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MADRIGAL v.

RAFFERTY
Facts: 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 (sociedad de gananciales). 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.
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 Court of First
Instance of the city 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 by the
defendants from the plaintiff, Vicente Madrigal, under the provisions of the Act of Congress known as the
Income Tax Law.
Issue: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in computing for the
additional income tax?
Ruling: No.Income Tax Law, as the name implies, taxes upon income and not upon capital and property. 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 income. Capital is wealth, while income is the service of wealth.
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 higher schedules of the additional tax directed at the incomes of the
wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal
partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law
must be given effect.__________________________________________________________________________
FISHER v. TRINIDAD (OCT30, 1922)
FACTS: Frederick Fisher was a stockholder in the corporation Philippine American Drug Company, which was
doing business in the City of Manila. PADC declared a stock dividend, the proportionate share of the appellant
was P24,800, which was issued to the appellant. In March 1920, the appellant, upon demand of the appellee,
paid under protest, and voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend.
For the recovery of that sum the present action was instituted. The defendant demurred to the petition. The
demurrer was sustained and the plaintiff appealed. F relies on ome decisions of the SC of the US in which it was
consistently held that "stock dividends" were capital and not an "income" and therefore not subject to the
"income tax" law. CIR Trinidad avers that the decisions of those cases should not be applied in the Ph bcoz d Ph
statute is different from that of the US.
ISSUE: Whether stock dividends may be considered as income
RULING: No way! Income may be defined as "the amount of money coming to a person or corporation within a
specified time whether as payment or corporation within a specified time whether as payment for services,
interest, or profit from investment. A mere advance in value in no sense constitutes the "income" specified in
the revenue law as "income" of the owner for the year in which the sale of the property was made. Such
advance constitutes and can be treated merely as an increase of capital.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock
dividends declared, as in the present case. The one is a disbursement to the stockholder of accumulated
earnings, and the corporation at once parts irrevocably with all interest thereon. The latter receives, not an
actual dividend, but certificate of stock which simply evidences his interest in the entire capital, including such
as by investment of accumulated profits has been added to the original capital. They are not income to him, but
represent additions to the source of his income, namely, his invested capital. One is an actual receipt of profits;
the other is a receipt of a representation of the increased value of the assets of corporation.________________

LIMPAN INVESTMENT CORPORATION v. CIR


FACTS: Petitioner Limpan Investment Corporation, a domestic corporation, is engaged in the business of leasing
real properties. Its principal stockholders are the spouses Isabelo P. Lim and Purificacion Ceiza de Lim, who
own and control ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board
is the same Isabelo P. Lim.1wph1.t
Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of which
were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim.
Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of
P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the sums of
P657.00 and P2,220.00.
Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an investigation of
petitioner's 1956 and 1957 income tax returns and, in the course thereof, they discovered and ascertained that
petitioner had underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable years and
had claimed excessive depreciation of its buildings in the sums of P4,260.00 and P16,336.00 covering the same
period. On the basis of these findings, respondent Commissioner of Internal Revenue issued its letterassessment and demand for payment of deficiency income tax and surcharge against petitioner corporation.
Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the assessment
but the latter denied said request and reiterated its original assessment and demand. Hence, the corporation
filed its petition for review before the Tax Appeals court, questioning the correctness and validity of the above
assessment of respondent Commissioner of Internal Revenue. It disclaimed having received or collected the
amount of P20,199.00, as unreported rental income for 1956, or any part thereof and denied having received or
collected the amount of P81,690.00, as unreported rental income for 1957, or any part thereof, explaining that
part of said amount totalling P31,380.00 was not declared as income in its 1957 tax return because its
president, Isabelo P. Lim, who collected and received P13,500.00 from certain tenants, did not turn the same
over to petitioner corporation in said year but did so only in 1959; that a certain tenant (Go Tong) deposited in
court his rentals amounting to P10,800.00, over which the corporation had no actual or constructive control;
and that a sub-tenant paid P4,200.00 which ought not be declared as rental income.
With regard to the depreciation which respondent disallowed and deducted from the returns filed by
petitioner, the same witness tried to establish that some of its buildings are old and out of style; hence, they are
entitled to higher rates of depreciation than those adopted by respondent in his assessment.
On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the investigation of
the 1956 and 1957 income tax returns of petitioner corporation, testified for the respondent that he personally
interviewed the tenants of petitioner and found that these tenants had been regularly paying their rentals to
the collectors of either petitioner or its president, Isabelo P. Lim, but these payments were not declared in the
corresponding returns.
The Tax Court upheld respondent Commissioner's assessment and demand for deficiency income tax which, as
above stated in the beginning of this opinion, petitioner has appealed to this Court.
ISSUE: Whether or not the respondent Court erred in holding that the petitioner had an unreported rental
income of P20,199.00 for the year 1956, and that it erred in holding that the petitioner had an unreported
rental income of P81,690.00 for the year 1957, and in holding that the depreciation in the amount of
P20,598.00 claimed by petitioner for the years 1956 and 1957 was excessive.
RULING: The decision appealed from is affirmed. This appeal is manifestly unmeritorious.
With respect to the balance, which petitioner denied having unreported in the disputed tax returns, the excuse
that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and only later
transferred or disposed of the ownership of the buildings existing thereon to petitioner corporation, so as to
justify the alleged verbal agreement whereby they would turn over to petitioner corporation six percent (6%) of

the value of its properties to be applied to the rentals of the land and in exchange for whatever rentals they
may collect from the tenants who refused to recognize the new owner or vendee of the buildings, is not only
unusual but uncorroborated by the alleged transferors, or by any document or unbiased evidence. Petitioner's
denial and explanation of the non-receipt of the remaining unreported income for 1957 is not substantiated by
satisfactory corroboration. As above noted, Isabelo P. Lim was not presented as witness to confirm accountant
Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which
he allegedly collected and received in 1957 were reported therein.
The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification
for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of
petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to have
constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have been reported
as rental income in said year, since it is income just the same regardless of its source.
It appearing that the Tax Court applied rates of depreciation in accordance with Bulletin "F" of the U.S. Federal
Internal Revenue Service, which this Court pronounced as having strong persuasive effect in this jurisdiction, for
having been the result of scientific studies and observation for a long period in the United States, after whose
Income Tax Law ours is patterned, the depreciation in the amount of P20,598.00 claimed by petitioner for the
years 1956 and 1957 was not excessive.___________________________________________________________

CONWI vs. COURT OF TAX APPEALS


FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing
Corporation. Said corporation is a subsidiary of Procter & Gamble, a foreign 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 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.
In 1973, petitioners filed their amended income tax returns for 1970 and 1971, this time using par value of the
peso as basis for converting their respective dollar income into Philippines pesos for purposes of computing and
paying corresponding income tax due from them. This resulted in the alleged overpayments, refund and/or tax
credit, for which claims for refund were filed with respondent Commissioner.
Petitioners argued that since the dollar earnings do not fall within the classification of foreign exchange
transactions, there occurred no actual inward remittances, and, therefore, they are not included in the
coverage of Central Bank Circular No. 289 which provides for the specific instances when the par value of the
peso shall not be the conversion rate used. They conclude that their earnings should be converted for income
tax purposes using the par value of the Philippine peso.
Without awaiting the resolution of the Commissioner on their claims, petitioners filed their petition for review
before the CTA. CTA 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. The refund claims were denied.
ISSUES:
1.

