Afisco Insurance Corp. et al. vs.

CA, CTA and

CIR
Facts:
The petitioners are 41 local insurance firms which
entered into Reinsurance Treaties with Munich, a nonresident foreign insurance corporation. The reinsurance
treaties required them to form an insurance pool or
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 dividends paid on Munich and to
the petitioners respectively. The assessments were
protested by the petitioners.
The CA ruled that the insurance pool was a partnership
taxable as a corporation and that the latters collection
of premiums on behalf of its members was taxable
income.
The petitioners belie the existence of a partnership
because, according to them, the reinsurers did not share
the same risk or solidary liability, there was no common
fund, the executive board of the pool did not exercise
control and management of its funds and the pool was
not engaged in business of reinsurance from which it
could have derived income for itself.
Issues:
a. May the insurance pool be deemed a partnership
or an association that is taxable as a corporation?
b. Should the pools remittances to member
companies and to Munich be taxable as
dividends?
Ruling: The pool is taxable as a corporation.

In the present case, the ceding companies

entered into a Pool Agreement or an association that
would handle all the insurance businesses covered
under their quota-sharing reinsurance treaty and
surplus reinsurance treaty with Munich. There are
unmistakable indicators that it is a partnership or
an association covered by NIRC.
a. The pool has a common fund, consisting of money
and other valuables that are deposited in the
name and credit of the pool.
b. The pool functions through an executive board
which resembles the BOD of a corporation.
c. Though the pool itself is not a reinsurer, its work is
indispensable, beneficial and economically useful
to the business of the ceding companies and
Munich because without it they would not have
received their premiums. Profit motive or business
is therefore the primordial reason for the pools
formation.
The fact that the pool does not retain any profit or
income does not 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 or co-action was indispensable to the
transaction of the business. If together they have
conducted business, profit must have been the object as
indeed, profit was earned. Though the profit was
apportioned among the members, this is one a matter
of consequence as it implies that profit actually
resulted.
Petitioners' reliance on Pascual v. Commissioner is
misplaced, because the facts obtaining therein are not

on all fours with the present case. In Pascual, there was

no unregistered partnership, but merely a co-ownership
which took up only 2 isolated transactions. The CA did
not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions
spanning more than 10 years, as in the case before us.

Pascual v. CIR

Internal Revenue Code that the unregistered

partnership was subject to corporate income tax as
distinguished from profits derived from the
partnership by them which is subject to individual
income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners
relieved petitioners of their individual income tax
liabilities but did not relieve them from the tax liability
of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency
income tax assessed.

FACTS:
Petitioners bought two (2) parcels of land and a
year after, they bought another three (3) parcels of
land. Petitioners subsequently sold the said lots in
1968 and 1970, and realized net profits. The
corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax
amnesties granted in the said years. However, the
Acting BIR Commissioner assessed and required
Petitioners 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
asserting that they had availed of tax amnesties way
back in 1974. In a reply, respondent Commissioner
informed petitioners that in the years 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, both of the National

ISSUE:
Whether the Petitioners should be treated as an
unregistered partnership or a co-ownership for the
purposes of income tax.
RULING:
The Petitioners are simply under the regime of
co-ownership and not under unregistered partnership.
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
(Art. 1767, Civil Code of the Philippines).
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. 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. Hence, 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.
Obillos v. CIR
FACTS:
Petitioners sold the lots they inherited from their
father and derived a total profit of P33,584 for each of
them. They treated the profit as capital gain and paid an
income tax thereof. The CIR required petitioners to pay
corporate income tax on their shares, .20% tax fraud
surcharge and 42% accumulated interest. Deficiency tax
was assessed on the theory that they had formed an
unregistered partnership or joint venture.
The Supreme Court, applying Art. 1769 of the Civil
Code, said that the sharing of gross returns does not
itself establish a joint partnership whether or the
persons sharing them have a joint or common right or

interest in the property from which the returns are

derived. There must, instead, be an unmistakable
intention to form that partnership or joint venture. A
sale of a co-ownership property at a profit does not
necessarily
establish
that
intention.
This is about the tax liability of 4 brothers & sisters who
sold 2 parcels of land which they had acquired from
their father. In 1973, Jose Obillos Sr bought 2 parcels of
land from Ortigas & Co & transferred his rights to his 4
children to enable them to build their residences. In
1974, the 4 children resold the lots to Walled City
Securities Corp & earned profit. CIR assessed the 4
children with corporate income tax. The Supreme Court,
applying Art. 1769 of the Civil Code, said that the
sharing of gross returns does not itself establish a joint
partnership whether or the persons sharing them have a
joint or common right or interest in the property from
which the returns are derived. There must, instead, be
an unmistakable intention to form that partnership or
joint venture. A sale of a co-ownership property at a
profit does not necessarily establish that intention.
This is about the tax liability of 4 brothers & sisters who
sold 2 parcels of land which they had acquired from
their father. In 1973, Jose Obillos Sr bought 2 parcels of
land from Ortigas & Co & transferred his rights to his 4
children to enable them to build their residences. In
1974, the 4 children resold the lots to Walled City
Securities Corp & earned profit. CIR assessed the 4
children with corporate income tax.

ISSUE:
Whether or not partnership was formed by the
siblings thus be assessed of the corporate tax.

Julia Buales died on March 23, 1944, leaving as

heirs her surviving spouse, Lorenzo T. Oa and her five
children

RULING:
Petitioners were co-owners and to consider them
partners would obliterate the distinction between coownership and partnership. The petitioners were not
engaged in any joint venture by reason of that isolated
transaction.

Because three of the heirs, namely Luz, Virginia

and Lorenzo, Jr., all surnamed Oa, were still minors
when the project of partition was approved, Lorenzo T.
Oa, their father and administrator of the estate, filed a
petition in Civil Case No. 9637 of the Court of First
Instance of Manila for appointment as guardian of said
minors. On November 14, 1949, the Court appointed
him guardian of the persons and property of the
aforenamed minors.
The project of partition shows that the heirs have
undivided one-half (1/2) interest in ten parcels of land
with a total assessed value of P87,860.00, six houses
with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War
Damage Commission.
Although the project of partition was approved by
the Court on May 16, 1949, no attempt was made to
divide the properties therein listed. Instead, the
properties remained under the management of Lorenzo
T. Oa who used said properties in business by leasing
or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in
real properties and securities. As a result, petitioners'
properties and investments gradually increased from
P105,450.00 in 1949 to P480,005.20 in 1956.
From said investments and properties petitioners
derived such incomes as profits from installment sales
of subdivided lots, profits from sales of stocks,
dividends, rentals and interests 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

Art 1769 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 partnership or joint venture.
It is error to hold that petitioners (Obillos) have
formed a taxable unregistered partnership simply
because they contributed in buying the lots, resold the
same & divided the profit among themselves. They are
simply co-owners. They were not engaged in any joint
venture by reason of the isolated transaction. The
original purpose was to divide the lots for residential
purposes. The division of the profit was merely
incidental to the dissolution of the co-ownership.

Ona v. CIR
FACTS:

On the basis of the foregoing facts, respondent

(Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax.
ISSUE:
Whether the
partnership

petitioners

formed

an

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.

Madrigal v. Rafferty

unregistered

HELD:
Yes, the petitioners formed an unregistered
partnership.
The Supreme Court held that that instead of
actually distributing the estate of the deceased among
themselves pursuant to the project of partition
approved in 1949, "the properties remained under the
management of Lorenzo T. Oa who used said
properties in business by leasing or selling them and
investing the income derived therefrom and the
proceeds from the sales thereof in real properties and
securities. It is thus incontrovertible that petitioners 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 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 petitioners proportionately in accordance
with their respective shares in the inheritance.
As already indicated, for tax purposes, the co-ownership
of inherited properties is automatically converted into
an unregistered partnership the moment the said
common properties and/or the incomes derived

FACTS:
In 1915, Vicente Madrigal filed a sworn
declaration with the CIR showing a total net income
for the year 1914 the sum of P296K. He claimed
that the amount did not represent his own income
for the year 1914, but the income of the conjugal
partnership existing between him and his wife,
Susana Paterno. He contended that since there
exists such conjugal partnership, the income
declared should be divided into 2 equal parts in
computing and assessing the additional income tax
provided by the Act of Congress of 1913. The
Attorney-General of the Philippines opined in favor
of Madrigal, but Rafferty, the US CIR, decided
against Madrigal.
After his payment under protest, Madrigal
instituted an action to recover the sum of P3,800
alleged to have been wrongfully and illegally
assessed and collected, under the provisions of the
Income Tax Law. However, this was opposed by
Rafferty, contending that taxes imposed by the
Income Tax Law are taxes upon income, not upon
capital or property, and that the conjugal
partnership has no bearing on income considered

as income. The CFI ruled in favor of the defendants,

Rafferty.
ISSUE:
Whether Madrigals income should be divided
into 2 equal parts in the assessment and
computation of his tax

between capital and income is that capital is a fund;

income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services
rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of
time is called income. Capital is wealth, while
income is the service of wealth. A tax on income is
not tax on property.

