Afisco Insurance Corp. et al. vs. CA, CTA and CIR Facts: The petitioners are 41 local insurance firms which entered into Reinsurance Treaties with Munich, a non-resident foreign insurance corporation. The reinsurance treaties required them to form an “insurance pool” or “clearing house” in order to facilitate the handling of the business they contracted with Munich. The CIR assessed the insurance pool deficiency corporate taxes and withholding taxes on dividends paid on Munich and to the petitioners respectively. The assessments were protested by the petitioners. The CA ruled that the insurance pool was a partnership taxable as a corporation and that the latter’s collection of premiums on behalf of its members was taxable income. The petitioners belie the existence of a partnership because, according to them, the reinsurers did not share the same risk or solidary liability, there was no common fund, the executive board of the pool did not exercise control and management of its funds and the pool was not engaged in business of reinsurance from which it could have derived income for itself. Issues:

a. May the insurance pool be deemed a partnership or an association that is taxable as a corporation?

b. Should the pool’s remittances to member companies and to Munich be taxable as dividends?

Ruling: The pool is taxable as a corporation.

In the present case, the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-sharing reinsurance treaty and

surplus reinsurance treaty with Munich. There are unmistakable indicators that it is a partnership or an association covered by NIRC.

a. The pool has a common fund, consisting of money and other

valuables that are deposited in the name and credit of the pool. b. The pool functions through an executive board which

resembles the BOD of a corporation. c. Though the pool itself is not a reinsurer, its work is

indispensable, beneficial and economically useful to the business of the ceding companies and Munich because without it they would not have received their premiums. Profit motive or business is therefore the primordial reason for the pool’s formation.

The fact that the pool does not retain any profit or income does not obliterate an antecedent fact that of the pool is being used in the transaction of business for profit. It is apparent, and petitioners admit that their association or co-action was indispensable to the transaction of the business. If together they have conducted business, profit must have been the object as indeed, profit was earned. Though the profit was apportioned among the members, this is one a matter of consequence as it implies that profit actually resulted. Petitioners' reliance on Pascual v. Commissioner is misplaced, because the facts obtaining therein are not on all fours with the present case. In Pascual, there was no unregistered partnership, but merely a co-ownership which took up only 2 isolated transactions. The CA did not err in applying Evangelista, which involved a partnership that engaged in a series of transactions spanning more than 10 years, as in the case before us.

Pascual v. CIR

FACTS:

Petitioners bought two (2) parcels of land and a year after, they bought another three (3) parcels of land. Petitioners subsequently sold the said lots in 1968 and 1970, and realized net profits. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years. However, the Acting BIR Commissioner assessed and required Petitioners to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970.

Petitioners protested the said assessment asserting that they

had availed of tax amnesties way back in 1974. In a reply, respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the National Internal Revenue Code that the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay the deficiency income tax assessed. ISSUE:

Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for the purposes of income tax. RULING:

The Petitioners are simply under the regime of co-ownership and not under unregistered partnership.

By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves (Art. 1767, Civil Code of the Philippines).

In the present case, there is no evidence that petitioners

entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. Hence, there is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

Obillos v. CIR

FACTS: Petitioners sold the lots they inherited from their father and derived a total profit of P33,584 for each of them. They treated the profit as capital gain and paid an income tax thereof. The CIR required petitioners to pay corporate income tax on their shares, .20% tax fraud surcharge and 42% accumulated interest. Deficiency tax was assessed on the theory that they had formed an unregistered partnership or joint venture. The Supreme Court, applying Art. 1769 of the Civil Code, said

that the sharing of gross returns does not itself establish a joint

partnership whether or the persons sharing them have a joint or

common right or interest in the property from which the returns are

derived. There must, instead, be an unmistakable intention to form

that partnership or joint venture. A sale of a co-ownership property at

a profit does not necessarily establish that intention.

This is about the tax liability of 4 brothers & sisters who sold 2 parcels

of land which they had acquired from their father. In 1973, Jose Obillos

Sr bought 2 parcels of land from Ortigas & Co & transferred his rights

to his 4 children to enable them to build their residences. In 1974, the

4 children resold the lots to Walled City Securities Corp & earned profit.

CIR assessed the 4 children with corporate income tax. The Supreme

Court, applying Art. 1769 of the Civil Code, said that the sharing of gross

returns does not itself establish a joint partnership whether or the

persons sharing them have a joint or common right or interest in the

property from which the returns are derived. There must, instead, be

an unmistakable intention to form that partnership or joint venture. A

sale of a co-ownership property at a profit does not necessarily

establish that intention.

This is about the tax liability of 4 brothers & sisters who sold 2 parcels

of land which they had acquired from their father. In 1973, Jose Obillos

Sr bought 2 parcels of land from Ortigas & Co & transferred his rights

to his 4 children to enable them to build their residences. In 1974, the

4 children resold the lots to Walled City Securities Corp & earned profit.

CIR assessed the 4 children with corporate income tax.

ISSUE: Whether or not partnership was formed by the siblings thus be assessed of the corporate tax. RULING: Petitioners were co-owners and to consider them partners would obliterate the distinction between co-ownership and partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Art 1769… the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. There must be an unmistakable intention to form partnership or joint venture. It is error to hold that petitioners (Obillos) have formed a taxable unregistered partnership simply because they contributed in buying the lots, resold the same & divided the profit among themselves. They are simply co-owners. They were not engaged in any joint venture by reason of the isolated transaction. The original purpose was to divide the lots for residential purposes. The division of the profit was merely incidental to the dissolution of the co-ownership.

Ona v. CIR FACTS:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and her five children Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oña, were still minors when the project of partition was approved, Lorenzo T. Oña, their father and administrator of the estate, filed a petition in Civil Case No. 9637 of the Court of First Instance of Manila for appointment as guardian of said minors. On November 14, 1949, the Court appointed him guardian of the persons and property of the aforenamed minors. The project of partition shows that the heirs have undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined amount to be collected from the War Damage Commission.

Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to divide the properties therein listed. Instead, the properties remained under the management of Lorenzo T. Oña who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners' properties and investments gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956. From said investments and properties petitioners derived such incomes as profits from installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests The said incomes are recorded in the books of account kept by Lorenzo T. Oña, where the corresponding shares of the petitioners in the net income for the year are also known

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax. ISSUE: Whether the petitioners formed an unregistered partnership HELD: Yes, the petitioners formed an unregistered partnership. The Supreme Court held that that instead of actually distributing the estate of the deceased among themselves pursuant to the project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oña who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance. As already indicated, for tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding.