WON petitioners dollar earnings are receipts derived from foreign exchange transactions.

2.

WON the CTA erred in holding that the proper rate of conversion is the prevailing free market rate of
exchange and not the par value of the peso.

3.

WON petitioners are exempt to pay tax for such income since there were no remittance/ acceptance
of their salaries in US Dollars into the Philippines.

HELD:
1.

NO. 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. Income can also
be thought of as flow of the fruits of one's labor. Petitioners are correct in claiming that their dollar
earnings are not receipts derived from foreign exchange transactions. For a foreign exchange
transaction is simply that-foreign exchange being the conversion of an amount of money of one
country into an equivalent amount of money of another country. When petitioners were assigned to

the foreign subsidiaries of P&G, they were earning in their assigned nations currency and were also
spending in said currency. There was no conversion from one currency to another.

2.

NO. 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 purposes.

3.

No. Even if there was no remittance and acceptance of their salaries and wages in US Dollars into the
Philippines, they are still bound to pay the tax. Petitioners forgot that they are citizens of the
Philippines, and their income, within or without, and in this case wholly without or outside the
Philippines, are subject to income tax. The petitions were denied for lack of merit.

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 years as payment
for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon the taxable net income received
during each taxable year from all sources by every individual, whether a citizen of the Philippines residing
therein or abroad or an alien residing in the Philippines, determined in accordance with the following schedule:
xxx xxx xxx
As income of the petitioners, Revenue Memorandum Circulars 7-71 and 41-71, reiterating BIR Ruling 70-027,
shall apply. These Revenue Memorandum Circulars were issued to prescribe a uniform rate of exchange for
internal revenue tax purposes.__________________________________________________________________
COMMISSIONER v. GLENSHAW GLASS
Glenshaw manufactures glass bottles and containers. Hatford- Empire company manufactures the machines
used by Glenshaw.
Glenshaw sued Hatford-Empire. His claims were demands for exemplary damages for fraud and treble damages
for injury to its business by reason of Hartfords violation of the federal antitrust laws. They had a settlement
wherein Hartford paid Glenshaw $800,000. Of this amount, around $324k, which was for punitive damages for
fraud and antitrust violations, was not reported by Glenshaw as income.
The Commissioner determined a deficiency, claiming as taxable the entire sum less only deductible legal fees.
The Tax Court and the Court of Appeals ruled for Glenshaw.
ISSUE: Whether or not the award for damages falls under income derived from whatever source, thus taxable
HELD: YES.
US Tax Code: SEC. 22. 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, or sales, or dealings in property, whether real or personal, growing
out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the
transaction of any business carried on for gain or profit, or gains or profits and income derived from any source
whatever. . . ."
Here, we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have
complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for
unlawful conduct cannot detract from their character as taxable income to the recipients. Respondents
concede, as they must, that the recoveries are taxable to the extent that they compensate for damages actually
incurred. It would be an anomaly that could not be justified in the absence of clear congressional intent to say
that a recovery for actual damages is taxable, but not the additional amount extracted as punishment for the
same conduct which caused the injury. And we find no such evidence of intent to exempt these payments.____

MURPHY v. IRS
Facts: Marrita Leveille (now Murphy) received compensatory damages of $70,000 after winning a complaint
against her former employer for a violation of whistle-blower statutes. The award was divided as follows:

$45,000 represented damages for emotional distress or mental anguish and $25,000 represented damages for
injury to professional reputation. Murphy included the $70,000 in gross income on her 2000 tax return and paid
$20,665 of related taxes. She later sought a refund of the $20,665. The IRS denied the request for a refund, and
Murphy brought a suit against the IRS in the U.S. District Court for the District of Columbia, which granted
summary judgment for the IRS. On appeal to the D.C. Circuit, Murphy contended that her receipt of damages on
account of personal injuries (including nonphysical personal injuries) was analogous to a tax-free return of
capital (i.e., human capital) and was, therefore, not subject to taxation.
Issue: WON Murphy can refund the amount she paid as tax in relation to the $70,000 awarded to her
Ruling: When the Sixteenth Amendment was drafted, the word "incomes" had well understood limits. To be
sure, the Supreme Court has broadly construed the phrase "gross income" in the IRC and, by implication, the
word "incomes" in the Sixteenth Amendment, but it also has made plain that the power to tax income extends
only to "gain[s]" or "accessions to wealth. That is why, as noted above, the Supreme Court has held a "return of
capital" is not income. The question in this case is not, however, about a return of capitalexcept insofar as
Murphy analogizes human capital to physical or financial capital; the question is whether the compensation she
received for her injuries is income.
Here, if the $70,000 Murphy received was "in lieu of" something "normally untaxed, then her compensation is
not income under the Sixteenth Amendment; it is neither a "gain" nor an "accession[] to wealth.
As we have seen, it is clear from the record that the damages were awarded to make Murphy emotionally and
reputationally "whole" and not to compensate her for lost wages or taxable earnings of any kind. The emotional
well-being and good reputation she enjoyed before they were diminished by her former employer were not
taxable as income. Under this analysis, therefore, the compensation she received in lieu of what she lost cannot
be considered income and, hence, it would appear the Sixteenth Amendment does not empower the Congress
to tax her award.
Every indication is that damages received solely in compensation for a personal injury are not income within the
meaning of that term in the Sixteenth Amendment. First, as compensation for the loss of a personal attribute,
such as well-being or a good reputation, the damages are not received in lieu of income. Second, the framers of
the Sixteenth Amendment would not have understood compensation for a personal injury, including a
nonphysical injury, to be income. Therefore, we hold 104(a)(2) unconstitutional insofar as it permits the
taxation of an award of damages for mental distress and loss of reputation.
Accordingly, we remand this case to the district court to enter an order and judgment instructing the
Government to refund the taxes Murphy paid on her award plus applicable interest.______________________

