30National Development Co. vs.

Commissioner
GR L-53961, 151 SCRA 472
30 June 1987
Facts: The National Development Co. (NDC) entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of 12 ocean-going vessels. Initial payments were made in
cash and through irrevocable letters of credit. When the vessels were completed and delivered to the
NDC in Tokyo, the latter remitted to the shipbilders the amount of US$ 4,066,580.70 as interest on the
balance of the purchase price. No tax was withheld. The Commissioner then held NDC liable on such tax
in the total amount of P5,115,234.74. The Bureau of Internal Revenue served upon the NDC a warrant of
distraint and levy after negotiations failed.
Issue: Whether the NDC is liable for deficiency tax.
Held: The Japanese shipbuilders were liable on the interest remitted to them under Section 37 of the Tax
Code. The NDC is not the one taxed. The imposition of the deficiency taxes on the NDS is a penalty for its
failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of
the Tax Code. NDC was remiss in the discharge of its obligation of its obligation as the withholding agent
of the government and so should be liable for its omission.

31Fisher v. Trinidad
GR 17518, 43 PHIL 973
October 30, 1922
Facts: 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. Fisher was a stockholder in
said corporation. Said corporation, as result of the business for that year, declared a "stock dividend" and
that the proportionate share of said stock divided of Fisher was P24,800. Said the stock dividend for that
amount was issued to Fisher. For this reason, Trinidad demanded payment of income tax for the
stock dividend received by Fisher. Fisher paid under protest the sum of P889.91 as income taxon said
stock dividend. Fisher filed an action for the recovery of P889.91. Trinidad demurred to the petition upon
the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained
and Fisher appealed.
Issue: Whether or not the stock dividend was an income and therefore taxable.
Held: No. Generally speaking, stock dividends represent undistributed increase in the capital of
corporations or firms, jointstock companies, etc., etc., for a particular period. The inventory of
the property of the corporation 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.
In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme Court held that mere advance in value
does not constitute 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 the case of Towne vs. Eisner, income was defined in an income tax law to mean cash or its equivalent,
unless it is otherwise specified. It does not mean unrealized increments in the value of theproperty. 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.

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179), Mr. Justice Pitney, said that the term "income"
in its natural and obvious sense, imports something distinct from principal or capital and conveying the
idea of gain or increase arising from corporate activity.
In the case of Eisner vs. Macomber (252 U.S., 189), income was 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.
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. 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. The stockholder by virtue of the stock dividendhas in fact received
nothing that answers the definition of an "income."
The stockholder who receives a stock dividend has received nothing but a representation of his increased
interest in the capital of thecorporation. 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 orindividual 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 theproperty 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. 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 thevalue 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 orcorporation for services, interest, or
profit from investments. We do not believe that the Legislature intended that a mere increase in thevalue
of the capital or assets of a corporation, firm, or individual, should be taxed as "income."
A stock dividend, still being the property of the corporation and not the stockholder, may be reached by an
execution against thecorporation, 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 thedividend is declared and paid,
the corporate profits still belong to thecorporation, 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 stockdividends, as capital or assets
If the ownership of the property represented by a stock dividend is still in the corporation and not 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 thecorporation. If the holder of the stock dividend is required
to pay anincome 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.
As stock dividends are not "income," the same cannot be considered taxes under that provision of Act No.
2833. For all of the foregoing reasons, SC held that the judgment of the lower court should be REVOKED.

32 Madrigal v. Rafferty
GR 12287, 38 PHIL 14
August 7, 1918

FACTS: In 1915, Vicente Madrigal filed a sworn declaration with the CIR showing a total net income for
the year 1914 the sum of P296K. He claimed that the amount did not represent his own income for the
year 1914, but the income of the conjugal partnership existing between him and his wife, Susana Paterno.
He contended that since there exists such conjugal partnership, the income declared should be divided
into 2 equal parts in computing and assessing the additional income tax provided by the Act of Congress
of 1913. The Attorney-General of the Philippines opined in favor of Madrigal, but Rafferty, the US CIR,
decided against Madrigal.
After his payment under protest, Madrigal instituted an action to recover the sum of P3,800 alleged to
have been wrongfully and illegally assessed and collected, under the provisions of the Income Tax Law.
However, this was opposed by Rafferty, contending that taxes imposed by the Income Tax Law are taxes
upon income, not upon capital or property, and that the conjugal partnership has no bearing on income
considered as income. The CFI ruled in favor of the defendants, Rafferty.
ISSUE: Whether Madrigals income should be divided into 2 equal parts in the assessment and
computation of his tax
HELD: NO. Susana Paterno, wife of Vicente Madrigal, still has an inchoate right in the property of her
husband during the life of the conjugal partnership. She has an interest in the ultimate property rights and
in the ultimate ownership of property acquired as income after such income has become capital. Susana
has no absolute right to onehalf the income of the conjugal partnership. Not being seized of a separate
estate, she cannot make a separate return in order to receive the benefit of exemption, which could arise
by reason of the additional tax. As she has no estate and income, actually and legally vested in her and
entirely separate from her husbands property, the income cannot be considered the separate income of
the wife for purposes of additional tax. Income, as contrasted with capital and property, is to be the test.
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 tax on property.

33 CONWI v. CTA
GR 48532, 213 SCRA 83
August 31, 1992
Facts: Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation,
subsidiary of Procter & Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were
assigned to other subsidiaries of Procter & Gamble outside the Philippines, for which petitioners were
paid US dollars as compensation.
Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-topeso conversion based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed
amened ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the
alleged overpayments, refund and/or tax credit, for which claims for refund were filed.
CTA held that the proper conversion rate for the purpose of reportingand paying the Philippine income
tax on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars
Nos. 7-71 and 41-71. The refund claims were denied.
Issues:
(1) Whether or not petitioners' dollar earnings are receipts derived from foreign exchange transactions;
NO.
(2) Whether or not the proper rate of conversion of petitioners' dollar earnings for tax purposes in the
prevailing free market rate of exchange and not the par value of the peso; YES.

Held: For the proper resolution of income tax cases, income may be defined as an amount of money
coming to a person or corporation within a specified time, whether as payment for services, interest or
profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be
though of as flow of the fruits of one's labor.
Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange transaction is simply that a transaction in foreign
exchange, foreign exchange being "the conversion of an amount of money or currency of one country into
an equivalent amount of money or currency of another." When petitioners were assigned to the foreign
subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO
spending in said currency. There was no conversion, therefore, from one currency to another.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two
years as payment for their services.
And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338
thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively
enforce its provisions pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71
were issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL
REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a
valid exercise of the authority given to the Secretary of Finance by the Legislature which enacted the
Internal Revenue Code. And these are presumed to be a valid interpretation of said code until revoked by
the Secretary of Finance himself.
Petitioners are citizens of the Philippines, and their income, within or without, and in these cases wholly
without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.
DENIED FOR LACK OF MERIT.

34 Javier v. CA
199 SCRA 824

Facts:
In 1977, Victoria Javier (wife of Melchor), received from the Prudential Bank and Trust Co.
US$999,973.70 remitted by her sister, Dolores Ventosa, through some banks in the United
States, among them Mellon Bank NA. Mellon Bank filed suit to recover the excess amount of
US$9999,000 as the remittance of US$ 1 million was a clerical error and should have been US
$1,000 only (Compare facts in Mellon Bank vs. Magsino, GR 71479, 18 October 1990). In 1978,
Melchor Javier filed his income tax return for 1977showing a gross income of P53,053.38 and a
net income of P48,053.38 and stating in the footnote of the return that taxpayer was recepient
of some money received from abroad which he presumed to be a gift but turned out to be an
error and is now subject of litigation. In 1980, the Commissioner assessed and demanded from
Javier deficiency assessment of P9,287,297.51 for 1977. Javier protested such assessment,
where the Commissioner in turn imposed a 50% fraud penalty against Javier.
Issue: Whether Javier is liable for the 50% fraud penalty.
Held:
Under the then Section 72 of the Tax Code, a taxpayer who files a false return is liable to pay
the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has
been made on the basis of the return filed before the discovery of the falsity or fraud. The fraud
contemplated by law is actual and not constructive. It must be intentional fraud, consisting of

deception willfully and deliberately done or resorted to in order to induce another to give up
some legal right. Fraud is never imputed and the courts never sustain findings of fraud upon
circumstances which, at most created only suspicion. A fraudulent return is always an attempt to
evade a tax, but a merely false return may not be. Herein, there was no actual and intentional
fraud through willful and deliberate misleading of the government agency concerned (BIR)
committed by Javier. Javier did not conceal anything to induce the government to give some
legal right and place itself at a disadvantage. Error or mistake of law is not fraud. As ruled by the
Court of Tax Appeals, the 50% surcharge imposed as fraud penalty in the deficiency
assessment should be deleted.

