Income Tax Case Digest

7/21/2019 Income Tax Case Digest

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GARRISON et al. vs. COURT OF APPEALS

Doctrine: An alien actually resent in t!e P!iliines "!o isnot a #ere transient or so$ourner is a resi%ent o& t!e

P!iliines &or uroses o& inco#e ta'.

FACTS:Petitioners( )o!n Garrison( Fran* Ro+ertson( Ro+ert Cat!ey( )a#es Ro+ertson( Felicitas %e Gu,#an an% E%"ar% -cGur*PETITIONERS/ are US Citi,ens "!o entere% t!e countryt!rou0! t!e P!iliine I##i0ration Act o& 1234 an% aree#loye% in t!e US Naval 5ase in Olon0ao City. T!ey earnno P!iliine source inco#e an% it is also t!eir intention toreturn to t!e US as soon as t!eir e#loy#ent !as en%e%. T!e 5IR sent notices to Petitioners statin0 t!at t!ey %i% not6le t!eir Inco#e Ta' Returns ITR/ &or 1272. T!e 5IR clai#e%

t!at t!ey "ere resi%ent aliens an% re8uire% t!e# to 6le t!eirreturns. Un%er t!en t!en Internal Revenue Co%e resi%entaliens #ay +e ta'e% re0ar%less o& "!et!er t!e 0ross inco#e"as %erive% &ro# P!iliine sources. Petitioners re&use%statin0 t!at t!ey "ere not resi%ent aliens +ut only secialte#orary visitors. 9ence( t!ey "ere not re8uire% to 6leITRs. T!ey also clai#e% e'e#tion +y virtue o& t!e RPUS-ilitary 5ases A0ree#ent. Un%er -ilitary 5ases A0ree#ent(a ;national o& t!e Unite% States servin0 in or e#loye% int!e P!iliines in connection "it! construction(#aintenance( oeration or %e&ense o& t!e +ases an% resi%ein t!e P!iliines +y reason only o& suc! e#loy#ent< is

only lia+le &or ta' on P!iliine sources o& inco#e. T!e Courto& Aeals !el% t!at t!e 5ases A0ree#ent ;sea*s o& e'e#tion &ro# t!e ay#ent o& inco#e ta'( not &ro# t!e6lin0 o& t!e inco#e ta' returns . . .<

ISSUE:1. =!et!er or not Petitioners can +e consi%ere% resi%entaliens.

>. =!et!er or not Petitioners are e'e#t &ro# inco#e ta'un%er t!e RPUS -ilitary 5ases A0ree#ent.

?. =!et!er or not Petitioners #ust still 6le ITRnot"it!stan%in0 t!e e'e#tion.

HELD:

1. @es. Revenue Re0ulations No. > Section rovi%es: ;Analien actually resent in t!e P!iliines "!o is not a #eretransient or so$ourner is a resi%ent o& t!e P!iliines &oruroses o& inco#e ta'.< =!et!er or not an alien is atransient or not is &urt!er %eter#ine% +y !is: ;intentions"it! re0ar%s to t!e len0t! an% nature o& !is stay. A #ereBoatin0 intention in%e6nite as to ti#e( to return to anot!ercountry is not sucient to constitute !i# as transient. I& !elives in t!e P!iliines an% !as no %e6nite intention as to !isstay( !e is a resi%ent.< T!e Section &urt!er rovi%es t!at i& t!e alien is in t!e P!iliines &or a %e6nite urose "!ic! +yits nature #ay +e ro#tly acco#lis!e%( !e is consi%ere%

a transient. 9o"ever( i& an e'ten%e% stay is necessary &or!i# to acco#lis! !is urose( !e is consi%ere% a resi%ent(;t!ou0! it #ay +e !is intention at all ti#es to return to !is%o#icile a+roa% "!en t!e urose &or "!ic! !e ca#e !as+een consu##ate% or a+an%one%.<

>. @es. Not"it!stan%in0 t!e &act t!at t!e Petitioners areresi%ent aliens "!o are 0enerally ta'a+le( t!eir class isnonet!eless e'e#t &ro# ayin0 ta'es on inco#e %erive%&ro# t!eir e#loy#ent in t!e naval +ase +y virtue o& t!e RPUS -ilitary +ases a0ree#ent. T!e 5ases A0ree#enti%enti6es t!e ersons NOT ;lia+le to ay inco#e ta' in t!e

P!iliines e'cet in re0ar% to inco#e %erive% &ro#P!iliine sources or sources ot!er t!an t!e US sources.< T!ey are t!e ersons in "!o# concur t!e &ollo"in0re8uisites( to "it:

i. nationals o& t!e Unite% States servin0 in or e#loye%in t!e P!iliines

ii. t!eir service or e#loy#ent is in connection "it!construction( #aintenance( oeration or %e&ense o& t!e +ases



iii. t!ey resi%e in t!e P!iliines +y reason only o& suc!e#loy#ent an%

iv. t!eir inco#e is %erive% e'clusively &ro# ;U.S.Sources.<

?. @es. Even t!ou0! t!e etitioners are e'e#t &ro# ayin0ta'es &ro# t!eir e#loy#ent in t!e Naval 5ase( t!ey #ustnevert!eless 6le an ITR. T!e Sure#e Court !el% t!at t!e6lin0 o& an ITR an% t!e ay#ent o& ta'es are t"o %istincto+li0ations. =!ile inco#e %erive% &ro# e#loy#entconnecte% "it! t!e Naval 5ase is e'e#t( inco#e &ro#P!iliine Sources is not. T!e re8uire#ent o& 6lin0 an ITR isso t!at t!e 5IR can %eter#ine "!et!er or not t!e USNational s!oul% +e ta'e%. ;T!e %uty rests on t!e U.S.nationals concerne% to invo*e an% ri#a &acie esta+lis!t!eir ta'e'e#t status. It cannot si#ly +e resu#e% t!att!ey earne% no inco#e &ro# any ot!er sources t!an t!eir

e#loy#ent in t!e A#erican +ases an% are t!ere&ore totallye'e#t &ro# inco#e ta'.<

AFISCO INSURANCE CORP. et al. vs. COURT OF APPEALS

DOCTRINE:Unregistered Partnerships and associations are consideredas corporations for tax purposes Un%er t!e ol% internalrevenue co%e( ;A ta' is !ere+y i#ose% uon t!e ta'a+lenet inco#e receive% %urin0 eac! ta'a+le year &ro# allsources +y every corporation organized in, or ei!ting"nder t#e $a%! o& t#e '#i$ippine!, no (atter #o%

created or organized( '''.< Inelu%i+ly( t!e P!iliinele0islature inclu%e% in t!e concet o& cororations t!oseentities t!at rese#+le% t!e# suc! as unre0istere%artners!is an% associations.

Insurance pool in the case at bar is deemed a partnership or association taxable as a corporation – In t!e case at +ar(etitionersinsurance co#anies &or#e% a Pool A0ree#ent(or an association t!at "oul% !an%le all t!e insurance+usinesses covere% un%er t!eir 8uotas!are reinsurancetreaty an% surlus reinsurance treaty "it! -unic! is

consi%ere% a artners!i or association "!ic! #ay +e ta'e%as a ccororation.

Double Taxation is not Present in the Case at Bar – Dou+leta'ation #eans ;ta'in0 t!e sa#e erson t"ice +y t!e sa#e

$uris%iction &or t!e sa#e t!in0.< In t!e instant case( t!einsurance ool is a ta'a+le entity %istinct &ro# t!e in%ivi%ualcororate entities o& t!e ce%in0 co#anies. T!e ta' on itsinco#e is o+viously %ierent &ro# t!e ta' on t!e %ivi%en%sreceive% +y t!e co#anies. T!ere is no %ou+le ta'ation.

FACTS: T!e etitioners are 31 nonli&e %o#estic insurancecororations. T!ey issue% ris* insurance olicies &or#ac!ines. T!e etitioners in 127 entere% into a )"otaS#are Rein!"rance Treaty and a S"rp$"! Rein!"ranceTreaty "it! t!e -unc!ener Ruc*versic!erun0sGesselsc!a&t

!erea&ter calle% -unic!/( a nonresi%ent &orei0n insurancecororation. T!e reinsurance treaties re8uire% etitioners to&or# a ool( "!ic! t!ey co#lie% "it!.

In 12H7( t!e ool o& #ac!inery insurers su+#itte% a6nancial state#ent an% 6le% an ;In&or#ation Return o& Or0ani,ation E'e#t &ro# Inco#e Ta'< &or 12H. On t!e+asis o& t!is( t!e CIR assesse% a %e6ciencyo& P1(3?(>H?.74( an% "it!!ol%in0 ta'es in t!e a#ounto& P1(H7(H22.?2 an% P2(3?.7 on %ivi%en%s ai% to-unic! an% to t!e etitioners( resectively.

T!e Court o& Ta' Aeal sustaine% t!e etitionerJs lia+ility. T!e Court o& Aeals %is#isse% t!eir aeal.

T!e CA rule% in t!at t!e ool o& #ac!inery insurers "as aartners!i ta'a+le as a cororation( an% t!at t!e latterKscollection o& re#iu#s on +e!al& o& its #e#+ers( t!e ce%in0co#anies( "as ta'a+le inco#e.ISSUE*S:=!et!er or not t!e ool is ta'a+le as a cororation.=!et!er or not t!ere is %ou+le ta'ation.



HELD:1/ @es: Pool ta'a+le as a cororation

Ar0u#ent o& Petitioner: T!e reinsurance olicies "ere"ritten +y t!e# ;in%ivi%ually an% searately(< an% t!at t!eir

lia+ility "as li#ite% to t!e e'tent o& t!eir allocate% s!are int!e ori0inal ris*s t!us reinsure%. 9ence( t!e ool %i% not actor earn inco#e as a reinsurer. Its role "as li#ite% to itsrincial &unction o& ;allocatin0 an% %istri+utin0 t!e ris*s/arisin0 &ro# t!e ori0inal insurance a#on0 t!e si0natories tot!e treaty or t!e #e#+ers o& t!e ool +ase% on t!eir a+ilityto a+sor+ t!e ris*s/ ce%e%M as "ell as t!e er&or#ance o& inci%ental &unctions( suc! as recor%s( #aintenance(collection an% custo%y o& &un%s( etc.<

Ar0u#ent o& SC: Accor%in0 to Section >3 o& t!e NIRC o& 12H:

;SEC. >3. Rate of tax on corporations. a/ Tax ondomestic corporations. A ta' is !ere+y i#ose% uon t!eta'a+le net inco#e receive% %urin0 eac! ta'a+le year &ro#all sources +y every cororation or0ani,e% in( or e'istin0un%er t!e la"s o& t!e P!iliines( no #atter !o" create% oror0ani,e%( +ut not inclu%in0 %uly re0istere% 0eneral coartners!i compañias colectias/( 0eneral ro&essionalartners!is( rivate e%ucational institutions( an% +uil%in0an% loan associations '''.<

Inelu%i+ly( t!e P!iliine le0islature inclu%e% in t!e concet

o& cororations t!ose entities t!at rese#+le% t!e# suc! asunre0istere% artners!is an% associations. Interestin0ly(t!e NIRCKs inclusion o& suc! entities in t!e ta' oncororations "as #a%e even clearer +y t!e Ta' Re&or# Acto& 122H Sec. >H rea% to0et!er "it! Sec. >> rea%s:

;SEC. >H. Rates of Income Tax on DomesticCorporations. !!A/ In "eneral. E'cet as ot!er"ise rovi%e% in t!isCo%e( an inco#e ta' o& t!irty6ve ercent ?/ is !ere+yi#ose% uon t!e ta'a+le inco#e %erive% %urin0 eac!

ta'a+le year &ro# all sources "it!in an% "it!out t!eP!iliines +y every cororation( as %e6ne% in Section >>5/ o& t!is Co%e( an% ta'a+le un%er t!is Title as acororation '''.<;SEC. >>. De#nition. =!en use% in t!is Title:

''' ''' ''' 5/ T!e ter# corporation+ s!all inclu%eartners!is( no #atter !o" create% or or0ani,e%( $ointstoc* co#anies( $oint accounts cuentas en participacion/(associations( or insurance co#anies( +ut %oes not inclu%e0eneral ro&essional artners!is orM a $oint venture orconsortiu# &or#e% &or t!e urose o& un%erta*in0construction ro$ects or en0a0in0 in etroleu#( coal(0eot!er#al an% ot!er ener0y oerations ursuant to anoeratin0 or consortiu# a0ree#ent un%er a service contract"it!out t!e Govern#ent. enera$ pro&e!!iona$partner!#ip!K are artners!is &or#e% +y ersons &or t!esole urose o& e'ercisin0 t!eir co##on ro&ession( no art

o& t!e inco#e o& "!ic! is %erive% &ro# en0a0in0 in anytra%e or +usiness. T!us( t!e Court in $angelista . Collector of Internal Reenue !el% t!at Section >3 covere% t!eseunre0istere% artners!is an% even associations or $ointaccounts( "!ic! !a% no le0al ersonalities aart &ro# t!eirin%ivi%ual #e#+ers.