OLD COLONY v. CIR


Wiliam Wood was President of the American Woolen Company from the years 1918-1920. He included in his
federal income tax the salaries and commissions he received for such years. Pursuant to the companys
resolutions, it paid to the CIR Mr. Woods income and surtaxes for the latters salaries and commissions.
The petitioners are the executors of the will of William M. Wood, deceased. On June 27, 1925, before Mr.
Wood's death, the Commissioner of Internal Revenue notified him by registered mail of the determination of a
deficiency in income tax against him for the years 1919 and 1920. An appeal was taken to the Board of Tax
Appeals. The Board found a deficiency in the federal income tax return of Mr. Wood for the year 1919 and for
the year 1920.
Issue: Whether or not the taxes paid by the employer assessable against the employee constitutes
as
additional taxable income to such employee?
(Stated differently, whether or not the taxes paid by the company constitutes as additional income
by Wood and therefore taxable?)
Held: The taxes paid by the company for Wood constitutes as additional income, and therefore taxable. The
payment of the tax by the employers was in consideration of the services rendered by the employee, and was
again derived by the employee from his labor. The taxes were imposed upon the employee, which were payed
by the employer, and that the employee entered upon his duties in the years in question under the express
agreement that his income taxes would be paid by his employer. The taxes were paid upon a valuable
consideration, namely, the services rendered by the employee and as part of the compensation therefor. _____

HELVERING v. BRUUN 309 U.S. 461 (1940)

Bruun was a landlord. He leased some property to a tenant. When the lease expired, the tenant left
and Bruun took the property back.

In 1929, while the tenant was in possession of the property, they knocked down an old building and
built a new building on the property. In 1933, when they left, Bruun got to keep the new building.

The building which had been erected upon said premises by the lessee had a fair market value of
$64,245.68, and that the unamortized cost of the old building, which was removed from the
premises in 1929 to make way for the new building, was $12,811.43, thus leaving a net fair market
value as at July 1, 1933, of $51,434.25, for the aforesaid new building erected upon the premises by
the lessee.

The IRS stepped in and said that Bruun's gain of a new building was a capital gain.
Contention of Bruun:
Bruun argued that no income had been realized yet because his interest was represented by a deed, and when
the tenant left, he had the exact same deed he had when the tenant arrived. So he hadn't gained anything.
Bruun suggested that the IRS would have to wait until the property was sold (aka the value was realized).

Basically, the construction of the new building increased the value of the land,
but there were other ways the value could change. But until the land was sold,
Bruun hadn't received anything.

See Eisner v. Macomber (252 U.S. 189 (1920)), which says that in general, you
don't have to report a gain until you sell the property (aka "severance is a
prerequisite to realization").

Contention of IRS:
The IRS argued that until the day the tenant left, Bruun didn't own a new building, as soon as the lease ended,
Bruun did own a new building. He had received a gain and needed to pay taxes on it immediately.
Issue: WON the improvements and increase attributable to the improvements are taxable.
Held: The US Supreme Court found for the IRS.
The US Supreme Court found that upon when a lease ended, the landlord repossessed the real estate and
improvements and increase in value attributable to the improvements was taxable.
While it is true that economic gain is not always taxable as income, it is settled that the realization of gain need
not be in cash derived from the sale of an asset. Gain may occur as a result of exchange of property, payment of
the taxpayer's indebtedness, relief from a liability, or other profit realized from the completion of a transaction.
The fact that the gain is a portion of the value of property received by the taxpayer in the transaction does not
negative its realization.
Here, as a result of a business transaction, the respondent received back his land with a new building on it,
which added an ascertainable amount to its value. It is not necessary to recognition of taxable gain that he
should be able to sever the improvement begetting the gain from his original capital. If that were necessary, no
income could arise from the exchange of property, whereas such gain has always been recognized as realized
taxable gain._________________________________________________________________________________
CIR v. CA, CTA and A. SORIANO CORP.
Don Andres Soriano (American), founder of A Soriano Y Cia predecessor of ANSCOR, had a total shareholdings
of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of original issue when the
corporation was founded and 134,659 shares as stock dividend declarations. So in 1964 when Soriano died, half
of the shares he held went to his wife as her conjugal share (wifes legitime) and the other half (92,577
shares, which is further broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went
to the estate. For sometime after his death, his estate still continued to receive stock dividends from ASC until it
grew to at least 108,000 shares.
In 1968, ANSCOR through its Board issued a resolution for the redemption of shares from Sorianos estate
purportedly for the planned Filipinization of ANSCOR. Eventually, 108,000 shares were redeemed from the
Soriano Estate. In 1973, a tax audit was conducted. Eventually, the Commissioner of Internal Revenue (CIR)
issued an assessment against ASC for deficiency withholding tax-at-source based on the transactions of
exchange and redemption of stocks
The BIR made the corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty
under
(P.D.) 23. However, petitioner ruled that the invoked decrees do not cover Sections 53 and 54 in relation to
Article 83(b) of the 1939 Revenue Act under which ANSCOR was assessed. The CIR explained that when the
redemption was made, the estate profited (because ANSCOR would have to pay the estate to redeem), and so

ASC would have withheld tax payments from the Soriano Estate yet it remitted no such withheld tax to the
government.
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the
redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling, after finding
36
sufficient evidence to overcome the prima facie correctness of the questioned assessments. In a petition for
37
review the CA as mentioned, affirmed the ruling of the CTA. Hence, this petition.
38

The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act which
provides:
Sec. 83. Distribution of dividends or assets by corporations.
(b) Stock dividends A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent
to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock
shall be considered as taxable income to the extent it represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied)
ANSCOR averred that it is not duty bound to withhold tax from the estate because it redeemed the said shares
for purposes of Filipinization of ANSCOR and also to reduce its remittance abroad.
Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b) making
the proceeds thereof taxable. It also argues that the Section applies to stock dividends which are the bulk of
stocks that ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the estate of Don
Andres gained from the redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-at-source
arising from the two transactions, pursuant to Section 53 and 54 of the 1939 Revenue Act.
ISSUE: Whether ANSCOR's redemption of stocks from its stockholder as well as the exchange of common with
preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend" making
the proceeds thereof taxable under the provisions of the above-quoted law.
HELD: The reason behind the redemption is not material. The proceeds from redemption are taxable and
ANSCOR is duty bound to withhold the tax at source. The Soriano Estate definitely profited from the
redemption and such profit is taxable, and again, ANSCOR had the duty to withhold the tax. There was a total of
108,000 shares redeemed from the estate. 25,247.5 of that was original issue from the capital of ANSCOR. The
rest (82,752.5) of the shares are deemed to have been from stock dividend shares. Sale of stock dividends is
taxable. It is also to be noted that in the absence of evidence to the contrary, the Tax Code presumes that every
distribution of corporate property, in whole or in part, is made out of corporate profits such as stock dividends.
It cannot be argued that all the 108,000 shares were distributed from the capital of ANSCOR and that the latter
is merely redeeming them as such. The capital cannot be distributed in the form of redemption of stock
dividends without violating the trust fund doctrine wherein the capital stock, property and other assets of
the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is
always capital. That doctrine was intended for the protection of corporate creditors.______________________

