MADRIGAL v.
RAFFERTY ISSUE: Whether stock dividends may be considered as income
Facts: Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914.
The marriage was contracted under the provisions of law concerning conjugal
partnerships (sociedad de gananciales). On February 25, 1915, Vicente Madrigal filed
sworn declaration on the prescribed form with the Collector of Internal Revenue, showing,
as his total net income for the year 1914, the sum of P296,302.73. Subsequently Madrigal
submitted the claim that the said P296,302.73 did not represent his income for the year
1914, but was in fact the income of the conjugal partnership existing between himself and
his wife Susana Paterno, and that in computing and assessing the additional income tax
provided by the Act of Congress of October 3, 1913, the income declared by Vicente
Madrigal should be divided into two equal parts, one-half to be considered the income of
Vicente Madrigal and the other half of Susana Paterno.
After payment under protest, and after the protest of Madrigal had been decided
adversely by the Collector of Internal Revenue, action was begun by Vicente Madrigal and
his wife Susana Paterno in the Court of First Instance of the city of Manila against Collector
of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the
sum of P3,786.08, alleged to have been wrongfully and illegally collected by the
defendants from the plaintiff, Vicente Madrigal, under the provisions of the Act of
Congress known as the Income Tax Law.
Issue: Whether or not the income reported by Madrigal on 1915 should be divided into 2
in computing for the additional income tax?
Ruling: No.Income Tax Law, as the name implies, taxes upon income and not upon capital
and property. The essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called capital. A flow
of services rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time is called
income. Capital is wealth, while income is the service of wealth.
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her
husband Vicente Madrigal during the life of the conjugal partnership. She has an interest
in the ultimate property rights and in the ultimate ownership of property acquired as
income after such income has become capital. Susana Paterno has no absolute right to
one-half the income of the conjugal partnership. Not being seized of a separate estate,
Susana Paterno cannot make a separate return in order to receive the benefit of the
exemption which would arise by reason of the additional tax. As she has no estate and
income, actually and legally vested in her and entirely distinct from her husband's
property, the income cannot properly be considered the separate income of the wife for
the purposes of the additional tax. Moreover, the Income Tax Law does not look on the
spouses as individual partners in an ordinary partnership. The husband and wife are only
entitled to the exemption of P8,000 specifically granted by the law. The higher schedules
of the additional tax directed at the incomes of the wealthy may not be partially defeated
by reliance on provisions in our Civil Code dealing with the conjugal partnership and
having no application to the Income Tax Law. The aims and purposes of the Income Tax
Law must be given
effect.__________________________________________________________________________
FISHER v. TRINIDAD (OCT30, 1922)
FACTS: Frederick Fisher was a stockholder in the corporation Philippine American Drug
Company, which was doing business in the City of Manila. PADC declared a stock dividend,
the proportionate share of the appellant was P24,800, which was issued to the appellant.
In March 1920, the appellant, upon demand of the appellee, paid under protest, and
voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend.
For the recovery of that sum the present action was instituted. The defendant demurred
to the petition. The demurrer was sustained and the plaintiff appealed. F relies on ome
decisions of the SC of the US in which it was consistently held that "stock dividends" were
capital and not an "income" and therefore not subject to the "income tax" law. CIR
Trinidad avers that the decisions of those cases should not be applied in the Ph bcoz d Ph
statute is different from that of the US.
RULING: No way! Income may be defined as "the amount of money coming to a person or
corporation within a specified time whether as payment or corporation within a specified
time whether as payment for services, interest, or profit from investment. A mere advance
in value in no sense constitutes the "income" specified in the revenue law as "income" of
the owner for the year in which the sale of the property was made. Such advance
constitutes and can be treated merely as an increase of capital.
There is a clear distinction between an extraordinary cash dividend, no matter when
earned, and stock dividends declared, as in the present case. The one is a disbursement
to the stockholder of accumulated earnings, and the corporation at once parts irrevocably
with all interest thereon. The latter receives, not an actual dividend, but certificate of
stock which simply evidences his interest in the entire capital, including such as by
investment of accumulated profits has been added to the original capital. They are not
income to him, but represent additions to the source of his income, namely, his invested
capital. One is an actual receipt of profits; the other is a receipt of a representation of the
increased value of the assets of corporation.________________
LIMPAN INVESTMENT CORPORATION v. CIR
FACTS: Petitioner Limpan Investment Corporation, a domestic corporation, is engaged in
the business of leasing real properties. Its principal stockholders are the spouses Isabelo P.
Lim and Purificacion Ceñiza de Lim, who own and control ninety-nine per cent (99%) of its
total paid-up capital. Its president and chairman of the board is the same Isabelo P.
Lim.1äwphï1.ñët
Its real properties consist of several lots and buildings, mostly situated in Manila and in
Pasay City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente
Pantangco Vda. de Lim.
Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein
net incomes of P3,287.81 and P11,098.36, respectively, for which it paid the
corresponding taxes therefor in the sums of P657.00 and P2,220.00.
Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted
an investigation of petitioner's 1956 and 1957 income tax returns and, in the course
thereof, they discovered and ascertained that petitioner had underdeclared its rental
incomes by P20,199.00 and P81,690.00 during these taxable years and had claimed
excessive depreciation of its buildings in the sums of P4,260.00 and P16,336.00 covering
the same period. On the basis of these findings, respondent Commissioner of Internal
Revenue issued its letter-assessment and demand for payment of deficiency income tax
and surcharge against petitioner corporation.
Petitioner corporation requested respondent Commissioner of Internal Revenue to
reconsider the assessment but the latter denied said request and reiterated its original
assessment and demand. Hence, the corporation filed its petition for review before the
Tax Appeals court, questioning the correctness and validity of the above assessment of
respondent Commissioner of Internal Revenue. It disclaimed having received or collected
the amount of P20,199.00, as unreported rental income for 1956, or any part thereof and
denied having received or collected the amount of P81,690.00, as unreported rental
income for 1957, or any part thereof, explaining that part of said amount totalling
P31,380.00 was not declared as income in its 1957 tax return because its president,
Isabelo P. Lim, who collected and received P13,500.00 from certain tenants, did not turn
the same over to petitioner corporation in said year but did so only in 1959; that a certain
tenant (Go Tong) deposited in court his rentals amounting to P10,800.00, over which the
corporation had no actual or constructive control; and that a sub-tenant paid P4,200.00
which ought not be declared as rental income.
With regard to the depreciation which respondent disallowed and deducted from the
returns filed by petitioner, the same witness tried to establish that some of its buildings
are old and out of style; hence, they are entitled to higher rates of depreciation than those
adopted by respondent in his assessment.
On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally
conducted the investigation of the 1956 and 1957 income tax returns of petitioner
corporation, testified for the respondent that he personally interviewed the tenants of
petitioner and found that these tenants had been regularly paying their rentals to the
collectors of either petitioner or its president, Isabelo P. Lim, but these payments were not
declared in the corresponding returns.
The Tax Court upheld respondent Commissioner's assessment and demand for deficiency
income tax which, as above stated in the beginning of this opinion, petitioner has
appealed to this Court.
ISSUE: Whether or not the respondent Court erred in holding that the petitioner had an
unreported rental income of P20,199.00 for the year 1956, and that it erred in holding that
the petitioner had an unreported rental income of P81,690.00 for the year 1957, and in
holding that the depreciation in the amount of P20,598.00 claimed by petitioner for the
years 1956 and 1957 was excessive.
RULING: The decision appealed from is affirmed. This appeal is manifestly unmeritorious.
