CIR vs. St. Luke's Medical Center, Inc.

Post under case digests, Political Law, Taxation at Thursday, January 28, 2016 Posted by Schizophrenic Mind

FACTS: St. Luke's is a non-stock non-profit hospital. The BIR assessed St. Luke's based on the
argument that Section 27(B) of the Tax Code should apply to it and hence all of St. Luke's income
should be subject to the 10% tax therein as it is a more specific provision and should prevail over
Section 30 which is a general provision. St. Luke's countered by saying that itsfree services to
patients was 65% of its operating income and that no part of its income inures to the benefit of any
individual.

ISSUE: Does Section 27(B) have the effect of taking proprietary non-profit hospitals out of the income
tax exemption under Section 30 of the Tax Code and should instead be subject to a preferential rate
of 10% on its entire income?

RULING: No. The enactment of Section 27(B) does not remove the possible income tax exemption of
proprietary non-profit hospitals. The only thing that Section 27(B) captures (at 10% tax) in the case of
qualified hospitals is in the instance where the income realized by the hospital falls under the last
paragraph of Section 30 such as when the entity conducts anyactivity for profit. The revenues derived
by St. Luke's from pay patients are clearly income from activities conducted for profit.

In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon the shareholders, it must be shown that the controlling
intention of the taxpayer is manifested at the time of the accumulation, not intentions
subsequently, which are mere afterthoughts.

Cyanamid vs CIR
Facts:
Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary
of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported finished goods and an
imported/indentor. In 1985 the CIR assessed on petitioner a deficiency income tax of
P119,817) for the year 1981. Cyanamid protested the assessments particularly the 25% surtax

for undue accumulation of earnings. It claimed that said profits were retained to increase
petitioners working capital and it would be used for reasonable business needs of the
company. The CIR refused to allow the cancellation of the assessments, petitioner appealed to
the CTA. It claimed that there was not legal basis for the assessment because 1) it
accumulated its earnings and profits for reasonable business requirements to meet working
capital needs and retirement of indebtedness 2) it is a wholly owned subsidiary of American
Cyanamid Company, a foreign corporation, and its shares are listed and traded in the NY
Stock Exchange. The CTA denied the petition stating that the law permits corporations to set
aside a portion of its retained earnings for specified purposes under Sec. 43 of the
Corporation Code but that petitioners purpose did not fall within such purposes. It found that
there was no need to set aside such retained earnings as working capital as it had considerable
liquid funds. Those corporations exempted from the accumulated earnings tax are found
under Sec. 25 of the NIRC, and that the petitioner is not among those exempted. The CA
affirmed the CTAs decision.

Issue: Whether or not the accumulation of income was

justified.

Held:
In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon the shareholders, it must be shown that the controlling
intention of the taxpayer is manifested at the time of the accumulation, not intentions
subsequently, which are mere afterthoughts. The accumulated profits must be used within
reasonable time after the close of the taxable year. In the instant case, petitioner did not
establish by clear and convincing evidence that such accumulated was for the immediate
needs of the business.

To determine the reasonable needs of the business, the United States Courts have invented the
Immediacy Test which construed the words reasonable needs of the business to mean the
immediate needs of the business, and it is held that if the corporation did not prove an
immediate need for the accumulation of earnings and profits such was not for reasonable
needs of the business and the penalty tax would apply. (Law of Federal Income Taxation Vol
7) The working capital needs of a business depend on the nature of the business, its credit
policies, the amount of inventories, the rate of turnover, the amount of accounts receivable,
the collection rate, the availability of credit and other similar factors. The Tax Court opted to
determine the working capital sufficiency by using the ration between the current assets to

current liabilities. Unless, rebutted, the presumption is that the assessment is correct. With the
petitioners failure to prove the CIR incorrect, clearly and conclusively, the Tax Courts ruling
is upheld.

Manila Banking Corp vs CIR

The intent of Congress relative to the minimum corporate income tax(MCIT) is to grant a 4-year
suspension of tax payment to newly formed corporations. Corporations still starting their business
operations have to stabilize their venture in order to obtain a stronghold in the industry.

