IncomeTax

MADRIGAL v. RAFFERTY Facts: Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnerships (sociedad de gananciales). On February 25, 1915, Vicente Madrigal filed sworn declaration on the prescribed form with the Collector of Internal Revenue, showing, as his total net income for the year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the year 19 14, but was in fact the income of the conjugal partnership existing between himself and his wife Susana Paterno, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-half to be considered the income of Vicente Madrigal and the other half of Susana Paterno. After payment under protest, and after the protest of Madrigal had been d ecided adversely by the Collector of Internal Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of the city of Manila against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to ha ve been wrongfully and illegally collected by the defendants from the plaintiff, Vicente Madrigal, under the provisions of the Act of Congress known as the Income Tax Law. Issue: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in computing for th e additional income tax? Ruling: No.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 f und of property existing at an instant of time is called capital. A flow of s ervices rendered by that capital by the payment of money from it or any other benefit rendered by a f und of capital in relation to such fund through a period of time is called income. Capital is w ealth, while income is the service of wealth. Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property a cquired as income after such income has become capital. Susana P aterno has no absolute right to one-half the income of t he conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate return in order to r eceive the benefit of the exemption which would arise by reason of the additional tax. As she h as 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 se parate income of the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not look on th e spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must b e given effect.________________ effect.__________________________________________ ___________________________________________________ ________________________________ _______ FISHER v. TRINIDAD (OCT30, 1922) FACTS: Frederick Fisher was a stockholder in the corporation Philippine American Drug Company, which was

doing business in the City of Manila. PADC declared a stock dividend, the proportionate share of the appellant was P24,800, which was issued to the appellant. In March 1920, the appellant, upon demand of the appellee, paid under protest, and voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend. For the recovery of that sum the present action w as instituted. The defendant demurred to the petition. The demurrer was sustained and the plaintiff appealed. F relies on ome decisions of the SC of the U S in which it was consistently held that "stock dividends" were capital and not an "income" and therefore not subject to t he "income tax" law. CIR Trinidad avers that the decisions of those cases should not be applied in the Ph bcoz d Ph statute is different from that of the US. ISSUE: Whether stock dividends may be considered as income RULING: No way! Income may be defined as " the amount of money coming to a person or corporation within a

specified time whether as payment or corporation within a specified time w hether as payment for services, interest, or profit from investment. A mere advance in value in no sense constitutes the "income" specified in the revenue law as "income" of the owner for the year in which the sale of the property was made. Such advance constitutes and can be treated merely as an increase of capital.

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends declared, as in the present case. The one is a disbursement to the stockholder of accumulated earnings, and the corporation at once parts irrevocably with all interest thereon. The latter receives, not an actual dividend, but certificate of stock w hich simply evidences his interest in the e ntire capital, including such as by investment of accumulated profits has been added to the original capital. They are not income to him, but represent additions to the source of his income, namely, his invested capital. One is an actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of corporation.________________

LIMPAN INVESTMENT CORPORATION v. CIR FACTS: Petitioner Limpan Investment Corporation, a d omestic corporation, is engaged in the business of leasing

real properties. Its principal stockholders are the spouses Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and control ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is the same Isabelo P. Lim. 1äwphï1.ñët  Its real properties consist of several lots and buildings, mostly situated situated in Manila and in Pasay City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim. Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the sums of P657.00 and P2,220.00. Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an investigation of petitioner's 1956 and 1957 income tax returns and, in the course t hereof, they discovered and ascertained that petitioner had underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable years and had claimed excessive depreciation depreciation of its buildings in the sums of P4,260.00 a nd P16,336.00 covering the same period. On the basis of t hese findings, respondent Commissioner of Internal Revenue issued its letterassessment assessment and demand for payment of deficiency income tax and surcharge against petitioner corporation. Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the assessment but the latter denied said request and reiterated its original assessment assessment and demand. Hence, the corporation filed its petition for review before the Tax Appeals court, questioning the correctness and validity of the above assessment assessment of r espondent Commissioner Commissioner of Internal Revenue. It disclaimed having received or collected the amount of P20,199.00, as unreported rental income for 1956, or any part thereof and denied having received or collected the amount of P81,690.00, as unreported rental income for 1957, or any part thereof, explaining that part of said amount totalling P31,380.00 was not declared as income in its 1957 tax return because its president, Isabelo P. Lim, who collected and received P13,500.00 from certain tenants, did not turn the same over to petitioner corporation in said year but did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals amounting to P10,800.00, over which the corporation had no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought not be declared as rental income. With regard to the depreciation which respondent disallowed and deducted from the returns filed by petitioner, the same witness tried to establish that some of its buildings are old and out of style; hence, they are entitled to higher rates of depreciation than those adopted by respondent in his assessment. On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the respondent that he personally interviewed the tenants of petitioner and found that these tenants had been regularly paying their rentals to the collectors of either petitioner or its president, Isabelo P. Lim, but these payments were not declared in the corresponding returns. The Tax Court upheld respondent Commissioner's Commissioner's assessment and demand for deficiency income tax which, as above stated in the beginning of this opinion, petitioner has appealed to this Court. ISSUE: Whether or not the respondent Court erred in holding that the petitioner had an unreported rental income of P20,199.00 for the year 1956, and t hat it erred in holding that the petitioner had an unreported rental income of P81,690.00 for the year 1957, and in holding that the depreciation in the amount of P20,598.00 claimed by petitioner for the years 1956 and 195 7 was excessive. RULING : The decision appealed f rom is affirmed. This appeal is manifestly unmeritorious. With respect to the balance, which petitioner denied having unreported in the disputed tax returns, the excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and on ly later transferred or disposed of the ownership of the buildings existing thereon to petitioner corporation, so as to  justify the alle corporation six percent (6%) (6%) of

the value of its properties to be applied to the rentals of the land and in exchange for whate ver rentals they may collect from the tenants who refused to recognize the new owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged transferors, or by any document o r unbiased evidence. Petitioner's denial and explanation of the non-receipt of the remaining unreported income for 1957 is n ot substantiated by satisfactory corroboration. As above noted, Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein. 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 to due to the refusal of petitioner to accept the same, and was not the f ault of its tenants; hence, petitioner is deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as rental income in said year, since it is income just the same regardless of its source. It appearing that the Tax Court applied rates of depreciation in accordance with Bulletin "F" of t he U.S. Federal Internal Revenue Service, which this Court pronounced as having strong persuasive effect in this jurisdiction, for having been the result of scientific studies and observation for a long period in the U nited States, after whose Income Tax Law ours is patterned, the depreciation in the amount of P20,598.00 claimed by petitioner for the years 1956 and 1957 w as not e xcessive.___________________________________________________________

