ADZUCL-incomesyllabus-SY2014-15 (1) (1)

8/11/2019 ADZUCL-incomesyllabus-SY2014-15 (1) (1)

1/72

Ateneo de Zamboanga University

College of Law

Course Outline

Tax I

INCOME TAX

1. Definitions

Section 22 (A) to (I), (Z), (GG), and (HH), Tax Code

Sections 25 (A)(1), 31, 35 (B), and 39 (A), Tax Code

Resident citizens and resident aliens

Garrison vs. Court of Appeals (July 19, 1990)

Non-resident citizens

RR 1-79 (January 8, 1979) (Section 2 only)

RR 5-01 (July 31, 2001)

BIR Ruling 33-00 (September 5, 2000)

BIR Ruling DA 095-05 (March 29, 2005)

Non-resident aliens engaged in business in the Philippines

Sec. 5 & 6, RR 2

Corporations

AFISCO Insurance Corporation vs. Court of Appeals (January 25, 1999)

Pascual vs. Commissioner of Internal Revenue (October 18, 1988)


2/72

Obillos vs. Commissioner of Internal Revenue (October 29, 1985)

Oa vs. Commissioner of Internal Revenue (May 25, 1972)

RR 10-2012 (June 1, 2012)

BIR Ruling 108-2010 (October 19, 2010)

2. Income

In general

VICENTE MADRIGAL and his wife, SUSANA PATERNO,plaintiffs-

appellants,

vs.

JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO

CONCEPCION, Deputy Collector of Internal Revenue,defendants-appellees.

Doctrine: The essential difference between capital and income is that capital is a fund;

income is a flow.


3/72

Facts: Madrigal and Paterno were legally married under conjugal partnerships (sociedad degananciales). On February 1915, Madrigal filed sworn declaration with the Collector ofInternal Revenue, showing, his total net income for the year 1914. Subsequently Madrigalsubmitted the claim that the net income did not represent his income for the year 1914, but

was in fact the income of the conjugal partnership, and that in computing and assessing the

additional income tax, the income declared by Vicente Madrigal should be divided into twoequal parts.The Attorney-General of the Philippine Islands held with the petitioner Madrigal.

The United States Commissioner of Internal Revenue reversed. After payment underprotest, action was begun by Madrigal and Susana Paterno in the Court of First Instance ofthe city of Manila for the recovery of the sum alleged to have been wrongfully and illegallycollected by the defendants from the plaintiff, Madrigal. The dispute between the plaintiffsand the defendants concerned the additional tax provided for in the Income Tax Law. Thetrial court found in favor of defendants.


4/72


5/72

tax.The appellee argues that Act No. 2833 which impose tax on the stock dividend does not

violate the provisions of the Jones Law (equivalent of Constitution on that time).

Issue: W/N stock dividends are income, hence subject to income tax.

Ruling: Stock dividends represent undistributed increase in the capital of corporations for a

particular period which show the increased interest or proportional shares in the capital of

each stockholder. Additional stock is issued showing the increase in the actual capital, or

property, or assets of the corporation. The stockholder who receives a stock dividend has

received nothing but a representation of his increased interest in the capital of the

corporation. All the property or capital of the corporation still belongs to the corporation.

There has been no separation of the interest of the stockholder from the general capital ofthe corporation. The stockholder, by virtue of the stock dividend, has no separate or

individual control over the interest represented. The receipt of a stock dividend do not

increase the money received of a stockholder nor his cash account. It simply shows that

there has been an increase in the amount of the capital of the corporation during the period.

Income taxation intended to tax only the "income" of corporations, firms or individuals

meaning money received for services, interest, or profit from investments. The essential

and controlling fact is that the stockholder has received nothing out of the

company's assets for his separate use and benefit ; on the contrary, every dollar of his

original investment, together with whatever accretions and accumulations resulting fromemployment of his money and that of the other stockholders in the business of the

company, still remains the property of the company.

LIMPAN INVESTMENT CORPORATION, petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

Doctrine: Basically, when income should be declared (see Ruling)

Facts: Limpan Investment Corporation is engaged in the business of leasing real properties.

It filed its 1956 and 1957 income tax returns, and paid the corresponding taxes therefor. The


6/72

examiners of the Bureau of Internal Revenue conducted an investigation of the income tax

returns and discovered underdeclared rental incomes and excessive depreciation of its

buildings. Commissioner of Internal Revenue issued its letter-assessment and demand for

payment of deficiency income tax and surcharge against corporation. Petitioner corporation

reconsideration but the latter denied; hence, the corporation filed its petition for reviewbefore the Tax Appeals court. It disclaimed having received or collected the alleged

unreported rental income because (1) the previous owners of the leased building has to

collect part of the total rentals in 1956 to apply to their payment of rental in the land and (2)

its president who collected and received the rentals did not turn the same over to petitioner

corporation in 1957 but so only in 1959 and (3) that a tenant deposited in court his rentals

over which the corporation had no actual or constructive control and (4) that a sub-tenant

paid an amount which ought not be declared as rental income. Petitioner also claimed that

the rates of depreciation in the assessment are unfair and inaccurate. Tax Court upheld the

Commissioner.

Issue: W/N there are undeclared rental income.

Ruling: YES. The appeal is without merit. Petitioner admitted that it had undeclared income

found by the BIR examiners as unreported rental income for the year 1956 and 1957,

contrary to its original claim. The excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de

Lim retained ownership of the lands and only later transferred or disposed of the ownershipof the buildings existing thereon to petitioner corporation, and the alleged verbal agreement

to turn over to petitioner corporation six percent (6%) of the value of its properties to be

applied to the rentals of the land and in exchange for whatever rentals they may collect from

the tenants is unusual and uncorroborated by the alleged transferors, or by any document or

unbiased evidence. Petitioner's denial and explanation of the non-receipt of the unreported

income is not substantiated satisfactorily. Isabelo P. Lim was not presented as witness. The

withdrawal in 1958 of the deposits in court pertaining to the rental income is no sufficient

justification for the non-declaration, since the deposit was because of the refusal of

petitioner to accept the same; hence, petitioner is deemed to have constructively receivedsuch rentals. The payment by the sub-tenant should have been reported as rental income,

since it is income regardless of its source.

Conwi vs. Court of Tax Appeals ( August 31, 1992) JOSH

Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (March 28, 1955)JOSH


7/72

Murphy vs. Internal Revenue Service 493 F3rd 170US Court of Appeals, District of Columbia

Circuit (July 3, 2007)JOSH

Statutory inclusions


8/72

8

Section 32 (A), Tax Code KHA

SEC. 32. Gross Income. -

(A) General Definition. - Except when otherwise provided in this Title, gross income means all

income derived from whatever source, including (but not limited to) the following items:

(1) Compensation for services in whatever form paid, including, but not limited to fees,

salaries, wages, commissions, and similar items;

(2) Gross income derived from the conduct of trade or business or the exercise of a

profession;

(3) Gains derived from dealings in property;

(4) Interests;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Annuities;

(9) Prizes and winnings;

(10) Pensions; and

(11) Partner's distributive share from the net income of the general professional

partnership.

Compensation for services

Old Colony Trust Co. vs. Commissioner of Internal Revenue, 279 US 716 (June 3, 1929)KHA

Brief Fact Summary.Wood was president of the American Woolen Company. The company adopted a resolution

wherein they would pay the tax obligations of Wood and other officers.

Synopsis of Rule of Law.The discharge of a taxpayers obligation by a third party is equivalent to direct receipt by the taxpayer.


9/72

9

Facts.William Wood was president of the American Woolen Company for the years 1918 through 1920. The company instated a

policy for 1919 and 1920 wherein the company would pay the taxes of the president and other company officers. The company paid

$681,169.88 for 1918 and $351,179.27 for 1919 on behalf of Wood. The Board of Tax Appeals held that these amounts paid were

income of Wood.

Issue.Were the taxes paid by the company additional income of Wood?

Held. The Supreme Court of the United States affirmed the lower court and holding thatthe taxes paid were income to Wood.The Court notes that Wood and other employeesreceived a direct benefit when their tax obligation was discharged by the company.Wood received a benefit in exchange for his services to the company. This was clearlya taxable gain.

