Afisco Insurance Corp. et al. vs.

CA, CTA and CIR

surplus reinsurance treaty with Munich. There are unmistakable

indicators that it is a partnership or an association covered by NIRC.

Facts:
The petitioners are 41 local insurance firms which entered into
Reinsurance Treaties with Munich, a non-resident foreign insurance
corporation. The reinsurance treaties required them to form an
insurance pool or clearing house in order to facilitate the handling
of the business they contracted with Munich. The CIR assessed the
insurance pool deficiency corporate taxes and withholding taxes on
dividends paid on Munich and to the petitioners respectively. The
assessments were protested by the petitioners.
The CA ruled that the insurance pool was a partnership taxable as a
corporation and that the latters collection of premiums on behalf of
its members was taxable income.
The petitioners belie the existence of a partnership because, according
to them, the reinsurers did not share the same risk or solidary liability,
there was no common fund, the executive board of the pool did not
exercise control and management of its funds and the pool was not
engaged in business of reinsurance from which it could have derived
income for itself.
Issues:
a. May the insurance pool be deemed a partnership or an
association that is taxable as a corporation?
b. Should the pools remittances to member companies and to
Munich be taxable as dividends?
Ruling: The pool is taxable as a corporation.
In the present case, the ceding companies entered into a Pool
Agreement or an association that would handle all the insurance
businesses covered under their quota-sharing reinsurance treaty and

a. The pool has a common fund, consisting of money and other

valuables that are deposited in the name and credit of the pool.
b. The pool functions through an executive board which
resembles the BOD of a corporation.
c. Though the pool itself is not a reinsurer, its work is
indispensable, beneficial and economically useful to the
business of the ceding companies and Munich because without
it they would not have received their premiums. Profit motive
or business is therefore the primordial reason for the pools
formation.
The fact that the pool does not retain any profit or income does not
obliterate an antecedent fact that of the pool is being used in the
transaction of business for profit. It is apparent, and petitioners admit
that their association or co-action was indispensable to the transaction
of the business. If together they have conducted business, profit must
have been the object as indeed, profit was earned. Though the profit
was apportioned among the members, this is one a matter of
consequence as it implies that profit actually resulted.
Petitioners' reliance on Pascual v. Commissioner is misplaced, because
the facts obtaining therein are not on all fours with the present case.
In Pascual, there was no unregistered partnership, but merely a coownership which took up only 2 isolated transactions. The CA did not
err in applying Evangelista, which involved a partnership that engaged
in a series of transactions spanning more than 10 years, as in the case
before us.

Pascual v. CIR
FACTS:

Whether the Petitioners should be treated as an

unregistered partnership or a co-ownership for the purposes of
income tax.

Petitioners bought two (2) parcels of land and a year after,

they bought another three (3) parcels of land. Petitioners
subsequently sold the said lots in 1968 and 1970, and realized net
profits. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years. However, the Acting BIR Commissioner
assessed and required Petitioners to pay a total amount of
P107,101.70 as alleged deficiency corporate income taxes for the
years 1968 and 1970.

RULING:

Petitioners protested the said assessment asserting that they

had availed of tax amnesties way back in 1974. In a reply,
respondent Commissioner informed petitioners that in the years
1968 and 1970, petitioners as co-owners in the real estate
transactions formed an unregistered partnership or joint venture
taxable as a corporation under Section 20(b) and its income was
subject to the taxes prescribed under Section 24, both of the
National Internal Revenue Code that the unregistered partnership
was subject to corporate income tax as distinguished from profits
derived from the partnership by them which is subject to individual
income tax; and that the availment of tax amnesty under P.D. No.
23, as amended, by petitioners relieved petitioners of their
individual income tax liabilities but did not relieve them from the tax
liability of the unregistered partnership. Hence, the petitioners were
required to pay the deficiency income tax assessed.

In the present case, there is no evidence that petitioners

entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide the
profits among themselves. The sharing of returns does not in itself
establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. There must
be a clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom
of each party to transfer or assign the whole property. Hence, there
is no adequate basis to support the proposition that they thereby
formed an unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the
gross profits as co- owners and paid their capital gains taxes on their
net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an
unregistered partnership which is thereby liable for corporate
income tax, as the respondent commissioner proposes.

ISSUE:

The Petitioners are simply under the regime of co-ownership

and not under unregistered partnership.
By the contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves
(Art. 1767, Civil Code of the Philippines).

Obillos v. CIR
FACTS:
Petitioners sold the lots they inherited from their father and
derived a total profit of P33,584 for each of them. They treated the
profit as capital gain and paid an income tax thereof. The CIR required
petitioners to pay corporate income tax on their shares, .20% tax fraud
surcharge and 42% accumulated interest. Deficiency tax was assessed
on the theory that they had formed an unregistered partnership or
joint venture.
The Supreme Court, applying Art. 1769 of the Civil Code, said
that the sharing of gross returns does not itself establish a joint
partnership whether or the persons sharing them have a joint or
common right or interest in the property from which the returns are
derived. There must, instead, be an unmistakable intention to form
that partnership or joint venture. A sale of a co-ownership property at
a profit does not necessarily establish that intention.
This is about the tax liability of 4 brothers & sisters who sold 2 parcels
of land which they had acquired from their father. In 1973, Jose Obillos
Sr bought 2 parcels of land from Ortigas & Co & transferred his rights
to his 4 children to enable them to build their residences. In 1974, the
4 children resold the lots to Walled City Securities Corp & earned profit.
CIR assessed the 4 children with corporate income tax. The Supreme
Court, applying Art. 1769 of the Civil Code, said that the sharing of gross
returns does not itself establish a joint partnership whether or the
persons sharing them have a joint or common right or interest in the
property from which the returns are derived. There must, instead, be
an unmistakable intention to form that partnership or joint venture. A
sale of a co-ownership property at a profit does not necessarily
establish that intention.

This is about the tax liability of 4 brothers & sisters who sold 2 parcels
of land which they had acquired from their father. In 1973, Jose Obillos
Sr bought 2 parcels of land from Ortigas & Co & transferred his rights
to his 4 children to enable them to build their residences. In 1974, the
4 children resold the lots to Walled City Securities Corp & earned profit.
CIR assessed the 4 children with corporate income tax.
ISSUE:
Whether or not partnership was formed by the siblings thus be
assessed of the corporate tax.
RULING:
Petitioners were co-owners and to consider them partners
would obliterate the distinction between co-ownership and
partnership. The petitioners were not engaged in any joint venture by
reason of that isolated transaction.
Art 1769 the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have
a joint or common right or interest in any property from which the
returns are derived. There must be an unmistakable intention to form
partnership or joint venture.
It is error to hold that petitioners (Obillos) have formed a
taxable unregistered partnership simply because they contributed in
buying the lots, resold the same & divided the profit among
themselves. They are simply co-owners. They were not engaged in any
joint venture by reason of the isolated transaction. The original
purpose was to divide the lots for residential purposes. The division of
the profit was merely incidental to the dissolution of the co-ownership.

