KARLY CASE NO. 203 thousand shares of stock in the Ajax Hand Brake Company.
thousand shares of stock in the Ajax Hand Brake Company. One George
GROSS INCOME
VICENTE MADRIGAL vs. JAMES J. RAFFERTY, CIR G.R. No.
L-12287
FACTS: Action was begun by Vicente Madrigal and his wife in the
CFI-Manila against Collector of Internal Revenue for the recovery of the
sum of P3,786.08, alleged to have been wrongfully collected by the
respondent from the him under the provisions of the Act of Congress
known as the Income Tax Law. Subsequently Madrigal submitted the
claim that the total income of P296,302.73 during 1914 was in fact the
income of the conjugal partnership existing between himself and his wife
Susana Paterno. The burden of the complaint was that if the income tax
for the year 1914 had been correctly computed there would have been
due payable by the spouses the sum of P5,842.18 instead of P9,668.21,
with P3,786.08 in excess of the payable. CFI ruled in favor of the
respondent.
ISSUE: WON the income reported by Madrigal in 1914 should be
divided into 2 in computing for the additional income tax.
RULING: NO. Susana Paterno cannot make a separate return in order to
receive the benefit of the exemption which would arise by reason of the
additional tax. Paterno has no estate and income, actually and legally
vested in her and entirely distinct from her husband's property, the
income cannot properly be considered the separate income of the wife
for the purposes of the additional tax. Moreover, the Income Tax Law
does not look on the spouses as individual partners in an ordinary
partnership. The husband and wife are only entitled to the exemption of
P8,000 specifically granted by the law.Income differs from capital in
that income is any wealth which flows into the taxpayer other than a
return of capital, while capital constitutes the investment which is
the source of income. Therefore, capital is fund, while income is the
flow. Capital is wealth, while income is the service of wealth. Capital
is the tree, while income is the fruit. Income is liable to income tax,
while capital or return of capital is exempt from tax.
KARLY CASE NO. 204
TO WHOM INCOME IS TAXABLE
MOORE VS. CIR, 124 F 2d 991 (7th Cir. 1941)
FACTS: Petition by Fay Harvey Moore to review a decision of the
Board of Tax Appeals, redetermining a deficiency in the tax imposed by
the Commissioner of Internal Revenue. The Petitioner owned four
including 50% surcharge and compromise penalty. The deficiency
M. DeGuire desired to purchase this stock under an escrow agreement.
DeGuire paid the cash payment stipulated in the contract of $43,904.
After this agreement was entered into, the Ajax Company declared and
paid a dividend on the stock in question in the sum of $7 per share, or
$28,000. The check for the dividend was made payable to the Petitioner,
as she was the owner of record of the shares of stock. The check was
then turned over to DeGuire, who had it certified and sent it by letter to
the Harris Trust and Savings Bank.
The Respondent contends that this transaction was no sale, that it was an
option to purchase granted to DeGuire; that Petitioner remained the
owner of the stock at the time the dividend was declared, and was
therefore owner of the dividend as such and properly taxed therefor as
income.
The Petitioner contends there was a sale and the stock was held to secure
the balance of the purchase price, and the title passed to DeGuire; that
even if title had not passed, the beneficial interest of the stock was in
DeGuire, and the Petitioner is not liable for the tax. Board of Tax
Appeals ruled in favor of the respondent. Hence, this petition for review.
ISSUE: WON Petitioner is liable for the payment of tax.
RULING: NO. Since the beneficial ownership of the property was not
in the Petitioner and she did not receive the dividend as a dividend, she
is not liable for the tax on such dividend. The title to this stock passed to
DeGuire upon the execution of the contract. Nothing remained for the
Petitioner to do to divest herself of title. Dividends are prima facie the
income of the record-owner of the stock and are taxable to such
owner. But where the record-owner has sold the stock under an
escrow agreement under which title is to be retained by him, the
dividends received by such owner and applied in reduction of the
purchase price are not taxable to him.
KARLY CASE NO. 205
TO WHOM INCOME IS TAXABLE
MERCY’S INC. VS. CIR, CTA Case No. 895, May 11, 1982
FACTS: After investigation of their tax liabilities by examiners from
BIR, the respondent CIR assessed deficiency income tax against Mercy’s
Inc., for the years 1953 to 1956 in the total amount of P20,674.00,
income tax assessment against Mercy’s Inc. is premised on its failure to
file returns for the years in question. Not satisfied with the decision of
respondent, petitioners appealed to this Court via Petition for review.
ISSUE: WON the deficiency income tax assessment issued against the
petitioner is legal.
RULING: NO. Ownership of building by an individual makes the
assessment against the corporation improper. It must be noted that
respondent’s assessment is based on the report of the examiners alleging
failure of Mercy’s Inc. to file returns from 1953 to 1956 in spite of the
receipt of income from Mercy Building it supposedly owns. In other
words, the assessment rests on the alleged ownership of Mercy Building
by Mercy Inc. This basis, however, is belied by the very same report
which states that Mercy Almonidovar de Vera, general manager of
Mercy Inc., is the registered owner of said building. Needless to say, the
income therefrom cannot be considered as income of Mercy’s Inc.
AREEJ
CASE NO. 206
Final tax on interest income from loans to resident borrowers is a
direct liability of FCDU
RCBC v. CIR | G.R. No. 170257, September 7, 2011
FACTS:Petitioner Rizal Commercial Banking Corporation (RCBC)
received a Formal Letter of Demand together with Assessment Notices
from the BIR for the deficiency tax assessments. RCBC protested and
refused to pay the assessments for deficiency onshore tax (the deficiency
final tax on Foreign Currency Deposit Unit onshore income). RCBC
contended that because the onshore tax was collected in the form of a
final withholding tax, it was the borrower, constituted by law as the
withholding agent, that was primarily liable for the remittance of the said
tax. CTA 1st Div upheld the assessments.
ISSUE:Whether or not petitioner, as payee-bank, can be held liable for
deficiency onshore tax, which is mandated by law to be collected at
source in the form of a final withholding tax.
RULING: YES. In the operation of the withholding tax system, the
withholding agent is the payor and is merely a tax collector; the
payer is the taxpayer – he is the person subject to tax imposed by law.
RCBC cannot evade its liability for FCDU Onshore Tax by shifting
the blame on the payor-borrower as the withholding agent.
The liability of the withholding agent is independent from that of the
taxpayer. The withholding agent is liable only insofar as he failed to
1
perform his duty to withhold the tax and remit the same to the
government. The liability for the tax, however, remains with the
taxpayer because the gain was realized and received by
him.Nonetheless, while the payor-borrower can be held accountable for
its negligence in performing its duty to withhold the amount of tax due
on the transaction, RCBC, as the taxpayer, remains liable for the
payment of tax as the taxpayer shares the responsibility of making
certain that the tax is properly withheld by the withholding agent, so as
to avoid any penalty that may arise from the non-payment of the
withholding tax due. Corollary, the withholding agent may also be
assessed deficiency withholding tax as a penalty for failure to fulfill its
obligation to withhold the tax as required by law.
AREEJ
CASE NO. 207
Final tax on interest income from loans to resident borrowers is a
direct liability of FCDU
ING Bank N.V. v. CIR | CTA EB Case No. 450, March 25, 2009
FACTS: Petitioner, ING Bank N.V. - Manila Branch, is the Philippine
branch office of ING Bank N.V., a company organized and existing
under the laws of the Kingdom of The Netherlands. Petitioner filed with
the BIR an administrative claim for refund or issuance of tax credit
certificate in the amount of P251,097,379.40, arising from its alleged
erroneous payment of branch profit remittance tax (BPRT) for 2004.
Thereafter, to toll the running of the two-year period, petitioner filed a
petition for review with the CTA, which denied petitioner’s claim for the
refund as petitioner's foreign currency deposit unit (FCDU) is in fact
subject to the branch profit remittance tax provided under Section 28(A)
(5) of the NIRC of 1997, which mandates payment of tax on branch
profit remittance.
ISSUE: Whether or not income derived by a depositary bank under the
foreign currency deposit system units from foreign currency transactions
with commercial banks are subject to a final tax of 10%.
RULING: YES. Prior to the amendment introduced by the NIRC of
1997, Section 25(a)(6)(B) of the 1977 Tax Code provides that: xxx
Income derived under the Expanded Foreign Currency Deposit System.
Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with non-
residents….. shall be exempt from all taxes xxx
However, it is very clear from Section 28(A)(7)(b) of the NIRC of 1997,
which amended Section 25(a)(6)(B) of the 1977 Tax Code, that the
phrase 'exempt from all taxes' was deleted. In other words, with the
deletion of the phrase, the payment now of the ten percent 10% final tax
on FCDU income does not exempt a bank from the payment of branch
profit remittance tax or other taxes.
By the clear import of Section 28(A)(7)(b) of the NIRC of 1997,
income derived by a depository bank under the foreign currency deposit
system units from foreign currency transactions with local commercial
banks shall be subject to a final tax of 10%.
AREEJ
CASE NO. 208
Final tax on interest income from loans to resident borrowers is a
direct liability of FCDU
ING Bank N.V. v. CIR | CTA EB Case No. 52, April 5, 2005
FACTS: Petitioner is the Philippine branch of Internationale
Nederlanden Bank N.V., a foreign banking corporation incorporated in
the Netherlands. Petitioner received a Final Assessment Notice (FAN)
overing deficiency tax assessments in the amount of P672,576,939.18.
Petitioner protested but CTA affirmed the deficiency tax assessments.
Hence, the petition. Petitioner claims that there is no deficiency onshore
tax because all taxes due on onshore interest income had been withheld
and remitted to the BIR. Citing Sections 50 and 51 of the 1977 Tax
Code, petitioner maintains that the 10% onshore tax is collected in the
form of final withholding tax and is to be paid and remitted to the BIR
by the payor-borrower, and not by the petitioner.
ISSUE: Whether or not the obligation of paying the 10% final tax on
onshore income rests on the payor-borrower, hence, the petitioner cannot
be held liable for deficiency onshore tax.
RULING: NO. While it is true that the payor-borrower is the one
constituted by the law to withhold and remit the 10% tax on onshore
income, the obligation of paying the 10% final tax on onshore income
rests on petitioner being the one directly liable for it, pursuant to Section
24(e)(3) of the NIRC Of 1993, as amended.
In the operation of the withholding tax system, the withholding
agent is merely a tax collector, not a taxpayer. Under the
withholding system, however, the agent-payor becomes a payee by
fiction of law. His (agent) liability is direct and independent from the
taxpayer, because the income tax is still imposed on and due from
the latter. The agent is not liable for the tax as no wealth flowed into
him — he earned no income. The Tax Code only makes the agent
personally liable for the tax arising from the breach of its legal duty to
withhold as distinguished from its duty to pay tax xxx.
