CONWI vs CTA 213 SCRA 83

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

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

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

Madrigal vs. Rafferty

The essential difference between capital and income is that capital is a fund; income is a flow. A
fund of property existing at an instant of time is called capital. A flow of services rendered by
that capital by the payment of money from it or any other benefit rendered by a fund of capital
in relation to such fund through a period of time is called income. Capital is wealth, while
income is the service of wealth.

FACTS:
• Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The
marriage was contracted under the provisions of law concerning conjugal partnership
• On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73
• Vicente Madrigal was contending that the said declared income does not represent his income
for the year 1914 as it was the income of his conjugal partnership with Paterno. He said that in
computing for his additional income tax, the amount declared should be divided by 2.
• The revenue officer was not satisfied with Madrigal’s explanation and ultimately, the United
States Commissioner of Internal Revenue decided against the claim of Madrigal.
• Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 alleged
to have been wrongfully and illegally assessed and collected by the CIR.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in
computing for the additional income tax.

HELD:

• No! The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon
income and not upon capital and property.
• The essential difference between capital and income is that capital is a fund; income is a flow.
A fund of property existing at an instant of time is called capital. A flow of services rendered by
that capital by the payment of money from it or any other benefit rendered by a fund of capital
in relation to such fund through a period of time is called income. Capital is wealth, while
income is the service of wealth.
• As Paterno 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.
• To recapitulate, Vicente wants to half his declared income in computing for his tax since he is
arguing that he has a conjugal partnership with his wife. However, the court ruled that the one
that should be taxed is the income which is the flow of the capital, thus it should not be divided
into 2.
Commissioner vs Javier 199 SCRA 824

Facts:
In 1977, Victoria Javier received a $1 Million remittance in her bank account from her sister abroad,
Dolores Ventosa. Melchor Javier, Jr., the husband of Victoria immediately withdrew the said amount and
then appropriated it for himself. Later, the Mellon Bank, a foreign bank in the U.S.A. filed a complaint
against the Javiers for estafa. Apparently, Ventosa only sent $1,000.00 to her sister Victoria but due to a
clerical error in Mellon Bank, what was sent was the $1 Million.
Meanwhile, Javier filed his income tax return. In his return, heplace a footnote which states:
Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned
out to be an error and is now subject of litigation.
The Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability amounting to P4.8
Million. The CIR also imposed a 50% penalty against Javier as the CIR deemed Javier’s return as a
fraudulent return.

Issue:
Whether or not Javier is liable to pay the 50% penalty

Ruling:
No. It is true that a fraudulent return shall cause the imposition of a 50% penalty upon a taxpayer filing
such fraudulent return. However, in this case, although Javier may be guilty of estafa due to
misappropriating money that does not belong to him, as far as his tax return is concerned, there can be
no fraud. There is no fraud in the filing of the return. Javier’s notation on his income tax return can be
considered as a mere mistake of fact or law but not fraud. Such notation was practically an invitation for
investigation and that Javier had literally “laid his cards on the table.” The government was never
defrauded because by such notation, Javier opened himself for investigation.
It must be noted that the fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to
induce another to give up some legal right.

TUASON vs. LINGAD

[July 31, 1974; G.R. No. L-24248]
CASTRO, J

TOPIC: Ordinary gain, capital asset, NIRC Sec. 39 A (1)

DOCTRINE:
Captial Assets; definition: The term "capital assets" includes all the properties of a taxpayer whether or
not connected with his trade or business, except: (1) stock in trade or other property included in the
taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or
business; (3) property used in the trade or business of the taxpayer and subject to depreciation allowance;
and (4) real property used in trade or business. If the taxpayer sells or exchanges any of the properties
above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary loss; the gain or loss
from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss.

In the case at bar, Taxpayer operated a substantial rental business of several properties, not only those
subject in this case, such that the Taxpayer had to a real estate dealer's tax. Taxpayer's sales of the several
lots forming part of his rental business cannot be characterized as other than sales of non-capital assets.

FACTS:
The mother of Taxpayer (Petitioner Antonio Tuason) owned a 7 hectare parcel of land located in the City
of Manila. She subdivided the land into twenty-nine (29) lots. Possession of the land was eventually
inherited by Taxpayer in 1948.

Taxpayer instructed his attorney-in-fact to sell the lots. Twenty-eight (28) out of the twenty-nine parcels
were all sold easily. The attorney-in-fact was not able to sell the twenty-ninth lot (hereinafter Lot 29)
immediately because it was located at a low elevation.
In 1952, Lot 29 was filled, subdivided and gravel roads were constructed. The small lots were then sold
over the years on a uniform 10-year annual amortization basis. The attorney-in-fact, did not employ any
broker nor did he put up advertisements in the matter of the sale thereof.

In 1953 and 1954 the Taxpayer reported his income from the sale of the small lots (P102,050.79 and
P103,468.56, respectively) as long-term capital gains. The CIR upheld Taxpayer's treatment of this tax.

