tax week 7 digests

7/28/2019 TAX Week 7 Digests

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T A X A T I O N 1 L A F O R T E Z A W E E K 7 : d 2 0 1 4

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INCOME TAXATION

A. INTRODUCTION

FISHER v. TRINIDAD(October 30, 1922)

DOCTRINE: When a corporation or company issues "stock dividends" it shows that thecompany's accumulated profits have been capitalized, instead of distributed to the

stockholders or retained as surplus available for distribution, in money or in kind, shouldopportunity offer. The essential and controlling fact is that the stockholder has receivednothing 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 andaccumulations resulting from employment of his money and that of the otherstockholders 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 SC does 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."Such property can be reached under the ordinary from of taxation. NATURE: AppealPONENTE: JohnsonFACTS:

1.

That during the year 1919 the Philippine American Drug Company was acorporation that appellant was a stockholder of 2. Corporation, as result of the business for that year, declared a "stock dividend" ;

that the proportionate share of said stock divided of the appellant was P24,800;that the stock dividend for that amount was issued to the appellant;

3. Thereafter, in the month of March, 1920, the appellant, upon demand of theappellee, paid under protest, and voluntarily, unto the appellee the sum of P889.91as income tax on said stock dividend .

4. For the recovery of that sum (P889.91) the present action was instituted.

ISSUES: Are the "stock dividends" in the present case "income" and taxable as suchunder the provisions of section 25 of Act No. 2833?

HELD: NO. We do not believe that the Legislature intended that a mere increase in thevalue of the capital or assets of a corporation, firm, or individual, should be taxed as"income." Such property can be reached under the ordinary from of taxation. PETITIONERS CONTENTIONS: - Cited US CASES which held that: "stock dividends" were capital and not an "income"

and therefore not subject to the "income tax" lawCOLLECTORS CONTENTIONS: - Admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189) that

a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing thetax on the stock dividend, does not violate the provisions of the Jones Law

- Further argues that the statute of the United States providing for tax upon stock dividends is different from the statute of the Philippine Islands, and therefore thedecision of the Supreme Court of the United States should not be followed in

interpreting the statute in force here

- There are no constitutional limitations upon the power of the Philippine Legislaturesuch as exist in the United States

COURTS RULING: (Sorry medyo Doctrine vomit sya) RE: Difference in US Statute and Act. No. 2833- It will be noted from a reading of the provisions of the two laws above quoted that

the writer of the law of the Philippine Islands must have had before him the statuteof the United States. No important argument can be based upon the slight different in the wording of the two sections.

RE: Constitutional Limitations upon power to impose income taxes- There is no question that the Philippine Legislature may provide for the payment of

an income tax, but it cannot, under the guise of an income tax, collect a tax onproperty which is not an "income." The Philippine Legislature can not impose a taxupon "property" under a law which provides for a tax upon "income" only.

- Constitutional limitations, that is to say, a statute expressly adopted for one purposecannot, without amendment, be applied to another purpose which is entirelydistinct and different. A statute providing for an income tax cannot be construed tocover property which is not, in fact income. The Legislature cannot, by a statutorydeclaration, change the real nature of a tax which it imposes.

- It is true that the statute in question provides for an income tax and contains afurther provision that "stock dividends" shall be considered income and are

therefore subject to income tax provided for in said law. If "stock dividends" are not "income" then the law permits a tax upon something not within the purpose andintent of the law.

RE: WON Stock dividends are considered income which may be subjected to income tax STOCK DIVIDENDS DEFINED:- ILLUSTRATION: (Its easier to understand by way of this illustration) A and B form

a corporation with an authorized capital of P10,000 for the purpose of opening andconducting a drug store, with assets of the value of P2,000, and each contributesP1,000. Their entire assets are invested in drugs and put upon the shelves in theirplace of business. They commence business without a cent in the treasury. Everydollar contributed is invested. Shares of stock to the amount of P1,000 are issued toeach of the incorporators, which represent the actual investment and entire assets

of the corporation. Business for the first year is good. At the end of the first year aninventory of the assets of the corporation is made, and it is then ascertained that theassets or capital of the corporation on hand amount to P4,000, with no debts, andstill not a cent in the treasury. All of the receipts during the year have beenreinvested in the business. Every peso received for the sale of merchandise wasimmediately used in the purchase of new stock new supplies. At the beginning of the year they were P2,000, and at the end of the year they were P4,000, and neitherof the stockholders have received a centavo from the business during the year. At the close of the year, instead of selling the extra merchandise on hand and therebyreducing the business to its original capital, they agree among themselves toincrease the capital they agree among themselves to increase the capital issued andfor that purpose issue additional stock in the form of "stock dividends" or additionalstock of P1,000 each, which represents the actual increase of the shares of interest

in the business. At the beginning of the year each stockholder held one-half interest


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in the capital. At the close of the year, and after the issue of the said stock dividends,they each still have one-half interest in the business.

- Generally speaking, stock dividends represent undistributed increase in the capital of corporations or firms, joint stock companies, etc., etc., for a particular period. They areused to show the increased interest or proportional shares in the capital of eachstockholder.

- In other words, the inventory of the property of the corporation, etc., for particularperiod 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,etc. - It is not denied, for the purpose of ordinary taxation, that the taxable property of the

corporation at the beginning of the year was P2,000 , that at the close of the year it was P4,000 , and that the tax rolls should be changed in accordance with the changedconditions in the business. In other words, the ordinary tax should be increased byP2,000.

INCOME DEFINED:- Mr. Black: "An income is the return in money from one's business, labor, or capital

invested; gains, profit or private revenue." "An income tax is a tax on the yearly profitsarising from property , professions, trades, and offices."

- Mr. Justice Hughes, in the case of Towne vs. Eisner, defined an "income" in an income

tax law, unless it is otherwise specified, to mean cash or its equivalent. It does not mean choses in action or unrealized increments in the value of the property- "income" in its natural and obvious sense, as importing something distinct from

principal or capital and conveying the idea of gain or increase arising from corporateactivity

- Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speakingfor the court said: "An income may be defined as the gain derived from capital, fromlabor, or from both combined, provided it be understood to include profit gainedthrough a sale or conversion of capital assets."

STOCK DIVIDEND NOT INCOME- '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 remainsthe same. . . .' In short, the corporation is no poorer and the stockholder is no richerthen they were before."

- The dividend normally is payable in money and when so paid, then only does thestockholder realize a profit or gain, which becomes his separate property, and thusderive an income from the capital that he has invested. Until that, is done the increased assets belong to the corporation and not to the individual stockholders.

- When a corporation or company issues "stock dividends" it shows that the company'saccumulated profits have been capitalized, instead of distributed to the stockholdersor retained as surplus available for distribution, in money or in kind, shouldopportunity offer.

- Far from being a realization of profits of the stockholder, it tends rather to postponesaid realization, in that the fund represented by the new stock has been transferred

from surplus to assets, and no longer is available for actual distribution.

- 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 dollarof his original investment, together with whatever accretions and accumulationsresulting from employment of his money and that of the other stockholders in thebusiness of the company, still remains the property of the company, and subject tobusiness risks which may result in wiping out of the entire investment.

- 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." Such property can be reached under the ordinary from of

taxation.- WHEN IS STOCK DIVIDEND TAXABLE FOR INCOME TAX It may be argued that a stockholder might sell the stock dividend which he had

acquired. If he does, then he has received, in fact, an income and such income, likeany other profit which he realizes from the business, is an income and he may betaxed thereon.

- CASH DIVIDEND v. STOCK DIVIDEND: There is a clear distinction between an extraordinary cash dividend, no matter

when earned, and stock dividends declared. The one is a disbursement to the stockholders of accumulated earning, and the

corporation at once parts irrevocably with all i nterest thereon. The other involvesno disbursement by the corporation. It parts with nothing to the stockholders.The latter receives, not an actual dividend, but certificates of stock which

evidence in a new proportion his interest in the entire capital. When a cash becomes the absolute property of the stockholders and cannot bereached by the creditors of the corporation in the absence of fraud. A stock dividend however, still being the property of the corporation and not thestockholder, it may be reached by an execution against the corporation, and soldas a part of the property of the corporation.