Indubitably, the law and jurisprudence do not dispense the liability of the
taxpayer with respect to the payment of 10% final tax on onshore income
if the withholding agent fails to deduct and remit the same to the Bureau
of Internal Revenue. After all, it is the taxpayer who earns the income.
Truly, the obligation to pay the 10% onshore tax lies with petitioner
because the onshore income was obviously earned by it."
DE FIESTA
CASE No. 209
Where legal title over the Fund is transferred to the trustee, the
income of the Fund shall accrue to the trustee, not the trustor.
DBP v. COA, G.R. No. 144516, February 11, 2004
FACTS: DBP Board of Governors adopted Resolution No. 794 creating
the DBP Gratuity Plan and authorizing the setting up of a retirement
fund to cover the benefits due to DBP retiring officials and employees
under C.A. No. 186, as amended. A Trust Indenture was entered into by
and between the DBP and the Board of Trustees of the Gratuity Plan
Fund, vesting in the latter the control and administration of the Fund. In
1983, the Bank established a Special Loan Program (SLP) availed thru
the facilities of the DBP Provident Fund and funded by placements from
the Gratuity Plan Fund.
Pursuant to the investment scheme, DBP-TSD paid to the investor-
members the net earnings of the investments. The payments were
disallowed by the Auditor on the ground that it is irregular and
constituted the use of public funds for private purposes. The DBP
contended that the income of the Fund should be treated and recorded as
separate from the income of DBP itself.
ISSUE: W/N the income of the Fund is income of DBP.
RULING:NO. The DBP Board of Governors (now Board of Directors)
Resolution No. 794 and the Agreement executed by former DBP
Chairman Rafael Sison and the trustees of the Plan created an express
trust, specifically, an employees trust. An employees trust is a trust
maintained by an employer to provide retirement, pension or other
benefits to its employees. It is a separate taxable entity established for
the exclusive benefit of the employees. Resolution No. 794 shows that
DBP intended to establish a trust fund to cover the retirement benefits of
certain employees under RA 1616. The principal and income of the Fund
would be separate and distinct from the funds of DBP. In the present
case, DBP, as the trustor, vested in the trustees of the Fund legal title
over the Fund as well as control over the investment of the money and
assets of the Fund. The powers and duties granted to the trustees of the
Fund under the Agreement were plainly more than just
administrative.Clearly, the trustees received and collected any income
and profit derived from the Fund, and they maintained separate books of
account for this purpose. The principal and income of the Fund will
not revert to DBP even if the trust is subsequently modified or
terminated. The Agreement states that the principal and income must be
used to satisfy all of the liabilities to the beneficiary officials and
employees under the Gratuity Plan. The beneficiaries or cestui que
trust of the Fund are the DBP officials and employees who will retire
under CA 186, as amended by RA 1616.
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DE FIESTA
CASE NO. 210.
Sources Rules: A non-resident alien is taxed only on her commission
income for services rendered in the Philippines
CIR v. Baier-Nickel, G.R. No. 156305, February 17, 2003
This case cannot be found.
FACTS:
ISSUE:
RULING:Non-resident aliens, whether or not engaged in trade or
business, are subject to Philippine income taxation on their income
received from all sources within the Philippines. Thus, the keyword in
determining the taxability of non-resident aliens is the income’s
"source." The underlying theory is that the consideration for taxation is
protection of life and property and that the income rightly to be levied
upon to defray the burdens of the United States Government is that
income which is created by activities and property protected by this
Government or obtained by persons enjoying that protection.  The
important factor therefore which determines the source of income of
personal services is not the residence of the payor, or the place where the
contract for service is entered into, or the place of payment, but the place
where the services were actually rendered.
DE FIESTA
CASE NO. 211.
Sources Rules: A non-resident alien is taxed only on her commission
income for services rendered in the Philippines
Commissioner v. Baier-Nickel, G.R. No. 153793, August 29, 2006
FACTS: Respondent, a non-resident German citizen, is the President of
JUBANITEX, Inc., a domestic Corporation. The latter engaged the
services of respondent as commission agent. It was agreed that
respondent will receive 10% sales commission on all sales actually
concluded and collected through her efforts. In 1995, respondent
received the amount of P1,707,772.64, representing her sales
commission income from which JUBANITEX withheld the
corresponding 10% withholding tax, and remitted the same to the BIR.
In 1997, respondent filed her 1995 income tax return reporting a taxable
income of P1,707,772.64 and a tax due of P170,777.26.
Respondent filed a claim to refund the amount alleged to have been
mistakenly withheld and remitted by JUBANITEX to the BIR.
Respondent contended that her sales commission income is not taxable
in the Philippines because the same was a compensation for her services
rendered in Germany and therefore considered as income from sources
outside the Philippines. Petitioner maintains that the income earned by
respondent is taxable in the Philippines because the source thereof is
JUBANITEX, a domestic corporation located in the City of Makati.
ISSUE: W/N Respondent is entitled to refund.
RULING: NO. In the instant case, the appointment letter of respondent
as agent of JUBANITEX stipulated that the activity or the service which
would entitle her to 10% commission income, are "sales actually
concluded and collected through [her] efforts."What she presented as
evidence to prove that she performed income producing activities
abroad, were copies of documents she allegedly faxed to JUBANITEX
and bearing instructions as to the sizes of, or designs and fabrics to be
used in the finished products as well as samples of sales orders
purportedly relayed to her by clients. However, these documents do not
show whether the instructions or orders faxed ripened into concluded or
collected sales in Germany. At the very least, these pieces of evidence
show that while respondent was in Germany, she sent instructions/orders
to JUBANITEX.
FRED
CASE 212
V. GROSS INCOME: A. SOURCES RULES: Offshore turnkey
income
Marubeni v. CIR, G.R. No. 137377
FACTS: Marubeni in its contract with NDC (for installation of
wharf/port complex) and Philpos (for construction of ammonia storage
complex) undertook on-shore and off-shore undertaking. Its offshore
undertaking was not declared for tax purposes since the payment and the
manufacture of materials was made in Japan. CIR sought to collect tax
deficiencies from its offshore undertaking with a rate of 50% for failure
to report and 25% for failure to pay on time the same. CTA ruled in
favor of Marubeni. CA affirmed.
ISSUE: w/n the entire
income constituted income from Philippines sources, thus, subject to
internal revenue taxes?
RULING: NO.Clearly, the two projects involved two taxing
jurisdictions. These acts occurred in two countries — Japan and the
Philippines. While the construction and installation work were
completed within the Philippines, the evidence is clear that some pieces
of equipment and supplies were completely designed and engineered in
Japan. All services for the design, fabrication, engineering and
manufacture of the materials and equipment under were made and
completed in Japan. These services were rendered outside the taxing
jurisdiction of the Philippines and are therefore not subject to
contractor's tax.
FRED
CASE 213
V. GROSS INCOME: A. SOURCES RULES: International Air
Carrier
CIR v. British Overseas Airways Corporation, G.R. No. L-65773-74
FACTS: BOAC an offline international carrier, did not operate in the
Philippines but has maintained a general sales agent (Warner Barnes) in
the Philippines, which sold BOAC’s tickets covering passengers and
cargoes. In 1961-62 BOAC was granted temporary landing permit by
Civil Aeronotics Board. CIR later assessed BOAC covering said periods.
BOAC maintained that it didn’t operate in Philippines. CTA ruled in its
favor. Hence, this petition.
ISSUE: w/n the BOAC can be taxed by CIR?
RULING:YES. The source of an income is the property, activity or
service that produced the income.  For the source of income to be
considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines.  The test of
taxability is the "source"; and the source of an income is that activity ...
which produced the income.  In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income.
FRED
CASE 214
V. GROSS INCOME: A. SOURCES RULES: International Air
Carrier
Alexander Howden & Co. v. Commissioner, G.R. No.L-19392
FACTS: CIC in a reinsurance contract with 32 British insurance
companies (represented by AHC), agreed to cede a portion of its
premiums on insurances it has underwitten in Philippines. CIC remitted
to AHC P798K as reinsurance premiums. On behalf of AHC, CIC filed
an income tax return amounting to P4K declaring the sum it remitted to
AHC and paid BIR P66K. AHC later claimed for refund arguing that it is
withholding tax premiums received from domestic insurance companies.
CTA denied.
ISSUE: w/n reinsurance premiums remitted by a domestic insurance
company to foreign insurance companies considered in come of the latter
derived from sources within the Philippines?
RULING: YES. Since Section 53 subjects to withholding tax various
specified income, among them, "premiums", the generic connotation of
each and every word or phrase composing the enumeration in Subsection
(b) thereof is income. Perforce, the word "premiums", which is neither
qualified nor defined by the law itself, should mean income and should
include all premiums constituting income, whether they be insurance or
reinsurance premiums, whether insurance or reinsurance premiums.
Section 24 of the Tax Code does not require a foreign corporation to be
engaged in business in the Philippines in order for its income from
sources within the Philippines to be taxable. It subjects foreign
corporations not doing business in the Philippines to tax for income from
sources within the Philippines. If by source of income is meant the
business of the taxpayer, foreign corporations not engaged in business in
3
the Philippines would be exempt from taxation on their income from
sources within the Philippines.
jAnSoriano
CASE NO. 215
Definition of Income
Conwi v. CTA and CIR - James v. US | GR No. 48532
FACTS: Petitioners were assignees to subsidiaries in the PH owned by a
US company in which they were paid in US dollars. They filed before
the CIR their income tax returns for the year 1970, claiming that a BIR
Ruling should be followed which would result to tax overpayment on
their part. However, they appealed to the CA without waiting for the
decision of the CIR. CA ruled against the petitioners ruling that their
dollar earning receipts derived from foreign exchange transactions, thus,
it does not fall under the definition of income.
ISSUE/S: W/N the case is an income tax case.
RULING: Yes. Income may be defined as an amount of money coming
to a person or corporation within a specified time, whether as payment
for services, interest or profit from investment (pg. 161). Petitioners are
correct as to their claim that their dollar earnings are not receipts derived
from foreign exchange transactions. For a foreign exchange transaction
is simply the conversion of an amount of money or currency of one
country into an equivalent amount of money or currency of another."
Thus, CA erred in its ruling.
CASE NO. 216
Definition of Income
Madrigal vs. Raferty
nSoriano
CASE NO. 217
Definition of Income
Fisher v. Trinidad | GR No. L-17518
FACTS: Petitioner was a stockholder of Philippine American Drug
Company. He was then made to pay income tax of his stock dividend by
the CIR. He then paid, under protest, he should not be made to pay
income tax for his stock dividend.
