tax digest 2nd set-1

7/29/2019 Tax Digest 2nd Set-1

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National Development Co. vs. Commissioner

GR L-53961, 30 June 1987

Facts:The National Development Co. (NDC) entered into contracts in Tokyo with several Japanese

shipbuilding companies for the construction of 12 ocean-going vessels. Initial payments were made in

cash and through irrevocable letters of credit. When the vessels were completed and delivered to theNDC in Tokyo, the latter remitted to the shipbilders the amount of US$ 4,066,580.70 as interest on the

balance of the purchase price. No tax was withheld. The Commissioner then held NDC liable on such tax

in the total amount of P5,115,234.74. The Bureau of Internal Revenue served upon the NDC a warrant of

distraint and levy after negotiations failed.

Issue:Whether the NDC is l iable for deficiency tax.

Held:The Japanese shipbuilders were liable on the interest remitted to them under Section 37 of the

Tax Code. The NDC is not the one taxed. The imposition of the deficiency taxes on the NDS is a penalty

for i ts failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section53(c) of the Tax Code. NDC was remiss in the discharge of its obligation of its obligation as the

withholding agent of the government and so should be liable for its omission.

Fisher vs. Trinidad

G.R. No. L-17518 October 30, 1922

Facts: Philippine American Drug Company was a corporation duly organized and existing under the laws

of the Phil ippine 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 tax on said stockdividend. 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 stocktheretofore i ssued 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.

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.


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As stock dividends are not "income," the same cannot be considered taxes under that provision of Act

No. 2833. For all of the foregoing reasons, SC held that the judgment of the lower court should be

REVOKED.

Madrigal vs. Rafferty

G.R. NO. L-12287 AUGUST 7, 1918

FACTS: Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. On February

25, 1915, Vicente Madrigal f iled sworn declaration on the prescribed form with the Collector of Internal

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

Madrigal submitted the claim that the said P296,302.73 did not represent his income for the year 1914,

but was in fact the income of the conjugal partnership existing between himself and his wife Susana

Paterno, and that in computing and assessing the additional income tax provided by the Act of Congress

of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts,

one-half to be considered the income of Vicente Madrigal and the other half of Susana Paterno.

ISSUE: Whether or not the additional income tax of a husband and wife should be divided into two equalparts because of the conjugal partnership existing between them.

RULING: No. The additional income tax of a husband and wife should not be divided into two e qual

parts.

Income as contrasted with capital or property is to be the test. The essential difference between capital

and income is that capital is a fund; income is a flow.

Susana Paterno 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 theexemption which would arise by reason of the additional tax. As she has no estate and income, actually

and legally vested in her and entirely distinct from her husband's property, the income cannot properly

be considered the separate income of the wife for the purposes of the additional tax.

Conwi v. Court of Tax Appeals

G.R. Nos. 48532 & 48533, August 31, 1992

FACTS: Hernando Conwi et al. (Conwi et al.) are employees of Procter & Gamble Philippine

Manufacturing Corporation, a local subsidiary of U.S.-based Procter & Gamble. Conwi et al. were

temporarily assigned to subsidiaries of Procter & Gamble outside of the Phil ippines, where the y were

paid in U.S. dollars. It is claimed that they earned and spent their money exclusively abroad, and that

they did not remit money back into the Philippines during the time they were outside of the country

earning in dollars. In the years 1970 and 1971, Conwi et al., since they were earning in U.S. currency, in

order to pay their income tax liabilities in Philippine peso, used the prevailing free market rate of

conversion prescribed under a Bureau of Internal Revenue ruling and two Revenue Memorandum

Circulars. However, in 1973, Conwi et al. filed with the Commissioner of Internal Revenue (CIR) amendedincome tax returns for the said years, this time using the par value of the peso as conversion rate. The


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adjustment caused a disparity between what was initially paid and what they were now claiming to be

their actual tax liabilities. Consequently, they asked for a refund of the overpayment. Even before the

CIR could rule on the matter, Conwi et al. filed a petition for review before the Court of Tax App eals

(CTA), which eventually denied their claim for tax refund and/or tax credit. Aggrieved, Conwi et al., via a

petition for review, elevated the matter to the Supreme Court.

ISSUE: W/N the ruling and circulars above apply to Conwi et al.

