[G.R. No. 21186. February 27, 1924.

FREDERICK C. FISHER, Plaintiff-Appellee, v. WENCESLAO TRINIDAD, Collector of

Internal Revenue, Defendant-Appellant.

Attorney-General Villa-Real for Appellant.

Fisher, DeWitt, Perkins & Brady and Johns R. McFie, jr., for Appellee.
JOHNS, J. :

SYLLABUS

Doctrine:

LEGAL EFFECT OF WITHDRAWAL OF PROTEST. — Where an income tax is paid under

protest, and pending an action brought to recover the money paid, the protestant
withdraws his protest, in the absence of a counterclaim, the legal effect of the withdrawal is
to dismiss the action and leave the parties in the same situation as if no protest was ever
made.

FACTS:

On October 19, 1920, the plaintiff, a resident of the City of Manila, and a shareholder in
the Philippine-American Drug Company filed a complaint against the defendant as
Collector Internal Revenue, in which he alleged that in the year 1919, he received from the
drug company certificates of shares of the par value of P24,800, as his proportionate share
of a stock dividend, duly and lawfully declared by the company; that the defendant
erroneously and unlawfully, and against the will and protest of the plaintiff, required him to
pay an income tax on such stock dividend in the amount of P899.91; that the plaintiff paid
the tax under protest, and made a written demand upon the defendant for its return, which
was refused, and plaintiff prays for judgment for the amount, with interest and costs.

The case was tried and submitted upon an agreed statement of facts, and the court
rendered judgment in favor of the plaintiff for the amount of P899.91, without interest and
costs.

On December 14, 1923, after the appeal was perfected, the plaintiff wrote the defendant a
letter withdrawing the protest in connection with income tax in the amount of P899.91
assessed by you on shares of the Philippine-American Drug Company of the par value of
P24,800."cralaw virtua1aw library

Issue:

"I. The court below erred in holding that the Philippine Legislature had no power to tax a
stock dividend as income in an income tax law.

"II. The court below erred in not passing on the constitutional question raised.

"III. The court below erred in rendering judgment for the plaintiff."
DECISION

Notwithstanding that fact, the Attorney-General insists upon a decision by this court on the
merits, and in particular as to the constitutionality of the law and the legal right of the
defendant to levy and collect the tax in question.

The plaintiff contends that the record now presents a moot case, and for such reason there
is nothing left for this court to decide. That contention must be sustained. The payment of
the money under protest was the basis of plaintiff’s action, without which it could not be
sustained. His protest is not withdrawn. The legal effect of it is to withdraw his complaint
and to place the whole matter in the same position as if no protest had ever been made. It
must be conceded that in the absence of a protest the action could not be maintained. In
other words, the plaintiff is now in court seeking to recover money which was not paid
under protest. It is true that the plaintiff obtained judgment against the defendant in the
lower court, but in legal effect the withdrawal of the protest was a waiver of all of plaintiff’s
rights under that judgment. For such reason, there is nothing left for this court to decide.

EN BANC

[G.R. No. L-18587. April 23, 1963.]

APOLINARIO VALERIO, Plaintiff-Appellee, v. HON. SECRETARY OF AGRICULTURE &

NATURAL RESOURCES, ET AL., Defendants, LUCERO DE GUZMAN, Defendant-
Appellant.

Filemon Q. Almazan for Plaintiff-Appellee.

Cipriano P. Primicias, Rene Diokno and Sibal & Associates for defendant-appellant
Lucero de Guzman.

SYLLABUS

1. ATTORNEY AND CLIENT; NEGLIGENCE OF COUNSEL RESULTING IN FINALITY OF

DECISION; CLIENT BOUND, ESPECIALLY WHERE HE IS PARTLY TO BLAME. — Appellee
is bound by the negligence of his own counsel who failed to notify him of the decision
rendered by the Secretary of Agriculture, and he should have known that his counsel filed a
motion for reconsideration which may be acted upon sooner or later by the Secretary and
yet be allowed more than seven months to elapse before inquiring into the matter, and only
then did he learn that his counsel withdrew from the case. He should therefore be partly to
blame for the delay which resulted in the decision of the Secretary becoming final and
executory.

2. ADMINISTRATIVE LAW; ADMINISTRATIVE REGULATIONS ADOPTED PURSUANT TO

LAW HAS THE FORCE AND EFFECT OF LAW. — It cannot be contended, as the court a
quo intimated, that an administrative regulation should not be given the same weight as a
rule of court but should rather be given a more liberal interpretation for, as is well-known,
a regulation adopted pursuant to law has the force and effect of law.

DECISION
BAUTISTA ANGELO, J.:

From the stipulation of facts submitted by the parties, the following may be deduced: On
July 5, 1950, Apolinario Valerio applied with the Rural Progress Administration for the
purchase of the lot in question. On August 5, 1950, Lucero de Guzman also filed a similar
application to purchase the same lot with the same office. Because of the conflicting claims,
the Director of Lands ordered a formal hearing thereon to determine who has a better right
to purchase the lot and, on July 24, 1952, Assistant Director Zoilo Castrillo rendered
decision awarding the lot to Apolinario Valerio. De Guzman appealed to the Secretary of
Agriculture & Natural Resources who, on January 14, 1953, reversed the decision of the
Director of Lands and awarded the lot to Lucero de Guzman.

It appears that copy of this decision was received by Valerio’s counsel on March 9, 1953,
but he filed his motion for reconsideration only on October 30, 1953, or after the lapse of
the reglementary period of 30 days provided for in the rules and regulations of the Bureau
of Lands within which a losing party may file a motion for reconsideration of the decision
either of the Director of Lands or the Secretary of Agriculture & Natural Resources. And
because of this late filing, said Secretary denied the motion holding that his decision of
January 14, 1953 has long become final and executory.

