Marcelo Steel v.

Collector (1960)
FACTS: The petitioner, a corporation engaged in manufacturing wire fence, nails, and steel bars, enjoyed tax exemption
under Republic Act No. 35 for its nail and steel manufacturing operations during the years 1952 and 1953. Initially, the
petitioner filed income tax returns only reflecting profits from its wire fence manufacturing, a taxable activity.
Subsequently, it filed amended income tax returns showing significant losses from its tax-exempt nail and steel
manufacturing. Claiming these losses, the petitioner requested a refund of the income taxes previously paid.

ISSUES: Whether the petitioner can deduct losses from its tax-exempt industries against profits from its taxable business
activities.

Whether the action for refund has prescribed under Section 306 of the Tax Code, specifically regarding the tax paid on
May 30, 1953.

RULING: The Court of Tax Appeals held that the petitioner cannot deduct losses from its tax-exempt industries against
profits from its taxable activities. Republic Act No. 35, which granted tax exemption, aimed to encourage the
establishment of new and necessary industries by lightening financial burdens and reducing losses. However, it did not
intend to allow deduction of losses from tax-exempt industries against profits from taxable ones. The law treated taxable
and tax-exempt industries separately for taxation purposes.

Regarding the action for refund, the Court affirmed the judgment, stating that the action has not prescribed. The
petitioner's claim for refund was filed within the prescribed period under Section 306 of the Tax Code, safeguarding its
rights.

Fernandez Hermanos v. CIR

FACTS: Four cases involve two decisions of the Court of Tax Appeal is determining the taxpayer's income tax liability for
the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of Internal Revenue, as
petitioner and respondent in the cases a quo respectively , appealed from the Tax Court's decisions, insofar as their
respective contentions on particular tax items were therein resolved against them. Since the issues raised are inter
related, the Court resolves the four appeals in this joint decision.

The taxpayer , Fernandez Hermanos, Inc. , is a domestic corporation organized for the principal purpose of engaging in
business as an "investment company" with main office at Manila. Upon verification of the taxpayer's income tax returns
for the period in question, the Commissioner of Internal Revenue assessed against the taxpayer the sums of P13,414.00,
P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency income taxes for the years 1950, 1951, 1952,
1953 and 1954, respectively. Said assessments were the result of alleged discrepancies found upon the examination and
verification of the taxpayer's income tax returns for the said years.

ISSUE: Whether the deductions are allowable under the tax code.

RULING: The Tax Court's decision to allow the taxpayer to write off the cost of shares of stock of Mati Lumber Co. as
worthless securities in its 1950 return has been upheld. The Mati Lumber Co. ceased operations in 1949 with no assets
remaining, making the writing off of the stock justified. If the company were to realize proceeds from its remaining assets
in the future and distribute them to stockholders, including the taxpayer, any amount received would be reportable as
income in the year it is received.

1|Page
The Tax Court's decision to disallow the taxpayer's writing-off of the sum of P353,134.25 as a loss or bad debt in 1951,
which it had advanced to Palawan Manganese Mines, Inc., was deemed appropriate. The advances made to the
taxpayer's 100% subsidiary were considered investments rather than loans. Evidence revealed that the board of directors
of both companies were identical since August 1945, and Palawan Manganese Mines, Inc. had only a capital of P100,000
listed in the taxpayer's balance sheet as its investment in the subsidiary. This close relationship between the companies
indicated that the advances were more akin to investments, especially given the subsidiary's poor financial state.

The Tax Court's decision was upheld regarding the subsidiary company's continued operation in 1951 and 1952, with the
taxpayer still providing advances during those years. As a result, the alleged debt or investment couldn't be considered
worthless and deductible in 1951 as claimed. Additionally, deductions for losses or bad debts under the Tax Code must
be fully ascertained and written off during the taxable year, with no provision for partial deductions. Therefore, partial
writing-off of a loss or bad debt, as attempted by the taxpayer, was not permissible under the Tax Code.

The Court upheld the Tax Court's decision to disallow the taxpayer's claim for deductions of sums spent on operating
its Balamban coal mine in Cebu in 1950 and 1951 as losses . The losses were deemed deductible only in 1952, when
the mines were abandoned, not in the preceding years when they were still operational. The taxpayer's argument that
the expenditures should be allowed as losses for the years incurred due to the absence of coal sales was rejected, as a
definite event like the actual abandonment of the mines in 1952 was necessary to fix the time when the loss occurred.

The Court upheld the Tax Court's decision to overrule the Commissioner's disallowance of losses in Hacienda Dalupiri
for the years 1950 to 1954 and Hacienda Samal for the years 1951 to 1952 . The Commissioner conceded that Revenue
Regulations No. 2, Section 100, did not specify how inventories should be made, and the Tax Court found the evidence
presented by the taxpayer satisfactory. The evidence included a physical count of the number of livestock in the
haciendas and the taxpayer's method of reporting based on receipts and disbursements as a farmer.

Where it is shown that the increase in the taxpayer's net worth were not the result of the receipt by it of unreported or
unexplained taxable income but were merely the result of the correction of errors in its entries in its books relating to its
debtedness to certain creditors, which had been erroneously overstated or listed as outstanding when they had in fact
duly paid, these increase in the taxpayer's net worth were not taxable increases in net worth.

The taxpayer contended that it could use its "capital investment" as a method for depletion, deducting one-fifth of this
investment every year, regardless of actual mining or sales. However, the court ruled against this, stating that the
"capital investment" method was not recognized as a depletion method. The Tax Code, before its amendment by
Republic Act No. 2698, limited depletion allowances to the amount of capital invested. Therefore, the taxpayer's
deduction of 1/5 of the mines' cost annually was not authorized under the Tax Code

Basilan Estate, Inc. v. CIR (1967)

FACTS: Basilan Estates, Inc., a Philippine corporation in the coconut industry, filed its income tax returns for 1953 on
March 24, 1954, paying an income tax of P8,028. However, on February 26, 1959, the Commissioner of Internal Revenue
assessed Basilan Estates, Inc. a deficiency income tax of P3,912 for 1953 and a 25% surtax on unreasonably accumulated
profits of P86,876.85. The company contested this assessment, arguing that the period for assessment and collection
had prescribed, and disputed the disallowance of certain deductions and the imposition of the surtax.

ISSUES: Whether the Commissioner's right to collect the deficiency income tax had prescribed.
Whether the disallowance of certain deductions was proper.

