CIR v. CA, CITY TRUST BANKING CORP.

GR No. 86785, November 21, 1991

234 SCRA 348

FACTS:

Respondent corporation Citytrust filed a refund of overpaid taxes with the BIR by which the latter denied
on the ground of prescription. Citytrust filed a petition for review before the CTA. The case was
submitted for decision based solely on the pleadings and evidence submitted by the respondent because
the CIR could not present any evidence by reason of the repeated failure of the Tax Credit/Refud Division
of the BIR to transmit the records of the case, as well as the investigation report thereon, to the Solicitor
General. CTA rendered the decision ordering BIR to grant the respondent's request for tax refund
amounting to P 13.3 million.

ISSUE:
Failure of the CIR to present evidence to support the case of the government, should the respondent's
claim be granted?

HELD:
Not yet. It is a long and firmly settled rule of law that the Government is not bound by the errors
committed by its agents. In the performance of its governmental functions, the State cannot be
estopped by the neglect of its agent and officers. Although the Government may generally be estopped
through the affirmative acts of public officers acting within their authority, their neglect or omission of
public duties as exemplified in this case will not and should not produce that effect.
Nowhere is the aforestated rule more true than in the field of taxation. It is axiomatic that the
Government cannot and must not be estopped particularly in matters involving taxes. Taxes are the
lifeblood of the nation through which the government agencies continue to operate and with which the
State effects its functions for the welfare of its constituents. The errors of certain administrative officers
should never be allowed to jeopardize the Government's financial position, especially in the case at bar
where the amount involves millions of pesos the collection whereof, if justified, stands to be prejudiced
just because of bureaucratic lethargy. Thus, it is proper that the case be remanded back to the CTA for
further proceedings and reception of evidence.
South African Airways v. CIR
G.R. No. 180356 February 16, 2010
VELASCO, JR., J.

Lessons Applicable: Taxes can be offset if intimately related, unless exempted assumed within the
purview of general rule, liabilities and tax credit must first be determined before offset can take place

Facts:
South African Airways, a foreign corporation with no license to do business in the Philippines, sells
passage documents for off-line flights through Aerotel Limited, general sales agent in the Philippines
Feb 5, 2003: Petitioner filed a claim for refund erroneously paid tax on Gross Philippine Billing (GPB) for
the year 2010.
CTA: denied - petitioner is a resident foreign corp. engaged in trade or business in the Philippines and
therefore is NOT liable to pay tax on GPB under the Sec. 28 (A) (3) (a) of the 1997 NIRC but cannot be
allowed refund because liable for the 32% income tax from its sales of passage documents.
This is upheld by the CTA and CTA En Banc

Issues:
1. W/N petitioner is engaged in trade or business in the Philippines is subject to 32% income tax.
2. W/N petitioner is entitled to refund

HELD:
CTA En Banc decision is set side

1. Yes. Since it does not maintain flights to or from the Philippines, it is not taxable under Sec. 28(A)(3)
(a) of the 1997 NIRC. This much was also found by the CTA. But petitioner further posits the view that
due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying any other income tax for
its sale of passage documents in the Philippines. But, Sec. 28 (A)(1) of the 1997 NIRC does not exempt
all international air carriers from the coverage of Sec. 28 (A) (1) of the 1997 NIRC being a general rule.
Petitioner, being an international carrier with no flights originating from the Philippines, does not fall
under the exception. As such, petitioner must fall under the general rule. This principle is embodied in
the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being
excepted must be regarded as coming within the purview of the general rule.

