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MADRIGAL vs. RAFFERTY August 7, 1918

MALCOLM, J. Mica Maurinne M. Adao

SUMMARY: Vicente Madrigal declared his net income in 1914 to be P296,302.73 but later on claimed that such was the income of the conjugal partnership between him and his wife thus additional income tax must be divided into two. This claim was denied by the CIR and sffirmed by trial court. SC affirmed the denial ruling that Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax as she has no estate and income, actually and legally vested in her and entirely distinct from her husband's property. DOCTRINE: Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnerships. The income of Vicente Madrigal and his wife Susana Paterno of the year 1914 was made up of three items: (1) P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50, the

profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made by Vicente Madrigal in a pawnshop company. The sum of these three items is P383,181.97, the gross income of Vicente Madrigal and Susana Paterno for the year 1914. General deductions were claimed and allowed in the sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the normal tax of 1% on the net income there were allowed as specific deductions the following: (1) P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the specific exemption granted to Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sum upon which the normal tax of 1% was assessed. The normal tax thus arrived at was P2,716.15. On February 25, 1915, Vicente Madrigal filed sworn declaration on the prescribed form with the CIR, showing, as his total net income for the year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife Susana Paterno, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into 2 equal parts between him and his wife. Attorney-General of the Philippine Islands, in an opinion, sided with Madrigal. The revenue officers being still unsatisfied, was forwarded to Washington for a decision by the United States Treasury Department. The United States Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus decided against the claim of Madrigal. After payment under protest, and after the protest of Madrigal had been decided adversely by the Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno in the CFI of Manila against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally collected under the provisions of the Income Tax Law. The trial court in an exhausted decision found in favor of defendants.

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CIR contends that the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon capital and property; that the fact that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal partnership, has no bearing on income considered as income, and that the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage. ISSUE: Whether or not the additional income tax should be divided into two equal parts, because of the conjugal partnership existing between the husband and wife? RULING: NO The Income Tax Law of the United States, extended to the Philippine Islands, is the result of an effect on the part of the legislators to put into statutory form this canon of taxation and of social reform. The aim has been to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay. To carry out this idea, public considerations have demanded an exemption roughly equivalent to the minimum of subsistence. With these exceptions, the income tax is supposed to reach the earnings of the entire non-governmental property of the country. *See Doctrine A regulation of the United States Treasury Department relative to returns by the husband and wife not living apart, contains the following: The husband, as the head and legal representative of the household and general custodian of its income, should make and render the return of the aggregate income of himself and wife, and for the purpose of levying the income tax it is assumed that he can ascertain the total amount of said income. If a wife has a separate estate managed by herself as her own separate property, and receives an income of more than $3,000, she may make return of her own income, and if the husband has other net income, making the aggregate of both incomes more than $4,000, the wife's return should be attached to the return of her husband, or his income should be included in her return, in order that a deduction of $4,000 may be made from the aggregate of both incomes. The tax in such case, however, will be imposed only upon so much of the aggregate income of both shall exceed $4,000. If either husband or wife separately has an income equal to or in

excess of $3,000, a return of annual net income is required under the law, and such return must include the income of both, and in such case the return must be made even though the combined income of both be less than $4,000. If the aggregate net income of both exceeds $4,000, an annual return of their combined incomes must be made in the manner stated, although neither one separately has an income of $3,000 per annum. They are jointly and separately liable for such return and for the payment of the tax. The single or married status of the person claiming the specific exemption shall be determined as one of the time of claiming such exemption which return is made, otherwise the status at the close of the year." Regarding conjugal partnership, it was held that "prior to the liquidation the interest of the wife and in case of her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen into title until there appears that there are assets in the community as a result of the liquidation and settlement." Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, 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. As she 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. The statute and the regulations promulgated in accordance therewith provide that each person of lawful age (not excused from so doing) having a net income of $3,000 or over for the taxable year shall make a return showing the facts; that from the net income so shown there shall be deducted $3,000 where the person making the return is a single person, or married and not living with consort, and $1,000 additional where the person making the return is married and living with consort; but that where the husband and wife both make returns (they living together), the

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amount of deduction from the aggregate of their several incomes shall not exceed $4,000. The only occasion for a wife making a return is where she has income from a sole and separate estate in excess of $3,000, but together they have an income in excess of $4,000, in which the latter event either the husband or wife may make the return but not both. In all instances the income of husband and wife whether from separate estates or not, is taken as a whole for the purpose of the normal tax. Where the wife has income from a separate estate makes return made by her husband, while the incomes are added together for the purpose of the normal tax they are taken separately for the purpose of the additional tax. In this case, however, the wife has no separate income within the contemplation of the Income Tax Law. The Income Tax Law was drafted by the Congress of the United States and has been by the Congress extended to the Philippine Islands. Being thus a law of American origin and being peculiarly intricate in its provisions, the authoritative decision of the official who is charged with enforcing it has peculiar force for the Philippines.

EISNER V. MACOMBER March 8, 1920

Pitney, J: Jayson C. Aguilar

SUMMARY: In order to readjust the capitalization, the board of directors of Standard Oil Co. decided to issue additional shares sufficient to constitute a stock dividend of 50 percent of the outstanding stock, and to transfer from surplus account to capital stock account an amount equivalent to such issue. Macomber, being the owner of 2,200 shares of the old stock, received certificates for 1, 100 additional shares. She was called upon to pay, and did pay under protest, a tax imposed under the Revenue Act of 1916, based upon a supposed income of $19,877 because of the new shares. She then brought action against the Collector to recover the tax. In her complaint, she alleged that, (1) in imposing such a tax the Revenue Act of 1916 violated the provisions of the US Constitution requiring

direct taxes to be apportioned according to population, and (2) that the stock dividend was not income within the meaning of the Sixteenth Amendment which exempts income from the apportionment requirement. The SC held that stock dividends are not income for tax purposes. DOCTRINE: A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased....The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones. In short, the corporation is no poorer and the stockholder is no richer than they were before.

FACTS: On January 1, 1916, the Standard Oil Company of California, a corporation of that state, out of an authorized capital stock of $100,000,000, had shares of stock outstanding, par value $100 each, amounting in round figures to $50,000,000. In addition, it had surplus and undivided profits invested in plant, property, and business and required for the purposes of the corporation, amounting to about $45,000,000, of which about $20,000,000 had been earned prior to March 1, 1913, the balance thereafter. In January, 1916, in order to readjust the capitalization, the board of directors decided to issue additional shares sufficient to constitute a stock dividend of 50 percent of the outstanding stock, and to transfer from surplus account to capital stock account an amount equivalent to such issue. Macomber, being the owner of 2,200 shares of the old stock, received certificates for 1, 100 additional shares, of which 18.07 percent, or 198.77 shares, par value $19,877, were treated as representing surplus earned between March 1, 1913, and January 1, 1916. She was called upon to pay, and did pay under protest, a tax imposed under the Revenue Act of 1916, based upon a supposed income of $19,877 because of the new shares. She then brought action against the Collector to recover the tax. In her complaint, she alleged that, (1) in imposing such a tax the Revenue Act of 1916 violated article 1, § 2, cl. 3, and Article I, § 9, cl. 4, of the Constitution of the United States, requiring

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direct taxes to be apportioned according to population, and (2) that the stock dividend was not income within the meaning of the Sixteenth Amendment. The Sixteenth Amendment provides: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states and without regard to any census or enumeration."

ISSUES: Whether or not stock dividends are ‘income’ within the meaning of the Sixteenth Amendment (hence, exempted from the general rule that direct taxes are to be apportioned according to population) RULING: No. The Court first cited its ruling in Towne v. Eisner:

"A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased. . . . The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones. In short, the corporation is no poorer and the stockholder is no richer than they were before. "

Then, it elaborated on the meaning of ‘income’:

It becomes essential to distinguish between what is and what is not "income," and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised.

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

Finally, it made a further discussion on the nature of a stock dividend:

Certainly the interest of the stockholder is a capital interest, and his certificates of stock are but the evidence of it. They state the number of shares to which he is entitled and indicate their par value and how the stock may be transferred. Short of liquidation, or until dividend declared, he has no right to withdraw any part of either capital or profits from the common enterprise; on the contrary, his interest pertains not to any part, divisible or indivisible, but to the entire assets, business, and affairs of the company. Nor is it the interest of an owner in the assets themselves, since the corporation has full title, legal and equitable, to the whole. For bookkeeping purposes, the company acknowledges a liability in form to the stockholders equivalent to the aggregate par value of their stock, evidenced by a "capital stock account." If profits have been made and not divided, they create additional bookkeeping liabilities under the head of "profit and loss," "undivided profits," "surplus account," or the like. None of these, however, gives to the stockholders as a body, much less to any one of them, either a claim against the going concern for any particular sum of money or a right to any particular portion of the assets or any share in them unless or until the directors conclude that dividends shall be made and a part of the company's assets segregated from the common fund for the purpose. The dividend normally is payable in money, under exceptional circumstances in some other divisible property, and when so paid, then only does the stockholder realize a profit or gain which becomes his separate property, and thus derive income from the capital that he or his predecessor has invested.

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In the present case, the corporation had surplus and undivided profits invested in plant, property, and business, and required for the purposes of the corporation, amounting to about $45,000,000, in addition to outstanding capital stock of $50,000,000. In this, the case is not extraordinary. The profits of a corporation, as they appear upon the balance sheet at the end of the year, need not be in the form of money on hand in excess of what is required to meet current liabilities and finance current operations of the company. Often, especially in a growing business, only a part, sometimes a small part, of the year's profits is in property capable of division, the remainder having been absorbed in the acquisition of increased plant, equipment, stock in trade, or accounts receivable, or in decrease of outstanding liabilities. When only a part is available for dividends, the balance of the year's profits is carried to the credit of undivided profits, or surplus, or some other account having like significance. If thereafter the company finds itself in funds beyond current needs, it may declare dividends out of such surplus or undivided profits; otherwise it may go on for years conducting a successful business, but requiring more and more working capital because of the extension of its operations, and therefore unable to declare dividends approximating the amount of its profits. Thus, the surplus may increase until it equals or even exceeds the par value of the outstanding capital stock. This may be adjusted upon the books in the mode adopted in the case at bar -- by declaring a "stock dividend." This, however, is no more than a book adjustment, in essence -- not a dividend, but rather the opposite; no part of the assets of the company is separated from the common fund, nothing distributed except paper certificates that evidence an antecedent increase in the value of the stockholder's capital interest resulting from an accumulation of profits by the company, but profits so far absorbed in the business as to render it impracticable to separate them for withdrawal and distribution. Again, this is merely bookkeeping that does not affect the aggregate assets of the corporation or its outstanding liabilities; it affects only the form, not the essence, of the "liability" acknowledged by the corporation to its own shareholders, and this through a readjustment of accounts on one side of the balance sheet only, increasing "capital

stock" at the expense of "surplus"; it does not alter the preexisting proportionate interest of any stockholder or increase the intrinsic value of his holding or of the aggregate holdings of the other stockholders as they stood before. The new certificates simply increase the number of the shares, with consequent dilution of the value of each share. A "stock dividend" shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution.

DISPOSITIVE: Since the stock dividend is not income, the Revenue Act of 1916, insofar as it imposes a tax upon the stockholder because of such dividend, is void for violating the Constitutional provisions requiring apportionment of direct taxes according to population.

Raytheon Production Corporation v. CIR

Nov. 20, 1944 Mahoney, J.

Dave Anastacio

SUMMARY: Raytheon was a pioneer manufacturer of rectifier tubes which are used in radio receiving. The Radio Corporation of America (R.C.A.) developed a competitive tube, with the same effect as the Raytheon tube. RCA’s license agreements with radio set manufacturers included a clause which required the manufacturers to buy their tubes only from RCA. Raytheon’s sales gradually declined, and so it brought an action against RCA for violating anti-trust laws, as well as for destruction of Raytheon’s profitable business and goodwill. Both parties finally agreed on a $410,000 settlement of the

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anti-trust case. Raytheon considered $60,000 from the amount as income from patent licenses, while the remaining $350,000 were counted as damages, and therefore not subject to income tax. The IRS claimed that the $350k that Raytheon received for the settlement of the suit was also taxable as gross income. The Court ruled that while damages for injury to goodwill are not considered taxable income, the cost of the goodwill must have been established by Raytheon. Since they were unable to establish the amount of nontaxable capital, its basis will be treated as zero and so the $350,000 will also be considered realized income. DOCTRINE: Recovery of damages which represent a reimbursement for lost profits are taxable gross income. The question to ask is “In lieu of what were the damages awarded?” If the suit is not to recover lost profits but is for injury to good will, the recovery represents a return of capital and is not taxable. However, compensation for the loss of goodwill in excess of its cost is gross income.

FACTS: Raytheon Prod. came into existence as a result of a tax free reorganization. The original Raytheon was a manufacturer of tubes which made possible the operation of radio receiving set. Another company (R.C.A) developed a competitive tube which produced the same type of rectification as those of the Raytheon tube. R.C.A began to license the manufacturers of radio sets and incorporated a clause which provided that the licensee was required to buy tubes from R.C.A. As a consequence of this restriction, Raytheon found it impossible to market its tubes so Raytheon also obtained a license from R.C.A. to manufacture tubes on a royalty basis. The license agreement between R.C.A and Raytheon contained a release of all claims of Raytheon against R.C.A. BUT such claims can be asserted if R.C.A paid similar claims to others. Raytheon was informed that R.C.A violated the agreement so a suit was filed to enforce Raytheon’s claims. Raytheon sued RCA for an anti-trust issue related to some patent claims. Essentially Raytheon claimed that RCA infringed on their patents, ruined their cathode-ray tube business, and damaged their company's 'goodwill' (e.g. their brand name, market share, etc.). They won a $410k settlement from R.C.A. The officers of Raytheon testified that they returned to R.C.A

$60,000 as income from patent licenses and treated the remaining $350,000 as a realization from a chose in action and not taxable income. The Commissioner however, determined this $350,000 as income tax. ISSUES: Whether an amount received by a taxpayer in compromise settlement of as suit for damages is a non-taxable return of capital or income. RULING: The question to ask is, "in lieu of what were the damages awarded." If the damaages were to answer for lost profits, then they were part of taxable gross income. RATIO: Damages recovered in an anti-trust action are not necessarily nontaxable. According to US jurisprudence, recoveries which represent a reimbursement for lost profits are income. In the case of Commercial Electrical Supply v Commissioner, the Court ruled that damages for violation of the anti-trust acts are treated as ordinary income where they represent compensation for lost profits. The test is not whether the action was one in tort or contract but rather “In lieu of what were the damages awarded?” Where the suit is not to recover lost profits but is for injury to good will, the recovery represents a return of capital and is not taxable. In the case, the Court held that there was nothing to indicate that the suit was for lost profits. It was not a kind of antitrust suit where the plaintiff’s business still exists and where the injury was merely for loss of profits. Since the suit was to recover damages to the destruction of the business and good will, the recovery represents a return of capital. Nor does the fact that the suit ended in a compromise agreement change the nature of the recovery, “ the determining factor is the nature of the basic claim from which the compromise amount was realized.” The presentation of evidence of profits was merely used to establish the value of good will and the business, since such value is derived by a capitalization of profits. Therefore, a recovery on goodwill and business represents return of capital. The fact that the case ended in settlement is of no moment. The determining factor is the NATURE of the basic claim from which the compromised amount was realized.

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However, compensation for the loss of goodwill in excess of its cost is gross income. The law does not exempt compensatory damages just because they are a return of capital. The tax exemption applies only to the portion that recovers the cost basis of that capital; any excess damages serve to realize prior appreciation, and should be taxed as income. In addition, evidence must be produced to establish the value of the goodwill and business. In this case, Raytheon was not able to establish the value of its goodwill and business. It did not produce enough evidence to such effect. The amount of nontaxable capital cannot be ascertained. Since Raytheon could not establish the cost basis of its good will, its basis will be treated as zero. DISPOSITIVE: The Court concludes that the $350,000 of the $410,000 attributable to the suit is thus taxable income. (I think all of it was taxable. Both the 60k and the 350k)

CIR v. Tours Specialist

March 21, 1990

Gutierrez

alycat

Summary: Tours derived income from its activities as a travel agency

by servicing the needs of foreign tourists and balikabayans. By some

arrangements of Tours with foreign travel agencies, the latter entrusts

to Tours the fund for hotel room accommodation, which it pays to the

local hotels when billed. The CIR assessed Tours for deficiency 3%

contractor’s tax as independent contractor by including the entrusted

hotel room charges. Tours contested the deficiency assessed on the

ground that the money received and entrusted to it by the tourists,

earmarked to pay hotel room charges, were not considered and have

never been considered by it as part of its taxable gross receipts for

purposes of computing and paying its contractor’s tax.

Doctrine: Gross receipts subject to tax under the Tax Code do not include

monies or receipts entrusted to the taxpayer which do not belong to them

and do not redound to the taxpayer’s benefit; and it is not necessary that

there must be a law or regulation which would exempt such monies or

receipts within the meaning of gross receipts under the Tax Code.

FACTS:

From 1974 to 1976, Tours Specialists, Inc. had derived income from its activities as a travel agency by servicing the needs of foreign tourists and travelers and Filipino "Balikbayans" during their stay in this country. Some of the services extended to the tourists consist of booking said tourists and travelers in local hotels for their lodging and board needs; transporting these foreign tourists from the airport to their respective hotels, and from the latter to the airport upon their departure from the Philippines, transporting them from their hotels to various embarkation points for local tours, visits and excursions; securing permits for them to visit places of interest; and arranging their cultural entertainment, shopping and recreational activities.

In order to ably supply these services to the foreign tourists, TOURS and its correspondent counterpart tourist agencies abroad have agreed to offer a package fee for the tourists. . Although the fee to be paid by said tourists is quoted by the petitioner, the payments of the hotel room accommodations, food and other personal expenses of said tourists, as a rule, are paid directly either by tourists themselves, or by their foreign travel agencies to the local hotels and restaurants or shops, as the case may be.

