INCOME TAX

TAN V DEL ROSARIO

G.R. 109446.

VITUG, J.:

These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of
Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending
certain provisions of the National Internal Revenue Code and, in

G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents
pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory
legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject which
shall be expressed in the title thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.

Article III, Section 1 — No person shall be deprived of . . . property without due process of law, nor
shall any person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents
have exceeded their rule-making authority in applying SNIT to general professional partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed
their respective memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at
least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed

and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and
Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the
National Internal Revenue Code, as Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now
amended, provide:

Sec. 21. Tax on citizens or residents. —

xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of
Profession. — A tax is hereby imposed upon the taxable net income as determined in Section 27
received during each taxable year from all sources, other than income covered by paragraphs (b),
(c), (d) and (e) of this section by every individual whether

a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices
his profession herein, determined in accordance with the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%

 but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%

but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%

but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%

of excess over P350,000

Sec. 29. Deductions from gross income. — In computing taxable income subject to tax under Sections
21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items specified in
paragraphs (a) to (i) of this section: Provided, however, That in computing taxable income subject to
tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only
the following direct costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business
or practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for the rehabilitation
of calamity stricken areas declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial
institutions which must be proven to have been incurred in connection with the conduct of a
taxpayer's profession, trade or business.

For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of
forty per cent (40%) of their gross receipts shall be allowed as deductions to answer for business or
professional expenses as the case may be.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory
law should be considered as having now adopted a gross income, instead of as having still retained the netincome,
taxation scheme. The allowance for deductible items, it is true, may have significantly been reduced by the
questioned law in comparison with that which has prevailed prior to the amendment; limiting, however, allowable
deductions from gross income is neither discordant with, nor opposed to, the net income tax concept. The fact of
the matter is still that various deductions, which are by no means inconsequential, continue to be well provided
under the new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation
intended to unite the members of the legislature who favor any one of unrelated subjects in support of the whole
act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through such
publications of its proceedings as are usually made, of the subjects of legislation. 1 The above objectives of the
fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual
compendium of the law which could not have been the intendment of the constitutional mandate.

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be
uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals
differently from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets,
however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act No.
7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs.
Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used
therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3)
the law applies, all things being equal, to both present and future conditions, and (4) the classification applies
equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197
SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly
shift the income tax system towards the schedular approach 2 in the income taxation of individual taxpayers and to
maintain, by and large, the present global treatment 3 on taxable corporations. We certainly do not view this
classification to be arbitrary and inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes
to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With
the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate),
coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by
constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable
and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its
plenitude, the power to tax cannot override constitutional proscriptions. This stage, however, has not been
demonstrated to have been reached within any appreciable distance in this controversy before us.

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being
violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a
clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression
is so evident to us.

G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of whether or not public
respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out
Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general professional partnership (GPP) and the
partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of
the partnership, only the direct costs mentioned in said law are to be deducted from partnership
income. Also, the expenses paid or incurred by partners in their individual capacities in the practice
of their profession which are not reimbursed or paid by the partnership but are not considered as
direct cost, are not deductible from his gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents that would
apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in
Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority
floor leader of the House of Representatives, in the latter's privilege speech by way of commenting on the
questioned implementing regulation of public respondents following the effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill.
Do we speak here of individuals who are earning, I mean, who earn through
business enterprises and therefore, should file an income tax return?

MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It
applies only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that
this bill is intended to increase collections as far as individuals are concerned and to
make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS,
it is categorically stated, thus:

This bill, Mr. President, is not applicable to business corporations or to

partnerships; it is only with respect to individuals and professionals. (Emphasis
ours)

The Court, first of all, should like to correct the apparent misconception that general professional partnerships are
subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged
in business or in the practice of their respective professions and partners in general professional partnerships. The
fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is
treated as a corporation for income tax purposes and so subject to the 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.
Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons exercising a
common profession in general partnership shall be liable for income tax only in their individual
capacity, and the share in the net profits of the general professional partnership to which any
taxable partner would be entitled whether distributed or otherwise, shall be returned for taxation
and the tax paid in accordance with the provisions of this Title.

