Complete Compilation Tax 1 Oct 3

TAX 1: CAPITAL GAINS AND LOSSES,GAINS /LOSS FROM SALE OF PROPERTY & ADMINISTRATIVE PROVISIONS: ATTY.GEOCANIGA 1

CAPITAL GAINS AND LOSSES

1) Calasanz vs. Commissioner of Internal Revenue (October 9, 1986)

FACTS:

Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land containing a total area of 1,678,000 square meters. In order to liquidate her inheritance, Ursula Calasanz had the land surveyed and subdivided into lots. Improvements, such as good roads, concrete gutters, drainage and lighting system, were introduced to make the lots saleable. Soon after, the lots were sold to the public at a profit.

In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and reported fifty per centum thereof or P15,530.03 as taxable capital gains.

Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged in business as real estate dealers. Petitioners contends that inherited land is a capital asset within the meaning of the Tax Code and that an heir who liquidated his inheritance cannot be said to have engaged in the real estate business and may not be denied the preferential tax treatment given to gains from sale of capital assets, merely because he disposed of it in the only possible and advantageous way.

Commissioner of Internal Revenue demanded from them the amount of P160.00 representing real estate dealer's fixed tax of P150.00 and P10.00 compromise penalty for late payment; and assessment in the amount of P3,561.24 as deficiency income tax on ordinary gain of P3,018.00 plus interest of P 543.24.

Petitioners filed with the Court of Tax Appeals a petition for review contesting the aforementioned assessments. The CTA upheld the respondent Commissioner except for that portion of the assessment regarding the compromise penalty of P10.00 for the reason that in this jurisdiction, the same cannot be collected in the absence of a valid and binding compromise agreement.

ISSUES:

1. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed tax; and2. Whether the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains

taxable at capital gain rates.

HELD: In agreeing with respondent CIR, the Court classified a taxpayer’s assets for income tax purposes into ordinary assets and capital assets. 'Capital assets' means property held by the taxpayer [whether or not connected with his trade or business]. The statutory definition of capital assets is negative in nature. If the asset is not among the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction . Thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be subdivided or improved or both to make it salable. However, if the inherited property is substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in the ordinary course of the heir's business.

In the case ar bar, the Court is convinced that the activities of petitioners are indistinguishable from those invariably employed by one engaged in the business of selling real estate. Petitioners did not sell the land in the condition in which they acquired it. As can be gleaned from the records, there exist a contract which shows comparative sales. Hence, in view of the foregoing, the Court held that, in the course of selling the subdivided lots, petitioners engaged in the real estate business and accordingly, the gains from the sale of the lots are ordinary income taxable in full.

2) Section 132, RR 2 SECTION 132. Definition of "capital assets." — The law provides that the term "capital assets" shall be held to mean property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of Section 30 of the Code. The term "capital asset" includes all classes of property not specifically excluded by Section 30(a).

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The exclusion from the term "capital assets" of property used in the trade or business of a taxpayer of a character which is subject to the allowance for depreciation provided in Section 30(f) of the Code is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange. It has no application to gains or losses arising from the sale of real property used in the trade or business to the extent that such gain or loss is allocable to the land, as distinguished from depreciable improvements upon the land. To such gain or loss allocable to the land, the limitations of Section 34(b) and (c) apply (such limitation may be inapplicable to a dealer in real estate, but, if so, it is because he holds the land primarily for sale to customers in the ordinary course of his trade or business, not because land is subject to a depreciation allowance). Gains or losses from the sale or exchange of property used in the trade or business of the taxpayer of a character which is subject to the allowance for depreciation provided in Section 30(f) of the Code, will not be subject to the percentage provisions of Section 34(b) and losses from such transactions will not be subject to the limitation of losses provided in Section 30(c). (Real property used in taxpayer's trade or business is no longer capital asset per Am. R.A. 82.)

3) BIR Ruling 27-02 (July 15, 2002)

WITHHOLDING TAX on sale of real property – If not actually used in the business of the seller-corporation and is treated as a capital asset, then a final tax of 6% shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition based on whichever is higher of the gross selling price or fair market value (FMV) of such land or building. This rule applies whether or not the seller-corporation is engaged in real estate business.

On the other hand, if the real property being sold is an ordinary asset, then the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations (RR) No. 2-98 shall apply.

Basis of Tax Rate

1. whether the seller is exempt or taxable2. whether the seller is habitually engaged in real estate business or not3. the gross selling price if the seller is habitually engaged in real estate business.

Where the seller is a corporation duly registered with the HLURB as habitually engaged in the real estate business, a creditable withholding tax based on the gross selling price/total amount of consideration or FMV, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be deducted by the withholding agent/buyer, in accordance with the following schedule:

P500,000 or less 1.5%

More than P500,000 but not more than P2,000,000 3%

More than P2,000,000 5%

The above tax treatment shall likewise apply in cases where the seller-corporation is habitually engaged in the real estate business, even if the buying corporation is not engaged in the real estate business.

Where the seller-corporation habitually engaged in the real estate business sells real property held as ordinary asset to an individual not engaged in trade or business, the following rules shall apply:

the sale is on installment plan (i.e., payments in the year of sale do not exceed 25% of the selling price), no withholding tax is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or FMV of the property, whichever is higher, shall be withheld on the last installment or installments to be paid to the seller until the tax is fully paid.

If, on the other hand, the sale is on a "cash basis" or is a "deferred payment sale not on the installment plan" (i.e. payments in the year of sale exceed 25% of the selling price or FMV of the property, whichever is higher), the applicable withholding tax rate shall be withheld on the first installment.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the following rules shall apply:

If the sale is on installment plan, the tax shall be deducted and withheld by the buyer on every installment.

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If, on the other hand, the sale is on a "cash basis" or is a "deferred payment sale not on the installment plan," the buyer shall withhold the tax based on the gross selling price or FMV of the property, whichever is higher, on the first installment.

4) BIR Ruling 142-2011: REAL PROPERTY TREATED AS ORDINARY ASSETS, WHICH REMAINED IDLE AND ABANDONED, WILL NOT CONVERT THE SAID ORDINARY ASSETS INTO CAPITAL ASSETS.

WS Corporation, primarily engaged in general construction and other allied businesses, and secondarily, in the sale and conveyance of real property, inquired whether the five parcels of land, originally intended to be utilized for biddings of big construction projects but was later on abandoned and became idle, are converted to capital assets. BIR ruled that, pursuant to Section 3 3(4)(e) of Revenue Regulations No. 7-2003, the subject properties are deemed ordinary assets. The fact that the said properties remained idle and abandoned for more than two years will not convert the said ordinary assets into capital assets. BIR Ruling No. 142-2011 dated May 4, 2011.

5) ANTONIO TUASON, JR., vs. JOSE B. LINGAD, as Commissioner of Internal Revenue,

Facts: Petitioner Antonio Tuason, assails the Tax Court's conclusion that the gains he realized from the sale of residential lots (inherited from his mother) were ordinary gains and not gains from the sale of capital assets under section 34(1) of the National Internal Revenue Code.

Petitioner inherited from his mother several tracts of land, among which were two contiguous parcels situated on Pureza and Sta. Mesa streets in Manila. Petitioner's mother was yet alive she had these two parcels subdivided into twenty-nine lots. After the petitioner took possession of the mentioned parcels in 1950, he instructed his attorney-in-fact, J. Antonio Araneta, to sell them.

Petitioner reported his income from the sale of the small lots as long-term capital gains. On May 1957 the Collector of Internal Revenue upheld the petitioner's treatment of his gains from the said sale of small lots, against a contrary ruling of a revenue examiner.

In his 1957 tax return the petitioner as before treated his income from the sale of the small lots as capital gains and included only ½ thereof as taxable income. In this return, the petitioner deducted the real estate dealer's tax he paid for 1957. It was explained, however, that the payment of the dealer's tax was on account of rentals received from the mentioned 28 lots and other properties of the petitioner.

On 1963, however, the Commissioner reversed himself and considered the petitioner's profits from the sales of the mentioned lots as ordinary gains. Petitioner was ordered to pay to pay deficiency income tax for 1957 aplus 5% Surcharge and 1% monthly interest.

Issue: Whether the properties which petitioner had inherited and subsequently sold in small lots to other persons should be regarded as capital assets.

Held: No. It is Ordinary Income.

The term "capital assets" includes all the properties of a taxpayer whether or not connected with his trade or business, except: (1) stock in trade or other property included in the taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or business; (3) property used in the trade or business of the taxpayer and subject to depreciation allowance; and (4) real property used in trade or business.

If the taxpayer sells or exchanges any of the properties above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss.

Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a corporation) from the sale or exchange of capital assets held for more than twelve months, only 50% of the net capital gain shall be taken into account in computing the net income.

