taxation itaxation i case digests

8/9/2019 TAXATION ITaxation i Case Digests

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TAXATION I

CASE DIGESTS

SUBMITTED BY:

BULAN, BLESSY MAY M.

ESTRADA, BENTEL JELLIE C.

FERNANDEZ, LORELYN

ORAS, PHYLIAN

TINDOC, NOBLIE

SUBMITTED TO: ATTY. CARANTES

INSTRUCTOR


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COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

MARUBENI CORPORATION, respondent.,

G.R. No. 13737, December 18, 2001

FACTS:

Petitioner assessed respondent for deficiency income, branch profit remittance,contractor's and commercial broker's taxes after the former’s revenue examiners found that

respondent have undeclared income from two contracts in the Philippines, both of which werecompleted in 1984. Assessment was based on the ground that subject contracts were for a pieceof work and for the construction and installation of facilities in the Philippines, the entire incometherefrom constituted income from Philippine sources which is subject to internal revenue taxes.Respondent filed petitions for reviewer before the Court of Tax Appeals(CTA) questioning the petitioner’s assessment. CTA ruled that the questioned deficiency taxes were cancelled and withdrawn because respondent had properly availed of tax amnesty under E.O. Nos. 41 and 64.

Since the said decision was affirmed by the Court of Appeals, petitioner filed this case before theSupreme Court alleging that respondent is disqualified from availing said tax amnesties becausethe latter falls under the exception in section 4(b) of E.O. 41 since respondent filed for incometax amnesty on October 30, 1986 when CTA Case No. 4109 had already been filed and was pending before the Court of Tax Appeals. On the other hand, respondent argued that even if itdid not validly avail of the tax amnesty, 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 whereinall materials and equipment in the contract under the "Offshore Portion" were manufactured andcompleted in Japan, not in the Philippines, and are therefore not subject to Philippine taxes.

ISSUES:

1. Whether or not the Court of Appeals erred in affirming the Decision of the Court of TaxAppeals which ruled that respondent's deficiency tax liabilities were extinguished uponrespondent's availment of tax amnesty under Executive Orders Nos. 41 and 64.

2. Whether or not respondent is liable to pay the income, branch profit remittance, andcontractor's taxes assessed by petitioner.

RULING:

1. No. Respondent was not disqualified from availing of the amnesty for income tax underE.O. No. 41. Section 4 (b) of E.O. No. 41 excepts from income tax amnesty those

taxpayers with income tax cases already filed in court as of the its effectivity. The filingof income tax cases in court must have been made before and as of the dateof effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4(b) there must have been no income tax cases filed in court against him when E.O. No. 41took effect. This is regardless of when the taxpayer filed for income tax amnesty, provided of course he files it on or before the deadline for filing. E.O. No. 41 took effecton August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income, branch profit remittance and contractor's tax assessments was filed by respondent with


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the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective onAugust 22, 1986, CTA Case No. 4109 had not yet been filed in court. Therefore,Respondent corporation did not fall under the said exception. The same ruling alsoapplies to the deficiency branch profit remittance tax assessment. In addition Courtdeclared that E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general

pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of anabsolute forgiveness or waiver by the government of its right to collect what is due it andto give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty,much like a tax exemption, is never favored nor presumed in law. If granted, the terms ofthe amnesty, like that of a tax exemption, must be construed strictly against the taxpayerand liberally in favor of the taxing authority. For the right of taxation is inherent ingovernment.

2. No. Respondent was able to present clear and convincing evidence that would establishthat not all its work under the subject contracts were performed in the Philippines but infact were completed in Japan in accordance with the provisions of the said contracts. As

provided in the contracts the service of "design and engineering, supply and delivery,construction, erection and installation, supervision, direction and control of testing andcommissioning, coordination… " of the two projects involved two taxing jurisdictions.

These acts occurred in two countries in Japan and the Philippines. While the constructionand installation work were completed within the Philippines, the evidence is clear thatsome pieces of equipment and supplies were completely designed and engineered inJapan. Corollary, contractor’s tax cannot be levied against respondent for servicesrendered in Japan. A contractor's tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature of an excise tax on the exercise of a privilege ofselling services or labor rather than a sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxingauthority only when the acts, privileges or business are done or performed within the jurisdiction of said authority.


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COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-

fact) Respondent.

G.R. No. 153793 August 29, 2006

FACTS:

Respondent, a non-resident German citizen, is the President of JUBANITEX, Inc., adomestic corporation engaged in manufacturing, importing and exporting, selling and disposingembroidered textile products. Respondent was also corporation appointed as commission agent,of the corporation, receiving 10% sales commission on all sales made by her. On April 14, 1998,respondent filed a claim to refund the amount of P170,777.26 which according to her was

mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended that hersales commission income is not taxable in the Philippines because the same was a compensationfor her services rendered in Germany and therefore considered as income from sources outsidethe Philippines. The Court of Tax Appeals in its decision denied her claim on the ground that thecommissions received by respondent were actually her remuneration in the performance of herduties as President of JUBANITEX and not as a mere sales agent thereof. The income derived byrespondent is therefore an income taxable in the Philippines because JUBANITEX is a domesticcorporation. On the other hand, the said decision was reversed by the Court of Appeals and ruledthat respondent received the commissions as sales agent of JUBANITEX and not as Presidentthereof. And since the "source" of income means the activity or service that produce the income,the sales commission received by respondent is not taxable in the Philippines because it arose

from the marketing activities performed by respondent in Germany. The CIR appealed this casearguing that the income earned by respondent is taxable in the Philippines because the sourcethereof is JUBANITEX, a domestic corporation located in the City of Makati. It thus impliedthat source of income means the physical source where the income came from. It further arguedthat since respondent is the President of JUBANITEX, any remuneration she received from saidcorporation should be construed as payment of her overall managerial services to the companyand should not be interpreted as a compensation for a distinct and separate service as a salescommission agent. Respondent countered that the income she received was payment for hermarketing services. She contended that income of nonresident aliens like her is subject to taxonly if the source of the income is within the Philippines. Source, according to respondent isthe situs of the activity which produced the income. And since the source of her income was hermarketing activities in Germany, the income she derived from said activities is not subject toPhilippine income taxation.

ISSUE:

1.Whether or not respondent’s sales commission income is taxable in the Philippines.

2.Whether or not the claim for tax refund should be denied.


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RULING:

1.Yes. Pursuant to the Section 25 of the NIRC, non-resident aliens, whether or not engaged in

trade or business, are subject to Philippine income taxation on their income received from allsources within the Philippines. Thus, the keyword in determining the taxability of non-residentaliens is the income’s "source."

Under Section 1 of Act No. 2833(1920), nonresident aliens are likewise subject to tax on income"from all sources within the Philippine Islands”.Act No. 2833 substantially reproduced theUnited States (U.S.) Revenue Law of 1916 as amended by U.S. Revenue Law of 1917. Being alaw of American origin, the authoritative decisions of the official charged with enforcing it in theU.S. have peculiar persuasive force in the Philippines.

The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from

sources within the U.S. and specifies when similar types of income are to be treated as fromsources outside the U.S. Under the said Code, compensation for labor and personal services performed in the U.S., is generally treated as income from U.S. sources; while compensation forsaid services performed outside the U.S., is treated as income from sources outside the U.S. Asimilar provision is found in Section 42 of Philippine NIRC. The Supreme Court of US has saidthat income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or(3) the sale of capital assets. If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the income should be from "sources within the UnitedStates." If the income is from capital, the place where the capital is employed should be decisive;if it is employed in this country, the income should be from "sources within the United States." Ifthe income is from the sale of capital assets, the place where the sale is made should be likewise

decisive.

