Millares v NLRC 122827

Facts:
Petitioners numbering one hundred sixteen (116)[1] occupied the positions of Technical Staff, Unit Manager,
Section Manager, Department Manager, Division Manager and Vice President in the mill site of respondent
Paper Industries Corporation of the Philippines (PICOP) in Bislig, Surigao del Sur. In 1992 PICOP suffered a
major financial setback allegedly brought about by the joint impact of restrictive government regulations on
logging and the economic crisis. To avert further losses, it undertook a retrenchment program and terminated
the services of petitioners. Accordingly, petitioners received separation pay computed at the rate of one (1)
month basic pay for every year of service. Believing however that the allowances they allegedly regularly
received on a monthly basis during their employment should have been included in the computation thereof
they lodged a complaint for separation pay differentials.
The allowances in question pertained to the following -

1. Staff/Manager's Allowance Respondent PICOP provides free housing facilities to supervisory and managerial employees
assigned in Bislig. The privilege includes free water and electric consumption. Owing however to
shortage of such facilities, it was constrained to grant Staff allowance instead to those who live in
rented houses outside but near the vicinity of the mill site. But the allowance ceases whenever a
vacancy occurs in the company's housing facilities. The former grantee is then directed to fill the
vacancy. For Unit, Section and Department Managers, respondent PICOP gives an additional
amount to meet the same kind of expenses called Manager's allowance.
2. Transportation Allowance To relieve respondent PICOP's motor pool in Bislig from a barrage of requests for company
vehicles and to stabilize company vehicle requirements it grants transportation allowance to key
officers and Managers assigned in the mill site who use their own vehicles in the performance of
their duties. It is a conditional grant such that when the conditions no longer obtain, the privilege is
discontinued. The recipients of this kind of allowance are required to liquidate it by submitting a
report with a detailed enumeration of expenses incurred.
3. Bislig Allowance The Bislig Allowance is given to Division Managers and corporate officers assigned in Bislig on
account of the hostile environment prevailing therein. But once the recipient is transferred
elsewhere outside Bislig, the allowance ceases.
the Executive Labor Arbiter opined that the subject allowances, being
customarily furnished by respondent PICOP and regularly received by
petitioners, formed part of the latter's wages.
The National Labor Relations Commission (NLRC) did not share the view of the Executive Labor
Arbiter. On 7 October 1994 it set aside the assailed decision by decreeing that the allowances did
not form part of the salary base used in computing separation pay. [5]
Issue: Whether or not the allowances form part of the income of the employees and is therefore
taxable.

Held: No. the assailed allowances were for the benefit and convenience of respondent company was supported
by the circumstance that they were not subjected to withholding tax. Revenue Audit Memo Order No. 1-87
pertinently provides -

3.2 x x x x transportation, representation or entertainment expenses shall not constitute taxable

compensation if:
(a) It is for necessary travelling and representation or entertainment expenses paid or incurred by
the employee in the pursuit of the trade or business of the employer, and
(b) The employee is required to, and does, make an accounting/liquidation for such expense in
accordance with the specific requirements of substantiation for such category or expense.
Board and lodging allowances furnished to an employee not in excess of the latter's needs and
given free of charge, constitute income to the latter except if such allowances or benefits are
furnished to the employee for the convenience of the employer and as necessary incident to proper
performance of his duties in which case such benefits or allowances do not constitute taxable
income.
G.R. No. L-19865

July 31, 1965

MARIA CARLA PIROVANO, etc., et al., petitioners-appellants,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