2|Page
Whether there were unreasonably accumulated profits, and if so, whether the 25% surtax should be imposed for the
entire surplus from 1947-1953 or only for 1953.
Whether the petitioner was exempt from the penalty tax under Republic Act 1823.

RULING: The court ruled that the Commissioner's right to collect the deficiency income tax had not prescribed, as the
notice of assessment was issued within the five-year period allowed by law, even if the taxpayer received it after the five-
year period.

The court upheld the disallowance of certain deductions, including depreciation beyond the acquisition cost of assets,
but allowed deductions for travelling and miscellaneous expenses.

The court found that there were unreasonably accumulated profits in 1953, based on various factors such as large
withdrawals by shareholders, investments in assets unrelated to the business, and reversion of reserved funds to surplus
without clear plans for their use. The 25% surtax was imposed on the unreasonably accumulated profit for 1953.

The court held that the petitioner was not exempt from the penalty tax under Republic Act 1823, as the accumulation
occurred in 1953, before the amendment took effect in 1957.

RR 12-2012 (on depreciation of motor vehicles)

- see attached -

Roxas v. CTA (1968)

FACTS: Antonio, Eduardo and Jose Roxas, brothers and at the same time partners of the Roxas y Compania, inherited
from their grandparents several properties which included farmlands. The tenants expressed their desire to purchase the
farmland. The tenants, however, did not have enough funds, so the Roxases agreed to a purchase by installment.
Subsequently, the CIR demanded from the brothers the payment of deficiency income taxes resulting from the sale,
100% of the profits derived therefrom was taxed. The brothers protested the assessment but the same was denied. On
appeal, the Court of Tax Appeals sustained the assessment. Hence, this petition.

ISSUE: Is Roxas liable?

RULING: No. It should be borne in mind that the sale of the farmlands to the very farmers who tilled them for
generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of our
Government to allocate lands to the landless.

In order to maintain the general public’s trust and confidence in the Government this power must be used justly and not
treacherously. It does not conform with the sense of justice for the Government to persuade the taxpayer to lend it a
helping hand and later on penalize him for duly answering the urgent call.

In fine, Roxas cannot be considered a real estate dealer and is not liable for 100% of the sale. Pursuant to Section 34 of
the Tax Code, the lands sold to the farmers are capital assets and the gain derived from the sale thereof is capital gain,
taxable only to the extent of 50%.

3|Page
Trebilcock v. Commissioner (1977)
FACTS: Lionel Trebilcock (plaintiff), the owner of a wood-products brokerage company called Litco Products (Litco), hired
Reverend James Wardrop to minister to his employees. To do so, Wardrop held prayer meetings and counseled Litco
employees on personal and business matters. Wardrop had no business experience and gave business advice based on
answers he received during prayer. In addition to ministering and counseling, Wardrop performed various business-
related tasks for Litco, including running errands, visiting sawmills, and dropping off mail. Trebilcock deducted the
amount he paid Wardrop from his income taxes as business expenses. The Commissioner of Internal Revenue (the
Commissioner) (defendant) disallowed all of Trebilcock’s deductions related to Wardrop’s employment and reclassified
the expenses as personal expenses. Trebilcock petitioned the United States Tax Court for a redetermination.
Petitioner and his wife deducted the $ 7,020 paid to Wardrop in both 1969 and 1970 as an ordinary and necessary
business expense under section 162(a)

ISSUE: Whether petitioner may deduct $ 7,020 paid in both 1969 and 1970 to Wardrop, who conducted prayer meetings,
ministered to petitioner and his employees, and performed various business-related tasks

RULING: Only $ 1,000 of the $ 7,020 paid Wardrop in each year was deductible under section 162(a). The case of Fred W.
Amend Co. is applicable here. Fred W. Amend (hereinafter Amend) was treasurer and chairman of the board of the Fred
W. Amend Co. (hereinafter company), an Illinois corporation manufacturing jellied candies. R. M. Halverstadt *854
(hereinafter Halverstadt) was a Christian Science practitioner and teacher. Amend sought the assistance of Halverstadt in
both business and personal matters. Halverstadt did not offer concrete solutions to Amend's problems but tried instead
to induce new spiritual awareness in Amend so that he could approach problems with detachment and understanding.
At first Amend paid Halverstadt personally for his assistance and was reimbursed by the company for assistance
attributable to its affairs. Eventually, however, the company paid Halverstadt directly; it put him on retainer so that he
would be available whenever a business problem arose. Amend continued to pay Halverstadt for consultations relating to
personal problems; the company did not reimburse him for these payments. After the company put Halverstadt on
retainer, his assistance was available to various members of the company's supervisory staff, but Amend alone consulted
him. The company deducted the fee paid to Halverstadt as "professional services" under section 162.

This Court conceded that Halverstadt's consultations promoted Amend's spiritual balance and thus allowed him to cope
more easily with the strain of running a large business. But we noted that Halverstadt's aid did not sharpen his business
skills; instead, it gave him heightened spiritual awareness. We concluded that Halverstadt's services were no different
from those regularly provided by ministers, that all benefits derived from such services are inherently personal in nature,
and that the proscription of section 262 against deduction of personal expenses prohibited deduction under section 162.

In this case, Wardrop provided counsel to the petitioner and their employees on business matters, claiming to receive
solutions through prayer. The court found these payments non-deductible as they did not arise from Wardrop's expertise
and lacked proof of being ordinary business expenses. However, payments for Wardrop's other business-related tasks
were deemed deductible, with $1,000 allocated for each year, as precise allocation was not possible, following the
principle in Cohan v Commissioner.. Thus, $1,000 for each year was deductible under section 162, while the remainder
was not deductible under section 262.

4|Page
Pevsner v. Commissioner (1980)
FACTS: Since June 1973 Sandra J. Pevsner, taxpayer,2 has been employed as the manager of the Sakowitz Yves St.
Laurent Rive Gauche Boutique located in Dallas, Texas. The boutique sells only women's clothes and accessories
designed by Yves St. Laurent (YSL)

The taxpayer, acting as the manager of a boutique, is required by her employer to wear Yves Saint Laurent (YSL) clothing
while on duty. This expectation extends to projecting an exclusive lifestyle and staying updated on YSL fashion trends.
She is also expected to disclose that her attire is from YSL when customers inquire. The requirement to wear YSL extends
beyond work hours, including during commuting, fashion events, and business gatherings representing the boutique.
Throughout 1975, the taxpayer purchased various YSL items at an employee discount, totaling $1,381.91. Additionally,
$240 was spent on maintaining these items.

