powers to
transact any business concerning the same. Petitioners then leased the
properties to various tenants. CIR assessed them for income tax on
corporation, real estate dealers fixed tax and corporation residence tax.
Issue: WON petitioners are subject to tax on corporations.
Held: Yes.
The two elements of a partnership as defined under the Civil Code are
present
1. There is an agreement to contribute money, property or industry
into a common fund. Here petitioners contributed money and
property.
2. With the intention to divide the profits among the contracting
parties
i. Said common fund was not something they found
already in existence;
ii. They invested the same, not merely on one
transaction, but in a series of transactions;
iii. The lots were leased to several persons and
petitioners derived rental income therefrom;
iv. The properties have been under the management of
one person;
v. The foregoing conditions existed roughly for 15 years
already;
vi. No contrary evidence was presented by petitioner.
Having formed an unregistered partnership, the same is liable for income
tax on corporations.
2. Afisco Insurance Corp. vs. CA (1999)
Facts:
Petitioners are 41 non-life insurance companies organized under the laws of
the PH. Pursuant to reinsurance treaties with an NRFC (Munich), a pool
composed of petitioner insurance companies was formed. The pool remits
profits derived from the reinsurance treaties to the ceding companies and
the NRFC. The CIR assessed the pool of insurers for deficiency corporate
taxes.
Issues:
1. WON the clearing house/ insurance pool was a partnership or an
association taxable as a corporation;
2. WON the remittance of petitioner and Munich of the respective
shares of reinsurance premiums pertaining to their individual and
separate contracts of reinsurance were dividends subject to tax.
Held:
1. The ceding companies entered into a pool agreement or an
association that would handle all the insurance businesses
covered by the reinsurance treaties. The following indicates a
partnership/ association covered by Sec. 24 of the NIRC
i. The pool has a common fund;
ii. The pool functions through an executive board;
iii. While the pool is not a reinsurer and does not issue
any insurance policy, its work is indispensable,
beneficial and economically useful to the business of
the ceding companies and to Munich.
- Profit motive is the primordial reason to the
pools formation.
2. Remittances made by the pool to petitioner ceding companies
and Munich are subject to tax on dividends
i. No double taxation. The pool is a taxable entity
different from the member companies and the tax on
income of the pool is different from the tax on
dividends received by the ceding companies;
ii. No exemption form tax
a.
ceding companies;
b. Sec. 24 (b) (1) pertains to tax on foreign
corporations hence cannot be claimed by the
ceding companies which are domestic
corporations;
c. Munich cannot claim exemption under the same
provision because the same specifically taxed
dividends, the type of remittance forwarded to it
by the pool;
d. Munich is an associate of the ceding companies
in the entity formed pursuant to the reinsurance
treaties;
e. Munich under the pool arrangement shared in
the income and losses.
f. It cannot be exempted under the RP-West
Germany Tax Treaty as the said treaty was not
yet in effect at the time of the assessment.
3. Wise & Co. Inc., et al. vs. Meer (1949)
Facts:
Plaintiffs were stockholders of Manila Wine Merchant Ltd. (HK Company), a
foreign corporation authorized to do business in the PH. The BOD of the HK
Company adopted resolutions to enable the company to sell its business
and assets to the Manila Wine Merchants Inc., a PH corporation. A contract
of sale was executed and final resolutions completing said sale and
tranches of business and assets were adopted by the BOD. Consequently,
the BOD declared and made distribution of its earnings to its stockholders.
PH income tax has been paid by the HK Company on said surplus. The SHs
of HK Company by proper resolution directed the company to be voluntarily
liquidated and its capital distributed. HK Co. was duly dissolved. Plaintiffs
filed their PH ITRs for which the CIR made deficiency income tax
assessments. Plaintiffs paid under protest. Plaintiffs file the instant
complaint following the denial of their claim for refund.
Issues/Ruling:
1. WON the amounts received by plaintiff-stockholders are
ordinary dividends or liquidating dividends.
SC: They are liquidating dividends
i. The later execution of the formal deed of sale and the
successive distributions of the amounts in question among
the SHs of the HK Co. were steps in its complete
liquidation;
ii. The distributions were not in the ordinary course of
business with intent to maintain a going concern, in which
case they would have been distributions of ordinary
dividedns, but after the liquidation of the business had
been decided upon, which makes them payment for the
surrender and relinquishment of the SHs interest in the
corporation or the so-called liquidating dividends;
iii. The stipulation of facts, being excerpts of the directors
meeting of the HK Co., that the surplus to be distributed be
that resulting after providing for the return of capital and
necessary and various expenses;
iv. Thus, the distributions were to be made in the course of or
as a result of the HK Co.s liquidation and that said
liquidation was to be complete and final;
v. Although the deed of sale was made only on July 22, 1937,
it was expressly stipulated that the said sale shall take
effect as of June 1, 1937 and that if the HK Company
would run the business thereafter, it did so only in trust for
its new owner, the Manila Company. How could they
deemed all the business and assets of the corporation sold
as of June 1, 1937 and still sat that said corporation as a
going concern and distribute ordinary dividends thereafter?
vi. Tge fact that the distributioins were called dividends and
some of them were made before liquidation and dissolution
is not controlling. The determining element is whether the
distributions were in the ordinary course of business and
with intent to maintain the corporation as a going concern
or after deciding to quit and with intent to liquidate the
business;
 vii. The amounts distributed were not in the nature of
recurring return on stock, in which case, it is an ordinady
dividen. If the corporation is really winding up, its business
or recapitalizing and ___________, the distribution may
properly be treated as a complete or partial liquidation and
as payment by the corporation to the SH of his stock.
2. WON such amounts are taxable.
SC: Yes
Our law at the time of the transaction in question, in providing that where a
corporation, etc distributes all its assets in complete liquidation or
dissolution, the gain realized or loss sustained by the SH is taxable as
income or deductible as loss as the case may be, in effect treated such
distributions as payment in exchange for the stock or share.
Liquidation or dissolution dividends are to be regarded as payments for the
stock of the dissolved corporation. Any excess so received over the cost of
his stock to the SH, or over its FMV, is taxable profit.
3. WON such distribution are taxable as dividends.
SC: Yes. The general definition of a dividend in Sec. 24(a) was not
intended to aply to distributions made to the SHs in the liquidation of the
corporation but that it was intended that such distributions should be
governed by Sec. 201(c), which, dealing specifically with such liquidation,
provided that the amounts distributed should be treated as payments in
exchange for stock and that any gain realized thereby should be taxed to
the SHs as other gains or profits.
4. WON the distributions should be subject not only to the normal
tax but also the additional tax.
SC: Yes. Where an insolvent corporation dissolved and liquidates it
distributes to it its stockholders not only earnings it has on hand but it also
pays to them their invested capital, namely the amount which they had
paid for their stocks thus wiping out their interest in the company.
5. WON plaintiffs should not be subject to PH income tax since
they are non-resident aliens and the profit realized by them does
not constitute income in the PH.
SC: They are subject to PH income tax. The HK Company was domiciled
and doing business in the PH. The profits, earnings, and assets including
the proceeds from which the distribution was made, had been earned and
acquired in the PH.
6. As between the Revenue Regulation which makes the gain from
distribution made in complete/ partial liquidation taxable as dividends and
the law which makes it taxable income, the latter prevails.
4. CIR vs. Baier-Nickel (2000)
Facts:
Respondent Baier-Nickel, non-resident German citizen, is the President of
Jubanitex, a domestic corporation engaged in the manufacturing, etc. of
embroidered textile products. The corporation appointed and engaged the
services of respondent as Commission agent. It was agreed that she will
receive 10% sales commission on all sales actually concluded and collected
through her efforts. She filed her ITR and filed and claimed for refund the
amount alleged to have been mistakenly withheld and remitted by
Jubanitex to the BIR. Respondent contended that her sales commission
income is not taxable in the PH because the same was compensation for
services rendered in Germany and therefore considered income from
sources outside the PH. No action was taken by the CIR thus she filed a
petition before the CTA which rendered a decision denying her claim. CA
reversed CTA. In the present petition, the CIR contended that the situs/
source of income should be the physical source of the money earned.
