3rd Batch of Cases

EVANGELISTA vs. THE COLLECTOR OF INTERNAL REVENUE and THE

COURT OF TAX APPEALS,
G.R. No. L-9996
FACTS:
This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and
Francisca Evangelista, for review of a decision of the Court of Tax Appeals
That the petitioners borrowed from their father the sum of P59,140.00 which
amount together with their personal monies was used by them for the
purpose of buying real properties. That on February 2, 1943 they bought
from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. m. including
improvements thereon for the sum of P100,000.00; this property has an
assessed value of P57,517.00 as of 1948. That on April 3, 1944 they
purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area
of 3,718.40 sq. m. including improvements thereon for P18,000.00; this
property has an assessed value of P8,255.00 as of 1948. That on April 23,
1944 they purchased from the Insular Investments, Inc., a lot of 4,358 sq. m.
including improvements thereon for P108,825.00. This property has an
assessed value of P4,983.00 as of 1943. That on April 28, 1944 they bought
from Mrs. Valentin Afable a lot of 8,371 sq. m. including improvements
thereon for P237,234.14. This property has an assessed value of P59,140.00
as of 1948. That in a document dated August 16, 1945, they appointed their
brother Simeon Evangelista to 'manage their properties with full power to
lease; to collect and receive rents; to issue receipts therefor; in default of
such payment, to bring suits against the defaulting tenant; to sign all letters,
contracts, etc., for and in their behalf, and to endorse and deposit all notes
and checks for them.
That after having bought the above-mentioned real properties, the
petitioners had the same rented or leased to various tenants wherein income
were derive there from.
It further appears that on September 24, 1954, respondent Collector of
Internal Revenue demanded the payment of income tax on corporations, real
estate dealer's fixed tax and corporation residence tax for the years 19451949, computed, according to the assessments made by said officer. The
TOTAL TAXES DUE is P6,878.34.

Said letter of demand and the corresponding assessments were delivered to

petitioners on December 3, 1954, whereupon they instituted the present
case in the Court of Tax Appeals, with a prayer that "the decision of the
respondent contained in his letter of demand dated September 24, 1954" be
reversed, and that they be absolved from the payment of the taxes in
question, with costs against the respondent.
After appropriate proceedings, the Court of Tax Appeals rendered the abovementioned decision for the respondent, and, a petition for reconsideration
and new trial having been subsequently denied.
ISSUE:
The issue in this case is whether petitioners are subject to the tax on
corporations as well as to the residence tax for corporations and the real
estate dealers' fixed tax.
HELD:
TAXATION; TAX ON CORPORATIONS INCLUDES ORGANIZATION WHICH ARE
NOT NECESSARY PARTNERSHIP. "Corporations" strictly speaking are
distinct and different from "partnership". When our Internal Revenue Code
includes "partnership" among the entities subject to the tax on
"corporations", it must be allude to organization which are not necessarily
"partnership" in the technical sense of the term.
As defined in section 84 (b) of the Internal Revenue Code "the term
corporation includes partnership, no matter how created or organized." This
qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standards form, or conformity with the usual
requirements of the law on partnerships, in order that one could be deemed
constituted for the purposes of the tax on corporations.
CORPORATIONS INCLUDES "JOINT ACCOUNT" AND ASSOCIATIONS WITHOUT
LEGAL PERSONALITY. Pursuant to Section 84 (b) of the Internal Revenue
Code, the term "corporations" includes, among the others, "joint accounts
(cuenta en participacion)" and "associations", none of which has a legal
personality of its own independent of that of its members. For purposes of
the tax on corporations, our National Internal Revenue Code includes these
partnership. with the exception only of duly registered general
partnership. within the purview of the term "corporations." Held: That the
petitioners in the case at bar, who are engaged in real estate transactions for
monetary gain and divide the same among themselves, constitute a
partnership, so far as the said Code is concerned, and are subject to the
income tax for the corporation.

CORPORATION; PARTNERSHIP WITHOUT LEGAL PERSONALITY SUBJECT TO

RESIDENCE TAX ON CORPORATION. The pertinent part of the provision of
Section 2 of Commonwealth Act No. 465 which says: "The term corporation
as used in this Act includes joint-stock company, partnership, joint account
(cuentas en participacion), association or insurance company, no matter how
created or organized." is analogous to that of Section 24 and 84 (b) of our
Internal Revenue Code which was approved the day immediately after the
approval of said Commonwealth Act No. 565. Apparently, the terms
"corporation" and "Partnership" are used both statutes with substantially the
same meaning, Held: That the petitioners are subject to the residence tax
corporations.
Wherefore, the appealed decision of the Court of Tax Appeals is hereby
affirmed with costs against the petitioners herein. It is so ordered

*CLYDEs Part
*JACILDOs Part
*JAMONERs Part
*JUDILLAS PART

CIR V. PHILIPPINE AIRLINES, INC.

G.R. No. 18006
Topic: INCOME TAX Minimum Income Tax
FACTS:
PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have
been liable for Minimum Corporate Income Tax based on its gross income.
However, PHILIPPINE AIRLINES, INC. did not pay the Minimum Corporate
Income Tax using as basis its franchise which exempts it from all other
taxes upon payment of whichever is lower of either (a) the basic corporate
income tax based on the net taxable income or (b) a franchise tax of 2%.
ISSUE:
Is PAL liable for Minimum Corporate Income Tax?

HELD:
NO. PHILIPPINE AIRLINES, INC.s franchise clearly refers to "basic corporate
income tax" which refers to the general rate of 35% (now 30%). In addition,
there is an apparent distinction under the Tax Code between taxable income,
which is the basis for basic corporate income tax under Sec. 27 (A) and gross
income, which is the basis for the Minimum Corporate Income Tax under
Section 27 (E). The two terms have their respective technical meanings and
cannot be used interchangeably. Not being covered by the Charter which
makes PAL liable only for basic corporate income tax, then Minimum
Corporate Income Tax is included in "all other taxes" from which PHILIPPINE
AIRLINES, INC. is exempted.
The CIR also can not point to the Substitution Theory which states that
Respondent may not invoke the in lieu of all other taxes provision if it did
not pay anything at all as basic corporate income tax or franchise tax. The
Court ruled that it is not the fact tax payment that exempts Respondent but
the exercise of its option. The Court even pointed out the fallacy of the
argument in that a measly sum of one peso would suffice to exempt PAL from
other taxes while a zero liability would not and said that there is really no
substantial distinction between a zero tax and a one-peso tax liability. Lastly,
the Revenue Memorandum Circular stating the applicability of the MCIT to
PAL does more than just clarify a previous regulation and goes beyond mere
internal administration and thus cannot be given effect without previous
notice or publication to those who will be affected thereby.

COMMISSIONER OF INTERNAL REVENUE vs. ST. LUKE'S MEDICAL

CENTER, INC.
G.R. No. 195909.
FACTS:
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a nonstock and non-profit corporation. Under its articles of incorporation, one its
corporate purpose is to establish, equip, operate and maintain a non-stock,
non-profit Christian, benevolent, charitable and scientific hospital which shall
give curative, rehabilitative and spiritual care to the sick, diseased and
disabled persons provided that purely medical and surgical services shall be
performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;
The Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to P76,063,116.06 for 1998, comprised of deficiency income tax,
value-added tax, withholding tax on compensation and expanded

withholding tax. St. Luke's filed an administrative protest with the BIR
against the deficiency tax assessments. The BIR did not act on the protest
within the 180-day period under Section 228 of the NIRC. Thus, St. Luke's
appealed to the CTA.
Argument of St. Lukes:
St. Luke's maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes under Section 30(E) and (G) of the
NIRC. It argued that the making of profit per se does not destroy its income
tax exemption.
Argument of BIR:
According to the BIR, Section 27(B), introduced in 1997, "is a new provision
intended to amend the exemption on non-profit hospitals that were
previously categorized as non-stock, non-profit corporations under Section
26 of the 1997 Tax Code
The Ruling of the Court of Tax Appeals
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby
PARTIALLY GRANTED. Accordingly, the 1998 deficiency VAT assessment
issued by respondent against petitioner in the amount of P110,000.00 is
hereby CANCELLED and WITHDRAWN. However, petitioner is hereby
ORDERED to PAY deficiency income tax and deficiency expanded withholding
tax for the taxable year 1998 in the respective amounts of P5,496,963.54
and P778,406.84 or in the sum of P6,275,370.38
Hence, CIR filed this petition.
ISSUE:
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998
under Section 27 (B) of the NIRC, which imposes a preferential tax rate of
10% on the income of proprietary non-profit hospitals.
RULING:
This Court resolves this case on a pure question of law, which involves the
interpretation of Section 27 (B) vis- -vis Section 30 (E) and (G) of the
National Internal Revenue Code of the Philippines (NIRC), on the income tax
treatment of proprietary non-profit hospitals.
Argument of BIR (reiterated its argument before the CTA):
According to the BIR, Section 27(B), introduced in 1997, "is a new provision
intended to amend the exemption on non-profit hospitals that were

previously categorized as non-stock, non-profit corporations under Section

26 of the 1997 Tax Code.
The 10% income tax rate under Section 27(B) specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals.
SEC. 27. Rates of Income Tax on Domestic Corporations. (B) Proprietary Educational Institutions and Hospitals. - Proprietary
educational institutions and hospitals which are non-profit shall pay a tax of
ten percent (10%) on their taxable income except those covered by
Subsection (D) (TAKE NOTE: D refers to passive income) hereof:
Provided, That if the gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, the term 'unrelated trade, business or other
activity' means any trade, business or other activity, the conduct of which is
not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function.
Argument of St. Lukes:
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It
contends that it is a charitable institution and an organization promoting
social welfare; the arguments of St. Luke's focus on the wording of Section
30(E) exempting from income tax non-stock, non-profit charitable
institutions.
SECTION 30. Exemptions from Tax on Corporations - The following
organizations shall not be taxed under this Title in respect to income
received by them as such:
(E) Nonstock corporation or association organized and operated exclusively
for religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any specific person;
(G) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;
XXXX
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for
profit regardless of the disposition made of such income, shall be subject to
tax imposed under this Code.
The Court partly grants the petition of the BIR but on a different ground.

