G.R. No. L-12287 August 7, 1918 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. Gregorio Araneta for appellants. Assistant Attorney Round for appellees. MALCOLM, J.: 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 sworn declaration on the prescribed form with the Collector of Internal Revenue, showing, as his total net income for the year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife Susana Paterno, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-half to be considered the income of Vicente Madrigal and the other half of Susana Paterno. 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 Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of the city of Manila against 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 collected by the defendants from the plaintiff, Vicente Madrigal, 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 payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of 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 of 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 granted to 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 is should be divided into two equal parts, because of the conjugal partnership existing between them. The 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 tax 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 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 the 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 an income. Capital is wealth, while income is the service of wealth. (See Fisher, "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 further Foster's Income Tax, second edition [1915], Chapter IV; Black on Income Taxes, second edition [1915], Chapter VIII; 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 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 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 one of the time of claiming such exemption 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 the Attorney-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 marred person." 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." 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 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 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 the contemplation 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 additional where 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, but together they have an income in excess of $4,000, in which the 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 makes return made by her husband, while the incomes are added together for the purpose of the normal tax they are taken separately 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.

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.

G.R. No. L-17518 October 30, 1922 FREDERICK C. FISHER, plaintiff-appellant, vs. WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee. Fisher and De Witt and Antonio M. Opisso for appellants. Acting Attorney-General Tuason for appellee. JOHNSON, J.: The only question presented by this appeal is: Are the "stock dividends" in the present case "income" and taxable as such under the provisions of section 25 of Act No. 2833? While the appellant presents other important questions, under the view which we have taken of the facts and the law applicable to the present case, we deem it unnecessary to discuss them now. The defendant demurred to the petition in the lower court. The facts are therefore admitted. They are simple and may be stated as follows: That during the year 1919 the Philippine American Drug Company was a corporation duly organized and existing under the laws of the Philippine Islands, doing business in the City of Manila; that the appellant was a stockholder in said corporation; that said corporation, as result of the business for that year, declared a "stock dividend"; that the proportionate share of said stock divided of the appellant was P24,800; that the stock dividend for that amount was issued to the appellant; that thereafter, in the month of March, 1920, the appellant, upon demand of the appellee, paid under protest, and voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend. For the recovery of that sum (P889.91) the present action was instituted. The defendant demurred to the petition upon the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained and the plaintiff appealed. To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of the United States as will as the decisions of the supreme court of some of the states of the Union, in which the questions before us, based upon similar statutes, was discussed. Among the most important decisions may be mentioned the following: Towne vs. Eisner, 245 U.S., 418; Doyle vs. Mitchell Bors. Co., 247 U.S., 179; Eisner vs. Macomber, 252 U.S., 189; Dekoven vs Alsop, 205 Ill., 309; 63 L.R.A., 587; Kaufman vs. Charlottesville Woolen Mills, 93 Va., 673. In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in each case it was held that "stock dividends" were capital and not an "income" and therefore not subject to the "income tax" law. The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189) that a "stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the stock dividend, does not violate the provisions of the Jones Law. The appellee further argues that the statute of the United States providing for tax upon stock dividends is different from the statute of the Philippine Islands, and therefore the decision of the Supreme Court of the United States should not be followed in interpreting the statute in force here. For the purpose of ascertaining the difference in the said statutes ( (United States and Philippine Islands), providing for an income tax in the United States as well as that in the Philippine Islands, the two statutes are here quoted for the purpose of determining the difference, if any, in the language of the two statutes. Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the collection of an "income tax." Section 2 of said Act attempts to define what is an income. The definition follows:
That the term "dividends" as used in this title shall be held to mean any distribution made or ordered to made by a corporation, . . . which stock dividend shall be considered income, to the amount of its cash value.

Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section 25 of said Act attempts to define the application of the income tax. The definition follows:
The term "dividends" as used in this Law shall be held to mean any distribution made or ordered to be made by a corporation, . . . out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, . . . . Stock dividend shall be considered income, to the amount of the earnings or profits distributed.

It will be noted from a reading of the provisions of the two laws above quoted that the writer of the law of the Philippine Islands must have had before him the statute of the United States. No important argument can be based upon the slight different in the wording of the two sections. It is further argued by the appellee that there are no constitutional limitations upon the power of the Philippine Legislature such as exist in the United States, and in support of that contention, he cites a number of decisions. There is no question that the Philippine Legislature may provide for the payment

of an income tax, but it cannot, under the guise of an income tax, collect a tax on property which is not an "income." The Philippine Legislature can not impose a tax upon "property" under a law which provides for a tax upon "income" only. The Philippine Legislature has no power to provide a tax upon "automobiles" only, and under that law collect a tax upon a carreton or bull cart. Constitutional limitations, that is to say, a statute expressly adopted for one purpose cannot, without amendment, be applied to another purpose which is entirely distinct and different. A statute providing for an income tax cannot be construed to cover property which is not, in fact income. The Legislature cannot, by a statutory declaration, change the real nature of a tax which it imposes. A law which imposes an important tax on rice only cannot be construed to an impose an importation tax on corn. It is true that the statute in question provides for an income tax and contains a further provision that "stock dividends" shall be considered income and are therefore subject to income tax provided for in said law. If "stock dividends" are not "income" then the law permits a tax upon something not within the purpose and intent of the law. It becomes necessary in this connection to ascertain what is an "income in order that we may be able to determine whether "stock dividends" are "income" in the sense that the word is used in the statute. Perhaps it would be more logical to determine first what are "stock dividends" in order that we may more clearly understand their relation to "income." Generally speaking, stock dividends represent undistributed increase in the capital of corporations or firms, joint stock companies, etc., etc., for a particular period. They are used to show the increased interest or proportional shares in the capital of each stockholder. In other words, the inventory of the property of the corporation, etc., for particular period shows an increase in its capital, so that the stock theretofore issued does not show the real value of the stockholder's interest, and additional stock is issued showing the increase in the actual capital, or property, or assets of the corporation, etc. To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose of opening and conducting a drug store, with assets of the value of P2,000, and each contributes P1,000. Their entire assets are invested in drugs and put upon the shelves in their place of business. They commence business without a cent in the treasury. Every dollar contributed is invested. Shares of stock to the amount of P1,000 are issued to each of the incorporators, which represent the actual investment and entire assets of the corporation. Business for the first year is good. Merchandise is sold, and purchased, to meet the demands of the growing trade. At the end of the first year an inventory of the assets of the corporation is made, and it is then ascertained that the assets or capital of the corporation on hand amount to P4,000, with no debts, and still not a cent in the treasury. All of the receipts during the year have been reinvested in the business. Neither of the stockholders have withdrawn a penny from the business during the year. Every peso received for the sale of merchandise was immediately used in the purchase of new stock new supplies. At the close of the year there is not a centavo in the treasury, with which either A or B could buy a cup of coffee or a pair of shoes for his family. At the beginning of the year they were P2,000, and at the end of the year they were P4,000, and neither of the stockholders have received a centavo from the business during the year. At the close of the year, when it is discovered that the assets are P4,000 and not P2,000, instead of selling the extra merchandise on hand and thereby reducing the business to its original capital, they agree among themselves to increase the capital they agree among themselves to increase the capital issued and for that purpose issue additional stock in the form of "stock dividends" or additional stock of P1,000 each, which represents the actual increase of the shares of interest in the business. At the beginning of the year each stockholder held one-half interest in the capital. At the close of the year, and after the issue of the said stock dividends, they each still have one-half interest in the business. The capital of the corporation increased during the year, but has either of them received an income? It is not denied, for the purpose of ordinary taxation, that the taxable property of the corporation at the beginning of the year was P2,000, that at the close of the year it was P4,000, and that the tax rolls should be changed in accordance with the changed conditions in the business. In other words, the ordinary tax should be increased by P2,000. Another illustration: C and D organized a corporation for agricultural purposes with an authorized capital stock of P20,000 each contributing P5,000. With that capital they purchased a farm and, with it, one hundred head of cattle. Every peso contributed is invested. There is no money in the treasury. Much time and labor was expanded during the year by the stockholders on the farm in the way of improvements. Neither received a centavo during the year from the farm or the cattle. At the beginning of the year the assets of the corporation, including the farm and the cattle, were P10,000, and at the close of the year and inventory of the property of the corporation is made and it is then found that they have the same farm with its improvements and two hundred head of cattle by natural increase. At the end of the year it is also discovered that, by reason of business changes, the farm and the cattle both have increased in value, and that the value of the corporate property is now P20,000 instead of

