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[G.R. No. 12287. August 7, 1918.]

VICENTE MADRIGAL and his wife, SUSANA PATERNO,plaintiffs-appellants, vs. JAMESJ. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy Collector ofInternal Revenue,defendants-appellees.

Gregorio Araneta, for appellants.

Assistant Attorney Round, for appellees.SYLLABUS

1. TAXATION; INCOME TAX; PURPOSES.The Income Tax Law of the United States in force in the

Philippine Islands has selected income as the test of faculty in taxation. The aim has been to mitigate the

evils arising from the inequalities of wealth by a progressive scheme of taxation, which places the burden

on those best able to pay. To carry out this idea, public considerations have demanded an exemption

roughly equivalent to the minimum of subsistence. With these exceptions, the Income Tax Law is supposed

to reach the earnings of the entire non-governmental property of the country.

2. ID.; ID.; INCOME CONTRACTED WITH CAPITAL AND PROPERTY.Income as contrasted with capital or

property is to be the test. The essential difference between capital and income is that capital is a fund;income is a flow. Capital is wealth, while income is the service of wealth. "The fact is that property is a tree,

income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs. City of

Savannah [1878], 60 Ga., 93.)

3. ID.; ID.; "INCOME:," DEFINED.Income means profits or gains.

4. ID.; ID.; CONJUGAL PARTNERSHIPS.The decisions of this court in Nable Jose vs. Nable Jose [1916],

16 Off. Gaz., 871, and Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265, approved and

followed. The provisions of the Civil Code concerning conjugal partnerships have no application to the

Income Tax Law.

5. ID.; ID.; ID.M and P were legally married prior to January 1, 1914. The marriage was contractedunder the provisions concerning conjugal partnerships. The claim is submitted that the income shown on

the form presented for 1914 was in fact the income of the conjugal partnership existing between M and P,

and that in computing and assessing the additional income tax, the income declared by M should be divided

into two equal parts, one-half to be considered the income of M and the other half the income of P. Held:

That P, the wife of M, has an inchoate right in the property of her husband M during the life of the conjugal

partnership, but that P has no absolute right to one-half of the income of the conjugal partnership.

6. ID.; ID.; ID.The higher schedules of the additional tax provided by the Income Tax Law directed at

the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing

with the conjugal partnership. The aims and purposes of the Income Tax Law must be given effect.

7. ID.; ID.; ID.The Income Tax Law does not look on the spouses as individual partners in an ordinarypartnership.

8. ID.; ID.; STATUTORY CONSTRUCTION.The Income Tax Law, being a law of American origin and

being peculiarly intricate in its provisions, the authoritative decision of the official charged with enforcing it

has peculiar force for the Philippines. Great weight should be given to the construction placed upon a

revenue law, whose meaning is doubtful, by the department charged with its execution

D E C I S I O N

MALCOLM,J p:

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This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to the

Civil Code, a law of Spanish origin.

STATEMENT OF THE CASE

Vicente Madrigal and Susana Paterno Were legally married prior to January 1, 1914. The marriage was

contracted under the provisions of law concerning conjugal partnerships (sociedad de gananciales) . On

February 25, 1915, Vicente Madrigal filed a sworn declaration on the prescribed form with the Collector of

Internal Revenue, showing, as his total net income for the year 1914, the sum of P296,302.73.Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the

year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife

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

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

parts, one-half to be considered the income of Vicente Madrigal and the other half the income of Susana

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

Philippine Islands who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue

officers being still unsatisfied, the correspondence together with this opinion was forwarded to Washington

for a decision by the United States Treasury Department. The United States Commissioner of Internal

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

After payment under protest, and after the protest of Madrigal had been decided adversely by the Collector

of Internal Revenue, action was begun by VicenteMadrigal and his wife Susana Paterno in the Court of First

Instance of the city of Manila against the Collector of Internal Revenue and the Deputy Collector of Internal

Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally assessed

and collected by the defendants from the plaintiff, VicenteMadrigal, under the provisions of the Act of

Congress known as the Income Tax Law. The burden of the complaint was that if the income tax for the

year 1914 had been correctly and lawfully computed there would have been due and payable by each of

the plaintiffs the sum of P2,921.09, which taken together amounts to a total of P5,842.18 instead of

P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that

plaintiff Madrigal has paid ' as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due

and payable.

The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the

stipulation, sets forth the basis of defendants' stand in the following way: The income of

Vicente Madrigal and his wife Susana Paterno for the year 1914 was made up of three items: (1)

P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50, the

profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made by

Vicente Madrigal in a pawnshop company. The sum of these three items is P383,181.97, the gross income

of Vicente Madrigal and Susana Paterno for the year 1914. General deductions were claimed and allowed in

the sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the

normal tax of one per cent on the net income there were allowed as specific deductions the following: (1)

P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the specific exemption grantedto Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sum upon

which the normal tax of one per cent was assessed. The normal tax thus arrived at was P2,716.15.

The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the

Income Tax Law. The trial court in an exhausted decision found in favor of defendants, without costs.

ISSUES.

The contentions of plaintiffs and appellants, having to do solely with the additional income tax, is that it

should be divided into two equal parts, because of the conjugal partnership existing between them. The

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learned argument of counsel is mostly based upon the provisions of the Civil Code establishing the sociedad

de gananciales. The counter contentions of appellees are that the taxes imposed by the Income Tax Law

are as the name implies taxes upon income and not upon capital and property; that the fact

that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal

partnership, has no bearing on income considered as income, and that the distinction must be drawn

between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting

from the relation of marriage.

DECISION.

From the point of view of test of faculty in taxation, no less than five answers have been given in the

course of history. The final stage has been the selection of income as the norm of taxation. (See Seligman,

"The Income Tax," Introduction.) The Income Tax Law of the United States, extended to the Philippine

Islands, is the result of an effect on the part of legislators to put into statutory form this canon of taxation

and of social reform. The aim has been to mitigate the evils arising from inequalities of wealth by a

progressive scheme of taxation, which places the burden on those best able to pay. To carry out this idea,

public considerations have demanded an exemption roughly equivalent to the minimum of subsistence.

With these exceptions, the income tax is supposed to reach the earnings of the entire non governmental

property of the country. Such is the background of the Income Tax Law.

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

income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called

capital. A flow of services rendered by that capital by the payment of money from it or any other benefit

rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is

wealth, while income is the service of wealth. (SeeFisher, "The Nature of Capital and Income.") The

Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that

property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit."

(Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. "Income," as

here used, can be defined as "profits or gains." (London County Council vs. Attorney-General [1901], A. C.,

26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See furtherFoster's

Income Tax, second edition [1915.], Chapter IV; Black on Income Taxes, second edition [1915], ChapterVIII; Gibbons vs. Mahon [1890], 136 U. S., 549; and Towne vs. Eisner, decided by the United States

Supreme Court, January 7, 1918.)

