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8/12/2019 Taxation (Income Tax) - Pp41-60
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TAXATION I (DEAN GRUBA)
CASE DOCTRINE FACTS
CIR v. Philippine Airlines, Inc., GR No. 160528,
9 October 2006
Q: What is taxable income? How is it
computed?Under PALs franchise, the basic corporate
income tax or franchise tax, whichever is
lower, that is payable by PAL in a given taxable
year shall be in lieu of all other taxes. Is the
20% final withholding tax on bank deposits
included in all other taxes? In CIR v.
Philippine Airlines, Inc., the Supreme Court
held affirmatively.[As a consequence, PAL was
held to be entitled to a refund of the 20% FWT
it paid on bank deposits for the period starting
March 1995 through November 1997.] A
corporate income tax liability has twocomponents: the general rate of now 30%, and
the specific final rates for certain passive
incomes. In arriving at the taxable income of
PAL, are these passive incomes taken into
consideration? No. The definition of gross
income is broad enough to include all passive
incomes subject to specific rates or final taxes.
However, since these passive incomes are
already subject to different rates and taxed
finally at source, they are no longer included in
thecomputation of gross income, which
determines taxable income.
The case involves the application of the tax
provision in PALs franchise defining its liability
for taxes. P.D. 1590, the legislative franchise of
PAL granted it an option to pay the lower of
two alternatives: (1) the basic corporate
income tax based on PALs annual net taxable
income computed in accordance with the
provisions of the NIRC, or (2) a franchise tax of
two percent of gross revenues. Availment of
either of these two alternatives shall exempt
the airline from the payment of all other
taxes. On this basis, a claim for refund of the
20% final withholding tax on its interest
income with various banks was instituted.
CIR v. Philippine Airlines, Inc., GR No. 180066,
7 July 2009
Q: What is taxable income? How is it
computed?Under PALs franchise, the basic corporate
income tax or franchise tax, whichever is
lower, that is payable by PAL in a given taxable
year shall be in lieu of all other taxes. Is
For its fiscal year ending 31 March 2001 (FY
2000-2001), PAL incurred zero taxable income,
which left it with unapplied creditable
withholding tax in the amount of P2.3M. PAL
did not pay any MCIT for the period. In a letter
dated 12 July 2002, addressed to CIR, PAL
requested for the refund of its unapplied
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MCIT included in all other taxes? In CIR v.
Philippine Airlines, Inc.,the Supreme Court
held affirmatively. [As a consequence, PAL was
held not liable to pay MCIT for the fiscal year
2000-2001.] Although regular corporate
income tax and minimum corporate income
tax are both income taxes, they are computed
differently, i.e., varying rates and bases. The
basis for regular corporate income tax is
taxable income, while the basis for minimum
corporate income tax is gross income. It must
be further noted that the gross income base
for MCIT is slightly different from gross
income under Section 32 of the 1997 Tax
Code.Taxable income is defined under Section 31 of
the NIRC of 1997 as the pertinent items ofgross income specified in the said Code, less
the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income by the same Code or
other special laws. The gross income, referred
to in Section 31, isdescribed in Section 32 of
the NIRC of 1997 as income from whatever
source, including compensation for services;
the conduct of trade or business or the
exercise of profession; dealings in property;
interests; rents; royalties; dividends; annuities;
prizes and winnings; pensions; and a partners
distributive share in the net income of a
general professional partnership.On the other hand, gross income in relation
to MCIT is understood to mean gross receipts,
less sales returns, allowances, discounts and
cost of services. Noticeably, inclusions in
andexclusions/deductions from gross income
creditable withholding tax for FY 2000-2001.
PAL attached to its letter the following: (1)
Schedule of Creditable Tax Withheld at Source
for FY 2000-2001; (2) Certificates of Creditable
Taxes Withheld; and (3) Audited Financial
Statements. Acting on the aforementioned
letter of PAL, the Large Taxpayers Audit and
Investigation Division 1 (LTAID 1) of the BIR
Large Taxpayers Service (LTS), issued Tax
Verification authorizing Revenue Officer Cueto
to verify the supporting documents and
pertinent records relative to the claim of PAL
for refund of its unapplied creditable
withholding tax for FY 2000-20001. LTAID 1
Chief Linsangan invited PAL to an informal
conference.
BIR officers and PAL representatives attended
the scheduled informal conference, during
which the former relayed to the latter that the
BIR was denying the claim for refund of PAL
and, instead, was assessing PAL for deficiency
MCIT for FY 2000-2001. The PAL
representatives argued that PAL was not liable
for MCIT under its franchise. The BIR officers
then informed the PAL representatives that
the matter would be referred to the BIR Legal
Service for opinion.
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for MCIT purposes are limited to those directly
arising from the conduct of the taxpayers
business. It is, thus, more limited than the
gross income used in the computation of basic
corporate income tax.Nitafan v. CIR, GR No. 78780, 23 July 1987 Q: Are the salaries of the members of the
judiciary subject to income tax?
Are salaries of judges subject to income tax?
Yes. Nitafan v. CIRconfirmed that during their
continuance in office, judges and justices enjoy
the constitutional protection against decrease
of their salaries. However, the salaries of
members of the judiciary are subject to the
general income tax applied to all taxpayers.
The Chief Justice has previously issued a
directive to the Fiscal Management and
Budget Office to continue to deduct
withholding taxes from the salaries of the
Justices of the Supreme Court and other
members of the judiciary. This was affirmed by
the Supreme Court En Banc on 4 December
1987. RTC judges seek to prohibit or enjoin the
Commissioner of the Internal Revenue and the
Financial Officer of the Supreme Court from
making any deduction of withholding taxesfrom their salaries.
CIR v. British Overseas Airways Corporation,
GR Nos. L-65773-74, 30 April 1987.
Q: What is gross income?In CIR v. British Overseas Airways Corporation,
BOAC was a British Government-owned
corporation engaged in the international
airline business. As such, it operated air
transportation service and sold transportation
tickets over the routes of the other airlinemembers. For the years 1959 to 1971, BOAC
had no landing rights for traffic purposes in the
Philippines. It did not carry passengers and/or
cargo to and from the Philippines, although
from 1959 to 1971, BOAC maintained a
general sales agent in the country which was
responsible for selling BOAC tickets covering
passengers and cargoes. The CIR issued an
assessment against BOAC for deficiency
income taxes for the years 1959 to 1971 for
British Overseas Airways Corporation
(BOAC) is a 100% British Government
Owned airline corporation organized under
the laws of the UK. BOAC maintains a
general sales agent (of its tickets) in the
Philippines namely Warner and Barnes
and Qantas Airways. It also did not have
landing rights in the Philippines. It wasassessed deficiency income taxes by CIR
in the years 1959-1963 and 1968-1979.
However, on appeal, the CTA held that the
proceeds of sales of BOAC tickets in the
Philippines do not constitute BOAC income
from Philippine sources since no service of
carriage of passengers or freight was
performed by BOAC within the Philippines
therefore said income is not subject to
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the sale of tickets in the Philippines for air
transportation. Did BOACs income from the
sale of tickets in the Philippines come from
sources within the Philippines and thus taxable
under Philippine income tax laws? The
Supreme Court held in the affirmative.
Although the enumeration in now Section
32(A) of the 1997 Tax Code does not include
income from the sale of tickets for
international transportation, the definition of
gross income is broad and comprehensive to
include proceeds from the sale of transport
documents. *Section 32 of the 1997 Tax
Code], by its language, does not intend the
enumeration to be exclusive. It merely directs
that the types of income listed therein be
treated as income from sources within thePhilippines. A cursory reading of the section
will show that it does not state that it is an all-
inclusive enumeration, and that no other kind
of income may be so considered."
income tax. The CTA held that the place
where services are rendered determines
the source of the income. The petitioner
contends that the revenue derived by
BOAC from sales of tickets in the
Philippines are taxable and that BOAC
should be considered a resident foreigncorporation and accordingly taxed as such.
Sison v. Ancheta, GR No. L-59431, 25 July 1984 Q: Compensation for services in whatever
form paid; illustrative case.See the case of Sison v. Anchetawhich was
governed by the 1977 Tax Code. Under the oldcode, a higher tax rate was imposed on
professional and business income than on
compensation income. Sison attacked the
distinction made by law on such grounds as
equal protection and uniformity in taxation.
The Supreme Court justified the difference in
treatment, thus: Taxpayers who are
recipients of compensation income are set
apart as a class. As there is practically no
overhead expense, these taxpayers are not
Sison, as a taxpayer, questions the validity of
Section 1 of BP 135 which amended Section 21
of the NIRC of 1977. BP 135 provides for rates
of tax on citizens or residents on: (a) taxable
compensation income, (b) taxable net income,(c) Royalties, prizes and other winnings, (d)
Interest from bank deposits and yield or any
other monetary benefit from deposit
substitutes and from trust fund and similar
arrangements, (e) Dividends and share of
individual partner in the net profits of taxable
partnership, and (e) Adjusted gross income.
Sison characterizes the law as arbitrary,
amounting to class legislation, oppressive and
capricious. Petitioner invokes the Equal
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entitled to make deductions for income tax
purposes because they are in the same
situation more or less. On the other hand, in
the case of professionals in the practice of
their calling and businessmen, there is no
uniformity in the costs or expenses necessary
to produce their income. It would not be just
then to disregard the disparities by giving all of
them zero deduction and indiscriminately
impose on all alike the same tax rates on the
basis of gross income. There is ample
justification then for the Batas Pambansa to
adopt the gross system of income taxation to
compensation income, while continuing the
system of net income taxation as regards
professional and business income.
Protection and Due Process clauses, as well as
the rule requiring Uniformity in Taxation.
Tan v. del Rosario, GR Nos. 109289 and109446, 3 October 1994
Q: Gross income derived from the conduct oftrade or business or the exercise of a
profession; illustrative case.The case of Tan v. del Rosariodealt with the
constitutionality of RA No. 7496, also
commonly known as the Simplified Net
Income Taxation Scheme (SNIT), amending
certain provisions of the old Tax Code. One
argument raised by petitioners was that the
law now taxed single proprietorships and
professionals differently from the manner it
imposed tax on corporations and partnerships.
Another argument was that general
professional partnerships should not be
treated differently from ordinary business
partnerships. The Supreme Court held that the
classification made between single
proprietorships and professionals on the one
hand, and corporations and partnerships on
Petitioners assail the constitutionality ofRA7496, known as the Simplified Net Income
Taxation Scheme (SNIT), which amended
certain provisions of the NIRC. They also seek
a declaration that public respondents have
exceeded their rule-making authority in
applying SNIT to general professional
partnerships through the issuance of Revenue
Regulations No 2-93, specifically Section 6
thereof
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the other, was valid. Furthermore, as regards
the first group, i.e., single proprietorships and
professionals: There is, then and now, no
distinction in income tax liability between a
person who practices his profession alone or
individually and one who does it through
partnership (whether registered or not) with
others in the exercise of a common profession.
Indeed, outside of the gross compensation
income tax and the final tax on passive
investment income, under the present income
tax system all individuals deriving from any
source whatsoever are treated in almost
invariably the same manner and under a
common set of rules.
CIR v. Court of Appeals, GR No. 108576, 20
January 1999
Q: Dividends; illustrative case
At issue in CIR v. Court of Appealswas the
taxability of the shares of stock in ANSCOR
owned by the estate of Don Andres Soriano as
well as Don Andres Sorianos widow, Doa
Carmen Soriano. On various dates, (1) the
estate and Doa Carmen exchanged a portion
of their common shares for preferred shares,
and (2) ANSCOR redeemed a portion of the
common shares owned by the estate and
Doa Carmen. ANSCORs business purpose for
the redemption of stocks was to partially retire
said stocks as treasury shares in order to
reduce the companys foreign exchange
remittances in case cash dividends were
declared. Subsequently, ANSCOR was issued
an assessment for deficiency withholding tax
at source based on the transactions of
exchange and redemption of stocks. Regarding
the exchange of stocks, the Supreme Court
Don Andres Soriano, a citizen and resident of
the United States, formed the corporation "A.Soriano Y Cia", predecessor of ANSCOR.
ANSCOR is wholly owned and controlled by
the family of Don Andres, who are all non-
resident aliens. Don Andres died, but his
estate continued to receive stock dividends as
well as his wife Doa Carmen Soriano.
Pursuant to a board resolution, ANSCOR
redeemed a stated in the Board Resolutions,
ANSCOR's business purpose for both
redemptions of stocks is to partially retire said
stocks as treasury shares in order to reduce
the company's foreign exchange remittances
in case cash dividends are declared. ANSCOR
also reclassified some of Doa Carmens
common shares to preferred shares. After
examining ANSCOR's books of account and
records, Revenue examiners issued a report
proposing that ANSCOR be assessed for
deficiency withholding tax-at-source based on
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found that there was no change in the
proportional interest of the estate and Doa
Carmen before and after the exchange. The
exchange transaction did not result into a flow
of wealth and hence, there was no income tax
liability.As regards the redemption of stocks, the issue
was, particularly, whether ANSCORs
redemption of stocks from its stockholder as
well as the exchange of common with
preferred shares could be considered as
essentially equivalent to the distribution of
taxable dividends, making the proceeds
thereof taxable income. The Supreme Court
started by saying that the stock dividends,
strictly speaking, represent capital and do not
constitute income to its recipient. The mereissuance of stock dividends is not yet subject
to income tax. As capital, the stock dividends
postpone the realization of profits. However, a
redemption of the stocks converts into money
the stock dividends which become a realized
profit or gain and consequently, the
stockholders separate property. As realized
income, the proceeds of the redeemed stock
dividends can be reached by income taxation
regardless of the existence of any business
purpose for the redemption. Here, the
proceeds of the redemption of the stock
dividends were deemed taxable dividends, i.e.,
income subject to income tax which was
required to be withheld at source.The determining factor for the imposition of
income tax is whether any gain or profit was
derived from a transaction. Furthermore,
there are 3 elements in the imposition of
the transactions of exchange and redemption
of stocks. ANSCOR filed a petition for review
with the CTA assailing the tax assessments on
the redemptions and exchange of stocks. The
CTA ruled that ANSCORs redemption and
exchange of the stocks of its foreign
stockholders cannot be considered as
"essentially equivalent to a distribution of
taxable dividends" under Section 83(b) of the
then 1939 Internal Revenue Act. ANSCOR
avers that it has no duty to withhold any tax
either from the Don Andres estate or from
Doa Carmen based on the two transactions,
because the same were done for legitimate
business purposes which are (a) to reduce its
foreign exchange remittances in the event the
company would declare cash dividends, and to(b) subsequently "filipinized" ownership of
ANSCOR, as allegedly, envisioned by Don
Andres. It likewise invoked the amnesty
provisions of P.D. 67.
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income tax, namely: (1) there must be gain or
profit; (2) the gain or profit is realized or
received, actually or constructively; and (3) the
gain or profit is not exempted by law or treaty
from income tax. Any business purpose as to
why or how the income was earned by the
taxpayer is not a requirement. Income tax is
assessed on income received from any
property, activity or service that produces the
income because the Tax Code stands as an
indifferent neutral party on the matter where
income comes from.El Oriente Fabrica de Tabacos, Inc. v. Posadas,
GR No. 34774, 21 September 1931
Q: Are proceeds of life insurance policies
excluded from gross income?Section 32(B) of the 1997 Tax Code partlyprovides: The following items shall not be
included in gross income and shall be exempt
from taxation under this title: xxx The
proceeds of life insurance policies paid to the
heirs or beneficiaries upon the death of the
insured, whether in a single sum or otherwise,
but if such amounts are held by the insurer
under an agreement to pay interest thereon,
the interest payments shall be included in
gross income. The law is clear that the
proceeds of life insurance policies paid to
individual beneficiaries are excluded from
gross income. Suppose the proceeds of a life
insurance policy are paid to a corporate
beneficiary upon the death of the insured, are
such proceeds likewise excluded from gross
income? In El Oriente Fabrica deTabacos, Inc.
v. Posadas, El Oriente took out insurance on
the life ofits manager, who had more than 35
El Oriente in order to protect itself against the
loss that it might suffer by reason of the death
of its manager, A. Velhagen, who had had
more than thirty-five (35) years of experiencein the manufacture of cigars in the Philippines,
procured from the Manufacturers Life
Insurance Co., of Toronto, Canada, thru its
local agent E. E. Elser, an insurance policy on
the life of the said A. Velhagen for the sum of
$50,000, United States currency designating
itself as the beneficiary.
El Oriente paid for the premiums due thereon
and charged as expenses of its business all the
said premiums and deducted the same from
its gross incomes as reported in its annual
income tax returns, which deductions were
allowed upon a showing that such premiums
were legitimate expenses of its business.
Upon the death of A. Velhagen in 1929, the El
Oriente received all the proceeds of the said
life insurance policy, together with the
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years of experience in the manufacture of
cigars in the Philippines, to protect itself
against the loss it might suffer by reason of the
death of its manager. The Supreme Court held
that: Considering, therefore, the purport of
the stipulated facts, considering the
uncertainty of Philippine law, and considering
the lack of express legislative intention to tax
the proceeds of life insurance policies paid to
corporate beneficiaries, particularly when in
the exemption in favor of individual
beneficiaries in the chapter on this subject, the
clause is inserted exempt from the provisions
of this law, we deem it reasonable to hold the
proceeds of the life insurance policy in
question as representing an indemnity and not
taxable income. *Note that this case wasdecided in 1931, and that in our present Tax
Code, the clause exempt from provisions of
this law does not appear anywhere in Section
32 of the code.]
interests and the dividends accruing thereon,
aggregating P104,957.88
CIR assessed El Oriente for deficiency taxes
because El Oriente did not include as income
the proceeds received from the insurance.
Santos v. Servier Philippines, Inc., GR No.
166377, 28 November 2008
Q: When are retirement benefits excluded
from gross income?
In Santos v. Servier Philippines, Inc., Santos was
the human resource manager of Servier
Philippines, Inc. since 1991. In 1998, while on
vacation in Paris, Santos suffered from a
sudden attack of alimentary allergy. Despite
months of medical treatment, Santos did not
fully recover mentally and physically. Servier
Philippines, Inc. was constrained to terminate
Santos services effective 31 August 1999. As a
consequence thereof, Servier Philippines, Inc.
offered Santos a retirement package. Were
Santos retirement benefits taxable? The
Santos was the Human Resource Manager of
Servier Philippines, Inc. Santos attended a
meeting of all human resource managers of
Servier, held in Paris, France. Since the last day
of the meeting coincided with the graduation
of Santos only child, she arranged for a
European vacation with her family right after
the meeting. She, thus, filed a vacation leave.
Santos, together with her husband Antonio P.
Santos, her son, and some friends, had dinner
at Leon des Bruxelles, a Paris restaurant
known for mussels as their specialty. While
having dinner, Santos complained of stomach
pain, then vomited. Eventually, she was
brought to a hospital where she fell into coma
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Supreme Court held in the affirmative. For
retirement benefits to be exempt from income
tax, and hence withholding tax, the taxpayer is
burdened to prove the concurrence of the
following elements:(1)a reasonable private benefit plan is
maintained by the employer;
(2) the retiring employee has been in the
service of the same employer for at
least 10 years;
(3) the retiring employee is not less than
50 years of age at the time of his/her
retirement; and
(4) the benefit had been availed of only
once.
Here, at the time of her retirement, Santos
was only 41 years of age, and had been in theservice for more or less 8 years. As such,
Section 32(B)(6)(a) of the 1997 Tax Code was
inapplicable for failure to comply with the age
and length of service requirements. The
retirement benefits received by Santos were
taxable.
for 21 days; and later stayed at the ICU for 52
days. The hospital found that the probable
cause of her sudden attack was "alimentary
allergy. During the time that Santos was
confined at the hospital, her husband and son
stayed with her in Paris. Santos
hospitalization expenses, as well as those of
her husband and son, were paid by Servier.
Santos was then allowed to go back to the
Philippines to continue her medical treatment.
She was confined at St. Lukes. During the
period of Santos rehabilitation, Servier
continued to pay Santos salaries and to assist
her in paying her hospital bills. Thereafter,
Servier informed Santos that it requested her
physician to conduct an evaluation of her
condition to determine her fitness to resumeher work at the company. It was concluded
that she was not fully recovered mentally and
physically. Hence, Servier was constrained to
terminate Santos services. As a consequence
of her termination from employment, Servier
offered a retirement package. Of the promised
retirement benefit, a portion was withheld
allegedly for taxation purposes. Servier also
failed to give other benefits in the package.
Santos filed a case against Servier. Santos
raised the legality of said deduction and stated
that it formed an "unpaid balance of the
retirement package."
Intercontinental Broadcasting Corporation
(IBC) v. Amarilla, GR No. 162775, 27 October
2006
Q: When are retirement benefits excluded
from gross income?
In Intercontinental Broadcasting Corporation
(IBC) v. Amarilla,
Quiones, Amarilla, Lagahit, and Otadoy
Intercontinental Broadcasting Corporation
(IBC) employed at its Cebu Station the
petitioners Amarilla, Quinones, Lagahit and
Otadoy. The four employees retired from the
company and received, on staggered basis,
their retirement benefits under the collective
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retired from IBC. It was agreed that IBC would
shoulder the income tax due on the retirement
benefits to be received by the four individuals.
The Supreme Court first held that the
retirement benefits granted to the retirees
were taxable. However, the Court
acknowledged that IBC bound itself to pay the
taxes on the retirement benefits. An
agreement to pay the taxes on the retirement
benefits as an incentive to prospective retirees
and for them to avail of the optional
retirement scheme is not contrary to law or to
public morals. Petitioner had agreed to
shoulder such taxes to entice them to
voluntarily retire early, on its belief that this
would prove disadvantageous to it.
Respondents agreed and relied on thecommitment of petitioner. For petitioner to
renege on its contract with respondents simply
because its new management had found the
same disadvantageous would amount to a
breach of contract.
bargaining agreement (CBA) between IBC and
the bargaining unit of its employees. In the
meantime, a salary increase was given to all
employees, current and retired. However,
when the four retirees demand theirs, the IBC
refused and instead informed them that their
differentials would be used to offset the tax
due on their retirement benefits in accordance
with the NIRC. The retirees thus lodged a
complaint with the NLRC questioning said
withholding. They averred that their
retirement benefits were exempt from income
tax; and IBC had no authority to withhold their
salary differentials. For its part, the IBC
averred that the retirement benefits received
by employees from their employers constitute
taxable income. While retirement benefits areexempt from taxes under the Code, the law
requires that such benefits received should be
in accord with a reasonable retirement plan
duly registered with the BIR after compliance
with the requirements therein enumerated.
Since its retirement plan in the CBA was not
approved by the BIR, the retirees were liable
for income tax on their retirement benefits.
The Labor Arbiter rendered judgment in
favour of the retirees. The NLRC affirmed. IBC
appealed to the CA. The CA dismissed the
petition and held that the salary differentials
of the respondents are part of their taxable
gross income, considering that the CBA was
not approved, much less submitted to the BIR.
However, petitioner could not withhold the
corresponding tax liabilities of respondents
due to the then existing CBA, providing that
such retirement benefits would not be
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subjected to any tax deduction, and that any
such taxes would be for its account.
CIR v. Court of Appeals, GR No. 96016, 17
October 1991
Q: When are retirement benefits excluded
from gross income?
In CIR v. Court of Appeals,Castaeda retired
from the government service as revenue
attach in the Philippine Embassy in London.
Upon retirement, he received terminal leave
pay from which the CIR withheld a certain
amount allegedly representing income tax
thereon. The issue in this case was whether
terminal leave pay received by a government
official or employee on the occasion of his
compulsory retirement from the government
service was subject to income tax, and hence
withholding tax. The Supreme Court ruled thatterminal leave pay was not a part of the gross
income of a government official or employee,
but a retirement benefit that was not subject
to income tax. Commutation of leave credits is
more commonly known as terminal leave. In
the exercise of sound personnel policy, the
Government encourages unused leaves to be
accumulated. The Government recognizes that
for most public servants, retirement pay is
always less than generous if not meager and
scrimpy. A modest nest egg which the senior
citizen may look forward to is thus avoided.
Terminal leave payments are given not only at
the same time but also for the same policy
considerations governing retirement benefits.
Castaneda retired from the government
service as Revenue Attache in the Philippine
Embassy in London. Upon retirement, he
received, among other benefits, terminal leave
pay from which the CIR withheld a portion
allegedly representing income tax thereon.
Castaneda filed a claim with the CIR for refund
contending that the cash equivalent of his
terminal leave is exempt from income tax. He
likewise filed a petition for review with the
CTA. The CTA ruled in favor of Castaneda and
ordered the CIR to refund Castaneda. CA
affirmed the decision of the CTA. Hence, this
petition by the CIR. The Solgen, acting on
behalf of the CIR, contends that the terminalleave pay is income derived from employer-
employee relationship; that as part of the
compensation for services rendered, terminal
leave pay is actually part of gross income of
the recipient.
CIR v. Central Luzon Drug Corporation, GR No.
159610, 12 June 2008.
Q: Differentiate between a tax deduction and
a tax credit. Respondent is a domestic corporationprimarily engaged in retailing of medicines andpharmaceutical products. Respondent granted
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How may a drugstore treat the 20% discount
given to senior citizens? May it be claimed as a
tax deduction from gross income or a tax
credit? The case of CIR v. Central Luzon Drug
Corporationcovered the taxable year 1997
and thus applied the old rule under RA No.
7432, i.e., the 20% senior citizens discount
could be claimed as a tax credit. However,
with the effectivity of RA No. 9257 (21 March
2004), there is now a new tax treatment for
senior citizens discount granted by all covered
establishments. This discount should be
considered as a deductible expense from gross
income and no longer as tax credit.
20% percent sales discount to qualified senior
citizens on their purchase of medicines.
Respondent filed for a tax refund/credit
alledgly arising from the 20% sales discount
granted by respondent to qualified senior
citizens in compliance with RA 7432. Unable to
obtain an affirmative response from
petitioner, Respondent elevated its claim to
the CTA. The CTA dismissed the petition but
eventually granted the motion for
reconsideration ordering petitioner to issue a
Tax Credit certificate. CA affirmed. Hence, this
petition.
Carlos Superdrug Corp. v. Department of
Social Welfare and Development (DSWD), GR
No. 166494, 29 June 2007
Q: Differentiate between a tax deduction and
a tax credit.In Carlos Superdrug Corp. v. Department of
Social Welfare andDevelopment (DSWD),
petitioners were drugstores assailing the
constitutionality of RA No. 9257, particularly,
the validity of the tax deduction scheme as a
reimbursement mechanism for the 20% senior
citizens discount. A tax deduction was
differentiated from a tax credit in this wise:
the tax deduction scheme does not fully
reimburse petitioners for the discount
privilege accorded to senior citizens. This is
because the discount is treated as a deduction,
a tax-deductible expense that is subtracted
from the gross income and results in a lower
taxable income. Stated otherwise, it is an
amount that is allowed by law to reduce the
income prior to the application of the tax rate
to compute the amount of tax which is due.
Being a tax deduction, the discount does not
Petitioners are domestic corporations and
proprietors operating drugstores in the
Philippines. Petitioners assail theconstitutionality of Section 4(a) of RA 9257,
otherwise known as the Expanded Senior
Citizens Act of 2003. Section 4(a) of RA 9257
grants twenty percent (20%) discount as
privileges for the Senior Citizens. Petitioner
contends that said law is unconstitutional
because it constitutes deprivation of private
property.
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reduce taxes owed on a peso for peso basis
but merely offers a fractional reductions in
taxes owed. On the other hand, a tax credit is
a peso-for-peso deduction from a taxpayers
tax liability due to the government of the
amounts of seniors citizens discount given by
the covered establishment. Such
establishment recovers the full amount and
hence, the government shoulders 100% of the
discounts granted. Ultimately, the Supreme
Court upheld the constitutionality of RA No.
9257 primarily on the ground that the law was
a legitimate exercise of police power.Basilan Estates, Inc. v. CIR, GR No. L-22492, 5
September 1967
Q: In general, what is the treatment accorded
to deductions from gross income?In Basilan Estates, Inc. v. CIR, petitioner was a
domestic corporation engaged in the coconut
industry. In 1953, petitioner received a
deficiency income tax assessment partly due
to disallowed deductions from its gross income
in the form of depreciation, travelling and
miscellaneous expenses. One issue tackled was
whether depreciation should be determined
on the acquisition cost or on the reappraised
value of the assets. The Supreme Court ruled
that the income tax law did not authorize the
depreciation of an asset beyond its acquisition
cost. A deduction over and above such cost
must be disallowed. The reason is that
deductions from gross income are privileges,
not matters of right. They are not created by
implication but upon clear expression in the
law.Moreover, the recovery, free of income tax, of
Basilan Estates, Inc. claimed deductions for the
depreciation of its assets on the basis of their
acquisition cost. As of January 1, 1950 itchanged the depreciable value of said assets
by increasing it to conform with the increase
in cost for their replacement. Accordingly,
from 1950 to 1953 it deducted from gross
income the value of depreciation computed on
the reappraised value.
CIR disallowed the deductions claimed by
petitioner, consequently assessing the latter of
deficiency income taxes.
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an amount more than the invested capital in
an asset will transgress the underlying purpose
of a depreciation allowance. For then what the
taxpayer would recover will be not only the
acquisition cost, but also some profit.
Recovery in due time thru depreciation of
investment made is the philosophy behind
depreciation allowance; the idea of profit on
the investment made has never been the
underlying reason for the allowance of a
deduction for depreciation.Aguinaldo Industries Corporation v. CIR, GR
No. L-29790, 25 February 1982
Q: In general, what is the treatment accorded
to deductions from gross income?InAguinaldo Industries Corporation v. CIR,
when petitioner sold its property inMuntinglupa, the corporate officers of
petitioner were given bonuses. The amount
representing these bonuses was claimed by
petitioner as a deductible business expense.
The Supreme Court held that the bonuses
could not be deemed a deductible expense for
tax purposes, even if the aforesaid sale could
be considered as a transaction for carrying on
the trade or business of the petitioner and the
grant of the bonus to the corporate officers
pursuant to petitioners by-laws could, as an
intra-corporate matter, be sustained. Citing
Alhambra Cigar andCigarette Manufacturing
Co. v. CIR (GR No. L- 12026, 29 May 1959),the
Supreme Court stated that: whenever a
controversy arises on the deductibility, for
purposes of income tax, of certain items for
alleged compensation of officers of the
taxpayer, two (2) questions become material,
Aguinaldo Industries Corporation (AIC) is a
domestic corporation engaged in the
manufacture of fishing nets, a tax-exempt
industry and the manufacture of furniture. For
accounting purposes, each division is providedwith separate books of accounts. Previously,
AIC acquired a parcel of land in Muntinlupa,
Rizal, as site of the fishing net factory. Later, it
sold the Muntinlupa property. AIC derived
profit from this sale which was entered in the
books of the Fish Nets Division as
miscellaneous income to distinguish it from its
tax-exempt income.
For the year 1957, AIC filed two separate
income tax returns for each division. After
investigation, the examiners of the BIR found
that the Fish Nets Division deducted from its
gross income for that year the amount of
P61,187.48 as additional remuneration paid to
the officers of AIC. This amount was taken
from the net profit of an isolated transaction
(sale of Muntinlupa land) not in the course of
or carrying on of AIC's trade or business, and
was reported as part of the selling expenses of
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namely: (a) Have personal services been
actually rendered by said officers? (b) In the
affirmative case, what is the reasonable
allowance therefor? Here, no evidence was
presented to show that the corporate officers
who received bonuses had a hand in the sale
transaction of the Muntinglupa property
[which could be the basis of a grant to them of
the bonuses out of the profit derived from the
sale]. Thus, the amount representing the
bonuses could not be allowed as a deductible
business expense.This posture is in line with the doctrine in the
law of taxation that the taxpayer must show
that its claimed deductions clearly come within
the language of the law since allowances, like
exemptions, are matters of legislative grace.
the Muntinlupa land. Upon recommendation
of the examiner that the said sum of
P61,187.48 be disallowed as deduction from
gross income, petitioner asserted in its letter
of February 19, 1958, that said amount should
be allowed as deduction because it was paid
to its officers as allowance or bonus pursuant
to its by-laws.
CIR v. General Foods (Phils.), Inc., GR No.
143672, 24 April 2003
Q: In general, what is the treatment accorded
to deductions from gross income?To be deductible from gross income, an
advertising expense must comply with the
following requirements:(1) the expense must be ordinary and
necessary;
(2) it must have been paid or incurred
during the taxable year;
(3) it must have been paid or incurred in
carrying on the trade or business of the
taxpayer; and
(4) it must be supported by receipts,
records or other pertinent papers.
In CIR v. General Foods (Phils.), Inc.,
respondent filed its income tax return for
1985, claiming a certain amount as deductible
Respondent corporation General Foods (Phils),
which is engaged in the manufacture of
Tang, Calumet and Kool-Aid, filed its
income tax return for the fiscal year ending
February 1985 and claimed as deduction,
among other business expenses, P9,461,246
for media advertising for Tang.
The Commissioner disallowed 50% of the
deduction claimed and assessed deficiency
income taxes of P2,635,141.42 against General
Foods, prompting the latter to file an MR
which was denied.
General Foods later on filed a petition for
review at CA, which reversed and set aside an
earlier decision by CTA dismissing the
companys appeal.
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media advertising expense for the product
Tang. Respondent and the CIR were in
agreement that the subject advertising
expense was paid or incurred within the
relevant taxable year and was incurred in
carrying on a trade or business. Hence, it was
necessary. However, as to whether it was
ordinary, their views were in conflict. The CIR
maintained that the subject advertising
expense was not ordinary for failure to comply
with two requirements set by US
jurisprudence: (1) the amount incurred must
be reasonable, and (2) the amount incurred
must not be a capital outlay to create
goodwill for the product and/or the
corporations business. *Otherwise, the
expense must be considered a capitalexpenditure to be spread out over a
reasonable time.]There is yet to be a clear-cut criteria or fixed
test for determining the reasonableness of an
advertising expense. There being no hard and
fast rule on the matter, the right to a
deduction depends on a number of factors
such as but not limited to: the type and size of
business in which the taxpayer is engaged; the
volume and amount of its net earnings; the
nature of the expenditure itself; the intention
of the taxpayer and the general economic
conditions. It is the interplay of these, among
other factors and properly weighted, that will
yield a proper evaluation. Here, the Supreme
Court held that the advertising expense for a
single product (Tang) was inordinately large.
Even if it was necessary, it could not be
considered an ordinary expense. In order to be
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deductible, a business expense must be both
ordinary and necessary.Deductions for income tax purposes partake
the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then
deductions must also be strictly construed
[against the taxpayer and liberally in favor of
the taxing authority].Philex Mining Corporation v. CIR, GR No.
148187, 16 April 2008
Q: In general, what is the treatment accorded
to deductions from gross income?In Philex Mining Corporation v. CIR, petitioner
entered into an agreement with Baguio Gold
Mining Company for the former to manage
and operate the latters mining claim in the
Benguet Province. The agreement was
denominated as Power of Attorney. In thecourse of managing and operating the project,
petitioner made advances of cash and
property to Baguio Gold. However, the mine
suffered continuing losses over the years
which resulted to petitioners withdrawal as
manager of the mine and in the eventual
cessation of mine operations. In its 1982
income tax return, petitioner deducted from
its gross income a sum representing loss on
settlement of receivables from Baguio Gold
against reserves and allowances. The CIR
disallowed the amount as deductible bad debt
and assessed petitioner a deficiency income
tax. The Supreme Court found that petitioners
advances were investments in a partnership
known as the Sto. Nio Mine. The advances
were not debts of Baguio Gold to petitioner
inasmuch as the latter was under no
unconditional obligation to return the same to
Philex Mining entered into a management
agreement with Baguio Gold. The parties'
agreement was denominated as "Power of
Attorney" which provided among others:
a. Funds available for Philex Mining
during the management agreement;
and
b. Compensation to Philex Mining which
shall be fifty per cent (50%) of the netprofit;
In the course of managing and operating the
project, Philex Mining made advances of cash
and property in accordance with the
agreement. However, the mine suffered
continuing losses over the years which
resulted to petitioner's withdrawal as manager
and cessation of mine operations.
The parties executed a "Compromise with
Dation in Payment" wherein Baguio Gold
admitted an indebtedness to Philex Mining,
which was subsequently amended to include
additional obligations.
Subsequently, Philex Mining wrote off in its
1982 books of account the remaining
outstanding indebtedness of Baguio Gold by
charging P112,136,000.00 to allowances and
reserves that were set up in 1981 and
P2,860,768.00 to the 1982 operations.
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the former under the Power of Attorney.
Petitioner failed to substantiate its assertion
that the advances were subsisting debts of
Baguio Gold that could be deducted from its
gross income.Deductions for income tax purposes partake
of the nature of tax exemptions and are
strictly construed against the taxpayer, who
must prove by convincing evidence that he is
entitled to the deduction claimed.
In its 1982 annual income tax return, Philex
Mining deducted from its gross income the
amount of P112,136,000.00 as "loss on
settlement of receivables from Baguio Gold
against reserves and allowances." However,
BIR disallowed the amount as deduction for
bad debt and assessed petitioner a deficiency
income tax of P62,811,161.39.
Atlas Consolidated Mining & Development
Corporation v. CIR, GR Nos. L-26911 and L-
26924, 27 January 1981
Q: What are the general requisites for
deductibility of business expense?InAtlas Consolidated Mining & Development
Corporation v. CIR, one question was: were the
expenses paid by Atlas for the services
rendered by a public relations firm, P.K.MacKer & Co., labeled as stockholders relation
service fee considered deductible business
expense? The expense in question was
incurred to create a favorable image of the
corporation in order to gain or maintain the
patronage of its stockholders and the public.
The Supreme Court held that such expense
was notan ordinary and necessary expense
allowed to be deducted from the corporations
gross income.In order to be deductible as a business
expense, three conditions must concur
[business test]: (1) the expense must be
ordinary and necessary; (2) it must be paid or
incurred within the taxable year; and (3) it
must be paid or incurred in carrying on a trade
or business. Additionally, the taxpayer must
substantially prove by evidence or records the
deductions claimed under the law.
Atlas is a corporation engaged in the mining
industry registered. On August 1962, CIR
assessed against Atlas for deficiency income
taxes for the years 1957 and 1958. For the
year 1957, it was the opinion of the CIR that
Atlas is not entitled to exemption from the
income tax under RA 909 because same coversonly gold mines. For the year 1958, the
deficiency income tax covers the disallowance
of items claimed by Atlas as deductible from
gross income. Atlas protested for
reconsideration and cancellation, thus the CIR
conducted a reinvestigation of the case.
On October 1962, the Secretary of Finance
ruled that the exemption provided in RA 909
embraces all new mines and old mines
whether gold or other minerals. Accordingly,
the CIR recomputed Atlas deficiency income
tax liabilities in the light of said ruling. On June
1964, the CIR issued a revised assessment
entirely eliminating the assessment for the
year 1957. The assessment for 1958 was
reduced from which Atlas appealed to the
CTA, assailing the disallowance of the
following items claimed as deductible from its
gross income for 1958: Transfer agent's fee,
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There is no hard and fast rule on the matter.
The right to a deduction depends in each case
on the particular facts and the relation of the
payment to the type of business in which the
taxpayer is engaged. The intention of the
taxpayer often may be the controlling fact in
making the determination. Assuming that the
expenditure is ordinary and necessary in theoperation of the taxpayers business, the
answer to the question as to whether the
expenditure is an allowable deduction as a
business expense must be determined from
the nature of the expenditure itself, which in
turn depends on the extent and permanency
of the work accomplished by the expenditure.
In all events, however, the taxpayer must
establish a logical link between the expenseand the taxpayers business.The Supreme Court eventually held that the
expense incurred by Atlas was not a deductible
business expense, but a capital expenditure.
Stockholders relation service fee, U.S. stock
listing expenses, Suit expenses, and Provision
for contingencies. The CTA allowed said items
as deduction except those denominated by
Atlas as stockholders relation service fee and
suit expenses.
Both parties appealed the CTA decision to the
SC by way of two (2) separate petitions for
review. Atlas appealed only the disallowance
of the deduction from gross income of the so-
called stockholders relation service fee.
Esso Standard Eastern, Inc. v. CIR, GR Nos.
28508-9, 7 July 1989
Q: What are the general requisites for
deductibility of business expense?At issue in Esso Standard Eastern, Inc. v. CIR
was the classification of the margin fees paid
by ESSO to the Central Bank on its profit
remittances to its New York head office in the
taxable years 1959 and 1960. ESSO sought the
refund of the amount it paid as margin fees
contending that these fees were deductible
from gross income either as a tax or as an
ordinary and necessary business expense. The
Supreme Court held that the margin fees were
not taxes, as they were imposed by the State
in the exercise of its police power and not the
ESSO deducted from its gross income, as part
of its ordinary and necessary business
expenses, the amount it had spent for drilling
and exploration of its petroleum concessions.
This claim was disallowed by the CIR on the
ground that the expenses should be
capitalized and might be written off as a loss
only when a "dry hole" should result.
ESSO then filed an amended return and
claimed as ordinary and necessary expenses
margin fees it had paid to the Central Bank on
its profit remittances to its New York head
office. The CIR disallowed the claimed
deduction for the margin fees paid. CIR
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power of taxation. The margin fees were an
exaction designed to curb the excessive
demands upon the countrys international
reserve. The High Court also stated that the
margin fees were not an ordinary and
necessary business expense, because ESSO
had not shown that the remittance to the
head office of part of its profits was made in
furtherance of its own trade or business. If at
all, the margin fees were incurred for purposes
proper to the conduct of the corporate affairs
of Standard Vacuum Oil Company in New York,
but certainly not in the Philippines.
assessed ESSO a deficiency income tax which
arose from the disallowance of the margin
fees.
ESSO paid under protest and claimed for a
refund. CIR denied the claims for refund,
holding that the margin fees paid to the
Central Bank could not be considered taxes or
allowed as deductible business expenses.
Hospital de San Juan de Dios, Inc. v. CIR, GR
No. 31305, 10 May 1990
Q: What are the general requisites for
deductibility of business expense?In Hospital de San Juan de Dios, Inc. v. CIR,petitioner was a charitable, non-stock non-
profit corporation which was engaged in both
taxable and non-taxable operations. Its income
included rentals, interests and dividends
received from its properties and investments.
In the computation of its taxable income for
the years 1952 to 1955, petitioner allowed all
its taxable income to share in the allocation of
administrative expenses. The CIR, however,
disallowed the interests and dividends from
sharing in the allocation of administrative
expenses on the ground that the expenses
incurred in the administration or management
of petitioners investments were not allowable
business expenses inasmuch as they were not
incurred in carrying on any trade or
business. The Supreme Court held that as
the principle of allocating expenses is
grounded on the premise that the taxable
In a letter dated January 15, 1959, the
Commissioner of Internal Revenue assessed
and demanded from the petitioner, Hospital
De San Juan De Dios, Inc., payment of P51,462as deficiency income taxes for 1952 to 1955.
The petitioner protested against the
assessment and requested the Commissioner
to cancel and withdraw it. After reviewing the
assessment, the Commissioner advised
petitioner on November 8, 1960 that the
deficiency income tax assessment against it
was reduced to only P16,852.41. Still the
petitioner, through its auditors, insisted on the
cancellation of the revised assessment. The
request was, however, denied.
On September 18, 1965, petitioner sought a
review of the assessment by the CTA. In a
decision dated August 29, 1969, the CTA
upheld the Commissioner. It held that the
expenses incurred by the petitioner for
handling its funds or income consisting solely
of dividends and interests, were not expenses
incurred in "carrying on any trade or
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income was derived from carrying on a trade
or business, as distinguished from mere
receipt of interests and dividends from ones
investments, the Court of Tax Appeals
correctly ruled that said income should not
share in the allocation of administrative
expenses. Otherwise stated, the expenses
incurred in the administration or management
of petitioners investments, i.e., interests and
dividends, were not deductible business
expenses.
business," hence, not deductible as business
or administrative expenses.
Petitioner filed a motion for reconsideration of
the CTA decision. When its motion was
denied, it filed this petition for review.
C.M. Hoskins & Co., Inc. v. CIR, GR No. L-
24059, 28 November 1969
Q: Compensation for personal services actually
rendered; illustrative cases.In C.M. Hoskins & Co., Inc. v. CIR, petitioner
filed its income tax return for the year 1957.The CIR disallowed as deductible business
expense a certain sum representing
supervision fee paid to its controlling
stockholder, Hoskins. Considering the
circumstances (e.g., Hoskins almost wholly
owning and controlling petitioner), the
Supreme Court found that the supervision fee
paid to Hoskins was inordinately large, and
could not be accorded the treatment of
ordinary and necessary expenses allowed as
deductible items. [It was treated as a
distribution of earnings and profits of
petitioner.] The Court explained the test of
reasonableness, citing in the process the case
of Kuenzle & Streiff, Inc. v. CIR(28 SCRA 366,
29 May 1969), to wit: The conditions
precedent to the deduction of bonuses to
employees are: (1) the payment of the
bonuses is in fact compensation; (2) it must be
Petitioner, a domestic corporation engaged in
the real estate business as brokers, managing
agents and administrators, filed its income tax
return for its fiscal year ending September 30,
1957 showing a net income of P92,540.25 anda tax liability due thereon of P18,508.00,
which it paid in due course. Upon verification
of its return, CIR, disallowed four items of
deduction in petitioner's tax returns and
assessed against it an income tax deficiency in
the amount of P28,054.00 plus interests. The
Court of Tax Appeals upon reviewing the
assessment at the taxpayer's petition, upheld
respondent's disallowance of the principal
item of petitioner's having paid to Mr. C. M.
Hoskins, its founder and controlling
stockholder the amount of P99,977.91
representing 50% of supervision fees earned
by it and set aside respondent's disallowance
of three other minor items.
Petitioner questions in this appeal the Tax
Court's findings that the disallowed payment
to Hoskins was an inordinately large one,
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for personal services actually rendered; and (3)
the bonuses, when added to the salaries, are
reasonable x x x when measured by the
amount and quality of the services performed
with relation to the business of the particular
taxpayer.Of course, *t+here is no fixed test for
determining the reasonableness of a given
bonus as compensation. This depends upon
many factors, one of them being the amount
and quality of the services performed with
relation to the business. Other tests
suggested are: payment must be made in
good faith; the character of the taxpayers
business, the volume and amount of its net
earnings, its locality, the type and extent of
the services rendered, the salary policy of thecorporation; the size of the particular
business; the employees qualifications and
contributions to the business venture; and
general economic conditions.Finally, the right of an employer to fix the
compensation of its officers and employees is
recognized, but for income tax purposes the
employer cannot legally claim such bonuses as
deductible expenses unless they are shown to
be reasonable. To hold otherwise would open
the gate of rampant tax evasion.
which bore a close relationship to the
recipient's dominant stockholdings and
therefore amounted in law to a distribution of
its earnings and profits.
Aguinaldo Industries Corporation v. CIR, GR
No. L-29790, 25 February 1982
Q: Compensation for personal services actually
rendered; illustrative cases.InAguinaldo Industries Corporation v. CIR,
when petitioner sold its property in
Muntinglupa, the corporate officers of
petitioner were given bonuses. The amount
representing these bonuses was claimed by
Aguinaldo Industries Corporation (AIC) is a
domestic corporation engaged in the
manufacture of fishing nets, a tax-exempt
industry and the manufacture of furniture. For
accounting purposes, each division is provided
with separate books of accounts. Previously,
AIC acquired a parcel of land in Muntinlupa,
Rizal, as site of the fishing net factory. Later, it
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petitioner as a deductible business expense.
The Supreme Court held that the bonuses
could not be deemed a deductible expense for
tax purposes, even if the aforesaid sale could
be considered as a transaction for carrying on
the trade or business of the petitioner and the
grant of the bonus to the corporate officers
pursuant to petitioners by-laws could, as anintra-corporate matter, be sustained. Citing
Alhambra Cigar andCigarette Manufacturing
Co. v. CIR (GR No. L- 12026, 29 May 1959),the
Supreme Court stated that: whenever a
controversy arises on the deductibility, for
purposes of income tax, of certain items for
alleged compensation of officers of the
taxpayer, two (2) questions become material,
namely: (a) Have personal services beenactually rendered by said officers? (b) In the
affirmative case, what is the reasonable
allowance therefor? Here, no evidence was
presented to show that the corporate officers
who received bonuses had a hand in the sale
transaction of the Muntinglupa property
[which could be the basis of a grant to them of
the bonuses out of the profit derived from the
sale]. Thus, the amount representing the
bonuses could not be allowed as a deductiblebusiness expense
sold the Muntinlupa property. AIC derived
profit from this sale which was entered in the
books of the Fish Nets Division as
miscellaneous income to distinguish it from its
tax-exempt income.
For the year 1957, AIC filed two separate
income tax returns for each division. After
investigation, the examiners of the BIR foundthat the Fish Nets Division deducted from its
gross income for that year the amount of
P61,187.48 as additional remuneration paid to
the officers of AIC. This amount was taken
from the net profit of an isolated transaction
(sale of Muntinlupa land) not in the course of
or carrying on of AIC's trade or business, and
was reported as part of the selling expenses of
the Muntinlupa land. Upon recommendationof the examiner that the said sum of
P61,187.48 be disallowed as deduction from
gross income, petitioner asserted in its letter
of February 19, 1958, that said amount should
be allowed as deduction because it was paid
to its officers as allowance or bonus pursuant
to its by-laws.
CIR v. Algue, Inc., GR No. L-28896, 17 February
1988
Q: Compensation for personal services actually
rendered; illustrative cases.In CIR v. Algue, Inc., for the years 1958 and
1959 respondent sought to claim as deductible
business expense the sum of Php 75,000 as
promotional fees. Respondent was a family
corporation appointed by the Philippine Sugar
Algue Inc. is a domestic corporation engaged
in engineering and construction. The
corporation was appointed by the Philippine
Sugar Estate Development Company (PSEDC)
as its agent, authorizing Algue to sell the
latters land, factories and oil manufacturing
process. Pursuant to this, a certain Guevara
and others worked for the formation of the
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Estate Development Company as its agent and
pursuant to such authority, several employees
of respondent worked for the formation of the
Vegetable Oil Investment Corporation,
inducing others to invest in it. The
compensation that these employees received
formed part of the promotional fees. The CIR
argued that these payments were fictitiousbecause most of the payees were members of
the same family in control of respondent. The
CIR suggested a tax dodge, i.e., an attempt to
evade a legitimate assessment by involving an
imaginary deduction. The Supreme Court
found for respondent. The burden is on the
taxpayer to prove the validity of the claimed
deduction. The Court held that in the present
case, that onus was discharged satisfactorily.Because respondent was a family corporation,
strict business procedures did not apply to it.
Moreover, payment of the promotional fees
was necessary and reasonable in the light of
the efforts exerted by the payees in inducing
investors and prominent businessmen to
venture in an experimental enterprise and
involve themselves in a new business requiring
millions of pesos.
Vegetable Oil Investment Corporating,
incuding others to invest. This corporation
purchased the PSEDC properties. For this sale,
Algue received a commission of 125K and 75K
was paid as promotional fees to the five
individuals led by Guevara. CIR sent Algue a
letter assessing it for delinquent income taxes.
Algue claims the 75k was deductible as anecessary business expense,. On the other
hand, the CIR contends otherwise and claimed
that these payments are fictitious because
most of the payees (the five individuals) are
members of the same family in control of
Algue.
3M Philippines, Inc. v. CIR, GR No. L-82833, 26
September 1988
Q: Rentals and other payments; illustrative
case
In 3M Philippines, Inc. v. CIR, 3M Phils. was a
subsidiary of 3M US. The parties entered into
agreements under which 3M Phils. agreed to
pay to 3M US a 3% technical service fee and a
royalty of 2% of its net sales. In its income tax
return for 1974, 3M Phils. claimed Php 3
million as deductible business expense,
3M Philippines, Inc. is a subsidiary of the
Minnesota Mining and Manufacturing
Company (or "3M-St. Paul") a non-resident
foreign corporation with principal office in St.
Paul, Minnesota, U.S.A. It is the exclusive
importer, manufacturer, wholesaler, and
distributor in the Philippines of all products of
3M-St. Paul. To enable it to manufacture,
package, promote, market, sell and install the
highly specialized products of its parent
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particularly, as royalties and technical service
fees. The CIR allowed a deduction only of an
amount representing royalties and technical
service fees for locally manufactured products.
The CIR disallowed the deduction of the
amount representing royalties and technical
service fees for finished products imported by
3M Phils. from 3M US. The CIR based itsdecision on CB Circular No. 393 (Regulations
Governing Royalties/Rentals) dated 7
December 1973 partly providing that royalties
should be paid only on commodities
manufactured by the licensee under the
royalty agreement. [No royalty was payable on
the wholesale price of finished products
imported by the licensee from the licensor.]
The Supreme Court upheld the CIRs argumentand ruled thus: although the Tax Code allows
payments of royalty to be deducted from gross
income as business expenses, it is CB Circular
No. 393 that defines what royalty payments
are proper. Hence, improper payments of
royalty are not deductible as legitimate
business expenses.
company, and render the necessary post-sales
service and maintenance to its customers, 3M
Phils. entered into a "Service Information and
Technical Assistance Agreement" and a
"Patent and Trademark License Agreement"
with the latter under which the 3m Phils.
agreed to pay to 3M-St. Paul a technical
service fee of 3% and a royalty of 2% of its netsales. Both agreements were submitted to,
and approved by, the Central Bank of the
Philippines. the petitioner claimed the
following deductions as business expenses:
(a) royalties and technical service fees of P
3,050,646.00; and
(b) pre-operational cost of tape coater of
P97,485.08.
As to (a), the Commissioner of InternalRevenue allowed a deduction of P797,046.09
only as technical service fee and royalty for
locally manufactured products, but disallowed
the sum of P2,323,599.02 alleged to have
been paid by the petitioner to 3M-St. Paul as
technical service fee and royalty on
P46,471,998.00 worth of finished products
imported by the petitioner from the parent
company, on the ground that the fee and
royalty should be based only on locallymanufactured goods. While as to (b), the CIR
only allowed P19,544.77 or one-fifth (1/5) of
3M Phils.capital expenditure of P97,046.09 for
its tape coater which was installed in 1973
because such expenditure should be
amortized for a period of five (5) years, hence,
payment of the disallowed balance of
P77,740.38 should be spread over the next
four (4) years. The CIR ordered 3M Phil. to pay
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P840,540 as deficiency income tax on its 1974
return, plus P353,026.80 as 14% interest per
annum from February 15, 1975 to February
15, 1976, or a total of P1,193,566.80.
3M Phils. protested the CIRs assessment but it
did not answer the protest, instead issuing a
warrant of levy. The CTA affirmed the
assessment on appeal.Roxas v. Court of Tax Appeals, GR No. L-25043,
26 April 1968
Q: Entertainment, amusement and recreation
expense; illustrative cases.In Roxas v. Court of Tax Appeals, the late Roxas
Spouses bequeathed several properties to
their grandchildren. To manage said
properties, a partnership called Roxas y Cia
was formed. For the years 1953 and 1955, the
CIR disallowed deductions from gross incomeof various business expenses of Roxas y Cia.
The business expenses comprised of Php 40
for tickets to a banquet given in honor of
Sergio Osmea and Ph 28 for San Miguel beer
given as gifts to various persons. These
deductions were claimed as representation
expenses. The Supreme Court found that no
evidence was shown to link the expenses to
the business of Roxas y Cia. Hence, according
to the Court, such deductions were correctly
disallowed by the CIR.Representation expenses are deductible from
gross income as expenditures incurred in
carrying on a trade or business under [now
Section 34(A) of the 1997 Tax Code] provided
the taxpayer proves that they are reasonable
in amount, ordinary and necessary, and
incurred in connection with his business.
Don Pedro Roxas and Dona Carmen Ayala,
Spanish subjects, transmitted to their
grandchildren by hereditary succession
agricultural lands in Batangas, a residential
house and lot in Manila, and shares of stocks
in different corporations. To manage the
properties, said children, namely, Antonio,
Eduardo and Jose Roxas formed a partnership
called Roxas y Compania.On June 1958, the CIR assessed deficiency
income taxes against the Roxas Brothers for
the years 1953 and 1955. Part of the
deficiency income taxes resulted from the
disallowance of deductions from gross income
of various business expenses and
contributions claimed by Roxas. (see expense
items below)
The Roxas brothers protested the assessment
but inasmuch as said protest was denied, theyinstituted an appeal in the CTA, which
sustained the assessment except the demand
for the payment of the fixed tax on dealer of
securities and the disallowance of the
deductions for contributions to the Philippine
Air Force Chapel and Hijas de Jesus' Retiro de
Manresa. Not satisfied, Roxas brothers
appealed to the SC. The CIR did not appeal.
