INCOME AND WITHHOLDING TAXES

CHAPTER III

TAX11.7 Mercury Drug Corp. v CIR | GR 164050

FACTS: Pursuant to RA 7432, petitioner Mercury Drug granted a 20% sales discount to qualified senior citizens on their purchases of medicines. RA 7432 allows a tax credit for sales discounts
granted to senior citizens so petitioner filed with the CIR claims for refund. When the CIR failed to act upon petitioners claims, the latter filed a petition for review with the CTA. The CTA
ordered to grant to petitioner a refund or issue a tax credit certificate. Moreover, the CTA stated that the claim for tax credit must be based on the actual cost of the medicine and not the whole
amount of the 20% SC discount.

On appeal to the CA, petitioner raised as legal issue the basis of the computation of tax credit. CA interpreted the term "cost" as used in Section 4(a) of RA 7432 to mean the acquisition cost of
the medicines sold to senior citizens. Therefore CA sustained the decision of the CTA.

ISSUE: Whether the claim for tax credit should be based on the full amount of the 20% SC discount or the acquisition cost of the merchandise sold?

HELD: The claim for tax credit should be based on the full amount of the 20% SC discount. The Court's rulings in previous similar cases such as in Bicolandia Drug v CIR, Cagayan Valley
Drug v CIR and M.E. Holding v CA operate as stare decisis, wherein the Court construed the term "cost" as referring to the amount of the 20% discount extneded by a private establishment to
senior citizens in their purchase of medicines.

TAX12.7 Maceda v Macaraig GR No 88291, May 31, 1991

FACTS: Commonwealth Act 120 created NAPOCOR as a public corporation to undertake the development of hydraulic power and the production of power from other sources. RA 358 granted
NAPOCOR tax and duty exemption privileges. RA 6395 revised the charter of the NAPOCOR, tasking it to carry out the policy of the national electrification and provided in detail NAPOCORs
tax exceptions. PD 380 specified that NAPOCORs exemption includes all taxes, etc. imposed directly or indirectly. PD 938 dated May 27, 1976 further amended the aforesaid provision by
integrating the tax exemption in general terms under one paragraph.

ISSUE: Whether or not NPC has ceased to enjoy indirect tax and duty exemption with the enactment of PD 938 on May 27, 1976 which amended PD 380 issued on January 11, 1974

RULING: No, it is still exempt. NAPOCOR is a non-profit public corporation created for the general good and welfare, and wholly owned by the government of the Republic of the Philippines.
From the very beginning of the corporations existence, NAPOCOR enjoyed preferential tax treatment to enable the corporation to pay the indebtedness and obligation and effective
implementation of the policy enunciated in Section 1 of RA 6395.

CHAPTER IV
KINDS OF TAXPAYERS

TAX13.7 GARRISON v. CA and REPUBLIC

FACTS: Petitioners are US citizens who entered the country under Section 9 (a) of the Philippine Immigration Act of 1940, as amended, and presently employed in the United States Naval Base,
Olongapo City. The BIR sent notices to petitioners informing them that they had not filed their respective income tax returns for the year 1969, as required by Section 45 of the National Internal
Revenue Code, and directing them to file the said returns within ten days from receipt of the notice. But the accused refused to file their income tax returns, claiming that they are not resident
aliens but only special temporary visitors, having entered this country under Section 9 (a) of the Philippine Immigration Act of 1940, as amended. The accused also claimed exemption from
filing the return in the Philippines by virtue of the provisions of Article XII, paragraph 2 of the US-RP Military Bases Agreement.

ISSUE: Whether or not petitioners can be considered resident aliens.

RULING: YES. None of them may be considered a non-resident alien, "a mere transient or sojourner," who is not under any legal duty to file an income tax return under the Philippine Tax
Code. Revenue Relations No. 2 Section 5 of the Department of Finance provides: An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines
for purposes of income tax. Whether or not an alien is a transient or not is further determined by his: intentions with regards to the length and nature of his stay. A mere floating intention
indefinite as to time, to return to another country is not sufficient to constitute him as transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. The
Section 5 further provides that if the alien is in the Philippines for a definite purpose which by its nature may be promptly accomplished, he is considered a transient. However, if an extended
stay is necessary for him to accomplish his purpose, he is considered a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came
has been consummated or abandoned.

TAX15.7 ONA COMMISSIONER 45 SCRA 74

MAINPOINT: The partnership is the taxpayer. For purposes of the tax on corporations, the NIRC, includes partnershipswith the exception only of duly registered general co-partnerships
within the purview of the term corporation.

PARTIES: LORENZO T. OA, and HEIRS [children] OF JULIA BUNALES, namely: RODOLFO B. OA, MARIANO B. OA, LUZ B. OA, VIRGINIA B. OA, and LORENZO B.
OA, JR., petitioners, vs. THE COMMISSIONER OF INTERNAL REVENUE, respondent.

FACTS: Julia Bunales died on March 23, 1944, leaving as heirs her surviving spouse. Lorenzo T. Oa and her five children.

In the settlement of estate, the partition was approved.

Although the project of partition was approved by the Court, no attempt was made to divide the properties therein listed. Instead, the properties remained under the sole management of Lorenzo
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.

Every year, petitioners returned for income tax purposes their shares in the net income derived from said properties and securities and/or from transactions involving them.

The CIR assessed the petitioners as an unregistered partnership and held the latter liable for corporate income tax pursuant to Section 24, in relation to Section 84(b), of the Tax Code.

The petitioners denied the assessment based on the alleged unregistered partnership.

ISSUE: Are the petitioners liable to corporate income tax based on the unregistered partnership in which they believe in good faith that they have not formed in the first place, and in addition
that, they have been paying annual individual tax returns based on their inherited share?

RULING: Yes. The heirs are entitled already to their respective definite shares of the estate and the incomes thereof, and, accordingly, he becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed.

The partnership profits distributable to the partners should be reduced by the amounts of income tax assessed against the partnership. Consequently, each of the petitioners in his individual
capacity overpaid his income tax for the years in question. But as the individual income tax liabilities of petitioners are not in issue in the instant proceeding, it is not proper for the Court to pass
upon the same.

A taxpayer who did not pay the tax due on the income from an unregistered partnership, of which he is a partner, due to an erroneous belief that no partnership, but only a co-ownership, existed
between him and his co-heirs, and who due to the payment of the individual income tax corresponding to his share in the unregistered partnership profits, on the balance, overpaid his income tax
has the right to be reimbursed what he has erroneously paid. However, in this case, the right to refund has already prescribed. The law is very clear that the claim and action for such reimbursement
are subject to the bar of prescription.

TAX16.7 Lorenzo Ona v CIR

FACTS: Julia Buales died leaving as heirs her surviving spouse, Lorenzo Oa and her five children. A civil case was instituted for the settlement of her state, in which Oa was appointed
administrator and later on the guardian of the three heirs who were still minors when the project for partition was approved. This shows that the heirs have undivided interest in 10 parcels of
land, 6 houses and money from the War Damage Commission.

Although the project of partition was approved by the Court, no attempt was made to divide the properties and they remained under the management of 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. Petitioners returned for income tax purposes their shares in the net income but they did not actually receive their shares because this left with Oa who invested them.

Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax, particularly for years 1955 and 1956. Petitioners asked
for reconsideration, which was denied hence this petition for review from CTAs decision.

ISSUE: whether the petitioners are liable for the deficiency corporate income tax
RULING: Yes. 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. The reason is simple. From the moment of such partition, the heirs are entitled
already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and,
accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to
be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed, for the purpose, for tax purposes, at least,
an unregistered partnership is formed.

TAX1.8 PASCUAL VS. COMMISSIONER OF INTERNAL REVENUE GR No. L-78133. October 18, 1988.*

FACTS: The petitioners bought two parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they bought 3 more parcels of land from one seller. In
1968, they sold the 2 parcels at a profit after which they did not make any additional or new purchase. In 1970, they sold the remaining parcel also at a profit. 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. 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.

ISSUE: Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for the purposes of income tax.

RULING: The Petitioners are simply under the regime of co-ownership and not under unregistered partnership.

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. Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became
co-owners thereof. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present.

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally participating in both profits and losses; (c) and such a community of interest, as far as
third persons are concerned as enables each party to make contract, manage the business, and dispose of the whole property. The sharing of returns does not in itself establish a partnership
whether or not the persons sharing therein have a joint or common right of interest in the property. There must be 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.

there is clear evidence of co-ownership between the petitioners. 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.

TAX2.8 Obillos v. Commissioner 139 SCRA 436

FACTS: In 1973, Jose Obillos completed payment on two lots located in Greenhills, San Juan. The next day, he transferred his rights to his four children for them to build their own residences.
The Torrens title would show that they were co-owners of the two lots. However, the petitioners resold them to Walled City Securities Corporation and Olga Cruz Canda for P313k or P33k for
each of them. They treated the profit as capital gains and paid an income tax of P16,792.00

The CIR requested the petitioners to pay the corporate income tax of their shares, as this entire assessment is based on the alleged partnership under Article 1767 of the Civil Code; simply because
they contributed each to buy the lots, resold them and divided the profits among them. But as testified by Obillos, they have no intention to form the partnership and that it was merely incidental
since they sold the said lots due to high demand of construction. Naturally, when they sell them as co-partners, it will result to the share of profits. Further, their intention was to divide the lots
for residential purposes.

ISSUE: Whether there was a partnership, making the petitioners subject to corporate income taxes.

RULING: No. 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.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.
Where the father sold his rights over two parcels of land to his four children so they can build their residence, but the latter after one (1) year sold them and paid the capital gains, they should not
be treated to have formed an unregistered partnership and taxed corporate income tax on the sale and dividend income tax on their shares of the profit's from the sale.Their original purpose
was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to
resell the same to dissolve the coownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to
be terminated sooner or later.

TAX3.8 Pascual v. CTA

The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition.

FACTS: Petitioners bought a total of 5 parcels of land. These parcels of land were sold by petitioners in 1968 and 1970. They realized a net profit in the sale made in 1968 in the amount of
P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. 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, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency
corporate income taxes for the years 1968 and 1970. 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 1 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. Petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review.

ISSUE: Whether petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation.

RULING: In order to constitute a partnership inter se there must be: (a) An intent to form the same; (b) generally participating in both profits and losses; (c) and such a community of interest,
as far as third persons are concerned as enables each party to make contract, manage the business, and dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III
470.)

In the present case, there is clear evidence of co-ownership between the petitioners. 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.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is
hereby rendered relieving petitioners of the corporate income tax liability in this case, without pronouncement as to costs.

TAX5.8 Collector of Internal Revenue v. Batangas Transport Company and Laguna-Tayabas Bus

Doctrines: Joint venture need not be undertaken in any of the standard form, or in conformity with the usual requirement of the law on partnership, in order that one could be deemed constituted
for the purpose of the tax on corporation.
Although no legal personality may have been created by the joint emergency operation, nevertheless said joint Emergency Operation joint venture or joint management of the two companies as
though they constituted a single entity, company or partnership thereby obtaining substantial economy and profits in the operation.

FACTS: This case is an appeal of the CTA decision which reversed the assessment and decision of the Collector of Internal Revenue (CIR) assessing and demanding from respondents Batangas
Transpo and Laguna Busthe amount of Php54,143.54 which represent deficiency income tax and compromise for the year 1946-1949. Pending then appeal to the CTA, the assessment was
increased to P148,890.14 Respondent bus companies are 2 distinct and separate corporations, engaged in the business of land transportation by means of motor busses and operating distinct and
separate lines.

Martin Olsen resigned as manager and Joseph Benedict was appointed as Manager of both companies by their respective Board of Directors. According to Benedict, the purpose of the joint
management called Joint Emergency Operation was to economize in overhead expenses. At the end of each calendar year, all gross receipts and expenses of both companies are determined
and the net profit were divided 50-50 then transferred to the book of accounts of each company, and each company prepares its own income tax return from their 50% share. The CIR theorizes
that the 2 companies pooled their resources in the establishment of the Joint Emergency Operation thereby forming a joint venture. He believes that a corporation exists, distinct from the 2
respondent companies. The CTA held that the Joint Emergency Operation is not a corporation within the contemplation of the NIRC, much less a partnership, association or insurance company,
and therefore was not subject to income tax separately and independently of respondent companies.

ISSUE: Whether the 2 transportation companies involved are liable to the payment of income tax as a corporation on the theory that the joint emergency operation organized and operated by
them is a Corporation within the meaning of Sec 84 of the Revised Internal Revenue Code.

RULING: YES, although no legal personality may have been created by the Joint Emergency Operation, nevertheless said joint venture or joint management operated the business affairs of the
2 companies as though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in the operation.

