CONWI vs CTA 213 SCRA 83

FACTS:
 Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation, subsidiary of
Procter & Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were assigned to
other subsidiaries of Procter & Gamble outside the Philippines, for which petitioners were paid US dollars
as compensation.
 Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso
conversion based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amended
ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the alleged
overpayments, refund and/or tax credit, for which claims for refund were filed.
 CTA held that the proper conversion rate for the purpose of reporting and paying the Philippine income
tax on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars
Nos. 7-71 and 41-71. The refund claims were denied.

ISSUE:
 Whether or not petitioners' dollar earnings are receipts derived from foreign exchange transactions

RULING:
 No. For the proper resolution of income tax cases, income may be defined as an amount of money
coming to a person or corporation within a specified time, whether as payment for services,
interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income
can also be thought of as flow of the fruits of one's labor.
 Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange transaction is simply that — a transaction in foreign
exchange, foreign exchange being "the conversion of an amount of money or currency of one country
into an equivalent amount of money or currency of another."
 When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they were earning in
their assigned nation's currency and were ALSO spending in said currency. There was no conversion,
therefore, from one currency to another.
 The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two
years as payment for their services.

NOTES: Income Tax is an amount of money coming to a person or corporation within or specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, it
means cash or its equivalent. Income can also be thought of as a flow of the fruits of one’s labor.
Earning and spending in the same foreign currency does not involve conversion hence it does not
constitute foreign exchange transaction.

Foreign exchange is defined as the conversion of an amount of money or currency of one country into
an equivalent amount of money or currency of another.
TOPIC: Sale Of The Tickets Taxable As Income From Sources Within The Philippines.

CIR VS. BRITISH OVERSEAS AIRWAYS CORPORATION and CTA

FACTS:

 BOAC is a British Government-owned corporation organized and existing under the laws of the United
Kingdom.It is engaged in the international airline business. It did not carry passengers or cargo to or from
the Philippines, although during the period covered by the assessments, it maintained a general sales
agent in the Philip. — Wamer Barnes and Company, Ltd., and later Qantas Airways — which was
responsible for selling BOAC tickets covering passengers and cargoes.
 It is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted
a Certificate of public convenience, except for a nine-month period, partly in 1961 and partly in 1962,
when it was granted a temporary landing permit .
 Petitioner assessed BOAC for deficiency income taxes covering the years 1959 to 1963. BOAC paid the
assessment under protest.
 CTA DECISION: The Tax Court held that the proceeds of sales of BOAC passage tickets in the
Philippines do not constitute BOAC income from Philippine sources "since no service of carriage of
passengers or freight was performed by BOAC within the Philippines" and, therefore, said income is not
subject to Philippine income tax.
 RESPONDENT’S MAIN ARGUMENT: BOAC's service of transportation is performed outside the
Philippines, the income derived is from sources without the Philippines and, therefore, not taxable under
our income tax laws.

ISSUES: Whether the revenue derived by BOAC from sales of tickets in the Philippines for air transportation,
while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly,
taxable.

HELD:

 YES. Sales of tickets in the Philippines is taxable.

 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. The absence of flight operations to and from the Philippines is not
determinative of the source of income or the site of income taxation.

In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income:

1. The tickets exchanged hands and payments for fares were also made in Philippine currency.
2. The site of the source of payments is the Philippines.
3. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government.
4. In consideration of such protection, the flow of wealth should share the burden of supporting the
government.

The definition of gross income under section 32 of tax code is broad and comprehensive to include
proceeds from sales of transport documents.

NOTE: Pursuant to Presidential Decree No. 69, international carriers are now taxed of 2-½ per cent on their
Gross Philippine billings.
 Madrigal vs. Rafferty G.R. No. L-12287 August 7, 1918 Income Tax defined, Income vs. Capital
December 4, 2017

FACTS:

 Vicente Madrigal and Susana Paterno were married with Conjugal Partnership as their property
relations.Vicente filed his 1914 income tax return but later claimed a refund on the contention that it was
the income of the conjugal partnership. Vicente claimed that the income should be divided into two with
each spouse filing a separate return.Hence, Vicente claimed that each spouse should be entitled to the
P8,000 exemption, which would result in a lower amount of income tax due.