HELD: YES, the said ruling and circulars apply to Conwi et al. 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. x x x Income can also be thought of as a flow of the fruits of ones

labor. (See pages 87-88 of the case) The dollar earnings of Conwi et al. are fruits of their labor in the

foreign subsidiaries of Procter & Gamble. They were given a definite amount of money which came to

them within a specified period of time as payment for their services. Sec. 21, NIRC, states: A tax is

hereby imposed upon the taxable net income received x x x from all sources by every individual,

whether a citizen of the Philippines residing therein or abroad x x x As such, their income is taxableeven if there were no inward remittances during the time they were earning in dollars abroad. The

ruling and the circulars are a valid exercise of power on the part of the Secretary of Finance by virtue ofSec. 338, NIRC, which empowers him to promulgate all needful rules and regulations to effectively

enforce its provisions. Besides, they have already paid their taxes using the prescribed rate of

conversion. There is no need for the CIR to give them a tax refund and/or credit.

Commissioner of Internal Revenue vs Court of Appeals and A. Soriano Corp.

301 SCRA 152

FACTS: Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings of185,154 shares. Broken down, the shares comprise of 50,495 shares which were of original issue when

the corporation was founded and 134,659 shares as stock dividend declarations. So in 1964 when

Soriano died, half of the shares he held went to his wife as her conjugal share (wifes legitime) and theother half (92,577 shares, which is further broken down to 25,247.5 original issue shares and 82,752.5

stock dividend shares) went to the estate. For sometime after his death, his estate stil l continued to

receive stock dividends from ASC until it grew to at least 108,000 shares.

In 1968, ASC through its Board issued a resolution for the redemption of shares from Sorianos estate

purportedly for the planned Filipinization of ASC. Eventually, 108,000 shares were redeemed from the

Soriano Estate. In 1973, a tax audit was conducted. Eventually, the Commissioner of Internal Revenue

(CIR) issued an assessment against ASC for deficiency withholding tax-at-source. The CIR explained that

when the redemption was made, the estate profited (because ASC would have to pay the estate toredeem), and so ASC would have withheld tax payments from the Soriano Estate yet it remitted no such

withheld tax to the government.

ASC averred that it is not duty bound to withhold tax from the estate because it redeemed the said

shares for purposes of Filipinization of ASC and also to reduce its remittance abroad.

ISSUE: Whether or not ASCs arguments are tenable.

HELD: No. The reason behind the redemption is not material. The proceeds from a redemption is taxable

and ASC is duty bound to withhold the tax at source. The Soriano Estate definitely profited from the

redemption and such profit is taxable, and again, ASC had the duty to withhold the tax. There was a totalof 108,000 shares redeemed from the estate. 25,247.5 of that was original issue from the capital of ASC.


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The rest (82,752.5) of the shares are deemed to have been from stock dividend shares. Sale of stock

dividends is taxable. It is also to be noted that in the absence of evidence to the contrary, the Tax Code

presumes that every distribution of corporate property, in whole or in part, is made out of corporate

profits such as stock dividends.

It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that the

latter is merely redeeming them as such. The capital cannot be distributed in the form of redemption ofstock dividends without violating the trust fund doctrine wherein the capital stock, property and

other assets of the corporation are regarded as equity in trust for the payment of the corporate

creditors. Once capital, it is always capital. That doctrine was intended for the protection of corporate

creditors.

Commissioner vs. Lednicky

GR L-18169, L-18286, L-21434; 31 July 1964

Facts: Spouses VE and Maria Valero Lednicky are American citizens residing in the Philippines, and havederived all their income from Philippine sources since 1947. In 1955, the spouses fi led with the US

Internal Revenue agent in Manila their Federal income tax return for 1947, 1951 to 1954 on incomefrom Phil ippine sources. From 1956 to 1958, they fi led their domesic income tax returns in compliance

with local laws. They amended their tax returns in 1959 to include their taxes paid to the US Federal

Government, interests, and exchange and bank charges. They filed their claims for refund.

Issue: Whether income tax paid to foreign governments can be deducted from the gross income or as a

tax credit.

Held: The laws intent is that the right to deduct income taxes paid to foreign government from thetaxpayers gross income is given only as an alternative or substitute to his right to claim a tax credit for

sich foreign income taxes; so that unless the alien resident has a right to claim such tax credit if he so

chooses, he is precluded from deducting the foreign income taxes from his gross income. The prupose ofthe law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes, by

deduction from gross income and by tax credit. To allow an alien resident to deduct from his gross

income whatever taxes he pays to his own government amounts to confer on the latter power to reduce

the tax income of the Phil ippine

Government. Such result is incompatible with the status of the Phil ippines as an independen and

sovereign state. Any relief from the alleged double taxation should come from the United States, since

its right to burden the taxpayer is solely predicated on the taxpayers citizenship, without contributing to

the production of the wealth that is being taxed.