Issue: Whether respondents sales commission income is taxable in the
Philippines.
Held: Yes.
The source of income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within the
Philippines.
With respect to the rendition of labor or personal service, as in the instant
case, it is the place where the labor or service was performed that
determines the source of income.
Respondent presented no contracts or orders signed by the customers in
Germany to prove the sales transactions therein. The faxed documents
presented did not constitute substantial evidence to support the conclusion
that it was in Germany where she performed the income-producing service
which have rise to the reported monthly sales. Thus she failed to prove that
her income was from sources outside the PH and exempt from the
application of PH income tax law. Respondent being an RA is taxable for
income sourced from within the PH. The claim of refund should be denied.
5. Tan vs. del Rosario (1994)
Facts:
These are consolidated petitions questioning the constitutionality of RA
7496 or the Simplified Net Income Taxation Scheme and assailing Section 6
of RR No. 2093 as it is alleged to apply the SNITS to General Professional
Partnerships.
Issue: Is the SNITS applicable to GPPs?
Held: Yes.
GPPs, unlike ordinary business partnerships which are treated as a
corporation for taxation purposes thus subject to corporate income tax, is
not itself an income taxpayer.
The income tax is imposed not on the professional partnership which is tax
exempt, but on the partners themselves in their individual capacity
computed on their distributive shares of partnership profits.
There is no distinction in income tax liability between a person who
practices his profession alone or individually and one who does it through
partnership with others in the exercise of a common profession.
The SNITS is not applicable to corporations and taxable partnerships since
they are independently subject to payment of income tax. Exempt
partnerships such as GPPs were the partners themselves, not the
partnership, who are liable for income tax in their individual capacity, is
covered by SNITS.
6. CIR vs. PAL (2009)
Facts:
PAL incurred zero taxable income for the FY 2000-2001. PAL did not pay
any MCIT for the period. It requested for refund of its unapplied creditable
withholding tax for the same period; however, the CIR denied the claim for
refund and assessed PAL for deficiency MCIT for said fiscal year.
Issue: WON PAL is liable for deficiency MCIT in FY 2000-2001.
Held: No.
Section 13(a) of PD 1590 refers to basic corporate income tax which relates
to the general rate of 35% (32% by the year 2000) in Section 27(1) of the
NIRC of 1994. Section 13(a) of PD 1590 requires that the basic corporate
income tax be computed in accordance with the NIRC, using the rates
prescribed therein.
Basic corporate income tax is computed based on a taxpayers net
taxable income while MCIT is computed based on gross income.
Even if the basic corporate income tax and MCIT are both income
taxes and is paid in place of the other, the two are distinct and
separate taxes. The two are different not just in rates but also in the
bases for their computation. Not being covered by Section 13(a) of PD
1590 which makes PAL liable for basic corporate income tax, MCIT is
included in all other taxes: from which PAL is exempted. Said taxes are
merely paid in the alternative.
The evident intent of Section 13 of PD 1590 is to extend to PAL tax
concessions not ordinarily available to other domestic
corporations.
The Substitution Theory of CIR is untenable. By basing the tax on the
annual net taxable income, PD 1590 necessarily recognized the situation in
which taxable income may result in a negative amount and thus translates
to zero tax liability. When PAL operates at a loss, no taxes are due; in this
instance, it has lower tax liability than that provided by Section 13(b) of PD
1590.
PD 1590 intended to give PAL the option to avail itself of
subsection (a) or (b). Either option excluded payment of other taxes and
dues imposed or collected. PAL has the option to choose the alternative
that results to lower taxes. It is not the fact of payment that exempts it but
the exercise of its option.
If PAL is subjected to MCIT, the provision in PD 1590 on net loss
carry-over will be rendered nugatory. Net loss carry-over is material
only in computing the annual net taxable income to be used as basis for the
basic corporate income tax of PAL; but PAL will never be able to avail itself
of basic corporate income tax option when it is in a net loss position
because it will be compelled to pay the necessarily higher MCIT.
7. CIR vs. St. Lukes Medical Center
Facts:
St. Lukes is a non-profit, non-proprietary business. The BIR assessed St.
Lukes deficiency income taxes. BIR argued that the 10% preferential tax
rate under Section 27(B) of the NIRC on income of proprietary non-profit
hospital should be applicable to St. Lukes for its income from paying-
patients.
St. Lukes claims tax exemption under Section 30 (E) and (G) of the NIRC
contending that it is a charitable institution. St. Lukes asserts that Section
30 (E) exempts from income tax non-stock, non-profit charitable institutions
while Section 27(B) removes the exemption for proprietary non-profit
hospital.
Issue: WON St. Lukes is liable for deficiency income tax under Section
27(B) which imposes a preferential tax rate of 10%.
Held: Yes, St. Lukes is liable for its income from paying patients.
There is no dispute that St. Lukes is organized as a non-stock, non-profit
charitable institution. However, this does not automatically exempts St.
Lukes from paying taxes. To be exempt from paying income taxes, Section
30 (E) of the NIRC requires that a charitable institution must be organized
and operated exclusively for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) requires that the institution be operated
exclusively for social welfare. However, the last paragraph of Section 30
provides that if a tax exempt charitable institution conducts any activity for
profit, such activity is not exempt even if its not for profit activities remain
tax exempt.
Thus even if a charitable institution must be organized and operated
exclusively for charitable purposes, it is nevertheless allowed to engage in
activities conducted for profit without losing its tax exempt status for its
not-for-profit activities. The only consequence is that the income of a
charitable institution from any of its activities conducted for profit should be
subject to income tax.
St. Lukes had total revenues of P1.73 billion from services to paying
patients. It is not an institution operated exclusively for charitable
purposes. The revenues from paying patients are income received from
activities conducted for profit. Thus, under the last paragraph of Section 30,
such income regardless of disposition is taxable. However, under Sec. 27
(B), it is taxed at the preferential rate of 10%.
8. CIR vs. Citytrust Investment Phils.
Facts:
Citytrust and Asiabank paid 5% gross receipts tax in their total gross
receipts. Subsequently, a CTA decision came out ruling that the basis in
computing the 5% GRT is the gross receipts minus the 20% FWT. In other
words, the 20% FWT on a banks passive income does not form part of the
taxable gross receipts. On the strength of the above-ruling, Citytrust and
Asiabank filed a claim for refund with the CIR. The CIR denied the claim for
refund.
Issue: WON the 20% FWT on a banks passive income form part of the
taxable gross receipts for the purpose of computing the 5% GRT.
Held: Yes.
Gross receipts means the entire receipts without any deductions. On the
contention of Citytrust and Asiabank that GRT is imposed on income
actually received based on Section 4 (e) of RR No. 12-80, the SC said that
Section 4 (e) merely recognizes that income may be taxable either at the
time of its actual receipt or its accrual, depending on the accounting
method of the taxpayer. It does not really exclude accrued interest income
from taxable gross receipts but merely postpones its inclusion until actual
payment of the interest to the lending bank. RR No. 12080 has already
been superseded by RR No. 17084 which includes all interest income in
computing the GRT.
Actual receipt may either be physical or constructive. When the depositary
bank withholds the final tax to pay the tax liability of the lending bank,
there is prior to withholding, a constructive receipt by the lending bank of
the account withheld.