ISSUE:

 Define Income Tax

RULING:

 The essential difference between capital and income is that capital is a fund; income is a flow. A fund of
property existing at an instant of time is called capital. A flow of services rendered by that capital by the
payment of money from it or any other benefit rendered by a fund of capital in relation to such fund
through a period of time is called income. Capital is wealth, while income is the service of wealth.
 A tax on income is not a tax on property. Income can be defined as profits or gains. Susana, has an
inchoate right in the property of her husband during the life of the conjugal partnership. Her interest in
the ultimate property rights and in the ultimate ownership of property acquired as income lies after such
income has become capital. She has no absolute right to ½ the income of the conjugal partnership. Not
being seized of a separate estate, Susana 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 purposes of the additional tax.
 International Freighting vs. CIR
135 F.2d 310 (1943)
Frank, Circuit Judge.

Facts:

- Petitioner (taxpayer), a subsidiary of another company (DuPont), had an arrangement from years 1933
to 1936 where select employees, particularly those who have been employed by taxpayer for at least two
years, are to receive bonuses in the form of common stock or in cash to be invested in such stock.
o For the year 1936, taxpayer paid and distributed to the beneficiaries certificates representing 150
shares of the common stock of DuPont, whose cost to taxpayer was $16, 153.36 (when it acquired
such from DuPont), and with the market value of $24,858.75 at the time it was given to the
employees. Each of the employees receiving a share paid a tax thereon, computing the market
value at the time of delivery as taxable income.
- Taxpayer took a deduction of $24,858.75 in its income tax return for 1936 on account of the shares of
stock distributed to its employees.
o The Commissioner, however, said that the appropriate deduction is only $16, 153.36. As the
bonus was paid in property, “the basis for calculation of the amount thereof is the cost of such
property and not its market value as claimed on the return.” Based on this, taxpayer still had a
deficiency in its payment of income tax return. The taxpayer raised a petition with the Tax Court
for a redetermination.
o Before the Tax Court, the Commissioner gave an amended answer and alleged that if it were held
that taxpayer was entitled to a deduction in the amount of $24,858.75 on account of payment of
bonus in stock, then taxpayer realized a taxable profit of $8, 705.39 on the disposition of the
shares, and so taxpayer’s net taxable income should be increased accordingly.
o Tax Court held that the taxpayer was entitled to the full deduction ($24,858.75), but that since
taxpayer acquired the said stocks for $16, 153.36, which later had a final market value of
$24,858.75, then it gained a profit of $8, 705.39, which was taxable as gross income.
Hence, this petition.

ISSUE: May the fair market value of the stock be deducted and is the gain taxable?

Held:

- The Tax Court correctly held that the market value at the time of delivery was properly deducted by the
taxpayer as an ordinary expense of the business, as such delivery was an additional reasonable
compensation for past services actually rendered.
- The Tax Court also correctly held that the transaction resulted in taxable gain to taxpayer.
o Pet: the delivery of those shares was a gift, hence not liable for income tax.
o Court: not a gift because: 1. It would have been wrongful as against taxpayer’s stockholders, 2.
The value of the shares could not have been deducted as an expense, and 3. The employees, as
donees, would not have been obliged to pay an income tax on what they received.
 In other words, it was not a gift precisely because it was “compensation for services
actually rendered,” i.e. because the tax payer received a full quid pro quo.
o As the delivery of the shares constituted a disposition for a valid consideration, it resulted
in a closed transaction with a consequent realized gain.
 It is of no relevance that taxpayer was not legally mandated to award those shares or pay
additional compensation to the employees; although they are not obligatory, they are
regarded as made for a sufficient consideration.
 Since the bonuses would be invalid to the extent that what was delivered to the employees
exceeded what the services of the employees were worth, it follows that the consideration
 received by the taxpayer from the beneficiaries (the at least two years of service) must be
deemed to be equal to the value of the shares given in 1936.
o Since it was made for a consideration equal to at least the market value of the shares when
it was delivered, there is then a taxable gain equal to the difference between the cost of
the shares and the market value.
 Court’s analogy: taxpayer, without entering into a previous contract fixing the amount of
compensation, had employed an employee for one day and, when he completed his work,
had paid him 5 shares of DuPont stock having a market value at that time of $500, but
which it (taxpayer) had bought in a previous year for only $100. It can be clearly seen then
that there’s a taxable gain.

