G.R. No.

L-17518

October 30, 1922

FREDERICK C. FISHER, plaintiff-appellant,

vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.
Fisher and De Witt and Antonio M. Opisso for appellants.
Acting Attorney-General Tuason for appellee.
JOHNSON, J.:
The only question presented by this appeal is: Are the "stock dividends" in the present case "income" and taxable as
such under the provisions of section 25 of Act No. 2833? While the appellant presents other important questions,
under the view which we have taken of the facts and the law applicable to the present case, we deem it
unnecessary to discuss them now.
The defendant demurred to the petition in the lower court. The facts are therefore admitted. They are simple and
may be stated as follows:
That during the year 1919 the Philippine American Drug Company was a corporation duly organized and existing
under the laws of the Philippine Islands, doing business in the City of Manila; that he appellant was a stockholder in
said corporation; that said corporation, as result of the business for that year, declared a "stock dividend"; that the
proportionate share of said stock divided of the appellant was P24,800; that the stock dividend for that amount was
issued to the appellant; that thereafter, in the month of 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 (P889.91) the present action was instituted. The defendant demurred to the petition upon
the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained and the
plaintiff appealed.
To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of the United States as
will as the decisions of the supreme court of some of the states of the Union, in which the questions before us,
based upon similar statutes, was discussed. Among the most important decisions may be mentioned the following:
Towne vs. Eisner, 245 U.S., 418; Doyle vs. Mitchell Bors. Co., 247 U.S., 179; Eisner vs. Macomber, 252 U.S., 189;
Dekoven vs Alsop, 205 Ill., 309; 63 L.R.A., 587; Kaufman vs. Charlottesville Woolen Mills, 93 Va., 673.
In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in each case it was
held that "stock dividends" were capital and not an "income" and therefore not subject to the "income tax" law.
The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189) that a "stock
dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the stock dividend, does not
violate the provisions of the Jones Law. The appellee further argues that the statute of the United States providing
for tax upon stock dividends is different from the statute of the Philippine Islands, and therefore the decision of the
Supreme Court of the United States should not be followed in interpreting the statute in force here.
For the purpose of ascertaining the difference in the said statutes ( (United States and Philippine Islands), providing
for an income tax in the United States as well as that in the Philippine Islands, the two statutes are here quoted for
the purpose of determining the difference, if any, in the language of the two statutes.
Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the collection of an "income tax."
Section 2 of said Act attempts to define what is an income. The definition follows:

That the term "dividends" as used in this title shall be held to mean any distribution made or ordered to
made by a corporation, . . . which stock dividend shall be considered income, to the amount of its cash
value.
Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section 25 of said Act attempts to
define the application of the income tax. The definition follows:
The term "dividends" as used in this Law shall be held to mean any distribution made or ordered to be made
by a corporation, . . . out of its earnings or profits accrued since March first, nineteen hundred and thirteen,
and payable to its shareholders, whether in cash or in stock of the corporation, . . . . Stock dividend shall be
considered income, to the amount of the earnings or profits distributed.
It will be noted from a reading of the provisions of the two laws above quoted that the writer of the law of the
Philippine Islands must have had before him the statute of the United States. No important argument can be based
upon the slight different in the wording of the two sections.
It is further argued by the appellee that there are no constitutional limitations upon the power of the Philippine
Legislature such as exist in the United States, and in support of that contention, he cites a number of decisions.
There is no question that the Philippine Legislature may provide for the payment of an income tax, but it cannot,
under the guise of an income tax, collect a tax on property which is not an "income." The Philippine Legislature can
not impose a tax upon "property" under a law which provides for a tax upon "income" only. The Philippine
Legislature has no power to provide a tax upon "automobiles" only, and under that law collect a tax upon
acarreton or bull cart. Constitutional limitations, that is to say, a statute expressly adopted for one purpose cannot,
without amendment, be applied to another purpose which is entirely distinct and different. A statute providing for an
income tax cannot be construed to cover property which is not, in fact income. The Legislature cannot, by a
statutory declaration, change the real nature of a tax which it imposes. A law which imposes an important tax on rice
only cannot be construed to an impose an importation tax on corn.
It is true that the statute in question provides for an income tax and contains a further provision that "stock
dividends" shall be considered income and are therefore subject to income tax provided for in said law. If "stock
dividends" are not "income" then the law permits a tax upon something not within the purpose and intent of the law.
It becomes necessary in this connection to ascertain what is an "income in order that we may be able to determine
whether "stock dividends" are "income" in the sense that the word is used in the statute. Perhaps it would be more
logical to determine first what are "stock dividends" in order that we may more clearly understand their relation to
"income." Generally speaking, stock dividends represent undistributed increase in the capital of corporations or
firms, joint stock companies, etc., etc., for a particular period. They are used to show the increased interest or
proportional shares in the capital of each stockholder. In other words, the inventory of the property of the
corporation, etc., for particular period shows an increase in its capital, so that the stock theretofore issued does not
show the real value of the stockholder's interest, and additional stock is issued showing the increase in the
actual capital, or property, or assets of the corporation, etc.
To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose of opening and
conducting a drug store, with assets of the value of P2,000, and each contributes P1,000. Their entire assets are
invested in drugs and put upon the shelves in their place of business. They commence business without a cent in
the treasury. Every dollar contributed is invested. Shares of stock to the amount of P1,000 are issued to each of the
incorporators, which represent the actual investment and entire assets of the corporation. Business for the first year
is good. Merchandise is sold, and purchased, to meet the demands of the growing trade. At the end of the first year
an inventory of the assets of the corporation is made, and it is then ascertained that the assets or capital of the
corporation on hand amount to P4,000, with no debts, and still not a cent in the treasury. All of the receipts during
the year have been reinvested in the business. Neither of the stockholders have withdrawn a penny from the

business during the year. Every peso received for the sale of merchandise was immediately used in the purchase of
new stock new supplies. At the close of the year there is not a centavo in the treasury, with which either A or B
could buy a cup of coffee or a pair of shoes for his family. At the beginning of the year they were P2,000, and at the
end of the year they were P4,000, and neither of the stockholders have received a centavo from the business during
the year. At the close of the year, when it is discovered that the assets are P4,000 and not P2,000, instead of selling
the extra merchandise on hand and thereby reducing the business to its original capital, they agree among
themselves to increase the capital they agree among themselves to increase the capital issued and for that purpose
issue additional stock in the form of "stock dividends" or additional stock of P1,000 each, which represents the
actual increase of the shares of interest in the business. At the beginning of the year each stockholder held one-half
interest in the capital. At the close of the year, and after the issue of the said stock dividends, they each still have
one-half interest in the business. The capital of the corporation increased during the year, but has either of them
received an income? It is not denied, for the purpose of ordinary taxation, that the taxable property of the
corporation at the beginning of the year was P2,000, that at the close of the year it was P4,000, and that the tax rolls
should be changed in accordance with the changed conditions in the business. In other words, the ordinary tax
should be increased by P2,000.
Another illustration: C and D organized a corporation for agricultural purposes with an authorized capital stock of
P20,000 each contributing P5,000. With that capital they purchased a farm and, with it, one hundred head of cattle.
Every peso contributed is invested. There is no money in the treasury. Much time and labor was expanded during
the year by the stockholders on the farm in the way of improvements. Neither received a centavo during the year
from the farm or the cattle. At the beginning of the year the assets of the corporation, including the farm and the
cattle, were P10,000, and at the close of the year and inventory of the property of the corporation is made and it is
then found that they have the same farm with its improvements and two hundred head of cattle by natural increase.
At the end of the year it is also discovered that, by reason of business changes, the farm and the cattle both have
increased in value, and that the value of the corporate property is now P20,000 instead of P10,000 as it was at the
beginning of the year. The incorporators instead of reducing the property to its original capital, by selling off a part of
its, issue to themselves "stock dividends" to represent the proportional value or interest of each of the stockholders
in the increased capital at the close of the year. There is still not a centavo in the treasury and neither has withdrawn
a peso from the business during the year. No part of the farm or cattle has been sold and not a single peso was
received out of the rents or profits of the capital of the corporation by the stockholders.
Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle for the sum of P10,000. At
the end of the first year, by reason of business conditions and the increase of the value of both real estate and
personal property, it is discovered that the value of the farm and the cattle is P20,000. A, during the year, has
received nothing from the farm or the cattle. His books at the beginning of the year show that he had property of the
value of P10,000. His books at the close of the year show that he has property of the value of P20,000. A is not a
corporation. The assets of his business are not shown therefore by certificates of stock. His books, however, show
that the value of his property has increased during the year by P10,000, under any theory of business or law, be
regarded as an "income" upon which the farmer can be required to pay an income tax? Is there any difference in law
in the condition of A in this illustration and the condition of A and B in the immediately preceding illustration? Can the
increase of the value of the property in either case be regarded as an "income" and be subjected to the payment of
the income tax under the law?
Each of the foregoing illustrations, it is asserted, is analogous to the case before us and, in view of that fact, let us
ascertain how lexicographers and the courts have defined an "income." The New Standard Dictionary, edition of
1915, defines an income 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." Webster's International Dictionary defines an income as "the receipt, salary; especially, the annual
receipts of a private person or a corporation from property." Bouvier, in his law dictionary, says that an "income" in
the federal constitution and income tax act, is used in its common or ordinary meaning and not in its technical, or
economic sense. (146 Northwestern Reporter, 812) Mr. Black, in his law dictionary, says "An income is the returnin