Issue:
Whether the Court a quo erred in setting aside the above order of respondent Secretary
which denies the motion for reconsideration of appellee

Ruling:

Yes. We are inclined to agree to this contention not only because appellee is bound by the
negligence of his own attorney who failed to notify him of the decision rendered in the case
but also because the Secretary did nothing but to comply with what is provided for in the
regulation on the matter of his own department. Moreover, appellee should have known
that his counsel filed a motion for reconsideration which may be acted upon sooner or
latter by the Secretary and yet he allowed more than seven months to elapse before
inquiring into the matter. It was only after the lapse of that period that he learned that his
counsel withdrew from the case. He should, therefore, partly be blamed for the delay which
resulted in the decision becoming final and executory.

And it cannot be contended, as the court a quo, intimated, that an administrative

regulation should not be given the same weight as a rule of court but should rather be
given a more liberal interpretation for, as is well-known, a regulation adopted pursuant to
law has the force and effect of law. 1 In fact, it is a wise policy that administrative
regulations be given the same force as rules of court in order to maintain the regularity of
administrative proceedings. Any way, there is no evidence to show that the Secretary has
abused his discretion in promulgating the questioned order which on its face appears well
justified.

CONWI v. CTA,
GR No. L-48532, 1992-08-31

NOCON, J.:
Facts:
Petitioners are Filipino citizens and employees of Procter and Gamble,
Philippine Manufacturing Corporation... a subsidiary of Procter & Gamble, a foreign
corporation based in Cincinnati, Ohio, U.S.A.
 Petitioners were assigned, for certain periods, to other subsidiaries of Procter &
Gamble, outside of the Philippines, during which petitioners were paid U.S. dollars as
compensation for services in their foreign... assignments.
When petitioners in C.T.A. Case No. 2511 filed their income tax returns for the
year 1970, they computed the tax due by applying the dollar-to-peso conversion on
the basis... of the floating rate.
However, on February 8, 1973 and October 8, 1973, petitioners in said cases filed
with the office of the respondent.
Commissioner, amended income tax returns for the above-mentioned years, this time
using the par value of the peso as prescribed in Section 48 of Republic Act No. 265 in
relation to Section 6 of Commonwealth Act No. 699 as the basis for converting their
respective dollar income... into Philippine pesos... aforesaid computation as shown in the
amended income tax returns resulted in the alleged overpayments, refund and/or tax
credit.
Claims for refund of said... over-payments were filed with respondent Commissioner.
Petitioners filed their petitions for review in the above-mentioned cases.
the respondent Court of Tax Appeals held that the... proper conversion rate for the
purpose of reporting and paying the Philippine income tax on the dollar earnings of
petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71
and 41-71.
The claim for refund and/or tax credit of petitioners in... the above-entitled cases
was denied and the petitions for review dismissed.
Respondent Commissioner of Internal Revenue, on the other hand, refutes
petitioners' claims
We are inclined to agree with respondents Court of Tax Appeals and Commissioner of
Internal Revenue and thus vote to deny the petition.
Petitioners claim that since the dollar earnings do not fall within the
classification of foreign exchange transactions, there... occurred no actual inward
remittances, and, therefore, they are not included in the coverage of Central Bank
Circular No. 289.
They conclude that their earnings... should be converted for income tax purposes using the
par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts
for export products, receipts of sale of foreign exchange or foreign borrowings and
investments but not income tax. He also claims that he had to use the prevailing free
market rate of exchange in... these cases because of the need to ascertain the true and
correct amount of income in Philippine peso of dollar earners for Philippine income tax
purposes.
Issues:
What exchange rate should be used to determine the peso equivalent of the foreign
earnings of petitioners for income tax purposes.
Ruling:
Income may be defined as an amount of money coming to a person or
corporation within a specified time, whether as payment for services; interest or
profit from investment. Unless otherwise... specified, it means cash or its equivalent.
[4] Income can also be thought of as a flow of the fruits of one's labor.
Petitioners are correct as to their claim that their dollar earnings are not receipts
derived from foreign exchange transactions. For a foreign exchange transaction is simply
that -- a transaction in foreign exchange, foreign exchange being "the conversion of an
amount of... money or currency of one country into an equivalent amount of money or
currency of another."
When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they
were earning in their assigned nation's... currency and were ALSO spending in said
currency. There was no conversion, therefore, from one currency to another.
 Public respondent Court of Tax Appeals did err when it concluded that the dollar
incomes of petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No.42.
A careful reading of said CB Circular No. 289[8] shows that the subject matters
involved therein are export products, invisibles, receipts of foreign exchange, foreign
exchange payments, new foreign borrowing investments --... nothing by way of income tax
payments Thus; petitioners are in error by concluding that since C.B. Circular No. 289
does not apply to them, the par value of the peso should be the guiding rate used for
income tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which came to them
within a specified period of time of two years as payment for their services.
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71[10] and 41-
71[11] were issued to prescribe a uniform rate of exchange from US dollars to Philippine
pesos for
INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively.
circulars were a valid exercise of the authority given to the Secretary of Finance by
the Legislature which enacted the Internal Revenue Code.
presumed to be a valid... interpretation of said code until revoked by the Secretary of
Finance himself
Petitioners argue that since there were no remittances and acceptances of their
salaries and wages in US dollars into the Philippines, they are exempt from the coverage of
such circulars. Petitioners forget that they are citizens of the Philippines, and their income,
within... or without, and in these cases wholly without, are subject to income tax. Sec. 21,
NIRC, as amended, does not brook any exemption.
Although it has become a worn-out cliché, the fact still remains that "taxes are the
lifeblood of the government" and one of the duties of a Filipino citizen is to pay his income
tax.
Principles:
Income may be defined as an amount of money coming to a person or corporation
within a specified time, whether as payment for services; interest or profit from investment.
Unless otherwise... specified, it means cash or its equivalent.[4] Income can also be thought
of as a flow of the fruits of one's labor.
The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which came to them
within a specified period of time of two years as payment for their services.
Petitioners forget that they are citizens of the Philippines, and their income, within...
or without, and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as
amended, does not brook any exemption.
 LIMPAN INVESTMENT V. CIR
July 26, 1966

JBL, J.

