CIR v Batangas Tayabas Bus Co.

October 1958
Montemayor, J.
DIGEST BY Cocoy Licaros
TOPIC and Provisions: Taxpayers Corporations
Doctrine: 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.
Facts:

To economize their overhead expenses and to recoup losses

incurred during the war, BTC and LTBC entered into a joint
management contract called Joint Emergency Operation which
allowed the two companies to save on salaries for one manager,
one assistance manager, fifteen inspectors, special agents and an
entire office worth of clerical workers.

The savings for one year amounted to around 200k, or about 100k
for each company.

At the end of each calendar year, all gross receipts and expenses
by both were determined and the net profits were divided 50-50,
and then reflected on the books of account for each company.
o The two companies still prepared separate income tax
returns, reflective of this 50-50 share in net profits

The Collector assessed both bus companies the amount of 422,210

as deficiency income tax for the years 1946-1949, operating under
the theory that their joint management contract was a joint
venture.
o As a joint venture, the two companies were a single
corporation, distinct from their individual identities, for the
purposes of taxation. (Sec. 24, NIRC)

The companies appealed this assessment, claiming that they were

not a corporation pursuant to their joint emergency operations. The
CTA granted their appeal. Hence this case by the Collector.
Issue: WON the two companies are liable to pay income tax as a
corporation, pursuant to their joint emergency operation?
Held: YES, the joint emergency operation involved the creation of a
corporation within the meaning of the NIRC, so as to make them liable as
such for income taxes.
Dispositive: CTA reversed.
Ratio:

Eufemia Evangelista et al. v CIR when the tax code includes

partnerships among the entities subject to the tax on corporations,
it must refer to organizations which are not necessarily

partnerships in the technical sense of the term, and that

furthermore, said law defined the term "corporation" as including
partnerships no matter how created or organized, thereby
indicating 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"; that besides,
said section 84 (b) provides that the term "corporation" includes
"joint accounts" (cuentas en participacion) and "associations",
none of which has a legal personality independent of that of its
members.
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.
o 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.

Ona v. CIR
May 25, 1972
Barredo
Digest by PS Magno

Topic : Taxpayers: Corporations

Facts:

Julia Buales died on March 23, 1944, leaving as heirs her surviving
spouse, Lorenzo T. Oa and her five children. In 1948, a civil case
was instituted in the CFI of Manila for the settlement of her estate.
Later, Lorenzo T. Oa the surviving spouse was appointed
administrator of the estate.

A project of partition was submitted and approved. Lorenzo Ona

was also appointed as guardian for his three minor children/heirs.

The project of partition shows that the heirs have undivided onehalf (1/2) interest in:
o ten parcels of land with a total assessed value of P87,860,
o six houses with a total assessed value of P17,590.00
o an undetermined amount to be collected from the War
Damage Commission.

Later, the heirs received from said Commission the amount of

P50,000, more or less. This amount was not divided among them
but was used in the rehabilitation of properties owned by them in
common. Of the ten parcels of land aforementioned, two were
acquired after the death of the decedent with money borrowed
from the Philippine Trust Company in the amount of P72,173.

The estate also shares equally with Lorenzo T. Oa in the obligation

of P94,973, consisting of loans contracted by the latter.

The properties were not divided and remained under the

management of Lorenzo T. Oa who used said properties in
business by leasing or selling them and investing the
income derived therefrom and the proceeds from the sales
thereof in real properties and securities. As a result,
petitioners' properties and investments gradually increased from
P105,450.00 in 1949 to P480,005.20 in 1956.
o From said investments and properties, the heirs derived
such incomes as profits from installment sales of
subdivided lots, profits from sales of stocks,
dividends, rentals and interests. The said incomes are
recorded in the books of account kept by Lorenzo T. Oa
where the corresponding shares of the petitioners in the
net income for the year are also known.

Every year, the heirs returned for [individual] income tax purposes
their shares in the net income derived from said properties and
securities and/or from transactions involving them. However, the
heirs did not actually receive their shares in the yearly
income. The income was always left in the hands of Lorenzo
T. Oa who, as heretofore pointed out, invested them in real
properties and securities.

Commissioner of Internal Revenue decided that the heirs formed

an unregistered partnership and therefore, subject to the
corporate income tax, pursuant to Section 24, in relation to
Section 84(b), of the Tax Code. Accordingly, he assessed
against the heirs the amounts of P8,092.00 and P13,899.00 as
corporate income taxes for 1955 and 1956, respectively1. The
heirs asked for reconsideration but this was denied.
CTA affirmed.

Issue: WoN the heirs should be considered as co-owners of the properties

inherited by them from the deceased Julia Buales and the profits derived
from transactions involving the same, or, must they be deemed to have
formed an unregistered partnership subject to tax under Sections 24 and
84(b) of the National Internal Revenue Code.
Held: The heirs formed an UNREGISTERED PARTNERSHIP (which is
considered a corporation under the NIRC). Thus they are subject
to corporate income tax.
Dispositive: CTA decision AFFIRMED.
Ratio:

The heirs formed an UNREGISTERED PARTNERSHIP (which is

considered a corporation under the NIRC). Thus they are
subject to corporate income tax.

DOCTRINE: For tax purposes, the co-ownership of inherited

properties is automatically converted into an unregistered
partnership the moment said common properties and/or the
incomes derived therefrom are used as a common fund
with intent to produce profits for the heirs in proportion to
their respective shares in the inheritance as determined in a
project partition either duly executed in an extrajudicial settlement
or approved by the court in the corresponding testate or intestate
proceeding.

The properties and investments increased steadily each year under

the management of Ona. And all these became possible because,
admittedly, the heirs never actually received any share of the
income or profits from Lorenzo T. Oa and instead, they allowed
him to continue using said shares as part of the common fund for
their ventures, even as they paid the corresponding income taxes
on the basis of their respective shares of the profits of their
common business as reported by the said Lorenzo T. Oa.

The heirs did not, contrary to their contention, merely limit

themselves to holding the properties inherited by them. Indeed, it
is admitted that during the material years herein involved, some
of the said properties were sold at considerable profit, and

1 Income tax due + 25% surcharge + compromise for non-filing. Later, the
25% surcharge was deleted. Compromise for non filing is compromise in
lieu of the criminal liability for failure of petitioners to file the corporate
income tax returns for said years.

that with said profit, petitioners engaged, thru Lorenzo T. Oa, in

the purchase and sale of corporate securities. It is likewise
admitted that all the profits from these ventures were divided
among the heirs proportionately in accordance with their
respective shares in the inheritance. In these circumstances, from
the moment the heirs allowed not only the incomes from their
respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oa as a
common fund in undertaking several transactions or in business,
with the intention of deriving profit to be shared by them
proportionally, such act was tantamount to actually
contributing such incomes to a common fund and, in effect,
they thereby formed an unregistered partnership.
o Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to
all the heirs, obviously, without them becoming thereby
unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the
inheritance is actually and physically distributed among
the heirs, for it is easily conceivable that after knowing
their respective shares in the partition, they might
decide to continue holding said shares under the
common management of the administrator or
executor or of anyone chosen by them and engage in
business on that basis.
Article 1769, paragraph (3)2, of the Civil Code distinguished from
Sec. 24 and 84(b) of the NIRC accdg to CJ. Concepcion in
Evangelista case:
o 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 confirmity with the usual requirements
of the law on partnerships, in order that one could
be deemed constituted for purposes of the tax on

2 The sharing of gross returns does not of itself establish a partnership,

whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived

corporation. Again, pursuant to said section 84(b),the

term "corporation" includes, among others, "joint
accounts" and "associations", none of which has a legal
personality of its own, independent of that of its
members.
American law provides its own concept of a partnership.
Under the term "partnership" it includes not only a
partnership as known in common law but, as well, a
syndicate,
group,
pool, joint
venture,
or
other
unincorporated organization which carries on any business,
financial operation, or venture, and which is not, within the
meaning of the Code, a trust, estate, or a corporation
For purposes of the tax on corporations, our National
Internal Revenue Code includes these partnerships with
the exception only of duly registered general copartnerships within the purview of the term
"corporation."

OTHER CONTENTIONS:

Heirs claim that the income from the inherited properties should
not be included in the tax assessment. Only income from
properties subsequently acquired should be included.
o WRONG. It is admitted that the inherited properties and the
income derived therefrom were used in the business of
buying and selling other real properties and corporate
securities. Accordingly, the partnership income must
include not only the income derived from the purchase and
sale of other properties but also the income of the
inherited properties.
o the income derived from inherited properties may be
considered as individual income of the respective heirs
only so long as the inheritance or estate is not distributed
or, at least, partitioned, but the moment their respective
known shares are used as part of the common assets of
the heirs to be used in making profits, it is but proper that
the income of such shares should be considered as the part
of the taxable income of an unregistered partnership.

Heirs claim that they already paid their individual income tax. The
amount they paid must be deducted from the corporate tax
assessment.
o WRONG. Its the other way around. The corporate tax
assessed would be deducted from the individual income
tax. Therefore, the heirs overpaid. But the individual
income tax is not in issue in this case so the Court did not
decide on this matter.
o Heirs are worried that if the income tax they paid is not
credited, an action to recover the same would already have
prescribed. SC says this is a case of a taxpayer who has
paid the wrong tax, assuming that the failure to pay the
corporate taxes in question was not deliberate. Of course,

such taxpayer has the right to be reimbursed what he has

erroneously paid. However, the period to ask for
reimbursement has already lapsed.

Obillos (Jose, Sarah, Romeo, Remedios, all surnamed Obillos) v.

CIR and CTA
October 29, 1985
Aquino, J.
Digest by: Kara Marcelo
Topic: Taxpayers; Corporations; Partnership, Co-ownership, GPP
FACTS:

March 2, 1973: Jose Obillos, Sr. completed payment to Ortigas &

Co., Ltd. on two lots in Greenhills, San Juan, Rizal.

He transferred his rights to his children (Ps) for them to build their
residences. Company sold the 2 lots to Ps for P178,708.23.

1974: Ps resold them to Walled City Securities Corp. and Olga Cruz
Canda for P313,050. From the sale, they earned P134,341.88
(P33,584 for each of them) as profit which they treated as capital
gain and paid an income tax on thereof or P16,792.

April 1980 (one day before expiration of 5-yr prescriptive period):

CIR assessed corporate income tax on the total profit (P37,018
corporate income tax, and other fees). CIR also asked Ps to pay
deficiency income taxes since he treated the share of the profits of
each of them not as a mere capital gain (of which is taxable) but
as taxable in full.

CIR acted on the theory that Ps had formed an unregistered

partnership of joint venture within the meaning of Secs. 24(a) and
84(b) of the Tax Code.

As a result, Ps are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in
addition to the tax on capital gains already paid by them.

CTA: 2 judges for Ps; one judge dissented.

Hence, present appeal.