Facts:
1961- Manila Banking Corp was incorporated. It engaged in the banking industry til 1987.
May 1987- Monetary Board of Bangko Sentral ng Pilipinas (BSP) issued Resolution # 505
{pursuant to the Central Bank Act (RA 265)} prohibiting Manila Bank from engaging in business
by reason of insolvency. So, Manila Bank ceased operations and its assets and liabilities were
placed under charge of a gov.- appointed receiver.
1998- Comprehensive Tax Reform Act (RA8424) imposed a minimum corporate income tax on
domestic and resident foreign corporations.
o Implementing law: Revenue Regulation # 9-98 stating that the law allows a 4year period
from the time the corporations were registered with the BIR during which the minimum corporate
income tax should not be imposed.
June 23, 1999- BSP authorized Manila Bank to operate as a thrift bank.
o NOTE: June 15, 1999 Revenue Regulation #4-95 (pursuant to Thrift Bank Act of 1995)
provides that the date of commencement of operations shall be understood to mean the date
when the thrift bank was registered with SEC or when Certificate of Authority to Operate was
issued by the Monetary Board, whichever comes LATER.
Dec 1999- Manila Bank wrote to BIR requesting a ruling on whether it is entitled to the 4 year
grace period under RR 9-98.
April 2000- Manila bank filed with BIR annual income tax return for taxable year 1999 and paid
33M.
Feb 2001- BIR issued BIR Ruling 7-2001 stating that Manila Bank is entitled to the 4year grace
period. Since it reopened in 1999, the min. corporate income tax may be imposed not earlier than
2002. It stressed that although it had been registered with the BIR before 1994, but it ceased
operations 1987-1999 due to involuntary closure.
o Manila Bank, then, filed with BIR for the refund. Due to the inaction of BIR on the claim, it
filed with CTA for a petition for review, which was denied and found that Manila Banks payment

of 33M is correct, since its operations were merely interrupted during 1987-1999. CA affirmed
CTA.

Issue: Whether or not Manila Bank is entitled to a refund

of its minimum corporate income tax paid to BIR for
1999.

Held: Yes.
CIRs contensions are without merit. He contended that based on RR# 9-98, Manila Bank
should pay the min. corporate income tax beg. 1998 as it did not close its operations in 1987 but
merely suspended it. Even if placed under suspended receivership, its corporate existence was
never affected. Thus falling under the category of a existing corporation recommencing its
banking business operations
** Sec. 27 E of the Tax Code provides the Minimum Corporate Income Tax (mcit) on Domestic
Corporations.

o (1) Imposition of Tax- MCIT of 2% of gross income as of the end of the taxable year, as defined
here in, is hereby imposed on a corporation taxable under this title, beginning on the 4th taxable
year immediately following the year in which such corp commenced its business operations,
when the mcit is greater than the tax computed under Subsec. A of this section for the taxable
year.

o (2) Any excess in the mcit over the normal income tax shall be carried forward and credited
against the normal income tax for the 3 succeeding taxable years.

Let it be stressed that RR 9-98 imposed the mcit on corps, the date when business operations
commence is the year in which the domestic corporation registered with the BIR. But under RR
4-95, the date of commencement of operations of thrift banks, is the date of issuance of
certificate by Monetary Board or registration with SEC, whichever comes later. Clearly then, RR
4-95 applies to Manila banks, being a thrift bank. 4-year period= counted from June 1999.

Procter and Gamble vs CIR

NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes
down to 15% ONLY IF the country of domicile of the foreign stockholder corporation shall allow
such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable
against the tax payable to the domiciliary country by the foreign stockholder corporation.
However, such tax credit for taxes deemed paid in the Philippines MUST, as a minimum, reach
an amount equivalent to 20 percentage points

FACTS:
Procter and Gamble Philippines declared dividends payable to its parent company and sole
stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend
withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a claim with the
Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to Section
24(b)(1) of the National Internal Revenue Code, as amended by Presidential Decree No. 369, the
applicable rate of withholding tax on the dividends remitted was only 15%.

MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:
YES. P&G Philippines is entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes
down to 15% ONLY IF he country of domicile of the foreign stockholder corporation shall allow
such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable
against the tax payable to the domiciliary country by the foreign stockholder corporation.
However, such tax credit for taxes deemed paid in the Philippines MUST, as a minimum, reach
an amount equivalent to 20 percentage points which represents the difference between the
regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA shall allow
P&G USA a tax credit for taxes deemed paid in the Philippines applicable against the US taxes
of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were
met.
Manila wine merchants vs CIR

TAXATION; NATIONAL INTERNAL REVENUE CODE; CORPORATE INCOME TAX; ADDITIONAL TAX ON
ACCUMULATED EARNINGS; EXEMPTION THEREFROM. A prerequisite to the imposition of the tax has
been that the corporation be formed or availed of for the purpose of avoiding the income tax (or surtax)
on its shareholders, or on the shareholders of any other corporation by permitting the earnings and
profits of the corporation to accumulate instead of dividing them among or distributing them to the
shareholders. If the earnings and profits were distributed, the shareholders would be required to pay an
income tax thereon whereas, if the distribution were not made to them, they would incur no tax in
respect to the undistributed earnings and profits of the corporation (Mertens, Law on Federal Income
Taxation, Vol. 7, Chapter 39, p. 44). The touchstone of liability is the purpose behind the accumulation of
the income and not the consequences of the accumulation (Ibid., p. 47). Thus, if the failure to pay
dividends is due to some other cause, such as the use of undistributed earnings and profits for the
reasonable needs of the business, such purpose does not fall within the interdiction of the statute (Ibid.,
p. 45).
2. ID.; ID.; ID.; ID.; ID.; WHEN ACCUMULATION CONSIDERED UNREASONABLE. An accumulation of
earnings or profits (including undistributed earnings or profits of prior years) is unreasonable if it is not
required for the purpose of the business, considering all the circumstances of the case (Sec. 21,
Revenue Regulations No. 2).
3. ID.; ID.; ID.; ID.; ID.; "REASONABLE NEEDS OF THE BUSINESS," CONSTRUED. To determine the
"reasonable needs" of the business in order to justify an accumulation of earnings, the Courts of the
United States have invented the so-called "Immediacy Test" which construed the words "reasonable
needs of the business" to mean the immediate needs of the business, and it was generally held that if
the corporation did not prove an immediate need for the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs of the business, and the penalty tax would apply.
American cases likewise hold that investment of the earnings and profits of the corporation in stock or
securities of an unrelated business usually indicates an accumulation beyond the reasonable needs of
the business. (Helvering v. Chicago Stockyards Co., 318 US 693; Helvering v. National Grocery Co., 304
US 282).
4. REMEDIAL LAW; APPEALS; FACTUAL FINDINGS OF THE COURT OF TAX APPEALS, BINDING. The
finding of the Court of Tax Appeals that the purchase of the U.S.A. Treasury bonds were in no way
related to petitioners business of importing and selling wines whisky, liquors and distilled spirits, and
thus construed as an investment beyond the reasonable needs of the business is binding on Us, the
same being factual (Renato Raymundo v. Hon. De Jova, 101 SCRA 495). Furthermore, the wisdom
behind thus finding cannot be doubted, The case of J.M. Perry & Co. v. Commissioner of Internal
Revenue supports the same.
5. TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX OF CORPORATIONS; ADDITIONAL
TAX ON ACCUMULATED EARNINGS; EXCEPTION THEREFROM; ACCUMULATION OF EARNINGS, MUST BE
USED FOR REASONABLE NEEDS OF BUSINESS WITHIN A REASONABLE TIME. The records further
reveal that from May 1951 when petitioner purchased the U.S.A. Treasury shares, until 1962 when it
finally liquidated the same, it (petitioner) never had the occasion to use the said shares in aiding or
financing its importation. This militates against the purpose enunciated earlier by petitioner that the
shares were purchased to finance its importation business. To justify an accumulation of earnings and
profits for the reasonably anticipated future needs, such accumulation must be used within a reasonable
time after the close of the taxable year (Mertens, Ibid., p. 104).
6. ID.; ID.; ID.; ID.; ID.; ID.; INTENTION AT THE TIME OF ACCUMULATION, BASIS OF THE TAX;
ACCUMULATION OF PROFITS IN CASE AT BAR, UNREASONABLE. In order to determine whether profits
are accumulated for the reasonable needs of the business as to avoid the surtax upon shareholders, the
controlling intention of the taxpayer is that which is manifested at the time of accumulation not
subsequently declared intentions which are merely the product of afterthought (Basilan Estates, Inc. v.
Comm. of Internal Revenue, 21 SCRA 17 citing Jacob Mertens, Jr., The law of Federal Income Taxation,
Vol. 7, Cumulative Supplement, p. 213; Smoot and San & Gravel Corp. v. Comm., 241 F 2d 197). A
speculative and indefinite purpose will not suffice. The mere recognition of a future problem and the
discussion of possible and alternative solutions is not sufficient. Definiteness of plan coupled with action
taken towards its consummation are essential (Fuel Carriers, Inc. v. US 202 F supp. 497; Smoot Sand &