In his 1957 tax return the Taxpayer as before treated his income from the sale of the small lots
(P119,072.18) as capital gains. This treatment was initially approved by the CIR, but by 1963, the CIR
reversed itself and considered the Taxpayer's profits from the sales of the lots as ordinary gainsc

The CIR assesed a deficiency of P31,095.36 from the Taxpayer.

Contention of Taxpayer: As he was engaged in the business of leasing the lots he inherited from his
mother as well other real properties, his subsequent sales of the mentioned lots cannot be recognized as
sales of capital assets but of “real property used in trade or business of the taxpayer.”

ISSUE/S:

Whether or not the properties in question which the Taxpayer had inherited and subsequently sold in
small lots to other persons should be regarded as capital assets.

HELD:

No. It is Ordinary Income

As thus defined by law, CAPITAL ASSETS include all properties of a taxpayer whether or not connected
with his trade or business, except:

stock in trade or other property included in the taxpayer's inventory;

property primarily for sale to customers in the ordinary course of his trade or business;
property used in the trade or business of the taxpayer and subject to depreciation allowance; and
real property used in trade or business.
If the taxpayer sells or exchanges any of the properties above, any gain or loss relative thereto is an
ordinary gain or an ordinary loss; the loss or gain from the sale or exchange of all other properties of the
taxpayer is a capital gain or a capital loss.

Under Section 34(b)(2) of the old Tax Code, if a gain is realized by a taxpayer (other than a corporation)
from the sale or exchange of capital assets held for more than 12 months, only 50% of the net capital gain
shall be taken into account in computing the net income.

The Tax Code's provisions on so-called long-term capital gains constitutes a statute of partial exemption.
In view of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority, it is the taxpayer's burden to bring himself clearly
and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will be
resolved against him.

In the case at bar, after a thoroughgoing study of all the circumstances, this Court is of the view and so
holds that Petitioner-Taxpayer's thesis is bereft of merit. Under the circumstances, Taxpayer's sales of the
several lots forming part of his rental business cannot be characterized as other than sales of non-capital
assets. the sales concluded on installment basis of the subdivided lots do not deserve a different
characterization for tax purposes.

This Court finds no error in the holding that the income of the Taxpayer from the sales of the lots in
question should be considered as ordinary income.

Calasanz vs CIR 144 SCRA 664

Facts:
Ursula Calasanz inherited from her father an agricultural land. Improvements were introduced to make such land
saleable and later in it was sold to the public at a profit. The Revenue examiner adjudged Ursula and her spouse as
engaged in business as real estate dealers and required them to pay the real estate dealer’s tax.

Issue:
Whether or not the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains
taxable at capital gain rates

Ruling:
They are taxable as ordinary income. The activities of Calasanz are indistinguishable from those invariably employed
by one engaged in the business of selling real estate. One strong factor is the business element of development
which is very much in evidence. They did not sell the land in the condition in which they acquired it. Inherited land
which an heir subdivides and makes improvements several times higher than the original cost of the land is not a
capital asset but an ordinary asses. Thus, in the course of selling the subdivided lots, they engaged in the real estate
business and accordingly the gains from the sale of the lots are ordinary income taxable in full.

Gonzales v CTA (Taxation)

Gonzales v CTA G.R. No. L-14532 May 26, 1965
FACTS:
Both petitioners Jose and Juana Gonzales are co-heirs and co-owners, (one-sixth each) of a tract of land of 871,
[982.] square meters which they, along with four other co-heirs, inherited from their mother. So on November 15,
1956, Jose Leon Gonzales and Juana F. Gonzales submitted to the Court of Tax Appeals a joint petition seeking a
refund, this time of the amount of P86,166.00 for each of the two petitioners.
ISSUES:
(1) Whether or not petitioners' claim for refund of the total of P86,166.00 may be properly entertained; and
(2) Whether or not the sum of P89,309.61 which each of the petitioners received as interest on the value of the land
expropriated is taxable as ordinary income, and not as capital gain.
RULING:
1. No. the requirement of prior timely claim for refund of the sum of P86,166.00 had not been met in this case. The
demand for refund must precede the suit, and this requirement is mandatory; so much so that non-compliance
therewith bars the action
2. It is ordinary income."the acquisition by the Government of private properties through the exercise of the power of
eminent domain, said properties being justly compensated, is embraced within the meaning of the term 'sale' or
'disposition of property'" and the definition of gross income laid down by Section 29 of the Tax Code of the
Philippines. We also adhered to the view that the transfer of property through condemnation proceedings is a sale or
exchange and that profit from the transaction constitutes capital gain.

In fact, the authorities support the conclusion that for income tax purposes, interest does not form part of the price
paid by the Government in condemnation proceedings; and may not be treated as part of the capital gain.
Limpan vs Comm
Facts

Limpan Investment Corp is a domestic corporation engaged in the business of leasing real properties.
Among its real properties are lots and buildings in Manila and Pasay City acquired from Isabelo Lim and
his mother. After filing tax returns for 1956, 1957, the examiners of BIR discovered that the corporation
has understated its rental incomes by 20k and 81k during said years as well as claimed excessive
depreciation amounting to 20k and 16k. The CIR demanded payment for deficiency tax and surcharge.
Petitioners argue that these amounts were either deposited with the court by the tenants or have yet to
be received.