Madrigal v. Rafferty

FACTS: In 1915, Vicente Madrigal filed a sworn declaration with

the CIR showing a total net income for the year 1914 the sum of P296K. He claimed that the amount did not represent his own income for the year 1914, but the income of the conjugal partnership existing between him and his wife, Susana Paterno. He contended that since there exists such conjugal partnership, the income declared should be divided into 2 equal parts in computing and assessing the additional income tax provided by the Act of Congress of 1913. The Attorney-General of the Philippines opined in favor of Madrigal, but Rafferty, the US CIR, decided against Madrigal.

After his payment under protest, Madrigal instituted an

action to recover the sum of P3,800 alleged to have been wrongfully and illegally assessed and collected, under the provisions of the Income Tax Law. However, this was opposed by Rafferty, contending that taxes imposed by the Income Tax Law are taxes upon income, not upon capital or property, and that the conjugal partnership has no bearing on income considered as income. The CFI ruled in favor of the defendants, Rafferty. ISSUE:

Whether Madrigal’s income should be divided into 2 equal parts in the assessment and computation of his tax

HELD:

NO. Susana Paterno, wife of Vicente Madrigal, still has an inchoate right in the property of her husband during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Susana has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, she cannot make a separate return in order to receive the benefit of exemption, which could arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely separate from her husband’s property, the income cannot be considered the separate income of the wife for purposes of additional tax.

Income, as contrasted with capital and property, is to be

the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. A tax on income is not tax on property.

Fisher v. Trinidad

Facts: Philippine American Drug Company was a corporation duly

organized and existing under the laws of the Philippine Islands, doing business in the City of Manila. Fisher was a stockholder in said corporation. Said corporation, as result of the business for that year, declared a "stock dividend" and that the proportionate share of said stock divided of Fisher was P24,800. Said the stock dividend for that amount was issued to Fisher. For this reason, Trinidad demanded payment of income tax for the stock dividend received by Fisher. Fisher paid under protest the sum of P889.91 as income taxon said stock dividend. Fisher filed an action for the recovery of P889.91. Trinidad demurred to the petition upon the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained and Fisher appealed.

Issue:

Whether or not the stock dividend was an income and therefore taxable.

Held:

No. Generally speaking, stock dividends represent undistributed increase in the capital of corporations or firms, joint stock companies, etc., etc., for a particular period. The inventory of the property of the corporation for particular period shows an increase in its capital, so that the stock theretofore issued does not show the real value of the stockholder's interest, and additional stock is issued showing the increase in the actual capital, or property, or assets of the corporation.

In the case of Gray vs. Darlington (82 U.S., 653), the US Supreme Court held that mere advance in value does not constitute 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.

In the case of Towne vs. Eisner, income was defined in

an income tax law to mean cash or its equivalent, unless it is otherwise specified. It does not mean unrealized increments in the value of the property. A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished and their interest are not increased. The proportional interest of each shareholder remains the same. In short, the corporation is no poorer and the stockholder is no richer than they were before.

In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179),

Mr. Justice Pitney, said that the term "income" in its natural and obvious sense, imports something distinct from principal or capital and conveying the idea of gain or increase arising from corporate activity.

In the case of Eisner vs. Macomber (252 U.S., 189), income

was defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets.

When a corporation or company issues "stock dividends"

it shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should

opportunity offer. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations resulting from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out of the entire investment. The stockholder by virtue of the stock dividend has in fact received nothing that answers the definition of an "income."

The stockholder who receives a stock dividend has

received nothing but a representation of his increased interest in the capital of the corporation. There has been no separation or segregation of his interest. All the property or capital of the corporation still belongs to the corporation. There has been no separation of the interest of the stockholder from the general capital of the corporation. The stockholder, by virtue of the stock dividend, has no separate or individual control over the interest represented thereby, further than he had before the stock dividend was issued. He cannot use it for the reason that it is still the property of the corporation and not the property of the individual holder of stock dividend. A certificate of stock represented by the stock dividend is simply a statement of his proportional interest or participation in the capital of the corporation. The receipt of a stock dividend in no way increases the money received of a stockholder nor his cash account at the close of the year. It simply shows that there has been an increase in the amount of the capital of the corporation during the particular period, which may be due to an increased business or to a natural increase of the value of the capital due to business, economic, or other reasons. We believe that the Legislature,

when it provided for an "income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is generally used in its common acceptation; that is that the income means money received, coming to a person or corporation for services, interest, or profit from investments. We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income."

A stock dividend, still being the property of the

corporation and not the stockholder, may be reached by an execution against the corporation, and sold as a part of the property of the corporation. In such a case, if all the property of the corporation is sold, then the stockholder certainly could not be charged with having received an income by virtue of the issuance of the stock dividend. Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the stockholders, and are liable for corporate indebtedness. The rule is well established that cash dividend, whether large or small, are regarded as "income" and all stock dividends, as capital or assets

If the ownership of the property represented by a stock

dividend is still in the corporation and not in the holder of such stock, then it is difficult to understand how it can be regarded as income to the stockholder and not as a part of the capital or assets of the corporation. If the holder of the stock dividend is required to pay an income tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income.

Limpan Investment Corporation v. CIR

Facts:

BIR assessed deficiency taxes on Limpan Corp, a company that leases real property, for under declaring its rental income for years 1956-57 by around P20K and P81K respectively. Petitioner appeals on the ground that portions of these under declared rents are yet to be collected by the previous owners and turned over or received by the corporation. Petitioner cited that some rents were deposited with the court, such that the corporation does not have actual nor constructive control over them.

The sole witness for the petitioner, Solis

(Corporate Secretary-Treasurer) admitted to some undeclared rents in 1956 and1957, and that some balances were not collected by the corporation in 1956 because the lessees refused to recognize and pay rent to the new owners and that the corporation’s president Isabelo Lim collected some rent and reported it in his personal income statement, but did not turn over the rent to the corporation. He also cites lack of actual or

constructive control over rents deposited with the court. ISSUE:

WON the BIR was correct in assessing

deficiency taxes against Limpan Corp. for undeclared rental income HELD:

Yes. Petitioner admitted that it indeed had undeclared income (although only a part and not the full amount assessed by BIR). Thus, it has become incumbent upon them to prove their excuses by clear and convincing evidence, which it has failed to do.

With regard to 1957 rents deposited with the

court, and withdrawn only in 1958, the court viewed the corporation as having constructively received said rents. The non-collection was the petitioner’s fault since it refused to refuse to accept the rent, and not due to non-payment of lessees. Hence, although the corporation did not actually receive the rent, it is deemed to have constructively received them.

Conwi v. CTA

Facts: Petitioners are employees of Procter and Gamble (Philippine

Manufacturing Corporation, subsidiary of Procter & Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were assigned to other subsidiaries of Procter & Gamble outside the Philippines, for which petitioners were paid US dollars as compensation.

Petitioners filed their ITRs for 1970 and 1971, computing tax

due by applying the dollar-to-peso conversion based on the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amended ITRs for 1970 and 1971, this time using the par value of the peso as basis. This resulted in the alleged overpayments, refund and/or tax credit, for which claims for refund were filed.

