TOPIC: Dividends

WISE & CO., INC., ET. AL., vs. MEER

FACTS: Wise & Co., Inc. et. al (Plaintiff-appellants) were stockholders of Manila Wine Merchants, Ltd.,
a foreign corporation duly authorized to do business in the Philippines. The Board of Directors of Manila
Wine Merchants, Ltd., (HK Co.), recommended to the stockholders that they adopt resolutions
necessary to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation, (PH
Co.), for the sum of P400,000. The HK Co. made a distribution from its earnings for the year 1937 to its
stockholders. As a result of the sale of its business and assets to PH Co., a surplus was realized and the
HK Co. distributed this surplus to the shareholders (Appellants included).
Philippine income tax had been paid by HK Co. on the said surplus from which the said distributions
were made. At a special general meeting of the shareholders of the HK Co., the stockholders by
resolution directed that the company be voluntarily liquidated and its capital distributed among the
stockholders. The Appellants duly filed Income Tax Returns, on which the defendant, Meer (CIR) made
deficiency assessments. Plantiffs paid under written protest and sought recovery. CFI ruled in favor of
CIR hence the appeal.

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

ISSUES and RULINGS:

1.) Appellants contend that the amounts received by them and on which the taxes in question were
assessed and collected were ordinary dividends; CIR contends that they were liquidating dividends.
SC: The distributions under consideration were not ordinary dividends. Therefore, they are taxable as
liquidating dividends. It was stipulated in the deed of sale that the sale and transfer of the HK Co. shall
take effect on June 1, 1937. Distribution took place on June 8. They could not consistently deem all the
business and assets of the corporation sold as of June 1, 1937, and still say that said corporation, as a
going concern, distributed ordinary dividends to them thereafter.

2.) Are such liquidating dividends taxable income?

SC: Income tax law states that Where a corporation, partnership, association, joint-account, or
insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized or
loss sustained by the stockholder, whether individual or corporation, is a taxable income or a deductible
loss as the case may be.
Appellants received the distributions in question in exchange for the surrender and relinquishment by
them of their stock in the HK Co. which was dissolved and in process of complete liquidation. That
money in the hands of the corporation formed a part of its income and was properly taxable to it under
the Income Tax Law. When the corporation was dissolved and in process of complete liquidation and its
shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a
transaction took place. The shareholder who received the consideration for the stock earned that much
money as income of his own, which again was properly taxable to him under the Income Tax Law.

3.) Non-resident alien individual appellants contend that if the distributions received by them were to be
considered as a sale of their stock to the HK Co., the profit realized by them does not constitute income
from Philippine sources and is not subject to Philippine taxes, "since all steps in the carrying out of this
so-called sale took place outside the Philippines."
SC: This contention is untenable. The HK Co. was at the time of the sale of its business in the
Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the
Philippines. The HK Co. was incorporated for the purpose of carrying on in the Philippine Islands the
business of wine, beer, and spirit merchants and the other objects set out in its memorandum of
association. Hence, its earnings, profits, and assets, including those from whose proceeds the
distributions in question were made, the major part of which consisted in the purchase price of the
business, had been earned and acquired in the Philippines. As such, it is clear that said distributions
were income "from Philippine sources."
CIR v. Soriano corp
301 SCRA 152 Business Organization Corporation Law Trust Fund Doctrine

Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total shareholdings
of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were of
original issue when the corporation was founded and 134,659 shares as stock dividend
declarations. So in 1964 when Soriano died, half of the shares he held went to his wife as
her conjugal share (wifes legitime) and the other half (92,577 shares, which is further
broken down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to
the estate. For sometime after his death, his estate still continued to receive stock
dividends from ASC until it grew to at least 108,000 shares.

In 1968, ASC through its Board issued a resolution for the redemption of shares from
Sorianos estate purportedly for the planned Filipinization of ASC. Eventually, 108,000
shares were redeemed from the Soriano Estate. In 1973, a tax audit was conducted.
Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment against ASC
for deficiency withholding tax-at-source. The CIR explained that when the redemption was
made, the estate profited (because ASC would have to pay the estate to redeem), and so
ASC would have withheld tax payments from the Soriano Estate yet it remitted no such
withheld tax to the government.

ASC averred that it is not duty bound to withhold tax from the estate because it redeemed
the said shares for purposes of Filipinization of ASC and also to reduce its remittance
abroad.

ISSUE: Whether or not ASCs arguments are tenable.

HELD: No. The reason behind the redemption is not material. The proceeds from a
redemption is taxable and ASC is duty bound to withhold the tax at source. The Soriano
Estate definitely profited from the redemption and such profit is taxable, and again, ASC
had the duty to withhold the tax. There was a total of 108,000 shares redeemed from the
estate. 25,247.5 of that was original issue from the capital of ASC. The rest (82,752.5) of
the shares are deemed to have been from stock dividend shares. Sale of stock dividends is
taxable. It is also to be noted that in the absence of evidence to the contrary, the Tax Code
presumes that every distribution of corporate property, in whole or in part, is made out of
corporate profits such as stock dividends.

It cannot be argued that all the 108,000 shares were distributed from the capital of ASC
and that the latter is merely redeeming them as such. The capital cannot be distributed in
the form of redemption of stock dividends without violating the trust fund doctrine
wherein the capital stock, property and other assets of the corporation are regarded as
equity in trust for the payment of the corporate creditors. Once capital, it is always capital.
That doctrine was intended for the protection of corporate creditors.

CIRvs.GCLRetirementPlan
Postundercasedigests,TaxationatSunday,February26,2012PostedbySchizophrenicMind
Facts: GCL is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension,
disability and death benefits to its employees. As such, it was exempt from income tax.
GCL made investments and earned interest income from which was withheld the fifteen per centum
(15%) final withholding tax.

GCL filed with CIR a claim for refund for the amounts withheld. GCL disagreed with the collection of the
15% final withholding tax from the interest income as it is an entity fully exempt from income tax.

The refund requested having been denied, GCL elevated the matter to the CTA, which ruled in favor of
GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest income
and ordering a refund of the tax withheld. CA upheld the CTA Decision.

CIR seeks a reversal of the decision.

Issue: Whether or not GCL is exempt from the final withholding tax on interest income

Held: YES.

Employees' trusts or benefit plans normally provide economic assistance to employees upon the
occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It
provides security against certain hazards to which members of the Plan may be exposed. It is an
independent and additional source of protection for the working group. What is more, it is established for
their exclusive benefit and for no other purpose.

The tax advantage was conceived in order to encourage the formation and establishment of such private
plans for the benefit of laborers and employees outside of the Social Security Act.

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise,
taxation of those earnings would result in a diminution accumulated income and reduce whatever the
trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the
law.