The concept of a withholding tax on income implies that the amount of tax
withheld comes from the income earned by the taxpayer. Since the amount
of tax withheld constitute income earned, then that amount forms part of
the taxpayers gross receipts.
The Manila Jockey Club case, cited by respondents, does not apply because
what happened there is earmarking, not withholding. The amounts
earmarked do not form part of gross receipts because those are by law or
regulation reserved for some person other than the taxpayer.
The amounts withheld forms part of gross receipt because they are in
constructive possession and not subject to any reservation, the withholding
agent being merely a conduit in the collection process.
The interest income that had been withheld for the government became
property of the financial institution upon constructive possession of the
same. It is ownership which determines whether interest income form part
of taxable gross receipts. Being originally owned by the financial institution
as part of their interest income, the FWT should form part of their taxable
gross receipts.
9. Marubeni Corporation vs. CIR (1989)
Facts:
Marubeni Corp. of Japan has equity investments in AG&P Manila. AG&P
declared and paid cash dividends to petitioner and withheld the
corresponding 10% final dividend tax thereon. AG&P directly remitted the
cash dividends to petitioners head office in Tokyo, Japan net not only of
10% final dividend tax but also of the withheld 15% profit remittance tax.
Petitioner sought a ruling from the BIR on whether the dividends it received
are effectively connected with the conduct of its business in the Philippines
and are to be considered branch profits subject to 15% BRPT. The BIR
issued a ruling that any profits remitted abroad by a branch office to its
head office which are effectively connected with its trade or business in the
Philippines are subject to 15% BRPT. In the instant case, the dividends
received by Marubeni from AG&P are not income arising from the business
of which Marubeni is engaged. Said dividends are not considered branch
profits for purposes of the 15% BRPT.
Petitioner claimed for the refund of the amount representing the BRPT it
erroneously paid on the dividends. The CIR denied the claim saying that
the dividends remitted were neither subject to the 10% intercorporate
dividend tax nor the 15% BRPT but of the 25% rate under the tax treaty
between the Philippines and Japan. Since the amount withheld and
remitted equalled the 25% tax rate that should have been imposed, the
same should be offset.
Contention of petitioner: Following the principal-agent relationship
theory, Marubeni Japan is an RFC subject to 10% intercorporate dividend
tax.
Contention of BIR: Marubeni Japan is an NRFC subject to 35% normal
corporate tax rate but expressly made subject to the special rate of 25%
under the RP-Japan Treaty.
Issue: Applicable tax rate on remittances received by petitioner
corporation.
Held:
Petitioner is an NRFC thus cannot claim the 10% intercorporate dividend
tax rate. It transacted business independently from its PH branch hence the
principal-agent relationship is not applicable. Consequently, the foreign
corporation is the tax payer and not its branch.
The BIR erred in imposing the 25% tax rate under the treaty. Each tax has
a different tax basis.
The Court applied Tax Sparing rule
While petitioner being an NRFC is generally taxed at 35%, it could avail of
the 15% preferential tax rate on dividends received from a domestic
corporation (AG&P) is a condition that its domicile state (Japan) extend the
same favour a tax credit of not less that 20% of the dividends received.
This 20% is the difference between the normal corporate tax rate of 35%
and the 15% special rate.
10. Manila Wine Merchants vs. CIR (1984)
Facts:
The CIR assessed petitioner for 25% surtax IAET for having unreasonably
accumulated surplus for the calendar years 1947-1957, in excess of the
reasonable needs of the business. Basis of the CIR
1. From 1947-1957, only 40.33% of its total surplus available for
distribution at the end of each calendar year was distributed as
dividends.
2. It made substantial investment of surplus in unrelated business
including US Treasury bonds.
3. The AET should be based on 25% of the total surplus available
at the end of each calendar year.
Contention of petitioners
1. The investments in other business were small amounts and
beneficial to its stockholders.
2. The investment in US Treasury bonds were used to finance its
importation and for the future expansion of its business including
acquisition of its business including acquisition of a lot and
construction of its own office building and bottling plant. The
bonds were held for years because of the Central Banks policies
on no-dollar licenses exportation and that the company was not
yet qualified to own real property in the PH thus it waited until
60% of its stocks would be owned by Filipinos.
3. It distributed 100% of its net earnings after income tax in 1957;
4. Assuming that the 25% imposition was proper, it should be
based on the total surplus or net income for the year after
deducting therefrom the income tax due.
Issues:
1. WON the purchase of US Treasury bonds can be construed as an
investment on unrelated business;
2. WON the penalty tax of 25% can be imposed on such improper
accumulations in 1957 despite the fact that the accumulation
occurred in 1951.
Held:
1. Yes.
An accumulation of earnings is unreasonable if it is not required for the
purpose of the business. To avail of the 25% surtax, petitioner has to prove
that the purchase of the bonds was an investment within the reasonable
needs of the corporation.
Test: Immediacy test reasonable needs of the business mean the
immediate needs of the business.
The CTA found that the purchase of the bonds made is in no way related to
petitioners business of importing and selling wines, whiskey, liquors and
distilled spirits. Records reveal that from 1951-1962, petitioner never had
the occasion to use the Treasury shares in aiding or financing its
importation.
As to the contention that the company held the shares a few more years
since it still cannot acquire real property in the Philippines considering that
60% of its stocks were not yet held by Filipinos, court said that the same
depends upon various contingencies. Whether the company would be able
to utilize the shares according to its plan remains to be seen. In order to
determine whether profits are accumulated for the reasonable needs of the
business as to avoid the surtax upon the stockholders, the controlling
intention of the taxpayer is that which is manifested at the time of
accumulation not subsequently declared intentions which are merely
products of afterthought.
Moreover, if there was any thought for the purchase of a lot and building
for the needs of petitioners business, the company may not with impunity
permit its earnings to pile up merely because at some future time, certain
outlayws would have to be made. Profits may only be accumulated for the
reasonable needs of the business and implicit in this is the further
requirement of reasonable time.
2. As to the reckoning time for computation of the 25% surtax
Undistributed earnings or profits of prior years are taken into consideration
in determining unreasonable accumulation for the year concerned.
It is necessary to take into account from accumulations since the same may
have been sufficient to cover the business needs and additional
accumulation during the year involved would not reasonably be necessary.
11. Cyanamid Phil. Inc. vs CA (2000)
Facts:
CIR assessed petitioner for deficiency income tax for the taxable year 1981
including 25% surtax. Petitioner protested the assessment including the
25% surtax assessment on its accumulated earnings for the following
reasons: (1) it accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement indebtedness;
(2) it is a wholly owned subsidiary of American Cyanamid Co., a corporation
organized under the laws of the US, whose shares of stock are listed and
traded in the NY Stock Exchange. This being the case, no individual
shareholder income taxes by petitioners accumulation of earnings and
profits, instead of distribution of the same.
Issue: Whether petitioner is liable for the accumulated earnings tax for the
year 1981.
Held: Yes.
As to the contention of petitioner that the imposition of IAET should be
limited to closely held corporations
The amendatory provision of Section 25 of the 1977 NIRC which was PD
1973, enumerated the corporations exempt from the imposition of IAT: (1)
banks; (2) non-bank financial intermediaries; (3) insurance companies; (4)
corporations organized primarily and authorized by the CB to hold shares of
stocks of banks. Petitioner does not fall among those exempt classes,
As to the contention of petitioner that increase of working capital by a
corporation justifies accumulating income (Petitioner relied on the so-called
Bardahl formula, which allowed retention, as working capital reserve,
sufficient amounts of liquid assets to carry the company through one
operating cycle. Using said formula, petitioner contends that Cyanamid
needed at least P33,763,624 as working capital. As of 1981, its liquid asset
was only P25,776,991. Thus, it had a working capital deficit of P7,986,633
thus the accumulated income if P9,540,926 as of 1981 was validly
accumulated to increase its working capital)
Companies where the Bardahl formula was applied had operating cycles
much shorter than petitioner. As stressed by American authorities, although
the Bardahl formula was well-established and routinely applied by the
courts, it is not a precise rule. It is used only for administrative
convenience. Its use of the Bardahl formula merely creates a false illusion
of exactitude.