The following circumstances in combination show unequivocally that the petitioner was, at the time

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material to this case, engaged in the real estate business:

(1) the parcels of land involved have in totality a substantially large area, nearly seven (7) hectares, big enough to be transformed into a subdivision, and in the case at bar, the said properties are located in the heart of Metropolitan Manila;

(2) they were subdivided into small lots and then sold on installment basis (this manner of selling residential lots is one of the basic earmarks of a real estate business);

(3) comparatively valuable improvements were introduced in the subdivided lots for the unmistakable purpose of not simply liquidating the estate but of making the lots more saleable to the general public;

(4) the employment of J. Antonio Araneta, the petitioner's attorney-in-fact, for the purpose of developing, managing, administering and selling the lots in question indicates the existence of owner-realty broker relationship;

(5) the sales were made with frequency and continuity, and from these the petitioner consequently received substantial income periodically;

(6) the annual sales volume of the petitioner from the said lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and

(7) the petitioner, by his own tax returns, was not a person who can be indubitably adjudged as a stranger to the real estate business.

Under the circumstances, undeniably the income of petitioner from the sales of the lots in question should be considered as ordinary income. Taxpayer's sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets.

Petitioner is not liable to pay a 5% surcharge plus 1% monthly interest because petitioner relied in good faith upon opinions rendered by no less than the highest officials of the Bureau of Internal Revenue, including the Commissioner himself.

6) China Banking Corporation vs. Court of Appeals (July 19, 2000) ---------------------DANDUAN

China Bank vs CAGRN 125508 July 19, 2000Vitug, J.:

FACTS:Petitioner CBC made a 53% equity investment in the First CBC, a Hongkong subsidiary engaged in financing and investment with “deposit-taking” function. First, CBC became insolvent and with approval from Bangko Sentral, petitioner wrote-off as being worthless its investment in First CBC, and its 1987 Income Tax Return, it treated as bad credit or an ordinary loss deductible from its gross income. CIR disallowed the deduction on the ground that although 1st CBC ceased to be a deposit-taking company, still it can exercise its financing and investment activities. Assuming that it become “worthless”, it should have been a capital loss, and not as a bad debt expense, there being no indebtedness to speak of between petitioner and its subsidiary.ISSUE:Whether or not “securities becoming worthless” be allowed as deduction from gross income of CBC.RULING:An equity investment is a capital, not ordinary asset of the investor, the sale or exchange in which results in either a capital gain or capital loss. The gain or loss is ordinary when the property sold or exchanged is not a capital asset. Sec 29 of NIRC on securities becoming worthless during the tax year are capital assets, the loss resulted therefrom shall be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: 1) there is a sale or exchange; 2) the thing sold or exchanged is a capital asset. Capital losses are allowed to be deducted only to the extent of capital gains, e.i. gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer… any capital loss can be deducted only from capital gains.

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DETERMINATION OF GAIN OR LOSS FROM SALE OR TRANSFER OF PROPERTY

7) Section 136-143, RR 2

SECTION 136. Basis for determining gain or loss from sale of property. — For the purpose of ascertaining the gain or loss from the sale or exchange of property, the basis is the cost of such property, or in the case of property which should be included in the inventory, its latest inventory value. But in the case of property acquired before March 1, 1913, when its fair market value as of that date is in excess of its cost, the gain to be included in gross income is the excess of the amount realized therefor over such fair market value. (See illustration I, Section 137 of these regulations). Also in the case of property acquired before March 1, 1913, when its fair market value as of that date is lower than its cost the deductible loss is the excess of such fair market value over the amount realized therefor. (See Illustration II, Id.). No gain or loss is recognized in the case of property sold or exchanged (a) at more than cost but less than its fair market value as of March 1, 1913 (See Illustration III, Id.), or (b) at less than cost but at more than its fair market value as of March 1, 1913. (See Illustration IV, Id., Id., Id.) In any case proper adjustment must be made in computing gain or loss from the exchange or sale of property for any depreciation or depletion sustained and allowable as deduction in computing net income; the amount of depreciation previously charged off by the taxpayer shall be deemed to be true depreciation sustained unless shown by clear and convincing evidence to be incorrect. What the fair market value of property was as of March 1, 1913, is a question of fact to be established by evidence which will reasonably and adequately make it appear. The nature and extent of the sales and the circumstances under which they were made should be considered. Prices received at forced sales or for small lots of property may be and often are no real indication of the value of the amount of property in question. For instance, sales from time to time of a small number of shares of stock is little indication of the value of a large or controlling interest in the corporation. If the taxpayer can not determine the cost of securities purchased prior to March 1, 1913, because of the loss, destruction, or failure to keep records, the value of the securities at the date of approximate date of acquisition may be used in determining the cost basis for purposes of computing the gain or loss from the sale of the securities. When the date or approximate date of acquisition is unknown, no general rule can be stated for determining the cost value of such securities. Each case must be considered separately upon its own facts.

SECTION 137. Illustrations of the computation of gain or loss from the sale or exchange of property acquired prior to March 1, 1913. — To avoid complexity no adjustment has been made in these examples for depreciation or depletion. In the case of property acquired before March 1, 1913, when its fair market value as of that date is in excess of its cost, the taxable gain is the excess of the amount realized therefor over such fair market value.

ILLUSTRATION I Cost Fair Market Value Sale Price Taxable gain

Mar. 1, 1913 P20,000 P30,000 P40,000 P10,000

Excess of amount realized over fair market value as of March 1, 1913. Gain attributed to the period prior to March 1, 1913 not taxable.

In the case of property acquired before March 1, 1913, when its fair market value as of that date is lower than its cost, the deductible loss is the excess of such fair market value over the amount realized therefor.

ILLUSTRATION IICost Fair Market Value Sale Price Taxable gain

Mar. 1, 1913P20,000 P10,000 P6,000 P4,000

Excess of fair market value over amount realized. Loss attributable to the period prior to March 1, 1913, not deductible.

No gain or loss is recognized in the case of property acquired before March 1, 1913, and sold or disposed of at more than cost but at less than its fair market value as of that date.

ILLUSTRATION IIICost Fair Market Value Sale Price Taxable gain

Mar. 1, 1913

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P20,000 P60,000 P40,000 No taxable gain or deductible loss. Reason: A gain on whole transaction, which gain is attributed to period prior to March 1,1913.

No gain or loss is recognized in the case of property acquired before March 1, 1913, and sold or disposed of at less than cost but at more than its fair market value as of that date.

ILLUSTRATION IV Cost Fair Market Value Sale Price Taxable gain Mar. 1, 1913

P20,000 P6,000 P10,000 No taxable gain or deductible loss. Reason: A loss on whole transaction, which loss is attributable to period prior to March 1, 1913.

Where the cost is equal to or greater than the fair market value as of March 1, 1913, and the selling price exceeds the cost, the gain to be included in gross income is the excess of the selling price over the cost.

ILLUSTRATION VCost Fair Market Value Sale Price Taxable gain

Mar. 1, 1913 P20,000 P10,000 P40,000 P20,000

Reason: Gain on whole transaction, all of which is attributable to period subsequent to March 1, 1913.

Where the fair market value as of March 1, 1913, is equal to or greater than the cost and the selling price is less than the cost, the deductible loss is the amount by which the cost exceeds the selling price.

ILLUSTRATION VICost Fair Market Value Sale Price Taxable gain

Mar. 1, 1913 P20,000 P30,000 P10,000 P10,000

Reason: Loss on whole transaction, all of which is attributable to period subsequent to March 1, 1913. Only actual loss sustained deductible.

SECTION 138. Sale of property acquired by gift. — In computing the gain or loss from the sale or other disposition of property acquired by gift, the basis shall be the selling price and the fair market value of the property at the time the gift was made, or its fair market value as of March 1, 1913, if acquired prior thereto, determined in accordance with the next two preceding sections. In the case of gifts made on or after July 1, 1939, the value taken as a basis for gift tax purposes shall be considered as the fair market value in computing gain or loss from the sale or other disposition of the property.

SECTION 139. Sale of property acquired by devise, bequests, or inheritance. — In computing the gain or loss from the sale or other disposition of property acquired by devise, bequest, or inheritance, the basis shall be the fair market price or value of such property at the time of the death of the decedent. The term "property acquired by bequest, devise, or inheritance" as used herein includes (a) such property interests as the taxpayer has received as the result of a transfer, or creation of a trust, in contemplation of or intended to take effect in possession or enjoyment at or after death, and (b) such property interest as the taxpayer has received as the result of the exercise by a person of a general power of appointment (1) by will, or (2) by deed executed in contemplation of or intended to take effect in possession or enjoyment at or after death. In the case of property acquired by gift, bequest, devise, or inheritance, prior to March 1, 1913, the taxable gain or deductible loss from the sale or other disposition thereof shall be computed in accordance with sections 136 and 137 of these regulations. In the case of property acquired by bequest, devise or inheritance, its value as appraised for the purpose of the inheritance tax shall be deemed to be its fair market value when acquired.

SECTION 140. Exchange of property. — Gain or loss arising from the acquisition and subsequent disposition of property is realized only when as the result of a transaction between the owner and another person the property is converted into other property (a) that is essentially different from the property disposed of, and (b) that has a market value. The requirement that the property received in exchange must be "essentially different from the property disposed of" implies that there must be a change in substance and not merely a change in form. By way of illustration, if a taxpayer owning ten shares of stock exchanges his stock certificate for a voting trust certificate, no income is realized. The term "market value" means the fair value of the property in money as between one who wishes to purchase and one who wishes to sell. It is not, however, what can be obtained for the property when the owner is under peculiar compulsion to sell or the purchaser to buy; nor is it a purely speculative value which an owner could not reasonably expect to obtain for the property although he might possibly be fortunate enough to do so. "Market value" is the price at which a seller willing to sell at a fair price and a buyer willing to buy at a fair price,

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both having reasonable knowledge of the facts, will trade. Evidence as to the assets and liabilities of a corporation and as to its earnings may furnish definite indications of the market value of its stock.