With respect to the balance, which petitioner denied having unreported in the disputed
tax returns, the excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained
ownership of the lands and only later transferred or disposed of the ownership of the
buildings existing thereon to petitioner corporation, so as to justify the alleged verbal
agreement whereby they would turn over to petitioner corporation six percent (6%) of the
value of its properties to be applied to the rentals of the land and in exchange for
whatever rentals they may collect from the tenants who refused to recognize the new
owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged
transferors, or by any document or unbiased evidence. Petitioner's denial and explanation
of the non-receipt of the remaining unreported income for 1957 is not substantiated by
satisfactory corroboration. As above noted, Isabelo P. Lim was not presented as witness to
confirm accountant Solis nor was his 1957 personal income tax return submitted in court
to establish that the rental income which he allegedly collected and received in 1957 were
reported therein.
The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no
sufficient justification for the non-declaration of said income in 1957, since the deposit
was resorted to due to the refusal of petitioner to accept the same, and was not the fault
of its tenants; hence, petitioner is deemed to have constructively received such rentals in
1957. The payment by the sub-tenant in 1957 should have been reported as rental
income in said year, since it is income just the same regardless of its source.
It appearing that the Tax Court applied rates of depreciation in accordance with Bulletin
"F" of the U.S. Federal Internal Revenue Service, which this Court pronounced as having
strong persuasive effect in this jurisdiction, for having been the result of scientific studies
and observation for a long period in the United States, after whose Income Tax Law ours is
patterned, the depreciation in the amount of P20,598.00 claimed by petitioner for the
years 1956 and 1957 was not
excessive.___________________________________________________________
CONWI vs. COURT OF TAX APPEALS
FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine
Manufacturing Corporation. Said corporation is a subsidiary of Procter & Gamble, a foreign
corporation. During the years 1970 and 1971 petitioners were assigned, for certain
periods, to other subsidiaries of Procter & Gamble, outside of the Philippines, during which
petitioners were paid U.S. dollars as compensation for services in their foreign
assignments. When petitioners filed their income tax returns for the year 1970, they
computed the tax due by applying the dollar-to-peso conversion on the basis of the
floating rate ordained under B.I.R. Ruling No. 70-027. In 1973, petitioners filed their
amended income tax returns for 1970 and 1971, this time using par value of the peso as
basis for converting their respective dollar income into Philippines pesos for purposes of
computing and paying corresponding income tax due from them. This resulted in the
alleged overpayments, refund and/or tax credit, for which claims for refund were filed with
respondent Commissioner.
Petitioners argued that since the dollar earnings do not fall within the classification of
foreign exchange transactions, there occurred no actual inward remittances, and,
therefore, they are not included in the coverage of Central Bank Circular No. 289 which
provides for the specific instances when the par value of the peso shall not be the
conversion rate used. They conclude that their earnings should be converted for income
tax purposes using the par value of the Philippine peso.
Without awaiting the resolution of the Commissioner on their claims, petitioners filed their
petition for review before the CTA. CTA held that the proper conversion rate for the
purpose of reporting and paying the Philippine income tax on the dollar earnings of
petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and
41-71. The refund claims were denied.
ISSUES:
1. WON petitioner’s dollar earnings are receipts derived from foreign exchange
transactions.
2. WON the CTA erred in holding that the proper rate of conversion is the prevailing
free market rate of exchange and not the par value of the peso.
3. WON petitioners are exempt to pay tax for such income since there were no
remittance/ acceptance of their salaries in US Dollars into the Philippines.
HELD:
1. NO. For the proper resolution of these cases income may be defined as an
amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless
otherwise specified, it means cash or its equivalent. Income can also be thought
of as flow of the fruits of one's labor. Petitioners are correct in claiming that their
dollar earnings are not receipts derived from foreign exchange transactions. For a
foreign exchange transaction is simply that-foreign exchange being “the
conversion of an amount of money of one country into an equivalent amount of
money of another country. When petitioners were assigned to the foreign
subsidiaries of P&G, they were earning in their assigned nation’s currency and
were also spending in said currency. There was no conversion from one currency
to another.
2. NO. CB Circular No. 289 shows that the subject matters involved therein are
export products, invisibles, receipts of foreign exchange, foreign exchange
payments, new foreign borrowing and investments — nothing by way of income
tax payments. Thus, petitioners are in error by concluding that since C.B. Circular
No. 289 does not apply to them, the par value of the peso should be the guiding
rate used for income tax purposes.
3. No. Even if there was no remittance and acceptance of their salaries and wages
in US Dollars into the Philippines, they are still bound to pay the tax. Petitioners
forgot that they are citizens of the Philippines, and their income, within or
without, and in this case wholly without or outside the Philippines, are subject to
income tax. The petitions were denied for lack of merit.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of
Procter & Gamble. It was a definite amount of money which came to them within a
specified period of time of two years as payment for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states
as follows:
Sec. 21. Rates of tax on citizens or residents. — A tax is hereby imposed upon the taxable
net income received during each taxable year from all sources by every individual,
whether a citizen of the Philippines residing therein or abroad or an alien residing in the
Philippines, determined in accordance with the following schedule:
xxx xxx xxx
As income of the petitioners, Revenue Memorandum Circulars 7-71 and 41-71, reiterating
BIR Ruling 70-027, shall apply. These Revenue Memorandum Circulars were issued to
prescribe a uniform rate of exchange for internal revenue tax
purposes.__________________________________________________________________
COMMISSIONER v. GLENSHAW GLASS
Glenshaw manufactures glass bottles and containers. Hatford- Empire company
manufactures the machines used by Glenshaw.
Glenshaw sued Hatford-Empire. His claims were demands for exemplary damages for
fraud and treble damages for injury to its business by reason of Hartford’s violation of the
federal antitrust laws. They had a settlement wherein Hartford paid Glenshaw $800,000.
Of this amount, around $324k, which was for punitive damages for fraud and antitrust
violations, was not reported by Glenshaw as income.
The Commissioner determined a deficiency, claiming as taxable the entire sum less only
deductible legal fees. The Tax Court and the Court of Appeals ruled for Glenshaw.
ISSUE: Whether or not the award for damages falls under “income derived from whatever
source,” thus taxable
HELD: YES.
US Tax Code: SEC. 22. GROSS INCOME.
"(a) GENERAL DEFINITION. 'Gross income' includes gains, profits, and income derived from
salaries, wages, or compensation for personal service . . . of whatever kind and in
whatever form paid, or from professions, vocations, trades, businesses, commerce, or
sales, or dealings in property, whether real or personal, growing out of the ownership or
use of or interest in such property; also from interest, rent, dividends, securities, or the
transaction of any business carried on for gain or profit, or gains or profits and income
derived from any source whatever. . . ."
Here, we have instances of undeniable accessions to wealth, clearly realized, and over
which the taxpayers have complete dominion. The mere fact that the payments were
extracted from the wrongdoers as punishment for unlawful conduct cannot detract from
their character as taxable income to the recipients. Respondents concede, as they must,
that the recoveries are taxable to the extent that they compensate for damages actually
incurred. It would be an anomaly that could not be justified in the absence of clear
congressional intent to say that a recovery for actual damages is taxable, but not the
additional amount extracted as punishment for the same conduct which caused the injury.
And we find no such evidence of intent to exempt these payments.____
MURPHY v. IRS
Facts: Marrita Leveille (now “Murphy”) received compensatory damages of $70,000 after
winning a complaint against her former employer for a violation of whistle-blower
statutes. The award was divided as follows: $45,000 represented damages for emotional
distress or mental anguish and $25,000 represented damages for injury to professional
reputation. Murphy included the $70,000 in gross income on her 2000 tax return and paid
$20,665 of related taxes. She later sought a refund of the $20,665. The IRS denied the
request for a refund, and Murphy brought a suit against the IRS in the U.S. District Court
for the District of Columbia, which granted summary judgment for the IRS. On appeal to
the D.C. Circuit, Murphy contended that her receipt of damages on account of personal
injuries (including nonphysical personal injuries) was analogous to a tax-free return of
capital (i.e., human capital) and was, therefore, not subject to taxation.
