Professional Documents
Culture Documents
Taxation Part 2, Digests
Taxation Part 2, Digests
o
previous year exceeds 1 ½%
maintaining the rate of 10% until the conditions above took
• 4) The law is consistent w/ Uniformity and Equitability of
Taxation
place
• Uniformity of taxation means that all taxable articles/property of the
• It also inserted a provision imposing a 70% limit on the amount of input
SAME CLASS be taxed at the SAME RATE.
tax to be credited against the output tax.
• Petitions were thus filed assailing the constitutionality of the law: • In this case, the tax law is uniform as it provides for a standard rate of
o ABAKADA argued that Congress abandoned its exclusive 10% / 12% on all goods and services. It does NOT even make any
authority to fix taxes by giving the President the authority distinction as to the type of industry / trade that will bear the 70%
upon the Finance Sec’s recommendation to raise VAT to 12% limitation on the creditable input tax, 5year amortization of input tax
o Sen. Pimentel and Rep. Escudero argued that the law was an paid on purchase of capital goods or the 5% final withholding tax by
undue delegation of legislative powers and a violation of due the government.
o
process
Pilipinas Shell dealers argued that the VAT reform was
• The law is also equitable because it is equipped with a threshold
margin—the 10/12% VATE rate will not apply to the sale of goods w/
arbitrary, oppressive and confiscatory.
gross annual sales at P1.5 or below. Small corner sari-sari stores are
• On the other hand, respondents countered that the law was complete,
consequently exempt from its application.
that it left no discretion to the President, and that it merely charged
• 5) Even if VAT is regressive, it is still constitutional.
the President with carrying out the rate increase once any of the 2
conditions arise. • The constitution does NOT prohibit the imposition of indirect taxes / a
regressive system of taxation. It simply provides that Congress shall
• I: W/n RA 9337 is constitutional
EVOLVE a progressive system of taxation, meaning direct taxes must
• R: YES, it is valid and constitutional.
be preferred to indirect taxes.
•
uniform taxes, licenses or fees.
For a tax to be just and uniform, it must apply equally to things
• The Municipal Board of Manila passed an ordinance levying a property
tax on all motor vehicles operating within the City of Manila.
identically situated. HOWEVER, classification can be made as long as it
• The ordinance provided that the rate of the tax would be 1% ad
is be germane to purpose of law, rest on substantial distinctions, apply
valorem per annum, and that the proceeds of the tax shall accrue to
equally to all members of same class, apply to present and future
the Streets and Bridges Funds of the City, w/c will be used for the
conditions.
repair, maintenance, and improvement of its streets and bridges.
• In this case, the tax imposed is violative of the equal protection clause.
• The Charter of Manila gives the municipal board the power to tax
• When the taxing ordinance was enacted, Ormoc Sugar was the ONLY motor vehicles, but this is limited by the Motor Vehicles Law, which
sugar central in the city. disallows the imposition of fees on motor vehicles, EXCEPT property
• A reasonable classification should be in terms applicable to future taxes imposed by a municipal corp.
conditions as well. The taxing power should not be singular and • THUS, the law allows the City of Manila to impose a property tax on
exclusive as to exclude any subsequent established sugar central from motor vehicles operating within its limits.
the coverage of the tax.
• However, the Association of Customs Brokers contended that the
• A subsequently established sugar central cannot be subject to tax ordinance is void because it actually imposes a license tax in the guise
because the ordinance expressly points to Ormoc Sugar Company Inc of a property tax.
as the entity to be levied upon.
• I: W/n ordinance is valid
Lutz v. Araneta- Uniformity • R: NO, it is void!
• Commonwealth Act 567 or the Sugar Adjustment • The ordinance infringes the rule of uniformity of taxation.
Act, was promulgated in 1940 in response to the imminent threat to • This is because it exacts the tax upon all motor vehicles operating
the sugar industry by the imposition of export taxes upon sugar as within the City of Manila, without distinguishing between those for HIRE
provided in the Tydings-McDuffie Act, and the eventual loss of its and for PRIVATE USE, as well as those REGISTERED IN MANILA and
preferential position in the US market. those REGISTERD OUTSIDE BUT OCCASSIONALLY COME TO MANILA.
• In order to stabilize the sugar industry to prepare • The ordinance imposes the tax ONLY on those vehicles registered in
for the loss, CA 567 provided for an INCREASE in the existing tax on Manila, even if those vehicles which are registered outside the city but
the manufacture of sugar (on a graduated basis), the proceeds of which use its streets also contribute equally to the deterioration of the
which would accrue to the Sugar Adjustment and Stabilization Fund (a roads and bridges.
special fund in the Phil Treasury).
• Walter Lutz, in his capacity as administrator of the Eastern Theatrical Co. Inc v. Alfonso: Equality and Uniformity
Estate of Antonio Ledesma, wanted to recover from the Collector of
Internal Revenue the amount paid by the estate as taxes, alleging that
•
tax imposed on all franchises.
In 1946, the NIRC was amended by RA 39, increasing the franchise tax
• A State may by contract based on consideration exempt the property
of an individual or corporation from taxation either for a specified
to 5%.
period or permanently.
• Lealda paid at first, but later filed a claim for refund w/ the CIR
• And it is equally well settled that the exemption is presumed to be on
contending that under its charter, it was liable to pay only 2% franchise
sufficient consideration, and binds the State if the charter containing it
tax.
is accepted. Such contract can be enforced against the State at the
• It argues that the franchise was a private contract between its instance of the corporation.
predecessor-in-interest on one hand and the Government, on the
other, and as such, cannot be amended by the Tax Code. • 2) Also, the provision conflicts with Section 60 of the Act of Congress of
• Because of CIR’s inaction, it filed a petition w/ the CTA, w/c held Lealda 1 July 1902, which indicate that concessions can be cancelled only by
liable for the 5% franchise tax reason of ILLEGALITY in the procedure by which they were obtained, or
• I: W/n Lealda should pay 5% franchise tax. for FAILURE to comply with the conditions prescribed. The grounds
• R: YES! were not shown or claimed in the case.
• The ruling in other cases (Visayan Electric and Manila Railrod) to the • The important distinction in this case is that there was consideration
effect that special laws or charters may not be amended, altered or between both parties for entering into the contract. From the
repealed, except by consent of all concerned cannot be inovked provisions of the deed, it was not a unilateral grant of a privilege by
because: the Spanish Government.
• 1) Lealda’s charter contains an express provision to the effect that the
same may be altered or repealed by Congress
• Cassanovas undertook to perform some things with respect to the
mining claim in consideration of the privilege. Hence, there was a
• 2) the franchises involved in the cases cited differ substantially from binding contract with reciprocal obligations, which the State cannot
Lealda’s franchise in that those of the Visayan Electric and of the abrogate.
Manila Railroad specifically provided that the franchise tax which the
grantees were required to pay was to be “in lieu of all taxes of any kind American Bible Society v. City of Manila: Free exercise of
levied, established, or collected by any authority whatsoever, now or in Religion
the future”
• Lealda's charter did NOT contain such provision. • The American Bible Society was a missionary society engaged in the
• HISTORY: RA 39 amending the Tax Code became the basic franchise distribution and sale of bibles in the Philippines.
tax law by fixing the tax to be paid by holders of all existing and future • The City Treasurer of Manila informed the Society that it was
franchises. Thus, the provisions of RA 39 should apply to Lealda since conducting the business of general merchandising without a Mayor’s
its franchise was already existing at the time of the adoption of the permit and municipal license, in violation of Ordinances 3000 and
amendment. 2529.
Cassanovas v. Hord: Impairment Clause • Ordinance 3000 requires one to obtain a Mayor’s permit before
engaging in any business, trade, or occupation, except those on which
• In 1897, the Spanish Gov granted Cassanovas certain mines in Ambos the city is not allowed to impose a license or tax.
Camarines. • Ordinance 2529 requires the quarterly payment of license fees based
• The Internal Revenue Act imposes on all mining concessions granted on gross sales from, among others, retail dealers in new merchandise,
prior to 1899 a property tax of P100 + an ad valorem tax of 3% of the such as those engaged in the sale of books.
actual market value of the output of the mines. • The Society paid the fees in protest, claiming that it never received any
• The CIR thus considered Cassanovas to fall under such. profit from the sale of the materials.
• Cassanovas assailed the validity of this provision on the ground that it • It then filed a complaint to declare the municipal ordinances in
impairs the obligations of contracts. Under the decree of the Spanish question unconstitutional for violating the non-establishment and free
Government, the mining claim was subject only to P20 property tax + exercise clause of the Constitution.
ad valorem tax of 3%. The decree provided that no other taxes except • I: W/n the Society is required to pay the fees under the two ordinances.
those mentioned shall be imposed upon mining industries. • R: No, the Society is NOT required to pay.
•
•
I: W/n there was a violation of the impairment clause
R: Yes. Therefore, the provision is void.
• Religious groups and the press are not free from all financial burdens
of government.
Abra Valley College v. Aquino: Exemptions in favor of CIR v Bishop of the Missionary District of the Philippines
educational institutions • The Bishop of the Missionary District of the Phils in the USA is a
corporation sole registered w/ SEC and in charge of managing estate
• Abra Valley College was an educational corporation and institution of properties in the Phils of the Missionary Society. On the other hand, the
higher learning duly incorporated with the SEC in 1948. Missionary District is a duly incorporated and established religious
• The premises of Abra Valley were being used for the educational society. It owns and operates diff hospitals in the Phils namely St.
purposes of the college (as classrooms of its high school and college Luke’s, Brent and St. Stephen’s.
students). • On different dates, the Missionary District in the Philippines received
• In addition, its second floor was the permanent residence of the from the Missionary Society in the US various shipments of materials
President and Director of the College and his family. for the construction and operation of the new St. Luke’s Hospital and
• The ground floor was being rented to a commercial establishment, the the Brent Hospital in St. Stephen’s.