SECTION 141. Determination of gain or loss from the exchange of property. — The amount of income derived or loss sustained from an exchange of property is the difference between the market value at the time of the exchange of the property received in exchange and the original cost, or other basis, of the property exchange. If the property exchanged was acquired prior to March 1, 1913, see Sections 136 and 137 of these regulations.

SECTION 142. Readjustment of interest in a registered copartnership. — When a partner retires from a duly registered copartnership, or the partnership is dissolved, he realizes a gain or loss measured by the difference between the price received for his interest and the cost to him of his interest in the partnership including in such cost the amount of his share in any undistributed partnership net income earned since he became a partner on which the income tax has been paid. However, if such interest in the partnership was acquired prior to March 1, 1913, both the cost as hereinbefore provided and the amount of such interest as of date, plus the amount of the shares in any undistributed partnership net income earned since March 1, 1913, on which the income tax has been paid, shall be ascertained and the taxable gain derived or the deductible loss sustained shall be computed as provided in Sections 136 and 137 of these regulations. If the partnership distributes its assets in kind and not in cash, the partner realizes gain or suffers loss according to the market value of the property received in liquidation. Whenever a new partner is admitted, to a partnership, or any existing partnership is reorganized, the facts as to such change or reorganization should be fully set forth in the next return of income, in order that the Commissioner of Internal Revenue may determine whether any gain or loss has been realized by any partner.

SECTION 143. Basis of stock or securities acquired in "wash sales". — In the sale or other disposition of stocks or securities the acquisition of which (or the contract or option to acquire which) resulted in the non deductibility of the loss from the sale or other disposition of substantially identical stock or securities the basis shall be the basis of the substantially identical stock so sold or disposed of, increased or decreased, as the case may be, by the difference, if any, between the price at which the stock or securities was acquired and the price at which such substantially identical stock or securities were sold or otherwise disposed of. The application of this rule may be illustrated by the following examples:

EXAMPLE (1): A purchased a share of common stock of the X Corporation for P100 in 1936, which he sold January 15, 1940, for P80.00. On February 1, 1940, he purchased a share of common stock of the same corporation for P90.00. No loss from the sale is recognized under Section 33 of the Code. The basis of the new share is P110; that is, the basis of the old share (P100) increased by P10, excess of the price at which the new share was acquired (P90) over the price at which the old share was sold (P80).

EXAMPLE (2): A purchased a share of common stock of the X corporation for P100 in 1936, which he sold January 15, 1940, for P80. On January 1, 1940, he purchased a share of common stock of the same corporation for P70. No loss from the sale is recognized under Section 33 of the Code. The basis of the new share is P90; that is, the basis of the old share (P100) decreased by P10, the excess of the price at which the old share was sold (P80) over the price at which the new share was acquired (P70). (See Section 131 of these regulations)

8)Commissioner of Internal Revenue vs. Rufino (February 27, 1987)

Facts: Private respondents ( RUFINOS: Vicente, Remedios, Ernesto, El vira, Rafael) were majority stockholders of the defunct Eastern Theatrical INC Co., a corporation organized in 1934 for a period of 25 years termination on Ja. 25, 1959. It had an original capital stock of P 500K which was increased in 1949 to P 2 million and was organized to engage in the business of operating theaters, opera houses, places of amusement and other related business and enterprises , more particularly the Lyric and Capitol Theaters in Manila. The president of the corportation ( OLD Corporation ) during the year in question was Ernesto Rufino.

The same private respondents are also the majority and controlling stockholders of another corporation , the Eastern Theatrical Co which was organized on Dec. 8, 1958, for a term of 50 years , with authorized capital stock of P200K. The corporation is engaged in the same kind of business as the OLD corporation.

In a special meeting of stockholders of the OLD corporation in Dec. 1958, a resolution was passed authorizing the OLD corporation to merge with NEW corporation by transferring its business, assets, good will and liabilities to the latter, which in exchange would issue and distribute to shareholders of the OLD corporation one share for each share held by them in said corporation. It was expressly declare that the merger of the OLD corp and NEW corp was necessary to continue the exhibition of moving pictures at the Lyric and Capitol even after expiration of the corporate existence of the OLD corp. , in view of its pending booking contracts, not to mention its

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collecting bargaining agreements with its employees.Pursuant to said resolution, a deed of assignment providing the conveyance and transfer of the OLD to the

NEW corp in exchange of the latter’s shares of stock to be distributed among the share holders on the basis of one stock for each stockholder held in the OLD corp. Thereafter, the resolution was duly approved by the stockholders of the NEW CORP in special meeting in 1959. The deed of assignment has retroactive effect on Jan. 1, 1959.BIR examined later the series of transactions made by the private respondents. BIR averred that the merger was not undertaken for a bonafide business purpose but merely to avoid liability for capital gains tax on the exchange of the OLD for the new shares of stock . Accordingly, CIR imposed the deficiency assessments against the private respondents. Private respondents requested for reconsideration but it was denied.

Petitioner further posited that the deed of assignment concluded was intended merely to evade the burden of taxation, the petitioner pointed out that the NEW corp did not actually issue stocks in exchange of the properties of the OLD corp. and that the exchange was only on the paper. Consequently, as there was no merger, the automatic dissolution of the OLD corp on its expiry date resulted in its liquidation , for which the respondents are now liable in taxes on their capital gains.CTA: Reversed petitioner’s decision.

Issue: Whether the merger is valid?

Held: YES. There was a VALID merger although the actual transfer of the properties subject of the deed of assignment was not made on the date of the merger. In the nature of things, this was not possible. It was necessary for the OLD corp to surrender its net assets first to the NEW CORP before the latter could issue its own stock to the shareholders of the OLD corp. because the NEW corp had to increase its capitalization for this purpose. The required adoption of the resolution to this effect at the special meeting in 1959, the registration of such issuance with the SEC and approval by the body.

All these took place AFTER the date of the merger but they were deemed part and parcel of and indispensable to the validity and enforceability of the deed of assignment. Thus, there was no impediment to the exchange of of property for stock between the 2 coprorations being considered to have been effected on the date of merger and that in fact , was the intention and the reason why the deed of assignment was made retroactive on Ja. 1, 1959. Such retroaction provided in effect all transactions set forth in the merger agreement shall be deemed to be taking place simultaneously on Jan 1, 1959, when the deed of assignment became operative.

Additionally, there was no indication that the scheme adopted by private respondents was to evade tax burdens because it is clear that the purpose of the merger was to continue the business of the OLD corp, whose corporate life was about to expire, thru the NEW corp. to which all assets and obligations of the former had been transferred. The NEW CORP continues to do so today after taking over the business of the OLD corp 27 years ago.

9) Commissioner of Internal Revenue vs. Filinvest Development Corporation (July 19, 2011)

Facts:On various dates during the years 1996 and 1997, taxpayer, a holding company, extended advances in favor of its affiliates, in particular Filinvest Land Incorporated (FLI). These advances were duly evidenced by instructional letters as well as cash and journal vouchers. FLI then requested BIR ruling, and acting on the request, the BIR issued Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is among those contemplated under Section 34 (c) (2) of the old National Internal Revenue Code (NIRC) which provides that (n)o gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for a stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation

The taxpayer received assessment for income tax for imputed interests on the advances extended by the taxpayer to its affiliates. As predicted, FDC contested these assessments, and when the BIR failed to act on their letters, they filed an appeal before the CTA.

The taxpayer invoked a previous BIR Ruling issued to another taxpayer which ruled that inter-office memo covering advances granted by an affiliate company is neither a form of promissory note nor evidence of indebtedness, hence, not subject to DST.

Issues:a.) Whether or not the transfer of the property is subject to tax

b.) Whether or not the evidences of the transfer are subject to documentary tax

c.) Whether or not the petitioner can invoke a previous BIR Ruling for itself

Ruling: a.) Inter-company advances not subject to interest

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The Supreme Court ruled that the Commissioner’s power of distribution, apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC (now Section 50 of the 1997 Tax Code) and Section 179 of Revenue Regulations No. 2 does not include the power to impute “theoretical interests” to the controlled taxpayer’s transactions. The term “income” has been variously interpreted to mean “cash received or its equivalent”, the amount of money coming to a person within a specific time or something distinct from principal or capital.

Otherwise stated, there must be proof of the actual, or at the very least, probable receipt or realization by the controlled taxpayer of the items of gross income sought to be distributed, apportioned or allocated by the Commissioner. There is no evidence of actual or possible showing that the advances extended to affiliates had resulted to interests subsequently assessed by the Commissioner. The Commissioner had adduced no evidence that the advances extended to affiliates were sourced from the borrowings made by the taxpayer from the commercial banks. The Court further said that pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing.

b.) Inter-company advances subject to DST.