Decision Affirmed.
 Anderson v Posadas (G.R. No. 44100)

Good will is the reputation of good name of an establishment. If the good will, that is, the good reputation of the
business is acquired in the course of its management and operation, it does form part of the capital with which
it was established. It is an intangible moral profit which is subject to income tax.

FACTS:
 William Anderson purchased the business of Erlanger & Galinger. He incorporated the partnership with
an authorized capital of P600,000 (all of which were subscribed by Anderson). Anderson paid P70,000
and the amount left (totaling P530,000) was entered in an underwriting account.
 A good will account was opened by Anderson. In 1918, he sold to Simon Feldstein 500 of his shares
which amounted to P150,000 but in the course of their transactions incurred losses. In view of the said
losses, Anderson deducted P125,000 from his taxable income which was approved by the BIR.
 Juan Posadas, Commissioner of Internal Revenue attempted to collect a tax (P300,000) at which
Anderson was assessed the goodwill of the business. Anderson agreed to eliminate the goodwill by
debiting the sum in his capital account and crediting it to the good will account .
 It appears, that with the P100,000 paid by Feldstein on account of his purchasing 500 shares, the loss
(P125,000) has been recovered and it is but just that the P125,000 be restored as taxable income.
 CFI Manila decided and held that P155,000 (which represents proceeds of the sale of the Goodwill
Account) and that P125,000 (representing the recovered loss) is not subject to income tax.

ISSUES:

1. Whether or not goodwill account is subject to income tax

2. Whether or not the amount of P125,000 subject to income tax.

HELD:

1. YES. Good will is the reputation of good name of an establishment. If the good will, that is, the good
reputation of the business is acquired in the course of its management and operation, it does form part
of the capital with which it was established. It is an intangible moral profit, susceptible of valuation in
money, acquired by the business by reason of the confidence reposed in it by the public, due to the
efficiency and honesty shown by the manager and personnel thereof in conducting the same on account
of the courtesy accorded its customers, which moral profit, once it is valuated and used, becomes a part
of the assets.

In the case, the good will of P155,000 created by Anderson has been beneficial not only to him but also
to Feldstein. Aside from the benefit, he also realized a gain of P70,838 from the sale of the 500 shares
to Feldstein. When you add these two amounts, it totals to P161,250 which is more than what the CIR is
trying to collect from Anderson.

2. YES. It is subject to income tax.* (no legal explanation given by the Court). In the case, the loss of
P125,000 suffered by Anderson (by reason of the sale of said 500 shares) has been recovered, and it is
but just that the sum of P125,000, deducted from the profits by reason of losses suffered temporarily on
the capital, be restored.
 LIMPAN INVESTMENT VS. CIR-
Actual vs Constructive Receipt

 Limpan Investment Company deemed to have constructively received rental payments in 1957 when they
were deposited in court due to its refusal to receive them.