CIR vs. Isabela Cultural Corporation

GR 135210, 11 July 2001

Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for

deficiency income tax and expanded withholding tax from BIR. It arose from the disallowance of ICCs

claimed expense for professional and security services paid by ICC; as well as the alleged

understatement of interest income on the three promissory notes due from Realty Investment Inc. The

deficiency expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e -

withholding tax on its claimed deduction for security services.


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

the case to CTA, which held that it is unappealable, since the final notice is not a decision. CTAs ruling

was reversed by CA, which was sustained by SC, and case was remanded to CTA. CTA rendered a

decision in favor of ICC. It ruled that the deductions for professional and security services were properly

claimed, it said that even if services were rendered in 1984 or 1985, the amount is not yet determ ined at

that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR which overstate theinterest income, when it applied compounding absent any stipulation.

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

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

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

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

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

under this method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum,when the method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in

the current year when they are incurred cannot be claimed in the succeeding year.

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

requires: 1) fixing of a right to income or liabil ity to pay; and 2) the availabil ity of the reasonable

accurate determination of such income or liabil ity. The test does not demand that the amount of

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

necessary to compute the amount with reasonable accuracy.

From the nature of the claimed deductions and the span of time during which the firm was retained, ICCcan be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an

excuse the delayed billing, since it could have inquired into the amount of their obligation and

reasonably determine the amount.

COLLECTOR VS. HENDERSON

1 SCRA 649

FACTS: Sps. Arthur Henderson and Marie Henderson fi led their annual income tax with the BIR. Arthur is

president of American International Underwriters for the Philippines, Inc., which is a domestic

corporation engaged in the business of general non-life insurance, and represents a group of American

insurance companies engaged in the business of general non -life insurance.

The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR included as part

of taxable income: 1) Arthurs allowances for rental, residentia l expenses, subsistence, water, electricity

and telephone expenses 2) entrance fee to the Marikina Gun and Country Club which was paid by his

employer for his account and 3) travelling allowance of his wife

The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent expense and

travel expenses were still held to be taxable. The Court of Tax Appeals ruled in favor of the taxpayers,

that such expenses must not be considered part of taxable income. Letters of the wife while in Ne w York

concerning the proposed building were presented as evidence.


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ISSUE: Whether or not the rental allowances and travel allowances furnished and given by the

employer-corporation are part of taxable income?

HELD: NO. Such claims are substantially supported by evidence.These claims are therefore NOT part of

taxable income. No part of the allowances in question redounded to their personal benefit, nor were

such amounts retained by them. These bills were paid directly by the employer-corporation to thecreditors. The rental expenses and subsistence allowances are to be considered not subject to income

tax. Arthurs high executive position and social standing, demanded and compelled the couple to live in

a more spacious and expensive quarters. Such subsist ence allowance was a SEPARATE account from

the account for salaries and wages of employees. The company did not charge rentals as deductible

from the salaries of the employees. These expenses are COMPANY EXPENSES, not income by employees

which are subject to tax.

CIR vs Ledesma

G.R. No. L-17509 January 30, 1970

Facts: Carlos Ledesma, Jul ieta Ledesma and the spouses Amparo Ledesma and Vicente Gustilo, Jr.,

purchased from their parents, Julio Ledesma and Florentina de Ledesma, the sugar plantation known as"Hacienda Fortuna," consisting of 36 parcels of land, situated in the municipality of San Carlos, province

of Negros Occidental, with an area of approximately 1,202 hectares and with a sugar quota of 79,211.17

piculs, which sugar quota was included in the sale. On July 11, 1949, the respondents organized

themselves into a general co-partnership under the firm name "Hacienda Fortuna", for the "production

of sugar cane for conversion into sugar, palay and corn and such other products as may profitably be

produced on said hacienda. On March 22, 1959 the Commissioner assessed against the partnership

"Hacienda Fortuna" corporate income tax for the calendar year 1949, under Section 24 of the National

Internal Revenue Code, in the sum of P23,704.22. The respondents contested the assessment upon theground that the "Hacienda Fortuna" was a registered general co-partnership. The respondents asked for

a reconsideration of the ruling so that the case of the "Hacienda Fortuna" was really one of co-

ownership and not that of an unregistered co-partnership which was subject to corporate tax. Therequest was denied. Appeal to the CTA. Before respondents could bring the case on appeal to the Court

of Tax Appeals a complaint for the Collection of the alleged income tax due on the "Hacienda Fortuna"

was fi led against them in the Court of First Instance of Negros Occidental The Court of Tax Appeals

rendered a decision, declaring that the right of the Government to collect the income tax in question

had not prescribed, but holding that the assessment of the corporate income tax against the "Hacienda

Fortuna" is not in accordance with law. Thus, Commissioner files this petition.