ISSUE/S: W/N the "stock dividends" in the present case are "income”
RULING: No. 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. In the present
case, income received as dividends is taxable as an income but an
income from "dividends" is a very different thing from 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
corporation, which is the case of the petitioner. Thus, petitioner
should not be made to pay income tax due to its ownership of the stock
dividend.
jAnSoriano
CASE NO. 218
Definition of Income
James v. US | 366 US 213 (1961)
FACTS: The petitioner, a union official, misappropriated the funds of
the years 1951 to 1954 of his employer union and from an insurance
company. He was sentenced to 3 years imprisonment for evading federal
income tax on the said misappropriated funds. On appeal, petitioner
claims that the misappropriated funds does not fall under the definition
of income.
ISSUE/S: W/N the misappropriated funds falls under the definition of
income.
RULING: Yes. Income includes earnings, lawfully or unlawfully
acquired, without the consensual recognition, express or implied, of an
obligation to repay and without restriction as to their disposition. Thus,
petitioner is still liable to pay income tax on the misappropriated funds.
Verdict: the petitioner was, however, acquitted on the ground that intent
was not proven in trial.
Martin
Case No. 219
Definition of Income
Philippines vs. Salem Investment Corporation| Gr No. 137569
Facts: Alfredo Guerrero intervened (entered into a contract to sell with
De la Ramas) in this proceeding for the determination of just
compensation for the expropriation of lands under B.P. Blg. 340 arguing
that, instead of the De la Ramas, he should receive the just compensation
for the subject land. De la Ramas claim that they should receive the
amount of just compensation because when they agreed to sell the lot to
Guerrero, it did not include the portion expropriated by the Republic. On
the other hand, Alfredo Guerrero argues that the title to the expropriated
portion of the lot did not immediately pass to the government upon the
enactment of B.P. Blg. 340, as payment of just compensation was yet to
be made before ownership of the land was transferred to the government.
Issue: Whether or not Guerrero is entitled to receive payment of just
compensation.
Ruling/Main Point: Yes.The expropriation of lands consists of two
stages: (1) the determination of the authority of the plaintiff to exercise
the power of eminent domain and the propriety of its exercise in the
context of the facts involved in the suit. (2) the determination by the
court of "the just compensation for the property sought to be taken." It is
only upon the completion of these two stages that expropriation is said to
have been completed. Moreover, it is only upon payment of just
compensation that title over the property passes to the government.
Martin
Case No. 220
Definition of Income
Capitol Steel Corporation vs. Phividec Industrial Authority| GR No.
169453
Facts: PHIVIDEC filed an expropriation case (later filed another motion
for the issuance of a writ of possession) before the RTC involving the
properties (most ideal for a container terminal project) of Capitol Steel
and it had deposited an amount (P116M - prerequisite for issuance of the
writ) in favor of Captiol. However, the trial court denied PHIVIDEC's
Motion for the Issuance of a Writ of Possession, noting that the amount
4
deposited was "seemingly inadequate." The trial court found it necessary
to first make a "judicial interpretation" to determine the prevailing
market value of the properties on the basis of the zonal valuation through
a full-blown trial.
Issue: Whether or not it is necessary to determine the final amount of
just compensation (using prevailing market value) before Phividec may
be issued a writ of possession.
Ruling/Main Point: No. Upon compliance with the requirements, a
petitioner in an expropriation case, in this case respondent, is entitled to
a writ of possession as a matter of right and it becomes the ministerial
duty of the trial court to forthwith issue the writ of possession. No
hearing is required.The payment of the provisional value as a
prerequisite to the issuance of a writ of possession differs from the
payment of just compensation for the expropriated property. While the
provisional value is based on the current relevant zonal valuation, just
compensation is based on the prevailing fair market value of the
property. The first refers to the preliminary or provisional determination
of the value of the property. Just compensation, on the other hand, is the
final determination of the fair market value of the property.
Martin
Case No. 221
Definition of Income
Capitol Steel Corporation vs. CIR| CTA Case No. 9240, 2017
Facts: CIR questions SC’s decision (in a Petition for Review) that
cancelled the imposition of capital gains tax and documentary stamp tax
(DST) due from Capitol. Capitol contends that since expropriation is still
pending and that the final valuation of the just compensation for the
property has not yet been decided, there is no occasion yet for the
imposition of the said taxes. On the other hand, CIR claims that Capitol
is liable for taxes because Phividec has already paid (P116M – as a
prerequisite for issuance of writ of possession) for the property.
Issue: Whether or not Capitol is liable for taxes.
Ruling/Main Point: No. The payment of the provisional value as a
prerequisite to the issuance of a writof possession differs from the
payment of just compensation for the expropriated property. The transfer
of property through expropriation proceedings and the payment of just
compensation are necessary elements of “sale” or “exchange” for
purposes of Sections 24(D) and 56(A)(3) of the NIRC of 1997, as
amended. Hence both elements must be present in order to be considered
“sale” and be subjected to the imposition of capital gains tax. As such,
without payment of just compensation, title remains with petitioner. The
expropriation process, therefore, is not yet complete and terminated.
Thus, there is yet no sale upon which the capital gains and DST may be
imposed.
KIM
CASE NO. 224
Tests in determining income (Realization Test)
Eisner v. Macomber, 252 U.S. 189
FACTS: Standard Oil Company of California decided to declare stock
dividend to its shareholders.
The declaration caused Mrs. Macomber to receive additional
1,100 shares of stock, thus causing an increase of $19,877 of her shares.
The IRS treated the $19,877 increase as taxable income under the
Revenue Act of 1916 which provided that a stock dividend was
considered income to the amount of its cash value.
Macomber argued that that provision in the Revenue Act of
1916 was unconstitutional because it was a direct tax not apportioned per
population; since a stock dividend was not income, a legislative
provision subjecting it to income tax was not constitutional under the
16th Amendment.
District Court: Dividends here were not taxable income
ISSUE: W/N the stock dividend issued to Mrs Macomber is considered
taxable income?
RULING: No. The Supreme Court affirmed the District Court holding
for the taxpayer that a stock dividend is not income. The Revenue Act of
1916 provision subjecting stock dividends to tax was held
unconstitutional. If a stock dividend is not considered income, it cannot
be subject to income tax under the 16th Amendment. In applying the
16th Amendment, it is important to distinguish between capital and
income, as only income is subject to income tax.
Macomber merely received additional capital. In receiving additional
dividend, the stockholder has received nothing out of the company's
assets for his separate use and benefit; on the contrary, every dollar of
his original investment, together with whatever accretions and
accumulations have resulted from employment of his money and that of
the other stockholders in the business of the company, still remains the
property of the company, and subject to business risks which may result
in wiping out the entire investment. Having regard to the very truth of
the matter, to substance and not to form, he has received nothing that
answers the definition of income within the meaning of the Sixteenth
Amendment
MAINPOINT: There is no taxable income until there is a separation
from capital of something of exchangeable value, thereby supplying
the realization or transmutation of which would result in the receipt
of income.
KIM
CASE NO. 226
Tests in determining income
Spouses Araneta v. CIR, CTA Case NO. 1699, November 6,
1970
FACTS: Petitioner J. Araneta was the president of few companies
related to the Sugar Central in Negros. From the said companies he had
received income and dividends denotes as cash receipt for the Sugar
Central companies and accrual basis for the farming business.
A memorandum for tax amnesty was issued by CIR. The
Aranetas availed this amnesty but failed to state their true income. They
paid the corresponding taxes and interest for the years 1957-1959 but
refused to pay them in 1960-1961 claiming that they overpaid their taxes
from the previous years. According to them they erroneously reported
the dividends of one the companies J. Araneta Co as personal income.
They later received an assessment for their delinquency.
ISSUE/S:W/N stock dividends received by the spouses be taxable on
their part as they as are stockholders of the companies involved?
RULING: Yes. Generallystock dividends are not income subject to
income tax on the part of the stockholder, because he merely holds
more shares representing the same equity interest in the corporation
that declared the stock dividends. However the interest which were
deducted as interest expense from the corporation's gross income,
were constructively received by the president and stockholder of the
payor corporation and therefore included in his gross income
We held that interests in dispute which were deducted as interest
expense from the corporation’s gross income were accepted by J.
Ararenta therefore includible in his gross income.
MAINPOINT: in bold and highlighted
KIM
CASE NO. 227
Tests in determining income
Commissioner v. Wilcox, 286 U.S. 417, 424
*No full text available for this case, a lot of opinion which favor the
dissenting opinion are available online but US SC said he’s not liable
FACTS: Wilcox, entered the employ of the Nevada Transfer
Warehouse Co (Nevada) aside from his salary it was discovered that he
embezzled money from Nevada.An information for embezzlement was
5
filed against him. . Wilcox did not return the money to Nevada nor
Nevada filed an action to recover the sum of money but the funds were
not condoned by Nevada.
Wilcox was jailed. The Commissioner determined that the
taxpayer was required to report the embezzled funds as income received
for that year, hence required to file and pay a tax deficiency
ISSUE/S:W/N embezzled money constitutes taxable income to the
embezzler under Section 22(a) of the Internal Revenue Code?
RULING: It depends, here Wilcox was not held liable the Supreme
Court of the United States held that the proceeds of the
embezzlement did not constitute taxable income. In the language of
the court, "Not every benefit received by a taxpayer from his labor or
investment necessarily renders him taxable. Nor is mere dominion over
money or property decisive in all cases. The court went on to say that the
reason that embezzled money. does not come under the definition of
taxable income in the Internal Revenue Code is obvious upon the face of
the statute, which says, "A taxable gain is conditioned upon (1) the
presence of a claim of right to the alleged gain, and (2) the absence of a
definite unconditional obligation to repay or return that which would
otherwise constitute a gain."
Generally embezzled funds could become taxable; however if
the statute of limitations runs through the victim's negligence or
condonation, the embezzler is vested with an irrefutable legal claim, and
the illegal gain would become taxable income.
MAINPOINT: A taxable gain is conditioned upon the presence of a
claim of right to the alleged gain and absence of a definite unconditional
obligation to return or repay that which would give the government an
unjustified presence as to the part of the money that rightfully and
completely belongs to the victim the embezzlers title is void
ADDALINO
CASE NO. 228
Tests in determining income: CLAIM OF RIGHT DOCTRINE
CIR v. Javier, 199 SCRA 824 (1991)
FACTS: Victoria Javier, wife of Javier-respondent, received $999k from
Prudential Bank remitted by her sister Dolores through Mellon Bank in
US. Later, Mellon Bank filed a complaint with CFI Rizal against Javier
claiming that its remittance of $1M was a clerical error and should have
been $1k only and praying that the excess be returned on the ground that
the Javiers are just trustees of an implied trust for the benefit of Mellon
Bank. CFI charged Javier with estafa alleging that they misappropriated
and converted it to their own personal use. A year after, Javier filed his
Income Tax Return for 1977 and stating in the footnote that “the RULING: YES. The MBA made no mention of exemption from tax of
taxpayer was recipient of some money received abroad which he the compensation to be paid for the expropriation of privately owned
presumed to be a gift but turned out to be an error and is now subject of lands located in the Philippines. Further, U.S jurisprudence has held that
litigation.” CIR demanded him to pay taxes for the deficiency, due to the the transfer of property through condemnation proceedings is a sale or
remittance. Javier replied to the Commissioner and said that he will pay exchange within the meaning of section 117 (a) of the 1936 Revenue Act
the deficiency but denied that he had any undeclared income for 1977. and profit from the transaction constitutes capital gain.