FACTS:

 BIR assessed deficiency taxes on Limpan Corp, a company that leases real property, for under-declaring its
rental income for years 1956-57 by around P20K and P81K respectively.
 Petitioner appeals on the ground that portions of these underdeclared rents are yet to be collected by the
previous owners and turned over or received by the corporation.
 Petitioner cited that some rents were deposited with the court, such that the corporation does not have actual
nor constructive control over them.
 The sole witness for the petitioner, Solis (Corporate Secretary- Treasurer) admitted to some undeclared rents
in 1956 and1957, and that some balances were not collected by the corporation in 1956 because the lessees
refused to recognize and pay rent to the new owners and that the corp’s president Isabelo Lim collected
some rent and reported it in his personal income statement, but did not turn over the rent to the corporation.
 He also cites lack of actual or constructive control over rents deposited with the court.

ISSUE:

 Whether or not the BIR was correct in assessing deficiency taxes against Limpan Corp. for undeclared rental
income

HELD:

 Yes. Petitioner admitted that it indeed had undeclared income (although only a part and not the full amount
assessed by BIR). Thus, it has become incumbent upon them to prove their excuses by clear and convincing
evidence, which it has failed to do. When is there constructive receipt of rent? With regard to 1957 rents
deposited with the court, and withdrawn only in 1958, the court viewed the corporation as having
constructively received said rents. The non-collection was the petitioner’s fault since it refused to refused to
accept the rent, and not due to nonpayment of lessees. Hence, although the corporation did not actually
receive the rent, it is deemed to have constructively received them.
 Republic v. Dela Rama
(Actual versus Constructive Receipt)

FACTS:

 The estate of the late Esteban de la Rama was the subject of Special Proceedings No. 401 of the Court
of First Instance of Iloilo. The executor-administrator, Eliseo Hervas, filed income tax returns of the estate
corresponding to the taxable year 1950. The Bureau of Internal Revenue later claimed that it had found
out that there had been received by the estate in 1950 from the De la Rama Steamship Company, Inc.
cash dividends amounting to P86,800.00, which amount was not declared in the income tax return of the
estate for the year 1950. The Bureau of Internal Revenue then made an assessment as deficiency income
tax against the estate.
 The Collector of Internal Revenue wrote a letter to Mrs. Lourdes de la Rama-Osmeña informing her of
the deficiency income tax and asking for payment. Counsel for Lourdes wrote to the Collector
acknowledging receipt of the assessment but contended that Lourdes had no authority to represent the
estate, and that the assessment should be sent to Leonor de la Rama who was pointed to by said counsel
as the administratrix. The Deputy Collector of Internal Revenue then sent a letter to Leonor de la Rama
as administratrix of the estate, asking payment. The tax, as assessed, not having been paid, the Deputy
Commissioner of Internal Revenue, on September 7, 1959, wrote another letter to Lourdes demanding
the payment of the deficiency income tax within the period of thirty days from receipt thereof. The counsel
of Lourdes insisted that the letter should be sent to Leonor de la Rama. The Deputy Commissioner of
Internal Revenue wrote to Leonor de la Rama another letter, demanding the payment within thirty days
from receipt thereof.
 The deficiency income tax not having been paid, the Republic of the Philippines filed a complaint against
the heirs of Esteban de la Rama. The Trial court, however, dismissed the complaint on the ground that
[relevant to the subject heading]it was Eliseo Hervas, and neither Leonor nor Lourdes, who was the
proper administrator at the time, and to whom the assessment should have been sent.
 The appellant contended that the assessment had become final, because the decision of the Collector of
Internal Revenue was sent in a letter dated February 11, 1960 and addressed to the heirs of the late
Esteban de la Rama, through Leonor de la Rama as administratrix of the estate, and was not disputed
or contested by way of appeal within thirty days from receipt thereof to the Court of Tax Appeals.

ISSUE: WON there was proper notice of the tax assessment

RATIO: If the notice was not sent to the taxpayer for the purpose of giving effect to the assessment, said notice
cannot produce any effect.