CONWI vs. COURT OF TAX APPEALS FACTS: Petitioners are Filipino c itizens and employees of Procter and Gamble, Philippine Manufacturing Corporation. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation. During the years 1970 and 1971 petitioners w ere 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 filed their income tax returns for the year 19 70, they computed the tax due by applying the dollar-to-peso conversion on the basis of the floating rate ordained under B.I.R. Ruling No. 70-027. In 1973, petitioners filed their amended income tax returns for 1970 and 1971, this time using par value of the peso as basis for con verting their respective dollar income into Philippines pesos for purposes of c omputing and paying corresponding income tax due f rom them. This resulted in the alleged overpayments, refund and/or tax credit, for which claims for refund w ere filed with respondent Commissioner. Petitioners argued that since the dollar earnings do not fall within the classification of foreign exchange transactions, there occurred no actual inward remittances, and, t herefore, they are not included in the coverage of Central Bank Circular No. 289 which provides for the specific instances when the par value of t he peso shall not be the conversion rate used. They conclude that their earnings should be converted for income tax purposes using the par value of the Philippine peso. Without awaiting the resolution of t he Commissioner on their claims, petitioners filed their petition for review before the CTA. CTA held that the proper conversion rate for the purpose of repo rting and paying the Philippine income tax on th e dollar earnings of petitioners are t he rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. The refund claims were denied. ISSUES: 1.

WON petitioner’s dollar earnings are receipts derived from foreign exchange tr ansactions.

2.

WON the CTA erred in holding that the proper rate of co nversion is the prevailing free market rate of exchange and not the par value of the peso.

3.

WON petitioners are exempt to pay tax for such income since there were no remittance/ acceptance of their salaries in US D ollars into the Philippines.

HELD: 1.

NO. For the proper resolution of these 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 in claiming that their dollar earnings are not receipts derived from f oreign exchange transactions. For a foreign exchange transaction is simply that-foreign exchange being “the conversion of an amount of money of one country into an equivalent amount of money of another country. When petitioners were assigned to

the foreign subsidiaries of P&G, they were earning in their assigned nation’s currency and we re also spending in said currency. There was no conversion from one currency to another.

2.

NO. CB Circular No. 289 shows that the subject matters involved therein are export products, invisibles, receipts of foreign e xchange, foreign exchange payments, new foreign borrowing and 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 va lue of the peso should be the guiding rate used for income tax purposes.

3.

No. Even if there was no remittance and acceptance of their salaries and wages in US Dollars into th e Philippines, they are still bound to pay the tax. Petitioners forgot that they are citizens of the Philippines, and their income, within or without, and in this case wholly without or outside the Philippines, are subject to income tax. The petitions were denied for lack of merit.

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. Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows: Sec. 21. Rates of tax on citizens or residents. — A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every individual, whether a citizen of the Philippines residing therein or abroad or an alien residing in the Philippines, determined in accordance with the following schedule: xxx xxx xxx As income of the p etitioners, Revenue Memorandum Circulars 7-71 and 41-71, reiterating BIR Ruling 70-027, shall apply. These Revenue Memorandum Circulars were issued to prescribe a uniform rate of exchange f or internal revenue tax purposes.__________________________________________________________________ COMMISSIONER v. GLENSHAW GLASS Glenshaw manufactures glass bottles and containers. Hatford- Empire company manufactures the machines used by Glenshaw. Glenshaw sued Hatford-Empire. His claims were demands for exemplary damages for fraud and treble damages for injury to its business by reason of Hartford’s violation of the federal antitrust laws. They had a settlement wherein Hartford paid Glenshaw $800,000. Of this amount, around $324k, which was for punitive damages for fraud and antitrust violations, was not reported by Glenshaw as income. The Commissioner determined a deficiency, claiming as taxable the entire sum less o nly deductible legal fees. The Tax Court and the Court of Appeals ruled for Glenshaw. ISSUE: Whether or not the award for damages falls under “income derived from whatever source,” thus taxable HELD: YES. US Tax Code: SEC. 22. GROSS INCOME. "(a) GENERAL DEFINITION. 'Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service . . . of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. . . ." Here, we have instances of undeniable accessions to wealth, clearly realized, and over w hich the taxpayers have complete dominion. The mere fact that t he payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients. Respondents concede, as they must, that the recoveries are taxable to the extent that t hey compensate for damages actually incurred. It would be an anomaly that could not be justified in the absence of clear congressional intent to say that a recovery for actual damages is taxable, but not the additional amount extracted as punishment for the same conduct which caused the injury. And we find no such evidence of intent t o exempt these payments.____

MURPHY v. IRS Facts: Marrita Leveille (now “Murphy”) received compensatory damages of $70,000 after winning a complaint

$45,000 represented damages for emotional distress or mental anguish and $25,000 represented damages for injury to professional reputation. Murphy included the $70,000 in gross income on her 2000 tax return and paid $20,665 of related taxes. She later sought a refund of the $20,665. The IRS denied the request for a refund, and Murphy brought a suit against the IRS in the U.S. D istrict Court for the District of Columbia, which granted summary judgment for the IRS. On appeal to the D.C. Circuit, Murphy contended that her receipt of damages on account of personal injuries (including nonphysical personal injuries) was analogous to a tax-free return of capital (i.e., human capital) and was, therefore, not subject to taxation. Issue: WON Murphy can refund the amount she paid as tax in relation to the $70,000 awarded to her Ruling: When the Sixteenth Amendment was drafted, the word "incomes" had well understood limits. To be sure, the Supreme Court has broadly construed the phrase "gross income" in the IRC and, by implication, the word "incomes" in the Sixteenth Amendment, but it also has made plain that the power to tax income extends only to "gain[s]" or "accessions to wealth. That is why, as noted above, the Supreme Court has held a "return of capital" is not income. The question in this case is not, however, about a return of c apital—except insofar as Murphy analogizes human capital to physical or financial capital; the question is whether the compensation she received for her injuries is income. Here, if the $70,000 Murphy received was "in lieu of" something "normally untaxed, then her compensation is not income under the Sixteenth Amendment; it is neither a "gain" nor an "accession[] to wealth. As we have seen, it is clear from the record that the damages were awarded to make Murphy emotionally and reputationally "whole" and not to compensate her for lost wages or taxable earnings of any kind. The emotional well-being and good reputation she enjoyed before they were diminished by her former employer were not taxable as income. Under this analysis, therefore, the compensation she received in lieu of what she lost cannot be considered income and, hence, it would appear the Sixteenth Amendment does not empower the Congress to tax her award. Every indication is that damages received solely in compensation for a personal injury are not income within the meaning of that term in the Sixteenth Amendment. First, as compensation for the loss of a personal attribute, such as well-being or a good reputation, the damages are not received in lieu of income. Second, the framers of the Sixteenth Amendment would not have understood compensation for a personal injury, including a nonphysical injury, to be income. Therefore, we hold § 1 04(a)(2) unconstitutional insofar as it permits the taxation of an award of damages for mental d istress and loss of reputation. Accordingly, we remand this case to the district court to enter an order and judgment instructing the Government to refund the ta xes Murphy paid on her award plus applicable interest.______________________