Furt!er#ore( Pool A0ree#ent or an association t!at "oul%!an%le all t!e insurance +usinesses covere% un%er t!eir8uotas!are reinsurance treaty an% surlus reinsurancetreaty "it! -unic! #ay +e consi%ere% a artners!i+ecause it contains t!e &ollo"in0 ele#ents: 1/ T!e ool !as

a co##on &un%( consistin0 o& #oney an% ot!er valua+lest!at are %eosite% in t!e na#e an% cre%it o& t!e ool. T!isco##on &un% ays &or t!e a%#inistration an% oeratione'enses o& t!e ool. >/ T!e ool &unctions t!rou0! ane'ecutive +oar%( "!ic! rese#+les t!e +oar% o& %irectors o& acororation( co#ose% o& one reresentative &or eac! o& t!ece%in0 co#anies. ?/ =!ile( t!e ool itsel& is not a reinsureran% %oes not issue any olicies its "or* is in%isensa+le(+ene6cial an% econo#ically use&ul to t!e +usiness o& t!ece%in0 co#anies an% -unic!( +ecause "it!out it t!ey"oul% not !ave receive% t!eir re#iu#s ursuant to t!e



a0ree#ent "it! -unic!. Pro6t #otive or +usiness is(t!ere&ore( t!e ri#or%ial reason &or t!e oolKs &or#ation.

>/ No: T!ere is no %ou+le ta'ation.

Ar0u#ent o& Petitioner: Re#ittances o& t!e ool to t!ece%in0 co#anies an% -unic! are not %ivi%en%s su+$ect tota'. I#osin0 a ta' ;"oul% +e tanta#ount to an ille0al%ou+le ta'ation( as it "oul% result in ta'in0 t!e sa#ere#iu# inco#e t"ice in t!e !an%s o& t!e sa#e ta'ayer.<Furt!er#ore( even i& suc! re#ittances "ere treate% as%ivi%en%s( t!ey "oul% !ave +een e'e#t un%er sections >3+/ I/ an% >7? o& t!e 12HH NIRC ( as "ell as Article H o& ara0ra! 1an% Article o& ara0ra! o& t!e RP=estGer#an Ta' Treaty.

Ar0u#ent o& Sure#e Court: Dou+le ta'ation #eans ;ta'in0

t!e sa#e erson t"ice +y t!e sa#e $uris%iction &or t!e sa#et!in0.< In t!e instant case( t!e insurance ool is a ta'a+leentity %istinct &ro# t!e in%ivi%ual cororate entities o& t!ece%in0 co#anies. T!e ta' on its inco#e is o+viously%ierent &ro# t!e ta' on t!e %ivi%en%s receive% +y t!eco#anies. T!ere is no %ou+le ta'ation.

Ta' e'e#tion cannot +e clai#e% +y nonresi%ent &orei0nInsurance Cororation ta' e'e#tion construe% strictlya0ainst t!e ta'ayer Section >3 +/ 1/ ertains to ta' on&orei0n cororations !ence( it cannot +e clai#e% +y t!ece%in0 co#anies "!ic! are %o#estic cororations. Nor can

-unic!( a &orei0n cororation( +e 0rante% e'e#tion +ase%solely on t!is rovision o& t!e Ta' Co%e +ecause t!e sa#esu+section seci6cally ta'es %ivi%en%s( t!e tye o& re#ittances &or"ar%e% to it +y t!e ool. T!e &ore0oin0interretation o& Section >3 +/ 1/ is in line "it! t!e %octrinet!at a ta' e'e#tion #ust +e construe% strictissimi %uris(an% t!e statutory e'e#tion clai#e% #ust +e e'resse% in alan0ua0e too lain to +e #ista*en.

PASCUAL vs. CO--ISSIONER OF INTERNAL REENUE

FACTS:Petitioners +ou0!t > arcels o& lan% in 127( an% anot!er ?arcels in 1277. T!e 6rst > arcels "ere sol% in 127( an%t!e re#ainin0 ? "ere sol% in 12H4. Petitioners reali,e% netro6t &ro# sale o& PI7( >>3.H4 in 127( an% P74( 444 in

12H4. Caital 0ains ta'es "ere ai% in 12H? an% 12H3 +yavailin0 ta' a#nesty. In 12H2( t!e actin0 5IR Co##issionerassesse% t!e etitioners an% re8uire% t!e# to ay%e6ciency inco#e ta'es o& P14H( 141.H4. Petitionersroteste% t!e assess#ent( assertin0 t!at t!ey !ave availe%o& ta' a#nesty. In rely( t!e Co##issioner in&or#e% t!eetitioners t!at as coo"ners( t!ey &or#e% an unre0istere%artners!i or $oint venture ta'a+le as a cororation( an%t!at t!e ta' a#nesty only relieve% t!e# &ro# lia+ility "it!resect to t!eir in%ivi%ual s!are in t!e ro6ts +ut %i% notrelieve t!e# &ro# t!e ta' lia+ility o& t!e unre0istere%artners!i. On revie"( t!e Court o& Ta' Aeals sustaine%

t!e assess#ent. 9ence( etitioners 6le% a etition +e&oret!e Sure#e Court.

ISSUE:=!et!er or not +y er&or#in0 t!e a&ore#entione%transactions( t!e etitioners !ave &or#e% an unre0istere%artners!i ta'a+le as a cororation.

HELD: T!e essential ele#ents o& a artners!i are t"o( na#ely: a/an a0ree#ent to contri+ute #oney( roerty or in%ustry to aco##on &un% an% +/ intent to %ivi%e t!e ro6ts a#on0 t!e

contractin0 arties. T!ere is no evi%ence t!at etitionersentere% into an a0ree#ent to contri+ute #oney( roerty orin%ustry to a co##on &un%( an% t!at t!ey inten%e% to %ivi%et!e ro6ts a#on0 t!e#selves. Reson%ent co##issioneran%Qor !is reresentative $ust assu#e% t!ese con%itions to+e resent on t!e +asis o& t!e &act t!at etitionersurc!ase% certain arcels o& lan% an% +eca#e coo"nerst!ereo&. T!e s!arin0 o& returns %oes not in itsel& esta+lis! aartners!i "!et!er or not t!e ersons s!arin0 t!erein !avea $oint or co##on ri0!t or interest in t!e roerty. T!ere#ust +e a clear intent to &or# a artners!i( t!e e'istence



o& a $uri%ical ersonality %ierent &ro# t!e in%ivi%ualartners( an% t!e &ree%o# o& eac! arty to trans&er orassi0n t!e "!ole roerty. In t!e resent case( t!ere is clearevi%ence o& coo"ners!i +et"een t!e etitioners. T!ere isno a%e8uate +asis to suort t!e roosition t!at t!ey

t!ere+y &or#e% an unre0istere% artners!i. T!e t"oisolate% transactions "!ere+y t!ey urc!ase% roertiesan% sol% t!e sa#e a &e" years t!erea&ter %i% not t!ere+y#a*e t!e# artners. T!ey s!are% in t!e 0ross ro6ts as coo"ners an% ai% t!eir caital 0ains ta'es on t!eir net ro6tsan% availe% o& t!e ta' a#nesty t!ere+y. Un%er t!ecircu#stances( t!ey cannot +e consi%ere% to !ave &or#e%an unre0istere% artners!i "!ic! is t!ere+y lia+le &orcororate inco#e ta'( as t!e reson%ent co##issionerrooses.

O5ILLOS vs. CIR an% CTA

FACTS:On -arc! >( 12H? )ose O+illos( Sr. co#lete% ay#ent toOrti0as Co.( Lt%. on t"o lots "it! areas o& 1(1>3 an% 27?s8uare #eters locate% at Green!ills( San )uan( Ri,al. T!ene't %ay !e trans&erre% !is ri0!ts to !is &our c!il%ren( t!eetitioners( to ena+le t!e# to +uil% t!eir resi%ences.Presu#a+ly( t!e Torrens 2 titles issue% to t!e# "oul% s!o"t!at t!ey "ere coo"ners o& t!e t"o lots. In 12H3( or a&ter!avin0 !el% t!e t"o lots &or #ore t!an a year( t!eetitioners resol% t!e# to t!e =alle% City SecuritiesCororation an% Ol0a Cru, Can%a. T!ey %erive% &ro# t!e

sale a total ro6t o& P 1?3(?31. or P ??(S3 &or eac! o& t!e#. T!ey treate% t!e ro6t as a caital 0ain an% ai% aninco#e ta' on one!al& t!ereo& or o& P17(H2>. In Aril( 124(or one %ay +e&ore t!e e'iration o& t!e 6ve year rescritiveerio%( t!e Co##issioner o& Internal Revenue re8uire% t!e&our etitioners to ay cororate inco#e ta' on t!e totalro6t o& P 1?3(??7 in a%%ition to in%ivi%ual inco#e ta' ont!eir s!ares t!ereo& 9e assesse% P?H(41 as cororateinco#e ta'( P 1(S42 as so &rau% surc!ar0e an% P1(S3H.S7 as 3> accu#ulate% interest( or a total o& PH1(4H37. Not only t!at. 9e consi%ere% t!e s!are o& t!e

ro6ts o& eac! etitioner in t!e su# o& P??(S3 as ta'a+le in&ull not a #ere caital 0ain o& "!ic! 1&> is ta'a+le/ an%re8uire% t!e# to ay %e6ciency inco#e ta'es a00re0atin0PS7(H4H.>4 inclu%in0 t!e &rau% surc!ar0e an% t!eaccu#ulate% interest. T!us( t!e etitioners are +ein0 !el%

lia+le &or %e6ciency inco#e ta'es an% enalties totalin0P1>H(H1.H7 on t!eir ro6t o& P1?3(??7( in a%%ition to t!eta' on caital 0ains alrea%y ai% +y t!e#. T!eCo##issioner acte% on t!e t!eory t!at t!e &our etitioners!a% &or#e% an unre0istere% artners!i or $oint venture"it!in t!e #eanin0 o& sections >3a/ an% 3+/ o& t!e Ta'Co%e. T!e etitioners conteste% t!e assess#ents. T"o )u%0es o& t!e Ta' Court sustaine% t!e sa#e. )u%0e Roa8uin%issente%. 9ence( t!e instant aeal.