2. Underterminable. Although offsetting of tax refund with tax deficiency is unavailing under Art. 1279
of the Civil Code, in CIR v. CTA it granted when deficiency assessment is intimately related and
inextricably intertwined with the right to claim for a tax refund. Sec. 72 Chapter XI of 1997 NIRC is not
applicable where petitioner's tax refund claim assumes that the tax return that it filed were correct
because petitioner is liable under Sec. 28 (A)(1), the correctness is now put in doubt and refund cannot
be granted. It cannot be assumed that the liabilities for two different provisions would be the same.
There is a necessity for the CTA to receive evidence and establish the correct amount before a refund can
be granted.
MADRIGAL VS. RAFFERTY- Difference Between Capital and Income

FACTS:
Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The marriage was
contracted under the provisions of law concerning conjugal partnership
On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73
Vicente Madrigal was contending that the said declared income does not represent his income for the
year 1914 as it was the income of his conjugal partnership with Paterno. He said that in computing for
his additional income tax, the amount declared should be divided by 2.
The revenue officer was not satisfied with Madrigals explanation and ultimately, the United States
Commissioner of Internal Revenue decided against the claim of Madrigal.
Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 alleged to have
been wrongfully and illegally assessed and collected by the CIR.

ISSUE:
Whether or not the income reported by Madrigal on 1915 should be divided into 2 in computing for the
additional income tax.

HELD:
No! The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon income
and not upon capital and property.
The essential difference between capital and income is that capital is a fund; income is a flow. A fund of
property existing at an instant of time is called capital. A flow of services rendered by that capital by the
payment of money from it or any other benefit rendered by a fund of capital in relation to such fund
through a period of time is called income. Capital is wealth, while income is the service of wealth.
As Paterno has no estate and income, actually and legally vested in her and entirely distinct from her
husbands property, the income cannot properly be considered the separate income of the wife for the
purposes of the additional tax.
To recapitulate, Vicente wants to half his declared income in computing for his tax since he is arguing
that he has a conjugal partnership with his wife. However, the court ruled that the one that should be
taxed is the income which is the flow of the capital, thus it should not be divided into 2.
COMMISSIONER VS. JAVIER- Claim of Right Doctrine

Claim of right doctrine or doctrine of ownership, command or control- In this case, Javier is not liable for
fraud penalty because the income he received is not yet a taxable gain since it is still under litigation.

FACTS:

1977: Victoria Javier, wife of Javier-respondent, received $999k from Prudential Bank remitted by her
sister Dolores through Mellon Bank in US.
Around 3 weeks after, Mellon Bank filed a complaint with CFI Rizal against Javier claiming that its
remittance of $1M was a clerical error and should have been $1k only and praying that the excess be
returned on the ground that the Javiers are just trustees of an implied trust for the benefit of Mellon
Bank.
CFI charged Javier with estafa alleging that they misappropriated and converted it to their own
personal use.
A year after, Javier filed his Income Tax Return for 1977 and stating in the footnote that the taxpayer
was recipient of some money received abroad which he presumed to be a gift but turned out to be an
error and is now subject of litigation
The Commissioner of Internal Revenue wrote a letter to Javier demanding him to pay taxes for the
deficiency, due to the remittance.
Javier replied to the Commissioner and said that he will pay the deficiency but denied that he had any
undeclared income for 1977 and requested that the assessment of 1977 be made to await final court
decision on the case filed against him for filing an allegedly fraudulent return.
Commissioner replied that the amount of Mellon Banks erroneous remittance which you were able to
dispose is definitely taxable and the Commissioner imposed a 50% fraud penalty on Javier.

ISSUE: Whether or not Javier is liable for the 50% penalty.

HELD: No.

No. It is true that a fraudulent return shall cause the imposition of a 50% penalty upon a taxpayer filing
such fraudulent return. However, in this case, although Javier may be guilty of estafa due to
misappropriating money that does not belong to him, as far as his tax return is concerned, there can be
no fraud. There is no fraud in the filing of the return. Javiers notation on his income tax return can be
considered as a mere mistake of fact or law but not fraud. Such notation was practically an invitation for
investigation and that Javier had literally laid his cards on the table. The government was never
defrauded because by such notation, Javier opened himself for investigation.

It must be noted that the fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce
another to give up some legal right.

o Claim of right doctrine- a taxable gain is conditioned upon the presence of a claim of right to the
alleged gain and the absence of a definite and unconditional obligation to return or repay.
o In this case, the remittance was not a taxable gain, since it is still under litigation and there is a chance
that Javier might have the obligation to return it. It will only become taxable once the case has been
settled because by then whatever amount that will be rewarded, Javier has a claim of right over it.
COMMISSIONER V TOURS SPECIALIST
183 SCRA 402 | March 21, 1990 | J. Gutierrez, Jr.

Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the
taxpayer which do not belong to them and do not redound to the taxpayers benefit; and it is not
necessary that there must be a law or regulation which would exempt such monies or receipts within the
meaning of gross receipts under the Tax Code

Facts:

The Commissioner of Internal Revenue filed a petition to review on certiorari to the CTA decision which
ruled that the money entrusted to private respondent Tours Specialist (TS), earmarked and paid for hotel
room charges of tourists, travellers and/or foreign travel agencies do not form part of its gross receipt
subject to 3% independent contractors tax.

Tours Specialist derived income from its activities and services as a travel agency, which included booking
tourists in local hotels. To supply such service, TS and its counterpart tourist agencies abroad have
agreed to offer a package fee for the tourists (payment of hotel room accommodations, food and other
personal expenses). By arrangement, the foreign tour agency entrusts to TS the fund for hotel room
accommodation, which in turn paid by the latter to the local hotel when billed.

Despite this arrangement, CIR assessed private respondent for deficiency 3% contractors tax as
independent contractor including the entrusted hotel room charges in its gross receipts from services for
years 1974-1976 plus compromise penalty.

During cross-examination, TS General Manager stated that the payment through them is only an act of
accommodation on (its) part and the agent abroad instead of sending several telexes and saving on
bank charges they take the option to send the money to (TS) to be held in trust to be endorsed to the
hotel.

Nevertheless, CIR caused the issuance of a warrant of distraint and levy, and had TS bank deposits
garnished.

Issue:
W/N amounts received by a local tourist and travel agency included in a package fee from tourists or
foreign tour agencies, intended or earmarked for hotel accommodations form part of gross receipts
subject to 3% contractors tax

Held:
No. Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the
taxpayer which do not belong to them and do not redound to the taxpayers benefit; and it is not
necessary that there must be a law or regulation which would exempt such monies or receipts within the
meaning of gross receipts under the Tax Code. Parenthetically, the room charges entrusted by the foreign
travel agencies to the private respondents do not form part of its gross receipts within the definition of
the Tax Code. The said receipts never belonged to the private respondent. The private respondent never
benefited from their payment to the local hotels. This arrangement was only to accommodate the
foreign travel agencies.
NDC vs. CIR

The NDC entered into contract in Tokyo with several Japanese shipbuilding companies for the
construction of its 12 ocean-going vessels. The purchase price was to come from the proceeds of bonds
issued by the Central Bank. Initial payments were made in cash and through irrevocable letter of credit.
Fourteen (14) promissory notes were signed for the balance by the NDC guaranteed by Republic of the
Philippines.

Pursuant thereto, the remaining payments and the interest thereon were remitted in due time by the
NDC to Tokyo. The NDC remitted to the ship builders in Tokyo the total amount of US$4,066,580 as
interest on the balance of the purchase price. No tax was withheld.

The Commissioner then held the NDC liable on such tax in the total sum of PhP5,115,234.74. The BIR
thereupon served on the NDC a warrant of distraint and levy to enforcce collection of the claimed
amount.

Petitioner argues that the Japanese ship builders were not subject to tax under the sec. 37 of the Tax
Code because all the related activities- the signing of the contract, the construction of the vessels, the
payment of the stipulated price, and their delivery to the NDC - were done in Tokyo.

ISSUE:
WON the Tokyo shipbuilders are subject to tax?

HELD:
The law specifies: interest derived from sources within the Philippines, and interest on bonds, notes, or
other interest-bearing obligation of resident, corporate or otherwise. Nothing there speak of the 'acts or
activity' of non-residential corporation in the Philippines, or place where the contract is signed.

The residence of the obligor who pays the interest rather than the physical location of the securities,
bonds or notes or the place of payment, is the determining factor of the source of interest income.
Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him can have no
other source than within the Philippines. The interest is paid not by the bond note or other interest-
bearing obligations, but by the obligor.
CIR vs. British Overseas Airways Corporation (BOAC)

Facts:
British Overseas Airways Corp (BOAC) is a 100% British Government-owned corporation engaged in
international airline business and is a member of the Interline Air Transport Association, and thus, it
operates air transportation services and sells transportation tickets over the routes of the other airline
members.