Facts: Enrico Pirovano was the father of the herein petitioners-appellants. Sometime in the early part of 1941, De la
Rama Steamship Co. insured the life of said Enrico Pirovano, who was then its President and General Manager until
the time of his death, with various Philippine and American insurance companies for a total sum of one million
pesos, designating itself as the beneficiary of the policies, obtained by it. Due to the Japanese occupation of the
Philippines during the second World War, the Company was unable to pay the premiums on the policies issued by
its Philippine insurers and these policies lapsed, while the policies issued by its American insurers were kept
effective and subsisting, the New York office of the Company having continued paying its premiums from year to
year.
During the Japanese occupation , or more particularly in the latter part of 1944, said Enrico Pirovano died.
After the liberation of the Philippines from the Japanese forces, the Board of Directors of De la Rama Steamship Co.
adopted a resolution dated July 10, 1946 granting and setting aside, out of the proceeds expected to be collected on
the insurance policies taken on the life of said Enrico Pirovano, the sum of P400,000.00 for equal division among
the four (4) minor children of the deceased, said sum of money to be convertible into 4,000 shares of stock of the
Company, at par, or 1,000 shares for each child. Shortly thereafter, the Company received the total sum of
P643,000.00 as proceeds of the said life insurance policies obtained from American insurers.
Upon receipt of the last stated sum of money, the Board of Directors of the Company modified, on January 6, 1947,
the above-mentioned resolution by renouncing all its rights title, and interest to the said amount of P643,000.00 in
favor of the minor children of the deceased, subject to the express condition that said amount should be retained by
the Company in the nature of a loan to it, drawing interest at the rate of five per centum (5%) per annum, and
payable to the Pirovano children after the Company shall have first settled in full the balance of its present
remaining bonded indebtedness in the sum of approximately P5,000,000.00.
On June 24, 1947, the Board of Directors of the Company further modified the last mentioned resolution providing
therein that the Company shall pay the proceeds of said life insurance policies to the heirs of the said Enrico
Pirovano after the Company shall have settled in full the balance of its present remaining bonded indebtedness, but
the annual interests accruing on the principal shall be paid to the heirs of the said Enrico Pirovano, or their duly
appointed representative, whenever the Company is in a position to meet said obligation.
On February 26, 1948, Mrs. Estefania R. Pirovano, in behalf of her children, executed a public document formally
accepting the donation; and, on the same date, the Company through its Board of Directors, took official notice of
this formal acceptance.
On September 13, 1949, the stockholders of the Company formally ratified the various resolutions hereinabove
mentioned with certain clarifying modifications that the payment of the donation shall not be effected until such time
as the Company shall have first duly liquidated its present bonded indebtedness in the amount of P3,260,855.77
with the National Development Company, or fully redeemed the preferred shares of stock in the amount which shall
be issued to the National Development Company in lieu thereof; and that any and all taxes, legal fees, and

