CIR V. RUFINO (TAX)

Issue: Whether or not the merger was formed to evade the capital gains tax.

NO.

We sustain the CTA. We hold that it did not err in finding that no taxable gain was derived by private respondent from the questioned transaction.

Contrary to the claim of the petitioner, there was a valid merger although the actual transfer of the properties subject of the Deed of Assignment was not made on the date of the merger. In the nature of things, this was not possible. Obviously, it was necessary for the Old Corporation to surrender its net assets first to the New Corporation before the latter could issue its own stock to the shareholders of the Old Corporation because the New Corporation had to increase its capitalization for this purpose..

The Court finds no impediment to the exchange of property for stock between the two corporations being considered to have been effected on the date of the merger. The certificates of stock subsequently delivered by the New Corporation to the private respondents were only evidence of the ownership of such stocks. Although these certificates could be issued to them only after the approval by the SEC of the increase in capitalization of the New Corporation, the title thereto, legally speaking was transferred to them on the date the merger took effect, in accordance with the Deed of Assignment.

The basic consideration of course, is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation.

It has been suggested that one certain indication of a scheme to evade the capital gains tax is the subsequent dissolution of the new corporation after the transfer to it of the properties of the old corporation and the liquidation of the former soon after.

We see no such furtive intention in the instant case. It is clear, in fact, that the purpose of the merger was to continue the business of the Old Corporation, whose corporate life was about to expire, through the New Corporation to which all the assets and obligations of the former had been transferred. what argues strongly, indeed, for the New Corporation is that it was not dissolved after the merger. On the contrary, it continued to operate the places of amusement originally owned by the Old Corporation.

Our ruling then is that the merger in question involved a pooling of resources aimed at the continuation and expansion of business and so came under the letter and intendment of the NIRC, as amended, exempting from the capital gains tax of property affected under lawful corporate combinations.

CHINA BANKING V. CA (TAX)

Issues:

1. Whether the 20% final withholding tax on interest income should form part of CBC's gross receipts in computing the gross receipts tax on banks; and


2. Whether CBC has established by sufficient evidence its right to claim the full refund representing alleged overpayment of the gross receipts tax.

We rule that the amount of interest income withheld in payment of the 20% final withholding tax forms part of CBC's gross receipts in computing the gross receipts tax on banks as provided for in Section 121 of the Tax Code. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar banking activities.

The CTA held in Far East Bank and Standard Chartered Bank that the exclusion of the final withholding tax from gross receipts operates as a tax exemption which the law must expressly grant. No law provides for such exemption.

CBC's argument will create tax exemptions where none exist. If the amount of the final withholding tax is excluded from taxable gross receipts, then the amount of the creditable withholding tax should also be excluded from taxable gross receipts.

There is a policy objective why no deductions, exemptions, or exclusions are normally allowed in a gross receipts tax. The gross receipts tax, a supposed to income tax, was devised to maintain simplicity in tax collection and to assure a steady source of state revenue even during periods of economic slowdown. such policy frowns upon erosion of the tax base. Deductions, exemption, or exclusions complicate the tax system and lessen the tax collection. By its nature, a gross receipts tax applies to the entire receipts without deduction, exemption, or exclusion unless the law clearly provides otherwise.

In summary, CBC has failed to point to any specific provision of law allowing the deduction, exemption, or exclusion from its taxable gross receipts, of the amount withheld as final tax. Such amount should therefore form part of CBC's gross receipts in computing the gross receipts tax. There being mo legal basis for CBC's claim for a tax refund or credit, the second issue raised in this petition is now moot.

CALASANZ V. CIR AND CTA (TAX)

Issues:

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

Commissioner maintained that the imposition of the taxes in question is in accordance with law since petitioners are deemed to be in the real estate business for having been involved in a series of real estate transactions pursued for profit. Respondent argued that property acquired by inheritance may be converted from an investment property to a business property if as in the present case, it was subdivided, improved, and subsequently sold and the number, continuity, and frequency of the sales were such as to constitute "doing business." Respondent likewise contended that inherited property is by itself neutral and the fact that the ultimate purpose is to liquidate is of no moment for the important inquiry is what the taxpayer did with the property. Respondent concluded that since the lots are ordinary assets, the profits realized therefrom are ordinary gains, hence, taxable in full.

We agree with respondent Commissioner.

The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets. NIRC broadly defines CAPITAL ASSETS as follows:

Capital assets. The Term 'capital assets' means property held by the taxpayer whether or not connected with his trade or business, but does not include,

1. stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year;
2. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
3. property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection (f) section 30; or
4. real property used in the trade or business of the taxpayer.

The statutory definition of capital assets is negative in nature. If the asset is not among the exceptions, it is capital asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction.

Also, a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale of inherited real property usually gives capital gain or loss even though the property has to be substantially improved or both to make it saleable. However, if the inherited property is substantially improved or very actively sold or both, it may be treated as held primarily for sale to customers in the ordinary course of the heir's business.

One strong factor against petitioners' contention is the business element of development which is very much in evidence. Petitioners did not sell the land in the condition in which they acquired it. While the land was originally devoted to rice and fruit trees, it was subdivided into small lots and in the process converted into a residential subdivision and given the name Don Mariano Subdivision.

Another distinctive feature of the real estate business discernible from the record is the existence of contract receivables. Also of significance is the circumstance that the lots were advertised for sale to the public and that sales and collection commissions were paid out during the period in question.

In view of the foregoing, the SC holds that in the course of selling the subdivided lots, petitioners engaged in the real estate business and accordingly, the gains from the sale of the lots are ordinary income taxable in full.

WELCH V. HELVERING, 290 US 111 (TAX)

Issue: Whether payments by taxpayer, who is in business as a commission agent, are allowable deductions in the computation of his income if made to the creditors of a bankrupt corporation in a endeavor to strengthen his own standing and credit.

We may assume that the payments to creditors of the Welch Company were necessary for the development of the petitioner's business as least in the sense that they were appropriate and helpful. But the problem is not solved when the payments are characterized as necessary. Many necessary payments are charges upon capital. There is a need to determine whether they are both necessary and ordinary.

Now what is ordinary is nonetheless a variable affected by time and place. Men do at times pay the debts of others without legal obligation or the lighter obligation imposed by the usages of trade or by neighborly amendities, but they do not do so ordinarily, not even though the result might be to heighten their reputation for generosity and opulence. Indeed, if language is to be read in its natural and common meaning, we should have to say that payment in such circumstances, instead of being ordinary is in a high degree extraordinary. There is nothing ordinary in the stimulus evoking it, and none in the response.

Reputation and learning are akin to capital assets, like the goodwill of an old partnership. For many, they are the only tools with which to hew a path way to success. The money spent in acquiring them is well and wisely spent. It is not ordinary expense of the operation of a business.

TAN TRUCK RENTALS V. COMMISSIONER 356 US 30 (TAX)

Fines imposed on and paid by the owners of tank trucks (and their drivers who are reimbursed by the owners) for violations of state maximum weight laws are not deductible by the truck owners as "ordinary and necessary" business expenses under the 1939 Internal Revenue Code, either (a) when commercial practicalities cause the truck owners to violate such state weight laws deliberately at the calculated risk of being detected and fined; or (b) when the violations are unintentional.

1. A finding that an expense is "necessary" cannot be made if allowance of the deduction would frustrate sharply defined national or state policies proscribing particular types of conduct, evidenced by some governmental declaration thereof.
2. The fines here concern the policy of several states evidenced by penal statutes enacted to protect their highways from damage and to insure safety of all persons using them.
3. Assessment of the fines here involved was punitive action, and not a mere toll for the use of their highways.
4. In allowing deductions for income purposes, Congress did not intend to encourage business enterprises to violate the declared policy of the State.
5. The rule as to frustration of sharply defined national or state policies is not absolute. Each case turns on its own facts, and the test of nondeductibility is the severity and immediacy of the frustration resulting from allowance of the deduction.
6. To permit the deduction of fines and penalties imposed by a state for violations of its laws would frustrate sate policy in severe and direct fashion by reducing the "sting" of penalties.
7. Since the maximum weight statutes make no distinction between innocent and willful violators, state policy is as much thwarted in the case of unintentional violations as it is in the case of willful violations.

PLARIDEL SURETY V. CIR (TAX)

The rule is that loss deduction will be denied if there is a measurable right to compensation for the loss, with ultimate collection reasonably clear. So where there is reasonable ground for reimbursement, the taxpayer must seek his redress and may not secure a loss deduction until he establishes that no recovery may be had. In other words, as the Tax Court put it, the taxpayer (petitioner) must exhaust his remedies first to recover or reduce his loss.

It is on record that petitioner had not exhausted its remedies, especially against Cuervo who was solidarily liable with San Jose for reimbursement to it. No evidence was submitted that anything was really done on the matter. It right to reimbursement is not only secured by the mortgages executed by San Jose and Cuervo but also by a final and executory judgment in the civil case itself. Thus, other properties of San Jose and Cuervo were subject to levy and execution. but no writ of execution, satisfied or not, was ever submitted. Neither has it been established that Cuervo was insolvent. The only evidence is the testimony that it is not really known if Cuervo really has properties or not. This is not substantial proof of insolvency. Thus, it was too premature for petitioner to claim a loss deduction.

But assuming that there was no reasonable expectation of recovery, still no loss deduction can be had. section 30(d)(2) of the Tax Code requires a charge-off as one of the conditions for loss deduction:

In case of a corporation, all losses actually sustained and charged-off within the taxable year and not compensated for by insurance or otherwise.

Petitioner who had the burden of proof failed to adduce evidence that there was a charge0off in connection with the amounts in issue which it paid to Galang Machinery.

In connection with the claimed interest deduction, the Solicitor General points out that this question was never raised before the Tax Court. Petitioner through counsel, had admitted that the only issue in this case was whether the entire amount paid by it was or was not a deductible loss. The alleged interest deduction not having been properly litigated as an issue before the Tax Court, it is now too late to raise and assert it before this Court.

PHILIPPINE REFINING COMPANY V. CA (TAX)

BAD DEBTS; REQUISITES FOR DEDUCTION

For debts to be considered as "worthless" and thereby qualify as "bad debts" making them deductible, the taxpayer should show that

1. there is a valid and subsisting debt;
2. the debt must be actually ascertained to be worthless and uncollectible during the taxable year;
3. the debt must be charged off during the taxable year; and
4. the debt must arise from the business or trade of the taxpayer.

Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. Further, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz:

1. sending of statement accounts;
2. sending of collection letters;
3. giving the account to a lawyer for collection; and
4. filing a collection case in court.

DEFICIENCY TAX ASSESSMENT; FAILURE TO PAY WITHIN 30 DAYS RENDERS TAXPAYER LIABLE FOR PAYMENT OF 25% SURCHARGE AND 20% INTEREST

As correctly pointed out by the Solicitor General, the deficiency tax assessment in this case, which was the subject of the demand letter of respondent Commissioner dated 11 April 1989 should have been paid within 30 days from receipt thereof. By reasons of petitioner's default thereon, the delinquency penalties of 25% surcharge and interest of 20% accrued from 11 April 1989. the fact the petitioner appealed the assessment to the CTA and that the same was modified does not relieve petitioner of the penalties incident to delinquency.

PENALTIES FOR DELINQUENCIES, INTENDED TO HASTEN PAYMENT OF TAXES

Tax laws imposing penalties for delinquencies are intended to hasten tax payments by punishing evasions or neglect of duty in respect thereof. If penalties could be condoned for flimsy reasons, the law imposing penalties for delinquencies would be rendered nugatory, and the maintenance of the Government and its multifarious activities will be adversely affected.

COLLECTION OF PENALTY AND INTEREST IN CASE OF DELINQUENCY, MANDATORY

We have likewise explained that it is mandatory to collect penalty and interest at the stated rate in case of delinquency. The intention of the law is to discourage delay in payment of taxes due the Government and in this sense, the penalty and interest are not penal but compensatory for the concomitant use of the funds by the taxpayer beyond the date when he is supposed to have paid them to the Government.

INDOPCO V. COMMISSIONER (TAX)

Petitioner's expenses do not qualify for deduction under Section 162(a).

Deductions are exceptions to the norm of capitalization and are allowed only if there is clear provision for them in the Code and the taxpayer has met the burden of showing a right to the deduction. Commissioner v. Lincoln Savings & Loan Assn holds simply that the creation of a separate and distinct asset may be a sufficient condition for classification as a capital expenditure, not that it is a prerequisite to such classification. Nor does Lincoln Savings prohibit reliance on future benefit as means of distinguishing an ordinary business expense from a capital expenditure.

Although the presence of an incidental future benefit may not warrant capitalization, a taxpayer's realization of benefits beyond the year in which the expenditure is incurred is important in determining whether the appropriate tax treatment is immediate deduction or capitalization. The record in the instant case amply supports the lower court's findings that the transaction produces significant benefits to petitioner extending beyond the tax year in question.

ESSO STANDARD EASTERN V. COMMISSIONER (TAX)

Issue: Whether the margin fees may be considered as ordinary and necessary business expenses.

Ruling: For an item to be deductible as business expense, the expense must be ordinary and necessary; it must be paid or incurred within the taxable year; and it must be paid or incurred in carrying on a trade or business. In addition, the taxpayer must substantially prove by evidence or records the deductions claimed under the law; otherwise, the same will be disallowed.

An expense is considered necessary when the expense is appropriate and helpful in the development of the taxpayer's business. It is ordinary when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances.

Assuming that the expenditure is ordinary and necessary in the operation of the business, the expenditure, to be allowable deduction as business expense must be determined from the nature of the expenditure itself and on the extent and permanence of the work accomplished by the expenditure.

Herein, ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely assumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires, which is erroneous. Claims for deductions are matter of legislative grace and do not turn on mere equitable considerations.

CIR V. GENERAL FOODS (TAX)

To be deductible from gross income, the subject advertising expense must comply with the following requisites:

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 papers.

The parties are in agreement that the subject advertising expense was paid or incurred within the corresponding taxable year and was incurred in carrying on a trade or business. Hence, it was necessary. However, their views conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary. These 2 requirements must be met.

The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the 2 conditions set by US jurisprudence:

1. reasonableness of the amount incurred; and
2. the amount incurred must not be a capital outlay to create "goodwill" for the product and/or private respondent's business.

Otherwise, the expense must be considered a capital expenditure to be spread out over a reasonable time.

We find the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under NIRC.

Advertising is generally of 2 kinds:

1. advertising to stimulate the current sale of merchandise or use of services; and
2. advertising designed to stimulate the future sale of merchandise or use of services.

The second type involves expenditures incurred to create or maintain some form of goodwill for the taxpayer's trade or business. If the expenditures are for the advertising of the first kind, then except as to the question of the reasonableness of the amount, there is no doubt such expenditures are deductible as business expenses. If however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time.

We agree with the CTA that the subject advertising expense was of the second kind. Not only was the amount staggering, the respondent corporation itself also admitted, that the subject media expense was incurred in order to protect respondent corporation's brand franchise.

The protection of brand franchise is analogous to the maintenance of goodwill or title to one's property. This is a capital expenditure which should be spread out over a reasonable period of time. This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business expenses but as capital expenditures.

COMMISSIONER V. TELLIER 383 US 687 (TAX)

The question presented in this case is whether expenses incurred by a taxpayer in the unsuccessful defense of a criminal prosecution may qualify for deduction from taxable income under the Internal Revenue Code, which allows a deduction of "all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Respondent Tellier was engaged in the business of underwriting the public sale of stock offerings and purchasing securities for resale to customers.

In 1956, he was brought to trial upon a 36-count indictment that charged him with violating the fraud section of the Securities Act of 1933 and the mail fraud statute and with conspiring to violate those statutes.

He was found guilty on all counts and was sentences to pay USD 18,000 fine and to serve 4 and a half years in prison. The judgment of conviction was affirmed on appeal.

In his unsuccessful defense of this criminal prosecution, the respondent incurs and paid USD 22,964 in legal expenses. He claimed a deduction for that amount on his federal income tax return for that year. The Commissioner disallowed the deduction and was sustained by the Tax Court. The CA reversed in a unanimous en banc decision, and we granted certiorari.

Where as here, an accused exercises his constitutional right to employ counsel to defend against criminal charges, there is no offense to public policy and deduction of the expenses of his defense is proper.

CM HOSKINS V. CIR (TAX)

Issue: Whether the term "gross compensation" in Section 195 includes supervision and collection fees received by a real estate broker as a realty subdivision operator.

With respect to the collection fees, there can be little doubt that the services rendered by Hoskins in collecting the amount due on the sales on the installment plan are incidental to it brokerage service in selling the lots. The sale of a lot may be on the cash basis or on installment. If the broker's commissions on the cash sales, of lots are subject to the brokerage percentage tax, it should logically follow that its commission s on installment sales are likewise taxable.

As to the supervision fees for the development and management of the subdivisions, which fees were paid out of the proceeds of the sales of the subdivision lots, the theory of the Tax Court is that the development, management, and supervision services were necessary to bring about the sales of the lots and were inseparably linked thereto.

The Tax Court did not err in applying to this case the ruling in the Tuason case where it was rules that "the duty of developing the subdivision, with its lots, streets, playgrounds, sewage, etc, is also a necessary incident to the duty of selling the lands subject of the contract." Hence, there is basis for holding that the operation of subdivisions is really incidental to the main business of the broker which is the sale of the lots on commission.

BASILAN ESTATES V. CIR AND CTA (TAX)

The first question for resolution is whether depreciation shall be determined on the acquisition cost or on the reappraised value of the assets.

DEPRECIATION is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets free from income tax.

Precisely, Section 30 (f)(1) states:

In general - a reasonable allowance for deterioration of property arising out of its use or employment in the business or trade, or out of its not being used: Provided, that when the allowance authorized under this subsection shall equal the capital invested by the taxpayer... no further allowance shall be made...

...allows deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated.

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. 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 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 on 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.

Accordingly, the claim for depreciation has no justification in the law. The determination therefore, of the Commissioner disallowing said amount, affirmed by the CTA is sustained.

The second question for resolution is whether the miscellaneous expenses and officer's travelling expenses are allowable expenses as the same could not be supported by appropriate papers.

On this ground, the petitioner may be sustained for under Section 337 of the Tax Code, receipts and papers supporting such expenses need be kept by the taxpayer for a period of 5 years from the last entry. At the time of the investigation, said 5 years have lapsed. Taxpayer's stand on this issue is therefore sustained.

The third question is on the unreasonably accumulated profits.

Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated provides:

Sec. 25. Additional tax on corporations improperly accumulating profits or surplus - (a) Imposition of tax. - If any corporation, except banks, insurance companies, or personal holding companies, domestic or foreign, is formed or availed of for the purpose of preventing imposition of tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to 25% of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by Section 24, and shall be computed, collected, and paid in the same manner and subject to the same provisions of law, including penalties, as that tax.

Petitioner failed to provide sufficient explanation. In order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared intentions which are merely the products of afterthought. As correctly held by the CTA, while certain expenses of the corporation were credited against large amounts, the unspent balance was retained by the stockholders without refunding them to petitioner at the end of each year. These advances were in fact indirect loans to the stockholders indicating the unreasonable accumulation or surplus beyond the needs of the business.

ATLAS CONSOLIDATED MINING V. CIR (TAX)

The decisive question is whether or not the expenses paid for the services rendered by a public relations firm labelled as stockholders relation service fee is an allowable deduction as business expense under the NIRC.

The law allowing expenses as deductions from gross income for purposes of income tax is Sec 30(a)(1) of the NIRC which allows a deduction of "all the ordinary expenses paid or incurred during the taxable year in carrying on a trade or business." an item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language.

The statutory TEST OF DEDUCTIBILITY where it is axiomatic that to be deductible as a business expense, 3 conditions are imposed, namely:

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 in a trade or business.

In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.

We sustain the ruling of the tax court that the expenditure paid as compensation for services carrying on the selling campaign in an effort to sell Atlas' additional capital stock is NOT an ordinary expense in line with the decision of the US Board of Tax Appeals in several cases. Accordingly, as found by the CTA, the said expense is not deductible from Atlas' gross income because the expenses relating to recapitalization and reorganization of the corporation, the cost of obtaining stock subscription, promotion expenses, and commission or fees paid for the sale of stock reorganization are CAPITAL EXPENDITURES.

That the expense in question was incurred to create a favorable image of the corporation in order to gain or maintain the public's and its stockholders patronage, does not make it deductible as business expense. Efforts to establish reputation are akin to acquisition of capital assets, and therefore, expenses related thereto are not business expense but capital expenditure.

CYNAMID PHILS V. CA (TAX)

Petitioner protested the assessments through its external accountant, claiming among others that the surtax for the undue accumulation of earnings was not proper because the said profits were retained to increase petitioner's working capital and it would be used for reasonable business needs of the company.

The Bardahl formula was developed to measure corporate liquidity. It requires an examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle.

If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to accumulate, and the taxpayer contested such a determination, the burden of proving the determination wrong, together with the corresponding burden of first going forward with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or investment company and does not have an unreasonable accumulation of earnings or profits.

In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifest at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts.

Furthermore, the accumulated profits must be used within a reasonable time after the close of taxable year. In the instant case, petitioner did not establish, by clear and convincing evidence that such accumulation of profit was for the immediate needs of the business.

AFISCO INSURANCE V. CA (TAX)

Pursuant to Reinsurance Treaties, a number of local insurance firms formed themselves into a "pool" in order to facilitate the handling of business contracted with a nonresident foreign insurance company.

Issues:

1. May the "clearing house" or "insurance pool" so formed be deemed a partnership or an association that is taxable as a corporation under the NIRC?
2. Should the pool's remittances to member companies ans to said foreign firm be taxable as dividends?
3. Has the government's right to asses and collect said tax prescribed?

Ruling: The pool is taxable as a corporation and the government's right to assess and collect taxes had not prescribed.

The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation), associations, or insurance companies, but does not include general professional partnerships or a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract without the Government.

In the case before us, the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-sharing reinsurance treaty and surplus reinsurance treaty with Munich. There are unmistakable indicators that it is a partnership or an association covered by NIRC.

The fact that the pool does not retain any profit or income does not obliterate an antecedent fact that of the pool being used in the transaction of business for profit. It is apparent, and petitioners admit that their association or coaction was indispensable to the transaction of the business. If together they have conducted business, profit must have been the object as indeed, profit was earned. Though the profit was apportioned among the members, this is one a matter of consequence as it implies that profit actually resulted.

Petitioners' reliance on Pascual v. Commissioner is misplaced, because the facts obtaining therein are not on all fours with the present case. In Pascual, there was no unregistered partnership, but merely a co-ownership which took up only 2 isolated transactions. The CA did not err in applying Evangelista, which involved a partnership that engaged in a series of transactions spanning more than 10 years, as in the case before us.

CIR V. ANSCOR (TAX)

A taxpayer cannot be compelled to answer for the non-performance by the withholding agent of its legal duty to withhold unless there is collusion or bad faith. In addition, the former could not be deemed to have evaded the tax had the withholding agent performed it duty.

An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed for deficiency withholding tax under the 1939 Code. As such, it is being held liable in its capacity as a withholding agent and not its personality as a taxpayer.

In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer - he is the persons subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His liability is direct and independent from the taxpayer, because the income tax is still imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him - he earned no income.