CTA held that the proper conversion rate for the purpose of

reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. The refund claims were denied. Issues: (1) Whether or not petitioners' dollar earnings are receipts derived from foreign exchange transactions; NO. (2) Whether or not the proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing free market rate of exchange and not the par value of the peso; YES.

Held:

For the proper resolution of income tax cases, income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or

profit from investment. Unless otherwise specified, it means cash orits equivalent.

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign exchange transactions. For a foreign exchange transaction is simply that — a transaction in foreign exchange, foreign exchange being "the conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another." When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO spending in said currency. There was no conversion, therefore, from one currency to another.

The dollar earnings of petitioners are the fruits of their labors

in the foreign subsidiaries of Procter & Gamble. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services.

And in the implementation for the proper enforcement of the

National Internal Revenue Code, Section 338 thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively enforce its provisions pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71 were issued to prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And these are presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself.

Petitioners are citizens of the Philippines, and their income,

within or without, and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

Commissioner v. Glenshaw Glass Co.

FACTS:

In a case between Glenshaw Glass Co. manufacturer of glass bottles and containers, and Hartford-Empire Company, manufacturer of machinery of a character used by Glenshaw, Hartford paid Glenshaw $800K as settlement. Out of this amount, $325K represented payment for exemplary damages for fraud and treble damages for injury to its business by reason of Hartford’s violation of federal antitrust laws. However, this portion was not reported as income for the tax year involved. The Commissioner determined a deficiency, claiming as taxable the whole amount less deductible legal fees. ISSUE:

Whether money received as exemplary damages for fraud or as the punitive 2/3 portion of a treble damage antitrust recovery must be reported by a taxpayer as gross income under Sec 22 of Internal Revenue Code of 1939

HELD:

YES. Under Sec 22, gross income includes gain, 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… or gains or profits and income derived from any source whatever…” Through this catch-all provision, Congress applied no limitations as to the source of neither taxable receipts nor restrictive labels as to their nature and intended to tax all gains except those specifically exempted. The mere fact that the payments were extracted from wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients.

Murphy v. IRS

Murphy had sued to recover income taxes that she paid on the compensatory damages for emotional distress and loss of reputation that she was awarded in an action against her former employer under whistle-blower statutes for reporting environmental hazards on her former employer’s property to state authorities. Murphy had claimed both physical and emotional-distress damages as a result of her former employer’s retaliation and mistreatment.

In a prior administrative proceeding, Murphy had been awarded compensatory damages of $70,000, of which $45,000 was for “emotional distress or mental anguish” and $ 25,000 was for “injury to professional reputation.” Murphy reported the $70,000 award as part of her “gross income” and paid $20,665 in Federal income taxes based upon the award.

Section 104(a)(2) of the Internal Revenue Code excludes, from gross income, amounts "received . . . on account of personal physical injuries." The statute provides that for purposes of that exclusion, "emotional distress shall not be treated as a physical injury or physical sickness." Based on that provision, Murphy sought a refund of the full amount of tax, arguing that the award should be exempt from taxation both because the award was “in fact” to compensate for “physical personal injuries” and because the

award was not “income” within the meaning of the Sixteenth Amendment. Interpreting Section 104(a)(2), the D.C. Circuit first held in August 2006 that the damages at issue did not fall within the scope of the statute because the damages were not in fact to compensate for “personal physical injuries,” and thus could not be excluded from gross income under that provision. The D.C. Circuit next analyzed whether Section 104(a)(2) is “constitutional,” relying upon language from Commissioner v. Glenshaw Glass Co. to the effect that, under the Sixteenth Amendment, Congress may “tax all gains” or “accessions to wealth.” Murphy argued that her award was neither a gain nor an accession to wealth because it compensated her for nonphysical injuries, and was thus effectively a restoration of “human capital.”

Recognizing that the Supreme Court has long held that a restoration of capital “[i]s not income,” and thus is not taxable, and that personal injury recoveries have traditionally been considered “nontaxable on the theory that they roughly correspond to a return of capital,” the D.C. Circuit accepted Murphy’s argument in its August 2006 decision. The D.C. Circuit reasoned that Murphy’s award for emotional distress or loss of reputation is not taxable because her 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 D.C. Circuit also explained that a 1918 opinion of

the Attorney General stating that proceeds from an accident insurance policy were not taxable income and a 1922 IRS ruling that damages based on loss of reputation were not taxable income, both issued relatively near the Sixteenth Amendment’s ratification in 1913, support its ruling. The D.C. Circuit thus concluded that “the framers of the Sixteenth Amendment would not have understood compensation for a personal injury – including a nonphysical injury – to be income.” Murphy’s position was that her award constituted only monies that “made her whole” and, in effect, was a return of her “human capital.” HELD: The Court ruled: (1) That the taxpayer's compensation was received on account of a non-physical injury or sickness; (2) That gross income under section 61 of the Internal Revenue Code does include compensatory damages for non-physical injuries, even if the award is not an "accession to wealth," (3) that the income tax imposed on an award for non-physical injuries is an indirect tax, regardless of whether the recovery is restoration of "human capital," and therefore the tax does not violate the constitutional requirement of Article

I, section 9, that capitations or other direct taxes must be laid among the states only in proportion to the population; (4) that the income tax imposed on an award for non-physical injuries does not violate the constitutional requirement of Article I, section 8, that all duties, imposts and excises be uniform throughout the United States; (5) That under the doctrine of sovereign immunity, the Internal Revenue Service may not be sued in its own name.

The Court stated: "[a]lthough the 'Congress cannot

make a thing income which is not so in fact,' [ . . . ] it can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9." The court ruled that Ms. Murphy was not entitled to the tax refund she claimed, and that the personal injury award she received was "within the reach of the congressional power to tax under Article I, Section 8 of the Constitution" -- even if the award was "not income within the meaning of the Sixteenth Amendment".

Old Colony Trust Co. v. CIR

Facts:

In 1916, the American Woolen Company adopted a resolution which provided that the company would pay all taxes due on the salaries of the company's officers. It calculated the employees' tax liabilities based on a gross income that omitted, or excluded, the amount of the income taxes themselves.

In 1925, the Bureau of Internal Revenue assessed a deficiency for the amount of taxes paid on behalf of the company's president, William Madison Wood, arguing that his $681,169.88 tax payment had wrongly been excluded from his gross income in 1919, and that his $351,179.27 tax payment had wrongly been excluded from his gross income in 1920. Old Colony Trust Co., as the executors of Wood's estate, filed suit in the District Court for a refund, then appealed to the Board of Tax Appeals (the predecessor to the United States Tax Court).

The petitioners then appealed the Board's decision

to the United States Court of Appeals for the First Circuit.

