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COMMISSIONER OF INTERNAL REVENUE, vs. JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-fact) Respondent. (NOTE: This is the second case, I cant find the 2003 case minute resolution, but part of its ruling is mentioned at the end of this case. To follow.) their income received from all sources within the Philippines. Thus, the keyword in determining the taxability of non-resident aliens is the incomes "source." In construing the meaning of "source" in Section 25 of the NIRC, resort must be had on the origin of the provision. The Supreme Court has said, in a definition much quoted but often debated, that FACTS: Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketing on wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile products." Through JUBANITEXs General Manager, Marina Q. Guzman, the corporation appointed and engaged the services of respondent as commission agent. It was agreed that respondent will receive 10% sales commission on all sales actually concluded and collected through her efforts. In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from which income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a particular item is from "sources within the United States" and suggest an investigation into the nature and location of the activities or property which produce the income. If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the income should be from "sources within the United States." If the income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the income should be from "sources within the United States." If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive. Much confusion will be avoided by regarding the term "source" in this fundamental light. It is not a place, it is an activity or property. As such, it has a situs or location, and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations. The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered.17 The source of an income is the property, activity or service that produced the income. Citing The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioners interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the ISSUE: The issue here is whether respondents sales commission income is taxable in the Philippines. income. Having disposed of the doctrine applicable in this case, we will now determine whether respondent was able to establish the factual circumstances showing that RULING: YES, for failure to present evidence that will support her claim that the activity which is the source of income was performed outside of the Philippines. Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income taxation on her income is exempt from Philippine income taxation. The decisive factual consideration here is not the capacity in which respondent received the income, but the sufficiency of evidence to prove that the services she rendered were performed in Germany. Though not raised as an issue, the Court is clothed with authority to address the same because the resolution thereof will settle the vital question posed in this controversy.23 In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the service which would entitle her to 10% commission income, are "sales actually concluded and collected through [her] efforts."25 What she presented as evidence to prove that she performed income producing activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients. However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and whether these sales were truly concluded in Germany, respondent presented no such evidence. Neither did she establish reasonable connection between the orders/instructions faxed and the reported monthly sales purported to have transpired in Germany. In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or that relevant evidence that a reasonable mind might accept as adequate to support the conclusion31 that it was in Germany where she performed the income producing service which gave rise to the reported monthly sales in the months of March and May to September of 1995. She thus failed to discharge the burden of proving that her income was from sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund should be denied. The Court notes that in Commissioner of Internal Revenue v. BaierNickel,32 a previous case for refund of income withheld from respondents remunerations for services rendered abroad, the Court in a Minute Resolution dated February 17, 2003,33 sustained the ruling of the Court of Appeals that respondent is entitled to refund the sum withheld from her sales commission income for the year 1994. This ruling has no bearing in the instant controversy because the subject matter thereof is the income of respondent for the year 1994 while, the instant case deals with her income in 1995. Otherwise, stated, res judicata has no application here. Its elements are: (1) there must be a final judgment or order; (2) the court that rendered the judgment must have jurisdiction over the subject matter and the parties; (3) it must be a judgment on the merits; (4) there must be between the two cases identity of parties, of subject matter, and of causes of action. 34 The instant case, however, did not satisfy the fourth requisite because there is no identity as to the

JUBANITEX withheld the corresponding 10% withholding tax amounting to P170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26. On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended that her sales commission income is not taxable in the Philippines because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. Contending that no action was being taken by BIR the case was brought before the CTA, which denied her claim holding that the income derived by respondent is therefore an income taxable in the Philippines because JUBANITEX is a domestic corporation. On petition CA reversed the decision, holding that respondent received the commissions as sales agent of JUBANITEX and not as President thereof. And since the "source" of income means the activity or service that produce the income, the sales commission received by respondent is not taxable in the Philippines because it arose from the marketing activities performed by respondent in Germany.

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subject matter of the previous and present case of respondent which deals with income earned and activities performed for different taxable years. corporation would result in repeated taxation of the same income and would leave very little for the ultimate individual shareholder. Until 1957 there had been no question that the proviso on dividend exclusion FILIPINAS LIFE ASSURANCE COMPANY, vs. THE COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL REVENUE, applied to all domestic and resident foreign life insurance companies. The question arose when, by virtue of Republic Act 1855 (1957), the original provisions of section 24, with slight modifications, were made sub-section (A) FACTS: The petitioner is a domestic life insurance company. On March 18, 1959, it filed an income tax return for 1958. Later, however, it filed an amended return. This was accompanied with a claim for the refund, which the petitioner had paid as income tax under its original return. The difference is due to the fact that, whereas in its original income tax return the petitioner reported in full its income from dividends amounting to P57,105.29,1 in its amended return it reported only 25 per cent, or P15,242.55,2 of the dividends from domestic corporations. The claim was not heard by CIR hence to avoid prescription of its action, took the matter to the CTA which denied the claim of the petitioner for refund. The Court of Tax Appeals ruled that life insurance companies should report in full their income from dividends because, while they are treated in subsection (B), the proviso regarding dividend exclusion is found in subsection (A) which treats of corporations in general. The petitioner appealed to this Court, contending, on the basis of the history of the proviso, that the benefits of dividend exclusion are available to all domestic and resident foreign corporations regardless of the business in which they may be engaged. ISSUE: WON domestic and resident foreign life insurance companies are entitled to return only 25 per cent of their income from dividends under the 1957 amendment of IRC? while a new sub-section (B), entitled "Rate of Tax on Life Insurance Companies," was added. The result is that the proviso on dividend exclusion now appears to qualify only a part of section 24, making it doubtful whether after 1957 the income from dividends of domestic and resident foreign life insurance companies still enjoys exemption, although, as noted in passing,15 the proviso continues to speak of "the tax imposed by this section" (not sub-section). However, a review of the circumstances, which prompted the amendment of section 24 in 1957 shows no intention to withdraw from life insurance companies the exemption which theretofore had been enjoyed by them along with non-life insurance companies. To be sure, the 1957 amendment was intended for a twofold purpose: first, to change the tax base from premium income to investment income and, second, to lower the tax on life insurance companies, in order to encourage their growth as well as their investment in the development of the national economy. Prior to 1957, life insurance companies were required, for income tax purposes, to include premium, receipts in gross income. It became generally recognized, however, that the inclusion of premium receipts in the gross taxable income of life insurance companies was unsound because premium receipts do not constitute income in the sense of gain or profit. They are really savings deposits of the individual policyholders, a large portion of which goes directly to reserve funds RULING: YES. Decision of CTA reversed. A resort to legislative history should prove particularly helpful in the case of section 24 of the Code as this section has gone through a miscellany of amendments, with the result that its basic outlines are now only vaguely discernible. From a one-paragraph section it has grown into a multi-paragraph one, with lengthy sentences qualified at every turn by exceptions and provisos It will thus be seen that dividend exclusion has always been a dominant feature of corporate income tax. It is a device for reducing extra or double taxation of distributed earnings. Since a corporation cannot deduct from its gross income the amount of dividends distributed to its corporation-shareholders during the taxable year, any distributed earnings are necessarily taxed twice; initially at the corporate level when they are included in the corporation's taxable income, and again, at the corporation-shareholder level when they are received as dividend. Thus, without exclusion the successive taxation of the dividend as it passes from corporation to required by law for the payment of their claims for death benefits, cash surrender values and maturity values. Therefore, to tax an insurance company on account of these "deposits" or "savings" is actually to tax the policyholder for being provident. What constitutes true income for a life insurance company is rather its investment income from interest, dividends and rents.16 Besides, the premiums which a life insurance company receives are already subject to a tax of 3 per cent under section 255 of the Code. To require their inclusion in gross income for purposes of section 24 is to subject them to double taxation.17 The rate of tax was lowered in recognition of the fact that a life insurance company derives profit from its investment income only to the extent that such income exceeds the rate of interest at which the reserve must be maintained.18 That Congress intended to accord preferential tax treatment to domestic and resident foreign life insurance companies is abundantly clear not only from the FACTS: For the years 1974 to 1976, petitioner (Tours Specialists, Inc.) had derived income from its activities as a travel agency by servicing the needs of foreign tourists and travelers and Filipino "Balikbayans" during their stay in this country. Some of the services extended to the tourists consist of booking said tourists and travelers in local hotels for their lodging and board needs; transporting these foreign taourists from the airport to their respective hotels, and COMMISSIONER OF INTERNAL REVENUE, vs. TOURS SPECIALISTS, INC., and THE COURT OF TAX APPEALS history of the 1957 amendment but also from the Comparative Table ( supra) which shows that while the rate of tax on corporations in general has been raised, that on domestic and resident foreign life insurance companies has remained at 6-1/2 per cent the lowest among those imposed on various types of corporations. The truth is that section 24 has undergone amendments through a process which, in Cardozo's phrase,20 is no more intellectual than the use of paste pot and scissors. Consequently, reliance cannot be placed on its grammatical construction in order to arrive at its meaning The reference to domestic and resident foreign life insurance companies in the excepting clause of sub-section (a) is even more awkward because the exception relates to the coverage of the entire section 24 and not simply to a sub-section thereof. Thus, registered general copartnerships are excepted from the coverage of section 24 because they are not subject to tax as an entity. By express provision of section 26 of the Code persons doing business as a general copartnership duly registered in the mercantile registry are subject to income tax "only in their individual capacity." On the other hand, by including domestic and resident foreign life insurance companies in the excepting clause it was never the intention to exempt them from the payment of corporate income tax, which is the subject of section 24 as a whole. Furthermore, the exclusion of registered general copartnerships from the coverage of section 24 is justified because by statutory definition they are not anyway considered "corporations." On the other hand, life insurance companies are deemed "corporations" for purposes of the Code.21 Thus, the haphazard amendment of section 24 by several legislative acts as a result of which the proviso on dividend exclusion is now found in sub-section (a) makes reliance on its grammatical construction highly unsafe and unsound in arriving at its meaning.22 Since nothing in the history of the 1957 amendment or in the rationale of dividend exclusion indicates the contrary, we hold that domestic and resident foreign life insurance companies are entitled to the benefits of dividend exclusion, the position of the proviso allowing it notwithstanding.

