TUASON V.

LINGAD (TAX) Facts: In 1948 the petitioner inherited from his mother several tracts of land, among which were two contiguous parcels situated on Pureza and Sta. Mesa streets in Manila, with an area of 318 and 67,684 square meters, respectively. When the petitioner's mother was yet alive she had these two parcels subdivided into twenty-nine lots. Twenty-eight were allocated to their then occupants who h ad lease contracts with the petitioner's predecessor at various times from 1900 to 1903, which contracts expired on December 31, 1953. The 29th lot (hereinafter referred to as Lot 29), with an area of 48,000 square meters, more or less, was not leased to any person. It needed filling because of its very low elevation, and was planted to kangkong and other crops. After the petitioner took possession of the mentioned parcels in 1950, he instru cted his attorney-in-fact, J. Antonio Araneta, to sell them. There was no difficulty encountered in selling the 28 small lots as their respec tive occupants bought them on a 10-year installment basis. Lot 29 could not howe ver be sold immediately due to its low elevation. Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdi vided into small lots and paved with macadam roads. The small lots were then sol d over the years on a uniform 10-year annual amortization basis. J. Antonio Aran eta, the petitioner's attorney-in-fact, did not employ any broker nor did he put up advertisements in the matter of the sale thereof. In 1953 and 1954 the petitioner reported his income from the sale of the small l ots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. On M ay 17, 1957 the Collector of Internal Revenue upheld the petitioner's treatment of his gains from the said sale of small lots, against a contrary ruling of a re venue examiner. In his 1957 tax return the petitioner as before treated his income from the sale of the small lots (P119,072.18) as capital gains and included only thereof as t axable income. In this return, the petitioner deducted the real estate dealer's tax he paid for 1957. It was explained, however, that the payment of the dealer' s tax was on account of rentals received from the mentioned 28 lots and other pr operties of the petitioner. On the basis of the 1957 opinion of the Collector of Internal Revenue, the revenue examiner approved the petitioner's treatment of h is income from the sale of the lots in question. In a memorandum dated July 16, 1962 to the Commissioner of Internal Revenue, the chief of the BIR Assessment De partment advanced the same opinion, which was concurred in by the Commissioner o f Internal Revenue. On January 9, 1963, however, the Commissioner reversed himself. Issue: Whether or not the properties in question which the petitioner had inheri ted and subsequently sold in small lots to other persons should be regarded as c apital assets. As thus defined by law, CAPITAL ASSETS include all properties of a taxpayer whet her or not connected with his trade or business, except: stock in trade or other property included in the taxpayer's inventory; property primarily for sale to customers in the ordinary course of his trade or business; property used in the trade or business of the taxpayer and subject to depreciati on allowance; and real property used in trade or business. If the taxpayer sells or exchanges any of the properties above, any gain or loss

relative thereto is an ordinary gain or an ordinary loss; the loss or gain from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss. Under Section 34(b)(2) of the Tax Code, if a gain is realized by a taxpayer (oth er than a corporation) from the sale or exchange of capital assets held for more than 12 months, only 50% of the net capital gain shall be taken into account in computing the net income. The Tax Code's provisions on so-called long-term capital gains constitutes a sta tute of partial exemption. In view of the familiar and settled rule that tax exe mptions are construed in strictissimi juris against the taxpayer and liberally i n favor of the taxing authority, it is the taxpayer's burden to bring himself cl early and squarely within the terms of a tax-exempting statutory provision, othe rwise, all fair doubts will be resolved against him. In the case at bar, after a thoroughgoing study of all the circumstances, this C ourt is of the view and so holds that petitioner's thesis is bereft of merit. Un der the circumstances, petitioner's sales of the several lots forming part of hi s rental business cannot be characterized as other than sales of non-capital ass ets. the sales concluded on installment basis of the subdivided lots do not dese rve a different characterization for tax purposes. This Court finds no error in the holding that the income of the petitioner from the sales of the lots in question should be considered as ordinary income. CIR V. RUFINO (TAX) Facts:The private respondents were the majority stockholders of the defunct East ern Theatrical Co., Inc., a corporation organized in 1934, for a period of twent y-five years terminating on January 25, 1959. It had an original capital stock o f P500,000.00, which was increased in 1949 to P2,000,000.00, divided into 200,00 0 shares at P10.00 per share, and was organized to engage in the business of ope rating theaters, opera houses, places of amusement and other related business en terprises, more particularly the Lyric and Capitol Theaters in Manila. The Presi dent of this corporation (hereinafter referred to as the Old Corporation) during the year in question was Ernesto D. Rufino. The private respondents are also the majority and controlling stockholders of an other corporation, the Eastern Theatrical Co Inc., which was organized on Decemb er 8, 1958, for a term of 50 years, with an authorized capital stock of P200,000 .00, each share having a par value of P10.00. This corporation is engaged in the same kind of business as the Old Corporation. The General-Manager of this corpo ration (hereinafter referred to as the New Corporation) at the time was Vicente A. Rufino. In a special meeting of stockholders of the Old Corporation on December 17, 1958 , to provide for the continuation of its business after the end of its corporate life, and upon the recommendation of its board of directors, a resolution was p assed authorizing the Old Corporation to merge with the New Corporation by trans ferring its business, assets, goodwill, and liabilities to the latter, which in exchange would issue and distribute to the shareholders of the Old Corporation o ne share for each share held by them in the said Corporation. It was expressly declared that the merger of the Old Corporation with the New Co rporation was necessary to continue the exhibition of moving pictures at the Lyr ic and Capitol Theaters even after the expiration of the corporate existence of the former, in view of its pending booking contracts, not to mention its collect ive bargaining agreements with its employees.