Other formulas are also used e.g. the ratio of current assets to current
liabilities and the adoption of the industry standard. The ratio of current
assets to current liabilities is used to determine the sufficiency of working
capital. Ideally, the working capital should equal current liabilities and there
must be 2 units of current assets for every unit of current liability, hence
the so-called 2 to 1 rule.
As of 1981, the working capital of Cyanamid was P25,776,991 or more than
twice its current liabilities. It therefore projects adequacy in working capital
which was expected to increase further when more funds were generated
from the succeeding years sales. Available income covered expenses or
indebtedness for that year, and there appeared no reason to expect an
impending working capital deficit which would have necessitated an
increase in working capital.
In order to determine whether profits are accumulated for the reasonable
needs to avoid the surtax upon SHs, it must be shown that the controlling
intention of the TP is manifest at the time of accumulation not intentions
declared subsequently, which are mere afterthoughts. Furthermore, the
accumulated profits must be used within a reasonable time after the close
of the taxable year. In the instant case, petitioner did not establish, by clear
and convincing evidence, that such accumulation of profit was for the
immediate needs of the business.
Using the Immediacy test, the words reasonable needs of the business
mean the immediate needs of the business. In the present case, petitioner
by adhering to the Bardahl formula failed to establish that the profits
accumulated were not beyond the reasonable needs of the company.
12. CIR vs. CA (1998)
Facts:
YMCA is a non-stock, non-profit institution. In 1980, it earned income from
leasing out a portion of its premises to small shop owners, like restaurants
and canteen operators, and from parking fees collected from non-members.
The CIR assessed YMCA for deficiency income tax. YMCA protested the
assessment but the same was denied by the CIR. It then elevated the case
to the CTA. In due course, the CTA issued a ruling in favour of YMCA. CIR
appealed to the CA which ruled in its favour. Upon MR however, the CA
reversed itself and held that income of YMCA from rentals of small shops
and parking fees are exempt from taxation.
CIR contends that while income received by organizations under Sec. 27
(now Sec.26) of the NIRC, as a rule, are exempted from payment of tax,
the exemption does not apply to income derived from any of their
properties, real or personal, or from any of their activities conducted for
profit, regardless of the disposition made of such income. Thus the rental
income derived by YMCA from the lease of its properties are not exempt
from income tax even if the same is exclusively used for the
accomloshment of its objectives.
Issue: Is the rental income of YMCA taxable?
Held: Yes
In the instant case, the exemption claimed by YMCA is expressly disallowed
by the very wording of the last paragraph of Section 27 of the NIRC which
mandates that the income of exempt organizations from any of their
properties, real or personal, be subject to the tax imposed by the same
Code. The last paragraph of said section unequivocally subjects to tax the
rent income of YMCA from its real properties.
The last paragraph of Section 27, YMCA argues should be subject to the
qualification that the income from the properties must arise from activities
conducted for profit before it may be considered taxable. This argument is
erroneous. As previously stated, a reading of said paragraph ineludibly
shows that the income from any property of exempt organizations, as well
as that arising from any activity it conducts for profit, is taxable. The phrase
any of their activities conducted for profit does not qualify the word
properties. This makes from the property of the organization taxable,
regardless of how that income is used whether for profit or for lofty non-
profit purposes.
YMCA contended that under the Article VI, Sec. 28(3) of the Constitution, it
is exempt not only from real property tax but also from income tax from
whatever source because it is a charitable institution.
SC said that what is exempted is not the institution itself but those lands,
buildings and improvements ADE used for religious charitable or
educational purposes. Further, said provision cited by YMCA covers only
property taxes. (*Thus the properties used by YMCA ADE for charitable
purposes are exempt from property but not from income tax).
YMCA also invokes Article XIV, Sec. 4(3) of the Constitution claiming that it
is a non-stock, non-profit educational institution whose revenues and assets
are ADE used for educational purposes thus it is exempt from property and
income taxes.
SC said that YMCA is not an educational institution. Under the Education
Act of 1982, the term refers to schools. The school system is synonymous
with formal education. There is nothing in the Amended Articles of
Incorporation and By-laws of YMCA that hints that it is a school or
educational institution.
Thus the income derived by petitioner from rentals of its real property is
subject to income tax.
13. CIR vs. Estate of Benigno Toda Jr. (2004)
Facts:
CIC authorized Toda, President and owner of 99.991% of its outstanding
capital stock to sell the CIbeles Bldg. and 2 parcels of land. Toda
purportedly sold the property for P100M to Rafael Altonaga who in turn
sold the same to Royal Match Inc. for P200M. These 2 transactions were
evidence by Deeds of Absolute Sale notarized on the same day by the same
NP.
For the sale of the property to RMI, Altonaga paid CGT of P10M. CIC filed
its corporate annual income tax return for the year 1989, declaring among
other things, its gain from the sale of real property. Meanwhile, Toda sold
his entire shares of stock in CIC to Le Hun T. Choa. 3 and years later,
Toda died.
The BIR sent an assessment notice and demand letter to CIC for deficiency
income tax for the year 1989.
The new CIC asked for reconsideration asserting that the assessment
should be directed against the old CIC which is owned by an entirely
different set of SHs; moreover, Toda had undertaken to hold the buyer of
his stockholdings and the CIC free from all tax liabilities for the FYs 1987-
1989.
The Estate of Benigno Toda Jr. also received a notice of assessment from
the BIR for deficiency income tax for the year 1989 which was protested by
the estate. The CIR dismissed the protest stating that a fraudulent scheme
was deliberately perpetuated by the CIC wholly owned by Toda by covering
the additional gain of P100M, which resulted in the change in the income
structure of the proceeds of the sale to an individual capital gains, thus
evading the higher corporate income tax of 35%.
CIR contends that the 2 transactions actually constituted a single sale of
the property by CIC to RMI and that Altonaga was neither buyer nor seller
of the same property. The additional gain of P100M (the difference
between the second simulated sale of P200M and the first simulated sale of
P100M) realized by CIC was taxed at the rate of only 5% CGT of Altonaga
instead of the 35% corporate income tax of CIC. The income tax return of
CIC for 1989 was with intent to evade payment of the tax and thus false or
fraudulent. Toda, being the registered owner of the 99.991% shares of CIC
and the beneficial owner of the remaining 0.009% shares should be held
liable for the deficiency income tax especially because the gains realized
from the sale were withdrawn by him as cash advances or paid to him as
cash dividends. Since he is already dead, his estate shall answer for his
liability.
CTA ruled that the scheme was merely tax avoidance and not tax evasion
and there being no fraudulent return filed, the prescriptive period for
assessment is 3 years after the last day prescribed by law for filing the
return. Thus the governments right to assess CIC for deficiency tax already
prescribed by April 15, 1993. CA affirmed CTA.
CIR points out that the documents evidencing the sales prove the fact of
fraud in that (1) the two sales were done simultaneously on the same date,
August 30, 1989 and (2) the Deed of Absolute Sale between Altonaga and
RMI was notarized ahead of the alleged sale by CIC and Altonaga and (3)
as early as May 4, 1989, CIC received P40million from RMI, not from
Altonaga.
Issues:
1. Is this a case of tax evasion or tax avoidance
2. Has the period for assessment of deficiency income tax for the
year 1989 prescribed?
3. Can respondent Estate be held liable for the deficiency income
tax of CIC for the year 1989?
