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CIR v. CA, ROH Auto (BIR Rules and Regulations) Facts:

EO41 was promulgated declaring a one-time tax amnesty on unpaid income taxes, later amended to include estate and donor's taxes and taxes on business, for the taxable years 1981 to 1985. Availing itself of the amnesty, R.O.H. Auto Products filed, tax amnesty returnms and paid the amnesty taxes due. Prior to this availment, CIR assessed the ROH deficiency income and business taxes in an aggregate amount of


ROH wrote back to state that since it had been able to avail itself of the tax amnesty, the deficiency tax notice should forthwith be cancelled and withdrawn. The request was denied by the Commissioner on the ground that Revenue Memorandum Order No. 4-87, dated 09 February 1987, implementing Executive Order No. 41, had construed the amnesty coverage to include only assessments issued by the Bureau of Internal Revenue after the promulgation of the executive order on 22 August 1986 and not to assessments theretofore made.


Is ROH covered by the tax amnesty? YES. Was the CIR’s position correct? NO.

Ratio Decidendi:

1. The added exception urged by petitioner Commissioner

based on Revenue Memorandum Order No. 4-87, further restricting the scope of the amnesty clearly amounts to an act of administrative legislation quite contrary to the mandate of the law which the regulation ought to implement. 2. The authority of the Secretary of Finance, in conjunction with the CIR, to promulgate rules and regulations for the enforcement of internal revenue laws cannot be controverted. Neither can it be disputed that such rules and regulations, as well as administrative opinions and rulings, ordinarily should deserve weight and respect by the courts. Much more fundamental than either of the above, however, is that all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify,

the law.

3. If, as the Commissioner argues, EO 41 had not been intended to include 1981-1985 tax liabilities already assessed prior to 22 August 1986, the law could have simply so provided in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the executive order has been designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically excepted by it

Holding: CA affirmed.

Commissioner v. CA (G.R. # 119761; 08-29-1996) by yurei™


1. RA 7654 was enacted by Congress on June 10, 1993 and took effect July 3, 1993. It amended partly Sec. 142 (c) of the NIRC 1

2. Fortune Tobacco manufactured the following cigaretter brands:

Hope, More and Champion. Prior to RA 7654, these 3 brands were considered local brands subjected to an ad valorem tax of 20 to 45%. Applying the amendment and nothing else, (see footnote below) the 3 brands should fall under Sec 142 (c) (2) NIRC and be taxed at 20 to 45%.

3. However, on July 1, 1993, petitioner Commissioner of Internal Revenue issued Revenue Memorandum Circular37-93 which reclassified the 3 brands as locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax. The reclassification was before RA 7654 took effect.

4. In effect, the memo circular subjected the 3 brands to the provisions of Sec 142 (c) (1) NIRC imposing upon these brands a rate of 55% instead of just 20 to 45% under Sec 142 (c) (2) NIRC.

5. There was no notice and hearing. CIR argued that the memo circular was merely an interpretative ruling of the BIR which did not require notice and hearing.

Issue: WON RMC 37-93 was valid and enforceable – No; lack of notice and hearing violated due process required for promulgated rules. Moreover, it infringed on uniformity of taxation / equal protection since other local cigarettes bearing foreign brands had not been included within the scope of the memo circular.


1. Contrary to petitioner’s contention, the memo was not a mere interpretative rule but a legislative rule in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. Promulgated legislative rules must be published.

2. On the other hand, interpretative rules only provide guidelines to the law which the administrative agency is in charge of enforcing.

3. BIR, in reclassifying the 3 brands and raising their applicable tax rate, did not simply interpret RA 7654 but legislated under its quasi-legislative authority.

BELLOSILLO separate opinion: the administrative issuance was not quasi-legislative but quasi-judicial. Due process should still be observed of course but use Ang Tibay v. CIR.

1 Sec. 142 (c)

prescribed below

There shall be


collected on cigarettes

a tax at the rates


On locally manufactured cigarettes which are currently classified


and taxed at 55% 55% On other locally manufactured cigarettes (already at 20 to 45%) 20 to 45%

CIR V. CA, CTA, & Fortune Tobacco

(BIR Rules and Regulations) Facts:

CIR, through RMC 37-93, aims to collect deficiencies on ad valorem taxes against Fortune Tobacco following a reclassification of foreign branded cigarettes, as per RA 7654. Fortune Tobacco raised the issue of the propriety of the assessment to the CTA, which decided against the CIR. CTA was affirmed by CA.


Is RMC 37-93 a mere interpretative ruling, therefore not requiring, for its effectivity, hearing and filing with the UP Law Center? NO.

Ratio Decidendi:

1. When an administrative rule is merely interpretative, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed.

2. When, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.

3. A reading of RMC 37-93, particularly considering the circumstances under which it has been issued, convinces us that the circular cannot be viewed simply as a corrective measure or merely as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion" within the classification of locally manufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654.

4. Specifically, the new law would have its amendatory provisions applied to locally manufactured cigarettes which at the time of its effectivity were not so classified as bearing foreign brands. (Prior to the issuance of the questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in the category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax.)

5. Hence, without RMC 37-93, the enactment of RA 7654, would have had no new tax rate consequence on private respondent's products.

6. Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes within the scope of the amendatory law and subject them to an increased tax rate, the now disputed RMC 37-93 had to be issued.

7. In so doing, the BIR not simply intrepreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the requirements of notice, of hearing, and of publication should not have been then ignored.

Holding: CTA, CA affirmed.

CIR v. Telefunken (BIR Rules and Regulations)

FACTS: Telefunken is a domestic corporation registered with

the Board of Investments (BOI) as an export producer on a

preferred pioneer status under RA 6135. From October 1979 to September 1981, Telefunken produced semi-conductor devices amounting to P92,843,774.00 which were entirely sold to foreign markets. BIR denied Telefunken’s request for a tax refund/tax credit from the contractor’s tax

which it paid for said amount.

Telefunken contended that under the provisions of Section 7 of

RA 6135 in relation to Section 8 (a) of RA 5186 (The

Investment Act), it was exempted from the payment of all national internal revenue taxes for the period in question, except for income tax. Section 7 2 of RA. 6135 (the law under which Telefunken is

registered) provides that registered export producers in a pioneer status are entitled to the incentives provided in section 8 (a) of RA 5186.

On the other hand CIR argues that the law speaks of firms

registered under RA 5186 only and thus, the privilege of tax

exemption does not apply to firms registered under RA 6135.

ISSUE: WON Telefunken, registered under RA 6135 as a pioneer export producer, is exempted from payment of the 3% contractor's tax from October 1979 to September 1981. HELD: YES. 1. The controlling statute is Section 205 (16) of the 1977

National Internal Revenue Code which states:

Sec. 205. Contractors, proprietors or operators of dockyards and others. A contractor's tax of three percentum of gross receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors including private detective or watchman agencies, except gross receipts of a pioneer enterprise registered with the Board of Investments under Republic Act 5186. (As amended by P.D. No. 1457 , June 11, 1978) There is no difference between the gross receipts of pioneer enterprises registered with the Board of Investments under RA 6135 and the gross receipts of registered pioneer enterprises under RA 5186. In fact the CIR himself had ruled in this vein on February 4, 1974 in the case of Asian Transmission Corporation. 3

This 1974 ruling was based the same on Section 191(16) of the Tax Code which states:

2 Sec. 7. Incentives to registered export producers — Registered export producers. — Registered export producers unless they already enjoy the same privileges under other laws shall be entitled to the incentives set forth in parahraphs (h), (i) and (j) of Section 7 of Republic Act Numbered Fifty-one hundred eigthy-six, known as the Investment Incentives Act; and registered export producers that are pioneer enterprises shall be entitled also to the incentives set forth in paragraphs (a), (b) and (c) of Section 8 of the said Act. In addition to the said incentives, and in lieu of other incentives provided in Section 7 and in Section 9 of that Act, registered export producer shall be entitled to benefits and incentives as enumerated hereunder:

3 “ Pursuant to Section 7 of Republic Act No. 6135, that corporation as a registered export producer on a pioneer status is entitled to the same tax incentives granted to a pioneer industry set forth in section 8(a) of republic Act No. 5186. Under this latter provision, a pioneer industry is exempt from all taxes under the National Internal Revenue Code, except income tax. In other words, both a registered export producer on a pioneer status under Republic Act No. 6135 and a pioneer industry under Republic Act No. 5186 are entitled to the same tax exemption benefits under the Tax Code.”

Sec. 191. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of three per centum of the gross receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors except persons, associations and corporations under contract

for embroidery and apparel for export, as well as their agents

and contractors and except gross receipts of or from a pioneer

industry registered with the Board of Investments under the provisions of Republic Act Numbered Five Thousand one hundred and eighty-six. (Emphasis supplied) A comparison of the above with the previously quoted Section 205(16) of the 1977 Tax Code reveals that both provisions specifically mention pioneer industries registered with the Board of Investments under Republic Act No. 5186 as exempt from payment of the contractor's tax. 2. Also, this 1974 ruling has not been abrogated with the passage of the 1977 Tax Code, Section 205(16) which expressly mentions only pioneer enterprises registered with the Board of Investments under RA 5186 as exempt from the contractor's tax (though with no reference being made regarding pioneer enterprises registered under RA 6135). Lastly, under Sec. 246 of the National Internal Revenue Code, rulings of the BIR may not be given retroactive effect, if the same is prejudicial to the taxpayer.

CIR v. Mega Gen. Merch (BIR Rules and



(BACKGROUND)Prior to the promulgation of P.D. No. 392 on February 18, 1974, importations of all kinds of paraffin wax were subject to 7% advance sales tax on landed costs plus 25% mark up pursuant to Section 183(b) now Section 197(II) in relation to Section 186 (now Section 200) of the Tax Code. With the promulgation of P.D. No. 392, a new provision for the

imposition of specific tax was added to Section 142 of the Tax


On April 1975 Mega wrote the CIR for clarification as to whether imported crude paraffin wax is subject to specific tax or advance sales tax. On May 14, 1975 Former Commissioner Misael P. Vera in his reply ruled that only wax used as high pressure lubricant and micro crystallin is subject to specific tax; that paraffin which was used as raw material in the manufacture of candles, wax paper, matches, crayons, drugs, appointments etc., is subject to the 7% advance sales tax, the tax to be based on the landed cost thereof, plus 25% mark-up. Due to Commissioner Vera's ruling Mega filed several claims for tax refund/tax credit of the specific tax paid by them. However, on January 28, 1977, then Acting CIR Efren Plana

denied Mega’s claim. According to him the law does not make any distinction as to the kind of wax subject to specific tax. During the pendency of Mega’s request for reconsideration, an investigation was conducted by the BIR in connection with the importations of wax and petroleum that arrived in the country on or subsequent to the date of the ruling of January 28, 1977 and it was ascertained that Mega owes the government specific tax for importation of paraffin wax on June 21, 1977 and August 17, 1977 which gave rise to the letter of assessment dated May 8, 1978. Prior, however, to the issuance of said letter of assessment of May 8, 1978, CIR in a letter dated January 11, 1978, granted Mega’s claim for refund or tax credit since the importation which had arrived in Manila on April 18, 1975 was covered by the ruling of May 14, 1975 (before its revocation by the ruling of January 28, 1977). Issue: WON Mega’s importation of crude paraffin wax on June 21 and August 17, 1977 are subject to specific tax under Section 142(i) of the Tax Code promulgated on February 18,



Contrary to the CTA’s ruling 5 , the Court believes that the letter of Commissioner Plana dated January 11, 1978 did not in any


(effective Feb 18 1974)

