TAXATION I | CASE DIGEST
Ong Abrantes, CPA
53. Madrigal vs. Rafferty Chiu
G.R. No. L-12287 August 7, 1918
VICENTE MADRIGAL and his wife, SUSANA
PATERNO, plaintiffs-appellants,
Vs. JAMES J. RAFFERTY, Collector of Internal Revenue,
and VENANCIO CONCEPCION, Deputy Collector of
Internal Revenue, defendants-appellees.
Facts:
Vicente Madrigal and Susana Paterno were legally married
prior to January 1, 1914. The marriage was contracted under
the provisions of law concerning conjugal partnerships. On
February 25, 1915, Vicente Madrigal filed sworn declaration
on the prescribed form with the CIR, showing, as his total net
income for the year 1914, the sum of P296,302.73.
Subsequently Madrigal submitted the claim that the said
P296,302.73 did not represent his income for the year 1914,
but was in fact the income of the conjugal partnership existing
between himself and his wife Susana Paterno. Hence, the
income declared by Vicente Madrigal should be divided into
two equal parts, one-half to be considered the income of
Vicente Madrigal and the other half of Susana Paterno.
CIR did not follow Vicente’s theory. After payment under
protest, Vicente and Susan filed a complaint for the recovery
of the sum of money, alleged to have been wrongfully and
illegally collected by the defendants from the plaintiff. The
burden of the complaint was that if the income tax for the year
1914 had been correctly and lawfully computed there would
have been due payable by each of the plaintiffs the sum of
P2,921.09, which taken together amounts of a total of
P5,842.18 instead of P9,668.21, erroneously and unlawfully
collected from the plaintiff Vicente Madrigal.
Issue: W/N the net income forms part of the conjugal
properties. No.
Held:
Petitioners contend that the taxable income should be divided
into two equal parts, because of the conjugal partnership
existing between them. The learned argument of counsel is
mostly based upon the provisions of the Civil Code
establishing the conjugal partnership. The counter contentions
of appellees are that the taxes imposed by the Income Tax
Law are as the name implies taxes upon income tax and not
upon capital and property; that the fact that Madrigal was a
married man, and his marriage contracted under the provisions
governing the conjugal partnership, has no bearing on income
considered as income, and that the distinction must be drawn
Anino | Arevalo | Banuelos | Chiu | Dosdos | Dulay | Macatol | Maiz | Pacquiao | Tado | Vosotros
Based on the lectures of Atty. Raymund Christian S.
between the ordinary form of commercial partnership and the
conjugal partnership of spouses resulting from the relation of
marriage.
From the point of view of test of faculty in taxation, no less
than five answers have been given the course of history. The
final stage has been the selection of income as the norm of
taxation. The Income Tax Law of the United States, extended
to the Philippine Islands. The aim has been to mitigate the
evils arising from inequalities of wealth by a progressive
scheme of taxation, which places the burden on those best able
to pay. Public considerations have demanded an exemption
roughly equivalent to the minimum of subsistence. With these
exceptions, the income tax is supposed to reach the earnings of
the entire non-governmental property of the country.
With these general observations relative to the Income Tax
Law in force in the Philippine Islands, we turn for a moment
to consider the provisions of the Civil Code dealing with the
conjugal partnership. Recently in two elaborate decisions in
which a long line of Spanish authorities were cited, this court
in speaking of the conjugal partnership, decided that "prior to
the liquidation the interest of the wife and in case of her death,
of her heirs, is an interest inchoate, a mere expectancy, which
constitutes neither a legal nor an equitable estate, and does not
ripen into title until there appears that there are assets in the
community as a result of the liquidation and settlement."
Susana Paterno, wife of Vicente Madrigal, has an inchoate
right in the property of her husband Vicente Madrigal during
the life of the conjugal partnership. She has an interest in the
ultimate property rights and in the ultimate ownership of
property acquired as income after such income has become
capital. Susana Paterno has no absolute right to one-half the
income of the conjugal partnership. Not being seized of a
separate estate, Susana Paterno cannot make a separate return
in order to receive the benefit of the exemption which would
arise by reason of the additional tax. As she has no estate and
income, actually and legally vested in her and entirely distinct
from her husband's property, the income cannot properly be
considered the separate income of the wife for the purposes of
the additional tax. Moreover, the Income Tax Law does not
look on the spouses as individual partners in an ordinary
partnership. The husband and wife are only entitled to the
exemption of P8,000 specifically granted by the law. The
higher schedules of the additional tax directed at the incomes
of the wealthy may not be partially defeated by reliance on
provisions in our Civil Code dealing with the conjugal
partnership and having no application to the Income Tax Law.
The Income Tax Law was drafted by the Congress of the
United States and has been by the Congress extended to the
Philippine Islands. Being thus a law of American origin and
being peculiarly intricate in its provisions, the authoritative
decision of the official who is charged with enforcing it has
peculiar force for the Philippines. It has come to be a well-
settled rule that great weight should be given to the
construction placed upon a revenue law, whose meaning is 4) The Court suggested that "income," which is not defined in
doubtful, by the department charged with its execution. the 16th Amendment, was something derived from capital or
labor, or from both.
HELD:
The Supreme Court affirmed the District Court holding for the
taxpayer that a stock dividend is not income. The Revenue Act
54. Eisner vs. Macomber Maiz of 1916 provision subjecting stock dividends to tax was held
unconstitutional.
DOCTRINE - (What is income? Income means something
derived from labor or capital. To be “derived” means
something of exchangeable value separated from the capital.)
If a stock dividend is not considered income, it can not be
subject to income tax under the 16th Amendment. In applying
FACTS: the 16th Amendment, it is important to distinguish between
capital and income, as only income is subject to income tax.
1. Mrs. Macomber owned 2,200 share of Standard Oil
Company of California stock.
2. In January, 1916, the company declared a stock dividend A stock dividend reflects the corporation transferring an
and Mrs. Macomber received an additional 1,100 shares of
amount from "surplus" (retained earnings) to "capital stock."
stock. Of these shares, 198.77 shares, par value $19,877, Such a transaction is merely a bookkeeping entry and "affects
represented surplus earned by the company after March 1,
only the form, not the essence, of the "liability" acknowledged
1913. by the corporation to its own shareholders ... it does not alter
the preexisting proportionate interest of any stockholder or
3. The IRS treated the $19,877 as taxable income under the increase the intrinsic value of his holding or of the aggregate
Revenue Act of 1916 which provided that a stock dividend holdings of the other stockholders as they stood before"
was considered income to the amount of its cash value. (Macomber, p. 1081). An increase to the value of capital
investment is not income. Nothing of value has been taken
4. Mrs. Macomber argued that that provision in the Revenue from the corporation and given to the shareholder as is the
Act of 1916 was unconstitutional because it was a direct tax case with a cash dividend.
not apportioned per population; since a stock dividend was not
income, a legislative provision subjecting it to income tax was
not constitutional under the 16th Amendment.
