TAX

FINALS
I.
A corporation, engaged in real estate development, executed deeds of sale on various
subdivided lots. One buyer, after going around the subdivision, bought a comer lot with a good
view of the surrounding terrain. He paid PI .2 million, and the title to the property was issued.
A year later, the value of the lot appreciated to a market value of PI.6 million, and the buyer
decided to build his house thereon. Upon inspection, however, he discovered that a huge tower
antennae had been erected on the lot frontage totally blocking his view. When he complained,
the realty company exchanged his lot with another comer lot with an equal area but affording
a better view.

Is the buyer liable for capital gains tax on the exchange of the lots?
ANSWER:

Yes, the buyer is subject to capital gains tax on the exchange of lots on the basis of prevailing fair
market value of the property transferred at the time of the exchange or the fair market value of
the property received, whichever is higher (Section 21(e), NIRC). Real property transactions
subject to capital gains tax are not limited to sales but also exchanges of property unless
exempted by a specific provision of law.

II.
During the year, a domestic corporation derived the following items of revenue: (a) gross
receipts from a trading business: (b) interests from money placements in the banks; (c)
dividends from its stock investments in domestic corporations; (d) gains from stock
transactions through the Philippine Stock Exchange; (e) proceeds under an insurance policy on
the loss of goods.

In preparing the corporate income tax return, what should be the tax treatment on each of the
above items?

ANSWER:
The gross receipts from trading business is includible as an item of income in the corporate
income tax return and subject to corporate income tax rate based on net income. The other items
of revenue will not be included in the corporate income tax return. The interest from money
market placements is subject to a final withholding tax of 20%; dividends from domestic
corporation are exempt from income tax; and gains from stock transactions with the Philippine
Stock Exchange are subject to transaction tax which is in lieu of the income tax. The proceeds
under an insurance policy on the loss of goods is not an item of income but merely a return of
capital hence not taxable.

ALTERNATIVE ANSWER:
The gross receipts from trading business are includible as an item of income in the corporate
income tax return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds
under an insurance policy on the loss of goods will be included in the corporate income tax return
either as a taxable gain or a deductible loss. The gain or loss is arrived at by deducting from the
proceeds of insurance (amount realized) the basis of the good lost (Sec. 34(a). NIRC). The net
income of the corporation shall be subject to corporate income tax rate of 35%.

The other items of revenue will not be included in the corporate income tax return. The interest
from money market placements is subject to a final withholding tax of 20%; dividends from
Domestic Corporation are exempt from income tax; and gains from stock transactions with the
Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. (BAR
1997)

III.



IV.
Mr. Santos died Intestate in 1989 leaving his spouse and five children as the only heirs. The
estate consisted of a family home and a four-door apartment which was being rented to
tenants. Within the year, an extrajudicial settlement of the estate was executed from the heirs,
each of them receiving his/her due share. The surviving spouse assumed administration of the
property. Each year, the net income from the rental property was distributed to all,
proportionately, on which they paid respectively, the corresponding Income tax.

In 1994, the income tax returns of the heirs were examined and deficiency income tax
assessments were is-sued against each of them for the years 1989 to 1993, inclusive, as having
entered into an unregistered partnership. Were the assessments justified?

ANSWER:
Yes. the assessments were justified because for income tax purposes, the co-ownership of
inherited property is automatically converted into an unregistered partnership from the moment
the said properties are used as a common fund with Intent to produce profits for the heirs In
proportion to their shares in the inheritance.

From the moment of such partition, the heirs are entitled already to their respective definite
shares of the estate and the income thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly, he becomes
liable individually for all taxes in connection therewith. If after such partition, he allows his shares
to be held in common with his co-heir under a single management to be used with the intent of
making profit thereby in proportion to his share, there can be no doubt that, even if no document
or instrument were executed for the purpose, for tax purposes, at least, an unregistered
partnership is formed (Lorenzo Ona, et at v. CIR, 45 SCRA 74).