Ona v. CIR
FACTS:
Julia Buales died on March 23, 1944, leaving as heirs her
surviving spouse, Lorenzo T. Oa and her five children
Because three of the heirs, namely Luz, Virginia and Lorenzo,
Jr., all surnamed Oa, were still minors when the project of partition
was approved, Lorenzo T. Oa, their father and administrator of the
estate, filed a petition in Civil Case No. 9637 of the Court of First
Instance of Manila for appointment as guardian of said minors. On
November 14, 1949, the Court appointed him guardian of the persons
and property of the aforenamed minors.
The project of partition shows that the heirs have undivided
one-half (1/2) interest in ten parcels of land with a total assessed value
of P87,860.00, six houses with a total assessed value of P17,590.00 and
an undetermined amount to be collected from the War Damage
Commission.
Although the project of partition was approved by the Court on
May 16, 1949, no attempt was made to divide the properties therein
listed. Instead, the properties remained under the management of
Lorenzo T. Oa who used said properties in business by leasing or
selling them and investing the income derived therefrom and the
proceeds from the sales thereof in real properties and securities. As a
result, petitioners' properties and investments gradually increased
from P105,450.00 in 1949 to P480,005.20 in 1956.
From said investments and properties petitioners derived such
incomes as profits from installment sales of subdivided lots, profits
from sales of stocks, dividends, rentals and interests The said incomes
are recorded in the books of account kept by Lorenzo T. Oa, where
the corresponding shares of the petitioners in the net income for the
year are also known

On the basis of the foregoing facts, respondent (Commissioner

of Internal Revenue) decided that petitioners formed an unregistered
partnership and therefore, subject to the corporate income tax.
ISSUE:
Whether the petitioners formed an unregistered partnership
HELD:
Yes, the petitioners formed an unregistered
partnership.
The Supreme Court held that that instead of actually
distributing the estate of the deceased among themselves pursuant to
the project of partition approved in 1949, "the properties remained
under the management of Lorenzo T. Oa who used said properties in
business by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real properties
and securities. It is thus incontrovertible that petitioners did not,
contrary to their contention, merely limit themselves to holding the
properties inherited by them. Indeed, it is admitted that during the
material years herein involved, some of the said properties were sold
at considerable profit, and that with said profit, petitioners engaged,
thru Lorenzo T. Oa, in the purchase and sale of corporate securities.
It is likewise admitted that all the profits from these ventures were
divided among petitioners proportionately in accordance with their
respective shares in the inheritance.
As already indicated, for tax purposes, the co-ownership of inherited
properties is automatically converted into an unregistered partnership
the moment the said common properties and/or the incomes derived
therefrom are used as a common fund with intent to produce profits
for the heirs in proportion to their respective shares in the inheritance
as determined in a project partition either duly executed in an
extrajudicial settlement or approved by the court in the corresponding
testate or intestate proceeding.

Madrigal v. Rafferty
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 one-half 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.

Fisher v. Trinidad
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.

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 the property. 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 than 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.

Held:
No. Generally speaking, stock dividends represent
undistributed increase in the capital of corporations or firms,
joint stock 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 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 dividend has 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 the corporation. 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 or individual 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 the property 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 the value 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 or corporation for
services, interest, or profit from investments. We do not believe
that the Legislature intended that a mere increase in the value 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 the corporation, 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 the dividend is declared and
paid, the corporate profits still belong to the corporation, 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 stock dividends, 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 the corporation. If the holder of the stock dividend is
required to pay an income 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.

Limpan Investment Corporation v. CIR

Facts:
BIR assessed deficiency taxes on Limpan Corp,
a company that leases real property, for under
declaring its rental income for years 1956-57 by
around P20K and P81K respectively. Petitioner
appeals on the ground that portions of these under
declared rents are yet to be collected by the previous
owners and turned over or received by the
corporation. Petitioner cited that some rents were
deposited with the court, such that the corporation
does not have actual nor constructive control over
them.
The sole witness for the petitioner, Solis
(Corporate Secretary-Treasurer) admitted to some
undeclared rents in 1956 and1957, and that some
balances were not collected by the corporation in
1956 because the lessees refused to recognize and
pay rent to the new owners and that the
corporations president Isabelo Lim collected some
rent and reported it in his personal income
statement, but did not turn over the rent to the
corporation. He also cites lack of actual or

constructive control over rents deposited with the

court.
ISSUE:
WON the BIR was correct in assessing
deficiency taxes against Limpan Corp. for undeclared
rental income
HELD:
Yes. Petitioner admitted that it indeed had
undeclared income (although only a part and not the
full amount assessed by BIR). Thus, it has become
incumbent upon them to prove their excuses by clear
and convincing evidence, which it has failed to do.
With regard to 1957 rents deposited with the
court, and withdrawn only in 1958, the court viewed
the corporation as having constructively received
said rents. The non-collection was the petitioners
fault since it refused to refuse to accept the rent, and
not due to non-payment of lessees. Hence, although
the corporation did not actually receive the rent, it is
deemed to have constructively received them.

Conwi v. CTA
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-to-peso conversion based on the floating
rate under BIR Ruling No. 70-027. In 1973, petitioners filed amended
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
reporting and 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 orits

equivalent.
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.

Commissioner v. Glenshaw Glass Co.

FACTS:

HELD:

In a case between Glenshaw Glass Co.

manufacturer of glass bottles and containers, and
Hartford-Empire Company, manufacturer of
machinery of a character used by Glenshaw, Hartford
paid Glenshaw $800K as settlement. Out of this
amount, $325K represented payment for exemplary
damages for fraud and treble damages for injury to
its business by reason of Hartfords violation of
federal antitrust laws. However, this portion was not
reported as income for the tax year involved. The
Commissioner determined a deficiency, claiming as
taxable the whole amount less deductible legal fees.

YES. Under Sec 22, gross income includes gain,

profits, and income derived from salaries, wages or
compensation for personal service of whatever
kind and in whatever form paid or from professions,
vocations, trades, businesses, commerce or sales, or
dealings in property, whether real or personal or
gains or profits and income derived from any source
whatever Through this catch-all provision,
Congress applied no limitations as to the source of
neither taxable receipts nor restrictive labels as to
their nature and intended to tax all gains except
those specifically exempted. The mere fact that the
payments were extracted from wrongdoers as
punishment for unlawful conduct cannot detract
from their character as taxable income to the
recipients.

ISSUE:
Whether money received as exemplary
damages for fraud or as the punitive 2/3 portion of a
treble damage antitrust recovery must be reported
by a taxpayer as gross income under Sec 22 of
Internal Revenue Code of 1939

Murphy v. IRS
Murphy had sued to recover income taxes that she
paid on the compensatory damages for emotional distress
and loss of reputation that she was awarded in an action
against her former employer under whistle-blower statutes
for reporting environmental hazards on her former
employers property to state authorities. Murphy had
claimed both physical and emotional-distress damages as a
result of her former employers retaliation and
mistreatment.
In a prior administrative proceeding, Murphy had
been awarded compensatory damages of $70,000, of which
$45,000 was for emotional distress or mental anguish and
$ 25,000 was for injury to professional reputation. Murphy
reported the $70,000 award as part of her gross income
and paid $20,665 in Federal income taxes based upon the
award.
Section 104(a)(2) of the Internal Revenue
Code excludes, from gross income, amounts "received . . . on
account of personal physical injuries." The statute provides
that for purposes of that exclusion, "emotional distress shall
not be treated as a physical injury or physical sickness."
Based on that provision, Murphy sought a refund of the full
amount of tax, arguing that the award should be exempt
from taxation both because the award was in fact to
compensate for physical personal injuries and because the