Northern Marketing Corporation. • The Missionary District also received from a certain William Minnis of
• The Municipal and Provincial treasurers issued a Notice of Seizure upon
•
Canada a stove for use of the Brent Hospital.
On these shipments, the CIR levied and collected the total amount of
Abra Valley to satisfy their taxes. They then served a Notice of Sale,
P118k+ as compensating tax.
the sale being held on the same day.
• The Bishop of the Missionary District filed claims for refund of the
• Dr. Millare, then municipal mayor, offered the highest bid and a amount he had paid on the ground that under RA 1916, the materials
certificate of sale was issued to him. received by him were exempt from the payment of compensating tax.
• Abra filed a petition to annul the Notice of Seizure and Notice of Sale. • CIR denied the claim for refund on the ground that the shipments
• CIF ruled in favor of CIR, saying that the property was NOT being used cannot be considered donations because the Missionary District is
exclusively for education purposes merely a branch of the Missionary Society, and are thus identical. It
• I: W/n the property was used exclusively for educational purposes, also alleged that St. Luke's Hospital is not a charitable institution and,
thereby exempting Abra Valley College from payment of tax. therefore, is not exempt from taxation because its admits pay patients.
• R: No. The Secretary of Finance states in his Dept. Order No. 18 that hospitals
• Abra Valley College is not exempt because the property was also being admitting pay patients and charity patients are not charitable
used for commercial purposes. institutions.
NOTE (if Sir asks about how this differs with OTHER cases): The cases relied on
by YMCA do not support its cause. YMCA of Manila v. CIR and Abra Valley
College, Inc. v. Aquino are not applicable, because the controversy in both cases
involved exemption from the payment of property tax, not income tax. Hospital
de San Juan de Dios, Inc. v. Pasay City is not in point either, because it involves
a claim for exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City -- an issue not at all
related to that involved in a claimed exemption from the payment if income
taxes imposed on property leases. In Jesus Sacred Heart College v. Com. Of
Internal Revenue, the party therein, which claimed an exemption from the Lung Center of the Phils v QC
payment of income tax, was an educational institution which submitted • The Lung Center of the Philippines, a non-stock and non-profit entity
substantial evidence that the income subject of the controversy had been established by virtue of PD 1823, was the owner of a parcel of land in
devoted or used solely for educational purposes. On the other hand, YMCA in QC.
the present case had not given any proof that it is an educational institution, or
that of its rent income is actually, directly and exclusively used for educational • In the middle of the lot was a hospital known as the Lung Center of the
purposes. Philippines.
• A big space at the ground floor was being leased to private parties, for
canteen and small store spaces, and to medical practitioners who use
the same as their private clinics for their patients whom they charge
for their professional services.
• Almost ½ of the entire area on the left side of the building along Q Ave
was vacant and idle, while a big portion on the right side, at the corner
of Q Ave and Elliptical Road, was being leased for commercial purposes
to a private enterprise known as the Elliptical Orchids and Garden
Center.
• The Lung Center accepts paying and non-paying patients. It also
renders medical services to out-patients, both paying and non-paying.
• Thus, it is clear from the statutes then in force that there was no • TC ruled in favour of the Municipality, saying it had the power to enact
double taxation involved. One was a PENALTY and the other was a TAX. the Ordinance under the Revised Admin Code (sec 2238), otherwise
known as the General Welfare Clause. It also declared P&G’s right of
•
whether extracted from public or private land.
Thus, a province may not ordinarily impose taxes on stones, sand,
• I: W/n the deed of exchange was a contract of sale
gravel, earth and other quarry resources, as the same are already • R: W/n there was a violation of the right of first refusal entitled to
taxed under the NIRC. Hydro Pipes
• HOWEVER, the province can impose a tax on stones, sand, gravel, • R: NO, the deed of exchange was NOT a contract of sale; thus, there
earth and other quarry resources extracted from public land because it was no violation of the right of first refusal
is expressly empowered to do so under the Local Government Code.
• As to the quarry resources extracted from PRIVATE LAND, it may not do • The "Deed of Exchange" of property between the Pachecos and
so due to the limitations in the LGC (sec 133) in relation to the NIRC Delpher Trades Corporation cannot be considered a contract of sale
(Sec 151). because there was no transfer of actual ownership interests by the
Pachecos to a third party.
• Finally the petitioners cannot invoke the Regalian Doctrine to extend
the coverage to quarry resources because taxes, being burdens are • The Pacheco family merely changed their ownership from one form to
NOT presumed beyond what the applicable statute expressly and another. The ownership remained in the same hands. Hence, Hydro
• The Estate of Toda received a Notice of Assessment from the CIR • Altonaga’s sole purpose of acquiring and transferring title of the
for deficiency income tax for the year 1989 in the amount of P79k+. subject properties on the same day was to create a tax shelter.
• The Estate thereafter filed a protest, which the CIR dismissed. Altonaga never controlled the property and did not enjoy the normal
benefits and burdens of ownership. The sale to him was merely a tax
• The estate filed a Petition for Review before the CTA alleging, ploy, a sham, and without business purpose and economic substance.
among others, that the CIR erred in holding the estate liable for income • To allow a taxpayer to deny tax liability on the ground that the
tax deficiency. Holding that CTA ruled in favour of the Estate. sale was made through another and distinct entity when it is proved
• I:W/n CTA erred in holding that Toda committed no fraud with that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga should be disregarded for
intent to evade the tax on the sale of the properties of Cibelles
income tax purposes. The two sale transactions should be treated as a
Insurance Corporation
single direct sale by CIC to RMI.
• R: YES, CTA erred. Toda committed fraud so his Estate should pay
the P79k+ deficiency income tax for 1989, plus legal interest until the
amount is fully paid.
• Tax avoidance and tax evasion are the two most common ways
used by taxpayers in escaping from taxation:
• Tax avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the taxpayer in
good faith and at arms length.
• Tax evasion, on the other hand, is a scheme used outside of
those lawful means and when availed of, it usually subjects the
taxpayer to further or additional civil or criminal liabilities. It connotes
the integration of three factors: EBU!
o 1) end to be achieved (payment of < taxes)
o 2) bad faith / evil state of mind
o 3) unlawful course of action / failure of action
• All these factors are present in the instant case.
• Prior to the purported sale of the Cibeles property by CIC to
Altonaga, CIC received P40M from from RMI, and NOT Altonaga.
• The P40M was debited by RMI and reflected in its trial balance as
"other inv. – Cibeles Bldg." Another ₱40M was debited and reflected in
RMI’s trial balance as "other inv. – Cibeles Bldg."
• This shows that the real buyer of the properties was RMI, and NOT
Altonaga.
•
sum of P5k+. Negotiations followed but failed.
The BIR thereupon served on the NDC a warrant of distraint and levy to
• In effect, therefore, the imposition of the deficiency taxes on the NDC
is a penalty for its failure to withhold the same from the Japanese
enforce collection of the claimed amount.
shipbuilders, as imposed by the Tax Code.
• The NDC went to the CTA, w/c ruled in favor of the BIR, except for a
slight reduction of the tax deficiency in the sum of P900, representing • LASTLY, the court has stated that in case of the doubt, the one
the compromise penalty. withholding can just the pay tax and ask for refund later when an error
• I: W/n NDC should be held liable for for withholding taxes on the
in the payment exists.
interest remitted to the Japanese corporation Manila Electric Company v Vera
• R: YES.
• The interest remitted to the Japanese shipbuilders in Japan on the
• Meralco was the holder of a franchise to construct, maintain, and
operate an electric light, heat, and power system in the City of Manila
UNPAID BALANCE of the purchase price of the vessels acquired by NDC and its suburbs.
is interest derived from sources within the Philippines and therefore
subject to income tax under the NIRC. • In 1962 and 1963, Meralco imported and received from abroad copper
wires, transformers, and insulators for use in the operation of its
• The law, however, does not speak of activity but of the SOURCE. The business.
Government’s right to levy and collect income tax on interest received • The Collector of Customs, as deputy of the Commissioner of Internal
by foreign corporations not engaged in trade or business within the Revenue, levied and collected a compensating tax.
Philippines is NOT based on the condition that the ACTIVITY be in the
Philippines. • Meralco claimed for refund for the said years, but such claims were
• Instead, it is the RESIDENCE of the obligor who pays the interest that is
either not acted upon or denied by the Commissioner.
material in determining the source of interest. It is not the physical • I: W/n Meralco is exempt from payment of a compensating tax on
location of the securities, bonds or notes or the place of payment. poles, wires, transformers and insulators imported by it for use in the
• The law specifies: “interest derived from SOURCES within the operation of its electric light, heat, and power system
Philippines and interests on bonds, notes or other interest bearing
obligations of residents, corporate or otherwise.” • R: NO. Meralco is not exempt from paying the compensating tax
• In this case, NDC is a Philippine corporation engaged in the business in provided for in Section 190 of the Tax Code.
the Philippines, it is a domestic corporation and resident of the • The purpose of Section 190 of the Tax Code is to “place casual
Philippines. Thus, it is subject to tax. importers, who are not merchants on equal footing with established
• 2) NDC also has no basis for saying that the interest payments were merchants who pay sales tax on articles imported by them.”
obligations of the Republic of the Philippines and that the government • MERALCO’s claim for exemption from payment of the compensating
notes were exempt from taxation. tax is not clear or expressed, contrary to the rule that “exemptions
• The law invoked (RA 1407) did NOT state any exemption on said from taxation are highly disfavored in law, and he who claims
interest on securities. exemption must be able to justify his claim by the clearest grant of
organic or statute law.”
•
NPC assigned to said firm.