The source of an income is the property, activity or service that produced the income. For thesource of income to be considered as coming from the Philippines, it is sufficient that the incomeis derived from activity within the Philippines. The Court reiterates the rule that "source ofincome" relates to the property, activity or service that produced the income. With respect torendition of labor or personal service, as in the instant case, it is the place where the labor orservice was performed that determines the source of the income. There is therefore no merit in petitioner’s interpretation which equates source of income in labor or personal service with the

residence of the payor or the place of payment of the income.

2.The settled rule is that tax refunds are in the nature of tax exemptions and are to beconstrued strictissimi jurisagainst the taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from taxation. Thefaxed documents presented by respondent did not constitute substantial evidence, or that relevantevidence that a reasonable mind might accept as adequate to support the conclusion that it was inGermany where she performed the income producing service which gave rise to the reportedmonthly sales in the months of March and May to September of 1995. She thus failed todischarge the burden of proving that her income was from sources outside the Philippines and


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exempt from the application of our income tax law. Hence, the claim for tax refund should bedenied.

NATIONAL DEVELOPMENT COMPANY, petitioner,vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. L-53961 June 30, 1987

FACTS:

Petitioner entered into contracts in Tokyo with several Japanese shipbuilding companiesfor the construction of twelve ocean-going vessels. Initial payments were made in cash andthrough irrevocable letters of credit. Fourteen promissory notes were signed for the balance by petitioner and, as required by the shipbuilders, guaranteed by the Republic of the

Philippines. Pursuant thereto, the remaining payments and the interests thereon were remitted indue time by the NDC to Tokyo. The petitioner remitted to the shipbuilders in Tokyo the totalamount of US$4,066,580.70 as interest on the balance of the purchase price. No tax waswithheld. Respondent then held petitioner liable on withholding tax. The respondent wassustained by the CTA. Thus, petitioner filed a petition for certiorari before the Supreme Courtarguing that Japanese shipbuilders were not subject to tax because all the related activities weredone in Tokyo.

ISSUES:

1.Whether or not the promissory notes were government securitiesexempt from taxation.

2.Whether or not the petitioner is liable to withholding tax despite the fact that all relatedactivities were done in Tokyo.

RULING:

1.No. The law invoked by the petitioner as authorizing the issuance of securities is R.A. No.1407, which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carrysuch authorization but, like R.A. No. 1407, does not exempt from taxes the interests on suchsecurities. It is also incorrect to suggest that the Republic of the Philippines could not collecttaxes on the interest remitted because of the undertaking signed by the Secretary of Finance in

each of the promissory notes.There is nothing in the above undertaking exempting the interestsfrom taxes. Petitioner has not established a clear waiver therein of the right to tax interests. Taxexemptions cannot be merely implied but must be categorically and unmistakablyexpressed. Any doubt concerning this question must be resolved in favor of the taxing power.The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on theinterests earned by the Japanese shipbuilders. It was the income of these companies and not theRepublic of the Philippines that was subject to the tax the NDC did not withhold.


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2.Yes. Under the Tax code, interest-bearing obligations of residents, corporate or otherwise, shall be treated as gross income from sources within the Philippines. Petitioner is a domesticcorporation with principal office in Manila. The Court ruled that petitioner should have withheldthe tax because the tax on interest received by foreign corporations not engaged in the trade or business in the Philippines is not conditioned on the fact that the sale or activity from which the

interest income took place in the Philippines. The residence of the debtor (petitioner) who paysthe interest is the determining factor of the source of interest income. Since petitioner was adomestic corporation, it follows that the interest payment it made is sourced within thePhilippines and is therefore subject to taxation.


vs.

SMART COMMUNICATION, INC., ⃰ Respondent.

G.R. Nos. 179045-46 ,August 25, 2010

FACTS:

Respondent entered into three Agreements for Programming and Consultancy Serviceswith Prism, a non-resident Malaysian corporation. Under the agreements, Prism was to provide programming and consultancy services for the installation of the Service Download Manager(SDM) and the Channel Manager (CM), and for the installation and implementation of SmartMoney and Mobile Banking Service SIM Applications (SIM Applications) and Private TextPlatform (SIM Application).

On June 25, 2001, Prism billed respondent in the amount of US$547,822.45.Thinkingthat these payments constitute royalties, respondent withheld the amount of US$136,955.61orP7,008,840.43,5 representing the 25% royalty tax under the RP-Malaysia TaxTreaty.Respondent filed with the Bureau of Internal Revenue (BIR), an administrative claim forrefund of the amount of P7,008,840.43.Respondent in its Petition for Review before CTA,claimed that it is entitled to a refund because the payments made to Prism are not royalties but"business profits," pursuant to the definition of royalties under the RP-Malaysia TaxTreaty. Respondent further averred that since under Article 7 of the RP-Malaysia Tax Treaty,"business profits" are taxable in the Philippines "only if attributable to a permanent establishmentin the Philippines, the payments made to Prism, a Malaysian company with no permanentestablishment in the Philippines," should not be taxed. Petitioner argued that respondent, aswithholding agent, is not a party-in-interest to file the claim for refund, and that assuming for thesake of argument that it is the proper party, there is no showing that the payments made to Prismconstitute "business profits." CTA upheld respondent’s right, as a withholding agent, to file theclaim for refund but entitled only to a partial refund. Although it agreed with respondent that the payments for the CM and SIM Application Agreements are "business profits," and therefore, notsubject to tax under the RP-Malaysia Tax Treaty, the Second Division found the payment for theSDM Agreement a royalty subject to withholding tax. CTA En Banc affirmed the Seconddivision’s ruling hence, petitioner appealed the case maintaining its argument.

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ISSUES:

(1) Whether or not respondent has the right to file the claim for refund; and (2) if respondent hasthe right, whether the payments made to Prism constitute "business profits" or royalties.

RULING:

1.Petitoner as withholding agent may file a claim for refund. Under Sections 204(c) and 229 ofthe National Internal Revenue Code (NIRC), the person entitled to claim a tax refund is thetaxpayer. However, in case the taxpayer does not file a claim for refund, the withholding agentmay file the claim. In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, a withholding agent was considered a proper party to file a claimfor refund of the withheld taxes of its foreign parent company. Although such relation betweenthe taxpayer and the withholding agent is a factor that increases the latter’s legal interest to file a

claim for refund, there is nothing in the decision to suggest that such relationship is required orthat the lack of such relation deprives the withholding agent of the right to file a claim for refund.

Rather, what is clear in the decision is that a withholding agent has a legal right to file a claim forrefund for two reasons. First , he is considered a "taxpayer" under the NIRC as he is personallyliable for the withholding tax as well as for deficiency assessments, surcharges, and penalties,should the amount of the tax withheld be finally found to be less than the amount that shouldhave been withheld under law. Second , as an agent of the taxpayer, his authority to file thenecessary income tax return and to remit the tax withheld to the government impliedly includesthe authority to file a claim for refund and to bring an action for recovery of such claim.

2. The payments for the CM and the SIM Application Agreements constitute "business profits".Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of any kindreceived as consideration for: "(i) the use of, or the right to use, any patent, trade mark, design or

model, plan, secret formula or process, any copyright of literary, artistic or scientific work, or forthe use of, or the right to use, industrial, commercial, or scientific equipment, or for informationconcerning industrial, commercial or scientific experience; (ii) the use of, or the right to use,cinematograph films, or tapes for radio or television broadcasting." These are taxed at the rate of25% of the gross amount.