award was not income within the meaning of the Sixteenth

Amendment.
Interpreting Section 104(a)(2), the D.C. Circuit first
held in August 2006 that the damages at issue did not fall
within the scope of the statute because the damages were
not in fact to compensate for personal physical injuries,
and thus could not be excluded from gross income under
that provision.
The D.C. Circuit next analyzed whether Section
104(a)(2) is constitutional, relying upon language
from Commissioner v. Glenshaw Glass Co. to the effect that,
under the Sixteenth Amendment, Congress may tax all
gains or accessions to wealth. Murphy argued that her
award was neither a gain nor an accession to wealth because
it compensated her for nonphysical injuries, and was thus
effectively a restoration of human capital.
Recognizing that the Supreme Court has long held that
a restoration of capital [i]s not income, and thus is not
taxable, and that personal injury recoveries have
traditionally been considered nontaxable on the theory that
they roughly correspond to a return of capital, the D.C.
Circuit accepted Murphys argument in its August 2006
decision. The D.C. Circuit reasoned that Murphys award for
emotional distress or loss of reputation is not taxable
because her damages were awarded to make Murphy
emotionally and reputationally whole and not to
compensate her for lost wages or taxable earnings of any
kind. The D.C. Circuit also explained that a 1918 opinion of

the Attorney General stating that proceeds from an accident

insurance policy were not taxable income and a 1922 IRS
ruling that damages based on loss of reputation were not
taxable income, both issued relatively near the Sixteenth
Amendments ratification in 1913, support its ruling. The
D.C. Circuit thus concluded that the framers of the
Sixteenth Amendment would not have understood
compensation for a personal injury including a nonphysical
injury to be income. Murphys position was that her award
constituted only monies that made her whole and, in
effect, was a return of her human capital.

HELD:
The Court ruled:
(1) That the taxpayer's compensation was received on
account of a non-physical injury or sickness;
(2) That gross income under section 61 of the Internal
Revenue Code does include compensatory damages for nonphysical injuries, even if the award is not an "accession to
wealth,"
(3) that the income tax imposed on an award for nonphysical injuries is an indirect tax, regardless of whether the
recovery is restoration of "human capital," and therefore the
tax does not violate the constitutional requirement of Article

I, section 9, that capitations or other direct taxes must be laid

among the states only in proportion to the population;
(4) that the income tax imposed on an award for nonphysical injuries does not violate the constitutional
requirement of Article I, section 8, that all duties, imposts
and excises be uniform throughout the United States;
(5) That under the doctrine of sovereign immunity, the
Internal Revenue Service may not be sued in its own name.
The Court stated: "[a]lthough the 'Congress cannot
make a thing income which is not so in fact,' [ . . . ] it
can label a thing income and tax it, so long as it acts within
its constitutional authority, which includes not only the
Sixteenth Amendment but also Article I, Sections 8 and 9."
The court ruled that Ms. Murphy was not entitled to the tax
refund she claimed, and that the personal injury award she
received was "within the reach of the congressional power
to tax under Article I, Section 8 of the Constitution" -- even if
the award was "not income within the meaning of the
Sixteenth Amendment".

Old Colony Trust Co. v. CIR

Issue. Were the taxes paid by the company additional

income of Wood?

Facts:
In 1916, the American Woolen Company adopted
a resolution which provided that the company would pay
all taxes due on the salaries of the company's officers. It
calculated the employees' tax liabilities based on a gross
income that omitted, or excluded, the amount of the
income taxes themselves.
In 1925, the Bureau of Internal Revenue assessed
a deficiency for the amount of taxes paid on behalf of the
company's president, William Madison Wood, arguing
that his $681,169.88 tax payment had wrongly been
excluded from his gross income in 1919, and that his
$351,179.27 tax payment had wrongly been excluded
from his gross income in 1920. Old Colony Trust Co., as
the executors of Wood's estate, filed suit in the District
Court for a refund, then appealed to the Board of Tax
Appeals (the predecessor to the United States Tax
Court).
The petitioners then appealed the Board's decision
to the United States Court of Appeals for the First Circuit.

Held:
The payment of Mr. Wood's taxes by his employer
constituted additional taxable income to him for the
years in question. The fact that a person induced or
permitted a third party from paying income taxes on his
behalf does not excuse him from filing a tax return.
Furthermore, "The discharge by a third person of an
obligation to him is equivalent to receipt by the person
taxed."
Thus, the company's payment of Wood's tax bill
was the same as giving him extra income, regardless of
the mode of payment. Nor could the payment of taxes
of Wood's behalf constitute a gift in the legal sense,
because it was made in consideration of his services to
the company, thus making it part of his compensation
package. (This case did not change the general rule that
gifts are not includable in gross income for the purposes
of U.S. Federal income taxation, while some gifts but not
all gifts from an employer to an employee are taxable to
the employee.

Helvering v. Bruun
Facts: Bruun repossessed land from a tenant who had defaulted in the
eighteenth year of a 99-year lease. During the course of the lease, the
tenant had torn down an old building (in which the landlords adjusted
basis was now $12,811.43) and built a new one (whose value was now
$64,245.68). The lease had specified that the landlord was not required
to compensate the tenant for these improvements.
Thus, the government argued that upon repossession the landlord
realized a gain of $51,434.25. The landlord argued that there was no
realization of the property because no transaction had occurred, and
because the improvement of the property that created the gain was
not "severable" from the landlord's original capital.
Issue: WON a landlord realize a taxable gain when he repossess
property improved by a tenant.
Held:
The improvements, the Court observed, were received by the
taxpayer "as a result of a business transaction," namely, the leasing of
the taxpayer's land. It was not necessary to the recognition of gain that
the improvements be severable from the land; all that had to be shown
was that the taxpayer had acquired valuable assets from his lease in
exchange for the use of his property. The medium of exchange
whether cash or kind, and whether separately disposable or "affixed"-was immaterial as far as the realization criterion was concerned. In
effect, the improvements represented rent, or rather a payment in lieu
of rent, which was taxable to the landlord regardless of the form in
which it was received.
"Severance" is not necessary for realization:
"It is not necessary to recognition of taxable gain that he should be able
to sever the improvement begetting the gain from his original capital.

If that were necessary, no income could arise from the exchange of

property, whereas such gain has always been recognized as realized
taxable gain."
The Court added that, while not all economic gain is "realized"
for taxation purposes, realization does not require that the economic
gain be in "cash derived from the sale of an asset". Realization can also
arise from property exchange; relief of indebtedness; or other
transactions yielding profite.g. by receiving an asset with enhanced
value in a transaction, even where severance does not occur (i.e. even
where "the gain is a portion of the value of property received by the
taxpayer in the transaction").

NOTE:

Congress nullified Bruun by enacting 109 and 1019 of

the Internal Revenue Code:
109 excludes, from a lessor's income, the value of leasehold
improvements realized on termination of a lease.
1019 then denies the lessor a basis for the property so
excluded.
These provisions overrule the proposition announced in "Bruun," that
repossession of an asset with an enhanced value from a transaction
with another party is gross income.
The aim of 109-1019 was to relieve lessorssuddenly confronted
with large tax obligationsof the need to raise cash in a hurry, at a
time (the 1930s) when the real estate market was scraping bottom. An
inadvertent side effect of the means chosenpermitting current
income to be deferred to later periodwas to reduce the lessor's tax
obligation absolutely, by postponing his realization of any
improvements to the sale of the property.