A regulation of the United States Treasury Department relative to returns by the husband and wife not

living apart, contains the following:

"The husband, as the head and legal representative of the household and general custodian of its income,

should make and render the return of the aggregate income of himself and wife, and for the purpose of

levying the income tax it is assumed that he can ascertain the total amount of said income. If a wife has a

separate estate managed by herself as her own separate property, and receives an income of more than

$3,000, she may make return of her own income, and if the husband has other net income, making the

aggregate of both incomes more than $4,000, the wife's return should be attached to the return of her

husband, or his income should be included in her return, in order that a deduction of $4,000 may be made

from the aggregate of both incomes. The tax in such case, however, will be imposed only upon so much of

the aggregate income of both as shall exceed $4,000. If either husband or wife separately has an income

equal to or in excess of $3,000, a return of annual net income is required under the law, and such return

must include the income of both, and in such case the return must be made even though the combined

income of both be less than $4,000. If the aggregate net income of both exceeds $4,000, an annual return

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of their combined incomes must be made in the manner stated, although neither one separately has an

income of $3,000 per annum. They are jointly and separately liable for such return and for the payment of

the tax. The single or married status of the person claiming the specific exemption shall be determined as

of the time of claiming such exemption if such claim be made within the year for which return is made,

otherwise the status at the close of the year."

With these general observations relative to the Income Tax Law in force in the Philippine Islands, we turn

for a moment to consider the provisions of the Civil Code dealing with the conjugal partnership. Recently in

two elaborate decisions in which a long line of Spanish authorities were cited, this court, in speaking of the

conjugal partnership, decided that "prior to the liquidation, the interest of the wife, and in case of her

death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an

equitable estate, and does not ripen into title until there appears that there are assets in the community as

a result of the liquidation and settlement." (Nable Jose vs.Nable Jose [1916], 15 Off. Gaz., 871; Manuel

and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)

Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband

Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property

rights and in the ultimate ownership of property acquired as income after such income has become capital.

Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized

of a separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the

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

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

considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income

Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and

wife are only entitled to the exemption of P8,000, specifically granted by the law. The higher schedules of

the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on

provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income

Tax Law. The aims and purposes of the Income Tax Law must be given effect.

The point we are discussing has heretofore been considered by the Attorney-General of the Philippine

Islands and the United States Treasury Department. The decision of the latter overruling the opinion of theAttorney-General is as follows:

"TREASURY DEPARTMENT, Washington.

"Income Tax.

"FRANK MCINTYRE,

"Chief, Bureau of Insular Affairs, War Department,

"Washington, D.C.

"SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of correspondence 'from the

Philippine authorities relative to the method of submission of income tax returns by married persons.'

"You advise that 'The Governor-General, in forwarding the papers to the Bureau, advises that the Insular

Auditor has been authorized to suspend action on the warrants in question until an authoritative decision

on the points raised can be secured from the Treasury Department.'

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"From the correspondence it appears that Gregorio Araneta, married and living with his wife, had an

income of an amount sufficient to require the imposition of the additional tax provided by the statute; that

the net income was properly computed and then both income and deductions and the specific exemption

were divided in half and two returns made, one return for each half in the names respectively of the

husband and wife, so that under the returns as filed there would be an escape from the additional tax; that

Araneta claims the returns are correct on the ground that under the Philippine law his wife is entitled to half

of his earnings; that Araneta has dominion over the income and under the Philippine law, the right to

determine its use and disposition; that in this case the wife has no 'separate estate' within thecontemplation of the Act of October 3, 1913, levying an income tax.

"It appears further from the correspondence that upon the foregoing explanation, tax was assessed against

the entire net income against Gregorio Araneta; that the tax was paid and an application for refund made,

and that the application for refund was rejected, whereupon the matter was submitted to the Attorney-

General of the Islands who holds that the returns were correctly rendered, and that the refund should be

allowed; and thereupon the question at issue is submitted through the Governor-General of the Islands and

Bureau of Insular Affairs for the advisory opinion of this office.

"By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be administered as

in the United States but by the appropriate internal-revenue officers of the Philippine Government. You are

therefore advised that upon the facts as stated, this office holds that for the Federal Income Tax (Act of

October 3, 1913), the entire net income in this case was taxable to Gregorio Araneta, both for the normal

and additional tax, and that the application for refund was properly rejected.

"The separate estate of a married woman within the contemplation of the Income Tax Law is that which

belongs to her solely and separate and apart from her husband, and over which her husband has no right

in equity. It may consist of lands or chattels.

"The statute and the regulations promulgated in accordance therewith provide that each person of lawful

age (not excused from so doing) having a net income of $3,000 or over for the taxable year shall make a

return showing the facts; that from the net income so shown there shall be deducted $3,000 where the

person making the return is a single person, or married and not living with consort, and $1,000 additionalwhere the person making the return is married and living with consort; but that where the husband and

wife both make returns (they living together), the amount of deduction from the aggregate of their several

incomes shall not exceed $4,000.

"The only occasion for a wife making a return is where she has income from a sole and separate estate in

excess of $3,000, or where the husband and wife neither separately have an income of $3,000, but

together they have an income in excess of $4,000, in which latter event either the husband or wife may

make the return but not both. In all instances the income of husband and wife whether from separate

estates or not, is taken as a whole for the purpose of the normal tax. Where the wife has income from a

separate estate and makes return thereof, or where her income is separately shown in the return made by

her husband, while the incomes are added together for the purpose of the normal tax they are takenseparately for the purpose of the additional tax. In this case, however, the wife has no separate income

within the contemplation of the Income Tax Law.

"Respectfully,

"DAVID A. GATES,

"Acting Commissioner."

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In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax Law

was drafted by the Congress of the United States and has been by the Congress extended to the Philippine

Islands. Being thus a law of American origin and being peculiarly intricate in its provisions, the authoritative

decision of the official who is charged with enforcing it has peculiar force for the Philippines. It has come to

be a well-settled rule that great weight should be given to the construction placed upon a revenue law,

whose meaning is doubtful, by the department charged with its execution. (U. S. vs. Cerecedo Hermanos y

Cia. [1907], 209 U. S., 338; In reAllen [1903], 2 Phil., 630; Government of the Philippine Islands vs.

Municipality of Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.)

We conclude that the judgment should be as it is hereby affirmed with costs against appellants. So ordered

|||(Madrigal v. Rafferty, G.R. No. 12287, August 07, 1918)

[G.R. No. 48532. August 31, 1992.]

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO,ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN,and JAIME A. SOQUES,petitioners,vs.THE HONORABLE COURT OF TAX APPEALS and

COMMISSIONER OF INTERNAL REVENUE, respondents.

[G.R. No. 48533. August 31, 1992.]

ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-LIACO,MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA, BENJAMIN T.ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP and JAIME A.SOQUES,petitioners, vs.THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OFINTERNAL REVENUE, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioners.

SYLLABUS1. TAXATION; INCOME TAX; INCOME; DEFINED.Income may be defined as an amount of money

coming to a person or corporation within a specified time, whether as payment for services, interest or

profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be

thought of as a flow of the fruits of one's labor.

2. ID.; ID.; FOREIGN EXCHANGE TRANSACTION; DOLLAR EARNED ARE NOT RECEIPTS DERIVED

THEREFROM.Petitioners are correct as to their claim that their dollar earnings are not receipts derived

from foreign exchange transactions. For a foreign exchange transaction is simply thata transaction in

foreign exchange, foreign exchange being "the conversion of an amount of money or currency of one

country into an equivalent amount of money or currency of another." When petitioners were assigned to

the foreign subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency andwere ALSO spending in said currency. There was no conversion, therefore, from one currency to another.