We hold that Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section 30(E) and (G).
Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can
be construed together without the removal of such tax exemption.
The effect of the introduction of Section 27(B) is to subject the taxable
income of two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals, which are
among the institutions covered by Section 30, to the 10% preferential rate
under Section 27(B) instead of the ordinary 30% corporate rate under the
last paragraph of Section 30 in relation to Section 27(A)(1).
RATIONALE FOR THE RULING:
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income
of
(1) proprietary non-profit educational institutions and
(2) proprietary non-profit hospitals.
The only qualifications for hospitals are that they must be proprietary and
non-profit.
Proprietary means private, following the definition of a "proprietary
educational institution" as "any private school maintained and administered
by private individuals or groups" with a government permit.
Non-profit" means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.
An organization may be considered as non-profit if it does not distribute any
part of its income to stockholders or members. However, despite its being a
tax exempt institution, any income such institution earns from activities
conducted for profit is taxable, as expressly provided in the last paragraph of
Section 30 Charity is essentially a gift to an indefinite number of persons
which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would
otherwise fall on the shoulders of government. Thus, as a matter of
efficiency, the government forgoes taxes which should have been spent to
address public needs, because certain private entities already assume a part
of the burden. This is the rationale for the tax exemption of charitable
institutions.
As a general principle, a charitable institution does not lose its character as
such and its exemption from taxes simply because it derives income from
paying patients, whether out-patient, or confined in the hospital, or receives

subsidies from the government, so long as the money received is devoted or

used altogether to the charitable object which it is intended to achieve; and
no money inures to the private benefit of the persons managing or operating
the institution.
The Constitution exempts charitable institutions only from real property
taxes. In the NIRC, Congress decided to extend the exemption to income
taxes.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must
be devoted "exclusively" for charitable purposes.
However, under Lung Center, any profit by a charitable institution must not
only be plowed back as income but must be "devoted or used altogether to
the charitable object which it is intended to achieve."
There is no dispute that St. Luke's is organized as a non-stock and non-profit
charitable institution. However, this does not automatically exempt St. Luke's
from paying taxes. This only refers to the organization of St. Luke's. Even if
St. Luke's meets the test of charity, a charitable institution is not ipso facto
tax exempt.
1. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually,
directly and exclusively" for charitable purposes.
2. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for
charitable purposes.
3. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC
requires that the institution be "operated exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words
"organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for
profit regardless of the disposition made of such income, shall be subject to

tax imposed under this Code. In short, the last paragraph of Section 30
provides that if a tax exempt charitable institution conducts "any" activity for
profit, such activity IS SUBJECT TO TAX even as its not-for-profit activities
remain tax exempt.
Thus, even if the charitable institution must be "organized and operated
exclusively" for charitable purposes, it is nevertheless allowed to engage in
"activities conducted for profit" without losing its tax exempt status for its
not-for-profit activities.
The only consequence is that the "income of
whatever kind and character" of a charitable institution "from any of its
activities conducted for profit, regardless of the disposition made of such
income, shall be subject to tax." Prior to the introduction of Section 27(B),
the tax rate on such income from for-profit activities was the ordinary
corporate rate of 30% under Section 27(A). With the introduction of Section
27(B), the tax rate is now 10%.
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R.
No. 195909 is PARTLY GRANTED.
Commissioner of Internal Revenue vs. Citytrust Investment Phils.,
Inc., G.R. No. 139786
Asian Bank Corporation vs CIR G.R. No. 140857
FACTS:
Case is about conflicting decisions regarding the inclusion of the twenty
percent (20%) final withholding tax (FWT) on a banks passive income form
part of the taxable gross receipts for the purpose of computing the five
percent (5%) gross receipts tax (GRT).
On January 30, 1996, the CTA, in Asian Bank Corporation v. Commissioner of
Internal Revenue (ASIAN BANK case), ruled that the basis in computing the
5% GRT is the gross receipts minus the 20% FWT. In other words, the 20%
FWT on a banks passive income does not form part of the taxable gross
receipts.
On the strength of the above-mentioned case City Trust and Asian Bank Corp
filed for petition for review with the CTA, which allowed for a refund of the
5% GRT they paid on the portion of 20% FWT.
CIR appealed the CTA decision. CA affirmed the CTA decision on Citytrust but
reversed the CTA decision on Asian Bank
ISSUES:

1. Does the twenty percent (20%) final withholding tax (FWT) on a banks
passive income form part of the taxable gross receipts for the purpose of
computing the five percent (5%) gross receipts tax (GRT)?
2. Would inclusion of the 20% FWT in the gross receipt constitute double
taxation?
RULING:
1. Interest income, whether actually received or merely accrued
(income received + amount withheld representing 20% FWT),
form part of the banks taxable gross receipts
A catena of cases decided by the SC is unanimous in defining gross
receipts as the entire receipts without any deduction.
Citytrust and Asian Bank simply anchor their argument on Section 4(e) of
Revenue Regulations No. 12-80 stating that the rates of taxes to be
imposed on the gross receipts of such financial institutions shall be based on
all items of income actually received. They contend that since the 20%
FWT is withheld at source, the same cannot be considered actually
received, hence, must be excluded from the taxable gross receipts.
However, Revenue Regulations No. 12-80, had been superseded by Revenue
Regulations No. 17-84, which includes all interest income (whether actual
or accrued) in computing the GRT.
In Bank of Commerce (G.R. No. 149636, June 8, 2005), the court held that
actual receipt may either be physical receipt or constructive receipt, thus:
When the depositary bank withholds the final tax to pay the tax liability
of the lending bank, there is prior to the withholding a constructive
receipt by the lending bank of the amount withheld. Thus, the
interest income actually received by the lending bank, both
physically and constructively, is the net interest plus the
amount withheld as final tax.
Because the amount withheld belongs to the taxpayer, he can transfer
its ownership to the government in payment of his tax liability. The
amount withheld indubitably comes from the income of the
taxpayer, and thus forms part of his gross receipts.
Both Asian bank and Citytrust rely on Manila Jockey Club, but what happened there
is earmarking and not withholding.
It was held that the gross receipts of the Manila Jockey Club should not include the
5% which went to the Board on Races and to the owners of horses and jockeys,
although delivered to the Club.

Amounts earmarked do not form part of gross receipts because these are by law or
regulation reserved for some person other than the taxpayer, although delivered or
received. On the contrary, amounts withheld form part of gross receipts because
these are in constructive possession and not subject to any reservation. The
distinction was explained in Solidbank, thus:

The Manila Jockey Club had to deliver to the Board on Races, horse
owners and jockeys amounts that never became the property of
the race track (Manila Jockey Club merely held that these amounts
were held in trust and did not form part of gross receipts). Unlike
these amounts, the interest income that had been withheld for
the government became property of the financial institutions
upon constructive possession thereof.
It is ownership that determines whether interest income forms
part of taxable gross receipts being originally owned by these
financial institutions as part of their interest income, the FWT
should form part of their taxable gross receipts.
2. The imposition of the 20% FWT and 5% GRT does not constitute
double taxation.
Double taxation means taxing for the same tax period the same thing or
activity twice, when it should be taxed but once, for the same purpose and
with the same kind of character of tax. This is not the situation in the case at
bar. The GRT is a percentage tax under Title V of the Tax Code ([Section
121], Other Percentage Taxes), while the FWT is an income tax under Title II
of the Code (Tax on Income).
The two concepts are different from each
other.
In fine, let it be stressed that tax exemptions are highly disfavored. It is a
governing principle in taxation that tax exemptions are to be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority and should be granted only by clear and unmistakable terms.

MARUBENI CORPORATION
Ltd.) vs. CIR

(formerly

Marubeni

Iida,

Co.,

G.R. No. 76573.

FACTS:
Petitioner Marubeni s a foreign corporation duly organized under the existing
laws of Japan and duly licensed to engage in business under Philippine laws.
Marubeni of Japan has equity investments in Atlantic Gulf & Pacific Co. of
Manila.

AG&P declared and directly remitted the cash dividends to Marubenis head
office in Tokyo net of the final dividend tax and withholding profit remittance
tax.
Thereafter, Marubeni, through SGV, sought a ruling from the BIR on whether
or not the dividends it received from AG&P are effectively connected with its
business in the Philippines as to be considered branch profits subject to profit
remittance tax.
The Acting Commissioner ruled that the dividends received by Marubeni are
not income from the business activity in which it is engaged. Thus, the
dividend if remitted abroad are not considered branch profits subject to profit
remittance tax.
Pursuant to such ruling, petitioner filed a claim for refund for the profit tax
remittance erroneously paid on the dividends remitted by AG& P.
Respondent Commissioner denied the claim. It ruled that since Marubeni is a
non resident corporation not engaged in trade or business in the Philippines
it shall be subject to tax on income earned from Philippine sources at the
rate of 35% of its gross income.
On the other hand, Marubeni contends that, following the principal-agent
relationship theory, Marubeni Japan is a resident foreign corporation subject
only to final tax on dividends received from a domestic corporation.

ISSUE:
Whether or not Marubeni Japan is a resident foreign corporation.
HELD:
No. The general rule is a foreign corporation is the same juridical entity as its
branch office in the Philippines . The rule is based on the premise that the
business of the foreign corporation is conducted through its branch office,
following the principal-agent relationship theory. It is understood that the
branch becomes its agent.
However, when the foreign corporation transacts business in the Philippines
independently of its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the branch or the
resident foreign corporation.
Thus, the alleged overpaid taxes were incurred for the remittance of dividend
income to the head office in Japan which is considered as a separate and
distinct income taxpayer from the branch in the Philippines.