From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus, did not
carry passengers and/or cargo to or from the Philippines but maintained a general sales agent in the
Philippines - Warner Barnes & Co. Ltd. and later, Qantas Airways - which was responsible for selling BOAC
tickets covering passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency
income taxes against BOAC.

Issue:
Whether the revenue derived by BOAC from ticket sales in the Philippines, constitute income of BOAC
from Philippine sources, and accordingly taxable.

Held:
The source of an income is the property, activity, or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from
activity within the Philippines. Herein, the sale of tickets in the Philippines is the activity that produced
the income. The tickets exchanged hands here and payment for fares were also made here in the
Philippine currency.

The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred
within Philippine territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of supporting the
government. PD 68, in relation to PD 1355, ensures that international airlines are taxed on their income
from Philippine sources. The 2 1/2% tax on gross billings is an income tax. If it had been intended as an
excise tax or percentage tax, it would have been placed under Title V of the Tax Code covering taxes on
business.
CIR vs. MARUBENI

Facts:
CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985 deficiency
income, branch profit remittance and contractors taxes from Marubeni Corp after finding the latter to
have properly availed of the tax amnesty under EO 41 & 64, as amended.

Marubeni, a Japanese corporation, engaged in general import and export trading, financing and
construction, is duly registered in the Philippines with Manila branch office. CIR examined the Manila
branchs books of accounts for fiscal year ending March 1985, and found that respondent had
undeclared income from contracts with NDC and Philphos for construction of a wharf/port complex and
ammonia storage complex respectively.

On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes. CIR
claims that the income respondent derived were income from Philippine sources, hence subject to
internal revenue taxes. On Sept 1986, respondent filed 2 petitions for review with CTA: the first,
questioned the deficiency income, branch profit remittance and contractors tax assessments and second
questioned the deficiency commercial brokers assessment.

On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that taxpayers
who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct
30, 1986.

On Nov 17, 1986, EO 64 expanded EO 41s scope to include estate and donors taxes under Title 3 and
business tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated
those who already availed amnesty under EO 41 should file an amended return to avail of the new
benefits. Marubeni filed a supplemental tax amnesty return on Dec 15, 1986.

CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency
taxes. CA affirmed on appeal.

Issue:
W/N Marubeni is exempted from paying tax

Held:
Yes.
1. On date of effectivity

CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in Sec 4b of
EO 41:

Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty herein granted:
xxx b) Those with income tax cases already filed in Court as of the effectivity hereof;

Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a case had
already been filed and was pending before the CTA and Marubeni therefore fell under the exception.
However, the point of reference is the date of effectivity of EO 41 and that the filing of income tax cases
must have been made before and as of its effectivity.
EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA on Sept
26, 1986. When EO 41 became effective, the case had not yet been filed. Marubeni does not fall in the
exception and is thus, not disqualified from availing of the amnesty under EO 41 for taxes on income and
branch profit remittance.

The difficulty herein is with respect to the contractors tax assessment (business tax) and respondents
availment of the amnesty under EO 64, which expanded EO 41s coverage. When EO 64 took effect on
Nov 17, 1986, it did not provide for exceptions to the coverage of the amnesty for business, estate and
donors taxes. Instead, Section 8 said EO provided that:

Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent
with this amendatory Executive Order shall remain in full force and effect.

Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of effectivity.
The general rule is that an amendatory act operates prospectively. It may not be given a retroactive
effect unless it is so provided expressly or by necessary implication and no vested right or obligations of
contract are thereby impaired.

2. On situs of taxation
Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the
deficiency tax because the income from the projects came from the Offshore Portion as opposed to
Onshore Portion. It claims all materials and equipment in the contract under the Offshore Portion
were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to
Philippine taxes.