3. ID.; ID.; EXCHANGE RATE TO DETERMINE THE PESO EQUIVALENT OF FOREIGN EARNINGS; RULE.

What exchange rate should be used to determine the peso equivalent of the foreign earnings of petitioners

for income tax purposes. Petitioners claim that since the dollar earnings do not fall within the classification

of foreign exchange transactions, there occurred no actual inward remittances, and, therefore, they are not

included in the coverage of Central Bank Circular No. 289 which provides for the specific instances when

the par value of the peso shall notbe the conversion rate used. They conclude that their earnings should

be converted for income tax purposes using the par value of the Philippine peso. Respondent Commissioner

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argues that CB Circular No. 289 speaks of receipts for export products, receipts of sale of foreign exchange

or foreign borrowings and investments but not income tax. He also claims that he had to use the prevailing

free market rate of exchange in these cases because of the need to ascertain the true and correct amount

of income in Philippine peso of dollar earners for Philippine income tax purposes. A careful reading of said

CB Circular No. 289 shows that the subject matters involved therein are export products, invisibles, receipts

of foreign exchange, foreign exchange payments, new foreign borrowing and investmentsnothing by

way of income tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289

does not apply to them, the par value of the peso should be the guiding rate used for income tax purposes.The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &

Gamble. It was a definite amount of money which came to them within a specified period of time of two

years as payment for their services.

4. ID.; SECRETARY OF FINANCE; EMPOWERED TO PROMULGATE RULES AND REGULATIONS FOR THE

PROPER ENFORCEMENT OF THE NATIONAL INTERNAL REVENUE CODE.And in the implementation for

the proper enforcement of the National Internal Revenue Code, Section 338 thereof empowers the

Secretary of Finance to "promulgate all needful rules and regulations" to effectively enforce its provisions.

Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71 were issued to prescribe a

uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for

the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority given tothe Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And these are

presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself.

D E C I S I O N

NOCON, J p:

Petitioners pray that this Court reverse the Decision of the public respondent Court of Tax Appeals,

promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and order the Commissioner

of Internal Revenue to refund to them their income taxes which they claim to have been erroneously or

illegally paid or collected.

As summarized by the Solicitor General, the facts of the cases are as follows:

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing Corporation,

with offices at Sarmiento Building Ayala Avenue, Makati, Rizal. Said corporation is a subsidiary of Procter &

Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners

were assigned, for certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines,

during which petitioners were paid U.S. dollars as compensation for services in their foreign assignments.

(Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19). When

petitioners in C.T.A. Case No. 2511 filed their income tax returns for the year 1970, they computed the tax

due by applying the dollar-to-peso conversion on the basis of the floating rate ordained under B.I.R. Ruling

No. 70-027 dated May 14, 1970, as follows:

From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;

From February 21 to December 31, 1970 at the conversion rate of P6.25 to U S. $1.00

Petitioners in C.T.A Case No. 2594 likewise used the above conversion rate in converting their dollar income

for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973, petitioners in said cases

filed with the office of the respondent Commissioner, amended income tax returns for the above-mentioned

years, this time using the par value of the peso as prescribed in Section 48 of Republic Act No. 265 in

relation to Section 6 of Commonwealth Act No. 699 as the basis for converting their respective dollar

income into Philippine pesos for purposes of computing and paying the corresponding income tax due from

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them. The aforesaid computation as shown in the amended income tax returns resulted in the alleged

overpayments, refund and/or tax credit. Accordingly, claims for refund of said over-payments were filed

with respondent Commissioner. Without awaiting the resolution of the Commissioner of Internal Revenue

on their claims, petitioners filed their petitions for review in the above-mentioned cases.

Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A. Case No. 2511 on

July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.

Upon joint motion of the parties on the ground that these two cases involve common question of law andfacts, the respondent Court of Tax Appeals heard the cases jointly. In its decision dated September 26,

1977, the respondent Court of Tax Appeals held that the proper conversion rate for the purpose of

reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates prescribed

under Revenue Memorandum Circulars Nos. 7-71 and 41-71. Accordingly, the claim for refund and/or tax

credit of petitioners in the above-entitled cases was denied and the petitions for review dismissed, with

costs against petitioners. Hence, this petition for review on certiorari.2

Petitioners claim that public respondent Court of Tax Appeals erred in holding:

1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.

2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes is the prevailing freemarket rate of exchange and not the par value of the peso; and

3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes into

Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate used.

Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as follows:

At the outset, it is submitted that the subject matter of these two cases are Philippine income tax for the

calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No. 2594) and, therefore, should be

governed by the provisions of the National Internal Revenue Code and its implementing rules and

regulations, and not by the provisions of Central Bank Circular No. 42 dated May 21, 1953, as contended by

petitioners.

Section 21 of the National Internal Revenue Code, before its amendment by Presidential Decrees Nos. 69

and 323 which took effect on January 1, 1973 and January 1, 1974, respectively, imposed a tax upon the

taxable net income received during each taxable year from all sources by a citizen of the Philippines,

whether residing here or abroad.

Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their employment. Thus,

in their income tax returns for the period involved herein, they gave their legal residence/address as c/o

Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes 'A' to 'A-8', and Annexes 'C' to 'C-8', Petition for

Review, CTACases Nos. 2511 and 2594).

Petitioners being subject to Philippine income tax, their dollar earnings should be converted into Philippinepesos in computing the income tax due therefrom, in accordance with the provisions of Revenue

Memorandum Circular No. 7-71 dated February 11, 1971 for 1970 income and Revenue Memorandum

Circular No. 41-71 dated December 21, 1971 for 1971 income, which reiterated BIR Ruling No. 70-027

dated May 4, 1970, to wit:

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'For internal revenue tax purposes, the free market rate of conversion (Revenue Circulars Nos. 7-71 and 41-

71) should be applied in order to determine the true and correct value in Philippine pesos of the income of

petitioners.'3

After a careful examination of the records, the laws involved and the jurisprudence on the matter, We are

inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue and thus

vote to deny the petition.

This is basically an income tax case. For the proper resolution of these cases income may be defined as anamount of money coming to a person or corporation within a specified time, whether as payment for

services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. 4

Income can also be thought of as a flow of the fruits of one's labor.5

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign

exchange transactions. For a foreign exchange transaction is simply thata transaction in foreign

exchange, foreign exchange being "the conversion of an amount of money or currency of one country into

an equivalent amount of money or currency of another."6 When petitioners were assigned to the foreign

subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO

spending in said currency. There was no conversion, therefore, from one currency to another.

Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner fell

under Section 2(f)(g) and (m) of C.B. Circular No. 42.7

The issue now is, what exchange rate should be used to determine the peso equivalent of the foreign

earnings of petitioners for income tax purposes. Petitioners claim that since the dollar earnings do not fall

within the classification of foreign exchange transactions, there occurred no actual inward remittances, and,

therefore, they are not included in the coverage of Central Bank Circular No. 289 which provides for the

specific instances when the par value of the peso shall notbe the conversion rate used. They conclude that

their earnings should be converted for income tax purposes using the par value of the Philippine peso.

Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products, receipts

of sale of foreign exchange or foreign borrowings and investments but not income tax. He also claims thathe had to use the prevailing free market rate of exchange in these cases because of the need to ascertain

the true and correct amount of income in Philippine peso of dollar earners for Philippine income tax

purposes.