There can be no denying either that the final withholding tax is collected from income in respect of which
employees' trusts are declared exempt. The application of the withholdings system to interest on bank
deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of
income taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-
exempt status from income, we see no logic in withholding a certain percentage of that income which it
is not supposed to pay in the first place.

CIR vs. Mitsubishi Metal Corporation (G.R. No. L-54908. January 22, 1990)
Post under case digests, Taxation at Saturday, March 10, 2012 Posted by Schizophrenic Mind
Facts: On April 17, 1970, Atlas Consolidated Mining and Development Corporation entered into a Loan
and Sales Contract with Mitsubishi Metal Corporation, a Japanese corporation licensed to engage in
business in the Philippines, for purposes of the projected expansion of the productive capacity of the
former's minesin Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the
amount of $20,000,000.00, United States currency. Atlas, in turn undertook to sell to Mitsubishi all the
copper concentrates produced for a period of fifteen (15) years. Mitsubishithereafter applied for a loan
with the Export-Import Bank of Japan (Eximbank) for purposes of its obligation under said contract. Its
loan application was approved on May 26, 1970 in the equivalent sum of $20,000,000.00 in United
States currency at the then prevailing exchange rate. The records in the Bureau of Internal Revenue
show that the approval of the loan by Eximbank toMitsubishi was subject to the condition
that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper
concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by September 30,
1981. Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the
former to the latter totaling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax
thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b)
(2) of the National Internal Revenue Code, asamended by Presidential Decree No. 131, and duly
remitted to the Government.

Issue: Whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible
from gross income taxation pursuant to Section 29 of the tax code and, therefore, exempt from
withholding tax.

Held: The court ruled in the negative. Eximbank had nothing to do with the sale of the copper
concentrates since all that Mitsubishistated in its loan application with the former was that the amount
being procured would be used as a loan to and in consideration for importing copper concentrates from
Atlas. Such an innocuous statement of purpose could not have been intended for, nor could it legally
constitute, a contract of agency. The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is
the sole creditorof ATLAS, the former being the owner of the $20 million upon completion of its loan
contract with EXIMBANK of Japan. It is settled a rule in this jurisdiction that laws granting exemption
from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by the exemption so claimed, which the petitioners have
failed to discharge. Significantly, private respondents are not among the entities which, under Section 29
of the tax code, are entitled to exemption and which should indispensably be the party in interest in this
case.
7. COMMISSIONER OF INTERNAL REVENUE V.
MISTUBISHIMETAL CORPORATION (181 SCRA 214)

Facts: Atlas Consolidated Mining andDevelopment Corporation, a domestic corporation, entered into a
Loan and Sales Contract with Mitsubishi Metal Corporation, a Japanese corporation licensed to engage in
business in the Philippines. To be able to extend the loan to Atlas, Mitsubishi entered into another loan
agreement with Export-Import Bank (Eximbank), a financing institution owned, controlled, and financed
by the Japanese government. After making interest payments to Mitsubishi, with the corresponding 15%
tax thereon remitted to the Government of the Philippines, Altas claimed for tax credit with the
Commissioner of Internal Revenue based on Section 29(b)(7) (A) of the National Internal Revenue Code,
stating that since Eximbank, and not Mitsubishi, is where the money for the loan originated from
Eximbank, then it should be exempt from paying taxes on its loan thereon.

Issue: WON the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross
income taxation.

NO. Mitsubishi secured the loan from Eximbank in its own independent capacity as a private entity and
not as a conduit of Eximbank. Therefore, what the subject of the 15% withholding tax is not the interest
income paid by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi from the loan to
Atlas. Thus, it does not come within the ambit of Section 29(b)(7)(A), and it is not exempt from the
payment of taxes.

Notes: Findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be
disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross error
or abuse on the part of the tax court. Laws granting exemption from tax are construed strictissimi
jurisagainst the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is
the exception.

CIR vs. Isabela Cultural Corporation

Post under case digests, Taxation at Friday, March 02, 2012 Posted by Schizophrenic Mind
Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice
for deficiency income tax and expanded withholding tax from BIR. It arose from the disallowance of
ICCs claimed expense for professional and security services paidby ICC; as well as the alleged
understatement of interest income on the three promissory notes due from Realty Investment Inc.
Thedeficiency expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e-
withholding tax on its claimed deduction for security services.

ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it
brought the case to CTA, which held that it is unappealable, since the final notice is not a decision. CTAs
ruling was reversed by CA, which was sustained by SC, and case was remanded to CTA. CTA rendered
a decision in favor of ICC. It ruled that the deductions for professional and security services were
properly claimed, it said that even if services were rendered in 1984 or 1985, the amount is not yet
determined at that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR which
overstate the interest income, when it applied compounding absent any stipulation.

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

Issue: Whether or not the expenses for professional and security services are deductible.

Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must
have been paid or incurred during the taxable year. This requisite is dependent on the method of
accounting of the taxpayer. In the case at bar, ICC is using theaccrual method of accounting. Hence,
under this method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum,
when the method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in
the current year when they are incurred cannot be claimed in the succeeding year.

The accrual of income and expense is permitted when the all-events test has been met. This test
requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate
determination of such income or liability. The test does not demand that the amount of income or liability
be known absolutely, only that a taxpayer has at its disposal the information necessary to compute the
amount with reasonable accuracy.

From the nature of the claimed deductions and the span of time during which the firm was retained, ICC
can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as
an excuse the delayed billing, since it could have inquired into the amount of their obligation and
reasonably determine the amount.

DIVISION
G.R. No. 172231 February 12, 2007
YNARES-SANTIAGO, J.

Lessons Applicable: Accrual method, burden of proof in accrual method, deductibility of ordinary and
necessary trade, business, or professional expenses, all events test

Laws Applicable:
FACTS:

BIR disallowed Isabela Cultural Corp. deductible expenses for services which were rendered in
1984 and 1985 but only billed, paid and claimed as a deduction on 1986.
After CA sent its demand letters, Isabela protested.
CTA found it proper to be claimed in 1986 and affirmed by CA
ISSUE: W/N Isabela who uses accrual method can claim on 1986 only

HELD: case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under
Assessment Notice No. FAS-1-86-90-000680.