Under the same Treaty, the "business profits" of an enterprise of a Contracting State is taxableonly in that State, unless the enterprise carries on business in the other Contracting State througha permanent establishment. The term "permanent establishment" is defined as a fixed place of business where the enterprise is wholly or partly carried on. However, even if there is no fixed place of business, an enterprise of a Contracting State is deemed to have a permanentestablishment in the other Contracting State if it carries on supervisory activities in that otherState for more than six months in connection with a construction, installation or assembly projectwhich is being undertaken in that other State.

In the instant case, it was established during the trial that Prism does not have a permanent establishment in the Philippines. Hence, "business profits" derived from Prism’sdealings with respondent are not taxable. The question is whether the payments made to Prismunder the SDM, CM, and SIM Application agreements are "business profits" and not royalties.


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The provisions in the agreements are clear. Prism has intellectual property right over the SDM program, but not over the CM and SIM Application programs as the proprietary rights of these programs belong to respondent. In other words, out of the payments made to Prism, only the payment for the SDM program is a royalty subject to a 25% withholding tax. A refund of theerroneously withheld royalty taxes for the payments pertaining to the CM and SIM Application

Agreements is therefore in order.

COMMISSIONER OF INTERNAL REVENUE vs. FILINVEST DEVELOPMENTCORPORATION

G.R. No. 163653. July 19, 2011

FACTS:

The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI),respondent Filinvest Development Corporation (FDC) is a holding company which also owned

67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC andFAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor ofthe latter parcels of land appraised at P4,306,777,000.00. In exchange for said parcels whichwere intended to facilitate development of medium-rise residential and commercial buildings,463,094,301 shares of stock of FLI were issued to FDC and FAI.

On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR)to the effect that no gain or loss should be recognized in the aforesaid transfer of real properties.Acting on the request, the BIR issued Ruling No. S-34-046-97 finding that the exchange isamong those contemplated under Section 34 (c) (2) of the old National Internal Revenue Code(NIRC) which provides that "(n)o gain or loss shall be recognized if property is transferred to a

corporation by a person in exchange for a stock in such corporation of which as a result of suchexchange said person, alone or together with others, not exceeding four (4) persons, gains controlof said corporation."

On various dates during the years 1996 and 1997, in the meantime, FDC also extendedadvances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC)and Filinvest Capital, Inc. (FCI). On 3 January 2000, FDC and FAI received from the BIR aFormal Notice of Demand to pay deficiency income and documentary stamp taxes, plus interestsand compromise penalties. The foregoing deficiency taxes were assessed on the taxable gainsupposedly realized by FDC from the Deed of Exchange it executed with FAI and FLI, on thedilution resulting from the Shareholders’ Agreement FDC executed with RHPL as well as the"arm’s-length" interest rate and documentary stamp taxes imposable on the advances FDCextended to its affiliates.

Both FDC and FAI filed their respective requests for reconsideration/protest, on theground that the deficiency income and documentary stamp taxes assessed by the BIR were bereftof factual and legal basis. Having submitted the relevant supporting documents pursuant to the31 January 2000 directive from the BIR Appellate Division, In view of the failure of petitionerCommissioner of Internal Revenue (CIR) to resolve their request for reconsideration/protest


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within the aforesaid period, FDC and FAI filed on 17 October 2000 a petition for review with theCourt of Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC.

CTA ruled that no taxable gain should have been assessed from the subject Deed ofExchange since FDC and FAI collectively gained further control of FLI as a consequence of the

exchange; that correlative to the CIR's lack of authority to impute theoretical interests on thecash advances FDC extended in favor of its affiliates, the rule is settled that interests cannot bedemanded in the absence of a stipulation to the effect; that not being promissory notes orcertificates of obligations, the instructional letters as well as the cash and journal vouchersevidencing said cash advances were not subject to documentary stamp taxes; and, that no incometax may be imposed on the prospective gain from the supposed appreciation of FDC'sshareholdings in FAC.

CIR filed its answer, claiming that the transfer of property in question should not beconsidered tax free since, with the resultant diminution of its shares in FLI, FDC did not gainfurther control of said corporation. Likewise calling attention to the fact that the cash advances

FDC extended to its affiliates were interest free despite the interest bearing loans it obtainedfrom banking institutions, the CIR invoked Section 43 of the old NIRC which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the power to allocate,distribute or apportion income or deductions between or among such organizations, trades or business in order to prevent evasion of taxes." The CIR justified the imposition of documentarystamp taxes on the instructional letters as well as cash and journal vouchers for said cashadvances on the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94 which provide that loan transactions are subject to said tax irrespective of whether or not they areevidenced by a formal agreement or by mere office memo. The CIR also argued that FDCrealized taxable gain arising from the dilution of its shares in FAC as a result of its Shareholders'Agreement with RHPL.

ISSUE: Whether or not Petitioner CIR is correct is invoking Section 43 of the Old NIRC asimplemented by Revenue Regulations No. 2, Section 179 (b) and (c).

RULING: No. Admittedly, Section 43 of the 1993 NIRC provides that, "(i)n any case of two ormore organizations, trades or businesses (whether or not incorporated and whether or notorganized in the Philippines) owned or controlled directly or indirectly by the same interests, theCommissioner of Internal Revenue is authorized to distribute, apportion or allocate gross incomeor deductions between or among such organization, trade or business, if he determines that suchdistribution, apportionment or allocation is necessary in order to prevent evasion of taxes orclearly to reflect the income of any such organization, trade or business." In amplification of theequivalent provision under Commonwealth Act No. 466, Sec. 179(b) of Revenue RegulationNo. 2 states as follows:

Determination of the taxable net income of controlled taxpayer. – (A)DEFINITIONS. – When used in this section –

(1) The term "organization" includes any kind, whether it be a sole proprietorship,a partnership, a trust, an estate, or a corporation or association, irrespective of the


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place where organized, where operated, or where its trade or business isconducted, and regardless of whether domestic or foreign, whether exempt ortaxable, or whether affiliated or not.

(2) The terms "trade" or "business" include any trade or business activity of any

kind, regardless of whether or where organized, whether owned individually orotherwise, and regardless of the place where carried on.

(3) The term "controlled" includes any kind of control, direct or indirect,whether legally enforceable, and however exercisable or exercised. It is the realityof the control which is decisive, not its form or mode of exercise. A presumptionof control arises if income or deductions have been arbitrarily shifted.

(4) The term "controlled taxpayer" means any one of two or moreorganizations, trades, or businesses owned or controlled directly or indirectly bythe same interests.

(5) The term "group" and "group of controlled taxpayers" means theorganizations, trades or businesses owned or controlled by the same interests.

(6) The term "true net income" means, in the case of a controlled taxpayer, the netincome (or as the case may be, any item or element affecting net income) whichwould have resulted to the controlled taxpayer, had it in the conduct of its affairs(or, as the case may be, any item or element affecting net income) which wouldhave resulted to the controlled taxpayer, had it in the conduct of its affairs (or, asthe case may be, in the particular contract, transaction, arrangement or other act)dealt with the other members or members of the group at arm’s length. It does not

mean the income, the deductions, or the item or element of either, resulting to thecontrolled taxpayer by reason of the particular contract, transaction, orarrangement, the controlled taxpayer, or the interest controlling it, chose to make(even though such contract, transaction, or arrangement be legally binding uponthe parties thereto).