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 ctual transfer of the properties subject of the Deed of Assignment was not on the date of the merger. In the nature of things, this was not possible. usly, it was necessary for the Old Corporation to surrender its net assets to the New Corporation before the latter could issue its own stock to the holders of the Old Corporation because the New Corporation had to increase apitalization for this purpose.. the a made Obvio first share its c

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 merge r. The certificates of stock subsequently delivered by the New Corporation to th e private respondents were only evidence of the ownership of such stocks. Althou gh 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, le gally speaking was transferred to them on the date the merger took effect, in ac cordance with the Deed of Assignment. The basic consideration of course, is the purpose of the merger, as this would d etermine 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 me rger 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 capit al gains tax is the subsequent dissolution of the new corporation after the tran sfer to it of the properties of the old corporation and the liquidation of the f ormer 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 a ll the assets and obligations of the former had been transferred. what argues st rongly, indeed, for the New Corporation is that it was not dissolved after the m erger. On the contrary, it continued to operate the places of amusement original ly owned by the Old Corporation. Our ruling then is that the merger in question involved a pooling of resources a imed 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. Gregory vs Helvering Facts: The private respondents were the majority stockholders of the defunct Eas tern Theatrical Co., Inc., a corporation organized in 1934, for a period of twen ty-five years terminating on January 25, 1959. It had an original capital stock of P500,000.00, which was increased in 1949 to P2,000,000.00, divided into 200,0 00 shares at P10.00 per share, and was organized to engage in the business of op erating theaters, opera houses, places of amusement and other related business e nterprises, more particularly the Lyric and Capitol Theaters in Manila. The Pres ident of this corporation (hereinafter referred to as the Old Corporation) durin g the year in question was Ernesto D. Rufino.

The private respondents are also the majority and controlling stockholders of an other corporation, the Eastern Theatrical Co Inc., which was organized on Decemb er 8, 1958, for a term of 50 years, with an authorized capital stock of P200,000 .00, each share having a par value of P10.00. This corporation is engaged in the same kind of business as the Old Corporation. The General-Manager of this corpo ration (hereinafter referred to as the New Corporation) at the time was Vicente A. Rufino. In a special meeting of stockholders of the Old Corporation on December 17, 1958 , to provide for the continuation of its business after the end of its corporate life, and upon the recommendation of its board of directors, a resolution was p assed authorizing the Old Corporation to merge with the New Corporation by trans ferring its business, assets, goodwill, and liabilities to the latter, which in exchange would issue and distribute to the shareholders of the Old Corporation o ne share for each share held by them in the said Corporation. It was expressly declared that the merger of the Old Corporation with the New Co rporation was necessary to continue the exhibition of moving pictures at the Lyr ic and Capitol Theaters even after the expiration of the corporate existence of the former, in view of its pending booking contracts, not to mention its collect ive bargaining agreements with its employees. Ruling: It is earnestly contended on behalf of the taxpayer that since every ele ment required by [the statute] is to be found in what was done, a statutory reor ganization was effected; and that the motive of the taxpayer thereby to escape p ayment of a tax will not alter the result or make unlawful what the statute allo ws. It is quite true that if a reorganization in reality was effected within the meaning of [the statute], the ulterior purpose mentioned will be disregarded. T he legal right of a taxpayer to decrease the amount of what otherwise would be h is [or her] taxes, or altogether avoid them, by means which the law permits, can not be doubted. [ . . . ] But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. The reasoning of the court below [i.e., the reasoning of the Court of Appeals] in ju stification of a negative answer leaves little to be said. When [the statute] speaks of a transfer of assets by one corporation to another, it means a transfer made 'in pursuance of a plan of reorganization' [ . . . ] o f corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of tax ation altogether, and fixing the character of the proceeding by what actually oc curred, what do we find? Simply an operation having no business or corporate pur pose-a mere device which put on the form of a corporate reorganization as a disg uise for concealing its real character, and the sole object and accomplishment o f which was the consummation of a preconceived plan, not to reorganize a busines s or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corpora tion was nothing more than a contrivance to the end last described. It was broug ht into existence for no other purpose; it performed, as it was intended from th e beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death. In these circumstances, the facts speak for themselves and are susceptible of bu t one interpretation. The whole undertaking, though conducted according to the t erms of [the statute], was in fact an elaborate and devious form of conveyance m asquerading as a corporate reorganization, and nothing else. [ . . . T]he transa ction upon its face lies outside the plain intent of the statute. To hold otherw ise would be to exalt artifice above reality and to deprive the statutory provis ion in question of all serious purpose. CIR vs. MARUBENI Facts:

CIR assails the CA decision which affirmed CTA, ordering CIR to desist from coll ecting the 1985 deficiency income, branch profit remittance and contractor s taxes from Marubeni Corp after finding the latter to have properly availed of the tax amnesty under EO 41 & 64, as amended. Marubeni, a Japanese corporation, engaged in general import and export trading, financing and construction, is duly registered in the Philippines with Manila br anch office. CIR examined the Manila branch s books of accounts for fiscal year en ding March 1985, and found that respondent had undeclared income from contracts with NDC and Philphos for construction of a wharf/port complex and ammonia stora ge complex respectively. On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes. CIR claims that the income respondent derived were income fro m Philippine sources, hence subject to internal revenue taxes. On Sept 1986, res pondent filed 2 petitions for review with CTA: the first, questioned the deficie ncy income, branch profit remittance and contractor s tax assessments and second q uestioned the deficiency commercial broker s assessment. On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85 , and that taxpayers who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct 30, 1986. On Nov 17, 1986, EO 64 expanded EO 41 s scope to include estate and donor s taxes un der Title 3 and business tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated those who already availed amnesty under EO 41 should file an amended return to avail of the new benefits. Marubeni filed a supplemental tax amnesty return on Dec 15, 1986. CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes. CA affirmed on appeal.

Issue: W/N Marubeni is exempted from paying tax

Held: Yes. On situs of taxation Marubeni contends that assuming it did not validly avail of the amnesty, it is s till not liable for the deficiency tax because the income from the projects came from the Offshore Portion as opposed to Onshore Portion . It claims all materials an d equipment in the contract under the Offshore Portion were manufactured and compl eted in Japan, not in the Philippines, and are therefore not subject to Philippi ne taxes. Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines because some of them were completed in Japan ( and in fact subcontracted) in accordance with the provisions of the contracts. A ll services for the design, fabrication, engineering and manufacture of the mate rials and equipment under Japanese Yen Portion I were made and completed in Japa n. These services were rendered outside Philippines taxing jurisdiction and are t herefore not subject to contractor s tax. Petition denied.

CIR vs CA GR L-54108 Facts: This case is about the refund of a 1971 income tax amounting to P324,255. Smith Kline and French Overseas Company, a multinational firm domiciled in Phil adelphia, Pennsylvania, is licensed to do business in the Philippines. It is eng aged in the importation, manufacture and sale of pharmaceuticals drugs and chemi cals. In its 1971 original income tax return, Smith Kline declared a net taxable incom e of P1,489,277 (Exh. A) and paid P511,247 as tax due. Among the deductions clai med from gross income was P501,040 ($77,060) as its share of the head office ove rhead expenses. However, in its amended return filed on March 1, 1973, there was an overpayment of P324,255 "arising from underdeduction of home office overhead " (Exh. E). It made a formal claim for the refund of the alleged overpayment. It appears that sometime in October, 1972, Smith Kline received from its interna tional independent auditors, Peat, Marwick, Mitchell and Company, an authenticat ed certification to the effect that the Philippine share in the unallocated over head expenses of the main office for the year ended December 31, 1971 was actual ly $219,547 (P1,427,484). It further stated in the certification that the alloca tion was made on the basis of the percentage of gross income in the Philippines to gross income of the corporation as a whole. By reason of the new adjustment, Smith Kline's tax liability was greatly reduced from P511,247 to P186,992 result ing in an overpayment of P324,255. On April 2, 1974, without awaiting the action of the Commissioner of Internal Re venue on its claim Smith Kline filed a petition for review with the Court of Tax Appeals. In its decision of March 21, 1980, the Tax Court ordered the Commissioner to ref und the overpayment or grant a tax credit to Smith Kline. The Commissioner appea led to this Court.