Limpan vs CIR

the remainder of its pretensions by clear and convincing evidence

Facts
which was lacking in this case.

Limpan Investment Corp is a domestic corporation engaged in the

The withdrawal in 1958 of the deposits in court pertaining to the 1957
business of leasing real properties. Among its real properties are lots
rental income is no sufficient justification for the non-declaration of
and buildings in Manila and Pasay City acquired from Isabelo Lim and
said income in 1957 since the deposit was resorted due to the refusal
his mother. After filing tax returns for 1956, 1957, the examiners of
of petitioner to accept the same, and was not the fault of its tenants;
BIR discovered that the corporation has understated its rental
hence, petitioner is deemed to have constructively received such
incomes by 20k and 81k during said years as well as claimed
rentals in 1957.
excessive depreciation amounting to 20k and 16k. The CIR

demanded payment for deficiency tax and surcharge. Petitioners The payment by the sub-tenant should have been reported as rental
argue that these amounts were either deposited with the court by the income in said year as it in still income regardless of the source.
tenants or have yet to be received.
Republic v. Dela Rama (Actual versus Constructive Receipt)

P: Zaldivar, J.
Issue:
Ordinary appeal.

W/N there was undeclared income

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

Held: vs.

LEONOR DE LA RAMA, ET AL., respondents-appellees.

Yes, petitioner admitted that it had undeclared more than half of the

amount, therefore it was incumbent upon the corporation to establish FACTS:The estate of the late Esteban de la Rama was the subject of
Special Proceedings No. 401 of the Court of First Instance of Iloilo.
The executor-administrator, EliseoHervas, filed income tax returns of
the estate corresponding to the taxable year 1950. The Bureau of
Internal Revenue later claimed that it had found out that there had
been received by the estate in 1950 from the De la Rama Steamship
Company, Inc. cash dividends amounting to P86,800.00, which
amount was not declared in the income tax return of the estate for the
year 1950. The Bureau of Internal Revenue then made an
assessment as deficiency income tax against the estate.
The Collector of Internal Revenue wrote a letter to Mrs.
Lourdes de la Rama-Osmeña informing her of the deficiency income
tax and asking for payment. Counsel for Lourdes wrote to the
Collector acknowledging receipt of the assessment but contended that
Lourdes had no authority to represent the estate, and that the
assessment should be sent to Leonor de la Rama who was pointed to
by said counsel as the administratrix. The Deputy Collector of Internal
Revenue then sent a letter to Leonor de la Rama as administratrix of
the estate, asking payment. The tax, as assessed, not having been
paid, the Deputy Commissioner of Internal Revenue, on September 7,
1959, wrote another letter to Lourdes demanding the payment of the
deficiency income tax within the period of thirty days from receipt
thereof. The counsel of Lourdes insisted that the letter should be sent
to Leonor de la Rama. The Deputy Commissioner of Internal Revenue
wrote to Leonor de la Rama another letter, demanding the payment
within thirty days from receipt thereof.
The deficiency income tax not having been paid, the Republic
of the Philippines filed a complaint against the heirs of Esteban de la
Rama. The Trial court, however, dismissed the complaint on the
ground that [relevant to the subject heading]it wasEliseoHervas, and
neither Leonor nor Lourdes, who was the proper administrator at the
time, and to whom the assessment should have been sent.
The appellant contended that the assessment had become
final, because the decision of the Collector of Internal Revenue was
sent in a letter dated February 11, 1960 and addressed to the heirs of
the late Esteban de la Rama, through Leonor de la Rama as
administratrix of the estate, and was not disputed or contested by way
of appeal within thirty days from receipt thereof to the Court of Tax
Appeals.
ISSUE: WON there was proper notice of the tax assessment
RATIO: If the notice was not sent to the taxpayer for the purpose of
giving effect to the assessment, said notice cannot produce any
effect.
HELD: The SC sustained the finding of the lower court that neither
Leonor nor Lourdes was the administratrix of the estate of Esteban de
la Rama. The Court noted that at the time the tax assessment was
sent, Special Proceedings No. 401 were still open with respect to the
controverted matter regarding the cash dividends upon which the
deficiency assessment was levied. It is clear that at the time these
special proceedings were taking place, EliseoHervas was the duly
appointed administrator of the estate.
Plaintiff-appellant also contends that the lower court could not
take cognizance of the defense that the assessment was erroneous,
this being a matter that is within the exclusive jurisdiction of the Court
of Tax Appeals. This contention has no merit. According to Republic
Act 1125, the Court of Tax Appeals has exclusive jurisdiction to
review by appeal decisions of the Collector of Internal Revenue in
cases involving disputed assessments, and the disputed assessment
must be appealed by the person adversely affected by the decision
within thirty days after the receipt of the decision. In the instant case,
the person adversely affected should have been the administrator of
the estate, and the notice of the assessment should have been sent to
him. The administrator had not received the notice of assessment,
and he could not appeal the assessment to the Court of Tax Appeals
within 30 days from notice. Hence the assessment did not fall within
the exclusive jurisdiction of the Court of Tax Appeals.
DISPOSITION: Petition is DISMISSED, decision appealed from is
AFFIRMED
Henderson v. Collector, 1 SCRA 649
Facts: Arthur Henderson is the President of the American Intl.
Underwriters for the Phils. w/c represents a group of American cos. CTA -> ruled in favor of Castaneda and ordered the refund.
engaged in the business of general insurance (exc. in life insurance). CA -> affirmed decision of CTA. Hence, this petition for review on
certiorari.
he receives a basic annual salary of P30,000 and allowance for house
rentals and utilities. Although he and his wife are childless and are ISSUE:
only two in the family, they lived in a large apartment provided for by Whether or not terminal leave pay (on occasion of his compulsory
his employer. As company president, he and his wife had to entertain retirement) is subject to income tax.
and put up houseguests for the company. The BIR now seeks to
collect taxes on the allowances for rental and utilities expenses. HELD:

NO. As explained in Borromeo v CSC, the rationale of the court in

Held: The exigencies of Henderson's high executive position, not to
mention social standing, demanded and compelled them to live in a
more spacious and pretentious quarters like the ones they had
occupied. Because they had to entertain and put up houseguests, the
employer had to grant him allowances for rental and utilities in
addition to his annual basic salary to take care of those expenses for
rental and utilities in excess of their personal needs. Hence, the fact
that the taxpayers had to live or did not have to live in the apartment
chosen by the employer is of no moment, for no part of the allowance
redounded to the benefit of the Hendersons. Neither was there an
amount retained by them. Their bills for rental were paid directly by
the employer to the creditor.
CIR v Castaneda (G.R. No. 96016)
FACTS:
Efren Castaneda retired from gov’t service as Revenue Attache in the
Philippine Embassy, London, England. Upon retirement, he received
benefits such as the terminal leave pay. The Commissioner of Internal
Revenue withheld P12,557 allegedly representing that it was tax
income.
Castaneda filed for a refund, contending that the cash equivalent of
his terminal leave is exempt from income tax.
The Solicitor General contends that the terminal leave is based from
an employer-employee relationship and that as part of the services
rendered by the employee, the terminal leave pay is part of the gross
income of the recipient.
holding that terminal leave pays are subject to income tax is that:
. . 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. 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.
A terminal leave pay is a retirement benefit which is NOT subject to
income tax.
*Petition denied.
Nitafan v CIR 152 SCRA 284
Nitafan v. Commissioner of Internal Revenue [GR L-78780, 23 July
1987]
FACTS:
1. Petitioners David Nitafan, Wenceslao Polo and Maximo Savellano
Jr., were duly appointed and qualified Judges of the RTC National
Capital Judicial Region.
2. Petitioners seeks to prohibit and/or perpetually enjoin respondents,
(CIR and the Financial Officer of the Supreme Court) from making any
deduction of withholding taxes from their salaries.
3. Petitioners submit that “any tax withheld from their emoluments or
compensation as judicial officers constitutes a decreased or
diminution of their salaries, contrary to Section 10, Article VIII of the
1987 Constitution.”
ISSUE:
Is a deduction of withholding tax a diminuition of the salaries of
Judges/Justices?
HELD:
The SC hereby makes of record that it had then discarded the ruling
in PERFECTO VS. MEER (88 Phil 552) and ENDENCIA VS. DAVID
(93 Phil 696), that declared the salaries of members of the Judiciary
exempt from payment of the income tax and considered such
payment as a diminution of their salaries during their continuance in
office. The Court hereby reiterates that the salaries of Justices and
Judges are property subject to general income tax applicable to all
income earners and that the payment of such income tax by Justices
and Judges does not fall within the constitution protection against
decrease of their salaries during their continuance in office.
The debates, interpellations and opinions expressed regarding the
constitutional provision in question until it was finally approved by the
Commission disclosed that the true intent of the framers of the 1987
Constitution, in adopting it, was to make the salaries of members of
the Judiciary taxable. The ascertainment of that intent is but in
keeping with the fundamental principle of constitutional construction
that the intent of the framers of the organic law and of the people
adopting it should be given effect.
The ruling that “the imposition of income tax upon the salary of judges
is a diminution thereof, and so violates the Constitution in Perfecto vs.
Meer, as affirmed in Endencia vs. David must be deemed discarded.
China Banking Corporation v CA
Facts:
China Banking Corporation made a 53% equity investment
(P16,227,851.80) in the First CBC Capital – a Hongkong subsidiary
engaged in financing and investment with “deposit-taking” function.
It was shown that CBC has become insolvent so China Banking
wrote-off its investment as worthless and treated it as a bad debt or as
an ordinary loss deductible from its gross income.
CIR disallowed the deduction on the ground that the investment
should not be classified as being worthless. It also held that assuming
that the securities were worthless, then they should be classified as a
capital loss and not as a bad debt since there was no indebtedness
between China Banking and CBC.
Issue:
Whether or not the investment should be classified as a capital loss.
Held:
Yes. Section 29.d.4.B of the NIRC contains provisions on securities
becoming worthless. It conveys that capital loss normally requires the
concurrence of 2 conditions:
a. there is a sale or exchange
b. the thing sold or exchanges is a capital asset.