4 Section 142. Specific tax on manufactured oils and other fuels.—On refined and manufactured mineral oils and other motor fuels, there shall be collected the following taxes:

xxx xxx xxx

(i) Greases, waxes and petroleum, per kilogram, thirty-five centavos;

5 Excerpt from CTA ruling:

“ To make petitioner liable for specific tax after it has made the importations, would surely prejudice petitioner as it would be subject to a tax liability of which the Bureau of Internal Revenue has not made it fully aware. As a result, the rulings of May 8, 1978 and February 15, 1980 having been issued long after the importations on June 21 and August 1 7, 1977 in question cannot be applied with legal effect in this case because to do so will violate the prohibition against retroactive application of the rulings of executive bodies. Rulings or circulars promulgated by the Commissioner of Internal Revenue, such as the rulings of January 28, 1977 and those of May 8, 1978 and February 15, 1980, can not have any retroactive application, where to do so, as it did in the case at bar, would prejudice the taxpayer.”

way revoke his ruling dated January 28,1977 which ruling applied the specific tax to wax (without distinction). The reason he removed in 1978 private respondent's liability for the specific tax was NOT because he wanted to revoke, expressly or implicitly, his ruling of January 28, 1977 but because the P321,436.79 tax referred to importation BEFORE January 28, 1977 and hence still covered by the ruling of Commissioner Vera, Mega’s request for refund of the amount of P321,436.79 was granted in CIR’s letter dated January 11, 1978 because the importation of private respondent was made on April 18,1975 wherein petitioner made clear that all importation of crude paraffin wax only after the ruling of January 28, 1977, is subject to specific tax The importation which gave rise to the assessment in the amount of P275,652.00 subject of this case, was made on June 27, 1977 and August 17, 1977 and that the petitioner's ruling of January 28,1977 was not revoked or overruled by his letter of January 11, 1978 granting respondent corporation's request for refund of the amount of P321,436.79.

CIR v. Burroughs (BIR Rules and Regulations)

FACTS:In March 1979, the branch office of Burroughs Ltd. in the country applied with the Central Bank for authority to remit to its parent company abroad branch profit amounting to


On March 14, 1979, it paid the 15% branch profit remittance tax pursuant to Sec. 24 (b) (2) (ii) 6 . Based on this law Burroughs Ltd remitted to its head office the amount of


However on December 24, 1980 Burroughs Ltd. filed a written claim for the refund or tax credit of the amount of P172,058.90 representing alleged overpaid branch profit remittance tax. BIR ruled in favor of the refund on January 21, 1980. CIR contends that there should be no refund because Memorandum Circular No. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980. Said memorandum circular states- “Considering that the 15% branch profit remittance tax is imposed and collected at source, necessarily the tax base should be the amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad.” Issue: WON Burroughs Limited is entitled to a refund (in the amount of P172,058.90). Held: Yes. In a BIR ruling dated January 21, 1980 by then Acting Commissioner of Internal Revenue Hon. Efren I. Plana the aforequoted provision had been interpreted to mean that "the tax base upon which the 15% branch profit remittance tax

shall be imposed


the profit actually remitted abroad

and not on the total branch profits out of which the remittance is to be made." What is applicable in the case at bar is still the BIR Ruling of

January 21, 1980 because Burroughs Ltd. paid the branch profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light of Section 327 7 of the National Internal Revenue Code. The prejudice that would result to private Burroughs Ltd. by a retroactive application of Memorandum Circular No. 8-82 is beyond question for it would be deprived of the substantial amount of P172,058.90.

6 Sec. 24. Rates of tax on corporations

(b) Tax on foreign

(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15 %)

7 Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shag not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayer except in the following cases (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (c) where the taxpayer acted in bad faith. (ABS-CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)

ABS-CBN v. CTA (BIR Rules and Regulations) FACTS: ABS-CBN is engaged in the business of telecasting local as well as foreign films acquired from foreign corporations not engaged in trade or business within the Philippines. The applicable law wrt the income tax of non-resident corporations is section 24 (b) of the National Internal Revenue Code, as amended by Republic Act No. 2343 dated June 20, 1959 8 . On April 12, 1961, in implementation of said provision, the CIR issued General Circular No. V-334 9 . Pursuant to the foregoing, ABS-CBN dutifully withheld and turned over to the BIR the amount of 30% of one-half of the film rentals paid by it to foreign corporations not engaged in trade or business within the Philippines. The last year that ABS-CBN withheld taxes pursuant to the foregoing Circular was in 1968.

On June 27, 1968, RA 5431 amended Section 24 (b) 10 of the Tax Code increasing the tax rate from 30 % to 35 % and revising the tax basis from "such amount" referring to rents, etc. to "gross income."


Memorandum Circular No. 4-71, revoking General Circular No. V-334, and holding that the latter was "erroneous for lack of legal basis," because "the tax therein prescribed should be based on gross income without deduction whatever. On the basis of this new Circular, CIR issued against ABS- CBN a letter of assessment and demand requiring them to pay deficiency withholding income tax on the remitted film rentals for the years 1965 through 1968 and film royalty as of the end of 1968 in the total amount of P525,897.06.








ISSUE: WON respondent can apply General Circular No. 4-71 retroactively and issue a deficiency assessment against petitioner in the amount of P 525,897.06 as deficiency

8 (b) Tax on foreign corporations.-(1) Non-resident corporations.- There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the Philippines, from an sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax equal to thirty per centum of such amount. (Emphasis supplied)

9 “ In connection with Section 24 (b) of Tax Code, the amendment introduced by Republic Act No. 2343, under which an income tax equal to 30% is levied upon the amount received by every foreign corporation not engaged in trade or business within the Philippines from all sources within this country as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, it has been determined that the tax is still imposed on income derived from capital, or labor, or both combined, in accordance with the basic principle of income taxation (Sec. 39, Income Tax Regulations), and that a mere return of capital or investment is not income (Par. 5,06, 1 Mertens Law of Federal 'Taxation). Since according to

the findings of the Special Team who inquired into business of the non-resident foreign film

distributors, the distribution or exhibition right on a film is invariably acquired for a consideration, either for a lump sum or a percentage of the film rentals, whether from a parent company or an independent outside producer, a part of the receipts of a non-resident foreign film distributor derived from said film represents, therefore, a return of investment.

xxx xxx xxx “

10 Amended version:

(b) Tax on foreign corporations.-(1) Non-resident corporations.-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 thirty-five per cent of the gross income received during each taxable year from all sources within the Philippines, as interests, dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical services or otherwise, emoluments or other fixed or determinable annual, periodical or casual gains, profits, and income, and capital gains, Provided however, That premiums shah not include reinsurance premiums. (Emphasis supplied)

withholding income tax for the years 1965, 1966, 1967 and


HELD: No. Sec. 338-A 11 (now Sec. 327) of the Tax Code applies in this case. Rulings or circulars promulgated by the CIR have no retroactive application where to so apply them would be prejudicial to taxpayers. The retroactive application of Memorandum Circular No. 4-71 prejudices ABS- CBN since:

a) it was issued only in 1971, or 3 years after 1968, the last

year that petitioner had withheld taxes under General Circular No. V-334.

b) the assessment and demand on petitioner to pay deficiency

withholding income tax was also made three years after 1968

for a period of time commencing in 1965.

c) ABS-CBN was no longer in a position to withhold taxes due

from foreign corporations because it had already remitted all film rentals and no longer had any control over them when the new Circular was issued. And in so far as the enumerated exceptions (to non- retroactivity) are concerned, ABS-CBN does not fall under any of them.

11 As inserted by Republic Act No. 6110 on August 9, 1969, it provides:

Sec. 338-A. Non-retroactivity of rulings. - Any revocation, modification, or reversal of and of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the relocation, modification, or reversal will be prejudicial to the taxpayers, except in the following cases: (a) where the taxpayer deliberately mis-states or omits material facts from his return or any document required of him by the Bureau of Internal Revenue: (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. (italics for emphasis)

CIR v. Benguet Corp (BIR Rules and Regulations) FACTS:(Benguet Corporation is a domestic corporation engaged in the exploration, development and operation of mineral resources, and the sale or marketing thereof to various entities. It is a value added tax (VAT) registered enterprise.)

The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of NIRC as amended by E.O. 273 s. 1987 then in effect, any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0% (zero-rated) depending on the classification of the transaction under Sec. 100 of the NIRC.

In January of 1988, Benguet applied for and was granted by the BIR zero-rated status on its sale of gold to Central Bank. On 28 August 1988 VAT Ruling No. 3788-88 was issued which declared that the sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to Section 100 of the Tax Code, as amended by EO 273.

Relying on its zero-rated status and the above issuances, Benguet sold gold to the Central Bank during the period of 1 August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT incurred in relation to the subject sales of gold. It then filed applications for tax refunds/credits corresponding to input VAT.

However, such request was not granted due to BIR VAT Ruling No. 008-92 dated 23 January 1992 that was issued subsequent to the consummation of the subject sales of gold to the Central Ban`k which provides that sales of gold to the Central Bank shall not be considered as export sales and thus, shall be subject to 10% VAT. BIR VAT Ruling No. 008- 92 withdrew, modified, and superseded all inconsistent BIR issuances.

Both petitioner and Benguet agree that the retroactive application of VAT Ruling No. 008-92 is valid only if such application would not be prejudicial to the Benguet pursuant Sec. 246 of the NIRC.


WON Benguet’s sale of gold to the Central Bank during the period when such was classified by BIR issuances as zero- rated could be taxed validly at a 10% rate after the consummation of the transactions involved. NO.

SUB ISSUE: (WON there was prejudice to Benguet Corp due to the new BIR VAT Ruling. YES.


(main issue):

1. At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by Benguet ordained that gold sales to the Central Bank were zero-rated. Benguet should not be faulted for relying on the BIRs interpretation of the said laws and regulations.

While it is true, as CIR alleges, that government is not estopped from collecting taxes which remain unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested right arising from an erroneous interpretation of law, these principles must give way to exceptions based on and in keeping with the interest of justice and fairplay. (then the Court cited the ABS-CBN case).



unexpected and unwilling debtor to the BIR of the amount equivalent to the total VAT cost of its product, a liability it previously could have recovered from the BIR in a zero-rated scenario or at least passed on to the Central Bank had it known it would have been taxed at a 10% rate. Thus, it is clear that Benguet suffered economic prejudice when its consummated sales of gold to the Central Bank were taken out of the zero-rated category. The change in the VAT rating of Benguet’s transactions with the Central Bank resulted in the twin loss of its exemption from payment of output VAT and its opportunity to recover input VAT, and at the same time subjected it to the 10% VAT sans the option to

pass on this cost

the Central Bank, with the total

The adverse effect is that Benguet Corp became the


prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the Central Bank.

3. Even assuming that the right to recover Benguets excess

payment of income tax has not yet prescribed, this relief would only address Benguet’s overpayment of income tax but not the other burdens discussed above. Verily, this remedy is not a feasible option for Benguet because the very reason why it was issued a deficiency tax assessment is that its input VAT was not enough to offset its retroactive output VAT. Indeed, the burden of having to go through an unnecessary and cumbersome refund process is prejudice enough.

BPI Leasing v.CA,CTA,CIR (BIR Rules &

Regulations) FACTS:For the calendar year 1986, BLC paid the CIR a total of P1,139,041.49 representing 4% "contractor’s percentage tax" imposed by Section 205 of the NIRC based on its gross rentals from equipment leasing for said year.