ISSUE:
WON CIR was correct in considering Ps as having formed a partnership
HELD:
NO!
DISPOSITIVE:
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The
assessments are cancelled. No costs.
RATIO:
It is error to consider the petitioners as having formed a partnership under
Art. 1767, CC simply because they allegedly contributed P178,708.12 to
buy the two lots, resold the same and divided the profit among
themselves.

To regard the petitioners as having formed a taxable unregistered

partnership would result in oppressive taxation and confirm the dictum
that the power to tax involves the power to destroy. That eventuality
should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were coowners pure and simple. To consider them as partners would obliterate the
distinction between a co-ownership and a partnership. The petitioners were
not engaged in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If
later on they found it not feasible to build their residences on the lots
because of the high cost of construction, then they had no choice but to
resell the same to dissolve the co-ownership. The division of the profit was
merely incidental to the dissolution of the co-ownership which was in the
nature of things a temporary state. It had to be terminated sooner or later.

Art. 1769(3), CC provides that "the sharing of gross returns does not of
itself establish a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property from which the
returns are derived". There must be an unmistakable intention to form a
partnership or joint venture.

Florencio Reyes and Angel Reyes v. Commissioner of Internal

Revenue and CTA
July 29, 1968
J. Fernando
Ortiz
Topic: Partnership; Co-ownership; GPP

Issue narrows down to their intent in acting as they did.

Common fund being created purposely not something already
found in existence, the investment of the same not merely in one
transaction but in a series of transactions
"Although, taken singly, they might not suffice to establish the
intent necessary to constitute a partnership, the collective effect of these
circumstances is such as to leave no room for doubt on the existence of
said intent in petitioners herein."

Facts:
- Ps, father and son, purchased a lot and building, known as the Gibbs
Building, situated at 671 Dasmarias Street, Manila, for PhP 835k, of which
they paid the sum of PhP 375k leaving a balance of PhP 460k, representing
the mortgage obligation of the vendors with the China Banking
Corporation, which mortgage obligations were assumed by the vendees
Initial payment of PhP 375k was shared equally by the Ps
At the time of the purchase, building was leased to various
tenants, whose rights under the lease contracts with the original owners,
the purchasers, petitioners herein, agreed to respect.
The administration of the building was entrusted to an
administrator who collected the rents; kept its books and records and
rendered statements of accounts to the owners; negotiated leases; made
necessary repairs and disbursed payments, whenever necessary, after
approval by the owners; and performed such other functions necessary for
the conservation and preservation of the building.
Petitioners divided equally the income of operation and
maintenance. The gross income from rentals of the building amounted to
about P90,000.00 annually.
- Ps were assessed by R Commissioner of Internal Revenue the sum of
P46,647.00 as income tax, surcharge and compromise for the years
1951 to 1954, an assessment subsequently reduced to P37,528.00.
Another assessment was made against Ps, this time for back income
taxes plus surcharge and compromise in the total sum of P25,973.75,
covering the years 1955 and 1956.
- CTA: Tax liability for the years 1951 to 1954 was reduced to
P37,128.00 and for the years 1955 and 1956, to P20,619.00 as
income tax due "from the partnership formed" by petitioners.
Reduction was due to the elimination of surcharge, the failure to file the
income tax return being accepted as due to petitioners honest belief that
no such liability was incurred as well as the compromise penalties for such
failure to file
- CTA cited Evangelista v. Collector, wherein the court ruled that the term
corporation in Sec. 24, NIRC includes partnerships
Essential elements: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties
Case involved real estate transactions for monetary gain
and then divide the same among themselves

Issue: WON Ps in this case are partners in a partnership, as contemplated

by the NIRC
Held: YES
Dispositive: WHEREFORE, the decision of the respondent Court of Tax
Appeals ordering petitioners "to pay the sums of P37,128.00 as income tax
due from the partnership formed by herein petitioners for the years 1951
to 1954 and P20,619.00 for the years 1955 and 1956 within thirty days
from the date this decision becomes final, plus the corresponding
surcharge and interest in case of delinquency," is affirmed. With costs
against petitioners.
Ratio:
- P: it was only for a single transaction. In the Evangelista case, there were
a series of transactions. Evangelista should not apply to us. We should not
be considered partners, thus no tax
Court: Although there is only a single transaction. There is still a
common fund created for the division of income after deducting expenses
of operation and maintenance
- 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
- Section 84(b) of said Code, "the term corporation includes partnerships,
no matter how created or organized."
Other inclusions in the corporation: includes, among others,
"joint accounts, (cuentas en participacion)" and "associations", none of
which has a legal personality of its own, independent of that of its
members
Legal personality = not a condition precedent to the existence of
the partnerships therein referred to
- 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.

JOSE GATCHALIAN, ET AL., plaintiffs-appellants, vs. THE

COLLECTOR OF INTERNAL REVENUE, defendant-appellee
April 29, 1939
Imperial, J
Digest by: Jonathan Pabillore
Topic and Provisions: Taxpayers; Corporations
Facts:

Plaintiff are all residents of the municipality of Pulilan, Bulacan, and

that defendant is the Collector of Internal Revenue of the
Philippines.

They (15 all in all) contributed money in varying amounts to buy a

sweepstakes ticket worth P2.00.

The said ticket was registered in the name of Jose Gatchalian and
Company.

The above-mentioned ticket won one of the third prizes in the

amount of P50,000 and that the corresponding check covering the
above-mentioned prize of P50,000 was drawn by the National
Charity Sweepstakes Office in favor of Jose Gatchalian & Company
against the Philippine National Bank, which check was cashed
during the latter part of December, 1934 by Jose Gatchalian &
Company. (Swerte ng mga gago. Gawin rin natin toh, baka Manalo
tayo sa grand prize. Free photocopies for life at magtayo tayo ng
Block-C library, na may complete and updated SCRA with
commentaries, codals, at subscription sa Playb, este, Harvard Law
Review).

On January 8, 1935, the defendant made an assessment against

Jose Gatchalian & Company requesting the payment of the sum of
P1,499.94.

The plaintiffs paid in protest.

Issue: WON the plaintiffs are exempted from.
Held: NO, partnerships are liable for income tax under the law.
Dispositive: In view of the foregoing, the appealed decision is affirmed,
with the costs of this instance to the plaintiffs appellants. So ordered.
Ratio:
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually
upon the total net income received in the preceding calendar year from all
sources by every corporation, joint-stock company, partnership (section
10 of Act No. 2833)
There is no doubt that if the plaintiffs merely formed a community of
property the latter is exempt from the payment of income tax under the
law. But 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 (article 1665,
Civil Code). The partnership was not only formed, but upon the
organization thereof and the winning of the prize, Jose Gatchalian
personally appeared in the office of the Philippines Charity Sweepstakes, in
his capacity as co-partner, as such collection the prize, the office issued
the check for P50,000 in favor of Jose Gatchalian and company, and the
said partner, in the same capacity, collected the said check. All these
circumstances repel the idea that the plaintiffs organized and formed a
community of property only.
Having organized and constituted a partnership of a civil nature, the said
entity is the one bound to pay the income tax which the defendant
collected under the aforesaid section 10 (a) of Act No. 2833, as amended
by section 2 of Act No. 3761. There is no merit in plaintiff's contention that
the tax should be prorated among them and paid individually, resulting in
their exemption from the tax.

Eufemia, Manuela and Francisca Evangelista v. CIR and the CTA

October 15, 1957
Concepcion
Digest by Arrow Pabiona

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

Topic: Taxpayers; Corporations

The said assessments were delivered to petitioners, December 1954. They

subsequently filed a case with the Court of Tax Appeals.

Facts:
Petition filed by for a review of the decision of the CTA, making petitioners
liable for income, real estate dealer and residence tax for 1945-1949 at
6,8678.34
Petitioners borrowed from their father the sum of P59,1400.00 which
amount together with their personal monies was used by them for the
purpose of buying real properties. On February 2, 1943, they bought from
Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. m. including
improvements thereon from the sum of P100,000.00; this property has an
assessed value of P57,517.00 as of 1948. On April 3, 1944 they purchased
from Mrs. Josefa Oppus 21 parcels of land with an aggregate area of
3,718.40 sq. m. including improvements thereon for P130,000.00; this
property has an assessed value of P82,255.00 as of 1948. On April 28,
1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq.
m. including improvements thereon for P108,825.00. This property has an
assessed value of P4,983.00 as of 1948; on the same day they bought form
Mrs. Valentina Afable a lot of 8,371 sq. m. including improvements thereon
for P237,234.34. This property has an assessed value of P59,140.00 as of
1948;
In a document dated August 16, 1945, they appointed their brother Simeon
Evangelista to 'manage their properties with full power to lease; to collect
and receive rents; to issue receipts therefor; in default of such payment, to
bring suits against the defaulting tenants; to sign all letters, contracts, etc.,
for and in their behalf, and to endorse and deposit all notes and checks for
them;
After having bought the above-mentioned real properties the petitioners
had the same rented or leases to various tenants; from the month of
March, 1945 up to an including December, 1945, the total amount
collected as rents on their real properties was P9,599.00 while the
expenses amounted to P3,650.00 thereby leaving them a net rental
income of P5,948.33
In 1946, they realized a gross rental income of in the sum of P24,786.30,
out of which amount was deducted in the sum of P16,288.27 for expenses
thereby leaving them a net rental income of P7,498.13. In1948, they
realized a gross rental income of P17,453.00 out of the which amount was
deducted the sum of P4,837.65 as expenses, thereby leaving them a net
rental income of P12,615.35.

Issue: WON petitioners are subject to the tax on corporations

provided for in section 24 of Commonwealth Act. No. 466,
otherwise known as the National Internal Revenue Code, as well
as to the residence tax for corporations and the real estate
dealers fixed tax
Held: YES
Dispositive: Wherefore, the appealed decision of the Court of Tax
appeals is hereby affirmed with costs against the petitioners herein. It is so
ordered.
Ratio:
With respect to the tax on corporations, the issue hinges on the meaning of
the terms "corporation" and "partnership," as used in section 24 and 84 of
said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.There shall be levied,
assessed, collected, and paid annually upon the total net income
received in the preceding taxable year from all sources by every
corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including
duly registered general co-partnerships (compaias colectivas), a
tax upon such income equal to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no
matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations or insurance
companies, but does not include duly registered general
copartnerships. (compaias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind
themselves to contribute money, properly, or industry to a
common fund, with the intention of dividing the profits among
themselves.
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: They jointly borrowed a substantial portion thereof in order to
establish said common fund, invested the same, not merely not merely in
one transaction, but in a series of transactions, the aforesaid lots were not
devoted to residential purposes, or to other personal uses, of petitioners
herein, the affairs relative to said properties have been handled as if the
same belonged to a corporation or business and enterprise operated for
profit with the appointment of an agent,
As defined in section 84 (b) of the Internal Revenue 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. Partnership,
as has been defined in the civil code refers to two or more persons who
bind themselves to contribute money, properly, or industry to a common
fund, with the intention of dividing the profits among themselves. Thus,
petitioners, being engaged in the real estate transactions for monetary
gain and dividing the same among themselves constitute a partnership so
far as the Code is concerned and are subject to income tax for
corporation.
Since Sec 2 of the Code in defining corporations also includes joint-stock
company, partnership, joint account, association or insurance company, no
matter how created or organized, it follows that petitioners, regardless of
how their partnership was created is also subject to the residence tax for
corporations.