(b) In determining his distributive share in the net income of the partnership, each partner —

(1) Shall take into account separately his distributive share of the partnership's
income, gain, loss, deduction, or credit to the extent provided by the pertinent
provisions of this Code, and

(2) Shall be deemed to have elected the itemized deductions, unless he declares his
distributive share of the gross income undiminished by his share of the deductions.

There is, then and now, no distinction in income tax liability between a person who practices his profession alone
or individually and one who does it through partnership (whether registered or not) with others in the exercise of
a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive
investment income, under the present income tax system all individuals deriving income from any source
whatsoever are treated in almost invariably the same manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as
an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become myopic,
however, when the law is understood, as it should be, as only forming part of, and subject to, the whole income tax
concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase
"income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons who derive
taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence of
the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax liability on
their income from all sources) and of the generally accepted and internationally recognized income taxable base
(that can subject non-resident aliens and foreign corporations to income tax on their income from Philippine
sources). In the process, the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2)
Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpusand as
to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships,
no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships")
which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally
contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt rule"
in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not
intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations on
Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the
payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as
independent taxable entities for income tax purposes. A general professional partnership is such an example. 4Here,
the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for
administration and data]), are liable for the payment of income tax in their individual capacity computed on their
respective and distributive shares of profits. In the determination of the tax liability, a partner does so as
an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general
professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such income to, respectively, each of the individual
partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so
modified by Republic Act

No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-
compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to
place in an unequal footing or in significant variance the income tax treatment of professionals who practice their
respective professions individually and of those who do it through a general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

______________________________________________________________________________________________________________
MARUBENI v CIR
The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not income arising from the
business activity in which Marubeni Corporation is engaged. Accordingly, said dividends if remitted abroad are not
considered branch profits subject to Branch Profit Remittance Tax.

Facts:
Marubeni Corporation is a Japanese corporation licensed to engage in business in the Philippines. When the profits
on Marubeni’s investments in Atlantic Gulf and Pacific Co. of Manila were declared, a 10% final dividend tax was
withheld from it, and another 15% profit remittance tax based on the remittable amount after the final 10%
withholding tax were paid to the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or tax credit
for the amount which it has allegedly overpaid the BIR.

Issues and Ruling:

1. Whether or not the dividends Marubeni Corporation received from Atlantic Gulf and Pacific Co. are effectively
connected with its conduct or business in the Philippines as to be considered branch profits subject to 15% profit
remittance tax imposed under Section 24(b)(2) of the National Internal Revenue Code.

NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only 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 the 15%
profit remittance tax. The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not
income arising from the business activity in which Marubeni Corporation is engaged. Accordingly, said dividends if
remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax imposed by
Section 24(b)(2) of the Tax Code, as amended.

2. Whether Marubeni Corporation is a resident or non-resident foreign corporation.

Marubeni Corporation is a non-resident foreign corporation, with respect to the transaction. Marubeni
Corporation’s head office in Japan is a separate and distinct income taxpayer from the branch in the Philippines.
The investment on Atlantic Gulf and Pacific Co. was made for purposes peculiarly germane to the conduct of the
corporate affairs of Marubeni Corporation in Japan, but certainly not of the branch in the Philippines.

3. At what rate should Marubeni be taxed?

15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction with the Philippine-Japan Tax
Treaty of 1980. As a general rule, it is taxed 35% of its gross income from all sources within the Philippines.
However, a discounted rate of 15% is given to Marubeni Corporation on dividends received from Atlantic Gulf and
Pacific Co. on the condition that Japan, its domicile state, extends in favor of Marubeni Corporation a tax credit of
not less than 20% of the dividends received. This 15% tax rate imposed on the dividends received under Section
24(b)(1)(iii) is easily within the maximum ceiling of 25% of the gross amount of the dividends as decreed in Article
10(2)(b) of the Tax Treaty.