Maceda contended that the exemption of NPC from INDIRECT
• In the case of property owned by the state or a city or other public
corporations, the express exemption should not be construed with the
TAXATION was revoked and repealed by the latest amendment to the
same degree of strictness that applies to exemptions contrary to the
NPC charter by PD 938, by the deletion of the phrases “directly or
policy of the state, since as to such property "exemption is the rule and
indirectly” and “on all petroleum products used by the Corporation in
taxation the exception."
the generation, transmission, utilization and sale of electric power”
• The exemption of NPC provided in Section of PD 938 regarding the Maceda v Macaraig MR
payments of “all forms of taxes, etc” cannot be interpreted to include
indirect tax exception since tax statutes must be strictly construed • Unfazed by the Decision that the SC decision, Maceda filed a motion for
against the one claiming the exemption must be strictly construed reconsideration.
against the one claiming the exemption • In the process, a hearing was held on July 9, 1992 where all parties
• I: W/n NPC is liable for indirect tax presented their respective arguments.
• R: NO, NPC is NOT liable for indirect tax • However, the MR was denied.
• Indirect taxes are taxes primarily paid by persons who can shift the
burden upon someone else. For example, the excise and ad valorem • 1) What kind of tax exemption privileges does NPC have?
taxes that oil companies pay to the BIR upon removal of petroleum • Maceda contended that PD 938 repealed the indirect tax exemption of
products from its refinery can be shifted to its buyer, like the NPC, by NPC as the phrase "all forms of taxes etc.," in its section 10, amending
adding them to the “cash” and/or “selling price”. Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not
expressly include "indirect taxes."
PLDT v City of Davao • The acceptance of PLDT’s theory would result in absurd
consequences. PLDT’s theory would require that, to level the playing
• PLDT applied for a Mayor’s Permit to operate its Davao Metro
field, any “advantage, favor, privilege, exemption, or immunity”
Exchange.
granted to Globe must be extended to all telecommunications
• City of Davao did not act on the application, pending PLDT's unpaid companies, including Smart.
local franchise tax of P3M+ (for the first to fourth quarter of 1999).
• This could not have been the intent of Congress in enacting §23 of Rep.
• PLDT protested the assessment and requested a refund of the Act 7925. PLDT’s theory will leave the Government with the burden of
franchise tax paid by it for the year 1997 and the first to the third having to keep track of all granted telecommunications franchises, lest
quarters of 1998. some companies be treated unequally.
• Before, PLDT enjoyed tax exemption under Section 12 of RA 7082 • The fact is that the term “exemption” in §23 is too general. A cardinal
(PLDT shall pay a franchise tax equivalent to 3% of all gross receipts of rule in statutory construction is that legislative intent must be
its business “in lieu of all taxes on this franchise or earnings thereof). ascertained from a consideration of the statute as a whole and not
merely of a particular provision. The thrust of R.A. No. 7925 is to
• However, this exemption was withdrawn by the Local Government promote gradually the deregulation of the entry, pricing, and
Code. operations of all public telecommunications entities and thus promote
• PLDT contended that it was still exempt from the payment of franchise
•
a level playing field in the telecommunications industry.
There is nothing in the language of §23 or in the proceedings of
tax based on an opinion by the Bureau of Local Government Finance
(BLGF - Department of Finance) w/c amended Section 23 of RA 7925 Congress in enacting this law which shows that it contemplates the
(Public Telecommunications Policy Act) in effect restored its grant of tax exemptions to all telecommunications entities, including
exemptions from local taxes. those whose exemptions had been withdrawn by the LGC.
• It states that any “advantage, favor, privilege, exemption, or • 2) Also, the BLGF is NOT an administrative agency whose findings on
immunity” granted to existing franchises shall ipso facto become part questions of fact are given weight and deference in the courts. It was
of previously granted telecommunications franchises. created merely to provide consultative services and technical
assistance to local governments and the general public on local
• PLDT claims that Smart and Globe enjoy exemption from the payment taxation, real property assessment, and other related matters, among
of the franchise tax by virtue of their legislative franchises. others. The question raised by PLDT is a legal question, to wit, the
interpretation of §23 of R.A. No. 7925. This is outside BLGF's
• Relying on the BLGF opinion, PLDT then argues that because Smart competence.
and Globe are exempt from the franchise tax, it follows that it must • 3) Lastly, PLDT failed to present any proof that Globe and Smart were
likewise be exempt from the tax being collected by the City of Davao enjoying local franchise and business tax exemptions.
because the grant of tax exemption to Smart and Globe ipso facto
extended the same exemption to it. *Sea-Land Services Inc. v. CA: International Comity
• City Treasurer Barcelona denied PLDT's protest and claim for tax
• Thus the ownership of the land passed from the Republic of the • Robert Cathey was a US-born citizen who became a US Navy employee
Philippines to the MCIA. As MCIA owns the said land, it CAN become the stationed in Makati, MM while John Garrison, a Phil-born American citizen,
subject of levying for the nonpayment of taxes. was assigned to Subic after being repatriated to the US and joining the
• Furthermore, MCIA is a “taxable person” under its Charter, and was military.
only exempted from the payment of real property taxes. The grant of • THUS, they were all citizens of the United States, holders of American
the privilege only in respect of this tax is conclusive proof of the passports and admitted as Special Temporary Visitors under Section 9 (a)
legislative intent to make it a taxable person subject to all taxes, visa of the Philippine Immigration Act of 1940, as amended.
except real property tax.
• Finally, even if the petitioner was originally not a taxable person for • They were civilian employees in the U.S. Military Base in the Philippines in
purposes of real property tax, it had already become, even if it be connection with its construction, maintenance, operation, and defense; and
conceded to be an “agency” or “instrumentality” of the Government, a incomes were solely derived from salaries from the U.S. government by
taxable person for such purpose in view of the withdrawal in the last reason of their employment in the U.S. Bases in the Philippines.
paragraph of Section 234 of exemptions from the payment of real
property taxes applies to the MCIAA.
• The CIR filed a petition for review w/ the SC, contending that the CTA erred
in holding that Robertson, etc. were, by virtue of Article XII, Par 2 of the RP-
• NOTE: A distinction should also be made between the phrases US Military Bases Agreement of 1947, exempt from Philippine income tax.
“National Government” and “Republic of the Philippines”, as they are • CIR argues that the laws granting tax exemptions must be construed strictly
not interchangeable.“Republic of the Philippines” is broader and against the taxpayer, and that the burden of proof is on Robertson, etc. to
synonymous with “Government of the Republic of the Philippines” establish that their residence in the country is by reason only of their
defined as the “corporate governmental entity through which the employment in connection with the construction, maintenance, operation or
functions of government are exercised throughout the Philippines, defense of the U.S. Bases in the Philippines (as provided for under Article
including, save as the contrary appears from the context, the various XII, Par. 2 of the RP-US Military Bases Agreement of 1947).
arms through which political authority is made affective in the • According to CIR, they failed to discharge this burden, given that they own
Philippines, whether pertaining to the autonomous regions, the residential properties in the Phils in their names.
provincial, city, municipal or barangay subdivisions or other forms of • I: W/n they are exempted
local government.” These “autonomous regions, provincial, city, • R: YES, they are exempted.
municipal or barangay subdivisions” are the political subdivisions. On
the other hand“National Government” refers “to the entire machinery • An examination of the words used and circumstances in the Agreement
of the central government, as distinguished from the different forms of shows the basic intent "to exempt all U.S. citizens working in the Military
local governments.” The National Government then is composed of the Bases from the burden of paying Philippine Income Tax without distinction
three great departments: the executive, the legislative and the judicial. as to whether born locally or born in their country of origin."
An “agency” of the Government refers to “any of the various units of
the Government, including a department, bureau, office,
• In this case, respondents and their families upon repatriation in 1945 had
instrumentality, or government-owned or controlled corporation, or a since acquired domicile and residency in the United States, and obtained
local government or a distinct unit therein.” An “instrumentality” refers employment with the United States Federal Service.
to “any agency of the National Government, not integrated within the • It was not until after several years of a hiatus that they returned to the
department framework, vested with special functions or jurisdiction by Philippines by reason of duties with the US military bases in the Philippines
law, endowed with some if not all corporate powers, administering where they were gainfully employed by the U.S. Federal Government.
special funds, and enjoying operational autonomy, usually through a • The situation of the petitioners is of no different mold as of the rest of the
charter. This term includes regulatory agencies, chartered institutions U.S. civilian employees who continued to enjoy the benefits of tax
and government-owned and controlled corporations.” exemption under the Agreement, Petitioners' circumstances before the
questioned ruling remained obtaining thru the taxable years 1969-1972.
CIR v Robertson
•
taxpayer even if there is an existing assessment against the latter
R: YES.
• The authority of the Minister of Finance (now the Secretary of Finance),
in conjunction with the Commissioner of Internal Revenue, to promulgate all
• What was granted under PD 213 is not just an exemption but an needful rules and regulations for the effective enforcement of internal
amnesty, and the Government is estopped from collecting the revenue laws cannot be controverted. Neither can it be disputed that such
difference between the deficiency tax assessment and the amount rules and regulations, as well as administrative opinions and rulings,
already paid by them as amnesty tax. ordinarily should deserve weight and respect by the courts. Much more
fundamental than either of the above, however, is that all such
• Being in the nature of a general pardon/intentional overlooking of the issuances must not override, but must remain consistent and in
State of its authority to impose penalties on persons otherwise guilty of harmony with, the law they seek to apply and implement.
evasion or like violations, it constitutes absolute forgiveness or a Administrative rules and regulations are intended to carry out,
waiver by the Government of its right to collect what would otherwise neither to supplant nor to modify, the law.
be due it.
• The findings of respondent appellate court that the deficiency income
• EO 41 did not provide for the assessment made prior to its
taxes were paid by the spouses and accepted by the government promulgation in the exclusionary clause, as CIR argued. The conclusion
under PD 213 are entitled the highest respect. In case of doubt, tax is clear, and it is that the executive order has been designed to be in the
statutes are to be construed strictly against the Government and nature of a general grant of tax amnesty subject only to the cases
liberally in favor of the taxpayer. specifically excepted by it.
