Marubeni Corporation v.

Commissioner of Internal Revenue,

G.R. No. 76573, 14 September 1989
Facts: Atlantic Gulf and Pacific Co. of Manila (AG&P) paid cash dividend to Marubeni
Corporation. AG&P directly remitted the cash dividends to petitioner’s head office in Tokyo,
Japan, net not only of the 10% final dividend tax but also of the withheld 15% profit remittance
tax based on the remittable amount after deducting the final withholding tax of 10%. Marubeni,
representing itself as a foreign corporation duly organized and existing under the laws of Japan
and duly licensed to engage in business under Philippine laws filed a claim for refund or tax
credit representing alleged overpayment of branch profit remittance tax withheld by AG&P.
The Commissioner of Internal Revenue denied the claim stating that while it is true that the
dividends remitted were not subject to the 15% profit remittance tax as they were not income
earned by a Philippine Branch of Marubeni Corporation of Japan; and neither is it subject to the
10% intercorporate dividend tax, Marubeni, being a non-resident stockholder, nevertheless, the
dividend income is subject to the 25% tax pursuant to Article 10 (2) (b) of the Tax Treaty dated
February 13, 1980 between the Philippines and Japan. The amount refundable offsets the
liability, hence, nothing is left to be refunded. The CA affirmed the decision of the CIR.
Issue: Whether or not Marubeni is entitled to refund.
Ruling: Yes, Marubeni is entitled to refund.
The Commissioner erred in automatically imposing the 25% rate under Article 10 (2) (b) of the
Tax Treaty as if this were a flat rate. The tax rates fixed by the Treaty are the maximum rates.
This means that any tax imposable by the contracting state concerned should not exceed the
25% limitation and that rate would apply only if the tax imposed by our laws exceeds the same.
To simply add the two taxes to arrive at the 25% tax rate is to disregard a basic rule in taxation
that each tax has a different tax basis. While the tax on dividends is directly levied on the
dividends received, the tax base upon which the 15% branch profit remittance tax is imposed is
the profit actually remitted abroad.
The dividends if remitted abroad are not considered branch profits for purposes of the 15%
profit remittance tax imposed by Section 24 (b) (2) of the Tax Code. Marubeni, being a non-
resident foreign corporation is only subject to discounted rate of 15% on dividends received
from a domestic corporation under Section 24 (b) (1) (iii) of the Tax Code. This 15% tax rate
clearly within the maximum ceiling of 25% of the gross amount of the dividends as decreed in
the Tax Treaty. Also, the dividends if remitted abroad are not considered branch profits for
purposes of the 15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code.
CIR vs. CA 301 SCRA 152
Facts: Sometime in the 1930s, Don Andres Soriano, a citizen and resident of US, formed the
corporation "A. Soriano Y Cia", predecessor of ANSCOR, owned by his family member who are
non-residents, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par
value of P100/share. Don Andres subscribed to 4,963 shares of the 5,000 shares originally
issued. When the capital stock was increased, he susbrcribed for 10,000 shares. A month
later,Don Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as their
initial investments in ANSCOR. 9 Both sons are foreigners. In the years 1947, 1949,and 1963,
stock dividends were declared increasing his total shareholdings with the total of 185,154
shares — 50,495 of which are original issues and the balance of 134.659 shares as stock
dividend declarations in the year 1964 when he died. Half of the shares were transferred to his
wife, Doña Carmen Soriano, as her conjugal share. The other half formed part of his estate. In
December 1966, stock dividends worth 46,290 and 46,287 shares were respectively received
by the Don Andres estate and Doña Carmen from ANSCOR. Hence, increasing their
accumulated shareholdings to 138,867 and 138,864 common shares each. March 31, 1968
Doña Carmen exchanged her whole 138,864 common shares for 138,860 of the newly
reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its
common shares, for the remaining 11,140 preferred shares, thus reducing its (the estate)
common shares to 127,727. ANSCOR redeemed 108, 000 common shares from Don Adres’
estate. Revenue examiners issued a report proposing that ANSCOR be assessed for
deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue
Code, for the year 1968 and the second quarter of 1969 based on the transactions of
exchange 31 and redemption of stocks.
Issue: Whether ANSCOR's redemption of stocks from its stockholder as well as the exchange
of common with preferred shares can be considered as "essentially equivalent to the
distribution of taxable dividend" making the proceeds thereof taxable.
Held: Yes as to the redemption. Redemption is repurchase, a reacquisition of stock by a
corporation which issued the stock in exchange for property, whether or not the acquired stock
is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its
stock, distributes cash or property to the shareholder in payment for the stock, and continues in
business as before. The redemption of stock dividends previously issued is used as a veil for
the constructive distribution of cash dividends. Redemption cannot be used as a cloak to
distribute corporate earnings. Otherwise, the apparent intention to avoid tax becomes doubtful
as the intention to evade becomes manifest. The test of taxability whether the redemption
resulted into a flow of wealth. If no wealth is realized from the redemption, there may not be a
dividend equivalence treatment. The redemption converts into money the stock dividends
which become a realized profit or gain and consequently, the stockholder's separate property.
Profits derived from the capital invested cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be reached by income taxation regardless of
the existence of any business purpose for the redemption.
No, as to the exchange. Exchange is an act of taking or giving one thing for another involving
reciprocal transfer and is generally considered as a taxable transaction. Exchange may not
produce income in a trade between two (2) persons as well as a trade between a stockholder
and a corporation. No taxable gain or loss may be recognized on exchange of property, stock
or securities related to reorganizations. Don Andres estate and Doña Carmen remained as
corporate subscribers except that their subscriptions now include preferred shares. There was
no change in their proportional interest after the exchange. There was no cash flow. Both
stocks had the same par value. Under the facts herein, any difference in their market value
would be immaterial at the time of exchange because no income is yet realized — it was a
mere corporate paper transaction. It would have been different, if the exchange transaction
resulted into a flow of wealth, in which case income tax may be imposed.
COMMISSIONER vs. MANNING G.R. No. L-28398. August 6, 1975 Income Tax on Stock
Dividends DECEMBER 4, 2017

FACTS:
Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of
P2.5 million divided into 25,000 common shares: 24,700 were owned by Reese and the rest at
100 shares each by the Respondents. Reese entered into a trust agreement whereby it is
stated that upon Reese’s death, the company would purchase back all of its shares. Reese
died. MANTRASCO repurchased the 24,700 shares. Thereafter, a resolution was passed
authorizing that the 24,700 shares be declared as stock dividends to be distributed to the
stockholders. The BIR ordered an examination of MANTRASCO’s books and discovered that
the 24,700 shares declared as dividends were not disclosed by respondents as part of their
taxable income for the year 1958. Hence, the CIR issued notices of assessment for deficiency
income taxes to respondents. Respondents protested but the CIR denied. Respondents
appealed to the CTA. The CTA ruled in their favor. Hence, this petition by the CIR

ISSUE:
Whether the respondents are liable for deficiency income taxes on the stock dividends.

