Taxation Law

LMG15

Case Digests

Submitted by: TULIAO, Maria Athena E.

4 DLM

Submitted to. Atty. Cardona

1. Madrigal v. Rafferty 38 Phil. 414, August 7, 1918

FACTS:

Vicente Madrigal and Susana Paterno legally contracted marriage prior toJanuary

1, 1914 under the provisions of law concerning conjugal partnerships. On February

25, 1915, Vicente Madrigal filed sworn declaration on the prescribed form with the

CIR, showing, as his total net income for the year 1914, the sum of P296,302.73.

Subsequently Madrigal submitted the claim that the said P296,302.73 did not

represent his income for the year 1914, but was in fact the income of the conjugal

partnership existing between himself and his wife, and that in computing and

assessing the additional income tax provided by the Act of Congress, the income

declared by Madrigal should be divided into two equal parts, one-half to be

considered the income of Vicente Madrigal and the other half of Susana Paterno.

The general question had in the meantime been submitted to the Attorney-General

of the Philippine Islands who in an opinion dated March17, 1915, held with the

petitioner Madrigal. The revenue officers forwarded the correspondence with the

opinion of the Attorney-General to Washington for a decision by the United States

Treasury Department. The United States Commissioner of Internal Revenue

reversed the opinion of the Attorney-General, and thus decided against the claim of

Madrigal.

ISSUE:

Whether or not the additional income tax should be divided into two equal parts

because of the conjugal partnership existing between Vicente Madrigal and Susana

Paterno.

HELD:

The income of husband and wife should be taken as a whole for the purpose of the

normal taxr egardless as to whether from separate estates or not.

2. CIR v. Tours SpecialistsGR No. 66416, March 21, 1990

FACTS:

The Commissioner of Internal Revenue filed a petition to the CTA decision which

ruled that the money entrusted to private respondent Tours Specialists, and paid for

hotel room charges of tourists, travelers or foreign travel agencies do not form part

of its gross receipt subject to 3% independent contractor’s tax. The Tours Specialist

derived income from its activities and services as a travel agency, which included

booking tourists in local hotels. To supply such service, Tours Specialists and its

counterpart tourist agencies abroad have agreed to offer a package fee for the

tourists inclusive of payment of hotel room accommodations, food and other

personal expenses. By arrangement, the foreign tour agency entrusts to TS the

fund for hotel room accommodation, which in turn paid by the latter to the local

hotel when billed.

Despite this arrangement, CIR assessed private respondent for deficiency 3%

contractor’s tax as independent contractor including the entrusted hotel room

charges in its gross receipts from services for years 1974-1976 plus compromise

penalty. During cross-examination, Tours Specialists General Manager stated that

the payment through them “is only an act of accommodation on its part” and “the

agent abroad instead of sending several telexes and saving on bank charges they

take the option to send the money to Tours Specialists to be held in trust to be

endorsed to the hotel.

CIR caused the issuance of a warrant of distraint and levy, and had Tours

Specialists’ bank deposits garnished.

ISSUE:

Whether or not the amounts received by a local tourist and travel agency included

in a package fee from tourists or foreign tour agencies, intended or earmarked for

hotel accommodations form part of gross receipts subject to 3% contractor’s tax.

HELD:

No. Gross receipts subject to tax under the Tax Code do not include monies or

receipts entrusted to the taxpayer which do not belong to them and do not redound

to the taxpayer’s benefit; and it is not necessary that there must be a law or

regulation which would exempt such monies or receipts within the meaning of gross

receipts under the Tax Code. Parenthetically, the room charges entrusted by the

foreign travel agencies to the private respondents do not form part of its gross

receipts within the definition of the Tax Code. The said receipts never belonged to

the private respondent. The private respondent never benefited from their payment

to the local hotels. This arrangement was only to accommodate the foreign travel

agencies.

3. CIR v. CTAGR No. 25043, March 21, 1990

FACTS:

Antonio, Eduardo and Jose Roxas, brothers and at the same time partners of the

Roxas y Compania, inherited from their grandparents several properties which

included farmlands with a total area of 19,000 hectares at Nasugbu Farmlands. The

tenants therein expressed their desire to purchase from the brothers the parcels

which they actually occupied so the government, pursuant to the constitutional

mandate to acquire big landed estate and apportion them among landless tenants,

persuaded the brothers sell the same. Roxas y Cia. then agreed to sell 13, 500

hectares of the lands but the government, however, did not have enough funds, so

the former allowed the farmers to buy the lands for the same price but by

installment. Subsequently, the CIR demanded from the brothers the payment of

deficiency income taxes resulting from the sale of the farmlands and considered

the partnership as engaged in the business of real estate, hence, 100% of the

profits derived there from was taxed. The brothers protested the assessment but

the same was denied. On appeal, the Court of Tax Appeals sustained the

assessment.

ISSUE:

Is Roxas y Cia liable for the payment of deficiency income for the sale of the

farmlands?

HELD:

No. Although the farmers are paid for their respective holdings in installment for a

period of 10 years, it would nevertheless not make the vendor Roxas y Cia. a real

estate dealer during the 10-year amortization period. It should be borne in mind

that the sale of the Nasugbu farm lands to the very farmers who tilled them for

generations was not only in consonance with, but more in obedience to the request

and pursuant to the policy of our Government to allocate lands to the landless.