ISSUE: =!et!er or not t!e etitioners &or#e% a ta'a+le artners!i

t!at s!oul% +e su+$ecte% to cororate inco#e ta' on t!etotal ro6t o& P 1?3(??7( in a%%ition to in%ivi%ual inco#e ta'on t!eir s!ares t!ereo&.

HELD: T!e Sure#e Court !el% t!at it is error to consi%er t!eetitioners as !avin0 &or#e% a artners!i un%er article1H7H o& t!e Civil Co%e si#ly +ecause t!ey alle0e%lycontri+ute% P 1H(H4.1> to +uy t!e t"o lots( resol% t!esa#e an% %ivi%e% t!e ro6t a#on0 t!e#selves. To re0ar%t!e etitioners as !avin0 &or#e% a ta'a+le unre0istere%artners!i "oul% result in oressive ta'ation an% con6r#

t!e %ictu# t!at t!e o"er to ta' involves t!e o"er to%estroy. T!at eventuality s!oul% +e o+viate%. As testi6e% +y )ose O+illos( )r.( t!ey !a% no suc! intention. T!ey "ere coo"ners ure an% si#le. To consi%er t!e# as artners "oul%o+literate t!e %istinction +et"een a coo"ners!i an% aartners!i. T!e etitioners "ere not en0a0e% in any $ointventure +y reason o& t!at isolate% transaction. T!eir ori0inalurose "as to %ivi%e t!e lots &or resi%ential uroses. I& later on t!ey &oun% it not &easi+le to +uil% t!eir resi%enceson t!e lots +ecause o& t!e !i0! cost o& construction( t!ent!ey !a% no c!oice +ut to resell t!e sa#e to %issolve t!e co



o"ners!i. T!e %ivision o& t!e ro6t "as #erely inci%entalto t!e %issolution o& t!e coo"ners!i "!ic! "as in t!enature o& t!in0s a te#orary state. It !a% to +e ter#inate%sooner or later. Article 1H72?/ o& t!e Civil Co%e rovi%est!at t!e s!arin0 o& 0ross returns %oes not o& itsel& esta+lis!

a artners!i( "!et!er or not t!e ersons s!arin0 t!e#!ave a $oint or co##on ri0!t or interest in any roerty&ro# "!ic! t!e returns are %erive%. T!ere #ust +e anun#ista*a+le intention to &or# a artners!i or $ointventure. All coo"ners!is are not %ee#e% unre0istere%artners!i. Coo"ners!i "!o o"n roerties "!ic!ro%uce inco#e s!oul% not auto#atically +e consi%ere%artners o& an unre0istere% artners!i( or a cororation("it!in t!e urvie" o& t!e inco#e ta' la". To !ol% ot!er"ise("oul% +e to su+$ect t!e inco#e o& all coo"ners!is o& in!erite% roerties to t!e ta' on cororations( inas#uc! asi& a roerty %oes not ro%uce an inco#e at all( it is not

su+$ect to any *in% o& inco#e ta'( "!et!er t!e inco#e ta'on in%ivi%uals or t!e inco#e ta' on cororation. In t!einstant case( "!at t!e Co##issioner( s!oul% !aveinvesti0ate% "as "!et!er t!e &at!er %onate% t!e t"o lots tot!e etitioners an% "!et!er !e ai% t!e %onorJs ta' SeeArt. 133( Civil Co%e/. =e are not re$u%0in0 t!is #atter. It#i0!t !ave alrea%y rescri+e%.

OA . CO--ISSIONER OF INTERNAL REENUE

FACTS: )ulia 5uales %ie% leavin0 as !eirs !er survivin0 souse(

Loren,o Oa an% !er 6ve c!il%ren. A civil case "as institute%&or t!e settle#ent o& !er state( in "!ic! Oa "as aointe%a%#inistrator an% later on t!e 0uar%ian o& t!e t!ree !eirs"!o "ere still #inors "!en t!e ro$ect &or artition "asarove%. T!is s!o"s t!at t!e !eirs !ave un%ivi%e% interest in 14 arcels o& lan%( 7 !ouses an% #oney &ro# t!e=ar Da#a0e Co##ission. Alt!ou0! t!e ro$ect o& artition"as arove% +y t!e Court( no atte#t "as #a%e to %ivi%et!e roerties an% t!ey re#aine% un%er t!e #ana0e#ent o& Oa "!o use% sai% roerties in +usiness +y leasin0 orsellin0 t!e# an% investin0 t!e inco#e %erive% t!ere&ro#

an% t!e rocee%s &ro# t!e sales t!ereo& in real roertiesan% securities. As a result( etitionersK roerties an%invest#ents 0ra%ually increase%. Petitioners returne% &orinco#e ta' uroses t!eir s!ares in t!e net inco#e +ut t!ey%i% not actually receive t!eir s!ares +ecause t!is le&t "it!

Oa "!o investe% t!e#. 5ase% on t!ese &acts( CIR %eci%e%t!at etitioners &or#e% an unre0istere% artners!i an%t!ere&ore( su+$ect to t!e cororate inco#e ta'( articularly&or years 12 an% 127.Petitioners as*e% &orreconsi%eration( "!ic! "as %enie% !ence t!is etition &orrevie" &ro# CTAKs %ecision.

ISSUE:1. =!et!er t!ere "as a coo"ners!i or an unre0istere%artners!i.>. =!et!er t!e etitioners are lia+le &or t!e %e6ciencycororate inco#e ta'.

HELD:Unre0istere% artners!i. T!e Ta' Court &oun% t!at instea%o& actually %istri+utin0 t!e estate o& t!e %ecease% a#on0t!e#selves ursuant to t!e ro$ect o& artition( t!e !eirsallo"e% t!eir roerties to re#ain un%er t!e #ana0e#ent o& Oa an% let !i# use t!eir s!ares as art o& t!e co##on&un% &or t!eir ventures( even as t!ey ai% correson%in0inco#e ta'es on t!eir resective s!ares.

@es. For ta' uroses( t!e coo"ners!i o& in!erite%roerties is auto#atically converte% into an unre0istere%

artners!i t!e #o#ent t!e sai% co##on roerties an%Qort!e inco#es %erive% t!ere&ro# are use% as a co##on &un%"it! intent to ro%uce ro6ts &or t!e !eirs in roortion tot!eir resective s!ares in t!e in!eritance as %eter#ine% in aro$ect artition eit!er %uly e'ecute% in an e'tra$u%icialsettle#ent or arove% +y t!e court in t!e correson%in0testate or intestate rocee%in0. T!e reason is si#le. Fro#t!e #o#ent o& suc! artition( t!e !eirs are entitle% alrea%yto t!eir resective %e6nite s!ares o& t!e estate an% t!einco#es t!ereo&( &or eac! o& t!e# to #ana0e an% %isose o& as e'clusively !is o"n "it!out t!e intervention o& t!e ot!er



!eirs( an%( accor%in0ly( !e +eco#es lia+le in%ivi%ually &or allta'es in connection t!ere"it!. I& a&ter suc! artition( !eallo"s !is s!are to +e !el% in co##on "it! !is co!eirsun%er a sin0le #ana0e#ent to +e use% "it! t!e intent o& #a*in0 ro6t t!ere+y in roortion to !is s!are( t!ere can

+e no %ou+t t!at( even i& no %ocu#ent or instru#ent "eree'ecute%( &or t!e urose( &or ta' uroses( at least( anunre0istere% artners!i is &or#e%. For uroses o& t!e ta'on cororations( our National Internal Revenue Co%einclu%es t!ese artners!is V T!e ter# ;artners!i<inclu%es a syn%icate( 0rou( ool( $oint venture or ot!erunincororate% or0ani,ation( t!rou0! or +y #eans o& "!ic!any +usiness( 6nancial oeration( or venture is carrie% onW"it! t!e e'cetion only o& %uly re0istere% 0eneral coartners!is V "it!in t!e urvie" o& t!e ter# ;cororation.<It is( t!ere&ore( clear to our #in% t!at etitioners !ereinconstitute a artners!i( inso&ar as sai% Co%e is concerne%(

an% are su+$ect to t!e inco#e ta' &or cororations. )u%0#ent ar#e%.

-ADRIAL v!. RAFFERT/

FACTS:icente -a%ri0al an% Susana Paterno "ere le0ally #arrie%an% !ave con$u0al artners!i. -a%ri0al 6le% !is total netinco#e &or t!e year is P>27(?4>.H?.

Su+se8uently( -a%ri0al su+#itte% t!e clai# t!at t!e sai%total net inco#e o& year 1213 %i% not reresent !is inco#e&or t!e year 1213( +ut "as in &act t!e inco#e o& t!e con$u0alartners!i e'istin0 +et"een !i#sel& an% !is "i&e( an% t!eco#utin0 an% assessin0 t!e a%%itional inco#e ta' rovi%e%+y t!e Act o& Con0ress o& Oct. ?( 121?( t!e inco#e %eclare%+y -a%ri0al an% t!e ot!er !al& o& Paterno. -a%ri0al an%Paterno +rou0!t action a0ainst Collector o& Internal Revenuean% t!e Deuty Collector o& Internal Revenue &or t!erecovery o& t!e su# P?(H7.4. T!e +ur%en o& t!e co#laint

"as t!at i& t!e inco#e ta' &or t!e year 1213 !a% +eencorrectly an% la"&ully co#ute% t!ere "oul% !ave +een %ueaya+le +y eac! o& t!e lainti t!e su# o& P>(2>1.42( "!ic!ta*en to0et!er a#ount o& P3>.1 instea% o& P2(77.>1.

ISSUE:=ON t!e a%%itional inco#e ta' s!oul% +e %ivi%e% into e8ualarts +ecause o& t!e con$u0al artners!i e'istin0 +et"eent!e#X

HELD:NO. Paterno !as an inc!oate ri0!t in t!e roerty o& !er!us+an% -a%ri0al %urin0 t!e li&eti#e o& t!e con$u0alroerty. S!e !as an interest in t!e ulti#ate o"ners!i o& roerty ac8uire% as inco#e o& t!e con$u0al artners!i.Not +ein0 sei,e% o& t!e searate estate( Paterno cannot#a*e a searate return in or%er to receive t!e +ene6t o& t!e

e'e#tion "!ic! "oul% arise +y reason o& t!e a%%itionalta'. As s!e !as no estate or inco#e( actually an% le0allyveste% in !er an% entirely %istinct &ro# !er !us+an%roerty( t!e inco#e cannot roerly +e consi%ere% t!esearate inco#e o& t!e "i&e &or t!e urose o& t!e a%%itionalta'. T!e inco#e ta' la" %oes not loo* on t!e souses asin%ivi%ual artners in an or%inary artners!i.

T!e !i0!er sc!e%ules o& t!e a%%itional ta' %irecte% at t!einco#es o& t!e "ealt!y #ay not +e artially %e&eate% +yreliance on rovisions in our Civil Co%e %ealin0 "it! t!e

con$u0al artners!i an% !avin0 no alication to t!eInco#e Ta' La".

FIS9ER v. TRINIDAD

FACTS: Fre%eric* Fis!er "as a stoc*!ol%er o& P!iliineA#erican Dru0 Co#any( a %o#estic cororation. For t!eyear 1212 !e %eclare% a ;stoc* %ivi%en%< in t!e a#ount o& P>3(44 &or "!ic! !e "as su+se8uently ta'e% +y t!ereson%ent Collector o& Internal Revenue &or t!esu# o& P2.21 as inco#e ta'. Fis!er ai% un%er rotest an%



+rou0!t action &or recovery. Trini%a% %e#urre% "!ic! "assustaine% !ence t!is aeal.