Collector of Internal Revenue v Batangas Transportation Co. and

Laguna Tayabas Bus Co.
January 6, 1958
Montemayor, J.
Digest by: P Plaza (Thanks Mai & Aby)
DOCTRINE:
The 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. The Joint Emergency
Operation falls under the provisions of Section 84 (b) the NIRC and is liable
for income tax under Section 24.

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
o Each company now has a fully paid up capital of Pl,000,000.
Before the last war, each company maintained separate head
offices

Max Blouse was the President of both corporations and owned

about 30% of the stock in each company
During the war, the American officials of these two corporations ceased
operations and they lost their respective properties and equipment
After Liberation, the two companies were able to acquire 56 auto buses
and the two companies divided the equipment equally
o The head office of the Laguna Bus in San Pablo City was made
the main office of both corporations, both of which were placed
under common management
o This "Joint Emergency Operation", was to economize in
overhead expenses. The joint fund was used for common
operation and maintenance, to pay all the salaries of the
personnel of both companies, such as drivers, conductors,
helpers and mechanics, and at the end of each year, the
gross income or receipts of both companies were merged,
and after deducting therefrom the gross expenses of the
two companies, also merged, 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.
The Collector believed that they formed a joint venture since they
pooled their resources in the establishment of the Joint Emergency
Operation, thus he wrote the bus companies that there was due
from them the amount of 422k as deficiency income tax and
compromise for the years 1946 to 1949, inclusive. He later changed
this the amount demanded to 54k after crediting overpayment.
o The Corps. Appealed to the CTA; but before filing his answer,
the Collector set aside his original assessment of
P54,143.54 and reassessed the alleged income tax liability
of respondents of P148,890.14, claiming that he had later
discovered that said companies had been "erroneously
credited in the last assessment with 100 per cent of their
income taxes paid when they should in fact have been credited
with only 75 per cent thereof, since under Section 24 of the
Tax Code dividends received by them from the Joint
Operation as a domestic corporation are returnable to
the extent of 25 %
The theory of the Collector is the Joint Emergency Operation
was a corporation distinct from the two respondent companies,
as defined in section 84 (b), and so liable to income tax under section
24, both of the National Internal Revenue Code
CTA rejected this argument; also held that the Collector cannot change
his assessment after CTA has acquired jurisdiction
o

ISSUES AND HELD:

W/N the Joint Emergency Operation organized and operated

by them is a corporation within the meaning of Section 84
of the Revised Internal Revenue Code. YES

W/N the Collector can change his assessment after the taxpayer
has appealed to the CTA, w/c acquired jurisdiction. YES

DISPOSITIVE: 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 income tax under section 24 of the code;
that pending appeal in the Court of Tax Appeals of an assessment made by
the Collector of Internal Revenue, the Collector, pending hearing before
said court, may amend his appealed assessment and include the
amendment in his answer before the court, and the latter may on the basis
of the evidence presented before it, redetermine the assessment; that
where the failure to file an income tax return for and in behalf of an entity
which is later found to be a corporation within the meaning of section 84
(b) of the Tax Code was due to a reasonable cause, such as an honest
belief based on the advice of its attorneys and accountants, a penalty in
the form of a surcharge should not be imposed and collected. The
respondents are therefore ordered to pay the amount of the reassessment
made by the Collector of Internal Revenue before the Tax Court, minus the
amount of 25 per cent surcharge. No costs.
RATIO :
POINT #1: The Joint Emergency Operation is liable for tax as a corporation

The question has already been passed upon in Evangelista v CIR:

when the Tax Code includes "partnerships" among the entities
subject to the tax on corporations, it must refer to
organizations which are not necessarily partnerships in the
technical sense of the term, and that furthermore, said law
defined the term "corporation" as including partnerships no
matter how created or organized, thereby indicating 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"

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 maintenance, a common repair shop, all the salaries
of the personnel of both companies
o 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
o 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

POINT #2: Pending appeal before the Court of Tax Appeals, the Collector
of Internal Revenue may still amend his appealed assessment
o the Government is not bound by the errors committed by its
agents and tax collectors in making tax assessments, specially
when due to a misinterpretation or application of the tax laws,
more so when done in good faith
POINT #3: The 2 corps. Are not liable for the 25% surcharge (included
in the P148,890.14) due to their failure to file an income tax return for the
Joint Emergency Operation
o the failure to file an income tax return for the Joint Emergency
Operation was due to a reasonable cause, the honest belief of
respondent companies that there was no such corporation
within the meaning of the Tax Code, and that their separate
income tax return was sufficient compliance with the law

Tan v. CIR (Ramon del Rosario, SoF and Jose Ong, CIR)
October 3, 1994
Vitug, J.
Digest by Ron Reodica

Topic: Corporation
Facts
-

Petitioners claim to be taxpayers adversely affected by the

continued implementation of the amendatory legislation for the
NIRC (RA 7496 Simplified Net Income Taxation Scheme SNIT)
o GR 109289: Petitioners claim that it contravenes Art VI
S 26(1) and S 28(1) of the Constitution. Also violates
the due process clause/EPC. Petitioner intimates that
Republic Act 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.
o GR 109446: Petitioners claim that public respondents
have exceeded their rule-making authority.

Issue: WON RA 7496 is Constitutional

Held: Yes. It is Constitutional.
Dispositive: WHEREFORE, the petitions are DISMISSED. No special
pronouncement on costs.
Ratio:
-

The allowance for deductible items have been significantly

reduced by the questioned law in comparison with that which
has prevailed prior to the amendment. Allowable deductions
from gross income is not discordant with the net income tax
concept. The fact of the matter is still that various deductions,
which are by no means inconsequential, continue to be well
provided under the new law.
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 class. The legislative intent
to shift the income tax system towards the scheduler approach
in the income taxation of individual taxpayers and to maintain
the present global treatment on taxable corporation is not
arbitrary and inappropriate.

A general professional partnership, unlike an ordinary

business partnership which is treated as a corporation
for income tax purposes and so subject to the corporate
income tax, is not itself an income taxpayer. The income
tax is imposed not on the professional partnership, which is tax
exempt, but on the partners themselves in their individual
capacity computed on their distributive shares of partnership
profits. There is 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.
The Code classifies taxpayers into 1) individuals; 2)
Corporations; 3) Estates under Judicial Settlement; and 4)
irrevocable trusts. Partnerships are, under the Code,
either "taxable partnerships" or "exempt partnerships."
Ordinarily, partnerships, no matter how created or
organized, are subject to income tax (and thus alluded
to as "taxable partnerships") which, for purposes of the
above categorization, are by law assimilated to be
within the context of, and so legally contemplated as,
corporations.

PASCUAL v. CIR

Corporation and the remaining three lands in 1970 to Erlinda Reyes

and Maria Samson.

18 October 1988

Net profit realized from 1968 sale: P165,224.70; Net profit realized
from 1970 sale: P60,000.00

The corresponding capital gains taxes were paid by petitioners in

1973 and 1974 by availing of the tax amnesties granted in the said
years.

Gancayco, J.
Digest by VILLAMIN

Topic: INCOME TAX > Taxpayers > Corporations> Partnership / Coownership / GPP
2
Provisions:
Article 1767, NCC. By the contract of partnership two or more persons
bind themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a
profession.

However, according to then Acting BIR Commissioner Plana, petitioners

were assessed and required to pay a total amount of P107, 101.70 as
alleged deficiency corporate income taxes for the years 1968 and
1970.

Petitioners protested the said assessment and asserted that they

had availed of tax amnesties.

Planas reply In 1968 and 1970, petitioners as co-owners in the real

estate transactions, formed an unregistered partnership or joint
venture taxable as a corporation under Section 20(b) and its income
was subject to the taxes prescribed under Section 24,NIRC.

Article 1769, NCC. In determining whether a partnership exists, these

rules apply: xxx

(2) Co-ownership or co-possession does not itself establish a partnership,

whether such co-owners or co-possessors do or do not share any profits
made by the use of the property;

An unregistered partnership is subject to corporate income tax

whereas profits derived from the partnership is subject to
individual income tax

After availing of the tax amnesty under P.D. No. 23, as amended,
petitioners were relieved of their individual income tax liabilities
but did not relieve them from the tax liability of the unregistered
partnership.

Hence, the petitioners were required to pay the deficiency income

tax assessed.

(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;xxx

Facts
1

After having bought 5 parcels of land, petitioners Mariano Pascual and

Renato Dragon sold two of those lands in 1968 to Marenir Development

CTA affirmed the decision and action taken by respondent

commissioner with costs against petitioners.

An unregistered partnership was in fact formed by petitioners

which like a corporation was subject to corporate income tax
distinct from that imposed on the partners.

Dissent (Roaquin) no adequate basis for concluding that

petitioners formed an unregistered partnership

Issue/ Held

Unlike in the Evangelista case cited by the court, the character of

habituality peculiar to business transactions engaged in for the
purpose of gain was not present in this case. After petitioners bought
the parcels of land in 1965 and 1966, they did not sell the same nor
make any improvements thereon. It was only in 1968 and in 1970
when they sold the land. They did not make any additional or new
purchase. The transactions were isolated.

Given Article 1769, NCC, 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.

WON petitioners formed an unregistered partnership that is subject to

corporate income tax / NO.

Dispositive
WHEREFROM, the petition is hereby GRANTED and the decision of the
respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED
and SET ASIDE and another decision is hereby rendered relieving
petitioners of the corporate income tax liability in this case, without
pronouncement as to costs.

In the present case, there is clear evidence of co-ownership between

the petitioners. There is no adequate basis to support the proposition
that they thereby formed an unregistered partnership. The two isolated
transactions whereby they purchased properties and sold the same a
few years thereafter did not thereby make them partners. They shared
in the gross profits as co- owners and paid their capital gains taxes on
their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an
unregistered partnership which is thereby liable for corporate income
tax, as the respondent commissioner proposes.

Ratio

Pursuant to Article 1767, NCC 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.

In the present case, there is no evidence that petitioners entered into

an agreement to contribute money, property or industry to a common
fund, and that they intended to divide the profits among themselves.
Respondent commissioner and/ or his representative just assumed
these conditions to be present on the basis of the fact that petitioners
purchased certain parcels of land and became co-owners thereof.