NO

The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are:
(a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable year; - qualified by Section 45 of
the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this
Title shall be taken for the taxable year in which paid or accrued or paid or incurred, dependent
upon the method of accounting upon the basis of which the net income is computed
(c) it must have been paid or incurred in carrying on the trade or business of the taxpayer;
and
(d) it must be supported by receipts, records or other pertinent papers.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when they
are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer
who is authorized to deduct certain expenses and other allowable deductions for the current year but
failed to do so cannot deduct the same for the next year.
http://www.lawphil.net/judjuris/juri2007/feb2007/gr_172231_2007.html - fnt13The
accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting.
Amounts of income accrue where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.
The accrual of income and expense is permitted when the all-events test has been met.
This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount
of such income or liability be determined with reasonable accuracy. However, the test does not
demand that the amount of income or liability be known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the amount with reasonable accuracy. The all-events
test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is
satisfied where a computation may be unknown, but is not as much as unknowable, within the
taxable year. The amount of liability does not have to be determined exactly; it must be determined
 with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something less than
an exact or completely accurate amount.
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year.
Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the
burden of proof of establishing the accrual of an item of income or deduction.
http://www.lawphil.net/judjuris/juri2007/feb2007/gr_172231_2007.html - fnt17In
the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the
expenses of said firm in connection with ICCs tax problems for the year 1984. As testified by the
Treasurer of ICC, the firm has been its counsel since the 1960s. - failed to prove the burden
CIR vs. Isabela Cultural Corporation
Isabela Cultural Corp.(ICC for brevity) , a domestic corporation received from BIR assessment notice no.
FAS-1-86-90000680 (680 for brevity) for deficiency income tax in the amount of PhP 333,196.86 and
assessment notice no. FAS-1-86-90-000681 (681 for brevity) for deficiency expanded withholding tax in
the amount of PhP 4,897.79, inclusive of surcharge and interest both for the taxable year 1986. The
deficiency income tax of PhP 333,196 arose from BIR disallowance of ICC claimed expenses deductions
for professional and security services billed to and paid by ICC in 1986.

The deficiency expanded withholding tax of PhP4,897.79 was allegedly due to the failure of ICC to
withhold 1% expanded withholding tax on its claimed PhP244,890 deduction for security services.

Court of Tax Appeal and Court of Appeal affirmed that the professional services were rendered to ICC in
1984 and 1985, the cost of the service was not yet determinable at that time, hence, it could be
considered as deductible expenses only in 1986 when ICC received the billing statement for said
service. It further ruled that ICC did not state its interest income from the promissory notes of Realty
Investment and that ICC properly withheld the remitted taxes on the payment for security services for the
taxable year 1986.

Petitioner contend that since ICC is using the accrual method of accounting, the expenses for the
professional services that accrued in 1984 and 9185 should have been declared as deductions from
income during the said years and the failure of ICC to do so bars it from claiming said expenses as
deduction for the taxable year 1986.

ISSUE (1): WON CA is correct in sustaining the deduction of the expenses for professionals and
security services form ICC gross income?

HELD: NO

Revenue Audit Memorandum Order No.1-2000 provides that under the accrual method of accounting,
expenses not being claimed as deductions by a tax payer in the current year when they are incurred
cannot be claimed as deductions from the income for the succeeding year.
ISSUE (2): WON CA correctly held that ICC did not understate its interest income from the promissory
notes of Realty Investment, Inc; that ICC withheld the required 1% withholding tax from the deduction for
security services.

HELD:

Sustaining the finding of the CTA and CA that no such understatement exist and that only simple interest
computation and not a compounded one should have been applied by the BIR. There is no indeed no
stipulation between the latter and ICC on the application of compound interest.

Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should not
further earn interest.

CIR V GENERAL FOODS

14FEB
GR No. 143672| April 24, 2003 | J. Corona
Test of Reasonableness

Facts:
Respondent corporation General Foods (Phils), which is engaged in the manufacture of Tang,
Calumet and Kool-Aid, filed its income tax return for the fiscal year ending February 1985 and
claimed as deduction, among other business expenses, P9,461,246 for media advertising for Tang.
The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of
P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied.
General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision
by CTA dismissing the companys appeal.

Issue:
W/N the subject media advertising expense for Tang was ordinary and necessary expense fully
deductible under the NIRC

Held:
No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of
the taxing authority, and he who claims an exemption must be able to justify his claim by the clearest
grant of organic or statute law. Deductions for income taxes partake of the nature of tax exemptions;
hence, if tax exemptions are strictly construed, then deductions must also be strictly construed.
To be deductible from gross income, the subject advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the
taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.
While the subject advertising expense was paid or incurred within the corresponding taxable year and
was incurred in carrying on a trade or business, hence necessary, the parties views conflict as to
whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary
but also ordinary.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it
failed the two conditions set by U.S. jurisprudence: first, reasonableness of the amount incurred and
second, the amount incurred must not be a capital outlay to create goodwill for the product and/or
private respondents business. Otherwise, the expense must be considered a capital expenditure to be
spread out over a reasonable time.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising
expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number
of factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the
volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer
and the general economic conditions. It is the interplay of these, among other factors and properly
weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then
Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use
of services and (2) advertising designed to stimulate the future sale of merchandise or use of services.
The second type involves expenditures incurred, in whole or in part, to create or maintain some form of
goodwill for the taxpayers trade or business or for the industry or profession of which the taxpayer is a
member. If the expenditures are for the advertising of the first kind, then, except as to the question of the
reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the second kind, then normally they should be spread
out over a reasonable period of time.
The companys media advertising expense for the promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half of the companys entire claim for marketing
expenses for that year under review. Petition granted, judgment reversed and set aside.
Atlas Consolidated vs. CIR
ATLAS CONSOLIDATED MINING DEVT CORP vs. CIR
524 SCRA 73, 103
GR Nos. 141104 & 148763, June 8, 2007

"The taxpayer must justify his claim for tax exemption or refund by the clearest grant of
organic or statute law and should not be permitted to stand on vague implications."

"Export processing zones (EPZA) are effectively considered as foreign territory for tax
purposes."

FACTS: Petitioner corporation, a VAT-registered taxpayer engaged in mining, production,

and sale of various mineral products, filed claims with the BIR for refund/credit of input VAT
on its purchases of capital goods and on its zero-rated sales in the taxable quarters of the
years 1990 and 1992. BIR did not immediately act on the matter prompting the petitioner
to file a petition for review before the CTA. The latter denied the claims on the grounds that
for zero-rating to apply, 70% of the company's sales must consists of exports, that the
same were not filed within the 2-year prescriptive period (the claim for 1992 quarterly
returns were judicially filed only on April 20, 1994), and that petitioner failed to submit
substantial evidence to support its claim for refund/credit.
The petitioner, on the other hand, contends that CTA failed to consider the following:
sales to PASAR and PHILPOS within the EPZA as zero-rated export sales; the 2-year
prescriptive period should be counted from the date of filing of the last adjustment return
which was April 15, 1993, and not on every end of the applicable quarters; and that the
certification of the independent CPA attesting to the correctness of the contents of the
summary of suppliers invoices or receipts examined, evaluated and audited by said CPA
should substantiate its claims.