The taxpayer was also assessed by the BIR for nonpayment of documentary stamp taxes on the advances. The Supreme Court ruled that the instructional letters as well as the journal vouchers evidencing advances extended to affiliates qualify as loan agreements upon which documentary stamp taxes may be imposed.

c.) A BIR ruling can be invoked only the taxpayer who requested the same.

The Court ruled that in keeping with the caveat attendant in every ruling to the effect that it is valid only if the facts claimed by the taxpayer are correct, the said BIR ruling could be invoked only by the taxpayer who sought the same. The Court further ruled that not being the taxpayer who, in the first instance, sought ruling from the BIR, the taxpayer cannot invoke the principle on non-retroactivity of BIR rulings.

10) BIR Ruling No. 274-87 (September 9, 1987)----------------------------------VIERNES

September 9, 1987 BIR RULING NO. 274-87 35 (c) 2 (c) 210-87 274-87 S i r : This refers to the letter dated July 13, 1987 of the Treasurer of Maray Maray Farms, Inc. and to your letter dated July 30, 1987 requesting a ruling on the tax consequence of the transfer by Messrs. Nestor D. de Rivera, Alfredo V. Asuncion, Pastor B. Esguerra, Jr., Benjamin T. Madlangsacay, Eric A. Cruz and Mrs. Josefina Ablan Mendoza of their real properties to Maray Maray Farms, Inc. in exchange for the latter's shares of stock. It is represented that Maray Maray Farms, Inc., a domestic corporation and duly registered with the Securities and Exchange Commission has an authorized capital stock of P2,500,000.00 divided into 250,000 shares with a par value of P10.00 per share; that the following are the incorporators of the corporation with the number of shares subscribed and paid-up viz: Names No. of Shares Amount of Amount Paid Subscribed Capital Stock on Subscription Nestor D. de Rivera 6,100 P 61,000.00 P 15,250.00 Alfredo V. Asuncion 1 4,400 144,000.00 36,000.00 Pastor B. Esguerra, Jr. 6,000 60,000.00 15,000.00 Josefina Ablan Mendoza 12,000 120,000.00 30,000.00 Benjamin T. Madlangsacay 12,000 120,000.00 30,000.00 Eric A. Cruz 12,000 120,000.00 30,000.00 ——— ———— ———— 62,500 P625,000.00 P156,250.00 ====== ========= ========= that a "Deed of Exchange and Transfer" was executed on April 1, 1987 by Messrs. Nestor D. de Rivera, Alfredo V. Asuncion, Pastor B. Esguerra, Jr., Benjamin T. Madlangsacay, Eric A. Cruz and Mrs. Josefina Ablan Mendoza (transferors) and the corporation (transferee) whereby the transferors transferred and conveyed to the corporation their respective properties situated at Maramag, Bukidnon in payment for their unpaid subscription and for additional issues of shares of capital Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 2 stock of the corporation viz:

Names Unpaid Additional TOTAL Subscription Issue Nestor D. de Rivera P45,750.00 P61,000.00 P106,750.00 Alfredo V. Asuncion 108,000.00 144,000.00 252,000.00 Pastor B. Esguerra, Jr. 45,000.00 60,000.00 105,000.00

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Josefina Ablan Mendoza 90,000.00 120,000.00 210,000.00 Benjamin T. Madlangsacay 90,000.00 120,000.00 210,000.00 Eric A. Cruz 90,000.00 120,000.00 210,000.00

———— ———— ———— P468,750.00 P625,000.00 P1,093,750.00 ========= ========= ==========

that as further consideration for the transfer and conveyance to the corporation of the properties of the transferors under said "Deed of Exchange and Transfer", the corporation issued additional shares to the transferors amounting to 31,200 shares with a value of P312,500.00 from its unissued shares; and that after the exchange and as a result of the exchange, the transferors gained control of the corporation by owning more than 51% of the total voting power of all classes of stocks entitled to vote. adc In reply, I have the honor to inform you that pursuant to Section 35, paragraph (c)(2)(c) of the Tax Code as amended by Republic Act No. 4522 and Presidential Decree Nos. 1705 and 1773, no gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock in such a corporation of which as a result of such exchange, said person alone or together with others, not exceeding four persons, gains control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock received i.e., subscribed and paid-up, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five.

Accordingly, no gain or loss shall be recognized to each of the six (6) transferors, Messrs. Nestor D. de Rivera, Alfredo V. Asuncion, Pastor B. Esguerra, Jr., Benjamin T. Madlangsacay, Eric A. Cruz and Mrs. Josefina Ablan Mendoza and the transferee corporation, Maray Maray Farms, Inc., considering that after the exchange and as a result of the said exchange not more than five (5) of the transferors will gain control of the transferee corporation. It should be emphasized, however, that Section 35 (c)(2)(c) of the Tax Code merely defers recognition of gain or loss from such transaction, for in determining Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 3 the gain or loss from a subsequent transaction of the properties or of the stocks involved in the exchange, the original or historical cost of the properties or the stock is considered. Thus, if the transferors later sell or exchange the shares of stock acquired by them in exchange, they shall be subject to income tax on gains derived from such sale or exchange taking into consideration that the cost basis of the shares of stock shall be the same as the original acquisition cost or adjusted cost basis to the transferors of the properties exchange therefor; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands, of the transferors [Section 35 (c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1773]. In this connection, you are further advised that in order that the parties to the exchange can avail of the non-recognition of gains provided for in Section 35 (c)(2)(c) of the Tax Code, as amended, they should comply with the requirements hereunder mentioned: (a) The transferors must file with their income tax return for the taxable year in which the exchange was consummated, a complete statement of all facts pertinent to the exchange, including: 1. A description of the properties transferred, or of their interest in such properties, together with a statement of the original acquisition cost or other basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock received and preferences if any; 3. The number of shares of each class received; and 4. The fair market value per share of each class at the date of the exchange. (b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the following: 1. A complete description of all properties received from the transferors; 2. A statement of the original acquisition cost or other basis of the properties in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer; and 3. Information with respect to the capital stock of that Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 4 corporation including: a. The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stocks; b. The classes of stock and number of shares issued to the transferors in the exchange, and c. The fair market value as of the date of exchange of the capital stock issued to the transferors. In addition to the foregoing requirements, permanent records in substantial form must be kept by the taxpayers participating in the exchange, showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of stock/properties received in the exchange. Moreover, pursuant to Section 245 of the Tax Code, as amended, a conveyance or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contracted to be paid for such realty. A stock in a corporation is a valuable consideration for transfer of real property (Section 177 Documentary Stamp Tax Regulations). Accordingly, if a parcel of land is exchanged with stocks in a corporation as in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the aforesaid deed. (BIR Ruling No. 245-00-000-00-109-82 dated April 6, 1982) After payment of the corresponding documentary stamp tax, the aforesaid real properties may now be registered by the Register of Deeds concerned in the name of Maray Maray Farms, Inc.

11) RR 18-01 (November 13, 2001) – (only Sections 3 to 6 and 9 to 12)

SUBJECT: Guidelines on the Monitoring of the Basis of Property Transferred and Shares Received, Pursuant to a

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Tax-Free Exchange of Property for Shares under Section 40(C)(2) of the National Internal Revenue Code of 1997, Prescribing the Penalties for Failure to Comply with such Guidelines, and Authorizing the Imposition of Fees for the

SECTION 3. Submission of Information on the Basis of Properties. - The parties to a tax-free exchange of property for shares under Section 40(C)(2) of the Tax Code of 1997 who are applying for confirmation that the transaction is indeed a tax-free exchange shall, together with such information as the Commissioner of Internal Revenue may require, submit the following:

(a) A sworn certification on the basis of the property to be transferred pursuant to such exchange. The basis of each real property/share of stock or other property transferred must be itemized in the certification in order to enable the BIR to determine the basis for subsequent disposition and to make it possible for the Register of Deeds or the corporate secretary, as the case may be, to annotate the information on such basis for each property/share of stock on the reverse side of the Transfer Certificate of Title/Condominium Certificate of Title of the real property involved, or of Certificate of Stock. The sworn declaration must be executed by the transferor himself, or in case the transferor is a juridical entity, by an official with rank of no less than the Chief Financial Officer or his equivalent. The Commissioner of Internal Revenue is authorized to prescribe the form in which such sworn declaration shall appear.

(b) Certified true copies of the Transfer Certificates of Title and/or Condominium Certificates of Title of the real properties to be transferred;

(c) Certified true copies of the corresponding latest Tax Declaration of the real properties to be transferred. It is understood that any improvement is separately declared and therefore, covered by a Tax Declaration distinct from the Tax Declaration on the land. Further, if the tax declaration was issued three (3) or more years prior to the exchange transaction, the Transferor shall include in the certification by the local government unit's Assessor that such tax declaration is the latest tax declaration covering the real property;

(d) Certified true copies of the certificates of stocks evidencing shares of stock to be transferred; and

(e) Certified true copy of the inventory of other property/ies to be transferred.

No certification/ruling will be issued by the Bureau of Internal Revenue unless the foregoing requirements, in addition to such other documents that the Commissioner of Internal Revenue may require, are submitted.