HELD:

 The SC sustained the finding of the lower court that neither Leonor nor Lourdes was the administratrix of
the estate of Esteban de la Rama. The Court noted that at the time the tax assessment was sent, Special
Proceedings No. 401 were still open with respect to the controverted matter regarding the cash dividends
upon which the deficiency assessment was levied. It is clear that at the time these special proceedings
were taking place, Eliseo Hervas was the duly appointed administrator of the estate.
 Plaintiff-appellant also contends that the lower court could not take cognizance of the defense that the
assessment was erroneous, this being a matter that is within the exclusive jurisdiction of the Court of Tax
Appeals. This contention has no merit. According to Republic Act 1125, the Court of Tax Appeals has
exclusive jurisdiction to review by appeal decisions of the Collector of Internal Revenue in cases involving
disputed assessments, and the disputed assessment must be appealed by the person adversely affected
by the decision within thirty days after the receipt of the decision. In the instant case, the person adversely
 affected should have been the administrator of the estate, and the notice of the assessment should have
been sent to him. The administrator had not received the notice of assessment, and he could not appeal
the assessment to the Court of Tax Appeals within 30 days from notice. Hence the assessment did not
fall within the exclusive jurisdiction of the Court of Tax Appeals.

DISPOSITION: Petition is DISMISSED, decision appealed from is AFFIRMED

Eisner VS Macomber

FACTS:

 Mrs. Macomber owned 2,200 share of Standard Oil Company of California stock.
 In January, 1916, the company declared a stock dividend and Mrs. Macomber received an additional
1,100 shares of stock. Of these shares, 198.77 shares, par value $19,877, represented surplus earned
by the company after March 1, 1913.
 The IRS treated the $19,877 as taxable income under the Revenue Act of 1916 which provided that a
stock dividend was considered income to the amount of its cash value.
 Mrs. Macomber argued that that provision in the Revenue Act of 1916 was unconstitutional because it
was a direct tax 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.
 The District Court held that the stock dividend was not income.

ISSUE:

 Does Congress have the power under the 16th Amendment to tax shareholders on stock
dividends received? Are stock dividends considered income or capital?

HELD:

 The Supreme Court affirmed the District Court holding for the taxpayer that a stock dividend is not income.
The Revenue Act of 1916 provision subjecting stock dividends to tax was held unconstitutional.
 If a stock dividend is not considered income, it cannot be subject to income tax under the 16th
Amendment. In applying the 16th Amendment, it is important to distinguish between capital and income,
as only income is subject to income tax
 A stock dividend reflects the corporation transferring an amount from "surplus" (retained earnings) to
"capital stock." Such a transaction is merely a bookkeeping entry and "affects only the form, not the
essence, of the "liability" acknowledged by the corporation to its own shareholders ... it does not alter the
preexisting proportionate interest of any stockholder or increase the intrinsic value of his holding or of the
aggregate holdings of the other stockholders as they stood before" (Macomber, p. 1081). An increase to
the value of capital investment is not income. Nothing of value has been taken from the corporation and
given to the shareholder as is the case with a cash dividend.
 In addition, since the shareholder receives no cash, in order to pay any tax on a stock dividend, he might
have to convert the stock into cash - he has no wherewithal to pay from the nature of the transaction.
"Nothing could more clearly show that to 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" (Macomber, p. 1082).
 RAYTHEON PRODUCTION VS. CIR- Tax Compromise

The determining factor is the NATURE of the basic claim from which the compromised amount was realized.

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
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 (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.

HELD:

 No. They are not taxable in general.