Issue: WON Murphy can refund the amount she paid as tax in relation to the $70,000
awarded to her
Ruling: When the Sixteenth Amendment was drafted, the word "incomes" had well
understood limits. To be sure, the Supreme Court has broadly construed the phrase "gross
income" in the IRC and, by implication, the word "incomes" in the Sixteenth Amendment,
but it also has made plain that the power to tax income extends only to "gain[s]" or
"accessions to wealth. That is why, as noted above, the Supreme Court has held a "return
of capital" is not income. The question in this case is not, however, about a return of
capital—except insofar as Murphy analogizes human capital to physical or financial
capital; the question is whether the compensation she received for her injuries is income.
Here, if the $70,000 Murphy received was "in lieu of" something "normally untaxed, then
her compensation is not income under the Sixteenth Amendment; it is neither a "gain" nor
an "accession[] to wealth.
As we have seen, it is clear from the record that the damages were awarded to make
Murphy emotionally and reputationally "whole" and not to compensate her for lost wages
or taxable earnings of any kind. The emotional well-being and good reputation she
enjoyed before they were diminished by her former employer were not taxable as income.
Under this analysis, therefore, the compensation she received in lieu of what she lost
cannot be considered income and, hence, it would appear the Sixteenth Amendment does
not empower the Congress to tax her award.
Every indication is that damages received solely in compensation for a personal injury are
not income within the meaning of that term in the Sixteenth Amendment. First, as
compensation for the loss of a personal attribute, such as well-being or a good reputation,
the damages are not received in lieu of income. Second, the framers of the Sixteenth
Amendment would not have understood compensation for a personal injury, including a
nonphysical injury, to be income. Therefore, we hold § 104(a)(2) unconstitutional insofar
as it permits the taxation of an award of damages for mental distress and loss of
reputation.
Accordingly, we remand this case to the district court to enter an order and judgment
instructing the Government to refund the taxes Murphy paid on her award plus applicable
interest.______________________
OLD COLONY v. CIR
Wiliam Wood was President of the American Woolen Company from the years 1918-1920.
He included in his federal income tax the salaries and commissions he received for such
years. Pursuant to the company’s resolutions, it paid to the CIR Mr. Woods’ income and
surtaxes for the latter’s salaries and commissions.
The petitioners are the executors of the will of William M. Wood, deceased. On June 27,
1925, before Mr. Wood's death, the Commissioner of Internal Revenue notified him by
registered mail of the determination of a deficiency in income tax against him for the
years 1919 and 1920. An appeal was taken to the Board of Tax Appeals. The Board found
a deficiency in the federal income tax return of Mr. Wood for the year 1919 and for the
year 1920.
Issue: Whether or not the taxes paid by the employer assessable against the employee
constitutes as additional taxable income to such employee?
(Stated differently, whether or not the taxes paid by the company constitutes as
additional income by Wood and therefore taxable?)
Held: The taxes paid by the company for Wood constitutes as additional income, and
therefore taxable. The payment of the tax by the employers was in consideration of the
services rendered by the employee, and was again derived by the employee from his
labor. The taxes were imposed upon the employee, which were payed by the employer,
and that the employee entered upon his duties in the years in question under the express
agreement that his income taxes would be paid by his employer. The taxes were paid
upon a valuable consideration, namely, the services rendered by the employee and as
part of the compensation therefor. _____
HELVERING v. BRUUN 309 U.S. 461 (1940)
 Bruun was a landlord. He leased some property to a tenant. When the lease
expired, the tenant left and Bruun took the property back.
 In 1929, while the tenant was in possession of the property, they knocked down
an old building and built a new building on the property. In 1933, when they left,
Bruun got to keep the new building.
 The building which had been erected upon said premises by the lessee had a fair
market value of $64,245.68, and that the unamortized cost of the old building,
which was removed from the premises in 1929 to make way for the new building,
was $12,811.43, thus leaving a net fair market value as at July 1, 1933, of
 $51,434.25, for the aforesaid new building erected upon the premises by the
lessee.
 The IRS stepped in and said that Bruun's gain of a new building was a capital
gain.
Contention of Bruun:
Bruun argued that no income had been realized yet because his interest was represented
by a deed, and when the tenant left, he had the exact same deed he had when the tenant
arrived. So he hadn't gained anything. Bruun suggested that the IRS would have to wait
until the property was sold (aka the value was realized).
 Basically, the construction of the new building increased the
value of the land, but there were other ways the value could
change. But until the land was sold, Bruun hadn't received
anything.
 See Eisner v. Macomber (252 U.S. 189 (1920)), which says
that in general, you don't have to report a gain until you sell
the property (aka "severance is a prerequisite to realization").
Contention of IRS:
The IRS argued that until the day the tenant left, Bruun didn't own a new building, as soon
as the lease ended, Bruun did own a new building. He had received a gain and needed to
pay taxes on it immediately.
Issue: WON the improvements and increase attributable to the improvements are
taxable.
Held: The US Supreme Court found for the IRS.
The US Supreme Court found that upon when a lease ended, the landlord repossessed the
real estate and improvements and increase in value attributable to the improvements was
taxable.
While it is true that economic gain is not always taxable as income, it is settled that the
realization of gain need not be in cash derived from the sale of an asset. Gain may occur
as a result of exchange of property, payment of the taxpayer's indebtedness, relief from a
liability, or other profit realized from the completion of a transaction. The fact that the
gain is a portion of the value of property received by the taxpayer in the transaction does
not negative its realization.
Here, as a result of a business transaction, the respondent received back his land with a
new building on it, which added an ascertainable amount to its value. It is not necessary
to recognition of taxable gain that he should be able to sever the improvement begetting
the gain from his original capital. If that were necessary, no income could arise from the
exchange of property, whereas such gain has always been recognized as realized taxable
gain._________________________________________________________________________________
CIR v. CA, CTA and A. SORIANO CORP.
Don Andres Soriano (American), founder of “A Soriano Y Cia” predecessor of ANSCOR, 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, ANSCOR through its Board issued a resolution for the redemption of shares from
Soriano’s estate purportedly for the planned “Filipinization” of ANSCOR. 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 based on the transactions of
exchange and redemption of stocks
The BIR made the corresponding assessments despite the claim of ANSCOR that it availed
of the tax amnesty under
(P.D.) 23. However, petitioner ruled that the invoked decrees do not cover Sections 53 and
54 in relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was
assessed. The CIR explained that when the redemption was made, the estate profited
(because ANSCOR 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.
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax
assessments on the redemptions and exchange of stocks. In its decision, the Tax Court
reversed petitioner's ruling, after finding sufficient evidence to overcome the prima
facie correctness of the questioned assessments. 36 In a petition for review the CA as
mentioned, affirmed the ruling of the CTA. 37 Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b) of the 1939
Revenue Act 38 which provides:
Sec. 83. Distribution of dividends or assets by corporations. —
(b) Stock dividends — A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax. However, if a corporation cancels or redeems stock
issued as a dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the distribution of
a taxable dividend, the amount so distributed in redemption or cancellation of the stock
shall be considered as taxable income to the extent it represents a distribution of earnings
or profits accumulated after March first, nineteen hundred and thirteen. (Emphasis
supplied)
ANSCOR averred that it is not duty bound to withhold tax from the estate because it
redeemed the said shares for purposes of “Filipinization” of ANSCOR and also to reduce its
remittance abroad.
Petitioner contends that the exchange transaction a tantamount to "cancellation" under
Section 83(b) making the proceeds thereof taxable. It also argues that the Section applies
to stock dividends which are the bulk of stocks that ANSCOR redeemed. Further, petitioner
claims that under the "net effect test," the estate of Don Andres gained from the
redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-at-source arising
from the two transactions, pursuant to Section 53 and 54 of the 1939 Revenue Act.