However, the government could not comply with its duty for lack of funds so Roxas

y Cia. Shouldered the Government's burden, went out of its way and sold lands

directly to the farmers inthe same way and under the same terms as would have

been the case had the government done it itself. For this act, the municipal council

of Nasugbu passed a resolution expressing the people's gratitude. The power of

taxation is sometimes called also the power to destroy. Therefore it should be

exercised with caution to minimize injury to the proprietary rights of a taxpayer. It

must be exercised fairly, equally and uniformly. And, in order to maintain the

general public's trust and confidence in the Government this power must be used

justly and not treacherously. It does not conform with our sense of justice in the

instant case for the Government to persuade the taxpayer to lend it a helping hand

and later on to penalize him for duly answering the urgent call. In fine, Roxas y Cia.

cannot be considered a real estate dealer for the sale in question. Hence, pursuant

to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and

the gain derived from the sale thereof is capital gain, taxable only to the extent of

50%.

4. CIR v. Isabela Cultural CorporationGR No. 172231, February 12, 2007

FACTS:

Isabela Cultural Corporation was assessed for deficiency income tax legal services

and deficiency expanded withholding tax, when it failed to withhold 1% expanded

withholding tax. The CTA cancelled and set aside the assessment notices holding

that the claimed deductions for professional and security services were properly

claimed in 1986 since it was only in that year when the bills demanding payment

were sent to Isablea Cultural Corporation. It also found that the Isabela Cultural

Ccorporation withheld 1% expanded withholding tax for security services. The

Court of Appeals affirmed hence the case at bar.

ISSUE:

Whether or not the aforementioned may be deducted.

HELD:

For the auditing and legal services NO but for the security services YES.

The requisites for deductibility of ordinary and necessary trade, business or

professional expenses, like expenses paid for legal and auditing services are: a)

the expense must be ordinary and necessary; b) it must have been paid or incurred

during the taxable year; c) it must have been paid or incurred in carrying on the

trade or business of the taxpayer and d) it must be supported by receipts, records

and other pertinent papers.

The requisite that it must have been paid or incurred during the taxable year is

qualified by Sec. 45 of NIRC which states that “the deduction provide for in this title

shall be taken for the taxable year in which ‘paid or incurred’. Isabela Cultural

Corporation uses the accrual method. It provides that under the accrual method,

expenses not claimed as deductions in the current year when they are incurred

cannot be claimed as deduction from income for the succeeding year. The accrual

method relies upon the taxpayer’s right to receive amount or its obligation to pay

them not the actual receipt or payment. Amounts of income accrue where the right

to receive them become fixed, where there is created an enforceable liability.

Liabilities are accrued when fixed and determinable in amount.

The accrual of income and expense is permitted when the all events test has been

met. The test requires that: 1) fixing of a right to income or liability to pay and 2) the

availability of the reasonable accurate determination of such income or liability. It

does not require that the amount be absolutely known only that the taxpayer has

information necessary to compute the amount with reasonable accuracy. The test is

satisfied where computation remains uncertain if its basis is unchangeable. The

amount of liability does not have to be determined exactly, it must be determined

with reasonable accuracy.

In the case at bar, the expenses for legal services pertain to the years 1984 and

1985. The firm has been retained since 1960. From the nature of the claimed

deduction and the span of time during which the firm was retained, Isabela Cultural

Corporation can be expected to have reasonably known the retainer fees charged

by the firm as well as compensation for its services. Exercising due diligence, they

could have inquired into the amount of their obligation. It could have reasonably

determined the amount of legal and retainer fees owing to their familiarity with the

rates charged.

5. CIR v. Marubeni CorporationGR No. 137377, December 18, 2001

FACTS:

Marubeni Corporation is a foreign corporation organized and existing under the laws

of Japan. It is engaged in general import and export trading, financing and the

construction business. It is duly registered to engage in such business in the

Philippines and maintains a branch office in Manila. Sometime in November 1985,

petitioner Commissioner of Internal Revenue issued a letter of authority to examine

the books of accounts of the Manila branch office of MC for the fiscal year ending

March 1985. In the course of the examination, petitioner found respondent to have

undeclared income from two contracts in the Philippines, both of which were

completed in 1984. One of the contracts was with the National Development

Company in connection with the construction and installation of a port complex at the

Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte.

The other contract was with the Philippine Phosphate Fertilizer Corporation

(Philphos) for the construction of an ammonia storage complex also at the Leyte

Industrial Development Estate.

Petitioner’s revenue examiners recommended an assessment for deficiency taxes.

Respondent questioned this assessment but it received a letter from petitioner

assessing its several deficiency taxes. The assessed deficiency internal revenue

taxes, inclusive of surcharge and interest, were as follows: (1) P290,583,972.40 for

deficiency income tax; (2) P83,036,965.16 for deficiency branch profit remittance tax;

(3) P85,563,625.46 for deficiency contractor’s tax; and (4) P3,600,535.68 for

deficiency commercial broker’s tax. Petitioner alleged that the National Development

Company and Philphos contracts were contracts for a piece of work and since the

projects called for the construction and installation of facilities in the Philippines, the

entire income therefrom constituted income from Philippine sources, hence, subject

to internal revenue taxes. However, upon issuance of E.O. No. 41 declaring a one-

time amnesty covering unpaid income taxes for the years 1981 to 1985, as extended

by E.O. No. 64, respondent was able to apply for the amnesty of its deficiency taxes.