Rents

Helvering vs. Bruun, 309 US 461 (March 25, 1940)KHA

Facts: Alandlordrepossessed land from a tenant who haddefaultedin the eighteenthyear of a99-year lease.During the course of the lease, the tenant had torn down an old building(in whichthe landlords adjusted basis was now $12,811.43) and built a new one (whose value was now$64,245.68). The lease had specified that the landlord was not required to compensate the tenant forthese improvements. Thus, thegovernmentargued that uponrepossessionthe landlord realized a gain of$51,434.25. The landlord argued that there was no realization of the property because no transaction hadoccurred, and because the improvement of the property that created the gain was not "severable" fromthe landlord's original capital.

Issue: Whether a landlord does realize a taxable gain when he repossesses property improved by atenant.

Held:The court held for the government: the value of the improvements was realized by the taxpayer in

the year in which the forfeiture occurred. The improvements, the Court observed, were received by the

taxpayer "as a result of a business transaction," namely, the leasing of the taxpayer's land. It was not

necessary to the recognition of gain that the improvements be severable from the land; all that had to be

shown was that the taxpayer had acquired valuable assets from his lease in exchange for the use of his

property. The medium of exchangewhether cash or kind, and whether separately disposable or

"affixed"--was immaterial as far as the realization criterion was concerned. In effect, the improvements

represented rent, or rather a payment in lieu of rent, which was taxable to the landlord regardless of the

form in which it was received. "Severance" is not necessary for realization.It is not necessary to

recognition of taxable gain that he should be able to sever the improvement begetting the gain from his

original capital. If that were necessary, no income could arise from the exchange of property, whereas

such gain has always been recognized as realized taxable gain."The Court added that, while not all

economic gain is "realized" for taxation purposes, realization does not require that the economic gain be

in "cash derived from the sale of an asset". Realization can also arise from property exchange; relief of

indebtedness; or other transactions yielding profite.g. by receiving an asset with enhanced value in a

transaction, even where severance does not occur (i.e. even where "the gain is a portion of the value of

property received by the taxpayer in the transaction").
http://en.wikipedia.org/wiki/Landlordhttp://en.wikipedia.org/wiki/Landlordhttp://en.wikipedia.org/wiki/Landlordhttp://en.wikipedia.org/wiki/Default_(law)http://en.wikipedia.org/wiki/Default_(law)http://en.wikipedia.org/wiki/Default_(law)http://en.wikipedia.org/wiki/99-year_leasehttp://en.wikipedia.org/wiki/99-year_leasehttp://en.wikipedia.org/wiki/99-year_leasehttp://en.wikipedia.org/wiki/Buildinghttp://en.wikipedia.org/wiki/Buildinghttp://en.wikipedia.org/wiki/Buildinghttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Repossessionhttp://en.wikipedia.org/wiki/Repossessionhttp://en.wikipedia.org/wiki/Repossessionhttp://en.wikipedia.org/wiki/Repossessionhttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Buildinghttp://en.wikipedia.org/wiki/99-year_leasehttp://en.wikipedia.org/wiki/Default_(law)http://en.wikipedia.org/wiki/Landlord


10/72

10

Dividends

SECTION 73. Distribution of Dividends or Assets by Corporations. -

"(A) Def ini t ion of Div idends. -The term 'dividends' when used in this Title means any distribution

made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders,

whether in money or in other property.

"Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain

realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a

deductible loss, as the case may be.

Commissioner of Internal Revenue vs. Court of Appeals (January 20, 1999)ALMAN

Facts: Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States,

formed the corporation A. Soriano Y Cia, predecessor of ANSCOR with a 1,000,000.00 capitalization

divided into 10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled

by the family of Don Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963

shares of the 5,000 shares originally issued.

On September 12, 1945, ANSCORs authorized capital stock was increased to P2,500,000.00

divided into 25,000 common shares with the same par value. Of the additional 15,000 shares, only 10,000

was issued which were all subscribed by Don Andres, after the other stockholders waived in favor of the

former their pre-emptive rights to subscribe to the new issues. This increased his subscription to 14,963

common shares. A month later, Don Andres transferred 1,250 shares each to his two sons, Jose and Andres

Jr., as their initial investments in ANSCOR. Both sons are foreigners.

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made

between 1949 and December 20, 1963. On December 30, 1964 Don Andres died. As of that date, the


11/72

11

records revealed that he has a total shareholdings of 185,154 shares. 50,495 of which are original issues

and the balance of 134,659 shares as stock dividend declarations. Correspondingly, one-half of that

shareholdings or 92,577 shares were transferred to his wife, Doa Carmen Soriano, as her conjugal share.

The offer half formed part of his estate.

A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further

increased it to P30M. In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares

were respectively received by the Don Andres estate and Doa Carmen from ANSCOR. Hence, increasing

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

On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue

Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a tax

avoidance scheme. By January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into

150,000 common and 150,000 preferred shares.

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization

scheme and not tax avoidance. Consequently, on March 31, 1968 Doa Carmen exchanged her whole

138,864 common shares for 138,860 of the preferred shares. The estate of Don Andres in turn exchanged

11,140 of its common shares for the remaining 11,140 preferred shares.

In 1973, after examining ANSCORs books of account and record Revenue examiners issued a

report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, for the year 1968 and

the 2nd quarter of 1969 based on the transaction of exchange and redemption of stocks. BIR made the

corresponding assessments. ANSCORs subsequent protest on the assessments was denied in 1983 by

petitioner. ANSCOR filed a petition for review with the CTA, the Tax Court reversed petitioners ruling. CA

affirmed the ruling of the CTA. Hence this position.

Issue: Whether or not a person assessed for deficiency withholding tax under Sec. 53 and 54 of the

Tax Code is being held liable in its capacity as a withholding agent.


12/72

12

Held: An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed

by petitioner for deficiency withholding tax, as such, it is being held liable in its capacity as a withholding

agent and not in its personality as taxpayer. A withholding agent, A. Soriano Corp. in this case, cannot be

deemed a taxpayer for it to avail of a tax amnesty under a Presidential decree that condones the collection

of all internal revenue taxes including the increments or penalties on account of non-payment as well as all

civil, criminal, or administrative liabilities arising from or incident to voluntary disclosures under the NIRC of

previously untaxed income and/or wealth realized here or abroad by any taxpayer, natural orjuridical. The

Court explains: The withholding agent is not a taxpayer, he is a mere tax collector. Under the withholding

system, however, the agent-payer becomes a payee by fiction of law. His liability is direct and independent

from the taxpayer, because the income tax is still imposed and due from the latter. The agent is not liable for

the tax as no wealth flowed into him, he earned no income.

Wise & Co., Inc. vs. Meer (June 30, 1947)ALMAN

FACTS: Wise & Co., Inc. et. al (Plaintiff-appellants) were stockholders of Manila WineMerchants, Ltd., a foreign corporation duly authorized to do business in the Philippines. The

Board of Directors of Manila Wine Merchants, Ltd., (HK Co.), recommended to the stockholders

that they adopt resolutions necessary to sell its business and assets to Manila Wine Merchants,

Inc., a Philippine corporation, (PH Co.), for the sum of P400,000. The HK Co. made a distribution

from its earnings for the year 1937 to its stockholders. As a result of the sale of its business and

assets to PH Co., a surplus was realized and the HK Co. distributed this surplus to the

shareholders (Appellants included).

Philippine income tax had been paid by HK Co. on the said surplus from which the said

distributions were made. At a special general meeting of the shareholders of the HK Co., the

stockholders by resolution directed that the company be voluntarily liquidated and its capital

distributed among the stockholders. The Appellants duly filed Income Tax Returns, on which the

defendant, Meer (CIR) made deficiency assessments. Plantiffs paid under written protest and

sought recovery. CFI ruled in favor of CIR hence the appeal.

SC HELD: CFI judgment affirmed. (Subsequent Motion for Reconsideration by Wise, et. al.

denied)

ISSUES and RULINGS:

1.)Appellants contend that the amounts received by them and on which the taxes in question

were assessed and collected were ordinary dividends; CIR contends that they were liquidating

dividends.


13/72

13

SC:The distributions under consideration were not ordinary dividends. Therefore, they are

taxable as liquidating dividends. It was stipulated in the deed of sale that the sale and transfer of

the HK Co. shall take effect on June 1, 1937. Distribution took place on June 8. They could not

consistently deem all the business and assets of the corporation sold as of June 1, 1937, and still

say that said corporation,as a going concern, distributed ordinary dividends to them thereafter.

2.)Are such liquidating dividends taxable income?