And even assuming for the sake of argument that such unregistered
partnership appears to have been formed, since there is no such
existing unregistered partnership with a distinct personality nor with
assets that can be held liable for said deficiency corporate income tax,
then petitioners can be held individually liable as partners for this
unpaid obligation of the partnership. However, as petitioners have
availed of the benefits of tax amnesty as individual taxpayers in these
transactions, they are thereby relieved of any further tax liability
arising therefrom

clearing house in order to facilitate the handling of the business

they contracted with Munich.
The CIR assessed the insurance pool deficiency corporate taxes and
withholding taxes on the dividends paid on Munich and to the
petitioners respectively. The assessments were protested by
petitioners
CA Insurance pool was a partnership taxable as a corporation
and that the latters collection of premiums on behalf of its members
was taxable income
Petitioners - not a partnership! The reinsurers didnt share the same
risk or solidary liability, there was no common fund, the executive
board of the pool didnt exercise control and management of the funds
and the pool wasnt engaged in business of reinsurance

Issue
1

WON the Insurance Pool is a partnership or association that

is taxable as a corporation

Held
YES! The insurance pool is taxable as a corporation!
Dispositive
WHEREFORE, the petition is DENIED. The Resolutions of the Court of
Appeals dated October 11, 1993 and November 15, 1993 are
hereby AFFIRMED. Costs against petitioners.
Ratio

Here the ceding companies entered into a Pool Agreement or an

association that would handle all the insurance businesses covered
under their quota-share reinsurance treaty and surplus reinsurance
treaty with Munich.

AFISCO INSURANCE CORP v CIR

January 25, 1999
Panganiban, J.
By Cate Alegre
Taxpayers Corporations (Partnership)
Facts

Petitioners are 41 local insurance firms which entered into Reinsurance

Treaties with Munich, a non-resident foreign insurance corporation. The
reinsurance treaties required them to form an insurance pool or

(Doctrine)

There are unmistakable indicators that it is a partnership or an

association covered by NIRC:
1 The pool has a common fund, consisting of money and other
valuables that are deposited in the name and credit of the pool.
This common fund pays for the administration and operation
expenses of the pool.
2 The pool functions through an executive board, which resembles
the board of directors of a corporation, composed of one
representative for each of the ceding companies.
3 Though the pool itself is not a reinsurer, its work is indispensable,
beneficial and economically useful to the business of ceding
companies and Munich because without it they wouldnt have
received premiums. Profit motive or business is therefore the
primordial reason for the pools formation.

The fact that the pool doesnt retain any profit or income doesnt
obliterate an antecedent fact that of the pool is being used in the
transaction of business for profit. It is apparent and petitioners admit

that their association was indispensable to the transaction of the

business.

Solidbank vs. CIR (CTA case No. 4868)

June 19, 1997
CTA

Azores
Topic: Taxpayers Partnership; Co-ownership
FACTS:

Solidbank Corporation (SBC) and Susana Reality Inc (SRI), in a

"Deed of Sale With Option and Agreement for Administration of
Property" became co- owners of 3 parcels of land together with a 4
storey building thereon when SBC acquired from SRI ownership
and interest of SRI and for which earnest money of P50,000.00 was
paid for by SBC to SRI

SBC filed complaint with the RTC for Partition. As co- owner, SBC
demanded the portion of the property owned in common pursuant
to CC Art. 494 because physical division of the building and
improvements thereon would not be compatible to the best
interest of the parties and that a more practical solution is "BuyOut" or "Sell- Out" of the share of one to the other co-owner or sale
to any party

After several hearings, realizing the futility of their claims and the
adverse effect the case may bring on their respective business
establishments and business reputations, SBC and SRI agreed to
settle the case amicably

The Court approved the compromise agreement and terminated

the co- ownership of the parties and vesting the sole, absolute,
exclusive and indefeasible title in favor of SBC

a former employee of SRI became an informer (perhaps to collect

reward through NIRC Sec. 281) filed an information denouncing
SBC and SRI. The informer opined that as a result of said amicable
settlement, SRI and SBC waived and completely gave away their
claims against each other and are therefore subject to and Iiable
for donors tax prescribed under NIRC Sections 120 and 121 (now
91 and 92)

Note: Art. 3 of the deed of sale was an agreement for

administration of property, giving SBC shall administer the
property (collect rents from tenants, advertise vacant space, do
repairs, etc.)
Relevant issue to the topic: WON petitioners formed an unregistered
partnership which is subject to corporate income tax prescribed under Sec.
24(a) in relation to Sect i on 20(b) of the Tax Code
HELD: No. They formed a co-ownership, not a partnership
RATIO:

They formed a co-ownership, not a partnership. The agreement for

administration of property (Art. 3 of deed of sale) is but a mere
incident of the co-ownership and not an act reflective of their
intention to engage in a mutual fund for profit or business.

CC 1767 prescribes two essential elements of a partnership,

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.

At first glance, SRI and SBC seem to fulfil the above essential
elements, however, after an exhaustive study, it is apparent that

no agreement, direct or implied was reached by SRI and SBC to

purposely contribute money, property or industry to a common
fund, and that, no such intent to divide the profits arising from the
use of the common fund in a business activity was ever
contemplated by the parties.
The deed of sale gave SBC the option to buy ownership and
interest of SRI over the property within 5 years from execution. The
real intention of the parties was to sell SRIs share to SBC
SBC even demolished portion of the building and built a new 10storey building for itself
SRI and SBC only entered into an isolated transaction. They simply
bought and co-owned the four-storey building inclusive of the land
where it stands and invested nothing more. The act of leasing the
building cannot be deemed as a series of transactions indicating
habituality in a business either, SBC mainly occupied the rentable
areas thereof (85%) for nearly 20 years for its own personal use.
THEREFORE, since the agreement between SBC and SRI DID NOT
produce a partnership with a separate juridical personality, they
cannot be assessed for withholding tax for inter-corporate
dividends.
Re assessment of doners tax: SRI availed of a tax amnesty under
EO 41 as amended by EO 64 since the donation arose by virtue of
a compromise agreement between the two parties.

BAHJIN Winship vs. Philippine Trust Co.

Marubeni v CIR
Sept 14, 1989
Fernan
Digest by Janine
Topic: Taxpayers Corporations Resident Foreign Corporation
Doctrine: A resident foreign corporation is one that is "engaged in
trade or business" within the Philippines. The general rule that a
foreign corporation is the same juridical entity as its branch office in the
Philippines cannot apply here. This rule is based on the premise that the
business of the foreign corporation is conducted through its branch office,
following the principal agent relationship theory. It is understood that the
branch becomes its agent here. So that when the foreign corporation
transacts business in the Philippines independently of its branch,
the principal-agent relationship is set aside. The transaction
becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation.
Facts:
Marubeni Corporation is a foreign corporation existing under the
laws of Japan and licensed to engage in business in the Philippines. It has a
branch office in Manila.
Petitioner has equity investments in AG&P of Manila. AG&P
declared and paid cash dividends to petitioner and withheld 10% as final
intercorporate dividend tax. AG&P directly remitted the cash dividends to
petitioners head office in Tokyo and also withheld 15% profit remittance
tax after deducting the 10% final withholding tax.
Marubeni sought a ruling from the BIR on WON the dividends
received from AG&P are effectively connected with its business in the PH to
be considered branch profits subject to 15% profit remittance tax.
Acting Commissioner Ancheta ruled that the dividends received
from AG&P are not income arising from the business in which
Marubeni is engaged, thus not subject to 15%
Marubeni claimed for refund or issuance of tax credits.
Commissioner denied the claim. While it is true that it was not subject to
the 10% and 15%, being a non-resident stockholder, said dividend income
is subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty
dated February 13, 1980 between the Philippines and Japan.
CTA affirmed.
Issue/Held: WON Marubeni is a resident or non-resident foreign
corporation NON- RESIDENT WITH RESPECT TO THE TRANSACTION
IN QUESTION

Dispositive: The decision of the CTA, which affirmed the denial by

respondent Commissioner of Internal Revenue of petitioners claim for
refund is hereby REVERSED. The Commissioner of Internal Revenue is
ordered to refund or grant as tax credit in favor of petitioner the amount of
P144, 452.40 representing overpayment of taxes on dividends received.
Ratio:
The general rule that a foreign corporation is the same juridical
entity as its branch office in the Philippines cannot apply here. This rule is
based on the premise that the business of the foreign corporation is
conducted through its branch office, following the principal agent
relationship theory. It is understood that the branch becomes its agent
here. So that when the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent relationship is
set aside. The transaction becomes one of the foreign corporation, not of
the branch. Consequently, the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation.
In other words, the alleged overpaid taxes were incurred for the remittance
of dividend income to the head office in Japan, which is a separate and
distinct income taxpayer from the branch in the Philippines.
Petitioner, being a non-resident foreign corporation with respect to the
transaction in question, the applicable provision of the Tax Code is Section
24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980.
Proceeding to apply the above section to the case at bar, petitioner,
being a non-resident foreign corporation, as a general rule, is
taxed 35 % of its gross income from all sources within the
Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on
dividends received from a domestic corporation (AG&P) on the
condition that its domicile state (Japan) extends in favor of
petitioner, a tax credit of not less than 20 % of the dividends received.
This 20 % represents the difference between the regular tax of 35 % on
non-resident foreign corporations, which petitioner would have ordinarily
paid, and the 15 % special rate on dividends received from a domestic
corporation. Petitioner is entitled to a refund on the transaction in
question
CIR v. BRITISH OVERSEAS AIRWAYS CORP and CTA
April 30, 1987
Melencio-Herrera, J.
Digest by: KY Bautista
Topic: Income Taxation - Taxpayers - Corporations
Doctrine: The term resident foreign corporation [is one] engaged in trade
or business within the Philippines or having an office or place of business
therein. There is no specific criterion as to what constitutes "doing" or
"engaging in" or "transacting" business. The term implies a continuity of
commercial dealings and arrangements, and contemplates the
performance of acts 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. BOAC has a general sales
agent here, in exercise of the functions normally incident to the main
purpose of an international air carrier. It is a resident foreign corp. It is
subject to tax upon its total net income received in the preceding taxable
year from all sources within the Phils
Facts:

BOAC is a corp 100% British-owned. It operates air transportation

service and sells air transport tickets.

During the periods covered by the disputed tax assessments, BOAC

admits that it had no landing rights for traffic purposes in the Phils,
and was not granted a certificate of public convenience to operate
in the Philippines (except for a nine-month period, when it was
granted a temporary landing permit).

It did not carry passengers and cargo to or from the Philippines,

although during the period covered by the assessments, it says a
general sales agent in the Phils (Wamer Barnes and later Qantas
Airways) was responsible for selling BOAC tickets.

Then there were 2 CTA cases where BOAC appealed CIR decisions
assessing it with deficiency income tax and penalties.

Tax Court: held that the proceeds of sales of BOAC passage tickets
in the Phils by the general sales agent do not constitute BOAC
income from Philippine sources "since no service of carriage of
passengers or freight was performed by BOAC within the
Philippines" therefore said income is not subject to Philippine
income tax.

The Tax Court ordered CIR to credit BOAC with P858k and cancel
the deficiency income tax assessments against BOAC.
Hence, this Petition for Review on Certiorari.
Issues/Held:
1 Whether the revenue derived by BOAC from sales of tickets in the
Phil for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and,
accordingly, taxable.
SC: Yes, the income derived is from passage documentations which
were sold in the Phils, and the revenue was derived from activity
regularly pursued in the Phils. Source conveys one essential idea:
origin.
2

Whether, during the fiscal years in question, BOAC was a resident

foreign corporation doing business in the Philippines (or has an
office or place of business in the Philippines).
SC: BOAC is a resident foreign corp

Dispositive: CTA decision set aside. BOAC ordered to pay deficiency

income tax + penalties.