Issue:

W/N there was undeclared income

Held:

Yes, petitioner admitted that it had undeclared more than half of the amount, therefore it was
incumbent upon the corporation to establish the remainder of its pretensions by clear and convincing
evidence which was lacking in this case.

The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient
justification for the non-declaration of said income in 1957 since the deposit was resorted due to the
refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is
deemed to have constructively received such rentals in 1957.

The payment by the sub-tenant should have been reported as rental income in said year as it in still
income regardless of the source.

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
LEONOR DE LA RAMA, ET AL., respondents-appellees.

FACTS: The estate of the late Esteban de la Rama was the subject of Special Proceedings No. 401 of the
Court of First Instance of Iloilo. The executor-administrator, Eliseo Hervas, filed income tax returns of
the estate corresponding to the taxable year 1950. The Bureau of Internal Revenue later claimed that it
had found out that there had been received by the estate in 1950 from the De la Rama Steamship
Company, Inc. cash dividends amounting to P86,800.00, which amount was not declared in the income
tax return of the estate for the year 1950. The Bureau of Internal Revenue then made an assessment as
deficiency income tax against the estate.
The Collector of Internal Revenue wrote a letter to Mrs. Lourdes de la Rama-Osmeña informing
her of the deficiency income tax and asking for payment. Counsel for Lourdes wrote to the Collector
acknowledging receipt of the assessment but contended that Lourdes had no authority to represent the
estate, and that the assessment should be sent to Leonor de la Rama who was pointed to by said
counsel as the administratrix. The Deputy Collector of Internal Revenue then sent a letter to Leonor de
la Rama as administratrix of the estate, asking payment. The tax, as assessed, not having been paid, the
Deputy Commissioner of Internal Revenue, on September 7, 1959, wrote another letter to Lourdes
demanding the payment of the deficiency income tax within the period of thirty days from receipt
thereof. The counsel of Lourdes insisted that the letter should be sent to Leonor de la Rama. The Deputy
Commissioner of Internal Revenue wrote to Leonor de la Rama another letter, demanding the payment
within thirty days from receipt thereof.
The deficiency income tax not having been paid, the Republic of the Philippines filed a complaint
against the heirs of Esteban de la Rama. The Trial court, however, dismissed the complaint on the
ground that [relevant to the subject heading]it was Eliseo Hervas, and neither Leonor nor Lourdes, who
was the proper administrator at the time, and to whom the assessment should have been sent.
The appellant contended that the assessment had become final, because the decision of the
Collector of Internal Revenue was sent in a letter dated February 11, 1960 and addressed to the heirs of
the late Esteban de la Rama, through Leonor de la Rama as administratrix of the estate, and was not
disputed or contested by way of appeal within thirty days from receipt thereof to the Court of Tax
Appeals.
ISSUE: WON there was proper notice of the tax assessment
RATIO: If the notice was not sent to the taxpayer for the purpose of giving effect to the assessment, said
notice cannot produce any effect.
HELD: The SC sustained the finding of the lower court that neither Leonor nor Lourdes was the
administratrix of the estate of Esteban de la Rama. The Court noted that at the time the tax assessment
was sent, Special Proceedings No. 401 were still open with respect to the controverted matter regarding
the cash dividends upon which the deficiency assessment was levied. It is clear that at the time these
special proceedings were taking place, Eliseo Hervas was the duly appointed administrator of the estate.
Plaintiff-appellant also contends that the lower court could not take cognizance of the defense
that the assessment was erroneous, this being a matter that is within the exclusive jurisdiction of the
Court of Tax Appeals. This contention has no merit. According to Republic Act 1125, the Court of Tax
Appeals has exclusive jurisdiction to review by appeal decisions of the Collector of Internal Revenue in
cases involving disputed assessments, and the disputed assessment must be appealed by the person
adversely affected by the decision within thirty days after the receipt of the decision. In the instant case,
the person adversely affected should have been the administrator of the estate, and the notice of the
assessment should have been sent to him. The administrator had not received the notice of assessment,
and he could not appeal the assessment to the Court of Tax Appeals within 30 days from notice. Hence
the assessment did not fall within the exclusive jurisdiction of the Court of Tax Appeals.

COMMISSIONER OF INTERNAL REVENUE vs. WYETH SUACO LABORATORIES, INC. and

THE COURT OF TAX APPEALS

FACTS: Wyeth Suaco is a domestic corporation engaged in the manufacture and sale of assorted
pharmaceutical and nutritional products. Its accounting period is on a fiscal year basis ending October 31
of every year.