And almost ten years after filing of the case, CTA rendered a decision in CTA Case

No. 4109. The tax court found that respondent had properly availed of the tax

amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said

case as deemed cancelled and withdrawn.

Petitioner appealed with the Court of Appeals, which dismissed the petition and

affirmed the decision of CTA. Respondent argued that assuming it did not validly avail

of the amnesty under the two Executive Orders, it is still not liable for the deficiency

contractor’s tax because the income from the projects came from the “Offshore

Portion”, not “Onshore Portion” of the contracts; that 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. And

that under the Philippine Onshore Portion, which petitioner has not denied, the

income it derived from the said portion had been declared for tax purposes and the

taxes thereon already paid to the Philippine government.

ISSUE:

Whether or not respondent is liable to pay the income, branch profit remittance, and

contractor’s taxes assessed by petitioner.

HELD:

NO. Respodent is not liable to pay for income and branch profit remittance as it did

not fall under exception for the applicability of the tax amnesty in Section 4 (b) of E.O.

No. 41 and is also not liable to pay for contractor’s tax as the materials used for the

contracts are produced in Japan, outside the jurisdiction of the taxing power of the

Philippines.

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 of selling

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 taxing

authority only when the acts, privileges or business are done or performed within the

jurisdiction of said authority. Like property taxes, it cannot be imposed on an

occupation or privilege outside the taxing district.In the case at bar, it is undisputed that respondent was an independent contractor

under the terms of the two subject contracts. Respondent, however, argues that the

work therein were not all performed in the Philippines because some of them were

completed in Japan in accordance with the provisions of the contracts. An

examination of Annex III to the two contracts reveals that the materials and

equipment to be made and the works and services to be performed by respondent

are indeed made by sub-contractors and manufacturers which are Japanese

corporations and are based in Japan and all engineering and design works were

performed in that country. All the materials and equipment transported to the

Philippines were inspected and tested in Japan prior to shipment in accordance with

the terms of the contracts. The inspection was made by representatives of

respondent corporation, of NDC and Philphos.

Clearly, the service of “design and engineering, supply and delivery, construction,

erection and installation, supervision, direction and control of testing and

commissioning, coordination. . . “ of the two projects involved two taxing jurisdictions.

These acts occurred in two countries — Japan and the Philippines. While the

construction and installation work were completed within the Philippines, the

evidence is clear that some pieces of equipment and supplies were completely

designed and engineered in Japan. These services were rendered outside the taxing

jurisdiction of the Philippines and are therefore not subject to contractor’s tax.

6. Philippine Guaranty Co., Inc. v. CIRGR No. L-2707, April 30, 1965

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.

7. Alexander Howden & Co. Ltd. v. Commissioner of Internal RevenueL-19392, April 14, 1965

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.

On May 12, 1954, Alexander Howden & Co., Ltd. filed with the BIR a claim for

refund of the P66,112.00, later reduced to P65,115.00, 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. 8. Subsequently,

petitioner. instituted an action in the CFI of Manila for the recovery of the amount

claimed. Tax Court denied the claim.

ISSUE:

Whether or not reinsurance premiums are subject to withholding tax under Section

54 in relation to Section 53 of the Tax Code.

HELD:

Yes. 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. 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.

8. Philamlife v. CTA and CIRCA-GR SP No. 31283, April 25, 1995

FACTS:Petitioner Philamlife, is a domestic corporation in the Philippines, entered into a

management contract with American International Reinsurance Co. Inc. (AIRCO),

a foreign corporation, whereby the latter would be paid $250,000 annually for

management services rendered for Philamlife. In relation to an erroneous

withholding tax from source 1979, the Commissioner of Internal revenue issued to

Philamlife a tax credit in the amount of Php643,000. Thereafter, Philamlife sought

to claim said amount for a second erroneous payment for source 1980. While the

claim was pending before the CTA, petitioner filed a claim for refund before the

Court of Appeals. On the other hand, the BIR canceled the tax credit memo it

previously issued to petitioner. Thus the demand for payment of the said tax

liability was issued to Philamlife/ AIRCO.

Petitioner now avers, that said tax liability is not proper as the income taxed was

that of AIRCO’s, a foreign company not doing business in the Philippines for

management services rendered by its personnel abroad and is therefore not

subject to Philippine withholding tax.

ISSUE:

Whether or not compensation for advisory services admittedly performed abroad

by the personnel of a non-resident corporation not doing business in the

Philippines are subject to Philippine withholding tax?

HELD:YES, it is subject to withholding tax. The pertinent provision in the NIRC with

regard to this issue is Section 37 (a) (4), whereby gross income derived from

rentals and royalties is subject to withholding tax. Petitioner contends that it is not

subject to such classification as it does not have property in the Philippines by

which rentals and royalties may be derived. However, upon a careful perusal of

the law in this case shows that such classification is apt so as to subject petitioner

to withholding tax.

A reading from the various management agreement will show that the arrangment

between Philamlife and AIRCO falls easily into the expanded meaning of

royalties; basically, from the heading ‘investments’ to ‘personnel’, the services call

for the supply by the non-resident foreign corporation of technical and commercial

information, knowledge, advise, assistance or services in connection with

technical management or administration of an insurance business-- a commercial

undertaking. Therefore, the income derived for the services performed by AIRCO

for Philamlife under the said management contract shall be considered as income

from services within the Philippines. AIRCO, being a non-resident foreign

corporation not engaged in trade and business in the Philippines shall pay a tax

equal to 35% the gross income received during each taxable year from all

sources within the Philippines as interests, dividends, rents and royalties,

including remuneration for technical services. Although it is true that AIRCO has

no properties in the Philippines, agreement with Philamlife necessary for the

latter company’s efficient operation and growth with AIRCO deriving income from

said agreement, AIRCO is well within the ambit of Section 37 (a) (7) of the NIRC.