(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, bydetermining, according to the standard of an uncontrolled taxpayer, the true netincome from the property and business of a controlled taxpayer. The interestscontrolling a group of controlled taxpayer are assumed to have complete power tocause each controlled taxpayer so to conduct its affairs that its transactions andaccounting records truly reflect the net income from the property and business ofeach of the controlled taxpayers. If, however, this has not been done and thetaxable net income are thereby understated, the statute contemplates that theCommissioner of Internal Revenue shall intervene, and, by making suchdistributions, apportionments, or allocations as he may deem necessary of grossincome or deductions, or of any item or element affecting net income, between oramong the controlled taxpayers constituting the group, shall determine the true net


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income of each controlled taxpayer. The standard to be applied in every case isthat of an uncontrolled taxpayer. Section 44 grants no right to a controlledtaxpayer to apply its provisions at will, nor does it grant any right to compel theCommissioner of Internal Revenue to apply its provisions.

(C) APPLICATION – Transactions between controlled taxpayer and anotherwill be subjected to special scrutiny to ascertain whether the common control is being used to reduce, avoid or escape taxes. In determining the true net income ofa controlled taxpayer, the Commissioner of Internal Revenue is not restricted tothe case of improper accounting, to the case of a fraudulent, colorable, or shamtransaction, or to the case of a device designed to reduce or avoid tax by shiftingor distorting income or deductions. The authority to determine true net incomeextends to any case in which either by inadvertence or design the taxable netincome in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayerdealing at arm’s length with another uncontrolled taxpayer.

As may be gleaned from the definitions of the terms "controlled" and "controlledtaxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDCand its affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from owningsignificant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDCextended substantial sums of money as cash advances to its said affiliates for the purpose of providing them financial assistance for their operational and capital expenditures seeminglyindicate that the situation sought to be addressed by the subject provision exists. From the tenorof paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's power to distribute, apportion or allocate gross income or deductions between or amongcontrolled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/sunder scrutiny. For as long as the controlled taxpayer's taxable income is not reflective of thatwhich it would have realized had it been dealing at arm's length with an uncontrolled taxpayer,the CIR can make the necessary rectifications in order to prevent evasion of taxes.

Despite the broad parameters provided, however, the Court finds that the CIR's powers ofdistribution, apportionment or allocation of gross income and deductions under Section 43 of the1993 NIRC and Section 179 of Revenue Regulation No. 2 does not include the power to impute"theoretical interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of the1993 NIRC, after all, the term "gross income" is understood to mean all income from whateversource derived, including, but not limited to the following items: compensation for services,including fees, commissions, and similar items; gross income derived from business; gainsderived from dealings in property;" interest; rents; royalties; dividends; annuities; prizes andwinnings; pensions; and partner’s distributive share of the gross income of general professional partnership. While it has been held that the phrase "from whatever source derived" indicates alegislative policy to include all income not expressly exempted within the class of taxableincome under our laws, the term "income" has been variously interpreted to mean "cash receivedor its equivalent", "the amount of money coming to a person within a specific time" or"something distinct from principal or capital." Otherwise stated, there must be proof of the actual


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or, at the very least, probable receipt or realization by the controlled taxpayer of the item of grossincome sought to be distributed, apportioned or allocated by the CIR.

Therefore, of the record yielded no evidence of actual or possible showing that theadvances FDC extended to its affiliates had resulted to the interests subsequently assessed by the

CIR. For all its harping upon the supposed fact that FDC had resorted to borrowings fromcommercial banks, the CIR had adduced no concrete proof that said funds were, indeed, thesource of the advances the former provided its affiliates

ARTHUR HENDERSON vs. COLLECTOR OF INTERNAL REVENUE

1 SCRA 649

FACTS:

Arthur Henderson is the President of the American International Underwriters for the

Philippines which represents a group of American companies engaged in the business of generalinsurance. Henderson receives a basic annual salary of P30,000 and allowance for house rentalsand utilities. Although he and his wife are childless and are only two in the family, they lived ina large apartment provided for by his employer. The spouses Artuhur Henderson and Marie B.Henderson filed with the Bureau of Internal Revenue returns of annual net income for the years1948 to 1952. The Bureau of Internal Revenue considered as part of their taxable income thetaxpayer-husband's allowances for rental, residential expenses, subsistence, water, electricity andtelephone; bonus paid to him; withholding tax and entrance fee to the Marikina gun and CountryBluc paid by his employer for his account; and travelling allowance of his wife. On 26 and 27January 1954 the taxpayers asked for reconsideration of the foregoing assessment. The claim thatas regards the husband-taxpayer's allowances for rental and utilities such as water, electricity and

telephone, he did not receive the money for said allowances, but that they lived in the apartmentfurnished and paid for by his employer for its convenience and that they had no choice but live inthe said apartment furnished by his employer, otherwise they would have lived in a lessexpensive one

After hearing conducted by the Conference Staff of the Bureau of Internal Revenue theStaff recommended to the Collector of Internal Revenue that the assessments made be sustainedexcept that the amount of P200 as entrance fee to the Marikina Gun and Country Club paid forthe husband-taxpayer's account by his employer in 1948 should not be considered as part of thetaxpayers' taxable income for that year. On 15 February 1956 the taxpayers filed in the Court ofTax Appeals a petition to review the decision of the Collector of Internal Revenue. On 26 June1957 the Court rendered judgment holding "that the inherent nature of petitioner's (the husband-taxpayer) employment as president of the American International Underwriters as president ofthe American International Underwriters of the Philippines, Inc. does not require him to occupythe apartments supplied by his employer-corporation. Consequently, on 7 October1957 theCollector of Internal Revenue filed a notice of appeal in the Court of Tax Appeals and on 21October1957, within the extension of time previously granted by this Court.


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ISSUE: Whether or not the allowances for rental of the apartment furnished by the husband-taxpayer's employer-corporation, including utilities such as light, water, telephone, etc. and theallowance for travel expenses given by his employer-corporation to his wife in 1952 part oftaxable income?

RULING: The evidence presented at the hearing of the case substantially supports the findingsof the Court of Tax Appeals. The taxpayers are childless and are the only two in the family. Thequarters, that they occupied at the Embassy Apartments consisting of a large sala, three bedrooms, dining room, two bathrooms, kitchen and a large porch, and at the RosariaApartments consisting of a kitchen, sala dining room, two bedrooms and a bathroom, exceededtheir personal needs. But the exigencies of the husband-taxpayer's high executive position, not tomention social standing, demanded and compelled them to live in a more spacious and pretentious quarters like the ones they had occupied. Although entertaining and putting uphouseguests and guests of the husband-taxpayer's employer-corporation were not his predominant occupation as president, yet he and his wife had to entertain and put up houseguestsin their apartments. That is why his employer-corporation had to grant him allowances for rental

and utilities in addition to his annual basic salary to take care of those extra expenses for rentaland utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or didnot have to live in the apartments chosen by the husband-taxpayer's employer-corporation is ofno moment, for no part of the allowances in question redounded to their personal benefit or wasretained by them. Their bills for rental and utilities were paid directly by the employer-corporation to the creditors. Nevertheless, as correctly held by the Court of Tax Appeals, thetaxpayers are entitled only to a ratable value of the allowances in question, and only the amountof P4,800 annually, the reasonable amount they would have spent for house rental and utilitiessuch as light, water, telephone, etc., should be the amount subject to tax, and the excessconsidered as expenses of the corporation.

The judgment under review is modified as above indicated. The Collector of InternalRevenue is ordered to refund to the taxpayers the sum of P5,986.61, without pronouncement asto costs.

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY vs.