ISSUE:=ON ;stoc* %ivi%en%s< are ;inco#e< ta'a+le as suc! un%er

Sec. > o& Act No. >?? t!e Inco#e Ta' La"M.HELD:No. Follo"in0 Eisner vs. -aco#+er an% ot!er US cases( t!eCourt !el% t!at ;stoc* %ivi%en%s< are ;inco#e< ta'a+leun%er t!e Inco#e Ta' La". T!ey $usti6e% t!e alica+ility o& t!e rulin0 +y sayin0 t!at t!ere is +ut sli0!t %ierence in t!e"or%in0 o& t!e t"o la"s1 "!ic! %e6ne% ;%ivi%en%s< as arto& ta'a+le inco#e. T!e receit o& stoc* %ivi%en%s #erelyreresents an increase in value o& t!e assets o& acororation. T!e court %e6nes stoc* %ivi%en%s as ;increasein caital o& cors( 6r#s( artners!is( etc &or a articular

erio%.< T!ey reresent t!e increase in t!e roortionals!are o& eac! stoc*!ol%er in t!e co#anyKs caital. It is nota %istri+ution o& t!e cororationKs ro6ts to t!e stoc*!ol%er.It only increases t!e stoc*!ol%erKs SOURCE o& inco#ecaital/( +ut %oes not increase inco#e itsel&. On %e6nitiono& inco#e ta': Act No. >?? ta'e% any %istri+ution +y acororation out o& its earnin0s or ro6ts. Fro# t!e various%e6nitions o& inco#e ta' cite%( an inco#e ta' is a ta' on 1Act o& Con0ress 1217/: T!at t!e ter# %ivi%en%s as use%in t!is title s!all +e !el% to #ean any %istri+ution #a%e oror%ere% to #a%e +y a cororation( . . . "!ic! stoc* %ivi%en%s!all +e consi%ere% inco#e( to t!e a#ount o& its cas! value.

Act No. >?? o& t!e P!iliine Le0islature: T!e ter#%ivi%en%s as use% in t!is La" s!all +e !el% to #ean any%istri+ution #a%e or or%ere% to +e #a%e +y a cororation. . .out o& its earnin0s or ro6ts accrue% '''( "!et!er in cas! orin stoc* o& t!e cororation( . . . . Stoc* %ivi%en% s!all +econsi%ere% inco#e( to t!e a#ount o& t!e earnin0s or ro6ts%istri+ute%. T!e yearly ro6ts arisin0 &ro# roerty( salary(rivate revenue( caital investe%( an% all ot!er sources o& inco#e. =!at is ta'e% is t!e ro6t( not t!e source. =!eninco#e is reali,e% Test o& Reali,ation/: Stoc* %ivi%en% int!is case is not ta'a+le &or inco#e +ecause t!e stoc*!ol%er

!as receive% not!in0 out o& t!e co#anyJs assets &or !issearate use an% +ene6t. Instea%( !is ori0inal invest#entalon0 "it! "!atever 0ains "!ic! resulte% &ro# t!e use o& !isan% ot!er stoc*!ol%erKs #oney re#ains roerty o& t!eco#any. T!e &act t!at it is not yet !is #eans t!e caital is

still su+$ect to +usiness ris*s t!at can "ie out !is entireinvest#ent. All !e !as receive% is a stoc* certi6catein%icatin0 t!e increase in !is caital in t!e co#any. T!us"e can say t!at inco#e !as +een reali,e% "!en t!ere !as+een a searation o& t!e interest o& t!e stoc*!ol%er &ro# t!e0eneral caital o& t!e cororation. T!is searation o& interest!aens "!en t!e co#any %eclares a cas! %ivi%en% on t!es!ares o& s!are!ol%ers.

CON=I v. COURT OF TAY APPEALS

RATIO DECIDENDI

Inco#e o& Filiino citi,ens te#orarily resi%in0 in a &orei0ncountry( even i& totally %erive% &ro# outsi%e t!e P!iliines(is su+$ect to ta' +y virtue o& Sec. >1( NIRC( vi,: ;A ta' is!ere+y i#ose% uon t!e ta'a+le net inco#e receive% ' ' '&ro# all sources +y every in%ivi%ual( "!et!er a citi,en o& t!eP!iliines resi%in0 t!erein or a+roa% ' ' '< italics #ine/

FACTS:9ernan%o Con"i et al. Con"i et al./ are e#loyees o& Procter Ga#+le P!iliine -anu&acturin0 Cororation( alocal su+si%iary o& U.S.+ase% Procter Ga#+le. Con"i et al."ere te#orarily assi0ne% to su+si%iaries o& Procter

Ga#+le outsi%e o& t!e P!iliines( "!ere t!ey "ere ai% inU.S. %ollars. It is clai#e% t!at t!ey earne% an% sent t!eir#oney e'clusively a+roa%( an% t!at t!ey %i% not re#it#oney +ac* into t!e P!iliines %urin0 t!e ti#e t!ey "ereoutsi%e o& t!e country earnin0 in %ollars. In t!e years 12H4an% 12H1( Con"i et al.( since t!ey "ere earnin0 in U.S.currency( in or%er to ay t!eir inco#e ta' lia+ilities inP!iliine eso( use% t!e revailin0 &ree #ar*et rate o& conversion rescri+e% un%er a 5ureau o& Internal Revenuerulin0 an% t"o Revenue -e#oran%u# Circulars. 9o"ever( in12H?( Con"i et al. 6le% "it! t!e Co##issioner o& Internal



Revenue CIR/ a#en%e% inco#e ta' returns &or t!e sai%years( t!is ti#e usin0 t!e ar value o& t!e eso asconversion rate. T!e a%$ust#ent cause% a %isarity +et"een"!at "as initially ai% an% "!at t!ey "ere no" clai#in0 to+e t!eir actual ta' lia+ilities. Conse8uently( t!ey as*e% &or a

re&un% o& t!e ;overay#ent.< Even +e&ore t!e CIR coul% rule on t!e #atter( Con"i et al.6le% a etition &or revie" +e&ore t!e Court o& Ta' AealsCTA/( "!ic! eventually %enie% t!eir clai# &or ta' re&un%an%Qor ta' cre%it. A00rieve%( Con"i et al.( via a etition &orrevie"( elevate% t!e #atter to t!e Sure#e Court.

ISSUES 0 ARU-ENTS:=QN t!e rulin0 an% circulars a+ove aly to Con"i et al.

Note: Conti et al. ar0ue t!at since t!ere "ere nore#ittances an% accetances o& t!eir salaries an% "a0es in

U.S. %ollars into t!e P!iliines( t!ey are e'e#t &ro# t!ecovera0e o& suc! rulin0 an% circulars./

HELD: @ES( t!e sai% rulin0 an% circulars aly to Con"i et al.

;Inco#e< #ay +e %e6ne% as ;an a#ount o& #oney co#in0to a erson or cororation "it!in a seci6e% ti#e( "!et!eras ay#ent &or services( interest( or ro6t &ro# invest#ent.' ' ' Inco#eK can also +e t!ou0!t o& as a Bo" o& t!e &ruitso& oneKs la+or.< T!e %ollar earnin0s o& Con"i et al. are &ruitso& t!eir la+or in t!e &orei0n su+si%iaries o& Procter Ga#+le.

T!ey "ere 0iven a %e6nite a#ount o& #oney "!ic! ca#e tot!e# "it!in a seci6e% erio% o& ti#e as ay#ent &or t!eirservices. Sec. >1( NIRC( states: ;A ta' is !ere+y i#ose%uon t!e ta'a+le net inco#e receive% ' ' ' &ro# all sources+y every in%ivi%ual( "!et!er a citi,en o& t!e P!iliinesresi%in0 t!erein or a+roa% ' ' '< As suc!( t!eir inco#e ista'a+le even i& t!ere "ere no in"ar% re#ittances %urin0 t!eti#e t!ey "ere earnin0 in %ollars a+roa%. Uytr3?>1ZT!erulin0 an% t!e circulars are a vali% e'ercise o& o"er on t!eart o& t!e Secretary o& Finance +y virtue o& Sec. ??( NIRC("!ic! e#o"ers !i# ;to ro#ul0ate all nee%&ul rules an%

re0ulations< to eectively en&orce its rovisions. 5esi%es(t!ey !ave alrea%y ai% t!eir ta'es usin0 t!e rescri+e% rateo& conversion. T!ere is no nee% &or t!e CIR to 0ive t!e# ata' re&un% an%Qor cre%it.

Co##issioner v. Glens!a" Glass Co.?3 U.S. 3>7 12/Glens!a" "on an antitrust la"suit an% receive% unitive%a#a0es. Searately( Gol%#an T!eaters "on a %ierentantitrust la"suit an% also receive% unitive %a#a0es. Inneit!er case "as t!e #oney reorte% as 0ross inco#e. T!eIRS sue% to collect ta'es on t!e inco#e. T!e IRS ar0ue% t!at%a#a0e a"ar%s s!oul% +e consi%ere% 0ross inco#e.Glens!a" an% Gol%#an ar0ue% t!at t!e %e6nition o& 0rossinco#e in >7 U.S.C. [>>a/ no" [71a// %i%nJt e'licitlystate t!at %a#a0e a"ar%s "ere 0ross inco#e( so t!ere&oret!ey coul%nJt +e inclu%e%. T!e US Sure#e Court !a%

reviously rule% t!at inco#e is t!e return to la+or( caital(or +ot! co#+ine%( an% Glens!a" ar0ue% t!at t!ere "as nola+or or caital involve% in "innin0 an antitrust la"suit. inEisner v. -aco#+er >> U.S. 12 12>4//. !e US Ta' Court&oun% &or Glens!a" an% Gol%#an. T!e IRS aeale%. T!eAellate Court ar#e% in +ot! cases. T!e IRS aeale%. T!e US Sure#e Court reverse% an% &oun% t!at t!e %a#a0ea"ar%s "ere 0ross inco#e. T!e US Sure#e Court loo*e% tot!e 17t! A#en%#ent an% &oun% t!ere "as no constitutional+ar to collectin0 ta'es on %a#a0e a"ar%s. T!e Court loo*e%to t!e lain lan0ua0e o& [>>a/( an% &oun% t!at Con0ressinten%e% to ta' all 0ains e'cet t!ose seci6cally e'e#te%.

[>>a/ %i%nJt e'licitly state t!at %a#a0e a"ar%s "ereta'a+le( +ut it also %i%nJt say t!at t!ey "erenJt. T!e%e6nition o& 0ross inco#e in [>>a/ inclu%e% a clause t!atsai%( ...or 0ains or ro6ts an% inco#e %erive% &ro# anysource "!atever. T!e Court interrete% t!at to #ean t!atCon0ress "ante% to use t!e &ull #easure o& its ta'in0o"er an% ta' everyt!in0 it ossi+ly coul%. T!e i%ea t!ateveryt!in0 is inco#e unless ot!er"ise in%icate% is a reversalo& Eisner.