The Court ruled on this issue by citing the case of Eufemia Evangelista, et. al v. CIR agency case. When the Tax Code included partnerships among the entities subject to the tax on
corporations, it must refer to organizations which are not necessarily partnerships in the technical sense of the term, and that furthermore, said law defined the term "corporation" as including
partnerships no matter how created or organized. the Court held that the Joint Emergency Operation or sole management or joint venture in this case falls under the provisions of section 84 (b)
of the Internal Revenue Code, and consequently, it is liable to income tax provided for in section 24 of the same code.

TAX6.8 Evangelista v. Collector | 102 PHIL 140

FACTS:
Petitioners borrowed sum of money from their father and together with their own personal funds they used said money to buy several real properties. They then appointed their brother (Simeon)
as manager of the said real properties with powers and authority to sell, lease or rent out said properties to third persons. They realized rental income from the said properties for the period 1945-
1949.

On September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years
1945-1949. The letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals, with
a prayer that "the decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved from the payment of the taxes in question.

CTA denied their petition and subsequent MR and New Trials were denied. Hence this petition.

ISSUE: Whether or not petitioners have formed a partnership and consequently, are subject to the tax on corporations provided for in section 24 of Commonwealth Act. No. 466, otherwise
known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers fixed tax.

RULING: YES. The essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund.

Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the
same among themselves, because of the following observations, among others: (1) Said common fund was not something they found already in existence; (2)They invested the same, not merely
in one transaction, but in a series of transactions; (3) The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. Although, taken singly, they might
not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners
herein. For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships with the exception only of duly registered general co partnerships within
the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to the income tax for
corporations.

TAX7.8. Reyes v. Commissioner

FACTS: Petitioners Florencio and Angel Reyes, father and son, purchased a lot and building for P 835,000.00. The amount of P 375,000.00 was paid. The balance of P 460,000.00 was left,
which represents the mortgage obligation of the vendors with the China Banking Corporation, which mortgage obligations were assumed by the vendees. The initial payment of P 375,000.00
was shared equally by the petitioners. At the time of the purchase, the building was leased to various tenants, whose rights under the lease contracts with the original owners, the purchaser,
petitioners herein, agreed to respect. Petitioners divided equally the income of operation and maintenance. The gross income from rentals of the building amounted to about P 90,000.00 annually.
An assessment was made against petitioners by the CIR. The assessment sought to be reconsidered was futile. On appeal to the Court of Tax Appeals, the CTA ruled that petitioners are liable for
the income tax due from the partnership formed by petitioners.

ISSUE: Are petitioners subject to the tax on corporations provided for in the National Internal Revenue Code?

RULING: After referring to another section of the NIRC, which explicitly provides that the term corporations includes partnerships and then to Article 1767 of the Civil Code of the Philippines,
defining what a contract of partnership is, the opinion goes on to state that the essential elements of a partnership are two, namely: a) an agreement to contribute money, property or industry to a
common fund; and b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case, for, admittedly, petitioners have agreed to, and did, contribute
money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, it was
determined that their purpose was to engage in real estate transaction for monetary gain and then divide the same among themselves, hence taxable.

TAX8.8 AFISCO Insurance Corporation v. Commissioner

FACTS: The petitioners are 41 non-life domestic insurance corporations. They issued risk insurance policies for machines. The petitioners in 1965 entered into a Quota Share Reinsurance
Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance
treaties required petitioners to form a pool, which they complied with.

In 1976, the pool of machinery insurers submitted a financial statement and filed an Information Return of Organization Exempt from Income Tax for 1975. On the basis of this, the CIR
assessed a deficiency of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively.

The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed their appeal.

The CA ruled in that the pool of machinery insurers was a partnership taxable as a corporation, and that the latters collection of premiums on behalf of its members, the ceding companies, was
taxable income.

ISSUE: Whether the pool is taxable as a corporation

RULING: Yes. According to Section 24 of the NIRC of 1975:

SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or organized, but not including duly registered general co-partnership (compaias colectivas),
general professional partnerships, private educational institutions, and building and loan associations xxx.

Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Interestingly, the NIRCs
inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997 Sec. 27 read together with Sec. 22 reads:

SEC. 27. Rates of Income Tax on Domestic Corporations. --

(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all
sources within and without the Philippines by every corporation, as defined in Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.
SEC. 22. -- Definition. -- When used in this Title:

xxx xxx xxx

(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies,
but does not include general professional partnerships [or] a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating or consortium agreement under a service contract without the Government. General professional partnerships are partnerships formed
by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.
Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered these unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members.

Furthermore, Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich may
be considered a partnership because it contains the following elements: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the
pool. This common fund pays for the administration and operation expenses of the pool. (2) The pool functions through an executive board, which resembles the board of directors of a corporation,
composed of one representative for each of the ceding companies. (3) While, the pool itself is not a reinsurer and does not issue any policies; 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 pursuant to the agreement with Munich. Profit motive or business is,
therefore, the primordial reason for the pools formation.

TAX9.8 Marubeni Corporation v. Commissioner of Internal Revenue

FACTS: Marubeni Corporation is a foreign corporation duly organized and existing under the laws of Japan and duly licensed to engage in business under Philippine laws with branch office in
Manila. It has equity investments in Atlantic Gulf and Pacific Co. of Manila (AG&P). When the profits on Marubenis investments in AG&P were declared, it was remitted to petitioner at its
head office in Japan and a 10% final dividend tax was withheld from it, and another 15% profit remittance tax based on the remittable amount after the final 10% withholding tax were paid to
the Bureau of Internal Revenue.

Marubeni then sought a ruling from the BIR on whether or not the dividends it received from AG&P are effectively connected with its business in the Philippines as to be considered branch
profits subject to profit remittance tax. The Acting Commissioner ruled that the dividends received by Marubeni are not income from the business activity in which it is engaged. Thus, the
dividend if remitted abroad are not considered branch profits subject to profit remittance tax.

Pursuant to such ruling, petitioner filed a claim for refund for the profit tax remittance erroneously paid on the dividends remitted by AG& P. Respondent Commissioner however denied the
claim. While it is true that said dividends remitted were not subject to the 15% profit remittance tax as the same were not income earned by a Philippine Branch of Marubeni Corporation of
Japan; and neither is it subject to the 10% intercorporate dividend tax, the recipient of the dividends, being a non-resident stockholder, nevertheless, said dividend income is subject to the 25 %
tax pursuant to Article 10 (2) (b) of the Tax Treaty between the Philippines and Japan. Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25 % tax,
and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit remittance tax totals (sic) 25 %, the amount refundable offsets the liability, hence, nothing is left to be
refunded.

On the other hand, Marubeni contends that, following the principal-agent relationship theory, Marubeni Japan is a resident foreign corporation subject only to final tax on dividends received
from a domestic corporation.

ISSUE: Whether or not Marubeni Japan is a resident foreign corporation, not subject to the 25% tax under the Tax Treaty

RULING: No. The general rule is a foreign corporation is the same juridical entity as its branch office in the Philippines. The rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent. However, when the foreign corporation
transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Thus, the alleged overpaid taxes were incurred for the remittance of dividend income to
the head office in Japan which is considered as a separate and distinct income taxpayer from the branch in the Philippines.

TAX10.8 CIR vs. MARUBENI

FACTS: In 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes of undeclared income from contracts with NDC and Philphos for construction of a wharf/port
complex and ammonia storage complex respectively. CIR claims that the income respondent derived were income from Philippine sources, hence subject to internal revenue taxes. Respondent
filed 2 petitions for review with CTA questioning the deficiency income, branch profit remittance and contractors tax assessments.

Earlier, on Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85. Marubeni filed its tax amnesty return on Oct 30, 1986.

On Nov 17, 1986, Marubeni filed for tax amnesty and CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes. CA affirmed on appeal.

In the present petition, the SC discussed the background of the two contracts.

Marubeni and NDC entered into an agreement entitled Turn-Key Contract for Leyte Industrial Estate Port Development Project. While the construction and installation work were completed
within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats
and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the
Philippines. The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products
when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture
of the materials and equipment under Japanese Yen Portion I were made and completed in Japan.

ISSUE: Should the income from turnkey contract with onshore and offshore portions be taxed.

RULING: No. Only onshore portions should be taxed. Some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the
boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped
to the Philippines. The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished
products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. These services were rendered outside the taxing jurisdiction
of the Philippines and are therefore not subject to contractors tax.

TAX11.8 Madrigal v Rafferty, 38 phil 414

Facts: Vicente Madrigal and Susana Paterno's marriage was contracted under the provisions of law concerning conjugal partnerships. Vicente filed his income tax return and claimed that it was
the income of the conjugal partnership with Susana; and in computing and assessing the additional income tax provided by the Income Tax Law, the income declared should be divided into 2
equal parts. The Attorney-General agreed with Vicente. The revenue officers forwarded the case to Washington for a decision by the US Treasury. The US CIR reversed the opinion of the
Attorney-General. Spouses Madrigal paid under protest and then instituted an action for the recovery of the tax paid.

Issue: Whether the additional income tax should be divided into 2 equal parts because of the conjugal partnership existing between Vicente and Susana

Held: No. Susana has an inchoate right in the property of her husband Madrigal during the lifetime of the conjugal property. She has an interest in the ultimate ownership of property acquired
as income of the conjugal partnership. Not being seized of the separate estate, Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason
of the additional tax. As she has no estate or income, actually and legally vested in her and entirely distinct from her husband property, the income cannot properly be considered the separate
income of the wife for the purpose of the additional tax. The income tax law does not look on the spouses as individual partners in an ordinary partnership.

TAX12.8 Moore vs Commissioner

FACTS: The Petitioner owned four thousand shares of stock in the Ajax Hand Brake Company. One George M. DeGuire desired to purchase this stock. An agreement was reached on December
31, 1935, and reduced to writing, whereby the Petitioner agreed to sell said stock to DeGuire for $96,000, each of said notes to bear interest from date at the rate of five per cent per annum,
payable semiannually. In order to secure the payment of these notes, the Petitioner agreed to and did deliver the four thousand shares of stock, endorsed in blank, to one Bakke, the agent of
DeGuire, for surrender to the Ajax Company, and received in exchange one certificate for 1,332 shares; two certificates for 667 shares each; and one for 1,334 shares. The Petitioner agreed to
and did endorse these certificates in blank, and affix the necessary transfer tax stamps, and then attached the certificate for 1,332 shares to the first note, a certificate for 667 shares to each the
second and third notes, and the certificate for 1,334 shares to the fourth note. The Respondent contends that this transaction was no sale, that it was an option to purchase granted to DeGuire; that
Petitioner remained the owner of the stock at the time the dividend was declared, and was therefore owner of the dividend as such and properly taxed therefor as income. The Petitioner contends
there was a sale and the stock was held to secure the balance of the purchase price, and the title passed to DeGuire; that even if title had not passed, the beneficial interest of the stock was in
DeGuire, and the Petitioner is not liable for the tax.

There is another question which arises on this appeal. The Petitioner had agreed to pay her attorney, employed in connection with the settlement of her husband's estate, as part of his compensation
for such services five per cent of any sum which Petitioner might receive from all of her shares of stock in the Ajax Company, not to exceed in all $5,000. The Petitioner paid to the attorney five
per cent of the $28,000 she received on the sale price of the stock she sold to DeGuire. This, she claims, was not taxable to her, as her agreement with her attorney for payment in this manner
amounted to an equitable assignment of a part of the stock, and therefore she was a mere conduit for the payment to the attorney, and not taxable on this sum as income to herself.

ISSUE: 1. W/N the Petitioner is liable for income tax? 2. W/N the Petitioner is liable for tax on the five per cent of the dividend for the lawyer?

RULING:
1. NO The decision of the Board of Tax Appeals with reference to the Petitioner's liability for tax on the dividend is reversed.
Tax statutes deal with realities and not fiction or fine-spun legalistic distinctions. In Griffiths v. Commissioner, 308 U.S. 355-357, 60 S.Ct. 277, 278, 84 L.Ed. 319,speaking for the Court, Mr.
Justice Frankfurter said: "We cannot too often reiterate that `taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed the actual
benefit for which the tax is paid.'" Since the beneficial ownership of the property was not in the Petitioner and she did not receive the dividend as a dividend, she is not liable for the tax on such
dividend.

2. YES, The decision of the Board of Tax Appeals on the Petitioner's liability for tax on the five per cent of the dividend which she paid to her attorney is affirmed.

The Commissioner and the Board of Tax Appeals held otherwise, and we think they were correct. The Petitioner did not agree to transfer or assign to the attorney and did not transfer or assign
to him any interest or estate in the Ajax Company stock. She agreed to pay him five per cent out of any sum she received out of the stock. The attorney was not employed in any litigation
involving the stock. It was just a yardstick to measure his fee within the limitation of $5,000. It was simply the designation of a fund or property from which a debt not related to that property
was to be paid. There was no pledging of the property or any part thereof or any interest therein to secure the payment of the agreed fee.