money from one's business, labor, or capital invested; gains, profit or private revenue." "An income tax is a tax on
the yearly profits arising from property , professions, trades, and offices."
The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653), said in speaking of
income that 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. (In re Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa., 414.)
Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and now Secretary of State of
the United States, in his argument before the Supreme Court of the United States in the case of Towne vs.
Eisner, supra, defined an "income" in an income tax law, unless it is otherwise specified, to mean cash or its
equivalent. It does not mean choses in action or unrealized increments in the value of the property, and cites in
support of the definition, the definition given by the Supreme Court in the case of Gray vs. Darlington, supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said: "Notwithstanding the
thoughtful discussion that the case received below, we cannot doubt that the dividend was capital as well for the
purposes of the Income Tax Law. . . . 'A stock dividend really takes nothing from the property of the corporation, and
adds nothing to the interests of the shareholders. Its property is not diminished and their interest are not increased. .
. . The proportional interest of each shareholder remains the same. . . .' In short, the corporation is no poorer and
the stockholder is no richer then they were before." (Gibbons vs. Mahon, 136 U.S., 549, 559, 560; Logan County vs.
U.S., 169 U.S., 255, 261).
In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking for the court, said that the act
employs the term "income" in its natural and obvious sense, as importing something distinct from principal or capital
and conveying the idea of gain or increase arising from corporate activity.
Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the court said: "An
income may be defined as the gain derived from capital, from labor, or from both combined, provided it be
understood to include profit gained through a sale or conversion of capital assets."
For bookkeeping purposes, when stock dividends are declared, the corporation or company acknowledges a liability,
in form, to the stockholders, equivalent to the aggregate par value of their stock, evidenced by a "capital stock
account." If profits have been made by the corporation during a particular period and not divided, they create
additional bookkeeping liabilities under the head of "profit and loss," "undivided profits," "surplus account," etc., or
the like. None of these, however, gives to the stockholders as a body, much less to any one of them, either a claim
against the going concern or corporation, for any particular sum of money, or a right to any particular portion of the
asset, or any shares sells or until the directors conclude that dividends shall be made a part of the company's assets
segregated from the common fund for that purpose. The dividend normally is payable in money and when so paid,
then only does the stockholder realize a profit or gain, which becomes his separate property, and thus derive an
income from the capital that he has invested. Until that, is done theincreased assets belong to the corporation and
not to the individual stockholders.
When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have
been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money
or in kind, should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock has been transferred from surplus to
assets, and no longer is available for actual distribution. The essential and controlling fact is that the stockholder has
received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his
original investment, together with whatever accretions and accumulations resulting from employment of his money
and that of the other stockholders in the business of the company, still remains the property of the company, and
subject to business risks which may result in wiping out of the entire investment. Having regard to the very truth of

the matter, to substance and not to form, the stockholder by virtue of the stock dividend has in fact received nothing
that answers the definition of an "income." (Eisner vs. Macomber, 252 U.S., 189, 209, 211.)
The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in
the capital of the corporation. There has been no separation or segregation of his interest. All the property or capital
of the corporation still belongs to the corporation. There has been no separation of the interest of the stockholder
from the general capital of the corporation. The stockholder, by virtue of the stock dividend, has no separate or
individual control over the interest represented thereby, further than he had before the stock dividend was issued.
He cannot use it for the reason that it is still the property of the corporation and not the property of the individual
holder of stock dividend. A certificate of stock represented by the stock dividend is simply a statement of his
proportional interest or participation in the capital of the corporation. For bookkeeping purposes, a corporation, by
issuing stock dividend, acknowledges a liability in form to the stockholders, evidenced by a capital stock account.
The receipt of a stock dividend in no way increases the money received of a stockholder nor his cash account at the
close of the year. It simply shows that there has been an increase in the amount of the capital of the corporation
during the particular period, which may be due to an increased business or to a natural increase of the value of the
capital due to business, economic, or other reasons. We believe that the Legislature, when it provided for an
"income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is generally used in
its common acceptation; that is that the income means money received, coming to a person or corporation for
services, interest, or profit from investments. We do not believe that the Legislature intended that a mere increase in
the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such property
can be reached under the ordinary from of taxation.
Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the difference between "capital"
and "income": "That the fundamental relation of 'capital' to 'income' has been much discussed by economists, the
former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir
supplied from springs; the latter as the outlet stream, to be measured by its flow during a period of time." It may be
argued that a stockholder might sell the stock dividend which he had acquired. If he does, then he has received, in
fact, an income and such income, like any other profit which he realizes from the business, is an income and he
may be taxed thereon.
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 other involves no disbursement by the
corporation. It parts with nothing to the stockholder. 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. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a person is in the
same position, so far as his income is concerned, as the owner of young domestic animal, one year old at the
beginning of the year, which is worth P50 and, which, at the end of the year, and by reason of its growth, is worth
P100. The value of his property has increased, but has had an income during the year? It is true that he had taxable
property at the beginning of the year of the value of P50, and the same taxable property at another period, of the
value of P100, but he has had no income in the common acceptation of that word. The increase in the value of the
property should be taken account of on the tax duplicate for the purposes of ordinary taxation, but not as income for
he has had none.
The question whether stock dividends are income, or capital, or assets has frequently come before the courts in
another form in cases of inheritance. A is a stockholder in a large corporation. He dies leaving a will by the terms
of which he give to B during his lifetime the "income" from said stock, with a further provision that C shall, at B's
death, become the owner of his share in the corporation. During B's life the corporation issues a stock dividend.
Does the stock dividend belong to B as an income, or does it finally belong to C as a part of his share in the capital
or assets of the corporation, which had been left to him as a remainder by A? While there has been some difference

of opinion on that question, we believe that a great weight of authorities hold that the stock dividend is capital or
assets belonging to C and not an income belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it
was held that stock dividends in such cases were regarded as capital and not as income(Gibbons vs. Mahon, 136
U.S., 549.)
In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the title of a corporation,
and the interest of its members or stockholders in the property of the corporation, is familiar and well settled. The
ownership of that property is in the corporation, and not in the holders of shares of its stock. The interest of each
stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the
corporation, during its existence, under its charter, and to a like proportion of the property remaining, upon the
termination or dissolution of the corporation, after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs.
Equitable Life Assurance Society, 160 N. Y., 19.) In the case of Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr.
Justice Wilkin said: "A dividend is defined as a corporate profit set aside, declared, and ordered by the directors to
be paid to the stockholders on demand or at a fixed time. Until the dividend is declared, these corporate profits
belong to the corporation, not to the stockholders, and are liable for corporate indebtedness.
There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends
declared. The one is a disbursement to the stockholders of accumulated earning, and the corporation at once parts
irrevocably with all interest thereon. The other involves no disbursement by the corporation. It parts with nothing to
the stockholders. The latter receives, not an actual dividend, but certificates of stock which evidence in a new
proportion his interest in the entire capital. When a cash becomes the absolute property of the stockholders and
cannot be reached by the creditors of the corporation in the absence of fraud. A stock dividend however, still being
the property of the corporation and not the stockholder, it may be reached by an execution against the corporation,
and sold as a part of the property of the corporation. In such a case, if all the property of the corporation is sold, then
the stockholder certainly could not be charged with having received an income by virtue of the issuance of the stock
dividend. Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the
stockholders, and are liable for corporate indebtedness. The rule is well established that cash dividend, whether
large or small, are regarded as "income" and all stock dividends, as capital or assets (Cook on Corporation, Chapter
32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs. Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of Law,
2d ed., p. 738.)
If the ownership of the property represented by a stock dividend is still in the corporation and to in the holder of such
stock, then it is difficult to understand how it can be regarded as income to the stockholder and not as a part of the
capital or assets of the corporation. (Gibbsons vs. Mahon, supra.) the stockholder has received nothing but a
representation of an interest in the property of the corporation and, as a matter of fact, he may never receive
anything, depending upon the final outcome of the business of the corporation. The entire assets of the corporation
may be consumed by mismanagement, or eaten up by debts and obligations, in which case the holder of the stock
dividend will never have received an income from his investment in the corporation. A corporation may be solvent
and prosperous today and issue stock dividends in representation of its increased assets, and tomorrow be
absolutely insolvent by reason of changes in business conditions, and in such a case the stockholder would have
received nothing from his investment. In such a case, if the holder of the stock dividend is required to pay an income
tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a
conclusion is absolutely contradictory to the idea of an income. An income subject to taxation under the law must be
an actual income and not a promised or prospective income.
The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the provisions of the Jones
Law. That may be admitted. He further argues that the Act of Congress (U.S. Revenue Act of 1918) expressly
authorized the Philippine Legislatures to provide for an income tax. That fact may also be admitted. But a careful
reading of that Act will show that, while it permitted a tax upon income, the same provided that income shall include
gains, profits, and income derived from salaries, wages, or compensation for personal services, as well as from
interest, rent, dividends, securities, etc. The appellee emphasizes the "income from dividends." Of course, income