A careful reading of said CB Circular No. 28988a shows that the subject matters involved therein areexport products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign

borrowing and investmentsnothing by way of income tax payments. Thus, petitioners are in error by

concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the

guiding rate used for income tax purposes.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &

Gamble. It was a definite amount of money which came to them within a specified period of time of two

years as payment for their services.

Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:

Sec. 21. Rates of tax on citizens or residents.A tax is hereby imposed upon the taxable net income

received during each taxable year from all sources by every individual, whether a citizen of the Philippines

residing therein or abroad or an alien residing in the Philippines, determined in accordance with the

following schedule:

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ces%2Fsearch&q%5Bcitation_finder%5D=&q%5Bfull_text%5D=conwi+vs+cta&q%5Bissue_no%5D=&q%5Bponente%5D=&q%5Bsyllabus%5D=&q%5Btitle%5D=&q%5Butf8%5D=%E2%9C%93&q%5Byear_end%5D=&q%5Byear_start%5D=#footnote3_0

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-"We are clear that not only does a stock dividend really take nothing from the property of the corporation

and add nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced

thereby, while indicating that the shareholder is richer because of an increase of his capital, at the same

time shows he has not realized or received any income in the transaction."

ANALYSIS-In Towne v. Eisner, court stated that stock dividends were not income, as nothing of value was received

by Towne - the company was not worth any less than it was when the dividend was declared, and the total

value of Towne's stock had not changed.-Although the Eisner v. MacomberCourt acknowledged the power of the Federal Government to tax income

under the Sixteenth Amendment, the Court essentially said this did not give Congress the power to tax as

income anything other than income, i.e., that Congress did not have the power to re-define the term

income as it appeared in the Constitution:

-Throughout the argument of the Government, in a variety of forms, runs the fundamental error already

mentioned, a failure to appraise correctly the force of the term "income" as used in the Sixteenth

Amendment, or at least to give practical effect to it. Thus, the Government contends that the tax "is levied

on income derived from corporate earnings," when in truth the stockholder has "derived" nothing except

paper certificates which, so far as they have any effect, deny him [or "her"in this case, Mrs. Macomber]

present participation in such earnings. It [the government] contends that the tax may be laid when

earnings "are received by the stockholder," whereas [s]he has received none; that the profits are"distributed by means of a stock dividend," although a stock dividend distributes no profits; that under the

Act of 1916 "the tax is on the stockholder's share in corporate earnings," when in truth a stockholder has

no such share, and receives none in a stock dividend; that "the profits are segregated from his [her] former

capital, and [s]he has a separate certificate representing his [her] invested profits or gains," whereas there

has been no segregation of profits, nor has [s]he any separate certificate representing a personal gain,

since the certificates, new and old, are alike in what they representa capital interest in the entire

concerns of the corporation.

CONCLUSIONThe Court ordered that Macomber be refunded the tax she overpaid.

Raytheon vs CIR

Brief Fact Summary.Raytheon, Taxpayer, alleged that the illegal conduct of R.C.A. in violation of anti-trust acts destroyed the profitable interstate and foreign commerce of Raytheon and cause in excess of $3

million in damage.

Synopsis of Rule of Law.Damages recovered for violations of anti-trust acts are treated as income whenthey represent compensation for loss of profits.

Facts.Raytheon, Taxpayer, alleged that the illegal conduct of R.C.A. in violation of anti-trust actsdestroyed the profitable interstate and foreign commerce of Raytheon and cause in excess of $3 million in

damage.Issue.Is the settlement required to be included in Taxpayers gross income?

Held.Circuit Judge Mahoney issued the opinion for the United States First Circuit Court of Appeals inholding that the compensation for Taxpayers loss of good will in excess of its cost is gross income.

Discussion.The Court of Appeals notes that the question to be asked is what was the nature of therecovery? There was nothing to indicate that the recovery by Taxpayer was for lost profits. Rather, the

evidence showed that the recovery was for the value of the goodwill and the busine

144 F.2d 110 (1944)

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RAYTHEON PRODUCTION CORPORATIONv.COMMISSIONER OF INTERNAL REVENUE.

No. 3956.

Circuit Court of Appeals, First Circuit.

July 28, 1944.Writ of Certiorari Denied November 20, 1944.

*111Edward C. Thayer, of Boston, Mass., for petitioner.

Newton K. Fox, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and J. Louis

Monarch, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.

Writ of Certiorari Denied November 20, 1944. See 65 S.Ct. 192.

MAHONEY, Circuit Judge.

This case presents the question whether an amount received by the taxpayer in compromise settlement of

a suit for damages under the Federal Anti-Trust Laws, 15 U.S.C.A. 1 et seq., is a non-taxable return of

capital or income. If the recovery is non-taxable, there is a second question as to whether the Tax Court

erred in holding that there was insufficient evidence to enable it to determine what part of the lump sum

payment received by the taxpayer was properly allocable to compromise of the suit and what part was

allocable to payment for certain patent license rights which were conveyed as a part of the settlement.

Petitioner, Raytheon Production Corporation, came into existence as a result of a series of what both

parties as well as the Tax Court have treated as tax free reorganizations. Since we think such is the proper

treatment, we shall simplify the facts by referring to any one of the original and successor companies as

Raytheon. The original Raytheon Company was a pioneer manufacturer of a rectifying tube which madepossible the operation of a radio receiving set on alternating current instead of on batteries. In 1926 its

profits were about $450,000; in 1927 about $150,000; and in 1928, $10,000. The Radio Corporation of

America had many patents covering radio circuits and claimed control over almost all of the practical

circuits. Cross-licensing agreements had been made among several companies including R.C.A., General

Electric Company, Westinghouse, and American Telephone & Telegraph Company. R.C.A. had developed a

competitive tube which produced the same type of rectification as the Raytheon tube. Early in 1927, R.C.A.

began to license manufacturers of radio sets and in the license agreement it incorporated "Clause 9", which

provided that the licensee was required to buy its tubes from R.C.A. In 1928 practically all manufacturers

were operating under R.C.A. licenses. As a consequence of this restriction, Raytheon was left with only

replacement sales, which soon disappeared. When Raytheon found it impossible to market its tubes in the

early part of 1929, it obtained a license from R.C.A. to manufacture tubes under the letters patent on aroyalty basis. The license agreement contained a release of all claims of Raytheon against R.C.A. by reason

of the illegal acts of the latter under Clause 9 but by a side agreement such claims could be asserted if

R.C.A. should pay similar claims to others. The petitioner was informed of instances in which R.C.A. had

settled claims against it based on Clause 9. On that ground it considered itself released from the agreement

not to enforce its claim against R.C.A. and consequently, on December 14, 1931, the petitioner caused its

predecessor, Raytheon, to bring suit against R.C.A. in the District Court of Massachusetts alleging that the

plaintiff had by 1926 created and then possessed a large and valuable good will in interstate commerce in

rectifying tubes for radios and had a large and profitable established business therein so that the net profit

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for the year 1926 was $454,935; that the business had an established prospect of large increases and that

the business and good will thereof was of a value of exceeding $3,000,000; that by the beginning of 1927

the plaintiff was doing approximately 80% of the business of rectifying tubes of the entire United States;

that the defendant conspired to destroy the business of the plaintiff and others by a monopoly of such

business and did suppress *112and destroy the existing companies; that the manufacturers of radio setsand others ceased to purchase tubes from the plaintiffs; that by the end of 1927 the conspiracy had

completely destroyed the profitable business and that by the early part of 1928 the tube business of the

plaintiff and its property and good will had been totally destroyed at a time when it had a present value inexcess of $3,000,000, and thereby the plaintiff was injured in its business and property in a sum in excess

of $3,000,000. The action against R.C.A. was referred to an auditor who found that Clause 9 was not the

cause of damage to the plaintiff but that the decline in plaintiff's business was due to advancement in the

radio art and competition. The auditor, however, also found that if it should be decided that Clause 9 had

turned the development of the radio art away from plaintiff's type of tube, then the damages would be

$1,000,000.