ISSUE: Whether ANSCOR's redemption of stocks from its stockholder as well as the
exchange of common with preferred shares can be considered as "essentially equivalent
to the distribution of taxable dividend" making the proceeds thereof taxable under the
provisions of the above-quoted law.
HELD: The reason behind the redemption is not material. The proceeds from redemption
are taxable and ANSCOR is duty bound to withhold the tax at source. The Soriano Estate
definitely profited from the redemption and such profit is taxable, and again, ANSCOR 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 ANSCOR. 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
ANSCOR 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.______________________
WISE & CO., INC., ET. AL., vs. MEER
FACTS: Herein plaintiff-appellants Wise & Co., Inc. et. al were stockholders of Manila Wine
Merchants, Ltd. (hereinafter referred to as the Hongkong Company), a foreign corporation
duly authorized to do business in the Philippines. On May 27, 1937 its Board of Directors
recommended to the stockholders that they adopt resolutions necessary to sell its
business and assets to Manila Wine Merchants, Inc., a Philippine corporation formed on
May 27, 1937, for the sum of P400,000. This sale was duly authorized by the stockholders
of the Hongkong Company at a meeting held on July 22, 1937.
The Hongkong Co. made a distribution from its earnings for the year 1937 to its
stockholders. As a result of the sale of its business and assets to Philippine Co., a surplus
was realized and the HK Co.distributed this surplus to the shareholders including Wise &
Co.Inc., et.al. Philippine income tax had been paid by HK Co. on the said surplus from
which said distributions were made. At a special general meeting of the shareholders of
the HK Co., the stockholders by resolution directed that the company be voluntarily
liquidated and its capital distributed among the stockholders. The plaintiff- appellants duly
filed Income Tax Returns, on which the defendant, Collector of Internal Revenue Bibiano L.
Meer made deficiency assessments of P11, 931.23 for the year 1937. They paid under
written protest. Since July 1, 1939 they requested from defendant a refund of the said
amounts which defendant has refused and still refuses to refund.
Now, before the Court of First Instance of Manila was a complaint for recovery of certain
amounts therein specified. CFI ruled in favor of CIR Meer stating that that the Hongkong
corporation, was in liquidation beginning June 1, 1937, that all dividends declared and
paid thereafter were distributions of all its assets in complete liquidation and were subject
to tax. Appellants appealed the decision of the CFI.
ISSUE: W the distributions received by plaintiffs-appellants are ordinary dividends and
therefore not taxable
HELD: No. The SC affirmed the CFI’s judgment. Appellants contend that the amounts
received by them and on which the taxes in question were assessed and collected were
ordinary dividends. On the other hand, CIR contends that they were liquidating dividends.
SC ruled that the distributions under consideration were not ordinary dividends. Therefore,
they are taxable as liquidating dividends.
Income tax law states that “Where a corporation, partnership, association, joint-account,
or insurance company distributes all of its assets in complete liquidation or dissolution,
the gain realized or loss sustained by the stockholder, whether individual or corporation, is
a taxable income or a deductible loss as the case may be. Appellants received the
distributions in question in exchange for the surrender and relinquishment by them of
their stock in the HK Co. which was dissolved and in process of complete liquidation.
Non-resident alien individual appellants contend that if the distributions received by them
were to be considered as a sale of their stock to the HK Co., the profit realized by them
does not constitute income from Philippine sources and is not subject to Philippine taxes,
"since all steps in the carrying out of this so-called sale took place outside the
Philippines." This contention is untenable. The HK Co. was at the time of the sale of its
business in the Philippines, and the PH Co. was a domestic corporation domiciled and
doing business also in the Philippines. The HK Co. was incorporated for the purpose of
carrying on in the Philippine Islands the business of wine, beer, and spirit merchants and
the other objects set out in its memorandum of association. Hence, its earnings, profits,
and assets, including those from whose proceeds the distributions in question were made,
the major part of which consisted in the purchase price of the business, had been earned
and acquired in the Philippines. As such, it is clear that said distributions were income
"from Philippine sources."________________
JAMES v. US
Facts: The petitioner is a union official who, with another person, embezzled in excess of
$738,000 during the years 1951 through 1954 from his employer union and from an
insurance company with which the union was doing business. Petitioner failed to report
these amounts in his gross income in those years. Petitioner was charged of a criminal
case for embezzlement. He was sentenced for a total of three years imprisonment.
In addition to criminal penalties for embezzlement, the IRS stepped in and claimed that
the $738k should be counted in James' gross income. James argued that since a person is
legally obligated to repay money that they steal, they've received no income in the same
way as a person receives no income from taking out a loan. So there should be no tax
liability.
Petitioner contends that the Wilcox rule has been in existence since 1946; that if Congress
had intended to change the rule, it would have done so; that there was a general revision
of the income tax laws in 1954 without mention of the rule; that a bill to change it was
introduced in the Eighty-sixth Congress but was not acted upon; that, therefore, we may
not change the rule now. But the fact that Congress has remained silent or has re-enacted
a statute which we have construed, or that congressional attempts to amend a rule
announced by this Court have failed, does not necessarily debar us from re-examining and
correcting the Court's own errors.
In Wilcox, the Court held that embezzled money does not constitute taxable income to the
embezzler in the year of the embezzlement under 22 (a) of the Internal Revenue Code of
1939.
Issue: Whether embezzled funds are to be included in the "gross income" of the
embezzler in the year in which the funds are misappropriated.
Held: Embezzled money is taxable income of the embezzler in the year of the
embezzlement under 22 (a) of the Internal Revenue Code of 1939, which defines "gross
income" as including "gains or profits and income derived from any source whatever," and
under 61 (a) of the Internal Revenue Code of 1954, which defines "gross income" as "all
income from whatever source derived."
It had been a well-established principle, long before either Rutkin or Wilcox, that unlawful,
as well as lawful, gains are comprehended within the term "gross income." Section II B of
the Income Tax Act of 1913 provided that "the net income of a taxable person shall
include gains, profits, and income from the transaction of any lawful business carried on
for gain or profit, or gains or profits and income derived from any source whatever . . . ."
When the statute was amended in 1916, the one word "lawful" was omitted. This
revealed, we think, the obvious intent of that Congress to tax income derived from both
legal and illegal sources, to remove the incongruity of having the gains of the honest
laborer taxed and the gains of the dishonest immune. And, the Court has pointed out,
with approval, that there "has been a widespread and settled administrative and judicial
recognition of the taxability of unlawful gains of many kinds. These include protection
payments made to racketeers, ransom payments paid to kidnappers, bribes, money
derived from the sale of unlawful insurance policies, graft, black market gains, funds
obtained from the operation of lotteries, income from race track bookmaking and illegal
prize fight pictures.________________________________________________________
CIR Vs. CA, CTA & GCL Retirement Plan
Facts: GCL Retirement Plan is an employees' trust maintained by the employer, GCL Inc.,
to provide retirement, pension, disability and death benefits to its employees. The Plan as
submitted was approved and qualified as exempt from income tax by CIR in accordance
with RA 4917. In 1984, GCL made investments and earned there from interest income
which was withheld the 15% final withholding tax imposed by PD 1959, GCL filed with CIR
a claim for refund in the amounts of P1,312.66 withheld by Anscor and P2,064.15 by
Commercial Bank of Manila. In 1985, it filed a second claim for refund of the amount of
P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the collection
of the 15% final withholding tax from the interest income as it is an entity fully exempt
from income tax as provided under RA 4917 in relation to Sec 56 (b) of the Tax Code.
CIR – denied the refund, Petitioner elevated the matter to CTA which ruled in favor of GCL,
holding that employees' trusts are exempt from the 15%final withholding tax on interest
income and ordering a refund of the tax withheld. CA - upheld the CTA Decision.
CIR’s Contention is that from 1984 when PD 1959 was promulgated, employees' trusts
ceased to be exempt and thereafter became subject to the final withholding tax.