HELD:
NO. Susana Paterno, wife of Vicente Madrigal,
still has an inchoate right in the property of her
husband during the life of the conjugal partnership.
She has an interest in the ultimate property rights
and in the ultimate ownership of property acquired
as income after such income has become capital.
Susana has no absolute right to one-half the income
of the conjugal partnership. Not being seized of a
separate estate, she cannot make a separate return
in order to receive the benefit of exemption, which
could arise by reason of the additional tax. As she
has no estate and income, actually and legally
vested in her and entirely separate from her
husbands property, the income cannot be
considered the separate income of the wife for
purposes of additional tax.
Income, as contrasted with capital and
property, is to be the test. The essential difference

Fisher v. Trinidad
Facts:
Philippine American Drug Company was a
corporation duly organized and existing under the
laws of the Philippine Islands, doing business in the
City of Manila. Fisher was a stockholder in said
corporation. Said corporation, as result of the
business for that year, declared a "stock dividend"
and that the proportionate share of said stock
divided
of
Fisher
was
P24,800.
Said the
stock dividend for that amount was issued to Fisher.
For this reason, Trinidad demanded payment
of income tax for the stock dividend received by
Fisher. Fisher paid under protest the sum of P889.91
as income taxon said stock dividend. Fisher filed an
action for the recovery of P889.91. Trinidad

demurred to the petition upon the ground that it did

not state facts sufficient to constitute cause of
action. The demurrer was sustained and Fisher
appealed.
Issue:
Whether or not the stock dividend was an
income and therefore taxable.
Held:
No. Generally speaking, stock dividends
represent undistributed increase in the capital of
corporations or firms, joint stock companies, etc.,
etc., for a particular period. The inventory of the
property of the corporation for particular period
shows an increase in its capital, so that the
stock theretofore issued does not show the real
value of the stockholder's interest, and additional
stock is issued showing the increase in the actual
capital, or property, or assets of the corporation.
In the case of Gray vs. Darlington (82 U.S.,
653),
the
US
Supreme
Court
held
that
mere advance in value does not constitute the
"income" specified in the revenue law as "income"
of the owner for the year in which the sale of the
property was made. Such advance constitutes and
can be treated merely as an increase of capital.
In the case of Towne vs. Eisner, income was
defined in an income tax law to mean cash or its
equivalent, unless it is otherwise specified. It does
not mean unrealized increments in the value of the

property. A stock dividend really takes nothing from

the property of the corporation, and adds nothing to
the interests of the shareholders. Its property is not
diminished and their interest are not increased. The
proportional interest of each shareholder remains
the same. In short, the corporation is no poorer and
the stockholder is no richer than they were before.
In the case of Doyle vs. Mitchell Bros. Co. (247
U.S., 179), Mr. Justice Pitney, said that the term
"income" in its natural and obvious sense, imports
something distinct from principal or capital and
conveying the idea of gain or increase arising from
corporate activity.
In the case of Eisner vs. Macomber (252 U.S.,
189), income was defined as the gain derived from
capital, from labor, or from both combined,
provided it be understood to include profit gained
through a sale or conversion of capital assets.
When a corporation or company issues "stock
dividends"
it
shows
that
the
company's
accumulated profits have been capitalized, instead
of distributed to the stockholders or retained as
surplus available for distribution, in money or in
kind, should opportunity offer. The essential and
controlling fact is that the stockholder has received
nothing out of the company's assets for his
separate use and benefit; on the contrary, every
dollar of his original investment, together with
whatever accretions and accumulations resulting
from employment of his money and that of the

other stockholders in the business of the company,

still remains the property of the company, and
subject to business risks which may result in wiping
out of the entire investment. The stockholder by
virtue of the stock dividend has in fact received
nothing that answers the definition of an "income."
The stockholder who receives a stock dividend
has received nothing but a representation of his
increased interest in the capital of the corporation.
There has been no separation or segregation of his
interest. All the property or capital of the
corporation still belongs to the corporation. There
has been no separation of the interest of the
stockholder from the general capital of the
corporation. The stockholder, by virtue of the
stock dividend, has no separate or individual control
over the interest represented thereby, further than
he had before the stock dividend was issued. He
cannot use it for the reason that it is still the
property of the corporation and not the property of
the individual holder of stock dividend. A certificate
of stock represented by the stock dividend is simply
a statement of his proportional interest or
participation in the capital of the corporation. The
receipt of a stock dividend in no way increases the
money received of a stockholder nor his cash
account at the close of the year. It simply shows
that there has been an increase in the amount of
the capital of the corporation during the particular
period, which may be due to an increased business
or to a natural increase of the value of the capital
due to business, economic, or other reasons. We

believe that the Legislature, when it provided for an

"income tax," intended to tax only the "income" of
corporations, firms or individuals, as that term is
generally used in its common acceptation; that is
that the income means money received, coming to
a person or corporation for services, interest, or
profit from investments. We do not believe that the
Legislature intended that a mere increase in the
value of the capital or assets of a corporation, firm,
or individual, should be taxed as "income."
A stock dividend, still being the property of
the corporation and not the stockholder, may be
reached by an execution against the corporation,
and sold as a part of the property of the
corporation. In such a case, if all the property of the
corporation is sold, then the stockholder certainly
could not be charged with having received an
income by virtue of the issuance of the
stock dividend. Until the dividend is declared and
paid, the corporate profits still belong to the
corporation, not to the stockholders, and are liable
for corporate indebtedness. The rule is well
established that cash dividend, whether large or
small, are regarded as "income" and all stock
dividends, as capital or assets
If the ownership of the property represented
by a stock dividend is still in the corporation and
not in the holder of such stock, then it is difficult to
understand how it can be regarded as income to
the stockholder and not as a part of the capital or
assets of the corporation. If the holder of the

stock dividend is required to pay an income tax on

the same, the result would be that he has paid a tax
upon an income which he never received. Such a
conclusion is absolutely contradictory to the idea of
an income.

Limpan Investment Corporation v.

CIR
Facts:
BIR assessed deficiency taxes on
Limpan Corp, a company that leases real
property, for under declaring its rental
income for years 1956-57 by around P20K
and P81K respectively. Petitioner appeals
on the ground that portions of these
under declared rents are yet to be
collected by the previous owners and
turned
over
or
received
by
the
corporation. Petitioner cited that some
rents were deposited with the court, such
that the corporation does not have actual
nor constructive control over them.
The sole witness for the petitioner,
Solis
(Corporate
Secretary-Treasurer)
admitted to some undeclared rents in

1956 and1957, and that some balances

were not collected by the corporation in
1956 because the lessees refused to
recognize and pay rent to the new owners
and that the corporations president
Isabelo Lim collected some rent and
reported it in his personal income
statement, but did not turn over the rent
to the corporation. He also cites lack of
actual or constructive control over rents
deposited with the court.
ISSUE:
WON the BIR was correct in assessing
deficiency taxes against Limpan Corp. for
undeclared rental income
HELD:
Yes. Petitioner admitted that it indeed
had undeclared income (although only a
part and not the full amount assessed by
BIR). Thus, it has become incumbent upon
them to prove their excuses by clear and
convincing evidence, which it has failed to
do.

With regard to 1957 rents deposited

with the court, and withdrawn only in
1958, the court viewed the corporation as
having constructively received said rents.
The non-collection was the petitioners
fault since it refused to refuse to accept
the rent, and not due to non-payment of
lessees. Hence, although the corporation
did not actually receive the rent, it is
deemed to have constructively received
them.