TAX13.8 MERCYS INC., v. COMMISSIONER, CTA Case No. 895, May 11, 1982

FACTS: Mercys Inc is a corporation registered in the SEC with office in Manila. Mercy de Vera and Juan de vera are residing in the same address. CIR assessed deficiency income tax against
Mercys Inc., for the years 1953 to 1956, and against Mercy de Vera for the same years. In other words, the assessment rests on the alleged ownership of Mercy Building by Mercy' s Inc therefore
taxable income. This claim by the CIR however, is invalidated by the record and report which states that Mercy de Vera is the registered owner of said building therefore, the deficiency income
tax should be charged against her and not on the other.

MAINPOINT: The court ruled that ownership of building by an individual makes the assessment against the corporation improper.

TAX15.8 ING BANK MANILA BRANCH VS CIR 2005 (CTA En Banc Case, not SC)

MAINPOINT: The law and jurisprudence do not dispense the liability of the taxpayer with respect to the payment of 10% final tax on onshore income if the withholding agent fails to deduct
and remit the same to the Bureau of Internal Revenue. After all, it is the taxpayer who earns the income. Truly, the obligation to pay the 10% onshore tax lies with petitioner because the onshore
income was obviously earned by it.

PARTIES: Petitioner is the Philippine branch of Intemationale Nederlanden Bank N.V., a foreign banking corporation incorporated in the Netherlands. It is duly authorized by the Bangko
Sentral ng Pilipinas to operate as a branch with full banking authority in the Philippines.

FACTS: CIR assessed ING Bank Manila Branch and demanded for the discrepancies in their payment of taxes. One of their alleged tax obligations was the payment of 10% final tax on onshore
income.

Petitioner claims that there is no deficiency onshore tax for the simple reason that all taxes due on onshore interest income had been withheld and remitted to the BIR. Petitioner maintains that
the 10% onshore tax is collected in the form of final withholding tax and is to be paid and remitted to the BIR by the payor-borrower, and not by the petitioner. That the payor- borrower is directly
liable for the payment of onshore tax has always been the rule since the promulgation of P.D. 1034 and P.D. 1035, as clearly evident from Section 5(b) ofR.R. No. 10-76, as amended by R.R.
No. 14- 77. Said Section states that the payee need not include the onshore income in the quarterly income tax return to be filed, as the income payor is constituted as the withholding agent
charged with the obligation of deducting, withholding and remittance to the Commissioner of Internal Revenue the income tax due thereon.

Petitioner further argues that the payment of the onshore tax to the BIR is a direct obligation and/or liability of the payor-borrower and the payee-bank cannot therefore be held liable for failure
on the part of the payor-borrower to remit the tax to the BIR. Thus, in case of his failure to withhold the tax, as in case of under withholding, the deficiency tax shall be collected from the payor-
borrower.

ISSUE: Is the petitioner correct?

RULING: No. While it is true that the payor-borrower is the one constituted by the law to withhold and remit the 10% tax on onshore income, the obligation of paying the 10% final tax on
onshore income rests on petitioner being the one directly liable for it, pursuant to Section 24(e)(3) ofthe National Internal Revenue Code of1993, as amended.

Citing the SC case CIR vs CA and A. Soriano Corp. (January 20, 1999) regarding the withholding tax system:

In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in
order to ensure its payments; the payer is the taxpayer - he is the person subject to tax impose (sic) by law; and the payee is the taxing authority. In other words, the withholding
agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and
independent from the taxpayer, because the income tax is still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him - he earned no
income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax XXX.

The law and jurisprudence do not dispense the liability of the taxpayer with respect to the payment of 10% final tax on onshore income if the withholding agent fails to deduct and remit the same
to the Bureau of Internal Revenue. After all, it is the taxpayer who earns the income. Truly, the obligation to pay the 10% onshore tax lies with petitioner because the onshore income was
obviously earned by it.

TAX16.8 DBP vs COA

FACTS: DBP adopted a Gratuity Plan in favor of its employees and officials. The plan created a retirement fund which will cover the benefits due to the aforesaid persons who will soon retire.
Later, a Trust Indenture was entered into by and between DBP and the Board of Trustees of the Gratuity Plan Fund which vested in the latter party control and administration of the fund, the
purpose of which was to make the income and principal of the fund sufficient to meet the liabilities of DBP in the plan. A Special Loan Program was subsequently adopted as part of the benefit
program wherein a prospective retiree is allowed the option to utilize in the form of a loan a portion of his outstanding equity in the gratuity fund and to invest it in a profitable investment or
undertaking. The earnings of the investment shall then be applied to pay for the interest due on the gratuity loan which was initially set at 9% per annum subject to the minimum investment rate
resulting from the updated actuarial study. The excess or balance of the interest earnings shall then be distributed to the investor-members. Thereafter, a total of 11m representing net earnings
were paid to its investors-members. COA disallowed the payments on the ground that the distribution of income of the Gratuity Plan Fund (GPF) to future retirees of DBP was irregular and
constituted the use of public funds for private purposes which is proscribed by law. DBP on the other hand contended that the funds are its own but that the Fund is the subject of a trust, and that
the Agreement transferred legal title over the Fund to the trustees. The income of the Fund does not accrue to DBP.

ISSUE: W/N the income generated by the fund pertain to the DBP.

RULING: No. The income pertains only to the Gratuity Plan Fund. The DBP Chairman and the trustees of the Plan created an express trust, specifically, an employees trust. The agreement
transferred legal title over the fund to the trustees. An employees trust is a trust maintained by an employer to provide retirement, pension or other benefits to its employees. It is a separate taxable
entity established for the exclusive benefit of the employees.

TAX1.9 BAIER-NICKEL V. COMMISSIONER, FEBRUARY 17, 2003

FACTS: Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in manufacturing, marketing on wholesale only, buying or
otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile products. Through its General Manager, the corporation engaged the services of respondent as
commission agent. It was agreed that respondent will receive 10% sales commission on all sales actually concluded and collected through her efforts

In 1995, Baier-nickel received commission income, which Jubanitex withheld 10% and remitted to the BIR. BAier-Nickel filed her income tax return on Oct. 17, 1997 and on April 14,1998, she
filed a claim for refund, contending that her commission income is not taxable in the Philippines because it was compensation for her services rendered in Germany.

ISSUE: W/N Baiers commission income is not taxable.

RULING: Non-resident aliens, whether or not engaged in trade or business are subject to Philippine income tax on their income received from all sources within the Philippines. The underlying
theory is that the consideration for taxation is protection of life and property and that income rightly to be levied upon to defray the burdens of the Government is that income which is created by
activities and property protected by the government or obtained by persons enjoying that protection. The important factor, therefore, which determines the source of income of personal services
is not the residence of the payor, or the place, where the contract for service is entered into, or the place of payments, but the place of where the services were actually rendered.

The fact that recipient of commission income is President and majority stockholder of the Philippine company does not alter the source of income. There are only two ways by which the President
and other members of the Board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders
agree to give it to them

Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income taxation on their income received from
all sources within the Philippines.
The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the
place of payment, but the place where the services were actually rendered.

TAX2.9 Commissioner v Baier-Nickel GR No. 153793

FACTS: Respondent Juliane Baier-Nickle, a non-resident German citizen, is the President of JUBANITEX, a domestic corporation engaged in manufacturing, marketing on wholesale only
embroided textile products. The corporation appointed and engaged the service of respondent as commission agent. It was agreed that respondent will receive 10% sales commission on all sales
actually concluded and collected through her efforts.

In 1995, respondent received the amount of PhP1,707,772.64 representing her sales commission income from which JUBANITEX withheld the corresponding 10% withholding tax amounting
to PhP170,777.26 and remitted the same to the BIR. Respondent filed a claim to refund the amount PhP170,777.26 alleged to have been mistakenly withheld and remitted by JUBANITEX to
the BIR. Respondent contended that her sales commission income is not taxable in the Philippines because the same was a compensation for her services rendered in Germany considered as
income from source outside the Philippines.

CTA rendered a decision denying her claim. It held that the commissions received by respondent were actually her remuneration in the performance of her duties as President of JUBANITEX
and not as a mere sales agent thereof. The income derived by respondent is therefore an income taxable in the Philippines because JUBANITEX is a domestic corporation. CA reversed the
Decision of the CTA, holding that respondent received the commissions as sales agent of JUBANITEX and not as President thereof. And since the "source" of income means the activity or
service that produce the income, the sales commission received by respondent is not taxable in the Philippines because it arose from the marketing activities performed by respondent in Germany.

ISSUE: Whether respondents sales commission income is taxable in the Philippines.

RULING: Yes. The Court reiterates the rule that source of income relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service,
as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioners interpretation which equates
source of income in labor or personal service with the residence of the payor or the place of payment of the income. The important factor therefore which determines the source of income of
personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered.

The decisive factual consideration here is not the capacity in which respondent received the income, but the sufficiency of evidence to prove that the services she rendered were performed in
Germany. The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the
burden of proving that the transaction subjected to tax is actually exempt from taxation.

In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the service which would entitle her to 10% commission income, are "sales actually
concluded and collected through [her] efforts."What she presented as evidence to prove that she performed income producing activities abroad, were copies of documents she allegedly faxed to
JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients. However,
these documents do not show whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that while respondent
was in Germany, she sent instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and whether these sales were truly concluded in Germany,
respondent presented no such evidence. Neither did she establish reasonable connection between the orders/instructions faxed and the reported monthly sales purported to have transpired in
Germany.

In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or that relevant evidence that a reasonable mind might accept as adequate to support
the conclusion that it was in Germany where she performed the income producing service which gave rise to the reported monthly sales in the months of March and May to September of 1995.
She thus failed to discharge the burden of proving that her income was from sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax
refund should be denied.

TAX3.9 Commissioner v. Marubini

FACTS: Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and the
construction business. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine the books of accounts of the Manila branch office of respondent corporation
for the fiscal year ending March 1985. In the course of the examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of which were
completed in 1984. One of the contracts was with the National Development Company (NDC) in connection with the construction and installation of a wharf/port complex at the Leyte Industrial
Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia
storage complex also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioners revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractors and commercial brokers taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.

Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and that the gross income from the two projects amounted to P967,269,811.14. Each contract was for a
piece of work and since the projects called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes.

ISSUE: Whether or not respondent is liable to pay the income, branch profit remittance, and contractors taxes assessed by petitioner.

RULING: A contractors tax is imposed in the National Internal Revenue Code (NIRC) as follows:

Sec. 205. Contractors, proprietors or operators of dockyards, and others.A contractors tax of four percent of the gross receipts is hereby imposed on proprietors or operators of the following
business establishments and/or persons engaged in the business of selling or rendering the following services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in Republic Act No. 4566;

(q) Other independent contractors. The term independent contractors includes persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax
under the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use
of the physical or mental faculties of such contractors or their employees. It does not include regional or area headquarters established in the Philippines by multinational corporations, including
their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region.

Under the afore-quoted provision, an independent contractor is a person whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance
of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. The word contractor refers to a person who, in the pursuit of independent
business, undertakes to do a specific job or piece of work for other persons, using his own means and methods without submitting himself to control as to the petty details.

A contractors tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a
sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are
done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district.

In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the two subject contracts.

Clearly, the service of design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordinationof
the two projects involved two taxing jurisdictions. These acts occurred in two countries Japan and the Philippines. While the construction and installation work were completed within the
Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile
equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines.
The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when shipped
to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials
and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to
contractors tax.

TAX4.9 Commissioner v. British Overseas Corp, 149 SCRA 395

MAIN POINT: The term resident foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein. The term "non-resident foreign
corporation" applies to a foreign corporation not engaged in trade or business within the Philippines and not having any office or place of business therein

FACTS: CIR had an assessment of deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71. BOAC is
a 100% British Government-owned corporation organized and existing under the laws of the United Kingdom It is engaged in the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such it operates air transportation service and sells transportation tickets over the routes of the other airline members. During the periods covered
by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and necessity to operate
in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB.

The Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company,
Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA position was that income from transportation is income from services so that the place
where services are rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel
the deficiency income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.

ISSUE: Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing business in the Philippines or has an office or place of business in the Philippines

RULING: Court ruled that BOAC is a resident foreign corporation. "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct
and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character.

BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement."

Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In
fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was
"engaged in" business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net
income received in the preceding taxable year from all sources within the Philippines.

TAX5.9 Alexander howden 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: Are portions of premiums earned from insurances locally underwritten by a domestic corporation, ceded to and received bynon-resident foreign reinsurance companies, thru a non-
resident foreign insurance broker, pursuant to reinsurance contracts signed by the reinsurers abroad but signed by the domestic corporation in the Philippines, subject to income tax or not?