Until the dividend is declared and paid, the corporate profits still belong to thecorporation, not to the stockholders, and are liable for corporate indebtedness.The rule is well established that cash dividend, whether large or small, areregarded as "income" and all stock dividends, as capital or assets

- If the ownership of the property represented by a stock dividend is still in thecorporation and to in the holder of such stock, then it is difficult to understand howit can be regarded as income to the stockholder and not as a part of the capital orassets of the corporation.

- A corporation may be solvent and prosperous today and issue stock dividends inrepresentation of its increased assets, and tomorrow be absolutely insolvent byreason of changes in business conditions, and in such a case the stockholder wouldhave received nothing from his investment. In such a case, if the holder of the stock dividend is required to pay an income tax on the same, the result would be that hehas paid a tax upon an income which he never received. Such a conclusion isabsolutely contradictory to the idea of an income. An income subject to taxationunder the law must be an actual income and not a promised or prospective income.

DISPOSITION: Having reached the conclusion, supported by the great weight of theauthority, that "stock dividends" are not "income," the same cannot be taxes underthat provision of Act No. 2833 which provides for a tax upon income. For all of theforegoing reasons, we are o f the opinion, and so decide, that the judgment of the lowercourt should be revoked, and without any finding as to costs, it is so ordered.


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VOTE: EN BANC; Araullo, C.J. Avancea, Villamor and Romualdez, JJ.,Street, concur.Ostrand, Malcolm, Johns, dissent.CONCURRING/DISSENTING OPINION: (There are concurring and dissenting opinions.But, I wont be including them just because Maam usually doesnt ask for separateopinions (other than the fact that I havent read it. )

-David

1. History of the Philippine Income Tax Law

VICENTE MADRIGAL and SUSANA PATERNO vs JAMES RAFFERTY (August 7, 1918)

Doctrine: The Income Tax Law is the result of an effect on the part of the legislators toput into statutory form the canon of taxation and of social reform. The aim of the law hasbeen to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay.

Nature: Appeal from a judgment of RTC

Ponente: Malcolm J .

Facts:- Petitioners are spouses, legally married prior to January 1, 1914. Theirproperty regime is conjugal partnership ( sociedad de gananciales ).

- On February 25, 1915, Vicente Madrigal declared as his total net income for the1914, the sum of P296,302.73 broken down as follows:

Profits made by Vicente Madrigal in his coal and shippingbusiness

362,407.67

Profits made by Susana Paterno in her embroidery business 4,086.50Profits made by Vicente Madrigal in a pawnshop company 16,687.80

General deductions allowed 86,879.24Resulting net income 296,302.73

- For the purpose of assessing the normal tax of 1% on the net income therewere allowed as specific deductions the following: (1) P16,687.80, the tax uponwhich was to be paid at source, and (2) P8,000, the specific exemption grantedto Vicente Madrigal and Susana Paterno, husband and wife.

Tax upon which was to be paid at source 16,687.80Specific exemption granted to Vicente Madrigal and SusanaPaterno, husband and wife

8,000

Remainder 271,614.93

- The remainder, P271,614.93 was the sum upon which the normal tax 1% was

assessed. The normal tax thus arrived at was P2,716.15. (The dispute between

the plaintiffs and the defendants in this case however concerned theadditional tax provided for in the Income Tax Law.)

- Vicente later wanted to correct the declaration he made because the sum of 296,302.73 was actually the income of their conjugal partnership, hence incomputing and assessing the additional income tax provided by Income TaxLaw, the income should be divided into two equal parts: as income of Vicente, as income of Susana.

- Hence, if the income tax for the year 1914 had been correctly computed, thetax due is P2,921.09 from each of the petitioners or a total of P5,842.18

instead of P9,668.21, erroneously and unlawfully collected.- The general question had been submitted to the Attorney-General of thePhilippine Islands who ruled in favor of petitioner.

- CIR forwarded the matter to US Treasury Department. US CIR reversed theAttorney-General.

- Petitioner paid under protest but sued for recovery of the sum of P3,786.08,alleged to have been wrongfully and illegally collected.

- The trial court ruled in favor of defendants.

Issue: WON for purposes of computing the additional income tax, the income shouldbe divided into two equal parts because of the conjugal partnership existing betweenthe spouses.

SUPER DISCLAIMER: I DID NOT UNDERSTAND THE REASONING BY THE COURT. Ijust dont get Rafferty cases. =l

Held: NO.

Ratio: The point we are discussing has heretofore been considered by the Attorney-General of the Philippine Islands and the United States Treasury Department. Thedecision of the latter overruling the opinion of the Attorney-General is as follows:

TREASURY DEPARTMENT,Washington .

FRANK MCINTYRE,Chief, Bureau of Insular Affairs, War Department,Washington, D. C.

xxx

From the correspondence it appears that Gregorio Araneta, married andliving with his wife, had an income of an amount sufficient to require theimposition of the net income was properly computed and then both incomeand deductions and the specific exemption were divided in half and tworeturns made, one return for each half in the names respectively of thehusband and wife, so that under the returns as filed there would be anescape from the additional tax; that Araneta claims the returns are correct on

the ground under the Philippine law his wife is entitled to half of hisearnings; that Araneta has dominion over the income and under the


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Philippine law, the right to determine its use and disposition; that in this casethe wife has no "separate estate" within the contemplation of the Act of October3, 1913, levying an income tax.

It appears further from the correspondence that upon the foregoingexplanation, tax was assessed against the entire net income against GregorioAraneta; that the tax was paid and an application for r efund made, and that theapplication for refund was rejected, whereupon the matter was submitted tothe Attorney-General of the Islands who holds that the returns were correctlyrendered, and that the refund should be allowed; and thereupon the question at issue is submitted through the Governor-General of the Islands and Bureau of Insular Affairs for the advisory opinion of this office.

By paragraph M of the statute, its provisions are extended to the PhilippineIslands, to be administered as in the United States but by the appropriateinternal-revenue officers of the Philippine Government. You are thereforeadvised that upon the facts as stated, this office holds that for the FederalIncome Tax (Act of October 3, 1913), the entire net income in this case wastaxable to Gregorio Araneta, both for the normal and additional tax, and that the application for refund was properly rejected.

The separate estate of a married woman within the contemplation of theIncome Tax Law is that which belongs to her solely and separate and apart from her husband, and over which her husband has no right in equity. It mayconsist of lands or chattels.

xxx

In all instances the income of husband and wife whether from separate estatesor not, is taken as a whole for the purpose of the normal tax. Where the wife hasincome from a separate estate makes return made by her husband, while theincomes are added together for the purpose of the normal tax they are takenseparately for the purpose of the additional tax. In this case, however, the wifehas no separate income within the contemplation of the Income Tax Law.

Respectfully,

DAVID A. GATES. Acting Commissioner.

The Income Tax Law was drafted by the Congress of the United States and has been bythe Congress extended to the Philippine Islands. Being thus a law of American origin andbeing peculiarly intricate in its provisions, the authoritative decision of the official who ischarged with enforcing it has peculiar force for the Philippines. It has come to be a well -settled rule that great weight should be given to the construction placed upon a revenuelaw, whose meaning is doubtful, by the department charged with its execution. We

conclude that the judgment should be as it is hereby affirmed with costs against appellants

Note the pertinent part of the case to the topic of history of income tax law:

The Income Tax Law of the United States, extended to the Philippine Islands, is theresult of an effect on the part of the legislators to put into statutory form this canon of taxation and of social reform. The aim has been to mitigate the evils arising frominequalities of wealth by a progressive scheme of taxation, which places the burden on

those best able to pay.

To carry out this idea, public considerations have demanded an exemption roughlyequivalent to the minimum of subsistence. With these exceptions, the income tax issupposed to reach the earnings of the entire non-governmental property of thecountry. Such is the background of the Income Tax Law.

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 isa 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 calledan income. Capital is wealth, while income is the service of wealth.

The Supreme Court of Georgia expresses the thought in the following figurativelanguage: "The fact is that property is a tree, income is the fruit; labor is a tree, incomethe fruit; capital is a tree, income the fruit." A tax on income is not a tax on property."Income," as here used, can be defined as "profits or gains."

