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COMMISSIONER OF INTERNAL REVENUE, vs. JULIANE BAIER-NICKEL, as

represented by Marina Q. Guzman (Attorney-in-fact) Respondent.

(NOTE: This is the second case, I can’t find the 2003 case minute resolution, but part of its

ruling is mentioned at the end of this case. To follow.)

FACTS: Juliane Baier-Nickel, a non-resident German citizen, is the President of

JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketing on

wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling

and disposing embroidered textile products." Through JUBANITEX’s General Manager,

Marina Q. Guzman, the corporation appointed and engaged the services of respondent as

commission agent. It was agreed that respondent will receive 10% sales commission on

all sales actually concluded and collected through her efforts. In 1995, respondent

received the amount of P1,707,772.64, representing her sales commission income from

which JUBANITEX withheld the corresponding 10% withholding tax amounting to

P170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR). On October

17, 1997, respondent filed her 1995 income tax return reporting a taxable income of

P1,707,772.64 and a tax due of P170,777.26. On April 14, 1998, respondent filed a claim

to refund the amount of P170,777.26 alleged to have been mistakenly withheld and

remitted by JUBANITEX to the BIR. Respondent contended that her sales commission

income is not taxable in the Philippines because the same was a compensation for her

services rendered in Germany and therefore considered as income from sources outside

the Philippines. Contending that no action was being taken by BIR the case was brought

before the CTA, which denied her claim holding that the income derived by respondent is

therefore an income taxable in the Philippines because JUBANITEX is a domestic

corporation. On petition CA reversed the decision, holding that respondent received the

commissions as sales agent of JUBANITEX and not as President thereof. And since the

"source" of income means the activity or service that produce the income, the sales

commission received by respondent is not taxable in the Philippines because it arose from

the marketing activities performed by respondent in Germany.

ISSUE: The issue here is whether respondent’s sales commission income is taxable in the

Philippines.

RULING: YES, for failure to present evidence that will support her claim that the activity

which is the source of income was performed outside of the Philippines.

Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not

engaged in trade or business, are subject to Philippine income taxation on their income

received from all sources within the Philippines. Thus, the keyword in determining the

taxability of non-resident aliens is the income’s "source." In construing the meaning of

"source" in Section 25 of the NIRC, resort must be had on the origin of the provision.

The Supreme Court has said, in a definition much quoted but often debated, that income

may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3)

the sale of capital assets. While the three elements of this attempt at definition need not

be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a

particular item is from "sources within the United States" and suggest an investigation into

the nature and location of the activities or property which produce the income.

If the income is from labor the place where the labor is done should be decisive; if it is

done in this country, the income should be from "sources within the United States." If the

income is from capital, the place where the capital is employed should be decisive; if it is

employed in this country, the income should be from "sources within the United States." If

the income is from the sale of capital assets, the place where the sale is made should be

likewise decisive.

Much confusion will be avoided by regarding the term "source" in this fundamental light. It

is not a place, it is an activity or property. As such, it has a situs or location, and if that

situs or location is within the United States the resulting income is taxable to nonresident

aliens and foreign corporations.

The important factor therefore which determines the source of income of personal services

is not the residence of the payor, or the place where the contract for service is entered

into, or the place of payment, but the place where the services were actually rendered.17

The source of an income is the property, activity or service that produced the income.

Citing The Court reiterates the rule that "source of income" relates to the property, activity

or service that produced the income. With respect to rendition of labor or personal service,

as in the instant case, it is the place where the labor or service was performed that

determines the source of the income. There is therefore no merit in petitioner’s

interpretation which equates source of income in labor or personal service with the

residence of the payor or the place of payment of the income.

Having disposed of the doctrine applicable in this case, we will now determine whether

respondent was able to establish the factual circumstances showing that her income is

exempt from Philippine income taxation.

The decisive factual consideration here is not the capacity in which respondent received

the income, but the sufficiency of evidence to prove that the services she rendered were

performed in Germany. Though not raised as an issue, the Court is clothed with authority

to address the same because the resolution thereof will settle the vital question posed in

this controversy.23

In the instant case, the appointment letter of respondent as agent of JUBANITEX

stipulated that the activity or the service which would entitle her to 10% commission

income, are "sales actually concluded and collected through [her] efforts."25 What she

presented as evidence to prove that she performed income producing activities abroad,

were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as

to the sizes of, or designs and fabrics to be used in the finished products as well as

samples of sales orders purportedly relayed to her by clients. However, these documents

do not show whether the instructions or orders faxed ripened into concluded or collected

sales in Germany. At the very least, these pieces of evidence show that while respondent

was in Germany, she sent instructions/orders to JUBANITEX. As to whether these

instructions/orders gave rise to consummated sales and whether these sales were truly

concluded in Germany, respondent presented no such evidence. Neither did she establish

reasonable connection between the orders/instructions faxed and the reported monthly

sales purported to have transpired in Germany.

In sum, we find that the faxed documents presented by respondent did not constitute

substantial evidence, or that relevant evidence that a reasonable mind might accept as

adequate to support the conclusion31 that it was in Germany where she performed the

income producing service which gave rise to the reported monthly sales in the months of

March and May to September of 1995. She thus failed to discharge the burden of proving

that her income was from sources outside the Philippines and exempt from the application

of our income tax law. Hence, the claim for tax refund should be denied.

The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,32 a

previous case for refund of income withheld from respondent’s remunerations for

services rendered abroad, the Court in a Minute Resolution dated February 17,

2003,33 sustained the ruling of the Court of Appeals that respondent is entitled to

refund the sum withheld from her sales commission income for the year 1994. This

ruling has no bearing in the instant controversy because the subject matter thereof

is the income of respondent for the year 1994 while, the instant case deals with her

income in 1995. Otherwise, stated, res judicata has no application here. Its elements are:

(1) there must be a final judgment or order; (2) the court that rendered the judgment must

have jurisdiction over the subject matter and the parties; (3) it must be a judgment on the

merits; (4) there must be between the two cases identity of parties, of subject matter, and

of causes of action. 34 The instant case, however, did not satisfy the fourth requisite

because there is no identity as to the subject matter of the previous and present case of

respondent which deals with income earned and activities performed for different taxable

years.

FILIPINAS LIFE ASSURANCE COMPANY, vs. THE COURT OF TAX APPEALS and

THE COMMISSIONER OF INTERNAL REVENUE,

FACTS: The petitioner is a domestic life insurance company. On March 18, 1959, it filed

an income tax return for 1958. Later, however, it filed an amended return. This was

accompanied with a claim for the refund, which the petitioner had paid as income tax

under its original return. The difference is due to the fact that, whereas in its original

income tax return the petitioner reported in full its income from dividends amounting to

P57,105.29,1 in its amended return it reported only 25 per cent, or P15,242.55,2 of the

dividends from domestic corporations. The claim was not heard by CIR hence to avoid

prescription of its action, took the matter to the CTA which denied the claim of the

petitioner for refund. The Court of Tax Appeals ruled that life insurance companies should

report in full their income from dividends because, while they are treated in subsection (B),

the proviso regarding dividend exclusion is found in subsection (A) which treats of

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corporations in general. The petitioner appealed to this Court, contending, on the basis of

the history of the proviso, that the benefits of dividend exclusion are available to all

domestic and resident foreign corporations regardless of the business in which they may

be engaged.

ISSUE: WON domestic and resident foreign life insurance companies are entitled to return

only 25 per cent of their income from dividends under the 1957 amendment of IRC?

RULING: YES. Decision of CTA reversed.

A resort to legislative history should prove particularly helpful in the case of section 24 of

the Code as this section has gone through a miscellany of amendments, with the result

that its basic outlines are now only vaguely discernible. From a one-paragraph section it

has grown into a multi-paragraph one, with lengthy sentences qualified at every turn by

exceptions and provisos

It will thus be seen that dividend exclusion has always been a dominant feature of

corporate income tax. It is a device for reducing extra or double taxation of distributed

earnings. Since a corporation cannot deduct from its gross income the amount of

dividends distributed to its corporation-shareholders during the taxable year, any

distributed earnings are necessarily taxed twice; initially at the corporate level when they

are included in the corporation's taxable income, and again, at the corporation-

shareholder level when they are received as dividend. Thus, without exclusion the

successive taxation of the dividend as it passes from corporation to corporation would

result in repeated taxation of the same income and would leave very little for the ultimate

individual shareholder.

Until 1957 there had been no question that the proviso on dividend exclusion applied to all

domestic and resident foreign life insurance companies. The question arose when, by

virtue of Republic Act 1855 (1957), the original provisions of section 24, with slight

modifications, were made sub-section (A) while a new sub-section (B), entitled "Rate of

Tax on Life Insurance Companies," was added. The result is that the proviso on dividend

exclusion now appears to qualify only a part of section 24, making it doubtful whether after

1957 the income from dividends of domestic and resident foreign life insurance companies

still enjoys exemption, although, as noted in passing,15 the proviso continues to speak of

"the tax imposed by this section" (not sub-section).

However, a review of the circumstances, which prompted the amendment of section 24 in

1957 shows no intention to withdraw from life insurance companies the exemption which

theretofore had been enjoyed by them along with non-life insurance companies. To be

sure, the 1957 amendment was intended for a two-fold purpose: first, to change the tax

base from premium income to investment income and, second, to lower the tax on life

insurance companies, in order to encourage their growth as well as their investment in the

development of the national economy.

Prior to 1957, life insurance companies were required, for income tax purposes, to include

premium, receipts in gross income. It became generally recognized, however, that the

inclusion of premium receipts in the gross taxable income of life insurance companies was

unsound because premium receipts do not constitute income in the sense of gain or profit.

They are really savings deposits of the individual policyholders, a large portion of which

goes directly to reserve funds required by law for the payment of their claims for death

benefits, cash surrender values and maturity values. Therefore, to tax an insurance

company on account of these "deposits" or "savings" is actually to tax the policyholder for

being provident. What constitutes true income for a life insurance company is rather its

investment income from interest, dividends and rents.16

Besides, the premiums which a life insurance company receives are already subject to a

tax of 3 per cent under section 255 of the Code. To require their inclusion in gross income

for purposes of section 24 is to subject them to double taxation.17

The rate of tax was lowered in recognition of the fact that a life insurance company derives

profit from its investment income only to the extent that such income exceeds the rate of

interest at which the reserve must be maintained.18

That Congress intended to accord preferential tax treatment to domestic and resident

foreign life insurance companies is abundantly clear not only from the history of the 1957

amendment but also from the Comparative Table (supra) which shows that while the rate

of tax on corporations in general has been raised, that on domestic and resident foreign

life insurance companies has remained at 6-1/2 per cent — the lowest among those

imposed on various types of corporations.

The truth is that section 24 has undergone amendments through a process which, in

Cardozo's phrase,20 is no more intellectual than the use of paste pot and scissors.