RULING: YES. Section 24 of the National Internal Revenue Code subjects to tax a non-resident foreign corporation's income from sources within the Philippines. The liabilities insured and the
risks originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. contrary to appellants' view,
then reinsurance contracts were perfected in the Philippines, for Commonwealth Insurance Co. signed them last in Manila. the parties to the reinsurance contracts in question evidently intended
Philippine law to govern.
Article 11 thereof provided for arbitration in Manila, and the contracts provided for the use of Philippine currency as the medium of exchange and for the payment of Philippine taxes.

TAX6.9 Conwi v. CTA and Commissioner

Income of Filipino citizens temporarily residing in a foreign country, even if totally derived from outside the Philippines, is subject to tax by virtue of Sec. 21, NIRC, viz: A tax is hereby imposed
upon the taxable net income received x x x from all sources by every individual, whether a citizen of the Philippines residing therein or abroad x x x

FACTS:
Hernando Conwi et al. (Conwi et al.) are employees of Procter & Gamble Philippine Manufacturing Corporation, a local subsidiary of U.S.-based Procter & Gamble.

Conwi et al. were temporarily assigned to subsidiaries of Procter & Gamble outside of the Philippines, where they were paid in U.S. dollars.

It is claimed that they earned and spent their money exclusively abroad, and that they did not remit money back into the Philippines during the time they were outside of the country earning in
dollars.

In the years 1970 and 1971, Conwi et al., since they were earning in U.S. currency, in order to pay their income tax liabilities in Philippine peso, used the prevailing free market rate of conversion
prescribed under a Bureau of Internal Revenue ruling and two Revenue Memorandum Circulars. However, in 1973, Conwi et al. filed with the Commissioner of Internal Revenue (CIR) amended
income tax returns for the said years, this time using the par value of the peso as conversion rate. The adjustment caused a disparity between what was initially paid and what they were now
claiming to be their actual tax liabilities. Consequently, they asked for a refund of the overpayment.

Even before the CIR could rule on the matter, Conwi et al. filed a petition for review before the Court of Tax Appeals (CTA), which eventually denied their claim for tax refund and/or tax
credit.

Aggrieved, Conwi et al., via a petition for review, elevated the matter to the Supreme Court arguing that since there were no remittances and acceptances of their salaries and wages in U.S.
dollars into the Philippines, they are exempt from the coverage of such ruling and circulars.

ISSUE: Whether the ruling and circulars above apply to Conwi et al.

RULING: YES, the said ruling and circulars apply to Conwi et al. 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. x x x Income can also be thought of as a flow of the fruits of ones labor.

The dollar earnings of Conwi et al. are fruits of their labor in the foreign subsidiaries of Procter & Gamble. They were given a definite amount of money which came to them within a specified
period of time as payment for their services.

Sec. 21, NIRC, states: A tax is hereby imposed upon the taxable net income received x x x from all sources by every individual, whether a citizen of the Philippines residing therein or abroad x
x x. As such, their income is taxable even if there were no inward remittances during the time they were earning in dollars abroad.

The ruling and the circulars are a valid exercise of power on the part of the Secretary of Finance by virtue of Sec. 338, NIRC, which empowers him to promulgate all needful rules and regulations
to effectively enforce its provisions. Besides, they have already paid their taxes using the prescribed rate of conversion. There is no need for the CIR to give them a tax refund and/or credit.

CHAPTER V
GROSS INCOME

TAX7.9 Madrigal v. Rafferty

FACTS: Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnership. On 1915,
Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73. Vicente Madrigal was contending that the said declared income does not represent his income for the year
1914 as it was the income of his conjugal partnership with Paterno. He said that in computing for his additional income tax, the amount declared should be divided by 2. The revenue officer was
not satisfied with Madrigals explanation and ultimately, the United States Commissioner of Internal Revenue decided against the claim of Madrigal. Madrigal paid under protest, and the couple
decided to recover the sum of P3,786.08 alleged to have been wrongfully and illegally assessed and collected by the CIR.

ISSUE: Whether the income reported by Madrigal on 1915 should be divided into 2 in computing for the additional income tax.
RULING: No. The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon income and not upon capital and property. 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. As Paterno has no
estate and income, actually and legally vested in her and entirely distinct from her husbands property, the income cannot properly be considered the separate income of the wife for the purposes
of the additional tax. To recapitulate, Vicente wants to half his declared income in computing for his tax since he is arguing that he has a conjugal partnership with his wife. However, the court
ruled that the one that should be taxed is the income which is the flow of the capital, thus it should not be divided into 2.

TAX8.9 Fisher v. Trinidad

FACTS: Fisher was a stockholder in Phil-Am Drug Company. The company declared a stock dividend with Fishers share of the dividend amounting to P24,800. Collector of Internal Revenue
Trinidad demanded P889 income tax on said dividend, which Fisher protested against but voluntarily paid.

ISSUE: Whether stock dividends can be classified as income and taxable under Act No. 2833 providing for tax upon income.

RULING: No, the receipt of tax dividends merely represents an increase in value of the assets of a corporation. The court defines stock dividends as increase in capital of corporations, firms,
partnerships, etc. for a particular period. They represent the increase in the proportional share of each stockholder in the companys capital. It is not a distribution of the corporations profits to
the stockholder. It only increases the stockholders SOURCE of income (capital), but does not increase income itself.

TAX9.9 James v. UC | 366 U.S. 213

FACTS: The petitioner, Eugene James, is a union official who, with another person, embezzled in excess of $738,000 during the years 1951 through 1954 from his employer union and from an
insurance company with which the union was doing business. He failed to report these amounts in his gross income in those years, and was convicted for willfully attempting to evade the federal
income tax due for each of the years 1951 through 1954. He 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 wherein the it held that
embezzled money does not constitute taxable income to the embezzler in the year of the embezzlement under Sec. 22(a) of the Internal Revenue Code of 1939. 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.

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.

TAX10.9 MADRIGAL V. RAFFERTY

FACTS: Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnership. On 1915,
Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73 Vicente Madrigal was contending that the said declared income does not represent his income for the year
1914 as it was the income of his conjugal partnership with Paterno. He said that in computing for his additional income tax, the amount declared should be divided by 2. The revenue officer was
not satisfied with Madrigals explanation and ultimately, the United States Commissioner of Internal Revenue decided against the claim of Madrigal. Madrigal paid under protest, and the couple
decided to recover the sum of P3,786.08 alleged to have been wrongfully and illegally assessed and collected by the CIR.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in computing for the additional income tax.

RULING: No. The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon income and not upon capital and property.

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.

As Paterno has no estate and income, actually and legally vested in her and entirely distinct from her husbands property, the income cannot properly be considered the separate income of the
wife for the purposes of the additional tax.

To recapitulate, Vicente wants to half his declared income in computing for his tax since he is arguing that he has a conjugal partnership with his wife. However, the court ruled that the one that
should be taxed is the income which is the flow of the capital, thus it should not be divided into 2.

TAX11.9 Eisner v Macomber | 252 US 189

Facts: Mrs. Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a 50% stock dividend and she received 1,100 additional shares, of which about $20,000 in par value represented
earnings accumulated by the company since the effective date of the original tax law.

The Revenue Act of 1916 expressly included stock dividends in income, and the government contended that those certificates should be taxed as income to Mrs. Macomber as though the
corporation had distributed money to her. She paid under protest and an appeal to the CIR having been disallowed, she brought an action against the Collector to recover the tax. Macomber
contended that in imposing such a tax, the Revenue Act of 1916 vioated the Constitution requiring direct taxes to be apportioned according to population and that the stock dividebd was not
income within the meaning of the 16th Amendment.

Issue: Whether the stock dividend is income within the meaning of the 16th Amendment

Held: No. The Court ruled that such stock dividend take nothing from the property of the corporation adna dd nothing to that of the shareholder, but that the antecedent accumulation of profits
evidenced thereby, while indicating that the shareholder is richer because of an increase of his capital, at the same time shows he has not realize or received any income in the transaction. The
Court as well acknowledged the power of the Federal Government to tax income under the 16th Amendment, however, this did not give Congress the power to tax--as income--anything other
than the income or the power to re-define the term income as it appeared in the Constitution. The Court ordered that Macomber be refunded.

TAX12.9 Commissioner vs Wilcox 286 US 417

Embezzle - steal or misappropriation.

Facts: The taxpayer was employed as a bookkeeper by a transfer and warehouse company in Reno, Nevada, from 1937 to 1942. He was paid his salary promptly each month when due, it not
being the custom to allow him to draw his salary in advance. In June, 1942, the company's books were audited and it was discovered for the first time that the taxpayer had converted $12,748.60
to his own use during 1941. This amount was composed of miscellaneous sums of money belonging to the company which he had received and collected at various times in his capacity as
bookkeeper. He failed to deposit this money to the credit of the company. Instead he pocketed and withdrew payments in cash made to him by customers, neglecting to credit the customers'
accounts or the company's accounts receivable with the funds received.

The taxpayer lost practically all of this money in various gambling houses in Reno. The company never condoned or forgave the taking of the money and still holds him liable to restore it. The
taxpayer was convicted in a Nevada state court in 1942 of the crime of embezzlement. He was sentenced to serve from 2 to 14 years in prison and was paroled in December, 1943. The
Commissioner determined that the taxpayer was required to report the $12,748.60 embezzled in 1941 as income received in that year and asserted a tax deficiency of $2,978.09. The Tax Court
sustained the Commissioner but the court below reversed. We granted certiorari, because of a conflict among circuits as to the taxability of embezzled money.

The Commissioner relies upon the established principle that orthodox concepts of ownership fail to reflect the outer boundaries of taxation. As this Court has stated, tax liability 'may rest upon
the enjoyment by the taxpayer of privileges and benefits so substantial and important as to mae it reasonable and just to deal with him as if he were the owner, and to tax him on that basis.

Issue: Whether embezzled money constitutes taxable income to the embezzler under Section 22(a) of the Internal Revenue Code.

Ruling: No, It is obvious that the taxpayer in this instance, in embezzling the $12,748.60, received the money without any semblance of a bona fide claim of right. And he was at all times under
an unqualified duty and obligation to repay the money to his employer. Under Nevada law the crime of embezzlement was complete whenever an appropriation was made; the employer was
entitled to replevy the money as soon as it was appropriated or to have it summarily restored by a magistrate. The employer, moreover, at all times held the taxpayer liable to return the full
amount. The debtor-creditor relationship was definite and unconditional. All right, title and interest in the money rested with the employer. The taxpayer thus received no taxable income from
the embezzlement.

TAX13.9 COMMISSIONER v. JAVIER

FACTS: Javiers wife received from Prudential Bank an amount of about $ 1M remitted by her sister abroad through a US bank. It turned out that the amount of $ 1M was a clerical error and
should have been $1K only. The US bank sued the Javiers, one of which is estafa for failing to return what was not theirs. Meanwhile, Javier filed his income tax return for that taxable year of
1977, stating his usual gross and net income. Concerning the excess income, he added a footnote in his return stating that: Taxpayer was recipient 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. The Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability amounting to P4.8 Million.
The CIR also imposed a 50% penalty against Javier as the CIR deemed Javiers return as a fraudulent return.

ISSUE: Whether or not Javier is liable to pay the 50% penalty.

RULING: No. It is true that a fraudulent return shall cause the imposition of a 50% penalty upon a taxpayer filing such fraudulent return. However, in this case, although Javier may be guilty of
estafa due to misappropriating money that does not belong to him, as far as his tax return is concerned, there can be no fraud. There is no fraud in the filing of the return. Javiers notation on his
income tax return can be considered as a mere mistake of fact or law but not fraud. Such notation was practically an invitation for investigation and that Javier had literally laid his cards on the
table. The government was never defrauded because by such notation, Javier opened himself for investigation. It must be noted that 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.

TAX15.9 COMMISSIONER VS SMITH 324 US 177

MAINPOINT: Income from whatever source derived is all income not expressly exempted from the class of taxable income under our laws form part of the taxable income, irrespective of the
voluntary or involuntary action of the taxpayer in producing the income.

FACTS: An employer gave to its employee as compensation for his services an option to purchase shares of stock at a price not less than the then value of the stock. The option had no value at
that time, and the compensation contemplated by the parties was the transfer to the employee of the shares of stock after their value had increased to more than the option price.

ISSUE: Should the employee be liable for the payment of taxes as income derived from the the difference between the fair market value of the shares at the time the option is exercised and the
option price constitutes additional compensation income to the employee?

RULING: Yes. This shall fall under income from whatever source derived. Meaning of the phrase income from whatever source derived - all income not expressly exempted from the class
of taxable income under our laws form part of the taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income. The source of the income may be
legal or illegal.

