#31 CONWI v.

CTA Petitioners argue that since there were no remittances and acceptances of
their salaries and wages in US dollars into the Philippines, they are exempt
FACTS: from the coverage of such circulars. Petitioners forget that they are citizens
of the Philippines, and their income, within or without, and in these cases
Petitioners are Filipino citizens and employees of Procter and Gamble. Said wholly without, are subject to income tax. Sec. 21, NIRC, as amended,
corporation is a subsidiary of Procter & Gamble, a foreign corporation. During does not brook any exemption.
the years 1970 and 1971 petitioners were assigned, for certain periods, to
other subsidiaries of Procter & Gamble, outside of the Philippines, during Since petitioners have already paid their 1970 and 1971 income taxes
which petitioners were paid U.S. dollars as compensation for services in their under the uniform rate of exchange prescribed under the aforestated
foreign assignments. Petitioners filed their income tax returns for the year Revenue Memorandum Circulars, there is no reason for respondent
1970, they computed the tax due by applying the dollar-to-peso conversion Commissioner to refund any taxes to petitioner as said Revenue
on the basis of the floating rate ordained under B.I.R. Ruling No. 70-027. Memorandum Circulars, being of long standing and not contrary to law,
Petitioners again filed with the CIR, amended income tax returns for the above- are valid. 13
mentioned years, this time using the par value of the peso as prescribed in
Section 48 of Republic Act No. 265 in relation to Section 6 of Commonwealth Although it has become a worn-out cliche, the fact still remains that
Act No. 265 in relation to Section 6 of Commonwealth Act No. 699 as the basis "taxes are the lifeblood of the government" and one of the duties of a
for converting their respective dollar income into Philippine pesos for purposes Filipino citizen is to pay his income tax.
of computing and paying the corresponding income tax due from them. _____________________________________________________________

DOCTRINE: #32 MADRIGAL VS. RAFFERTY

A. INCOME / DOLLAR EARNINGS V. FOREIGN EXCHANGE Doctrine:

TRANSACTION
A.Functions of Income Tax
Income
An amount of money coming to a person or corporation within a specified time, The aim has been to mitigate the evils arising from the inequalities of wealth
whether as payment for services, interest or profit from investment. Unless by a progressive scheme of taxation, which places the burden on those best
otherwise specified, it means cash or its equivalent. 4 Income can also be able to pay. To carry out this idea, public considerations have demanded an
thought of as flow of the fruits of one's labor. exemption roughly equivalent to the minimum of subsistence. With these
exceptions, the Income Tax Law is supposed to reach the earnings of the
Petitioners are correct as to their claim that their dollar earnings are not entire non-governmental property of the country.
receipts derived from foreign exchange transactions.
B.Income v Capital
Foreign exchange transaction
A transaction in foreign exchange, foreign exchange being "the conversion of The essential difference between capital and income is that capital is a fund;
an amount of money or currency of one country into an equivalent amount of income is a flow. A fund of property existing at an instant of time is called
money or currency of another." 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
When petitioners were assigned to the foreign subsidiaries of Procter & through a period of time is called income. Capital is wealth, while income is
Gamble, they were earning in their assigned nation's currency and were ALSO the service of wealth.
spending in said currency. There was no conversion, therefore, from one
currency to another. C. Allowable Deductions from Gross Compensation Income: Personal
Exemptions
B. INCOME TAX JURISDICTION; LIFEBLOOD DOCTRINE
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 FACTS: CIR assails the CA decision which affirmed CTA, ordering CIR to
net income for year 1914, the sum of P296,302.73. Vicente Madrigal was desist from collecting the 1985 deficiency income, branch profit remittance and
contending that the said declared income does not represent his income for contractor’s taxes from Marubeni Corp after finding the latter to have properly
the year 1914 as it was the income of his conjugal partnership with Paterno. availed of the tax amnesty under EO 41 & 64, as amended.
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 Marubeni, a Japanese corporation, engaged in general import and export
explanation and ultimately, the United States Commissioner of Internal trading, financing and construction, is duly registered in the Philippines with
Revenue decided against the claim of Madrigal. Madrigal paid under protest, Manila branch office. CIR examined the Manila branch’s books of accounts for
and the couple decided to recover the sum of P3,786.08 alleged to have been fiscal year ending March 1985, and found that respondent had undeclared
wrongfully and illegally assessed and collected by the CIR. income from contracts with NDC and Philphos for construction of a wharf/port
complex and ammonia storage complex respectively.
Q. Should the income tax be divided between the spouses?
On August 27, 1986, Marubeni received a letter from CIR assessing it for
A. Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the several deficiency taxes. CIR claims that the income respondent derived were
property of her husband Vicente Madrigal during the life of the conjugal income from Philippine sources, hence subject to internal revenue taxes.
partnership. She has an interest in the ultimate property rights and in the
ultimate ownership of property acquired as income after such income has Q: WON Marubeni is exempted from paying tax
become capital. Susana Paterno has no absolute right to one-half the income
of the conjugal partnership. Not being seized of a separate estate, Susana A. Marubeni was able to sufficiently prove in trial that not all its work was
Paterno cannot make a separate return in order to receive the benefit of the performed in the Philippines because some of them were completed in Japan
exemption which would arise by reason of the additional tax. As she has no (and in fact subcontracted) in accordance with the provisions of the contracts.
estate and income, actually and legally vested in her and entirely distinct from All services for the design, fabrication, engineering and manufacture of the
her husband's property, the income cannot properly be considered the materials and equipment under Japanese Yen Portion I were made and
separate income of the wife for the purposes of the additional tax. Moreover, completed in Japan. These services were rendered outside Philippines’ taxing
the jurisdiction and are therefore not subject to contractor’s tax.
Income Tax Law does not look on the spouses as individual partners in an _____________________________________________________________
ordinary partnership. The husband and wife are only entitled to the exemption
of P8,000, specifically granted by the law.
_____________________________________________________________ #34 NATIONAL DEVELOPMENT VS CIR

#33 CIR VS. MARUBENI DOCTRINE:

DOCTRINE: SOURCE OF TAX – WITHIN OR WITHOUT THE PHILIPPINES

A contractor’s tax is a tax imposed upon the privilege of engaging in “The petitioner also forgets that it is not the NDC that is being taxed. The tax
business—it is generally in the nature of an excise tax on the exercise of a was due on the interests earned by the Japanese shipbuilders. It was the
privilege of selling services or labor rather than a sale on products, and is income of these companies and not the Republic of the Philippines that was
directly collectible from the person exercising the privilege. Being an excise subject to the tax the NDC did not withhold.”
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 FACTS: The National Development Company (NDC) entered into contracts in
property taxes, it cannot be imposed on an occupation or privilege outside the Tokyo with several Japanese shipbuilding companies for the construction of
taxing district. 12 ocean-going vessels. Initial payments were made in cash and through
irrevocable letters of credit. When the vessels were completed and delivered
to the NDC in Tokyo, the latter remitted to the shipbuilders the 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  Arthur H. Henderson testified that he is the President of American
sum of P5, 115,234.74. Negotiations followed but failed. NDC went to CTA. International Underwriters for the Philippines, Inc.,
BIR was sustained by CTA. BIR was sustained by CTA. Hence, this petition  they had to live in apartments of the size beyond their personal needs
for certiorari.  as president of the corporation, he and his wife had to entertain and
put up houseguests;
Q. Is NDC liable for the tax?  the trip to New York undertaken by his wife in 1952, for which she was
granted by his employer-corporation travelling expense allowance of
A. Yes. Although NDC is not the one taxed since it was the Japanese P3,247.40, was made at the behest of his employer
shipbuilders who were liable on the interest remitted to them under Section 37
The taxpayers' claim is supported by the evidence. The total amount of
of the Tax Code, still, the imposition is valid. The imposition of the deficiency
P3,249.32 "for manager's residential expense" in 1948 should be treated as
taxes on NDC is a penalty for its failure to withhold the same from the rentals for apartments and utilities and should not form part of the ratable value
Japanese shipbuilders. Such liability is imposed by Section 53c of the Tax subject to tax.
Code. NDC was remiss in the discharge of its obligation as the withholding
agent of the government and so should be liable for the omission. CIR is ordered to refund to the taxpayers the sum of P5,986.61
_____________________________________________________________ _____________________________________________________________