CTA held that the proper conversion rate for the

purpose of reporting and paying the Philippine income
tax on the dollar earnings of petitioners are the
rates prescribed under Revenue Memorandum Circulars
Nos. 7-71 and 41-71. The refund claims were denied.
Issues:
(1) Whether or not petitioners' dollar earnings are
receipts derived from foreign exchange transactions;
NO.
(2) Whether or not the proper rate of conversion of
petitioners' dollar earnings for tax purposes in the
prevailing free market rate of exchange and not the par
value of the peso; YES.
Held:

Conwi v. CTA
Facts:
Petitioners are employees of Procter and Gamble
(Philippine Manufacturing Corporation, subsidiary of
Procter & Gamble, a foreign corporation).During the
years 1970 and 1971, petitioners were assigned to
other subsidiaries of Procter & Gamble outside the
Philippines, for which petitioners were paid US dollars as
compensation.
Petitioners filed their ITRs for 1970 and 1971,
computing tax due by applying the dollar-to-peso
conversion based on the floating rate under BIR Ruling
No. 70-027. In 1973, petitioners filed amended ITRs for
1970 and 1971, this time using the par value of the
peso as basis. This resulted in the alleged
overpayments, refund and/or tax credit, for which
claims for refund were filed.

For the proper resolution of income tax cases,

income may be defined as an amount of money coming
to a person or corporation within a specified time,
whether as payment for services, interest or profit from
investment. Unless otherwise specified, it means cash
orits equivalent.
Petitioners are correct as to their claim that their
dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange
transaction is simply that a transaction in foreign
exchange, foreign exchange being "the conversion of an
amount of money or currency of one country into an
equivalent amount of money or currency of another."
When petitioners were assigned to the foreign
subsidiaries of Procter & Gamble, they were earning in
their assigned nation's currency and were ALSO
spending in said currency. There was no conversion,
therefore, from one currency to another.

The dollar earnings of petitioners are the fruits of

their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came
to them within a specified period of time of two years as
payment for their services.
And in the implementation for the proper
enforcement of the National Internal Revenue Code,
Section 338 thereof empowers the Secretary of Finance
to "promulgate all needful rules and regulations" to
effectively enforce its provisions pursuant to this
authority, Revenue Memorandum Circular Nos. 7-71 and
41-71 were issued to prescribed a uniform rate of
exchange
from US
dollars to
Philippine
pesos
for INTERNAL REVENUE TAX PURPOSES for the years
1970 and 1971, respectively. Said revenue circulars
were a valid exercise of the authority given to the
Secretary of Finance by the Legislature which enacted
the Internal Revenue Code. And these are presumed to
be a valid interpretation of said code until revoked by
the Secretary of Finance himself.
Petitioners are citizens of the Philippines, and their
income, within or without, and in these cases wholly
without, are subject to income tax. Sec. 21, NIRC, as
amended, does not brook any exemption.

Commissioner v. Glenshaw
Glass Co.
FACTS:

In a case between Glenshaw Glass

Co. manufacturer of glass bottles and
containers,
and
Hartford-Empire
Company, manufacturer of machinery of a
character used by Glenshaw, Hartford
paid Glenshaw $800K as settlement. Out
of this amount, $325K represented
payment for exemplary damages for fraud
and treble damages for injury to its
business by reason of Hartfords violation
of federal antitrust laws. However, this
portion was not reported as income for
the tax year involved. The Commissioner
determined a deficiency, claiming as
taxable the whole amount less deductible
legal fees.
ISSUE:
Whether money
received as
exemplary damages for fraud or as the
punitive 2/3 portion of a treble damage
antitrust recovery must be reported by a
taxpayer as gross income under Sec 22 of
Internal Revenue Code of 1939

HELD:
YES. Under Sec 22, gross income
includes gain, profits, and income derived
from salaries, wages or compensation for
personal service of whatever kind and
in whatever form paid or from professions,
vocations, trades, businesses, commerce
or sales, or dealings in property, whether
real or personal or gains or profits and
income
derived
from
any
source
whatever
Through
this
catch-all
provision, Congress applied no limitations
as to the source of neither taxable
receipts nor restrictive labels as to their
nature and intended to tax all gains
except those specifically exempted. The
mere fact that the payments were
extracted from wrongdoers as punishment
for unlawful conduct cannot detract from
their character as taxable income to the
recipients.

Murphy v. IRS
Murphy had sued to recover income taxes
that she paid on the compensatory damages for
emotional distress and loss of reputation that
she was awarded in an action against her
former employer under whistle-blower statutes
for reporting environmental hazards on her
former employers property to state authorities.
Murphy had claimed both physical and
emotional-distress damages as a result of her
former employers retaliation and mistreatment.
In a prior administrative proceeding,
Murphy had been awarded compensatory
damages of $70,000, of which $45,000 was for
emotional distress or mental anguish and $
25,000 was for injury to professional
reputation. Murphy reported the $70,000
award as part of her gross income and paid
$20,665 in Federal income taxes based upon
the award.
Section 104(a)(2) of the Internal Revenue
Code excludes, from gross income, amounts
"received . . . on account of personal physical
injuries." The statute provides that for purposes
of that exclusion, "emotional distress shall not
be treated as a physical injury or physical

sickness." Based on that provision, Murphy

sought a refund of the full amount of tax,
arguing that the award should be exempt from
taxation both because the award was in fact
to compensate for physical personal injuries
and because the award was not income within
the meaning of the Sixteenth Amendment.
Interpreting Section 104(a)(2), the D.C.
Circuit first held in August 2006 that the
damages at issue did not fall within the scope of
the statute because the damages were not in
fact to compensate for personal physical
injuries, and thus could not be excluded from
gross income under that provision.
The D.C. Circuit next analyzed whether
Section 104(a)(2) is constitutional, relying
upon language from Commissioner v. Glenshaw
Glass Co. to the effect that, under the Sixteenth
Amendment, Congress may tax all gains or
accessions to wealth. Murphy argued that her
award was neither a gain nor an accession to
wealth because it compensated her for
nonphysical injuries, and was thus effectively a
restoration of human capital.
Recognizing that the Supreme Court has
long held that a restoration of capital [i]s not
income, and thus is not taxable, and that
personal injury recoveries have traditionally
been considered nontaxable on the theory that

they roughly correspond to a return of capital,

the D.C. Circuit accepted Murphys argument in
its August 2006 decision. The D.C. Circuit
reasoned that Murphys award for emotional
distress or loss of reputation is not taxable
because her damages were awarded to make
Murphy emotionally and reputationally whole
and not to compensate her for lost wages or
taxable earnings of any kind. The D.C. Circuit
also explained that a 1918 opinion of the
Attorney General stating that proceeds from an
accident insurance policy were not taxable
income and a 1922 IRS ruling that damages
based on loss of reputation were not taxable
income, both issued relatively near the
Sixteenth Amendments ratification in 1913,
support its ruling. The D.C. Circuit thus
concluded that the framers of the Sixteenth
Amendment would not have understood
compensation for a personal injury including a
nonphysical injury to be income. Murphys
position was that her award constituted only
monies that made her whole and, in effect,
was a return of her human capital.
HELD:
The Court ruled:

(1) That the taxpayer's compensation was

received on account of a non-physical injury or
sickness;
(2) That gross income under section 61 of the
Internal
Revenue
Code
does
include
compensatory
damages
for
non-physical
injuries, even if the award is not an "accession
to wealth,"
(3) that the income tax imposed on an award for
non-physical injuries is an indirect tax,
regardless of whether the recovery is
restoration of "human capital," and therefore
the tax does not violate the constitutional
requirement of Article I, section 9, that
capitations or other direct taxes must be laid
among the states only in proportion to the
population;
(4) that the income tax imposed on an award for
non-physical injuries does not violate the
constitutional requirement of Article I, section 8,
that all duties, imposts and excises be uniform
throughout the United States;
(5) That under the doctrine of sovereign
immunity, the Internal Revenue Service may not
be sued in its own name.

The
Court
stated:
"[a]lthough
the
'Congress cannot make a thing income which is
not so in fact,' [ . . . ] it can label a thing income
and tax it, so long as it acts within its
constitutional authority, which includes not only
the Sixteenth Amendment but also Article I,
Sections 8 and 9." The court ruled that Ms.
Murphy was not entitled to the tax refund she
claimed, and that the personal injury award she
received was "within the reach of the
congressional power to tax under Article I,
Section 8 of the Constitution" -- even if the
award was "not income within the meaning of
the Sixteenth Amendment".