P10,000 as it was at the beginning of the year. The incorporators instead of reducing the property to its original capital, by selling off a part of its, issue to themselves "stock dividends" to represent the proportional value or interest of each of the stockholders in the increased capital at the close of the year. There is still not a centavo in the treasury and neither has withdrawn a peso from the business during the year. No part of the farm or cattle has been sold and not a single peso was received out of the rents or profits of the capital of the corporation by the stockholders. Another illustration: A, an individual farmer, buys a farm with one hundred head of cattle for the sum of P10,000. At the end of the first year, by reason of business conditions and the increase of the value of both real estate and personal property, it is discovered that the value of the farm and the cattle is P20,000. A, during the year, has received nothing from the farm or the cattle. His books at the beginning of the year show that he had property of the value of P10,000. His books at the close of the year show that he has property of the value of P20,000. A is not a corporation. The assets of his business are not shown therefore by certificates of stock. His books, however, show that the value of his property has increased during the year by P10,000, under any theory of business or law, be regarded as an "income" upon which the farmer can be required to pay an income tax? Is there any difference in law in the condition of A in this illustration and the condition of A and B in the immediately preceding illustration? Can the increase of the value of the property in either case be regarded as an "income" and be subjected to the payment of the income tax under the law? Each of the foregoing illustrations, it is asserted, is analogous to the case before us and, in view of that fact, let us ascertain how lexicographers and the courts have defined an "income." The New Standard Dictionary, edition of 1915, defines an income as "the amount of money coming to a person or corporation within a specified time whether as payment or corporation within a specified time whether as payment for services, interest, or profit from investment." Webster's International Dictionary defines an income as "the receipt, salary; especially, the annual receipts of a private person or a corporation from property." Bouvier, in his law dictionary, says that an "income" in the federal constitution and income tax act, is used in its common or ordinary meaning and not in its technical, or economic sense. (146 Northwestern Reporter, 812) Mr. Black, in his law dictionary, says "An income is the return in money from one's business, labor, or capital invested; gains, profit or private revenue." "An income tax is a tax on the yearly profits arising from property , professions, trades, and offices." The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653), said in speaking of income that mere advance in value in no sense constitutes the "income" specified in the revenue law as "income" of the owner for the year in which the sale of the property was made. Such advance constitutes and can be treated merely as an increase of capital. (In re Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa., 414.) Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and now Secretary of State of the United States, in his argument before the Supreme Court of the United States in the case of Towne vs. Eisner, supra, defined an "income" in an income tax law, unless it is otherwise specified, to mean cash or its equivalent. It does not mean choses in action or unrealized increments in the value of the property, and cites in support of the definition, the definition given by the Supreme Court in the case of Gray vs. Darlington,supra. In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said: "Notwithstanding the thoughtful discussion that the case received below, we cannot doubt that the dividend was capital as well for the purposes of the Income Tax Law. . . . 'A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished and their interest are not increased. . . . The proportional interest of each shareholder remains the same. . . .' In short, the corporation is no poorer and the stockholder is no richer then they were before." (Gibbons vs. Mahon, 136 U.S., 549, 559, 560; Logan County vs. U.S., 169 U.S., 255, 261). In the case of Doyle vs. Mitchell Bros. Co. (247 U.S., 179, Mr. Justice Pitney, speaking for the court, said that the act employs the term "income" in its natural and obvious sense, as importing something distinct from principal or capital and conveying the idea of gain or increase arising from corporate activity. Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U.S., 189), again speaking for the court said: "An income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets." For bookkeeping purposes, when stock dividends are declared, the corporation or company acknowledges a liability, in form, to the stockholders, equivalent to the aggregate par value of their stock, evidenced by a "capital stock account." If profits have been made by the corporation during a particular period and not divided, they create additional bookkeeping liabilities under the head of "profit

and loss," "undivided profits," "surplus account," etc., or the like. None of these, however, gives to the stockholders as a body, much less to any one of them, either a claim against the going concern or corporation, for any particular sum of money, or a right to any particular portion of the asset, or any shares sells or until the directors conclude that dividends shall be made a part of the company's assets segregated from the common fund for that purpose. The dividend normally is payable in money and when so paid, then only does the stockholder realize a profit or gain, which becomes his separate property, and thus derive an income from the capital that he has invested. Until that, is done theincreased assets belong to the corporation and not to the individual stockholders. When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets, and no longer is available for actual distribution. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations resulting from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out of the entire investment. Having regard to the very truth of the matter, to substance and not to form, the stockholder by virtue of the stock dividend has in fact received nothing that answers the definition of an "income." (Eisner vs. Macomber, 252 U.S., 189, 209, 211.) The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation. There has been no separation or segregation of his interest. 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 of the corporation. The stockholder, by virtue of the stock dividend, has no separate or individual control over the interest represented thereby, further than he had before the stock dividend was issued. He cannot use it for the reason that it is still the property of the corporation and not the property of the individual holder of stock dividend. A certificate of stock represented by the stock dividend is simply a statement of his proportional interest or participation in the capital of the corporation. For bookkeeping purposes, a corporation, by issuing stock dividend, acknowledges a liability in form to the stockholders, evidenced by a capital stock account. The receipt of a stock dividend in no way increases the money received of a stockholder nor his cash account at the close of the year. It simply shows that there has been an increase in the amount of the capital of the corporation during the particular period, which may be due to an increased business or to a natural increase of the value of the capital due to business, economic, or other reasons. We believe that the Legislature, when it provided for an "income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is generally used in its common acceptation; that is that the income means money received, coming to a person or corporation for services, interest, or profit from investments. We do not believe that the Legislature intended that a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such property can be reached under the ordinary from of taxation. Mr. Justice Pitney, in the case of the Einer vs. Macomber, supra, said in discussing the difference between "capital" and "income": "That the fundamental relation of 'capital' to 'income' has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs; the latter as the outlet stream, to be measured by its flow during a period of time." It may be argued that a stockholder might sell the stock dividend which he had acquired. If he does, then he has received, in fact, an income and such income, like any other profit which he realizes from the business, is an income and he may be taxed thereon. There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends declared, as in the present case. The one is a disbursement to the stockholder of accumulated earnings, and the corporation at once parts irrevocably with all interest thereon. The other involves no disbursement by the corporation. It parts with nothing to the stockholder. The latter receives, not an actual dividend, but certificate of stock which simply evidences his interest in the entire capital, including such as by investment of accumulated profits has been added to the original capital. They are not income to him, but represent additions to the source of his income, namely, his invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a person is in the same position, so far as his income is concerned, as the owner of young domestic animal, one year old at the beginning of the year, which is worth P50 and, which, at the end of the year, and by reason of its growth, is worth P100. The value of his property has increased, but has had an income during the year? It is true that he had taxable property at the beginning of the year of the value of P50, and the same taxable property at