#35 CIR v. HENDERSON #36. LIMPAN INVESTMENT CORP. VS. COMMISIONER

FACTS: Doctrine:
Sps Arthur Henderson and Marie B. Henderson (later referred to as the
A.Effect of admission by taxpayer of undeclared income
taxpayers) filed with the BIR returns of annual net income for the years 1948
to 1952. In due time the taxpayers received assessment notices and paid the Petitioner, having admitted, through its own witness, that it had not
amounts assessed. After investigation and verification, the BIR reassessed declared more than one-half of the amount found by the BIR examiners as
the taxpayers ‘income for the years 1948 to 1952 and demanded payment of unreported rental income for the year 1956 and more than one-third of the
the deficiency taxes. BIR considered as part of their taxable income the amount ascertained by the examiners as unreported rental income for the year
taxpayer-husband's: allowances for rental, residential expenses, 1957, contrary to its original claim to the revenue authorities, it was incumbent
subsistence, water, electricity and telephone; bonus paid to him; withholding upon it to establish the remainder of its pretensions by clear and convincing
evidence.
tax entrance fee to the Marikina gun and Country Club paid by his employer
for his account; travelling allowance of his wife. B.Constructive receipt of income
DOCTRINE: WHAT CONSTITUTES GROSS INCOME The withdrawal in 1958 of the deposits in court pertaining to the 1957
rental income is not sufficient justification for the non-declaration of said
Section 29, Commonwealth Act No. 466, National Internal Revenue Code, income in 1957, since the deposit was resorted to due to the refusal of
provides: petitioner to accept the same, and was not the fault of its tenants; hence,
petitioner is deemed to have constructively received such rentals in 1957. The
"Gross income" payment by the subtenant in 1957 should have been reported as rental income
Includes gains, profits, and income derived from salaries, wages, or in said year, since it is income just the same regardless of its source.
compensation for personal service of whatever kind and in whatever form paid,
or from professions, vocations, trades, businesses, commerce, sales, or Facts: Petitioner, a domestic corporation duly registered is engaged in the
dealings in property, whether real or personal, growing out of the ownership or business of leasing real properties. Limpan duly filed its 1956 and 1957 income
use of or interest in such property; also from interest, rents dividend, securities, tax returns however the examiners of BIR conducted investigation of
or the transaction of any business carried on for gain or profit, or gains, profits, petitioner’s income tax returns and they discovered and ascertained that
and income derived from any source whatever. petitioner had under declared its rental income during said taxable years and
had claimed excessive depreciation of its buildings. CIR demands the payment corporate income tax based on PAL’s annual net taxable income computed in
of deficiency income tax. Petitioner denied having received or collected the accordance with the provisions of the NIRC, or (2) a franchise tax of two
said unreported rental income explaining that part of said amount was not percent of gross revenues. Availment of either of these two alternatives shall
declared because its president did not turn the same over to petitioner in said exempt the airline from the payment of “all other taxes”. On this basis, a claim
year but did so only in 1959 and that a certain tenant deposited in court his for refund of the 20% final withholding tax on its interest income with various
rentals over which the corporation had no actual or constructive control. banks was instituted.

Q. Is the contention of the petitioner sufficient to justify the non-declaration of Q: Will the “in lieu of all other taxes” provision in PAL’s franchise relieve it from
rental income? paying the 20% final withholding tax on its interest on bank deposits even if
there were in fact no taxes paid?
A. No, the withdrawal in 1958 of the deposits in court pertaining to the 1957
rental income is no sufficient justification for the non- declaration of said A: The SC ruled that the “in lieu of all other taxes” provision in PAL’s franchise
income in 1957, since the deposit was resorted to due to the refusal of is broad enough to cover the 20% final withholding tax, thereby making it
petitioner to accept the same, and was not the fault of its tenants; hence, exempt from its imposition. The SC explained that for the year involved, PAL
petitioner is deemed to have constructively received such rentals in 1957. The chose to be subjected to the basic corporate income “computed in accordance
payment by the sub- tenant in 1957 should have been reported as rental with the provisions of the National Internal Revenue Code”. The computation
income in said year, since it is income just the same regardless of its source. of the income tax is anchored on the definition of taxable income. Section 31
_____________________________________________________________ of the NIRC provides: “Taxable income means the pertinent items of gross
income specifies in the Tax Code, less the deductions and/or personal and
#37 CIR VS. PAL additional exemptions, if any, authorized for these types of income”. Section
32 enumerated the items of gross income to include interest and other passive
DOCTRINE: income. However, since these passive incomes are already subject to different
rates and taxed finally at source, they are no longer included in the
A. Meaning of taxable income and gross income under the Tax Code.— computation of the gross income, which determines taxable income. The SC
Taxable income means the pertinent items of gross income specified in concluded as follows: “Clearly, then, the basic corporate income tax identified
the Tax Code, less the deductions and/or personal and additional in the franchise relates to the general rate of 35% as stipulated in Section 27
exemptions, if any, authorized for these types of income. Under Section of the Tax Code. The final 20% taxes disputed in the present case are not
32 of the Tax Code, gross income means income derived from whatever covered under Section 13(a) of PAL’s franchise; thus, a refund is in order.”
_____________________________________________________________
source, including compensation for services; the conduct of trade or
business or the exercise of a profession; dealings in property; interests; #38 COMMISSIONER VS ANSCOR
rents; royalties; dividends; annuities; prizes and winnings; pensions; and
a partner’s distributive share in the net income of a general professional DOCTRINE:
partnership.
ALLOWABLE DEDUCTIONS FROM GROSS COMPENSATION INCOME –
B. Under the Tax Code, “taxable income” does not include passive Business/Trade/Professional Income. Stock dividends are not taxable as
income subjected to final withholding taxes; The “basic corporate income a general rule.
tax” identified in Section 13(a) of the franchise relates to the general rate
“It laid down the general rule known as the proportionate test wherein stock
of 35 percent as stipulated in Section 27 of the Tax Code.
dividends once issued form part of the capital and, thus, subject to income tax.
Specifically, the general rule states that: A stock dividend representing the
transfer of surplus to capital account shall not be subject to tax.
FACTS: The case involves the application of the tax provision in PAL’s
franchise defining its liability for taxes. P.D. 1590, the legislative franchise of EXCEPTION: However, if a corporation cancels or redeems stock issued as a
PAL granted it an option to pay the lower of two alternatives: (1) the basic dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the issued nine (9) checks to petitioner drawn against BPI with the uniform
distribution of a taxable dividend, the amount so distributed in redemption or amount of P205,224.00. In his 1976 Income Tax Return, petitioner reported
cancellation of the stock shall be considered as taxable income to the extent it the P461,754 initial payment as income from disposition of capital asset. In
the succeeding years, until 1979, petitioner reported a uniform income of
represents a distribution of earnings or profits accumulated after March first,
P230,877.00. In his 1980 income tax amnesty return, petitioner also reported
nineteen hundred and thirteen.” the same amount of P230,877.00 as the realized gain on disposition of
capital asset for the year. They recommended deficiency tax assessment for
Facts: Don Andres Soriano, a citizen and resident of the US, formed the two million, four hundred seventy-three thousand, six hundred seventy-three
corporation “A. Soriano Y Sia”, predecessor of ANSCOR. ANSCOR is wholly (P2,473,673.00) pesos. Petitioner insisted that the sale of his land to AYALA
owned and controlled by the family of Don Andres, who are all non-resident was on installment. Larin filed a criminal complaint for tax evasion against the
aliens. ANSCOR declared stock dividends. In 1964, Don Andres died one-half petitioner. July 2, 1981, petitioner filed an Amnesty Tax Return under P.D.
of his shareholdings were transferred to his wife, Dona Carmen, as her 1740 and paid the amount of P41,729.81. November 2, 1981, petitioner
conjugal share and the other half formed part of his estate. Dona Carmen again filed an Amnesty Tax Return under P.D. 1840 and paid an additional
amount of P1,525.62. In both, petitioner did not recognize that his sale of
requested a ruling from the US Internal Revenue Service, inquiring if an
land to AYALA was on cash basis.
exchange of common with preferred shares may be considered as tax
avoidance scheme. The IRS opined that the exchange is only recapitalization DOCTRINES/ISSUES
scheme and not tax avoidance scheme. The BIR examiners after examining
ANSCOR’ books of account and records issued a report proposing that A. WHETHER P.D. NOS. 1740 AND 1840 WHICH GRANTED TAX
ANSCOR be assessed for deficiency withholding tax. Petitioner contends that AMNESTIES ALSO GRANTED IMMUNITY FROM CRIMINAL
the redemption of stocks and exchange of common with preferred shares can PROSECUTION AGAINST TAX OFFENSES
be considered as “essentially equivalent to the distribution of taxable dividend”,
making the proceeds thereof taxable. When he availed of the tax amnesty, his disclosure, however, did not include
the income from his sale of land to AYALA on cash basis. Instead he insisted
Q. Is the contention of petitioner correct? that such sale was on installment. He did not amend his income tax return.
He did not pay the tax which was considerably increased by the income
A. No, stock dividends, strictly speaking, represent capital and do not derived from the discounting. He did not meet the twin requirements of P.D.
constitute income to its recipient. So that the mere issuance thereof is not yet 1740 and 1840, declaration of his untaxed income and full payment of tax
subject to income tax as they are nothing but an “enrichment through increase due thereon. Clearly, the petitioner is not entitled to the benefits of P.D. Nos.
1740 and 1840. The mere filing of tax amnesty return under P.D. 1740 and
in value of capital investment.” In a loose sense, stock dividends issued by the 1840 does not ipso facto shield him from immunity against prosecution.
corporation are considered unrealized gain, and cannot be subjected to tax
until that gain has been realized. B. CASH V. INSTALLMENT BASIS