Old Colony Trust Co. v. CIR

Facts:
In
1916,
the American
Woolen
Company adopted
a resolution which
provided that the company would pay all
taxes due on the salaries of the
company's officers.
It
calculated
the

employees' tax liabilities based on a gross

income that omitted, or excluded, the
amount of the income taxes themselves.
In
1925,
the Bureau
of
Internal
Revenue assessed a deficiency for the
amount of taxes paid on behalf of the
company's president, William Madison Wood,
arguing that his $681,169.88 tax payment
had wrongly been excluded from his gross
income in 1919, and that his $351,179.27
tax payment had wrongly been excluded
from his gross income in 1920. Old Colony
Trust Co., as the executors of Wood's estate,
filed suit in the District Court for a refund,
then appealed to the Board of Tax Appeals
(the predecessor to the United States Tax
Court).
The petitioners then appealed the
Board's decision to the United States Court
of Appeals for the First Circuit.
Issue. Were the taxes paid by the company
additional income of Wood?
Held:

The payment of Mr. Wood's taxes by his

employer constituted additional taxable
income to him for the years in question. The
fact that a person induced or permitted a
third party from paying income taxes on his
behalf does not excuse him from filing a tax
return. Furthermore, "The discharge by a
third person of an obligation to him is
equivalent to receipt by the person taxed."
Thus, the company's payment of Wood's
tax bill was the same as giving him extra
income, regardless of the mode of payment.
Nor could the payment of taxes of Wood's
behalf constitute a gift in the legal sense,
because it was made in consideration of his
services to the company, thus making it part
of his compensation package. (This case did
not change the general rule that gifts are not
includable in gross income for the purposes
of U.S. Federal income taxation, while some
gifts but not all gifts from an employer to an
employee are taxable to the employee.
Helvering v. Bruun
Facts: Bruun repossessed land from a tenant who
had defaulted in the eighteenth year of a 99-year lease.

During the course of the lease, the tenant had torn

down an old building (in which the landlords adjusted
basis was now $12,811.43) and built a new one (whose
value was now $64,245.68). The lease had specified
that the landlord was not required to compensate the
tenant for these improvements.
Thus,
the government argued
that
upon repossession the landlord realized a gain of
$51,434.25. The landlord argued that there was no
realization of the property because no transaction had
occurred, and because the improvement of the property
that created the gain was not "severable" from the
landlord's original capital.
Issue: WON a landlord realize a taxable gain when
he repossess property improved by a tenant.

"It is not necessary to recognition of taxable gain that

he should be able to sever the improvement begetting
the gain from his original capital. If that were necessary,
no income could arise from the exchange of property,
whereas such gain has always been recognized as
realized taxable gain."
The Court added that, while not all economic gain
is "realized" for taxation purposes, realization does not
require that the economic gain be in "cash derived from
the sale of an asset". Realization can also arise from
property exchange; relief of indebtedness; or other
transactions yielding profite.g. by receiving an asset
with enhanced value in a transaction, even where
severance does not occur (i.e. even where "the gain is a
portion of the value of property received by the
taxpayer in the transaction").

Held:
The improvements, the Court observed, were
received by the taxpayer "as a result of a business
transaction," namely, the leasing of the taxpayer's land.
It was not necessary to the recognition of gain that the
improvements be severable from the land; all that had
to be shown was that the taxpayer had acquired
valuable assets from his lease in exchange for the use
of his property. The medium of exchangewhether cash
or kind, and whether separately disposable or "affixed"-was immaterial as far as the realization criterion was
concerned. In effect, the improvements represented
rent, or rather a payment in lieu of rent, which was
taxable to the landlord regardless of the form in which it
was received.
"Severance" is not necessary for realization:

NOTE:

Congress nullified Bruun by enacting 109 and

1019 of the Internal Revenue Code:
109 excludes, from a lessor's income, the value
of
leasehold
improvements
realized
on
termination of a lease.
1019 then denies the lessor a basis for the
property so excluded.
These provisions overrule the proposition announced in
"Bruun," that repossession of an asset with an enhanced
value from a transaction with another party is gross
income.
The aim of 109-1019 was to relieve lessorssuddenly
confronted with large tax obligationsof the need to

raise cash in a hurry, at a time (the 1930s) when the

real estate market was scraping bottom. An inadvertent
side effect of the means chosenpermitting current
income to be deferred to later periodwas to reduce
the lessor's tax obligation absolutely, by postponing his
realization of any improvements to the sale of the
property.

CIR v. CA (JANUARY 22, 1999)

Facts:

Sometime in the 1930s, Don Andres Soriano,

a citizen and resident of the United States, formed
the corporation A. Soriano Y Cia, predecessor of
ANSCOR with a 1,000,000.00 capitalization divided
into 10,000 common shares at a par value of
P100/share.
ANSCOR
is
wholly
owned
and controlled by the family of Don Andres, who are
all non-resident aliens. In 1937, Don Andres
subscribed to 4,963 shares of the 5,000 shares
originally
issued.
On September 12, 1945, ANSCORs authorized
capital stock was increased to P2,500,000.00
divided into 25,000 common shares with the same
par value. Of the additional 15,000 shares, only
10,000 was issued which were all subscribed by
Don Andres, after the other stockholders waived in
favor of the former their pre-emptive rights to
subscribe to the new issues. This increased his

subscription to 14,963 common shares. A month

later, Don Andres transferred 1,250 shares each to
his two sons, Jose and Andres Jr., as their initial
investments in ANSCOR. Both sons are foreigners.
By 1947, ANSCOR declared stock dividends.
Other stock dividend declarations were made
between 1949 and December 20, 1963. On
December 30, 1964 Don Andres died. As of that
date, the records revealed that he has a total
shareholdings of 185,154 shares. 50,495 of which
are original issues and the balance of 134,659
shares
as
stock
dividend declarations.
Correspondingly, one-half of that shareholdings or
92,577 shares were transferred to his wife, Doa
Carmen Soriano, as her conjugal share. The offer
half
formed
part
of
his
estate.
A day after Don Andres died, ANSCOR
increased its capital stock to P20M and in 1966
further increased it to P30M. In the same year,
stock dividends worth 46,290 and 46,287 shares
were respectively received by the Don Andres
estate and Doa Carmen from ANSCOR. Hence,
increasing their accumulated shareholdings to
138,867 and 138,864 common shares each.
On December 28, 1967, Doa Carmen
requested a ruling from the United States Internal

Revenue Service (IRS), inquiring if an exchange of

common with preferred shares may be considered
as a tax avoidance scheme. By January 2, 1968,
ANSCOR reclassified its existing 300,000 common
shares into 150,000 common and 150,000 preferred
shares.
In a letter-reply dated February 1968, the IRS
opined that the exchange is only a recapitalization
scheme and not tax avoidance. Consequently, Doa
Carmen exchanged her whole 138,864 common
shares for 138,860 of the preferred shares. The
estate of Don Andres in turn exchanged 11,140 of
its common shares for the remaining 11,140
preferred
shares.
In 1973, after examining ANSCORs books of
account and record Revenue examiners issued a
report proposing that ANSCOR be assessed for
deficiency withholding tax-at-source, for the year
1968 and the 2nd quarter of 1969 based on the
transaction of exchange and redemption of stocks.
BIR
made
the
corresponding
assessments.
ANSCORs subsequent protest on the assessments
was denied in 1983 by petitioner. ANSCOR filed a
petition for review with the CTA, the Tax Court
reversed petitioners ruling. CA affirmed the ruling of
the
CTA.
Hence
this
position.

Issue:
Whether
or
not
a
person
assessed
for
deficiency withholding tax under Sec. 53 and 54 of
the Tax Code is being held liable in its capacity as a
withholding
agent.

Held:
An income taxpayer covers all persons who derive
taxable income. ANSCOR was assessed by
petitioner for deficiency withholding tax, as such, it
is being held liable in its capacity as a withholding
agent and not in its personality as taxpayer. A
withholding agent, A. Soriano Corp. in this case,
cannot be deemed a taxpayer for it to avail of a tax
amnesty under a Presidential decree that condones
the collection of all internal revenue taxes
including the increments or penalties on account of
non-payment as well as all civil, criminal,
or administrative liabilities arising from or incident
to voluntary disclosures under the NIRC of
previously untaxed income and/or wealth realized
here or abroad by any taxpayer, natural or
juridical. The Court explains: The withholding
agent is not a taxpayer, he is a mere tax collector.
Under the withholding system, however, the agent-

payer becomes a payee by fiction of law. His

liability is direct and independent from the
taxpayer, because the income tax is still imposed
and due from the latter. The agent is not liable for
the tax as no wealth flowed into him, he earned no
income.

dividends, were distributed to its stockholders. The

Hong Kong Company then paid the income tax for the
entire earnings. As a result of the sale of its business
and assets, a surplus was realized by the Hong Kong
Company after deducting the dividends. This surplus
was also distributed to its stockholders. The Hong
Kong Company also paid the income tax for the said
surplus. The petitioners then filed their respective
income tax returns. The respondent Commissioner,
then, made a deficiency assessment charging the
individual stockholders for taxes on the shares
distributed to them despite the fact that income tax
was already paid by the Hong Kong Company. The
petitioners paid the assessed amount in protest. The
lower courts ruled in favor of the Commissioner of
Internal Revenue, hence, this action.

