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1. Evangelista vs. CIR (1957) a.

The pool is a taxable entity distinct from the

ceding companies;
Facts: b. Sec. 24 (b) (1) pertains to tax on foreign
corporations hence cannot be claimed by the
Petitioners borrowed from their father a certain sum and together with their ceding companies which are domestic
personal monies used the same for the purpose of buying real properties. corporations;
They appointed their brother to manage the properties with full powers to c. Munich cannot claim exemption under the same
transact any business concerning the same. Petitioners then leased the provision because the same specifically taxed
properties to various tenants. CIR assessed them for income tax on dividends, the type of remittance forwarded to it
corporation, real estate dealers fixed tax and corporation residence tax. by the pool;
d. Munich is an associate of the ceding companies
Issue: WON petitioners are subject to tax on corporations. in the entity formed pursuant to the reinsurance
Held: Yes. e. Munich under the pool arrangement shared in
the income and losses.
f. It cannot be exempted under the RP-West
The two elements of a partnership as defined under the Civil Code are
Germany Tax Treaty as the said treaty was not
yet in effect at the time of the assessment.
1. There is an agreement to contribute money, property or industry
3. Wise & Co. Inc., et al. vs. Meer (1949)
into a common fund. Here petitioners contributed money and
2. With the intention to divide the profits among the contracting
i. Said common fund was not something they found Plaintiffs were stockholders of Manila Wine Merchant Ltd. (HK Company), a
already in existence; foreign corporation authorized to do business in the PH. The BOD of the HK
ii. They invested the same, not merely on one Company adopted resolutions to enable the company to sell its business
transaction, but in a series of transactions; and assets to the Manila Wine Merchants Inc., a PH corporation. A contract
iii. The lots were leased to several persons and of sale was executed and final resolutions completing said sale and
petitioners derived rental income therefrom; tranches of business and assets were adopted by the BOD. Consequently,
iv. The properties have been under the management of the BOD declared and made distribution of its earnings to its stockholders.
one person; PH income tax has been paid by the HK Company on said surplus. The SHs
v. The foregoing conditions existed roughly for 15 years of HK Company by proper resolution directed the company to be voluntarily
already; liquidated and its capital distributed. HK Co. was duly dissolved. Plaintiffs
vi. No contrary evidence was presented by petitioner. 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.
Having formed an unregistered partnership, the same is liable for income
tax on corporations.
2. Afisco Insurance Corp. vs. CA (1999)
1. WON the amounts received by plaintiff-stockholders are
ordinary dividends or liquidating dividends.

Petitioners are 41 non-life insurance companies organized under the laws of SC: They are liquidating dividends
the PH. Pursuant to reinsurance treaties with an NRFC (Munich), a pool
composed of petitioner insurance companies was formed. The pool remits i. The later execution of the formal deed of sale and the
profits derived from the reinsurance treaties to the ceding companies and successive distributions of the amounts in question among
the NRFC. The CIR assessed the pool of insurers for deficiency corporate the SHs of the HK Co. were steps in its complete
taxes. liquidation;
ii. The distributions were not in the ordinary course of
Issues: 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
1. WON the clearing house/ insurance pool was a partnership or an
been decided upon, which makes them payment for the
association taxable as a corporation;
surrender and relinquishment of the SHs interest in the
2. WON the remittance of petitioner and Munich of the respective
corporation or the so-called liquidating dividends;
shares of reinsurance premiums pertaining to their individual and
iii. The stipulation of facts, being excerpts of the directors
separate contracts of reinsurance were dividends subject to tax.
meeting of the HK Co., that the surplus to be distributed be
that resulting after providing for the return of capital and
Held: necessary and various expenses;
iv. Thus, the distributions were to be made in the course of or
1. The ceding companies entered into a pool agreement or an as a result of the HK Co.s liquidation and that said
association that would handle all the insurance businesses liquidation was to be complete and final;
covered by the reinsurance treaties. The following indicates a v. Although the deed of sale was made only on July 22, 1937,
partnership/ association covered by Sec. 24 of the NIRC it was expressly stipulated that the said sale shall take
i. The pool has a common fund; effect as of June 1, 1937 and that if the HK Company
ii. The pool functions through an executive board; would run the business thereafter, it did so only in trust for
iii. While the pool is not a reinsurer and does not issue its new owner, the Manila Company. How could they
any insurance policy, its work is indispensable, deemed all the business and assets of the corporation sold
beneficial and economically useful to the business of as of June 1, 1937 and still sat that said corporation as a
the ceding companies and to Munich. going concern and distribute ordinary dividends thereafter?
- Profit motive is the primordial reason to the vi. Tge fact that the distributioins were called dividends and
pools formation. some of them were made before liquidation and dissolution
2. Remittances made by the pool to petitioner ceding companies is not controlling. The determining element is whether the
and Munich are subject to tax on dividends distributions were in the ordinary course of business and
i. No double taxation. The pool is a taxable entity with intent to maintain the corporation as a going concern
different from the member companies and the tax on or after deciding to quit and with intent to liquidate the
income of the pool is different from the tax on business;
dividends received by the ceding companies;
ii. No exemption form tax
vii. The amounts distributed were not in the nature of The source of income is the property, activity or service that produced the
recurring return on stock, in which case, it is an ordinady income. For the source of income to be considered as coming from the
dividen. If the corporation is really winding up, its business Philippines, it is sufficient that the income is derived from activity within the
or recapitalizing and ___________, the distribution may Philippines.
properly be treated as a complete or partial liquidation and
as payment by the corporation to the SH of his stock. 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
2. WON such amounts are taxable. determines the source of income.

SC: Yes Respondent presented no contracts or orders signed by the customers in

Germany to prove the sales transactions therein. The faxed documents
Our law at the time of the transaction in question, in providing that where a presented did not constitute substantial evidence to support the conclusion
corporation, etc distributes all its assets in complete liquidation or that it was in Germany where she performed the income-producing service
dissolution, the gain realized or loss sustained by the SH is taxable as which have rise to the reported monthly sales. Thus she failed to prove that
income or deductible as loss as the case may be, in effect treated such her income was from sources outside the PH and exempt from the
distributions as payment in exchange for the stock or share. 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.
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 5. Tan vs. del Rosario (1994)
his stock to the SH, or over its FMV, is taxable profit.
3. WON such distribution are taxable as dividends.
These are consolidated petitions questioning the constitutionality of RA
SC: Yes. The general definition of a dividend in Sec. 24(a) was not 7496 or the Simplified Net Income Taxation Scheme and assailing Section 6
intended to aply to distributions made to the SHs in the liquidation of the of RR No. 2093 as it is alleged to apply the SNITS to General Professional
corporation but that it was intended that such distributions should be Partnerships.
governed by Sec. 201(c), which, dealing specifically with such liquidation,
provided that the amounts distributed should be treated as payments in Issue: Is the SNITS applicable to GPPs?
exchange for stock and that any gain realized thereby should be taxed to
the SHs as other gains or profits. Held: Yes.

