COMMISSIONER OF IR VS CENTRAL LUZON DRUG CORPGR 148512June 26, 2006Azcuna, J.

Petitioner Bicolandia Drug Corporation is a domestic corporation principally engaged in the

retail of pharmaceutical products. Petitioner has a drugstore located in Naga City under the
:FACTS: name and business style of "Mercury Drug."

This is a petition for review under Rule 45 of Rules of Court seeking the nullification of CA
Pursuant to the provisions of R.A. No. 7432, entitled "An Act to Maximize the Contribution of
decision granting respondents claim for tax equal to the amount of the 20% that it extended
Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other
to senior citizens on the latters purchases pursuant to Senior Citizens Act. Respondent
Purposes," also known as the "Senior Citizens Act," and Revenue Regulations No. 2-94,
deducted the total amount of Php219,778 from its gross income for the taxable year 1995
petitioner granted to qualified senior citizens a 20% sales discount on their purchase of
whereby respondent did not pay tax for that year reporting a net loss of Php20,963 in its
medicines covering the period from July 19, 1993 to December 31, 1994.
corporate income tax. In 1996, claiming that the Php219,778 should be applied as a tax credit,
respondent claimed for refund in the amount of Php150, 193.
When petitioner filed its corresponding corporate annual income tax returns for taxable years
ISSUE: Whether or not the 20% discount granted by the respondent to qualified senior citizens 1993 and 1994, it claimed as a deduction from its gross income the respective amounts
may be claimed as tax credit or as deduction from gross sales? of P80,330 and P515,000 representing the 20% sales discount it granted to senior citizens.

RULING: Tax credit is explicitly provided for in Sec4 of RA 7432. The discount given to Senior
citizens is a tax credit, not a deduction from the gross sales of the establishment concerned.
The tax credit that is contemplated under this Act is a form of just compensation, not a remedy
for taxes that were erroneously or illegally assessed and collected. In the same vein, prior
payment of any tax liability is a pre-condition before a taxable entity can benefit from tax
credit. The credit may be availed of upon payment, if any. Where there is no tax liability or
where a private establishment reports a net loss for the period, the tax credit can be availed of
and carried over to the next taxable year.
On March 28, 1995, however, alleging error in the computation and claiming that the
aforementioned 20% sales discount should have been treated as a tax credit pursuant to R.A.
No. 7432 instead of a deduction from gross income, petitioner filed a claim for refund or credit
of overpaid income tax for 1993 and 1994, amounting to P52,215 and P334,750, respectively.
Petitioner computed the overpayment as follows:
Income tax benefit of tax credit 100%

Income tax benefit of tax deduction 35%

G.R. No. 142299 June 22, 2006
Differential 65%
BICOLANDIA DRUG CORPORATION (FORMERLY ELMAS DRUG COPRORATION), Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent. For 1993

DECISION 20% discount granted in 1993 P80,330

AZCUNA, J.: Multiply by 65% x 65%

Overpaid corporate income tax P52,215

This is a petition for review1 by Bicolandia Drug Corporation, formerly known as Elmas Drug
Corporation, seeking the nullification of the Decision and Resolution of the Court of Appeals,
dated October 19, 1999 and February 18, 2000, respectively, in CA-G.R SP No. 49946 entitled For 1994
"Commissioner of Internal Revenue v. Elmas Drug Corporation."

20% discount granted in 1993 P515,000

The controversy primarily involves the proper interpretation of the term "cost" in Section 4 of
Republic Act (R.A.) No. 7432, otherwise known as "An Act to Maximize the Contribution of Multiply by 65% x 65%
Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other
Purposes." Overpaid corporate income tax P334,750

The facts2 of the case are as follows:

On December 29, 1995, petitioner filed a Petition for Review with the Court of Tax Appeals
(CTA) in order to toll the running of the two-year prescriptive period for claiming for a tax
refund under Section 230, now Section 229, of the Tax Code.
It contended that Section 4 of R.A. No. 7432 provides in clear and unequivocal language that xxx
discounts granted to senior citizens may be claimed as a tax credit. Revenue Regulations No. 2-
94, therefore, which is merely an implementing regulation cannot modify, alter or depart from After a careful scrutiny of the documents presented, the Court, allows only the amount of sales
the clear mandate of Section 4 of R.A. No. 7432, and, thus, is null and void for being discounts duly supported by the pre-marked cash slips x x x.
inconsistent with the very statute it seeks to implement.
Hence, only the above amounts which are properly documented can be used as base in
The Commissioner of Internal Revenue, on the other hand, maintained that the aforesaid computing for the cost of 20% discount as tax credit. The overpaid income tax therefore is
section providing for a 20% sales discount to senior citizens is a misnomer as it runs counter to computed as follows: 3
the solemn duty of the government to collect taxes. The Commissioner likewise pointed out
that the provision in question employs the word "may," thereby implying that the availability
of the remedy of tax credit is not absolute and mandatory and it does not confer an absolute For 1993
right on the taxpayer to avail of the tax credit scheme if he so chooses. The Commissioner
further stated that in statutory construction, the contemporaneous construction of a statute Net Sales P31,080,508.00
by executive officers of the government whose duty is to execute it is entitled to great respect
and should ordinarily control in its interpretation. Add: 20% Discount to Senior Citizens 80,330.00

Thus, addressing the matter of the proper construction of Section 4(a) of R.A. No. 7432 Gross Sales P31,160,838.00
regarding the treatment of the 20% sales discount given to senior citizens on their medicine
purchases, the CTA ruled on the issue of whether or not the discount should be deductible Less: Cost of Sales
from gross sales of value-added tax or other percentage tax purposes as prescribed under
Revenue Regulations No. 2-94 or as a tax credit deductible from the tax due. Merchandise Inventory, beg. P 4,226,588.00

Add Purchases 29,234,361.00

In its Decision, dated August 27, 1998, the CTA declared that:

"x x x Total Goods available for Sale P33,460,947.00

Less: Merchandise Inventory, End P 4,875.944.00 P28,585,003.00

Revenue Regulations No. 2-94 gave a new meaning to the phrase "tax credit," interpreting it to
mean that the 20% discount granted to qualified senior citizens is an amount deductible from
the establishments gross sales, which is completely contradictory to the literal or widely Gross Income P 2,575,835.00
accepted meaning of the said phrase, as an amount subtracted from an individuals or entitys
tax liability to arrive at the total tax liability (Blacks Law Dictionary).
Less: Operating Expenses 1,706,491.00
In view of such apparent discrepancy in the interpretation of the term "tax credit", the
provisions of the law under R.A. 7432 should prevail over the subordinate regulation issued by Net Operating Income P 869,344.00
the respondent under Revenue Regulation No. 2-94. x x x
Add: Miscellaneous Income 72,680.00

Having settled the legal issue involved in the case at bar, We are now tasked to resolve the
factual issues of whether or not petitioner is entitled to the claim for refund of its overpaid Net Income P 942,024.00
income taxes for the years 1993 and 1994 based on the evidence at hand.
Less: Interest Income Subject to Final Tax 21,140.00
Contrary to the findings of the independent CPA, aside from the unverifiable 20% sales
discounts in the amount of P18,653.70 (Exh. R-3), the Court noted some material Net Taxable Income P 920,884.00
discrepancies. Not all the details listed in the 1994 "Summary of Sales and Discounts Given to
Senior Citizens" correspond with the cash slips presented. There are various sales discounts Tax Due (P920,884 x 35%) P 322,309.40
granted which were not properly computed and there were also some cash slips left unsigned
by the buyers. Less: 1) Tax Credit (Cost of 20% Discount)
[(28,585,003.00/31,160,838.00) P 73,690.03
 x 80,330.34]

2) Income Tax Payment for the Year 294,194.00 P 367,884.03 AMOUNT REFUNDABLE P 135,906.48

P 45,574.63
AMOUNT REFUNDABLE
WHEREFORE, in view of all the foregoing, petitioners claim for refund is hereby partially
GRANTED. Respondent is hereby ORDERED to REFUND, or in the alternative, to ISSUE a tax
For 1994 credit certificate in favor of the petitioner the amounts of P45,574.63 and P135,906.48,
representing overpaid income tax for the years 1993 and 1994, respectively.
Net Sales P 29,904,734.00

Add: 20% Discount to Senior Citizens 515,000.00 SO ORDERED.4

Gross Sales P 30,419,734.00 Both the Commissioner and petitioner moved for a reconsideration of the above decision.
Petitioner, in its Motion for Partial Reconsideration, claimed that the "cost" that private
establishments may claim as tax credit under Section 4 of R.A. No. 7432 should be construed to
Less: Cost of Sales mean the full amount of the 20% sales discount granted to senior citizens instead of the
formula --[Tax Credit = Cost of Sales/Gross Sales x 20% discount] used by the CTA in
Merchandise Inventory, beg. P 4,875,944.00
computing for the amount of the tax credit. In view of this, petitioner prayed for the refund of
Add Purchases 28,138,103.00 the amount of income tax it allegedly overpaid in the aggregate amount of P45,574.63
and P135,906.48, respectively, for the taxable years 1993 and 1994 as a result of treating the
sales discount of 20% as a tax deduction rather than as a tax credit.
Total Goods available for Sales P 33,014,047.00
The Commissioner, on the other hand, moved for a re-computation of petitioners tax liability
Less: Merchandise Inventory, End 5,036.117.00 27,977,930.00 averring that the sales discount of 20% should be deducted from gross income to arrive at the
taxable income. Such discount cannot be considered a tax credit because the latter, being in
the nature of a tax refund, is treated as a return of tax payments erroneously or excessively
Gross Income P 2,441,804.00
assessed and collected as provided under Section 204(3) of the Tax Code, to wit:
Less: Operating Expenses 1,880,153.00
(3) x x x No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2) years after the
Net Operating Income P 561,651.00 payment of the tax or penalty.
Add: Miscellaneous Income 82,207.00
lawphil.net

Net Income P 643,858.00 In its Resolution, dated December 7, 1998, the CTA modified its earlier decision, thus:

Less: Interest Income Subject to Final Tax 30,618.00

ACCORDINGLY, the petitioners Motion for Partial Reconsideration is hereby GRANTED.
Respondent is hereby ORDERED to ISSUE tax credit certificates in favor of petitioner [in] the
Net Taxable Income P 613,240.00 amounts of P45,574.63 and P135,906.48 representing overpaid income tax for the years 1993
and 1994, as prayed for in its motion. On the other hand, the Respondents Motion for
Tax Due (613,240 x 35%) P 214,634.00 Reconsideration is DENIED for lack of merit.