Ratio:
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation [is one] engaged in trade
or business within the Philippines or having an office or place of
business therein.
(i) The term "non-resident foreign corporation" applies to a
foreign corporation not engaged in trade or business within the
Philippines and not having any office or place of business therein
BOAC is a resident foreign corp. It is subject to tax upon its total
net income received in the preceding taxable year from all sources
within the Phils

There is no specific criterion as to what constitutes "doing" or

"engaging in" or "transacting" business. The term implies a
continuity of commercial dealings and arrangements, and
contemplates the performance of acts 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.

BOAC maintained a general sales agent. Those acts of the agent

were in exercise of the functions normally incident to the main
purpose (as an international air carrier).

Sec. 24. Rates of tax on corporations ... (b) Tax on foreign

corporations ... (2) Resident corporations. A corporation
organized, authorized, or existing under the laws of any foreign
country, except a foreign fife insurance company, engaged in trade
or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in
the preceding taxable year from all sources within the Philippines.
Tax Code defn of gross income is broad and includes proceeds
from sales of transport documents.

"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)]

As used in our income tax law, "income" refers to the flow of

wealth.
Now the question is, did such flow of wealth come from within the Phils?
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 Phils, it is sufficient that the income is derived

from ACTIVITY WITHIN the Phils.

For BOAC, the sale of tickets is the income-producing activity.

Therefore, the flow of wealth proceeded from, and occurred within,
Phil territory.

Although Sec 37(a) of the Tax Code, enumerates items of gross

income from sources within the Philippines: (1) interest, (21)
dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, and does not mention
income from the sale of tickets for international transportation, it
does not mean that it is not an income from sources within the
Phils.

Sec 37 enumeration is not exclusive. It merely directs that the

types of income listed are to be treated as income from sources
within the Phils.

The test of taxability is the "source"; and the source of an

income is that activity which produced the income.

The word "source" conveys one essential idea, that of origin, and
the origin of the income herein is the Phils.
----Teehankee concurs, but says that the conflict as to the proper
characterization of the taxable income become moot after November 1972
(PD 69 promulgation). International carriers such as BOAC, have since then
been taxed at a reduced rate of 2-% on their gross Philippine billings.
Feliciano dissents:
He says that the liability of BOAC to Philippine income tax depends, not on
BOAC's status as a "resident foreign corporation" but on whether such
income is derived from "source within the Philippines."
For purposes of income tax, the "source of income" relates not to the
physical sourcing of a flow of money or the physical situs of payment,
rather, to the "property, activity, or service which produced the income."
Income may be derived from three possible sources
only: (1) capital and/or (2) labor and/or (3) the sale of capital assets.
1
If the income is from labor (services) the place where the labor is
done should be decisive
2 If the income is from capital, the place where the capital is
employed should be decisive
3 If the income is from the sale of capital assets, the place where the
sale is made should be likewise decisive
Therefore, if income is taxed, the recipient must be a resident within the
jurisdiction, or the property or activities out of which the income issue or is
derived must be situated within the jurisdiction so that the source of the
income may be said to have a situs in the country.

The underlying theory is that the consideration for tax is protection

of life and property and that the income rightly to be levied
upon to defray the burdens of the US Government is that income
which is created by activities and property protected by this
Government or obtained by persons enjoying that protection.

In this case, there are 2 source of income rules:

a The source rule applicable in respect of contracts of service; and
b The source rule applicable in respect of sales of personal property.
For Contracts of Service:
For contract for service, the applicable source rule: the income is sourced
in the place where the service contracted for is rendered.
Sec 37 (e) of our Tax Code was derived from the US Tax Code which was
based on a recognition that transportation was a service and that the
source of the income derived therefrom was to be treated as being the
place where the service of transportation was rendered.
For Sales of Personal Property:
Income from the sale of personal property will be regarded as
sourced entirely within or entirely without the Philippines depending upon
two factors: (a) the place where the sale of such personal property occurs;
and (b) the place where such personal property was produced.
In this case, BOAC may be considered either as sales of personal property
(the tickets) or in the lease of services. "Sale of airline tickets," is not
correct as a matter of tax law. The ticket is really the evidence of the
contract of carriage.
Under PD 69 and 1355 (law governing taxation of international carriers),
international carriers issuing compensation passage documentation in the
Philippines, are not charged any Philippine income tax on their Philippine
billings. Intl carriers who service ports in the Phils are treated in exactly
the same way as international carriers not serving any port in the
Philippines.
The source of income rule has been set aside. The Tax Code now imposes
this 2 per cent tax computed on the basis of billings in respect of
passengers and cargo originating from the Philippines regardless of where
embarkation and debarkation would be taking place. This 2- per cent tax
is effectively a tax on gross receipts or an excise or privilege tax and not a
tax on income.

Marubeni v CIR
Sept. 14, 1989
Fernan, CJ
Digest by Jobar Buenagua
Topic and Provisions
Taxpayers: Corporations
Facts:
Petitioner Marubeni s a foreign corporation duly organized under
the existing laws of Japan and duly licensed to engage in business
under Philippine laws.
Marubeni of Japan has equity investments in Atlantic Gulf & Pacific
Co. of Manila.

When the profits of AG&P were declared, a 10% final dividend tax
was withheld from it, and another 15% profit remittance tax based
on the remittable amount after the final 10% withholding tax were
paid to the Bureau of Internal Revenue. Thereafter, Marubeni,
through SGV, sought a ruling from the BIR on whether or not the
dividends it received from AG&P are effectively connected with its
business in the Philippines as to be considered branch profits
subject to profit remittance tax.
The Acting Commissioner ruled that the dividends received by
Marubeni are not income from the business activity in which it is
engaged. Thus, the dividend if remitted abroad are not considered
branch profits subject to profit remittance tax.
Pursuant to such ruling, petitioner filed a claim for refund for the
profit tax remittance erroneously paid on the dividends remitted by
AG& P.
Respondent Commissioner denied the claim. It ruled that since
Marubeni is a non resident corporation not engaged in trade or
business in the Philippines it shall be subject to tax on income
earned from Philippine sources at the rate of 35% of its gross
income.
On the other hand, Marubeni contends that, following the principalagent relationship theory, Marubeni Japan is a resident foreign
corporation subject only to final tax on dividends received from a
domestic corporation.

Issue:
1. WON Marubeni Corporation is a resident or non-resident foreign
corporation.
2. What should be the proper tax rate for Marubeni?

Held: Marubeni is a non-resident corporation. He should be taxed

with a rate of 15%. .

Dispositive:
WHEREFORE, the questioned decision of respondent Court of Tax Appeals
dated February 12, 1986 which affirmed the denial by respondent
Commissioner of Internal Revenue of petitioner Marubeni Corporation's
claim for refund is hereby REVERSED. The Commissioner of Internal
Revenue is ordered to refund or grant as tax credit in favor of petitioner
the amount of P144,452.40 representing overpayment of taxes on
dividends received. No costs.
Ratio:
1 Marubeni Corporation is a non-resident foreign corporation, with
respect to the transaction.
o The general rule is a foreign corporation is the same
juridical entity as its branch office in the

Philippines . The rule is based on the premise that the

business of the foreign corporation is conducted through its
branch office, following the principal-agent relationship
theory. It is understood that the branch becomes its agent.
o However, when the foreign corporation transacts
business in the Philippines independently of its
branch, the principal-agent relationship is set aside.
The transaction becomes one of the foreign
corporation, not of the branch. Consequently, the
taxpayer is the foreign corporation, not the branch or the
resident foreign corporation.
o Thus, the alleged overpaid taxes were incurred for
the remittance of dividend income to the head office
in Japan which is considered as a separate and
distinct income taxpayer from the branch in the
Philippines.
o Marubeni Corporations head office in Japan is a separate
and distinct income taxpayer from the branch in the
Philippines. The investment on Atlantic Gulf and Pacific Co.
was made for purposes peculiarly germane to the conduct
of the corporate affairs of Marubeni Corporation in Japan,
but certainly not of the branch in the Philippines.
The applicable provision of the Tax Code is Section 24(b)(1)(iii) in
conjunction with the Philippine-Japan Tax Treaty of 1980. As a
general rule, it is taxed 35% of its gross income from all sources
within the Philippines. However, a discounted rate of 15% is given
to Marubeni Corporation on dividends received from Atlantic Gulf
and Pacific Co. on the condition that Japan, its domicile state,
extends in favor of Marubeni Corporation a tax credit of not less
than 20% of the dividends received. This 15% tax rate imposed on
the dividends received under Section 24(b)(1)(iii) is easily within
the maximum ceiling of 25% of the gross amount of the dividends
as decreed in Article 10(2)(b) of the Tax Treaty.

January 1984 and to DENY the Petition for Review for lack of merit. No
pronouncement as to costs.
December 2, 1991
COMMISSIONER OF INTERNAL REVENUE vs. PROCTER & GAMBLE
PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF
TAX APPEALS
Topic: Taxpayers > Non-resident Foreign Corporations
FELICIANO, J.:
Digest by Chua
FACTS:

For two successive taxable years, P&G Phil. declared dividends

payable to its parent company and sole stockholder, P&G-USA,
from which thirty-five percent (35%) withholding tax at source was
deducted.

P&G Phil. filed for tax refund claiming that that rate applicable is
15% not 35%.

CTA allowed refund. This was reversed on the ground that:

a
b

P&G-USA was the proper party to claim the refund.

There is no provision that allows a credit against the tax due
from P&G-USA of taxes deemed to have been paid in the
Philippines equivalent to 20% which represents the difference
between the regular tax of 35% on corporations and the tax of
15% on dividends; and
P&G-Phil. failed to meet certain conditions necessary in order
that "the dividends received by its non-resident parent
company in the US may be subject to the preferential tax rate
of 15% instead of 35%.

ISSUE: WON P&G Phil is entitled to the tax refund.

HELD: YES.
DISPOSITIVE: WHEREFORE, for all the foregoing, the Court Resolved to
GRANT private respondent's Motion for Reconsideration dated 11 May
1988, to SET ASIDE the Decision of the Division of the Court promulgated
on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the
Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31

RATIO:
1st Issue:

NIRC defines taxpayer "any person subject to tax imposed by the

Title on Tax on Income.

It is significant to note that, the withholding agent who is "required

to deduct and withhold any tax" is made personally liable for such
tax. The withholding agent, P&G-Phil., is directly and
independently liable for the correct amount of the tax that should
be withheld from the dividend remittances.

A "person liable for tax" has been held to be a "person subject to

tax". It is conceptually impossible then to consider a person who is
statutorily made "liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party
in interest, or as a person having sufficient legal interest, to bring a
suit for refund of taxes he believes were illegally collected from
him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal

Revenue, it is pointed out that a withholding agent is in fact the
agent both of the government and of the taxpayer, and that the
withholding agent is not an ordinary government agent:

Thus, P&G-Phil. is properly regarded as a "taxpayer" and as such is

impliedly authorized to file the claim for refund and the suit to
recover such claim.