4. WON the distributions should be subject not only to the normal GPPs, unlike ordinary business partnerships which are treated as a
tax but also the additional tax. corporation for taxation purposes thus subject to corporate income tax, is
not itself an income taxpayer.
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 The income tax is imposed not on the professional partnership which is tax
pays to them their invested capital, namely the amount which they had exempt, but on the partners themselves in their individual capacity
paid for their stocks thus wiping out their interest in the company. computed on their distributive shares of partnership profits.

5. WON plaintiffs should not be subject to PH income tax since There is no distinction in income tax liability between a person who
they are non-resident aliens and the profit realized by them does practices his profession alone or individually and one who does it through
not constitute income in the PH. partnership with others in the exercise of a common profession.

SC: They are subject to PH income tax. The HK Company was domiciled The SNITS is not applicable to corporations and taxable partnerships since
and doing business in the PH. The profits, earnings, and assets including they are independently subject to payment of income tax. Exempt
the proceeds from which the distribution was made, had been earned and partnerships such as GPPs were the partners themselves, not the
acquired in the PH. partnership, who are liable for income tax in their individual capacity, is
covered by SNITS.
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.
6. CIR vs. PAL (2009)
4. CIR vs. Baier-Nickel (2000)
PAL incurred zero taxable income for the FY 2000-2001. PAL did not pay
Respondent Baier-Nickel, non-resident German citizen, is the President of any MCIT for the period. It requested for refund of its unapplied creditable
Jubanitex, a domestic corporation engaged in the manufacturing, etc. of withholding tax for the same period; however, the CIR denied the claim for
embroidered textile products. The corporation appointed and engaged the refund and assessed PAL for deficiency MCIT for said fiscal year.
services of respondent as Commission agent. It was agreed that she will
receive 10% sales commission on all sales actually concluded and collected Issue: WON PAL is liable for deficiency MCIT in FY 2000-2001.
through her efforts. She filed her ITR and filed and claimed for refund the
amount alleged to have been mistakenly withheld and remitted by Held: No.
Jubanitex to the BIR. Respondent contended that her sales commission
income is not taxable in the PH because the same was compensation for Section 13(a) of PD 1590 refers to basic corporate income tax which relates
services rendered in Germany and therefore considered income from
to the general rate of 35% (32% by the year 2000) in Section 27(1) of the
sources outside the PH. No action was taken by the CIR thus she filed a NIRC of 1994. Section 13(a) of PD 1590 requires that the basic corporate
petition before the CTA which rendered a decision denying her claim. CA
income tax be computed in accordance with the NIRC, using the rates
reversed CTA. In the present petition, the CIR contended that the situs/
prescribed therein.
source of income should be the physical source of the money earned.
Basic corporate income tax is computed based on a taxpayers net
Issue: Whether respondents sales commission income is taxable in the taxable income while MCIT is computed based on gross income.
Even if the basic corporate income tax and MCIT are both income
Held: Yes. 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 Citytrust and Asiabank paid 5% gross receipts tax in their total gross
included in all other taxes: from which PAL is exempted. Said taxes are receipts. Subsequently, a CTA decision came out ruling that the basis in
merely paid in the alternative. 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
The evident intent of Section 13 of PD 1590 is to extend to PAL tax taxable gross receipts. On the strength of the above-ruling, Citytrust and
concessions not ordinarily available to other domestic Asiabank filed a claim for refund with the CIR. The CIR denied the claim for
corporations. refund.