FACTS:



T!is case concerns unitive %a#a0es collecte% +y t"oco#anies( Glens!a" Glass Co. Glens!a"/ an% =illia#Gol%#an T!eatres( Inc. Gol%#an T!eatres/ %e&en%ants/.Glens!a" "as involve% in a suit a0ainst a #anu&acturin0co#any( in "!ic! Glens!a" re8ueste% e'e#lary %a#a0es

&or t!e %e&en%antKs alle0e% &rau% an% tre+le %a#a0es &orin$ury to Glens!a"Ks +usiness. In 123H( t!e arties settle%an% Glens!a" receive% \?>3(>2.23 in unitive %a#a0es.Glens!a" %i% not inclu%e t!e unitive %a#a0es in itsinco#e ta' return &or t!at year. T!e Co##issioner &oun%t!at Glens!a" o"e% ta' on t!e unitive %a#a0es. T!e Ta'Court %isa0ree%( statin0 t!at unitive %a#a0es "ere notta'a+le. Gol%#an T!eatres si#ilarly receive% unitive%a#a0es "!en it "on an action &or &e%eral antitrustviolations co##itte% +y Loe"Ks( Inc. T!e trial court &oun%t!at Gol%#an T!eatres !a% sustaine% \1>(444 in loss o& ro6ts an% a"ar%e% \?H(444 in tre+le %a#a0es. Gol%#an

T!eatre reorte% \1>(444 o& t!e a"ar% as 0ross inco#e &ort!at year( +elievin0 t!at t!e unitive t"ot!ir%s o& t!e a"ar%"ere not su+$ect to ta'ation. T!e Ta' Court a0ree%. T!eCourt o& Aeals &or t!e T!ir% Circuit consoli%ate% t!e t"ocases an% ar#e% t!e Ta' CourtKs %ecisions. T!e Sure#eCourt 0rante% certiorari.

A ta'ayer as 0ross inco#e un%er >> a/ o& t!e InternalRevenue Co%e o& 12?2:

i. In %eter#inin0 "!at constitutes 0ross inco#e as%e6ne% in >> a/( eect #ust +e 0iven to t!e catc!alllan0ua0e 0ains or ro6ts an% inco#e %erive% &ro#

any source "!atever.ii. Eisner v. -aco#+er( >> U.S. 12 ( %istin0uis!e%.iii. T!e #ere &act t!at suc! ay#ents are e'tracte% &ro#

t!e "ron0%oers as unis!#ent &or unla"&ul con%uctcannot %etract &ro# t!eir c!aracter as ta'a+leinco#e to t!e reciients.

iv. A %ierent result is not re8uire% +y t!e &act t!at >>a/ "as reenacte% "it!out c!an0e a&ter t!e 5oar% o& Ta' Aeals !a% !el% unitive %a#a0es nonta'a+lein 9i0!lan% Far#s Cor.

v. T!e le0islative !istory o& t!e Internal Revenue Co%eo& 123 %oes not re8uire a %ierent result. T!e%e6nition o& 0ross inco#e "as si#li6e%( +ut noeect uon its resent +roa% scoe "as inten%e%.

vi. Punitive %a#a0es cannot +e classi6e% as 0i&ts( nor %o

t!ey co#e un%er any ot!er e'e#tion in t!e Co%e.

OLD COLON@ TRUST CO. et al. v. CO--ISSIONER OFINTERNAL REENUE.

=e !ave +e&ore us &or consi%eration t"o 8uestions certi6e%&ro# t!e sa#e Circuit Court o& Aeals( No. 1?4 an% No.1>2. T!ey are resente% uon %ierent state#ents o& &acts(an% t!e cases reac! t!e certi&yin0 court in %ierent "ays(+ut t!e 8uestions are so nearly ali*e t!at t!e certi&yin0 $u%0es %ee#e% it convenient to resent t!e# in

consoli%ate% &or#. =e re&er to searate t!e 8uestions(%iscuss an% %eci%e No. 1?4 6rst( an% t!en consi%er No. 1>2.

No. 1?4 co#es !ere +y certi6cate &ro# t!e Circuit Court o& Aeals &or t!e First Circuit. T!e action in t!at court "as+e0un +y a etition to revie" a %ecision o& t!e Unite% States5oar% o& Ta' Aeals. T!e etitioners are t!e e'ecutors o& t!e "ill o& =illia# -. =oo%( %ecease%. On )une >H( 12>(+e&ore -r. =oo%Js %eat!( t!e Co##issioner o& InternalRevenue noti6e% !i# +y re0istere% #ail o& t!e%eter#ination o& a %e6ciency in inco#e ta' a0ainst !i# &ort!e years 1212 an% 12>4( un%er t!e Revenue Act o& 121

34 Stat. 14H/. T!e %e6ciency "as revise% +y t!eCo##issioner Au0ust 1( 12>. An aeal "as ta*en to t!e5oar% o& Ta' Aeals( "!ic! "as 6le% Octo+er >H( 12>. A!earin0 +e&ore t!e 5oar%( Aril 11( 12>H( resulte% in a%ecision Nove#+er 1>( 12>H. T!e 5oar% arove% t!e actiono& t!e Co##issioner( an% &oun% a %e6ciency in t!e &e%eralinco#e ta' return o& -r. =oo% &or t!e year 1212 o& \H4(H1.2?( an% &or t!e year 12>4 o& \?4(?H.13. T!eetition &or revie" "as er&ecte% Dece#+er >?( 12>H(ursuant to t!e Revenue Act o& 12>7( [ >?$/( an% sections1441 to 144( c. >H( 33 Stat. 2( 7( 142 >7 USCA [ 1473$/(



an% [[ 1>>31>>( an% rule ? o& t!e First Circuit Court o& Aeals.

T!e &acts certi6e% to us are su+stantially as &ollo"s:

=illia# -. =oo% "as resi%ent o& t!e A#erican =oolenCo#any %urin0 t!e years 121( 1212( an% 12>4. In 121!e receive% as salary an% co##issions &ro# t!e co#any\2H(H>( "!ic! !e inclu%e% in !is &e%eral inco#e ta' return&or 121. In 1212 !e receive% as salary an% co##issions&ro# t!e co#any \3(1?>.H( "!ic! !e inclu%e% in !isreturn &or 1212.

Au0ust ?( 1217( t!e A#erican =oolen Co#any !a%a%ote% t!e &ollo"in0 resolution( "!ic! "as in eect in 1212an% 12>4:

Jote%: T!at t!is co#any ay any an% all inco#e ta'es(State an% Fe%eral( t!at #ay !erea&ter +eco#e %ue an%aya+le uon t!e salaries o& all t!e ocers o& t!e co#any(inclu%in0 t!e resi%ent( =illia# -. =oo% t!e co#troller(Parry C. =i00in t!e au%itor( Geor0e R. La"ton an% t!e&ollo"in0 #e#+ers o& t!e sta( to "it: Fran* 9. Carenter(E%"in L. 9eat!( Sa#uel R. 9aines( an% =illia# -. Las+ury(to t!e en% t!at sai% ersons an% ocers s!all receive t!eirsalaries or ot!er co#ensation in &ull "it!out %e%uction onaccount o& inco#e ta'es( State or Fe%eral( "!ic! ta'es areto +e ai% out o& t!e treasury o& t!is cororation.J

T!is resolution "as a#en%e% on -arc! >( 121( as &ollo"s:

Jote%: T!at( re&errin0 to t!e vote asse% +y t!is +oar% onAu0ust ?( 1217( in re&erence to inco#e ta'es( State an%Fe%eral( aya+le uon t!e salaries or co#ensation o& t!eocers an% certain e#loyees o& t!is co#any( t!e #et!o%o& co#utin0 sai% ta'es s!all +e as &ollo"s( vi,.:

T!e %ierence +et"een "!at t!e total a#ount o& !is ta'"oul% +e( inclu%in0 !is inco#e &ro# all sources( an% t!ea#ount o& !is ta' "!en co#ute% uon !is inco#e

e'clu%in0 suc! co#ensation or salaries ai% +y t!isco#any.

Pursuant to t!ese resolutions( t!e A#erican =oolenCo#any ai% to t!e collector o& internal revenue -r.

=oo%Js &e%eral inco#e an% surta'es %ue to salary an%co##issions ai% !i# +y t!e co#any( as &ollo"s:

T!e %ecision o& t!e 5oar% o& Ta' Aeals !ere sou0!t to +erevie"e% "as t!at t!e inco#e ta'es o& \71(172. an%\?1(1H2.>H ai% +y t!e A#erican =oolen Co#any &or -r.=oo% "ere a%%itional inco#e to !i# &or t!e years 1212 an%12>4.

T!e 8uestion certi6e% +y t!e Circuit Court o& Aeals &orans"er +y t!is Court is:

JDi% t!e ay#ent +y t!e e#loyer o& t!e inco#e ta'esassessa+le a0ainst t!e e#loyee constitute a%%itionalta'a+le inco#e to suc! e#loyeeXJ

T!e 6rst oint resente% to us is t!at o& t!e $uris%iction o& t!is Court to ans"er t!e 8uestion o& la" certi6e%. It re8uiresus to e'a#ine t!e ori0inal statute rovi%in0 &or t!e 5oar% o& Ta' Aeals un%er t!e Revenue Act o& 12>3( an% t!ea#en%in0 act o& 12>7.

T!e 5oar% o& Ta' Aeals( esta+lis!e% +y section 244 o& t!eRevenue Act o& 12>3( tit. 2( c. >3?( 3? Stat. >?( ??7 >7

USCA [ 1>11( note( et se8./( "as create% +y Con0ress torovi%e ta'ayers an oortunity to secure an in%een%entrevie" o& t!e Co##issioner o& Internal RevenueJs%eter#ination o& a%%itional inco#e an% estate ta'es +y t!e5oar% in a%vance o& t!eir ayin0 t!e ta' &oun% +y t!eCo##issioner to +e %ue. 5e&ore t!e act o& 12>3( t!eta'ayer coul% only contest t!e Co##issionerJs%eter#ination o& t!e a#ount o& t!e ta' a&ter its ay#ent. T!e 5oar%Js %uty un%er t!e act o& 12>3 "as to !ear(consi%er( an% %eci%e "!et!er %e6ciencies reorte% +y t!eCo##issioner "ere ri0!t.



Section >H? o& t!at act >7 USCA [ 143H/ %e6ne% aJ%e6ciencyJ to +e t!e a#ount +y "!ic! t!e ta' i#ose%e'cee%e% t!e a#ount s!o"n +y t!e return o& t!e ta'ayera&ter t!e return "as increase% +y t!e a#ounts reviously

assesse% or %isallo"e%. T!ere "as un%er t!e act o& 12>3 no%irect $u%icial revie" o& t!e rocee%in0s +e&ore t!e 5oar% o& Ta' Aeals. 5ut eac! arty !a% t!e un!in%ere% ri0!t tosee* searate action +y a court o& co#etent $uris%iction totest t!e correctness o& t!e 5oar%Js action. Suc! courtrocee%in0s "ere to +e +e0un "it!in one year a&ter t!e 6nal%ecision o& t!e 5oar%.

Section >H3+/ >7 USCA [ 1432( note( rovi%e% t!at( i& t!e5oar% %eter#ine% t!ere "as a %e6ciency( t!e a#ount so%eter#ine% s!oul% +e assesse% an% ai% uon notice an%%e#an% &ro# t!e collector. No art o& t!e a#ount

%eter#ine% as a %e6ciency +y t!e Co##issioner( +ut%isallo"e% as a %e6ciency +y t!e 5oar%( coul% +e assesse%(+ut t!e Co##issioner "as at li+erty( not"it!stan%in0 t!e%ecision o& t!e 5oar% a0ainst !i#( to +rin0 a suit in a roercourt a0ainst t!e ta'ayer to collect t!e alle0e% %e6ciency.

On t!e ot!er !an%( +y section 2440/ >7 USCA [ 1>1( note(it "as rovi%e% t!at( in any suit +rou0!t +y t!eCo##issioner( or +y t!e ta'ayer to recover any a#ountsai% in ursuance o& a %ecision o& t!e 5oar%( t!e 6n%in0s o& t!e 5oar% "ere ri#a &acie evi%ence o& t!e &acts.