COMMISSIONER OF INTERNAL REVENUE

G.R. No. 157264. January 31, 2008

FACTS:

Petitioner, the Philippine Long Distance Telephone Company (PLDT), claiming that itterminated in 1995 the employment of several rank-and-file, supervisory, and executiveemployees due to redundancy; that in compliance with labor law requirements, it paid thoseseparated employees separation pay and other benefits; and that as employer and withholdingagent, it deducted from the separation pay withholding taxes in the total amount ofP23,707,909.20 which it remitted to the Bureau of Internal Revenue (BIR), filed on November20, 1997 with the BIR a claim for tax credit or refund of the P23,707,909.20, invoking Section28(b)(7)(B) of the 1977 National Internal Revenue Code which excluded from gross income


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[a]ny amount received by an official or employee or by his heirs from the employer as aconsequence of separation of such official or employee from the service of the employerdue to death, sickness or other physical disability or for any cause beyond the control ofthe said official or employee.2 (Underscoring supplied)

As the BIR took no action on its claim, PLDT filed a claim for judicial refund before theCourt of Tax Appeals (CTA). In its Answer, respondent, the Commissioner of Internal Revenue,contended that PLDT failed to show proof of payment of separation pay and remittance of thealleged withheld taxes. PLDT thus filed a Petition for Review before the Court of Appealswhich, by Decision of February 11, 2002, dismissed the same.

ISSUE: Whether or not PLDT is correct in arguing that taxes withheld from separation benefitsand paid to the BIR constitute erroneous payment of taxes and should therefore, berefunded/credited to the taxpayer/withholding agent, regardless of whether or not separation paywas actually paid to the concerned employees.

RULING: No. Tax refunds, like tax exemptions, are construed strictly against the taxpayer andliberally in favor of the taxing authority, and the taxpayer bears the burden of establishing the factual basis of his claim for a refund .

Under Section 28 (b)(7)(B) of the National Internal Revenue Code of 1977 (now Section32(B)6(b) of the National Internal Revenue Code of 1997), it is incumbent on PLDT as aclaimant for refund on behalf of each of the separated employees to show that each employee did

x x x reflect in his or its own return the income upon which any creditable tax is requiredto be withheld at the source. Only when there is an excess of the amount of tax sowithheld over the tax due on the payee's return can a refund become possible.

A taxpayer must thus do two things to be able to successfully make a claim for the taxrefund: (a) declare the income payments it received as part of its gross income and (b)establish the fact of withholding. On this score, the relevant revenue regulation providesas follows:

"Section 10. Claims for tax credit or refund . - Claims for tax credit or refund ofincome tax deducted and withheld on income payments shall be given due courseonly when it is shown on the return that the income payment received wasdeclared as part of the gross income and the fact of withholding is established bya copy of the statement duly issued by the payer to the payee (BIR Form No.1743.1) showing the amount paid and the amount of tax withheldtherefrom."23 (Underscoring supplied)

In fine, PLDT must prove that the employees received the income payments as part ofgross income and the fact of withholding. Even the "newly discovered evidence" that PLDTseeks to offer does not suffice to establish its claim for refund, as it would still have to complywith Revenue Regulation 6-85 by proving that the redundant employees, on whose behalf it filedthe claim for refund, declared the separation pay received as part of their gross

http://www.lawphil.net/judjuris/juri2008/jan2008/gr_157264_2008.html#fnt2http://www.lawphil.net/judjuris/juri2008/jan2008/gr_157264_2008.html#fnt2http://www.lawphil.net/judjuris/juri2008/jan2008/gr_157264_2008.html#fnt2http://www.lawphil.net/judjuris/juri2008/jan2008/gr_157264_2008.html#fnt23http://www.lawphil.net/judjuris/juri2008/jan2008/gr_157264_2008.html#fnt23http://www.lawphil.net/judjuris/juri2008/jan2008/gr_157264_2008.html#fnt23http://www.lawphil.net/judjuris/juri2008/jan2008/gr_157264_2008.html#fnt23http://www.lawphil.net/judjuris/juri2008/jan2008/gr_157264_2008.html#fnt2


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income. Furthermore, the same Revenue Regulation requires that "the fact of withholding isestablished by a copy of the statement duly issued by the payor to the payee (BIR Form No.1743.1) showing the amount paid and the amount of tax withheld therefrom."

COMMISSIONER OF IR VS CENTRAL LUZON DRUG CORP

GR 148512 June 26, 2006

FACTS:

This is a petition for review under Rule 45 of Rules of Court seeking the nullification of

CA decision granting respondent’s claim for tax equal to the amount of the 20% that it extended

to senior citizens on the latter’s purchases pursuant to Senior Citizens Act. Respondent deducted

the total amount of Php219,778 from its gross income for the taxable year 1995 whereby

respondent did not pay tax for that year reporting a net loss of Php20,963 in its corporate incometax. In 1996, claiming that the Php219,778 should be applied as a tax credit, respondent claimed

for refund in the amount of Php150, 193.

ISSUE:

Whether or not the 20% discount granted by the respondent to qualified senior citizens

may be claimed as tax credit or as deduction from gross sales?

RULING:

“Tax credit” is explicitly provided for in Sec4 of RA 7432. The discount given to Seniorcitizens is a tax credit, not a deduction from the gross sales of the establishment concerned. The

tax credit that is contemplated under this Act is a form of just compensation, not a remedy for

taxes that were erroneously or illegally assessed and collected. In the same vein, prior payment

of any tax liability is a pre-condition before a taxable entity can benefit from tax credit. The

credit may be availed of upon payment, if any. Where there is no tax liability or where a private

establishment reports a net loss for the period, the tax credit can be availed of and carried over to

the next taxable year.


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CARLOS SUPERDRUG CORP., ET. AL. vs. DSWD

G.R. No. 166494 June 29, 2007

FACTS:

Petitioners are domestic corporations and proprietors operating drugstores in the

Philippines. Meanwhile, AO 171 or the Policies and Guidelines to Implement the Relevant

Provisions of Republic Act 9257, otherwise known as the “Expanded Senior Citiz ens Act of

2003” was issued by the DOH, providing the grant of twenty percent (20%) discount in the

purchase of unbranded generic medicines from all establishments dispensing medicines for the

exclusive use of the senior citizens.

DOH issued Administrative Order No 177 amending A.O. No. 171. Under A.O. No. 177,

the twenty percent discount shall not be limited to the purchase of unbranded generic medicines

only, but shall extend to both prescription and non-prescription medicines whether branded or

generic. Thus, it stated that “[t]he grant of twenty per cent (20%) discount shall be provided in the

purchase of medicines from all establishments dispensing medicines for the exclusive use of the

senior citizens.”

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes

deprivation of private property. Compelling drugstore owners and establishments to grant thediscount will result in a loss of profit and capital because 1) drugstores impose a mark-up of only

5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores

will be justly compensated for the discount.

ISSUE:

Whether or not the State, in promoting the health and welfare of a special group of

citizens, can impose upon private establishments the burden of partly subsidizing a government

program.

RULING:

Yes. The law grants a twenty percent discount to senior citizens for medical and dental

services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls,


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circuses, carnivals, and other similar places of culture, leisure and amusement; fares for domestic

land, air and sea travel; utilization of services in hotels and similar lodging establishments,

restaurants and recreation centers; and purchases of medicines for the exclusive use or enjoyment

of senior citizens. As a form of reimbursement, the law provides that business establishments

extending the twenty percent discount to senior citizens may claim the discount as a tax

deduction.