Some tour agencies abroad request the local tour agencies that the hotel room charges be paid through them. By this arrangement, the foreign tour agency entrusts to Tours, the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed. The

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billing hotel sends the bill to Tours. The local hotel identifies the individual tourist, or the particular groups of tourists by code name or group designation and also the duration of their stay for purposes of payment. Upon receipt of the bill, Tours then pays the local hotel with the funds entrusted to it by the foreign tour correspondent agency.

Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax as independent contractor by including the entrusted hotel room charges in its gross receipts from services for the years 1974 to 1976.

During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in charge of the Accounting Department of Tours, had testified, that the amounts entrusted to it by the foreign tourist agencies intended for payment of hotel room charges, were paid entirely to the hotel concerned, without any portion thereof being diverted to its own funds. And that the reason why tourists pay their room charge, or through their foreign tourists agencies, is the fact that the room charge is exempt from hotel room tax under P.D. 31

CTA ruled that the money entrusted to private respondent Tours Specialists, Inc., earmarked and paid for hotel room charges of tourists, travelers and/or foreign travel agencies does not form part of its gross receipts subject to the 3% independent contractor's tax under the National Internal Revenue Code of 1977.

ISSUE: WON amounts received by a local tourist and travel agency

included in a package fee from tourists or foreign tour agencies,

intended or earmarked for hotel accommodations form part of gross

receipts subject to 3% contractor's tax – NO

RATIO:

Gross receipts subject to tax under the Tax Code do not include monies

or receipts entrusted to the taxpayer which do not belong to them and

do not redound to the taxpayer's benefit; and it is not necessary that

there must be a law or regulation which would exempt such monies

and receipts within the meaning of gross receipts under the Tax Code.

The room charges entrusted by the foreign travel agencies to the

private respondent do not form part of its gross receipts within the

definition of the Tax Code. The said receipts never belonged to the

private respondent. The private respondent never benefited from their

payment to the local hotels. As stated earlier, this arrangement was

only to accommodate the foreign travel agencies.

Another objection raised by the petitioner is to the respondent court's

application of Presidential Decree 31 which exempts foreign tourists

from payment of hotel room tax. Section 1 thereof provides: Sec. 1. —

Foreign tourists and travelers shall be exempt from payment of any and

all hotel room tax for the entire period of their stay in the country.

If the hotel room charges entrusted to Tours will be subjected to 3%

contractor's tax as what CIR would want to do in this case, that would

in effect do indirectly what P.D. 31 would not like hotel room charges of

foreign tourists to be subjected to hotel room tax. Although, CIR may

claim that the 3% contractor's tax is imposed upon a different

incidence i.e. the gross receipts of the tourist agency which he asserts

includes the hotel room charges entrusted to it, the effect would be to

impose a tax, and though different, it nonetheless imposes a tax

actually on room charges. One way or the other, it would not have the

effect of promoting tourism in the Philippines as that would increase

the costs or expenses by the addition of a hotel room tax in the overall

expenses of said tourists.

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DISPOSITIVE: WHEREFORE, the instant petition is DENIED. The

decision of the Court of Tax Appeals is AFFIRMED. No pronouncement

as to costs.

CIR V JAVIER July 31, 1991 Sarmiento J

Rods

SUMMARY: This is the so called million-dollar case. Javier erroneously received $1million from the US, and a case was filed against them to return the money. When they filed an Income Tax Return, CIR wanted to assess 50% penalty for fraud for not reporting such income. CTA removed the penalty, and SC upheld CTA decision, saying that there was a footnote which basically showed that Javier spouses did not intend to defraud the government. DOCTRINE: Under sec 72 of the tax code, a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has been made on the basis of return filed before the discovery of the falsity or fraud. Fraud must amount to intentional wrong doing with the sole object of avoiding tax. Mere mistake cannot be considered fraudulent. Implied: Income wrongfully received is still taxable, based on the events in this case.

FACTS: Victoria Javier, wife of respondent Javier, received from Prudential Bank $999,973.70 remitted by her sister Mrs. Dolores Ventosa, through banks in the US including Mellon Bank. Mellon filed a case in CFI Rizal against Javier claiming that the remittance of $1million was a clerical error, and it should have been $1000 only, praying the excess be returned, since the Javiers were only trustees of an implied trust for the benefit of Mellon. Sps Javier were charged with estafa for misappropriating, misapplying, and converting the money to their own personal use.

A year after, Javier filed his Income Tax Return for taxable year 1977 which showed gross income of P53K, and net income P48K and stating in a footnote that “taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation”. Acting Commissioner of Internal Revenue assessed deficiency taxes P1,615.96 and P9.28million as deficiency assessments for years 1976, 1977 respectively. Javier agreed to pay 1976 deficiency, but prayed that the final court decision on the case filed against him be waited. CIR sent a letter protest, saying that the amount of the erroneous remittance that they disposed were taxable. It imposed 50% fraud penalty against them. CTA deleted the 50% fraud penalty upon appeal, saying that there was no fraud. ISSUES: WON there was actual fraud which would justify the 50% penalty RULING: No, there was no actual fraud RATIO: Under sec 72 of the tax code, a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has been made on the basis of return filed before the discovery of the falsity or fraud. The SC agrees with the CTA, quoted the latter: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or mistake of fact or law" not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally "laid his cards on the table." In Aznar v CA, it was said that the fraud contemplated by the law is actual, not constructive, and must be intentional fraud. It must amount to intentional wrong-doing with the sole object of avoiding tax. Mere mistake cannot be considered fraudulent. Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at

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most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. In this case , there was no actual and intentional fraud. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. DISPOSITIVE: Petition denied. CTA affirmed

Sison v. Ancheta July 25, 1984 Fernando, C.J.

Paolo Q. Bernardo (edited Sai's digest)

SUMMARY: Antero Sison Jr. filed this case for declaratory relief or prohibition proceeding against BIR acting commissioner Ancheta, challenging the validity of Section 1 of Batas Pambansa Blg. 135 alleging that he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession and that they are oppressive and capricious. SC upheld the validity of the BP 135 Sison Jr has not made out a case since allegations lack factual foundation to show the arbitrary character of the assailed provision as well as on due process, equal protection and uniformity.

DOCTRINE: Short: A schedular tax system is not violative of the due process and equal protection clause of the constitution; neither is it violative of the rule of uniformity of taxation.

Definition of a schedular tax system: Under the schedular tax system, different types of incomes are subject to different sets of graduated or flat income tax rates. The applicable tax rates will depend on the classification of the taxable income and the basis could be gross income (without deductions) or net income (i.e. gross income less allowable deductions) [Mamalateo, 2008].

Long, verbatim from case: Taxpayers may be classified into different categories. In the case of the gross income taxation embodied in BP 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them.

Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers are not entitled to make deductions for income tax purposes because they are in the same situation more or less.

On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income.

It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the BP 135 to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

FACTS: Antero Sison Jr. filed a case for declaratory relief or prohibition proceeding against BIR acting commissioner Ancheta. He challenges the validity of Section 1 of Batas Pambansa Blg. 135 which further amends Section 21 of the NIRC 1977. Section 21 provides for rates of tax on citizens OR residents on:

(a) taxable compensation income; (b) taxable net income,; (c) royalties, prizes, and other winnings; (d)interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements; (e) dividends and share of individual partner in the net profits of taxable partnership;

(f) adjusted gross income.

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Sison alleges that Section 21 violates the due process and equal protection

clause and also the rule on uniformity of taxation. He would be discriminated against by the imposition of higher

rates of tax upon his income arising from the exercise of his profession THAN THAT imposed upon fixed income or salaried individual taxpayers. He asserts that they are arbitrary, amounting to class legislation, oppressive and capricious.

ISSUE: WON Section 1 of BP Blg. 135―which imposes a higher tax rate on taxable net income derived from business or profession than on compensation―is constitutionally infirm. Ruling: No. Ratio:

1. The SC ruled that because the field of state activity has assumed a much wider scope, there is need for more revenues. The power to tax, an inherent prerogative has to be availed of to assure the performance of vital state functions. a. Taxes being the life blood of the government, their prompt

and certain availability is of the essence. b. As Justice Malcolm asserted “The power to tax is an

attribute of sovereignty. It is the strongest of all powers of the government”. i. But the power to tax is not unconfined. There are

restrictions set forth by the Constitution. Both due process and equal protection clauses may properly be invoked, as Sison does in this case, to invalidate a revenue measure. If it were otherwise, there would be truth to the

Marshall dictum that the power to tax involves the power to destroy.

However, Holmes’ s dictum is adopted in the Philippines: the power to tax is not the power to destroy while this court sits.

c. On arbitrariness, the SC said that mere allegation does not suffice. Considering that Sison, Jr. would condemn such a provision as void on its face, he has not made out a case. i. Where due process and equal protection clauses are

invoked, considering that they are not fixed rules but broad standards, there is a need of proof. Absent such showing, presumption of validity must prevail.

d. On Due process i. The Due process clause may be invoked where a

taxing statute is so arbitrary that it finds no support in the Constitution. It did not obtain in this case, absent proof. An example of clear abuse of power is confiscation

of property or where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds.

e. On Equal Protection i. In terms of burden or charges, those that fall within a

class should be treated in the same fashion, whatever restrictions cast on some in the group equally binding on the rest. This applies as well to taxation measures.

ii. Equal protection is inspired by the concept of approximating the Ideal of the laws benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is of the very essence of the Idea of law.

iii. However, as Justice Frankfurter states: The Constitution does not require things which are different in fact or opinion to be treated in law as though they were the same."

iv. Hence the constant reiteration of the view that classification if rational in character is allowable. In Lutz V. Araneta, J.B.L. Reyes held "at any rate, it

is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for

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taxation, or exemption infringe no constitutional limitation.

f. On Uniformity i. In Philippine Trust Company v. Yatco, Justice Laurel

said that the requirement of uniformity is met when the tax operates with the same force and effect in every place where the subject may be found. The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable.

ii. Also, equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation.

iii. There is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies equally to all persons, firms and corporations placed in similar situation."

g. SC said that what misled petitioner is his failure to distinguish between a tax rate and a tax base. i. There is no legal objection to a broader tax base or

taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate.

h. Also, taxpayers may be classified into different categories. In the case of the gross income taxation embodied in BP 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. i. Taxpayers who are recipients of compensation income

are set apart as a class. As there is practically no overhead expense, these taxpayers are not entitled to make deductions for income tax purposes because they are in the same situation more or less.

ii. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no

uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the

disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the BP 135 to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

DISPOSITIVE: Section 1 of BP 135 is held constitutional.

Eufemia EVANGELISTA, Manuela Evangelista, and Francisca

Evangelista vs. CIR and CTA October 15, 1957

Concepcion, J. Ron

SUMMARY: 1. The Evangelistas bought various real properties, built

improvements and had the same rented or leased to various tenants.

2. The CIR demanded the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949.

3. CTA ruled that the Evangelistas are liable to pay the taxes. 4. SC affirmed saying that they constituted a “partnership” which is

covered by the term “corporation” under the NIRC, thus liable to pay the taxes.

DOCTRINE: 1. When our Internal Revenue Code includes "partnerships" among

the entities subject to the tax on "corporations", said Code must

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allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term.

2. Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized."

3. For purposes of the tax on corporations, the NIRC, includes these partnerships — with the exception only of duly registered general copartnerships (Note: this is the old NIRC, now General Professional Partnerships are taxed differently) — within the purview of the term "corporation."

4. See definition of “corporations” under amended NIRC. FACTS: 1. The Evangelistas borrowed from their father the sum of

P59,1400.00 which amount together with their personal monies was used by them for the purpose of buying real properties.

2. They bought various real properties, built improvements and had the same rented or leased to various tenants.

3. They appointed their brother Simeon Evangelista to 'manage their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in default of such payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes and checks for them.

4. Collector of Internal Revenue demanded the payment, for the years 1945-1949, of the following: a. Income tax on corporations – P6,157.09 b. Real estate dealer's fixed tax – P527.00 c. Corporation residence tax – P193.75

5. The Evangelistas filed case with the CTA questioning the assessment of the CIR.

6. CTA: Evagelistas are liable to pay the taxes assessed. ISSUE/S: 1. WON they are liable to pay Income Tax on Corporations. 2. WON they are liable to pay Real Estate Dealer's Fixed Tax. 3. WON they are liable to pay Corporation Residence Tax.

RATIO: 1. YES, they are liable to pay Income Tax on Corporations because

they conducted their business as a “Corporation” as defined under the NIRC.

2. YES, they are liable to pay Real Estate Dealer's Fixed Tax because they are “Real Estate Dealers” as defined under the NIRC.

3. YES, they are liable to pay Corporation Residence Tax because they are a “Corporation” under the NIRC.

RULING: 1. Under the NIRC, the terms "corporation" and "partnership," as used

in section 24 and 84 of said Code, the pertinent parts of which read: SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized but not including duly registered general co-partnerships (compañias colectivas), a tax upon such income equal to the sum of the following: . . . SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not include duly registered general copartnerships. (compañias colectivas). .

Their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves as evidenced by their business of buying real properties and renting/leasing them out to several persons.

When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term. o Thus, for instance, section 24 of said Code exempts from the

aforementioned tax "duly registered general partnerships

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which constitute precisely one of the most typical forms of partnerships in this jurisdiction.

Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized." o This qualifying expression clearly indicates that a joint venture

need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations.

o Again, pursuant to said section 84(b), the term "corporation" includes, among other, joint accounts, (cuentas en participation)" and "associations," none of which has a legal personality of its own independent of that of its members.

o Accordingly, the lawmaker could not have regarded that personality as a condition essential to the existence of the partnerships therein referred to.

o In fact, as above stated, "duly registered general copartnerships" — which are possessed of the aforementioned personality — have been expressly excluded by law (sections 24 and 84 [b] from the connotation of the term "corporation"

o It may not be amiss to add that the Evagelistas' allegation to the effect that their liability in connection with the leasing of the lots, under the management of one person, tends to increase the similarity between the nature of their venture and that corporations, and is, therefore, an additional argument in favor of the imposition of said tax on corporations.

For purposes of the tax on corporations, the NIRC, includes these partnerships — with the exception only of duly registered general copartnerships (Note: this is the old NIRC, now General Professional Partnerships are taxed differently) — within the purview of the term "corporation."

It is, therefore, clear that the Evangelista’s constitute a partnership, insofar as said Code is concerned and are subject to the income tax for corporations.

2. The Evangelistas have habitually engaged in leasing properties for a period of over twelve years, and that the yearly gross rentals of

said properties from June 1945 to 1948 ranged from P9,599 to P17,453.

Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to section 194 (s) thereof. 'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or renting property or his own account as principal and holding himself out as a full or part time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year. . .:

3. Section 2 of Commonwealth Act No. 465 provides in part:

Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of five pesos and an annual additional tax which in no case, shall exceed one thousand pesos, in accordance with the following schedule: . . .

The term 'corporation' as used above includes joint-stock company,

partnership, joint account (cuentas en participacion), association or insurance company, no matter how created or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with substantially the same meaning.

Consequently, the Evangelistas are subject, also, to the residence tax for corporations.

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DISPOSITIVE: Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners herein. It is so ordered.

TAN v. CIR October 3, 1994

Vitug, J. Denn

SUMMARY: This is a consolidation of 2 civil actions for prohibition, challenging the constitutionality and validity of RA7296 (the SNIT scheme, amending NIRC provisions) and the Revenue Regulations promulgated pursuant thereto. In Case#1, petitioners argue that RA7496 is unconstitutional for being violative of due process and of the requirement of uniformity and equitability in taxation statutes. SC held that the said law is not violative of the Consitution. In Case#2, petitioners objected to the interpretation given by the CIR that SNIT would be applied to partners in general professional partnerships (implying that partners in GPP should not be covered by SNITS because such scheme only applies to individuals and professionals). The SC held that partners in a GPP are liable for income tax in their individual capacity, and hence, are correctly considered as covered by RA7496. DOCTRINE: Under the Tax Code, partnerships are either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income tax. They are by law assimilated to be within the context of, and so legally contemplated as, corporations. "Exempt partnerships," on the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A general professional partnership is an exempt partnership. In a GPP, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits.

FACTS: 2 special civil actions for prohibition were consolidated. In Case #1, petitioner Rufino Tan challenges the constitutionality of RA7496, the Simplified Net Income Taxation Scheme (SNIT), which amended certain NIRC provisions. In Case #2, petitioners Carag et al. are assailing the validity of Sec. 6 of Revenue Regulations No. 2-93 (R.R. 2-93), promulgated by public respondents Sec. of Finance Del Rosario and Commissioner of Internal Revenue Ong, pursuant to RA7496. Petitioners in both cases claim to be taxpayers adversely affected by the implementation of RA7496. CASE #1: Tan claims that the enactment of RA7496 violates the ff. constitutional provisions:

- Art. VI, Sec. 26(1) – Every bill passed by Congress shall embrace only one subject which shall be expressed in the title.

- Art. VI, Sec. 28(1) – The rule of taxation shall be uniform and equitable…

- Art. III, Sec. 1 – No person shall be deprived of… property without due process of law, nor shall any person be denied equal protection of the laws.

CASE #2: Carag et. al argue that public respondents Ong and Del Rosario exceeded their rule-making authority in applying SNIT to general professional partnerships. (The SC discussed the 2 cases separately.) _____________________________________________________________________________

CASE #1 (challenging RA7496) A. Petitioner TAN: The title of HB34314, the progenitor of RA7496, is

a misnomer, or at least, deficient for being merely entitled “Simplified Net Income Taxation Scheme for Self-Employed and Professionals Engaged in the Practice of their Profession”. - To Tan, the amendatory law (RA7496) should be considered as

having now adopted a gross income, instead of as having still retained the net income, taxation scheme.

COURT: It may be true that the allowance for deductible items have significantly been reduced by RA7496, in comparison with that which prevailed prior to the amendment. However, limiting allowable deductions from gross income is neither discordant with, nor opposed to,

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the net income tax concept. The fact is that the new law still continue to provide for various deductions. B. Petitioner TAN: RA7496 desecrates the requirement of uniformity

and equitability in taxation because the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships.