Disposition: We conclude that the judgment should be as i t is hereby affirmed withcosts against appellants. So ordered.

Vote: Torres, Johnson, Carson, Street and Fisher, JJ., concur.

Concurring/Dissenting Opinion: None. -Dana


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3. When the CIR failed to act upon petitioners claims, the latter filed a petition for reviewwith the Court of Tax Appeals. On 6 September 2000, the Court of Tax Appeals renderedthe following judgment:Petition for Review is hereby PARTIALLY GRANTED. Accordingly, Revenue RegulationsNo. 2-94 of the CIR is declared null and void insofar as it treats the 20% discount givenby private establishments as a deduction from gross sales. CIR is hereby ORDERED toGRANT A REFUND OR ISSUE A TAX CREDIT CERTIFICATE to Mercury Drug in thereduced amount of P1,688,178.43 representing the latters ov erpaid income tax for thetaxable year 1993. However, the claim for refund for taxable year 1994 is denied for lack

of merit. CTA: declared that the 20% sales discount should be treated as a tax credit rather than amere deduction from gross income. But there are irregularities and discrepancies in thecash slips submitted by Mercury as basis for tax refund so those for 1994 and some of amounts for 1993 are disallowed.The amount of P3,522,123.25 corresponding to 1993 will be further reducedto P2,989,930.43 as this Courts computation is based on the cost of the 20% discount and not on the total amount of the 20% discount based on the decision of the Court of Appeals in Commissioner of Internal Revenue v. Elmas Drug Corporation, CA-SP No.49946 promulgated on October 19, 1999, where it ruled:"Thus the cost of the 20% discount represents the actual amount spent by drugcorporations in complying with the mandate of RA 7432. Working on this premise, it could not have been the intention of the lawmakers to grant these companies the fullamount of the 20% discount as this could be extending to them more than what theyactually sacrificed when they gave the 20% discount to senior citizens."Similarly the amount of P8,789,792.27 corresponding to taxable year 1994 will bereduced to P7,393,094.28 based on the aforequoted Court of Appeals decision.

4. Upon appeal to CA, CA affirmed CTA. Hence this appeal.

Issue:Is the claim for tax credit to be based on the full amount of the 20% senior citizendiscount or the acquisition cost of the item sold?

Held: YES, it should be based on full amount of 20% senior citizens discount.

RATIO:Sec. 4 of RA 7432 clearly states: The senior citizens shall be entitled to the following: a. the grant of 20% discount from all establishments relative to the utilization of transportation services, hotels and similar lodging establishments, restaurants andrecreation centers and the purchase of medicines anywhere in the country, Provided,that private establishments may claim the cost as tax credit.

The burden imposed on private establishments amounts to taking of private property forpublic use with just compensation in the form of a tax credit. Proviso specifically allowsthe 20% discount to be claimed as tax credit, and not merely as deduction from grosssales or gross income. The law however, is silent as to how cost of the discount as taxcredit should be construed.There is nothing novel in this question. As we have held in the case of Bicolandia DrugCorp. v. CIR, etc. the term cost refers to the amount of the 20% discount extended tosenior citizens in the purchase of their medicine. We reiterated this ruling in the 2008case of Cagayan Valley Drug.

The tax credit should be equivalent to the actual 20% sales discount granted to thesenior citizens. The previous ruling of the CTA that the tax credit is based only on thecost of the discount which was interpreted to cover only direct acquisition cost,excluding administrative and other incremental costs, is struck down by the Court.

DISPOSITIVE: The judgment of the lower court affirmed with modification.

VOTES: 2nd Division; Carpio, Brion, De Castro and Peralta concur.-Ann

C. TAX ON CORPORATIONS

1. Definition of corporations

Collector of Internal Revenue v. Batangas Transportation Co. Barbie

CIR vs. OaLorenzo T. Oa, and Heirs of Julia Bunales, namely: Rodolfo B. Oa, Mariano B. Oa,Luz B. Oa, Virginia B. Oa, and Lorenzo B. Oa, Jr., petitioners, vs. The Commissionerof Internal Revenue, respondent

RATIO: The tax in question is one imposed upon 'corporations', which, strictlyspeaking, are distinct and different from 'partnerships'. When the Internal RevenueCode includes 'partnerships' among the entities subject to the tax on 'corporations',said Code must allude, therefore, to organizations which are not necessarily'partnerships', in the technical sense of the term. Likewise, as defined in section 84(b)of said Code, 'the term corporation includes partnerships, no matter how created ororganized.' This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usualrequirements of the law on partnerships, in order that one could be deemedconstituted for purposes of the tax on corporation. Again, pursuant to said section84(b), the term 'corporation' includes, among other, 'joint accounts, (cuentas enparticipacion)' and 'associations', none of which has a legal personality of its own,independent of that of its members. Accordingly, the lawmaker could not haveregarded that personality as a condition essential to the existence of the partnershipstherein referred to.

Date: May 25, 1972Shorter Facts & Ratio found in a reviewer:Julia Buales passed away on March 23, 1944, leaving behind her husband, LorenzoOa, and their five children.

In her intestate proceedings, Lorenzo was appointed administrator of her estate. OnApril 1949, he submitted the project of partition, but because three of the childrenwere still minors at the time of approval of the partition, Lorenzo filed a petition to beappointed as guardian of the minors.

The project of partition shows that the heirs have undivided interest in ten parcels of land, six houses, and an amount collected from the War Damage Commission. Thisamount was used to rehabilitate the properties owned by them.


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Although the partition was approved, no actual partition was made. Instead, theproperties remained under the management of Lorenzo who used the properties inbusiness by leasing or selling them and investing the income earned in real properties.

The incomes were recorded in books of account kept by Lorenzo, with the correspondingshares of each child for the year known. However, the children did not actually receivetheir shares in the profits, which were kept by Lorenzo as he reinvested them.

On the basis of these facts the Commissioner decided that the Oas were in anunregisteredpartnership and therefore subject to corporate i ncome tax.

Are the Oas liable for corporate income tax?

Yes, but only from 1955, when the CIR assessed them as a de facto partnership, and not from the moment of the creation of the de facto partnership itself.

The moment the Oas allowed not only the incomes from their respective shares but even the inherited properties themselves to be used by Lorenzo as a common funinundertaking several transactions or in business, with the intention of deriving profit toshared by them proportionally, such act was tantamount to actually contributingincomes to a common fund and thus formed anunregistered partnership within thepurview of the provisions of the Tax Code.

From the moment of partition, heirs are entitled to their respective definite shares of theestate and the incomes thereof, for each of them to manage and dispose of as exclusivelyhis own wthout the intervention of the other heirs, and he becomes liable individually forall taxes in connection therewith. If after partition, he allows his share to be held incommon withhis co-heirs under a single management to be used with the intentof making profit thereby in proportion to his share,there can be no doubt that, even if nodocument or instrument were executed for the purpose, for tax purposes at least, anunregistered partnership is formed.

For purposes of the tax on corporations, our NIRC includes these partnerships, with theexception only of duly registered general copartnerships within the purview of the termcorporation.

Ponente: Barredo, J.FACTS: On March 23, 1944, Julia Buales died leaving as heirs her surviving spouse,

Lorenzo and her five children. In 1948, Civil Case No. 4519 was instituted for thesettlement of her estate. Later, Lorenzo, the surviving spouse, was appointedadministrator of the estate.

April 14, 1949 The administrator submitted the project of partition, which wasapproved by the Court on May 16, 1949. Because three of the heirs, namely Luz,Virginia and Lorenzo, Jr., were still minors when the project of partition wasapproved, Lorenzo filed a petition in Civil Case No. 9637 for appointment asguardian of said minors. The Court appointed him guardian of the persons andproperty of the minors.

The project of partition shows that the heirs have undivided interest in tenparcels of land with a total assessed value of P87,860, six houses with a totalassessed value of P17,590 and an undetermined amount to be collected from theWar Damage Commission. Later, they received from said Commission the amount of P50,000, more or less. This amount was not divided among them but was usedin the rehabilitation of properties owned by them in common. Of the ten parcelsof land, two were acquired after the death of the decedent with money borrowedfrom the Philippine Trust Company in the amount of P72,173.