(BG: Marubeni won in the public bidding for projects with government corporations NDC and Philphos.
In the contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos
Portion and financed either by OECF or by suppliers credit. The Japanese Yen Portion I corresponds to
the Foreign Offshore Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond
to the Philippine Onshore Portion. Marubeni has already paid the Onshore Portion, a fact that CIR does
not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of both materials and
services to the client, they are contracts for a piece of work and are indivisible. The situs of the two
projects is in the Philippines, and the materials provided and services rendered were all done and
completed within the territorial jurisdiction of the Philippines. Accordingly, respondents entire receipts
from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine
sources. The total gross receipts covering both labor and materials should be subjected to contractors
tax (a tax on the exercise of a privilege of selling services or labor rather than a sale on products).

Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the
Philippines because some of them were completed in Japan (and in fact subcontracted) in accordance
with the provisions of the contracts. All services for the design, fabrication, engineering and manufacture
of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These
services were rendered outside Philippines taxing jurisdiction and are therefore not subject to
contractors tax. Petition denied.
First Lepanto Taisho Insurance Corporation vs. CIR [GR No. 197117, April 10, 2013]

FACTS:
After submitting its corporate income tax return for taxable year ending December 31, 1997, petitioner
received a Letter of Authority, dated October 30, 1998, from respondent Commissioner of Internal
Revenue (CIR) to allow it to examine their books of account and other accounting records for 1997 and
other unverified prior years.

On 29 December 1999, CIR issued internal revenue tax assessments for deficiency income, withholding,
expanded withholding, final withholding, value-added and documentary stamp taxes for taxable year
1997. On 24 February 2000, petitioner protested the said tax assessments.

ISSUE:
Whether a stipulation between contending parties as to correct withholding of taxes is sufficient
evidence for deductibility of expense

RULING:
As to service/contractors and purchases, petitioner contends that both parties already stipulated that it
correctly withheld the taxes due. Thus, petitioner is of the belief that it is no longer required to present
evidence to prove the correct payment of taxes withheld. As correctly ruled by the CTA Second Division
and En Banc, however, stipulations cannot defeat the right of the State to collect correct taxes due on an
individual or juridical person because taxes are the lifeblood of our nation so its collection should be
actively pursued without unnecessary impediment.
Collector v. Henderson
Rental allowances and travel allowances by a company are not part of taxable income.

FACTS:
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 employer-
corporations 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
employer-corporation 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 Castaneda (G.R. No. 96016)

FACTS:
Efren Castaneda retired from govt service as Revenue Attache in the Philippine Embassy, London,
England. Upon retirement, he received benefits such as the terminal leave pay. The Commissioner of
Internal Revenue withheld P12,557 allegedly representing that it was tax income.

Castaneda filed for a refund, contending that the cash equivalent of his terminal leave is exempt from
income tax.

The Solicitor General contends that the terminal leave is based from an employer-employee relationship
and that as part of the services rendered by the employee, the terminal leave pay is part of the gross
income of the recipient.

CTA -> ruled in favor of Castaneda and ordered the refund.

CA -> affirmed decision of CTA. Hence, this petition for review on certiorari.

ISSUE:
Whether or not terminal leave pay (on occasion of his compulsory retirement) is subject to income tax.

HELD:
NO. As explained in Borromeo v CSC, the rationale of the court in holding that terminal leave pays are
subject to income tax is that:
. . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or
employee who retires, resigns or is separated from the service through no fault of his own. In the
exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The
Government recognizes that for most public servants, retirement pay is always less than generous if not
meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided.
Terminal leave payments are given not only at the same time but also for the same policy considerations
governing retirement benefits.
A terminal leave pay is a retirement benefit which is NOT subject to income tax.

*Petition denied.
CIR v. CA and Soriano

Facts:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the
corporation A. Soriano Y Cia, predecessor of ANSCOR with a 1,000,000.00 capitalization divided into
10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the
family of Don Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of
the 5,000 shares originally issued.

On September 12, 1945, ANSCORs authorized capital stock was increased to P2,500,000.00 divided into
25,000 common shares with the same par value. Of the additional 15,000 shares, only 10,000 was issued
which were all subscribed by Don Andres, after the other stockholders waived in favor of the former
their pre-emptive rights to subscribe to the new issues. This increased his subscription to 14,963
common shares. A month later, Don Andres transferred 1,250 shares each to his two sons, Jose and
Andres Jr., as their initial investments in ANSCOR. Both sons are foreigners.

