G.R. No.

L-17518

October 30, 1922

further argues that the statute of the United States providing for tax upon stock dividends is
different from the statute of the Philippine Islands, and therefore the decision of the Supreme
Court of the United States should not be followed in interpreting the statute in force here.

FREDERICK
C.
FISHER, plaintiff-appellant,
vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.
Fisher
and
De
Witt
and
Antonio
Acting Attorney-General Tuason for appellee.

M.

Opisso

for

For the purpose of ascertaining the difference in the said statutes ( (United States and
Philippine Islands), providing for an income tax in the United States as well as that in the
Philippine Islands, the two statutes are here quoted for the purpose of determining the
difference, if any, in the language of the two statutes.

appellants.

JOHNSON, J.:

Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the
collection of an "income tax." Section 2 of said Act attempts to define what is an income. The
definition follows:

The only question presented by this appeal is: Are the "stock dividends" in the present case
"income" and taxable as such under the provisions of section 25 of Act No. 2833? While the
appellant presents other important questions, under the view which we have taken of the
facts and the law applicable to the present case, we deem it unnecessary to discuss them
now.

That the term "dividends" as used in this title shall be held to mean any distribution made or
ordered to made by a corporation, . . . which stock dividend shall be considered income, to
the amount of its cash value.

The defendant demurred to the petition in the lower court. The facts are therefore admitted.
They are simple and may be stated as follows:

Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section 25
of said Act attempts to define the application of the income tax. The definition follows:

That during the year 1919 the 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; that he appellant was a stockholder in said corporation; that said corporation, as
result of the business for that year, declared a "stock dividend"; that the proportionate share
of said stock divided of the appellant was P24,800; that the stock dividend for that amount
was issued to the appellant; that thereafter, in the month of March, 1920, the appellant, upon
demand of the appellee, paid under protest, and voluntarily, unto the appellee the sum of
P889.91 as income tax on said stock dividend. For the recovery of that sum (P889.91) the
present action was instituted. The defendant demurred to the petition upon the ground that it
did not state facts sufficient to constitute cause of action. The demurrer was sustained and
the plaintiff appealed.

The term "dividends" as used in this Law shall be held to mean any distribution made or
ordered to be made by a corporation, . . . out of its earnings or profits accrued since March
first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in
stock of the corporation, . . . . Stock dividend shall be considered income, to the amount of
the earnings or profits distributed.
It will be noted from a reading of the provisions of the two laws above quoted that the writer of
the law of the Philippine Islands must have had before him the statute of the United States.
No important argument can be based upon the slight different in the wording of the two
sections.
It is further argued by the appellee that there are no constitutional limitations upon the power
of the Philippine Legislature such as exist in the United States, and in support of that
contention, he cites a number of decisions. There is no question that the Philippine
Legislature may provide for the payment of an income tax, but it cannot, under the guise of an
income tax, collect a tax on property which is not an "income." The Philippine Legislature can
not impose a tax upon "property" under a law which provides for a tax upon "income" only.
The Philippine Legislature has no power to provide a tax upon "automobiles" only, and under
that law collect a tax upon acarreton or bull cart. Constitutional limitations, that is to say, a
statute expressly adopted for one purpose cannot, without amendment, be applied to another
purpose which is entirely distinct and different. A statute providing for an income tax cannot
be construed to cover property which is not, in fact income. The Legislature cannot, by a
statutory declaration, change the real nature of a tax which it imposes. A law which imposes
an important tax on rice only cannot be construed to an impose an importation tax on corn.

To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court
of the United States as will as the decisions of the supreme court of some of the states of the
Union, in which the questions before us, based upon similar statutes, was discussed. Among
the most important decisions may be mentioned the following: Towne vs. Eisner, 245 U.S.,
418; Doyle vs. Mitchell Bors. Co., 247 U.S., 179; Eisner vs. Macomber, 252 U.S., 189;
Dekoven vs Alsop, 205 Ill., 309; 63 L.R.A., 587; Kaufman vs. Charlottesville Woolen Mills, 93
Va., 673.
In each of said cases an effort was made to collect an "income tax" upon "stock dividends"
and in each case it was held that "stock dividends" were capital and not an "income" and
therefore not subject to the "income tax" law.
The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S.,
189) that a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing the
tax on the stock dividend, does not violate the provisions of the Jones Law. The appellee

It is true that the statute in question provides for an income tax and contains a further
provision that "stock dividends" shall be considered income and are therefore subject to

income tax provided for in said law. If "stock dividends" are not "income" then the law permits
a tax upon something not within the purpose and intent of the law.

year it was P4,000, and that the tax rolls should be changed in accordance with the changed
conditions in the business. In other words, the ordinary tax should be increased by P2,000.

It becomes necessary in this connection to ascertain what is an "income in order that we may
be able to determine whether "stock dividends" are "income" in the sense that the word is
used in the statute. Perhaps it would be more logical to determine first what are "stock
dividends" in order that we may more clearly understand their relation to "income." Generally
speaking, stock dividends represent undistributed increase in the capital of corporations or
firms, joint stock companies, etc., etc., for a particular period. They are used to show the
increased interest or proportional shares in the capital of each stockholder. In other words,
the inventory of the property of the corporation, etc., 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, etc.

Another illustration: C and D organized a corporation for agricultural purposes with an

authorized capital stock of P20,000 each contributing P5,000. With that capital they
purchased a farm and, with it, one hundred head of cattle. Every peso contributed is invested.
There is no money in the treasury. Much time and labor was expanded during the year by the
stockholders on the farm in the way of improvements. Neither received a centavo during the
year from the farm or the cattle. At the beginning of the year the assets of the corporation,
including the farm and the cattle, were P10,000, and at the close of the year and inventory of
the property of the corporation is made and it is then found that they have the same farm with
its improvements and two hundred head of cattle by natural increase. At the end of the year it
is also discovered that, by reason of business changes, the farm and the cattle both have
increased in value, and that the value of the corporate property is now P20,000 instead of
P10,000 as it was at the beginning of the year. The incorporators instead of reducing the
property to its original capital, by selling off a part of its, issue to themselves "stock dividends"
to represent the proportional value or interest of each of the stockholders in the increased
capital at the close of the year. There is still not a centavo in the treasury and neither has
withdrawn a peso from the business during the year. No part of the farm or cattle has been
sold and not a single peso was received out of the rents or profits of the capital of the
corporation by the stockholders.