In the spring of 1938, after the auditor's report and just prior to the time for the commencement of the trial

before a jury, the Raytheon affiliated companies began negotiations for the settlement of the litigation with

R.C.A. In the meantime a suit brought by R.C.A. against the petitioner for the non-payment of royalties

resulted in a judgment of $410,000 in favor of R.C.A. R.C.A. and the petitioner finally agreed on thepayment by R.C.A. of $410,000 in settlement of the anti trust action. R.C.A. required the inclusion in the

settlement of patent license rights and sublicensing rights to some thirty patents but declined to allocate

the amount paid as between the patent license rights and the amount for the settlement of the suit. The

agreement of settlement contained a general release of any and all possible claims between the parties.

The officers of the Raytheon companies testified that $60,000 of the $410,000 received from R.C.A. was

the maximum worth of the patents, basing their appraisal on the cost of development of the patents and

the fact that few of them were then being used and that no royalties were being derived from them. In its

income tax return the petitioner returned $60,000 of the $410,000 as income from patent licenses and

treated the remaining $350,000 as a realization from a chose in action and not as taxable income. The

Commissioner determined that the $350,000 constituted income on the following ground contained in thestatement attached to his notice of deficiency: "It is the opinion of this office that the amount of $350,000

constitutes income under 22(a) of the Revenue Act of 1936. There exists no clear evidence of what the

amount was paid for so that an accurate apportionment can be made as to a specific consideration for

patent rights transferred to Radio Corporation of America and a consideration for damages. The amount of

$350,000 has therefore been included in your taxable income."

The pertinent sections of the statute are set out in the margin.[1]

Adverting to the question of whether *113that part of the $410,000 which was paid by R.C.A. toRaytheon to settle the anti trust suit was a return of capital or ordinary income, we must observe that the

auditor's report is immaterial on that issue. Despite the fact that the auditor found that the loss was not

caused by Clause 9, it was open to the jury to come to a different conclusion on the question of liability,and to avoid this R.C.A. settled the suit by compromise.

Damages recovered in an antitrust action are not necessarily nontaxable as a return of capital. As in other

types of tort damage suits, recoveries which represent a reimbursement for lost profits are income.

Swastika Oil & Gas Co. v. Commissioner, 6 Cir., 1941, 123 F.2d 382, certiorari denied 1943, 317 U.S. 639,

63 S.Ct. 30, 87 L.Ed. 515; H. Liebes & Co. v. Commissioner, 9 Cir., 1937, 90 F.2d 932; Sternberg v.

Commissioner, 1935, 32 B.T.A. 1039. The reasoning is that since the profits would be taxable income, the

proceeds of litigation which are their substitute are taxable in like manner.

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Damages for violation of the anti-trust acts are treated as ordinary income where they represent

compensation for loss of profits. Commercial Electrical Supply Co. v. Commissioner, 1927, 8 B.T.A. 986; see

Park v. Gilligan, D.C.S.D.Ohio 1921, 293 F. 129, 130.

The test is not whether the action was one in tort or contract but rather the question to be asked is "In lieu

of what were the damages awarded?" Farmers' & Merchants' Bank v. Commissioner, 6 Cir., 1932, 59 F.2d

912; Swastika Oil & Gas Co. v. Commissioner, supra; Central R. Co. of New Jersey v. Commissioner, 3 Cir.,

1935, 79 F.2d 697, 101 A.L.R. 1448. See United States v. Safety Car Heating & Lighting Co., 1936, 297 U.S.

88, 98, 56 S.Ct. 353, 80 L.Ed. 500. Plumb, "Income Tax on Gains and Losses in Litigation" (1940) 25

Cornell L. Q. 221. Where the suit is not to recover lost profits but is for injury to good will, the recovery

represents a return of capital and, with certain limitations to be set forth below, is not taxable. Farmers' &

Merchants' Bank v. Commissioner, supra. Plumb, supra, 25 Cornell L. Q. 221, 225. "Care must certainly be

taken in such cases to avoid taxing recoveries for injuries to good will or loss of capital". 1 Paul and

Mertens Law of Federal Income Taxation 6.48.

Upon examination of Raytheon's declaration in its anti-trust suit we find nothing to indicate that the suit

was for the recovery of lost profits. The allegations were that the illegal conduct of R.C.A. "completely

destroyed the profitable interstate and foreign commerce of the plaintiff and thereby, by the early part of

1928, the said tube business of the plaintiff and the property good will of the plaintiff therein had been

totally destroyed at a time when it then had a present value in excess of three million dollars and thereby

the plaintiff was then injured in its business and property in a sum in excess of three million dollars." This

was not the sort of antitrust suit where the plaintiff's business still exists and where the injury was merely

for loss of profits. The allegations and evidence as to the amount of profits were necessary in order to

establish the value of the good will and business since that is derived by a capitalization of profits. A

somewhat similar idea was expressed in Farmers' & Merchants' Bank v. Commissioner, supra, *11459F.2d at page 913. "Profits were one of the chief indications of the worth of the business; but the usual

earnings before the injury, as compared with those afterward, were only an evidential factor in determining

actual loss and not an independent basis for recovery." Since the suit was to recover damages for the

destruction of the business and good will, the recovery represents a return of capital. Nor does the fact that

the suit ended in a compromise settlement change the nature of the recovery; "the determining factor isthe nature of the basic claim from which the compromised amount was realized." Paul Selected Studies in

Federal Taxation, Second Series, pp. 328-9, footnote 76; Helvering v. Safe Deposit & Trust Co. of

Baltimore, 1941, 316 U.S. 56, 62 S.Ct. 925, 86 L.Ed. 1266, 139 A.L.R. 1513; Lyeth v. Hoey, 1938, 305 U.S.

188, 59 S.Ct. 155, 83 L.Ed. 119, 119 A.L.R. 410; Central R. of New Jersey v. Commissioner, supra; Farmers'

& Merchants' Bank v. Commissioner, supra; Megargel v. Commissioner, 1944, 3 T.C. 238.

But, to say that the recovery represents a return of capital in that it takes the place of the business good

will is not to conclude that it may not contain a taxable benefit. Although the injured party may not be

deriving a profit as a result of the damage suit itself, the conversion thereby of his property into cash is a

realization of any gain made over the cost or other basis of the good will prior to the illegal interference.

Thus A buys Blackacre for $5,000. It appreciates in value to $50,000. B tortiously destroys it by fire. A suesand recovers $50,000 tort damages from B. Although no gain was derived by A from the suit, his prior gain

due to the appreciation in value of Blackacre is realized when it is turned into cash by the money damages.