The project of partition also shows that the estate shares equally with Lorenzo, in

the obligation of P94,973, consisting of loans contracted by the latter with theapproval of the Court.. Although the project of partition was approved by the Court, no attempt was

made to divide the properties therein listed. Instead, the properties remainedunder the management of Lorenzo who used said properties in business byleasing or selling them and investing the income derived therefrom and theproceeds from the sales thereof in real properties and securities. As a result,petitioners' properties and investments gradually increased from P105,450 in1949 to P480,005 in 1956.

From said investments and properties, petitioners derived such incomes asprofits 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, where the corresponding shares of the petitioners in

the net income for the year are also known. Every year, petitioners returned forincome tax purposes their shares in the net income derived from said propertiesand securities and/or from transactions involving them. However, petitioners didnot actually receive their shares in the yearly income. The income was always left in the hands of Lorenzo who invested them in real properties and securities.

On the basis of the foregoing facts, the Commissioner of Internal Revenue decidedthat petitioners formed an unregistered partnership and therefore, subject to thecorporate income tax, pursuant to Section 24, in relation to Section 84(b), of theTax Code. Accordingly, he assessed against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956,respectively.

Petitioners protested against the assessment and asked for reconsideration of theruling of respondent that they have formed an unregistered partnership. Finding

no merit in petitioners' request, respondent denied it. CTA affirmed.Issue: W/N petitioners have formed an unregistered partnershipHeld: YES.Ratio: At the start, or in the years 1944 to 1954, the Commissioner of Internal Revenue

did treat petitioners as co-owners, not liable to corporate tax, and it was onlyfrom 1955 that he considered them as having formed an unregisteredpartnership.

Petitioners never actually received any share of the income or profits fromLorenzo, and instead, they allowed him to continue using said shares as part of the common fund for their ventures, even as they paid the corresponding incometaxes on the basis of their respective shares of the profits of their commonbusiness as reported by Lorenzo.

Petitioners did not merely limit themselves to holding the properties inherited bythem. During the material years involved, some of the said properties were sold


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at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo,in the purchase and sale of corporate securities. All the profits from these ventureswere divided among petitioners proportionately in accordance with their respectiveshares in the inheritance. In these circumstances, from the moment petitionersallowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo as a common fundin undertaking several transactions or in business, with the intention of derivingprofit to be shared by them proportionally, such act was tantamount to actuallycontributing such incomes to a common fund and, in effect, they thereby formed an

unregistered partnership within the purview of the Tax Code. It is logical that in cases of inheritance, there should be a period when the heirs canbe considered as co-owners rather than unregistered co-partners within thecontemplation of corporate tax laws. Before the partition and distribution of theestate of the deceased, all the income thereof does belong commonly to all the heirswithout them becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-owners continues until the inheritance isactually and physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continueholding said shares under the common management of the administrator orexecutor or of anyone chosen by them and engage in business on that basis. Withal,if this were to be allowed, i t would be the easiest thing for heirs in any inheritance tocircumvent and render meaningless Sections 24 and 84(b) of the National InternalRevenue Code.

In Evangelista vs. Collector , it was stated, among the reasons for holding theappellants therein to be unregistered co-partners for tax purposes, that theircommon fund was not something they found already in existence" and that it wasnot a property inherited by them pro indiviso, but it does not follow that in allinstances where an inheritance is not actually divided, there can be no unregisteredco-partnership. For tax purposes, the co-ownership of inherited properties isautomatically converted into an unregistered partnership the moment the saidcommon properties and/or the incomes derived therefrom are used as a commonfund with intent to produce profits for the heirs in proportion to their respectiveshares in the inheritance as determined in a project partition either duly executed inan extrajudicial settlement or approved by the court in the corresponding testate orintestate proceeding. From the moment of such partition, the heirs are entitledalready to their respective definite shares of the estate and the incomes thereof, foreach of them to manage and dispose of as exclusively his own without theintervention of the other heirs, and, accordingly he becomes liable individually forall taxes in connection therewith. If after such partition, he allows his share to beheld in common with his co-heirs under a single management to be used with theintent of making profit thereby in proportion to his share, even if no document orinstrument were executed for the purpose, for tax purposes, at least, anunregistered partnership is formed.

The tax in question is one imposed upon 'corporations', which, strictly speaking, aredistinct and different from 'partnerships'. When the Internal Revenue Code includes'partnerships' among the entities subject to the tax on 'corporations', said Codemust allude, therefore, to organizations which are not necessarily 'partnerships', inthe technical sense of the term. Likewise, as defined in section 84(b) of said Code,'the term corporation includes partnerships, no matter how created or organized.'This qualifying expression clearly indicates that a joint venture need not beundertaken in any of the standard forms, or in conformity with the usual

requirements of the law on partnerships, in order that one could be deemedconstituted for purposes of the tax on corporation. Again, pursuant to said section84(b), the term 'corporation' includes, among other, 'joint accounts, (cuentas enparticipacion)' and 'associations', none of which has a legal personality of its own,independent of that of its members. Accordingly, the lawmaker could not haveregarded that personality as a condition essential to the existence of thepartnerships therein referred to.

American law:o Under the term 'partnership' it includes not only a partnership as known as

common law but, as well, a syndicate, group, pool, joint venture, or otherunincorporated organization which carries on any business, financialoperation, or venture, and which is not, within the meaning of the Code, atrust, estate, or a corporation. . . .' (7A Merten's Law of Federal IncomeTaxation, p. 789)

o 'The term "partnership" includes a syndicate, group, pool, joint venture orother unincorporated organization, through or by means of which anybusiness, financial operation, or venture is carried on. . . .' (8 Merten's Law of Federal Income Taxation, p. 562 Note 63)

*taken from B2013 reviewer on Partnership.-Jamie

OBILLOS v. CIR and CTA(Oct 29, 1985)

DOCTRINE: Article 1769(3) of the Civil Code provides that "the sharing of grossreturns does not of itself establish a partnership, whether or not the persons sharingthem have a joint or common right or interest in any property from which the returnsare derived". There must be an unmistakable intention to form a partnership or joint venture.

NATURE : Instant AppealPONENTE: AquinoFACTS:

1. March 2, 1973. Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. ontwo lots located at Greenhills, San Juan, Rizal. The next day he transferred hisrights to his four children, the petitioners, to enable them to build theirresidences.

2. The company sold the two lots to petitioners for P178,708.12 on March 13.Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots.

3. In 1974, or after having held the two lots for more than a year, thepetitioners resold them to the Walled City Securities Corporation and OlgaCruz Canda for the total sum of P313,050. They derived from the sale a totalprofit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.


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4. In April, 1980, or one day before the expiration of the five-year prescriptiveperiod, the Commissioner of Internal Revenue required the fourpetitioners to pay corporate income tax on the total profit of P134,336 inaddition to individual income tax on their shares thereof . He assessedP37,018 as corporate income tax, P18,509 as 50% fraud surcharge andP15,547.56 as 42% accumulated interest, or a total of P71,074.56.

a. He also considered the share of the profits of each petitioner inthe sum of P33,584 as a " taxable in full (not a mere capital gain

of which is taxable) and required them to pay deficiencyincome taxes aggregating P56,707.20 including the 50% fraudsurcharge and the accumulated interest.

5. In sum, the petitioners were held liable for deficiency income taxes andpenalties totalling P127,781.76 on their profit of P134,336, in addition to thetax on capital gains already paid by them.

a. The Commissioner acted on the theory that the four petitionershad formed an unregistered partnership or joint venture withinthe meaning of sections 24(a) and 84(b) of the Tax Code .

6. The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the instant appeal.

ISSUE:1. WON petitioners formed a partnership or joint venture. NO

RATIO: Petitioners did not form a partnership or joint venture

1. NO INTENTION TO FORM PARTNERSHIP To regard the petitioners as having formed a taxable unregistered partnership under Art.1767 NCCsimply because they allegedly contributed money to buy the two lots, resoldthe same and divided the profit among themselves would result in oppressive taxation.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pureand simple. To consider them as partners would obliterate the di stinction betweena co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later onthey found it not feasible to build their residences on the lots because of thehigh cost of construction, then they had no choice but to resell the same todissolve the co-ownership. The division of the profit was merely incidental tothe dissolution of the co-ownership which was in the nature of things atemporary state. It had to be terminated sooner or later.