SC:Income tax law states that Where a corporation, partnership, association, joint-account, or

insurance company distributes all of its assets in complete liquidation or dissolution, the gain

realized or loss sustained by the stockholder, whether individual or corporation, is a taxable

incomeor a deductible loss as the case may be.

Appellants received the distributions in question in exchange for the surrender and relinquishment

by them of their stock in the HK Co. which was dissolved and in process of complete liquidation.

That money in the hands of the corporation formed a part of its income and was properly taxable

to it under the Income Tax Law. When the corporation was dissolved and in process of complete

liquidation and its shareholders surrendered their stock to it and it paid the sums in question to

them in exchange, a transaction took place. The shareholder who received the consideration for

the stock earned that much money as income of his own, which again was properly taxable to

him under the Income Tax Law.

3.)Non-resident alien individual appellants contend that if the distributions received by them were

to be considered as a sale of their stock to the HK Co., the profit realized by them does not

constitute income from Philippine sources and is not subject to Philippine taxes, "since all steps in

the carrying out of this so-called sale took place outside the Philippines."

SC:This contention is untenable. The HK Co. was at the time of the sale of its business in thePhilippines, and the PH Co. was a domestic corporation domiciled and doing business also in the

Philippines. The HK Co. was incorporated for the purpose of carrying on in the Philippine

Islands the business of wine, beer, and spirit merchants and the other objects set out in its

memorandum of association. Hence, its earnings, profits, and assets, including those from whose

proceeds the distributions in question were made, the major part of which consisted in the

purchase price of the business, had been earned and acquired in the Philippines. As such, it is

clear that said distributions were income "from Philippine sources."

Sections 250-254, and 256, RR 2 PHY

BIR Ruling 322-87 (October 19, 1987)PHY


14/72

14

BIR Ruling 479-11 (December 5, 2011)PHY

BIR Ruling 039-02 (November 11, 2002) MEGAN

DOCUMENTARY STAMP TAX; gain or loss in partial or complete liquidation of a corporation-

The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale

of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation.Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its

shareholders pursuant to a complete or partial liquidation.

No Documentary Stamp Tax (DST) is due on the surrender and cancellation of shares since the

surrender does not constitute a sale, assignment or transfer because the liquidating corporation is not taking

title to the surrendered shares and the shares are retired and not retained as treasury shares.

A distribution in liquidation, without consideration, of the assets of a corporation consisting of real

estate is not subject to DST under Section 196 of the Tax Code of 1997. A corporation that distributes its

assets to its shareholders as liquidating dividends is not deemed to be selling such assets to the latter.

However, the notarial certification on the deeds of assignment is subject to DST of P15.00 under Section 188

of the Tax Code of 1997. (BIR Ruling No. 039-2002 dated November 11, 2002)

From whatever source

Section 34 (C)(1), Tax CodeMEGAN

(C) Taxes. - (1) In General.- Taxes paid or incurred within the taxable year in connection

with the taxpayer's profession, trade or business, shall be allowed as deduction, except:

(a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any

foreign country; but this deduction shall be allowed in the case of a taxpayer who does not

signify in his return his desire to have to any extent the benefits of paragraph (3) of this

subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and

(d) Taxes assessed against local benefits of a kind tending to increase the value of the property

assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall

be included as part of gross income in the year of receipt to the extent of the income tax

benefit of said deduction.


15/72

15

James vs. United States, 366 US 213 (May 15, 1961)MEGAN

Doctrine: Embezzled money is taxable income of the embezzler in the year of the embezzlement under 22

(a) of the Internal Revenue Code of 1939, which defines "gross income" as including "gains or profits and income

derived from any source whatever," and under 61 (a) of the Internal Revenue Code of 1954, which defines "gross

income" as "all income from whatever source derived."

Facts:

The petitioner is a union official who, with another person, embezzled in excess of $738,000 during the years 1951

through 1954 from his employer union and from an insurance company with which the union was doing

business. Petitioner failed to report these amounts in his gross income in those years and was convicted for

willfully attempting to evade the federal income tax due for each of the years 1951 through 1954 in violation of

the Internal Revenue Code of 1939 and Internal Revenue Code of 1954. He was sentenced to a total of three

years' imprisonment.

Issue:

Whether embezzled funds are to be included in the "gross income" of the embezzler in the year in which the funds

are misappropriated.

HELD:

It had been a well-established principle that unlawful, as well as lawful, gains are comprehended within the term

"gross income." Section II B of the Income Tax Act of 1913 provided that "the net income of a taxable person shall

include gains, profits, and income . . . from . . . the transaction of any lawful business carried on for gain or profit,

or gains or profits and income derived from any source whatever . . . ." (Emphasis supplied.) 38 Stat. 167. When

the statute was amended in 1916, the one word "lawful" was omitted. This revealed, we think, the obvious intent

of that Congress to tax income derived from both legal and illegal sources, to remove the incongruity of having the

gains of the honest laborer taxed and the gains of the dishonest immune. The Court held that gains from illicit

traffic in liquor are includible within "gross income." And, the Court has pointed out, with approval, that there "has

been a widespread and settled administrative and judicial recognition of the taxability of unlawful gains of many

kinds," These include protection payments made to racketeers, ransom payments paid to kidnappers, bribes,

money derived from the sale of unlawful insurance policies, graft, black market gains, funds obtained from theoperation of lotteries, income from race track bookmaking and illegal prize fight pictures. The language of 22 (a) of

the 1939 Code, "gains or profits and income derived from any source whatever," and the more simplified language

of 61 (a) of the 1954 Code, "all income from whatever source derived," have been held to encompass all

"accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." A gain "constitutes


16/72

16

taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable

economic value from it."

RMC 16-2013 (February 8, 2013)

Notes on RMC 16-2013

On treatment of Cash Deposi ts o r Adv ances (or simply payment in advance):

Side of the Seller: They are considered as Gross Receipts.

Obligation to issue an official receipt

Side of the Buyer: They are considered as Expenses.

Upon payment, the buyer/customer shall withhold tax.

To be remitted at the 10th day of the following month.

To be considered as expense, the official receipts shall substantiate the report.

COMMENT: For accounting/business graduates, the method to be followed in recordingis the Expense/Revenue method not the Asset/Liability Method.

SECTION 50 RR 2

Section 50. Allocation of Income and Deductions. - In the case of two or moreorganizations, trades or businesses (whether or not incorporated and whether or notorganized in the Philippines) owned or controlled directly or indirectly by the sameinterests, the Commissioner is authorized to distribute, apportion or allocate grossincome or deductions between or among such organization, trade or business, if hedetermined that such distribution, apportionment or allocation is necessary in order toprevent evasion of taxes or clearly to reflect the income of any such organization, tradeor business.


17/72

17

RMC 88-2012

Tax Implications of Stock Options to Employees

As to ordinary employees BIR Ruling No. 119-2012 rules that the exercise isconsidered as additional compensation subject to Income Tax, and consequently, to

withholding taxes on compensation.

As to managerial and supervisory employees It shall be considered as fringe benefitssubject to fringe taxes benefit taxes.

The valuation shall be based on book value or fair market value of the shares,whichever is higher, at the time of exercise of stock option and the price fixed on thegrant date.

If exercised and the stocks come from the unissued shares of stock of the issuingcorporation, the original issuance is subject to Documentary Stamp Tax.

Tax Implications if the option is sold by the Employee

As to shares not traded in the stock exchange (domestic corporation) Capital GainsTax, also Documentary Stamp Tax upon execution of the deed transferring ownershipor rights thereto, or upon delivery, assignment or indorsement of such shares in favor ofanother.

As to shares traded in the Local Stock Exchange Stock transaction tax

As to shares of stock in a foreign corporation Income tax

Inventories

Section 41, Tax Code CHE


18/72

18

SEC. 41. Inventories. - Whenever in the judgment of the Commissioner, the use of

inventories is necessary in order to determine clearly the income of any taxpayer,

inventories shall be taken by such taxpayer upon such basis as the Secretary of

Finance, upon recommendation of the Commissioner, may, by rules and regulations,

prescribe as conforming as nearly as may be to the best accounting practice in the trade

or business and as most clearly reflecting the income.