GCL’s contention is that the tax exempt status of the employees' trusts applies to all
kinds of taxes, including the final withholding tax on interest income. That exemption,
according to GCL, is derived from Sec 56(b) and not from Sec 21 (d) or 24 (cc) of the Tax
Code.
Issue: Whether GCL is exempted from Income Tax
Held: GCL Plan was qualified as exempt from income tax by the CIR in accordance with
RA 4917. In so far as employees' trusts are concerned, the foregoing provision should be
taken in relation to then Sec 56(b) (now 53[b]) of the Tax Code, as amended by RA 1983.
The tax-exemption privilege of employees' trusts, as distinguished from any other kind of
property held in trust, springs from the foregoing provision. It is unambiguous. The tax law
has singled out employees' trusts for tax exemption and rightly so, by virtue of the raison
de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans
normally provide economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or disability. It provides
security against certain hazards to which members of the Plan may be exposed. It is an
independent and additional source of protection for the working group. What is more, it is
established for their exclusive benefit and for no other purpose. The deletion in PD 1959
of the provisos regarding tax exemption and preferential tax rates under the old law,
therefore, cannot be deemed to extent to employees' trusts.
Said Decree, being a general law, cannot repeal by implication a specific provision, Sec
56(b) now 53 [b]) in relation to RA 4917 granting exemption from income tax to
employees' trusts. RA 1983, which exempted employees' trusts in its Sec 56 (b) was
effective on 1957 while RA 4917 was enacted on 1967, long before the issuance of PD
1959 in 1984. A subsequent statute, general in character as to its terms and application,
is not to be construed as repealing a special or specific enactment, unless the legislative
purpose to do so is manifested. This is so even if the provisions of the latter are
sufficiently comprehensive to include what was set forth in the special act. There can be
no denying either that the final withholding tax is collected from income in respect of
which employees' trusts are declared exempt. The application of the withholdings system
to interest on bank deposits or yield from deposit substitutes is essentially to maximize
and expedite the collection of income taxes by requiring its payment at the source. If an
employees' trust like the GCL enjoys a tax-exempt status from income, we see no logic in
withholding a certain percentage of that income which it is not supposed to pay in the first
place.
We herein rule that PD 1959 did not have the effect of revoking the tax exemption
enjoyed by employees' trusts; reliance on those authorities is now misplaced.
WHEREFORE, the Writ of Certiorari prayed for is DENIED.
CIR vs. CA and EFREN P. CASTANEDA G.R. No. 96016 October 17, 1991
FACTS: Private respondent Efren P. Castaneda retired from the government service as
Revenue Attache in the Philippine Embassy in London, England, on 10 December 1982.
Upon retirement, he received terminal leave pay from which petitioner CIR withheld
P12,557.13 allegedly representing income tax.
Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13,
contending that the cash equivalent of his terminal leave is exempt from income tax. To
comply with the 2-year prescriptive period within which claims for refund may be filed,
Castaneda filed on 16 July 1984 with the Court of Tax Appeals (CTA) a Petition for Review,
seeking the refund of income tax withheld from his terminal leave pay.
The CTA found for private respondent Castaneda and ordered the CIR to refund Castaneda
the sum of P12,557.13 withheld as income tax. Petitioner appealed the CTA decision. On
26 September 1990, the CA dismissed the petition for review and affirmed the decision of
the CTA.
ISSUE: WON terminal leave pay received by a government official or employee on the
occasion of his compulsory retirement from the government service is subject to
withholding (income) tax.
HELD: We resolve the issue in the negative. The Solicitor General, acting on behalf of the
CIR, contends that the terminal leave pay is income derived from employer-employee
relationship, citing in support of his stand Section 28 of the National Internal Revenue
Code; that as part of the compensation for services rendered, terminal leave pay is
actually part of gross income of the recipient. Thus —
. . . It (terminal leave pay) cannot be viewed as salary for purposes which would reduce
it. . . . there can thus be no "commutation of salary" when a government retiree applies
for terminal leave because he is not receiving it as salary. What he applies for is a
"commutation of leave credits." It is an accumulation of credits intended for old age or
separation from service. . . .
The Court has already ruled that the terminal leave pay received by a government official
or employee is not subject to withholding (income) tax. In the recent case of Jesus N.
Borromeo vs. The Hon. Civil Service Commission, et al., G.R. No. 96032, 31 July 1991, the
Court explained the rationale behind the employee's entitlement to an exemption from
withholding (income) tax on his terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as terminal leave, is applied for
by an officer or employee who retires, resigns or is separated from the service through no
fault of his own. (Manual on Leave Administration Course for Effectiveness published by
the Civil Service Commission, pages 16-17). In the exercise of sound personnel policy, the
Government encourages unused leaves to be accumulated. The Government recognizes
that for most public servants, retirement pay is always less than generous if not meager
and scrimpy. A modest nest egg which the senior citizen may look forward to is thus
avoided. Terminal leave payments are given not only at the same time but also for the
same policy considerations governing retirement benefits.
In fine, not being part of the gross salary or income of a government official or employee
but a retirement benefit, terminal leave pay is not subject to income
tax.______________________________________________
RE: REQUEST OF ATTY. BERNARDO ZIALCITA FOR RECONSIDERATION OF THE
ACTION OF THE FINANCIAL AND BUDGET OFFICE
FACTS: On February 16, 1990 Atty. Zialcita retired from government service upon
reaching the compulsory retirement age of 65 years. Withholding tax for compensation
was deducted from the payment of the money value of his accumulated leave credits.
On 23 August 1990, a resolution was issued by the Court En Banc stating that the terminal
leave pay of Atty. Zialcita received by virtue of his compulsory retirement can never be
considered a part of his salary subject to the payment of income tax but falls under the
phrase “other benefits received by retiring employees and workers,” within the meaning
of Section 1 of PD 220 and is thus exempt from the payment of income tax. That the
money value of his accrued leave credits is not a part of his salary is further buttressed by
Sec. 3 of PD No. 985, otherwise known as The "Budgetary Reform Decree on
Compensation and Position Classification of 1976" particularly Sec. 3 (a) thereof, which
makes it clear that the actual service is the period of time for which pay has been
received, excluding the period covered by terminal leave.
Accordingly, the Court Resolved to (1) ORDER the Fiscal Management and Budget Office to
refund Atty. Zialcita the amount of P59,502.33 which was deducted from his terminal
leave pay as withholding tax; and (2) Declare that henceforth no withholding tax shall be
deducted by any Office of this Court from the terminal leave pay benefits of all retirees
similarly situated including those who have already retired and from whose retirement
benefits such withholding taxes were deducted.
On September 18, 1990, the Commissioner of Internal Revenue, as intervenor- movant
and through the Solicitor General, filed a motion for clarification and/or reconsideration.
ISSUE: Whether commutation of leave credits (commonly known as terminal leave) is
subject to income tax.
HELD: No.
REASONS:
1. Applying Section 12 (c) of Commonwealth Act 186, as incorporated into RA 660,
and Section 28 (c) of CA 186, the amount received by Atty. Zialcita as a result of
the conversion of these unused leaves into cash is exempt from income tax.
Commonwealth Act No. 186. Section 12(c) of CA 186 states:
... Officials and employees retired under this Act shall be entitled to the commutation of
the unused vacation leave and sick leave, based on the highest rate received, which they
may have to their credit at the time of retirement.
Section 28(c) of the same Act, in turn, provides:
(c) Except as herein otherwise provided, the Government Service Insurance System, all
benefits granted under this Act, and all its forms and documents required of the members
shall be exempt from all types of taxes, documentary stamps, duties and contributions,
fiscal or municipal, direct or indirect, established or to be established;
2. The commutation of leave credits is commonly known as terminal leave. (Manual
on Leave Administration Course for Effectiveness, published by the Civil Service
Commission, p. 17) Terminal leave is applied for by an officer or employee who
retires, resigns or is separated from the service through no fault of his own.