expenses in any way connected with the above transaction shall be chargeable and deducted from the proceeds of
the life insurance policies mentioned in the resolutions of the Board of Directors.
On March 8, 1951, however, the majority stockholders of the Company voted to revoke the resolution approving the
donation in favor of the Pirovano children.
As a consequence of this revocation and refusal of the Company to pay the balance of the donation amounting to
P564,980.90 despite demands therefor, the herein petitioners-appellants represented by their natural guardian, Mrs.
Estefania R. Pirovano, brought an action for the recovery of said amount, plus interest and damages against De la
Rama Steamship Co., in the Court of First Instance of Rizal which rendered judgment in favor of the Pirovano
children.
On March 6, 1955, respondent Commissioner of Internal Revenue assessed the amount of P60,869.67 as donees'
gift tax, inclusive of surcharges, interests and other penalties, against each of the petitioners-appellants, or for the
total sum of P243,478.68; and, on April 23, 1955, a donor's gift tax in the total amount of P34,371.76 was also
assessed against De la Rama Steamship Co., which the latter paid.
Petitioners-appellants herein contested respondent Commissioner's assessment and imposition of the donees' gift
taxes and donor's gift tax and also made a claim for refund of the donor's gift tax so collected.
Issue: Whether or not the donation made by De la Rama Steamship Co. to the minor children of the decease
Pirovano be subjected to donees tax.
Held: Yes. There is nothing on record to show that when the late Enrico Pirovano rendered services as President
and General Manager of the De la Rama Steamship Co. he was not fully compensated for such services, or that,
because they were "largely responsible for the rapid and very successful development of the activities of the
company" (Res. of July 10, 1946). Pirovano expected or was promised further compensation over and in addition to
his regular emoluments as President and General Manager. The fact that his services contributed in a large
measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the
company to his heirs remain a gift or donation. This is emphasized by the directors' Resolution of January 6, 1947,
that "out of gratitude" the company decided to renounce in favor of Pirovano's heirs the proceeds of the life
insurance policies in question. The true consideration for the donation was, therefore, the company's gratitude for
his services, and not the services themselves.
That the tax court regarded the conveyance as a simple donation, instead of a remuneratory one as it was declared
to be in our previous decision, is but an innocuous error; whether remuneratory or simple, the conveyance remained
a gift, taxable under Chapter 2, Title III of the Internal Revenue Code.
But then appellants contend, the entire property or right donated should not be considered as a gift for taxation
purposes; only that portion of the value of the property or right transferred, if any, which is in excess of the value of
the services rendered should be considered as a taxable gift. They cite in support Section 111 of the Tax Code
which provides that
Where property is transferred for less, than an adequate and full consideration in money or money's worth,
then the amount by which the value of the property exceeded the value of the consideration shall, for the
purpose of the tax imposed by this Chapter, be deemed a gift, ... .
The flaw in this argument lies in the fact that, as copied from American law, the term consideration used in this
section refers to the technical "consideration" defined by the American Law Institute (Restatement of Contracts) as
"anything that is bargained for by the promisor and given by the promisee in exchange for the promise" (Also,
Corbin on Contracts, Vol. I, p. 359). But, as we have seen, Pirovano's successful activities as officer of the De la
Rama Steamship Co. cannot be deemed such consideration for the gift to his heirs, since the services were
rendered long before the Company ceded the value of the life policies to said heirs; cession and services were not
the result of one bargain or of a mutual exchange of promises.
And the Anglo-American law treats a subsequent promise to pay for past services (like one to pay for improvements
already made without prior request from the promisor) to be a nudum pactum (Roscorla vs. Thomas, 3 Q.B. 234;
Peters vs. Poro, 25 ALR 615; Carson vs. Clark, 25 Am. Dec. 79; Boston vs. Dodge, 12 Am. Dec. 206), i.e., one that
is unenforceable in view of the common law rule that consideration must consist in a legal benefit to the promisee or
some legal detriment to the promisor.
What is more, the actual consideration for the cession of the policies, as previously shown, was the Company's
gratitude to Pirovano; so that under section 111 of the Code there is no consideration the value of which can be
deducted from that of the property transferred as a gift. Like "love and affection," gratitude has no economic value
and is not "consideration" in the sense that the word is used in this section of the Tax Code.

As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known book, "Outlines of the Law"
(p. 204)
Love and affection are not considerations of value they are not estimable in terms of value. Nor are sentiments of
gratitude for gratuitous part favors or kindnesses; nor are obligations which are merely moral. It has been well said
that if a moral obligation were alone sufficient it would remove the necessity for any consideration at all, since the
fact of making a promise impose, the moral obligation to perform it."
It is of course perfectly possible that a donation or gift should at the same time impose a burden or condition on the
donee involving some economic liability for him. A, for example, may donate a parcel of land to B on condition that
the latter assume a mortgage existing on the donated land. In this case the donee may rightfully insist that the gift
tax be computed only on the value of the land less the value of the mortgage. This, in fact, is contemplated by Article
619 of the Civil Code of 1889 (Art. 726 of the Tax Code) when it provides that there is also a donation "when the gift
imposes upon the donee a burden which is less than the value of the thing given." Section 111 of the Tax Code has
in view situations of this kind, since it also prescribes that "the amount by which the value of the property exceeded
the value of the consideration" shall be deemed a gift for the purpose of the tax. .
G.R. No. L-12954

February 28, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ARTHUR HENDERSON, respondent.
x---------------------------------------------------------x
G.R. No. L-13049