SECTION 4. Information to be Contained in Certification/Ruling by the Bureau of Internal Revenue. - All certifications or rulings issued by the Bureau of Internal Revenue confirming that an exchange of property for shares complies with the provisions of Section 40(C)(2) of the Tax Code of 1997 shall include a statement on the substituted basis of the property transferred.

SECTION 5. Conditions for the Issuance of Certificate Authorizing Registration (CAR) or Tax Clearance (TCL). - The CAR/TCL for the real property or share of stock/unit of participation/interest involved in the exchange shall be issued by the Revenue District Officer/Authorized Internal Revenue Officer on the basis of the certification or ruling to be issued in triplicate by the Commissioner or his duly authorized representative to the effect that the transaction qualifies as a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997.

The CAR/TCL to be issued shall specify, among others, that the transaction involved is a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997; the date of exchange; and the substituted basis of the properties as stated in the certification or ruling issued by the Bureau of Internal Revenue.

SECTION 6. Information to be annotated in the Transfer Certificate of Title or Condominium Certificate of Title issued by the Register of Deeds, and on the Certificate of Stock/Units of Participation issued by the Corporate Secretary. -- In cases of transfers or exchanges falling under Section 40(C)(2) of the Tax Code of 1997, the following information shall be annotated on the reverse side of the Transfer Certificate of Title or Condominium Certificate of Title or certificate of stock that is transferred or issued pursuant to such transfer or exchange:

"The acquisition of the property described in this title/certificate is by virtue of a tax-free exchange pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997 per Deed of Exchange/ Assignment dated _________________. The substituted basis pursuant to Section 40(C)(5) of the National Internal Revenue Code of 1997 is in the amount of _________________________________."

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The following persons shall be responsible for making the above annotation:

(a) The Registrar of Deeds, with respect to the Transfer Certificate of Title or Condominium Certificate of Title of real property that is transferred;

(b) The Corporate Secretary or equivalent officer of the investee corporation/partnership whose shares/units are transferred by the Transferor to the transferee/surviving/consolidated corporation;

(c) The Corporate Secretary of transferee/surviving/consolidated corporation, upon the issuance of the certificates of stock evidencing the original shares issued pursuant to the transfer or exchange.

The annotation shall be made on the reverse side of the Transfer Certificate of Title or Condominium Certificate of Title, or certificate of stock/unit of participation, as the case may be.

In addition to the foregoing, each Deed of Exchange/Assignment transferring such property must state that the parties thereto shall undertake to comply with the provisions of these Regulations.

SECTION 9. Fees to be Paid by the Applicant/Taxpayer. -- Every applicant/taxpayer who wants to avail of the tax-free exchange in accordance with Section 40(C)(2) and 6(b) and (c) of the Tax Code of 1997 shall secure a form that the Bureau shall provide for such purpose and shall pay in advance a processing and certification fee of Five Thousand Pesos (P5,000.00) for each application not involving more than ten (10) real properties and/or Certificates of Stock.

An additional fee of One Hundred Pesos (P100.00) shall be paid for every Transfer Certificate of Title/Condominium Certificate of Title/ Certificate of Stock in excess of ten (10).

SECTION 10. Penalties. -- Every official, agent, or employee of the Registry of Deeds who is guilty of failing to annotate the information stated in Section 5 hereof shall, upon conviction for each omission, be punished by a fine of not less than Fifty Thousand Pesos (P50,000.00) but not more than One Hundred Thousand Pesos (P100,000.00) and suffer imprisonment of not less than ten (10) years but not more than fifteen (15) years and shall likewise suffer an additional penalty of perpetual disqualification to hold public office, to vote, and to participate in any public election pursuant to Section 58(E) in relation to Section 269 of the Tax Code of 1997.

Every Corporate Secretary or the duly authorized officer of the corporation who is guilty of failing to annotate the information stated above shall, upon conviction for each omission, be punished by a fine of not more than One Thousand Pesos (P1,000.00), or suffer imprisonment of not more than six (6) months, or both pursuant to Section 275 of the Tax Code of 1997.

Any other violation of the provisions of these Regulations by any of the parties to the exchange transaction or by any responsible public officer, shall be subject to the appropriate penalties provided under the Tax Code of 1997, and/or the Revised Penal Code.

12) REVENUE MEMORANDUM RULINGS NO. 1-2002 = issued on May 9, 2002 consolidates, provides, clarifies and harmonizes the existing guidelines on the tax consequences of a de facto merger pursuant to Section 40(C)(2) and (6)(b) of the National Internal Revenue Code of 1997. A de facto merger involves the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock. The phrase “substantially all the properties of another corporation” mean “the acquisition by one corporation of at least 80% of the assets, including cash, of another corporation,” which has the element of permanence and not merely momentary holding.

To constitute a de facto merger, the following elements must occur: 1) there must be a transfer of all or substantially all of the properties of the transferor corporation solely for stock; 2) it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. The provisions of the Ruling shall apply solely and exclusively to situations in which the facts are substantially similar to the facts specified in the Ruling.

The Transferor (a domestic corporation) shall not recognize any gain or loss on the transfer of the property to the Transferee. Consequently, the Transferor will not be subject to Capital Gains Tax, Income Tax, nor to Creditable Withholding Tax on the transfer of such property to the Transferee. Neither may the Transferor recognize a loss, if any, incurred on the transfer.

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In addition, the assumption of liabilities or the transfer of property that is subject to a liability does not affect the non-recognition of gain or loss under Section 40(C)(2) of the Tax Code of 1997, since in this case, the total amount of such liabilities does not exceed the basis of the property transferred. The Transferee is not subject to Income Tax on its receipt of the property as contribution to its capital, even if the value of such property exceeds the par value or stated value of the shares issued to the Transferor.

The Transferor is not subject to Donor’s Tax, regardless of whether the value of the property transferred exceeds the par/stated value of the Transferee shares issued to the Transferor, there having no intent to donate on the part of the transferor.

The Transferor is not subject to Value-Added Tax (VAT) on the transfer of the property if it is not engaged in a business that is subject to the VAT. Even if the Transferor is engaged in an activity that is subject to VAT, it is nonetheless not subject to VAT on the transfer of the property to the Transferee. The Documentary Stamp Tax consequences of the transfer, including the time of payment of the tax are specified in the Ruling

13) Gregory vs. Helvering, 293 U.S. 465; 55 S.CT. 266 (January 7, 1935)

FACTS: Evelyn Gregory was the owner of all the shares of a company called United Mortgage Company (“United”). United Mortgage in turn owned 1,000 shares of stock of a company called Monitor Securities Corporation (“Monitor”). On 18 September 1928 she created Averill Corp and three days after transferred the 1000 shares in Monitor to Averill. On 24 September she dissolved Averill and distributed the 1000 shares in Monitor to herself, and on the same day sold the shares for $133,333.33. She claimed there was a cost of $57,325.45, and she should be taxed on a capital net gain on $76,007.88. On her 1928 federal income tax return, Gregory treated the transaction as a tax free corporate reorganization, under the Revenue Act of 1928 section 112. The Commissioner of Internal Revenue, Guy Helvering, argued in economic substance there was no business reorganization, that Gregory owned all three corporations and was simply following a legal form to make it appear like a reorganization so she could dispose of the Monitor shares without paying substantial income tax. Accordingly, she understated her liability by $10,000.

ISSUE: Whether or not there is a reorganization as contemplated by the law to exempt the petitioner distribution of gain.

RULING: The Revenue Act defined reorganization as follows: “a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred. . . ."

It is quite true that, if a reorganization in reality was effected within the meaning of subdivision (B), the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.

The Supreme Court said that the transfer of assets by one corporation to another means a transfer made "in pursuance of a plan of reorganization" of corporate business, and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose -- a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created.

But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function.

14) RMC 40-2012 (August 3, 2012) pdf format

REVENUE MEMORANDUM CIRCULAR NO.40-2012Issued on August 6, 2012 prescribes a period of prescription for rulings under Section 40(C)(2) of the National Internal Revenue Code (NIRC), as amended.

Said rulings shall be valid only for 90 days accounted from the date of receipt of the ruling by any of the parties to

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the exchange transaction. The properties and shares of stocks involved in the transfer should be conveyed to the transferee/s and transferor/s, respectively, within this period. Pursuant to RR No. 18-2001 and RMO No. 32-01, a photocopy of the TCT/Condominium Certificate of Title (CCT)/ Share of Stock that bears the annotation of substituted basis of the real property/ shares of stock transferred/r received in connection with the transaction, as duly certified by the Register of Deeds/ Corporate Secretary, should be submitted to the Law Division , Bureau of Internal Revenue, 7/F National Office Building, Diliman, Quezon City, also within 90 days from the date of receipt of the ruling or certification, by any of the parties to the exchange transaction. Otherwise, the ruling shall be void and without effect, and the Chief, Law Division shall refer the docket of the case to the Prosecution Division for appropriate action.

Any violation of this Circular by any of the parties to the exchange transaction or by any public officer or employee shall be subject to the appropriate penalties provided under Section 269 and 275 of the NIRC, as amended, as implemented by RR No. 18-2001 and RMO N. 32-01.

Unless an extension of the period is granted by the Commissioner in meritorious cases, Revenue District Offices are hereby directed not to honor such ruling beyond 90 days counted from the date of receipt of the ruling by any of the parties to the exchange.

15) RR 2-131

SECTION 131. Losses from wash sales of stock or securities. —

(a) General Rule: A taxpayer cannot deduct any loss claimed to have been sustained from the sale or other disposition of stock or securities, if, within a period beginning thirty days before the date of such sale or disposition and ending thirty days after such date (referred to in this section as the sixty-one-day period), he has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities.

EXCEPTION: This prohibition does not apply in the case of a dealer in stock or securities if the sale or other disposition of stock or securities is made in the ordinary course of its business as such dealer.

(b) Where more than one loss is claimed to have been sustained within the taxable year from the sale or other disposition of stock or securities, the provisions of this section shall be applied to the losses in the order in which the stock or securities the disposition of which resulted in the respective losses were disposed of (beginning with the earliest disposition). If the order of disposition of stock or securities disposed of at a loss on the same day cannot be determined, the stock or securities will be considered to have been disposed of in the order in which they were originally acquired (beginning with earliest acquisition).

AMOUNT OF STOCK OR SECURITIES ACQUIRED:

(c) Where the amount of stock or securities acquired within the sixty-one day period is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the loss from the sale or other disposition of which is not deductible shall be those with which the stock or securities acquired are matched in accordance with the following rule:

The stock or securities acquired will be matched in accordance with the order of their acquisition (beginning with the earliest acquisition) with an equal number of the shares of stock or securities sold or otherwise disposed of.

(d) Where the amount of stock or securities acquired within the sixty- one-day period is not less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the acquisition of which resulted in the nondeductibility of the loss shall be those with which the stock or securities disposed of are matched in accordance with the following rule:

The stock or securities sold or otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or securities acquired.

(e) The acquisition of any security which results in the non-deductibility of a loss under the provisions of this section shall be disregarded in determining the deductibility of any other loss.

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(f) The word "acquired" as used in this section means acquired by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law, and comprehends cases where the taxpayer has entered into a contract or option within the sixty-one-day period to acquire by purchase or by such an exchange.

EXAMPLE (1): A, whose taxable year is the calendar year, on December 1, 1939, purchased 100 shares of common stock in the M Company for P10,000 and on December 15, 1939, purchased 100 additional shares for P9,000. On January 2, 1940, he sold the 100 shares purchased on December 1, 1939, for P9,000. Because of the provisions of Section 33 no loss from the sale is allowable as a deduction.

EXAMPLE (2): A, whose taxable year is the calendar year, on September 21, 1939, purchased 100 shares of the common stock of the M Company for P5,000. On December 21, 1939, he purchased 50 shares of substantially identical stock for P2,750, and on December 26, 1939, he purchased 25 additional shares of such stock for P1,125. On January 2, 1940, he sold for P4,000 the 100 shares purchased on September 21, 1939. There is an indicated loss of P1,000 on the sale of the 100 shares. Since within the sixty-one-day period A purchased 75 shares of substantially identical stock, the loss on the sale of 75 of the shares (P3,750 less P3,000, or P750) is not allowable as a deduction because of the provisions of Section 33. The loss on the sale of the remaining 25 shares (P1,250 less P1,000, or P250) is deductible subject to the limitations provided in Sections 31(b) and 34.

The basis of the 50 shares purchased December 21, 1939, the acquisition of which resulted in the non-deductibility of the loss (P500) sustained on 50 of the 100 shares sold on January 2, 1940, is P2,500 (the cost of 50 of the shares sold on January 2, 1940), plus P750 [the difference between the purchase price of the 50 shares acquired on December 21, 1939, (P2,750) and the selling price of 50 of the shares sold on January 2, 1940 (P2,000)], or P3,250. Similarly the basis of the 25 shares purchased on December 26, 1939, the acquisition of which resulted in the nondeductibility of the loss (P250) sustained on 25 of the shares sold on January 2, 1940, is P1,250 plus P125, or P1,375. (See Section 143 of these regulations.)

EXAMPLE (3): A, whose taxable year is the calendar year, on September 15, 1938, purchased 100 shares of the stock of the M Company for P5,000. He sold these shares on February 1, 1940, for P4,000. On each of the four days from February 15, 1940, to February 18, 1940, he purchased 50 shares of substantially identical stock for P2,000. There is an indicated loss of P1,000 from the sale of the 100 shares on February 1, 1940, but since within the sixty-one-day period A purchased not less than 100 shares of substantially identical stock, the loss is not deductible. The particular shares of stock the purchase of which resulted in the nondeductibility of the loss are the first 100 shares purchased within such period, that is, the 50 shares purchased on February 15, 1940, and the 50 shares purchased on February 16, 1940.

___________________________________________________________________________________________

ADMINISTRATIVE PROVISIONS:

(1) Accounting Periods and Methods16)Section 166-177, RR 2 ---------------------------------------------- DANDUAN,

17) Section 51-53, RR 2 SECTION 51. When income is to be reported. — Gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefore in a later year, income is realized in that year, assuming that the money or property would have been income in the earlier year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off.

SECTION 52. Income constructively received. — Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the

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demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt.

SECTION 53. Examples of constructive receipt. — When interest coupons have matured and are payable, but have not been cashed, such interest payment though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in which paid. The distributive share of the profits of a partner in a general co-partnership duly registered is regarded as received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days' notice in advance of cashing depositors' checks, is income to the depositor when credited. An amount credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has taxable status as income for the year of the credit. When the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is income for the year of maturity of the share.

18) Consolidated Mines, Inc. vs. Court of Tax Appeals Facts: Petitioner is a domestic company engaged in mining, had filed its income tax returns from 1951, 1952, 1953 and 1956. In 1957, BIR examiners investigated the income tax returns filed by the company because, its auditor , Felipe Ollada claimed the refund of P 107, 472, representing overpayments of income taxes for the year 1951.The company has certain mining claims located in Zambales. Because it wanted to relieve itself of the work and expense necessary for developing the claims, the company entered into an agreement with Benguet, whereby the latter undertook to explore, develop mine and concentrate and market the pay ore in said mining claims. The sharing of profits is 90-10% while Benguet was being reimbursed the expenses disbursed during the period it was trying to put mines on profit-producing basis. It appeared that by 1953, Benguet had recouped said advances , because they were dividing the profits share and share alike.

After investigation, the examiners reported that : 1. The Company had not accrued expense the share in the company profits of Benguet Consolidated Mines as operator of the petitioner’s mines, although for income tax purposes the petitioner company had reported income and expenses on accrual basis; 2. The company overstated its claim for depletion and certain claims were not supported by evidence. In view of the report, CIR sent the company a letter of demand requiring it to pay certain deficiency income taxes. Notice of tax assessment was sent to the petitioner. The company requested for reconsideration but CIR refused to reconsider, hence the company appealed to CTA and contested the assessments.

CTA ordered the company to pay the difficiency income taxes for years 1953, ’54, ’56. In its amended decision CTA subscribed to the theory of the company that Benguet Consolidated Mining Company, had no right to share in Accounts receivable , hence ½ thereof may not be accrued as an expense of the company for a given year.

Both the company and CIR appealed. The company questions the rate of mine depletion adopted by CTA and the disallowance of depreciation charges and certain miscellaneous expenses. The commissioner on the other hand, questions what he characterizes as the hybrid or mixed method of accounting utilized by the company and approved by the Tax Court, in treating share of Benguet in the net profits from the operation of the mines in connection with income tax returns.

“The company used the accrual method of accounting in computing its income. One of its expenses is the amount paid to Benguet as mine operator , which amount is computed as 50% of net income. The company deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at the end of each calendar year what the commissioner alleges is 50% of the share of Benguet in account receivable . However, it deducts benguet ‘s 50% if and when the AR are actually paid.

It would seem therefore that the company has been deducting a portion of this expense ( Benguet ‘s share as mine operator) on the cash and carry basis. The computation of net profits only cash payments received and cash disbursements made by Benguet be given to net profits and accordingly must equated with cash receipts. The language used by the parties showed their intention to compute Benguet’s 50% share on excess of actual receipts over disbursements without considering Accounts Receivables and accounts payable as factors in computation. Benguet then have no right to share in Accounts Receivable and correspondingly the petitioner did not have the liability to pay Benguet any part of that item. And deduction cannot be accrued until an actual liability is incurred, even if payment has not been made.”

Issue: Whether the Company (based on the circumstances) used a hybrid method of accounting in preparation of its income tax returns, hence, inconsistent with its claim that it used accrual method of accounting?

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HELD: NO. The company consistently used accrual method. There was a need to distinguish between the method of accounting used by the company in determining its net income for tax purposes and the method of computation agreed upon between the petitioner and Benguet in determining the amount of compensation that was to be paid by the former to the latter.