THE MANILA WINE MERCHANTS, INC. v. CIR

G.R. No. L-26145.
FACTS:
"Petitioner, a domestic corporation organized in 1937, is principally engaged
in the importation and sale of whisky, wines, liquors and distilled spirits. Its
original subscribed and paid capital was P500,000.00. Its capital of
P500,000.00 was reduced to P250,000.00 in 1950 with the approval of the
Securities and Exchange Commission but the reduction of the capital was
never implemented. On June 21, 1958, petitioners capital was increased to
P1,000,000.00 with the approval of the said Commission.
On December 31, 1957, herein respondent caused the examination of herein
petitioners book of account and found the latter of having unreasonably
accumulated surplus of P428,934.32 for the calendar year 1947 to 1957, in
excess of the reasonable needs of the business subject to the 25% surtax
imposed by Section 25 of the Tax Code.
On February 26, 1963, the Commissioner of Internal Revenue demanded
upon the Manila Wine Merchants, Inc. payment of P126,536.12 as 25%
surtax and interest on the latters unreasonable accumulation of profits and
surplus for the year 1957
Respondent contends that petitioner has accumulated earnings beyond the
reasonable needs of its business because the average ratio of the cash
dividends declared and paid by petitioner from 1947 to 1957 was 40.33% of
the total surplus available for distribution at the end of each calendar year.
On the other hand, petitioner contends that in 1957, it distributed 100% of
its net earnings after income tax and part of the surplus for prior years.
Respondent further submits that the accumulated earnings tax should be
based on 25% of the total surplus available at the end of each calendar year
while petitioner maintains that the 25% surtax is imposed on the total
surplus or net income for the year after deducting therefrom the income tax
due.
The records show the following analysis of petitioners net income, cash
dividends and earned surplus for the years 1946 to 1957:
Another basis of respondent in assessing petitioner for accumulated earnings
tax is its substantial investment of surplus or profits in unrelated business.
These investments are itemized as follows:
As to the investment of P27,501.00 made by petitioner in the Acme
Commercial Co., Inc., Mr. N.R.E. Hawkins, president of the petitioner
corporation 2 explained as follows:
The first item consists of shares of Acme Commercial Co., Inc. which the
Company acquired in 1947 and 1949. In the said years, we thought it

prudent to invest in a business which patronizes us. As a supermarket, Acme

Commercial Co., Inc. is one of our best customers. The investment has
proven to be beneficial to the stockholders of this Company. As an example,
the Company received cash dividends in 1961 totalling P16,875.00 which
was included in its income tax return for the said year.
As to the investments of petitioner in Union Insurance Society of Canton and
Wack Wack Golf Club in the sums of P1,145.76 and P1.00, respectively, the
same official of the petitioner-corporation stated that:
The second and fourth items are small amounts which we believe would not
affect this case substantially. As regards the Union Insurance Society of
Canton shares, this was a pre-war investment, when Wise & Co., Inc., Manila
Wine Merchants and the said insurance firm were common stockholders of
the Wise Bldg. Co.,, Inc. and the three companies were all housed in the
same building. Union Insurance invested in Wise Bldg. Co., Inc. but invited
Manila Wine Merchants, Inc. to buy a few of its shares.
As to the U.S.A. Treasury Bonds amounting to P347,217.50, Mr. Hawkins
explained as follows:
With regards to the U.S.A. Treasury Bills in the amount of P347,217.50, in
1950, our balance sheet for the said year shows the Company had deposited
in current account in various banks P629,403.64 which was not earning any
interest. We decided to utilize part of this money as reserve to finance our
importations and to take care of future expansion including acquisition of a
lot and the construction of our own office building and bottling plant.
At that time, we believed that a dollar reserve abroad would be useful to the
Company in meeting immediate urgent orders of its local customers. In order
that the money may earn interest, the Company, on May 31, 1951 purchased
US Treasury bills with 90-day maturity and earning approximately 1% interest
with the face value of US$175,000.00. US Treasury Bills are easily convertible
into cash and for the said reason they may be better classified as cash rather
than investments.
The Treasury Bills in question were held as such for many years in view of our
expectation that the Central Bank inspite of the controls would allow nodollar licenses importations. However, since the Central Bank did not relax its
policy with respect thereto, we decided sometime in 1957 to hold the bills for
a few more years in view of our plan to buy a lot and construct a building of
our own. According to the lease agreement over the building formerly
occupied by us in Dasmarias St., the lease was to expire sometime in 1957.
At that time, the Company was not yet qualified to own real property in the
Philippines. We therefore waited until 60% of the stocks of the Company
would be owned by Filipino citizens before making definite plans. Then in
1959 when the Company was already more than 60% Filipino owned, we
commenced looking for a suitable location and then finally in 1961, we

bought the man lot with an old building on Otis St., Paco, our present site, for
P665,000.00. Adjoining smaller lots were bought later. After the purchase of
the main property, we proceeded with the remodelling of the old building
and the construction of additions, which were completed at a cost of
P143,896.00 in April, 1962.
In view of the needs of the business of this Company and the purchase of the
Otis lots and the construction of the improvements thereon, most of its
available funds including the Treasury Bills had been utilized, but inspite of
the said expenses the Company consistently declared dividends to its
stockholders. The Treasury Bills were liquidated on February 15, 1962.
Respondent found that the accumulated surplus in question were invested to
unrelated business which were not considered in the immediate needs of
the Company such that the 25% surtax be imposed therefrom."
Petitioner appealed to the Court of Tax Appeals.
On the basis of the tabulated figures, supra, the Court of Tax Appeals found
that the average percentage of cash dividends distributed was 85.77% for a
period of 11 years from 1946 to 1957 and not only 40.33% of the total
surplus available for distribution at the end of each calendar year actually
distributed by the petitioner to its stockholders, which is indicative of the
view that the Manila Wine Merchants, Inc. was not formed for the purpose of
preventing the imposition of income tax upon its shareholders.
With regards to the alleged substantial investment of surplus or profits in
unrelated business, the Court of Tax Appeals held that the investment of
petitioner with Acme Commercial Co., Inc., Union Insurance Society of
Canton and with the Wack Wack Golf and Country Club are harmless
accumulation of surplus and, therefore, not subject to the 25% surtax
provided in Section 25 of the Tax Code.
As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of Tax
Appeals ruled that its purchase was in no way related to petitioners business
of importing and selling wines, whisky, liquors and distilled spirits.
Respondent Court was convinced that the surplus of P347,217.50 which was
invested in the U.S.A. Treasury Bonds was availed of by petitioner for the
purpose of preventing the imposition of the surtax upon petitioners
shareholders by permitting its earnings and profits to accumulate beyond the
reasonable needs of business. Hence, the Court of Tax Appeals modified
respondents decision by imposing upon petitioner the 25% surtax for 1957
only in the amount of P86,804.38
ISSUES:
(1) whether the purchase of the U.S.A. Treasury bonds by petitioner in 1951
can be construed as an investment to an unrelated business and hence, such
was availed of by petitioner for the purpose of preventing the imposition of

the surtax upon petitioners shareholders by permitting its earnings and

profits to accumulate beyond the reasonable needs of the business, and if
so,
(2) whether the penalty tax of twenty-five percent (25%) can be imposed on
such improper accumulation in 1957 despite the fact that the accumulation
occurred in 1951.
HELD:
The pertinent provision of the National Internal Revenue Code reads as
follows:
"Sec. 25. Additional tax on corporations improperly accumulating profits or
surplus. (a) Imposition of Tax. If any corporation, except banks,
insurance companies, or personal holding companies whether domestic or
foreign, is formed or availed of for the purpose of preventing the imposition
of the tax upon its shareholders or members or the shareholders or members
of another corporation, through the medium of permitting its gains and
profits to accumulate instead of being divided or distributed, there is levied
and assessed against such corporation, for each taxable year, a tax equal to
twenty-five per centum of the undistributed portion of its accumulated profits
or surplus which shall be in addition to the tax imposed by section twentyfour and shall be computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties, as that tax:
Provided, that no such tax shall be levied upon any accumulated profits or
surplus, if they are invested in any dollar-producing or dollar-saving industry
or in the purchase of bonds issued by the Central Bank of the Philippines.
(c) Evidence determinative of purpose. The fact that the earnings of profits
of a corporation are permitted to accumulate beyond the reasonable needs
of the business shall be determinative of the purpose to avoid the tax upon
its shareholders or members unless the corporation, by clear preponderance
of evidence, shall prove the contrary." (As amended by Republic Act No.
1823)
A prerequisite to the imposition of the tax has been that the corporation be
formed or availed of for the purpose of avoiding the income tax (or surtax)
on its shareholders, or on the shareholders of any other corporation by
permitting the earnings and profits of the corporation to accumulate instead
of dividing them among or distributing them to the shareholders. If the
earnings and profits were distributed, the shareholders would be required to
pay an income tax thereon whereas, if the distribution were not made to
them, they would incur no tax in respect to the undistributed earnings and
profits of the corporation. 8 The touchstone of liability is the purpose behind
the accumulation of the income and not the consequences of the
accumulation. 9 Thus, if the failure to pay dividends is due to some other
cause, such as the use of undistributed earnings and profits for the