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint orcommon right or interest in any property from which the returns are derived". Theremust be an unmistakable intention to form a partnership or joint venture.

See Gatchalian vs. Collector of Internal Revenue where 15 personscontributed small amounts to purchase a two-peso sweepstakes ticket withthe agreement that they would divide the prize The ticket won the thirdprize of P50,000. The 15 persons were held liable for income tax as anunregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit.

2.

ALL CO-OWNERSHIPS ARE NOT AUTOMATICALLY DEEMEDUNREGISTERED PARTNERSHIPS

The Commissioner has even based its ruling on the following CTA Decisions:

Co-Ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or acorporation, within the purview of the income tax law. To hold otherwise, wouldbe to subject the income of all co-ownerships of inherited properties to the tax oncorporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the incometax on corporation. De Leon v. CIR, CTA case

See Longa v. Aranas, CTA case: The Longa heirs inherited the 'hacienda' inquestion pro-indiviso from their deceased parents; they did not contribute orinvest additional ' capital to increase or expand the inherited properties;they merely continued dedicating the property to the use to which it hadbeen put by their forebears; they individually reported in their tax returnstheir corresponding shares in the income and expenses of the 'hacienda', andthey continued for many years the status of co-ownership in order, asconceded by respondent, 'to preserve its value and to continue the existingcontractual relations.

3. WHEN CO-OWNERSHIP MAY BECOME AN UNREGISTERED PARTNERSHIP

Where after an extrajudicial settlement the co-heirs used the inheritance or theincomes derived therefrom as a common fund to produce profits for themselves,it was held that they were taxable as an unregistered partnership.

In the following cases, the SC held that petitioners had an unregistered partnership:

Reyes vs. Commissioner of Internal Revenue : where father and son purchaseda lot and building, entrusted the administration of the building to anadministrator and divided equally the net income,

Evangelista vs. Collector of Internal Revenue : where the three Evangelistasisters bought four pieces of real property which they leased to varioustenants and derived rentals therefrom.

In the instant case, what the Commissioner should have investigated was whether thefather donated the two lots to the petitioners and whether he paid the donor's tax (See


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Art. 1448, Civil Code). We are not prejudging this matter. It might have alreadyprescribed.

DISPOSITION: WHEREFORE, the judgment of the Tax Court is reversed and set aside.The assessments are cancelled. No costs.VOTING: 2nd Division. 4 concur. 1 on leave

-Jenin

2. Classification of corporations and the tax rates

a. In generalb. Special corporations1. Private educational institutions and non-profit hospitals2. Non-resident cinematographic film owner, lessor or distributor

3. International carriers

Commissioner of Internal Revenue v. British Overseas AirwaysCOMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BRITISH OVERSEAS

AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.(April 30, 1987)

NOTES: Kind of Tax Involved:

Income Tax a direct tax on the income of persons or other entities.- DE LEON: Income Tax is a tax on the net income or the entire income realized in

one taxable year. It is levied upon corporate and individual incomes in excess of specified amounts, less certain deductions and/or specified exemption in casespermitted by law.

- Where was income tax imposed? On the ticket sales of British Airways made inthe Philippines, which was coursed through their local agents and not on theactual exercise of transportation (which would have been an excise tax).

An issue was raised, however, that the tax assessment was ACTUALLY a commoncarr iers excise tax, which is a tax on transporting or removing passengers and cargofrom one place to another. But, the main decision reiterated that the tax in this caseis on the income derived from the ticket sales made in the Philippines.

The distinction is important because, while excise tax may only be collected wherethe services or activities were performed, income tax is collected on whateversource derived in the Philippines.

DOCTRINE: The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. Admittedly, BOACwas an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity ... which producedthe income. Unquestionably, the passage documentations in these cases were sold in thePhilippines and the revenue therefrom was derived from a activity regularly pursuedwithin the PhilippinesThe word "source" conveys one essential idea, that of origin, andthe origin of the income herein is the Philippines.

It should be pointed out, however, that the assessments upheld herein apply only to thefiscal years covered by the questioned deficiency income tax assessments in these cases,

or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No.69, promulgated on 24 November, 1972, international carriers are now taxed asfollows:

... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross Philippine billings. (Sec. 24[b] [21, TaxCode).

NATURE: Petitioner Commissioner of Internal Revenue (CIR) seeks a review oncertiorari of the joint Decision of the Court of Tax Appeals (CTA), which set asidepetitioner's assessment of deficiency income taxes against respondent BritishOverseas Airways Corporation

PONENTE: MELENCIO-HERRERA, J.:

FACTS:1. BOAC is a 100% British Government-owned corporation organized and existing

under the laws of the United Kingdom It is engaged in the international airlinebusiness.

2. During the periods covered by the disputed assessments, it is admitted that BOAChad no landing rights for traffic purposes in the Philippines, and was not granteda Certificate of public convenience and necessity.

3. Consequently, it did not carry passengers and/or cargo to or from the Philippines.4. Although during the period covered by the assessments, it maintained a general

sales agent in the Philippines Wamer Barnes and Company, Ltd., and laterQantas Airways which was responsible for selling BOAC tickets coveringpassengers and cargoes.

5. First CTA Case- Petitioner (CIR, for brevity) assessed BOAC the aggregate amount of

P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963and subsequent investigation resulted in the issuance of a new assessment,dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79.

- BOAC paid this new assessment under protest. BOAC filed a claim for refund

of the amount of P858,307.79, which claim was denied by the CIR.6. Second CTA Case

- BOAC was assessed deficiency income taxes, interests, and penalty for thefiscal years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 ascompromise penalties for the requirement to file corporate returns.

- BOAC's request for reconsideration was denied by the CIR on 24 August 1973.

- This prompted BOAC to file the Second Case before the Tax Court prayingthat it be absolved of liability for deficiency income tax for the years 1969 to1971.

7. CTAs DECISION: Reversed CIR - MAIN POSITION: The CTA position was that income from transportation is

income from services so that the place where services are rendereddetermines the source.


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- The Tax Court held that the proceeds of sales of BOAC passage tickets in thePhilippines by Warner Barnes and Company, Ltd., and later by Qantas Airways,during the period in question,

- These do not constitute BOAC income from Philippine sources "since noservice of carriage of passengers or freight was performed by BOACwithin the Philippines "

- Therefore, said income is not subject to Philippine income tax.

ISSUES:

(1)

Whether or not during the fiscal years in question BOAC is a resident foreigncorporation doing business in the Philippines or has an office or place of business inthe Philippines.

(2) Whether or not the revenue derived by private respondent British OverseasAirways Corporation (BOAC) from sales of tickets in the Philippines for airtransportation, while having no landing rights here, constitute income of BOAC fromPhilippine sources, and, accordingly, taxable.

HELD/RATIO/RULING:(1) It is our considered opinion that BOAC is a resident foreign corporation.

- Under Section 20 of the 1977 Tax Code: (h) the term resident foreigncorporation engaged in trade or business within the Philippines or having anoffice or place of business therein.

- The term implies a continuity of commercial dealings and arrangements, andcontemplates, to that extent, the performance of acts or works or the exerciseof some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization,such as the appointment of a local agent, and not one of a temporary character

- BOAC, during the periods covered by the subject - assessments, maintained ageneral sales agent in the Philippines that was engaged in activities that were inexercise of the functions which are normally incident to, and are in progressivepursuit of, the purpose and object of its organization as an international aircarrier. (See enumeration p. 405 last par.)

- In fact, the regular sale of tickets, its main activity, is the very lifeblood of theairline business, the generation of sales being the paramount objective. Thereshould be no doubt then that BOAC was "engaged in" business in thePhilippines through a local agent during the period covered by the assessments.

- Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within thePhilippines.