On November 10, 1986, CIR issued Revenue Regulation 19- 86. Section 6.2 thereof provided that finance and leasing

companies registered under RA 5980 shall be subject to gross receipt tax of 5%-3%-1% on actual income earned. This





under Republic Act










percentage tax" under Section 205 but are, instead, subject to "gross receipts tax" under Section 260 (now Section 122) of the NIRC.

Since BLC had earlier paid the "contractor’s percentage tax for its 1986 lease rentals BLC filed a claim for a refund with the CIR on April 1988 for the amount representing the difference between what it had paid as "contractor’s percentage tax" and what it should have paid for "gross receipts tax."


1. WON Revenue Regulation 19-86 is legislative 12 rather than

interpretative in character.

2. WON it should retroact to the date of effectivity of the law it

seeks to interpret.


1. NO. Section 1 of Revenue Regulation 19-86 plainly states

that it was promulgated pursuant to Section 277 of the NIRC. Section 277 (now Section 244) is an express grant of authority to the Secretary of Finance to promulgate all needful rules and regulations for the effective enforcement of the provisions of the NIRC.

2.NO. The principle is well entrenched that statutes, including administrative rules and regulations, operate prospectively only, unless the legislative intent to the contrary is manifest by express terms or by necessary implication. In the present case, there is no indication that the revenue regulation may operate retroactively.

Furthermore, there is an express provision stating that it "shall

take effect on January 1, 1987,"

applicable to all leases written ON OR AFTER the said date." Being clear on its prospective application, it must be

literal meaning and applied without further

interpretation. Thus, BLC is not in a position to invoke the

provisions of Revenue Regulation 19-86 for lease rentals it received prior to January 1, 1987.



and that

it "shall


12 Administrative issuances may be distinguished according to their nature and substance:

legislative and interpretative. A legislative rule is in the matter of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law which the administrative agency is in charge of enforcing.

Conwi v. CTA (income tax defined) FACTS: Petitioners Conwi et al. are Filipino citizens and employees of P&G. During the years 1970-1971, they were assigned to other foreign subsidiaries of P&G for which they were paid in dollars. They filed their corresponding income tax returns but subsequently claimed a refund. The alleged overpayment of income tax resulted from the use of floating rates as dollar-to-peso conversion basis provided under BIR Ruling 70-027. In its amended return, petitioners claimed that the par value of the peso should be used as conversion basis under RA 265. HELD: No overpayment of tax. Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit from investment. Unless otherwise specified, it means cash or its equivalent. 4 Income can also be thought of as a flow of the fruits of one's labor. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of P&G. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services. Since petitioners are citizens of the Philippines, their incomes, within or without, are subject to income tax in accordance with Sec. 21 NIRC (now, Sec. 23). As income of the petitioners, RMC 7- 71 and 41-71, reiterating BIR Ruling 70-027, shall apply. These RMCs were issued to prescribe a uniform rate of exchange for internal revenue tax purposes.

Commissioner v. BOAC (income tax defined)

FACTS: British Overseas Airways Corp. (BOAC), a wholly

owned British corporation, is engaged in international airline business. From 1959 to 1972, it had no landing rights for traffic purposes in the Phil. but maintained a general sales agent in the Phil. which was responsible for selling BOAC tickets covering passengers and cargoes. The CIR assessed deficiency income taxes against BOAC. HELD: The definition of gross income in the Tax Code is broad and comprehensive to include proceeds from sales of transport documents. The words 'income from any source whatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws. Income means "cash received or its equivalent"; it is the amount of money coming to a

person within a specific time

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. Herein, the sale of tickets in the Philippines is the activity that produced the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occured within, Philippine territory, enjoying the protection accorded by the Philippine Government. Hence, income of BOAC from the ticket sales is subject to Phil. income tax.

; it means something

Madrigal v. Rafferty (income tax defined)

FACTS: Vicente Madrigal and Susana Paterno were married with CPG as their property relations. Vicente filed his 1914 income tax return but later claimed a refund on the contention that it was the income of the conjugal partnership. Vicente claimed that the income should be divided into two with each spouse filing a separate return. Hence, Vicente claimed that each spouse should be entitled to the P8,000 exemption, which would result in a lower amount of income tax due. HELD: The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. A tax on income is not a tax on property. Income can be defined as profits or gains. Susana, has an inchoate right in the property of her husband during the life of the conjugal partnership. Her interest in the ultimate property rights and in the ultimate ownership of property acquired as income lies after such income has become capital. She has no absolute right to ½ the income of the conjugal partnership. Not being seized of a separate estate, Susana cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husband’s property, the income cannot properly be considered the separate income of the wife for purposes of the additional tax.








Realization Test of Determining Income)

Fisher was a stockholder in Phil-Am Drug Company. The company declared a stock dividend with Fisher’s share of the dividend amounting to P24,800. Collector of Internal Revenue Trinidad demanded P889 income tax on said dividend, which Fisher protested against but voluntarily paid. Issue: WON stock dividends can be classified as income and taxable under Act No. 2833 providing for tax upon income? Held: No, the receipt of stock dividends merely represents an increase in value of the assets of a corporation. The court defines stock dividends as “increase in capital of corps, firms, partnerships, etc for a particular period.” They represent the increase in the proportional share of each stockholder in the company’s capital. It is not a distribution of the corp’s profits to the stockholder. It only increases the stockholder’s SOURCE of income (capital), but does not increase income itself. Issue: Definition of income tax Held: Act No. 2833 taxed any distribution by a corporation out of its earnings or profits. From the various definitions of income tax cited, an income tax is a tax on the yearly profits arising from property, salary, private revenue, capital invested, and all other sources of income. What is taxed is the profit, not the source. Issue: When is income realized (Test of Realization) Held: Stock dividend in this case is not taxable for income because the stockholder has received nothing out of the company's assets for his separate use and benefit. Instead, his original investment along with whatever gains which resulted from the use of his and other stockholder’s money remains property of the company. The fact that it is not yet his means the capital is still subject to business risks that can wipe out his entire investment. All he has received is a stock certificate indicating the increase in his capital in the company. Thus we can say that income has been realized when there has been a separation of the interest of the stockholder from the general capital of the corporation. This separation of interest happens when the company declares a cash dividend on the shares of shareholders.


Constructive receipt) BIR assessed deficiency taxes on Limpan Corp, a company that leases real property, for underdeclaring its rental income for years 1956-57 by around P20K and P81K respectively. Petitioner appeals on the ground that portions of these underdeclared rents are yet to be collected by the previous owners and turned over or received by the corporation. Petitioner cited that some rents were deposited with the court, such that the corporation does not have actual nor constructive control over them. The sole witness for the petitioner, Solis (Corporate Secretary- Treasurer) admitted to some undeclared rents in 1956 and 1957, and that some balances were not collected by the corporation in 1956 because the lessees refused to recognize and pay rent to the new owners and that the corp’s president Isabelo Lim collected some rent and reported it in his personal income statement, but did not turn over the rent to the corporation. He also cites lack of actual or constructive control over rents deposited with the court. Issue: WON the BIR was correct in assessing deficiency taxes against Limpan Corp. for undeclared rental income Held: Yes. Petitioner admitted that it indeed had undeclared income (although only a part and not the full amount assessed by BIR). Thus, it has become incumbent upon them to prove their excuses by clear and convincing evidence, which it has failed to do. Issue: When is there constructive receipt of rent? With regard to 1957 rents deposited with the court, and withdrawn only in 1958, the court viewed the corporation as having constructively received said rents. The non-collection was the petitioner’s fault since it refused to refused to accept the rent, and not due to non-payment of lessees. Hence, although the corporation did not actually receive the rent, it is deemed to have constructively received them.







Republic v. dela Rama (Actual v. Constructive receipt) FACTS: The BIR assessed deficiency income tax against the estate of the late Esteban dela Rama for the cash dividends it allegedly received but failed to include in its income tax return. The cash dividends were declared by the Dela Rama Steamship Co in favor of the decedent and were applied as payment of the latter’s account with the former. ISSUE: Whether crediting of accounts in the books of the company constituted a constructive receipt by the estate or the heirs of Esteban de la Rama of the dividends, and this dividend was an income of the estate and was, therefore, taxable? NO HELD: If the debts to which the dividends were applied really existed and legally demandable and chargeable against the deceased, there was constructive receipt of the dividends. If there were no such debts, then there was no constructive receipt. The existence and validity of the first debt was in dispute and no proof was adduced to show the existence and validity of the debt. As to the second debt, the alleged debtor Hijos dela Rama, Inc. was an entity separate and distinct from the deceased. Hence, its debts could not be charged against the estate. Appellant cites the case of Herbert v. Commissioner of Internal Revenue, 81 F. (2d) 912 as authority that the crediting of dividends against accounts constitutes payment and constructive receipt of the dividends. The citation of authority misses the point in issue. In that case the existence of the indebtedness of Leon S. Herbert to the corporation that declared the dividends and against which indebtedness the dividends were applied, was never put in issue, and was admitted. In the instant case, the existence of the obligations has been disputed and, as the trial court found, has not been proved. It having been shown in the instant case that there was no basis for the assessment of the income tax, the assessment itself and the sending of notices regarding the assessment would neither have basis, and so that assessment and the notices produced no legal effect that would warrant the collection of the tax.

Eisner v Macomber (Realization Test) There is no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income.

The taxpayer owned 2,200 shares of stock in a company. The company declared a 50% stock dividend in 1916, so the taxpayer received an additional 1,100 shares of which 198.77 shares represented the surplus of the company earned between 1913 and 1916. The shares that represented the surplus had a par value of $19,877 and the Commissioner treated the par value of these shares as included in the taxpayer’s taxable income. The taxpayer asserted that the stock dividend was not income under the 16th amendment. The District court found for the taxpayer. Issue:

WON the payment of a stock dividend to a stockholder of a company is includable as taxable income?

Held: No. The Court understood a stock dividend to be a method of recapitalizing surplus, and spreading that capital among the stockholders in proportion to the shares that they held. Thus, the shareholder's capital investment had grown and was worth more if it were to be sold, but he still owned the same proportion of the company as he did previously. A stock dividend takes nothing from the property of the company and adds nothing to that of the shareholder. The sixteenth amendment gave Congress the power to tax 'income', and in the common meaning of the word, 'income' did not include unrealized gains that were still the property of the company. Using Towne v. Esiner's definition of income being a 'gain derived from capital' under the Revenue act of 1913, the Court analogized 'capital' as being separate from 'income' in the way that a tree is separate from its fruit.

The Government argued that it was nevertheless a 'gain' to the stockholder because it could be sold for more. However, the Court stated that the taxpayer had not sold yet, and that his investment was still exposed to the business risks that could wipe it out. The taxpayer does not realize increased worth in property unless he receives 'something of exchangeable value proceeding from the property.' A stock dividend is different from a cash dividend which is subsequently reinvested because cash dividends actually transfer the company's property to the stockholder. A stock dividend does not.

Gutierrez v Court of Tax Appeals

(Income from whatever source)

Maria Morales (Gutierrez is her husband) was the registered owner of an agricultural land in Mabalacat Pampanga. The Republic, pursuant to the Military Bases Agreement, instituted expropriation proceedings for the expansion of the Clark Field Air Base.

The land was expropriated; Morales, compensated its fair market value. CIR included the amount paid by the Republic in assessing taxes on Morales’ gross income. Morales protested, arguing that due compensation from property expropriated was not "income derived from sale, dealing or disposition of property" referred to by section 29 of the Tax Code and therefore not taxable. CIR denied Morales’ protest, contending that section 29 is intended to be broad enough in its construction to subsume “income from any source” as taxable.