35 CIR v. CA
GR 119761, 29 August 1996
Facts:
Fortune Tobacco is engaged in the manufacture of different brands of cigarettes, specifically
Champion, Hope4, and More (which are foreign brands listed in the World Tobacco
Directory as belonging to foreign companies. Fortune Tobacco, however, changed names of
Hope to Luxury and More to Premium More thereby removing said brands from the
foreign brand category. Proof was also made/ submitted to the BIR that Champion was an
original Fortune Tobacco Corp. register and thus a local brand. RA 7654 was enacted on 10
June 1993, levying a P5 minimum tax on locally manufactured cigarettes taxed at 55% or
exportation of which is not authorized by contract, and P2 minimum tax per pack on other locally
manufactured cigarette. The BIR sent the Company a month later a copy Revenue
Memorandum Circular 37-93 declaring Hope, More and Champion as foreign brands, and
thus subjecting them to 55% as valorem tax, a review of RMC 37-93 was denied.
Issue: Whether the brands may be placed within the scope of the amendatory law (RA 7654)
and subject then to an increased, through RMC 37-93.
Held:
Prior to the issuance of RMC 37-93, the brands were in the category of locally manufactured
cigarettes not bearing foreign brands, subject to 45% ad valorem tax. Without RMC 37-93, the
enactment of RA7654 would not have new tax rate consequences on the companys products.
In issuing RMC 37-93, the BIR legislated under its quasi-legislative authority and not simply
interpreted the law. When an administrative rule goes beyond merely providing for the means
that can facilitate or render least cumbersome the implementation of the law but substantially
adds to or increases the burden of those governed. It behoves the agency to accord at least to
those directly affected a chance to be heard, and thereby be duly informed, before that new
issuance is given the force and effect of law.
36 CIR. Lednicky
11 SCRA 603

FACTS:
Resp spouses V.E. Lednicky and Maria Valero Lednicky are American Citizens residing in the
Philippines and derived their income from Philippine sources for the taxable years in question

1957 Sps filed their ITR for 1956 reporting a gross income P1,017,287.65 and a net income of
P733,809.44 on which P317,395.40 was assessed after deducting P4,805.59 as withholding tax.
Sps paid 326,247.41 on April 1957
March 1959 Sps filed an amended ITR for 1956. They claimed a deduction of P205,939.24 paid
in 1956 to US govt. Respondents requested refund of 112,437.90
CIR failed to answer the claim for refund, resps filed their petition with the Tax Court
G.R. No. L-18169 formerly CTA case 570[different case/year] is also a claim for refund in the
amount of P150,269.00 as alleged overpaid income tax for 1955
o Facts:
In Feb 1956 Sps filed ITR for 1955 = gross income of P1,7771,124.63 and net
income of P1,052,550.67
1956 sps filed an amended ITR
Back in 1955, sps filed with the US Internal Revenue Agent in Manila their federal
ITR for the years 1947,1951-54 on income from Phil sources on a cash basis
1958 Sps amended their Phil ITR for 1955 to include the deductions of US
Federal income taxes, interest accrued up to May 15, 1955, and exchange and
bank charges
CTA case 570 was filed
G.R. No. 21434 formerly CTA Case No. 783, facts are similar but refer to Lednickys OTR for
1957 filed in Feb 1958
o In 1959 sps filed amended return for 1957 claiming deductions representing taxes paid to
US Govt.
* Tac xourt held that the taxes may be deducted because the Sps did not signify in their ITRa desire to
avail themselves of the benefits of paragraph 3(B) of Sec. 30
COMMON ISSUE: WON a citizen of the US residing in Phils who derives income wholly from sources
within the Phils may deduct from his gross income the income taxes he has paid to US govt for the
taxable year?
HELD/RATIO:
SC: CIR correct that the construction and wording of Sec. 30c(1)B of the Internal Revenue Act
shows the laws intent that the right to deduct income taxes paid to foreign government from the
taxpayers gross income is given only as an alternative or substitute to his right to claim a tax
credit for such foreign income taxes
o (B) Income, war-profits, and excess profits taxes imposed by the authority of any
foreign country; but this deduction shall be allowed in the case of a taxpayer who does
not signify in his return his desire to have any extent the benefits of paragraph (3) of this
subsection (relating to credit for foreign countries)
So that unless the alien resident has a right to claim such tax credit if he so chooses, he is
precluded from deducting the foreign income taxes from his gross income.
For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer
who does not signify in his return his desire to have any extent benefits of paragraph 3, the
statute assumes that the taxpayer in question may signify his desire to claim a tax credit and
waive the deduction; otherwise, the foreign taxes would always be deductible and their mention in
the list on non-deductible items in Sec. 30c might as well have been omitted or at least expressly
limited to taxes on income from sources outside the Philippine Islands
Had the law intended that foreign income taxes could be deducted from gross income in any
event, regardless of the taxpayers right to claim a tax credit, it is the latter right that should be
conditioned upon the taxpayers waiving the deduction
No danger of double credit/taxation.
o Double taxation becomes obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity

o
o
o
o

The Philippine government only receives the proceeds of one tax

Justice and equity demand that the tax on the income should accrue to the benefit of the
Philippines
Any relief from the alleged double taxation should come from the US since the formers
right to burden the taxpayer is solely predicated in is citizenship, without contributing to
the production of wealth that is being taxed
To allow an alien resident to deduct from his gross income whatever taxes he pays to his
own government amounts to conferring on the latter the power to reduce the tax income
of the Philippine government simply by increasing the tax rates on the alien resident.

37 CIR v. Isabela Cultural Corp

GR 17223
February 12, 2007

Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment

notice for deficiency income tax and expanded withholding tax from BIR. It arose from the
disallowance of ICCs claimed expense for professional and security services paid by ICC; as
well as the alleged understatement of interest income on the three promissory notes due from
Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the failure
of ICC to withhold 1% e-withholding tax on its claimed deduction for security services.
ICC sought a reconsideration of the assessments. Having received a final notice of assessment,
it brought the case to CTA, which held that it is unappealable, since the final notice is not a
decision. CTAs ruling was reversed by CA, which was sustained by SC, and case was
remanded to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for
professional and security services were properly claimed, it said that even if services were
rendered in 1984 or 1985, the amount is not yet determined at that time. Hence it is a proper
deduction in 1986. It likewise found that it is the BIR which overstate the interest income, when
it applied compounding absent any stipulation.
Petitioner appealed to CA, which affirmed CTA, hence the petition.
Issue: Whether or not the expenses for professional and security services are deductible.
Held:
No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must
have been paid or incurred during the taxable year. This requisite is dependent on the method
of accounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting.
Hence, under this method, an expense is recognized when it is incurred. Under a Revenue
Audit Memorandum, when the method of accounting is accrual, expenses not being claimed as
deductions by a taxpayer in the current year when they are incurred cannot be claimed in the
succeeding year.

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 test does not demand that
the amount of income or liability be known absolutely, only that a taxpayer has at its disposal the
information necessary to compute the amount with reasonable accuracy.
From the nature of the claimed deductions and the span of time during which the firm was
retained, ICC can be expected to have reasonably known the retainer fees charged by the firm.
They cannot give as an excuse the delayed billing, since it could have inquired into the amount
of their obligation and reasonably determine the amount.

38 Coll v. Henderson
1 SCRA 649

FACTS:
Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the BIR. Arthur
is president of American International Underwriters for the Philippines, Inc., which is a domestic
corporation engaged in the business of general non-life insurance, and represents a group of
American insurance companies engaged in the business of general non-life insurance.
The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR included as part
of taxable income: 1) Arthurs allowances for rental, residential expenses, subsistence, water, electricity
and telephone expenses 2) entrance fee to the Marikina Gun and Country Club which was paid by his
employer for his account and 3) travelling allowance of his wife
The taxpayers justifications are as follows:
1) as to allowances for rental and utilities, Arthur did not receive money for the allowances. Instead, the
apartment is furnished and paid for by his employer-corporation (the mother company of American
International), for the employer corporations purposes. The spouses had no choice but to live in the
expensive apartment, since the company used it to entertain guests, to accommodate officials, and to
entertain customers. According to taxpayers, only P 4,800 per year is the reasonable amount that the
spouses would be spending on rental if they were not required to live in those apartments. Thus, it is the
amount they deem is subject to tax. The excess is to be treated as expense of the company.
2) The entrance fee should not be considered income since it is an expense of his employer, and
membership therein is merely incidental to his duties of increasing and sustaining the business of his
employer.
3) His wife merely accompanied him to New York on a business trip as his secretary, and at the employercorporations request, for the wife to look at details of the plans of a building that his employer intended to
construct. Such must not be considered taxable income.
The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent expense and
travel expenses were still held to be taxable. The Court of Tax Appeals ruled in favor of the taxpayers, that
such expenses must not be considered part of taxable income. Letters of the wife while in New York
concerning the proposed building were presented as evidence.