5y t!e Revenue Act o& 12>7( t!is roce%ure "as c!an0e%(an% a %irect $u%icial revie" o& t!e 5oar%Js %ecision "assu+stitute%.

T!e act o& 12>7 also enlar0e% t!e ori0inal $uris%iction o& t!e5oar% o& Ta' Aeals to consi%er %e6ciencies +eyon% t!oses!o"n in t!e Co##issionerJs notice( i& t!e Co##issioner#a%e suc! a clai# at or +e&ore t!e !earin0 section >H3e/>7 USCA [ 143c/( an% also to %eter#ine t!at t!e ta'ayernot only %i% not o"e t!e ta' +ut !a% over ai% section>3e/ >7 USCA [ 147( note/.

T!e c!ie& c!an0e #a%e +y t!e act o& 12>7 "as t!e rovision&or %irect $u%icial revie" o& t!e 5oar%Js %ecisions +y t!e 6lin0+y t!e Co##issioner or t!e ta'ayer o& a etition &or revie"in a Circuit Court o& Aeals or t!e Court o& Aeals o& t!e

District o& Colu#+ia un%er rules a%ote% +y suc! courts.It is su00este% t!at t!e rocee%in0s +e&ore t!e CircuitCourts o& Aeals or t!e District Court o& Aeals on aetition to revie" are an% can not +e $u%icial( &or t!eyinvolve Jno case or controversy(J an% "it!out t!is a CircuitCourt o& Aeals( "!ic! is a constitutional court E' arte5a*elite Cororation( No. 1H( Ori0inal( >H2 U. S. 3?( 32 S.Ct. 311( H? L. E%. V( %eci%e% -ay >4( 12>2/ is incaa+le o& e'ercisin0 its $u%icial &unction. T!is vie" o& t!e nature o& t!erocee%in0s "e cannot sustain.

T!e case is analo0ous to t!e suits "!ic! are lo%0e% in t!eCircuit Courts o& Aeals uon etition or 6n%in0 o& ane'ecutive or a%#inistrative tri+unal. It is not i#ortant"!et!er suc! a rocee%in0 "as ori0inally +e0un +y ana%#inistrative or e'ecutive %eter#ination( i&( "!en it co#esto t!e court( "!et!er le0islative or constitutional( it calls &ort!e e'ercise o& only t!e $u%icial o"er o& t!e court uon"!ic! $uris%iction !as +een con&erre% +y la". T!e $uris%ictionin t!is cause is 8uite li*e t!at o& Circuit Courts o& Aeals inrevie" o& or%ers o& t!e Fe%eral Tra%e Co##ission. Fe%eral Tra%e Co##ission v. East#an ]o%a* Co.( >H3 U. S. 7>?( 3HS. Ct. 7( H1 L. E%. 1>? Silver Co. v. Fe%eral Tra%e

Co##ission C. C. A./ >2> F. H>. T!ere are ot!er instanceso& a li*e *in% "!ic! can +e cite%. Unite% States v. Ritc!ie( 1H9o". >( ?3( 1 L. E%. >?7 Interstate Co##erceCo##ission v. 5ri#son( 13 U. S. 33H( 372( 13 S. Ct. 11>(? L. E%. 143H Ste!ens v. C!ero*ee Nation( 1H3 U. S. 33(3HH( 12 S. Ct. H>>( 3? L. E%. 1431. See( also( Fon0 @ue Tin0v. Unite% States( 132 U. S. 72( H13( 1? S. Ct. 1417( ?H L.E%. 24.

It is not necessary t!at t!e rocee%in0 to +e $u%icial s!oul%+e one entirely %e novo. It is enou0! t!at( +e&ore t!e



$u%0#ent "!ic! #ust +e 6nal !as +een invo*e% as ane'ercise o& $u%icial o"er( it s!all !ave certain necessary&eatures. =!at t!ese are !as +een o&ten %eclare% +y t!isCourt. Per!as t!e #ost co#re!ensive %e6nitions o& t!e#are set &ort! in -us*rat v. Unite% States( >12 U. S. ?37( ?7(

?1 S. Ct. >4( L. E%. >37( "!ere t!is Court entere% intot!e in8uiry "!at "as t!e e'ercise o& $u%icial o"er ascon&erre% +y t!e Constitution. T!ere "as cite% t!ere a%e6nition +y -r. )ustice Fiel% in Re Paci6c Rail"ayCo##ission C. C./ ?> F. >31( >( "!ic! !as +een 0enerallyaccete% as accurate. 9e sai%:

JT!e $u%icial article o& t!e Constitution #entions cases an%controversies. T!e ter# Jcontroversies(J i& %istin0uis!a+le atall &ro# Jcases(J is so in t!at it is less co#re!ensive t!ant!e latter( an% inclu%es only suits o& a civil nature. C!is!ol#v. Geor0ia( > Dall. 3?1( 3?>( 1 L. E%. 334/ 1 Tuc*. 5l.

Co##. A. 3>4( 3>1. 5y cases an% controversies areinten%e% t!e clai#s o& liti0ants +rou0!t +e&ore t!e courts &or%eter#ination +y suc! re0ular rocee%in0s as areesta+lis!e% +y la" or custo# &or t!e rotection oren&orce#ent o& ri0!ts( or t!e revention( re%ress( orunis!#ent o& "ron0s. =!enever t!e clai# o& a arty un%ert!e Constitution( la"s( or treaties o& t!e Unite% States ta*essuc! a &or# t!at t!e $u%icial o"er is caa+le o& actin0 uonit( t!en it !as +eco#e a case. T!e ter# i#lies t!ee'istence o& resent or ossi+le a%verse arties "!osecontentions are su+#itte% to t!e court &or a%$u%ication.J

In Os+orn v. Unite% States 5an*( 2 =!eat. H?( a0e 12( 7L. E%. >43( C!ie& )ustice -ars!all construe% article ? o& t!eConstitution as &ollo"s:

JT!is clause ena+les t!e $u%icial %eart#ent to receive $uris%iction to t!e &ull e'tent o& t!e constitution( la"s an%treaties o& t!e Unite% States( "!en any 8uestion resectin0t!e# s!all assu#e suc! a &or# t!at t!e $u%icial o"er iscaa+le o& actin0 on it. T!at o"er is caa+le o& actin0 only"!en t!e su+$ect is su+#itte% to it( +y a arty "!o asserts!is ri0!ts in t!e &or# rescri+e% +y la". It t!en +eco#es a

case( an% t!e constitution %eclares( t!at t!e $u%icial o"ers!all e'ten% to all cases arisin0 un%er t!e constitution( la"san% treaties o& t!e Unite% States.J

T!e Circuit Court o& Aeals is a constitutional court un%er

t!e %e6nition o& suc! courts as 0iven in t!e 5a*elite Case(sura( an% a case or controversy #ay co#e +e&ore it(rovi%e% it involves neit!er a%visory nor e'ecutive action +yit.

In t!e case "e !ave !ere( t!ere are a%verse arties. T!eUnite% States or its aut!ori,e% ocial asserts its ri0!t to t!et!e ay#ent +y a ta'ayer o& a ta' %ue &ro# !i# to t!e0overn#ent( an% t!e ta'ayer is resistin0 t!at ay#ent oris see*in0 to recover "!at !e !as alrea%y ai% as ta'es"!en +y la" t!ey "ere not roerly %ue. T!at #a*es a caseor controversy( an% t!e roer %isosition o& it is t!e

e'ercise o& $u%icial o"er. T!e courts are eit!er t!e CircuitCourt o& Aeals or t!e District o& Colu#+ia Court o& Aeals. T!e su+$ect#atter o& t!e controversy is t!ea#ount o& t!e ta' clai#e% to +e %ue or re&un%a+le an% itsvali%ity( an% t!e $u%0#ent to +e ren%ere% is a $u%icial $u%0#ent.

T!e 5oar% o& Ta' Aeals is not a court. It is an e'ecutive ora%#inistrative +oar%( uon t!e %ecision o& "!ic! t!e artiesare 0iven an oortunity to +ase a etition &or revie" to t!ecourts a&ter t!e a%#inistrative in8uiry o& t!e 5oar% !as +een!a% an% %eci%e%.

It is ne't su00este% t!at t!ere is no a%e8uate 6nalityrovi%e% in resect to t!e action o& t!ese courts. In t!e 6rstlace( it is not necessary( in or%er to constitute a $u%icial $u%0#ent( t!at t!ere s!oul% +e +ot! a %eter#ination o& t!eri0!ts o& t!e liti0ants an% also o"er to issue &or#ale'ecution to carry t!e $u%0#ent into eect( in t!e "ay t!at $u%0#ents &or #oney or &or t!e ossession o& lan% usuallyare en&orce%. A $u%0#ent is so#eti#es re0ar%e% as roerlyen&orcea+le t!rou0! t!e e'ecutive %eart#ents instea% o& t!rou0! an a"ar% o& e'ecution +y t!is Court( "!ere t!e



eect o& t!e $u%0#ent is to esta+lis! t!e %uty o& t!e%eart#ent to en&orce it. La A+ra Silver -inin0 Co. v. Unite%States( 1H U. S. 3>?( 3H( 371( >4 S. Ct. 17( 33 L. E%. >>?. T!e case o& Fi%elity National 5an* Trust Co. v. S"oe( >H3U. S. 1>?( 1?>( 3H S. Ct. 11( H1 L. E%. 22( s!o"s clearly

t!at t!ere are instances "!ere t!e a"ar% o& e'ecution is notan in%isensa+le ele#ent o& a constitutional case orcontroversy. In t!at %ecision t!ere are collecte% &a#iliare'a#les o& $u%icial rocee%in0s resultin0 in a 6nala%$u%ication o& t!e ri0!ts o& liti0ants "it!out it.

5ut( even i& a &or#al e'ecution +e re8uire%( "e t!in* o"erto resort to it is clearly s!o"n "it! resect to t!een&orce#ent o& t!e action o& t!e courts !ere involve% +ysections 1441 to 144.

5y t!e 6rst( t!e %ecision o& t!e 5oar% o& Ta' Aeals

ren%ere% a&ter t!e assa0e o& t!e act o& 12>7 #ay +erevie"e% +y t!e Circuit Court o& Aeals or t!e District Courto& Aeals( i& a etition &or suc! revie" is 6le% eit!er +y t!eCo##issioner or t!e ta'ayer "it!in si' #ont!s a&ter t!e%ecision is ren%ere%. T!e courts are to a%ot rules &or t!e6lin0 o& t!e etition( t!e rearation o& t!e recor%( an% t!econ%uct o& t!e rocee%in0s uon suc! revie". T!e revie" isnot to oerate as a stay o& assess#ent or collection o& anyortion o& t!e a#ount o& t!e %e6ciency %eter#ine% +y t!e5oar%( unless a etition &or revie" is 6le% +y t!e ta'ayer(or unless t!e ta'ayer !as 6le% a +on% "!ic! "!en en&orce%"ill oerate 6nally to settle t!e ri0!ts o& t!e arties as &oun%

+y t!e courts.5y section 144> >7 USCA [ 1>>/( it is rovi%e% in "!atvenue t!e %ecision #ay +e revie"e%. In section 144? >7USCA [ 1>>7/( t!e Circuit Courts o& Aeals an% t!e Court o& Aeals o& t!e District are 0iven e'clusive $uris%iction torevie" t!e %ecisions o& t!e 5oar%( an% it is %eclare% t!att!eir $u%0#ents s!all +e 6nal( e'cet t!at t!ey s!all +esu+$ect to revie" +y t!e Sure#e Court o& t!e Unite% States(on certi6cate or +y certiorari in t!e #anner rovi%e% insection >34 o& t!e )u%icial Co%e as a#en%e% > USCA [

?3H/( an% in suc! revie" t!e courts s!all !ave t!e o"er toar#( or( i& t!e %ecision o& t!e 5oar% is not in accor%ance"it! la"( to #o%i&y or reverse t!e %ecision o& t!e 5oar%( "it!or "it!out re#an%in0 t!e case &or a re!earin0( as $ustice#ay re8uire.