COURT: Tan forgets that such a system of income taxation has long been the prevailing rule even prior to RA7496.

- Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not prohibit classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class.

- The legislative intent behind RA7496 is to increasingly shift the income tax system towards the schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment on taxable corporations. Such classification is not viewed by the SC as arbitrary and inappropriate.

o Schedular: A system employed where the income tax treatment varies and made to depend on the kind or category of taxable income of the taxpayer.

o Global: A system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer.

C. Petitioner TAN: Given RA7496, there would be an imbalance

between the tax liabilities of those covered by RA7496 and those who are not.

COURT: With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects)

and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. CONCLUSION: RA7496 is not unconstitutional (hence, constitutional). It is not violative of due process. ___________________________________________________________________________

CASE #2 (challenging Revenue Regulations No.2-93) Proposition of petitioners revolve around the ISSUE of WON public respondents have exceeded their authority in promulgating Sec. 6, R.R. 2-93, to carry out RA7496.

Sec.6. General Professional Partnership — The general professional partnership (GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income.

Petitioners’ real objection is focused on respondents’ administrative interpretation that would apply SNIT to partners in general professional partnerships (GPPs). Petitioners Carag et al. cite the pertinent deliberations in Congress during its enactment of RA7496, also quoted by the Hon. Hernando Perez in his privilege speech.

MR. ALBANO: Now Mr. Speaker, I would like to get the correct impression of this bill. Do we speak here of individuals who are earning, I mean, who earn through business enterprises and therefore, should file an income tax return? MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals.

Other deliberations support this position, to wit: MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to increase collections as far as individuals are concerned and to make collection of taxes equitable? MR. PEREZ. That is correct, Mr. Speaker.

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In fact, in the sponsorship speech of Sen. Mamintal Tamano on the Senate version of the SNITS, it is categorically stated, thus:

This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to individuals and professionals.

COURT: A general professional partnership (GPP), unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code1, which has not been amended at all by RA7496, is explicit: There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules.

1 Sec. 23. Tax liability of members of general professional partnerships. — (a)

Persons exercising a common profession in general partnership shall be liable for income tax only in their individual capacity, and the share in the net profits of the general professional partnership to which any taxable partner would be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this Title. (b) In determining his distributive share in the net income of the partnership, each partner — (1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and (2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross income undiminished by his share of the deductions.

When the law is understood as only forming part of, and subject to, the whole income tax concept and precepts long obtaining under the National Internal Revenue Code, it can be seen that the phrase "income taxpayers" is an all embracing term used in the Tax Code. It practically covers all persons who derive taxable income.

- The Code classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships."

- Ordinarily, partnerships, no matter how created or organized, are subject to income tax ("taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations, to cover corporations and partnerships which are independently subject to the payment of income tax.

- "Exempt partnerships," on the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes.

o A general professional partnership is such an example. In a GPP, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter.

CONCLUSION: Under the Tax Code on income taxation, the GPP is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners. Hence, Section 6 of RR 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by RA7496 on basically the

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extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. DISPOSITIVE: Petitions dismissed. RA7496 and RR 2-93 are constitutional and valid.

PASCUAL v. CIR Oct 29, 1968 Fernando, J

Diway

SUMMARY: Pascual and Dragon bought 5 parcels of lands which they sold to other buyers. They realized profits for which they paid capital gains tax and availed of tax amnesty so they would not have to pay individual income tax. However, the commissioner assessed them with corporate income tax because they were an “unregistered partnership” which is taxable as a corporation. The SC held that notwithstanding the co-ownership, there is no partnership to speak of that can be taxed as a corporation. Hence, Pascual and Dragon are not liable for corporate income tax. DOCTRINE: Distinction between co-ownership and an unregistered partnership for income tax purposes: The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be

1. A clear intent to form a partnership 2. The existence of a juridical personality different from the

individual partners, and 3. The freedom of each party to transfer or assign the whole

property. To determine whether the parties intended to form a partnership, an important factor is the character of habituality peculiar to business

transactions engaged in for the purpose of gain. FACTS: Pascual and Dragon bought - 2 parcels of land from Santiago Bernardino which they sold to

Merenir Dev’t Corp - 3 parcels from Juan Roque which they sold to Erlinda Reyes and

Maria Camson They realized P165,000 profit in 1968, P60,000 profit in 1970. They paid capital gains taxes, availing of some amnesties but they were still assessed deficiency corporate income taxes (P107,000) to which they protested asserting their tax amnesties. COMMISSIONER’S RULING - They are co-owners in the real estate transactions and formed an

unregistered partnership or joint venture taxable as a corporation under Section 20(b)

- Its income was subject to the taxes prescribed under Section 24, NIRC

- The unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership which is subject to individual income tax

- The availment of tax amnesty under P.D. No. 23, relieved them of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership.

- They are required to pay the deficiency corporate income tax They filed a petition for review with the CTA CTA RULING Pascual and Dragon are liable for corporate income tax. Affirmed the Commissioner’s ruling ISSUES: W/N Pascual and Dragon formed an unregistered partnership and is thus liable for corporate income tax RATIO:

Earlier Case of Evangelista v. Collector

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Taxpayers borrowed a sum of money from their father which together with their own personal funds they used in buying real properties. They appointed their brother to manage their properties. They had the real properties rented or leased and they gained net profits. The Collector of Internal Revenue demanded the payment of income tax on a corporation The SC held them liable for corporate income taxes. - Sec. 84(b). The term "corporation" includes partnerships, no

matter how created or organized xxx but does not include duly registered general co-partnerships (companies colectivas).

Article 1767, CC defines a partnership. Pursuant to this article, the essential elements of a partnership are 1. An agreement to contribute money, property or industry to a

common fund; and o This element is present. Petitioners have agreed to, and did,

contribute money and property to a common fund.

2. Intent to divide the profits among the contracting parties. o This element is also present. Their purpose was to engage in

real estate transactions for monetary gain and then divide the same among themselves, because: Common fund was not something they found already in

existence. They created it purposely. They invested the same, not merely in one transaction, but

in a series of transactions. This is strongly indicative of a pattern or common design that was not limited to the preservation of common fund. One cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain.

The lots were not devoted to personal uses. They were leased separately to several persons

The properties have been under the management of one person. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit.

Comparison between Evangelista and the Present Case

Evangelista v. Collector In the Present Case

No evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund and that they intended to divide profits among themselves

There was a series of transactions where petitioners purchased twenty-four (24) lots showing that the purpose was not limited to the conservation or preservation of the common fund.

The transactions are isolated. 1965 – bought 2 parcels 1966 – bought 3 parcels 1968 – sold 2 parcels 1970 – sold 3 parcels

The character of habituality peculiar to business transactions engaged in for the purpose of gain was PRESENT.

The character of habituality peculiar to business transactions engaged in for the purpose of gain was ABSENT

Property was leased to tenants for 15 years

No similar circumstances exist. The co-ownership started only in 1965 and ended in 1970.

The Concurring Opinion (Bautista, J) in Evangelista v. Collector Article 1769(2)(3)of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property; (3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a

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joint or common right or interest in any property from which the returns are derived;

The fact that those who agree to form a co- ownership share or do not share any profits from the property held in common does not convert their venture into a partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. This only means that, aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear intent to form a partnership, the existence of a juridical personality different from that of the individual partners, and the freedom to transfer or assign any interest in the property by one with the consent of the others. Hence, an isolated transaction whereby two or more persons contribute funds to buy certain real estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a partnership. Persons who contribute property or funds for a common enterprise, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock or capital, and no community of interest. In order to constitute a partnership inter se there must be: (a) An intent to form the same; (b) generally participating in both profits and losses; (c) and such a community of interest, as far as third persons are concerned, enables each party to make contract, manage the business, and dispose of the whole property.

Conclusion of the Court The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be

1. A clear intent to form a partnership

2. The existence of a juridical personality different from the individual partners, and

3. The freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership but no adequate basis to conclude that they formed an unregistered partnership. The two isolated transactions did not thereby make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes. Assuming for the sake of argument that such unregistered partnership is formed, since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid obligation of the partnership. However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom. DISPOSITIVE: Petition is GRANTED Pascual and Dragon are not liable for corporate income tax.

Afisco v. CIR January 25, 1999

Panganiban, J. (which also explains the length of this digest) Call me Jaddie

SUMMARY: 41 non-life insurance companies (“The Insurers”) organized and existing under Philippine laws issued certain insurance policies (Erection, Machinery Breakdown, Boiler, Explosion, and Contractors’ All Risk). They entered into a Reinsurance Treaty w/ Munchener Ruckversicherungs-Gesselschaft (“Munich”, a non-resident foreign insurance corporation,) w/c required them to form a pool. Around 10 years later (in 1976), The Pool submitted a financial

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statement and filed a Return ("Information of Return of Organization Exempt from Income Tax”) for the year 1975. On the basis of the return, the Commissioner of Internal Revenue assessed The Pool for Deficiency Corporate Taxes and Withholding Taxes (for Dividends to Munich and companies.) The companies protested through SGV (their auditors), w/c the Commissioner denied. The CTA and CA decided adversely against The Insurers. The SC upheld the CA. DOCTRINE: (Income Taxation; Taxpayers; Corporations; Partnership, Co-ownership, GPP) 1) Entities that resemble corporations, such as unregistered

partnerships and associations are considered as corporations for the purpose of Sec. 24 of the 1975 NIRC.

2) For the purposes of taxation, a Pool formed pursuant to a Reinsurance Treaty is a taxable as a partnership or association.

FACTS:

41 non-life insurance companies ("The Insurers") organized and existing under Philippine laws issued Erection, Machinery Breakdown, Boiler Explosion and Contractors' All Risk insurance policies.

August 1, 1965: After issuing the said policies, the companies entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty w/ the Munchener Ruckversicherungs-Gesselschaft ("Munich", a non-resident foreign insurance corporation)

The Reinsurance Treaty required The Insurers to form a pool ("The Pool"), w/c they did.

April 14, 1976: The Pool submitted a financial statement and filed an "Information of Return of Organization Exempt from Income Tax" for the year ending in 1975.

On the basis of The Return, the Commissioner of Internal Revenue ("The Commissioner") assessed The Pool for Deficiency Corporate Taxes amounting to P1,843,273.60, and Withholding Taxes worth P1,768,799.39 (on Dividends paid to Munich) and P89,438.68 (on Dividends to The Insurers).

The assessments were protested through SGV, The Insurers’ auditors.

January 27, 1986: The Commissioner denied the protest. The CTA and CA decided adversely against The Pool.

ISSUES: Whether: 1) The Clearing House/Pool is a partnership or association subject to

tax as a corporation. 2) The remittances to The Insurers and Munich are Dividends subject

to tax. 3) The Commissioner’s right to assess the Clearing House/Pool has

prescribed. ARGUMENTS OF THE INSURERS: 1) No.

a) The Pool is a mere agent and performs strictly administrative functions. i) It did not insure or assume any risk in its name. ii) The insurance policies are separate and the liabilities

resultant from these are limited to the members only to the extent of their allocated shares.

iii) The Pool did not earn income as a reinsurer. iv) Its role was limited to the principal function of allocating

and distributing risks. b) Neither is The Pool a partnership:

i) The same risk was not shared, nor solidary liability ii) There was no common fund iii) The executive board of The Pool did not exercise

control/management of the fund iv) The Pool was not engaged in reinsurance.

2) No. a) The remittances are not dividends subject to tax. Such

remittances would be contrary to Sec. 24(b)(1) and 263 of the 1977 NIRC, tantamount to an illegal double taxation since the same taxpayer is taxed twice.

b) Munich was not a signatory to The Pool agreement, so the remittances are not dividends.

c) Even if the remittances are dividends, Munich is exempt by virtue of: i) The 1977 NIRC

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ii) Art. 7 Par. 1 and Art. 5 Par. 5 of the RP-West German Tax Treaty

3) Yes. a) The return was filed by The Pool in on April 14, 1976 b) The BIR only contacted them on November 11, 1981 to give

them notice of the assessment dated March 27, 1981. c) There is a 5-year statute of limitations provided by the NIRC.

RULING: 1) Yes. 2) Yes. 3) No. RATIO: 1) The Pool is taxable as a corporation.

a) The opinion/ruling of the CIR is accorded great weight and finality when there is no showing of patent error, especially in the situation where the findings and conclusions of The Commissioner were subsequently affirmed by the CTA (yes, that’s what Panganiban said), (a specialized body created exclusively for reviewing tax cases) and the CA.

b) It has been the policy of the SC to respect the conclusions of quasi-judicial agencies such as the CTA, w/c is exclusively dedicated to dealing w/ tax problems and has consequently developed an expertise on the matter.

c) For the purposes of Sec. 24 of the NIRC (as it was in 1975,) it can be said that the Legislature included entities that resemble corporations (such as unregistered partnerships and associations,) in that section’s concept of corporations. i) “SEC. 24. Rate of tax on corporations. -- (a) Tax on

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

ii) This legislative policy is even clearer in the 1997 Tax Reform Act (RA 8424) w/c amended the Tax Code (Sec. 27 vis-à-vis Sec. 22(B)) (1) Sec. 27, provides: “SEC. 27. Rates of Income Tax on

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

(2) Sec. 22(B): “SEC. 22. -- Definition. -- When used in this Title: xxx (B) The term ‘corporation’ shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships [or] a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract without the Government. ‘General professional partnerships’ are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

d) Jurisprudence on the matter affirms that those provisions of law covered unregistered partnerships, and even associations or joint accounts, w/c have no legal personalities apart from their individual members (referring to Evangelista v. Collector of Internal Revenue): i) “The term ‘partnership’ includes a syndicate, group, pool,

joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. (Evangelista, citing 8 Merten’s Law of Federal Income Taxation, p. 562 Note 63)’”

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ii) The CA correctly applied Evangelista. (1) A Partnership was created.

(a) NCC 1767 recognizes the creation of a contract of partnership when “two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.”

(b) Requisites (citing Tolentino): (1) mutual contribution to a common stock, and (2) a joint interest in the profits. (i) Restated (citing Prautch, Scholes & Co. v.

Dolores Hernandez de Goyonechea): “a partnership is formed when persons contract “to devote to a common purpose either money, property, or labor with the intention of dividing the profits between themselves.”

(2) It may also be considered an association, based on the definition in Morrissey v. Commissioner of “a joint enterprise for the transaction of business.”

(3) In the instant case, The Insurers entered into a Pool Agreement or association that would handle all the insurance business under their reinsurance treaty w/ Munich, based on Sec. 24 of the NIRC: (a) The Pool has a common fund, consisting of money

and other valuables deposited in the pool’s name and credit. This Common Fund pays for The Pool’s administration and operation expenses.

(b) The Pool functions through an executive board, resembling a corporation’s board of directors (one representative per Insurer)

(c) Profit motive or business is the main reason for The Pool’s formation. The Pool’s work is indispensable, beneficial, and economically useful to the Insurers and Munich, since w/o The Pool, they would not receive their premiums. (i) The Court emphasized that the companies

involved share in “the business ceded to the pool” and in the “expenses” according to an annexed Rules of Distribution.

(ii) The fact that The Pool does not retain profit or income does not diminish the fact that it is being used in the transaction of business for profit. This entity was indispensable to the transaction of business.

(iii) That profit was apportioned is only a matter of consequence, since it implies that profit was made in the first place.

e) The Insurers’ reliance on Pascuals v. Commissioner is erroneous. The facts are not on all fours: Pascuals concerned a co-ownership involving 2 isolated transactions, not an unregistered partnership. Evangelista was the correct case to be applied, as it involved a partnership engaged in a series of transactions spread out over 10 years, very similar to the instant case.

2) The remittances are taxable. a) “Petitioners are clutching at straws” (Panganiban, 1999) b) There is no double taxation. In this case, The Pool is a taxable

entity distinct from the individual members. i) Definition of Double Taxation: Taxing the same property

twice when it should be taxed only once. ii) Another definition: “Taxing the same person twice by the

same jurisdiction for the same thing.” (Victorias Milling Co., Inc. v. Municipality of Victorias, Negros Occidental)

iii) The tax on the income is “obviously different” from the tax on the dividends received by the Insurers.

c) As for the claim of exemptions, these remain unproven and unsubstantiated.

d) The 1977 NIRC is inapplicable since it was not yet in effect when the income was earned and the information return for 1975 was filed.

e) Not even the 1975 NIRC’s counterpart sections justify The Insurers’ claims. The Pool is a distinct taxable entity.

f) Sec. 24(b)(1) pertains to tax on foreign corporations, which cannot be claimed by The Insurers since they are domestic corporations. i) Not even Munich can claim an exemption since the same

subsection specifically taxes dividends, the type of remittances forwarded to it by The Pool. Although not a

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signatory to the Pool Agreement, Munich is plainly an associate to The Insurers and the Pool, by virtue of the Reinsurance Treaties. (1) Under the Pool Arrangement and Reinsurance

Treaties, Munich shares in The Insurers’ income and loss.

ii) Sec. 24(b)(1) is in line w/ the doctrine that tax exemptions are construed strictissimi juris, and the claimed statutory exemption must be expressed clearly and unmistakably.

g) Nor can a tax exemption for Munich under the RP-West German Tax Treaty be claimed, since the treaty was not yet in effect in 1975. i) The Court takes judicial notice (shudder) that the treaty

took effect in 1984. 3) The Government’s right to assess and collect the taxes had not

prescribed. a) The CA and CTA categorically found that the prescriptive

period was tolled under Sec. 333 of the NIRC because the taxpayer could not be located at the address given in the information return filed, causing a delay in sending the assessment. i) “SEC. 333. Suspension of running of statute. -- The

running of the statute of limitations provided in section three hundred thirty-one or three hundred thirty-two on the making of assessment and the beginning of distraint or levy or a proceeding in the court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner of Internal Revenue is prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner when the taxpayer cannot be located in the address by him in the return filed upon which a tax is being assessed or collected: x x x.”

ii) There is no palpable error or grave abuse of discretion warranting the reversal of the CTA and CA’s factual findings.

b) Finally, the Insurers themselves admitted in their MR w/ the CA that The Pool changed its address.

i) The Insurers said that The Pool’s information return filed in 1980 indicated its present (new) address.

ii) Sec. 333 requires that The Commissioner is informed by the taxpayer.

