Taxation Law

LMG15
Case Digests

Submitted by: TULIAO, Maria Athena E.

4 DLM
Submitted to. Atty. Cardona

1.

Madrigal v. Rafferty
38 Phil. 414, August 7, 1918

FACTS:
Vicente Madrigal and Susana Paterno legally contracted marriage prior toJanuary
1, 1914 under the provisions of law concerning conjugal partnerships. On February
25, 1915, Vicente Madrigal filed sworn declaration on the prescribed form with the
CIR, showing, as his total net income for the year 1914, the sum of P296,302.73.
Subsequently Madrigal submitted the claim that the said P296,302.73 did not
represent his income for the year 1914, but was in fact the income of the conjugal
partnership existing between himself and his wife, and that in computing and
assessing the additional income tax provided by the Act of Congress, the income
declared by Madrigal should be divided into two equal parts, one-half to be
considered the income of Vicente Madrigal and the other half of Susana Paterno.
The general question had in the meantime been submitted to the Attorney-General
of the Philippine Islands who in an opinion dated March17, 1915, held with the
petitioner Madrigal. The revenue officers forwarded the correspondence with the
opinion of the Attorney-General to Washington for a decision by the United States
Treasury Department. The United States Commissioner of Internal Revenue
reversed the opinion of the Attorney-General, and thus decided against the claim of
Madrigal.
ISSUE:
Whether or not the additional income tax should be divided into two equal parts
because of the conjugal partnership existing between Vicente Madrigal and Susana
Paterno.
HELD:
The income of husband and wife should be taken as a whole for the purpose of the
normal taxr egardless as to whether from separate estates or not.

2.

CIR v. Tours Specialists

GR No. 66416, March 21, 1990

FACTS:
The Commissioner of Internal Revenue filed a petition to the CTA decision which
ruled that the money entrusted to private respondent Tours Specialists, and paid for
hotel room charges of tourists, travelers or foreign travel agencies do not form part
of its gross receipt subject to 3% independent contractors tax. The Tours Specialist
derived income from its activities and services as a travel agency, which included
booking tourists in local hotels. To supply such service, Tours Specialists and its
counterpart tourist agencies abroad have agreed to offer a package fee for the
tourists inclusive of payment of hotel room accommodations, food and other
personal expenses. By arrangement, the foreign tour agency entrusts to TS the
fund for hotel room accommodation, which in turn paid by the latter to the local
hotel when billed.
Despite this arrangement, CIR assessed private respondent for deficiency 3%
contractors tax as independent contractor including the entrusted hotel room
charges in its gross receipts from services for years 1974-1976 plus compromise
penalty. During cross-examination, Tours Specialists General Manager stated that
the payment through them is only an act of accommodation on its part and the
agent abroad instead of sending several telexes and saving on bank charges they
take the option to send the money to Tours Specialists to be held in trust to be
endorsed to the hotel.
CIR caused the issuance of a warrant of distraint and levy, and had Tours
Specialists bank deposits garnished.

ISSUE:
Whether or not the amounts received by a local tourist and travel agency included
in a package fee from tourists or foreign tour agencies, intended or earmarked for
hotel accommodations form part of gross receipts subject to 3% contractors tax.

HELD:
No. Gross receipts subject to tax under the Tax Code do not include monies or
receipts entrusted to the taxpayer which do not belong to them and do not redound
to the taxpayers benefit; and it is not necessary that there must be a law or
regulation which would exempt such monies or receipts within the meaning of gross
receipts under the Tax Code. Parenthetically, the room charges entrusted by the
foreign travel agencies to the private respondents do not form part of its gross
receipts within the definition of the Tax Code. The said receipts never belonged to
the private respondent. The private respondent never benefited from their payment
to the local hotels. This arrangement was only to accommodate the foreign travel
agencies.

3.

CIR v. CTA
GR No. 25043, March 21, 1990

FACTS:
Antonio, Eduardo and Jose Roxas, brothers and at the same time partners of the
Roxas y Compania, inherited from their grandparents several properties which
included farmlands with a total area of 19,000 hectares at Nasugbu Farmlands. The
tenants therein expressed their desire to purchase from the brothers the parcels
which they actually occupied so the government, pursuant to the constitutional
mandate to acquire big landed estate and apportion them among landless tenants,
persuaded the brothers sell the same. Roxas y Cia. then agreed to sell 13, 500
hectares of the lands but the government, however, did not have enough funds, so
the former allowed the farmers to buy the lands for the same price but by
installment. Subsequently, the CIR demanded from the brothers the payment of
deficiency income taxes resulting from the sale of the farmlands and considered
the partnership as engaged in the business of real estate, hence, 100% of the
profits derived there from was taxed. The brothers protested the assessment but
the same was denied. On appeal, the Court of Tax Appeals sustained the
assessment.
ISSUE:
Is Roxas y Cia liable for the payment of deficiency income for the sale of the
farmlands?
HELD:
No. Although the farmers are paid for their respective holdings in installment for a
period of 10 years, it would nevertheless not make the vendor Roxas y Cia. a real
estate dealer during the 10-year amortization period. It should be borne in mind
that the sale of the Nasugbu farm lands to the very farmers who tilled them for
generations was not only in consonance with, but more in obedience to the request
and pursuant to the policy of our Government to allocate lands to the landless.
However, the government could not comply with its duty for lack of funds so Roxas
y Cia. Shouldered the Government's burden, went out of its way and sold lands
directly to the farmers inthe same way and under the same terms as would have

been the case had the government done it itself. For this act, the municipal council
of Nasugbu passed a resolution expressing the people's gratitude. The power of
taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly. And, in order to maintain the
general public's trust and confidence in the Government this power must be used
justly and not treacherously. It does not conform with our sense of justice in the
instant case for the Government to persuade the taxpayer to lend it a helping hand
and later on to penalize him for duly answering the urgent call. In fine, Roxas y Cia.
cannot be considered a real estate dealer for the sale in question. Hence, pursuant
to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and
the gain derived from the sale thereof is capital gain, taxable only to the extent of
50%.