ISSUE: Did the petitioner corporation sufficiently establish the factual bases for its
applications for refund/credit of input VAT?

HELD: No. Although the Court agreed with the petitioner corporation that the two-year
prescriptive period for the filing of claims for refund/credit of input VAT must be counted
from the date of filing of the quarterly VAT return, and that sales to PASAR and PHILPOS
inside the EPZA are taxed as exports because these export processing zones are to be
managed as a separate customs territory from the rest of the Philippines, and thus, for tax
purposes, are effectively considered as foreign territory, it still denies the claims of
petitioner corporation for refund of its input VAT on its purchases of capital goods and
effectively zero-rated sales during the period claimed for not being established and
substantiated by appropriate and sufficient evidence.
Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the
sovereign authority, and should be construed in strictissimi juris against the person or
entity claiming the exemption. The taxpayer who claims for exemption must justify his
claim by the clearest grant of organic or statute law and should not be permitted to stand
on vague implications.

Zamora v Collector
There shall be allowed as deductions all the ordinary and necessary expenses paid or
incurred during the taxable year, in carrying on any trade or business. Since promotion
expenses constitute one of the deductions in conducting a business, same must testify
these requirements. Claim for the deduction of promotion expenses or entertainment
expenses must also be substantiated or supported by record showing in detail the amount
and nature of the expenses incurred.

That to be deductible, said business expenses must be ordinary and necessary expenses
paid or incurred in carrying on any trade or business; that those expenses must also meet
the further test of reasonableness in amount; that when some of the representation
expenses claimed by the taxpayer were evidenced by vouchers or chits, but others were
without vouchers or chits, the court should determine from all available data, the amount
properly deductible as representation expenses.

FACTS:

Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora, Manila, filed his
income tax returns the years 1951 and 1952. The Collector of Internal Revenue found that
he failed to file his return of the capital gains derived from the sale of certain real
properties and claimed deductions which were not allowable. The collector required him to
pay the sums of P43,758.50 and P7,625.00, as deficiency income tax for the years 1951
and 1952.

On appeal by Zamora, the Court of Tax Appeals modified the decision appealed from and
ordered him to pay the reduced total sum of P30,258.00 (P22,980.00 and P7,278.00, as
deficiency income tax for the years 1951 and 1952.

Having failed to obtain a reconsideration of the decision, Mariano Zamora appealed

alleging that the Court of Tax Appeals erred (amongst other things, this being the only
relevant to the topic) in disallowing P10,478.50, as promotion expenses incurred by his wife
for the promotion of the Bay View Hotel and Farmacia Zamora (which is of P20,957.00,
supposed business expenses).

Note: He contends that the whole amount of P20,957.00 as promotion expenses in his
1951 income tax returns, should be allowed and not merely one-half of it or P10,478.50, on
the ground that, while not all the itemized expenses are supported by receipts, the absence
of some supporting receipts has been sufficiently and satisfactorily established. For, as
alleged, the said amount of P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife of
Mariano), during her travel to Japan and the United States to purchase machinery for a new
Tiki-Tiki plant, and to observe hotel management in modern hotels. The CTA, however,
found that for said trip Mrs. Zamora obtained only the sum of P5,000.00 from the Central
Bank and that in her application for dollar allocation, she stated that she was going abroad
on a combined medical and business trip, which facts were not denied by Mariano Zamora.
No evidence had been submitted as to where Mariano had obtained the amount in excess
of P5,000.00 given to his wife which she spent abroad. No explanation had been made
either that the statement contained in Mrs. Zamora's application for dollar allocation that
she was going abroad on a combined medical and business trip, was not correct. The
alleged expenses were not supported by receipts. Mrs. Zamora could not even remember
how much money she had when she left abroad in 1951, and how the alleged amount of
P20,957.00 was spent.

ISSUE:

Whether or not the CTA erred in disallowing P10,478.50 as promotion expenses incurred by
his wife for the promotion of the Bay View Hotel and Farmacia Zamora in the absence of
receipts proving the same.

HELD: NO
 Section 30, of the Tax Code, provides that in computing net income, there shall be
allowed as deductions all the ordinary and necessary expenses paid or incurred during the
taxable year, in carrying on any trade or business. Since promotion expenses constitute
one of the deductions in conducting a business, same must testify these requirements.
Claim for the deduction of promotion expenses or entertainment expenses must also be
substantiated or supported by record showing in detail the amount and nature of the
expenses incurred (N.H. Van Socklan, Jr. v. Comm. of Int. Rev.; 33 BTA 544). Considering, as
heretofore stated, that the application of Mrs. Zamora for dollar allocation shows that she
went abroad on a combined medical and business trip, not all of her expenses came under
the category of ordinary and necessary expenses; part thereof constituted her personal
expenses. There having been no means by which to ascertain which expense was incurred
by her in connection with the business of Mariano Zamora and which was incurred for her
personal benefit, the Collector and the CTA in their decisions, considered 50% of the said
amount of P20,957.00 as business expenses and the other 50%, as her personal expenses.
We hold that said allocation is very fair to Mariano Zamora, there having been no receipt
whatsoever, submitted to explain the alleged business expenses, or proof of the connection
which said expenses had to the business or the reasonableness of the said amount of
P20,957.00. While in situations like the present, absolute certainty is usually not possible,
the CTA should make as close an approximation as it can, bearing heavily, if it chooses,
upon the taxpayer whose inexactness is of his own making.

In the case of Visayan Cebu Terminal Co., Inc. v. Collector of Int. Rev, it was declared that
representation expenses fall under the category of business expenses which are allowable
deductions from gross income, if they meet the conditions prescribed by law, particularly
section 30 (a) [1], of the Tax Code; that to be deductible, said business expenses must be
ordinary and necessary expenses paid or incurred in carrying on any trade or business; that
those expenses must also meet the further test of reasonableness in amount; that when
some of the representation expenses claimed by the taxpayer were evidenced by vouchers
or chits, but others were without vouchers or chits, documents or supporting papers; that
there is no more than oral proof to the effect that payments have been made for
representation expenses allegedly made by the taxpayer and about the general nature of
such alleged expenses; that accordingly, it is not possible to determine the actual amount
covered by supporting papers and the amount without supporting papers, the court should
determine from all available data, the amount properly deductible as representation
expenses.

Gutierrez v Collector
It appears then that the acquisition by the Government of private properties through the
exercise of the power of eminent domain, said properties being JUSTLY compensated, is
embraced within the meaning of the term "sale" "disposition of property", and the
proceeds from said transaction clearly fall within the definition of gross income laid down
by Section 29 of the Tax Code of the Philippines.

FACTS:

1. Maria Morales, married to Gutierrez(spouses), was the owner of an agricultural land. The
U.S. Gov(pursuant to Military Bases Agreement) wanted to expropriate the land of Morales
to expand the Clark Field Air Base.