#39 BIBIANO V. BAÑAS, JR., v. CA Although the proceed of a discounted promissory note is not considered part
of the initial payment, it is still taxable income for the year it was converted
FACTS: into cash. If the seller disposes the entire installment obligation by
discounting the bill or the promissory note, he necessarily must report the
Petitioner, Bibiano V. Bañas Jr. sold to Ayala Investment Corporation balance of the income from the discounting not only income from the initial
(AYALA), 128,265 square meters of land for P2,308,770.00. The Deed of installment payment. Where an installment obligation is discounted at a bank
Sale: upon the signing of the contract AYALA shall pay P461,754.00. The or finance company, a taxable disposition results, even if the seller
balance was to be paid in four equal consecutive annual installments, with guarantees its payment, continues to collect on the installment obligation, or
twelve (12%) percent interest per annum. AYALA issued one promissory handles repossession of merchandise in case of default.17 When petitioner
note covering four equal annual installments. Petitioner discounted the had the promissory notes covering the succeeding installment payments of
promissory note with AYALA, for its face value of P1,847,016.00. AYALA the land issued by AYALA, discounted by AYALA itself, on the same day of
the sale, he lost entitlement to report the sale as a sale on installment since,
a taxable disposition resulted and petitioner was required by law to report in Q. Distinguish Tax Deduction from Tax Credit.
his returns the income derived from the discounting. What petitioner did is
tantamount to an attempt to circumvent the rule on payment of income taxes A. On the one hand, a tax credit reduces the tax due, including -- whenever
gained from the sale of the land to AYALA for the year 1976. applicable -- the income tax that is determined after applying the
corresponding tax rates to taxable income. A tax deduction, on the other,
_____________________________________________________________ reduces the income that is subject to tax in order to arrive at taxable income.
A tax credit is used only after the tax has been computed; a tax
deduction, before.
#40 COMMISSIONER VS. CENTRAL LUZON DRUG
Q. When can tax credit be availed/ What is required for its availment?
Doctrine: Power to tax as an instrument to implement the power of
eminent domain
A. Since 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,
The 20 percent discount required by the law to be given to senior citizens is
any tax credit application will be useless. There will be no reason for deducting
a tax credit, not merely a tax deduction from the gross income or gross sale of
the latter when there is, to begin with, no existing obligation to the government.
the establishment concerned. A tax credit is used by a private establishment
However, as will be presented shortly, the existence of a tax credit or
only after the tax has been computed; a tax deduction, before the tax is
its grant by law is not the same as the availment or use of such credit. While
computed. RA 7432 unconditionally grants a tax credit to all covered entities.
the grant is mandatory, the availment or use is not.
Thus, the provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations cannot amend
If a net loss is reported by, and no other taxes are currently due from, a
or revoke the law.
business establishment, there will obviously be no tax liability against which
any tax credit can be applied.[24] For the establishment to choose the
Facts: Central Luzon Drug (CLD) is a domestic corporation primarily engaged
immediate availment of a tax credit will be premature and impracticable.
in retailing of medicines and other pharmaceutical products. It operated 6
Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has
drugstores under the name and style “Mercury Drug”. CLD granted 20% sales
granted without conditions a tax credit benefit to all covered establishments.
discount to senior citizens pursuant to RA 7432 and its Implementing Rules.
_____________________________________________________________
CLD filed with petitioner a claim for tax refund/credit in the amount allegedly
arising from the 20% sales discount. CIR was ordered to issue a tax credit
certificate in favor of CLD. #41 CIR VS. CENTRAL LUZON DRUG CORP