Consequently, reliance cannot be placed on its grammatical construction in order to arrive

at its meaning

The reference to domestic and resident foreign life insurance companies in the excepting

clause of sub-section (a) is even more awkward because the exception relates to the

coverage of the entire section 24 and not simply to a sub-section thereof. Thus, registered

general copartnerships are excepted from the coverage of section 24 because they are

not subject to tax as an entity. By express provision of section 26 of the Code persons

doing business as a general copartnership duly registered in the mercantile registry are

subject to income tax "only in their individual capacity." On the other hand, by including

domestic and resident foreign life insurance companies in the excepting clause it was

never the intention to exempt them from the payment of corporate income tax, which is the

subject of section 24 as a whole. Furthermore, the exclusion of registered general

copartnerships from the coverage of section 24 is justified because by statutory definition

they are not anyway considered "corporations." On the other hand, life insurance

companies are deemed "corporations" for purposes of the Code.21

Thus, the haphazard amendment of section 24 by several legislative acts — as a result of

which the proviso on dividend exclusion is now found in sub-section (a) — makes reliance

on its grammatical construction highly unsafe and unsound in arriving at its

meaning.22 Since nothing in the history of the 1957 amendment or in the rationale of

dividend exclusion indicates the contrary, we hold that domestic and resident foreign life

insurance companies are entitled to the benefits of dividend exclusion, the position of the

proviso allowing it notwithstanding.

COMMISSIONER OF INTERNAL REVENUE, vs. TOURS SPECIALISTS, INC., and THE

COURT OF TAX APPEALS

FACTS: For the years 1974 to 1976, petitioner (Tours Specialists, Inc.) had derived

income from its activities as a travel agency by servicing the needs of foreign tourists and

travelers and Filipino "Balikbayans" during their stay in this country. Some of the services

extended to the tourists consist of booking said tourists and travelers in local hotels for

their lodging and board needs; transporting these foreign taourists from the airport to their

respective hotels, and etc. In order to ably supply these services to the foreign tourists,

petitioner and its correspondent counterpart tourist agencies abroad have agreed to offer

a package fee for the tourists. There are some tour agencies abroad request the local tour

agencies, such as the petitioner in the case, that the hotel room charges, in some specific

cases, be paid through them. (By this arrangement, the foreign tour agency entrusts to the

petitioner TSI the fund for hotel room accommodation, which in turn is paid by petitioner

tour agency to the local hotel when billed. Despite this arrangement, respondent

Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax

as independent contractor by including the entrusted hotel room charges in its gross

receipts from services for the years 1974 to 1976. Consequently, on December 6, 1979,

petitioner received from respondent the 3% deficiency independent contractor's tax

assessment. Petitioner protested the assessment on the ground that the money received

and entrusted to it by the tourists, earmarked to pay hotel room charges, were not

considered and have never been considered by it as part of its taxable gross receipts for

purposes of computing and paying its constractor's tax.Nevertheless, respondent, without

deciding the petitioner's written protest, caused the issuance of a warrant of distraint and

levy. And later, respondent had petitioner's bank deposits garnished. Petitioner appealed

to the Court of Tax Appeals which ruled that the money entrusted to private respondent

TSI, earmarked and paid for hotel room charges of tourists, travelers and/or foreign travel

agencies does not form part of its gross receipts subject to the 3% independent

contractor's tax under the National Internal Revenue Code of 1977.

ISSUE: WON money entrusted to private respondent TSI is earmarked and does not form

part of its gross receipts subject to the 3% independent contractor's tax?

RULING: YES. Affirmed the decision of CTA.

The respondent differentiated between the package fee — offered by both the local travel

agency and its correspondent counterpart tourist agencies abroad and the requests made

by some tour agencies abroad to local tour agencies wherein the hotel room charges in

some specific cases, would be paid to the local hotels through them. In the latter case, the

correspondent court found as a fact ". . . that the foreign tour agency entrusts to the

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petitioner TSI the fund for hotel room accommodation, which in turn is paid by petitioner

tour agency to the local hotel when billed." (Rollo, p. 42) The following procedure is

followed: The billing hotel sends the bill to the respondent; the local hotel then identifies

the individual tourist, or the particular group of tourist by code name or group designation

plus the duration of their stay for purposes of payment; upon receipt of the bill the private

respondent pays the local hotel with the funds entrusted to it by the foreign tour

correspondent agency.

Moreover, evidence presented by the private respondent shows that the amounts

entrusted to it by the foreign tourist agencies to pay the room charges of foreign tourists in

local hotels were not diverted to its funds; this arrangement was only an act of

accommodation on the part of the private respondent. This evidence was not refuted.

In essence, the petitioner's assertion that the hotel room charges entrusted to the private

respondent were part of the package fee paid by foreign tourists to the respondent is not

correct. The evidence is clear to the effect that the amounts entrusted to the private

respondent were exclusively for payment of hotel room charges of foreign tourists

entrusted to it by foreign travel agencies.

As demonstrated in the above-mentioned case, gross receipts subject to tax under the

Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong

to them and do not redound to the taxpayer's benefit; and it is not necessary that there

must be a law or regulation which would exempt such monies and receipts within the

meaning of gross receipts under the Tax Code.

Parenthetically, the room charges entrusted by the foreign travel agencies to the private

respondent do not form part of its gross receipts within the definition of the Tax Code. The

said receipts never belonged to the private respondent. The private respondent never

benefited from their payment to the local hotels. As stated earlier, this arrangement was

only to accommodate the foreign travel agencies.

Another objection raised by the petitioner is to the respondent court's application of

Presidential Decree 31 which exempts foreign tourists from payment of hotel room tax.

Accordingly, the significance of P.D. 31 is clearly established in determining whether or

not hotel room charges of foreign tourists in local hotels are subject to the 3% contractor's

tax. As the respondent court aptly stated:

. . . If the hotel room charges entrusted to petitioner will be

subjected to 3% contractor's tax as what respondent would want

to do in this case, that would in effect do indirectly what P.D. 31

would not like hotel room charges of foreign tourists to be

subjected to hotel room tax. Although, respondent may claim

that the 3% contractor's tax is imposed upon a different

incidence i.e. the gross receipts of petitioner tourist agency

which he asserts includes the hotel room charges entrusted to it,

the effect would be to impose a tax, and though different, it

nonetheless imposes a tax actually on room charges. One way

or the other, it would not have the effect of promoting tourism in

the Philippines as that would increase the costs or expenses by

the addition of a hotel room tax in the overall expenses of said

tourists. (Rollo, pp. 51-52)

COLLECTOR OF INTERNAL REVENUE vs. BATANGAS TRANSPORTATION

COMPANY and LAGUNA-TAYABAS BUS COMPANY

FACTS: Respondent companies are two distinct and separate corporations engaged in

the business of land transportation by means of motor buses, and operating distinct and

separate lines. Before the last war, each company maintained separate head offices. Each

company also kept and maintained separate books, fleets of buses, management,

personnel, maintenance and repair shops, and other facilities. Joseph Benedict managed

the Batangas Transportation, while Martin Olson was the manager of the Laguna Bus. To

show the connection and close relation between the two companies, it should be stated

that Max Blouse was the President of both corporations. During the war, the American

officials of these two corporations were interned in Santo Tomas, and said companies

ceased operations. They also lost their respective properties and equipment. After

Liberationthe two companies were able to acquire 56 auto buses from the United States

Army, and the two companies diveded said equipment equally between

themselves,registering the same separately in their respective names. In March, 1947,

after the resignation of Martin Olson as Manager of the Laguna Bus, Joseph Benedict,

who was then managing the Batangas Transportation, was appointed Manager of both

companies.

the purpose of the joint management, which was called, "Joint Emergency Operation",

was to economize in overhead expenses; At the end of each calendar year, all gross

receipts and expenses of both companies were determined and the net profits were

divided fifty-fifty, and transferred to the book of accounts of each company, and each

company "then prepared its own income tax return from this fifty per centum of the gross

receipts and expenditures, assets and liabilities thus transferred to it from the `Joint

Emergency Operation' and paid the corresponding income taxes thereon separately".

Under the theory that the two companies had pooled their resources in the establishment

of the Joint Emergency Operation, thereby forming a joint venture, the Collector wrote the

bus companies that there was due from them the amount of P422,210.89 as deficiency

income tax and compromise for the years 1946 to 1949, inclusive. Since the Collector

caused to be restrained, seized, and advertized for sale all the rolling

The respondent companies appealed from said assessment of P54,143.54 to the Court of

Tax Appeals, but before filing his answer, the Collector set aside his original assessment

of P54,143.54 and reassessed the alleged income tax liability of respondents of

P148,890.14, claiming that he had later discovered that said companies had been

"erroneously credited in the last assessment with 100 per cent of their income taxes paid

when they should in fact have been credited with only 75 per cent thereof, That corrected

and increased reassessment was embodied in the answer filed by the Collector with the

Court of Tax Appeals, which revered the decision.

ISSUE: Whether or not the Joint Emergency Operation can be considered as separate

corporation and hence liable to tax? Whether or not the Collector can still change his

assessment issued despite the pendency of appeal before the CTA?

RULING: 1. Yesliable to income tax; @. Yes witin prescribed period to avoid multiplicity of

suit. Nt liable for surcharges for they were in good faith.

In the present case, the two companies contributed money to a common fund to pay the

sole general manager, the accounts and office personnel attached to the office of said

manager, as well as for the maintenance and operation of a common maintenance and

repair shop. the net income was determined and divided equally between them, wholly

and utterly disregarding the expenses incurred in the maintenance and operation of each

company and of the individual income of said companies.

From the standpoint of the income tax law, this procedure and practice of determining the

net income of each company was arbitrary and unwarranted, disregarding as it did the real

facts in the case. There can be no question that the receipts and gross expenses of two,

distinct and separate companies operating different lines and in some cases, different

territories, and different equipment and personnel at least in value and in the amount of

salaries, can at the end of each year be equal or even approach equality.

In view of this, and considering that the Batangas Transportation and the Laguna Bus

operated different lines, sometimes in different provinces or territories, under different

franchises, with different equipment and personnel, it cannot possibly be true and correct

to say that the end of each year, the gross receipts and income in the gross expenses of

two companies are exactly the same for purposes of the payment of income tax. What

was actually done in this case was that, although no legal personality may have been

created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation

joint venture, or joint management operated the business affairs of the two companies as

though they constituted a single entity, company or partnership, thereby obtaining

substantial economy and profits in the operation.

For the foregoing reasons, and in the light of our ruling in the Evangelista vs. Collector of

Internal Revenue case,supra, we believe and hold that the Joint Emergency Operation or

sole management or joint venture in this case falls under the provisions of section 84 (b) of

the Internal Revenue Code, and consequently, it is liable to income tax provided for in

section 24 of the same code.