Issue. Were the taxes paid by the company additional income of Wood? Held: The payment of Mr. Wood's taxes by his employer constituted additional taxable income to him for the years in question. The fact that a person induced or permitted a third party from paying income taxes on his behalf does not excuse him from filing a tax return. Furthermore, "The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed." Thus, the company's payment of Wood's tax bill was the same as giving him extra income, regardless of the mode of payment. Nor could the payment of taxes of Wood's behalf constitute a gift in the legal sense, because it was made in consideration of his services to the company, thus making it part of his compensation package. (This case did not change the general rule that gifts are not includable in gross income for the purposes of U.S. Federal income taxation, while some gifts but not all gifts from an employer to an employee are taxable to the employee.

Helvering v. Bruun

Facts: Bruun repossessed land from a tenant who had defaulted in the eighteenth year of a 99-year lease. During the course of the lease, the tenant had torn down an old building (in which the landlord’s adjusted basis was now $12,811.43) and built a new one (whose value was now $64,245.68). The lease had specified that the landlord was not required to compensate the tenant for these improvements. Thus, the government argued that upon repossession the landlord realized a gain of $51,434.25. The landlord argued that there was no realization of the property because no transaction had occurred, and because the improvement of the property that created the gain was not "severable" from the landlord's original capital. Issue: WON a landlord realize a taxable gain when he repossess property improved by a tenant. Held:

The improvements, the Court observed, were received by the taxpayer "as a result of a business transaction," namely, the leasing of the taxpayer's land. It was not necessary to the recognition of gain that the improvements be severable from the land; all that had to be shown was that the taxpayer had acquired valuable assets from his lease in exchange for the use of his property. The medium of exchange—whether cash or kind, and whether separately disposable or "affixed"--was immaterial as far as the realization criterion was concerned. In effect, the improvements represented rent, or rather a payment in lieu of rent, which was taxable to the landlord regardless of the form in which it was received.

"Severance" is not necessary for realization:

"It is not necessary to recognition of taxable gain 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."

The Court added that, while not all economic gain is "realized" for taxation purposes, realization does not require that the economic gain be in "cash derived from the sale of an asset". Realization can also arise from property exchange; relief of indebtedness; or other transactions yielding profit—e.g. by receiving an asset with enhanced value in a transaction, even where severance does not occur (i.e. even where "the gain is a portion of the value of property received by the taxpayer in the transaction").

NOTE: Congress nullified Bruun by enacting §§ 109 and 1019 of

the Internal Revenue Code: §109 excludes, from a lessor's income, the value of leasehold

improvements realized on termination of a lease. §1019 then denies the lessor a basis for the property so

excluded.

These provisions overrule the proposition announced in "Bruun," that repossession of an asset with an enhanced value from a transaction with another party is gross income. The aim of §§109-1019 was to relieve lessors—suddenly confronted with large tax obligations—of the need to raise cash in a hurry, at a time (the 1930s) when the real estate market was scraping bottom. An inadvertent side effect of the means chosen—permitting current income to be deferred to later period—was to reduce the lessor's tax obligation absolutely, by postponing his realization of any improvements to the sale of the property.

CIR v. CA (JANUARY 22, 1999) Facts:

Sometime in the 1930’s, Don Andres Soriano, a citizen and

resident of the United States, formed the corporation “A. Soriano

Y Cia”, predecessor of ANSCOR with a 1,000,000.00 capitalization

divided into 10,000 common shares at a par value of P100/share.

ANSCOR is wholly owned and controlled by the family of Don

Andres, who are all non-resident aliens. In 1937, Don Andres

subscribed to 4,963 shares of the 5,000 shares originally issued.

On September 12, 1945, ANSCOR’s authorized capital

stock was increased to P2,500,000.00 divided into 25,000

common shares with the same par value. Of the additional 15,000

shares, only 10,000 was issued which were all subscribed by Don

Andres, after the other stockholders waived in favor of the

former their pre-emptive rights to subscribe to the new issues.

This increased his subscription to 14,963 common shares. A

month later, Don Andres transferred 1,250 shares each to his two

sons, Jose and Andres Jr., as their initial investments in ANSCOR.

Both sons are foreigners.

By 1947, ANSCOR declared stock dividends. Other

stock dividend declarations were made between 1949 and

December 20, 1963. On December 30, 1964 Don Andres died. As

of that date, the records revealed that he has a total

shareholdings of 185,154 shares. 50,495 of which are original

issues and the balance of 134,659 shares as stock

dividend declarations. Correspondingly, one-half of that

shareholdings or 92,577 shares were transferred to his wife, Doña

Carmen Soriano, as her conjugal share. The offer half formed part

of his estate.

A day after Don Andres died, ANSCOR increased its capital

stock to P20M and in 1966 further increased it to P30M. In the

same year, stock dividends worth 46,290 and 46,287 shares were

respectively received by the Don Andres estate and Doña Carmen

from ANSCOR. Hence, increasing their accumulated

shareholdings to 138,867 and 138,864 common shares each.

On December 28, 1967, Doña Carmen requested a ruling

from the United States Internal Revenue Service (IRS), inquiring if

an exchange of common with preferred shares may be

considered as a tax avoidance scheme. By January 2, 1968,

ANSCOR reclassified its existing 300,000 common shares into

150,000 common and 150,000 preferred shares.

In a letter-reply dated February 1968, the IRS opined that

the exchange is only a recapitalization scheme and not

tax avoidance. Consequently, Doña Carmen exchanged her whole

138,864 common shares for 138,860 of the preferred shares. The

estate of Don Andres in turn exchanged 11,140 of its common

shares for the remaining 11,140 preferred shares.

In 1973, after examining ANSCOR’s books of account and

record Revenue examiners issued a report proposing that

ANSCOR be assessed for deficiency withholding tax-at-source, for

the year 1968 and the 2nd quarter of 1969 based on the

transaction of exchange and redemption of stocks. BIR made the

corresponding assessments. ANSCOR’s subsequent protest on

the assessments was denied in 1983 by petitioner. ANSCOR filed

a petition for review with the CTA, the Tax Court reversed

petitioners ruling. CA affirmed the ruling of the CTA. Hence this

position.

Issue:

Whether or not a person assessed for deficiency withholding tax

under Sec. 53 and 54 of the Tax Code is being held liable in its

capacity as a withholding agent.