Held:
1. It is tax evasion.
Tax evasion connotes the integration of 3 factors: (1) the end to be
achieved i.e. payment of less than that known by the TP to be legally due
or the non-payment of tax when it is shown that a tax is due; (2) an
accompanying state of mind which is described as being evil, in bad faith,
wilful or deliberate and not accidental and (3) a course of action or failure
of action which is unlawful.
All these factors are present in the instant case. The real buyer of the
properties was RMI, not Altonaga. As early as 1989, CIC had already
received part of the purchase price from RMI. Further, the P40M was
debited and reflected by RMI in its trial balance.
Altonaga was a close business associate and one of the many trusted
corporate executives of Toda. That he was a mere conduit finds support in
the admission of respondent Estate that the sale to him was part of the tax
planning scheme of CIC.
The scheme resorted by CIC in making it appear that there were 2 sales of
the subject properties i.e. from CIC to Altonaga and then from Altonaga to
RMI cannot be considered a legitimate tax planning bus is tainted with
fraud.
The objective of the sale to Altonaga was to reduce the amount of tax to be
paid esp. that the transfer from him to RMI would then be subject to 5%
individual CGT and not the 35% corporate income tax. Altonagas sole
purpose of acquiring and transferring title of the subject properties on the
same day was to create a tax shelter. He never controlled the property and
did not enjoy the normal benefits and burdens of ownership. The sale to
him was merely a tax ploy, a sham, and without business purpose and
economic substance. Doubtless, the execution of the 2 sales was calculated
to mislead the BIR with the end view of reducing the consequent income
tax liability.
The intermediary transaction i.e. the sale of Altonaga, which was prompted
more on mitigating of tax liabilities than for legitimate business purposes
constitutes tax evasion. The 2 sale transactions should be treated as a
single direct sale by CIC to RMI. CIC therefore is liable to pay 35%
corporate income tax for its taxable income in 1989. The 5% CGT is
inapplicable. Hence, the deficiency income tax assessment must be upheld.
2. The period for assessment has not prescribed.
Under Sec. 269 of the NIRC of 1986, in cases of fraudulent returns, false
returns with intent to evade tax and failure to file a return, the period
within which to assess the tax is 10 years from discovery of the fraud,
falsification or omission, as the case may be.
The transaction being tainted with fraud and there being a false return filed
by CIC in 1989, the prescriptive period should be 10 years from discovery
of the falsity. The false return was filed on April 15, 1990 and the falsity
thereof discovered only on March 8, 1991. The assessment for deficiency
income tax was issued on January 9, 1995, which is well within the
prescriptive period.
3. Respondent Estate is liable for the deficiency income tax of CIC
for the year 1989.
When Toda sold his shares to Le Hun T. Choa, he knowingly and voluntarily
held himself personally liable for all the tax liabilities of CIC and the buyer
for the years 1987-1989 as specifically provided in the Deed of Sale of
Shares of Stocks. He thereby voluntarily held himself personally liable
therefore. Respondent Estates obligation arose from Todas contractual
undertaking thus it cannot evade its liability for the deficiency income tax of
CIC.
14. Santos vs. Servier Philippines, Inc. (2008)
Facts:
Santos was the Human Resources Manager of Servier Philippines Inc. She
attended a meeting of all human resource managers of respondent
company in Paris France. She brought along her husband and child. While
there, she was hospitalized because of an allergic attack triggered by her
recent ingested meal of mussels in a restaurant. She later fell into a coma
for 21 days and stayed in the ICU for 52 days. During the time she was
confined at the hospital, her husband and son stayed in Paris. Her
hospitalization expenses as well as that of her husband and son were
shouldered by the company.
When Santos went back to the Philippines, she was confined to St. Lukes
for continuation of her medical treatment which was likewise paid by
respondent. The company was constrained to terminate her services upon
conclusion of petitioners physician that she had not fully recovered
mentally and physically.
As a consequence of her termination, respondent offered a retirement
package consisting of insurance pension at P20K/month for 60 months for
company sponsored group life policy in the amount of P1.2 M, educational
assistance worth P465K and medical and health care worth P200K. Of the
promised retirement benefits amounting to P1,063,841.76, only
P701,454.89 was released, the balance thereof withheld by the company
for tax purposes. Respondent company also failed to give the other benefits
included in the retirement package.
She instituted a case for illegal dismissal against the company before the
labor tribunal. The LA ruled dismissed her complaint. The NLRC partly
granted petitioners appeal stating that she was dismissed from
employment due to disease/disability under Art. 284 of the LC; that in view
of her non-entitlement to retirement benefits, the amounts received by her
should then be treated as separation pay. The NLRC thus ordered the
payment of the other benefits promised by respondent. The CA affirmed
the NLRC.
Upon petition with the SC, Santos changed her theory saying that she is not
entitled to separation pay but to retirement pay pursuant to Sec. 4, Art. V
of the companys Retirement Plan, on disability retirement. She thus prayed
for the full payment of her retirement benefits by giving back to her the
amount deducted for tax purposes.
Issues:
1. WON petitioner is entitled to separation pay under the law or
retirement benefits under the companys retirement benefit plan.
2. WON the retirement benefits received by petitioner are taxable/
WON the deduction of P362, 386.87 from petitioners retirement
benefits for tax purposes was proper.
Held:
1. Petitioner is entitled either to separation pay under the LC or
retirement benefits under the companys plan but not both.
Respondent dismissed petitioner from her employment due to
disease/disability under Art. 284 of the LC which entitles her the right to
demand separation pay. However, respondent established a retirement plan
in favour of all its EEs, which specifically provides for disability retirement.
On the basis of said retirement plan, the company offered petition a
retirement package consisting of retirement plan benefits, insurance
pension and educational assistance of which the amount of P1,063,841.76
represented the disability retirement benefit under the plan.
 The receipt of retirement benefits does not bar the retiree from receiving
separation pay. They are not mutually exclusive. However, this is only trure
if there is no specific prohibition against payment of both benefits in the
retirement plan and/or CBA. In the instant case, the Retirement Plan bears
petitioner from claiming additional benefits on top of that provided for in
the Plan. As such, she is entitled only to either separation pay under the
law or retirement benefits under the Plan but not both. Clearly, the benefits
received by petitioner represent her retirement benefits under the Plan.
2. The retirement benefits received by petitioner are taxable/
the deduction was proper.
Retirement benefits are exempt from income tax, provided that certain
requirement are met. For the retirement benefits to be exempt from
withholding tax, the TP is burdened to prove the ff: (1) a reasonable
private benefit plan is maintained by the ER; (2) the retiring official or EE
has been in the service of the same ER for at least 10 years; (3) the retiring
official or EE is not less than 50 years of age at the time of his retirement;
and (4) the benefit had been availed of only once.
Petitioner was qualified for disability retirement. At the time of such
retirement, she was only 41 years of age; and had been in the service for
more or less 8 years. As such, the above provision is not applicable for
failure to comply with the age and length of service requirement. Therefore
respondent company cannot be faulted for deducting from petitioners total
retirement benefits the amount of P362, 386.87 for taxation purposes.
15. Intercontinental Broadcasting Corp. vs. Amarilla, et al. (2006)
Facts:
On various dates, petitioner employed the services of respondents Amarilla,
Quiones, Otadoy and Lagahit. Later on, the Government sequestered IBC-
13 and took over its management and operations from its owner, Roberto
Benedicto. Consequently, the government and Benedicto entered into a
temporary agreement under which the latter would retain management and
operation of the station. A compromise agreement was entered into by the
PCGG and Benedicto where the latter transferred and assigned all his
rights, shares and interests in the station to the government, which
agreement was later on submitted to the SB.
In the meantime, the 4 EEs retired from the company and received, on
staggered basis, their retirement benefits under the companys 1993 CBA.