CIR v. CA (JANUARY 22, 1999)

Facts:

Sometime in the 1930s, Don Andres Soriano, a citizen and

resident of the United States, formed the corporation A. Soriano
Y Cia, predecessor of ANSCOR with a 1,000,000.00 capitalization
divided into 10,000 common shares at a par value of P100/share.
ANSCOR is wholly owned and controlled by the family of Don
Andres, who are all non-resident aliens. In 1937, Don Andres
subscribed to 4,963 shares of the 5,000 shares originally issued.
On September 12, 1945, ANSCORs authorized capital
stock was increased to P2,500,000.00 divided into 25,000
common shares with the same par value. Of the additional 15,000
shares, only 10,000 was issued which were all subscribed by Don
Andres, after the other stockholders waived in favor of the
former their pre-emptive rights to subscribe to the new issues.
This increased his subscription to 14,963 common shares. A
month later, Don Andres transferred 1,250 shares each to his two
sons, Jose and Andres Jr., as their initial investments in ANSCOR.
Both
sons
are
foreigners.
By 1947, ANSCOR declared stock dividends. Other
stock dividend declarations were made between 1949 and
December 20, 1963. On December 30, 1964 Don Andres died. As
of that date, the records revealed that he has a total
shareholdings of 185,154 shares. 50,495 of which are original

issues and the balance of 134,659 shares as stock

dividend declarations. Correspondingly, one-half of that
shareholdings or 92,577 shares were transferred to his wife, Doa
Carmen Soriano, as her conjugal share. The offer half formed part
of
his
estate.
A day after Don Andres died, ANSCOR increased its capital
stock to P20M and in 1966 further increased it to P30M. In the
same year, stock dividends worth 46,290 and 46,287 shares were
respectively received by the Don Andres estate and Doa Carmen
from ANSCOR. Hence, increasing their accumulated
shareholdings to 138,867 and 138,864 common shares each.
On December 28, 1967, Doa Carmen requested a ruling
from the United States Internal Revenue Service (IRS), inquiring if
an exchange of common with preferred shares may be
considered as a tax avoidance scheme. By January 2, 1968,
ANSCOR reclassified its existing 300,000 common shares into
150,000
common
and
150,000
preferred
shares.
In a letter-reply dated February 1968, the IRS opined that
the exchange is only a recapitalization scheme and not
tax avoidance. Consequently, Doa Carmen exchanged her whole
138,864 common shares for 138,860 of the preferred shares. The
estate of Don Andres in turn exchanged 11,140 of its common
shares for the remaining 11,140 preferred shares.
In 1973, after examining ANSCORs books of account and

record Revenue examiners issued a report proposing that

ANSCOR be assessed for deficiency withholding tax-at-source, for
the year 1968 and the 2nd quarter of 1969 based on the
transaction of exchange and redemption of stocks. BIR made the
corresponding assessments. ANSCORs subsequent protest on
the assessments was denied in 1983 by petitioner. ANSCOR filed
a petition for review with the CTA, the Tax Court reversed
petitioners ruling. CA affirmed the ruling of the CTA. Hence this
position.

Issue:
Whether or not a person assessed for deficiency withholding tax
under Sec. 53 and 54 of the Tax Code is being held liable in its
capacity
as
a
withholding
agent.

Held:
An income taxpayer covers all persons who derive taxable
income. ANSCOR was assessed by petitioner for
deficiency withholding tax, as such, it is being held liable in its
capacity as a withholding agent and not in its personality as
taxpayer. A withholding agent, A. Soriano Corp. in this case,
cannot be deemed a taxpayer for it to avail of a tax amnesty
under a Presidential decree that condones the collection of all

internal revenue taxes including the increments or penalties on

account of non-payment as well as all civil, criminal,
or administrative liabilities arising from or incident to voluntary
disclosures under the NIRC of previously untaxed income and/or
wealth realized here or abroad by any taxpayer, natural or
juridical. The Court explains: The withholding agent is not a
taxpayer, he is a mere tax collector. Under the withholding
system, however, the agent-payer becomes a payee by fiction of
law. His liability is direct and independent from the taxpayer,
because the income tax is still imposed and due from the latter.
The agent is not liable for the tax as no wealth flowed into him,
he earned no income.

Wise & Co. v. Meer

Facts:
On June 1, 1937, Manila Wine Merchants, Ltd., a Hong Kong
company, was liquidated and its capital stock was distributed to its
stockholders, one of which is the petitioner. As part of its
liquidation, the corporation was sold to Manila Wine Merchants.,
Inc. for Php400, 000. The said earnings, declared as dividends, were
distributed to its stockholders. The Hong Kong Company then paid
the income tax for the entire earnings. As a result of the sale of its
business and assets, a surplus was realized by the Hong Kong
Company after deducting the dividends. This surplus was also
distributed to its stockholders. The Hong Kong Company also paid
the income tax for the said surplus. The petitioners then filed their
respective income tax returns. The respondent Commissioner, then,
made a deficiency assessment charging the individual stockholders
for taxes on the shares distributed to them despite the fact that
income tax was already paid by the Hong Kong Company. The
petitioners paid the assessed amount in protest. The lower courts
ruled in favor of the Commissioner of Internal Revenue, hence, this
action.

Issue(s):
1. Whether the amount received by the petitioners were ordinary
dividends or liquidating dividends.
2. Whether such dividends were taxable or not.
3. Whether or not the profits realized by the non-resident alien
individual appellants constitute income from the Philippines
considering that the sale took place outside the Philippines.
Held:
1. The dividends are liquidating dividends or payments for
surrendered or relinquished stock in a corporation in complete

liquidation. It was stipulated in the deed of sale that the sale and
transfer of the corporation shall take effect on June 1, 1937 while
distribution took place on June 8. They could not consistently
deem all the business and assets of the corporation sold as of
June 1, 1937,
and still say that said corporation, as a going
concern, distributed ordinary dividends to them thereafter.
2. Yes. Petitioners received the said distributions in exchange for
the surrender and relinquishment by them of their stock in the
liquidated corporation. That money in the hands of the
corporation formed a part of its income and was properly taxable
to it under the Income Tax Law. When the corporation was
dissolved in the process of complete liquidation and its
shareholders surrendered their stock to it and it paid the sums in
question to them in exchange, a transaction took place. The
shareholder who received the consideration for the stock earned
received that money as income of his own, which again was
properly taxable to him under the Income Tax Law.
3. The contention of the petitioners that the earnings cannot be
considered as income from the Philippines because the sale was
made outside the Philippines and is not subject to Philippine tax
law is untenable. At the time of the sale, the Hong Kong Company
was engage in its business in the Philippines. Its successor was a
domestic corporation and doing business also in the Philippines.
It must be taken into consideration that the Hong Kong Company
was incorporated for the purpose of carrying business in the
Philippine Islands. Hence, its earnings, profits and assets,
including those from whose proceeds the distribution was made,
had been earned and acquired in the Philippines. It is clear that
the distributions in questions were income from Philippine
sources, hence, taxable under Philippine law.