Compensation for the loss of Raytheon's good will in excess of its cost is gross income. See Magill Taxable

Income, p. 339. 1 Mertens, Law of Federal Income Taxation, 5.21, footnote 82. Plumb, supra, 25 Cornell

L. Q. 225, 6.

Since we assume with the parties that the petitioner secured the original Raytheon's assets through a series

of tax free reorganizations, petitioner's basis for the good will is the same as that of the original Raytheon.

As the Tax Court pointed out, the record is devoid of evidence as to the amount of that basis and "in the

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absence of evidence of the basis of the business and good will of Raytheon, the amount of any nontaxable

capital recovery cannot be ascertained." 1 T.C. 952. Cf. Sterling v. Commissioner, 2 Cir., 1937, 93 F.2d 304.

Where the cost basis that may be assigned to property has been wholly speculative, the gain has been held

to be entirely conjectural and not taxable. In Strother v. Commissioner, 4 Cir., 1932, 55 F.2d 626, affirmed

on other grounds, 1932, 287 U.S. 308, 53 S.Ct. 150, 77 L.Ed. 325, a trespasser had taken coal and then

destroyed the entries so that the amount of coal taken could not be determined. Since there was no way of

knowing whether the recovery was greater than the basis for the coal taken, the gain was purely

conjectural and not taxed. Magill explains the result as follows: "as the amount of coal removed could not

be determined until a final disposition of the property, the computation of gain or loss on the damages

must await that disposition." Taxable Income, pp. 339-340. The same explanation may be applied to

Farmers' & Merchants' Bank v. Commissioner, supra, which relied on the Strother case in finding no gain.

The recovery in that case had been to compensate for the injury to good will and business reputation of the

plaintiff bank inflicted by defendant reserve banks' wrongful conduct in collecting checks drawn on the

plaintiff bank by employing "agents who would appear daily at the bank with checks and demand payment

thereof in cash in such a manner as to attract unfavorable public comment". Since the plaintiff bank's

business was not destroyed but only injured and since it continued in business, it would have been difficult

to require the taxpayer to prove what part of the basis of its good will should be attributed to the recovery.

In the case at bar, on the contrary, the entire business and good will were destroyed so that to require thetaxpayer to prove the cost of the good will is no more impractical than if the business had been sold.[2]

Inasmuch as we conclude that the portion of the $410,000 attributable to the suit is taxable income, the

second question as *115to allocation between this and the ordinary income from patent licenses is notpresent.

The decision of the Tax Court is affirmed.

[G.R. No. 66416. March 21, 1990.]

COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.TOURS SPECIALISTS, INC., and THECOURT OF TAX APPEALS,respondents.

Gadioma Law Officesfor private respondent.

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; FINDINGS OF FACTS OF COURT OF TAX APPEALS; BINDING WITH

THE SUPREME COURT IF SUPPORTED BY SUBSTANTIAL EVIDENCE.The well-settled doctrine is that the

findings of facts of the Court of Tax Appeals are binding on this Court and absent strong reasons for this

Court to delve into facts, only questions of law are open for determination. (Nilsen v. Commissioner of

Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA 444 [1967]; Raymundo v. De Joya, 101 SCRA

495 [1980]). In the recent case of Sy Po v. Court of Appeals,(164 SCRA 524 [1988]), we ruled that the

factual findings of the Court of Tax Appeals are binding upon this court and can only be disturbed on

appeal if not supported by substantial evidence.

2. TAXATION; CONTRACTOR'S TAX; HOTEL ROOM CHARGES HELD IN TRUST BY TRAVEL AGENCY FOR

FOREIGN TOURIST AND PAID TO LOCAL HOST HOTEL; NOT SUBJECT THEREOF.Goss receiptssubject

to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong

to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or

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by code name or group designation and also the duration of their stay for purposes of payment. Upon

receipt of the bill, the petitioner then pays the local hotel with the funds entrusted to it by the foreign tour

correspondent agency. cdll

"Despite this arrangement, respondent Commissioner of Internal Revenue assessed petitioner for deficiency

3% contractor's tax as independent contractor by including the entrusted hotel room charges in its gross

receipts from services for the years 1974 to 1976. Consequently, on December 6, 1979, petitioner received

from respondent the 3% deficiency independent contractor's tax assessment in the amount of P122,946.93

for the years 1974 to 1976, inclusive, computed as follows:

1974 deficiency percentage tax

per investigation P3,995.63

15% surcharge for late payment 998.91

_________

P4,994.54

14% interest computed by quarters

up to 12-28-79 3,953.18 P8,847.721975 deficiency percentage tax

per investigation P8,427.39

25% surcharge for late payment 2,106.85

__________

P10,534.24

14% interest computed by

quarters up to 12-28-79 6,808.47 P17,342.71

1976 deficiency percentage

tax per investigation P54,276.42

25% surcharge for late payment 13,569.11

__________

P67,845.53

14% interest computed by quarters

up to 12-28-79 28,910.97 P96,756.50

_________ __________

Total amount due P122,946.93

=========

"In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a compromise

penalty of P500.00.

"Subsequently, on December 11, 1979, petitioner formally protested the assessment made by respondent

on the ground that the money received and entrusted to it by the tourists, earmarked to pay hotel room

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charges, were not considered and have never been considered by it as part of its taxable gross receipts for

purposes of computing and paying its contractor's tax. prLL

"During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in

charge of the Accounting Department of petitioner, had testified, her credibility not having been destroyed

on cross examination, categorically stated that the amounts entrusted to it by the foreign tourist agencies

intended for payment of hotel room charges, were paid entirely to the hotel concerned, without any portion

thereof being diverted to its own funds. (t.s.n., Feb. 2, 1981,pp. 7, 25; t.s.n.,Aug 20, 1981,pp. 5-9, 17-

18). The testimony of Serafina Sazon was corroborated by Gerardo Isada, General Manager of petitioner,

declaring to the effect that payments of hotel accommodation are made through petitioner without any

increase in the room charged (t.s.n., Oct. 9, 1981,pp. 21-25) and that the reason why tourists pay their

room charge, or through their foreign tourists agencies, is the fact that the room charge is exempt from

hotel room tax under P.D. 31. (t.s.n., Ibid.,pp. 25-29.) Witness Isada stated, on cross-examination, that if

their payment is made, thru petitioner's tour agency, the hotel cost or charges 'is only an act of

accommodation on our (its) part'or that the 'agent abroad instead of sending several telexes and saving on

bank charges they take the option to send money to us to be held in trust to be endorsed to the hotel.' (pp.

3-4, t.s.n.Aug 10, 1982.).

"Nevertheless, on June 2, 1980, respondent without deciding the petitioner's written protest, caused the

issuance of a warrant of distraint and levy. (p. 51, BIR Rec.) And later, respondent had petitioner's bank

deposits garnished. (pp. 49-50, BIR Rec.)

"Taking this action of respondent as the adverse and final decision on the disputed assessment, petitioner

appealed to this Court." (Rollo, pp. 40-45)

The petitioner raises the lone issue in this petition as follows:

"WHETHER AMOUNTS RECEIVED BY A LOCAL TOURIST AND TRAVEL AGENCY INCLUDED IN A PACKAGE

FEE FROM TOURISTS OR FOREIGN TOUR AGENCIES, INTENDED OR EARMARKED FOR HOTEL

ACCOMMODATIONS FORM PART OF GROSS RECEIPTS SUBJECT TO 3% CONTRACTOR'S TAX." (Rollo, p.