Issue(s):
1. Whether the amount received by the petitioners
were ordinary dividends or liquidating dividends.
2. Whether such dividends were taxable or not.
3. Whether or not the profits realized by the nonresident alien individual appellants constitute income
from the Philippines considering that the sale took
place outside the Philippines.
Wise & Co. v. Meer
Facts:
On June 1, 1937, Manila Wine Merchants, Ltd., a
Hong Kong company, was liquidated and its capital
stock was distributed to its stockholders, one of which
is the petitioner. As part of its liquidation, the
corporation was sold to Manila Wine Merchants., Inc.
for Php400, 000. The said earnings, declared as

Held:
1. The dividends are liquidating dividends or
payments for surrendered or relinquished stock in a
corporation in complete liquidation. It was
stipulated in the deed of sale that the sale and
transfer of the corporation shall take effect on June
1, 1937 while distribution took place on June 8.
They could not consistently deem all the business

and assets of the corporation sold as of June 1,

1937,
and still say that said corporation, as a
going concern, distributed ordinary dividends to
them thereafter.
2. Yes. Petitioners received the said distributions in
exchange for the surrender and relinquishment by
them of their stock in the liquidated corporation.
That money in the hands of the corporation formed
a part of its income and was properly taxable to it
under the Income Tax Law. When the corporation
was dissolved in the process of complete liquidation
and its shareholders surrendered their stock to it
and it paid the sums in question to them in
exchange,
a
transaction
took
place.
The
shareholder who received the consideration for the
stock earned received that money as income of his
own, which again was properly taxable to him under
the Income Tax Law.
3. The contention of the petitioners that the
earnings cannot be considered as income from the
Philippines because the sale was made outside the
Philippines and is not subject to Philippine tax law is
untenable. At the time of the sale, the Hong Kong
Company was engage in its business in the
Philippines. Its successor was a domestic
corporation and doing business also in the
Philippines. It must be taken into consideration
that the Hong Kong Company was incorporated for
the purpose of carrying business in the Philippine
Islands. Hence, its earnings, profits and assets,
including those from whose proceeds the

distribution was made, had been earned and

acquired in the Philippines. It is clear that the
distributions in questions were income from
Philippine sources, hence, taxable under Philippine
law.
James v. US
FACTS:
The defendant, Eugene James, was an official
in a labor union who had embezzled more than
$738,000 in union funds, and did not report these
amounts on his tax return. He was tried for tax
evasion, and claimed in his defense that embezzled
funds did not constitute taxable income because,
like a loan, the taxpayer was legally obligated to
return those funds to their rightful owner Indeed,
James pointed out, the Supreme Court had
previously made such a determination in
Commissioner v. Wilcox, 327 U.S. 404 (1946).
However, this defense was unavailing in the trial
court, where Eugene James was convicted and
sentenced to three years in prison.
ISSUE:
Whether or not the receipt of embezzled funds
constitutes income taxable to the wrongdoer, even
though an obligation to repay exists. YES
RULING:
The Supreme Court of the US ruled that the
receipt of embezzled funds was includable in the
gross income of the wrongdoer and was taxable to

the wrongdoer, even though the wrongdoer had an

obligation to return the funds to the rightful owner.
If a taxpayer receives income, legally or
illegally,
without
consensual
recognition
of
obligation to repay, that income is automatically
taxable. The Court noted that the Sixteenth
Amendment did not limit its scope to "lawful"
income, a distinction which had been found in the
Revenue Act of 1913. The removal of this modifier
indicated that the framers of the Sixteenth
Amendment had intended no safe harbor for illegal
income.
The Court also ruled, however, that Eugene
James could not be held liable for the willful tax
evasion because it is not possible to willfully violate
laws that were not established at the time of the
violation.
Embezzled money is taxable income of the
embezzler in the year of the embezzlement under
22 (a) of the Internal Revenue Code of 1939, which
defines "gross income" as including "gains or profits
and income derived from any source whatever,"
and under 61 (a) of the Internal Revenue Code of
1954, which defines "gross income" as "all income
from whatever source derived."
The language of 22 (a) of the 1939 Code,
"gains or profits and income derived from any
source whatever," and the more simplified
language of 61 (a) of the 1954 Code, "all income
from whatever source derived," have been held to

encompass all "accessions to wealth, clearly

realized, and over which the taxpayers have
complete dominion.".
A gain "constitutes taxable income when its
recipient has such control over it that, as a practical
matter, he derives readily realizable economic
value from it." Under these broad principles, we
believe that petitioner's contention, that all
unlawful gains are taxable except those resulting
from embezzlement, should fail.

CIR v. CA (March 23, 1992)

FACTS:
GCL Retirement Plan 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
withholding tax imposed by Pres. Decree No.
1959, 2 which took effect on 15 October 1984.
GCL filed with Petitioner a claim for refund
in the amounts of P1, 312.66 withheld by Anscor

Capital and Investment Corp., and P2,064.15 by

Commercial Bank of Manila. On 12 February 1985,
it filed a second claim for refund of the amount of
P7,925.00 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 Rep. Act No. 4917 in
relation to Section 56 (b) 3 of the Tax Code.
CIR denied the refund, Petitioner elevated
the matter to CTA. CTA 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 the CTA Decision.
CIR s Contention - 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 Pres. Decree No. 1959. Petitioner
thus submits that the deletion of the exempting
and preferential tax treatment provisions under
the old law is a clear manifestation that the single
15% (now 20%) rate is impossible on all interest
incomes from deposits, deposit substitutes, trust

funds and similar arrangements, regardless of the

tax status or character of the recipients thereof.
In short, petitioner's position is that from 15
October 1984 when Pres. Decree No. 1959 was
promulgated, employees' trusts ceased to be
exempt and thereafter became subject to the final
withholding tax. GCL contention - the tax exempt
status of the employees' trusts applies to all kinds
of taxes, including the final withholding tax on
interest income. That exemption, according to
GCL, is derived from Section 56(b) and not from
Section 21 (d) or 24 (cc) of the Tax Code.
ISSUE: Whether or not GCL is exempted from
Income Tax. YES
RULING:
GCL Plan was qualified as exempt from
income tax by the Commissioner of Internal
Revenue in accordance with Rep. Act No. 4917
approved on 17 June 1967. 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, supra, which took
effect on 22 June 1957.
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 deletion in Pres. Decree No. 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, cannot repeal by
implication a specific provision, Section 56(b) now
53 [b]) in relation to RA No. 4917 granting
exemption from income tax to employees' trusts.
RA 1983, which accepted employees' trusts
in its Section 56 (b) was effective on 22 June 1957
while Rep. Act No. 4917 was enacted on 17 June
1967, long before the issuance of Pres. Decree
No. 1959 on 15 October 1984.

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
(Villegas v. Subido, G.R. No. L-31711, 30
September 1971, 41 SCRA 190).
There can be no denying either that the final
withholding tax is collected from income in
respect of which employees' trusts are declared
exempt (Sec. 56 [b], now 53 [b], Tax Code). The
application of the withholdings system to interest
on bank deposits or yield from deposit substitutes
is essentially to maximize and expedite the
collection of income taxes by requiring its
payment at the source. If an employees' trust like
the GCL enjoys a tax-exempt status from income,
we see no logic in withholding a certain
percentage of that income which it is not
supposed to pay in the first place.