reasonable needs of the business, such purpose does not fall within the
interdiction of the statute.
An accumulation of earnings or profits (including undistributed earnings or
profits of prior years) is unreasonable if it is not required for the purpose of
the business, considering all the circumstances of the case.
In purchasing the U.S.A. Treasury Bonds, in 1951, petitioner argues that
these bonds were so purchased (1) in order to finance their importation; and
that a dollar reserve abroad would be useful to the Company in meeting
urgent orders of its local customers and (2) to take care of future expansion
including the acquisition of a lot and the construction of their office building
and bottling plant.
We find no merit in the petition.
To avoid the twenty-five percent (25%) surtax, petitioner has to prove that
the purchase of the U.S.A. Treasury Bonds in 1951 with a face value of
$175,000.00 was an investment within the reasonable needs of the
Corporation.
To determine the "reasonable needs" of the business in order to justify an
accumulation of earnings, the Courts of the United States have invented the
so-called "Immediacy Test" which construed the words "reasonable needs of
the business" to mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an immediate need for
the accumulation of the earnings and profits, the accumulation was not for
the reasonable needs of the business, and the penalty tax would apply. 12
American cases likewise hold that investment of the earnings and profits of
the corporation in stock or securities of an unrelated business usually
indicates an accumulation beyond the reasonable needs of the business.
The finding of the Court of Tax Appeals that the purchase of the U.S.A.
Treasury bonds were in no way related to petitioners business of importing
and selling wines whisky, liquors and distilled spirits, and thus construed as
an investment beyond the reasonable needs of the business 14 is binding on
Us, the same being factual. 15 Furthermore, the wisdom behind thus finding
cannot be doubted
The records further reveal that from May 1951 when petitioner purchased
the U.S.A. Treasury shares, until 1962 when it finally liquidated the same, it
(petitioner) never had the occasion to use the said shares in aiding or
financing its importation. This militates against the purpose enunciated
earlier by petitioner that the shares were purchased to finance its
importation business. To justify an accumulation of earnings and profits for
the reasonably anticipated future needs, such accumulation must be used
within a reasonable time after the close of the taxable year.

Petitioner advanced the argument that the U.S.A. Treasury shares were held
for a few more years from 1957, in view of a plan to buy a lot and construct a
building of their own; that at that time (1957), the Company was not yet
qualified to own real property in the Philippines, hence it (petitioner) had to
wait until sixty percent (60%) of the stocks of the Company would be owned
by Filipino citizens before making definite plans.

These arguments of petitioner indicate that it considers the U.S.A. Treasury

shares not only for the purpose of aiding or financing its importation but
likewise for the purpose of buying a lot and constructing a building thereon in
the near future, but conditioned upon the completion of the 60% citizenship
requirement of stock ownership of the Company in order to qualify it to
purchase and own a lot. The time when the company would be able to
establish itself to meet the said requirement and the decision to pursue the
same are dependent upon various future contingencies. Whether these
contingencies would unfold favorably to the Company and if so, whether the
Company would decide later to utilize the U.S.A. Treasury shares according to
its plan, remains to be seen. From these assertions of petitioner, We cannot
gather anything definite or certain. This, We cannot approve.
In order to determine whether profits are accumulated for the reasonable
needs of the business as to avoid the surtax upon shareholders, the
controlling intention of the taxpayer is that which is manifested at the time
of accumulation not subsequently declared intentions which are merely the
product of afterthought. 19 A speculative and indefinite purpose will not
suffice. The mere recognition of a future problem and the discussion of
possible and alternative solutions is not sufficient. Definiteness of plan
coupled with action taken towards its consummation are essential. 20 The
Court of Tax Appeals correctly made the following ruling:
"As to the statement of Mr. Hawkins in Exh. "B" regarding the expansion
program of the petitioner by purchasing a lot and building of its own, we find
no justifiable reason for the retention in 1957 or thereafter of the US Treasury
Bonds which were purchased in 1951.
"Moreover, if there was any thought for the purchase of a lot and building for
the needs of petitioners business, the corporation may not with impunity
permit its earnings to pile up merely because at some future time certain
outlays would have to be made. Profits may only be accumulated for the
reasonable needs of the business, and implicit in this is further requirement
of a reasonable time.
Finally, petitioner asserts that the surplus profits allegedly accumulated in
the form of U.S.A. Treasury shares in 1951 by it (petitioner) should not be
subject to the surtax in 1957. In other words, petitioner claims that the

surtax of 25% should be based on the surplus accumulated in 1951 and not
in 1957.
This is devoid of merit.
The rule is now settled in Our jurisprudence that undistributed earnings or
profits of prior years are taken into consideration in determining
unreasonable accumulation for purposes of the 25% surtax.
In determining whether accumulations of earnings or profits in a particular
year are within the reasonable needs of a corporation, it is necessary to take
into account prior accumulations, since accumulations prior to the year
involved may have been sufficient to cover the business needs and
additional accumulations during the year involved would not reasonably be
necessary."

WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of Tax

Appeals is AFFIRMED in toto, with costs against petitioner.

*LULUS PART

CIR vs. CA, CTA and YMCA

G.R. No. 124043.
FACTS:
The Commissioner of Internal Revenue filed a petition for review on certiorari
assailing the decision of the Court of Appeals affirming the initial rulings of
the CTA in allowing YMCA to claim tax exemption from the lease of its real
property.
YMCA is a non-stock, non-profit institution. Being such, on the year 1980 it
earned the following as rent income: (1) P676,829.80 for leasing its premises
to small shop owners like canteen operators. (2) P44,259 as parking fees
collected from non-members.
In 1984, the CIR assessed YMCA for a total amount of P415,615.01
representing including surcharge and interest, for deficiency income tax,
deficiency expanded withholding taxes on rentals and professional fees and
deficiency withholding tax on wages.
YMCA in response filed a letter protest with the CIR, one which the latter
denied. Aggrieved, YMCA filed a petition for review with the CTA which ruled
in its favor, ruling that the canteen operations and parking were reasonably
necessary for the accomplishment of the objectives of the YMCA.

The CIR then appealed to the Court of Appeals which initially reversed the
decision of the CTA. But upon motion for reconsideration, the CA reversed
itself and again ruled in favor of YMCA adopting the ratio of the CTA.
ISSUE:
(1) Whether or not the collection or earnings of rental income from the lease
of certain premises and income earned from parking fees shall fall under the
last paragraph of Section 27 (Now section 30) of the National Internal
Revenue Code of 1977, as amended

RULING:
NO. Because taxes are the lifeblood of the nation, the Court has always
applied the doctrine of strict interpretation in construing tax exemptions.
Furthermore, a claim of statutory exemption from taxation should be
manifest and unmistakable from the language of the law on which it is
based. Thus, the claimed exemption "must expressly be granted in a statute
stated in a language too clear to be mistaken." In the instant case, the
exemption claimed by the YMCA is expressly disallowed by the very wording
of the last paragraph of then Section 27 of the NIRC which mandates that the
income of exempt organizations (such as the YMCA) from any of their
properties, real or personal, be subject to the tax imposed by the same Code.
Because the last paragraph of said section unequivocally subjects to tax the
rent income of the YMCA from its real property, the Court is duty-bound to
abide strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction. It is axiomatic that where the language
of the law is clear and unambiguous, its express terms must be applied.
Parenthetically, a consideration of the question of construction must not
even begin, particularly when such question is on whether to apply a strict
construction or a liberal one on statutes that grant tax exemptions to
"religious, charitable and educational propert[ies] or institutions." The phrase
"any of their activities conducted for profit" does not qualify the word
"properties." This makes income from the property of the organization
taxable, regardless of how that income is used whether for profit or for
lofty non-profit purposes. Verba legis non est recedendum. Hence,
Respondent Court of Appeals committed reversible error when it allowed, on
reconsideration, the tax exemption claimed by YMCA on income it derived
from renting out its real property, on the solitary but unconvincing ground
that the said income is not collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental income is taxable
regardless of whence such income is derived and how it is used or disposed
of. Where the law does not distinguish, neither should we.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE
ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-

administrators Lorna Kapunan and Mario Luza

Bautista, respondents.
Facts:
The President of CIC Benigno Toda sold to Rafael A. Altonaga a
commercial building known as Cibles Building situated in two parcels of land
for P100 million, who, in turn, sold the same property on the same day to
Royal Match Inc. (RMI) for P200 million evidenced by Deeds of Absolute Sale
notarized on the same day by the same notary public. For the sale of the
property to RMI, Altonaga paid capital gains tax in the amount of P10 million.
On 16 April 1990, CIC filed its corporate annual income tax return for
the year 1989, declaring, among other things, its gain from the sale of real
property. After crediting withholding taxes it paid its net taxable income of
P75,987,725. Subsequently in 1990, Toda sold his entire shares of stocks in
CIC to Le Hun T. Choa. Three and a half years later, Toda died.
A Notice of Assessment was sent to the new CIC on March 29, 1994 by
the Commissioner of Internal Revenue for deficiency income tax arising from
the alleged simulated sale of the building. The new CIC asked for
reconsideration, asserting that the assessment should be directed against
the old CIC.
Upon receipt by the Estate of Toda the Notice of Assessment, it
thereafter filed a protest. The Commissioner dismissed the protest, stating
that a fraudulent scheme was deliberately perpetuated by the CIC wholly
owned and controlled by Toda by covering up the additional gain of P100
million.
In the CTA, the Estate interposed that the inference of fraud of the sale
of the properties is unreasonable and unsupported; and that the right of the
Commissioner to assess CIC had already prescribed. The Commissioner on its
part said that the two transactions actually constituted a single sale of the
property by CIC to RMI, and that Altonaga was neither the buyer of the
property from CIC nor the seller of the same property to RMI. The additional
gain of P100 million (the difference between the second simulated sale for
P200 million and the first simulated sale for P100 million) realized by CIC was
taxed at the rate of only 5% purportedly as capital gains tax of Altonaga,
instead of at the rate of 35% as corporate income tax of CIC. Since such
falsity or fraud was discovered by the BIR only on 8 March 1991, the
assessment issued on 9 January 1995 was well within the prescriptive period.
The CTA held that the Commissioner failed to prove that CIC committed fraud
to deprive the government of the taxes due it and the government's right to
assess CIC prescribed on 15 April 1993. The Court of Appeals affirmed the
decision of the CTA. Hence, this petition.