(2) RESPONDENTS CONTENTION:

- Income derived from transportation is income for services, with the result that the place where the services are rendered determines the source

- since BOAC's service of transportation is performed outside the Philippines, theincome derived is from sources without the Philippines and, therefore, not taxable under our income tax laws

COURTS RULING: Unquestionably, the passage documentations in these cases weresold in the Philippines and the revenue therefrom was derived from a activity regularlypursued within the Philippines.

- The Tax Code "Gross income" as gains, profits, and income derived fromxxxbusiness, commerce , sales , or x xxtransactions of any business carried on for gain or profile, or gains, profits, and income derived from any sourcewhatever (Sec. 29[3] o The definition is broad and comprehensive to include proceeds from

sales of transport documents. "The words 'income from any sourcewhatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws."

- The source of an income is the property, activity or service that produced the

income. For the source of income to be considered as coming from thePhilippines, it is sufficient that the income is derived from activity within thePhilippines.o In BOAC's case, the sale of tickets in the Philippines is the activity that

produces the income.o The tickets exchanged hands here and payments for fares were also

made here in Philippine currency.o The site of the source of payments is the Philippines. The flow of

wealth proceeded from, and occurred within, Philippine territory,enjoying the protection accorded by the Philippine government. Inconsideration of such protection, the flow of wealth should sharethe burden of supporting the government

- The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation.The test of taxability is the "source"; and the source of an income is that activity ... which produced the income.o And even if the BOAC tickets sold covered the "transport of passengers

and cargo to and from foreign cities", it cannot alter the fact that incomefrom the sale of tickets was derived from the Philippines. The word"source" conveys one essential idea, that of origin, and the origin of theincome herein is the Philippines.

- It should be pointed out, however, that the assessments upheld hereinapply only to the fiscal years covered by the questioned deficiencyincome tax assessments in these cases, or, from 1959 to 1967, 1968-69to 1970-71.o For, pursuant to Presidential Decree No. 69, promulgated on 24

November, 1972, international carriers are now taxed on theirincome from Philippine sources. The 2- % tax on gross Philippinebillings is an income tax. If it had been intended as an excise orpercentage tax it would have been place under Title V of the TaxCode covering Taxes on Business.

RESPONDENTS LAST CONTENTION - Cites JAL v. CIR:that the mere sale of tickets, unaccompanied by the physical

act of carriage of transportation, does not render the taxpayer thereinsubject to the common carrier's tax.

COURTS RULING: The subject matter of the case under consideration is income tax, adirect tax on the income of persons and other entities "of whatever kind and inwhatever form derived from any source."

- The common carrier's tax is an excise tax, being a tax on the activity of transporting, conveying or removing passengers and cargo from one place toanother.


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- It purports to tax the business of transportation. Being an excise tax, the samecan be levied by the State only when the acts, privileges or businesses are doneor performed within the jurisdiction of the Philippines.

- The tax in this case is imposed on the income not the activity of transportation.

DISPOSITION:VOTE: EN BANC;Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur. Fernan, J., took no part; Feliciano, Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.

CONCURRING/DISSENTING OPINION (I tried to summarize the dissent as much as I could and this is the best I can do. She likes Feliciano kasi di ba so I dont know how detailed this should be. In case of doubt read the original na lang. Especially in No. 3,medyointerrelation of tax provisions yun kung paanosyanagarrivesa conclusions nya whichwould make this digest super long if I dont cut it. also, I dont think Teehankees dissent would matter just because he pointed out nadahilsabaging PD nanaissue rendered moot naang conflict of interpretation ngdalawang justices.) :

FELICIANO, J., dissenting: 1. Whether the foreign corporate taxpayer is doing business in the Philippines and

therefore a resident foreign corporation, or not doing business in the Philippinesand therefore a non-resident foreign corporation, it is liable to income tax only tothe extent that it derives income from sources within the Philippines. Thecircumtances that a foreign corporation is resident in the Philippines yields noinference that all or any part of its income i s Philippine source income.- Similarly, the non-resident status of a foreign corporation does not imply that it

has no Philippine source income.- Conversely, the receipt of Philippine source income creates no presumption

that the recipient foreign corporation is a resident of the Philippines.- The critical issue, for present purposes, is therefore whether of not BOAC is

deriving income from sources within the Philippines. 2. For purposes of income taxation, it is well to bear in mind that the "source of

income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which produced theincome."

3. We turn now to the question what is the source of income rule applicable in theinstant case. There are two possibly relevant source of income rules that must beconfronted; (a) the source rule applicable in respect of contracts of service ; and (b)the source rule applicable in respect of sales of personal property. - Where a contract for the rendition of service is involved, the applicable source

rule may be simply stated as follows : the income is sourced in the placewhere the service contracted for is rendered :

- Section 37. Income for sources within the Philippines:(a) Gross income from sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines:

(3) Services . Compensation for labor or personalservices performed in the Philippines ;... (Emphasis supplied)

- It should be noted that the portion of Section 37 (e) was derived from the 1939U.S. Tax Code which "was based upon a recognition that transportation was aservice and that the source of the income derived therefrom was to be treated asbeing the place where the service of transportation was rendered .

o Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income derived fromtransportation or other services rendered entirely outside thePhilippines must be treated as derived entirely from sourceswithout the Philippines.

4. The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of service, i.e., carriage of passengers or cargo betweenpoints located outside the Philippines.The phrase "sale of airline tickets," whilewidely used in popular parlance, does not appear to be correct as a matter of tax

law.- The airline ticket in and of itself has no monetary value, even as scrap paper.The value of the ticket lies wholly in the right acquired by the "purchaser" the passenger to demand a prestation from BOAC, which prestationconsists of the carriage of the "purchaser" or passenger from the one point toanother outside the Philippines.

- The ticket is really the evidence of the contract of carriage entered intobetween BOAC and the passenger.

- The money paid by the passenger changes hands in the Philippines. But thepassenger does not receive undertaken to be delivered by BOAC.

- The "purchase price of the airline ticket" is quite different from the purchaseprice of a physical good or commodity such as a pair of shoes of arefrigerator or an automobile; it is really the compensation paid for theundertaking of BOAC to transport the passenger or cargo outside thePhilippines.

- The very existance of "source rules" specifically and precisely applicable tothe rendition of services must preclude the application here of "source rules"applying generally to sales, and purchases and sales, of personal propertywhich can be invoked only by the grace of popular language.

- On a slighty more abstract level, BOAC's income is more appropriatelycharacterized as derived from a "service", rather than from an "activity" (abroader term than service and including the activity of selling) or from thehere involved is income taxation, and not a sales tax oran excise or privilege tax.

-JP

UNITED AIRLINES V. CIRG.R. No. 178788

29 September 2010United Airlines, Inc., petitioner v.

Commissioner of Internal Revenue, respondent. Villarama, Jr., J.

DOCTRINE: " Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from thePhilippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document

NATURE: Petition for Review


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FACTS: United Airlines is a foreign airline organized under Delaware law. It used to operate

cargo and passenger flights originating in the Philippines On Feb. 21, 1998, it ceased operating passenger flights from the Philippines.

Instead it appointed Aerotel, Ltd. As its general sales agent and continued operatingcargo flights from the Philippines until Jan. 31, 2001

In 2002, United filed a claim for refund of allegedly overpaid income tax for theperiod of 1999 to 2001. The claim included some 5.028M pesos income tax paid forthe year 1999 on passenger revenue

It contended that since it no longer operated passenger flights from the Philippines,it no longer needed to pay income tax on such revenue based on the reviseddefinition of gross Philippine billings (GPB)

The CIR not having acted on its claim, United elevated it to the CTA. The CTA First Division agreed that United cannot be taxed on the revenues from passenger flightsoriginating outside the Philippines. The definition of GPB under Sec. 28 of the NIRCincludes only flights originating from the Philippines

HOWEVER, the Court disallowed the payment of refund since it found that Unitedunderpaid its taxes for its cargo revenue by some 31.43M pesos which is greaterthan the amount it sought to be refunded

The CTA en banc affirmed the decision of the Division Hence this present recourse by United

ISSUE:1. W/N United is entitled to a refund of its income tax overpayments?

HELD/RATIO1. NO

United claims that the denial of its claim based on the finding that it has cargorevenue income tax underpayments is tantamount to an offset of its tax liabilityand its refunds

It claims that it is settled that such an offset cannot be done citing the cases of Francia v. IAC , et seq.