In our jurisprudence, the test of taxability is the ‘source’, and the source of an

income is “that activity... which produced the income”. It is not the presence of any

property from which one derives rentals and royalties that is controlling, but rather

as expressed under the expanded meaning of ‘royalties’, it includes ‘royalties for

the supply of scientific, technical, industrial or commercial knowledge or

information; and the technical advise, assistance or services rendered in

connection with the technical management and administration of any scientific,

industrial or commercial undertaking, venture, project or scheme. Thus, as

rendered in this decision, AIRCO’s income derived from the management

agreement with Philamlife is subject to Philippine withholding tax.

9. Aguinaldo Industries Corp. v. CIRGR No. L-29790, February 25, 1982

FACTS:Aguinaldo Industries Corporation is engaged in the businesses of: (a) the

manufacture of fishing nets, a tax-exempt industry, and (b) the manufacture of

furniture. For accounting purposes, each division is provided with separate books

of accounts as required by the Department of Finance. Previously, petitioner

acquired a parcel of land in Muntinlupa as site of the fishing net factory. This

transaction was entered in the books of the Fish Nets Division. Later, it sold the

said property and the profit from this sale was again entered in the books of the

Fish Nets Division as miscellaneous income to distinguish it from its tax-exempt

income.

For the year 1957, petitioner filed two separate income tax returns. After

investigation of these returns, the examiners of the BIR found that the Fish Nets

Division deducted from its gross income for that year the amount of P61,187.48

as additional remuneration paid to the officers of petitioner. The examiner further

found that this amount was taken from the net profit of sale of the land and not in

the course of or carrying on of its trade or business. The said amount was

disallowed as deduction from gross income.

Petitioner argues that the profit derived from the sale of its Muntinlupa land is not

taxable for it is tax- exempt income, considering that its Fish Nets Division enjoys

tax exemption as a new and necessary industry under Republic Act 901.

ISSUE:Whether or not the bonus given to the officers of the petitioner upon the sale of its

Muntinlupa land is an ordinary and necessary business expense deductible for

income tax purposes.

HELD:

No. Pursuant to Sec.30 (a)(1) of the NIRC, the bonus given to the officers of the

petitioner as their share of the profit realized from the sale of petitioner’s

Muntinlupa land cannot be deemed a deductible expense for tax purposes, even if

the aforesaid sale could be considered as a transaction for carrying on the trade

or business of the petitioner and the grant of the bonus to the corporate officers

pursuant to petitioner’s by-laws could, as an intra-corporate matter, be sustained.

The records show that the sale was effected through a broker who was paid by

petitioner a commission for his services. On the other hand, there is absolutely no

evidence of any service actually rendered by petitioner’s officers which could be

the basis of a grant to them of a bonus out of the profit derived from the sale. This

being so, the payment of a bonus to them out of the gain realized from the sale

cannot be considered as a selling expense; nor can it be deemed reasonable and

necessary so as to make it deductible for tax purposes. Hence, the alleged

amounts paid by petitioner to these directors in the guise and form of

compensation for their supposed services as such, without any relation to the

measure of their actual services, cannot be regarded as ordinary and necessary

expenses within the meaning of the law.

10. CIR v. General Foods (Philippines) Inc.GR 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 1985 and claimed as deduction, among other business expenses,

P9,461,246 for media advertising for “Tang”. The Commissioner disallowed 50% of

the deduction claimed and assessed deficiency income taxes of P2,635,141.42

against General Foods, prompting the latter to file an MR which was denied. General

Foods later on filed a petition for review at CA, which reversed and set aside an

earlier decision by CTA dismissing the company’s appeal.

ISSUE:

Whether or not the subject media advertising expense for “Tang” was ordinary and

necessary expense fully deductible under the NIRC.

HELD:

No. Tax exemptions must be construed in stricissimi juris against the taxpayer and

liberally in favor 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 nature of tax exemptions; hence, if tax exemptions are

strictly construed, then deductions must also be strictly construed.

To be deductible from gross income, the subject advertising expense must comply

with the following requisites: (a) the expense must be ordinary and necessary; (b) it

must have been paid or incurred during the taxable year; (c) it must have been paid

or incurred in carrying on the trade or 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 year and was incurred in carrying on a trade or business, hence necessary,

the parties’ views conflict as to whether or not it was ordinary. To be deductible, an

advertising expense should not only be necessary but also ordinary.

The Commissioner maintains that the subject advertising expense was not ordinary

on the ground that it failed the two conditions set by U.S. jurisprudence: first,

“reasonableness” of the amount 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 an advertising expense. There being no hard and fast rule on the matter, the right

to a deduction depends on a number of factors such as but not limited to: the type

and size of business in which the taxpayer is engaged; the volume and amount of its

net earnings; the nature of the expenditure itself; the intention of the taxpayer and the

general economic conditions. It is the interplay of these, 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

inordinately large. 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 of

merchandise or use of services and (2) advertising designed to stimulate the future

sale of merchandise 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 the industry or profession of which the taxpayer is

a member. If the expenditures are for the advertising 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, the expenditures are for

advertising of the second kind, then normally they should be spread out over a

reasonable period of time.