To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose
of opening and conducting a drug store, with assets of the value of P2,000, and each
contributes P1,000. Their entire assets are invested in drugs and put upon the shelves in their
place of business. They commence business without a cent in the treasury. Every dollar
contributed is invested. Shares of stock to the amount of P1,000 are issued to each of the
incorporators, which represent the actual investment and entire assets of the corporation.
Business for the first year is good. Merchandise is sold, and purchased, to meet the demands
of the growing trade. At the end of the first year an inventory of the assets of the corporation
is made, and it is then ascertained that the assets or capital of the corporation on hand
amount to P4,000, with no debts, and still not a cent in the treasury. All of the receipts during
the year have been reinvested in the business. Neither of the stockholders have withdrawn a
penny from the business during the year. Every peso received for the sale of merchandise
was immediately used in the purchase of new stock new supplies. At the close of the year
there is not a centavo in the treasury, with which either A or B could buy a cup of coffee or a
pair of shoes for his family. At the beginning of the year they were P2,000, and at the end of
the year they were P4,000, and neither of the stockholders have received a centavo from the
business during the year. At the close of the year, when it is discovered that the assets are
P4,000 and not P2,000, instead of selling the extra merchandise on hand and thereby
reducing the business to its original capital, they agree among themselves to increase the
capital they agree among themselves to increase the capital issued and for that purpose
issue additional stock in the form of "stock dividends" or additional stock of P1,000 each,
which represents the actual increase of the shares of interest in the business. At the
beginning of the year each stockholder held one-half interest in the capital. At the close of the
year, and after the issue of the said stock dividends, they each still have one-half interest in
the business. The capital of the corporation increased during the year, but has either of them
received an income? It is not denied, for the purpose of ordinary taxation, that the taxable
property of the corporation at the beginning of the year was P2,000, that at the close of the

Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle for
the sum of P10,000. At the end of the first year, by reason of business conditions and the
increase of the value of both real estate and personal property, it is discovered that the value
of the farm and the cattle is P20,000. A, during the year, has received nothing from the farm
or the cattle. His books at the beginning of the year show that he had property of the value of
P10,000. His books at the close of the year show that he has property of the value of
P20,000. A is not a corporation. The assets of his business are not shown therefore by
certificates of stock. His books, however, show that the value of his property has increased
during the year by P10,000, under any theory of business or law, be regarded as an "income"
upon which the farmer can be required to pay an income tax? Is there any difference in law in
the condition of A in this illustration and the condition of A and B in the immediately preceding
illustration? Can the increase of the value of the property in either case be regarded as an
"income" and be subjected to the payment of the income tax under the law?
Each of the foregoing illustrations, it is asserted, is analogous to the case before us and, in
view of that fact, let us ascertain how lexicographers and the courts have defined an
"income." The New Standard Dictionary, edition of 1915, defines an income as "the amount
of money coming to a person or corporation within a specified time whether as payment or
corporation within a specified time whether as payment for services, interest, or profit from
investment." Webster's International Dictionary defines an income as "the receipt, salary;
especially, the annual receipts of a private person or a corporation from property." Bouvier, in

his law dictionary, says that an "income" in the federal constitution and income tax act, is
used in its common or ordinary meaning and not in its technical, or economic sense. (146
Northwestern Reporter, 812) Mr. Black, in his law dictionary, says "An income is the returnin
money from one's business, labor, or capital invested; gains, profit or private revenue." "An
income tax is a tax on the yearly profits arising from property , professions, trades, and
offices."

them, either a claim against the going concern or corporation, for any particular sum of
money, or a right to any particular portion of the asset, or any shares sells or until the
directors conclude that dividends shall be made a part of the company's assets segregated
from the common fund for that purpose. The dividend normally is payable in money and when
so paid, then only does the stockholder realize a profit or gain, which becomes his separate
property, and thus derive an income from the capital that he has invested. Until that, is done
theincreased assets belong to the corporation and not to the individual stockholders.

The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653),
said in speaking of income that mere advance in value in no sense constitutes 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 re Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa., 414.)

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. Far
from being a realization of profits of the stockholder, it tends rather to postpone said
realization, in that the fund represented by the new stock has been transferred from surplus
to assets, and no longer is available for actual distribution. 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. Having
regard to the very truth of the matter, to substance and not to form, the stockholder by virtue
of the stock dividend has in fact received nothing that answers the definition of an "income."
(Eisner vs. Macomber, 252 U.S., 189, 209, 211.)

Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and
now Secretary of State of the United States, in his argument before the Supreme Court of the
United States in the case of Towne vs. Eisner, supra, defined an "income" in an income tax
law, unless it is otherwise specified, to mean cash or its equivalent. It does not mean choses
in action or unrealized increments in the value of the property, and cites in support of the
definition, the definition given by the Supreme Court in the case of Gray vs. Darlington, supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said:
"Notwithstanding the thoughtful discussion that the case received below, we cannot doubt
that the dividend was capital as well for the purposes of the Income Tax Law. . . . 'A stock
dividend really takes nothing from the property of the corporation, and adds nothing to the
interests of the shareholders. Its property is not diminished and their interest are not
increased. . . . The proportional interest of each shareholder remains the same. . . .' In short,
the corporation is no poorer and the stockholder is no richer then they were before." (Gibbons
vs. Mahon, 136 U.S., 549, 559, 560; Logan County vs. U.S., 169 U.S., 255, 261).