In addition, since the shareholder receives no cash, in order to
5. The District Court held that the stock dividend was not pay any tax on a stock dividend, he might have to convert the
income. stock into cash - he has no wherewithal to pay from the nature
of the transaction. "Nothing could more clearly show that to
ISSUE: tax a stock dividend is to tax a capital increase, and not
income, than this demonstration that in the nature of things it
requires conversion of capital in order to pay the tax"
Does Congress have the power under the 16th Amendment to (Macomber, p. 1082).
tax shareholders on stock dividends received? Are stock
dividends considered income or capital?
Laws/ References:
1) 16th Amendment - "The Congress shall have power to lay
and collect taxes on income, from whatever source derived,
without apportionment among the several States, and without
regard to any census or enumeration."
2) Revenue Act of 1916 - a "stock dividend shall be
considered income, to the amount of its cash value."
3) Brushaber v Union Pacific - in this case, the Supreme Court
stated that the 16th Amendment "did not extend the taxing
power to new subjects, but merely removed the necessity
which otherwise might exist for an apportionment among the
State of taxes laid on income." Macomber, 1 USTC ¶32, page
1079. Thus, the item must be income in order for Congress to
tax it.
page 1
TAXATION I | CASE DIGEST
55. Raytheon Production vs. CIR
Vosotros
Raytheon Production Corp. v. Commissioner of Int. Rev.,
144 F.2d 110 (1st Cir. 1944)
Facts:
Raytheon (original company) was a pioneer manufacturer of
rectifier tubes which are used in radio receiving sets (using
alternating current instead of batteries). The Radio
Corporation of America (RCA) developed a competitive tube,
with the same effect as the Raytheon tube.
RCA owned many patents covering radio circuits. Beginning
1927, RCA’s license agreements with radio set manufacturers
included a clause which required the manufacturers to buy
their tubes only from RCA. Soon, Raytheon’s sales gradually
declined.
Raytheon brough suit against R.C.A., alleging that the plaintiff
Raytheon had by 1926 created and then possessed a large and
valuable good will in interstate commerce in rectifying tubes
for radios and had a large and profitable established business
therein so that the net profit for the year 1926 was $454,935;
that the business had an established prospect of large increases
and that the business and good will thereof was of a value of
exceeding $3,000,000; that by the beginning of 1927 the
plaintiff was doing approximately 80% of the business of
rectifying tubes of the entire United States; that the defendant
Radio Corporation of America (RCA) conspired to destroy the
business of the Raytheon and others by a monopoly of such
business and did suppress and destroy the existing companies;
Raytheon further alleged that the manufacturers of radio sets
and others ceased to purchase tubes from the plaintiffs; that by
the end of 1927 the conspiracy had completely destroyed the
profitable business and that by the early part of 1928 the tube
business of the Raytheon and its property and good will had
been totally destroyed at a time when it had a present value in
excess of $3,000,000, and thereby the plaintiff was injured in
its business and property in a sum in excess of $3,000,000.
The action against R.C.A. was referred to an auditor who
found that Clause 9 was not the cause of damage to the
plaintiff but that the decline in plaintiff's business was due to
advancement in the radio art and competition. The auditor,
however, also found that if it should be decided that Clause 9
had turned the development of the radio art away from
plaintiff's type of tube, then the damages would be $1,000,000.
Anino | Arevalo | Banuelos | Chiu | Dosdos | Dulay | Macatol | Maiz | Pacquiao | Tado | Vosotros
Based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA
Raytheon sued RCA for an anti-trust issue related to some
patent claims. They won a $410k settlement.
In the anti-trust case, Raytheon claimed that RCA infringed on
their patents, ruined their cathode-ray tube business, and
damaged their company's 'goodwill' (e.g. their brand name,
market share, etc.).
Out of the $410k Raytheon received, they estimated the value
of the patents at $60k. They filed taxes claiming the $60k as
gross income and excluding the remaining $350k.
The IRS claimed that the $350k that Raytheon received for the
settlement of the suit was also taxable as gross income.
Raytheon disagreed.
Raytheon argued that it wasn't gross income at all, but a
replacement of capital, which was not taxable.
Ant-trust lawsuits are based on the idea that the plaintiff has
been damaged by the defendant. Raytheon claimed that they
weren't getting income, but that they were just being
reimbursed for damages.
Raytheon (new company that bought original company)
brought an action against RCA for violating anti-trust laws, as
well as for destruction of Raytheon’s profitable business and
goodwill. Both parties finally agreed on a $410,000 settlement
of the anti-trust case, with RCA acquiring patent license rights
and sublicensing rights. Raytheon counted the $60,000 from
the amount as income from patent licenses, while the
remaining $350,000 were counted as damages, and therefore
not subject to income tax.
The income from patents was determined from the cost of the
development of such patents, and the fact that few of them
were being used and none were earning royalties. Thus, the
value of patents and the goodwill was backed by evidence
during trial.
Issue:
Whether or not damages for loss of business good will are a
nontaxable return of capital or income. (NO)
Held: evidence of what the amount was paid for so that an accurate
apportionment can be made as to a specific consideration for
patent rights transferred to Radio Corporation of America and
a consideration for damages. The amount of $350,000 has
No. They are not taxable in general. therefore been included in your taxable income."
Exception: Compensation for the loss of Raytheon's good will in excess
of its cost is gross income.
Damages recovered in an antitrust action are not necessarily
nontaxable as a return of capital. As in other types of tort However, compensation for the loss of goodwill in excess of
damage suits, recoveries which represent a reimbursement for its cost is gross income. The law does not exempt
lost profits are income. The reasoning is that since the profits compensatory damages just because they are a return of
would be taxable income, the proceeds of litigation which are capital. The tax exemption applies only to the portion that
their substitute are taxable in like manner. recovers the cost basis of that capital; any excess damages
serve to realize prior appreciation, and should be taxed as
income. In addition, evidence must be produced to establish
the value of the goodwill and business.
Damages for violation of the anti-trust acts are treated as
ordinary income where they represent compensation for loss
of profits. The test is not whether the action was one in tort or
contract but rather the question to be asked is "In lieu of what In this case, Raytheon was not able to establish the value of its
were the damages awarded?" Where the suit is not to recover goodwill and business. It did not produce enough evidence to
lost profits but is for recovery in injury to good will, the such effect. The amount of nontaxable capital cannot be
recovery represents a return of capital and, with certain ascertained. Since Raytheon could not establish the cost basis
limitations (necessity of proof/evidence), is not taxable. of its good will, its basis will be treated as zero.