TAX16.9 Brotherhood Labor Unity Movement vs Zamora

FACTS: Petitioners are workers who have been employed at the San Miguel Parola Glass Factory as pahinantes or kargadors for almost seven years. They worked exclusively at the SMC
plant, never assigned to other companies or departments of SMC. Their work was neither regular nor continuous, depending on the volume of bottles to be loaded and unloaded, as well as the
business activity of the company. However, work exceeded the eight-hour day and sometimes, necessitated work on Sundays and holidays. For this, they were neither paid overtime nor
compensation. Later, the workers organized and affiliated themselves with Brotherhood Labor Unity Movement (SMC union). They pressed the SMC to hear their grievances. SMC refused to
bargain with respect to such workers contending that they are not its employees. Later on, the workers were dismissed from their jobs and denied entrance to the glass factory despite regularly
reporting for work. A complaint was filed for illegal dismissal and unfair labor practices. SMC denied existence of employer-employee relationship contending that such workers are paid on a
piece-rate basis.

ISSUE: W/N the method of wage payment determines existence of employer-employee relationship

RULING: No. Compensation means all remuneration for services performed by an employee for his employer under an employer-employee relationship unless specifically excluded by the Tax
Code. It does not determine whether a worker is an employee of an employer. The four fold test is controlling, particularly the control test.

TAX1.10 FIRST LEPANTO TAISHO INSURANCE CORPORATION vs. CIR

FACTS: First Lepanto Taisho Insurance Corporation is a Large Taxpayer under Revenue Regulations No. 6-85, as amended. The Commissioner of Internal Revenue sent a Letter of Authority
to petitioner to examine their books of account for the year 1997 and other unverified years. On December 29, 1999, the respondent issued tax assessments for deficiency income, withholding,
expanded withholding, final withholding, value-added, and documentary taxes for the year 1997. The petitioner protested such assessment, which it partially withdrew in view of the tax amnesty
program it had availed. The CTA ordered the petitioner to pay P 1,994,390.86 as deficiency withholding tax on compensation, expanded withholding tax, and final tax. The petitioner appealed
to the CTA En Banc which affirmed the decision of the CTA Division. The CTA rejected the contention of the petitioner that it is not liable to pay withholding tax on compensation to some of
its directors since they were not employees and they had already been subjected to expanded withholding tax.

As to the petitioners transportation, subsistence and lodging, and representation allowance, the CTA En Banc ruled that the petitioner failed to prove that those were actual expenses. As to
deficiency expanded withholding taxes on compensation, petitioner failed to substantiate that the commissions earned came fro m reinsurance activities and should not be subject to withholding
tax. As to deficiency final withholding taxes, petitioner failed to present proof of remittance to establish that it had remitted the final tax on dividends paid as well as the payments for services
rendered by a Malaysian company. As to the imposition of delinquency interest, records reveal that petitioner failed to pay the deficiency taxes within thirty (30) days from receipt of the demand
letter, thus, delinquency interest accrued from such non-payment

ISSUES: Is the petitioner liable for the:

a.deficiency withholding taxes on compensation on directors bonuses;

deficiency expanded withholding taxes on transportation, subsistence and lodging, and representation expense; commission expense; direct loss expense; occupancy cost; and service/contractor
and purchases;

c. deficiency final withholding taxes on payment of dividends and computerization expenses to foreign entities; and

d. delinquency interest under Section 249 (c) (3) of the NIRC?

RULING: Yes. The petitioner is liable for the deficiencies.

I. Deficiency withholding taxes on compensation on directors bonuses

For taxation purposes, a director is considered an employee under Section 5 of Revenue Regulation No. 12-86, to wit: An individual, performing services for a corporation, whether as an officer
and director or merely as a director whose duties are confined to attendance at and participation in the meetings of the Board of Directors, is an employee. The non-inclusion of the names of
some of petitioners directors in the companys Alpha List for 1997 does not ipso facto create a presumption that they are not employees of the corporation, because the imposition of withholding
tax on compensation hinges upon the nature of work performed by such individuals in the company. Moreover, Section 2.57.2A(9) Revenue Regulation No. 2-98 cannot be applied to this case
as the latter is a later regulation while the accounting books examined were for taxable year 1997.

II. Deficiency expanded withholding taxes on transportation, subsistence and lodging, and representation expense; commission expense; direct loss expense; occupancy cost; and service/contractor
and purchases

As to the deficiency withholding tax assessment on transportation, subsistence and lodging, and representation expense, commission expense, direct loss expense, occupancy cost,
service/contractor and purchases, the petitioner was not able to sufficiently establish that the transportation expenses reflected in their books were reimbursement from actual transportation
expenses incurred by its employees in connection with their duties as the only document presented was a Schedule of Transportation Expenses without pertinent supporting documents. Without
said documents, such as but not limited to, receipts, transportation-related vouchers and/or invoices, there is no way of ascertaining whether the amounts reflected in the schedule of expenses
were disbursed for transportation. With regard to commission expense, no additional documentary evidence, like the reinsurance agreements contracts, was presented to support petitioners
allegation that the expenditure originated from reinsurance activities that gave rise to reinsurance commissions, not subject to withholding tax. As to occupancy costs, records reveal that petitioner
failed to compute the correct total occupancy cost that should be subjected to withholding tax, hence, petitioner is liable for the deficiency.

As to service/contractors and purchases, petitioner contends that both parties already stipulated that it correctly withheld the taxes due. Stipulations cannot defeat the right of the State to collect
the correct taxes due on an individual or juridical person because taxes are the lifeblood of our nation so its collection should be actively pursued without unnecessary impediment.

III.Deficiency final withholding taxes on payment of dividends and computerization expenses to foreign entities

As to the deficiency final withholding tax assessments for payments of dividends and computerization expenses incurred by petitioner to foreign entities, particularly Matsui Marine & Fire
Insurance Co. Ltd. (Matsui), the Court agrees with CIR that petitioner failed to present evidence to show the supposed remittance to Matsui.
IV.Delinquency interest under Section 249 (c) (3) of the NIRC

The Court likewise holds the imposition of delinquency interest under Section 249 (c) (3) of the 1997 NIRC to be proper, because failure to pay the deficiency tax assessed within the time
prescribed for its payment justifies the imposition of interest at the rate of twenty percent (20%) per annum, which interest shall be assessed and collected from the date prescribed for its payment
until full payment is made. It is worthy to note that tax revenue statutes are not generally intended to be liberally construed. Moreover, the CTA being a highly specialized court .particularly
created for the purpose of reviewing tax and customs cases, it is settled that its findings and conclusions are accorded great respect and are generally upheld by this Court, unless there is a clear
showing of a reversible error or an improvident exercise of authority. Absent such errors, the challenged decision should be maintained.

TAX2.10 Escareal v CTA CA-GR SP No. 41989

When an award of back wages is made, there is an acceptance that the employee was illegally or unjustly dismissed, and the back wages are the salaries he was supposed to have earned had he
not been dismissed. It is as though he was not separated from employment, and as though he actually rendered service.

TAX3.10 RMC 39-2012 dated August 3, 2012

August 3, 2012

REVENUE MEMORANDUM CIRCULAR NO. 039-12

SUBJECT : Withholding of Income Tax on Backwages, Allowances, and Benefits Received by Employees through Garnishments of Debts or Credits Pursuant to a Labor Dispute Award

TO : All Internal Revenue Officials, Employees and Others Concerned

This Circular is issued to require the withholding of taxes on backwages, allowances and benefits received by virtue of a labor dispute award through garnishments of debts due to the employers
and other credits to which the employer is entitled including bank deposits, financial interests, royalties, or commissions. AcSHCD

It should be noted that backwages, allowances and benefits awarded in a labor dispute constitute remunerations for services that would have been performed by the employee in the year when
actually received, or during the period of his dismissal from the service which was subsequently ruled to be illegal. The employee should report as income and pay the corresponding income
taxes by allocating or spreading his backwages, allowances and benefits through the years from his separation up to the final decision of the court awarding the backwages. The said back wages,
allowances and benefits are subject to withholding tax on wages.

However, when the judgment awarded in a labor dispute is enforced through garnishment of debts due to the employer or other credits to which the employer is entitled, the person owing such
debts or having in possession or control of such credits (e.g., banks or other financial institutions) would normally release and pay the entire garnished amount to the employee. As a result,
employers who are mandated to withhold taxes on wages pursuant to Section 79 of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 2-98, as amended, cannot
withhold the appropriate tax due thereon. DHAcET

In this regard, the provisions of Section 78 (D) (1) of the Tax Code of 1997, as amended, and Section2.78.4 (A) of Revenue Regulations No. 2-98, as amended, provide, thus:

"SEC. 78. Definitions.As used in this Chapter:

xxx xxx xxx

(D) EmployerThe term 'employer' means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that:

(1) If the person for whom the individual performs or performed any service does not have control of the payment of the wages for such services, the term 'employer' (except for the purpose of
Subsection A) means the person having control of the payment of such wages." (Emphasis and underscoring supplied) aEHADT

SECTION 2.78.4. Employer.. . .

(A) Person for whom the services are or were performed does not have control.The term "employer" also refers to the person having control of the payment of the compensation in
cases where the services are or were performed for a person who does not exercise such control. For example, where compensation, such as certain types of pensions or retirement
pay, are paid by a trust and the person for whom the services were performed has no control over the payment of such compensation, the trust is deemed to be the "employer".
(Emphasis and underscoring supplied)IcEaST
Based on the foregoing provisions, persons having control of the payment of wages or salaries are authorized to deduct and withhold upon such wages or salaries the withholding
tax due thereon. In this case, the garnishees are the persons owning debts due to the employer or in possession or control of credits to which the employer are entitled. Accordingly,
they are in control of the payment of backwages, allowances and benefits and they are authorized to deduct and withhold the incometax due from the backwages, allowances and
benefits to be paid to employees, and are respectively liable for such deductions.

In order to ensure the collection of the appropriate withholding taxes on wages, garnishees of a judgment award in a labor dispute are constituted as withholding agents with the duty
of deducting the corresponding withholding tax on wages due thereon in an amount equivalent to five percent(5%) of the portion of the judgment award representing the taxable
backwages, allowances and benefits. IDaEHS

All internal revenue officers and others concerned are hereby enjoined to give this Circular as wide a publicity as possible.

(SGD.) KIM S. JACINTO-HENARES

Commissioner of Internal Revenue

TAX4.10 Nitafan, et. al v. Commissioner, 152 SCRA 284, 1987

MAINPOINT: Salaries of Justices and Judges are properly subject to a general income tax law applicable to all income earners and that the payment of such income tax by Justices and Judges
does not fall within the constitutional protection against decrease of their salaries during their continuance in office.

FACTS: Petitioners, the duly appointed and qualified Judges presiding over RTCs in the National Capital Judicial Region, all with stations in Manila, seek to enjoin respondents from making
any deduction of withholding taxes from their salaries.

In a nutshell, they submit that "any tax withheld from their emoluments or compensation as judicial officers constitutes a decrease or diminution of their salaries, contrary to the provision of
Section 10, Article VIII of the 1987 Constitution mandating that "(d)uring their continuance in office, their salary shall not be decreased," even as it is anathema to the Ideal of an independent
judiciary envisioned in and by said Constitution."

ISSUE: Whether Judges and Justices are exempted from paying income taxes

RULING: No. What is provided for by the constitution is that salaries of judges may not be decreased during their continuance in office. They have a fix salary which may not be subject to the
whims and caprices of congress. But the salaries of the judges shall be subject to the general income tax as well as other me mbers of the judiciary.

The framers of the fundamental law, as the alter ego of the people, have expressed in clear and unmistakable terms the meaning and import of Section 10, Article VIII, of the 1987 Constitution
that they have adopted. Stated otherwise, we accord due respect to the intent of the people, through the discussions and deliberations of their representatives, in the spirit that all citizens should
bear their aliquot part of the cost of maintaining the government and should share the burden of general income taxation equitably.

TAX5.10 Henderson v Collector

MAINPOINT: Rental allowances and travel allowances by a company are not part of taxable income.

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.

Petitioner contended that 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. 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?

RULING: 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.

TAX6.10 Commissioner v. Smith

FACTS:
Respondent's employer gave to him, as compensation for his services, an option to purchase from the employer certain shares of stock of another corporation at a price not less than the then
value of the stock. In two later tax years, when the market value of the stock was greater than the option price, respondent exercised the option, purchasing large amounts of the stock in each
year.

Respondent, on motion for rehearing in this Court, for the first time contends that if he is taxable at all after the receipt of the option in 1934, he is taxable as of the date in March 1938, when
he exercised his option, and not when he received the stock in later years. The only later year in question is 1939 in which he received a substantial part of the stock. Before the delivery in 1939
and after the exercise of the option in 1938 there was a substantial increase in the value of the stock. He argues that the tax should be measured by the value of the stock in 1938 less the option
price.

ISSUE: Whether or not the difference between the market value and the option price of the stock was compensation for personal services of the employee, taxable as income in the years when
he exercised his option and not when he received the stock.