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. For bookkeeping purposes, a corporation, by
issuing stock dividend, acknowledges a liability in form to the stockholders, evidenced by a
capital stock account. 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

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking for the
court, said that the act employs the term "income" in its natural and obvious sense, as
importing something distinct from principal or capital and conveying the idea of gain or
increase arising from corporate activity.
Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the
court said: "An income may be defined as the gain derived from capital, from labor, or from
both combined, provided it be understood to include profit gained through a sale or
conversion of capital assets."
For bookkeeping purposes, when stock dividends are declared, the corporation or company
acknowledges a liability, in form, to the stockholders, equivalent to the aggregate par value of
their stock, evidenced by a "capital stock account." If profits have been made by the
corporation during a particular period and not divided, they create additional bookkeeping
liabilities under the head of "profit and loss," "undivided profits," "surplus account," etc., or the
like. None of these, however, gives to the stockholders as a body, much less to any one of

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." Such property can be reached under the ordinary from of
taxation.

Mass., 558, 560) it was held that stock dividends in such cases were regarded as capital and
not as income(Gibbons vs. Mahon, 136 U.S., 549.)
In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the
title of a corporation, and the interest of its members or stockholders in the property of the
corporation, is familiar and well settled. The ownership of that property is in the corporation,
and not in the holders of shares of its stock. The interest of each stockholder consists in the
right to a proportionate part of the profits whenever dividends are declared by the corporation,
during its existence, under its charter, and to a like proportion of the property remaining, upon
the termination or dissolution of the corporation, after payment of its debts." (Minot vs. Paine,
99 Mass., 101; Greeff vs. Equitable Life Assurance Society, 160 N. Y., 19.) In the case of
Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend is
defined as a corporate profit set aside, declared, and ordered by the directors to be paid to
the stockholders on demand or at a fixed time. Until the dividend is declared, these corporate
profits belong to the corporation, not to the stockholders, and are liable for corporate
indebtedness.

Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the
difference between "capital" and "income": "That the fundamental relation of 'capital' to
'income' has been much discussed by economists, the former being likened to the tree or the
land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from
springs; the latter as the outlet stream, to be measured by its flow during a period of time." It
may be argued that a stockholder might sell the stock dividend which he had acquired. If he
does, then he has received, in fact, an income and such income, like any other profit which
he realizes from the business, is an income and he may be taxed thereon.
There is a clear distinction between an extraordinary cash dividend, no matter when earned,
and stock dividends declared, as in the present case. The one is a disbursement to the
stockholder of accumulated earnings, and the corporation at once parts irrevocably with all
interest thereon. The other involves no disbursement by the corporation. It parts with nothing
to the stockholder. The latter receives, not an actual dividend, but certificate of stock which
simply evidences his interest in the entire capital, including such as by investment of
accumulated profits has been added to the original capital. They are not income to him, but
represent additions to the source of his income, namely, his invested capital. (DeKoven vs.
Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a person is in the same position, so far as his
income is concerned, as the owner of young domestic animal, one year old at the beginning
of the year, which is worth P50 and, which, at the end of the year, and by reason of its growth,
is worth P100. The value of his property has increased, but has had an income during the
year? It is true that he had taxable property at the beginning of the year of the value of P50,
and the same taxable property at another period, of the value of P100, but he has had no
income in the common acceptation of that word. The increase in the value of the property
should be taken account of on the tax duplicate for the purposes of ordinary taxation, but not
as income for he has had none.

There is a clear distinction between an extraordinary cash dividend, no matter when earned,
and stock dividends declared. The one is a disbursement to the stockholders of accumulated
earning, and the corporation at once parts irrevocably with all interest thereon. The other
involves no disbursement by the corporation. It parts with nothing to the stockholders. The
latter receives, not an actual dividend, but certificates of stock which evidence in a new
proportion his interest in the entire capital. When a cash becomes the absolute property of
the stockholders and cannot be reached by the creditors of the corporation in the absence of
fraud. A stock dividend however, still being the property of the corporation and not the
stockholder, it 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 (Cook on Corporation,
Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs. Britton, 64 Conn., 4;
5 Am., and Eng. Encycl. of Law, 2d ed., p. 738.)

The question whether stock dividends are income, or capital, or assets has frequently come
before the courts in another form in cases of inheritance. A is a stockholder in a large
corporation. He dies leaving a will by the terms of which he give to B during his lifetime the
"income" from said stock, with a further provision that C shall, at B's death, become the
owner of his share in the corporation. During B's life the corporation issues a stock dividend.
Does the stock dividend belong to B as an income, or does it finally belong to C as a part of
his share in the capital or assets of the corporation, which had been left to him as a
remainder by A? While there has been some difference of opinion on that question, we
believe that a great weight of authorities hold that the stock dividend is capital or assets
belonging to C and not an income belonging to B. In the case of D'Ooge vs. Leeds (176

If the ownership of the property represented by a stock dividend is still in the corporation and
to 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.
(Gibbsons vs. Mahon, supra.) the stockholder has received nothing but a representation of an
interest in the property of the corporation and, as a matter of fact, he may never receive
anything, depending upon the final outcome of the business of the corporation. The entire
assets of the corporation may be consumed by mismanagement, or eaten up by debts and
obligations, in which case the holder of the stock dividend will never have received an income

