TAXATION 1 l INCOME TAX CASE DIGEST MARQUEZ, CAMILLE ANNE D.

3-B

COMMISSIONER VS. BRITISH OVERSEAS AIRWAYS CORP.

FACTS:

British Overseas Airways Corp. (BOAC) is a 100% British Government-owned corporation engaged in
international airline business and is a member of the Interline Air Transport Association, and thus, it
operates air transportation service and sells transportation tickets over the routes of the other airline
members. From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus
did not carry passengers and/or cargo to or from the Philippines but maintained a general sales agent in
the Philippines -- Warner Barnes & Co. Ltd., and later, Qantas Airwayus -- which was responsible for
selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal Revenue assessed
deficiency income taxes against BOAC.

ISSUE:

Whether the revenue derived by BOAC from ticket sales in the Philippines for air transportation, while
having no landing rights in the Philippines, constitute income of BOAC from Philippine sources, and
accordingly, taxable.

HELD:

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. Herein, the sale of tickets in the Philippines is the activity that produced
the income. The tickets exchanged hands here and payments for fares were also made here in Philippine
currency. The situs 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. PD 68, in
relation to PD 1355, ensures that international airlines are taxed on their income from Philippine sources.
The 2 1/2 %tax on gross billings is an income tax. If it had been intended as an excise or percentage tax,
it would have been placed under Title V of the Tax Code covering taxes on business.
TAXATION 1 l INCOME TAX CASE DIGEST MARQUEZ, CAMILLE ANNE D. 3-B

J. COMMISSIONER OF INTERNAL REVENUE V. SOLIDBANK CORP.

FACTS:

 Solidbank filed its Quarterly Percentage Tax Returns for the calendar year of 1995
 Gross receipts (GR) = P1,474,691,693.44 / Gross receipts tax (GRT) = P73,734,584.60
 Solidbank alleged that the GR included the sum of P350,807,875.15 representing gross receipts
from passive income which was already subjected to 20% final withholding tax (FWT)
 In 1996, CTA rendered a decision in Asian Bank v. CIR, it was held that the 20% withholding tax
on bank’s interest income should not form parts of its taxable receipts for purposes of computing
the GRT
 Because of this decision, Solidbank filed with the BIR a request for a refund in the amount of
P3,508,078.75 representing overpaid GRT for 1995
 CTA rendered a decision in favor of Solidbank ordering CIR to refund the requested amount
 CA affirmed the CTA decision. The 20% FWT does not form part of the taxable gross receipts in
computing the 5% GRT because the FWT was not actually received by the bank but was directly
remitted to the government
ISSUE:
W/N the 20% FWT on bank’s interest income forms part of taxable gross receipts in computing the 5%
GRT
HELD:

 The fact that the 20% FWT redounded to the benefit of Solidbank makes it part of the 5%GRT
 GRT is a percentage tax. FWT is an income tax. As a bank, Solidbank is covered by both taxes
 Percentage tax – a national tax measured by a certain percentage of the gross selling price or
gross value in money of goods sold, bartered or imported. It is not subject to withholding
 Income tax – a national tax imposed on the net or the gross income realized in a taxable year. It
is subject to withholding.
 In a withholding tax system, the payee is the taxpayer and the payor acts no more than an agent
of the government for collection
 Gross receipts – the total receipts before any deduction
 Amounts withheld form part of gross receipts, because these are in constructive possession and
not subject to any reservation
 Tax refunds are in the nature of tax exemptions. Such exemptions are construed against the
taxpayer.
 Double taxation – taxing the same person twice by the same jurisdiction for the same thing
 No double taxation here because the two taxes are different from each other.
 FWT is deducted and withheld as soon as the income is earned, and is paid every calendar
quarter. The GRT is neither deducted nor withheld, but is paid every taxable quarter.
TAXATION 1 l INCOME TAX CASE DIGEST MARQUEZ, CAMILLE ANNE D. 3-B

COLLECTOR VS. HENDERSON

FACTS:

• Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the BIR. Arthur is
president of American International Underwriters for the Philippines, Inc., which is a domestic
corporation engaged in the business of general non-life insurance, and represents a group of American
insurance companies engaged in the business of general non-life insurance.

• The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR included as part
of taxable income: 1) Arthur’s allowances for rental, residential expenses, subsistence, water, electricity
and telephone expenses 2) entrance fee to the Marikina Gun and Country Club which was paid by his
employer for his account and 3) travelling allowance of his wife

• The taxpayer’s justifications are as follows:

1) as to allowances for rental and utilities, Arthur did not receive money for the allowances. Instead, the
apartment is furnished and paid for by his employer-corporation (the mother company of American
International), for the employer corporation’s purposes. The spouses had no choice but to live in the
expensive apartment, since the company used it to entertain guests, to accommodate officials, and to
entertain customers. According to taxpayers, only P 4,800 per year is the reasonable amount that the
spouses would be spending on rental if they were not required to live in those apartments. Thus, it is the
amount they deem is subject to tax. The excess is to be treated as expense of the company.

2) The entrance fee should not be considered income since it is an expense of his employer, and
membership therein is merely incidental to his duties of increasing and sustaining the business of his
employer.

3) His wife merely accompanied him to New York on a business trip as his secretary, and at the employer-
corporation’s request, for the wife to look at details of the plans of a building that his employer intended
to construct. Such must not be considered taxable income.