Less: 1) Tax Credit (Cost of 20% Discount) SO ORDERED.5

[(28,585,003.00/31,160,838.00)
x 80,330.34] P316,156.48
Consequently, the Commissioner filed a petition for review with the Court of Appeals asking for
2) Income Tax Payment for the Year 34,384.00 P 350,540.48 the reversal of the CTA Decision and Resolution.
The Court of Appeals rendered its assailed Decision on October 19, 1999, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing premises, the petition is hereby GRANTED IN PART. The
resolution issued by the Court of Tax Appeals dated December [7], 1998 is SET ASIDE and the
Decision rendered by the latter is AFFIRMED IN TOTO.
No costs.
SO ORDERED.6
Hence, this petition positing that:
THE COURT OF APPEALS ERRED IN RULING THAT IN COMPUTING THE TAX CREDIT TO BE
ALLOWED PETITIONER FOR DISCOUNTS GRANTED TO SENIOR CITIZENS ON THEIR PURCHASE OF
MEDICINES, THE ACQUISITION COST RATHER THAN THE ACTUAL DISCOUNT GRANTED TO
SENIOR CITIZENS SHOULD BE THE BASIS.7
Otherwise stated, the matter to be determined is the amount of tax credit that may be claimed
by a taxable entity which grants a 20% sales discount to qualified senior citizens on their
purchase of medicines pursuant to Section 4(a) of R.A. No. 7432 which states:
Sec. 4. Privileges for the Senior citizens. The senior citizens shall be entitled to the following:
a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishments, restaurants and recreation
centers and purchase of medicines anywhere in the country: Provided, That private
establishments may claim the cost8 as tax credit.
The term "cost" in the above provision refers to the amount of the 20% discount extended by a
private establishment to senior citizens in their purchase of medicines. This amount shall be
applied as a tax credit, and may be deducted from the tax liability of the entity concerned. If
there is no current tax due or the establishment reports a net loss for the period, the credit
may be carried over to the succeeding taxable year. This is in line with the interpretation of this
Court in Commissioner of Internal Revenue v. Central Luzon Drug Corporation 9 wherein it
affirmed that R.A. No. 7432 allows private establishments to claim as tax credit the amount of
discounts they grant to senior citizens.
The Court notes that petitioner, while praying for the reinstatement of the CTA Resolution,
dated December 7, 1998, directing the issuance of tax certificates in favor of petitioner for the
respective amounts of P45,574.63 and P135,906.48 representing overpaid income tax for 1993
and 1994, asks for the refund of the same.10
In this regard, petitioners claim for refund must be denied. The law expressly provides that the
discount given to senior citizens may be claimed as a tax credit, and not a refund. Thus, where
the words of a statute are clear, plain and free from ambiguity, it must be given its literal
meaning and applied without attempted interpretation.11
WHEREFORE, the petition is PARTLY GRANTED. The Decision and Resolution of the Court of
Appeals, dated October 19, 1999 and February 18, 2000, respectively, in CA-G.R SP No. 49946
are REVERSED and SET ASIDE. The Resolution of the Court of Tax Appeals, dated December 7,
1998, directing the issuance of tax credit certificates in favor of petitioner in the amounts
of P45,574.63 and P135,906.48 is hereby REINSTATED. No costs.
SO ORDERED.
CARLOS SUPERDRUG CORP. vs. DSWD, ET. AL
GR No. 166494, June 29, 2007
FACTS:
Petitioners, belonging to domestic corporations and proprietors operating drugstores in the
Philippines, are praying for preliminary injunction assailing the constitutionality of Section 4(a)
of Republic Act (R.A.) No. 9257, otherwise known as the Expanded Senior Citizens Act of
2003. On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432, was signed into law by
President Gloria Macapagal-Arroyo and it became effective on March 21, 2004. Section 4(a) of
the Act states:
SEC. 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging establishments, restaurants and recreation
centers, and purchase of medicines in all establishments for the exclusive use or enjoyment of
senior citizens, including funeral and burial services for the death of senior citizens;
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction
based on the net cost of the goods sold or services rendered: Provided, That the cost of the
discount shall be allowed as deduction from gross income for the same taxable year that the
discount is granted. Provided, further, That the total amount of the claimed tax deduction net
of value added tax if applicable, shall be included in their gross sales receipts for tax purposes
and shall be subject to proper documentation and to the provisions of the National Internal
Revenue Code, as amended.
The DSWD, on May 8, 2004, approved and adopted the Implementing Rules and Regulations of
RA No. 9275, Rule VI, Article 8 which contains the proviso that the implementation of the tax
deduction shall be subject to the Revenue Regulations to be issued by the BIR and approved by
the DOF. With the new law, the Drug Stores Association of the Philippines wanted a
clarification of the meaning of tax deduction. The DOF clarified that under a tax deduction
scheme, the tax deduction on discounts was subtracted from Net Sales together with other
deductions which are considered as operating expenses before the Tax Due was computed
based on the Net Taxable Income. On the other hand, under a tax credit scheme, the amount
of discounts which is the tax credit item, was deducted directly from the tax due amount.
The DOH issued an Administrative Order that the twenty percent discount shall include both
prescription and non-prescription medicines, whether branded or generic. It stated that such
discount would be provided in the purchase of medicines from all establishments supplying
medicines for the exclusive use of the senior citizens.
 Drug store owners assail the law with the contention that granting the discount would result to
loss of profit and capital especially that such law failed to provide a scheme to justly
compensate the discount.
ISSUE: WON Section 4(a) of the Expanded Senior Citizens Act is unconstitutional or not violative
of Article 3 Section 9 of the Constitution which provides that private property shall not be
taken for public use without just compensation and the equal protection clause of Article 3
Section 1.
HELD:
The permanent reduction in their total revenues is a forced subsidy corresponding to the taking
of private property for public use or benefit. This constitutes compensable taking for which
petitioners would ordinarily become entitled to a just compensation. Just compensation is
defined as the full and fair equivalent of the property taken from its owner by the expropriator.
The measure is not the takers gain but the owners loss. The word just is used to intensify the
meaning of the word compensation, and to convey the idea that the equivalent to be rendered
for the property to be taken shall be real, substantial, full and ample.
The law grants a twenty percent discount to senior citizens for medical and dental services, and
diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses,
carnivals, and other similar places of culture, leisure and amusement; fares for domestic land,
air and sea travel; utilization of services in hotels and similar lodging establishments,
restaurants and recreation centers; and purchases of medicines for the exclusive use or
enjoyment of senior citizens. As a form of reimbursement, the law provides that business
establishments extending the twenty percent discount to senior citizens may claim the
discount as a tax deduction.
The law is a legitimate exercise of police power which, similar to the power of eminent domain,
has general welfare for its object. Police power is not capable of an exact definition, but has
been purposely veiled in general terms to underscore its comprehensiveness to meet all
exigencies and provide enough room for an efficient and flexible response to conditions and
circumstances, thus assuring the greatest benefits. Accordingly, it has been described as the
most essential, insistent and the least limitable of powers, extending as it does to all the great
public needs. It is [t]he power vested in the legislature by the constitution to make, ordain,
and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either
with penalties or without, not repugnant to the constitution, as they shall judge to be for the
good and welfare of the commonwealth, and of the subjects of the same.
The all event test
CIR vs. Isabela Cultural Corporation
Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice
for deficiency income tax and expanded withholding tax from BIR. It arose from the
disallowance of ICCs claimed expense for professional and security services paid by ICC; as well
as the alleged understatement of interest income on the three promissory notes due from
Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the
failure of ICC to withhold 1% e-withholding tax on its claimed deduction for security services.
ICC sought a reconsideration of the assessments. Having received a final notice of assessment,
it brought the case to CTA, which held that it is unappealable, since the final notice is not a
decision. CTAs ruling was reversed by CA, which was sustained by SC, and case was remanded
to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for professional
and security services were properly claimed, it said that even if services were rendered in 1984
or 1985, the amount is not yet determined at that time. Hence it is a proper deduction in 1986.
It likewise found that it is the BIR which overstate the interest income, when it applied
compounding absent any stipulation.
Petitioner appealed to CA, which affirmed CTA, hence the petition.
Issue: Whether or not the expenses for professional and security services are deductible.
Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that
it must have been paid or incurred during the taxable year. This requisite is dependent on the
method of accounting of the taxpayer. In the case at bar, ICC is using the accrual method of
accounting. Hence, under this method, an expense is recognized when it is incurred. Under a
Revenue Audit Memorandum, when the method of accounting is accrual, expenses not being
claimed as deductions by a taxpayer in the current year when they are incurred cannot be
claimed in the succeeding year.
The accrual of income and expense is permitted when the all-events test has been met. This
test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the
reasonable accurate determination of such income or liability. The test does not demand that
the amount of income or liability be known absolutely, only that a taxpayer has at its disposal
the information necessary to compute the amount with reasonable accuracy.
From the nature of the claimed deductions and the span of time during which the firm was
retained, ICC can be expected to have reasonably known the retainer fees charged by the firm.
They cannot give as an excuse the delayed billing, since it could have inquired into the amount
of their obligation and reasonably determine the amount.
Reasonable test
C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue
Facts:
Hoskins, a domestic corporation engaged in the real estate business as broker, managing
agents and administrators, filed its income tax return (ITR) showing a net income of P92,540.25
and a tax liability of P18,508 which it paid.
CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the disallowance
of an item which was paid to Mr. C. Hoskins representing 50% of supervision fees earned and
set aside the disallowance of the other 3 items.
Issue: Whether or not the disallowance of the 4 items were proper.
Held: NOT deductible. It did not pass the test of reasonableness which is:
General rule, bonuses to employees made in good faith and as additional compensation for
services actually rendered by the employees are deductible, provided such payments, when
added to the salaries do not exceed the compensation for services rendered.
The conditions precedent to the deduction of bonuses to employees are:
Payment of bonuses is in fact compensation
Must be for personal services actually rendered
Bonuses when added to salaries are reasonable when measured by the amount and
quality of services performed with relation to the business of the particular taxpayer.
There is no fixed test for determining the reasonableness of a given bonus as compensation.
This depends upon many factors.