ISSUE: Whether or not the rental allowances and travel allowances furnished and given by
the employer-corporation are part of taxable income?
HELD: NO. Such claims are substantially supported by evidence.
These claims are therefore NOT part of taxable income. No part of the allowances in question redounded
to their personal benefit, nor were such amounts retained by them. These bills were paid directly by the
employer-corporation to the creditors. The rental expenses and subsistence allowances are to be
considered not subject to income tax. Arthurs high executive position and social standing, demanded and
compelled the couple to live in a more spacious and expensive quarters. Such subsistence allowance
was a SEPARATE account from the account for salaries and wages of employees. The company did not
charge rentals as deductible from the salaries of the employees. These expenses are COMPANY
EXPENSES, not income by employees which are subject to tax.

39CIR v. Ledesma
G.R. No. L-17509 31 SCRA 95
January 30, 1970
FACTS: On July 9, 1949, Carlos Ledesma, Julieta Ledesma and the spouses Amparo Ledesma
andVicente Gustilo, Jr., purchased from their parents, the sugar plantation known as "HaciendaFortuna,"
consisting of 36 parcels of land, which sugar quota was included in the sale. By virtue of the purchase,
respondents owned one-third each of the undivided portion of the plantation. After the purchase of the
plantation, herein respondents took over the sugar cane farming on the plantation beginning with the crop
year 1948-1949. For the crop year 1948- 1949 the San Carlos Milling Co.,Ltd. credited the respondents
with their shares in the gross sugar production.The respondents shared equally the expenses of
production, on the basis of their respectiveone-third undivided portions of the plantation. In their individual
income tax returns for the year 1949 the respondents included as part of their income their respective net
profits derived from their individual sugar production from the "Hacienda Fortuna," as herein-above
stated.On July 11, 1949, the respondents organized themselves into a general co-partnership under the
firm name "Hacienda Fortuna", for the "production of sugar cane for conversion into sugar, palay and corn
and such other products as may profitably be produced on said hacienda, which products shall be sold or
otherwise disposed of for the purpose of realizing profit for the partner-ship." The articles of general copartnership were registered in the commercial register of the officeof the Register of Deeds in Bacolod
City, Negros Occidental, on July 14, 1949. Paragraph 14 of thearticles of general partnership provides
that the agreement shall have retroactive effect as of January1, 1949.
Issue: Whether or not respondent operated the Hacienda Fortuna as partnership prior to the exe-cution
of articles of co-partnership.
Ruling: Yes. Suffice it to say that the conclusion of the Court of Tax Appeals that the respondents
operated the "Hacienda Fortuna" as a partnership prior to the execution of the articles of general copartnership is based on findings of fact, and We find no reason in the record to disturb the findings of the
tax court on this matter. On the contrary, the intention of the respondents to operate the "Hacienda
Fortuna" as a partnership, before July 11, 1949, is clearly shown in paragraph 14 of the articles of general
co-partnership which provides that the partnership agreement "shall be retroactive as of January 1,
1949."

40Pascual v. CIR

GR No. 78133
October 18, 1988
FACTS:
Petitioners bought two parcels of land and another 3 parcels the following year. The 2 parcels
were sold in 1968 while the other 3 were sold in 1970. Realizing profits from the sale, petitioners
filed capital gains tax. However, they were assessed with deficiency tax for corporate income
taxes.
ISSUE: Whether or not petitioners formed an unregistered partnership thereby assessed with
corporate income tax.
RULING:
By the contract of partnership, two or more persons bind themselves to contribute
money, industry or property to a common fund with the intention of dividing profits among
themselves. There is no evidence though, that petitioners entered into an agreement to
contribute MPI to a common fund and that they intend to divide profits among themselves. The
petitioners purchased parcels of land and became co-owners thereof. Their transactions of
selling the lots were isolated cases. The character of habituality peculiar to the business
transactions for the purpose of gain was not present.
The sharing of returns foes 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 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.
41Obillos v. CIR
GR 68118, 139 SCRA 436
October 29, 1985
Facts: On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and 963 square meters of
located atGreenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the
petitioners, to enablethem to build their residences. The Torrens titles issued to them showed that they
were co-owners of the twolots.In 1974, or after having held the two lots for more than a year, the
petitioners resold them to the Walled CitySecurities Corporation and Olga Cruz Canada for the total sum
of P313,050. They derived from the sale a totalprofit of P134, 341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an incometax on one-half thereof or of P16,792.In April, 1980,
the Commissioner of Internal Revenue required the four petitioners to pay
corporate incometax
on the total profit of P134,336 in addition to individual income tax on their shares thereof. The
petitionersare being held liable for deficiency income taxes and penalties totalling P127,781.76 on their
profit of P134,336, in addition to the tax on capital gains already paid by them.The Commissioner acted
on the theory that the four petitioners had formed an unregistered partnership or jointventure The
petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Hence,
theinstant appeal.
Issue: Whether or not the petitioners had indeed formed a partnership or joint venture and thus liable for
corporate tax.

Held: The Supreme Court held that the petitioners should not be considered to have formed a partnership
just becausethey allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the
profit amongthemselves. To regard so would result in oppressive taxation and confirm the dictum that the
power to taxinvolves the power to destroy. That eventuality should be obviated.As testified by Jose
Obillos, Jr., they had no such intention. They were co-owners pure and simple. To considerthem as
partners would obliterate the distinction between a co-ownership and a partnership. The petitionerswere
not engaged in any joint venture by reason of that isolated transaction.
*
Article 1769(3) of the Civil Code provides that "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 a
partnership or joint venture.

42Philex Mining v. CIR

GR 148187
April 16, 2008
FACTS:

Philex Mining Corp. entered into an agreement with Baguio Gold Mining Co. for the former to manageand
operate the latters mining claim, known as the Sto. Nino Mine. The parties agreement wasdenominated
as Power of Attorney which provides inter alia:4. Within three (3) years from date thereof, the
PRINCIPAL (Baguio Gold) shall make available tothe MANAGERS (Philex Mining) up to ELEVEN
MILLION PESOS (P11,000,000.00), in such amounts asfrom time to time may be required by the
MANAGERS within the said 3-year period, for use in theMANAGEMENT of the STO. NINO MINE. The
said ELEVEN MILLION PESOS (P11,000,000.00) shall bedeemed, for internal audit purposes, as the
owners account in the Sto. Nino PROJECT. Any part of any income of the PRINCIPAL from the STO.
NINO MINE, which is left with the Sto. Nino PROJECT,shall be added to such owners account.5.
Whenever the MANAGERS shall deem it necessary and convenient in connection with
theMANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the Sto.
NinoPROJECT, in accordance with the following arrangements:(a) The properties shall be appraised and,
together with the cash, shall be carried by the Sto.Nino PROJECT as a special fund to be known as the
MANAGERS account.(b) The total of the MANAGERS account shall not exceed P11,000,000.00, except
with priorapproval of the PRINCIPAL; provided, however, that if the compensation of the MANAGERS as
hereinprovided cannot be paid in cash from the Sto. Nino PROJECT, the amount not so paid in cash shall
beadded to the MANAGERS account.(c) The cash and property shall not thereafter be withdrawn from
the Sto. Nino PROJECT untiltermination of this Agency.(d) The MANAGERS account shall not accrue
interest. Since it is the desire of the PRINCIPAL toextend to the MANAGERS the benefit of subsequent
appreciation of property, upon a projectedtermination of this Agency, the ratio which the MANAGERS
account has to the owners account willbe determined, and the corresponding proportion of the entire
assets of the STO. NINO MINE,excluding the claims, shall be transferred to the MANAGERS, except that
such transferred assetsshall not include mine development, roads, buildings, and similar property which
will be valueless, orof slight value, to the MANAGERS. The MANAGERS can, on the other hand, require
at their optionthat property originally transferred by them to the Sto. Nino PROJECT be re-transferred to
them. Untilsuch assets are transferred to the MANAGERS, this Agency shall remain subsisting.x x x x12.
The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto.Nino
PROJECT before income tax. It is understood that the MANAGERS shall pay income tax on
theircompensation, while the PRINCIPAL shall pay income tax on the net profit of the Sto. Nino
PROJECTafter deduction therefrom of the MANAGERS compensation.

Philex Mining made advances of cash and property in accordance with paragraph 5 of theagreement.
However, the mine suffered continuing losses over the years which resulted to PhilexMinings withdrawal
as manager of the mine and in the eventual cessation of mine operations.

The parties executed a Compromise with Dation in Payment wherein Baguio Gold admitted
anindebtedness to petitioner in the amount of P179,394,000.00 and agreed to pay the same in

threesegments by first assigning Baguio Golds tangible assets to Philex Mining, transferring to the
latterBaguio Golds equitable title in its Philodrill assets and finally settling the remaining liability
throughproperties that Baguio Gold may acquire in the future.

