INCOME TAX CASE DIGEST

1. Madrigal v. Rafferty 38 Phil 14

G.R. No. 12287 (1918)
Malcolm, J.

PARTIES:
Plaintiff-Appellants Vicente Madrigal and his wife Susana Paterno
Defendants-Appellees James J. Rafferty, (Collector of Internal Revenue),
Venancio Concepcion (Deputy CIR)

Facts:

Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914.
The marriage was contracted under the provisions of law concerning conjugal
partnership
On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of
P296,302.73
Vicente Madrigal was contending that the said declared income does not represent
his income for the year 1914 as it was the income of his conjugal partnership with
Paterno. He said that in computing for his additional income tax, the amount
declared should be divided by 2.
The revenue officer was not satisfied with Madrigal’s explanation and ultimately,
the United States Commissioner of Internal Revenue decided against the claim of
Madrigal.
Madrigal paid under protest, and the couple decided to recover the sum of
P3,786.08 alleged to have been wrongfully and illegally assessed and collected by
the CIR.

Issue: ISSUE: Whether or not the income reported by Madrigal on 1915 should be
divided into 2 in computing for the additional income tax.
Ruling: The essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called capital. A
flow of services rendered by that capital by the payment of money from it or any
other benefit rendered by a fund of capital in relation to such fund through a period
of time is called income. Capital is wealth, while income is the service of wealth.
2. Commissioner vs. Javier, 199 SCRA 824

Facts: 1977: Victoria Javier, wife of Javier-respondent, received $999k from

Prudential Bank remitted by her sister Dolores through Mellon Bank in US.
Around 3 weeks after, Mellon Bank filed a complaint with CFI Rizal against Javier
claiming that its remittance of $1M was a clerical error and should have been $1k
only and praying that the excess be returned on the ground that the Javiers are just
trustees of an implied trust for the benefit of Mellon Bank.
CFI charged Javier with estafa alleging that they misappropriated and converted it
to their own personal use.
A year after, Javier filed his Income Tax Return for 1977 and stating in the footnote
that “the taxpayer was recipient of some money received abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation”
The Commissioner of Internal Revenue wrote a letter to Javier demanding him to
pay taxes for the deficiency, due to the remittance.
Javier replied to the Commissioner and said that he will pay the deficiency but
denied that he had any undeclared income for 1977 and requested that the
assessment of 1977 be made to await final court decision on the case filed against
him for filing an allegedly fraudulent return.

Commissioner replied that “the amount of Mellon Bank’s erroneous remittance

which you were able to dispose is definitely taxable” and the Commissioner
imposed a 50% fraud penalty on Javier.

Issue: Whether or not Javier is liable for the 50% penalty.

Ruling: No. The court held that there was no actual and intentional fraud through
willful and deliberate misleading of the BIR in the case. Javier even noted that “the
taxpayer was recipient of some money received abroad which he presumed to be a
gift but turned out to be an error and is now subject of litigation”
It must be noted that the fraud contemplated by law is actual and not constructive.
It must be intentional fraud, consisting of deception willfully and deliberately done
or resorted to in order to induce another to give up some legal right.
Claim of right doctrine- a taxable gain is conditioned upon the presence of a claim
of right to the alleged gain and the absence of a definite and unconditional
obligation to return or repay.
In this case, the remittance was not a taxable gain, since it is still under litigation
and there is a chance that Javier might have the obligation to return it. It will only
become taxable once the case has been settled because by then whatever amount
that will be rewarded, Javier has a claim of right over it.

3. ING Bank vs CIR, GR No. 167679, July 22, 2015

Facts:
ING Bank, "the Philippine branch of Internationale Nederlanden Bank N.V., a foreign
banking corporation incorporated in the Netherlands, is duly authorized by the
Bangko Sentral ng Pilipinas tooperate as a branch with full banking authority in the
Philippines. "Petitioner ING Bank asserts that it is "qualified to avail of the tax
amnesty under Section 5 [of Republic Act No. 9480] and not disqualified under
Section 8 [of the same law]."Furthermore, Petitioner ING Bank claims that it is not
liable for withholding taxes on bonuses accruing toits officers and employees during
taxable years 1996 and 1997. It maintains its position that the liability of the
employer to withhold the tax does not arise until such bonus is actually distributed.
Petitioner ING Bank further argues that the Court of Tax Appeals' discussion on
Section 29(j) of the 1993 National Internal Revenue Code and Section 3 of Revenue
Regulations No. 8-90 is not applicable because theissue in this case.In petitioner's
case, bonuses were determined during the year (1996 and 1997) but were
distributed in the succeeding year. No withholding of income tax was effected but
the bonuses were claimed as an expense for the year. Since the bonuses were not
subjected to withholding tax during the year they were claimed as an expense, the
same should be disallowed.
issue: whether petitioner ING Bank may validly avail itself of the tax amnesty
granted by Republic ActNo. 9480;

