Commissioner of Internal Revenue Vs. Sutter 27 SCRA 152 G.R. No.

L-25532 February 28, 1969 Facts: A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," wasformed by herein respondent William J. Sutter as the general partner, andJulia Spirig and Gustav Carlson, as the limited partners. The partnerscontributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to thepartnership. The firm was duly registered with the Securities and ExcangangeCommission and engaged in lawful business. Later, Sutter and Spirig gotmarried while Carlson sold his share to the spouses. The limited partnershiphad been filing its income tax returns as a corporation, without objection bythe herein petitioner, CIR, until in 1959 when the latter, in an assessment,consolidated the income of the firm and the individual incomes of thepartners-spouses Sutter and Spirig resulting in a determination of a deficiencyincome tax against respondent Sutter. Respondent Sutter protested theassessment, and requested its cancellation and withdrawal, as not inaccordance with law, but his request was denied. Unable to secure areconsideration, he appealed to the CTA, which ruled in favor of Sutter. Issue: Was the partnership dissolved by the marriage of Sutter and Spirigand the subsequent sale of Carlson of his share to the spouses? Ruling: No. The appellant's view, that by the marriage of both partners thecompany became a single proprietorship, is erroneous. The capitalcontributions of partners William J. Sutter and Julia Spirig were separatelyowned and contributed by them before their marriage; and after they were joined in wedlock, such contributions remained their respective separateproperty under the Spanish Civil Code (Article 1396): The following shall be the exclusive property of each spouse: Conwi v. CTA

FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble Philippines with an office located at Ayala Ave. Makati. The corporation is a subsidiary of P&G based at Ohio USA. For the year 1970 and 1971, petitioners were assigned outside the Phil with their compensation paid in US dollars. When they filed their income tax returns for the year 1970, theyve computed the tax by applying the dollar-to-peso conversion based on the floating rate provided by the BIR. However, on 1973, they filed an amended tax return using the par value of the peso provided by Sec.40 of RA 265. They claim for a refund due to overpayment. Petitioners argued that since the dollar earnings does not fall within the classification of foreign exchange transaction; there occurred no actual inward remittances therefore NOT included in Central Bank Circular No. 289. CB no. 289 provides for specific instances when the par value of the peso shall not be the conversion rate. Therefore, they can base their conversion using the par value of the peso. The Commissioner of the BIR denied the claim of petitioners stating that the basis must be the prevailing free market rate of exchange and not the par value. CB No. 289 speaks of receipts for export products, receipts of sale of foreign exchange and investment but not income tax. The CTA also held that petitioners dollar earnings are receipts derived from foreign exchange transactions. WON petitioners are exempt to pay tax for such income since there were no remittance/ acceptance of their salaries in UD Dollars into the Philippines. HELD: No. Even if there was no remittance and acceptance of their salaries and wages in US Dollars into the Philippines, they are still bound to pay the tax. Petitioners forgot that they are citizens of the Philippines, and their income, within or without, and in this case wholly without or outside the Philippines, are subject to income tax. The petitions were denied for lack of merit.

MARUBENI CORPORATION (formerly Marubeni-Iida, Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS Facts: Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash

dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%. In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and Company, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773. In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled: Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. To be effectively connected it is not necessary that the income be derived from the actual operation of taxpayer-corporation's trade or business; it is sufficient that the income arises from the business activity in which the corporation is engaged. For example, if a resident foreign corporation is engaged in the buying and selling of machineries in the Philippines and invests in some shares of stock on which dividends are subsequently received, the dividends thus earned are not considered 'effectively connected' with its trade or business in this country. (Revenue Memorandum Circular No. 55-80). In the instant case, the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged. Accordingly, said dividends if remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as amended. Petitioner claimed for the refund or issuance of a tax credit of P229,424.40 "representing profit tax remittance erroneously paid on the dividends remitted by AG&P to head office in Tokyo. It was denied. While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the same were not income earned by a Philippine Branch of Marubeni Corporation of Japan; and neither is it subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident stockholder, nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and Japan. The Commissioner pointed that inasmuch as the cash dividends remitted by AG&P to Marubeni