On her joint federal income tax return for 1975, taxpayer deducted $990 as an ordinary and necessary business expense
with respect to her purchase of the YSL clothing and accessories. However, in the tax court, taxpayer claimed a deduction
for the full $1381.91 cost of the apparel and for the $240 cost of maintaining the apparel. The tax court allowed the
taxpayer to deduct both expenses in the total amount of $1621.91. The tax court reasoned that the apparel was not
suitable to the private lifestyle maintained by the taxpayer. This appeal by the Commissioner followed.

The Commissioner stipulated that the taxpayer was required by her employer to wear YSL clothing and that she did not
wear such apparel apart from work. The Commissioner maintained, however, that a deduction should be denied because
the YSL clothes and accessories purchased by the taxpayer were adaptable for general usage as ordinary clothing and she
was not prohibited from using them as such.

ISSUE: Whether the taxpayer is entitled to deduct as an ordinary and necessary business expense the cost of purchasing
and maintaining the YSL clothes and accessories worn by the taxpayer in her employment as the manager of the
boutique.

RULING: No. The generally accepted rule governing the deductibility of clothing expenses is that the cost of clothing is
deductible as a business expense only if: (1) the clothing is of a type specifically required as a condition of employment,
(2) it is not adaptable to general usage as ordinary clothing, and (3) it is not so worn.

The tax court relied heavily upon Yeomans v. Commissioner, 30 T.C. 757 (1958). In Yeomans, the taxpayer was employed
as fashion coordinator for a shoe manufacturing company. Her employment necessitated her attendance at meetings of
fashion experts and at fashion shows sponsored by her employer. On these occasions, she was expected to wear clothing
that was new, highly styled, and such as "might be sought after and worn for personal use by women who make it a
practice to dress according to the most advanced or extreme fashions." However, for her personal wear, Ms. Yeomans
preferred a plainer and more conservative style of dress. As a consequence, some of the items she purchased were not
suitable for her private and personal wear and were not so worn. The tax court allowed a deduction for the cost of the
items that were not suitable for her personal wear. Although the basis for the decision in Yeomans is not clearly stated,
the tax court in the case sub judice determined that a careful reading of Yeomans shows that, without a doubt, the Court
based its decision on a determination of Ms. Yeomans' lifestyle and that the clothes were not suitable for her use in such
lifestyle. Furthermore, the Court recognized that the clothes Ms. Yeomans purchased were suitable for wear by women
who customarily wore such highly styled apparel, but such fact did not cause the court to decide the issue against her.
Thus, Yeomans clearly decides the issue before us in favor of the petitioner.

5|Page
An objective approach was also taken by the tax court in Drill v. Commissioner, 8 T.C. 902 (1947). Under an objective
test, no reference is made to the individual taxpayer's lifestyle or personal taste. Instead, adaptability for personal or
general use depends upon what is generally accepted for ordinary street wear.

The Commissioner argues for an objective test regarding the deductibility of clothing expenses for tax purposes, citing
administrative necessity and fairness among taxpayers. This test relies on objective facts rather than subjective
considerations like personal taste or lifestyle. The tax court's reliance on subjective factors lacks concrete guidelines
and may lead to unfair outcomes. Therefore, the decision upholding the deduction for the taxpayer's purchase of Yves
Saint Laurent (YSL) clothing is reversed, along with the deduction for maintenance costs.

McCabe v. Commissioner (1982)

FACTS: Dennis McCabe, a police officer in New York City, was required to carry his service revolver at all times while in
the city. His commute from Suffern, NY, to work led him through New Jersey, where carrying a weapon required a permit
he could not obtain. New Jersey law permitted carrying weapons only for official duties or urgent needs, making it
unlawful for New York City police officers to carry firearms through New Jersey without a permit. McCabe claimed a
$2,950 deduction for automobile expenses on his tax return due to this requirement. The Commissioner of Internal
Revenue disallowed the deduction, a decision upheld by the Tax Court. The appellate court affirms this decision.

ISSUE: When the ordinary and necessary business deduction embodied in Internal Revenue Code (I.R.C.) section 162(a)
(1976)6 may properly be claimed.

RULING: Internal Revenue Code section 162 is concerned with expenses incurred as a direct result of engaging in
business. For appellant to prevail he must establish that his expense falls within the general provisions of section 162(a) -
ordinary and necessary expenses of carrying on a trade or business. We agree with the determination of the Tax Court
that petitioner failed to meet his burden in this regard. For section 162 purposes "ordinary" means normal and
expected; "necessary" means appropriate and helpful.

One well-established rule in tax law is that expenses incurred as a result of commuting from home to work are personal
and not deductible under section 162. Treasury Regulation section 1.162-2(e) provides that "commuters' fares are not
considered as business expenses and are not deductible.

In Fausner v. Commissioner, an exception to the general rule regarding commuting expenses was acknowledged. While
commuting expenses are generally not deductible, the court recognized that additional expenses incurred for
transporting job-required tools and materials could potentially be allocated between personal and business expenses .
However, the court provided limited guidance on the circumstances triggering such allocation, emphasizing the need to
establish the requirements of section 162(a) (ordinary and necessary) before proceeding with allocation. The taxpayer
must first establish "the necessity of transporting work implements to and from work." Giving the word "necessity" its
usual meaning in tax law, it again appears that the taxpayer must establish that the additional expenses were
appropriate and helpful to the employer's legal business and not personal in nature.

6|Page
US v. Correll (1967)
FACTS: The respondent in this case was a traveling salesman for a wholesale grocery company in Tennessee. He
customarily left home early in the morning, ate breakfast and lunch on the road, and returned home in time for dinner.
In his income tax returns for 1960 and 1961, he deducted the cost of his morning and noon meals as "traveling expenses"
incurred in the pursuit of his business "while away from home" under § 162(a)(2) of the Internal Revenue Code of 1954.
Because the respondent's daily trips required neither sleep nor rest, the Commissioner disallowed the deductions, ruling
that the cost of the respondent's meals was a "personal, living" expense under § 262, rather than a travel expense under
§ 162(a)(2). The respondent paid the tax, sued for a refund in the District Court, and there received a favorable jury
verdict.