another period, of the value of P100, but he has had no income in the common acceptation of that word. The increase in the value of the property should be taken account of on the tax duplicate for the purposes of ordinary taxation, but not as income for he has had none. The question whether stock dividends are income, or capital, or assets has frequently come before the courts in another form in cases of inheritance. A is a stockholder in a large corporation. He dies leaving a will by the terms of which he give to B during his lifetime the "income" from said stock, with a further provision that C shall, at B's death, become the owner of his share in the corporation. During B's life the corporation issues a stock dividend. Does the stock dividend belong to B as an income, or does it finally belong to C as a part of his share in the capital or assets of the corporation, which had been left to him as a remainder by A? While there has been some difference of opinion on that question, we believe that a great weight of authorities hold that the stock dividend is capital or assets belonging to C and not an income belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was held that stock dividends in such cases were regarded as capital and not as income(Gibbons vs. Mahon, 136 U.S., 549.) In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the title of a corporation, and the interest of its members or stockholders in the property of the corporation, is familiar and well settled. The ownership of that property is in the corporation, and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the corporation, during its existence, under its charter, and to a like proportion of the property remaining, upon the termination or dissolution of the corporation, after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs. Equitable Life Assurance Society, 160 N. Y., 19.) In the case of Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend is defined as a corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is declared, these corporate profits belong to the corporation, not to the stockholders, and are liable for corporate indebtedness. There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends declared. The one is a disbursement to the stockholders of accumulated earning, and the corporation at once parts irrevocably with all interest thereon. The other involves no disbursement by the corporation. It parts with nothing to the stockholders. The latter receives, not an actual dividend, but certificates of stock which evidence in a new proportion his interest in the entire capital. When a cash becomes the absolute property of the stockholders and cannot be reached by the creditors of the corporation in the absence of fraud. A stock dividend however, still being the property of the corporation and not the stockholder, it may be reached by an execution against the corporation, and sold as a part of the property of the corporation. In such a case, if all the property of the corporation is sold, then the stockholder certainly could not be charged with having received an income by virtue of the issuance of the stock dividend. Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the stockholders, and are liable for corporate indebtedness. The rule is well established that cash dividend, whether large or small, are regarded as "income" and all stock dividends, as capital or assets (Cook on Corporation, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58; Mills vs. Britton, 64 Conn., 4; 5 Am., and Eng. Encycl. of Law, 2d ed., p. 738.) If the ownership of the property represented by a stock dividend is still in the corporation and to in the holder of such stock, then it is difficult to understand how it can be regarded as income to the stockholder and not as a part of the capital or assets of the corporation. (Gibbsons vs. Mahon, supra.) the stockholder has received nothing but a representation of an interest in the property of the corporation and, as a matter of fact, he may never receive anything, depending upon the final outcome of the business of the corporation. The entire assets of the corporation may be consumed by mismanagement, or eaten up by debts and obligations, in which case the holder of the stock dividend will never have received an income from his investment in the corporation. A corporation may be solvent and prosperous today and issue stock dividends in representation of its increased assets, and tomorrow be absolutely insolvent by reason of changes in business conditions, and in such a case the stockholder would have received nothing from his investment. In such a case, if the holder of the stock dividend is required to pay an income tax on the same, the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. An income subject to taxation under the law must be an actual income and not a promised or prospective income. The appelle argues that there is nothing in section 25 of Act No 2833 which contravenes the provisions of the Jones Law. That may be admitted. He further argues that the Act of Congress (U.S. Revenue Act of 1918) expressly authorized the Philippine Legislatures to provide for an income tax. That fact may also be admitted. But a careful reading of that Act will show that, while it permitted a tax

upon income, the same provided that income shall include gains, profits, and income derived from salaries, wages, or compensation for personal services, as well as from interest, rent, dividends, securities, etc. The appellee emphasizes the "income from dividends." Of course, income received as dividends is taxable as an income but an income from "dividends" is a very different thing from receipt of a "stock dividend." One is an actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of corporation. In all of the foregoing argument we have not overlooked the decisions of a few of the courts in different parts of the world, which have reached a different conclusion from the one which we have arrived at in the present case. Inasmuch, however, as appeals may be taken from this court to the Supreme Court of the United States, we feel bound to follow the same doctrine announced by that court. Having reached the conclusion, supported by the great weight of the authority, that "stock dividends" are not "income," the same cannot be taxes under that provision of Act No. 2833 which provides for a tax upon income. Under the guise of an income tax, property which is not an income cannot be taxed. When the assets of a corporation have increased so as to justify the issuance of a stock dividend, the increase of the assets should be taken account of the Government in the ordinary tax duplicates for the purposes of assessment and collection of an additional tax. For all of the foregoing reasons, we are of the opinion, and so decide, that the judgment of the lower court should be revoked, and without any finding as to costs, it is so ordered.

G.R. No. L-21570 July 26, 1966 LIMPAN INVESTMENT CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents. Vicente L. San Luis for petitioner. Office of the Solicitor General A. A. Alafriz, Assistant Solicitor General F. B. Rosete, Solicitor A. B. Afurong and Atty. V. G. Saldajeno for respondents. REYES, J.B.L., J.: Appeal interposed by petitioner Limpan Investment Corporation against a decision of the Court of Tax Appeals, in its CTA Case No. 699, holding and ordering it (petitioner) to pay respondent Commissioner of Internal Revenue the sums of P7,338.00 and P30,502.50, representing deficiency income taxes, plus 50% surcharge and 1% monthly interest from June 30, 1959 to the date of payment, with cost. The facts of this case are: Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business of leasing real properties. It commenced actual business operations on July 1, 1955. Its principal stockholders are the spouses Isabelo P. Lim and Purificacion Ceiza de Lim, who own and control ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is the same Isabelo P. Lim. Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim. Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the sums of P657.00 and P2,220.00. Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they discovered and ascertained that petitioner had underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable years and had claimed excessive depreciation of its buildings in the sums of P4,260.00 and P16,336.00 covering the same period. On the basis of these findings, respondent Commissioner of Internal Revenue issued its letter-assessment and demand for payment of deficiency income tax and surcharge against petitioner corporation, computed as follows:
1w ph1.t

90-AR-C-348-58/56 Net income per audited return Add: Unallowable deductions: Undeclared Rental Receipt (Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00 Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . . 4,260.00 Net income per investigation Tax due thereon Less: Amount already assessed Balance Add: 50% Surcharge DEFICIENCY TAX DUE 90-AR-C-1196-58/57 Net income per audited return Add: Unallowable deductions: Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00 Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00 P11,098.00 P24,459.00 P27,746.00 P5,549.00 657.00 P4,892.00 2,446.00 P7,338.00 P 3,287.81

Net income per investigation Tax due thereon Less: Amount already assessed Balance Add: 50% Surcharge DEFICIENCY TAX DUE

P109,126.00 P22,555.00 2,220.00 20,335.00 10,167.50 P30,502.50

Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the above assessment but the latter denied said request and reiterated its original assessment and demand, plus 5% surcharge and the 1% monthly interest from June 30, 1959 to the date of payment; hence, the corporation filed its petition for review before the Tax Appeals court, questioning the correctness and validity of the above assessment of respondent Commissioner of Internal Revenue. It disclaimed having received or collected the amount of P20,199.00, as unreported rental income for 1956, or any part thereof, reasoning out that 'the previous owners of the leased building has (have) to collect part of the total rentals in 1956 to apply to their payment of rental in the land in the amount of P21,630.00" (par. 11, petition). It also denied having received or collected the amount of P81,690.00, as unreported rental income for 1957, or any part thereof, explaining that part of said amount totalling P31,380.00 was not declared as income in its 1957 tax return because its president, Isabelo P. Lim, who collected and received P13,500.00 from certain tenants, did not turn the same over to petitioner corporation in said year but did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals amounting to P10,800.00, over which the corporation had no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought not be declared as rental income. Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent Commissioner of its buildings in the above assessment are unfair and inaccurate. Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer, Vicente G. Solis, who admitted that it had omitted to report the sum of P12,100.00 as rental income in its 1956 tax return and also the sum of P29,350.00 as rental income in its 1957 tax return. However, with respect to the difference between this omitted income (P12,100.00) and the sum (P20,199.00) found by respondent Commissioner as undeclared in 1956, petitioner corporation, through the same witness (Solis), tried to establish that it did not collect or receive the same because, in view of the refusal of some tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco Vda. de Lim, the former owners, on one hand, and the same Isabelo P. Lim, as president of petitioner corporation, on the other, had verbally agreed in 1956 to turn over to petitioner corporation six per cent (6%) of the value of all its properties, computed at P21,630.00, in exchange for whatever rentals the Lims may collect from the tenants. And, with respect to the difference between the admittedly undeclared sum of P29,350.00 and that found by respondent Commissioner as unreported rental income, (P81,690.00) in 1957, the same witness Solis also tried to establish that petitioner corporation did not receive or collect the same but that its president, Isabelo P. Lim, collected part thereof and may have reported the same in his own personal income tax return; that same Isabelo P. Lim collected P13,500.00, which he turned over to petitioner in 1959 only; that a certain tenant (Go Tong deposited in court his rentals (P10,800.00), over which the corporation had no actual or constructive control and which were withdrawn only in 1958; and that a sub-tenant paid P4,200.00 which ought not be declared as rental income in 1957. With regard to the depreciation which respondent disallowed and deducted from the returns filed by petitioner, the same witness tried to establish that some of its buildings are old and out of style; hence, they are entitled to higher rates of depreciation than those adopted by respondent in his assessment. Isabelo P. Lim was not presented as witness to corroborate the above testimony of Vicente G. Solis. On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the respondent that he personally interviewed the tenants of petitioner and found that these tenants had been regularly paying their rentals to the collectors of either petitioner or its president, Isabelo P. Lim, but these payments were not declared in the corresponding returns; and that in applying rates of depreciation to petitioner's buildings, he adopted Bulletin "F" of the U.S. Federal Internal Revenue Service. On the basis of the evidence, the Tax Court upheld respondent Commissioner's assessment and demand for deficiency income tax which, as above stated in the beginning of this opinion, petitioner has appealed to this Court. Petitioner corporation pursues, the same theory advocated in the court below and assigns the following alleged errors of the trial court in its brief, to wit: I. The respondent Court erred in holding that the petitioner had an unreported rental income of P20,199.00 for the year 1956. II. The respondent Court erred in holding that the petitioner had an unreported rental income of P81,690.00 for the year 1957. III. The respondent Court erred in holding that the depreciation in the amount of P20,598.00 claimed by petitioner for the years 1956 and 1957 was excessive.