Ruling
Yes. Qualified taxpayers with pending tax cases may still avail themselves of the tax
amnestyprogram. Thus, the provision in BIR Revenue Memorandum Circular No. 19-
2008 excepting"issues and cases which were ruled by any court (even without
finality) in favor of the BIR prior toamnesty availment of the taxpayer" from the
benefits of the law is illegal, invalid, and null andvoid. The duty to withhold the tax
on compensation arises upon its accrual.

4. Air Canada vs. CIR, G.R. No. 169507, January 11, 2016
FACTS:

Air Canada filed a claim for refund for more than 5 million pesos. It claims
that there was overpayment, saying that the applicable tax rate against it is
2.5% under the law on tax on Resident Foreign Corporations (RFCs) for
international carriers. It argues that, as an international carrier doing
business in the Philippines, it is not subject to tax at the regular rate of 32%.

Air Canada also claims that it is not taxable because its income is taxable
only in Canada because of the Philippines-Canada Treaty (treaty). According
to it, even if taxable, the rate should not exceed 1.5% as stated in said
treaty.

However, the CTA ruled that Air Canada was engaged in business in the
Philippines through a local agent that sells airline tickets on its behalf. As
such, it should be taxed as a resident foreign corporation at the regular rate
of 32%.

The CTA also said that Air Canada cannot avail of the lower tax rate under the
treaty because it has a "permanent establishment" in the Philippines. Hence,
Air Canada cannot avail of the tax exemption under the treaty.

Issue:
Is Air Canada, an offline international carrier selling passage documents
through Aerotel, a RFC?

HELD:
Yes, Air Canada is a resident foreign corporation. Although there is no one
rule in determining what "doing business in the Philippines" means, the
appointment of an agent or an employee is a good indicator. This is
especially true when there is effective control, similar to that of employer-
employee relationship. This is true between Air Canada and Aerotel. Hence,
Air Canada is a RFC whose income is subject to Philippine Income Tax.
 5. NDC vs. CIR, 151 SCRA 472
The National Development Company entered into contracts in Tokyo with several
Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. The
purchase price was
to come from the proceeds of bonds issued by the Central Bank. Initial payments
were made in cash
and through irrevocable letters of credit. Fourteen promissory notes were signed for
the balance by
the NDC and, as required by the shipbuilders, guaranteed by the Republic of the
Philippines.
Pursuant thereto, the remaining payments and the interests thereon were remitted
in due time by
the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC
in Tokyo.
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70
as
interest on the balance of the purchase price. No tax was withheld. The
Commissioner then held the
NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but
failed. The BIR
thereupon served on the NDC a warrant of distraint and levy to enforce collection of
the claimed
amount. The NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency
in the
sum of P900.00, representing the compromise penalty. The NDC then filed a
petition for certiorari.

ISSUE: Whether or not NDC is liable for withholding taxes. (YES)

RULING:
The petitioner argues that the Japanese Shipbuilders were not subject to tax under
Section
37(1)of the Tax Code because all the related activities — the signing of the contract,
the
construction of the vessels, the payment of the stipulated price, and their delivery
to the NDC —
were done in Tokyo. The law, however, does not speak of activity but of "source,"
which in this case
is the NDC. This is a domestic and resident corporation with principal offices in
Manila.

Petitioner was remiss in the discharge of its obligation as the withholding agent of
the government and so should be liable for the omission. It is also incorrect to
suggest that the Republicc of the Philippines could not collect taxes on the interest
remitted because of the undertaking signed by the Secretary of Finance in each of
the promissory notes. There is nothing in the PN guaranteed by the state
exempting the interests from taxes. Petitioner has not established a clear waiver
therein of the right to tax interests. Tax exemptions cannot be merely implied but
must be categorically and unmistakably expressed. Any doubt concerning this
question must be resolved in favor of the taxing power.

Gross income
6. Henderzon vs. Collector, 1 SCRA 649L-12954, February 28, 1961

Facts: Sps. Arthur Henderson and Marie Henderson filed their annual income tax
with the BIR. Arthur is president of American International Underwriters for the
Philippines, Inc., which is a domestic corporation engaged in the business of general
non-life insurance, and represents a group of American insurance companies
engaged in the business of general non-life insurance.

The BIR demanded payment for alleged deficiency taxes. In their computation, the
BIR included as part of taxable income: 1) Arthur’s allowances for rental, residential
expenses, subsistence, water, electricity and telephone expenses 2) entrance fee to
the Marikina Gun and Country Club which was paid by his employer for his account
and 3) travelling allowance of his wife

ISSUE: Whether or not the rental allowances and travel allowances furnished and
given by the employer-corporation are part of taxable income?

HELD: NO. Such claims are substantially supported by evidence.

These claims are therefore NOT part of taxable income. No part of the allowances in
question redounded to their personal benefit, nor were such amounts retained by
them. These bills were paid directly by the employer-corporation to the creditors.
The rental expenses and subsistence allowances are to be considered not subject to
income tax. Arthur’s high executive position and social standing, demanded and
compelled the couple to live in a more spacious and expensive quarters. Such
‘subsistence allowance’ was a SEPARATE account from the account for salaries and
wages of employees. The company did not charge rentals as deductible from the
salaries of the employees. These expenses are COMPANY EXPENSES, not income by
employees which are subject to tax.

7. PLDT vs. CIR, GR No. 157264, 31 January 2008

Facts: Petitioner PLDT claiming that it terminated in 1995 the employment of several rank
and file, supervisory and executive employees’ dues to redundancy.  In compliance with
labor law requirements, it paid those separated employees separation pay and other
benefits, and that as employer and withholding agent, it deducted from the separation pay
withholding taxes which was remitted to BIR.

Petitioner filed with BIR a claim of tax credit or refund invoking sec. 28(b)(7)(B) of NIRC
which excluded from gross income any amount received by an official or employee or by his
heirs from the employer as a consequence of separation of such official or employee from
service of the employer due to death, sickness or other physical ability or for any cause
beyond the control of the said official or employer.

CTA denied PLDT claim on the ground that it failed to sufficiently prove that the terminated
employees received separation pay and that taxes were withheld therefrom or remitted to
the BIR.

ISSUE: WON the withholding taxes, which petitioner remitted to the BIR, should be refunded
for having been erroneously withheld and paid to the later.
Ruling: PLDT failed to establish that the redundant employees actually received separation
ay and it withheld taxes therefrom and remitted the same to the BIR.

A taxpayer must do two (2) things to be able to be able to successfully make a claim for the
tax refund:
1.  Declare the income payment it received as part of its gross income.
2.  Establish the fact of withholding.

On this score, the relevant revenue regulations provide as follows:

Sec. 10. Claims for tax credit or refund -  claims for tax credit or refund of income tax
deducted and withheld on income payments shall be given due course only when it is shown
on the return that the income payment received was declared as part of the gross income
and the fact of withholding is established by a copy of the statement duly issued by the
payer to the payee showing the amount paid and the amount of tax withheld therefrom.

8. Jaime N. Soriano, et al vs. Sec. of Finance and CIR, GR No. 184450,

24 January 2017

Facts: On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34,
35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as the
National Internal Revenue Code of 1997," was approved and signed into law by
President Arroyo. Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR
10-2008 providing for the prorated application of the personal and additional
exemptions for taxable year 2008 to begin only effective 6 July 2008 for being
contrary to Section 4 of Republic Act No. 9504. The Office of the Solicitor General
(OSG) filed a Consolidated Comment[16] and took the position that the application
of R.A. 9504 was intended to be prospective, and not retroactive. This was
supposedly the general rule under the rules of statutory construction: law will only
be applied retroactively if it clearly provides for retroactivity, which is not provided
in this instance

The OSG further argues that the legislative intent of non-retroactivity was
effectively confirmed by the "Conforme" of Senator Escudero, Chairperson of the
Senate Committee on Ways and Means, on the draft revenue regulation that
became RR 10-2008.

Issue: First, whether the increased personal and additional exemptions provided by
R.A. 9504 should be applied to the entire taxable year 2008 or prorated, considering
that R.A. 9504 took effect only on 6 July 2008.

Ruling: This Court ruled in the affirmative, considering that the increased
exemptions were already available on or before 15 April 1992, the date for the filing
of individual income tax returns. Further, the law itself provided that the new set of
personal and additional exemptions would be immediately available upon its
effectivity. While R.A. 7167 had not yet become effective during calendar year
1991, the Court found that it was a piece of social legislation that was in part
intended to alleviate the economic plight of the lower-income taxpayers. For that
purpose, the new law provided for adjustments "to the poverty threshold level"
prevailing at the time of the enactment of the law
T]he Court is of the considered view that Rep. Act 7167 should cover or extend to
compensation income earned or received during calendar year 1991
In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly
intended to afford immediate tax relief to individual taxpayers, particularly low-
income compensation earners. Indeed, if R.A. 9504 was to take effect beginning
taxable year 2009 or half of the year 2008 only, then the intent of Congress to
address the increase in the cost of living in 2008 would have been negated.
The NIRC is clear on these matters. The taxable income of an individual taxpayer
shall be computed on the basis of the calendar year.[30] The taxpayer is required to
fi1e an income tax return on the 15th of April of each year covering income of the
preceding taxable year.[31] The tax due thereon shall be paid at the time the return
is filed.

9. Supreme Transliner, Inc. BPI family Savings Bank, GR Nos. 165617 &
165837, 25 February 2011

FACTS:
Supreme Transliner took out a loan from respondent and was unable to pay. The
respondent bank extrajudicially foreclosed the collateral and, before the expiration
of the one-year redemption period, the mortgagors notified the bank of its intention
to redeem the property.
According to the trial court, plaintiffs-mortgagors are estopped from questioning the
correctness of the redemption price as they had freely and voluntarily signed the
letter-agreement prepared by the defendant bank.

ISSUE:
Is the mortgagee-bank liable to pay the capital gains tax upon the execution of the
certificate of sale and before the expiry of the redemption period?

HELD:
NO. Under Revenue Regulations (RR) No. 13-85 every sale or exchange or
otherdisposition of real property classified as capital asset under Section 34(a) of
the Tax Code shall be subject to the final capital gains tax. The term sale includes
pacto de retro and other forms of conditional sale. Section 2.2 of Revenue
Memorandum Order (RMO) No. 29-86 (as amended by RMO No. 16-88 and a sfurther
amended by RMO Nos. 27-89 and 6-92) states that these conditional sales
necessarily include mortgage foreclosure sales (judicial and extrajudicial foreclosure
sales)
It is clear that in foreclosure sale there is no actual transfer of the mortgaged real
property until after the expiration of the one-year period and title is consolidated in
the name of the mortgagee in case of non-redemption. This is because before the
period expires there is yet no transfer of title and no profit or gain is realized by the
mortgagor.

Deductions from Gross Income

10. Mercury Drug vs. CIR, G.R. No. 164050, 20 July 2011
FACTS:
Mercury Drug granted 20% sales discount to qualified senior citizens on their
purchases of medicines. They subsequently filed a refund for taxable years 1993
and 1994 given that the then prevailing rule allowed that the sales discounts be
claimed as tax credits.

ISSUE:
Is the claim for tax credit to be based on the full amount of the 20% senior citizen
discount or the     acquisition cost of the item sold?

HELD:

The court ruled that the cost of discount should be computed on the
actual amount of the discount extended to senior citizens.
RA 7432, which grants, among others, sales discounts to senior citizens on the
purchase of medicines, imposes burden to private establishments amounting to
taking of private property for public use with just compensation in the form of tax
credit. However, said law does not provide how the cost of the discount as tax credit
be computed. Thus, the court construed the cost as referring to the amount of the
20% sales discount extended by establishments to senior citizens in the purchase of
medicines. However, the Court gave full accord to the factual findings of the Court
of Tax Appeals with respect to the actual amount of the 20% sales discount. Thus
the court held that petitioner is entitled to a tax credit equivalent to the actual
amounts of the 20% sales discount as determined by the Court of Tax Appeals. A
new computation for tax was made in favor of petitioner in the amounts of
P2,289,381.71 and P22,237,650.34.

11. CIR vs. General Foods (Phils.), Inc., G.R. No. 143672, April 24

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 of Internal Revenue 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 Motion for Reconsideration which was denied.
General Foods later on filed a petition for review, which reversed and set aside an
earlier
decision by CTA dismissing the company’s appeal.

Issue: Whether or not the subject media advertising expense for “Tang” was
ordinary and
necessary expense fully deductible.

Ruling: 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.

12. Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of

Internal Revenue, G.R. No. L-26911, January 27, 1981

Facts: FACTS:
Petitioner corporation filed with the BIR its VAT Return for the first quarter of 1992.
It alleged that
it likewise filed with the BIR the corresponding application for the refund/credit of its
input VAT on
its purchases of capital goods and on its zero-rated sales. Asserting that it was a
"zero-rated VAT person," it prayed that the CTA order herein respondent
Commissioner of Internal Revenue (respondent Commissioner) to refund/credit
petitioner corporation.

ISSUE:
Whether sales to enterprises operating within the export processing zones are export sales.

RULING:
Yes. Without actual exportation, Article 23 of the Omnibus Investments Code of 1987 also considers
constructive exportation as export sales. Among other types of constructive exportation specifically
identified by the said provision are sales to export processing zones. Sales to export processing
zones are subjected to special tax treatment. Article 77 of the same Code establishes the tax
treatment of goods or merchandise brought into the export processing zones. Of particular
relevance herein is paragraph 2, which provides that "Merchandise purchased by a registered zone
enterprise from the customs territory and subsequently brought into the zone, shall be considered
as export sales and the exporter thereof shall be entitled to the benefits allowed by law for such
transaction."
 13. C. M. Hoskins & Co., Inc. vs. CIR, G.R. No. L-24059, November
28, 1969

Facts:
Hoskins, a domestic corporation engaged in the real estate business as broker,
managing agents and administrators, filed its income tax return (ITR) showing a net
income of P92,540.25 and a tax liability of P18,508 which it paid.
CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the
disallowance of an item which was paid to Mr. C. Hoskins representing 50% of
supervision fees earned and set aside the disallowance of the other 3 items.

Issue:
Whether or not the disallowance of the 4 items were proper.

Held:
NOT deductible.  It did not pass the test of reasonableness which is:
General rule, bonuses to employees made in good faith and as additional
compensation for services actually rendered by the employees are deductible,
provided such payments, when added to the salaries do not exceed the
compensation for services rendered.
The conditions precedent to the deduction of bonuses to employees are:
·         Payment of bonuses is in fact compensation
·         Must be for personal services actually rendered
·         Bonuses when added to salaries are reasonable when measured by the
amount and quality of services performed with relation to the business of the
particular taxpayer.
50% share of supervision fees received by the company was inordinately large and
could not be treated as an ordinary and necessary expenses allowed for deduction.

14. CIR Vs. Isabela Cultural Corporation, G.R. No. 172231. February
12, 2007

Facts: FACTS:

BIR disallowed Isabela Cultural Corp. deductible expenses for services which were
rendered in 1984 and 1985 but only billed, paid and claimed as a deduction on
1986.   After CA sent its demand letters, Isabela protested. CTA found it proper to
be claimed in 1986 and affirmed by CA

ISSUE: W/N Isabela who uses accrual method can claim on 1986 only

HELD: case is remanded to the BIR for the computation of Isabela Cultural
Corporation’s liability under Assessment Notice No. FAS-1-86-90-000680.

NO, The requisites for the 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; - qualified by Section
45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction
provided for in this Title shall be taken for the taxable year in which ‘paid or
accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the
basis of which the net income is computed
(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.

15. Collector of Internal Revenue vs. Goodrich International

Rubber Co., G.R. No. L 22265,December 22, 1967
Facts:
Goodrich claimed for deductions based upon receipts issued, not by entities in
which the alleged expenses had been incurred, but by the officers of Goodrich who
allegedly paid for them.

The Commissioner disallowed deductions in the amount of P50,455.41 (for the year
1951) for bad debts and P30,188.88 (for year 1952) for representation expenses.

Goodrich appealed from the said assessment to the Court of Tax Appeals (CTA)
which allowed the deduction for bad debts but disallowing the alleged
representation expenses. CTA amended its decision allowing the deduction of
representation expenses.

Issue:
Whether or not the bad debts are properly deducted.

Held:
The claim for deduction for debt numbers 1-10 is REJECTED. Goodrich has not
established either that the debts are actually worthless or that it had reasonable
grounds to believe them to be so.

NIRC permits the deduction of debts “actually ascertained to be worthless within

the taxable year” obviously to prevent arbitrary action by the taxpayer, to unduly
avoid tax liability.

The requirement of ascertainment of worthlessness require proof of 2 facts:

1.       That the taxpayer did in fact ascertain the debt to be worthless
2.       That he did so, in good faith.

Income Tax on Corporations

16. Air Canada vs. CIR, January 11, 2016, G.R. No. 169507

Facts: Air Canada is an offline air carrier selling passage tickets in the Philippines,
through a general sales agent, Aerotel. As an off-line carrier, [Air Canada] does not
have flights originating from or coming to the Philippines [and does not] operate
any airplane [in] the Philippines[.] On November 28, 2002, Air Canada filed a written
claim for refund of alleged erroneously paid income taxes amounting to
P5,185,676.77 before the Bureau of Internal Revenue,[12] Revenue District Office
No. 47-East Makati.[13] It found... basis from the revised definition[14] of Gross
Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal Revenue
Code
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision
denying the Petition for Review and, hence, the claim for refund.[17] It found that
Air Canada was engaged in business in the Philippines through a local agent that
sells... airline tickets on its behalf. As such, it should be taxed as a resident foreign
corporation at the regular rate of 32%.

Issue: whether petitioner Air Canada is-a resident foreign corporation subject to
corporate income tax

Ruling: Yes. Petitioner is a resident foreign corporation that is taxable on its income
derived from
sources within the Philippines. International air carrier[s] maintaining flights to and
from the
Philippines shall be taxed at the rate of 2½% of its Gross Philippine Billings while
international air
carriers that do not have flights to and from the Philippines but nonetheless earn
income from
other activities in the country [like sale of airline tickets] will be taxed at the regular
income tax
rate.
In this case however there is a tax treaty that must be taken into consideration to
determine the proper tax rate. While petitioner is taxable as a resident foreign
corporation under Section 28(A)(1) of the Tax
Code on its taxable income from sale of airline tickets in the Philippines, it could
only be taxed at a
maximum of 1½% of gross revenues, pursuant to Article VIII of the Republic of the
Philippines-
Canada Tax Treaty that applies to petitioner as a "foreign corporation organized and
existing under
the laws of Canada.

17.St. Luke’s Case (G.R. No. 195909, September 26, 2012;

Facts:
St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized as a non-stock and
non-profit corporation. St. Luke’s accepts both paying and non-paying patients. The
BIR assessed St. Luke’s deficiency taxes for 1998 comprised of deficiency income
tax, value-added tax, and withholding tax. The BIR claimed that St. Luke’s should be
liable for income tax at a preferential rate of 10% as provided for by Section 27(B).
Further, the BIR claimed that St. Luke’s was actually operating for profit in 1998
because only 13% of its  revenues  came from  charitable purposes. Moreover, the
hospital’s board of trustees, officers and employees directly benefit  from  its 
profits  and  assets.

Issue: whether St. Luke’s is liable for deficiency income tax in 1998 under Section
27(B) of the NIRC, which imposes a preferential tax rate of 10^ on the income of
proprietary non-profit hospitals.

Ruling:   Section 27(B) of the NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one
hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption.
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the
income of (1) proprietary non-profit educational institutions and (2) proprietary non-
profit hospitals. The effect of the introduction of Section 27(B) is to subject the
taxable income of two specific institutions, namely, proprietary non-profit
educational institutions[36] and... proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in
relation to Section 27(A)(1). Charitable institutions, however, are not ipso facto
entitled to a tax exemption. The requirements for a tax exemption are specified by
the law granting it.

18. CIR vs. St. Luke’s Medical Center, Inc., G.R. No 203514,
February 13, 2017

FACTS:

The respondent St. Luke’s Medical Center, Inc. (SLMC) received a tax payment
assessment from the Large Taxpayers Service-Documents Processing and Quality
Assurance Division of the Bureau of Internal Revenue Audit Result/Assessment
Notice on December 14, 2007. Based on the assessment the respondent SLMC has
a deficiency income tax under Section 27 (B) of the 1997 National Internal Revenue
Code (NIRC).
In response to the received assessment from NIRC, SLMC filed with the petitioner
Commission on Internal Revenue (CIR) an administrative protest assailing the
assessments.  CIR’s issued its Final Decision on the Disputed Assessment. Aggrieved
SLMC elevated the matter to Court of Tax Appeal (CTA) finding the decision that
SLMC is not liable for the deficiency income tax under Section 27 (B) of the 1997
NIRC.

Whether or not SLMC is entitled to tax exemption under Section 30 (E) and (G) of
the1997 NIRC and whether or not it is liable to pay compromise penalty pursuant to
Section248 (A) of the 1997 NIRC.