Held:

An income taxpayer covers all persons who derive taxable

income. ANSCOR was assessed by petitioner for

deficiency withholding tax, as such, it is being held liable in its

capacity as a withholding agent and not in its personality as

taxpayer. A withholding agent, A. Soriano Corp. in this case,

cannot be deemed a taxpayer for it to avail of a tax amnesty

under a Presidential decree that condones “the collection of all

internal revenue taxes including the increments or penalties on

account of non-payment as well as all civil, criminal,

or administrative liabilities arising from or incident to voluntary

disclosures under the NIRC of previously untaxed income and/or

wealth realized here or abroad by any taxpayer, natural or

juridical.” The Court explains: “The withholding agent is not a

taxpayer, he is a mere tax collector. Under the withholding

system, however, the agent-payer becomes a payee by fiction of

law. His liability is direct and independent from the taxpayer,

because the income tax is still imposed and due from the latter.

The agent is not liable for the tax as no wealth flowed into him,

he earned no income.”

Wise & Co. v. Meer

Facts: On June 1, 1937, Manila Wine Merchants, Ltd., a Hong Kong

company, was liquidated and its capital stock was distributed to its stockholders, one of which is the petitioner. As part of its liquidation, the corporation was sold to Manila Wine Merchants., Inc. for Php400, 000. The said earnings, declared as dividends, were distributed to its stockholders. The Hong Kong Company then paid the income tax for the entire earnings. As a result of the sale of its business and assets, a surplus was realized by the Hong Kong Company after deducting the dividends. This surplus was also distributed to its stockholders. The Hong Kong Company also paid the income tax for the said surplus. The petitioners then filed their respective income tax returns. The respondent Commissioner, then, made a deficiency assessment charging the individual stockholders for taxes on the shares distributed to them despite the fact that income tax was already paid by the Hong Kong Company. The petitioners paid the assessed amount in protest. The lower courts ruled in favor of the Commissioner of Internal Revenue, hence, this action.

Issue(s): 1. Whether the amount received by the petitioners were ordinary dividends or liquidating dividends. 2. Whether such dividends were taxable or not. 3. Whether or not the profits realized by the non-resident alien individual appellants constitute “income from the Philippines” considering that the sale took place outside the Philippines.

Held: 1. The dividends are liquidating dividends or payments for surrendered or relinquished stock in a corporation in complete

liquidation. It was stipulated in the deed of sale that the sale and transfer of the corporation shall take effect on June 1, 1937 while distribution took place on June 8. They could not consistently deem all the business and assets of the corporation sold as of June 1, 1937, and still say that said corporation, as a going concern, distributed ordinary dividends to them thereafter. 2. Yes. Petitioners received the said distributions in exchange for the surrender and relinquishment by them of their stock in the liquidated corporation. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the Income Tax Law. When the corporation was dissolved in the process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place. The shareholder who received the consideration for the stock earned received that money as income of his own, which again was properly taxable to him under the Income Tax Law. 3. The contention of the petitioners that the earnings cannot be considered as income from the Philippines because the sale was made outside the Philippines and is not subject to Philippine tax law is untenable. At the time of the sale, the Hong Kong Company was engage in its business in the Philippines. Its successor was a domestic corporation and doing business also in the Philippines. It must be taken into consideration that the Hong Kong Company was incorporated for the purpose of carrying business in the Philippine Islands. Hence, its earnings, profits and assets, including those from whose proceeds the distribution was made, had been earned and acquired in the Philippines. It is clear that the distributions in questions were income “from Philippine sources”, hence, taxable under Philippine law.

James v. US

FACTS: The defendant, Eugene James, was an official in a labor

union who had embezzled more than $738,000 in union funds, and did not report these amounts on his tax return. He was tried for tax evasion, and claimed in his defense that embezzled funds did not constitute taxable income because, like a loan, the taxpayer was legally obligated to return those funds to their rightful owner Indeed, James pointed out, the Supreme Court had previously made such a determination in Commissioner v. Wilcox, 327 U.S. 404 (1946). However, this defense was unavailing in the trial court, where Eugene James was convicted and sentenced to three years in prison. ISSUE:

Whether or not the receipt of embezzled funds constitutes income taxable to the wrongdoer, even though an obligation to repay exists. YES RULING:

The Supreme Court of the US ruled that the receipt of

embezzled funds was includable in the gross income of the wrongdoer and was taxable to the wrongdoer, even though the wrongdoer had an obligation to return the funds to the rightful owner.

If a taxpayer receives income, legally or illegally, without

consensual recognition of obligation to repay, that income is automatically taxable. The Court noted that the Sixteenth Amendment did not limit its scope to "lawful" income, a

distinction which had been found in the Revenue Act of 1913. The removal of this modifier indicated that the framers of the Sixteenth Amendment had intended no safe harbor for illegal income.

The Court also ruled, however, that Eugene James could not be held liable for the willful tax evasion because it is not possible to willfully violate laws that were not established at the time of the violation.

Embezzled money is taxable income of the embezzler in

the year of the embezzlement under 22 (a) of the Internal Revenue Code of 1939, which defines "gross income" as including "gains or profits and income derived from any source whatever," and under 61 (a) of the Internal Revenue Code of 1954, which defines "gross income" as "all income from whatever source derived."

The language of 22 (a) of the 1939 Code, "gains or profits

and income derived from any source whatever," and the more simplified language of 61 (a) of the 1954 Code, "all income from whatever source derived," have been held to encompass all "accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.".

A gain "constitutes taxable income when its recipient has

such control over it that, as a practical matter, he derives readily realizable economic value from it." Under these broad principles, we believe that petitioner's contention, that all unlawful gains are taxable except those resulting from embezzlement, should fail.

CIR v. CA (March 23, 1992)

FACTS: GCL Retirement Plan is an employees' trust maintained

by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917.

In 1984, Respondent GCL made investments and earned

therefrom interest income from which was withheld the fifteen per centum (15%) final withholding tax imposed by Pres. Decree No. 1959, 2 which took effect on 15 October 1984.

GCL filed with Petitioner a claim for refund in the

amounts of P1, 312.66 withheld by Anscor Capital and Investment Corp., and P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second claim for refund of the amount of P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax as provided under Rep. Act No. 4917 in relation to Section 56 (b) 3 of the Tax Code.

CIR denied the refund, Petitioner elevated the matter to

CTA. CTA 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 - the exemption from withholding tax

on interest on bank deposits previously extended by Pres. Decree No. 1739 if the recipient (individual or corporation) of the interest income is exempt from income taxation, and the imposition of the preferential tax rates if the recipient of the income is enjoying preferential income tax treatment, were both abolished by Pres. Decree No. 1959. Petitioner thus submits that the deletion of the exempting and preferential tax treatment provisions under the old law is a clear manifestation that the single 15% (now 20%) rate is impossible on all interest incomes from deposits, deposit substitutes, trust funds and similar arrangements, regardless of the tax status or character of the recipients thereof.