• Sec. 4. Exceptions. — The following taxpayers may not avail
CIR v CA & ROH (Jan 20, 1995) themselves of the amnesty herein granted:
• August 13, 1986, CIR assessed ROH Auto Products, Inc. with income a) Those falling under the provisions of Executive
deficiency and business taxes for fiscal years that ended September Order Nos. 1, 2 and 14;
30, 1981 and September 30, 1982 in an aggregate amount of b) Those with income tax cases already filed in Court
P1,410,157.71. as of the effectivity hereof;
• August 22, 1986, when the President still has legislative powers, c) Those with criminal cases involving violations of the
income tax already filed in court as of the effectivity filed in
promulgated EO No. 41, declaring a one-time tax amnesty on unpaid
court as of the effectivity hereof;
income taxes, later amended to include estate and donor's taxes
d) Those that have withholding tax liabilities under the
and taxes on business, for the taxable years 1981 to 1985.
National Internal Revenue Code, as amended, insofar as the
said liabilities are concerned;
• Acting upon an authority granted by the office of the President, the • In this case, disbursement of public funds was only made in 1975 when
Province was able to negotiate with Ortigas & Co., Ltd. (Ortigas) for the the Province bought the lands from Ortigas at P110 per square meter
acquisition of 4 parcels of land in Ugong Norte, Pasig. in line with the objectives of P.D. 674.
• The projected construction, however, never materialized because of
the decimation of the Province's resources brought about by the
• The AGL never referred to such purchase as an illegal disbursement of
public funds but focused on the alleged fraudulent reconveyance of
creation of the Metro Manila Commission (MMC) in 1976.
said property to Ortigas because the price paid was lower than the
• 12 yrs later, with the property lying idle and the Province needing prevailing market value of neighboring lots. The first requirement,
funds to propel its 5-years Comprehensive Development Program, the therefore, which would make this petition a taxpayer's suit is absent.
then incumbent Board passed Resolution No. 87-205 authorizing the
Governor to sell the same.
• As to the 2nd ground (w/n petitioner is directly affected), undeniably, as
a taxpayer, AGL would somehow be adversely affected by an illegal
• The said property was eventually sold to Valley View Realty use of public money.
Development Corporation (Valley View) for P135M+, where P30M was
given as downpayment.
• When, however, no such unlawful spending has been shown, as in the
case at bar, AGL, even as a taxpayer, cannot question the transaction
• Because of this, Ortigas filed a case of rescission against the Province validly executed by and between the Province and Ortigas for the
because the Province violated the provisions of their contract which simple reason that it is not privy to said contract.
• 1) As taxpayers, petitioners may not file the instant petition, for • Vicente Madrigal and Susana Paterno were married prior to
nowhere therein is it alleged that tax money is being illegally spent. January 1, 1914. The marriage was contacted under the provisions of law
The act complained of is the inaction of the COMELEC to call a special concerning conjugal partnerships.
election, as is allegedly its ministerial duty under the constitutional
provision above cited, and therefore, involves no expenditure of public
• On February 1915, Vicente Madrigal filed a sworn declaration
w/ the CIR showing that his total net income for the year 1914 is P296k.
funds.
• It is only when an act complained of, which may include a legislative • Subsequently, Madrigal submitted the claim that the P296k
enactment or statute, involves the illegal expenditure of public money did NOT represent his income for 1914, BUT it was in fact the income of the
that the so-called taxpayer suit may be allowed. conjugal partnership, and that in computing and assessing the additional
• What the case at bar seeks is one that entails expenditure of public
income tax provided for by the Act of Congress of Oct. 3, 1913, the income
declared should be divided: ½ from Madrigal and ½ from Paterno.
funds which MAY BE illegal because it would be spent for a purpose
• This question was submitted to the Atty. General, who in an
that of calling a special election has no authority either in the
opinion ruled in favour of Madrigal.
Constitution or a statute.
• The revenue officers were still unsatisfied, so they forwarded
• 2) As voters, neither have petitioners the requisite interest or this opinion to Washington for a decision by the US Treasury Dept.
personality to qualify them to maintain and prosecute the present • The US CIR reversed the opinion of the Atty. General.
petition.
• The unchallenged rule is that the person who impugns the validity of a
• Madrigal paid under protest, then he filed an action in CFI
statute must have a personal and substantial interest in the case such Manila against CIR and Deputy CIR for recovery of P3.7k. alleged to have
that he has sustained, or will sustain, direct injury as a result of its been wrongfully and illegally assessed and collected by the CIR, under the
enforcement. Income Tax Law.
• CIR argued that the taxes imposed by the Income Tax Law
• In this case, the alleged inaction of the COMELEC to call a special are taxes upon INCOME and NOT upon capital and property. The fact that
election to fill-up the existing vacancies in the Batasan Pambansa, Madrigal’s marriage was under conjugal partnership has no bearing on
standing alone, would adversely affect only the generalized interest of income considered as income.
all citizens. • The answer of the defendants sets forth the basis of
• 3) It is obvious that the holding of special elections in several regional
defendants’ stand in the following way: The income of Madrigal and Paterno
for the year 1914 was made up of 3 items:
districts where vacancies exist, would entail huge expenditure of 1. 362k – profits made by Madrigal in coal and shipping business
money. Only the Batasan Pambansa can make the necessary 2. 4k – profits made by Paterno in her embroidery business
appropriation for the purpose, and this power of the Batasan Pambansa 3. 16k – profits made by Madrigal in pawnshop business
may neither be subject to mandamus by the courts much less may
COMELEC compel the Batasan to exercise its power of appropriation.
• ECD is a disbursement to the stockholder of accumulated earnings, and • Limpan duly filed its 1956 and 1957 income tax returns, reporting
the corp parts w/ AL INTEREST on it. therein net incomes of about P3k+ and P11k+ respectively, for which it
paid the corresponding taxes for such.
• SD, on the other hand, involves NO disbursement and parts w/
NOTHING. • Later on, the BIR conducted an investigation of the said income tax
• The stockholder receives NOT an actual dividend but certificate of returns and discovered that Limpan had underdeclared its rental
incomes by P20k and P81k during the said years, and had claimed
stock which simply evidences his interest in the entire capital,
excessive depreciation of its buildings in the sums of P4k+ and P16k+
including such as by investment of accumulated profits has been
covering the same period.
added to the original capital. They are not income to him, but
represent additions to the source of his income, namely, his invested • CIR thus issued its letter-assessment and demand for payment of
capital. deficiency income tax and surcharge against Limpan, in the amount of
• Until the dividend is declared and paid, the corporate profits still P30k+.
belong to the corporation, not to the stockholders, and are liable for
corporate indebtedness • Limpan asked CIR for reconsideration of the assessment, but CIR
denied.
• Justice Wilkin: "A dividend is a corporate profit set aside, declared, and
ordered by the directors to be paid to the stockholders on demand or • Limpan filed its petition for review before the CTA. During the trial, it
at a fixed time. Until the dividend is declared, these corporate profits came out that Limpan had undeclared more than ½ of the amount
belong to the corporation, NOT to the stockholders, and are liable for (P12,100.00 out of P20,199.00) found by the BIR examiners as
corporate indebtedness. unreported rental income for the year 1956 and more than 1/3 of the
amount (P29,350.00 out of P81,690.00) ascertained by the same
• A careful reading of ACT 2833 will show that, while it permitted a tax examiners as unreported rental income for the year 1957 during the
upon income, the same provided that income shall include gains, trial. Thus, CTA upheld CIR’s assessment.
profits, and income derived from salaries, wages, or
compensation for personal services, as well as from interest, • I: W/n CTA was correct in holding that Limpan had unreported rental
rent, dividends, securities, etc. incomes for the years 1956 and 1957
• R: YES.
• Thus, income received as dividends IS taxable as an income but an • Limpan admitted through its own witness (Secretary-Treasurer Solis)
income from "dividends" is a very different thing from receipt of a that it had undeclared more than one-half ½ of the amount found by
"stock dividend." INCOME FROM DIVIDENDS is the actual receipt of BIR examiners and more than 1/3 ascertained by the same examiners
profits while STOCK DIVIDEND is the a receipt of a representation of as unreported rental income for the year 1957, contrary to its original
•
floating rate ordained by the BIR ruling No. 70-27.
The said ruling states that:
• Thus, Revenue Memorandum Circ. Nos. 7-71 and 41-71 were
promulgated to prescribe a uniform rate of exchange from US dollars
o FROM Jan.-Feb. 1970 the conversion rate is P3.90 to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the
years 1970 and 1971, respectively. These circulars were validly
o FROM Feb.-Dec. 1970 the conversion rate is P6.25
promulgated and are presumed to be valid until revoked by the
• Petitioners from the second case also filed using the same conversion Secretary of Finance himself. Thus, the petitioners were correctly taxed
rate but amended their income tax returns in 1973 and used the par by the Commissioner.
• Personal and additional exemptions are considered as deductions from • ME filed an MR attributing its failure to submit the cash slips to the
gross income. Deductions for income tax purposes partake of the inadvertence of its independent auditor, and the court should have
nature of tax exemptions, hence strictly construed against the accepted other evidence presented such as special record books. It
taxpayer and cannot be allowed unless granted in the most explicit also argued that the tax credit should be based on the actual discount
and categorical language too plain to be mistaken. and not on the acquisition cost of the medicines.
• Thus, the CA decision construing the word “cost” as the acquisition Bank of America NT & SA v CA
cost of medicines was REVERSED and SET ASIDE. Accordingly, M.E. is
entitled to a tax credit equivalent to the actual 20% sales discount it • Bank of America was a foreign corporation duly licensed to engage in
granted to qualified senior citizens. business in the Philippines.