RULING: The Tax Court found that respondent received compensation when (he) exercised his option and received the stock. We take it that the Tax Court regarded fulfilment of the
conditions upon the right of Western to receive the stock, and therefore of the conditions upon the derivative right of respondent to receive it under his option, as prerequisite to the effective
exercise of the option; and that the taxable compensation to petitioner intended to be secured by the option was in fact received by respondent as and when the shares of stock were delivered to
him, since prior to that time there was no certainty that he would receive the stock. This conclusion of the Tax Court finds ample support in the record, and we concur in it. Hence, petition denied.

TAX.7.10. Henderson v. Collector

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 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 employer-corporations request.

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.

ISSUE: Whether the rental allowances and travel allowances furnished and given by the employer-corporation are part of taxable income?

RULING: 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. Thus, Rental and Travel Allowance are not Part of Taxable Income.

TAX8.10 Commissioner v. British Overseas Airways Corporation

FACTS: British Overseas Airways Corp (BOAC) is a 100% British Government-owned corporation engaged in international airline business and is a member of the Interline Air
Transport Association, and thus, it operates air transportation services and sells transportation tickets over the routes of the other airline members.

From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus, did not carry passengers and/or cargo to or from the Philippines but maintained a general sales
agent in the Philippines - Warner Barnes & Co. Ltd. and later, Qantas Airways - which was responsible for selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal
Revenue assessed deficiency income taxes against BOAC.

ISSUE: Whether the revenue derived by BOAC from ticket sales in the Philippines constitute income of BOAC from Philippine sources, and accordingly taxable.

RULING: The source of an income is the property, activity, or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines. Herein, the sale of tickets in the Philippines is the activity that produced the income. The tickets exchanged hands here and payment
for fares were also made here in the Philippine currency.

The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within Philippine territory, enjoying the protection accorded by the Philippine government.
In consideration of such protection, the flow of wealth should share the burden of supporting the government. PD 68, in relation to PD 1355, ensures that international airlines are taxed on their
income from Philippine sources. The 2 % tax on gross billings is an income tax. If it had been placed under Title V of the Tax Code covering taxes on business.

TAX9.10 Luzon Stevedoring Co. v. Trinidad | 43 Phil. 803

FACTS: Petitioner seeks to recover the percentage tax which had been paid by it to the defendant under protest. The defendant alleged that the plaintiff was engaged in business as a contractor,
its gross receipts from said business during said quarter amounting to P242,281.33, and that the defendant, levied and assessed on the above-mentioned amount the percentage tax amounting to
P2,422.81.

From an examination of the evidence adduced, it appears that the plaintiff is and was a corporation duly organized under the laws of the Philippine Islands; that it was engaged in the stevedoring
business in said city, said business consisting of loading and unloading cargo from vessels in port, at certain rates of charge per unit of cargo; that all the work done by it is conducted under the
direct supervision of the officers of the ships and under the instruction given to plaintiffs men by the captain and officers of said ships: that no liability attaches to the plaintiff for the improper
loading or unloading of vessels, the captain being responsible for said work; that the captain answers for all the cargo placed on board and for the manner in which said cargo is loaded; while it
is true that the plaintiff undertakes to work in the loading or unloading of cargo from any vessel in port, yet it always does the work under the direct supervision of the officers of the vessel; that
said supervision is so effective that, while the loading is made, plaintiffs laborers are under the direct control of the officers of the ship; and that said supervision is so direct, that no discretion
is left to the plaintiff nor its men. It was mutually agreed at the time of the trial that the provisions of section 1462 of Act No. 2711 had been in force for a period of eight years (section 43, Act
No. 2339; section 1617, Act No. 2657; section 1462, Act No, 2711) before the defendant made any effort to collect the taxes in question.

ISSUE: Whether the plaintiff is a contractor?

RULING: No. In a general sense every person who enters into a contract may be called a contractor, yet the word, for want of a better one, has come to be used with special reference to a person
who, in the pursuit of an independent business, undertakes to do a specific piece of job or work for other persons, using his own means and methods without submitting himself to control as to
the petty details. The true test of a "contractor" would seem to be that he renders service in the course of an independent occupation representing the will of his employer only as to the result of
his work, and not as to the means by which it is accomplished. From the foregoing it seems clear to us that the plaintiff is not a contractor in the sense that word is used in said section 1436 of
Act No. 2711, and therefore the tax paid by plaintiff under protest was illegally collected and should be repaid.

TAX10.10 CIR vs. ENGINEERING EQUIPMENT

FACTS: Engineering Equipment & Supply (EES) was engaged in the business of designing and installing central air-conditioning systems. It was assessed by the Commissioner of Internal
Revenue for 30% advanced sales tax, among other penalties pursuant to an anonymous complaint filed before the BIR. EES objected and argued that they are contractors and not manufacturers
and should be liable only for the 3% tax on sales of services or pieces of work. The commissioner demanded upon Engineering the payment of the assessed tax and suggested that Engineering
pay P10k as compromise for Engineerings penal liability for violation of the Tax Code.

ISSUE: Whether Engineering is a contractor for a piece of work thus only liable for 3% tax on sales of service.

RULING: The distinction between a contract of sale and one for work, labor and materials is tested by the inquiry whether the thing transferred is one not in existence and which never would
have existed but for the order of the party desiring to acquire it, or a thing which would have existed and has been the subject of sale to some other persons even if the order had not been given.
If the article ordered by the purchaser is exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change or modification of it is made at defendant's request, it is a contract
of sale, even though it may be entirely made after, and in consequence of, the defendants order for it.

The SC found that Engineering was not a manufacturer of air-conditioning units. While it imported such items, they were not for sale to the general public and were used as mere components for
the design of the centralized air-conditioning system, the designs and specifications of which are different for every client. Various technical factors must be considered and it can be argued that
no two plants are the same; all are engineered separately and distinctly. Each project requires careful planning and meticulous layout. Such central air-conditioning systems and their designs
would not have existed were it not for the special order of the party desiring to acquire it. Engineering is thus not liable for the sales tax.

TAX11.10 Advertising associates v CA

Facts: Petitioner alleges that its business is limited to making, construction and installation of billboards and electric signs and making and printing of posters, signs, handbills, etc. It contends
that it is a media company, not an advertising company. The CIR subjected to 3% contractor's tax the billboards and electric signs petitioner sold and leased. Petitioner requested the cancellation
of the assessments. Inexplicably, for about 4 years there was no movement in the case. Thereon, CIR issued 2 warrants of distraint against petitioner's personal property. A year after, Acting
Commissioner wrote petitioner a letter reiterating the enforcement of the warrants and stated petitioner to appeal to the CTA if they disagree. The CTA ruled the that the warrants were the CIR's
appealable decisions but since the petition was filed out of time, the petition is dismissed. Petitioner contends that Section 319 of the 1977 Tax Code, the collection of the tax had already
prescribed as the the tax may be collected "within fiver years after the assessment of the tax".

Issue: Whether petitioner is not a contractor? Whether the collection of the tax has already prescribed?

Held: No. Petitioner is a business agent and an independendent contractor as contemplated in Section 191 and 194(v). Neon signs and billboards are primarily designed for advertising. The
collection has not prescribed because the issuance of warrants of distraint interrupted the five-year prescriptive period.

TAX12.10 REVENUE REGULATIONS NO. 6-2013 (April 11, 2013)

SECTION 1. Scope. Pursuant to provisions of Sec. 244 of the National Internal Revenue Code of 1997, as amended, in relation to Secs. 24 (C), 25 (A)(3), 25 (B), 27 (D) (2), 28 (A) (7) (C),
28 (B) (5) (C) of the National Internal Revenue Code (Tax Code), as Amended., these Regulations are hereby promulgated to amend certain provisions of Revenue Regulations (RR) No. 06-
2008 relative to the imposition of tax for the sale, barter, exchange or other disposition of shares not traded through the Local Stock Exchange.

SECTION 2. Sale, Barter or Exchange of Shares of Stock Not Traded Through a Local Stock Exchange Pursuant to Secs. 24 (C), 25 (A)(3), 25 (B), 27 (D) (2), 28 (A) (7) (C), 28 (B) (5) (C) of
The Tax Code, as Amended. Sec. 7 of RR No. 06-2008 is hereby amended to read as follows:

"SEC. 7. Sale, Barter or Exchange of Shares of Stock Not Traded Through a Local Stock Exchange Pursuant to Secs. 24 (C), 25 (A)(3), 25 (B), 27 (D) (2), 28 (A) (7) (C), 28 (B) (5) (C) of The
Tax Code, as Amended. xxx xxx xxx

(c.2) Definition of "fair market value" of the Shares of Stock. For purposes of this Section, "fair market value" of the shares of stock sold shall be:

(c.2.1) x x x

(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the value of the shares of stock at the time of sale shall be the fair market value. In determining the value
of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus the liability values is the indicated
value of the equity. For purposes of this section, the appraised value of real property at the time of sale shall be the higher of

(1) The fair market value as determined by the Commissioner, or

(2) The fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, or

(3) The fair market value as determined by Independent Appraiser.

Illustrations: Assume that Mr. X sold on April 30, 2013, 5000 shares of stock of A Corporation. A Corporation has 10,000 outstanding shares The total assets and liabilities of A Corporation
in its latest audited financial statements (AFS) are Php20,000,000 and Php5,000,000, respectively. Assuming further that the book value of all its assets and liabilities is also the market value
with the exception of its real property. Supposing, the market value of the real properties of A Corporation are as follows:

In the above case, the net asset of A Corporation is Php15,000,000 while the adjusted net asset is Php24,500,000 [(20,000,000 + 9,500,000)- 5,000,000]. As such, with the adjusted value per
shares of stock of Php2,450, the fair market value of the shares sold was Php12,250,000 (5000 shares at Php2,450 per share).

TAX13.10 Del Rosario v. Commissioner, CTA Case No. 4796, December 1, 1994

MAINPOINT: It involves the sale of shares of stock of a domestic corporation which is not listed and not traded in the stock exchange by a non dealer in securities. The capital gain from the
sale of listed shares over the counter or outside of the local stock exchange shall be subject to the 5%/10% capital gains tax, since the law requires that the listed shares must be traded in the local
stock exchange. What is controlling is whether or not the shares of stock are traded in the local stock exchange and not where the actual sale happened. (Del Rosario v. Commissioner, CTA Case
No. 4796, December 1, 1994).

If the taxpayer constructed a new residence and then sold his old house, is the transaction subject to capital gains tax? Yes, exemption from capital gains tax does not find application since the
law is clear that the proceeds should be used in acquiring or constructing a new principal residence. Thus, the sale happened.

If the stock is traded in the stock exchange, it is NOT subject to capital gains tax BUT to stock transaction tax of of 1% on its gross selling price. Only those sales of shares of stock of a
domestic corporation which are not listed or not traded in the stock exchange by a non-dealer in securities.

TAX15.10 REVENUE REGULATION NO. 17-2003 MARCH 31, 2003

https://www.bir.gov.ph/images/bir_files/old_files/pdf/1180rr03_17.pdf

Income payments subject to Final Withholding Tax:

Income Payments to a Citizen or to a Resident Alien Individual
Interest on any peso bank deposit 20%
 Royalties from books, literary works, & musical compositions 10%
Royalty other than above 20%
Interest under the expanded foreign currency deposit system 7.5%
Prizes [except prizes amounting to P10,000 or less which is subject to tax under 20%
Sec. 24(A)(1) of the Tax Code]
Interest income from long term deposit (except those with term of five years or 5%
more) 12%
20%

Cash and/or property dividends Dividend from a domestic corp, or from a joint 10%
stock company, insurance or mutual fund company, & regional operating
headquarters of multinational company or share in the distributive net income
after tax of partnership (except a general professional partnership), joint stock or
joint venture or consortium taxable as a corporation
Capital Gains presumed to have been realized from the sale, exchange or other 6%
disposition of real property as CAPITAL assets
Winnings (except winnings from Philippine Charity Sweepstake Office and 20%
Lotto)
Capital gains from sale of shares of stock of a domestic corporation, not listed 5%
and traded thru a local stock exchange 10%
Income Payments to a Non-Resident Alien Engaged in Trade or Business in the Philippines
On Certain Passive Income :
Dividend from a domestic corp, or from a joint stock company, insurance or 20%
mutual fund company, & regional operating headquarters of multinational
company or share in the distributive net income after tax of partnership (except
a general professional partnership), joint stock or joint venture or consortium
taxable as a corporation
Share in the distributable net income of a partnership 20%
Interests from any currency bank deposit and yield or any other monetary benefit 20%
from deposit substitutes and from trust funds and similar arrangements;
Royalties from books, literary works, & musical compositions 10%
Royalty other than above 20%
Prizes (except prizes amounting to P10,000 or less which is subject to tax under 20%
Sec. 25(A)(1) of the Tax Code.
Winnings (except from Philippine Charity Sweepstake Office and Lotto) 20%
Interest on Long Term Deposits (except those with term of five years or more) 5%
12%
20%

Capital Gains presumed to have been realized from the sale, exchange or other 6%

disposition of real property as CAPITAL assets.