HELD:
Yes.
Dividends means any distribution made by a corporation to its shareholders out of its
earnings or profits. Stock dividends which represent transfer of surplus to capital account is not
subject to income tax. But if a corporation redeems stock issued so as to make a distribution,
this is essentially equivalent to the distribution of a taxable dividend the amount so distributed
in the redemption considered as taxable income.
The distinctions between a stock dividend which does not and one which does
constitute taxable income to the shareholders is that a stock dividend constitutes income if its
gives the shareholder an interest different from that which his former stockholdings
represented. On the other hand, it does constitute income if the new shares confer no different
rights or interests than did the old shares. Therefore, whenever the companies involved parted
with a portion of their earnings to buy the corporate holdings of Reese, they were making a
distribution of such earnings to respondents. These amounts are thus subject to income tax as
a flow of cash benefits to respondents. Hence, respondents are liable for deficiency income
taxes.

We are of the opinion, however, that the Commissioner erred in assessing the
respondents the total acquisition cost (P7,973,660) of the alleged treasury stock dividends in
one lump sum. The record shows that the earnings of MANTRASCO over a period of years
were used to gradually wipe out the holdings therein of Reese. Consequently, those earnings,
which we hold, under the facts disclosed in the case at bar, as in effect having been distributed
to the respondents, should be taxed for each of the corresponding years when payments were
made to Reese’s estate on account of his 24,700 shares. With regard to payments made with
MANTRASCO earnings in 1958 and the years before, while indeed those earnings were
utilized in those years to gradually pay off the value of Reese’s holdings in MANTRASCO,
there is no evidence from which it can be inferred that prior to the passage of the stockholders’
resolution of December 22, 1958 the contributed equity of each of the respondents rose
correspondingly. It was only by virtue of the authority contained in the said resolution that the
respondents actually, albeit illegally, appropriated and partitioned among themselves the
stockholders’ equity representing Reese’s interests in MANTRASCO. As those payments
accrued in favor of the respondents in 1958 they are and should be liable, for income tax
purposes, to the extent of the aggregate amount paid, from 1955 to 1958, by MANTRASCO to
buy off Reese’s shares.

The fact that the resolution authorizing the distribution of the said earnings is null and
void is of no moment. Under the National Internal Revenue Code, income tax is assessed on
income received from any property, activity or service that produces income. 9 The Tax Code
stands as an indifferent, neutral party on the matter of where the income comes from. 10

Subject to the foregoing qualifications, we find the action taken by the Commissioner in
all other respects — that is, the assessment of a fraud penalty and imposition of interest
charges pursuant to the provisions of the Tax Code — to be in accordance with law.
CIR v. WANDER PHILS

FACTS:

Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic
corporation organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A.
Ltd. (Glaro for short), a Swiss corporation not engaged in trade or business in the Philippines.

On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June
30, 1975 and remitted to its parent company, Glaro dividends in the amount of P222,000.00, on
which 35% withholding tax thereof in the amount of P77,700.00 was withheld and paid to the
Bureau of Internal Revenue.

Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending
June 30, 1976 on the dividends it remitted to Glaro amounting to P355,200.00, on wich 35%
tax in the amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.

On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for
refund and/or tax credit in the amount of P115,400.00, contending that it is liable only to 15%
withholding tax in accordance with Section 24 (b) (1) of the Tax Code, as amended by
Presidential Decree Nos. 369 and 778, and not on the basis of 35% which was withheld and
paid to and collected by the government.

On January 19, 1984, The Court of Tax Appeals rendered a Decision granting a refund and/or
tax credit. CIR filed a Motion for Reconsideration but the same was denied.

ISSUE:

Whether or not private respondent Wander is entitled to the preferential rate of 15% withholding
tax on dividends declared and remitted to its parent corporation, Glaro. = Y

RULING:

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

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

While it may be true that claims for refund construed strictly against the claimant, nevertheless,
the fact that Switzerland did not impose any tax on the dividends received by Glaro from   the
Philippines should be considered as a full satisfaction if the given condition. For, as aptly stated
by respondent Court, to deny private respondent the privilege to withhold only 15% tax
provided for under PD No. 369 amending section 24 (b) (1) of the Tax Code, would run counter
to the very spirit and intent of said law and definitely will adversely affect foreign corporations
interest here and discourage them for investing capital in our country.
El Oriente v. Posadas
56 Phil 147

Doctrine:
Exclusions From Gross Income- Life Insurance

Facts:
El Oriente Fabrica de Tabacos Inc., the plaintiff, procured from Manufacturers Life
Insurance Co., of Toronto, Canada, through its local agent E.E. Elser, an insurance policy on
the life of A. Velhagen, the plaintiff’s manager, the sum of $50,000, and designated itself as
the sole beneficiary of said policy on the life of its said manager. The plaintiff secured a life
insurance to protect itself against the loss that it might suffer by reason of the death of its
manager, who had had more than 35 years of experience in the manufacture of cigarettes in
the Philippine Islands.

During the time the life insurance policy was in force and effect, the plaintiff paid from
its funds all the insurance premiums due thereon. It charged as expenses of its business all the
said premiums and deducted the same from its gross incomes as reported in its annual income
tax returns, which deductions were allowed by the defendant, Juan Posadas, Collector of
Internal Revenue, upon a showing made by the plaintiff that such premiums were legitimate
expenses of its business.

The insured manager had no interest or participation in the proceeds of said life
insurance policy. Upon his death, the plaintiff received all the proceeds of the said life
insurance policy, together with the interests and the dividends accruing thereon, aggregating
P104,957.88.