February 28, 1961

ARTHUR HENDERSON, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the BIR. Arthur is president of
American International Underwriters for the Philippines, Inc., which is a domestic corporation engaged in the
business of general non-life insurance, and represents a group of American insurance companies engaged in the
business of general non-life insurance.
The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR included as part of taxable
income: 1) Arthurs allowances for rental, residential expenses, subsistence, water, electricity and telephone
expenses 2) entrance fee to the Marikina Gun and Country Club which was paid by his employer for his account and
3) travelling allowance of his wife
The taxpayers justifications are as follows:
1) as to allowances for rental and utilities, Arthur did not receive money for the allowances. Instead, the apartment is
furnished and paid for by his employer-corporation (the mother company of American International), for the employer
corporations purposes. The spouses had no choice but to live in the expensive apartment, since the company used
it to entertain guests, to accommodate officials, and to entertain customers. According to taxpayers, only P 4,800 per
year is the reasonable amount that the spouses would be spending on rental if they were not required to live in those
apartments. Thus, it is the amount they deem is subject to tax. The excess is to be treated as expense of the
company.
2) The entrance fee should not be considered income since it is an expense of his employer, and membership
therein is merely incidental to his duties of increasing and sustaining the business of his employer.
3) His wife merely accompanied him to New York on a business trip as his secretary, and at the employercorporations request, for the wife to look at details of the plans of a building that his employer intended to construct.
Such must not be considered taxable income.

 The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent expense and travel
expenses were still held to be taxable. The Court of Tax Appeals ruled in favor of the taxpayers, that such expenses
must not be considered part of taxable income. Letters of the wife while in New York concerning the proposed
building were presented as evidence.

ISSUE: Whether or not the rental allowances and travel allowances

furnished and given by the employer-corporation are part of taxable
income?
HELD: NO. Such claims are substantially supported by evidence.
These claims are therefore NOT part of taxable income. No part of the allowances in question redounded to their
personal benefit, nor were such amounts retained by them. These bills were paid directly by the employercorporation to the creditors. The rental expenses and subsistence allowances are to be considered not subject to
income tax. Arthurs high executive position and social standing, demanded and compelled the couple to live in a
more spacious and expensive quarters. Such subsistence allowance was a SEPARATE account from the account
for salaries and wages of employees. The company did not charge rentals as deductible from the salaries of the
employees. These expenses are COMPANY EXPENSES, not income by employees which are subject to tax.

CIR v. Filinvest GR No. 163653

The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI),
respondent FilinvestDevelopment Corporation (FDC) is a holding company which also
owned 67.42% of the outstanding shares ofFilinvest Land, Inc. (FLI).
FDC and FAI entered into a Deed of Exchange with FLI whereby the former
both transferred in favor of thelatter parcels of land. In exchange, 463,094,301
shares of stock of FLI were issued to FDC and FAI. As a resultof the exchange, FLIs
ownership structure was changed.
FLI requested a ruling from BIR to the effect that no gain or loss should be recognized
in the aforesaid transferof real properties. Acting on the request, the BIR issued a ruling,
finding that the exchange is among thosecontemplated under Sec 34 (c) (2) of the old
NIRC which provides that (n)o gain or loss shall be recognized ifproperty is transferred
to a corporation by a person in exchange for a stock in such corporation of which as
aresult of such exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation."
FDC received from the BIR a Formal Notice of Demand to pay deficiency
income and documentary stamptaxes, plus interests and compromise penalties.
The deficiency taxes were assessed on the taxable gain supposedly realized by
FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution
resultingfrom the Shareholders Agreement FDC executed with RHPL as well as the
arms-length interest rate anddocumentary stamp taxes imposable on the advances
FDC extended to its affiliates.
FAI similarly received from the BIR a Formal Letter of Demand for deficiency income
taxes.
Both FDC and FAI filed their respective requests for reconsideration/protest. The CIR
failed to resolve theirrequest thus, FDC and FAI filed a petition for review with the CTA
pursuant to Sec 228 of the 1997 NIRC.