CIR: replied “the amount of Mellon Bank’s erroneous remittance which MAINPOINT: All income not expressly excluded or exempted from the
class of taxable income, irrespective of the voluntary or involuntary
you were able to dispose is definitely taxable” and the Commissioner
imposed a 50% fraud penalty on Javier.” action of the taxpayer in producing the income, regardless of the source
of income, is taxable.
ISSUE: W/N private respondent is liable for the 50% fraud penalty
ADDALINO
RULING: No. The court ruled that the amount received is income CASE NO. 230
subject to tax BUT the tax return filed cannot be considered fraudulent Tests in determining income
because petitioner literally "laid his cards on the table" for the CIR to BDO v Republic, GR No. 198756, January 13, 2015
examine. Error or mistake of fact or law is not fraud. (page 168). The
footnote was practically an invitation to the petitioner to make an
FACTS: Bureau of Treasury (BTr) announced the auction of 10- year
investigation, and to make the proper assessment
Zero-Coupon Bonds denominated as the Poverty Eradication and
Alleviation Certificates or the PEACe Bonds, which the BTr states shall
ADDALINO
not be subject to 20% final withholding tax since the issue is limited to
CASE NO. 229
19 buyers/lenders. At the auction, RCBC participated on behalf of
Tests in determining income; INCOME FROM WHATEVER
Caucus of Development NGO Networks (CODE-NGO) and won the bid.
SOURCE
Thus, bonds were issued to RCBC, then sold and distributed said
Gutierrez v. CTA and Collector, 101 Phil. 713 (1957)
government bonds to petitioner-banks. Barely 11 days before maturity of
the PEACe Bonds, the BIR issued Ruling No. 370- 201119 declaring
FACTS: Maria Morales was the owner of an agricultural land. Pursuant
that the PEACe Bonds, being deposit substitutes, were subject to 20%
the Military Bases Agreement, the US government wanted to expropriate
final withholding tax . Under this, DOF directed BTr to withhold 20%
the land of Morales to expand the Clark Field Air Base. After entering
final tax from the face value of the PEACe Bonds.
into a compromise agreement, Morales was later compensated for said
land. In an assessment notice, CIR demanded payment of Php 8k for
ISSUE/S: Whether the PEACe Bonds are “deposit substitutes” and thus
deficiency of income tax for the year 1950, inclusive of surcharges and
subject to 20% final withholding tax under the 1997 National Internal
penalties. The spouses contend that the expropriation was not taxable
Revenue Code
because it is not "income derived from sale, dealing or disposition of
property" as defined in Sec. 29 of the Tax Code. CIR did not agree.
RULING: NO SUFFICIENT INFORMATION TO DETERMINE.
SC ruled that the number of lenders/ investors at every transaction
PETITIONER: since, at the request of the U.S. Government, the
determines whether a debt instrument is a deposit substitute subject to
proceeding to expropriate the land in question necessary for the
20% FWT. When at any transaction, funds are simultaneously obtained
expansion of the Clark Field Air Base was instituted by the Philippine
from 20 or more lenders/investors, there is deemed to be public
Government as part of its obligation under the Military Bases
borrowing and bonds are deemed deposit substitutes. Hence, seller is
Agreement, the compensation accruing therefrom must necessarily
required to withhold 20% FWT on the imputed interest income from the
fall under the exemption provided for by Section 29-(b)-6 of the Tax
bonds. In this case, the PEACe Bonds requires further information for
Code.
proper determination of whether these bonds are within the purview of
deposit substitutes. The Court noted that it may seem that the lender is
ISSUE/S: Whether or not that for income tax purposes, the
only CODE-NGO through RCBC. However, the underwriting agreement
expropriation should be deemed as income from sale and any profit
reveals that the entire 35billion worth of zero-coupon bonds were
derived therefrom is subject to income taxes capital gain
sourced directly from the undisclosed number of investors. Hence, until
6
there is information as to whether the PEACe Bonds are found within the FACTS: Macasio filed before the Labor Arbiter a complaint against
coverage of deposit substitutes, the proper procedure for the BIR is to WEE petitioner David, ("Yiels Hog Dealer") for non-payment of overtime pay,
collect the unpaid final withholding tax directly from RCBC Capital/ CASE NO. 232 holiday pay, 13th month pay, and service incentive leave.Macasio
CODE-NGO, or any lender if such be the case. Compensation Income alleged before the LA that he had been working as a butcher for David
Brotherhood Labor Unity Movement of the Phils. (BLUM) v. since 6 January 1995. Macasio claimed that David exercised effective
MAINPOINT: Passive income from debt instruments that do not Zamora ǀ G.R. No. L-48645, 7 January 1987 control and supervision over his work, pointing out that David: (1) set
TOPIC: ER-EE Relationship; NO COMPENSATION INCOME the work day, reporting time and hogs to be chopped, as well as the
qualify as deposit substitutes under the 1997 National Internal Revenue
manner by which he was to perform his work; (2) daily paid his salary of
Code are subject to the regular income tax.
FACTS: Petitioners are workers who have been employed as ₱700.00; and (3) approved and disapproved his leaves.In his
“pahinantes” or “kargadors” for almost 7 years. They worked defense, David claims that Macasio was not his employee as he hired the
exclusively at the San Miguel Corp. (SMC) plant, never having been latter on "pakyaw" or task basis. LA dismissed Macasio’s complaint for
WEE
assigned to other companies or departments of SMC, even when the lack of merit. NLRC affirmed.Macasio moved for reconsideration but
CASE NO. 231
volume of work was at its minimum. The workers organized and the NLRC denied his motion, prompting Macasio to elevate his case to
Test in Determining Income: Economic Benefit Test
affiliated themselves with BLUM. They wanted to be paid for overtime the CA via a petition for certiorari. CA partly granted Macasio’s
Commissioner v. Smith ǀ 324 US 177
work and holiday pay. SMC refused to bargain with the union alleging certiorari petition and reversed the NLRC’s ruling for having been
that the workers are not their employees but the employees of an rendered with GAD. Hence, this present petition.
FACTS: Respondent Smith was employed by Western Cooperage
independent labor contracting firm, Guaranteed Labor Contractor. The
Company. Western took over the management of the Hawley Pulp and
workers were then dismissed from their jobs and denied entry to the ISSUE: Whether or not the engagement on “pakyaw” or task basis
Paper Co.. Respondent was active in the reorganization of the Hawley
glass factory. A complaint was filed for illegal dismissal and unfair labor negates the existence of an employer-employee relationship between
Company. As compensation for respondent’s services, the president of
practices. David and Macasio.
Western (December 1934) gave respondent an oral option to purchase a
part of the Hawley stock, to be acquired by Western under its contract.
ISSUE: Whether or not an ER-EE relationship exists between RULING: NO. Engagement on “pakyaw” or task basis does not
In 1938, Western became entitled to the stipulated number of shares of
petitioners-members of the BLUM and respondent SMC. characterize the relationship that may exist between the
the Hawley stock. In 1938 and 1939, respondent, by the exercise of his
parties, i.e., whether one of employment or independent
option, acquired from Western large amounts of the stock on payment of
RULING: YES.In determining the existence of an ER-EE relationship, contractorship. It only determines the manner of calculation of the
the option price. The Tax Court found that at the date of the option
the elements that are generally considered are the following: (a) the wages due to the employee which, in this case, is the quantity or
[1934] the market price of the stock did not exceed the option price, but
selection and engagement of the employee; (b) the payment of wages; quality of work done. Moreover, Macasio’s relationship with David
that in 1938 and 1939 the market value of the stock, then acquired by
(c) the power of dismissal; and (d) the employer's power to control the satisfies the “four-fold” test of employment relationship. First, David
respondent, exceeded its option price. It held that the excess of the
employee with respect to the means and methods by which the work is to engaged the services of Macasio, thus satisfying the element of
market value of the shares over the option price in the years when the
be accomplished. It. is the called "control test" that is the most important “selection and engagement of the employee.” Second, David paid
shares were received by respondent was compensation for his services,
element. Macasio’s wages. Third, David had been setting the day and time when
taxable as income in those years.
Petitioners worked continuously and exclusively for an average of 7 Macasio should report for work. And fourth, David had the right and
years for the company. Considering the length of time that the petitioners power to control and supervise Macasio’s work as to the means and
ISSUE: Whether or not the difference between the market value and the
have worked, there is justification to conclude that they were engaged to methods of performing it. Also, since Macasio performed his tasks at
option price of the stock, as compensation, was taxable as income.
perform activities necessary or desirable in the usual business of trade of David’s workplace, David could easily exercise control and supervision
the respondent. Hence, petitioners are considered “regular employees.” over the former. 
RULING: YES. Section 22(a) of the Revenue Act is broad enough to
Even assuming that there is a contract of employment executed between
include in taxable income any economic or financial benefit
SMC and the said labor contractor, the court ruled that Guaranteed and MAIN POINT: Under the control test, an employer-employee
conferred on the employee as compensation, whatever the form or
Reliable Labor contractors have neither substantial capital nor relationship exists where the person for whom the services are performed
mode by which it is effected. The regulation specifically includes in
investment to qualify as an independent contractor under the law. reserves the right to control not only the end achieved, but also the
income, property 'transferred * * * by an employer to an employee,
manner and means used to achieve that end.
for an amount substantially less than its fair market value,' even
MAIN POINT: “Compensation” means all remuneration for services
though the transfer takes the form of a sale or exchange, to the
performed by an employee for his employer under an ER-EE GOMEZ
extent that the employee receives compensation.
relationship, unless specifically excluded by the Tax Code. CASE NO. 234
Any economic benefit to the employee that increases his net worth;
whatever may have been the mode by which it is effected, is taxable. Who is an employee
WEE First Lepanto Taisho Insurance Corp. v. CIR
The Tax Court thus found that the option was given to respondent as
CASE NO. 233 G.R. No. 197117
compensation for services, and implicitly that the compensation referred
Compensation Income
to was the excess in value of the shares of stock over the option price
David v. Macasio ǀ G.R. No. 195466, 2 July 2014
whenever the option was exercised. From these facts it concluded that FACTS: Petitioner is a non-life insurance company. After filing their
TOPIC: ER-EE Relationship; NO COMPENSATION INCOME
the compensation was taxable as such by the provisions of the applicable 2011 income tax, the BIR sent them a letter to allow them to inspect
Revenue Acts and regulations. their books. The BIR then assessed that they failed to remit the proper

7
withholding tax of their director’s bonus. In Reply, the directors averred
that they are not employees under Revenue Regulation No. 12-86, that
would put validity to the assessment claimed by BIR.