from his investment in the corporation. A corporation may be solvent and prosperous today
and issue stock dividends in representation of its increased assets, and tomorrow be
absolutely insolvent by reason of changes in business conditions, and in such a case the
stockholder would have received nothing from his investment. In such a case, 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. An income subject to taxation under the law must be
an actual income and not a promised or prospective income.
The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the
provisions of the Jones Law. That may be admitted. He further argues that the Act of
Congress (U.S. Revenue Act of 1918) expressly authorized the Philippine Legislatures to
provide for an income tax. That fact may also be admitted. But a careful reading of that Act
will show that, while it permitted a tax upon income, the same provided that income shall
include gains, profits, and income derived from salaries, wages, or compensation for personal
services, as well as from interest, rent, dividends, securities, etc. The appellee emphasizes
the "income from dividends." Of course, income received as dividends is taxable as an
income but an income from "dividends" is a very different thing from receipt of a "stock
dividend." One is an actual receipt of profits; the other is a receipt of a representation of the
increased value of the assets of corporation.
In all of the foregoing argument we have not overlooked the decisions of a few of the courts in
different parts of the world, which have reached a different conclusion from the one which we
have arrived at in the present case. Inasmuch, however, as appeals may be taken from this
court to the Supreme Court of the United States, we feel bound to follow the same doctrine
announced by that court.
Having reached the conclusion, supported by the great weight of the authority, that "stock
dividends" are not "income," the same cannot be taxes under that provision of Act No. 2833
which provides for a tax upon income. Under the guise of an income tax, property which is
not an income cannot be taxed. When the assets of a corporation have increased so as to
justify the issuance of a stock dividend, the increase of the assets should be taken account of
the Government in the ordinary tax duplicates for the purposes of assessment and collection
of an additional tax. For all of the foregoing reasons, we are of the opinion, and so decide,
that the judgment of the lower court should be revoked, and without any finding as to costs, it
is so ordered.
Araullo, C.J. Avancea, Villamor and Romualdez, JJ., concur.

which dismissed petitioners' appeal of the October 19, 1992 Decision 3 of the Court of Tax
Appeals 4 (CTA) which had previously sustained petitioners' liability for deficiency income tax,
interest and withholding tax. The Court of Appeals ruled:

G.R. No. 112675 January 25, 1999

AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER
INSURANCE CO., INC.; CIBELES INSURANCE CORPORATION; COMMONWEALTH
INSURANCE COMPANY; CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT
INSURANCE & SURETY CORPORATION DOMESTIC INSURANCE COMPANY OF THE
PHILIPPINE; EASTERN ASSURANCE COMPANY & SURETY CORP; EMPIRE
INSURANCE COMPANY; EQUITABLE INSURANCE CORPORATION; FEDERAL
INSURANCE CORPORATION INC.; FGU INSURANCE CORPORATION; FIDELITY &
SURETY COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS' INSURANCE CO.,
INC.; GOVERNMENT SERVICE INSURANCE SYSTEM; MALAYAN INSURANCE CO.,
INC.; MALAYAN ZURICH INSURANCE CO.; INC.; MERCANTILE INSURANCE CO., INC.;
METROPOLITAN
INSURANCE
COMPANY;
METRO-TAISHO
INSURANCE
CORPORATION; NEW ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE
CORPORATION; PARAMOUNT INSURANCE CORPORATION; PEOPLE'S TRANS-EAST
ASIA INSURANCE CORPORATION; PERLA COMPANIA DE SEGUROS, INC.;
PHILIPPINE BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST INSURANCE CO.,
INC.; PIONEER INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL
INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY OF THE
PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE
COMPANY; RIZAL SURETY & INSURANCE COMPANY; SANPIRO INSURANCE
CORPORATION; SEABOARD-EASTERN INSURANCE CO., INC.; SOLID GUARANTY,
INC.; SOUTH SEA SURETY & INSURANCE CO., INC.; STATE BONDING & INSURANCE
CO., INC.; SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO., INC.

all
assessed
as
"POOL
OF
MACHINERY
INSURERS, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMISSIONER OF INTERNAL
REVENUE, respondent.

WHEREFORE, the petition is DISMISSED, with costs against petitioner

The petition also challenges the
Resolution 6 denying reconsideration.

November

15,

1993

Court

of

Appeals

(CA)

The Facts
The antecedent facts, 7 as found by the Court of Appeals, are as follows:
The petitioners are 41 non-life insurance corporations, organized and existing under the laws
of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler
Explosion and Contractors' All Risk insurance policies, the petitioners on August 1, 1965
entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident
foreign insurance corporation. The reinsurance treaties required petitioners to form a [p]ool.
Accordingly, a pool composed of the petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
"Information Return of Organization Exempt from Income Tax" for the year ending in 1975, on
the basis of which it was assessed by the Commissioner of Internal Revenue deficiency
corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount of
P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners,
respectively. These assessments were protested by the petitioners through its auditors Sycip,
Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered
the petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax,
interest, and with [h]olding tax, itemized as follows:
Net income per information return P3,737,370.00
===========

PANGANIBAN, J.:

Income tax due thereon P1,298,080.00

Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into
a "pool" in order to facilitate the handling of business contracted with a nonresident foreign
insurance company. May the "clearing house" or "insurance pool" so formed be deemed a
partnership or an association that is taxable as a corporation under the National Internal
Revenue Code (NIRC)? Should the pool's remittances to the member companies and to the
said foreign firm be taxable as dividends? Under the facts of this case, has the goverment's
right to assess and collect said tax prescribed?

Add: 14% Int. fr. 4/15/76

to 4/15/79 545,193.60

TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE
Dividend paid to Munich

The Case

Reinsurance Company P3,728,412.00

These are the main questions raised in the Petition for Review on Certiorari before us,
assailing the October 11, 1993 Decision 1 of the Court of Appeals 2 in CA-GR SP 25902,

35% withholding tax at

2. Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance,
were "dividends" subject to tax; and

source due thereon P1,304,944.20

Add: 25% surcharge 326,236.05

3. Whether or not the respondent Commissioner's right to assess the Clearing House had
already prescribed. 10

14% interest from

1/25/76 to 1/25/79 137,019.14

The Court's Ruling

Compromise penaltylate payment 300.00

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is
taxable as a corporation, and that the government's right to assess and collect the taxes had
not prescribed.