By virtue of Letter of Authority dated June 17, 1974 issued by then Commissioner of Internal Revenue
Misael P. Vera, Revenue Examiner Kabigting conducted an investigation and examination of the books of
accounts of Wyeth Suaco.1 The report disclosed that Wyeth Suaco was paying royalties to its foreign
licensors as well as remuneration for technical services to Wyeth International Laboratories of London.
Wyeth Suaco was also found to have declared cash dividends on September 27, 1973 and these were paid
on October 31, 1973. However, it allegedly failed to remit withholding tax at source for the fourth
(4th) quarter of 1973 on accrued royalties, remuneration for technical services and cash dividends,
resulting in a deficiency withholding tax at source in the aggregate amount of P3,178,994.15.2

Consequently, the Bureau of Internal Revenue assessed Wyeth Suaco on the aforesaid tax liabilities in
two (2) notices dated December 16, 1974 and December 17, 1974. These assessment notices were both
received by Wyeth Suaco on December 19, 1974.4

Wyeth Suaco argued that it was not liable to pay withholding tax at source on the accrued royalties and
dividends because they have yet to be remitted or paid abroad. With regard to what the Bureau of Internal
Revenue claimed as the amount of P2,952,391.00 forming part of the cash dividends declared in 1973,
Wyeth Suaco alleged that the same was due its foreign stockholders. Again, Wyeth Suaco was not able to
remit these dividends because of the restriction of the Central Bank in a memorandum implementing CB
Circular No. 289 dated February 21, 1970. Thus, Wyeth Suaco's contention was that a withholding tax at
source on royalties and dividends becomes due and payable only upon their actual payment or remittance.

Commissioner of Internal Revenue asked Wyeth Suaco to avail itself of the compromise settlement under
LOI 308. In its answer, Wyeth Suaco manifested its conformity to a 10% compromise provided it be
applied only to the basic sales tax, excluding surcharge and interest. As to the deficiency withholding tax
at source, Wyeth took exception on the ground that it involves purely a legal question and some of the
amounts included in the assessment have already been paid.

On December 10, 1979, petitioner, thru then acting Commissioner of Internal Revenue Ruben B.
Ancheta, rendered a decision reducing the assessment of the withholding tax at source for 1973 to
P1,973,112.86. However, the amount of P61,155.21 as deficiency sales tax remained the same. 6

Thereafter, Wyeth Suaco filed a petition for review in Court of Tax Appeals on January 18, 1980, praying
that petitioner be enjoined from enforcing the assessments by reason of prescription and that the
assessments be declared null and void for lack of legal and factual basis. 7 Court of Tax Appeals rendered
a decision enjoining the Commissioner of Internal Revenue from collecting the deficiency taxes.

The basis of the above decision was the finding of the Tax Court that while the assessments for the
deficiency taxes were made within the five-year period of limitation, the right of petitioner to collect
the same has already prescribed, in accordance with Section 319 (c) of the Tax Code of 1977. The said
law provides that an assessment of any internal revenue tax within the five-year period of limitation
may be collected by distraint or levy or by a proceeding in court, but only if begun within five (5)
years after the assessment of the tax. Hence, this recourse by petitioner.

ISSUE:
1. Whether or not petitioner's right to collect deficiency withholding tax at source and sales tax
liabilities from private respondent is barred by prescription.
2. Whether or not Wyeth Suaco sought reinvestigation or reconsideration of the deficiency tax
assessments issued by the Bureau of Internal Revenue.

RULING:

1. SEC. 318. Period of limitation upon assessment and collection — Except as provided in the
succeeding section, internal revenue taxes shall be assessed within five years after the return was
filed, and no proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period. ...
 SEC. 319. Exceptions as to period of limitations of assessment and collection of taxes. — x x x
xxx xxx

(c) Where the assessment of any internal revenue tax has been made within the period of
limitation above-prescribed such tax may be collected by distraint or levy by a proceeding in
court, but only if begun (1) within five years after the assessment of the tax, or (2) prior the
expiration of any period for collection agreed upon in writing by the Commissioner and the
taxpayer before the expiration of such five-year period. The period so agreed upon may be
extended by subsequent agreements in writing made before the expiration of the period
previously agreed upon. (emphasis supplied)

The main thrust of petitioner for the allowance of this petition is that the five-year prescriptive period
provided by law to make a collection by distraint or levy or by a proceeding in court has not yet
prescribed. Although he admits that more than five (5) years have already lapsed from the time the
assessment notices were received by private respondent on December 19, 1974 up to the time the
warrants of distraint and levy were served on March 12, 1980, he avers that the running of the
prescriptive period was stayed or interrupted when Wyeth Suaco protested the assessments.
Petitioner argues that the protest letters sent by SGV & Co. in behalf of Wyeth Suaco dated January 17,
1975 and February 8, 1975, requesting for withdrawal and cancellation of the assessments were actually
requests for reinvestigation or reconsideration, which could interrupt the running of the five-year
prescriptive period.

Settled is the rule that the prescriptive period provided by law to make a collection by distraint or levy or
by a proceeding in court is interrupted once a taxpayer requests for reinvestigation or
reconsideration of the assessment.