The law is a legitimate exercise of police power which, similar to the power of eminent

domain, has general welfare for its object. Police power is not capable of an exact definition, but

has been purposely veiled in general terms to underscore its comprehensiveness to meet all

exigencies and provide enough room for an efficient and flexible response to conditions and

circumstances, thus assuring the greatest benefits. Accordingly, it has been described as “the

most essential, insistent and the least limitable of powers, extending as it does to all the great

public needs.” It is “[t]he power vested in the legislature by the constitution to make, ordain, andestablish all manner of wholesome and reasonable laws, statutes, and ordinances, either with

penalties or without, not repugnant to the constitution, as they shall judge to be for the good and

welfare of the commonwealth, and of the subjects of the same.”

For this reason, when the conditions so demand as determined by the legislature, property

rights must bow to the primacy of police power because property rights, though sheltered by due

process, must yield to general welfare. Police power as an attribute to promote the common good

would be diluted considerably if on the mere plea of petitioners that they will suffer loss ofearnings and capital, the questioned provision is invalidated. Moreover, in the absence of

evidence demonstrating the alleged confiscatory effect of the provision in question, there is no

basis for its nullification in view of the presumption of validity which every law has in its favor.

Given these, it is incorrect for petitioners to insist that the grant of the senior citizen

discount is unduly oppressive to their business, because petitioners have not taken time to

calculate correctly and come up with a financial report, so that they have not been able to show

properly whether or not the tax deduction scheme really works greatly to their disadvantage. The

Court is not oblivious of the retail side of the pharmaceutical industry and the competitive

pricing component of the business. While the Constitution protects property rights, petitioners

must accept the realities of business and the State, in the exercise of police power, can intervene

in the operations of a business which may result in an impairment of property rights in the

process.


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Banas Jr. vs CA

GR No. 102967

FACTS:

On February 20, 1976, petitioner, Bibiano V. Bañas Jr. sold to Ayala Investment

Corporation (AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for two

million, three hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed

of Sale provided that upon the signing of the contract AYALA shall pay four hundred sixty-one

thousand, seven hundred fifty-four (P461,754.00) pesos. The balance of one million, eight

hundred forty-seven thousand and sixteen (P1,847,016.00) pesos was to be paid in four equal

consecutive annual installments, with twelve (12%) percent interest per annum on the

outstanding balance. AYALA issued one promissory note covering four equal annual

installments. Each periodic payment of P461,754.00 pesos shall be payable starting on February

20, 1977, and every year thereafter, or until February 20, 1980.

The same day, petitioner discounted the promissory note with AYALA, for its face value of

P1,847,016.00, evidenced by a Deed of Assignment signed by the petitioner and AYALA.

AYALA issued nine (9) checks to petitioner, all dated February 20, 1976, drawn against Bank of

the Philippine Islands with the uniform amount of two hundred five thousand, two hundred

twenty-four (P205,224.00) pesos.

In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from

disposition of capital asset.

On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo

Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976.They discovered that petitioner had no outstanding receivable from the 1976 land sale to

AYALA and concluded that the sale was cash and the entire profit should have been taxable in

1976 since the income was wholly derived in 1976.

ISSUE:

Whether respondent court erred in finding that petitioner’s income from the sale of land

in 1976 should be declared as a cash transaction in his tax return for the same year (because the

buyer discounted the promissory note issued to the seller on future installment payments of the

sale, on the same day of the sale)?

RULING:

As a general rule, the whole profit accruing from a sale of property is taxable as income

in the year the sale is made. But, if not all of the sale price is received during such year, and a

statute provides that income shall be taxable in the year in which it is "received," the profit from

an installment sale is to be apportioned between or among the years in which such installments


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are paid and received. Section 43 and Sec. 175 says that among the entities who may use the

above-mentioned installment method is a seller of real property who disposes his property on

installment, provided that the initial payment does not exceed 25% of the selling price. They also

state what may be regarded as installment payment and what constitutes initial payment. Initial

payment means the payment received in cash or property excluding evidences of indebtedness

due and payable in subsequent years, like promissory notes or mortgages, given of the purchaser

during the taxable year of sale. Initial payment does not include amounts received by the vendor

in the year of sale from the disposition to a third person of notes given by the vendee as part of

the purchase price which are due and payable in subsequent years. Such disposition or

discounting of receivable is material only as to the computation of the initial payment. If the

initial payment is within 25% of total contract price, exclusive of the proceeds of discounted

notes, the sale qualifies as an installment sale, otherwise it is a deferred sale.

Although the proceeds of a discounted promissory note is not considered part of the

initial payment, it is still taxable income for the year it was converted into cash. The subsequent

payments or liquidation of certificates of indebtedness is reported using the installment methodin computing the proportionate income to be returned, during the respective year it was realized.

Non-dealer sales of real or personal property may be reported as income under the installment

method provided that the obligation is still outstanding at the close of that year. If the seller

disposes the entire installment obligation by discounting the bill or the promissory note, he

necessarily must report the balance of the income from the discounting not only income from the

initial installment payment.


vs. THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO

CORP., Respondents., G.R. No. 108576.January 20, 1999

FACTS:

ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. On September 12, 1945, ANSCORs authorized capital stock was increasedto P2,500,000.00 divided into 25,000 common shares with the same par value. Of the additional15,000 shares, only 10,000 was issued which were all subscribed by Don Andres. This increasedhis subscription to 14,963 common shares. By 1947, ANSCOR declared stock dividends. On

December 30, 1964 Don Andres died. As of that date, the records revealed that he has a totalshareholdings of 185,154 shares - 50,495 of which are original issues and the balance of 134,659shares as stock dividend declarations. Correspondingly, one-half of that shareholdings or92,577 shares were transferred to his wife, Dona Carmen Soriano, as her conjugal share. Theother half formed part of his estate. A day after Don Andres died, ANSCOR increased its capitalstock to P20M and in 1966 further increased it toP30M. In the same year (December 1966),stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andresestate and Dona Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to


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138,867 and 138,864 common shares each. On June 30, 1968, pursuant to a Board Resolution,ANSCOR redeemed 28,000 common shares from the Don Andres estate. By November 1968,the Board further increased ANSCORs capital stock to P75M divided into 150,000 preferredshares and 600,000 common shares. About a year later, ANSCOR again redeemed 80,000common shares from the Don Andres estate, further reducing the latters common shareholdings

to 19,727. In 1973, after examining ANSCORs books of account and records, Revenueexaminers issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, for the year 1968 and the second quarter of 1969 based on the transactions ofexchange and redemption of stocks.

ISSUE:

Whether or not ANSCORs redemption of stocks from its stockholder can be considered

as essentially equivalent to the distribution of taxable dividend, making the proceeds thereof

taxable under the provisions law.

DECISION:

Stock dividends represent capital and do not constitute income to its recipient. So that themere issuance thereof is not yet subject to income tax as they are nothing but an enrichmentthrough increase in value of capital investment. Income in tax law is an amount of moneycoming to a person within a specified time, whether as payment for services, interest, or profitfrom investment. It means cash or its equivalent. It is gain derived and severed from capital,from labor or from both combined- so that to tax a stock dividend would be to tax a capitalincrease rather than the income. In a loose sense, stock dividends issued by the corporation, areconsidered unrealized gain, and cannot be subjected to income tax until that gain has beenrealized. As capital, it is not yet subject to income tax. The determining factor for the imposition

of income tax is whether any gain or profit was derived from a transaction. However, if acorporation cancels or redeems stock issued as a dividend at such time and in such manner as tomake the distribution and cancellation or redemption, in whole or in part, essentially equivalentto the distribution of a taxable dividend, the amount so distributed in redemption or cancellationof the stock shall be considered as taxable income to the extent it represents a distribution ofearnings or profits accumulated. After considering the manner and the circumstances by whichthe issuance and redemption of stock dividends were made, there is no other conclusion but thatthe proceeds thereof are essentially considered equivalent to a distribution of taxable dividends.As taxable dividend under Section 83(b), it is part of the entire income subject to tax underSection 22 in relation to Section 21 of the 1939 Code. Moreover, under Section 29(a) of saidCode, dividends are included in gross income. As income, it is subject to income tax which is

required to be withheld at source.


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G.R. No. 165617.February 25, 2011

SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S.

ALVAREZ, Petitioners,

vs.

BPI FAMILY SAVINGS BANK, INC., Respondent.

x - - - - - - - - - - - - - - - - - - - - - - -xG.R. No. 165837

BPI FAMILY SAVINGS BANK, INC., Petitioner,

vs.

SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S.

ALVAREZ, Respondents.

FACTS:

On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director,

Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the amount of P9,853,000.00 from

BPI Family Savings Bank with a 714-square meter lot covered by Transfer Certificate of Title

No. T-79193 in the name of Moises C. Alvarez and Paulita S. Alvarez, as collateral. For non- payment of the loan, the mortgage was extrajudicially foreclosed and the property was sold to the

bank as the highest bidder. On August 7, 1996, a Certificate of Sale was issued in favor of the

bank and the same was registered on October 1, 1996. Before the expiration of the one-year

redemption period, the mortgagors notified the bank of their intention to redeem the property.

Accordingly, the total amount due is P15,704,249.12 which includes the capital gains tax and

documentary stamp tax.

ISSUE:

Whether or not the foreclosing mortgagee should pay capital gains tax upon execution ofthe certificate of sale, and if paid by the mortgagee, whether the same should be shouldered bythe redemptioner.

DECISION:

In the issue of capital gains tax, court ruled in favor of petitioners-mortgagors’ argumentthat there is no legal basis for the inclusion of this charge in the redemption price. UnderRevenue Regulations No. 13-85 every sale or exchange or other disposition of real propertyclassified as capital asset under Section 34(a) of the Tax Code shall be subject to the final capitalgains tax. The term sale includes pacto de retro and other forms of conditional sale. Section 2.2

of Revenue Memorandum Order No. 29-86 states that these conditional sales "necessarilyinclude mortgage foreclosure sales whether judicial and extrajudicial foreclosure sales." Further,for real property foreclosed by a bank the capital gains tax and documentary stamp tax must be paid before title to the property can be consolidated in favor of the bank. However underSection 63 of Presidential Decree No. 1529 if no right of redemption exists, the certificate of titleof the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser.But where the right of redemption exists, the certificate of title of the mortgagor shall not becancelled, but the certificate of sale and the order confirming the sale shall be registered In the


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event the property is redeemed, the certificate or deed of redemption shall be filed with theRegister of Deeds. It is therefore clear that in foreclosure sale, there is no actual transfer of themortgaged real property until after the expiration of the one-year redemption. The mortgagor isgiven the option whether or not to redeem the real property. The issuance of the Certificate ofSale does not by itself transfer ownership. Under RR No. 4-99 issued on March 16, 1999, further

amends RMO No. 6-92 relative to the payment of Capital Gains Tax and Documentary StampTax on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurancecompanies it provides that:

SEC. 3. CAPITAL GAINS TAX. –

(1) In case the mortgagor exercises his right of redemption within one year from theissuance of the certificate of sale, no capital gains tax shall be imposed because no capitalgains has been derived by the mortgagor and no sale or transfer of real property wasrealized. x x x

(2) In case of non-redemption, the capital gains [tax] on the foreclosure sale imposedunder Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based onthe bid price of the highest bidder but only upon the expiration of the one-year period ofredemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, andshall be paid within thirty (30) days from the expiration of the said one-year redemption period.

SEC. 4. DOCUMENTARY STAMP TAX. –

(1) In case the mortgagor exercises his right of redemption, the transaction shall only besubject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of

1997 because no land or realty was sold or transferred for a consideration.

(2) In case of non-redemption, the corresponding documentary stamp tax shall be levied,collected and paid by the person making, signing, issuing, accepting, or transferring thereal property wherever the document is made, signed, issued, accepted or transferredwhere the property is situated in the Philippines.

Considering that herein petitioners-mortgagors exercised their right of redemption beforethe expiration of the statutory one-year period, petitioner bank is not liable to pay the capitalgains tax due on the extrajudicial foreclosure sale. There was no actual transfer of title from theowners-mortgagors to the foreclosing bank. Hence, the inclusion of the said charge in the totalredemption price was unwarranted and the corresponding amount paid by the petitioners-mortgagors should be returned to them


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vs.

UNITED COCONUT PLANTERS BANK, Respondent.

G.R. No. 179063.October 23, 2009

FACTS:

Respondent United Coconut Planters Bank (UCPB) granted loans of P68,840,000.00and P335,000,000.00 to George C. Co, Go Tong Electrical Supply Co., Inc., and Tesco RealtyCo. that the borrowers caused to be secured by several real estate mortgages. When the latterlater failed to pay their loans, on December 31, 2001 a notary public for Manila held a public

auction sale of the mortgaged properties. UCPB made the highest winning bidofP504,785,000.00 for the whole lot. The notary public submitted the Certificate of Sale to theExecutive Judge of Regional Trial Court of Manila for his approval. On March 1, 2002 theexecutive judge finally signed the certificate of sale and approved its issuance to UCPB as thehighest bidder. On July 5, 2002 the bank paid creditable withholding taxes of P28,640,700.00and documentary stamp taxes of P7,160,165.00 in relation to the extrajudicial foreclosure sale.Petitioner Commissioner of Internal Revenue , however, charged UCPB with late payment of thecorresponding DST and CWT, citing Section 2.58 of Revenue Regulation 2-98, which stated thatthe CWT must be paid within 10 days after the end of each month, and Section 5 of RevenueRegulation 06-01, which required payment of DST within five days after the close of the monthwhen the taxable document was made, signed, accepted or transferred. These taxes accrued upon

the lapse of the redemption period of the mortgaged properties. The CIR pointed out that themortgagor, a juridical person, had three months after foreclosure within which to redeem the properties.

ISSUE:

Whether or not the three-month redemption period for juridical persons should bereckoned from the date of the auction sale.

DECISION:

. Under Section 2.58 of Revenue Regulation 2-98, the CWT return and payment becomedue within 10 days after the end of each month, except for taxes withheld for the month ofDecember of each year, which shall be filed on or before January 15 of the following year. Onthe other hand, under Section 5 of Revenue Regulation 06-01, the DST return and payment become due within five days after the close of the month when the taxable document was made,signed, accepted, or transferred. The BIR confirmed and summarized the above provisions underRevenue Memorandum Circular 58-2008 in this manner: If the property is an ordinary asset ofthe mortgagor, the creditable expanded withholding tax shall be due and paid within ten days


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following the end of the month in which the redemption period expires. Moreover, the paymentof the documentary stamp tax and the filing of the return thereof shall have to be made withinfive days from the end of the month when the redemption period expires. UCPB had, therefore,until July 10, 2002 to pay the CWT and July 5, 2002 to pay the DST. Since it paid both taxes onJuly 5, 2002, it is not liable for deficiencies. Thus, the Court finds no reason to reverse the

decision of the CTA. For purposes of reckoning the one-year redemption period in the case ofindividual mortgagors, or the three-month redemption period for juridical persons/mortgagors,the same shall be reckoned from the date of the confirmation of the auction sale which is the datewhen the certificate of sale is issued.

CIR vs. ISABELA CULTURAL CORPORATION

G.R. NO. 172231, February 12, 2007

FACTS:

Isabela Cultural Corporation (ICC), a domestic corporation received an assessment noticefor deficiency income tax and expanded withholding tax from BIR. It arose from the

disallowance of ICC’s claimed expense for professional and security services paid by ICC; as

well as the alleged understatement of interest income on the three promissory notes due

from Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the

failure of ICC to withhold 1% e-withholding tax on its claimed deduction for security services.

ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it

brought the case to CTA, which held that it is unappealable, since the final notice is not a

decision. CTA’s ruling was reversed by CA, which was sustained by SC, and case was remanded

to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for professionaland security services were properly claimed, it said that even if services were rendered in 1984

or 1985, the amount is not yet determined at that time. Hence it is a proper deduction in 1986. It

likewise found that it is the BIR which overstate the interest income, when it applied

compounding absent any stipulation.

Petitioner appealed to CA, which affirmed CTA; hence the petition.

Issue:

Whether or not the expenses for professional and security services are deductible.

RULING:

No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must

have been paid or incurred during the taxable year. This requisite is dependent on the method of

accounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting.

Hence, under this method, an expense is recognized when it is incurred. Under a Revenue Audit


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Memorandum, when the method of accounting is accrual, expenses not being claimed as

deductions by a taxpayer in the current year when they are incurred cannot be claimed in the

succeeding year.

The accrual of income and expense is permitted when the all-events test has been met. This test

requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonableaccurate determination of such income or liability. The test does not demand that the amount of

income or liability be known absolutely, only that a taxpayer has at its disposal the information

necessary to compute the amount with reasonable accuracy.

From the nature of the claimed deductions and the span of time during which the firm was

retained, ICC can be expected to have reasonably known the retainer fees charged by the firm.

They cannot give as an excuse the delayed billing, since it could have inquired into the amount

of their obligation and reasonably determine the amount.

CIR vs. GENERAL FOODSGR No. 143672 April 24, 2003

FACTS:

Respondent corporation General Foods (Phils), which is engaged in the manufacture of “Tang”,“Calumet” and “Kool-Aid”, filed its income tax return for the fiscal year ending February 1985and claimed as deduction, among other business expenses, P9,461,246.00 for media advertisingfor “Tang”.

The Commissioner disallowed 50% of the deduction claimed and assessed deficiency incometaxes of P2,635,141.42 against General Foods, prompting the latter to file an MR which wasdenied.

General Foods later on filed a petition for review at CA, which reversed and set aside an earlierdecision by CTA dismissing the company’s appeal.

ISSUE:

Whether or not the subject media advertising expense for “Tang” was ordinary and necessaryexpense fully deductible under the NIRC

RULING: No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally infavor of the taxing authority, and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. Deductions for income taxes partake of the natureof tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also bestrictly construed.

http://lazylegalboneswilldigest.wordpress.com/2012/02/14/cir-v-general-foods/http://sc.judiciary.gov.ph/jurisprudence/2003/apr2003/143672.htmhttp://sc.judiciary.gov.ph/jurisprudence/2003/apr2003/143672.htmhttp://lazylegalboneswilldigest.wordpress.com/2012/02/14/cir-v-general-foods/


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To be deductible from gross income, the subject advertising expense must comply with thefollowing requisites: (a) the expense must be ordinary and necessary; (b) it must have been paidor incurred during the taxable year; (c) it must have been paid or incurred in carrying on the tradeor business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.

While the subject advertising expense was paid or incurred within the corresponding taxable yearand was incurred in carrying on a trade or business, hence necessary, the parties’ views conflictas to whether or not it was ordinary. To be deductible, an advertising expense should not only benecessary but also ordinary.

The Commissioner maintains that the subject advertising expense was not ordinary on theground that it failed the two conditions set by U.S. jurisprudence: first, “reasonableness” of theamount incurred and second, the amount incurred must not be a capital outlay to create“goodwill” for the product and/or private respondent’s business. Otherwise, the expense must be

considered a capital expenditure to be spread out over a reasonable time.

There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of anadvertising expense. There being no hard and fast rule on the matter, the right to a deductiondepends on a number of factors such as but not limited to: the type and size of business in whichthe taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditureitself; the intention of the taxpayer and the general economic conditions. It is the interplay ofthese, among other factors and properly weighed, that will yield a proper evaluation.

The Court finds the subject expense for the advertisement of a single product to be inordinatelylarge. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible

under then Section 29 (a) (1) (A) of the NIRC.

Advertising is generally of two kinds: (1) advertising to stimulate the current sale ofmerchandise or use of services and (2) advertising designed to stimulate the future sale ofmerchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer’s trade or business or for theindustry or profession of which the taxpayer is a member. If the expenditures are for theadvertising of the first kind, then, except as to the question of the reasonableness of amount,there is no doubt such expenditures are deductible as business expenses. If, however, theexpenditures are for advertising of the second kind, then normally they should be spread out overa reasonable period of time.

The company’s media advertising expense for the promotion of a single product is doubtlesslyunreasonable considering it comprises almost one-half of the company’s entire claim formarketing expenses for that year under review. Petition granted, judgment reversed and setaside.


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C.M. HOSKINS & CO, INC. v CIR

G.R. No 143672, April 24, 2003

FACTS:

Petitioner, a domestic corporation engaged in the real estate business as brokers,managing agents and administrators, filed its income tax return for its fiscal year endingSeptember 30, 1957 showing a net income of P92,540.25 and a tax liability due thereon ofP18,508.00, which it paid in due course. Upon verification of its return, CIR, disallowed fouritems of deduction in petitioner's tax returns and assessed against it an income tax deficiency inthe amount of P28,054.00 plus interests. The Court of Tax Appeals upon reviewing theassessment at the taxpayer's petition, upheld respondent's disallowance of the principal item of petitioner's having paid to Mr. C. M. Hoskins, its founder and controlling stockholder the amountof P99,977.91 representing 50% of supervision fees earned by it and set aside respondent'sdisallowance of three other minor items.

Petitioner questions in this appeal the Tax Court's findings that the disallowed payment toHoskins was an inordinately large one, which bore a close relationship to the recipient'sdominant stockholdings and therefore amounted in law to a distribution of its earnings and profits.

ISSUE: Whether the 50% supervision fee paid to Hoskin may be deductible for income tax purposes.

RULING:

NO. It is a general rule that 'Bonuses to employees made in good faith and as additionalcompensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for theservices rendered. The conditions precedent to the deduction of bonuses to employees are: (1)the payment of the bonuses is in fact compensation; (2) it must be for personal services actuallyrendered; and (3) the bonuses, when added to the salaries, are 'reasonable’ when measured by theamount and quality of the services performed with relation to the business of the particulartaxpayer.

There is no fixed test for determining the reasonableness of a given bonus ascompensation. This depends upon many factors, one of them being the amount and quality of theservices performed with relation to the business.' Other tests suggested are: payment must be'made in good faith'; 'the character of the taxpayer's business, the volume and amount of its netearnings, its locality, the type and extent of the services rendered, the salary policy of thecorporation'; 'the size of the particular business'; 'the employees' qualifications and contributionsto the business venture'; and 'general economic conditions. However, 'in determining whether the particular salary or compensation payment is reasonable, the situation must be considered aswhole. Ordinarily, no single factor is decisive. . . . it is important to keep in mind that it seldomhappens that the application of one test can give satisfactory answer, and that ordinarily it is theinterplay of several factors, properly weighted for the particular case, which must furnish thefinal answer."


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