 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 were the damages awarded?" Where the suit is not to recover
lost profits but is for recovery in injury to good will, the recovery represents a return of capital and, with
certain limitations (necessity of proof/evidence), is not taxable.
 The suit by Raytheon was not one of recovering lost profits. From its allegations, Raytheon’s suit was for
the destruction of 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.
 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.
 However, compensation for the loss of goodwill in excess of its cost is gross income. The law does not
exempt compensatory damages just because they are a return of capital. The tax exemption applies only
to the portion that 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. In this case, Raytheon was not able to establish the value of its
goodwill and business. It did not produce enough evidence to such effect. The amount of nontaxable
capital cannot be ascertained. Since Raytheon could not establish the cost basis of its good will, its basis
will be treated as zero. The Court concludes that the $350,000 of the $410,000 attributable to the suit is
thus taxable income.
 COMMISSIONER V TOURS SPECIALIST

Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer
which do not belong to them and do not redound to the taxpayer’s benefit; and it is not necessary that there must
be a law or regulation which would exempt such monies or receipts within the meaning of gross receipts under
the Tax Code

Facts:

 The Commissioner of Internal Revenue filed a petition to review on certiorari to the CTA decision which
ruled that the money entrusted to private respondent Tours Specialist (TS), earmarked and paid for hotel
room charges of tourists, travellers and/or foreign travel agencies do not form part of its gross receipt
subject to 3% independent contractor’s tax.
 Tours Specialist derived income from its activities and services as a travel agency, which included
booking tourists in local hotels. To supply such service, TS and its counterpart tourist agencies abroad
have agreed to offer a package fee for the tourists (payment of hotel room accommodations, food and
other personal expenses). By arrangement, the foreign tour agency entrusts to TS the fund for hotel room
accommodation, which in turn paid by the latter to the local hotel when billed.
 Despite this arrangement, CIR assessed private respondent for deficiency 3% contractor’s tax as
independent contractor including the entrusted hotel room charges in its gross receipts from services for
years 1974-1976 plus compromise penalty.
 During cross-examination, TS General Manager stated that the payment through them “is only an act of
accommodation on (its) part” and “the agent abroad instead of sending several telexes and saving on
bank charges they take t
 he option to send the money to (TS) to be held in trust to be endorsed to the hotel.” Nevertheless, CIR
caused the issuance of a warrant of distraint and levy, and had TS’ bank deposits garnished.

Issue:

 W/N amounts received by a local tourist and travel agency included in a package fee from tourists or
foreign tour agencies, intended or earmarked for hotel accommodations form part of gross receipts
subject to 3% contractor’s tax

Held:

 No. Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the
taxpayer which do not belong to them and do not redound to the taxpayer’s benefit; and it is not necessary
that there must be a law or regulation which would exempt such monies or receipts within the meaning
of gross receipts under the Tax Code. Parenthetically, the room charges entrusted by the foreign travel
agencies to the private respondents do not form part of its gross receipts within the definition of the Tax
Code. The said receipts never belonged to the private respondent. The private respondent never
benefited from their payment to the local hotels. This arrangement was only to accommodate the foreign
travel agencies.
 The room charges entrusted by the foreign travel agencies to the private respondent do not form part of
its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private
respondent. The private respondent never benefited from their payment to the local hotels. As stated
earlier, this arrangement was only to accommodate the foreign travel agencies.
 Another objection raised by the petitioner is to the respondent court's application of Presidential Decree
31 which exempts foreign tourists from payment of hotel room tax. Section 1 thereof provides: Sec. 1. —
 Foreign tourists and travelers shall be exempt from payment of any and all hotel room tax for the entire
period of their stay in the country.
 If the hotel room charges entrusted to Tours will be subjected to 3% contractor's tax as what CIR would
want to do in this case, that would in effect do indirectly what P.D. 31 would not like hotel room charges
of foreign tourists to be subjected to hotel room tax. Although, CIR may claim that the 3% contractor's
tax is imposed upon a different incidence i.e. the gross receipts of the tourist agency which he asserts
includes the hotel room charges entrusted to it, the effect would be to impose a tax, and though
different, it nonetheless imposes a tax actually on room charges. One way or the other, it would not have
the effect of promoting tourism in the Philippines as that would increase the costs or expenses by the
addition of a hotel room tax in the overall expenses of said tourists.
 COMMISSIONER VS. JAVIER- Claim of Right Doctrine

Claim of right doctrine or doctrine of ownership, command or control- In this case, Javier is not liable for fraud
penalty because the “income” he received is not yet a taxable gain since it is still under litigation.