WON compensation from expropriation is taxable as part of gross income

Held: Yes. The acquisition by government of private property through expropriation proceedings, said property being justly compensated, is embraced within the meaning of the term “sale” or “disposition of property,” and the proceeds of the transaction clearly fall within the definition of gross income 13 .

These words disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains.

13 SEC. 29.

profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales or dealings in property, whether real or personal, growing out of 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 profit, or gains, profits, and income derived from any source whatsoever.

GROSS INCOME. - (a) General definition. - "Gross income" includes gains,

Collector v Henderson (Compensation Income)

Arthur Henderson is the president of the American International Underwriters for the Phils., Inc., a domestic corporation engaged in insurance business. The CIR included as part of the spouses’ personal taxable income the allowances for rental of the apartment furnished by the employer-corporation, including utilities, and the allowance for travel expenses of Mrs. Henderson.

The spouses did not live in the apartments and nor did they avail of the travel expenses. As such, they did not pay for taxes corresponding to the allowances. Hence, the CIR assessed deficiency income taxes against the spouses.


WON allowances given by an employer, but unavailed of by an employee, are taxable on the latter’s personal income.

Held: No. No part of the allowances in question redounded to the benefit of the spouses ultimately or was retained by them. The Hendersons are entitled only to a ratable value of the allowances – the reasonable amount they would have spent for house rental and utilities – which would be the only part of the allowances at issue subject to their personal tax. The same is true with the allowances as no part of the allowance for traveling expenses redounded to the benefit of the Hendersons. Hence, the traveling allowance is likewise not taxable.

Pirovano v CIR (Compensation Income)

Sec. 32[B] of the NIRC provides that Gifts, bequests and devises are excluded from gross income liable to tax. Instead, such donations are subject to estate or gift taxes. However, if the amount is received on account of services rendered, whether constituting a demandable debt or not (such as remuneratory donations under Civil Law), the donation is considered taxable income.

De la Rama Steamship Co. insured the life of Enrico Pirovano who was then its President and General Manager. The company initially designated itself as the beneficiary of the policies but, after Pirovano’s death, it renounced all its rights, title and interest therein, in favor of Pirovano’s heirs.

The CIR subjected the donation to gift tax. Pirovano’s heirs contended that the grant was not subject to such donee’s tax because it was not a simple donation, as it was made for a full and adequate compensation for the valuable services by the late Priovano (i.e. that it was remuneratory).


WON the donation is remuneratory and therefore not subject to donee’s tax, but rather taxable as part of gross income.

Held: No. The donation is not remuneratory. There is nothing on record to show that, when the late Enrico Pirovano rendered services as President and General Manager of the De la Rama Steamship Co. and was “largely responsible for the rapid and very successful development of the activities of the company", he was not fully compensated for such services. The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or a donation. The company’s gratitude was the true consideration for the donation, and not the services themselves.

E. Rodriguez, Inc. v. Collector (Income from dealings

in property, Net capital gain (loss) Some of petitioner’s lands were subject of expropriation under RA No. 333. The court awarded the expropriation to the Republic of the Phils. Petitioner negotiated with the government thru the Capital City Planning Commission, resulting in a compromise agreement as follows: Govt will pay petitioner the sum of around P1.2M for the expropriated property of which around P0.62M were in tax-exempt Government Bonds.

In its income tax return for 1950, Petitioner did not include the P0.62M worth of bonds it received from the Govt in its computation of profits / losses. The BIR however assessed deficiency tax on this portion to the amount of around P63K. Petitioner contends that the payment in tax-exempt bonds exempts such portion from income taxation. It contends that this tax exemption is an inducement offered by the Govt to the landowners. Petitioner refers to RA No. 1400 which expressly provides that payment of the Govt shall not be considered as income of the landowners for income tax purposes. Issue: WON the P 0.62M portion paid by the Govt in the form of bonds should be included in determining the profit / loss of petitioner for income tax Held: Yes, this portion paid in Bonds should be included for income tax purposes. The income derived from the sale of land to the Govt is different from the income derived from interests earned or profits earned from the exchange of the said bonds. The tax exemption only covers the latter. Petitioner must pay income tax on his profit on the sale of land, whether payment was in the form of cash or bonds. Reference to RA No. 1400 merely strengthens this decision because RA No. 333 does not explicitly provide for income tax exemption, unlike the former. The court reiterated that exemption from taxation is not favored and presumed, and that tax exemption is strictly construed vs. the taxpayer.

Tuason v. Lingad (net capital gain)

FACTS: In his 1957 tax return the petitioner as before treated

his income from the sale of the small lots (P119,072.18) as

capital gains and included only ½ thereof as taxable income. In

this return, the petitioner deducted the real estate dealer's tax

he paid for 1957. It was explained, however, that the payment

of the dealer's tax was on account of rentals received from the mentioned 28 lots and other properties of the petitioner. On the basis of the 1957 opinion of the Collector of Internal Revenue, the revenue examiner approved the petitioner's treatment of his income from the sale of the lots in question. In a memorandum dated July 16, 1962 to the Commissioner of Internal Revenue, the chief of the BIR Assessment Department advanced the same opinion, which was concurred in by the

Commissioner of Internal Revenue. On January 9, 1963, however, the Commissioner reversed himself and considered the petitioner's profits from the sales of

the mentioned lots as ordinary gains.

ISSUE: Whether the properties in question which the petitioner

had inherited and subsequently sold in small lots to other persons should be regarded as capital assets. NO RATIO: As thus defined by law, the term "capital assets" includes all the properties of a taxpayer whether or not

connected with his trade or business, except: (1) stock in trade

or other property included in the taxpayer's inventory; (2)

property primarily for sale to customers in the ordinary course

of his trade or business; (3) property used in the trade or

business of the taxpayer and subject to depreciation allowance; and (4) real property used in trade or business. If

the taxpayer sells or exchanges any of the properties above-

enumerated, any gain or loss relative thereto is an ordinary

gain or an ordinary loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss. The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve a different characterization

for tax purposes. The following circumstances in combination

show unequivocally that the petitioner was, at the time material to this case, engaged in the real estate business: (1) the

parcels of land involved have in totality a substantially large area, nearly seven (7) hectares, big enough to be transformed into a subdivision, and in the case at bar, the said properties

are located in the heart of Metropolitan Manila; (2) they were

subdivided into small lots and then sold on installment basis (this manner of selling residential lots is one of the basic earmarks of a real estate business); (3) comparatively valuable improvements were introduced in the subdivided lots for the unmistakable purpose of not simply liquidating the estate but of making the lots more saleable to the general public; (4) the employment of J. Antonio Araneta, the petitioner's attorney-in- fact, for the purpose of developing, managing, administering

and selling the lots in question indicates the existence of owner-realty broker relationship; (5) the sales were made with frequency and continuity, and from these the petitioner consequently received substantial income periodically; (6) the annual sales volume of the petitioner from the said lots was

considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and (7) the petitioner, by his own tax returns, was not a person who can be indubitably adjudged as

a stranger to the real estate business. Under the

circumstances, this Court finds no error in the holding below that the income of the petitioner from the sales of the lots in question should be considered as ordinary income.

Calasanzv.CIR(tax as capital gain/tax as ordinary income?) Facts: Petitioner inherited agricultural land. Wanting to liquidate the same, she developed the area into a subdivision, divided the same into lots, made improvements such as roads, gutters, drainage, and lighting, and subsequently sold individual lots to the public for profit.

CIR claims that petitioner is a real-estate dealer and thus required to pay real estate tax as well as a deficiency income tax on profits derived from sale of lots based on rates of ordinary income.

Argument of petitioner: inherited land is capital asset. Inheritance had to be improved in order to be liquidated in the only possible and advantageous way. It would be difficult to sell the entire estate and thus has to be subdivided.

Counter argument of respondent: petitioner involved in a series of real-estate transactions for profit thus can be considered “doing business” owing to continuity and frequency of said transactions. Thus converting the investment property to a business property. Issue: WON petitioner is a real-estate dealer; WON the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable at capital gain rates. Held: Real-estate dealer. Tax as ordinary income. Ratio:

See Sec. 39(a)(1) of the NIRC. Statutory definition is negative in nature. If the asset is not among the exceptions, it is a capital asset. Conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction.

Though the Tuasan case offered guidelines in determining whether property was sold in the regular course of business or whether it was sold as a capital asset, there is no rigid rule and each must, in the last analysis, rest upon its own peculiar facts and circumstances. In this case:


Business element of development very apparent, land originally devoted to rice/fruit trees.


Existence of contracts receivables – installment basis of payments suggesting the number, continuity and frequency of the sales.


Another factor: lots were advertised for sale to the public, commission sales paid out.

Petitioner’s defense of “sale for the purpose of liquidation” rebutted. US jurisprudence has rejected the liquidation test in determining whether or not a tax payer is carrying on a trade or business. “The liquidation sale may be conducted in the most advantageous manner to the seller and he will not lose the benefits of the capital gain provision of the statute unless he enters the real estate business and carries on the sale in the manner in which such a business is ordinarily conducted. In that event, the liquidation constitutes a business and a sale in the ordinary course of such a business and the preferred tax status is lot.”

“Property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer’s trade or business. Thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it saleable. However, if the inherited property is substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heir’s business.”








government capital gain or ordinary income?) Facts:

Estate sold to the government in expropriation proceedings. Amount still due from the government:

P1.3M. Using this amount at a rate of 6%/annum, interest on the same: P0.53M. Since their were 6 heirs to the estate, each had a share of P89k of the interest;

Tentative return was prepared and filed for each of the two petitioners (heirs) in the case with the amounts of P213k as capital gain, and the amount of P89k (share on interest) as ordinary income.

Petitioners seek a refund based on the argument that “the accessory follows the principal”: thus the P89k should be considered as part of capital gain, and be taxed as such, rather than ordinary income. Issue: WON interest received should be taxed as capital gain or ordinary income. Held: Yes. Ratio:

Eminent domain = “sale/disposition of property” within Sec. 29 of the (then) Tax Code; profit from such condemnation proceedings constitutes capital gain. – affirming Gutierrez v. CTA;

But interest from such a sale does not partake of the same nature as the sale itself. Interest is compensation for the delay in the return of such capital. In fact, authorities support the conclusion that for income tax purposes, interest does not form part of the price paid by the Government in condemnation proceedings; and may not be treated as part of the capital gain.

Regarding interest: “the additional payment was necessary to give the owners the full equivalent of the value of the property at the time it was taken. XXX It is not a capital gain upon an asset sold.” – Kieselback v. CIR (US);

CIR v. Rufino (Merger/Consolidation) Facts:

CIR v. Binalbagan Estate (Merger, Consolidation) Facts:

Corporation engaged in the theater/amusement business. Old corporation’s charter was about to end. New corporation formed to absorb assets of the first and continue operations.

Upon advice of then President Roxas, BISCOM in order to achieve economy in the rehabilitation of destroyed sugar mills and to lower costs of operation. Binalbagan Estate and Isabela Sugar proposed to merge their assets to form



new corporation to be known as. Previously however

Because of a prohibition in the old Corporation Law, it was

BIR questions the series of transactions leading to the

Binalbagan Estate’s records were lost during World War II.

necessary for the Old and New corporation to enter into a


committee was formed (Westly Committee) to ascertain

merger that involved a Deed of Assignment that mandated transfer of assets of the old corporation to the new corporation in exchange for New corporation stocks to be issued to the shareholders of the Old corporation. Actual transfer of property was not made on the date of the merger.

merger claiming that it was not undertaken for bona fide

the contribution and participation of both corporations in BISCOM: Binalbagan’s tangible assets were pegged at P2.54M, sugar quota at P1.48M while Isabela’s tangible assets were placed at P2.44M. Merged was effected with 216,000 BISCOM shares allotted to Binalbagan Estate. Later, Binalbagan sold its shares to (and paid in installment by) Phil. Planters Investment Corp. Income tax returns reported by Binalbagan were as follows: 1951, P14k; 1952, 37k; P1953, 139k.

business purposes but merely to avoid liability for the capital gains tax on the exchange of the old for the new shares of stock. Issue: Was there a valid merger which would allow the exchange to be exempt from capital gains tax?