In short, petitioner's position is that from 15 October

1984 when Pres. Decree No. 1959 was promulgated, employees' trusts ceased to be exempt and thereafter became subject to the final withholding tax. GCL contention - the tax exempt status of the employees' trusts applies to all kinds of taxes, including the final withholding tax on interest income. That exemption, according to GCL, is derived from Section 56(b) and not from Section 21 (d) or 24 (cc) of the Tax Code. ISSUE: Whether or not GCL is exempted from Income Tax. YES RULING:

GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. In so far as employees' trusts are concerned, the foregoing provision should be taken

in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No. 1983, supra, which took effect on 22 June 1957.

The tax-exemption privilege of employees' trusts, as

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

And rightly so, by virtue of the raison de'etre behind the

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

The deletion in Pres. Decree No. 1959 of the provisos

regarding tax exemption and preferential tax rates under the old law, therefore, cannot be deemed to extent to employees' trusts. Said Decree, being a general law, cannot repeal by implication a specific provision, Section 56(b) now 53 [b]) in relation to RA No. 4917 granting exemption from income tax to employees' trusts.

RA 1983, which accepted employees' trusts in its Section

56 (b) was effective on 22 June 1957 while Rep. Act No. 4917

was enacted on 17 June 1967, long before the issuance of Pres. Decree No. 1959 on 15 October 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 manifested. This is so even if the provisions of the latter are sufficiently comprehensive to include what was set forth in the special act (Villegas v. Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA 190).

There can be no denying either that the final

withholding tax is collected from income in respect of which employees' trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-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.

CIR v. CA (October 17, 1991)

FACTS: Efren Castaneda retired from gov’t service as

Revenue Attache in the Philippine Embassy, London, England. Upon retirement, he received benefits such as the terminal leave pay. The Commissioner of Internal Revenue withheld P12,557 allegedly representing that it was tax income. Castaneda filed for a refund, contending that the cash equivalent of his terminal leave is exempt from income tax. The Solicitor General contends that the terminal leave is based from an employer-employee relationship and that as part of the services rendered by the employee, the terminal leave pay is part of the gross income of the recipient. CTA ruled in favor of Castaneda and ordered the refund. CA affirmed decision of CTA. Hence, this petition for review on certiorari. ISSUE:

Whether or not terminal leave pay (on occasion

of his compulsory retirement) is subject to withholding income tax. NO

RULING:

As explained in Borromeo v CSC, the rationale of the court in holding that terminal leave pays are subject to income tax is that: . . 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. 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 policy considerations governing retirement benefits. A terminal leave pay is a retirement benefit which is NOT subject to income tax. Petition denied.

Re: Request of Atty. Bernardo Zialcita

Facts: Amounts were claimed by Atty. Bernardo F. Zialcita on the occasion of his retirement. 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 part 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 part of his salary is buttressed by Section 3 of PD 985, which it makes it clear that the actual service is the period of time for which pay has been received, excluding the period covered by terminal leave.

The Commissioner filed a motion for reconsideration. The Commissioner of Internal Revenue, as intervenor-movant and through the Solicitor General, filed a motion for clarification and/or reconsideration with this Court.

The Court resolved to deny the motion for

reconsideration and hereby holds that the money value of the accumulated leave credits of Atty. Bernardo Zialcita are not taxable for the following reasons: 1) Atty. Zialcita opted to retire under the provisions of Republic Act 660, which is incorporated in Commonwealth Act No. 186. 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.

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. 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 value of his accumulated leave credits, is no longer compensation for services rendered. It cannot be viewed as salary. ISSUES: Whether or not the retirement benefit of Zialcita is taxable. NO Whether or not the terminal leave pay is exempt from tax; as well as other amounts claimed herein. YES RULING:

1. The retirement benefit is not taxable. In the case of Atty. Zialcita, he rendered government service from March 13, 1962 up to February 15, 1990. The next day, or on February 16, 1990, he reached the compulsory retirement

age of 65 years. Upon his compulsory retirement, he is entitled to the commutation of his accumulated leave credits to its money value.

Within the purview of the above-mentioned

provisions of the NLRC, compulsory retirement may be considered as a "cause beyond the control of the said official or employee". Consequently, the amount that he received by way of commutation of his accumulated leave credits as a result of his compulsory retirement, or his terminal leave pay, fags within the enumerated exclusions from gross income and is therefore not subject to tax.

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. It is a mere bounty given by the government in consideration or in recognition of meritorious services and springs from the appreciation and graciousness of the government.

When a government employee chooses to go to work

rather than absent himself and consume his leave credits, there is no doubt that the government is thereby benefited by the employee's uninterrupted and continuous service. It is in cognizance of this fact that laws were passed entitling retiring government employees, among others, to the

commutation of their accumulated leave credits. The commutation of accumulated leave credits may thus be considered a retirement gratuity, within the import of Section 28(b), 7(f) of the NLRC, since it is given only upon retirement and in consideration of the retiree's meritorious services.

2. Applying Section 12 (c) of Commonwealth Act 186,

as incorporated into RA 660, and Section 28 (c) of the former law, the amount received by Atty. Zialcita as a result of the conversion of unused leave credits, 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.

Since the terminal leave is applied for after the

severance of the employment, terminal pay is no longer compensation for services rendered. It cannot be viewed as salary. Further, the terminal leave pay may also be considered as a retirement gratuity, which is also another exclusion from gross income as provided for in Section 28 (b), 7 (f) of the Tax Code. The 23 August 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 principle an advisory opinion.

Intercontinental Broadcasting Corporation v. Amarilla

FACTS:

Petitioner IBC employed the following persons at its Cebu station: Candido C. Quiñones, Jr., Corsini R. Lagahit, as Studio Technician, Anatolio G. Otadoy, as Collector, and Noemi Amarilla, as Traffic Clerk. On March 1, 1986, the government sequestered the station, including its properties, funds and other assets, and took over its management and operations from its owner, Roberto Benedicto.

On November 3, 1990, the Presidential Commission on

Good Government (PCGG) and Benedicto executed a Compromise Agreement, where Benedicto transferred and assigned all his rights, shares and interests in petitioner station to the government.

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. In the meantime, a 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 their retirement benefits in accordance with the National Internal Revenue Code (NIRC).

The four retirees filed separate complaints which averred that the retirement benefits are exempt from income tax under Article 32 of the NIRC.

For its part, petitioner averred that under Section 21 of

the NIRC, the retirement benefits received by employees from their employers constitute taxable income. While retirement benefits are exempt from taxes under Section 28(b) of said Code, the law requires that such benefits received should be in accord with a reasonable retirement plan duly registered with the Bureau of Internal Revenue (BIR). Since its retirement plan in the 1993 CBA was not approved by the BIR, complainants were liable for income tax on their retirement benefits.

In reply, complainants averred that the claims for the

retirement salary differentials of Quiñones and Otadoy had not prescribed because the said CBA was implemented only in 1997. They pointed out that they filed their claims with petitioner on April 3, 1999. They maintained that they availed of the optional retirement because of petitioner’s inducement that there would be no tax deductions.