Then, the defendant assessed and levied the sum of P3,148.74 as income tax on the
proceeds of the insurance policy, which tax the plaintiff paid under protest.

Issue:
Whether the proceeds of insurance taken by a corporation on the life of an important
official to indemnify it against loss in case of his death, are taxable as income.

Ruling:
 In Tax Code, Chapter I On Individuals, Section 4 provides that, "The following incomes
shall be exempt from the provisions of this law: (a) The proceeds of life insurance policies paid
to beneficiaries upon the death of the insured . . ." while Chapter II On Corporations, Section 10
as amended provides that, "There shall be levied, assessed, collected, and paid annually upon
the total net income received in the preceding calendar year from all sources by every
corporation . . .a tax of three per centum upon such income . . ." Section 11 of the same
chapter provides the exemptions under the law, but neither on Section 11 nor in any other
section is reference made to the provisions of Section 4 in Chapter I.

Supreme Court (SC), on the anomalous and vague condition of the law, is certain that
the proceeds of life insurance policies paid to individual beneficiaries upon the death of the
insured are exempt. However, it is not so certain that the proceeds of life insurance policies
paid to corporate beneficiaries upon the death of the insured are likewise exempt. But
according to them, the law is indefinite in phraseology and does not permit them unequivocally
to hold that the proceeds of life insurance policies received by corporations constitute income
which is taxable.

The situation was better elucidated by a brief reference to laws on the same subject in
the United States where in it was stated that not only in the part of the law concerning
individuals were exemptions provided for beneficiaries, but also in the part concerning
corporations, specific reference was made to the exemptions in favor of individuals, thereby
making the same applicable to corporations.

SC do not believe that when the plaintiff received P104,957.88 from the insurance on
the life of its manager, it thereby realized a net profit in the said amount. It is true that the
Income Tax Law, in exempting individual beneficiaries, speaks of the proceeds of life insurance
policies as income, but this is a very slight indication of legislative intention. In reality, what the
plaintiff received was in the nature of an indemnity for the loss which it actually suffered
because of the death of its manager.

SC quoted the words in the cited case of Chief Justice Taft stating that “that proceeds
of a life insurance policy paid on the death of the insured are not usually classed as income”
and that “Life insurance in such a case is like that of fire and marine insurance, — a contract of
indemnity. The benefit to be gained by death has no periodicity. It is a substitution of money
value for something permanently lost, either in a house, a ship, or a life.

Therefore, SC held that it is reasonable to hold the proceeds of the life insurance policy
in question as representing an indemnity and not taxable income.
 FISHER V. TRINIDAD, G.R. NO. L-17518, OCTOBER 30, 1922

FACTS:

That during the year 1919, the Philippine American Drug Company was a corporation duly
organized and existing under the laws of the Philippine Islands, doing business in the City of
Mania; that the appellant was a stockholder in said corporation; that said corporation, as result
of the business for that year, declared a “stock dividend”; that the proportionate share of said
stock divided of the appellant was P24,800; that the stock dividend for that amount was issued
to the appellant; that thereafter, in the month of March 1920, the appellant, upon demand of the
appellee, paid under protest, and involuntarily, unto the appellee the sum of P889.91 as
income tax on said stock dividend. For the recovery of that sum (889.91), the present action
was instituted. The defendant demurred to the petition upon the ground that it did not state
facts sufficient to constitute cause of action. The demurrer was sustained, and the plaintiff
appealed.

The appellee admits the doctrine established in the case of Eisner vs. Macomber (252
U. S., 189), that a "stock dividend" is not "income" but argues that said Act No. 2833, in
imposing the tax on the stock dividend, does not violate the provisions of the Jones Law.

Further argues that the statute of the United States providing for tax upon stock
dividends is different from the statute of the Philippine Islands, and therefore the decision of the
Supreme Court of the United States should not be followed in interpreting the statute... in force
here.

It will be rioted from a reading of the provisions of the two laws above quoted that the
writer of the law of the Philippine Islands must have had before him the statute of the United
States. No important argument can be based upon the slight difference in the wording of the
two... sections.

There is no question that the Philippine Legislature may provide for the payment of an
income tax, but it cannot, under the guise of an income tax, collect a tax on property which is
not an "income." The Philippine Legislature cannot impose a tax upon "property" under a law
which provides for a tax upon "income" only.

The Philippine Legislature has no power to provide a tax upon "automobiles" only, and under
that law collect a tax upon a carreton or bull cart.
 A statute providing for an income tax cannot be construed to cover property which is
not, in fact, income. The Legislature cannot, by a... statutory declaration, change the real
nature of a tax which it imposes. A law which imposes an importation tax on rice only cannot be
construed to impose an importation tax on corn.

ISSUE: Whether the income received as dividends is taxable as an income

RULING:

No. Generally speaking, stock dividends represent undistributed increase in the capital of
corporations or firms, joint stock companies, etc., for a particular period. They are used to show
the increased interest or proportional shares in the capital of each stockholder. In other words,
the inventory of the property of the corporation for a particular period shows an increase in its
capital, so that the stock theretofore issued does not show the real value of stockholder’s
interest, and additional stock is issued showing the increase in the actual capital, or property, or
assets of the corporation, etc.

The New Standard Dictionary, edition of 1915, defines an income as "the amount of...
money coming to a person or corporation within a specified time whether as payment for
services, interest, or profit from investment."

Webster's International Dictionary defines an income as "the receipts, salary;

especially, the annual receipts of a private person or a... corporation from property."

Bouvier, in his law dictionary, says that an "income" in the federal constitution and income tax
act, is used in its common or ordinary meaning and not in its technical or economic sense.

Mr. Black, in his law... dictionary, says: "An income is the return in money from one's
business, labor, or capital invested ; gains, profit, or private revenue." "An income tax is a tax
on the yearly profits arising from property, professions, trades, and offices."

Gray vs. Darlington (82 U. S., 63), said in speaking of income that mere advance in value in no
sense constitutes the "income"

Such advance constitutes and can be treated merely as an increase of capital.

Mr. Justice Hughes: "income" in an income... tax law, unless it is otherwise specified, to mean
cash or its equivalent. It does not mean choses in action or unrealized increments in the value
of the property

Towne vs. Eisner, supra, Mr, Justice Holmes: 'A... stock dividend really takes nothing
from the property of the corporation, and adds nothing to the interests of the shareholders. Its
property is not diminished and their interests are not increased. * * * The proportional interest of
each shareholder remains the same. * * *' In... short, the corporation is no poorer and the
stockholder is no richer than they were before.