In the case, Hoskins fails to pass the test. CTA was correct in holding that the payment of the
company to Mr. Hoskins of the sum P99,977.91 as 50% share of supervision fees received by
the company was inordinately large and could not be treated as an ordinary and necessary
expenses allowed for deduction.
CIR V GENERAL FOODS
GR No. 143672| April 24, 2003 | J. Corona
Test of Reasonableness
Facts:
Respondent corporation General Foods (Phils), which is engaged in the manufacture of Tang,
Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 1985
and claimed as deduction, among other business expenses, P9,461,246 for media advertising
for Tang.
The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income
taxes of P2,635,141.42 against General Foods, prompting the latter to file an MR which was
denied.
General Foods later on filed a petition for review at CA, which reversed and set aside an earlier
decision by CTA dismissing the companys appeal.
Issue: W/N the subject media advertising expense for Tang was ordinary and necessary
expense fully deductible under the NIRC
Held: No. Tax exemptions must be construed in stricissimi juris against the taxpayer and
liberally in favor of the taxing authority, and he who claims an exemption must be able to
justify his claim by the clearest grant of organic or statute law. Deductions for income taxes
partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then
deductions must also be strictly construed.
To be deductible from gross income, the subject advertising expense must comply with the
following requisites: (a) the expense must be ordinary and necessary; (b) it must have been
paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on
the trade or business of the taxpayer; and (d) it must be supported by receipts, records or
other pertinent papers.
While the subject advertising expense was paid or incurred within the corresponding taxable
year and was incurred in carrying on a trade or business, hence necessary, the parties views
conflict as to whether or not it was ordinary. To be deductible, an advertising expense should
not only be necessary but also ordinary.
The Commissioner maintains that the subject advertising expense was not ordinary on the
ground that it failed the two conditions set by U.S. jurisprudence: first, reasonableness of the
amount incurred and second, the amount incurred must not be a capital outlay to create
goodwill for the product and/or private respondents business. Otherwise, the expense must
be considered a capital expenditure to be spread out over a reasonable time.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an
advertising expense. There being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the type and size of business in
which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the
expenditure itself; the intention of the taxpayer and the general economic conditions. It is the
interplay of these, among other factors and properly weighed, that will yield a proper
evaluation.
The Court finds the subject expense for the advertisement of a single product to be
inordinately large. Therefore, even if it is necessary, it cannot be considered an ordinary
expense deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of
merchandise or use of services and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves expenditures incurred, in whole or in
part, to create or maintain some form of goodwill for the taxpayers trade or business or for
the industry or profession of which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the reasonableness of amount,
there is no doubt such expenditures are deductible as business expenses. If, however, the
expenditures are for advertising of the second kind, then normally they should be spread out
over a reasonable period of time.
The companys media advertising expense for the promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half of the companys entire claim for
marketing expenses for that year under review. Petition granted, judgment reversed and set
aside.
Substantiation Rule and Cohan Rule
Gancayco vs.Collector
Gancyaco files his income tax return for the year 1949. Respondent issued a warrant of
distraint and levy against the properties of Gancayco for the satisfaction of his deficiency
income tax liability, and accordingly, the municipal treasurer issued a notice of sale of said
property at public auction. Gancayco filed a petition to cancel the sale and direct that the same
be re-advertised at a future date
ISSUE: Whether the sum of PhP 16,860.31 is due from Gancayco as deficiency income tax for
1949 hinges on the validity of his claim for deduction:
a) farming expense PhP 27,459
b) representation expenses PhP 8,933.45
HELD:
a)Farming Expenses - no evidence has been presnted as to the nature of the said farming
expenses other than the care statement of petitioner that they were spent for the
development and cultivation of his property.
No specification has been made as to the actual amount spent for purchase of tools,
equipment or materials or the amount spent for improvement.
b) Representation expense
PhP 22, 820 is allowed PhilexMinings withdrawal as manager of the mine and in the eventual cessation of mine
PhP 8,993.45 is disallowed because of the absence of recipt, invoices or vouchers of the operations.
expenditures in question, petitioner could not sspecify the items constituting the same when
The parties executed a Compromise with Dation in Payment wherein Baguio Gold admitted
or on whom or on what they were incurred.
indebtedness to petitioner in the amount of P179, 394,000.00 and agreed to pay the same in
three segments by first assigning Baguio Golds tangible assets to Philex Mining, transferring to
Wala H.tambunting
the latter Baguio Golds equitable title in its Phil drill assets and finally settling the remaining
liability through properties that Baguio Gold may acquire in the future.
Bad debts
The parties executed an Amendment to Compromise with Dation in Payment where the
Philex Mining v. CIR GR 148187 April 16, 2008
parties determined that Baguio Golds indebtedness to petitioner actually amounted to P259,
FACTS:
137,245.00, which sum included liabilities of Baguio Gold to other creditors that petitioner had
assumed as guarantor. These liabilities pertained to long-term loans amounting to
Philex Mining Corp. entered into an agreement with Baguio Gold Mining Co. for the former to
US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank
manage and operate the latters mining claim, known as the Sto. Nino Mine. The parties
N.A. This time, Baguio Gold undertook to pay petitioner in two segments by first assigning its
agreement was denominated as Power of Attorney which provides inter alia: . Within three
tangible assets forP127, 838,051.00 and then transferring its equitable title in its Philodrill
(3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available tothe
assets for P16, 302,426.00. The parties then ascertained that Baguio Gold had a remaining
MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts
outstanding indebtedness to petitioner in the amount of P114, 996,768.00.
as from time to time may be required by the MANAGERS within the said 3-year period, for use
in the MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION PESOS (P11,
Philex Mining wrote off in its 1982 books of account the remaining outstanding indebtedness
000,000.00) shall be deemed, for internal audit purposes, as the owners account in the Sto.
of Baguio Gold by charging P112, 136,000.00 to allowances and reserves that were set up in
Nino PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO MINE, which is
1981 andP2,860,768.00 to the 1982 operations.
left with the Sto. Nino PROJECT shall be added to such owners account.
Whenever the MANAGERS shall deem it necessary and convenient in connection with the
In its 1982 annual income tax return, Philex Mining deducted from its gross income the amount
MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the
of P112,136,000.00 as loss on settlement of receivables from Baguio Gold against reserves
Sto. Nino PROJECT, in accordance with the following arrangements:(a) The properties shall be
and allowances. However, the BIR disallowed the amount as deduction for bad debt and
appraised and, together with the cash, shall be carried by the Sto.Nino PROJECT as a special
assessed petitioner a deficiency income tax of P62,811,161.39. Philex Mining protested before
fund to be known as the MANAGERS account.
the BIR arguing that the deduction must be allowed since all requisites for a bad debt
(b) The total of the MANAGERS account shall not exceed P11, 000,000.00, except
deduction were satisfied,
With prior approval of the PRINCIPAL; provided, however, that if the compensation of the
To wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be worthless;
MANAGERS as herein provided cannot be paid in cash from the Sto. Nino PROJECT, the amount
and (c) it was charged off within the taxable year when it was determined to be worthless. BIR
not so paid in cash shall be added to the MANAGERS account. (c) The cash and property shall
denied petitioners protest. It held that the alleged debt was not ascertained to be worthless
not thereafter be withdrawn from the Sto. Nino PROJECT until termination of this Agency. (d)
since Baguio Gold remained existing and had not filed a petition for bankruptcy; and that the
The MANAGERS account shall not accrue interest. Since it is the desire of the PRINCIPAL
deduction did not consist of a valid and subsisting debt considering that, under the
toextend to the MANAGERS the benefit of subsequent appreciation of property, upon a
management contract, petitioner was to be paid 50% of the projects net profit.
projected termination of this Agency, the ratio which the MANAGERS account has to the
owners account will be determined, and the corresponding proportion of the entire assets of
ISSUE:
the STO. NINO MINE, excluding the claims, shall be transferred to the MANAGERS, except that
WON the parties entered into a contract of agency coupled with an interest whichis not
such transferred assets shall not include mine development, roads, buildings, and similar
revocable at will
property which will be valueless, or of slight value, to the MANAGERS. The MANAGERS can, on
HELD:
the other hand, require at their option that property originally transferred by them to the Sto.
No. An examination of the Power of Attorney reveals that a partnership or joint venture was
Nino PROJECT be re-transferred to them. Until such assets are transferred to the MANAGERS;
indeed intended by the parties.
this Agency shall remain subsistings x x x12.
The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the
In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
Sto.Nino PROJECT before income tax. It is understood that the MANAGERS shall pay income tax
principal due to an interest of a third party that depends upon it, or the mutual interest of both
on their compensation, while the PRINCIPAL shall pay income tax on the net profit of the Sto.
principal and agent.
Nino PROJECT after deduction therefrom of the MANAGERS compensation.
In this case, the non-revocation or non-withdrawal under paragraph 5(c) applies to the
advances made by petitioner who is supposedly the agent and not the principal under the
Philex Mining made advances of cash and property in accordance with paragraph 5 of the
contract. Thus, it cannot be inferred from the stipulation that the parties relation under the
agreement. However, the mine suffered continuing losses over the years which resulted to
agreement is one of agency coupled with an interest and not a partnership.
 NOLCO
Neither can paragraph 16 of the agreement be taken as an indication that the relationship of
the parties was one of agency and not a partnership. Although the said provision states that PICOP VS CIR
this Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the Paper Industries Corporation of the Philippines (PICOP) is a Philippine Corporation registered
MANAGERS is outstanding, inclusive of the MANAGERS account, it does not necessarily with Board of Investment (BOI) as preferred pioneer enterprise with respect to its integrated
follow that the parties entered into an agency contract coupled with an interest that cannot be pulp and paper mill, and as preferred non-pioneer enterprise with respect to its integrated
withdrawn by Baguio Gold. plywood and veneer mills.

The main object of the Power of Attorney was not to confer a power in favor of petitioner to
PICOP received from CIR two (2) letters of assessment (a) for deficiency transaction tax and for
contract with third persons on behalf of Baguio Gold but to create a business relationship
between petitioner and Baguio Gold, in which the former was to manage and operate the documentary and science stamp tax (b) deficiency income tax for 1977.
latters mine through the parties mutual contribution of material resources and industry. The
essence of an agency, even one that is coupled with interest, is the agents ability to represent PICOP maintains that it is not liable at all to pay any of the assessments or any part
his principal and bring about business relations between the latter and third persons. thereof. PICOP questions the imposition by the CA of the deficiency income tax resulting from
disallowance of certain claimed financial guarantee expense and claimed year-end adjustment
The strongest indication that petitioner was a partner in the Sto. Nino Mine is the fact that it
of sales and cost of sales.
would receive 50% of the net profits as compensation under paragraph 12 of the agreement.
The entirety of the parties contractual stipulations simply leads to no other conclusion than
that petitioners compensation is actually its share in the income of the joint venture. Article ISSUE: Whether PICOP is liable for: (1) the 35% transaction; (2) interest and surcharge on
1769 (4) of the Civil Code explicitly provides that the receipt by a person of a share in the unpaid transaction tax.
profits of a business is prima facie evidence that he is a partner in the business
HELD:
Interest on tax delinquencies

CIR vs. Itogon Suyoc Mines PICOP is liable for the 35% transaction tax due in respect of interest payments on its money
Respondent Itogon-Suyoc Mines, a mining corporation duly organized and existing under market borrowings.
Philippine laws fild its income tax return.
The transaction tax maybe levied only in respect of the interest earnings of PICOP money
Fiscal year (1956-1960) paid PhP 13, 155.20 as the first installment of the income tax due. Then market lenders accruing after PD No. 1154 went into effect, and not in respect of all the 1977
filed an amended income tax return reporting a net loss of PhP 331,707.33 interest earning of such lenders.

Fiscal year (1960-1961) setting forth its income tax liability of PhP 97.345 but deducting the
amount of PhP 13,155.20 representing alleged tax credit for over-payment of the preceding
fiscal year 1959-1960. BIBIANO V. BAAS, JR. vs. COURT OF APPEALS, ET. AL.

Petitioner assessed against the respondent the amount of PhP 1,512.83 as 1% monthly G.R. No. 102967 February 10, 2000
interest. The basis for such an assessment was the absence of legal right to deduct said
amount before the refund or tax credit thereof was approved by petitioner CIR.

ISSUE: WON respondent corporation is liable to pay the sum of PhP1,512.83 as 1% monthly Facts: On February 20, 1976, Petitioner sold to AYALA a parcel of land for
interest for delinquency in the payment of income tax.? P2,308,770.00. Petitioner received an initial payment amounting to P461,754.00 with the
balance to be paid in four equal consecutive annual installments covered by promissory note.
HELD: The same day, petitioner discounted the promissory note with AYALA, for its face value. AYALA
NIRC provides that interest upon the amount determined as a deficiency shall be assessed and issued nine (9) checks to petitioner, all dated February 20, 1976, with the uniform amount of
shall be paid upon notice and demand from the CIR at the specified. If in any preceding year P205,224.00.
the tax payer was entitled to a refund of any amount due as tax, such amount, if not yet
refunded, maybe deducted from the tax to be paid.
In his 1976 Income Tax Return, petitioner reported only the initial payment as income from
disposition of capital asset. In the succeeding years, until 1979, petitioner reported a uniform
income corresponding to the annual installment as gain from sale of capital asset.
Later, the BIR Regional Director, through its tax examiners, discovered that petitioner had no
outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash
and the entire profit should have been taxable in 1976.
Petitioner was assessed deficiency tax with surcharges and penalties for the year 1976. A
demand letter was then issued for the settlement of the income tax deficiency. Petitioner
failed to pay and insisted that the sale of his land to AYALA was on installment.
On June 17, 1981, a criminal complaint for tax evasion was filed against petitioner.
On July 2, 1981, petitioner filed an Amnesty Tax Return under P. D. 1740. Likewise, on
November 2, 1981, petitioner again filed an Amnesty Tax Return under P.D. 1840. In both,
petitioner did not recognize that his sale of land to AYALA was on cash basis.
Petitioner maintains that the proceeds of the promissory notes, not yet due, which he
discounted to AYALA should not be included as income realized in 1976.
Petitioner states that the original agreement in the Deed of Sale should not be affected by the
subsequent discounting of the bill.
Issues:
1. Does the mere filing of tax amnesty return under P.D. 1740 and 1840 ipso facto
shield a taxpayer from immunity against prosecution?
2. Should petitioners income from the sale of land be declared as a cash transaction in
his tax return because the buyer discounted the promissory note, issued to the seller, on the
same day of the sale?
Held: 1. No. The petitioner is not entitled to the benefits of P.D. Nos.
1740 and 1840. The mere filing of tax amnesty return under P.D. 1740 and 1840 does not ipso
facto shield him from immunity against prosecution. Tax amnesty is a general pardon to
taxpayers who want to start a clean tax slate. It also gives the government a chance to collect
uncollected tax from tax evaders without having to go through the tedious process of a tax
case. To avail of a tax amnesty granted by the government, and to be immune from suit on its
delinquencies, the taxpayer must have voluntarily disclosed his previously untaxed income and
must have paid the corresponding tax on such previously untaxed income.
PD 1740 and PD 1840 granted any individual, who voluntarily files a return under this Decree
and pays the income tax due thereon, immunity from the penalties, civil or criminal, under the
NIRC. Petitioner is not entitled to claim immunity from prosecution under the shield of availing
tax amnesty. His disclosure in his tax amnesty return did not include the income from his sale
of land to AYALA on cash basis. Instead he insisted that such sale was on installment. He did
not amend his income tax return. He did not pay the tax which was considerably increased by
the income derived from the discounting. He did not meet the twin requirements of P.D. 1740
and 1840, declaration of his untaxed income and full payment of tax due thereon.
It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor
presumed in law and if granted by statute, the terms of the amnesty like that of a tax
exemption must be construed strictly against the taxpayer and liberally in favor of the taxing
authority.
2. Yes. The general rule is that the whole profit accruing from a sale of property is
taxable as income in the year the sale is made. But, if not all of the sale price is received during
such year, and a statute provides that income shall be taxable in the year in which it is
"received," the profit from an installment sale is to be apportioned between or among the
years in which such installments are paid and received.
In this case, although the proceeds of a discounted promissory note is not considered initial
payment, still it must be included as taxable income on the year it was converted to cash.
When petitioner had the promissory notes covering the succeeding installment payments of
the land issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost
entitlement to report the sale as a sale on installment since, a taxable disposition resulted and
petitioner was required by law to report in his returns the income derived from the
discounting. What petitioner did is tantamount to an attempt to circumvent the rule on
payment of income taxes gained from the sale of the land to AYALA for the year 1976.