Petitioner countered that under Sections 72 and 73 of

the NIRC, it is obliged to deduct and withhold taxes determined in accordance with the rules and regulations to be prepared by the Secretary of Finance. The NLRC held that the benefits of the retirement plan under the CBAs between petitioner and its union members were subject to tax as the scheme was not approved by the BIR.

However, it had also been the practice of petitioner to give retiring employees their retirement pay without tax

deductions and there was no justifiable reason for the respondent to deviate from such practice. ISSUES: Whether the retirement benefits of respondents are part of their gross income. YES Whether petitioner is estopped from reneging on its agreement with respondent to pay for the taxes on said retirement benefits. YES RULING:

1. Yes. Under the NIRC, the retirement benefits of respondents are part of their gross income subject to taxes. Thus, 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.

Respondents were qualified to retire optionally from their employment with petitioner. However, there is no evidence on record that the 1993 CBA had been approved or was ever presented to the BIR; hence, the retirement benefits of respondents are taxable. Under Section 80 of the NIRC, petitioner, as employer, was obliged to withhold the taxes on said benefits and remit the same to the BIR. However, the Court agrees with respondents’ contention that petitioner did not withhold the taxes due on their retirement benefits

because it had obliged itself to pay the taxes due thereon. This was done to induce respondents to agree to avail of the optional retirement scheme.

2. Yes. Petitioner is estopped from doing so. It must be

stressed that the parties are free to enter into any contract stipulation provided it is not illegal or contrary to public morals. When such agreement freely and voluntarily entered into turns out to be advantageous to a party, the courts cannot “rescue” the other party without violating the constitutional right to contract.

Courts are not authorized to extricate the parties from the consequences of their acts. An agreement to pay the taxes on the retirement benefits as an incentive to prospective retirees and for them to avail of the optional retirement scheme is not contrary to law or to public morals. Petitioner had agreed to shoulder such taxes to entice them to voluntarily retire early, on its belief that this would prove advantageous to it.

Respondents agreed and relied on the commitment of petitioner. For petitioner to renege on its contract with respondents simply because its new management had found the same disadvantageous would amount to a breach of contract. The well-entrenched rule is that estoppel may arise from a making of a promise if it was intended that the promise should be relied upon and, in fact, was relied upon, and if a refusal to sanction the perpetration of fraud would result to injustice. The mere omission by the promisor to do whatever he promises to do is sufficient forbearance to give rise to a promissory estoppel.

CIR v. Mitsubishi Metal Corporation

Facts:

Atlas Consolidated Mining and Development Corporation, a domestic corporation, entered into a Loan and Sales Contract with Mitsubishi Metal Corporation, a Japanese corporation licensed to engage in business in the Philippines.

To be able to extend the loan to Atlas, Mitsubishi

entered into another loan agreement with Export-Import Bank (Eximbank), a financing institution owned, controlled, and financed by the Japanese government. After making interest payments to Mitsubishi, with the corresponding 15% tax thereon remitted to the Government of the Philippines, Altas claimed for tax credit with the Commissioner of Internal Revenue based on Section 29(b)(7) (A) of the National Internal Revenue Code, stating that since Eximbank, and not Mitsubishi, is where the money for the loan originated from Eximbank, then it should be exempt from paying taxes on its loan thereon. ISSUE: Whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation. NO RULING:

Mitsubishi secured the loan from Eximbank in its own independent capacity as a private entity and not as a conduit of Eximbank. Therefore, what the subject of the 15% withholding tax is not the interest income paid by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi from

the loan to Atlas. Thus, it does not come within the ambit of Section 29(b) (7)(A), and it is not exempt from the payment of taxes. It is too settled a rule in this 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 the 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 covered 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 exemption and which should indispensably be the party in interest in this case. Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution of much needed funds. Nor can we close this discussion without taking cognizance of petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans or other domestic securities with private foreign entities, which in turn will negotiate independently with their governments, could be availed of to take advantage of the tax exemption law under discussion.

CIR v. Marubeni Corp.

Facts: Marubeni Corporation is a foreign corporation organized and

existing under the laws of Japan. It is engaged in import and export trading, financing, and the construction business. It is duly registered in the Philippines and has a branch office in Manila

In 1985, the CIR examined the books of accounts of Marubeni and found it to have undeclared income from two contracts in the Philippines, both of which were completed in 1984. One contract was with the National Development Company for the construction of a wharf complex in Leyte, and the other contract was with the Philippine Phosphate Fertilizer Corp. (Philphos) for the construction of an ammonia storage complex, also in Leyte.

CIR assessed Marubeni for deficiency income, branch profit remittance, contractor‘s and commercial broker‘s taxes. Marubeni filed two petitions with the CTA questioning the assessment.

Earlier, E.O. 41 was issued, declaring a one-time amnesty for unpaid income taxes for the years 1981 to 1985. It was provided in the same E.O., however, that ―those with income tax cases already filed in Court was of the effectivity hereof…may not avail themselves of the tax amnesty herein granted.

E.O. 64 was subsequently issued amending E.O. 41 and extending its coverage to business, estate and donor‘s taxes.

CTA granted the petitions of Marubeni because the latter had properly availed of the tax amnesty under E.O. Nos. 41 and 64. CA affirmed the CTA decisions Issue: WON Marubeni is liable for income and branch profit remittance tax. WON Marubeni is liable for contractor‘s tax. Held:

1.) NO, Marubeni is not liable for any of the taxes assessed by CIR. As to the income and branch profit remittance tax (branch profit

remittance also falls under income tax), Marubeni had properly availed of

the tax amnesty provided by E.O. 41. It is not one of the taxpayers disqualified from availing of the amnesty for income tax since it filed the cases with CTA in Sept.26,1986, while E.O. 41 took effect in Aug.22,1986. This means when E.O. 41 became effective, the CTA cases had not yet been filed in court.

2.) NO. As to the contractor‘s tax, however, this falls under business taxes covered by E.O. 64, which took effect on Nov.17, 1986. This E.O. contained the same disqualification clause as mentioned in E.O. 41. Marubeni filed the cases with CTA in Sept.26, prior to the effectivity of E.O.64. Thus it was already disqualified from availing of the tax amnesty under the said E.O.

It is Marubeni‘s argument, however that even if it had not availed of the amnesty under the two executive orders, it isstill 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.

The income derived from the Onshore Portion of the two projects had been declared for tax purposes and the taxes thereon had already been paid. It is with regard to the Foreign Offshore Portion of the two contracts that the assessment liabilities in this case arose.

It is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The other construction supplies listed under the Offshore Portion were fabricated and manufactured by sub-contractors in Japan. All services for the design, fabrication, engineering, and manufacture of the materials and equipment under the Offshore Portion were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to the contractor‘s tax.