Issues: 1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the
year 1989 prescribed?
3. Can respondent Estate be held liable for the deficiency income
tax of CIC for the year 1989, if any?
Ruling:
1. Tax avoidance and tax evasion are the two most common ways used by
taxpayers in escaping from taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion, on the other hand, is
a scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors: (1) the end to be
achieved, i.e., the payment of less than that known by the taxpayer to be
legally due, or the non-payment of tax when it is shown that a tax is due; (2)
an accompanying state of mind which is described as being "evil," in "bad
faith," "willful," or "deliberate and not accidental"; and (3) a course of action
or failure of action which is unlawful.
All these factors are present in the instant case. It is significant to note
that as early as 4 May 1989, prior to the purported sale of the Cibeles
property by CIC to Altonaga on 30 August 1989, CIC received P40 million
from RMI, and not from Altonaga. That P40 million was debited by RMI and
reflected in its trial balance. Also, as of 31 July 1989, another P40 million was
debited and reflected in RMI's trial balance. This would show that the real
buyer of the properties was RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a
close business associate and one of the many trusted corporate executives
of Toda. That Altonaga was a mere conduit finds support in the admission of
respondent Estate that the sale to him was part of the tax planning scheme
of CIC. The admission is borne by the records. The scheme resorted to by CIC
in making it appear that there were two sales of the subject properties, i.e.,
from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud.
Here, it is obvious that the objective of the sale to Altonaga was to
reduce the amount of tax to be paid especially that the transfer from him to
RMI would then subject the income to only 5% individual capital gains tax,
and not the 35% corporate income tax. Altonaga's sole purpose of acquiring
and transferring title of the subject properties on the same day was to create

a tax shelter. The intermediary transaction, i.e., the sale of Altonaga, which
was prompted more on the mitigation of tax liabilities than for legitimate
business purposes constitutes one of tax evasion. Hence, the sale to
Altonaga should be disregarded for income tax purposes. The two sale
transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the
NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997).
2. The period of assessment has not prescribed by virtue of Section 269 of
the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997). Put
differently, in cases of (1) fraudulent returns; (2) false returns with intent to
evade tax; and (3) failure to file a return, the period within which to assess
tax is ten years from discovery of the fraud, falsification or omission, as the
case may be.
Although the BIR was amply informed of the transactions even prior to
the execution of the necessary documents to affect the transfer in a query by
Altonaga in August 24, 1989 regarding tax consequences of the sale, such
circumstance do not negate the existence of fraud. And even
assuming arguendo that there was no fraud, we find that the income tax
return filed by CIC for the year 1989 was false. It did not reflect the true or
actual amount gained from the sale.
The false return was filed on 15 April 1990, and the falsity thereof was
claimed to have been discovered only on 8 March 1991. The assessment for
the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly,
the issuance of the correct assessment for deficiency income tax was well
within the prescriptive period.
3. Respondent estate cannot deny liability for CIC's deficiency income tax for
the year 1989. A corporation has a juridical personality distinct and separate
from the persons owning or composing it. Thus, the owners or stockholders
of a corporation may not generally be made to answer for the liabilities of a
corporation and vice versa. There are, however, certain instances in which
personal liability may arise, i.e., he agrees to hold himself personally and
solidarily liable with the corporation.
It is worth noting that when the late Toda sold his shares of stock to Le
Hun T. Choa, he knowingly and voluntarily held himself personally liable for
all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989
provided in the Deed of Sale of Shares of Stocks. When the late Toda
undertook and agreed "to hold the BUYER and Cibeles free from any all
income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he
thereby voluntarily held himself personally liable therefor. Petition granted.

SANTOS vs. SERVIER PHILIPPINES, INC. and NATIONAL LABOR

RELATIONS COMMISSION
G.R. No. 166377
FACTS:
Petitioner Ma. Isabel Santos is a Human Resource Manager of respondent
Servier Philippines since 1991 up to 1999. She attended a meeting in Paris,
France on March 26 and 27 1998, together with her husband and her only
child. On March 29, she and her family had dinner at Leon des Bruxelles, a
restaurant known for mussels. While having dinner, petitioner experienced
stomach pains and was rushed to the hospital; she fell into a coma for 21
days and stayed at the ICU for 52. Doctors found that she had an allergic
reaction to the mussels.
During the time, respondent paid for her hospital bills, as well as the stay of
her family in Paris. Petitioner was subsequently transferred to St. Lukes
Medical Center in the Philippines.
In a letter dated May 14, 1999, respondent informed the petitioner that the
former had requested the latter's physician to conduct a thorough physical
and psychological evaluation of her condition, to determine her fitness to
resume her work at the company. Petitioner's physician concluded that the
former had not fully recovered mentally and physically. Hence, respondent
was constrained to terminate petitioner's services effective August 31, 1999.
As a consequence of petitioner's termination from employment, respondent
offered a retirement package which consists of: Retirement Plan
Benefits:P1,063,841.76, among other benefits. Out of this amount, only
P701,454.89 was released to petitioner's husband, the balance thereof was
withheld allegedly for taxation purposes, and the other benefits were also
not given. Petitioner through her husband filed a case with the Labor Arbiter
and NLRC to recover said amounts.
The LA did not rule on the withholding of the income for tax purposes, as did
the NLRC, for allegedly a lack of jurisdiction on their part to rule on the tax
issue. But the latter tribunal ruled in favour of petitioner for the other
benefits. Unsatisfied, petitioner is now questioning the propriety of the
deduction.

ISSUES:
1. WHETHER OR NOT THE LABOR ARBITER AND
JURISDICTION TO RULE ON THE ILLEGAL DEDUCTION.

THE

NLRC

HAVE

2. WHETHER OR NOT PETITIONERS RETIREMENT BENEFITS ARE TAX EXEMPT.

RULING:
1. Contrary to the Labor Arbiter and NLRC's conclusions, petitioner's claim
for illegal deduction falls within the tribunal's jurisdiction. It is noteworthy
that petitioner demanded the completion of her retirement benefits,
including the amount withheld by respondent for taxation purposes. The
issue of deduction for tax purposes is intertwined with the main issue of
whether or not petitioner's benefits have been fully given her. It is, therefore,
a money claim arising from the employer-employee relationship, which
clearly falls within the jurisdiction 41 of the Labor Arbiter and the NLRC.
2. Section 32 (B) (6) (a) of the New National Internal Revenue Code (NIRC)
provides for the exclusion of retirement benefits from gross income, thus:
(6)Retirement Benefits, Pensions, Gratuities, etc.
a)Retirement benefits received under Republic Act 7641 and those received
by officials and employees of private firms, whether individual or corporate,
in accordance with a reasonable private benefit plan maintained by the
employer: Provided, That the retiring official or employee has been in the
service of the same employer for at least ten (10) years and is not less than
fifty (50) years of age at the time of his retirement: Provided further, That the
benefits granted under this subparagraph shall be availed of by an official or
employee only once. . . . .
Thus, for the retirement benefits to be exempt from the withholding tax, the
taxpayer is burdened to prove the concurrence of the following elements: (1)
a reasonable private benefit plan is maintained by the employer; (2) the
retiring official or employee has been in the service of the same employer for
at least ten (10) years; (3) the retiring official or employee is not less than
fifty (50) years of age at the time of his retirement; and (4) the benefit had
been availed of only once. 43
As discussed above, petitioner was qualified for disability retirement. At the
time of such retirement, petitioner was only 41 years of age; and had been in
the service for more or less eight (8) years. As such, the above provision is
not applicable for failure to comply with the age and length of service
requirements. Therefore, respondent cannot be faulted for deducting from
petitioner's total retirement benefits the amount of P362,386.87, for taxation
purposes.

INTERCONTINENTAL
AMARILLA
G.R. No. 162775
FACTS:

BROADCASTING

CORPORATION

(IBC)

vs.

On various dates, petitioner employed the respondents at its Cebu station.

The four (4) employees retired from the company and received, on staggered
basis, their retirement benefits under the 1993 Collective Bargaining
Agreement (CBA) between petitioner and the bargaining unit of its
employees.
In the meantime, a P1,500.00 salary increase was given to all employees of
the company, current and retired, effective July 1994. However, when the
four retirees demanded theirs, petitioner refused and instead informed them
via a letter that their differentials would be used to offset the tax due on
their retirement benefits in accordance with the National Internal Revenue
Code (NIRC).
The four (4) retirees filed separate complaints against IBC TV-13 Cebu and
Station Manager Louella F. Cabaero for unfair labor practice and nonpayment of backwages before the NLRC, Regional Arbitration Branch VII.
The complainants averred that their retirement benefits are exempt from
income tax under Article 32 of the NIRC. Sections 28 and 72 of the NIRC,
which petitioner relied upon in withholding their differentials, do not apply to
them since these provisions deal with the applicable income tax rates on
foreign corporations and suits to recover taxes based on false or fraudulent
returns. They pointed out that, under Article VIII of the CBA, only those
employees who reached the age of 60 were considered retired, and those
under 60 had the option to retire, like Quiones and Otadoy who retired at
ages 58 and 51, respectively.
For its part, petitioner averred that under Section 21 of the NIRC, the
retirement benefits received by employees from their employers constitute
taxable income. While retirement benefits are exempt from taxes under
Section 28(b) of said Code, the law requires that such benefits received
should be in accord with a reasonable retirement plan duly registered with
the Bureau of Internal Revenue (BIR) after compliance with the requirements
therein enumerated. Since its retirement plan in the 1993 CBA was not
approved by the BIR, complainants were liable for income tax on their
retirement benefits.
ISSUES:
(1) Whether the retirement benefits of respondents are part of their gross
income; and

(2) Whether petitioner is estopped from reneging on its agreement with

respondent to pay for the taxes on said retirement benefits.

