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Commissioner of Internal Revenue vs.

Court of Appeals
298 SCRA 83 and GR 124043
Same Case
Facts:
YMCA is a non-stock, non-profit institution, which conducts various programs and activities
that are beneficial to the public, especially the young people, pursuant to its religious,
educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing
operations, and P44,259.00 from parking fees collected from non-members. On July 2, 1984,
the Commissioner of Internal Revenue (CIR) issued an assessment to YMCA, in the total
amount of P415,615.01 including surcharge and interest, for deficiency income tax, deficiency
expanded withholding taxes on rentals and professional fees and deficiency withholding tax on
wages. The Court of Tax Appeals ruled in favor of YMCA stating that the leasing and parking
fees are reasonably incidental and necessary for the accomplishment of YMCAs goals. The CA
reversed the CTAs decision and affirmed it after the motion was filed. CIR argues that as a
rule, exempted from the payment of tax in respect to income received by them as such, the
exemption does not apply to income derived from any if their properties, real or personal, or
from any of their activities conducted for profit, regardless, of the disposition made of such
income. Petitioner adds that rented income derived by a tax-exempt organization from the lease
of its properties, real or personal, [is] not, therefore, exempt from income taxation, even if such
income [is] exclusively used for the accomplishment of its objectives.
Issue:
YMCA exempt from paying income tax?
Held:
No, Because taxes are the lifeblood of the nation, the Court has always applied the doctrine
of strict interpretation in construing tax exemptions Furthermore, a claim of statutory exemption
from taxation should be manifest and unmistakable from the language of the law on which it is
based. Thus, the claimed exemption must expressly be granted in a statute stated in a language
too clear to be mistaken.
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of
exempt organizations (such as the YMCA) from any of their properties, real or personal, be
subject to the imposed by the same Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income f the YMCA from its rental property, the Court is
duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted
attempt at construction.

It is axiomatic that where the language of the law is clear and unambiguous, its express
terms must be applied. Parenthetically, a consideration of the question of construction must not
even begin, particularly when such question is on whether to apply a strict construction or a
literal one on statutes that grant tax exemptions to religious, charitable and educational
propert[ies] or institutions.
The last paragraph of Section 27, the YMCA argues, 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. This argument is erroneous. As previously stated, a reading of said
paragraph ineludibly shows that the income from any property of exempt organizations, as well
as that arising from any activity it conducts for profit, is taxable. The phrase any of their activities
conducted for profit does not qualify the word properties. This makes income from the property
of the organization taxable, regardless of how that income is used -- whether for profit or for lofty
non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed
reversible error when it allowed, on reconsideration, 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. The law does
not make a distinction. The rental income is taxable regardless of whence such income is
derived and how it used or disposed of. Where the law does not distinguish, neither should we.

Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary
Facts:
Misamis Oriental Association of Coco Traders, Inc. is a corporation whose members,
individually or collectively, are engaged in the buying and selling of copra . The petitioner alleges
that prior to the issuance of Revenue Memorandum Circular 47-91 on June 11, 1991, which
implemented VAT Ruling 190-90, copra was classified as agricultural food product under
Section 103(b) of the National Internal Revenue Code and, therefore, exempt from VAT at all
stages of production or distribution.
Under Section 103(a), as above quoted, the sale of agricultural non-food products in
their original state is exempt from VAT only if the sale is made by the primary producer or owner
of the land from which the same are produced. The sale made by any other person or entity, like
a trader or dealer, is not exempt from the tax. On the other hand, under 103(b) the sale of
agricultural food products in their original state is exempt from VAT at all stages of production or
distribution regardless of who the seller is.
On June 11, 1991, respondent Commissioner of Internal Revenue issued the circular in
question, classifying copra as an agricultural non-food product and declaring it "exempt from
VAT only if the sale is made by the primary producer pursuant to Section 103(a) of the Tax
Code, as amended. The reclassification had the effect of denying to the petitioner the exemption
it previously enjoyed when copra was classified as an agricultural food product under Section
103(b) of the NIRC.