The company’s media advertising expense for the promotion of a single product is

doubtlessly unreasonable considering it comprises almost one-half of the company’s

entire claim for marketing expenses for that year under review. Petition granted,

judgment reversed and set aside.

11. Esso Standard Eastern Inc. vs. CIR

G.R. Nos. L-28508-9, July 7, 1989

FACTS:

In CTA Case No. 1251, Esso Standard Eastern Inc. deducted from its gross income for

1959, as part of its ordinary and necessary business expenses, the amount it had

spent for drilling and exploration of its petroleum concessions. This claim was

disallowed by the CIR on the ground that the expenses should be capitalized and

might be written off as a loss only when a "dry hole" should result. Esso then filed an

amended return where it asked for the refund of P323,279.00 by reason of its

abandonment as dry holes of several of its oil wells. Also claimed as ordinary and

necessary expenses in the same return was the amount of P340,822.04, representing

margin fees it had paid to the Central Bank on its profit remittances to its New York

head office. On August 5, 1964, the CIR granted a tax credit of P221,033.00 only,

disallowing the claimed deduction for the margin fees paid on the ground that the

margin fees paid to the Central Bank could not be considered taxes or allowed as

deductible business expenses. Esso appealed to the Court of Tax Appeals (CTA) for

the refund of the margin fees it had earlier paid contending that the margin fees were

deductible from gross income either as a tax or as an ordinary and necessary business

expense. However, Esso’s appeal was denied.

ISSUE:

Whether or not the margin fees are taxes.

HELD:

No. A tax is levied to provide revenue for government operations, while the proceeds of

the margin fee are applied to strengthen our country's international reserves. The

margin fee was imposed by the State in the exercise of its police power and not the

power of taxation.

12. Atlas Consolidated Mining and Development Corp v. CIR GR No. 269111, January 27, 1981

FACTS:

Atlas Consolidated Mining & Development Corp is a corporation engaged in the

mining industry. It was assessed deficiency income tax for the year 1958 as a

result of the disallowance of certain items claimed by the company as deductions

from its gross income. Atlas claimed the following items as deductible from its

gross income: (1) transfer agent’s fee, (2) stockholders relation service fee, (3)

US stock listing expenses, (4) suit expenses, (5) provision for contingencies. The

Commissioner of Internal Revenue disallowed all these items. Atlas elevated the

issue to the Court of Tax Appeals. The CTA rendered a decision allowing the said

items, except for the stockholders relation service fee and the suit expenses. Both

Atlas and the CIR went to the Supreme Court to appeal the CTA decision. Atlas

argues that the CTA should not have disallowed the stockholders relation service

fee. The corporation contends that such fee constitutes an ordinary and

necessary business expense, and should, therefore, be allowed as a deductible

expense from the company’s gross income.

ISSUE:

In GR No. L-26911, whether or not the expenses paid for the services rendered

by a public relations firm, P. K. Macker & Co., labeled as stockholders relation

service fee is an allowable deduction as business expense.

HELD:

Under Sec 30 (a) (1) of the Tax Code, three conditions have to be complied with

before a business expense is allowed as a deduction from gross income: (1) the

expense must be ordinary and necessary, (2) it must be paid or incurred within

the taxable year, and (3) it must be paid or incurred in carrying a trade or

business. The Court sustained the rulingof the CTA that the expenditure paid to P.

K. Macker & Co. denominated as stockholders relationservice fee is not an

ordinary expense. The fee was paid to the PR firm as ompensationfor services

carrying on the selling campaign in an effort to sell Atlas’ additional capital stock.

Such is not an ordinary expense because, according to the Court, expenses

relating to the recapitalization and reorganization of a corporation, the cost of

obtaining stock subscription, promotion expenses, and commission or fees paid

for the sale of stock reorganization are capital expenditures. The stockholders

relation service fee is not deductible from Atlas’ gross income.

13. Republic of the Philippines v. Manila Electric CompanyGR No. 141314, November 15, 2002

FACTS:On 23 December 1993, Meralco filed with the Energy Regulatory Board (ERB) an

application for the revision of its rate schedules. On 28 January 1994, the ERB

issued an order granting a provisional increase of P0.184/kwh subject to the

condition that in event that the board finds that Meralco is entitled to a lesser

increase in rates, all excess amounts collected shall be refunded or credited to its

customers. Subsequently, ERB rendered its decision adopting the audit of the

Commission on Audit (COA) and authorized Meralco to implement a rate

adjustment of P0.017/kwh, but ordered the refund of the excess amount of

P0.167/kwh collected from the billing cycles of February 1994 to February 1997,

holding that income tax should not be treated as operating expense, and applying

the net average investment method in the computation of the rate base. On

appeal, the Court of Appeals set aside the ERB decision insofar as it directed the

reduction of the rates by P0.167/kwh and the refund to Meralco’s customers.

Motions for reconsideration were denied. Hence, the petition before the Supreme

Court.

ISSUE:Whether income tax may be shifted to the public utility’s customer.