The parties, being free to do so, had contracted that in the method of computing compensation the basis were cash receipts and cash payments. Once so determined in accordance with stipulated bases and procedure , then the amount due Benguet for each month ACCRUED at the end of that month, whether the company had made payment or not. To make the company deduct as an expense ½ of the Accounts Receivable would , in effect , be equivalent to giving Benguet a right which it did not have under the contract and to substitute for the parties choice a mode of computation of compensation not contemplated by them. Since Benguet had no right to ½ of A/R the company was correct in NOT ACCRUDING said one –half as deduction. The company was not using a hybrid method of accounting, but was consistent in its use of the accrual method of accounting.

The rule is that a taxpayer may use any method of accounting but not the COMBINATION of 2 or more methods for each type of business during a taxable year. The use of hybrid method of accounting is NOT ALLOWED

19) Section 44, RR 2

SECTION 44. Long term contracts. — Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract.

Examples: building, installation, or construction contracts covering a period in excess of one year.As to persons who report their income based on such contracts

1.) Report such income on a basis of percentage of completion. In such a case, there must be a certificate

from the architect or engineer reflecting such percentage completion

2.) Income may be reported on the year that the project is completed.

A taxpayer need not change his usual accounting methods to reflect the procedures given above. When he does so, however, a certificate must accompany his return detailing the change.

20) Bibiano V. Banas, Jr. vs. Court of Appeals (February 10, 2000)

BIBIANO V. BAÑAS, JR. vs. COURT OF APPEALS, ET. AL.G.R. No. 102967 February 10, 2000

Facts:On February 20, 1976, Petitioner sold to AYALA a parcel of land for P2,308,770.00. Petitioner received an initial payment amounting to P461,754.00 with the balance to be paid in four equal consecutive annual installments covered by promissory note. The same day, petitioner discounted the promissory note with AYALA, for its face value. AYALA issued nine (9) checks to petitioner, all dated February 20, 1976, with the uniform amount of P205,224.00.

In his 1976 Income Tax Return, petitioner reported only the initial payment as income from disposition of capital asset. In the succeeding years, until 1979, petitioner reported a uniform income corresponding to the annual installment as gain from sale of capital asset.

Later, the BIR Regional Director, through its tax examiners, discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should have been taxable in 1976.

Petitioner was assessed deficiency tax with surcharges and penalties for the year 1976. A demand letter was then issued for the settlement of the income tax deficiency. Petitioner failed to pay and insisted that the sale of his land to AYALA was on installment.

On June 17, 1981, a criminal complaint for tax evasion was filed against petitioner.

On July 2, 1981, petitioner filed an Amnesty Tax Return under P. D. 1740. Likewise, on November 2, 1981,

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petitioner again filed an Amnesty Tax Return under P.D. 1840. In both, petitioner did not recognize that his sale of land to AYALA was on cash basis.

Petitioner maintains that the proceeds of the promissory notes, not yet due, which he discounted to AYALA should not be included as income realized in 1976.

Petitioner states that the original agreement in the Deed of Sale should not be affected by the subsequent discounting of the bill.

Issues:

1. Does the mere filing of tax amnesty return under P.D. 1740 and 1840 ipso facto shield a taxpayer from immunity against prosecution?

2. Should petitioner’s income from the sale of land be declared as a cash transaction in his tax return because the buyer discounted the promissory note, issued to the seller, on the same day of the sale?

Held:

1. No. The petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from immunity against prosecution. Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. To avail of a tax amnesty granted by the government, and to be immune from suit on its delinquencies, the taxpayer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income.

PD 1740 and PD 1840 granted any individual, who voluntarily files a return under this Decree and pays the income tax due thereon, immunity from the penalties, civil or criminal, under the NIRC. Petitioner is not entitled to claim immunity from prosecution under the shield of availing tax amnesty. His disclosure in his tax amnesty return did not include the income from his sale of land to AYALA on cash basis. Instead he insisted that such sale was on installment. He did not amend his income tax return. He did not pay the tax which was considerably increased by the income derived from the discounting. He did not meet the twin requirements of P.D. 1740 and 1840, declaration of his untaxed income and full payment of tax due thereon.

It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority.

2. Yes. The general rule is that the whole profit accruing from a sale of property is taxable as income in the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income shall be taxable in the year in which it is "received," the profit from an installment sale is to be apportioned between or among the years in which such installments are paid and received.

In this case, although the proceeds of a discounted promissory note is not considered initial payment, still it must be included as taxable income on the year it was converted to cash. When petitioner had the promissory notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his returns the income derived from the discounting. What petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale of the land to AYALA for the year 1976.

RETURNS AND PAYMENT OF TAXES

21)RR 019-11 (December 9, 2011)-------------------------ARCILLA

Section 1. Objective. These Revenue Regulations are issued to prescribe the new BIR Forms that will be used for Income Tax filing covering and starting with Calendar Year 2011, and to modify Revenue Memorandum Circular No. 57-2011.

Section 2. Scope. Pursuant to Section 244 in relation to Sections 6(H), 51(A)(1), and 51(A)(2) of the National 18


Internal Revenue Code of 1997 (Tax Code), as amended, these Regulations are prescribed to revise BIR Form Nos. 1700, 1701, and 1702 to reflect the changes in information requested from said BIR Forms and to enable the said forms to be read by an Optical Character Reader.

Section 3. Filing of New Income Tax Return Forms.

All taxpayers required to file their Income Tax returns under section 51(A)(1) of the Tax code, and those not required to file under section 51(A)(2) but who nevertheless opt to do so, covering and staring with calendar year 2011 – due for filing on or before April 15, 2012, should use the following revised forms:

1. BIR Form 1700 version November 2011 (Annual Income Tax Return for Individuals Earning Purely Compensation Income);

2. BIR Form 1701 version November 2011 (Annual Income Tax Return for Self-Employed Individuals, Estates and Trusts); and

3. BIR Form 1702 version November 2011 (Annual Income Tax Return for Corporation, Partnership and Other Non-Individual Taxpayer).

All juridical entities following fiscal year of reporting are likewise required to use the new BIR Form 1702 starting with those covered under fiscal year ending January 31, 2012.

22) Systra Philippines, Inc. vs. Commissioner of Internal Revenue (September 21, 2007)

Facts:Petitioner elected to carry over its excess credits for the year 2000 in the amount of P4,627,976 as tax credits for the following year. In 2001 ITR, it indicated that creditable withholding taxes will also be carried over to next year’s tax as credit. However, on August 9, 2001, petitioner instituted a claim for refund of its unutilized creditable withholding taxes. Due to BIR’s inaction, petitioner filed a petition for review. CTA partially granted the petition but denied claim for refund because petitioner was precluded from claiming a refund. Once it was made for a particular taxable period, the option to carry over become irrevocable.

Issue:Whether or not the exercise of the option to carry-over excess income tax credits bars a taxpayer from claiming the excess tax credits for refund.

Held:Yes. Petitioner could no longer claim a refund.

Section 76 of the Tax Code provides:

SEC. 76. Final Adjustment Return. – Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable net income of that year the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the carry over option was made, actually or constructively, it became forever irrevocable regardless of whether the excess tax credits were actually or fully utilized. In Philam Asset Management, Inc., the amount will

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not be forfeited in favor of the government but will remain in the taxpayer’s account. Petitioner may claim and carry it over in the succeeding taxable years, creditable against future income tax liabilities until fully utilized.

This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the Tax Code. The phrase "such option shall be considered irrevocable for that taxable period" means that the option to carry over the excess tax credits of a particular taxable year can no longer be revoked. The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: (1) as automatic credit against taxes for the taxable quarters of the succeeding years for which no tax credit certificate has been issued and (2) as a tax credit either for which a tax credit certificate will be issued or which will be claimed for cash refund.

In this case, it was in the year 2000 that petitioner derived excess tax credits and exercised the irrevocable option to carry them over as tax credits for the next taxable year. Under Section 76 of the Tax Code, a claim for refund of such excess credits can no longer be made. The excess credits will only be applied "against income tax due for the taxable quarters of the succeeding taxable years."

23) PHILAM ASSET MANAGEMENT, INC. vs COMMISSIONER OF INTERNAL REVENUE

FACTS: Both in the year 1998 (for taxable year 1997) and 1999 (for taxable year 1998), Philam Management filed an annual corporate income tax representing net losses. Consequently, they were unable to apply the creditable withholding tax which was previously withheld by withholding agents because no tax due is declared.In 1998, Philam filed an administrative claim for refund with BIR for the unutilized tax credits for taxable year 1997 but the BIR did not act on the petitioner’s claim.In 2000, petitioner had a tax due in the amount of P80,042.00, and a creditable withholding tax in the amount of P915,995.00. [Petitioner] likewise declared in its 1999 tax return the amount of P459,756.07, which represents its prior excess credit for taxable year 1998.Thereafter, the petitioner filed for another administrative refund but the CIR once again did not act on the matter.

ISSUE: whether petitioner is entitled to a refund of its creditable taxes withheld for taxable years 1997 and 1998.

RULING: In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor."

The carry-over option under Section 76 is permissive. Once chosen, the carry-over option shall be considered irrevocable for that taxable period, and no application for a tax refund or issuance of a tax credit certificate shall then be allowed.

According to petitioner, it neither chose nor marked the carry-over option box in its 1998 FAR. As this option was not chosen, it seems that there is nothing that can be considered irrevocable. In other words, petitioner argues that it is still entitled to a refund of its 1998 excess income tax payments.