The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since the government's cause of action against the withholding is not for the collection of income tax, but for the enforcement of the withholding provision of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer.

Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected by the amnesty under the decree.

Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent. The taxpayer should not answer for the non-performance by the withholding agent of its legal duty to withhold unless there is collusion or bad faith. The former could not be deemed to have evaded the tax had the withholding agent performed his duty.

This could be the situation for which the amnesty decree was intended. Thus, to curtail tax evasion and give tax evaders a chance to reform, it was deemed administratively feasible to grant tax amnesty in certain instances. In addition, a TAX AMNESTY much like tax exemption, is never favored nor presumed in law and if granted by statute, the term of the amnesty like that of tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The rule on strictissimi juris equally applies. So that any doubt in the application of an amnesty law/decree should be resolved in favor of the taxing authority.

CIR V. CA AND YMCA (TAX)

YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational, and charitable objectives.

In 1980, YMCA earned, among others, an income from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and income form parking collected from non-members.

In 1985, CIR issued an assessment to YMCA, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. YMCA formally protested the assessment , which CIR denied.

Issue: Is the income derived from rentals of real property owned by YMCA - established as welfare, educational, and charitable non-profit corporation - subject to income tax under the NIRC and the Constitution?

Petitioner argued that while the income received by the organizations enumerated in the NIRC is, as a rule, exempt from payment of tax, in respect to income received by them as such, the exemption does not apply to income derived from any of its properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income.

Petitioner adds that rented income derived by a tax-exempt organization from the lease of its properties, real or personal, is not therefore exempt from income taxation, even if such income is exclusively used for the accomplishment of its objectives.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.

CIR V. WANDER PHILIPPINES (TAX)

This is a petition for review on certiorari of the Decision of the CTA holding that Wander Philippines is entitle to the preferential rate of 15% withholding tax on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident corporation.

The dividends received form a domestic corporation liable to tax, the tax shall be 15% of the dividends received, subject to the condition that the country is which the non-resident corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends.

In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Wander claims that full credit is granted and not merely credit equivalent to 20%. Petitioner on the other hand, avers the tax sparing credit is applicable only if the country of the parent corporation allows a foreign tax credit only for the 15% point portion actually paid but also the equivalent 20% point portion spared, waived, or otherwise deemed as if paid in the Philippines; that private respondent does not cite anywhere a Swiss law to the effect that in case where a foreign tax, such as the Philippine 35% dividend tax, is spared, waived, or otherwise considered as if paid in whole or in part by the foreign country, a Swiss foreign tax credit would be allowed for the whole or for the part, as the case may be, of the foreign tax so spared or waived or considered as if paid by the foreign country.

While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax or the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. For, as aptly stated by CTA, to deny private respondent the privilege to withhold only 15% tax provided for under the Tax Code, would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations' interest here and discourage them form investing capital in our country.

MARUBENI V. CIR (TAX)

Under the Tax Code, a RESIDENT FOREIGN CORPORATION is one that is engaged in trade or business within the Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines through its Philippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that since the Philippine branch and the Tokyo head office are one and the same entity, whoever made the investment in AG&P Manila, doe snot matter at all.

A single corporate entity cannot be both a resident and not-resident corporation depending on the nature of the particular transaction involved. Accordingly, whether the dividends are paid directly to the head office or coursed through its local branch is of no moment for after all, the head office and the office branch constitute but one corporate entity, the Marubeni corporation, which, under Philippine tax and corporate laws, is a resident foreign corporation because it is transacting business in the Philippines.

The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines indipendently of its branch, the principal-agent relationship is set aside. the transaciton becomes one of the foreign corporation, not of the branch. Consequestly, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation.

In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer form the branch in the Philippines. There can be no other logical conclusion considering the undisputed fact that the investment was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Japan, but certainly not of the branch in the Philippines. It is thus clear that petitioner, having made this independent investment attributable only to the head office, cannot now claim the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10& other than 25%.