• HOWEVER, SC did NOT agree w/ lower courts on what ME is entitled to. • It paid 15% branch profit remittance tax on profit from its regular
RA 7432 expressly provides that the sales discount may be claimed as banking unit operations (about P7M+) and on profit from its foreign
TAX CREDIT, not as tax refund. currency deposit unit operations (about P445k+). The tax was based
on net profits after income tax w/o deducting the amount
• In this case, ME originally prayed for a tax refund for its tax corresponding to the 15% tax.
overpayment for 1995. The CTA and the CA granted the desired
refund, albeit at a lower amount due to their interpretation, erroneous • Later, Bank of America claimed a refund from the BIR of the portion of
as it turned out to be, of the term “cost.”ン payment corresponding to the 15% branch profit remittance tax, given
that the tax should have been computed on the basis of profits
• It must be noted that on Feb 26, 2004, RA 9257, or The Expanded ACTUALLY remitted, and NOT on the amount BEFORE profit remittance
Senior Citizens Act of 2003, amending RA 7432, was signed into law, tax.
ushering in, upon its effectivity on March 21, 2004, a new tax
• CTA upheld petitioner bank in its claim for refund, but CA set aside CTA
decision.
• The phrase "any profit remitted abroad" should be construed to • The RP-US Tax Treaty provides that:
mean the profit to be remitted. Hence, there must be an actual o Royalties derived by a resident of one of the Contracting
remittance, as distinguished from profit which is remittable. States from sources within the other Contracting State may
• EXAMPLE: If the total branch profit is P115k but the amount to be be taxed by both Contracting States.
remitted is P100k, then tax base should be P100k. o However, the tax imposed by that Contracting State shall not
• Moreover, the 15% profit remittance tax imposed by Section 24 (b)(2) exceed:
of the Tax Code is an income tax, it is therefore clear that the same is o In the case of the United States, 15% of the gross amount of
non-deductible from the gross (profit) income. Inasmuch as the tax is
the royalties, and in the case of the Philippines, the least of
an exaction on profit realized for remittance abroad, the deduction
25% of the gross amount of the royalties,
thereof as an expense is not sustained by law nowhere in Section 30 of
o 15% of the gross amount of the royalties, where the royalties
the Tax Code is it provided that the same is deductible. Besides
are paid by a corporation registered with the Philippine Board
deductions from gross income are masters of legislative grace, what is
of Investments and engaged in preferred areas of activities;
not expressly granted by the law is deemed withheld.
and
• Considering that the 15% branch profit remittance tax is imposed and
o The lowest rate of Philippine tax that may be imposed
collected at source, necessarily the tax base should be the amount
on royalties of the same kind paid under similar
actually applied for by the branch with the Central Bank of the
circumstances to a resident of a third State.
Philippines as profit to be remitted abroad.
• It is desired that this Circular be given as wide publicity as possible. • The RP-Germany Tax Treaty provides that such royalties may also be
taxed in the Contracting State in which they arise, and according to
• Remitted = refers to the total branch profits w/c would be sent abroad the of that State, but the tax so charged shall not exceed 10% of the
and NOT total profits of the branch (not all of w/c need to be sent gross amount of royalties from the use of a patent, trademakrk, etc.
abroad) • The RP-West Germany Tax Treaty also allows tax credit of 20% of the
• THUS, the company is entitled to a refund or tax credit in the amount gross amount of such royalties against German income and
of P152,690.61 corresponding to overpaid branch profit remittance corporation tax for the taxes payable in the Philippines on such
taxes during the years from 1981 to 1983. royalties where the tax rate is reduced to 10 to 15% under such treaty.
• As to the 1984 and 1985 branch profit remittance taxes, no refund or
tax credit is due the petitioner since the latter did not present any • I: W/N SC Johnson USA is entitled to the “most favored nation” tax rate
proof of passive income it received during the period. of 10% on royalties as provided in the RP-US Tax Treaty in relation to
the RP-Germany Tax Treaty
•
as that in eh tax treaty under which the taxpayer is liable.
Both Articles 13 of the RP-US Tax Treaty and Article 12 of the RP-
• In reply to petitioner's query, Acting Commissioner Ruben
Ancheta ruled that the dividends received by Marubeni from AG&P are
Germany Tax Treaty speaks of tax on royalties for the use of
not income arising from the business activity in which Marubeni is
trademark, patent, and technology. The entitlement of the 10% rate of
engaged. Accordingly, said dividends if remitted abroad are not
US firms despite the absence of a matching credit (20% for royalties)
considered branch profits for purposes of the 15% profit remittance tax
would derogate from the design behind the most grant equality of
imposed by Section 24 (b) (2) of the Tax Code, as amended.
international treatment since the tax burden laid upon the income of
the investor is not the same in the two countries. THE SIMILARITY IN • Petitioner claimed for the refund or issuance of a tax credit
THE CIRCUMSTANCES OF PAYMENT OF TAXES IS A CONDITION FOR THE "representing profit tax remittance erroneously paid on the dividends
ENJOYMENT OF MOST FAVORED NATION TREATMENT PRECISELY TO remitted by AG&P to the head office in Tokyo.
UNDERSCORE THE NEED FOR EQUALITY OF TREATMENT. • Commissioner of Internal Revenue denied petitioner's claim
for refund/credit. The Court of Tax Appeals affirmed. Hence, the
• RP-US Tax Treaty DOES NOT GIVE A MATCHING CREDIT OF 20% instant petition for review.
FOR THE TAXES PAID TO THE PHILIPPINES ON ROYALTIES AS • It is the argument of petitioner corporation that following the
ALLOWED UNDER the RP-West Germany Tax Treaty, SC Johnson principal-agent relationship theory, Marubeni Japan is likewise a
cannot be deemed entitled to the 10% granted under the latter treaty resident foreign corporation subject only to the 10 % intercorporate
for the reason that there is no payment of taxes on royalties under final tax on dividends received from a domestic corporation in
similar circumstances. accordance with Section 24(c) (1) of the Tax Code of 1977.
• Tax refunds are in the nature of tax exemptions. As such they are • Public respondents, however, are of the contrary view that
regarded as in derogation of sovereign authority and to be construed Marubeni, Japan, being a non-resident foreign corporation and not
strictissimi juris against the person or entity claiming exemption. The engaged in trade or business in the Philippines, is subject to tax on
burden of proof is upon him who claims exemption in his favor and he income earned from Philippine sources at the rate of 35 % of its gross
• At one point, they reduced their capital to P250k with the approval of • In 1981, CIR assessed Antonio Tuason, Inc. 25% surtax on
the SEC but this reduction was never implemented. unreasonable accumulation of surplus for the years 1975 to 1978 by
virtue of Section 25 of the Tax Code, which levies an additional tax on
• When business began to flourish, they increased their capital to P1M corporation improperly accumulating profits or surplus.
again with SEC approval in 1958. • CIR based his determination on the ground that:
• Wine Merchants invested in several companies including Acme a. Antonio Tuason, Inc. was a mere holding or investment
Commercial Co. Union Insurance of Canton, and bought shares in Wack company for the corporation did not involve itself in the
• Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides • In this case, the subject advertising expense was of the second kind.
that there shall be allowed as deduction from gross income all ordinary Not only was the amount staggering; the respondent corporation itself
•
exempt income.
In 1951, Aguinaldo Industries filed separate returns for its fishing and
• Atlas protested and asked for its reconsideration.
furniture divisions. • Later, a ruling was issued by the Secretary of Finance, who clarified
• The BIR investigating officers found that AIC Fish Net deducted from its that the exemption in RA 909 applied to all mines, not just gold mines.
gross income the amount of 61k as additional renumeration paid to the • The CIR recomputed the assessment. It eliminated the P546k
officers of Aguinaldo Industries. deficiency and reduced the P215k deficiency to P39k.
• The examiner found that this money was taken from the sale of the
Muntinlupa property, an isolated transaction not in the usual course of • Atlas still appealed to the CTA and assailed the disallowance of the
business. Thus, the examiner recommended that the amount be following items as deductible from their gross income: transfer agent’s
disallowed as a deduction. fee, stockholder’s relation service fee, US stock listing expenses,
• AIC contends that the money was paid as an allowance or bonus to its suit expenses and provision for contingencies.
officers as provided in its by-laws. • The CTA allowed the aforementioned deductions except for the items
• CTA upheld the CIR’s decision and held Aguinaldo Industries liable for titled stockholder’s relation services and suit expenses (only partial
17k in back taxes. disallowance, from P23k to P13k to finally, as deduced by the CTA,
• AIC argues that the profit derived from the sale of the Muntinlupa land P6k).
is not taxable for it is tax exempt under RA 901 as a new and • Since the exemption was only good until the first quarter of 1958, ¾ of
necessary industry. the net taxable income of petitioner is subject to income tax. Hence, it
assessed ¾ of Atlas’ promotion fees (amounting to P25k for the whole
• I: W/n the bonus given to Aguinaldo’s officers was an ordinary and year) with income tax.
necessary business expense and therefore deductible • Both parties appealed to the SC regarding the decision of the CTA.
• R: No, it was not deductible. • I/ R:
• The records show that the sale effected through a broker who got a
commission and there is no evidence of any service rendered by the • 1. Were the expenses paid for the services rendered by a PR
officer. firm to be considered allowable deduction as business
• In computing net income, there shall be allowed as deductions “all expense?
ordinary and necessary expenses paid or incurred during the taxable • NO, it is considered a capital expenditure. This is based on US
year in carrying on any trade or business including reasonable jurisprudence where it was held that expenses incurred to create a
allowances for personal services actually incurred.” favorable image does NOT make it a business expense.
• NO,litigation expenses incurred in defense or protection of title are 2. The sale of the Batangas land is only an isolated transaction and it was
CAPITAL in nature and not deductible. It is considered a part of the done at the request of the government for lack of funds to pay the said
cost of the property. property. The Municipality of Nasugbu even passed a resolution
expressing gratitude to the Roxas y Cia. ”In fine, Roxas y Cia.