2. The Republic was the plaintiff, and deposited a sum of Php 152k to be able to take
immediate possession. The spouses wanted consequential damages but instead settled
with a compromise agreement. In the compromise agreement, the parties agreed to keep
the value of Php 2,500 per hectare, except to some particular lot which would be at Php
3,000 per hectare.

3. In an assessment notice, CIR demanded payment of Php 8k for deficiency of income tax
for the year 1950.

4. The spouses contend that the expropriation was not taxable because it is not "income
derived from sale, dealing or disposition of property" as defined in Sec. 29 of the Tax Code.
The spouses further contend that they did not realize any profit in the said transaction. CIR
did not agree.

5. The spouses appealed to the CTA. The Solicitor General, in representation of the
respondent Collector of Internal Revenue, filed an answer that the profit realized by
petitioners from the sale of the land in question was subject to income tax, that the full
compensation received by petitioners should be included in the income received in 1950,
same having been paid in 1950 by the Government. CTA favored SolGen but disregarded
the penalty charged.

6. Both parties appealed to the SC.

ISSUES:

1. Whether or not that for income tax purposes, the expropriation should be deemed as
income from sale and any profit derived therefrom is subject to income taxes capital gain?

2. Whether or not there was profit or gain to be taxed?

HELD: Yes to both. CTA decision affirmed. It is subject to income tax.

RATIO 1: It is to be remembered that said property was acquired by the Government

through condemnation proceedings and appellants' stand is, therefore, that same cannot
be considered as sale as said acquisition was by force, there being practically no meeting of
the minds between the parties. U.S jurisprudence has held that the transfer of property
through condemnation proceedings is a sale or exchange within the meaning of section 117
(a) of the 1936 Revenue Act and profit from the transaction constitutes capital gain" "The
taking of property by condemnation and the, payment of just compensation therefore is a
"sale" or "exchange" within the meaning of section 117 (a) of the Revenue Act of 1936, and
profits from that transaction is capital gain.

SEC. 29. GROSS INCOME. (a) General definition. "Gross income" includes gains, profits,
and income derived from salaries, wages, or compensation for personal service of whatever
kind and in whatever form paid, or from professions, vocations, trades, businesses,
commerce, sales or dealings in property, whether real or personal, growing out of
ownership or use of or interest in such property; also from interests, rents, dividends,
securities, or the transactions of any business carried on for gain or profit, or gains, profits,
and income derived from any source whatsoever.

SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES.

(a) Gross income from sources within the Philippines. The following items of gross
income shall be treated as gross income from sources within the Philippines:
xxxxxxxxx
(5) SALE OF REAL PROPERTY. Gains, profits, and income from the sale of real property
located in the Philippines;
xxxxxxxxx
It appears then that the acquisition by the Government of private properties through the
exercise of the power of eminent domain, said properties being JUSTLY compensated, is
embraced within the meaning of the term "sale" "disposition of property", and the proceeds
from said transaction clearly fall within the definition of gross income laid down by Section
29 of the Tax Code of the Philippines.

RATIO 2: As to appellant taxpayers' proposition that the profit, derived by them from the
expropriation of their property is merely nominal and not subject to income tax, We find
Section 35 of the Tax Code illuminating. Said section reads as follows:

SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER DISPOSITION OF
PROPERTY. The gain derived or loss sustained from the sale or other disposition of
property, real or personal, or mixed, shall be determined in accordance with the following
schedule:
(a) xxx xxx xxx
(b) In the case of property acquired on or after March first, nineteen hundred and thirteen,
the cost thereof if such property was acquired by purchase or the fair market price or value
as of the date of the acquisition if the same was acquired by gratuitous title.
xxxxxxxxx

The records show that the property in question was adjudicated to Maria Morales by order
of the Court of First Instance of Pampanga on March 23, 1929, and in accordance with the
aforequoted section of the National Internal Revenue Code, only the fair market price or
value of the property as of the date of the acquisition thereof should be considered in
determining the gain or loss sustained by the property owner when the property was
disposed, without taking into account the purchasing power of the currency used in the
transaction. The records placed the value of the said property at the time of its acquisition
by appellant Maria Morales P28,291.73 and it is a fact that same was compensated with
P94,305.75 when it was expropriated. The resulting difference is surely a capital gain and
should be correspondingly taxed.

Gutierrez v Collector of Internal Revenue (14 SCRA 33)

Facts:
Lino Gutierrez was primarily engaged in the business of leasing real property for which he paid real
estate brokers privilege tax. The Collector assessed against Gutierrez deficiency income tax amounting
to P11,841.
 The deficiency tax came about by the disallowance of deductions from gross income representing
depreciation expenses Gutierrez allegedly incurred in carrying on his business. The expenses consisted
of:

1. Transportation expenses incurred to attend the funeral of his friends,

2. Procurement and installation of an iron door,

3. Cost of furniture given by the taxpayer in furtherance of a business transaction,

4. Membership fees in organizations established by those engaged in the real estate trade,

5. Car expenses, salary of his driver and car depreciation,

6. Repairing taxpayers rental apartments,

7. Litigation expenses,

8. Depreciation of Gutierrez residence,

9. Fines and penalties for late payment of taxes,

10. Alms given to in indigent family and a donation consisting of officers jewels and aprons to Biak-na-
Bato Lodge No. 7.

Issue:

Whether or not claims for deduction are proper and allowable.

Held:

To be deductible, an expense must be:

Ordinary and necessary

Paid or incurred within the taxable year

Paid or incurred in carrying on a trade or business.

1. Transportation expenses which petitioner incurred to attend the funeral of his friends and the cost of
admission tickets to operas - expenses relative to his personal and social activities rather than to his
business of leasing real estate.

2. Procurement and installation of an iron door to - purely a personal expense. Personal, living, or family
expenses are not deductible.
3. Cost of furniture given by the taxpayer as commission in furtherance of a business transaction - the
expenses incurred in attending the National Convention of Filipino Businessmen, luncheon meeting and
cruise to Corregidor of the Homeowners' Association were shown to have been made in the pursuit of
his business. Commissions given in consideration for bringing about a profitable transaction are part of
the cost of the business transaction and are deductible.

4. Membership and activities in connection therewith were solely to enhance his business -Gutierrez was
an officer of the Junior Chamber of Commerce which sponsored the National Convention of Filipino
Businessmen. He was also the president of the Homeowners' Association, an organization established
by those engaged in the real estate trade. Having proved that his, the expenses incurred are deductible
as ordinary and necessary business expenses.