Further, the examination of the CTA of its other income and its declaration of underpayments is tantamount to an assessment of liability outside the provinceof the CTA and is a denial of due process

The relevant provision of the NIRC provides:

SEC. 28. Rates of Income Tax on Foreign Corporations . -

(A) Tax on Resident Foreign Corporations. -

x x x x

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder:

(a) International Air Carrier - "Gross Philippine Billings" refers to the amount of gross revenuederived from carriage of persons, excess baggage, cargo and mail originating from thePhilippines in a continuous and uninterrupted flight, irrespective of the place of sale or issueand the place of payment of the ticket or passage document: xxx.

The Court held that United correctly pointed out that since it ceasedoperating passenger flights to or from the Philippines in 1998, it is not taxable under Section 28(A)(3)(a) of the NIRC for gross passenger revenues.This much was also found by the CTA in their assailed decision.

In South African Airways v. Commissioner of Internal Revenue , the Court ruledthat the correct interpretation of the said provisions is that, if aninternational air carrier maintains flights to and from the Philippines, it shallbe taxed at the rate of 2% of its GPB, while international air carriers that do not have flights to and from the Philippines but nonetheless earn incomefrom other activities in the country will be taxed at the rate of 32% of suchincome.

However, the refund sought cannot be granted in any case. This is because,as correctly found by the CTA, United had underpayments of its cargorevenue income taxes for the same period which was even greater than the

refund sought

While it is true that offsetting of tax liabilities are generally not allowed ( cf .Francia, Philex cases), the case of CIR v. CTA granted the offsetting of a taxrefund with a tax deficiency

That case held that:

The grant of a refund is founded on the assumption that the tax return is valid, that is, the factsstated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said returnwhich, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund.

xxx

Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes.

Thus the Court upheld the resulting offset on the theory that the deficienciesfound in the payment of cargo revenue taxes negates the validity of thereturns on which the refund is based

Hence having underpaid its cargo revenue income taxes by 31 Million, it cannot properly claim a refund of passenger revenue income taxesamounting to only 5 Million pesos

DISPOSITION: Decision of the Court of Tax Appeals AFFIRMED


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While the grant of economic incentives may be essential to the creation and successof SEZs, free trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained.

o The incentives under R.A. No. 7227 are exclusive only to the SubicSEZ, hence, the extension of the same to the John Hay SEZ finds no support therein.

o Neither does the same grant of privileges to the John Hay SEZ find support in the other laws specified under Section 3 of Proclamation No. 420, whichlaws were already extant before the issuance of the proclamation or the

enactment of R.A. No. 7227. The nature of most of the assailed privileges is one of tax exemption . (You

know, like we havent discussed this shit for the thousandth time. But shell still ask this ofcourse, so have fun.)

o It is the legislature, unless limited by a provision of the state constitution,that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power totax.

o The challenged grant of tax exemption would circumvent theConstitutions imposition that a law granting any tax exemption must havethe concurrence of a majority of all the members of Congress. In the samevein, the other kinds of privileges extended to the John Hay SEZ are bytradition and usage for Congress to legislate upon.

The unconstitutionality of the grant of tax immunity and financial incentives ascontained in the second sentence of Section 3 of Proclamation No. 420notwithstanding , the entire assailed proclamation cannot be declaredunconstitutional , the other parts thereof not being repugnant to law or theConstitution.

o The delineation and declaration of a portion of the area covered byCamp John Hay as a SEZ was well within the powers of the President to do so by means of a proclamation.

DISPOSITIVE:This Court finds that the other provisions in Proclamation No. 420 converting adelineated portion of Camp John Hay into the John Hay SEZ are separable from theinvalid second sentence of Section 3 thereof, hence they stand.

WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is herebydeclared NULL AND VOID and is accordingly declared of no legal force and effect.

-Ice

John Hay Peoples Alternative Coalition v. Victor Lim (2005) Ivan

COCONUT OIL REFINERS ASSOCIATION vs HON. RUBEN TORRES, in his capacityas Executive Secretary; BCDA, CDC, SBMA, 88 MART DUTY FREE, FREEPORTTRADERS, PX CLUB, AMERICAN HARDWARE, ROYAL DUTY FREE SHOPS etc.

(July 29, 2005)

NOTE:CSEZ means Clark and Other Special Economic ZonesBCDA means Bases Conversion and Development Authority

DOCTRINE : In the present case , while Section 12 of Republic Act No. 7227expressly provides for the grant of incentives to the SSEZ, it fails to make anysimilar grant in favor of other economic zones, including the CSEZ. Tax andduty-free incentives being in the nature of tax exemptions, the basis thereof should be categorically and unmistakably expressed from the language of thestatute. Consequently, in the absence of any express grant of tax and duty-freeprivileges to the CSEZ in Republic Act No. 7227, there would be no legal basis touphold the questioned portions of two issuances: Section 5 of Executive Order No. 80and Section 4 of BCDA Board Resolution No. 93-05-034, which both pertain to theCSEZ.

Congress had justifiable reasons in granting incentives to the privaterespo ndents, in accordance with Republic Act No. 7227s policy of developingthe SSEZ into a self-sustaining entity that will generate employment and attract foreign and local investment . If petitioners had wanted to avoid any allegedunfavorable consequences on their profits, they should upgrade their standards of quality so as to effectively compete in the market. In the alternative, if petitionersreally wanted the preferential treatment accorded to the private respondents, theycould have opted to register with SSEZ in order to operate within the special economiczone.

Nature : Petition for Prohibition and Injunction seeking to enjoin and prohibit theExecutive Branch, through the public respondents Ruben Torres in his capacity asExecutive Secretary, the Bases Conversion Development Authority (BCDA), the Clark Development Corporation (CDC) and the Subic Bay Metropolitan Authority (SBMA),from allowing, and the private respondents from continuing with, the operation of taxand duty-free shops located at the Subic Special Economic Zone

Ponente: Azcuna, J .

FACTS :- Petitioners are suppliers of the local retailers operating outside the special

economic zones.- March 13, 1992 : Congress enacted Republic Act No. 7227 , providing for

the conversion of the Clark and Subic military reservations to specialeconomic zones in order to promote the economic and socialdevelopment of Central Luzon in particular and the country in general.

- Salient provisions of RA 7227:SECTION 12 . Subic Special Economic Zone . . . .

The abovementioned zone shall be subject to the following policies:


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(a) Within the framework and subject to the mandate and limitations of theConstitution and the pertinent provisions of the Local Government Code, theSubic Special Economic Zone shall be developed into a self-sustaining,industrial, commercial, financial and investment center to generateemployment opportunities in and around the zone and to attract and promoteproductive foreign investments;(b) The Subic Special Economic Zone shall be operated and managed as aseparate customs territory ensuring free flow or movement of goods andcapital within, into and exported out of the Subic Special Economic Zone, aswell as provide incentives such as tax and duty-free importations of rawmaterials, capital and equipment. However, exportation or removal of goodsfrom the territory of the Subic Special Economic Zone to the other parts of thePhilippine territory shall be subject to customs duties and taxes under theCustoms and Tariff Code and other relevant tax laws of the Philippines;(c) The provision of existing laws, rules and regulations to the contrarynotwithstanding, no taxes, local and national, shall be imposed within the SubicSpecial Economic Zone. In lieu of paying taxes, three percent (3%) of the grossincome earned by all businesses and enterprises within the Subic SpecialEcoomic Zone shall be remitted to the National Government, one percent (1%)each to the local government units affected by the declaration of the zone inproportion to their population area, and other factors. In addition, there ishereby established a development fund of one percent (1%) of the grossincome earned by all businesses and enterprises within the Subic SpecialEconomic Zone to be utilized for the development of municipalities outside theCity of Olangapo and the Municipality of Subic, and other municipalitiescontiguous to the base areas.