Corporation, Japan is subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit remittance tax totals 25 %, the amount refundable offsets the liability, hence, nothing is left to be refunded. Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the Commissioner of Internal Revenue. CTA held that the said dividends were distributions made by the Atlantic, Gulf and Pacific Company(AG &P) of Manila to its shareholder out of its profits on the investments of the Marubeni Corporation of Japan, a non-resident foreign corporation. The investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were directly made by it and the dividends on the investments were likewise directly remitted to and received by the Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine Branch has no participation or intervention, directly or indirectly, in the investments and in the receipt of the dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific Company did not come out of the funds infused by the Marubeni Corporation of Japan to the Marubeni Corporation Philippine Branch. As a matter of fact, the Central Bank of the Philippines, in authorizing the remittance of the foreign exchange equivalent of the dividends in question, treated the Marubeni Corporation of Japan as a non-resident stockholder of the Atlantic Gulf & Pacific Company based on the supporting documents submitted to it. Subject to certain exceptions not pertinent hereto, income is taxable to the person who earned it. Admittedly, the dividends under consideration were earned by the Marubeni Corporation of Japan, and hence, taxable to the said corporation. While it is true that the Marubeni Corporation Philippine Branch is duly licensed to engage in business under Philippine laws, such dividends are not the income of the Philippine Branch and are not taxable to the said Philippine branch. We see no significance thereto in the identity concept or principal-agent relationship theory of petitioner because such dividends are the income of and taxable to the Japanese corporation in Japan and not to the Philippine branch. Hence the instant petition for review Issue: Whether or not Marubeni is a resident or non-resident corporation Held: It is a resident corporation. Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within the Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines through its Philippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that since the Philippine branch and the Tokyo head office are one and the same entity, whoever made the investment in AG&P, Manila does not matter at all. A single corporate entity cannot be both a resident and a non-resident corporation depending on the nature of the particular transaction involved. Accordingly, whether the dividends are paid directly to the head office or coursed through its local branch is of no moment for after all, the head office and the office branch constitute but one corporate entity, the Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident foreign corporation because it is transacting business in the Philippines.

In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There can be no other logical conclusion considering the undisputed fact that the investment (totalling 283.260 shares including that of nominee) was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan, but certainly not of the branch in the Philippines. It is thus clear that petitioner, having made this independent investment attributable only to the head office, cannot now claim the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %. But while public respondents correctly concluded that the dividends in dispute were neither subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a non-resident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article 10 (2) (b). To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad." WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor of petitioner the amount of P144,452.40 representing overpayment of taxes on dividends received. No costs.

Obillos vs. Commissioner (139 SCRA 436) On March 2, 1973, Jose Obillos, Sr. completed payments on two lots of significant size in Greenhills.The next day, he transferred his rights to his four children, to enable them to build their residences.The lots were sold for P178,708.12 on March 13. The Torrens titles issued showed the Obillios siblingsas co-owners of the properties.After having held the properties for almost a year, the siblings sold the properties to Walled CitySecurities and Olga Cruz Canda for P313,050.00, with each sibling earning a total profit ofP33,584.00. They treated the profit as a capital gain and paid income tax amounting to half of theirprofits.One day before the expiration of the five-year prescriptive period, the Commissiner of InternaRevenue required the Obillos siblings to pay corporate income tax on the total profit in addition toindividual income