ISSUE/S: Whether or not Petitioners is correct that the directors of First
Lipanto are not employees under Revenue Regulation No. 12-86.
RULING (BOOK, PAGE 171): NO.For taxation purposes, a
director is considered an employee under Section 5 of Revenue
Regulation No. 12-86,14 to wit:
An individual, performing services for a corporation, whether as an
officer and director or merely as a director whose duties are
confined to attendance at and participation in the meetings of the
Board of Directors, is an employee.
The non-inclusion of the names of some of petitioner’s directors in the
company’s Alpha List does not ipso facto create a presumption that they
are not employees of the corporation, because the imposition of
withholding tax on compensation hinges upon the nature of work
performed by such individuals in the company. Moreover, contrary to
petitioner’s attestations, Revenue Regulation No. 2-98,15 specifically,
Section 2.57.2. A (9) thereof, cannot be applied to this case as the latter
is a later regulation while the accounting books examined were for
taxable year 1997.
GOMEZ
CASE NO. 235
Statutory Minimum Wage
Soriano v. Secretary of Finance
G.R. No. 184450, January 24, 2017
FACTS: Petitioners assail the subject RR (Revenue Regulation 10-
2008) as an unauthorized departure from the legislative intent of R.A.
9504.They contest the validity of the RR’s alleged imposition of a
condition for the availment by Minimum Wage Earners (MWEs) of the
exemption provided by R.A. 9504. That it imposes additional
requirements to MWEs for availing a tax exemption.
ISSUE: Whether or not the said RR is valid insofar as it adds additional
requirement for MWEs before they could avail of the tax exemption
under said law.
RULING: NO. Revenue Regulation 10-2008 is void for adding that
MWEs additional compensation are not tax exempt. It is clear from R.A.
9504, holiday pay, overtime pay, night shift differential pay, and hazard
pay earned by Minimum Wage Earner (MWE) shall be exempt from
income tax and withholding tax.
GOMEZ
CASE NO. 236
Statutory Minimum Wage
Escareal v. CTA (CIR)
* Mainpoint ng book is on the effect of an award of backwages.
FACTS: Petitioner, Orlando Escareal, was employed by Unilever as
Pollution Control Manager. Later, his position was declared redundant.
Thus, he filed a illegal dismissal case before the NLRC which he was
awarded with backwages. However, Unilever withheld a portion of the
total backwages to be remitted to the BIR as withholding tax. This
prompted petitioner to file a suit against the BIR for the collection of the
amount withheld and remitted by Unilever to BIR.
The BIR replied that under the Tax Code as ruled by the Supreme Court,
backwages awarded to a claimant under an illegal dismissal suit is still
subject to withholding tax.
ISSUE: Whether or not Unilever is correct in withholding a portion of
the award of backwages of Escareal for it to be remitted to the BIR as
payment for tax.
RULING: YES. When an award of backwages is made, there is an
acceptance that the employee was illegally or unjustly dismissed, and the
backwages are the salaries he was suppose to have earned had he not
been dismissed. Is as though he was not separated from employment,
and as though he actually rendered service.
Having this in mind, under Revenue Regulation No. 2-98, an employer
having control or possession of the credit (backwages in this case) shall
withhold the required tax.
AIRA
CASE NO. 237
Items not included as compensation income
Nitafan et. al. vs. Commissioner of lnternal Revenue, 152 SCRA 284,
July 23, 1987
FACTS: Citing Sec. 10, Art. VIII of the 1987 Constitution, which
provides that salaries of judges shall be fixed by law and that during
their continuance in office, their salary shall not be decreased,
petitioners, judges of NCR RTC, questioned the deduction of
withholding taxes from their salaries since it results into a net deduction
of their pay.
ISSUE: Whether or not the deduction of withholding taxes from judges’
salaries violates the Constitution.
RULING: NO. The salaries of judges are not tax-exempt and their
taxability is not contrary to the provisions of Sec. 20, Art. VIII of the
Constitution on the non-diminution of the salaries of the judiciary during
their continuance in office. The clear intent of the Constitutional
Commission that framed the Constitution is to subject their salaries to
tax as in the case of all taxpayers. Hence, the deduction of withholding
taxes, being a manner of collecting the income tax on their salary, is not
a diminution contemplated by the fundamental law.
AIRA
CASE NO. 238
De minimis benefits
Collector of Internal Revenue vs. Henderson, 1 SCRA 649, February
28, 1961
FACTS: BIR assessed the Spouses Henderson for their deficiency taxes.
In their computation, BIR included as part of taxable income: 1) Arthur’s
allowances for rental, residential expenses, subsistence, water, electricity
and telephone expenses 2) entrance fee to the Marikina Gun and Country
Club which was paid by his employer for his account and 3) travelling
allowance of his wife. The Hendersons claim that as regards Arthur’s
allowances for rental and utilities, he did not receive the money for said
allowances, but that they lived in the apartment furnished and paid for by
his employer for the latter’s convenience; that as regards the entrance fee
to the Marikina Gun and Country Club paid for him by his employer, it
was an expense of his employer and his membership therein was merely
incidental to his duties of increasing and sustaining the business of his
employer; and that as regards the wife's travelling allowance, it should
not be considered as part of their income because she merely
accompanied him in his business trip to New York as his secretary and,
at the behest of Arthur's employer, to study and look into the details of
the plans and decorations of the building intended to be constructed by
his employer in its property.
ISSUE: Whether or not the mentioned items should be included as
taxable income.
RULING: NO. The prevailing judicial opinion is to the effect that
generally, the value to the employee of living quarters and meals
furnished in addition to salary constitutes income subject to tax.
However, where the quarters and meals are furnished for the
convenience of the employer, the ratable value of the same need not be
added to the salary or cash compensation of the employee for income tax
purposes.
CASE NO. 239
Stock option plans
Commissioner vs. Smith, 324 U.S. 177
CASE NO. 240
Stock option plans
Collector of Internal Revenue vs. Henderson, 1 SCRA 649, February
28, 1961
AR
8
 CASE NO. 242
Trade or Business Income
Luzon Stevedoring v. Trinidad (CIR) (1922)
FACTS: Petitioner is engaged in the stevedoring business, consisting of
loading and unloading cargo from vessels in port. All the work done by
it is conducted under the direct supervision of the officers of the ships
and under the instruction given to plaintiff's men by the captain and
officers of said ships.
Under the provisions of Section 1462 of Act No. 2711 (Admin Code),
defendant levied and assessed the petitioner’s gross receipts the 1%
percentage tax because it considered petitioner as a contractor.
Petitioner filed an action in the CFI for the recovery of taxes paid by it to
the defendant CIR under protest. CFI ruled in favor of petitioner,
holding that plaintiff was not a contractor, thus not subject to the said
percentage tax.
ISSUE: Is the plaintiff a contractor, thus subject to the percentage tax?
RULING: NO. Thus, the tax paid under protest was illegally collected
and should be repaid.
A contractor is a person who, in the pursuit of an independent business,
undertakes to do a specific piece or job or work for other persons, using
his own means and methods without submitting himself to control as to
the petty details.  customer, the said air conditioning units were not intended for sale to the
The true test of a 'contractor' would seem to be that he renders the
service in the course of an independent occupation, representing the
will of his employer only as to the result of his work, and not as to
the means by which it is accomplished.
If the one rendering service submits himself to the direction of his
employer as to the details of the work, fulfilling his will not merely as to
the result but also as to the means by which that result is to be attained,
the contractor becomes a servant and is not a contractor in respect to that
work.  RULING and MP: NO.
AR
CASE NO. 243
Trade or Business Income
CIR v. Engineering Equipment and Supply Co 64 SCRA 597 (1975)
FACTS: Defendant is an engineering and machinery firm. It is engaged,
among others, in the design and installation of central type air
conditioning system. One Juan de la Cruz wrote petitioner denouncing
Engineering for tax evasion by misdeclaring its imported articles and
failing to pay the correct percentage taxes due thereon in connivance
with its foreign suppliers. Commissioner, of Internal Revenue assessed
deficiency advance sales tax upon Engineering. The firm, however,
contested the tax assessment.
Commissioner contends that Engineering is a manufacturer and seller of
air conditioning units and, therefore, subject to the 30% advance sales
tax. Engineering claims that it is a contractor engaged in the design,
supply and installation of the central type of air-conditioning system
subject to the 3% tax.
ISSUE: Whether Engineering really did "manufacture" and sell to hold
it liable to the advance sales tax.
RULING: NO. Engineering is a contractor.The true test of a
contractor, would be that he renders service in the course of an
independent occupation, representing the will of his employer only
as to the result of his work, and not as to the means by which it is
accomplished.
The supply of air conditioning units to Engineer's various customers,
whether the said machineries were in hand or not, was especially made
for each customer and installed in his building upon his special order.
The air conditioning units installed in a central type of air conditioning
system would not have existed but for the order of the party desiring to
acquire it and if it existed without the special order of Engineering's
general public.
Therefore, Engineering is a contractor rather than a manufacturer. As
contractor, it is subject to the 3% tax imposed by Section 191 of the
same Code.
AR
CASE NO. 244
Trade or Business Income
Advertising Associates v. CA (1984)
FACTS: This case is about the liability of Advertising Associates, lnc.
for 3% contractor's percentage tax on its rental income from the lease of
neon signs and billboards imposed by section 191 of the Tax Code on
business agents and independent contractors.
The Commissioner required petitioner to pay contractor's tax, including
25% surcharge on its income from billboards and neon signs. The basis
of the assessment is the fact that the taxpayer's articles of incorporation
provide that its primary purpose is to engage in general advertising
business. Its income tax returns indicate that its business was advertising.
Petitioner contends that it is a media company, not an advertising
company, It stresses that it is a mere lessor of neon signs and billboards
and does not perform advertising services.
ISSUE: Whether petitioner is a media company.
RULING: NO. A firm which leases its neon signs and billboards
cannot be considered itself as a media company, like a newspaper or
a radio broadcasting company. Neon signs and billboards are
primarily designed for advertising. It performs advertising services.
It is, therefore, an independent contractor.
However, in view of the prior rulings (previous cases involving the same
parties) that the taxpayer is not a business agent nor an independent
contractor and in view of the controversial nature of the deficiency
assessments, the 25% surcharge should be eliminated.