Note: Each tax has a different tax basis.

Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum rate, as reflected in the phrase
“shall not exceed.” This means that any tax imposable by the contracting state concerned hould not exceed the
25% limitation and said rate would apply only if the tax imposed by our laws exceeds the same.

CIR v BOAC

"The source of an income is the property, activity or service that produced the income. For such source to be
considered as coming from the Philippines, it is sufficient that the income is derived from activity within the
Philippines."

FACTS: Petitioner CIR seeks a review of the CTA's decision setting aside petitioner's assessment of deficiency
income taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1971.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United
Kingdom, and is engaged in the international airline business. During the periods covered by the disputed
assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines. Consequently, it
did not carry passengers and/or cargo to or from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines — Wamer Barnes and Company, Ltd., and later
Qantas Airways — which was responsible for selling BOAC tickets covering passengers and cargoes. The CTA sided
with BOAC citing that the proceeds of sales of BOAC tickets do not constitute BOAC income from Philippine sources
since no service of carriage of passengers or freight was performed by BOAC within the Philippines and, therefore,
said income is not subject to Philippine income tax. The CTA position was that income from transportation is
income from services so that the place where services are rendered determines the source.

ISSUE: Are the revenues derived by BOAC from sales of ticket for air transportation, while having no landing rights
here, constitute income of BOAC from Philippine sources, and accordingly, taxable?

HELD: Yes. The source of an income is the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity
within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income.
The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The site of
the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the
flow of wealth should share the burden of supporting the government.

AFISCO V CIR

Facts: AFISCO and 40 other non-life insurance companies entered into a Quota Share Reinsurance Treaties with
Munich, a non-resident foreign insurance corporation, to cover for All Risk Insurance Policies over machinery
erection, breakdown and boiler explosion. The treaties required petitioners to form a pool, to which AFISCO and
the others complied. On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
“Information Return of Organization Exempt from Income Tax” for the year ending 1975, on the basis of which, it
was assessed by the commissioner of Internal Revenue deficiency corporatetaxes. A protest was filed but denied by
the CIR.

Petitioners contend that they cannot be taxed as a corporation, because (a) the reinsurance policies were written
by them individually and separately, (b) their liability was limited to the extent of their allocated share in the
original risks insured and not solidary, (c) there was no common fund, (d) the executive board of the pool did not
exercise control and management of its funds, unlike the board of a corporation, (e) the pool or clearing house was
not and could not possibly have engaged in the business of reinsurance from which it could have derived income
for itself. They further contend that remittances to Munich are not dividends and to subject it to tax would be
tantamount to an illegal double taxation, as it would result to taxing the same premium income twice in the hands
of the same taxpayer. Finally, petitioners argue that the government’s right toassess and collect the subject
Information Return was filed by the pool on April 14, 1976. On the basis of this return, the BIR telephoned
petitioners on November 11, 1981 to give them notice of its letter of assessmentdated March 27, 1981. Thus, the
petitioners contend that the five-year prescriptive period then provided in the NIRC had already lapsed, and that
the internal revenue commissioner was already barred by prescription from making an assessment.

Held: A pool is considered a corporation for taxation purposes. Citing the case of Evangelista v. CIR, the court held
that Sec. 24 of the NIRC covered these unregistered partnerships and even associations or joint accounts, which
had no legal personalities apart from individual members. Further, the pool is a partnership as evidence by a
common fund, the existence of executive board and the fact that while the pool is not in itself, 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 Munich, because without it they would not have received their premiums.

As to the claim of double taxation, the pool is a taxable entity distinct from the individual corporate entities of the
ceding companies. The tax on its income is obviously different from the tax on the dividends received by the said
companies. Clearly, there is no double taxation.