Issue:Whether or not the partnership known as "Hacienda Fortuna" which was organized byrespondents on July 11, 1949, whose articles of general partnership provided that the partnership

agreement should retroact as of January 1, 1949, and which articles of general co-partnership were

registered on July 14, 1949, should pay corporate income tax as an unregistered partnership on its net

income received during the period from January 1, 1949 to July 13, 1949, the period in the year 1949

prior to the date of said registration.

Held. No. It is for this reason that the government imposes a corporate income tax against an

unregistered partnership as an entity, and an individual income tax against the apparent members

thereof. But once the partnership is duly registered, the names of all the partners are known, the

proportional interest of the partners in the business of the partnership is known, and the governmentcan very well assess the income tax on the respective income of the partners whose names appear in


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the articles of co-partnership. Once the partnership is registered its operation during the taxable year

may be ascertained in al l matters regarding its management, its expenditures, its earnings, and the

participation of the partners in the net profits. If it can be ascertained that the profits of the partnership

have actually been given, or credited, to the partners, then there is no reason why the partnership

should be made to pay a corporate income tax on the profits realized by the partnership, and at the

same time assess an income tax on the income that the partners had received from the partnership. Andso, We believe that it is a fair and sound application of Section 24 of the tax code that once a

partnership is registered during a taxable year that partnership should be considered as registered

"partnership exempt from the payment of corporate income tax during that taxable year, and only the

partners thereof should be made to pay income tax on the profi ts of the partnership that were divided

among them. The exclusion of a registered partnership from the entities subject to the payment of

corporate income tax under Section 24 of the tax code should be made to cover the entire taxable year,

regardless of whether the registration takes place at the middle, or towards the last days, of the taxable

year. This is so because, after all, the taxable status of the taxpayer, for the purposes of the payment of

income tax, is determined as of the end of the taxable year, and the income tax is collected after the end

of the taxable year.

FRANCISCO PASCUAL vs THE COMMISSIONER OF CUSTOMSG.R. No. L-10979 June 30, 1959

FACTS: There are two cases (Seizure Identification Nos. 1899 and 1990) which were brought on appeal

to the Supreme Court from the decisions of the respondent Commissioner of customs, affirming the

decisions of the Acting Collector of Customs for the Port of Manila which decreed the forfeiture of two

shipments from Hong Kong to Manila, one with 42 and the other with 27 packages of foreign made

candies, for il legal violations of Central Bank Circulars Nos. 44 and 45 in relation to section 1363 (f) of

the Revised Administrative Code (forfeiture of prohibited merchandise) which requires a license fromthe Monetary Board or release certificates to be able to receive goods from any foreign country.

ISSUE: Whether or not the sixty-nine (69) packages of candies in question are subject to forfeiture forviolation of Central Bank Circulars Nos. 44 and 45 in relation to section 1363 (f) of the Revised

Administrative Code (forfeiture of merchandise prohibited by law).

HELD: The decision of the Commissioner of Customs decreeing the forfeiture of the candies is

AFFIRMED. The importations, assumed to involve the sale of foreign exchange, were in violation of

circulars 44 and 45 for fai lure to obtain the corresponding dollar allocation or foreign exchange license

from the Central Bank as required by Circular No. 44 of said bank.

Section 74, Republic Act No. 265 authorized the Monetary Board, with the approval of the President, to

temporarily suspend or restrict sales of exchange and to subject all transactions in gold an d foreign

exchange to license during an exchange crisis in order to protect the international reserve and to give

the Monetary Board and the Government time in to take constructive measures to combat such a crisis.

Circular No. 44, prohibiting the release by the Commissioner of Customs of any item of import without

the presentation of a release certificate issued by the Central Bank or any authorized agent bank in a

form prescribed by the Monetary Board, and Circular No. 45, requiring "any person or entity who

intends to import or receive goods from any foreign country for which no foreign exchange is required

or will be required of the banks, to apply for a license from the Monetary Board to authorize such

import," are measures taken to check the unregulated flow of foreign exchange from the country andare within the powers of the Monetary Board.


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