WISE & CO., INC., ET. AL., vs. MEER


FACTS: Herein plaintiff-appellants Wise & Co., Inc. et. al were stockholders of Manila Wine Merchants, Ltd.
(hereinafter referred to as the Hongkong Company), a foreign corporation duly authorized to do business in the
Philippines. On May 27, 1937 its Board of Directors recommended to the stockholders that they adopt
resolutions necessary to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation
formed on May 27, 1937, for the sum of P400,000. This sale was duly authorized by the stockholders of the
Hongkong Company at a meeting held on July 22, 1937.
The Hongkong Co. made a distribution from its earnings for the year 1937 to its stockholders. As a result of the
sale of its business and assets to Philippine Co., a surplus was realized and the HK Co.distributed this surplus to
the shareholders including Wise & Co.Inc., et.al. Philippine income tax had been paid by HK Co. on the said
surplus from which said distributions were made. At a special general meeting of the shareholders of the HK
Co., the stockholders by resolution directed that the company be voluntarily liquidated and its capital

distributed among the stockholders. The plaintiff- appellants duly filed Income Tax Returns, on which the
defendant, Collector of Internal Revenue Bibiano L. Meer made deficiency assessments of P11, 931.23 for the
year 1937. They paid under written protest. Since July 1, 1939 they requested from defendant a refund of the
said amounts which defendant has refused and still refuses to refund.
Now, before the Court of First Instance of Manila was a complaint for recovery of certain amounts therein
specified. CFI ruled in favor of CIR Meer stating that that the Hongkong corporation, was in liquidation
beginning June 1, 1937, that all dividends declared and paid thereafter were distributions of all its assets in
complete liquidation and were subject to tax. Appellants appealed the decision of the CFI.
ISSUE: W the distributions received by plaintiffs-appellants are ordinary dividends and therefore not taxable
HELD: No. The SC affirmed the CFIs judgment. Appellants contend that the amounts received by them and on
which the taxes in question were assessed and collected were ordinary dividends. On the other hand, CIR
contends that they were liquidating dividends. SC ruled that the distributions under consideration were not
ordinary dividends. Therefore, they are taxable as liquidating dividends.
Income tax law states that Where a corporation, partnership, association, joint-account, or insurance company
distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the
stockholder, whether individual or corporation, is a taxable income or a deductible loss as the case may
be. Appellants received the distributions in question in exchange for the surrender and relinquishment by them
of their stock in the HK Co. which was dissolved and in process of complete liquidation.
Non-resident alien individual appellants contend that if the distributions received by them were to be
considered as a sale of their stock to the HK Co., the profit realized by them does not constitute income from
Philippine sources and is not subject to Philippine taxes, "since all steps in the carrying out of this so-called sale
took place outside the Philippines." This contention is untenable. The HK Co. was at the time of the sale of its
business in the Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the
Philippines. The HK Co. was incorporated for the purpose of carrying on in the Philippine Islands the business
of wine, beer, and spirit merchants and the other objects set out in its memorandum of association. Hence, its
earnings, profits, and assets, including those from whose proceeds the distributions in question were made, the
major part of which consisted in the purchase price of the business, had been earned and acquired in the
Philippines. As such, it is clear that said distributions were income "from Philippine sources."________________

JAMES v. US
Facts: The petitioner is a union official who, with another person, embezzled in excess of $738,000 during the
years 1951 through 1954 from his employer union and from an insurance company with which the union was
doing business. Petitioner failed to report these amounts in his gross income in those years. Petitioner was
charged of a criminal case for embezzlement. He was sentenced for a total of three years imprisonment.
In addition to criminal penalties for embezzlement, the IRS stepped in and claimed that the $738k should be
counted in James' gross income. James argued that since a person is legally obligated to repay money that they
steal, they've received no income in the same way as a person receives no income from taking out a loan. So
there should be no tax liability.
Petitioner contends that the Wilcox rule has been in existence since 1946; that if Congress had intended to
change the rule, it would have done so; that there was a general revision of the income tax laws in 1954
without mention of the rule; that a bill to change it was introduced in the Eighty-sixth Congress but was not
acted upon; that, therefore, we may not change the rule now. But the fact that Congress has remained silent or
has re-enacted a statute which we have construed, or that congressional attempts to amend a rule announced
by this Court have failed, does not necessarily debar us from re-examining and correcting the Court's own
errors.
In Wilcox, the Court held that embezzled money does not constitute taxable income to the embezzler in the
year of the embezzlement under 22 (a) of the Internal Revenue Code of 1939.
Issue: Whether embezzled funds are to be included in the "gross income" of the embezzler in the year in which
the funds are misappropriated.
Held: Embezzled money is taxable income of the embezzler in the year of the embezzlement under 22 (a) of the
Internal Revenue Code of 1939, which defines "gross income" as including "gains or profits and income derived
from any source whatever," and under 61 (a) of the Internal Revenue Code of 1954, which defines "gross
income" as "all income from whatever source derived."
It had been a well-established principle, long before either Rutkin or Wilcox, that unlawful, as well as lawful,
gains are comprehended within the term "gross income." Section II B of the Income Tax Act of 1913 provided
that "the net income of a taxable person shall include gains, profits, and income from the transaction of any
lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever . .

. ." When the statute was amended in 1916, the one word "lawful" was omitted. This revealed, we think, the
obvious intent of that Congress to tax income derived from both legal and illegal sources, to remove the
incongruity of having the gains of the honest laborer taxed and the gains of the dishonest immune. And, the
Court has pointed out, with approval, that there "has been a widespread and settled administrative and judicial
recognition of the taxability of unlawful gains of many kinds. These include protection payments made to
racketeers, ransom payments paid to kidnappers, bribes, money derived from the sale of unlawful insurance
policies, graft, black market gains, funds obtained from the operation of lotteries, income from race track
bookmaking and illegal prize fight pictures.________________________________________________________

FACTS: Private respondent Efren P. Castaneda retired from the government service as Revenue Attache in the
Philippine Embassy in London, England, on 10 December 1982. Upon retirement, he received terminal leave pay
from which petitioner CIR withheld P12,557.13 allegedly representing income tax.

CIR Vs. CA, CTA & GCL Retirement Plan

The CTA found for private respondent Castaneda and ordered the CIR to refund Castaneda the sum of
P12,557.13 withheld as income tax. Petitioner appealed the CTA decision. On 26 September 1990, the CA
dismissed the petition for review and affirmed the decision of the CTA.