OLD COLONY v. CIR Wiliam Wood was President of the American Woolen Company from the years 1918-1920. He included in his federal income tax the sa laries and commissions he received for such years. Pursuant to the company’s resolutions, it paid to the CIR Mr. Woods’ income and surtaxes fo r the latter’s salaries and commissions. The petitioners are the executors of the will of William M. Wood, deceased. On June 27, 192 5, before Mr. Wood's death, the Commissioner of Internal Revenue notified him by registered mail of the determination of a deficiency in income tax against him for the years 1919 and 1920. An appeal was taken to the Board of Tax Appeals. The Board found a deficiency in the federal income tax return of Mr. Wood for the year 1919 and for the year 1920. Issue: Whether or not the taxes paid by the employer assessable against the employee constitutes as additional taxable income to such employee? (Stated differently, whether or not the taxes paid by the compan y constitutes as additional income by Wood and therefore taxable?) Held: The taxes paid by the company for Wood c onstitutes as additional income, and therefore taxable. The payment of the tax by the employers was in consideration of the services rendered by the employee, and was again derived by the employee from his labor. The taxes were imposed upon the employee, which were payed by the employer, and that the employee entered upon his dut ies in the years in question under the express agreement that his income taxes would be paid by his employer. The taxes were paid upon a valuable consideration, namely, the services rendered by the employee a nd as part of the compensation therefor. _____

HELVERING v. BRUUN 309 U.S. 461 (1940) 

Bruun was a landlord. He leased some property to a tenant. When t he lease expired, the tenant left and Bruun took the property back.



In 1929, while the tenant was in possession of the property, they knocked down an old building and built a new building on the property. In 1933, when the y left, Bruun got to keep the new b uilding.



The building which had been erected upon said premises by the lessee had a fair market value of $64,245.68, and that the unamortized cost of the old b uilding, which was removed from the premises in 1929 to make way for the new b uilding, was $12,811.43, thus leaving a net fair market value as at July 1, 1933, of $51,434.25, for the aforesaid new building erected upon the premises by the lessee.

The IRS stepped in and said that Bruun's gain of a new building was a capital gain.  Contention of Bruun: Bruun argued that no income had been realized  yet because his interest was represented by a deed, and wh en the tenant left, he had the exact same deed he had when the tenant arrived. So he hadn't gained anything. Bruun suggested that the IRS would have to wait until the property was sold (aka the value was realized ). 

Basically, the construction of the new building increased the value of the land, but there were other ways the value could change. But until the la nd was sold, Bruun hadn't received anything.



See Eisner v. Macomber  (252 U.S. 189 (1920)), which says that in general, you don't have to report a gain until you sell the property (aka "severance is a prerequisite to realization").

Contention of IRS: The IRS argued that until the day the tenant left, Bruun didn't own a new building, as soon as the lease ended, Bruun did own a new building. He had received a gain and needed to pay taxes on it immediately. Issue: WON the improvements and increase attributable to the improvements are taxable. Held: The US Supreme Court found for the IRS. The US Supreme Court found that upon when a le ase ended, the landlord repossessed the real estate and improvements and increase in value attributable to the improvements was taxable. While it is true that economic gain is not always taxable as income, it is settled that the realization of gain need not be in cash derived from the sale of an asset. Gain may occur as a result of exchange of property, payment of the taxpayer's indebtedness, relief from a liability, or ot her profit realized from the completion of a transaction. The fact that the gain is a portion of t he value of property received by the taxpayer in the transaction does not negative its realization. Here, as a result of a business transaction, the respondent received back his land with a new building on it, which added an ascertainable amount to its value. It is not necessary to recognition of taxable g ain that he should be able to sever the improvement begetting the gain from his original capital. If that were necessary, no income could arise from the exchange of property, whereas such gain has always been recognized as realized taxable gain._________________________________________________________________________________ CIR v. CA, CTA and A. SORIANO CORP. Don Andres Soriano (American), founder of “A Soriano Y Cia” predecessor of ANSCOR, had a total shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of original issue when the corporation was founded and 134,659 shares as stock dividend declarations. So in 1964 when Soriano died, half of the shares he held went to his wife as her conjugal share (wife’s “legitime”) and the other half (92,577 shares, which is further broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to the estate. For sometime after his death, his estate still continued to receive stock dividends from ASC until it grew to at least 108,000 shares.

In 1968, ANSCOR through its Board issued a resolution for the redemption of shares from Soriano’s estate purportedly for the planned “Filipinization” of ANSCOR. Eventually, 108,000 shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted. Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against ASC for deficiency withholding tax-at-source based on the transactions of exchange and redemption of stocks The BIR made the corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty under (P.D.) 23. However, petitioner ruled that the invoked decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was assessed. The CIR explained that when the redemption was made, the estate profited (because ANSCOR would have to pay the estate to redeem), and so

ASC would have withheld tax payments from the Soriano Estate yet it remitted no such withheld tax to the government. Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling, after finding 36 sufficient evidence to overcome the  prima facie correctness of the questioned assessments.  In a petition for 37 review the CA as mentioned, affirmed the ruling of the CTA.  Hence, this petition. 38

The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act  which provides: Sec. 83. Distribution of dividends or assets by corporations. — (b) Stock dividends —  A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner  as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend , the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied) ANSCOR averred that it is not duty bound to withhold tax from the estate because it redeemed the said shares for purposes of “Filipinization” of ANSCOR and also to reduce its remittance abroad. Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b) making the proceeds thereof taxable. It also argues that the Section applies to stock dividends which are the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the estate of Don Andres gained from the redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-at-source arising from the two transactions, pursuant to Section 53 and 54 of the 1939 Revenue Act. ISSUE: Whether ANSCOR's redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend" making the proceeds thereof taxable under the provisions of the above-quoted law. HELD: The reason behind the redemption is not material. The proceeds from redemption are taxable and ANSCOR is duty bound to withhold the tax at source. The Soriano Estate definitely profited from the redemption and such profit is taxable, and again, A NSCOR had the duty to withhold the ta x. There was a total of 108,000 shares redeemed from the estate. 25,247.5 of that was original issue from the capital of ANSCOR. The rest (82,752.5) of the shares are deemed to have been from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate p rofits such as stock dividends.