The parties executed an Amendment to Compromise with Dation in Payment where the
partiesdetermined that Baguio Golds indebtedness to petitioner actually amounted to
P259,137,245.00,which sum included liabilities of Baguio Gold to other creditors that petitioner had
assumed asguarantor. These liabilities pertained to long-term loans amounting to US$11,000,000.00
contracted
by Baguio Gold from the Bank of America NT & SA and Citibank N.A. This time, Baguio Goldundertook to
pay petitioner in two segments by first assigning its tangible assets forP127,838,051.00 and then
transferring its equitable title in its Philodrill assets for P16,302,426.00. The parties then ascertained that
Baguio Gold had a remaining outstanding indebtedness topetitioner in the amount of P114,996,768.00.

Philex Mining wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio
Gold by charging P112,136,000.00 to allowances and reserves that were set up in 1981
andP2,860,768.00 to the 1982 operations.

In its 1982 annual income tax return, Philex Mining deducted from its gross income the amount of
P112,136,000.00 as loss on settlement of receivables from Baguio Gold against reserves
andallowances. However, the BIR disallowed the amount as deduction for bad debt and
assessedpetitioner a deficiency income tax of P62,811,161.39. Philex Mining protested before the BIR
arguingthat the deduction must be allowed since all requisites for a bad debt deduction were satisfied,
towit: (a) there was a valid and existing debt; (b) the debt was ascertained to be worthless; and (c) itwas
charged off within the taxable year when it was determined to be worthless. BIR deniedpetitioners
protest. It held that the alleged debt was not ascertained to be worthless since BaguioGold remained
existing and had not filed a petition for bankruptcy; and that the deduction did notconsist of a valid and
subsisting debt considering that, under the management contract, petitionerwas to be paid 50% of the
projects net profit.
ISSUE: WON the parties entered into a contract of agency coupled with an interest which is notrevocable
at will
HELD:
No. An examination of the Power of Attorney reveals that a partnership or joint venture wasindeed
intended by the parties.

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by theprincipal
due to an interest of a third party that depends upon it, or the mutual interest of bothprincipal and agent.
In this case, the non-revocation or non-withdrawal under paragraph 5(c) appliesto the advances made by
petitioner who is supposedly the agent and not the principal under thecontract. Thus, it cannot be inferred
from the stipulation that the parties relation under theagreement is one of agency coupled with an interest
and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the relationship of theparties
was one of agency and not a partnership. Although the said provision states that thisAgency shall be
irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS isoutstanding, inclusive of
the MANAGERS account, it does not necessarily follow that the partiesentered into an agency contract
coupled with an interest that cannot be withdrawn by Baguio Gold.

The main object of the Power of Attorney was not to confer a power in favor of petitioner tocontract with
third persons on behalf of Baguio Gold but to create a business relationship betweenpetitioner and
Baguio Gold, in which the former was to manage and operate the latters minethrough the parties mutual
contribution of material resources and industry. The essence of anagency, even one that is coupled with
interest, is the agents ability to represent his principal andbring about business relations between the
latter and third persons.


The strongest indication that petitioner was a partner in the Sto. Nino Mine is the fact that it wouldreceive
50% of the net profits as compensation under paragraph 12 of the agreement. Theentirety of the parties
contractual stipulations simply leads to no other conclusion than thatpetitioners compensation is
actually its share in the income of the joint venture. Article 1769 (4) of the Civil Code explicitly provides
that the receipt by a person of a share in the profits of a businessis prima facie evidence that he is a
partner in the business.

43Abra Valley College, Inc. v. Aquino

G.R. No. L-39086, 162 SCRA 106
June 15, 1988
Facts:
Petitioner, an educational corporation and institution of higher learning duly incorporated with
the Securities and Exchange Commission in 1948, filed a complaint to annul and declare void the Notice
of Seizure and the Notice of Sale of its lot and building located at Bangued, Abra, for non-payment of
real estate taxes and penalties amounting to P5,140.31. Said Notice of Seizure by respondents
Municipal Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the
said taxes thereon.
The parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned
decision. The trial court ruled for the government, holding that the second floor of the building is being
used by the director for residential purposes and that the ground floor used and rented by Northern
Marketing Corporation, a commercial establishment, and thus the property is not being used exclusively
for educational purposes. Instead of perfecting an appeal, petitioner availed of the instant petition for
review on certiorari with prayer for preliminary injunction before the Supreme Court, by filing said petition
on 17 August 1974.
Issue: whether or not the lot and building are used exclusively for educational purposes
Held: Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, expressly grants
exemption from realty taxes for cemeteries, churches and parsonages or convents appurtenant thereto,
and all lands, buildings, and improvements used exclusively for religious, charitable or educational
purposes. Reasonable emphasis has always been made that the exemption extends to facilities which
are incidental to and reasonably necessary for the accomplishment of the main purposes. The use of the
school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. In the
case at bar, the lease of the first floor of the building to the Northern Marketing Corporation cannot by any
stretch of the imagination be considered incidental to the purpose of education. The test of exemption
from taxation is the use of the property for purposes mentioned in the Constitution.
The decision of the CFI Abra (Branch I) is affirmed subject to the modification that half of the assessed tax
be returned to the petitioner. The modification is derived from the fact that the ground floor is being used
for commercial purposes (leased) and the second floor being used as incidental to education (residence
of the director).

44N.V. Reederif Amsterdam v. CIR

GR 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 or not 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. (*take note that 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)
Petiioner 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.

45CIR v. Solidbank
GR 148191
November 25, 2003
Facts:

Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting to
P1,474,693.44. It alleged that the total included P350,807,875.15 representing gross receipts from
passive income which was already subjected to 20%final withholding tax (FWT).
The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20% FWT should not
form part of its taxable gross receipts for purposes of computing the tax.
Solidbank, relying on the strength of this decision, filed with the BIR a letter-request for the refund or tax
credit. It also filed a petition for review with the CTA where the it ordered the refund.
The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross receipts because
the FWT was not actually received by the bank but was directly remitted to the government.
The Commissioner claims that although the FWT was not actually received by Solidbank, the fact that the
amount redounded to the banks benefit makes it part of the taxable gross receipts in computing the
Gross Receipts Tax. Solidbank says the CA ruling is correct.
Issue:
Whether or not the FWT forms part of the gross receipts tax.
Held:
Yes. In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed. The
payor, a separate entity, acts as no more than an agent of the government for the collection of tax in order
to ensure its payment. This amount that is used to settle the tax liability is sourced from the proceeds
constitutive of the tax base.
These proceeds are either actual or constructive. Both parties agree that there is no actual receipt by the
bank. What needs to be determined is if there is constructive receipt. Since the payee is the real taxpayer,
the rule on constructive receipt can be rationalized.
The Court applied provisions of the Civil Code on actual and constructive possession. Article 531 of the
Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and
legal formalities established. The withholding process is one such act. There may not be actual receipt
of the income withheld; however, as provided for in Article 532, possession by any person without any
power shall be considered as acquired when ratified by the person in whose name the act of possession
is executed.
In our withholding tax system, possession is acquired by the payor as the withholding agent of the
government, because the taxpayer ratifies the very act of possession for the government. There is thus
constructive receipt.
The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes
that are subjected to FWT are tantamount to delivery, receipt or remittance. Besides, Solidbank admits
that its income is subjected to a tax burden immediately upon receipt, although it claims that it derives
no pecuniary benefit or advantage through the withholding process.
There being constructive receipt, part of which is withheld, that income is included as part of the tax base
on which the gross receipts tax is imposed.

46Chamber of Real Estate & Builders Association, Inc v. Executve Secretary et. Al.

GR 160756
March 09, 2010

FACTS:
Petitioner is an association of real estate developers and builders in the Philippines. It
impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita
D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as
respondents. Petitioner assails the validity of the imposition of minimum corporate income tax
(MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties
classified as ordinary assets. Section 27(E) of RA 8424 provides for MCIT on domestic
corporations and is implemented by RR 9-98. Petitioner argues that the MCIT violates the due
process clause because it levies income tax even if there is no realized gain. Petitioner also
seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the
collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner also
asserts that the enumerated provisions of the subject revenue regulations violate the due
process clause because, like the MCIT, the government collects income tax even when the net
income has not yet been determined. They contravene the equal protection clause as well
because the CWT is being levied upon real estate enterprises but not on other business
enterprises, more particularly those in the manufacturing sector.
ISSUE: Whether or not the imposition of the MCIT on domestic corporations is unconstitutional

HELD:
No. The MCIT is imposed on gross income which is arrived at by deducting the capital
spent by a corporation in the sale of its goods, i.e., the cost of goods1[48] and other direct
expenses from gross sales. Clearly, the capital is not being taxed. Furthermore, the MCIT is not
an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely approximates the amount of net
income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as
the base the corporations gross income. Besides, there is no legal objection to a broader tax
base or taxable income by eliminating all deductible items and at the same time reducing the
applicable tax rate.

47CIR v. Tokyo Shipping Co.