Facts: GCL Retirement Plan is an employees' trust maintained by the employer, GCL Inc., to provide retirement,
pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as
exempt from income tax by CIR in accordance with RA 4917. In 1984, GCL made investments and earned there
from interest income which was withheld the 15% final withholding tax imposed by PD 1959, GCL filed with CIR
a claim for refund in the amounts of P1,312.66 withheld by Anscor and P2,064.15 by Commercial Bank of
Manila. In 1985, it filed a second claim for refund of the amount of P7,925.00 withheld by Anscor, stating in
both letters that it disagreed with the collection of the 15% final withholding tax from the interest income as it
is an entity fully exempt from income tax as provided under RA 4917 in relation to Sec 56 (b) of the Tax Code.
CIR denied the refund, Petitioner elevated the matter to CTA which ruled in favor of GCL, holding that
employees' trusts are exempt from the 15%final withholding tax on interest income and ordering a refund of
the tax withheld. CA - upheld the CTA Decision.
CIRs Contention is that from 1984 when PD 1959 was promulgated, employees' trusts ceased to be exempt
and thereafter became subject to the final withholding tax.
GCLs contention is that the tax exempt status of the employees' trusts applies to all kinds of taxes, including
the final withholding tax on interest income. That exemption, according to GCL, is derived from Sec 56(b) and
not from Sec 21 (d) or 24 (cc) of the Tax Code.
Issue: Whether GCL is exempted from Income Tax
Held: GCL Plan was qualified as exempt from income tax by the CIR in accordance with RA 4917. In so far as
employees' trusts are concerned, the foregoing provision should be taken in relation to then Sec 56(b) (now
53[b]) of the Tax Code, as amended by RA 1983. The tax-exemption privilege of employees' trusts, as
distinguished from any other kind of property held in trust, springs from the foregoing provision. It is
unambiguous. The tax law has singled out employees' trusts for tax exemption and rightly so, by virtue of the
raison de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans normally provide
economic assistance to employees upon the occurrence of certain contingencies, particularly, old age
retirement, death, sickness, or disability. It provides security against certain hazards to which members of the
Plan may be exposed. It is an independent and additional source of protection for the working group. What is
more, it is established for their exclusive benefit and for no other purpose. The deletion in PD 1959 of the
provisos regarding tax exemption and preferential tax rates under the old law, therefore, cannot be deemed to
extent to employees' trusts.
Said Decree, being a general law, cannot repeal by implication a specific provision, Sec 56(b) now 53 [b]) in
relation to RA 4917 granting exemption from income tax to employees' trusts. RA 1983, which exempted
employees' trusts in its Sec 56 (b) was effective on 1957 while RA 4917 was enacted on 1967, long before the
issuance of PD 1959 in 1984. 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.
This is so even if the provisions of the latter are sufficiently comprehensive to include what was set forth in the
special act. There can be no denying either that the final withholding tax is collected from income in respect of
which employees' trusts are declared exempt. The application of the withholdings system to interest on bank
deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes
by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from
income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in
the first place.
We herein rule that PD 1959 did not have the effect of revoking the tax exemption enjoyed by employees'
trusts; reliance on those authorities is now misplaced. WHEREFORE, the Writ of Certiorari prayed for is DENIED.

CIR vs. CA and EFREN P. CASTANEDA G.R. No. 96016 October 17, 1991

Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13, contending that the cash
equivalent of his terminal leave is exempt from income tax. To comply with the 2-year prescriptive period
within which claims for refund may be filed, Castaneda filed on 16 July 1984 with the Court of Tax Appeals (CTA)
a Petition for Review, seeking the refund of income tax withheld from his terminal leave pay.

ISSUE: WON terminal leave pay received by a government official or employee on the occasion of his
compulsory retirement from the government service is subject to withholding (income) tax.
HELD: We resolve the issue in the negative. The Solicitor General, acting on behalf of the CIR, contends that the
terminal leave pay is income derived from employer-employee relationship, citing in support of his stand
Section 28 of the National Internal Revenue Code; that as part of the compensation for services rendered,
terminal leave pay is actually part of gross income of the recipient. Thus
. . . It (terminal leave pay) cannot be viewed as salary for purposes which would reduce it. . . . there can thus be
no "commutation of salary" when a government retiree applies for terminal leave because he is not receiving it
as salary. What he applies for is a "commutation of leave credits." It is an accumulation of credits intended for
old age or separation from service. . . .
The Court has already ruled that the terminal leave pay received by a government official or employee is not
subject to withholding (income) tax. In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service
Commission, et al., G.R. No. 96032, 31 July 1991, the Court explained the rationale behind the employee's
entitlement to an exemption from withholding (income) tax on his terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or
employee who retires, resigns or is separated from the service through no fault of his own. (Manual on Leave
Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17). In the exercise
of sound personnel policy, the Government encourages unused leaves to be accumulated. The 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.______________________________________________
RE: REQUEST OF ATTY. BERNARDO ZIALCITA FOR RECONSIDERATION OF THE ACTION OF THE FINANCIAL AND
BUDGET OFFICE
FACTS: On February 16, 1990 Atty. Zialcita retired from government service upon reaching the compulsory
retirement age of 65 years. Withholding tax for compensation was deducted from the payment of the money
value of his accumulated leave credits.
On 23 August 1990, a resolution was issued by the Court En Banc stating that the terminal leave pay of Atty.
Zialcita received by virtue of his compulsory retirement can never be considered a part of his salary subject to
the payment of income tax but falls under the phrase other benefits received by retiring employees and
workers, within the meaning of Section 1 of PD 220 and is thus exempt from the payment of income tax. That
the money value of his accrued leave credits is not a part of his salary is further buttressed by Sec. 3 of PD No.
985, otherwise known as The "Budgetary Reform Decree on Compensation and Position Classification of 1976"
particularly Sec. 3 (a) thereof, which makes it clear that the actual service is the period of time for which pay
has been received, excluding the period covered by terminal leave.

Accordingly, the Court Resolved to (1) ORDER the Fiscal Management and Budget Office to refund Atty. Zialcita
the amount of P59,502.33 which was deducted from his terminal leave pay as withholding tax; and (2) Declare
that henceforth no withholding tax shall be deducted by any Office of this Court from the terminal leave pay
benefits of all retirees similarly situated including those who have already retired and from whose retirement
benefits such withholding taxes were deducted.
On September 18, 1990, the Commissioner of Internal Revenue, as intervenor- movant and through the
Solicitor General, filed a motion for clarification and/or reconsideration.
ISSUE: Whether commutation of leave credits (commonly known as terminal leave) is subject to income tax.
HELD: No.
REASONS:
1.
Applying Section 12 (c) of Commonwealth Act 186, as incorporated into RA 660, and Section 28 (c) of
CA 186, the amount received by Atty. Zialcita as a result of the conversion of these unused leaves
into cash is exempt from income tax.
Commonwealth Act No. 186. Section 12(c) of CA 186 states:
... Officials and employees retired under this Act shall be entitled to the commutation of the unused vacation
leave and sick leave, based on the highest rate received, which they may have to their credit at the time of
retirement.
Section 28(c) of the same Act, in turn, provides:
(c) Except as herein otherwise provided, the Government Service Insurance System, all benefits granted under
this Act, and all its forms and documents required of the members shall be exempt from all types of taxes,
documentary stamps, duties and contributions, fiscal or municipal, direct or indirect, established or to be
established;
2.
The commutation of leave credits is commonly known as terminal leave. (Manual on Leave
Administration Course for Effectiveness, published by the Civil Service Commission, p. 17) Terminal
leave is applied for by an officer or employee who retires, resigns or is separated from the service
through no fault of his own. (supra, p. 16) Since terminal leave is applied for by an officer or
employee who has already severed his connection with his employer and who is no longer working,
then it follows that the terminal leave pay, which is the cash value of his accumulated leave credits,
is no longer compensation for services rendered. It cannot be viewed as salary.
3.