tax on their shares. He also assessed for fraud surcharge and accumulatedinterest. He also considered each share of the profits a distributive dividend and required that it betaxed in full.Thus, the Obillos siblings were charged taxes and penalties worth P121,781.86 on their profit ofP134,336.00, in addition to the capital gains already paid by them.The case was elevated to the CTA, which affirmed the decision of the CIR. Was there an unregistered partnership between the Obillos siblings such that the income theyderived from the sale of the land could be held subject to corporate income tax distinct from theincome tax of the partners? The Supreme Court held in favor of the Obillos siblings.To hold the co-ownership as an unregistered partnership would result in oppressive taxation,confirming the overturned dictum that the power to tax is the power to destroy.There is also no de facto partnership between the siblings. The Court found Obilloss testimonypersuasive in finding that the siblings were merely co-owners. To hold them as co-owners wouldobliterate the distinction between a coownership and a partnership. Just because the siblingsshared profits on an isolated transaction does not make them partners.The division of the profit was merely incidental to the dissolution of the co-ownership. Theiroriginal purpose was to divide the lots for residential purposes.Art. 1769(3) of the Civil Code provides that the sharing of gross returns does not o itself establish apartnership, whether or not the persons sharing them have a joint or common right or interest inany property from which the returns are derived. There must be an unmistakeable intention toform a partnership or joint venture.The Court distinguished this from the Oa case, supra , where the heirs of an estate after partitionused the inheritance and the incomes derived as a common fund to produce profits for themselves.In that case the Court found there actually was an unregistered partnership that was liable forcorporate income tax.The Court noted that what should have been investigated was whether or not the transfer from thesenior Obillos was in fact a donation and whether the corresponding donors tax had been paid.However, the Court noted that the same may have already prescribed.

CIR VS. SUTER FACTS:A limited partnership named William J. Suter 'Morcoin' Co., Ltd was formed 30September 1947 by William J. Suter as the general partner, and Julia Spirig andG u s t a v C a r l s o n . T h e y c o n t r i b u t e d , r e s p e c t i v e l y , P 2 0 , 0 0 0 . 0 0 , P 1 8 , 0 0 0 . 0 0 a n d P2,000.00. it was also duly registered with the SEC. On 1948 Suter and Spirig gotm a r r i e d a n d i n e f f e c t C a r l s o n s o l d h i s

s h a r e t o t h e c o u p l e , t h e s a m e w a s a l s o registered with the SEC. T h e l i m i t e d p a r t n e r s h i p h a d b e e n f i l i n g i t s i n c o m e t a x r e t u r n s a s a corporation, without objection by the herein petitioner, Commissioner of InternalRevenue, until in 1959 when the latter, in an assessment, consolidated the incomeof the firm and the individual incomes of the partners-spouses Suter and Spirigresulting in a determination of a deficiency income tax against respondent Suter inthe amount of P2,678.06 for 1954 and P4,567.00 for 1955.ISSUE:Whether or not the limited partnership has been dissolved after the marriageof Suter and Spirig and buying the interest of limited partner Carlson.RULING:No, the limited partnership was not dissolved. A h u s b a n d a n d a w i f e m a y n o t e n t e r i n t o a c o n t r a c t o f g e n e r a l copartnership, because under the Civil Code, which applies in the absence of express provisi o n i n t h e C o d e o f C o m m e r c e , p e r s o n s p r o h i b i t e d f r o m m a k i n g do nations to each other are prohibited from entering into universal partnerships. (2Echaverri 196) It follows that the marriage of partners necessarily brings about thedissolution of a pre-existing partnership. W h a t t h e l a w p r o h i b i t s w a s w h e n t h e s p o u s e s e n t e r e d i n t o a g e n e r a l partnership. In the case at bar, the partnership was limited.

Tan Guan vs CTA GR No. L-23676 April 27, 1967 Tan Guan and Sian Lin , both chinese nationals formed and registered a generalpartnersip. A general Partnership is exempt from income tax although it I required tofile income tax return and profits whether or not distributed are considered income of the partners. Upon confidential report BIR investigator examined the books of thepartnership and found fictitious expenses posted therein to avoid taxes, it thendisallowed certain expenses and treated the same as individual income of Tan Guan. The latter was assessed by the commissioner for the deficiency tax which the CTAaffirmed. To whom lies the burden of proof?Held: The taxpayer Tan Guan. The Commissioner, sustained by the Tax Court foundfor a fact that the expenses posted are fictitious. Tan Guan presented no evidence to disprove such findings, he only alleged that he could not prese n t t h e r e c e i p t s anymore considering that the assessment was made after the prescription period of Five years within which he is required to preserve the books. The same cannot beaccepted as the investigation was conducted within five years. In appeals to the CTA,the determination of the Commissioner of Internal Revenue is presumed correct andit behoves the taxpayers to rebut such presumption. Tan Guan failed to overcome hisburden. Being fictitious , the expenses cannot be deducted from the gross income. Commissioner of Internal Revenue vs. CA G.R. No. 124043, October 14, 1998