In the meantime, a P1500 salary increase was given to all EEs of the
company, current and retired effective 1994. However, when the four
retirees demanded theirs, petitioner refused and instead informed them
that their salary differentials would be used to offset the tax due on their
retirement benefits in accordance with the NIRC.
The 4 retirees filed separate complaints against IBC for unfair labor practice
and non-payment of backwages with the NLRC. They averred that their
retirement benefits are exempt from income tax under the NIRC. They
pointed out that under Art. VIII of the CBA, only those EEs who reached
the age of 60 were considered retired and those under 60 had the option to
retire.
For its part, petitioner averred that under Section 21 of the NIRC, the
retirement benefits received by EEs from their ERs constitute taxable
income. While retirement benefits are exempt from taxes under Sec. 28(b)
of the Code, the law requires that such benefits should be in accord with a
reasonable retirement plan duly registered with the BIR after compliance
with the requirements therein enumerated. Since its retirement plan in the
1993 CBA was not approved by the BIR, complainants were liable for
income tax on their retirement benefits. Accordingly, petitioner was obliged
to withhold the taxes under the NIRC otherwise it would be civilly and
criminally liable. Thus the offsetting of the salary differentials with the
withholding taxes due on the retirement benefits. Consequently, the
retirees were liable for payment of the balance paid by the company as
taxes after offsetting the salary differentials.
The LA ruled that the claims of Quiones and Otadoy had already
prescribed. The retirement benefits of Lagahit and Amarilla, on the other
had, were exempt from income tax under Sec. 28(b) of the NIRC. However,
the differentials due to the two complainants were computed 3 years
backwards due to the law on prescription. On appeal, the NLRC affirmed
the LA stating that the benefits of the retirement plan under the CBA were
subject to tax as the scheme was not approved by the BIR. However, it had
also been the practice of petitioner to give retiring EEs their retirement pay
without tax deductions and there was no justifiable reasonable for IBC to
deviate from such practice. It is deemed to have assumed the tax liabilities
of the complainants on their retirement benefits hence it had no right to
deduct taxes from their salary differentials. CA affirmed the NLRC.
Issues:
1. WON the retirement benefits of respondents are part of their
gross income;
2. WON petitioner is stopped from reneging on its agreement with
respondents to pay the taxes on said retirement benefits.
Held:
1. The retirement benefits are part of respondents gross income
and are taxable.
Petitioner is not obliged to pay for the taxes on respondents retirement
benefits under its CBA. There is no provision in the CBA where petitioner
obliged itself to pay taxes on retirement benefits of its EEs. Under the
NIRC, retirement benefits are part of respondent EEs gross income subject
to tax. For retirement benefits to be exempt from withholding tax, the ff.
must concur: (1) a reasonable private benefit plan is maintained by the ER;
(2) the retiring official or EE has been in the service of the same ER for at
least 10 years; (3) the retiring official or EE is not less than 50 years of age
at the time of his retirement; and (4) the benefit had been availed of only
once.
Article VIII of the companys 1993 CBA provides for two kinds of retirement
plans compulsory and optional.
1. Compulsory retirement if EE has reached the age of 55
2. Optional retirement Any covered EE, regardless of age, who
has rendered at least 5 years of service may voluntarily retire
and the company agrees to pay Long Service Pay to covered
EEs.
Respondents were qualified to retire optionally from their employment with
petitioner. However, there is no evidence on record that the 1993 CBA had
been approved or was ever presented to the BIR; hence, the retirement
benefits of respondents are taxable.
2. Petitioner was guilty of promissory estoppels.
Under Sec. 80 of the NIRC, petitioner as ER, was obliged to withhold taxes
on said benefits and remit the same. However, petitioner did not withhold
taxes due on their retirement benefits caused it had obliged itself to pay
the taxes due thereon. This was done to induce respondents to agree to
avail of the optional retirement scheme.
Respondents received their retirement benefits in 3 staggered instalments
without any tax deduction for the simple reason that petitioner had
remitted the same to the BIR with the use of its own funds conformably
with its agreement with the retirees. It was only when respondents
demanded the payment of their salary differentials that petitioner alleged,
for the first time, that it had failed to present the 1993 CBA to the BIR for
approval, rendering such retirement benefits not exempt from taxes;
consequently, they were obliged to refund to it the amounts it had remitted
to the BIR in payment of their taxes. Petitioner used this failure as an
afterthought, as an excuse for its refusal to pay respondents salary
differentials. Patently, petitioner is stopped from doing so. It cannot renege
on its commitment to pay the taxes on respondents retirement benefits on
the pretext that the new management had found the policy
disadvantageous for that would amount to a breach of contract.
Moreover, petitioner cannot hide behind the fact that, under the
compromise agreement between the PCGG and Benedicto, the latter had
assigned and conveyed to the government his shares, interest and rights in
petitioner company. Respondents retired only after the Court affirmed the
compromise agreement and the execution by petitioner and the union of
their 1993 CBA while the civil case was still pending in the SB. There is no
showing that before respondents demanded payment of their salary
differentials, petitioner had rejected its commitment to shoulder the taxes
on respondents retirement benefits and sought is nullification before the
court; nor is there any showing that petitioners new management filed nay
criminal or administrative charges against the former officers/BOD
comprising the old management relative to the payment of the taxes on the
retirement benefits.
16. Atlas Consolidated Mining vs. CIR; CIR vs. Atlas Consolidated
Mining (1981)
Facts:
Atlas is a domestic corporation engaged in the mining industry. The CIR
assessed against Atlas the sum of P546, 295.16 and P215, 493.96 or a total
of P761, 789.12 as deficiency income taxes for the years 1957 and 1958.
For the year 1957, it was the opinion of the CIR that Atlas is not entitled to
exemption from income tax under Sec. 4 of RA 909 because the same
covers only gold mines.
For the year 1958, the assessment of deficiency covers disallowance of
items claimed by Atlas as deductible from gross income. Subsequently, the
SOF ruled that the exemption in RA 909 embraces all new mines and old
mines whether gold or other minerals. Accordingly, the CIR issued a revised
assessment eliminating the assessment in 1957 and reducing the
assessment in 1958 to 38, 646.82 to which Atlas appealed to the CTA,
assailing the disallowance of certain items as deductible from its gross
income for 1958 including transfer agents fee, stockholders relation
service fee, US stock listing expenses, suit for expenses and provision for
contingencies. The CTA rendered a decision allowing said disallowed items,
except the stockholders relation service fee and suit expenses. Atlas
appealed only that portion of the CTAs decision disallowing the
stockholders relation service fee amounting to P25, 523.14.
It is the contention of Atlas that said amount paid as annual public relations
expenses is a deductible expense from gross income under Section 30 (a)
(1) of the NIRC. Atlas claimed that it was paid for the services of a public
relations firm, PK Macker & Co., a reputable relations consultant in NY,
USA, hence an ordinary and necessary business expense in order to
compete with other corporations interested in the investment market in the
US. It is the stand of Atlas that information given out to the public in
general and to the SH in particular by the PK Macker & Co., concerning the
operation of Atlas was aimed at creating a favourable image and goodwill
to gain or maintain their patronage.
On the other hand, the CIR contended that the transfer agents fee, US
stock listing expenses, suit for expenses and provision for contingencies
should be disallowed for not being ordinary and necessary and not incurred
in trade or business as required by the NIRC. He asserted that said fees
were therefore incurred not for the production of income but for the
acquisition of capital in view of the definition that an expense is deemed to
be incurred in trade or business if it was incurred for the production of
income, or in the expectation of producing income for the business.
Issues:
1. WON the stockholders relation service fee is an ordinary and
necessary expense or a capital expense;
2. WON the other expenses are ordinary and necessary expenses
deductible from gross income.