If a taxpayer, after having complied with the terms and a conditions prescribed by

the Commissioner, uses a particular method of valuing its inventory for any taxable

year, then such method shall be used in all subsequent taxable years unless:

(i) with the approval of the Commissioner, a change to a different

method is authorized; or (ii) the Commissioner finds that the nature of the

stock on hand(e.g., its scarcity, liquidity, marketability and price movements) is

such that inventory gainsshould be considered realized for tax purposes and,

therefore, it is necessary to modify the valuation method for purposes of

ascertaining the income, profit, or loss in a more realistic manner: Provided,

however,That the Commissioner shall not exercise his authority to require a

change in inventory method more often than once every three (3)

years:Provided, further, That any change in an inventory valuation method must

be subject to approval by the Secretary of Finance .

BIR Ruling DA 128-08 (August 11, 2008)CHE

BIR Ruling DA 12-08 talks about the CIRs approval of Shell PHs application to change

inventory costing method from Weighted Average Method (WAVE) to First-In-First-Out(FIFO) due to

the implementation of a new computerized accounting system( Global Systems Application ProductData Processing or GSAP) which is used by its Ultimate Parent. Royal Dutch Shell Plc (RSD) and

all its other affiliates. The approval was based on Sec 41 of the Tax Code and Section 2 of RR 3-80

(Requiring a change from LIFO (Last-In-First-Out to WAVE and any change must be approved by

the CIR or when required by the CIR) and the CIRs recognition that the purpose of Shells change

in its inventory method will best conform to its accounting practice as said valuation will clearly

reflect the income of said companies.

Exclusions

Section 32 (B), Tax Code CHE


19/72

19

(B) Exclus ions from Gross Income. - The following items shall not be included in

gross incomeand shall be exempt from taxation under this title:

(1) Life Insu rance- The proceeds of life insurance policies paid to the heirs or

beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if

such amounts are held by the insurer under an agreement to pay interest thereon, the

interest payments shall be included in gross income.(2)Amount Received by Insured as Return of Premium- The amount received

by the insured, as a return of premiums paid by him under life insurance, endowment,

or annuity contracts, either during the term or at the maturity of the term mentioned

in the contract or upon surrender of the contract.

(3) Gifts, Bequests , and Devises. - The value of property acquired by gift,

bequest, devise, or descent: Provided, however, That income from such property, as well

as gift, bequest, devise or descent of income from any property, in cases of transfers of

divided interest, shall be included in gross income.

(4) Compensat ion for In jur ies or Sickness- amounts received, through

Accident or Health Insurance or under Workmen's Compensation Acts, as

compensation for personal injuries or sickness, plus the amounts of any damages

received, whether by suit or agreement, on account of such injuries or sickness.

(5) Income Exempt un der Treaty. - Income of any kind,to the extent required

by any treaty obligation bindingupon the Government of the Philippines.

(6) Retirem ent Benefi ts, Pensions , Gratui t ies, etc. -

(a) Retirement benefits received under Republic Act No. 7641and

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 employeehas 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.

For purposes of this Subsection, the term'reasonable private benefit

plan'means a pension, gratuity, stock bonus or profit-sharing plan

maintained by an employer for the benefit of some or all of his officials or

employees, wherein contributions are made by such employer for theofficials or employees, or both, for the purpose of distributing to such

officials and employees the earnings and principal of the fund thus

accumulated, and wherein its is provided in said plan that at no time shall


20/72


21/72

21

or civic achievementbut only if: (i) The recipient was selected without any

action on his part to enter the contest or proceeding ; and (ii) The recipient is

not required to render substantial future services as a condition to

receiving the prize or award.

(d)Prizes and Aw ards in Sports Com pet i t ion.- All prizes and awards

granted to athletes in local and international sports competitions and

tournamentswhether held in the Philippines or abroadand sanctioned by

their national sports associations.

(e) 13thMonth Pay and Other Benefi ts.- Gross benefits received by

officials and employees of public and private entities: Provided, however,That the

total exclusion under this subparagraph shall not exceed Thirty thousand

pesos (P30,000)which shall cover: (i) Benefits received by officials and

employees of the national and local government pursuant to Republic Act No.

6686(Christmas Bonus); (ii) Benefits received by employees pursuant to

Presidential Decree No. 851(13th

Month Pay), as amended by MemorandumOrder No. 28, dated August 13, 1986; (iii) Benefits received by officials and

employees not covered by Presidential decree No. 851, as amended by

Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits

such as productivity incentives and Christmas bonus:Provided,further,That

the ceiling of Thirty thousand pesos (P30,000) may be increasedthrough rules

and regulations issued by the Secretary of Finance, upon recommendation of the

Commissioner, after considering among others, the effect on the same of the

inflation rate at the end of the taxable year.

(f) GSIS, SSS, Medicare and Other Co ntr ibu tions.- GSIS, SSS,

Medicare and Pag-ibig contributions, and union dues of individuals.

(g) Gains from the Sale of Bo nds , Debentures or ot her Certi f icate of

Indebtedness. - Gains realized from the same or exchange or retirement of

bonds, debentures or other certificate of indebtedness with a maturity of more

than five (5) years.

(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by

the investor upon redemption of shares of stock in a mutual fund companyas

defined in Section 22 (BB) (an open-end and close-end investment company as defined

under the Investment Company Act)of this Code.

Retirement benefits, etc.


22/72

22

Commissioner of Internal Revenue vs. Court of Appeals (March 23, 1992) ELKIE

Commissioner of Internal Revenue vs. Court of Appeals (October 17, 1991)ELKIE

Re: Request of Atty. Bernardo Zialcita (October 18, 1990)ELKIE

Intercontinental Broadcasting Corporation vs. Amarilla (October 27, 2006) BONG

RMC 27-2011 (July 1, 2011)BONG

Income derived by foreign government

Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation (January 22, 1990)BONG

De minimis/ PERA

Republic Act 9505 JUVERT

RR 8-00 (August 21, 2000)JUVERT

RR 5-2011 (March 16, 2011) JUVERT

RR 17-2011 (October 27, 2011) VAR

RR 8-2012 (May 11, 2012) VAR

3. General Principles

Section 23, Tax CodeVAR

4. Source of Income Rules

Section 42, Tax Code JOSH


23/72

23

Gross income from sources within Phils.

Commissioner of Internal Revenue vs. Marubeni Corporation (December 18, 2001)JOSH

Commissioner of Internal Revenue vs. BOAC (April 30, 1987)JOSH

Commissioner v. CTA and Smith Kline & French Overseas (January 17, 1984)KHA

Facts: This case is about the refund of a 1971 income tax amounting to P324,255. In its 1971 originalincome tax return, Smith Kline declared a net taxable income of P1,489,277 and paid P511,247 as taxdue. Among the deductions claimed from gross income was P501,040 as its share of the head officeoverhead expenses. However, in its amended return filed on March 1, 1973, there was an overpaymentof P324,255 "arising from underdeduction of home office overhead". It made a formal claim for the refundof the alleged overpayment. It appears that sometime in October, 1972, Smith Kline received from itsinternational independent auditors, Peat, Marwick, Mitchell and Company, an authenticated certification tothe effect that the Philippine share in the unallocated overhead expenses of the main office for the yearended December 31, 1971 was actually P1,427,484. It further stated in the certification that the allocationwas made on the basis of the percentage of gross income in the Philippines to gross income of the

corporation as a whole. By reason of the new adjustment, Smith Kline's tax liability was greatly reducedfrom P511,247 to P186,992 resulting in an overpayment of P324,255.On April 2, 1974, without awaitingthe action of the Commissioner of Internal Revenue on its claim Smith Kline filed a petition for review withthe Court of Tax Appeals. In 1980, the Tax Court ordered the Commissioner to refund the overpayment orgrant a tax credit to Smith Kline. The Commissioner appealed to this Court.

Issue: Whether or not the claim for refund is in order.

Held: Yes. The governing law is found in section 37 of the old National Internal Revenue Code,Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158, the National InternalRevenue Code of 1977 and which reads:

SEC. 37. Income form sources within the Philippines.

(b) Net income from sources in the Philippines.From the items of gross income specified in subsection(a) of this section there shall be deducted the expenses, losses, and other deductions properlyapportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which

cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall beincluded in full as net income from sources within the Philippines.

Revenue Regulations No. 2 of the Department of Finance contains the following provisions on thedeductions to be made to determine the net income from Philippine sources:

SEC. 160.Apportionment of deductions.From the items specified in section 37(a), as being derivedspecifically from sources within the Philippines there shall be deducted the expenses, losses, and otherdeductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses ordeductions which can not definitely be allocated to some item or class of gross income. The remaindershall be included in full as net income from sources within the Philippines. The ratable part is based uponthe ratio of gross income from sources within the Philippines to the total gross income.