4.

CIR v. Isabela Cultural Corporation

GR No. 172231, February 12, 2007

FACTS:
Isabela Cultural Corporation was assessed for deficiency income tax legal services
and deficiency expanded withholding tax, when it failed to withhold 1% expanded
withholding tax. The CTA cancelled and set aside the assessment notices holding
that the claimed deductions for professional and security services were properly
claimed in 1986 since it was only in that year when the bills demanding payment
were sent to Isablea Cultural Corporation. It also found that the Isabela Cultural
Ccorporation withheld 1% expanded withholding tax for security services. The
Court of Appeals affirmed hence the case at bar.
ISSUE:
Whether or not the aforementioned may be deducted.
HELD:
For the auditing and legal services NO but for the security services YES.
The requisites for deductibility of ordinary and necessary trade, business or
professional expenses, like expenses paid for legal and auditing services are: a)
the expense must be ordinary and necessary; b) it must have been paid or incurred
during the taxable year; c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer and d) it must be supported by receipts, records
and other pertinent papers.
The requisite that it must have been paid or incurred during the taxable year is
qualified by Sec. 45 of NIRC which states that the deduction provide for in this title
shall be taken for the taxable year in which paid or incurred. Isabela Cultural
Corporation uses the accrual method. It provides that under the accrual method,
expenses not claimed as deductions in the current year when they are incurred
cannot be claimed as deduction from income for the succeeding year. The accrual
method relies upon the taxpayers right to receive amount or its obligation to pay
them not the actual receipt or payment. Amounts of income accrue where the right

to receive them become fixed, where there is created an enforceable liability.

Liabilities are accrued when fixed and determinable in amount.
The accrual of income and expense is permitted when the all events test has been
met. The test requires that: 1) fixing of a right to income or liability to pay and 2) the
availability of the reasonable accurate determination of such income or liability. It
does not require that the amount be absolutely known only that the taxpayer has
information necessary to compute the amount with reasonable accuracy. The test is
satisfied where computation remains uncertain if its basis is unchangeable. The
amount of liability does not have to be determined exactly, it must be determined
with reasonable accuracy.
In the case at bar, the expenses for legal services pertain to the years 1984 and
1985. The firm has been retained since 1960. From the nature of the claimed
deduction and the span of time during which the firm was retained, Isabela Cultural
Corporation can be expected to have reasonably known the retainer fees charged
by the firm as well as compensation for its services. Exercising due diligence, they
could have inquired into the amount of their obligation. It could have reasonably
determined the amount of legal and retainer fees owing to their familiarity with the
rates charged.

5.

CIR v. Marubeni Corporation

GR No. 137377, December 18, 2001

FACTS:
Marubeni Corporation is a foreign corporation organized and existing under the laws
of Japan. It is engaged in general import and export trading, financing and the
construction business. It is duly registered to engage in such business in the
Philippines and maintains a branch office in Manila. Sometime in November 1985,
petitioner Commissioner of Internal Revenue issued a letter of authority to examine
the books of accounts of the Manila branch office of MC for the fiscal year ending
March 1985. In the course of the examination, petitioner found respondent to have
undeclared income from two contracts in the Philippines, both of which were
completed in 1984. One of the contracts was with the National Development
Company in connection with the construction and installation of a port complex at the
Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte.
The other contract was with the Philippine Phosphate Fertilizer Corporation
(Philphos) for the construction of an ammonia storage complex also at the Leyte
Industrial Development Estate.
Petitioners revenue examiners recommended an assessment for deficiency taxes.
Respondent questioned this assessment but it received a letter from petitioner
assessing its several deficiency taxes. The assessed deficiency internal revenue
taxes, inclusive of surcharge and interest, were as follows: (1) P290,583,972.40 for
deficiency income tax; (2) P83,036,965.16 for deficiency branch profit remittance tax;
(3) P85,563,625.46 for deficiency contractors tax; and (4) P3,600,535.68 for
deficiency commercial brokers tax. Petitioner alleged that the National Development
Company and Philphos contracts were contracts for a piece of work and since the
projects called for the construction and installation of facilities in the Philippines, the
entire income therefrom constituted income from Philippine sources, hence, subject
to internal revenue taxes. However, upon issuance of E.O. No. 41 declaring a onetime amnesty covering unpaid income taxes for the years 1981 to 1985, as extended
by E.O. No. 64, respondent was able to apply for the amnesty of its deficiency taxes.
And almost ten years after filing of the case, CTA rendered a decision in CTA Case
No. 4109. The tax court found that respondent had properly availed of the tax

amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said
case as deemed cancelled and withdrawn.
Petitioner appealed with the Court of Appeals, which dismissed the petition and
affirmed the decision of CTA. Respondent argued that assuming it did not validly avail
of the amnesty under the two Executive Orders, it is still not liable for the deficiency
contractors tax because the income from the projects came from the Offshore
Portion, not Onshore Portion of the contracts; that all materials and equipment in
the contract under the Offshore Portion were manufactured and completed in
Japan, not in the Philippines, and are therefore not subject to Philippine taxes. And
that under the Philippine Onshore Portion, which petitioner has not denied, the
income it derived from the said portion had been declared for tax purposes and the
taxes thereon already paid to the Philippine government.
ISSUE:
Whether or not respondent is liable to pay the income, branch profit remittance, and
contractors taxes assessed by petitioner.
HELD:
NO. Respodent is not liable to pay for income and branch profit remittance as it did
not fall under exception for the applicability of the tax amnesty in Section 4 (b) of E.O.
No. 41 and is also not liable to pay for contractors tax as the materials used for the
contracts are produced in Japan, outside the jurisdiction of the taxing power of the
Philippines.
A contractors tax is a tax imposed upon the privilege of engaging in business. It is
generally in the nature of an excise tax on the exercise of a privilege of selling
services or labor rather than a sale on products; and is directly collectible from the
person exercising the privilege. Being an excise tax, it can be levied by the taxing
authority only when the acts, privileges or business are done or performed within the
jurisdiction of said authority. Like property taxes, it cannot be imposed on an
occupation or privilege outside the taxing district.
In the case at bar, it is undisputed that respondent was an independent contractor
under the terms of the two subject contracts. Respondent, however, argues that the
work therein were not all performed in the Philippines because some of them were
completed in Japan in accordance with the provisions of the contracts. An

examination of Annex III to the two contracts reveals that the materials and
equipment to be made and the works and services to be performed by respondent
are indeed made by sub-contractors and manufacturers which are Japanese
corporations and are based in Japan and all engineering and design works were
performed in that country. All the materials and equipment transported to the
Philippines were inspected and tested in Japan prior to shipment in accordance with
the terms of the contracts. The inspection was made by representatives of
respondent corporation, of NDC and Philphos.
Clearly, the service of design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of testing and
commissioning, coordination. . . of the two projects involved two taxing jurisdictions.
These acts occurred in two countries Japan and the Philippines. While the
construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were completely
designed and engineered in Japan. These services were rendered outside the taxing
jurisdiction of the Philippines and are therefore not subject to contractors tax.

6.

Philippine Guaranty Co., Inc. v. CIR

GR No. L-2707, April 30, 1965

FACTS:
The petitioner Philippine Guaranty Co., Inc., a domestic insurance company,
entered into reinsurance contracts with foreign insurance companies not doing
business in the country, thereby ceding to foreign reinsurers a portion of the
premiums on insurance it has originally underwritten in the Philippines. The

premiums paid by such companies were excluded by the petitioner from its gross
income when it file its income tax returns for 1953 and 1954.
Furthermore, it did not withhold or pay tax on them. Consequently, the CIR
assessed against the petitioner withholding taxes on the ceded reinsurance
premiums to which the latter protested the assessment on the ground that the
premiums are not subject to tax for the premiums did not constitute income from
sources within the Philippines because the foreign reinsurers did not engage in
business in the Philippines, and CIR's previous rulings did not require insurance
companies to withhold income tax due from foreign companies.

ISSUE:
Are insurance companies not required to withhold tax on reinsurance premiums
ceded to foreign insurance companies, which deprives the government from
collecting the tax due from them?

HELD:
No. The power to tax is an attribute of sovereignty. It is a power emanating from
necessity. It is a necessary burden to preserve the State's sovereignty and a
means to give the citizenry an army to resist an aggression, a navy to defend its
shores from invasion, a corps of civil servants to serve, public improvement
designed for the enjoyment of the citizenry and those which come within the State's
territory, and facilities and protection which a government is supposed to provide.
Considering that the reinsurance premiums in question were afforded protection by
the government and the recipient foreign reinsurers exercised rights and privileges
guaranteed by our laws, such reinsurance premiums and reinsurers should share
the burden of maintaining the state.
The petitioner's defense of reliance of good faith on rulings of the CIR requiring no
withholding of tax due on reinsurance premiums may free the taxpayer from the
payment of surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate it from liability to pay such

withholding tax. The government is not estopped from collecting taxes by the
mistakes or errors of its agents.

7.

Alexander Howden & Co. Ltd. v. Commissioner of Internal Revenue

L-19392, April 14, 1965

FACTS:
In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into
reinsurance contracts with 32 British insurance companies not engaged in trade or
business in the Philippines, whereby the former agreed to cede to them a portion of
the premiums on insurances on fire, marine and other risks it has underwritten in the
Philippines.
The reinsurance contracts were prepared and signed by the foreign reinsurers in
England and sent to Manila where Commonwealth Insurance Co. signed them.
Alexander Howden & Co., Ltd., also a British corporation, represented the British
insurance companies. Pursuant to the contracts, Commonwealth Insurance Co
remitted P798,297.47 to Alexander Howden & Co., Ltd., as reinsurance premiums. .
In behalf of Alexander Howden & Co., Ltd., Commonwealth Insurance Co. filed an
income tax return declaring the sum of P798,297.47, with accrued interest in the

amount of P4,985.77, as Alexander Howden & Co., Ltd.'s gross income for
calendar year 1951.
On May 12, 1954, Alexander Howden & Co., Ltd. filed with the BIR a claim for
refund of the P66,112.00, later reduced to P65,115.00, because it agreed to the
payment of P977.00 as income tax on the P4,985.77 accrued interest. A ruling of
the CIR was invoked, stating that it exempted from withholding tax reinsurance
premiums received from domestic insurance companies by foreign insurance
companies not authorized to do business in the Philippines. 8. Subsequently,
petitioner. instituted an action in the CFI of Manila for the recovery of the amount
claimed. Tax Court denied the claim.