and prays that the appealed decision be reversed. This appeal is manifestly unmeritorious. Petitioner having admitted, through its own witness (Vicente G. Solis), that it had undeclared more than one-half (1/2) of the amount (P12,100.00 out of P20,199.00) found by the BIR examiners as unreported rental income for the year 1956 and more than one-third (1/3) of the amount (P29,350.00 out of P81,690.00) ascertained by the same examiners as unreported rental income for the year 1957, contrary to its original claim to the revenue authorities, it was incumbent upon it to establish the remainder of its pretensions by clear and convincing evidence, that in the case is lacking. With respect to the balance, which petitioner denied having unreported in the disputed tax returns, 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 ownership of the buildings existing thereon to petitioner corporation, so as to justify the alleged verbal agreement whereby they would 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 who refused to recognize the new owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged transferors, or by any document or unbiased evidence. Hence, the first assigned error is without merit. As to the second assigned error, petitioner's denial and explanation of the non-receipt of the remaining unreported income for 1957 is not substantiated by satisfactory corroboration. As above noted, Isabelo P. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return submitted in court to establish that the rental income which he allegedly collected and received in 1957 were reported therein. The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have been reported as rental income in said year, since it is income just the same regardless of its source. On the third assigned error, suffice it to state that this Court has already held that "depreciation is a question of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual facts", and the findings of the Tax Court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion (Commissioner of Internal Revenue vs. Priscila Estate, Inc., et al., L-18282, May 29, 1964), and petitioner has not shown any arbitrariness or abuse of discretion in the part of the Tax Court in finding that petitioner claimed excessive depreciation in its returns. It appearing that the Tax Court applied rates of depreciation in accordance with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Court pronounced as having strong persuasive effect in this jurisdiction, for having been the result of scientific studies and observation for a long period in the United States, after whose Income Tax Law ours is patterned (M. Zamora vs. Collector of internal Revenue & Collector of Internal Revenue vs. M. Zamora; E. Zamora vs. Collector of Internal Revenue and Collector of Internal Revenue vs. E. Zamora, Nos. L-15280, L-15290, L-15289 and L-15281, May 31, 1963), the foregoing error is devoid of merit. Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs against petitioner-appellant, Limpan Investment Corporation. Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.

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-LIACCO, 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 OF INTERNAL REVENUE, respondents. Angara, Abello, Concepcion, Regala & Cruz for petitioners. NOCON, J.: Petitioners pray that his 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. 70027 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. 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 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 the Internal Revenue on their claims, petitioners filed their petitioner 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 and facts, that 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 in the prevailing free market 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 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 "A8" and Annexes "C" to "C-8", Petition for Review, CTA Nos. 2511 and 2594). Petitioners being subject to Philippine income tax, their dollar earnings should be converted into Philippine pesos 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:

For internal revenue tax purposes, the free marker 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 basically an income tax case. For the proper resolution of these cases 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. 4 Income can also be though of as 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 that a 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 not be 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 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 8 shows that the subject matters involved therein are export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and investments nothing 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 yeas 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: xxx xxx xxx 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. 9 Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to prescribed 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 to the 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. 12

Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that they are citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption. Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for respondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars, being of long standing and not contrary to law, are valid. 13 Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the government" and one of the duties of a Filipino citizen is to pay his income tax. WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent Court of Tax Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is AFFIRMED. Costs against petitioners. SO ORDERED.

G.R. No. 102967 February 10, 2000 BIBIANO V. BAAS, JR., petitioner, vs. COURT OF APPEALS, AQUILINO T. LARIN, RODOLFO TUAZON AND PROCOPIO TALON, respondents. QUISUMBING, J.: For review is the Decision of the Court of Appeals in CA-C.R. CV No. 17251 promulgated on November 29, 1991. It affirmed in toto the judgment of the Regional Trial Court (RTC), Branch 39, Manila, in Civil Case No. 82-12107. Said judgment disposed as follows: FOR ALL THE FOREGOING CONSIDERATIONS, this Court hereby renders judgment DISMISSING the complaint against all the defendants and ordering plaintiff [herein petitioner] to pay defendant Larin the amount of P200,000.00 (Two Hundred Thousand Pesos) as actual and compensatory damages; P200,000.00 as moral damages; and P50,000.00 as exemplary damages and attorneys fees of P100,000.00.1 The facts, which we find supported by the records, have been summarized by the Court of Appeals as follows: On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment Corporation (AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for two million, three hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided that upon the signing of the contract AYALA shall pay four hundred sixty-one thousand, seven hundred fifty-four (P461,754.00) pesos. The balance of one million, eight hundred forty-seven thousand and sixteen (P1,847,016.00) pesos was to be paid in four equal consecutive annual installments, with twelve (12%) percent interest per annum on the outstanding balance. AYALA issued one promissory note covering four equal annual installments. Each periodic payment of P461,754.00 pesos shall be payable starting on February 20, 1977, and every year thereafter, or until February 20, 1980. The same day, petitioner discounted the promissory note with AYALA, for its face value of P1,847,016.00, evidenced by a Deed of Assignment signed by the petitioner and AYALA. AYALA issued nine (9) checks to petitioner, all dated February 20, 1976, drawn against Bank of the Philippine Islands with the uniform amount of two hundred five thousand, two hundred twenty-four (P205,224.00) pesos. In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from disposition of capital asset.2 Selling Price of Land Less Initial Payment Unrealized Gain P2,308,770.00 461,754.00 P1,847,016.00
3

1976 Declaration of Income on Disposition of Capital Asset subject to Tax: Initial Payment Less: Cost of land and other incidental Expenses Income Income subject to tax (P385,206. 10 x 50%) P461,754.00 ( 76,547.90) P385,206.10 P192,603.65

In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty thousand, eight hundred seventy-seven (P230,877.00) pesos4 as gain from sale of capital asset. In his 1980 income tax amnesty return, petitioner also reported the same amount of P230,877.00 as the realized gain on disposition of capital asset for the year. On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo Tuazon and Procopio Talon to examine the books and records of petitioner for the year 1976. They discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should have been taxable in 1976 since the income was wholly derived in 1976. Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They recommended deficiency tax assessment for two million, four hundred seventy-three thousand, six hundred seventy-three (P2,473,673.00) pesos. Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila Region IV-A. After reviewing the examiners' report, Larin directed the revision of the audit report, with instruction to consider the land as capital asset. The tax due was only fifty (50%) percent of the total gain from sale of the property held by the taxpayer beyond twelve months pursuant to Section 345 of the 1977 National Internal Revenue Code (NIRC). The

