Income Taxation Case Digest

8/18/2019 Income Taxation Case Digest

1/22

Commisioner of Internal Revenue vs Lednicky

FACTS:

This case involves separate petitions by the Commissioner for review of the corresponding decisions of the Court of Tax Appeals which have beendecided jointly, namely; G! "o #$%&%'(, G! "o#$ %&)&' and G! "o #$)%*+*

The respondents are husband and wife; both are American citiensresiding in the -hilippines and have derived all their income from -hilippineresources for the taxable years under .uestion: %(//, %(/', and %(/01ubse.uently, they filed separate amended tax return covering the above$

mentioned taxable years, claiming deductions representing taxes paid to the2nited 1tates on income derived wholly from -hilippine sources TheCommissioner failed to ta3e action on the amended tax returns, hence; the#ednic3y spouse brought suits in the Tax Court which decided in favor of therespondents

ISSUE:

4hether citiens of the 2nited 1tates residing in the -hilippines whoderives income wholly from sources within the country, may deduct from grossincome the taxes they have paid to the 21 Government5

RULING:

"o The taxpayers are not entitled to tax deductions because all their income is derived from -hilippine sources To allow an alien resident to deductfrom his gross income whatever taxes he pays to his own government amountsto conferring on the latter power to reduce the tax income of the -hilippinegovernment simply by increasing the tax rates on the alien resident 1uch a

result is incompatible with the status of the -hilippines as an independent andsovereign 1tate


2/22

Fiser vs Trinidad GR No! L"#$$%&

FACTS:

The -hilippine American 6rug Company, a domestic corporation, inwhich 7rederic3 7isher was a stoc3holder declared a stoc3 dividend for the year %(%( The proportionate share of said stoc3 dividend was -)*,&88 The stoc3 dividend for that amount was issued to 7isher Trinidad demanded the sum of -&&((% as income tax on said stoc3 dividend; 7isher paid the said amountunder protest To recover the paid amount, 7isher instituted an action Trinidadfiled a demurrer to the petition on the ground that it failed to constitute a cause

of action The demurrer was sustained and 7isher appealed

ISSUES:

% 4hat is an income5) 4hether or not a stoc3 dividend should be considered an income5

RULING:

% 9ncome is defined as the amount of money coming to a person or corporationwithin a specified time whether as payment for services, interest, or profit frominvestment

) "o A stoc3holder who receives a stoc3 dividend has received nothing but arepresentation of his increased interest in the capital of the corporation 4e

believe that the #egislature when it provided income tax, intended only to taxthe income of corporations or firms as that used in its common acceptation; thatis money received for services, interest or profit from investments 4e do not

believe that the #egislature intended that a mere increase in the value of the

capital or assets of a corporation or firm should be taxed as income


3/22

El 'riente Fa(ricia de Ta(acos vs )uan *osadas GR No! +,--,

FACTS:

anufacturers #ife 9nsurance Co, an insurance policy of A ?elhagen, whois its manager in order to protect itself from loss by reason of the latter@s lossThe plaintiff designated itself as the sole beneficiary 9t also charged as anexpense of its business all the said premiums and deducted the same from itsgross income owever, the Collector of 9nternal !evenue assessed and levied

the sum of -+, %*&0* as income tax on the proceeds of the insurance policy,which the plaintiff paid under protest but was conse.uently, overruled by thedefendants The plaintiff appealed

ISSUE:

4hether the proceeds of the insurance policy ta3en by a corporation onthe life of an official or employer to indemnify it against loss in case of hisdeath are taxable income5

RULING:


4/22

"o The Court held that the proceeds of the life insurance policyrepresents as an indemnity and not taxable income

C! . /oskins vs CIR GR No! L"#,012

FACTS:

C > os3ins is a domestic corporation engaged in real estate business 9tis owned by C> os3ins who is the controlling stoc3holder and at the sametime, Chairman of the Board of 6irectors during the taxable year in .uestion=n 1ept +8, %(/0, the petitioner filed its income tax return owever, theCommissioner of the 9nternal !evenue disallowed four *D items of deduction in

the petitioner@s tax return The Court of Tax Appeals upheld the disallowance of the item being paid to C> os3ins which represents /8E of the supervision