 They allege that no taxable gain should have been assessed from the subject
Deed of Exchangesince FDC and FAI collectively gained further control of FLI as a
consequence of the exchange; thatcorrelative to the CIR's lack of authority to impute
theoretical interests on the cash advances FDCextended in favor of its affiliates, the rule
is settled that interests cannot be demanded in the absenceof a stipulation to the
effect; that not being promissory notes or certificates of obligations, the
instructional letters as well as the cash and journal vouchers evidencing said
cash advances were n o t s u b j e c t t o d o c u m e n t a r y s t a m p t a x e s ;
a n d , t h a t n o i n c o m e t a x m a y b e i m p o s e d o n t h e prospective gain from the
supposed appreciation of FDC's shareholdings in FAC. They prayed that the subject
assessments be cancelled and annulled.
CIR filed its answer, claiming that the transfer should not be considered taxfree since, with the resultantdiminution of its shares in FLI, FDC did not gain further
control of said corporation. Also, the cash advancesFDC extended to its affiliates
were interest free despite the interest bearing loans it obtained from
bankinginstitutions, the CIR invoked Sec 43 of the old NIRC which, as
implemented by RR 2, Sec 179 (b) and (c), gave him:
"the power to allocate, distribute or apportion income or deductions be
t w e e n o r a m o n g s u c h organizations, trades or business in order to prevent evasion
of taxes." The CIR justified the imposition of documentary stamp taxes on the
instructional letters as well as cash
and journal vouchers for said cash advances on the strength of Sec 180 of the NIRC
and RRs 9-94 which provide that loan transactions are subject to said tax
irrespective of whether or not they are evidenced by a formal agreement or
by mere office memo. The CIR also argued that FDC realized taxable gain
arising from the dilution of its shares in FAC as a result of its Shareholders' Agreement
with RHPL.
CTA Decision: with the exception of the deficiency income tax on the interest income
FDC supposedly realized from the advances it extended in favor of its affiliates, the rest
of deficiency income and documentary stamp taxes assessed against FDC and FAI are
cancelled.
FDC filed a petition for review before the CA. CA reversed the decision of the CTA.
Issues/Held:
1. W/N the advances extended by respondent to its affiliates are subject to income tax
NO
2. W/N the exchange of shares of stock for property among FDC, FAI and FLI
met all therequirements for the non-recognition of taxable gain under sec 34 (c) (2) of
the old NIRC (now sec 40(c) (2) (c) of the NIRC) YES
3. W/N the letters of instruction or cash vouchers extended by FDC to its affiliates are
deemedloan agreements subject to DST under sec 180 of the NIRC YES
4. W/N the gain on dilution as a result of the increase in the value of FDCs
shareholdings is taxable NO
Ratio:
Theoretical Interest Rates (for the advances extended)
Sec 43 of the 1993 NIRC provides that,
(i)n any case of 2 or more organizations, trades
or businesses (whether or notincorporated and whether or not organize

d i n t h e P h i l i p p i n e s ) o w n e d o r c o n t r o l l e d d i r e c t l y o r indirectly by the same

