A message to

Dante R.

Dear Atty. Bravo,

We would like to thank you for this opportunity to discover the sometimes confusing but wholly practical and informative world of taxation law under your esteemed tutelage. Our class feels blessed to come under your guidance once again this semester.

We promise to strive harder in meeting the quality of excellence you expect of your students. Please continue to guide us patiently even though we may sometimes fall short of your expectations. We look forward to the new challenges we will encounter this semester.

Sincerely,3B

Bravo, B.S.C., L.L.B.Atty.

Table of ContentsTAXABLE INCOME IN GENERAL1. Madrigal vs. Rafferty 12. Fisher vs. Trinidad 33. Limpan Investment Corporation vs. Commissioner of Internal Revenue 44. Conwi vs. Court of Tax Appeals 55. Baas, Jr. vs. Court of Appeals 6INCOME TAX ON INDIVIDUALS6. Garrison vs. Court of Appeals 87. Pansacola vs. Commissioner of Internal Revenue 108. Umali vs. Estanislao 12DEFINITION OF CORPORATIONS9. AFISCO Insurance Corporation v. Court of Appeals 1410. Pascual vs. Commissioner of Internal Revenue 1511. Obillos vs. Commissioner of Internal Revenue 1612. Oa vs. Commissioner of Internal Revenue 18PASSIVE INCOME13. Commissioner of Internal Revenue vs. Manning 20MINIMUM CORPORATE INCOME TAX (MCIT)14. Commissioner of Internal Revenue vs. Philippine Airlines, Inc. (PAL) 2115. The Manila Banking Corporation vs. Commissioner of Internal Revenue 2216. Chamber of Real Estate and Builders Associations, Inc. (CREBA) vs. Romulo, et al. 24INCOME TAX ON RESIDENT FOREIGN CORPORATION17. Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) and Court of Tax Appeals 2518. Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) and Court of Tax Appeals 2719. Steamship Company of Svendborg and Steamship Company of 1912 vs. Commissioner of Interval Revenue 2920. Bank of America NT & SA vs. Court of Appeals 3121. Commissioner of Internal Revenue vs. Burroughs Limited 3322. Compania General de Tabacos de Filipinas vs. Commissioner of Internal Revenue 35INCOME TAX ON NON-RESIDENT FOREIGN CORPORATION23. Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. 3624. Marubeni Corporation vs. Commissioner of Internal Revenue 37

25. N.V. Reederij "Amsterdam" and Royal Interocean Lines vs. Commissioner of Internal Revenue 39IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)26. The Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue 4027. Commissioner of Internal Revenue vs. Tuason 4228. Cyanamid Philippines, Inc. vs. Court of Appeals 43TAX-EXEMPT CORPORATIONS29. Commissioner of Internal Revenue vs G. Sinco Educational Corp 44GROSS INCOME30. Filinvest Development Corporation and Filinvest Alabang, Inc vs Commissioner of Internal Revenue 4531. Commissioner of Internal Revenue vs. Court of Appeals 4632. Commissioner of Internal Revenue vs. Manning 4733. Wise & Co., Inc. vs. Meer 4934. Commissioner of Internal Revenue vs. Court of Appeals 5135. Commissioner of Internal Revenue vs. Court of Appeals 5336. RE: Request of Atty. Bernardo Zialcita for Reconsideration of the Action of

the Financial and Budget Office5437. Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation 55

DEDUCTIONS; IN GENERAL38. Aguinaldo Industries Corporation vs. Commissioner of Internal Revenues 5639. Atlas Consolidated Mining Corporation vs. Commissioner of Internal Revenue 5740. Roxas vs. Court of Tax Appeals 5941. Zamora v. Collector of Internal Revenue 6142. C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue 6243. Calanoc vs. Collector of Internal Revenue 6344. Kuenzle & Streiff Inc. vs. Collector of Internal Revenue 6445. Paper Industries Corporation of the Philippines vs. Court of Appeals 6546. Commissioner of Internal Revenue vs. Vda de Prieto 6647. Commissioner of Internal Revenue vs. Lednicky 6748. Paper Industries Corporation of the Philippines vs. Court of Appeals 6949. Philippine Refining Company vs. Court of Appeals 7150. Fernandez Hermanos, Inc. vs. Commissioner of Internal Revenue 7351. Basilan Estates, Inc. vs. Commissioner of Internal Revenue 7552. Limpan Investment Corporation vs. Commissioner of Internal Revenue 7753. Consolidated Mines, Inc. vs. Court of Tax Appeals 7854. 3M Philippines, Inc. vs. Commissioner of Internal Revenue 8055. Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue 81CAPITAL GAIN AND LOSS56. Calasanz, et al. vs. Commissioner of Internal Revenue 83

56. Tuason vs Lingad 8557. China Banking Corporation vs. Court of Appeals 87DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF PROPERTY58. Commissioner of Internal Revenue v. Rufino 9059. Gregory v. Helvering 92SITUS OF TAXATION60. Commissioner of Internal Revenue vs. Marubeni Corporation 9361. Commissioner of Internal Revenue vs. BOAC 9562. Commissioner vs. CTA and Smith Kline & French Overseas Co. 9763. Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue 9964. Howden and Co. Ltd. vs. Collector of Internal Revenue 10165. Philippine American Life Insurance Co. Inc. vs. Court of Tax Appeals 103ACCOUNTING PERIODS AND METHODS66. Consolidated Mines Inc. vs. Court of Tax Appeals 10567. Banas. Jr. vs. Court of Appeals 106RETURNS AND PAYMENT OF TAXES68. BPI-Family Savings Bank vs. Court of Appeals 10869. Philam Asset Management, Inc. vs. Commissioner of Internal Revenue 11070. Commissioner of Internal Revenue vs. BPI 11271. Bank of the Philippine Islands vs. Commissioner of Internal Revenue 113WITHHOLDING TAX72. Citibank vs. Court of Appeals 11473. Commissioner of Internal Revenue vs. Wander Philippines, Inc. 11574. Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corp. 11675. Filipinas Synthetic Fiber Corp. vs. Court of Appeals 117

CASEDOCTRINES

CASE DOCTRINESTAXABLE INCOME IN GENERAL1. Madrigal vs. Rafferty 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. 2. Fisher vs. TrinidadIncome is defined as the amount of money coming to a person or corporation within a specified time whether as payment for services, interest, or profit from investment. A stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation. We believe that the Legislature when it provided income tax, intended only to tax the income of corporations or firms as that used in its common acceptation; that is money received for services, interest or profit from investments.

3. Limpan Investment Corporation vs. Commissioner of Internal RevenueThe non-collection was the petitioners fault since it refused to refused to accept the rent, and not due to nonpayment of lessees. Hence, although the corporation did not actually receive the rent, it is deemed to have constructively received them.4. Conwi vs. Court of Tax AppealsIncome 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. 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.5. Baas, Jr. vs. Court of AppealsThe general rule is that the whole profit accruing from a sale of property is taxable as income in the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income shall be taxable in the year in which it is received, the profit from an installment sale is to be apportioned between or among the years in which such installments are paid and received.INCOME TAX ON INDIVIDUALS6. Garrison vs. Court of AppealsAn alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of income tax. Whether he is a transient or not is determined by his intentions with regards to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him as transient.

DEFINITION OF CORPORATIONS9. AFISCO Insurance Corporation v. Court of AppealsThe term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on.10. Pascual vs. Commissioner of Internal RevenueThe sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.11. Obillos vs. Commissioner of Internal RevenueNot all co-ownerships are deemed unregistered partnership. A co-ownership owning properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law.12. Oa vs. Commissioner of Internal RevenueFor tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. PASSIVE INCOME13. Commissioner of Internal Revenue vs. ManningA stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings: 'A stock dividend always involves a transfer of surplus (or profit) to capital stock.' A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend.MINIMUM CORPORATE INCOME TAX (MCIT)14. Commissioner of Internal Revenue vs. Philippine Airlines, Inc. (PAL)The tax paid by the grantee under either of the alternatives provided in Sec. 13 of P.D. 1590 (basic corporate income tax based on grantees annual net taxable income or franchise tax of 2 % of the gross revenues derived by the grantee from all sources) shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future.

15. The Manila Banking Corporation vs. Commissioner of Internal RevenueThe date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later. Thus, for purposes of ascertaining when the 4-year grace period commences for non-imposition of the MCIT, the date the thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comes later should be considered.16. Chamber of Real Estate and Builders Associations (CREBA), Inc. vs. RomuloMCIT Is Not Violative of Due Process. An income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.INCOME TAX ON RESIDENT FOREIGN CORPORATION17. Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) and Court of Tax AppealsIn order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character.18. Commissioner of Internal Revenue vs. British Overseas Airways Corporation (BOAC) and Court of Tax AppealsThe 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.

19. Steamship Company of Svendborg and Steamship Company of 1912 vs. Commissioner of Interval RevenueDemurrage fees are definitely income or revenue accruing to the international carriers. Demurrage fees or charges consists of an inflow of funds to the international carriers which are neither capital contributions nor incurrence of liabilities. It cannot be understood in any other manner except in the concept of income to the petitioners. Income means cash received or its equivalent; it is the amount of money coming to a person within a specific time; something distinct from principal or capital. For while capital is fund, income is flow.

20. Bank of America NT & SA vs. Court of Appeals The statute employs "Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%)" without more. Where the law does not qualify that the tax is imposed and collected at source based on profit to be remitted abroad, that qualification should not be read into the law. In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the law calls for nothing further.

21. Commissioner of Internal Revenue vs. Burroughs LimitedAny revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shag not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayer except in the following cases (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (c) where the taxpayer acted in bad faith.22. Compania General de Tabacos de Filipinas vs. Commissioner of Internal RevenueWhat should apply as the taxable base in computing the 15% branch profit remittance tax is the amount applied for with the Central Bank as profit to be remitted abroad and not the total amount of branch profits.INCOME TAX ON NON-RESIDENT FOREIGN CORPORATION23. Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc.It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however there is nothing on record to support a claim that the tax on royalties under the RP-US Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.24. Marubeni Corporation vs. Commissioner of Internal Revenue The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation.25. N.V. Reederij "Amsterdam" and Royal Interocean Lines vs. Commissioner of Internal RevenueA foreign corporation not engaged in trade or business within the Philippines and which does not have any office or place of business therein is taxed on income received from all sources within the Philippines at the rate of 35% of the gross income.

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)26. The Manila Wine Merchants, Inc. vs. Commissioner of Internal RevenueTo determine the reasonable needs of the business in order to justify an accumulation of earnings, the Courts of the United States had developed the Immediacy Test which construed the words reasonable needs of the business to mean the immediate needs of the business, and it was generally held that; if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply. 27. Commissioner of Internal Revenue vs. TuasonThe importance of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of using the undistributed earnings & profits for the reasonable needs of the business, that purpose would not fall to overcome the presumption and correctness of CIR.28. Cyanamid Philippines, Inc. vs. Court of AppealsIn order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts.TAX-EXEMPT CORPORATIONS29. Commissioner of Internal Revenue vs G. Sinco Educational CorpMere provision for the distribution of its assets to the stockholders upon dissolution does not remove the right of an educational institution from tax exemption. GROSS INCOME - INCLUSIONS30. Filinvest Development Corporation and Filinvest Alabang, Inc vs Commissioner of Internal RevenueNo taxable gain from an exchange of property for shares of stock of a corporation shall be recognized if as a result of the exchange the transferor, alone or together with others, not exceeding four persons, gains control of the corporation.31. Commissioner of Internal Revenue vs. Court of AppealsThe three elements in the impositions of income tax are. 1) There must be gain and or profit, 2) that the gain and or is realized or received actually or constructively, and 3) it is not exempted by law or treaty from income tax.32. Commissioner of Internal Revenue vs. ManningThe essence of a stock dividend was the segregation out of surplus account of a definite portion of the corporate earnings as part of the permanent capital resources of the corporation by the device of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing the profits so capitalized.

33. Wise & Co., Inc. vs. MeerA dividend is a return upon the stock of its stockholders, paid to them by a going corporation without reducing their stockholdings, leaving them in a position to enjoy future returns upon the same stock. In other words, it is earnings paid to him by the corporation upon his invested capital therein, without wiping out his capital. Under the law so long as a gain is realized, it will be taxable income whether the distribution comes from the earnings or profits of the corporation or from the sale of all of its assets in general, so long as the distribution is made "in complete liquidation or dissolution".GROSS INCOME - EXCLUSIONS34. Commissioner of Internal Revenue vs. Court of AppealsEmployees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability and established for their exclusive benefit and for no other purpose. Tax-exemption is to be enjoyed by the income of the pension trust, otherwise, taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. The application of the withholdings system is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source, therefore, there is no logic in withholding a certain percentage of an income which it is not supposed to pay in the first place.

35. Commissioner of Internal Revenue vs. Court of AppealsThe terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is not subject to withholding (income) tax. It not being part of the gross salary or income of a government official or employee but a retirement benefit.

36. RE: Request of Atty. Bernardo Zialcita for Reconsideration of the Action of the Financial and Budget OfficeThe amount received by way of commutation of his accumulated leave credits as a result of his compulsory retirement, or his terminal leave pay, falls within the enumerated exclusions from gross income and is therefore not subject to tax. 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.

37. Commissioner of Internal Revenue vs. Mitsubishi Metal CorporationLaws 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), are entitled to exemption and which should indispensably be the party in interest in this case.

DEDUCTIONS IN GENERAL38. Aguinaldo Industries Corporation vs. Commissioner of Internal RevenuesWhenever a controversy arises on the deductibility, for purposes of income tax, of certain items for alleged compensation of officers of the taxpayer, two (2) questions become material, namely: (a) Have personal services been actually rendered by said officers? (b) In the affirmative case, what is the reasonable allowance therefore? This posture is in line with the doctrine in the law of taxation that the taxpayer must show that its claimed deductions clearly come within the language of the law since allowances, like exemptions, are matters of legislative grace.

39. Atlas Consolidated Mining Corporation vs. Commissioner of Internal RevenueThe intention of the taxpayer often may be the controlling fact in making the determination. The answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure.40. Roxas vs. Court of Tax AppealsRepresentation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business provided the taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business.41. Zamora v. Collector of Internal RevenueClaims for deduction of promotion expenses or entertainment expenses must also be supported and substantiated by records showing in detail the amount and nature of the expenses incurred. Where absolute certainty is usually not possible, the CTA should make as close an approximate as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness was his own making.DEDUCTIONS - EXPENSES42. C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue Bonuses to employees made in good faith and as additional compensation for services actually rendered by the employees are deductible, provided such payments, when added to the salaries do not exceed the compensation for services rendered.43. Calanoc vs. Collector of Internal RevenueWhere the expenses submitted to the CIR are not justified and were not supported by receipts there is no reason to deduct it from the gross sales of the charitable event.44. Kuenzle & Streiff Inc. vs. Collector of Internal RevenueBonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered'

DEDUCTIONS - INTEREST45. Paper Industries Corporation of the Philippines vs. Court of AppealsInterest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by the NIRC as deductions against the taxpayers gross income. (Section 30 of the 1977 Tax Code) Thus, the general rule is that interest expenses are deductible against gross income and this certainly includes interest paid under loans incurred in connection with the carrying on of the business of the taxpayer.

46. Commissioner of Internal Revenue vs. Vda de PrietoFor interest to be allowed as deduction from gross income, it must be shown that there be indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year.DEDUCTIONS - TAXES47. Commissioner of Internal Revenue vs. LednickyThe Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the law's intent that the right to deduct income taxes paid to foreign government from the taxpayer's gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. DEDUCTIONS - LOSSES48. Paper Industries Corporation of the Philippines vs. Court of AppealsPICOPs claim for deduction is not only bereft of statutory basis; it does violence to the legislative intent which animates the tax incentive granted by Section 7 (c) of R.A. No. 5186. In granting the extraordinary privilege and incentive of a net operating loss carry-over to BOI-registered pioneer enterprises, the legislature could not have intended to require the Republic to forego tax revenues in order to benefit a corporation which had run no risks and suffered no losses, but had merely purchased anothers losses.DEDUCTIONS BAD DEBTS49. Philippine Refining Company vs. Court of Appeals Before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. Furthermore, the steps to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts are: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filling a collection case in court.Thus, mere testimony of the Financial Accountant of the petitioner explaining the worthlessness of debts without documentary evidence to support such testimony is nothing more than a self-serving exercise which lacks probative value.

50. Fernandez Hermanos, Inc. vs. Commissioner of Internal RevenueNeither under Section 30 (d) (2) of our Tax Code providing for deduction by corporations of losses actually sustained and charged off during the taxable year nor under Section 30 (e) (1) thereof providing for deduction of bad debts actually ascertained to be worthless and charged off within the taxable year, can there be a partial writing off of a loss or bad debt. For such losses or bad debts must be ascertained to be so and written off during the taxable year, are therefore deductible in full or not at all, in the absence of any express provision in the Tax Code authorizing partial deductions.DEDUCTIONS - DEPRECIATION51. Basilan Estates, Inc. vs. Commissioner of Internal RevenueThe income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law.52. Limpan Investment Corporation vs. Commissioner of Internal RevenueDepreciation is a question of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual facts. The findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion and petitioner has not shown any arbitrariness or abuse of discretion in the part of the Tax Court in finding that petitioner claimed excessive depreciation in its returns. DEDUCTIONS - DEPLETION53. Consolidated Mines, Inc. vs. Court of Tax Appeals In computing net income there shall be allowed as deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return is made. As an income tax concept, depletion is wholly a creation of the statue solely a matter of legislative grace. Hence, the taxpayer has the burden of justifying the allowance of any deduction claimed.DEDUCTIONS RESEARCH AND DEVELOPMENT54. 3M Philippines, Inc. vs. Commissioner of Internal RevenueImproper payments of royalty are not deductible as legitimate business expenses. Section 3-C of CB Circular No. 393 provides for payment of royalties only on commodities manufactured by the licensee under the royalty agreement not on the whole sale price of finished products imported by the licensee from the licensor.

DEDUCTIONS NON DEDUCTIBLE EXPENSES55. Esso Standard Eastern, Inc. vs. Commissioner of Internal RevenueThe statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.CAPITAL GAINS AND LOSSES56. Calasanz, et al. vs. Commissioner of Internal Revenue A property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable. However, if the inherited property is substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heir's business. 57. Tuason vs LingadThe Tax Codes provision on long-term capital gains constitutes a statute of partial exemption. In view of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, the field of application of the term it capital assets is necessarily narrow, while its exclusions must be interpreted broadly. Consequently, it is the taxpayers burden to bring himself clearly and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will be resolved against him.

58. China Banking Corporation vs. Court of AppealsThe equity investment in shares of stock held by CBC of approximately 53% in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset. Even assuming that the equity investment of CBC has indeed become worthless, the loss sustained is a capital, not an ordinary, loss. The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable year that the securities have become worthless.

DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF PROPERTY59. Commissioner of Internal Revenue v. RufinoIt is well established that where stocks for stocks were exchanged, and distributed to the stockholders of the corporations, parties to the merger or consolidation, pursuant to a plan of reorganization, such exchange is exempt from capital gains tax pursuant to Section 35(c) (2), in relation to (c) (5), of the National Internal Revenue Code.The basic consideration, of course, is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger" must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation.60. Gregory v. HelveringThe Business Purpose Doctrine is simply an operation having no business or corporate purpose -- a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. The new corporation was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function.SITUS OF TAXATION61. Commissioner of Internal Revenue vs. Marubeni CorporationWhile 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. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax. 62. Commissioner of Internal Revenue vs. BOAC For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which produced the income."63. Commissioner vs. CTA and Smith Kline & French Overseas Co.It is manifest that where an expense is clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment.

64. Philippine Guaranty Co., Inc. vs. Commissioner of Internal RevenueThe foreign insurers' place of business should not be confused with their place of activity. Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax; it suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income.65. Howden and Co. Ltd. vs. Collector of Internal RevenueActivity that creates income should not be confused with business in the course of which an income is realized. An activity may consist of a single act; while business implies continuity of transactions. An income may be earned by a corporation in the Philippines although such corporation conducts all its businesses abroad.

66. Philippine American Life Insurance Co. Inc. vs. Court of Tax AppealsThe test of taxability is the source, and the source of an income is that activity... which produced the income. It is not the presence of any property from which one derives rentals and royalties that is controlling, but includes royalties for the supply of scientific, technical, industrial or commercial knowledge or information; and the techni-cal advise, assistance or services rendered in connection with the technical management and administration of any scientific, industrial or commercial undertaking, venture, project or scheme. ACCOUNTING PERIODS AND METHODS67. Consolidated Mines Inc. vs. Court of Tax AppealsThe use of accounting methods to determine tax liability is dependent upon the cir-cumstances of the taxpayer; those which are prescribed under the NIRC may be used, alternatively, methods that would accurately determine the correct tax liability may also be used if it is necessary as deemed by the commissioner.RETURNS AND PAYMENT OF TAXES71. Commissioner of Internal Revenue vs. BPIAs shown in the NIRC of 1997 Section 76. The remedies of tax refund and tax credit for excess payment of taxes are alternative in nature; the choice of one precludes the taxpayer from claiming the other. Once a remedy has been chosen by the taxpayer either actually or constructively, it becomes irrevocable. 72. Bank of the Philippine Islands vs. Commissioner of Internal RevenueThe claim for refund of taxes paid in excess prescribes after two years from the day the corporation is required by law to file its final income tax return. The expiration of the period bars the party or taxpayer the right to claim the refund.

WITHHOLDING TAX73. Citibank vs. Court of AppealsTaxes withheld quarterly are in the nature of payment of a taxpayer of possible tax obligations. They are installments on the annual tax which may be due at the end of the taxable year. These taxes are provisional in nature unlike the withholding of final taxes on passive incomes. They are creditable withholding taxes which are creditable only if there are tax liabilities for that year, if none, they are considered erroneously collected therefore subject to claims for refunds.74. Commissioner of Internal Revenue vs. Wander Philippines, Inc.The dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends. Since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, is satisfied. The withholding tax rate of 15% is affirmed.

75. Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corp.There is nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public Law 87-834, the law governing tax credits granted to U.S. corporations on dividends received from foreign corporation, that would justify tax return of the disputed 15% to the private respondent. Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.76. Filipinas Synthetic Fiber Corp. vs. Court of Appeals Since Sec. 53, NIRC (now, Sec. 57 of 1997 NIRC) in relation to Sec. 54 (now Sec. 58) is silent as to when the duty to withhold arises, it is necessary to look into the nature of the accrual method of accounting. Under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayers right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income.

CASEDIGESTS

Taxable Income

in General

Madrigal vs. RaffertyG.R. No. L-12287. August 7, 1918

Digest by: ACASILI, Carl Jillson B.MALCOLM, J.: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. On February 1915, Madrigal filed a sworn declaration showing that his total net income for the year 1914 was P296,302.73. Subsequently, Madrigal submitted a 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, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Madrigal should be divided into two equal parts, one-half to be considered the income of Madrigal and the other half of Paterno. The general question was submitted to the Attorney-General of the Philippine Islands who in an opinion, held with the petitioner Madrigal. The revenue officers were unsatisfied, so the question was forwarded to Washington for a decision by the United States Treasury Department. The United States Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus decided against the claim of Madrigal. Madrigal paid under protest. The Collector of Internal Revenue ruled against Madrigal so the latter filed an action in the Court of First Instance 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 under the provisions of the Act of Congress known as the Income Tax Law. The claim was that, if the income tax for the year 1914 had been correctly and lawfully computed there would have been due payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of a total of P5,842.18 instead of P9,668.21, with the result that plaintiff Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due and payable.ISSUE:

Whether or not the income of Madrigal and Paterno should be divided into two equal parts, because of the conjugal partnership relations existing between them.HELD:

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 an income. Capital is wealth, while income is the service of wealth.Paterno, only has an inchoate right in the property of her husband 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. Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, 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 husbands property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. 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.

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In addition, the Income Tax Law was drafted by the Congress of the United States and has been by the Congress extended to the Philippine Islands. Being a law of American origin and being peculiarly intricate in its provisions, the authoritative decision of the official who is charged with enforcing it has peculiar force for the Philippines. It has come to be a well-settled rule that great weight should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the department charged with its execution.

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Fisher v. TrinidadNo. 17518. October 30, 1922

Digest by: ACASILI, Carl Jillson B.JOHNSON, J.FACTS:

The Philippine American Drug Company, a domestic corporation, in which Frederick Fisher was a stockholder declared a stock dividend for the year 1919. The proportionate share of said stock dividend was P24,800. The stock dividend for that amount was issued to Fisher. Trinidad demanded the sum of P889.91 as income tax on said stock dividend; Fisher paid the said amount under protest. To recover the paid amount, Fisher instituted an action. Trinidad filed a demurrer to the petition on the ground that it failed to constitute a cause of action. The demurrer was sustained and Fisher appealed. ISSUES:

1. What is an income?2. Whether or not a stock dividend should be considered an income.HELD:

1. Income is defined as the amount of money coming to a person or corporation within a specified time whether as payment for services, interest, or profit from investment. The Supreme Court of the U.S. explained that a mere advance in value in no sense constitutes the income specified in revenue law as income of the owner. Such advance constitutes and can be treated merely as an increase in capital. Stock dividends represent undistributed increase in the capital of the corporation for a particular period. They are used to show the increased interest or proportional share in the capital of each stockholder. 2. NO. For bookkeeping purposes, when stock dividends are declared, the corporation acknowledges a liability to the stockholders, equivalent to the aggregate par value of their stock, evidenced by a capital stock account. A stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation. We believe that the Legislature when it provided income tax, intended only to tax the income of corporations or firms as that used in its common acceptation; that is money received for services, interest or profit from investments. We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation or firm should be taxed as income.

If the holder of the stock dividend is required to pay an income tax on the stock dividend the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. An income to be subject to taxation under the law must be an actual income and not a promised or prospective income.

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Limpan Investment Corporation vs. Commissioner of Internal RevenueG.R. No. L-21570. July 26, 1966

Digest by: AGADER, Charisse Ann C. REYES, J.FACTS:

BIR assessed deficiency taxes on Limpan Corp, a company that leases real property, for under-declaring its rental income for years 1956-57 by around P20K and P81K respectively. Petitioner appeals on the ground that portions of these underdeclared rents are yet to be collected by the previous owners and turned over or received by the corporation. Petitioner cited that some rents were deposited with the court, such that the corporation does not have actual nor constructive control over them. The sole witness for the petitioner, Solis (Corporate Secretary- Treasurer) admitted to some undeclared rents in 1956 and1957, and that some balances were not collected by the corporation in 1956 because the lessees refused to recognize and pay rent to the new owners and that the corps president Isabelo Lim collected some rent and reported it in his personal income statement, but did not turn over the rent to the corporation. He also cites lack of actual or constructive control over rents deposited with the court.ISSUE:

Whether or not the BIR was correct in assessing deficiency taxes against Limpan Corp. for undeclared rental incomeHELD:

Yes. Petitioner admitted that it indeed had undeclared income (although only a part and not the full amount assessed by the BIR). Thus, it has become incumbent upon them to prove their excuses by clear and convincing evidence, which it has failed to do. When is there constructive receipt of rent? With regard to 1957 rents deposited with the court, and withdrawn only in 1958, the court viewed the corporation as having constructively received said rents. The non-collection was the petitioners fault since it refused to refused to accept the rent, and not due to nonpayment of lessees. Hence, although the corporation did not actually receive the rent, it is deemed to have constructively received them.

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Conwi vs. Commissioner of Internal RevenueG.R. No. 48532. August 31, 1992

Digest by: AGADER, Charisse Ann C. NOCON, J.FACTS: Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation, subsidiary of Procter & Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were assigned to other subsidiaries of Procter & Gamble outside the Philippines, for which petitioners were paid US dollars as compensation. Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso conversion based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amened ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the alleged overpayments, refund and/or tax credit, for which claims for refund were filed. 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.ISSUE: Whether or not petitioners dollar earnings are receipts derived from foreign exchange transactions HELD: No. For the proper resolution of income tax 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 ones labor.

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign exchange transactions. For a foreign exchange transaction is simply that a transaction in foreign exchange, foreign exchange being the conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another. When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned nations currency and were ALSO spending in said currency. There was no conversion, therefore, from one currency to another. 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. And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338 thereof empowers the Secretary of Finance to promulgate all needful rules and regulations to effectively enforce its provisions pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71 were issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself. Petitioners are citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

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Baas, Jr. vs. Court of Appeals G.R. No. 102967, February 10, 2000

Digest by: Alviar, Joyce B.QUISUMBING, J.FACTS:

On February 20, 1976, Bibiano V. Baas Jr. sold to AYALA Corporation, a 128,265 square meters of land located at Muntinlupa, for P2,308,770.00. Petitioner received an initial payment of P461,754.00 with the balance to be paid in four equal consecutive annual installments covered by promissory note. The same day, petitioner discounted the promissory note with AYALA, for its face value. AYALA issued 9 checks to petitioner, all dated February 20, 1976, with the uniform amount of P205,224.00.In his 1976 Income Tax Return, petitioner reported only the initial payment as income from disposition of capital asset. In the succeeding years, until 1979, petitioner reported a uniform income corresponding to the annual installment as gain from sale of capital asset. Later, the BIR Regional Director, through its tax examiners, discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should be taxable in 1976.

Petitioner was assessed deficiency tax with surcharges and penalties for the year 1976. A demand letter was then issued for the settlement of the income tax deficiency. Petitioner failed to pay and insisted that the sale of his land to AYALA was on installment.On June 1981, a criminal complaint for tax evasion was filed against petitioner. On July 1981, petitioner filed an Amnesty Tax Return under P.D. 1740. Likewise, on November 2, 1981, petitioner again filed an Amnesty Tax Return under P.D. 1840. In both, petitioner did not recognize that his sale of land to AYALA was on cash basis. Petitioner maintains that the proceeds of the promissory notes, were not yet due, which he discounted to AYALA should not be included as income realized in 1976. Petitioner states that the original agreement in the Deed of Sale should not be affected by the subsequent discounting of the bill. ISSUES:

1. Whether or not the mere filing of tax amnesty return under P.D. 1740 and 1840 ipso facto shield a taxpayer from immunity against prosecution?2. Whether or not the petitioners income from the sale of the land should be declared as a cash transaction in his tax return because the buyer discounted the promissory note, issued to the seller, on the same day of the sale?HELD:

1. No. the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere filing of tax amnesty return does not ipso facto shield him from immunity against prosecution. Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. To avail of a tax amnesty granted by the government and to be immune from suit on its delinquencies, the tax payer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on the same. P.D. Nos. 1740 and 1840 granted any individual, who voluntarily files a return under this decree and pays the income tax due thereon, immunity from the penalties, civil or criminal under the NIRC. Petitioner is not entitled to claim immunity from prosecution under the shield of the availing tax amnesty. His

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disclosure in his tax amnesty return did not include the income from his sale of land to AYALA on cash basis. Instead he insisted that such sale was on installment. He did not amend his income tax return. He did not pay the tax in which was considerably increased by the income derived from the discounting. He did not meet the twin requirements of P.D. Nos. 1740 and 1840, declaration of his untaxed income and full payment of tax due thereon.It also bear noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 2. Yes. The general rule is that the whole profit accruing from a sale of property is taxable as income in the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income shall be taxable in the year in which it is received, the profit from an installment sale is to be apportioned between or among the years in which such installments are paid and received. In this case, although the proceeds of a discounted promissory note is not considered initial payment, still it must be included as taxable income on the year it was converted to cash. When petitioner had the promisorry notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his returns the income derived from the discounting. What petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale of the land to AYALA for the year 1976.

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Income Taxon Individuals

Garrison vs. Court of AppealsG.R. Nos. L-44501-05. July 19, 1990

Digest by: ALVIAR, Joyce B.NARVASA, J.FACTS:

Petitioners, JOHN L. GARRISON, JAMES W. ROBERTSON, FRANK W. ROBERTSON, ROBERT H. CATHEY, FELICITAS DE GUZMAN and EDWARD McGURK are United States citizens, entered this country under Section 9 (a) of the Philippine Immigration Act of 1940, as amended, and presently employed in the United States Naval Base, Olongapo City. For the year 1969 John L. Garrison earned $15,288.00; Frank Robertson, $12,045.84; Robert H. Cathey, $9,855.20; James W. Robertson, $14,985.54; Felicitas de Guzman, $ 8,502.40; and Edward McGurk $12,407.99 . They received separate notices from Ladislao Firmacion, District Revenue Officer, stationed at Olongapo City, informing them that they had not filed their respective income tax returns for the year 1969, as required by Section 45 of the National Internal Revenue Code, and directing them to file the said returns within ten days from receipt of the notice. But the accused refused to file their income tax returns, claiming that they are not resident aliens but only special temporary visitors, having entered this country under Section 9 (a) of the Philippine Immigration Act of 1940, as amended. The accused also claimed exemption from filing the return in the Philippines by virtue of the provisions of Article XII, paragraph 2 of the US-RP Military Bases Agreement. The petitioners contend that given these facts, they may not under the law be deemed resident aliens required to file income tax returns. The petitioners claim that they are covered by this exempting provision of the Bases Agreement since, as is admitted on all sides, they are all U.S. nationals, all employed in the American Naval Base at Subic Bay (involved in some way or other in construction, maintenance, operation or defense thereof), and receive salary therefrom exclusively and from no other source in the Philippines; and it is their intention, as is shown by the unrebutted evidence, to return to the United States on termination of their employment.That claim had been rejected by the Court of Appeals with the terse statement that the Bases Agreement speaks of exemption from the payment of income tax, not from the filing of the income tax returns

ISSUE: Whether or not the petitioners are resident aliens and if so, whether or not they are required to file their respective income tax returns. HELD:

The petitioners are Resident Aliens, however they are exempt to pay income taxes, based on the provisions of The Bases Agreement. But even if exempt from paying income tax, said petitioners were not excused from filing income tax returns. For the Internal Revenue Code (Sec. 45, supra) requires the filing of an income tax return by any alien residing in the Philippines, regardless of whether the gross income was derived from sources within or outside the Philippines; and since the petitioners, although aliens residing within the Philippines, had failed to do so, they had been properly prosecuted and convicted for having thus violated the Code.What the law requires, is merely physical or bodily presence in a given place for a period of time, not the intention to make it a permanent place of abode. It is on this proposition, that almost all of the appellants were born here, repatriated to the US and to come back, in the latest in 1967, and to stay in the Philippines up to the present time, that makes appellants resident aliens not merely transients or sojourners which residence for quite a long period of time. Each of the petitioners does indeed fall

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within the letter of the codal precept that an alien residing in the Philippines and thus obliged to file an income tax return. None of them may be considered a non-resident alien, a mere transient or sojourner, who is not under any legal duty to file an income tax return under the Philippine Tax Code. This is made clear by Revenue Relations No. 2 of the Department of Finance of February 10, 1940, which lays down the relevant standards on the matter:An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of income tax. Whether he is a transient or not is determined by his intentions with regards to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him as transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary to its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned.Quite apart from the evidently distinct and different character of the requirement to pay income tax in contrast to the requirement to file a tax return, it appears that the exemption granted to the petitioners by the Bases Agreement from payment of income tax is not absolute. By the explicit terms of the Bases Agreement, it exists only as regards income derived from their employment in the Philippines in connection with construction, maintenance, operation or defense of the bases; it does not exist in respect of other income, i.e., income derived from Philippine sources or sources other than the US sources. Obviously, with respect to the latter form of income, i.e., that obtained or proceeding from Philippine sources or sources other than the US sources, the petitioners, and all other American nationals who are residents of the Philippines, are legally bound to pay tax thereon. In other words, so that American nationals residing in the country may be relieved of the duty to pay income tax for any given year, it is incumbent on them to show the Bureau of Internal Revenue that in that year they had derived income exclusively from their employment in connection with the U.S. bases, and none whatever from Philippine sources or sources other than the US sources. They have to make this known to the Government authorities. It is not in the first instance the latters duty or burden to make unaided verification of the sources of income of American residents. The duty rests on the U.S. nationals concerned to invoke and prima facie establish their tax-exempt status. It cannot simply be presumed that they earned no income from any other sources than their employment in the American bases and are therefore totally exempt from income tax. The situation is no different from that of Filipino and other resident income-earners in the Philippines who, by reason of the personal exemptions and permissible deductions under the Tax Code, may not be liable to pay income tax year for any particular year; that they are not liable to pay income tax, no matter how plain or irrefutable such a proposition might be, does not exempt them from the duty to file an income tax return.

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Pansacola vs. Commissioner of Internal RevenueG.R. No. 159991 November 16, 2006

Digest by: ARBAS, Andrei Christopher G.QUISUMBING, J.:FACTS:

Carmelino Pansacola filed his income tax return for the taxable year 1997 that reflected an overpayment of P5,950 which he claimed as the increased amounts of personal and additional exemptions under Section 35 of the NIRC. BIR denied his claim for a refund of P5,950. The CTA also denied his claim because according to the tax court, it would be absurd for the law to allow the deduction from a taxpayers gross income earned on a certain year of exemptions availing on a different taxable year. Petitioner sought reconsideration, but the same was denied.On appeal, the Court of Appeals denied his petition for lack of merit and ruled that Umali v. Estanislao, relied upon by petitioner, was inapplicable to his case. It further ruled that the NIRC took effect on January 1, 1998, thus the increased exemptions were effective only to cover taxable year 1998 and cannot be applied retroactively.ISSUE:

Whether or not the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the taxable year 1997.HELD:

NO. Since NIRC took effect on January 1, 1998, the increased amounts of personal and additional exemptions under Section 35, can only be allowed as deductions from the individual taxpayers gross or net income, as the case maybe, for the taxable year 1998 to be filed in 1999. The availability of the deductions if he is thus entitled, would be reflected on his tax return filed on or before the 15th day of April 1999 as mandated by Section 51 (C) (1). The NIRC made no reference that the personal and additional exemptions shall apply on income earned before January 1, 1998.As provided in Section 24 (A) (1) (a) in relation to Sections 31 and 22 (P) and Sections 43, 45 and 79 (H) of the NIRC, the income subject to income tax is the taxpayers income as derived and computed during the calendar year, his taxable year. What the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. Consequently, his correct taxable income and his corresponding allowable deductions e.g. personal and additional deductions, if any, had already been determined as of the end of the calendar year.Petitioners reliance in Umali v. Estanislao is misplaced because in that case the adjustment provided by Rep. Act No. 7167 effective 1992 was made to cover the past year 1991, for the reason that it is a social legislation which would especially benefit lower and middle-income taxpayers, and as cited in that case, the legislative intent is also clear in the records of the House of Representatives Journal. This is not so in the case at bar. There is nothing in the NIRC that expresses any such intent. The policy declarations in its enactment do not indicate it was a social legislation that adjusted personal and additional exemptions according to the poverty threshold level nor is there any indication that its application should retroact. At the time petitioner filed his 1997 return and paid the tax due thereon in April 1998, the increased amounts of personal and additional exemptions in Section 35 were not yet available. It has not yet accrued as of December 31, 1997, the last day of his taxable year. Petitioners taxable income covers his income for the calendar year 1997. The law cannot be given retroactive effect. It is established that tax laws are prospective in application, unless it is expressly provided to apply retroactively. In the NIRC, we note, there is no specific mention that the increased amounts of personal and additional exemptions under Section 35 shall be given retroactive effect. Conformably

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too, personal and additional exemptions are considered as deductions from gross income. Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly construed against the taxpayer and cannot be allowed unless granted in the most explicit and categorical language too plain to be mistaken. They cannot be extended by mere implication or inference. And, where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms.

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Umali vs. EstanislaoG.R Nos. 104037 and 104069, May 29, 1992

Digest by: ARBAS, Andrei Christopher G.PADILLA, J.:FACTS: Congress enacted Rep. Act 7167, entitled AN ACT ADJUSTING THE BASIC PERSONAL AND ADDITIONAL EXEMPTIONS ALLOWABLE TO INDIVIDUALS FOR INCOME TAX PURPOSES TO THE POVERTY THRESHOLD LEVEL, AMENDING FOR THE PURPOSE SECTION 29, PARAGRAPH [L], ITEMS (1) AND (2) [A] OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES. The said Act was signed and approved by the President on 19 December 1991 and published on 14 January 1992 in Malaya a newspaper of general circulation.On 26 December 1991, respondents promulgated Revenue Regulations No. 1-92 prescribing the collection at source of income tax on compensation income paid on or after January 1, 1992 under the Revised Withholding Tax Tables which take into account the increase of personal and additional exemptions.Thereafter, Revenue Regulations No. 6-82 is amended by Revenue Regulations No. 1-86 providing that each employee shall be allowed to claim the following amount of exemption with respect to compensation paid on or after January 1, 1992 effective on compensation income from January 1, 1992.The petitioners as taxpayers filed a Petition for Mandamus and Prohibition to compel the respondents to implement Rep. Act No. 7167 with respect to taxable income of individual taxpayers earned or received on or after 1 January 1991 or as of taxable year ending 31 December 1991 and to enjoin the respondents from implementing Revenue Regulations No. 1-92.ISSUE: Whether or not the Rep. Act 7167 covers or applies to compensation income earned or received during calendar year 1991.HELD:

YES. The Court ruled that Rep. Act 7167 should cover or extend to compensation income earned or received during calendar year 1991. The Court considered the legislative intent of Congress in enacting Rep. Act 7167, that although its passage was delayed and it did not become effective law until 30 January 1992, the Bill provides for increased personal additional exemptions to individuals in view of the higher standard of living. It limits the amount of income of individuals subject to income tax to enable them to spend for basic necessities and have more disposable income. Further, it is imperative for the government to take measures to ease the burden of the individual income tax filers,

The Court observed that Rep. Act 7167, speaks of the adjustments that it provides for, as adjustments to the poverty threshold level. Certainly, the poverty threshold level is the poverty threshold level at the time Rep. Act 7167 was enacted by Congress, not poverty threshold levels in futuro, at which time there may be need of further adjustments in personal exemptions. In the end, it is the lower-income and the middle-income groups of taxpayers who stand to benefit most from the increase of personal and additional exemptions. To that extent, the Act is a social legislation intended to alleviate in part the present economic plight of the lower income taxpayers. It is intended to remedy the inadequacy of the existing personal and additional exemptions for individual taxpayers.Thus, Rep. Act 7167, which became effective on 30 January 1992, the increased exemptions are

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literally available on or before 15 April 1992. But these increased exemptions can be available on 15 April 1992 only in respect of compensation income earned or received during the calendar year 1991. Therefore, Revenue Regulations No. 1-92 would, in effect, postpone the availability of the increased exemptions to 1 January-15 April 1993, and thus, literally defer the effectivity of Rep. Act 7167 to 1 January 1993. The implementing regulations collide frontally with Rep. Act 7167 which states that the statute shall take effect upon its approval. The law-making authority has spoken and the Court cannot refuse to apply the lawmakers words. Whether or not the government can afford the drop in tax revenues resulting from such increased exemptions was for Congress to decide.Sections 1, 3 and 5 of Revenue Regulations No. 1-92 which provide for the effectivity of the regulation were thereby set aside. They should take effect on compensation income earned or received from 1 January 1991.

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Definitionof Corporations

AFISCO Insurance Corporation vs. Court of AppealsG.R. No. 112675 January 25, 1999

Digest: AUMENTADO, Adrian F.PANGANIBAN, J.:FACTS:

Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a pool in order to facilitate the handling of business contracted with a nonresident foreign reinsurance company. The CIR assessed them with corporate deficiency taxes and denied their protest.

On appeal, the CA ruled that the pool of machinery insurers was a partnership taxable as a corporation, and that the latters collection of premiums on behalf of its members, the ceding companies, was taxable income. ISSUE:

Whether or not the clearing house or insurance pool be deemed a partnership or an association that is taxable as a corporation under the National Internal Revenue Code?HELD:

The Court in Evangelista v. Collector of Internal Revenue held that the law covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart from their individual members. The term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on.The ceding companies entered into a Pool Agreement that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC:

(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool.(2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies.(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share in the business ceded to the pool and in the expenses according to a Rules of Distribution annexed to the Pool Agreement. Profit motive or business is, therefore, the primordial reason for the pools formation. As aptly found by the CTA:xxx The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that of the pool being used in the transaction of business for profit. It is apparent, and petitioners admit, that their association or co-action was indispensable [to] the transaction of the business. x x x If together they have conducted business, profit must have been the object as, indeed, profit was earned. Though the profit was apportioned among the members, this is only a matter of consequence, as it implies that profit actually resulted.

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Pascual vs. Commissioner of Internal RevenueG.R. No. 78133 October 18, 1988

Digest: AUMENTADO, Adrian F.GANCAYCO, J.FACTS:

Petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and at a later date, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners in 1968 to Marenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson. Petitioners realized a net profit in the sale made in 1968 and 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years. However, in a letter of then Acting BIR Commissioner Plana, petitioners were assessed and required to pay deficiency corporate income taxes for the years 1968 and 1970. The commissioner contended that petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation. Also, the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.

ISSUE:

Whether or not an unregistered partnership or joint venture exists?HELD:

There is no unregistered partnership or joint venture.There is no evidence that petitioners enttered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present.The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.There is clear evidence of co-ownership between the petitioners. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

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Obillos vs. Commissioner of Internal RevenueG.R. No. L-68118. October 29, 1985

Digest by: AVILA, Alyssa Daphne M.AQUINO, J.FACTS:

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had acquired from their father.On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots. In 1974, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canda, deriving from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.In April, 1980, the Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares thereof. He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56. He also considered the share of the profits of each petitioner in the sum of P33,584 as a taxable in full (not a mere capital gain of which is taxable) and required them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code. ISSUES:

1. Whether or not the petitioners have formed a partnership under article 1767 of the Civil Code.2. Whether or not the petitioners are liable under the Tax Code.HELD:

1. NO. To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. The division of the profit was merely incidental to the dissolution of the co-ownership. Article 1769(3) of the Civil Code provides that the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. There must be an unmistakable intention to form a partnership or joint venture.2. NO. Not all co-ownerships are deemed unregistered partnership. A co-ownership owning properties which produce income should not automatically be considered partners of an unregistered

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partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation.

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Oa vs. Commissioner of Internal RevenueG.R. No. L-19342 May 25, 1972

Digest by: AVILA, Alyssa Daphne M.BARREDO, J.FACTS:

Julia Buales died leaving as heirs her surviving spouse, Lorenzo T. Oa and her five children. Lorenzo T. Oa, the surviving spouse was appointed administrator of the estate of said deceased. Later, the administrator submitted the project of partition. The project of partition shows that the heirs have undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined amount to be collected from the War Damage Commission. Later, they received from said Commission the amount of P50,000.00, more or less. This amount was not divided among them but was used in the rehabilitation of properties owned by them in common.Although the project of partition was approved by the Court, no attempt was made to divide the properties therein listed. Instead, the properties remained under the management of Lorenzo T. Oa who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners properties and investments gradually increased. From said investments and properties petitioners derived such incomes as profits from installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests. Every year, petitioners returned for income tax purposes their shares in the net income derived from said properties and securities and/or from transactions involving them However, petitioners did not actually receive their shares in the yearly income. The income was always left in the hands of Lorenzo T. Oa who, as heretofore pointed out, invested them in real properties and securities.On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. ISSUE:

Whether or not the petitioners have formed an unregistered partnership, and hence liable for corporate income taxes under the Tax Code.HELD:

YES. For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for this is simple. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what happened to petitioners in this case.The Tax Court found that instead of actually distributing the esta