2nd and 3rd Issues:

NIRC provides that a foreign corporation not engaged in trade and

business in the Philippines shall pay a tax equal to 35% of the
gross income from all sources within the Philippines, as dividends.
However, for dividends received from a domestic corporation liable
to tax, the tax shall be 15% of the dividends, 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% on dividends.

Therefore, the reduced fifteen percent 15% dividend tax rate is

applicable if the USA "shall allow" to P&G-USA a tax credit for
"taxes deemed paid in the Philippines" applicable against the US
taxes of P&G-USA. The NIRC specifies that such tax credit for
"taxes deemed paid in the Philippines" must, as a minimum, reach
an amount equivalent to twenty 20% which represents the
difference between the 35% dividend tax rate and the preferred
fifteen percent 15% dividend tax rate.

The question arises: Did the US law comply with the above
requirement? The US Intemal Revenue Code grants P&G-USA a tax
credit for the amount of the dividend tax actually paid
(i.e., withheld) from the dividend remittances to P&G-USA; In short,
it grants to P&G-USA a "deemed paid' tax credit for a
proportionate part of the corporate income tax actually paid to the
Philippines by P&G-Phil.

US tax law treats the Philippine corporate income tax as if it came

out of the pocket, of P&G-USA as a part of the economic cost of
carrying on business operations in the Philippines through the
medium of P&G-Phil.

To determine whether it meets the conditions the amount of 20%

dividend tax waived by Philippine Govt must be at least equal to
the amount of the deemed paid tax credit allowed by USA.

Following long computation, it was found out that a tax credit of

P29.75 is allowed by US Tax Code for Philippine corporate income
tax "deemed paid" by the parent but actually paid by the whollyowned subsidiary. Since P29.75 is much higher than P13.00 (the
amount of dividend tax waived by the Philippine government), US
Tax Code, specifically and clearly complies with the requirements
of NIRC.

Moreover, the concept of "deemed paid" tax credit, which is

embodied in the US Tax Code, is exactly the same "deemed paid"
tax credit found in our NIRC and which Philippine tax law allows to
Philippine corporations which have operations abroad (say, in the
United States) and which, therefore, pay income taxes to the US
government.

Purpose of the reduction:

The economic objectives sought to be achieved by the Philippine

Government by reducing the thirty-five percent (35%) dividend rate to
fifteen percent (15%) is 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 (i.e., second-tier taxation) (the home country would
simply have more "post-R.P. tax" income to subject to its own taxing
power) by allowing the investor additional tax credits which would be
applicable against the tax payable to such home country. Accordingly, NIRC
requires the home or domiciliary country to give the investor corporation a
"deemed paid" tax credit at least equal in amount to the twenty (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.

DE GUZMAN CIR vs. Visayas Electric

Commissioner of Internal Revenue vs CA
March 23, 1992
J. Melencio-Herrera
Digest by De Veyra
Topic: Taxpayers > Estates and Trusts
Facts:
Respondent, GCL Retirement Plan (GCL) is an employees' trust
maintained by the employer, GCL Inc., to provide retirement,
pension, disability and death benefits to its employees. The Plan as
submitted was approved and qualified as exempt from income tax
by Petitioner Commissioner of Internal Revenue in accordance with
Rep. Act No. 4917.
In 1984, Respondent GCL made investments and earned therefrom
interest income from which was withheld the fifteen per centum
(15%) final witholding tax imposed by Pres. Decree No. 1959.
GCL filed with CIR a claim for refund in the amounts withheld by
Anscor Capital and Investment Corp., and Commercial Bank of
Manila. It filed a second claim for refund withheld by Anscor,
stating in both letters that it disagreed with the collection of the
15% final withholding tax from the interest income as it is an entity
fully exempt from income tax as provided under RA 4917 in
relation to Section 56 (b) of the Tax Code.
The refund was denied so GCL elevated the matter to CTA which
ruled in favor of GCL, holding that employees' trusts are exempt
from the 15% final withholding tax on interest income and ordering
a refund of the tax withheld. CA upheld CTA
CIRs claim
o It appears that under RA 1983, amending Sec. 56 (b) of the
National Internal Revenue Code (Tax Code, for brevity),
employees' trusts were exempt from income tax. PD 1156,
on the other hand, provided, for the first time, for the
withholding from the interest on bank deposits at the
source of a tax of fifteen per cent (15%) of said interest.
However, it also allowed a specific exemption in its Section
53, for depositors enjoying tax exemption privileges or
preferential tax treatment.
o This exemption and preferential tax treatment were carried
over in PD 1739, which law also subjected interest from
bank deposits and yield from deposit substitutes to a final
tax of twenty per cent (20%).
o Subsequently, however, PD 1959 was issued, amending
the aforestated provisions. The exemption from withholding
tax on interest on bank deposits previously extended by
Pres. Decree No. 1739 if the recipient (individual or
corporation) of the interest income is exempt from income
taxation, and the imposition of the preferential tax rates if
the recipient of the income is enjoying preferential income
tax treatment, were both abolished by PD 1959. Thus,

when PD 1959 was promulgated, employees' trusts

ceased to be exempt and thereafter became subject
to the final withholding tax.
Issue: WON the GCL Plan is exempt from the final withholding tax on
interest income from money placements and purchase of treasury bills as
required by Pres. Decree No. 1959.
Held: YES.
Dispositive: WHEREFORE, the Writ of Certiorari prayed for is DENIED. The
judgment of respondent Court of Appeals, affirming that of the Court of Tax
Appeals is UPHELD. No costs.
Ratio:
To begin with, it is significant to note that the GCL Plan was qualified as
exempt from income tax by the Commissioner of Internal Revenue in
accordance with RA 4917. In so far as employees' trusts are concerned, the
foregoing provision should be taken in relation to then Section 56(b) (now
53[b]) of the Tax Code, as amended by Rep. Act No. 1983. This provision
specifically exempted employee's trusts from income tax.
The tax-exemption privilege of employees' trusts, as distinguished from
any other kind of property held in trust, springs from the foregoing
provision. It is unambiguous. Manifest therefrom is that the tax law has
singled out employees' trusts for tax exemption.
And rightly so, by virtue of the raison de'etre behind the creation of
employees' trusts. Employees' trusts or benefit plans normally provide
economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or
disability. It provides security against certain hazards to which members of
the Plan may be exposed. It is an independent and additional source of
protection for the working group. What is more, it is established for their
exclusive benefit and for no other purpose.
The tax advantage in RA 1983, Section 56(b), was conceived in order to
encourage the formation and establishment of such private Plans for the
benefit of laborers and employees outside of the Social Security Act. It is
evident that tax-exemption is likewise to be enjoyed by the income of the
pension trust. Otherwise, taxation of those earnings would result in a
diminution accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund. This would run afoul of
the very intendment of the law.
The deletion in PD 1959 of the provisos regarding tax exemption and
preferential tax rates under the old law, therefore, cannot be deemed to
extent to employees' trusts. Said Decree, being a general law, can not
repeal by implication a specific provision. A subsequent statute,
general in character as to its terms and application, is not to be construed
as repealing a special or specific enactment, unless the legislative purpose

to do so is manifested. This is so even if the provisions of the latter are

sufficiently comprehensive to include what was set forth in the special act.

DEL VALLE REAGAN vs. CIR

CIR v. Frank and James Robertson, Robert Cathey, John Garrison,
CTA
August 12, 1986
Paras, J.
Digest by Doms Gana

Philippines in 1952 assigned at the U.S. Naval Base, Subic Bay,

Philippines.
-

All respondents are citizens of the US, holders of American

passports and admitted as Special Temporary Visitors under
Section 9 (a) visa of the Philippine Immigration Act of 1940; civilian
employees in the U.S. Military Base in the Philippines in connection
with its construction, maintenance, operation, and defense; and
incomes are solely derived from salaries from the U.S. government
by reason of their employment in the U.S. Bases in the Philippines."

The court rendered judgment in favor of respondents and cancelled

the assessments for deficiency of income tax for the taxable years
of 1969-1972.

CIR claims that the laws granting tax exemptions must be

construed in strictissimi juris against the taxpayer, and that the
burden of proof is on respondents to establish that their residence
in the country is by reason only of their employment in connection
with the construction, maintenance, operation or defense of the
U.S. Bases in the Philippines as provided for under Article XII, Par. 2
of the RP-US Military Bases Agreement of 1947. CIR claims that this
burden has not been disproved since the respondents have
properties in the Philippines via their wives and that they reside in
the Philippines not only due to their employment.

Topic and Provision: Exempt Taxpayers Exempt Individuals

Facts:
-

These are consolidated cases involving the tax exemption provision

in Art. XII Par. 2 of the RP US Military Bases Agreement: No national
of the United States serving in or employed in the Philippines in
connection with the construction, maintenance, operation or
defense of the bases and residing in the Philippines by reason only
of such employment, or his spouse and minor children and
dependent parents of either spouse, shall be liable to pay income
tax in the Philippines except in respect of income derived from
Philippine sources or sources other than US resources.

CTA has found that the respondents are exempt under the
aforementioned provision and do not have to pay the deficiency of
income tax assessed against them for the taxable years of 19691972.

Frank Robertson is an American citizen born in the Philippines. He

resided in the Philippines until repatriated to the US in 1945. After
he was employed by the U.S. Federal Government with a job at the
U.S. Navy, wherein due to various installations overseas he
assigned to U.S. Naval Ship Repair Facility at Subic Bay, Olongapo,
Philippines.

James Robertson was born in the Philippines and had since resided
in this country until repatriated to the US in 1945 and there,
established his domicile. He landed a job with the U.S. Navy
Shipyard as a U.S. Federal Civil Service employee. He returned to
the Philippines in 1958 with assignment at the U.S. Naval Base at
Subic Bay, Olongapo, and has since remained thru 1972.

Robert H. Cathey is a US born citizen who upon discharge from the

military service in 1946 turned a U.S. Navy's civilian employee with
station at Makati, Metro Manila.