FACTS:

• BIR assessed deficiency taxes on Limpan Corp, a company that leases real property, for
under-declaring its rental income for years 1956-57 by around P20K and P81K

respectively. • Petitioner appeals on the ground that portions of these underdeclared rents
are yet to be collected by the previous owners and turned over or received by the
corporation. • Petitioner cited that some rents were deposited with the court, such that the
corporation does not have actual nor constructive control over them. • The sole witness for
the petitioner, Solis (Corporate Secretary- Treasurer) admitted to some undeclared rents in
1956 and1957, and that some balances were not collected by the corporation in 1956
because the lessees refused to recognize and pay rent to the new owners and that the
corp’s president Isabelo Lim collected some rent and reported it in his personal income
statement, but did not turn over the rent to the corporation. • He also cites lack of actual or
constructive control over rents deposited with the court.

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

HELD: Yes. Petitioner admitted that it indeed had undeclared income (although only a part
and not the full amount assessed by BIR). Thus, it has become incumbent upon them to
prove their excuses by clear and convincing evidence, which it has failed to do. When is
there constructive receipt of rent? With regard to 1957 rents deposited with the court, and
withdrawn only in 1958, the court viewed the corporation as having constructively received
said rents. The non-collection was the petitioner’s fault since it refused to refused to accept
the rent, and not due to nonpayment of lessees. Hence, although the corporation did not
actually receive the rent, it is deemed to have constructively received them.
CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION 204
SCRA 377

NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate
goes down to 15% ONLY IF the country of domicile of the foreign stockholder corporation
“shall allow” such foreign corporation a tax credit for “taxes deemed paid in the
Philippines,” applicable against the tax payable to the domiciliary country by the foreign
stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points

FACTS:

Procter and Gamble Philippines declared dividends payable to its parent company and
sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35%
dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a
claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that
pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by
Presidential Decree No. 369, the applicable rate of withholding tax on the dividends
remitted was only 15%.

MAIN ISSUE:

Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:

YES.

P&G Philippines is entitled.

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend
remittances to non-resident corporate stockholders of a Philippine corporation. This rate
goes down to 15% ONLY IF he country of domicile of the foreign stockholder corporation
“shall allow” such foreign corporation a tax credit for “taxes deemed paid in the
Philippines,” applicable against the tax payable to the domiciliary country by the foreign
stockholder corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points
which represents the difference between the regular 35% dividend tax rate and the
reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for
”taxes deemed paid in the Philippines” applicable against the US taxes of P&G USA, and
such tax credit must reach at least 20 percentage points. Requirements were met.
Bank of America N.T. and S.A. v. Court of Appeals
GR No. 105395, 1993-12-10
Facts:
petitioner Bank of America, NT & SA, Manila, received by registered mail an Irrevocable
Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch,
for the account of General Chemicals, Ltd., of Thailand in the amount of
US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files," with the
petitioner as advising bank and private respondent Inter-Resin Industrial Corporation as
beneficiary.
Inter-Resin sought to make a partial availment under the letter of credit by submitting to
Bank of America invoices, covering the shipment
Finally, after being satisfied that Inter-Resin's documents conformed with the conditions
expressed in the letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's
Check
Bank of America wrote Bank of Ayudhya advising the latter of the availment under the
letter of credit and sought the corresponding reimbursement therefor.
Bank of Ayudhya declaring the letter of credit fraudulent,[2] Bank of America stopped the
processing of Inter-Resin's documents and sent a telex to its branch office in Bangkok,
Thailand,... requesting assistance in determining the authenticity of the letter of credit.
Bank of America sued Inter-Resin
On the other hand, Inter-Resin claimed that not only was it entitled to retain
P10,219,093.20 on its first shipment but also to the balance US$1,461,400.00 covering the
second shipment.
the trial court ruled for Inter-Resin,[4] holding that: (a) Bank of America made assurances
that enticed Inter-Resin to send the merchandise to Thailand; (b) the telex declaring the
letter of credit fraudulent... was unverified and self-serving, hence hearsay, but even
assuming that the letter of credit was fake, "the fault should be borne by the BA which was
careless and negligent"[5] for failing to utilize its modern means of... communication to
verify with Bank of Ayudhya in Thailand the authenticity of the letter of credit before
sending the same to Inter-Resin; (c) the loading of plastic products into the vans were
under strict supervision, inspection and verification of government officers who... have in
their favor the presumption of regularity in the performance of official functions; and (d)
Bank of America failed to prove the participation of Inter-Resin or its employees in the
alleged fraud as, in fact, the complaint for estafa through falsification of documents was...
dismissed by the Provincial Fiscal of Rizal.[6]
On appeal, the Court of Appeals[7] sustained the trial court; hence, this present recourse
by petitioner Bank of America.
Issues:
whether under the "letter of credit," Bank of America has incurred any liability to the
"beneficiary" thereof
May Bank of America then recover what it has paid under the letter of credit when the
corresponding draft for partial availment thereunder and the required documents therefor
were later negotiated with it by Inter-Resin?
Ruling:
an issue that largely is dependent on the bank's participation in that transaction; as a mere
advising or notifying bank, it would not be liable, but as a... confirming bank, had this been
the case, it could be considered as having incurred that liability.
That Bank of America has asked Inter-Resin to submit documents required by the letter of
credit and eventually has paid the proceeds thereof, did not obviously make it a...
confirming bank. The fact, too, that the draft required by the letter of credit is to be drawn
under the account of General Chemicals (buyer) only means that the same had to be
presented to Bank of Ayudhya (issuing bank) for payment. It may be significant to... recall
that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay
the draft.
As an advising or notifying bank, Bank of America did not incur any obligation more than
just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the
letter of credit.
The... bare statement of the bank employee, aforementioned, in responding to the inquiry
made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of credit
certainly did not have the effect of novating the letter of credit and Bank of America's letter
of... advise,[26] nor can it justify the conclusion that the bank must now assume total
liability on the letter of credit.
The view that Bank of America should have first checked the authenticity of the letter of
credit with Bank of Ayudhya, by using advanced mode of business... communications,
before dispatching the same to Inter-Resin finds no real support in U.C.P. Article 18 of the
U.C.P. states that: "Banks assume no liability or responsibility for the consequences arising
out of the delay and/or loss in transit of... any messages, letters or documents, or for delay,
mutilation or other errors arising in the transmission of any telecommunication x x x" As
advising bank, Bank of America is bound only to check the "apparent authenticity" of the
letter of credit, which... it did.
he answer is yes. This kind of transaction is what is... commonly referred to as a
discounting arrangement. This time, Bank of America, has acted independently as a
negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents
directly to Bank of Ayudhya to recover payment.
As a negotiating bank, Bank of America has a right of recourse against the issuer bank and
until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to
assume a... contingent liability thereon.[
CIR v. BOAC (149 SCRA 395)