ROXAS v CTA cannot be considered a real estate dealer for the sale in
question. Hence, pursuant to Section 34 of the Tax Code the
• Antonio, Eduardo and Jose formed a partnership, Roxas y Compania, to lands sold to the farmers are capital assets, and the gain
manage the 19,000 hectares agricultural lands in Nasugbu, Batangas, a derived from the sale thereof is capital gain, taxable only to
residential lot in Malate, Manila and shares of stocks in different the extent of 50%.”
corporations acquired from their ancestors. 3. Deductions must be proven by the taxpayer to be reasonable, ordinary
• After the WWII, the Government persuaded the Roxas brothers and and necessary and must be incurred in connection to the business.
agreed to sell 13,500 hectares of their property in Batangas to be • Tickets for banquet in Honor of Sergio Osmena – no connection to
distributed by the government to the actual occupants as part of the the business
government’s land reform program, for P2,079,048.47 plus P300,000.00 for • Civic Groups (organized by Herald) for needy – Herald not a
survey and subdivision expenses. corporation but an association for charity
• However, the government did not have enough funds to pay them. So • Contributions (Our Lady of Fatima at FEU) – FEU gives dividends
they make arrangement for the Rehabilitation Finance Corp. to advance and Fatima has not shown to belong to Church
1.5M as loan with the land as collateral. Roxas y Cia. will then pay its loan A contribution to the government entity is valid as deductions if used
from the proceeds of the yearly amortizations paid by the farmers. EXCLUSIVELY for public purposes.
• Antonio and Eduardo got married, leaving Jose to stay in the house for • Christmas Funds (Pasay & Baguio Police, Pasay Fireman) – Not for
which he paid rentals to Roxas y Cia. the amount of P8000/yr. public purpose, gifts to families of public officials
• The CIR assessed the company deficiencies in real estate dealer’s tax • Contributions (Manila Police Trust Fund) – intended to be used for
on the house rentals from Jose, securities dealer’s tax from profits from the public purpose
purchase and sale of securities and the unreported net profits from the sale
of the Batangas Land. It also disallowed deductions claimed by the
brothers. Roxas protested the assessment. ZAMORA v CIR
• Issues: Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila,
1. W/N Roxas y Cia. is liable for payment of fixed real estate dealer’s tax? filed his income tax returns the years 1951 and 1952. The Collector of Internal
YES Revenue found that he failed to file his return of the capital gains derived from
2. W/N the profit derived from the sale of Batangas land considered an the sale of certain real properties and claimed deductions which were not
ordinary gain 100% taxable?NO allowable. The collector required him to pay the deficiency income tax for the
3. W/N the expenses claimed can be included as deductions? years 1951 and 1952. On appeal by Zamora, the CTA modified the decision
• R: The Roxas y Cia. is liable to pay fixed tax as real estate
appealed from and ordered him to pay the reduced total sum of P30,258.00
(P22,980.00 and P7,278.00, as deficiency income tax for the years 1951 and
dealer from the rentals of Jose but the Batangas land is considered a capital
1952, respectively), pursuant to section 51(e), Int. Revenue Code. With costs
asset 50% taxable only. The contributions to the Manila Police trust fund
against petitioner. Having failed to obtain a reconsideration of the decision,
was allowed as deductions. The Christmas funds to Pasay Police, Pasay
Mariano Zamora appealed.
• Also, Calanoc denies having received the stadium fee of P1k which is • CTA: upheld the assessment made by the CIR. CTA ruled that while the
not included in the receipts, and claims that if he did, he can not be bonuses given to the non-resident officers are reasonable, bonuses given to
made to pay almost seven times the amount as amusement tax. the resident officers and employees are, quite EXCESSIVE.
HOWEVER, evidence showed that while he did not receive said stadium
fee, amount was paid by the O-SO Beverages directly to the stadium
• I/R:
for advertisement privileges in the evening of the entertainments. • 1) W/n the reasonableness of the amount of bonuses given to resident officers
Thus, Calanoc had no right to include it as expense items. IT seems and employees should follow the same pattern for determining the
that the P1k went into his pocket and was NOT accounted for. reasonableness of the amount of bonuses given to non-resident officers- YES
• Calanoc also admitted that he could not justify the other expenses, • GR: Bonuses to employees made in good faith and as additional compensation
for the services actually rendered by the employees are deductible, provided
such as those for police protection and gifts. He claims further that the
such payments, when added to the stipulated salaries, do NOT exceed a
accountant who prepared the statement of receipts is already dead
REASONABLE compensation for the services rendered.
and could no longer be questioned on the items contained in said
statement. • The condition precedents to the deduction of bonuses to employees are: (CPR)
(1) the payment of the bonuses is in fact compensation;
• MOREOVER, the payment of P461.65 for police protection is (2) it must be for personal services actually rendered; and
illegal as it is a consideration given by the Calanoc to the police for (3) the bonuses, when added to the salaries, are reasonable when
the performance by the latter of the functions required of them to be measured by the amount and quality of the services performed with
rendered by law. relation to the business of the particular taxpayer
• There is no fixed test for determining the reasonableness of a given bonus as
compensation. However, in determining whether the particular salary or
Kuenzle Streiff v CIR compensation payment is reasonable, the situation must be considered as a
• Kuenzle & Streiff, Inc is a domestic corporation engaged in the importation of whole.
textiles, hardware, sundries, chemicals, pharmaceuticals, lumbers, groceries,
wines and liquor; in insurance and lumber; and in some exports.
• In this case, Kuenzle contended that it is error to apply the same measure of
reasonableness to both resident and non-resident officers because the nature,
• When Kuenzle filed its Income Tax Return with CIR, it deducted from its gross
extent and quality of the services performed by each with relation to the
income certain items which were the:
business of the corporation widely differ.
1. salaries, directors' fees and bonuses of its non-resident president
& VP; • According to the corp’s management, the non-resident officers rendered the
2. bonuses of its resident officers and employees; and same amount of efficient personal service and contribution to deserve equal
3. interests on earned but unpaid salaries and bonuses of its officers treatment in compensation and other emoluments.
and employees.
• CIR however DISALLOWED the deductions of all 3 items enumerated above • Since the non-resident president and VP gave the same amount of duties and
and assessed Kuenzle for deficiency income taxes. services as compared to resident officers and employees (nonresidents gave
their full time and attention to the services of the corporation, directed and
supervised the business operations, were policy-makers, etc.), there is NO
TAXES
CIR v Lednicky
*NOTE: There are 3 cases involved here, all of which were elevated to the SC
CIR v Vda. De Prieto and were decided jointly given that they involve the same parties and issues.
• In 1945, Consuelo de Prieto conveyed by way of gifts to her four The Tax Court decided for the spouses, but SC reversed the decision.
children real property with a total assessed value of about P890k.
• After the filing of the gift tax returns, CIR appraised the real property GR 18286: V. E. Lednicky and Maria Valero Lednicky, were husband and wife,
donated for gift tax purposes at P1M+ and assessed the total sum of both American citizens residing in the Philippines, and have derived all their
about P117k as donor's gift tax, interest and compromises due income from Philippine sources. In 1957, the spouses filed their income tax
thereon. return for 1956 and correspondingly paid taxes amounting to about P320k+. In
1959, the spouses filed an amended income tax return for 1956. The
• The donor's tax was paid by de Preito, but since the sum of about P55k
amendment consisted in a claimed deduction paid in 1956 to the US
represnted the total interest on account of deliquency, she calimed the
government as federal income tax for 1956. Simultaneously with the filing of the
P55k as deduction from her income tax return.
amended return, the spouses requested the refund. When the Commissioner of
• CIR, however, disallowed the claim and assessed de Prieto deficiency Internal Revenue failed to answer the claim for refund, the spouses filed a
income tax due on the P55k, surcharge and compromise for the late
petition with the Court of Tax Appeals.
payment. GR 18169: The same thing was done in 1956, when the spouses filed their
• I: W/n interest on LATE PAYMENT of donor's tax be claimed as domestic income tax return for 1955 and later on filed an amended income tax
deduction in income tax return return. On the basis of this amended return, the spouses paid about P570k+.
• R: YES.
• In its 1982 annual income tax return, Philex deducted from its gross • Philippine Refining Company (PRC) was assessed by Commissioner of
income the amount of P112M as "loss on settlement of receivables Internal Revenue (Commissioner) to pay a deficiency tax for the year
from Baguio Gold against reserves and allowances." 1985.
• PRC protested the assessment based on the erroneous disallowances
• However, the BIR disallowed the amount as deduction for bad debt and of "bad debts" and "interest expense" although the same are both
assessed petitioner deficiency income tax. allowable and legal deductions.
• Philex protested, arguing that the deduction must be allowed since all • CIR, however, issued a warrant of garnishment against the deposits of
requisites for a bad debt deduction were satisfied, to wit: (a) there was PRC at a branch of City Trust Bank, in Makati, Metro Manila.
a valid and existing debt; (b) the debt was ascertained to be worthless;
and (c) it was charged off within the taxable year when it was • PRC accordingly filed a petition for review with the Court of Tax
determined to be worthless. Appeals (CTA) on the same assignment of error.
• I: W/n advances made by Philex to Baguio Gold can be considered a • The Tax Court reversed and set aside the Commissioner's disallowance
bad debt and be deductible- NO of the interest expense but maintained the disallowance of the
supposed bad debts of 13 (out of 16) debtors.
• R: Advances were in the nature of an INVESTMENT and NOT a loan,
therefore not deductible. • PRC then elevated the case to respondent Court of Appeals which
denied due course to the petition for review.
• A reading of the agreement shows denominated as the SPA indicates
that the parties had intended to create a partnership and establish a • I: W/N the bad debts can be deducted.
common fund for the purpose.
• It filed its income tax returns and was charged deficiency income tax • The corp duly filed its 1956 and 1957 income tax returns and
due to disallowed depreciation, travelling expenses, miscellaneous respectively paid corresponding taxes.
expenses and unreasonably accumulated profits. • Subsequently, the BIR conducted an investigation of the corp’s income
• Due to the nonpayment of the amount, a warrant of levy was issued tax returns and ascertained that Limpan had underdeclared its rental
incomes during these taxable years and had claimed excessive
but was not executed because Basilan was able to get the Deputy of
CIR to hold execution and maintain constructive embargo instead. depreciation of its buildings in the covering the same period.