CIR v. CA (October 17, 1991)

FACTS:
Efren Castaneda retired from govt
service as Revenue Attache in the
Philippine Embassy, London, England.
Upon retirement, he received benefits
such as the terminal leave pay. The
Commissioner
of
Internal
Revenue
withheld P12,557 allegedly representing
that it was tax income. Castaneda filed for
a refund, contending that the cash
equivalent of his terminal leave is exempt
from income tax. The Solicitor General
contends that the terminal leave is based
from an employer-employee relationship
and that as part of the services rendered
by the employee, the terminal leave pay
is part of the gross income of the
recipient. CTA ruled in favor of Castaneda
and ordered the refund. CA affirmed
decision of CTA. Hence, this petition for
review on certiorari.
ISSUE:

Whether or not terminal leave pay

(on
occasion
of
his
compulsory
retirement) is subject to withholding
income tax. NO
RULING:
As explained in Borromeo v CSC, the
rationale of the court in holding that
terminal leave pays are subject to income
tax is that: . . Commutation of leave
credits, more commonly known as
terminal leave, is applied for by an officer
or employee who retires, resigns or is
separated from the service through no
fault of his own. In the exercise of sound
personnel
policy,
the
Government
encourages
unused
leaves
to
be
accumulated. The Government recognizes
that for most public servants, retirement
pay is always less than generous if not
meager and scrimpy. A modest nest egg
which the senior citizen may look forward
to is thus avoided. Terminal leave
payments are given not only at the same
time but also for the same policy
considerations
governing
retirement

benefits. A terminal leave pay is a

retirement benefit which is NOT subject to
income tax. Petition denied.

Re: Request of Atty. Bernardo

Zialcita
Facts:
Amounts were claimed by Atty. Bernardo F.
Zialcita on the occasion of his retirement. On 23
August 1990, a resolution was issued by the
Court En Banc stating that the terminal leave
pay of Atty. Zialcita received by virtue of his
compulsory retirement can never be considered
a part of his salary subject to the payment of
income tax but falls under the phrase other
benefits received by retiring employees and
workers, within the meaning of Section 1 of PD
220 and is thus exempt from the payment of
income tax. That the money value of his
accrued leave credits is not part of his salary is
buttressed by Section 3 of PD 985, which it
makes it clear that the actual service is the

period of time for which pay has been received,

excluding the period covered by terminal leave.
The Commissioner filed a motion for
reconsideration. The Commissioner of Internal
Revenue, as intervenor-movant and through the
Solicitor General, filed a motion for clarification
and/or reconsideration with this Court.
The Court resolved to deny the motion for
reconsideration and hereby holds that the
money value of the accumulated leave credits
of Atty. Bernardo Zialcita are not taxable for the
following reasons: 1) Atty. Zialcita opted to
retire under the provisions of Republic Act 660,
which is incorporated in Commonwealth Act No.
186. Section 28(c) of the same Act, in turn,
provides: (c) Except as herein otherwise
provided, the Government Service Insurance
System, all benefits granted under this Act, and
all its forms and documents required of the
members shall be exempt from all types of
taxes, documentary stamps, duties and
contributions, fiscal or municipal, direct or
indirect, established or to be established. 2) The
commutation of leave credits is commonly
known as terminal leave.
Terminal leave is applied for by an officer
or employee who retires, resigns or is separated
from the service through no fault of his own.

Since terminal leave is applied for by an officer

or employee who has already severed his
connection with his employer and who is no
longer working, then it follows that the terminal
leave pay, which is the cash value of his
accumulated leave credits, is no longer
compensation for services rendered. It cannot
be viewed as salary.
ISSUES:
Whether or not the retirement benefit of Zialcita
is taxable. NO Whether or not the terminal leave
pay is exempt from tax; as well as other
amounts claimed herein. YES
RULING:
1. The retirement benefit is not taxable. In
the case of Atty. Zialcita, he rendered
government service from March 13, 1962 up to
February 15, 1990. The next day, or on February
16, 1990, he reached the compulsory retirement
age of 65 years. Upon his compulsory
retirement, he is entitled to the commutation of
his accumulated leave credits to its money
value.
Within the purview of the above-mentioned
provisions of the NLRC, compulsory retirement
may be considered as a "cause beyond the

control of the said official or employee".

Consequently, the amount that he received by
way of commutation of his accumulated leave
credits as a result of his compulsory retirement,
or his terminal leave pay, fags within the
enumerated exclusions from gross income and
is therefore not subject to tax.
The terminal leave pay of Atty. Zialcita
may likewise be viewed as a "retirement
gratuity received by government officials and
employees" which is also another exclusion
from gross income as provided for in Section
28(b), 7(f) of the NLRC. A gratuity is that paid to
the beneficiary for past services rendered
purely out of generosity of the giver or grantor.
It is a mere bounty given by the government in
consideration or in recognition of meritorious
services and springs from the appreciation and
graciousness of the government.
When a government employee chooses to
go to work rather than absent himself and
consume his leave credits, there is no doubt
that the government is thereby benefited by the
employee's uninterrupted and continuous
service. It is in cognizance of this fact that laws
were passed entitling retiring government
employees, among others, to the commutation
of their accumulated leave credits. The
commutation of accumulated leave credits may

thus be considered a retirement gratuity, within

the import of Section 28(b), 7(f) of the NLRC,
since it is given only upon retirement and in
consideration of the retiree's meritorious
services.
2.
Applying
Section
12
(c)
of
Commonwealth Act 186, as incorporated into RA
660, and Section 28 (c) of the former law, the
amount received by Atty. Zialcita as a result of
the conversion of unused leave credits,
commonly known as terminal leave, is applied
for by an officer or employee who retires,
resigns, or is separated from the service
through no fault of his own.
Since the terminal leave is applied for after
the severance of the employment, terminal pay
is no longer compensation for services
rendered. It cannot be viewed as salary. Further,
the terminal leave pay may also be considered
as a retirement gratuity, which is also another
exclusion from gross income as provided for in
Section 28 (b), 7 (f) of the Tax Code. The 23
August Resolution (AM 90-6-015-SC), however,
specifically applies only to employees of the
Judiciary who retire, resign or are separated
through no fault of their own. The resolution
cannot be made to apply to other government
employees,
absent
an
actual
case
or

controversy, as that would be in principle an

advisory opinion.
Intercontinental Broadcasting Corporation
v. Amarilla
FACTS:
Petitioner IBC employed the following
persons at its Cebu station: Candido C. Quiones,
Jr., Corsini R. Lagahit, as Studio Technician,
Anatolio G. Otadoy, as Collector, and Noemi
Amarilla, as Traffic Clerk. On March 1, 1986, the
government sequestered the station, including its
properties, funds and other assets, and took over
its management and operations from its owner,
Roberto Benedicto.
On November 3, 1990, the Presidential
Commission on Good Government (PCGG) and
Benedicto executed a Compromise Agreement,
where Benedicto transferred and assigned all his
rights, shares and interests in petitioner station to
the government.
The four (4) employees retired from the
company and received, on staggered basis, their
retirement benefits under the 1993 Collective
Bargaining Agreement (CBA) between petitioner
and the bargaining unit of its employees. In the
meantime, a P1,500.00 salary increase was given

to all employees of the company, current and

retired, effective July 1994. However, when the
four retirees demanded theirs, petitioner refused
and instead informed them via a letter that their
differentials would be used to offset the tax due
on their retirement benefits in accordance with
the National Internal Revenue Code (NIRC).
The four retirees filed separate complaints
which averred that the retirement benefits are
exempt from income tax under Article 32 of the
NIRC.
For its part, petitioner averred that under
Section 21 of the NIRC, the retirement benefits
received by employees from their employers
constitute taxable income. While retirement
benefits are exempt from taxes under Section
28(b) of said Code, the law requires that such
benefits received should be in accord with a
reasonable retirement plan duly registered with
the Bureau of Internal Revenue (BIR). Since its
retirement plan in the 1993 CBA was not
approved by the BIR, complainants were liable for
income tax on their retirement benefits.
In reply, complainants averred that the
claims for the retirement salary differentials of
Quiones and Otadoy had not prescribed because
the said CBA was implemented only in 1997. They
pointed out that they filed their claims with
petitioner on April 3, 1999. They maintained that

they availed of the optional retirement because of

petitioners inducement that there would be no
tax deductions.
Petitioner countered that under Sections 72
and 73 of the NIRC, it is obliged to deduct and
withhold taxes determined in accordance with the
rules and regulations to be prepared by the
Secretary of Finance. The NLRC held that the
benefits of the retirement plan under the CBAs
between petitioner and its union members were
subject to tax as the scheme was not approved by
the BIR.
However, it had also been the practice of
petitioner to give retiring employees their
retirement pay without tax deductions and there
was no justifiable reason for the respondent to
deviate from such practice.
ISSUES:
Whether the retirement benefits of respondents
are part of their gross income. YES
Whether petitioner is estopped from reneging on
its agreement with respondent to pay for the
taxes on said retirement benefits. YES
RULING:
1. Yes. Under the NIRC, the retirement
benefits of respondents are part of their gross
income subject to taxes. Thus, for the retirement
benefits to be exempt from the withholding tax,