received as dividends is taxable as an income but an income from "dividends" is a very different thing from receipt of
a "stock dividend." One is an actual receipt of profits; the other is a receipt of a representation of the increased value
of the assets of corporation.
In all of the foregoing argument we have not overlooked the decisions of a few of the courts in different parts of the
world, which have reached a different conclusion from the one which we have arrived at in the present case.
Inasmuch, however, as appeals may be taken from this court to the Supreme Court of the United States, we feel
bound to follow the same doctrine announced by that court.
Having reached the conclusion, supported by the great weight of the authority, that "stock dividends" are not
"income," the same cannot be taxes under that provision of Act No. 2833 which provides for a tax upon income.
Under the guise of an income tax, property which is not an income cannot be taxed. When the assets of a
corporation have increased so as to justify the issuance of a stock dividend, the increase of the assets should be
taken account of the Government in the ordinary tax duplicates for the purposes of assessment and collection of an
additional tax. For all of the foregoing reasons, we are of the opinion, and so decide, that the judgment of the lower
court should be revoked, and without any finding as to costs, it is so ordered.
Araullo, C.J. Avancea, Villamor and Romualdez, JJ., concur.
Separate Opinions
STREET, J., concurring:
I agree that the trial court erred in sustaining the demurrer, and the judgment must be reversed. Instead of
demurring the defendant should have answered and alleged, if such be the case, that the stock dividend which was
the subject of taxation represents the amount of earnings or profits distributed by means of the issuance of said
stock dividend; and the case should have been tried on that question of fact.
In this connection it will be noted that section 25 (a) of Act No. 2833, of the Philippine Legislature, under which this
tax was imposed, does not levy a tax generally on stock dividends to the extend of the part of the stock nor even to
the extend of its value, but declares that stock dividends shall be considered as income to the amount of the
earnings or profits distributed. Under provision, before the tax can be lawfully assessed and collected, it must
appear that he stock dividend represents earning or profits distributed; and the burden of proof is on the Collector of
Internal Revenue to show this.
The case of Eisner vs. Macomber (252 U.S., 189; 64 L. ed., 521), has been cited as authority for the proposition that
it is incompetent for the Legislature to tax as income any property which by nature is really capital as a stock
dividend is there said to be. In that case the Supreme Court of the United States held that a Congressional Act
taxing stock dividends as income was repugnant to that provision of the Constitution of the United States which
required that direct taxes upon property shall be apportioned for collection among the several states according to
population and that the Sixteenth Amendment, in authorizing the imposition by Congress of taxes upon income, had
not vested Congress with the power to levy direct taxes, on property under the guise of income taxes. But the
resolution embodied in that decision was evidently reached because of the necessity of harmonizing two different
provisions of the Constitution of the United States, as amended. In this jurisdiction our Legislature has full authority
to levy both taxes on property and income taxes; and there is no organic provision here in force similar to that
which, under the Constitution of the United States, requires direct taxes on property to be levied in a particular way.
It results, under the statute here in force, there being no constitutional restriction upon the action of the law making
body, that the case before us presents merely a question of statutory construction. That the problem should be
viewed in this light, in a case where there is no restriction upon the legislative body, is pointed our in Eisner vs.
Macomber, supra, where in the course of his opinion Mr. Justice Pitney refers to the cases of the Swan Brewery Co.

vs. Rex ([1914] A. C. 231), and Tax Commissioner vs. Putnam (227 Mass., 522), as being distinguished from Eisner
vs. Macomber by the very circumstance that in those cases the law making body, or bodies were under no
restriction as to the method of levying taxes. Such is the situation here.
OSTRAND, J., dissenting:
In its final analysis the opinion of the court rests principally, if not entirely on the decision of the United States
Supreme Court in the case of Eisner vs. Macomber (252 U.S., 189), a decision which, for at least two reasons, is
entirely inapplicable to the present case.
In the first place, there is a radical difference between the definition of a taxable stock dividend given in the United
States Income Tax Law of September 8, 1916, construed in the case of Eisner vs. Macomber, and that given in Act
No. 2833 of the Philippine Legislature, the Act with which we are concerned in the present case. The former
provides that "stock dividend shall be considered income, to the amount of its cash value;" the Philippine Act
provides that "Stock dividend shall be considered income, to the amount of the earnings or profits distributed." The
United State statute made stock dividends based upon an advance in the value of the property or investment
taxable as income whether resulting from earning or not; our statute make stock dividends taxable only to the
amount of the earning and profits distributed, and stock dividends based on the increment income and are not
taxable. Though the difference would seem sufficiently obvious, we will endeavor to make it still clearer by borrowing
one of the illustrations with which the opinion of the court is provided. The court says:
A, an individual farmer, buys a farm with one hundred head of cattle for the sum of P10,000. At the end of
the first year, by reason of business conditions and the increase of the value of both real estate and personal
property, it is discovered that the value of the farm and the cattle is P20,000. A, during the year has received
nothing from the farm or the cattle. His books at the beginning of the year show that he had property of the
value of P10,000. His books at the close of the year show that he has property of the value of P20,000. A is
not a corporation. The assets of his business are not shown therefore by certificate of stock. His books,
however, show that the value of his property has increased during the year by P10,000. Can the P10,000,
under any theory of business or law, be regarded as an "income" upon which the farmer can be required to
pay an income tax? Is there any difference in law in the conditions of A in this illustration and the conditions
of A and B in the immediately preceding illustration? Can the increase of the value of the property in either
case be regarded as an 'income' and be subjected to the payment of the income tax under the law?
I answer no. And while the increment if in the form of a stock dividend would have been regarded as income under
the United States statute and taxes as such, it is not regarded as income and cannot be so taxes under our statute
because it is not based on earnings or profits. That is precisely the difference between the two statutes and that is
the reason the illustration is not in point in this case, though it would have been entirely appropriate in the Eisner vs.
Macomber case. It is also one of the reasons why that case is inapplicable here and why most of the arguments in
the majority opinion are beside the mark.
But let us suppose that A had sold the products of the farm during the year for P10,000 over and above his expense,
and had invested the money in buildings and improvements on the farm, thus increasing its value to P20,000. Why
would not the P10,000 earned during the year and so invested in improvements still be income for the year? And
why would not a tax on these earnings be an income tax under the definition given in Black's Law Dictionary, and
quoted with approval in the decision of the court, that "An income tax is a tax on the yearly profits arising from the
property, professions, trades, and offices?" There can be but one answer. There is no reason whatever why the
gains derived from the sale of the products of the farm should not be regarded as income whether reinvested in
improvements upon the farm or not and there is no reason way a tax levied thereon cannot be considered an
income tax.

Moreover, to constitute income, profits, or earnings need not necessarily be converted into cash. Black's Law
Dictionary says and I am again quoting from the decision of the court "An income is the return in money from
one's business, labor, or capital invested; gains profits, or private revenue." As will be seen in the secondary sense
of the word, income need not consist in money; upon this point there is no divergence of view among the
lexicographers. If a farmer stores the gain produced upon his farm without selling, it may none the less be regarded
as income.
In the Eisner vs. Macomber case, the United States supreme Court felt bound to give the word "income" a strict
interpretation. Under article 1, paragraph 2, clause 3, and paragraph 9, clause 4 of the original Constitution of the
United States, Congress could not impose direct taxes without apportioning them among the States according to
population. As it was thought desirable to impose Federal taxes upon incomes and as a levy of such taxes by
appointment among the States in proportion to population would lead to an unequal distribution of the tax with
reference to the amount of taxable incomes, the Sixteenth Amendment was adopted and which provided that "The
Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without
apportionment among the several states, and without regard to any census or enumeration."
The United States Supreme Court therefore says in the Eisner vs. Macomber case:
A proper regard for its generis, as well as its very clear language, requires also that this Amendment shall
not be extended by loose construction, so as to repeal or modify, except as applied to income, those
provisions of the Constitution that require an apportionment according to population for direct taxes upon
property, real and personal. This limitation still has an appropriate and important functions, and is not to be
overridden by Congress or disregarded by the courts.
In order, therefore, that the clauses cited from Article I of the constitution may have proper force and effect,
save only as modified by the Amendment, and that the latter also may have proper effect, it becomes
essential to distinguish between what is and what is not "income," as the term is there used; and to apply the
distinction as cases arise, according to truth and substance, without regard to form. Congress cannot by any
definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which
alone it derives its power to legislate, and within whose limitations alone that power can be lawfully
exercised.
That, in the absence of the peculiar restrictions placed by the Constitution upon taxing power of Congress, the
decision of the court might have been different is clearly indicated by the following language:
Two recent decisions, proceeding from courts of high jurisdiction, are cited in support of the position of the
Government.
Sean Brewery Co. vs. Rex ([1914] A. C., 231), arose under the Dividend Duties Act of Western Australia,
which provided that "dividend" should include "every dividend, profit, advantage, or gain intended to be paid
or credited to or distributed among any members or director of any company," except etc. There was a stock
dividend, the new shares being alloted among the shareholders pro rata; and the question was whether this
was a distribution of a dividend within the meaning of the act. The Judicial Committee of the Privy Council
sustained the dividend duty upon the ground that, although "in ordinary language the new shares would not
be distribution of a dividend," yet within the meaning of the act, such new share were an "advantage" to the
recipients. There being no constitutional restriction upon the action of the lawmaking body, the case
presented merely a question of statutory construction, and manifestly the decision is not a precedent for the
guidance of this court when acting under a duty to test an act of Congress by the limitations of a written
Constitution having superior force.