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etc. In order to ably supply these services to the foreign tourists, petitioner and its correspondent counterpart tourist agencies abroad have agreed to offer a package fee for the tourists. There are some tour agencies abroad request the local tour agencies, such as the petitioner in the case, that the hotel room charges, in some specific cases, be paid through them. (By this arrangement, the foreign tour agency entrusts to the petitioner TSI the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed. Despite this arrangement, respondent Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax as independent contractor by including the entrusted hotel room charges in its gross receipts from services for the years 1974 to 1976. Consequently, on December 6, 1979, petitioner received from respondent the 3% deficiency independent contractor's tax assessment. Petitioner protested the assessment on the ground that the Moreover, evidence presented by the private respondent shows that the amounts entrusted to it by the foreign tourist agencies to pay the room charges of foreign tourists in local hotels were not diverted to its funds; this arrangement was only an act of accommodation on the part of the private respondent. This evidence was not refuted. In essence, the petitioner's assertion that the hotel room charges entrusted to the private respondent were part of the package fee paid by foreign tourists to the respondent is not correct. The evidence is clear to the effect that the amounts entrusted to the private respondent were exclusively for payment of hotel room charges of foreign tourists entrusted to it by foreign travel agencies. As demonstrated in the above-mentioned case, gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code. Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their payment to the local hotels. As stated earlier, this arrangement was only to accommodate the foreign travel agencies. Another objection raised by the petitioner is to the respondent court's application of Presidential Decree 31 which exempts foreign tourists from payment of hotel room tax. ISSUE: WON money entrusted to private respondent TSI is earmarked and does not form part of its gross receipts subject to the 3% independent contractor's tax? RULING: YES. Affirmed the decision of CTA. The respondent differentiated between the package fee offered by both the local travel agency and its correspondent counterpart tourist agencies abroad and the requests made by some tour agencies abroad to local tour agencies wherein the hotel room charges in some specific cases, would be paid to the local hotels through them. In the latter case, the correspondent court found as a fact ". . . that the foreign tour agency entrusts to the petitioner TSI the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed." (Rollo, p. 42) The following procedure is followed: The billing hotel sends the bill to the respondent; the local hotel then identifies the individual tourist, or the particular group of tourist by code name or group designation plus the duration of their stay for purposes of payment; upon receipt of the bill the private respondent pays the local hotel with the funds entrusted to it by the foreign tour correspondent agency. Accordingly, the significance of P.D. 31 is clearly established in determining whether or not hotel room charges of foreign tourists in local hotels are subject to the 3% contractor's tax. As the respondent court aptly stated: . . . If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as what respondent would want to do in this case, that would in effect do indirectly what P.D. 31 would not like hotel room charges of foreign tourists to be subjected to hotel room tax. Although, respondent may claim that the 3% contractor's tax is imposed upon a different incidence i.e. the gross receipts of petitioner tourist agency which he asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and though different, it nonetheless imposes a tax actually on room charges. One way or the other, it would not have the effect of promoting tourism in the Philippines as that would increase the costs or expenses FACTS: Respondent companies are two distinct and separate corporations engaged in the business of land transportation by means of motor buses, and operating distinct and separate lines. Before the last war, each company maintained separate head offices. Each company also kept and maintained separate books, fleets of buses, management, personnel, maintenance and repair shops, and other facilities. Joseph Benedict managed the Batangas COLLECTOR OF INTERNAL REVENUE vs. BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY by the addition of a hotel room tax in the overall expenses of said tourists. (Rollo, pp. 51-52)

Transportation, while Martin Olson was the manager of the Laguna Bus. To show the connection and close relation between the two companies, it should be stated that Max Blouse was the President of both corporations. During the war, the American officials of these two corporations were interned in Santo Tomas, and said companies ceased operations. They also lost their respective properties and equipment. After Liberationthe two companies were able to acquire 56 auto buses from the United States Army, and the two companies diveded said equipment equally between themselves,registering the same separately in their respective names. In March, 1947, after the resignation of Martin Olson as Manager of the Laguna Bus, Joseph Benedict, who was then managing the Batangas Transportation, was appointed Manager of both companies. the purpose of the joint management, which was called, "Joint Emergency Operation", was to economize in overhead expenses; At the end of each calendar year, all gross receipts and expenses of both companies were determined and the net profits were divided fifty-fifty, and transferred to the book of accounts of each company, and each company "then prepared its own income tax return from this fifty per centum of the gross receipts and expenditures, assets and liabilities thus transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes thereon separately". Under the theory that the two companies had pooled their resources in the establishment of the Joint Emergency Operation, thereby forming a joint venture, the Collector wrote the bus companies that there was due from them the amount of P422,210.89 as deficiency income tax and compromise for the years 1946 to 1949, inclusive. Since the Collector caused to be restrained, seized, and advertized for sale all the rolling The respondent companies appealed from said assessment of P54,143.54 to the Court of Tax Appeals, but before filing his answer, the Collector set aside his original assessment of P54,143.54 and reassessed the alleged income tax liability

money received and entrusted to it by the tourists, earmarked to pay hotel room charges, were not considered and have never been considered by it as part of its taxable gross receipts for purposes of computing and paying its constractor's tax.Nevertheless, respondent, without deciding the petitioner's written protest, caused the issuance of a warrant of distraint and levy. And later, respondent had petitioner's bank deposits garnished. Petitioner appealed to the Court of Tax Appeals which ruled that the money entrusted to private respondent TSI, earmarked and paid for hotel room charges of tourists, travelers and/or foreign travel agencies does not form part of its gross receipts subject to the 3% independent contractor's tax under the National Internal Revenue Code of 1977.