As to the argument on prescription, the prescriptive period was totaled under the Section 333 of the NIRC, because
the taxpayer cannot be located at the address given in the information return filed and for which reason there was
delay in sending the assessment. Further, the law clearly states that the prescriptive period will be suspended only
if the taxpayer informs the CIR of any change in the address.

OBILLOS V CIR
facts of the case

 March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots located at Greenhills, San
Juan, Rizal.
o The next day he transferred his rights to his four children, the petitioners, to enable them to build their
residences.
o The company sold the two lots to petitioners for P178,708.12 on March 13
 they were coowners of the two lots.
 After more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz
Canda for the total sum of P313,050.
 They derived from the sale a total profit of P134,341.88 or P33,584 for each of them.
 They treated the profit as a capital gain and paid an income tax on onehalf thereof or of P16,792.
 In April, 1980, or one day before the expiration of the fiveyear prescriptive period, the CIR required the four
petitioners to pay corporate income tax on the total profit in addition to individual income tax on their
shares thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56
as 42% accumulated interest, or a total of P71,074.56.
o The CIR alleged that the four petitioners had formed an unregistered partnership or joint venture
within the meaning of sections 24(a) and 84(b) of the Tax Code
Issue
WON the petioners had indeed formed an unregistered partnership, and therefore, liable for the extra taxes
and penalties imposed by the CIR. NO

Ratio
o To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy.
o As testified by Jose Obillos, Jr., they had no such intention. They were coowners pure and simple. The
petitioners were not engaged in any joint venture by reason of that isolated transaction.
o Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to
build their residences on the lots because of the high cost of construction, then they had no choice but to resell
the same to dissolve the coownership.
o The division of the profit was merely incidental to the dissolution of the co ownership which was in the
nature of things a temporary state
o Article 1769(3) of the CC provides that:
o "the sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are
derived". There must be an unmistakable intention to form a partnership or joint venture.*
o As held in the De Leon Case:
o All coownerships are not deemed unregistered pratnership.—CoOwnership who own properties which
produce income should not automatically be considered partners of an unregistered partnership, or a
corporation, within the purview of the income tax law. To hold otherwise, would be to subject the
income of all coownerships of inherited properties to the tax on corporations, inasmuch as if a property
does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on
individuals or the income tax on corporation.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No
costs.

Calasanz vs CIR 144 SCRA 664

Facts:
Ursula Calasanz inherited from her father an agricultural land. Improvements were introduced to make such land
saleable and later in it was sold to the public at a profit. The Revenue examiner adjudged Ursula and her spouse as
engaged in business as real estate dealers and required them to pay the real estate dealer’s tax.

Issue:
Whether or not the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains
taxable at capital gain rates

Ruling:
They are taxable as ordinary income. The activities of Calasanz are indistinguishable from those invariably
employed by one engaged in the business of selling real estate. One strong factor is the business element of
development which is very much in evidence. They did not sell the land in the condition in which they acquired it.
Inherited land which an heir subdivides and makes improvements several times higher than the original cost of the
land is not a capital asset but an ordinary asses. Thus, in the course of selling the subdivided lots, they engaged in
the real estate business and accordingly the gains from the sale of the lots are ordinary income taxable in full.