In Tax Commissioner vs. Putnam (1917], 227 Mass., 522), it was held that the 44th Amendment to the
constitution of Massachusetts, which conferred upon the legislature full power to tax incomes, "must be
interpreted as including every item which by any reasonable understanding can fairly be regarded as
income" (pp. 526, 531); and that under it a stock dividend was taxable as income. . . . Evidently, in order to
give a sufficiently broad sweep to the new taxing provision, it was deemed necessary to take the symbol for
the substance, accumulation for distribution, capital accretion for its opposite; while a case where money is
paid into the hand of the stockholder with an option to buy new shares with it, followed by acceptance of the
option, was regarded as identical in substance with a case where the stockholder receives no money and
has no option. The Massachusetts court was not under an obligation, like the one which binds us, of
applying a constitutional provisions that stand in the way of extending it by construction.
The Philippine Legislature has full power to levy taxes both on capital or property and on income, subject only to the
provisions of the Organic Act that "the rule of taxation shall be uniform." In providing for the income tax the
Legislature is therefore entirely free to employ the term "income" in its widest sense and is in nowise limited or
hampered by organic limitations such as those imposed upon Congress by the Constitution of the United States.
This is the second reason why the rule laid down in Eisner vs. Macomber has no application here.
The majority opinion in discussing this question, says:
There is no question that the Philippine Legislature may provide for the payment of an income tax, but it
cannot, under the guise of an income tax, collect a tax on property which is not an "income." The Philippine
Legislature cannot impose a tax upon "income" only . The Philippine Legislature has no power to provide a
tax upon "automobiles," only, and under that law collect a tax upon a carreton or bull cart. Constitutional
limitations upon the power of the Legislature are not stronger than statutory limitations, that is to say, a
statute expressly adopted for one purpose cannot, without amendment, be applied to another purpose which
is entirely distinct and different. A statute providing for an income tax cannot be construed to cover property
which is not, in fact, income. The Legislature cannot, by a statutory declaration, change the real of a nature
of a tax which it imposes. A law which imposes an importation tax on rice only cannot be construed to
impose an importation tax on corn.
These assertions while in the main true are, perhaps, a little to broadly stated; much will depend on the
circumstances of each particular case. If the Legislature cannot do the things enumerate it must be by reason of the
limitation imposed by the Organic Act, "That no bill which may be enacted into law shall embrace more than on
subject, and that subject shall be expressed in the title of the bill." Similar provisions are contained in most State
Constitutions, their object being to prevent "log-rolling" and the passing of undesirable measures without their being
brought properly to the attention of the legislators. Where the prevention of this mischief is not involved, the courts
have uniformly given such provisions a very liberal construction and there are few, if any, cases where a statute has
been declared unconstitutional for dealing with several cognate subjects in the same Act and under the same title.
(Lewis Sutherland on Statutory Construction, 2d ed., pars 109 et seq.: Government of the Philippine Island vs.
Municipality of Binalonan and Roman Catholic Bishop of Nueva Segovia, 32, Phil., 634). Certainly no income tax
statute would be declared unconstitutional on that ground for treating dividends as income and providing for their
taxation as such.
Reverting to the question of the nature of income, it is argued that a stock certificate has no intrinsic value and that,
therefore, even it is based on earnings instead of increment in capital it cannot be regarded as income. But neither
has a bank check or a time deposit certificate any intrinsic value, yet it may be negotiated, or sold, or assigned and
it represents a cash value. So also does a stock certificate. A lawyer might take his fee in stock certificates instead
of in money. Would it be seriously contended that he had received no fee and that his efforts had brought no
income?
1awph!l.net

Some of the members of the court agree that stock dividends based on earnings or profits may be taxed as income,
but take the view that in an action against the Collector of the Internal Revenue for recovering back taxes paid on
non-taxable stock dividends, the plaintiff need not allege that the stock dividends are not base on earnings or profits
distributed, but that question of the taxability or non-taxability of the stock dividends is a matter of defense and
should be set up by the defendant by way of answer.
I think this view is erroneous. If some stock dividends are taxable and others are not, an allegation that stock
dividends in general have been taxed is not sufficient and does not state a cause of action. the presumption is that
the tax has been legally collected and the burden is upon the plaintiff both to allege and prove facts showing that the
collection is unlawfully or irregular. (Code of Civil Procedure, sec. 334, subsec. 14 and 31.)
Malcolm, J., concurs.

JOHNS, J., dissenting:

We have studied and analyzed with care the able and exhaustive majority opinion written by Mr. Justice Johnson.
In the final analysis, the question involved is whether the words "which stock dividend shall be considered income,
to the amount of its cash value" are to be construed as meaning the same things as the words "stock dividend shall
be considered income, to the amount of the earnings or profits distributed," as the majority opinion says. The first is
an Act of Congress defining what is a stock dividend, and that the word dividend shall be construed as income to the
amount of its cash value. It is upon that construction and that definition that the majority opinion is founded. That is
the definition of the words as used in an Act of Congress. The other is an Act defining the meaning of the words as
used in an Act of Congress. The other is an Act defining the meaning of the words by the Legislature of the
Philippine Islands, and it says: "Stock dividend shall be considered income, to the amount of the earnings or profits
distributed."
It is true, as the majority opinion says, that in enacting the Income Tax Law of the Philippine Islands, the Legislature
had before it the Act of Congress. But it is also true that by the Act of the Philippine Legislature "Stock dividend shall
be considered income, to the amount of the earnings or profits distributed." One law is founded upon the actual cash
value of the stock and the other is founded upon distributed earnings and profits.
Much is said in the textbooks and by the numerous decisions cited in the majority opinion as to the meaning of the
word income, and the decision in the United States are founded upon the meaning of that word, as it is used in the
Act of Congress, and to the effect that the word is to be construed in its usual and ordinary meaning. But assuming
that to be true, it must also be conceded that the Legislature of the Philippine Islands has a legal right to define the
meaning of the word "income" by a legislative act, and when its meaning is defined by legislative act, it is the duty of
the courts to follow that definition regardless of whether it is the usual and ordinary meaning of the word, and therein
lies the distinction between the two acts and the reason why the authorities cited in the majority opinion are not in
point. Act No. 2833 of the Philippine Legislature specifically says that "Stock dividend shall be considered income, to
the amount of the earnings or profits distributed." The Act of Congress is founded upon the "cash value of the stock,"
and the Act in question is founded upon "the amount of the earnings or profits distributed."
Hence, then, we have the meaning of the words defined in the legislative act, and it is very apparent that the
purpose and intent of the legislative act was to avoid the meaning and construction of such words which is now
given to them in the majority opinion. The Legislature had the power to define the meaning of the words, did define
them, and it is the duty of the courts to follow and adopt the meaning and definition of the words given to them in the
legislative act.

As pointed out in the opinion of Mr. Justice Street, the constitutional limitations upon the legislative power for
taxation purposes, which exist in the United States, does not exist in the Philippine Islands. There is no organic law
here similar to the provisions of the Constitution of the United States which require direct taxes on property to be
levied in a specific way, in other words, the restrictions and limitations placed on the power to levy an income tax
under the Constitution of the United States do not exist in the Philippine Islands. Hence, it must follow that the
authorities cited in the majority opinion are not in point the instant case. They are founded upon different language,
different organic powers, different conditions, and the different meaning of the same words as defined in the different
legislative acts. The Philippine Legislature had a legal right to define the meaning of the words "dividend" and
"income," and it expressly says "Stock dividend shall be considered income, to the amount of the earnings or profits
distributed." In the instant case, the earnings and profits of the corporation were distributed among the existing
stockholders of the company upon a pro rata basis, and they were made exclusively out of "distributed earnings and
profits." The declaring of the dividend was a matter in the sole discretion of the stockholders, but when such a
dividend is made from and out of "earnings or profits distributed," it then becomes and is an income within the
meaning of Act No. 2833, and should be subject to an income tax.
For such reason, I dissent.

G.R. No. 112675 January 25, 1999

AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER INSURANCE CO., INC.;
CIBELES INSURANCE CORPORATION; COMMONWEALTH INSURANCE COMPANY; CONSOLIDATED
INSURANCE CO., INC.; DEVELOPMENT INSURANCE & SURETY CORPORATION DOMESTIC INSURANCE
COMPANY OF THE PHILIPPINE; EASTERN ASSURANCE COMPANY & SURETY CORP; EMPIRE INSURANCE
COMPANY; EQUITABLE INSURANCE CORPORATION; FEDERAL INSURANCE CORPORATION INC.; FGU
INSURANCE CORPORATION; FIDELITY & SURETY COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS'
INSURANCE CO., INC.; GOVERNMENT SERVICE INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.;
MALAYAN ZURICH INSURANCE CO.; INC.; MERCANTILE INSURANCE CO., INC.; METROPOLITAN
INSURANCE COMPANY; METRO-TAISHO INSURANCE CORPORATION; NEW ZEALAND INSURANCE CO.,
LTD.; PAN-MALAYAN INSURANCE CORPORATION; PARAMOUNT INSURANCE CORPORATION; PEOPLE'S
TRANS-EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA DE SEGUROS, INC.; PHILIPPINE
BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER INSURANCE &
SURETY CORP.; PIONEER INTERCONTINENTAL INSURANCE CORPORATION; PROVIDENT INSURANCE
COMPANY OF THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE
COMPANY; RIZAL SURETY & INSURANCE COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARDEASTERN INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE CO., INC.;
STATE BONDING & INSURANCE CO., INC.; SUMMA INSURANCE CORPORATION; TABACALERA
INSURANCE CO., INC. all assessed as "POOL OF MACHINERY INSURERS, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMISSIONER OF INTERNAL REVENUE, respondent.

PANGANIBAN, J.:
Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a "pool" in order to
facilitate the handling of business contracted with a nonresident foreign insurance company. May the "clearing
house" or "insurance pool" so formed be deemed a partnership or an association that is taxable as a corporation
under the National Internal Revenue Code (NIRC)? Should the pool's remittances to the member companies and to

the said foreign firm be taxable as dividends? Under the facts of this case, has the goverment's right to assess and
collect said tax prescribed?
The Case
These are the main questions raised in the Petition for Review on Certiorari before us, assailing the October 11,
1
2
1993 Decision of the Court of Appeals in CA-GR SP 25902, which dismissed petitioners'

appeal of the October 19, 1992 Decision 3 of the Court of Tax Appeals 4 (CTA) which had previously
sustained petitioners' liability for deficiency income tax, interest and withholding tax. The Court of Appeals ruled:

WHEREFORE, the petition is DISMISSED, with costs against petitioner

The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution

denying

reconsideration.
The Facts
The antecedent facts,

as found by the Court of Appeals, are as follows:

The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the
Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and
Contractors' All Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota
Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool
composed of the petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an
"Information Return of Organization Exempt from Income Tax" for the year ending in 1975, on the
basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes
in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and
P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These assessments
were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the
petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax, interest, and
with [h]olding tax, itemized as follows:
Net income per information return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60

TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE
Dividend paid to Munich

Reinsurance Company P3,728,412.00

35% withholding tax at

source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penaltynon-filing of return 300.00
late payment 300.00

TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penaltynon-filing of return 300.00
late payment 300.00

TOTAL AMOUNT DUE & P89,438.68

COLLECTIBLE ===========

The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation, and that
the latter's collection of premiums on behalf of its members, the ceding companies, was taxable income. It added
that prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due, because "the

taxpayer cannot be located at the address given in the information return filed." Hence, this Petition for Review
9
before us.
The Issues
Before this Court, petitioners raise the following issues:
1. Whether or not the Clearing House, acting as a mere agent and performing strictly administrative
functions, and which did not insure or assume any risk in its own name, was a partnership or
association subject to tax as a corporation;
2. Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were
"dividends" subject to tax; and
3. Whether or not the respondent Commissioner's right to assess the Clearing House had already
prescribed. 10
The Court's Ruling
The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a corporation,
and that the government's right to assess and collect the taxes had not prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house was an informal
partnership, which was taxable as a corporation under the NIRC. They point out that the reinsurance policies were
written by them "individually and separately," and that their liability was limited to the extent of their allocated share
11
in the original risk thus reinsured. Hence, the pool did not act or earn income as a

reinsurer. 12 Its role was limited to its principal function of "allocating and distributing the
risk(s) arising from the original insurance among the signatories to the treaty or the
members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the
performance of incidental functions, such as records, maintenance, collection and custody
of funds, etc." 13
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the same

(3) the executive board of the pool did

not exercise control and management of its funds, unlike the board
of directors of a corporation; 16 and (4) the pool or clearing house
"was not and could not possibly have engaged in the business of
reinsurance from which it could have derived income for itself." 17
risk or solidary liability,

14

(2) there was no common fund;

15

The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency tasked with
the enforcement of tax law, is accorded much weight and even finality, when there is no showing. that it is patently
18
wrong, particularly in this case where the findings and conclusions of the internal revenue

commissioner were subsequently affirmed by the CTA, a specialized body created for the
exclusive purpose of reviewing tax cases, and the Court of Appeals. 19Indeed,

[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasijudicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an
20
expertise on the subject, unless there has been an abuse or improvident exercise of its authority.
This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal revenue
commissioner, committed no reversible error. Section 24 of the NIRC, as worded in the year ending 1975, provides:
Sec. 24. Rate of tax on corporations. (a) Tax on domestic corporations. A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or
organized, but not including duly registered general co-partnership (compaias colectivas), general
professional partnerships, private educational institutions, and building and loan associations . . . .
Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such
as unregistered partnerships and associations. Parenthetically, the NIRC's inclusion of such entities in the tax on
21
corporations was made even clearer by the tax Reform Act of 1997, which amended the Tax Code.

Pertinent provisions of the new law read as follows:

Sec. 27. Rates of Income Tax on Domestic Corporations.
(A) In General. Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined in Section 22 (B) of this Code,
and taxable under this Title as a corporation . . . .
Sec. 22. Definition. When used in this Title:
xxx xxx xxx
(B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations, or insurance companies, but
does not include general professional partnerships [or] a joint venture or consortium formed for the
purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating or consortium agreement under a service contract
without the Government. "General professional partnerships" are partnerships formed by persons for
the sole purpose of exercising their common profession, no part of the income of which is derived
from engaging in any trade or business.
xxx xxx xxx
22

held that Section 24 covered these

unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members. 23 The Court of Appeals astutely
applied Evangelista. 24
Thus, the Court in Evangelista v. Collector of Internal Revenue

. . . Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v.
Collector of Internal Revenue, supra. The Supreme Court said:
The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. *** (8 Merten's Law of Federal Income Taxation,
p. 562 Note 63)

Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when "two or more persons bind
themselves to contribute money, property, or Industry to a common fund, with the intention of dividing the profits
25
among themselves." Its requisites are: "(1) mutual contribution to a common stock, and (2)

26

joint interest in the profits." In other words, a partnership is formed when persons
contract "to devote to a common purpose either money, property, or labor with the
intention of dividing the profits between
themselves." Meanwhile, an association implies associates who enter into a "joint enterprise . . . for the transaction
27

of business."

28

or an association 30 that
would handle all the insurance businesses covered under their quota-share reinsurance
treaty 31 and surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or
In the case before us, the ceding companies entered into a Pool Agreement

29

32

an association covered by Section 24 of the NIRC:

(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit

This common fund pays for the administration and

operation expenses of the pool. 24
of the pool.

33

(2) The pool functions through an executive board, which resembles the board of directors of a corporation,
35
composed of one representative for each of the ceding companies.
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is
indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because
without it they would not have received their premiums. The ceding companies share "in the business ceded to the
36
pool" and in the "expenses" according to a "Rules of Distribution" annexed to the Pool Agreement. Profit

motive or business is, therefore, the primordial reason for the pool's formation. As aptly
found by the CTA:
. . . The fact that the pool does not retain any profit or income does not obliterate an antecedent fact,
that of the pool being used in the transaction of business for profit. It is apparent, and petitioners
admit, that their association or coaction was indispensable [to] the transaction of the business, . . . If
together they have conducted business, profit must have been the object as, indeed, profit was
earned. Though the profit was apportioned among the members, this is only a matter of
37
consequence, as it implies that profit actually resulted.
38

is misplaced, because the facts obtaining

therein are not on all fours with the present case. In Pascual, there was no unregistered
partnership, but merely a co-ownership which took up only two isolated transactions. The
The petitioners' reliance on Pascuals v. Commissioner

39

Court of Appeals did not err in applying Evangelista, which involved a partnership that engaged in a series of transactions
spanning more than ten years, as in the case before us.

Second Issue:
Pool's Remittances are Taxable
Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not dividends
subject to tax. They insist that such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and
40
"would be tantamount to an illegal double taxation as it would result in taxing the same taxpayer" Moreover, petitioners
41

They add
that even if such remittances were treated as dividends, they would have been exempt
argue that since Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot be deemed dividends.

under the previously mentioned sections of the 1977 NIRC, 42 as well as Article 7 of
paragraph 1 43 and Article 5 of paragraph 5 44 of the RP-West German Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should be taxed
46
only once. That is, ". . . taxing the same person twice by the same jurisdiction for the same thing" In the

instant case, the pool is a taxable entity distinct from the individual corporate entities of the
ceding companies. The tax on its income is obviously different from the tax on
thedividends received by the said companies. Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, "exemptions
therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or
47
right." Petitioners have failed to discharge this burden of proof. The sections of the 1977

NIRC which they cite are inapplicable, because these were not yet in effect when the
income was earned and when the subject information return for the year ending 1975 was
filed.
Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the exemptions
claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any company that has already paid
the tax . . ." This cannot be applied to the present case because, as previously discussed, the pool is a taxable
entity distinct from the ceding companies; therefore, the latter cannot individually claim the income tax paid by the
former as their own.
48

pertains to tax on foreign corporations; hence, it cannot be

claimed by the ceding companies which are domestic corporations. Nor can Munich, a
foreign corporation, be granted exemption based solely on this provision of the Tax Code,
because the same subsection specifically taxes dividends, the type of remittances
forwarded to it by the pool. Although not a signatory to the Pool Agreement, Munich is
patently an associate of the ceding companies in the entity formed, pursuant to their
reinsurance treaties which required the creation of said pool.
On the other hand, Section 24 (b) (1)

Under its pool arrangement with the ceding companies; Munich shared in their income and loss. This is manifest
49
50
51
52
from a reading of Article 3 and 10 of the Quota-Share Reinsurance treaty and Articles 3 and 10 of the Surplus

Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the
doctrine that a tax exemption must be construed strictissimi juris, and the statutory
exemption claimed must be expressed in a language too plain to be mistaken. 53
Finally the petitioners' claim that Munich is tax-exempt based on the RP- West German Tax Treaty is likewise
unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the
information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in

Although petitioners omitted in their pleadings the date of

effectivity of the treaty, the Court takes judicial notice that it took
effect only later, on December 14, 1984. 55
effect.

54

Third Issue:
Prescription

Petitioners also argue that the government's right to assess and collect the subject tax had prescribed. They claim
that the subject information return was filed by the pool on April 14, 1976. On the basis of this return, the BIR
telephoned petitioners on November 11, 1981, to give them notice of its letter of assessment dated March 27, 1981.
Thus, the petitioners contend that the five-year statute of limitations then provided in the NIRC had already lapsed,
56
and that the internal revenue commissioner was already barred by prescription from making an assessment.
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period was tolled
57
under then Section 333 of the NIRC, because "the taxpayer cannot be located at the address

given in the information return filed and for which reason there was delay in sending the
assessment." 58 Indeed, whether the government's right to collect and assess the tax has
prescribed involves facts which have been ruled upon by the lower courts. It is axiomatic
that in the absence of a clear showing of palpable error or grave abuse of discretion, as in
this case, this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the pool
changed its address, for they stated that the pool's information return filed in 1980 indicated therein its "present
address." The Court finds that this falls short of the requirement of Section 333 of the NIRC for the suspension of
the prescriptive period. The law clearly states that the said period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated October 11, 1993 and
November 15, 1993 are hereby AFFIRMED. Cost against petitioners.
1wphi1.nt

SO ORDERED.
Romero, Vitug, Purisima, Gonzaga-Reyes, JJ., concur.

Footnotes
1 Rollo, pp. 57-69.
2 Second Division, composed of J. Vicente V. Mendoza (now an associate justice of the Supreme
Court), ponente and chairman of the Division; concurred in by JJ. Jesus M. Elbinias and Lourdes K.
Tayao-Taguros, members.
3 Rollo, pp. 172-191.
4 Penned by Presiding Judge Ernesto D. Acosta and concurred in by Judges Manuel K. Gruba and
Ramon O. De Veyra.
5 Decision of the Court of Appeals, p. 12; rollo, p. 68.
6 Rollo, p. 71.
7 The petition aptly raises only questions of law, not of facts.
8 CA Decision, pp. 1-3; rollo, pp. 57-59.
9 The case was deemed submitted for resolution on January 20, 1998, upon receipt by this Court of
the memorandum for Respondent Commissioner. Petitioners' Memorandum was received earlier, on
July 11, 1997.
10 Memorandum for Petitioner, p. 10; rollo, p. 390.

11 Ibid., p. 14; rollo, p. 394.

12 Ibid., p. 28; rollo, p. 408.
13 Ibid., p. 15; rollo, p. 395.
14 Ibid., p. 24; rollo, p. 404.
15 Ibid., p. 26; rollo, p. 406.
16 Ibid., pp. 24-25; rollo, p. 404-405.
17 Ibid., p. 25; rollo, p. 405.
18 See Joebon Marketing Corporation v. Court of Appeals, the Commissioner of Internal Revenue,
GR No. 125070, July 17, 1996, Third Division, Minute Resolution; citing Misamis Oriental Association
of Coco Traders, Inc. v. Department of Finance Secretary, 238 SCRA 63, 68, November 10, 1994.
19 See Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 619-620, April 18,
1997.
20 Commissioner of Internal Revenue v. Court of Appeals, 204 SCRA 182, 189-190 per Regalado, J.
21 RA No. 8424, which took effect on January 1, 1998.
22 102 Phil. 140 (1957).
23 Supra, pp. 146-147; cited in Justice Jose C. Vitug, Compedium of Tax Law and Jurisprudence, p.
52, 2nd revised ed. (1989).
24 Decision of the Court of Appeals, p. 5; rollo, p. 61.
25 Art. 1767, Civil Code of the Philippines.
26 Tolentino Civil Code of the Philippines, p. 320, Vol. V (1992).
27 Prautch, Scholes & Co. v. Dolores Hernandez de Goyonechea, 1 Phil. 705, 709-710 (1903), per
Williard, J.; cited in Moreno, Philippine Law Dictionary, p. 445 (1982).
28 Morrissey v. Commissioner, 296 US 344, 356; decided December 16, 1935, per Hughes, CJ.
29 Pool Agreement, p. 1; rollo, p. 154.
30 Ibid., p. 2; rollo, p. 155.
31 Annex C; rollo, pp. 72-100.
32 Annex D; rollo, pp. 101-153.
33 Pool Agreement, p. 4; rollo, p. 157.
34 Ibid., p. 6; rollo, p. 159.
35 Ibid., p. 2; rollo, p. 155.

36 Ibid., p. 6; rollo, p. 159.

37 CTA Decision, pp. 16-17; rollo, pp. 187-188.
38 166 SCRA 560, October 18, 1988.
39 Pascual v. Commissioner, supra, p. 568.
40 Memorandum for Petitioners, pp. 32-33; rollo, pp. 412-413.
41 Ibid., p. 29; rollo, p. 409.
42 Ibid., p. 30; rollo, p. 410.
43 "1. The profits of an enterprise of a Contracting State shall taxable only in that State unless the
enterprise carries on business in the other Contracting State through a permanent establishment
situated therein. . . ."
44 "5. An insurance enterprise of a Contracting State shall, except with regard to re-insurance, be
deemed to have a permanent establishment in the other State, if it collects premiums in the territory
of that State or insures risks situated therein through an employee or through a representative who
is not an agent of independent status within the meaning of paragraph 6.
45 Memorandum for Petitioners, p. 31; rollo, p. 411. Petitioner are reffering to the treaty entitled
"Agreement between the Federal Republic of Germany and the Republic of the Philippines for the
Avoidance of Double Taxation with respect to Taxes on Income and Capital."
46 Victorias Milling Co., Inc., v. Municipality of Victorias, Negros Occidental, 25 SCRA 192, 209,
September 27, 1968, per Sanchez, J.
47 Vitug, supra, p 29; citing Wonder Mechanical Engineering Corporation v. Court of Tax Appeals, 64
SCRA 555, June 30, 1975. See also Commissioner of Internal Revenue v. Court of Appeals, Court of
Tax of Appeal and Young Men's Christian Association of the Philippines, Inc, GR No. 124043, pp. 1112, October 14, 1998; Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 613614, April 18, 1997.
48 Section 24 (b) (1), as amended by RA No. 6110 which took effect on August 4, 1969, 1969 reads:
(b) Tax on foreign corporation. (1) Non-resident corporations. A foreign corporation not
engaged in trade or business in the Philippines including a foreign life insurance company not
engaged in the life insurance business in the Philippines shall pay a tax equal to thirty-five per cent
of the gross income received during each taxable year from all sources within the philippines, as
interests, dividends, rents, royalties, salaries, wages, technical services or otherwise, emoluments or
other fixed or determinable annual, periodical or casual gains, profits, and income, and capital
gains:Provided, however, That Premiums shall not include reinsurance premiums.
49 Rollo, p. 73.
"The "Ceding Companies" undertake to cede to the "Munich" fixed quota share of 40% of all
insurances mentioned in Article 2 and the "Munich" shall be obliged to accept all insurances so
ceded."
50 Ibid., p. 76.
"The Munich's proportion of any loss shall be settled by debiting it in account, and a monthly list
comprising all losses paid shall be rendered to the "Munich." . . ."

51 Ibid., p. 102.
"The "Ceding Companies" bind themselves to cede to the "Munich" the entire 15 line surplus of the
insurances specified in Article 2 hereof.
The surplus shall consist of all sums insured remaining after deduction of the Quota Share and the
proportion combined net retention of the "Pool."
The Munich undertakes to accept the amounts so ceded up to fifteen times the "Ceding Company's"
proportionate retention."
52 Ibid., 105.
"The Munich's' proportion of any loss shall be settled by debiting in it account. A monthly list
comprising all losses paid shall be rendered to the "Munich" on forms to be agreed. . . ."
53 Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and Court of Appeals, GR
No. 117359, p. 15, July 23, 1998.
54 See the Philippine Treaties Index: 1946-1982, Foreign Service Institute, Manila, Philippines
(1983). See also Philippine Treaty Series, Vol. I to VII.
55 See Bundegesetzblatt Jahrgang:1984, Teil II (Federal Law Gazette: 1984, Part II),p. 1008.
56 Memorandum for Petitioners, 33-35; rollo, pp. 413-415.
57 Sec. 333. Suspension of running of statute. The running of the statute of limitations provided in
section three hundred thirty-one or three hundred-thirty two on the making of the assessment and
the beginning of distraint or levy or a proceeding in the court collection, in respect of any deficiency,
shall be suspended for the period during which Commissioner of Internal Revenue is prohibited from
making the assessment or beggining distraint or levy or a proceeding in court, and for sixty days
thereafter; when the taxpayer request for a reinvestigation which is granted by the Commissioner
when the taxpayer cannot be located in the address by him in the return filed upon which a tax is
being assessed or collected: . . ."
58 Decision of the Court of Appeals, p. 11; rollo, p. 67.

G.R. No. 153793 August 29, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002 Decision 1 of the Court of
Appeals in CA-G.R. SP No. 59794, which granted the tax refund of respondent Juliane Baier-Nickel and reversed
the June 28, 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the
May 8, 2002 Resolution3 of the Court of Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of
JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketing on wholesale only, buying or
otherwise acquiring, holding, importing and exporting, selling and disposing embroidered textile products." 4Through
JUBANITEXs General Manager, Marina Q. Guzman, the corporation appointed and engaged the services of
respondent as commission agent. It was agreed that respondent will receive 10% sales commission on all sales
actually concluded and collected through her efforts.5
In 1995, respondent received the amount of P1,707,772.64, representing her sales commission income from which
JUBANITEX withheld the corresponding 10% withholding tax amounting to P170,777.26, and remitted the same to
the Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax return reporting a
taxable income of P1,707,772.64 and a tax due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly
withheld and remitted by JUBANITEX to the BIR. Respondent contended that her sales commission income is not
taxable in the Philippines because the same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA contending that no action was taken by the
BIR on her claim for refund.7 On June 28, 2000, the CTA rendered a decision denying her claim. It held that the
commissions received by respondent were actually her remuneration in the performance of her duties as President

of JUBANITEX and not as a mere sales agent thereof. The income derived by respondent is therefore an income
taxable in the Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that respondent received
the commissions as sales agent of JUBANITEX and not as President thereof. And since the "source" of income
means the activity or service that produce the income, the sales commission received by respondent is not taxable
in the Philippines because it arose from the marketing activities performed by respondent in Germany. The
dispositive portion of the appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated June 28, 2000 is
hereby REVERSED and SET ASIDE and the respondent court is hereby directed to grant petitioner a tax refund in
the amount of Php 170,777.26.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was denied. 9 Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the Philippines because the source thereof
is JUBANITEX, a domestic corporation located in the City of Makati. It thus implied that source of income means the
physical source where the income came from. It further argued that since respondent is the President of
JUBANITEX, any remuneration she received from said corporation should be construed as payment of her overall
managerial services to the company and should not be interpreted as a compensation for a distinct and separate
service as a sales commission agent.
Respondent, on the other hand, claims that the income she received was payment for her marketing services. She
contended that income of nonresident aliens like her is subject to tax only if the source of the income is within the
Philippines. Source, according to respondent is the situs of the activity which produced the income. And since the
source of her income were her marketing activities in Germany, the income she derived from said activities is not
subject to Philippine income taxation.
The issue here is whether respondents sales commission income is taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.
(1) In General. A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received
from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay
therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be
deemed a nonresident alien doing business in the Philippines, Section 22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied,
collected and paid for each taxable year upon the entire income received from all sources within the Philippines by
every nonresident alien individual not engaged in trade or business within the Philippines x x x a tax equal to twentyfive percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or business,
are subject to Philippine income taxation on their income received from all sources within the Philippines. Thus, the
keyword in determining the taxability of non-resident aliens is the incomes "source." In construing the meaning of
"source" in Section 25 of the NIRC, resort must be had on the origin of the provision.

The first Philippine income tax law enacted by the Philippine Legislature was Act No. 2833, 10 which took effect on
January 1, 1920.11 Under Section 1 thereof, nonresident aliens are likewise subject to tax on income "from all
sources within the Philippine Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net income received
in the preceding calendar year from all sources by every individual, a citizen or resident of the Philippine Islands, a
tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon
the entire net income received in the preceding calendar year from all sources within the Philippine Islands by every
individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as amended by U.S. Revenue
Law of 1917.12 Being a law of American origin, the authoritative decisions of the official charged with enforcing it in
the U.S. have peculiar persuasive force in the Philippines.13
The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from sources within
the U.S. and specifies when similar types of income are to be treated as from sources outside the U.S. 14 Under the
said Code, compensation for labor and personal services performed in the U.S., is generally treated as income from
U.S. sources; while compensation for said services performed outside the U.S., is treated as income from sources
outside the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services performed in the Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three
possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three elements of
this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into
whether a particular item is from "sources within the United States" and suggest an investigation into the nature and
location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the
income should be from "sources within the United States." If the income is from capital, the place where the capital
is employed should be decisive; if it is employed in this country, the income should be from "sources within the
United States." If the income is from the sale of capital assets, the place where the sale is made should be likewise
decisive.
Much confusion will be avoided by regarding the term "source" in this fundamental light. It is not a place, it is an
activity or property. As such, it has a situs or location, and if that situs or location is within the United States the
resulting income is taxable to nonresident aliens and foreign corporations.