Facts: Private respondent YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable objectives. YMCA earned an income from leasing out a portion of its premises to small shop owners and from parking fees collected from non-members. The Commissioner of Internal Revenue (CIR) issued an assessment for deficiency income tax, deficiency expanded withholding the taxes on rentals and professionalfees and deficiency withholding tax on wages. YMCA protested assessment. Issue: Whether or not the income of private respondent YMCA from rentals of small shops and parking fees is exempt from taxation Held: No. Art. VI, Sec. 28(3) of the Constitutionexempts charitable institutions from the payment not only of property taxes but also of income tax from any source. The Court is not persuaded. The Court reiterates that YMCA is exempt from the payment of property tax, but not income tax on the rentals from its property. The bare allegation alone that it is a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax. Laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be granted the exemption it claims under the aforecited provision, it must prove with substantial evidence that: 1. it falls under the classification non-stock, non-profit educational institution; and 2. the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes. The term educational institution, when used in laws granting tax exemptions, refers to a school, seminary, college or educational establishment. Therefore, YMCA cannot be deemed one of the educational institutions covered by the said constitutional provision.

Commissioner vs. British Overseas Airways Corp. GR L-65773-74, 30 April 1987 En Banc, Melencio-Herrera (J): 7 concur, 1 took no part

Facts: British Overseas Airways Corp. (BOAC) is a 100% Britis Government-owned corporation engaged in international airline business and is a member of the Interline Air Transport Association, and thus, it operates air transportation service and sells transportation tickets over the routes of the other airline members. From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus did not carry passengers and/or cargo to or from the Philippines but maintained a general sales agent in the Philippines -- Warner Barnes & Co. Ltd., and later, Qantas Airwayus -- which was responsible for selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency income taxes against BOAC. Issue: Whether the revenue derived by BOAC from ticket sales in the Philippines for air transportation, while having no landing rights in the Philippines, constitute income of BOAC from Philippine sources, andaccordingly, taxable. Held: 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. Herein, the sale of tickets in the Philippines is the activity that produced 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. PD 68, in relation to PD 1355, ensures that international airlines are taxed on their income from Philippine sources. The 2 1/2 %tax on gross billings is an income tax. If it had been intended as an excise or percentage tax, it would have been placed under Title V of the Tax Code covering taxes on business. CIR vs VISAYAN ELECTRIC CO.Facts: 1.Visayan Electric Co. established a pension fund for the benefit of its employees2.The fund was later invested in stocks of San Miguel Brewery, for which dividendshad been regularly received. These dividends, however, were not declared fortax purposes3.The Provincial Auditor allowed VEC to declare the dividends as income forfranchise tax purposes, thus tax exempt4.The Revenue Examiner, however, argued that the dividend were subject tocorporate income tax Issue: WoN the pension fund invested in stocks is tax exempt?Held: No The dividends were not income of VEC. They do not go to the general fund of the company The dividends were part of the pension fund which was solely for the benefitof the employees To qualify for exemption, the employees trust (pension) fund mustrefer to a definite program, scheme, or plan. It must be set

up ingood, actuarially sound, and not to be used or controlled in any wayby the company. It must extend retirement and pension benefits forthe employees Unquestionably, the VEC pension fund was created in good faith. It wasmeant for the benefit of the employees However, no sufficient data which would justify the Court to make aconclusive statement that the VEC pension fund qualifies as a trust under the Tax Code. 1) The requirements for the formation of employees trust fundsfor pension had not been strictly complied withe.g., the only record evidence of its creation is the minutes of a board meeting; 2) No record toshow that the fund was actuarially sound Absent such data, the dividends are not tax exempt .Reason: Exemptions in tax statutes are never presumed.