The Substitution Theory of CIR is untenable. By basing the tax on the Issue: WON the 20% FWT on a banks passive income form part of the
annual net taxable income, PD 1590 necessarily recognized the situation in taxable gross receipts for the purpose of computing the 5% GRT.
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 Held: Yes.
instance, it has lower tax liability than that provided by Section 13(b) of PD
1590. Gross receipts means the entire receipts without any deductions. On the
contention of Citytrust and Asiabank that GRT is imposed on income
PD 1590 intended to give PAL the option to avail itself of actually received based on Section 4 (e) of RR No. 12-80, the SC said that
subsection (a) or (b). Either option excluded payment of other taxes and Section 4 (e) merely recognizes that income may be taxable either at the
dues imposed or collected. PAL has the option to choose the alternative time of its actual receipt or its accrual, depending on the accounting
that results to lower taxes. It is not the fact of payment that exempts it but method of the taxpayer. It does not really exclude accrued interest income
the exercise of its option. from taxable gross receipts but merely postpones its inclusion until actual
payment of the interest to the lending bank. RR No. 12080 has already
If PAL is subjected to MCIT, the provision in PD 1590 on net loss been superseded by RR No. 17084 which includes all interest income in
carry-over will be rendered nugatory. Net loss carry-over is material computing the GRT.
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 Actual receipt may either be physical or constructive. When the depositary
of basic corporate income tax option when it is in a net loss position bank withholds the final tax to pay the tax liability of the lending bank,
because it will be compelled to pay the necessarily higher MCIT. there is prior to withholding, a constructive receipt by the lending bank of
the account withheld.
7. CIR vs. St. Lukes Medical Center
The concept of a withholding tax on income implies that the amount of tax
Facts: withheld comes from the income earned by the taxpayer. Since the amount
of tax withheld constitute income earned, then that amount forms part of
St. Lukes is a non-profit, non-proprietary business. The BIR assessed St. the taxpayers gross receipts.
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 The Manila Jockey Club case, cited by respondents, does not apply because
hospital should be applicable to St. Lukes for its income from paying- what happened there is earmarking, not withholding. The amounts
patients. earmarked do not form part of gross receipts because those are by law or
regulation reserved for some person other than the taxpayer.
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 The amounts withheld forms part of gross receipt because they are in
30 (E) exempts from income tax non-stock, non-profit charitable institutions constructive possession and not subject to any reservation, the withholding
while Section 27(B) removes the exemption for proprietary non-profit agent being merely a conduit in the collection process.
The interest income that had been withheld for the government became
Issue: WON St. Lukes is liable for deficiency income tax under Section property of the financial institution upon constructive possession of the
27(B) which imposes a preferential tax rate of 10%. same. It is ownership which determines whether interest income form part
of taxable gross receipts. Being originally owned by the financial institution
Held: Yes, St. Lukes is liable for its income from paying patients. as part of their interest income, the FWT should form part of their taxable
gross receipts.
There is no dispute that St. Lukes is organized as a non-stock, non-profit
charitable institution. However, this does not automatically exempts St. 9. Marubeni Corporation vs. CIR (1989)
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 Facts:
and operated exclusively for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) requires that the institution be operated Marubeni Corp. of Japan has equity investments in AG&P Manila. AG&P
exclusively for social welfare. However, the last paragraph of Section 30 declared and paid cash dividends to petitioner and withheld the
provides that if a tax exempt charitable institution conducts any activity for corresponding 10% final dividend tax thereon. AG&P directly remitted the
profit, such activity is not exempt even if its not for profit activities remain cash dividends to petitioners head office in Tokyo, Japan net not only of
tax exempt. 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
Thus even if a charitable institution must be organized and operated are effectively connected with the conduct of its business in the Philippines
exclusively for charitable purposes, it is nevertheless allowed to engage in and are to be considered branch profits subject to 15% BRPT. The BIR
activities conducted for profit without losing its tax exempt status for its issued a ruling that any profits remitted abroad by a branch office to its
not-for-profit activities. The only consequence is that the income of a head office which are effectively connected with its trade or business in the
charitable institution from any of its activities conducted for profit should be Philippines are subject to 15% BRPT. In the instant case, the dividends
subject to income tax. received by Marubeni from AG&P are not income arising from the business
of which Marubeni is engaged. Said dividends are not considered branch
St. Lukes had total revenues of P1.73 billion from services to paying profits for purposes of the 15% BRPT.
patients. It is not an institution operated exclusively for charitable
purposes. The revenues from paying patients are income received from Petitioner claimed for the refund of the amount representing the BRPT it
activities conducted for profit. Thus, under the last paragraph of Section 30, erroneously paid on the dividends. The CIR denied the claim saying that
such income regardless of disposition is taxable. However, under Sec. 27 the dividends remitted were neither subject to the 10% intercorporate
(B), it is taxed at the preferential rate of 10%. 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
8. CIR vs. Citytrust Investment Phils. remitted equalled the 25% tax rate that should have been imposed, the
same should be offset.
Contention of petitioner: Following the principal-agent relationship that the purchase of the bonds was an investment within the reasonable
theory, Marubeni Japan is an RFC subject to 10% intercorporate dividend needs of the corporation.
Test: Immediacy test reasonable needs of the business mean the
Contention of BIR: Marubeni Japan is an NRFC subject to 35% normal immediate needs of the business.
corporate tax rate but expressly made subject to the special rate of 25%
under the RP-Japan Treaty. 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
Issue: Applicable tax rate on remittances received by petitioner distilled spirits. Records reveal that from 1951-1962, petitioner never had
corporation. the occasion to use the Treasury shares in aiding or financing its
As to the contention that the company held the shares a few more years
Petitioner is an NRFC thus cannot claim the 10% intercorporate dividend since it still cannot acquire real property in the Philippines considering that
tax rate. It transacted business independently from its PH branch hence the 60% of its stocks were not yet held by Filipinos, court said that the same
principal-agent relationship is not applicable. Consequently, the foreign depends upon various contingencies. Whether the company would be able
corporation is the tax payer and not its branch. 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
The BIR erred in imposing the 25% tax rate under the treaty. Each tax has business as to avoid the surtax upon the stockholders, the controlling
a different tax basis. intention of the taxpayer is that which is manifested at the time of
accumulation not subsequently declared intentions which are merely
The Court applied Tax Sparing rule products of afterthought.

While petitioner being an NRFC is generally taxed at 35%, it could avail of Moreover, if there was any thought for the purchase of a lot and building
the 15% preferential tax rate on dividends received from a domestic for the needs of petitioners business, the company may not with impunity
corporation (AG&P) is a condition that its domicile state (Japan) extend the permit its earnings to pile up merely because at some future time, certain
same favour a tax credit of not less that 20% of the dividends received. outlayws would have to be made. Profits may only be accumulated for the
This 20% is the difference between the normal corporate tax rate of 35% reasonable needs of the business and implicit in this is the further
and the 15% special rate. requirement of reasonable time.