From the foregoing provisions, it is manifest that where an expense is clearly related to the production ofPhilippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of officebuilding in the Philippines), that expense can be deducted from the gross income acquired in the

Philippines without resorting to apportionment. The overhead expenses incurred by the parent companyin connection with finance, administration, and research and development, all of which direct benefit itsbranches all over the world, including the Philippines, fall under a different category however. These areitems which cannot be definitely allocated or Identified with the operations of the Philippine branch. For1971, the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code


24/72

24

and section 160 of the regulations, Smith Kline can claim as its deductible share a ratable partof suchexpenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, ofthe multinational corporation.

Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue (April 30, 1965)KHA

FACTS: The petitioner Philippine Guaranty Co., Inc., a domestic insurance company, entered intoreinsurance contracts with foreign insurance companies not doing business in the country, thereby cedingto foreign reinsurers a portion of the premiums on insurance it has originally underwritten in thePhilippines. The premiums paid by such companies were excluded by the petitioner from its gross incomewhen it file its income tax returnsfor 1953 and 1954. Furthermore, it did not withhold or pay tax on them.Consequently, the CIR assessed againstthe petitioner withholding taxes on the ceded reinsurancepremiums to which the latter protested the assessment on the ground that the premiums are not subjectto tax for the premiums did not constitute income from sources within the Philippines because the foreignreinsurers did not engage in business in the Philippines, and CIR's previous rulings did not requireinsurance companies to withhold income tax due from foreign companies.

ISSUE: 1 Are insurance companies not required to withhold tax on reinsurance premiums ceded toforeign insurance companies, which deprives the government from collecting the tax due from them?

2. Whether or not REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS are CONSIDEREDINCOME FROM PHILIPPINE SOURCES.

HELD: No. The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a

necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resistan aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, publicimprovement designed for the enjoyment of the citizenry and those which come within the State's territory,and facilities and protection which a government is supposed to provide. Considering that the reinsurancepremiums in question were afforded protection by the government and the recipient foreign reinsurersexercised rights and privileges guaranteed by our laws, such reinsurance premiums and reinsurersshould share the burden of maintaining the state. The petitioner's defense of reliance of good faith onrulings of the CIR requiring no withholding of tax due onreinsurance premiums may free the taxpayer fromthe payment of surcharges or penalties imposed for failure to pay the corresponding withholding tax, but itcertainly would not exculpate it from liability to pay such withholding tax. The Government is not estoppedfrom collecting taxes by the mistakes or errors of its agents.

2. Where the reinsurance contracts show that the activities that constituted the undertaking to reinsure adomestic insurer against losses arising from the original insurances in the Philippines were performed inthe Philippines, the reinsurance premiums are considered as coming from sources within the Philippinesand are subject to Philippine Income Tax.

Howden & Co., Ltd. Vs. Collector of Internal Revenue (April 14, 1965)KHA


25/72

25

FACTS:1. In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into reinsurance

contracts with 32 Britishinsurance companies not engaged in trade or business in the Philippines,

whereby the former agreed to cede to them aportion of the premiums on insurances on fire, marine and

other risks it has underwritten in the Philippines.2. The reinsurance contracts were prepared and signed

by the foreign reinsurers in England and sent to Manila where Commonwealth Insurance Co. signed

them.3. Alexander Howden & Co., Ltd., also a British corporation, represented the British insurance

companies.4. Pursuant to the contracts, Commonwealth Insurance Co remitted P798,297.47

to Alexander Howden & Co., Ltd., asreinsurance premiums.5. In behalf of Alexander Howden & Co., Ltd.,

Commonwealth Insurance Co. filed an income tax return declaring the sum of P798,297.47, with accrued

interest in the amount of P4,985.77, as Alexander Howden & Co., Ltd.'s gross income for calendar year

1951.It also paid the BIR P66,112.00 income tax.6. On May 12, 1954, Alexander Howden & Co.,

Ltd. filed with the BIR a claim for refund of the P66,112.00, later reduced toP65,115.00, because it

agreed to the payment of P977.00 as income tax on the P4,985.77 accrued interest .7. A ruling of the

CIR was invoked, stating that it exempted from withholding tax reinsurance premiums received from

domesticinsurance companies by foreign insurance companies not authorized to do business in the

Philippines.8. Subsequently, petitioner. instituted an action in the CFI of Manila for the recovery of the

amount claimed. Tax Court denied theclaim.

ISSUE:Are portions of premiums earned from insurances locally underwritten by a domestic corporation,

ceded to and received bynon-resident foreign reinsurance companies subject to income tax or not?

HELD: YES. Section 24 of the National Internal Revenue Code subjects to tax a non-resident foreign

corporation's income fromsources within the Philippines.Appellants contends that the reinsurance

premiums came from sources outside the Philippines, for these reasons: (1) Thecontracts of reinsurance,

out of which the reinsurance premiums were earned, were prepared and signed abroad (2) Thereinsurers,not being engaged in business in the Philippines, received the reinsurance premiums as income from

their business conducted in England and, as such, taxable in England; and, (3) Section 37 of the Tax

Code, enumerating what areincome from sources within the Philippines, does not include reinsurance

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

reinsurance premiums remitted toappellants by virtue of the reinsurance contracts, had for their source

the undertaking to indemnify Commonwealth InsuranceCo. against liability. Said undertaking is the

activity that produced the reinsurance premiums, and the same took placein the Philippines.In the

first place, the reinsured, the liabilities insured and the risks originally underwritten by

CommonwealthInsurance Co., upon which the reinsurance premiums and indemnity were based,

were all situated in thePhilippines.Secondly, contrary to appellants' view, the insurance contracts were

perfected in the Philippines for Commonwealth Insurance Co. signed them last in Manila. Thirdly, the

parties to the reinsurance contracts in question evidently intended Philippine law to govern. Section 24 of

the Tax Code does not require a foreign corporation to be engaged in business in the Philippines in order

for its income from sources within the Philippines to be taxable. It subjects foreign corporations not doing


26/72

26

business in the Philippines to tax for income from sources within the Philippines. If by source of income

is meant the business of the taxpayer, foreigncorporations not engaged in business in the Philippines

would be exempt from taxation on their income from sources withinthe Philippines.

Philippine American Life Insurance Company, Inc. vs. Court of Tax Appeals CA-GR Sp. No. 31283 (April 25,1995)ALMAN

Facts: PHILAMLIFE, a domestic corporation entered into a Management Services Agreement with American

International Reinsurance Co., Inc. (AIRCO) or American International Group Inc (AIGI) after their merger, a non-resident

foreign corporation with principal place of business in Pembroke, Bermuda, for a fee of not exceeding $250,000.00 per

annum. AIGI gave advisory services admittedly performed abroad by the personnel of a non-resident foreign corporation

not doing business in the Philippines (AIGI). The CTA held that they are subject to Philippines withholding income tax.

Issue: Are they subject to income tax despite being an NRFC?

Held: Yes. Petitioners insist that there is no legal nor factual bias for the respondent court to conclude that the

compensation paid for advisory services rendered outside the Philippines to petitioner AIGI, a non-resident foreigncorporation not engaged in trade or business in the Philippines, is considered "rentals and royalties from properties

located in the Philippines" pursuant to Section 37 (a) (4) of the National Internal Revenue Code. Petitioners contend that

petitioner AIGI is not covered by the above provision of the Tax Code considering that it has no properties located in the

Philippines from which rentals and royalties can be derived.

After a careful perusal of the facts and law of the case, we agree with respondent court's ruling which comprehensively

discusses the above issue, to wit:

Under the law:

Section 37. Income from Services within the Philippines, (a) Gross income from sources within the Philippines the

following items of gross income shall be treated as gross income from source within the Philippines.

-Rentals and royalties Rentals and royalties from properties located in the Philippines or from any interest in such

property, including rentals or royalties for

-The supply of scientific, technical, industrial or commercial knowledge or informations;

-The supply of any assistance that is auxiliary and subsidiary to, and is furnished as a means of enabling the application

or enjoyment of, any property, or right as is mentioned in paragraph (a), any such equipment as is mentioned in

paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); or

-Technical advice, assistance or services rendered in connection with the technical management and administration of

any scientific, industrial or commercial undertaking, venture, project of scheme; and


27/72

27

AIGI being a non-resident foreign corporation not engaged in trade or business in the Philippines 'shall pay a tax equal to

thirty-five (35%) percent of the gross income received during each taxable year from all sources within the Philippines as

interest, dividends, rents, royalties (including remuneration for technical services), salaries, premiums, annuities,

emoluments or other fixed or determinable annual, periodical or casual gains, profits and income and capital gains: . . .