23)

The petitioner premises the issue raised on the following assumptions:

"Firstly,the ruling overlooks the fact that the amounts received, intended for hotel room accommodations,

were received as part of the package fee and, therefore, form part of 'gross receipts' as defined by law.

Secondly,there is no showing and is not established by the evidence, that the amounts received and

'earmarked' are actually what had been paid out as hotel room charges. The mere possibility that the

amounts actually paid could be less than the amounts received is sufficient to destroy the validity of the

ruling." (Rollo, pp. 26-27)

In effect, the petitioner's lone issue is based on alleged error in the findings of facts of the respondent

court.

The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this Court

and absent strong reasons for this Court to delve into facts, only questions of law are open for

determination. (Nilsen v. Commissioner of Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA 444

[1967]; Raymundo v. De Joya, 101 SCRA 495 [1980]). In the recent case of Sy Po v. Court of Appeals,(164

SCRA 524 [1988]), we ruled that the factual findings of the Court of Tax Appeals are binding upon this

court and can only be disturbed on appeal if not supported by substantial evidence.

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In the instant case, we find no reason to disregard and deviate from the findings of facts of the Court of

Tax Appeals.

As quoted earlier, the Court of Tax Appeals sufficiently explained the services of a local travel agency, like

the herein private respondent, rendered to foreign customers. The respondent differentiated between the

package fee offered by both the local travel agency and its correspondent counterpart tourist agencies

abroad and the requests made by some tour agencies abroad to local tour agencies wherein the hotel room

charges in some specific cases, would be paid to the local hotels through them. In the latter case, the

correspondent court found as a fact ". . . that the foreign tour agency entrusts to the petitioner Tours

Specialists, Inc. the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to

the local hotel when billed." (Rollo, p. 42) The following procedure is followed: The billing hotel sends the

bill to the respondent; the local hotel then identifies the individual tourist, or the particular group of tourists

by code name or group designation plus the duration of their stay for purposes of payment; upon receipt of

the bill the private respondent pays the local hotel with the funds entrusted to it by the foreign tour

correspondent agency. Cdpr

Moreover, evidence presented by the private respondent shows that the amounts entrusted to it by the

foreign tourist agencies to pay the room charges of foreign tourists in local hotels were not diverted to its

funds; this arrangement was only an act of accommodation on the part of the private respondent. This

evidence was not refuted.

In essence, the petitioner's assertion that the hotel room charges entrusted to the private respondent were

part of the package fee paid by foreign tourists to the respondent is not correct. The evidence is clear to

the effect that the amounts entrusted to the private respondent were exclusively for payment of hotel room

charges of foreign tourists entrusted to it by foreign travel agencies.

As regards the petitioner's second assumption, the respondent court stated:

". . . [C]ontrary to the contention of respondent, the records show, firstly,in the Examiners' Worksheet

(Exh. T, p. 22, BIR Rec.), that from July to December 1976 alone, the following sums made up the hotel

room accommodations:

July 1976 P102,702.97

Aug. 1976 121,167.19

Sept. 1976 53,209.61

P282,079.77

==========

Oct. 1976 P 71,134.80Nov. 1976 409,019.17

Dec. 1976 142,761.55

__________

622,915.51

Grand Total P904,995.29

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==========

"It is not true, therefore, as stated by respondent, that there is no evidence proving the amounts

earmarked for hotel room charges. Since the BIR examiners could not have manufactured the above figures

representing 'advances for hotel room accommodations,' these payments must have certainly been taken

from the records of petitioner, such as the invoices, hotel bills, official receipts and other pertinent

documents." (Rollo, pp. 48-49) LLjur

The factual findings of the respondent court are supported by substantial evidence, hence binding upon thisCourt.

With these clarifications, the issue to be threshed out is as stated by the respondent court, to wit:

". . . [W]hether or not the hotel room charges held in trust for foreign tourists and travelers and or

correspondent foreign travel agencies and paid to local host hotels form part of the taxable gross receipts

for purposes of the 3% contractor's tax." (Rollo, p. 45)

The petitioner opines that the gross receipts which are subject to the 3% contractor's tax pursuant

to Section 191 (Section 205 of the National Internal Revenue Code of 1977) of the Tax Code include the

entire gross receipts of a taxpayer undiminished by any amount. According to the petitioner, this

interpretation is in consonance with B.I.R. Ruling No. 68-027, dated 23 October, 1968 (implementingSection 191 of the Tax Code) which states that the 3% contractor's tax prescribed by Section 191 of the

Tax Code is imposed on the gross receipts of the contractor, "no deduction whatever being allowed by said

law " The petitioner contends that the only exception to this rule is when there is a law or regulation which

would d exempt such gross receipts from being subjected to the 3% contractor's tax citing the case

of Commissioner of Internal Revenue v. Manila Jockey Club, Inc.(108 Phil. 821 [1960]). Thus, the

petitioner argues that since there is no law or regulation that money entrusted, earmarked and paid for

hotel room charges should not form part of the gross receipts, then the said hotel room charges are

included in the private respondent's gross receipts for purposes of the 3% contractor's tax.

In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (supra),the Commissioner

appealed two decisions of the Court of Tax Appeals disapproving his levy of amusement taxes upon theManila Jockey Club, a duly constituted corporation authorized to hold horse races in Manila. The facts of the

case show that the monies sought to be taxed never really belonged to the club. The decision shows that

during the period November 1946 to 1950, the Manila Jockey Club paid amusement tax on its commission

but without including the 5-1/2% which pursuant to Executive Order 320 and Republic Act 309 went to the

Board of Races, the owner of horses and jockeys. Section 260 of the Internal Revenue Code provides that

the amusement tax was payable by the operator on its "gross receipts". The Manila Jockey Club, however,

did not consider as part of its "gross receipts" subject to amusement tax the amounts which it had to

deliver to the Board on Races, the horse owners and the jockeys. This view was fully sustained by three

opinions of the Secretary of Justice, to wit: cdll

"There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the total bets registered by theTotalizer. This portion represents its share or commission in the total amount of money it handles and goes

to the funds thereof as its own property which it may legally disburse for its own purposes. The 5% does

not belong to the club. It is merely held in trust for distribution as prizes to the owners of winning horses. It

is destined for no other object than the payment of prizes and the club cannot otherwise appropriate this

portion without incurring liability to the owners of winning horses. It cannot be considered as an item of

expense because the sum used for the payment of prizes is not taken from the funds of the club but from a

certain portion of the total bets especially earmarked for that purpose.

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"In view of all the foregoing, I am of the opinion that in the submission of the returns for the amusement

tax of 10% (now it is 20% of the 'gross receipts', provided for in Section 260 of the National Internal

Revenue Code), the 5% of the total bets that is set aside for prizes to owners of winning horses should not

be included by the Manila Jockey Club, Inc."

The Collector of the Internal Revenue, however had a different opinion on the matter and demanded

payment of amusement taxes. The Court of Tax Appeals reversed the Collector.