CIR however assessed deficiency income tax in the sums of P267k, P36k, and 127k for 1951, 1952, and 1953, respectively. In said assessments, he spread over 1951, 1952, and 1953 the gain realized form the sale of Binalbagan’s BISCOM shares in accordance with Sec. 43

Held: Yes.


the National Revenue



The Court finds no impediment to the later exchange of property for stock between the two corporations retroacting to the day of the merger. It was necessary for the old corporation to surrender its assets first to the new corporation before the latter could issue its own stock to the shareholders of the old corporation. The said issuance required a resolution from a special stockholders meeting in order to make the Deed of Assignment valid.

The basic consideration is the purpose of the merger since this would determine whether the exchange of properties involved would be subject or not to capital gains tax. The criterion laid down by law is that the merger must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation.

Binalbagan paid under protest. CTA found the appraisal made by the Westly Committee the correct acquisition value and thus ordered the refund. Issue: Did the Westly Committee make the correct calculation? How much did Binalbagan gain when it sold 176,945 nonpar value BISCOM shares to PPIC? Held: Yes Ratio:

To determine gain or loss from the sale of nonpar value BISCOM shares, the basis is the acquisition cost of said

shares. Binalbagan however did not pay for them in cash but with its tangible assets and sugar quota. This brings us

to the question value of the latter’s tangible assets and

sugar quote as of 1946 when Binalbagan acquired the 216,000 nonpar value shares of BISCOM in exchange thereof.

If the operation of the merger “is one having no business

or corporate purpose – a mere devise which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan to transfer a parcel of corporate shares to the petitioner, a corporation is created but is nothing more than a contrivance. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death.” – this would be a devious form of conveyance masquerading as a corporate reorganization and nothing else.

No such intention is apparent in the instant case. It is clear that the purpose of the merger was to continue the business of the old corporation, whose corporate life was about to expire, through the new corporation to which all the assets and obligation of the former had been transferred. Strong factor in favor of this: no dissolution of new corporation right after the merger. On the contrary, the New Corporation continued to operate the places of

CIR bases its assessment on the fact that P824k was the acquisition cost as determined by Mr. Ramos.

SC: Considering that records were destroyed, no showing how this figure was established. The CIR places much emphasis on what he asserts as estoppel in pais and contends that because the said amount appears in Binalbagan’s book, the same should be held controlling. WE do not find this contention material herein inasmuch as whether or the P824k is held the correct acquisition cost of the tangible assets in question, the same would not determine the profits realized from the sale of Binalbagan’s BISCOM shares to PPC. The basis in computing the taxable gain from the sale of Binalbagan’s BISCOM shares is the fair market value (FMV) of the assets and sugar quota in question. At any rate, Binalbagan’s error in carrying the figure P824k in its books and using the same in its income tax returns for 1951, 1952, and 1953 neither benefited Binalbagan, nor prejudiced the government


amusement originally owned by the old corporation.


SC: Even assuming that the amount was as claimed, this cannot be considered the acquisition cost as claimed by CIR. We are not called upon to decide the income tax due on the

profit which may have been realized by Binalbagan’s when it acquired the 216,000 BISCOM shares IN EXCHANGE for its tangible assets, in which case the basis would be the acquisition cost of said assets pursuant to then Sec. 35(b) of the Tax Code – Gutierrez v. CTA. The controversy rests on whatever tax is imposable on the gain obtained from the sale of BISCOM shares to PPIC. In short, the first transaction was an exchange. The second, a sale. The basis in determining the gain in such sale is the cost of shares. Thus “where the consideration is property, its amount is determined by its FMV at the time of the exchange and not by the original cost of the consideration. It is the same as if the property given in exchange had first been sold and the purchase price then immediately used to buy the property whose cost basis is under consideration. The consideration for property surrendered therein.”

o Accepted formula for computing the taxable gain or income received during the year which the gross profit was realized is found in Sec. 43 of the then Tax Code. (Gross Profit/Selling Price) x Installment Received = Profit for the year

Commisioner v. Manning (Disguised Dividend)

FACTS: MANTRASCO had 25,000 common shares, wherein 24,700 of which was owned by Reese. The rest of the shares were owned by private respondents. A trust agreement was executed between them, the manifest intention of which was to make respondents the sole owners of Reese’s interest in MANTRASCO upon his death. When Reese died, MANTRASCO made partial payment of Reese’s shares and a new certificate was issued in the favor of MANTRASCO. Thereafter, MANTRASCO’s stockholders issued a Resolution declaring that the 24,700 be reverted to the capital account of the company as a stock dividend to be distributed to respondent. Eventually, all the shares were paid and distributed to private respondents. BIR claims that the distribution of Reese’s share as stock dividend was in effect a distribution of the “asset or property” of the corporation as may be gleamed from the payment of cash for the redemption of said stock and upon distribution of the same to respondents; hence, taxable as income of respondents. On the other hand, respondents claim that their respective shares remained the same before and after the declaration of the stock dividends and only the number of shares held by them had changed, therefore, they are not liable for taxes. Both parties were on the assumption that the stock dividends were treasury shares. HELD: They were not treasury shares. Treasury shares are stocks issued and fully paid for and reacquired by the same corporation either by purchase, donation, forfeiture or other means. Although they are issued shares, they do not have the status of outstanding shares being in the treasury. Such share, as long as it is held by the corporation as such, participates neither as dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporation as a voting stock, for otherwise equal voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation. These essential features of a treasury stock are lacking in the questioned shares. The intention of the parties to the trust agreement was to treat the 24,700 shares of Reese as absolutely outstanding shares of Reese’s estate until they were fully paid. Such being their nature, their declaration as treasury stock was a complete nullity, being violative of public policy. A stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings. When the companies involved parted of their earnings to “buy” the corporate holdings of Reese, they were in ultimate effect making a distribution of such earnings to the respondents. All these amounts are subject to income tax.

C.M. Hoskin v. Commissioner (disguised dividend)

FACTS: The petitioner company is engaged in the real estate business as brokers, managing agents and administrators. It was founded by Mr. C.M. Hoskins who owned 996 shares out of its 1,000 shares. The other 4 shares were owned by other officers of the corporation. At the time that this controversy arose, Hoskin was the President, Chairman of the Board of Directors, stockholder and was also a salesman-broker of the company which entitled him to salaries and bonuses including 50% of the supervision fees that was collected by the company from its clients (amounting to Php99,977.91). The CIR disallowed the deduction made by the petitioner in its income tax return of the amount representing the supervision fees. HELD: The payment by the taxpayer to its controlling stockholder of 50% of its supervision fees is not deductible ordinary and necessary expense and should be treated as distribution of earnings and profits of the taxpayer. The amount was inordinately large. Bonus to employees made in good faith and as additional compensation are deductible, PROVIDED, such payment, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The conditions precedent to the deduction of bonuses are as follows: (a) the payment of the bonuses is in fact compensation; (b) it must be for personal services actually rendered; and (c) the bonuses, when added to the salaries, are reasonable. Although there’s no fixed test in determining what is reasonable, some tests used are as follows: i. Amount and quality of the services performed; ii. Good faith; iii. Character of the taxpayer’s business; iv. Volume and amount of its earnings; v. locality, type and extent of the services rendered; vi. Salary policy; vii. Size of the business; viii. Employee’s qualifications and contributions to the business; and ix. General economic condition. For income tax purposes, the employer cannot legally such bonuses as deductible unless they are shown to be reasonable. The question of allowing or disallowing as deductible expenses the amounts paid to corporate officers by way of bonus is determined by the CIR exclusively for income tax purposes. Although admittedly, it is the corporation’s discretion to fix the amounts to be paid to its corporate officers, this right is NOT absolute. It cannot be used for the purpose of evading payment of taxes. The corporation was practically of a sole proprietorship of Hoskin.

Hoskin had virtually absolute control of the company and as he has chosen to conduct his business as a corporation, he has also bound himself with the corporate norms and obligations. He is bound to pay income tax imposed on corporations and may not diminish his tax liability by way of corporate resolutions authorizing payment of inordinately large commissions and fees to its controlling stockholder.

Kuenzle vs CIR (disguised dividend)

Petitioner, a domestic corporation, filed its income tax returns for the taxable years 1953, 1954 and 1955, declaring net losses of P2,085.84, P4,953.91 and P9,246.07 respectively. Upon a verification thereof, the respondent, on September 9, 1957, assessed against it the deficiency income taxes in question, arrived at as follows:

For the year 1953, by disallowing as deductions all amounts paid that year by the petitioner as bonus to its officers and staff-members in the aggregate sum of P175,140.00, this resulting in a net taxable income of petitioner amounting to P173,054.16; for the taxable years 1954 and 1955, the similar disallowance as deductions of a portion of the bonuses paid by petitioner in said years to its officers and staff-members in the aggregate sums of P88,193.33 for 1954 and P90,385.00 for 1955, resulted likewise in a net taxable income for petitioner in the sum of P83,239.42 for 1954 and P81,138.93 for 1955. Tax Court and CIR considered bonuses given as “unreasonable” construing Section 30(a) (1) of the Revenue Code 14 . Petitioners contends that respondent and tax court acted in an arbitrary manner. ISSUE: Whether or not the bonuses are to be considered reasonable so as to be considered deductible under the Revenue Code. HELD: NO. Court agrees with respondent that bonuses given cannot be deducted. It is a general rule that `Bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered' (4 Mertens Law of Federal Income Taxation, Sec. 25.50, p. 410). The condition precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services actually rendered; and (3) bonuses, when added to

the salaries, are `reasonable

when measured by the amount

and quality of the services performed with relation to the business of the particular taxpayer' (Idem., Sec. 25.44, p. 395). Petitioner fails such test considering that (1) recipients of

bonuses were top officers, all foreigners, who were not evidenced to have any special talent, extraordinary training or did anything to contribute materially to petitioner company's success, (2) there were Filipino employees who were not given any increases at all , (3) bonuses were made at times that petitioner allegedly suffered net losses and (4) petitioner admits that the amounts it paid to its top officers in 1953 as bonus or "additional remuneration" were taken either from operating funds, that is, funds from the year's business operations, or from its general reserve. Normally, the amounts taken from the first source should have constituted profits of the corporation distributable as dividends amongst its shareholders. Instead it would appear that they were diverted from this purpose and used to pay the bonuses for the year


Petitioner justifies payment of these bonuses to its top officials by saying that its general salary policy was to give a low salary

but to grant substantial bonuses at the end of each year, so that its officers may receive considerable lump sums with

14 Now Article Section 34 (a) (1) of 1997 NIRC:

(A) Expenses. - (1) Ordinary and Necessary Trade, Business or Professional Expenses.- (a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including:

(i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee:

Provided, That the final tax imposed under Section 33 hereof has been paid;

which to purchase whatever expensive objects or items they might need. While We are not prepared to hold that such policy is unreasonable, still We believe that its application should not result in producing a net loss for the employer at the end of the year, for if that were to be the case, the scheme may be utilized to freely achieve some other purpose — evade payment of taxes.