CIR v CA
Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings of 185,154 shares.
Broken down, the shares comprise of 50,495 shares which were of original issue when the corporation was
founded and 134,659 shares as stock dividend declarations. So in 1964 when Soriano died, half of the shares he
held went to his wife as her conjugal share (wife’s “legitime”) and the other half (92,577 shares, which is further
broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to the estate. For
sometime after his death, his estate still continued to receive stock dividends from ASC until it grew to at least
108,000 shares.
In 1968, ASC through its Board issued a resolution for the redemption of shares from Soriano’s estate purportedly
for the planned “Filipinization” of ASC. Eventually, 108,000 shares were redeemed from the Soriano Estate. In
1973, a tax audit was conducted. Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment
against ASC for deficiency withholding tax-at-source. The CIR explained that when the redemption was made, the
estate profited (because ASC would have to pay the estate to redeem), and so ASC would have withheld tax
payments from the Soriano Estate yet it remitted no such withheld tax to the government.
ASC averred that it is not duty bound to withhold tax from the estate because it redeemed the said shares for
purposes of “Filipinization” of ASC and also to reduce its remittance abroad.
ISSUE: Whether or not ASC’s arguments are tenable.
HELD: No. The reason behind the redemption is not material. The proceeds from a redemption is taxable and ASC
is duty bound to withhold the tax at source. The Soriano Estate definitely profited from the redemption and such
profit is taxable, and again, ASC had the duty to withhold the tax. There was a total of 108,000 shares redeemed
from the estate. 25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of the shares are
deemed to have been from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in the
absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole
or in part, is made out of corporate profits such as stock dividends.
It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that the latter is
merely redeeming them as such. The capital cannot be distributed in the form of redemption of stock dividends
without violating the trust fund doctrine — wherein the capital stock, property and other assets of the corporation
are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That
doctrine was intended for the protection of corporate creditors.
______________________________________________________________________________________________________________________
ATLAS V CIR

"The taxpayer must justify his claim for tax exemption or refund by the clearest grant of organic or statute law and
should not be permitted to stand on vague implications."

"Export processing zones (EPZA) are effectively considered as foreign territory for tax purposes."

FACTS: Petitioner corporation, a VAT-registered taxpayer engaged in mining, production, and sale of various
mineral products, filed claims with the BIR for refund/credit of input VAT on its purchases of capital goods and on
its zero-rated sales in the taxable quarters of the years 1990 and 1992. BIR did not immediately act on the matter
prompting the petitioner to file a petition for review before the CTA. The latter denied the claims on the grounds
that for zero-rating to apply, 70% of the company's sales must consists of exports, that the same were not filed
within the 2-year prescriptive period (the claim for 1992 quarterly returns were judicially filed only on April 20,
1994), and that petitioner failed to submit substantial evidence to support its claim for refund/credit.
The petitioner, on the other hand, contends that CTA failed to consider the following: sales to PASAR and
PHILPOS within the EPZA as zero-rated export sales; the 2-year prescriptive period should be counted from the
date of filing of the last adjustment return which was April 15, 1993, and not on every end of the applicable
quarters; and that the certification of the independent CPA attesting to the correctness of the contents of the
summary of suppliers’ invoices or receipts examined, evaluated and audited by said CPA should substantiate its
claims.

ISSUE: Did the petitioner corporation sufficiently establish the factual bases for its applications for refund/credit of
input VAT?

HELD: No. Although the Court agreed with the petitioner corporation that the two-year prescriptive period for the
filing of claims for refund/credit of input VAT must be counted from the date of filing of the quarterly VAT return,
and that sales to PASAR and PHILPOS inside the EPZA are taxed as exports because these export processing zones
are to be managed as a separate customs territory from the rest of the Philippines, and thus, for tax purposes, are
effectively considered as foreign territory, it still denies the claims of petitioner corporation for refund of its input
VAT on its purchases of capital goods and effectively zero-rated sales during the period claimed for not being
established and substantiated by appropriate and sufficient evidence.
Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the sovereign authority, and
should be construed in strictissimi juris against the person or entity claiming the exemption. The taxpayer who
claims for exemption must justify his claim by the clearest grant of organic or statute law and should not be
permitted to stand on vague implications.

CIR V GENERAL FOODS

Facts:
Respondent corporation General Foods (Phils), which is engaged in the manufacture of “Tang”, “Calumet” and
“Kool-Aid”, filed its income tax return for the fiscal year ending February 1985 and claimed as deduction, among
other business expenses, P9,461,246 for media advertising for “Tang”.
The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of
P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied.

General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision by CTA
dismissing the company’s appeal.