When securities become worthless, there is strictly no sale or
exchange but the law deems it to be a loss. These are allowed to be
deducted only to the extent of capital gains and not from any other
income of the taxpayer. A similar kind of treatment is given by the
NIRC on the retirement of certificates of indebtedness with interest
coupons or in registered form, short sales and options to buy or sell
property where no sale or exchange strictly exists. In these cases,
The NIRC dispenses with the standard requirements.
There is ordinary loss when the property sold is not a capital asset.
In the case, CBC as an investee corporation, is a subsidiary
corporation of China Banking whose shares in CBC are not intended
for purchase or sale but as an investment. An equity investment is a
capital asset of the investor. Unquestionably, any loss is a capital loss
to the investor.
--
Additional notes:
*The loss cannot be deductible as bad debt since the shares of stock
do not constitute a loan extended by it to its subsidiary or a debt
subject to obligatory repayment by the latter.
CHINA BANKING CORPORATION vs. COURT OF
APPEALSG.R. No. 125508 July 19, 2000FACTS:
Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment
in theFirst CBC Capital Ltd., a Hongkong subsidiary engaged in
financing and investment with "deposit-taking"function. The
investment amounted to P16,227,851.80, consisting of 106,000
shares with a par Value ofP100 per share.In the course of the regular
examination of the financial books and investment portfolios
ofpetitioner conducted by BangkoSentral in 1986, it was shown that
First CBC Capital Ltd., has becomeinsolvent. With the approval
of BangkoSentral, petitioner wrote-off as being worthless its
investment in FirstCBC Capital Ltd., in its 1987 Income Tax Return
and treated it as a bad debt or as an ordinary lossdeductible from its
gross income.Respondent Commissioner of internal Revenue disallowed the
deduction and assessed petitionerfor income tax deficiency in the amount of
P8,533,328.04, inclusive of surcharge, interest and
compromisepenalty. The disallowance of the deduction was made on
the ground that the investment should not beclassified as being
"worthless" and that, although the Hongkong Banking Commissioner
had revoked thelicense of First CBC Capital as a "deposit-taping"
company, the latter could still exercise, however, itsfinancing and
investment activities. Assuming that the securities had indeed
become worthless, respondentCommissioner of Internal Revenue
held the view that they should then be classified as "capital loss,"
andnot as a bad debt expense there being no indebtedness to speak
of between petitioner and its subsidiary.Petitioner contested the ruling
of respondent Commissioner before the CTA. The tax courtsustained
the Commissioner, holding that the securities had not indeed become
worthless and orderedpetitioner to pay its deficiency income tax for
1987 of P8,533,328.04 plus 20% interest per annum until fullypaid.
When the decision was appealed to the Court of Appeals, the latter upheld the CTA. In its
instantpetition for review on certiorari, petitioner bank assails the CA
decision.
I SSUE:
Whether or not an equity investment is a capital asset?
RULING:
An equity investment is a capital, not ordinary, asset of the investor
the sale or exchange of whichresults in either a capital gain or a
capital loss. The gain or the loss is ordinary when the property sold
orexchanged is not a capital asset. A capital asset is defined
negatively in Section 33(1) of the NIRC; viz:Capital assets. - The term
'capital assets' means property held by the taxpayer (whether or not
connectedwith his trade or business), but does not include stock in
trade of the taxpayer or other property of a kindwhich would properly
be included in the inventory of the taxpayer if on hand at the close
of the taxable year,or property held by the taxpayer primarily for sale
to customers in the ordinary course of his trade orbusiness, or
property used in the trade or business, of a character which is subject
to the allowance fordepreciation provided in subsection (f) of section
twenty-nine; or real property used in the trade or business
of the taxpayer.”
A capital gain or a capital loss normally requires the concurrence
of two conditions for it to result:(1) There is a sale or exchange; and
(2) the thing sold or exchanged is a capital asset. When
securitiesbecome worthless, there is strictly no sale or exchange but
the law deems the loss anyway to be "a lossfrom the sale or
exchange of capital assets.”A similar kind of treatment is given, by the
NIRC on the
retirement of certificates of indebtedness with interest coupons or in
registered form, short sales andoptions to buy or sell property where
no sale or exchange strictly exists.[6] In these cases, the NIRC
Bañas Jr. v. Court of Appeals [G.R. No. 102967. February
10, 2000]30JUL
FACTS
Petitioner entered into a deed of sale purportedly on installment. He
discounted the promissory note covering the future installments for
purposes of taxation.
ISSUE
Whether or not the promissory note should be declared cash
transaction for purposes of taxation.
RULING
YES. A negotiable instrument is deemed a substitute for money and
for value. According to Sec. 25 of NIL: “value is any consideration
sufficient to support a simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such whether the instrument is
payable on demand or at a future time”. Although the proceed of a
discounted promissory note is not considered part of the initial
payment, it is still taxable income for the year it was converted into
cash.
CIR v. CA
Don Andres Soriano formed ANSCOR, a corporation.
1947 - ANSCOR declared stock dividends.
1964 - Don Andres died. Shares were transferred to Dona Carmen,
his wife.1
966 - stock dividends worth 46, 290 and 46,287 shares were respectively received by the
estate andDona Carmen from ANSCOR.
1968 - ANSCOR redeemed 28000 common shares from the estate.
1967 - ANSCOR redeemed 80,000 common shares from the estate.
1973 - BIR assessed ANSCOR for deficiency withholding tax-at-
source, despite ANSCOR's claimthat it availed of a tax amnesty under
PD 23.
ANSCOR filed a petition for review with the CTA assailing the tax
assessments on the redemptionsand exchange of stocks. CTA reversed the
CIR, and the CA affirmed the CTA's ruling.
ISSUE: W/N ANSCOR's redemption of stocks from its stockholder
Don Andres, can be consideredas "essentially equivalent to the
distribution of taxable dividend" making the proceeds taxable.
HELD: YES.1.Tax exemption.
The Court held that ANSCOR was not covered by the amnesty it is
claiming.
2.Tax dividends.
Section 83(b) of the 1939 Revenue Act. Distribution of dividends or
assets by corporations. —(b) Stock dividends — A stock dividend
representing the transfer of surplus to capital accountshall not be
subject to tax. However, if a corporation cancels or redeems stock
issued as a divi-dend atsuch 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 sodistributed in redemption or cancellation of the stock shall
be considered as taxable income tothe extent it represents a
distribution of earnings or profits accumulated after March first, nine-
teen hundred and thirteen.
Redemption -
repurchase, a reacquisition of stock by a corpor
a t i o n w h i c h i s s u e d t h e stock 8 in exchange for property,
whether or not the acquired stock is cancelled, retired or held inthe
treasury. Essentially, the corporation gets back some of its stock,
distributes cash or property tothe shareholder in payment for
the stock,The application of Sec. 83(b) depends on the special factual
circumstances of each case.

General rule: A stock dividend representing the transfer of surplus to
capital account shall not besubject to tax.
Exception: If a corporation cancels or redeems stock issued as a
dividend at such time and in suchmanner as to make the distribution
and cancellation or redemption, in whole or in part,
essentiallyequivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or can-cellation of the stock shall
be considered as taxable income to the extent it represents a
distributionof earnings or profits accumulated.
Stock dividends, strictly speaking, represent capital and do not
constitute income to itsrecipient. The mere issuance is not yet subject
to income tax as they are nothing but an "enrichmentthrough increase
in value of capital investment." It postpones profits because stocks as
capital is nolonger available for actual distribution (aka sale).
I ncom e in tax law is " an am ount of m oney com ing t o a
person wit hin a specif ied t ime, whether as payment for services,
interest, or profit from investment."
Depending on the circumstances, the proceeds of redemption of stock
dividends are essen-tially distribution of cash dividends, which when
paid becomes the absolute property of the stock-holder. Having
realized gain from that redemption, the income earner cannot escape
income tax.For the exempting clause of Section, 83(b) to apply, it is indispensable
that:(a) there is redemption or cancellation;(b) the transaction involves stock
dividends and(c) the "time and manner" of the transaction makes it
"essentially equivalent to a distributionof taxable dividends."Of these,
the most important is the third.
3.Application to this case.
ANSCOR redeemed shares of stocks from a stockholder (Don
Andres)twice (28,000 and 80,000 common shares). But where did the
shares redeemed come from?
If it s sour ce is t he orig inal capit al subscr ipt ions upon
establishment of t he cor porat ion or from initial capital
investment in an existing enterprise, its redemption to the concurrent
value of ac-quisition may not invite the application of Sec. 83(b) under
the 1939 Tax Code, as it is not incomebut a mere return of capital. On
the contrary, if the redeemed shares are from stock dividend decla-
rations other than as initial capital investment, the proceeds of the
redemption is additional wealth,for it is not merely a return of capital
but a gain thereon.
But here, it is undisputed that at the time of the last redemption, the
original common sharesowned by the estate were only 25,247.5. This
means that from the total of 108,000 shares redeemedfrom the estate,
the balance of 82,752.5 (108,000 less 25,247.5) must have come
from stock divi-dends.
As to the 3rd element, the stock dividends that were redeemed were
issued just 2 to 3 yearsearlier.
The issuance of stock dividends and its subsequent redemption must
be separate, distinct,and not related, for the redemption to be
considered a legitimate tax scheme. Redemption cannot beused as a
cloak to distribute corporate earnings.
The three elements in the imposition of income tax are:
(1) there must be gain or and profit,
(2) that the gain or profit is realized or received, actually or
constructively, and
(3) it is not exempt-ed by law or treaty from income tax.
The test of taxability under the exempting clause of Section 83(b) is,
whether income wasrealized through the redemption of stock
dividends.
The two purposes invoked by ANSCOR are no excuse for its tax liability.First, the
alleged "filipinization" plan cannot be considered legitimate as it was
not imple-mented until the BIR started making assessments on the
proceeds of the redemption. Records showt hat despit e the
exist ence of enorm ous cor por at e pr of it s no cash dividend
was ever declar ed byANSCO R f rom 1945 unt il t he BI R
st art ed m aking assessm ent s in t he ear ly 1970' s.
This cir cum - stance negates the legitimacy of ANSCOR's alleged
purposes.ANSCOR argued that to treat as "taxable dividend" the
proceeds of the redeemed stock divi-dends would be to impose
on such stock an undisclosed lien and would be extremely unfair
to inter-vening purchase. Such argument, however, bears no relevance in this case as Case No. 3540, seeking saidrefund.During pendency of said case,
no intervening buyer isinvolved. respondent denied PHILAMLIFE’s claim for refund ofPhp643,125.00
as withholding tax at source for 1980. Respondent also cancelled the
After considering the manner and the circumstances by which the
issuance and redemptionof stock dividends were made, there is no taxcredit memo in the amount of Php643,125.00 previously
other conclusion but that the proceeds thereof are essen-tially issued to PHILAMLIFE onNovember 18, 1980 and requested the
considered equivalent to a distribution of taxable dividends. As latter to pay the amount of Php643,125.00 asde²ciency withholding
"taxable dividend" under Sec-tion 83(b), it is part of the "entire tax at source for 1979 plus increments.Without protesting the
income" subject to tax. assessment, petitioners ²led a petition with CTA on June 14,1985,
PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, INC., ET docketed as CTA Case No. 3943, seeking the annulment of said
AL., v. HON.COURT OF TAX APPEALS, AND THE COMMISSIONER assessment.After trial on the merits, respondent tax court rendered
OF INTERNAL REVENUECA-G.R. SP No. 3128325 April the decision dated March10, 1993 denying both petitions for review
1995Doctrine:The test of taxability is the ‘source’, and the source of and subsequent motions for reconsiderations.Both parties ²led
an income is thatactivity which produced the income.Facts:Petitioner motion for reconsideration on the March 10, 1993
Philippine American Life Insurance Co., Inc. (PHILAMLIFE), a decisionwherein the respondent tax court issued a resolution dated
domesticcorporation entered into a Management Services Agreement May 19, 1993 which modi²edthe dispositive portion of the said
with American InternationalReinsurance Co., Inc. (AIRCO), a non- decision ordering the PHILAMLIFE to pay respondentthe amount of
resident foreign corporation with principal place ofbusiness in Php643,125.00 with interest at the rate of twenty per centum (20%)
Pembroke, Bermuda whereby, e±ective January 1, 1972, for a fee of perannum from March 9, 1981 until paid
notexceeding $250,000.00 per annum, AIRCO shall perform
for PHILAMLIFE variousmanagement services.On September 30,
1978, AIRCO merged with petitioner American InternationalGroup,
Inc. (AIGI) with the latter as the surviving corporation and successor-
in-interest inAIRCO’s Management Services Agreement with
PHILAMLIFE.On November 18, 1980, respondent Commission of
Internal Revenue (CIR) issuedin favour of PHILAMLIFE Tax Credit
Memo in the amount of Php643,125.00 representingerroneous
payment of withholding tax at source on remittances to AIGIfor
servicesrendered abroad in 1979.On the basis of the said issuance of
tax credit, PHILAMLIFE, through a letter datedMarch 21, 1981, ²led
with CIR a claim for refund of the second erroneous tax payment
ofPhp643,125.00 which was made on December 16, 1980. Another
letter dated July 6,1982 was sent wherein PHILAMLIFE alleged that
the claim for refund of the amount paidin 1980 is exactly the same
subject matter as in the previous claim for refund in 1979.Without
waiting for CIR to resolve the claim, petitioners ²led with the Court of
TaxAppeals (CTA) on July 29, 1982 the petition docketed as CTA