2. After carefully examining the records of the case, we find that Wyeth Suaco admitted that it was
seeking reconsideration of the tax assessments as shown in a letter of James A. Gump, its President and
General Manager.

Furthermore, when Wyeth Suaco thru its tax consultant SGV & Co. sent the letters protesting the
assessments, the Bureau of Internal Revenue, Manufacturing Audit Division, conducted a review and
reinvestigation of the assessments. This fact was admitted by Wyeth Suaco thru its Finance Manager in a
letter dated July 1, 1975 addressed to the Chief, Tax Accounts Division.

These letters of Wyeth Suaco interrupted the running of the five-year prescriptive period to collect the
deficiency taxes. The Bureau of Internal Revenue, after having reviewed the record of Wyeth Suaco, in
accordance with its request for reinvestigation, rendered a final assessment. This final assessment issue by
then Acting Commissioner Ruben B. Ancheta was date December 10, 1979 and received by private
respondent on January 2, 1980, fixed its tax liability at P1,973,112.86 as deficiency withholding tax at
source and P61,155.21 as deficiency sales tax. It was only upon receipt by Wyeth Suaco of this final
assessment that the five-year prescriptive period started to run again.

Verily, the original assessments dated December 16 and 17, 1974 were both received by Wyeth Suaco on
December 19, 1974. However, when Wyeth Suaco protested the assessments and sought its
reconsideration in two (2) letters received by the Bureau of Internal Revenue on January 20 and February
10, 1975, the prescriptive period was interrupted. This period started to run again when the Bureau of
Internal Revenue served the final assessment to Wyeth Suaco on January 2, 1980. Since the warrants of
distraint and levy were served on Wyeth Suaco on March 12, 1980, then, only about four (4) months of
the five-year prescriptive period was used.
WHEREFORE, the petition is GRANTED. Wyeth Suaco Laboratories, Inc, is hereby ordered to pay the
Bureau of Internal Revenue the amount of P1,973,112.86 as deficiency withholding tax at source, with
interest and surcharge in accordance with law, without prejudice to any reduction brought about by
payments or remittance made. Wyeth Suaco Laboratories, Inc. is also ordered to pay the Bureau of
Internal Revenue the amount of P60,855.21 as deficiency sales tax with interest and surcharge in
accordance with law. Costs against private respondent. SO ORDERED.

G.R. Nos. L-18843 and L-18844 August 29, 1974

CONSOLIDATED MINES, INC., petitioner,

vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. Nos. L-18853 & L-18854 August 29, 1974

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
CONSOLIDATED MINES, INC., respondent.

PONENTE: MAKALINTAL, C.J.

CASE DIGEST BY: KIRSTIE BARRION

Facts: The Company, a domestic corporation engaged in mining, had filed its income tax returns
for 1951, 1952, 1953 and 1956. In 1957 examiners of the BIR investigated the income tax
returns filed by the Company because its auditor, Felipe Ollada, claimed the refund of the sum of
P107,472.00 representing alleged overpayments of income taxes for the year 1951. After the
investigation the examiners reported that (A) for the years 1951 to 1954 (1) the Company had not
accrued as an expense the share in the company profits of Benguet Consolidated Mines as
operator of the Company's mines, although for income tax purposes the Company had reported
income and expenses on the accrual basis; (2) depletion and depreciation expenses had been
overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953 and
1954 had not been properly substantiated; and that (B) for the year 1956 (1) the Company had
overstated its claim for depletion; and (2) certain claims for miscellaneous expenses were not
duly supported by evidence.

In view of said reports the Commissioner of Internal Revenue sent the Company a letter of
demand requiring it to pay certain deficiency income taxes for the years 1951 to 1954, inclusive,
and for the year 1956. Deficiency income tax assessment notices for said years were also sent to
the Company. The Company requested a reconsideration of the assessment, but the
Commissioner refused to reconsider, hence the Company appealed to the Court of Tax Appeals.

On May 6, 1961 the Tax Court rendered judgment ordering the Company to pay the amounts of
P107,846.56, P134,033.01 and P71,392.82 as deficiency income taxes for the years 1953, 1954
and 1956, respectively.
However, on August 7, 1961, upon motion of the Company, the Tax Court reconsidered its
decision and further reduced the deficiency income tax liabilities of the Company to P79,812.93,
P51,528.24 and P71,382.82 for the years 1953, 1954 and 1956, respectively.

Both the Company and the Commissioner appealed to this Court. The Company questions the
rate of mine depletion adopted by the Court of Tax Appeals and the disallowance of depreciation
charges and certain miscellaneous.

Issue: Whether the Court of Tax Appeals erred with respect to the rate of mine depletion.

Held: The Tax Code provides that in computing net income there shall be allowed as deduction,
in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value
in the mine of the product thereof which has been mined and sold during the year for which the
return is made [Sec. 30(g) (1) (B)].

The formula for computing the rate of depletion is:

Cost of Mine Property

---------------------- = Rate of Depletion Per Unit Estimated ore Deposit of Product Mined and
sold.