Taxation of Income of Individual Taxpayer
Change of Status
G.R. No. 159991 November 16, 2006
CARMELINO F. PANSACOLA, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
QUISUMBING, J.:
For review on certiorari is the Decision1 dated June 5, 2003 of the Court of Appeals in CA-G.R.
S.P. No. 60475. The appellate court denied petitioners availment of the increased amounts of
personal and additional exemptions under Republic Act No. 8424, the National Internal
Revenue Code of 19972 (NIRC), which took effect on January 1, 1998. Also assailed is the
appellate courts Resolution3 dated September 11, 2003, denying the motion for
reconsideration.
The facts are undisputed.
On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax return for the taxable
year 1997 that reflected an overpayment of 5,950. In it he claimed the increased amounts of
personal and additional exemptions under Section 354 of the NIRC, although his certificate of
income tax withheld on compensation indicated the lesser allowed amounts5 on these
exemptions. He claimed a refund of 5,950 with the Bureau of Internal Revenue, which was
denied. Later, the Court of Tax Appeals also denied his claim because according to the tax
court, "it would be absurd for the law to allow the deduction from a taxpayers gross income
earned on a certain year of exemptions availing on a different taxable year"6 Petitioner
sought reconsideration, but the same was denied.7
On appeal, the Court of Appeals denied his petition for lack of merit. The appellate court ruled
that Umali v. Estanislao,8 relied upon by petitioner, was inapplicable to his case. It further ruled
that the NIRC took effect on January 1, 1998, thus the increased exemptions were effective
only to cover taxable year 1998 and cannot be applied retroactively.
Petitioner, before us, raises a single issue:
[W]hether or not the increased personal and additional exemptions under [the NIRC] can be
availed of by the [p]etitioner for purposes of computing his income tax liability for the taxable
year 1997 and thus be entitled to the refund.9
Simply stated, the issue is: Could the exemptions under Section 35 of the NIRC, which took
effect on January 1, 1998, be availed of for the taxable year 1997?
Petitioner argues that the personal and additional exemptions are of a fixed character based
on Section 35 (A) and (B) of the NIRC10 and as ruled by this Court in Umali, these personal and
additional exemptions are fixed amounts to which an individual taxpayer is entitled. He
contends that unlike other allowable deductions, the availability of these exemptions does not
depend on the taxpayers profession, trade or business for a particular taxable period. Relying
again in Umali, petitioner alleges that the Court of Appeals erred in ruling that the increased
exemptions were meant to be applied beginning taxable year 1998 and were to be reflected in
the taxpayers returns to be filed on or before April 15, 1999. Petitioner reasons that such
ruling would postpone the availability of the increased exemptions and literally defer the
effectivity of the NIRC to January 1, 1999. Petitioner insists that the increased exemptions were
already available on April 15, 1998, the deadline for filing income tax returns for taxable year
1997, because the NIRC was already effective.
Respondent, through the Office of the Solicitor General, counters that the increased
exemptions were not yet available for taxable year 1997 because all provisions of the NIRC
took effect on January 1, 1998 only; that the fixed character of personal and additional
exemptions does not necessarily mean that these were not time bound; and petitioners
proposition was contrary to Section 35 (C)11 of the NIRC. It further stated that petitioners
exemptions were determined as of December 31, 1997 and the effectivity of the NIRC during
the period of January 1 to April 15, 1998 did not affect his tax liabilities within the taxable year
1997; and the inclusive period from January 1 to April 15, 1998, the filing dates and deadline
for administrative purposes, was outside of the taxable year 1997. Respondent also maintains
that Umali is not applicable to this case.
Prefatorily, personal and additional exemptions under Section 35 of the NIRC are fixed
amounts to which certain individual taxpayers (citizens, resident aliens) 12 are entitled. Personal
exemptions are the theoretical personal, living and family expenses of an individual allowed to
be deducted from the gross or net income of an individual taxpayer. These are arbitrary
amounts which have been calculated by our lawmakers to be roughly equivalent to the
minimum of subsistence,13 taking into account the personal status and additional qualified
dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been
predetermined by our lawmakers as provided under Section 35 (A) and (B). Unless and until
our lawmakers make new adjustments on these personal exemptions, the amounts allowed to
be deducted by a taxpayer are fixed as predetermined by Congress.
A careful scrutiny of the provisions14 of the NIRC specifically shows that Section 79
(D)15 provides that the personal and additional exemptions shall be determined in accordance
with the main provisions in Title II of the NIRC. Its main provisions pertain to Section 35 (A) and
(B) which state,
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General.-For purposes of determining the tax provided in Section 24(A) of this
Title,16 there shall be allowed a basic personal exemption as follows:
xxxx
For each married individual 32,000
xxxx
(B) Additional Exemption for Dependents.There shall be allowed an additional exemption of
Eight thousand pesos (8,000) for each dependent not exceeding four (4). (Emphasis ours.)
Section 35 (A) and (B) allow the basic personal and additional exemptions as deductions from
gross or net income, as the case maybe, to arrive at the correct taxable income of certain
individual taxpayers. Section 24 (A) (1) (a) imposed income tax on a resident citizens taxable
income derived for each taxable year. It provides as follows:
SEC. 24. Income Tax Rates.
(A) Rates of Income Tax on Individual Citizen
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax
under Subsections (B),17 (C),18 and (D)19 of this Section, derived for each taxable year from all
sources within and without the Philippines by every individual citizen of the Philippines residing
therein; (Emphasis ours.)
Section 31 defines "taxable income" as the pertinent items of gross income specified in the
NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for
such types of income by the NIRC or other special laws. As defined in Section 22 (P), 20 "taxable
year" means the calendar year, upon the basis of which the net income is computed under
Title II of the NIRC. Section 4321 also supports the rule that the taxable income of an individual
shall be computed on the basis of the calendar year. In addition, Section 45 22 provides that the
deductions provided for under Title II of the NIRC shall be taken for the taxable year in which
they are "paid or accrued" or "paid or incurred."
Moreover, Section 79 (H)23 requires the employer to determine, on or before the end of the
calendar year but prior to the payment of the compensation for the last payroll period, the tax
due from each employees taxable compensation income for the entire taxable year in
accordance with Section 24 (A). This is for the purpose of either withholding from the
employees December salary, or refunding to him not later than January 25 of the succeeding
year, the difference between the tax due and the tax withheld.
Therefore, as provided in Section 24 (A) (1) (a) in relation to Sections 31 and 22 (P) and Sections
43, 45 and 79 (H) of the NIRC, the income subject to income tax is the taxpayers income as
derived and computed during the calendar year, his taxable year.
Clearly from the abovequoted provisions, what the law should consider for the purpose of
determining the tax due from an individual taxpayer is his status and qualified dependents at
the close of the taxable year and not at the time the return is filed and the tax due thereon is
paid. Now comes Section 35 (C) of the NIRC which provides,
Sec. 35. Allowance of Personal Exemption for Individual Taxpayer.
xxxx
(C) Change of Status. If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the corresponding additional
exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes
twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer
may still claim the same exemptions as if the spouse or any of the dependents died, or as if
such dependents married, became twenty-one (21) years old or became gainfully employed at
the close of such year.
Emphasis must be made that Section 35 (C) of the NIRC allows a taxpayer to still claim the
corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional
dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry,
turn 21 years old; or become gainfully employed. It is as if the changes in his or his dependents
status took place at the close of the taxable year.
Consequently, his correct taxable income and his corresponding allowable
deductions e.g. personal and additional deductions, if any, had already been determined as of
the end of the calendar year.
In the case of petitioner, the availability of the aforementioned deductions if he is thus
entitled, would be reflected on his tax return filed on or before the 15th day of April 1999 as
mandated by Section 51 (C) (1).24 Since the NIRC took effect on January 1, 1998, the increased
amounts of personal and additional exemptions under Section 35, can only be allowed as
deductions from the individual taxpayers gross or net income, as the case maybe, for the
taxable year 1998 to be filed in 1999. The NIRC made no reference that the personal and
additional exemptions shall apply on income earned before January 1, 1998.
Thus, petitioners reliance in Umali is misplaced.
In Umali, we noted that despite being given authority by Section 29 (1) (4) 25 of the National
Internal Revenue Code of 1977 to adjust these exemptions, no adjustments were made to
cover 1989. Note that Rep. Act No. 7167 is entitled "An Act Adjusting the Basic Personal and
Additional Exemptions Allowable to Individuals for Income Tax Purposes to the Poverty
Threshold Level, Amending for the Purpose Section 29, Paragraph (L), Items (1) and (2) (A), of
the National Internal Revenue Code, As Amended, and For Other Purposes." Thus, we said
in Umali, that the adjustment provided by Rep. Act No. 7167 effective 1992, should consider
the poverty threshold level in 1991, the time it was enacted. And we observed therein that
since the exemptions would especially benefit lower and middle-income taxpayers, the
exemption should be made to cover the past year 1991. To such an extent, Rep. Act No. 7167
was a social legislation intended to remedy the non-adjustment in 1989. And as cited in Umali,
this legislative intent is also clear in the records of the House of Representatives Journal.
This is not so in the case at bar. There is nothing in the NIRC that expresses any such intent. The
policy declarations in its enactment do not indicate it was a social legislation that adjusted
personal and additional exemptions according to the poverty threshold level nor is there any
indication that its application should retroact. At the time petitioner filed his 1997 return and
paid the tax due thereon in April 1998, the increased amounts of personal and additional
exemptions in Section 35 were not yet available. It has not yet accrued as of December 31,
1997, the last day of his taxable year. Petitioners taxable income covers his income for the