HELD:Income tax should be borne by the taxpayer alone as they are payments made in

exchange for benefits received by the taxpayer from the State. No benefit is

derived by the customers of a public utility for such entity and no direct

contribution is made by the payment of income tax to the operation of a public

utility for purposes of generating revenue or profit. Thus, the burden of paying

income tax should be Meralco’s alone and should not be shifted to the customers

by including the same in the computation of its operating expenses.

14. Kuenzle & Streiff Inc. v. CIRGR Nos. L-12020 and L-12113, October 20,1959

FACTS:Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return,

declaring losses. CIR filed for deficiency of income taxes against Kuenzle & Streiff

Inc. for the said years in the amounts of P40,455.00, P11,248.00 and P16,228.00,

respectively, arising from the disallowance, as deductible expenses, of the

bonuses paid by the corporation to its officers, upon the ground that they were not

ordinary, nor necessary, nor reasonable expenses within the purview of Section

30(a) (1) of the National Internal Revenue Code. The corporation filed with the

Court of Tax Appeals a petition for review contesting the assessments. CTA

favored the CIR, however lowered the tax due on 1954. The corporation moved

for reconsideration, but still lost. The Corporation contends that the tax court, in

arriving at its conclusion, acted "in a purely arbitrary manner", and erred in not

considering individually the total compensation paid to each of petitioner's officers

and staff members in determining the reasonableness of the bonuses in question,

and that it erred likewise in holding that there was nothing in the record indicating

that the actuation of the respondent was unreasonable or unjust.

ISSUE:Whether or not the bonuses in question was reasonable and just to be allowed as

a deduction?

HELD:No. It is a general rule that `Bonuses to employees made in good faith and as

additional compensation 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 the services rendered. The condition

precedents 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 actually

rendered; and (3) bonuses, when added to the salaries, are `reasonable ... when

measured by the amount and quality of the services performed with relation to the

business of the particular taxpayer. Here it is admitted that the bonuses are in fact

compensation and were paid for services actually rendered. The only question is

whether the payment of said bonuses is reasonable. There is no fixed test for

determining the reasonableness of a given bonus as compensation. This depends

upon many factors, one of them being the amount and quality of the services

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 net earnings, its locality, the type and extent of the services

rendered, the salary policy of the corporation'; 'the size of the particular business';

'the employees' qualifications and contributions to the business venture'; and

'general economic conditions. However, 'in determining whether the particular

salary or compensation payment is reasonable, the situation must be considered

as a whole.

15. CIR v. Palanca Jr.GR No. L-16626, Ocotber 29, 1966

FACTS:The late Don Carlos Palanca, Sr. donated in favor of his son, Carlos Palanca, Jr.

shares of stock in La Tondeña Inc. amounting to 12,500 shares. Later, the BIR

considered the donation as transfer in contemplation of death; consequently, the

BIR assessed against the respondent, Palanca Jr., the sum of P191,591.62 as

estate and inheritance taxes on the transfer of said 12,500 shares of stock,

including therein interest for delinquency of P60,581.80. The respondent then filed

an amended income tax return, claiming an additional deduction in the amount

P60,581.80; hence, his new income tax due is only P428. He attached a letter

requesting the refund of P20,624.01. However, the said request for refund was

denied by the BIR. Court of tax appeals ordered the refund. Hence, this petition.

ISSUE:Whether the interest on the delinquent estate and inheritance tax is deductible

from the gross income.

HELD:Yes, the interest is deductible. The rule is settled that although taxes already due

have not, strictly speaking, the same concept as debts, they are, however,

obligations that may be considered as such.

16. CIR v. Vda. De PrietoGR No. L-13912, September 30, 1960

FACTS:

On December 4, 1945, the respondent conveyed by way of gifts to her four

children, namely, Antonio, Benito, Carmen and Mauro, all surnamed Prieto, real

property with a total assessed value of Php 892,497.50. After the filing of the gift

tax returns on or about February 1, 1954, the petitioner Commissioner of Internal

Revenue appraised the real property donated for gift tax purposes at Php

1,231,268.00 and assessed the total sum of Php 117,706.50 as donor’s gift tax,

interests and compromises due thereon. Of the total sum of Php 117,706.50 paid

by respondent on April 29, 1954, the sum of Php 55,978.65 represents the total

interest on account of delinquency. This sum of Php 55,978.65 was claimed as

deduction, among others, by respondent in her 1954 income tax return. Petitioner,

however, disallowed the claim and as a consequence of such disallowance

assessed respondent for 1954 the total sum of Php 21,410.38 as deficiency

income tax due on the aforesaid Php 55,978.65, including interest up to March 31,

1957, surcharge and compromise for the late payment.

Under the law, for interest to be deductible, it must be shown that there be an

indebtedness, that there should be interest upon it, and that what is claimed as an

interest deduction should have been paid or accrued within the year. It is here

conceded that the interest paid by respondent was in consequence of the late

payment of her donor’s tax, and the same was paid within the year it is sought to

be deducted.

ISSUE:

Whether or not such interest was paid upon an indebtedness within the

contemplation of section 30(b) (1) of the Tax Code.

HELD:

Sec. 30. Deductions from gross income. — In computing net income there shall

be allowed as deductions: “(b) Interest: “(1) In general. — The amount of interest

paid within the taxable year on indebtedness, except on indebtedness incurred or

continued to purchase or carry obligations the interest upon which is exempt from

taxation as income under this Title.”