Under § 162(a)(2), taxpayers "traveling . . . away from home in the pursuit of trade or business" may deduct the total
amount "expended for meals and lodging" As a result, even the taxpayer who incurs substantial hotel and restaurant
expenses because of the special demands of business travel receives something of a windfall, for at least part of what he
spends on meals represents a personal living expense that other taxpayers must bear without receiving any deduction at
all. Not surprisingly, therefore, Congress did not extend the special benefits of § 162(a)(2) to every conceivable situation
involving business travel. It made the total cost of meals and lodging deductible only if incurred in the course of travel
that takes the taxpayer "away from home." The problem before us involves the meaning of that limiting phrase.

In resolving that problem, the Commissioner has avoided the wasteful litigation and continuing uncertainty that would
inevitably accompany any purely case-by-case approach to the question of whether a particular taxpayer was "away from
home" on a particular day. Rather than requiring "every meal-purchasing taxpayer to take pot luck in the courts," the
Commissioner has consistently construed travel "away from home" to exclude all trips requiring neither sleep nor rest.

ISSUE: Whether the traveling expenses is deductible expense.

RULING: No. The Court upheld the rule, stating that it achieved ease, certainty, and fairness in application, and fell within
the Commissioner's authority to implement the statute. The Court rejected arguments against the rule, finding it
consistent with congressional intent and reasonable in its application.

Hantzis v. Commissioner (1981)

FACTS: In 1975, Catharine Hantzis, a law student at Harvard, worked as a legal assistant in New York City for ten weeks
during the summer while her husband remained in Boston. They jointly reported her earnings ($3,750) on their tax
return and deducted transportation, rent for a New York apartment, and meal expenses ($3,204) related to her
employment.

The Commissioner disallowed the deduction on the ground that taxpayer's home for purposes of section 162(a) (2) was
her place of employment and the cost of traveling to and living in New York was therefore not "incurred ... while away
from home." The Commissioner also argued that the expenses were not incurred "in the pursuit of a trade or business."
Both positions were rejected by the Tax Court, which found that Boston was Mrs. Hantzis' home because her
employment in New York was only temporary and that her expenses in New York were "necessitated" by her
employment there. The court thus held the expenses to be deductible under section 162(a) (2).

7|Page
ISSUE: Whether expenses is deductible.

RULING: Section 262 of the Code, 26 U.S.C. § 262 (1976), declares that "except as otherwise provided in this chapter, no
deductions shall be allowed for personal, living, or family expenses." Section 162 provides less of an exception to this
rule than it creates a separate category of deductible business expenses. This category manifests a fundamental principle
of taxation: that a person's taxable income should not include the cost of producing that income. "One of the specific
examples given by Congress" of a deductible cost of producing income is travel expenses in section 162(a) (2).

To be deductible under section 162(a) (2), an expense must be "incurred ... in the pursuit of a trade or business." In
Flowers the Supreme Court read this phrase to mean that "the exigencies of business rather than the personal
conveniences and necessities of the traveler must be the motivating factors." Of course, not every travel expense
resulting from business exigencies rather than personal choice is deductible; an expense must also be "ordinary and
necessary" and incurred "while away from home." But the latter limitations draw also upon the basic concept that only
expenses necessitated by business, as opposed to personal, demands may be excluded from the calculation of taxable
income.

The passage discusses the deductibility of travel expenses for tax purposes. It argues against the Commissioner's stance
that travel expenses are only deductible if incurred in connection with a preexisting trade or business. The argument
highlights legal cases and principles suggesting that such a requirement would be overly restrictive and inconsistent with
the purpose of the deduction. It provides examples to support the assertion that travel expenses should be considered a
necessary cost of producing income, regardless of whether the taxpayer had a preexisting trade or business.

As already noted, Flowers construed section 162(a) (2) to mean that a traveling expense is deductible only if it is (1)
reasonable and necessary, (2) incurred while away from home, and (3) necessitated by the exigencies of business.

We hold merely that for a taxpayer in Mrs. Hantzis' circumstances to be "away from home in the pursuit of a trade or
business," she must establish the existence of some sort of business relation both to the location she claims as "home"
and to the location of her temporary employment sufficient to support a finding that her duplicative expenses are
necessitated by business exigencies. This, we believe, is the meaning of the statement in Flowers that "business trips
are to be identified in relation to business demands and the traveler's business headquarters." On the uncontested
facts before us, Mrs. Hantzis had no business relation to Boston; we therefore leave to cases in which the issue is
squarely presented the task of elaborating what relation to a place is required under section 162(a) (2) for duplicative
living expenses to be deductible.

Moss v. Commissioner (1983)

FACTS: John Moss (plaintiff) was an attorney at a busy law firm. Every day, the lawyers at the firm met at a café near the
courthouse for a lunch meeting to discuss the firm’s business. Because the lawyers were busy and often spent the day
outside the firm’s office, the lunch meetings were the most convenient time and location for the lawyers to convene and
exchange advice. The firm paid for the daily lunches. Moss deducted his share of the lunch costs on his income-tax return
as business expenses. The Commissioner of Internal Revenue (the Commissioner) (defendant) disallowed the deductions.
The Commissioner viewed the cost of the food at the daily lunch meetings as inherently personal expenses. Moss
petitioned the United States Tax Court for a redetermination.

8|Page
Tax code explains that while certain sections disallow deductions for personal expenses, others allow deductions for
ordinary and necessary business expenses. It clarifies that Moss, as a partner, doesn't fall under the provisions for
employees' meal deductions or deductions for travel expenses away from home. However, meals can still be deductible
as ordinary and necessary business expenses under section 162(a), provided they are substantiated with proper records,
even if not explicitly permitted by other provisions.

ISSUE: Whether meals is a business expense.

RULING: No. The tax deduction for business meals can lead to excessive spending, prompting the IRS to require proof of
a genuine business necessity. It suggests that meals with clients or outsiders can enhance business relationships and
communication, thereby reducing transaction costs. However, it posits that daily meals among coworkers, like in Moss's
firm, may not always serve a necessary business purpose since they already know each other well. It concludes that
while occasional lunches for relationship-building may be necessary for larger firms, Moss's small firm did not require
daily lunches for relationship cementing.

The deductibility of business meal expenses depends on factors such as frequency, necessity, and circumstances. The Tax
Court ruled against deducting the cost of frequent lunches, indicating that daily meals for a full year may be excessive.
Regarding Moss's firm, while daily lunch meetings were convenient, it questions whether the expense was truly
necessary for conducting business. It suggests that if the restaurant choice was favorable and the meal cost wasn't
excessive, the deduction might not be warranted. Additionally, it notes that monotony or occasional changes in venue
don't affect the deduction's validity.