The majority, however, holds, not without valid arguments and reasons, that the

Government is not bound by the errors committed by its agents and tax collectors in

making tax assessments, specially when due to a misinterpretation or application of the

tax laws, more so when done in good faith; that the tax laws provide for a prescriptive

period within which the tax collectors may make assessments and reassessments in order

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to collect all the taxes due to the Government, and that if the Collector of Internal Revenue

is not allowed to amend his assessment before the Court of Tax Appeals, and since he

may make a subsequent reassessment to collect additional sums within the same subject

of his original assessment, provided it is done within the prescriptive period, that would

lead to multiplicity of suits which the law does not encourage; that since the Collector of

Internal Revenue, in modifying his assessment, may not only increase the same, but may

also reduce it, if he finds that he has committed an error against the taxpayer, and may

even make refunds of amounts erroneously and illegally collected, the taxpayer is not

prejudiced; that the hearing before the Court of Tax Appeals partakes of a trial de novo

and the Tax Court is authorized to receive evidence, summon witnesses, and give both

parties, the Government and the taxpayer, opportunity to present and argue their sides, so

that the true and correct amount of the tax to be collected, may be determined and

decided, whether resulting in the increase or reduction of the assessment appealed to it.

The result is that the ruling and doctrine now being laid by this Court is, that pending

appeal before the Court of Tax Appeals, the Collector of Internal Revenue may still amend

his appealed assessment, as he has done in the present case.

In view of the foregoing, and with the reversal of the appealed decision of the Court of Tax

Appeals, judgment is hereby rendered, holding that the Joint Emergency Operation

involved in the present is a corporation within the meaning of section 84 (b) of the Internal

Revenue Code, and so is liable to incom tax under section 24 of the code; that pending

appeal in the Court of Tax Appeals of an assessment made by the Collector of Internal

Revenue, the Collector, pending hearing before said court, may amend his appealed

assessment and include the amendment in his answer before the court, and the latter may

on the basis of the evidence presented before it, redetermine the assessment; that where

the failure to file an income tax return for and in behalf of an entity which is later found to

be a corporation within the meaning of section 84 (b) of the Tax Code was due to a

reasonable cause, such as an honest belief based on the advice of its attorneys and

accountants, a penalty in the form of a surcharge should not be imposed and collected.

The respondents are therefore ordered to pay the amount of the reassessment made by

the Collector of Internal Revenue before the Tax Court, minus the amount of 25 per cent

surcharge. No costs.

each of the individual partners.

AFISCO INSRANCE CORP vs CA

FACTS: The petitioners are 41 non-life insurance corporations, organized and existing

under the laws of the Philippines. Upon issuance by them of Erection, Machinery

Breakdown, Boiler Explosion and Contractors' All Risk insurance policies, the petitioners

entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with

the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident

foreign insurance corporation. The reinsurance treaties required petitioners to form a

[p]ool. Accordingly, a pool composed of the petitioners was formed on the same day.On

April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an

"Information Return of Organization Exempt from Income Tax" for the year ending in 1975,

on the basis of which it was assessed by the Commissioner of Internal Revenue a

deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes in the

amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the

petitioners, respectively. These assessments were protested by the petitioners through its

auditors Sycip, Gorres, Velayo and Co. CIR denied the protest. Ruled that the poll of

machinery is a partnership.

ISSUE: WON petitioners formed a partnership and hence liable for corporate tax?

RULING: YES.

First Issue:

Pool Taxable as a Corporation

Petitioners belie the existence of a partnership in this case, because (1) they, the

reinsurers, did not share the same risk or solidary liability, 14 (2) there was no common

fund; 15 (3) the executive board of the pool did not exercise control and management of

its funds, unlike the board of directors of a corporation;  16 and (4) the pool or clearing

house "was not and could not possibly have engaged in the business of reinsurance from

which it could have derived income for itself." 17

The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue,

the agency tasked with the enforcement of tax law, is accorded much weight and even

finality, when there is no showing. that it is patently wrong, 18 particularly in this case

where the findings and conclusions of the internal revenue commissioner were

subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of

reviewing tax cases, and the Court of Appeals. 

In the case before us, the ceding companies entered into a Pool Agreement 29 or an

association 30 that would handle all the insurance businesses covered under their quota-

share reinsurance treaty 31 and surplus reinsurance treaty 32 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. 33 This common fund pays for the

administration and operation expenses of the pool. 24

(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. 35

(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. 36 Profit motive or business is, therefore, the primordial reason for the pool's

formation. As aptly found by the CTA:

. . . 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 coaction was

indispensable [to] the transaction of the business, . . . 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. 37

The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the facts

obtaining therein are not on all fours with the present case. In Pascual, there was no

unregistered partnership, but merely a co-ownership which took up only two isolated

transactions. 39 The Court of Appeals did not err in applyingEvangelista, which involved a

partnership that engaged in a series of transactions spanning more than ten years, as in

the case before us.

CIR vs JAVIER

Facts

That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private

respondent herein), received from the Prudential Bank and Trust Company in Pasay City

the amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some

banks in the United States, among which is Mellon Bank, N.A.

That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax

Return for the taxable year 1977 showing a gross income of P53,053.38 and a net income

of P48,053.88 and stating in the footnote of the return that "Taxpayer was recipient of

some money received from abroad which he presumed to be a gift but turned out to

be an error and is now subject of litigation."

That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau

of Internal Revenue that he was paying the deficiency income assessment for the year

1976 but denying that he had any undeclared income for the year 1977 and requested that

the assessment for 1977 be made to await final court decision on the case filed against

him for filing an allegedly fraudulent return. . . .

8. That on November 11, 1981, the petitioner (private respondent herein) received from

Acting Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981

stating in reply to his December 15, 1980 letter-protest that "the amount of Mellon Bank's

erroneous remittance which you were able to dispose, is definitely taxable." . . . 

Because of a stupid clerical error, $1M instead of 1k was transmitted to Javier’s

account at the Prudential Bank

In her income tax return, Javier stated in a footnote that she received $1M by

mistake and therefore not subject to tax

5

BIR, however, imposed a 50% fraud penalty against Javier, the latter appealed to the

CTA

CTA: “it can hardly be said that there was actual and intentional fraud, consisting of

deception willfully and deliberately done or resorted to by petitioner (private

respondent) in order to induce the Government to give up some legal right, or the

latter, due to a false return, was placed at a disadvantage so as to prevent its lawful

agents from proper assessment of tax liabilities. ” , because petitioner literally "laid

his cards on the table" for respondent to examine. Error or mistake of fact or law is

not fraud.

ISSUE: Whether or not the imposition of the 50% fraud penalty was proper

Ruling:

The Supreme Court sustained the ruling of the CTA: It held that:

We are persuaded considerably by the private respondent's contention that there is no

fraud in the filing of the return and agree fully with the Court of Tax Appeals' interpretation

of Javier's notation on his income tax return filed on March 15, 1978 thus: "Taxpayer was

the recipient of some money from abroad which he presumed to be a gift but turned out to

be an error and is now subject of litigation that it was an "error or mistake of fact or law"

not constituting fraud, that such notation was practically an invitation for investigation and

that Javier had literally "laid his cards on the table." 

In the case at bar, there was no actual and intentional fraud through willful and deliberate

misleading of the government agency concerned, the Bureau of Internal Revenue, headed

by the herein petitioner. The government was not induced to give up some legal right and

place itself at a disadvantage so as to prevent its lawful agents from proper assessment of

tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud.

The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly

commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified

by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by

spending most of the money he received, but the records lack a clear showing of fraud

committed because he did not conceal the fact that he had received an amount of money

although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the

50% surcharge imposed as fraud penalty by the petitioner against the private respondent

in the deficiency assessment should be deleted.

Fraudulent return is always considered an evasion of tax, but a false return is not

necessarily so

It can hardly be said that there was actual and intentional fraud on the part of Javier

to induce the government to not assess against her tax liabilities

Javier received money from abroad which she presumed to be a gift and spent some

of it. That it turned out to be an error or mistake of fact cannot constitute fraud

Fraud must be intentional, consisting of deception willfully and deliberately done or

resorted to in order to induce another to give up some legal right

Javier did no such thing, 50% fraud penalty against should be deleted

EVANGELISTA vs. CIR

Facts: Petitioners borrowed sum of money from their father and together with their own

personal funds they used said money to buy several real properties. They then appointed

their brother (Simeon) as manager of the said real properties with powers and authority to

sell, lease or rent out said properties to third persons. in 1946, they realized a gross rental

income of in the sum of P24,786.30, while in 1948, they realized a gross rental income of

P17,453.00.

On September 24, 1954 respondent Collector of Internal Revenue demanded the payment

of income tax on corporations, real estate dealer's fixed tax and corporation residence tax

for the years 1945-1949. The letter of demand and corresponding assessments were

delivered to petitioners on December 3, 1954, whereupon they instituted the present case

in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained

in his letter of demand dated September 24, 1954" be reversed, and that they be absolved

from the payment of the taxes in question. CTA denied their petition and subsequent MR

and New Trials were denied. Hence this petition.

Issue: WON they are subject to corporate income tax?

Held: YES. To begin with, the tax in question is one imposed upon "corporations", which,

strictly speaking, are distinct and different from "partnerships". When our Internal Revenue

Code includes "partnerships" among the entities subject to the tax on "corporations", said

Code must allude, therefore, to organizations which are not necessarily "partnerships", in

the technical sense of the term. Thus, for instance, section 24 of said Code exempts from

the aforementioned tax "duly registered general partnerships which constitute precisely

one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in

section 84(b) of said Code, "the term corporation includes partnerships, no matter how

created or organized." This qualifying expression clearly indicates that a joint venture need

not be undertaken in any of the standard forms, or in conformity with the usual

requirements of the law on partnerships, in order that one could be deemed constituted for

purposes of the tax on corporations.

The essential elements of a partnership are two, namely: (a) an agreement to contribute

money, property or industry to a common fund; and (b) intent to divide the profits among

the contracting parties. The first element is undoubtedly present in the case at bar, for,

admittedly, petitioners have agreed to, and did, contribute money and property to a

common fund. Hence, the issue narrows down to their intent in acting as they did. Upon

consideration of all the facts and circumstances surrounding the case, we are fully

satisfied that their purpose was to engage in real estate transactions for monetary gain

and then divide the same among themselves, because:

1.       Said common fund was not something they found already in existence.

2.       They invested the same, not merely in one transaction, but in a series of

transactions. The number of lots (24) acquired and transactions undertaken is strongly

indicative of a pattern or common design that was not limited to the conservation and

preservation of the aforementioned common fund or even of the property acquired. In

other words, one cannot but perceive a character of habitually peculiar to business

transactions engaged in the purpose of gain.

3.       The aforesaid lots were not devoted to residential purposes, or to other personal

uses, of petitioners herein.

4.       Since August, 1945, the properties have been under the management of one

person, namely Simeon Evangelista, with full power to lease, to collect rents, to issue

receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and

checks. Thus, the affairs relative to said properties have been handled as if the same

belonged to a corporation or business and enterprise operated for profit.