ISSUE:
Whether or not reinsurance premiums are subject to withholding tax under Section
54 in relation to Section 53 of the Tax Code.
HELD:
Yes. Appellants maintain that reinsurance premiums are not "premiums" at all and
that they are not within the scope of "other fixed or determinable annual or
periodical gains, profits, and income"; that, therefore, they are not items of income
subject to withholding tax. SC disagrees with the contention. Since Section 53
subjects to withholding tax various specified income, among them, "premiums", the
generic connotation of each and every word or phrase composing the enumeration
in Subsection (b) thereof is income. Perforce, the word "premiums", which is neither
qualified nor defined by the law itself, should mean income and should include all
premiums constituting income, whether they be insurance or reinsurance
premiums.

Assuming that reinsurance premiums are not within the word

"premiums" in Section 53, still they may be classified as determinable and

periodical income under the same provision of law. Appellants' claim for refund, as
stated, invoked a ruling of the CIR cited rulings attempting to show that the
prevailing administrative interpretation of Sections 53 and 54 of the Tax Code
exempted from withholding tax reinsurance premiums ceded to non-resident
foreign insurance companies. It is asserted that since Sections 53 and 54 were

"substantially re-enacted" by Republic Acts 1065 , 1291, 1505, and 2343, when the
said administrative rulings prevailed, the rulings should be given the force of law
under the principle of legislative approval by re-enactment.

8.

Philamlife v. CTA and CIR

CA-GR SP No. 31283, April 25, 1995
FACTS:
Petitioner Philamlife, is a domestic corporation in the Philippines, entered into a
management contract with American International Reinsurance Co. Inc. (AIRCO),
a foreign corporation, whereby the latter would be paid $250,000 annually for
management services rendered for Philamlife. In relation to an erroneous
withholding tax from source 1979, the Commissioner of Internal revenue issued to
Philamlife a tax credit in the amount of Php643,000. Thereafter, Philamlife sought
to claim said amount for a second erroneous payment for source 1980. While the
claim was pending before the CTA, petitioner filed a claim for refund before the
Court of Appeals. On the other hand, the BIR canceled the tax credit memo it
previously issued to petitioner. Thus the demand for payment of the said tax
liability was issued to Philamlife/ AIRCO.
Petitioner now avers, that said tax liability is not proper as the income taxed was
that of AIRCOs, a foreign company not doing business in the Philippines for
management services rendered by its personnel abroad and is therefore not
subject to Philippine withholding tax.
ISSUE:

Whether or not compensation for advisory services admittedly performed abroad

by the personnel of a non-resident corporation not doing business in the
Philippines are subject to Philippine withholding tax?
HELD:
YES, it is subject to withholding tax. The pertinent provision in the NIRC with
regard to this issue is Section 37 (a) (4), whereby gross income derived from
rentals and royalties is subject to withholding tax. Petitioner contends that it is not
subject to such classification as it does not have property in the Philippines by
which rentals and royalties may be derived. However, upon a careful perusal of
the law in this case shows that such classification is apt so as to subject petitioner
to withholding tax.
A reading from the various management agreement will show that the arrangment
between Philamlife and AIRCO falls easily into the expanded meaning of
royalties; basically, from the heading investments to personnel, the services call
for the supply by the non-resident foreign corporation of technical and commercial
information, knowledge, advise, assistance or services in connection with
technical management or administration of an insurance business-- a commercial
undertaking. Therefore, the income derived for the services performed by AIRCO
for Philamlife under the said management contract shall be considered as income
from services within the Philippines. AIRCO, being a non-resident foreign
corporation not engaged in trade and business in the Philippines shall pay a tax
equal to 35% the gross income received during each taxable year from all
sources within the Philippines as interests, dividends, rents and royalties,
including remuneration for technical services. Although it is true that AIRCO has
no properties in the Philippines, agreement with Philamlife necessary for the
latter companys efficient operation and growth with AIRCO deriving income from
said agreement, AIRCO is well within the ambit of Section 37 (a) (7) of the NIRC.
In our jurisprudence, the test of taxability is the source, and the source of an
income is that activity... which produced the income. It is not the presence of any
property from which one derives rentals and royalties that is controlling, but rather
as expressed under the expanded meaning of royalties, it includes royalties for
the supply of scientific, technical, industrial or commercial knowledge or
information; and the technical advise, assistance or services rendered in

connection with the technical management and administration of any scientific,

industrial or commercial undertaking, venture, project or scheme. Thus, as
rendered in this decision, AIRCOs income derived from the management
agreement with Philamlife is subject to Philippine withholding tax.

9.

Aguinaldo Industries Corp. v. CIR

GR No. L-29790, February 25, 1982
FACTS:
Aguinaldo Industries Corporation is engaged in the businesses of: (a) the
manufacture of fishing nets, a tax-exempt industry, and (b) the manufacture of
furniture. For accounting purposes, each division is provided with separate books
of accounts as required by the Department of Finance. Previously, petitioner
acquired a parcel of land in Muntinlupa as site of the fishing net factory. This
transaction was entered in the books of the Fish Nets Division. Later, it sold the
said property and the profit from this sale was again entered in the books of the
Fish Nets Division as miscellaneous income to distinguish it from its tax-exempt
income.
For the year 1957, petitioner filed two separate income tax returns. After
investigation of these returns, 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 petitioner. The examiner further
found that this amount was taken from the net profit of sale of the land and not in
the course of or carrying on of its trade or business. The said amount was
disallowed as deduction from gross income.
Petitioner argues that the profit derived from the sale of its Muntinlupa land is not
taxable for it is tax- exempt income, considering that its Fish Nets Division enjoys
tax exemption as a new and necessary industry under Republic Act 901.
ISSUE:
Whether or not the bonus given to the officers of the petitioner upon the sale of its
Muntinlupa land is an ordinary and necessary business expense deductible for
income tax purposes.
HELD:

No. Pursuant to Sec.30 (a)(1) of the NIRC, the bonus given to the officers of the
petitioner as their share of the profit realized from the sale of petitioners
Muntinlupa land cannot 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.
The records show that the sale was effected through a broker who was paid by
petitioner a commission for his services. On the other hand, there is absolutely no
evidence of any service actually rendered by petitioners officers which could be
the basis of a grant to them of a bonus out of the profit derived from the sale. This
being so, the payment of a bonus to them out of the gain realized from the sale
cannot be considered as a selling expense; nor can it be deemed reasonable and
necessary so as to make it deductible for tax purposes. Hence, the alleged
amounts paid by petitioner to these directors in the guise and form of
compensation for their supposed services as such, without any relation to the
measure of their actual services, cannot be regarded as ordinary and necessary
expenses within the meaning of the law.

10. CIR v. General Foods (Philippines) Inc.

GR No. 143672, April 24, 2003
FACTS:

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.
ISSUE:
Whether or not the subject media advertising expense for Tang was ordinary and
necessary expense fully deductible under the NIRC.
HELD:
No. Tax exemptions must be construed in stricissimi juris against the taxpayer and
liberally in favor of the taxing authority, and he who claims an exemption must be
able to justify his claim by the clearest grant of organic or statute law. Deductions for
income taxes partake of the nature of tax exemptions; hence, if tax exemptions are
strictly construed, then deductions must also be strictly construed.
To be deductible from gross income, the subject advertising expense must comply
with the following requisites: (a) the expense must be ordinary and necessary; (b) it
must have been paid or incurred during the taxable year; (c) it must have been paid
or incurred in carrying on the trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers.
While the subject advertising expense was paid or incurred within the corresponding
taxable year and was incurred in carrying on a trade or business, hence necessary,
the parties views conflict as to whether or not it was ordinary. To be deductible, an
advertising expense should not only be necessary but also ordinary.
The Commissioner maintains that the subject advertising expense was not ordinary
on the ground that it failed the two conditions set by U.S. jurisprudence: first,
reasonableness of the amount incurred and second, the amount incurred must not
be a capital outlay to create goodwill for the product and/or private respondents
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 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 weighed, that will yield a proper evaluation.
The Court finds 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 then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two 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, in whole or in part, to create or maintain some form of goodwill for the
taxpayers trade or business or for the industry or profession of which the taxpayer is
a member. If the expenditures are for the advertising of the first kind, then, except as
to the question of the reasonableness of 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.
The companys media advertising expense for the promotion of a single product is
doubtlessly unreasonable considering it comprises almost one-half of the companys
entire claim for marketing expenses for that year under review. Petition granted,
judgment reversed and set aside.

11. Esso Standard Eastern Inc. vs. CIR

G.R. Nos. L-28508-9, July 7, 1989

FACTS:
In CTA Case No. 1251, Esso Standard Eastern Inc. deducted from its gross income for
1959, 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 where it asked for the refund of P323,279.00 by reason of its
abandonment as dry holes of several of its oil wells. Also claimed as ordinary and
necessary expenses in the same return was the amount of P340,822.04, representing
margin fees it had paid to the Central Bank on its profit remittances to its New York
head office. On August 5, 1964, the CIR granted a tax credit of P221,033.00 only,
disallowing the claimed deduction for the margin fees paid on the ground that the
margin fees paid to the Central Bank could not be considered taxes or allowed as
deductible business expenses. Esso appealed to the Court of Tax Appeals (CTA) for
the refund of the margin fees it had earlier paid contending that the margin fees were

deductible from gross income either as a tax or as an ordinary and necessary business
expense. However, Essos appeal was denied.

ISSUE:
Whether or not the margin fees are taxes.

HELD:
No. A tax is levied to provide revenue for government operations, while the proceeds of
the margin fee are applied to strengthen our country's international reserves. The
margin fee was imposed by the State in the exercise of its police power and not the
power of taxation.
12.

Atlas Consolidated Mining and Development Corp v. CIR

GR No. 269111, January 27, 1981
FACTS:
Atlas Consolidated Mining & Development Corp is a corporation engaged in the
mining industry. It was assessed deficiency income tax for the year 1958 as a
result of the disallowance of certain items claimed by the company as deductions
from its gross income. Atlas claimed the following items as deductible from its
gross income: (1) transfer agents fee, (2) stockholders relation service fee, (3)
US stock listing expenses, (4) suit expenses, (5) provision for contingencies. The
Commissioner of Internal Revenue disallowed all these items. Atlas elevated the
issue to the Court of Tax Appeals. The CTA rendered a decision allowing the said
items, except for the stockholders relation service fee and the suit expenses. Both
Atlas and the CIR went to the Supreme Court to appeal the CTA decision. Atlas
argues that the CTA should not have disallowed the stockholders relation service
fee. The corporation contends that such fee constitutes an ordinary and
necessary business expense, and should, therefore, be allowed as a deductible
expense from the companys gross income.
ISSUE:

In GR No. L-26911, whether or not the expenses paid for the services rendered
by a public relations firm, P. K. Macker & Co., labeled as stockholders relation
service fee is an allowable deduction as business expense.
HELD:
Under Sec 30 (a) (1) of the Tax Code, three conditions have to be complied with
before a business expense is allowed as a deduction from gross income: (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 a trade or
business. The Court sustained the rulingof the CTA that the expenditure paid to P.
K. Macker & Co. denominated as stockholders relationservice fee is not an
ordinary expense. The fee was paid to the PR firm as ompensationfor services
carrying on the selling campaign in an effort to sell Atlas additional capital stock.
Such is not an ordinary expense because, according to the Court, expenses
relating to the recapitalization and reorganization of a corporation, the cost of
obtaining stock subscription, promotion expenses, and commission or fees paid
for the sale of stock reorganization are capital expenditures. The stockholders
relation service fee is not deductible from Atlas gross income.