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of respondents of P148,890.14, claiming that he had later discovered that said companies had been "erroneously credited in the last assessment with 100 per cent of their income taxes paid when they should in fact have been credited with only 75 per cent thereof, That corrected and increased reassessment was embodied in the answer filed by the Collector with the Court of Tax Appeals, which revered the decision. For the foregoing reasons, and in the light of our ruling in the Evangelista vs. Collector of Internal Revenue case,supra, we believe and hold that the Joint Emergency Operation or sole management or joint venture in this case falls under the provisions of section 84 (b) of the Internal Revenue Code, and consequently, it is liable to income tax provided for in section 24 of the same code. The majority, however, holds, not without valid arguments and reasons, that the Government is not bound by the errors committed by its agents and tax collectors ISSUE: Whether or not the Joint Emergency Operation can be considered as separate corporation and hence liable to tax? Whether or not the Collector can still change his assessment issued despite the pendency of appeal before the CTA? in making tax assessments, specially when due to a misinterpretation or application of the tax laws, more so when done in good faith; that the tax laws provide for a prescriptive period within which the tax collectors may make assessments and reassessments in order to collect all the taxes due to the Government, and that if the Collector of Internal Revenue is not allowed to amend RULING: 1. Yesliable to income tax; @. Yes witin prescribed period to avoid multiplicity of suit. Nt liable for surcharges for they were in good faith. In the present case, the two companies contributed money to a common fund to pay the sole general manager, the accounts and office personnel attached to the office of said manager, as well as for the maintenance and operation of a common maintenance and repair shop. the net income was determined and divided equally between them, wholly and utterly disregarding the expenses incurred in the maintenance and operation of each company and of the individual income of said companies. From the standpoint of the income tax law, this procedure and practice of determining the net income of each company was arbitrary and unwarranted, disregarding as it did the real facts in the case. There can be no question that the receipts and gross expenses of two, distinct and separate companies operating different lines and in some cases, different territories, and different equipment and personnel at least in value and in the amount of salaries, can at the end of each year be equal or even approach equality. In view of this, and considering that the Batangas Transportation and the Laguna Bus operated different lines, sometimes in different provinces or territories, under different franchises, with different equipment and personnel, it cannot possibly be true and correct to say that the end of each year, the gross receipts and income in the gross expenses of two companies are exactly the same for purposes of the payment of income tax. What was actually done in this case was that, although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or joint management operated the business affairs of the two companies as though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in the operation. his assessment before the Court of Tax Appeals, and since he may make a subsequent reassessment to collect additional sums within the same subject of his original assessment, provided it is done within the prescriptive period, that would lead to multiplicity of suits which the law does not encourage; that since the Collector of Internal Revenue, in modifying his assessment, may not only increase the same, but may also reduce it, if he finds that he has committed an error against the taxpayer, and may even make refunds of amounts erroneously and illegally collected, the taxpayer is not prejudiced; that the hearing before the Court of Tax Appeals partakes of a trial de novo and the Tax Court is authorized to receive evidence, summon witnesses, and give both parties, the Government and the taxpayer, opportunity to present and argue their sides, so that the true and correct amount of the tax to be collected, may be determined and decided, whether resulting in the increase or reduction of the assessment appealed to it. The result is that the ruling and doctrine now being laid by this Court is, that pending appeal before the Court of Tax Appeals, the Collector of Internal Revenue may still amend his appealed assessment, as he has done in the present case. In view of the foregoing, and with the reversal of the appealed decision of the Court of Tax Appeals, judgment is hereby rendered, holding that the Joint Emergency Operation involved in the present is a corporation within the meaning of section 84 (b) of the Internal Revenue Code, and so is liable to incom tax under section 24 of the code; that pending appeal in the Court of Tax Appeals of an assessment made by the Collector of Internal Revenue, the Collector, pending hearing before said court, may amend his appealed assessment and include the amendment in his answer before the court, and the latter may on the basis of the evidence presented before it, redetermine the assessment; that where the failure to file an income tax return for and in behalf of an entity which is later found to be a corporation within the meaning of section 84 (b) of the Tax Code was due to a RULING: YES. First Issue: Pool Taxable as a Corporation Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the same risk or solidary liability, 14 (2) there was no common fund; 15 (3) the executive board of the pool did not exercise control and management of its funds, unlike the board of directors of a corporation; 16 and (4) the pool or clearing house "was not and could not possibly have engaged in the business of reinsurance from which it could have derived income for itself." 17 The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency tasked with the enforcement of tax law, is accorded much weight and even finality, when there is no showing. that it is patently ISSUE: WON petitioners formed a partnership and hence liable for corporate tax? AFISCO INSRANCE CORP vs CA FACTS: The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors' All Risk insurance policies, the petitioners entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool composed of the petitioners was formed on the same day.On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an "Information Return of Organization Exempt from Income Tax" for the year ending in 1975, on the basis of which it was assessed by the Commissioner of Internal Revenue a deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co. CIR denied the protest. Ruled that the poll of machinery is a partnership. each of the individual partners. reasonable cause, such as an honest belief based on the advice of its attorneys and accountants, a penalty in the form of a surcharge should not be imposed and collected. The respondents are therefore ordered to pay the amount of the reassessment made by the Collector of Internal Revenue before the Tax Court, minus the amount of 25 per cent surcharge. No costs.

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wrong, 18 particularly in this case where the findings and conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the Court of Appeals. In the case before us, the ceding companies entered into a Pool Agreement 29 or an association 30 that would handle all the insurance businesses covered under their quota-share reinsurance treaty 31 and surplus reinsurance treaty 32 with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. 33 This common fund pays for the administration and operation expenses of the pool. 24 (2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies. 35 (3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share "in the business ceded to the pool" and in the "expenses" according to a "Rules of Distribution" annexed to the Pool Agreement. 36 Profit motive or business is, therefore, the primordial reason for the pool's formation. As aptly found by the CTA: . . . The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that of the pool being used in the transaction of business for profit. It is apparent, and petitioners admit, that their association or coaction was indispensable [to] the transaction of the business, . . . If together they have conducted business, profit must have been the object as, indeed, profit was earned. Though the profit was apportioned among the members, this is only a matter of consequence, as it implies that profit actually resulted. 37 The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the facts obtaining therein are not on all fours with the present case. In Pascual, there was no unregistered partnership, but merely a co-ownership which took up only two isolated transactions. 39 The Court of Appeals did not err in applyingEvangelista, which involved a partnership that engaged in a series of transactions spanning more than ten years, as in the case before us.

Facts That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein), received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is Mellon Bank, N.A. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in the footnote of the return that "Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation." That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal Revenue that he was paying the deficiency income assessment for the year 1976 but denying that he had any undeclared income for the year 1977 and requested that the assessment for 1977 be made to await final court decision on the case filed against him for filing an allegedly fraudulent return. . . . 8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance which you were able to dispose, is definitely taxable." . . . Because of a stupid clerical error, $1M instead of 1k was transmitted to Javiers account at the Prudential Bank In her income tax return, Javier stated in a footnote that she received $1M by mistake and therefore not subject to tax BIR, however, imposed a 50% fraud penalty against Javier, the latter appealed to the CTA CTA: it can hardly be said that there was actual and intentional fraud, consisting of deception willfully and deliberately done or resorted to by petitioner (private respondent) in order to induce the Government to give up some legal right, or the latter, due to a false return, was placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities. , because petitioner literally "laid his cards on the table" for respondent to examine. Error or mistake of fact or law is not fraud.