Gravel Corp. v. Comm., supra). Viewed on the foregoing analysis and tested under the "immediacy
doctrine," We are convinced that the Court of Tax Appeals is correct in finding that the investment made
by petitioner in the U.S.A. Treasury shares in 1951 was an accumulation of profits in excess of the
reasonable needs of petitioners business.
chanroble svirtuallawlibrary

7. ID.; ID.; ID.; ID.; ACCUMULATIONS OF PRIOR YEARS TAKEN INTO ACCOUNT IN DETERMINATION OF
LIABILITY THEREFOR. The rule is now settled in Our jurisprudence that undistributed earnings or
profits of prior years are taken into consideration in determining unreasonable accumulation for
purposes of the 25% surtax. The case of Basilan Estates, Inc. v. Commissioner of Internal Revenue
further strengthen this rule in determining unreasonable accumulation for the year concerned.In
determining whether accumulations of earnings or profits in a particular year are within the reasonable
needs of a corporation, it is necessary to take into account prior accumulations, since accumulations
prior to the year involved may have been sufficient to cover the business needs and additional
accumulations during the year involved would not reasonably be necessary.

Cir vs gen foods

Facts:
Respondent corporation General Foods (Phils), which is engaged in the manufacture of Tang,
Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 1985
and claimed as deduction, among other business expenses, P9,461,246 for media advertising for
Tang.
The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income
taxes of P2,635,141.42 against General Foods, prompting the latter to file an MR which was
denied.
General Foods later on filed a petition for review at CA, which reversed and set aside an earlier
decision by CTA dismissing the companys appeal.

Issue:
W/N the subject media advertising expense for Tang was ordinary and necessary expense fully
deductible under the NIRC

Held:
No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in
favor of the taxing authority, and he who claims an exemption must be able to justify his claim by

the clearest grant of organic or statute law. Deductions for income taxes partake of the nature of
tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be
strictly construed.
To be deductible from gross income, the subject advertising expense must comply with the
following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid
or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and (d) it must be supported by receipts, records or other
pertinent papers.
While the subject advertising expense was paid or incurred within the corresponding taxable year
and was incurred in carrying on a trade or business, hence necessary, the parties views conflict
as to whether or not it was ordinary. To be deductible, an advertising expense should not only be
necessary but also ordinary.
The Commissioner maintains that the subject advertising expense was not ordinary on the
ground that it failed the two conditions set by U.S. jurisprudence: first, reasonableness of the
amount incurred and second, the amount incurred must not be a capital outlay to create
goodwill for the product and/or private respondents business. Otherwise, the expense must be
considered a capital expenditure to be spread out over a reasonable time.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an
advertising expense. There being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the type and size of business in which
the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure
itself; the intention of the taxpayer and the general economic conditions. It is the interplay of
these, among other factors and properly weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement of a single product to be inordinately
large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible
under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise
or use of services and (2) advertising designed to stimulate the future sale of merchandise or use
of services. The second type involves expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpayers trade or business or for the industry or
profession of which the taxpayer is a member. If the expenditures are for the advertising of the
first kind, then, except as to the question of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If, however, the expenditures are for
advertising of the second kind, then normally they should be spread out over a reasonable period
of time.
The companys media advertising expense for the promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half of the companys entire claim for
marketing expenses for that year under review.Petition granted, judgment reversed and
set aside.

