U.S.
Supreme Court
Eisner v. Macomber, 252 U.S. 189 (1920)
Congress was not empowered by the Sixteenth Amendment to tax, as income of the
stockholder, without apportionment, a stock dividend made lawfully and in good faith
against profits accumulated by the corporation since March 1, 1913. P. 252 U. S. 201.
Towne v. Eisner, 245 U. S. 418.
The Revenue Act of September 8, 1916, c. 463, 39 Stat. 756, plainly evinces the purpose
of Congress to impose such taxes, and is to that extent in conflict with Art. I, § 2, cl. 3, and
Art. I, § 9, cl. 4, of the Constitution. Pp. 252 U. S. 199, 252 U. S. 217.
These provisions of the Constitution necessarily limit the extension, by construction, of
the Sixteenth Amendment. P. 252 U. S. 205.
What is or is not "income" within the meaning of the Amendment must be determined in
each case according to truth and substance, without regard to form. P. 252 U. S. 206.
Income may be defined as the gain derived from capital, from labor, or from both
combined, including profit gained through sale or conversion of capital. P. 252 U. S. 207.
Mere growth or increment of value in a capital investment is not income; income is
essentially a gain or profit, in itself, of exchangeable value, proceeding from capital,
severed from it, and derived or received by the taxpayer for his separate use, benefit, and
disposal. Id.
A stock dividend, evincing merely a transfer of an accumulated surplus to the capital
account of the corporation, takes nothing from the property of the corporation and adds
nothing to that of the shareholder; a tax on such dividends is a tax an capital increase,
and not on income, and, to be valid under the Constitution, such taxes must be
apportioned according to population in the several states. P. 252 U. S. 208.
Affirmed.
INCOME TAX; Income tax paid or accrued (now incurred) by a company within a
taxable year not allowed as deduction - (a) BIR is prohibited from issuing further
comments on Questions Nos. 1, 2, 3, 7 and 8 issued by the Energy Regulatory Board in
relation to ERB Case No. 93-118 entitled "Meralco vs. Energy Regulatory Board, et. al." in
so far as the rate fixing issue is concerned considering that the issues are all sub judice
pending before the Court of Appeals. With regard to the question of whether the
appraisal increase of property, plant and equipment of electric utilities is taxable, the
general rule is that, mere increase in the value of property without actual realization,
either through sale or other disposition, is not taxable. However, if by reason of
appraisal, the cost basis of property is increased and the resulting basis is used as the
new tax base for purposes of computing the allowable depreciation expense, the net
difference between the original cost basis and new basis due to appraisal is taxable
under the economic benefit principle.
(b) BIR is not following American Laws on taxation because we have our tax
laws, including rules and regulations implementing our tax laws. However,
under the doctrine of precedent, a court may apply American Laws or Court
Decisions.
(c) The amendments introduced by EO No. 37 to then Section 21(c)(2) of the
Tax Code of 1997 provides that dividend received by a citizen or resident alien
from a domestic corporation is subject to income tax at the rate of 15% in 1986,
10% effective January 1, 1987, 5% effective January 1, 1988 and 0% effective
January 1, 1989. However, Sec. 22 (a) and (b) of the same Code provides that
dividends received by a non-resident alien individual, whether engaged or not
in trade or business in the Philippines, from a domestic corporation is subject
to final withholding tax of 30% of such dividend income.
(d) For purposes of computing the taxable income of domestic corporation
derived form within and without the Philippines, the allowable deductions are
limited to those provided under Section 29 of the Tax Code of 1997 for taxable
year 1997 and prior years but for taxable year 1998, Section 34 of the Tax Code
of 1997 governs.
(e) Pursuant to then Section 117 of the Tax Code of 1997, as amended by RA
8241, the 2% franchise tax of electric, gas and water utilities is based on gross
receipts derived from the business covered by the law granting the
franchise. (BIR Ruling No. 029-98 dated March 19, 1998)
CIR V. Isabela Cultural Corp. (2007)
FACTS:
 BIR disallowed Isabela Cultural Corp. deductible expenses for services which
were rendered in 1984 and 1985 but only billed, paid and claimed as a deduction
on 1986.
 After CA sent its demand letters, Isabela protested.
 CTA found it proper to be claimed in 1986 and affirmed by CA
ISSUE: W/N Isabela who uses accrual method can claim on 1986 only
HELD: case is remanded to the BIR for the computation of Isabela Cultural
Corporation’s liability under Assessment Notice No. FAS-1-86-90-000680.
NO
 The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are:
 (a) the expense must be ordinary and necessary;
 (b) it must have been paid or incurred during the taxable year; - qualified by
Section 45 of the National Internal Revenue Code (NIRC) which states that:
"[t]he deduction provided for in this Title shall be taken for the taxable year in
 which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of
accounting upon the basis of which the net income is computed
 (c) it must have been paid or incurred in carrying on the trade or business of the
taxpayer; and
 (d) it must be supported by receipts, records or other pertinent papers.
 Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer
in the current year when they are incurred cannot be claimed as deduction from
income for the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year but failed to
do so cannot deduct the same for the next year.
 The accrual method relies upon the taxpayer’s right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of income accrue where
the right to receive them become fixed, where there is created an enforceable
liability. Similarly, liabilities are accrued when fixed and determinable in amount,
without regard to indeterminacy merely of time of payment.
 The accrual of income and expense is permitted when the all-events test has
been met. This test requires: (1) fixing of a right to income or liability to pay; and
(2) the availability of the reasonable accurate determination of such income or
liability.
 The all-events test requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test
is satisfied where computation remains uncertain, if its basis is unchangeable;
the test is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be
determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than an
exact or completely accurate amount.
 The propriety of an accrual must be judged by the facts that a taxpayer knew, or
could reasonably be expected to have known, at the closing of its books for the
taxable year.
 Accrual method of accounting presents largely a question of fact; such that the
taxpayer bears the burden of proof of establishing the accrual of an item of
income or deduction.
 In the instant case, the expenses for professional fees consist of expenses for
legal and auditing services. The expenses for legal services pertain to the 1984
and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of
said firm in connection with ICC’s tax problems for the year 1984. As testified by
the Treasurer of ICC, the firm has been its counsel since the 1960’s. - failed to
prove the burden