The Supreme Court sustained the ruling of the CTA: It held that: We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or mistake of fact or law" not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally "laid his cards on the table." In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of the money he received, but the records lack a clear showing of fraud committed because he did not conceal the fact that he had received an amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment should be deleted.

Fraudulent return is always considered an evasion of tax, but a false return is not necessarily so It can hardly be said that there was actual and intentional fraud on the part of Javier to induce the government to not assess against her tax liabilities Javier received money from abroad which she presumed to be a gift and spent some of it. That it turned out to be an error or mistake of fact cannot constitute fraud Fraud must be intentional, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right Javier did no such thing, 50% fraud penalty against should be deleted

EVANGELISTA vs. CIR Facts: Petitioners borrowed sum of money from their father and together with their own personal funds they used said money to buy several real properties. They

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

CIR vs JAVIER

Ruling:

then appointed their brother (Simeon) as manager of the said real properties with

6
powers and authority to sell, lease or rent out said properties to third persons. in 1946, they realized a gross rental income of in the sum of P24,786.30, while in 1948, they realized a gross rental income of P17,453.00. On September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949. The letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved from the payment of the taxes in question. CTA denied their petition and subsequent MR and New Trials were denied. Hence this petition. Issue: WON they are subject to corporate income tax? Held: YES. To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly registered general partnerships which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. The essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because: 1. 2. Said common fund was not something they found already in existence. They invested the same, not merely in one transaction, but in a series of Facts: Petitioner has been engaged in the manufacture and sale of articles made of rattan, including rattan round pieces. On April 19, 1954, the Collector of Internal Revenue demanded of the petitioner the amount of P1,313.75, as deficiency sales tax on round rattan pieces, surcharge and penalty thereon, for the period from September 4, 1951 to January 24, 1952. The articles were sold to foreign buyers on F.O.B. terms. On June 29, 1954, the Rattan Art & Decorations, Inc., asked for the cancellation of the demand, claiming that the transaction was considered by it as an export and thus free from sales tax, title to said articles passing only to the buyers upon arrival in the States and after inspection. Because of the letter asking cancellation, a reinvestigation was conducted, and on September 30, 1954, the investigating agent found that the petitioner was not only liable for the P1,313.75, but for P96,706.30. Based upon the report and re-assessment made, the Deputy Collect of Internal Revenue, on June 22, 1955, made a demand for the payment of P87,914.93 within 30 days from receipt of the letter of demand, plus P8,700.00 as penalty. Counsel for petitioner asked for a reconsideration and/or re-investigation, of the assessment. On June 17, 1958, a modified assessment was made, demanding RATTAN ART & DECORATIONS, INC., vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, property acquired. In other words, one cannot but perceive a character of habitually peculiar to business transactions engaged in the purpose of gain. 3. The aforesaid lots were not devoted to residential purposes, or to other the payment of P77,087.28, all told. The motion for reconsideration and/ or readjustment of the assessment was denied and for failure of petitioner to pay the tax liability, a Warrant of Distraint and Levy was sued out. On August 7, 1958, petitioner filed with the Court of Tax Appeals a Petition for Review of the assessment of Deficiency Sales Tax, Claiming the same to be erroneous and/or the liability has already prescribed. The respondent Collector of Internal Revenue interposed the following Special and Affirmative Defenses, to wit: (1) That the total amount of P77,087.28 representing deficiency sales tax for 1949 to 1952, 25% surcharge thereon, fixed tax for 1952 and 1953, and penalty was assessed against petitioner in accordance with law; (2) That the right of the respondent to assess and collect the tax has not yet prescribed CTA ruled: Under Section 196 of the National Internal Revenue Code, manufacturers (other than manufacturers of articles enumerated in Sections 184 and 185) are subject to the sales tax of 7% of the gross selling price of the articles sold. The tax is imposed on sales consummated in the Philippines. The CTA RULED THAT THE SALE WAS CONSUMMATED IN THE PHILIPPINES. FOR THE FOREGOING CONSIDERATIONS, the decision appealed from is hereby modified and petitioner is ordered to pay to the Government the sum of P68,582.23. A motion for reconsideration of the above judgment was presented. In said motion, counsel for petitioner invoked for the first time the amendment of Section 186 of the Internal Revenue Code by Republic Act 894, wherein it was provided that effective June 20, 1953, shipments abroad by manufacturers or producers, irrespective of shipping arrangements affecting the place of transfer of title to the articles shipped, were exempted from sales tax. Under petitioner's contention, the deficiency sales taxes prior to the passage of the law (Act 894) should be condoned, by giving said law a retroactive effect. The CTA denied the motion for reconsideration on November 5, 1960, thus the instant appeal. ISSUES: (1) In not holding that by virtue of Central Bank's Rules and Regulations the herein sales having been dollar transactions were, therefore, foreign sale transactions; (2) In not holding that the herein transactions, made by and between the Rattan Art & Decorations, Inc., and foreign buyers were foreign sales, consummated outside Philippine territory and hence not subject to the domestic sales tax; and (3) In not holding Republic Act 894 as having retroactive effect. Ruling:

personal uses, of petitioners herein. 4. Since August, 1945, the properties have been under the management of

one person, namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business and enterprise operated for profit. 5. The foregoing conditions have existed for more than ten (10) years, or, to

be exact, over fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager. Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate dealers," Wherefore the SC affirmed the CTAs decision.

transactions. The number of lots (24) acquired and transactions undertaken is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the

7
The SUPREME COURT AFFIRMED THE DECISION OF THE CTA: IT HELD THAT: 1ST ISSUE: petitioner has failed to prove that the transactions in question were in fact foreign sales. While it is true that the sale was paid in dollars, this alone did not make it a foreign sale and exempted from the payment of the sales tax. The compliance with Central Bank Rules and Regulations was only necessary for the purpose of controlling the use of foreign exchange. 2ND ISSUE: Under these circumstances, there is no mistaking the fact that when the petitioner has placed the goods aboard the ship, all its rights ended there and the sole authority for the disposition of the shipped merchandise rested upon the foreign buyers. Title was transferred at that very moment. While it is true that payments were made after the boat had left Philippine waters, the delay did not change the fact that the transactions were consummated in the Philippines. It will be noted that the delay was merely caused by the preparation of the papers for submission to the banks against whom the letters of credit had been drawn. Even on the supposition that the contracts in the involved transactions were perfected in the United States, as claimed by the petitioner, still it does not follow that the passing of title should also be in the United States. Transfer of title to the vendee may be made by actual or constructive delivery (Art. 1477, NCC). The delivery of the goods on board the carrying vessels partake of the nature of actual delivery, since from that time, the foreign buyers assumed the risk of loss of the goods and paid the insurance premiums covering them. 3RD ISSUE: The third and last error deals with the contention that Republic Act 894, which exempted the transactions at bar from liability for sales tax, should be given retroactive effect and extend to petitioner the benefits thereof. It must be recalled, however, that this is a tax case, and one who seeks exemption from payment thereof, should justify the exemption with the clearest legislative grant. During the period when petitioner was made liable for the taxes in question, Republic Act 894 was not in existence. While it is true that a law creating new rights may be given retroactive effect, the same can only be made possible if the new right does not prejudice or impair any vested right. The government had already acquired such right in the taxes due from petitioner, when the exempting statute came to life. withholding tax in accordance with Section 24(b)(1) of the Tax Code, as amended by Presidential Decree Nos. 369 and 778. On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, ordering the respondent to grant the refund prayed for by the petitioner corporation. MR was also denied. Issues and Ruling: 1.Whether or Not Wander is the proper party to claim the tax refund. Yes! Wander is, first and foremost, a wholly owned subsidiary of Glaro. As the Philippine counterpart, Wander is the proper entity who should file for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro.2. 2) W /N Switzerland allows as tax credit the deemed paid20% Philippine tax on such dividends. YES. As a matter of fact, Switzerland does not even impose any income tax on dividends received by Swiss corporations domiciled in foreign countries. Section 24(B) (1) of the tax code states that:: Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows: (b) Tax on foreign corporations. 1) Non-resident corporation. A foreign corporation not engaged in trade or business in the Philippines, including a foreign life insurance company not engaged in the life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except interest on foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensations, remuneration for technical services or otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains, profits, and income, and capital gains: ... Provided, still further That on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends as provided in this section CIR vs Wander Philippines Topic: Tax on dividends remitted to foreign corporations Facts: Wander Philippines, a domestic corporation, is a wholly-owned subsidiary of Glaro S.A. Ltd., a Swiss corporation not engaged in trade or business in the Philippines. It had been remitting 35% of its earnings to the Bureau of Internal Revenue when it claimed a tax refund, stating that it was only liable for 15% CIR vs JAVIER Thus, it should be deemed that the condition in Section 24(b)(1) of theTax Code requiring at least 20% tax be credited by the foreign government is fully satisfied. Thus, Wander is entitled to the tax refund. Petition denied.