5.       The foregoing conditions have existed for more than ten (10) years, or, to be exact,

over fifteen (15) years, since the first property was acquired, and over twelve (12) years,

since Simeon Evangelista became the manager.

Lastly, the records show that petitioners have habitually engaged in leasing the properties

above mentioned for a period of over twelve years, and that the yearly gross rentals of

said properties from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are

subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for

"real estate dealers," Wherefore the SC affirmed the CTA’s decision.

RATTAN ART & DECORATIONS, INC.,  vs. THE COLLECTOR OF INTERNAL

REVENUE and THE COURT OF TAX APPEALS,

Facts: Petitioner has been engaged in the manufacture and sale of articles made of rattan,

including rattan round pieces. On April 19, 1954, the Collector of Internal Revenue

demanded of the petitioner the amount of P1,313.75, as deficiency sales tax on round

rattan pieces, surcharge and penalty thereon, for the period from September 4, 1951 to

January 24, 1952. The articles were sold to foreign buyers on F.O.B. terms. On June 29,

1954, the Rattan Art & Decorations, Inc., asked for the cancellation of the demand,

claiming that the transaction was considered by it as an export and thus free from sales

tax, title to said articles passing only to the buyers upon arrival in the States and after

inspection. Because of the letter asking cancellation, a reinvestigation was conducted, and

on September 30, 1954, the investigating agent found that the petitioner was not only

liable for the P1,313.75, but for P96,706.30.

Based upon the report and re-assessment made, the Deputy Collect of Internal Revenue,

on June 22, 1955, made a demand for the payment of P87,914.93 within 30 days from

receipt of the letter of demand, plus P8,700.00 as penalty.

6

Counsel for petitioner asked for a reconsideration and/or re-investigation, of the

assessment. On June 17, 1958, a modified assessment was made, demanding the

payment of P77,087.28, all told. The motion for reconsideration and/ or readjustment of

the assessment was denied and for failure of petitioner to pay the tax liability, a Warrant of

Distraint and Levy was sued out. On August 7, 1958, petitioner filed with the Court of Tax

Appeals a Petition for Review of the assessment of Deficiency Sales Tax, Claiming the

same to be erroneous and/or the liability has already prescribed.

The respondent Collector of Internal Revenue interposed the following Special and

Affirmative Defenses, to wit:

(1) That the total amount of P77,087.28 representing deficiency sales tax for 1949 to

1952, 25% surcharge thereon, fixed tax for 1952 and 1953, and penalty was assessed

against petitioner in accordance with law;

(2) That the right of the respondent to assess and collect the tax has not yet prescribed

CTA ruled:

Under Section 196 of the National Internal Revenue Code, manufacturers (other than

manufacturers of articles enumerated in Sections 184 and 185) are subject to the sales

tax of 7% of the gross selling price of the articles sold. The tax is imposed on sales

consummated in the Philippines. The CTA RULED THAT THE SALE WAS

CONSUMMATED IN THE PHILIPPINES. FOR THE FOREGOING CONSIDERATIONS,

the decision appealed from is hereby modified and petitioner is ordered to pay to

the Government the sum of P68,582.23.

A motion for reconsideration of the above judgment was presented. In said motion,

counsel for petitioner invoked for the first time the amendment of Section 186 of the

Internal Revenue Code by Republic Act 894, wherein it was provided that effective June

20, 1953, shipments abroad by manufacturers or producers, irrespective of shipping

arrangements affecting the place of transfer of title to the articles shipped, were exempted

from sales tax. Under petitioner's contention, the deficiency sales taxes prior to the

passage of the law (Act 894) should be condoned, by giving said law a retroactive effect.

The CTA denied the motion for reconsideration on November 5, 1960, thus the instant

appeal.

ISSUES:

(1) In not holding that by virtue of Central Bank's Rules and Regulations the herein sales

having been dollar transactions were, therefore, foreign sale transactions;

(2) In not holding that the herein transactions, made by and between the Rattan Art &

Decorations, Inc., and foreign buyers were foreign sales, consummated outside Philippine

territory and hence not subject to the domestic sales tax; and

(3) In not holding Republic Act 894 as having retroactive effect.

Ruling:

The SUPREME COURT AFFIRMED THE DECISION OF THE CTA: IT HELD THAT:

1ST ISSUE: petitioner has failed to prove that the transactions in question were in fact

foreign sales. While it is true that the sale was paid in dollars, this alone did not make it a

foreign sale and exempted from the payment of the sales tax. The compliance with Central

Bank Rules and Regulations was only necessary for the purpose of controlling the use of

foreign exchange.

2ND ISSUE: Under these circumstances, there is no mistaking the fact that when the

petitioner has placed the goods aboard the ship, all its rights ended there and the sole

authority for the disposition of the shipped merchandise rested upon the foreign buyers.

Title was transferred at that very moment. While it is true that payments were made after

the boat had left Philippine waters, the delay did not change the fact that the transactions

were consummated in the Philippines. It will be noted that the delay was merely caused by

the preparation of the papers for submission to the banks against whom the letters of

credit had been drawn. Even on the supposition that the contracts in the involved

transactions were perfected in the United States, as claimed by the petitioner, still it does

not follow that the passing of title should also be in the United States. Transfer of title to

the vendee may be made by actual or constructive delivery (Art. 1477, NCC). The delivery

of the goods on board the carrying vessels partake of the nature of actual delivery, since

from that time, the foreign buyers assumed the risk of loss of the goods and paid the

insurance premiums covering them.

3RD ISSUE: The third and last error deals with the contention that Republic Act 894,

which exempted the transactions at bar from liability for sales tax, should be given

retroactive effect and extend to petitioner the benefits thereof. It must be recalled,

however, that this is a tax case, and one who seeks exemption from payment thereof,

should justify the exemption with the clearest legislative grant. During the period when

petitioner was made liable for the taxes in question, Republic Act 894 was not in

existence. While it is true that a law creating new rights may be given retroactive effect,

the same can only be made possible if the new right does not prejudice or impair any

vested right. The government had already acquired such right in the taxes due from

petitioner, when the exempting statute came to life.

CIR vs Wander Philippines

Topic: Tax on dividends remitted to foreign corporations 

Facts: Wander Philippines, a domestic corporation, is a wholly-owned subsidiary of Glaro

S.A. Ltd., a Swiss corporation not engaged in trade or business in the Philippines. It had

been remitting 35% of its earnings to the Bureau of Internal Revenue when it claimed a tax

refund, stating that it was only liable for 15% withholding tax in accordance with Section

24(b)(1) of the Tax Code, as amended by Presidential Decree Nos. 369 and 778. On

January 19, 1984, respondent Court of Tax Appeals rendered a Decision, ordering the

respondent to grant the refund prayed for by the petitioner corporation. MR was also

denied.

 Issues and Ruling:

 1.Whether or Not Wander is the proper party to claim the tax refund.

Yes! Wander is, first and foremost, a wholly owned subsidiary of Glaro. As the Philippine

counterpart,

 Wander is the proper entity who should file for the refund or credit of overpaid withholding

tax on dividends paid or remitted by Glaro.2.

2) W/N Switzerland allows as tax credit the deemed paid´20% Philippine tax on such

dividends. 

YES. As a matter of fact, Switzerland does not even impose any income tax on dividends

received by Swiss corporations domiciled in foreign countries. Section 24(B) (1) of the tax

code states that::

Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal

Revenue Code, as amended, is hereby further amended to read as follows:

(b) Tax on foreign corporations. — 1) Non-resident corporation. A foreign corporation not

engaged in trade or business in the Philippines, including a foreign life insurance company

not engaged in the life insurance business in the Philippines, shall pay a tax equal to 35%

of the gross income received during its taxable year from all sources within the

Philippines, as interest (except interest on foreign loans which shall be subject to 15%

tax), dividends, premiums, annuities, compensations, remuneration for technical services

or otherwise, emoluments or other fixed or determinable, annual, periodical or casual

gains, profits, and income, and capital gains: ... Provided, still further That on dividends

received from a domestic corporation liable to tax under this Chapter, the tax shall be 15%

of the dividends received, which shall be collected and paid as provided in Section 53 (d)

of this Code, 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 as provided in this section

Thus, it should be deemed that the condition in Section 24(b)(1) of theTax Code requiring

at least 20% tax be credited by the foreign government is fully satisfied. Thus, Wander is

entitled to the tax refund. Petition denied.

CIR vs JAVIER

Facts: That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private

respondent herein), received from the Prudential Bank and Trust Company in Pasay City

the amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some

banks in the United States, among which is Mellon Bank, N.A.

That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax

Return for the taxable year 1977 showing a gross income of P53,053.38 and a net income

of P48,053.88 and stating in the footnote of the return that "Taxpayer was recipient of

some money received from abroad which he presumed to be a gift but turned out to

be an error and is now subject of litigation."

7

That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau

of Internal Revenue that he was paying the deficiency income assessment for the year

1976 but denying that he had any undeclared income for the year 1977 and requested that

the assessment for 1977 be made to await final court decision on the case filed against

him for filing an allegedly fraudulent return. . . .

8. That on November 11, 1981, the petitioner (private respondent herein) received from

Acting Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981

stating in reply to his December 15, 1980 letter-protest that "the amount of Mellon Bank's

erroneous remittance which you were able to dispose, is definitely taxable." . . . 

Because of a stupid clerical error, $1M instead of 1k was transmitted to Javier’s

account at the Prudential Bank

In her income tax return, Javier stated in a footnote that she received $1M by

mistake and therefore not subject to tax

BIR, however, imposed a 50% fraud penalty against Javier, the latter appealed to the

CTA

CTA: “it can hardly be said that there was actual and intentional fraud, consisting of

deception willfully and deliberately done or resorted to by petitioner (private

respondent) in order to induce the Government to give up some legal right, or the

latter, due to a false return, was placed at a disadvantage so as to prevent its lawful

agents from proper assessment of tax liabilities. ” , because petitioner literally "laid

his cards on the table" for respondent to examine. Error or mistake of fact or law is

not fraud.

ISSUE:

Whether or not the imposition of the 50% fraud penalty was proper

Ruling:

The Supreme Court sustained the ruling of the CTA: It held that:

We are persuaded considerably by the private respondent's contention that there is no

fraud in the filing of the return and agree fully with the Court of Tax Appeals' interpretation

of Javier's notation on his income tax return filed on March 15, 1978 thus: "Taxpayer was

the recipient of some money from abroad which he presumed to be a gift but turned out to

be an error and is now subject of litigation that it was an "error or mistake of fact or law"

not constituting fraud, that such notation was practically an invitation for investigation and

that Javier had literally "laid his cards on the table." 

In the case at bar, there was no actual and intentional fraud through willful and deliberate

misleading of the government agency concerned, the Bureau of Internal Revenue, headed

by the herein petitioner. The government was not induced to give up some legal right and

place itself at a disadvantage so as to prevent its lawful agents from proper assessment of

tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud.