calendar year 1997. The law cannot be given retroactive effect. It is established that tax laws
are prospective in application, unless it is expressly provided to apply retroactively.26 In the
NIRC, we note, there is no specific mention that the increased amounts of personal and
additional exemptions under Section 35 shall be given retroactive effect. Conformably too,
personal and additional exemptions are considered as deductions from gross income.
Deductions for income tax purposes partake of the nature of tax exemptions, hence strictly
construed27 against the taxpayer28 and cannot be allowed unless granted in the most explicit
and categorical language29 too plain to be mistaken.30 They cannot be extended by mere
implication or inference.31 And, where a provision of law speaks categorically, the need for
interpretation is obviated, no plausible pretense being entertained to justify non-compliance.
All that has to be done is to apply it in every case that falls within its terms.32
Accordingly, the Court of Appeals and the Court of Tax Appeals were correct in denying
petitioners claim for refund.1wphi1
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated June 5, 2003 and the
Resolution dated September 11, 2003 of the Court of Appeals in CA-G.R. S.P. No. 60475 are
hereby AFFIRMED.
SO ORDERED.
Taxation of Income of Corporate Taxpayers
The tests applied to partnership, co-ownerships and estates
LORENZO OA V CIR GR No. L -19342 | May 25, 1972 | J. Barredo
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:
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate income tax
Held: Unregistered partnership. The Tax Court found that instead of actually distributing the
estate of the deceased among themselves pursuant to the project of partition, the heirs
allowed their properties to remain under the management of Oa and let him use their shares
as part of the common fund for their ventures, even as they paid corresponding income taxes
on their respective shares.
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.
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships
The term partnership includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial operation,
or venture is carried on (8 Mertens Law of Federal Income Taxation, p. 562 Note 63;
emphasis ours.)
with the exception only of duly registered general copartnerships 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. Judgment affirmed.
Manuel Pascual and Renato Dragon petitioners vs. CIR and CTA
Facts:
Petitioners Pascual and Dragon bought two (2) parcels of land on June 22, 1965 and
another three (3) parcels of land on May 28, 1966. They sold the first two parcels in 1968 and
the three parcels in 1970. They paid the corresponding capital gains taxes in 1973 and 1974 by
availing of the tax amnesties granted in the said years. However, in 1979, they were assessed
and required to pay deficiency corporate income taxes for the years 1968 and 1970.
The respondent Commissioner informed petitioners that in 1968 and 1970,
petitioners as co-owners in real estate transactions formed an unregistered partnership or joint
venture taxable as a corporation under Sec. 20(b) and its income was subject to the taxes
prescribed under Sec. 24, both of the NIRC.
Issue:
WON the co-ownership between the petitioners constitutes an unregistered partnership/joint
venture which is taxable as a corporation.
Held: The co-ownership between the petitioners does not constitute an unregistered
partnership. The petitioners shall be relieved of the corporate tax liability.
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 representatives 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 purchase of the lands and the subsequent sale thereof were isolated transactions. In this
case, the character of habituality peculiar to business transactions for the purpose of gain
was not present.
In Evangelista vs CIR, the court stated that there are two essential elements of a partnership:
(a) an agreement to contribute money, property or industry to a common fund; and (b) intent
to divide the profits among the contracting parties. In the said case, there was a series of
transactions where petitioners purchased 24 lots which demonstrate the character of
habituality peculiar to business transactions.
The court also held that that the sharing of returns does not in itself establish a partnership
whether or not the persons sharing therein have a joint or common right or interest in the
property. There must be a clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom of each party to transfer or
assign the whole property.
In the present case, there is no adequate basis to support the proposition that the petitioners
formed an unregistered partnership on the basis of their co-ownership. The two isolated
transactions did not 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 tax amnesty. Under these
circumstances, they cannot be considered to have formed an unregistered partnership.
AFISCO INSURANCE CORP. V CA 302 SCRA 1 (January 25, 1999)
Facts: AFISCO and 40 other non-life insurance companies entered into a Quota Share
Reinsurance Treaties with Munich, a non-resident foreign insurance corporation, to cover for
All Risk Insurance Policies over machinery erection, breakdown and boiler explosion. The
treaties required petitioners to form a pool, to which AFISCO and the others complied. On April
14, 1976, the pool of machinery insurers submitted a financial statement and filed an
Information Return of Organization Exempt from Income Tax for the year ending 1975, on
the basis of which, it was assessed by the commissioner of Internal Revenue deficiency
corporate taxes. A protest was filed but denied by the CIR.
Petitioners contend that they cannot be taxed as a corporation, because (a) the reinsurance
policies were written by them individually and separately, (b) their liability was limited to the
extent of their allocated share in the original risks insured and not solidary, (c) there was no
common fund, (d) the executive board of the pool did not exercise control and management of
its funds, unlike the board of a corporation, (e) the pool or clearing house was not and could
not possibly have engaged in the business of reinsurance from which it could have derived
income for itself. They further contend that remittances to Munich are not dividends and to
subject it to tax would be tantamount to an illegal double taxation, as it would result to taxing
the same premium income twice in the hands of the same taxpayer. Finally, petitioners argue
that the governments right to assess and collect the subject Information Return was filed by
the pool on April 14, 1976. On the basis of this return, the BIR telephoned petitioners on
November 11, 1981 to give them notice of its letter of assessment dated March 27, 1981. Thus,
the petitioners contend that the five-year prescriptive period then provided in the NIRC had
already lapsed, and that the internal revenue commissioner was already barred by prescription
from making an assessment.
Held: A pool is considered a corporation for taxation purposes. Citing the case of Evangelista v.
CIR, the court held that Sec. 24 of the NIRC covered these unregistered partnerships and even
associations or joint accounts, which had no legal personalities apart from individual members.
Further, the pool is a partnership as evidence by a common fund, the existence of executive
board and the fact that while the pool is not in itself, a reinsurer and does not issue any
insurance policy, 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.
As to the claim of double taxation, the pool is a taxable entity distinct from the individual
corporate entities of the ceding companies. The tax on its income is obviously different from
the tax on the dividends received by the said companies. Clearly, there is no double taxation.
As to the argument on prescription, the prescriptive period was totaled under the Section 333
of the NIRC, because the taxpayer cannot be located at the address given in the information
return filed and for which reason there was delay in sending the assessment. Further, the law
clearly states that the prescriptive period will be suspended only if the taxpayer informs the CIR
of any change in the address.
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS,
brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
AQUINO, J.:
Facts:
On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and 963 square meters
of located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four
children, the petitioners, to enable them to build their residences. The Torrens titles issued to
them showed that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to
the Walled City Securities Corporation and Olga Cruz Canada for the total sum of P313,050.
They derived from the sale a total profit of P134, 341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, the Commissioner of Internal Revenue required the four petitioners to
pay corporate income tax on the total profit of P134,336 in addition to individual income tax on
their shares thereof. The petitioners are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital
gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture The petitioners contested the assessments. Two Judges of the Tax
Court sustained the same. Hence, the instant appeal.
Issue: Whether or not the petitioners had indeed formed a partnership or joint venture and
thus liable for corporate tax.
Held: The Supreme Court held that the petitioners should not be considered to have formed a
partnership just because they allegedly contributed P178,708.12 to buy the two lots, resold the
same and divided the profit among themselves. To regard so would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and
simple. To consider them as partners would obliterate the distinction between a co-ownership
and a partnership. The petitioners were not engaged in any joint venture by reason of that
isolated transaction.
*Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.*
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 co-ownership. 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.
They did not contribute or invest additional ' capital to increase or expand the properties, nor
was there an unmistakable intention to form partnership or joint venture.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs.
All co-ownerships are not deemed unregistered partnership.Co-Ownership who own
properties which produce income should not automatically be considered partners of an
unregistered partnership, or a corporation, within the purview of the income tax law. To hold
otherwise, would be to subject the income of all
Co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does
not produce an income at all, it is not subject to any kind of income tax, whether the income tax
on individuals or the income tax on corporation.
As compared to other cases:
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as
a common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
This case is different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where
father and son purchased a lot and building, entrusted the administration of the building to an
administrator and divided equally the net income, and from Evangelista vs. Collector of Internal
Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property
which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in
these two cases had formed an unregistered partnership.
Evangelista, et al. v. CIR, GR No. L-9996, October 15, 1957