The Commissioner and the Company do not agree as to the figures corresponding to either factor
that affects the rate of depletion per unit. The figures according to the Commissioner are:

P2,646,878.44 (mine cost) P0.59189 (rate of

------------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit)

while the Company insists they are:

P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- - = depletion per ton)
4,156,888 tons (estimated
ore deposit)

They agree, however, that the "cost of the mine property" consists of (1) mine cost; and (2)
expenses of development before production.

As an income tax concept, depletion is wholly a creation of the statute— "solely a matter of
legislative grace."Hence, the taxpayer has the burden of justifying the allowance of any
deduction claimed. As in connection with all other tax controversies, the burden of proof to show
that a disallowance of depletion by the Commissioner is incorrect or that an allowance made is
inadequate is upon the taxpayer, and this is true with respect to the value of the property
constituting the basis of the deduction. This burden-of-proof rule has been frequently applied and
a value claimed has been disallowed for lack of evidence.
The Company's balance sheet for December 31, 1947 lists the "mine cost" of P2,500,000 as
"development cost" and the amount of P1,738,974.37 as "suspense account (mining properties
subject to war losses)." The Company claims that its accountant, Mr. Calpo, made these errors,
because he was then new at the job. Granting that was what had happened, it does not affect the
fact that the, evidence on hand is insufficient to prove the cost of development alleged by the
Company. Nor can we rely on the statements of Eligio S. Garcia, who was the Company's
treasurer and assistant secretary at the time he testified on August 14, 1959. He admitted that he
did not know how the figure P4,238,974.57 was arrived at, explaining: "I only know that it is the
figure appearing on the balance sheet as of December 31, 1946 as certified by the Company's
auditors; and this we made as the basis of the valuation of the depletable value of the mines."

We, therefore, have to rely on the Commissioner's assertion that the "development cost" was
P131,878.44, broken down as follows: assessment, P34,092.12; development, P61,484.63;
exploration, P13,966.62; and diamond drilling, P22,335.07.

The question as to which figure should properly correspond to "mine cost" is one of fact. The
findings of fact of the Tax Court, where reasonably supported by evidence, are conclusive upon
the Supreme Court.

13 & 14. Commissioner of Internal Revenue vs. CA and GCL Inc.

Facts: Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees' trust
maintained by the employer, GCL Inc., to provide retirement, pension, disability and death
benefits to its employees. The Plan as submitted was approved and qualified as exempt from
income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No.
4917. In 1984, Respondent GCL made investsments and earned therefrom interest income from
which was witheld the fifteen per centum (15%) final witholding tax imposed by Pres. Decree
No. 1959,2 which took effect on 15 October 1984.
On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund in the amounts of
P1,312.66 withheld by Anscor Capital and Investment Corp., and P2,064.15 by Commercial
Bank of Manila. On 12 February 1985, it filed a second claim for refund of the amount of
P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the collection of the
15% final withholding tax from the interest income as it is an entity fully exempt from income
tax as provided under Rep. Act No. 4917 in relation to Section 56 (b) 3 of the Tax Code

The refund requested having been denied, Respondent GCL elevated the matter to respondent
Court of Tax Appeals (CTA). The latter ruled in favor of GCL, holding that employees' trusts are
exempt from the 15% final withholding tax on interest income and ordering a refund of the tax
withheld. Upon appeal, originally to this Court, but referred to respondent Court of Appeals, the
latter upheld the CTA Decision. Before us now, Petitioner assails that disposition.

It appears that under Rep. Act No. 1983, which took effect on 22 June 1957, amending Sec. 56
(b) of the National Internal Revenue Code (Tax Code, for brevity), employees' trusts were
exempt from income tax. That law provided:
 Sec. 56 Imposition of tax. —(a) Application of tax. — The taxes imposed by this Title
upon individuals shall apply to the income of estates or of any kind of property held in
trust, including

(b) Exception. — The tax imposed by this Title shall not apply to employees' trust which
forms a part of a pension, stock bonus or profit-sharing plan of an employer for the
benefit of some or all of his employees (1) if contributions are made to trust by such
employer, or employees, or both, for the purpose of distributing to such employees the
earnings and principal of the fund accumulated by the trust in accordance with such
plan, . . .

It is to be noted that the exemption from withholding tax on interest on bank deposits previously
extended by Pres. Decree No. 1739 if the recipient (individual or corporation) of the interest
income is exempt from income taxation, and the imposition of the preferential tax rates if the
recipient of the income is enjoying preferential income tax treatment, were both abolished by
Pres. Decree No. 1959. Petitioner thus submits that the deletion of the exempting and preferential
tax treatment provisions under the old law is a clear manifestation that the single 15% (now
20%) rate is impossible on all interest incomes from deposits, deposit substitutes, trust funds and
similar arrangements, regardless of the tax status or character of the recipients thereof. In short,
petitioner's position is that from 15 October 1984 when Pres. Decree No. 1959 was promulgated,
employees' trusts ceased to be exempt and thereafter became subject to the final withholding tax.