Ruling: The Supreme Court ruled that SLMC is not entitled to tax exemption
under Section 30(E) and (G) of the 1997 NIRC and applied the doctrine of stare
decisis-"absent any powerful countervailing considerations, like cases ought to be
decided alike." Under Section 30 (E) and (G) of the 1997 NIRC, a charitable
institution will be exempted from tax if it has the following qualifications: a non-
stock corporation or association; organized exclusively for charitable purposes;
operated exclusively for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its
tax exemption if it earns income from its for-profit activities. Such income from for-
profit activities, under the last paragraph of Section 30, is merely subject to income
tax, previously at the ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27(B). 
St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary
non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are reinvested pursuant to its
corporate purposes. St. Luke’s, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.

19. PAGCOR v. BIR, et al. G.R. No. 215427, 10 December 2014

Facts: Petitioner further seeks to prohibit the implementation of Bureau of Internal
Revenue (BIR) Revenue Regulations No. 16-2005 for being contrary to law. With the
enactment of R.A. No. 9337[10] on May 24, 2005, certain sections of the National
Internal Revenue Code of 1997 were amended.
Different groups came to this Court via petitions for certiorari and prohibition[11]
assailing the validity and constitutionality of R.A. No. 9337
10% Value Added Tax (VAT) on sale of goods and properties
10% VAT on importation of goods
10% VAT on sale of services and use or lease of properties... the Court dismissed all
the petitions and upheld the constitutionality of R.A. No. 9337.
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,
[13]  specifically identifying PAGCOR as one of the franchisees subject to 10% VAT
imposed under Section 108 of the National Internal Revenue Code of 1997, as
amended by R.A.
No. 9337.
Furthermore, according to the OSG,... public respondent BIR exceeded its statutory
authority when it enacted RR No. 16-2005, because the latter's provisions are
contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.

ISSUE:
Is Republic Act 9337 constitutional insofar as it excluded PAGCOR from the
enumeration of GOCCs exempt from the payment of corporate income tax?

HELD:
YES. The original exemption of PAGCOR from corporate income tax was not made
pursuant to a valid classification based on substantial distinctions so that the law
may operate only on some and not on all. Instead, the same was merely granted
due to the acquiescence of the House Committee on Ways and Means to the
request of PAGCOR.

The argument that the withdrawal of the exemption also violates the non-
impairment clause will not hold since any franchise is subject to amendment,
alteration or repeal by Congress.
However, the Court made it clear that PAGCOR remains exempt from payment of
indirect taxes and as such its purchases remain not subject to VAT, reiterating the
rule laid down in the Acesite case.

20. Bloombery Resort vs. BIR, GR No, 212530, 10 Aug 2016

Facts: Bloomberry Resorts and Hotels, Inc., the one who owns and operates Solaire
Resort and Casino, filed a petition to the Supreme Court to void a Bureau of Internal
Revenue (BIR) ruling of an apparent unlawful governmental regulation which
requires the gaming firms to pay income taxes on top of their franchise tax, as well
as to seek “to enjoin respondent CIR from implementing the assailed provision of
RMC No. 33-2013.”Being one of PAGCOR’s licensees, the petitioner pays only
license fees. But as R.A. No.9337 was taken into effect, the petitioner has been
detached of its exemption from paying corporate income tax. The petitioner argued
that Presidential Decree No. 1869 “expressly and clearly exempts the contractees
and licensees of PAGCOR from the payment of all' kinds of taxes except the 5%
franchise tax on its gross gaming revenue. ”They claimed that this was not repealed
by the deletion of PAGCOR as a tax – exempt entity under NIRC.

Issue: WON, WN Petitioner is liable for corporate income tax

Ruling: Section 13 of PD No. 1869 evidently states that payment of the 5%

franchise tax by PAGCOR and its contractees and licensees exempts them from
payment of any other taxes, including corporate
income tax. This provision providing for the said exemption was neither amended
nor repealed by
any subsequent laws (i.e. Section 1 of R.A. No. 9337 which amended Section 27(C)
of the NIRC of
1997); thus, it is still in effect. Guided by the doctrinal teachings in resolving the
case at bench, it is
without a doubt that, like PAGCOR, its contractees and licensees remain exempted
from the payment
of corporate income tax and other taxes since the law is clear that said exemption
inures to their
benefit.
As the PAGCOR Charter states in unequivocal terms that exemptions granted for
earnings
derived from the operations conducted under the franchise specifically from the
payment of any tax,
income or otherwise, as well as any form of charges, fees or levies, shall inure to
the benefit of and
extend to corporation(s), association(s), agency(ies), or individual(s) with whom the
PAGCOR or
operator has any contractual relationship in connection with the operations of the
casino(s)
authorized to be conducted under this Franchise, so it must be that all contractees
and licensees of
PAGCOR, upon payment of the 5% franchise tax, shall likewise be exempted from all
other taxes,
including corporate income tax realized from the operation of casinos. Plainly, too,
upon payment of
the 5% franchise tax, petitioner's income from its gaming operations of gambling
casinos, gaming
clubs and other similar recreation or amusement places, and gaming pools, defined
within the
purview of the aforesaid section, is not subject to corporate income tax.
 21. Cyanamid Philippines, Inc. vs. Court of Appeals, et al., G.R. No.
108067, January 20, 2000
Facts:
the CIR sent an assessment letter to petitioner and demanded the payment of
deficiency income tax for taxable year 1981.
petitioner protested the assessments. Petitioner, through its external accountant,
Sycip,
Gorres, Velayo & Co., claimed, among others, that the surtax for the undue
accumulation of earnings
was not proper because the said profits were retained to increase petitioner's
working capital and it
would be used for reasonable business needs of the company. Petitioner contended
that it availed of
the tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil
and criminal
prosecution granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow
the
cancellation of the assessment notices.
Petitioner appealed to the Court of Tax Appeals. During the pendency of the case,
however,
both parties agreed to compromise the 1981 deficiency income tax assessment of
P119,817.00.
Petitioner paid a reduced amount —P26,577.00 — as compromise settlement.
However, the surtax
on improperly accumulated profits remained unresolved.

Issue: Whether or not the petitioner is liable for the accumulated earnings
tax for the year 1981.

Ruling: In order to determine whether profits are accumulated for the reasonable
needs of the business to avoid the surtax upon the shareholders, it must be shown
that the controlling intention of the taxpayer is manifested at the time of the
accumulation, not intentions subsequently, which are mere afterthoughts. The
accumulated profits must be used within reasonable time after the close of the
taxable year. In the instant case, petitioner did not establish by clear and
convincing evidence that such accumulated was for the immediate needs of the
business.
The working capital needs of a business depend on the nature of the business, its
credit policies, the amount of inventories, the rate of turnover, the amount of
accounts receivable, the collection rate, the availability of credit and other similar
factors. The Tax Court opted to determine the working capital sufficiency by using
the ration between the current assets to current liabilities. Unless, rebutted, the
presumption is that the assessment is correct. With the petitioner’s failure to prove
the CIR incorrect, clearly and conclusively, the Tax Court’s ruling is upheld.

22. Manila Wine Merchants, Inc. vs. Commissioner of Internal

Revenue, G.R. No. L-26145, February 20, 1984
Facts: In 1957 the CIR caused the examination of petitioner‟s book of accounts and
found the latter having unreasonably accumulated surplus of P428,934.32 for the
calendar year 1947 to 1957, in excess of thereasonable needs of the business
subject to the 25% surtax imposed by Section 25 of the Tax Code.
Respondent found that the accumulated surplus in question were invested to
'unrelated business' which were not considered in the 'immediate needs' of the
Company such that the 25% surtax be imposed therefrom." Petitioner appealed to
the Court of Tax Appeals.
Issue: Whether the penalty tax of twenty-five percent (25%) can be imposed on
such improper accumulation in 1957 despite the fact that the accumulation
occurred in 1951.
Ruling: An accumulation of earnings or profits (including undistributed
earnings or profits of prior years) is unreasonable if it is not required for the purpose
of the business, considering all the circumstances of the case. To determine the
"reasonable needs" of the business in order to justify an accumulation of earnings,
the Courts of the United States have invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the business" to mean the immediate
needs of the business, and it was generally held that if the corporation did not prove
an immediate need for the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs of the business, and the penalty tax
would apply American cases likewise hold that investment of the earnings and
profits of the corporation in stock or securities of an unrelated business usually
indicates an accumulation beyond the reasonable needs of the business.
As to the contention that that the surtax of 25% should be based on the surplus
accumulated in 1951 and not in 1957, the rule is now settled in Our jurisprudence
that undistributed earnings or profits of prior years are taken into consideration in
determining unreasonable accumulation for purposes of the 25% surtax.