Commissioner v. Soliman (1992)

FACTS: Nader E. Soliman (plaintiff) was an anesthesiologist who worked between three hospitals. None of the hospitals
provided Soliman with an office, so he used a spare bedroom in his condominium as a home office. Soliman used the
office for 10 to 15 hours a week making phone calls, maintaining records, preparing for work, and staying up to date on
continuing-education requirements and medical journals. Soliman did not meet with patients in the office. Soliman
deducted a portion of his condominium fees and utilities, as well as depreciation, on his income-tax return as expenses
related to his home office as allowed by § 280A of the Internal Revenue Code.

The Commissioner of Internal Revenue (the Commissioner) (defendant) disallowed the deductions, arguing that the
home office was not Soliman’s principal place of business. Soliman petitioned the United States Tax Court for a
redetermination. The tax court reversed the Commissioner and held that the home office was Soliman’s principal place
of business. The Court of Appeals for the Fourth Circuit affirmed the tax court and explained that a home office can be a
taxpayer’s principal place of business if the taxpayer spends a substantial amount of time in his home office performing
essential management or administrative activities and has no other location to perform those activities. The tax court
and court of appeals both abandoned the focal-point test, which looked at where a taxpayer performed the services he
was paid for. The Commissioner appealed.

ISSUE: Whether Soliman is entitled to business expenses.

RULING: Soliman was not entitled to a deduction for home office expenses. The test used by the Court of Appeals is
rejected because it fails to undertake a comparative analysis of the taxpayer's various business locations. This Court looks

9|Page
to words' "ordinary, everyday senses" in interpreting a revenue statute's meaning. Section 280A(c)(1)(A) refers to the
"principal place of business," and both the commonsense and dictionary meanings of "principal" demonstrate that this
constitutes the most important or significant place for the business, as determined through a comparison of all of the
places where business is transacted. Contrary to the Court of Appeals' suggestion, the statute does not allow for a
deduction whenever a home office may be characterized as legitimate.

There are two primary considerations in deciding whether a home office is the principal place of business. First, the
relative importance of the functions performed at each business location must be analyzed. This requires, as a
preliminary step, an objective description of the particular characteristics of the business in question. If the nature of
that business requires the taxpayer to meet or confer with a client or patient or to deliver goods or services to a
customer, the place where that contact occurs, though not conclusive, must be given great weight. Moreover, if the
nature of the business requires that its services are rendered or its goods are delivered at a facility with unique or special
characteristics, this is a further and weighty consideration. Contrary to the Court of Appeals' ruling, the essentiality of
the functions performed at home, while relevant, is not controlling, whereas the availability of alternative office space is
irrelevant. Second-and particularly if the foregoing analysis yields no definitive answer-the decisionmaker should
compare the amount of time spent at the home with the time spent in each of the other places where the business is
transacted. If the comparative analysis required by the statute reveals that there is no principal place of business, the
courts and the Commissioner should not strain to conclude that a home office qualifies by default.

Application of these principles demonstrates that Soliman's home office was not his principal place of business. His home
office activities, from an objective standpoint, must be regarded as less important to his business than the tasks he
performed at the hospitals. The actual treatment of patients at these facilities having special characteristics was the
essence of the professional service he provided and was therefore the most significant event in the professional
transaction. Moreover, the hours he spent in the home office, when compared to the time he spent at the hospitals, are
insufficient to render the home office the principal place of business in light of all of the circumstances of this case.

Woodward v. Commissioner (1970)

FACTS: Woodward and others (collectively, the majority shareholders) (plaintiffs) were majority shareholders in the
Telegraph-Herald, an Iowa newspaper. When a dispute arose among the shareholders, the dissenters exercised their
appraisal rights under state law and sought to require the majority shareholders to purchase the dissenters’ shares at
their real value. When the parties could not agree on the value of the dissenters’ shares, the district court ordered an
appraisal, for which the majority shareholders paid more than $25,000 in attorneys’, accountants’, and appraisers’ fees.
The majority shareholders sought to deduct these fees under Internal Revenue Code § 212, which allowed the deduction
of ordinary and necessary expenses incurred in connection with income-producing property. The commissioner of
Internal Revenue (defendant) disallowed the deduction, and the majority shareholders appealed to the United States Tax
Court. The tax court affirmed the commissioner, and Woodward and the majority shareholders appealed to the United
States Court of Appeals for the Eighth Circuit, which affirmed the tax court’s denial of the deduction. The majority
shareholders appealed to the United States Supreme Court.

ISSUE: Whether such expenses is deductible.

RULING: No. The expenses incurred by petitioners must be treated as part of their cost in acquiring the stock, rather
than as ordinary expenses, since the appraisal proceeding was merely the substitute provided by state law for the

10 | P a g e
process of negotiation to fix the price at which the stock was to be purchased. The appropriate standard here is the
origin of the claim litigated, rather than the taxpayers' "primary purpose" in incurring the appraisal litigation expenses

INDOPCO v. Commissioner (1992)

FACTS: On its 1978 federal income tax return, petitioner corporation claimed a deduction for certain investment banking
fees and expenses that it incurred during a friendly acquisition in which it was transformed from a publicly held,
freestanding corporation into a wholly owned subsidiary. After respondent Commissioner disallowed the claim,
petitioner sought reconsideration in the Tax Court, adding to its claim deductions for legal fees and other acquisition-
related expenses. The Tax Court ruled that because long-term benefits accrued to petitioner from the acquisition, the
expenditures were capital in nature and not deductible under § 162(a) of the Internal Revenue Code as "ordinary and
necessary" business expenses. The Court of Appeals affirmed, rejecting petitioner's argument that, because the expenses
did not "create or enhance ... a separate and distinct additional asset," see Commissioner v. Lincoln Savings & Loan Assn.
they could not be capitalized under § 263 of the Code.

ISSUE: Whether expenses is deductible.

RULING: Petitioner's expenses do not qualify for deduction under § 162(a).