The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing
nonresident aliens and foreign corporations and to make the test of taxability the "source," or situs of the activities or
property which produce the income. The result is that, on the one hand, nonresident aliens and nonresident foreign
corporations are prevented from deriving income from the United States free from tax, and, on the other hand, there
is no undue imposition of a tax when the activities do not take place in, and the property producing income is not
employed in, this country. Thus, if income is to be taxed, the recipient thereof must be resident within the jurisdiction,
or the property or activities out of which the income issues or is derived must be situated within the jurisdiction so
that the source of the income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is protection of life and property and that the income
rightly to be levied upon to defray the burdens of the United States Government is that income which is created by
activities and property protected by this Government or obtained by persons enjoying that protection. 16
The important factor therefore which determines the source of income of personal services is not the residence of
the payor, or the place where the contract for service is entered into, or the place of payment, but the place where
the services were actually rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,18 the Court addressed the issue on the applicable
source rule relating to reinsurance premiums paid by a local insurance company to a foreign insurance company in
respect of risks located in the Philippines. It was held therein that the undertaking of the foreign insurance company
to indemnify the local insurance company is the activity that produced the income. Since the activity took place in
the Philippines, the income derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law of Federal
Income Taxation, the Court emphasized that the technical meaning of source of income is the property, activity or
service that produced the same. Thus:
The source of an income is the property, activity or service that produced the income. The reinsurance premiums
remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to
indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the
reinsurance premiums, and the same took place in the Philippines. x x x the reinsured, the liabilities insured and the
risk originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity
were based, were all situated in the Philippines. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),20 the issue was whether
BOAC, a foreign airline company which does not maintain any flight to and from the Philippines is liable for
Philippine income taxation in respect of sales of air tickets in the Philippines, through a general sales agent relating
to the carriage of passengers and cargo between two points both outside the Philippines. Ruling in the affirmative,
the Court applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated the rule
that the source of income is that "activity" which produced the income. It was held that the "sale of tickets" in the
Philippines is the "activity" that produced the income and therefore BOAC should pay income tax in the Philippines
because it undertook an income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways
Corporation in support of their arguments, but the correct interpretation of the said case favors the theory of
respondent that it is the situs of the activity that determines whether such income is taxable in the Philippines. The
conflict between the majority and the dissenting opinion in the said case has nothing to do with the underlying
principle of the law on sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v.
Collector of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in the Philippines is
to be construed as the "activity" that produced the income, as viewed by the majority, or merely the physical source
of the income, as ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through Justice
Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise to the
income of BOAC. Petitioner cannot therefore invoke said case to support its view that source of income is the
physical source of the money earned. If such was the interpretation of the majority, the Court would have simply
stated that source of income is not the business activity of BOAC but the place where the person or entity disbursing
the income is located or where BOAC physically received the same. But such was not the import of the ruling of the
Court. It even explained in detail the business activity undertaken by BOAC in the Philippines to pinpoint the
taxable activity and to justify its conclusion that BOAC is subject to Philippine income taxation. Thus

BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the Philippines.
That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the
fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally
incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air
carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation
of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments. x x x 21
xxxx
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 situs 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.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract
between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare
and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth
thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the
elements to constitute it a valid contract, binding upon the parties entering into the relationship. 22
The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the
income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor
or service was performed that determines the source of the income. There is therefore no merit in petitioners
interpretation which equates source of income in labor or personal service with the residence of the payor or the
place of payment of the income.
Having disposed of the doctrine applicable in this case, we will now determine whether respondent was able to
establish the factual circumstances showing that her income is exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the income, but the
sufficiency of evidence to prove that the services she rendered were performed in Germany. Though not raised as
an issue, the Court is clothed with authority to address the same because the resolution thereof will settle the vital
question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi
jurisagainst the taxpayer.24 To those therefore, who claim a refund rest the burden of proving that the transaction
subjected to tax is actually exempt from taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the
service which would entitle her to 10% commission income, are "sales actually concluded and collected through
[her] efforts."25 What she presented as evidence to prove that she performed income producing activities abroad,
were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs
and fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by
clients. However, these documents do not show whether the instructions or orders faxed ripened into concluded or
collected sales in Germany. At the very least, these pieces of evidence show that while respondent was in Germany,
she sent instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated
sales and whether these sales were truly concluded in Germany, respondent presented no such evidence. Neither
did she establish reasonable connection between the orders/instructions faxed and the reported monthly sales
purported to have transpired in Germany.

The paucity of respondents evidence was even noted by Atty. Minerva Pacheco, petitioners counsel at the hearing
before the Court of Tax Appeals. She pointed out that respondent presented no contracts or orders signed by the
customers in Germany to prove the sale transactions therein. 26 Likewise, in her Comment to the Formal Offer of
respondents evidence, she objected to the admission of the faxed documents bearing instruction/orders marked as
Exhibits "R,"27 "V," "W", and "X,"28 for being self serving.29 The concern raised by petitioners counsel as to the
absence of substantial evidence that would constitute proof that the sale transactions for which respondent was paid
commission actually transpired outside the Philippines, is relevant because respondent stayed in the Philippines for
89 days in 1995. Except for the months of July and September 1995, respondent was in the Philippines in the
months of March, May, June, and August 1995,30 the same months when she earned commission income for
services allegedly performed abroad. Furthermore, respondent presented no evidence to prove that JUBANITEX
does not sell embroidered products in the Philippines and that her appointment as commission agent
is exclusively for Germany and other European markets.
In sum, we find that the faxed documents presented by respondent did not constitute substantial evidence, or that
relevant evidence that a reasonable mind might accept as adequate to support the conclusion 31 that it was in
Germany where she performed the income producing service which gave rise to the reported monthly sales in the
months of March and May to September of 1995. She thus failed to discharge the burden of proving that her income
was from sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim
for tax refund should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,32 a previous case for refund of income
withheld from respondents remunerations for services rendered abroad, the Court in a Minute Resolution dated
February 17, 2003,33 sustained the ruling of the Court of Appeals that respondent is entitled to refund the sum
withheld from her sales commission income for the year 1994. This ruling has no bearing in the instant controversy
because the subject matter thereof is the income of respondent for the year 1994 while, the instant case deals with
her income in 1995. Otherwise, stated, res judicata has no application here. Its elements are: (1) there must be a
final judgment or order; (2) the court that rendered the judgment must have jurisdiction over the subject matter and
the parties; (3) it must be a judgment on the merits; (4) there must be between the two cases identity of parties, of
subject matter, and of causes of action. 34 The instant case, however, did not satisfy the fourth requisite because
there is no identity as to the subject matter of the previous and present case of respondent which deals with income
earned and activities performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002 Resolution of the
Court of Appeals in CA-G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28, 2000 Decision of the
Court of Tax Appeals in C.T.A. Case No. 5633, which denied respondents claim for refund of income tax paid for the
year 1995 is REINSTATED.
SO ORDERED.
CONSUELO YNARES-SANTIAGO
Associate Justice
WE CONCUR:
ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson
MA. ALICIA AUSTRIA-MARTINEZ, ROMEO J. CALLEJO, SR.
Associate Justice Associate Justice
MINITA V. CHICO-NAZARIO
Associate Justice

C E R TI F I C ATI O N
Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above
Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts
Division.
ARTEMIO V. PANGANIBAN
Chief Justice

Footnotes
Penned by Associate Justice Salvador J. Valdez, Jr. and concurred in by Associate Justices Mercedes
Gozo-Dadole and Juan Q. Enriquez, Jr; rollo, pp. 47-57.
1

Penned by Presiding Judge Ernesto D. Acosta, with Associate Judges Ramon O. De Veyra, concurring and
Amancio Q. Saga, dissenting; rollo, pp. 78-91.
2

Rollo, pp. 59-61.

General Information Sheet of JUBANITEX, Inc., rollo, p. 211.

Rollo, p. 100.

Exhibit "A," Folder of Exhibits, unpaged.

Petition for Review with the CTA, records, p. 4.

Rollo, p. 57.

Resolution dated May 8, 2002; rollo, pp. 59-61.

An Act establishing the income tax law, making other provisions relating to said tax, and amending certain
sections of Act Numbered Twenty-seven hundred and eleven.
10

11

F. Dalupan, National Internal Revenue Code Annotated, 1964 ed., vol. 1, p. 25.

12

Id.

J. Araas, Annotations and Jurisprudence on the National Internal Revenue Code, as Amended, 1963 ed.,
vol. 1, p. 34.
13

14

34 Am Jur 2d, 30651, p. 453 (2000).

15

34 Am Jur 2d, 30654, p. 453 (2000).

12 J. Mertens, The Law of Federal Income Taxation, Section 45C:04, pp. 45C-12 to 45C-13 (1996). The
1957 edition thereof was cited in the dissenting opinion of Justice Florentino P. Feliciano in Commissioner of
Internal Revenue v. British Overseas Airways Corporation, G.R. Nos. L-65773-74, April 30, 1987, 149 SCRA
395, 415-416.
16

17

12 J. Mertens, The Law of Federal Income Taxation, Section 45C:11, p. 45C-32 (1996).

18

121 Phil. 579 (1965).

19

Id. at 583.

20

Supra note 16.

21

Id. at 405-406.

22

Id. at 407-408.

23

Velarde v. Social Justice Society, G.R. No. 159357, April 28, 2004, 428 SCRA 283, 312.

Calamba Steel Center, Inc. v. Commissioner of Internal Revenue, G.R. No. 151857, April 28, 2005, 457
SCRA 482, 500.
24

25

Rollo, p. 100.

26

TSN, November 10, 1998, pp. 49-55.

27

Rollo, pp. 95-99.

28

Folder of Exhibits, unpaged.

29

Records, pp. 74-75.

30

Respondents Formal Offer of Evidence, rollo, p. 202.

31

Transglobe International, Inc. v. Court of Appeals, 361 Phil. 727, 738 (1999).

32

G.R. No. 156305.

33

It became final and executory on March 31, 2003.

34

Barbacina v. Court of Appeals, G.R. No. 135365, August 31, 2004, 437 SCRA 300, 307.