DISPOSITIVE: Petition DENIED. CA decision AFFIRMED. DISSENTING OPINION: N/A CONCURRING OPINION: N/A

SOLIDBANK v. CIR June 19, 1997

CTA Case Krissy

SUMMARY: SBC and SRI in a Deed of Sale with Option for Administration of Property became co-owners of 3 parcels of land and a 4-storey building thereon. SBC then filed a complaint with the RTC for Partition. Eventually they decided to settle the case amicably and submitted a Motion for Judgment based on Compromise Agreement, which was approved by the court. The CIR, however, assessed deficiency income tax against the unregistered partnership of SBC and SRI, deficiency donor’s tax against SRI and deficiency withholding tax against SBC and SRI, contending that the two actually formed a partnership and not a mere co-ownership of the properties. Both protested but SBC opted to pay the compromise amount, while SRI pursued the case. The CTA ruled in favor of SRI, finding that what was entered into was a co-ownership. DOCTRINE: The agreement for administration of property is but a mere incident of co-ownership and not an act with intention to engage in a mutual fund for profit or business. The law applicable is Art. 1767, CC which prescribes 2 essential elements of a partnership: (a) an agreement to contribute money, property or industry to a common fund, and (b) intent to divide the profits among the contracting parties. However, no agreement, direct or implied, was reached by SRI and SBC to purposely contribute money, property or

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industry to a common fund, and no such intent to divide the profits arising from the use of the common fund in a business activity was ever contemplated. The mere circumstance of profit sharing is not indicative of partnership. It is necessary in determining the existence of a partnership the intent to form a partnership, existence of a juridical personality different from that of the individual partners and the freedom to transfer/assign any interest in the property with the consent of the other.

FACTS: On Dec. 5, 1965, Solidbank Corporation (SBC a.k.a. Consolidated Bank and Trust Corporation) and Susana Realty, Inc. (SRI), in a Deed of Sale with Option for Administration of Property (DOS) became co-owners of 3 parcels of land together with a 4 story building thereon when SBC acquired from SRI ½ ownership and interest of SRI and paid earnest money of P50,000 to the latter. On July 30, 1984, SBC filed a complaint with the RTC for Partition. As co-owner, it demanded the portion of the property owned in common pursuant to Art. 494, CC for the reason that physical division of the building and improvements thereon would not be compatible to the best interest of the parties and a more practical solution is Buy-Out or Sell-Out of the share of one to the other co-owner or to any party, conformably with Art. 498, CC. The parties eventually decided to settle the case amicably. The parties submitted a Motion for Judgment Based on Compromise Agreement and the Court rendered judgment approving the same and terminating the co-ownership, vesting the sole, absolute, exclusive and indefeasible title in favor of SBC. On April 24, 1987, an informer, a former employee of SRI, motivated by ill will and obsessed in collecting a reward under Sec. 281, NIRC, filed an information denouncing SBC and SRI, opining that as a result of the amicable settlement, SBC and SRI waived and completely gave away their claims against each other and are therefore subject to and liable for Donor’s Tax prescribed under Secs. 91 and 92 of the NIRC.

CIR Jose Ong denied… saying that SBC and SRI were unregistered partners of the subject property, therefore subject to Corporate Income Tax prescribed under Sec. 24(a) in relation to Sec. 20(b) of the NIRC. The elements of partnership are present in the instant case, to wit: The DOS provided that the parties actually agreed to embark in real estate business by leasing the building to the public. They contributed capital – SRI contributed its ½ equity in the property plus its share of rental income in the leasing business; while SBC also contributed its other ½ equity plus industry including its share from rental income, as the same shall have been realized. This was bolstered by findings of investigating examiners. Since the purpose and activities that arose from the transaction was a leasing business activity, it follows that they did not merely enter into a co-ownership agreement. Rather, they in fact entered into a joint venture and engaged in leasing business, hence, under the law, they have formed a taxable corporation. As to the Donor’s Gift Tax, the CIR found that the outright purchase of SRI’s share in the alleged co-ownership of the MRS building in an amount far less than its fair market value constitutes a donation subject to gift tax. (Gross rental income = P30.89M; Net income = P24.7M; SRI’s share in the total net income = P11.96M; Amount received by SRI by virtue of the compromise agreement for its equity in the property = P1.3M) The difference is clearly subject to donor’s tax irrespective of the donative intent. Furthermore, as a result of the foregoing taxable partnership, the unregistered partnership was assessed 10% Final Withholding Tax on Inter-Corporate Dividends from its undistributed net income. SBC and SRI filed this petition to review the letter decision of the Commissioner of Internal Revenue denying their letter-protest against the following deficiency tax assessments:

1. P15,316,258.23 – deficiency income tax against unregistered partnership of SBC and SRI

2. P6,383,776.99 – deficiency donor’s tax against SRI 3. P732,358.51 – deficiency withholding tax against SRI 4. P732, 358.51 – deficiency withholding tax against SBC

However, pursuant to Revenue Memorandum Orders Nos. 45-93 and 54-93, SBC opted and paid the compromise amount of P2,867,704.76. Consequently, the case against it was withdrawn and deemed closed and terminated by virtue of its availment of the benefits of said

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compromise settlement. SRI, on the other hand, decided to forego this avenue and pursued the present appeal on account of respondent’s alleged obstinate stand against a further reduction of the compromise amount due it in the sum of P4,862,634.76. Petitioners’ argument No partnership created between them, citing Pascual and Dragon v. CIR and CTA, which said that common ownership of property does not itself create a partnership between the owners, though they may use it for the purpose of making gains… In order to constitute partnership inter sese, there must be an intent to form the same; generally participating in both profits and losses; and such community of interest, as far as 3rd persons are concerned as to enable each party to make contract, manage the business and dispose of the whole property. The sharing of returns does no itself establish a partnership whether or not the parties have a joint/common right/interest in the property. There must be a clear intent to form a partnership… Their true intention was not to become partners and operate the acquired property for profit but for it to ultimately sell and convey the acquired property in favor of SBC in the future since the latter was using the building as its Head Office in its banking operations. In the alternative, they argue that the basis of the assessments is whimsical, arbitrary and in gross violation of generally accepted accounting principles. Their alleged rental income were never substantiated by figures and facts and was never proven in court as having been actually realized; that the depreciation on the building was not considered by the CIR in the determination of the net taxable income; and, assuming arguendo that SRI and SBC are unregistered partners, their alleged income was excessive because computation was done in one lump sum and not on a yearly basis, thus resulting in the overstatement of the taxable amount subjected to the 35% bracket, inasmuch as the first P100,000 of the taxable net income was subject to 25% tax only under Sec. 24 of the 1970 Tax Code was deducted only once instead of 16 times. The donation theory was without legal and factual basis. The rental income was never proven in Court nor substantiated by the examiners,

hence the valuation arrived at was erroneous. The judicial compromise agreement was the result of a court case and not by a sham or false proceedings. The valuation f the donation should be based on the DOS because the transaction was more of an exercise of right of ownership, with the termination of co-ownership by way of the judicial compromise agreement being a legitimate exercise. Even if SRI is subject tot ax, the assessment was unjust and excessive because SRI is being penalized to pay for the entire valuation of the property/equity, when as a co-owner it is entitled only to ½. CIR’s right to assess and collect the alleged deficiencies has prescribed. Sec. 235 of the Tax Code provides that books and accounts shall be subject to texamination only once in a taxable year, except on specified cases, but the reinvestigation of their cases was not in accordance therewith. Cir never imputed any fraud committed by them, hence the exceptions as to the period of limitation of assessment and collection under Sec. 223 of the Tax Code do not apply. Lastly, they reserved their right to submit tax amnesty returns which may have been availed of by them during the period in question. However, in its memorandum, only SRI raised the issue of its availmet of a tax amnesty. ISSUES: 1. Whether SRI and SBC, by virtue of the DOS, have thereby formed an unregistered partnership which is subject to corporate income tax prescribed under Sec. 24(a) in relation to Sec. 20(b) of the Tax Code. [relevant] 2. If the 1st issue is in the affirmative, whether the unregistered partnership is subject to 10% withholding tax on inter-corporate dividends beginning Aug. 24, 1975 to 1984 from its undistributed net income. 3. Whether the Compromise Agreement enterd into by SRI and SBC constitutes a transfer of property for less than adequate and full consideration as provided under Sec. 93 of the Tax Code, thus making it liable to donor’s tax. RULING: 1. Under the DOS, SRI and SBC entered into a co-ownership and not an unregistered partnership. [relevant]

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2. The assessment of withholding tax on inter-corporate dividends on account of the alleged unregistered partnership is without basis because no partnership existed between SRI and SBC. 3. The assessment of donor’s tax is without basis and invalid due to the availment by SRI of a Tax Amnesty under EO 41 covering the years. 1981 to 1985. The alleged donation arose by virtue of the Compromise Agreement signed on Aug. 28, 1984, hence, covered by the tax amnesty. RATIO (on issue #1 only): Under the DOS, SRI and SBC entered into a co-ownership and not an unregistered partnership. The agreement for administration of property is but a mere incident of co-ownership and not an act with intention to engage in a mutual fund for profit or business. The law applicable is Art. 1767, CC (definition of the contract of partnership) which prescribes 2 essential elements of a partnership: (a) an agreement to contribute money, property or industry to a common fund, and (b) intent to divide the profits among the contracting parties. However, no agreement, direct or implied, was reached by SRI and SBC to purposely contribute money, property or industry to a common fund, and no such intent to divide the profits arising from the use of the common fund in a business activity was ever contemplated. A close reading of the DOS clearly shows that the parties entered into a transaction involving sale of property, which gave SBC the option to buy the pro-indiviso ½ ownership and interest of SRI over the subject property within 5 years from its execution. Furthermore, in 1967 or 68, without the prior approval and consent of SRI and contrary to the terms of the DOS, SBC demolished the ½ portion of the building and constructed on the demolished site a new 10-storey building. SRI did not appear in the assessment rolls and in the Mayor’s Permit of said building. There is no intent to form a partnership over the property. SBC mainly acted on its own in handling its business affairs. The mere circumstance of profit sharing is not indicative of partnership. The SC regarded as necessary in determining the existence of a partnership the intent to form a partnership, existence of a juridical personality different from that of the individual partners and the freedom to transfer/assign any interest in the property with the consent of the other.

In this case, the CIR bolstered the finding that SRI and SBC were engaged in the leasing business by solely relying on the terms and conditions of stipulated under Article III (Agreement for Administration) in the DOS. A scrutiny of that article would reveal that SBC has been given authority by SRI to: (1) principally administer and manage the building and its operations, and (2) to make improvements and remodeling of the building and to make sufficient funds to finance such in accordance with the specification both parties may agree upon. It was also stipulated therein that the net income on the gross rental received after expenses shall be divided equally among themselves; that SRI shall pay its share of the cost of the building improvements and/or remodeling from its share of the rental income; and that if SBC does not exercise its option to buy, said cost due from SRI shall be charged against SRI’s share of rental income until the expense is full liquidated. The existence of a juridical personality different from that of the individual partners is absent in this case: (1) Co-owners who share any profits made by their use of the property does not by itself establish a partnership. Although SRI and SBC realized net income/profit from the lease of their building, such fact does not per se mean that they are engaged in partnership. Aside from the circumstance of profit, the presence of other elements constituting partnership must be considered; (2) SRI and SBC did not create a common fund in order to engage in leasing business activity. The original building has 4 stories and SBC had the preference to occupy the 1st and 2nd floors thereof as well as other available space therein as it may be required for its business. Upon the completion of the construction of the 10-storey building by SBC, the latter occupied at least 85% of the rentable area inclusive of the remaining portion of the 4-storey building. Since SBC occupied more than half of the 2 buildings for its own business needs, the intent is evident that SBC bought ½ of property for its own personal use. Moreover, the act of SBC in constructing the building without the consent of SRI negates any mutual agreement between them to forma partnership. The DOS only talked of making improvements and remodeling, not the demolition and construction of a new building. The civil case between them to end their co-ownership attempted to resolve

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the aspect of their respective share of the net income due owing through the years. Furthermore, the parties retained title to their respective share of the properties; (3) SRI and SBC only entered into an isolated transaction. They simply bought and co-owned the 4-storey building inclusive of the land where it stands and invested nothing more. The act of leasing the building cannot be deemed as a series of transactions indicating habituality, because SBC mainly occupied the rentable areas thereof for nearly 20 years for its personal use. If the parties really formed a partnership, SBC would not have allowed itself to be charged profit/gain over the ½ property it rightfully owns and shares with SRI. It was more plausible for SBC to pay ½ of the building administration expenses only or let the building premises to others for profit, unless the real intent was to manage the property in co-ownership. But inasmuch as the property was co-owned pro-indiviso, it was more convenient and logical for the parties to collect rental and divide the net income after expenses than to occupy specific areas of the building which would be tantamount to partition already. The supposed net income received by SBC was in actuality a mere return of capital/money it owned and paid for the rentals; (4) There is no authority given to SBC to transfer or assign any interest in the property which may be construed as indicative of partnership. The DOS granted only acts of administration. The leasing of the rentable areas was an act of administration and not one involving alienation of ownership or interest. (5) No administration fee was given to SBC in its administration of the building. If the parties were in a partnership business, labor or services rendered must necessarily be compensated. In Pascual v. CIR, the SC differentiated co-ownership and partnership, to wit: Persons who contribute property/funds for a common enterprise and agree to share in the gross returns of hta tneterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not partners. They have no common stock capital, and no community of interest as principal proprietors in the business itself which the proceeds were derived. A joint purchase of

land by two does not constitute a co-partnership in respect thereto, nor does an agreement to share the profits and losses on the sale of land create a partnership; the parties are only tenants in common. The common ownership of property does not itself create a partnership between the owners though they may use it for the purpose of making gains; and they may, without becoming partners, agree among themselves as to the management and use of such property and the application of the proceeds therefrom. DISPOSITIVE: Assessment of deficiency income tax, donor’s tax and withholding tax cancelled and withdrawn.

MARUBENI V. CIR CIR v. Procter & Gamble and CTA

December 2, 1991 Feliciano, J.

Oswald P. Imbat Note: Computations were not included as they are too long.

SUMMARY: P&G (Phils.) paid taxes for the dividends it remitted to P&G (USA) with a rate of 35% for 2 taxable years. Subsequently, however, it filed a claim with the CIR for refund or grant of tax credit, contending that the applicable rate is 15%. Failing to obtain a responsive action from the CIR, it filed a petition with the CTA, which upheld its contention. The SC originally reversed. However, on reconsideration, it reinstated the CTA decision, on the ground that the requisites under Section 24(b)(1), NIRC were complied with. DOCTRINE: The term "taxpayer" is defined in the NIRC as referring to "any person subject to tax imposed by the Title [on Tax on Income]." Under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made "personally liable for such tax" and indeed is indemnified against any claims and

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demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. As such, the withholding agent is properly regarded as a taxpayer who may file a claim for refund or tax credit.

FACTS:

For the taxable years 1974 (ending on June 30, 1974), and 1975 (ending June 30, 1975), Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA), amounting to P24,164,946.30, from which P8,457,731.21 (35% withholding tax at source) was deducted.

On January 5, 1977, P&G (Phils.) filed with the CIR a claim for refund or tax credit of P4,832,989.26, claiming, inter alia, that pursuant to Section 24(b)(1), NIRC, as amended by PD 369, the applicable rate of withholding tax on the dividends remitted was only 15%, not 35%.

Since there was no responsive action from the CIR, P&G (Phils.) Filed a petition for review with the CTA, which ordered the refund or grant of tax credit for the amount claimed.

The SC, however, reversed on the grounds that: (1) it is P&G (USA) which is the proper party to claim refund or tax credit, (2) the US Tax Code does not allow credit against the US tax due from P&G (USA) of taxes paid in the Philippines equivalent to 20% [see Issue 3 for this to make sense], and (3) P&G (Phils.) failed to meet certain conditions necessary to qualify under the preferential tax rate of 15% imposed on dividends received by P&G (USA).

P&G (Phils.) moved for reconsideration. ISSUES/RULINGS: Whether

[1] Does P&G (Phils.) have capacity to bring the claim for refund or tax credit? BIR cannot raise the issue anymore.

[2] [Still in relation to capacity to bring the action] Is P&G (Phils.) a taxpayer under Section 309(3), NIRC? Yes.

[3] Should the 15% tax rate be applied to the dividend remittances by P&G (Phils.) to P&G (USA)? Yes.

[4] Is it required that P&G (USA) is actually granted the "deemed paid" tax credit before the dividend tax rate be reduced to 15%? No.

RATIO:

[1] Since BIR failed to raise the question on the administrative level or even in the CTA, it cannot now be raised for the first time on appeal. Had it so raised the issue on the administrative level, P&G (Phils.) could have secured authorization from P&G (USA) before filing the action.

In any case, since the withholding agent is an agent of the taxpayer, his authority may reasonably be held to include the filing of a claim for refund and to bring an action for recovery of such claim, especially in this case since P&G (Phils.), the withholding agent, is a wholly-owned subsidiary of P&G (USA), and at all times under its effective control.

Even now, BIR may require a confirmation of the authority of P&G (Phils.) to pursue the claim, before it actually pays the refund or issue the tax credit certificate. It unfair to deny liability of the government simply because the BIR did not demand a written confirmation of the implied authority from the very beginning.

Thus, P&G (Phils.) is properly regarded as a taxpayer under Section 309, and, as such, impliedly authorized to file the claim.

[2] Under Section 306, NIRC, a claim for refund or credit filed with the CIR must be first made before instituting a suit or proceeding for recovery of taxes. Also, under Section 309(3), no claim for refund or credit is allowed unless the taxpayer filed in writing with the CIR a such claim within 2 years after payment.

A determination of whether P&G (Phils.) is a taxpayer under the latter provision is thus necessary.