The suit by Raytheon was not one of recovering lost profits. The Court concludes that the $350,000 of the $410,000
From its allegations, Raytheon’s suit was for the destruction of attributable to the suit is thus taxable income.
its goodwill. The presentation of evidence of profits was
merely used to establish the value of good will and the
business, since such value is derived by a capitalization of
profits. Therefore, a recovery on goodwill and business
represents return of capital.
Since we assume with the parties that the petitioner secured
the original Raytheon's assets through a series of tax free
reorganizations, petitioner's basis for the good will is the same
as that of the original Raytheon. As the Tax Court pointed out,
the record is devoid of evidence as to the amount of that basis
and "in the absence of evidence of the basis of the business
and good will of Raytheon, the amount of any nontaxable
capital recovery cannot be ascertained." 1 T.C. 952. Cf.
Sterling v. Commissioner, 2 Cir., 1937, 93 F.2d 304.
The fact that the case ended in settlement is of no moment.
The determining factor is the NATURE of the basic claim
from which the compromised amount was realized.
The Commissioner determined that the $350,000 constituted
income on the following ground contained in the statement
attached to his notice of deficiency: "It is the opinion of this
office that the amount of $350,000 constitutes income under §
22(a) of the Revenue Act of 1936. There exists no clear
page 2
TAXATION I | CASE DIGEST Based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA

56. CIR vs. Tours Specialist Anino

Anino | Arevalo | Banuelos | Chiu | Dosdos | Dulay | Macatol | Maiz | Pacquiao | Tado | Vosotros page 3
TAXATION I | CASE DIGEST
57. CIR vs. Javier Arevalo
G.R. No. 78953 July 31, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX
APPEALS, respondents.
FACTS:
Victoria L. Javier, the wife of the private
respondent, received from the Prudential Bank and Trust
Company in Pasay City the amount of US$999,973.70
remitted by her sister through some banks in the United States,
among which is Mellon Bank, N.A.
June 29, 1977, Mellon Bank, N.A. filed a
complaint with the Court of First Instance of Rizal against the
private respondent his wife and other defendants, claiming that
its remittance of US$1,000,000.00 was a clerical error and
should have been US$1,000.00 only, and praying that the
excess amount of US$999,000.00 be returned.
November 5, 1977, the City Fiscal of Pasay City
filed an Information charging the private respondent and his
wife with the crime of estafa, alleging that they
misappropriated, misapplied, and converted to their own
personal use and benefit the amount of US$999,000.00 which
they received under an implied trust for the benefit of Mellon
Bank and as a result of the mistake in the remittance by the
latter.
March 15, 1978 private respondent filed his Income Tax
Return for the taxable year 1977 showing a gross income of
P53,053.38 and a net income of P48,053.88 and stating in the
footnote of the return that "Taxpayer was recipient of some
money received from abroad which he presumed to be a gift
but turned out to be an error and is now subject of litigation."
December 15, 1980, private respondent received
a letter from the acting Commissioner of Internal Revenue
dated November 14, 1980, together with income assessment
notices for the years 1976 and 1977, demanding that he shall
pay on or before December 15, 1980 the amount of P1,615.96
and P9,287,297.51 as deficiency assessments for the years
1976 and 1977 respectively.
The Commissioner also imposed a 50% fraud
penalty against Javier. Disagreeing, Javier filed an appeal
before the respondent Court of Tax Appeals. The respondent
CTA ruled in favor of the deletion of the 50% surcharge
assessment or imposition.
Anino | Arevalo | Banuelos | Chiu | Dosdos | Dulay | Macatol | Maiz | Pacquiao | Tado | Vosotros
Based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA
ISSUE: WHETHER OR NOT PRIVATE RESPONDENT IS
LIABLE FOR THE 50% FRAUD PENALTY?
RULING:
NO. Under the then Section 72 of the Tax Code
(now Section 248 of the 1988 National Internal Revenue
Code), a taxpayer who files a false return is liable to pay
the fraud penalty of 50% of the tax due from him or of the
deficiency tax in case payment has been made on the basis
of the return filed before the discovery of the falsity or
fraud.
We are persuaded considerably by the private
respondent's contention that there is no fraud in the filing of
the return and agree fully with the Court of Tax Appeals'
interpretation of Javier's notation on his income tax return
thus: "Taxpayer was the recipient of some money from abroad
which he presumed to be a gift but turned out to be an error
and is now subject of litigation that it was an "error or mistake
of fact or law" not constituting fraud, that such notation was
practically an invitation for investigation and that Javier had
literally "laid his cards on the table."
In Aznar v. Court of Tax Appeals, fraud in relation to the filing
of income tax return was discussed in this manner:
. . . The fraud contemplated by law is actual and not
constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in
order to induce another to give up some legal right.
Negligence, whether slight or gross, is not equivalent to the
fraud with intent to evade the tax contemplated by law. It must
amount to intentional wrong-doing with the sole object of
avoiding the tax.
In the case at bar, there was no actual and intentional fraud
through willful and deliberate misleading of the government
agency concerned, the Bureau of Internal Revenue, headed by
the herein petitioner. The government was not induced to give
up some legal right and place itself at a disadvantage so as to
prevent its lawful agents from proper assessment of tax
liabilities because Javier did not conceal anything. Error or
mistake of law is not fraud. The petitioner's zealousness to
collect taxes from the unearned windfall to Javier is highly
commendable.Unfortunately, the imposition of the fraud
penalty in this case is not justified by the extant facts.
58. Sison Jr. vs. Ancheta Chiu
page 4
TAXATION I | CASE DIGEST
VII - TAXPAYERS
59. Evangelista vs. Collector Banuelos
TOPIC: Partnership, Co-ownership, GPP
EUFEMIA EVANGELISTA, MANUELA
EVANGELISTA, and FRANCISCA EVANGELISTA, vs.
THE COLLECTOR OF INTERNAL REVENUE and
THE COURT OF TAX APPEALS.G.R. No. L-9996
October 15, 1957
Ponente: CONCEPCION, J.
Facts:
That the petitioners borrowed from their father the sum of
P591, 400.00 which amount together with their personal
monies was used by them for the purpose of buying real
properties.