CIR vs. Isabela Cultural Corporation

Isabela Cultural Corp.(ICC for brevity) , a domestic corporation received from BIR assessment notice
no. FAS-1-86-90000680 (680 for brevity) for deficiency income tax in the amount of PhP 333,196.86
and assessment notice no. FAS-1-86-90-000681 (681 for brevity) for deficiency expanded withholding
tax in the amount of PhP 4,897.79, inclusive of surcharge and interest both for the taxable year 1986.
The deficiency income tax of PhP 333,196 arose from BIR disallowance of ICC claimed expenses
deductions for professional and security services billed to and paid by ICC in 1986.

The deficiency expanded withholding tax of PhP4,897.79 was allegedly due to the failure of ICC to
withhold 1% expanded withholding tax on its claimed PhP244,890 deduction for security services.
Court of Tax Appeal and Court of Appeal affirmed that the professional services were rendered to ICC
in 1984 and 1985, the cost of the service was not yet determinable at that time, hence, it could be
considered as deductible expenses only in 1986 when ICC received the billing statement for said
service. It further ruled that ICC did not state its interest income from the promissory notes of Realty
Investment and that ICC properly withheld the remitted taxes on the payment for security services for
the taxable year 1986.

Petitioner contend that since ICC is using the accrual method of accounting, the expenses for the
professional services that accrued in 1984 and 9185 should have been declared as deductions from
income during the said years and the failure of ICC to do so bars it from claiming said expenses as
deduction for the taxable year 1986.

ISSUE (1): WON CA is correct in sustaining the deduction of the expenses for professionals and
security services form ICC gross income?
HELD: NO
Revenue Audit Memorandum Order No.1-2000 provides that under the accrual method of accounting,
expenses not being claimed as deductions by a tax payer in the current year when they are incurred
cannot be claimed as deductions from the income for the succeeding year.
ISSUE (2): WON CA correctly held that ICC did not understate its interest income from the promissory
notes of Realty Investment, Inc; that ICC withheld the required 1% withholding tax from the deduction
for security services.
HELD:
Sustaining the finding of the CTA and CA that no such understatement exist and that only simple
interest computation and not a compounded one should have been applied by the BIR. There is no
indeed no stipulation between the latter and ICC on the application of compound interest.
Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should
not further earn interest.

Philex Mining Corporation v CIR (1998)

Philex Mining Corporation v CIR GR No 125704, August 28, 1998
FACTS:
BIR sent a letter to Philex asking it to settle its tax liabilities amounting to P124 million. Philex protested the
demand for payment stating that it has pending claims for VAT input credit/refund amounting to P120 million.
Therefore, these claims for tax credit/refund should be applied against the tax liabilities.

In reply the BIR found no merit in Philexs position. On appeal, the CTA reduced the tax liability of Philex.
ISSUES:
1. Whether legal compensation can properly take place between the VAT input credit/refund and the
excise tax liabilities of
Philex Mining Corp;
2. Whether the BIR has violated the NIRC which requires the refund of input taxes within 60 days
3. Whether the violation by BIR is sufficient to justify non-payment by Philex
RULING:
1. No, legal compensation cannot take place. The government and the taxpayer are not creditors and
debtors of each other.
2. Yes, the BIR has violated the NIRC. It took five years for the BIR to grant its claim for VAT input credit.
Obviously, had the
BIR been more diligent and judicious with their duty, it could have granted the refund
3. No, despite the lethargic manner by which the BIR handled Philexs tax claim, it is a settled rule that in
the performance of
government function, the State is not bound by the neglect of its agents and officers. It must be stressed
that the same is not a valid reason for the non-payment of its tax liabilities.