Issue:
Did the BIR apply the law correctly?
Held:
Yes, In interpreting 103(a) and (b) of the NIRC, the Commissioner of Internal Revenue
gave it a strict construction consistent with the rule that tax exemptions must be strictly
construed against the taxpayer and liberally in favor of the state. The opinion of the Bureau of
Food and Drug was based on "the broader definition of food which includes agricultural
commodities and other components used in the manufacture/processing of food.
Moreover, as the government agency charged with the enforcement of the law, the
opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly
wrong, is entitled to great weight. Indeed, the ruling was made by the Commissioner of Internal
Revenue in the exercise of his power under 245 of the NIRC to "make rulings or opinions in
connection with the implementation of the provisions of internal revenue laws,including rulings
on the classification of articles for sales tax and similar purposes.

Nestl Philippines, Inc. vs. Court of Appeals


Facts:
Nestle is engaged in the importations of milk and milk products for processing,
distribution and sale in the Philippines. Between July and November 1984, petitioner transacted
sixteen (16) separate importations of milk and milk products from different countries. Petitioner
was assessed customs duties and advance sales taxes. Petitioner paid the same but
seasonably filed the corresponding protests before the said Collector of Customs fr\uniformly
alleging therein that the latter erroneously applied higher home consumption values in
determining the dutiable value for each of these separate importations. In the said protests,
petitioner claims for refund of both the alleged overpaid import duties amounting to Five Million
Eight Thousand and Twenty-Nine Pesos (P5,008,029.00) and advance sales taxes aggregating
to Four Million Five Hundred Sixty-Four Thousand One Hundred Seventy-Nine Pesos and Thirty
Centavos (P4,564,179.30). On October 14, 1986, petitioner formally filed a claim for refund of
allegedly overpaid advance sales taxes with the Bureau of Internal Revenue (BIR) amounting to
Four Million Five Hundred Sixty-Four Thousand One Hundred Seventy-Nine Pesos and Thirty
Centavos (P4,564,179.30) covering the same sixteen (16) importations of milk and milk
products from different countries. Not long after, on October 15, 1986 and within the two-year
prescriptive period provided for under the National Internal Revenue Code (NIRC) for claiming a
tax refund, petitioner filed the corresponding petition for review with the Court of Tax Appeals
(CTA) which was docketed therein as C.T.A. Case No. 4114. On January 3, 1994, the tax court
ruled in favor of petitioner and forthwith ordered the BIR to refund to the petitioner the sum of
Four Million Four Hundred Eighty-Nine Thousand Six Hundred Sixty-One Pesos and NinetyFour Centavos (P4,489,661.94) representing the overpaid Advance Sales Taxes on the
aforesaid importations.

Issue:
Does the ruling of the tax court excuse the petitioner from proving its claims for refund of
alleged overpayment of customs duties?
Held:
Customs duties is the name given to taxes on the importation and exportation of
commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a
foreign country.[15] Any claim for refund of customs duties, therefore, take the nature of tax
exemptions that must be construed strictissimi juris against the claimants and liberally in favor of
the taxing authority.[16] This power of taxation being a high prerogative of sovereignty, its
relinquishment is never presumed. Any reduction or diminution thereof with respect to its mode
or its rate must be strictly construed, and the same must be couched in clear and unmistakable
terms in order that it may be applied.[17]
Thus, any outright award for the refund of allegedly overpaid customs duties in favor of
petitioner on its subject sixteen (16) importations is not favored in this jurisdiction unless there is
a direct and clear finding thereon. The fact alone that the tax court, in C.T.A. Case No. 4114,
has awarded in favor of the petitioner the refund of overpaid Advance Sales Tax involving the
same sixteen (16) importations does not in any way excuse the petitioner from proving its claims
for refund of alleged overpayment of customs duties. We have scrutinized the decision rendered
by the tax court in C.T.A. Case No. 4114 and found no clear indication therein that the tax court
has ruled on petitioners claims for alleged overpayment of customs duties.

Coconut Oil Refiners Association, Inc. vs. Torres


Facts:
A Petition for Prohibition and Injunction seeking to enjoin and prohibit the Executive
Branch from allowing, and the private respondents from continuing with, the operation of tax and
duty-free shops located at the Subic Special Economic Zone (SSEZ) and the Clark Special
Economic Zone (CSEZ), and to declare Section 5 of EO No. 80, EO No. 97-A, and Section 4 of
BCDA Board Resolution No. 93-05-034 as unconstitutional, illegal, and void. RA No. 7227 was
enacted, providing for, among other things, the sound and balanced conversion of the Clark and
Subic military reservations and their extensions into alternative productive uses in the form
of special economic zones in order to promote the economic and social development of Central
Luzon in particular and the country in general. Section 12 (b) provides that The Subic Special
Economic Zone shall be operated and managed as a separate customs territory ensuring free
flow or movement of goods and capital within, into and exported out of the Subic Special
Economic Zone, as well as provide incentives such as tax and duty-free importations of raw
materials, capital and equipment. The petitioners contend that the law limits the privilege only
to raw materials, capital and equipment and does not extend to consumer goods.
Issue:

Does the privilege extend to consumer goods?


Held:
Yes, While it is true that Section 12 (b) of Republic Act No. 7227 mentions only raw
materials, capital and equipment, this does not necessarily mean that the tax and duty-free
buying privilege is limited to these types of articles to the exclusion of consumer goods. It must
be remembered that in construing statutes, the proper course is to start out and follow the true
intent of the Legislature and to adopt that sense which harmonizes best with the context and
promotes in the fullest manner the policy and objects of the Legislature.
In the present case, there appears to be no logic in following the narrow interpretation
petitioners urge. To limit the tax-free importation privilege of enterprises located inside the
special economic zone only to raw materials, capital and equipment clearly runs counter to the
intention of the Legislature to create a free port where the free flow of goods or capital within,
into, and out of the zones is insured.
The phrase tax and duty-free importations of raw materials, capital and equipment was
merely cited as an example of incentives that may be given to entities operating within the zone.
Public respondent SBMA correctly argued that the maxim expressio unius est exclusio
alterius, on which petitioners impliedly rely to support their restrictive interpretation, does not
apply when words are mentioned by way of example. It is obvious from the wording of Republic
Act No. 7227, particularly the use of the phrase such as, that the enumeration only meant to
illustrate incentives that the SSEZ is authorized to grant, in line with its being a free port zone

Maceda vs. Macaraig (1991)


Facts:
On November 3, 1936, Commonwealth Act No. 120 created the NPC as a public
corporation to undertake the development of hydraulic power and the production of power from
other sources. Republic Act No. 358 granted NPC tax and duty exemption privileges exempt
from all taxes, duties, fees, imposts, charges and restrictions of the Republic of the Philippines,
its provinces, cities and municipalities On June 11, 1984, Presidential Decree No. 1931
withdrew all tax exemption privileges granted in favor of government-owned or controlled
corporations including their subsidiaries. 4 However, said law empowered the President and/or
the then Minister of Finance, upon recommendation of the FIRB to restore, partially or totally,
the exemption withdrawn, or otherwise revise the scope and coverage of any applicable tax and
duty
Pursuant to said law, on February 7, 1985, the FIRB issued Resolution No. 10-85
restoring the tax and duty exemption privileges of NPC from June 11, 1984 to June 30, 1985.
On January 7, 1986, the FIRB issued resolution No. 1-86 indefinitely restoring the NPC tax and
duty exemption privileges effective July 1, 1985.

However, effective March 10, 1987, Executive Order No. 93 once again withdrew all tax
and duty incentives granted to government and private entities which had been restored under
Presidential Decree Nos. 1931 and 1955 but it gave the authority to FIRB to restore, revise the
scope and prescribe the date of effectivity of such tax and/or duty exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and duty
exemption privileges effective March 10, 1987. On October 5, 1987, the President, through
respondent Executive Secretary Macaraig, Jr., confirmed and approved FIRB Resolution No.
17-87.
The petitioner, argues that under both FIRB resolutions, only the tax and duty exemption
privileges enjoyed by the NPC under its charter, C.A. No. 120, as amended, are restored, that
is, only its direct tax exemption privilege; and that it cannot be interpreted to cover indirect taxes
under the principle that tax exemptions are construed stricissimi juris against the taxpayer and
liberally in favor of the taxing authority.
Issue:
Should tax exemptions be applied against government political subdivision or
instrumentalities?
Held:
It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general
terms, as to cover "all taxes, duties, fees, imposts, charges, etc. . . ." However, the amendment
under Republic Act No. 6395 enumerated the details covered by the exemption. Subsequently,
P.D. No. 380, made even more specific the details of the exemption of NPC to cover, among
others, both direct and indirect taxes on all petroleum products used in its operation.
Presidential Decree No. 938 amended the tax exemption by simplifying the same law in general
terms. It succinctly exempts NPC from "all forms of taxes, duties, fees, imposts, as well as costs
and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings."
The use of the phrase "all forms" of taxes demonstrate the intention of the law to give
NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that
being non-profit the NPC "shall devote all its returns from its capital investment as well as
excess revenues from its operation, for expansion
The preamble of P.D. No. 938 states
WHEREAS, in the application of the tax exemption provision of the Revised Charter, the
non-profit character of the NPC has not been fully utilized because of restrictive
interpretations of the taxing agencies of the government on said provisions. . . .
(Emphasis supplied.)

It is evident from the foregoing that the lawmaker did not intend that the said provisions
of P.D. No. 938 shall be construed strictly against NPC. On the contrary, the law mandates that
it should be interpreted liberally so as to enhance the tax exempt status of NPC.
Hence, petitioner cannot invoke the rule on strictissimi juris with respect to the
interpretation of statutes granting tax exemptions to NPC.
Moreover, it is a recognized principle that the rule on strict interpretation does not apply
in the case of exemptions in favor of a government political subdivision or instrumentality
In the case of property owned by the state or a city or other public corporations, the
express exemption should not be construed with the same degree of strictness that applies to
exemptions contrary to the policy of the state, since as to such property "exemption is the rule
and taxation the exception." 30
Maceda vs. Macaraig (1993) (Motion for reconsideration)
Facts:
On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National
Power Corporation, a public corporation, mainly to develop hydraulic power from all water
sources in the Philippines. The law contained a provision that exempted NPC from payment of
all taxes by the Commonwealth of the Philippines, or by any authority, branch, division or
political subdivision thereof and subject to the provisions of the Act of Congress. He contends
that P.D No. 938 repealed the indirect tax exemptions granted to NPC by R.A. No. 6395, as
amended by P.D. No. 380. The said law states that The Corporation is hereby declared
exempt: (d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly by the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum products used by the Corporation
in the generation, transmission, utilization and sale of electric power.

Issue:
Whether P.D. No. 938 repealed the indirect tax exemption of NPC?
Held:
No, P.D. No. 938 provides that The Corporation shall be non-profit and shall devote all
its returns from its capital investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance
and effective implementation of the policy enunciated in Section one of this Act, the Corporation,
including its subsidiaries, is hereby declared exempt from the payment of ALL FORMS
OF taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal
bonds, supersedeas bonds, in any court or administrative proceedings.

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF
TAXES, ETC.,", included 13(a) under the "as well as" clause and added PNOC subsidiaries as
qualified for tax exemptions.

Conwi vs. Court of Tax Appeals


Facts:
Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine
Manufacturing Corporation. During the years 1970 and 1971 petitioners were assigned, for
certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines, during
which petitioners were paid U.S. dollars as compensation for services in their foreign
assignments. When petitioners in C.T.A. Case No. 2511 filed their income tax returns for the
year 1970, they computed the tax due by applying the dollar-to-peso conversion on the basis of
the floating rate ordained under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows: From
January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00; From February 21
to December 31, 1970 at the conversion rate of P6.25 to U.S. $1.00. . The aforesaid
computation as shown in the amended income tax returns resulted in the alleged overpayments,
refund and/or tax credit.
Accordingly, claims for refund of said over-payments were filed with respondent
Commissioner. Without awaiting the resolution of the Commissioner of the Internal Revenue on
their claims, petitioners filed their petitioner for review in the above-mentioned cases. The
respondent Court of Tax Appeals held that the proper conversion rate for the purpose of
reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates
prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71.
Accordingly, the claim for refund and/or tax credit of petitioners in the above-entitled
cases was denied. Petitioners claim that public respondent Court of Tax Appeals erred in
holding that of the par value of the peso to convert petitioners' dollar earnings for tax purposes
into Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the
rate used, That the proper rate of conversion of petitioners' dollar earnings for tax purposes in
the prevailing free market rate of exchange and not the par value of the peso and that
petitioners' dollar earnings are receipts derived from foreign exchange transaction. They also
state that Court of Tax Appeals erred when it concluded that the dollar incomes of petitioner fell
under Section 2(f)(g) and (m) of C.B. Circular No. 42
Issue:
What should be the guiding exchange rate in determining the conversion of foreign
earnings to peso value for income tax purposes
Held:

A careful reading of said CB Circular No. 289 shows that the subject matters involved
therein are export products, invisibles, receipts of foreign exchange, foreign exchange
payments, new foreign ,borrowing and investments nothing by way of income tax payments.
Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not apply to
them, the par value of the peso should be the guiding rate used for income tax purpose
This basically an income tax case. For the proper resolution of these cases income may
be defined as an amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified,
it means cash or its equivalent. 4 Income can also be though of as flow of the fruits of one's
labor.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries
of Procter & Gamble. It was a definite amount of money which came to them within a specified
period of time of two yeas as payment for their services

Commissioner of Internal Revenue vs. British Overseas Airways Corporation


Facts:
BOAC is a 100% British Government-owned corporation organized and existing under
the laws of the United Kingdom It is engaged in the international airline business and is a
member-signatory of the Interline Air Transport Association (IATA). As such it operates air
transportation service and sells transportation tickets over the routes of the other airline
members. During the assessed period, it maintained a general sales agent in the Philippines
Wamer Barnes and Company, Ltd., and later Qantas Airways which was responsible for
selling BOAC tickets covering passengers and cargoes. On 7 May 1968, petitioner
Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate amount of
P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. On 17 November
1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years
1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts
of P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46. BOAC,
contends that income derived from transportation is income for services, with the result that the
place where the services are rendered determines the source; and since BOAC's service of
transportation is performed outside the Philippines, the income derived is from sources without
the Philippines and, therefore, not taxable under our income tax laws
Issue:
Whether or not the revenue from sales of tickets by BOAC in the Philippines constitutes
income from Philippine sources and, accordingly, taxable under our income tax laws?
Held:
Yes the revenue is taxable. 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 profession, vocations, trades,business, commerce, sales, or dealings in
property, whether real or personal, growing out of the ownership or use of or interest in such
property; also from interests, rents, dividends, securities, or thetransactions of any business
carried on for gain or profile, or gains, profits, and income derived from any source whatever.

The source of an income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale
of tickets in the Philippines is the activity that produces the income. The tickets exchanged
hands here and payments for fares were also made here in Philippine currency. The site of the
source of payments is the Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of supporting the
government.
The absence of flight operations to and from the Philippines is not determinative of the
source of income or the site of income taxation. Admittedly, BOAC was an off-line international
airline at the time pertinent to this case. The test of taxability is the "source"; and the source of
an income is that activity ... which produced the income. Unquestionably, the passage
documentations in these cases were sold in the Philippines and the revenue therefrom was
derived from a activity regularly pursued within the Philippines. business a And even if the
BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", it
cannot alter the fact that income from the sale of tickets was derived from the Philippines. The
word "source" conveys one essential idea, that of origin, and the origin of the income herein is
the Philippines
Madrigal vs. Rafferty
Facts:
Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. On
February 25, 1915, Vicente Madrigal filed sworn declaration on the prescribed form with the
Collector of Internal Revenue, 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 two equal parts, one-half to be considered the
income of Vicente Madrigal and the other half of Susana Paterno. Madrigal 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:
Should the additional tax be divided into two equal parts due to the conjugal
partnership?
Held:
No, 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.
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
International Freighting vs. CIR
Facts:
Taxpayer had an arrangement to pay certain employees bonuses in the form of common
stock of the DuPont company. Taxpayer paid over and distributed 150 shares of common stock
at a cost of $16,153.36. The market value was $24,858.75. Each of the employees paid a tax on
the stock. Taxpayer deducted $24,858.75 in its income tax return. The Commissioner reduced
the deduction to $16,153.36 arguing that the basis for determining the amount is the cost of the
property and not the fair market value. Before the Tax Court, the Commissioner argued that if
Taxpayer were entitled to a deduction in the amount of $24,858, then Taxpayer realized a gain
that should be reported as taxable profit. The Tax Court held that the Taxpayer was entitled to
the full deduction and that the profit should count as gross income.
Issue:
May the fair market value of the stock be deducted and is the gain taxable?
Held:
Circuit Judge Frank issued the opinion for the United States Sixth Court of Appeals in
affirming the order of the Tax Court and holding that the market value was the stock was
properly deductible and it was taxable gain

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