GR L- 68252
May 26, 1995
Facts: Tokyo Shipping a foreign corporation represented in the Philippines by Soriamont Steamship
Agencies and owns and operates M/V Gardenia. NASUTRA 2 chartered M/V Gardenia to load 16,500
metric tons of raw sugar in the Philippines. Soriamont Agency, 4 paid the required income and common
carrier's taxes P59,523.75 and P47,619.00, respectively (Total P107,142.75). Upon arriving, however, at
Guimaras Port of Iloilo, the vessel found no sugar for loading. NASUTRA and Soriamont mutually agreed
to have the vessel sail for Japan without any cargo. Claiming the pre-payment of income and common
carrier's taxes as erroneous since no receipt was realized from the charter agreement, Tokyo instituted a

claim for tax credit or refund of the sum P107,142.75 from CIR. Petitioner failed to act promptly on the
claim , hence Tokyo filed a petition for review 6 before Court of Tax Appeals. CTA decided for Tokyo and
denied MR of CIR.
Issue: WON Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit whether it was able to prove
that it derived no receipts from its charter agreement, and hence is entitled to a refund of the taxes it prepaid to the government.
Ruling: Yes. Pursuant to Section 24 (b) (2) of the National Internal Revenue Code which at that time, a
resident foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount
of income it derives from sources within the Philippines. Thus, before such a tax liability can be enforced
the taxpayer must be shown to have earned income sourced from the Philippines.
Indeed, a claim for refund is in the nature of a claim for exemption 8 and should be construed
in strictissimi juris against the taxpayer. And Tokyo has the burden of proof to establish the factual basis of
its claim for tax refund.
But sufficient evidence has already been adduced by Tokyo proving that it derived no receipt from its
charter agreement with NASUTRA - M/V "Gardenia" arrived in Iloilo on January 10, 1981 but found no
raw sugar to load and returned to Japan without any cargo laden on board.

48CIR v. Marubeni
GR No. 137377

Facts:
CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985
deficiency income, branch profit remittance and contractors taxes from Marubeni Corp after
finding the latter to have properly availed of the tax amnesty under EO 41 & 64, as amended.
Marubeni, a Japanese corporation, engaged in general import and export trading, financing and
construction, is duly registered in the Philippines with Manila branch office. CIR examined the
Manila branchs books of accounts for fiscal year ending March 1985, and found that
respondent had undeclared income from contracts with NDC and Philphos for construction of a
wharf/port complex and ammonia storage complex respectively.
On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency
taxes. CIR claims that the income respondent derived were income from Philippine sources,
hence subject to internal revenue taxes.
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that
taxpayers who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax
amnesty return on Oct 30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41s scope to include estate and donors taxes under
Title 3 and business tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec
15, 1986 and stated those who already availed amnesty under EO 41 should file an amended
return to avail of the new benefits. Marubeni filed a supplemental tax amnesty return on Dec 15,
1986.
CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the
deficiency taxes. CA affirmed on appeal.

Issue:
W/N Marubeni is exempted from paying tax

Held:
Yes.
1. On date of effectivity
CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in
Sec 4b of EO 41:
Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty herein
granted: xxx b) Those with income tax cases already filed in Court as of the effectivity hereof;
EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with
CTA on Sept 26, 1986. When EO 41 became effective, the case had not yet been filed.
Marubeni does not fall in the exception and is thus, not disqualified from availing of the amnesty
under EO 41 for taxes on income and branch profit remittance.
2. On situs of taxation
Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the
deficiency tax because the income from the projects came from the Offshore Portion as
opposed to Onshore Portion. It claims all materials and equipment in the contract under
the Offshore Portion were manufactured and completed in Japan, not in the
Philippines, and are therefore not subject to Philippine taxes. These services were
rendered outside Philippines taxing jurisdiction and are therefore not subject to
contractors tax. Petition denied.
49CIR v. SC Johnson & Sons
G.R. No. 127105
June 25, 1999
FACTS:
[Respondent], a domestic corporation organized and operating under the Philippine laws,
entered into a license agreement with SC Johnson and Son, United States of America (USA), a
non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was
granted the right to use the trademark, patents and technology owned by the latter including the
right to manufacture, package and distribute the products covered by the Agreement and secure
assistance in management, marketing and production from SC Johnson and Son, U. S. A.

For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and
Son, USA royalties based on a percentage of net sales and subjected the same to 25%
withholding tax on royalty payments which [respondent] paid for the period covering July 1992
to May 1993 in the total amount of P1,603,443.00 (Exhs. B to L and submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the
BIR a claim for refund of overpaid withholding tax on royalties arguing that, the antecedent facts
attending [respondents] case fall squarely within the same circumstances under which said
MacGeorge and Gillete rulings were issued.
ISSUE: WHETHER SC JOHNSON AND SON, USA IS ENTITLED TO THE MOST FAVORED
NATION TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN
RELATION TO THE RP-WEST GERMANY TAX TREATY
HELD:
Under the RP-West Germany Tax Treaty, the Philippine tax paid on income from sources within
the Philippines is allowed as a credit against German income and corporation tax on the same
income. In the case of royalties for which the tax is reduced to 10 or 15 percent according to
paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the
gross amount of such royalty. To illustrate, the royalty income of a German resident from
sources within the Philippines arising from the use of, or the right to use, any patent, trade mark,
design or model, plan, secret formula or process, is taxed at 10% of the gross amount of said
royalty under certain conditions. The rate of 10% is imposed if credit against the German
income and corporation tax on said royalty is allowed in favor of the German resident. That
means the rate of 10% is granted to the German taxpayer if he is similarly granted a credit
against the income and corporation tax of West Germany. The clear intent of the matching
credit is to soften the impact of double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar matching credit as that provided under the RP-West
Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under
similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the
most favored nation clause in the RP-West Germany Tax Treaty cannot be availed of in
interpreting the provisions of the RP-US Tax Treaty.
50CIR v. Procter and Gamble
GR L-66838
April 15 1988
Facts:
Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA
(PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and
business therein. PMC-USA is the sole shareholder of PMC Philippines and is entitled to receive
income from PMC Philippines in the form of dividends, if not rents or royalties. For the taxable
years 1974 and 1975, PMC Philippines filed its income tax return and also declared dividends in
favor of PMC-USA. In 1977, PMC Philippines, invoking the tax-sparing provision of Section 24
(b) as the withholding agent of the Philippine Government with respect to dividend taxes paid by
PMC-USA, filed a claim for the refund of 20 percentage point portion of the 35 percentage
whole tax paid with the Commissioner of Internal Revenue.

Issue:
Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared and
remitted to its parent corporation.
Held:
Under the same underlying principle of prior exhaustion of administrative remedies, on the
judicial level, issues not raised in the lower court cannot be generally raised for the first time on
appeal. Nonetheless, it is axiomatic that the state can never be allowed to jeopardize the
governments financial position. The submission of the Commissioner that PMC Philippines is
but a withholding agent of the government and therefore cannot claim reimbursement of alleged
overpaid taxes, is completely meritorious. The real party in interest is PMC-USA, which should
prove that it is entitled under the US Tax Code to a US Foreign Tax Credit equivalent to at least
20 percentage points spared or waived as otherwise considered or deemed paid by the
Government. Herein, the claimant failed to show or justify the tax return of the disputed 15% as
it failed to show the actual amount credited by never be allowed to jeopardize the governments
financial position. The submission of the Commissioner that PMC Philippines is but a
withholding agent of the government and therefore cannot claim reimbursement of alleged
overpaid taxes is completely meritorious. The real party in interest is PMC-USA, which should
prove that it is entitled under the US Tax Code to a US Foreign Tax Credit equivalent to at least
20 percentage points spared or waived as otherwise considered or deemed paid by the
Government. Herein, the claimant failed to show or justify the tax return of the disputed 15% as
it failed to show the actual amount credited by the US Government against the income tax due
from PMC-USA on the dividends received from PMC Philippines; to present the income tax
return of PMC-USA for 1975 when the dividends were received; and to submit duly
authenticated document showing that the US government credited teh 20% tax deemed paid in
the Philippines. The US Government against the income tax due from PMC-USA on the
dividends received from PMC Philippines; to present the income tax return of PMC-USA for
1975 when the dividends were received; and to submit duly authenticated document showing
that the US government credited teh 20% tax deemed paid in the Philippines.
51Cynamid Phils Inc. v. CA
G.R. No. 108067
January 20, 2000
FACTS:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly
owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the
manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished
goods, and an importer/indentor. On February 7, 1985, the CIR sent an assessment letter to
petitioner and demanded the payment of deficiency income tax of one hundred nineteen
thousand eight hundred seventeen (P119,817.00) pesos for taxable year 1981. Petitioner
claimed that CIRs assessment representing the 25% surtax on its accumulated earnings for the
year 1981 had no legal basis. Hence the petition.
ISSUE: W/N PETITIONER IS LIABLE FOR THE ACCUMULATED EARNINGS TAX FOR THE
YEAR 1981
HELD:

The Tax Court opted to determine the working capital sufficiency by using the ratio between
current assets to current liabilities. The working capital needs of a business depend upon the
nature of the business, its credit policies, the amount of inventories, the rate of turnover, the
amount of accounts receivable, the collection rate, the availability of credit to the business, and
similar factors. Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court
with the required definiteness envisioned by the statute. We agree with the tax court that the
burden of proof to establish that the profits accumulated were not beyond the reasonable needs
of the company, remained on the taxpayer. With petitioners failure to prove the CIR incorrect,
clearly and conclusively, this Court is constrained to uphold the correctness of tax courts ruling
as affirmed by the Court of Appeals.
52YMCA, CIR v. CA
G.R. No. 124043
October 14, 1998
Facts:
The main question in this case is: is the income derived from rentals of real property owned by
Young Mens Christian Association of the Philippines (YMCA) established as a welfare,
educational and charitable non-profit corporation subject to income tax under the NIRC and
the Constitution? In 1980, YMCA earned an income of P676,829 from leasing out a portion of its
premises to small shop owners, like restaurants and canteen operators and P44k form parking
fees.
Issue: Is the rental income of the YMCA taxable?
Held:
Yes. The exemption claimed by the YMCA is expressly disallowed by the very wording of the
last paragraph of then Sec. 27 of the NIRC; court is duty-bound to abide strictly by its literal
meaning and to refrain from resorting to any convoluted attempt at construction. The said
provision mandates that the income of exempt organizations (such as YMCA) from any of their
properties, real or personal, be subject to the tax imposed by the same Code. Private
respondent is exempt from the payment of property tax, but nit income tax on rentals from its
property.
53PLDT v. CIR
GR 157264
January 31, 2008
FACTS:
PLDT terminated and compensated affected employees in compliance with labor law
requirements. It deducted from separation pay withholding taxes and remitted the same to BIR.
In 1997, it filed a claim for tax refund and CTA contended that petitioner failed to show proof of
payment of separation pay and remittance of the alleged with held taxes. CA dismissed the
same and PLDT assailed the decision arguing against the need for proof that the employees
received their separation pay and proffers actually received by terminated employees.
ISSUE: Whether or not the withholding taxes remitted to the BIR should be refunded for having
been erroneously withheld and paid to the latter.

HELD:
Tax refunds, like tax exemptions, are considered strictly against the taxpayer and
liberally in favor of the taxing authority, and the taxpayer bears the burden of establishing the
factual basis of his claim for a refund. A taxpayer must do two things to be able to successfully
make a claim for tax refund: a) declare the income payments it received as part of its gross
income and b) establish the fact of withholding. At all events, the alleged newly discovered
evidence that PLDT seeks to offer does not suffice to established its claim for refund as it would
still have to comply with Revenue Regulation 6-85 by proving that the redundant employees on
whose behalf it filed the claim for refund, declared the separation pay received as part of their
gross income. The same Revenue Regulation required that the facts of withholding is
established by a copy of the statement duly issued by the payor to the payee showing the
amount paid and the amount of tax withhold therefrom.
54Atlas Consolidated Mining v. CIR
GR Nos. 141104 & 148763
June 8, 2007
FACTS:
Petitioner corporation, a VAT-registered taxpayer engaged in mining, production, and sale of
various mineral products, filed claims with the BIR for refund/credit of input VAT on its purchases
of capital goods and on its zero-rated sales in the taxable quarters of the years 1990 and 1992.
BIR did not immediately act on the matter prompting the petitioner to file a petition for review
before the CTA. The latter denied the claims on the grounds that for zero-rating to apply, 70% of
the company's sales must consists of exports, that the same were not filed within the 2-year
prescriptive period (the claim for 1992 quarterly returns were judicially filed only on April 20,
1994), and that petitioner failed to submit substantial evidence to support its claim for
refund/credit.
The petitioner, on the other hand, contends that CTA failed to consider the following: sales to
PASAR and PHILPOS within the EPZA as zero-rated export sales; the 2-year prescriptive
period should be counted from the date of filing of the last adjustment return which was April 15,
1993, and not on every end of the applicable quarters; and that the certification of the
independent CPA attesting to the correctness of the contents of the summary of suppliers
invoices or receipts examined, evaluated and audited by said CPA should substantiate its
claims.
ISSUE: Did the petitioner corporation sufficiently establish the factual bases for its applications
for refund/credit of input VAT?
HELD:
No. Although the Court agreed with the petitioner corporation that the two-year prescriptive
period for the filing of claims for refund/credit of input VAT must be counted from the date of
filing of the quarterly VAT return, and that sales to PASAR and PHILPOS inside the EPZA are
taxed as exports because these export processing zones are to be managed as a separate
customs territory from the rest of the Philippines, and thus, for tax purposes, are effectively
considered as foreign territory, it still denies the claims of petitioner corporation for refund of its
input VAT on its purchases of capital goods and effectively zero-rated sales during the period
claimed for not being established and substantiated by appropriate and sufficient evidence.
Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the sovereign
authority, and should be construed in strictissimi juris against the person or entity claiming the

exemption. The taxpayer who claims for exemption must justify his claim by the clearest grant
of organic or statute law and should not be permitted to stand on vague implications.
55Aguinaldo v. CIR
G.R. No. L-29790
February 25, 1982
Facts:
Aguinaldo Industries is engaged in the manufacture of fishing nets (a tax exempt industry),
which is handled by its Fish Nets Division. It is also engaged in the manufacture of furniture
which is operated by its Furniture Division. Each division is provided with separate books of
accounts. The income from the Fish Nets Division, miscellaneous income of the Fish Nets
Division, and and the income from the Furniture Division are computed individually.
Petitioner acquired a parcel of land in Muntinlupa Rizal as site for its fishing net factory. The
transaction was entered in the books of the Fish Nets Division. The company then found
another parcel of land in Marikina Heights, which was more suitable. They then sold the
Muntinlupa property and the profit derived from the sale was entered in the books of the Fish
Nets Division as miscellaneous income to separate it from its tax exempt income.
CTA imposed a 5% surcharge and 1% monthly interest for the deficiency assessment. Petitioner
then stressed that the profit derived from the sale of the land is not taxable because the Fish
Nets Div enjoys tax exemption under RA 901.
Issue: Whether petitioner is liable for surcharge and interest for late payment.
Held:
YES. Interest and surcharges on deficiency taxes are imposable upon failure of the taxpayer to
pay the tax on the date fixed in the law for the payment thereof, which was, under the
unamended Section 51 of the Tax Code, the 15th day of the 5th month following the close of the
fiscal year in the case of taxpayers whose tax returns were made on the basis of fiscal years. A
deficiency tax indicates non-payment of the correct tax, and such deficiency exists not only from
the assessment thereof but from the very time the taxpayer failed to pay the correct amount of
tax when it should have been paid and the imposition thereof is mandatory even in the absence
of fraud or willful failure to pay the tax is full.
56CIR v. Isabela Cultural Corp. (repeated)
GR 17223
February 12, 2007

Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment

notice for deficiency income tax and expanded withholding tax from BIR. It arose from the
disallowance of ICCs claimed expense for professional and security services paid by ICC; as
well as the alleged understatement of interest income on the three promissory notes due from
Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the failure
of ICC to withhold 1% e-withholding tax on its claimed deduction for security services.

ICC sought a reconsideration of the assessments. Having received a final notice of assessment,
it brought the case to CTA, which held that it is unappealable, since the final notice is not a
decision. CTAs ruling was reversed by CA, which was sustained by SC, and case was
remanded to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for
professional and security services were properly claimed, it said that even if services were
rendered in 1984 or 1985, the amount is not yet determined at that time. Hence it is a proper
deduction in 1986. It likewise found that it is the BIR which overstate the interest income, when
it applied compounding absent any stipulation.
Petitioner appealed to CA, which affirmed CTA, hence the petition.
Issue: Whether or not the expenses for professional and security services are deductible.
Held:
No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must
have been paid or incurred during the taxable year. This requisite is dependent on the method
of accounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting.
Hence, under this method, an expense is recognized when it is incurred. Under a Revenue
Audit Memorandum, when the method of accounting is accrual, expenses not being claimed as
deductions by a taxpayer in the current year when they are incurred cannot be claimed in the
succeeding year.

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 test does not demand that
the amount of income or liability be known absolutely, only that a taxpayer has at its disposal the
information necessary to compute the amount with reasonable accuracy.
From the nature of the claimed deductions and the span of time during which the firm was
retained, ICC can be expected to have reasonably known the retainer fees charged by the firm.
They cannot give as an excuse the delayed billing, since it could have inquired into the amount
of their obligation and reasonably determine the amount.