That on February 2, 1943, they bought from Mrs. Josefina
Florentino a lot with an area of 3,713.40 sq. m. including
improvements thereon from the sum of P100,000.00; this
property has an assessed value of P57,517.00 as of 1948;
That on April 3, 1944 they purchased from Mrs. Josefa Oppus
21 parcels of land with an aggregate area of 3,718.40 sq. m.
including improvements thereon for P130,000.00; this
property has an assessed value of P82,255.00 as of 1948;
That on April 28, 1944 they purchased from the Insular
Investments Inc., a lot of 4,353 sq. m. including improvements
thereon for P108,825.00. This property has an assessed value
of P4,983.00 as of 1948;
That on April 28, 1944 they bought from Mrs. Valentina
Afable a lot of 8,371 sq. m. including improvements thereon
for P237,234.34. This property has an assessed value of
P59,140.00 as of 1948;
Anino | Arevalo | Banuelos | Chiu | Dosdos | Dulay | Macatol | Maiz | Pacquiao | Tado | Vosotros
Based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA
That in a document dated August 16, 1945, they appointed
their brother Simeon Evangelista to 'manage their properties
with full power to lease; to collect and receive rents; to issue
receipts therefor; in default of such payment, to bring suits
against the defaulting tenants; to sign all letters, contracts, etc.,
for and in their behalf, and to endorse and deposit all notes and
checks for them;
That after having bought the above-mentioned real properties
the petitioners had the same rented or leases to various tenants.
It further appears that on September 24, 1954 respondent
Collector of Internal Revenue demanded the payment of
income tax on corporations, real estate dealer's fixed tax
and corporation residence tax for the years 1945-1949.
Said letter of demand and corresponding assessments were
delivered to petitioners on December 3, 1954, whereupon they
instituted the present case in the Court of Tax Appeals, with a
prayer that "the decision of the respondent contained in his
letter of demand dated September 24, 1954" be reversed, and
that they be absolved from the payment of the taxes in
question, with costs against the respondent.
Petitioners insist, however, that they are mere co-owners, not
copartners, for, in consequence of the acts performed by them,
a legal entity, with a personality independent of that of its
members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar.
Legal Issue: W/N EVANGELISTAS should not be considered
as a corporation and be taxed thereafter.
Held:
NO. They are considered as a corporation within the meaning
of the Internal Revenue Code and should be taxed accordingly.
With respect to the tax on corporations, the issue hinges on the
meaning of the terms "corporation" and "partnership," as used
in section 24 and 84 of said Code, the pertinent parts of which
read:
SEC. 24. Rate of tax on corporations.—There shall be levied,
assessed, collected, and paid annually upon the total net
income received in the preceding 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-partnerships (compañias
colectivas), a tax upon such income equal to the sum of the
following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no
matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations or insurance
companies, but does not include duly registered general
copartnerships. (compañias colectivas).
To begin with, the tax in question is one imposed upon
"corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to the
tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in
the technical sense of the term. Thus, for instance, section
24 of said Code exempts from the aforementioned tax
"duly registered general partnerships which constitute
precisely one of the most typical forms of partnerships in
this jurisdiction.
Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law
on partnerships, in order that one could be deemed constituted
for purposes of the tax on corporations. Again, pursuant to
said section 84(b), the term "corporation" includes, among
other, joint accounts, (cuentas en participation)" and
"associations," none of which has a legal personality of its
own, independent of that of its members. Accordingly, the
lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein
referred to.
In fact, as above stated, "duly registered general co
partnerships" — which are possessed of the aforementioned
personality — have been expressly excluded by law (sections
24 and 84 [b] from the connotation of the term "corporation" It
may not be amiss to add that petitioners' allegation to the
effect that their liability in connection with the leasing of the
lots above referred to, under the management of one person —
even if true, on which we express no opinion — tends to
increase the similarity between the nature of their venture and
that corporations, and is, therefore, an additional argument in
favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States,
"corporations" are taxed differently from "partnerships". By
specific provisions of said laws, such "corporations" include
"associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the
aforementioned laws.
. . . in any narrow or technical sense. It includes any
organization, created for the transaction of designed affairs, or
the attainment of some object, which like a corporation,
continues notwithstanding that its members or participants
change, and the affairs of which, like corporate affairs, are
conducted by a single individual, a committee, a board, or
some other group, acting in a representative capacity. It is
immaterial whether such organization is created by an
agreement, a declaration of trust, a statute, or otherwise. It
includes a voluntary association, a joint-stock corporation or
company, a 'business' trusts a 'Massachusetts' trust, a 'common
law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating
through an attorney in fact, a partnership association, and any
other type of organization (by whatever name known) which is
not, within the meaning of the Code, a trust or an estate, or a
partnership. (7A Mertens Law of Federal Income Taxation, p.
788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term
'partnership 'it includes not only a partnership as known at
common law but, as well, a syndicate, group, pool, joint
venture or other unincorporated organizations which carries on
any business financial operation, or venture, and which is not,
within the meaning of the Code, a trust, estate, or a
corporation. . . (7A Merten's Law of Federal Income taxation,
p. 789; emphasis supplied.)
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; emphasis supplied.) .
For purposes of the tax on corporations, our National Internal
Revenue Code, includes these partnerships — with the
exception only of duly registered general co partnerships —
within the purview of the term "corporation." It is, therefore,
clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned and are subject
to the income tax for corporations.
60. Tan vs. CIR Chiu
page 5
TAXATION I | CASE DIGEST
61. Pascual vs. CIR Dosdos
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON
vs.THE COMMISSIONER OF INTERNAL REVENUE
and COURT OF TAX APPEALS
FACTS:
Petitioners bought two (2) parcels of land and a year after,
they bought another three (3) parcels of land. Petitioners
subsequently sold the said lots in 1968 and 1970, and realized
net profits. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years. However, the Acting BIR
Commissioner assessed and required Petitioners to pay a total
amount of P107,101.70 as alleged deficiency corporate
income taxes for the years 1968 and 1970. Petitioners
protested the said assessment asserting that they had availed of
tax amnesties way back in 1974. In a reply, respondent
Commissioner informed petitioners that in the years 1968 and
1970, petitioners as co-owners in the real estate transactions
formed an unregistered partnership or joint venture taxable as
a corporation under Section 20(b) and its income was subject
to the taxes prescribed under Section 24, both of the National
Internal Revenue Code that the unregistered partnership was
subject to corporate income tax as distinguished from profits
derived from the partnership by them which is subject to
individual income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not
relieve them from the tax liability of the unregistered
partnership. Hence, the petitioners were required to pay the
deficiency income tax assessed.
ISSUE:
Whether the Petitioners should be treated as an unregistered
partnership or a co-ownership for the purposes of income tax.
NO
RULING:
In the present case, there is no evidence that petitioners
entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide
the profits among themselves. Respondent commissioner and/
or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased
certain parcels of land and became co-owners thereof.