Deductions are exceptions to the norm of capitalization and are allowed only if there is clear provision for them in the
Code and the taxpayer has met the burden of showing a right to the deduction. Commissioner v. Lincoln Savings & Loan
Assn., supra, holds simply that the creation of a separate and distinct asset may be a sufficient condition for classification
as a capital expenditure, not that it is a prerequisite to such classification. Nor does Lincoln Savings prohibit reliance on
future benefit as means of distinguishing an ordinary business expense from a capital expenditure. Although the
presence of an incidental future benefit may not warrant capitalization, a taxpayer's realization of benefits beyond the
year in which the expenditure is incurred is important in determining whether the appropriate tax treatment is
immediate deduction or capitalization. The record in the instant case amply supports the lower courts' findings that the
transaction produced significant benefits to petitioner extending beyond the tax year in question.

E. Income Tax on Individuals

Types of Individuals
Section 24 of NIRC as amended.
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. — (1) An income tax is
hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C),
and (D) of this Section, derived for each taxable year from all sources within and without the
Philippines by every individual citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C),
and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the
Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection (C) of
Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this

11 | P a g e
Code, other than income subject to tax under Subsections (B), (C), and (D) of this Section, derived for each taxable year
from all sources within the Philippines by an individual alien who is a resident of the Philippines

Section 25 of NIRC as amended.

SEC. 25. Tax on Nonresident Alien Individual. -
(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from
all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident
alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding.

Section 26 of NIRC as amended.

Tax Liability of Members of General

Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed
under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for
income tax only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in
the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.

BIR Ruling 33-00

BIR RULING NO. 033-00 22 (E) (3) 23 (c) 000-00
Technoserve International Company, Inc. TIC Inc.
Bldg., 1606 Trada St. cor. Investment Drive Madrigal Business Park, Ayala Alabang Muntinlupa City

Attention: Ms . B . K . Baria
VP & Administration Manager Gentlemen :

This refers to your letter dated November 23, 1999 requesting for a clarification or ruling with regard to the proper tax
classification of your employees assigned abroad thru Secondment Agreement with your overseas client. It is
represented that your company, Technoserve International Co., Inc. (TIC), is a domestic foreign corporation engaged in
rendering specialty and technical services for overseas or domestic projects in the areas of engineering, procurement
service and construction management and other related fields; that the bulk of your revenue comes from work order
contracts for design and engineering works for overseas projects being awarded to you by your main client and parent
company, JGC Corporation, having its principal office at Yokohama, Japan; that the design works are being done here at
your Alabang office but there are also cases wherein you are required to send your qualified staff to Japan and other site
office for design and engineering works, thus the Secondment Agreement with your client; that the employee shall be
stationed at JGC offices for a certain period of time and shall perform his duties according to client's instruction and
without losing the status of employment with TIC; that usually, Intra-company Transference Visas are being secured by
the client and the work contracts pass thru Philippine Overseas Employment Agency (POEA); that the client will
provide for the accommodation, transportation, meal and site allowances and other necessities while on overseas
assignment; that the salaries, which are stated in US dollar, are being paid here in the Philippines by TIC converted to
pesos using the prevailing exchange rate at the time of payment.

12 | P a g e
Consequently, and as stated in the Secondment Agreement, the manhour spent by the overseas' assignees are billed to
client at an agreed manhour billing rate based on their position level and salaries; that the client then remits the
payment and TIC converts the same to pesos through the Philippine Banking System; that, in effect, of client of JGC
Corporation is actually the one paying the salaries of overseas' assignees through TIC; that for income tax purposes, all
your employees who are assigned overseas for at least 183 days in a taxable year were classified as non-residents since
the situs of income whether within or without was determined by the place where the service was rendered ; that the
income thus earned, even if paid locally, were taxed based on the preferential rates of 1-2- 3% before the taxable year
1998; that with the implementation of the Comprehensive Tax Reform Program as of January 1, 1998, you now seek
clarifications as the proper tax treatment of your employees assigned abroad.

In reply, please be advised that Section 23(C) of the Tax Code of 1997 which took effect on January 1, 1998, provides as
follows:

"(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract
workers is taxable only on income from sources within the Philippines . . . " (Emphasis supplied)

Corollary thereto, Section 22(E)(3) of the same Code provides one of the definitions of the term 'non-resident citizen' of
the Philippines, viz:
"(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires
him to be physically present abroad most of the time during the taxable year."

Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-sources income for being a non-
resident citizen or for being an overseas contract worker (OCW). All your employees whose services are rendered
abroad for being seconded or assigned overseas for at least 183 days may fall under the first category and are
therefore exempt from payment of Philippine income tax. In this connection, the phrase "most of the time" which is
used in determining when a citizen's physical presence abroad will qualify him as non-resident, shall mean that the said
citizen shall have stayed abroad for at least 183 days in a taxable year. (Sec. (2) (c), Rev. Regs. 1-79)

The same exemption applies to an overseas contract worker but as such worker, the time spent abroad is not material for
tax exemption purposes. All that is required is for the worker's employment contract to pass through and be registered
with the Philippine Overseas Employment Agency (POEA). You may, therefore, recognize the income tax exemption of
your employees Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2013 3
assigned abroad based on either of the foregoing premises. This ruling is being issued on the basis of the foregoing facts
as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered
null and void.

Very truly yours, (SGD.)

DAKILA B. FONACIER
Commissioner of Internal Revenue

Garrison vs. CA
FACTS: Petitioners, John Garrison, Frank Robertson, Robert Cathey, James Robertson, Felicitas de Guzman and Edward
McGurk (PETITIONERS) are US Citizens who entered the country through the Philippine Immigration Act of 1940 and are
employed in the US Naval Base in Olongapo City. They earn no Philippine source income and it is also their intention to
return to the US as soon as their employment has ended. The BIR sent notices to Petitioners stating that they did not file

13 | P a g e
their Income Tax Returns (ITR) for 1969. The BIR claimed that they were resident aliens and required them to file their
returns. Under then then Internal Revenue Code resident aliens may be taxed regardless of whether the gross income
was derived from Philippine sources. Petitioners refused stating that they were not resident aliens but only special
temporary visitors. Hence, they were not required to file ITRs. They also claimed exemption by virtue of the RP-US
Military Bases Agreement.

Under Military Bases Agreement, a “national of the United States serving in or employed in the Philippines in connection
with construction, maintenance, operation or defense of the bases and reside in the Philippines by reason only of such
employment” is only liable for tax on Philippine sources of income.The Court of Appeals held that the Bases Agreement
“speaks of exemption from the payment of income tax, not from the filing of the income tax returns . . .”