5. Car expenses, salary of his driver and car depreciation 1/3 of the same was disallowed by the
Commissioner on the ground that the taxpayer used his car and driver both for personal and business
purposes. There is no clear showing, however, that the car was devoted more for the taxpayer's
business than for his personal and business needs. According to the evidence, the taxpayer's car was
utilized both for personal and business needs. It is reasonable to allow as deduction 1/2 of the driver's
salary, car expenses and depreciation.

6. Those used to repair the taxpayer's rental apartments - did not increase the value of such apartments,
or prolong their life. They merely kept the apartments in an ordinary operating condition. Hence, the
expenses incurred are deductible as necessary expenditures for the maintenance of the taxpayer's
business.
7. Litigation expenses - defrayed by Gutierrez to collect apartment rentals and to eject delinquent
tenants are ordinary and necessary expenses in pursuing his business. It is routinary and necessary for
one in the leasing business to collect rentals and to eject tenants who refuse to pay their accounts.

8. Depreciation of Gutierrez' residence - not deductible. A taxpayer may deduct from gross income a
reasonable allowance for deterioration of property arising out of its use or employment in business or
trade. Gutierrez' residence was not used in his trade or business.

9. Deduction the fines and penalties which he paid for late payment of taxes - while Section 30 allows
taxes to be deducted from gross income, it does not specifically allow fines and penalties to be so
deducted.

Deductions from gross income are matters of legislative grace; what is not expressly granted by
Congress is withheld. Moreover, when acts are condemned, by law and their commission is made
punishable by fines or forfeitures, to allow them to be deducted from the wrongdoer's gross income,
reduces, and so in part defeats, the prescribed punishment.

10. Alms to an indigent family and various individuals, contributions to Lydia Yamson and G. Trinidad
and a donation consisting of officers' jewels and aprons to Biak-na-Bato Lodge No. 7 - not deductible
from gross income inasmuch as their recipients have not been shown to be among those specified by
law. Contributions are deductible when given to the Government of the Philippines, or any of its political
subdivisions for exclusively public purposes, to domestic corporations or associations organized and
operated exclusively for religious, charitable, scientific, athletic, cultural or educational purposes, or for
the rehabilitation of veterans, or to societies for the prevention of cruelty to children or animals, no part of
the net income of which inures to the benefit of any private stockholder or individual.

Kuenzel v CIR
It is a general rule that `Bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees are deductible, provided
such payments, when added to the stipulated salaries, do not exceed a reasonable
compensation for the services rendered.

The condition precedents to the deduction of bonuses to employees are: (1) the payment
of the bonuses is in fact compensation; (2) it must be for personal services actually
rendered; and (3) bonuses, when added to the salaries, are `reasonable ... when measured
by the amount and quality of the services performed with relation to the business of the
particular taxpayer. Here it is admitted that the bonuses are in fact compensation and were
paid for services actually rendered.

FACTS:

1. Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return, declaring
losses.

2. CIR filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said years in
the amounts of P40,455.00, P11,248.00 and P16,228.00, respectively, arising from the
disallowance, as deductible expenses, of the bonuses paid by the corporation to its officers,
upon the ground that they were not ordinary, nor necessary, nor reasonable expenses
within the purview of Section 30(a) (1) of the National Internal Revenue Code.

3. The corporation filed with the Court of Tax Appeals a petition for review contesting the
assessments. CTA favored the CIR, however lowered the tax due on 1954. The corporation
moved for reconsideration, but still lost.

4. The Corporation contends that the tax court, in arriving at its conclusion, acted "in a
purely arbitrary manner", and erred in not considering individually the total compensation
paid to each of petitioner's officers and staff members in determining the reasonableness of
the bonuses in question, and that it erred likewise in holding that there was nothing in the
record indicating that the actuation of the respondent was unreasonable or unjust.

ISSUE: Whether or not the bonuses in question was reasonable and just to be allowed as a
deduction?

HELD: No.

RATIO: It is a general rule that `Bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees are deductible, provided
such payments, when added to the stipulated salaries, do not exceed a reasonable
compensation for the services rendered. The condition precedents to the deduction of
bonuses to employees are: (1) the payment of the bonuses is in fact compensation; (2) it
must be for personal services actually rendered; and (3) bonuses, when added to the
salaries, are `reasonable ... when measured by the amount and quality of the services
performed with relation to the business of the particular taxpayer. Here it is admitted that
the bonuses are in fact compensation and were paid for services actually rendered. The
only question is whether the payment of said bonuses is reasonable.

There is no fixed test for determining the reasonableness of a given bonus as

compensation. This depends upon many factors, one of them being the amount and quality
of the services performed with relation to the business. Other tests suggested are: payment
must be 'made in good faith'; the character of the taxpayer's business, the volume and
amount of its net earnings, its locality, the type and extent of the services rendered, the
salary policy of the corporation'; 'the size of the particular business'; 'the employees'
qualifications and contributions to the business venture'; and 'general economic conditions.
However, 'in determining whether the particular salary or compensation payment is
reasonable, the situation must be considered as a whole.

It seems clear from the record that, in arriving at its main conclusion, the tax
court considered, inter alia, the following factors:
1) The paid officers, in the absence of evidence to the contrary, that they were competent,
on the other the record discloses no evidence nor has petitioner ever made the claim that
all or some of them were gifted with some special talent, or had undergone some
extraordinary training, or had accomplished any particular task, that contributed materially
to the success of petitioner's business during the taxable years in question.

2) All the other employees received no pay increase in the said years.

3) The bonuses were paid despite the fact that it had suffered net losses for 3 years.
Furthermore the corporation cannot use the excuse that it is 'salary paid' to an employee
because the CIR does not question the basic salaries paid by petitioner to the officers and
employees, but disallowed only the bonuses paid to petitioner's top officers at the end of
the taxable years in question.

Kuenzle and Streiff v. Collector of Customs

Full Text: http://www.lawphil.net/judjuris/juri1915/dec1915/gr_l-10710_1915.html

Facts:

From the record it appears that the plaintiff and appellant imported into Philippine Islands a
quantity of merchandise, which was invoiced as "cases roast coffee, chicory, cereals." Said
merchandise was classified by the department of customs as "Bonanza mixture." Against
that classification the plaintiff, through its attorney, protested, alleging "that the mixture is
a product and manufacture of the United States, in chief value of the growth of the United
States; the shipment came direct, was accompanied by the proper certificate of origin; the
goods should have been passed free of duty as American products, under section 5 of
American Tariff of 1909."

Said protest was duly considered by the Insular Collector of Customs, who decided that:
"This claim for the free entry of certain `bonanza mixture' as a manufacture of the United
States under section 12 of the Philippine Tariff Law of 1909, is overruled and denied, for the
reasons stated in the decision of this office, on protest 7298 of the same importers (copy
attached), which decision has been affirmed by the Court of First Instance of Manila.