57Esso Standard Eastern v. CIR

GR 28508-9
July 7, 1989
Facts:
ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business

expenses, the amount it had spent for drilling and exploration of its petroleum conscessions.
The Commissioner disallowed the claim on the ground that the expenses should be capitalized
and might be written off as a loss only when a dry hole should result. Hence, ESSO filed an
amended return where it asked for the refund of P323,270 by reason of its abandonment, as dry
holes, of several of its oil wells. It also claimed as ordinary and necessary expenses in the same
return amount representing margin fees it had paid to the Central Bank on its profit remittances
to its New York Office.
Issue: Whether the margin fees may be considered ordinary and necessary expenses when
paid.
Held:
For an item to be deductible as a business expense, the expense must ebe ordinary and
necessary; it must be paid or incurred within the taxable year; and it must be paid or incurred in
carrying on a trade or business. In addition, the taxpayer must substantially prove by evidence
or records the deductions claimed under law, otherwise, the same will be disallowed. There has
been no attempt to define ordinary and necessary with precision. However, as guiding
principle in the proper adjudication of conflicting claims, an expenses is considered necessary
where the expenditure is appropriate and helpdul in the development of the taxpayers business.
It is ordinary when it connotes a payment which is normal in relation to the business of the
taxpayer and the surrounding circumstances. Assuming that the expenditure is ordinary and
necessary in the operation of the taxpayers business; the expenditure, to be an allowable
deduction as a business expense, must be determined from the nature of the expenditure itself,
and on the extent and permanency of the work accomplished by the expenditure. Herein, ESSO
has not shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a showing that they are illegal or
ultra vires; which is erroneous. Claims for deductions are a matter of legislative grace and do
not turn on mere equitable considerations.
58FEBTC v. CA, CTA & BIR
GR No. 129130
December 9, 2005
FACTS:
Petitioner is a domestic banking corporation duly organized and existing under and by
virtue of Philippine laws. In the early part of 1992, the Cavite Development Bank [CDB],
also a domestic banking corporation, was merged with Petitioner with the latter as its
surviving entity [under] the merger. Petitioner being the surviving entity[, it] acquired all
[the] assets of CDB. During the period from 1990 to 1991, CDB sold some acquired
assets in the course of which it allegedly withheld the creditable tax from the sales
proceeds which amounted to P755,715.00.
Thus, petitioner, being the surviving entity of the merger, filed this Petition for Review
after its administrative claim for refund was not acted upon.
ISSUE: Whether petitioner adduced sufficient evidence to prove its entitlement to a refund
HELD:

A taxpayer must thus do two things to be able to successfully make a claim for the tax refund:
(a) declare the income payments it received as part of its gross income and (b) establish the
fact of withholding. Petitioner relies heavily on the confirmation receipts with the corresponding
official receipts and payment orders to support its case. Standing alone, however, these
documents only establish that CDB withheld certain amounts in 1990 and 1991. It does not
follow that the payments reflected in the confirmation receipts relate to the creditable
withholding taxes arising from the sale of the acquired properties. The claim that CDB had
excess creditable withholding taxes can only be upheld if it were clearly and positively shown
that the amounts on the various confirmation receipts were the amounts withheld by virtue of the
sale of the acquired assets.
59CIR v. General Foods
G.R. No. 143672
April 24, 2003
FACTS:
The records reveal that, on June 14, 1985, respondent corporation, which is engaged in the
manufacture of beverages such as Tang, Calumet and Kool-Aid, filed its income tax return
for the fiscal year ending February 28, 1985. In said tax return, respondent corporation claimed
as deduction, among other business expenses, the amount of P9,461,246 for media advertising
for Tang.
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by
respondent corporation. Consequently, respondent corporation was assessed deficiency income
taxes in the amount of P2,635, 141.42. The latter filed a motion for reconsideration but the
same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the
appeal was dismissed
ISSUE: W/N the subject media advertising expense for Tang incurred by respondent
corporation was an ordinary and necessary expense fully deductible under the National Internal
Revenue Code (NIRC)
HELD:
We find the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible
under then Section 29 (a) (1) (A) of the NIRC.
Accordingly, we find that the Court of Appeals committed reversible error when it declared the
subject media advertising expense to be deductible as an ordinary and necessary expense on
the ground that it has not been established that the item being claimed as deduction is
excessive. It is not incumbent upon the taxing authority to prove that the amount of items being
claimed is unreasonable. The burden of proof to establish the validity of claimed deductions is
on the taxpayer.2[14] In the present case, that burden was not discharged satisfactorily.
60CIR v. Lednicky
GR L-18169, L-18286, L-21434
July 31, 1964
2

Facts:
Spouses VE and Maria Valero Lednicky are American citizens residing in the Philippines, and
have derived all their income from Philippine sources since 1947. In 1955, the spouses filed with
the US Internal Revenue agent in Manila their Federal income tax return for 1947, 1951 to 1954
on income from Philippine sources. From 1956 to 1958, they filed their domesic income tax
returns in compliance with local laws. They amended their tax returns in 1959 to include their
taxes paid to the US Federal Government, interests, and exchange and bank charges. They
filed their claims for refund.
Issue:
Whether income tax paid to foreign governments can be deducted from the gross income or as
a tax credit.
Held:
The laws intent is that the right to deduct income taxes paid to foreign government from the
taxpayers gross income is given only as an alternative or substitute to his right to claim a tax
credit for sich foreign income taxes; so that unless the alien resident has a right to claim such
tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his
gross income. The prupose of the law is to prevent the taxpayer from claiming twice the benefits
of his payment of foreign taxes, by deduction from gross income and by tax credit. To allow an
alien resident to deduct from his gross income whatever taxes he pays to his own government
amounts to confer on the latter power to reduce the tax income of the Philippine Government.
Such result is incompatible with the status of the Philippines as an independent and sovereign
state. Any relief from the alleged double taxation should come from the United States, since its
right to burden the taxpayer is solely predicated on the taxpayers citizenship, without
contributing to the production of the wealth that is being taxed.
61CIR v. Central Luzon Drug Corp.
G.R. No. 148512
June 26, 2006
FACTS:
Respondent is a domestic corporation primarily engaged in retailing of medicines and
other pharmaceutical products. In 1996, it operated six (6) drugstores under the
business name and style Mercury Drug. From January to December 1996, respondent
granted twenty (20%) percent sales discount to qualified senior citizens on their
purchases of medicines pursuant to Republic Act No. [R.A.] 7432 and its Implementing
Rules and Regulations. For the said period, the amount allegedly representing the 20%
sales discount granted by respondent to qualified senior citizens totaled P904,769.00.
On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996
declaring therein that it incurred net losses from its operations.
On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the
amount of P904,769.00 allegedly arising from the 20% sales discount granted by
respondent to qualified senior citizens in compliance with [R.A.] 7432. Unable to obtain
affirmative response from petitioner, respondent elevated its claim to the Court of Tax
Appeals [(CTA or Tax Court)] via a Petition for Review.

ISSUE: Whether respondent may claim the 20% sales discount as a tax credit instead of
as a deduction from gross income or gross sales
HELD:
Section 4a) of RA 7432 grants to senior citizens the privilege of obtaining a 20 percent
discount on their purchase of medicine from any private establishment in the country.
The latter may then claim the cost of the discount as a tax credit. But can such credit be
claimed, even though an establishment operates at a loss.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20
percent discount deductible from gross income for income tax purposes, or from gross
sales for VAT or other percentage tax purposes. In effect, the tax credit benefit under RA
7432 is related to a sales discount. This contrived definition is improper, considering that
the latter has to be deducted from gross sales in order to compute the gross income in
the income statement and cannot be deducted again, even for purposes of computing
the income tax.
62Philex Mining v. CIR
GR No. 125704
August 28, 1998
FACTS:
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals affirming the Court of
Tax Appeals decision ordering it to pay the amount of P110.7 M as excise tax liability for the
period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from
1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977. Philex protested
the demand for payment of the tax liabilities stating that it has pending claims for VAT input
credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P120 M plus
interest. Therefore these claims for tax credit/refund should be applied against the tax liabilities.
ISSUE: Can there be an off-setting between the tax liabilities vis-a-vis claims of tax refund of the
petitioner?
HELD:
No. Philex's claim is an outright disregard of the basic principle in tax law that taxes are the
lifeblood of the government and so should be collected without unnecessary hindrance.
Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection
system. Too simplistic, it finds no support in law or in jurisprudence. Philex cannot be allowed to
refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or
credit against the government which has not yet been granted.Taxes cannot be subject to
compensation for the simple reason that the government and the taxpayer are not creditors and
debtors of each other.
63Basilan Estates Inc. v. CIR
G.R. No. L-22492
September 5, 1967
FACTS:

A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with principal
offices in Basilan City, filed on March 24, 1954 its income tax returns for 1953 and paid an
income tax of P8,028. On February 26, 1959, the Commissioner of Internal Revenue, per
examiners' report of February 19, 1959, assessed Basilan Estates, Inc., a deficiency income tax
of P3,912 for 1953 and P86,876.85 as 25% surtax on unreasonably accumulated profits as of
1953 pursuant to Section 25 of the Tax Code. On non-payment of the assessed amount, a
warrant of distraint and levy was issued but the same was not executed because Basilan
Estates, Inc. succeeded in getting the Deputy Commissioner of Internal Revenue to order the
Director of the district in Zamboanga City to hold execution and maintain constructive embargo
instead. Because of its refusal to waive the period of prescription, the corporation's request for
reinvestigation was not given due course, and on December 2, 1960, notice was served the
corporation that the warrant of distraint and levy would be executed.
On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals a petition for
review of the Commissioner's assessmen
ISSUE: Was the disallowance of items claimed as deductible proper?
HELD:
Upon investigation and examination of taxpayer's books and papers, the Commissioner of
Internal Revenue found that the reappraised assets depreciated in 1953 were the same ones
upon which depreciation was claimed in 1952. And for the year 1952, the Commissioner had
already determined, with taxpayer's concurrence, the depreciation allowable on said assets to
be P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer. Hence, the
Commissioner pegged the deductible depreciation for 1953 on the same old assets at
P36,842.04 and disallowed the excess thereof in the amount of P10,500.49.
64Silverio v. Republic of the Philippines
GR. No. 174689
October 22, 2007
FACTS:
On November 26, 2002, Silverio field a petition for the change of his first name Rommel
Jacinto to Mely and his sex from male to female in his birth certificate in the RTC of Manila,
Branch 8, for reason of his sex reassignment. He alleged that he is a male transsexual, he is
anatomically male but thinks and acts like a female. The Regional Trial Court ruled in favor of
him, explaining that it is consonance with the principle of justice and equality.
The Republic, through the OSG, filed a petition for certiorari in the Court of Appeals alleging that
there is no law allowing change of name by reason of sex alteration. Petitioner filed a
reconsideration
but
was
denied.
Hence,
this
petition.
ISSUE: W/N change in name and sex in birth certificate are allowed by reason of sex
reassignment.
HELD:

No. A change of name is a privilege and not a right. It may be allowed in cases where the name
is ridiculous, tainted with dishonor, or difficult to pronounce or write; a nickname is habitually
used; or if the change will avoid confusion. The petitioners basis of the change of his name is
that he intends his first name compatible with the sex he thought he transformed himself into
thru surgery. The Court says that his true name does not prejudice him at all, and no law allows
the change of entry in the birth certificate as to sex on the ground of sex reassignment. The
Court denied the petition.
65Delpher Trades Corp. v. IAC
G.R. No. L-69259
January 26, 1988
Facts:
Delfin Pacheco and sister Pelagia were the owners of a parcel of land in Polo (now Valenzuela).
On April 3, 1974, they leased to Construction Components International Inc. the property and
providing for a right of first refusal should it decide to buy the said property.
Construction Components International, Inc. assigned its rights and obligations under the
contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and
consent of Delfin and Pelagia. In 1976, a deed of exchange was executed between lessors
Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the Pachecos
conveyed to the latter the leased property together with another parcel of land also located in
Malinta Estate, Valenzuela for 2,500 shares of stock of defendant corporation with a total value
of P1.5M.
On the ground that it was not given the first option to buy the leased property pursuant to the
proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended
complaint
for
reconveyance
of
the
lot.
Trivia lang: Delpher Trades Corp is owned by the Pacheco Family, managed by the sons and
daughters of Delfin and Pelagia. Their primary defense is that there is no transfer of ownership
because the Pachecos remained in control of the original co-owners. The transfer of ownership,
if anything, was merely in form but not in substance.
Issue: W/N the Deed of Exchange of the properties executed by the Pachecos and the Delpher
Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced
the Hydro Phils right of first refusal over the leased property included in the deed of
exchange? NO
Held:
By their ownership of the 2,500 no par shares of stock, the Pachecos have control of the
corporation. Their equity capital is 55% as against 45% of the other stockholders, who also
belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit
of the Pachecos. What they really did was to invest their properties and change the nature of
their ownership from unincorporated to incorporated form by organizing Delpher Trades
Corporation to take control of their properties and at the same time save on inheritance taxes.
The Deed of Exchange of property between the Pachecos and Delpher Trades Corporation
cannot be considered a contract of sale. There was no transfer of actual ownership interests by

the Pachecos to a third party. The Pacheco family merely changed their ownership from one
form to another. The ownership remained in the same hands. Hence, the private respondent
has no basis for its claim of a light of first refusal under the lease contract.
66Ericsson v. Pasig City
G.R. NO. 176667
November 22, 2007
FACTS:
Ericsson Telecommunications, Inc. (petitioner), a corporation with principal office in
Pasig City, is engaged in the design, engineering, and marketing of telecommunication
facilities/system. In an Assessment Notice dated October 25, 2000 issued by the City Treasurer
of Pasig City, petitioner was assessed a business tax deficiency for the years 1998 and 1999
amounting to P9,466,885.00 and P4,993,682.00, respectively, based on its gross revenues as
reported in its audited financial statements for the years 1997 and 1998. Petitioner filed a
Protest dated December 21, 2000, claiming that the computation of the local business tax
should be based on gross receipts and not on gross revenue.
The City of Pasig (respondent) issued another Notice of Assessment to petitioner on
November 19, 2001, this time based on business tax deficiencies for the years 2000 and 2001,
amounting to P4,665,775.51 and P4,710,242.93, respectively, based on its gross revenues for
the years 1999 and 2000. Again, petitioner filed a Protest on January 21, 2002, reiterating its
position that the local business tax should be based on gross receipts and not gross revenue.
ISSUE: whether the local business tax on contractors should be based on gross receipts or
gross revenues.
HELD:
The imposition of local business tax based on petitioners gross revenue will inevitably
result in the constitutionally proscribed double taxation taxing of the same person twice by the
same jurisdiction for the same thing3[26] inasmuch as petitioners revenue or income for a
taxable year will definitely include its gross receipts already reported during the previous year
and for which local business tax has already been paid.
Thus, respondent committed a palpable error when it assessed petitioners local
business tax based on its gross revenue as reported in its audited financial statements, as
Section 143 of the Local Government Code and Section 22(e) of the Pasig Revenue Code
clearly provide that the tax should be computed based on gross receipts.
67Philam Asset Management, Inc. v. CIR
G.R.156637 and 162004
December 14, 2005
Facts:

Petitioner acts as investment manager of PFI &PBFI. It provides management &technical

services and thus respectively paid for its services. PFI & PBFI withhold the amount of
equivalent to 5% creditable tax regulation. On April 3, 1998, filed ITR with a net loss thus
incurred withholding tax. Petitioner filed for refund from BIR but was unanswered . CTA denied
the petition for review. CA held that to request for either a refund or credit of income tax paid, a
corporation must signify its intention by marking the corresponding box on its annual corporate
adjustment
return.
Issue:

W/N

petitioner

is

entitled

to

refund

of

its

creditible

taxes.

HELD:
Any tax income that is paid in excess of its amount due to the government may be refunded,
provided that a taxpayer properly applies for the refund. One can not get a tax refund and a tax
credit at the same time for the same excess to income taxes paid. Failure to signify ones
intention in Final Assessment Return (FAR) does not mean outright barring of a valid request for
a refund
Requiring that the ITR on the FAR of the succeeding year be presented to the BIR in requesting
a tax refund has no basis in law and jurisprudence. The Tax Code likewise allows the refund of
taxes to taxpayer that claims it in writing within 2 years after payment of the taxes. Technicalities
and legalism should not be misused by the government to keep money not belonging to it, and
thereby enriched itself at the expense of its law-abiding citizens.
68State Land Investment Corp. v. CIR
G.R. 171956
January 18, 2008
FACTS:
Petitioner filed income tax return for 1997 having an accumulated tax credits of
P23,632,959.05 from which 1997 tax was deducted, leaving P13,929,793.51 unutilized.
Petitioner opted to apply this amount as tax credit to the succeeding taxable year 1998. For
1998, petitioner still had an unutilized tax credit after deducting 1998 tax, thus filed for a refund.
CTA ruled that failure of petitioner to present its 1999 corporate annual income tax return shows
that it incurred a net loss thus no tax liability.
ISSUE: W/N petitioner is entitles to the refund representing the excess creditable withholding
tax for 1997.
HELD:
A corporation entitled to a refund of excess creditable withholding tax may either obtain
the refund or credit the amount to the succeeding taxable year. Sec 76 states In case the
corporation is entitled to a refund of the excess estimated quarterly taxes paid, the refundable
amount shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years.
Petitioner filed with BIR its claim for the refund within the two-year statutory limitation.
Both CTA and CA failed to consider that petitioners intention was to apply the tax credit to 1997
to its income tax due for 1998. It was not necessary for petitioner to file it ITR for 1999, thus
requiring ITR of the succeeding year be presented has no basis in law.

This Court held that if a tax payer suffered a net loss in the succeeding year, incurring
no tax liability to which a previous years tax credit could be applied there is no reason for BIR to
withhold the refund that rightfully belongs to the tax payer.