ISSUE: Whether or not Petitioners can be considered resident aliens

Whether or not Petitioners are exempt from income tax under the RP-US Military Bases Agreement
Whether or not Petitioners must still file ITR notwithstanding the exemption.

RULING: Yes, Revenue Regulations No. 2 Section 5 provides: “An alien actually present in the Philippines who is not a
mere transient or sojourner is a resident of the Philippines for purposes of income tax.” Whether or not an alien is a
transient or not is further determined by his: “intentions with regards to the length and nature of his stay. A mere
floating intention indefinite as to time, to return to another country is not sufficient to constitute him as transient. If he
lives in the Philippines and has no definite intention as to his stay, he is a resident.” The Section 5 further provides that if
the alien is in the Philippines for a definite purpose which by its nature may be promptly accomplished, he is considered
a transient. However, if an extended stay is necessary for him to accomplish his purpose, he is considered a resident,
“though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has
been consummated or abandoned.”

Yes, Notwithstanding the fact that the Petitioners are resident aliens who are generally taxable, their class is nonetheless
exempt from paying taxes on income derived from their employment in the naval base by virtue of the RP-US Military
bases agreement. The Bases Agreement identifies the persons NOT “liable to pay income tax in the Philippines except in
regard to income derived from Philippine sources or sources other than the US sources.” They are the persons in whom
concur the following requisites, to wit:
1) nationals of the United States serving in or employed in the Philippines;
2) their service or employment is "in connection with construction,maintenance, operation or defense of the bases;
3) they reside in the Philippines by reason only of such employment; and
4) their income is derived exclusively from “U.S. Sources.”

Yes, even though the petitioners are exempt from paying taxes from their employment in the Naval Base, they must
nevertheless file an ITR. The Supreme Court held that the filing of an ITR and the payment of taxes are two distinct
obligations. While income derived from employment connected with the Naval Base is exempt, income from Philippine
Sources is not. The requirement of filing an ITR is so that the BIR can determine whether or not the US National should
be taxed. “The duty rests on the U.S. nationals concerned to invoke and prima facie establish their tax-exempt status. It
cannot simply be presumed that they earned no income from any other sources than their employment in the American
bases and are therefore totally exempt from income tax.”

Ramnani vs. CIR

FACTS: Ishwar, Choithram, and Navalrai are brothers. Ishwar and his wife Sonya had a business in New York and gave
Choithram and Navalrai power of attorney to manage their business in the Philippines. Choithram, acting on behalf of

14 | P a g e
Ishwar, bought land and built buildings on it. Ishwar later asked Choithram for an account of the property's finances, but
Choithram didn't provide it. Ishwar then revoked Choithram's power of attorney. Despite this, Choithram transferred
Ishwar's property to his daughter-in-law. Ishwar and Sonya sued Choithram, his family, and Ortigas for the return of the
property or compensation. The court initially ruled against Ishwar and Sonya.

The Court of Appeals reversed the previous decision and ordered Choithram Jethmal Ramnani, Nirmla V. Ramnani, Moti
C. Ramnani, and Ortigas and Company Limited Partnership to pay Ishwar and Sonya the following:

1. Actual damages equal to the fair market value of the properties in question and all improvements thereon, with a
minimum value determined by Asian Appraisal, Inc.
2. Rental incomes from the properties and improvements, calculated based on various occupancy periods and prevailing
rental rates.
3. Moral damages of P200,000.00.
4. Exemplary damages of P100,000.00.
5. Attorney's fees amount to 10% of the total award.
6. Legal interest on the total amount awarded from the time of first demand in 1967 until full payment.
7. The cost of the lawsuit.

Special Exemption to minimum wage earners

Alternative Tax rates for Self-employed individuals/professionals
Definition of Self-employed – Section 2(n) Revenue Regulations 8-2018
Tax Treatment for Mixed Income Earners

F. Income Tax on Corporations

Definition of the term “Corporation” under NIRC as amended.
'Corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts
(cuentas en participacion), association, or insurance companies, but does not include general professional partnerships
and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum,
coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract
with the Government.

Section 27 of NIRC as amended.

SEC. 27. Rates of Income tax on Domestic Corporations. - (A) In General. - Except as otherwise provided in this Code, an
income tax of twenty-five percent (25%) effective July 1, 2020 is hereby imposed upon the taxable income derived
during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section
22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the
Philippines:

Please see codal.

Section 28 of NIRC as amended. Foreign corporation and percentage tax.

Exemptions: Section 30 of NIRC as amended.
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in
respect to income received by them as such:
(A) Labor, agricultural, or horticultural organization not organized principally for profit;

15 | P a g e
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock
organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by
employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of
which inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis
of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless
of the disposition made of such income, shall be subject to tax imposed under this Code.

AFISCO Ins. Corp. v. CIR

FACTS: The petitioners, 41 non-life insurance corporations in the Philippines, entered reinsurance treaties with
(Munchener Ruckversicherungs-Gesselschaft) Munich, a foreign insurance corporation, in 1965. These treaties required
the formation of a pool, which was created on the same day. In 1976, the pool submitted a financial statement and was
assessed deficiency corporate taxes and withholding taxes by the Commissioner of Internal Revenue. The assessments
were protested but were denied in 1986, requiring the petitioners to pay the assessed taxes, interest, and withholding
tax.

The Court of Appeals decided that the machinery insurers' pool was like a corporation and its collection of premiums
counted as taxable income. They also said the Bureau of Internal Revenue could still collect taxes even if the taxpayer's
address was not correct on their filed information return because they could not be found there.

ISSUE: Whether the Clearing House was a partnership or association subject to tax as a corporation.
Whether the remittances to petitioners and MUNICHRE of their respective shares of reinsurance premiums, pertaining to
their individual and separate contracts of reinsurance, were “dividends” subject to tax.

RULING: Article 1767 of the Civil Code recognizes the creation of a contract of partnership when “two or more persons
bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.” Its requisites are: “(1) mutual contribution to a common stock, and (2) a joint interest in the profits.”

16 | P a g e
In other words, a partnership is formed when persons contract “to devote to a common purpose either money, property,
or labor with the intention of dividing the profits between themselves.” Meanwhile, an association implies associates
who enter into a “joint enterprise x x x for the transaction of business.”