FACTS:

 1977: Victoria Javier, wife of Javier-respondent, received $999k from Prudential Bank remitted by her
sister Dolores through Mellon Bank in US.
 Around 3 weeks after, Mellon Bank filed a complaint with CFI Rizal against Javier claiming that its
remittance of $1M was a clerical error and should have been $1k only and praying that the excess be
returned on the ground that the Javiers are just trustees of an implied trust for the benefit of Mellon Bank.
 CFI charged Javier with estafa alleging that they misappropriated and converted it to their own personal
use.
 A year after, Javier filed his Income Tax Return for 1977 and stating in the footnote that “the taxpayer
was recipient of some money received abroad which he presumed to be a gift but turned out to be an
error and is now subject of litigation”
 The Commissioner of Internal Revenue wrote a letter to Javier demanding him to pay taxes for the
deficiency, due to the remittance.
 Javier replied to the Commissioner and said that he will pay the deficiency but denied that he had any
undeclared income for 1977 and requested that the assessment of 1977 be made to await final court
decision on the case filed against him for filing an allegedly fraudulent return.
 Commissioner replied that “the amount of Mellon Bank’s erroneous remittance which you were able to
dispose is definitely taxable” and the Commissioner imposed a 50% fraud penalty on Javier.

ISSUE: Whether or not Javier is liable for the 50% penalty.

HELD:

 No. It is true that a fraudulent return shall cause the imposition of a 50% penalty upon a taxpayer filing
such fraudulent return. However, in this case, although Javier may be guilty of estafa due to
misappropriating money that does not belong to him, as far as his tax return is concerned, there can be
no fraud. There is no fraud in the filing of the return. Javier’s notation on his income tax return can be
considered as a mere mistake of fact or law but not fraud. Such notation was practically an invitation for
investigation and that Javier had literally “laid his cards on the table.” The government was never
defrauded because by such notation, Javier opened himself for investigation. It must be noted that 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.
 Claim of right doctrine- a taxable gain is conditioned upon the presence of a claim of right to the alleged
gain and the absence of a definite and unconditional obligation to return or repay.
 In this case, the remittance was not a taxable gain, since it is still under litigation and there is a chance
that Javier might have the obligation to return it. It will only become taxable once the case has been
settled because by then whatever amount that will be rewarded, Javier has a claim of right over it.
 Sison v Ancheta

FACTS:

 Petitioners challenged the constitutionality of Section 1 of Batas Pambansa Blg. 135. It amended Section
21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents
on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d)
interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from
trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of
taxable partnership, (f) adjusted gross income.
 Petitioner as taxpayer alleged that "he would be unduly discriminated against by the imposition of higher
rates of tax upon his income arising from the exercise of his profession vis-a-vis those which are imposed
upon fixed income or salaried individual taxpayers." He characterizes the above section as arbitrary
amounting to class legislation, oppressive and capricious in character.
 For petitioner, therefore, there is a transgression of both the equal protection and due process clauses
of the Constitution as well as of the rule requiring uniformity in taxation.
 The OSG prayed for dismissal of the petition due to lack of merit.

ISSUE:
 Whether the imposition of a higher tax rate on taxable net income derived from business or profession
than on compensation is constitutionally infirm.

(WON there is a transgression of both the equal protection and due process clauses of the Constitution as well
as of the rule requiring uniformity in taxation)

HELD:
 No. Petition dismissed

 The need for more revenues is rationalized by the government's role to fill the gap not done by public
enterprise in order to meet the needs of the times. It is better equipped to administer for the public welfare.

 The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state
functions. It is the source of the bulk of public funds.

