1. COMMISSIONER OF INTERNAL REVENUE vs.
Unsatisfied, the Commissioner filed with the Court of
CITYTRUST INVESTMENT PHILS., INC. G.R. No.
139786;
Facts:
In Commissioner v. City trust:
Citytrust reported the amount of
P110,788,542.30 as its total gross receipts and paid the
amount of P5,539,427.11 corresponding to its 5% GRT
(Gross Receipt Tax).
Meanwhile, the CTA, in Asian Bank Corporation
v. Commissioner of Internal Revenue (ASIAN BANK
case), ruled that the basis in computing the 5% GRT is
the gross receipts minus the 20% FWT. In other words,
the 20% FWT on a bank's passive income does not form
part of the taxable gross receipts.
Citytrust, inspired by the CTA ruling, filed with
the Commissioner a written claim for the tax refund or
credit in the amount of P326,007.01. It alleged that its
reported total gross receipts included the 20% FWT
(Final Withholding Tax) on its passive income amounting
to P32,600,701.25. Thus, it sought to be reimbursed of
the 5% GRT it paid on the portion of 20% FWT.
On the same date, Citytrust filed a petition for
review with the CTA, which eventually granted its claim.
On appeal by the Commissioner, the Court of
Appeals affirmed the CTA Decision, holding that monies
or receipts that do not redound to the benefit of the
taxpayer are not part of its gross receipts, thus:
The 20% final tax on the Respondent's passive income
was already deducted and withheld by various
withholding agents. Hence, the actual or the exact
amount received by the Respondent, as its passive
income in the year 1994, was less the 20% final tax
already withheld by various withholding agents.
Moreover, under Section 51 (g) of the said Code, all
taxes withheld pursuant to the provisions of this Code
and its implementing regulations are considered trust
funds and shall be maintained in a separate account and
not commingled with any other funds of the withholding
agent.
Accordingly, the 20% final tax withheld against the
Respondent's passive income was already remitted to
the Bureau of Internal Revenue, for the corresponding
year that the same was actually withheld and considered
final withholding taxes under Section 50 of the same
Code. Indubitably, to include the same to the
Respondent's gross receipts for the year 1994 would be
to tax twice the passive income derived by Respondent
for the said year, which would constitute double taxation
anathema to our taxation laws.
In AsianBank v. Commisioner:
For the taxable quarters ending June 30, 1994
to June 30, 1996, Asianbank filed and remitted to the
(BIR) the 5% GRT on its total gross receipts.
On the strength of the CTA Decision in the
ASIAN BANK case, Asianbank filed with the
Commissioner a claim for refund of the overpaid GRT
amounting to P2,022,485.78.
Asianbank also filed a petition for review with the
CTA.
The CTA allowed refund in the reduced amount
of P1,345,743.01, the amount proven by Asianbank.
Appeals a petition for review.
The Court of Appeals reversed the CTA
Decision and ruled in favor of the Commissioner, thus:
It is true that Revenue Regulation No. 12-80 provides
that the gross receipts tax on banks and other financial
institutions should be based on all items of income
actually received. Actual receipt here is used in
opposition to mere accrual. Accrued income refers to
income already earned but not yet received.
But receipt may be actual or constructive.
The 20% final tax withheld from interest income of banks
and other similar institutions is not income that they have
not received; it is simply withheld from them and paid to
the government, for their benefit. Thus, the 20% income
tax withheld from the interest income is, in fact, money of
the taxpayer bank but paid by the payor to the
government in satisfaction of the bank's obligation to pay
the tax on interest earned. It is the bank's obligation to
pay the tax. Hence, the withholding of the said tax and
its payment to the government is for its benefit.
Citytrust and Asianbank simply anchor their argument on
Section 4(e) of Revenue Regulations No. 12-80 stating
that "the rates of taxes to be imposed on the gross
receipts of such financial institutions shall be based on
all items of income actually received." They contend that
since the 20% FWT is withheld at source and is paid
directly to the government by the entities from which the
banks derived the income, the same cannot be
considered actually received, hence, must be excluded
from the taxable gross receipts.
Issue: Whether the twenty percent (20%) final
withholding tax (FWT) on a bank's passive income form
part of the taxable gross receipts for the purpose of
computing the five percent (5%) gross receipts tax
(GRT).
Held: YES.
The Tax Code does not provide a definition of
the term "gross receipts". Accordingly, the term is
properly understood in its plain and ordinary meaning
and must be taken to comprise of the entire receipts
without any deduction.
As commonly understood, the term "gross
receipts" means the entire receipts without any
deduction. Deducting any amount from the gross
receipts changes the result, and the meaning, to net
receipts.
Revenue Regulations No. 12-80, issued on
November 7, 1980, had been superseded by Revenue
Regulations No. 17-84 issued on October 12, 1984.
Section 4(e) of Revenue Regulations No. 12-80 provides
that only items of income actually received shall be
included in the tax base for computing the GRT. On the
other hand, Section 7(c) of Revenue Regulations No. 17-
84 includes all interest income in computing the GRT.
There is, therefore, an implied repeal of Section
4(e). There exists a disparity between Section 4(e) which
imposes the GRT only on all items of income actually
received (as opposed to their mere accrual) and Section
7(c) which includes all interest income (whether actual or
accrued) in computing the GRT.
The exception having been eliminated, the clear
intent is that the later R.R. No. 17-84 includes the
exception within the scope of the general rule." Clearly,
then, the current Revenue Regulations require interest
income, whether actually received or merely accrued, to
form part of the bank's taxable gross receipts.
Note:
From the time the GRT on banks was first
imposed in 1946 under Republic Act No. 39 and
throughout its successive re-enactments, the legislature
has not established a definition of the term "gross
receipts." Under Revenue Regulations No. 12-80 and
No. 17-84, as well as several numbered rulings, the BIR
has consistently ruled that the term "gross receipts" does
not admit of any deduction. This interpretation has
remained unchanged throughout the various re-
enactments of the present Section 121 of the Tax Code.
The GRT is a percentage tax under the Tax
Code while the FWT is an income tax under the Code.
The two concepts are different from each other. this
Court defined that a percentage tax is a national tax
measured by a certain percentage of the gross selling
price or gross value in money of goods sold, bartered or
imported; or of the gross receipts or earnings derived by
any person engaged in the sale of services. It is not
subject to withholding. An income tax, on the other hand,
is a national tax imposed on the net or the gross income
realized in a taxable year. It is subject to withholding.
Thus, there can be no double taxation here as the Tax
Code imposes two different kinds of taxes.
2. COMMISSIONER OF INTERNAL REVENUE vs.
MANNING
L-28398 | Aug 6, 1975 | Petition for Review | Castro
Petitioner: Commissioner of Internal Revenue
Respondents: John Manning, W.D. McDonald, E.E.
Simmons & CTA
Quick Summary:
Facts: Reese, the majority stockholder of Mantrasco,
executed a trust agreement between him, Mantrasco,
Ross, Selph, carrascoso & Janda law firm and the
minority stockholders, Manning, McDonald and
Simmons. Said agreement was entered into because of
Reese’s desire that Mantrasco and Mantrasoc’s 2
subsidiaries, Mantrasco Guam and Port Motors, to
continue under the management of Manning, McDonald
and Simmons upon his [Reese] death. When Reese
died, Mantrasco paid Reese’s estate the value of his
shares. When said purchase price has been fully paid,
the 24,700 shares, which were declared as dividends,
were proportionately distributed to Manning, McDonald
and Simmons. Because of this, the BIR issued
assessments on Manning, McDonald and Simmons for
deficiency income tax for 1958. Manning et al, opposed
this assessment but the BIR still found them liable.
Manning et al. appealed to the CTA, which absolved
them from any liability.
Held: The manifest intention of the parties to the trust
agreement was, in sum and substance, to treat the
24,700 shares of Reese as absolutely outstanding
shares of Reese's estate until they were fully paid. Such
being the true nature of the 24,700 shares, their
declaration as treasury stock dividend in 1958 was a
complete nullity and plainly violative of public policy. A
stock dividend, being one payable in capital stock,
cannot be declared out of outstanding corporate stock,
but only from retained earnings.
A stock dividend always involves a transfer of surplus (or
profit) to capital stock. A stock dividend is a conversion
of surplus or undivided profits into capital stock, which is
distributed to stockholders in lieu of a cash dividend.
Facts:
 1952 - Mantrasco had an authorized capital
stock of P2.5M divided into 25,000 common
shares. 24,700 of these shares are owned by
Julius Reese while the rest, at 100 each, are
owned by Manning, McDonald & Simmons.
 February 29, 1958 - a trust agreement was
executed between Reese, Mantrasco, Ross,
Selph, carrascoso & Janda law firm, Manning,
McDonald and Simmons. Said agreement was
entered into because of Reese’s desire that
Mantrasco and Mantrasoc’s 2 subsidiaries,
Mantrasco Guam and Port Motors, to continue
under the management of Manning, McDonald
and Simmons upon his [Reese] death.
 October 19, 1954 - Reese died. However, the
projected transfer of his shares in the name of
Mantrasco could not be immediately effected for
lack of sufficient funds to cover the initial
payment on the shares.
 February 2, 1955 - after Mantrasco made a
partial payment of Reese's shares, the certificate
for the 24,700 shares in Reese's name was
cancelled and a new certificate was issued in
the name of Mantrasco. Also, new certificate
was endorsed to the law firm of Ross, Selph,
Carrascoso and Janda, as trustees for and in
behalf of Mantrasco.
 December 22, 1958 - a resolution was passed
during a special meeting of Mantrasco
stockholders.
 November 25, 1963 - entire purchase price of
Reese's interest in Mantrasco was finally paid in
full by Mantrasco.
 May 4, 1964 - trust agreement was terminated
and the trustees delivered to Mantrasco all the
shares which they were holding in trust.
 September 14, 1962 - BIR ordered an
examination of Mantrasco’s books. This
examination disclosed that:
1. as of December 31, 1958 the 24,700 shares
declared as dividends had been
proportionately distributed to Manning,
McDonald & Simmons, representing a total
book value or acquisition cost of P7,973,660
2. Manning, McDonald & Simmons failed to
declare the said stock dividends as part of
their taxable income for the year 1958
 Thus, BIR examiners concluded that the
distribution of Reese's shares as stock
dividends was in effect a distribution of the
"asset or property of the corporation as may
be gleaned from the payment of cash for the
redemption of said stock and distributing the
same as stock dividend."
 April 14, 1965 - Commissioner of Internal
Revenue issued notices of assessment for
deficiency income taxes to Manning, McDonald
& Simmons for the year 1958.
  Manning, McDonald & Simmons opposed said
assessments. BIR still held them liable for these
assessments.
 Manning, McDonald & Simmons appealed to the
CTA.
 CTA: absolved Manning, McDonald &
Simmons from any liability on the ground that
their respective 1/3 interest in Mantrasco
remained the same before and after the
declaration of stock dividends and only the
number of shares held by each of them
changed.
Issues:
1. WON the shares are treasury shares [NO]
2. WON Manning, McDonald & Simmons should
pay for deficiency income taxes [YES]
Ratio:
1. Treasury shares are stocks issued and fully
paid for and re-acquired by the corporation
either by purchase, donation, forfeiture or
other means. Treasury shares are therefore
issued shares, but being in the treasury they
do not have the status of outstanding
shares. Consequently, although a treasury
share, not having been retired by the
corporation re-acquiring it, may be re-issued
or sold again, such share, as long as it is
held by the corporation as a treasury share,
participates neither in dividends, because
dividends cannot be declared by the corporation
to itself, nor in the meetings of the
corporation as voting stock, for otherwise
equal distribution of voting powers among
stockholders will be effectively lost and the
directors will be able to perpetuate their control
of the corporation, though it still represents a
paid-for interest in the property of the
corporation.
 In this case, such essential features
of a treasury share are lacking in the
former shares of Reese.
 The manifest intention of the parties
to the trust agreement was, in sum
and substance, to treat the 24,700
shares of Reese as absolutely
outstanding shares of Reese's estate
until they were fully paid. Such being
the true nature of the 24,700 shares,
their declaration as treasury stock
dividend in 1958 was a complete
nullity and plainly violative of public
policy. A stock dividend, being one
payable in capital stock, cannot be
declared out of outstanding
corporate stock, but only from
retained earnings.
Nature of a stock dividend
 A stock dividend always involves a
transfer of surplus (or profit) to capital
stock.
 A stock dividend is a conversion of
surplus or undivided profits into capital
stock, which is distributed to
stockholders in lieu of a cash dividend.
2. The ultimate purpose which the parties to the
trust agreement aimed to realize is to make
Manning, McDonalds & Simmons the sole
owners of Reese’s interest in Mantrasco by
utilizing the periodic earnings of Mantrasco
and its subsidiaries to directly subsidize
their purchase of said interests and by
making it appear that they have not received
any income from those firms when, in fact, by
the formal declaration of non-existent stock
dividends in the treasury they secured to
themselves the means to turn around as full
owners of Reese’s shares.
 Manning, McDonald & Simmons, using
the trust instrument as a convenient
technical device, bestowed unto
themselves the full worth and value of
Reese's corporate holdings with the use
of the very earnings of the companies.
 Such package device, obviously not
designed to carry out the usual stock
dividend purpose of corporate
expansion reinvestment but exclusively
for expanding the capital base of
Manning, McDonald & Simmons in
Mantrasco, cannot be allowed to deflect
their responsibilities toward our income
tax laws.
 All these amounts are subject to
income tax as being a flow of cash
benefits to Manning, McDonald &
Simmons.
Commissioner’s assessment is erroneous
 Commissioner should not have
assessed the income tax on the total
acquisition cost of the alleged treasury
stock dividends in 1 lump sum.
 The record shows that the earnings of
Mantrasco over a period of years were
used to gradually wipe out the holdings
of Reese.
 Consequently, those earnings should be
taxed for each of the corresponding
years when payments were made to
Reese’s estate on account of his 24,700
shares.
Dispositive: CTA judgment set aside. Case remanded
to the CTA for further proceedings for the recomputation
of the income tax liabilities of Manning, McDonald &
Simmons.