10. Manila Wine Merchants vs. CIR (1984) 2. As to the reckoning time for computation of the 25% surtax

Facts: Undistributed earnings or profits of prior years are taken into consideration
in determining unreasonable accumulation for the year concerned.
The CIR assessed petitioner for 25% surtax IAET for having unreasonably
accumulated surplus for the calendar years 1947-1957, in excess of the It is necessary to take into account from accumulations since the same may
reasonable needs of the business. Basis of the CIR have been sufficient to cover the business needs and additional
accumulation during the year involved would not reasonably be necessary.
1. From 1947-1957, only 40.33% of its total surplus available for
distribution at the end of each calendar year was distributed as
2. It made substantial investment of surplus in unrelated business 11. Cyanamid Phil. Inc. vs CA (2000)
including US Treasury bonds.
3. The AET should be based on 25% of the total surplus available Facts:
at the end of each calendar year.
CIR assessed petitioner for deficiency income tax for the taxable year 1981
Contention of petitioners including 25% surtax. Petitioner protested the assessment including the
25% surtax assessment on its accumulated earnings for the following
1. The investments in other business were small amounts and reasons: (1) it accumulated its earnings and profits for reasonable business
beneficial to its stockholders. requirements to meet working capital needs and retirement indebtedness;
2. The investment in US Treasury bonds were used to finance its (2) it is a wholly owned subsidiary of American Cyanamid Co., a corporation
importation and for the future expansion of its business including organized under the laws of the US, whose shares of stock are listed and
acquisition of its business including acquisition of a lot and traded in the NY Stock Exchange. This being the case, no individual
construction of its own office building and bottling plant. The shareholder income taxes by petitioners accumulation of earnings and
bonds were held for years because of the Central Banks policies profits, instead of distribution of the same.
on no-dollar licenses exportation and that the company was not
yet qualified to own real property in the PH thus it waited until Issue: Whether petitioner is liable for the accumulated earnings tax for the
60% of its stocks would be owned by Filipinos. year 1981.
3. It distributed 100% of its net earnings after income tax in 1957;
4. Assuming that the 25% imposition was proper, it should be Held: Yes.
based on the total surplus or net income for the year after
deducting therefrom the income tax due. 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
1. WON the purchase of US Treasury bonds can be construed as an 1973, enumerated the corporations exempt from the imposition of IAT: (1)
investment on unrelated business; banks; (2) non-bank financial intermediaries; (3) insurance companies; (4)
2. WON the penalty tax of 25% can be imposed on such improper corporations organized primarily and authorized by the CB to hold shares of
accumulations in 1957 despite the fact that the accumulation stocks of banks. Petitioner does not fall among those exempt classes,
occurred in 1951.
As to the contention of petitioner that increase of working capital by a
Held: corporation justifies accumulating income (Petitioner relied on the so-called
Bardahl formula, which allowed retention, as working capital reserve,
1. Yes. sufficient amounts of liquid assets to carry the company through one
operating cycle. Using said formula, petitioner contends that Cyanamid
An accumulation of earnings is unreasonable if it is not required for the needed at least P33,763,624 as working capital. As of 1981, its liquid asset
purpose of the business. To avail of the 25% surtax, petitioner has to prove 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 shows that the income from any property of exempt organizations, as well
accumulated to increase its working capital) 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
Companies where the Bardahl formula was applied had operating cycles properties. This makes from the property of the organization taxable,
much shorter than petitioner. As stressed by American authorities, although regardless of how that income is used whether for profit or for lofty non-
the Bardahl formula was well-established and routinely applied by the profit purposes.
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 YMCA contended that under the Article VI, Sec. 28(3) of the Constitution, it
of exactitude. is exempt not only from real property tax but also from income tax from
whatever source because it is a charitable institution.
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 SC said that what is exempted is not the institution itself but those lands,
assets to current liabilities is used to determine the sufficiency of working buildings and improvements ADE used for religious charitable or
capital. Ideally, the working capital should equal current liabilities and there educational purposes. Further, said provision cited by YMCA covers only
must be 2 units of current assets for every unit of current liability, hence property taxes. (*Thus the properties used by YMCA ADE for charitable
the so-called 2 to 1 rule. purposes are exempt from property but not from income tax).

As of 1981, the working capital of Cyanamid was P25,776,991 or more than YMCA also invokes Article XIV, Sec. 4(3) of the Constitution claiming that it
twice its current liabilities. It therefore projects adequacy in working capital is a non-stock, non-profit educational institution whose revenues and assets
which was expected to increase further when more funds were generated are ADE used for educational purposes thus it is exempt from property and
from the succeeding years sales. Available income covered expenses or income taxes.
indebtedness for that year, and there appeared no reason to expect an
impending working capital deficit which would have necessitated an SC said that YMCA is not an educational institution. Under the Education
increase in working capital. Act of 1982, the term refers to schools. The school system is synonymous
with formal education. There is nothing in the Amended Articles of
In order to determine whether profits are accumulated for the reasonable Incorporation and By-laws of YMCA that hints that it is a school or
needs to avoid the surtax upon SHs, it must be shown that the controlling educational institution.
intention of the TP is manifest at the time of accumulation not intentions
declared subsequently, which are mere afterthoughts. Furthermore, the Thus the income derived by petitioner from rentals of its real property is
accumulated profits must be used within a reasonable time after the close subject to income tax.
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 13. CIR vs. Estate of Benigno Toda Jr. (2004)
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 CIC authorized Toda, President and owner of 99.991% of its outstanding
by adhering to the Bardahl formula failed to establish that the profits capital stock to sell the CIbeles Bldg. and 2 parcels of land. Toda
accumulated were not beyond the reasonable needs of the company. 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
12. CIR vs. CA (1998) evidence by Deeds of Absolute Sale notarized on the same day by the same
For the sale of the property to RMI, Altonaga paid CGT of P10M. CIC filed
YMCA is a non-stock, non-profit institution. In 1980, it earned income from its corporate annual income tax return for the year 1989, declaring among
leasing out a portion of its premises to small shop owners, like restaurants other things, its gain from the sale of real property. Meanwhile, Toda sold
and canteen operators, and from parking fees collected from non-members. his entire shares of stock in CIC to Le Hun T. Choa. 3 and years later,
Toda died.
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 The BIR sent an assessment notice and demand letter to CIC for deficiency
to the CTA. In due course, the CTA issued a ruling in favour of YMCA. CIR income tax for the year 1989.
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 The new CIC asked for reconsideration asserting that the assessment
and parking fees are exempt from taxation. 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
CIR contends that while income received by organizations under Sec. 27 his stockholdings and the CIC free from all tax liabilities for the FYs 1987-
(now Sec.26) of the NIRC, as a rule, are exempted from payment of tax, 1989.
the exemption does not apply to income derived from any of their
properties, real or personal, or from any of their activities conducted for The Estate of Benigno Toda Jr. also received a notice of assessment from
profit, regardless of the disposition made of such income. Thus the rental the BIR for deficiency income tax for the year 1989 which was protested by
income derived by YMCA from the lease of its properties are not exempt the estate. The CIR dismissed the protest stating that a fraudulent scheme
from income tax even if the same is exclusively used for the was deliberately perpetuated by the CIC wholly owned by Toda by covering
accomloshment of its objectives. 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
Issue: Is the rental income of YMCA taxable? evading the higher corporate income tax of 35%.