Mr. Justice Pitney

 Eisner vs. Macomber: "An income may be defined as the gain derived from capital,
from labor, or from both combined, provided it be understood to include profit gained through a
sale... or conversion of capital assets. when stock dividends are declared, the corporation or
company acknowledges a liability, in form, to the stockholders If profits have been made by
the... corporation... they create additional bookkeeping liabilities under the head of "profit and
loss,"

None of these, however, gives to the stockholders as a body, much less to any... one
of them, either a claim against the going concern or corporation, for any particular sum of
money, or a right to any particular portion of the asset, or any share unless or until the directors
conclude that dividends shall be made and a part of the company's assets... segregated from
the common fund for that purpose.

The dividend normally is payable in money and when so paid, then only does the
stockholder realize a profit or gain, which becomes his separate property, and thus derive an
income from the capital that he has invested. Until that... is done the increased assets belong
to the corporation and not to the individual stockholders.

When a corporation or company issues "stock dividends" it shows that the company's
accumulated profits have been capitalized, instead of distributed to the stockholders or retained
as surplus available for distribution, in money or in kind, should opportunity offer.

it tends rather to postpone said realization, in that the fund represented by the new stock has
been transferred from surplus to assets, and no longer is available for actual distribution.

The essential and controlling fact is... that the stockholder has received nothing out of
the company's assets for his separate use and benefit

The stockholder who receives a stock dividend has received nothing but a
representation of his increased interest in the capital of the corporation.

There has been no separation or segregation of his interest.

All the property or capital of the corporation still belongs to... the corporation.

no separation of the interest of the stockholder from the general capital of the corporation

The stockholder, by virtue of the stock dividend, has no separate or individual control over the
interest represented thereby, further than he had before... the stock dividend was issued

He cannot use it for the reason that it is still the property of the corporation

A certificate of stock represented by the stock dividend is simply a statement of his

proportional... interest or participation in the capital of the corporation.

We believe that the Legislature, when it provided for an "income tax," intended to tax only the
"income" of corporations, firms, or individuals, as that term is generally used in its common
acceptation;... that the income means money received, coming to a person or corporation for
services, interest, or profit from investments.

We do not believe that the Legislature intended that a mere increase in the value of the
capital or assets of a corporation, firm, or individual,... should be taxed as "income."
 Mr. Justice Pitney, in the case of Eisner vs. Macomber

"That the fudamental relation of 'capital' to 'income' has been much discussed by
economists, the former being likened to the tree or the... land, the latter to the fruit or the crop...
the former depicted as a reservoir supplied from springs; the latter as the outlet stream, to be
measured by its flow during a period of time."

There is a clear distinction between an extraordinary cash dividend, no matter when

earned, and stock dividends declared, as in the present case.

The one is a disbursement to the stockholder of accumulated earnings, and the

corporation at once parts irrevocably with all... interest thereon. The other involves no
disbursement by the corporation. It parts with nothing to the stockholder.

The latter receives, not an actual dividend, but certificate of stock which simply
evidences his interest in the entire capital, including such as by investment of... accumulated
profits has been added to the original capital.

They are not income to him, but represent additions1 to the source of his income,
namely, his invested capital.

Gibbons vs. Mahon

The ownership of that property is in... the corporation, and not in the holders of shares
of its stock.

DeKoven vs. Alsop

Mr. Justice Wilkin said: "A dividend is defined as 'a corporate profit set aside, declared,
and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Until
the dividend is... declared, these corporate

  profits belong to the corporation, not to the stockholders, and are liable for corporate
indebtedness.'"

When a cash dividend is declared and paid to the... stockholders, such cash becomes
the absolute property of the stockholders and cannot be reached by the creditors of the
corporation in the absence of fraud. A stock dividend, however, still being the property of the
corporation, and not of the stockholder, it may be reached by... an execution against the
corporation, and sold as a part of the property of the corporation

The rule is well established that cash dividends, whether large or small, are regarded
as "income"... and all stock dividends, as capital or assets.

if the holder of the stock... dividend is required to pay an income tax on the same, the result
would be that he has paid a tax upon an income which he never received. Such a conclusion is
absolutely contradictory to the idea of an income. An income subject to taxation under the law
must be an actual income... and not a promised or prospective income.

The appellee emphasizes the "income from dividends." Of course, income received as
dividends is taxable as an income, but an income from "dividends" is a very different thing from
a receipt of a "stock dividend." One is... an actual receipt of profits; the other is a receipt of a
representation of the increased value of the assets of a corporation.

In- asmuch, however, as appeals may be taken... from this court to the Supreme Court of the
United States, we feel bound to follow the same doctrine announced by that court.

"stock dividends" are not "income," the same cannot be taxed under that provision of Act No,
2833 which provides for a tax upon income.

Under the guise of an income tax, property which is not an... income cannot be taxed.

Principles:

We believe that the Legislature, when it provided for an "income tax," intended to tax
only the "income" of corporations, firms, or individuals, as that term is generally used in its
common acceptation; that... is, that the income means money received, coming to a person or
corporation for services, interest, or profit from investments. We do not believe that the
Legislature intended that a mere increase in the value of the capital or assets of a corporation,
firm, or individual,... should be taxed as "income."

"That the fudamental relation of 'capital' to 'income' has been much discussed by
economists, the former being likened to the tree or the... land, the latter to the fruit or the crop;
the former depicted as a reservoir supplied from springs; the latter as the outlet stream, to be
measured by its flow during a period of time."

When a cash dividend is declared and paid to the... stockholders, such cash becomes the
absolute property of the stockholders and cannot be reached by the creditors of the corporation
in the absence of fraud. A stock dividend, however, still being the property of the corporation,
and not of the stockholder, it may be reached by... an execution against the corporation, and
sold as a part of the property of the corporation.

The rule is well established that cash dividends, whether large or small, are regarded
as "income"... and all stock dividends, as capital or assets.

if the holder of the stock... dividend is required to pay an income tax on the same, the result
would be that he has paid a tax upon an income which he never received. Such a conclusion is
absolutely contradictory to the idea of an income. An income subject to taxation under the law
must be an actual income... and not a promised or prospective income.