SECTION 15 . Clark and Other Special Economic Zones . Subject to theconcurrence by resolution of the local government units directly affected,the President is hereby authorized to create by executive proclamation aSpecial Economic Zone covering the lands occupied by the Clark militaryreservations and its contiguous extensions as embraced, covered and definedby the 1947 Military Bases Agreement between the Philippines and the UnitedStates of America, as amended, located within the territorial jurisdiction of Angeles City, Municipalities of Mabalacat and Porac, Province of Pampanga andthe Municipality of Capas, Province of Tarlac, in accordance with the policies asherein provided insofar as applicable to the Clark military reservations.The governing body of the Clark Special Economic Zone shall likewise beestablished by executive proclamation with such powers and functionsexercised by the Export Processing Zone Authority pursuant to PresidentialDecree No. 66 as amended.

The policies to govern and regulate the Clark Special Economic Zone shallbe determined upon consultation with the inhabitants of the localgovernment units directly affected which shall be conducted within six(6) months upon approval of this Act

- Similarly, subject to the concurrence by resolution of the local government units directly affected, the President shall create other Special Economic

Zones , in the base areas of Wallace Air Station in San Fernando, La Union(excluding areas designated for communications, advance warning and radar

requirements of the Philippine Air Force to be determined by the ConversionAuthority) and Camp John Hay in the City of Baguio.

- April 3, 1993 : President Fidel V. Ramos issued Executive Order No. 80 ,which declared that Clark shall have all the applicable incentives grantedto the Subic Special Economic and Free Port Zone under Republic Act No. 7227 .Assailed provision under EO 80:SECTION 5. Investments Climate in the CSEZ. Pursuant to Section 5(m)and Section 15 of RA 7227, the BCDA shall promulgate all necessary policies,rules and regulations governing the CSEZ, including investment incentives, inconsultation with the local government units and pertinent government departments for implementation by the CDC.

Among others, the CSEZ shall have all the applicable incentives in the SubicSpecial Economic and Free Port Zone under RA 7227 and those applicableincentives granted in the Export Processing Zones, the Omnibus InvestmentsCode of 1987, the Foreign Investments Act of 1991 and new investmentslaws which may hereinafter be enacted.

The CSEZ Main Zone covering the Clark Air Base proper shall have allthe aforecited investment incentives, while the CSEZ Sub-Zone coveringthe rest of the CSEZ shall have limited incentives. The full incentives in

the Clark SEZ Main Zone and the limited incentives in the Clark SEZ Sub-Zone shall be determined by the BCDA.

- May 18, 1993 : Pursuant to the Executive Order No. 80, the Bases Conversionand Development Authority ( BCDA) passed Board Resolution No. 93-05-034 , allowing the tax and duty-free sale at retail of consumer goodsimported via Clark for consumption outside the CSEZ.

- June 10, 1993 : President issued Executive Order No. 97, "Clarifying the Taxand Duty Free Incentive Within the Subic Special Economic Zone Pursuant toR.A. No. 7227." Said issuance in part states, thus:

SECTION 1. On Import Taxes and Duties Tax and duty-free importationsshall apply only to raw materials, capital goods and equipment brought in by business enterprises into the SSEZ . Except for these

items, importations of other goods into the SSEZ, whether bybusiness enterprises or resident individuals, are subject to taxesand duties under relevant Philippine laws.The exportation or removal of tax and duty-free goods from theterritory of the SSEZ to other parts of the Philippine territory shallbe subject to duties and taxes under relevant Philippine laws.

- June 19, 1993 : Executive Order No. 97-A was issued, "Further Clarifyingthe Tax and Duty-Free Privilege Within the Subic Special Economic and FreePort Zone."

- Petitioners assail the $100 monthly and $200 yearly tax-free shoppingprivileges granted by the aforecited provisions respectively to SSEZresidents living outside the Secured Area of the SSEZ and to Filipinos aged 15and over residing outside the SSEZ.

-

February 23, 1998 : petitioners filed the instant petition seeking thedeclaration of nullity of Executive 97.


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ISSUES + HELD :1. WON petitioner has legal standing, WON there is unreasonable delay in the

filing of the petition, WON petition is barred by laches, and WON the remedy of prohibition is proper. PROCEDURAL TECHNICALITIES BRUSHED ASIDE.

2. WON Section 5 of Executive Order No. 80; and Section 4 of BCDA BoardResolution No. 93-05-034) constitute invalid exercise of executive legislationfora. Extending the tax exemption to consumer goods. YES b. Extending the tax exemptions enjoyed by SSEZ (Subic Special Economic

Zone) to CSEZ (Clark Special Economic Zone). YES. 3. WON paragraphs 1.2 and 1.3 of Executive Order No. 97-A , are null and void

for being contrary to Section 12 of Republic Act No. 7227. YES. 4. WON Executive Order No. 97-A is violative of the right to equal protection of

the laws. NO. 5. WON the grant of special tax exemptions and privileges gave the private

respondents undue advantage over local enterprises which do not operateinside the SSEZ, thereby creating unfair competition in violation of theconstitutional prohibition against unfair competition and practices in restraint of trade. NO.

6. WON Executive Order No. 97-A openly violated the State policy of promotingthe preferential use of Filipino labor, domestic materials and locally producedgoods and adopting measures to help make them competitive. NO.

RATIO :

I. Procedural flawsAssuming that the petitioners do not suffer direct injury in the enforcement of theissuances being assailed herein, this Court has nevertheless held that in cases of paramount importance where serious constitutional questions are involved, the standingrequirements may be relaxed and a suit may be allowed to prosper even where there isno direct injury to the party claiming the right of judicial review.

In the same vein, with respect to the other alleged procedural flaws, even assuming theexistence of such defects, this Court, in the exercise of its discretion, brushes aside thesetechnicalities and takes cognizance of the petition considering the importance to thepublic of the present case and in keeping with the duty to determine

II. Executive legislation

A. Extension of tax exemption to consumer goods

Petitioner: RA. 7227 clearly limits the grant of tax incentives to the importationof raw materials, capital and equipment only, hence the following issuancesconstitute executive legislation for invalidly granting tax incentives in theimportation of consumer goods such as those being sold in the duty-free shops,pursuant to

1. An application of the legal maxim expressio unius est exclusio alterius

2. Committee Report No. 1206 submitted by the Ad Hoc Oversight Committee on Bases Conversion 2

Law contravened: Sec. 12 RA 7227 :(b) The Subic Special Economic Zone shall be operated and managed as a

separate customs territory ensuring free flow or movement of goods andcapital within, into and exported out of the Subic Special Economic Zone, aswell as provide incentives such as tax and duty-free importations of rawmaterials, capital and equipment

Assailed issuances :1. EO 97-A : Business enterprises and individuals (Filipinos and foreigners)

residing within the Secured Area are free to import raw materials, capitalgoods, equipment, and consumer items tax and duty- free

2. Board Resolution No. 93-05-034: Section 4 : The CSEZ-registeredenterprises/businesses shall be entitled to all the incentives available underR.A. No. 7227, E.O. No. 226 and R.A. No. 7042 which shall include, but not limited to, the following:

4. Tax and duty-free purchase and consumption of goods/articles (dutyfree shopping) within the CSEZ Main Zone.5. For individuals, duty-free consumer goods may be brought out of theCSEZ Main Zone into the Philippine Customs territory but not to exceedUS$200.00 per month per CDC- registered person

Committee Report No. 1206 : the setting up of duty-free stores never figured in theminds of the authors of Republic Act No. 7227 in attracting foreign investors to theformer military baselands.

BUT SC SAYS:1. Expressio unius est exclusio alterius

a. To limit the tax-free importation privilege of enterprises located insidethe special economic zone only to raw materials, capital and equipment clearly runs counter to the intention of the Legislature to create a freeport where the "free flow of goods or capital within, into, and out of thezones" is insured.

b. The maxim expressio unius est exclusio alterius, on which petitionersimpliedly rely to support their restrictive interpretation, does not applywheni. words are mentioned by way of example

It is obvious from the wording of Republic Act No. 7227,particularly the use of the phrase "such as," that theenumeration only meant to illustrate incentives that the SSEZis authorized to grant, in line with its being a free port zone.

ii. legislative intent which is manifest The records of the Senate containing the discussion of the concept

of "special economic zone" in Section 12 (a) of Republic Act No.7227 show the legislative intent that consumer goods enteringthe SSEZ which satisfy the needs of the zone and are consumed

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