James v. US
FACTS:
The defendant, Eugene James, was an official in a labor
union who had embezzled more than $738,000 in union funds,
and did not report these amounts on his tax return. He was tried
for tax evasion, and claimed in his defense that embezzled funds
did not constitute taxable income because, like a loan, the
taxpayer was legally obligated to return those funds to their
rightful owner Indeed, James pointed out, the Supreme Court had
previously made such a determination in Commissioner v. Wilcox,
327 U.S. 404 (1946). However, this defense was unavailing in the
trial court, where Eugene James was convicted and sentenced to
three years in prison.
ISSUE:
Whether or not the receipt of embezzled funds constitutes
income taxable to the wrongdoer, even though an obligation to
repay exists. YES
RULING:
The Supreme Court of the US ruled that the receipt of
embezzled funds was includable in the gross income of the
wrongdoer and was taxable to the wrongdoer, even though the
wrongdoer had an obligation to return the funds to the rightful
owner.
If a taxpayer receives income, legally or illegally, without
consensual recognition of obligation to repay, that income is
automatically taxable. The Court noted that the Sixteenth
Amendment did not limit its scope to "lawful" income, a

distinction which had been found in the Revenue Act of 1913. The
removal of this modifier indicated that the framers of the
Sixteenth Amendment had intended no safe harbor for illegal
income.
The Court also ruled, however, that Eugene James could
not be held liable for the willful tax evasion because it is not
possible to willfully violate laws that were not established at the
time of the violation.
Embezzled money is taxable income of the embezzler in
the year of the embezzlement under 22 (a) of the Internal
Revenue Code of 1939, which defines "gross income" as including
"gains or profits and income derived from any source whatever,"
and under 61 (a) of the Internal Revenue Code of 1954, which
defines "gross income" as "all income from whatever source
derived."
The language of 22 (a) of the 1939 Code, "gains or profits
and income derived from any source whatever," and the more
simplified language of 61 (a) of the 1954 Code, "all income from
whatever source derived," have been held to encompass all
"accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion.".
A gain "constitutes taxable income when its recipient has
such control over it that, as a practical matter, he derives readily
realizable economic value from it." Under these broad principles,
we believe that petitioner's contention, that all unlawful gains are
taxable except those resulting from embezzlement, should fail.

CIR v. CA (March 23, 1992)

FACTS:
GCL Retirement Plan is an employees' trust maintained
by the employer, GCL Inc., to provide retirement, pension,
disability and death benefits to its employees. The Plan as
submitted was approved and qualified as exempt from income
tax by Petitioner Commissioner of Internal Revenue in
accordance with Rep. Act No. 4917.
In 1984, Respondent GCL made investments and earned
therefrom interest income from which was withheld the fifteen
per centum (15%) final withholding tax imposed by Pres.
Decree No. 1959, 2 which took effect on 15 October 1984.
GCL filed with Petitioner a claim for refund in the
amounts of P1, 312.66 withheld by Anscor Capital and
Investment Corp., and P2,064.15 by Commercial Bank of
Manila. On 12 February 1985, it filed a second claim for refund
of the amount of P7,925.00 withheld by Anscor, stating in both
letters that it disagreed with the collection of the 15% final
withholding tax from the interest income as it is an entity fully
exempt from income tax as provided under Rep. Act No. 4917
in relation to Section 56 (b) 3 of the Tax Code.

CIR s Contention - the exemption from withholding tax

on interest on bank deposits previously extended by Pres.
Decree No. 1739 if the recipient (individual or corporation) of
the interest income is exempt from income taxation, and the
imposition of the preferential tax rates if the recipient of the
income is enjoying preferential income tax treatment, were
both abolished by Pres. Decree No. 1959. Petitioner thus
submits that the deletion of the exempting and preferential tax
treatment provisions under the old law is a clear manifestation
that the single 15% (now 20%) rate is impossible on all interest
incomes from deposits, deposit substitutes, trust funds and
similar arrangements, regardless of the tax status or character
of the recipients thereof.
In short, petitioner's position is that from 15 October
1984 when Pres. Decree No. 1959 was promulgated,
employees' trusts ceased to be exempt and thereafter became
subject to the final withholding tax. GCL contention - the tax
exempt status of the employees' trusts applies to all kinds of
taxes, including the final withholding tax on interest income.
That exemption, according to GCL, is derived from Section
56(b) and not from Section 21 (d) or 24 (cc) of the Tax Code.
ISSUE: Whether or not GCL is exempted from Income Tax. YES

CIR denied the refund, Petitioner elevated the matter to

CTA. CTA ruled in favor of GCL, holding that employees' trusts
are exempt from the 15% final withholding tax on interest
income and ordering a refund of the tax withheld. CA upheld
the CTA Decision.

RULING:
GCL Plan was qualified as exempt from income tax by
the Commissioner of Internal Revenue in accordance with Rep.
Act No. 4917 approved on 17 June 1967. In so far as employees'
trusts are concerned, the foregoing provision should be taken

in relation to then Section 56(b) (now 53[b]) of the Tax Code,

as amended by Rep. Act No. 1983, supra, which took effect on
22 June 1957.
The tax-exemption privilege of employees' trusts, as
distinguished from any other kind of property held in trust,
springs from the foregoing provision. It is unambiguous.
Manifest therefrom is that the tax law has singled out
employees' trusts for tax exemption.
And rightly so, by virtue of the raison de'etre behind the
creation of employees' trusts. Employees' trusts or benefit
plans normally provide economic assistance to employees
upon the occurrence of certain contingencies, particularly, old
age retirement, death, sickness, or disability. It provides
security against certain hazards to which members of the Plan
may be exposed. It is an independent and additional source of
protection for the working group. What is more, it is
established for their exclusive benefit and for no other
purpose.
The deletion in Pres. Decree No. 1959 of the provisos
regarding tax exemption and preferential tax rates under the
old law, therefore, cannot be deemed to extent to employees'
trusts. Said Decree, being a general law, cannot repeal by
implication a specific provision, Section 56(b) now 53 [b]) in
relation to RA No. 4917 granting exemption from income tax to
employees' trusts.
RA 1983, which accepted employees' trusts in its Section
56 (b) was effective on 22 June 1957 while Rep. Act No. 4917

was enacted on 17 June 1967, long before the issuance of Pres.

Decree No. 1959 on 15 October 1984.
A subsequent statute, general in character as to its
terms and application, is not to be construed as repealing a
special or specific enactment, unless the legislative purpose to
do so is manifested. This is so even if the provisions of the latter
are sufficiently comprehensive to include what was set forth in
the special act (Villegas v. Subido, G.R. No. L-31711, 30
September 1971, 41 SCRA 190).
There can be no denying either that the final
withholding tax is collected from income in respect of which
employees' trusts are declared exempt (Sec. 56 [b], now 53 [b],
Tax Code). The application of the withholdings system to
interest on bank deposits or yield from deposit substitutes is
essentially to maximize and expedite the collection of income
taxes by requiring its payment at the source. If an employees'
trust like the GCL enjoys a tax-exempt status from income, we
see no logic in withholding a certain percentage of that income
which it is not supposed to pay in the first place.

CIR v. CA (October 17, 1991)

FACTS:
Efren Castaneda retired from govt service as
Revenue Attache in the Philippine Embassy, London,
England. Upon retirement, he received benefits such
as the terminal leave pay. The Commissioner of
Internal Revenue withheld P12,557 allegedly
representing that it was tax income. Castaneda filed
for a refund, contending that the cash equivalent of
his terminal leave is exempt from income tax. The
Solicitor General contends that the terminal leave is
based from an employer-employee relationship and
that as part of the services rendered by the
employee, the terminal leave pay is part of the gross
income of the recipient. CTA ruled in favor of
Castaneda and ordered the refund. CA affirmed
decision of CTA. Hence, this petition for review on
certiorari.
ISSUE:
Whether or not terminal leave pay (on occasion
of his compulsory retirement) is subject to
withholding income tax. NO

RULING:
As explained in Borromeo v CSC, the rationale
of the court in holding that terminal leave pays are
subject to income tax is that: . . Commutation of
leave credits, more commonly known as terminal
leave, is applied for by an officer or employee who
retires, resigns or is separated from the service
through no fault of his own. In the exercise of sound
personnel policy, the Government encourages
unused leaves to be accumulated. The Government
recognizes that for most public servants, retirement
pay is always less than generous if not meager and
scrimpy. A modest nest egg which the senior citizen
may look forward to is thus avoided. Terminal leave
payments are given not only at the same time but
also for the same policy considerations governing
retirement benefits. A terminal leave pay is a
retirement benefit which is NOT subject to income
tax. Petition denied.