interests, the CIR is authorized to distribute, apportion or allocate gross income
or deductions between or among such organization, trade or business, if he determines
that such distribution, apportionment or allocation is necessary in order to
prevent evasion of taxes or clearly to reflect the income of any such organization,
trade or business.
It may also be seen that the CIR's power to distribute, apportion or allocate gross
income or deductions between or among controlled taxpayers may be likewise exercised
whether or not fraud inheres in the transaction/s under scrutiny. For as long as the
controlled taxpayer's taxable income is n o t r e f l e c t i v e o f t h a t w h i c h i t w o u l d
h a v e r e a l i z e d h a d i t b e e n d e a l i n g a t a r m ' s l e n g t h w i t h a n uncontrolled
taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of
taxes.
Despite the broad parameters provided, the power to impute "theoretical interests" to
the controlled taxpayer's transactions is not included. There must be proof of the actual
or, at the very least, probable receipt or realization by the controlled taxpayer of the
item of gross income sought to be distributed, apportioned or allocated by the CIR.
There is no evidence of actual or possible showing that the advances FDC extended to
its affiliates had resulted to the interests subsequently assessed by the CIR.
Regarding the Deed of Exchange
Sec 34 (c) (2) of the 1993 NIRC:
Sec. 34. Determination of amount of and recognition of gain or loss
-(c) Exception
xxxx
No gain or loss shall also be recognized if property is transferred to a corporation by a
person in exchange for shares of stock in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four persons, gains
control of said corporation;
Provided, That stocks issued for services shall not be considered as issued in return
of property
Since the term "control" is clearly defined as "ownership
o f s t o c k s i n a c o r p o r a t i o n possessing at least fifty-one percent of the total
voting power of classes of stocks entitled to one vote" under Sec 34 (c) (6) [c] of
the 1993 NIRC, the exchange of property for stocks between FDCFAI and FLI clearly
qualify as a tax-free transaction under par 34 (c) (2) of the same provision.
Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding
capital stock adds up to a total of 70.99%, it stands to reason that neither of said
transferors can be held liable for deficiency income taxes the CIR assessed on the
supposed gain which resulted from the subject transfer.
Documentary Stamp Taxes
The instructional letters as well as the journal and cash vouchers evidencing the
advances FDC extended to its affiliates qualified as loan agreements upon which DST
may be imposed.
We find that both the CTA and the CA erred in invalidating the assessments
issued by the CIR for the deficiency DST.
Dilution of Shares

 No reversible error can, finally, be imputed against both the CTA and the CA
for invalidating the deficiency income taxes FDC is supposed to have incurred as a
consequence of the dilution of its shares in FAC.
Absent showing of such error here, we find no strong and cogent reasons to depart
from said rule with respect to the CTA's finding that no deficiency income tax can
be assessed on the gain on the supposed dilution and/or increase in the value of
FDC's shareholdings in FAC which the CIR failed to establish.

G.R. No. 48231

June 30, 1947

WISE & CO., INC., ET AL., plaintiffs-appellants,

vs.
BIBIANO L. MEER, Collector of Internal Revenue, defendant-appellee.

Facts: On May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd., (hereinafter referred to as the
Hongkong Company), recommended to the stockholders of the company that they adopt the resolutions necessary
to enable the company to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation
formed on May 27, 1937, (hereinafter referred to as the Manila Company), for the sum of P400,000 Philippine
currency. This sale was duly authorized by the stockholders of the Hongkong Company at a meeting held on July
22, 1937. The final resolutions completing the said sale and transferring the business and assets of the Hongkong
Company to the Manila Company were adopted on August 3, 1937, on which date the Manila Company paid the
Hongkong company the P400,000 purchase price.
Pursuant to a resolution by its Board of Directors purporting to declare a dividend, the Hongkong Company made a
distribution from its earnings for the year 1937 to its stockholders, plaintiffs receiving the following:

Declared and paid

June 8, 1937

Wise & Co.,

Inc.

P7,677.82

Mr. J.F.
MacGregor

2,554.86

Mr. N.C.
MacGregor

2,369.48

Mr. C.J.
Lafrentz

529.51

Mrs. E.M.G.
Strickland

2,369.48

Mrs. M.J.G.

2,369.48

Mullins

P17,870.63

That the Hongkong Company has paid Philippine income tax on the entire earnings from which the said distributions
were paid.