FACTS

British Overseas Airways Corporation (BOAC), a 100 percent British Government-owned

corporation and existing under the laws of the United Kingdom, was assessed by the CIR
for deficiency income taxes for the years 1959 to 1963.

BOAC challenged the validity of the assessment, arguing that while it has local sales agents
who sell airline tickets, its revenue was really derived from rendering transportation
services, not from the mere ticket sales. Further, it argued that since it did not transport
passengers and cargo to and from the Philippines, its income did not come from Philippine
sources, therefore not taxable.

The Tax Court reversed the CIR, holding that the proceeds of sales of BOAC passage tickets
in the Philippines by its sale agents did not constitute BOAC income from Philippine
sources, hence not subject to Philippine income tax.

RULING

The Supreme Court ruled in favor of the CIR.

Being a resident foreign corporation, BOAC is subject to tax upon its total net income in the
preceding taxable year from all sources within the Philippines. The source of an income is
the property, activity or service that produced the income.

For the source of income to be considered as coming from the Philippines, it is sufficient
that the income is derived from activity within the Philippines. In the present case, the
BOAC derived its revenue from ticket sales in the Philippines; payment for the tickets were
made in the Philippines and handed in Philippine currency; and the flow of wealth
proceeded from, and occurred within, Philippine territory, enjoying the protection accorded
by the Philippine government. In consideration of such protection, the flow of wealth should
share the burden of supporting the government.
MADRIGAL vs. RAFFERTY
GR no. L-12287, August 7, 1918
FACTS:
Vicente and Susana were legally married under conjugal partnerships. Vicenta filed a
sworn declaration with the CIR, showing his total net income for the year 1914 (sum of
P296,302.00). Subsequently, Vicente submitted the claim that P296,302.00 did not
represent his income for the year 1914, but was the income of the conjugal partnership
existing between himself and his wife Susana, and that in computing and assessing the
additional income tax provided by the Act of Congress the income declared by Vicente
should be divided into two equal parts between him and Susana, one-half to be considered
the income of Vicente and the other half the income of Susana, with each spouse filing a
separate return. Hence, Vicente claimed that each spouse should be entitled to the P8,000
exemption, which would result in a lower amount of income tax due.
CIR denied and Vicente filed under protest.
ISSUE:
1. Define income tax.
2. W/N the P296,302.00 income filed by Vicente should be divided equally between him
and his wife, Susana? — NO
3. What are the functions of Income Tax?
4. What are personal exemptions?
RULING:

1. Income means profits or gains. A tax on income is not a tax on property.

"The fact is that property is a tree, income is the fruit; labor is a tree, income the
fruit; capital is a tree, income the fruit."
Income as contrasted with capital or property is to be the test. The essential
difference between capital and income is that capital is a fund, income is a flow. A
fund of property existing at an instant of time is called a capital. A flow of services
rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time is
called an income. Capital is wealth, while income is the service of wealth.
2. NO. Susana has an inchoate right in the property (interest in the ultimate property
rights and in the ultimate ownership of property acquired as income after such
income has become capital) of her husband during the life of the conjugal
partnership but that she has no absolute right to one half of the income of the
conjugal partnership.
Not being seized of a separate estate, Susana Paterno cannot make a separate return
in order to receive the benefit of the exemption which would arise by reason of the
additional tax. As she has no estate and income, actually and legally vested in her
and entirely distinct from her husband's property, the income cannot properly be
considered the separate income of the wife for the purposes of the additional tax.
Moreover, The provisions of the Civil Code concerning conjugal partnerships have no
application to the Income Tax Law. The Income Tax Law does not look on the spouses
as individual partners in an ordinary partnership. The husband and wife are only
entitled to the exemption of P8,000 specifically granted by the law. The higher
schedules of the additional tax provided by the Income Tax Law directed at the
incomes of the wealthy may not be partially defeated by reliance on provisions in our
Civil Code dealing with the conjugal partnership. The aims and purposes of the
Income Tax Law must be given effect.
3. One of the functions of Income Tax is to mitigate the evils arising from the
inequalities in the distribution of income and wealth which are considered deterrents
to social progress, by a progressive scheme of taxation, which places the burden on
those best able to pay.
To carry out this idea, public considerations have demanded an exemption roughly
equivalent to the minimum of subsistence.
4. Personal exemptions are arbitrary amounts (they may not be fully adequate to cover
all personal expenses) which are allowable deductions from gross or net income, for
personal, living or family expenses. According to the Supreme Court, the amount has
been calculated to be roughly equivalent to the minimum of subsistence.
James v. United States
366 U.S. 213 (1961)
[Note: this is a US case. The laws cited are US laws. But PH Income Tax Laws were based
on US laws, take note also]
FACTS:
The petitioner is a union official who, with another person, embezzled in excess of $738,000
during the years 1951 through 1954 from his employer union and from an insurance
company with which the union was doing business. Petitioner failed to report these
amounts in his gross income in those years, and was convicted for willfully attempting to
evade the federal income tax due for each of the years 1951 through 1954 in violation of §
145(b) of the Internal Revenue Code of 1939 and § 7201 of the Internal Revenue
ISSUE:
WON embezzled funds are to be included in the "gross income" of the embezzler in the year
in which the funds are misappropriated.
HELD:
YES. Embezzled money is taxable income of the embezzler in the year of the embezzlement
under § 22(a) of the Internal Revenue Code of 1939, which defines "gross income" as
including "gains or profits and income derived from any source whatever," and under §
61(a) of the Internal Revenue Code of 1954, which defines "gross income" as "all income
from whatever source derived."
Unlawful, as well as lawful, gains are comprehended within the term "gross income."
Section II B of the Income Tax Act of 1913 provided that "the net income of a taxable person
shall include gains, profits, and income . . . from . . . the transaction of any lawful business
carried on for gain or profit, or gains or profits and income derived from any source
whatever. . . ."
When the statute was amended in 1916, the one word "lawful" was omitted. This revealed
the obvious intent of that Congress to tax income derived from both legal and illegal
sources, to remove the incongruity of having the gains of the honest laborer taxed and the
gains of the dishonest immune.
There has been a widespread and settled administrative and judicial recognition of the
taxability of unlawful gains of many kinds. These include protection payments made to
racketeers, ransom payments paid to kidnappers, bribes, money derived from the sale of
unlawful insurance policies, graft, black market gains, funds obtained from the operation of
lotteries, income from race track bookmaking and illegal prize fight pictures.
The starting point in all cases dealing with the question of the scope of what is included in
"gross income" begins with the basic premise that the purpose of Congress was "to use the
full measure of its taxing power.
The Court has given a liberal construction to the broad phraseology of the "gross income"
definition statutes in recognition of the intention of Congress to tax all gains except those
specifically exempted.
“All income from whatever source derived,” have been held to encompass all "accessions to
wealth, clearly realized, and over which the taxpayers have complete dominion."
A gain "constitutes taxable income when its recipient has such control over it that, as a
practical matter, he derives readily realizable economic value from it." [Realization Test –
receipt of income]

Anderson v Posadas
G.R. No. 44100 September 22, 1938
Good will is the reputation of good name of an establishment. If the good will, that is, the
good reputation of the business is acquired in the course of its management and operation,
it does form part of the capital with which it was established. It is an intangible moral profit
which is subject to income tax.
FACTS:
William Anderson paid the sum of P42,542.63 as penalty for fraud committed in his income
tax returns corresponding to the years 1918 and 1919, which he claimed as deduction for
the income tax return made by him for the year 1921. CFI approved the reduction of the
sum of P42,542.63 representing 100 per cent surcharge on income tax.
In 1915, William Anderson purchased the business of Erlanger & Galinger. He incorporated
the partnership with an authorized capital of P600,000 (all of which were subscribed by
Anderson) divided into 1,200 shares at the par value of P500 each. Anderson paid P70,000
and the unpaid balance of P530,000 was entered in an underwriting account, which was
opened in the corporation in Anderson’s name, in place of his personal account.
In 1918, Anderson opened a goodwill account. On the same day, he sold to Simon 200
shares at the rate of 1 to 1, receiving in payment thereof the sum of P50,000 with a loss of
P50,000. The next day, Anderson sold 300 more shares to Feldstein at the rate of 3 to 1,
and received in payment thereof the sum of P50,000, having lost P100,00 in the
transaction.
In view of said losses, Anderson deducted the sum of P50,000 from the taxable income
stated by him in his return for the year 1918, and the sum of P75,000 from his return for
the year 1919, or a total amount of P125,000. Said deductions were approved by the
Bureau of Internal Revenue.

Juan Posadas, Commissioner of Internal Revenue attempted to collect a tax (P300,000) at

which Anderson was assessed the goodwill of the business. Anderson agreed to eliminate
the goodwill by debiting the sum in his capital account and crediting it to the goodwill
account.
It appears that with the P100,000 paid by Feldstein on account of his purchasing 500
shares, the loss (P125,000) has been recovered and it is but just that the P125,000 be
restored as taxable income.
CFI Manila decided and held that P155,000 (which represents proceeds of the sale of the
Goodwill Account) and that P125,000 (representing the recovered loss) is not subject to
income tax.
ISSUES:
1. WON the P42,542.63 paid by Anderson as penalty for fraud committed in his income
tax returns corresponding to the years 1918 and 1919, may be deducted from the
income tax return made by him for the year 1921?
2. WON the amount of P125,000 subject to income tax?
3. WON goodwill account of P155,000 is subject to income tax?
HELD:
1. NO. Section 5 of the Income Tax Law enumerates the items that may be deducted in
computing the net income of a citizen or resident of the Philippines, but the amount
paid as penalty for fraud is not mentioned among them.
Section 15 of said Act provides, among other things, that "In case a false or
fraudulent return or list is willfully made, the Collector of Internal Revenue shall add to
the tax one hundred per centum of its amount. the amount so added to any tax shall be
collected at the same time and in the same manner and as part of the tax unless the
tax has been paid before the discovery of the neglect, falsity, or fraud, in which case
the amount so added shall be collected in the same manner as the tax."
Pursuant to the authority conferred by the Revised Administrative Code and by Act
No. 2833, as amended by Act No. 2926, the Department of Finance, under whose
jurisdiction the Bureau of Internal Revenue falls, promulgated, on August 17, 1921,
Regulations No. 20, entitled "Income Tax Regulations," Section 33 of which, in
interpreting the word "taxes," provides, among other things, as follows: "The word
’taxes’ means taxes proper and no deductions should be allowed for amounts
representing interest or penalties incident to delinquency."
2. YES. It is subject to income tax. The good will created by an incorporator in the
course of the business of a corporation and appraised to pay the unpaid price of
shares subscribed to by said incorporator, is a profit and is subject to the payment of
income tax.
In the case, the loss of P125,000 suffered by Anderson (by reason of the sale of said
500 shares) has been recovered, and it is but just that the sum of P125,000,
deducted from the profits by reason of losses suffered temporarily on the capital, be
restored.
3. YES. The good will account of P155,000 was created "because the conditions of the
business deserved the establishment of this item. Good will may be defined to be the
“advantage or benefit which is acquired by an establishment, beyond the mere value
of the capital stock, funds, or property employed therein in consequence of the
general public patronage and encouragement which it received from constant or
habitual customers on account of its local position or common celebrity or reputation
for skill, affluence, punctuality, or from other accidental circumstances or
necessities, or even from ancient partialities or prejudices…”
Good will is the reputation of a good name of an establishment. If the good will, that
is, the good reputation of the business is acquired in the course of its management
and operation, it does form part of the capital with which it was established. It is an
intangible moral profit, susceptible of valuation in money, acquired by the business
by reason of the confidence reposed in it by the public, due to the efficiency and
honesty shown by the manager and personnel thereof in conducting the same on
account of the courtesy accorded its customers, which moral profit, once it is
valuated and used, becomes a part of the assets.
In the case, the good will of P155,000 created by Anderson has been beneficial not
only to him but also to Feldstein in the proportion of 7/12 for Feldstein, which is the
proportion of the participation of each in the shares of the corporation Erlanger &
Galinger, Inc., that is, P90,412 for Anderson and P64,588 for Feldstein, inasmuch as
Anderson’s personal debt for the balance of the unpaid shares was diminished by
said sum of P90,412 and Feldstein’s capital account increased by P64,588.

The benefit received by Anderson does not consist merely in the sum of P90, 412. He
also realized a gain of P70,838 from the sale of 500 shares to Feldstein When you add
these two amounts it makes a total of P161,250, that is, P6,250 more than the sum
of P155,00 on which the Collector of Internal Revenue is attempting to collect tax
from him.
In view of the foregoing considerations, the Court holds: (1) That the fines paid as
penalty by a taxpayer cannot be deducted from the amount subject to the payment of
income tax; (2) that the amount deducted from the income by reason of temporary
partial loss from the capital should, upon the recovery of said loss, be restored to the
profits and pay the corresponding tax, and (3) that the good will created by an
incorporator in the course of the business of a corporation and appraised to pay the
unpaid price of shares subscribed to by said incorporator, is a profit and is subject to
the payment of income tax.
FERNANDEZ HERMANOS
Vs
CIR

29 SCRA 552

FACTS:
 The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the
principal purpose of engaging in business as an "investment company" with main
office at Manila.
 Upon verification of the taxpayer's income tax returns for the period in question, the
Commissioner of Internal Revenue assessed against the taxpayer the sums of
P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged
deficiency income taxes for the years 1950, 1951, 1952, 1953 and 1954, respectively.
 Said assessments were the result of alleged discrepancies found upon the
examination and verification of the taxpayer's income tax returns for the said years,
summarized by the Tax Court in its decision of June 10, 1963.
 The Tax Court set aside the Commissioner's treatment as taxable income of certain
increases in the taxpayer's net worth. It found that:

For the year 1950, respondent determined that petitioner had an increase in
net worth in the sum of P30,050.00, and for the year 1951, the sum of P1,382.85.
These amounts were treated by respondent as taxable income of petitioner for said
years.

 It appears that petitioner had an account with the Manila Insurance Company, the
records bearing on which were lost. When its records were reconstituted the amount
of P349,800.00 was set up as its liability to the Manila Insurance Company. It was
discovered later that the correct liability was only 319,750.00, or a difference of
P30,050.00, so that the records were adjusted so as to show the correct liability. The
correction or adjustment was made in 1950.
 Respondent contends that the reduction of petitioner's liability to Manila Insurance
Company resulted in the increase of petitioner's net worth to the extent of
P30,050.00 which is taxable.
ISSUES:
1. Whether the CIR is correct.
2. Whether government's right to collect the deficiency income taxes in question has
already prescribed.

RULING:
1. No. This is erroneous. The principle underlying the taxability of an increase in the
net worth of a taxpayer rests on the theory that such an increase in net worth, if
unreported and not explained by the taxpayer, comes from income derived from a
taxable source. (See Perez v. Araneta, G.R. No. L-9193, May 29, 1957; Coll. vs. Reyes,
G.R. Nos. L- 11534 & L-11558, Nov. 25, 1958.) In this case, the increase in the net
worth of petitioner for 1950 to the extent of P30,050.00 was not the result of the
receipt by it of taxable income. It was merely the outcome of the correction of an error
in the entry in its books relating to its indebtedness to the Manila Insurance
Company. The Income Tax Law imposes a tax on income; it does not tax any or every
increase in net worth whether or not derived from income. Surely, the said sum of
P30,050.00 was not income to petitioner, and it was error for respondent to assess a
deficiency income tax on said amount.
 The same holds true in the case of the alleged increase in net worth of petitioner for
the year 1951 in the sum of P1,382.85. It appears that certain items (all amounting to
P1,382.85) remained in petitioner's books as outstanding liabilities of trade creditors. These
accounts were discovered in 1951 as having been paid in prior years, so that the necessary
adjustments were made to correct the errors. If there was an increase in net worth of the
petitioner, the increase in net worth was not the result of receipt by petitioner of taxable
income." The Commissioner advances no valid grounds in his brief for contesting the Tax
Court's findings. Certainly, these increases in the taxpayer's net worth were not taxable
increases in net worth, as they were not the result of the receipt by it of unreported or
unexplained taxable income, but were shown to be merely the result of the correction of
errors in its entries in its books relating to its indebtedness’s to certain creditors, which
had been erroneously overstated or listed as outstanding when they had in fact been duly
paid. The Tax Court's action must be affirmed.
2. Regarding the second issue of prescription, this Court has long rejected the
taxpayer's argument that the Commissioner's action to collect the taxpayer's tax
liability should be deemed to have prescribed for the Commissioner's failure to file a
complaint for collection against it in a suitable civil action, as opposed to the answer
filed by the Commissioner to its petition for review of the questioned assessments in
the case a quo.
According to the rule established by this Court, "a judicial action for the collection of
a tax is begun by the filing of a complaint with the proper court of first instance, or
where the assessment is appealed to the Court of Tax Appeals, by filing an answer to
the taxpayer's petition for review wherein payment of the tax is prayed for."
This is but logical for where the taxpayer avails of the right to appeal the tax
assessment to the Court of Tax Appeals, the said Court is vested with the authority
to pronounce judgment as to the taxpayer's liability to the exclusion of any other
court.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
TOURS SPECIALISTS, INC., and THE COURT OF TAX APPEALS, respondents.

G.R. No. L-66416 March 21, 1990

FACTS:
 From 1974 to 1976, Tours Specialists, Inc. (TSI) derived its income from its activities
as a travel agency (servicing the travel needs, lodging, transportation of foreign
tourists and Filipino "Balikbayans" during their stay in the Phil.).
 To supply services to foreigners, TSI and its counterpart travel agency abroad agreed
to offer a package fee to its clients (TSI quotes the fee to be paid by tourist, but
tourist still has to pay for hotel room, food, and other personal expenses).
 Some tour agencies abroad request the local tour agencies (TSI in this case) that the
hotel room charges be paid through them (billing hotel sends the bill to TSI, the local
hotel identifies the tourist/group of tourists and the duration of their stay, and then,
TSI pays the local hotel with the funds entrusted to it by the foreign tour
correspondent agency).
 Despite this arrangement, Commissioner of Internal Revenue (CIR) assessed TSI for
deficiency of 3% contractor's tax as independent contractor by including the
entrusted hotel room charges in its gross receipts for the years 1974 to 1976.
 CIR: TSI should pay deficiency contractor's tax of P122,946.93, AND compromise
penalty of P500.00.
 TSI formally protested the assessment made by CIR (the money received and
entrusted to it by the tourist travel agencies to pay hotel room charges were not
considered by it as part of its taxable gross receipts for purposes of computing and
paying its contractor's tax).
 During one of the hearings in this case, a witness, Serafina Sazon, Certified Public
Accountant and in charge of the Accounting Department of TSI, had testified and
 stated that the amounts entrusted to it by the foreign tourist agencies intended for
payment of hotel room charges, were paid entirely to the hotel concerned, without
any portion being diverted to its own funds.
 Serafina Sazon’s testimony was corroborated by Gerardo Isada, General Manager of
TSI, declaring that payments of hotel accommodation are made through TSI without
any increase in the room charge and that the reason why tourists pay their room
charge through their foreign tourists agencies, is because the room charge is exempt
from hotel room tax under P.D. 31.
 Isada stated on cross-examination that if the payment is made thru TSI's tour
agency, the hotel cost or charges "is only an act of accomodation on its part" or that
the "agent abroad instead of sending several telexes and saving on bank charges they
take the option to send money to us to be held in trust to be endorsed to the hotel."
 CIR, without deciding TSI's written protest, caused the issuance of a warrant of
distraint and levy, and later, CIR had TSI's bank deposits garnished.
 CTA: money entrusted to private respondent Tours Specialists, Inc., earmarked and
paid for hotel room charges of tourists, travelers and/or foreign travel agencies does
not form part of its gross receipts subject to the 3% independent contractor's tax
under the National Internal Revenue Code of 1977.

ISSUE:
Whether amounts received by a local travel agency from a foreign travel agency intended for
payment of tourist’s hotel accommodation form part of gross receipts subject to 3%
contractor’s tax.
RULING:
NO, gross receipts subject to tax under the Tax Code do not include monies or receipts
entrusted to the taxpayer which do not belong to them and do not redound to the
taxpayer's benefit.

The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding
on this Court and absent strong reasons for this Court to delve into facts, only questions of
law are open for determination. In the recent case of Sy Po v. Court of Appeals, we ruled
that the factual findings of the Court of Tax Appeals are binding upon this court and can
only be disturbed on appeal if not supported by substantial evidence.

In the instant case, we find no reason to disregard and deviate from the findings of facts of
the Court of Tax Appeals. Evidence presented by TSI shows that the amounts entrusted to
it by the foreign tourist agencies to pay the room charges of foreign tourists in local hotels
were not diverted to its funds; this arrangement was only an act of accommodation on the
part of the private respondent. This evidence was not refuted.

In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc., the CTA, as
affirmed by the SC stated:

Needless to say, gross receipts of the proprietor of the amusement place should not
include any money which although delivered to the amusement place has been especially
earmarked by law or regulation for some person other than the proprietor. (The situation
thus differs from one in which the owner of the amusement place, by a private contract,
with its employees or partners, agrees to reserve for them a portion of the proceeds of the
establishment.