As stipulated by the parties, the "bonanza mixture" is a mixture of coffee, cereals and
chicory; that the coffee it contains was originally imported coffee it contains was originally
imported into the United States in the bean, and was there roasted, ground and finally
mixed with the chicory and cereals which are, nevertheless, products of the United States.
According to the report of the Bureau of Science, the proportion of the mixture is about 50
per cent of real coffee and the rest is chicory and cereals.

Issue:

Whether or not the roasting, grinding and mixing of coffee with chicory and cerals
constitutes a manufacture

Held:

The bonanza mixture is not a manifacture article. The Philippine Tariff Law of August 5th,
1909 in paragraph 242 provides for a duty upon coffee. said duty depends upon the
condition of the coffee or the manner of its packing. Paragraph 243 provides for a duty on
chicory. Paragraph 215 218 provide for duty upon various classes of cereals. There is no
express provisions in the law of a duty upon a mixture of said articles.

In order to ascertain the ordinary meaning of these words, resort may be had to the
definitions given by well-recognized lexicographers. Webster, in his valuable International
Dictionary, defines manufacture as "The operation of making wares or any product by
hand, by machinery, or by other agencies; anything made from raw material, by the hands,
by machinery, or by art, as clothes, iron utensils, shoes, machinery, saddlery, etc." Black, in
his valuable Law Dictionary, defines manufacture as "Any useful product made directly
by human labor, or by the aid of machinery directed or controlled by human power, and
either from raw materials or from materials worked up into a new form. Also the process by
which such products are made or fashioned." Bouvier, in his Law Dictionary, defines
manufacture "To make or fabricate raw materials by hand or by machinery, worked into
forms convenient for use;" and, when used as a noun, "anything made from raw materials
by hand or by machinery or by art.

The application of labor to an article, either by hand or by mechanism, does not make the
article necessarily a manufactured article within the meaning of that term as used in the
tariff laws, unless the application of such labor is carried to such an extend that the article
suffers a species of transformation and is changed into a new and different article, having a
distinctive name, character or use.

If the mixing of the different kinds of ground coffee or different grades of tea does not
constitute manufacture, then it would seem to be reasonable to say that the mixture simply
of ground coffee with other ground materials or articles such as chicory and cereals, would
not constitute a manufacture.

The courts have been obliged to formulate their definitions in order to give effect to the
purpose of legislative enactments, while lexicographers have been free to define said term
upon the pure etymology of the word. Courts have been obliged to define the terms in
order to make it applicable to practical affairs. It is the duty of the court to give the Tariff
Law a strict interpretation, which will give force and effect to such law. The primary purpose
of the law is to produce revenue.

CIR vs Lednicky

Principle/s:
- Alien residents deduction of Income Taxation from Gross Income paid in their home country
- Double Taxation

Commissioner of Internal Revenue vs W.E. Lednicky and Maria Lednicky

GR Nos. L-18262 and L-21434, 1964

FACTS:
Spouses are both American citizens residing in the Philippines and have derived all their income from
Philippine sources for taxable years in question.

On March, 1957, filed their ITR for 1956, reporting gross income of P1,017,287.65 and a net income of P
733,809.44. On March 1959, file an amended claimed deduction of P 205,939.24 paid in 1956 to the
United States government as federal income tax of 1956.

ISSUE:
Whether a citizen of the United States residing in the Philippines, who derives wholly from sources within
the Philippines, may deduct his gross income from the income taxes he has paid to the United States
government for the said taxable year?

HELD:
An alien resident who derives income wholly from sources within the Philippines may not deduct from
gross income the income taxes he paid to his home country for the taxable year. The right to deduct
foreign income taxes paid given only where alternative right to tax credit exists.

Section 30 of the NIRC, Gross Income Par. C (3): Credits against tax per taxes of foreign countries.

If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by
this shall be credited with: Paragraph (B), Alien resident of the Philippines; and, Paragraph C (4),
Limitation on credit.

An alien resident not entitled to tax credit for foreign income taxes paid when his income is derived
wholly from sources within the Philippines.

Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity. In the present case, although the taxpayer would have to pay two taxes on the
same income but the Philippine government only receives the proceeds of one tax, there is no
obnoxious double taxation.
CIR V BICOLANDIA DRUG CORPORATION

RATIO: Incasesofconflictbetweenthelawandtherulesandregulationsimplementingthelaw,thelawshall
alwaysprevail.ShouldRevenueRegulationsdeviatefromthelawtheyseektoimplement,theywillbestruck
down.

FACTS:

1992RA7432,otherwiseknownas"AnActtoMaximizetheContributionofSeniorCitizenstoNation
Building,GrantBenefitsandSpecialPrivilegesandForOtherPurposes,"grantedseniorcitizensseveral
privileges,oneofwhichwasobtaininga20percentdiscountfromallestablishmentsrelativetotheuseof
transportationservices,hotelsandsimilarlodgingestablishments,restaurantsandrecreationcentersand
purchaseofmedicinesanywhereinthecountry
Thelawalsoprovidedthattheprivateestablishmentsgivingthediscounttoseniorcitizensmayclaimthe
costastaxcredit
BIRissuedRevenueRegulationsNo.294,whichdefined"taxcredit"asfollows:
TaxCreditreferstotheamountrepresentingthe20%discountgrantedtoaqualifiedseniorcitizenbyall
establishmentsrelativetotheirutilizationoftransportationservices,hotelsandsimilarlodging
establishments,restaurants,halls,circuses,carnivalsandothersimilarplacesofculture,leisureand
amusement,whichdiscountshallbedeductedbythesaidestablishmentsfromtheirgrossincomefor
incometaxpurposesandfromtheirgrosssalesforvalueaddedtaxorotherpercentagetaxpurposes.
1995,respondentBicolandiaDrugCorporation,acorporationengagedinthebusinessofretailing
pharmaceuticalproductsunderthebusinessstyleof"MercuryDrug,"grantedthe20percentsalesdiscount
toqualifiedseniorcitizenspurchasingtheirmedicinesincompliancewithR.A.No.7432.
RespondenttreatedthisdiscountasadeductionfromitsgrossincomeincompliancewithRRNo.294,
whichimplementedR.A.No.7432.
1996,respondentfiledits1995CorporateAnnualITRdeclaringanetlosspositionwithnilincometax
liability.OnDecember27,1996,respondentfiledaclaimfortaxrefundorcreditintheamountofPhP
259,659.00
respallegedthatCIRerredintreatingthe20percentsalesdiscountgiventoseniorcitizensasadeduction
fromitsgrossincomeforincometaxpurposesorotherpercentagetaxpurposesratherthanasataxcredit
 1998respappealedtoCTAinordertotolltherunningof2yearprescriptiveperiodtofileaclaimfor
refundpursuanttoSection230oftheTaxCodethen
PetitionermaintainedthatRevenueRegulationsNo.294isvalidsincethelawtaskedtheDepartmentof
Finance,amongothergovernmentoffices,withtheissuanceofthenecessaryrulesandregulationstocarry
outtheobjectivesofthelaw
CTADECISION:R.A.No.7432wouldprevailoverSection2(i)ofRRNo.294,whosedefinitionof"tax
credit"deviatedfromtheintendmentofthelaw;andasaresult,partiallygrantedtherespondent'sclaimfor
arefund
CAmodifiedCTAdecision;lawprovidedfortaxcreditnotataxrefund

ISSUE:WONthe20percentsalesdiscountgrantedtoqualifiedseniorcitizensbytherespondentpursuanttoR.A.
No.7432maybeclaimedasataxcredit,insteadofadeductionfromgrossincomeorgrosssales?