Facts: That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein), received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is Mellon Bank, N.A. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in the footnote of the return that "Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation." That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal Revenue that he was paying the deficiency income assessment for the year 1976 but denying that he had any undeclared income for the year 1977 and requested that the assessment for 1977 be made to await final court decision on the case filed against him for filing an allegedly fraudulent return. . . . 8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance which you were able to dispose, is definitely taxable." . . . Because of a stupid clerical error, $1M instead of 1k was transmitted to Javiers account at the Prudential Bank In her income tax return, Javier stated in a footnote that she received $1M by mistake and therefore not subject to tax BIR, however, imposed a 50% fraud penalty against Javier, the latter appealed to the CTA CTA: it can hardly be said that there was actual and intentional fraud, consisting of deception willfully and deliberately done or resorted to by petitioner (private respondent) in order to induce the Government to give up some legal right, or the latter, due to a false return, was placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities. , because petitioner literally "laid his cards on the table" for respondent to examine. Error or mistake of fact or law is not fraud. ISSUE: Whether or not the imposition of the 50% fraud penalty was proper Ruling: The Supreme Court sustained the ruling of the CTA: It held that:

8
We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or mistake of fact or law" not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally "laid his cards on the table." In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of the money he received, but the records lack a clear showing of fraud committed because he did not conceal the fact that he had received an amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment should be deleted. The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the stipulation, sets forth the basis of defendants' stand in the following way: The income of Vicente and his wife Susana of the year 1914 was made up of three items: (1) profits made by Vicente in his coal and shipping business; (2) the profits made by Susana in her embroidery business; (3) profits

Vicente and Susana were legally married under the provisions of law concerning conjugal partnerships. On February 1915, Vicente filed sworn declaration on the prescribed form with the CIR, showing, as his total net income for the year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife Susana, hence, the income declared by Vicente should be divided into two equal parts, other half being of Susana. The general question had in the meantime been submitted to the Attorney-General of the Philippines who in an opinion, held with the petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence together with this opinion was forwarded to Washington for a decision by the U.S Treasury Department. The U.S CIR reversed the opinion of the Attorney-General, and thus decided against the claim of Madrigal.

1. Whether Madrigals income should be divided into 2 equal parts in the assessment and computation of his tax 2. WON the fact that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal partnership, has no bearing on income considered as income, and that the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage.

HELD: 1. NO. Susana Paterno, wife of Vicente Madrigal, still has mere an inchoate right in the property of her husband during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Susana has no absolute right to one-half the income of the conjugal partnership. Not being seized

After payment under protest, action was begun by Vicente and his wife Susana in the CFI Manila against CIR and the Deputy CIR for the recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally collected by the defendants from the them.

of a separate estate, she cannot make a separate return in order to receive the benefit of exemption, which could arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely separate from her husbands property, the income cannot be considered the separate income of the wife for purposes of additional tax. Income, as contrasted with capital and property, is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. A tax on income is not tax on property.

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

made by Vicente in a pawnshop company. The sum of these three items is P383,181.97, the gross income of Vicente and Susana for the year 1914. General deductions were claimed and allowed in the sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the normal tax of one percent on the net income there were allowed as specific deductions the following: (1) P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the specific exemption granted to Vicente and Susana, husband and wife. The remainder, P271,614.93 was the sum upon which the normal tax of one per cent was assessed. The normal tax thus arrived at was P2,716.15.

It can hardly be said that there was actual and intentional fraud on the part of Javier to induce the government to not assess against her tax liabilities

Javier received money from abroad which she presumed to be a gift and spent some of it. That it turned out to be an error or mistake of fact cannot constitute fraud

2. The Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax

Fraud must be intentional, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right

Javier did no such thing, 50% fraud penalty against should be deleted The dispute between the plaintiffs and the defendants concerned the additional VICENTE MADRIGAL and his wife, SUSANA vs. JAMES J. RAFFERTY, CIR, and VENANCIO CONCEPCION G.R. No. L-12287 August 7, 1918 ISSUES: FACTS: tax provided for in the Income Tax Law. The trial court in an exhausted decision found in favor of defendants, without costs.

Law must be given effect.

LIMPAN INVESTMENT CORPORATION vs. CIR , ET AL. G.R. No. L-21570 July 26, 1966

FACTS:

9
LIMPAN INVESTMENT CORPORATION (Petitioner), a domestic corporation duly registered is engaged in the business of leasing real properties. Its principal stockholders are the spouses Isabelo P. Lim and Purificacion Ceiza de Lim, who own and control ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is the same Isabelo P. Lim. Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim. Sole witness for corporation was its Sec-Treasurer Solis, who admitted that it had omitted to report the sum of P12,100.00 as rental income in its 1956 tax return and also the sum of P29,350.00 as rental income in its 1957 tax return. However, with respect to the difference between this omitted income (P12,100.00) and the sum (P20,199.00) found by respondent Commissioner as undeclared in 1956, petitioner corporation, through the same witness (Solis), tried to establish that it did not collect or receive the same because, in view of the refusal of some tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco Vda. de Lim, the former owners, on one hand, and the same Isabelo P. Lim, as president of Petitioner corporation duly filed its 1956 and 1957 income tax returns, for which it paid the corresponding taxes therefor in the sums of P657.00 and P2,220.00. Sometime in 1958 and 1959, the examiners of the BIR conducted an investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they discovered and ascertained that petitioner had (1) underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable years and (2) had claimed excessive depreciation of its buildings in the sums of P4,260.00 and P16,336.00 covering the same period. On the basis of these findings, respondent CIR issued its letter-assessment and demand for payment of deficiency income tax plus 5% surcharge and the 1% monthly interest from June 30, 1959 to the date of payment against petitioner corporation. petitioner corporation, on the other, had verbally agreed in 1956 to turn over to petitioner corporation six per cent (6%) of the value of all its properties, computed at P21,630.00, in exchange for whatever rentals the Lims may collect from the tenants. And, with respect to the difference between the admittedly undeclared sum of P29,350.00 and that found by respondent Commissioner as unreported rental income, (P81,690.00) in 1957, the same witness Solis also tried to establish that petitioner corporation did not receive or collect the same but that its president, Isabelo P. Lim, collected part thereof and may have reported the same in his own personal income tax return; that same Isabelo P. Lim collected P13,500.00, which he turned over to petitioner in 1959 only; that a certain tenant (Go Tong deposited in court his rentals (P10,800.00), over which the corporation had no actual or constructive control and which were withdrawn only in 1958; and Corporation filed its petition for review before the Tax Appeals court, questioning the correctness and validity of the above assessment of respondent CIR. It disclaimed having received or collected the amount of P20,199.00, as unreported rental income for 1956, or any part thereof, reasoning out that the previous owners of the leased building have to collect part of the total rentals in 1956 to apply to their payment of rental in the land in the amount of P21,630.00. It also denied having received or collected the amount of P81,690.00, as unreported rental income for 1957, or any part thereof, explaining that part of said amount totalling P31,380.00 was not declared as income in its 1957 tax return because its president, Isabelo P. Lim, who collected and received P13,500.00 from certain tenants, did not turn the same over to petitioner corporation in said year but did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals amounting to P10,800.00, over which the corporation had no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought not be declared as rental income. Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent Commissioner of its buildings in the above assessment are unfair and inaccurate. ISSUES: 1. WON petitioner had an unreported rental income of P20,199.00 for the year 1956. 2. WON petitioner had an unreported rental income of P81,690.00 for the year 1957. FACTS: WISE & CO., INC., ET. AL., vs. MEER, CIR G.R. No. 48231 June 30, 1947 On the other hand, Mingoa, one of the BIR examiners who personally conducted the investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the respondent that he personally interviewed the tenants of petitioner and found that these tenants had been regularly paying their rentals to the collectors of either petitioner or its president, Isabelo P. Lim, but these payments were not declared in the corresponding returns; and that in applying rates of depreciation to petitioner's buildings, he adopted Bulletin "F" of the U.S. Federal Internal Revenue Service. 3. NO. Suffice it to state that this Court has already held that "depreciation is a question of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual fact, and the findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion. that a sub-tenant paid P4,200.00 which ought not be declared as rental income in 1957. INTERESTINGLY, Isabelo P. Lim was not presented as witness to corroborate the above testimony of Vicente G. Solis. 2. YES. Petitioner's denial and explanation of the non-receipt of the remaining unreported income for 1957 is not substantiated by satisfactory corroboration. As above noted, Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein. The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as rental income in said year, since it is income just the same regardless of its source. HELD: 1. YES. Petitioner having admitted, through its own witness Solis,, that it had undeclared more than one-half (1/2) of the amount (P12,100.00 out of P20,199.00) found by the BIR examiners as unreported rental income for the year 1956 and more than one-third (1/3) of the amount (P29,350.00 out of P81,690.00) ascertained by the same examiners as unreported rental income for the year 1957, contrary to its original claim to the revenue authorities, it was incumbent upon it to establish the remainder of its pretensions by clear and convincing evidence, that in the case is lacking. The claim of petitioner is not only unusual but uncorroborated by the alleged transferors, or by any document or unbiased evidence. 3. WON the depreciation in the amount of P20,598.00 claimed by petitioner for the years 1956 and 1957 was excessive.

10
Wise & Co., Inc. et. al were stockholders of Manila Wine Merchants, Ltd., a foreign corporation duly authorized to do business in the Philippines. The Board of Directors of Manila Wine Merchants, Ltd., (HK Co.), recommended to the stockholders that they adopt resolutions necessary to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation, (PH Co.), for the sum of P400,000. The HK Co. made a distribution from its earnings for the year 1937 to its stockholders. As a result of the sale of its business and assets to PH Co., a surplus was realized and the HK Co. distributed this surplus to the shareholders . Philippine income tax had been paid by HK Co. on the said surplus from which the said distributions were made. At a special general meeting of the shareholders of the HK Co., the stockholders by resolution directed that the company be voluntarily liquidated and its capital distributed among the stockholders. The Appellants duly filed Income Tax Returns, on which the defendant, Meer (CIR) made deficiency assessments. Plantiffs paid under written protest and sought recovery. CFI ruled in favor of CIR hence the appeal. 3. This contention is untenable. The HK Co. was at the time of the sale of its business in the Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the Philippines. The HK Co. was incorporated for the purpose of carrying on in the Philippine Islands the business of wine, beer, and ISSUES 1. Appellants contend that the amounts received by them and on which the taxes in question were assessed and collected were ordinary dividends; CIR contends that they were liquidating dividends. 2. WON liquidating dividends taxable income? 3. WON non-resident alien individual appellants contend that if the distributions received by them were to be considered as a sale of their stock to the HK Co., the profit realized by them does not constitute income from Philippine sources and is not subject to Philippine taxes, "since all steps in the carrying out of this so-called sale took place outside the Philippines." In De Koven vs. Alsop (205 Ill., 309; 63 L.R.A., 587), the court said: A dividend is defined as "a corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on demand or RULINGS: 1. The distributions under consideration were not ordinary dividends. Therefore, they are taxable as liquidating dividends. It was stipulated in the deed of sale that the sale and transfer of the HK Co. shall take effect on June 1, 1937. Distribution took place on June 8. They could not consistently deem all the business and assets of the corporation sold as of June 1, 1937, and still say that said corporation, as a going concern, distributed ordinary dividends to them thereafter. at a fixed time. Until the dividend is declared, these corporate profits belong to the corporation, not to the stockholders, and are liable for corporate indebtedness." (Emphasis supplied.) We are fully satisfied from the facts and data furnished here by the parties themselves that the dividends in question were paid to plaintiffs, personally or thru their proxies or agents, in the Philippines. The fact that payment was made in Philippine pesos would strongly corroborate the conclusion that it was made in this country if it had been made in Hongkong or elsewhere abroad, the 2. Income tax law states that Where a corporation, partnership, association, joint-account, or insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, reasonable assumption is that it would have been made in Hongkong dollars or in the currency of such other place abroad. But aside from this, from the moment they were declared and a definite fund specified for their payment (all surplus remaining "after providing for return of capital and various expenses") and all of RESOLUTION ON MOTION FOR RECONSIDERATION spirit merchants and the other objects set out in its memorandum of association. Hence, its earnings, profits, and assets, including those from whose proceeds the distributions in question were made, the major part of which consisted in the purchase price of the business, had been earned and acquired in the Philippines. As such, it is clear that said distributions were income "from Philippine sources." FACTS: These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of RA No. 7496, also commonly known as the Simplified Net Income Taxationn Scheme (SNIT), amending certain provisions of the National Internal Revenue Regulations No. 293, promulgated by public respondents pursuant to said law. Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation. In G.R. No. 109289, it is asserted that the enactment of RA No. 7496 violates the following provisions of the Constitution: Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof. Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall any person be denied the equal protection of the laws. Appellants received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HK Co. which was dissolved and in process of complete liquidation. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the Income Tax Law. When the corporation was dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place. The shareholder who received the consideration for the stock earned that much money as income of his own, which again was properly taxable to him under the Income Tax Law. RUFINO R. TAN vs. RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE, G.R. No. 109289 October 3, 1994 whether individual or corporation, is a taxable income or a deductible loss as the case may be. this was done in the Philippines to all legal intents and purposes they earned those dividends in this country. From the record we deduce that the funds and assets of the Manila Wine Merchants, Ltd., from which those dividends proceeded, were in the Philippines where its business was located. So far as the record discloses, its liquidation was effected in terms of Philippine pesos, indicating that it was made here. And this in turn would lead to the deduction that the funds and assets liquidated were here. Motion denied. So ordered.

x------------------------------------------------------------------------------------------------------------------------------x CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR. vs. RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE G.R. No. 109446 October 3, 1994