RULING:
(1) Yes; (2) Yes.
We agree with petitioner's contention that, under the CBA, it is not obliged to
pay for the taxes on the respondents' retirement benefits. We have carefully
reviewed the CBA and find no provision where petitioner obliged itself to pay
the taxes on the retirement benefits of its employees.
We also agree with petitioner's contention that, under Section 28 (b) (7) (A)
of the NIRC of 1986, the retirement benefits of respondents are part of their
gross income subject to taxes.
Sec. 28.Gross Income.
(b)Exclusions from gross income. The following items shall not be included
in gross income and shall be exempt from taxation under this Title:
(7)Retirement benefits, pensions, gratuities, etc. (A) Retirement benefits
received by officials and employees of private firms whether individuals or
corporate, in accordance with a reasonable private benefit plan maintained
by the employer: Provided, That the retiring official or employee has been in
the service of the same employer for at least ten (10) years and is not less
than fifty years of age at the time of his retirement: Provided, further, That
the benefits granted under this subparagraph shall be availed of by an
official or employee only once.
Revenue Regulation No. 12-86, the implementing rules of the foregoing
provisions, provides:
(b)Pensions, retirements and separation pay. Pensions, retirement and
separation pay constitute compensation subject to withholding tax, except
the following:
(1)Retirement benefit received by official and employees of private firms
under a reasonable private benefit plan maintained by the employer, if the
following requirements are met:
(i)The retirement plan must be approved by the Bureau of Internal Revenue;
(ii)The retiring official or employees must have been in the service of the
same employer for at least ten (10) years and is not less than fifty (50) years
of age at the time of retirement; and
(iii)The retiring official or employee shall not have previously availed of the
privilege under the retirement benefit plan of the same or another employer.

Thus, for the retirement benefits to be exempt from the withholding tax, the
taxpayer is burdened to prove the concurrence of the following elements: (1)
a reasonable private benefit plan is maintained by the employer; (2) the
retiring official or employee has been in the service of the same employer for
at least 10 years; (3) the retiring official or employee is not less than 50
years of age at the time of his retirement; and (4) the benefit had been
availed of only once.
Article VIII of the 1993 CBA provides for two kinds of retirement plans compulsory and optional.
Respondents were qualified to retire optionally from their employment with
petitioner. However, there is no evidence on record that the 1993 CBA had
been approved or was ever presented to the BIR; hence, the retirement
benefits of respondents are taxable.
However, we agree with respondents' contention that petitioner did not
withhold the taxes due on their retirement benefits because it had obliged
itself to pay the taxes due thereon. This was done to induce respondents to
agree to avail of the optional retirement scheme.
Respondents received their retirement benefits from the petitioner in three
staggered installments without any tax deduction for the simple reason that
petitioner had remitted the same to the BIR with the use of its own funds
conformably with its agreement with the retirees. It was only when
respondents demanded the payment of their salary differentials that
petitioner alleged, for the first time, that it had failed to present the 1993
CBA to the BIR for approval, rendering such retirement benefits not exempt
from taxes; consequently, they were obliged to refund to it the amounts it
had remitted to the BIR in payment of their taxes. Petitioner used this
"failure" as an afterthought, as an excuse for its refusal to remit to the
respondents their salary differentials. Patently, petitioner is estopped from
doing so. It cannot renege on its commitment to pay the taxes on
respondents' retirement benefits on the pretext that the "new management"
had found the policy disadvantageous. For petitioner to renege on its
contract with respondents simply because its new management had found
the same disadvantageous would amount to a breach of contract.

ATLAS CONSOLIDATED
vs. CIR
G.R. No. L-26911

MINING

&

DEVELOPMENT

CORPORATION

CIR
vs. ATLAS
CONSOLIDATED
MINING
CORPORATION and COURT OF TAX APPEALS
G.R. No. L-26924.

&

DEVELOPMENT

FACTS:
In an appeal, where Atlas Consolidated Mining and Development Corporation
assailed the disallowance of the transfer agent's fee; stockholder's relation
fee; U.S. listing expenses; suit expenses and provision for contingencies, as
deductible expenses from its gross income which resulted in the deficiency
income tax assessments made by the Commissioner of Internal Revenue
against Atlas, the Court of Tax Appeals allowed said disallowed items except
the stockholders relation service fee and suit expenses. Both parties
appealed by filing two separate petitions for review, one filed by Atlas in L26911 as to the portion disallowed and the other by the Commissioner in L26924, not only raising for the first time lack of proof of payment of the
expense deducted but questioning as well the allowance of said deductible
expenses.
ISSUES:
1. WON the attys fees/litigation expenses paid in defense of title tot he
Toledo Mining properties purchased from Mindanao Lode Mines Inc. in a
civil case is an allowable deduction as business expense under Sec. 30
(a)(1) of NIRC.
2. WON the CIR can raise the fact of payment for the first time on appeal.
RULING:
The Supreme Court ruled: in L-26911, that the stockholder's relation service
fee was in effect spent as a capital expenditure and should be disallowed and
in L-26924, that: (a) the Commissioner of Internal Revenue cannot raise for
the first time on appeal the fact of payment of expense deducted; (b) the
listing fee which was paid annually is deductible as an ordinary and
necessary business expense; (c) the findings of the Court of Tax Appeal on
the "provision for contingencies" are factual in nature and in the absence of
grave abuse of discretion should not be disturbed on appeal; and (d)
litigation expenses in defense of title of property are capital in nature and not
deductible.
Judgments modified as to taxable amount.

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil

Company) vs. CIR
G.R. No. 28508-9
FACTS:
On appeal is the decision of the Court of Tax Appeals denying petitioner's
claims for refund of overpaid income taxes of P102,246.00 for 1959 and
P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.
In CTA Case No. 1251, petitioner deducted from its gross income for 1959, as
part of its ordinary and necessary business expenses, the amount spent for
drilling and exploration of its petroleum concessions. This claim was
disallowed by the respondent CIR on the ground that the expenses should be
capitalized and might be written off as a loss only when a "dry hole" should
result. ESSO amended its return and further claimed as ordinary and
necessary expenses in the same return the margin fees it had paid to the
Central Bank on its profit remittances to its New York head office.
In 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the
claimed deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the
year 1960 which arose from the disallowance of the margin fees.
ESSO settled this deficiency assessment in 1964 under protest and claimed
overpayment on the interest on its deficiency income tax. It argued that the
interest should be only on the difference between the total deficiency and its
tax credit.
The CIR denied the claims of ESSO. ESSO appealed to the CTA, contending
that the margin fees were deductible from gross income either as a tax or as
an ordinary and necessary business expense. ESSO further argued on the
excess interest.
The CTA denied petitioner's claim for refund but sustained its claim for
excess interest.
ISSUE:
Whether R.A. 2009, entitled An Act to Authorize the Central Bank of the
Philippines to Establish a Margin Over Banks' Selling Rates of Foreign
Exchange, is a police measure or a revenue measure.

RULING:
It is a police measure.
Basis:
If it is a revenue measure, the margin fees should be deductible from ESSO's
gross income under Sec. 30(c) of the National Internal Revenue Code which
provides that all taxes paid or accrued during or within the taxable year and
which are related to the taxpayer's trade, business or profession are
deductible from gross income.
In 2 other cases, SC held that a margin fee is not a tax but an exaction
designed to curb the excessive demands upon our international reserve.
To be deductible as a business expense, three conditions are imposed,
namely: (1) the expense must be ordinary and necessary, (2) it must be paid
or incurred within the taxable year, and (3) it must be paid or incurred in
carrying on a trade or business.
Ordinarily, an expense will be considered necessary, where the expenditure
is appropriate and helpful in the development of the taxpayer's business.
The fees were paid for the remittance by ESSO as part of the profits to the
head office in the United States. As stated in the Lopez case, the margin fees
are not expenses in connection with the production or earning of petitioner's
incomes in the Philippines. They were expenses incurred in the disposition of
said incomes; expenses for the remittance of funds after they have already
been earned by petitioner's branch in the Philippines for the disposal of its
Head Office in New York which is already another distinct and separate
income taxpayer.
Thus, ESSO has not shown that the remittance to the head office of part of its
profits was made in furtherance of its own trade or business.
Claims for deductions are a matter of legislative grace. The taxpayer has the
burden of justifying the allowance of any deduction claimed.

COMMISSIONER
(PHILS.), INC.
G.R. No. 143672

OF

INTERNAL

REVENUE vs.

