COMMISSIONER OF INTERNAL REVENUE VS.

FILINVEST DEVELOPMENT
CORPORATION- Theoretical Interest
G. R. No. 163653
July 19, 2011

Filinvest Development Corporation extended advances in favor of its affiliates and supported the
same with instructional letters and cash and journal vouchers. The BIR assessed Filinvest for
deficiency income tax by imputing an “arm’s length” interest rate on its advances to affiliates.
Filinvest disputed this by saying that the CIR lacks the authority to impute theoretical interest
and that the rule is that interests cannot be demanded in the absence of a stipulation to the effect.

ISSUE:
Can the CIR impute theoretical interest on the advances made by Filinvest to its affiliates?

HELD:
NO. Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross
income under (now) Section 50 of the Tax Code, the same does not include the power to impute
theoretical interests even with regard to controlled taxpayers’ transactions. This is true even if
the CIR is able to prove that interest expense (on its own loans) was in fact claimed by the
lending entity. The term in the definition of gross income that even those income “from whatever
source derived” is covered still requires that there must be actual or at least probable receipt or
realization of the item of gross income sought to be apportioned, distributed, or allocated.
Finally, the rule under the Civil Code that “no interest shall be due unless expressly stipulated in
writing” was also applied in this case.

The Court also ruled that the instructional letters, cash and journal vouchers qualify as loan
agreements that are subject to DST.

ABAKADA GURO PARTY LIST VS EXECUTIVE SECRETARY

G.R. No. 168056 September 1, 2005
ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.
ALCANTARA and ED VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and
HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR., Respondent.

Facts:
Petitioners ABAKADA GURO Party List challenged the constitutionality of R.A. No. 9337
particularly Sections 4, 5 and 6, amending Sections 106, 107 and 108, respectively, of the
National Internal Revenue Code (NIRC). These questioned provisions contain a
uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to
raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have
been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of
its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987
Philippine Constitution. They further argue that VAT is a tax levied on the sale or exchange of
goods and services and cannot be included within the purview of tariffs under the exemption
delegation since this refers to customs duties, tolls or tribute payable upon merchandise to the
government and usually imposed on imported/exported goods. They also said that the President
has powers to cause, influence or create the conditions provided by law to bring about the
conditions precedent. Moreover, they allege that no guiding standards are made by law as to how
the Secretary of Finance will make the recommendation. They claim, nonetheless, that any
recommendation of the Secretary of Finance can easily be brushed aside by the President since
the former is a mere alter ego of the latter, such that, ultimately, it is the President who decides
whether to impose the increased tax rate or not.

Issue:
Whether or not there was a violation of the due process and equal protection under Article III
Sec. 1 of the Constitution.
Discussions:
The equal protection clause under the Constitution means that “no person or class of persons
shall be deprived of the same protection of laws which is enjoyed by other persons or other
classes in the same place and in like circumstances.”

Rulings:
Supreme Court held no decision on this matter. The power of the State to make reasonable and
natural classifications for the purposes of taxation has long been established. Whether it relates
to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised,
the methods of assessment, valuation and collection, the State’s power is entitled to presumption
of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.

Commissioner of Internal Revenue vs Central Luzon Drug Corporation

G.R. No. 159647 April 15, 2005

Facts:
Respondents operated six drugstores under the business name Mercury Drug. From January to
December 1996 respondent granted 20% sales discount to qualified senior citizens on their
purchases of medicines pursuant to RA 7432 for a total of ₱ 904,769.`

On April 15, 1997, respondent filed its annual Income Tax Return declaring therein net losses.
Respondent also filed with petitioner a claim for tax refund/credit of ₱ 904,769.00 allegedly arising
from the 20% sales discount. Unable to obtain affirmative response from petitioner, respondent
elevated its claim to the Court of Tax Appeals. The court dismissed the same but upon
reconsideration, the latter reversed its earlier ruling and ordered petitioner to issue a Tax Credit
Certificate in favor of respondent citing CA GR SP No. 60057 (May 31, 2001, Central Luzon Drug
Corp. vs. CIR) citing that Sec. 229 of RA 7432 deals exclusively with illegally collected or
erroneously paid taxes but that there are other situations which may warrant a tax credit/refund.

CA affirmed Court of Tax Appeal's decision reasoning that RA 7432 required neither a tax liability
nor a payment of taxes by private establishments prior to the availment of a tax credit. Moreover,
such credit is not tantamount to an unintended benefit from the law, but rather a just compensation
for the taking of private property for public use.

Issue: Whether or not respondent, despite incurring a net loss, may still claim the 20% sales
discount as a tax credit.

Ruling:
Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of obtaining a 20%
discount on their purchase of medicine from any private establishment in the country. The latter
may then claim the cost of the discount as a tax credit. Such credit can be claimed even if the
establishment operates at a loss. A tax credit generally refers to an amount that is “subtracted
directly from one’s total tax liability.” It is an “allowance against the tax itself” or “a deduction
from what is owed” by a taxpayer to the government.
A tax credit should be understood in relation to other tax concepts. One of these is tax deduction
– which is subtraction “from income for tax purposes,” or an amount that is “allowed by law to
reduce income prior to the application of the tax rate to compute the amount of tax which is due.”
In other words, whereas a tax credit reduces the tax due, tax deduction reduces the income subject
to tax in order to arrive at the taxable income.

A tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the
tax credit can be applied. Without that liability, any tax credit application will be useless. There
will be no reason for deducting the latter when there is, to begin with, no existing obligation to the
government. However, as will be presented shortly, the existence of a tax credit or its grant by
law is not the same as the availment or use of such credit. While the grant is mandatory, the
availment or use is not. If a net loss is reported by, and no other taxes are currently due from, a
business establishment, there will obviously be no tax liability against which any tax credit can be
applied. For the establishment to choose the immediate availment of a tax credit will be premature
and impracticable.
 G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

FACTS:
The Philippine Sugar Estate Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority,
Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez,
worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to
invest in it. Ultimately, after its incorporation largely through the promotion of the said persons,
this new corporation purchased the PSEDC properties. For this sale, Algue received as agent a
commission of P126, 000.00, and it was from this commission that the P75, 000.00 promotional
fees were paid to the forenamed individuals. But the same was disallowed by the petitioner
Commissioner of Internal Revenue.

The petitioner contends that the claimed deduction of P75, 000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered. The payment was in the
form of promotional fees.

ISSUE:

Whether or not the Collector of Internal Revenue correctly disallowed the P75, 000.00 deduction
claimed by private respondent Algue as legitimate business expenses in its income tax returns.

RULING:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance, made in accordance with law. The Supreme Court agrees with the respondent court that
the amount of the promotional fees was not excessive. The amount of P75,000.00 was 60% of the
total commission. This was a reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil Investment Corporation to the
actual purchase by it of the Sugar Estate properties.
Sec. 30 of the Tax Code: allowed deductions in the net income – Expenses - All the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for personal services actually
rendered xxx the burden is on the taxpayer to prove the validity of the claimed deduction.
 In this case, Algue Inc. has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos.
It is said that taxes are what we pay for civilization society. Without taxes, the government would
be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government.
Hence the claimed deduction by Algue Inc. was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the CIR.

MANILA BANKING CORP VS. CIR- Minimum Corporate Income Tax (MCIT)

The intent of Congress relative to the minimum corporate income tax(MCIT) is to grant a 4-year
suspension of tax payment to newly formed corporations. Corporations still starting their
business operations have to stabilize their venture in order to obtain a stronghold in the industry.

Facts:
• 1961- Manila Banking Corp was incorporated. It engaged in the banking industry til 1987.
• May 1987- Monetary Board of Bangko Sentral ng Pilipinas (BSP) issued Resolution # 505
{pursuant to the Central Bank Act (RA 265)} prohibiting Manila Bank from engaging in
business by reason of insolvency. So, Manila Bank ceased operations and its assets and liabilities
were placed under charge of a gov.- appointed receiver.
• 1998- Comprehensive Tax Reform Act (RA8424) imposed a minimum corporate income tax on
domestic and resident foreign corporations.
o Implementing law: Revenue Regulation # 9-98 stating that the law allows a 4year period
from the time the corporations were registered with the BIR during which the minimum
corporate income tax should not be imposed.
• June 23, 1999- BSP authorized Manila Bank to operate as a thrift bank.
o NOTE: June 15, 1999 Revenue Regulation #4-95 (pursuant to Thrift Bank Act of 1995)
provides that the date of commencement of operations shall be understood to mean the date
when the thrift bank was registered with SEC or when Certificate of Authority to Operate was
issued by the Monetary Board, whichever comes LATER.
• Dec 1999- Manila Bank wrote to BIR requesting a ruling on whether it is entitled to the 4 year
grace period under RR 9-98.
• April 2000- Manila bank filed with BIR annual income tax return for taxable year 1999 and
paid 33M.
• Feb 2001- BIR issued BIR Ruling 7-2001 stating that Manila Bank is entitled to the 4year grace
period. Since it reopened in 1999, the min. corporate income tax may be imposed not earlier than
2002. It stressed that although it had been registered with the BIR before 1994, but it ceased
operations 1987-1999 due to involuntary closure.
o Manila Bank, then, filed with BIR for the refund. • Due to the inaction of BIR on the claim,
it filed with CTA for a petition for review, which was denied and found that Manila Bank’s
payment of 33M is correct, since its operations were merely interrupted during 1987-1999. CA
affirmed CTA.

Issue: Whether or not Manila Bank is entitled to a refund of its minimum corporate income tax
paid to BIR for 1999.

Held: Yes.
• CIR’s contensions are without merit. He contended that based on RR# 9-98, Manila Bank
should pay the min. corporate income tax beg. 1998 as it did not close its operations in 1987 but
merely suspended it. Even if placed under suspended receivership, its corporate existence was
never affected. Thus falling under the category of a existing corporation recommencing its
banking business operations
** Sec. 27 E of the Tax Code provides the Minimum Corporate Income Tax (mcit) on Domestic
Corporations.

o (1) Imposition of Tax- MCIT of 2% of gross income as of the end of the taxable year, as
defined here in, is hereby imposed on a corporation taxable under this title, beginning on the 4th
taxable year immediately following the year in which such corp commenced its business
operations, when the mcit is greater than the tax computed under Subsec. A of this section for the
taxable year.

o (2) Any excess in the mcit over the normal income tax… shall be carried forward and credited
against the normal income tax for the 3 succeeding taxable years.

• Let it be stressed that RR 9-98 imposed the mcit on corps, the date when business operations
commence is the year in which the domestic corporation registered with the BIR. But under RR
4-95, the date of commencement of operations of thrift banks, is the date of issuance of
certificate by Monetary Board or registration with SEC, whichever comes later. Clearly then, RR
4-95 applies to Manila banks, being a thrift bank. 4-year period= counted from June 1999.
 CIR vs CTA
GR No 106611, July 21, 1994

FACTS:

A total amount of P19,971,745 was claimed by the Citytrust Banking Corporation as a refund
on its alleged overpayments for the years 1983, 1984 and 1985. In CTA, the case was decided in
favor of Citytrust mainly because the Commissioner for Internal Revenue (CIR) was not able to
present pieces of evidence due to the repeated failure of the Tax Credit or Refund Audit Division
of the BIR to transmit the records of the case and the investigation report to the Solicitor General,
as his counsel. However, in the motion of reconsideration of the CIR, he was able to present an
office memorandum (dated August 8, 1991) issued by the Tax Credit or Refund Audit Division
that Citytrust has outstanding tax liabilities in the amount of P56,588,740.91 representing
deficiency income and business taxes for the year 1984. Thus, the petition was submitted to the
SC.

ISSUES:

1. Whether or not the BIR was denied its day in court

2. Whether or not the CTA erred in denying petitioner’s supplemental motion for
reconsideration alleging bringing to said court’s attention the existence of deficiency income and
business taxes.

RULING:

1. Yes, the BIR is denied its day in court. Though it is certain that the Solicitor General
continuously motioned for postponements, as to his turn of presentation of evidence, such
undertaking was due to the unavailability of the necessary records which were not transmitted by
the Refund Audit Division of the BIR. Hence, the main offshoot is the unfortunate circumstance
that the Sol. Gen. submitted the case for decision without presenting any evidence. However, it is
a long and firmly settled rule of law that the government is not bound by the errors committed by
its agents. By this reason, it is to be noted that taxes are the lifeblood of the government, hence,
delay with such settlement and not giving focus on such would detriment its main tenet. Thus, the
Sol. Gen. should have given the opportunity to present evidence thru other legal remedies
maintaining the real purpose of taxation.

2. Yes. The private respondent cannot be entitled to refund and at the same time be liable for
a deficiency tax assessment for the same year (1984). In fact, such deficiency assessment is
intimately related and inextricably intertwined with the right of the bank. Consequently, it would
lead to multiplicity of suits, as the government files another suit with regard to the refund claim,
on one hand, and the tax liabilities on the other, that is indeed burdensome to both parties. Thus, it
should be a joint case to manifest a proper administration of justice which is best to begin by
considering the petitioner’s supplemental motion for reconsideration.

NOTE: The case was remanded to the CTA for its consideration.

MARCOS II v. CA
GR No. 120880, June 5, 1997
293 SCRA 77

FACTS:

The Court of Appeals granted the Commissioner of Internal Revenue (CIR) petition to levy
the properties of the late Pres. Marcos to cover the payment of his tax delinquencies during the
period of his exile in the US. This predicament was questioned by Ferdinand “Bongbong” Marcos
II as he asked the SC to reverse such decision. Amidst the notices that were constructively served
to the Marcoses, as a result of the BIR assessment to the properties of Marcos family name to the
late President Marcos, Imelda Marcos (wife of the latter and as main defendant in behalf of his
husband) did not protest administratively which led to the prescription of the period for filing of
opposition, thus, final and unappealable. Consequently, some of the Marcoses’ alleged properties
were levied and even sold by the government. Mainly, Bongbong Marcos contends that the
properties could not be levied to cover the tax dues because they are still pending probate with the
court, and settlement of tax deficiencies could not be had, unless there is an order by the probate
court or until the probate proceedings are terminated.

ISSUE:

Whether or not the contention of Bongbong Marcos is tenable.

HELD:

No, it is not tenable. Since the deficiency income tax assessments and estate tax assessment
are already final and unappealable, Section 213 and 218 of the National Internal Revenue Code is
clear that the subsequent levy of real properties is a tax remedy resorted to by the government. It
is to be noted that other tax remedies, such that for Criminal actions or Civil actions, are different,
separate and distinct remedies from a summary tax remedy, and it is not affected or precluded by
the pendency of any other tax remedies instituted by the government.
 Notably, any decision of any probate or settlement court over a deceased person is not a
mandatory requirement in the collection of estate taxes. In fact, there is nothing in the Tax Code,
and in the pertinent remedial laws that implies the necessity of the probate or estate settlement
court's approval of the state's claim for estate taxes, before the same can be enforced and collected.
It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of
the properties allegedly owned by the late President, on the ground that it was required to seek first
the probate court's sanction. Moreover, under Section 87 of the NIRC, it is the probate or settlement
court which is bidden not to authorize the executor or judicial administrator of the decedent's estate
to deliver any distributive share to any party interested in the estate, unless it is shown a
Certification by the Commissioner of Internal Revenue that the estate taxes have been paid. This
provision disproves the petitioner's contention that it is the probate court which approves the
assessment and collection of the estate tax.

NOTE: The decision of CA was affirmed in toto.

G.R. No. L-24248 July 31, 1974

ANTONIO TUASON, JR., petitioner,

vs.
JOSE B. LINGAD, as Commissioner of Internal Revenue, respondent.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete
and Special Attorney Antonio H. Garces for respondent.

In this petition for review of the decision of the Court of Tax Appeals in CTA Case 1398,
the petitioner Antonio Tuason, Jr. (hereinafter referred to as the petitioner) assails the Tax Court's
conclusion that the gains he realized from the sale of residential lots (inherited from his mother)
were ordinary gains and not gains from the sale of capital assets under section 34(1) of the National
Internal Revenue Code.

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 had 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 instructed his
attorney-in-fact, J. Antonio Araneta, to sell them.

There was no difficulty encountered in selling the 28 small lots as their respective
occupants bought them on a 10-year installment basis. Lot 29 could not however be sold
immediately due to its low elevation.

Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into
small lots and paved with macadam roads. The small lots were then sold over the years on a
uniform 10-year annual amortization basis. J. Antonio Araneta, 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 lots
(P102,050.79 and P103,468.56, respectively) as long-term capital gains. On May 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 revenue 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 ½ thereof as taxable 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 properties 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 his 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 Department advanced the same opinion, which was
concurred in by the Commissioner of Internal Revenue.

On January 9, 1963, however, the Commissioner reversed himself and considered the
petitioner's profits from the sales of the mentioned lots as ordinary gains. On January 28, 1963 the
petitioner received a letter from the Bureau of Internal Revenue advising him to pay deficiency
income tax for 1957, as follows:

Net income per orig. investigation ............... P211,095.36

Add:
56% of realized profit on sale
of lots which was deducted in the
income tax return and allowed in
the original report of examination ................. 59,539.09 Net income per final investigation
................. P270,824.70

Less: Personal exemption ..................................... 1,800.00

Amount subject to tax ................................. P269,024.70 Tax due thereon
.......................................... P98,551.00
Less: Amount already assessed .................... 72,199.00 Balance ......... P26,352.00

Add:
½% monthly interest from
6-20-59 to 6-29-62 .................................... 4,742.36
TOTAL AMOUNT DUE AND
COLLECTIBLE ......................................... P31,095.36

The petitioner's motion for reconsideration of the foregoing deficiency assessment was
denied, and so he went up to the Court of Tax Appeals, which however rejected his posture in a
decision dated January 16, 1965, and ordered him, in addition, to pay a 5% Surcharge and 1%
monthly interest "pursuant to Sec. 51(e) of the Revenue Code."

ISSUE:
Whether the properties which petitioner had inherited and subsequently sold in small lots to other
persons should be regarded as capital assets.
RULING:
No. it is ordinary income.

1. The National Internal Revenue Code (C.A. 466, as amended) defines the term "capital assets"
as follows:

(1) 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 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, or
property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business, or property, used in the trade or business, of a character
which is subject to the allowance for depreciation provided in subsection (f) of
section thirty; or real property used in the trade or business of the taxpayer.

As thus defined by law, the term "capital assets" includes all the properties of a taxpayer
whether or not connected with his trade or business, except: (1) stock in trade or other property
included in the taxpayer's inventory; (2) property primarily for sale to customers in the ordinary
course of his trade or business; (3) property used in the trade or business of the taxpayer and subject
to depreciation allowance; and (4) real property used in trade or business.1If the taxpayer sells or
exchanges any of the properties above-enumerated, any gain or loss relative thereto is an ordinary
gain or an ordinary loss; the gain or loss from the sale or exchange of all other properties of the
taxpayer is a capital gain or a capital loss.2

Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a
corporation) from the sale or exchange of capital assets held for more than twelve months, only
50% of the net capital gain shall be taken into account in computing the net income.

Under the circumstances, undeniably the income of petitioner from the sales of the lots in
question should be considered as ordinary income. Taxpayer’s sale of the several lots forming part
of his rental businesses cannot be characterized as other than sales of non-capital assets.

Petitioner is not liable to pay a 5% surcharge plus 1% monthly interest because petitioner
relied in good faith upon opinions rendered by no less than the highest officials of the Bureau of
Internal Revenue, including the Commissioner himself.
G.R. No. 120135 March 31, 2003

BANK OF AMERICA NT & SA, BANK OF AMERICA INTERNATIONAL,

LTD., petitioners,
vs.
COURT OF APPEALS, HON. MANUEL PADOLINA, EDUARDO LITONJUA, SR., and
AURELIO K. LITONJUA, JR., respondents.

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the
November 29, 1994 decision of the Court of Appeals1 and the April 28, 1995 resolution denying
petitioners' motion for reconsideration.

FACTS:

On May 10, 1993, Eduardo K. Litonjua, Sr. and Aurelio J. Litonjua (Litonjuas, for brevity)
filed a Complaint2 before the Regional Trial Court of Pasig against the Bank of America NT&SA
and Bank of America International, Ltd. (defendant banks for brevity) alleging that: they were
engaged in the shipping business; they owned two vessels: Don Aurelio and El Champion, through
their wholly-owned corporations; they deposited their revenues from said business together with
other funds with the branches of said banks in the United Kingdom and Hongkong up to 1979;
with their business doing well, the defendant banks induced them to increase the number of their
ships in operation, offering them easy loans to acquire said vessels;3 thereafter, the defendant
banks acquired, through their (Litonjuas') corporations as the borrowers: (a) El Carrier4; (b) El
General5; (c) El Challenger6; and (d) El Conqueror7; the vessels were registered in the names of
their corporations; the operation and the funds derived therefrom were placed under the complete
and exclusive control and disposition of the petitioners;8 and the possession the vessels was also
placed by defendant banks in the hands of persons selected and designated by them (defendant
banks).9

The Litonjuas claimed that defendant banks as trustees did not fully render an account of
all the income derived from the operation of the vessels as well as of the proceeds of the subsequent
foreclosure sale;10 because of the breach of their fiduciary duties and/or negligence of the
petitioners and/or the persons designated by them in the operation of private respondents' six
vessels, the revenues derived from the operation of all the vessels declined drastically; the loans
acquired for the purchase of the four additional vessels then matured and remained unpaid,
prompting defendant banks to have all the six vessels, including the two vessels originally owned
by the private respondents, foreclosed and sold at public auction to answer for the obligations
incurred for and in behalf of the operation of the vessels; they (Litonjuas) lost sizeable amounts of
their own personal funds equivalent to ten percent (10%) of the acquisition cost of the four vessels
and were left with the unpaid balance of their loans with defendant banks.11 The Litonjuas prayed
for the accounting of the revenues derived in the operation of the six vessels and of the proceeds
of the sale thereof at the foreclosure proceedings instituted by petitioners; damages for breach of
trust; exemplary damages and attorney's fees.12
ISSUES:

First issue. Did the trial court commit grave abuse of discretion in refusing to dismiss the complaint
on the ground that plaintiffs have no cause of action against defendants since plaintiffs are merely
stockholders of the corporations which are the registered owners of the vessels and the borrowers
of petitioners?

Second Issue. Should the complaint be dismissed on the ground of forum non-conveniens?

Third issue. Are private respondents guilty of forum shopping because of the pendency of foreign
action?

RULING:
On the first issue:
No. Petitioners' argument that private respondents, being mere stockholders of the foreign
corporations, have no personalities to sue, and therefore, the complaint should be dismissed, is
untenable. A case is dismissible for lack of personality to sue upon proof that the plaintiff is not
the real party-in-interest. Lack of personality to sue can be used as a ground for a Motion to
Dismiss based on the fact that the complaint, on the face thereof, evidently states no cause of
action.The Court clarified that a complaint states a cause of action where it contains three essential
elements of a cause of action, namely: (1) the legal right of the plaintiff, (2) the correlative
obligation of the defendant, and (3) the act or omission of the defendant in violation of said legal
right. If these elements are absent, the complaint becomes vulnerable to a motion to dismiss on the
ground of failure to state a cause of action.37 To emphasize, it is not the lack or absence of cause
of action that is a ground for dismissal of the complaint but rather the fact that the complaint states
no cause of action.
On the second issue:
No. The doctrine of forum non-conveniens, literally meaning 'the forum is inconvenient',
emerged in private international law to deter the practice of global forum shopping,42 that is to
prevent non-resident litigants from choosing the forum or place wherein to bring their suit for
malicious reasons, such as to secure procedural advantages, to annoy and harass the defendant, to
avoid overcrowded dockets, or to select a more friendly venue. Under this doctrine, a court, in
conflicts of law cases, may refuse impositions on its jurisdiction where it is not the most
"convenient" or available forum and the parties are not precluded from seeking remedies
elsewhere.
On the third issue:

No. Forum shopping exists where the elements of litis pendentia are present and where a
final judgment in one case will amount to res judicata in the other.49 Parenthetically, for litis
pendentia to be a ground for the dismissal of an action there must be: (a) identity of the parties or
at least such as to represent the same interest in both actions; (b) identity of rights asserted and
relief prayed for, the relief being founded on the same acts; and (c) the identity in the two cases
should be such that the judgment which may be rendered in one would, regardless of which party
is successful, amount to res judicata in the other.50

In case at bar, not all the requirements for litis pendentia are present. While there may be
identity of parties, notwithstanding the presence of other respondents,51 as well as the reversal in
positions of plaintiffs and defendants52, still the other requirements necessary for litis
pendentia were not shown by petitioner. It merely mentioned that civil cases were filed in
Hongkong and England without however showing the identity of rights asserted and the reliefs
sought for as well as the presence of the elements of res judicata should one of the cases be
adjudged.
COMMISSIONER OF INTERNAL REVENUE vs. MANNING
L-28398 | Aug 6, 1975 | Petition for Review | Castro
Petitioner: Commissioner of Internal Revenue
Respondents: John Manning, W.D. McDonald, E.E. Simmons & CTA

Quick Summary:
Facts: Reese, the majority stockholder of Mantrasco, executed a trust agreement between him,
Mantrasco, Ross, Selph, carrascoso & Janda law firm and the minority stockholders, Manning,
McDonald and Simmons. Said agreement was entered into because of Reese’s desire that
Mantrasco and Mantrasoc’s 2 subsidiaries, Mantrasco Guam and Port Motors, to continue under
the management of Manning, McDonald and Simmons upon his [Reese] death. When Reese died,
Mantrasco paid Reese’s estate the value of his shares. When said purchase price has been fully
paid, the 24,700 shares, which were declared as dividends, were proportionately distributed to
Manning, McDonald and Simmons. Because of this, the BIR issued assessments on Manning,
McDonald and Simmons for deficiency income tax for 1958. Manning et al, opposed this
assessment but the BIR still found them liable. Manning et al. appealed to the CTA, which
absolved them from any liability.
Held: The manifest intention of the parties to the trust agreement was, in sum and substance, to
treat the 24,700 shares of Reese as absolutely outstanding shares of Reese's estate until they were
fully paid. Such being the true nature of the 24,700 shares, their declaration as treasury stock
dividend in 1958 was a complete nullity and plainly violative of public policy. A stock dividend,
being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only
from retained earnings.
A stock dividend always involves a transfer of surplus (or profit) to capital stock. A stock dividend
is a conversion of surplus or undivided profits into capital stock, which is distributed to
stockholders in lieu of a cash dividend.

Facts:
 1952 - Mantrasco had an authorized capital stock of P2.5M divided into 25,000 common
shares. 24,700 of these shares are owned by Julius Reese while the rest, at 100 each, are
owned by Manning, McDonald & Simmons.
 February 29, 1958 - a trust agreement was executed between Reese, Mantrasco, Ross,
Selph, carrascoso & Janda law firm, Manning, McDonald and Simmons. Said agreement
was entered into because of Reese’s desire that Mantrasco and Mantrasoc’s 2 subsidiaries,
 Mantrasco Guam and Port Motors, to continue under the management of Manning,
McDonald and Simmons upon his [Reese] death.
 October 19, 1954 - Reese died. However, the projected transfer of his shares in the name
of Mantrasco could not be immediately effected for lack of sufficient funds to cover the
initial payment on the shares.
 February 2, 1955 - after Mantrasco made a partial payment of Reese's shares, the certificate
for the 24,700 shares in Reese's name was cancelled and a new certificate was issued in the
name of Mantrasco. Also, new certificate was endorsed to the law firm of Ross, Selph,
Carrascoso and Janda, as trustees for and in behalf of Mantrasco.
 December 22, 1958 - a resolution was passed during a special meeting of Mantrasco
stockholders.
 November 25, 1963 - entire purchase price of Reese's interest in Mantrasco was finally
paid in full by Mantrasco.
 May 4, 1964 - trust agreement was terminated and the trustees delivered to Mantrasco all
the shares which they were holding in trust.
 September 14, 1962 - BIR ordered an examination of Mantrasco’s books. This examination
disclosed that:
1. as of December 31, 1958 the 24,700 shares declared as dividends had been
proportionately distributed to Manning, McDonald & Simmons, representing a total
book value or acquisition cost of P7,973,660
2. Manning, McDonald & Simmons failed to declare the said stock dividends as part of
their taxable income for the year 1958
 Thus, BIR examiners concluded that the distribution of Reese's shares as stock
dividends was in effect a distribution of the "asset or property of the corporation as
may be gleaned from the payment of cash for the redemption of said stock and
distributing the same as stock dividend."
 April 14, 1965 - Commissioner of Internal Revenue issued notices of assessment for
deficiency income taxes to Manning, McDonald & Simmons for the year 1958.
 Manning, McDonald & Simmons opposed said assessments. BIR still held them liable for
these assessments.
 Manning, McDonald & Simmons appealed to the CTA.
 CTA: absolved Manning, McDonald & Simmons from any liability on the ground that
their respective 1/3 interest in Mantrasco remained the same before and after the
declaration of stock dividends and only the number of shares held by each of them
changed.
Issues:
1. WON the shares are treasury shares [NO]
2. WON Manning, McDonald & Simmons should pay for deficiency income taxes [YES]
Ratio:
1. Treasury shares are stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other means. Treasury shares
are therefore issued shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not having been retired
by the corporation re-acquiring it, may be re-issued or sold again, such share, as long
as it is held by the corporation as a treasury share, participates neither in dividends,
 because dividends cannot be declared by the corporation to itself, nor in the meetings of
the corporation as voting stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to perpetuate their control
of the corporation, though it still represents a paid-for interest in the property of the
corporation.
 In this case, such essential features of a treasury share are lacking in the former
shares of Reese.
 The manifest intention of the parties to the trust agreement was, in sum and
substance, to treat the 24,700 shares of Reese as absolutely outstanding shares of
Reese's estate until they were fully paid. Such being the true nature of the 24,700
shares, their declaration as treasury stock dividend in 1958 was a complete nullity
and plainly violative of public policy. A stock dividend, being one payable in
capital stock, cannot be declared out of outstanding corporate stock, but only from
retained earnings.

Nature of a stock dividend

 A stock dividend always involves a transfer of surplus (or profit) to capital stock.
 A stock dividend is a conversion of surplus or undivided profits into capital stock,
which is distributed to stockholders in lieu of a cash dividend.

2. The ultimate purpose which the parties to the trust agreement aimed to realize is to make
Manning, McDonalds & Simmons the sole owners of Reese’s interest in Mantrasco
by utilizing the periodic earnings of Mantrasco and its subsidiaries to directly
subsidize their purchase of said interests and by making it appear that they have not
received any income from those firms when, in fact, by the formal declaration of non-
existent stock dividends in the treasury they secured to themselves the means to turn around
as full owners of Reese’s shares.
 Manning, McDonald & Simmons, using the trust instrument as a convenient technical
device, bestowed unto themselves the full worth and value of Reese's corporate
holdings with the use of the very earnings of the companies.
 Such package device, obviously not designed to carry out the usual stock dividend
purpose of corporate expansion reinvestment but exclusively for expanding the capital
base of Manning, McDonald & Simmons in Mantrasco, cannot be allowed to deflect
their responsibilities toward our income tax laws.
 All these amounts are subject to income tax as being a flow of cash benefits to
Manning, McDonald & Simmons.

Commissioner’s assessment is erroneous

 Commissioner should not have assessed the income tax on the total acquisition cost of
the alleged treasury stock dividends in 1 lump sum.
  The record shows that the earnings of Mantrasco over a period of years were used to
gradually wipe out the holdings of Reese.
 Consequently, those earnings should be taxed for each of the corresponding years when
payments were made to Reese’s estate on account of his 24,700 shares.

Dispositive: CTA judgment set aside. Case remanded to the CTA for further proceedings for the
recomputation of the income tax liabilities of Manning, McDonald & Simmons.