(supra, p. 16) Since terminal leave is applied for by an officer or employee who
has already severed his connection with his employer and who is no longer
working, then it follows that the terminal leave pay, which is the cash value of his
accumulated leave credits, is no longer compensation for services rendered. It
cannot be viewed as salary.
3. The terminal leave pay of Atty. Zialcita may likewise be viewed as a "retirement
gratuity received by government officials and employees" which is also another
exclusion from gross income as provided for in Section 28(b), 7(f) of the NLRC. A
gratuity is that paid to the beneficiary for past services rendered purely out of
generosity of the giver or grantor.
4. Section 284 of the Revised Administrative Code grants to a government
employee 15 days vacation leave and 15 days sick leave for every year of
service. Hence, even if the government employee absents himself and exhausts
his leave credits, he is still deemed to have worked and to have rendered
services. His leave benefits are already imputed in, and form part of, his salary
which in turn is subjected to withholding tax on income. He is taxed on the
entirety of his salaries without any deductions for any leaves not utilized. It
follows then that the money values corresponding to these leave benefits both
the used and unused have already been taxed during the year that they were
earned. To tax them again when the retiring employee receives their money
value as a form of government concern and appreciation plainly constitutes an
attempt to tax the employee a second time. This is tantamount to double
taxation.
The 23 August 1990 Resolution (AM 90-6-015-SC), however, specifically applies only to
employees of the Judiciary who retire, resign or are separated through no fault of their
own. The resolution cannot be made to apply to other government employees, absent an
actual case or controversy, as that would be in principle an advisory
opinion._____________________________________________________________________________
INTERCONTINENTAL BROADCASTING CORPORATION (IBC) vs. NOEMI B.
AMARILLA et al
FACTS: Petitioner employed the following persons at its Cebu station: Candido C.
Quiñones, Jr., Corsini R. Lagahit, Anatolio G. Otadoy, and Noemi Amarilla.
On March 1, 1986, the government sequestered the station, including its properties, funds
and other assets, and took over its management and operations from its owner, Roberto
Benedicto. The government and Benedicto entered into a temporary agreement under
which the latter would retain its management and operation.
On November 3, 1990, the Presidential Commission on Good Government (PCGG) and
Benedicto executed a Compromise Agreement, where Benedicto transferred and assigned
all his rights, shares and interests in petitioner station to the government.
In the meantime, the four (4) employees retired from the company and received, on
staggered basis, their retirement benefits under the 1993 Collective Bargaining
Agreement (CBA) between petitioner and the bargaining unit of its employees. When a
salary increase took effect P1,500.00 salary increase was given to all employees of the
company, current and retired, effective July 1994. However, when the four retirees
demanded theirs, petitioner refused and instead informed them via a letter that their
differentials would be used to offset the tax due on their retirement benefits in accordance
with the National Internal Revenue Code (NIRC).
The four (4) retirees filed separate complaints against IBC TV-13 Cebu and Station
Manager Louella F. Cabañero for unfair labor practice and non-payment of backwages
before the NLRC, Regional Arbitration Branch VII. The complainants averred that their
retirement benefits are exempt from income tax under Article 32 of the NIRC.
The Labor Arbiter rendered judgment in favor of the retirees. The retirement benefits of
complainants Lagahit and Amarilla were exempt from income tax under Section 28(b) of
the NIRC. However, the differentials due to the two complainants were computed three
years backwards due to the law on prescription.
NLRC affirmed.
ISSUE: Whether or not the retirement benefits of respondents are part of their gross
income
Whether or not the petitioner is estopped from reneging on its agreement with respondent
to pay for the taxes on said retirement benefits.
HELD: We agree with petitioner’s contention that, under the CBA, it is not obliged to pay
for the taxes on the respondents’ retirement benefits. We have carefully reviewed the CBA
and find no provision where petitioner obliged itself to pay the taxes on the retirement
benefits of its employees.
We also agree with petitioner’s contention that, under the NIRC, the retirement benefits of
respondents are part of their gross income subject to taxes.
For the retirement benefits to be exempt from the withholding tax, the taxpayer is
burdened to prove the concurrence of the following elements: (1) a reasonable private
benefit plan is maintained by the employer; (2) the retiring official or employee has been
in the service of the same employer for at least 10 years; (3) the retiring official or
employee is not less than 50 years of age at the time of his retirement; and (4) the benefit
had been availed of only once.
While it may indeed be conceded that the previous dispensation of petitioner IBC-13
footed the bill for the withholding taxes, upon discovery by the new management, this
was stopped altogether as this was grossly prejudicial to the interest of the petitioner IBC-
13. The policy of withholding the taxes due on the differentials as a remedial measure was
a matter of sound business judgment and dictates of good governance aimed at
protecting the interests of the government. Necessarily, the newly-appointed board and
officers of the petitioner, who learned about this grossly disadvantageous mistake
committed by the former management of petitioner IBC-13 cannot be expected to just
follow suit blindly. An illegal act simply cannot give rise to an obligation. Accordingly, the
new officers were correct in not honoring this highly suspect practice and it is now their
duty to rectify this anomalous occurrence, otherwise, they become remiss in the
performance of their sworn
responsibilities._________________________________________________________________________
CIR v. MITSUBISHI
These cases, involving the same issue being contested by the same parties and having
originated from the same factual antecedents generating the claims for tax credit of
private respondents, the same were consolidated by resolution of this Court dated May
31, 1989 and are jointly decided herein.
FACTS: The records reflect that on April 17, 1970, Atlas Consolidated Mining and
Development Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with
Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to
engage in business in the Philippines, for purposes of the projected expansion of the
productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi
agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States
currency, for the installation of a new concentrator for copper production. Atlas, in turn
undertook to sell to Mitsubishi all the copper concentrates produced from said machine for
a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to
be used for the purchase of the concentrator machinery from Japan.
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank
for short) obviously for purposes of its obligation under said contract. Its loan application
was approved on May 26, 1970 in the sum of ¥4,320,000,000.00, at about the same time
as the approval of its loan for ¥2,880,000,000.00 from a consortium of Japanese banks.
The total amount of both loans is equivalent to $20,000,000.00 in United States currency
at the then prevailing exchange rate. The records in the Bureau of Internal Revenue show
that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that
Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing
copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of
loan by September 30, 1981.
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by
the former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The
corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to
Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as
amended by Presidential Decree No. 131, and duly remitted to the Government.
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum
of P1,971,595.01 be applied against their existing and future tax liabilities.
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private
respondents filed a petition for review with respondent Court.
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant
a tax credit in favor of Atlas in the amount of P1,971,595.01.
A motion for reconsideration having been denied on August 20, 1980, petitioner
interposed an appeal to this Court.
While CTA Case was still pending before the tax court, the corresponding 15% tax on the
amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and
1978 was withheld and remitted to the Government. Atlas again filed a claim for tax credit
with the petitioner, repeating the same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax
Appeals. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private
respondents dated November 12, 1979, denied said claim for tax credit for lack of factual
or legal basis.
On January 15, 1981, relying on its prior ruling, respondent court rendered judgment
ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for
reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution
dated September 7, 1987. A notice of appeal was filed on September 22, 1987 by
petitioner with respondent court and a petition for review was filed with this Court on
December 19, 1987. Said later case is now before us as G.R. No. 80041 and is
consolidated with G.R. No. 54908.
ISSUE/S: 1.Whether or not the interest income from the loans extended to Atlas by
Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the
tax code and, therefore, exempt from withholding tax.
2. Whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered
as the creditor whose investments in the Philippines on loans are exempt from taxes
under the code.
RULING: The loan and sales contract between Mitsubishi and Atlas does not contain any
direct or inferential reference to Eximbank whatsoever. The agreement is strictly between
Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper
concentrates.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that
Mitsubishi stated in its loan application with the former was that the amount being
procured would be used as a loan to and in consideration for importing copper
concentrates from Atlas.