PASTOR
Case No. 245
Sales or exchanges of real property
Capitol Steel Corporation v. CIR
CTA Case No. 9240, October 26, 2017
FACTS: Petitioner Capitol Steel Corp. received an assessment notice
for its alleged tax deficiencies. One of which is the non-payment of
capital gains tax (CGT) and documentary stamp taxes (DST) in
connection to the expropriation of the petitioner’s property located in the
Municipality of Tagoloan, Misamis Oriental.
It was noted that the Regional Trial Court (RTC) of Misamis Oriental
certified that the final valuation of the just compensation for the property
involved in this case has not yet been decided by the Court. Therefore,
the payment of just compensation has not been made to petitioner.
ISSUE: Should petitioner Capitol Steel be liable of CGT and DST?
Pending valuation of the just compensation before the RTC,
ownership over the property cannot yet be transferred to the
government. Thus, expropriation process cannot be deemed
completed. Consequently, there is still no sale transaction which may
be subject to the imposition of CGT and DST.
It is only upon the completion of the two stages (1-Determination of
Authority to exercise power of eminent domain and 2-determination of
just compensation) that expropriation is said to have been completed.
9
Moreover, it is only upon payment of just compensation that title over
the property passes to the government.
It is settled that the transfer of property through expropriation
proceedings is a “sale” or “exchange” within the meaning of Sections
24(0) and 56(A)(3) of the National Internal Revenue Code. Hence, both
elements must be present in order to be considered "sale" and be
subjected to the imposition of capital gains tax.
PASTOR
Case No. 246
Sales or exchanges of real property
Association of Small Landowners in the Phil., Inc., et al. v. Secretary
of Agrarian Reform, G.R. No. 78742, July 14, 1989
WARNING: This is not a tax case.
FACTS: This case challenges the PD 27 or the then Comprehensive
Agrarian Reform Program (CARP) Law. P.D. No. 27 expressly ordered
the emancipation of tenant-farmer and declared that he shall “be deemed
the owner” of a portion of land consisting of a family-sized farm.
Landowners are contesting that they are divested of their property even
before actual payment in full of just compensation, in contravention of a
well accepted principle of eminent domain.
ISSUE: Did the CARP law violate due process by arbitrarily transferring
title before the land is fully paid for must also be rejected.
RULING AND MP: NO.
The rule is that title to property which is the subject of condemnation
proceedings does not vest the condemnor until the judgment fixing just
compensation is entered and paid, but the condemnor’s title relates back
to the date on which the petition under the Eminent Domain Act, or the
commissioner’s report under the Local Improvement Act, is filed.
However, the CARP Law, for its part, conditions the transfer of
possession and ownership of the land to the government on receipt by
the landowner of the corresponding payment or the deposit by the DAR
of the compensation in cash or LBP bonds with an accessible bank.
Until then, title also remains with the land-owner. No outright
change of ownership is contemplated either.
PASTOR
Case No. 247
Professional Income; Capital Assets
Del Rosario v CIR, CTA Case No. 4796, December 1, 1994
FACTS: Petitioner Del Rosario sold outside the stock exchange a total
of 755, 731 shares it held from Benguet Corporation. Petitioner allegedly
incurred loss in the said transaction. Therefore, petitioner is filing a
refund/application for tax credit certificates for the overpaid gains tax on
stock transactions. Respondent CIR contends that petitioner should pay
¼ of 1% capital gains on the sale of Benguet Shares. Petitioner however
contends that the tax rate applicable to shares sold outside the stock
exchange even though listed therein is covered by Section 21(d)(1)
where the tax rate applicable is 10% on the first P100,000 capital gain
and 20% in excess.
ISSUE: Which tax rate should apply?
RULING: Respondent CIR is correct (¼ of 1% of capital gains).
The Court cannot hardly find anything ambiguous in Section 21(d)(1) of
the tax code that pose a problem of interpretation. The words are plain
and readily understandable.
The schedular rate of 10% and 20% based on the net capital gains
realized from sale of shares of stocks applies to those not traded
through local stock exchange. Whereas, the ¼ of 1% based on the
gross selling price of the shares of stocks applies to those listed and
traded through a local stock exchange.
What is controlling is whether or not the shares of stock are traded in
local stock exchange.
However, the capital loss from the sale of listed shares outside the local
stock exchange can be deducted from the capital gain from another sale
of unlisted shares, or listed shares but traded outside of the local stock
exchange because the tax bases is net capital gain (capital gain less
capital losses). Given this, application for refund/tax credit was granted.
AYEH
CASE NO. 248
CAPITAL ASSETS
Compaigne Financiere Sucres et Denrees v CIR (G.R. No. 133834
August 28, 2006)
FACTS: Petitioner transferred its 8% equity interest in the Makati
Shangri-La Hotel and Resort, Incorporated to Kerry Holdings Ltd. In
relation to this transaction, it filed with CIR a claim for refund alleging
that the transfer of deposits on stock subscriptions is not a
sale/assignment of shares of stock subject to documentary stamps tax
and capital gains tax. CTA denied and held that petitioner admitted that
it profited from the sale of shares of stocks. Hence, such profit is subject
to capital gains tax.
ISSUE: WON assignment of deposits on stock subscriptions is subject
to documentary stamps tax and capital gains tax.
RULING: YES. Section 176 of the NIRC applicable to the issue
provides that the future transfer of shares of stocks is subject to
documentary stamp tax. The said assignment of deposit on stock resulted
to petitioner’s net gain. As the CTA aptly ruled, " a tax on the profit of
sale on net capital gain is the very essence of the net capital gains tax
law. To hold otherwise will ineluctably deprive the government of its
due and unduly set free from tax liability persons who profited from said
transactions."
AYEH
CASE NO. 249
CAPITAL ASSETS
China Banking Corporation v CA (G.R. No. 125508 July 19, 2000
FACTS: Petitioner made a 53% equity investment in the First CBC
Capital (Asia) Ltd., a Hongkong subsidiary engagedin financing and
investment with "deposit-taking" function. First CBC Capital has
become insolvent. With the approval of Bangko Sentral, petitioner
wrote-off as being worthless its investment in First CBC Capital in its
1987 Income Tax Return and treated it as a bad debt or as an ordinary
loss deductible from its gross income.
The Commissioner of Internal Revenue denied the deduction from gross
income on the ground that the investment should not be classified as
being "worthless". Assuming that the securities had indeed become
worthless, they should then be classified as "capital loss," and not as a
bad debt expense there being no indebtedness to speak of between
petitioner and its subsidiary.
ISSUE: WON CBC should be granted the deduction from gross income.
RULING: NO. An equity investment is a capital, not ordinary, asset of
the investor the sale or exchange of which results in either a capital gain
or a capital loss. What is involved here are capital assets and losses.
The capital loss sustained by CBC can only be deducted from capital
gains if any derived by it during the same taxable year that the securities
have become "worthless."Assuming that the equity investment of CBC
has indeed become "worthless," the loss sustained is still a capital, not an
ordinary, loss. Section 29(d)(4)(B) of the NIRC conveys that the loss
sustained by the holder of the securities, which are capital assets (to
him), is to be treated as a capital loss as if incurred from a sale or
10
exchange transaction. Capital losses are allowed to be deducted only
to the extent of capital gains, i.e., gains derived from the sale or
exchange of capital assets, and not from any other income of the
taxpayer.
AYEH
CASE NO. 250
REAL PROPERTY LOCATED OUTSIDE OF THE PHILIPPINES
CIR v Estate of Benigno P. Toda, Jr.
FACTS: In 1989, Toda, President and owner of Cibeles Insurance Corp.
purportedly sold the 16-storey commercial building known as Cibeles
Building in Ayala Avenue, Makati City for ₱100 million to Rafael A.
Altonaga, who, in turn, sold the same property on the same day to Royal
Match Inc. (RMI) for ₱200 million. These two transactions were
evidenced by Deeds of Absolute Sale notarized on the same day by the
same notary public. For the sale of the property to RMI, Altonaga paid
capital gains tax in the amount of ₱10 million. Toda died years later.
BIR sent an assessment notice and demand letter to the CIC and later to
the Estate of Benigno P. Toda, Jr., represented by special co-
administrators Lorna Kapunan and Mario Luza Bautista for deficiency
income tax for the year 1989. Commissioner stated that a fraudulent
scheme was deliberately perpetuated by the CIC wholly owned and
controlled by Toda by covering up the additional gain of ₱100 million.
ISSUE: Is this a case of tax evasion or tax avoidance?
RULING: TAX EVASION. Tax evasion connotes the integration of
three factors: (1) the end to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or the non-payment of tax
when it is shown that a tax is due; (2) an accompanying state of mind
which is described as being "evil," in "bad faith," "willfull," or
"deliberate and not accidental"; and (3) a course of action or failure of
action which is unlawful. All these elements of tax evasion are present in
this case.
CIC/Estate of Toda was held liable to pay 5% capital gains tax provided
for in Section 34 (h) of the NIRC of 1986
MACY
Case No. 251
passive investment income
CIR v CA and GCL Retirement Plan 2-7 SCRA 487
FACTS: Private Respondent, GCL Retirement Plan (GCL, for brevity)
is an employees' trust maintained by the employer, GCL Inc., to provide
retirement, pension, disability and death benefits to its employees. The
Plan as submitted was approved and qualified as exempt from income
tax by Petitioner Commissioner of Internal Revenue in accordance with
Rep. Act No. 4917
GCL made investments earned from interest income which was withheld
15% final witholding tax imposed by PD 1959. GCL filed with CIR a
claim for refund in the amounts withheld by Anscor Capital and
Investment Corp., and by Commercial Bank of Manila.GCL filed a
second claim for refund stating in both letters that it disagreed with the
collection of the 15% final withholding tax from the interest income as it
is an entity fully exempt from income tax as provided under Rep. Act
No. 4917 in relation to Section 56 (b) 3 of the Tax Code.
Refund request was denied. GCL elevated the matter to CTA which
ruled in favor of GCL stating that employees’ trust are exempt from the
15% final witholding tax on interest income and ordering a refund of the
tax withheld.
petitioner's position is that from 15 October 1984 when Pres. Decree No.
1959 was promulgated, employees' trusts ceased to be exempt and
thereafter became subject to the final withholding tax. While GCL
contends that the tax exempt status of the employees' trusts applies to all
kinds of taxes, including the final withholding tax on interest income.
ISSUE: whether or not the GCL Plan is exempt from the final
withholding tax on interest income from money placements and
purchase of treasury bills required by Pres. Decree No. 1959.