11
Petitioner intimates that RA No. 7496 desecrates the constitutional requirement that taxation shall be uniform and equitable in that the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships. Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation. 3. NO. Section 6 of Revenue Regulation No. 2-93 did not alter, but merely ISSUES: 1. WON RA No. 7496 a misnomer or, at least, deficient for being merely entitled, Simplified Net Income Taxation Scheme for the Self -Employed and Professionals Engaged in the Practice of their Profession (Petition in G.R. No. 109289) 2. WON it violate the Constitution for imposing taxes that are not uniform and equitable. And against due process? 3. WON the Secretary of Finance and the BIR Commissioner exceeds their rulemaking authority in applying SNIT to general professional partnerships? The questioned regulation reads: HELD: 1. NO. Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to unite the members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through such publications of its proceedings as are usually made, of the subjects of legislation. The above objectives of the fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual compendium of the law which could not have been the intendment of the constitutional mandate. Sec. 6. General Professional Partnership The general professional partnership (GPP) and the partners confirmed, the above standing rule as now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership. Jose Gatchalian was required to file the corresponding income taxreturn covering the prize won. Defendant-Collector made anassessment against Jose Gatchalian and Co. requesting thepayment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan. Plaintiffs, however through counsel made a request for exemption. It was denied. Gatchalian vs. Collector of Internal Revenue [G.R. No. L-45425, April 29, 1939] Facts: Plaintiffs purchased, in the ordinary course of business, from one of the duly authorized agents of the National Charity Sweepstakes Office one ticket for the sum of two pesos (P2), saidticket was registered in the name of Jose Gatchalian and Company. The ticket won one of the third-prizes in the amount of P50,000. Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners.

comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income.

Plaintiffs failed to pay the amount due, hence a warrant of distraint and levy was issued. Plaintiffs paid under protest a part of the tax and penalties to avoid the effects of the warrant. A request that the balance be paid by plaintiffs in installments was made. This was granted on the condition that a bond be filed.

Plaintiffs failed in their installment payments. Hence a request for execution of the warrant of distraint and levy was made. Plaintiffs paid under protest to avoid the

2. NO. Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment on taxable corporations. We certainly do not view this classification to be arbitrary and inappropriate. Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules.

execution.

A claim for refund was made by the plaintiffs, which was dismissed, hence the appeal.

Issue: Whether the plaintiffs formed a partnership hence liable forincome tax.

Held: Yes. According to the stipulation facts the plaintiffs organized a partnership of a civil nature because each of them put up money to buy a

sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the amount of P50,000. The partnership was not only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office of the Philippines Charity

Sweepstakes, in his capacity as co-partner, as such collection the prize, the office

12
issued the check for P50,000 in favor of Jose Gatchalian and company, and the said partner, in the same capacity, collected the said check. All these circumstances repel the idea that the plaintiffs organized and formed a community of property only. Case was then jointly tried. the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC income COMMISSIONER OF INTERNAL REVENUE, petitioner,vs. BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents. from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA position was that income from transportation is income from services so that the place where services are Facts: BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air Transport Association (IATA). As such it operates air transportation service and sells transportation tickets over the routes of the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines, although during the period covered by the assessments, it maintained a general sales agent in the Philippines Warner Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. Held: 1. Yes. It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of (First Case) Petitioner Commissioner of Internal Revenue assessed BOAC the for deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, for the years 1959 to 1967. BOAC paid this new assessment under protest. BOAC filed a claim for refund which was denied by the CIR. its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a (Second Case) BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-1969 to 1970-1971 and the additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of corporation returns). BOAC requested that the assessment be countermanded and set aside. CIR not only denied the BOAC request for refund in the First Case but also re-issued in the Second Case the deficiency income tax assessment in the second case. local agent, and not one of a temporary character. BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as Issue/s: Whether or not the revenue derived by private respondent British Overseas Airways Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable. Hence, this Petition for Review on certiorari of the Decision of the Tax Court. rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71. prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines. The Tax Code defines "gross income" thus: "Gross income" includes gains, profits, and income derived from salaries, wages or compensation for personal service of whatever kind and in whatever form paid, or from profession, vocations, trades, business, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profile, or gains, profits, and income derived from any source whatever (Sec. 29[3]). Income means "cash received or its equivalent"; it is the amount of money coming to a person within a specific time; it means something distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the elements to

13
constitute it a valid contract, binding upon the parties entering into the relationship. True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets for international transportation. However, that does not render it less an income from sources within the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may be so considered. The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity ... which produced the income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. Issue: Whether or not the stock dividend was an income and therefore taxable. FELICIANO, J., dissenting: The liability of BOAC to Philippine income taxation in respect of such income depends, not on BOAC's status as a "resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but rather on whether or not such income is derived from "source within the Philippines." A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having an office or place of business in the Philippines is subject to Philippine income taxation only in respect of income derived from sources within the Philippines. In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme Court held that Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to income tax only to the extent that it derives income from sources within the Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference that all or any part of its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not In the case of Towne vs. Eisner, income was defined in an incometax law to mean cash or its equivalent, unless it is otherwise specified. It does not mean unrealized mere advance in value does not constitute the "income" specified in the revenue law as "income" of the owner for the year in which the sale of the property was made. Such advance constitutes and can be treated merely as an increase of capital. Held: No. Generally speaking, stock dividends represent undistributed increase in the capital of corporations or firms, jointstock companies, etc., etc., for a particular period. The inventory of the property of the corporation for particular period shows an increase in its capital, so that the stock theretofore issued does not show the real value of the stockholder's interest, and additional stock is issued showing the increase in the actual capital, or property, or assets of the corporation. The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation. There has been no separation or segregation of his interest. All the property or capital of the corporation still belongs to the corporation. There has been no separation of the interest of the stockholder from the general capital of the corporation. The stockholder, by virtue of the stock dividend, has no separate or individual control over the interest represented thereby, further than he had before the stock dividend was issued. He cannot use it for the reason that it is still the property of the corporation and not the property of the individual holder of stock dividend. A certificate of stock represented by the stock dividend is simply a statement of his proportional interest or participation in the capital of the corporation. The receipt of a stock dividend in no way increases the money received of a stockholder nor his cash account at the close of the year. It simply shows that there has been an Fisher vs. Trinidad [G.R. No. L-17518 October 30, 1922] Facts: Philippine American Drug Company was a corporation duly organized and existing under the laws of the Philippine Islands, doing business in the City of Manila. Fisher was a stockholder in said corporation. Said corporation, as result of the business for that year, declared a "stock dividend" and that the proportionate share of said stock divided of Fisher was P24,800. Said the stock dividend for that amount was issued to Fisher. For this reason, Trinidad When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations resulting from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out of the entire investment. The stockholder by virtue of the stock dividendhas in fact received nothing that answers the definition of an "income." In the case of Eisner vs. Macomber (252 U.S., 189), income was defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which produced the income." In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179), Mr. Justice Pitney, said that the term "income" in its natural and obvious sense, imports something distinct from principal or capital and conveying the idea of gain or increase arising from corporate activity. imply that it has no Philippine source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient foreign corporation is a resident of the Philippines. The critical issue, for present purposes, is therefore whether of not BOAC is deriving income from sources within the Philippines. increments in the value of the property. A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished and their interest are not increased. The proportional interest of each shareholder remains the same. In short, the corporation is no poorer and the stockholder is no richer then they were before.

demanded payment of income tax for the stock dividend received by Fisher. Fisher paid under protest the sum of P889.91 as income taxon said stock dividend. Fisher filed an action for the recovery of P889.91. Trinidad demurred to the petition upon the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained and Fisher appealed.