Commissioner vs JAL (Gross or taxable income from sources within the Philippines) Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for brevity), is a foreign corporation engaged in the business of international air carriage. From 1959 to 1963, JAL did not have planes that lifted or landed passengers and cargo in the Philippines as it had not been granted then by the Civil Aeronautics Board (CAB) a certificate of public convenience and necessity to operate here. However, since mid-July, 1957, JAL had maintained an officeat the Filipinas Hotel, Roxas Boulevard, Manila. Said office did not sell tickets but was maintained merely for the promotion of the company's public relations and to hand out brochures, literature and other information playing up the attractions of Japan as a tourist spot and the services enjoyed in JAL planes. On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its general sales agent in the Philippines. As an agent, PAL, among other things, sold for and in behalf of JAL, plane tickets and reservations for cargo spaces which were used by the passengers or customers on the facilities of JAL. On June 2, 1972, JAL received deficiency income tax assessment notices and a demand letter from petitioner Commissioner of Internal Revenue (hereinafter referred to as Commissioner for brevity), all dated February 28, 1972, for a total amount of P2,099,687.52 inclusive of 50% surcharge and interest, for years 1959 through 1963 On June 19, 1972, JAL protested said assessments alleging that as a non-resident foreign corporation, it was taxable only on income from Philippine sources as determined under Section 37 of the Tax Code, and there being no such income during the period in question, it was not liable for the deficiency income tax liabilities assessed . The Commissioner resolved otherwise and in a letter-decision dated December 21, 1972, denied JAL's request for cancellaton of the assessment . ISSUE: Whether or not proceeds from JAL ticket sales in the Philippines are taxable as income from sources within the Philippines. HELD: YES. The issues in the case at bar have already been laid to rest in no less than three cases resolved by this Court. Anent the first issue, the landmark case of Commissioner of Internal Revenue vs. British Overseas Airways Corporation (G.R. No.L-65773-74, April 30, 1987, 149 SCRA 395) has categorically ruled:

"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 situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. "x x x x x x "True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (2) 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 (British Traders Insurance Co., Ltd. vs. Commissioner of Internal Revenue, 13 SCRA 719 [1965]). "x x x x x x "The absence of flight operations to and from the Philippines is not determinative of the source of income or the situs of income taxation. x x x The test of taxability is the `source'; and the source of an income is that activity x x x which produced the income (Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601 [1965]). Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a business activity regularly pursued within the Philippines. x x x The word `source' conveys one essential Idea, that of origin, and the origin of the income herein is the Philippines (Manila Gas Corporation vs. Collector of Internal Revenue, 62 Phil. 895 [1935])." The above ruling was adopted en toto in the subsequent case of Commissioner of Internal Revenue vs. Air India and the Court of Tax Appeals (G.R. No. L-72443, January 29, 1988, 157 SCRA 648) holding that the revenue derived from the sales of airplane tickets through its agent Philippine Air Lines, Inc., here in the Philippines, must be considered taxable income, and more recently, in the case of Commissioner of Internal Revenue vs. American Airlines, Inc. and Court of Tax Appeals (G.R. No. 67938, December 19, 1989, 180 SCRA 274), it was likewise declared that for the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activities within this country regardless of the absence of flight operations within Philippine territory.

NDC vs Commissioner (Gross or taxable income from sources within the Philippines) The National Development Co. (NDC) entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. Initial payments were made in cash and through irrevocable letters of credit. When the vessels were completed and delivered to the NDC in Tokyo, the latter remitted to the shipbilders the amount of US$ 4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held NDC liable on such tax in the total amount of P5,115,234.74 under ISSUE: Whether or not NDC is liable for tax HELD: YES. NDC argues that the Japanese shipbuilders were not subject to tax under the above provision because all the related activities — the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC — were done in Tokyo. The law, however, does not speak of activity but of "source," 15 which in this case is the NDC. This is a domestic and resident corporation with principal offices in Manila. The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold. In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus:

Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)

15 Income from Sources Within the Philippines.-

(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines:

(1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of residents, corporate or otherwise;

Howden vs Collector (Gross or taxable income from sources within the Philippines) In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into reinsurance contracts with 32 British insurance companies not engaged in trade or business in the Philippines, whereby the former agreed to cede to them a portion of the premiums on insurances on fire, marine and other risks it has underwritten in the Philippines. Alexander Howden & Co., Ltd., also a British corporation not engaged in business in this country, represented the aforesaid British insurance companies. The reinsurance contracts were prepared and signed by the foreign reinsurers in England and sent to Manila where Commonwealth Insurance Co. signed them. On May 12, 1954, within the two-year period provided for by law, Alexander Howden & Co., Ltd. filed with the Bureau of Internal Revenue a claim for refund of the P66,112.00, later reduced to P65,115.00, because Alexander Howden & Co., Ltd. agreed to the payment of P977.00 as income tax on the P4,985.77 accrued interest. A ruling of the Commissioner of Internal Revenue, dated December 8, 1953, was invoked, stating that it exempted from withholding tax reinsurance premiums received from domestic insurance companies by foreign insurance companies not authorized to do business in the Philippines. Subsequently, Alexander Howden & Co., Ltd. instituted an action in the Court of First Instance of Manila for the recovery of the aforesaid amount claimed. Pursuant to Section 22 of Republic Act 1125 the case was certified to the Court of Tax Appeals. On November 24, 1961 the Tax Court denied the claim. ISSUE: Whether or not 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? HELD: YES. The source of an income is the property, activity or service that produced the income. The reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance premiums, and the same took place in the Philippines. In the first place, the reinsured, the liabilities insured and the risks originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. Secondly, contrary to appellants' view, the reinsurance contracts were perfected in thePhilippines, for Commonwealth Insurance Co. signed them last in Manila. The American cases cited are inapplicable to this case because in all of them the reinsurance contracts were signed outside the jurisdiction of the taxing State. And, thirdly, the parties to the reinsurance contracts in question evidently intended Philippine law to govern. Article 11 thereof provided for arbitration in Manila, according to the laws of the Philippines, of any dispute arising between the parties in regard to the interpretation of said contracts or rights in respect of any transaction involved. Furthermore, the contracts provided for the use of Philippine currency as the medium of exchange and for the payment of Philippine taxes.

CIR v. Mitsubishi Metal (Exclusions under the Tax Code – certain passive income of foreign govts from Phil. Investments) Mitsubishi Metal entered into Loan and Sales contract with Atlas Mining and Devt Corp. for the capacity expansion of Atlas’ mines in Cebu. Under the terms, Mitsubishi agreed to extend a US$20M loan in exchange for copper concentrates from Atlas. To comply with said contract, Mitsubishi loaned JPN Y4.32B from Export-Import Bank of Japan (which is owned and controlled by Japanese govt), and JPN Y2.88B from a consortium of Japanese banks. 15% withholding tax was assessed on interest payments by Atlas to Mitsubishi. Mitsubishi applied for tax credit on the amount withheld, saying that it was a mere agent to Ex-Im Bank. It also claimed a tax credit on the portion loaned from a consortium of Japanese banks, stating that said loans ultimately came from Ex-Im Bank also. Respondents rely on Sec. 29 (b) (7,A) of NIRC which excludes from gross income:

(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing from them . Appellate division of BIR granted the tax credit for which Mitsubishi executed a waiver and disclaimer in favor of Atlas. It stated that Mitsubishi was a mere arranger and conduit of Ex- Im Bank of Japan, thus falling within the exclusion of the NIRC. During the pendency of the case above, another 15% tax was withheld for which Atlas filed another claim for tax credit on the same basis and was again granted. Hence the appeal by the Commissioner. Issue: WON Mitsubishi is indeed merely a conduit of Ex-Im Bank, which determines WON the interest payments are excluded from gross income taxation Held: No.The loan between Ex-Im Bank and Mitsubishi is a distinct and separate contract from that between Mitsubishi and Atlas. Mitsubishi is the principal party in the contract between itself and Atlas. They are reciprocally obligated to each other. Mitsubishi was obliged to provide the funds for the installation of new machinery, while Atlas was obliged to sell copper concentrate to Mitsubishi for 15yrs. The contract is not a contract of agency and had nothing to do with Ex-Im bank. Thus, the contract does not fall within the ambit of Sec. 29 (b) (7,A) of NIRC, and the interest payments are not excluded from the 15% withholding tax. The court reiterated that exemption from taxation is not favored and presumed, and that tax exemption is strictly construed vs. the taxpayer.

CIR v. General Foods (Phils.), Inc. (Requisites for

deductibility, nature: ordinary and necessary) FACTS: General Foods (Phils.) Inc. manufactures beverages such as Kool-Aid, Calumet and Tang. In Feb 1985, they claimed as deduction P9,461,246 (the media advertising for Tang). CIR disallowed half of this amount and assessed the company a deficiency income tax of P2,635,141.42. MR was denied, CTA affirmed CIR. CA reversed CTA and cancelled the assessment. ISSUE: Whether or not the subject media advertising expense for "Tang" incurred by respondent corporation was an ordinary and necessary expense fully deductible under the National Internal Revenue Code (NIRC)? NO HELD: The advertising expense is not an ordinary and necessary expense, but a capital expenditure that should be spread out over a reasonable time. It failed to meet the two conditions set by US jurisprudence: (1) reasonableness of the amount incurred [their advertising expense was almost double the amount of their administrative expense] and (2) not be a capital outlay to create goodwill. Advertising is generally of 2 kinds: (1) stimulate current sale of merchandise and (2) stimulate future sale of merchandise. The first kind is allowed, subject to reasonableness of the expenditure. The second is normally spread out over time. The company’s advertising expense falls under the second kind, as the company admitted it is to “protect the brand franchise”.

CIR v. Isabela Cultural

Aguinaldo v. Com

Com v. Soriano Cia

Gutierrez v. Collector

Gancayo v. Collector

Roxas v. CTA

Com v. Prieto

CIR v. Lednicky

CIR v. Bicolandia

Plaridel Security

Com v. Priscilla Estate

Fernandez Hermanos v. Com

Collector v. Goodrich


Commissioner assessed Goodrich based on disallowed deductions,

claimed by Goodrich, consisting of several alleged bad debts, in the aggregate sum of P50,455.41, for the year 1951, and the sum of P30,138.88, as representation expenses allegedly incurred in the year 1952. (For the values of the individual debts and expenses, please see original)

Goodrich had appealed from said assessments to the Court of Tax

Appeals, which, after appropriate proceedings, rendered, on June 8, 1963, a

decision allowing the deduction for bad debts, but disallowing the alleged representation expenses.

On motion for reconsideration and new trial, filed by Goodrich, the

Court of Tax Appeals amended its aforementioned decision and allowed said deductions for representation expenses. ISSUES / HELD:

WON the claims for deduction based on alleged representation expenses must be allowed.

NO. The claim for deduction thereof is based upon receipts issued,

not by the entities in which the alleged expenses had been incurred, but by the officers of Goodrich who allegedly paid them.

The claim must be rejected. If the expenses had really been incurred,

receipts or chits would have been issued by the entities to which the payments had been made, and it would have been easy for Goodrich or its officers to produce such receipts.

These issued by said officers merely attest to their claim that they

had incurred and paid said expenses. They do not establish payment of said alleged expenses to the entities in which the same are said to have been incurred. The Court of Tax Appeals erred, therefore, in allowing the deduction thereof. Whether or not the debts had been properly deducted as bad debts for the year 1951.