CIR v. BOAC

Facts: British overseas airways corp. (BOAC) a wholly owned British Corporation, is engaged in international airlines business. From 1959to 1972, it has no loading rights for traffic purposes in the Philippines but maintained a general sales agent in the Philippines which was responsible for selling, BOAC tickets covering passengers and cargoes the CIR assessed deficiency income taxes against. Issue: WON BOAC is liable for the deficiency of its income tax. Held:

Yes. The source of income is the property, activity of service that produces the income. For the source of income to be considered coming from the Philippines, it is sufficient that the income is derived from the activity coming from the Philippines. The tax code provides that for revenue to be taxable, it must constitute income from Philippine sources. In this case, the sale of tickets is the source of income. The situs of the source of payments is the Philippines.

Commissioner v. CTA and Smith and Kline

FACTS: Smith Kline and French Overseas Company, a multinational

pharmaceutical firm domiciled in Philadelphia, Pennsylvania, is licensed to do business in the Philippines. In its 1971 original ITR, Smith Kline declared a net taxable income of P1.4M and paid P511k as tax due. Among the deductions claimed from gross income was P501+k as its share of the head office overhead expenses. However, in its amended return filed on March 1, 1973, there was an overpayment of P324+k arising from under deduction of home office overhead. It made

a formal claim for the refund of the alleged overpayment. In October, 1972, Smith Kline received from its international independent auditors an authenticated certification to the effect that the Philippine share in the unallocated overhead expenses of the main office for the year was actually P1.4+M.Thereafter, without awaiting the action of the Commissioner of Internal Revenue on its claim, Smith Kline filed a petition for review with the CTA. The CTA ordered the CIR to refund the overpayment or grant a tax credit to Smith Kline. The Commissioner appealed to the SC. HELD:

Where an expense is clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment.

The overhead expenses incurred by the parent company in connection with finance, administration, and research and development, all of which directly benefit its branches all over the world, including the Philippines, fall under a different category however. These are items which cannot be definitely allocated or identified with the operations of the Philippine branch. For 1971, the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code and section 160 of the regulations, Smith Kline can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation. The weight of evidence bolsters Smith Kline’s position that the amount of P1.4+M represents the correct ratable share, the same having been computed pursuant to section 37(b) and section 160. Therefore, it is entitled to a refund.

Phil. Guaranty Co., Inc. v. CIR

FACTS: The petitioner Philippine Guaranty Co., Inc., a

domestic insurance company, entered into reinsurance contracts with foreign insurance companies not doing business in the country, thereby ceding to foreign reinsurers a portion of the premiums on insurance it has originally underwritten in the Philippines. The premiums paid by such companies were excluded by the petitioner from its gross income when it file its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, the CIR assessed against the petitioner withholding taxes on the ceded reinsurance premiums to which the latter 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 foreign companies. ISSUE:

Are insurance companies not required to withhold tax on reinsurance premiums ceded to foreign insurance companies, which deprives the government from collecting the tax due from them?

HELD: No. The power to tax is an attribute of sovereignty. 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 improvement 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.

The petitioner's defense of reliance of good faith on rulings of the CIR requiring no withholding of tax due on reinsurance premiums may free the taxpayer from the payment of surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents.

Howden & Co. v. CIR

Facts: In 1950 the Commonwealth Insurance Co., a

domestic corporation, entered into reinsurance contracts with 32 British insurance companies not engaged in trade or business in the Philippines, whereby the former agreed to cede to them a portion of the premiums on insurances on fire, marine and other risks it has underwritten in the Philippines. The reinsurance contracts were prepared and signed by the foreign reinsurers in England and sent to Manila where Commonwealth Insurance Co. signed them. Alexander Howden & Co., Ltd., also a British corporation, represented the British insurance companies. Pursuant to the contracts, Commonwealth Insurance Co remitted P798,297.47 to Alexander Howden & Co., Ltd., as reinsurance premiums. In behalf of Alexander Howden & Co., Ltd., Commonwealth Insurance Co. filed an income tax return declaring the sum of P798,297.47, with accrued interest in the amount of P4,985.77, as Alexander Howden & Co., Ltd.'s gross income for calendar year 1951. It also paid the BIR P66,112.00 income tax.

On May 12, 1954, Alexander Howden & Co., Ltd. filed with the BIR a claim for refund of the P66,112.00, later reduced toP65,115.00, because it agreed to the payment of P977.00 as income tax on the P4,985.77 accrued interest. A ruling of the CIR was invoked, stating that it exempted from withholding tax reinsurance premiums received from domestic insurance companies by foreign insurance companies not authorized to do business in the Philippines. Subsequently, petitioner instituted an action in the CFI of Manila for the recovery of the amount claimed. Tax Court denied the claim Issue:

WON reinsurance premiums are subject to withholding tax under Section 54 in relation to Section 53 of the Tax Code. Held: Yes. Subsection (b) of Section 53 “subjects to withholding tax the following: interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any non-resident alien individual not engaged in trade or business within the Philippines and not having any office or place of business therein. Section 54, by reference, applies this provision to foreign corporations not engaged in trade or business in the Philippines”.

Appellants maintain that reinsurance premiums are not "premiums" at all and that they are not within the scope of "other fixed or determinable annual or periodical gains, profits, and income"; that, therefore, they are not items of income subject to withholding tax. SC disagrees with the contention. Since Section 53 subjects to withholding tax various specified income, among them, “premiums", the generic connotation of each and every word or phrase composing the enumeration in Subsection (b) thereof is income. Perforce, the word "premiums", which is neither qualified nor defined by the law itself, should mean income and should include all premiums constituting income, whether they be insurance or reinsurance premiums. Assuming that reinsurance premiums are not within the word "premiums" in Section 53, still they may be classified as determinable and periodical income under the same provision of law. Section 199 of the Income Tax Regulations defines fixed, determinable, annual and periodical income: Income is fixed when it is to be paid in amounts definitely pre-determined. On the other hand, it is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained. The income need not be paid annually if it is paid periodically. That the length of time during which the payments are to be made may be increased or diminished in accordance with someone's will or with the

happening of an event does not make the payments any the less determinable or periodical. ... Reinsurance premiums, therefore, are determinable and periodical income: determinable, because they can be calculated accurately on the basis of the reinsurance contracts; periodical, inasmuch as they were earned and remitted from time to time. Appellants' claim for refund, as stated, invoked a ruling of the CIR cited rulings attempting to show that the prevailing administrative interpretation of Sections 53 and 54 of the Tax Code exempted from withholding tax reinsurance premiums ceded to non-resident foreign insurance companies. It is asserted that since Sections 53 and 54 were "substantially re-enacted" by Republic Acts 1065 , 1291, 1505, and 2343, when the said administrative rulings prevailed, the rulings should be given the force of law under the principle of legislative approval by re-enactment