5/22

fee but set aside the disallowance of the other three +D minor items The petitioner appealed the Tax Court@s finding

ISSUE:

4hether or not the payment by the taxpayer to its controlling stoc3holder of /8E of its supervision fee is a deductible, ordinary and necessary expense5

RULING:

"= 9t did not fall within the purview of ordinary and necessary expenseand it failed to pass the test of reasonable compensation Bonuses to employeesmade in good faith and as additional compensation for services actually

rendered by the employees are deductible, provided such payments, when addedto the salaries do not exceed the compensation for services rendered

The Court ruled that the employer@s right to fix the compensation of itsofficers may be conceded but for income tax purposed the employer cannotlegally claim such bonuses as deductible expenses unless they are shown to bereasonable To hold otherwise would open of rampant tax evasion

Commissioner of Internal Revenue vs General Foods


6/22


7/22

Commissioner of Internal Revenue vs .elcor )avier

FACTS:

?ictoria Favier, wife of the petitioner, received from -rudential Ban3 andTrust Company the amount of 21 H (((,(0+0+, remitted by her sister, >rs6olores ?entosa, through some ban3s in the 21 , among which is >ellon Ban3>ellon Ban3 filed a complaint with the Court of 7irst 9nstance against the

petitioner, his wife and other defendants, claiming that its remittance of 21 H%,888,888 was a clerical error and should have been 21 H%,888 only and praysthat the excess should be returned 1ubse.uently, the petitioner was chargedwith estafa for allegedly misappropriating the excess amount

=n >arch /, %(0&, the respondents filed an income tax return for %(00and states in its footnote that the taxpayer was a recipient of some moneyreceived from abroad which he presumed to be a gift but turned out to be anerror and is subject of litigation The Acting Commissioner states the amountreceived by the >ellon Ban3 which the respondents were able to dispose isdefinitely taxable The Commissioner further imposes /8E fraud penaltyagainst Favier The latter filed an appeal before the CTA which ruled on hisfavor

ISSUE:

4hether or not private respondent is liable for the /8E fraud penalty5

RULING:

"o There was no actual and intentional fraud through willful anddeliberate misleading of the government agency concerned The governmentwas not induced to give up some legal right and place itself at a disadvantage so

as to prevent its lawful agents from proper assessment of tax liabilities becauseFavier did not conceal anything A mista3e of law is not fraud


8/22

Commisioner of Internal Revenue vs Isa(ela Cultural Cor3oration

FACTS:

=n 7eb )+, %((', the respondent received from the B9! assessmentnotices for deficiency income tax and for deficiency expanded withholding tax,inclusive of surcharges and interest, both for the taxable year of %(&' Theformer arose from the B9!@s disallowance of the 9CC@s claimed expensedeductions for professional and security services billed to and paid by therespondent corporation The latter was allegedly due to the failure of therespondent to withhold %E expanded withholding tax on its claimed

-)**,&(888 deductions for security services The 9CC sought reconsiderationof the subject assessment owever, it received a final notice of assessment 9nthe CTA, the petition was held as premature because the final notice of assessment cannot be considered as a final decision appealed to the Tax CourtThis was reversed by the CA and was sustained by the Court This wasremanded to the CTA for further proceedings The CTA rendered a decisioncancelling the assessment against 9CC The petitioner filed a petition contendingthat since 9CC is using the accrual method of accounting, the expenses for the

professional services that accrued in the %(&* and %(&', should have been

declared as deductions from income during the said years and the failure of 9CCto do so bars it from claiming said expense as deduction for the taxable year


9/22

ISSUES:

% 4hether the CA correctly sustained the deduction of the expense for

professional and security services from the 9CC@s gross income5) 4hether or not the respondent did not understate its interest income from the

promissory notes from the !ealty 9nvestment and that 9CC withheld there.uired %E withholding tax from the deductions for security services5

RULING:

% "o 7ollowing the principle that tax exemptions must be construed instrictissimi juris against the tax payer, accrual method of accounting must be

largely a .uestion of fact, such that tax payer bears the burden proof of establishing the accrual of income or deduction owever, 9CC failed todischarge the burden

)"o "o such interest understatement exists and that only simple interestcomputation and not a compounded one should have been applied by the B9!There is no stipulation between the !ealty 9nvestment and the 9CC on theapplication of compounded interest 2nder Art %(/(of the Civil Code, unlessthere is a stipulation to the contrary, interest due should not further earn interest

Fili3inas Syntetic Fi(er Cor3oration vs CA4 CTA and Commisioner of Internal Revenue GR Nos! $$%,2% and $#+,+--

FACTS:

=n 6ec )0, %(0( the petitioner received a letter of demand from theCommissioner of 9nternal !evenue, assessing it for deficiency withholding taxat source inclusive of interest and compromise penalties The bul3 of thedeficiency withholding tax assessment consisted of interest and compromise

penalties for alleged late payment of withholding taxes due on interest loans,royalties and guarantees for fees paid by the petitioner to non$resident The


10/22

assessment was protested by the petitioner but such was denied by therespondent on the ground that the liability to withhold and pay income taxwithheld at source from certain payment due to a foreign corporation is at thetime of accrual and not at the time of actual payment or remittance thereof

=n Fune )&, %(&/, petitioner brought a petition for review before theCourt of Tax Appeals which renders a decision against it 4ith the denialmotion for reconsideration, the petitioner appealed to the Court of Appealswhich affirmed in toto the appealed decision

ISSUE:

4hether the liability to withhold tax at source on income payments to

non$ resident foreign corporation arises upon remittance of the amounts due toforeign creditors or upon the accrual thereof5

RULING:

The liability to withheld tax at source on income payments to non$resident foreign corporations arises upon the accrual of the amounts due toforeign creditors 9n the case at bar, the Court concurred in the finding by theCTA that there was a definite liability, a clear and imminent certainty that at thematurity of the loan contracts, the foreign corporation was going to earn income

in an ascertained amount, so much so that the petitioner already deducted a business expense the said amount as interest due to the foreign corporation Thisis allowed under the law, petitioner having adopted the accrual method of accounting in reporting its income


11/22

.adri5al vs Rafferty GR No! L"$##%-

FACTS:

?icente >adrigal and 1usana -aterno were legally married prior toFanuary %, %(%* Their marriage was governed by the provisions of the lawconcerning conjugal partnerships =n 7ebruary %(%/, >adrigal filed a sworndeclaration showing that his total net income for the year %(%* was -)(',+8)0+ representing the income of the conjugal partnership >adrigal assailedthat in computing and assessing the additional income tax provided by the Actof Congress of =ctober +, %(%+, the income declared by >adrigal should bedivided into two e.ual parts, one$half to be considered the income of >adrigaland the other half of -aterno The subject matter was brought to the Attorney$

General of the -hilippine 9slands who ruled in favor of the petitioner 9t wassubse.uently brought to the 2nited 1tates Commissioner of 9nternal !evenuewho reversed the opinion of the Attorney$General, and thus decided against theclaim of >adrigal The petitioner paid under protest The Collector of 9nternal!evenue ruled against the petitioner who later filed an action in Court of 7irst9nstance for the recovery of some sum alleged to have been wrongfullycollected by the defendant under the Act of Congress

ISSUE:

4hether or not the income of >adrigal and -aterno should be dividedinto two e.ual parts, because of the conjugal partnership relations existing

between them5

RULING:

"o The 9ncome Tax #aw does not loo3 on the spouses as individual partners in an ordinary partnership The husband and wife are only entitled tothe exemption of -&, 888 specifically granted by the law The higher schedules

of the additional tax directed at the incomes of the wealthy may not be partiallydefeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the 9ncome Tax #aw


12/22

Con6i vs CTA G!R! Nos ,%1+#"++

FACTS:

-etitioners are employees of -rocter and Gamble -hilippine>anufacturing Corporation, subsidiary of -rocter I Gamble, a foreigncorporationD6uring the years %(08 and %(0%, petitioners were assigned to other subsidiaries of -rocter I Gamble outside the -hilippines, for which petitionerswere paid 21 dollars as compensation