John Garrison is a Philippine born American citizen also repatriated

to the US in 1945. Soon after he was employed by the U.S. Federal
Government in its military installations. He returned to the

Issue: WON respondents are exempt for tax pursuant to the RP US Military
Bases Agreement?
Held: YES. Respondents are not liable to pay, thus deficiency of income
tax assessment is cancelled.
Dispositive: WHEREFORE, premises considered, the appealed decision of
the Court of Tax Appeals is AFFIRMED and the petition for review is hereby
DISMISSED. No costs.
Ratio:
The law and the facts of the case are so clear that there is no room
left for us to doubt the validity of respondents' defense. In order to
avail oneself of the tax exemption under the RP-US Military Bases
Agreement: he must be a national of the United States employed in
connection with the construction, maintenance, operation or
defense, of the bases, residing in the Philippines by reason of such
employment, and the income derived is from the U.S. Govt. Said
circumstances are all present in the case at bar.
We find nothing in the said treaty provision that justified the lifting
of the tax exemption privilege of the respondents.
CIR has grafted a meaning other than that conveyed by the
plain and clear tenor of the Agreement. An examination of
the words used and the circumstances in which they were

used, shows the basic intendment "to exempt all U.S.

citizens working in the Military Bases from the burden of
paying Philippine Income Tax without distinction as to
whether born locally or born in their country of origin." Ubi
lex non distinguit nec nos distinguere debemos (one must
not distinguish where the law does not distinguish).
Moreover, the ruling has altered a satisfactorily settled
application of the exemption clause and has fallen short of
measuring up to the familiar principle of International Law
of pacta sund servanda.
-

Respondents together with families upon repatriation in 1945 had

since acquired domicile and residency in the US. And, obtained
employment with the United States Federal Service. Not until after
several years of a hiatus, did respondents return to the Philippines
not so much of honoring a pledge nor of sentimental journey but
by reason of taking up assigned duties with the US military bases
in the Philippines where they were gainfully employed by the U.S.
Federal Government. The situation of the respondents is of no
different mold as of the rest of the U.S. civilian employees
who continued to enjoy the benefits of tax exemption under
the Agreement. It appears too much of a stretch to hold
respondents straight-jacketed to an irreversible situs of
birth constraint and by reason thereof deny altogether any
opportunity to a serendipitous enjoyment of a tax relief
accorded in the Agreement. Such a random quirk of
pirouette in the tax treatment fags sharply at odds with the
shared expectations of the high contracting parties. This
Court will not deem itself authorized to depart from the
plain meaning of the tax exemption provision so explicit in
terms and so searching in extent.

Reagan vs. Commissioner of Internal Revenue is

inapplicable to the case at bar due to the different factual
circumstances. A cursory reading of said case shows that William
Reagan was at one time a civilian employee of an American
corporation providing technical assistance to the U.S. Air Force in
the Philippines. He questioned the payment of the income tax
assessed on him by CIR on an amount realized by him on a
sale of his automobile to a member of the US Marine
Corps., the transaction having taken place at the Clark
Field Air Base in Pampanga. It was his contention that in
legal contemplation the sale was made outside Philippine
territory and therefore beyond our jurisdictional power to
tax.

CIR v. Sinco Educational Corporation

October 23, 1956
Bautista-Angelo
Digest by: CG
Doctrine: The fact is that, as it has been established, the Appellee is a
non-profit institution and since its organization it has never distributed any

dividend or profit to its stockholders. Of course, part of its income went to

the payment of its teachers or professors and to the other expenses of the
college incident to an educational institution but none of the income has
ever been channeled to the benefit of any individual stockholder. The
authorities are clear to the effect that whatever payment is made to those
who work for a school or college as a remuneration for their services is not
considered as distribution of profit as would make the school one
conducted for profit.
Topic: Income Tax -> Exempt Corporations
Facts:
On September 21, 1951, the V. G. Sinco (former Dean of the UP
College of Law and President of the UP System) Educational
Institution was organized. This corporation was non-stock and was
capitalized by V. G. Sinco and members of his immediate family.
This corporation continued the operations of Foundation College of
Dumaguete.
Since its operation, this college derived, by way of tuition fees, the
following
yearly
gross
profits:
1949 P32,684.70;
1950 P88,341.80;
1951 P114,499.35;
1952 P83,259.04;
1953 P97,907.18
The Collector of Internal Revenue assessed against the college an
income tax for the years 1950 and 1951 in the aggregate sum of
P5,364.77, which was paid by the college. Two years thereafter, the
corporation commenced an action in the Court of First Instance of
Negros Oriental for the refund of this amount alleging that it is
exempt from income tax under section 27 (e) of the National
Internal Revenue Code. Pursuant to the provisions of Republic Act
1125, the case was remanded to the Court of Tax Appeals which,
after due trial, decided the case in favor of the corporation.
Appellee Petitioner: Invoking section 27 (e) of the National
Internal Revenue Code, it is exempt from the payment of the
income tax because it is organized and maintained exclusively for
the educational purposes and no part of its net income inures to
the benefit of any private individual. Appellant Respondent:
maintains that part of the net income accumulated by
the Appellee inured to the benefit of V. G. Sinco, president and
founder of the corporation, and therefore the Appellee is not
entitled to the exemption prescribed by the law. Appellant claims
that a great portion of the net profits realized by the corporation
was channeled and redounded to the personal benefit of V. G.
Sinco, who was its founder and president. Another benefit that
accrued to Sinco according to Appellantis represented by the
several amounts which appear payable to the Community
Publishers, Inc. because, being the biggest stockholder of this
entity, the money to be paid by the Appellee to that entity as
appearing in the above quoted entries would redound to the
personal benefit of Sinco.
Issue: WON the VG Sinco Educational institution should be taxed?

Held: No! It is a non-profit institution.

Dispositive: Wherefore, the decision appealed from is affirmed, without
pronouncement as to costs.
Ratio:
Dean Sinco made the following clarification: He acted as president
of the Foundation College and as chairman of its Board of
Directors; in 1949 he served as its teacher for a time; the
accountant of the college suggested that a certain amount be set
aside as his salary for purposes of orderly and practical accounting;
but notwithstanding this suggestion, he never collected his salary
for which reason it was carried in the books as accrued expenses.
With regard to the account of the Community Publishers, Inc.,
Sinco said that this is a distinct and separate corporation although
he is one of its stockholders. The account represents payment for
services rendered by this entity to the college. These are two
different entities and whatever relation there is between the two is
that the former merely extends help to the latter to enable it to
comply with the requirements of the law and to fill its needs for
educational purposes. This clarification made by Sinco stand
undisputed.
The fact is that, as it has been established, the Appellee is
a non-profit institution and since its organization it has
never distributed any dividend or profit to its stockholders.
Of course, part of its income went to the payment of its
teachers or professors and to the other expenses of the
college incident to an educational institution but none of
the income has ever been channeled to the benefit of any
individual stockholder. The authorities are clear to the
effect that whatever payment is made to those who work
for a school or college as a remuneration for their services
is not considered as distribution of profit as would make
the school one conducted for profit.
it is not denied that the Appellee charges tuition fees and other
fees for the different services it renders to the students and in fact
it is its only source of income, but such fact does not in itself make
the school a profit-making enterprise that would place it beyond
the purview of the law. Needless to say, every responsible
organization must be so run as to, at least, insure its existence, by
operating within the limits of its own resources, especially its
regular income. In other words, it should always strive, whenever
possible, to have a surplus. Upon the other hand, Appellants
pretense would limit the benefits of the exemption, under said
section 27 (e), to institutions which do not hope, or propose, to
have such surplus. Under this view, the exemption would apply
only to schools which are on the verge of bankruptcy, for unlike
the United States, where a substantial number of institutions of
learning are dependent upon voluntary contributions and still enjoy
economic stability, such as Harvard, the trust fund of which has
been steadily increasing with the years there are, and there
have always been, very few educational enterprises in the

Philippines which are supported by donations, and these

organizations usually have a very precarious existence. The final
result of Appellants contention, if adopted, would be to discourage
the establishment of colleges in the Philippines, which is precisely
the opposite of the objective consistently sought by our laws.

Jesus Sacred Heart College v. Collector of Internal Revenue

(appellant)
May 24, 1954
Concepcion, J.
Digest by Mimi H.
Topic: Exempt Corporations
Provisions:
Sec. 27, NIRC. Exemption from tax on corporation. The following
organizations shall not be taxed under this Title in respect to income
received by them as such
xxx
xxx
xxx
(e) Corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, cultural, or educational purposes,
or for the rehabilitation of veterans no part of the net income of which
inures to the benefit of any private stockholder or individual: Provided,
however, That the income of whatever kind and character from any of its
properties, real or personal, or from any activity conducted for profit
regardless of the disposition made of such income, shall be liable to the tax
imposed under this Code.
Facts:
Petitioner is an educational organization operating in Lucena,
Quezon, offering public elementary, secondary and collegiate
courses. For the years 1947 to 1949, petitioner earned a total of
P12,900 from tuition, and was then assessed for income tax, and
paid a total of P2,241 including penalties for late filing of income
tax returns.
Petitioner then filed a refund claim, which was denied by the
Collector. The Collector contended that the income in question was
derived form an "activity conducted for profit," and is therefore
taxable.
o If the educational activity is conducted for profit, it is
subject to tax (citing Institute of Holy Angels v. Bonder;
Borough v. State). The test is WON the institution gives to
the public at large substantially more than it receives "as a
public work or service to the state, without expectation of
remuneration." Also considered is WON tuition charges are
fixed in such a way as to show the intent to make profit
over and above the cost of tuition. Actual realization of
profits is immaterial.
o If non-sectarian schools and colleges which realize profits
are not exempted from levy, there would be no plausible

reason for exempting from tax sectarian schools and

colleges which are run for profit. And the argument that,
because the profits realized by Catholic Schools and
Colleges are invested in the expansion and improvement of
said schools and not distributed among the stockholders,
they should be free from income tax falls to the ground in
view of the last clause in the proviso: "regardless of the
disposition made of such income.
o Any activity conducted for profit shows Congress
intention to tax income from activities conducted for profit
which were formerly not embraced under the old law which
only taxed income from real and personal property.
Lower court: Found for petitioner. It is exempt from taxation under
Sec. 27(e). The Collector did not even attempt to prove that the
fees collected were considerable, or that petitioner had the intent
to make profit, or that the fees collected indicate that petitioner is
commercial.
Hence, this appeal from the Collector.

Issue: WON net income for tuition and other fees collected from
students by an educational institution is subject to income tax
Held: NO. There is no legislative intent to offer a blanket tax
exemption to telecommunications entities.
Dispositive: Wherefore, the decision appealed from is hereby
affirmed, without special pronouncement as to costs.
Ratio:
Every responsible corporation/association should strive to have a
surplus whenever such is possible. The Collectors interpretation of
Sec. 27(e) would in effect limit the exemption to those that do not
hope to attain a surplus. In effect, the exemption would only
apply to schools on the verge of bankruptcy. Unlike the US,
the Philippines has very few educational enterprises in the
Philippines which are supported by donations. Adopting the
Collectors view would discourage the establishment of colleges in
the Philippines which is precisely the opposite of the objective
sought by our laws.

The amount of fees charged by a school depends on the policy of a

given administration at a particular time. It is not conclusive of the
purpose of the institution. The purpose can be found in the
corporations articles of incorporation and by-laws.

Petitioners purpose is the instruction and education of

young girls.

In Art. 21 of the by-laws, the corporation was stated to be

non-profit. All income shall be devoted to the
maintenance, improvement and expenses of the College.

No part of its net income shall inure to the benefit of

private individuals.