Q. Can taxation be used as an implement for the exercise of the power of DOCTRINE:
eminent domain?
The 20% discount required by R.A. 7432 to be given to senior citizens is a tax
A. Yes, the taxation power can also be used as an implement for the exercise credit, not a deduction from the gross sales of the establishment concerned;
of the power of eminent domain. Tax measures are but “enforced contributions The definition of ‘tax credit’ found in Section 2(1) of Revenue Regulations No.
exacted on pain of penal sanctions” and “clearly imposed for a public purpose.” 2-94 is erroneous as it refers to a tax credit as the amount representing the
In recent years, the power to tax has indeed become a most effective tool to 20% discount that “shall be deducted by the said establishment from their
realize social justice, public welfare, and the equitable distribution of wealth. gross sales for value added tax and other percentage tax purposes.”
The 20% discount given to senior citizens on pharmacy products was
considered a property, in the form of a supposed profit, taken from the FACTS:
drugstore and used for public use, by means of giving it directly to individual  Central Luzon Drug Corporation has been a retailer of medicines and other
senior citizen. Be it stressed that the privilege enjoyed by senior citizens does pharmaceutical products. It opened 3 drugstores as a franchisee under
not come directly from the State, but rather from the private establishments the business name and style of "Mercury Drug."
concerned. Accordingly, the tax credit benefit granted to these establishments  For the period January 1995 to December 1995, in conformity to Sec. 4(a)
can be deemed as their just compensation for private property taken by the of R.A. No. 7432, petitioner granted a 20% discount on the sale of
State for public use. medicines to qualified senior citizens amounting to P219,778
 Pursuant to Revenue Regulations No. 2-94 implementing R.A. No. 7432, FACTS: Petitioner claimed the 20% discount granted to senior citizens as a
which states that the discount given to senior citizens shall be deducted deduction from its gross income thereby giving it a tax relief equivalent to 35%
by the establishment from its gross sales for value-added tax and other (corporate income tax rate) of the deduction. Later if filed a claim for refund of
percentage tax purposes, respondent deducted the total amount of overpaid income tax due to the error in computation of its tax liability
P219,778 from its gross income for the taxable year 1995. For said taxable maintaining the position that the discounts should have been treated pursuant
period, respondent reported a net loss of P20,963 in its corporate income to R.A. No. 7432. The CTA ordered the refund but on lesser amount. The CTA
tax return. As a consequence, respondent did not pay income tax for 1995. made a recomputation of the income tax liability of the petitioner by allowing
 Subsequently, on December 27, 1996, claiming that according to Sec. 4(a) as tax credit the “cost of the discount” only which is computed by getting the
of R.A. No. 7432, the amount of P219,778 should be applied as a tax percentage of cost of sales to total sales and multiplying it with total discounts
credit, respondent filed a claim for refund in the amount of P150,193 granted. This ruling was affirmed by the CA.
 Since the Commissioner of Internal Revenue "was not able to decide the
claim for refund on time," respondent filed a Petition for Review with the Q. What is the amount allowed as tax credit? Can the discount be claimed by
CTA which dismissed the petition. the taxpayer as a tax refund?
 On a Petition for Review, the CA granted petitioner’s claim for tax credit.
Hence, this petition A. YES. The tax credit allowed under RA 7432 to establishments as a result
of granting senior citizens 20% discount on their purchase of medicines from
Q: Whether or not the 20% sales discount granted by respondent to qualified private establishments may be claimed by such establishments even though
senior citizens is a tax credit or a deduction from gross sales they are operating at a loss. Under RA 7432, Congress has granted without
A: It is a tax credit. The above provision explicitly employed the word "tax conditions a tax credit benefit to all covered establishments. Although this tax
credit." Nothing in the provision suggests for it to mean a "deduction" from credit benefit is available, it need not be used by losing ventures, since there
gross sales. To construe it otherwise would be a departure from the clear is no tax liability that calls for its application – by its nature, the tax credit may
mandate of the law. still be deducted from a future, not a present, tax liability, without which it does
Thus, the 20% discount required by the Act to be given to senior citizens is a not have any use .Also, the discount privilege to which our senior citizens are
tax credit, not a deduction from the gross sales of the establishment entitled is actually a benefit enjoyed by the general public to which these
concerned. As a corollary to this, the definition of ‘tax credit’ found in Section citizens belong. As a result of the 20% discount imposed by RA 7432, an
2(1) of Revenue Regulations No. 2-94 is erroneous as it refers to tax credit as establishment becomes entitled to a just compensation, and this term refers
the amount representing the 20% discount that "shall be deducted by the said not only to the issuance of a tax credit certificate indicating the correct amount
establishment from their gross sales for value added tax and other percentage of the discounts given, but also to the promptness of its release.
tax purposes." This definition is contrary to what our lawmakers had
envisioned with regard to the treatment of the discount granted to senior The SC ruled that the remedy of refund is not available. The law expressly
citizens. provides that the discount given to senior citizens may be claimed as a tax
Accordingly, when the law says that the cost of the discount may be claimed credit, and not a refund. Thus, where the words of a statute are clear, plain
as a tax credit, it means that the amount -- when claimed – shall be treated as and free from ambiguity, it must be given its literal meaning and applied without
a reduction from any tax liability. The law cannot be amended by a mere attempted interpretation.
regulation. The administrative agencies issuing these regulations may not
enlarge, alter or restrict the provisions of the law they administer. In fact, a
regulation that "operates to create a rule out of harmony with the statute is a #43 CIR V. CENTRAL LUZON DRUG CORPORATION
mere nullity."
_____________________________________________________________ FACTS:
#42 Bicolandia Drug Corp vs CIR
Respondent is a domestic corporation engaged in the retail of medicines and
other pharmaceutical products.5 In 1997, it operated eight drugstores under
DOCTRINE:
the business name and style "Mercury Drug." Pursuant to the provisions of
RA 7432 and Revenue Regulations No. (RR) 2-947 - sales discount granted
CLAIM FOR REFUND: There must be a written claim for refund filed by
to senior citizens totaled P2,798,508.00. Respondent filed its 1997
the taxpayer with the Commissioner. Corporate Annual Income Tax Return reflecting a nil income tax liability
due to net loss incurred from business operations D. THE SENIOR CITIZENS' DISCOUNT MAY BE CLAIMED
of P2,405,140.00.8 Respondent filed its 1997 Income Tax Return under AS A TAX CREDIT AND NOT A REFUND.
protest.9 Respondent filed with the petitioner a claim for refund or credit of
overpaid income tax for the taxable year 1997 in the amount Section 4(a) of RA 7432 expressly provides that private establishments
of P2,660,829.00.10 Respondent alleged that the overpaid tax was the result may claim the cost as a tax credit. A tax credit can only be utilized as
of the wrongful implementation of RA 7432. Respondent treated the 20% payment for future internal revenue tax liabilities of the taxpayer while a tax
sales discount as a deduction from gross sales in compliance with RR 2-94 refund, issued as a check or a warrant, can be encashed. A tax refund can
instead of treating it as a tax credit as provided under Section 4(a) of RA be availed of immediately while a tax credit can only be utilized if the
7432. taxpayer has existing or future tax liabilities.Hence, the senior citizens'
discount may be claimed as a tax credit and not as a refund.30
DOCTRINES / TOPICS / ISSUES
E. RA 9257 NOW SPECIFICALLY PROVIDES THAT ALL COVERED
A. TAX CREDIT UNDER RA 7432 ESTABLISHMENTS MAY CLAIM THE SENIOR CITIZENS'
DISCOUNT AS TAX DEDUCTION.
Under RA 7432, Congress granted the tax credit benefit to all covered
establishments without conditions. The net loss incurred in a taxable year On 26 February 2004, RA 9257, otherwise known as the "Expanded
does not preclude the grant of tax credit because by its nature, the tax credit Senior Citizens Act of 2003," was signed into law and became effective
may still be deducted from a future, not a present, tax liability. However, the on 21 March 2004.31: The establishment may claim the discounts
senior citizens' discount granted as a tax credit cannot be refunded. granted under (a), (f), (g) and (h) as tax deduction based on the net cost of
the goods sold or services rendered:
B. RA 7432 EXPRESSLY ALLOWS PRIVATE ESTABLISHMENTS
TO CLAIM THE AMOUNT OF DISCOUNTS THEY GRANT TO Contrary to the provision in RA 7432 where the senior citizens' discount
SENIOR CITIZENS granted by all covered establishments can be claimed as tax credit, RA
AS TAX CREDIT. 9257 now specifically provides that this discount should be treated as
tax deduction. With the effectivity of RA 9257 on 21 March 2004, there is
In Commissioner of Internal Revenue v. Central Luzon Drug now a new tax treatment for senior citizens' discount granted by all covered
Corporation,24 the Court ruled that petitioner's definition in RR 2-94 of a establishments. This discount should be considered as a deductible expense
tax credit is clearly erroneous. from gross income and no longer as tax credit.32 The present case, however,
covers the taxable year 1997 and is thus governed by the old law, RA 7432.
"When the law says that the cost of the discount may be claimed as
a tax credit, it means that the amount- when claimed ― shall be treated Petition DENIED. CA AFFIRMED
as a reduction from any tax liability, plain and simple."
_____________________________________________________________
C. THE TAX CREDIT MAY STILL BE DEDUCTED
FROM A FUTURE, NOT A PRESENT, TAX LIABILITY.
#44 CIR VS ISABELA CULTURAL CORP
In Commissioner of Internal Revenue v. Central Luzon Drug
Corporation,26 the Court stressed that prior payment of tax liability is not a Doctrine: Deductions from Gross Income
pre-condition before a taxable entity can avail of the tax credit. The Court
declared, "Where there is no tax liability or where a private establishment
reports a net loss for the period, the tax credit can be availed of and carried A.Tax Deductions in the nature of exemption
over to the next taxable year."27 Hence, respondent is entitled to claim the It is a governing principle in taxation that tax exemptions must be construed
amount of P2,376,805.63 as tax credit despite incurring net loss from in strictissimi juris against the taxpayer and liberally in favor of the taxing
business operations for the taxable year 1997. authority; and one who claims an exemption must be able to justify the same
by the clearest grant of organic or statute law. Since a deduction for income
tax purposes partakes of the nature of a tax exemption, then it must also be The accrual of income and expense is permitted when the all-events test has
strictly construed. been met. This test requires: 1) fixing of a right to income or liability to pay;
and 2) the availability of the reasonable accurate determination of such income
B. All-events test in relation to accrual method or liability. The test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at its disposal the information
The all-events test is satisfied where computation remains uncertain, if its necessary to compute the amount with reasonable accuracy.
basis is unchangeable; the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year. The In the instant case, the expenses for professional fees consist of expenses for
amount of liability does not have to be determined exactly; it must be legal and auditing services. The expenses for legal services pertain to the 1984
determined with "reasonable accuracy." Accordingly, the term and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso
"reasonable accuracy" implies something less than an exact or Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses
completely accurate amount. The propriety of an accrual must be judged of said firm in connection with ICC’s tax problems for the year 1984. From the
by the facts that a taxpayer knew, or could reasonably be expected to nature of the claimed deductions and the span of time during which the firm
have known, at the closing of its books for the taxable year. was retained, ICC can be expected to have reasonably known the retainer
fees charged by the firm. They cannot give as an excuse the delayed billing,
Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an since it could have inquired into the amount of their obligation and reasonably
assessment notice for deficiency income tax and expanded withholding determine the amount. under the circumstances, such delay is not sufficient to
tax from BIR. It arose from the disallowance of ICC’s claimed expense for exempt it from being charged with knowledge of the reasonable amount of the
professional and security services paid by ICC; as well as the alleged expenses for legal and auditing services.
understatement of interest income onthe three promissory notes due
from Realty Investment Inc. Thedeficiency expanded withholding tax was _____________________________________________________________
allegedly due to the failure of ICC to withhold 1% e-withholding tax on its
claimed deduction for security services. #45 BASILAN ESTATE INC. VS. COMMISSIONER
ICC sought a reconsideration of the assessments. Having received a final
notice of assessment, it brought the case to CTA, which held that it is DOCTRINE:
unappealable, since the final notice is not a decision. CTA’s ruling was
reversed by CA, which was sustained by SC, and case was remanded to CTA. Depreciation is the gradual diminution in the useful value of tangible property
CTA rendered a decision in favor of ICC. It ruled that the deductions for resulting from wear and tear and normal obsolescense. The term is also
professional and security services were properly claimed, it said that even if applied to amortization of the value of intangible assets, the use of which in
services were rendered in 1984 or 1985, the amount is not yet determined at the trade or business is definitely limited in duration. Depreciation commences
that time. Hence it is a proper deduction in 1986. It likewise found that it is the
with the acquisition of the property and its owner is not bound to see his
BIR which overstate the interest income, when it applied compounding absent
any stipulation. property gradually waste, without making provision out of earnings for its
replacement. It is entitled to see that from earnings the value of the property
Petitioner appealed to CA, which affirmed CTA, hence the petition. invested is kept unimpaired, so that at the end of any given term of years, the
Q. Are the expenses for professional and security services are deductible? original investment remains as it was in the beginning. It is not only the right of
A. No. One of the requisites for the deductibility of ordinary and necessary a company to make such a provision, but it is its duty to its bond and
expenses is that it must have been paid or incurred during the taxable year. stockholders, and, in the case of a public service corporation, at least, its plain
This requisite is dependent on the method of accounting of the taxpayer. In duty to the public.3 Accordingly, the law permits the taxpayer to recover
the case at bar, ICC is using the accrual method of accounting. Hence, gradually his capital investment in wasting assets free from income tax.
under this method, an expense is recognized when it is incurred. Under a
Revenue Audit Memorandum, when the method of accounting is accrual, FACTS: A Phil. corporation engaged in the coconut industry, Basilan Estates,
expenses not being claimed as deductions by a taxpayer in the current year Inc., filed its income tax returns for 1953 and paid the same. The
when they are incurred cannot be claimed in the succeeding year. Commissioner of Internal Revenue, per examiners' report assessed that
petitioner has a deficiency income tax for 1953 and 25% surtax on Respondent corporation, which is engaged in the manufacture of beverages
unreasonably accumulated profits as of 1953 pursuant to Section 25 of the such as "Tang," "Calumet" and "Kool-Aid," filed its income tax return for the
Tax Code. Petitioner contends that there is an error in disallowing claimed fiscal year ending February 28, 1985. Claimed as deduction, among other
business expenses, the amount of P9,461,246 for media advertising for
deductions. However, these were disallowed on the ground that the nature of
"Tang." CIR disallowed 50% or P4,730,623 of the deduction claimed by
these expenses could not be satisfactorily explained nor could the same be respondent corporation. Consequently, respondent corporation was
supported by appropriate papers. assessed deficiency income taxes in the amount of P2,635, 141.42. MR
denied.
Q: Can the expenses be allowed as deductions even if they are not
substantiated by proof? DOCTRINES / TOPICS / ISSUES