the taxpayer is burdened to prove the

concurrence of the following elements: (1) a
reasonable private benefit plan is maintained by
the employer; (2) the retiring official or employee
has been in the service of the same employer for
at least 10 years; (3) the retiring official or
employee is not less than 50 years of age at the
time of his retirement; and (4) the benefit had
been availed of only once.
Respondents were qualified to retire
optionally from their employment with petitioner.
However, there is no evidence on record that the
1993 CBA had been approved or was ever
presented to the BIR; hence, the retirement
benefits of respondents are taxable. Under
Section 80 of the NIRC, petitioner, as employer,
was obliged to withhold the taxes on said benefits
and remit the same to the BIR. However, the
Court agrees with respondents contention that
petitioner did not withhold the taxes due on their
retirement benefits because it had obliged itself
to pay the taxes due thereon. This was done to
induce respondents to agree to avail of the
optional retirement scheme.
2. Yes. Petitioner is estopped from doing so.
It must be stressed that the parties are free to
enter into any contract stipulation provided it is
not illegal or contrary to public morals. When
such agreement freely and voluntarily entered
into turns out to be advantageous to a party, the

courts cannot rescue the other party without

violating the constitutional right to contract.
Courts are not authorized to extricate the
parties from the consequences of their acts. An
agreement to pay the taxes on the retirement
benefits as an incentive to prospective retirees
and for them to avail of the optional retirement
scheme is not contrary to law or to public morals.
Petitioner had agreed to shoulder such taxes to
entice them to voluntarily retire early, on its belief
that this would prove advantageous to it.
Respondents agreed and relied on the
commitment of petitioner. For petitioner to renege
on its contract with respondents simply because
its new management had found the same
disadvantageous would amount to a breach of
contract. The well-entrenched rule is that
estoppel may arise from a making of a promise if
it was intended that the promise should be relied
upon and, in fact, was relied upon, and if a refusal
to sanction the perpetration of fraud would result
to injustice. The mere omission by the promisor to
do whatever he promises to do is sufficient
forbearance to give rise to a promissory estoppel.
CIR v. Mitsubishi Metal Corporation
Facts:
Atlas Consolidated Mining and Development
Corporation, a domestic corporation, entered into
a Loan and Sales Contract with Mitsubishi Metal

Corporation, a Japanese corporation licensed to

engage in business in the Philippines.
To be able to extend the loan to Atlas,
Mitsubishi entered into another loan agreement
with Export-Import Bank (Eximbank), a financing
institution owned, controlled, and financed by the
Japanese government. After making interest
payments to Mitsubishi, with the corresponding
15% tax thereon remitted to the Government of
the Philippines, Altas claimed for tax credit with
the Commissioner of Internal Revenue based on
Section 29(b)(7) (A) of the National Internal
Revenue Code, stating that since Eximbank, and
not Mitsubishi, is where the money for the loan
originated from Eximbank, then it should be
exempt from paying taxes on its loan thereon.
ISSUE: Whether or not the interest income from
the loans extended to Atlas by Mitsubishi is
excludible from gross income taxation. NO
RULING:
Mitsubishi secured the loan from Eximbank
in its own independent capacity as a private
entity and not as a conduit of Eximbank.
Therefore, what the subject of the 15%
withholding tax is not the interest income paid by
Mitsubishi to Eximbank, but the interest income
earned by Mitsubishi from the loan to Atlas. Thus,
it does not come within the ambit of Section 29(b)
(7)(A), and it is not exempt from the payment of

taxes. It is too settled a rule in this jurisdiction, as

to dispense with the need for citations, that laws
granting exemption from tax are construed
strictissimi juris against the taxpayer and liberally
in favor of the taxing power. Taxation is the rule
and exemption is the exception. The burden of
proof rests upon the party claiming exemption to
prove that it is in fact covered by the exemption
so claimed, which onus petitioners have failed to
discharge. Significantly, private respondents are
not even among the entities which, under Section
29 (b) (7) (A) of the tax code, are entitled to
exemption and which should indispensably be the
party in interest in this case. Definitely, the
taxability of a party cannot be blandly glossed
over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial
supportive
evidence,
lest
governmental
operations suffer due to diminution of much
needed funds. Nor can we close this discussion
without taking cognizance of petitioner's warning,
of pervasive relevance at this time, that while
international comity is invoked in this case on the
nebulous representation that the funds involved
in the loans are those of a foreign government,
scrupulous care must be taken to avoid opening
the floodgates to the violation of our tax laws.
Otherwise, the mere expedient of having a
Philippine corporation enter into a contract for
loans or other domestic securities with private
foreign entities, which in turn will negotiate
independently with their governments, could be

availed of to take advantage of the tax exemption

law under discussion.
CIR v. Marubeni Corp.

Issue:
WON Marubeni is liable for income and branch profit
remittance tax.
WON Marubeni is liable for contractors tax.
Held:

Facts:
Marubeni Corporation is a foreign corporation
organized and existing under the laws of Japan. It is
engaged in import and export trading, financing, and the
construction business. It is duly registered in the
Philippines and has a branch office in Manila
In 1985, the CIR examined the books of accounts of
Marubeni and found it to have undeclared income from
two contracts in the Philippines, both of which were
completed in 1984. One contract was with the National
Development Company for the construction of a wharf
complex in Leyte, and the other contract was with the
Philippine Phosphate Fertilizer Corp. (Philphos) for the
construction of an ammonia storage complex, also in
Leyte.
CIR assessed Marubeni for deficiency income,
branch profit remittance, contractors and commercial
brokers taxes. Marubeni filed two petitions with the CTA
questioning the assessment.
Earlier, E.O. 41 was issued, declaring a one-time
amnesty for unpaid income taxes for the years 1981 to
1985. It was provided in the same E.O., however, that
those with income tax cases already filed in Court was of
the effectivity hereofmay not avail themselves of the tax
amnesty herein granted.
E.O. 64 was subsequently issued amending E.O. 41
and extending its coverage to business, estate and donors
taxes.
CTA granted the petitions of Marubeni because the
latter had properly availed of the tax amnesty under E.O.
Nos. 41 and 64. CA affirmed the CTA decisions

1.) NO, Marubeni is not liable for any of the taxes

assessed by CIR.
As to the income and branch profit remittance tax
(branch profit remittance also falls under income tax),
Marubeni had properly availed of the tax amnesty
provided by E.O. 41. It is not one of the taxpayers
disqualified from availing of the amnesty for income tax
since it filed the cases with CTA in Sept.26,1986, while E.O.
41 took effect in Aug.22,1986. This means when E.O. 41
became effective, the CTA cases had not yet been filed in
court.
2.) NO. As to the contractors tax, however, this falls
under business taxes covered by E.O. 64, which took effect
on Nov.17,
1986. This E.O. contained the same disqualification clause
as mentioned in E.O. 41. Marubeni filed the cases with CTA
in Sept.26, prior to the effectivity of E.O.64. Thus it was
already disqualified from availing of the tax amnesty
under the said E.O.
It is Marubenis argument, however that even if it
had not availed of the amnesty under the two executive
orders, it isstill not liable for the deficiency contractors tax
because the income from the projects came from the
Offshore Portion of the contracts. The two contracts
were divided into two parts, i.e., the Onshore Portion and
the Offshore Portion. All materials and equipment in the
contract under the Offshore Portion were manufactured
and completed in Japan, not in the Philippines, and are
therefore not subject to Philippine taxes.
The income derived from the Onshore Portion of the
two projects had been declared for tax purposes and the

taxes thereon had already been paid. It is with regard to

the Foreign Offshore Portion of the two contracts that the
assessment liabilities in this case arose.
It is clear that some pieces of equipment and
supplies were completely designed and engineered in
Japan. The other construction supplies listed under the
Offshore Portion were fabricated and manufactured by
sub-contractors in Japan. All services for the design,
fabrication, engineering, and manufacture of the materials
and equipment under the Offshore Portion were made and
completed in Japan. These services were rendered outside
the taxing jurisdiction of the Philippines and are therefore
not subject to the contractors tax.