Held: Yes 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
In the instant case, the exemption claimed by YMCA is expressly disallowed of the same property. The additional gain of P100M (the difference
by the very wording of the last paragraph of Section 27 of the NIRC which between the second simulated sale of P200M and the first simulated sale of
mandates that the income of exempt organizations from any of their P100M) realized by CIC was taxed at the rate of only 5% CGT of Altonaga
properties, real or personal, be subject to the tax imposed by the same instead of the 35% corporate income tax of CIC. The income tax return of
Code. The last paragraph of said section unequivocally subjects to tax the CIC for 1989 was with intent to evade payment of the tax and thus false or
rent income of YMCA from its real properties. 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
The last paragraph of Section 27, YMCA argues should be subject to the liable for the deficiency income tax especially because the gains realized
qualification that the income from the properties must arise from activities from the sale were withdrawn by him as cash advances or paid to him as
conducted for profit before it may be considered taxable. This argument is cash dividends. Since he is already dead, his estate shall answer for his
erroneous. As previously stated, a reading of said paragraph ineludibly liability.
CTA ruled that the scheme was merely tax avoidance and not tax evasion 3. Respondent Estate is liable for the deficiency income tax of CIC
and there being no fraudulent return filed, the prescriptive period for for the year 1989.
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 When Toda sold his shares to Le Hun T. Choa, he knowingly and voluntarily
prescribed by April 15, 1993. CA affirmed CTA. 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
CIR points out that the documents evidencing the sales prove the fact of Shares of Stocks. He thereby voluntarily held himself personally liable
fraud in that (1) the two sales were done simultaneously on the same date, therefore. Respondent Estates obligation arose from Todas contractual
August 30, 1989 and (2) the Deed of Absolute Sale between Altonaga and undertaking thus it cannot evade its liability for the deficiency income tax of
RMI was notarized ahead of the alleged sale by CIC and Altonaga and (3) CIC.
as early as May 4, 1989, CIC received P40million from RMI, not from
Altonaga. 14. Santos vs. Servier Philippines, Inc. (2008)

Issues: Facts:

1. Is this a case of tax evasion or tax avoidance Santos was the Human Resources Manager of Servier Philippines Inc. She
2. Has the period for assessment of deficiency income tax for the attended a meeting of all human resource managers of respondent
year 1989 prescribed? company in Paris France. She brought along her husband and child. While
3. Can respondent Estate be held liable for the deficiency income there, she was hospitalized because of an allergic attack triggered by her
tax of CIC for the year 1989? 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
Held: confined at the hospital, her husband and son stayed in Paris. Her
hospitalization expenses as well as that of her husband and son were
1. It is tax evasion. shouldered by the company.

Tax evasion connotes the integration of 3 factors: (1) the end to be When Santos went back to the Philippines, she was confined to St. Lukes
achieved i.e. payment of less than that known by the TP to be legally due for continuation of her medical treatment which was likewise paid by
or the non-payment of tax when it is shown that a tax is due; (2) an respondent. The company was constrained to terminate her services upon
accompanying state of mind which is described as being evil, in bad faith, conclusion of petitioners physician that she had not fully recovered
wilful or deliberate and not accidental and (3) a course of action or failure mentally and physically.
of action which is unlawful.
As a consequence of her termination, respondent offered a retirement
All these factors are present in the instant case. The real buyer of the package consisting of insurance pension at P20K/month for 60 months for
properties was RMI, not Altonaga. As early as 1989, CIC had already company sponsored group life policy in the amount of P1.2 M, educational
received part of the purchase price from RMI. Further, the P40M was assistance worth P465K and medical and health care worth P200K. Of the
debited and reflected by RMI in its trial balance. promised retirement benefits amounting to P1,063,841.76, only
P701,454.89 was released, the balance thereof withheld by the company
Altonaga was a close business associate and one of the many trusted for tax purposes. Respondent company also failed to give the other benefits
corporate executives of Toda. That he was a mere conduit finds support in included in the retirement package.
the admission of respondent Estate that the sale to him was part of the tax
planning scheme of CIC. She instituted a case for illegal dismissal against the company before the
labor tribunal. The LA ruled dismissed her complaint. The NLRC partly
The scheme resorted by CIC in making it appear that there were 2 sales of granted petitioners appeal stating that she was dismissed from
the subject properties i.e. from CIC to Altonaga and then from Altonaga to employment due to disease/disability under Art. 284 of the LC; that in view
RMI cannot be considered a legitimate tax planning bus is tainted with of her non-entitlement to retirement benefits, the amounts received by her
fraud. should then be treated as separation pay. The NLRC thus ordered the
payment of the other benefits promised by respondent. The CA affirmed
The objective of the sale to Altonaga was to reduce the amount of tax to be the NLRC.
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 Upon petition with the SC, Santos changed her theory saying that she is not
purpose of acquiring and transferring title of the subject properties on the entitled to separation pay but to retirement pay pursuant to Sec. 4, Art. V
same day was to create a tax shelter. He never controlled the property and of the companys Retirement Plan, on disability retirement. She thus prayed
did not enjoy the normal benefits and burdens of ownership. The sale to for the full payment of her retirement benefits by giving back to her the
him was merely a tax ploy, a sham, and without business purpose and amount deducted for tax purposes.
economic substance. Doubtless, the execution of the 2 sales was calculated
to mislead the BIR with the end view of reducing the consequent income Issues:
tax liability.
1. WON petitioner is entitled to separation pay under the law or
The intermediary transaction i.e. the sale of Altonaga, which was prompted retirement benefits under the companys retirement benefit plan.
more on mitigating of tax liabilities than for legitimate business purposes 2. WON the retirement benefits received by petitioner are taxable/
constitutes tax evasion. The 2 sale transactions should be treated as a WON the deduction of P362, 386.87 from petitioners retirement
single direct sale by CIC to RMI. CIC therefore is liable to pay 35% benefits for tax purposes was proper.
corporate income tax for its taxable income in 1989. The 5% CGT is
inapplicable. Hence, the deficiency income tax assessment must be upheld. Held:

2. The period for assessment has not prescribed. 1. Petitioner is entitled either to separation pay under the LC or
retirement benefits under the companys plan but not both.
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 Respondent dismissed petitioner from her employment due to
within which to assess the tax is 10 years from discovery of the fraud, disease/disability under Art. 284 of the LC which entitles her the right to
falsification or omission, as the case may be. demand separation pay. However, respondent established a retirement plan
in favour of all its EEs, which specifically provides for disability retirement.
The transaction being tainted with fraud and there being a false return filed On the basis of said retirement plan, the company offered petition a
by CIC in 1989, the prescriptive period should be 10 years from discovery retirement package consisting of retirement plan benefits, insurance
of the falsity. The false return was filed on April 15, 1990 and the falsity pension and educational assistance of which the amount of P1,063,841.76
thereof discovered only on March 8, 1991. The assessment for deficiency represented the disability retirement benefit under the plan.
income tax was issued on January 9, 1995, which is well within the
prescriptive period.
The receipt of retirement benefits does not bar the retiree from receiving without tax deductions and there was no justifiable reasonable for IBC to
separation pay. They are not mutually exclusive. However, this is only trure deviate from such practice. It is deemed to have assumed the tax liabilities
if there is no specific prohibition against payment of both benefits in the of the complainants on their retirement benefits hence it had no right to
retirement plan and/or CBA. In the instant case, the Retirement Plan bears deduct taxes from their salary differentials. CA affirmed the NLRC.
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 Issues:
law or retirement benefits under the Plan but not both. Clearly, the benefits
received by petitioner represent her retirement benefits under the Plan. 1. WON the retirement benefits of respondents are part of their
gross income;
2. The retirement benefits received by petitioner are taxable/ 2. WON petitioner is stopped from reneging on its agreement with
the deduction was proper. respondents to pay the taxes on said retirement benefits.