Upon the other hand, GCL contends that the tax exempt status of the employees' trusts applies to
all kinds of taxes, including the final withholding tax on interest income. That exemption,
according to GCL, is derived from Section 56(b) and not from Section 21 (d) or 24 (cc) of the
Tax Code, as argued by Petitioner.

Issue: Whether or not the GCL Plan is exempt from the final withholding tax on interest income
from money placements and purchase of treasury bills required by Pres. Decree No. 1959.

Held: Yes. In so far as employees’ trusts are concerned, the foregoing provision should be taken
in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No. 1983,
supra, which took effect on 22 June 1957. This provision specifically exempted employees’
trusts from income tax and is repeated hereunder for emphasis:

“Sec. 56. Imposition of Tax.—(a) Application of tax.—The taxes imposed by this Title upon
individuals shall apply to the income of estates or of any kind of property held in trust. xxx xxx “
(b) Exception.—The tax imposed by this Title shall not apply to employee’s trust which forms
part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all
of his employees x x x” The tax exemption privilege of employees’ trusts, as distinguished from
any other kind of property held in trust, springs from the foregoing provision. It is unambiguous.
Manifest therefrom is that the tax law has singled out employees’ trusts for tax exemption.

It is evident that tax exemption is likewise to be enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in a diminution of accumulated income and
reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul
of the very intendment of the law.

The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential
tax rates under the old law, therefore, cannot be deemed to extend to employees’ trusts. Said
Decree, being a general law, cannot repeal by implication a specific provision, Section 56(b)
(now 53 [b]) in relation to Rep. Act No. 4917 granting exemption from income tax to employees’
trusts. Rep. Act 1983, which excepted employees’ trusts in its Section 56(b) was effective on 22
June 1957 while Rep. Act No. 4917 was enacted on 17 June 1967, long before the issuance of
Pres. Decree No. 1959 on 15

The tax-exemption privilege of employees' trusts, as distinguished from any other kind of
property held in trust, springs from the foregoing provision. It is unambiguous. Manifest
therefrom is that the tax law has singled out employees' trusts for tax exemption.

And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts.
Employees' trusts or benefit plans normally provide economic assistance to employees upon the
occurrence of certain contingencies, particularly, old age retirement, death, sickness, or
disability. It provides security against certain hazards to which members of the Plan may be
exposed. It is an independent and additional source of protection for the working group. What is
more, it is established for their exclusive benefit and for no other purpose.

15. Collector of Internal Revenue v. Batangas Transport Company and Laguna-Tayabas

Bus Company (1958) Joint Emergency Operation;
Caveat: I’m not 100% sure if I got the right case, in the sense that this is an OG case … and I got mine off
lawphil.net. Rest assured nag-match naman ang title and doctrine involved, so most likely tama naman.
Doctrines: • A joint venture need not be undertaken in any of the standard form, or in conformity with the
usual requirements of the law on partnerships, in order that one could be deemed constituted for the
purposes of the tax on corporations.
• Although no legal personality may have been created by the Joint Emergency Operation, nevertheless,
said Joint Emergency Operation joint venture, or joint management operated the business affairs of the
two companies as though they constituted a single entity, company or partnership, thereby obtaining
substantial economy and profits in the operation.
Facts: This case is an appeal of the CTA decision which reversed the assessment and decision of
the Collector of Internal Revenue (CIR) assessing and demanding from respondents Batangas
Transpo and Laguna Bus the amount of Php54,143.54 which represent deficiency income tax
and compromise for the year 1946- 1949. Pending then appeal to the CTA, the assessment was
increased to P148,890.14 Respondent bus companies are 2 distinct and separate corporations,
engaged in the business of land transportation by means of motor busses and operating distinct
and separate lines.
Batangas Transpo Laguna Bus
Incorporation 1918 1928
Paid up capital (each) Php 1M Php 1M
Pre – war Head Office Batangas Laguna
Manager Joseph Benedict Martin Olsen
Connection & Close relation: Max Blouse
President and Owner of 30%
 stock of each corpo