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Based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA
In Evangelists, there was a series of transactions where
petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of
the common fund or even the properties acquired by them. The
character of habituality peculiar to business transactions
engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land
in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3)
parcels of land from one seller. It was only 1968 when they
sold the two (2) parcels of land after which they did not make
any additional or new purchase. The remaining three (3)
parcels were sold by them in 1970. The transactions were
isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for
several years. The business was under the management of one
of the partners. Such condition existed for over fifteen (15)
years. None of the circumstances are present in the case at bar.
The co-ownership started only in 1965 and ended in 1970.
The sharing of returns does not in itself establish a partnership
whether or not the persons sharing therein have a joint or
common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership
between the petitioners. There is no adequate basis to support
the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they
purchased properties and sold the same a few years thereafter
did not thereby make them partners. They shared in the gross
profits as co- owners and paid their capital gains taxes on their
net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an
unregistered partnership which is thereby liable for corporate
income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such
unregistered partnership appears to have been formed, since
there is no such existing unregistered partnership with a
distinct personality nor with assets that can be held liable for
said deficiency corporate income tax, then petitioners can be
held individually liable as partners for this unpaid obligation
of the partnership p. However, as petitioners have availed of
the benefits of tax amnesty as individual taxpayers in these
transactions, they are thereby relieved of any further tax
liability arising therefrom.
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.
62. Afisco vs. CIR Dulay
ISSUE:
AFISCO INSURANCE CORPORATION, et. al 1.WON the Clearing House, acting as a mere agent and
performing strictly administrative functions, and which did not
vs. COURT OF APPEALS, COURT OF TAX APPEALS insure or assume any risk in its own name, was a partnership
and COMMISSIONER OF INTERNAL REVENUE, or association subject to tax as a corporation;
respondents.
(YES, Pool Taxable as a Corporation)
[G.R. No. 112675. January 25, 1999] PANGANIBAN, J.:
Pursuant to reinsurance treaties, a number of local insurance 2. WON the remittances to petitioners and MUNICHRE of
firms formed themselves into a pool in order to facilitate the their respective shares of reinsurance premiums,
handling of business contracted with a nonresident foreign pertaining to their individual and separate contracts of
reinsurance company. May the clearing house or insurance reinsurance, were dividends subject to tax; and
pool so formed be deemed a partnership or an association that
is taxable as a corporation under the National Internal (YES, Pools Remittances Are Taxable)
Revenue Code (NIRC)? Should the pools remittances to the
member companies and to the said foreign firm be taxable as
dividends? Under the facts of this case, has the government's 3.Whether or not the Commissioners right to assess the
right to assess and collect said tax prescribed? Clearing House had already prescribed. (NO)
FACTS:
The petitioners are 41 non-life insurance corporations,
organized and existing under the laws of the Philippines.
HELD:
Upon issuance by them of Erection, Machinery Breakdown,
SC sustain the ruling of the CA that the pool is taxable as a
Boiler Explosion and Contractors All Risk insurance policies,
the petitioners on August 1, 1965 entered into a Quota corporation, and that the government's right to assess and
collect the taxes had not prescribed.
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
First Issue: Pool Taxable as a Corporation
to form a pool. Accordingly, a pool composed of the
petitioners was formed on the same day.
CONTENTIONS:
On April 14, 1976, the pool of machinery insurers
Petitioners contend that the Court of Appeals erred in finding
submitted a financial statement and filed an Information
that the pool or clearing house was an informal partnership,
Return of Organization Exempt from Income Tax for the
which was taxable as a corporation under the NIRC. They
year ending in 1975, on the basis of which it was assessed
point out that the reinsurance policies were written by them
by the CIR deficiency corporate taxes in the amount of
individually and separately, and that their liability was limited
P1,843,273.60, and withholding taxes in the amount of
to the extent of their allocated share in the original risks thus
P1,768,799.39 and P89,438.68 on dividends paid to Munich
reinsured. Hence, the pool did not act or earn income as a
and to the petitioners, respectively.
reinsurer. 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[;]
These assessments were protested by the petitioners
as well as the performance of incidental functions, such as
through its auditors Sycip, Gorres, Velayo and Co.
records, maintenance, collection and custody of funds, etc.
CIR: denied the protest and ordered the petitioners, assessed
as Pool of Machinery Insurers, to pay deficiency income tax,
Petitioner Corporations belie the existence of a partnership in
interest, and withholding tax, itemized as follows: xxx
this case, because
CA: ruled in the main that the pool of machinery insurers was
(1) they, the reinsurers, did not share the same risk or solidary
a partnership taxable as a corporation, and that the latters
liability;
collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did
page 6
TAXATION I | CASE DIGEST
(2) there was no common fund;
(3) the executive board of the pool did not exercise control and
management of its funds, unlike the board of directors of a
corporation; 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.
HELD: The Court is not persuaded.
The opinion or ruling of the CIR, the agency tasked with the
enforcement of tax laws, is accorded much weight and even
finality, when there is no showing that it is patently 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.
Indeed,
[I]t has been the long standing policy and
practice of this Court to respect the conclusions
of quasi-judicial 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 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 xxx.
Ineludibly, the Philippine legislature included in the concept
of corporations those entities that resembled them such as
unregistered partnerships and associations. Parenthetically, the
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Based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA
NLRCs inclusion of such entities in the tax on 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 xxx.
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."
Thus, the Court in Evangelista v. CIR held that Section 24
covered these unregistered partnerships and even
associations or joint accounts, which had no legal
personalities apart from their individual members. The
Court of Appeals astutely applied Evangelista:
xxx 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 Mertens Law of Federal Income Taxation,
p. 562 Note 63)
Article 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 among
themselves.
Its requisites are: (1) mutual contribution to a
common stock, and (2) a 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 x x x for the transaction of business.
In the case before us, the ceding companies entered into a
Pool Agreement or an association that would handle all the
insurance businesses covered under their quota-share
reinsurance treaty and surplus reinsurance treaty with
Munich.
The following unmistakably indicates a partnership or 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 of the pool. This
common fund pays for the administration and
operation expenses of the pool.
(2) The pool functions through an executive
board, which resembles the board of directors
of a corporation, 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 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 pools formation.
As aptly found by the CTA:
xxx 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. x x x 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 consequence, as it implies that
profit actually resulted.
The petitioners reliance on Pascual v. Commissioner 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. T
The 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: Pools Remittances Are Taxable
CONTENTIONS:
Petitioners further contend that the remittances of the pool to
the ceding companies and Munich are not dividends subject to
tax. They insist that taxing such remittances contravene
Sections 24 (b) (I) and 263 of the 1977 NIRC and would be
tantamount to an illegal DOUBLE TAXATION, as it would
result in taxing the same premium income twice in the hands
of the same taxpayer. Moreover, petitioners argue that since
Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed
dividends. They add that even if such remittances were treated
as dividends, they would have been exempt under the
previously mentioned sections of the 1977 NIRC, as well as
Article 7 of paragraph 1 and Article 5 of paragraph 5 of the
RP-West German Tax Treaty.