Revenue Regulations No. 10-2001, 10 July Q: Entertainment, amusement and recreation
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2002 expense; illustrative cases.Revenue Regulations No. 10-2002 enumerates
the requisites for the deductibility of
entertainment, amusement and recreation
expense as follows:(1) it must be paid or incurred during the
taxable year;(2) it must be directly connected to the
development, management and
operation of the trade, business or
profession of the taxpayer, OR directly
related to or in furtherance of the
conduct of his/its trade, business or
exercise of a profession;
(3) it must not be contrary to law, morals,
good customs, public policy or publicorder;
(4) it must not have been paid, directly or
indirectly, to any person as a bribe,
kickback or other similar payment;
(5) it must be duly substantiated by
adequate proof; and
the appropriate amount of withholding tax, if
applicable, should have been withheld
therefrom and paid to the BIR
CIR v. A. Soriano y Cia, GR No. L-24893, 26March 1971
Q: Make a distinction between businessexpense and capital expenditure
How does one classify expenses incurred on
property? In CIR v.A. Soriano y Cia,
respondent owned a parcel of land in
Intramuros,which it later sold to J.M. Tuason
& Co. In computing the income tax due, was
respondent allowed to include as cost of the
property the expenditures it incurred in
A. Soriano y Cia owned a piece of land locatedin Intramuros, City of Manila, on which it
proposed to construct an office building. To
carry out the project it had the necessary
plans drawn in 1960 by Architect J. M.
Zaragoza, and entered into a pile-driving
contract that same year with the construction
firm of A. M. Oreta & Co. The pile-driving was
actually done in 1960.
After these preparations and before the
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improving said property (e.g., pile-driving
service fee and architects fee)? The Supreme
Court said that: expenditures for
replacements, alterations, improvements or
additions which either prolong the life of the
property or increase its value are capital in
nature. The expenses incurred by respondent
increased the value of the Intramuros propertyand hence, must be considered as capital
expenditures that formed part of the cost of
the property [which amount was relevant in
computing the income tax due].
construction of the building, the Taxpayer sold
the property to J. M. Tuason & Co.
The balance of P49,329.55 due on the
Contractor's fees, including the cost of testing
timber piles in the amount of P4,000.00, was
paid only on June 16, 1961 after the
Contractor had concluded negotiations with
the City Engineer of Manila for the settlementof the problem brought by J. M. Tuason & Co.
and after said Contractor had secured a
certification by the Office of the City Engineer
of Manila in connection therewith.
It also appears that in the year 1961, the
Taxpayer completed payment to the architect,
Mr. Zaragoza, of the latter's fees for services
rendered, the same consisting of the unpaid
balance of P10,000.00, plus P1,000.00reimbursement for disbursements made by
the latter in connection with the Intramuros
property.
On April 17, 1961, the Taxpayer filed its 1960
Income Tax Return and in due time paid the
income tax due. On October 4, 1961, it filed an
amended Income Tax Return for the year 1960
showing a refundable amount of P15,099.00
due to the inclusion of expenses paid on June
1 and June 16, 1961 amounting to P50,329.55,expenses allegedly incurred for pile-driving
and architect's fees which the Taxpayer
claimed were part of the cost of its Intramuros
property sold. On the same day, a request for
the refund of the said amount was filed. Again,
on March 12, 1963, the Taxpayer filed a
second amended return showing this time a
refundable amount of P18,099.00 based on
expenses already included in the previous
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amended Income Tax Return, plus another
item of expense in the amount of P10,000.00
paid as architect's fees on March 15, 1961,
upon the claim that all said expenses formed
part of the cost of the Intramuros property
aforesaid. A request for the refund of the total
amount of P18,099.00 was also made.
Atlas Consolidated Mining & DevelopmentCorporation v. CIR, GR Nos. L-26911 and L-
26924, 27 January 1981
Q: Make a distinction between businessexpense and capital expenditure
InAtlas Consolidated Mining & Development
Corporation v. CIR, one question was: were the
expenses paid by Atlas for the services
rendered by a public relations firm, P.K.
MacKer & Co., labeled as stockholders relation
service fee considered deductible business
expense? The expense in question wasincurred to create a favorable image of the
corporation in order to gain or maintain the
patronage of its stockholders and the public.
The Supreme Court held that such expense
was not an ordinary and necessary expense
allowed to be deducted from the corporations
gross income.
In order to be deductible as a business
expense, three conditions must concur
[business test]: (1) the expense must be
ordinary and necessary; (2) it must be paid or
incurred within the taxable year; and (3) it
must be paid or incurred in carrying on a trade
or business. Additionally, the taxpayer must
substantially prove by evidence or records the
deductions claimed under the law.The Supreme Court eventually held that the
expense incurred by Atlas was not a deductible
business expense, but a capital expenditure.
Atlas is a corporation engaged in the miningindustry registered. On August 1962, CIR
assessed against Atlas for deficiency income
taxes for the years 1957 and 1958. For the
year 1957, it was the opinion of the CIR that
Atlas is not entitled to exemption from the
income tax under RA 909 because same covers
only gold mines. For the year 1958, the
deficiency income tax covers the disallowance
of items claimed by Atlas as deductible fromgross income. Atlas protested for
reconsideration and cancellation, thus the CIR
conducted a reinvestigation of the case.
On October 1962, the Secretary of Finance
ruled that the exemption provided in RA 909
embraces all new mines and old mines
whether gold or other minerals. Accordingly,
the CIR recomputed Atlas deficiency income
tax liabilities in the light of said ruling. On June
1964, the CIR issued a revised assessment
entirely eliminating the assessment for the
year 1957. The assessment for 1958 was
reduced from which Atlas appealed to the
CTA, assailing the disallowance of the
following items claimed as deductible from its
gross income for 1958: Transfer agent's fee,
Stockholders relation service fee, U.S. stock
listing expenses, Suit expenses, and Provision
for contingencies. The CTA allowed said items
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The expense incurred to create a favorable
image of the corporation in order to gain or
maintain the patronage of it stockholders and
the public, similar to expenses relating to
recapitalization and reorganization of the
corporation, the cost of obtaining stock
subscription, promotion and commission or
fees paid for the sale of stock reorganizationare capital expenditures which should be
spread out over a reasonable period of t ime.
as deduction except those denominated by
Atlas as stockholders relation service fee and
suit expenses.
Both parties appealed the CTA decision to the
SC by way of two (2) separate petitions for
review. Atlas appealed only the disallowance
of the deduction from gross income of the so-
called stockholders relation service fee.
CIR v. General Foods (Phils.), Inc., GR No.
143672, 24 April 2003
Q: Make a distinction between business
expense and capital expenditure
To be deductible from gross income, an
advertising expense must comply with the
following requirements:(1) the expense must be ordinary andnecessary;
(2) it must have been paid or incurred
during the taxable year;
(3) it must have been paid or incurred in
carrying on the trade or business of the
taxpayer; and
(4) it must be supported by receipts,
records or other pertinent
papers.In CIR v. General Foods (Phils.), Inc.,respondent filed its income tax return for
1985, claiming a certain amount as deductible
media advertising expense for the product
Tang. Respondent and the CIR were in
agreement that the subject advertising
expense was paid or incurred within the
relevant taxable year and was incurred in
carrying on a trade or business. Hence, it was
necessary. However, as to whether it was
Commissioner disallowed 50% of the
deduction claimed and assessed deficiency
income taxes of P2,635,141.42 against General
Foods, prompting the latter to file an MR
which was denied.
General Foods later on filed a petition for
review at CA, which reversed and set aside anearlier decision by CTA dismissing the
companys appeal.
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ordinary, their views were in conflict. The CIR
maintained that the subject advertising
expense was not ordinary for failure to comply
with two requirements set by US
jurisprudence: (1) the amount incurred must
be reasonable, and (2) the amount incurred
must not be a capital outlay to create
goodwill for the product and/or thecorporations business. *Otherwise, the
expense must be considered a capital
expenditure to be spread out over a
reasonable time.]There is yet to be a clear-cut criteria or fixed
test for determining the reasonableness of an
advertising expense. There being no hard and
fast rule on the matter, the right to a
deduction depends on a number of factorssuch as but not limited to: the type and size of
business in which the taxpayer is engaged; the
volume and amount of its net earnings; the
nature of the expenditure itself; the intention
of the taxpayer and the general economic
conditions. It is the interplay of these, among
other factors and properly weighted, that will
yield a proper evaluation. Here, the Supreme
Court held that the advertising expense for a
single product (Tang) was inordinately large.Even if it was necessary, it could not be
considered an ordinary expense. In order to be
deductible, a business expense must be both
ordinary and necessary. The Supreme Court
also found that the subject advertising
expense was a capital expenditure which
should be spread out over a reasonable period
of time.Advertising is generally of two kinds: (1)
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advertising to stimulate the currentsale of
merchandise or use of services and (2)
advertising designed to stimulate thefuture
sale of merchandise or use of services. The
second type involves expenditures incurred, in
whole or in part, to create or maintain some
form of goodwill for the taxpayers trade or
business or for the industry or profe