It cannot be argued that a ll the 108,000 shares were distributed from the capital of ANSCOR and that the latter is merely redeeming them as such. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund doctrine — wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine was intended for the protection of corporate creditors.______________________

WISE & CO., INC., ET. AL., vs. MEER FACTS: Herein plaintiff-appellants Wise & Co., Inc. et. al were stockholders of Manila Wine Merchants, Ltd. (hereinafter referred to as the Hongkong Company), a foreign corporation duly authorized to do business in the Philippines. On May 27, 1937 its Board of Directors recommended to the stockholders that they adopt resolutions necessary to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation formed on May 27, 1937, for th e sum of P400,000. This sale was duly authorized by the stockholders of the Hongkong Company at a meeting held on July 2 2, 1937. The Hongkong Co. made a distribution from its earnings for the year 1937 t o its stockholders. As a result of the sale of its business and assets to Philippine Co., a surplus was rea lized and the HK Co.distributed this surplus to the shareholders including Wise & Co.Inc., et.al. Philippine income tax had been paid by HK Co. on the said surplus from which said distributions were made. At a special general meeting of the shareholders of the HK

distributed among the stockholders. The plaintiff- appellants duly filed Income Tax Returns, on which t he defendant, Collector of Internal Revenue Bibiano L. Meer made deficiency assessments of P11, 931.23 for the year 1937. They paid under written protest. Since July 1, 193 9 they requested from defendant a refund of the said amounts which defendant has refused and still refuses to refund. Now, before the Court of First Instance of Manila was a complaint for recovery of cert ain amounts therein specified. CFI ruled in favor of CIR Meer stating that that the Hongkong corporation, was in liquidation beginning June 1, 1937, that all dividends declared and paid thereafter were distributions of all its assets in complete liquidation and were subject to tax. Appellants appealed the decision of the CFI. ISSUE: W the distributions received by plaintiffs-appellants are ordinary dividends and therefore not taxable HELD: No. The SC affirmed the CFI’s judgment. Appellants contend that the amounts received by them and on which the taxes in question were assessed and collected were ordinary dividends. On the other hand, CIR contends that they were liquidating dividends. SC ruled that the d istributions under consideration were not ordinary dividends. Therefore, they are taxable as liquidating dividends. Income tax law states th at “Where a corporation, partnership, association, joint-account, or insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is a taxable income or a deductible loss as the case may be. Appellants received the distributions in question in exchange for the surrender and relinquishment by t hem of their stock in the HK Co. which was dissolved and in process of complete liquidation. Non-resident alien individual appellants contend that if the distributions received by them were to be considered as a sale of their stock to the HK Co., the pr ofit realized by them does not constitute income from Philippine sources and is not subject t o Philippine taxes, "since all steps in the carrying out of this so-called sale took place outside the Philippines." This contention is untenable. The HK Co. was at the time of the sale of its business in the Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the Philippines. The HK Co. was incorporated for the purpose of carrying on in the Philippine Islands the business of wine, beer, and spirit merchants and the other objects set out in its memorandum of association. Hence, its earnings, profits, and assets, including those from whose proceeds the distributions in question were made, the major part of which consisted in the purchase price of the business, had been earned and acquired in the Philippines. As such, it is clear that said distributions were income "from Philippine sources."________________

JAMES v. US 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 i n his gross income in those years. Petitioner was charged of a criminal case for embezzlement. He was sentenced for a t otal of three years imprisonment. In addition to criminal penalties for embezzlement, the IRS stepped in and claimed that the $738k should be counted in James' gross income. James argued that since a person is legally obligated to repay money th at they steal, they've received no income in the same way as a person receives no income from taking out a loan. So there should be no tax liability. Petitioner contends that the Wilcox rule has been in existence since 1946; that if Congress had intended to change the rule, it would have done so; that th ere was a general revision of the income tax laws in 1954 without mention of the rule; that a bill to c hange it was introduced in the Eighty-sixth Congress but was not acted upon; that, therefore, we may not change the rule now. But the fact that Congress has remained silent or has re-enacted a statute which we have construed, or that congressional attempts to amend a rule announced by this Court have f ailed, does not necessarily debar us from re-examining and correcting the Court's own errors. In Wilcox, the Court held that embezzled money does not constitute taxable income to the embezzler in the year of the embezzlement under 22 (a) of the Internal Revenue Code of 1939. Issue: Whether embezzled funds are to be included in the "gross income" of the embezzler in the year in which the funds are misappropriated. Held: Embezzled money is taxable income of the embezzler in the year of the embezzlement under 22 (a) of the Internal Revenue Code of 1939, wh ich defines "gross income" as including "gains o r 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." It had been a well-established principle, long before either Rutkin or Wilcox, that unlawful, as well as lawful, gains are comprehended within the term "gross income." Section II B of the Income Tax Act of 1913 p rovided that "the net income of a taxable person shall include gains, profits, and income from the transaction of any

. ." When the statute was amended in 1916, the one word "lawful" was omitted. This revealed, we think, 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. And, the Court has pointed out, with approval, that 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 t he operation of lotteries, income from race track bookmaking and illegal prize fight pictures.________________________________________________________

FACTS: Private respondent Efren P. Castaneda retired from the government service as Revenue Attache in the Philippine Embassy in London, England, on 10 Dec ember 1982. Upon retirement, he r eceived terminal leave pay from which petitioner CIR withheld P12,557.13 allegedly representing income tax.

CIR Vs. CA, CTA & GCL Re tirement Plan

The CTA found for private respondent Castaneda and ordered the CIR to refund Castaneda the sum of P12,557.13 withheld as income tax. Petitioner appealed the CTA decision. On 26 September 1990, the CA dismissed the petition for review and affirmed the decision of the CTA.