HELD: Petitioners are clutching at straws. (NO DOUBLE
TAXATION)
Double taxation means taxing the same property twice when it
should be taxed only once. That is, xxx 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 the
dividends 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 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.
page 7
TAXATION I | CASE DIGEST
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 xxx be paid upon
reinsurance by any company that has already paid the tax xxx.
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.
On the other hand, Section 24 (b) (1) 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.
Under its pool arrangement with the ceding companies,
Munich shared in their income and loss. This is manifest from
a reading of Articles 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.
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 effect.[54] 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.
Third Issue: Prescription
CONTENTIONS:
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, and that the internal
revenue commissioner was already barred by prescription
from making an assessment.
HELD: We cannot sustain the petitioners. (NOT
PRESCRIBED)
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Based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA
The CA and the CTA categorically found that the
prescriptive period was tolled 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.] Indeed,
whether the governments 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 pools 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.
63. Solidbank vs. CIR Macatol
Solidbank Corporation (AKA The Consolidated Bank and
Trust Corporation) and Susana Realty, Inc. vs.
Commissioner of Internal Revenue | CTA case No. 4868 |
June 19, 1997
Facts:
Solidbank Corporation (SBC) and Susana Reality Inc (SRI), in
a "Deed of Sale With Option and Agreement for
Administration of Property" became co- owners of 3 parcels of
land together with a 4-storey building thereon when SBC
acquired from SRI ½ ownership and interest of SRI and for
which earnest money of P50,000 was paid for by SBC to SRI.
SBC filed complaint with the RTC for Partition. As co-owner,
SBC demanded the portion of the property owned in common
pursuant to CC Art. 494 because physical division of the
building and improvements thereon would not be compatible
to the best interest of the parties and that a more practical
solution is "Buy-Out" or "Sell-Out" of the share of one to the
other co-owner or sale to any party.
After several hearings, realizing the futility of their claims and
the adverse effect the case may bring on their respective
business establishments and business reputations, SBC and
SRI agreed to settle the case amicably.
The Court approved the compromise agreement and and co-owned the four-storey building inclusive of the land
terminated the co-ownership of the parties and vesting the where it stands and invested nothing more. The act of leasing
sole, absolute, exclusive and indefeasible title in favor of SBC the building cannot be deemed as a series of transactions
a former employee of SRI became an informer (perhaps to indicating habituality in a business either, SBC mainly
collect reward through NIRC Sec. 281) filed an information occupied the rentable areas thereof (85%) for nearly 20 years
denouncing SBC and SRI. The informer opined that as a result for its own personal use.
of said amicable settlement, SRI and SBC waived and
completely gave away their claims against each other and are
therefore subject to and Iiable for donors tax prescribed under
NIRC Sections 120 and 121 (now 91 and 92). Hence, since the agreement between SBC and SRI did not
produce a partnership with a separate juridical personality,
they cannot be assessed for withholding tax for inter-corporate
dividends.
Note: Art. 3 of the deed of sale was an agreement for
administration of property, giving SBC shall administer the
property (collect rents from tenants, advertise vacant space, do
repairs, etc.).
64. Marubeni vs. CIR Maiz
Issue:
Whether petitioners formed an unregistered partnership which
is subject to corporate income tax prescribed under Sec. 24(a)
in relation to Section 20(b) of the Tax Code
HELD:
No. They formed a co-ownership, not a partnership.
They formed a co-ownership, not a partnership. The
agreement for administration of property (Art. 3 of deed of
sale) is but a mere incident of the co-ownership and not an act
reflective of their intention to engage in a mutual fund for
profit or business.
CC 1767 prescribes two essential elements of a partnership,
namely: (a) an agreement to contribute money, property or
industry to a common fund; and (b) intent to divide the profits
among the contracting parties.
At first glance, SRI and SBC seem to fulfil the above essential
elements, however, after an exhaustive study, it is apparent
that no agreement, direct or implied was reached by SRI and
SBC to purposely contribute money, property or industry to a
common fund, and that, no such intent to divide the profits
arising from the use of the common fund in a business activity
was ever contemplated by the parties.
The deed of sale gave SBC the option to buy ½ ownership and
interest of SRI over the property within 5 years from
execution. The real intention of the parties was to sell SRI’s
share to SBC. SBC even demolished ½ portion of the building
and built a new 10-storey building for itself. SRI and SBC
only entered into an isolated transaction. They simply bought
page 8
TAXATION I | CASE DIGEST
65. CIR vs. Procter and Gamble
(Pacquiao, L)
COMMISSIONER OF INTERNAL REVENUE,
petitioner, vs. PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION & THE COURT
OF TAX APPEALS, respondents. G.R. No. L-66838 April
15, 1988
FACTS
For the taxable year 1974 ending on 30 June 1974, and the
taxable year 1975 ending 30 June 1975, private respondent
"P&G-Phil." declared dividends payable to its parent company
and sole stockholder, Procter and Gamble Co., Inc. (USA)
(P&G-USA), amounting to P24,164,946.30, from which
dividends the amount of P8,457,731.21 representing the 35%
withholding tax at source was deducted.
On 1977, private respondent P&G-Phil. filed with petitioner
CIR a claim for refund or tax credit in the amount of
P4,832,989.26 claiming, among other things, that pursuant to
Section 24 (b) (1) of the National Internal Revenue Code
(NITC), as amended by PD No. 369, the applicable rate of
withholding tax on the dividends remitted was only 15 and not
35% of the dividends.
There being no responsive action on the part of the
Commissioner, P&G-Phil. filed a petition for review with
public respondent Court of Tax Appeals (CTA). Subsequently,
the CTA rendered a decision ordering petitioner
Commissioner to refund or grant the tax credit in the amount
of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second
Division reversed the decision of the CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the
proper party to claim the refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the
US Tax Code that allows a credit against the US tax due from
P&G-USA of taxes deemed to have been paid in the
Philippines equivalent to twenty percent (20%) which
represents the difference between the regular tax of thirty-five
percent (35%) on corporations and the tax of fifteen percent
(15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain
conditions necessary in order that "the dividends received by
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Based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA
its non-resident parent company in the US (P&G-USA) may The NIRC does not require that the US tax law deem the
be subject to the preferential tax rate of 15% instead of 35%." parent corporation to have paid the 20 percentage points of
dividend tax waived by the Philippines. It only requires that
the US “shall allow” P&G-USA a “deemed paid” tax credit in
an amount equivalent to the 20 percentage points waived by
ISSUE the Philippines. Section 24(b)(1) does not create a tax
exemption nor does it provide a tax credit; it is a provision
Whether or not P&G Philippines is entitled to the refund or tax which specifies when a particular (reduced) tax rate is legally
credit applicable.