Retirement benefits are exempt from income tax, provided that certain Held:
requirement are met. For the retirement benefits to be exempt from
withholding tax, the TP is burdened to prove the ff: (1) a reasonable 1. The retirement benefits are part of respondents gross income
private benefit plan is maintained by the ER; (2) the retiring official or EE and are taxable.
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; Petitioner is not obliged to pay for the taxes on respondents retirement
and (4) the benefit had been availed of only once. 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
Petitioner was qualified for disability retirement. At the time of such NIRC, retirement benefits are part of respondent EEs gross income subject
retirement, she was only 41 years of age; and had been in the service for to tax. For retirement benefits to be exempt from withholding tax, the ff.
more or less 8 years. As such, the above provision is not applicable for must concur: (1) a reasonable private benefit plan is maintained by the ER;
failure to comply with the age and length of service requirement. Therefore (2) the retiring official or EE has been in the service of the same ER for at
respondent company cannot be faulted for deducting from petitioners total least 10 years; (3) the retiring official or EE is not less than 50 years of age
retirement benefits the amount of P362, 386.87 for taxation purposes. at the time of his retirement; and (4) the benefit had been availed of only
15. Intercontinental Broadcasting Corp. vs. Amarilla, et al. (2006)
Article VIII of the companys 1993 CBA provides for two kinds of retirement
Facts: plans compulsory and optional.

On various dates, petitioner employed the services of respondents Amarilla, 1. Compulsory retirement if EE has reached the age of 55
Quiones, Otadoy and Lagahit. Later on, the Government sequestered IBC- 2. Optional retirement Any covered EE, regardless of age, who
13 and took over its management and operations from its owner, Roberto has rendered at least 5 years of service may voluntarily retire
Benedicto. Consequently, the government and Benedicto entered into a and the company agrees to pay Long Service Pay to covered
temporary agreement under which the latter would retain management and EEs.
operation of the station. A compromise agreement was entered into by the
PCGG and Benedicto where the latter transferred and assigned all his Respondents were qualified to retire optionally from their employment with
rights, shares and interests in the station to the government, which petitioner. However, there is no evidence on record that the 1993 CBA had
agreement was later on submitted to the SB. been approved or was ever presented to the BIR; hence, the retirement
benefits of respondents are taxable.
In the meantime, the 4 EEs retired from the company and received, on
staggered basis, their retirement benefits under the companys 1993 CBA. 2. Petitioner was guilty of promissory estoppels.
In the meantime, a P1500 salary increase was given to all EEs of the
company, current and retired effective 1994. However, when the four Under Sec. 80 of the NIRC, petitioner as ER, was obliged to withhold taxes
retirees demanded theirs, petitioner refused and instead informed them on said benefits and remit the same. However, petitioner did not withhold
that their salary differentials would be used to offset the tax due on their taxes due on their retirement benefits caused it had obliged itself to pay
retirement benefits in accordance with the NIRC. the taxes due thereon. This was done to induce respondents to agree to
avail of the optional retirement scheme.
The 4 retirees filed separate complaints against IBC for unfair labor practice
and non-payment of backwages with the NLRC. They averred that their Respondents received their retirement benefits in 3 staggered instalments
retirement benefits are exempt from income tax under the NIRC. They without any tax deduction for the simple reason that petitioner had
pointed out that under Art. VIII of the CBA, only those EEs who reached remitted the same to the BIR with the use of its own funds conformably
the age of 60 were considered retired and those under 60 had the option to with its agreement with the retirees. It was only when respondents
retire. 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
For its part, petitioner averred that under Section 21 of the NIRC, the approval, rendering such retirement benefits not exempt from taxes;
retirement benefits received by EEs from their ERs constitute taxable consequently, they were obliged to refund to it the amounts it had remitted
income. While retirement benefits are exempt from taxes under Sec. 28(b) to the BIR in payment of their taxes. Petitioner used this failure as an
of the Code, the law requires that such benefits should be in accord with a afterthought, as an excuse for its refusal to pay respondents salary
reasonable retirement plan duly registered with the BIR after compliance differentials. Patently, petitioner is stopped from doing so. It cannot renege
with the requirements therein enumerated. Since its retirement plan in the on its commitment to pay the taxes on respondents retirement benefits on
1993 CBA was not approved by the BIR, complainants were liable for the pretext that the new management had found the policy
income tax on their retirement benefits. Accordingly, petitioner was obliged disadvantageous for that would amount to a breach of contract.
to withhold the taxes under the NIRC otherwise it would be civilly and
criminally liable. Thus the offsetting of the salary differentials with the Moreover, petitioner cannot hide behind the fact that, under the
withholding taxes due on the retirement benefits. Consequently, the compromise agreement between the PCGG and Benedicto, the latter had
retirees were liable for payment of the balance paid by the company as assigned and conveyed to the government his shares, interest and rights in
taxes after offsetting the salary differentials. petitioner company. Respondents retired only after the Court affirmed the
compromise agreement and the execution by petitioner and the union of
The LA ruled that the claims of Quiones and Otadoy had already their 1993 CBA while the civil case was still pending in the SB. There is no
prescribed. The retirement benefits of Lagahit and Amarilla, on the other showing that before respondents demanded payment of their salary
had, were exempt from income tax under Sec. 28(b) of the NIRC. However, differentials, petitioner had rejected its commitment to shoulder the taxes
the differentials due to the two complainants were computed 3 years on respondents retirement benefits and sought is nullification before the
backwards due to the law on prescription. On appeal, the NLRC affirmed court; nor is there any showing that petitioners new management filed nay
the LA stating that the benefits of the retirement plan under the CBA were criminal or administrative charges against the former officers/BOD
subject to tax as the scheme was not approved by the BIR. However, it had comprising the old management relative to the payment of the taxes on the
also been the practice of petitioner to give retiring EEs their retirement pay retirement benefits.
16. Atlas Consolidated Mining vs. CIR; CIR vs. Atlas Consolidated The right to a deduction depends in each case on the particular
Mining (1981) facts and the relation of the payment to the type of business in
which the TP is engaged.
Facts: The intention of the TP often may be the controlling factor.
Whether an ordinary and necessary expense is deductible must
Atlas is a domestic corporation engaged in the mining industry. The CIR be determined from the nature of the expenditure itself which in
assessed against Atlas the sum of P546, 295.16 and P215, 493.96 or a total turn depends on the extent and permanency of the work
of P761, 789.12 as deficiency income taxes for the years 1957 and 1958. accomplished by the expenditure.
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 It appears that in 1957, Atlas increased its capital stock from P15M to
covers only gold mines. 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
For the year 1958, the assessment of deficiency covers disallowance of ruled that the information about Atlas given out and played up in the mass
items claimed by Atlas as deductible from gross income. Subsequently, the communication media resulted in full subscription of the additional shares
SOF ruled that the exemption in RA 909 embraces all new mines and old issued by Atlas; consequently, the questioned item, stockholders relation
mines whether gold or other minerals. Accordingly, the CIR issued a revised service fee, was in effect spent for the acquisition of additional capital,
assessment eliminating the assessment in 1957 and reducing the ergo, a capital expenditure.
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 Said expense is not deductible from Atlas gross income in 1958 because
income for 1958 including transfer agents fee, stockholders relation expenses relating to recapitalization and reorganization of the corporation,
service fee, US stock listing expenses, suit for expenses and provision for the cost of obtaining stock subscription, promotion expenses and
contingencies. The CTA rendered a decision allowing said disallowed items, commission or fees paid for the sale of stock reorganization are capital
except the stockholders relation service fee and suit expenses. Atlas expenditures.
appealed only that portion of the CTAs decision disallowing the
stockholders relation service fee amounting to P25, 523.14. 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
It is the contention of Atlas that said amount paid as annual public relations patronage, does not make it a deductible business expense. Efforts to
expenses is a deductible expense from gross income under Section 30 (a) establish reputation are akin to the acquisition of capital assets and
(1) of the NIRC. Atlas claimed that it was paid for the services of a public therefore expenses related thereto not business expense but capital
relations firm, PK Macker & Co., a reputable relations consultant in NY, expenditures.
USA, hence an ordinary and necessary business expense in order to
compete with other corporations interested in the investment market in the 2. The listing fee and provision for contingencies are deductible
US. It is the stand of Atlas that information given out to the public in ordinary and necessary expense while the litigation expenses
general and to the SH in particular by the PK Macker & Co., concerning the are not deductible.
operation of Atlas was aimed at creating a favourable image and goodwill
to gain or maintain their patronage. As to the listing fee