5y section 1443 >7 USCA [ 1>>H/( t!e sa#e courts are0iven o"er to i#ose %a#a0es in any case "!ere t!e%ecision o& t!e 5oar% is ar#e%( an% it aears t!at t!eetition "as 6le% #erely &or %elay.

5y section 144 >7 USCA [ 1>>/( t!e %ecision o& t!e 5oar%is to +eco#e 6nal in resect to all t!e nu#erous instances"!ic! in t!e course o& t!e revie" #ay naturally en% &urt!erliti0ation. In t!e rovisions o& t!ese sections( t!e le0islationrescri+es #inute %etails &or t!e en&orce#ent o& t!e $u%0#ents t!at are t!e result o& t!ese etitions &or revie" in

t!e several courts veste% "it! $uris%iction over t!e#. T!eco#lete urose o& Con0ress to rovi%e a 6nal a%$u%icationin suc! rocee%in0s( +in%in0 all t!e arties( is #ani&est( an%%e#onstrates t!e unsoun%ness o& t!e o+$ection.

=e !ave +e&ore us( !o"ever( &or actual in8uiry a case%ierent &ro# one $ust consi%ere% in t!e re0ular course o& aetition &or revie" o& a %ecision o& t!e 5oar%( +e0un an%%eci%e% all a&ter t!e enact#ent o& t!e act o& 12>7. It is onein "!ic! t!e aeal to t!e 5oar% o& Ta' Aeals !a% +eenta*en( +ut t!e aeal !a% not +een %eci%e% +y t!e 5oar%+e&ore t!e assa0e o& t!e act o& 12>7. T!at resents "!at

involves a trou+leso#e e'cetion or %ulication in t!eroce%ure. T!is occurs +ecause o& t!e last e'cetin0 clauseo& section >?+/ o& t!e a#en%in0 act o& 12>7 >7 USCA [1473+/( "!ic! is as &ollo"s:

JI& +e&ore t!e enact#ent o& t!is Act any erson !as aeale%to t!e 5oar% o& Ta' Aeals un%er su+%ivision a/ o& Section>H3 o& t!e Revenue Act o& 12>3 ^ ^ ^ an% t!e aeal isen%in0 +e&ore t!e 5oar% at t!e ti#e o& t!e enact#ent o& t!is Act( t!e 5oar% s!all !ave $uris%iction o& t!e aeal. In allsuc! cases t!e o"ers( %uties( ri0!ts( an% rivile0es o& t!e



Co##issioner an% o& t!e erson "!o !as +rou0!t t!eaeal( an% t!e $uris%iction o& t!e 5oar% an% o& t!e courts(s!all +e %eter#ine%( an% t!e co#utation o& t!e ta' s!all +e#a%e( in t!e sa#e #anner as rovi%e% in su+%ivision a/ o& t!is section( e'cet as rovi%e% in su+%ivision $/ o& t!is

section an% e'cet t!at t!e erson lia+le &or t!e ta' s!allnot +e su+$ect to t!e rovisions o& su+%ivision %/ o& Section>3.J

T!e rovisions o& section >3%/ >7 USCA [ 147%/ aret!ose "!ic! %eny to t!e ta'ayer t!e o"er to +rin0 anysuit &or t!e recovery o& t!e ta' a&ter !e !as a%ote% t!eroce%ure o& aealin0 to t!e 5oar% o& Ta' Aeals or to t!eCircuit Court o& Aeals.

5y t!is last e'cetion in >?+/( t!ere see#s still oen tot!e ta'ayers "!o !ave 6le% a etition un%er t!e la" o&

12>3 an% !ave not !a% a %ecision +y t!e 5oar% +e&ore t!eenact#ent o& t!e la" o& 12>7( t!e ri0!t to ay t!e ta' an%sue &or a re&un% in t!e roer District Court ara0ra! >4 o& section >3 o& t!e )u%icial Co%e( as a#en%e% +y section1?14c/( c. 1?7( 3> Stat. ?11( U. S. Co%e( title >( [ 31 >USCA [ 31>4/. E#ery v. Unite% States D. C./ >H F.>%/ 22>(an% Ol% Colony R. Co. v. Unite% States D. C./ >H F.>%/ 223(!ol% t!at t!e etitioner still retains t!is earlier re#e%y.

T!e trut! see#s to +e t!at( in #a*in0 rovision to ren%erconclusive $u%0#ents on etitions &or revie" in t!e CircuitCourts o& Aeals( Con0ress "as not "illin0 in cases "!ere

t!e 5oar% o& Ta' Aeals !a% not %eci%e% t!e issue +e&oret!e assa0e o& t!e act o& 12>7 to cut o t!e ta'ayer &ro#ayin0 t!e ta' an% suin0 &or a re&un% in t!e roer DistrictCourt. 5ut t!e aarent conBict in suc! cases can +e easilyresolve% +y t!e use o& t!e rinciles o& res $u%icata. I& +ot!re#e%ies are ursue%( t!e one in a District Court &or re&un%(an% t!e ot!er on a etition &or revie" in t!e Circuit Court o& Aeals( t!e $u%0#ent "!ic! is 6rst ren%ere% "ill t!en utan en% to t!e 8uestions involve%( an% in eect #a*e allrocee%in0s in t!e ot!er court o& no avail. =!ic!ever $u%0#ent is 6rst in ti#e is necessarily 6nal to t!e e'tent to

"!ic! it +eco#es a $u%0#ent. T!ere is no reason( t!ere&ore(in t!e case +e&ore us to %ecline to ta*e $uris%iction. See5ryar v. Ca#+ell( 1HH U. S. 732( >4 S. Ct. H23( 33 L. E%.2>7 ]line v. 5ur*e Construction Co.( >74 U. S. >>7( >?4( 3?S. Ct. H2( 7H L. E%. >>7( >3 A. L. R. 14HH Stanton v. E#+ry(

2? U. S. 3( 3( >? L. E%. 2?.Secon%. T!e $uris%iction !ere is +ase% uon t!e certi6cate o& a 8uestion o& la". T!at is "!et!er t!e ay#ent +y t!ee#loyer o& t!e inco#e ta'es assesse% a0ainst t!ee#loyee constitutes a%%itional returna+le ta'a+le inco#eto suc! e#loyee. T!e certi6cation o& suc! a 8uestion +yt!e Circuit Court o& Aeals is an invocation o& t!e aellate $uris%iction o& t!is Court an% t!ere&ore "it!in t!eConstitution.

T!ir%. Co#in0 no" to t!e #erits o& t!is case( "e t!in* t!e

8uestion resente% is "!et!er a ta'ayer( !avin0 in%uce% at!ir% erson to ay !is inco#e ta' or !avin0 ac8uiesce% insuc! ay#ent as #a%e in %isc!ar0e o& an o+li0ation to !i#(#ay avoi% t!e #a*in0 o& a return t!ereo& an% t!e ay#ento& a correson%in0 ta'. =e t!in* !e #ay not %o so. T!eay#ent o& t!e ta' +y t!e e#loyers "as in consi%eration o& t!e services ren%ere% +y t!e e#loyee( an% "as a0ain%erive% +y t!e e#loyee &ro# !is la+or. T!e &or# o& t!eay#ent is e'ressly %eclare% to #a*e no %ierence.Section >1?( Revenue Act o& 121( c. 1( 34 Stat. 147. It ist!ere&ore i##aterial t!at t!e ta'es "ere %irectly ai% overto t!e 0overn#ent. T!e %isc!ar0e +y a t!ir% erson o& an

o+li0ation to !i# is e8uivalent to receit +y t!e ersonta'e%. T!e certi6cate s!o"s t!at t!e ta'es "ere i#ose%uon t!e e#loyee( t!at t!e ta'es "ere actually ai% +y t!ee#loyer( an% t!at t!e e#loyee entere% uon !is %uties int!e years in 8uestion un%er t!e e'ress a0ree#ent t!at !isinco#e ta'es "oul% +e ai% +y !is e#loyer. T!is isevi%ence% +y t!e ter#s o& t!e resolution asse% Au0ust ?(1217( #ore t!an one year rior to t!e year in "!ic! t!eta'es "ere i#ose%. T!e ta'es "ere ai% uon a valua+leconsi%eration( na#ely( t!e services ren%ere% +y t!ee#loyee an% as art o& t!e co#ensation t!ere&or. =e



t!in*( t!ere&ore( t!at t!e ay#ent constitute% inco#e to t!ee#loyee.

T!is result is sustaine% +y #any %ecisions. Provi%ence =orcester R. R. Co.( 5. T. A. 117 9ouston 5elt Ter#inal

Ry. Co. v. Co##issioner( 7 5. T. A. 1?73 =est En% StreetRail"ay Co. v. -alley C. C. A./ >37 F. 7> Rensselaer S. R.Co. v. Ir"in C. C. A./ >32 F. H>7 Nort!ern R. Co. o& Ne" )ersey v. Lo"e C. C. A./ >4 F. 7 9ouston 5elt Ter#inalRy. Co. v. Unite% States C. C. A./ >4 F. 1 5laloc* v. Geor0iaRy. Electric Co. C. C. A./ >37 F. ?H 9a#ilton v. ]entuc*y In%iana Ter#inal R. Co. C. C. A./ >2 F. >4 A#erican Tele0ra! Ca+le Co. v. Unite% States( 71 Ct. Cl. ?>7Unite% States v. =estern Union Tele0ra! Co. D. C./ 12 F.>%/ 1H Estate o& Levalley( 121 =is. ?7( >14 N. =. 231Estate o& Ir"in( 127 Cal. &or services( even t!ou0! entirelyvoluntary(

Nor can it +e ar0ue% t!at t!e ay#ent o& t!e ta' in No. 1?4"as a 0i&t. T!e ay#ent &or services( even t!ou0! entirelyyoluntary( "as nevert!eless co#ensation "it!in t!estatute. T!is is s!o"n +y t!e case o& Noel v. Parrott C. C. A./1 F.>%/ 772. T!ere it "as resolve% t!at a 0ratuitousaroriation e8ual in a#ount to \? er s!are on t!eoutstan%in0 stoc* o& t!e co#any +e set asi%e out o& t!eassets &or %istri+ution to certain ocers an% e#loyees o& t!e co#any( an% t!at t!e e'ecutive co##ittee +eaut!ori,e% to #a*e suc! %istri+ution as t!ey %ee#e% "isean% roer. T!e e'ecutive co##ittee 0ave \?(444 to +e

ai% to t!e lainti ta'ayer. T!e court sai% a0e 7H> o& 1F.>%//:

JIn no vie" o& t!e evi%ence( t!ere&ore( can t!e \?(444 +ere0ar%e% as a 0i&t. It "as eit!er co#ensation &or servicesren%ere% or a 0ain or ro6t %erive% &ro# t!e sale o& t!estoc* o& t!e cororation( or +ot! an%( in any vie"( it "asta'a+le as inco#e.J

It is ne't ar0ue% a0ainst t!e ay#ent o& t!is ta' t!at( i& t!ese ay#ents +y t!e e#loyer constitute inco#e to t!e

e#loyee( t!e e#loyee "ill +e calle% uon to ay t!e ta'i#ose% uon t!is a%%itional inco#e( an% t!at t!e ay#ento& t!e a%%itional ta' "ill create &urt!er inco#e "!ic! "ill inturn +e su+$ect to ta'( "it! t!e result t!at t!ere "oul% +e ata' uon a ta'. T!is( it is ur0e%( is t!e result o& t!e

0overn#entJs t!eory( "!en carrie% to its lo0ical conclusion(an% results in an a+sur%ity "!ic! Con0ress coul% not !aveconte#late%.