GENERAL

FOODS

FACTS:
On June 14, 1985, respondent corporation, which is engaged in the
manufacture of beverages such as "Tang," "Calumet" and "Kool-Aid," filed its
income tax return for the fiscal year ending February 28, 1985. In said tax
return, respondent corporation claimed as deduction, among other business
expenses, the amount of P9,461,246 for media advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the
deduction claimed by respondent corporation. Consequently, respondent
corporation was assessed deficiency income taxes in the amount of
P2,635,141.42. The latter filed a motion for reconsideration but the same
was denied.
ISSUE:
Whether or not the subject media advertising expense for "Tang" incurred by
respondent was an ordinary and necessary expense fully deductible under
the National Internal Revenue Code (NIRC).
RULING:
To be deductible from gross income, the subject advertising expense must
comply with the following requisites: (a) the expense must be ordinary and
necessary; (b) it must have been paid or incurred during the taxable year; (c)
it must have been paid or incurred in carrying on the trade or business of the
taxpayer; and (d) it must be supported by receipts, records or other pertinent
papers.
The parties are in agreement that the subject advertising expense was paid
or incurred within the corresponding taxable year and was incurred in
carrying on a trade or business. Hence, it was necessary. However,
their views conflict as to whether or not it was ordinary. To be deductible, an
advertising expense should not only be necessary but also ordinary. These
two requirements must be met.
As agreed by the Supreme Court, the Commissioner of Tax Appeals maintains
that the subject advertising expense was not ordinary on the ground that it
failed the two conditions set by U.S. jurisprudence: first, "reasonableness" of
the amount incurred and second, the amount incurred must not be a capital
outlay to create "goodwill" for the product and/or private respondent's

business. Otherwise, the expense must be considered a capital expenditure

to be spread out over a reasonable time.
We find the subject expense for the advertisement of a single product to be
inordinately large. Therefore, even if it is necessary, it cannot be considered
an ordinary expense deductible.
Advertising is generally of two kinds: (1) advertising to stimulate
the current sale of merchandise or use of services and (2)
advertising designed to stimulate the future sale of merchandise or
use of services. The second type involves expenditures incurred, in
whole or in part, to create or maintain some form of goodwill for the
taxpayer's trade or business or for the industry or profession of
which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the
reasonableness of amount, there is no doubt such expenditures are
deductible as business expenses. If, however, the expenditures are for
advertising of the second kind, then normally they should be spread out over
a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense
was of the second kind. Not only was the amount staggering; the respondent
corporation itself also admitted, in its letter protest to the Commissioner of
Internal Revenue's assessment, that the subject media expense was incurred
in order to protect respondent corporation's brand franchise, a critical point
during the period under review.
The protection of brand franchise is analogous to the maintenance of
goodwill or title to one's property. This is a capital expenditure which should
be spread out over a reasonable period of time.
Respondent corporation's venture to protect its brand franchise was
tantamount to efforts to establish a reputation. This was akin to the
acquisition of capital assets and therefore expenses related thereto were not
to be considered as business expenses but as capital expenditures.

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

G.R No. L-24059
FACTS:
Petitioner, a domestic corporation engaged in the real estate business as
brokers, managing agents and administrators, filed its income tax return for
its fiscal year ending September 30, 1957 showing a net income of

P92,540.25 and a tax liability due thereon of P18,508.00, which it paid in due
course. Upon verification of its return, CIR, disallowed four items of deduction
in petitioner's tax returns and assessed against it an income tax deficiency in
the amount of P28,054.00 plus interests. The Court of Tax Appeals upon
reviewing the assessment at the taxpayer's petition, upheld respondent's
disallowance of the principal item of petitioner's having paid to Mr. C. M.
Hoskins, its founder and controlling stockholder the amount of P99,977.91
representing 50% of supervision fees earned by it and set aside respondent's
disallowance of three other minor items.
Petitioner questions in this appeal the Tax Court's findings that the
disallowed payment to Hoskins was an inordinately large one, which bore a
close relationship to the recipient's dominant stockholdings and therefore
amounted in law to a distribution of its earnings and profits.
ISSUE:
Whether the 50% supervision fee paid to Hoskin may be deductible for
income tax purposes.
RULING:
NO.
Hoskin owns 99.6% of the CM Hoskins & Co. He was also the President and
Chairman of the Board. That as chairman of the Board of Directors, he
received a salary of P3,750.00 a month, plus a salary bonus of about
P40,000.00 a year and an amounting to an annual compensation of
P45,000.00 and an annual salary bonus of P40,000.00, plus free use of the
company car and receipt of other similar allowances and benefits, the Tax
Court correctly ruled that the payment by petitioner to Hoskins of the
additional sum of P99,977.91 as his equal or 50% share of the 8%
supervision fees received by petitioner as managing agents of the real
estate, subdivision projects of Paradise Farms, Inc. and Realty Investments,
Inc. was inordinately large and could not be accorded the treatment
of ordinary and necessary expenses allowed as deductible items
within the purview of the Tax Code.
The fact that such payment was authorized by a standing resolution of
petitioner's board of directors, since "Hoskins had personally conceived and
planned the project" cannot change the picture. There could be no question
that as Chairman of the board and practically an absolutely controlling

stockholder of petitioner, Hoskins wielded tremendous power and influence

in the formulation and making of the company's policies and decisions. Even
just as board chairman, going by petitioner's own enumeration of the powers
of the office, Hoskins, could exercise great power and influence within the
corporation, such as directing the policy of the corporation, delegating
powers to the president and advising the corporation in determining
executive salaries, bonus plans and pensions, dividend policies, etc.
It is a general rule that 'Bonuses to employees made in good faith and as
additional compensation for the services actually rendered by the employees
are deductible, provided such payments, when added to the stipulated
salaries, do not exceed a reasonable compensation for the services rendered.
The conditions precedent to the deduction of bonuses to employees are: (1)
the payment of the bonuses is in fact compensation; (2) it must be for
personal services actually rendered; and (3) the bonuses, when added to the
salaries, are 'reasonable when measured by the amount and quality of the
services performed with relation to the business of the particular taxpayer.
There is no fixed test for determining the reasonableness of a given bonus as
compensation. This depends upon many factors, one of them being the
amount and quality of the services performed with relation to the business.'
Other tests suggested are: payment must be 'made in good faith'; 'the
character of the taxpayer's business, the volume and amount of its net
earnings, its locality, the type and extent of the services rendered, the salary
policy of the corporation'; 'the size of the particular business'; 'the
employees' qualifications and contributions to the business venture'; and
'general economic conditions. However, 'in determining whether the
particular salary or compensation payment is reasonable, the situation must
be considered as whole. Ordinarily, no single factor is decisive. . . . it is
important to keep in mind that it seldom happens that the application of one
test can give satisfactory answer, and that ordinarily it is the interplay of
several factors, properly weighted for the particular case, which must furnish
the final answer."
Petitioner's case fails to pass the test. On the right of the employer as
against respondent Commissioner to fix the compensation of its officers and
employees, we there held further that while the employer's right may be
conceded, the question of the allowance or disallowance thereof as
deductible expenses for income tax purposes is subject to determination by
CIR. As far as petitioner's contention that as employer it has the right to fix
the compensation of its officers and employees and that it was in the
exercise of such right that it deemed proper to pay the bonuses in question,
all that We need say is this: that right may be conceded, but for income tax

purposes the employer cannot legally claim such bonuses as deductible

expenses unless they are shown to be reasonable. To hold otherwise would
open the gate of rampant tax evasion.
Lastly, the question of allowing or disallowing as deductible expenses the
amounts paid to corporate officers by way of bonus is determined by
respondent exclusively for income tax purposes.

*ONGS PART

PHILIPPINE REFINING COMPANY (now known as "UNILEVER

PHILIPPINES [PRC], INC.") vs. COURT OF APPEALS, COURT OF TAX
APPEALS, and THE COMMISSIONER OF INTERNAL REVENUE, .
G.R. No. 118794
FACTS:
This is an appeal by certiorari from the decision of respondent Court of
Appeals 1affirming the decision of the Court of Tax Appeals which disallowed
petitioner's claim for deduction as bad debts of several accounts in the total
sum of P395,324,27, and imposing a 25% surcharge and 20% annual
delinquency interest on the alleged deficiency income tax liability of
petitioner. Cdpr
Petitioner Philippine Refining Company (PRC) was assessed by respondent
Commissioner of Internal Revenue (Commissioner) to pay a deficiency tax for
the year 1985 in the amount of P1,892,584.00, computed as follows:
Deficiency Income Tax
Net Income per investigationP197,502,568.00
Add: Disallowances
Bad DebtsP713,070.93
Interest ExpenseP2,666,545.49P3,379,616.00

Net Taxable IncomeP200,882,184.00

Tax Due ThereonP70,298,764.00

Less: Tax PaidP69,115,899.00
Deficiency Income TaxP1,182,865.00

Add: 20% Interest (60% max.)P709,719.00

Total Amount Due and CollectibleP1,892.584.00 2

The assessment was timely protested by petitioner on April 26, 1989, on the
ground that it was based on the erroneous disallowances of "bad debts" and
"interest expense" although the same are both allowable and legal
deductions. Respondent Commissioner, however, issued a warrant of
garnishment against the deposits of petitioner at a branch of City Trust Bank,
in Makati, Metro Manila, which action the latter considered as a denial of its
protest.
ISSUE:
Whether or not there was an erroneous disallowance of bad debts.
RULING:
We agree with respondent Court of Tax Appeals:
Out of the sixteen (16) accounts alleged as bad debts, We find that only
three (3) accounts have met the requirements of the worthlessness of the
accounts, hence were properly written off as bad debts.
We find that said accounts have not satisfied the requirements of the
'worthlessness of a debt'. Mere testimony of the Financial Accountant of the
Petitioner explaining the worthlessness of said debts is seen by this Court as
nothing more than a self-serving exercise which lacks probative value. There
was no iota of documentary evidence (e.g., collection letters sent, report
from investigating fieldmen, letter of referral to their legal department, police
report/affidavit that the owners were bankrupt due to fire that engulfed their
stores or that the owner has been murdered etc.), to give support to the
testimony of an employee of the Petitioner. Mere allegations cannot prove
the worthlessness of such debts in 1985. Hence, the claim for deduction of
these thirteen (13) debts should be rejected."
This pronouncement of respondent Court of Appeals relied on the ruling of
this Court in Collector vs. Goodrich International Rubber Co., which
established the rule in determining the "worthlessness of a debt." In said
case, we held that for debts to be considered as "worthless," and thereby
qualify as "bad debts" making them deductible, the taxpayer should show
that (1) there is a valid and subsisting debt; (2) the debt must be actually
ascertained to be worthless and uncollectible during the taxable year; (3) the

debt must be charged off during the taxable year; and (4) the debt must
arise from the business or trade of the taxpayer. Additionally, before a debt
can be considered worthless, the taxpayer must also show that it is indeed
uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to
prove that he exerted diligent efforts to collect the debts, viz: (1) sending of
statement of accounts; (2) sending of collection letters; (3) giving the
account to a lawyer for collection; and (4) filing a collection case in court.