Held:
1. The SH stockholders relation fee is a capital expense.
Statutory test of deductibility For a business expense to be deductible,
three conditions are imposed: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it
must be paid or incurred in carrying a trade or business. In addition, not
only must the TP meet the business test, he must substantially prove by
evidence or records the deductions claimed otherwise the same will be
disallowed. Mere allegation of the TP that an item of expense is ordinary
and necessary does not justify its deduction.
Although there is no single definition of what constitutes and ordinary/
necessary expense, there are guiding principles used by the Court for
adjudication of conflicting claims:
An expense is considered necessary where the expenditure is
appropriate and helpful in the development of the TPs business.
It is ordinary when it connotes that payments be habitual or
normal in the sense that the same TP will have to make them
often; the payment may be unique or non-recurring to the
particular TP affected.
There is no hard and fast rule on the matter.
The right to a deduction depends in each case on the particular
facts and the relation of the payment to the type of business in
which the TP is engaged.
The intention of the TP often may be the controlling factor.
Whether an ordinary and necessary expense is deductible must
be determined from the nature of the expenditure itself which in
turn depends on the extent and permanency of the work
accomplished by the expenditure.
It appears that in 1957, Atlas increased its capital stock from P15M to
P18.325M. It was claimed by Atlas that is shares of stock worth P3.325M
were sold in the US because of the services by PK Macker & Co. The CTA
ruled that the information about Atlas given out and played up in the mass
communication media resulted in full subscription of the additional shares
issued by Atlas; consequently, the questioned item, stockholders relation
service fee, was in effect spent for the acquisition of additional capital,
ergo, a capital expenditure.
Said expense is not deductible from Atlas gross income in 1958 because
expenses relating to recapitalization and reorganization of the corporation,
the cost of obtaining stock subscription, promotion expenses and
commission or fees paid for the sale of stock reorganization are capital
expenditures.
That the expense in question was incurred to create a favourable image of
the corporation in order to gain and maintain the publics and its SHs
patronage, does not make it a deductible business expense. Efforts to
establish reputation are akin to the acquisition of capital assets and
therefore expenses related thereto not business expense but capital
expenditures.
2. The listing fee and provision for contingencies are deductible
ordinary and necessary expense while the litigation expenses
are not deductible.
As to the listing fee
The Chesapeake decision relied upon by the CTA is controlling with the
facts and circumstances of the instant case. In the Dome Mines Ltd. Case,
relied upon by the CIR, the stock listing fee was disallowed as a deduction
not only because the expenditure did not meet the statutory test but also
because the same was paid only once and the benefit acquired thereby
continued indefinitely, whereas, in the Chesapeake Corporation case, fee
paid to the stock exchange was annual and recurring. In the instant case,
we deal with the stock listing fee paid annually to a stock exchange for the
privilege of having its stock listed. The CTA rejected the Dome Mines case
because it involves a payment made only once, hence, it was held therein
that the single payment made to the stock exchange was capital
expenditure, as distinguished from the instant case, where payments were
made annually. For this reason, we hold that the listing fee is an ordinary
and necessary business expense.
As to the provisions for contingencies
As ruled by the CTA, the said amount was in effect added to Atlas taxable
income. The same being factual in nature and supported by substantial
evidence, such findings should not be disturbed on appeal.
As to the litigation expenses
The litigation expenses under consideration were incurred in defense of
Atlas title to its mining properties. It is well-settled that litigation expenses
incurred in defense or protection of title are capital in nature and not
deductible. Likewise, expenditures in defense of title to property constitute
part of the cost of the property and are not deductible as expense.
Surprisingly, the investigating revenue examiner recommended a partial
disallowance of only P13, 333.30 instead of the entire amount of P23,
333.30, which was further reduced by the CIR to P6, 666.65. Whether it
was due to mistake, negligence or omission of the officials concerned, the
arithmetical error committed herein should not prejudice the Government.
The Government cannot be stopped by the mistakes of its officials or
agents. Therefore the amount of P17, 499.98 (3/4 of P23, 333.30)
representing suit expenses be disallowed as deduction instead of P6,
666.65 only.
*deductibility of the transfer agents fee was not appealed by the CIR
17. ESSO Standard Eastern Inc. vs. CIR (1989)
Facts:
Petitioner ESSO deducted from its gross income for 1959 and 1960 as part
of its ordinary and necessary business expenses the amounts of P340,
822.04 and P1,226,647.72 representing margin fees it had paid to the
Central Bank on its profit remittances to its New York Head Office.
The CIR assessed ESSO for deficiency income taxes representing the
disallowance of the margin fees. ESSO partially settled this deficiency
assessment. It claimed for refund of its overpayment of its 1959 and 1960
income taxes as well as the excess interest thereon. The CIR denied the
claim saying that the margin fees paid to the CB could not be considered
taxes or allowed as deductible business expenses.
ESSO appealed to the CTA and sought refund contending that the margin
fees were deductible from gross income either as a tax or as ordinary and
necessary business expense. ESSO claims that the fees were paid for its
remittances as part of the profits to the Head Office in NY in the US
therefore the same was an expenditure necessary and proper for the
conduct of its corporate affairs. The CTA denied the claim for refund but
sustained its claim for refund of the overpayment of the interest.
Issues:
1. Whether RA 2009 entitled An Act to Authorize the Central Bank
of the Philippines to Establish a Margin over Banks Selling Rates
of Foreign Exchange is a police or revenue measure.
2. Whether the margin fees are deductible from petitioners gross
income as ordinary and necessary expense.
Held:
1. Margin fee under RA 2009 was imposed by the State in the
exercise of its police power and not the power of taxation
(Margin fee is not a tax).
The SC held in Caltex Phil Inc. vs. Acting COC
A margin levy on foreign exchange is a form of exchange control or
restriction designed to discourage imports and encourage exports, and
ultimately to curtail any excessive demand upon the international reserve in
order to stabilize the currency xxxxx In the case of the margin levy, the
immediate impact is on the rate of foreign exchange; in fact its main
function is to control the exchange rate without changing the par value of
the peso xxxx By its nature, the margin levy is part of the rate of exchange
as fixed by the government.
As to the contention that the margin levy is a tax on the purchase of
foreign exchange and hence should not form part of the exchange rate,
suffice it to state that it forms part of the exchange rate for a tax is levied
to provide revenue for government operations while the proceeds of the
margin fee are applied to strengthen our countrys international reserves.
Similarly, the Court held in Chamber of Agricultural and Natural Resources
of the Philippines vs. CB that margin fees are applied to strengthen the CBs
international reserve.
2. The margin fees paid by petitioner for remittances to its Head
Office in NY are not deductible business expense.
As held by the SC in Atlas Consolidated Mining vs. CIR
Statutory test of deductibility For a business expense to be deductible,
three conditions are imposed: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it
must be paid or incurred in carrying a trade or business. In addition, not
only must the TP meet the business test, he must substantially prove by
evidence or records the deductions claimed otherwise the same will be
disallowed. Mere allegation of the TP that an item of expense is ordinary
and necessary does not justify its deduction.
As held by the CTA
Considering the foregoing test of what constitutes an ordinary and
necessary deductible expense, it may be asked: Were the margin fees paid
by petitioner on its profit remittance to its Head Office in NY appropriate
and helpful in the TPs business in the PH? Were the margin fees incurred
for purposes proper to the conduct of the affairs of petitioners branch in
the PH? Or were they incurred for the purpose of realizing a profit or
minimizing a loss in the PH? Obviously not. The margin fees are not
expenses incurred in the disposition of said incomes; expenses for the
remittance of funds after they have already been earned by petitioners
branch in the PH for the disposal of its Head Office in NY which is already
another distinct and separate income TP;
Since the margin fees in question were incurred for the remittance of funds
to petitioners Head Office in NY, which is a separate and distinct income TP
from the branch in the PH, for its disposal abroad, it can never be said
therefore that the margin fees were appropriate and helpful in the
development of petitioners business in the PH exclusively or were incurred
for purposes proper to the conduct of the affairs of petitioners branch in
the PH exclusively or were for purposes of realizing a profit or minimizing a
loss in the PH exclusively. If at all, the margin fees were incurred for
purposes proper to the conduct of the corporate affairs of Standard
Vacuum Oil Company in NY, but certainly not in the PH.