In another case, the SC resolved the issue in the following manner:

We think the reasons for upholding the Tax Court's decision in the first case apply to this
one. The ten-peso contribution never belonged to the Club. It was held by it as a trust
fund. And then, after all, when it received the ten-peso contribution, it at the same time
contributed ten pesos out of its own pocket, and thereafter distributed both amounts as
prizes to horse owners. It would seem unreasonable to regard the ten-peso contribution of
the horse owners as taxable receipt of the Club, since the latter, at the same moment it
received the contribution necessarily lost ten pesos too.
As demonstrated in the above-mentioned case, gross receipts subject to tax under the Tax
Code do not include monies or receipts entrusted to the taxpayer which do not belong to
them and do not redound to the taxpayer's benefit; and it is not necessary that there must
be a law or regulation which would exempt such monies and receipts within the meaning of
gross receipts under the Tax Code.

Parenthetically, the room charges entrusted by the foreign travel agencies to the private
respondent do not form part of its gross receipts within the definition of the Tax Code. The
said receipts never belonged to the private respondent. The private respondent never
benefited from their payment to the local hotels. As stated earlier, this arrangement was
only to accommodate the foreign travel agencies.

ISSUE OF PD 31 which exempts foreign tourists from payment of hotel room tax (BAKA
LANG ITANONG NI ATTY. BALILI):

Accordingly, the significance of P.D. 31 is clearly established in determining whether or not

hotel room charges of foreign tourists in local hotels are subject to the 3% contractor's tax.
As the respondent court aptly stated:

. . . If the hotel room charges entrusted to petitioner will be subjected to 3%

contractor's tax as what respondent would want to do in this case, that would
in effect do indirectly what P.D. 31 would not like hotel room charges of foreign
tourists to be subjected to hotel room tax. Although, respondent may claim
that the 3% contractor's tax is imposed upon a different incidence i.e. the gross
receipts of petitioner tourist agency which he asserts includes the hotel room
charges entrusted to it, the effect would be to impose a tax, and though
different, it nonetheless imposes a tax actually on room charges. One way or
the other, it would not have the effect of promoting tourism in the Philippines
as that would increase the costs or expenses by the addition of a hotel room
tax in the overall expenses of said tourists.

Tourist Trade and Travel Corporation

vs.
Commissioner of Internal Revenue
C T.A. Case No. 4806/ January 19/ 1996
FACTS:
 Petitioner is a domestic corporation duly organized and existing under and by virtue
of the laws of the Philippines, engaged on the business of tourism and travel, to
undertake and promote the development of tourist attractions and operate and
maintain essential facilities for tourist and travelers.
 In line with this purpose, petitioner leased from the City of Manila a parcel of land
upon which a complex was built. This lease contract entitled petitioner to a leasehold
right over the property for a period of 20 years.
 Thereafter, petitioner received two notices of assessment issued by respondent
demanding payment of alleged unpaid income and value-added taxes for the year
1988.
 Petitioner file a letter with the respondent requesting for a
reinvestigation/reconsideration of the findings made by the BIR examiners regarding
their tax liabilities.
 The said request was denied due to petitioners alleged refusal to turn over several
documents necessary to support the grounds for reconsideration.
 Petitioner denies this and stressed that it was willing to hand over the documents but
the BIR had rescheduled the investigation.
 Petitioner elevated its case to the CTA praying for the nullification of the
aforementioned assessment.
 The issue that confronts the court was Whether the petitioner is liable for the
payment of unpaid income and value-added tax as its tax liability.
 However, resolving the issue, an assessment was made, wherein the respondents
insists that the rentals paid by Shoemart and Rustan’s belong to the petitioner.
 Petitioner denies having received the rentals from the 2 establishments as its income
because it claims that it does not wholly own Harisson Plaza.
 In fact, it stressed that there are two other corporations who share ownership with
them and that the spaces leased and occupied by Rustan’s and Shoemart properly
belong to Multiplex Marketing Corporation and Plaza Amusement Co., Inc.
 Another aspect of the assessment issued by respondent concerns the alleged
undeclared rental income of petitioner.
 Petitioner claims that this amount correspondents to the 6 month rental advances
and six month rental deposits given by its lessees pursuant to the lease agreement
and should not be considered as income because the advance rentals received by
petitioner as lessor are eventually returned to the lessees on a quarterly basis over
the lifetime of the lease contract and the rental deposits are kept intact during the
lifetime of the said contract and are to be returned to said lessees upon the
expiration of the contract.

ISSUE:
Whether the petitioner’s claims are correct.
RULING:
The Court finds that the rental income generated from Rustan’s and Shoemart for the
spaces leased by them do not belong to the petitioner. The BIR records submitted
indicate that originally petitioner was the lessor of the space occupied by Rustan’s
whereby Rustan’s Commercial Corporation as lessee agreed to pay monthly rentals to
petitioner as lessor. However, the ownership and lesse over the building was entered
into between petitioner and MCC whereby petitioner assigned ownership, rights, interest
and obligations over the building rented by Rustan’s in favor of MMC. As a consequence
of the assignment, MCC assumed the rights of the petitioner as lessor to Rustan’s
whereby the latter paid MCC rentals for the lease of the property.
Similarly, a deed of assignment of ownership and lease right over the building
occupied and rented by Shoe Mart was executed between petitioner and the PACI. This
assignment had identical arrangements as that between petitioner and MCC, thus
rentals were no longer paid to petitioner but to PACI.
Also, the security deposit paid to the petitioner as lessor, should then not be considered
as income for tax purposes. By its very nature, the amount received by the lessor as
security deposit is eventually returned to the lessee hence, the petitioner did not earn
any gain or profit therefrom