*PASATIEMPO
*PENA

CONSOLIDATED MINES, INC. vs. COURT

COMMISSIONER OF INTERNAL REVENUE, .
G.R. Nos. L-18843 & 18844

OF

TAX

APPEALS

and

FACTS
The Company, a domestic corporation engaged in mining, had filed its
income tax returns for 1951, 1952, 1953 and 1956. After the investigation
the examiners reported that (A) for the years 1951 to 1954 (1) the Company
had not accrued as an expense the share in the company profits of Benguet
Consolidated Mines as operator of the Company's mines, although for
income tax purposes the Company had reported income and expenses on
the accrual basis; (2) depletion and depreciation expenses had been
overcharged; and (3) the claims for audit and legal fees and miscellaneous
expenses for 1953 and 1954 had not been properly substantiated; and that
(B) for the year 1956 (1) the Company had overstated its claim for depletion;

and (2) certain claims for miscellaneous expenses were not duly supported
by evidence.
ISSUES and RULING
DEPLETION
The first issue raised by the Company is with respect to the rate of mine
depletion used by the Court of Tax Appeals. The Tax Code provides that in
computing net income there shall be allowed as deduction, in the case of
mines, a reasonable allowance for depletion thereof not to exceed the
market value in the mine of the product thereof which has been mined and
sold during the year for which the return is made
As an income tax concept, depletion is wholly a creation of the statute 21
"solely a matter of legislative grace." 22Hence, the taxpayer has the burden
of justifying the allowance of any deduction claimed. 23 As in connection with
all other tax controversies, the burden of proof to show that a disallowance
of depletion by the Commissioner is incorrect or that an allowance made is
inadequate is upon the taxpayer, and this is true with respect to the value of
the property constituting the basis of the deduction. 24 This burden-of-proof
rule has been frequently applied and a value claimed has been disallowed for
lack of evidence. 25
The question as to which figure should properly correspond to "mine cost" is
one of fact. 37 The findings of fact of the Tax Court, where reasonably
supported by evidence, are conclusive upon the Supreme Court. 38
DEPRECIATION EXPENSE
In its second assigned error, the Company questions the disallowance by the
Tax Court of the depreciation charges claimed by the Company as deductions
from its gross income 44 The items thus disallowed consist mainly of
depreciation expenses for the years 1953 and 1954 allegedly sustained as a
result of the deterioration of some of the Company's incomplete
constructions.
The initial memorandum 45 of the BIR examiner states the basic reason why
the Company's claimed depreciation should be disallowed or re-adjusted,
thus: since "up to its completion (the incomplete asset) has not been and is
not capable of use in the operation, the depreciation claimed could not, in
fairness to the Government and the taxpayer, be considered as proper

deduction for income tax purposes as the said asset is still under
construction."
For taxation purposes the phrase "out of its not being used," with reference
to depreciation allowable on assets which are idle or the use of which is
temporarily suspended, should be understood to refer only to property that
has once been used in the trade or business, not to property that has never
been actually devoted to the taxpayer's business, particularly incomplete
assets that have yet to be used.
MISCELLANEOUS BUSINESS EXPENDITURES
The Company's third assigned error assails the Court of Tax Appeals in not
allowing the deduction from its gross income of certain miscellaneous
business expenditures in the course of its operation "for lack of any
supporting paper or evidence."
The vouchers and cancelled checks submitted by the Company only show
that the amounts claimed had indeed been spent, and confirm the fact of
disbursement, but do not necessarily prove that the expenses for which they
were disbursed are deductible items. In the case of Collector of Internal
Revenue vs. Goodrich International Rubber Co. 48 this Court rejected the
taxpayer's similar claim for deduction of alleged representation expenses,
based upon receipts issued not by the entities to which the alleged expenses
were paid but by the officers of taxpayer corporation who allegedly paid
them. It was there stated:
If the expenses had really been incurred, receipts or chits would have been
issued by the entities to which the payments have been made, and it would
have been easy for Goodrich or its officers to produce such receipts. These
receipts issued by said officers merely attest to their claim that they had
incurred and paid said expenses. They do not establish payment of said
alleged expenses to the entities in which the same are said to have been
incurred.
In the case before Us, except for the Company's own vouchers and cancelled
checks, together with the Company treasurer's lone and uncorroborated
testimony regarding the purpose of said disbursements, there is no other
supporting evidence to show that the expenses were legally deductible
items. We therefore affirm the Tax Court's disallowance of the same.

TOMAS CALASANZ, ET AL.vs. CIR

G.R. No. L-26284 October 8, 1986
FACTS:
Petitioner inherited a parcel of land and in order to liquidate her inheritance,
they had the land surveyed and subdivided into lots. Improvements, such as
good roads, concrete gutters, drainage and lighting system, were introduced
to make the lots saleable. Soon after, the lots were sold to the public at a
profit. They paid Capital gains tax from proceeds of the realized sale of lot.
BIR and then CTA held them liable for Deficiency of Income Tax.
Defense of Petitioner: It is captal gain and not income tax because they are
not Real Estate Dealers. The subdivision and improvements made was to
facilitate liquidation of inherited lot.
ISSUES:
(1) WON Petitioners are Real Estate Dealer
(2) WON the property is capital asset or ordinary asset?
HELD:
(1)They are deemed as Real Estate Dealers. The activities of petitioners are
indistinguishable from those invariably employed by one engaged in the
business of selling real estate. Also, Petitioners did not sell the land in the
condition in which they acquired it. While the land was originally devoted to
rice and fruit trees. And lastly, Another distinctive feature of the real estate
business discernible from the records is the existence of contracts
receivables which signify the lots were sold on installment basis.
As to their defense in mere liquidation process, the American court in clear
and categorical terms rejected the liquidation test in determining whether or
not a taxpayer is carrying on a trade or business The court observed that the
fact that property is sold for purposes of liquidation does not foreclose a
determination that a "trade or business" is being conducted by the seller.
(2)ORDINARY ASSET. A property initially classified as a capital asset may
thereafter be treated as an ordinary asset if a combination of the factors
indubitably tend to show that the activity was in furtherance of or in the
course of the taxpayer's trade or business. Thus, a sale of inherited real
property usually gives capital gain or loss even though the property has to

be subdivided or improved or both to make it salable. However, if the

inherited property is substantially improved or very actively sold or both it
may be treated as held primarily for sale to customers in the ordinary course
of the heir's business.

DEVELOPMENT BANK OF THE PHILIPPINES vs. COMMISSION ON

AUDIT
G.R. No. 144516.
FACTS:
On February 20, 1980, the Development Bank of the Philippines (DBP) Board
of Governors adopted Resolution No. 794 creating the DBP Gratuity Plan and
authorizing the setting up of a retirement fund to cover the benefits due to
DBP retiring officials and employees under Commonwealth Act No. 186, as
amended.
In 1983, the Bank established a Special Loan Program availed thru the
facilities of the DBP Provident Fund and funded by placements from the
Gratuity Plan Fund. Under the Special Loan Program, a prospective retiree is
allowed the option to utilize in the form of a loan a portion of his
outstanding equity in the gratuity fund and to invest it in a profitable
investment or undertaking. The earnings of the investment shall then be
applied to pay for the interest due on the gratuity loan which was initially set
at 9% per annum subject to the minimum investment rate resulting from the
updated actuarial study. The excess or balance of the interest earnings shall
then be distributed to the investor-members.
Pursuant to the investment scheme, DBP-TSD paid to the investor-members a
total of P11,626,414.25 representing the net earnings of the investments for
the years 1991 and 1992. The payments were disallowed by the Auditor
under Audit Observation Memorandum No. 93-2 dated March 1, 1993, on the
ground that the distribution of income of the Gratuity Plan Fund (GPF) to
future retirees of DBP is irregular and constituted the use of public funds for
private purposes which is specifically proscribed under Section 4 of P.D.
1445. The Auditor reasoned that the Fund is still owned by the Bank, the
Board of Trustees is a mere administrator of the Fund in the same way that
the Trust Services Department where the fund was invested was a mere
investor and neither can the employees, who have still an inchoate interest
in the Fund be considered as rightful owner of the Fund.
ISSUES:
1. Whether or not the income of the Gratuity Plan Fund is income of DBP.

2. Whether or not the distribution of income of the Gratuity Plan Fund

(GPF) to future retirees of DBP makes it lose its tax-exempt status.
HELD:
1. NO. An employees' trust is a trust maintained by an employer to provide
retirement, pension or other benefits to its employees. Resolution No. 794
shows that DBP intended to establish a trust fund to cover the retirement
benefits of certain employees under Republic Act No. 1616. The principal and
income of the Fund would be separate and distinct from the funds of DBP.
2. YES. The Gratuity Plan will lose its tax-exempt status if the retirement
benefits are released prior to the retirement of the employees. The trust
funds of employees other than those of private employers are qualified for
certain tax exemptions pursuant to Section 60(B), formerly Section 53(b), of
the National Internal Revenue Code.
The Gratuity Plan provides that the gratuity benefits of a qualified DBP
employee shall be released only upon retirement under the Plan. If the
earnings and principal of the Fund are distributed to DBP employees prior to
their retirement, the Gratuity Plan will no longer qualify for exemption under
Section 60(B). To recall, DBP Resolution No. 794 creating the Gratuity Plan
expressly provides that since the gratuity plan will be tax qualified under
the National Internal Revenue Code xxx, the Banks periodic contributions
thereto shall be deductible for tax purposes and the earnings therefrom tax
free. If DBP insists that its employees may receive the P11,626,414.25
dividends, the necessary consequence will be the non-qualification of the
Gratuity Plan as a tax-exempt plan.

*REPAYO