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is
complete in itself, does not appear to be suppletory or collateral to another contract and
is, therefore, not to be distorted by other considerations aliunde.
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that
laws granting exemption from tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule and exemption is the exception.
The burden of proof rests upon the party claiming exemption to prove that it is in fact
covered by the exemption so claimed, which onus petitioners have failed to discharge.
Significantly, private respondents are not even among the entities which, under Section
29 (b) (7) (A) of the tax code, are entitled to exemption and which should indispensably be
the party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a
supposed "broad, pragmatic analysis" alone without substantial supportive evidence, lest
governmental operations suffer due to diminution of much needed funds. Otherwise, the
mere expedient of having a Philippine corporation enter into a contract for loans or other
domestic securities with private foreign entities, which in turn will negotiate
independently with their governments, could be availed of to take advantage of the tax
exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals dated April 18, 1980 and January
15, 1981, respectively, are hereby REVERSED and SET
ASIDE._____________________________________________________________
CIR v. MARUBENI
Facts: Respondent Marubeni Corporation is a foreign corporation organized and existing
under the laws of Japan. It is engaged in general import and export trading, financing and
the construction business. It is duly registered to engage in such business in the
Philippines and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter
of authority to examine the books of accounts of the Manila branch office of respondent
corporation for the fiscal year ending March 1985. In the course of the examination,
petitioner found respondent to have undeclared income from two (2) contracts in the
Philippines, both of which were completed in 1984. One of the contracts was with the
National Development Company (NDC) in connection with the construction and
installation of a wharf/port complex at the Leyte Industrial Development Estate in the
municipality of Isabel, province of Leyte. The other contract was with the Philippine
Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage
complex also at the Leyte Industrial Development Estate.
All the materials and equipment transported to the Philippines were inspected and tested
in Japan prior to shipment in accordance with the terms of the contracts. They were
already finished products when shipped to the Philippines.
On March 1, 1986, petitioner's revenue examiners recommended an assessment for
deficiency income, branch profit remittance, contractor's and commercial broker's taxes.
Respondent questioned this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from
petitioner assessing respondent several deficiency taxes.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a one-time amnesty
covering unpaid income taxes for the years 1981 to 1985 was issued. The period of the
amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986
by E.O. No. 54 dated November 4, 1986. The respondent availed of the amnesty.
It is respondent's other argument that assuming it did not validly avail of the amnesty
under the two Executive Orders, it is still not liable for the deficiency contractor's tax
because the income from the projects came from the "Offshore Portion" of the contracts.
The two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore
Portion. All materials and equipment in the contract under the "Offshore Portion" were
manufactured and completed in Japan, not in the Philippines, and are therefore not
subject to Philippine taxes.
Issue: Whether or not respondent’s income from the projects is subject to taxing
jurisdiction of the Philippines
Ruling: The service of "design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of testing and commissioning,
coordination. . . " of the two projects involved two taxing jurisdictions. These acts occurred
in two countries — Japan and the Philippines.
While the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were completely designed
and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile
equipment for the NDC project and the ammonia storage tanks and refrigeration units
were made and completed in Japan.
They were already finished products when shipped to the Philippines. The other
construction supplies listed under the Offshore Portion such as the steel sheets, pipes and
structures, electrical and instrumental apparatus, these were not finished products when
shipped to the Philippines. They, however, were likewise fabricated and manufactured by
the sub-contractors in Japan. All services for the design, fabrication, engineering and
manufacture of the materials and equipment under Japanese Yen Portion I were made and
completed in Japan. These services were rendered outside the taxing jurisdiction of the
Philippines and are therefore not subject to contractor's
tax.______________________________________________________________________________
CIR vs BOAC
FACTS: British Overseas Airways Corp (BOAC) is a 100% British Government-owned
corporation organized and existing under the laws of the United Kingdom. It is engaged in
the international airline business. As such it operates air transportation service and sells
transportation tickets over the routes of the other airline members. BOAC had no landing
rights in the Philippines and was not granted a Certificate of Public Convenience except
for a nine-month period during 1961 and 1962. Although it did not carry passengers/cargo
to and from the Philippines, it maintained a general sales agent – Wamer Barnes and Co.,
Ltd and Qantas Airways – which was responsible for selling BOAC tickets.
The CIR initiated assessments for deficiency taxes against BOAC. After paying under
protest and denials by the CIR to refund the amount paid, BOAC filed cases with the Tax
Court. The Tax Court held that the proceeds of ticket sales in Wamer and Qantas do not
constitute income from Philippine sources "since no service of carriage of passengers or
freight was performed by BOAC within the Philippines." The CTA position was that income
from transportation is income from services so that the place where services are rendered
determines the source.
ISSUE: WON the revenue derived by BOAC from ticket sales in the Philippines, constitute
income of BOAC from Philippine sources, and accordingly taxable?
HELD: The SC set aside the decision of the CTA, ordered BOAC to pay the deficiency taxes
and denied the refund. The words 'income from any source whatever' disclose a
legislative policy to include all income not expressly exempted within the class of taxable
income under our laws. 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.
The absence of flight operations to and from the Philippines is not determinative of the
source of income or the site of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the
"source"; and the source of an income is that activity which produced the income.
CIR v. CTA & SMITH KLINE
FACTS: In its 1971 original income tax return, Smith Kline declared a net taxable income
of 1,482,277, and paid 511,274 as tax due. Among the deductions claimed from gross
income was 501,040 as its share of the head office overhead expenses. However, on its
amended return filed on March 01, 1973, there was an overpayment of 324,255 “arising
from under deduction of home office overhead”. It made a formal claim for the refund of
the alleged overpayment. It appears that sometime in October 1972, Smith Kline received
from its international dependent auditors, an authenticated certification to the effect that
the Philippine share in the unallocated overhead expenses of the main office for the year
ended December 31, 1971 was actually 1,424,484. It further stated in the certification
that the allocation was made on the basis of the percentage of gross income in the
Philippines to gross income of the corporation as a whole. By reason of the new
adjustment, Smith Kline’s tax liability was greatly reduced from 511,247 to 168,992
resulting in an overpayment of 324,255.
ISSUE: WON the amended return filed by respondents in contrary to law.
HELD: NO. the governing law found in sec. 37 of the NIRC, which reads “Income from
sources within the Philippines: xxxxxxx (b) Net income from the sources in the Philippines.
From the items specified in subsection (a) of this section there shall be deducted the
expenses, losses, or other deductions which cannot definitely be allocated to some item
or class of gross income. The remainder, if any, shall be included in full as net income
from sources within the Philippines. The ratable part is based upon the ratio of gross
income from sources within the Philippines to the total gross income.
Where an expense is clearly related to the production of the Philippine-derived
income or to Philippine operations (eg Salaries of Philippine personnel, rental of office
building in the Philippines), that expenses can be deducted from the gross income
acquired in the Philippines without resorting to apportionment. Clearly, the weight of
evidence bolsters its position that the amount of 1,427,484 represents the correct ratable
share, the same having been computed pursuant to section 37 (b) and section
160.________
THE PHILIPPINE GUARANTY CO., INC. v. CIR
Facts: The Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance contracts with foreign insurance companies not doing business in the
Philippines, thereby ceding to the foreign reinsurers a portion of the premiums on
insurances it has originally underwritten in the Philippines. Philippine Guaranty Co., Inc.
ceded to the foreign reinsurers the premiums for 1953 and 1954. Said premiums were
excluded by Philippine Guaranty Co., Inc. from its gross income when it filed its income
tax returns for 1953 and 1951. Furthermore, it did not withhold or pay tax on them.