In the case before us, the ceding companies entered 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 Munich.
The following indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool has a common
fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund
pays for the administration and operation expenses of the pool. (2) The pool functions through an executive board,
which resembles the board of directors of a corporation, composed of one representative for each of the ceding
companies.(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is
indispensable, beneficial, and economically useful to the business of the ceding companies and Munich, because without
it they would not have received their premiums. The ceding companies share “in the business ceded to the pool” and in
the “expenses” according to a “Rules of Distribution” annexed to the Pool Agreement. Profit motive or business is,
therefore, the primordial reason for the pool’s formation.

, the petitioners’ claim that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise unpersuasive,
because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the information return
it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect. [54] Although petitioners
omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect only later,
on December 14, 1984, the petitioners’ claim that Munich is tax-exempt based on the RP-West German Tax Treaty is
likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of
the information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect.
[54] Although petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice
that it took effect only later, on December 14, 1984.

(2) In the instant case, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies.
The tax on its income is obviously different from the tax on the dividends received by the said companies. Clearly, there
is no double taxation here. The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. Petitioners have failed to discharge this burden of proof. The sections of the
1977 NIRC which they cite are inapplicable, because these were not yet in effect when the income was earned and when
the subject information return for the year ending 1975 was filed.

Pascual vs. CIR (isolated transaction)

FACTS: On June 22, 1965, petitioners bought two parcels of land from Santiago Bernardino, et al., and on May 28, 1966,
they bought three more parcels of land from Juan Roque. They sold the first two parcels in 1968 to Marenir
Development Corporation and the remaining three parcels in 1970 to Erlinda Reyes and Maria Samson. They made a net
profit of P165,224.70 from the 1968 sale and P60,000.00 from the 1970 sale. They paid the corresponding capital gains
taxes in 1973 and 1974 using tax amnesties granted in those years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were assessed and
required to pay a total amount of P107,101.07 as alleged deficiency corporate income taxes for the years 1968 and 1970.

The Commissioner informed the petitioners that in 1968 and 1970, they, as co-owners in real estate transactions, formed
an unregistered partnership or joint venture, which was taxable as a corporation under Section 20(b) of the National

17 | P a g e
Internal Revenue Code. The income of this unregistered partnership was subject to corporate income tax, different from
individual income tax. Although they availed of tax amnesty under P.D. No. 23, it did not exempt them from the tax
liability of the unregistered partnership. Consequently, they were required to pay the assessed deficiency income tax.

ISSUE: Whether the petitioners formed a n unregistered partnership.

RULING: There is no evidence that petitioners entered into an agreement to contribute money, property, or industry to a
common fund, and that they intended to divide the profits among themselves. Respondent commissioner and/or his
representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain
parcels of land and became co-owners thereof.

In Evangelista, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by
them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only in 1968 when
they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining three
(3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.

The sharing of returns does not in itself establish a partnership whether the persons sharing therein have a joint or
common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom of each party to transfer or assign the whole
property

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 thereby formed an unregistered partnership. The two isolated transactions whereby
they purchased properties and sold the same a few years thereafter 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 the tax amnesty
thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes.

Obillos vs. CIR

FACTS: On March 2, 1973, Jose Obillos, Sr. finished paying Ortigas & Co., Ltd. for two lots in Greenhills, San Juan, Rizal,
totaling 1,124 and 963 square meters. The following day, he transferred ownership to his four children so they could
build their homes. The company then sold the lots to the children for P178,708.12 on March 13. As a result, the titles
issued would likely indicate that the children were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities
Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit
of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half
thereof or on P16,792.

18 | P a g e
The Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof. He assessed P37,018 as corporate income tax,
P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56

ISSUE: Whether they formed a unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b)
of the Tax Code.

RULING: No. The Supreme Court believe it is wrong to say the petitioners formed a partnership just because they
supposedly put in P178,708.12 to buy two lots, sold them, and split the profit. To regard the petitioners as having formed
a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax
involves the power to destroy. To consider them as partners would obliterate the distinction between a co-ownership
and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their
original purpose was to divide the lots for residential purposes. The division of the profit was merely incidental to the
dissolution of the co-ownership which was in the nature of things a temporary state.

Ona vs. CIR

FACTS: Julia Buñales passed away in 1944, leaving behind her spouse, Lorenzo T. Oña, and five children. Civil Case No.
4519 was initiated in 1948 to settle her estate, with Lorenzo T. Oña appointed as the estate's administrator. The project
of partition was approved in 1949, but since three heirs were minors, Lorenzo T. Oña filed a petition to become their
guardian. He was appointed as such in 1949. The heirs had an undivided one-half interest in various properties and
received a sum from the War Damage Commission, which was reinvested in property rehabilitation. Some properties
were acquired after Julia's death through a loan. The estate shared an obligation of loans with Lorenzo T. Oña. However,
instead of dividing the properties, Lorenzo managed them, leading to an increase in their value over the years.

The petitioners derived income from various investments and properties, including profits from sales of subdivided lots,
stocks, dividends, rentals, and interests. These incomes were recorded in the books kept by Lorenzo T. Oña, showing the
petitioners' shares in the net income each year. Although the petitioners reported their shares for income tax purposes,
they did not physically receive them; instead, Lorenzo reinvested the income in real properties and securities. The
Commissioner of Internal Revenue concluded that the petitioners formed an unregistered partnership, subjecting them
to corporate income tax. Assessments were made for the years 1955 and 1956, which the petitioners contested but were
denied by the Commissioner.

ISSUE: Whether petitioners deemed to have formed an unregistered partnership subject to tax under Sections 24 and
84(b) of the National Internal Revenue Code?

RULING: To be unregistered co-partners for tax purposes, that their common fund "was not something they found
already in existence" and that "itwas not a property inherited by them pro indiviso," but it is certainly far-fetched to
argue therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance is not actually divided,
there can be no unregistered co-partnership. As already indicated, for tax purposes, the co-ownership of inherited
properties is automatically converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in
proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an
extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for
this is simple. From the moment of such partition, the heirs are entitled already to their respective definite shares of
the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly, he becomes liable individually for all taxes in connection therewith. If

19 | P a g e
after such partition, he allows his share to be held in common with his co-heirs under a 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
instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. This is
exactly what happened to petitioners in this case.

D. Taxable Income

Section 31 of NIRC as amended.

The term 'taxable income' means the pertinent items of gross income specified in this Code, less deductions, if any,
authorized for such types of income by this Code or other special laws.

(Gross Income Less Deductions equals Taxable Income)

Taxation classmates @everyone

paki-add po sa readings thank you.

20 | P a g e