13. Republic of the Philippines v. Manila Electric Company

GR No. 141314, November 15, 2002
FACTS:
On 23 December 1993, Meralco filed with the Energy Regulatory Board (ERB) an
application for the revision of its rate schedules. On 28 January 1994, the ERB
issued an order granting a provisional increase of P0.184/kwh subject to the
condition that in event that the board finds that Meralco is entitled to a lesser
increase in rates, all excess amounts collected shall be refunded or credited to its
customers. Subsequently, ERB rendered its decision adopting the audit of the
Commission on Audit (COA) and authorized Meralco to implement a rate
adjustment of P0.017/kwh, but ordered the refund of the excess amount of
P0.167/kwh collected from the billing cycles of February 1994 to February 1997,
holding that income tax should not be treated as operating expense, and applying
the net average investment method in the computation of the rate base. On
appeal, the Court of Appeals set aside the ERB decision insofar as it directed the
reduction of the rates by P0.167/kwh and the refund to Meralcos customers.
Motions for reconsideration were denied. Hence, the petition before the Supreme
Court.
ISSUE:
Whether income tax may be shifted to the public utilitys customer.
HELD:
Income tax should be borne by the taxpayer alone as they are payments made in
exchange for benefits received by the taxpayer from the State. No benefit is
derived by the customers of a public utility for such entity and no direct
contribution is made by the payment of income tax to the operation of a public
utility for purposes of generating revenue or profit. Thus, the burden of paying
income tax should be Meralcos alone and should not be shifted to the customers
by including the same in the computation of its operating expenses.

14. Kuenzle & Streiff Inc. v. CIR

GR Nos. L-12020 and L-12113, October 20,1959

FACTS:
Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return,
declaring losses. CIR filed for deficiency of income taxes against Kuenzle & Streiff
Inc. for the said years in the amounts of P40,455.00, P11,248.00 and P16,228.00,
respectively, arising from the disallowance, as deductible expenses, of the
bonuses paid by the corporation to its officers, upon the ground that they were not
ordinary, nor necessary, nor reasonable expenses within the purview of Section
30(a) (1) of the National Internal Revenue Code. The corporation filed with the
Court of Tax Appeals a petition for review contesting the assessments. CTA
favored the CIR, however lowered the tax due on 1954. The corporation moved
for reconsideration, but still lost. The Corporation contends that the tax court, in
arriving at its conclusion, acted "in a purely arbitrary manner", and erred in not
considering individually the total compensation paid to each of petitioner's officers
and staff members in determining the reasonableness of the bonuses in question,
and that it erred likewise in holding that there was nothing in the record indicating
that the actuation of the respondent was unreasonable or unjust.
ISSUE:
Whether or not the bonuses in question was reasonable and just to be allowed as
a deduction?
HELD:
No. It is a general rule that `Bonuses to employees made in good faith and as
additional compensation for the services actually rendered by the employees are
deductible, provided such payments, when added to the stipulated salaries, do
not exceed a reasonable compensation for the services rendered. The condition
precedents to the deduction of bonuses to employees are: (1) the payment of the
bonuses is in fact compensation; (2) it must be for personal services actually
rendered; and (3) bonuses, when added to the salaries, are `reasonable ... when
measured by the amount and quality of the services performed with relation to the
business of the particular taxpayer. Here it is admitted that the bonuses are in fact
compensation and were paid for services actually rendered. The only question is
whether the payment of said bonuses is reasonable. There 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 taxpayer's business, the volume and
amount of its net earnings, its locality, the type and extent of the services
rendered, the salary policy of the corporation'; 'the size of the particular business';
'the employees' qualifications and contributions to the business venture'; and
'general economic conditions. However, 'in determining whether the particular
salary or compensation payment is reasonable, the situation must be considered
as a whole.

15. CIR v. Palanca Jr.

GR No. L-16626, Ocotber 29, 1966
FACTS:
The late Don Carlos Palanca, Sr. donated in favor of his son, Carlos Palanca, Jr.
shares of stock in La Tondea Inc. amounting to 12,500 shares. Later, the BIR
considered the donation as transfer in contemplation of death; consequently, the
BIR assessed against the respondent, Palanca Jr., the sum of P191,591.62 as
estate and inheritance taxes on the transfer of said 12,500 shares of stock,
including therein interest for delinquency of P60,581.80. The respondent then filed
an amended income tax return, claiming an additional deduction in the amount
P60,581.80; hence, his new income tax due is only P428. He attached a letter
requesting the refund of P20,624.01. However, the said request for refund was
denied by the BIR. Court of tax appeals ordered the refund. Hence, this petition.

ISSUE:
Whether the interest on the delinquent estate and inheritance tax is deductible
from the gross income.
HELD:
Yes, the interest is deductible. The rule is settled that although taxes already due
have not, strictly speaking, the same concept as debts, they are, however,
obligations that may be considered as such.

16. CIR v. Vda. De Prieto

GR No. L-13912, September 30, 1960
FACTS:
On December 4, 1945, the respondent conveyed by way of gifts to her four
children, namely, Antonio, Benito, Carmen and Mauro, all surnamed Prieto, real
property with a total assessed value of Php 892,497.50. After the filing of the gift
tax returns on or about February 1, 1954, the petitioner Commissioner of Internal
Revenue appraised the real property donated for gift tax purposes at Php
1,231,268.00 and assessed the total sum of Php 117,706.50 as donors gift tax,
interests and compromises due thereon. Of the total sum of Php 117,706.50 paid
by respondent on April 29, 1954, the sum of Php 55,978.65 represents the total
interest on account of delinquency. This sum of Php 55,978.65 was claimed as
deduction, among others, by respondent in her 1954 income tax return. Petitioner,
however, disallowed the claim and as a consequence of such disallowance
assessed respondent for 1954 the total sum of Php 21,410.38 as deficiency
income tax due on the aforesaid Php 55,978.65, including interest up to March 31,
1957, surcharge and compromise for the late payment.
Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed as an

interest deduction should have been paid or accrued within the year. It is here
conceded that the interest paid by respondent was in consequence of the late
payment of her donors tax, and the same was paid within the year it is sought to
be deducted.
ISSUE:
Whether or not such interest was paid upon an indebtedness within the
contemplation of section 30(b) (1) of the Tax Code.

HELD:

Sec. 30. Deductions from gross income. In computing net income there shall
be allowed as deductions: (b) Interest: (1) In general. The amount of interest
paid within the taxable year on indebtedness, except on indebtedness incurred or
continued to purchase or carry obligations the interest upon which is exempt from
taxation as income under this Title.
The term indebtedness as used in the Tax Code of the United States containing
similar provisions as in the above-quoted section has been defined as an
unconditional and legally enforceable obligation for the payment of money. Within
the meaning of that definition, it is apparent that a tax may be considered an
indebtedness.
Where statute imposes a personal liability for a tax, the tax becomes, at least in a
board sense, a debt. A tax is a debt for which a creditors bill may be brought in a
proper case. It follows that the interest paid by herein respondent for the late
payment of her donors tax is deductible from her gross income under section 30
(b) of the Tax Code above quoted.
For interest to be allowed as deduction from gross income, it must be shown that
there be indebtedness, that there should be interest upon it, and that what is
claimed as an interest deduction should have been paid or accrued within the
year.

17. Philippine Refining Co. v. Court of Appeals

GR No. 118794, May 8,1996
FACTS:
Philippine Refining Company (PRC) was assessed by the Commissioner of
Internal Revenue to pay a deficiency tax for the year 1985 in the amount of Php
1,892,584.00. On April 26, 1989, PRC timely protested the assessment on the
ground that it was based on the erroneous disallowances of bad debts and
interest expense although the same are both allowable and legal deductions.
However, the Commissioner issued a warrant of garnishment against the deposits
of PRC at a branch of City Trust Bank, in Makati, Metro Manila, which action the
latter considered as a denial of its protest.
Consequently, PRC filed a petition for review with the Court of Tax Appeals on the
same assignment of error, that is, that the bad debts and interest expense are
legal and allowable deductions. In its decision of February 3, 1993 , the CTA
modified the findings of the Commissioner by reducing the deficiency income tax
assessment to Php 237,381.26, with surcharge and interest incident to
delinquency. In said decision, the Tax Court reversed and set aside the
Commissioners disallowance of the interest expense of Php 2,666,545.19 but
maintained the disallowance of the supposed bad debts of 13 debtors in the total
sum of Php 395,324.27. PRC then elevated the case to the Court of Appeals but
was denied; hence, this appeal by certiorari.
ISSUE:
Whether or not the bad debts of PRCs 13 debtors may be considered worthless
and deductible.
HELD:
No. The rule on determining the worthlessness of a debt was established in the
case of Collector vs. Goodrich International Rubber Co. In that case, the Supreme

Court held that 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.
Moreover, before a debt can be considered worthless, the taxpayer must also
show that it is indeed uncollectible even in the future. The steps to be undertaken
by the taxpayer to prove that he exerted Php 1,892,584.00 diligent efforts to
collect the debts are: (1) sending of statement of accounts; (2) sending of
collection letters; (3) giving the account to a lawyer for collection; and (4) filling a
collection case in court.
In this case, the only evidentiary support given by PRC for its alleged bad debts
was the explanation or justification posited by its financial adviser or accountant,
Guia D. Masagana. However, her allegation were not supported by any
documentary evidence, hence both the Court of Appeals and CTA ruled that said
contentions per se cannot prove that the debts were indeed uncollectible and can
be considered as bad debts as to make them deductible. Thus, mere testimony of
the Financial Accountant of the petitioner explaining the worthlessness of debts
without documentary evidence to support such testimony is nothing more than a
self-serving exercise which lacks probative value.