The appellee emphasizes the "income from dividends." Of course, income received as
dividends is taxable as an income, but an income from "dividends" is a very different thing from
a receipt of a "stock dividend." One is... an actual receipt of profits; the other is a receipt of a
representation of the increased value of the assets of a corporation.

"stock dividends" are not "income," the same cannot be taxed under that provision of Act No,
2833 which provides for a tax upon income. Under the guise of an income tax, property which
is not an... income cannot be taxed.
Lombo VS Standard Cigarette Manufacturing Corporation
GR No. L-35531

Facts:
Petitioner Pascuala Lombo claimed for compensation with Regional office of the
Department of Labor The claim alleged, among the other things, that herein petitioner Pascuala
Lombo worked as a laborer with respondent company from 1951 to June 5, 1967, when she
last reported for work by reason of her physical disability (PTB minimal, heart disease and high
blood pressure) allegedly contracted in the course of her employment with the respondent
company; that she first felt pains in the chest in 1965; that this was aggravated by the nature of
her work and the working conditions in the company; that she has incurred expenses more or
less in the amount of P500.00 for medical treatment and medicines, and that her illness was
brought to the attention of the company. The respondent company in time filed its answer
controverting the claim.

Issue:
Is Pascuala Lombo entitled to workmen’s compensation?

Held:
The Supreme Court ruled in the negative. Workmen’s compensation refers to liability for
compensation for loss resulting from injury, disability or death of the workingman through
industrial accident or disease. It is based on incapacity or disability for work, and hence on the
loss or impairment of the employee’s earning capacity in the employment at which he was
engaged when injured, the compensation payments being in lieu of wages or based on the loss
thereof and on the idea of providing means of subsistence to the employees during the time
when his earning capacity has been partially or entirely destroyed. In other words as long as
the employee is able to work and receives his pay even if he is suffering from illness, he is not
entitled to compensation.
In the instant case, claimant never incurred loss of earning power as she stopped working
only after June 5, 1967, after which she worked with La Ilustre Cigar and Cigarette Factory as
evidenced by the Certificate of Employment issued by none other than the latter’s Accountant.
Her claim that her illness arose out of her work and that her supposed pulmonary tuberculosis
and high blood pressure had started in 1965 also was not substantiated.
MIGUEL J. OSSORIO PENSION FOUNDATION, INCORPORATED (MJOPFI), vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE.
G.R. No. 162175, June 28, 2010

Facts:

Petitioner, MJOPFI, is a corporation that was formed to administer the Employees' Trust Fund
established for the benefit of the employees of Victorias Milling Company, Inc. (VMC).

Petitioner invested ₱5,504,748.25 of the funds of the Employees' Trust Fund to purchase the
Madrigal Business Park (MBP) lot. After the purchase, the MBP lot is now co-owned by the
MJOPFI (49.59%), VMC (32.23%), VFC (18.18%). The lot was sold to pay the retirement and
pension benefits of VMC employees.

When the MBP lot was sold, the gross income of the Employees’ Trust Fund (share of
MJOPFI) from the sale of the MBP lot was ₱40,500,000. The 7.5% withholding tax of
₱3,037,500 and 3% broker’s commission were deducted from the proceeds and withheld by
Metrobank, as the buyer of the Property.

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 presented before the appellate courts.
Petitioner asserts that VMC has confirmed that petitioner, as trustee of the Employees’ Trust
Fund, is VMC’s co-owner of the MBP lot.

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 amounting to ₱3,037,500 should be refunded.

Hence, petitioner, as trustee of the Employees’ Trust Fund, filed for refund.

Issue:

Is petitioner entitled to tax refund?

Ruling:

Petitioner is entitled for the tax refund.

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in a diminution of accumulated income and
reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul
of the very intendment of the law.
There can be no denying either that the final withholding tax is collected from income in respect
of which employees’ trusts are declared exempt (under the Tax Code). xxx If an employees’
trust xxx enjoys a tax-exempt status from income, we see no logic in withholding a certain
percentage of that income which it is not supposed to pay in the first place.

Similarly, 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) (Note: it is now Sec. 32(B)(6a) of NIRC). 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.

(Not in the case)

Requisites of exclusion of benefits from Retirement Benefit Plans and Pension Plans from
Gross Income (Sec. 32(B)(6a) of NIRC)
(1) reasonable private benefit plan maintained by the employer (and approved by the BIR)
(2) retiring official or employee has been in the service of the same employer for at least ten
(10) years
(3) is not less than fifty (50) years of age at the time of his retirement, and
(4) benefits granted under this subparagraph shall be availed of by an official or employee only
once.
IV. (7) RETIREMENT BENEFITS

MA. ISABEL T. SANTOS vs. SERVIER PHILIPPINES, INC.

G.R. No. 166377             November 28, 2008

FACTS:
Petitioner Ma. Isabel T. Santos was the Human Resource Manager of respondent Servier
Philippines, Inc. since 1991 until her termination from service in 1999. On March 26 and 27,
1998, petitioner attended a meeting of all human resource managers of respondent, held in
Paris, France.
On March 29, 1998, while having dinner (in Paris), petitioner complained of stomach pain, then
vomited. Eventually, she was brought to the hospital known as Centre Chirurgical de
L’Quest where she fell into coma for 21 days; and later stayed at the Intensive Care Unit (ICU)
for 52 days. The hospital found that the probable cause of her sudden attack was "alimentary
allergy.’
In June 1998, petitioner was allowed to go back to the Philippines for the continuation of her
medical treatment. She was then confined at the St. Luke’s Medical Center for rehabilitation. 
In a letter dated May 14, 1999, respondent informed the petitioner that the former had
requested the latter’s physician to conduct a thorough physical and psychological evaluation of
her condition, to determine her fitness to resume her work at the company. Petitioner’s
physician concluded that the former had not fully recovered mentally and physically. Hence,
respondent was constrained to terminate petitioner’s services effective August 31, 1999.
As a consequence of petitioner’s termination from employment, respondent offered a
retirement package which consists of:

Retirement Plan Benefits: P 1,063,841.76

Insurance Pension at 20,000.00/month for

60 months from company-sponsored
group life policy: P 1,200,000.00

Educational assistance: P 465,000.00

Medical and Health Care: P 200,000.001

Of the promised retirement benefits amounting to P1,063,841.76, only P701,454.89 was

released to petitioner’s husband, the balance thereof was withheld allegedly for taxation
purposes. Respondent also failed to give the other benefits listed above.
ISSUE:
Whether the retirement benefits are taxable.
HELD:
YES.
Section 32 (B) (6) (a) of the New National Internal Revenue Code (NIRC) provides for the
exclusion of retirement benefits from gross income, thus:
(6) Retirement Benefits, Pensions, Gratuities, etc. –
a) Retirement benefits received under Republic Act 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable
private benefit plan maintained by the employer: Provided, That the retiring official or employee
has been in the service of the same employer for at least ten (10) years and is not less than
fifty (50) years of age at the time of his retirement: Provided further, That the benefits granted
under this subparagraph shall be availed of by an official or employee only once. x x x.
Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is
burdened to prove the concurrence of the following elements: (1) a reasonable private benefit
plan is maintained by the employer; (2) the retiring official or employee has been in the service
of the same employer for at least ten (10) years; (3) the retiring official or employee is not less
than fifty (50) years of age at the time of his retirement; and (4) the benefit had been availed of
only once.
As discussed above, petitioner was qualified for disability retirement. At the time of such
retirement, petitioner was only 41 years of age; and had been in the service for more or less
eight (8) years. As such, the above provision is not applicable for failure to comply with the age
and length of service requirements. Therefore, respondent cannot be faulted for deducting from
petitioner’s total retirement benefits the amount of P362,386.87, for taxation purposes.

G.R. No. 173373               July 29, 2013

H. TAMBUNTING PAWNSHOP, INC., VS. CIR

Doctrine: To be entitled to claim a tax deduction, the taxpayer must competently establish the
factual and documentary bases of its claim.
FACTS: H. Tambunting Pawnshop, Inc. a domestic corporation duly licensed and authorized
to engage in the pawnshop business. On June 26, 2000, the Bureau of Internal Revenue (BIR)
issued assessment notices and demand letters, all numbered 32-1-97, assessing Tambunting
for deficiency percentage tax, income tax and compromise penalties for taxable year 1997 plus
20% delinquency interest computed from August 29, 2000 until full payment, but cancelling the
compromise penalties for lack of basis.

On July 26, 2000, Tambunting instituted an administrative protest against the assessment
notices and demand letters with the Commissioner of Internal Revenue. On February 21,
2001, Tambunting brought a petition for review in the CTA, pursuant to Section 228 of the
National Internal Revenue Code of 1997, citing the inaction of the Commissioner of Internal
Revenue on its protest within the 180-day period prescribed by law.

Apparently, petitioner is still liable for deficiency income tax in the reduced amount of
₱4,536,687.15. Petitioner’s contention that the NIRC of 1977 did not impose substantial
requirements on deductions from gross income is bereft of merit. Tambunting filed a petition for
review in the CTA En Banc, arguing that the First Division erred in disallowing its deductions on
the ground that it had not substantiated them by sufficient evidence.
Tambunting argues that the CTA should have allowed its deductions because it had been able
to point out the provisions of law authorizing the deductions; that it proved its entitlement to the
deductions through all the documentary and testimonial evidence presented in court; that the
provisions of Section 34 (A)(1)(b) of the 1997 National Internal Revenue Code, governing the
types of evidence to prove a claim for deduction of expenses, were applicable because the law
took effect during the pendency of the case in the CTA; that the CTA had allowed deductions
for ordinary and necessary expenses on the basis of cash vouchers issued by the taxpayer or
certifications issued by the payees evidencing receipt of interest on loans as well as
agreements relating to the imposition of interest; that it had thus shown beyond doubt that it
had incurred the losses in its auction sales; and that it substantially complied with the
requirements of Revenue Regulations No. 12-77 on the deductibility of its losses.
ISSUE: Whether the petitioner is entitled to tax deduction.
HELD: NO. To be entitled to claim a tax deduction, the taxpayer must competently establish the
factual and documentary bases of its claim. Tambunting did not discharge its burden of
substantiating its claim for deductions due to the inadequacy of its documentary support of its
claim. Its reliance on withholding tax returns, cash vouchers, lessor’s certifications, and the
contracts of lease was futile because such documents had scant probative value.
This case involved assessments relating to transactions incurred by Tambunting prior to the
effectivity of Republic Act No. 8424 (National Internal Revenue Code of 1997, or NIRC of
1997), the provisions governing the propriety of the deductions was Presidential Decree 1158
(NIRC of 1977).
To reiterate, deductions for income tax purposes partake of the nature of tax exemptions and
are strictly construed against the taxpayer, who must prove by convincing evidence that he is
entitled to the deduction claimed. The rule that tax deductions, being in the nature of tax
exemptions, are to be construed in strictissimi juris against the taxpayer is well
settled. Corollary to this rule is the principle that when a taxpayer claims a deduction, he must
point to some specific provision of the statute in which that deduction is authorized and must be
able to prove that he is entitled to the deduction which the law allows. An item of expenditure,
therefore, must fall squarely within the language of the law in order to be deductible. A mere
averment that the taxpayer has incurred a loss does not automatically warrant a deduction from
its gross income.
Tambunting did not properly prove that it had incurred losses. The subasta books it presented
were not the proper evidence of such losses from the auctions because they did not reflect the
true amounts of the proceeds of the auctions due to certain items having been left unsold after
the auctions. The rematado books did not also prove the amounts of capital because the
figures reflected therein were only the amounts given to the pawnees. It is interesting to note,
too, that the amounts received by the pawnees were not the actual values of the pawned
articles but were only fractions of the real values.
[G.R. No. L-8505.  May 30, 1956.]
THE COLLECTOR OF INTERNAL REVENUE, Petitioner, vs. THE PHILIPPINE EDUCATION
CO., INC., Respondent.