Facts:
Herein petitioners seek a review of CTAs decision holding them liable for income tax,
real estate dealers tax and residence tax. As stipulated, petitioners borrowed from their father
a certain sum for the purpose of buying real properties. Within February 1943 to April 1994,
they have bought parcels of land from different persons, the management of said properties
was charged to their brother Simeon evidenced by a document. These properties were then
leased or rented to various tenants.
On September 1954, CIR demanded the payment of income tax on corporations, real
estate dealers fixed tax, and corporation residence tax to which the petitioners seek to be
absolved from such payment.
Issue: Whether petitioners are subject to the tax on corporations.
Ruling:
The Court ruled that with respect to the tax on corporations, the issue hinges on the
meaning of the terms corporation and partnership as used in Section 24 (provides that a analogous to that of section 24 and 84 (b) of the NIRC. It is apparent that the terms
tax shall be levied on every corporation no matter how created or organized except general co-
partnerships) and 84 (provides that the term corporation includes among others, partnership)
of the NIRC. Pursuant to Article 1767, NCC (provides for the concept of partnership), its
essential elements are: (a) an agreement to contribute money, property or industry to a
common fund; and (b) intent to divide the profits among the contracting parties.
It is of the opinion of the Court that the first element is undoubtedly present for petitioners
have agreed to, and did, contribute money and property to a common fund. As to the second
element, the Court fully satisfied that their purpose was to engage in real estate transactions
for monetary gain and then divide the same among themselves as indicated by the following
circumstances:
1. The common fund was not something they found already in existence nor a
property inherited by them pro indiviso. It was created purposely, jointly borrowing a
substantial portion thereof in order to establish said common fund;
2. They invested the same not merely in one transaction, but in a series of
transactions. The number of lots acquired and transactions undertake is strongly
indicative of a pattern or common design that was not limited to the conservation
and preservation of the aforementioned common fund or even of the property
acquired. In other words, one cannot but perceive a character of habitually peculiar
to business transactions engaged in the purpose of gain;
3. Said properties were not devoted to residential purposes, or to other personal
uses, of petitioners but were leased separately to several persons;
4. They were under the management of one person where the affairs relative to
said properties have been handled as if the same belonged to a corporation or
business and enterprise operated for profit;
5. Existed for more than ten years, or, to be exact, over fifteen years, since the
first property was acquired, and over twelve years, since Simeon Evangelista became
the manager;
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its continued
existence.
The collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein.
Also, petitioners argument that their being mere co-owners did not create a separate
legal entity was rejected because, according to the Court, the tax in question is one imposed
upon "corporations", which, strictly speaking, are distinct and different from "partnerships".
When the NIRC includes "partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations which are not necessarily
"partnerships", in the technical sense of the term. The qualifying expression found in Section
24 and 84(b) clearly indicates that a joint venture need not be undertaken in any of the
standard forms, or in conformity with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of the tax on corporations.
Accordingly, the lawmaker could not have regarded that personality as a condition essential to
the existence of the partnerships therein referred to. For purposes of the tax on corporations,
NIRC includes these partnerships - with the exception only of duly registered general co
partnerships - within the purview of the term "corporation." It is, therefore, clear that
petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to
the income tax for corporations.
As regards the residence of tax for corporations (Section 2 of CA No. 465), it is
"corporation" and "partnership" are used in both statutes with substantially the same
meaning. Consequently, petitioners are subject, also, to the residence tax for corporations.
Finally, on the issues of being liable for real estate dealers tax, they are also liable for
the same because the records show that they have habitually engaged in leasing said
properties whose yearly gross rentals exceeds P3,000.00 a year.
Rules Applicable to Passive Income
Tax Sparing Rule
CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION (204 SCRA 377)
NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS
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 the 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
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%.
MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit.
HELD: 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.
NOTES: Breakdown:
Amount of accumulated P 65.00
profits earned
P35 is the income tax paid.
P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax
deemed paid by the parent company. Since P29.75 is much higher than P13, Sec 902 US Tax
Code complies with the requirements of sec 24 NIRC. (I did not understand why these were
divided and multiplied. Point is, requirements were met)
Reason behind the law:
Since the US Congress desires to avoid or reduce double taxation of the same income stream, it
allows a tax credit of both (i) the Philippine dividend tax actually withheld, and (ii) the tax credit
for the Philippine corporate income tax actually paid by P&G Philippines but deemed paid by
P&G USA.

