Manila Gas Corporation vs.

Collector of Internal Revenue

J. Malcolm
Jan. 17, 1936

Facts:
 Manila Gas Corp. (Corp) is a corporation organized under the laws of the Philippine Islands
o Operates a gas plant and furnishes gas service in the City of Manila
o Operates through a franchise granted by the government
 Associated with the Corp: (as stockholders and creditors of the Corp)
o Islands Gas and Electric Company – New York, US
o General Finance Company – Zurich, Switzerland
 Dividends were paid by the Corp to the Associates
o Taxes were withheld and paid to the CIR
 Interest on bonds issued by the Corp were also paid to the associates (Php 131,644)
o Taxes were also withheld and paid to the CIR (Php 3,949)
o Place of payment was in the US & Switzerland
Issues/Ratio
1. W/N the dividends paid were subject to tax. – YES
a. Corp: Franchise states that a percentage tax on gross receipts shall be in lieu of all taxes
(except real estate & property taxes)
b. Court: As held in the Philippine Telephone and Telegraph vs. CIR case, a corporation has
a personality distinct from that of its stockholders, enabling the taxing power to reach
the stockholders when they reach dividends.

2. W/N the interest on bonds were subject to Philippine taxes. – YES

a. Corp: Associates are domiciled outside of the Philippines and the interest on the bonds
were paid in their respective domiciles, this is not income from Philippine sources within
the meaning of the Philippine Income Tax Law. (Manila Railroad Co. vs. CIR)
b. Court
i. Different facts from Manila Railroad case
ii. The interest income was derived from sources within the Philippine Islands.
1. Corp operates its business entirely within the Philippines, therefore, its
earnings come from local sources.
2. Place where the interest is paid is immaterial.
3. Source = origin; Origin was in the Philippines
c. Discussion on Situs
i. No state may tax anything not within its jurisdiction without violating the due
process clause of the Constitution. (GENERAL RULE)
ii. Taxing power of the State does not extend beyond its territorial limits, but may
tax persons, property, income or business within such limits.
iii. If an interest in property is taxed, the situs of either the property or interest
must be found within the state.
iv. If income is taxed, the recipient thereof must be must have domiciled within the
state or the property or business out of which the income issues must be
situated within the state so that the income may be said to have a situs therein.
v. Personal property may be separated from its owner
 1. Owner may be taxed on its account at the place where the property is
although it is not the place of his own domicile or that he is not a citizen
or resident of the state which imposes the tax.
vi. Debts owing by corporations are obligations of the debtors, and only possess
value in the hands of the creditors.

NOTE: J. Malcolm (the ponente) didn’t agree with how the second issue was disposed of and actually
agreed with the Corp but in the interest of the speedy disposition of the case, he decided as he was
instructed by the majority of the justices, that’s why the discussion on how the source of the interest
income was WITHIN the Philippines was so short.