We affirmed the decision of the Court of Tax Appeals and stated:

"The Secretary's opinion was correct. The Government could not have meant to tax as gross receipt of the

Manila Jockey Club the 1/2% which it directs same Club to turn over to the Board on Races. The latter

being a Government institution, there would be double taxation, which should be avoided unless the statute

admits of no other interpretation. In the same manner, the Government could not have intended to

consider as gross receipt the portion of the funds which it directed the Club to give, or knew the Club would

give, to winning horses and jockeysadmittedly 5%. It is true that the law says that out of the total

wager funds 12-1/2% shall be set aside as the 'commission' of the race track owner, but the law itself takes

official notice, and actually approves or directs payment of the portion that goes to owners of horses as

prizes and bonuses of jockeys, which portion is admittedly 5% out of that 12-1/2% commission. As it did

not at that time contemplate the application of 'gross receipts' revenue principle, the law in making adistribution of the total wager funds, took no trouble of separating one item from the other; and for

convenience, grouped three items under one common denomination. cdphil

"Needless to say, gross receipts of the proprietor of the amusement place should not include any money

which although delivered to the amusement place has been especially earmarked by law or regulation for

some person other than the proprietor." (The situation thus differs from one in which the owner of the

amusement place, by a private contract, with its employees or partners, agrees to reserve for them a

portion of the proceeds of the establishment. (See Wong & Lee v. Coll. 104 Phil. 469; 55 Off Gaz. [51]

10539; Sy Chuico v. Coll., 107 Phil., 428; 59 Off Gaz., [6] 896)."

In the second case, the facts of the case are:

"The Manila Jockey Club holds once a year a so called 'special Novato race', wherein only 'novato' horses,

(i.e. horses which are running for the first time in an official [of the club] race), may take part. Owners of

these horses must pay to the Club an inscription fee of P1.00, and a declaration fee of P1.00 per horse. In

addition, each of them must contribute to a common fund (P10.00 per horse). The Club contributes an

equal amount (P10.00 per horse) to such common fund, the total amount of which is added to the 5%

participation of horse owners already described herein-above in the first case.

"Since the institution of this yearly special novato race in 1950, the Manila Jockey Club never paid

amusement tax on the moneys thus contributed by horse owners (P10.00 each) because it entertained the

belief that in accordance with the three opinions of the Secretary of Justice herein-above described, such

contributions never formed part of its gross receipts. On the inscription fee of the P1.00 per horse, it paid

the tax. It did not on the declaration fee of P1.00 because it was imposed by the Municipal Ordinance of

Manila and was turned over to the City officers.

"The Collector of Internal Revenue required the Manila Jockey Club to pay amusement tax on such

contributed fund P10.00 per horse in the special novato race, holding they were part of its gross receipts.

The Manila Jockey Club protested and resorted to the Court of Tax Appeals, where it obtained favorable

judgment on the same grounds sustained by said Court in connection with the 5% of the total wager funds

in the herein-mentioned first case; they were not receipts of the Club." prLL

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We resolved the issue in the following manner:

"We think the reasons for upholding the Tax Court's decision in the first case apply to this one. The ten-

peso contribution never belonged to the Club. It was held by it as a trust fund. And then, after all, when it

received the ten-peso contribution, it at the same time contributed ten pesos out of its own pocket, and

thereafter distributed both amounts as prizes to horse owners. It would seem unreasonable to regard the

ten-peso contribution of the horse owners as taxable receipt of the Club, since the latter, at the same

moment it received the contribution necessarily lost ten pesos too."

As demonstrated in the above-mentioned case, gross receiptssubject to tax under the Tax Code do not

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

the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt

such monies and receipts within the meaning of gross receipts under the Tax Code.

Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do not

form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the

private respondent. The private respondent never benefited from their payment to the local hotels. As

stated earlier, this arrangement was only to accommodate the foreign travel agencies. cdll

Another objection raised by the petitioner is to the respondent court's application of Presidential Decree

31 which exempts foreign tourists from payment of hotel room tax. Section 1 thereof provides:

"Sec. 1.Foreign tourists and travelers shall be exempt from payment of any and all hotel room tax for

the entire period of their stay in the country."

The petitioner now alleges that P.D. 31 has no relevance to the case. He contends that the tax under

Section 191 of the Tax Code is in the nature of an excise tax; that it is a tax on the exercise of the privilege

to engage in business as a contractor and that it is imposed on, and collectible from the person exercising

the privilege. He sums his arguments by stating that "while the burden may be shifted to the person for

whom the services are rendered by the contractor, the latter is not relieved from payment of the tax."

(Rollo, p. 28)

The same arguments were submitted by the Commissioner of Internal Revenue in the case

of Commissioner of Internal Revenue v. John Gotamco & Son., Inc.(148 SCRA 36 [1987]), to justify his

imposition of the 3% contractor's tax under Section 191 of the National Internal Revenue Code on the

gross receipts John Gotamco & Sons, Inc., realized from the construction of the World Health Organization

(WHO) office building in Manila. We rejected the petitioner's arguments and ruled:

"We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the respondent

court:

"'In context, direct taxes are those that are demanded from the very person who, it is intended or desired,

should pay them; while indirect taxes are those that are demanded in the first instance from one person in

the expectation and intention that he can shift the burden to someone else. (Pollock v. Farmers, L & T Co.,1957 US 429, 15 S. Ct. 673, 39 Law. ed. 759). The contractor's tax is of course payable by the contractor

but in the last analysis it is the owner of the building that shoulders the burden of the tax because the

same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax.

And it is an indirect tax on the WHO because, although it is payable by the petitioner, the latter can shift its

burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly through the contractor

and it certainly cannot be said that 'this tax has no bearing upon the World Health Organization.'"

"Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of

Internal Revenue, et al., (127 Phil. 461) the 3% contractor's tax falls directly on Gotamco and cannot be

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shifted to the WHO. The Court of Tax Appeals, however, held that the said case is not controlling in this

case, since the Host Agreement specifically exempts the WHO from 'indirect taxes.' We agree. The

Philippine Acetylene case involved a tax on sales of goods which under the law had to be paid by the

manufacturer or producer; the fact that the manufacturer or producer might have added the amount of the

tax to the price of the goods did not make the sales tax 'a tax on the purchaser.' The Court held that the

sales tax must be paid by the manufacturer or producer even if the sale is made to tax-exempt entities like

the National Power Corporation, an agency of the Philippine Government, and to the Voice of America, an

agency of the United States Government. LexLib

"The Host Agreement, in specifically exempting the WHO from 'indirect taxes,' contemplates taxes which,

although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid by

it."

Accordingly, the significance of P.D. 31 is clearly established in determining whether or not hotel room

charges of foreign tourists in local hotels are subject to the 3% contractor's tax. As the respondent court

aptly stated:

". . . If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as what

respondent would want to do in this case, that would in effect do indirectly what P.D. 31 would not like

hotel room charges of foreign tourists to be subjected to hotel room tax. Although, respondent may claimthat the 3% contractor's tax is imposed upon a different incidence, i.e. the gross receipts of petitioner

tourist agency which he asserts includes the hotel room charges entrusted to it, the effect would be to

impose a tax, and though different, it nonetheless imposes a tax actually on room charges. One way or the

other, it would not have the effect of promoting tourism in the Philippines as that would increase the costs

or expenses by the addition of a hotel room tax in the overall expenses of said tourists." (Rollo, pp. 51-52).

WHEREFORE, the instant petition is DENIED. The decision of the Court of Tax Appeals is AFFIRMED. No

pronouncement as to costs.

SO ORDERED.