(NO - 1988 decision) Section 24(b)(1) of the NIRC seeks to promote the in-flow of
foreign equity investment in the Philippines by reducing the
(YES – 1991 resolution) tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor,
however, would not benefit from the reduction of the
Philippine dividend tax rate unless its home country gives it
HELD some relief from double taxation by allowing the investor
additional tax credits which would be applicable against the
tax payable to such home country. Accordingly, Section
NO. The Second Division of the Supreme Court held that
24(b)(1) of the NIRC requires the home or domiciliary country
PMC-Phil, is but a withholding agent of the government and
to give the investor corporation a “deemed paid” tax credit at
therefore cannot claim reimbursement of the alleged overpaid
least equal in amount to the 20 percentage points of dividend
taxes, the real party-in-interest being the mother corporation in
tax foregone by the Philippines, in the assumption that a
the United States, and should have been the claimant of the tax
positive incentive effect would thereby be felt by the investor.
refund.
66. CIR vs. Visayas Electric Tado
YES. We conclude that private respondent P&G-Phil, is
entitled to the tax refund or tax credit which it seeks. Sec 24
(b) (1) of the NIRC states that an ordinary 35% tax rate will be
applied to dividend remittances to non-resident corporate
stockholders of a Philippine corporation. This rate goes down
to 15% ONLY IF the country of domicile of the foreign
stockholder corporation “shall allow” such foreign corporation
a tax credit for “taxes deemed paid in the Philippines,”
applicable against the tax payable to the domiciliary country
by the foreign stockholder corporation. However, such tax
credit for “taxes deemed paid in the Philippines” MUST, as a
minimum, reach an amount equivalent to 20 percentage points
which represents the difference between the regular 35%
dividend tax rate and the reduced 15% tax rate. Thus, the test
is if USA “shall allow” P&G USA a tax credit for “taxes
deemed paid in the Philippines” applicable against the US
taxes of P&G USA, and such tax credit must reach at least 20
percentage points. Requirements were met.
Since the US Congress desires to avoid or reduce double
taxation of the same income stream, it allows a tax credit of
both (i) the Philippine dividend tax actually withheld, and (ii)
the tax credit for the Philippine corporate income tax actually
paid by P&G Philippines but “deemed paid” by P&G USA.
Moreover, under the Philippines-United States Convention
“With Respect to Taxes on Income,” the Philippines, by treaty
commitment, reduced the regular rate of dividend tax to a
maximum of 20% of he gross amount of dividends paid to US
parent corporations, and established a treaty obligation on the
part of the United States that it “shall allow” to a US parent
corporation receiving dividends from its Philippine subsidiary
“a [tax] credit for the appropriate amount of taxes paid or
accrued to the Philippines by the Philippine [subsidiary].
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TAXATION I | CASE DIGEST
67. CIR vs. CA (207 SCRA 487)
Vosotros
Commissioner of Internal Revenue vs. Court of Appeals,
GCL Retirement Plan G.R. No. 95022 (207 SCRA 487)
March 23, 1992
Facts:
Private Respondent, GCL Retirement Plan (GCL, for brevity)
is an employees’ trust maintained by the employer, GCL Inc.,
to provide retirement, pension, disability and death benefits to
its employees. The Plan as submitted was approved and
qualified as exempt from income tax by Petitioner
Commissioner of Internal Revenue in accordance with Rep.
Act No. 4917.
In 1984, Respondent GCL made investsments and earned
therefrom interest income from which was witheld the fifteen
per centum (15%) final witholding tax imposed by Pres.
Decree No. 1959.
Respondent GCL filed with Petitioner a claim for refund in the
amounts of P1,312.66 withheld by Anscor Capital and
Investment Corp., and P2,064.15 by Commercial Bank of
Manila.
On 12 February 1985, it filed a second claim for refund of the
amount of P7,925.00 withheld by Anscor, stating in both
letters that it disagreed with the collection of the 15% final
withholding tax from the interest income as it is an entity fully
exempt from income tax as provided under Rep. Act No. 4917
in relation to Section 56 (b) 3 of the Tax Code.
The refund requested having been denied, Respondent GCL
elevated the matter to respondent Court of Tax Appeals
(CTA). The latter ruled in favor of GCL, holding that
employees' trusts are exempt from the 15% final withholding
tax on interest income and ordering a refund of the tax
withheld.
Rep. Act No. 1983, which took effect on 22 June 1957,
amending Sec. 56 (b) of the National Internal Revenue Code
(Tax Code, for brevity), employees' trusts were exempt from
income tax. That law provided:
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10
Based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA
Sec. 56 Imposition of tax. —(a) Application of tax. —
The taxes imposed by this Title upon individuals shall apply to
the income of estates or of any kind of property held in trust,
including —
xxx xxx xxx
(b) Exception. — The tax imposed by this Title
shall not apply to employees' trust which forms a part of a
pension, stock bonus or profit-sharing plan of an employer for
the benefit of some or all of his employees (1) if contributions
are made to trust by such employer, or employees, or both, for
the purpose of distributing to such employees the earnings and
principal of the fund accumulated by the trust in accordance
with such
plan, . . .
CIR CONTENTION:
It is to be noted that the exemption from withholding tax on
interest on bank deposits previously extended by Pres. Decree
No. 1739 if the recipient (individual or corporation) of the
interest income is exempt from income taxation, and the
imposition of the preferential tax rates if the recipient of the
income is enjoying preferential income tax treatment, were
both abolished by Pres. Decree No. 1959.
Petitioner CIR thus submits that the deletion of the exempting
and preferential tax treatment provisions under the old law is a
clear manifestation that the single 15% (now 20%) rate is
impossible on all interest incomes from deposits, deposit
substitutes, trust funds and similar arrangements, regardless of
the tax status or character of the recipients thereof.
In short, petitioner's position is that from 15 October 1984
when Pres. Decree No. 1959 was promulgated, employees'
trusts ceased to be exempt and thereafter became subject to the
final withholding tax.
Issue:
Whether or not the GCL Plan is exempt from the final
withholding tax on interest income from money placements
and purchase of treasury bills required by Pres. Decree No. if the provisions of the latter are sufficiently comprehensive to
1959. include what was set forth in the special act (Villegas v.
Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA
190).