Legislative history behind Sec. 27(e):

Section II, subdivision G (a), of the Act of Congress of the
United States of 1913: That nothing in this section shall
apply to any corporation or association organized and
operated exclusively for religious, charitable, scientific, or
education purposes, no part of the net income of which
inures to the benefit of any private stockholder or
individual, nor to business leagues, nor to chambers of
commerce or boards of trade, not organized for profit or no
part of the net income of which inures to the benefit of the
private stockholder or individual; nor to any civil league or
organization not organized for profit, but operated
exclusively for the promotion of social welfare.
This was reproduced in Act No. 2833, which added the
additional statement Provided, however, That the income
of whatever kind and character from any of its properties,
real or personal, except income expressly exempted by
this Law, shall be liable to the tax imposed under this
chapter.
In dealing with institutions organized and operated exclusively for
education purposes, the profit motive was disregarded, on
condition that the net income does not inure to the benefit
of any private stockholder or individual.
Congress had no intention of taxing matriculation, laboratory,
library, athletic and graduation fees and other fees of similar
nature, essential to, or necessarily connected with, the
educational purposes of an institution of learning. Congress
positively intended such fees to be exempt from taxation.

COMMISSIONER OF INTERNAL REVENUE v. YMCA

October 14, 1998

to the public, especially the young people, pursuant to its religious,

educational and charitable objectives.

In 1980, private respondent earned, among others, an income of

P676,829.80 from leasing out a portion of its premises to small
shop owners, like restaurants and canteen operators, and
P44,259.00 from parking fees collected from non-members.

On July 2, 1984, the commissioner of internal revenue (CIR) issued

an assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for deficiency
income tax, deficiency expanded withholding taxes on rentals and
professional fees and deficiency withholding tax on wages.

Private respondent formally protested the assessment and, as a

supplement to its basic protest, filed a letter dated October 8,
1985.

In reply, the CIR denied the claims of YMCA.

CTA issued this ruling in favor of the YMCA. CA affirmed.

Petitioner argues that while the income received by the

organizations enumerated in Section 27 (now Section 30) of the
NIRC is, as a rule, exempted from the payment of tax "in respect to
income received by them as such," the exemption does not apply
to income derived from any of their properties, real or personal, or
from any of their activities conducted for profit, regardless of the
disposition made of such income. "Rental income derived by a taxexempt organization from the lease of its properties, real or
personal, [is] not, therefore, exempt from income taxation, even if
such income is exclusively used for the accomplishment of its
objectives."

Panganiban J
Digest by Martin Lagmay
Topic: Prohibition Against Taxation of Religious/Charitable
Institutions
Facts:

Private Respondent YMCA is a non-stock, non-profit institution,

which conducts various programs and activities that are beneficial

Issue: WON the income derived from rentals of real property owned by
YMCA is subject to income tax
Held: Yes
Dispositive: WHEREFORE, the petition is GRANTED. The Resolutions of
the Court of Appeals dated September 28, 1995 and February 29, 1996 are
hereby dated February 16, 1995 is REVERSED and SET ASIDE. The
Decision of the Court of Appeals dated February 16, 1995
is REINSTATED, insofar as it ruled that the income tax. No
pronouncement as to costs.

Ratio:

Income of whatever kind and character of non-stock non-profit

organizations from any of their properties, real or personal, or from
any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to the tax
imposed under the NIRC.

Rental income derived by a tax-exempt organization from the lease

of its properties, real or personal, is not exempt from income
taxation, even if such income is exclusively used for the
accomplishment of its objectives.

Because taxes are the lifeblood of the nation, the Court has always
applied the doctrine of strict in interpretation in construing tax
exemptions (Commissioner of Internal Revenue v. Court of
Appeals, 271 SCRA 605, 613, April 18, 1997). Furthermore, a claim
of statutory exemption from taxation should be manifest and
unmistakable from the language of the law on which it is based.
Thus, the claimed exemption must expressly be granted in a
statute stated in a language too clear to be mistaken (Davao Gulf
Lumber Corporation v. Commissioner of Internal Revenue and
Court of Appeals, G.R. No. 117359, p. 15 July 23, 1998).

Verba legis non est recedendum. The law does not make a
distinction. The rental income is taxable regardless of whence such
income is derived and how it is used or disposed of. Where the law
does not distinguish, neither should we.

Private respondent also invokes Article XIV, Section 4, par. 3 of the

Constitution, claiming that it is a non-stock, non-profit educational
institution whose revenues and assets are used actually, directly
and exclusively for educational purposes so it is exempt from taxes
on its properties and income.

This is without merit since the exemption provided lies on the

payment of property tax, and not on the income tax on the rentals
of its property. The bare allegation alone that one is a non-stock,
non-profit educational institution is insufficient to justify its
exemption from the payment of income tax.

For the YMCA to be granted the exemption it claims under the

above provision, it must prove with substantial evidence that (1) it
falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from

taxation is used actually, directly, and exclusively for educational

purposes. Unfortunately for respondent, the Court noted that not a
scintilla of evidence was submitted to prove that it met the said
requisites.

In leasing its facilities to small shop owners and in operating

parking spaces, YMCA does not engage in any profit-making
business. These activities conducted on YMCA's property were
aimed not only at fulfilling the needs and requirements of its
members as part of YMCA's youth program but, more importantly,
at raising funds to finance the multifarious projects of the
Association.

In order to claim exemption from income tax, a corporation

or association must show that it is organized and operated
exclusively for religious, charitable, scientific, athletic,
cultural or educational purposes or for the rehabilitation of
veterans, and that no part of its income inures to the
benefit of any private stockholder or individual.

The majority, if not all, of the income of the organizations covered

by the exemption provided in Sec. 27, pars. (g) and (h), of the NIRC
are derived from their properties, real or personal. If we are to
interpret the last paragraph of Sec. 27 to the effect that all income
of whatever kind from the properties of said organization, real or
personal, are taxable, even if not conducted for profit, then Sec.
27, pars. (g) and (h), would be rendered ineffective and nugatory.
(so last paragraph applies only those income derived from these
properties for profit)

In YMCA of Manila v. Collector of Internal Revenue this Court

categorically held and found YMCA to be an educational institution
exclusively devoted to educational and charitable purposes and
not operated for profit. We ruled therein that YMCA cannot be said
to be an institution used exclusively for religious purposes or an
institution devoted exclusively for charitable purposes or an
institution devoted exclusively to educational purposes, but it can
be truthfully said that it is an institution used exclusively for all
three purposes (religious, charitable and educational) and that, as
such, it is entitled to be exempted from taxation.

LAO CIR vs. CA (G.R. No. 115349, April 18, 1997)

CIR v. MARUBENI
December 18, 2001
Puno, J.

Digest by: Monique Lee

Topic and Provisions: Exemptions from Taxation > Compared with
Other Terms > Tax Amnesty
Facts
Marubeni Corporation is a foreign corporation existing under the laws of
Japan. It is engaged in the general import and export trading, financing,
and construction business.
In November 1985, the CIR issued a Letter of Authority to examine the
Books of Accounts of the Manila branch office of the respondent. In the
course of the examination, it was found that respondent had an undeclared
income form two contracts in the Philippines, both of which were
completed in 1984 - one was with the National Development Company,
and the other was with Philippine Phosphate Fertilizer Corporation.
Marubeni received a letter from the CIR declaring its deficiency for Income,
Branch Profit Remittance, Contractors, and Commercial Brokers Taxes.
August 2, 1986: EO 41 was issued
- EO 41 declared a one-time amnesty for unpaid INCOME taxes for
the years 1981-1985.
- The period of amnesty was later extended from October 31, 1986
to December 5, 1986
August 22, 1986: EO 41 became effective
September 26, 1986: Marubeni filed 2 petitions with the CTA questioning
its deficiency tax assessments - CTA Case Nos. 4109 (Income, Branch
Profit, and Contractors) and 4110 (Commercial Brokers).
October 30, 1986: Marubeni filed its tax amnesty return with its SALN as of
Fiscal Year 1981-1986. Marubeni also paid the required 10% of its net
worth increase between 1981-1986.
November 17, 1986: EO 64 was issued
- EO 64 was a supplementary amendment to EO 41 which
expanded the scope and coverage of the said EO by including ESTATE and
DONORS taxes for the years 1981-1985.
- The period of amnesty under EO 64 was extended to January 31,
1987
December 15, 1986: Marubeni filed a supplemental tax amnesty return
under the benefit of EO 64.
CTA and CA held that respondent had properly availed of the tax amnesty
under EO Nos. 41 and 64. CIR filed a petition for review to the SC.
Issue/ Held
WON Marubeni properly availed of the tax amnesties / YES.

Dispositive
IN VIEW WHEREOF, the petition is DENIED.
Ratio
EO nos. 41 and 64 are TAX AMNESTY ISSUANCES. A tax amnesty is a
general pardon or intentional overlooking by the State of its authority to
imposed penalties on persons otherwise guilty of evasion or violation of a
revenue or tax law. It partakes of an absolute forgiveness or waiver by the
government of its right to collect what is due it and to give tax evaders
who wish to relent a chance to start with a clean slate. A tax amnesty,
much like a tax exemption, is never favoured nor presumed in law. If
granted, the terms of the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing
authority. Fir the right of taxation is inherent in government. The State
cannot strip itself of the most essential power of taxation by doubtful
words. He who claims an exemption (or amnesty) from the common burden
must justify his claim by the clearest grant of organic or state law. It cannot
be allowed to exist upon vague implication. If a doubt arises as to the
intent of the legislature, that doubt must be resolved in favor of the State.
INCOME and BRANCH PROFIT REMITTANCE TAX
It is CIRs contention that Marubeni is not covered by the tax amnesty
because according to Section 4(b) of EO 41, those who with income tax
cases already filed in Court as of the effectivity of the EO may not avail
themselves of the amnesty herein granted. The Court ruled that when EO
41 became effective on August 22, CTA Case No. 4109 HAS NOT YET BEEN
FILED in Court. The same ruling applies to the Branch Profit Remittance
Tax.
Bottom Line: Marubeni MAY avail of the tax amnesty granted under EO 41
CONTRACTORS TAX
Since EO 64 took effect on November 17, 1986, and Marubeni filed the CTA
Case on September 26, 1986 - the tax amnesty for Estate and Donors
Taxes cannot be availed of.
EO 64 is an amendment of EO 41.
EO 64 just expanded the scope and coverage of EO 41, therefore
all of the terms in EO 41 will apply to EO 64. Provided that the provisions
from the old EO are not contrary or inconsistent to the amendatory one.
Thus, the Exceptions under EO 41 will also apply to E0 64.
It has been held that where a statute amending a tax law is silent
as to whether it operates retroactively, the amendment will not be given
retroactive effect. There is nothing in EO 64 that provides that it should
retroact to the date of effectivity of EO 41. Neither is it necessarily implied
from EO 64 that it or any of its provisions may apply retroactively.
Bottom Line: Marubeni MAY NOT avail of the tax amnesty granted under
EO 64.

LEYNES CIR vs. St. Luke's Medical Center

LICAROS De La Salle University, Inc. vs. CIR (CTA EB No. 671, June 8, 2011)