CIR v. BOAC
Facts:
British overseas airways corp. (BOAC) a wholly
owned British Corporation, is engaged in international
airlines business. From 1959to 1972, it has no loading
rights for traffic purposes in the Philippines but
maintained a general sales agent in the Philippines
which was responsible for selling, BOAC tickets covering
passengers and cargoes the CIR assessed deficiency
income taxes against.
Issue: WON BOAC is liable for the deficiency of its
income tax.
Held:

Yes. The source of income is the property, activity

of service that produces the income. For the source of
income to be considered coming from the Philippines, it
is sufficient that the income is derived from the activity
coming from the Philippines. The tax code provides that
for revenue to be taxable, it must constitute income
from Philippine sources. In this case, the sale of tickets
is the source of income. The situs of the source of
payments is the Philippines.
Commissioner v. CTA and Smith and Kline
FACTS:
Smith Kline and French Overseas Company, a
multinational
pharmaceutical
firm
domiciled
in
Philadelphia, Pennsylvania, is licensed to do business in
the Philippines. In its 1971 original ITR, Smith Kline
declared a net taxable income of P1.4M and paid P511k
as tax due. Among the deductions claimed from gross
income was P501+k as its share of the head office
overhead expenses. However, in its amended return
filed on March 1, 1973, there was an overpayment of
P324+k arising from under deduction of home office
overhead. It made a formal claim for the refund of the
alleged
overpayment.
In October, 1972, Smith Kline received from its
international independent auditors an authenticated
certification to the effect that the Philippine share in the
unallocated overhead expenses of the main office for
the year was actually P1.4+M.Thereafter, without
awaiting the action of the Commissioner of Internal
Revenue on its claim, Smith Kline filed a petition for
review with the CTA. The CTA ordered the CIR to refund
the overpayment or grant a tax credit to Smith Kline.
The Commissioner appealed to the SC.

HELD:
Where an expense is clearly related to the
production of Philippine-derived income or to Philippine
operations (e.g. salaries of Philippine personnel, rental
of office building in the Philippines), that expense can
be deducted from the gross income acquired in the
Philippines
without
resorting
to
apportionment.
The overhead expenses incurred by the parent
company in connection with finance, administration,
and research and development, all of which directly
benefit its branches all over the world, including the
Philippines, fall under a different category however.
These are items which cannot be definitely allocated or
identified with the operations of the Philippine branch.
For 1971, the parent company of Smith Kline spent
$1,077,739. Under section 37(b) of the Revenue Code
and section 160 of the regulations, Smith Kline can
claim as its deductible share a ratable part of such
expenses based upon the ratio of the local branch's
gross income to the total gross income, worldwide, of
the
multinational
corporation.
The weight of evidence bolsters Smith Klines position
that the amount of P1.4+M represents the correct
ratable share, the same having been computed
pursuant to section 37(b) and section 160. Therefore, it
is entitled to a refund.

Phil. Guaranty Co., Inc. v. CIR

FACTS:
The petitioner Philippine Guaranty Co.,
Inc., a domestic insurance company, entered

into
reinsurance
contracts
with
foreign
insurance companies not doing business in the
country, thereby ceding to foreign reinsurers a
portion of the premiums on insurance it has
originally underwritten in the Philippines. The
premiums paid by such companies were
excluded by the petitioner from its gross income
when it file its income tax returns for 1953 and
1954. Furthermore, it did not withhold or pay
tax on them. Consequently, the CIR assessed
against the petitioner withholding taxes on the
ceded reinsurance premiums to which the latter
protested the assessment on the ground that
the premiums are not subject to tax for the
premiums did not constitute income from
sources within the Philippines because the
foreign reinsurers did not engage in business in
the Philippines, and CIR's previous rulings did
not require insurance companies to withhold
income tax due from foreign companies.
ISSUE:
Are insurance companies not required to
withhold tax on reinsurance premiums ceded to
foreign insurance companies, which deprives
the government from collecting the tax due
from them?

HELD:

No. The power to tax is an attribute of

sovereignty. It is a power emanating from
necessity. It is a necessary burden to preserve
the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy
to defend its shores from invasion, a corps of
civil servants to serve, public improvement
designed for the enjoyment of the citizenry and
those which come within the State's territory,
and
facilities
and
protection
which
a
government is supposed to provide. Considering
that the reinsurance premiums in question were
afforded protection by the government and the
recipient foreign reinsurers exercised rights and
privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should
share the burden of maintaining the state.
The petitioner's defense of reliance of
good faith on rulings of the CIR requiring no
withholding of tax due on reinsurance premiums
may free the taxpayer from the payment of
surcharges or penalties imposed for failure to
pay the corresponding withholding tax, but it
certainly would not exculpate it from liability to
pay such withholding tax. The Government is
not estopped from collecting taxes by the
mistakes or errors of its agents.

Howden & Co. v. CIR

Facts:
In 1950 the Commonwealth Insurance
Co., a
domestic corporation,
entered
into
reinsurance contracts with 32 British insurance
companies not engaged in trade or business in
the Philippines, whereby the former agreed to
cede to them a portion of the premiums
on insurances on fire, marine and other risks
it has underwritten in the Philippines.
The reinsurance contracts were prepared
and signed by the foreign reinsurers in England
and sent to Manila where Commonwealth
Insurance Co. signed them.
Alexander Howden & Co., Ltd., also a
British corporation, represented the British
insurance companies. Pursuant to the contracts,
Commonwealth
Insurance Co
remitted
P798,297.47 to Alexander Howden & Co.,
Ltd., as reinsurance premiums.
In behalf of Alexander Howden & Co., Ltd.,
Commonwealth Insurance Co. filed an income
tax return declaring the sum of P798,297.47,
with
accrued
interest
in
the
amount

of P4,985.77, as Alexander Howden & Co., Ltd.'s

gross income for calendar year 1951. It also
paid the BIR P66,112.00 income tax.
On May 12, 1954, Alexander Howden
& Co., Ltd. filed with the BIR a claim for refund
of the P66,112.00, later reduced toP65,115.00,
because it agreed to the payment of P977.00 as
income tax on the P4,985.77 accrued interest.
A ruling of the CIR was invoked, stating
that
it exempted
from withholding
tax reinsurance
premiums received
from
domestic insurance companies by foreign
insurance companies not authorized to do
business
in the
Philippines. Subsequently,
petitioner instituted an action in the CFI of
Manila for the recovery of the amount claimed.
Tax Court denied the claim
Issue:
WON
reinsurance
premiums
are
subject to withholding tax under Section
54 in relation to Section 53 of the Tax
Code.
Held:
Yes. Subsection (b) of Section 53
subjects to withholding tax the following:
interest, dividends, rents, salaries, wages,
premiums,
annuities,
compensations,

remunerations, emoluments, or other fixed

or determinable annual or periodical gains,
profits, and income of any non-resident alien
individual not engaged in trade or business
within the Philippines and not having any office
or place of business therein. Section 54, by
reference, applies this provision to foreign
corporations not engaged in trade or business
in the Philippines.
Appellants maintain that reinsurance premiums
are not "premiums" at all and that they are not
within the scope of "other fixed or determinable
annual or periodical gains, profits, and income";
that, therefore, they are not items of income
subject to withholding tax.
SC disagrees with the contention. Since Section
53 subjects to withholding tax various specified
income, among them, premiums", the generic
connotation of each and every word or phrase
composing the enumeration in Subsection (b)
thereof is
income.
Perforce,
the
word
"premiums", which is neither qualified nor
defined by the law itself, should mean income
and should include all premiums constituting
income,
whether
they
be
insurance
or reinsurance premiums.
Assuming that reinsurance premiums are not
within the word "premiums" in Section 53, still

they may be classified as determinable and

periodical income under the same provision of
law.
Section 199 of the Income Tax Regulations
defines fixed, determinable, annual and
periodical income:
Income is fixed when it is to be paid in amounts
definitely pre-determined. On the other hand, it
is determinable whenever there is a basis of
calculation by which the amount to be paid may
be ascertained. The income need not be paid
annually if it is paid periodically. That the length
of time during which the payments are to
be made may be increased or diminished in
accordance with someone's will or with the
happening of an event does not make the
payments
any
the
less
determinable
or periodical. ...
Reinsurance
premiums,
therefore,
are
determinable
and
periodical
income:
determinable, because they can be calculated
accurately on the basis of the reinsurance
contracts; periodical, inasmuch as they were
earned and remitted from time to time.

Appellants' claim for refund, as stated, invoked

a ruling of the CIR cited rulings attempting to
show
that
the prevailing
administrative
interpretation of Sections 53 and 54 of the Tax
Code
exempted
from
withholding
tax
reinsurance premiums ceded to non-resident
foreign insurance companies. It is asserted that
since Sections 53 and 54 were "substantially reenacted" by Republic Acts 1065 , 1291, 1505,
and 2343, when the said administrative rulings
prevailed, the rulings should be given the force
of law under the principle of legislative approval
by re-enactment