(Section 12(6) (I) of the National Internal Revenue Code. (Underscoring for emphasis).

Thus, this Court rules that while it is true petitioner AIGI has no properties in the Philippines, agreement with petitionerPHILAMLIFE necessary for the latter company's efficient operation and growth, with petitioner AIGI deriving income form

said agreement, petitioner AIGI is well-within the ambit of Section 37 (a)(7) of the Tax Code.

In our jurisprudence, the test of taxability is the 'source', and the source of an income is "that activity . . . which produced

the income". It is not the presence of any property from which one derives rentals and royalties that is controlling, but

rather as expressed under the expanded meaning of "royalties", it includes " royalties for the supply of scientific, technical,

industrial, or commercial knowledge or informations; and the technical advice, assistance or services rendered in

connection with the technical management and administration of any scientific, industrial or commercial undertaking,

venture, project or scheme", and others (Section 37 (a) (7) as amended by P.D. 1457).

WHEREFORE, the instant petition for review is DISMISSED by the Court for lack of merit. The respondent court's

decision dated March 10, 1993 and order dated May 19, 1993 in C.T.A. Cases Nos. 3504 and 3943 are hereby Affirmed.

Costs against petitioners.

Commissioner of Internal Revenue vs. Baier-Nickel (August 29, 2006)ALMANA

Facts: CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the CTA. Juliane

Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic corporation engaged in the manufacturing,

marketing and selling of embroidered textile products. Through Jubanitexs general manager, Marina Guzman, the

company appointed respondent as commission agent with 10% sales commission on all sales actually concluded and

collected through her efforts.

In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the 10% withholding tax

of P170, 777.26 and remitted to BIR. Respondent filed her income tax return but then claimed a refund from BIR for the

P170K, alleging this was mistakenly withheld by Jubanitex and that her sales commission income was compensation for

services rendered in Germany not Philippines and thus not taxable here.

She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but decision was reversed by

CA on appeal, holding that the commission was received as sales agent not as President and that the source of incomearose from marketing activities in Germany.

Issue: W/N respondent is entitled to refund


28/72

28

Held: No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to

the Philippine income taxation on their income received from all sources in the Philippines. In determining the meaning of

source, the Court resorted to origin of Act 2833 (the first Philippine income tax law), the US Revenue Law of 1916, as

amended in 1917.

US SC has said that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the

sale of capital assets. If the income is from labor, the place where the labor is done should be decisive; if it is done in thiscountry, the income should be from sources within the United States. If the income is from capital, the place where the

capital is employed should be decisive; if it is employed in this country, the income should be from sources within the

United States. If the income is from the sale of capital assets, the place where the sale is made should be likewise

decisive. Source is not a place, it is an activity or property. As such, it has a situs or location, and if that situs or location

is within the United States the resulting income is taxable to nonresident aliens and foreign corporations.

The source of an income is the property, activity or service that produced the income. For the source of income to be

considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines.

The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the

taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually

exempt from taxation.

In the instant case, respondent failed to give substantial evidence to prove that she performed the incoming producing

service in Germany, which would have entitled her to a tax exemption for income from sources outside the Philippines.

Petition granted.

A. Soriano Y Cia vs. Collector of Internal Revenue (August 31, 1955)ALMANA

TAXATION; BROKERS PERCENTAGE TAX; AUTHORITY OF COLLECTOR OF INTERNAL REVENUE TO COLLECT

THE TAX; CASE AT BAR.Brokerage is subject to two different taxesone for the business itself, which is a specific

amount fixed by Section 193 ofthe Tax Code, and another is imposed by section 195 of the same Code, which is 6 per

cent of the gross compensation to be received on account of the brokerage. The latter form of tax is not an exaction onthe business, nor on the business transaction, but on the compensation resulting from said transaction. In the case at bar,

as the compensation received by petitioner partook of the nature of brokerage commission, the respondent Collector of

Internal Revenue has authority to collect 6 per cent thereof as broker's percentage tax, for the right of receiving

compensation for the exercise of an occupation recognized by Philippine laws. Said tax is not a levy on the brokerage

transactions effected outside of the Philippines, but on the compensation received by petitioner as a broker from another

domestic corporation, in virtue of a contract executed in the Philippines. The parties, in executing the same, subjected

themselves to the taxing jurisdiction of this country. [A. Soriano y Ca. vs. Collector of Internal Revenue, 101 Phil.

504(1957)]

Facts: Petitioner was engaged in the business of selling surplus goods acquired from the Foreign Liquidation Commission

pursuant to an agreement with the United States Government whereby petitioner undertook to rehabilitate the Veterans

Administration Building (formerly Heacock Building) for and in consideration of over a million pesos worth of surplus goods.

Part of the surplus goods consisted of tractors which were then in the various U. S. military bases or depots in the

Philippines. The United Africa Co., Ltd. sent its representative, Hugh Gibson, to the Philippines to look into the availability

of tractors for sale in the Philippines. Gibson learned of the petitioner's business and contracted to buy tractors from the


29/72

29

latter, to be delivered f.a.s. (free alongside ship), Manila, in good working condition and capable of running off lighters

under their own power. A tractor expert, Mr. Tex Taylor, was employed by the foreign company to select, inspect and test

the tractors before delivery. virtual law library

Tex Taylor went to the different military bases, took the serial numbers of the tractors which he wanted, and gave the list

thereof to the petitioner, who then secured from the Foreign Liquidation Commission the purchase invoices and other

documents for the immediate release of the tractors. The tractors were then removed by petitioner to its Pieco Yard,where they were tested by Tex Taylor. Those found to be in good condition were approved by Taylor, wherefore petitioner

presented to him the sales invoices for his signature, stamping his approval thereon. Twenty-four of the tractors were

found defective and so were brought to petitioner's Sta. Mesa Yard for reconditioning. Upon approval of each invoice, the

same was presented by petitioner to the Philippine Refining Company, Inc., an affiliate of the foreign buyer, for payment of

the purchase price. The Philippine Refining Co. would in turn notify the National City Bank of New York and the Hongkong

and Shanghai Banking Corporation, Manila, where the United Africa Co. had dollar deposits, to make payment of

petitioner's invoices. The tractors were delivered by petitioner to the pier in Manila by means of barges as soon as notice

was received from the representative of its foreign buyer that a carrying vessel was ready. On June 24 and August 26,

1947, the Philippine Refining Co., Inc. shipped the 57 tractors acquired from petitioner from the port of Manila to United

Africa Co., Ltd. at Dares Salaem, East Africa. The total value of the tractors was P757,000. However, due to certain

defects of some of them upon reaching Africa, the sum of P4,959.19 was reimbursed by petitioner to its foreign buyer by

credit memo.

Issue: Whether or petitioner is liable for the payment of percentage or sales tax on its gross sales of the 57

Held: Yes. Under the above provisions, petitioner's liability would thus depend on first, whether or not it was an importer of

the 57 tractors in question, and second, whether it made an original sale thereof in the Philippines. The theory of the

Bureau of Internal Revenue, affirmed by the defunct Board of Tax Appeals, is that petitioner imported the tractors from the

army bases; that they were subsequently sold to its foreign buyer within the Philippines; and that title passed upon

delivery to the carrier f.a.s. Manila. This Court has already held that one who acquires title to surplus equipment found in U.

S. army bases or installations within the Philippines by purchase, and then brings them out of those bases or depots, is an

importer, and sales made by him by such surplus goods to the general public are taxable under sections 185 and 186 of

the Tax Code.

Quill Corp. vs. North Dakota, 504 US 298 (May 26, 1992) PHY

Vodafone International Holdings B.V. vs. Union of India & Anr. (Supreme Court of India, Civil Appeal No.

733 of 2012; January 20, 2012)PHY

RAMO 1-95 (March 21, 1995) PHY

RAMO 4-86 (April 5, 1986) MEG


30/72

30

5. Deductions

Sections 34-36, Tax CodeMEG

Business expenses

Republic Act 10028 (Sections 3 & 14 only)MEG

Section 3.Section 3 of Republic Act No. 7600 is hereby amended to read as follows:

"Sec. 3.Definition of Terms.- For purposes of this Act, the following definitions are adopted:

"a)Age of gestation- the length of time the fetus is inside the mother's womb.