First Issue:

TOTAL AMOUNT DUE & P1,768,799.39

Pool Taxable as a Corporation

COLLECTIBLE ===========

Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house
was an informal partnership, which was taxable as a corporation under the NIRC. They point
out that the reinsurance policies were written by them "individually and separately," and that
their liability was limited to the extent of their allocated share in the original risk thus
reinsured. 11 Hence, the pool did not act or earn income as a reinsurer. 12 Its role was limited
to its principal function of "allocating and distributing the risk(s) arising from the original
insurance among the signatories to the treaty or the members of the pool based on their
ability to absorb the risk(s) ceded[;] as well as the performance of incidental functions, such
as records, maintenance, collection and custody of funds, etc." 13

non-filing of return 300.00

Dividend paid to Pool Members P655,636.00

===========
10% withholding tax at
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18

Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers,
did not share the same risk or solidary liability, 14 (2) there was no common fund; 15 (3) the
executive board of the pool did not exercise control and management of its funds, unlike the
board of directors of a corporation; 16 and (4) the pool or clearing house "was not and could
not possibly have engaged in the business of reinsurance from which it could have derived
income for itself." 17

Compromise penaltynon-filing of return 300.00

late payment 300.00

TOTAL AMOUNT DUE & P89,438.68

The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the
agency tasked with the enforcement of tax law, is accorded much weight and even finality,
when there is no showing. that it is patently wrong, 18 particularly in this case where the
findings and conclusions of the internal revenue commissioner were subsequently affirmed by
the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the
Court of Appeals. 19Indeed,

COLLECTIBLE =========== 8
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latter's collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because "the taxpayer cannot be located at the
address given in the information return filed." Hence, this Petition for Review before us. 9

[I]t has been the long standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions,
is dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident
exercise of its authority. 20

The Issues
Before this Court, petitioners raise the following issues:
1. Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name, was a
partnership or association subject to tax as a corporation;

This Court rules that the Court of Appeals, in affirming the CTA which had previously
sustained the internal revenue commissioner, committed no reversible error. Section 24 of the
NIRC, as worded in the year ending 1975, provides:

The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial operation,
or venture is carried on. *** (8 Merten's Law of Federal Income Taxation, p. 562 Note 63)

Sec. 24. Rate of tax on corporations. (a) Tax on domestic corporations. A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized, but not including duly registered general co-partnership (compaias
colectivas), general professional partnerships, private educational institutions, and building
and loan associations . . . .

Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when "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." 25 Its requisites are: "(1) mutual
contribution to a common stock, and (2) a joint interest in the profits." 26 In other words, a
partnership is formed when persons contract "to devote to a common purpose either money,
property,
or
labor
with
the
intention
of
dividing
the
profits
between
themselves." 27 Meanwhile, an association implies associates who enter into a "joint
enterprise . . . for the transaction of business." 28

Ineludibly, the Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Parenthetically, the
NIRC's inclusion of such entities in the tax on corporations was made even clearer by the tax
Reform Act of 1997, 21 which amended the Tax Code. Pertinent provisions of the new law
read as follows:

In the case before us, the ceding companies entered into a Pool Agreement 29 or an
association 30 that would handle all the insurance businesses covered under their quota-share
reinsurance treaty 31 and surplus reinsurance treaty 32 with Munich. The following
unmistakably indicates a partnership or an association covered by Section 24 of the NIRC:

Sec. 27. Rates of Income Tax on Domestic Corporations.

(1) The pool has a common fund, consisting of money and other valuables that are deposited
in the name and credit of the pool. 33 This common fund pays for the administration and
operation expenses of the pool. 24

(A) In General. Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable year
from all sources within and without the Philippines by every corporation, as defined in Section
22 (B) of this Code, and taxable under this Title as a corporation . . . .

(2) The pool functions through an executive board, which resembles the board of directors of
a corporation, composed of one representative for each of the ceding companies. 35

Sec. 22. Definition. When used in this Title:

(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however,
its work is indispensable, beneficial and economically useful to the business of the ceding
companies and Munich, because without it they would not have received their premiums. The
ceding companies share "in the business ceded to the pool" and in the "expenses" according
to a "Rules of Distribution" annexed to the Pool Agreement. 36 Profit motive or business is,
therefore, the primordial reason for the pool's formation. As aptly found by the CTA:

xxx xxx xxx

(B) The term "corporation" shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract without the Government. "General
professional partnerships" are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging
in any trade or business.

. . . The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It is
apparent, and petitioners admit, that their association or coaction was indispensable [to] the
transaction of the business, . . . If together they have conducted business, profit must have
been the object as, indeed, profit was earned. Though the profit was apportioned among the
members, this is only a matter of consequence, as it implies that profit actually resulted. 37

xxx xxx xxx

Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that Section 24
covered these unregistered partnerships and even associations or joint accounts, which had
no legal personalities apart from their individual members. 23 The Court of Appeals astutely
applied Evangelista. 24

The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the facts

obtaining therein are not on all fours with the present case. In Pascual, there was no
unregistered partnership, but merely a co-ownership which took up only two isolated
transactions. 39 The Court of Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning more than ten years, as in the
case before us.

. . . Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v.
Collector of Internal Revenue, supra. The Supreme Court said:

Second Issue:

Pool's Remittances are Taxable

interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption claimed must be expressed in a
language too plain to be mistaken. 53

Petitioners further contend that the remittances of the pool to the ceding companies and
Munich are not dividends subject to tax. They insist that such remittances contravene
Sections 24 (b) (I) and 263 of the 1977 NIRC and "would be tantamount to an illegal double
taxation as it would result in taxing the same taxpayer" 40 Moreover, petitioners argue that
since Munich was not a signatory to the Pool Agreement, the remittances it received from the
pool cannot be deemed dividends. 41They add that even if such remittances were treated as
dividends, they would have been exempt under the previously mentioned sections of the
1977 NIRC, 42 as well as Article 7 of paragraph 1 43 and Article 5 of paragraph 5 44 of the RPWest German Tax Treaty. 45

Finally the petitioners' claim that Munich is tax-exempt based on the RP- West German Tax
Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the
pool for corporate taxes on the basis of the information return it had submitted for the year
ending 1975, a taxable year when said treaty was not yet in effect. 54 Although petitioners
omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice
that it took effect only later, on December 14, 1984. 55
Third Issue:

Petitioners are clutching at straws. Double taxation means taxing the same property twice
when it should be taxed only once. That is, ". . . taxing the same person twice by the same
jurisdiction for the same thing" 46 In the instant case, the pool is a taxable entity distinct from
the individual corporate entities of the ceding companies. The tax on its income is obviously
different from the tax on thedividends received by the said companies. Clearly, there is no
double taxation here.