This argument does not hold water. The subsequent acts of petitioner reveal that it has effectively chosen the carry-over option.

The fact that it filled out the portion "Prior Year’s Excess Credits" in its 1999 FAR means that it categorically availed itself of the carry-over option. In fact, the line that precedes that phrase in the BIR form clearly states "Less: Tax Credits/Payments." The contention that it merely filled out that portion because it was a requirement -- and that to have done otherwise would have been tantamount to falsifying the FAR -- is a long shot.

Also, the resulting redundancy in the claim of petitioner for a refund of its 1998 excess tax credits on November 14, 2000 cannot be countenanced. It cannot be allowed to avail itself of a tax refund and a tax credit at the same time for the same excess income taxes paid. Besides, disallowing it from getting a tax refund of those excess tax credits will not enervate the two-year prescriptive period under the Tax Code. That period will apply if the carry-over option has not been chosen.

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24) Sec. 244, RR 2Section 244. Return of corporation contemplating dissolution or retiring from business. — All corporations, partnership, joint accounts and associations, contemplating dissolution or retiring from business without formal dissolution shall, within 30 days after the approval of such resolution authorizing their dissolution, and within the same period after their retirement from business, file their income tax returns covering the profit earned or business done by them from the beginning of the year up to the date of such dissolution or retirement and pay the corresponding income tax due thereon upon demand by the Commissioner of Internal Revenue to addition to the income tax return required to be filed they shall also submit within the same period the following: (a) Copy of the resolution authorizing such dissolution; (b) Balance sheet at the date of dissolution or retirement and a profit and loss statement covering the period from the beginning of the taxable year to the date of dissolution or retirement; (c) In the case of a corporation, the names end addresses of the shareholders and the number and par value of the shares held by each; and in the case of a partnership, joint-account or association, the name of the partners or members and the capital contributed by each; (d) The value and a description of, the assets received in liquidation by each shareholder; (e) The name and address of each individual or corporation, other than shareholders, if any, receiving assets at the time of dissolution together with a description and the value of the assets received by such individuals or corporations; and the consideration, if any, paid by each of them for the assets received.

25) BANK OF THE PHILIPPINE ISLANDS vs. COMMISSIONER OFINTERNAL REVENUE,

Facts: By virtue of the Articles of Merger approved by the SEC on July 1, 1985 petitioner BPI became the successor-in-interest of the Family Bank and Trust Company (FBTC) whose corporate existence ended on June 30, 1995.

From January to June 30, 1985, FBTC earned incomes consisting of rentals from itsl eased properties and interest from treasury notes purchased from the Central Bank. Pursuant to the Expanded Withholding Tax Regulations, the lessees of FBTC withheld 5 percent on said rentals while the Central Bank withheld 15percent on the interest on the treasury notes. These withheld income taxes in the total amount of P 174,065.77 were remitted to BIR.

Moreover, the FBTC had a prior years' excess credit plus the withheld income taxes amounted to P2,320,138.34. On April 1986, the FBTC filed its final income tax return (with the BIR showing a net loss of P64M and a refundable amount of P174,065.77 representing the creditable income tax withheld at source from January 1 to June 30, 1985.

On October 1986, petitioner BPI as successor-in-interest of FBTC filed a letter claim with the BIR asking for refund of P2.3M. The BIR however refunded to petitioner BPI only the amount of P2.1M.Since the BIR refused to refund the withheld income taxes on rentals and interests in the amount of P174,065.77, petitioner BPI filed a petition for review with the Court of Tax Appeals seeking a reversal of BIR's resolution.

CTA: dismissed the petition for review on the ground that the claim for tax refund had already prescribed. Citing Section 52(c) of tax code, the CTA held that said return should have been filed within 30 days from SEC's approval of the Articles of Merger on July 1, 1985.

CONTENTION OF PETITIONER: Petitioner BPI disagrees and, invoking Sec. 46 & Sec. 70 (B) of the Tax Code which refers to the Quarterly Corporate Income Tax Payments, and contends that said return should have been filed on the 15th day of the 4th month following the close of FBTC's taxable year.

Issue: On October 7, 1986, had petitioner BPI's claim for refund of the withheld income taxes in the amount of P174,065.77 already prescribed?

Held: Yes. The claim for refund of creditable income tax withheld for 1985, was already prescribed.

Normally, an ongoing corporation files a Quarterly Corporate Income Tax Return. The final adjustment return therefore aptly refers to the Final Adjustment Income Tax Return.

Petitioner tries to mislead the Court by saying that what is required to file only is information return.

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A closer look of Section 46(a) and Chapter X of Title II showed that it both made specific mention of "income tax return" and "income tax payments", respectively,

Sec. 46. Corporation returns. — (a) Requirements. — Every corporation, subject to the tax herein imposed, except foreign corporations not engaged in trade orbusiness in the Philippines shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter IX of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer."

Thus, the final adjustment return therefore aptly refers to the Final Adjustment Income Tax Return. All references pointed to by petitioner have some relations to income tax payments and the filing of an accurate Income Tax Return. Indeed 'correct return' means 'correct income tax return', the Final Adjustment Income Tax Return.

26) United Airlines, Inc. vs. Commissioner of Internal Revenue (September 29, 2010)

UNITED AIRLINES, INC. vs.COMMISSIONER OF INTERNAL REVENUE

Facts: Petitioner United Airlines is a foreign corporation organized and existing under the laws of the State of Delaware, U.S.A., engaged in the international airline business.

Petitioner used to be an online international carrier of passenger and cargo, originating in the Philippines. Upon cessation of its passenger flights in and out of the Philippines beginning February 1998, petitioner appointed a sales agent in the Philippines -- Aerotel Ltd. Corp., an independent general sales agent acting as such for several international airline companies. Petitioner continued operating cargo flights from the Philippines until January 31, 2001.

On 2002, petitioner filed with respondent Commissioner a claim for income tax refund, pursuant to Section 28(A)(3)(a) of the (NIRC) in relation to Article 4(7) of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with respect to Income Taxes (RP-US Tax Treaty).

Petitioner argues that its claim for refund of erroneously paid GPB tax on off-line passenger revenues cannot be denied based on the finding of the CTA that petitioner allegedly underpaid the GPB tax on cargo revenues by P31,431,171.09, which underpayment is allegedly higher than the GPB tax of P5,028,813.23 on passenger revenues, the amount of the instant claim. The denial of petitioners claim for refund on such ground is tantamount to an offsetting of petitioners claim for refund of erroneously paid GPB against its alleged tax liability. Petitioner thus cites the well-entrenched rule in taxation cases that internal revenue taxes cannot be the subject of set-off or compensation.

According to petitioner, the offsetting of the liabilities is very clear in the instant case because the amount of petitioners claim for refund of erroneously paid GPB tax of P5,028,813.23 for the taxable year 1999 is being offset against petitioners alleged deficiency GPB tax liability on cargo revenues for the same year, which was not even the subject of an investigation nor any valid assessment issued by respondent against the petitioner. Under Section 228, of the NIRC, the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. This administrative process of issuing an assessment is part of procedural due process enshrined in the 1987 Constitution. Records do not show that petitioner has been assessed by the BIR for any deficiency GBP tax for 1999, nor was there any finding or investigation being conducted by respondent of any liability of petitioner for GPB tax for the said taxable period.Clearly, petitioners right to due process was violated.

Issue: Whether petitioner is entitled to a refund of the amount of P5M it paid as income tax on its passenger revenues in 1999?

Held:

No. Petitioners arguments regarding the propriety of such determination by the CTA are misplaced.

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Under Section 72 of the NIRC, the CTA can make a valid finding that petitioner made erroneous deductions on its gross cargo revenue; that because of the erroneous deductions, petitioner reported a lower cargo revenue and paid a lower income tax thereon; and that petitioner's underpayment of the income tax on cargo revenue is even higher than the income tax it paid on passenger revenue subject of the claim for refund, such that the refund cannot be granted.

Section 72 of the NIRC reads:SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an assessment is made in case of any list, statement or return, which in the opinion of the Commissioner was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suit, unless it is proved that the said list, statement or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines.

Here, petitioners similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a refund. (Additional emphasis supplied.)

In the case at bar, the CTA explained that it merely determined whether petitioner is entitled to a refund based on the facts. On the assumption that petitioner filed a correct return, it had the right to file a claim for refund of GPB tax on passenger revenues it paid in 1999 when it was not operating passenger flights to and from the Philippines. However, upon examination by the CTA, petitioners return was found erroneous as it understated its gross cargo revenue for the same taxable year due to deductions of two (2) items consisting of commission and other incentives of its agent. Having underpaid the GPB tax due on its cargo revenues for 1999, petitioner is not entitled to a refund of its GPB tax on its passenger revenue, the amount of the former being even much higher (P31.43 million) than the tax refund sought (P5.2 million). The CTA therefore correctly denied the claim for tax refund after determining the proper assessment and the tax due. Obviously, the matter of prescription raised by petitioner is a non-issue. The prescriptive periods under Sections 203 and 222 of the NIRC find no application in this case.

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Documents

Complete Compilation Tax 1 Oct 3