deficiency tax assessment was reduced to nine hundred thirty six thousand, five hundred ninety-eight pesos and fifty centavos (P936,598.50), inclusive of surcharges and penalties for the year 1976. On June 27, 1980, respondent Larin sent a letter to petitioner informing of the income tax deficiency that must be settled him immediately. On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of his land to AYALA was on installment. On June 8, 1981, the matter was endorsed to the Acting Chief of the Legal Branch of the National Office of the BIR. The Chief of the Tax Fraud Unit recommended the prosecution of a criminal case for conspiring to file false and fraudulent returns, in violation of Section 51 of the Tax Code against petitioner and his accountants, Andres P. Alejandre and Conrado Baas. On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner. On July 1, 1981, news items appeared in the now defunct Evening Express with the headline: "BIR Charges Realtor" and another in the defunct Evening Post with a news item: "BIR raps Realtor, 2 accountants." Another news item also appeared in the July 2, 1981, issue of the Bulletin Today entitled: "3-face P1-M tax evasion raps." All news items mentioned petitioner's false income tax return concerning the sale of land to AYALA. On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the amount of forty-one thousand, seven hundred twenty-nine pesos and eighty-one centavos (P41,729.81). On November 2, 1981, petitioner again filed an Amnesty Tax Return under P.D. 1840 and paid an additional amount of one thousand, five hundred twenty-five pesos and sixty-two centavos (P1,525.62). In both, petitioner did not recognize that his sale of land to AYALA was on cash basis. Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC of Manila an action 6for damages against respondents Larin, Tuazon and Talon for extortion and malicious publication of the BIR's tax audit report. He claimed that the filing of criminal complaints against him for violation of tax laws were improper because he had already availed of two tax amnesty decrees, Presidential Decree Nos. 1740 and 1840. The trial court decided in favor of the respondents and awarded Larin damages, as already stated. Petitioner seasonably appealed to the Court of Appeals. In its decision of November 29, 1991, the respondent court affirmed the trial court's decision, thus: The finding of the court a quo that plaintiff-appellant's actions against defendant-appellee Larin were unwarranted and baseless and as a result thereof, defendant-appellee Larin was subjected to unnecessary anxiety and humiliation is therefore supported by the evidence on record. Defendant-appellee Larin acted only in pursuance of the authority granted to him. In fact, the criminal charges filed against him in the Tanodbayan and in the City Fiscal's Office were all dismissed. WHEREFORE, the appealed judgment is hereby AFFIRMED in toto.7 Hence this petition, wherein petitioner raises before us the following queries: I. WHETHER THE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF PERTINENT TAX LAWS, THUS IT FAILED TO APPRECIATE THE CORRECTNESS AND ACCURACY OF PETITIONER'S RETURN OF THE INCOME DERIVED FROM THE SALE OF THE LAND TO AYALA. II. WHETHER THE RESPONDENT COURT ERRED IN NOT FINDING THAT THERE WAS AN ALLEGED ATTEMPT TO EXTORT [MONEY FROM] PETITIONER BY PRIVATE RESPONDENTS. III. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF PRESIDENTIAL DECREE NOS. 1740 AND 1840, AMONG OTHERS, PETITIONER'S IMMUNITY FROM CRIMINAL PROSECUTION. IV. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF WELLESTABLISHED DOCTRINES OF THIS HONORABLE COURT AS REGARDS THE AWARD OF ACTUAL, MORAL AND EXEMPLARY DAMAGES IN FAVOR OF RESPONDENT LARIN. In essence, petitioner asks the Court to resolve seriatim the following issues: 1. Whether respondent court erred in ruling that there was no extortion attempt by BIR officials; 2. Whether respondent court erred in holding that P.D. 1740 and 1840 granting tax amnesties did not grant immunity from tax suits; 3. Whether respondent court erred in finding that petitioner's income from the sale of land in 1976 should be declared as a cash transaction in his tax return for the same year (because the buyer discounted the promissory note issued to the seller on future installment payments of the sale, on the same day of the sale); 4. Whether respondent court erred and committed grave abuse of discretion in awarding damages to respondent Larin. The first issue, on whether the Court of Appeals erred in finding that there was no extortion, involves a determination of fact. The Court of Appeals observed, The only evidence to establish the alleged extortion attempt by defendants-appellees is the plaintiffappellant's self serving declarations. As found by the court a quo, "said attempt was known to plaintiff-appellant's son-in-law and counsel on record, yet, said counsel did not take the witness stand to corroborate the testimony of plaintiff."8 As repeatedly held, findings of fact by the Court of Appeals especially if they affirm factual findings of the trial court will not be disturbed by this Court, unless these findings are not supported by evidence. 9 Similarly, neither should we disturb a finding of the trial court and appellate court that an allegation is not supported by evidence on record. Thus, we agree with the conclusion of respondent court that herein private respondents, on the basis of evidence, could not be held liable for extortion.
1w phi1.nt

On the second issue of whether P.D. Nos. 1740 and 1840 which granted tax amnesties also granted immunity from criminal prosecution against tax offenses, the pertinent sections of these laws state: P.D. No. 1740. CONDONING PENALTIES FOR CERTAIN VIOLATIONS OF THE INCOME TAX LAW UPON VOLUNTARY DISCLOSURE OF UNDECLARED INCOME FOR INCOME TAX PURPOSES AND REQUIRING PERIODIC SUBMISSION OF NET WORTH STATEMENT. xxx xxx xxx Sec. 1. Voluntary Disclosure of Correct Taxable Income. Any individual who, for any or all of the taxable years 1974 to 1979, had failed to file a return is hereby, allowed to file a return for each of the aforesaid taxable years and accurately declare therein the true and correct income, deductions and exemptions and pay the income tax due per return. Likewise, any individual who filed a false or fraudulent return for any taxable year in the period mentioned above may amend his return and pay the correct amount of tax due after deducting the taxes already paid, if any, in the original declaration. (emphasis ours) xxx xxx xxx Sec. 5. Immunity from Penalties. Any individual who voluntarily files a return under this Decree and pays the income tax due thereon shall be immune from the penalties, civil or criminal, under the National Internal Revenue Code arising from failure to pay the correct income tax with respect to the taxable years from which an amended return was filed or for which an original return was filed in cases where no return has been filed for any of the taxable years 1974 to 1979: Provided, however, That these immunities shall not apply in cases where the amount of net taxable income declared under this Decree is understated to the extent of 25% or more of the correct net taxable income. (emphasis ours) P.D. NO. 1840 GRANTING A TAX AMNESTY ON UNTAXED INCOME AND/OR WEALTH EARNED OR ACQUIRED DURING THE TAXABLE YEARS 1974 TO 1980 AND REQUIRING THE FILING OF THE STATEMENT OF ASSETS, LIABILITIES, AND NET WORTH. Sec. 1. Coverage. In case of voluntary disclosure of previously untaxed income and/or wealth such as earnings, receipts, gifts, bequests or any other acquisition from any source whatsoever, realized here or abroad, by any individual taxpayer, which are taxable under the National Internal Revenue Code, as amended, the assessment and 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 thereto under the National Internal Revenue Code, are hereby condoned provided that the individual taxpayer shall pay. (emphasis ours) . . . Sec. 2. Conditions for Immunity. The immunity granted under Section one of this Decree shall apply only under the following conditions: a) Such previously untaxed income and/or wealth must have been earned or realized in any of the years 1974 to 1980; b) The taxpayer must file an amnesty return on or before November 30, 1981, and fully pay the tax due thereon; c) The amnesty tax paid by the taxpayer under this Decree shall not be less than P1,000.00 per taxable year; and d) The taxpayer must file a statement of assets, liabilities and net worth as of December 31, 1980, as required under Section 6 hereof. (emphasis ours) It will be recalled that petitioner entered into a deed of sale purportedly on installment. On the same day, he discounted the promissory note covering the future installments. The discounting seems questionable because ordinarily, when a bill is discounted, the lender (e.g. banks, financial institution) charges or deducts a certain percentage from the principal value as its compensation. Here, the discounting was done by the buyer. On July 2, 1981, two weeks after the filing of the tax evasion complaint against him by respondent Larin on June 17, 1981, petitioner availed of the tax amnesty under P.D. No. 1740. His amended tax return for the years 1974 - 1979 was filed with the BIR office of Valenzuela, Bulacan, instead of Manila where the petitioner's principal office was located. He again availed of the tax amnesty under P.D. No. 1840. His disclosure, however, did not include the income from his sale of land to AYALA on cash basis. Instead he insisted that such sale was on installment. He did not amend his income tax return. He did not pay the tax which was considerably increased by the income derived from the discounting. He did not meet the twin requirements of P.D. 1740 and 1840, declaration of his untaxed income and full payment of tax due thereon. Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from immunity against prosecution. Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. To avail of a tax amnesty granted by the government, and to be immune from suit on its delinquencies, the tax payer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income. 10 It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority.11 Hence, on this matter, it is our view that petitioner's claim of immunity from prosecution under the shield of availing tax amnesty is untenable. On the third issue, petitioner asserts that his sale of the land to AYALA was not on cash basis but on installment as clearly specified in the Deed of Sale which states:

That for and in consideration of the sum of TWO MILLION THREE HUNDRED EIGHT THOUSAND SEVEN HUNDRED SEVENTY (P2,308,770.00) PESOS Philippine Currency, to be paid as follows: 1. P461,754.00, upon the signing of the Deed of Sale; and, 2. The balance of P1,847,016.00, to be paid in four (4) equal, consecutive, annual installments with interest thereon at the rate of twelve percent (12%) per annum, beginning on February 20, 1976, said installments to be evidenced by four (4) negotiable promissory notes.12 Petitioner resorts to Section 43 of the NIRC and Sec. 175 of Revenue Regulation No. 2 to support his claim. Sec. 43 of the 1977 NIRC states, Installment basis. (a) Dealers in personal property. . . . (b) Sales of realty and casual sales of personalty In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding one thousand pesos, or (2) of a sale or other disposition of real property if in either case the initial payments do not exceed twenty-five percentum of the selling price, the income may, under regulations prescribed by the Minister of Finance, be returned on the basis and in the manner above prescribed in this section. As used in this section the term "initial payment" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. . . . (emphasis ours) Revenue Regulation No. 2, Section 175 provides, Sale of real property involving deferred payments. Under section 43 deferred-payment sales of real property include (1) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the selling price has been paid, and (b) sales in which there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments. Such sales either under (a) or (b), fall into two classes when considered with respect to the terms of sale, as follows: (1) Sales of property on the installment plan, that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made do not exceed 25 per cent of the selling price; (2) Deferred-payment sales not on the installment plan, that is sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made exceed 25 per cent of the selling price; In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall be included as a part of the "selling price" but the amount of the mortgage, to the extent it does not exceed the basis to the vendor of the property sold, shall not be considered as a part of the "initial payments" or of the "total contract price," as those terms are used in section 43 of the Code, in sections 174 and 176 of these regulations, and in this section. The term "initial payments" does not include amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price which are due and payable in subsequent years. Commissions and other selling expenses paid or incurred by the vendor are not to be deducted or taken into account in determining the amount of the "initial payments," the "total contract price," or the "selling price." The term "initial payments" contemplates at least one other payment in addition to the initial payment. If the entire purchase price is to be paid in a lump sum in a later year, there being no payment during the year, the income may not be returned on the installment basis. Income may not be returned on the installment basis where no payment in cash or property, other than evidences of indebtedness of the purchaser, is received during the first year, the purchaser having promised to make two or more payments, in later years. Petitioner asserts that Sec. 43 allows him to return as income in the taxable years involved, the respective installments as provided by the deed of sale between him and AYALA. Consequently, he religiously reported his yearly income from sale of capital asset, subject to tax, as follows: Year 1977 (50% of P461,754) 1978 1979 1980 P230,877.00 230,877.00 230,877.00 230,877.00

Petitioner says that his tax declarations are acceptable modes of payment under Section 175 of the Revenue Regulations (RR) No. 2. The term "initial payment", he argues, does not include amounts received by the vendor which are part of the complete purchase price, still due and payable in subsequent years. Thus, the proceeds of the promissory notes, not yet due which he discounted to AYALA should not be included as income realized in 1976. Petitioner states that the original agreement in the Deed of Sale should not be affected by the subsequent discounting of the bill. On the other hand, respondents assert that taxation is a matter of substance and not of form. Returns are scrutinized to determine if transactions are what they are and not declared to evade taxes. Considering the progressive nature of our income taxation, when income is spread over several installment payments through the

years, the taxable income goes down and the tax due correspondingly decreases. When payment is in lump sum the tax for the year proportionately increases. Ultimately, a declaration that a sale is on installment diminishes government taxes for the year of initial installment as against a declaration of cash sale where taxes to the government is larger. As a general rule, the whole profit accruing from a sale of property is taxable as income in the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income shall be taxable in the year in which it is "received," the profit from an installment sale is to be apportioned between or among the years in which such installments are paid and received.13 Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned installment method is a seller of real property who disposes his property on installment, provided that the initial payment does not exceed 25% of the selling price. They also state what may be regarded as installment payment and what constitutes initial payment. Initial payment means the payment received in cash or property excluding evidences of indebtedness due and payable in subsequent years, like promissory notes or mortgages, given of the purchaser during the taxable year of sale. Initial payment does not include amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price which are due and payable in subsequent years.14 Such disposition or discounting of receivable is material only as to the computation of the initial payment. If the initial payment is within 25% of total contract price, exclusive of the proceeds of discounted notes, the sale qualifies as an installment sale, otherwise it is a deferred sale. 15 Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still taxable income for the year it was converted into cash. The subsequent payments or liquidation of certificates of indebtedness is reported using the installment method in computing the proportionate income16 to be returned, during the respective year it was realized. Non-dealer sales of real or personal property may be reported as income under the installment method provided that the obligation is still outstanding at the close of that year. If the seller disposes the entire installment obligation by discounting the bill or the promissory note, he necessarily must report the balance of the income from the discounting not only income from the initial installment payment. Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even if the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of merchandise in case of default.17 This rule prevails in the United States.18 Since our income tax laws are of American origin,19 interpretations by American courts an our parallel tax laws have persuasive effect on the interpretation of these laws.20 Thus, by analogy, all the more would a taxable disposition result when the discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of the buyer is discharged, while the seller acquires money for the settlement of his receivables. Logically then, the income should be reported at the time of the actual gain. For income tax purposes, income is an actual gain or an actual increase of wealth.21 Although the proceeds of a discounted promissory note is not considered initial payment, still it must be included as taxable income on the year it was converted to cash. When petitioner had the promissory notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his returns the income derived from the discounting. What petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale of the land to AYALA for the year 1976. Lastly, petitioner questions the damages awarded to respondent Larin. Any person who seeks to be awarded actual or compensatory damages due to acts of another has the burden of proving said damages as well as the amount thereof.22 Larin says the extortion cases filed against him hampered his immediate promotion, caused him strong anxiety and social humiliation. The trial court awarded him two hundred thousand (P200,000,00) pesos as actual damages. However, the appellate court stated that, despite pendency of this case, Larin was given a promotion at the BIR. Said respondent court: We find nothing on record, aside from defendant-appellee Larin's statements (TSN, pp. 6-7, 11 December 1985), to show that he suffered loss of seniority that allegedly barred his promotion. In fact, he was promoted to his present position despite the pendency of the instant case (TSN, pp. 35-39, 04 November 1985).23 Moreover, the records of the case contain no statement whatsoever of the amount of the actual damages sustained by the respondents. Actual damages cannot be allowed unless supported by evidence on the record.24The court cannot rely on speculation, conjectures or guesswork as to the fact and amount of damages.25 To justify a grant of actual or compensatory damages, it is necessary to prove with a reasonable degree of certainty, the actual amount of loss.26 Since we have no basis with which to assess, with certainty, the actual or compensatory damages counter-claimed by respondent Larin, the award of such damages should be deleted. Moral damages may be recovered in cases involving acts referred to in Article 21 27 of the Civil Code.28 As a rule, a public official may not recover damages for charges of falsehood related to his official conduct unless he proves that the statement was made with actual malice. In Babst, et. al. vs. National Intelligence Board, et. al., 132 SCRA 316, 330 (1984), we reiterated the test for actual malice as set forth in the landmark American case ofNew York Times vs. Sullivan,29 which we have long adopted, in defamation and libel cases, viz.: . . . with knowledge that it was false or with reckless disregard of whether it was false or not. We appreciate petitioner's claim that he filed his 1976 return in good faith and that he had honestly believed that the law allowed him to declare the sale of the land, in installment. We can further grant that the pertinent tax laws needed construction, as we have earlier done. That petitioner was offended by the headlines alluding to him as tax