In t!e 6rst lace( no atte#t !as +een #a%e +y t!e Treasuryto collect &urt!er ta'es( uon t!e t!eory t!at t!e ay#ent o& t!e a%%itional ta'es creates &urt!er inco#e( an% t!e8uestion o& a ta' uon a ta' "as not +e&ore t!e Circuit Courto& Aeals( an% !as not +een certi6e% to t!is Court. =e cansettle 8uestions o& t!at sort "!en an atte#t to i#ose ata' uon a ta' is un%erta*en( +ut not no". Unite% States v.Sullivan( >H3 U. S. >2( >73( 3H S. Ct. 74H( H1 L. E%. 14?H(

1 A. L. R. 14>4 @a,oo -ississii alley R. Co. v. )ac*sonine0ar Co.( >>7 U. S. >1H( >12( ?? S. Ct. 34( H L. E%. 12?.It is not( t!ere&ore( necessary to ans"er t!e ar0u#ent +ase%uon an al0e+raic &or#ula to reac! t!e a#ount o& ta'es %ue. T!e 8uestion in t!is case is( JDi% t!e ay#ent +y t!ee#loyer o& t!e inco#e ta'es assessa+le a0ainst t!ee#loyee constitute a%%itional ta'a+le inco#e to suc!e#loyeeXJ T!e ans"er #ust +e [email protected]

9ELERING v. 5RUUNFACTS:5ruun "as a lan%lor%. 9e lease% so#e roerty to a tenant.=!en t!e lease e'ire%( t!e tenant le&t an% 5ruun too* t!eroerty +ac*. =!ile t!e tenant "as in ossession o& t!eroerty( t!ey *noc*e% %o"n an ol% +uil%in0 an% +uilt a ne"+uil%in0 on t!e roerty. =!en t!ey le&t( 5ruun 0ot to *eet!e ne" +uil%in0. T!e ne" +uil%in0 "as assesse% to +e"ort! \1* #ore t!an t!e ol% one. T!e IRS stee% in an%sai% t!at 5ruunJs 0ain o& a ne" +uil%in0 "as a caital 0ain.



5ruun ar0ue% t!at no inco#e !a% +een reali,e% yet +ecause!is interest "as reresente% +y a %ee%( an% "!en t!etenant le&t( !e !a% t!e e'act sa#e %ee% !e !a% "!en t!etenant arrive%. So !e !a%nJt 0aine% anyt!in0. 5ruunsu00este% t!at t!e IRS "oul% !ave to "ait until t!e roerty

"as sol% a*a t!e value "as reali,e%/. 5asically( t!econstruction o& t!e ne" +uil%in0 increase% t!e value o& t!elan%( +ut t!ere "ere ot!er "ays t!e value coul% c!an0e. 5utuntil t!e lan% "as sol%( 5ruun !a%nJt receive% anyt!in0. SeeEisner v. -aco#+er >> U.S. 12 12>4/( "!ic! says t!at in0eneral( you %onJt !ave to reort a 0ain until you sell t!eroerty a*a severance is a rere8uisite to reali,ation/. T!e IRS ar0ue% t!at until t!e %ay t!e tenant le&t( 5ruun%i%nJt o"n a ne" +uil%in0( as soon as t!e lease en%e%(5ruun %i% o"n a ne" +uil%in0. 9e !a% receive% a 0ain an%nee%e% to ay ta'es on it i##e%iately.

T!e US Sure#e Court &oun% &or t!e IRS. HELD: T!e US Sure#e Court &oun% t!at uon "!en a lease en%e%(t!e lan%lor% reossesse% t!e real estate an% i#rove#entsan% increase in value attri+uta+le to t!e i#rove#ents "asta'a+le. T!e real estate in%ustry &elt t!at t!is "as veryun&air to lan%lor%s. I& t!e ne" +uil%in0 "as e'ensive( t!elan%lor% #i0!t +e &orce% to sell t!e lan% $ust to +e a+le toaor% t!e ta'. T!ey lo++ie% Con0ress( "!o asse% >7 U.S.C. [142 "as to rovi%e relie& &or e'actly lan%lor%Js in 5ruunJssituation. No"( un%er [142( 0ross inco#e 0enerally %oes not

inclu%e i#rove#ents #a%e +y a tenant. 9o"ever( it %oesnot inclu%e i#rove#ents ot!er t!an rent. T!at clause"as a%%e% so t!e lan%lor% an% tenant coul%nJt consire toi#rove t!e roerty instea% o& ayin0 rent So you canJt sayto a tenant( instea% o& ayin0 #e rent( $ust +uil% a &ancyne" +uil%in0 t!at I can *ee a&ter you leave.

CIR CA

FACTS:

So#eti#e in t!e 12?4Ks( Don An%res Soriano( a citi,en an%resi%ent o& t!e Unite% States( &or#e% t!e cororation ;A.Soriano @ Cia<( re%ecessor o& ANSCOR "it! a 1(444(444.44caitali,ation %ivi%e% into 14(444 co##on s!ares at a arvalue o& P144Qs!are. ANSCOR is "!olly o"ne% an%

controlle% +y t!e &a#ily o& Don An%res( "!o are all nonresi%ent aliens. In 12?H( Don An%res su+scri+e% to 3(27?s!ares o& t!e (444 s!ares ori0inally issue%.

On Sete#+er 1>( 123( ANSCORKs aut!ori,e% caital stoc*"as increase% to P>(44(444.44 %ivi%e% into >(444co##on s!ares "it! t!e sa#e ar value. O& t!e a%%itional1(444 s!ares( only 14(444 "as issue% "!ic! "ere allsu+scri+e% +y Don An%res( a&ter t!e ot!er stoc*!ol%ers"aive% in &avor o& t!e &or#er t!eir ree#tive ri0!ts tosu+scri+e to t!e ne" issues. T!is increase% !is su+scritionto 13(27? co##on s!ares. A #ont! later( Don An%res

trans&erre% 1(>4 s!ares eac! to !is t"o sons( )ose an%An%res )r.( as t!eir initial invest#ents in ANSCOR. 5ot! sonsare &orei0ners.

5y 123H( ANSCOR %eclare% stoc* %ivi%en%s. Ot!er stoc*%ivi%en% %eclarations "ere #a%e +et"een 1232 an%Dece#+er >4( 127?. On Dece#+er ?4( 1273 Don An%res%ie%. As o& t!at %ate( t!e recor%s reveale% t!at !e !as atotal s!are!ol%in0s o& 1(13 s!ares. 4(32 o& "!ic! areori0inal issues an% t!e +alance o& 1?3(72 s!ares as stoc*%ivi%en% %eclarations. Correson%in0ly( one!al& o& t!ats!are!ol%in0s or 2>(HH s!ares "ere trans&erre% to !is "i&e(

Doa Car#en Soriano( as !er con$u0al s!are. T!e oer !al& &or#e% art o& !is estate.

A %ay a&ter Don An%res %ie%( ANSCOR increase% its caitalstoc* to P>4- an% in 1277 &urt!er increase% it to P?4-. Int!e sa#e year Dece#+er 1277/( stoc* %ivi%en%s "ort!37(>24 an% 37(>H s!ares "ere resectively receive% +y t!eDon An%res estate an% Doa Car#en &ro# ANSCOR. 9ence(increasin0 t!eir accu#ulate% s!are!ol%in0s to 1?(7H an%1?(73 co##on s!ares eac!.



On Dece#+er >( 127H( Doa Car#en re8ueste% a rulin0&ro# t!e Unite% States Internal Revenue Service IRS/(in8uirin0 i& an e'c!an0e o& co##on "it! re&erre% s!ares#ay +e consi%ere% as a ta' avoi%ance sc!e#e. 5y )anuary>( 127( ANSCOR reclassi6e% its e'istin0 ?44(444 co##ons!ares into 14(444 co##on an% 14(444 re&erre% s!ares.

In a letterrely %ate% Fe+ruary 127( t!e IRS oine% t!att!e e'c!an0e is only a recaitali,ation sc!e#e an% not ta'avoi%ance. Conse8uently( on -arc! ?1( 127 Doa Car#ene'c!an0e% !er "!ole 1?(73 co##on s!ares &or 1?(74o& t!e re&erre% s!ares. T!e estate o& Don An%res in turne'c!an0e% 11(134 o& its co##on s!ares &or t!e re#ainin011(134 re&erre% s!ares.

In 12H?( a&ter e'a#inin0 ANSCORKs +oo*s o& account an%recor% Revenue e'a#iners issue% a reort roosin0 t!at

ANSCOR +e assesse% &or %e6ciency "it!!ol%in0 ta'atsource( &or t!e year 127 an% t!e >n% 8uarter o& 1272 +ase%on t!e transaction o& e'c!an0e an% re%e#tion o& stoc*s.5IR #a%e t!e correson%in0 assess#ents. ANSCORKssu+se8uent rotest on t!e assess#ents "as %enie% in 12?+y etitioner. ANSCOR 6le% a etition &or revie" "it! t!eCTA( t!e Ta' Court reverse% etitioners rulin0. CA ar#e%t!e rulin0 o& t!e CTA. 9ence t!is osition.

ISSUE:=!et!er or not a erson assesse% &or %e6ciency "it!!ol%in0ta' un%er Sec. ? an% 3 o& t!e Ta' Co%e is +ein0 !el% lia+lein its caacity as a "it!!ol%in0 a0ent.

HELD:An inco#e ta'ayer covers all ersons "!o %erive ta'a+leinco#e. ANSCOR "as assesse% +y etitioner &or %e6ciency"it!!ol%in0 ta'( as suc!( it is +ein0 !el% lia+le in its caacityas a "it!!ol%in0 a0ent an% not in its ersonality asta'ayer. A "it!!ol%in0 a0ent( A. Soriano Cor. in t!is case(cannot +e %ee#e% a ta'ayer &or it to avail o& a ta' a#nestyun%er a Presi%ential %ecree t!at con%ones ;t!e collection o& all internal revenue ta'es inclu%in0 t!e incre#ents orenalties on account o& nonay#ent as "ell as all civil(cri#inal( or a%#inistrative lia+ilities arisin0 &ro# or inci%entto voluntary %isclosures un%er t!e NIRC o& reviously

unta'e% inco#e an%Qor "ealt! reali,e% !ere or a+roa% +yany ta'ayer( natural or $uri%ical.< T!e Court e'lains: ;T!e"it!!ol%in0 a0ent is not a ta'ayer( !e is a #ere ta'collector. Un%er t!e "it!!ol%in0 syste#( !o"ever( t!ea0entayer +eco#es a ayee +y 6ction o& la". 9is lia+ilityis %irect an% in%een%ent &ro# t!e ta'ayer( +ecause t!einco#e ta' is still i#ose% an% %ue &ro# t!e latter. T!ea0ent is not lia+le &or t!e ta' as no "ealt! Bo"e% into !i#(!e earne% no inco#e.<

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Income Tax Case Digest