On the other hand, the CIR contended that the transfer agents fee, US The Chesapeake decision relied upon by the CTA is controlling with the
stock listing expenses, suit for expenses and provision for contingencies facts and circumstances of the instant case. In the Dome Mines Ltd. Case,
should be disallowed for not being ordinary and necessary and not incurred relied upon by the CIR, the stock listing fee was disallowed as a deduction
in trade or business as required by the NIRC. He asserted that said fees not only because the expenditure did not meet the statutory test but also
were therefore incurred not for the production of income but for the because the same was paid only once and the benefit acquired thereby
acquisition of capital in view of the definition that an expense is deemed to continued indefinitely, whereas, in the Chesapeake Corporation case, fee
be incurred in trade or business if it was incurred for the production of paid to the stock exchange was annual and recurring. In the instant case,
income, or in the expectation of producing income for the business. 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
Issues: because it involves a payment made only once, hence, it was held therein
that the single payment made to the stock exchange was capital
1. WON the stockholders relation service fee is an ordinary and expenditure, as distinguished from the instant case, where payments were
necessary expense or a capital expense; made annually. For this reason, we hold that the listing fee is an ordinary
2. WON the other expenses are ordinary and necessary expenses and necessary business expense.
deductible from gross income.
As to the provisions for contingencies
As ruled by the CTA, the said amount was in effect added to Atlas taxable
1. The SH stockholders relation fee is a capital expense. income. The same being factual in nature and supported by substantial
evidence, such findings should not be disturbed on appeal.
Statutory test of deductibility For a business expense to be deductible,
three conditions are imposed: (1) the expense must be ordinary and As to the litigation expenses
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 The litigation expenses under consideration were incurred in defense of
only must the TP meet the business test, he must substantially prove by Atlas title to its mining properties. It is well-settled that litigation expenses
evidence or records the deductions claimed otherwise the same will be incurred in defense or protection of title are capital in nature and not
disallowed. Mere allegation of the TP that an item of expense is ordinary deductible. Likewise, expenditures in defense of title to property constitute
and necessary does not justify its deduction. part of the cost of the property and are not deductible as expense.