The term “indebtedness” as used in the Tax Code of the United States containing

similar provisions as in the above-quoted section has been defined as an

unconditional and legally enforceable obligation for the payment of money. Within

the meaning of that definition, it is apparent that a tax may be considered an

indebtedness.

Where statute imposes a personal liability for a tax, the tax becomes, at least in a

board sense, a debt. A tax is a debt for which a creditor’s bill may be brought in a

proper case. It follows that the interest paid by herein respondent for the late

payment of her donor’s tax is deductible from her gross income under section 30

(b) of the Tax Code above quoted.

For interest to be allowed as deduction from gross income, it must be shown that

there be indebtedness, that there should be interest upon it, and that what is

claimed as an interest deduction should have been paid or accrued within the

year.

17. Philippine Refining Co. v. Court of AppealsGR No. 118794, May 8,1996

FACTS:

Philippine Refining Company (PRC) was assessed by the Commissioner of

Internal Revenue to pay a deficiency tax for the year 1985 in the amount of Php

1,892,584.00. On April 26, 1989, PRC timely protested the assessment on the

ground that it was based on the erroneous disallowances of “bad debts” and

“interest expense” although the same are both allowable and legal deductions.

However, the Commissioner issued a warrant of garnishment against the deposits

of PRC at a branch of City Trust Bank, in Makati, Metro Manila, which action the

latter considered as a denial of its protest.

Consequently, PRC filed a petition for review with the Court of Tax Appeals on the

same assignment of error, that is, that the “bad debts” and “interest expense” are

legal and allowable deductions. In its decision of February 3, 1993 , the CTA

modified the findings of the Commissioner by reducing the deficiency income tax

assessment to Php 237,381.26, with surcharge and interest incident to

delinquency. In said decision, the Tax Court reversed and set aside the

Commissioner’s disallowance of the interest expense of Php 2,666,545.19 but

maintained the disallowance of the supposed bad debts of 13 debtors in the total

sum of Php 395,324.27. PRC then elevated the case to the Court of Appeals but

was denied; hence, this appeal by certiorari.

ISSUE:

Whether or not the bad debts of PRC’s 13 debtors may be considered worthless

and deductible.

HELD:

No. The rule on determining the “worthlessness of a debt” was established in the

case of Collector vs. Goodrich International Rubber Co. In that case, the Supreme

Court held that for debts to be considered as “worthless,” and thereby qualify as

“bad debts” making them deductible, the taxpayer should show that (1) there is a

valid and subsisting debt; (2) the debt must be actually ascertained to be

worthless and uncollectible during the taxable year; (3) the debt must be charged

off during the taxable year; and (4) the debt must arise from the business or trade

of the taxpayer.

Moreover, before a debt can be considered worthless, the taxpayer must also

show that it is indeed uncollectible even in the future. The steps to be undertaken

by the taxpayer to prove that he exerted Php 1,892,584.00 diligent efforts to

collect the debts are: (1) sending of statement of accounts; (2) sending of

collection letters; (3) giving the account to a lawyer for collection; and (4) filling a

collection case in court.

In this case, the only evidentiary support given by PRC for its alleged bad debts

was the explanation or justification posited by its financial adviser or accountant,

Guia D. Masagana. However, her allegation were not supported by any

documentary evidence, hence both the Court of Appeals and CTA ruled that said

contentions per se cannot prove that the debts were indeed uncollectible and can

be considered as bad debts as to make them deductible. Thus, mere testimony of

the Financial Accountant of the petitioner explaining the worthlessness of debts

without documentary evidence to support such testimony is nothing more than a

self-serving exercise which lacks probative value.

18. Basilan Estates, Inc. v. CIRGR No. L-22492, September 5, 1967

FACTS:

Basilan estate inc., a corporation engaged in coconut industry filed an income tax

return and paid income tax on 1954 for period 1953. upon examination however

the Commissioner assessed Basilan estates for efficiency estate tax and

surcharge. On non-payment a warrant of distraint and levy was issued but not

executed when the deputy commissioner ordered the District Director to hold

execution and maintain construction embargo instead. Because of its refusal to

execute waiver of prescription. Basilan’s request for reinvestigation was not given

due course. Notice was served that the warrant would be executed. Basilan filed

petition for review with CTA alleging prescription of the period of assessment and

collection considering that the assessment was made on February 26, 1959 but

Basilan claims it never received the same or if it did it was received beyond the

five-year period. To prove it the notice had an annotation stating “no

accompanying letter 11/25/” indicative that the notice was after March 24,

1959,the last date of the five year period within which to assess deficiency tax,

since the original returns were filed on March 24, 1954.

ISSUE:

Whether the the assessment made within the prescriptive period.

HELD:

Yes. Under Sec. 331 of the Tax Code requiring five years within which to assess

deficiency taxes, theassessment is deemed made when the notice to his effect is

released, mailed or sent by the collector of internal revenue to the taxpayer and it

is not required that the notice be received y the taxpayer within the afore

mentioned 5-year period.

19. Roxas v. Court of Tax AppealsGR No. L-25043, April 26, 1968

FACTS:

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their

grandchildren by hereditary succession agricultural lands in Batangas, a

residential house and lot in Manila, and shares of stocks in different corporations.

To manage the properties, said children, namely, Antonio, Eduardo and Jose

Roxas formed a partnership called Roxas y Compania.