Prescription
Petitioners also argue that the government's right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14,
1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to
give them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners
contend that the five-year statute of limitations then provided in the NIRC had already lapsed,
and that the internal revenue commissioner was already barred by prescription from making
an assessment. 56

The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, "exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right." 47 Petitioners have failed to
discharge this burden of proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the income was earned and when the
subject information return for the year ending 1975 was filed.

We cannot sustain the petitioners. The CA and the CTA categorically found that the
prescriptive period was tolled under then Section 333 of the NIRC, 57 because "the taxpayer
cannot be located at the address given in the information return filed and for which reason
there was delay in sending the assessment." 58 Indeed, whether the government's right to
collect and assess the tax has prescribed involves facts which have been ruled upon by the
lower courts. It is axiomatic that in the absence of a clear showing of palpable error or grave
abuse of discretion, as in this case, this Court must not overturn the factual findings of the CA
and the CTA.

Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot
justify the exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon
reinsurance by any company that has already paid the tax . . ." This cannot be applied to the
present case because, as previously discussed, the pool is a taxable entity distinct from the
ceding companies; therefore, the latter cannot individually claim the income tax paid by the
former as their own.

Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of
Appeals that the pool changed its address, for they stated that the pool's information return
filed in 1980 indicated therein its "present address." The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law
clearly states that the said period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address."

On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign corporations; hence, it
cannot be claimed by the ceding companies which are domestic corporations. Nor can
Munich, a foreign corporation, be granted exemption based solely on this provision of the Tax
Code, because the same subsection specifically taxes dividends, the type of remittances
forwarded to it by the pool. Although not a signatory to the Pool Agreement, Munich is
patently an associate of the ceding companies in the entity formed, pursuant to their
reinsurance treaties which required the creation of said pool.

WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated October
11, 1993 and November 15, 1993 are hereby AFFIRMED. Cost against
petitioners.1wphi1.nt
SO ORDERED.

Under its pool arrangement with the ceding companies; Munich shared in their income and
loss. This is manifest from a reading of Article 3 49 and 10 50 of the Quota-Share Reinsurance
treaty and Articles 3 51 and 10 52 of the Surplus Reinsurance Treaty. The foregoing

Romero, Vitug, Purisima, Gonzaga-Reyes, JJ., concur.

G.R. No. 153793 August 29, 2006

income, the sales commission received by respondent is not taxable in the Philippines
because it arose from the marketing activities performed by respondent in Germany. The
dispositive portion of the appellate courts Decision, reads:

COMMISSIONER
OF
INTERNAL
REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-infact) Respondent.
DECISION

WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated
June 28, 2000 is hereby REVERSED and SET ASIDE and the respondent court is hereby
directed to grant petitioner a tax refund in the amount of Php 170,777.26.

YNARES-SANTIAGO, J.:

SO ORDERED.8

Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002
Decision1 of the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax refund of
respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision 2 of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May 8, 2002
Resolution3 of the Court of Appeals denying its motion for reconsideration.

Petitioner filed a motion for reconsideration but was denied. 9 Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the Philippines
because the source thereof is JUBANITEX, a domestic corporation located in the City of
Makati. It thus implied that source of income means the physical source where the income
came from. It further argued that since respondent is the President of JUBANITEX, any
remuneration she received from said corporation should be construed as payment of her
overall managerial services to the company and should not be interpreted as a compensation
for a distinct and separate service as a sales commission agent.

The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the
President of JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing,
marketing on wholesale only, buying or otherwise acquiring, holding, importing and exporting,
selling and disposing embroidered textile products." 4Through JUBANITEXs General
Manager, Marina Q. Guzman, the corporation appointed and engaged the services of
respondent as commission agent. It was agreed that respondent will receive 10% sales
commission on all sales actually concluded and collected through her efforts. 5

Respondent, on the other hand, claims that the income she received was payment for her
marketing services. She contended that income of nonresident aliens like her is subject to tax
only if the source of the income is within the Philippines. Source, according to respondent is
the situs of the activity which produced the income. And since the source of her income were
her marketing activities in Germany, the income she derived from said activities is not subject
to Philippine income taxation.

In 1995, respondent received the amount of P1,707,772.64, representing her sales

commission income from which JUBANITEX withheld the corresponding 10% withholding tax
amounting to P170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR).
On October 17, 1997, respondent filed her 1995 income tax return reporting a taxable income
of P1,707,772.64 and a tax due of P170,777.26. 6

The issue here is whether respondents sales commission income is taxable in the
Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:

On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to
have been mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent
contended that her sales commission income is not taxable in the Philippines because the
same was a compensation for her services rendered in Germany and therefore considered as
income from sources outside the Philippines.

SEC. 25. Tax on Nonresident Alien Individual.

(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.
(1) In General. A nonresident alien individual engaged in trade or business in the
Philippines shall be subject to an income tax in the same manner as an individual citizen and
a resident alien individual, on taxable income received from all sources within the Philippines.
A nonresident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during any calendar year shall
be deemed a nonresident alien doing business in the Philippines, Section 22(G) of this Code
notwithstanding.

The next day, April 15, 1998, she filed a petition for review with the CTA contending that no
action was taken by the BIR on her claim for refund. 7 On June 28, 2000, the CTA rendered a
decision denying her claim. It held that the commissions received by respondent were
actually her remuneration in the performance of her duties as President of JUBANITEX and
not as a mere sales agent thereof. The income derived by respondent is therefore an income
taxable in the Philippines because JUBANITEX is a domestic corporation.

xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines.
There shall be levied, collected and paid for each taxable year upon the entire income
received from all sources within the Philippines by every nonresident alien individual not

On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that
respondent received the commissions as sales agent of JUBANITEX and not as President
thereof. And since the "source" of income means the activity or service that produce the

10

engaged in trade or business within the Philippines x x x a tax equal to twenty-five percent
(25%) of such income. x x x

The Supreme Court has said, in a definition much quoted but often debated, that income may
be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of
capital assets. While the three elements of this attempt at definition need not be accepted as
all-inclusive, they serve as useful guides in any inquiry into whether a particular item is from
"sources within the United States" and suggest an investigation into the nature and location of
the activities or property which produce the income.

Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not
engaged in trade or business, are subject to Philippine income taxation on their income
received from all sources within the Philippines. Thus, the keyword in determining the
taxability of non-resident aliens is the incomes "source." In construing the meaning of
"source" in Section 25 of the NIRC, resort must be had on the origin of the provision.

If the income is from labor the place where the labor is done should be decisive; if it is done in
this country, the income should be from "sources within the United States." If the income is
from capital, the place where the capital is employed should be decisive; if it is employed in
this country, the income should be from "sources within the United States." If the income is
from the sale of capital assets, the place where the sale is made should be likewise decisive.

The first Philippine income tax law enacted by the Philippine Legislature was Act No.
2833,10 which took effect on January 1, 1920.11 Under Section 1 thereof, nonresident aliens
are likewise subject to tax on income "from all sources within the Philippine Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire
net income received in the preceding calendar year from all sources by every individual, a
citizen or resident of the Philippine Islands, a tax of two per centum upon such income; and a
like tax shall be levied, assessed, collected, and paid annually upon the entire net income
received in the preceding calendar year from all sources within the Philippine Islands by
every individual, a nonresident alien, including interest on bonds, notes, or other interestbearing obligations of residents, corporate or otherwise.

Much confusion will be avoided by regarding the term "source" in this fundamental light. It is
not a place, it is an activity or property. As such, it has a situs or location, and if that situs or
location is within the United States the resulting income is taxable to nonresident aliens and
foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and
1913 basis of taxing nonresident aliens and foreign corporations and to make the test of
taxability the "source," or situs of the activities or property which produce the income. The
result is that, on the one hand, nonresident aliens and nonresident foreign corporations are
prevented from deriving income from the United States free from tax, and, on the other hand,
there is no undue imposition of a tax when the activities do not take place in, and the property
producing income is not employed in, this country. Thus, if income is to be taxed, the recipient
thereof must be resident within the jurisdiction, or the property or activities out of which the
income issues or is derived must be situated within the jurisdiction so that the source of the
income may be said to have a situs in this country.

Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as
amended by U.S. Revenue Law of 1917.12 Being a law of American origin, the authoritative
decisions of the official charged with enforcing it in the U.S. have peculiar persuasive force in
the Philippines.13
The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as
from sources within the U.S. and specifies when similar types of income are to be treated as
from sources outside the U.S.14 Under the said Code, compensation for labor and personal
services performed in the U.S., is generally treated as income from U.S. sources; while
compensation for said services performed outside the U.S., is treated as income from
sources outside the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:

The underlying theory is that the consideration for taxation is protection of life and property
and that the income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property protected by this
Government or obtained by persons enjoying that protection. 16

SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x

The important factor therefore which determines the source of income of personal services is
not the residence of the payor, or the place where the contract for service is entered into, or
the place of payment, but the place where the services were actually rendered. 17

xxxx
(3) Services. Compensation for labor or personal services performed in the Philippines;
xxxx

In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 18 the Court addressed the
issue on the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign insurance company in respect of risks located in the
Philippines. It was held therein that the undertaking of the foreign insurance company to
indemnify the local insurance company is the activity that produced the income. Since the
activity took place in the Philippines, the income derived therefrom is taxable in our
jurisdiction. Citing Mertens, The Law of Federal Income Taxation, the Court emphasized that

(C) Gross Income From Sources Without the Philippines. x x x

xxxx
(3) Compensation for labor or personal services performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue Code of the
U.S., are instructive:

11

the technical meaning of source of income is the property, activity or service that produced
the same. Thus:

selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in
the series corresponding to a different airline company; (3) receiving the fare from the whole
trip; and (4) consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement as prescribed
by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in
exercise of the functions which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the regular sale of
tickets, its main activity, is the very lifeblood of the airline business, the generation of sales
being the paramount objective. There should be no doubt then that BOAC was "engaged in"
business in the Philippines through a local agent during the period covered by the
assessments. x x x21

The source of an income is the property, activity or service that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance contracts,
accordingly, had for their source the undertaking to indemnify Commonwealth Insurance Co.
against liability. Said undertaking is the activity that produced the reinsurance premiums, and
the same took place in the Philippines. x x x the reinsured, the liabilities insured and the risk
originally underwritten by Commonwealth Insurance Co., upon which the reinsurance
premiums and indemnity were based, were all situated in the Philippines. x x x 19
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),20 the
issue was whether BOAC, a foreign airline company which does not maintain any flight to and
from the Philippines is liable for Philippine income taxation in respect of sales of air tickets in
the Philippines, through a general sales agent relating to the carriage of passengers and
cargo between two points both outside the Philippines. Ruling in the affirmative, the Court
applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and
reiterated the rule that the source of income is that "activity" which produced the income. It
was held that the "sale of tickets" in the Philippines is the "activity" that produced the income
and therefore BOAC should pay income tax in the Philippines because it undertook an
income producing activity in the country.

xxxx
The source of an income is the property, activity or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in
the Philippines is the activity that produces the income. The tickets exchanged hands here
and payments for fares were also made here in Philippine currency. The situs of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of supporting the
government.

Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v.
British Overseas Airways Corporation in support of their arguments, but the correct
interpretation of the said case favors the theory of respondent that it is the situs of the activity
that determines whether such income is taxable in the Philippines. The conflict between the
majority and the dissenting opinion in the said case has nothing to do with the underlying
principle of the law on sourcing of income. In fact, both applied the case of Alexander
Howden & Co., Ltd. v. Collector of Internal Revenue. The divergence in opinion centered on
whether the sale of tickets in the Philippines is to be construed as the "activity" that produced
the income, as viewed by the majority, or merely the physical source of the income, as
ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through Justice
Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets as a business activity
that gave rise to the income of BOAC. Petitioner cannot therefore invoke said case to support
its view that source of income is the physical source of the money earned. If such was the
interpretation of the majority, the Court would have simply stated that source of income is not
the business activity of BOAC but the place where the person or entity disbursing the income
is located or where BOAC physically received the same. But such was not the import of the
ruling of the Court. It even explained in detail the business activity undertaken by BOAC in
the Philippines to pinpoint the taxable activity and to justify its conclusion that BOAC is
subject to Philippine income taxation. Thus

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it
constitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation
of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to
transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket
issued to members of the traveling public in general embraces within its terms all the
elements to constitute it a valid contract, binding upon the parties entering into the
relationship.22
The Court reiterates the rule that "source of income" relates to the property, activity or service
that produced the income. With respect to rendition of labor or personal service, as in the
instant case, it is the place where the labor or service was performed that determines the
source of the income. There is therefore no merit in petitioners interpretation which equates
source of income in labor or personal service with the residence of the payor or the place of
payment of the income.
Having disposed of the doctrine applicable in this case, we will now determine whether
respondent was able to establish the factual circumstances showing that her income is
exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the
income, but the sufficiency of evidence to prove that the services she rendered were

BOAC, during the periods covered by the subject assessments, maintained a general sales
agent in the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1)

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performed in Germany. Though not raised as an issue, the Court is clothed with authority to
address the same because the resolution thereof will settle the vital question posed in this
controversy.23

Philippines and that her appointment as commission agent is exclusively for Germany and
other European markets.
In sum, we find that the faxed documents presented by respondent did not constitute
substantial evidence, or that relevant evidence that a reasonable mind might accept as
adequate to support the conclusion 31 that it was in Germany where she performed the income
producing service which gave rise to the reported monthly sales in the months of March and
May to September of 1995. She thus failed to discharge the burden of proving that her
income was from sources outside the Philippines and exempt from the application of our
income tax law. Hence, the claim for tax refund should be denied.

The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi jurisagainst the taxpayer.24 To those therefore, who claim a refund rest
the burden of proving that the transaction subjected to tax is actually exempt from taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated
that the activity or the service which would entitle her to 10% commission income, are "sales
actually concluded and collected through [her] efforts." 25 What she presented as evidence to
prove that she performed income producing activities abroad, were copies of documents she
allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and
fabrics to be used in the finished products as well as samples of sales orders purportedly
relayed to her by clients. However, these documents do not show whether the instructions or
orders faxed ripened into concluded or collected sales in Germany. At the very least, these
pieces of evidence show that while respondent was in Germany, she sent instructions/orders
to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and
whether these sales were truly concluded in Germany, respondent presented no such
evidence. Neither did she establish reasonable connection between the orders/instructions
faxed and the reported monthly sales purported to have transpired in Germany.

The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,32 a previous case
for refund of income withheld from respondents remunerations for services rendered abroad,
the Court in a Minute Resolution dated February 17, 2003, 33 sustained the ruling of the Court
of Appeals that respondent is entitled to refund the sum withheld from her sales commission
income for the year 1994. This ruling has no bearing in the instant controversy because the
subject matter thereof is the income of respondent for the year 1994 while, the instant case
deals with her income in 1995. Otherwise, stated, res judicata has no application here. Its
elements are: (1) there must be a final judgment or order; (2) the court that rendered the
judgment must have jurisdiction over the subject matter and the parties; (3) it must be a
judgment on the merits; (4) there must be between the two cases identity of parties, of
subject matter, and of causes of action. 34 The instant case, however, did not satisfy the fourth
requisite because there is no identity as to the subject matter of the previous and present
case of respondent which deals with income earned and activities performed for different
taxable years.

The paucity of respondents evidence was even noted by Atty. Minerva Pacheco, petitioners
counsel at the hearing before the Court of Tax Appeals. She pointed out that respondent
presented no contracts or orders signed by the customers in Germany to prove the sale
transactions therein.26 Likewise, in her Comment to the Formal Offer of respondents
evidence, she objected to the admission of the faxed documents bearing instruction/orders
marked as Exhibits "R,"27 "V," "W", and "X,"28 for being self serving.29 The concern raised by
petitioners counsel as to the absence of substantial evidence that would constitute proof that
the sale transactions for which respondent was paid commission actually transpired outside
the Philippines, is relevant because respondent stayed in the Philippines for 89 days in 1995.
Except for the months of July and September 1995, respondent was in the Philippines in the
months of March, May, June, and August 1995, 30 the same months when she earned
commission income for services allegedly performed abroad. Furthermore, respondent
presented no evidence to prove that JUBANITEX does not sell embroidered products in the

WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8,
2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are REVERSED and SET
ASIDE. The June 28, 2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633,
which denied respondents claim for refund of income tax paid for the year 1995
is REINSTATED.
SO ORDERED.
CONSUELO YNARES-SANTIAGO
Associate Justice

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