• Notice was then served that the levy would be executed. • On the basis of these findings, CIR issued its letter-assessment and
demand for payment of deficiency income tax and surcharge against
• Thus, Basilan filed before the CTA a petition for review of the petitioner corporation.
Commisioner’s assessment alleging prescription of period for
assessment and collection, error in disallowing claimed depreciations,
• Limpan asked for reconsideration regarding the assessment, but it was
traveling and miscellaneous expenses and error in finding the denied.
existence of unreasonably accumulated profits but CA affirmed he • I: W/n Limpan is liable for payment of deficiency.
deficiency assessment. • R: YES, Limpan is liable for deficiency.
• I: W/n the deficiency assessments were proper • Limpan admitted through its own witness (Vicente G. Solis – Corporate
• R: YES, they were proper. Secretarty-Treasurer), that it had undeclared more than one-half (1/2)
• Depreciation is the gradual diminution in useful value of tangible of the amount (P12,100.00 out of P20,199.00) found by the BIR
property resulting from wear and tear. An owner is entitled to see that examiners as unreported rental income for the year 1956 and more
from his earnings the value of the property invested is kept unimpaired than one-third (1/3) of the amount (P29,350.00 out of P81,690.00)
so that at the end of ay given term of years the original investment ascertained by the same examiners as unreported rental income for
remains as it was in the beginning. the year 1957, contrary to its original claim to the revenue authorities,
it was incumbent upon it to establish the remainder of its pretensions
• Thus the law permits taxpayer to recover gradually his capital by clear and convincing evidence, that in the case is lacking.
investment free from income tax. Under the tax code, a deduction is
allowed from gross income for depreciation but NOT beyond the
• The excuse that Lim retained ownership of the lands and only later
acquisition cost. If beyond the acquisition cost, the owner would also transferred or disposed of the ownership of the buildings existing
be able to recover profit. thereon to the corporation, so as to justify the alleged verbal
agreement whereby they would turn over to the corporation 6% of the
• In this case, Basilan claimed deductions for depreciation of its assets value of its properties to be applied to the rentals of the land and in
up to 1949 on the basis of their acquisition cost. In 1950, it changed exchange for whatever rentals they may collect from the tenants who
the depreciable value of said assets by increasing it to conform with refused to recognize the new owner or vendee of the buildings, is not
the increase in cost for their replacement (P51,252.98). Thus, the CIR only unusual but uncorroborated by the alleged transferors, or by any
was correct in allowing it depreciation based on the SAME OLD ASSETS document or unbiased evidence.
only, and NOT the reappraised value. • Also, Lim was not presented as witness to corraborate the testimony
• Anything beyond the acquisition cost is already considered PROFIT. Solis nor was his 1957 personal income tax return submitted in court to
establish that the rental income which he allegedly collected and
• Upon investigation, the CIR found that the reappraised assets in 1953 received in 1957 were reported therein.
were the same ones which depreciation was claimed in 1952. And in
They agree, however, that the "cost of the mine property" consists of (1) mine
DEPLETION cost; and (2) expenses of development before production. As to mine cost, the
Consolidated Mines, Inc v CTA parties are practically in agreement — the Commissioner says it is P2,515,000
• Consolidated Mines (CM), engaged in mining, had filed its income tax (the Company puts it at P2,500,000). As to expenses of development before
returns for 1951, 1952, 1953 and 1956. production the Commissioner and the Company widely differ. The Company
claims it is P1,738,974.56, while the Commissioner says it is only P131,878.44.
• In 1957, examiners of the Bureau of Internal Revenue investigated the As an income tax concept, depletion is wholly a creation of the statute 21 —
income tax returns filed by the Company because on August 10, 1954, "solely a matter of legislative grace." 22 Hence, the taxpayer has the burden of
its auditor, Felipe Ollada claimed the refund of the sum of P107,472.00 justifying the allowance of any deduction claimed. 23 As in connection with all
representing alleged overpayments of income taxes for the year 1951. other tax controversies, the burden of proof to show that a disallowance of
• After the investigation the examiners reported that CM had overstated depletion by the Commissioner is incorrect or that an allowance made is
its claim for depletion. inadequate is upon the taxpayer, and this is true with respect to the value of the
• The CIR then assessed CM for deficiency taxes. CM appealed this property constituting the basis of the deduction.
assessment to the CTA. CM then questioned the judgment of the CTA
regarding the rate of depletion it adopted.
• I: W/n CM overstated its rate of depletion; W/n the rate of depletion (The following discussion is about the difference between the expenses of
adopted by the CTA was proper development before production)
• R: Yes, CM overstated its rate of depletion.
As proof that the amount spent for developing the mines was P1,738,974.56, the
• The rate of depletion per ton of the ore deposit mined and sold by the Company relies on the testimony of Eligio S. Garcia and on Exhibits 1, 31 and 38.
Company is P0.6196 per ton 49 not P0.59189 as contended by the
Commissioner nor P1.0197 as claimed by the Company;
Exhibit I is the Company's report to its stockholders for the year 1947. It
• The Tax Code provides that in computing net income there shall be contains the Company's balance sheet as of December 31, 1946 (Exhibit I-1).
allowed as deduction, in the case of mines, a reasonable allowance for Among the assets listed is "Mines, Improvement & Dev." in the amount of
depletion thereof not to exceed the market value in the mine of the P4,238,974.57 (costs of mine property), which, according to the Company,
product thereof which has been mined and sold during the year for consisted of P2,500,000, purchase price of the mine, and P1,738,974.56, cost of
which the return is made [Sec. 30(g) (1) (B)]. developing it. The Company has not explained in detail in what amount or the
lesser amount of P1,738,974.56 consisted. Nor has it explained how that bigger
amount became P1,738,974.56 in the balance sheet for December 31, 1946.
The formula for computing the rate of depletion is:
(Simply put, CM was not able to explain what the P1.7m consisted.)
The correct figures therefore are: Petitioner protested the assessment in a letter dated March 7, 1980. The
P2,515,000.00 (mine cost proper) + P131,878.44 respondent Commissioner did not answer the protest. Instead, he issued
(development cost) warrants of distraint and levy on October 1, 1984. On October 23, 1984,
4,271,892 (estimated ore deposit) petitioner appealed to the Court of Tax Appeals by petition for review with a
prayer for the issuance of a writ of preliminary injunction to stop the
or enforcement of the warrants of distraint and levy. The writ was issued upon
petitioner posting a ₱1,850,000 bond.The Tax Court rendered a decision on
August 14, 1987 upholding the Commissioner's ruling. Petitioner's motion for
P2,646,878.44 (mine cost) = P0.6196 (rate of depletion reconsideration of the decision was denied by the Tax Court on April 6, 1988.
deposit) Hence, this petition.
4,271,892 (estimated ore per ton)
Issue: Whether or not the ruling of CIR is proper?
RESEARCH AND DEVELOPMENT Held: Finding no reversible error in the decision of the Court of Tax Appeals, the
petition for review is denied.
3M Phils v CIR
Facts: Because remittances to foreign licensors of technical service fees and royalties
3M Philippines, Inc., a subsidiary of 3M-St. Paul, is a non-resident foreign are made in foreign exchange, CB Circular No. 393 (Regulations Governing
corporation with principal office in St. Paul, Minnesota, USA. It is the exclusive Royalties/Rentals) dated December 7, 1973 was promulgated by the Central
importer, manufacturer, wholesaler, and distributor in the Philippines of all Bank as an exchange control regulation to conserve foreign exchange and avoid
products of the latter. To enable it to manufacture, package, promote, market, unnecessary drain on the country's international reserves Section. 3-C of the
sell and install the highly specialized products of its parent company, and render circular provides that royalties shall be paid only on
the necessary post-sales service and maintenance to its customers, petitioner commodities manufactured by the licensee under the royalty agreement.
entered into a "Service Information and Technical Assistance Agreement" and a Clearly, no royalty is payable on the wholesale price of finished products
Petitioner points out that the Central bank "has no say in the assessment and
collection of internal revenue taxes as such power is lodged in the Bureau of Calasanz v CIR
Internal Revenue," that the Tax Code "never mentions Circular 393 and there is
no law or regulation governing deduction of business expenses that refers to Ursula Calasanz (wife of Tomas) inherited from her father a parcel of land in
said circular." The argument is specious, for, although the Tax Code allows Cainta, Rizal. In order to liquidate her inheritance, she had the land surveyed,
payments of royalty to be deducted from gross income as business expenses, it and subdivided into lots, and put up improvements such as roads, drainage,
is CB Circular No. 393 that defines what royalty payments are proper. Hence, lighting, etc., to make it more saleable. Afterwards, the lots were sold. She and
improper payments of royalty are not deductible as legitimate business her husband in the same year filed a join income tax return with the BIR,
expenses. disclosing a profit of P 31, 060. 06 from the sale of the lots, and reported 50% or
P15,530.03 as taxable capital gains. However upon audit and review, they were
adjudged as petitioners engaged in real estate business and were thus assessed
real estate dealer’s tax and deficiency income tax on ordinary gain.