evader is also fully understandable. All these, however, do not justify what amounted to a baseless prosecution of respondent Larin. Petitioner presented no evidence to prove Larin extorted money from him. He even admitted that he never met nor talked to respondent Larin. When the tax investigation against the petitioner started, Larin was not yet the Regional Director of BIR Region IV-A, Manila. On respondent Larin's instruction, petitioner's tax assessment was considered one involving a sale of capital asset, the income from which was subjected to only fifty percent (50%) assessment, thus reducing the original tax assessment by half. These circumstances may be taken to show that Larin's involvement in extortion was not indubitable. Yet, petitioner went on to file the extortion cases against Larin in different fora. This is where actual malice could attach on petitioner's part. Significantly, the trial court did not err in dismissing petitioner's complaints, a ruling affirmed by the Court of Appeals. Keeping all these in mind, we are constrained to agree that there is sufficient basis for the award of moral and exemplary damages in favor of respondent Larin. The appellate court believed respondent Larin when he said he suffered anxiety and humiliation because of the unfounded charges against him. Petitioner's actions against Larin were found "unwarranted and baseless," and the criminal charges filed against him in the Tanodbayan and City Fiscal's Office were all dismissed.30 Hence, there is adequate support for respondent court's conclusion that moral damages have been proved. Now, however, what would be a fair amount to be paid as compensation for moral damages also requires determination. Each case must be governed by its own peculiar circumstances.31 On this score, Del Rosario vs.Court of Appeals,32 cites several cases where no actual damages were adjudicated, and where moral and exemplary damages were reduced for being "too excessive," thus: In the case of PNB v. C.A., [256 SCRA 309 (1996)], this Court quoted with approval the following observation from RCPI v. Rodriguez, viz: ** **. Nevertheless, we find the award of P100,000.00 as moral damages in favor of respondent Rodriguez excessive and unconscionable. In the case of Prudenciado v. Alliance Transport System,Inc. (148 SCRA 440 [1987]) we said: . . . [I]t is undisputed that the trial courts are given discretion to determine the amount of moral damages (Alcantara v. Surro, 93 Phil. 472) and that the Court of Appeals can only modify or change the amount awarded when they are palpably and scandalously excessive "so as to indicate that it was the result of passion, prejudice or corruption on the part of the trial court" (Gellada v. Warner Barnes & Co., Inc., 57 O.G. [4] 7347, 7358; Sadie v. Bacharach Motors Co., Inc., 57 O.G. [4] 636 and Adone v. Bacharach Motor Co., Inc., 57 O.G. 656). But in more recent cases where the awards of moral and exemplary damages are far too excessive compared to the actual loses sustained by the aggrieved party, this Court ruled that they should be reduced to more reasonable amounts. . . . . (Emphasis ours.) In other words, the moral damages awarded must be commensurate with the loss or injury suffered. In the same case (PNB v. CA), this Court found the amount of exemplary damages required to be paid (P1,000,000,00) "too excessive" and reduced it to an "equitable level" (P25,000.00). It will be noted that in above cases, the parties who were awarded moral damages were not public officials. Considering that here, the award is in favor of a government official in connection with his official function, it is with caution that we affirm granting moral damages, for it might open the floodgates for government officials counterclaiming damages in suits filed against them in connection with their functions. Moreover, we must be careful lest the amounts awarded make citizens hesitate to expose corruption in the government, for fear of lawsuits from vindictive government officials. Thus, conformably with our declaration that moral damages are not intended to enrich anyone,33 we hereby reduce the moral damages award in this case from two hundred thousand (P200,000.00) pesos to seventy five thousand (P75,000.00) pesos, while the exemplary damage is set at P25,000.00 only. The law allows the award of attorney's fees when exemplary damages are awarded, and when the party to a suit was compelled to incur expenses to protect his interest.34 Though government officers are usually represented by the Solicitor General in cases connected with the performance of official functions, considering the nature of the charges, herein respondent Larin was compelled to hire a private lawyer for the conduct of his defense as well as the successful pursuit of his counterclaims. In our view, given the circumstances of this case, there is ample ground to award in his favor P50,000,00 as reasonable attorney's fees. WHEREFORE, the assailed decision of the Court of Appeals dated November 29, 1991, is hereby AFFIRMED with MODIFICATION so that the award of actual damages are deleted; and that petitioner is hereby ORDERED to pay to respondent Larin moral damages in the amount of P75,000.00, exemplary damages in the amount of P25,000.00, and attorney's fees in the amount of P50,000.00 only. No pronouncement as to costs. SO ORDERED.
1wphi1.nt

CHAPTER II - GENERAL PRINCIPLES SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

CHAPTER I - DEFINITIONS SEC. 22. Definitions - When used in this Title: (F) The term 'resident alien' means an individual whose residence is within the Philippines and who is not a citizen thereof.

G.R. Nos. L-44501-05 July 19, 1990 JOHN L. GARRISON, FRANK ROBERTSON, ROBERT H. CATHEY, JAMES W. ROBERTSON, FELICITAS DE GUZMAN and EDWARD McGURK, petitioners, vs. COURT OF APPEALS and REPUBLIC OF THE PHILIPPINES, respondents. Quasha, Asperilla, Ancheta, Valmonte, Pea & Marcos for petitioners. NARVASA, J.: Sought to be overturned in these appeals is the judgment of the Court of Appeals, 1 which affirmed the decision of the Court of First Instance of Zambales at Olongapo City convicting the petitioners "of violation of Section 45 (a) (1) (b) of the National Internal Revenue Code, as amended, by not filing their respective income tax returns for the year 1969" and sentencing "each of them to pay a fine of Two Thousand (P2,000.00) Pesos, with subsidiary imprisonment in case of insolvency, and to pay the costs proportionately. 2 The petitioners have adopted the factual findings of the Court of Appeals, 3 viz.: 1. JOHN L. GARRISON "was born in the Philippines and . . . lived in this country since birth up to 1945, when he was repatriated and returned to the United States. He stayed in the United States for the following twenty years until May 5, 1965, when he entered the Philippines through the Clark Air Base. The said accused lived in the Philippines since his return on May 6, 1965. He lives with his Filipino wife and their children at No. 4 Corpus Street, West Tapinac, Olongapo City, and they own the house and lot on which they are presently residing. His wife acquired by inheritance six hectares of agricultural land in Quezon Province." 2. JAMES W. ROBERTSON "was born on December 22, 1915 in Olongapo, Zambales and he grew up in this country. He and his family were repatriated to the United States in 1945. They stayed in Long Beach, California until the latter part of 1946 or the early part of 1947, when he was re-assigned overseas, particularly to the Pacific area with home base in Guam. His next arrival in the Philippines was in 1958 and he stayed in this country from that time up to the present. He is presently residing at No. 25 Elicao, Street, East Bajac-Bajac, Olongapo City, and his house and lot are declared in his name for tax purposes." 3. FRANK W. ROBERTSON "was born in the Philippines and he lived in this country up to 1945, when he was repatriated to the United States along with his brother, his co-accused James W. Robertson. He stayed in the United States for about one year, during which time he resided in Magnolia Avenue, Long Beach, California. Sometime in 1946 or early 1947, he was assigned to work in the Pacific Area, particularly Hawaii. At that time he had been visiting the Philippines off and on in connection with his work. In 1962, he returned once more to the Philippines and he has been residing here ever since. He is married to a Filipino citizen named Generosa Juico and they live at No. 3 National Road, Lower Kalaklan, Olongapo City. The residential lot on which they are presently residing is declared in his wife's name for tax purposes, while the house constructed thereon was originally declared in his name and the same was transferred in his wife's name only in February, 1971." 4. ROBERT H. CATHEY was born in Tennessee, United States, on April 8, 1917; his first arrival in the Philippines, as a member of the liberation forces of the United States, was in 1944. He stayed in the Philippines until April, 1950, when he returned to the United States, and he came back to the Philippines in 1951. He stayed in the Philippines since 1951 up to the present." 5. FELICITAS DE GUZMAN "was born in the Philippines in 1935 and her father was a naturalized American citizen. While she was studying at the University of Sto. Tomas, Manila, she was recruited to work in the United States Naval Base, Subic Bay, Philippines. Afterwards, she left the Philippines to work in the United States Naval Base, Honolulu, Hawaii, and she returned to the Philippines on or about April 21, 1967. The said accused has not left the Philippines since then. She is married to Jose de Guzman, a Filipino citizen, and they and their children live at No. 96 Fendler Street, East Tapinac, Olongapo City. Her husband is employed in the United States Naval Base, Olongapo City, and he also works as an insurance manager of the Traveller's Life." 6. EDWARD McGURK "came to the Philippines on July 11, 1967 and he stayed in this country continuously up to the present time." ALL THE PETITIONERS "are United States citizens, entered this country under Section 9 (a) of the Philippine Immigration Act of 1940, as amended, and presently employed in the United States Naval Base, Olongapo City. For the year 1969 John L. Garrison earned $15,288.00; Frank Robertson, $12,045.84; Robert H. Cathey, $9,855.20; James W. Robertson, $14,985.54; Felicitas de Guzman, $ 8,502.40; and Edward McGurk $12,407.99 . .. ALL SAID PETITIONERS "received separate notices from Ladislao Firmacion, District Revenue Officer, stationed at Olongapo City, informing them that they had not filed their respective income tax returns for the year 1969, as required by Section 45 of the National Internal Revenue Code, and directing them to file the said returns within ten days from receipt of the notice. But the accused refused to file their income tax returns, claiming that they are not