 The power to tax is an attribute of sovereignty and the strongest power of the government. There are
restrictions, however, diversely affecting as it does property rights, both the due process and equal
protection clauses may properly be invoked, as petitioner does, to invalidate in appropriate cases a
revenue measure. If it were otherwise, taxation would be a destructive power.

 The petitioner failed to prove that the statute ran counter to the Constitution. He used arbitrariness as
basis without a factual foundation. This is merely to adhere to the authoritative doctrine that where the
due process and equal protection clauses are invoked, considering that they are not fixed rules but rather
broad standards, there is a need for proof of such persuasive character as would lead to such a
conclusion.

 It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious example is where it can be shown to amount to the
confiscation of property. That would be a clear abuse of power.
  It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not
for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to
attack on due process grounds.

 For equal protection, the applicable standard to determine whether this was denied in the exercise of
police power or eminent domain was the presence of the purpose of hostility or unreasonable
discrimination.

 It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or
that all persons must be treated in the same manner, the conditions not being different, both in the
privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For
the principle is that equal protection and security shall be given to every person under circumstances,
which if not identical are analogous. If law be looks upon in terms of burden or charges, those that fall
within a class should be treated in the same fashion, whatever restrictions cast on some in the group
equally binding on the rest.

 The equal protection clause is, of course, inspired by the noble concept of approximating the ideal of the
law's benefits being available to all and the affairs of men being governed by that serene and impartial
uniformity, which is of the very essence of the idea of law.

 The equality at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth
Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do
not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties,
addressed to the attainment of specific ends by the use of specific remedies. The Constitution does not
require things which are different in fact or opinion to be treated in law as though they were the same.

Lutz v Araneta- it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation.

Petitioner- kindred concept of uniformity- Court- Philippine Trust Company- The rule of uniformity does not call
for perfect uniformity or perfect equality, because this is hardly attainable

Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for
purposes of taxation

There is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies
equally to all persons, firms and corporations placed in similar situation"

There was a difference between a tax rate and a tax base. There is no legal objection to a broader tax base or
taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate.

The discernible basis of classification is the susceptibility of the income to the application of generalized rules
removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied
to all of them. As there is practically no overhead expense, these taxpayers are not entitled to make deductions
for income tax purposes because they are in the same situation more or less.

Taxpayers who are recipients of compensation income are set apart as a class.
On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the
disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the
basis of gross income.

There was a lack of a factual foundation, the forcer of doctrines on due process and equal protection, and he
reasonableness of the distinction between compensation and taxable net income of professionals and
businessmen not being a dubious classification.

Sison vs Ancheta

FACTS:
 Section 1 of BP Blg 135 amended the Tax Code and petitioner Antero M. Sison, as taxpayer, alleges that
"he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising
from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers. He characterizes said provision as arbitrary amounting to class legislation,
oppressive and capricious in character. It therefore violates both the equal protection and due process
clauses of the Constitution as well asof the rule requiring uniformity in taxation.

ISSUE:
 Whether or not the assailed provision violates the equal protection and due process clauses of the
Constitution while also violating the rule that taxes must be uniform and equitable.

HELD:
 The petition is without merit.
 On due process - it is undoubted that it may be invoked where a taxing statute is so arbitrary that it finds
no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation
of property from abuse of power. Petitioner alleges arbitrariness but his mere allegation does not suffice
and there must be a factual foundation of such unconstitutional taint.
 On equal protection - it suffices that the laws operate equally and uniformly on all persons under similar
circumstances, both in the privileges conferred and the liabilities imposed.
On the matter that the rule of taxation shall be uniform and equitable - this requirement is met when the
tax operates with the same force and effect in every place where the subject may be found." Also, :the
rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly
unattainable." When the problem of classification became of issue, the Court said: "Equality and
uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed
the same rate. The taxing power has the authority to make reasonable and natural classifications for
purposes of taxation..." As provided by this Court, where "the differentiation" complained of "conforms to
the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and
is therefore uniform.”