Re: Request of Atty. Bernardo Zialcita

Facts:
Amounts were claimed by Atty. Bernardo F. Zialcita on
the occasion of his retirement. On 23 August 1990, a
resolution was issued by the Court En Banc stating that the
terminal leave pay of Atty. Zialcita received by virtue of his
compulsory retirement can never be considered a part of his
salary subject to the payment of income tax but falls under
the phrase other benefits received by retiring employees
and workers, within the meaning of Section 1 of PD 220 and
is thus exempt from the payment of income tax. That the
money value of his accrued leave credits is not part of his
salary is buttressed by Section 3 of PD 985, which it makes it
clear that the actual service is the period of time for which
pay has been received, excluding the period covered by
terminal leave.
The Commissioner filed a motion for reconsideration.
The Commissioner of Internal Revenue, as intervenormovant and through the Solicitor General, filed a motion for
clarification and/or reconsideration with this Court.
The Court resolved to deny the motion for
reconsideration and hereby holds that the money value of
the accumulated leave credits of Atty. Bernardo Zialcita are
not taxable for the following reasons: 1) Atty. Zialcita opted
to retire under the provisions of Republic Act 660, which is
incorporated in Commonwealth Act No. 186. Section 28(c) of

the same Act, in turn, provides: (c) Except as herein

otherwise provided, the Government Service Insurance
System, all benefits granted under this Act, and all its forms
and documents required of the members shall be exempt
from all types of taxes, documentary stamps, duties and
contributions, fiscal or municipal, direct or indirect,
established or to be established. 2) The commutation of
leave credits is commonly known as terminal leave.
Terminal leave is applied for by an officer or employee
who retires, resigns or is separated from the service through
no fault of his own. Since terminal leave is applied for by an
officer or employee who has already severed his connection
with his employer and who is no longer working, then it
follows that the terminal leave pay, which is the cash value
of his accumulated leave credits, is no longer compensation
for services rendered. It cannot be viewed as salary.
ISSUES:
Whether or not the retirement benefit of Zialcita is taxable.
NO Whether or not the terminal leave pay is exempt from
tax; as well as other amounts claimed herein. YES
RULING:
1. The retirement benefit is not taxable. In the case of
Atty. Zialcita, he rendered government service from March
13, 1962 up to February 15, 1990. The next day, or on
February 16, 1990, he reached the compulsory retirement

age of 65 years. Upon his compulsory retirement, he is

entitled to the commutation of his accumulated leave credits
to its money value.
Within the purview of the above-mentioned
provisions of the NLRC, compulsory retirement may be
considered as a "cause beyond the control of the said official
or employee". Consequently, the amount that he received
by way of commutation of his accumulated leave credits as
a result of his compulsory retirement, or his terminal leave
pay, fags within the enumerated exclusions from gross
income and is therefore not subject to tax.
The terminal leave pay of Atty. Zialcita may likewise be
viewed as a "retirement gratuity received by government
officials and employees" which is also another exclusion
from gross income as provided for in Section 28(b), 7(f) of
the NLRC. A gratuity is that paid to the beneficiary for past
services rendered purely out of generosity of the giver or
grantor. It is a mere bounty given by the government in
consideration or in recognition of meritorious services and
springs from the appreciation and graciousness of the
government.
When a government employee chooses to go to work
rather than absent himself and consume his leave credits,
there is no doubt that the government is thereby benefited
by the employee's uninterrupted and continuous service. It
is in cognizance of this fact that laws were passed entitling
retiring government employees, among others, to the

commutation of their accumulated leave credits. The

commutation of accumulated leave credits may thus be
considered a retirement gratuity, within the import of
Section 28(b), 7(f) of the NLRC, since it is given only upon
retirement and in consideration of the retiree's meritorious
services.
2. Applying Section 12 (c) of Commonwealth Act 186,
as incorporated into RA 660, and Section 28 (c) of the former
law, the amount received by Atty. Zialcita as a result of the
conversion of unused leave credits, commonly known as
terminal leave, is applied for by an officer or employee who
retires, resigns, or is separated from the service through no
fault of his own.
Since the terminal leave is applied for after the
severance of the employment, terminal pay is no longer
compensation for services rendered. It cannot be viewed as
salary. Further, the terminal leave pay may also be
considered as a retirement gratuity, which is also another
exclusion from gross income as provided for in Section 28 (b),
7 (f) of the Tax Code. The 23 August Resolution (AM 90-6015-SC), however, specifically applies only to employees of
the Judiciary who retire, resign or are separated through no
fault of their own. The resolution cannot be made to apply
to other government employees, absent an actual case or
controversy, as that would be in principle an advisory
opinion.

Intercontinental Broadcasting Corporation v. Amarilla

FACTS:
Petitioner IBC employed the following persons at its
Cebu station: Candido C. Quiones, Jr., Corsini R. Lagahit, as
Studio Technician, Anatolio G. Otadoy, as Collector, and Noemi
Amarilla, as Traffic Clerk. On March 1, 1986, the government
sequestered the station, including its properties, funds and
other assets, and took over its management and operations
from its owner, Roberto Benedicto.
On November 3, 1990, the Presidential Commission on
Good Government (PCGG) and Benedicto executed a
Compromise Agreement, where Benedicto transferred and
assigned all his rights, shares and interests in petitioner station
to the government.
The four (4) employees retired from the company and
received, on staggered basis, their retirement benefits under
the 1993 Collective Bargaining Agreement (CBA) between
petitioner and the bargaining unit of its employees. In the
meantime, a P1,500.00 salary increase was given to all
employees of the company, current and retired, effective July
1994. However, when the four retirees demanded theirs,
petitioner refused and instead informed them via a letter that
their differentials would be used to offset the tax due on their
retirement benefits in accordance with the National Internal
Revenue Code (NIRC).

The four retirees filed separate complaints which

averred that the retirement benefits are exempt from income
tax under Article 32 of the NIRC.
For its part, petitioner averred that under Section 21 of
the NIRC, the retirement benefits received by employees from
their employers constitute taxable income. While retirement
benefits are exempt from taxes under Section 28(b) of said
Code, the law requires that such benefits received should be in
accord with a reasonable retirement plan duly registered with
the Bureau of Internal Revenue (BIR). Since its retirement plan
in the 1993 CBA was not approved by the BIR, complainants
were liable for income tax on their retirement benefits.
In reply, complainants averred that the claims for the
retirement salary differentials of Quiones and Otadoy had not
prescribed because the said CBA was implemented only in
1997. They pointed out that they filed their claims with
petitioner on April 3, 1999. They maintained that they availed
of the optional retirement because of petitioners inducement
that there would be no tax deductions.
Petitioner countered that under Sections 72 and 73 of
the NIRC, it is obliged to deduct and withhold taxes determined
in accordance with the rules and regulations to be prepared by
the Secretary of Finance. The NLRC held that the benefits of the
retirement plan under the CBAs between petitioner and its
union members were subject to tax as the scheme was not
approved by the BIR.
However, it had also been the practice of petitioner to
give retiring employees their retirement pay without tax

deductions and there was no justifiable reason for the

respondent to deviate from such practice.
ISSUES:
Whether the retirement benefits of respondents are part of
their gross income. YES
Whether petitioner is estopped from reneging on its
agreement with respondent to pay for the taxes on said
retirement benefits. YES
RULING:
1. Yes. Under the NIRC, the retirement benefits of
respondents are part of their gross income subject to taxes.
Thus, for the retirement benefits to be exempt from the
withholding tax, the taxpayer is burdened to prove the
concurrence of the following elements: (1) a reasonable
private benefit plan is maintained by the employer; (2) the
retiring official or employee has been in the service of the same
employer for at least 10 years; (3) the retiring official or
employee is not less than 50 years of age at the time of his
retirement; and (4) the benefit had been availed of only once.
Respondents were qualified to retire optionally from
their employment with petitioner. However, there is no
evidence on record that the 1993 CBA had been approved or
was ever presented to the BIR; hence, the retirement benefits
of respondents are taxable. Under Section 80 of the NIRC,
petitioner, as employer, was obliged to withhold the taxes on
said benefits and remit the same to the BIR. However, the
Court agrees with respondents contention that petitioner did
not withhold the taxes due on their retirement benefits

because it had obliged itself to pay the taxes due thereon. This
was done to induce respondents to agree to avail of the
optional retirement scheme.
2. Yes. Petitioner is estopped from doing so. It must be
stressed that the parties are free to enter into any contract
stipulation provided it is not illegal or contrary to public morals.
When such agreement freely and voluntarily entered into turns
out to be advantageous to a party, the courts cannot rescue
the other party without violating the constitutional right to
contract.
Courts are not authorized to extricate the parties from
the consequences of their acts. An agreement to pay the taxes
on the retirement benefits as an incentive to prospective
retirees and for them to avail of the optional retirement
scheme is not contrary to law or to public morals. Petitioner
had agreed to shoulder such taxes to entice them to voluntarily
retire early, on its belief that this would prove advantageous to
it.
Respondents agreed and relied on the commitment of
petitioner. For petitioner to renege on its contract with
respondents simply because its new management had found
the same disadvantageous would amount to a breach of
contract. The well-entrenched rule is that estoppel may arise
from a making of a promise if it was intended that the promise
should be relied upon and, in fact, was relied upon, and if a
refusal to sanction the perpetration of fraud would result to
injustice. The mere omission by the promisor to do whatever
he promises to do is sufficient forbearance to give rise to a
promissory estoppel.

CIR v. Mitsubishi Metal Corporation

Facts:
Atlas Consolidated Mining and Development
Corporation, a domestic corporation, entered into a Loan and
Sales Contract with Mitsubishi Metal Corporation, a Japanese
corporation licensed to engage in business in the Philippines.
To be able to extend the loan to Atlas, Mitsubishi
entered into another loan agreement with Export-Import Bank
(Eximbank), a financing institution owned, controlled, and
financed by the Japanese government. After making interest
payments to Mitsubishi, with the corresponding 15% tax
thereon remitted to the Government of the Philippines, Altas
claimed for tax credit with the Commissioner of Internal
Revenue based on Section 29(b)(7) (A) of the National Internal
Revenue Code, stating that since Eximbank, and not Mitsubishi,
is where the money for the loan originated from Eximbank,
then it should be exempt from paying taxes on its loan thereon.
ISSUE: Whether or not the interest income from the loans
extended to Atlas by Mitsubishi is excludible from gross income
taxation. NO
RULING:
Mitsubishi secured the loan from Eximbank in its own
independent capacity as a private entity and not as a conduit
of Eximbank. Therefore, what the subject of the 15%
withholding tax is not the interest income paid by Mitsubishi to
Eximbank, but the interest income earned by Mitsubishi from

the loan to Atlas. Thus, it does not come within the ambit of
Section 29(b) (7)(A), and it is not exempt from the payment of
taxes. It is too settled a rule in this jurisdiction, as to dispense
with the need for citations, that laws granting exemption from
tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The burden of proof rests upon the
party claiming exemption to prove that it is in fact covered by
the exemption so claimed, which onus petitioners have failed
to discharge. Significantly, private respondents are not even
among the entities which, under Section 29 (b) (7) (A) of the
tax code, are entitled to exemption and which should
indispensably be the party in interest in this case. Definitely,
the taxability of a party cannot be blandly glossed over on the
basis of a supposed "broad, pragmatic analysis" alone without
substantial supportive evidence, lest governmental operations
suffer due to diminution of much needed funds. Nor can we
close this discussion without taking cognizance of petitioner's
warning, of pervasive relevance at this time, that while
international comity is invoked in this case on the nebulous
representation that the funds involved in the loans are those
of a foreign government, scrupulous care must be taken to
avoid opening the floodgates to the violation of our tax laws.
Otherwise, the mere expedient of having a Philippine
corporation enter into a contract for loans or other domestic
securities with private foreign entities, which in turn will
negotiate independently with their governments, could be
availed of to take advantage of the tax exemption law under
discussion.

CIR v. Marubeni Corp.

Facts:
Marubeni Corporation is a foreign corporation organized and
existing under the laws of Japan. It is engaged in import and export
trading, financing, and the construction business. It is duly registered in
the Philippines and has a branch office in Manila
In 1985, the CIR examined the books of accounts of Marubeni and
found it to have undeclared income from two contracts in the Philippines,
both of which were completed in 1984. One contract was with the
National Development Company for the construction of a wharf complex
in Leyte, and the other contract was with the Philippine Phosphate
Fertilizer Corp. (Philphos) for the construction of an ammonia storage
complex, also in Leyte.
CIR assessed Marubeni for deficiency income, branch profit
remittance, contractors and commercial brokers taxes. Marubeni filed
two petitions with the CTA questioning the assessment.
Earlier, E.O. 41 was issued, declaring a one-time amnesty for
unpaid income taxes for the years 1981 to 1985. It was provided in the
same E.O., however, that those with income tax cases already filed in
Court was of the effectivity hereofmay not avail themselves of the tax
amnesty herein granted.
E.O. 64 was subsequently issued amending E.O. 41 and extending
its coverage to business, estate and donors taxes.
CTA granted the petitions of Marubeni because the latter had
properly availed of the tax amnesty under E.O. Nos. 41 and 64. CA
affirmed the CTA decisions
Issue:
WON Marubeni is liable for income and branch profit remittance tax.
WON Marubeni is liable for contractors tax.
Held:
1.) NO, Marubeni is not liable for any of the taxes assessed by CIR.
As to the income and branch profit remittance tax (branch profit
remittance also falls under income tax), Marubeni had properly availed of

the tax amnesty provided by E.O. 41. It is not one of the taxpayers
disqualified from availing of the amnesty for income tax since it filed the
cases with CTA in Sept.26,1986, while E.O. 41 took effect in Aug.22,1986.
This means when E.O. 41 became effective, the CTA cases had not yet
been filed in court.
2.) NO. As to the contractors tax, however, this falls under
business taxes covered by E.O. 64, which took effect on Nov.17,
1986. This E.O. contained the same disqualification clause as mentioned
in E.O. 41. Marubeni filed the cases with CTA in Sept.26, prior to the
effectivity of E.O.64. Thus it was already disqualified from availing of the
tax amnesty under the said E.O.
It is Marubenis argument, however that even if it had not availed
of the amnesty under the two executive orders, it isstill not liable for the
deficiency contractors tax because the income from the projects came
from the Offshore Portion of the contracts. The two contracts were
divided into two parts, i.e., the Onshore Portion and the Offshore Portion.
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.
The income derived from the Onshore Portion of the two projects
had been declared for tax purposes and the taxes thereon had already
been paid. It is with regard to the Foreign Offshore Portion of the two
contracts that the assessment liabilities in this case arose.
It is clear that some pieces of equipment and supplies were
completely designed and engineered in Japan. The other construction
supplies listed under the Offshore Portion were fabricated and
manufactured by sub-contractors in Japan. All services for the design,
fabrication, engineering, and manufacture of the materials and
equipment under the Offshore Portion were made and completed in
Japan. These services were rendered outside the taxing jurisdiction of the
Philippines and are therefore not subject to the contractors tax.

CIR v. BOAC
Facts:
British overseas airways corp. (BOAC) a wholly owned British
Corporation, is engaged in international airlines business. From 1959to
1972, it has no loading rights for traffic purposes in the Philippines but
maintained a general sales agent in the Philippines which was
responsible for selling, BOAC tickets covering passengers and cargoes
the CIR assessed deficiency income taxes against.

a formal claim for the refund of the alleged overpayment.

In October, 1972, Smith Kline received from its international
independent auditors an authenticated certification to the effect that
the Philippine share in the unallocated overhead expenses of the main
office for the year was actually P1.4+M.Thereafter, without awaiting
the action of the Commissioner of Internal Revenue on its claim, Smith
Kline filed a petition for review with the CTA. The CTA ordered the CIR
to refund the overpayment or grant a tax credit to Smith Kline. The
Commissioner appealed to the SC.
HELD:

Issue: WON BOAC is liable for the deficiency of its income tax.
Held:
Yes. The source of income is the property, activity of service
that produces the income. For the source of income to be considered
coming from the Philippines, it is sufficient that the income is derived
from the activity coming from the Philippines. The tax code provides
that for revenue to be taxable, it must constitute income from
Philippine sources. In this case, the sale of tickets is the source of
income. The situs of the source of payments is the Philippines.

Commissioner v. CTA and Smith and Kline

FACTS:
Smith Kline and French Overseas Company, a multinational
pharmaceutical firm domiciled in Philadelphia, Pennsylvania, is
licensed to do business in the Philippines. In its 1971 original ITR, Smith
Kline declared a net taxable income of P1.4M and paid P511k as tax
due. Among the deductions claimed from gross income was P501+k as
its share of the head office overhead expenses. However, in its
amended return filed on March 1, 1973, there was an overpayment of
P324+k arising from under deduction of home office overhead. It made

Where an expense is clearly related to the production of

Philippine-derived income or to Philippine operations (e.g. salaries of
Philippine personnel, rental of office building in the Philippines), that
expense can be deducted from the gross income acquired in the
Philippines
without
resorting
to
apportionment.
The overhead expenses incurred by the parent company in
connection with finance, administration, and research and
development, all of which directly benefit its branches all over the
world, including the Philippines, fall under a different category
however. These are items which cannot be definitely allocated or
identified with the operations of the Philippine branch. For 1971, the
parent company of Smith Kline spent $1,077,739. Under section 37(b)
of the Revenue Code and section 160 of the regulations, Smith Kline
can claim as its deductible share a ratable part of such expenses based
upon the ratio of the local branch's gross income to the total gross
income,
worldwide,
of
the
multinational
corporation.
The weight of evidence bolsters Smith Klines position that the amount
of P1.4+M represents the correct ratable share, the same having been
computed pursuant to section 37(b) and section 160. Therefore, it is
entitled to a refund.

Phil. Guaranty Co., Inc. v. CIR

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

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

Howden & Co. v. CIR

Facts:
In 1950 the Commonwealth Insurance Co., a
domestic corporation, entered into reinsurance contracts
with 32 British insurance companies not engaged in trade or
business in the Philippines, whereby the former agreed to
cede to them a portion of the premiums on insurances on
fire, marine and other risks it has underwritten in the
Philippines.
The reinsurance contracts were prepared and signed
by the foreign reinsurers in England and sent to Manila
where Commonwealth Insurance Co. signed them.
Alexander Howden & Co., Ltd., also a
British corporation, represented the British insurance
companies. Pursuant to the contracts, Commonwealth
Insurance Co remitted P798,297.47 to Alexander Howden &
Co., Ltd., as reinsurance premiums.
In behalf of Alexander Howden & Co., Ltd.,
Commonwealth Insurance Co. filed an income tax return
declaring the sum of P798,297.47, with accrued interest in
the amount of P4,985.77, as Alexander Howden & Co., Ltd.'s
gross income for calendar year 1951. It also paid the
BIR P66,112.00 income tax.

On May 12, 1954, Alexander Howden & Co., Ltd. filed

with the BIR a claim for refund of the P66,112.00, later
reduced toP65,115.00, because it agreed to the payment of
P977.00 as income tax on the P4,985.77 accrued interest.
A ruling of the CIR was invoked, stating that
it exempted from withholding tax reinsurance
premiums received from domestic insurance companies by
foreign insurance companies not authorized to do business
in the Philippines. Subsequently, petitioner instituted an
action in the CFI of Manila for the recovery of the amount
claimed. Tax Court denied the claim
Issue:
WON reinsurance premiums are subject to
withholding tax under Section 54 in relation to Section 53
of the Tax Code.
Held:
Yes. Subsection (b) of Section 53 subjects to
withholding tax the following: interest, dividends, rents,
salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable
annual or periodical gains, profits, and income of any nonresident alien individual not engaged in trade or business
within the Philippines and not having any office or place of
business therein. Section 54, by reference, applies this
provision to foreign corporations not engaged in trade
or business in the Philippines.

Appellants maintain that reinsurance premiums are not

"premiums" at all and that they are not within the scope of
"other fixed or determinable annual or periodical gains,
profits, and income"; that, therefore, they are not items of
income subject to withholding tax.
SC disagrees with the contention. Since Section 53 subjects
to withholding tax various specified income, among them,
premiums", the generic connotation of each and every
word or phrase composing the enumeration in Subsection
(b) thereof is income. Perforce, the word "premiums", which
is neither qualified nor defined by the law itself, should mean
income and should include all premiums constituting
income, whether they be insurance or reinsurance
premiums.
Assuming that reinsurance premiums are not within the
word "premiums" in Section 53, still they may be classified
as determinable and periodical income under the same
provision of law.
Section 199 of the Income Tax Regulations defines fixed,
determinable, annual and periodical income:
Income is fixed when it is to be paid in amounts definitely
pre-determined. On the other hand, it is determinable
whenever there is a basis of calculation by which the amount
to be paid may be ascertained. The income need not be paid
annually if it is paid periodically. That the length of time
during which the payments are to be made may be increased
or diminished in accordance with someone's will or with the

happening of an event does not make the payments any the

less determinable or periodical. ...
Reinsurance premiums, therefore, are determinable and
periodical income: determinable, because they can be
calculated accurately on the basis of the reinsurance
contracts; periodical, inasmuch as they were earned and
remitted from time to time.
Appellants' claim for refund, as stated, invoked a ruling of
the CIR cited rulings attempting to show that the prevailing
administrative interpretation of Sections 53 and 54 of
the Tax Code exempted from withholding tax reinsurance
premiums ceded to non-resident foreign insurance
companies. It is asserted that since Sections 53 and 54
were "substantially re-enacted" by Republic Acts 1065
, 1291, 1505, and 2343, when the said administrative rulings
prevailed, the rulings should be given the force of law under
the principle of legislative approval by re-enactment