On June 1958, the CIR assessed deficiency income taxes against the Roxas

Brothers for the years 1953 and 1955. Part of the deficiency income taxes

resulted from the disallowance of deductions from gross income of various

business expenses and contributions claimed by Roxas.

The Roxas brothers protested the assessment but inasmuch as said protest was

denied, they instituted an appeal in the CTA, which sustained the assessment

except the demand for the payment of the fixed tax on dealer of securities and the

disallowance of the deductions for contributions to the Philippine Air Force Chapel

and Hijas de Jesus' Retiro de Manresa. Not satisfied, Roxas brothers appealed to

the SC. The CIR did not appeal.

ISSUE:

Whether or not the deductions for business expenses and contributions

deductible.

HELD:

With regard to the disallowed deductions (expenses for tickets to a banquet given

in honor of Sergio Osmena and beer given as gifts to various persons, labelled

as representation expenses), representation expenses are deductible from gross

income as expenditures incurred in carrying on a trade or business under Section

30(a) of the Tax Code provided the taxpayer proves that they are reasonable in

amount, ordinary and necessary, and incurred in connection with his business. In

the case at bar, the evidence does not show such link between the expenses and

the business of Roxas.

20. CIR v. Wander Philippines Inc. and CTAGR No. L-68375, April 15, 1988

FACTS:

Wander Philippines, Inc., is a domestic corporation organized under Philippine

laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd., a Swiss corporation not

engaged in trade or business in the Philippines. On July 18, 1975, Wander filed its

withholding tax return for the second quarter ending June 30, 1975 and remitted

to its parent company, Glaro dividends in the amount of P222,000.00, on which

35% withholding tax thereof in the amount of P77,700.00 was withheld and paid

to the Bureau of Internal Revenue. Again, on July 14, 1976, Wander filed a

withholding tax return for the second quarter ending June 30, 1976 on the

dividends it remitted to Glaro amounting to P355,200.00, on which 35% tax in the

amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.

On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue

a claim for refund and/or tax credit in the amount of P115,400.00, contending that

it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the

Tax Code, as amended by Presidential Decree Nos. 369 and 778, and not on the

basis of 35% which was withheld and paid to and collected by the government.

There being no immediate action by the BIR on Wander’s letter-claim the latter

sought the intervention of the CTA, the latter ruled for the private respondent.

ISSUE:

Whether or not private respondent Wander is entitled to the preferential rate of

15% withholding tax on dividends declared and remitted to its parent corporation,

Glaro

HELD:Yes. The dividends received from a domestic corporation liable to tax, the tax

shall be 15% of the dividends received, subject to the condition that the country in

which the non-resident foreign corporation is domiciled shall allow a credit against

the tax due from the non-resident foreign corporation taxes deemed to have been

paid in the Philippines equivalent to 20% which represents the difference between

the regular tax (35%) on corporations and the tax (15%) dividends. Since the

Swiss Government does not impose any tax on the dividends to be received by

the said parent corporation in the Philippines, the condition imposed under the

Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, is satisfied.

The withholding tax rate of 15% is hereby affirmed.

21. Banco Filipino Savings and Mortgage Bank v. Court of AppealsGR No. 155682, March 27, 2007

FACTS:

Petitioner filed a Petition for Review with the CA but the CA dismissed the same

in the May 28, 2002 Decision There are three conditions for the grant of a claim

for refund of creditable withholding tax: 1) the claim is filed with the CIR within the

two-year period from the date of paymen tof the tax; 2) it is shown on the return of

the recipient that the income payment received was declared as part of the gross

income; and, 3) the fact of withholding is established by a copy of a statement

duly issued by the payor to the payee showing the amount paid and the amount of

the tax withheld therefrom. The third condition is specifically imposed under

Section 10 of Revenue Regulation No. 6-85 There is no doubt that petitioner

complied with the first two requirements in that the claim it filed on January 30,

1998 was well within the two-year prescriptive period counted from the date of

filing of its annual income tax return (Exhibit "A") on April 12, 1996; and that said

return reflects the amount of P1,622,576.00 subject of the claim.

ISSUE:

Whether it complied with the third condition by presenting merely a Certificate of

Income Tax Withheld on Compensation or BIR Form No. W-2 (Exhibit "II") and

Monthly Remittance Return of Income Taxes Withheld under BIR Form No.

1743W (Exhibits "C" through "Z").

HELD:

No. The petition is denied for lack of merit. As to petitioner’s Exhibit "II," while it

was issued by a payor, the document does not state the amount and nature of the

income payment. Hence, it cannot be verified from the document if the tax

withheld is correct. Perhaps aware of the deficiencies in its evidence, petitioner

also presented Exhibit "B" which is a list of Miscellaneous Assets it sold to various

persons. However, Exhibit "B" was prepared by petitioner’s own real estate

department, and is therefore of doubtful credence. Furthermore, there is nothing

in Exhibit "B" which would link the the transactions described therein to the taxes

reflected in Exhibit "II" and Exhibits "C" through "Z". For all its deficiencies,

therefore, petitioner’s Exhibits "C" through "Z" cannot take the place of BIR Form

No. 1743.1 and its Exhibit "II," of BIR Form No. 1743-750. Petitioner cannot fault

the CA and CTA for finding said evidence insufficient to support its claim for tax

refund. Such finding of both courts, obviously grounded on evidence, will not be

so lightly discarded by this Court, not even on a plea for liberality of which

petitioner, by its own negligence, is not deserved.