The term "taxpayer" is defined in Section 20(n) as referring to "any person subject to tax imposed by the Title [on Tax on Income]." Under Section 53(c), the withholding agent who is "required to deduct and withhold any tax" is made "personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms "liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is

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very difficult, indeed conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.

A withholding agent is in fact the agent both of the government (in collecting tax) and of the taxpayer (in filing the ITR and payment to the government). The withholding agent is no ordinary government agent since under Section 53(c) he is held personally liable for the tax he is duty bound to withhold.

[3] Under Section 24(b)(1)2 the ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to 15% 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. In other words, the reduced 15% dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach 20% representing the difference between the regular 35% and the preferred 15%.

Section 24 (b)(1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20%) waived by the Philippines in making applicable the preferred dividend tax rate of 15%. In other words, NIRC does not require that the US tax law deem the parent-corporation to have paid the 20% of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-

2 (b) Tax on foreign corporations. --

(1) Non-resident corporation. -- A foreign corporation not engaged in trade and business in the Philippines, x x x, shall pay a tax equal to 35% of the gross income receipt during its taxable year from all sources within the Philippines, as x x x dividends x x x. Provided, still further, that on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this Section x x x."

USA a "deemed paid" tax credit in an amount equivalent to the 20% waived by the Philippines. [I don't get it.]

The question, therefore, is whether US law complies with the requirement. An examination of the US Tax Code reveals that:

(1) US law (Section 901) grants P&G (USA) a tax credit for the amount of the dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;

(2) US law (Section 902) grants P&G (USA) a "deemed paid" tax credit for a proportionate part of the corporate income tax actually paid to the Philippines by P&G (Phils.).

Thus, 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. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket of P&G-USA as a part of the economic cost of carrying on business operations here. This is to avoid or reduce double taxation of the same income stream.

Is the tax "deemed to have paid" by the P&G (USA) equal to at least the amount of dividend tax waived by the Philippines (20%)? To determine this, the amount of the 20% tax waived and the amount of the "deemed paid" tax credit should be compared.

Assuming the pretax corporate income is P100, the 20% dividend tax waived is P13. Under the US Tax Code, the income tax "deemed paid" by the P&G (USA) is P29.75, much higher than P13. Thus, there is compliance with Section 24(b)(1), NIRC.

The reading made is identical with the reading of the BIR of the relevant US Tax Code provisions, as shown by administrative rulings, such as BIR Ruling No. 76-004, issued in 1976. The applicable rate therefore for the dividends is 15%.

[4] The original decision of the SC 2nd Division held that P&G (Phils.) failed to prove that P&G had in fact been given a "deemed paid" tax credit. However, this issue is not a legal one, but relates to the administrative implementation of the reduced tax rate. The legal question is which rate applies.

Further, Section 24(b)(1) does not require that the "deemed paid" tax credit shall have actually been granted before reduction of the rate, as evidenced by the phrase "shall allow." Also, the provision does not provide for a tax exemption or tax credit, but specifies when a particular tax rate is legally applicable. Since the requisites are complied with in this case, the tax rate is 15%.

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Also, the original decision results in administrative circularity, since the US "deemed paid" tax credit cannot be given unless dividends have actually been remitted under the reduced rate. As such, reduction will never happen. This is to be avoided.

An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily the correct reading of the statute. There are many tax statutes or provisions which are designed, not to trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to the legislative design and objectives as they are written into the statute even if, as in the case at bar, some revenues have to be foregone in that process. In this case, the policy is to encourage the in-flow of foreign equity investment by reducing tax cost of earning profits in the country.

The reduction of the dividend tax rate, it is noted, is in conformity with the Philippines-US Convention With Respect to Taxes on Income, where the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of 20%. DISPOSITIVE: The CTA decision ordering refund or tax credit was reinstated.

CIR v. Visayas Electric 27 May 1968

Justice Sanchez Lindain

SUMMARY: Visayas Electric is a holder of a legislative franchise to operate and maintain an electric light, heat, and power system in Cebu. In the meeting of the board of directors, the company established a pension fund known as the “Employees’ Reserve for pensions”. Said funds is for the benefit of its present and future employees, in the event of retirement, accident or disability. This reserve fund was later on invested in stocks of San Miguel Brewery for which dividends have been regularly received. The CIR assessed deficiency income tax, additional residence tax, and 25% surcharge for late payment of franchise tax, against Visayas Electric. The CTA sustained the liability for additional residence tax assessment but

freed the company from liability for deficiency income tax and surcharge for late payment of franchise taxes. The Supreme Court affirmed CTA Decision. DOCTRINE: For tax purposes, the employees’ reserve fund is a separate taxable entity. To qualify for exemption, the employees' trust must refer to a definite program, scheme or plan. It must be set up in good faith. It must be acturially sound. Under such plan, employees generally are to be extended retirement and pension benefits.

FACTS:

1. Visayas Electric Company is a holder of a legislative franchise, Act 3499 to operate and maintain an electric light, heat, and power system in Cebu.

2. In the meeting of the board of directors, Visayas Electric established the “Employees’ Reserve for Pesnions”.

a. Said fund is for the benefit of its present and future employees, in case of retirement, accident or disability.

b. Every month an amount has been set aside for this purpose. It is taken from the gross operating receipts of the company.

3. Visayas Electric later invested this reserve fund in stocks of San Miguel Brewery, Inc., for which dividends have been regularly received. But these dividends were not declared for tax purposes.

4. In a letter, the Auditor General gave notice that the dividends are not tax exempt since the company has retained full control of the fund.

a. However, such dividends may be excluded from gross receipts for franchise tax purposes provided the same are declared for income tax purposes.

b. The Provincial Auditor allowed the Visayas Electric the option to declare dividends either as part of company’s income for income tax purposes or as part of its income for franchise tax purposes.

c. Visayas Electric elected that the dividends be considered as part of its income for franchise tax purposes.

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5. The Revenue Examiner conducted a separate investigation for BIR.

a. The Revenue Examiner considered the dividends as subject to corporate income tax under Sec. 25 of the NIRC.

b. The report further disclosed that in the years 1957, 1958 and 1959, some payments of the franchise tax were made after 15 days of the month following the end of each calendar quarter, contrary to Sec. 259 of the Tax Code, which imposes a 25% surcharge if the franchise tax remains “unpaid for 15 days from and after the date on which they must be paid”

c. From 1954 to 1959, the Visayas Electric had not paid additional residence tax.

6. With the foregoing report as basis, the CIR, in two letters of demand assessed the following against the company:

a. Deficiency income tax for 1953 to 1958, plus interest and 50% surcharge

b. Additional residence tax from 1954 to 1959 c. 25% surcharge for late payment of franchise taxes for

1957, 1958 and 1959 7. The CTA sustained the correctness of the additional residence

tax assessments but freed Visayas Eelectric from liability for deficiency income tax and the 25% surcharge for late payment of franchise tax

ISSUES:

1. [Relevant] Is Visayas Electric liable for deficiency income tax on dividends from the stock investment of its employees’ reserve fund for pensions? NO. But is it liable for individual income tax.

2. Is Visayas Electric liable for 25% surcharge on alleged late payment of franchise tax? NO.

RATIO:

1. The investment of the fund in shares of stocks is not part of Visayas Electric’s business. The disputed income are not receipts, revenues or profits of the company. They do not go to the general fund of the company. They are dividends from San

Miguel Brewery investment which form part of and are added to the reserve pension fund which is solely for the benefit of the employees.

The setting aside of monthly amounts from its gross operating receipts for the pension fund shows that Visayas Electric was merely acting as a trustee of its employees. The intention to establish a trust in favor of the employees is clear. A valid express trust has been created. And, for tax purposes, the employees’ reserve fund is a separable tax entity. Which law should be applied for the employees’ trust for tax exemption? It should be Section 563 of the Tax Code. An amendment4 to Sec 56 singles out employees’ trust for tax

exemption. However, wanting are sufficient data which would justify the

3 SEC. 56. Imposition of tax — (a) Application of tax. — The taxes imposed by this Title upon individuals shall apply to the income of estate or of any kind of property held in trust, including —

(1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests and income accumulated or held for future distribution under the terms of the will or trust;

x x x x x x x x x

(c) Computation and payment —

(1) In general. — The tax shall be computed upon the net income of the estate or trust and shall be paid by the fiduciary, except as provided in Section fifty-nine (relating to revocable trust) and section sixty (relating to income for the benefit of the grantor); 4 (b) Exception. — The tax imposed by this Title shall not apply to employees' trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other then for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.

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SC to make conclusive statement that the trust qualifies under Sec. 56(b)f. The only written evidence or record of the creation of the pension trust is the minutes of the board of directors’ meeting. Nothing extant in the record will show a pension plain actuarially sound. Coming into play then is the specific provision in paragraph (a), Section 56, heretofore transcribed, which directs that the "taxes imposed by this Title upon individuals shall apply to the income ... of any kind of property held in trust." For which reason, the income received by the employees' trust fund from January 1, 1957 is subject to the income tax prescribed for individuals under Section 21 of the Tax Code. 2. In determining whether Visayas Electric was late in the payment of its franchise taxes, Sec. 2595 of the NIRC, Sec. 183(a)6 of the NIRC, and Visayas Electric’s legislative franchise7, must be considered. The CIR argues that the phrase “due and payable quarterly” in the franchise means that the tax is immediately demandable at the end of each calendar quarter. Since the franchise itself sets the time limit for the payment of the franchise tax, Sec. 183 does not apply. Consequently, 25% surcharge would be collectible if the percentage taxes remain unpaid after 15 days from the end of each calendar quarter. The Supreme Court held that the term “due and payable quarterly” merely indicates the frequency of payment of the franchise

5 SEC. 259. Tax on corporate franchises. — ....The taxes, charges, and percentages on corporate franchises, shall be due and payable as specified in the particular franchise, or in case no time limit is specified therein, the provisions of section one hundred and eighty-three shall apply; and if such taxes, charges, and percentages remain unpaid for fifteen days from and after the date on which they must be paid, twenty-five per centum shall be added to the amount of such taxes, charges, and percentages, which increase shall form part of the tax.

6 SEC. 183. Payment of percentage taxes. — (a) In general. — It shall be the duty of every person conducting a business on which a percentage tax is imposed under this Title, to make a true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings, or gross value of output actually removed from the factory or mill warehouses and within twenty days after the end of each month, pay the tax due thereon:.... 7 ... Said percentage shall be due and payable quarterly

tax, i.e., every three months. It does not refer to the time limit or, in language of Sec. 259, “the date on which the taxes must be paid”. Under Section 183(a) in relation to Section 259, second paragraph, the law has opted to collect the tax within twenty days after it becomes due and payable, namely, the last day of each quarter. The time limit or the date on which the percentage tax must be paid by the company is the twentieth day after the last day of each quarter. Section 259 grants another grace period of fifteen days from the termination of this time limit before imposing the 25% surcharge. The tax cannot be immediately demandable at the end of each calendar quarter. Reason for this is that transactions on the last day of the quarter must have to be included in the computation of the taxpayer's return for each particular quarter. It is impossible for the taxpayer to add up his income, write down the deductions, and compute the net amount taxable as of the last working hour of the last day of the quarter, and at the same time go to the nearest revenue office, submit the quarterly return and pay the tax.

This accounts for the fact that Section 183(a) of the National Internal Revenue Code gives the taxpayer a leeway of twenty days after the end of each quarter to do all of these. And by Section 259, it is only upon failure to pay for fifteen days "from and after the date on which they must be paid" that the twenty-five per centum shall be added to the amount of "taxes, charges, and percentages," on corporate franchises. Statutes are not to be so narrowly read as to beget unreasonableness.

The SC ruled that the franchise tax must be paid within 20 days after the end of each quarter and that if such tax remaind unpaid for 15 days from and after the date on which they must be paid, then 25% shall be added to the amount due. No surcharge for late payment of Visayas Electric’s franchise taxes accrue. DISPOSITIVE: The judgment under review is hereby AFFIRMED insofar as it reverses petitioner's assessment of surcharge for late payment of respondent company's franchise tax;34 and

Said judgment is hereby REVERSED insofar as it exempts respondent company from the payment of deficiency income tax, in the sense that respondent company, in its capacity as fiduciary of its employees'

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reserve fund, is hereby declared liable for the payment of individual income tax set forth in Section 56(a) in connection with Section 21 of the National Internal Revenue Code; and

Conformably to the opinion expressed herein, let the record of this case be returned to the Court of Tax Appeals with instructions to hear and determine the tax liability of the trust known as "Employees' Reserve for Pensions" and/or tax refund, if any, to respondent Visayan Electric Company, upon the dividends received during the years 1953 to 1958 on the investment of its employees' reserve fund for pensions, and tax payments made by reason thereof, said tax to be computed in accordance with Section 56(a) and (c) of the National Internal Revenue Code in relation to Section 21 of the same Code. DISSENTING OPINION: NONE CONCURRING OPINION: NONE

COMMISSIONER OF INTERNAL REVENUE v CA, THE COURT OF

TAX APPEALS, GCL RETIREMENT PLAN

March 23, 1992 Melencio-Herrera, J

Ana Lomboy

SUMMARY: Private respondent GCL Retirement Plan (GCL) is an employees’ trust maintained by the employer, GCL Inc, to provide retirement, pension, disability and death benefits to its employees. The Plan was approved and qualified as exempt from income tax by CIR in accordance with RA 4917. Petitioner GCL made investments in 1984 and earned income therefrom. However, a final withholding tax of 15% from the interest income was withheld by Anscor Capital and Investment Corp and by Commercial Bank of Manila. GCL filed a claim for refund with the CIR alleging that it is an entity fully exempt from

income tax as provided under RA 4917 in relation to Sec. 56 (b) of the Tax Code. The CIR denied the refund request. GCL appealed to the CTA and the latter ruled in favor of GCL and upheld its exemption. The CA upheld the ruling of the CTA. DOCTRINE: Sec. 56(b) of the Tax Code specifically exempts employees’ trusts, as distinguished from any other kind of property held in trust. Manifest therefrom is that the tax law has singled out employees’ trust for tax exemption. Employees’ trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingenices, 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. A law granting specific exemption cannot be amended or repealed by a general law.

FACTS:

1. Private respondent GCL Retirement Plan (GCL) is an employees’ trust maintained by the employer, GCL Inc, to provide retirement, pension, disability and death benefits to its employees. The Plan was approved and qualified as exempt from income tax by CIR in accordance with RA 4917.

2. Petitioner GCL made investments in 1984 and earned income therefrom. However, a final withholding tax of 15% from the interest income was withheld by Anscor Capital and Investment Corp and by Commercial Bank of Manila amounting to P1,312.66 and P2,064 respectively. Anscor also withheld an additional P7,925 as tax on the interest earned by GCL’s investment.

3. GCL filed a claim for refund with the CIR alleging that it is an entity fully exempt from income tax as provided under RA 4917 in relation to Sec. 56 (b) of the Tax Code. The CIR denied the refund request. According to the CIR, PD 1959 abolished the exemption of interests on bank deposits from withholding tax.

HISTORY OF AMENDMENTS A. RA 1983 (June 22, 1957) – employees’ trust were

exempt from income tax (Sec. 56 (b)).

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B. PD 1156 (June 3, 1977) – provided, for the first time, for the withholding from the interest on bank deposits at the source of a tax of 15 % of said interest. It also allowed a specific exemption: In all cases where the depositor is tax-exempt or is enjoying preferential income tax treatment under existing laws, the withholding tax imposed in this paragraph shall be refunded or credited x x x

C. PD 1739 (September 17, 1980) – exemption and preferential tax treatment were carried over; final tax increased to 20%

D. PD 1959 (October 15, 1984) – exemption from withholding tax on interest on bank deposits previously extended by PD 1739 were no longer present in this amendment

4. GCL appealed to the CTA and the latter ruled in favor of GCL and upheld its exemption. The CA upheld the ruling of the CTA.

Petitioner’s argument: The deletion of the exempting and preferential tax treatment provisions under the old law is a clear manifestation that the tax is imposable on all recipients of income. When PD 1959 was promulgated, employees’ trusts ceased to be exempt and thereafter became subject to the final withholding tax. GCL’s argument: The tax exempt status of the employees’ trusts applies to all kinds of taxes, including the final withholding tax on interest income. The exemption is derived from Sec. 56(b) and not from Sec. 21(d) or 24(cc) of the Tax Code. ISSUES: 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 PD (1959)? RULING: GCL is exempt from the final withholding tax on interest income. RATIO:

1. GCL Plan was qualified as exempt from income tax by the CIR in accordance with RA 4917.

a. Sec. 1 of RA 4917 states any provision of law to the contrary nothwithstanding, the retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes x x x

b. The abovementioned provision shall be taken in relation to Sec. 56 (b) (now 53(b)) of the Tax Code, as amended by RA 1983, which specifically exempted employee’s trusts from income tax. For reference, Sec. 56 (b): “the tax imposed by this title (income tax) shall not apply to employee’s trust which form part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees”

2. Manifest therefrom is that the tax law has singled out employees’ trust for tax exemption. Employees’ trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingenices, 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.

3. The tax advantage was conceived to encourage the formation and establishment of such private Plans for the benefit of laborers and employees outside the Social Security Act, as explained in explanatory note to HB no. 6503, now RA 1983.

4. The deletion in PD 1959 of the provisos regarding tax exemption cannot be deemed to extent to employees’ trusts.

a. PD 1959 is a general law that cannot repeal a specific provision by implication.

b. A subsequent statute, general in character as to its terms and application, is not to be construed as repealing a special or specific enactment, unless the legislative purpose to do so is manifested.