14
increase in the amount of the capital of the corporation during the particular period, which may be due to an increased business or to a natural increase of the value of the capital due to business, economic, or other reasons. We believe that the Legislature, when it provided for an "income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is generally used in its common acceptation; that is that the income means money received, coming to a person or corporation for services, interest, or profit from investments. We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." HELD: YES. P&G Philippines is entitled. MAIN ISSUE: Whether or not P&G Philippines is entitled to the refund or tax credit. P 65.00 -- dividends remittable - 9.75 -- dividend tax withheld at reduced rate P 55.25 -- dividends actually remitted to P&G USA Internal Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only 15%. P 65.0o x 15% -- Reduced dividend tax rate P 9.75 -- reduced dividend tax

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate stockholders of a Philippine Dividends actually remitted by P&G Phil = P 55.25 ---------------------------------- ------------- x P35 = P29.75 Amount of accumulated P 65.00 profits earned

A stock dividend, still being the property of the corporation and not the stockholder, may be reached by an execution against the corporation, and sold as a part of the property of the corporation. In such a case, if all the property of the corporation is sold, then the stockholder certainly could not be charged with having received an income by virtue of the issuance of the stock dividend. Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the stockholders, and are liable for corporate

corporation. This rate goes down to 15% ONLY IF he country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. However, such tax credit for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA shall allow P&G USA a tax credit for taxes deemed paid in the Philippines applicable against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were met.

P35 is the income tax paid. P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax deemed paid by the parent company. Since P29.75 is much higher than P13, Sec 902 US Tax Code complies with the requirements of sec 24 NIRC. (I did not understand why these were divided and multiplied. Point is, requirements were met)

indebtedness. The rule is well established that cash dividend, whether large or small, are regarded as "income" and all stock dividends, as capital or assets

If the ownership of the property represented by a stock dividend is still in the corporation and not in the holder of such stock, then it is difficult to understand how it can be regarded as income to the stockholder and not as a part of the capital or assets of the corporation. If the holder of the stock dividend is required to pay anincome tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. b) 20 percentage points requirement: (computation is as follows) As stock dividends are not "income," the same cannot be considered taxes under that provision of Act No. 2833. For all of the foregoing reasons, SC held that the judgment of the lower court should be REVOKED P 100.00 -- corporate income earned by P&G Phils x 35% -- Philippine income tax rate P 35.00 -- paid by P&G Phil as corporate income tax NOTES: Breakdown: a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation (owning 10% of remitting foreign corporation) shall be deemed to have paid a proportionate extent of taxes paid by such foreign corporation upon its remittance of dividends to domestic corporation.

Reason behind the law: Since the US Congress desires to avoid or reduce double taxation of the same income stream, it allows a tax credit of both (i) the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Philippines but deemed paid by P&G USA.

Moreover, under the Philippines-United States Convention With Respect to Taxes on Income, the Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of he gross amount of dividends paid to US parent corporations, and established a treaty obligation on the part of the

P 100.00 CIR vs PROCTER FACTS: Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National P 65. 00 x 35% -- Regular Philippine dividend tax rate P 22.75 -- regular dividend tax - 35.00 65. 00 -- available for remittance

United States that it shall allow to a US parent corporation receiving dividends from its Philippine subsidiary a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary].

Note: The NIRC does not require that the US tax law deem the parent corporation to have paid the 20 percentage points of dividend tax waived by the Philippines. It only requires that the US shall allow P&G-USA a deemed paid tax credit in an

15
amount equivalent to the 20 percentage points waived by the Philippines. Section 24(b)(1) does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable. with business in the course of which an income is realized. An activity may consist of a single act; while business implies continuity of transactions. An income may be earned by a corporation in the Philippines although such corporation conducts all its business abroad. Furthermore, "income" refers to the flow of wealth. Such Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation by allowing the investor additional tax credits which would be applicable against the tax payable to such home country. Accordingly Section 24(b)(1) of the NIRC requires the home or domiciliary country to give the investor corporation a deemed paid tax credit at least equal in amount to the 20 percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor. Marubeni vs. CIR FACTS: Marubeni corp. a japanese corp s licensed to engage in business under Phil. Laws and having a branch office located at Intramuros invested to Atlantic Gulf Pacific Co. of Manila (AG&P) , a domestic corp. AG&P acts as withholding agent of Marubeni, they remit dividends to Marubeni corp's main office in japan with income tax already imposed. Dividends remitted by AG&P were deducted, 10% tax. on the last 3 quarters of Howden vs. CIR 1981, it was subject to 15% branch profit remmittance tax. Marubeni questioned the additional 15% imposition. They filed a claim for refund to the BIR but was FACTS: Common Wealth insurance corp, a domestic corp, enggages in reinsurance contracts with several birtish companies. Alexander Howden & Co., Ltd., a British corporation not engaged in business in this country, represented the aforesaid British insurance companies. the contracts were ceded to Common Wealth Insurance Corp. The reinsurance contracts were prepared and signed by the foreign reinsurers in England and sent to Manila where Commonwealth Insurance Co. signed them. Howden filed a claim for refund.Appellant raises the questions (1) Are portions of premiums earned from insurances locally underwritten by a domestic corporation, ceded to and received by non- resident foreign reinsurance companies, thru a non-resident foreign insurance broker, pursuant to reinsurance contracts signed by the reinsurers abroad but signed by the domestic corporation in the Philippines, subject to income tax or not? (2) If subject thereto, may or may not the income tax on reinsurance premiums be withheld pursuant to Sections 53 and 54 of the National Internal Revenue Code? HELD : Yes, Marubeni is a single corporate entity. tax imposed on dividends received by it's main office cannot be separate from tax imposed on it's branch in Intramuros. Also, it was found out that dividends were neither subject to the 15% profit remittance tax nor to the 10% dividend tax, the recipient being a nonresident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25% rate imposed by the Phil-Japan Tax Convention . To simply add the two taxes to arrive at the 25% tax rate is to disregard a basic rule in taxation that each tax has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which the 15% branch profit remittance tax is imposed is the profit ISSUE:Whether or not petitioners foreign corporation will be subject to income and witholding tax? Gutierrez, Morales vs. CIR actually remitted abroad. Marubeni is therefore entitled for refund. HELD: No, The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. They shared in the gross profits as co-owners and paid their capital gains taxes on their net, these alone is not a sufficient basis of a formation of a partnership. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes. They are merely coHELD: Yes, The source of an income is the property, activity or service that produced the income. Appellants should not confuse activity that creates income FACTS: Maria Morales owns a agricultural land located beside the Clark Air Base. One day, by virtue of the Phil-US military agreement, US requested the extension owners of the land that they bought and sold. The petition should therefore be granted exempting petitionenrs from corporate income tax. ISSUE: Whether or not Petitioners are subject to corporate income tax? ISSUE: Whether or not Marubeni, a foreign corp. is entitled for refund.? denied. BIR's contention is that the 10% and 15% falls under the 25% tax to be imposed on foreign corporation in accordance to the Phil, Japan tax treaty. PASCUAL vs. CIR FACTS: Mr. Pascual and Mr. Dragon bought several parcel of lands and eventually sold them, they earned income for these transactions and they even availed of tax amnesties,. One day, the BIR commissioner assessed their tax, there was a deficiency for non payment of corporate tax, the commissioner alleged that both Dragon and Pascual are members of their partnership" ""unregistered flow, in the instant case, proceeded from the Philippines. Such income enjoyed the protection of the Philippine government. As wealth flowing from within the taxing jurisdiction of the Philippines and in consideration for protection accorded it by the Philippines, said income should properly share the burden of maintaining the government. HELD: Yes, Expropriation and payment of just compensation is in fact a sale. Acquisition by the Government through the exercise of the power of eminent domain, said properties being justly compensated, is embraced within the meaning of the term "sale or disposition of property," and the proceeds derived therefrom is subject to income tax as capital gain pursuant to the provisions of Section of the Tax Code. ISSUE: Whether or not the land expropriated by the Government is subject to income tax? of the air base, Phil Gov. complied by expropriating nearby lands including that of Maria's land. Maria was compensated for her land, after expropriation proceeding. Also, a income tax was imposed on the expropriation of land, deducting income tax from the compensation. Petitioners Morales and Gutierrez filed a opposition to the imposition.

and is therefore liable to pay corporate tax which was distinct from

their individual income tax.

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