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949
and December 20, 1963. On December 30, 1964 Don Andres died. As of that date, the records revealed
that he has a total shareholdings of 185,154 shares. 50,495 of which are original issues and the balance
of 134,659 shares as stock dividend declarations. Correspondingly, one-half of that shareholdings or
92,577 shares were transferred to his wife, Doa Carmen Soriano, as her conjugal share. The offer half
formed part of his estate.

A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it
to P30M. In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were
respectively received by the Don Andres estate and Doa Carmen from ANSCOR. Hence, increasing their
accumulated shareholdings to 138,867 and 138,864 common shares each.

On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue
Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a tax
avoidance scheme. By January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into
150,000 common and 150,000 preferred shares.

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme
and not tax avoidance. Consequently, on March 31, 1968 Doa Carmen exchanged her whole 138,864
common shares for 138,860 of the preferred shares. The estate of Don Andres in turn exchanged 11,140
of its common shares for the remaining 11,140 preferred shares.

In 1973, after examining ANSCORs books of account and record Revenue examiners issued a report
proposing that ANSCOR be assessed for deficiency withholding tax-at-source, for the year 1968 and the
2nd quarter of 1969 based on the transaction of exchange and redemption of stocks. BIR made the
corresponding assessments. ANSCORs subsequent protest on the assessments was denied in 1983 by
petitioner. ANSCOR filed a petition for review with the CTA, the Tax Court reversed petitioners ruling. CA
affirmed the ruling of the CTA. Hence this position.

Issue:
Whether or not a person assessed for deficiency withholding tax under Sec. 53 and 54 of the Tax Code is
being held liable in its capacity as a withholding agent.
Held:
An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner
for deficiency withholding tax, as such, it is being held liable in its capacity as a withholding agent and
not in its personality as taxpayer. A withholding agent, A. Soriano Corp. in this case, cannot be deemed a
taxpayer for it to avail of a tax amnesty under a Presidential decree that condones the collection of all
internal revenue taxes including the increments or penalties on account of non-payment as well as all
civil, criminal, or administrative liabilities arising from or incident to voluntary disclosures under the NIRC
of previously untaxed income and/or wealth realized here or abroad by any taxpayer, natural or
juridical. The Court explains: The withholding agent is not a taxpayer, he is a mere tax collector. Under
the withholding system, however, the agent-payer becomes a payee by fiction of law. His liability is direct
and independent from the taxpayer, because the income tax is still imposed and due from the latter. The
agent is not liable for the tax as no wealth flowed into him, he earned no income.
C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue

Facts:
Hoskins, a domestic corporation engaged in the real estate business as broker, managing agents and
administrators, filed its income tax return (ITR) showing a net income of P92,540.25 and a tax liability of
P18,508 which it paid.

CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the disallowance of an item
which was paid to Mr. C. Hoskins representing 50% of supervision fees earned and set aside the
disallowance of the other 3 items.

Issue:
Whether or not the disallowance of the 4 items were proper.

Held:
NOT deductible. It did not pass the test of reasonableness which is:
General rule, bonuses to employees made in good faith and as additional compensation for services
actually rendered by the employees are deductible, provided such payments, when added to the salaries
do not exceed the compensation for services rendered.

The conditions precedent to the deduction of bonuses to employees are:

Payment of bonuses is in fact compensation
Must be for personal services actually rendered
Bonuses when added to salaries are reasonable when measured by the amount and quality of
services performed with relation to the business of the particular taxpayer.
There is no fixed test for determining the reasonableness of a given bonus as compensation. This
depends upon many factors.

In the case, Hoskins fails to pass the test. CTA was correct in holding that the payment of the company to
Mr. Hoskins of the sum P99,977.91 as 50% share of supervision fees received by the company was
inordinately large and could not be treated as an ordinary and necessary expenses allowed for
deduction.
CIR v. Isabela Cultural

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 paid by ICC; as well as the alleged understatement of
interest income on the three promissory notes due from Realty Investment Inc. The deficiency 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 the accrual 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.