Ruling: There can be no denying either that the final withholding tax is
collected from income in respect of which employees' trusts
are declared exempt (Sec. 56 [b], now 53 [b], Tax Code).The
application of the withholdings system to interest on bank
Yes. GCL Plan was qualified as exempt from income tax by deposits or yield from deposit substitutes is essentially to
the CIR in accordance with Rep. Act. 4917. maximize and expedite the collection of income taxes by
requiring its payment at the source. If an employees’ trust like
the GCL enjoys a tax-exempt status from income, we see no
logic in withholding a certain percentage of that income which
The tax-exemption privilege of employees’ trusts, as it is not supposed to pay in the first place.
distinguished from any other kind of property held in trust,
springs from Section 56(b) (now 53[b]) of the Tax Code, “The
tax imposed by this Title shall not apply to employee’s trust
which forms part of a pension, stock bonus or profit-sharing
plan of an employer for the benefit of some or all of his
employees . . .” And rightly so, by virtue of the raison de’etre VIII - EXEMPT TAXPAYERS
behind the creation of employees’ trusts. Employees’ trusts or
benefit plans normally provide economic assistance to
employees upon the occurrence of certain contingencies,
particularly, old age retirement, death, sickness, or disability.
It provides security against certain hazards to which members
of the Plan may be exposed. It is an independent and 68. CIR vs. CA (G.R. No. 124043) Anino
additional source of protection for the working group. What is
more, it is established for their exclusive benefit and for no
other purpose.
It is evident that tax-exemption is likewise to be enjoyed by
the income of the pension trust. Otherwise, taxation of those
earnings would result in a diminution accumulated income and
reduce whatever the trust beneficiaries would receive out of
the trust fund. This would run afoul of the very intendment of
the law. There can be no denying either that the final
withholding tax is collected from income in respect of which
employees’ trusts are declared exempt (Sec. 56 [b], now 53
[b], Tax Code).
The deletion in Pres. Decree No. 1959 of the provisos
regarding tax exemption and preferential tax rates under the
old law, therefore, can not be deemed to extent to employees'
trusts. Said Decree, being a general law, can not repeal by
implication a specific provision, Section 56(b) now 53 [b]) in
relation to Rep. Act No. 4917 granting exemption from
income tax to employees' trusts.
Rep. Act 1983, which excepted employees' trusts in its Section
56 (b) was effective on 22 June 1957 while Rep. Act No. 4917
was enacted on 17 June 1967, long before the issuance of Pres.
Decree No. 1959 on 15 October 1984. A subsequent statute,
general in character as to its terms and application, is not to be
construed as repealing a special or specific enactment, unless
the legislative purpose to do so is manifested. This is so even
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TAXATION I | CASE DIGEST
69. CIR vs. CA (G.R. No. 115349)
Arevalo
G.R. No. 115349 April 18, 1997
COMMISSIONER OF INTERNAL REVENUE, petitioner,
Vs.
THE COURT OF APPEALS, THE COURT OF TAX
APPEALS and ATENEO DE MANILA UNIVERSITY,
respondents.
FACTS:
Private respondent is a non-stock, non-profit educational
institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is the Institute of
Philippine Culture (IPC), which has no legal personality
separate and distinct from that of private respondent. The IPC
is a Philippine unit engaged in social science studies of
Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international
organizations, private foundations and government agencies.
On July 8, 1983, private respondent received from petitioner
Commissioner of Internal Revenue a demand letter dated June
3, 1983, assessing private respondent the sum of P174,043.97
for alleged deficiency contractor's tax, and an assessment
dated June 27, 1983 in the sum of P1,141,837 for alleged
deficiency income tax, both for the fiscal year ended March
31, 1978. Denying said tax liabilities, private respondent sent
petitioner a letter-protest and subsequently filed with the latter
a memorandum contesting the validity of the assessments.
ISSUE: Is Ateneo de Manila University, through its auxiliary
unit or branch — the Institute of Philippine Culture —
performing the work of an independent contractor and, thus,
subject to the three percent contractor's tax levied by then
Section 205 of the National Internal Revenue Code?
RULING: NO.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue
Code germane to the case before us read:
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11
Based on the lectures of Atty. Raymund Christian S. Ong Abrantes, CPA
Sec. 205. Contractors, proprietors or operators To fall under its coverage, Section 205 of the National Internal
of dockyards, and others. — A contractor's tax Revenue Code requires that the independent contractor be
of threeper centum of the gross receipts is engaged in the business of selling its services. Hence, to
hereby imposed on the following: impose the three percent contractor's tax on Ateneo's
Institute of Philippine Culture, it should be sufficiently
proven that the private respondent is indeed selling its
services for a fee in pursuit of an independent business. And it
(16) Business agents and other independent is only after private respondent has been found clearly to be
contractors, except persons, associations and subject to the provisions of Sec. 205 that the question of
corporations under contract for embroidery and exemption therefrom would arise.
apparel for export, as well as their agents and
contractors, and except gross receipts of or
from a pioneer industry registered with the
Board of Investments under the provisions of After reviewing the records of this case, we find no evidence
Republic Act No. 5186; that Ateneo's Institute of Philippine Culture ever sold its
services for a fee to anyone or was ever engaged in a business
apart from and independently of the academic purposes of the
university.
The term "independent contractors" include
persons (juridical or natural) not enumerated
above (but not including individuals subject to
the occupation tax under Section 12 of the Moreover, the Court of Tax Appeals accurately and correctly
Local Tax Code) whose activity consists declared that the " funds received by the Ateneo de Manila
essentially of the sale of all kinds of services University are technically not a fee. They may however fall
for a fee regardless of whether or not the as gifts or donations which are tax-exempt" as shown by
performance of the service calls for the private respondent's compliance with the requirement of
exercise or use of the physical or mental Section 123 of the National Internal Revenue Code providing
faculties of such contractors or their for the exemption of such gifts to an educational institution.
employees.
The term "independent contractor" shall not
include regional or area headquarters
established in the Philippines by multinational
corporations, including their alien executives,
and which headquarters do not earn or derive
------------END OF COVERAGE FOR MIDTERM EXAM----
income from the Philippines and which act as
--------
supervisory, communications and coordinating
centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.
The term "gross receipts" means all amounts
received by the prime or principal contractor as
the total contract price, undiminished by
amount paid to the subcontractor, shall be
excluded from the taxable gross receipts of the
subcontractor.
The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens
on the populace, before asking Ateneo to prove its exemption
therefrom. The Court takes this occasion to reiterate the
hornbook doctrine in the interpretation of tax laws that
"(a) statute will not be construed as imposing a tax unless
it does so clearly, expressly, and unambiguously . . . (A) tax
cannot be imposed without clear and express words for that
purpose.
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