As a result of the sale of its business and assets, a surplus was realized by the Hongkong
company after deducting the dividends. This surplus was also distributed to its
stockholders. The Hong kong company also paid the income tax for the said surplus. The
petitioners then filed their respective income tax returns. The respondent Commissioner,
then, made a deficiency assessment charging the individual stockholders for taxes on
the shares distributed to them despite the fact that income tax was already paid by the
Hongkong company. The petitioners paid the assessed amount in protest. The lower
courts ruled in favor of the Commissioner of Internal Revenue, hence, this action.
Issue(s):
1. Whether the amount received by the petitioners were ordinary dividends or liquidating
dividends.
2. Whether such dividends were taxable or not.
3. Whether or not the profits realized by the non-resident alien individual appellants
constitute income from the Philippines considering that the sale took place outside the
Philippines.
Held:
1. The dividends are liquidating dividends or payments for surrendered or relinquished
stock in a corporation in complete liquidation. It was stipulated in the deed of sale that
the sale and transfer of the corporation shall take effect on June 1, 1937 while
distribution took place on June 8. They could not consistently deem all the business and
assets of the corporation sold as of June 1, 1937 and still say that said corporation, as a
going concern, distributed ordinary dividends to them thereafter.
2. Yes. Petitioners received the said distributions in exchange for the surrender and
relinquishment by them of their stock in the liquidated corporation. That money in the
hands of the corporation formed a part of its income and was properly taxable to it
under the Income Tax Law. When the corporation was dissolved in the process of
complete liquidation and its shareholders surrendered their stock to it and it paid the
sums in question to them in exchange, a transaction took place. The shareholder who
received the consideration for the stock earned received that money as income of his
own, which again was properly taxable to him under the Income Tax Law.
3. The contention of the petitioners that the earnings cannot be considered as income
from the Philippines because the sale was made outside the Philippines and is not
subject to Philippine tax law is untenable. At the time of the sale, the Hong kong
company was engage in its business in the Philippines. Its successor was a domestic
corporation and doing business also in the Philippines. It must be taken into
consideration that the Hong kong company was incorporated for the purpose of carrying
business in the Philippine Islands. Hence, its earnings, profits and assets, including those
from whose proceeds the distribution was made, had been earned and acquired in the
Philippines. It is clear that the distributions in questions were income from Philippine sources,
hence, taxable under Philippine law.
G.R. No. L-16021

August 31, 1962

ANTONIO PORTA FERRER, petitioner,

vs.
(COLLECTOR) now COMMISSIONER OF INTERNAL REVENUE, respondent.:
Facts:
The petitioner was the sole proprietor of the "La Suiza Bakery" on R. Hidalgo, Quiapo, Manila. He owned this bakery
from October 16, 1951 up to September 15, 1955, when he sold the same to Juan Pons for the sum of
P100,000.00. The assets of the bakery consisted of accounts receivable raw materials, wrapping supplies, firewood,
unexpired insurance, good-will, machinery and equipment, and furniture and fixtures, with a total book value of
P74,321.91. In selling the bakery, petitioner spent P5,000.00 for broker's commission and P1,000.00 for
accountant's fee, or a total of P6,000.00.
After deducting the total book value of the assets and the incidental expenses from the gross selling price, petitioner
filed on February 14, 1956 his income tax return, showing a net profit of P19,678.09 as having been realized from
the sale of the bakery. On the basis of this amount, he paid P2,439.00 as income tax on February 15, 1956.
Petitioner later requested the respondent to refund to him the sum of P2,030.00, claiming that the bakery was a
capital asset which he had held for more than twelve months, so that the profit from its sale was a long term capital
gain, and therefore, only 50 per cent of it was taxable under the National Internal Revenue Code When no action
was taken by respondent on his request, petitioner filed a petition for refund in the Court of Tax Appeals.
The Tax Court held that the sale of the bakery did not constitute a sale of a single asset but of individual assets,
some of which were capital assets while others were ordinary assets. But since petitioner failed to show what
portion of the selling price of the bakery was fairly attributable to each asset, the Tax Court held that it could not
ascertain the capital and/or ordinary gains taxes properly payable upon the sale of the business. For this reason, it
denied petitioner's claim for refund.
Issue:
Whether or not the sale of the business known as "La Suiza Bakery" was a sale of the individual assets comprising
the same and not of an entire, single asset which, under the law, is a capital asset.

Held:
Yes. Section 34 of the Tax Code provides in part:
Capital gains and losses. (a) Definitions. As used in this Title
(1) Capital assets.-The term "capital assets" means property held by the taxpayer (whether or not connected
with his trade or business), but does not include, stock in trade of the taxpayer or other 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,
or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, of property used in the trade or business, of a character which is subject to allowance for
depreciation provided in subsection (f) of section thirty; or real property used in the trade or business of the
taxpayer.
xxx

xxx

xxx

(b) Percentage taken into account. In the case of a taxpayer, other than a corporation, only the following
percentage of the gain or loss recognized upon the sale shall be taken into account in computing net capital
gain, net capital loss, and net income.
(1) One hundred per centum if the capital asset has been held for not more than twelve months;
(2) Fifty per centum if the capital asset has been held for more than twelve months.