The terminal leave pay of Atty. Zialcita may likewise be viewed as a "retirement gratuity received by
government officials and employees" which is also another exclusion from gross income as provided
for in Section 28(b), 7(f) of the NLRC. A gratuity is that paid to the beneficiary for past services
rendered purely out of generosity of the giver or grantor.

Section 284 of the Revised Administrative Code grants to a government employee 15 days vacation
leave and 15 days sick leave for every year of service. Hence, even if the government employee
absents himself and exhausts his leave credits, he is still deemed to have worked and to have
rendered services. His leave benefits are already imputed in, and form part of, his salary which in
turn is subjected to withholding tax on income. He is taxed on the entirety of his salaries without any
deductions for any leaves not utilized. It follows then that the money values corresponding to these
leave benefits both the used and unused have already been taxed during the year that they were
earned. To tax them again when the retiring employee receives their money value as a form of
government concern and appreciation plainly constitutes an attempt to tax the employee a second
time. This is tantamount to double taxation.
The 23 August 1990 Resolution (AM 90-6-015-SC), however, specifically applies only to employees of the
Judiciary who retire, resign or are separated through no fault of their own. The resolution cannot be made to
apply to other government employees, absent an actual case or controversy, as that would be in principle an
advisory opinion._____________________________________________________________________________

On March 1, 1986, the government sequestered the station, including its properties, funds and other assets,
and took over its management and operations from its owner, Roberto Benedicto. The government and
Benedicto entered into a temporary agreement under which the latter would retain its management and
operation.
On November 3, 1990, the Presidential Commission on Good Government (PCGG) and Benedicto executed a
Compromise Agreement, where Benedicto transferred and assigned all his rights, shares and interests in
petitioner station to the government.
In the meantime, the four (4) employees retired from the company and received, on staggered basis, their
retirement benefits under the 1993 Collective Bargaining Agreement (CBA) between petitioner and the
bargaining unit of its employees. When a salary increase took effect P1,500.00 salary increase was given to all
employees of the company, current and retired, effective July 1994. However, when the four retirees
demanded theirs, petitioner refused and instead informed them via a letter that their differentials would be
used to offset the tax due on their retirement benefits in accordance with the National Internal Revenue Code
(NIRC).
The four (4) retirees filed separate complaints against IBC TV-13 Cebu and Station Manager Louella F. Cabaero
for unfair labor practice and non-payment of backwages before the NLRC, Regional Arbitration Branch VII. The
complainants averred that their retirement benefits are exempt from income tax under Article 32 of the NIRC.
The Labor Arbiter rendered judgment in favor of the retirees. The retirement benefits of complainants Lagahit
and Amarilla were exempt from income tax under Section 28(b) of the NIRC. However, the differentials due to
the two complainants were computed three years backwards due to the law on prescription.
NLRC affirmed.
ISSUE: Whether or not the retirement benefits of respondents are part of their gross income
Whether or not the petitioner is estopped from reneging on its agreement with respondent to pay for the taxes
on said retirement benefits.
HELD: We agree with petitioners contention that, under the CBA, it is not obliged to pay for the taxes on the
respondents retirement benefits. We have carefully reviewed the CBA and find no provision where petitioner
obliged itself to pay the taxes on the retirement benefits of its employees.
We also agree with petitioners contention that, under the NIRC, the retirement benefits of respondents are
part of their gross income subject to taxes.
For the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the
concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2)
the retiring official or employee has been in the service of the same employer for at least 10 years; (3) the
retiring official or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit
had been availed of only once.

4.

INTERCONTINENTAL BROADCASTING CORPORATION (IBC) vs. NOEMI B. AMARILLA et al


FACTS: Petitioner employed the following persons at its Cebu station: Candido C. Quiones, Jr., Corsini R.
Lagahit, Anatolio G. Otadoy, and Noemi Amarilla.

While it may indeed be conceded that the previous dispensation of petitioner IBC-13 footed the bill for the
withholding taxes, upon discovery by the new management, this was stopped altogether as this was grossly
prejudicial to the interest of the petitioner IBC-13. The policy of withholding the taxes due on the differentials
as a remedial measure was a matter of sound business judgment and dictates of good governance aimed at
protecting the interests of the government. Necessarily, the newly-appointed board and officers of the
petitioner, who learned about this grossly disadvantageous mistake committed by the former management of
petitioner IBC-13 cannot be expected to just follow suit blindly. An illegal act simply cannot give rise to an
obligation. Accordingly, the new officers were correct in not honoring this highly suspect practice and it is now
their duty to rectify this anomalous occurrence, otherwise, they become remiss in the performance of their
sworn responsibilities._________________________________________________________________________

CIR v. MITSUBISHI
These cases, involving the same issue being contested by the same parties and having originated from the same
factual antecedents generating the claims for tax credit of private respondents, the same were consolidated by
resolution of this Court dated May 31, 1989 and are jointly decided herein.
FACTS: The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for
brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of the projected

expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi
agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency, for the installation of
a new concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper
concentrates produced from said machine for a period of fifteen (15) years. It was contemplated that
$9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from Japan.
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for
purposes of its obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of
4,320,000,000.00, at about the same time as the approval of its loan for 2,880,000,000.00 from a consortium
of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United States currency at
the then prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval of the
loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to
Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back
the total amount of loan by September 30, 1981.
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the
latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount
of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal
Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government.
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be
applied against their existing and future tax liabilities.
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a petition
for review with respondent Court.
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in favor of
Atlas in the amount of P1,971,595.01.
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to this
Court.
While CTA Case was still pending before the tax court, the corresponding 15% tax on the amount of
P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and remitted to
the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same basis for
exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals. Petitioner filed
his answer thereto on August 14, 1979, and, in a letter to private respondents dated November 12, 1979,
denied said claim for tax credit for lack of factual or legal basis.
On January 15, 1981, relying on its prior ruling, respondent court rendered judgment ordering the petitioner to
credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed on March 10, 1981, was
denied by respondent court in a resolution dated September 7, 1987. A notice of appeal was filed on September
22, 1987 by petitioner with respondent court and a petition for review was filed with this Court on December
19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.
ISSUE/S: 1.Whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible
from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and, therefore, exempt from
withholding tax.
2. Whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor
whose investments in the Philippines on loans are exempt from taxes under the code.
RULING: The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential
reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of
loan and Atlas as the seller of the copper concentrates.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in
its loan application with the former was that the amount being procured would be used as a loan to and in
consideration for importing copper concentrates from Atlas.
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not
appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other
considerations aliunde.
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to
discharge. Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A)
of the tax code, are entitled to exemption and which should indispensably be the party in interest in this case.

Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic
analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution
of much needed funds. Otherwise, the mere expedient of having a Philippine corporation enter into a contract
for loans or other domestic securities with private foreign entities, which in turn will negotiate independently
with their governments, could be availed of to take advantage of the tax exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals dated April 18, 1980 and January 15, 1981, respectively,
are hereby REVERSED and SET ASIDE._____________________________________________________________

CIR v. MARUBENI
Facts: Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of
Japan. It 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.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to
examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year ending
March 1985. In the course of the examination, petitioner found respondent to have undeclared income from
two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the
National Development Company (NDC) in connection with the construction and installation of a wharf/port
complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The other
contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia
storage complex also at the Leyte Industrial Development Estate.
All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to
shipment in accordance with the terms of the contracts. They were already finished products when shipped to
the Philippines.
On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency income, branch
profit remittance, contractor's and commercial broker's taxes. Respondent questioned this assessment in a
letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner assessing
respondent several deficiency taxes.
2
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 declaring a one-time amnesty covering unpaid income
taxes for the years 1981 to 1985 was issued. The period of the amnesty in E.O. No. 41 was later extended from
October 31, 1986 to December 5, 1986 by E.O. No. 54 dated November 4, 1986. The respondent availed of the
amnesty.
It is respondent's other argument that assuming it did not validly avail of the amnesty under the two Executive
Orders, it is still not liable for the deficiency contractor's tax because the income from the projects came from
the "Offshore Portion" of the contracts. The two contracts were divided into two parts, i.e., the Onshore
Portion and the Offshore Portion. All materials and equipment in the contract under the "Offshore Portion"
were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine
taxes.
Issue: Whether or not respondents income from the projects is subject to taxing jurisdiction of the Philippines
Ruling: The service of "design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning, coordination. . . " of the two projects involved
two taxing jurisdictions. These acts occurred in two countries Japan and the Philippines.
While the construction and installation work were completed within the Philippines, the evidence is clear that
some pieces of equipment and supplies were completely designed and engineered in Japan. 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.______________________________________________________________________________
CIR vs BOAC
FACTS: British Overseas Airways Corp (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. As such it

operates air transportation service and sells transportation tickets over the routes of the other airline members.
BOAC had no landing rights in the Philippines and was not granted a Certificate of Public Convenience except
for a nine-month period during 1961 and 1962. Although it did not carry passengers/cargo to and from the
Philippines, it maintained a general sales agent Wamer Barnes and Co., Ltd and Qantas Airways which was
responsible for selling BOAC tickets.
The CIR initiated assessments for deficiency taxes against BOAC. After paying under protest and denials by the
CIR to refund the amount paid, BOAC filed cases with the Tax Court. The Tax Court held that the proceeds of
ticket sales in Wamer and Qantas do not constitute income from Philippine sources "since no service of carriage
of passengers or freight was performed by BOAC within the Philippines." The CTA position was that income
from transportation is income from services so that the place where services are rendered determines the
source.
ISSUE: WON the revenue derived by BOAC from ticket sales in the Philippines, constitute income of BOAC from
Philippine sources, and accordingly taxable?
HELD: The SC set aside the decision of the CTA, ordered BOAC to pay the deficiency taxes and denied the
refund. The words 'income from any source whatever' disclose a legislative policy to include all income not
expressly exempted within the class of taxable income under our laws. 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.

CIR v. CTA & SMITH KLINE


FACTS: In its 1971 original income tax return, Smith Kline declared a net taxable income of 1,482,277, and paid
511,274 as tax due. Among the deductions claimed from gross income was 501,040 as its share of the head
office overhead expenses. However, on its amended return filed on March 01, 1973, there was an overpayment
of 324,255 arising from under deduction of home office overhead. It made a formal claim for the refund of
the alleged overpayment. It appears that sometime in October 1972, Smith Kline received from its international
dependent auditors, an authenticated certification to the effect that the Philippine share in the unallocated
overhead expenses of the main office for the year ended December 31, 1971 was actually 1,424,484. It further
stated in the certification that the allocation was made on the basis of the percentage of gross income in the
Philippines to gross income of the corporation as a whole. By reason of the new adjustment, Smith Klines tax
liability was greatly reduced from 511,247 to 168,992 resulting in an overpayment of 324,255.
ISSUE: WON the amended return filed by respondents in contrary to law.
HELD: NO. the governing law found in sec. 37 of the NIRC, which reads Income from sources within the
Philippines: xxxxxxx (b) Net income from the sources in the Philippines. From the items specified in subsection
(a) of this section there shall be deducted the expenses, losses, or other deductions which cannot definitely be
allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income
from sources within the Philippines. The ratable part is based upon the ratio of gross income from sources
within the Philippines to the total gross income.
Where an expense is clearly related to the production of the Philippine-derived income or to
Philippine operations (eg Salaries of Philippine personnel, rental of office building in the Philippines), that
expenses can be deducted from the gross income acquired in the Philippines without resorting to
apportionment. Clearly, the weight of evidence bolsters its position that the amount of 1,427,484 represents
the correct ratable share, the same having been computed pursuant to section 37 (b) and section 160.________

THE PHILIPPINE GUARANTY CO., INC. v. CIR


Facts: The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts with
foreign insurance companies not doing business in the Philippines, thereby ceding to the foreign reinsurers a
portion of the premiums on insurances it has originally underwritten in the Philippines. Philippine Guaranty
Co., Inc. ceded to the foreign reinsurers the premiums for 1953 and 1954. Said premiums were excluded by
Philippine Guaranty Co., Inc. from its gross income when it filed its income tax returns for 1953 and 1951.
Furthermore, it did not withhold or pay tax on them. Consequently, the Commissioner of Internal Revenue
assessed Philippine Guaranty Co., Inc. against withholding tax on the ceded reinsurance premiums. Philippine
Guaranty Co., Inc. protested the assessment on the ground that the premiums are not subject to tax for the
premiums did not constitute income from sources within the Philippines because the foreign reinsurers did not
engage in business in the Philippines, and CIR's previous rulings did not require insurance companies to
withhold income tax due from foreign companies.
ISSUE: Are insurance companies required to withhold tax on reinsurance premiums ceded to foreign insurance
companies?
Ruling: Yes. The reinsurance contracts however show that the transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co., Inc. against losses arising from the original insurances in the
Philippines were performed in the Philippines. The reinsurance premiums were income created from the
undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc. against liability for
loss under original insurances. Such undertaking, as explained above, took place in the Philippines. These
insurance premiums therefore came from sources within the Philippines and, hence, are subject to corporate
income tax.
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden
to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to
defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the
enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which
a government is supposed to provide. Considering that the reinsurance premiums in question were afforded
protection by the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by
our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the state._______