Consequently, the Commissioner of Internal Revenue assessed Philippine Guaranty Co.,
Inc. against withholding tax on the ceded reinsurance premiums. Philippine Guaranty Co.,
Inc. protested the assessment on the ground that the premiums are not subject to tax for
the premiums did not constitute income from sources within the Philippines because the
foreign reinsurers did not engage in business in the Philippines, and CIR's previous rulings
did not require insurance companies to withhold income tax due from foreign companies.
ISSUE: Are insurance companies required to withhold tax on reinsurance premiums ceded
to foreign insurance companies?
Ruling: Yes. The reinsurance contracts however show that the transactions or activities
that constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against losses
arising from the original insurances in the Philippines were performed in the Philippines.
The reinsurance premiums were income created from the undertaking of the foreign
reinsurance companies to reinsure Philippine Guaranty Co., Inc. against liability for loss
under original insurances. Such undertaking, as explained above, took place in the
Philippines. These insurance premiums therefore came from sources within the Philippines
and, hence, are subject to corporate income tax.
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It
is a necessary burden to preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvements designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities and protection
which a government is supposed to provide. Considering that the reinsurance premiums in
question were afforded protection by the government and the recipient foreign reinsurers
exercised rights and privileges guaranteed by our laws, such reinsurance premiums and
reinsurers should share the burden of maintaining the state._______
PHILAM LIFE V. CA
Facts: This is a consolidated case involving a claim for the refund of the amount as
alledgely erroneous payment of withholding tax and an assessment for the similar amount
as deficiency withholding tax as a result of the cancellation of a previously issued tax
credit memo for the said amount in another CTA case.
Philam Life entered into a Management Services Agreement with AIRCO whereby,
effective on July 1, 1972 for a fee not extending $250k per annum AIRCO shall perform
services for Philam Life.
On September 30, 1978 AIRCO merge with AIG Inc., with the latter as the
surviving corp and successor in interest in AIRCO’s agreement with Philam.
On November 18, 1980 respondent CIR issued a tax credit in favor of Philam Life
Memo representing the erroneous payment of the withholding tax at source on
remittances to AIG for services rendered abroad. Consequently, it was followed by another
claim for refund for the second erroneous tax payment and then another letter.
Without waiting for the claim to be resolved by the respondent CIR, petitioners
filed a petition seeking said refund. During its pendency however respondent CIR sent a
letter denying petitioners claim for refund, cancel the tax credit memo issued and asked
petitioner to pay the amount of P643, 125.00 as deficiency withholding tax at source for
1979 plus increments.
Without protesting, Petitioner filed a petition seeking for the annulment of said
assessment in the CTA, however the latter sustain the ruling of the respondent CIR.
Issue:
Whether the services performed abroad by AIG, a non-resident corporation not
doing business in the Philippines, May still be subject to an assessment of a withholding
tax.
Held:
Yes. A reading of the various management services enumerated in the said
management services agreement will show that they can easily fall within under any of
the expanded meaning of royalties as given in section 37 of the NIRC. Therefore being
considered as having commercial undertaking within the meaning of section 37, the
income derived for the services performed by AIG to PHILAM Life under said agreement
shall be considered income from services within the Philippines. With this view, AIG being
a non-resident corporation not engage in trade or business in the Philippines shall pay a
tax equal to 35% of the gross income received during each taxable year from all sources
within the Philippines as interest, dividends, rents, royalties, salaries, premiums, annuities,
emoluments or other fixed or determinable annual, periodical or casual gains profits and
capital gains in relation to section 12 (6) (I) of the NIRC. In our jurisprudence, the test of
taxability is the source and the source is that activity which produces
income._______________________________________________
VODAFONE INT’L v. UNION OF INDIA & ANR.
Facts: In February 2007, Vodafone International Holdings B.V (Vodafone or VIH), a Dutch
entity, had acquired 100 percent shares in CGP (Holdings) Limited (CGP), a Cayman
Islands company for USD 11.1 billion from Hutchinson Telecommunications International
Limited (HTIL). CGP, through various intermediate companies/ contractual arrangements
controlled 67 percent of Hutchison Essar Limited (HEL), an Indian company. The
acquisition resulted in Vodafone acquiring control over CGP and its downstream
subsidiaries including, ultimately, HEL. HEL was a joint venture between the Hutchinson
group and the Essar group. It had obtained telecom licences to provide cellular telephony
in different circles in India from November 1994.
In September 2007, the tax department issued a show-cause notice to Vodafone to
explain why tax was not withheld on payments made to HTIL in relation to the above
transaction. The tax department contended that the transaction of transfer of shares in
CGP had the effect of indirect transfer of assets situated in India.
• Vodafone filed a writ petition in the Bombay High Court, inter alia, challenging the
jurisdiction of the tax authorities in the matter. By its order dated 3 December 2008, the
Bombay High Court held that the tax authorities had made out a prima facie case that the
transaction was one of transfer of a capital asset situate in India, and accordingly, the
Indian income-tax authorities had jurisdiction over the matter.
• Vodafone challenged the order of the Bombay High Court before the Supreme Court. In
its ruling, dated 23 January 2009, the Supreme Court directed the tax authorities to first
determine the jurisdictional challenge raised by Vodafone. It also permitted Vodafone to
challenge the decision of the tax authorities on the preliminary issue of jurisdiction before
the High Court.
• In May 2010, the tax authorities held that they had jurisdiction to proceed against
Vodafone for their alleged failure to withhold tax from payments made under Section 201
of the Income-tax Act, 1961 (the Act). This order of the tax authorities was challenged by
Vodafone before the Bombay High Court.
• By its order dated 8 September 2010, the Bombay High Court dismissed Vodafone's
challenge to the order passed by the tax authorities. Vodafone filed a Special Leave
Petition (SLP) against the High Court order before the Supreme Court. On 26 November
2010, SLP was admitted and the Supreme Court directed Vodafone to deposit a sum of
INR 25000 million within three weeks and provide a bank guarantee of INR 85000 million
within eight weeks from the date of its order.
Held: At the heart of the controversy was the interpretation of Section 9(1)(i) of the Act.
As per the said section, inter alia, income accruing or arising directly or indirectly from the
transfer of a capital asset situated in India is deemed to accrue/ arise in India in the hands
of a non-resident.
• In connection with the above, the Supreme Court observed that:
Charge to capital gains under Section 9(1)(i) of the Act arises on existence of three
elements, viz, transfer, existence of a capital asset and situation of such asset in India.
The legislature has not used the words ‘indirect transfer' in Section 9(1)(i) of the Act. If the
word ‘indirect' is read into Section 9(1)(i) of the Act, then the phrase ‘capital asset situate
in India' would be rendered nugatory.
Section 9(1)(i) of the Act does not have ‘look through' provisions, and it cannot be
extended to cover indirect transfers of capital assets/ property situated in India.
The proposals contained in the Direct Taxes Code Bill, 2010, on taxation of off-shore share
transactions indicate that indirect transfers are not covered by Section 9(1)(i) of the Act.
A legal fiction has a limited scope and it cannot be expanded by giving purposive
interpretation, particularly if the result of such interpretation is to transform the concept
of chargeability which is also there in Section 9(1)(i) of the Act.
The question of withholding tax at source would not arise as the subject matter of offshore
transfer between the two non-residents was not liable to capital gains tax in India.
For the purposes of Section 195 of the Act, tax presence has to be viewed in the context
of the transaction that is subjected to tax, and not with reference to an entirely unrelated
matter.
The Supreme Court further observed that as there was no incidence of capital gains tax in
India, the provisions under Section 163 of the Act, for treating Vodafone as a
representative assessee of HTIL, were not applicable.
• Accordingly, the Supreme Court concluded that the transfer of the share in CGP did not
result in the transfer of a capital asset situated in India, and gains from such transfer
could not be subject to Indian tax.
The Supreme Court reversed the decision of the Bombay High Court and held that the
Indian tax authorities did not have territorial jurisdiction to tax the offshore transaction,
and therefore, Vodafone was not liable to withhold Indian
taxes._________________________________________________________________________