"b) Bottlefeeding- the method of feeding an infant using a bottle with artificial nipples, the contents of whichcan be any type of fluid.

"c) Breastfeeding- the method of feeding an infant directly from the human breast.

"d) Breastmilk- the human milk from a mother.

"e) Breastmilk substitute- any food being marketed or otherwise represented as partial or total replacement

of breastmilk whether or not suitable for that purpose."f) Donor milk- the human milk from a non-biological mother.

"g) Expressed breastmilk- the human milk which has been extracted from the breast by hand or by breastpump. It can be fed to an infant using a dropper, a nasogastric tube, a cup and spoon, or a bottle.

"h) Expressing milk- the act of extracting human milk from the breast by hand or by pump into a container.

"i) Formula feeding- the feeding of a newborn with infant formula usually by bottle feeding. It is also calledartificial feeding.

"j) Health institutions- are hospitals, health infirmaries, health centers, lying-in centers, or puericulturecenters with obstetrical and pediatric services.

"k) Health personnel- are professionals and workers who manage and/or administer the entire operations ofhealth institutions and/or who are involved in providing maternal and child health services.

"l) Health workers- all persons who are engaged in health and health-related work, and all personsemployed in all hospitals, sanitaria, health infirmaries, health centers, rural health units, barangay healthstations, clinics and other health-related establishments, whether government or private, and shall include

medical, allied health professional, administrative and support personnel employed regardless of theiremployment status.

"m) Infant- a child within zero (0) to twelve (12) months of age.

"n) Infant formula- the breastmilk substitute formulated industrially in accordance with applicable CodexAlimentarius standards, to satisfy the normal nutritional requirements of infants up to six (6) months of age,and adopted to their physiological characteristics.

"o) Lactation management- the general care of a mother-infant nursing couple during the mother's prenatal,immediate postpartum and postnatal periods. It deals with educating and providing knowledge andinformation to pregnant and lactating mothers on the advantages of breastfeeding, the risks associated withbreastmilk substitutes and milk products not suitable as breastmilk substitutes such as, but not limited to,condensed milk and evaporated milk, the monitoring of breastfeeding mothers by health workers andbreastfeeding peer counselors for service patients to ensure compliance with the Department of Health,World Health Organization (WHO) and the United Nations Children's Fund (UNICEF) on the implementationof breastfeeding policies, the physiology of lactation, the establishment and maintenance of lactation, the

proper care of the breasts and nipples, and such other matters that would contribute to successfulbreastfeeding.

"p) Lactation stations- private, clean, sanitary, and well-ventilated rooms or areas in the workplace or publicplaces where nursing mothers can wash up, breastfeed or express their milk comfortably and store thisafterward.

"q) Low birth weight infant- a newborn weighing less than two thousand five hundred (2,500) grams at birth.


31/72

31

"r) Nursing employee- any female worker, regardless of employment status, who is breastfeeding her infantand/or young child.

"s) Mother's milk- the breastmilk from the newborn's own mother.

"t) Non-health facilities, establishment or institution- public places and working places, as defined insubparagraphs (u) and (y), respectively.

"u) Public place- enclosed or confined areas such as schools, public transportation terminals, shoppingmalls, and the like.

"v) Rooming-in- the practice of placing the newborn in the same room as the mother right after delivery upto discharge to facilitate mother-infant bonding and to initiate breastfeeding. The infant may either share themother's bed or be placed in a crib beside the mother.

"w) Seriously ill mothers- are those who are: with severe infections; in shock, in severe cardiac orrespiratory distress; or dying; or those with other conditions that may be determined by the attendingphysician as serious.

"x) Wet-nursing- the feeding of a newborn from another mother's breast when his/her own mother cannotbreastfeed.

"y) Workplace- work premises, whether private enterprises or government agencies, including theirsubdivisions, instrumentalities and government-owned and -controlled corporations.

"z) Young child- a child from the age of twelve (12) months and one (1) day up to thirty-six (36) moths.

Section 14.Section 13 of Republic Act No. 7600 is hereby renumbered and amended to read as follows:

"Sec. 19. Incentives. - The expenses incurred by a private health and non-health facility, establishment or institution,in complying with the provisions of this Act, shall be deductible expenses for income tax purposes up to twice theactual amount incurred: Provided,That the deduction shall apply for the taxable period when the expenses wereincurred: Provided, further,That all health and non-health facilities, establishments and institutions shall comply withthe provisions of this Act within six (6) months after its approval: Provided, finally,That such facilities, establishmentsor institutions shall secure a "Working Mother-Baby-Friendly Certificate" from the Department of Health to be filedwith the Bureau of Internal Revenue, before they can avail of the incentive.

"Government facilities, establishments or institutions shall receive an additional appropriation equivalent to thesavings they may derive as a result of complying with the provisions of this Act. The additional appropriation shall beincluded in their budget for the next fiscal year."

Republic Act 8502 BENN

Republic Act 8525 (Sections 1 to 5 only) BENN

Republic Act 9999 BENN

Commissioner of Internal Revenue vs. Isabela Cultural CorporationCHE

FACTS: Isabela Cultural Corporation (ICC), a domestic corporation received anassessment notice for deficiency income tax and expanded withholding tax from BIR. Itarose from the disallowance of ICCs claimed expense for professional (1) auditingservices by SGV & Co. 2) legal services Bengzon law office) and security services paidby ICC; as well as the alleged understatement of interest income on the three promissorynotes due from Realty Investment Inc. The deficiency expanded withholding tax wasallegedly due to the failure of ICC to withhold 1% e-withholding tax on its claimed

deduction for security services.

ICC sought a reconsideration of the assessments. Having received a final noticeof assessment, it brought the case to CTA, which held that it is unappealable, since thefinal notice is not a decision. CTAs ruling was reversed by CA, which was sustained by


32/72

32

SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruledthat the deductions for professional and security services were properly claimed, it saidthat even if services were rendered in 1984 or 1985, the amount is not yet determined atthat time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR whichoverstate the interest income, when it applied compounding absent any stipulation.

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

ISSUE:W/N the aforementioned may be deducted

HELD:for the auditing and legal services NObut for the security services YES

The requisites for deductibility of ordinary and necessary trade, business orprofessional expenses, like expenses paid for legal and auditing services are: a) theexpense must be ordinary and necessary; b) it must have been paid or incurred duringthe taxable year; c) it must have been paid or incurred in carrying on the trade orbusiness of the taxpayer and d) it must be supported by receipts, records and otherpertinent papers.

The requisite that it must have been paid or incurred during the taxable year isqualified by Sec. 45 of NIRC which states that the deduction provide for in this title shallbe taken for the taxable year in which paid or incurred dependent upon the method ofaccounting upon the basis of which the net income is computed x x x.

ICC uses the accrual method. RAM No. 1-2000 provides that under the accrualmethod, expenses not claimed as deductions in the current year when they are incurredCANNOT be claimed as deduction from income for the succeeding year. The accrualmethod relies upon the taxpayers right to receive amount or its obligation to pay them

NOT the actual receipt or payment. Amounts of income accrue where the right to receivethem become fixed, where there is created an enforceable liability. Liabilities are accruedwhen fixed and determinable in amount.

The accrual of income and expense is permitted when the ALL-EVENTS TESThas been met. The test requires that: 1) fixing of a right to income or liability to pay and 2)the availability of the reasonable accurate determination of such income or liability. Itdoes not require that the amount be absolutely known only that the taxpayer hasinformation necessary to compute the amount with reasonable accuracy. The test issatisfied where computation remains uncertain if its basis is unchangeable. The amountof liability does not have to be determined exactly, it must be determined with reasonableaccuracy.

In the case at bar, the expenses for legal services pertain to the years 1984 and1985. The firm has been retained since 1960. From the nature of the claimed deductionand the span of time during which the firm was retained, ICC can be expected to havereasonably known the retainer fees charged by the firm as well as compensation for itsservices. Exercising due diligence, they could have inquired into the amount of their


33/72


34/72

34

FACTS: Aguinaldo Industries Corporation (AIC) is a domestic corporation engaged in themanufacture of fishing nets, a tax-exempt industry and the manufacture of furniture. Foraccounting purposes, each division is provided with separate books of accounts. Previously,AIC acquired a parcel of land in Muntinlupa, Rizal, as site of the fishing net factory. Later, itsold the Muntinlupa property. AIC derived profit from this sale which was entered in thebooks of the Fish Nets Division as miscellaneous income to distinguish it from its tax-exemptincome.