Issue:
W/N the subject media advertising expense for “Tang” was ordinary and necessary expense fully deductible under
the NIRC

Held:
No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of the taxing
authority, and he who claims an exemption must be able to justify his claim by the clearest grant of organic or
statute law. Deductions for income taxes partake of the nature of tax exemptions; hence, if tax exemptions are
strictly construed, then deductions must also be strictly construed.
To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a)
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 taxpayer; and (d) it must be supported
by receipts, records or other pertinent papers.

While the subject advertising expense was paid or incurred within the corresponding taxable year and was
incurred in carrying on a trade or business, hence necessary, the parties’ views conflict as to whether or not it was
ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary.

The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the
two conditions set by U.S. jurisprudence: first, “reasonableness” of the amount incurred and second, the amount
incurred must not be a capital outlay to create “goodwill” for the product and/or private respondent’s business.
Otherwise, the expense must be considered a capital expenditure to be spread out over a reasonable time.

There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense.
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: the type and size of business in which the taxpayer is engaged; the volume and amount of its net
earnings; the nature of the expenditure itself; the intention of the taxpayer and the general economic conditions. It
is the interplay of these, among other factors and properly weighed, that will yield a proper evaluation.

The Court finds the subject expense for the advertisement of a single product to be inordinately large. Therefore,
even if it is necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1) (A) of
the NIRC.

Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services
and (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, to create or maintain some form of goodwill for the taxpayer’s
trade or business or for the industry or profession of which the taxpayer 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 company’s media advertising expense for the promotion of a single product is doubtlessly unreasonable
considering it comprises almost one-half of the company’s entire claim for marketing expenses for that year under
review. Petition granted, judgment reversed and set aside.

Esso Standard Eastern Inc. vs. CIR (G.R. Nos. L-28508-9, July 7, 1989)

Facts: In CTA Case No. 1251, Esso Standard Eastern Inc. (Esso) deducted from its gross income for 1959, as part of
its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum
concessions. This claim was disallowed by the Commissioner of Internal Revenue (CIR) on the ground that the
expenses should be capitalized and might be written off as a loss only when a "dry hole" should result. Esso then
filed an amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of
several of its oil wells. Also claimed as ordinary and necessary expenses in the same return was the amount of
P340,822.04, representing margin fees it had paid to the Central Bank on its profit remittances to its New York
head office.

On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the
margin fees paid on the ground that the margin fees paid to the Central Bank could not be considered taxes or
allowed as deductible business expenses.

Esso appealed to the Court of Tax Appeals (CTA) for the refund of the margin fees it had earlier paid contending
that the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business
expense. However, Esso’s appeal was denied.

Issues:
(1) Whether or not the margin fees are taxes.
(2) Whether or not the margin fees are necessary and ordinary business expenses.

Held:
(1) No. A tax is levied to provide revenue for government operations, while the proceeds of the margin fee are
applied to strengthen our country's international reserves. The margin fee was imposed by the State in the exercise
of its police power and not the power of taxation.

(2) No. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful in
the development of the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation
to the business of the taxpayer and the surrounding circumstances. Since the margin fees in question were
incurred for the remittance of funds to Esso's Head Office in New York, which is a separate and distinct income
taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin
fees were appropriate and helpful in the development of Esso's business in the Philippines exclusively or were
incurred for purposes proper to the conduct of the affairs of Esso's branch in the Philippines exclusively or for the
purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees were
incurred for purposes proper to the conduct of the corporate affairs of Esso in New York, but certainly not in the
Philippines.

Phil. Refining Company v. CA

G.R. No. 118794 May 8, 1996
REGALADO, J.