ALTERNATIVE ANSWER:
No. the assessments are not justified. The mere sharing of income does not of itself establish a
partnership absent any dear intention of the co-owners who are only awaiting liquidation of the
estate. (BAR 1997)

V
PAGCOR VAT EXEMPTION
Given that petitioner’s Charter is not deemed repealed or amended by R.A. No. 9337, petitioner’s
income derived from gaming operations is subject only to the five percent (5%) franchise tax, in
accordance with P.D. 1869, as amended. With respect to petitioner’s income from operation of
other related services, the same is subject to income tax only. The five percent (5%) franchise tax
finds no application with respect to petitioner’s income from other related services, in view of
the express provision of Section 14(5) of P.D. 1869, as amended, to wit:

Section 14. Other Conditions. (5) Operation of related services. — The Corporation is authorized
to operate such necessary and related services, shows and entertainment. Any income that may
be realized from these related services shall not be included as part of the income of the
Corporation for the purpose of applying the franchise tax, but the same shall be considered as
a separate income of the Corporation and shall be subject to income tax.[24]

Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income
from other related services without basis therefor.

For proper guidance, the first classification of PAGCOR’s income under RMC No. 33-2013
(i.e., income from its operations and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places, gambling pools) should be interpreted in relation to Section
13(2) of P.D. 1869, which pertains to the income derived from issuing and/or granting the license
to operate casinos to PAGCOR’s contractees and licensees, as well as earnings derived by
PAGCOR from its own operations under the Franchise. On the other hand, the second
classification of PAGCOR’s income under RMC No. 33-2013 (i.e., income from other related
operations) should be interpreted in relation to Section 14(5) of P.D. 1869, which pertains to
income received by PAGCOR from its contractees and licensees in the latter’s operation of
casinos, as well as PAGCOR’s own income from operating necessary and related services, shows
and entertainment.

As to whether petitioner’s tax privilege of paying five percent (5%) franchise tax inures to the
benefit of third parties with contractual relationship with petitioner in connection with the
operation of casinos, we find no reason to rule upon the same. The resolution of the instant
petition is limited to clarifying the tax treatment of petitioner’s income vis-à-vis our Decision
dated March 15, 2011. This Decision is not meant to expand our original Decision by delving into
new issues involving petitioner’s contractees and licensees. For one, the latter are not parties to
the instant case, and may not therefore stand to benefit or bear the consequences of this
resolution. For another, to answer the fourth issue raised by petitioner relative to its contractees
and licensees would be downright premature and iniquitous as the same would effectively
countenance sidesteps to judicial process.

In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion
amounting to lack of jurisdiction when it issued RMC No. 33-2013 subjecting both income from
gaming operations and other related services to corporate income tax and five percent (5%)
franchise tax. This unduly expands our Decision dated March 15, 2011 without due process since
the imposition creates additional burden upon petitioner. Such act constitutes an overreach on
the part of the respondent, which should be immediately struck down, lest grave injustice results.
More, it is settled that in case of discrepancy between the basic law and a rule or regulation
issued to implement said law, the basic law prevails, because the said rule or regulation cannot
go beyond the terms and provisions of the basic law.

In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of
R.A. No. 8424, by excluding petitioner from the enumeration of GOCCs exempted from corporate
income tax, is valid and constitutional. In addition, we hold that:

1. Petitioner’s tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes
with respect to its income from gaming operations, pursuant to P.D. 1869, as amended,
is not repealed or amended by Section 1(c) of R.A. No. 9337;
2. Petitioner’s income from gaming operations is subject to the five percent (5%) franchise
tax only; and
3. Petitioner’s income from other related services is subject to corporate income tax only.

In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist
the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on
petitioner’s income derived from its gaming operations; and (2) franchise tax on petitioner’s
income from other related services.

WHEREFORE, the Petition is hereby GRANTED.

VI.
S.C. JOHNSON see page 295 of Tax Principles and Remedies Book

VII.
Pension fund and DC to DC dividends.
Pension fund: exempt under the new law.
Intercorporate Dividends: Exempt from income tax.






 VIII.
The price difference is subject to donor’s tax

Petitioner’s substantive argumentsare unavailing. The absence of donative intent, if that be the
case, does not exempt the sales of stock transaction from donor’s tax since Sec. 100 of the NIRC
categorically states that the amount by which the fair market value of the property exceeded the
value of the consideration shall be deemed a gift. Thus, even if there is no actual donation, the
difference in price is considered a donation by fiction of law.

Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the
parameters for determining the “fair market value” of a sale of stocks. Such issuance was made
pursuant to the Commissioner’s power to interpret tax laws and to promulgate rules and
regulations for their implementation.

Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, was
being applied retroactively in contravention to Sec. 246 of the NIRC.[26] Instead, it merely called
for the strict application of Sec. 100, which was already in force the moment the NIRC was
enacted. WHEREFORE, the petition is hereby DISMISSED.

Caveat: see RR 30-2019 (attached below [last page of this file]).

IX.
Procter & Gamble: PMC’s dispute has no merit because “increase in capital reserves” is not
covered by the justifying instances for the retention of corporate surplus under RR 2-2001.

X.
Plaridel Case

Of the sum of P44,490.00, the amount of P30,600.00 - which is the principal sum stipulated in
the performance bond - is being claimed as loss deduction under Sec. 30(d)(2) of the Tax Code
and P10,000.00 - which is the interest that had accrued on the principal sum - is now being
claimed as interest deduction under Sec. 30(b)(1).

Loss is deductible only in the taxable year it actually happens or is sustained. However, if it is
compensable by insurance or otherwise, deduction for the loss suffered is postponed to a
subsequent year, which, to be precise, is that year in which it appears that no compensation at
all can be had, or that there is remaining or net loss, i.e., no full compensation.[5]

There is no question that the year in which the petitioner Insurance Co. effected payment
to Galang Machinery pursuant to a final decision occurred in 1957. However, under the same
court decision, San Jose and Cuervo were obligated to reimburse petitioner for whatever
payments it would make to Galang Machinery. Clearly, petitioner's loss is compensable
otherwise (than by insurance). It should follow, then, that the loss deduction can not be claimed
in 1957.
RR 30-2019

REVENUE MEMORANDUM CIRCULAR NO. 30-2019 issued on February 28, 2019 clarifies Section
100 of the National Internal Revenue Code of 1997, as amended by Republic Act No. 10963
(TRAIN Law) in relation to Sale of Shares of Stock Not Traded or Listed.

The legislative intendment of the “deemed gift” provision under Section 100 of the Tax Code is
to discourage the parties to a sale from manipulating their selling price in order to save on Income
Taxes. This is because under the Tax Code, the measurement of gain from a disposition of
property merely considers the amount realized from the sale, which is the selling price minus the
basis of the property sold. Hence, if the parties would declare a lower selling price per document
of sale than the actual amount of money which changed hands, there is foregone revenue and
the government is placed at a very disadvantageous position. In order to plug this tax leakage,
Section 100 automatically treats the disparity between the Fair Market Value (FMV) and selling
price of the property as gift subject to Donor’s Tax. In short, the “deemed gift” provision
compliments the Income Tax rule on the measurement of gain and, accordingly, works to avoid
the recurrence of under-declaration of the selling price. Thus, if the FMV of the shares of stock is
higher than the selling price, the excess/difference shall be treated as gift subject to Donor’s Tax.
The TRAIN Law which took effect on January 1, 2018, however, provides an exception. Section
100 of the Tax Code now further states that “Provided, however, That a sale, exchange or other
transfer of property made in the ordinary course of business (a transaction which is a bona fide,
at arm’s length, and free from any donative intent), will be considered as made for an adequate
and full consideration in money or money’s worth”.

Under the rules of statutory construction, exceptions, as a general rule, should be strictly, but
reasonably construed; they extend only so far as their language fairly warrants, and all doubts
should be resolved in favor of the general provisions rather than the exception.

Thus, starting January 1, 2018, when shares of stock not traded in stock exchange are sold for
less than its FMV, the excess of the FMV over the selling price shall be treated as gift subject to
Donor’s Tax imposed by Section 100 of the 1997 NIRC, as amended, except when it is sold at
arm’s length, free from any donative intent (in the ordinary course of business).

The determination of whether the sale of shares of stock not listed and traded is at arm’s length
is a question of fact and not of law. Since an arm’s length transaction is a question of fact, it
therefore behooves upon the party seeking to apply the exception to prove that indeed the sale
involves no irregularity between unrelated and independent parties. This would require
presentation and reception of reasonable evidence sufficient enough to convince that the sale of
the shares of stock for less than its FMV is without intent to evade tax and defraud the
government (of the tax due therein). The evidence that should be presented should be viewed in
accordance with its relation and relevance to the transaction on a case to case basis.