Facts: GCL Retirement Plan is an employees' trust maintained by the emp loyer, 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 CIR in accordance with RA 4917. I n 1984, GCL made investments and earned there from interest income which was withheld the 15% final withholding tax imposed by PD 1959, GCL filed with CIR a claim for refund in the amounts of P1,312.66 withheld by Anscor and P2,064.15 by Commercial Bank of Manila. In 1985, it filed a second claim for refund of t he amount of P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the collection of the 15% f inal withholding tax from the interest income as it is an entity fully exempt from income tax as provided under RA 4 917 in relation to Sec 56 (b) of the Tax Code. CIR – denied the refund, Petitioner elevated the matter to CTA which 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. CA - upheld the CTA Decision. CIR’s Contention  is that from 1984 w hen PD 1959 was promulgated, employees' trusts ceased to be exempt and thereafter became subject to the final withholding tax. GCL’s contention  is that the tax e xempt 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 Sec 56(b) and not from Sec 21 (d) or 24 (cc) of the Tax Code. Issue: Whether GCL is exempted from Income Tax Held: GCL Plan was qualified as exempt from income tax by the CIR in accordance with RA 4917. In so far as employees' trusts are concerned, the foregoing provision should be taken in relation to then Sec 56(b) (now 53[b]) of the Tax Code, as amended by RA 1983. 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. 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 p lans 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. The deletion in PD 1959 of the provisos regarding tax exemption and preferential tax rates under the old law, therefore, cannot be deemed to extent to employees' trusts. Said Decree, being a general law, cannot repeal by implication a specific provision, Sec 56(b) now 53 [b]) in relation to RA 4917 granting exemption from income tax to employees' trusts. RA 1 983, which exempted employees' trusts in its Sec 56 (b) was effective on 1957 wh ile RA 4917 was enacted on 1 967, long before the issuance of PD 1959 in 1984. A subsequent statute, general in character as to its terms and application, is not to be construed as repealing a special or specific enactment, unless the legislative purpose to do so is m anifested. This is so even if the provisions of the latter are sufficiently comprehensive to include what was set forth in the special act. There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt. The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the c ollection of income taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a t ax-exempt status from income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place. We herein rule that PD 1959 did n ot have the effect of revoking the tax e xemption enjoyed by employees' trusts; reliance on those authorities is now misplaced. WHEREFORE, the Writ of Certiorari prayed for is DENIED.

CIR vs. CA and EFREN P . CASTANEDA G.R. No. 96016 October 17, 1991

Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13, contending that the c ash equivalent of his terminal leave is e xempt from income tax. To comply with the 2-year prescriptive period within which claims for refund may be filed, Castaneda filed on 16 July 1984 with t he Court of Tax Appeals (CTA) a Petition for Review, seeking the refund of income tax withheld from his terminal leave pay.

ISSUE: WON terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is subject to withholding (income) t ax. HELD: We resolve the issue in the negative. The Solicitor General, acting on behalf of the CIR, contends that the terminal leave pay is income derived from employer-employee relationship, citing in support of his stand Section 28 of the National Internal Revenue Code; that as part of the compensation for services rendered, terminal leave pay is actually part of gross income of the recipient. Thus —

. . . It (terminal leave pay) cannot be viewed as salary for purposes which would reduce it. . . . there can thus be no "commutation of salary" when a government retiree applies for terminal leave because he is not receiving it as salary. What he applies for is a "commutation of leave credits." It is an accumulation of credits intended for old age or separation from service. . . . The Court has already ruled that the terminal leave pay received by a government official or employee is not subject to withholding (income) tax. In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al., G.R. No. 96032, 31 July 1991, the Court explained the rationale behind the employee's entitlement to an exemption from withholding (income) tax on his terminal leave pay as follows: . . . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. (Manual on Leave Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17). In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same p olicy considerations governing retirement benefits. In fine, not being part of the gross salary or income of a g overnment official or employee but a retirement benefit, terminal leave pay is not su bject to income tax.______________________________________________ RE: REQUEST OF ATTY. BERNARDO ZIALCITA FOR RECONSIDERATION OF THE ACTION OF THE FINANCIAL AND BUDGET OFFICE FACTS: On February 16, 1990 Atty. Zialcita retired from government service upon reaching the compulsory retirement age of 65 years. Withholding tax for compensation was deducted from the payment of the money value of his accumulated leave credits.

On 23 August 1990, a resolution was issued by the Court En Banc stating that the terminal leave pay of Atty. Zialcita received by virtue of his compulsory retirement can never be considered a pa rt of his salary subject to the payment of income tax but falls under the phrase “other benefits received by retiring employees and workers,” within the meaning of Section 1 of PD 220 and is thus exempt from the payment of income tax. That the money value of his accrued leave credits is not a part of his salary is further buttressed by Sec. 3 of PD No. 985, otherwise known as The "Budgetary Reform Decree on Compensation and Position Classification of 1976" particularly Sec. 3 (a) thereof, which makes it clear that the actual service is the period of time fo r which pay has been received, excluding the period covered by terminal leave.

Accordingly, the Court Resolved to (1) ORDER the Fiscal Management and Budget Office to refund Atty. Zialcita the amount of P59,502.33 which was deducted from his terminal leave pay as withholding tax; and (2) Declare that henceforth no withholding tax shall be deducted by any Office of this Court  from the terminal leave pay benefits of all retirees similarly situated including those who have already retired and f rom whose retirement benefits such withholding taxes were deducted. On September 18, 1990, the Commissioner of Internal Revenue, as intervenor- movant and through the Solicitor General, filed a motion for clarification and/or reconsideration. ISSUE: Whether commutation of leave credits (commonly known as terminal leave) is subject to income tax. HELD: No. REASONS: 1. Applying Section 12 (c) of Commonwealth Act 186, as incorporated into RA 660, and Section 28 (c) of CA 186, the amount received by Atty. Zialcita as a result of the conversion of these unused leaves into cash is exempt from income tax. Commonwealth Act No. 186. Section 12(c) of CA 186 states: ... Officials and employees retired under this Act shall be entitled to the commutation of the unused vacation leave and sick leave, based on the highest rate received, which they may have to their credit at the time of retirement.

Section 28(c) of the same Act, in turn, provides: (c) Except as herein otherwise provided, the Government Service Insurance System, all benefits granted under this Act , and all its forms and documents required of the members shall be exempt from all types of taxes, documentary stamps, duties and contributions, fiscal or municipal, direct or indirect, established or to be established; 2. The commutation of leave credits is commonly known as terminal leave. (Manual on Leave Administration Course for Effectiveness, published by the Civil Service Commission, p. 17) Terminal leave is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. ( supra, p. 16) Since terminal leave is applied for by an officer or employee who has already severed his connection with his employer and who is no longer working, then it follows that the terminal leave pay, which is the cash v alue of his accumulated leave credits, is no longer compensation for services rendered. It cannot be viewed as salary. 3.

The terminal leave pay of Atty. Zialcita may likewise be viewed as a "retirement gratuity received by government officials and employees" which is also another exclusion from gross income as provided for in Section 28(b), 7(f) of the NLRC. A gratuity is that paid to the beneficiary for past services rendered purely out of generosity of the giver or grantor.