Income Derived from All Sources Within the Philippines by a Non-Resident Alien Individual Not Engaged in Trade or Business

On gross amount of income derived from all sources within the Philippines 25%
On Capital Gains presumed to have been realized from the sale, exchange or 6%
disposition of real property located in the Philippines
Capital gains from sale of shares of stock of a domestic corporation, not listed 5%/10%
and traded thru a local stock exchange
Income derived by Alien Individuals employed by
Regional or Area Headquarters and Regional Operating Headquarters of 15% (except income subject to FBT)
Multinational Companies,
Offshore Banking Units 15%
Foreign Petroleum Service Contractors and Subcontractors 15%
Income Payment to a Domestic Corporation
Interest from any currency bank deposits and yield or any other monetary benefit 20%
from deposit substitutes and from trust fund and similar arrangements derived
from sources within the Philippines
Royalties derived from sources within the Philippines ( if from outside 20%
Philippines taxable income of 30%)
Interest income derived from a depository bank under the Expanded Foreign 7.5%
Currency Deposit (FCDU) System
Income derived by a depository bank under the FCDU from foreign transactions 10%
with local commercial banks
On capital gains presumed to have been realized from the sale, exchange or other 6%
disposition of real property located in the Philippines classified as capital assets.
Capital gains from sale of shares of stock of a domestic corporation,not listed 5%
and traded thru a local stock exchange 10%
Income Payments to a Resident Foreign Corporation
Offshore Banking Units 10%
Tax on branch Profit Remittances 15%
Interest on any currency bank deposits and yield or any other monetary benefit 20%
from deposit substitute and from trust funds and similar arrangements and
royalties derived from sources within the Philippines
Interest income on FCDU 7.5%
Income derived by a depository bank under the expanded foreign currency 10%
deposits system from foreign currency transactions with local commercial banks
Income Derived from all Sources Within the Philippines by a Non-Resident Foreign Corporation
Gross income from all sources within the Philippines 30%
Gross income from all sources within the Philippines derived by a non-resident 25%
cinematographic film owner, lessor and distributor
On the gross rentals, lease and charter fees derived by a non-resident owner or 4.5%
lessor of vessels from leases or charters to Filipino citizens or corporations
On the gross rentals, charter and other fees derived by a non-resident lessor of 7.5%
aircraft, machineries and other equipment
Interest on foreign loans contracted on or after August 1, 1986 20%
Dividends received from a domestic corporation ( subject to tax sparing rule) 15%
Others
Fringe Benefit Taxes ( except rank-and- file) 32% on grossed up mone-tary value
Informers reward 10%

TAX16.10 CIR vs Estate of Toda

FACTS: Benigno Toda was 99% owner/stockholder of CIC (Cibeles Insurance Corp). On March 2, 1989 CIC thru Toda sold some of its properties for 100m to Altonaga. On the same date,
Altonaga sold the same properties to RMI for 200m (Royal Match Inc). Sometime later, Toda sold all of his shares in CIC to Choa for 12.5m. Then he died. On January 27, 1995, the estate of
Toda then received a Notice of Assessment for deficiency income tax in the amount of 79m for the year 1989 (or the year when the abovementioned transaction took place). The Commissioner
of internal Revenue was of the contention that that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100
million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher
corporate income tax rate of 35%.
Structure:

If CIC to Altonaga to RMI

Effect:
CIC pay 35% (Corporate income tax) of 100m,
Altonaga pay 5% (Capital Gains Tax) of 200m.

If CIC to RMI directly.

Effect:
CIC pay 35% (CIT) of 300m. (Bigger tax liability)

ISSUE: What was the tax scheme adopted, avoidance or evasion?

RULING: Evasion.

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is
shown that a tax is due; (2) an accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and (3) a course of action or failure of action
which is unlawful.

All these factors are present in the instant case. It is significant to note that prior to the purported sale by CIC to Altonaga, CIC received P40 million from RMI, and not from Altonaga. That P40
million was debited by RMI and reflected in its trial balance as other inv. Cibeles Bldg. Also, later on, another P40 million was debited and reflected in RMIs trial balance as other inv. Cibeles
Bldg. Showing that the real buyer of the properties was RMI, and not the intermediary Altonaga. The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5%
individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter.
Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale was merely a tax ploy, a sham, and without business purpose and economic
substance. The execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.

TAX1.11 COMMISSIONER OF INTERNAL REVENUE vs. THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL RETIREMENT PLAN

FACTS: GCL is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. As such, it was exempt from income
tax. GCL made investments and earned interest income from which was withheld the fifteen per centum (15%) final withholding tax. GCL filed with CIR a claim for refund for the amounts
withheld. GCL disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax.

The refund requested having been denied, GCL elevated the matter to the CTA, which 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.

CIR seeks a reversal of the decision.

ISSUE: Whether or not GCL is exempt from the final withholding tax on interest income

RULING: Yes. 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 tax advantage was conceived in order to encourage the formation and establishment of such private plans for the benefit of laborers and employees outside of the Social Security Act.

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution accumulated income and reduce
whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law.

There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt. 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.

TAX2.11 Fisher v Collector 43 Phil 973

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 dividend 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 tax on 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 stock dividends are income and are taxable.

RULING: No. A stock dividend, when declared, is merely a certificate of stock which evidences the interest of the stockholder in the increased capital of the corporation. There is a clear
distinction between a cash dividend and a stock dividend. The one is a disbursement to the stockholder of accumulated earnings. and the corporation parts irrevocably with all interest therein;
the other involves no disbursement by the corporation; the corporation parts with nothing to its stockholder. When a cash dividend is declared and paid to the stockholders, such cash becomes
the absolute property of the stockholders and cannot be reached by the creditors of the corporation in the absence of fraud. The property represented by a stock dividend, however, still being the
property of the corporation, and not of the stockholder, it 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 of the property of the corporation is sold under execution, then the stockholders certainly could not be charged with having received an income by virtue of the issuance of
the stock dividend. If the ownership of the property represented by a stock dividend is still in the corporation and not in the holder of such stock, certainly such stock cannot be regarded as income
to the stockholder. The stockholder has received nothing but a representation of an interest in the property of the corporation and, as a matter of fact, he may never receive anything, depending
upon the final outcome of the business of the corporation.

TAX3.11 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 tax on 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.

RULING: 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.

As stock dividends are not "income," the same cannot be considered taxes under that provision of Act No. 2833.

TAX4.11 Hyatt v. Alen, 56 NY 553

MAIN POINT: A shareholder in a corporation has no legal title to the property or profits of the corporation until a division is made.
FACTS: The exchange of stock contemplated by the agreement of August 11, 1871, having been made, the defendant was bound by his covenant "that all profits and dividends of and upon the
stock of the Albany Dental Plate Company so exchanged, up to the first day of January 1872, shall be paid" to the plaintiffs. The Albany Dental Plate Company was a corporation, and no dividend
on the stock of the company was made after the agreement of August 11, 1871, until April 9, 1872, when a dividend of fifteen dollars on each share was declared, whereby the defendant was
entitled to receive, and did receive on the twenty shares transferred to him by the plaintiffs, $300.

The referee finds that of this sum $250 was derived from the increase in the value of the assets and cash of said company on hand January 1, 1872, over the value of its cash and other assets
August 11, 1871, the date of the agreement, and for that sum he directed judgment against the defendant.

ISSUE: Whether, upon the facts found, there were any profits or dividends on the stock to which, under the agreement, the plaintiffs were entitled

RULING: It is conceded that the plaintiffs are not entitled to recover anything by force of the word dividends contained in the agreement. This word when used in reference to corporate stocks
has a technical but well understood meaning, and indicates corporate funds derived from the business and earnings of the corporation, appropriated by a corporate act to the use of and to be
divided among the stockholders. If it has in some cases a broader signification, it is not material now to notice it. The defendant agreed that dividends to the 1st of January, 1872, should be paid
to the plaintiffs. As no declaration of a dividend was made until April 9, 1872, the defendant incurred no liability under this part of the agreement.
The covenant of the defendant related to profits of the stock up to the 1st of January, 1872. There were profits earned by the corporation up to that time, but to these the covenant does not apply.
They were not profits of the stockholders in any legitimate sense. There were no profits accruing to the stockholders until they were set apart by the corporation for their use.

TAX 5.11 Commissioner v CA and Soriano

Doctrine: capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. This was intended
for the protection of corporate creditors.

FACTS: Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of
original issue when the corporation was founded and 134,659 shares as stock dividend declarations. So in 1964 when Soriano died, half of the shares he held went to his wife as her conjugal
share (wifes legitime) and the other half (92,577 shares, which is further broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to the estate. For sometime
after his death, his estate still continued to receive stock dividends from ASC until it grew to at least 108,000 shares.

In 1968, ASC through its Board issued a resolution for the redemption of shares from Sorianos estate purportedly for the planned Filipinization of ASC. Eventually, 108,000 shares were
redeemed from the Soriano Estate. In 1973, a tax audit was conducted. Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against ASC for deficiency withholding
tax-at-source. The CIR explained that when the redemption was made, the estate profited (because ASC would have to pay the estate to redeem), and so ASC would have withheld tax payments
from the Soriano Estate yet it remitted no such withheld tax to the government.

ASC averred that it is not duty bound to withhold tax from the estate because it redeemed the said shares for purposes of Filipinization of ASC and also to reduce its remittance abroad.

ISSUE: Whether or not ASCs arguments are tenable.

HELD: No. The reason behind the redemption is not material. The proceeds from a redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano Estate definitely
profited from the redemption and such profit is taxable, and again, ASC had the duty to withhold the tax. There was a total of 108,000 shares redeemed from the estate. 25,247.5 of that was
original issue from the capital of ASC. The rest (82,752.5) of the shares are deemed to have been from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in the
absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate profits such as stock dividends.

It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that the latter is merely redeeming them as such. The capital cannot be distributed in the form of
redemption of stock dividends without violating the trust fund doctrine.

TAX6.11 Commissioner v. Procter & Gamble PMC

FACTS:
Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend
withholding tax to the BIR which amounted to Php 8.3M.

It subsequently filed a claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended
by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only 15%.

ISSUE: Whether or not P&G Philippines is entitled to the refund or tax credit.

RULING: YES. P&G Philippines is entitled. Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate stockholders of a
Philippine corporation. This rate goes down to 15% ONLY IF he country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed
paid in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. However, such tax credit for taxes deemed paid in the Philippines
MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the
test is if USA shall allow P&G USA a tax credit for taxes deemed paid in the Philippines applicable against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage
points. Requirements were met.

TAX.7.11. Commissioner v. Wander

FACTS: Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss
corporation not engaged in trade for business in the Philippines. Wander filed its withholding tax return for 1975 and 1976 and remitted to its parent company Glaro dividends from which 35%
withholding tax was withheld and paid to the BIR. In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for reimbursement, contending that it is liable only to 15%
withholding tax in accordance with sec. 24 (b) (1) of the Tax code, as amended by PD nos. 369 and 778, and not on the basis of 35% which was withheld ad paid to and collected by the
government. petitioner failed to act on the said claim for refund, hence Wander filed a petition with Court of Tax Appeals who in turn ordered to grant a refund and/or tax credit. CIR's petition
for reconsideration was denied hence the instant petition to the Supreme Court.

ISSUE: Whether Wander is entitled to the preferential rate of 15% withholding tax on dividends declared and to remitted to its parent corporation.

RULING: Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this case, reads:
sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hereby further amended to read as follows:
(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not engaged in trade or business in the Philippines, including a foreign life insurance company not engaged
in life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except interest
on a foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensation, remuneration for technical services or otherwise emolument, or other fixed determinable
annual, periodical ot casual gains, profits and income, and capital gains: xxx Provided, still further that on dividends received from a domestic corporation liable to tax under this chapter, the tax
shall be 15% of the dividends received, which shall be collected and paid as provided in sec 53 (d) of this code, subject to the condition that the country in which the non-resident foreign
corporation is domiciled shall allow a credit against tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporation and the tax (15%) dividends as provided in this section: xxx."

From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends received, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends.

While it may be true that claims for refund construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax on the dividends received by Glaro from the
Philippines should be considered as a full satisfaction if the given condition. For, as aptly stated by respondent Court, to deny private respondent the privilege to withhold only 15% tax provided
for under PD No. 369 amending section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations interest
here and discourage them for investing capital in our country.

TAX8.11 Commissioner v. SC Johnson & Sons

FACTS: Respondent is a domestic corporation organized and operating under the Philippine Laws, entered into a licensed agreement with the SC Johnson and Son, USA, a non-resident foreign
corporation based in the USA pursuant to which the respondent was granted the right to use the trademark, patents and technology owned by the later 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 USA.