HELD/RATIO:Petitiondenied.Lawgrantsataxcreditnotataxdeduction.RR294VOID.Respentitledtotax
credit

TheproblemstemsfromtheissuanceofRR.294,whichwassupposedtoimplementR.A.No.7432,and
theradicaldepartureitmadewhenitdefinedthe"taxcredit"thatwouldbegrantedtoestablishmentsthat
give20percentdiscounttoseniorcitizens.

Itequated"taxcredit"with"taxdeduction,"contrarytothedefinitioninBlack'sLawDictionary,whichdefined
taxcreditas:

Anamountsubtractedfromanindividual'sorentity'staxliabilitytoarriveatthetotaltaxliability.Atax
creditreducesthetaxpayer'sliabilityxxx,comparedtoadeductionwhichreducestaxableincomeupon
whichthetaxliabilityiscalculated.Acreditdiffersfromdeductiontotheextentthattheformeris
subtractedfromthetaxwhilethelatterissubtractedfromincomebeforethetaxiscomputed
Petitionerarguesthatthetaxcreditisinthenatureofataxrefundandshouldbetreatedasareturnfortax
paymentserroneouslyorexcessivelyassessedagainstataxpayer,inlinewithSection204(c)ofRA8424,
ortheNIRC1997.Paymentfirstbeforetaxcreditcanbeclaimed
SC:NIRCspeaksofataxcreditfortaxdue,sopaymentofthetaxhasnotyetbeenmadeinthatparticular
example.
CAcorrectlyexpresslyrecognizedthedifferencesbetweena"taxcredit"anda"taxrefund,"andstatedthat
thesamearenotsynonymouswitheachother
RRNo.294isstillsubordinatetoR.A.No.7432,andincasesofconflict,theimplementingrulewillnot
prevailoverthelawitseekstoimplement.Whileseeminglyconflictinglawsmustbeharmonizedasfaras
practicable,inthisparticularcase,theconflictcannotberesolvedinthemannerthepetitionerwishes.
petitionerarguesthatshouldprivateestablishments,whichcountrespondentintheirnumber,beallowedto
claimtaxcreditsfordiscountsgiventoseniorcitizens,theywouldbeearningandnotjustbereimbursedfor
thediscountsgiven.
ItcannotbedeniedthatR.A.No.7432hasalaudablegoal.Theconcernsoftheaffectedprivate
establishmentswerealsoconsideredbythelawmakers.
Iftheprivateestablishmentsappeartobenefitmorefromthetaxcreditthanoriginallyintended,itisnotfor
petitionertosaythattheyshouldn't.Thetaxcreditmayactuallyhaveprovidedgreaterincentiveforthe
privateestablishmentstocomplywithR.A.No.7432,orquickerrelieffromthecutintoprofitsofthese
businesses.
Fromtheabovediscussion,itmustbeconcludedthatRevenueRegulationsNo.294isnullandvoidfor
failingtoconformtothelawitsoughttoimplement.Incaseofdiscrepancybetweenthebasiclawanda
ruleorregulationissuedtoimplementsaidlaw,thebasiclawprevailsbecausesaidruleorregulation
cannotgobeyondthetermsandprovisionsofthebasiclaw
 R.A.No.7432hasbeenamendedbyRepublicActNo.9257,the"ExpandedSeniorCitizensActof2003."
Inthis,theterm"taxcredit"isnolongerused.
Thistimearound,thereisnoconflictbetweenthelawandtheimplementingRevenueRegulations.Under
RevenueRegulationsNo.42006,"(o)nlytheactualamountofthediscountgrantedorasalesdiscountnot
exceeding20%ofthegrosssellingpricecanbedeductedfromthegrossincome,netofvalueaddedtax,if
applicable,forincometaxpurposes,andfromgrosssalesorgrossreceiptsofthebusinessenterprise
concerned,forVATorotherpercentagetaxpurposes.Underthenewlaw,thereisnotaxcredittospeak
of,onlydeductions.
But RA 7432 was the law in force then.
BASILAN ESTATES, INC. v. CIR
G.R. No. L-22492 September 5, 1967
Bengzon, J.P., J.
Doctrine:
The income tax law does not authorize the depreciation of an asset beyond its acquisition cost.
Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that
deductions from gross income are privileges, not matters of right. They are not created by
implication but upon clear expression in the law.
Facts:
Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the basis of their
acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by
increasing it to conform with the increase in cost for their replacement. Accordingly, from 1950 to
1953 it deducted from gross income the value of depreciation computed on the reappraised
value.
CIR disallowed the deductions claimed by petitioner, consequently assessing the latter of
deficiency income taxes.
Issue:
Whether or not the depreciation shall be determined on the acquisition cost rather than the
reappraised value of the assets
Held:
Yes. The following tax law provision allows a deduction from gross income for depreciation but
limits the recovery to the capital invested in the asset being depreciated:
(1)In general. A reasonable allowance for deterioration of property arising out of its use or
employment in the business or trade, or out of its not being used: Provided, That when the
allowance authorized under this subsection shall equal the capital invested by the taxpayer . . .
no further allowance shall be made. . . .
The income tax law does not authorize the depreciation of an asset beyond its acquisition cost.
Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that
deductions from gross income are privileges, not matters of right. They are not created by
implication but upon clear expression in the law [Gutierrez v. Collector of Internal Revenue, L-
19537, May 20, 1965].
Depreciation is the gradual diminution in the useful value of tangible property resulting from wear
and tear and normal obsolescense. It commences with the acquisition of the property and its
 owner is not bound to see his property gradually waste, without making provision out of earnings
for its replacement.
The recovery, free of income tax, of an amount more than the invested capital in an asset will
transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would
recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru
depreciation of investment made is the philosophy behind depreciation allowance; the idea of
profit on the investment made has never been the underlying reason for the allowance of a
deduction for depreciation.