INCOME TAXATION CASE DIGESTS

Submitted by: Roz Lourdiz P. Camacho

Ll.B. IV-B

1. CIR v. Juliane Baier-Nickel G.R. No. 153793, August 29, 2006

Facts: 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."
Through JUBANITEXs General Manager, Marina Q. Guzman, the corporation appointed and engaged the
services of respondent as commission agent. It was agreed that respondent will receive 10% sales
commission on all sales actually concluded and collected through her efforts.

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. Then 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.

Thereafter she filed a petition for review with the CTA contending that no action was taken by the BIR
on her claim for refund. The CTA rendered a decision denying her claim stating that the income derived by
respondent is therefore an income taxable in the Philippines because JUBANITEX is a domestic corporation. On
petition with the CA, the latter reversed the decision. Petitioner filed a motion for reconsideration but was
denied. Hence, this petition.

Issue: Whether or not respondents sales commission income is taxable in the Philippines.

Held: Yes. The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed
strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden of proving that the
transaction subjected to tax is actually exempt from taxation.

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." 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 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 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.

2. Oa v. CIR, 45 SCRA 74, May 23, 1972

Facts: Julia Buales died leaving as heirs her surviving spouse, Lorenzo Oa and her five children. A civil case
was instituted for the settlement of her state, in which Oa was appointed administrator and later on the
guardian of the three heirs who were still minors when the project for partition was approved. This
shows that the heirs have undivided interest in 10 parcels of land, 6 houses and money from the War
Damage Commission.
Although the project of partition was approved by the Court, no attempt was made to divide the properties and
they remained under the management of Oa who used said properties in business by leasing or selling them
and investing the income derived therefrom and the proceeds from the sales thereof in real properties and
securities. As a result, petitioners properties and investments gradually increased. Petitioners returned for
income tax purposes their shares in the net income but they did not actually receive their shares because this
left with Oa who invested them.

Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore, subject to
the corporate income tax, particularly for years 1955 and 1956. Petitioners asked for reconsideration, which
was denied hence this petition for review from CTAs decision.

Issue: Whether there was a co-ownership or an unregistered partnership

Whether the petitioners are liable for the deficiency corporate income tax

Held:
Unregistered partnership. The Tax Court found that instead of actually distributing the estate of the deceased
among themselves pursuant to the project of partition, the heirs allowed their properties to remain under the
management of Oa and let him use their shares as part of the common fund for their ventures, even as they
paid corresponding income taxes on their respective shares.
Yes. For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the incomes derived therefrom are used as a
common fund with intent to produce profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved
by the court in the corresponding testate or intestate proceeding. The reason is simple. From the moment of
such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes
thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other
heirs, and, accordingly, he becomes liable individually for all taxes in connection therewith. If after such
partition, he allows his share to be held in common with his co-heirs under a single management to be used
with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no
document or instrument were executed, for the purpose, for tax purposes, at least, an unregistered partnership
is formed.
For purposes of the tax on corporations, our National Internal Revenue Code includes these partnerships

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 Mertens Law of
Federal Income Taxation, p. 562 Note 63; emphasis ours.)

with the exception only of duly registered general co-partnerships within the purview of the term
corporation. It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said
Code is concerned, and are subject to the income tax for corporations. Judgment affirmed.

3. Evangelista v. Coll, 102 Phil 140

Facts: Petitioners borrowed sum of money from their father and together with their own personal funds they
used said money to buy several real properties. They then appointed their brother (Simeon) as manager
of the said real properties with powers and authority to sell, lease or rent out said properties to third
persons. They realized rental income from the said properties for the period 1945-1949.On September
24, 1954 respondent Collector of Internal Revenue demanded the payment of income tax on
corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949. The
letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954,
whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision
of the respondent contained in his letter of demand dated September 24, 1954" be reversed, and that
they be absolved from the payment of the taxes in question. CTA denied their petition and subsequent
MR and New Trials were denied. Hence this petition.

Issue: Whether petitioners have formed a partnership and consequently, are subject to the tax on corporations
provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal
Revenue Code, as well as to the residence tax for corporations and the real estate dealers fixed tax.
Held: YES. The essential elements of a partnership are two, namely: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide the profits among the contracting parties.
The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did,
contribute money and property to a common fund. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves, because of the following observations, among
others: (1) Said common fund was not something they found already in existence; (2)They invested the same,
not merely in one transaction, but in a series of transactions; (3) The aforesaid lotswere not devoted to
residential purposes, or to other personal uses, of petitioners herein.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the
collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in
petitioners herein.

For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships with
the exception only of duly registered general co-partnershipswithin the purview of the term"corporation." It
is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is
concerned and are subject to the income tax for corporations.

4. Obillos v. CIR, October 29, 1985

Facts: Petitioners sold the lots they inherited from their father and derived a total profit of P33,584 for each of
them. They treated the profit as capital gain and paid an income tax thereof. The CIR required petitioners
to pay corporate income tax on their shares, .20% tax fraud surcharge and 42% accumulated interest.
Deficiency tax was assessed on the theory that they had formed an unregistered partnership or joint
venture.

Issue: Whether a partnership was formed by the siblings thus be assessed of the corporate tax.

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

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

5. Pascual v. CIR, 166 SCRA 560

Facts: On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May
28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land
were sold by petitioners in 1968 to Marenir Development Corporation, while the three parcels of land
were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioner realized a net
profit in the sale made in 1968 in the amount of P165, 224.70, while they realized a net profit of P60,000
in the sale made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and
1974 . Respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-
owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a
corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24,
both of the National Internal Revenue Code; that the unregistered partnership was subject to corporate
income tax as distinguished from profits derived from the partnership by them which is subject to
individual income tax.

Issue: Whether petitioners formed an unregistered partnership subject to corporate income tax (partnership vs.
co-ownership)

Held: Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be
deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides:(2) Coownership or co-
possession does not itself establish a partnership, whether such co-owners or co-possessors do or do not share
any profits made by the use of the property; (3) The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived; The sharing of returns does not in itself establish a partnership whether or
not the persons sharing therein have a joint or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical personality different from the individual partners, and
the freedom of each party to transfer or assign the whole property. In the present case, there is clear evidence
of co-ownership between the petitioners. There is no adequate basis to support the proposition that they
thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties
and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits
as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby.
Under the circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes. And even assuming for the
sake of argument that such unregistered partnership appears to have been formed, since there is no such
existing unregistered partnership with a distinct personality nor with assets that can be held liable for said
deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid
obligation of the partnership.

6. Rufino R. Tan v. Ramon R. Del Rosario, G.R. No. 109289, October 3, 1994

Facts: Petitioner assails the constitutionality of RA 7496 or the Simplified Net Income Taxation Scheme and
asserts the violation of Article III, Section 1 and Article VI, Sections 26(1)and 28 (1)of the Constitution and
the validity of Section 6 of the Revenue Regulations No. 2-93. These provisions state the following:

No person shall be deprived of life, liberty, or property without due process of law, nor shall any
person be denied the equal protection of the laws.
Every bill passed by the Congress shall embrace only one subject which shall be expressed in the
title thereof.
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.
General Professional Partnership - The general professional partnership (GPP) and the partners
comprising the GPP are covered by R. A. No. 7496.

Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be
deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities
in the practice of their profession which are not reimbursed or paid by the partnership but are not considered
as direct cost, are not deductible from his gross income.

Issue: Whether or not SNIT is unconstitutional on the ground that it fails to comply that the rule of taxation
shall be uniform and equitable in compliance to Article VI, Section 28(1) of the Constitution

Held: No. The law would now attempt to tax single proprietorship and professionals differently from the
manner it imposes the tax on corporations and partnerships. Court: Such system of income taxation has long
been prevailing rule even prior to RA 7496. Uniformity of taxation requires that all subjects or objects of
taxation similarly situated be treated alike both in privileges and liabilities. Requirements: 1. The standards that
are used therefor are substantial and not arbitrary 2. The categorization is germane to achieve the legislative
purpose 3. The law applies, all things being equal, to both present and future conditions 4. The classification
applies equally well to all those belonging to the same class Legislative intent: 1. to increasingly shift the income
tax system towards the schedular approach for individual taxpayers 2. to maintain, by and large, the present
global treatment on taxable corporations. Classification is deemed neither arbitrary nor inappropriate. Petition
dismissed.

7. Marubeni Corporation v. CIR, G.R. No. 76573, September 14, 1989

Facts: Petitioner Marubeni is a foreign corporation duly organized under the existing laws of Japan and duly
licensed to engage in business under Philippine laws. Marubeni of Japan has equity investments in
Atlantic Gulf & Pacific Co. of Manila. AG&P declared and directly remitted the cash dividends to
Marubenis head office in Tokyo net of the final dividend tax and withholding profit remittance tax.
Thereafter, Marubeni, through SGV, sought a ruling from the BIR on whether or not the dividends it
received from AG&P are effectively connected with its business in the Philippines as to be considered
branch profits subject to profit remittance tax.

The Acting Commissioner ruled that the dividends received by Marubeni are not income from the
business activity in which it is engaged. Thus, the dividend if remitted abroad are not considered branch profits
subject to profit remittance tax. Pursuant to such ruling, petitioner filed a claim for refund for the profit tax
remittance erroneously paid on the dividends remitted by AG& P.

Respondent Commissioner denied the claim. It ruled that since Marubeni is a non resident corporation
not engaged in trade or business in the Philippines it shall be subject to tax on income earned from Philippine
sources at the rate of 35% of its gross income. On the other hand, Marubeni contends that, following the
principal-agent relationship theory, Marubeni Japan is a resident foreign corporation subject only to final tax on
dividends received from a domestic corporation.
Issue: Whether or not Marubeni Japan is a resident foreign corporation.

Held: No. The general rule is a foreign corporation is the same juridical entity as its branch office in the
Philippines . The rule is based on the premise that the business of the foreign corporation is conducted
through its branch office, following the principal-agent relationship theory. It is understood that the
branch becomes its agent. However, when the foreign corporation transacts business in the Philippines
independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of
the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation. Thus, the alleged overpaid taxes were incurred for the
remittance of dividend income to the head office in Japan which is considered as a separate and distinct
income taxpayer from the branch in the Philippines.

8. CIR v. Marubeni, G.R. No. 137377, December 18, 2001

Facts: Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of
Japan. It is engaged in general import and export trading, financing and the construction business. It is
duly registered to engage in such business in the Philippines and maintains a branch office in Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to
examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year ending
March 1985. In the course of the examination, petitioner found respondent to have undeclared income from
two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the
National Development Company (NDC) in connection with the construction and installation of a wharf/port
complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The other
contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an
ammonia storage complex also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioners revenue examiners recommended an assessment for deficiency income, branch
profit remittance, contractors and commercial brokers taxes. Respondent questioned this assessment in
a letter dated June 5, 1986.

Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and that the gross
income from the two projects amounted to P967,269,811.14. Each contract was for a piece of work and
since the projects called for the construction and installation of facilities in the Philippines, the entire
income therefrom constituted income from Philippine sources, hence, subject to internal revenue taxes.

Issue: Whether or not respondent is liable to pay the income, branch profit remittance, and contractors taxes
assessed by petitioner.

Held: A contractors tax is imposed in the National Internal Revenue Code (NIRC) as follows:
Sec. 205. Contractors, proprietors or operators of dockyards, and others.A contractors tax of four
percent of the gross receipts is hereby imposed on proprietors or operators of the following business
establishments and/or persons engaged in the business of selling or rendering the following services for a
fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in Republic Act No. 4566;

(q) Other independent contractors. The term independent contractors includes persons (juridical or
natural) not enumerated above (but not including individuals subject to the occupation tax under the
Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of
whether or not the performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. It does not include regional or area headquarters
established in the Philippines by multinational corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific
Region.

Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of
the service calls for the exercise or use of the physical or mental faculties of such contractors or their
employees. The word contractor refers to a person who, in the pursuit of independent business,
undertakes to do a specific job or piece of work for other persons, using his own means and methods
without submitting himself to control as to the petty details.

A contractors tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature
 of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products;
and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by
the taxing authority only when the acts, privileges or business are done or performed within the
jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege
outside the taxing district.

In the case at bar, it is undisputed that respondent was an independent contractor under the terms of
the two subject contracts. Clearly, the service of design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and control of testing and commissioning,
coordinationof the two projects involved two taxing jurisdictions. These acts occurred in two countries
Japan and the Philippines. While the construction and installation work were completed within the
Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed
and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for
the NDC project and the ammonia storage tanks and refrigeration units were made and completed in
Japan. They were already finished products when shipped to the Philippines. The other construction
supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and
instrumental apparatus, these were not finished products when shipped to the Philippines. They,
however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the
design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen
Portion I were made and completed in Japan. These services were rendered outside the taxing
jurisdiction of the Philippines and are therefore not subject to contractors tax.

9. The Philippine Guaranty Co. Inc. v. CIR, G.R. No. L-22074, April 30, 1975

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

Issue: Are insurance companies not required to withhold tax on reinsurance premiums ceded to foreign
insurance companies, which deprives the government from collecting the tax due from them?

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

10. N.V. Reederij Amsterdam v. CIR, G.R. No. L-46029, June 23, 1988

Facts: Both vessels of petitioner N.V. Reederij Amsterdam called on Philippine ports to load cargoes for foreign
destinations. The freight fees for these transactions were paid in abroad. In these two transactions,
petition Royal Interocean Lines acted as husbanding agent for a fee or commission on said vessels. No
income tax has been paid by Amsterdam on the freight receipts. As a result, Commissioner of Internal
Revenue filed the corresponding income tax returns for the petitioner. Commissioner assessed petitioner
for deficiency of income tax, as a non-resident foreign corporation NOT engaged in trade or business.

On the assumption that the said petitioner is a foreign corporation engaged in trade or business in the
Philippines, petitioner Royal Interocean Lines filed an income tax return of the aforementioned vessels and paid
the tax in pursuant to their supposed classification. On the same date, petitioner Royal Interocean Lines, as the
husbanding agent of Amsterdam, filed a written protest against the abovementioned assessment made by the
respondent Commissioner. The protest was denied. On appeal, CTA modified the assessment by eliminating the
50% fraud compromise penalties imposed upon petitioners. Petitioner still was not satisfied and decided to
appeal to the SC.

Issue: Whether N.V. Reederij Amsterdam should be taxed as a foreign corporation not engaged in trade or
business in the Philippines

Held: Petitioner is a foreign corporation not authorized or licensed to do business in the Philippines. It does not
have a branch in the Philippines, and it only made two calls in Philippine ports, one in 1963 and the other in
1964. In order that a foreign corporation may be considered engaged in trade or business, its business
transactions must be continuous. A casual business activity in the Philippines by a foreign corporation does not
amount to engaging in trade or business in the Philippines for income tax purposes.

A foreign corporation doing business in the Philippines is taxable on income solely from sources within
the Philippines. It is permitted to claim deductions from gross income but only to the extent connected with
income earned in the Philippines. On the other hand, foreign corporations not doing business in the Philippines
are taxable on income from all sources within the Philippines. The tax is 30% (now 35% for non-resident foreign
corp which is also known as foreign corp not engaged in trade or business) of such gross income. (Note: In a
resident foreign corp, what is being taxed is the taxable income, which is with deductions, as compared to a
non-resident foreign corp which the tax base is gross income). Petitioner Amsterdam is a non-resident foreign
corporation, organized and existing under the laws of the Netherlands with principal office in Amsterdam and
not licensed to do business in the Philippines.

11. CIR v. Japan Air Lines, G.R. No. 60714, October 4, 1991

Facts - I957: JAL constituted PAL as its general sales agent in the Philippines, whereby PAL sold for and in behalf
of JAL plane tickets and reservations for cargo spaces - 1959-1963: JAL did not have planes that landed or
lifted passengers and cargoes in the Philippineshaving had no CPCN (certificate of public convenience
and necessity) - CIR assessed against JAL deficiency income tax for the years 1959-1963 - JAL protested,
claiming it was a non -resident foreign corporation and, therefore, taxable only on income from
Philippine sources Decision : - For CIR. The Court adopted the BOAC doctrine: 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 an activity within the
Philippines - When JAL constituted PAL as its sales agent, there is no doubt that JAL is a resident foreign
corporation doing business in the Philippines. Sale of plane tickets, after all, is the very lifeblood of the
airline industry.
Madrigal vs. Rafferty (CIR) [38 Phil. 414; G.R. No. L-12287; En Banc FACTS: August 7, 1918] (income tax defined)
Vicente Madrigal and Susana Paterno were married with CPG as their property relations.Vicente filed his 1914
income tax return but later claimed a refund on the contention that it was the income of the conjugal
partnership.Vicente claimed that the income should be divided into two with each spouse filing a separate
return.Hence, Vicente claimed that each spouse should be entitled to the P8,000 exemption, which would
result in a lower amount of income tax due. HELD: The essential difference between capital and income is that
capital is a fund; income is a flow.A fund of property existing at an instant of time is called capital.A flow of
services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the
service of wealth. A tax on income is not a tax on property.Income can be defined as profits or gains. Susana,
has an inchoate right in the property of her husband during the life of the conjugal partnership.Her interest in
the ultimate property rights and in the ultimate ownership of property acquired as income lies after such
income has become capital.She has no absolute right to the income of the conjugal partnership.Not being
seized of a separate estate, Susana cannot make a separate return in order to receive the benefit of the
exemption which would arise by reason of the additional tax.As she has no estate and income, actually and
legally vested in her and entirely distinct from her husbands property, the income cannot properly be
considered the separate income of the wife for purposes of the additional tax.
CIR vs. PAL Inc. [504 SCRA 19; G.R. No. 160528; October 9, 2006] 1st Division FACTS: (On tax exemptions on
franchises) Philippine Airlines, Inc. (PAL) is a domestic corporation organized in accordance with the laws of the
Republic of the Philippines, while [Petitioner] Commissioner of Internal Revenue (CIR) is in-charge of the
assessment and collection of the 20% final tax on interest on Philippine currency bank deposits and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements, imposed on
domestic corporation under Sec. 24 (e) (1) [now Sec. 27 (D) (1)] of the National Internal Revenue Code (NIRC).
On November 5, 1997, [respondents] AVP-Revenue Operations and Tax Services Officer, Atty. Edgardo P.
Curbita, filed with the Office of the then Commissioner of Internal Revenue, a written request for refund of the
amount of P2,241,527.22 which represents the total amount of 20% final withholding tax withheld from the
[respondent] by various withholding agent banks. On December 4, 1997, the [respondents] AVP-Revenue
Operations and Tax Services Officer again filed with [petitioner] CIR another written request for refund of the
amount of P1,048,047.23, representing the total amount of 20% final withholding tax withheld by various
depository banks of the [respondent]. "[Petitioner] CIR failed to act on the [respondents] request for refund;
thus, a petition was filed before the CTA on April 23, 1999. CTA ruled that Respondent PAL was not entitled to
the refund. Section 13 of Presidential Decree No. 1590, PALs franchise,7 allegedly gave respondent the option
to pay either its corporate income tax under the provisions of the NIRC or a franchise tax of two percent of its
gross revenues. Payment of either tax would be in lieu of all "other taxes." Had respondent paid the two
percent franchise tax, then the final withholding taxes would have been considered as "other taxes." Since it
chose to pay its corporate income tax, payment of the final withholding tax is deemed part of this liability and
therefore not refundable. Court of Appeals reversed the Decision of the CTA. The CA held that PAL was bound
to pay only the corporate income tax or the franchise tax. Section 13 of Presidential Decree No. 1590 exempts
respondent from paying all other taxes, duties, royalties and other fees of any kind.9 Respondent chose to pay
its basic corporate income tax, which, after considering the factors allowed by law, resulted in a zero tax
liability.10 This zero tax liability should neither be taken against respondent nor deprive it of the exemption
granted by the law.11 Having chosen to pay its corporate income tax liability, respondent should now be
exempt from paying all other taxes including the final withholding tax. Hence, this Petition ISSUE: WON Court of
Appeals erred on a question of law ruling that the in lieu of all other taxes provision in Section 13 of PD No.
1590 applies even if there were in fact no taxes paid under any of subsections (A) and (B) of the said decree.
HELD: The Petition has no merit. PALs franchise (PD 1590) SEC. 13. In consideration of the franchise and rights
hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise whichever
of subsections (a) and (b) hereunder will result in a lower tax: (a) The basic corporate income tax based on the
grantee's annual net taxable income computed in accordance with the provisions of the National Internal
Revenue Code; or (b) A franchise tax of two percent (2%) of the gross revenues derived by the grantee from all
sources, without distinction as to transport or non-transport operations; provided, that with respect to
international air-transport service, only the gross passenger, mail, and freight revenues from its outgoing flights
shall be subject to this tax.
"The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties,
royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied,
established, assessed, or collected by any municipal, city, provincial, or national authority or government
agency, now or in the future, x x x. Being a domestic corporation, PAL is subject to Section 27, which reads as
follows: "Section 27. Rates of Income Tax on Domestic Corporations. "(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, x x x,
organized in, or existing under the laws of the Philippines x x x The NIRC also imposes final taxes on certain
passive incomes,as with in this case, 20 percent on the interests on currency bank deposits, other monetary
benefits from deposit substitutes, trust funds and similar arrangements, and royalties derived from sources
within the Philippines. A corporate income tax liability, therefore, has two components: the general rate of 35
percent, which is not disputed; and the specific final rates for certain passive incomes. PALs request for a refund
in the present case pertains to the passive income on bank deposits, which is subject to the specific final tax of
20 percent. A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes"
proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590
intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise.
Either option excludes the payment of other taxes and dues imposed or collected by the national or the local
government. PAL has the option to choose the alternative that results in lower taxes. It is not the fact of tax
payment that exempts it, but the exercise of its option. While the Court recognizes the general rule that the
grant of tax exemptions is strictly construed against the taxpayer and in favor of the taxing power,31 Section 13
of the franchise of respondent leaves no room for interpretation. Its franchise exempts it from paying any tax
other than the option it chooses: either the "basic corporate income tax" or the two percent gross revenue tax.
Determining whether this tax exemption is wise or advantageous is outside the realm of judicial power. This
matter is addressed to the sound discretion of the lawmaking department of government. PETITION DENIED

12. State Investment House Inc. v. Citibank, G.R. Nos. 79926-27, October 17, 1991
13. CIR v. British Overseas Airways Corp., G.R. Nos. L-65773-74, April 30, 1987
14. CIR v. St. Luke's Medical Center, Inc. G.R. Nos. 15909 & 195960, September 26, 2012
15. Commissioner v. Court of Appeals, Court of Tax Appeals and GCL Retirement Plans, G.R. No.
95022, March 23, 1992
16. CIR v. Court of Tax Appeals and Smith Kline & French Overseas Co., G.R. No. L-54108, January
17, 1984
17. A. Soriano Y. Cia v. CIR, G.R. No. L-5896, August 31, 1955
18. National Development Company v. CIR, G.R. No. L-53961, June 30, 1987