For the use of 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.

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 Gillette rulings were issued. Since the agreement was approved by the Technology
Transfer Board, the preferential tax rate of 10% should apply to the respondent. So, royalties paid by the respondent to SC Johnson and Son, USA is only subject to 10% withholding tax.
The Commissioner did not act on said claim for refund. Private respondent SC Johnson & Son, Inc. then filed a petition for review before the CTA, to claim a refund of the overpaid withholding
tax on royalty payments from July 1992 to May 1993.

On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and ordered the CIR to issue a tax credit certificate in the amount of P163,266.00 representing overpaid withholding tax
on royalty payments beginning July 1992 to May 1993.

The CIR thus filed a petition for review with the CA which rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in toto the CTA ruling.

ISSUE: Whether tax refunds are considered as tax exemptions.

RULING: It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in derogation of sovereign authority and to be construed strictissimi juris against the
person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute
law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; However, there is nothing on record to support a claim that the tax on royalties under RP-US
Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

TAX9.11 Wrigley Philippines v. Commissioner

FACTS: Petitioner is a corporation duly organized and existing under and by virtue of the laws of the Philippines, engaged in the business of manufacturing, purchasing, exporting, importing,
selling, and in general, trading and dealing in and handling chewing gum, confectionary, gum chide, food products, and by products of any of the foregoing. It entered into a License Agreement
with Wrigley-US, a non-resident foreign corporation duly organized and existing under the laws of the State of Delaware, U.S.A. In accordance with the provisions of the License Agreement,
petitioner paid Wrigley-US the royalty fees due thereon and subjected the same to fifteen percent (15%) withholding tax rate.

Later, an Agreement between the Philippines and the China was signed and said Treaty imposed only ten percent (10%) withholding tax rate on royalty payments. Consequently, petitioner filed
with the Bureau of Internal Revenue-International Tax Affairs Division, a request for confirmation of whether petitioner's royalty payments to Wrigley-US are subject to ten percent (10%)
withholding tax rate pursuant to the provisions of Article 13 (2) (b) (iii) or the 'most favored nation' clause of the RP-US Tax Treaty in relation to Article 12 (2) (b) of the RP-China Tax Treaty
with a Claim for Refund or Issuance of a Tax Credit Certificate. Having received no response, it filed a petition for review.

ISSUE: Whether petitioner is entitled to a refund/Credit

RULING: Yes. The Court in Division then proceeded to determine the proper interpretation of the provisions of RP-US, RP-Russia, RP-Denmark or RPSweden, and RP-China Tax Treaties,
particularly, the provisions on the rate of final taxes on royalties to be imposed by the Philippines upon royalties received by a non-resident foreign corporation. After studying the Treaties, the
Court in Division declared that the provisions of the RP-China Tax Treaty, more particularly, the reduced rate on royalties at ten percent (10%) should apply to respondent. Based on the
documents submitted by respondent, the Court in Division also found that respondent complied with all the requirements provided for in Revenue Memorandum Circular (RMC) No. 46-02 for
the availment of the reduced withholding tax rate of 10%.

"Under Revenue Memorandum Circular (RMC) No. 46-02, the following conditions must be complied with before the reduced withholding tax rate of ten percent (1 0%) on royalties
may be availed of by the taxpayer invoking the same, thus:

1. It is necessary that there be an agreement or a contract whereby the royalties paid to the US must originate from the use of, or the right to use any patent, trade mark, design or
model, plan, secret formula or process, or from the use, or the right to use, industrial, commercial or scientific experience; and

2. For as long as the contract or agreement is subject to the approval under Philippine law, the same must be duly approved by the Philippine competent authorities.

Hence, this Court is convinced that petitioner is entitled to the reduced Withholding tax rate of ten percent (10%) on its royalty payments.

TAX10.11 COMMISSIONER vs. SMITH

FACTS: Respondent's employer gave to him, as compensation for his services, an option to purchase from the employer certain shares of stock of another corporation at a price not less than the
then value of the stock. In two later tax years, when the market value of the stock was greater than the option price, respondent exercised the option, purchasing large amounts of the stock in each
year.

ISSUE: Whether the difference between the market value and the option price of the stock was compensation for personal services of the employee, taxable as income in the years when he
received the stock.

RULING: Any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected, is taxable. Thus, in stock options, the difference
between the fair market value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee at the time of exercise not upon
the grant or vesting of the right.

TAX11.11 Fernandez hermanos inc. v commisioner, cta case 787 june 10, 1963

Facts: The CIR assessed against the petitioner alleged deficiency income tax from 1950-1954 which were the result of alleged discrepancies found in the income tax returns for said years.

Issue: (1) Whether the right of the Government to collect the deficiency income tax in question has already prescribed
(2) Whether the CIR's determination with respect to the disputed items is correct

Held: (1) Section 332 of the NIRC provides that where the assessment of a tax been made within the time prescribed by law, such tax may be collected by judicial action within 5 years from the
date of assessment. The judicial action is deemed to have been commenced on the date of the filing of the appeal, and not on the date of the filing of respondent's answer. Herein appeal was filed
less than 5 years from the assessment of the tax, hence, the right to collect the tax has not yet prescribed.

(2) The value of shares of stock of Mati Lumber acquired by petitioner were determined by petitioner to be worthless. These shares were written off the books and was claimed as a loss deduction.
CIR disallowed the deduction becuase the worthlessness was not clearly established. Evidence shows that sometime in 1950 petitioner became aware that Mati Lumber Co. ceased to operate
when its manager and owner left for Spain where he subsequently died. The company left no assets and completely insolvent. Petitioner wrote off the investment as worthless and consequently
claimed the loss as a deduction in its income tax return. SC: These facts supported by evidence has proven to be worthless.

In 1945, the controlling stockholders of Palawan Manganese Mines, Inc. are also the controlling stockholders of petitioner, who requested financial help from petitioner to enable it to resume its
mining operations in Palawan. The request was approved by the Board of Directors of petitioner. Petitioner gave to PMMI advances from 1945-1951. Despite the advances and resumption of its
operations, PMMI continued to suffer losses. Petitioner became convinced that those advances could no longer be recovered. While it continued to give advances hoping it might be able to
recover the same, it wrote off as worthless the amount representing the total advances given. These advances cannot be considered as a bad debt because petitioner had no expectation of
repayment. Under their MOA, PMMI was to pay petitioner 15% of its net profits, not advances. Even assuming they are debts, it has been held that if the debtor corporation, although losing
money or insolvent, was still operating at the end of the taxable year, the debt is not considered worthless and therefore not deductible.

Petitioner spent for the operation of its Balamban Coal Mines in Cebu in 1950 and 1951. The amount of which were deducted by petitioner as losses in its returns for said years. CIR disallowed
the deduction on the ground that the expenditures should have been capitalized, or if they are deductible losses, the losses are deductible in 1952, not in 1950 and 1951. As there were no road or
outlet thru which coal products could be transported from the mines to the provincial road, the mines had to be abandoned in 1952. Considered as losses, the Court agrees its deduction in 1952,
the time they were abandoned not when the expenditure could not be considered losses prior to the abandonment of the mines. Disallowance is sustained.

CIR disallowed petitioner's deduction of its losses in the operation of its Hacienda Dalupiri; solely on the ground that it was operated solely as a hobby and not for profit evident by its continuous
operation at a loss. The Court ruled that it does not appear that the farm was used for entertainment, social activities, or other non-business purposes, therefore, entitled to deduct expanses and
losses in connection with its operation, which losses were determined by means of inventories authorized under Sec 100 of Revenue regulation no. 2. The same is applicable in its losses sustained
in the operation of the Hacienda Samal.

Petitioner claimed a depreciation allowance for its buildings at the rate of 10%. Respondent claims that the reasonable allowance for depreciation is only 3%, hence, it disallowed the excess in
3%. The Court sustained the disallowance on the ground that petitioner has not submitted adequate proof of the correctness of its determination that the buildngs had a useful life of only 10 years.

Petitioner had an increase in net worth of P30,050 in 1950. The amount was treated as taxable income of petitioner. It appears that petitioner had an account with Manila Insurance Company, the
records bearing on which were lost. When its records were reconstituted, the amount of its liability was corrected, which resulted in the increase of the net worth of petitioner. The Court ruled
that CIR erred in taxing said increase as the principle underlying its taxability rests on the theory that such an increase if unreported and not explained by the taxpayer, comes from income derived
from a taxable source. In this case, the increase was not result of the receipt by it of taxable income. It was merely the outcome of the correction of an error. The Income Tax Law imposes a tax
on income; it does not tax any or every increase in net worth whether or not derived from income.
Petitioner acquired in 1926 a real property for P11,852.74 and was sold in 1950 for P60K. Petitioner reported in its return a gain of 37K or a discrepancy of 11,852.74. It was sufficiently proved
during the hearing that, after acquiring the property, petitioner made improvements the value of which amounted to P11,852.74, hence, the discrepancy. The Court reversed the disallowance of
its deduction.

TAX12.11 Commissioner v. Duberstein 363 U.S. 278 (1960)

Facts: Duberstein, Taxpayer, was president of the Duberstein Iron & Metal Company. He did business with Mohawk Metal Corporation. Berman was the president of Mohawk and the two knew
each other for seven years. Taxpayer often provided Berman with information on potential customers. Berman gave Taxpayer a Cadillac in exchange for the information. Taxpayer did not want
to accept the car because he had no expectation for giving the information to Berman., but upon Bermans insistence he accepted the car. Taxpayer testified that he did not think Berman would
have sent him the Cadillac except for the customer information. Mohawk deducted the Cadillac as a business expense on its corporate income tax return. Taxpayer did not include the value of
the Cadillac in his gross income for 1951. The Commissioner of Internal Revenue asserted a deficiency and the Tax Court affirmed.

The text also discusses the case of Stanton v. United States. Stanton, Taxpayer, was employed by Trinity Church for 10 years. He resigned to go into business for himself and received a gratuity
of $22,500. Taxpayer failed to include this amount as gross income and a deficiency was asserted. Testimony showed that the amount could have been a gift for the years of service. However,
other evidence suggested the amount may have been part of a severance package in return for his resignation.

Issue: Was the Cadillac a gift excludable from gross income?

Ruling: The Supreme Court determined that the courts must take into consideration the intention of the one transferring the property. Ultimately, whether or not an item is a gift is a question of
fact for the trier of fact. Further, appellate courts should not overturn a trier of facts determination unless it is clearly erroneous.

.Justice Brennan issued the opinion for the Supreme Court of the United States in holding that in Duberstein it was not error to consider the Cadillac as income and not a gift.

In Stanton, the Supreme Court found that the facts are not sufficient to make a determination and vacated the judgment and remanded for further proceedings.

TAX13.11 CIR v. YMCA

FACTS: YMCA--a non-stock, non-profit institution, which conducts various programs beneficial to the public pursuant to its religious, educational and charitable objectives--leases out a portion
of its premises to small shop owners, like restaurants and canteen operators, deriving substantial income for such. Seeing this, the Commissioner of Internal Revenue (CIR) issued an assessment
to private respondent for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. YMCA opposed arguing that
its rental income is not subject to tax, mainly because of the provisions of Section 27 of NIRC which provides that civic league or organizations not organized for profit but operate exclusively
for promotion of social welfare and those organized exclusively for pleasure, recreation and other non-profitble businesses shall not be taxed.

ISSUE: Is the contention of YMCA tenable?

HELD: No. Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in interpretation in construing tax exemptions. Furthermore, a claim of statutory
exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. Thus, the claimed exemption "must expressly be granted in a statute stated in a
language too clear to be mistaken."

Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is not exempt from income taxation, even if such income is exclusively used for the
accomplishment of its objectives.

Verba-legis non est recedendum. The law does not make a distinction. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. Where the law
does not distinguish, neither should we.

TAX15.11 FISHER VS TRINIDAD 43 PHIL 1922

MAINPOINT: Stock dividends are not income, thus not taxable.

FACTS:
During the year 1919, the 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;
Frederick Fisher was a stockholder in said corporation;
Said corporation, as result of the business for that year, declared a "stock dividend";
The proportionate share of said stock divided of theFisher was P24,800; that the stock dividend for that amount was issued to the him;
Thereafter, in the month of March, 1920, Fisher, upon demand of Wenceslao Trinidad, paid under protest, and voluntarily, unto the latter the sum of P889.91 as income tax on said
stock dividend.
For the recovery of that sum (P889.91) the present action was instituted.

ISSUE: Are the "stock dividends" in the present case "income" and taxable?

RULING: No.
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.

For bookkeeping purposes, a corporation, by issuing stock dividend, acknowledges a liability in form to the stockholders, evidenced by a capital stock account. 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.

The SC said 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. It is not 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." Such property can be reached under the ordinary from of taxation.