Although there is no single definition of what constitutes and ordinary/ Surprisingly, the investigating revenue examiner recommended a partial
necessary expense, there are guiding principles used by the Court for disallowance of only P13, 333.30 instead of the entire amount of P23,
adjudication of conflicting claims: 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
An expense is considered necessary where the expenditure is arithmetical error committed herein should not prejudice the Government.
appropriate and helpful in the development of the TPs business. The Government cannot be stopped by the mistakes of its officials or
It is ordinary when it connotes that payments be habitual or agents. Therefore the amount of P17, 499.98 (3/4 of P23, 333.30)
normal in the sense that the same TP will have to make them representing suit expenses be disallowed as deduction instead of P6,
often; the payment may be unique or non-recurring to the 666.65 only.
particular TP affected.
There is no hard and fast rule on the matter. *deductibility of the transfer agents fee was not appealed by the CIR
17. ESSO Standard Eastern Inc. vs. CIR (1989) 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
Facts: 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
Petitioner ESSO deducted from its gross income for 1959 and 1960 as part minimizing a loss in the PH? Obviously not. The margin fees are not
of its ordinary and necessary business expenses the amounts of P340, expenses incurred in the disposition of said incomes; expenses for the
822.04 and P1,226,647.72 representing margin fees it had paid to the remittance of funds after they have already been earned by petitioners
Central Bank on its profit remittances to its New York Head Office. branch in the PH for the disposal of its Head Office in NY which is already
another distinct and separate income TP;
The CIR assessed ESSO for deficiency income taxes representing the
disallowance of the margin fees. ESSO partially settled this deficiency Since the margin fees in question were incurred for the remittance of funds
assessment. It claimed for refund of its overpayment of its 1959 and 1960 to petitioners Head Office in NY, which is a separate and distinct income TP
income taxes as well as the excess interest thereon. The CIR denied the from the branch in the PH, for its disposal abroad, it can never be said
claim saying that the margin fees paid to the CB could not be considered therefore that the margin fees were appropriate and helpful in the
taxes or allowed as deductible business expenses. development of petitioners business in the PH exclusively or were incurred
for purposes proper to the conduct of the affairs of petitioners branch in
ESSO appealed to the CTA and sought refund contending that the margin the PH exclusively or were for purposes of realizing a profit or minimizing a
fees were deductible from gross income either as a tax or as ordinary and loss in the PH exclusively. If at all, the margin fees were incurred for
necessary business expense. ESSO claims that the fees were paid for its purposes proper to the conduct of the corporate affairs of Standard
remittances as part of the profits to the Head Office in NY in the US Vacuum Oil Company in NY, but certainly not in the PH.
therefore the same was an expenditure necessary and proper for the
conduct of its corporate affairs. The CTA denied the claim for refund but ESSO has not shown that the remittance to the head office of part of its
sustained its claim for refund of the overpayment of the interest. profits was made in furtherance of its own trade or business. ESSO, having
assumed an expense properly attributable to its head office, cannot now
Issues: claim this as an ordinary and necessary expense paid or incurred in carrying
its own trade and business. Hence, the same is not deductible.
1. Whether RA 2009 entitled An Act to Authorize the Central Bank
of the Philippines to Establish a Margin over Banks Selling Rates 18. CIR vs. General Foods (Phils.) Inc. (2003)
of Foreign Exchange is a police or revenue measure.
2. Whether the margin fees are deductible from petitioners gross Facts:
income as ordinary and necessary expense.
General Foods Inc, which is engaged in the manufacture of beverages such
Held: 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
1. Margin fee under RA 2009 was imposed by the State in the P9,461,246 for media advertising for Tang,
exercise of its police power and not the power of taxation
(Margin fee is not a tax). 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.
The SC held in Caltex Phil Inc. vs. Acting COC 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
A margin levy on foreign exchange is a form of exchange control or
petitioner thus should be properly spread out over a period of time. The
restriction designed to discourage imports and encourage exports, and
ultimately to curtail any excessive demand upon the international reserve in CA, however, reversed the CTA holding that the unreasonableness of the
claimed deduction was not adequately established. Hence, this petition.
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 CIR maintains that the subject advertising expense was not ordinary on
the peso xxxx By its nature, the margin levy is part of the rate of exchange the ground that it failed the two conditions set by US jurisprudence: first,
as fixed by the government. reasonableness in the amount incurred and second, the amount incurred
must not be a capital outlay to create goodwill for the product and/or
As to the contention that the margin levy is a tax on the purchase of respondents business. Otherwise, the expense must be considered capital
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 Issue: WON the subject media advertising expense for Tang was an
margin fee are applied to strengthen our countrys international reserves. ordinary and necessary expense fully deductible under the NIRC.

Similarly, the Court held in Chamber of Agricultural and Natural Resources Held: Respondents media advertising expense is not an ordinary
of the Philippines vs. CB that margin fees are applied to strengthen the CBs and necessary expense but a capital expenditure which should be
international reserve. amortized over a reasonable period.

2. The margin fees paid by petitioner for remittances to its Head To be deductible from gross income, the subject advertising expense must
Office in NY are not deductible business expense. 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
As held by the SC in Atlas Consolidated Mining vs. CIR
of the TP; and (d) it must be supported by receipts, records or other
pertinent paper.
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 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
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 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
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 the general economic conditions.
and necessary does not justify its deduction.
In the case at bar, the P9, 461,246 claimed as media advertising expense
As held by the CTA 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
Considering the foregoing test of what constitutes an ordinary and
media advertising expense was almost double the amount of the
necessary deductible expense, it may be asked: Were the margin fees paid
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 If such were allowed, then Hoskins would receive on these three times
of services; alone (salary, bonus and supervision fee) a total of P184, 977.91, which
2. Advertising designed to stimulate the future sale of merchandise would be double petitioners reported income for the year of P92, 540. 25.
or use of services. 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
The second type involves expenditures incurred, in whole or in part, in and influence in the making og the companys policies and decisions.
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 As a general rule, bonuses to EEs made in good faith and as additional
expenditures are for the advertising of the first kind, then, except as to the compensation are deductible provided that certain conditions precedent are
question of the reasonableness of amount, there is no doubt such met: (1) the payment of the bonuses is in fact compensation; (2) it must
expenditures are deductible as business expenses. If, however, the be for personal services actually rendered; and (3) the bonuses, when
expenditures are for advertising of the second kind, then normally they added to the salaries are reasonable (Test of Reasonable Compensation).
should be spread out over a reasonable period of time.
There is no fixed test for determining the reasonableness of a given bonus
The subject advertising expense was of the second kind. Not only was the as compensation. It depends upon many factors the amount and quality
amount startling, the corporation itself admitted that the same was incurred of the services performed relating to the business, payment made in good
in order to protect its brand franchise, a critical point during the period faith, the character of the TPs business, the size of a particular business,
under review. the EEs qualifications and contributions to the business venture; and
general economic conditions. However, the situation must be considered as
The protection of brand franchise is analogous to the maintenance of a whole. No single factor is decisive.
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 Petitioners case fails to pass the test. On the right of the ER as against the
acquisition of capital assets and therefore expenses related were not to be CIR to fix the compensation of its officers and EEs, we hold that while the
considered business expense but as capital expenditures. ERs right may be conceded, the question of the allowance thereof as
deductible expense for income tax purposes is subject to determination by
True, it is the TPs prerogative to determine the amount of advertising respondent CIR.
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.

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


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