18. Basilan Estates, Inc. v. CIR

GR No. L-22492, September 5, 1967
FACTS:
Basilan estate inc., a corporation engaged in coconut industry filed an income tax
return and paid income tax on 1954 for period 1953. upon examination however

the Commissioner assessed Basilan estates for efficiency estate tax and
surcharge. On non-payment a warrant of distraint and levy was issued but not
executed when the deputy commissioner ordered the District Director to hold
execution and maintain construction embargo instead. Because of its refusal to
execute waiver of prescription. Basilans request for reinvestigation was not given
due course. Notice was served that the warrant would be executed. Basilan filed
petition for review with CTA alleging prescription of the period of assessment and
collection considering that the assessment was made on February 26, 1959 but
Basilan claims it never received the same or if it did it was received beyond the
five-year period. To prove it the notice had an annotation stating no
accompanying letter 11/25/ indicative that the notice was after March 24,
1959,the last date of the five year period within which to assess deficiency tax,
since the original returns were filed on March 24, 1954.
ISSUE:
Whether the the assessment made within the prescriptive period.
HELD:
Yes. Under Sec. 331 of the Tax Code requiring five years within which to assess
deficiency taxes, theassessment is deemed made when the notice to his effect is
released, mailed or sent by the collector of internal revenue to the taxpayer and it
is not required that the notice be received y the taxpayer within the afore
mentioned 5-year period.
19. Roxas v. Court of Tax Appeals
GR No. L-25043, April 26, 1968
FACTS:
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.
The Roxas brothers protested the assessment but inasmuch as said protest was
denied, they instituted 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.
ISSUE:
Whether or not the deductions for business expenses and contributions
deductible.
HELD:
With regard to the disallowed deductions (expenses for tickets to a banquet given
in honor of Sergio Osmena and beer given as gifts to various persons, labelled
as representation expenses), representation expenses are deductible from gross
income as expenditures incurred in carrying on a trade or business under Section
30(a) of the Tax Code provided the taxpayer proves that they are reasonable in
amount, ordinary and necessary, and incurred in connection with his business. In
the case at bar, the evidence does not show such link between the expenses and
the business of Roxas.

20. CIR v. Wander Philippines Inc. and CTA

GR No. L-68375, April 15, 1988
FACTS:
Wander Philippines, Inc., is a domestic corporation organized under Philippine
laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd., a Swiss corporation not
engaged in trade or business in the Philippines. On July 18, 1975, Wander filed its
withholding tax return for the second quarter ending June 30, 1975 and remitted
to its parent company, Glaro dividends in the amount of P222,000.00, on which
35% withholding tax thereof in the amount of P77,700.00 was withheld and paid
to the Bureau of Internal Revenue. Again, on July 14, 1976, Wander filed a
withholding tax return for the second quarter ending June 30, 1976 on the
dividends it remitted to Glaro amounting to P355,200.00, on which 35% tax in the
amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue
a claim for refund and/or tax credit in the amount of P115,400.00, contending that
it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the
Tax Code, as amended by Presidential Decree Nos. 369 and 778, and not on the
basis of 35% which was withheld and paid to and collected by the government.
There being no immediate action by the BIR on Wanders letter-claim the latter
sought the intervention of the CTA, the latter ruled for the private respondent.
ISSUE:
Whether or not private respondent Wander is entitled to the preferential rate of
15% withholding tax on dividends declared and remitted to its parent corporation,
Glaro

HELD:
Yes. The dividends received from a domestic corporation liable to tax, the tax
shall be 15% of the dividends received, subject to the condition that the country in
which the non-resident foreign 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%) dividends. Since the
Swiss Government does not impose any tax on the dividends to be received by
the said parent corporation in the Philippines, the condition imposed under the
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, is satisfied.
The withholding tax rate of 15% is hereby affirmed.

21. Banco Filipino Savings and Mortgage Bank v. Court of Appeals

GR No. 155682, March 27, 2007
FACTS:
Petitioner filed a Petition for Review with the CA but the CA dismissed the same
in the May 28, 2002 Decision There are three conditions for the grant of a claim

for refund of creditable withholding tax: 1) the claim is filed with the CIR within the
two-year period from the date of paymen tof the tax; 2) it is shown on the return of
the recipient that the income payment received was declared as part of the gross
income; and, 3) the fact of withholding is established by a copy of a statement
duly issued by the payor to the payee showing the amount paid and the amount of
the tax withheld therefrom. The third condition is specifically imposed under
Section 10 of Revenue Regulation No. 6-85 There is no doubt that petitioner
complied with the first two requirements in that the claim it filed on January 30,
1998 was well within the two-year prescriptive period counted from the date of
filing of its annual income tax return (Exhibit "A") on April 12, 1996; and that said
return reflects the amount of P1,622,576.00 subject of the claim.
ISSUE:
Whether it complied with the third condition by presenting merely a Certificate of
Income Tax Withheld on Compensation or BIR Form No. W-2 (Exhibit "II") and
Monthly Remittance Return of Income Taxes Withheld under BIR Form No.
1743W (Exhibits "C" through "Z").
HELD:
No. The petition is denied for lack of merit. As to petitioners Exhibit "II," while it
was issued by a payor, the document does not state the amount and nature of the
income payment. Hence, it cannot be verified from the document if the tax
withheld is correct. Perhaps aware of the deficiencies in its evidence, petitioner
also presented Exhibit "B" which is a list of Miscellaneous Assets it sold to various
persons. However, Exhibit "B" was prepared by petitioners own real estate
department, and is therefore of doubtful credence. Furthermore, there is nothing
in Exhibit "B" which would link the the transactions described therein to the taxes
reflected in Exhibit "II" and Exhibits "C" through "Z". For all its deficiencies,
therefore, petitioners Exhibits "C" through "Z" cannot take the place of BIR Form
No. 1743.1 and its Exhibit "II," of BIR Form No. 1743-750. Petitioner cannot fault
the CA and CTA for finding said evidence insufficient to support its claim for tax
refund. Such finding of both courts, obviously grounded on evidence, will not be
so lightly discarded by this Court, not even on a plea for liberality of which
petitioner, by its own negligence, is not deserved.