Section 284 of the Revised Administrative Code grants to a government employee 15 days vacation leave and 15 days sick leave for every year of service. Hence, even if the government employee absents himself and exhausts his leave credits, he is still deemed  to have worked and to have rendered services. His leave benefits are already imputed in, and form part of, his salary which in turn is subjected to withholding tax on income. He is taxed on the entirety of his salaries without any deductions for any leaves not utilized. It follows then that the money values corresponding to these leave benefits both the used and unused have already been taxed during the year that they were earned. To tax them again when the retiring employee receives their money value as a form of government concern and appreciation plainly constitutes an attempt to tax the employee a second time. This is tantamount to double taxation. The 23 August 1990 Resolution (AM 90-6-015-SC), however, specifically applies only to employees of the Judiciary who retire, resign or are separated through no fault of their own. The resolution cannot be made to apply to other government employees, absent an actual case or controversy, as that would be in p rinciple an advisory opinion._____________________________________________________________________________

On March 1, 198 6, the government sequestered the station, including its properties, funds and other assets, and took over its management and operations from its owner, Roberto Benedicto. The government and Benedicto entered into a temporary agreement under which the latter would retain its management and operation. On November 3, 1 990, the Presidential Commission on Good Government (PCGG) and Benedicto e xecuted a Compromise Agreement, where Benedicto transferred and assigned all his rights, shares and interests in petitioner station to the government. In the meantime, the four ( 4) employees retired from the company and received, on staggered basis, their retirement benefits under the 1993 Collective Bargaining Agreement (CBA) between petitioner and the bargaining unit of its employees. When a salary increase took effect P1,500.00 salary increase was given to all employees of the company, current and retired, effective July 1994. However, when the four retirees demanded theirs, petitioner refused and instead informed them via a letter that their differentials would be used to offset the tax due on t heir retirement benefits in accordance with the National Internal Revenue Code (NIRC). The four (4) retirees filed separate complaints against IBC TV-13 Cebu and Station Manager Louella F. Cabañero for unfair labor practice and n on-payment of backwages before the N LRC, Regional Arbitration Branch VII. The complainants averred that their retirement benefits are exempt from income tax under Article 32 of the NIRC. The Labor Arbiter rendered judgment in f avor of the retirees. The retirement benefits of complainants Lagahit and Amarilla were exempt from income tax under Section 28(b) of the NIRC. However, the differentials due to the two complainants were computed three years backwards due to the law on prescription. NLRC affirmed. ISSUE: Whether or not the retirement benefits of respondents are part of their gross income Whether or not the petitioner is estopped from reneging on its agreement with respondent to pay for the t axes on said retirement benefits. HELD: We agree with petitioner’s contention that, under the CBA, it is not obliged to pay for t he taxes on the respondents’ retirement benefits. We ha ve carefully reviewed the CBA and find no provision where p etitioner obliged itself to pay the taxes on the retirement benefits of its employees.

We also agree with petitioner’s contention that, under the NIRC, the retirement benefits of respondents are part of their gross income subject to taxes. For the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the employer; (2) the retiring official or employee has been in the service of the same employer for at least 10 years; (3) the retiring official or employee is not less than 50 years of age at the time of his retirement; and (4) the benefit had been availed of only once.

4.

INTERCONTINENTAL BROADCASTING CORPORATION (IBC) vs. NOEMI B. AMARILLA et al FACTS: Petitioner employed the following persons at its Cebu station: Candido C. Q uiñones, Jr., Corsini R.

While it may indeed be conceded that the previous dispensation of petitioner IBC-13 footed the bill for the withholding taxes, upon discovery by the new management, this was stopped altogether as this was grossly prejudicial to the interest of the petitioner IBC-13. The policy of withholding the taxes due on the differentials as a remedial measure was a matter of sound business judgment and dictates of good governance aimed at protecting the interests of the government. Necessarily, the newly-appointed board and officers of the petitioner, who learned about this g rossly disadvantageous mistake committed by the former management of petitioner IBC-13 cannot be expected to just follow suit blindly. An illegal act simply cannot give rise to an obligation. Accordingly, the new officers were correct in not honoring this highly suspect practice and it is now their duty to rectify this anomalous occurrence, otherwise, they become remiss in the performance of t heir sworn responsibilities._________________________________________________________________________

CIR v. MITSUBISHI These cases, involving the same issue being contested by the same parties and having originated from the same factual antecedents generating the claims for tax credit of private respondents, the same were consolidated by resolution of this Court dated May 31, 1989 and a re jointly decided herein. FACTS: The records reflect that on April 1 7, 1970, Atlas Consolidated Mining and Development Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for

expansion of the productive capacity of the former's mines in To ledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to A tlas 'in the amount of $20,000,000.00, United S tates currency, for the installation of a new concentrator for copper production. Atlas, in turn undertook to sell t o Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from Japan. Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for purposes of its obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of ¥4,320,000,000.00, at about the same time as the approval of its loan for ¥2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the Bureau of Internal Revenue show that the a pproval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan b y September 30, 1981. Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter totalling P13,143,966.79 for the years 1974 and 1 975. The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) ( 1) and Section 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government. On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be applied against their existing and future t ax liabilities. The petitioner not having acted on the claim for tax c redit, on April 23, 1976 private respondents filed a petition for review with respondent Court. On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in f avor of Atlas in the amount of P1,971,595.01. A motion for reconsideration having been denied on August 20, 198 0, petitioner interposed an appeal to this Court. While CTA Case was still pending before the tax court, the corresponding 15% tax on the amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same basis for exemption. On June 25, 1979, Mitsubishi and Atlas filed a p etition for review with the Court of Tax Appeals. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or le gal basis. On January 15, 1981, relying on its prior ru ling, respondent court rendered judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated September 7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with respondent court and a petition for review was filed with this Court on December 19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated with G.R. No. 5 4908. ISSUE/S: 1.Whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and, therefore, exempt from withholding tax. 2. Whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on loans are exempt from taxes under the code. RULING: The loan and sales contract between Mitsubishi and Atlas does not co ntain any direct or inferential reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper c oncentrates. Surely, Eximbank had nothing to do with the sale of t he copper concentrates since all that Mitsubishi stated in its loan application with the former was that the amount being p rocured would be used as a loan to and in consideration for importing copper concentrates from Atlas. To repeat, the contract betw een Eximbank and Mitsubishi is entirely different. It is complete in itself, does not appear to be suppletory or collateral to another contract and is, t herefore, not to be distorted by other considerations aliunde. It is too settled a rule in th is jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of th e taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact c overed by the exemption so claimed, which onus petitioners have failed to discharge. Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to

Definitely, the taxability of a party cannot be blandly glossed over on the b asis of a supposed "broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution of much needed funds. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans or other d omestic securities with private foreign entities, which in turn w ill negotiate independently with their governments, could be availed of to take advantage of the tax exemption law under discussion. WHEREFORE, the decisions of the Court of Tax Ap peals dated April 18, 1980 and J anuary 15, 1981, respectively, are hereby REVERSED and SET ASIDE._____________________________________________________________

CIR v. MARUBENI Facts: Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and the construction business. It is duly registered to engage in such business in t he Philippines and maintains a branch office in Manila. Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of aut hority to examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year ending March 1985. In the course of the examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the National Development Company (NDC) in connection with th e construction and installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the Le yte Industrial Development Estate. All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to shipment in accordance with the terms of the contracts. They were already finished products when shipped to the Philippines. On March 1, 198 6, petitioner's revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractor's and commercial broker's taxes. Respondent questioned this assessment in a letter dated June 5, 1986. On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner assessing respondent several deficiency taxes. 2 Earlier, on August 2, 1986, Executive Order (E.O.) No. 41  declaring a one-time amnesty c overing unpaid income taxes for the years 1981 to 1985 was issued. The period of the amnesty in E.O. No. 41 w as later extended from October 31, 1986 to December 5, 1986 by E.O. N o. 54 dated November 4, 1986. The respondent availed of the amnesty. It is respondent's other argument that assuming it did not validly avail of the amnesty under the two Executive Orders, it is still not liable for the deficiency contractor's tax because the income from the projects came from the "Offshore Portion" of the contracts. The two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and equipment in the contract under the "Offshore Portion" were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes. Issue: Whether or not respondent’s income from the projects is subject to taxing jurisdiction of the Philippines Ruling: The service of "design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination. . . " of the two projects involved two taxing jurisdictions. These acts occurred in tw o countries — Japan and the Philippines. While the construction and installation work were com pleted within the Philippines, the evidence is clear t hat some pieces of equipment and supplies were completely designed and engineered in Japan. The tw o sets of ship unloader and loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other c onstruction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when s hipped to the Philippines. They, how ever, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax.______________________________________________________________________________ CIR vs BOAC FACTS: British Overseas Airways Corp (BOAC) is a 10 0% British Government-owned corporation organized and

operates air transportation service and sells transportation tickets over the routes of th e other airline members. BOAC had no landing rights in the Philippines and was not g ranted a Certificate of Public Convenience except for a nine-month period during 1961 and 196 2. Although it did not carry passengers/cargo to and from the Philippines, it maintained a general sales agent – Wamer Barnes and Co., Ltd and Qantas Airways – which was responsible for selling BOAC t ickets. The CIR initiated assessments for deficiency taxes against BOAC. After paying under protest and d enials by the CIR to refund the amount paid, BOAC filed cases with the Tax Court. The Tax Court held that the proceeds of ticket sales in Wamer and Q antas do not constitute income f rom Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines." The CTA position w as that income from transportation is income from services so that the place where services are rendered determines the source. ISSUE: WON the revenue derived by BOAC from ticket sales in the Philippines, constitute income of BOAC from Philippine sources, and accordingly taxable? HELD: The SC set aside the decision of the CTA, ordered BOAC to pay the deficiency taxes and denied the refund. The words 'income from any source whatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws. The source of an income is the property, activity or service that produced the income. For the source of income to be c onsidered as coming from the Philippines, it is sufficient that the income is derived from activity within the P hilippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The site of the source of payments is the Philippines. 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.

The absence of flight operations to and from the Philippines is not determinative of the source of income or t he site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity which produced the income.

CIR v. CTA & SMITH KLINE FACTS: In its 1971 original income tax return, Smith Kline declared a net taxable income of 1,482,277, and paid 511,274 as tax due. Among the deductions claimed from gross income was 501,040 as its share of the head office overhead expenses. However, on its amended return filed on March 01, 1973, there was an overpayment of 324,255 “arising from under deduction of home office overhead”. It made a formal claim for the refund of the alleged overpayment. It appears that sometime in O ctober 1972, Smith Kline received from its international dependent auditors, an authenticated certification to the effect that the Philippine share in the unallocated overhead expenses of the main office for the year ended December 31, 1971 was actually 1,424,484. It further stated in the certification that the allocation was made on the basis of the percentage of gross income in the Philippines to gross income of the corporation as a whole. By reason of the new adjustment, Smith Kline’s tax liability was greatly reduced from 511,247 to 168,992 resulting in an o verpayment of 324,255. ISSUE: WON the amended return filed by respondents in contrary to law. HELD: NO. the governing law found in sec. 37 of the NIRC, which reads “Income from sources within the Philippines: xxxxxxx (b) Net income from the sources in the Philippines. From the items specified in subsection (a) of this section there s hall be deducted the expenses, losses, or other d eductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the Philippines. The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income.

Where an expense is clearly related to the production of the Philippine-derived income or to Philippine operations (eg Salaries of Philippine personnel, rental of office building in the Philippines), that expenses can be deducted from the gross income acquired in the Philippines without resorting to apportionment. Clearly, the weight of evidence bolsters its position that the amount of 1,427,484 represents the correct ratable share, the same having been computed pursuant to section 37 (b) and section 16 0.________

THE PHILIPPINE GUARANTY CO., INC. v. CIR Facts: The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts with foreign insurance companies not doing business in the Philippines, thereby ceding to the foreign reinsurers a portion of the premiums on insurances it has originally underwritten in the Philippines. Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the premiums for 1953 and 1954. Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it filed its income tax returns for 1953 and 1951. Furthermore, it did not withhold or pay tax on them. Consequently, the Commissioner of Internal Revenue assessed Philippine Guaranty Co., Inc. against withholding tax on the ceded reinsurance premiums. Philippine Guaranty Co., Inc. protested the assessment on the ground that the premiums are not subject to tax for the premiums did not constitute income from sources within the Philippines because the foreign reinsurers did not engage in business in the Philippines, and CIR's previous rulings did not require insurance companies to withhold income tax due from fo reign companies. ISSUE: Are insurance companies required to withhold tax on reinsurance premiums ceded to foreign insurance companies? Ruling: Yes. The reinsurance contracts however show that the transactions or activities that constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against losses arising from the original insurances in the Philippines were performed in the Philippines. The reinsurance premiums were income created from the undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc. against liability for loss under original insurances. Such undertaking, as explained above, took place in the Philippines. These insurance premiums therefore came from sources within the Philippines and, hence, are subject to corporate income tax.

The power to tax is an attribute of so vereignty. It is a power emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide. Considering that the reinsurance premiums in question were afforded protection by the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the state._______

PHILAM LIFE V. CA Facts: This is a consolidated case involving a c laim for the refund of the amount as alledgely erroneous payment of withholding tax and an assessment for the similar amount as deficiency withholding tax as a result of the cancellation of a previously issued tax credit memo for the said amount in another CTA case. Philam Life entered into a Management Services Agreement with AIRCO whereby, effective on July 1, 1972 for a fee not e xtending $250k per annum AIRCO shall perform services for Philam Life. On September 30, 1978 AIRCO merge with AIG Inc., with the latter as the surviving corp and successor in interest in AIRCO’s agreement with Philam. On November 18, 1980 respondent CIR issued a t ax credit in favor of Ph ilam Life Memo representing the erroneous payment of the withholding tax at source on remittances to AIG for services rendered abroad. Consequently, it was followed by another claim for refund for the second erroneous tax payment and then another letter. Without waiting for the claim to be resolved by the respondent CIR, petitioners filed a petition seeking said refund. During its pendency however respondent CIR sent a letter denying petitioners claim for refund, cancel the tax credit memo issued and asked petitioner to pa y the amount of P643, 125 .00 as deficiency withholding tax at source for 1979 plus increments. Without protesting, Petitioner filed a petition seeking for the annulment of said assessment in the CTA, however the latter sustain the ruling of the respondent CIR. Issue:

Whether the services performed abroad by AIG, a non-resident corporation not doing business in the Philippines, May still be subject to an assessment of a withholding tax. Held:

Yes. A reading of the various management services enumerated in the said management services agreement will show that they can easily fall within under any of the expanded meaning of royalties as given in section 37 of the NIRC. Therefore being considered as having commercial undertaking within the meaning of section 37, the income derived for the services performed by AIG to PHILAM Life under said agreement shall be considered income from services within the Philippines. With this view, AIG being a non-resident corporation not engage in trade or business in the Philippines shall pay a tax equal to 35% of the gross income received during each taxable year from all sources within the Philippines as int erest, dividends, rents, royalties, salaries, premiums, annuities, emoluments or other fixed or determinable annual, periodical or casual gains profits and capital gains in relation to section 12 (6) (I) of the NIRC. In our jurisprudence, the test of taxability is the source and the s ource is that activity which produces income._______________________________________________

VODAFONE INT’L v. UNION OF INDIA & ANR. Facts: In February 2007, Vodafone International Holdings B.V (Vodafone or VIH), a Dutch entity, had acquired 100 percent shares in CGP (Holdings) Limited (CGP), a Cayman Islands company for USD 11.1 billion from Hutchinson Telecommunications International Limited (HTIL). CGP, through various intermediate companies/ contractual arrangements controlled 67 percent of Hutchison Essar Limited (HEL), an Indian company. The acquisition resulted in Vodafone acquiring control over CGP and its downstream subsidiaries including, ultimately, HEL. HEL was a joint venture between the Hutchinson group and the Essar group. It had obtained telecom licences to provide cellular telephony in different circles in India from November 1994. In September 2007, the tax department issued a show-cause notice to Vodafone to explain why tax was not withheld on payments made to HTIL in relation to the above transaction. The tax department contended that the transaction of transfer of shares in CGP had the effect of indirect transfer of assets situated in India. • Vodafone filed a writ petition in the Bombay High Court, inter alia, challenging the jurisdiction of the tax authorities in the matter. By its order dated 3 December 2008, the Bombay High Court held that the tax authorities had made out a prima facie case that the transaction was one of transfer of a capital asset situate in India, and accordingly, the Indian income-tax authorities had jurisdiction over the matter. • Vodafone challenged the order of the Bombay High Court before the Supreme Court. In its ruling, dated 23 January 2009, the Supreme Court directed the tax authorities to first determine the jurisdictional challenge raised by Vodafone. It also permitted Vodafone to challenge the decision of the tax authorities on the preliminary issue of jurisdiction before the High Court. • In May 2010, the tax authorities held that they had jurisdiction to proceed against Vodafone for their alleged failure to withhold tax from payments made under Section 201 of the Income-tax Act, 19 61 (the Act). This order of the tax authorities was challenged by Vodafone before the Bombay High Court. • By its order dated 8 September 2010, the Bombay High Court dismissed Vodafone's challenge to the order passed by the tax authorities. Vodafone filed a Special Leave Petition (SLP) against the High Court order before the Supreme Court. On 26 November 2010, SLP was admitted and the Supreme Court directed Vodafone to deposit a sum of INR 25000 million within three weeks and provide a bank guarantee of INR 85000 million within eight weeks from the date of its order. Held: At the heart of the controversy was the interpretation of S ection 9(1)(i) of the Act. As per th e said section, inter alia, income accruing or arising directly or indirectly from the transfer of a c apital asset situated in India is deemed to accrue/ arise in India in the hands of a non-resident. • In connection with the above, the Supreme Court observed that: Charge to capital gains under Section 9(1)(i) of the Act arises on existence of three elements, viz, transfer, existence of a capital asset and situation of such asset in India. The legislature has not used the words ‘indirect transfer' in Section 9(1)(i) of the Act. If the word ‘indirect' is read into Section 9(1)(i) of the Act, then the phrase ‘capital asset situate in India' would be rendered nugatory. Section 9(1)(i) of the Act does not have ‘look through' provisions, and it cannot be extended to cover indirect transfers of capital assets/ property situated in India. The proposals contained in the Direct Taxes Code Bill, 2010, on t axation of off-shore share transactions indicate that indirect transfers are not covered by Section 9(1)(i) of the Act. A legal fiction has a limited scope and it cannot be expanded by giving purposive interpretation, particularly if the result of such interpretation is to transform the concept of char geability which is also there in Section 9(1)(i) of the Act. The question of withholding tax at source would not arise as the subject matter of offshore transfer between the two non-residents was not liable to capital gains tax in India. For the purposes of Section 195 of the Act, tax presence has to be viewed in the conte xt of the transaction that

The Supreme Court further observed that as the re was no incidence of c apital gains tax in India, the provisions under Section 163 of the Act, for treating Vodafone as a representative assessee of HTIL, were not applicable. • Accordingly, the Supreme Court concluded that the transfer of the share in CGP did not result in the transfer of a capital asset situated in India, and gains from such transfer could not be subject to Indian tax. The Supreme Court reversed the decision of the Bombay High Court and held that the Indian tax authorities did not have territorial jurisdiction to tax the offshore transaction, and therefore, Vodafone was not liable to withhold Indian taxes._________________________________________________________________________