resident aliens but only special temporary visitors, having entered this country under Section 9 (a) of the Philippine Immigration Act of 1940, as amended. The accused also claimed exemption from filing the return in the Philippines by virtue of the provisions of Article XII, paragraph 2 of the US-RP Military Bases Agreement." The petitioners contend that given these facts, they may not under the law be deemed resident aliens required to file income tax returns. Hence, they argue, it was error for the Court of Appeals 1) to consider their "physical or bodily presence" in the country as "sufficient by itself to qualify . . (them) as resident aliens despite the fact that they were not 'residents' of the Philippines immediately before their employment by the U.S. Government at Subic Naval Base and their presence here during the period concerned was dictated by their respective work as employees of the United States Naval Base in the Philippines," and 2) to refuse to recognize their "tax-exempt status . . under the pertinent provisions of the RP-US Military Bases Agreement." The provision alleged to have been violated by the petitioners, Section 45 of the National Internal Revenue Code, as amended, reads as follows: SEC. 45. Individual returns. (a) Requirements. (1) The following individuals are required to file an income tax return, if they have a gross income of at least One Thousand Eight Hundred Pesos for the taxable year; . . . (b) If alien residing in the Philippines, regardless of whether the gross income was derived from sources within or outside the Philippines. The sanction for breach thereof is prescribed by Section 73 of the same code, to wit: SEC. 73. Penalty for failure to file return nor to pay tax. Anyone liable to pay the tax, to make a return or to supply information required under this code, who refuses or neglects to pay such tax, to make such return or to supply such information at the time or times herein specified each year, shall be punished by a fine of not more than Two Thousand Pesos or by imprisonment for not more than six months, or both . . . The provision under which the petitioners claim exemption, on the other hand, is contained in the Military Bases Agreement between the Philippines and the United States, 4 reading as follows: 2. No national of the United States serving in or employed in the Philippines in connection with construction, maintenance, operation or defense of the bases and reside in the Philippines by reason only of such employment, or his spouse and minor children and dependents, parents or her spouse, shall be liable to pay income tax in the Philippines except in regard to income derived from Philippine sources or sources other than the US sources. The petitioners claim that they are covered by this exempting provision of the Bases Agreement since, as is admitted on all sides, they are all U.S. nationals, all employed in the American Naval Base at Subic Bay (involved in some way or other in "construction, maintenance, operation or defense" thereof), and receive salary therefrom exclusively and from no other source in the Philippines; and it is their intention, as is shown by the unrebutted evidence, to return to the United States on termination of their employment. That claim had been rejected by the Court of Appeals with the terse statement that the Bases Agreement "speaks of exemption from the payment of income tax, not from the filing of the income tax returns . ." 5 To be sure, the Bases Agreement very plainly Identifies the persons NOT "liable to pay income tax in the Philippines except in regard to income derived from Philippine sources or sources other than the US sources." They are the persons in whom concur the following requisites, to wit: 1) nationals of the United States serving in or employed in the Philippines; 2) their service or employment is "in connection with construction, maintenance, operation or defense of the bases;" 3) they reside in the Philippines by reason only of such employment; and 4) their income is derived exclusively from "U.S. sources." Now, there is no question (1) that the petitioners are U.S. nationals serving or employed in the Philippines; (2) that their employment is "in connection with construction, maintenance, operation or defense" of a base, Subic Bay Naval Base; (3) they reside in the Philippines by reason only of such employment since, as is undisputed, they all intend to depart from the country on termination of their employment; and (4) they earn no income from Philippine sources or sources other than the U.S. sources. Therefore, by the explicit terms of the Bases Agreement, none of them "shall be liable to pay income tax in the Philippines . . ." Indeed, the petitioners' claim for exemption pursuant to this Agreement had been sustained by the Court of Tax Appeals which set aside and cancelled the assessments made against said petitioners by the BIR for deficiency income taxes for the taxable years 19691972. 6 The decision of the Court of Tax Appeals to this effect was contested in this Court by the Commissioner of Internal Revenue, 7 but the same was nonetheless affirmed on August 12, 1986. 8 But even if exempt from paying income tax, said petitioners were, it is contended by the respondents, not excused from filing income tax returns. For the Internal Revenue Code (Sec. 45, supra) requires the filing of an income tax return also by any "alien residing in the Philippines, regardless of whether the gross income was derived from sources within or outside the Philippines;" and since the petitioners, although aliens residing within the Philippines, had failed to do so, they had been properly prosecuted and convicted for having thus violated the Code. "What the law requires," states the challenged judgment of the Court of Appeals, "is merely physical or bodily presence in a given place for a period of time, not the intention to make it a permanent place of abode. It is on this proposition, taken in the light of the established facts on record to the effect that almost all of the appellants were

born here, repatriated to the US and to come back, in the latest in 1967, and to stay in the Philippines up to the present time, that makes appellants resident aliens not merely transients or sojourners which residence for quite a long period of time, coupled with the amount and source of income within the Philippines, renders immaterial, for purposes of filing the income tax returns as contra-distinguished from the payment of income tax, their intention to go back to the United States." Each of the petitioners does indeed fall within the letter of the codal precept that an "alien residing in the Philippines" is obliged "to file an income tax return." None of them may be considered a non-resident alien, "a mere transient or sojourner," who is not under any legal duty to file an income tax return under the Philippine Tax Code. This is made clear by Revenue Relations No. 2 of the Department of Finance of February 10, 1940, 9which lays down the relevant standards on the matter: An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of income tax. Whether he is a transient or not is determined by his intentions with regards to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him as transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary to its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. The petitioners concede that the foregoing standards have been "a good yardstick," and are in fact not at substantial variance from American jurisprudence. 10 They acknowledge, too, that "their exemption under the Bases Agreement relates simply to non-liability for the payment of income tax, not to the filing of . . . (a return)." But, they argue 11 . . . after having expressly recognized that petitioners need not pay income tax here, there appears to be no logic in requiring them to file income tax returns which anyhow would serve no practical purpose since their liability on the amounts stated thereon can hardly be exacted. The more practical view, taking into account policy considerations that prompted the Government of the Republic of the Philippines to exempt the petitioners, as well as other American citizens similarly situated, from the payment of income tax here, is to recognize the lesser act of filing within the exemption granted. This is simply being consistent with the reason behind the grant of tax-exempt status to petitioners. Pointing out further to what they consider "the administrative implementation of that (tax-exemption) provision (of the Bases Agreement) by both governments for about 22 years (which did not require the filing of income tax returns by American citizen-employees holding 9-A special visas like petitioners), and to "the higher plane of political realities which prompted the Philippine Government to partially surrender its inherent right to tax," petitioners submit that "the particular problem involved in these cases is a matter that has to find solution and ought to be dealt with in conference tables rather than before the court of law. " 12 Quite apart from the evidently distinct and different character of the requirement to pay income tax in contrast to the requirement to file a tax return, it appears that the exemption granted to the petitioners by the Bases Agreement from payment of income tax is not absolute. By the explicit terms of the Bases Agreement, it exists only as regards income derived from their employment "in the Philippines in connection with construction, maintenance, operation or defense of the bases;" it does not exist in respect of other income, i.e., "income derived from Philippine sources or sources other than the US sources." Obviously, with respect to the latter form of income, i.e., that obtained or proceeding from "Philippine sources or sources other than the US sources," the petitioners, and all other American nationals who are residents of the Philippines, are legally bound to pay tax thereon. In other words, so that American nationals residing in the country may be relieved of the duty to pay income tax for any given year, it is incumbent on them to show the Bureau of Internal Revenue that in that year they had derived income exclusively from their employment in connection with the U.S. bases, and none whatever "from Philippine sources or sources other than the US sources." They have to make this known to the Government authorities. It is not in the first instance the latter's duty or burden to make unaided verification of the sources of income of American residents. The duty rests on the U.S. nationals concerned to invoke and prima facie establish their tax-exempt status. It cannot simply be presumed that they earned no income from any other sources than their employment in the American bases and are therefore totally exempt from income tax. The situation is no different from that of Filipino and other resident income-earners in the Philippines who, by reason of the personal exemptions and permissible deductions under the Tax Code, may not be liable to pay income tax year for any particular year; that they are not liable to pay income tax, no matter how plain or irrefutable such a proposition might be, does not exempt them from the duty to file an income tax return. These considerations impel affirmance of the judgments of the Court of Appeals and the Trial Court. WHEREFORE, the petition for review on certiorari is DENIED, and the challenged decision of the Court of Appeals is AFFIRMED. Costs against petitioners. SO ORDERED.

CHAPTER I - DEFINITIONS SEC. 22. Definitions - When used in this Title: (E) The term 'nonresident citizen' means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.