a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation
(owning 10% of remitting foreign corporation) shall be deemed to have paid a proportionate Moreover, under the Philippines-United States Convention With Respect to Taxes on Income,
extent of taxes paid by such foreign corporation upon its remittance of dividends to domestic the Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum
corporation. of 20% of he gross amount of dividends paid to US parent corporations, and established a
treaty obligation on the part of the United States that it shall allow to a US parent
corporation receiving dividends from its Philippine subsidiary a [tax] credit for the
b) 20 percentage points requirement: (computation is as follows) appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary].
P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax Note:
The NIRC does not require that the US tax law deem the parent corporation to have paid the 20
percentage points of dividend tax waived by the Philippines. It only requires that the US shall
P 100.00 allow P&G-USA a deemed paid tax credit in an amount equivalent to the 20 percentage
- 35.00 points waived by the Philippines. Section 24(b)(1) does not create a tax exemption nor does it
65. 00 -- available for remittance provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is
legally applicable.

P 65. 00
x 35% -- Regular Philippine dividend tax rate Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in the
P 22.75 -- regular dividend tax Philippines by reducing the tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor, however, would not benefit from
the reduction of the Philippine dividend tax rate unless its home country gives it some relief
P 65.0o from double taxation by allowing the investor additional tax credits which would be applicable
x 15% -- Reduced dividend tax rate against the tax payable to such home country. Accordingly Section 24(b)(1) of the NIRC
P 9.75 -- reduced dividend tax requires the home or domiciliary country to give the investor corporation a deemed paid tax
credit at least equal in amount to the 20 percentage points of dividend tax foregone by the
P 65.00 -- dividends remittable Philippines, in the assumption that a positive incentive effect would thereby be felt by the
- 9.75 -- dividend tax withheld at reduced rate investor.
P 55.25 -- dividends actually remitted to P&G USA Taxes Peculiar to Corporations

Dividends actually
remitted by P&G Phil = P 55.25
---------------------------------- ------------- x P35 = P29.75
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC. vs. EXECUTIVE SECRETARY- issued by the Monetary Board, whichever comes LATER.
Minimum Corporate Income Tax Dec 1999- Manila Bank wrote to BIR requesting a ruling on whether it is entitled to the 4 year
grace period under RR 9-98.
April 2000- Manila bank filed with BIR annual income tax return for taxable year 1999 and
FACTS: paid 33M.
CREBA assails the imposition of the minimum corporate income tax (MCIT) as being violative of Feb 2001- BIR issued BIR Ruling 7-2001 stating that Manila Bank is entitled to the 4year grace
the due process clause as it levies income tax even if there is no realized gain. They also period. Since it reopened in 1999, the min. corporate income tax may be imposed not earlier
question the creditable withholding tax (CWT) on sales of real properties classified as ordinary than 2002. It stressed that although it had been registered with the BIR before 1994, but it
assets stating that (1) they ignore the different treatment of ordinary assets and capital assets; ceased operations 1987-1999 due to involuntary closure.
(2) the use of gross selling price or fair market value as basis for the CWT and the collection of o Manila Bank, then, filed with BIR for the refund. Due to the inaction of BIR on the claim,
tax on a per transaction basis (and not on the net income at the end of the year) are it filed with CTA for a petition for review, which was denied and found that Manila Banks
inconsistent with the tax on ordinary real properties; (3) the government collects income tax payment of 33M is correct, since its operations were merely interrupted during 1987-1999. CA
even when the net income has not yet been determined; and (4) the CWT is being levied upon affirmed CTA.
real estate enterprises but not on other enterprises, more particularly those in the
manufacturing sector. Issue: Whether or not Manila Bank is entitled to a refund of its minimum corporate income tax
paid to BIR for 1999.
ISSUE:
Held: Yes.
Are the impositions of the MCIT on domestic corporations and CWT on income from sales of
real properties classified as ordinary assets unconstitutional? CIRs contensions are without merit. He contended that based on RR# 9-98, Manila Bank
should pay the min. corporate income tax beg. 1998 as it did not close its operations in 1987
HELD: but merely suspended it. Even if placed under suspended receivership, its corporate existence
was never affected. Thus falling under the category of a existing corporation recommencing its
NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT is banking business operations
arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost ** Sec. 27 E of the Tax Code provides the Minimum Corporate Income Tax (mcit) on Domestic
of goods and other direct expenses from gross sales. Besides, there are sufficient safeguards Corporations.
that exist for the MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows
the carry forward of any excess MCIT paid over the normal income tax; and (3) the Secretary of
Finance can suspend the imposition of MCIT in justifiable instances. o (1) Imposition of Tax- MCIT of 2% of gross income as of the end of the taxable year, as
defined here in, is hereby imposed on a corporation taxable under this title, beginning on the
4th taxable year immediately following the year in which such corp commenced its business
The regulations on CWT did not shift the tax base of a real estate business income tax from net operations, when the mcit is greater than the tax computed under Subsec. A of this section for
income to GSP or FMV of the property sold since the taxes withheld are in the nature of the taxable year.
advance tax payments and they are thus just installments on the annual tax which may be due
at the end of the taxable year. As such the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income and the use of the GSP or FMV is because o (2) Any excess in the mcit over the normal income tax shall be carried forward and credited
these are the only factors reasonably known to the buyer in connection with the performance against the normal income tax for the 3 succeeding taxable years.
of the duties as a withholding agent.
Neither is there violation of equal protection even if the CWT is levied only on the real industry Let it be stressed that RR 9-98 imposed the mcit on corps, the date when business operations
as the real estate industry is, by itself, a class on its own and can be validly treated different commence is the year in which the domestic corporation registered with the BIR. But under RR
from other businesses. 4-95, the date of commencement of operations of thrift banks, is the date of issuance of
e income tax on domestic and resident foreign corporations. certificate by Monetary Board or registration with SEC, whichever comes later. Clearly then, RR
o Implementing law: Revenue Regulation # 9-98 stating that the law allows a 4year period 4-95 applies to Manila banks, being a thrift bank. 4-year period= counted from June 1999.
from the time the corporations were registered with the BIR during which the minimum CIR vs. PHILIPPINE AIRLINES, INC. - Minimum Corporate Income Tax
corporate income tax should not be imposed.
June 23, 1999- BSP authorized Manila Bank to operate as a thrift bank.
o NOTE: June 15, 1999 Revenue Regulation #4-95 (pursuant to Thrift Bank Act of 1995) FACTS:
provides that the date of commencement of operations shall be understood to mean the date PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have been liable for
when the thrift bank was registered with SEC or when Certificate of Authority to Operate was Minimum Corporate Income Tax based on its gross income. However, PHILIPPINE AIRLINES,
INC. did not pay the Minimum Corporate Income Tax using as basis its franchise which exempts
it from all other taxes upon payment of whichever is lower of either (a) the basic corporate
income tax based on the net taxable income or (b) a franchise tax of 2%.
ISSUE: Is PAL liable for Minimum Corporate Income Tax?
HELD:
NO. PHILIPPINE AIRLINES, INC.s franchise clearly refers to "basic corporate income tax" which
refers to the general rate of 35% (now 30%). In addition, there is an apparent distinction under
the Tax Code between taxable income, which is the basis for basic corporate income tax under
Sec. 27 (A) and gross income, which is the basis for the Minimum Corporate Income Tax under
Section 27 (E). The two terms have their respective technical meanings and cannot be used
interchangeably. Not being covered by the Charter which makes PAL liable only for basic
corporate income tax, then Minimum Corporate Income Tax is included in "all other taxes"
from which PHILIPPINE AIRLINES, INC. is exempted.
The CIR also can not point to the Substitution Theory which states that Respondent may not
invoke the in lieu of all other taxes provision if it did not pay anything at all as basic corporate
income tax or franchise tax. The Court ruled that it is not the fact tax payment that exempts
Respondent but the exercise of its option. The Court even pointed out the fallacy of the
argument in that a measly sum of one peso would suffice to exempt PAL from other taxes
while a zero liability would not and said that there is really no substantial distinction between a
zero tax and a one-peso tax liability. Lastly, the Revenue Memorandum Circular stating the
applicability of the MCIT to PAL does more than just clarify a previous regulation and goes
beyond mere internal administration and thus cannot be given effect without previous notice
or publication to those who will be affected thereby.
Improperly Accumulated Earnings Tax
CYANAMID PHILIPPINES, INC. VS. CA, CTA AND CIR- Surtax
In order to determine whether profits are accumulated for the reasonable needs of the business
to avoid the surtax upon the shareholders, it must be shown that the controlling intention of
the taxpayer is manifested at the time of the accumulation, not intentions subsequently, which
are mere afterthoughts.
Facts:
Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of
American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported finished goods and an
imported/indentor. In 1985 the CIR assessed on petitioner a deficiency income tax of
P119,817) for the year 1981. Cyanamid protested the assessments particularly the 25% surtax
for undue accumulation of earnings. It claimed that said profits were retained to increase
petitioners working capital and it would be used for reasonable business needs of the
company. The CIR refused to allow the cancellation of the assessments, petitioner appealed to
the CTA. It claimed that there was not legal basis for the assessment because 1) it accumulated
its earnings and profits for reasonable business requirements to meet working capital needs
and retirement of indebtedness 2) it is a wholly owned subsidiary of American Cyanamid
Company, a foreign corporation, and its shares are listed and traded in the NY Stock Exchange.
The CTA denied the petition stating that the law permits corporations to set aside a portion of
its retained earnings for specified purposes under Sec. 43 of the Corporation Code but that
petitioners purpose did not fall within such purposes. It found that there was no need to set
aside such retained earnings as working capital as it had considerable liquid funds. Those
corporations exempted from the accumulated earnings tax are found under Sec. 25 of the
NIRC, and that the petitioner is not among those exempted. The CA affirmed the CTAs
decision.
Issue: Whether or not the accumulation of income was justified.
Held:
In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon the shareholders, it must be shown that the controlling
intention of the taxpayer is manifested at the time of the accumulation, not intentions
subsequently, which are mere afterthoughts. The accumulated profits must be used within
reasonable time after the close of the taxable year. In the instant case, petitioner did not
establish by clear and convincing evidence that such accumulated was for the immediate needs
of the business.
To determine the reasonable needs of the business, the United States Courts have invented
the Immediacy Test which construed the words reasonable needs of the business to mean
the immediate needs of the business, and it is held that if the corporation did not prove an
immediate need for the accumulation of earnings and profits such was not for reasonable
needs of the business and the penalty tax would apply. (Law of Federal Income Taxation Vol 7)
The working capital needs of a business depend on the nature of the business, its credit
policies, the amount of inventories, the rate of turnover, the amount of accounts receivable,
the collection rate, the availability of credit and other similar factors. The Tax Court opted to
determine the working capital sufficiency by using the ration between the current assets to
current liabilities. Unless, rebutted, the presumption is that the assessment is correct. With the
petitioners failure to prove the CIR incorrect, clearly and conclusively, the Tax Courts ruling is
upheld.
Special Corporations
Exempt Organizations and Corporations
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), petitioner, vs. THE
BUREAU OF INTERNAL REVENUE, respondents. G.R. No. 215427 dated December 10, 2014
FACTS:
On April 17, 2006, petitioner filed a Petition for Review on Certiorari and Prohibition
seeking the declaration of nullity of Section 1 of RA 9337 insofar as it amends Section
27(c) of RA 8424, otherwise known as the NIRC by excluding petitioner from the
 enumeration of government-owned or controlled corporations (GOCCs) exempted
from liability for corporate income tax.
On March 15, 2011, SC partly granted the petition insofar as it held that the BIR
Revenue Regulation No. 16-2005 which subjects PAGCOR to 10% VAT is null and void
for being contrary to the NIRC. It also held that Section 1 of RA 9337 is valid and
constitutional.
BIR issued RMC No. 33-2013 on April 17, 2013 pursuant to the decision which clarifies
the Income Tax and Franchise Tax Due from PAGCOR, its Contractees and
Licensees. It now subjects the income from PAGCORs operations and licensing of
gambling casinos, gaming clubs and other similar recreation or amusement places,
gaming pools, and other related operations, to corporate income tax under the NIRC.
PAGCOR filed a Motion for Clarification in the case entitled PAGCOR vs The Bureau of
Internal Revenue, et al., which was promulgated on March 15, 2011 which also prays
for the issuance of a TRO and/or writ of Preliminary Injunction against BIR in the
implementation of BIR Revenue Memorandum Circular No. 33-2013 dated April 17,
2013. PAGCOR alleges that said RMC is an erroneous interpretation and application
of the aforesaid decision.
ISSUE:
1. Whether PAGCORs gaming income is subject to both 5% franchise tax and income
tax?
2. Whether PAGCORs income from operation of related services is subject to both
income tax and 5% franchise tax.
HELD:
1. Gaming Income: Franchise Tax YES; Income Tax - NO
Under PD 1869, as amended, petitioner is subject to income tax only with respect to its
operations of related services. Accordingly, the income tax exemption ordained under Section
27(c) of RA 8424 clearly pertains only to petitioners income from operation of related services.
Such income tax exemption could not have been applicable to petitioners income from gaming
operations as it is already exempt therefrom under PD 1869.
There was no need for Congress to grant tax exemption to petitioner with respect to its income
from gaming operating as the same is already exempted from all taxes of any kind or form,
income or otherwise, whether national or local, under its Charter, save only for the five percent
(5%) franchise tax. The exemption attached to the income from gaming operations exists
independently would be downright ridiculous, if not deleterious, since petitioner would be in a
worse position if the exemption was granted (then withdrawn) then when it was not granted at
all in the first place.
2. Income from Operation of related services: Income tax - YES ; Franchise tax - NO
Petitioners Charter is not deemed repealed or amended by RA 9337; petitioners income
derived from gaming operation is subject only to the five percent (5%) franchise tax, in
accordance with PD 1869, as amended. With respect to petitioners income from operation of
other related services, the same is subject to income tax only. The five percent (5%) franchise
tax finds no application with respect to petitioners income from other related services, in view
of the express provision of Section 14(5) of PD 1869, as amended.
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income
from other related services without basis therefor.
SC granted the petition and ordered the respondent to cease and desist the implementation of
RMC No. 33-2013 insofar as it imposes corporate income tax on petitioners income derived
from its gaming operations; and franchise tax on petitioners income from other related
services.
Corporations enjoying preferential tax rates
Gross Philippine Billings
South African Airways v. CIR
G.R. No. 180356 February 16, 2010
VELASCO, JR., J.
Lessons Applicable: Taxes can be offset if intimately related, unless exempted assumed within
the purview of general rule, liabilities and tax credit must first be determined before offset can
take place
Laws Applicable:
Facts:
South African Airways, a foreign corporation with no license to do business in the
Philippines, sells passage documents for off-line flights through Aerotel Limited, general
sales agent in the Philippines
Feb 5, 2003: Petitioner filed a claim for refund erroneously paid tax on Gross Philippine
Billing (GPB) for the year 2010.
CTA: denied - petitioner is a resident foreign corp. engaged in trade or business in the
Philippines and therefore is NOT liable to pay tax on GPB under the Sec. 28 (A) (3) (a) of
the 1997 NIRC but cannot be allowed refund because liable for the 32% income tax from
its sales of passage documents.
This is upheld by the CTA and CTA En Banc
Issue:
1. W/N petitioner is engaged in trade or business in the Philippines is subject to 32% income
tax.
2. W/N petitioner is entitled to refund
HELD: CTA En Banc decision is set side
1. Yes. Since it does not maintain flights to or from the Philippines, it is not taxable under Sec.
28(A)(3)(a) of the 1997 NIRC. This much was also found by the CTA. But petitioner further
posits the view that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from
paying any other income tax for its sale of passage documents in the Philippines. But, Sec. 28
(A)(1) of the 1997 NIRC does not exempt all international air carriers from the coverage of Sec.
28 (A) (1) of the 1997 NIRC being a general rule. Petitioner, being an international carrier with
no flights originating from the Philippines, does not fall under the exception. As such,
petitioner must fall under the general rule. This principle is embodied in the Latin maxim,
exception firmat regulam in casibus non exceptis, which means, a thing not being excepted
must be regarded as coming within the purview of the general rule.
its Gross Philippine Billings, while international air carriers that do not have flights to and
from the Philippines but nonetheless earn income from other activities in the country will be
taxed at the rate of 32% of such income.