5. Petitioner also relies on Revenue Memorandum Circular 31-84 and Bureau of Internal Revenue Ruling No. 027-e-000-00-005-

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85, which pronounced the deletion of the exempting and preferential tax treatment provisions by PD 1959.

a. Since PD 1959 did not have the effect of revoking the tax exemption enjoyed the employees’ trusts, reliance on these authorities are now misplaced

DISPOSITIVE: Writ of Certiorari prayed for is DENIED. The judgment of respondent Court of Appeals, affirming that of the Court of Tax Appeals is UPHELD. No Costs. DISSENTING OPINION: ONLY if the professor asks for dissenting opinion. (CAMBRIA 10) CONCURRING OPINION: ONLY if the professor asks for concurring opinion (CAMBRIA 10)

CIR v. CA October 14, 1998

Panganiban, J Luciano, Noel Christian O.

SUMMARY: YMCA earned income from leasing out a portion of its premises to small show owners like canteens and from parking fees collected from non-members. CIR issued an assessment for deficiency income tax. YMCA protested invoking exemption from income tax. CTA ruled in favor of the CIR. CA reversed. SC reversed the SC and held that YMCA is not exempt from income tax. DOCTRINE: Strictissimi juris in tax exemptions. The exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then Sec. 27 NIRC which mandates that the income of exempt organizations (such as YMCA) from any of their real properties, real or personal, be subject to the tax imposed by the same Code. A reading of said paragraph shows that the income from any property of exempt organizations, as well as that arising from any activity it conducts for profit, is taxable. YMCA argues that Art. VI, Sec. 28, par. 3 Constitution exempts “charitable institutions” from the payment not only of property taxes but also of income tax from any source. The Court did not agree and

reiterated that YMCA is exempt from the payment of property tax, but not income tax on the rentals from its property. YMCA also claims exemption under Sec. 4, par.3, Art. XIV of the Constitution. But for YMCA to be granted the exemption it claims under par. 3, Sec.4, Art. XIV, it must prove with substantial evidence that: (1) It falls under the classification of non-stock, non-profit educational institution; and (2) The income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. No evidence was offered to prove these elements. Besides, YMCA is NOT an educational institution within Sec. 4, par. 3, Art. XIV.

FACTS: Young Men’s Christian Association of the Philippines (YMCA), is a non-stock, non-profit institution conducting various programs and activities beneficial to the public, especially young people, pursuant to its religious, educational and charitable objectives. In 1980, YMCA earned, among others the following income:

1. P676,829 – from leasing out a portion of its premises to small shop owners like restaurants and canteen

2. P44,259 from parking fees collected from non-members The CIR issued an assessment to YMCA, totaling P415,615.01 including surcharge and interest for:

1. Deficiency income tax 2. Deficiency expanded withholding taxes on rentals and

professional fees 3. Deficiency withholding tax on wages

YMCA formally protested said assessment and filed a letter to the CIR. CIR denied YMCA’s claim. YMCA then went to the CTA via petition for review. CTA DECISION: CTA ruled in favor of YMCA and held:

1. The leasing of facilities to small shop owners and the operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of YMCA

2. The facilities were leased to members and they have to service the needs of its members and guests

3. The rentals were minimal

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4. There was no actual lot devoted for parking space as the parking was done at the sides of the building

5. Rentals and parking fees were just enough to cover costs of operation and maintenance

6. Earnings from these rentals and parking charges including other sources are the main source of income which is channeled to support its many activities since the membership dues are very insufficient

7. As such, the following assessments are dismissed: a. Deficiency fixed tax b. Deficiency contractor’s tax c. Deficiency income tax

8. The following assessments are sustained: a. Deficiency expanded withholding tax b. Deficiency withholding tax on wages

FIRST CA DECISION: CIR elevated the case to the CA. The CA initially decided in favor of the CIR and held:

1. Following Province of Abra v. Hernando and Abra Valley College v. Aquino, the ruling of the CTA should be reversed

YMCA asked for reconsideration of the CA decision RECONSIDERED CA DECISION: The CA reversed itself and promulgated a decision holding that YMCA is not taxable for its income. Hence, this petition before the SC ISSUE: WON YMCA is subject to income tax. RULING: YES, YMCA’s income is taxable. RATIO:

I. [IRRELEVANT] It is a basic rule in taxation that the factual findings of the CTA when supported by substantial evidence, will be disturbed on appeal unless it is shown that the said court committed gross error in the appreciation of facts A. The CA did not deviate from this rule

1. The CA merely applied the law to the facts as found by the CTA and ruled on the issue raised by the CIR

B. The CA did not alter any fact or evidence C. So the CA did not doubt, much less change, the facts as

narrated by the CTA

II. [RELEVANT] YMCA’s income is taxable. A. Relevant provision of the NIRC: Sec. 278

B. Discussion on Tax Exemptions

1. It is the lifeblood of the country; strict interpretation is applied

2. A claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based

C. The exemption claimed by the YMCA is expressly

disallowed by the very wording of the last paragraph of then Sec. 27 NIRC which mandates that the income of exempt organizations (such as YMCA) from any of

8 Sec. 27. Exemptions from tax on corporations. — The following

organizations shall not be taxed under this Title in respect to income received by them as such — xxx xxx xxx (g) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member; xxx xxx xxx Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to the tax imposed under this Code. (as amended by Pres. Decree No. 1457)

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their real properties, real or personal, be subject to the tax imposed by the same Code. 1. Hence, we abide strictly by the law’s literal meaning 2. This provision unequivocally subjects to tax the

income of the YMCA from its real property

D. YMCA argues that the last paragraph of Sec. 27 should be subject to the qualification that the income from the properties must arise from activities “CONDUCTED FOR PROFIT” before it may be considered taxable 1. SC: This is erroneous! 2. A reading of said paragraph shows that the income

from any property of exempt organizations, as well as that arising from any activity it conducts for profit, is taxable a. “any of their activities conducted for profit” does

not qualify the word “properties” b. This makes the property of the organization

taxable, regardless of how that income is used – profit or non-profit

E. The CA committed error when it allowed the tax

exemption claimed by YMCA on income it derived from renting out its real property, on the solitary but unconvincing ground that the said income is not collected for profit but is merely incidental to its operation 1. The law does not make a distinction 2. The rental income is taxable regardless of whence

such income is derived and how it is used or disposed of

F. YMCA argues that Art. VI, Sec. 28, par. 3 Constitution exempts “charitable institutions” from the payment not only of property taxes but also of income tax from any source 1. YMCA presents 3 points:

a. The present provision is divisible into 2 categories:

(1) Charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques and non-profit cemeteries, the incomes of which are, from whatever source, all tax exempt

(2) All lands, buildings, and improvements actually and directly used for religious, charitable or educational purposes, which are exempt only from property taxes

b. Lladoc v. CIR, which limited the exemption only to property taxes refers only to the 1935 Constitution

c. The phrase “all lands, buildings, and improvements” but also to the above-quoted first category which includes charitable institutions like YMCA

2. SC does not agree. a. From the ConCom records: what is exempted is

not the institution itself; those exempted from real estate taxes are lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes

b. Justice Vitug concurs, stating that the tax exemption covers property taxes only

3. The Court reiterated that YMCA is exempt from the payment of property tax, but not income tax on the rentals from its property a. The bare allegation alone that it is a non-stock,

non-profit educational institution is insufficient to justify its exemption

G. YMCA also claims exemption under Sec. 4, par.3, Art. XIV of

the Constitution 1. For YMCA to be granted the exemption it claims

under par. 3, Sec.4, Art. XIV, it must prove with substantial evidence that: a. It falls under the classification of non-stock,

non-profit educational institution; and

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b. The income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes

2. In this case, there is no evidence to prove such 3. YMCA is NOT an educational institution within Sec.

4, par. 3, Art. XIV a. Under the Educational Act of 1982, such term

refers to schools. The school system is synonymous with formal education

b. A perusal of YMCA’s Articles of Incorporation and By-Laws, there is nothing in them that shows that it is a school or educational institution

DISPOSITIVE: The petition is granted. CA decision reversed and set aside. Original CA decision reinstated. Income derived by YMCA from rentals of its real property is subject to income tax.

CIR v. CA, CTA, and Ateneo April 18, 1997 Panganiban, J.

Manzano

SUMMARY: Ateneo’s Institute of Philippine Culture (IPC) receives sponsorship for its research. CIR assessed IPC for contractor’s tax. The issue resolved here is: In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine Culture, is the Ateneo de Manila University performing the work of an independent contractor and thus taxable within the purview of then Section 205 of the National Internal Revenue Code levying a three percent contractor's tax? SC, CA, and CTA ruled in the negative. SC found that IPC is not a contractor within the purview of the law. And the money received by it does not constitute a fee, but rather gifts and donations to an educational institution which are exempted from tax. DOCTRINE: (Implied) By applying strict construction of tax laws against the government, it should be sufficiently proven that the person being taxed is within the coverage of the law. Only after such coverage is shown that the rule of construction on tax exemptions are to be strictly construed against the taxpayer.

Section 123 of the National Internal Revenue Code provides for the exemption of gifts to an educational institution.

FACTS: Ateneo is a non-stock, non-profit educational institution with auxiliary units and branches all over the Philippines. One of its auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality separate and distinct from that Ateneo. IPC is a Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international organizations, private foundations and government agencies. On 1983, received from CIR a demand letter assessing Ateneo the sum of P174,043.97 for alleged deficiency contractor's tax, and the sum of P1,141,837 for alleged deficiency income tax. Ateneo sent CIR a lter protest denying said tax liabilities and subsequently filed a memorandum contesting the validity of the assessments. CIR rendered a letter-decision canceling the assessment for deficiency income tax but modifying the assessment for deficiency contractor's tax by increasing the amount due to P193,475.55. Unsatisfied, Ateneo requested for a reconsideration of the modified assessment. It also filed in the CTA a petition for review. While the petition was pending before the CTA, CIR issued its final decisionreducing the assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest.

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CIR’s argument: Ateneo falls under the definition of an "independent contractor" and is not among the aforementioned exceptions, it is subject to the 3% contractor's tax imposed under the same Code. CTA cancelled the deficiency contractor’s tax. CA affirmed the CTA, hence, this petition. ISSUES: 1. WON Ateneo, receiving through IPC, sponsorships for its research activities is engaged contractual work as to subject it to 3% contractor’s tax under the NIRC? RULING: NO. Tax rules should be construed strictly against the state. Before Ateneo proves that it is exempted it should first be proven whether it is within the coverage of the tax law. Ateneo was not proven to be a contractor thus it is not liable for contractor’s tax. Section 205 of the National Internal Revenue Code reads: Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of three per centum of the gross receipts is hereby imposed on the following:

xxx xxx xxx (16) Business agents and other independent contractors, except persons, associations and corporations under contract for embroidery and apparel for export, as well as their agents and contractors, and except gross receipts of or from a pioneer industry registered with the Board of Investments under the provisions of Republic Act No. 5186;

xxx xxx xxx The term "independent contractors" include persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. The term "independent contractor" shall not include regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region. The term "gross receipts" means all amounts received by the prime or principal contractor as the total contract price, undiminished by amount paid to the subcontractor, shall be excluded from the taxable gross receipts of the subcontractor.

CIR: Ateneo "falls within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is properly a subject of the three percent contractor's tax. That the "term 'independent contractor' is not specifically defined so as to delimit the scope thereof, so much so that any person who renders physical and mental service for a fee, is now indubitably considered an independent

contractor liable to 3% contractor's tax." Ateneo has the burden of proof to show its exemption from the coverage of the law. Court: CIR erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if Ateneo was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication." In answering the question of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import." To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor be engaged in the business of selling its services. To impose the three percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven that the Ateneo is indeed selling its services for a fee in pursuit of an independent business. Only after such coverage is shown does the rule of construction that tax exemptions are to be strictly construed against the taxpayer come into play. The Ateneo de Manila University Did Not Contract for the Sale of the Service of its Institute of Philippine Culture There is no evidence to show that that Ateneo's Institute of Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university. CIR: It is not the Ateneo de Manila University per se which is being taxed, the tax is due on its activity of conducting researches for a fee. The

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tax is due on the gross receipts made in favor of IPC pursuant to the contracts the latter entered to conduct researches for the benefit primarily of its clients. The sale of services of Ateneo is made under a contract and the various contracts entered into between Ateneo and its clients are almost of the same terms, showing the compensation and terms of payment." Court: The records do not show that Ateneo's IPC in fact contracted to sell its research services for a fee. CIR presented no evidence to prove its bare contention that contracts for sale of services were ever entered into by Ateneo. Only the following documentary evidences were presented:

1. BIR letter of authority no. 331844 2. Examiner's Field Audit Report 3. Adjustments to Sales/Receipts 4. Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.

None of the foregoing evidence even comes close to purport to be contracts between private respondent and third parties. CTA accurately and correctly declared that the " funds received by the Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which are tax-exempt" as shown by Ateneo's compliance with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational institution. It is clear that the funds received by Ateneo's IPC are not given in the concept of a fee or price in exchange for the performance of a service or delivery of an object. Rather, the amounts are in the nature of an endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding the research with no strings attached. As found by the CA and CTA, such sponsorships are subject to IPC's terms and conditions. No proprietary or commercial research is done, and IPC retains the ownership of the results of the research, including the absolute right to publish the same. The copyrights over the results of the research are owned by Ateneo and, consequently, no portion thereof may be reproduced without its permission. The amounts given to IPC may not be deemed as fees or gross receipts that can be subjected to the three percent contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent." By its very nature, a contract of sale requires a transfer of ownership. Whether the contract be one of sale or one for a piece of work, a transfer of ownership is involved and a party necessarily walks away with an object. In the case at bench, it is clear from the evidence on record that there was no sale either of objects or services because, as adverted to earlier, there was no transfer of ownership over the research data obtained or the results of research projects undertaken by the IPC. Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently erroneous because the former is not an independent juridical entity that is separate and distinct form the latter. The factual findings and conclusions of the Court of Tax Appeals when affirmed by the Court of Appeals are generally conclusive. Public Service, Not Profit, is the Motive The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. In fact, it was Ateneo de Manila University itself that had funded the research projects of the institute, and it was only when Ateneo could no longer produce the needed funds that the institute sought funding from outside. DISPOSITIVE: SC affirmed the CTA and CA decision ruling in favor of Ateneo.

Gutierrez v. CTA, Collector May 31, 1957

J. Felix Jerome Marcelo

SUMMARY: Maria owned lands in Pampanga that were expropriated in accordance with the Military Bases Agreement (MBA) with the US. The CIR considered the proceeds taxable. Maria opposes. The CTA

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ruled that such is taxable, but removed the surcharges imposed by the CIR. Both parties appealed to the SC. Maria argues that the compensation from the expropriation is not "income derived from sale, dealing or disposition of property" under the Tax Code and thus is not taxable. She also argues that the MBA also exempts it. SC: CTA affirmed. DOCTRINE: The acquisition by Government of properties through eminent domain, said properties being JUSTLY compensated, is embraced within the meaning of the term "sale" and "disposition of property", and the proceeds from the transaction falls within the definition of gross income in the NIRC. Income under a specific treaty is tax-exempt only to the extent required by a treaty obligation binding upon government of the Philippines.

FACTS: Maria Morales owns agricultural lands in Mabalacat, Pampanga. The Philippines, at the request of the U.S. Government and pursuant to the terms of the Military Bases Agreement of 1947, instituted condemnation proceedings in CFI- Pampanga for the purpose of expropriating Morales’ lands and others needed for the expansion of the Clark Field Air Base. Blas Gutierrez was also made a party for being the husband of the landowner Maria. After due hearing, the CFI decided in 1949, wherein it fixed as just compensation P2,500 per hectare for some of the lots and P3,000 per hectare for the others, based on the reports of the Commission on Appraisal. In virtue of said decision, defendant Maria was to receive the amount of P94,305.75 as compensation. In a notice of assessment dated January 28, 1953, the Collector of Internal Revenue demanded of the petitioners P8,481 as deficiency income tax for the year 1950, inclusive of surcharges and penalties. Counsel for Maria sent a letter to the Collector requesting the latter to reconsider, contending that the compensation paid to the spouses by the Government for their property was not "income derived from sale, dealing or disposition of property" referred to by section 29 of the Tax Code and therefore not taxable; that even granting that condemnation of private properties is embraced within the meaning of the word "sale" or "dealing", the compensation received by the taxpayers must be

considered as income for 1948 and not for 1950 since the amount deposited and paid in 1948 represented more than 25 per cent of the total compensation awarded by the court; that the assessment was made after the lapse of the 3-year prescriptive period provided for in section 51-(d) of the Tax Code; that the compensation in question should be exempted from taxation by reason of the provision of section 29 (b)-6 of the Tax Code; that the petitioners did not realize any profit in said transaction as there were improvements on the land already made and that the purchasing value of the peso at the time of the expropriation proceeding had depreciated if compared to the value of the pre-war peso; and that penalties should not be imposed on said spouses because granting the assessment was correct, the omission of the compensation awarded therein was due to an honest mistake. The Collector alleges that petitioners failed to include from their gross income for 1950 the amount of P94,305.75 which they had received as compensation for their land taken in expropriation proceedings, that such transfer of property, for taxation purposes, is "sale" and that the income derived therefrom is taxable. The CTA held that the gain from the expropriation constituted taxable income and as such was capital gain; and that said gain was taxable in 1950 when it realized. It was also held that the evidence did not warrant the imposition of the 50 per cent surcharge because the petitioners acted in good faith and without intent to defraud the Government, and, therefore, modified the assessment made by respondent, requiring petitioners to pay only the sum of P5,654. ISSUE: WON compensation from expropriation proceedings is taxable. RULING: YES RATIO: The pertinent provisions of the NIRC are the following: SEC. 29. GROSS INCOME. — (a) General definition. — "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales or dealings in property, whether real or personal, growing out of ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the

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transactions of any business carried on for gain or profit, or gains, profits, and income derived from any source whatsoever. SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES. — (a) Gross income from sources within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: (5) SALE OF REAL PROPERTY. — Gains, profits, and income from the sale of real property located in the Philippines;

There is no question that the property expropriated being located in the Philippines, compensation or income derived therefrom has to be considered as income from sources within the Philippines and subject to the taxing jurisdiction. Petitioner contends that the property was acquired by the Government through condemnation proceedings and that it cannot be considered as sale as said acquisition was by force, there being practically no meeting of the minds. Consequently, the taxpayers contend, this kind of transfer of ownership must perforce be distinguished from sale, for the purpose of Section 29-(a) of the Tax Code. Based on US jurisprudence ((David S. Brown v. Comm, Lapham v. US, Kneipp v. US), income from expropriation proceedings is considered income from sales or exchange and therefore taxable. It appears then that 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" "disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax Code of the Philippines. Petitioners also aver that granting that the compensation thus received is "income", it is exempted under Section 29-(b)-6 of the Tax Code, which reads as follows: SEC. 29. GROSS INCOME. — (b) EXCLUSIONS FROM GROSS INCOME. — The following items shall not be included in gross income and shall exempt from taxation under this Title; (6) Income exempt under treaty. — Income of any kind, to the extent required by any treaty obligation binding upon government of the Philippines.