Lessons Applicable: deductibility of bad debts, penalties of 25% surcharge, interest of 20, civil penalties are
compensatory (not penal), civil penalties and interest are automatic

Laws Applicable:

FACTS:

 Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal Revenue
(Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584
 PRC protested that the amounts are bad debts and interest expense which are allowable and legl
deductions. But, CIR ignored it and issued a warrant of garnishment against PRC's deposits at City Trust Bank.
 PRC filed a Petition for Review with the CTA who reversed the interest expense disallowance but maintained
the 13 bad debts disallowance.
 PRC elevated the case to CA who dismissed the case for failing to satisfy the requirements of worthiness of a
debt:
 (1) there is a valid and subsisting debt
 (2) debt must be actually ascertained to be worthless and uncollectible during the taxable year
 (3) debt must be charged off during the taxable year
 (4) debt must arise from the business or trade of the taxpayer
 (5) uncollectible even in the future
 (6) exerted diligent effort to collect
ISSUES:
1. W/N bad debts requirements are met to be deductible as assessed by the CA
2. W/N PRC should be liable for penalties and interests

HELD: petition at bar is DENIED

1. NO.

 The only evidentiary support given by PRC for its aforesaid claimed deductions was the explanation or
justification posited by its financial adviser or accountant. Not a single document was offered to show that the
Remoblas Store and CM Variety Store were burned, even just a police report or an affidavit attesting to such
loss by fire.T he account of Tomas Store in the amount of P16,842.79 is uncollectible, claims petitioner PRC,
since the owner thereof was murdered and left no visible assets which could satisfy the debt. Withal, just like
the accounts of the two other stores just mentioned, petitioner again failed to present proof of the efforts
exerted to collect the debt, other than the aforestated asseverations of its financial adviser. The accounts of
Aboitiz Shipping Corporation and J. Ruiz Trucking in the amounts of P89,483.40 and P69,640.34, respectively,
both of which allegedly arose from the hijacking of their cargo and for which they were given 30% rebates by
PRC, are claimed to be uncollectible. Again, petitioner failed to present an iota of proof, not even a copy of the
supposed policy regulation of PRC that it gives rebates to clients in case of loss arising from fortuitous events
or force majeure, which rebates it now passes off as uncollectible debts.
 Findings of the CTA having recognized expertise will not ordinarily be reviewed absent a showing of gross
error or abuse on its part.
2. YES.

 Sec. 248 and 249 of the tax code clearly provides that civil penalty is imposed in case of failure to pay the tax
within the prescribed time for its payment and deficiency tax or any surcharge or interest on the due date
appearing in the notice and demand of the commissioner. Thus, penalties of 25% surcharge and interest of
20% shall accrue from April 11, 1989.
 Tax laws imposing penalties for delinquencies, so we have long held, are intended to hasten tax payments by
punishing evasions or neglect of duty in respect thereof. If penalties could be condoned for flimsy reasons, the
law imposing penalties for delinquencies would be rendered nugatory, and the maintenance of the
Government and its multifarious activities will be adversely affected.

BASILAN ESTATES, INC. v. CIR

G.R. No. L-22492 September 5, 1967

Bengzon, J.P., J.

Doctrine:

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction
over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are
privileges, not matters of right. They are not created by implication but upon clear expression in the law.

Facts:

Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the basis of their acquisition cost. As of
January 1, 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost
for their replacement. Accordingly, from 1950 to 1953 it deducted from gross income the value of depreciation
computed on the reappraised value.

CIR disallowed the deductions claimed by petitioner, consequently assessing the latter of deficiency income taxes.

Issue:

Whether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of
the assets

Held:

Yes. The following tax law provision allows a deduction from gross income for depreciation but limits the recovery
to the capital invested in the asset being depreciated:

(1)In general. — A reasonable allowance for deterioration of property arising out of its use or employment in the
business or trade, or out of its not being used: Provided, That when the allowance authorized under this subsection
shall equal the capital invested by the taxpayer . . . no further allowance shall be made. . . .

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction
over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are
privileges, not matters of right. They are not created by implication but upon clear expression in the law [Gutierrez
v. Collector of Internal Revenue, L-19537, May 20, 1965].

Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and
normal obsolescense. It commences with the acquisition of the property and its owner is not bound to see his
property gradually waste, without making provision out of earnings for its replacement.

The recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the
underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only the
acquisition cost, but also some profit. Recovery in due time thru depreciation of investment made is the philosophy
behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for
the allowance of a deduction for depreciation.