• The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent expense
and travel expenses were still held to be taxable. The Court of Tax Appeals ruled in favor of the taxpayers,
that such expenses must not be considered part of taxable income. Letters of the wife while in New York
concerning the proposed building were presented as evidence.

ISSUE:

Whether or not the rental allowances and travel allowances furnished and given by the employer-
corporation are part of taxable income?

HELD:

NO. Such claims are substantially supported by evidence.

These claims are therefore NOT part of taxable income. No part of the allowances in question redounded
to their personal benefit, nor were such amounts retained by them. These bills were paid directly by the
employer-corporation to the creditors. The rental expenses and subsistence allowances are to be
considered not subject to income tax. Arthur’s high executive position and social standing, demanded
and compelled the couple to live in a more spacious and expensive quarters. Such ‘subsistence
allowance’ was a SEPARATE account from the account for salaries and wages of employees. The company
TAXATION 1 l INCOME TAX CASE DIGEST MARQUEZ, CAMILLE ANNE D. 3-B

did not charge rentals as deductible from the salaries of the employees. These expenses are COMPANY
EXPENSES, not income by employees which are subject to tax.
TAXATION 1 l INCOME TAX CASE DIGEST MARQUEZ, CAMILLE ANNE D. 3-B

COMMISSIONER OF INTERNAL REVENUE v. CA/YMCA

FACTS:

YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are
beneficial to public pursuant of its religious, educational and charitable objectives. YMCA earned income
form leasing out a portion of its premises to small shop owners and parking fees collected from
nonmembers. CIR issued an assessment to YMCA. YMCA protested. CIR denied claims of YMCA.

ISSUE:
WON the income derived from rentals of real property owned by YMCA, established as a welfare,
educational and charitable non-profit corporation, subject to income tax under the NIRC and
Constitution?

HELD:
YES.
The exemption claimed by YMCA is expressly disallowed by the provision set by Section 27 which
provides "income...from any of their properties...or any activities conducted for profit...shall be subject
to tax...”, for the rental income were derived from the properties of YMCA that were leased. YMCA
argues that sec 27 should be subject to qualification that income from properties must arise from
activities conducted for profit before it may be taxable. This argument is erroneous. The phrase “any
other activities conducted for profit" does not qualify the word "properties". Income from properties is
taxable whether for profit of not. Constitutional provisions cited by YMCA as contentions:

 YMCA cites art VI sec 28 par 3 of 1987 Constitution exempting charitable institution from
payment of property taxes. However, tax on rental income from lease of property is income tax
and not property tax.
 YMCA cites Art XIV sec 4 par 3 claiming that YMCA is a non-stock non- profit educational
institution and therefore exempted from payment of the disputed tax. Exemption covers
property tax only. YMCA is not an educational institution.
TAXATION 1 l INCOME TAX CASE DIGEST MARQUEZ, CAMILLE ANNE D. 3-B

PASEO REALTY AND DEVELOPMENT CORP. vs. CA

FACTS:
Petitioner filed a its Income Tax Return (ITR) for the calendar year 1989. He later filed with respondent
CTA for a refund of excess creditable taxes withholding (CTW) and income taxes for the years 1989 and
1990 in the aggregate amount of 147, 036.15.

Respondent Commissioner (CIR) filed an Answer stating some defenses. The Court rendered decision in
favor of the petitioner. However, CIR filed a Motion for Reconsideration (MFR) alleging that the amount
sought to be refunded “has already been included in the 172, 447 which the petitioner applied as tax
credit for the succeeding taxable year 1990.

Upon the respondent Court (RC) dismissed the petition, the petitioner filed MFR which was denied by
the RC. Thus, petitioner filed a petition for Review before the CA. The appellate court held that petitioner
is not entitled to a refund because it appears that the latter did not specify the amount to be refunded
and the amount to be applied as tax credit to the succeeding taxable year, but only marked an “X” to the
box indicating “to be applied as tax credit to the succeeding taxable year” when the latter filed its income
tax return for the year 1989.

The Office of the Solicitor General (OSG) filed a Comment that the claimed refund was to be applied
against its tax liability for 1990.

Petitioner filed a Reply that the issue is not whether the 54,104 was included as tax credit to be applied
against its 1990 income tax liability but whether the same amount was actually applied as tax credit for
1990.

The OSG filed a Rejoinder that petitioner’s 1989 tax return shows that the latter included 1988 excess
credit which had already been segregated for refund and specified that the full amount of Php 172,
479.00 be considered as its tax credit for 1990. The OSG further contended that the remaining tax credit
for 1989 should be the excess credit to be applied against its 1990 tax liability. Hence, petitioner ask for
a refund of its CTW in 1989 because it had been applied against its 1990 tax due.

ISSUE:

WON Petitioner should be refunded.

HELD:

No. The grant of refund is founded on the assumption that the tax return is valid. Without the tax return,
it is error to grant a refund since it would be impossible to determine whether the proper taxes have
been assessed and paid.

In this case, petitioner did not present evidence to prove that its claimed refund had already been
automatically credited against its 1990 tax liability. The burden of proof to establish the factual basis of
claim for tax credit or refund lies on the claimant. Tax refunds are construed strictly against the taxpayer.

Under the provision, the taxpayer is allowed three (3) options if the sum of its quarterly tax payments
made during the taxable year is not equal to the total tax due for that year:

 pay the balance of the tax still due;

 carry-over the excess credit; or
 be credited or refunded the amount period.