For the year 1957, AIC filed two separate income tax returns for each division. Afterinvestigation, the examiners of the BIR found that the Fish Nets Division deducted from itsgross income for that year the amount of P61,187.48 as additional remuneration paid to theofficers of AIC. This amount was taken from the net profit of an isolated transaction (sale ofMuntinlupa land) not in the course of or carrying on of AIC's trade or business, and wasreported as part of the selling expenses of the Muntinlupa land. Upon recommendation of theexaminer that the said sum of P61,187.48 be disallowed as deduction from gross income,petitioner asserted in its letter of February 19, 1958, that said amount should be allowed asdeduction because it was paid to its officers as allowance or bonus pursuant to its by-laws.

ISSUE/HELD:W/N the bonus given to the officers of the petitioner upon the sale of itsMuntinlupa land is an ordinary and necessary business expense deductible for income taxpurposes

HELD: NO. Sec. 30 (a) (1) of the Tax Code provides that in computing net income, thereshall be allowed as deductions Expenses, including all the ordinary and necessaryexpenses paid or incurred during the taxable year in carrying on any trade or business,including a reasonable allowance for personal services actually rendered.

The bonus given to the officers of the petitioner as their share of the profitrealized from the sale of petitioner's Muntinglupa land cannot be deemed a deductibleexpense for tax purposes, even if the aforesaid sale could be considered as a

transaction for carrying on the trade or business of the petitioner and the grant of thebonus to the corporate officers pursuant to petitioner's by-laws could, as an intra-corporate matter, be sustained. The records show that the sale was effected through abroker who was paid by petitioner a commission of P51,723.72 for his services. On the otherhand, there is absolutely no evidence of any service actually rendered by petitioner'sofficers which could be the basis of a grant to them of a bonus out of the profitderived from the sale. This being so, the payment of a bonus to them out of the gainrealized from the sale cannot be considered as a selling expense; nor can it bedeemed reasonable and necessary so as to make it deductible for tax purposes. Theextraordinary and unusual amounts paid by petitioner to these directors in the guise andform of compensation for their supposed services as such, without any re lat ion to themeasure of their actual services, cannot be regarded as ordin ary and necessary

expenses within the meaning of the law. This is in line with the doctrine in the law of

taxation that the taxpayer must show that its claimed deductions clearly come within thelanguage of the law since allowances, like exemptions, are matters of legislative grace.


35/72

35

Atlas Consolidated Mining & Development Corporation vs. Commissioner of Internal Revenue

(January 27, 1981) ELKIE

Zamora vs. Collector of Internal Revenue (May 31, 1963) ELKIE

C.M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue (November 28, 1969) ELKIE

Calanoc vs. Collector of Internal Revenue (November 29, 1961) BONG

Kuenzle & Streiff, Inc. vs. Collector of Internal Revenue (October 20, 1959) BONG

RR 10-2002 (July 10, 2002) BONG

RR 1-2009 (December 9, 2008) JUVER

RR 7-2010 (July 20, 2010) JUVERT

Interest (as amended by Republic Act 9337)

Paper Industries Corporation of the Philippines vs. Court of Appeals (December 1, 1995) JUVERT

Commissioner of Internal Revenue vs. Vda. de Prieto (September 30, 1960) VAR

RR 13-2000 (November 20, 2000) VAR

Interest arbitrage

BIR Ruling No. 006-00 (January 5, 2000) VAR

Taxes

Commissioner of Internal Revenue vs. Lednicky (July 31, 1964) JOSH

Losses


36/72

36

Section 38, Tax Code

RR 12-77 (October 6, 1977) JOSH

RMO 31-2009 (October 16, 2009) KHA

Forex losses

BIR Ruling 206-90 (October 30, 1990) KHA

This refers to your letter dated June 25, 1990 requesting in behalf of your client, PorcelanaMariwasa, Inc.

(PMI), a ruling confirming your opinion that the foreign exchange lossincurred by PMI is a deductible lossin 1990.It is represented that PMI is a corporation established and organized under Philippine laws. In

reply, please be informed that the annual increase in value of an asset is not taxableincome because

such increase has not yet been realized. The increase in value i.e., thegain, could only be taxed when a

disposition of the property occurred which was of such anature as to constitute a realization of such gain,

that is, a severance of the gain from theoriginal capital invested in the property. The same conclusion

obtains as to losses. Theannual decline in the value of property is not normally allowable as a deduction.

Hence, tobe allowable the loss must be realized. When foreign currency acquired in connection with a

transaction in the regular course ofbusiness is disposed ordinary gain or loss results from the fluctuations.

The loss is deductible only for the year it is actually sustained. It is sustained during the year in which the

loss occurs as evidenced by the completed transaction and as fixed by identifiable occurring in that year.

Closed transaction is a taxable event which has been consummated. No taxation event has as yet beenconsummated prior tothe remittance of the scheduled amortization. Accordingly, your request for

confirmation ofyour aforesaid opinion is hereby denied considering that foreign exchange losses

sustainedas a result of conversion or devaluation of the peso vis-a-vis the foreign currency or USdollar

and vice versa but which remittance of scheduled amortization consisting of principaland interests

payment on a foreign loan has not actually been made are not deductible fromgross income for income

tax purposes.

BIR Ruling No. 144-85 (August 26, 1985) KHA

This refers to your letter dated July 1, 1985 requesting a ruling as to whether foreign

exchange losses which have accrued byreason of devaluation are deductible for income tax purposes.

The losses arose from matured but unremitted principal repayments onloans affected by the debt

restructuring program in the Philippines.In reply thereto, I have the honor to inform you that annual


37/72

37

increase in value of an asset is not taxable income because suchincrease has not yet been realized. The

increase in value, i.e., the gain, could only be taxed when a disposition of the property occurredwhich was

of such a nature as to constitute a realization of such gain, that is, a severance of the gain from the

original capital investedin the property. The same conclusion obtains as to losses. The annual decrease

in the value of property is not normally allowable as aloss. Hence, to be allowable the loss must be

realized. When foreign currency acquired in connection with a transaction in the regular course of

business is disposed of ordinary gainor loss results from the fluctuations. The loss is deductible only for

the year it is actuallysustained. It is sustained during the year in which the loss occurs as evidenced by

closed and completed transaction and as fixed byidentifiable events occurring in that year. A closed

transaction is a taxable event which has beenconsummated. No taxable event has as yet been

consummated prior to the remittance of the scheduled amortization. Accordingly, foreign exchange losses

sustained as a result of devaluation of the peso vis-a-vis the foreigncurrency e.g., US dollar, but which

remittance of scheduled amortization consisting of principal and interests payments on a foreign loanhas

not actually been made are not deductible from gross income for income tax purposes

Bad Debts

Philex Mining Corporation vs. Commissioner of Internal Revenue (April 16, 2008) ALMAN

Taxation; Bad Debt Deductions; Deductions for income tax purposes partake of the nature of tax exemptions and are

strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction

claimed.

Facts: Petitioner Philex entered into an agreement with Baguio Gold Mining Corporation for the former to manage the

latters mining claim know as the Sto. Mine. The parties agreement was denominated as Power of Attorney. The

mine suffered continuing losses over the years, which resulted in petitioners withdrawal as manager of the mine. The

parties executed a Compromise Dation in Payment, wherein the debt of Baguio amounted to Php. 112,136,000.00.

Petitioner deducted said amount from its gross income in its annual tax income return as loss on the settlement of

receivables from Baguio Gold against reserves and allowances. BIR disallowed the amount as deduction for bad

debt. Petitioner claims that it entered a contract of agency evidenced by the power of attorney executed by them

and the advances made by petitioners is in the nature of a loan and thus can be deducted from its gross income.

Court of Tax Appeals (CTA) rejected the claim and held that it is a partnership rather than an agency. CA affirmed

CTA

Issue: Whether the bad debts can be valid deductions.


38/72

38

Held: The lower courts did not err in treating petitioners adva

ADZUCL-incomesyllabus-SY2014-15 (1) (1)

Documents

Transcript of ADZUCL-incomesyllabus-SY2014-15 (1) (1)