RULING: YES. GCL Plan was qualified as exempt from income tax by
the CIR in consonance with Rep. Act No. 4917. Employees' trusts or
benefit plans normally provide economic assistance to employees upon
the occurrence of certain contingencies, particularly, old age retirement,
death, sickness, or disability. It provides security against certain hazards
to which members of the Plan may be exposed. It is an independent and
additional source of protection for the working group. What is more, it is
established for their exclusive benefit and for no other purpose.
MP: Gross interest income from Philippine currency bank deposits
and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements are subject to 20%
final withholding tax, of all depositors, except when the depositor is
a non resident alien not engaged in trade or business in the
Philippines, where such interest income shall be subject to the
higher 25% tax rate pursuant to section 25(b) of the TAX Code.
However, if the depositor is an employee trust fund or accredited
retirement plan, such interest income, yield or other monetary
benefit is exempt from the final withholding tax
MACY
Case No. 252
Dividend Income
Fisher v Trinidad 43 Phil 973 1992 p 218
FACTS:
ISSUE: Philippine American Drug Company was a corporation doing
business in Manila to which Fisher is a stockholder. Said corporation
declared a “stock dividend” an that the proportionate share of said stock
dividend of Fisher was P24,800. Said stock dividend was issued to
Fisher. Trinidad demanded payment of income tax for the stock dividend
received by fisher. Fisher paid under protest P889.91 as income tax on
the said dividend. Fisher filed an action for recovry of P889.91. Trinidad
demurred to the petition on the ground that it does not state facts
sufficient to constitute an action. Demurrer was sustained and fisher filed
an appeal.
ISSUE: WON stock dividend was an income and therefore taxable
RULING: No. Generally speaking, stock dividends represent
undistributed increase in the capital of corporations or firms, joint stock
companies, for a particular period. The inventory of the property of the
corporation for particular period shows an increase in its capital, so that
the stock theretofore issued does not show the real value of the
stockholder's interest, and additional stock is issued showing the increase
in the actual capital, or property, or assets of the corporation. income as
"the amount of money coming to a person or corporation within a
specified time whether as payment or corporation within a specified time
whether as payment for services, interest, or profit from investment."
MP: Dividends comprise any distribution whether in cash or other
property in the ordinary course of business, even though
extraordinary in amount made by a domestic corporation, joint
stock company, partnership, joint account, association, or insurance
company to the shareholders or members out of its earnings or
profits. 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 cash or property dividend is
declared, the corporate profits belong to the corporation and not to
the stockholders, and are liable for the payment of the debts of the
corporation
MACY
11
 Case No 253
Distinction between Cash Dividend and Stock Dividend
fisher v Trinidad
Dividend is a corporate profit set aside, declared and ordered by the
directors to be paid to the stockholders on demand or at a fixed time.
Stock dividend is a dividend payable in reserve or increase of additional
stock of the corporation.
Cash dividend is disbursement to the stockholder of the accumulated
earnings, and the corporation parts irrevocably with all interest therein.
A stock dividend involves no disbursement, and the corporation parts
with nothing to the stockholders and such cash becomes the absolute
property of the stockholders and cannot be reached 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, may be
reached by an execution against the corporation and may be sold as a
part of the corporate property
MACY
Case No 254
Distinction between Cash Dividend and Stock Dividend
Hyatt v Allen 56 ny 533
FACTS: anagreement was entered into by Hyatt and Allen
contemplating an exchange of stock. Allen agreed that “all profits and
dividends of and upon the stock of the Albany Dental Plate Company so
exchanged, up to the first day of January 1872, shall be paid" to the
plaintiffs. There was an increase in the value of the asset and cash of said
company. The agreement stipulates that Allen is entitled to fifteen
dollars on each share of the dividend.
ISSUE: WON plaintff is entitled to any profit or dividend on the stock
RULING: No. when used in reference to corporate stocks has a
technical but well understood meaning, and indicates corporate funds
derived from the business and earnings of the corporation, appropriated
by a corporate act to the use of and to be divided among the
stockholders. Increase in he assets of the company were profits and that
the defendant having interest therein as a stockholder, that interest is a
profit on the stock which he bound himself to pay to the plaintiff. A
shareholder in a corporation has no legal title to the property or profits of
the corporation until a division is made.
MP: Dividend is distinguished from profits, for profits in the hands of a
corporation do not become dividends until they have been set aart, or at
least declared, as dividends and transferred to the separate property of
the stockholders.
Eloise
Case 255 | CIR v.CA, CTA. and A. Soriano Corp (1999) | Stock
dividends
Facts: Don Andres Soriano (American), founder of A. Soriano Corp.
(ASC) had a total shareholdings of 185,154 shares. When Soriano died,
half of the shares he held went to his wife as her conjugal share and the
other half 92,577 shares went to the estate. For sometime after his death,
his estate still continued to receive stock dividends from ASC until it
grew to at least 108,000 shares. In 1968, ASC through its Board issued a
resolution for the redemption of shares from Soriano’s estate purportedly
for the planned “Filipinization” of ASC.Eventually, 108,000 shares were
redeemed from the Soriano Estate. In 1973, a tax audit was conducted.
CIR issued an assessment against ASC for deficiency withholding tax-
at-source. CIR explained that when the redemption was made, the estate
profited because ASC would have to pay the estate to redeem, and so
ASC would have withheld tax payments from the Soriano Estate yet it
remitted no such withheld tax to the government.ASC argued: that it is
not duty bound to withhold tax from the estate because it redeemed
the said shares for purposes of “Filipinization” of ASC and also to
reduce its remittance abroad.
Issues:
1. Whether ASC’s argument is meritorious.
2. Whether subsequent cancellation or redemption of stock
dividends is essentially equivalent to the declaration of cash
dividend.
Ruling:
1. No. The reason behind the redemption is not material. The proceeds
from a redemption is taxable and ASC is duty bound to withhold the
tax at source. The Soriano Estate definitely profited from the redemption
and such profit is taxable, Sale of stock dividends is taxable.In the
absence of evidence to the contrary, the Tax Code presumes that
every distribution of corporate property, in whole or in part, is
made out of corporate profits such as stock dividends.
2. Yes. If a corporation cancels or redeems stock issued as a dividend
at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent it represents a
distribution of earnings or profits. This process of issuance-
redemption amounts to a distribution of cash dividends, which was
just delayed to escape tax. (Main Point, pp. 220)
Eloise
Case 256 | Filipinas Life Assurance Co. v. CTA; CIR (1967) |
Dividends; Domestic Corporations or Resident Foreign Corporations
Facts: Petitioner Company filed an income tax return (original) for
1958. It subsequently filed an amended return accompanied with a claim
for the refund of P2,721 representing the difference between P3,378,
which the petitioner had paid as income tax under its original return, and
P657, which it now averred was the correct amount due from it. The
difference is due to the fact that, whereas in its original income tax
return the petitioner reported in full its income from dividends
amounting to P57,105.29; in its amended return it reported only 25%, or
P15,242.55, of the dividends from domestic corporations.
Petitioner Co. filed for a claim for refund with respondent Commissioner
on Internal Revenue (CIR) asserting that It is entitled to return only 25
per cent of their income from dividends. But since there was no action
by the CIR, petitioner took the matter to the Court of Tax Appeals
(CTA) to avoid prescription. CTA denied the claim for refund and ruled
that life insurance companies should report in full their income from
dividends because, while they are treated in subsection (B) Sec. 24,
NIRC, the proviso regarding dividend exclusion is found in subsection
(A) of the same section which treats of corporations in general.
Issue: Whether benefits of dividend exclusion are available to all
domestic and resident foreign corporations regardless of the business in
which they may be engaged.
Ruling: Yes. Petitioner is a domestic life insurance company. Dividend
exclusion has always been a dominant feature of corporate income
tax. It is a device for reducing extra or double taxation of distributed
earnings.Since a corporation cannot deduct from its gross income
the amount of dividends distributed to its corporation-shareholders
during the taxable year, any distributed earnings are necessarily
taxed twice: initially at the corporate level when they are included in
the corporation's taxable income, and again, at the corporation-
shareholder level when they are received as dividend. Thus, without
exclusion the successive taxation of the dividend as it passes from
corporation to corporation would result in repeated taxation of the
same income and would leave very little for the ultimate individual
shareholder.(Main Point, pp. 25) At the same time the decision to tax a
part (e.g., 25 per cent) of such dividends reflects the policy of
discouraging complicated corporate structures as well as corporate
divisions in the form of parent-subsidiary arrangements adopted to
achieve a lower effective corporate income tax rate.
Eloise
Case 257 | CIR v. Procter and Gamble; CIR (1991) | Dividends;
Domestic Corporations or Resident Foreign Corporations
Facts: Procter and Gamble Philippines (P&G Phil) declared dividends
payable to its parent company and sole stockholder, P&G USA. Such
dividends amounted to 24.1M php. P&G Phil paid a 35% dividend
withholding tax to the BIR which amounted to 8.3M php It subsequently
filed a claim with the Commissioner of Internal Revenue (CIR) for a
12
refund or tax credit, claiming that pursuant to Section 24(b)(1) of the
National Internal Revenue Code, as amended by Presidential Decree No.
369, the applicable rate of withholding tax on the dividends remitted was
only 15%.
Issue: Whether P&G Philippines is entitled to the refund or tax credit.
Ruling: Yes. 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 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—and such requirements
were met.
Main Point, pp. 226: The taxation code does not require that the US tax
law deem the parent-corporation to have paid the twenty (20) percentage
points of dividend tax waived by the Philippines. What It only requires is
that the US "shall allow" P&G-USA a "deemed paid" tax credit in an
amount equivalent to the twenty (20) percentage points waived by the
Philippines. The parent-corporation P&G-USA is "deemed to have paid"
a portion of the Philippine corporate income tax although that tax was
actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA.
This "deemed paid" concept merely reflects economic reality, since the
Philippine corporate income tax was in fact paid and deducted from
revenues earned in the Philippines, thus reducing the amount remittable
as dividends to P&G-USA. In other words, US tax law treats the
Philippine corporate income tax as if it came out of the pocket, as it
were, of P&G-USA as a part of the economic cost of carrying on
business operations in the Philippines through the medium of P&G-Phil.
and here earning profits. What is, under US law, deemed paid by P&G-
USA are not "phantom taxes" but instead Philippine corporate income
taxes actually paid here by P&G-Phil., which are very real indeed.
ANGELO
CASE NO. 258
Recipient is a Domestic Corporation or a Resident Foreign
Corporation
CIR v. Wander Philippines, Inc
FACTS: Wander is a domestic corporation organized under Philippine
laws. It is wholly-owned subsidiary a Swiss corporation not engaged in
trade in the Philippines.Wander filed Internal Revenue a claim for refund
or credit contending that it is liable only to 15% withholding tax, and not
on the basis of 35% which was withheld and paid to and collected by the
government.
ISSUE: Whether the tax-sparing credit should apply only if the foreign
country allows a foreign tax credit.