FACTS:
The Philippine Education Co., Inc., lost all its pre-war books of accounts and records, with the
exception of a copy of the trial balance sheet of November 30, 1941. The accounting firm of
Dalupan, Sanchez & Co. was employed to prepare and prove Respondent’s war damage
claim, as in fact it did so. On October 29, 1948, the War Damage Commission made the first
payment of P402,273.96 to the Respondent which paid to Dalupan, Sanchez & Co. the sum of
P13,045.48 as the latter’s stipulated fee. In the income tax return filed by the Respondent for
the fiscal year ending on March 31, 1949, the Respondent claimed the sum of P13,045.48 as a
deduction under section 30 of the National Internal Revenue Code. Disallowing said deduction,
the Collector of Internal Revenue, Petitioner herein, assessed against the Respondent the sum
of P2,405.14 as deficiency income tax on the amount of P13,045.48, including surcharge,
penalty and interest, payment of which was demanded from the Respondent. Refusing to
acquiesce in said ruling, the Respondent appealed to the Court of Tax Appeals which rendered
a decision reversing the view of the Petitioner and declaring the Respondent exempt from the
deficiency income tax in question.

RULING:
The legal provision involved is section 30 of the National Internal Revenue Code which allows
as deductions “all the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business.”
As pointed out by the Court of Tax Appeals, three conditions are imposed: (1) The expense
must be ordinary and necessary ;(2) it must be paid or incurred within the taxable year;  and (3)
it must be paid or incurred in carrying on a trade or business.
It is admitted that the sum of P13,045.13 was paid by the Respondent to Dalupan, Sanchez &
Co. within the fiscal year 1949. The questions to be decided are whether or not the expense in
question was ordinary and necessary and whether or not it was paid or incurred in carrying
on Respondent’s business.
It is Petitioner’s theory that the Respondent is a corporation engaged in the purchase and sale
of textbooks, magazines, office and school supplies, and a variety of other merchandise and
commodities; that it was never normally and customarily engaged in filing petitions for war
damage compensation; and that, therefore, the fee paid by it to the accounting firm of Dalupan,
Sanchez & Co. was not incurred in the kind of business transactions in which it is normally and
customarily engaged.
In our opinion, this view is too narrow and technical. To carry on its business, even as specified
by the Petitioner, the Respondent not only must have sufficient assets but must preserve the
same and recover any that should be lost. The fee in question was paid by the  Respondent to
recover its lost assets occasioned by the war and thereby to be so rehabilitated as to be able to
carry on its business. The law does not say that the expense must be for or on account of
transactions in one’s trade or business.
As stated in Merten’s Law of Federal Income Taxation, Vol. IV, “ordinarily, an expense will be
considered necessary where the expenditure is appropriate and helpful in the development of
the taxpayer’s business” (page 35); “it is sufficient that the expense were incurred for purposes
proper to the conduct of the corporate affairs or for the purpose of realizing a profit or of
minimizing a loss” (pp. 382-383);“the term ‘ordinary’ as used in these statutes does not require
that the payments be habitual or normal in the sense that the same taxpayer will have to make
them often; the payment may be unique or non-recurring to the particular taxpayer affected” (p.
316); and “attorney’s fees for services rendered in the prosecution of claim before the Mixed
Claims Commission are deductible” (p. 346).

There is no essential difference between attorney’s fees and that paid to an accountant, as
regards the benefit derived by the claimant. With particular reference to attorney’s fees, the
following cases were cited: Commissioner of Internal Revenue vs. Ullmann 77 F (2d) 827, 296,
U.S. 631, 80 L fd. 449, 56 SCRA 155 (1935), and Commissioner of Internal Revenue vs.
Speyer 77 F (2d) 824, 296 U. S. 631, 80 L fd. 449, 56 SCRA 1955. The  Petitioner observes,
however, that these cases are not applicable because there is no law of the United States
Federal Government exempting the proceeds of war damage claims from taxes. This
observation is successfully answered by the Respondent which has pointed out that the
exemption provided in Republic Act No. 227 is a surplusage, because even without said
statutory exemption, a war damage compensation would still not be subject to tax, not being an
income. “The word ‘income’, as used in the sixteenth amendment, cannot be construed to
include property other than income, even if such property is described as income by an act of
Congress.” (Brewester vs. Walch, D. C. Conn. 268 F207, 216.) “Compensation for injury to
capital is never ‘income,’ no matter when collected.” (H. Liebes & Co. vs. Commissioner of
Internal Revenue, C. C. A. 9, 90 F 2nd 932.)
The Petitioner also resorts to the argument that Republic Act No. 227 gives taxpayers double
benefits, namely, that of deducting from the gross income the loss sustained, and that of
exempting the recovered amounts from income tax; and if the fees incurred in the recovery of
war damage compensation can be allowed as a deduction, it would work to the great prejudice
and disadvantage of the Government. As ruled by the Court of Tax Appeals, “the questioned
item represent legitimate business expense incurred in the recovery of losses and it has never
been deducted by Petitioner (Respondent herein) as part of his war losses.” And
the Respondent, moreover, add: “Besides, there is nothing in the stipulation of facts which
suggest even vaguely that there was in this case an infringement of the double-benefit theory.
On the contrary, the Respondent failed to deduct in any of its income tax returns its war losses,
and even the amount of its approved claim which the United States Philippine War Damage
Commission did not pay for lack of appropriation.”
ESSO Standard Eastern v. Commissioner 175 SCRA 149 G.R. Nos. L-28508-9 July 7, 1989

Rule on Expenses

Doctrine:
Margin fees shall be ordinary and necessary business expenses incurred for purposes of
carrying on its own trade or business in the Philippines exclusively in order to be deductible
from gross income.

Facts:
Petitioner ESSO claimed for deductions from its gross income in 1959, as part of its ordinary
and necessary business expenses, P323,279.00 representing abandonment as dry holes of its
several oil wells and P340,822.04 representing margin fees it had paid to the Central Bank on
its profit remittances to its New York head office.

Respondent CIR granted then a tax credit of P221,033.00 only, disallowing the claimed
deduction for the margin fees paid. Later, the CIR assessed ESSO a deficiency income tax for
the year 1960 plus interests for a total of P434,232.92, which arose from the disallowance of
the margin fees paid by ESSO to the Central Bank on its profit remittances to its New York
head office.

ESSO settled this deficiency assessment in 1964, by applying the tax credit of P221,033.00
representing its overpayment on its income tax for 1959 and paying under protest the additional
amount of P213,201.92.

CIR then denied the claims of ESSO for refund of the overpayment of its income taxes, holding
that the margin fees paid to the Central Bank could not be considered taxes or allowed as
deductible business expenses.

ESSO appealed to the CTA and sought the refund, contending that the margin fees were
deductible from gross income either as a tax or as an ordinary and necessary business
expense.