PHILAM LIFE V. CA
Facts: This is a consolidated case involving a claim for the refund of the amount as alledgely erroneous payment
of withholding tax and an assessment for the similar amount as deficiency withholding tax as a result of the
cancellation of a previously issued tax credit memo for the said amount in another CTA case.
Philam Life entered into a Management Services Agreement with AIRCO whereby, effective on July
1, 1972 for a fee not extending $250k per annum AIRCO shall perform services for Philam Life.
On September 30, 1978 AIRCO merge with AIG Inc., with the latter as the surviving corp and
successor in interest in AIRCOs agreement with Philam.
On November 18, 1980 respondent CIR issued a tax credit in favor of Philam Life Memo representing
the erroneous payment of the withholding tax at source on remittances to AIG for services rendered abroad.
Consequently, it was followed by another claim for refund for the second erroneous tax payment and then
another letter.
Without waiting for the claim to be resolved by the respondent CIR, petitioners filed a petition
seeking said refund. During its pendency however respondent CIR sent a letter denying petitioners claim for
refund, cancel the tax credit memo issued and asked petitioner to pay the amount of P643, 125.00 as deficiency
withholding tax at source for 1979 plus increments.
Without protesting, Petitioner filed a petition seeking for the annulment of said assessment in the
CTA, however the latter sustain the ruling of the respondent CIR.
Issue:
Whether the services performed abroad by AIG, a non-resident corporation not doing business in
the Philippines, May still be subject to an assessment of a withholding tax.
Held:

Yes. A reading of the various management services enumerated in the said management services
agreement will show that they can easily fall within under any of the expanded meaning of royalties as given in
section 37 of the NIRC. Therefore being considered as having commercial undertaking within the meaning of
section 37, the income derived for the services performed by AIG to PHILAM Life under said agreement shall be
considered income from services within the Philippines. With this view, AIG being a non-resident corporation
not engage in trade or business in the Philippines shall pay a tax equal to 35% of the gross income received
during each taxable year from all sources within the Philippines as interest, dividends, rents, royalties, salaries,
premiums, annuities, emoluments or other fixed or determinable annual, periodical or casual gains profits and
capital gains in relation to section 12 (6) (I) of the NIRC. In our jurisprudence, the test of taxability is the source
and the source is that activity which produces income._______________________________________________

VODAFONE INTL v. UNION OF INDIA & ANR.


Facts: In February 2007, Vodafone International Holdings B.V (Vodafone or VIH), a Dutch entity, had acquired
100 percent shares in CGP (Holdings) Limited (CGP), a Cayman Islands company for USD 11.1 billion from
Hutchinson Telecommunications International Limited (HTIL). CGP, through various intermediate companies/
contractual arrangements controlled 67 percent of Hutchison Essar Limited (HEL), an Indian company. The
acquisition resulted in Vodafone acquiring control over CGP and its downstream subsidiaries including,
ultimately, HEL. HEL was a joint venture between the Hutchinson group and the Essar group. It had obtained
telecom licences to provide cellular telephony in different circles in India from November 1994.
In September 2007, the tax department issued a show-cause notice to Vodafone to explain why tax was not
withheld on payments made to HTIL in relation to the above transaction. The tax department contended that
the transaction of transfer of shares in CGP had the effect of indirect transfer of assets situated in India.
Vodafone filed a writ petition in the Bombay High Court, inter alia, challenging the jurisdiction of the tax
authorities in the matter. By its order dated 3 December 2008, the Bombay High Court held that the tax
authorities had made out a prima facie case that the transaction was one of transfer of a capital asset situate in
India, and accordingly, the Indian income-tax authorities had jurisdiction over the matter.
Vodafone challenged the order of the Bombay High Court before the Supreme Court. In its ruling, dated 23
January 2009, the Supreme Court directed the tax authorities to first determine the jurisdictional challenge
raised by Vodafone. It also permitted Vodafone to challenge the decision of the tax authorities on the
preliminary issue of jurisdiction before the High Court.
In May 2010, the tax authorities held that they had jurisdiction to proceed against Vodafone for their alleged
failure to withhold tax from payments made under Section 201 of the Income-tax Act, 1961 (the Act). This order
of the tax authorities was challenged by Vodafone before the Bombay High Court.
By its order dated 8 September 2010, the Bombay High Court dismissed Vodafone's challenge to the order
passed by the tax authorities. Vodafone filed a Special Leave Petition (SLP) against the High Court order before
the Supreme Court. On 26 November 2010, SLP was admitted and the Supreme Court directed Vodafone to
deposit a sum of INR 25000 million within three weeks and provide a bank guarantee of INR 85000 million
within eight weeks from the date of its order.
Held: At the heart of the controversy was the interpretation of Section 9(1)(i) of the Act. As per the said section,
inter alia, income accruing or arising directly or indirectly from the transfer of a capital asset situated in India is
deemed to accrue/ arise in India in the hands of a non-resident.
In connection with the above, the Supreme Court observed that:
Charge to capital gains under Section 9(1)(i) of the Act arises on existence of three elements, viz, transfer,
existence of a capital asset and situation of such asset in India.
The legislature has not used the words indirect transfer' in Section 9(1)(i) of the Act. If the word indirect' is
read into Section 9(1)(i) of the Act, then the phrase capital asset situate in India' would be rendered nugatory.
Section 9(1)(i) of the Act does not have look through' provisions, and it cannot be extended to cover indirect
transfers of capital assets/ property situated in India.
The proposals contained in the Direct Taxes Code Bill, 2010, on taxation of off-shore share transactions indicate
that indirect transfers are not covered by Section 9(1)(i) of the Act.
A legal fiction has a limited scope and it cannot be expanded by giving purposive interpretation, particularly if
the result of such interpretation is to transform the concept of chargeability which is also there in Section 9(1)(i)
of the Act.
The question of withholding tax at source would not arise as the subject matter of offshore transfer between
the two non-residents was not liable to capital gains tax in India.
For the purposes of Section 195 of the Act, tax presence has to be viewed in the context of the transaction that
is subjected to tax, and not with reference to an entirely unrelated matter.

The Supreme Court further observed that as there was no incidence of capital gains tax in India, the provisions
under Section 163 of the Act, for treating Vodafone as a representative assessee of HTIL, were not applicable.
Accordingly, the Supreme Court concluded that the transfer of the share in CGP did not result in the transfer
of a capital asset situated in India, and gains from such transfer could not be subject to Indian tax.
The Supreme Court reversed the decision of the Bombay High Court and held that the Indian tax authorities did
not have territorial jurisdiction to tax the offshore transaction, and therefore, Vodafone was not liable to
withhold Indian taxes._________________________________________________________________________

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