The claim for deduction of ten (10) debts should be rejected.

o Goodrich has not established either that the debts are

actually worthless or that it had reasonable grounds to believe them to be so in 1951. Our statute permits the deduction of debts "actually ascertained to be worthless within the taxable year," obviously to prevent arbitrary action by the taxpayer, to unduly avoid tax liability.

o The requirement of ascertainment of worthlessness requires

proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be worthlessness, in the year for which the deduction is sought; and (2) that, in so doing, he acted in good faith.

o Good faith on the part of the taxpayer is not enough. He must

show, also, that he had reasonably investigated the relevant facts and had drawn a reasonable inference from the information thus obtained by him. 2 Respondent herein has not adequately made such showing.

o The payments made, some in full, after some of the foregoing

accounts had been characterized as bad debts, merely stresses the undue haste with which the same had been written off. At any rate, respondent has not proven that said debts were worthless.

o There is no evidence that the debtors can not pay them. It

should be noted also that, in violation of Revenue Regulations No. 2, Section 102, respondent had not attached to its income tax returns a statement showing the propriety of the deductions therein made for alleged bad debts.

Upon the other hand, the deduction of eight (8) accounts, aggregating P22,627.35, as bad debts should be allowed:

o One account was contracted in 1950. Referred, for collection,

to respondent's counsel, the latter secured no payment. In November, 1950, the corresponding suit for collection was filed. The debtor's counsel was allowed to withdraw, as such, the debtor having failed to meet him. In fact, the debtor did not appear at the hearing of the case. Judgment was rendered in 1951 for the creditor. The corresponding writ of execution was returned unsatisfied, for no properties could be attached or levied upon.

o Four (4) accounts were 2 or 3 years old in 1951. After the

collectors of the creditor had failed to collect the same, its counsel

wrote letters of demand to no avail. Considering the small amounts involved in these accounts, the taxpayer was justified in feeling that the unsuccessful efforts therefore exerted to collect the same sufficed to warrant their being written off.

o Three (3) accounts were among those referred to counsel for

Goodrich for collection. Up to 1951, when they were written off, counsel had sent various letters of demand to them. In 1951, Lion Shoe Store, Ruiz Highway Transit, and Esquire Auto Seat Cover had made partial payments in the sums of P1,050.00, P400.00, and P300.00 respectively. Subsequent to the write-off, additional small payments were made and accounted for as income of Goodrich. Counsel interviewed the debtors, investigated their ability to pay and threatened law suits. He found that the debtors were in strained financial condition and had no attachable or leviable property. Moreover, Lion Shoe Store was burned twice, in 1948 and 1949. Thereafter, it continued to do business on limited scale. Later; it went out of business. Ruiz Highway Transit, had more debts than assets. Counsel, therefore, advised respondent to write off these accounts as bad debts without going to court, for it would be "foolish to spend good money after bad."



Philippine Refining Company (PRC) was assessed by respondent

Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00.

The assessment was timely protested by petitioner on the ground

that it was based on the erroneous disallowances of “bad debts” and “interest expense” although the same are both allowable and legal deductions. Respondent Commissioner, however, issued a warrant of garnishment against the deposits of petitioner at a branch of City Trust Bank, which action the latter considered as a denial of its protest.

The Tax Court reversed and set aside the Commissioner’s

disallowance of the supposed interest expense but maintained the disallowance of the bad debts of thirteen (13) debtors in the total sum of P395,324.27 out of 16 debts.


WON the Court of Appeals erred in affirming the decision of the Court of Tax Appeals which disallowed petitioner’s claim for deduction as bad debts of several accounts


NO. For debts to be considered as “worthless,” and thereby qualify as

“bad debts” making them deductible, the taxpayer should show that (1) there is a valid and subsisting debt; (2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future.

Furthermore, there are steps outlined to be undertaken by the

taxpayer to prove that he exerted diligent efforts to collect the debts, viz: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court.

Petitioner did not satisfy the requirements of “worthlessness of a

debt” as to the thirteen (13) accounts disallowed as deductions. Mere testimony of the Financial Accountant of the Petitioner explaining the worthlessness of said debts is seen by this Court as nothing more than a self-serving exercise which lacks probative value. There was no iota of documentary evidence (e. g., collection letters sent, report from investigating fieldmen, letter of referral to their legal department, police report/affidavit that the owners were bankrupt due to fire that engulfed their stores or that the owner has been murdered, etc.), to give support to the testimony of an employee of the Petitioner. Mere allegations cannot prove the worthlessness of such debts in 1985. Hence, the claim for deduction of these thirteen (13) debts should be rejected.”

Basilan v. Com

Com v. CTA



The Commissioner assessed Basilan Estates, Inc., a deficiency

In its 1971 original income tax return, Smith Kline declared a net

income tax of P3,912 for 1953 and P86,876.85 as 25% surtax on unreasonably accumulated profits as of 1953. On non-payment of the assessed amount, a warrant of distraint and levy was issued but the same was not executed because Basilan Estates, Inc. succeeded in getting the Deputy Commissioner of Internal Revenue to order the Director of the district in Zamboanga City to hold execution and maintain constructive embargo instead. Because of its refusal to waive the period of prescription, the corporation's request for reinvestigation was not given due course, and notice was served the corporation that the warrant of distraint and levy would be executed.

Basilan Estates, Inc. filed before the CTA a petition for review of the

Commissioner's assessment, alleging prescription of the period for assessment and collection; error in disallowing claimed depreciations, travelling and miscellaneous expenses; and error in finding the existence of unreasonably accumulated profits and the imposition of 25% surtax thereon.

CTA found that there was no prescription and affirmed the deficiency assessment in toto.

Basilan Estates, Inc. claimed deductions for the depreciation of its

assets up to 1949 on the basis of their acquisition cost. As of January 1,

1950 it changed the depreciable value of said assets by increasing it to

conform with the increase in cost for their replacement. Accordingly, from

1950 to 1953 it deducted from gross income the value of depreciation

taxable income of P1,489,277 and paid P511,247 as tax due. Among the deductions claimed from gross income was P501,040 ($77,060) as its share of the head office overhead expenses.

However, in its amended return filed on March 1, 1973, there was an

overpayment of P324,255 "arising from under-deduction of home office overhead". It made a formal claim for the refund of the alleged overpayment.

It appears that sometime in October, 1972, Smith Kline received from

its international independent auditors, Peat, Marwick, Mitchell and Company, an authenticated certification to the effect that the Philippine share in the

unallocated overhead expenses of the main office for the year ended December 31, 1971 was actually $219,547 (P1,427,484). It further stated in the certification that the allocation was made on the basis of the percentage of gross income in the Philippines to gross income of the corporation as a whole. By reason of the new adjustment, Smith Kline's tax liability was greatly reduced from P511,247 to P186,992 resulting in an overpayment of


Without awaiting the action of the Commissioner of Internal Revenue

on its claim Smith Kline filed a petition for review with the Court of Tax Appeals. The Tax Court ordered the Commissioner to refund the overpayment or grant a tax credit to Smith Kline. The Commissioner appealed to this Court. ISSUE:

computed on the reappraised value.

WON the refund or credit of the resulting overpayment is in order.

The Commissioner found that the reappraised assets depreciated in



were the same ones upon which depreciation was claimed in 1952.

YES. In section 37 of the old National Internal Revenue Code,

And for the year 1952, the Commissioner had already determined, with taxpayer's concurrence, the depreciation allowable on said assets to be P36,842.04, computed on their acquisition cost at rates fixed by the

taxpayer. Hence, the Commissioner pegged the deductible depreciation for

1953 on the same old assets at P36,842.04 and disallowed the excess

thereof in the amount of P10,500.49. ISSUE:

Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158, the National Internal Revenue Code of 1977 and which reads:

SEC. 37. Income form sources within the Philippines.

xxx xxx xxx

(b) Net income from sources in the Philippines. — From the items of gross income specified in subsection (a) of this

section there shall be deducted the expenses, losses, and

WON the depreciation of an asset beyond its acquisition cost is allowed.

other deductions properly apportioned or allocated thereto


and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some

NO. The claim for depreciation beyond P36,842.04 or in the amount

of P10,500.49 has no justification in the law. The determination of the Commissioner disallowing said amount, affirmed by the Court of Tax

item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the Philippines.

Appeals, is sustained.


xxx xxx

Depreciation is the gradual diminution in the useful value of tangible

property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration.

Depreciation commences with the acquisition of the property and its

owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the end of any given term of years, the original investment remains as it was in the beginning. It is not only the right of a company to make such a provision, but it is its duty to its bond and stockholders, and, in the case of a public service corporation, at least, its plain duty to the public. Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets free from income tax.

The income tax law does not authorize the depreciation of an asset

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

Moreover, the recovery, free of income tax, of an amount more than

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

Revenue Regulations No. 2 of the Department of Finance contains

the following provisions on the deductions to be made to determine the net income from Philippine sources:

SEC. 160. Apportionment of deductions. — From the items specified in section 37(a), as being derived specifically from sources within the Philippines there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income. Example: A non-resident alien individual whose taxable year is the calendar year, derived gross income from all sources for 1939 of P180,000, including therein:

Interest on bonds of a domestic corporation P9,000 Dividends on stock of a domestic corporation 4,000 Royalty for the use of patents within the Philippines 12,000 Gain from sale of real property located within the Philippines 11,000 Total P36,000 that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of the gross income was from sources without the Philippines, determined under section 37(c). The expenses of the taxpayer for the year amounted to P78,000. Of these expenses the amount of P8,000 is properly allocated to income from sources within the Philippines and the amount of P40,000 is properly allocated to income from sources without the Philippines.

The remainder of the expense, P30,000, cannot be definitely allocated to any class of income. A ratable part thereof, based upon the relation of gross income from sources within the Philippines to the total gross income, shall be deducted in computing net income from sources within the Philippines. Thus, these are deducted from the P36,000 of gross income from sources within the Philippines expenses amounting to P14,000 [representing P8,000 properly apportioned to the income from sources within the Philippines and P6,000, a ratable part (one-fifth) of the expenses which could not be allocated to any item or class of gross income.] The remainder, P22,000, is the net income from sources within the Philippines.

From the foregoing provisions, it is manifest that where an expense is

clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment.

The overhead expenses incurred by the parent company in

connection with finance, administration, and research and development, all of which direct benefit its branches all over the world, including the Philippines, fall under a different category however. These are items which cannot be definitely allocated or Identified with the operations of the Philippine branch. For 1971, the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code and section 160 of the regulations, Smith Kline can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation.

Pansacola v. CIR


Carmelino F. Pansacola filed his income tax return for the taxable

year 1997 that reflected an overpayment of P5,950. In it he claimed the increased amounts of personal and additional exemptions under Section 35 of the NIRC, although his certificate of income tax withheld on compensation indicated the lesser allowed amounts on these exemptions.

He claimed a refund of P5,950 with the Bureau of Internal Revenue,

which was denied. Later, the Court of Tax Appeals also denied his claim because according to the tax court, "it would be absurd for the law to allow the deduction from a taxpayer’s gross income earned on a certain year of exemptions availing on a different taxable year…"

On appeal, the Court of Appeals denied his petition for lack of merit.

The appellate court ruled that Umali v. Estanislao, relied upon by petitioner, was inapplicable to his case. It further ruled that the NIRC took effect on January 1, 1998, thus the increased exemptions were effective only to cover taxable year 1998 and cannot be applied retroactively. ISSUE:

WON the exemptions under Section 35 of the NIRC, which took effect on January 1, 1998, be availed of for the taxable year 1997. HELD:

NO. Prefatorily, personal and additional exemptions under Section 35

of the NIRC are fixed amounts to which certain individual taxpayers (citizens, resident aliens) are entitled. Personal exemptions are the theoretical personal, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers as provided under Section 35 (A) and (B). Unless and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress.