ESSO Standard Eastern v CIR
The spouses Calasanz contended that inherited land is a capital asset within the
meaning of Section 34 of the Tax Code and that an heir who liquidates his
Facts: ESSO deducted from its gross income for 1959, as part of its ordinary and inheritance cannot be said to have engaged in real estate business and may not
necessary business expenses, the amount it had spent for drilling and be denied the preferential tax treatment given to gains from sale of capital
exploration of its petroleum conscessions. The Commissioner disallowed the assets, merely because he disposed of it in the only possible and advantageous
claim on the ground that the expenses should be capitalized and might be way. They also averred that the land was sold because of their intention to effect
written off as a loss only when a “dry hole” should result. Hence, ESSO filed an a liquidation, it’s being divided into smaller lots made it easier to dispose of.
amended return where it asked for the refund of P323,270 by reason of its However they also admitted that the improvements they introduced to the land
abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary were added to facilitate its sale.
and necessary expenses in the same return amount representing margin fees it
had paid to the Central Bank on its profit remittances to its New York Office. On the other hand, respondent Commissioner maintained that the imposition of
the taxes in question is in accordance with law since petitioners are deemed to
be in the real estate business for having been involved in a series of real estate
Issue: Whether the margin fees may be considered ordinary and necessary transactions pursued for profit. Respondent argued that property acquired by
expenses when paid. inheritance may be converted from an investment property to a business
property if, as in the present case, it was subdivided, improved, and
Held: For an item to be deductible as a business expense, the expense must subsequently sold and the number, continuity and frequency of the sales were
ebe ordinary and necessary; it must be paid or incurred within the taxable year; such as to constitute "doing business." Respondent likewise contended that
and it must be paid or incurred in carrying on a trade or business. In addition, inherited property is by itself neutral and the fact that the ultimate purpose is to
the taxpayrer must substantially prove by evidence or records teh deductions liquidate is of no moment for the important inquiry is what the taxpayer did with
claimed under law, otherwise, the same will be disallowed. There has been no the property. Respondent concluded that since the lots are ordinary assets, the
attempt to define “ordinary and necessary” with precision. However, as guiding profits realized therefrom are ordinary gains, hence taxable in full.
principle in the proper adjudication of conflicting claims, an expenses is
considered necessary where the expenditure is appropriate and helpdul in the
If an asset is not among the exceptions, it is a capital asset; conversely, assets In 1948 the petitioner inherited from his mother several tracts of land, among
falling within the exceptions are ordinary assets. And necessarily, any gain which were two contiguous parcels situated on Pureza and Sta. Mesa streets in
resulting from the sale or exchange of an asset is a capital gain or an ordinary Manila, with an area of 318 and 67,684 square meters, respectively.
gain depending on the kind of asset involved in the transaction. When the petitioner's mother was yet alive she had these two parcels
subdivided into twenty-nine lots. Twenty-eight were allocated to their then
occupants who had lease contracts with the petitioner's predecessor at various
However there is no fixed formula or rule which can determine whether a times from 1900 to 1903, which contracts expired on December 31, 1953. The
property sold by a taxpayer was sold in the ordinary course of business or 29th lot (hereinafter referred to as Lot 29), with an area of 48,000 square
whether it was sold as a capital asset. The facts and circumstances of each case meters, more or less, was not leased to any person. It needed filling because of
must be analyzed to determine that. A property initially classified as a capital its very low elevation, and was planted to kangkong and other crops.
asset may be treated as an ordinary asset if a combination of the factors show After the petitioner took possession of the mentioned parcels in 1950, he
that the activity was in furtherance of or in the course of the taxpayer's trade or instructed his attorney-in-fact, J. Antonio Araneta, to sell them.
business. Thus, a sale of inherited real property usually gives capital gain or loss There was no difficulty encountered in selling the 28 small lots as their
even though the property has to be subdivided or improved or both to make it respective occupants bought them on a 10-year installment basis. Lot 29 could
saleable. However, if the inherited property is substantially improved or very not however be sold immediately due to its low elevation.
actively sold or both it may be treated as held primarily for sale to customers in Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then
the ordinary course of the heir's business. subdivided into small lots and paved with macadam roads. The small lots were
then sold over the years on a uniform 10-year annual amortization basis. J.
Upon an examination of the facts on record, the activities of petitioners are Antonio Araneta, the petitioner's attorney-in-fact, did not employ any broker nor
indistinguishable from those invariably employed by one engaged in the did he put up advertisements in the matter of the sale thereof.
business of selling real estate. This is primarily due to the development of the In 1953 and 1954 the petitioner reported his income from the sale of the small
real property. The petitioners did not sell the land in the condition they acquired lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. On
it. It was originally agricultural land, which they turned into a residential area, May 17, 1957 the Collector of Internal Revenue upheld the petitioner's treatment
introducing numerous improvements in order to entice buyers. The cost of the of his gains from the said sale of small lots, against a contrary ruling of a
improvements amounted to a large amount, and the extensive improvements revenue examiner.
indicate that the seller held the property primarily for sale to customers in the On the basis of the 1957 opinion of the Collector of Internal Revenue, the
ordinary course of business. revenue examiner approved the petitioner's treatment of his income from the
sale of the lots in question. which was concurred in by the Commissioner of
Internal Revenue.
China Banking Corp v CA Subject to certain exceptions, such as the compensation income of individuals
and passive income subject to final tax, as well as income of non-resident aliens
and foreign corporations not engaged in trade or business in the Philippines, the
Thus, shares of stock; like the other securities defined in Section 20(t) of the
NIRC, would be ordinary assets only to a dealer in securities or a person "(A) Limitations. - Losses from sales or exchanges of capital assets shall be
engaged in the purchase and sale of, or an active trader (for his own allowed only to the extent provided in Section 33."
account) in, securities. Section 20(u) of the NIRC defines a dealer in
securities thus: The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid
Section 29(d)(4)(A), read:
"(u) The term 'dealer in securities' means a merchant of stocks or securities,
whether an individual, partnership or corporation, with an established place of "Section 33. Capital gains and losses. -
business, regularly engaged in the purchase of securities and their resale to
customers; that is, one who as a merchant buys securities and sells them to
customers with a view to the gains and profits that may be derived therefrom." “x x x xxx x x x.
In the hands, however, of another who holds the shares of stock by way of an "(c) Limitation on capital losses. - Losses from sales or exchange of capital
investment, the shares to him would be capital assets. When the shares held assets shall be allowed only to the extent of the gains from such sales
by such investor become worthless, the loss is deemed to be a loss or exchanges. If a bank or trust company incorporated under the laws of the
from the sale or exchange of capital assets. Section 29(d)(4)(B) of the Philippines, a substantial part of whose business is the receipt of deposits, sells
NIRC states: any bond, debenture, note, or certificate or other evidence of indebtedness
issued by any corporation (including one issued by a government or political
subdivision thereof), with interest coupons or in registered form, any loss
"(B) Securities becoming worthless. - If securities as defined in Section 20 resulting from such sale shall not be subject to the foregoing limitation an shall
become worthless during the tax" year and are capital assets, the loss resulting not be included in determining the applicability of such limitation to other
therefrom shall, for the purposes of his Title, be considered as a loss from the losses.”
sale or exchange, on the last day of such taxable year, of capital assets."
The exclusionary clause found in the foregoing text of the law does not include
The above provision conveys that the loss sustained by the holder of the all forms of securities but specifically covers only bonds, debentures, notes,
securities, which are capital assets (to him), is to be treated as a capital loss as certificates or other evidence of indebtedness, with interest coupons or
if incurred from a sale or exchange transaction. A capital gain or a capital in registered form, which are the instruments of credit normally dealt with in
loss normally requires the concurrence of two conditions for it to result: (1) the usual lending operations of a financial institution. Equity holdings cannot
There is a sale or exchange; and (2) the thing sold or exchanged is a capital come close to being, within the purview of "evidence of indebtedness" under
asset. When securities become worthless, there is strictly no sale or exchange the second sentence of the aforequoted paragraph. Verily, it is for a like thesis
The above law should be taken within context on the general subject of the
"(b) Basis for determining gain or loss from sale or disposition of property. - The determination, and recognition of gain or loss; it is not preclusive of, let alone
basis of property shall be - (1) The cost thereof in cases of property acquired on renders completely inconsequential, the more specific provisions of the code.
or before March 1, 1913, if such property was acquired by purchase; or Thus, pursuant, to the same section of the law, no such recognition shall be
made if the sale or exchange is made in pursuance of a plan of corporate merger
"(2) The fair market price or value as of the date of acquisition if the same was or consolidation or, if as a result of an exchange of property for stocks, the
acquired by inheritance; or exchanger, alone or together with others not exceeding four, gains control of the
corporation. Then, too, how the resulting gain might be taxed, or whether or not
the loss would be deductible and how, are matters properly dealt with elsewhere
"(3) If the property was acquired by gift the basis shall be the same as if it would in various other sections of the NIRC. At all events, it may not be amiss to once
be in the hands of the donor or the last preceding owner by whom it was not again stress that the basic rule is still that any capital loss can be deducted
acquired by gift, except that if such basis is greater than the fair market value of only from capital gains under Section 33(c) of the NIRC.
the property at the time of the gift, then for the purpose of determining loss the
basis shall be such fair market value; or
In sum -
"(4) If the property, other than capital asset referred to in Section 21 (e), was
acquired for less than an adequate consideration in money or moneys worth, the (a) The equity investment in shares of stock held by CBC of approximately 53%
basis of such property is (i) the amount paid by the transferee for the property in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an
or (ii) the transferor's adjusted basis at the time of the transfer whichever is indebtedness, and it is a capital, not an ordinary, asset.
greater.
(b) Assuming that the equity investment of CBC has indeed become "worthless,"
"(5) The basis as defined in paragraph (c) (5) of this section if the property was the loss sustained is a capital, not an ordinary, loss.
acquired in a transaction where gain or loss is not recognized under paragraph
(c) (2) of this section. (As amended by E.O. No. 37) (c) The capital loss sustained by CBC can only be deducted from capital gains if
any derived by it during the same taxable year that the securities have become
“(c) Exchange of property. "worthless."
MERGER / CONSOLIDATION
Section 112 of the Revenue Act of 1928 (26 USCA 2112) deals with the subject of gain or
loss resulting from the sale or exchange of property. Such gain or loss is to be recognized in
computing the tax, except as provided in that section.
In these circumstances, the facts speak for themselves and are susceptible of but one
interpretation. The whole undertaking, though conducted according to the terms of
subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as
a corporate reorganization, and nothing else. The rule which excludes from consideration
the motive of tax avoidance is not pertinent to the situation, because the transaction upon its
face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice
above reality and to deprive the statutory provision in question of all serious purpose.