Issue:
Whether the margin fees paid by the petitioner to the Central Bank on its profit remittances to
its New York head office should be deductible from ESSO's gross income either as tax or as
ordinary and necessary business expenses, and hence entitle ESSO to refund of the margin
fees paid.

Ruling:
No, the margin fees are not deductible from petitioner’s gross income, either as tax or ordinary
and necessary business expense, and hence ESSO is not entitled to refund.

The SC held that a tax is levied to provide revenue for government operations, while the
proceeds of the margin fee are applied to strengthen our country's international reserves. Thus,
a margin fee is not a tax but an exaction designed to curb the excessive demands upon and
strengthen our international reserve, and hence shall not be deductible from gross income.
As to whether a margin fee is a business expense, the statutory test of deductibility states that
to be deductible, three conditions are imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or
incurred in carrying on a trade or business. In addition, not only must the taxpayer meet the
business test, he must substantially prove by evidence or records the deductions claimed
under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that
an item of expense is ordinary and necessary does not justify its deduction.
Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and
helpful in the development of the taxpayer's business. It is 'ordinary' when it connotes a
payment which is normal in relation to the business of the taxpayer and the surrounding
circumstances. The term 'ordinary' does not require that the payments be habitual or normal in
the sense that the same taxpayer will have to make them often; the payment may be unique or
non-recurring to the particular taxpayer affected.

Considering the foregoing test of what constitutes an ordinary and necessary deductible
expense, the margin fees are not expenses in connection with the production or earning of
petitioner's incomes in the Philippines. They were expenses incurred in the disposition of said
incomes; expenses for the remittance of funds after they have already been earned by
petitioner's branch in the Philippines for the disposal of its Head Office in New York which is
already another distinct and separate income taxpayer.

It can never be said therefore that the margin fees were appropriate and helpful in the
development of petitioner's business in the Philippines exclusively or were incurred for
purposes proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively
or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively.
Therefore, ESSO, having assumed an expense properly attributable to its head office, cannot
now claim this as an ordinary and necessary expense, deductible from its gross income, and
thus cannot also claim for refund.

Atlas Consolidated Mining v. CIR

G.R. No. L-26911, L-26924, January 27, 1981
DE CASTRO, J.

Doctrine: For the expense to be deductible, it must be: (1) ordinary and necessary, (2) incurred
within the taxable year, and (3) incurred in carrying in a trade or business.
Facts: Atlas is a corporation engaged in the mining industry registered in Philippines. The CIR
assessed Atlas deficiency income taxes for the years 1957 and 1958.
For the year 1957, the CIR opined that Atlas is not entitled to exemption from the income tax
under Sec 4 of RA 909 because same covers only gold mines. For the year 1958, the
assessment of deficiency income tax covers the disallowance of items claimed by Atlas as
deductible from gross income.
Atlas protested the assessment. The Secretary of Finance ruled that the exemption in RA 909
embraces all new and old mines whether gold or other minerals. The CIR issued a revised
assessment entirely eliminating the assessment for the year 1957. The assessment for 1958
was reduced disallowing the following items as deductible from its gross income for 1958:
Transfer agent's fee, Stockholders relation service fee, U.S. stock listing expenses, Suit
expenses, and Provision for contingencies
Atlas appealed to the CTA. The CTA allowed the disallowed items, except the stockholders
relation service fee and suit expenses.
It is well settled that suit or litigation expenses incurred in defense or protection of title are
capital in nature and not deductible.

Issue: Whether the stockholders relation service fee paid by Atlas to P.K. Macker & Co. is an
allowable deduction as business expense.

Ruling: No, stockholders relation service fee is capital in nature, hence not deductible.

Section 30 (a)(1) of the NIRC states that for an expense to be deductible it must be: (1) be
ordinary and necessary, (2) incurred within the taxable year, and (3) incurred in carrying in a
trade or business.

The expense is paid as compensation to P.K. Macker & Co. for its services of carrying on the
selling campaign to sell Atlas' additional capital stock. It was incurred to create a favorable
image of the corporation. Efforts to establish reputation are akin to acquisition of capital assets
and, therefore, expenses related thereto are not business expense but capital expenditures.

Rule on Expenses
Commissioner of Internal Revenue v. Algue Inc.
G.R. No. L-28896, February 17, 1988

Doctrine: The test of deductibility of compensation payments is whether they are reasonable
and are, in fact, payments purely for services. Any amount paid in the form of compensation,
but not in fact as the purchase price of services, is not deductible.

Facts: Algue Inc. is a corporation engaged in engineering and construction. It was assessed for
delinquency income taxes totaling P83,183.85 for the years 1958, and 1959. Algue filed a
protest which was duly received. Algue was served a warrant of distraint and levy but refused
to receive it on the ground of its protest. The warrant was received only when Algue was
informed that the BIR was not acting on its protest. Algue filed a petition for review with the
CTA.

The CTA held that Algue’s claimed deduction of P75,000 represented a necessary business
expense and should not be disallowed by the BIR. The payment was for promotional fees paid
for the creation of the Vegetable Oil Investment Company (VOICO) and purchase of the
Philippine Sugar Estate Development Company (PSEDCO).

The CIR claimed that the payments were fictitious because most of the payees are members of
the same family in control of Algue. CIR suggested that the expenses were made as an attempt
to evade a legitimate assessment, considering that the payments were not sufficiently
substantiated. During the trial it was shown that strict business procedures were not applied
because of the close relationship among the persons in the family corporation.

Issue: Whether the claim of expenses is proper

Ruling: Yes. The SC agreed with the CTA in holding that the promotional fees were not
excessive. PSEDCO paid Algue P125,000. The claimed deduction of P75,000 which was 60%
of the commission was reasonable under the circumstances, considering that the payees did
practically everything from forming VOICO and purchasing PSEDCO.

Ostensible salaries paid by a corporation may be a distribution of a dividend on stock. This is

likely to occur in corporations having few stockholders. In such cases, the payment of salaries
are not paid wholly for services rendered but for distribution of earnings upon the stock. Under
the test of deductibility of compensation payments, such expenses are disallowed.

The test does not apply in this case because the payees were not in the regular employ of
Algue, nor were they its controlling stockholders. The expenses claimed are thus proper.