Section 35 (A) and (B) allow the basic personal and additional

exemptions as deductions from gross or net income, as the case maybe, to arrive at the correct taxable income of certain individual taxpayers. Section 24 (A) (1) (a) imposed income tax on a resident citizen’s taxable income derived for each taxable year.

Section 45 provides that the deductions provided for under Title II of

the NIRC shall be taken for the taxable year in which they are "paid or accrued" or "paid or incurred."

Moreover, Section 79 (H) requires the employer to determine, on or

before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the tax due from each employee’s taxable compensation income for the entire taxable year in accordance with Section 24 (A). This is for the purpose of either withholding from the employee’s December salary, or refunding to him not later than January 25 of the succeeding year, the difference between the tax due and the tax withheld.

Therefore, as provided in Section 24 (A) (1) (a) in relation to

Sections 31 and 22 (P) and Sections 43, 45 and 79 (H) of the NIRC, the income subject to income tax is the taxpayer’s income as derived and computed during the calendar year, his taxable year. Clearly what the law should consider for the purpose of determining

Reagan v. Com

Com v. Robertson(Exemptions granted under international agreements) The respondents in this case are citizens of the United States; civilian employees in the U.S. Military Base in the Philippines in connection with its construction, maintenance, operation, and defense; and incomes are solely derived from salaries from the U.S. government by reason of their employment in the U.S. Bases in the Philippines. The CIR made an assessment for deficiency income taxes of the respondents for years 1969-1972. A case was brought by the defendants against the petitioner to the Court of Tax appeals. Pursuant to Article XII, Par. 2, of the RP-US Military Bases Agreement of 1947, the Court of Tax Appeals cancelled and set aside the assessments for deficiency income taxes of respondents for the taxable years 1969-1972. inclusive of interests and penalties. The treaty provision is quoted as follows:

No national of the United States serving in or employed in the Philippines in connection with the construction, maintenance, operation or defense of the bases and residing in the Philippines by reason only of such employment, or his spouse and minor children and dependent parents of either spouse, shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources or sources other than the United States sources The CIR now assails the decision of the CTA, arguing that the tax exemptions must be construed in strictissimi juris against the taxpayer, and that the burden of proof is on private to establish that their residence in the country is by reason only of their employment in connection with the construction, maintenance, operation or defense of the U.S. Bases in the Philippines. Issue: WON the respondents are exempt from income taxation Held: Yes. The law and the facts of the case are so clear that there is no room left to doubt the validity of private respondents' defense. We find nothing in the said treaty provision that justified the lifting of the tax exemption privilege. The CIR has grafted a meaning other than that conveyed by the plain and clear tenor of the Agreement. An examination of the words used and the circumstances in which they were used, shows the basic intendment "to exempt all U.S. citizens working in the Military Bases from the burden of paying Philippine Income Tax without distinction as to whether born locally or born in their country of origin." One must not distinguish where the law does not distinguish.

Ona v. Com(Test whether an entity is a taxable partnership) Julia Buñales died leaving as heirs her surviving spouse, Lorenzo T. Oña and her five children. In 1948, A case was instituted for the settlement of her estate. The surviving spouse was appointed administrator of the estate of said deceased. On April 14, 1949, the administrator submitted the project of partition, which was approved by the Court. Because three of the heirs, were still minors when the project of partition was approved, their father and administrator of the estate, filed a petition for appointment as guardian of said minors. The Court appointed him guardian of the persons and property of the minors. Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to divide the properties. Instead, the properties remained under the management of Lorenzo who used said properties in business by leasing or selling them and investing the income from the sales thereof in real properties and securities. As a result, petitioners' properties and investments gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956 . On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Issues Should petitioners be considered as co-owners of the properties inherited or must they be deemed to have formed an unregistered partnership subject to tax under the NIRC? Held:

From the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually







branch profit remittance) Marubeni Corp. of Japan is a foreign corporation duly organized and existing under the laws of Japan and duly licensed to engage in business under Philippine laws with a branch office in Manila. Marubeni has equity investments in AG&P of Manila. AG&P declared and paid cash to petitioner and withheld the corresponding 10% final dividend tax thereon. After deducting the final withholding tax of, AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final dividend tax, but also of the withheld 15% profit remittance tax based on the remittable amount. These taxes were paid by AG&P to the BIR. Marubeni sent a letter query to the BIR, asking for a ruling on whether or not the dividends petitioner received from AG&P are to the 15% profit remittance tax under the National Internal Revenue Code. The Commissioner responded, saying that the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax. However, the said Commissioner denied a refund for overpayment, saying that under the Philippines- Japan Tax Treaty of 1980, the company is subject to 25% tax on the gross amount of dividends. Therefore, there is nothing to be refunded (10% + 15% = 25%). Marubeni now argues that it is a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a domestic corporation. Because it is engaged in business in the Philippines through its Philippine branch, it must be considered as a resident foreign corporation, that since the Philippine branch and the Tokyo head office are one and the same entity, whoever made the investment in AG&P, Manila does not matter at all. Issues:

Is Marubeni a resident or non-resident foreign corporation?


contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of sec. 24 of the NIRC. For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding.


Can Marubeni ask for a refund for overpayment?


1. Marubeni of Japan is a non-resident foreign corporation. The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation.

2. Yes. Pursuant to the tax treaty, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the dividends received. This


% represents the difference between the regular tax of


% on non-resident foreign corporations which petitioner

would have ordinarily paid, and the 15 % special rate on

dividends received from a domestic corporation.

Hospital de San Juan de Dios v. Pasay(Exemption

under the Constitution) Facts: The appellant (hospital) was organized as a charitable institution. Due to electrical Section 5, Ordinance No. 7, series of 1945, the City Engineer conducts inspections on buildings, including the building used by the hospital. For this, the Pasay City government charged inspection fees. Under the ordinance, charitable and religious institutions are exempt from paying the said fees. However, fees were charged from the hospital. The trial court admitted that while the hospital was organized as a charitable institution, it is actually managed and operated for profit. Issue: whether or not the hospital is a charitable institution Held: It is a charitable institution. The general rule that a charitable institution does not lose its charitable character and its consequent exemption from taxation merely because recipients of its benefits who are able to pay are required to do so, where funds derived in this manner are devoted to the charitable purposes of the institution, applies to hospitals. A hospital owned and conducted by a charitable organization, devoted for the most part to the gratuitous care of charity patients, is exempt from taxation as a building used for "purposes purely charitable", notwithstanding it receives and cares for pay patients, where any profit thus derived is applied to the purposes of the institution. An institution established, maintained, and operated for the purpose of taking care of the sick, without any profit or view to profit, but at a loss, which is made up by benevolent contributions, the benefits of which are open to the public generally, is a purely public charity within the meaning of a statute exempting the property of institutions of purely public charity from taxation; the fact that patients who are able to pay are charged for services rendered, according to their ability, being of no importance upon the question of the character of the institution.

Cyanamids Phil v. CA (Other taxes: improperly accumulated earnings tax) Facts: Petitioner, Cyanamid is a corporation organized under Philippine laws. It is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. The CIR demanded the payment of deficiency income tax, which included a 25% surtax for the undue accumulation of earnings. Petitioner claimed that CIR’s assessment representing the 25% surtax on its accumulated earnings had no legal basis for the following reasons: (a) it accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness; (b) it is a wholly owned subsidiary of American Cyanamid Company, a publicly owned corporation whose shares of stock are listed and traded in the NY Stock Exchange. Hence, no individual shareholder of petitioner could have evaded or prevented the imposition of individual income taxes by petitioner’s accumulation of earnings and profits, instead of distribution of the same. Issue: WON Cyanamid is liable for 25% surtax on improperly accumulated earnings Held: Yes. Under sec. 25 of the NIRC of 1977, if any corporation is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders through permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation a tax equal to 25% of the undistributed portion of its accumulated profits. The provision also lists down specific exceptions, under which the petitioner does not fall. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed. Furthermore, to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of accumulation, not intentions declared later as an afterthought. The accumulated profits must be used within a reasonable time. In the instant case, petitioner did not establish by clear and convincing evidence that such accumulation of profit was for the immediate needs of the business.

CIR v. Procter &Gamble(taxation of NRFC’s)

Facts: Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA (PMC-USA), a non- resident foreign corporation in the Philippines, not engaged in trade and business therein. PMC-USA is the sole shareholder of PMC Philippines and is entitled to receive income from PMC Philippines in the form of dividends, if not rents or royalties. For the taxable years 1974 and 1975, PMC Philippines filed its income tax return and also declared dividends in favor of PMC- USA. In 1977, PMC Philippines, invoking the tax-sparing provision of Section 24 (b) as the withholding agent of the Philippine Government with respect to dividend taxes paid by PMC-USA, filed a claim for the refund of 20 percentage point portion of the 35 percentage whole tax paid with the Commissioner of Internal Revenue. Issue: Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared and remitted to its parent corporation. Held: The submission of the Commissioner that PMC Philippines is but a withholding agent of the government and therefore cannot claim reimbursement of alleged overpaid taxes, is completely meritorious. The real party in interest is PMC-USA, which should prove that it is entitled under the US Tax Code to a US Foreign Tax Credit equivalent to at least 20 percentage points spared or waived as otherwise considered or deemed paid by the Government. Herein, the claimant failed to show or justify the tax return of the disputed 15% as it failed to show the actual amount credited by the US Government against the income tax due from PMC-USA on the dividends received from PMC Philippines; to present the income tax return of PMC-USA for 1975 when the dividends were received; and to submit duly authenticated document showing that the US government credited the 20% tax deemed paid in the Philippines.

CIR v. Procter &Gamble(taxation of NRFC’s) CIR vs. Procter and Gamble 16 (taxation of NRFC’s)

Facts: refer to facts of the first P&G case Issue:

1. Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared and remitted to its parent corporation

2. WON the US allows P&G-USA a tax credit for taxes deemed paid in the Philippines

3. WON the tax credit reaches an amount equivalent to 20% of the dividends


1. Yes. Section 24(b)(1) of the NIRC says that the ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the 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 corporation. In other words, the reduced 15% dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to 20%, which represents the difference between the regular 35% dividend tax rate and the preferred 15% dividend tax rate. Our NIRC does not require that the US tax law deem the parent-corporation to have actually paid the 20% of dividend tax waived by the Philippines for the 15% rate to apply. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the 20% waived by the Philippines.

2. Yes. Sec. 901(b)(a) of the US Tax Code gives a tax credit to US corporations for taxes paid or accrued to any foreign country. Sec. 902(A)(2) of the said code says that a US corporation owning at least 10% of the voting stock of a foreign (eg Philippine) corporation are receiving dividends therefrom, to the extent that the dividends are paid out of accumulated profits is deemed to have paid the proportion of any income taxes paid by such foreign corporation to any foreign country (ie Philippines) on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits. Accumulated profits, for purposes of sec. 902(A)(2) are defined as the amount of gains (in this case, the dividends) in excess of the income tax. The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.

16 This is a motion for reconsideration of the earlier CIR vs. P&G case

3. Yes. It can be shown by the following theoretical computations:

Assume 100 = corporate net income of P&G-Phil, before taxes 100 – (100 x 35% as income tax) = 65 - available for remittance to P&G-USA

65 x 20% = 13 (minimum amount tax credit given the US for

taxes deemed paid in the Philippines)

BPI v. Com

65 – (65 x 15% as dividend tax at the reduced rate) = 55.25 –

divdends actually remitted to P&G-USA

Amount paid by P&G-Phil as income tax = 35

Applying Sec. 902(A)(2) of the US Tax Code

35 ×

. ( & )

( )

= 29.75 > 13 Therefore, Section 902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC. The reduced rate of 15% shall apply.