-etitioners filed their 9T!s for %(08 and %(0%, computing tax due byapplying the dollar$to$peso conversion based on the floating rate under B9! !uling "o 08$8)0 9n %(0+, petitioners filed amended 9T!s for %(08 and %(0%,

this time using the par value of the peso as basis This resulted in the allegedoverpayments, refund andor tax credit, for which claims for refund were filed

CTA held that the proper conversion rate for the purpose of reporting and paying the -hilippine income tax on the dollar earnings of petitioners are therates prescribed under !evenue >emorandum Circulars "os 0$0% and *%$0%The refund claims were denied

ISSUE:

4hether or not petitioners@ dollar earnings are receipts derived fromforeign exchange transactions5

RULING:

"o A foreign exchange transaction is a transaction in foreign exchange being the conversion of an amount of money or currency of one country intoan e.uivalent amount of money or currency of another The petitioners wereassigned to the foreign subsidiaries -rocter I Gamble wherein they were

earning in their assigned nation@s currency and were also spending in saidcurrency There was no conversion, therefore, from one currency to another


13/22

.anila 7ine .ercants Inc! vs CIR GR No! L"#&$,1

FACTS:

>anila 4ine >erchants organied in %(+0 was engaged in theimportation and sale of whis3ey, wines, li.uor and distilled spirits 9ts original

paid up capital was -hp /88,888 At one point, they reduced to their capital to-hp )/8,888 with the approval of the 1illion -esos, again with the approval of 1erchantsinvested in several companies including Acme Commercial, Co, 2nion

9nsurance of Canton and bought shares in 4ac3 4ac3 Golf and Country Club4ine >erchants also ac.uired 21A Treasury Bills valued at around +*0,888-esos

The C9! examined the boo3s of >anila 4ine >erchants and found that ithad unreasonably accumulated a surplus of -hp *)&,888 from %(*0$%(/0 inexcess of the reasonable needs of business subject to the surtax of )E imposed

by 1ection )/ of the Tax Code then demanded payment of the 9Aerchants appealed to the CTA


14/22

7or the CTA, the purchase of shares in 4ac3 4ac3, 2nion 9nsurance andAcme Commercial were harmless and not subject to )/E surtax owever, the

purchase of the Treasury Bills was in no way related to the business of importing and selling wines and ordered >anila 4ine >erchants to pay 9Aanila 4ine >erchants appealed to the CTA

ISSUE:

4hether or not >anila 4ine >erchants unreasonably accumulatedearnings in excess of the reasonable needs of business, thus ma3ing it liable tosurtax under the Tax Code5

RULING:

Janila 4ine >erchants is liable to surtax under the Tax Code Thefindings of the CTA that the purchase were in no way related to the business of the petitioner and thus construed as an investment beyond the reasonable needsof the business is binding upon the Court

2nder the 9mmediacy Test, the words reasonable needs of the businessmeans the immediate needs of the business 9t has been generally held that if thecorporation did not prove an immediate need for the accumulation of theearnings and profits, the accumulation was not for the reasonable needs of the

business, and the penalty tax would apply The touchstone of liability is the purpose behind the accumulation of the income and not the conse.uences of theaccumulation

CIR vs .itsu(isi .etal Cor3oration GR Nos! L"1,20% and %00,$

FACTS:

-rivate respondent Atlas Consolidated >ining and 6evelopmentCorporation entered into a #oan and 1ales Contract with >itsubishi >etalCorporation for purposes of the projected expansion of the productive capacityof the Atlas@ mines in Toledo, Cebu 2nder said contract, >itsubishi agreed toextend a loan to Atlas in the amount of H)8,888,88888 for the installation of a

new concentrator for copper production Atlas, in turn undertoo3 to sell to


15/22


16/22

proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge

Commissioner of Internal Revenue vs 8ritis 'verseas Air6ays

Cor3oration

FACTS:

British =verseas Airways Corporation B=ACD is a %88E BritishGovernment$owned corporation organied and existing under the laws of the2nited Kingdom B=AC did not carry passengers andor cargo to or from the-hilippines, although during the period covered by the assessments, itmaintained a general sales agent in the -hilippines $ 4amer Barnes and

Company, #td, and later Lantas Airways M which was responsible for sellingB=AC tic3ets covering passengers and cargoes

=n >ay 0, %('& C9! assessed B=AC with -),*(&,+/&/' for deficiencyincome taxes covering the years %(/( to %('+ B=AC protested 9nvestigationresulted to an assessment in the amount of -&/&,+800( covering the years %(/(to %('0 B=AC paid this new assessment under protest B=AC filed a claim for refund in the amount of -&/&,+800( with the C9! owever, B=AC did notwait for the decision of the C9!, filed petition for review with the tax courtThereafter, C9! denied claim for refund

=n "ovember %0, %(0% C9! assessed B=AC with deficiency incometaxes ,interests, and penalty for the fiscal years %('&$%('( to %(08$%(0% in theaggregate amount of -/*(,+)0*+, and the additional amounts of -%,88888 and-%,&8888 as compromise penalties for violation of 1ection *' re.uiring thefiling of corporation returnsD penalied under 1ection 0* of the "ational 9nternal!evenue Code "9!CDB=AC in a letter re.uested that the assessment tocountermanded and set aside C9! denied the re.uest and reissued thedeficiency income tax assessment for -/+*,%+)8& for the years%('( to %(08$0%

plus -%,88888 as compromise penalty under 1ection 0* of the Tax CodeB=AC as3ed for reconsideration but C9! denied the same B=AC filed a )nd

petition for review with the tax court The ) cases before the CTA wereconsolidated Tax Court rendered the assailed joint 6ecision reversing the C9!9ts position was that income from transportation is income from services so thatthe place where services are rendered determines the source 9t further held thatthe proceeds of sales of B=AC passage tic3ets in the -hilippines by 4arner Barnes and Company, #td, and later by Lantas Airways, during the period in.uestion, do not constitute B=AC income from -hilippine sources sinceno

service of carriage of passengers or freight was performed by B=AC within the-hilippines and, therefore, said income is not subject to -hilippine income tax


17/22

ISSUE:

4hether or not during the fiscal years in .uestion B=AC is a resident

foreign corporation doing business in the -hilippines or has an office or place of business in the -hilippines4hether proceeds from the sale of B=AC tic3ets in the -hilippines by

4arner Barnes and Company, #td are considered income from sources withinthe -hilippines

RULING:

% Jes! The Court rule that in order that a foreign corporation may be regardedas doing business within a 1tate, there must be continuity of conduct andintention to establish a continuous business, such as the appointment of a localagent, and not one of a temporary character B=AC, during the periods covered

by the subject $ assessments, maintained a general sales agent in the -hilippines,that general sales agent, from %(/( to %(0%, was engaged in %Dselling andissuing tic3ets; )D brea3ing down the whole trip into series of trips $ each trip inthe series corresponding to a different airline company; +D receiving the farefrom the whole trip; and *D conse.uently allocating to the various airlinecompanies on the basis of their participation in the services rendered throughthe mode of interline settlement as prescribed by Article ?9 of the !esolution

"o &/8 of the 9ATA Agreement

) Jes The test of taxability is the source; and the source of an income is thatactivity which produced the income 2n.uestionably, the passagedocumentations in these cases were sold in the -hilippines and the revenuetherefrom was derived from an activity regularly pursued within the -hilippines


18/22


19/22

4hether or not the retirement benefits are taxable5

RULING:

Jes 7or the retirement benefits to be exempt from withholding tax, thetaxpayer is burdened to prove the concurrence of the following: aD a reasonable

private benefit plan maintained by the employer; bD the retiring official or employer has been in the service of the same employer for atleast ten %8D years;cD the retiring official or employee is not less than fifty /8D years of age of hisretirement; and dD the benefit had been availed of only once

owever, the above provision is not applicable in this case, for failure tocomply with the age and length of service re.uirements

Eisner vs .acom(er #1# U!S $%2

FACTS:


20/22

>rs >acomber owned ),)88 shares of 1tandard =il Company of California stoc3 =n Fanuary %(%', the company declared a stoc3 dividend >rs>acomber received an additional %,%88 shares of stoc3 out of which %(&00, par value H%(,&00, represented surplus earned by the company after >arch %, %(%+

The 9!1 treated the said amount as taxable income under the !evenue Act of %(%' which provided that a stoc3 dividend was considered income to theamount of its cash value >rs >acomber argued that the provision in the!evenue Act was unconstitutional because it was a direct tax not apportioned

per population The 6istrict Court held that the stoc3 dividend was not income

ISSUE:

4hether or not stoc3 dividends are taxable income5

RULING:

"o A stoc3 dividend reflects the corporation transferring an amount fromsurplus retained earningsD to capital stoc3 1uch transaction is merely a

boo33eeping entry and affects only the form not the essence of the liabilityac3nowledges by the corporation to its own shareholders 9t does not alter the

preexisting proportionate interest of any of its stoc3holder or increase theintrinsic value of his holding or of his aggregate holdings of the other stoc3holders as they stood before An increase to the value of the capital

investment is not an income "othing of value has been ta3en from thecorporation and given to the shareholder as is the case with cash dividend


21/22

Intercontinental 8roadcastin5 Cor3oration vs Amarilla4 et! Al GR No!

$--1

FACTS:

-etitioner employed the following persons at its Cebu station: Candido CLuiNones, Fr; on 7ebruary %, %(0/;O+P Corsini ! #agahit, as 1tudio Technician,

also on 7ebruary %, %(0/; Anatolio G =tadoy, as Collector, on April %, %(0/;and "oemi Amarilla, as Traffic Cler3, on Fuly %, %(0/ =n >arch %, %(&', thegovernment se.uestered the station, including its properties, funds and other assets, and too3 over its management and operations from its owner, !obertoBenedicto owever, in 6ecember %(&', the government and Benedicto enteredinto a temporary agreement under which the latter would retain its managementand operation =n "ovember +, %((8, the -residential Commission on GoodGovernment -CGGD and Benedicto executed a Compromise Agreement, whereBenedicto transferred and assigned all his rights, shares and interests in

petitioner station to the government

The four *D employees retired from the company and received, onstaggered basis, their retirement benefits under the %((+ Collective BargainingAgreement CBAD between petitioner and the bargaining unit of its employees4hen a salary increase too3 effect -%, /8888 salary increase was given to allemployees of the company, current and retired, effective Fuly %((* owever,when the four retirees demanded theirs, petitioner refused and instead informedthem via a letter that their differentials would be used to offset the tax due ontheir retirement benefits in accordance with the "ational 9nternal !evenue Code

"9!CD

ISSUES:

% 4hether the retirements of the respondents are part of their gross income5) 4hether the petitioner is estopped from reneging on its agreement withrespondent to pay for the taxes on said retirement benefits5

RULING:


22/22

% Jes 7or the retirement benefits to be exempt from withholding tax, thetaxpayer is burdened to prove the concurrence of the following: aD a reasonable

private benefit plan maintained by the employer; bD the retiring official or employer has been in the service of the same employer for at least ten %8D

years; cD the retiring official or employee is not less than fifty /8D years of ageof his retirement; and dD the benefit had been availed of only once >ore so,there is no evidence on record that the %((+ CBA had been approved or wasever presented to the B9! ence, the retirement benefits of the respondents aretaxable

) Jes The agreement to pay the taxes on the retirement benefits had beenagreed upon by the parties and relied upon by the respondents 1uch agreementis not contrary to law or to public morals 7or petitioner to renege on its contract

simply because its new management had found the same disadvantageouswould amount to a breach of contract The well$entrenched rule is that estoppelmay arise from a ma3ing a promise if it was intended that the promise be reliedupon and in fact, was relied upon and if a refusal to sanction the perpetration of fraud would result to injustice The mere omission by the promisor to dowhatever he promises is sufficient forbearance to give rise to a promissoryestoppel

Income Taxation Case Digest

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