The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly

commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified

by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by

spending most of the money he received, but the records lack a clear showing of fraud

committed because he did not conceal the fact that he had received an amount of money

although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the

50% surcharge imposed as fraud penalty by the petitioner against the private respondent

in the deficiency assessment should be deleted.

Fraudulent return is always considered an evasion of tax, but a false return is not

necessarily so

It can hardly be said that there was actual and intentional fraud on the part of Javier

to induce the government to not assess against her tax liabilities

Javier received money from abroad which she presumed to be a gift and spent some

of it. That it turned out to be an error or mistake of fact cannot constitute fraud

Fraud must be intentional, consisting of deception willfully and deliberately done or

resorted to in order to induce another to give up some legal right

Javier did no such thing, 50% fraud penalty against should be deleted

VICENTE MADRIGAL and his wife, SUSANA vs. JAMES J. RAFFERTY, CIR, and

VENANCIO CONCEPCION

G.R. No. L-12287 August 7, 1918

FACTS:

Vicente and Susana were legally married under the provisions of law concerning conjugal

partnerships. On February 1915, Vicente filed sworn declaration on the prescribed form

with the CIR, showing, as his total net income for the year 1914, the sum of P296,302.73.

Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent

his income for the year 1914, but was in fact the income of the conjugal partnership

existing between himself and his wife Susana, hence, the income declared by Vicente

should be divided into two equal parts, other half being of Susana. The general question

had in the meantime been submitted to the Attorney-General of the Philippines who in an

opinion, held with the petitioner Madrigal. The revenue officers being still unsatisfied, the

correspondence together with this opinion was forwarded to Washington for a decision by

the U.S Treasury Department. The U.S CIR reversed the opinion of the Attorney-General,

and thus decided against the claim of Madrigal.

After payment under protest, action was begun by Vicente and his wife Susana in the CFI

Manila against CIR and the Deputy CIR for the recovery of the sum of P3,786.08, alleged

to have been wrongfully and illegally collected by the defendants from the them.

The answer of the defendants, together with an analysis of the tax declaration, the

pleadings, and the stipulation, sets forth the basis of defendants' stand in the following

way: The income of Vicente and his wife Susana of the year 1914 was made up of three

items: (1) profits made by Vicente in his coal and shipping business; (2) the profits made

by Susana in her embroidery business; (3) profits made by Vicente in a pawnshop

company. The sum of these three items is P383,181.97, the gross income of Vicente and

Susana for the year 1914. General deductions were claimed and allowed in the sum of

P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the

normal tax of one percent on the net income there were allowed as specific deductions the

following: (1) P16,687.80, the tax upon which was to be paid at source, and (2) P8,000,

the specific exemption granted to Vicente and Susana, husband and wife. The remainder,

P271,614.93 was the sum upon which the normal tax of one per cent was assessed. The

normal tax thus arrived at was P2,716.15.

The dispute between the plaintiffs and the defendants concerned the additional tax

provided for in the Income Tax Law. The trial court in an exhausted decision found in favor

of defendants, without costs.

ISSUES:

1. Whether Madrigal’s income should be divided into 2 equal parts in the assessment and

computation of his tax

2. WON the fact that Madrigal was a married man, and his marriage contracted under the

provisions governing the conjugal partnership, has no bearing on income considered as

income, and that the distinction must be drawn between the ordinary form of commercial

partnership and the conjugal partnership of spouses resulting from the relation of

marriage.

HELD:

1. NO. Susana Paterno, wife of Vicente Madrigal, still has mere an inchoate right in the

property of her husband during the life of the conjugal partnership. She has an interest in

the ultimate property rights and in the ultimate ownership of property acquired as income

after such income has become capital. Susana has no absolute right to one-half the

income of the conjugal partnership. Not being seized of a separate estate, she cannot

make a separate return in order to receive the benefit of exemption, which

could arise by reason of the additional tax. As she has no estate and income, actually and

legally vested in her and entirely separate from her husband’s property, the income cannot

be considered the separate income of the wife for purposes of additional tax.

Income, as contrasted with capital and property, is to be the test. The essential

difference between capital and income is that capital is a fund; income is a flow. A fund of

property existing at an instant of time is called capital. A flow of services rendered by that

capital by the payment of money from it or any other benefit rendered by a fund of capital

in relation to such fund through a period of time is called income. Capital is wealth, while

income is the service of wealth. A tax on income is not tax on property.

2. The Income Tax Law does not look on the spouses as individual partners in an ordinary

partnership. The husband and wife are only entitled to the exemption of P8,000

specifically granted by the law. The higher schedules of the additional tax directed at the

incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil

Code dealing with the conjugal partnership and having no application to the Income Tax

Law. The aims and purposes of the Income Tax Law must be given effect.

8

LIMPAN INVESTMENT CORPORATION vs. CIR , ET AL.

G.R. No. L-21570 July 26, 1966

FACTS:

LIMPAN INVESTMENT CORPORATION (Petitioner), a domestic corporation duly

registered is engaged in the business of leasing real properties. Its principal stockholders

are the spouses Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and control

ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the

board is the same Isabelo P. Lim. Its real properties consist of several lots and buildings,

mostly situated in Manila and in Pasay City, all of which were acquired from said Isabelo

P. Lim and his mother, Vicente Pantangco Vda. de Lim.

Petitioner corporation duly filed its 1956 and 1957 income tax returns, for which it paid the

corresponding taxes therefor in the sums of P657.00 and P2,220.00. Sometime in 1958

and 1959, the examiners of the BIR conducted an investigation of petitioner's 1956 and

1957 income tax returns and, in the course thereof, they discovered and ascertained that

petitioner had (1) underdeclared its rental incomes by P20,199.00 and P81,690.00 during

these taxable years and (2) had claimed excessive depreciation of its buildings in the

sums of P4,260.00 and P16,336.00 covering the same period. On the basis of these

findings, respondent CIR issued its letter-assessment and demand for payment of

deficiency income tax plus 5% surcharge and the 1% monthly interest from June 30, 1959

to the date of payment against petitioner corporation.

Corporation filed its petition for review before the Tax Appeals court, questioning the

correctness and validity of the above assessment of respondent CIR. It disclaimed having

received or collected the amount of P20,199.00, as unreported rental income for 1956, or

any part thereof, reasoning out that the previous owners of the leased building have to

collect part of the total rentals in 1956 to apply to their payment of rental in the land in the

amount of P21,630.00. It also denied having received or collected the amount of

P81,690.00, as unreported rental income for 1957, or any part thereof, explaining that part

of said amount totalling P31,380.00 was not declared as income in its 1957 tax return

because its president, Isabelo P. Lim, who collected and received P13,500.00 from certain

tenants, did not turn the same over to petitioner corporation in said year but did so only in

1959; that a certain tenant (Go Tong) deposited in court his rentals amounting to

P10,800.00, over which the corporation had no actual or constructive control; and that a

sub-tenant paid P4,200.00 which ought not be declared as rental income. Petitioner

likewise alleged in its petition that the rates of depreciation applied by respondent

Commissioner of its buildings in the above assessment are unfair and inaccurate.

Sole witness for corporation was its Sec-Treasurer Solis, who admitted that it had omitted

to report the sum of P12,100.00 as rental income in its 1956 tax return and also the sum of

P29,350.00 as rental income in its 1957 tax return. However, with respect to the difference

between this omitted income (P12,100.00) and the sum (P20,199.00) found by respondent

Commissioner as undeclared in 1956, petitioner corporation, through the same witness

(Solis), tried to establish that it did not collect or receive the same because, in view of the

refusal of some tenants to recognize the new owner, Isabelo P. Lim and Vicenta

Pantangco Vda. de Lim, the former owners, on one hand, and the same Isabelo P. Lim, as

president of petitioner corporation, on the other, had verbally agreed in 1956 to turn over

to petitioner corporation six per cent (6%) of the value of all its properties, computed at

P21,630.00, in exchange for whatever rentals the Lims may collect from the tenants. And,

with respect to the difference between the admittedly undeclared sum of P29,350.00 and

that found by respondent Commissioner as unreported rental income, (P81,690.00) in

1957, the same witness Solis also tried to establish that petitioner corporation did not

receive or collect the same but that its president, Isabelo P. Lim, collected part thereof and

may have reported the same in his own personal income tax return; that same Isabelo P.

Lim collected P13,500.00, which he turned over to petitioner in 1959 only; that a certain

tenant (Go Tong deposited in court his rentals (P10,800.00), over which the corporation

had no actual or constructive control and which were withdrawn only in 1958; and that a

sub-tenant paid P4,200.00 which ought not be declared as rental income in 1957.

INTERESTINGLY, Isabelo P. Lim was not presented as witness to corroborate the above

testimony of Vicente G. Solis.

On the other hand, Mingoa, one of the BIR examiners who personally conducted the

investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for

the respondent that he personally interviewed the tenants of petitioner and found that

these tenants had been regularly paying their rentals to the collectors of either petitioner or

its president, Isabelo P. Lim, but these payments were not declared in the corresponding

returns; and that in applying rates of depreciation to petitioner's buildings, he adopted

Bulletin "F" of the U.S. Federal Internal Revenue Service.

ISSUES:

1. WON petitioner had an unreported rental income of P20,199.00 for the year 1956.

2. WON petitioner had an unreported rental income of P81,690.00 for the year 1957.

3. WON the depreciation in the amount of P20,598.00 claimed by petitioner for the years

1956 and 1957 was excessive.

HELD:

1. YES. Petitioner having admitted, through its own witness Solis,, that it had undeclared

more than one-half (1/2) of the amount (P12,100.00 out of P20,199.00) found by the BIR

examiners as unreported rental income for the year 1956 and more than one-third (1/3) of

the amount (P29,350.00 out of P81,690.00) ascertained by the same examiners as

unreported rental income for the year 1957, contrary to its original claim to the revenue

authorities, it was incumbent upon it to establish the remainder of its pretensions by clear

and convincing evidence, that in the case is lacking. The claim of petitioner is not only

unusual but uncorroborated by the alleged transferors, or by any document or unbiased

evidence.

2. YES. Petitioner's denial and explanation of the non-receipt of the remaining unreported

income for 1957 is not substantiated by satisfactory corroboration. As above noted,

Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was his 1957

personal income tax return submitted in court to establish that the rental income which he

allegedly collected and received in 1957 were reported therein.

The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no

sufficient justification for the non-declaration of said income in 1957, since the deposit was

resorted to due to the refusal of petitioner to accept the same, and was not the fault of its

tenants; hence, petitioner is deemed to have constructively received such rentals in 1957.

The payment by the sub-tenant in 1957 should have been reported as rental income in

said year, since it is income just the same regardless of its source.

3. NO. Suffice it to state that this Court has already held that "depreciation is a question of

fact and is not measured by theoretical yardstick, but should be determined by a

consideration of actual fact, and the findings of the Tax Court in this respect should not be

disturbed when not shown to be arbitrary or in abuse of discretion.

WISE & CO., INC., ET. AL., vs. MEER, CIR

G.R. No. 48231 June 30, 1947

FACTS:

Wise & Co., Inc. et. al were stockholders of Manila Wine Merchants, Ltd., a foreign

corporation duly authorized to do business in the Philippines. The Board of Directors of

Manila Wine Merchants, Ltd., (HK Co.), recommended to the stockholders that they adopt

resolutions necessary to sell its business and assets to Manila Wine Merchants, Inc., a

Philippine corporation, (PH Co.), for the sum of P400,000. The HK Co. made a distribution

from its earnings for the year 1937 to its stockholders. As a result of the sale of its

business and assets to PH Co., a surplus was realized and the HK Co. distributed this

surplus to the shareholders

.

Philippine income tax had been paid by HK Co. on the said surplus from which the said

distributions were made. At a special general meeting of the shareholders of the HK Co.,

the stockholders by resolution directed that the company be voluntarily liquidated and its

capital distributed among the stockholders. The Appellants duly filed Income Tax Returns,

on which the defendant, Meer (CIR) made deficiency assessments. Plantiffs paid under

written protest and sought recovery. CFI ruled in favor of CIR hence the appeal.

ISSUES

1. Appellants contend that the amounts received by them and on which the taxes in

question were assessed and collected were ordinary dividends; CIR contends that they

were liquidating dividends.

2. WON liquidating dividends taxable income?

9

3. WON non-resident alien individual appellants contend that if the distributions received

by them were to be considered as a sale of their stock to the HK Co., the profit realized by

them does not constitute income from Philippine sources and is not subject to Philippine

taxes, "since all steps in the carrying out of this so-called sale took place outside the

Philippines."

RULINGS:

1. The distributions under consideration were not ordinary dividends. Therefore, they are

taxable as liquidating dividends. It was stipulated in the deed of sale that the sale and

transfer of the HK Co. shall take effect on June 1, 1937. Distribution took place on June 8.

They could not consistently deem all the business and assets of the corporation sold as of

June 1, 1937, and still say that said corporation, as a going concern, distributed ordinary

dividends to them thereafter.

2. Income tax law states that “Where a corporation, partnership, association, joint-

account, or insurance company distributes all of its assets in complete liquidation or

dissolution, the gain realized or loss sustained by the stockholder, whether individual or

corporation, is a taxable income or a deductible loss as the case may be.”

Appellants received the distributions in question in exchange for the surrender and

relinquishment by them of their stock in the HK Co. which was dissolved and in process of

complete liquidation. That money in the hands of the corporation formed a part of its

income and was properly taxable to it under the Income Tax Law. When the corporation

was dissolved and in process of complete liquidation and its shareholders surrendered

their stock to it and it paid the sums in question to them in exchange, a transaction took

place. The shareholder who received the consideration for the stock earned that much

money as income of his own, which again was properly taxable to him under the Income

Tax Law.

3. This contention is untenable. The HK Co. was at the time of the sale of its business in

the Philippines, and the PH Co. was a domestic corporation domiciled and doing business

also in the Philippines. The HK Co. was incorporated for the purpose of carrying on in the

Philippine Islands the business of wine, beer, and spirit merchants and the other objects

set out in its memorandum of association. Hence, its earnings, profits, and assets,

including those from whose proceeds the distributions in question were made, the major

part of which consisted in the purchase price of the business, had been earned and

acquired in the Philippines. As such, it is clear that said distributions were income "from

Philippine sources."

RESOLUTION ON MOTION FOR RECONSIDERATION

In De Koven vs. Alsop (205 Ill., 309; 63 L.R.A., 587), the court said:

A dividend is defined as "a corporate profit set aside, declared, and ordered

by the directors to be paid to the stockholders on demand or at a fixed

time. Until the dividend is declared, these corporate profits belong to the

corporation, not to the stockholders, and are liable for corporate

indebtedness." (Emphasis supplied.)

We are fully satisfied from the facts and data furnished here by the parties themselves that

the dividends in question were paid to plaintiffs, personally or thru their proxies or agents,

in the Philippines. The fact that payment was made in Philippine pesos would strongly

corroborate the conclusion that it was made in this country — if it had been made in

Hongkong or elsewhere abroad, the reasonable assumption is that it would have been

made in Hongkong dollars or in the currency of such other place abroad. But aside from

this, from the moment they were declared and a definite fund specified for their payment

(all surplus remaining "after providing for return of capital and various expenses") — and

all of this was done in the Philippines — to all legal intents and purposes they earned

those dividends in this country. From the record we deduce that the funds and assets of

the Manila Wine Merchants, Ltd., from which those dividends proceeded, were in the

Philippines where its business was located. So far as the record discloses, its liquidation

was effected in terms of Philippine pesos, indicating that it was made here. And this in turn

would lead to the deduction that the funds and assets liquidated were here.

Motion denied. So ordered.

RUFINO R. TAN vs. RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE &

JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE, 

G.R. No. 109289 October 3, 1994

x----------------------------------------------------------------------------------------------------------------------

---------x

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG,

MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA,

JR. vs. RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and

JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE

G.R. No. 109446 October 3, 1994

FACTS:

These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289,

the constitutionality of RA No. 7496, also commonly known as the Simplified Net Income

Taxationn Scheme (“SNIT”), amending certain provisions of the National Internal Revenue

Regulations No. 293, promulgated by public respondents pursuant to said law. Petitioners

claim to be taxpayers adversely affected by the continued implementation of the

amendatory legislation. In G.R. No. 109289, it is asserted that the enactment of RA No.

7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress

shall embrace only one subject which shall be expressed in the

title thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform

and equitable. The Congress shall evolve a progressive system

of taxation.

Article III, Section 1 — No person shall be deprived of . . .

property without due process of law, nor shall any person be

denied the equal protection of the laws.

Petitioner intimates that RA No. 7496 desecrates the constitutional requirement that

taxation “shall be uniform and equitable” in that the law would now attempt to tax single

proprietorships and professionals differently from the manner it imposes the tax on

corporations and partnerships. Petitioners claim to be taxpayers adversely affected by the

continued implementation of the amendatory legislation.

ISSUES:

1. WON RA No. 7496 a misnomer or, at least, deficient for being merely entitled,

“Simplified Net Income Taxation Scheme for the Self-Employed and Professionals

Engaged in the Practice of their Profession” (Petition in G.R. No. 109289)

2. WON it violate the Constitution for imposing taxes that are not uniform and equitable.

And against due process?

3. WON the Secretary of Finance and the BIR Commissioner exceeds their rule-making

authority in applying SNIT to general professional partnerships?

HELD:

1. NO. Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to

prevent log-rolling legislation intended to unite the members of the legislature who favor

any one of unrelated subjects in support of the whole act, (b) to avoid surprises or even

fraud upon the legislature, and (c) to fairly apprise the people, through such publications of

its proceedings as are usually made, of the subjects of legislation. The above objectives of

the fundamental law appear to us to have been sufficiently met. Anything else would be to

require a virtual compendium of the law which could not have been the intendment of the

constitutional mandate.

2. NO. Uniformity of taxation, like the kindred concept of equal protection, merely requires

that all subjects or objects of taxation, similarly situated, are to be treated alike both in

privileges and liabilities Uniformity does not forfend classification as long as:

(1) the standards that are used therefor are substantial and not arbitrary,

(2) the categorization is germane to achieve the legislative purpose

(3) the law applies, all things being equal, to both present and future conditions, and

(4) the classification applies equally well to all those belonging to the same

What may instead be perceived to be apparent from the amendatory law is the legislative

intent to increasingly shift the income tax system towards the schedular approach in the

income taxation of individual taxpayers and to maintain, by and large, the present global

10

treatment on taxable corporations. We certainly do not view this classification to be

arbitrary and inappropriate.

Having arrived at this conclusion, the plea of petitioner to have the law declared

unconstitutional for being violative of due process must perforce fail. The due process

clause may correctly be invoked only when there is a clear contravention of inherent or

constitutional limitations in the exercise of the tax power.

3. NO. Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the

above standing rule as now so modified by Republic Act No. 7496 on basically the extent

of allowable deductions applicable to all individual income taxpayers on their non-

compensation income. There is no evident intention of the law, either before or after the

amendatory legislation, to place in an unequal footing or in significant variance the income

tax treatment of professionals who practice their respective professions individually and of

those who do it through a general professional partnership.

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general

professional partnership (GPP) and the partners comprising the

GPP are covered by R. A. No. 7496. Thus, in determining the

net profit of the partnership, only the direct costs mentioned in

said law are to be deducted from partnership income. Also, the

expenses paid or incurred by partners in their individual

capacities in the practice of their profession which are not

reimbursed or paid by the partnership but are not considered as

direct cost, are not deductible from his gross income.

There is, then and now, no distinction in income tax liability between a person who

practices his profession alone or individually and one who does it through partnership

(whether registered or not) with others in the exercise of a common profession. Indeed,

outside of the gross compensation income tax and the final tax on passive investment

income, under the present income tax system all individuals deriving income from any

source whatsoever are treated in almost invariably the same manner and under a

common set of rules.

Here, the partners themselves, not the partnership (although it is still obligated to file an

income tax return [mainly for administration and data]), are liable for the payment of

income tax in their individual capacity computed on their respective and distributive shares

of profits. In the determination of the tax liability, a partner does so as an individual, and

there is no choice on the matter. In fine, under the Tax Code on income taxation, the

general professional partnership is deemed to be no more than a mere mechanism or a

flow-through entity in the generation of income by, and the ultimate distribution of such

income to, respectively, each of the individual partners.

Gatchalian vs. Collector of Internal Revenue [G.R. No. L-45425, April 29, 1939]

Facts: Plaintiffs purchased, in the ordinary course of business, from one of the duly

authorized agents of the National Charity Sweepstakes Office one ticket for the sum of two

pesos (P2), saidticket was registered in the name of Jose Gatchalian and Company.

The ticket won one of the third-prizes in the amount of P50,000. 

Jose Gatchalian was required to file the corresponding income taxreturn covering the prize

won. Defendant-Collector made anassessment against Jose Gatchalian and Co.

requesting thepayment of the sum of P1,499.94 to the deputy provincial treasurer of

Pulilan, Bulacan. Plaintiffs, however through counsel made a request for exemption. It was

denied. 

Plaintiffs failed to pay the amount due, hence a warrant of distraint and levy was issued.

Plaintiffs paid under protest a part of the tax and penalties to avoid the effects of the

warrant. A request that the balance be paid by plaintiffs in installments was made. This

was granted on the condition that a bond be filed. 

Plaintiffs failed in their installment payments. Hence a request for execution of the warrant

of distraint and levy was made. Plaintiffs paid under protest to avoid the execution. 

A claim for refund was made by the plaintiffs, which was dismissed, hence the appeal. 

Issue: Whether the plaintiffs formed a partnership hence liable forincome tax. 

Held: Yes. According to the stipulation facts the plaintiffs organized a partnership of a civil

nature because each of them put up money to buy a sweepstakes ticket for the sole

purpose of dividing equally the prize which they may win, as they did in fact in the amount

of P50,000. The partnership was not only formed, but upon the organization thereof and

the winning of the prize, Jose Gatchalian personally appeared in the office of

the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the

prize, the office issued the check for P50,000 in favor of Jose Gatchalian and company,

and the said partner, in the same capacity, collected the said check. All these

circumstances repel the idea that the plaintiffs organized and formed a community of

property only.

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.

BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS,

respondents.

Facts: BOAC is a 100% British Government-owned corporation organized and existing

under the laws of the United Kingdom It is engaged in the international airline business

and is a member-signatory of the Interline Air Transport Association (IATA). As such it

operates air transportation service and sells transportation tickets over the routes of the

other airline members. During the periods covered by the disputed assessments, it is

admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was

not granted a Certificate of public convenience and necessity to operate in the Philippines

by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and

partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently,

it did not carry passengers and/or cargo to or from the Philippines, although during the

period covered by the assessments, it maintained a general sales agent in the Philippines

Warner Barnes and Company, Ltd., and later Qantas Airways which was responsible for

selling BOAC tickets covering passengers and cargoes.

(First Case)

Petitioner Commissioner of Internal Revenue assessed BOAC the for

deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC.

Subsequent investigation resulted in the issuance of a new assessment, for the years

1959 to 1967. BOAC paid this new assessment under protest. BOAC filed a claim for

refund which was denied by the CIR.

(Second Case)

BOAC was assessed deficiency income taxes, interests, and penalty for the

fiscal years 1968-1969 to 1970-1971 and the additional amounts of P1,000.00 and

P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of

corporation returns). BOAC requested that the assessment be countermanded and set

aside. CIR not only denied the BOAC request for refund in the First Case but also re-

issued in the Second Case the deficiency income tax assessment in the second case.

Case was then jointly tried. the Tax Court rendered the assailed joint Decision reversing

the CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the

Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the

period in question, do not constitute BOAC income from Philippine sources "since no

service of carriage of passengers or freight was performed by BOAC within the

Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA

position was that income from transportation is income from services so that the place

where services are rendered determines the source. Thus, in the dispositive portion of its

Decision, the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79,

and to cancel the deficiency income tax assessments against BOAC in the amount of

P534,132.08 for the fiscal years 1968-69 to 1970-71.

Hence, this Petition for Review on certiorari of the Decision of the Tax Court.

Issue/s: Whether or not the revenue derived by private respondent British Overseas

Airways Corporation (BOAC) from sales of tickets in the Philippines for air

transportation, while having no landing rights here, constitute income of BOAC

from Philippine sources, and, accordingly, taxable.

Held: 1. Yes. It is our considered opinion that BOAC is a resident foreign corporation.

There is no specific criterion as to what constitutes "doing" or "engaging in" or

"transacting" business. Each case must be judged in the light of its peculiar environmental

circumstances. The term implies a continuity of commercial dealings and arrangements,

and contemplates, to that extent, the performance of acts or works or the exercise of some

of the functions normally incident to, and in progressive prosecution of commercial gain or

for the purpose and object of the business organization. "In order that a foreign

corporation may be regarded as doing business within a State, there must be continuity of

11

conduct and intention to establish a continuous business, such as the appointment of a

local agent, and not one of a temporary character.

BOAC, during the periods covered by the subject - assessments, maintained

a general sales agent in the Philippines, That general sales agent, from 1959 to 1971,

"was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series

of trips each trip in the series corresponding to a different airline company; (3) receiving

the fare from the whole trip; and (4) consequently allocating to the various airline

companies on the basis of their participation in the services rendered through the mode of

interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA

Agreement." Those activities were in exercise of the functions which are normally incident

to, and are in progressive pursuit of, the purpose and object of its organization as an

international air carrier. In fact, the regular sale of tickets, its main activity, is the very

lifeblood of the airline business, the generation of sales being the paramount objective.

There should be no doubt then that BOAC was "engaged in" business in the Philippines

through a local agent during the period covered by the assessments. Accordingly, it is a

resident foreign corporation subject to tax upon its total net income received in the

preceding taxable year from all sources within the Philippines.

The Tax Code defines "gross income" thus:

"Gross income" includes gains, profits, and income derived from salaries,

wages or compensation for personal service of whatever kind and in whatever form paid,

or from profession, vocations, trades, business, commerce, sales, or dealings in property,

whether real or personal, growing out of the ownership or use of or interest in such

property; also from interests, rents, dividends, securities, or the transactions of any

business carried on for gain or profile, or gains, profits, and income derived from any

source whatever (Sec. 29[3]).

Income means "cash received or its equivalent"; it is the amount of money

coming to a person within a specific time; it means something distinct from principal or

capital. For, while capital is a fund, income is a flow. As used in our income tax law,

"income" refers to the flow of wealth.

The source of an income is the property, activity or service that produced the

income. For the source of income to be considered as coming from the Philippines, it is

sufficient that the income is derived from activity within the Philippines. In BOAC's case,

the sale of tickets in the Philippines is the activity that produces the income. The tickets

exchanged hands here and payments for fares were also made here in Philippine

currency. The site of the source of payments is the Philippines. The flow of wealth

proceeded from, and occurred within, Philippine territory, enjoying the protection accorded

by the Philippine government. In consideration of such protection, the flow of wealth

should share the burden of supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a

common carrier, it constitutes the contract between the ticket-holder and the carrier. It

gives rise to the obligation of the purchaser of the ticket to pay the fare and the

corresponding obligation of the carrier to transport the passenger upon the terms and

conditions set forth thereon. The ordinary ticket issued to members of the traveling public

in general embraces within its terms all the elements to constitute it a valid contract,

binding upon the parties entering into the relationship.

True, Section 37(a) of the Tax Code, which enumerates items of gross

income from sources within the Philippines, namely: (1) interest, (21) dividends, (3)

service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal

property, does not mention income from the sale of tickets for international transportation.

However, that does not render it less an income from sources within the Philippines.

Section 37, by its language, does not intend the enumeration to be exclusive. It merely

directs that the types of income listed therein be treated as income from sources within the

Philippines. A cursory reading of the section will show that it does not state that it is an all-

inclusive enumeration, and that no other kind of income may be so considered.

The absence of flight operations to and from the Philippines is not

determinative of the source of income or the site of income taxation. Admittedly, BOAC

was an off-line international airline at the time pertinent to this case. The test of taxability is

the "source"; and the source of an income is that activity ... which produced the income.

Unquestionably, the passage documentations in these cases were sold in the Philippines

and the revenue therefrom was derived from a activity regularly pursued within the

Philippines. business a And even if the BOAC tickets sold covered the "transport of

passengers and cargo to and from foreign cities", it cannot alter the fact that income from

the sale of tickets was derived from the Philippines. The word "source" conveys one

essential idea, that of origin, and the origin of the income herein is the Philippines.

FELICIANO, J., dissenting:

The liability of BOAC to Philippine income taxation in respect of such income depends, not

on BOAC's status as a "resident foreign corporation" or alternatively, as a "non-resident

foreign corporation," but rather on whether or not such income is derived from "source

within the Philippines." A "resident foreign corporation" or foreign corporation engaged in

trade or business in the Philippines or having an office or place of business in the

Philippines is subject to Philippine income taxation only in respect of income derived from

sources within the Philippines.

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and

therefore a resident foreign corporation, or not doing business in the Philippines and

therefore a non-resident foreign corporation, it is liable to income tax only to the extent that

it derives income from sources within the Philippines. The circumtances that a foreign

corporation is resident in the Philippines yields no inference that all or any part of its

income is Philippine source income. Similarly, the non-resident status of a foreign

corporation does not imply that it has no Philippine source income. Conversely, the receipt

of Philippine source income creates no presumption that the recipient foreign corporation

is a resident of the Philippines. The critical issue, for present purposes, is therefore

whether of not BOAC is deriving income from sources within the Philippines.

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."

Fisher vs. Trinidad [G.R. No. L-17518 October 30, 1922]

Facts: Philippine American Drug Company was a corporation duly organized and existing

under the laws of the Philippine Islands, doing business in the City of Manila. Fisher was a

stockholder in said corporation. Said corporation, as result of the business for that year,

declared a "stock dividend" and that the proportionate share of said stock divided of Fisher

was P24,800. Said the stock dividend for that amount was issued to Fisher. For this

reason, Trinidad demanded payment of income tax for the stock dividend received by

Fisher. Fisher paid under protest the sum of P889.91 as income taxon said stock dividend.

Fisher filed an action for the recovery of P889.91. Trinidad demurred to the petition upon

the ground that it did not state facts sufficient to constitute cause of action. The demurrer

was sustained and Fisher appealed. 

Issue: Whether or not the stock dividend was an income and therefore taxable. 

Held: No. Generally speaking, stock dividends represent undistributed increase in the

capital of corporations or firms, jointstock companies, etc., etc., for a particular period.

The inventory of the property of the corporation for particular period shows an increase in

its capital, so that the stock theretofore issued does not show the real value of the

stockholder's interest, and additional stock is issued showing the increase in the actual

capital, or property, or assets of the corporation. 

In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme Court held that mere

advance in value does not constitute the "income" specified in the revenue law as

"income" of the owner for the year in which the sale of the property was made. Such

advance constitutes and can be treated merely as an increase of capital. 

In the case of Towne vs. Eisner, income was defined in an incometax law to mean cash or

its equivalent, unless it is otherwise specified. It does not mean unrealized increments in

the value of the property. A stock dividend really takes nothing from the property of the

corporation, and adds nothing to the interests of the shareholders. Its property is not

diminished and their interest are not increased. The proportional interest of each

shareholder remains the same. In short, the corporation is no poorer and the stockholder

is no richer then they were before. 

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179), Mr. Justice Pitney, said that the

term "income" in its natural and obvious sense, imports something distinct from principal

or capital and conveying the idea of gain or increase arising from corporate activity. 

In the case of Eisner vs. Macomber (252 U.S., 189), income was defined as the gain

derived from capital, from labor, or from both combined, provided it be understood to

include profit gained through a sale or conversion of capital assets. 

12

When a corporation or company issues "stock dividends" it shows that the company's

accumulated profits have been capitalized, instead of distributed to the stockholders or

retained as surplus available for distribution, in money or in kind, should opportunity offer.

The essential and controlling fact is that the stockholder has received nothing out of the

company's assets for his separate use and benefit; on the contrary, every dollar of his

original investment, together with whatever accretions and accumulations resulting from

employment of his money and that of the other stockholders in the business of the

company, still remains the property of the company, and subject to business risks which

may result in wiping out of the entire investment. The stockholder by virtue of the stock

dividendhas in fact received nothing that answers the definition of an "income." 

The stockholder who receives a stock dividend has received nothing but a representation

of his increased interest in the capital of the corporation. There has been no separation or

segregation of his interest. All the property or capital of the corporation still belongs to the

corporation. There has been no separation of the interest of the stockholder from the

general capital of the corporation. The stockholder, by virtue of the stock dividend, has no

separate or individual control over the interest represented thereby, further than he had

before the stock dividend was issued. He cannot use it for the reason that it is still the

property of the corporation and not the property of the individual holder of  stock dividend.

A certificate of stock represented by the stock dividend is simply a statement of his

proportional interest or participation in the capital of the corporation. The receipt of a stock

dividend in no way increases the money received of a stockholder nor his cash account at

the close of the year. It simply shows that there has been an increase in the amount of the

capital of the corporation during the particular period, which may be due to an increased

business or to a natural increase of the value of the capital due to business, economic, or

other reasons. We believe that the Legislature, when it provided for an "income tax,"

intended to tax only the "income" of corporations, firms or individuals, as that term is

generally used in its common acceptation; that is that the income means money received,

coming to a person or corporation 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, firm, or individual, should be taxed as "income." 

A stock dividend, still being the property of the corporation and not the stockholder, may

be reached by an execution against the corporation, and sold as a part of the property of

the corporation. In such a case, if all the property of the corporation is sold, then the

stockholder certainly could not be charged with having received an income by virtue of the

issuance of the stock dividend. Until the dividend is declared and paid, the corporate

profits still belong to the corporation, not to the stockholders, and are liable for corporate

indebtedness. The rule is well established that cash dividend, whether large or small, are

regarded as "income" and all stock dividends, as capital or assets 

If the ownership of the property represented by a stock dividend is still in the corporation

and not in the holder of such stock, then it is difficult to understand how it can be regarded

as income to the stockholder and not as a part of the capital or assets of the corporation. If

the holder of the stock dividend is required to pay anincome tax on the same, 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. 

As stock dividends are not "income," the same cannot be considered taxes under that

provision of Act No. 2833. For all of the foregoing reasons, SC held that the judgment of

the lower court should be REVOKED

CIR vs PROCTER

FACTS:

Procter and Gamble Philippines declared dividends payable to its parent company and

sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a

35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed

a claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that

pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by

Presidential Decree No. 369, the applicable rate of withholding tax on the dividends

remitted was only 15%.

MAIN ISSUE:

Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:

YES. P&G Philippines is entitled.

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend

remittances to non-resident corporate stockholders of a Philippine corporation. This rate

goes down to 15% ONLY IF  he country of domicile of the foreign stockholder corporation

“shall allow” such foreign corporation a tax credit for “taxes deemed paid in the

Philippines,” applicable against the tax payable to the domiciliary country by the foreign

stockholder corporation. However, such tax credit for “taxes deemed paid in the

Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points

which represents the difference between the regular 35% dividend tax rate and the

reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for

”taxes deemed paid in the Philippines” applicable against the US taxes of P&G USA, and

such tax credit must reach at least 20 percentage points. Requirements were met.

NOTES: Breakdown:

a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic

corporation (owning 10% of remitting foreign corporation) shall be deemed to have paid a

proportionate extent of taxes paid by such foreign corporation upon its remittance of

dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)

P 100.00 -- corporate income earned by P&G Phils

x 35% -- Philippine income tax rate

P 35.00 -- paid by P&G Phil as corporate income tax

P 100.00

- 35.00

65. 00 -- available for remittance

P 65. 00

x 35% -- Regular Philippine dividend tax rate

P 22.75 -- regular dividend tax

P 65.0o

x 15% -- Reduced dividend tax rate

P 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable

- 9.75 -- dividend tax withheld at reduced rate

P 55.25 -- dividends actually remitted to P&G USA

Dividends actually

remitted by P&G Phil = P 55.25

---------------------------------- ------------- x P35 = P29.75

Amount of accumulated P 65.00

profits earned

P35 is the income tax paid.

P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax

‘deemed paid’ by the parent company. Since P29.75 is much higher than P13, Sec 902

US Tax Code complies with the requirements of sec 24 NIRC. (I did not understand why

these were divided and multiplied. Point is, requirements were met)

Reason behind the law:

Since the US Congress desires to avoid or reduce double taxation of the same income

stream, it allows a tax credit of both (i) the Philippine dividend tax actually withheld, and (ii)

the tax credit for the Philippine corporate income tax actually paid by P&G Philippines but

“deemed paid” by P&G USA.

Moreover, under the Philippines-United States Convention “With Respect to Taxes on

Income,” the Philippines, by treaty commitment, reduced the regular rate of dividend tax to

a maximum of 20% of  he gross amount of dividends paid to US parent corporations, and

established a treaty obligation on the part of the United States that it “shall allow” to a US

13

parent corporation receiving dividends from its  Philippine subsidiary “a [tax] credit for the

appropriate amount of taxes paid or accrued to the Philippines by the Philippine

[subsidiary].

Note:

The NIRC does not require that the US tax law deem the parent corporation to have paid

the 20 percentage points of dividend tax waived by the Philippines. It only requires that the

US “shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent to the 20

percentage points waived by the Philippines. Section 24(b)(1) does not create a tax

exemption nor does it provide a tax credit; it is a provision which specifies when a

particular (reduced) tax rate is legally applicable.

Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in

the Philippines by reducing the tax cost of earning profits here and thereby increasing the

net dividends remittable to the investor. The foreign investor, however, would not benefit

from the reduction of the Philippine dividend tax rate unless its home country gives it some

relief from double taxation by allowing the investor additional tax credits which would be

applicable against the tax payable to such home country. Accordingly Section 24(b)(1) of

the NIRC requires the home or domiciliary country to give the investor corporation a

“deemed paid” tax credit at least equal in amount to the 20 percentage points of dividend

tax foregone by the Philippines, in the assumption that a positive incentive effect would

thereby be felt by the investor.

Howden vs. CIR

FACTS: Common Wealth insurance corp, a domestic corp, enggages in reinsurance

contracts with several birtish companies. Alexander Howden & Co., Ltd., a British

corporation not engaged in business in this country, represented the aforesaid British

insurance companies. the contracts were ceded to Common Wealth Insurance Corp. The

reinsurance contracts were prepared and signed by the foreign reinsurers in England and

sent to Manila where Commonwealth Insurance Co. signed them. Howden filed a claim for

refund.Appellant raises the questions (1) Are portions of premiums earned from

insurances locally underwritten by a domestic corporation, ceded to and received by non-

resident foreign reinsurance companies, thru a non-resident foreign insurance broker,

pursuant to reinsurance contracts signed by the reinsurers abroad but signed by the

domestic corporation in the Philippines, subject to income tax or not? (2) If subject thereto,

may or may not the income tax on reinsurance premiums be withheld pursuant to Sections

53 and 54 of the National Internal Revenue Code?

ISSUE:Whether or not petitioners foreign corporation will be subject to income and

witholding tax?

HELD: Yes, The source of an income is the property, activity or service that produced the

income. Appellants should not confuse activity that creates income 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 business abroad. Furthermore,

"income" refers to the flow of wealth. Such flow, in the instant case, proceeded from the

Philippines. Such income enjoyed the protection of the Philippine government. As wealth

flowing from within the taxing jurisdiction of the Philippines and in consideration for

protection accorded it by the Philippines, said income should properly share the burden of

maintaining the government.

Marubeni vs. CIR

FACTS: Marubeni corp. a japanese corp s licensed to engage in business under Phil.

Laws and having a branch office located at Intramuros invested to Atlantic Gulf Pacific

Co. of Manila (AG&P) , a domestic corp. AG&P acts as withholding agent of Marubeni,

they remit dividends to Marubeni corp's main office in japan with income tax already

imposed.

Dividends remitted by AG&P were deducted, 10% tax. on the last 3 quarters of 1981, it

was subject to 15% branch profit remmittance tax. Marubeni questioned the additional

15% imposition. They filed a claim for refund to the BIR but was denied. BIR's contention

is that the 10% and 15% falls under the 25% tax to be imposed on foreign corporation in

accordance to the Phil, Japan tax treaty.

ISSUE: Whether or not Marubeni, a foreign corp. is entitled for refund.?

HELD : Yes, Marubeni is a single corporate entity. tax imposed on dividends received by

it's main office cannot be separate from tax imposed on it's branch in Intramuros. Also, it

was found out that dividends were neither subject to the 15% profit remittance tax nor to

the 10% dividend tax, the recipient being a non-resident stockholder, they grossly erred in

holding that no refund was forthcoming to the petitioner because the taxes thus withheld

totalled the 25% rate imposed by the Phil-Japan Tax Convention . To simply add the two

taxes to arrive at the 25% tax rate is to disregard a basic rule in taxation that each tax has

a different tax basis. While the tax on dividends is directly levied on the dividends

received, "the tax base upon which the 15% branch profit remittance tax is imposed is the

profit actually remitted abroad. Marubeni is therefore entitled for refund.

Gutierrez, Morales vs. CIR

FACTS: Maria Morales owns a agricultural land located beside the Clark Air Base. One

day, by virtue of the Phil-US military agreement, US requested the extension of the air

base, Phil Gov. complied by expropriating nearby lands including that of Maria's land.

Maria was compensated for her land, after expropriation proceeding. Also, a income tax

was imposed on the expropriation of land, deducting income tax from the compensation.

Petitioners Morales and Gutierrez filed a opposition to the imposition.

ISSUE: Whether or not the land expropriated by the Government is subject to income tax?

HELD: Yes, Expropriation and payment of just compensation is in fact a sale. Acquisition

by the Government through the exercise of the power of eminent domain, said properties

being justly compensated, is embraced within the meaning of the term "sale or disposition

of property," and the proceeds derived therefrom is subject to income tax as capital gain

pursuant to the provisions of Section of the Tax Code.

PASCUAL vs. CIR

FACTS: Mr. Pascual and Mr. Dragon bought several parcel of lands and eventually sold

them, they earned income for these transactions and they even availed of tax amnesties,.

One day, the BIR commissioner assessed their tax, there was a deficiency for non

payment of corporate tax, the commissioner alleged that both Dragon and Pascual are

members of their ""unregistered partnership" and is therefore liable to pay corporate tax

which was distinct from their individual income tax.

ISSUE: Whether or not Petitioners are subject to corporate income tax?

HELD: No, 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 no adequate basis to support the proposition that they thereby formed an

unregistered partnership. They shared in the gross profits as co-owners and paid their

capital gains taxes on their net, these alone is not a sufficient basis of a formation of a

partnership. 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. They are merely co-owners of the land that they

bought and sold. The petition should therefore be granted exempting petitionenrs from

corporate income tax.