2. Underterminable. Although offsetting of tax refund with tax deficiency is unavailing under
Art. 1279 of the Civil Code, in CIR v. CTA it granted when deficiency assessment is intimately
related and inextricably intertwined with the right to claim for a tax refund. Sec. 72 Chapter XI
of 1997 NIRC is not applicable where petitioner's tax refund claim assumes that the tax return Tax Returns and Other Administrative Requirements
that it filed were correct because petitioner is liable under Sec. 28 (A)(1), the correctness is
now put in doubt and refund cannot be granted. It cannot be assumed that the liabilities for CIR vs. MIRANT OPERATIONS- Tax Credit and Tax Refund
two different provisions would be the same. There is a necessity for the CTA to receive
evidence and establish the correct amount before a refund can be granted. COMMISSIONER OF INTERNAL REVENUE vs. MIRANT (PHILIPPINES) OPERATIONS,
CORPORATION- Tax Credit and Tax Refund
South African Airways vs. CIR

Facts: Petitioner South African Airways is a foreign corporation organized and existing under
and by virtue of the laws of the Republic of South Africa. Its principal office is located at
Airways Park, Jones Road, Johannesburg International Airport, South Africa. In the Philippines,
it is an internal air carrier having no landing rights in the country. Petitioner has a general sales
agent in the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel sells passage
documents for compensation or commission for petitioners off-line flights for the carriage of
passengers and cargo between ports or points outside the territorial jurisdiction of the
Philippines. Petitioner is not registered with the Securities and Exchange Commission as a
corporation, branch office, or partnership. It is not licensed to do business in the Philippines. It
paid a corporate tax in the rate of 32% of its gross billings. However, it subsequently claim for
refund contending that its income should be taxed at the rate of 2 1/2% of its gross billings.
Issues: whether or not petitioners income is sourced within the Philippines and is to be taxed
at 32% of the gross billings?
Held: Yes! In the instant case, the general rule is that resident foreign corporations shall be
liable for a 32% income tax on their income from within the Philippines, except for resident
foreign corporations that are international carriers that derive income from carriage of
persons, excess baggage, cargo and mail originating from the Philippines which shall be taxed
at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with no
flights originating from the Philippines, does not fall under the exception. As such, petitioner
must fall under the general rule. This principle is embodied in the Latin maxim, exception firmat
regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as
coming within the purview of the general rule.
To reiterate, the correct interpretation of the above provisions is that, if an international air
carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of
FACTS:
Mirant filed its final adjusted Annual Income Tax Return for fiscal year ending 1999 declaring a
net loss. It then amended the said return this time reflecting an increased net loss and showing
that it opted to carry over as tax credit its overpayment to the succeeding taxable year. This
excess tax credit was unutilized in 2000 as Mirant still reported a net loss. Mirant then filed a
claim for refund of its excess creditable income tax for 1999.
ISSUE: Can Mirant claim for refund its excess credits from 1999?
HELD: NO. Mirants choice to carry over its 1999 excess income tax credit to succeeding
taxable years is irrevocable, regardless of whether it was able to actually apply the said amount
to a tax liability. It is a mistake to understand the phrase "for that taxable period" as a
prescriptive period for the irrevocability rule i.e., that since the tax credit in this case was
acquired in 1999, and Respondent opted to carry it over to 2000, then the irrevocability of the
option to carry over expired by the end of 2000, leaving Respondent free to again take another
option as regards its 1999 excess income tax credit. The Court ruled that this interpretation
effectively renders nugatory the irrevocability rule.
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. PL MANAGEMENT INTERNATIONAL
PHILIPPINES, INC., RESPONDENT. G.R. No. 160949, April 04 ,2011
FACTS
The inaction of petitioner Commissioner of Internal Revenue (Commissioner) on the
respondent's written claim for tax refund or tax credit impelled the latter to commence judicial
action for that purpose in the CTA. However, the CTA denied the claim on December 10, 2001
for being brought beyond two years from the accrual of the claim.
On appeal, the Court of Appeals (CA) reversed the CTA's denial through the decision
promulgated in C.A.-G.R. Sp. No. 68461 on November 28, 2002, and directed the petitioner to
refund the unutilized creditable withholding tax to the respondent, hence, the petitioner
appeals. It was denied by the CTA because of prescription. Aggrieved, the respondent appealed
to the CA, assailing the correctness of the CTA's denial of its judicial claim for refund on the
ground of bar by prescription. The CA partly granted the petition. The CA rejected the
petitioner's motion for reconsideration
Issues
ISSUES I.WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT THE TWO-YEAR
PRESCRIPTIVE PERIOD UNDER SECTION 229 OF THE TAX CODE IS NOT JURISDICTIONAL, THUS
THE CLAIM FOR REFUND OF RESPONDENT IS SUSPENDED FOR REASONS OF EQUITY.
II. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT'S
JUDICIAL RIGHT TO CLAIM FOR REFUND BROUGHT BEFORE THE COURT OF APPEALS ON APRIL
14, 2000 WAS ONE DAY LATE ONLY.
RULING
We reverse and set aside the decision of the CA to the extent that it orders the petitioner to
refund to the respondent the P1,200,000.00 representing the unutilized creditable
withholding tax in taxable year 1997, but permit the respondent to apply that amount as tax
credit in succeeding taxable years until fully exhausted. Section 76 of the NIRC of 1997
provides: Section 76.
Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If
the sum of the quarterly tax payments made during the said taxable year is not equal to the
total tax due on the entire taxable income of that year the corporation shall either: (A) Pay the
balance of tax still due; or (B) Carry over the excess credit; or (C) Be credited or refunded with
the excess amount paid, as the case may be. The predecessor provision of Section 76 of the
NIRC of 1997 is Section 79 of the NIRC of 1985, which provides: Section 79.
Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total net income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable year is not equal to the total
tax due on the entire taxable net income of that year the corporation shall either: (a) Pay the
excess tax still due; or (b) Be refunded the excess amount paid, as the case may be.
These two options under Section 76 are alternative in nature. The choice of one precludes the
other. One cannot get a tax refund and a tax credit at the same time for the same excess
income taxes paid.
Inasmuch as the respondent already opted to carry over its unutilized creditable withholding
tax of P1,200,000.00 to taxable year 1998, the carry-over could no longer be converted into a
claim for tax refund because of the irrevocability rule provided in Section 76 of the NIRC of
1997. Thereby, the respondent became barred from claiming the refund. However, in view of it
irrevocable choice, the respondent remained entitled to utilize that amount of P1,200,000.00
as tax credit in succeeding taxable years until fully exhausted. In this regard, prescription did
not bar it from applying the amount as tax credit considering that there was no prescriptive
period for the carrying over of the amount as tax credit in subsequent taxable years.
Taxations Of Esates and Trusts
Taxation of Income of Trusts
MIGUEL J. OSSORIO PENSION FOUNDATION, INCORPORATED v. CA & CIR
EMERGENCY DIGEST (FROM THE INTERNET)
Miguel J. Osorio Pension Foundation, Inc. vs. CA and CIR (2010)
Facts: Petitioner, a non-stock and non-profit corporation, was organized for the purpose of
holding title to and administering the employees trust or retirement funds (Employees Trust
Fund) established for the benefit of the employees of Victorias Milling Company, Inc. (VMC).
Petitioner, as trustee, claims that the income earned by the Employees Trust Fund is
tax exempt under Section 53(b) of the National Internal Revenue Code (Tax Code).
- Petitioner bought the MBP lot through VMC. Petitioner claims that its share in the MBP lot is
49.59%. Petitioners investment manager, the Citytrust Banking Corporation (Citytrust), in
submitting its Portfolio Mix Analysis, regularly reported the Employees Trust Funds share in
the MBP lot.
- On 26 March 1997, VMC eventually sold the MBP lot to Metrobank.
Petitioner claims that it is a co-owner of the MBP lot as trustee of the Employees
Trust Fund, based on the notarized Memorandum of Agreement. Petitioner maintains
that its ownership of the MBP lot is supported by the excerpts of the minutes and the
resolutions of petitioners Board Meetings.
Petitioner further contends that there is no dispute that the Employees Trust Fund is
exempt from income tax. Since petitioner, as trustee, purchased 49.59% of the MBP
lot using funds of the Employees Trust Fund, petitioner asserts that the Employees
Trust Fund's 49.59% share in the income tax paid (or P3,037,697.40 rounded off to
P3,037,500) should be refunded.
- The CTA denied petitioner's claim for refund of withheld creditable tax of P3,037,500 arising
from the sale of real property of which petitioner claims to be a co-owner as trustee of the
employees' trust or retirement funds.
- CA agreed with the CTA that pieces of documentary evidence submitted by petitioner are
largely self-serving and can be contrived easily. The CA ruled that these documents failed to
show that the funds used to purchase the MBP lot came from the Employees Trust Fund.
Issues: 1. Whether petitioner or the Employees Trust Fund is estopped from claiming that the
Employees Trust Fund is the beneficial owner of 49.59% of the MBP lot and that VMC merely
held 49.59% of the MBP lot in trust for the Employees Trust Fund? [Not estopped.]
2. If petitioner or the Employees Trust Fund is not estopped, whether they have sufficiently
established that the Employees Trust Fund is the beneficial owner of 49.59% of the MBP lot,
and thus entitled to tax exemption for its share in the proceeds from the sale of the MBP lot.
[Yes]
Ratio: 1. Article 1452 of the Civil Code provides:
Art. 1452. If two or more persons agree to purchase a property and by
common consent the legal title is taken in the name of one of them for the
benefit of all, a trust is created by force of law in favor of the others in
proportion to the interest of each. (Emphasis supplied)
For Article 1452 to apply, all that a co-owner needs to show is that there is common
consent among the purchasing co-owners to put the legal title to the purchased property in
the name of one co-owner for the benefit of all. Once this common consent is shown, a
trust is created by force of law. The BIR has no option but to recognize such legal trust as
well as the beneficial ownership of the real owners because the trust is created by force of
law. The fact that the title is registered solely in the name of one person is not conclusive that
he alone owns the property.
Thus, this case turns on whether petitioner can sufficiently establish that petitioner, as
trustee of the Employees Trust Fund, has a common agreement with VMC and VFC that
petitioner, VMC and VFC shall jointly purchase the MBP lot and put the title to the MBP lot in
the name of VMC for the benefit petitioner, VMC and VFC.
We rule that petitioner, as trustee of the Employees Trust Fund, has more than
sufficiently established that it has an agreement with VMC and VFC to purchase jointly the
MBP lot and to register the MBP lot solely in the name of VMC for the benefit of petitioner,
VMC and VFC.
The CTA ruled that the documents presented by petitioner cannot prove its co-
ownership over the MBP lot especially that the TCT, Deed of Absolute Sale and the Remittance
Return disclosed that VMC is the sole owner and taxpayer. However, the appellate courts failed
to consider the genuineness and due execution of the notarized Memorandum of Agreement
acknowledging petitioners ownership of the MBP lot. The BIR failed to present any clear and
convincing evidence to prove that the notarized Memorandum of Agreement is fictitious or has
no legal effect. Likewise, VMC, the registered owner, did not repudiate petitioners share in the
MBP lot. Further, Citytrust, a reputable banking institution, has prepared a Portfolio Mix
Analysis for the years 1994 to 1997 showing that petitioner invested P5,504,748.25 in the MBP
lot. Absent any proof that the Citytrust bank records have been tampered or falsified, and the
BIR has presented none, the Portfolio Mix Analysis should be given probative value.
2. Income from Employees Trust Fund is Exempt from Income Tax
Tax exemption cannot arise by implication and any doubt whether the exemption exists is
strictly construed against the taxpayer. Further, the findings of the CTA, which were affirmed by
the CA, should be given respect and weight in the absence of abuse or improvident exercise of
authority.
Section 53(b) and now Section 60(b) of the Tax Code provides:
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - x x x
(B) Exception. - The tax imposed by this Title shall not apply to
employees trust which forms part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or all of his
employees (1) if contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to such employees the
earnings and principal of the fund accumulated by the trust in accordance
with such plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or income to be
(within the taxable year or thereafter) used for, or diverted to, purposes
other than for the exclusive benefit of his employees: Provided, That any
amount actually distributed to any employee or distributee shall be
taxable to him in the year in which so distributed to the extent that it
exceeds the amount contributed by such employee or distributee.
Petitioners Articles of Incorporation state that its purpose is to hold legal title to, control,
invest and administer in the manner provided, pursuant to applicable rules and conditions as
established, and in the interest and for the benefit of its beneficiaries and/or participants,the
private pension plan as established for certain employees of Victorias Milling Company, Inc.,
and other pension plans of Victorias Milling Company affiliates and/or subsidiaries; and The
SC has long been settled the tax-exemption privilege of income derived from employee's trusts.
The tax-exempt character of the Employees' Trust Fund has long been settled. It is
also settled that petitioner exists for the purpose of holding title to, and administering, the
tax-exempt Employees Trust Fund established for the benefit of VMCs employees. As such,
petitioner has the personality to claim tax refunds due the Employees' Trust Fund.
In Citytrust Banking Corporation as Trustee and Investment Manager of Various
Retirement Funds v. Commissioner of Internal Revenue, the CTA granted Citytrusts claim for
refund on withholding taxes paid on the investments made by Citytrust in behalf of the trust
funds it manages, including petitioner.
Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling
exempting it from the payment of withholding tax on the sale of the land by various BIR-
approved trustees and tax-exempt private employees' retirement benefit trust funds
represented by Citytrust. The BIR ruled that the private employees benefit trust funds, which
included petitioner, have met the requirements of the law and the regulations and therefore
qualify as reasonable retirement benefit plans within the contemplation of Republic Act No.
4917 (now Sec. 28(b)(7)(A), Tax Code). The income from the trust fund investments is therefore
exempt from the payment of income tax and consequently from the payment of the creditable
withholding tax on the sale of their real property.
 Thus, the documents issued and certified by Citytrust showing that money from the
Employees Trust Fund was invested in the MBP lot cannot simply be brushed aside by the BIR
as self-serving, in the light of previous cases holding that Citytrust was indeed handling the
money of the Employees Trust Fund. These documents, together with the notarized
Memorandum of Agreement, clearly establish that petitioner, on behalf of the Employees Trust
Fund, indeed invested in the purchase of the MBP lot. Thus, the Employees' Trust Fund owns
49.59% of the MBP lot.

Since petitioner has proven that the income from the sale of the MBP lot came from an
investment by the Employees' Trust Fund, petitioner, as trustee of the Employees Trust Fund, is
entitled to claim the tax refund of P3,037,500 which was erroneously paid in the sale of the
MBP lot.
What is a remittance?
In broad terms, there is a remittance if you have foreign income or foreign gains and you bring
them directly or indirectly to the UK so that you (or a relevant person) can enjoy the benefit of
the income or gains in the UK.
He needs to determine the Romanian tax deducted from his Romanian interest by the
Romanian bank.
He needs to claim a double taxation credit against his UK liability of 10 (50 at 20%) which
may eliminate the UK tax liability.

There is also a remittance if you receive a service in the UK and pay for the service using
income or gains that arose outside of the UK. If you buy an asset in the UK and pay for it using
foreign income or gains, that is a remittance. If you purchase an asset overseas using foreign
income or gains, and you then bring that asset to the UK, for example, a car or luxury goods,
there is normally a remittance (see exceptions below).
If possible, it is best to avoid making remittance of income or gains. It can be difficult to avoid
making remittances without a full understanding of the law and advice from a tax adviser. You
can find out where to find advice in our getting help section of the site.
What types of remittance are exempt from UK tax?

If you create a UK debt and then pay that off using foreign income, that is a remittance.
If you give money to someone else who then uses that money to buy goods and services in the
UK for you or a relevant person (see below), that is a remittance.
Not all remittances are taxable; see exceptions below.
Who is a relevant person?
A relevant person includes a husband or wife, civil partner, cohabitant plus children or
grandchildren aged under 18.
An example of a remittance
Robert has come to the UK from Romania to work on a farm in Lincolnshire. He has been
resident in the UK for less than 7 of the last 9 years so the Remittance Basis Charge does not
apply to him. His only UK income is from the farmer who employs him. He sends his spare cash
back to his wife and family in Romania, who spend it. He also has a bank account in Romania,
which holds savings from before he went to work in the UK. The bank pays him 6.5% interest
on his bank account balance; this produces the equivalent of 120 in 2017/18.
Some items that have been bought with foreign income or gains may be brought into the UK
without incurring a tax charge, including:items of clothing, footwear, jewellery or watches that
are brought to the UK for personal use. If you sell the items once they are in the UK they no
longer qualify as exempt and will be considered to be remittances;property with a value of less
than 1,000;property which is only in the UK for less than 275 days in total.
How do I know what income or gains I have remitted?
It may not always be easy to tell what income or gains you have remitted, especially if you put
more than one type of income or gain into an account.
For example, if Robert from Romania (in the example above) paid his UK money into the same
bank account as his Romanian bank interest, and then remitted money from this account to
the UK, Robert would have to follow complex rules to help him decide whether the remitted
money was the interest or the UK money.
If you make a remittance to the UK from a bank account that contains income from more than
one source, you should seek help from HMRC and/or a professional tax adviser.

One day, Robert uses his Romanian debit card to draw out 50 from his Romanian bank
account from a cash machine in Lincoln.

Robert has made a remittance of 50 of his Romanian bank interest.

The consequences are as follows:

He may have a UK tax liability on the remittance of 50 of Romanian interest. In order to

determine how much of the remittance is taxable, Robert will have to analyse his Romanian
bank account for all incomings and outgoings.

He must notify HMRC of this liability before 5 October following the tax year in which the
remittance is made, unless he already has to complete a self assessment tax return.