The taxpayers maintain that since the proceeding to expropriate the land was instituted by the Philippine Government as part of its

obligation under the Military Bases Agreement (MBA), the compensation accruing therefrom must fall under the exemption provided for by Section 29-(b)-6 of the Tax Code. We find this stand untenable. Though the condemnation or expropriation of properties was provided for in the MBA, the exemption from tax of the compensation to be paid for the expropriation of privately owned lands located in the Philippines was not given any attention, and the internal revenue exemptions specifically taken care of by said MBA applies only to members of the US Armed Forces serving in the Philippines and U.S. nationals working here in connection with the construction, maintenance, operation and defense of said bases. DISPOSITIVE: The decision appealed from is hereby affirmed, without pronouncement as to costs. It is so ordered.

EISNER VS MACOMBER March 8, 1920

Pitney Luisa

SUMMARY: Macomber’s shares of stock was being taxed as income tax based on Revenue Act of 1916. She brought an action against the collector to recover the tax, the lower court ruled for Macomber. This court sustained the lower court ruling. DOCTRINE: Income may be defined as the gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital. Mere growth or increment of value in a capital investment is not income; income is essentially a gain or profit, in itself, of exchangeable value, proceeding from capital, severed from it, and derived or received by the taxpayer for his separate use, benefit, and disposal. A stock dividend, evincing merely a transfer of an accumulated surplus to the capital account of the corporation, takes nothing from the property of the corporation and adds nothing to that of the shareholder; a tax on such dividends is a tax an capital increase, and not on income, and, to be valid under the Constitution, such taxes must be apportioned according to population in the several states.

FACTS:

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On January 1, 1916, the Standard Oil Company of California, out of an authorized capital stock of $100,000,000, had shares of stock outstanding, par value $100 each, amounting in round figures to $50,000,000. In addition, it had surplus and undivided profits invested in plant, property, and business and required for the purposes of the corporation, amounting to about $45,000,000, of which about $20,000,000 had been earned prior to March 1, 1913, the balance thereafter. In January 1916, in order to readjust the capitalization, the board of directors decided to issue additional shares sufficient to constitute a stock dividend of 50 percent of the outstanding stock, and to transfer from surplus account to capital stock account an amount equivalent to such issue. Appropriate resolutions were adopted, an amount equivalent to the par value of the proposed new stock was transferred accordingly, and the new stock duly issued against it and divided among the stockholders. Macomber was owner of 2,200 shares of old stock. She received certificates for 1,100 additional shares. 18.07 percent, or 198.77 shares of which, par value $19,877, were treated as representing surplus earned between March 1, 1913, and January 1, 1916. Hence she was called upon to pay, and did pay under protest, a tax imposed under the Revenue Act of 1916, based upon a supposed income of the said $19,877 because of the new shares. She appealed to the Commissioner of Internal Revenue but this was disallowed. Hence she brought action against the Collector to recover the tax. In her complaint, she alleged the above facts and contended that, in imposing such a tax the Revenue Act of 1916 violated article 1, § 2, cl. 3, and Article I, § 9, cl. 4, of the Constitution of the United States, requiring direct taxes to be apportioned according to population, and that the stock dividend was not income within the meaning of the Sixteenth Amendment. A general demurrer to the complaint was overruled and, later on a final judgment went against Collector. ISSUES: whether, by virtue of the Sixteenth Amendment, Congress has the power to tax, as income of the stockholder and without apportionment, a stock dividend made lawfully and in good faith against profits accumulated by the corporation

RULING: NO RATIO: The issue in the case at bar has already been decided in the case of Towne vs. Eisner and the court does not see any reason to depart from such judgment.

In Towne v. Eisner, the question was whether a stock dividend made in 1914 against surplus earned prior to January 1, 1913, was taxable against the stockholder under the Act of October 3, 1913, which provided that net income should include "dividends," and also "gains or profits and income derived from any source whatever." The lower court treated the construction of the act as inseparable from the interpretation of the Sixteenth Amendment; and, having referred to and quoted the Amendment, proceeded very to say: "It is manifest that the stock dividend in question cannot be reached by the Income Tax Act and could not, even though Congress expressly declared it to be taxable as income, unless it is in fact income." This was affirmed by this court. It also went on to say in that case that: “A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased. The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones….In short, the corporation is no poorer and the stockholder is no richer than they were before. If the plaintiff gained any small advantage by the change, it certainly was not an advantage of $417,450, the sum upon which he was taxed. What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new.” The issue in this case would be settled by simply quoting the Towne case but the court decided to discuss more about the constitutional question involved. The Sixteenth Amendment must be construed in connection with the taxing clauses of the original Constitution and the effect attributed to them before the amendment was adopted. In Pollock v. Farmers' Loan & Trust Co., it was held that taxes upon rents and profits of real estate and upon returns from investments of personal property were in effect direct taxes upon the

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property from which such income arose, imposed by reason of ownership, and that Congress could not impose such taxes without apportioning them among the states according to population, as required by Article I, § 2, cl. 3, and § 9, cl. 4, of the original Constitution. Afterwards, and evidently in recognition of the limitation upon the taxing power of Congress thus determined, the Sixteenth Amendment was adopted, in words lucidly expressing the object to be accomplished: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states and without regard to any census or enumeration." As repeatedly held, this did not extend the taxing power to new subjects, but merely removed the necessity which otherwise might exist for an apportionment among the states of taxes laid on income. A proper regard for its genesis, as well as its very clear language, requires also that this amendment shall not be extended by loose construction, so as to repeal or modify, except as applied to income, those provisions of the Constitution that require an apportionment according to population for direct taxes upon property, real and personal. This limitation still has an appropriate and important function, and is not to be overridden by Congress or disregarded by the courts. In order, therefore, that the clauses cited from Article I of the Constitution may have proper force and effect, save only as modified by the amendment, and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not "income," as the term is there used, and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised. For the present purpose, we require only a clear definition of the term "income," as used in common speech, in order to determine its meaning in the amendment, and, having formed also a correct judgment as to the nature of a stock dividend, we shall find it easy to decide the matter at issue. After examining dictionaries in common use, we find little to add to the succinct definition adopted in two cases

arising under the Corporation Tax Act of 1909 "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. The government, although basing its argument upon the definition as quoted, placed chief emphasis upon the word "gain," which was extended to include a variety of meanings; while the significance of the next three words was either overlooked or misconceived. "Derived from capital;" "the gain derived from capital," etc. Here, we have the essential matter: not a gain accruing to capital; not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being "derived" -- that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal -- that is income derived from property. Nothing else answers the description. The same fundamental conception is clearly set forth in the Sixteenth Amendment -- "incomes, from whatever source derived" -- the essential thought being expressed with a conciseness and lucidity entirely in harmony with the form and style of the Constitution. Can a stock dividend, considering its essential character, be brought within the definition? To answer this, regard must be had to the nature of a corporation and the stockholder's relation to it. We refer, of course, to a corporation such as the one in the case at bar, organized for profit, and having a capital stock divided into shares to which a nominal or par value is attributed. Certainly the interest of the stockholder is a capital interest, and his certificates of stock are but the evidence of it. They state the number of shares to which he is entitled and indicate their par value and how the stock may be transferred. Short of liquidation, or until dividend declared, he has no right to withdraw any part of either capital or profits from the common enterprise; on the contrary, his interest pertains not to any part, divisible or indivisible, but to the entire assets, business, and affairs of the company. If he desires to dissociate himself from the company, he can do so only by disposing of his stock. For bookkeeping purposes, the company acknowledges a liability in form to the stockholders equivalent to the aggregate par value of

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their stock, evidenced by a "capital stock account." If profits have been made and not divided, they create additional bookkeeping liabilities under the head of "profit and loss," "undivided profits," "surplus account," or the like. None of these, however, gives to the stockholders as a body, much less to any one of them, either a claim against the going concern for any particular sum of money or a right to any particular portion of the assets or any share in them unless or until the directors conclude that dividends shall be made and a part of the company's assets segregated from the common fund for the purpose. The dividend normally is payable in money, under exceptional circumstances in some other divisible property, and when so paid, then only (excluding, of course, a possible advantageous sale of his stock or winding-up of the company) does the stockholder realize a profit or gain which becomes his separate property, and thus derive income from the capital that he or his predecessor has invested. In the present case, the corporation had surplus and undivided profits invested in plant, property, and business, and required for the purposes of the corporation, amounting to about $45,000,000, in addition to outstanding capital stock of $50,000,000. In this, the case is not extraordinary. The profits of a corporation, as they appear upon the balance sheet at the end of the year, need not be in the form of money on hand in excess of what is required to meet current liabilities and finance current operations of the company. Often, especially in a growing business, only a part, sometimes a small part, of the year's profits is in property capable of division, the remainder having been absorbed in the acquisition of increased plant, equipment, stock in trade, or accounts receivable, or in decrease of outstanding liabilities. When only a part is available for dividends, the balance of the year's profits is carried to the credit of undivided profits, or surplus, or some other account having like significance. If thereafter the company finds itself in funds beyond current needs, it may declare dividends out of such surplus or undivided profits; otherwise it may go on for years conducting a successful business, but requiring more and more working capital because of the extension of its operations, and therefore unable to declare dividends approximating the amount of its profits. Thus, the surplus may increase until it equals or even exceeds the par value of the outstanding capital stock. This may be adjusted upon the books in the mode adopted in the case at bar -- by declaring a "stock dividend." This, however, is no more than a book adjustment.

The new certificates simply increase the number of the shares, with consequent dilution of the value of each share. A "stock dividend" shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit. 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. Being concerned only with the true character and effect of such a dividend when lawfully made, we lay aside the question whether, in a particular case, a stock dividend may be authorized by the local law governing the corporation, or whether the capitalization of profits may be the result of correct judgment and proper business policy on the part of its management, and a due regard for the interests of the stockholders. We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced thereby, while indicating that the shareholder is the richer because of an increase of his capital, at the same time shows he has not realized or received any income in the transaction. Throughout the argument of the government, in a variety of forms, runs the fundamental error already mentioned -- a failure to appraise correctly the force of the term "income" as used in the Sixteenth Amendment, or at least to give practical effect to it. Enrichment through increase in value of capital investment is not income in any proper meaning of the term. Thus, from every point of view, we are brought irresistibly to the conclusion that neither under the 16th amendment nor otherwise has congress power to tax without apportionment a true stock dividend made lawfully and in good faith, or the accumulated profits behin it, as income of the stockholder. The revenue act of 1916, insofar as it imposes a tax upon the stockholder because of such dividend contravenes the provisions of the constitution and to this extent is invalid notwithstanding the 16th amendment DISPOSITIVE: affirmed.

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DISSENTING OPINION: Justice Louis Brandeis took issue with the majority's interpretation of income. He argued the Sixteenth Amendment authorized Congress to tax “incomes, from whatever source derived”, and the authors of the amendment “intended to include thereby everything which by reasonable understanding can fairly be regarded as income”, and that “Congress possesses the power which it exercised to make dividends representing profits, taxable as income, whether the medium in which the dividend is paid be cash or stock, and that it may define, as it has done, what dividends representing profits shall be deemed income”. He noted that in business circles, cash dividends and stock dividends were treated identically. In effect, he argued that a stock dividend is really a cash dividend, since it is really two-step affair, consisting of 1. a cash distribution, 2. subsequently used to purchase additional shares through the exercise of stock subscription rights. Brandeis saw no reason why two essentially identical transactions should be treated differently for tax purposes.

CIR V JAVIER July 31, 1991 Sarmiento J

Rods

SUMMARY: This is the so called million-dollar case. Javier erroneously received $1million from the US, and a case was filed against them to return the money. When they filed an Income Tax Return, CIR wanted to assess 50% penalty for fraud for not reporting such income. CTA removed the penalty, and SC upheld CTA decision, saying that there was a footnote which basically showed that Javier spouses did not intend to defraud the government. DOCTRINE: Under sec 72 of the tax code, a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has been made on the basis of return filed before the discovery of the falsity or fraud.

Fraud must amount to intentional wrong doing with the sole object of avoiding tax. Mere mistake cannot be considered fraudulent. Implied: Income wrongfully received is still taxable, based on the events in this case.

FACTS: Victoria Javier, wife of respondent Javier, received from Prudential Bank $999,973.70 remitted by her sister Mrs. Dolores Ventosa, through banks in the US including Mellon Bank. Mellon filed a case in CFI Rizal against Javier claiming that the remittance of $1million was a clerical error, and it should have been $1000 only, praying the excess be returned, since the Javiers were only trustees of an implied trust for the benefit of Mellon. Sps Javier were charged with estafa for misappropriating, misapplying, and converting the money to their own personal use. A year after, Javier filed his Income Tax Return for taxable year 1977 which showed gross income of P53K, and net income P48K and stating in a footnote that “taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation”. Acting Commissioner of Internal Revenue assessed deficiency taxes P1,615.96 and P9.28million as deficiency assessments for years 1976, 1977 respectively. Javier agreed to pay 1976 deficiency, but prayed that the final court decision on the case filed against him be waited. CIR sent a letter protest, saying that the amount of the erroneous remittance that they disposed were taxable. It imposed 50% fraud penalty against them. CTA deleted the 50% fraud penalty upon appeal, saying that there was no fraud. ISSUES: WON there was actual fraud which would justify the 50% penalty RULING: No, there was no actual fraud RATIO:

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Under sec 72 of the tax code, a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has been made on the basis of return filed before the discovery of the falsity or fraud. The SC agrees with the CTA, quoted the latter: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or mistake of fact or law" not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally "laid his cards on the table." In Aznar v CA, it was said that the fraud contemplated by the law is actual, not constructive, and must be intentional fraud. It must amount to intentional wrong-doing with the sole object of avoiding tax. Mere mistake cannot be considered fraudulent. Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. In this case , there was no actual and intentional fraud. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. DISPOSITIVE: Petition denied. CTA affirmed

NDC v. CIR June 30, 1987

Cruz Mafoxci

SUMMARY: The National Development Company (NDC), a Philippine company, entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of vessels. The remaining payments and the interests on bonds issued by the Central Bank were remitted by the NDC to Tokyo as part of the purchase price. NDC did

not withhold taxes due to the Japanese companies. The Commissioner held NDC liable for the tax that was not withheld. This was sustained by the CTA and the SC. The SC held that the Japanese companies were liable to tax on the interest remitted to them under Sec. 37 of the Tax Code. It said that the residence of the obligor (NDC) who pays the interest is the determining factor of the source of income. The imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese companies. NDC, being remiss in the discharge of its obligation as the withholding agent of the government, is liable for its omission. DOCTRINE: Applying Sec. 37 of the Tax Code, the residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income. The interest is paid not by the bonds, note or other interest-bearing obligations, but by the obligor.

FACTS: The National Development Corporation (NDC), a corporation duly organized and existing under the laws of the Philippines, with an office in Manila, entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of twelve ocean-going vessels. It executed 14 promissory notes for each vessel. Pursuant to the terms of the promissory notes, the NDC remitted to the Japanese shipbuilders in Japan during the years 1960, 1961 and 1962 the interest on the unpaid balance of the purchase price. These are interests on the bonds issued by the Central Bank as part of the purchase price. NDC did not withhold taxes due to the Japanese companies. The Commissioner held NDC liable for the tax that was not withheld. The BIR served NDC a warrant of distraint and levy to enforce collection. This was sustained by the CTA except for a slight reduction of the tax deficiency. ISSUES: 1. Whether the Japanese shipbuilders were liable to tax on the

interest remitted to them under Sec. 37 of the Tax Code. 2. Whether the fact that that the signing of the contract, the

construction of the vessels, the payment of the stipulated price, and

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their delivery to the NDC were done in Tokyo removes the transaction from the situs of the Philippines.

3. Whether the interest payments were obligations of the Philippines and the promissory notes of the NDC were government securities exempt from taxation under Sec. 29(b)[4] of the Tax Code.

4. Whether the undertaking signed by the Secretary of Finance in each of the promissory notes that he guarantees the due and punctual payment of the interests exempts it from taxes.

5. Whether NDC is merely an administrator of the funds of the Philippines.

6. Whether the NDC was being taxed on the interests. RULING: 1. Yes. The Japanese shipbuilders were liable. 2. No because the source of the income is the NDC which is a domestic

corporation. 3. No. The law invoked by the NDC is silent on the matter of

exemption. 4. No, it is merely a guarantee. 5. No, has proprietary activites and is governed by other laws. 6. No, the Japanese companies are the ones being taxed based on the

interest. The deficiency tax imposed on the NDC is merely the penalty for its failure to withhold the taxes from the Japanese companies.

RATIO: 1. The Japanese shipbuilders were liable to tax on the interest

remitted to them under Sec. 37 of the Tax Code which says: “Sec. 37. Income from sources within the Philippines. — (a) Gross income from sources within the Philippines. — The following items

of gross income shall be treated as gross income from sources within the Philippines: (1) Interest. — Interest derived from sources within the

Philippine,s and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise; X X X”

The law is clear that the residence of the obligor which paid the interest under consideration is the Philippines. The interest paid is on the promissory notes issued by it. Clearly, the interest remitted to the Japanese shipbuilders in Japan is interest derived from sources within the Philippines subject to income tax under Sec. 24(b)(1) of the NIRC.