ESSO has not shown that the remittance to the head office of part of its
profits was made in furtherance of its own trade or business. ESSO, having
assumed an expense properly attributable to its head office, cannot now
claim this as an ordinary and necessary expense paid or incurred in carrying
its own trade and business. Hence, the same is not deductible.
18. CIR vs. General Foods (Phils.) Inc. (2003)
Facts:
General Foods Inc, which is engaged in the manufacture of beverages such
as Tang, Calumet and Kool-Aid, filed its ITR for the fiscal year ending Feb.
28, 1985 and claimed as deduction for business expense the amount of
P9,461,246 for media advertising for Tang,
The CIR disallowed 50% of the deduction claimed by the corporation and
assessed it for deficiency income taxes in the amount of P2,635,141,42.
General Foods appealed to the CTA which denied the appeal saying that
the media advertising expense is not an ordinary and business expense but
were rather incurred to create or maintain some form of good will for the
petitioner thus should be properly spread out over a period of time. The
CA, however, reversed the CTA holding that the unreasonableness of the
claimed deduction was not adequately established. Hence, this petition.
The CIR maintains that the subject advertising expense was not ordinary on
the ground that it failed the two conditions set by US jurisprudence: first,
reasonableness in the amount incurred and second, the amount incurred
must not be a capital outlay to create goodwill for the product and/or
respondents business. Otherwise, the expense must be considered capital
expenditure.
Issue: WON the subject media advertising expense for Tang was an
ordinary and necessary expense fully deductible under the NIRC.
Held: Respondents media advertising expense is not an ordinary
and necessary expense but a capital expenditure which should be
amortized over a reasonable period.
To be deductible from gross income, the subject advertising expense must
comply with the following requisites: (1) the expense must be ordinary and
necessary; (b) it must have been paid or incurred during the taxable year;
(c) it must have been paid or incurred in carrying on the trade or business
of the TP; and (d) it must be supported by receipts, records or other
pertinent paper.
There being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: they type and
size of business in which the TP is engaged; the volume and amount of its
net earnings; the nature of the expenditure itself; the intention of the TP
and the general economic conditions.
In the case at bar, the P9, 461,246 claimed as media advertising expense
for Tang alone was almost of its total marketing expenses. Aside from
that, it also claimed P2,67,328 as other advertising and promotions expense
and another P1,546,614 for consumer promotion. Furthermore, the subject
media advertising expense was almost double the amount of the
corporations P4,640,636 general and administrative expenses. Thus the received by the company as managing agent of Paradise Farms Inc and
same is inordinately large. IT cannot be considered an ordinary expense. Realty Investments Inc., was inordinately large and could not be accorded
the treatment of ordinary and necessary expense allowed as deduction
Advertising is generally of two kinds under the Tax Code.

1. Advertising to stimulate the current sale of merchandise or use
of services;
2. Advertising designed to stimulate the future sale of merchandise
or use of services.
The second type involves expenditures incurred, in whole or in part, in
whole or in part to create some form of goodwill for the TPs trade or
business or for the industry or profession of which he is a member. If the
expenditures are for the advertising of the first kind, then, except as to the
question of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If, however, the
expenditures are for advertising of the second kind, then normally they
should be spread out over a reasonable period of time.
The subject advertising expense was of the second kind. Not only was the
amount startling, the corporation itself admitted that the same was incurred
in order to protect its brand franchise, a critical point during the period
under review.
The protection of brand franchise is analogous to the maintenance of
goodwill or title to ones property which is a capital expenditure which
should be spread out over a reasonable period of time. It is akin to the
acquisition of capital assets and therefore expenses related were not to be
considered business expense but as capital expenditures.
True, it is the TPs prerogative to determine the amount of advertising
expenses it will incur and where to apply them. Said prerogative is however
subject to certain conditions. The first relates to the extent to which the
expenditures are actually capital outlays; this necessitates an inquiry into
the nature or purpose of such expenditures. The second, which must be
applied in harmony with the first, relates to whether the expenditures are
ordinary and necessary. Concomitantly, for an expense to be considered
ordinary, it must be reasonable in amount. The subject media advertising
expense in the amount of P9, 461,246 is doubtlessly unreasonable.
If such were allowed, then Hoskins would receive on these three times
alone (salary, bonus and supervision fee) a total of P184, 977.91, which
would be double petitioners reported income for the year of P92, 540. 25.
The fact that such payment was authorized by a resolution of the BOD is of
no moment as Hoskins holding 99.6% of the capital stock wielded power
and influence in the making og the companys policies and decisions.
As a general rule, bonuses to EEs made in good faith and as additional
compensation are deductible provided that certain conditions precedent are
met: (1) the payment of the bonuses is in fact compensation; (2) it must
be for personal services actually rendered; and (3) the bonuses, when
added to the salaries are reasonable (Test of Reasonable Compensation).
There is no fixed test for determining the reasonableness of a given bonus
as compensation. It depends upon many factors the amount and quality
of the services performed relating to the business, payment made in good
faith, the character of the TPs business, the size of a particular business,
the EEs qualifications and contributions to the business venture; and
general economic conditions. However, the situation must be considered as
a whole. No single factor is decisive.
Petitioners case fails to pass the test. On the right of the ER as against the
CIR to fix the compensation of its officers and EEs, we hold that while the
ERs right may be conceded, the question of the allowance thereof as
deductible expense for income tax purposes is subject to determination by
respondent CIR.

19. CM Hoskins & Co, Inc. vs. CIR (1969)

Facts:

Petitioner, a DC engaged in the real estate business as brokers, managing

agents and administrators, filed its IRT for its fiscal year ending Sept. 30,
1957 showing a net income of P92, 540.25 and a tax liability due thereon of
P18, 508,00, which it paid in due course. The CIR disallowed four items of
deduction and assessed petitioner for income tax deficiency in the amount
of P28, 054.00 plus interests. The CTA upheld the disallowance of the
principal item of petitioners having paid to Mr. CM Hoskins, its founder and
controlling SH the amount of P99, 977.91 representing 50% of supervision
fees earned by it and set aside the disallowance of the three other minor
items. The CTA determined petitioners tax liability as P27, 145.00.

Petitioner questions the CTAs findings that disallowed payment to Hoskins

was an inordinately large one which bore a close relationship to the
recipients dominant stockholdings and therefore amounted in law to a
distribution of its earnings and profits.

Issue: WON the disallowance of the supervision fees paid by the

corporation to its controlling SH was proper.

Held: The disallowance was proper. The supervision fees paid to the
controlling SH cannot be considered as a reasonable expense deductible
from gross income.

As found by the CRA, petitioner was founded by CM Hoskins and of the

1000 shares of the corporation, Hoskins owned 996 or 99.6% thereof with
the remaining four shares being nominally held by other officers.

Considering that in addition to being Chairman of the BOD, Hoskins also

receives a 50% share of the sales commissions earned by the company
besides a monthly salary of P3, 750 amounting to an annual compensation
of P45, 000 and an annual salary bonus of P40, 000 plus free use of the
company car and receipt of other similar allowances and benefits, the CTA
correctly ruled that the payment by the company to Hoskins of the
additional sum of P99, 977 as his 50% share of the 8% supervision fees