RULING: NO. The fact that Switzerland does not impose any tax on
the dividends received from a domestic corporation should be
considered as full satisfaction of the condition that the 20%
differential is deemed credited by the Swiss Government. To deny
the privilege to withhold the 15% provided for under PD 369 will
adversely affect foreign corporations’ interest and discourage them
from investing capital in our country.
ANGELO
CASE NO. 259
Royalty Income
CIR v. SC Johnson & Sons
FACTS: The Commissioner contends that under the RP-US Tax Treaty,
which is known as the "most favored nation" clause, a tax of 10% may
be imposed on royalties derived by a US resident from sources within
the Philippines only if the circumstances of the US resident are similar to
those of the resident of West Germany. Since the RP-US Tax Treaty
contains no "matching credit" provision as that provided under the RP-
West Germany Tax Treaty, the tax on royalties is not paid under similar
circumstances.
ISSUE: Whether the phrase “paid under similar circumstances” refers
to the manner of payment of royalties.
RULING: NO. The phrase necessarily contemplates the manner of
payment of taxes or circumstances that are tax-related, and not to
the subject matter of the tax (royalty). The two tax treaties do not
contain similar provisions on tax crediting: RP-Germany, allows the
20% crediting whereas RP-US, does not provide for the 20%
crediting.
ANGELO
CASE NO. 260
Royalty Income
Wrigley Philippines v. CIR
FACTS: Wrigley paid royalty fees to Wrigley-US. Said royalty fees
were subjected to 15% withholding tax, pursuant to the "most favored
nation" clause of the RP-US Tax Treaty. BIR issued a Revenue
Memorandum Circular stating that the tax on royalty payments to
residents of US and China are paid under similar circumstances, i.e., the
amount of royalty income tax paid is available as tax credit.
13
ISSUE: Whether the phrase “paid under similar circumstances” refers
to the manner of payment of royalties.
RULING: NO. The phrase necessarily contemplates the manner of
payment of taxes or circumstances that are tax-related, and not to
the subject matter of the tax (royalty). The two tax treaties do not
contain similar provisions on tax crediting.
ARZHY
CASE NO. 261
Other Income
Gutierrez v. CTA and Collector
FACTS: The agricultural land owned by Maria Morales (Gutierrez’
wife) was expropriated by the government for the expansion of Clark
Field Air Base. CIR assessed deficiency income tax for the year 1950
amounting to P8,481, inclusive of surcharges and penalties, because
petitioner spouses did not declare the just compensation they received as
part of their taxable income. Petitioners contended that said
compensation was not “income derived from sale, dealing or disposition
of property” referred to in Sec 29 of the Tax Code. The acquisition was
by force and there was no meeting of the minds hence, no sale and not
taxable.
ISSUE: W/N the compensation received by the spouses from their
expropriated property is taxable
RULING: YES. The acquisition by the Government of private
properties through the exercise of the power of eminent domain, said
properties being justly compensated, is embraced within the meaning of
the term "sale" or "disposition of property," and the proceeds derived
therefrom is subject to income tax as capital gains pursuant to the
provisions of Section 37-(a)-(5) in relation to Section 29-(a) of the Tax
Code.
The phrase “income from any source whatever” is broad enough to
cover gains contemplated here.These words disclose legislative
policy to include all income not expressly exempted within the class
of taxable income under our law, irrespective of the voluntary or
involuntary action of the taxpayer in producing the gain.(Book’s MP
but not found in the case)
MAINPOINT (or in bold):
ARZHY
CASE NO. 263
Other Income
Fernandez Hermanos Inc. v. CIR
FACTS: Petitioner was an investment company. CIR assessed petitioner
taxpayer of deficiency income taxes for the years 1950 to 1954. Among
others, CIR treated as taxable income the increase in the taxpayer’s net
worth for the years 1950 to 1951. These increases in net worth were due
to corrections made in the petitioner’s books pertaining to overstated
liability to Manila Insurance Company (P30,050 for year 1950) and
unrecorded payment to trade creditors (P1,382.85 for year 1951).
ISSUE: W/N the increase in the taxpayer’s net worth is taxable income
RULING: NO. The principle underlying the taxability of an increase in
the net worth of a taxpayer rests on the theory that such an increase in
net worth, if unreported and not explained by the taxpayer, comes from
income derived from a taxable source. In this case, the increase in the net
worth of petitioner for 1950 to the extent of P30,050.00 was not the
result of the receipt by it of taxable income. It was merely the outcome
of the correction of an error in the entry in its books relating to its
indebtedness to the Manila Insurance Company. The Income Tax
Law imposes a tax on income; it does not tax any or every increase
in net worth whether or not derived from income.
The same holds true in the case of the alleged increase in net worth of
petitioner for the year 1951 in the sum of P1,382.85.
MAINPOINT (or in bold):
ARZHY
CASE NO. 264
Prizes and Awards (Embezzled Money)
James v. US
FACTS: Petitioner was a union official who, in conspiracy with another
person, embezzled large sums of money ($738K) from his employer
union and from an insurance company with which the union was doing
business for the years 1951 to 1954. He failed to report the amount as
gross income in his income tax returns for those years. He was convicted
of "willfully" attempting to evade the federal income tax due for each of
the years 1951 through 1954, in violation of §145(b) of the Internal
Revenue Code of 1939 and § 7201 of the Internal Revenue Code of
1954.
ISSUE: W/N receipts from swindling form part of gross income of
taxpayer hence, taxable
RULING: YES. When a taxpayer acquires earnings, lawfully or
unlawfully, without the consensual recognition, express or implied,
of an obligation to repay and without restriction as to their
disposition, "he has received taxable income, even though it may still
be claimed that he is not entitled to retain the money, and even though he
may still be adjudged liable to restore its equivalent." To treat the
embezzled funds not as taxable income would perpetuate injustice by
relieving embezzlers of the duty of paying income taxes on the money
they enrich themselves through embezzlement, while honest people pay
their taxes on every conceivable type of income.
Element of willfulness was not proven so, his conviction was reversed.
MAINPOINT (or in bold):
COELI
CASE NO. 265
Prizes and Awards
Commissioner v. Duberstein, 363 U.S. 278
FACTS: Duberstein, an individual taxpayer, gave to a business
corporation the names of potential customers. The information proved
valuable, and the corporation reciprocated by giving Duberstein a
Cadillac automobile. Duberstein did not include the value of the Cadillac
in his gross income when he filed his tax return, deeming it a gift.
CIR asserted a deficiency for the car's value against Duberstein.
ISSUE/S: W/Nthe car that Duberstein received was a gift, for taxation
purposes.
RULING: NO. Duberstein's car was not a gift, because the motives
were certainly not "disinterested"—it was given to compensate for past
customer references or to encourage future references.
Gifts result from "detached and disinterested generosity." The transfer
was not a gift because it was not made out of detached/disinterested
generosity but for benefit accruing to Duberstein.A payment, though
voluntary, if it is in return for services rendered xxx is a taxable income
to the payee even if characterized as a “gift” by the payor.
COELI
Cases 266 & 267 are bar questions in Mamalateo (p.241). No MP about
Prizes and Awards
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 CASE NO. 266
Prizes and Awards
CIR v. YMCA, G.R. No. 124043, October 14, 1998
FACTS: YMCA is a non-stock, non-profit institution, which conducts
various programs and activities that are beneficial to the public,
especially the young people, pursuant to its religious, educational and
charitable objectives.
It earned, among others, an income from leasing out a portion of its
premises to small shop owners,
CIR issued an assessment to YMCA for deficiency income tax,
deficiency expanded withholding taxes on rentals, among others. YMCA
invoked the tax exemption under the Constitution granted to nonstock
corporations which are formed exclusively for religious, charitable or
social welfare purposes.
ISSUE: W/N the income derived from rentals of real property owned by
YMCA subject to income tax under the NIRC and the Constitution.
RULING: YES. The last paragraph of Section 27 of the NIRC subjects
to tax the rent income of the exempt organizations (like YMCA) from its
real property.
The exemption contemplated in the Constitution covers real estate tax on
real properties actually, directly and exclusively used for religious,
charitable or social welfare purposes. It does not cover exemption from
the imposition of income tax.
COELI
CASE NO. 267
Prizes and Awards
CIR v. St. Luke’s Medical Center, Inc., G.R. Nos. 195909 and 195960,
September 26, 2012
FACTS: BIR assessed St. Luke's deficiency taxes comprised of
deficiency income tax, VAT, withholding tax on compensation and
expanded withholding tax.
St. Luke's maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes under Section 30(E) and (G) of
the NIRC. It argued that the making of profit per se does not destroy
its income tax exemption.
ISSUE: W/N St. Luke's is liable for deficiency income tax
RULING: YES
Even if the charitable institution must be "organized and operated The proceeds of a life insurance received by a child as a irrevocable
exclusively" for charitable purposes, it is nevertheless allowed to engage beneficiary are not to be reported in the annual income tax return,
in "activities conducted for profit" without losing its tax exempt status because they are excluded from gross income. This kind of receipt does
for its not-for-profit activities. not fall within the definition of income – “any wealth which flows into
the taxpayer other than a mere return of capital”. Since insurance is
The only consequence is that the "income of whatever kind and compensatory in nature, the receipt is merely considered as a return of
character" of a charitable institution "from any of its activities conducted capital.(MP not related to case)
for profit, regardless of the disposition made of such income, shall be
subject to tax."
MP: SAME W/ CASE NO. 266
CHAM
Case No. 268
CHAPTER V; Prizes and Awards
Fisher v. Trinidad, p243
(This case is not discussed under prizes and rewards. Mamalateo
merely cited the MP as a suggested answer, but it has no discussion
on the topic. The case is about stock dividends, not life insurance)
FACTS
Philippine American Drug Company was a corporation duly
organized and existing under the laws of the Philippines. Fisher was a
stockholder. PADC declared a "stock dividend" where the proportionate
share of said stock divided of Fisher was P24,800. Fisher, upon demand
of Trinidad (CIR), paid P889.91 as income tax on said stock dividend.
An action for recovery of sum 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, thus, Fisher
appealed.
ISSUE
Whether or not "stock dividends" is considered "income" and
taxable as such under the provisions of section 25 of Act No. 2833
RULING/MAIN POINT
No. The stockholder who receives a stock dividend has
received nothing but a representation of his increased interest in the
capital of the corporation. There has been no separation or segregation of
his interest. All the property or capital of the corporation still belongs to
the corporation. The stockholder, by virtue of the stock dividend, has no
separate or individual control over the interest represented thereby,
further than he had before the stock dividend was issued. He cannot use
it for the reason that it is still the property of the corporation and not the
property of the individual holder of stock dividend.
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." Such property can be reached
under the ordinary from of taxation.
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