2. The law does not speak of activity but of “source,” which in this

case is the NDC. Since NDC is a domestic and resident corporation with principal offices in Manila, the source is subject to tax. The Court cited the CTA saying that under the terms of the law, the Government’s right to levy and collect income tax on interest received by foreign corporations not engaged in trade or business within the Philippines is not planted upon the condition that the activity or labor and the sale from which the (interest) income flowed had its situs in the Philippines. Nothing in Sec. 37 of the Tax Code speaks of the “act of activity” of non-resident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income. Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond, note or other interest-bearing obligations, but by the obligor.

3. Sec. 29(b)[4] of the Tax Code excludes from gross income and exempts from taxation interest on government securities “only to the extent provided in the act authorizing the issue thereof.” The law invoked by NDC is RA 1407 which is silent on the matter of issuance of government securities and exempting them from tax.

4. There is nothing in the undertaking that exempts the interests from taxes. The waiver of the right to tax must be clear. Any doubt concerning this question must be resolved in favor of the taxing power. The undertaking merely guaranteed the obligations of the NDC but without diminution of its taxing power under existing laws.

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5. The NDC is governed in its proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws.

6. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Philippines that was subject to the tax the NDC did not withhold. The imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Sec. 53(c) of the Tax Code. NDC was remiss in the discharge of its obligation as the withholding agent of the government and so should be held liable for its omission.

DISPOSITIVE: CTA decision affirmed. NDC is liable to pay the deficiency taxes.

CIR V. CTA

CIR v. Marubeni 18 December 2001

Justice Puno Lindain

SUMMARY: MARUBENI Corporation, a foreign corporation, entered into a contract with the National Development Company and Philippine Phosphate Fertilizer Corporation. The CIR issued a letter of authority to examine the books of account of MARUBENI. CIR found MARUBENI to have undeclared income from two contracts in the Philippines (the two aforestated contracts). CIR assessed MARUBENI fort deficiency income, branch profit remittance, contractor’s and commercial broker’s taxes. Earlier, two Executive Orders were issued declaring a one-time amnesty covering unpaid income taxes, estate and donor’s taxes, and tax on business. MARUBENI filed a tax amnesty return. The CIR argues that MARUBENI cannot avail of the tax amnesty. The Supreme Court ruled in favor of MARUBENI.

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

FACTS:

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

2. Sometime in November 1985, the CIR issued a letter of authority to examine MARUBENI’s books of accounts for the fiscal year ending March 1985. Results showed that MARUBENBI had undeclared income from two contracts in the Philippines – one with the National Development Corporation (NDC- construction and installation of a wharf/ port complex at Leyte Industrial Development Estate) and the other with Philippine Phosphate Fertilizaer Corporation – construction of ammonia storage complex also at Leyte Industrial Development Estate.

3. As a result of the examination, CIR recommended an assessment for deficiency income, branch profit remittance, contractor’s and commercial broker’s taxes. CIR stated that the entire income from the contracts constituted income from Philippine sources, hence, subject to internal revenue taxes.

4. On August 27, 1986, MARUBENI received a letter dated august 15, 1986 from CIR assessing several deficiency taxes.

a. CIR found that the NDC and Philphos contracts were made on a “turn-key” basis. Each contract was for a piece of work and since the projects called for the construction and installation of facilities in the

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Philippines, the entire income came from Philippine sources, hence, subject to internal revenue taxes.

b. On September 26, 1968, MARUBENI filed two petitions for review with the CTA.

i. First petition, CTA Case 4109. This petition questioned the deficiency income branch profit remittance and contractor’s tax assessments.

ii. Second petition, CTA Case 4110. This petition questioned the deficiency commercial broker’s assessment.

5. Earlier, on August 2, 1986, EO 419 was issued. 6. In accordance with EO 41, MARUBENI filed a tax amnesty

return dated October 30, 1986. MARUBENI paid the amount of 10% of its net worth increase between 1981 and 1986.

7. Later on, the scope and coverage of EO 41 was expanded by EO 64 which included estate and donor’s taxes under Title III and the tax on business under Chapter II, Title V of the NIRC, also covering the years 1981 to 1985.

a. EO 64 further provided that the immunities and privileges under EO 41 were extended to the foregoing tax liabilities.

b. Those taxpayers who already filed their amnesty return under EO 41, as amended, could avail themselves of the benefits under the EO 64 by filing an amended return and paying an additional 5% on the increase in net worth.

c. MARUBENI filed a supplemental tax amnesty return under the benefit of EO 64.

8. On July 29, 1996, almost 10 years after the filing of the case, the CTA rendered a decision in CTA Case 4109, in favor of MARUBENI.

a. CIR challenged the CTA Decision through the CA. The CA affirmed CTA’s decision.

9 “Declaring a One-Time Tax amnesty Covering Unpaid Income Taxes for the Years 1981 to 1985”

ISSUES: Were MARUBENI’s deficiency tax liabilities extinguished upon its availment of tax amnesty under EO 41 and 64? YES. RATIO: There are three types of taxes involved in this case. These are covered by the amnesties granted by EO 41 and 64.

a. Income tax b. Branch Profit Remittance tax c. Contractor’s tax

CIR’s argument: MARUBENI falls under the exception in Sec. 4(b) of EO 41.10 At the time MARUBENI filed for income tax amnesty on October 30, 1986, CTA Case 4109 had already been field and was pending before the CTA. SC: CIR’s argument has NO merit. The point of reference is the date of effectivity of EO 41. For a taxpayer not to be disqualified, there must have been no income tax cases filed in court against the taxpayer when EO 41 took effect. EO 41 took effect on August 22, 1986. CTA Case 4109 questioning the 1985 deficiency income, branch profit remittance and contractor’s tax assessments was filed by MAURBENI with the CTA on September 26, 1986. When EO 41 took effect, the CTA Case had not yet been filed in court. MARUBENI did not fall under the exception in Sec. 4(b). The same ruling applied to the deficiency branch profit remittance tax. In the Tax Code, this tax falls under Title II. It is a tax on income. The difficulty is with regard to the Contractor’s tax assessment and availment of the amnesty under EO 64, which expanded the

10 "Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity hereof;

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coverage of EO 41 by including estate and donor’s taxes and tax on business. When EO 64 took effect on November 17, 1986, it did not provide for exceptions to the coverage of amnesty for business, estate and donor’s taxes. Instead, Sec. 8 of EO 64 provided that “Sec. 8. The provisions of EO 41 and 54 which are not contrary to or inconsistent with this amendatory EO shall remain in full force and effect.” Sec. 4 of EO 41 on the exceptions to amnesty coverage also applied to EO 64. With respect to Sec. 4(b), this provision excepts from tax amnesty coverage a taxpayer who has “income tax cases already field in court as of the effectivity hereof.” The vagueness in Sec. 4 (b) brought by EO 64 should be construed strictly against the taxpayer. The term “income tax cases” should be read as to refer to estate and donor’s taxes and taxes on business while the word “hereof” to EO 64. Since EO 64 took effect on November 17, 1986, insofar as taxes in EO 64 are concerned, the date of effectivity referred to in Sec. 4(b) of EO 41 should be November 17, 1986. Marubeni field CTA Case 4109 on September 26, 1986. When EO 64 took effect on November 17, 1986, CTA Case 4109 was already filed and pending in court By the time MARUBENI filed its supplementary tax amnesty return, MARUBENI already fell under the exception in Sec. 4(b) of EO 41 and 64. Therefore, MARUBENI was disqualified from availing of the business tax amnesty granted therein. MARUEBENI’s argument: Assuming that it fell under the exception, it is still NOT liable for the deficiency contractor’s tax because the income from the two contracts came from the “Offshore Portion” of the contracts.

a. The two contracts were divided into 2 parts – Onshore Portion and Offshore Portion.

b. All materials and equipment in the contract under “Offshore Portion” were manufactured and completed in Japan, not in the Philippines, and therefore not subject to Philippine taxes.

Under the Philippine Inshore Portion, MARUBENI does not

deny its liability for contractor’s tax on the income from the two projects. It is with regard to GROSS RECEPITS from the Foreign

Offshore Portion of the two contracts that the liabilities involved in the assessments subject of the present case arose. CIR’s argument: Since the two agreements are turn-key11, they call for the supply of both materials and services to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the materials and services were done within the Philippines. Accordingly, MARUBENI’s entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractor’s tax. SC: A contractor’s tax is imposed upon the privilege of engaging in business.

It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products.

It is directly collectible from the person exercising the privilege.

Being an excise tax, it can be levied inly when the acts, privileges, or business are done within the jurisdiction of the taxing authority.

In MARUBENI’s case, MARUBENI was an independent contractor under the terms of the two contracts. It argues that the work were not entirely done in the Philippines. Some of them were completed in Japan in accordance with the contracts. The materials and equipment to be made and the works and services to be performed by MARUBENI are classified into two. Clearly, the services of MARUBENI in the “design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination of the two projects” involve two taxing jurisdictions. These acts occurred in Japan and Philippines.

11 A "turn-key job" is defined as a job or contract in which the contractor agrees to complete the work of building and installation to the point of readiness for operation or occupancy — Webster's Third New International Dictionary of the English Language, Unabridged [1993].

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While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax. DISPOSITIVE: IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.

DISSENTING OPINION: None CONCURRING OPINION: None

PHIL GUARANTY vs. CIR April 30, 1965

Justice Bengzon tecskat

SUMMARY: Phil Guaranty entered into reinsurance contracts with foreign reinsurers. It agreed to cede to the foreign reinsurers a portion of the premiums on the insurance it has underwritten, in exchange for the assumption by the foreign reinsurers of the liability on an equivalent portion of the risks insured. The contract also showed the intention of the parties to be bound by Phil law. Phil Guaranty also kept in Manila a register of the risks ceded to the foreign reinsurers. Entries made in such register bound the foreign reinsurers, localizing in the Philippines the actual cession of the risks and premiums and

assumption of the reinsurance undertaking by the foreign reinsurers. Phil Guaranty excluded from its gross income the premiums it ceded to the foreign reinsurers. The CIR assessed Phil Guaranty withholding tax on the ceded premiums. This was affirmed by the CTA. The Supreme Court held that the ceded premiums were income created from the undertaking of the foreign reinsurance companies to reinsure Phil Guaranty, against liability for loss under original insurances. Such undertaking took place in the Philippines. These insurance premiums, therefore, came from sources within the Philippines and, hence, are subject to corporate income tax. DOCTRINE: Situs of Income: From Sources Within the Philippines -Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the Philippines. The word "sources" has been interpreted as the activity, property or service giving rise to the income. -The foreign insurers' place of business should not be confused with their place of activity. Business should not be continuity and progression of transactions while activity may consist of only a single transaction. An activity may occur outside the place of business. Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income.

FACTS:

1. Philippine Guaranty Corp, a domestic insurance company, entered into reinsurance contracts with foreign insurance companies not doing business in the Philippines. It agreed to cede to the foreign reinsurers a portion of the premiums on the insurance it has underwritten, in exchange for the assumption by the foreign reinsurers of the liability on an equivalent portion of the risks insured.

2. Under the reinsurance contracts, the foreign reinsurers’ liability commenced at the same time as that of Phil Guaranty’s. Phil Guaranty kept a register in Manila where the risks ceded to the foreign reinsurers were entered. A proportionate amount of

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taxes on insurance premiums not recovered from the original assured were to be paid for by the foreign reinsurers. The foreign reinsurers further agreed, in consideration for managing their affairs in the Philippines, to compensate the Philippine Guaranty, in an amount equal to 5% of the reinsurance premiums. Conflicts under the reinsurance contracts were to be arbitrated in Manila. A contract with one foreign reinsurer, in particular, stipulated that their contract will be governed by Phil laws.

3. Pursuant to the contracts, Phil Guaranty ceded to the foreign reinsurers the following premiums: (1) Year 1953- P842, 466 and (2) Year 1954- P721,471.85.

4. Said premiums were excluded by Phil Guaranty from its gross income when it filed it Income Tax returns for 1953 and 1954. Ita lso did not withhold or pay tax on them.

5. The CIR assessed against Phil Guaranty withholding tax on the ceded reinsurance premiums in the amount of P230,673 for the year 1953 and P234,364 for the year 1954. The CTA ordered Phil Guaranty to pay the CIR the respective sums.

ISSUES:

1. WON Phil Guaranty should pay the assessed tax on the reinsurance premiums ceded to the foreign reinsurers./WON the ceded premiums are taxable in the Philippines.-YES

RATIO: Phil Guaranty: The reinsurance premiums in question did not constitute income from sources within the Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did they have offices here. COURT:

1. The reinsurance contracts, however, show that the transactions that constituted the undertaking to reinsure Phil Guaranty against losses arising from the original insurances in the Philippines were performed in the Philippines. The liability of the foreign reinsurers commenced simultaneously with the liability of Phil Guaranty under the original insurances. Phil Guaranty also kept in Manila a register of the risks ceded to the foreign reinsurers. Entries made in such register bound the foreign reinsurers, localizing in the Philippines the actual

cession of the risks and premiums and assumption of the reinsurance undertaking by the foreign reinsurers.

2. All the contracts, except that of the Swiss Reinsuance Co., were signed by Phil Guaranty in the Philippines and later signed by the reinsurers abroad. While the contract with the Swiss Co. was signed by both parties in Switzerland, it stipulated that it would be construed according to Phil law, manifesting that the parties intended to be bound by Phil law.

3. Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the Philippines. The word "sources" has been interpreted as the activity, property or service giving rise to the income.

4. The reinsurance premiums were income created from the undertaking of the foreign reinsurance companies to reinsure Phil Guaranty, against liability for loss under original insurances. Such undertaking, as explained in points 1-2 took place in the Philippines. These insurance premiums, therefore, came from sources within the Philippines and, hence, are subject to corporate income tax.

5. The foreign insurers' place of business should not be confused with their place of activity. Business should not be continuity and progression of transactions while activity may consist of only a single transaction. An activity may occur outside the place of business. Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income.

RULING: Phil Guaranty to pay the assessed withholding taxes. DISPOSITIVE: Decision of CTA affirmed.

HENDERSON V. CTA

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55

CIR v. Castañeda

17 October 1991

J. Padilla

Dan Amorin

SUMMARY: On 10 December 1982, Respondent Castañeda retired from government service as Revenue Attaché pursuant to Section 12 (c) of CA 186 (GSIS). The CIR withheld ₱ 12 557.13 from his terminal leave pay allegedly representing income tax thereon. Respondent filed a formal written complaint with the Petitioner for a refund of the withheld amount claiming that terminal leave pay is tax exempt. On 16 July 1984, Respondent filed before CTA a Petition for Review, seeking the refund of ₱ 12 557.13. CTA ruled in favor of Respondent. CIR appealed the decision before the SC, which referred the case to the CA. The appellate court affirmed the CTA; hence, CIR filed a petition for review before the SC assailing the CA’s decision. The SC denied the Petition reiterating its earlier ruling that terminal leave pay is tax emept. DOCTRINE: Terminal leave pay is a retirement benefit, not part of gross salary or income; hence, it is not subject to income tax.

FACTS:

On 10 December 1982, Respondent Efren Castañeda retired from

government service as Revenue Attaché in the Philippine Embassy in

London, England pursuant to Section 12 (c) of CA 186 (GSIS), as

amended, which provides:

(c) Retirement is likewise allowed to any official or employee,

appointive or elective, regardless of age and employment

status, who has rendered a total of at least twenty years of

service, the last three years of which are continuous. The

benefit shall, in addition to the return of his personal

contributions with interest compounded monthly and the

payment of the corresponding employer's premiums described

in subsection (a) of Section five hereof, without interest, be

only a gratuity equivalent to one month's salary for every year

of the first twenty years of service, plus one and one-half

month's salary for every year of service over twenty but below

thirty years and two month's salary for every year of service

over thirty years in case of employees based on the highest

rate received and in case of elected officials on the rates of pay

as provided by law. This gratuity is payable on the rates of pay

as provided by law. This gratuity is payable by the employer or

officer concerned which is hereby authorized to provide the

necessary appropriation or pay the same from any

unexpended items of appropriations or savings in its

appropriations. Officials and employees retired under this Act

shall be entitled to the commutation of the unused vacation

and sick leave, based on the highest rate received, which they

may have to their credit at the time of retirement.

He received terminal leave pay, among other benefits, from which

Petitioner CIR withheld ₱ 12 557.13 allegedly representing income tax

thereon. Castañeda filed a formal written complaint with CIR for a

refund of the withheld amount, contending that the cash equivalent of

his terminal leave is exempt from income tax.

On 16 July 1984, Respondent filed before CTA a Petition for Review,

seeking the refund of the income tax withheld. The appellate court

ruled in favor of Respondent and ordered Petitioner to refund the sum

of ₱ 12 557.13. Petitioner appealed the CTA decision before the SC,

which referred the case to the CA for resolution.

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On 26 September 1990, CA dismissed the petition and affirmed the

CTA’s decision. Hence, Petition filed a petition for review on certiorari

before the SC, assailing the CA’s decision.

ISSUE:

Whether or not terminal leave pay received by a government official or

employee on the occasion of his compulsory retirement from

government service is subject to withholding tax on income

RATIO:

No. Terminal leave pay is a retirement benefit, not part of gross salary

or income; hence, it is not subject to income tax.

RULING:

The Solicitor General, on behalf of Petitioner, contends that the

terminal leave pay is income derived from employer-employee

relationship (Section 28, NIRC). Since it is part of the compensation for

services rendered, terminal leave pay is actually part of gross income of

the recipient.

The Court held that it has already ruled that the terminal leave pay is

not subject to withholding (income) tax. Citing Borromeo v. CSC, the

Court held that: “[t]he Government recognizes that for most public

servants, retirement pay is always less than generous if not meager and

scrimpy. A modest nest egg which the senior citizen may look forward

to is thus avoided. Terminal leave payments are given not only at the

same time but also for the same policy considerations governing

retirement benefits.”

“In fine, not being part of the gross salary or income of a government

official or employee but a retirement benefit, terminal leave pay is not

subject to income tax.”

DISPOSITIVE:

Petition denied.

CIR V. CASTANEDA