A: Yes, even if there are no records or receipts available, the oral testimony
A. TAX EXEMPTION LAWS, CONSTRUCTION
(CPA) not contradicted by the government is sufficient. The petitioner further
argues that when the Bureau of Internal Revenue decided to investigate, It is a governing principle in taxation that tax exemptions must be
petitioner had no more obligation to keep the same since five years had lapsed construed in strictissimi juris against the taxpayer and liberally in favor of the
from the time these expenses were incurred (Sec. 337 of the Tax Code). taxing authority;5 and he who claims an exemption must be able to justify
his claim by the clearest grant of organic or statute law. An exemption
_____________________________________________________________ from the common burden cannot be permitted to exist upon vague
implications.6Deductions for income tax purposes partake of the nature of
#46 HOSPITAL DE SAN JUAN DE DIOS vs CIR tax exemptions; hence, if tax exemptions are strictly construed, then
deductions must also be strictly construed.
DOCTRINE:
Business Expenses, Requisites for Deductibility: The expenses must be B. NECESSARY AND ORDINARY EXPENSES V. CAPITAL
incurred in trade or business carried on by the taxpayer. EXPENDITURE
Facts: Hospital de San Juan de Dios is engaged in both taxable and non-
Was the media advertising expense for "Tang" paid or incurred by
taxable operations. In the computation of its taxable income for the years 1952
respondent corporation for the fiscal year ending February 28, 1985
to 1955, Hospital de San Juan de Dios allowed all its taxable income to share
"necessary and ordinary," hence, fully deductible under the NIRC? Or
in the allocation of administrative expenses. The Commissioner disallowed,
was it a capital expenditure, paid in order to create "goodwill and
however, the interests and dividends from sharing in the allocation of
reputation" for respondent corporation and/or its products, which
administrative expenses.
should have been amortized over a reasonable period?
Q. Are the expenses business expense and therefore deductible?
It is necessary? The parties are in agreement that the subject advertising
A. No, the interests and dividends in question are merely incidental income to expense was paid or incurred within the corresponding taxable year and was
petitioner's main activity, which is the operation of its hospital and nursing incurred in carrying on a trade or business. Hence, it was necessary.
schools. Mere holding of investments cannot be considered engaging in
business so that the expenses in managing the investments are not Is it ordinary?
considered ordinary and necessary in the pursuit of a trade or business.
Hence, it is not deductible as business or administrative expenses. 1. In the case at bar, the P9,461,246 claimed as media advertising
expense for "Tang" alone was almost one-half of its total claim
for "marketing expenses." Aside from that, respondent-corporation
#47 CIR V. GENERAL FOODS also claimed P2,678,328 as "other advertising and promotions
expense" and another P1,548,614, for consumer promotion.
FACTS:
 2. Furthermore, the subject P9,461,246 media advertising expense for e.) the type and extent of the services rendered;
"Tang" was almost double the amount of respondent f.) the salary policy of the corporation;
corporation’s P4,640,636 general and administrative expenses. g.) the size of the particular business;
h.) the employees' qualifications and contributions to the business venture;
Subject expense for the advertisement of a single product to be inordinately and;
large. Therefore, even if it is necessary, it cannot be considered an ordinary i.)general economic conditions.
expense deductible under then Section 29 (a) (1) (A) of the NIRC.
The right to fix compensation may be conceded, but for income tax purposes
the employer cannot legally claim such bonuses as deductible expenses
If the expenditures are for the advertising of the first kind (advertising to
stimulate the current sale of merchandise or use of services,) then, except as unless they are shown to be reasonable. To hold otherwise would open the
gate of rampant tax evasion.
to the question of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If, however, the
Facts: Petitioner is a domestic corporation engaged in the real estate business
expenditures are for advertising of the second kind (advertising designed to
stimulate the future sale of merchandise or use of services.), then normally as brokers, managing agents and administrators, filed its income tax return for
they should be spread out over a reasonable period of time. the fiscal year ending September 30, 1957. Upon verification, the CIR
disallowed four items of deduction and assessed against it an income tax
Subject advertising expense was of the second kind. The protection of brand deficiency in the amount of P28,054.00 plus interests. The Court of Tax
franchise is analogous to the maintenance of goodwill or title to one’s Appeals upheld the respondent’s disallowance of the 50% supervision fees
property. This is a capital expenditure which should be spread out over a paid to Mr. Hoskins, its founder and principal stockholder.
reasonable period of time.9 Respondent corporation’s venture to protect its
brand franchise was tantamount to efforts to establish a reputation. This was Q. Are the supervision fees of Hoskins considered as necessary expense?
akin to the acquisition of capital assets and therefore expenses related
thereto were not to be considered as business expenses but as capital A. No. Considering that in addition being Chairman of the Board of Directors
expenditures.10 of petitioner corporation, Hoskins owned 99.6% of its total authorized capital
stock, was also salesman- broker for his company receiving a 50% share of
___________________________________________________________ the sales commissions earned by petitioner, besides monthly salary and other
allowances and benefits, the Tax court correctly ruled that the payment to
#48 C.M. HOSKINS AND CO. VS. COMMISSIONER Hoskins of his share in the supervision fees received by petitioner as managing
agent of the real estate projects of Paradise Farms and Realty Investments (of
Doctrine: which he is also a stockholder) was inordinately large and could not be
accorded the treatment of ordinary and necessary expenses allowed as
Business expenses--Factors or Tests to Determine Whether
deductible items in the Tax Code.
Compensation Paid for Services Rendered is Deductible or Not
Officers’ extra fees, bonuses and commissions are upheld by the
In determining whether the particular salary or compensation payment is Court as not being within the purview of ordinary and necessary expenses
reasonable, the situation must be considered as a whole. There is no fixed test
and not passing the test of reasonable compensation thus are not deductible
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 items. In Kuenzle v CIR, the Court ruled that “Bonuses to employees made in
services performed with relation to the business. good faith and as additional compensation for the services actually rendered
by the employees are deductible, provided such payments, when added to the
THE OTHER TESTS SUGGESTED ARE: stipulated salaries, do not exceed a reasonable compensation fpr the services
a.) payment must be 'made in good faith; rendered.” The conditions precedent to the deduction of bonuses to
b.) the character of the taxpayer's business; employees are: 10 the payment of the bonuses is in fact compensation; 2) it
c.) the volume and amount of its net earnings;
must be for personal services actually rendered; and 3) the bonuses, when
d.) its locality;
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 development and cultivation of his property. Gancayco's claim for
taxpayer. representation expenses aggregated P31,753.97, of which P22,820.52 was
allowed, and P8,933.45 disallowed. Such disallowance is justified by the
_____________________________________________________________ record, for, apart from the absence of receipts, invoices or vouchers of the
expenditures in question, petitioner could not specify the items constituting the
#49 GANCAYCO VS. COLLECTOR
same, or when or on whom or on what they were incurred.
_____________________________________________________________
DOCTRINE:
#50 CIR vs Itogon-Suyoc Mines, Inc & CTA
Farming expenses; Capital expenditures.—Farming expenses, which are
capital expenditures, are not deductible for income tax purposes. DOCTRINE:
“the imposition of the monthly interest was considered as not constituting a
Representation expenses.—Representation expenses cannot be allowed as penalty "but a just compensation to the state for the delay in paying the tax,
an income tax deduction in the absence of receipts, invoices or vouchers and for the concomitant use by the taxpayer of funds that rightfully should be
supporting said expenses and in case the taxpayer cannot specify the items in the government's hands ...."
constituting said expenses.
FACTS: Respondent Itogon-Suyoc Mines, a mining corporation duly
FACTS: Gancyaco files his income tax return for the year 1949. Respondent organized and existing under Philippine laws fild its income tax return. Fiscal
issued a warrant of distraint and levy against the properties of Gancayco for year (1956-1960) paid PhP 13, 155.20 as the first installment of the income
tax due. Then filed an amended income tax return reporting a net loss of PhP
the satisfaction of his deficiency income tax liability, and accordingly, the
331,707.33. Fiscal year (1960-1961) setting forth its income tax liability of PhP
municipal treasurer issued a notice of sale of said property at public auction. 97.345 but deducting the amount of PhP 13,155.20 representing alleged tax
Gancayco filed a petition to cancel the sale and direct that the same be re- credit for over-payment of the preceding fiscal year 1959-1960. Petitioner
advertised at a future date. assessed against the respondent the amount of PhP 1,512.83 as 1% monthly
interest. The basis for such an assessment was the absence of legal right to
Q: Whether the sum of PhP 16,860.31 is due from Gancayco as deficiency deduct said amount before the refund or tax credit thereof was approved by
income tax for 1949 hinges on the validity of his claim for deduction: a) farming petitioner CIR.
expense PhP 27,459 and b) representation expenses PhP 8,933.45
Q: Is respondent corporation liable to pay the sum of PhP1,512.83 as 1%
monthly interest for delinquency in the payment of income tax.?
A. Section 30 of the Tax Code partly reads:
A. NIRC provides that interest upon the amount determined as a deficiency
(a) Expenses: shall be assessed and shall be paid upon notice and demand from the CIR at
the specified. If in any preceding year the tax payer was entitled to a refund of
(1) In General — All the ordinary and necessary expenses paid or any amount due as tax, such amount, if not yet refunded, maybe deducted
incurred during the taxable year in carrying on any trade or business, from the tax to be paid.
including a reasonable allowance for salaries or other compensation There is no question respondent was entitled to a refund. Instead of
for personal services actually rendered; traveling expenses while waiting for the sum involved to be delivered to it, it deducted the said amount
away from home in the pursuit of a trade or business; and rentals or from the tax that it had to pay. That it had a right to do according to the law. It
other payments required to be made as a condition to the continued is an admitted fact though that respondent was clearly entitled to it, and
use or possession, for the purposes of the trade or business, of
property to which the taxpayer has not taken or is not taking title or in petitioner did not allege otherwise. Nor could he do so. Under all the
which he has no equity. (Emphasis supplied.) circumstances disclosed therefore, the applicability of the legal provision
allowing such a deduction from the amount of the tax to be paid cannot be
No evidence has been presented as to the nature of the said farming expenses disputed.
other than the care statement of petitioner that they were spent for the
MARCELO STEEL CORPORATION vs. CIR The fact that the petitioner is a corporate organized with a single capital that
answer for all its financial obligations including those incurred in the tax exempt
FACTS: industries is of no moment. The intent of the law is to treat taxable or non-
exempt industries as separate and distinct from new and necessary industries
which are tax-exempt for purposes of taxation did not mean to grant an
Petitioner is a corporation duly organized and existing under and by virtue of
the laws of the Philippines engaged in three (3) industrial activities: entrepreneur, engaged at the same time in a taxable or non-exempt industry
and a new and necessary industry, the benefit or privilege of deducting his
gains or profit derived from the operation of the first from the losses incurred
 manufacture of wire fence in the operation of the second.
 manufacture of nails
 manufacture of steel bars, rods and other allied steel products _____________________________________________________________

enjoined the benefits of the tax exemption under Republic Act No. 35. #52 PICOP vs. CA

Petitioner filed: Doctrine:

 An income tax return for the year 1952, reflecting a net income of Interest Expenses: Non-deductible interest expenses
P34,386.58 realized solely from its business of manufacturing wire
fence, an activity which is not tax exempt Theoretical interest is that interest "calculated" or computed (and not incurred
 Income tax return for the year 1953, showing a net income of or paid) for the purpose of determining the "opportunity cost" of investing funds
P58,329.00 realized from the same sources, i.e., the manufacture of in a given business. Such "theorefical" or imputed interest does not arise from
wire fence. a legally demandable interest-bearing obligation incurred by the taxpayer, who
however wishes to find out e.g., whether he would have been better off by
On basis of the said income tax return filed by the petitioner for the year 1952 lending out his funds and earning interest rather than investing such funds in
and 1953 which did not reflect the financial of its tax exempt business activities, his business.
the respondent assessed the total sum of P12,750. Petitioner filed amended One thing that Section 79 quoted above makes clear is that interest which
income tax returns for taxable years 1952 and 1953 claiming that instead of does constitute a charge arising under an interest-bearing obligation is an
earning the net income shown in its original income tax returns for 1952 and allowable deduction from gross income.
1953, it sustained the losses shown in its amended income tax returns for
refund of the income taxes for the said years amounting to P12,750.00 which Facts: Paper Industries Corporation of the Philippines (PICOP) is a Philippine
it allegedly paid to the respondent. corporation registered with the Board of Investments (BOI) as a preferred
pioneer enterprise with respect to its integrated pulp and paper mill, and as a
preferred non-pioneer enterprise with respect to its integrated plywood and
DOCTRINE:
veneer mills. Petitioner received from the Commissioner of Internal Revenue
(CIR) two (2) letters of assessment and demand (a) one for deficiency
A. DEDUCTION FROM THE PROFITS REALIZED FROM ITS transaction tax and for documentary and science stamp tax; and (b) the other
TAXABLE BUSINESS ACTIVITIES, THE LOSSES SUSTAINED BY for deficiency income tax for 1977, for an aggregate amount of
ITS TAX EXEMPT INDUSTRIES, NOT ALLOWED PhP88,763,255.00.

Republic Act No. 35: The law which the petitioner was granted tax exemption PICOP protested the assessment of deficiency transaction tax , the
for the manufacture of nails and steel bars, rods and other allied steel products. documentary and science stamp taxes, and the deficiency income tax
assessment. CIR did not formally act upon these protests, but issued a warrant
 Purpose: to encourage the establishment or exploitation of new and of distraint on personal property and a warrant of levy on real property against
necessary industries to promote the economic growth of the country. PICOP, to enforce collection of the contested assessments, thereby denying
 RA No. 35 has confined the privilege of tax exemption only to new and PICOP's protests. Thereupon, PICOP went before (CTA) appealing the
necessary industries. assessments.
On 15 August 1989, CTA rendered a decision, modifying the CIR’s findings The CIR invokes Section 79 of Revenue Regulations No. 2 as amended which
and holding PICOP liable for the reduced aggregate amount of reads as follows:
P20,133,762.33. Both parties went to the Supreme Court, which referred the
case to the Court of Appeals (CA). Sec. 79. Interest on Capital. — Interest calculated for cost-
keeping or other purposes on account of capital or surplus
CA denied the appeal of the CIR and modified the judgment against PICOP invested in the business, which does not represent a charge
holding it liable for transaction tax and absolved it from payment of arising under an interest-bearing obligation, is not allowable
documentary and science stamp tax and compromise penalty. It also held deduction from gross income. (Emphases supplied)
PICOP liable for deficiency of income tax.
We read the above provision of Revenue Regulations No. 2 as
Q. Is Picop entitled to deductions against income of interest payments on loans
referring to so called "theoretical interest," that is to say, interest
for the purchase of machinery and equipment?
"calculated" or computed (and not incurred or paid) for the purpose of
determining the "opportunity cost" of investing funds in a given
A. We begin by noting that interest payments on loans incurred by a taxpayer business. Such "theoretical" or imputed interest does not arise from a
(whether BOI-registered or not) are allowed by the NIRC as deductions against legally demandable interest-bearing obligation incurred by the
the taxpayer's gross income. Section 30 of the 1977 Tax Code provided as taxpayer who however wishes to find out, e.g., whether he would have
follows: been better off by lending out his funds and earning interest rather
than investing such funds in his business. One thing that Section 79
Sec. 30. Deduction from Gross Income. — The following may quoted above makes clear is that interest which does constitute a
be deducted from gross income: charge arising under an interest-bearing obligation is an allowable
deduction from gross income.
(a) Expenses:
We have already noted that our 1977 NIRC does not prohibit the deduction of
xxx xxx xxx interest on a loan incurred for acquiring machinery and equipment. Neither
does our 1977 NIRC compel the capitalization of interest payments on such a
(b) Interest: loan. The 1977 Tax Code is simply silent on a taxpayer's right to elect one or
the other tax treatment of such interest payments. Accordingly, the general
rule that interest payments on a legally demandable loan are deductible from
(1) In general. — The amount of interest gross income must be applied.
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: . . . #53 CHINA BANKING VS. CA
(Emphasis supplied)
DOCTRINE:

A. The gain or the loss is ordinary when the property sold or

exchanged is not a capital asset.—An equity investment is a
The general rule is that interest expenses are deductible against gross income capital, not ordinary, asset of the investor the sale or exchange of
and this certainly includes interest paid under loans incurred in connection with which results in either a capital gain or a capital loss. The gain or the
the carrying on of the business of the taxpayer. 20 In the instant case, the CIR loss is ordinary when the property sold or exchanged is not a capital
does not dispute that the interest payments were made by Picop on asset.
loans incurred in connection with the carrying on of the registered operations B. Shares of stock would be ordinary assets only to a dealer in
of Picop, i.e., the financing of the purchase of machinery and equipment securities or a person engaged in the purchase and sale of, or
actually used in the registered operations of Picop. an active trader in securities.
 C. When the shares held by such investor become worthless, the
loss is deemed to be a loss from the sale or exchange of capital When securities become worthless, there is strictly no sale or
assets.—In the hands, however, of another who holds the shares of exchange but the law deems it to be a loss. These are allowed to be deducted
stock by way of an investment, the shares to him would be capital only to the extent of capital gains and not from any other income of the
assets. When the shares held by such investor become worthless, taxpayer. A similar kind of treatment is given by the NIRC on the retirement of
the loss is deemed to be a loss from the sale or exchange of capital certificates of indebtedness with interest coupons or in registered form, short
assets. sales and options to buy or sell property where no sale or exchange strictly
D. When securities become worthless, there is strictly no sale or exists. In these cases, The NIRC dispenses with the standard requirements.
exchange but the law deems the loss anyway to be “a loss from
the sale or exchange of capital assets.”—A capital gain or a capital There is ordinary loss when the property sold is not a capital asset.
loss normally requires the concurrence of two conditions for it to
result: (1) There is a sale or exchange; and (2) the thing sold or In the case, CBC as an investee corporation, is a subsidiary
exchanged is a capital asset. When securities become worthless, corporation of China Banking whose shares in CBC are not intended for
there is strictly no sale or exchange but the law deems the loss purchase or sale but as an investment. An equity investment is a capital asset
anyway to be “a loss from the sale or exchange of capital assets.” of the investor. Unquestionably, any loss is a capital loss to the investor. The
E. Capital losses allowed to be deducted only to the extent of loss cannot be deductible as bad debt since the shares of stock do not
capital gains.—Capital losses are allowed to be deducted only to the constitute a loan extended by it to its subsidiary or a debt subject to obligatory
extent of capital gains, i.e., gains derived from the sale or exchange repayment by the latter.
of capital assets, and not from any other income of the taxpayer. _____________________________________________________________

FACTS: China Banking Corporation made a 53% equity investment #54 Lorenzo T. Oña vs CIR
(P16,227,851.80) in the First CBC Capital – a Hongkong subsidiary engaged
in financing and investment with “deposit-taking” function. It was shown that DOCTRINE:
CBC has become insolvent so China Banking wrote-off its investment as
worthless and treated it as a bad debt or as an ordinary loss deductible from CORPORATION INCOME TAXATION – UNREGISTERED OR
its gross income. CIR disallowed the deduction on the ground that the REGISTERED PARTNERSHIP
investment should not be classified as being worthless. It also held that
assuming that the securities were worthless, then they should be classified as “the income derived from inherited properties may be considered as individual
a capital loss and not as a bad debt since there was no indebtedness between income of the respective heirs only so long as the inheritance or estate is not
China Banking and CBC.
distributed or, at least, partitioned, but the moment their respective known
Q: WON petitioner is allowed to claim for the deductions? shares are used as part of the common assets of the heirs to be used in making
profits, it is but proper that the income of such shares should be considered as
A: NO. The disallowance of the deduction was made on the ground the part of the taxable income of an unregistered partnership.”
that the investment should not be classified as being “worthless” and that,
although the HongKong Banking Commissioner had revoked the license of FACTS: Julia Buńales died leaving as heirs her surviving spouse, Lorenzo
First CBC Capital as a “deposit-taking company” it can still exercise its Ońa and her five children. A settlement of the estate was instituted in the CFI.
financing investments. Also, it should be classified as capital loss and not as The project partition was approved by the Court however, there was no attempt
a bad debts expense there being no indebtedness to speak petitioner and its made to divide the properties listed. Instead, the properties remained under
subsidiary. the management of Lorenzo who used said properties by leasing or selling
them and investing the income derived therefrom and the proceeds from the
Section 29.d.4.B of the NIRC contains provisions on securities sales thereof in real properties and securities. From said investments and
becoming worthless. It conveys that capital loss normally requires the properties petitioners derived such income as profits. Respondent decided that
concurrence of 2 conditions: petitioners formed an unregistered partnership and therefore subject to
a. there is a sale or exchange corporate income tax. Petitioners protested the assessment and asked for
b. the thing sold or exchanges is a capital asset.
reconsideration alleging that they are co-owners of the properties inherited and a. An agreement to contribute money, property or industry to a common
the profits derived from the transactions. fund;
b. Intent to divide the profits among the contracting parties.
Q. Are petitioners subject to corporate income tax?
In the present case:
A. Yes, as a rule, co-ownership is tax exempt. The co-ownership of inherited
properties is automatically converted into an unregistered partnership the
 There is no evidence that petitioners entered into an agreement to
moment the said common properties and/or the income derived therefrom are
contribute money, property or industry to a common fund, and that
used as common fund with intent to produce profits for the heirs in proportion
they intended to divide the profits among themselves.
to their respective shares in the inheritance as determined in the proper
 The transactions were isolated. The character of habituality peculiar
partition either duly executed in an extra-judicial settlement or approved by the
to business transactions for the purpose of gain was not present.
court in the corresponding estate or intestate proceeding. If after such partition,
each heir allows his share to be held in common with his co-heirs under a  The co-ownership started only in 1965 and ended in 1970.
single management to be used with the intent of making profit thereby in
proportion to his share, there can be no doubt that, even if no document or The sharing of returns does not in itself establish a partnership whether or
instrument were executed for the purpose, for tax purposes, at least, an not the persons sharing therein have a joint or common right or interest in the
unregistered partnership is formed and therefore subject to corporate income property. There must be a clear intent to form a partnership, the existence of
tax. a juridical personality different from the individual partners, and the freedom
of each party to transfer or assign the whole property.
G.R. No. 78133 October 18, 1988
In the present case, there is clear evidence of co-ownership between the
petitioners. There is no adequate basis to support the proposition that they
PASCUAL V. CIR
thereby formed an unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few years thereafter
FACTS: did not thereby make them partners. They shared in the gross profits as co-
owners and paid their capital gains taxes on their net profits and availed of
Petitioners bought two (2) parcels of land from Santiago Bernardino, et al. the tax amnesty thereby. Under the circumstances, they cannot be
and they bought another three (3) parcels of land from Juan Roque. The first considered to have formed an unregistered partnership which is thereby
two parcels of land were sold by petitioners in 1968 to Marenir Development liable for corporate income tax, as the respondent commissioner proposes.
Corporation. The three parcels of land were sold by petitioners to Erlinda
Reyes and Maria Samson in 1970. Petitioners realized a net profit 1968 in _____________________________________________________________
the amount of P165,224.70, while they realized a net profit of P60,000.00 in
the sale made in 1970. The corresponding capital gains taxes were paid by #56 OBILLOS, SR. VS. CIR
petitioners in 1973 and 1974 by availing of the tax amnesties granted in the
said years. Petitioners were assessed and required to pay a total amount of Doctrine: Corporation Income Taxation: Unregistered or Registered
P107,101.70 as alleged deficiency corporate income taxes for the years Partnerships
1968 and 1970. Petitioners protested the said assessment in a letter of June
26, 1979 asserting that they had availed of tax amnesties way back in 1974.
To regard the petitioners as having formed a taxable unregistered partnership
would result in oppressive taxation and confirm the dictum that the power to
DOCTRINE / ISSUE / TOPIC
tax involves the power to destroy. As testified by Jose Obillos, Jr., they had no
such intention. They were co-owners pure and simple. To consider them as
A. CO-OWNERSHIP VS. AN UNREGISTERED PARTNERSHIP partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason
Essential elements of a partnership: of that isolated transaction.
 A: A pool is considered a corporation for taxation purposes. Citing the case of
Facts: On 2 March 1973, Joe Obillos Sr. transferred his rights under contract Evangelista v. CIR, the court held that Sec. 24 of the NIRC covered these
with Ortigas Co. to his 4 children to enable them to build residences on the unregistered partnerships and even associations or joint accounts, which had
lots. TCTs were issued. Instead of building houses, a year, the Obillos children
no legal personalities apart from individual members. Further, the pool is a
sold them to Walled City Securities Corporation and Olga Cruz Canda.
Petitioner required the children to pay corporate income tax under the theory partnership as evidence by a common fund, the existence of executive board
that they formed an unregistered partnership or joint venture. and the fact that while the pool is not in itself, a reinsurer and does not issue
any insurance policy, its work is indispensable, beneficial and economically
Q. Are the petitioners liable for corporate income tax? useful to the business of the ceding companies and Munich, because without
it they would not have received their premiums.
A. No, Obillos children are co-owners, it is an isolated act which shows no
intention to from a partnership. To regard the Obillos children as having formed As to the claim of double taxation, the pool is a taxable entity distinct from the
a taxable unregistered partnership would result in oppressive taxation and individual corporate entities of the ceding companies. The tax on its income is
confirm the dictum that the power to tax involves the power to destroy. It
obviously different from the tax on the dividends received by the said
appears that they decided to sell it after they found it expensive to build
houses. The division of the profit was merely incidental to the dissolution of companies. Clearly, there is no double taxation.
the co-ownership which was in the nature of things a temporary state.
_____________________________________________________________ As to the argument on prescription, the prescriptive period was totaled under
the Section 333 of the NIRC, because the taxpayer cannot be located at the
#57 AFISCO INSURANCE CORPORATION vs CA address given in the information return filed and for which reason there was
delay in sending the assessment. Further, the law clearly states that the
DOCTRINE: prescriptive period will be suspended only if the taxpayer informs the CIR of
any change in the address.
Where several local insurance ceding companies enter into a Pool Agreement
or an association that would handle all the insurance businesses covered _____________________________________________________________
under their quota-share reinsurance treaty and surplus reinsurance treaty with
a non-resident foreign reinsurance company, the resulting pool having a #58 Eufemia Evangelista vs CIR & CTA
common fund, and functions through an executive board, and its work is
indispensable, beneficial and economically useful to the business of the ceding DOCTRINE:
companies and the foreign firm, such circumstances indicate a partnership or
CORPORATION INCOME TAXATION – UNREGISTERED OR
an association covered by Section 24 of the NIRC.
REGISTERED PARTNERSHIP
FACTS: AFISCO and 40 other non-life insurance companies entered into a
“To begin with, the tax in question is one imposed upon "corporations", which,
Quota Share Reinsurance Treaties with Munich, a non-resident foreign
strictly speaking, are distinct and different from "partnerships". When our
insurance corporation, to cover for All Risk Insurance Policies over machinery
Internal Revenue Code includes "partnerships" among the entities subject to
erection, breakdown and boiler explosion. The treaties required petitioners to
the tax on "corporations", said Code must allude, therefore, to organizations
form a pool, to which AFISCO and the others complied. On April 14, 1976, the
which are not necessarily "partnerships", in the technical sense of the term.
pool of machinery insurers submitted a financial statement and filed an
Thus, for instance, section 24 of said Code exempts from the aforementioned
“Information Return of Organization Exempt from Income Tax” for the year
tax "duly registered general partnerships," which constitute precisely one of
ending 1975, on the basis of which, it was assessed by the commissioner of
the most typical forms of partnerships in this jurisdiction. Likewise, as defined
Internal Revenue deficiency corporate taxes. A protest was filed but denied by
in section 84(b) of said Code, "the term corporation includes partnerships, no
the CIR.
matter how created or organized." This qualifying expression clearly indicates
Q: Whether or not AFISCO can be validly taxed as a corporation. that a joint venture need not be undertaken in any of the standard forms, or in
confirmity with the usual requirements of the law on partnerships, in order that the amount of P8,457,731.21 representing the thirty-five percent (35%)
one could be deemed constituted for purposes of the tax on corporation. Again, withholding tax at source was deducted. P&G-Phil. filed with CIR a claim for
pursuant to said section 84(b),the term "corporation" includes, among others, refund or tax credit claiming that the applicable rate of withholding tax on the
dividends remitted was only fifteen percent (15%) (and not thirty-five percent
"joint accounts," and "associations", none of which has a legal personality of
[35%]) of the dividends.
its own, independent of that of its members. Accordingly, the lawmaker could
not have regarded that personality as a condition essential to the existence of
DOCTRINE / ISSUE / TOPIC
the partnerships therein referred to. In fact, as above stated, "duly registered
general co-partnerships" — which are possessed of the aforementioned A. LEGAL STANDING OF PETITIONER AS WITHHOLDING AGENT
personality — have been expressly excluded by law (sections 24 and 84[b]) TO CLAIM A REFUND IN BEHALF OF ACTUAL TAX PAYER;
from the connotation of the term "corporation.” DEFINITION OF A TAX PAYER

FACTS: Petitioners borrowed a sum of money from their father which amount Is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC?
together with their personal monies was used by them for the purpose of
buying real properties. The real properties they bought were rented or leased
Taxpayer
to various tenants. The respondent demanded the payment of income tax on
corporations, real estate dealer’s tax, and corporation residence tax. However,
petitioners seek to reversed the letter of demand and be absolved from the Any person subject to tax imposed by the Title [on Tax on Income]."
payment of the taxes in question.
Section 53 (c) of the NIRC: Withholding Agent:
Q. Are petitioners subject to tax on corporations?
One required to deduct and withhold any tax is made personally liable for such
A. Yes, "Corporations" strictly speaking are distinct and different from tax and indeed is indemnified against any claims and demands which the
"partnership". When our Internal Revenue Code includes "partnership" among stockholder might wish to make in questioning the amount of payments
the entities subject to the tax on "corporations", it must be allude to effected by the withholding agent in accordance with the provisions of the
organizations which are not necessarily "partnership" in the technical sense of NIRC.
the term. Section 24 of the Internal Revenue Code exempts from the tax
imposed upon corporations "duly registered general partnership", which  The withholding agent, P&G-Phil., is directly and independently
constitute precisely one of the most typical forms of partnership in this liable for the correct amount of the tax that should be withheld from
jurisdiction. As defined in section 84 (b) of the Internal Revenue Code "the the dividend remittances.
term corporation includes partnership, no matter how created or organized."
 The withholding agent is, moreover, subject to and liable for deficiency
This qualifying expression clearly indicates that a joint venture need not be
assessments, surcharges and penalties should the amount of the tax
undertaken in any of the standards form, or conformity with the usual
withheld be finally found to be less than the amount that should have
requirements of the law on partnerships, in order that one could be deemed
been withheld under law.
constituted for the purposes of the tax on corporations.
_____________________________________________________________
A "person liable for tax" has been held to be a "person subject to tax" and
properly considered a "taxpayer." 4 The terms liable for tax" and "subject to
#59 CIR v. PROCTER AND GAMBLE tax" both connote legal obligation or duty to pay a tax.

FACTS: By any reasonable standard, such a person should be regarded as a party in

interest, or as a person having sufficient legal interest, to bring a suit for refund
For the taxable year 1974 AND 1975, private respondent Procter and Gamble of taxes he believes were illegally collected from him.
Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends
payable to its parent company and sole stockholder, Procter and Gamble Co., Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue:
Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which dividends
  The withholding agent is constituted the agent of both the Government _____________________________________________________________
and the taxpayer. With respect to the collection and/or withholding of
the tax, he is the Government's agent. In regard to the filing of the #60 CYANAMID PHIL. INC V CA
necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. The withholding agent, Doctrine:
therefore, is no ordinary government agent especially because under A.Accumulated Earnings Tax—Tax avoidance thru corporate surplus
Section 53 (c) he is held personally liable for the tax he is duty bound accumulation
to withhold; whereas the Commissioner and his deputies are not made
liable by law. 6 When corporations do not declare dividends, income taxes are not paid on the
undeclared dividends received by the shareholders. The tax on improper
accumulation of surplus is essentially a penalty tax designed to compel
The withholding agent is also an agent of the beneficial owner of the dividends
corporations to distribute earnings so that the said earnings by shareholders
with respect to the filing of the necessary income tax return and with respect
could, in turn, be taxed.
to actual payment of the tax to the government.
B. Tax Exemption
Such authority may reasonably be held to include the authority to file a claim
Laws granting exemption from tax are construed strictissimi juris against the
for refund and to bring an action for recovery of such claim. This implied
taxpayer and liberally in favor of the taxing power. Taxation is the rule and
authority is especially warranted where, is in the instant case, the withholding
exemption is the exception. The burden of proof rests upon the party claiming
agent is the wholly owned subsidiary of the parent-stockholder and therefore,
exemption to prove that it is, in fact, covered by the exemption so claimed.
at all times, under the effective control of such parent-stockholder. In the
circumstances of this case, it seems particularly unreal to deny the implied
authority of P&G-Phil. to claim a refund and to commence an action for such
refund. Facts: Petitioner, Cyanamid Philippines, Inc., a corporation organized under
Philippine laws, is a wholly owned subsidiary of American Cyanamid Co.
based in Maine, USA. It is engaged in the manufacture of pharmaceutical
P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section products and chemicals, a wholesaler of imported finished goods, and an
309, NIRC, and as impliedly authorized to file the claim for refund and the suit importer/indenter.
to recover such claim.
February 7, 1985, the CIR sent an assessment letter to petitioner and
B. CONSTRUCTION OF TAX STATUTES demanded the payment of deficiency in come tax of P119,817 for taxable year
1981 which the petitioner on March 4, 1985, protested particularly (1) 25%
An interpretation of a tax statute that produces a revenue flow for the surtax assessment of P3,774,867.50; (2) 1981 deficiency income tax
government is not, for that reason alone, necessarily the correct reading assessment of P119,817; (3) 1981 deficiency percentage assessment of
of the statute. There are many tax statutes or provisions which are designed, P3,346.72. CIR refused to allow the cancellation of the assessment notices.
not to trigger off an instant surge of revenues, but rather to achieve longer-
term and broader-gauge fiscal and economic objectives. The task of our During the pendency of the case on appeal to the CTA, both parties agreed to
Court is to give effect to the legislative design and objectives as they are compromise the 1981 deficiency income assessment of P119,817 and
written into the statute even if, as in the case at bar, some revenues have reduced to P26,577 as compromise settlement. But the surtax on improperly
to be foregone in that process. accumulated profits remained unresolved. Petitioner claimed that the
assessment representing the 25% surtax had no legal basis for the following
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of reasons: (a) petitioner accumulated its earnings and profits for reasonable
foreign equity investment in the Philippines by reducing the tax cost of business requirements to meet working capital needs and retirement of
earning profits here and thereby increasing the net dividends remittable indebtedness, (b) petitioner is wholly owned subsidiary of American Cyanamid
to the investor. Co., a corporation organized under the laws of the State of Maine, in the USA,
whose shares of stock are listed and traded in New York Stock Exchange. This
being the case, no individual shareholder of petitioner could have evaded or
Private respondent P&G-Phil, is entitled to the tax refund or tax credit
prevented the imposition of individual income taxes by petitioner’s
which it seeks.
accumulation of earnings and profits, instead contribution of the same.
CTA denied said petition.

Q. Is petitioner is liable for the accumulated earnings tax for the year 1981?

A. Yes. The amendatory provision of Sec. 25 of the 1977 NIRC, which was
PD1739, enumerated the corporations exempt from the imposition of
improperly accumulated tax: (a) banks, (b) non-bank financial intermediaries;
(c) insurance companies; and (d) corporations organized primarily and
authorized by the Central Bank to hold shares of stocks of banks. Petitioner
does not fall among those exempt classes. Besides, the laws granting
exemption form tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule and exemption is the
exception. The burden of proof rests upon the party claiming the exemption to
prove that it is, in fact, covered by the exemption so claimed; a burden which
petitioner here has failed to discharge.

Unless rebutted, all presumptions generally are indulged in favor of the

correctness of the CIR’s assessment against the taxpayer. With petitioner’s
failure to prove the CIR incorrect, clearly and conclusively, this court is
constrained to uphold the correctness of tax court’s ruling as affirmed by the
CA.
Another point raised by the petitioner in objecting to the assessment, is that
increase of working capital by a corporation justifies accumulating income..
Petitioner relies on the so-called "Bardahl" formula, which allowed retention,
as working capital reserve, sufficient amounts of liquid assets to carry the
company through one operating cycle. The "Bardahl"[17] formula was
developed to measure corporate liquidity. The formula requires an
examination of whether the taxpayer has sufficient liquid assets to pay all of
its current liabilities and any extraordinary expenses reasonably
anticipated, plus enough to operate the business during one operating cycle.
Operating cycle is the period of time it takes to convert cash into raw materials,
raw materials into inventory, and inventory into sales, including the time it takes
to collect payment for the sales.

In order to determine whether profits are accumulated for the reasonable

needs of the business to avoid the surtax upon shareholders, it must be shown
that the controlling intention of the taxpayer is manifested at the time of
accumulation, not intentions declared subsequently, which are mere
afterthoughts.[28] Furthermore, the accumulated profits must be used within a
reasonable time after the close of the taxable year. In the instant case,
petitioner did not establish, by clear and convincing evidence, that such
accumulation of profit was for the immediate needs of the business.