During the war, the two companies lost their respective businesses. Post-war, they were able to
acquire 56 auto busses from the US Army which they divided equally.
Two years later, Martin Olsen resigned as manager and Joseph Benedict was appointed as
Manager of both companies by their respective Board of Directors. According to Benedict, the
purpose of the joint management called “Joint Emergency Operation” was to economize in
overhead expenses. At the end of each calendar year, all gross receipts and expenses of both
companies are determined and the net profit were divided 50-50 then transferred to the book of
accounts of each company, and each company prepares its own income tax return from their 50%
share.
The CIR theorizes that the 2 companies pooled their resources in the establishment of the Joint
Emergency Operation thereby forming a joint venture. He believes that a corporation exists,
distinct from the 2 respondent companies.
The CTA held that the Joint Emergency Operation is not a corporation within the contemplation
of the NIRC, much less a partnership, association or insurance company, and therefore was not
subject to income tax separately and independently of respondent companies.
Issues: W/N the 2 transportation companies involved are liable to the payment of income tax as
a corporation on the theory that the joint emergency operation organized and operated by them is
a corporation within the meaning of Sec 84 of the Revised Internal Revenue Code.
Held: YES, although no legal personality may have been created by the Joint Emergency
Operation, nevertheless said joint venture or joint management operated the business affairs of
the 2 companies as though they constituted a single entity, company or partnership, thereby
obtaining substantial economy and profits in the operation.
The Court ruled on this issue by citing the case of Eufemia Evangelista, et. al v. CIR – agency
case. This involved the 3 sisters who borrowed from their father money which they invested in
land and then improved upon and later sold. The sisters also hired their brother to oversee the
buy-and-sell of land. Contrary to their claim that said operation was merely a co-ownership, the
Court ruled that considering the facts and circumstances surrounding the said case, the 3 sisters
had purpose to engage in real estate transactions for monetary gain and then divide the profits
among themselves, making them co-partners. When the Tax Code included “partnerships”
among the entities subject to the tax on corporations, it must refer to organizations which are not
necessarily partnerships in the technical sense of the term, and that furthermore, said law defined
the term "corporation" as including partnerships no matter how created or organized.
Further, from the standpoint of income tax law, the procedure and practice of the 2 bus
companies in determining the net income of each was arbitrary and unwarranted. After all, the 2
companies operates in 2 different lines, in different provinces or territories, with different
equipment and personnel it cannot possibly be true and correct to say that the end of each year,
the gross receipts and income in the gross expenses of two companies are exactly the same for
purposes of the payment of income tax.
Thus, the Court held that the Joint Emergency Operation or sole management or joint venture in
this case falls under the provisions of section 84 (b) of the Internal Revenue Code, and
consequently, it is liable to income tax provided for in section 24 of the same code.
* But they were exempted from paying 25% surcharge for failure to file a tax return, because of
their honest belief (based on advice of their attorneys and accountants) that they are not required
to do so.
16. Commissioner of Internal Revenue vs. Carlos Ledesma, Julieta Ledesma, Vi-cente Gustilo. Jr. and
Amparo Ledesma de Gustilo

Facts: On July 9, 1949, Carlos Ledesma, Julieta Ledesma and the spouses Amparo Ledesma
andVicente Gustilo, Jr., purchased from their parents, the sugar plantation known as "HaciendaFortuna,"
consisting of 36 parcels of land, which sugar quota was included in the sale. By virtue of the purchase,
respondents owned one-third each of the undivided portion of the plantation.
Afterthe purchase of the plantation, herein respondents took over the sugar cane farming on the planta
tion beginning with the crop year 1948-1949. For the crop year 1948- 1949 the San Carlos Milling Co.,
Ltd. credited the respondents with their shares in the gross sugar production. The respondents shared
equally the expenses of production, on the basis of their respective one-third undivided portions of the
plantation. In their individual income tax returns for the year 1949 the respondents included as part of
their income their respective net profits derived from their individual sugar production from the
"Hacienda Fortuna," as herein-above stated. On July 11, 1949, the respondents organized themselves
into a general co-partnership under the firm name "Hacienda Fortuna", for the "production of sugar
cane for conversion into
sugar, palay and corn and such other products as may profitably be produced on said hacienda, which pr
oducts shall be sold or otherwise disposed of for the purpose of realizing profit for the partner-ship.”
The articles of general co-partnership were registered in the commercial register of the office of the
Register of Deeds in Bacolod City, Negros Occidental, on July 14, 1949. Paragraph 14 of the articles of
general partnership provides that the agreement shall have retroactive effect as of January1, 1949.

Issue: Whether or not respondent operated the “Hacienda Fortuna” as partnership prior to the exe-
cution of articles of co-partnership.

Ruling:
Yes. Respondents operated the "Hacienda Fortuna" as a partnership prior to the execution of the
articles of general co-partnership based on their intention as clearly shown in paragraph 14 of the
articles of general co-partnership which provides that the partnership agreement "shall be retroactive as
of January 1, 1949

(1) The Court of Tax Appeals erred in holding that herein respondents, as partners of the general co-
partnership "Hacienda Fortuna", are not subject to corporate income tax prior to its registration or for
the period from January 1 to July 13, 1949.
Sec. 24. Rate of tax on corporation. — (a) Tax on domestic corporations. — In general, there
shall be levied, collected, and paid annually upon the total net income received in the preceding
taxable year from all sources by every corporation organized in, or existing under the laws of,
the Philippines, no matter how created or organized, but not including duly registered general
co-partnerships (compañias colectivas), domestic life insurance companies and foreign life
insurance companies doing business in the Philippines, a tax upon such income equal to the sum
of the following: (Italics supplied.).
Section 24 of the Revenue Code imposes an income tax on corporations. The term "corporation"
includes unregistered general co-partnerships. (See. 84 [b]). Section 26 provides that persons carrying
on business in general co-partnership duly registered in the mercantile registry shall be liable for income
tax only in their individual capacity.