We find that Section 34 (a) (1) of our Tax Code is patterned after Section 117 (a) (1) of the U.S. Internal Revenue
Code (26 USCA, Sec. 117 [a] [17]). In interpreting this latter provision, the United States Circuit Court of Appeals
held in the leading case of Williams v. McGowan, 152 F2d 570, 162 ALR 1036 thus

. . . We have to decide only whether upon the sale of a going business it is to be comminuted into its
fragments, and these are to be separately matched against the definition in Section 117 (a) (1), or whether
the whole business is to be treated as if it were a single piece of property.
Our law has been sparing in the creation of juristic entities; it has never, for example, taken over the Roman
"universitas facti" and indeed for many years it fumbled uncertainly with the concept of a corporation. One
might have supposed that partnership would have been an especially promising field in which to raise up an
entity, particularly since merchants have always kept their accounts upon that basis. Yet there too our law
resisted at the price of great and continuing confusion; and even when it might be thought that a statute
admitted, if it did not demand, recognition of the firm as an entity, the old concepts prevailed. Francis v.
McNeal, 228 US 695, 33 S Ct 701, 57 L. ed. 1029, LRA 1915 E 706. And so, even though we might agree
that under the influence of the Uniform Partnership Act a partner's interest in the firm should be treated as
indivisible, and for that reason a "capital asset" within Section 117 (a) (1), we should be chary about
extending further so exotic a jural concept. Be that as it may, in this instance the section itself furnishes the
answer. It starts in the broadest way by declaring that all "property" is "capital asset", and then makes three
exceptions. The first is "stock in trade . . . or other property of a kind which would properly be included in the
inventory"; next comes "property held . . . primarily for sale to customers"; and finally property "used in the
trade or business of a character which is subject to . . . allowance for depreciation." In the face of this
language, although it may be true that a "stock in trade," taken by itself should be treated as a "universitas
facti" by no possibility can a whole business be so treated; and the same is true as to any property within the
other exceptions. Congress plaintly did mean to comminute the elements of a business; plainly it did not
regard the whole as "capital assets."
This ruling was cited with approval by the United State Supreme Court in Watson v. Commissioner, 345 U.S. 544,
97 L. ed. 1232.
In line with this ruling, We hold that the sale of the "La Suiza Bakery" was a sale not of a single asset but of
individual assets that made up the business. And since petitioner failed to point out what part of the price he had
received could be fairly attributed to each asset, the Tax Court correctly denied his claim.
While agreeing with the Tax Court that the good-will of the business is a capital asset, petitioner nevertheless
contends that there is neither factual nor legal basis for concluding that the good-will of the bakery which he had
acquired for P10,000.00 was sold at the same price. The petitioner states that he sold the assets of the bakery at
their stated book value and that whatever amount of the selling price exceeded the total book value of the assets
minus the good-will should be attributed to the latter alone. In short, it is urged that whatever profit was made from
the sale came solely from the bakery's good-will which the Tax Court held to be a capital asset, only 50 per cent of
which was taxable.
The Tax Court's finding that the petitioner acquired and sold the good-will of the bakery for the same amount is
supported by evidence (Exhibit "4" of respondent) which has not been rebutted. Indeed, it is inconceivable how a
business, which was heavily indebted as petitioner contends can ever possess a good-will that can command so
high a price.
For this reason, We believe that any profit which the petitioner may have gained in the same must have come from
the sale of the other assets of the business which must have been sold for amounts other than their stated book
value. As the Tax Court held, in order to ascertain the capital and/or ordinary gains taxes properly payable on the
sale of a business, including its tangible assets, it is incumbent upon the taxpayer to show not only the cost basis of
each asset, but also what portion of the selling price is fairly attributable to each asset.

G.R. No. 108576 January 20, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP.,
Facts: