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1 | P I E R R E M A R T I N D L R E Y E S


Semester AY 2010-2011



This Reviewer covers the study of the law on Income Taxation which

1. Title II of the National Internal Revenue Code (NIRC)
2. Statutes related or amending the NIRC
3. Related Revenue Regulations, BIR Rulings and other

administrative issuances
4. Cases decided by the Supreme Court

As a complement to this reviewer, I suggest you get any book containing
the complete codal provisions of the NIRC (either the green codal from
Rex Bookstore or the NIRC annotated codal by Casasola and Bernaldo. As
for reference books, I would recommend Income Taxation by Mamalateo
or Tax Law and Jurisprudence by Vitug and Acosta.

As Albert Einstein puts it, “the hardest thing in the world to understand
is the income tax.” May this reviewer serve its purpose in helping us in
our efforts in overcoming this challenge and achieve excellence.

Yours in Honor and Excellence,
Pierre Martin DL Reyes


Q: What is an Income Tax?

A: Income Tax has been defined as a tax on all yearly profits arising from
property, professions, trades or offices, or as a tax on a person’s income,
emoluments, profits and the like.

Q: Where is the Philippine Income Tax Law embodied?

A: It is embodied in Title II (Tax on Income) of the National Internal
Revenue Code (“NIRC”) as well as in numerous (a) revenue regulations
and (b) BIR rulings and other administrative issuances (e.g. Revenue
Memorandum Circulars or RMCs).

Q: What are the different income tax systems adopted by the

A: The types of income tax systems adopted are as follows:

1. Global Tax System – where the taxpayer is required to lump
up all items of income earned during a taxable period and pay
under a single set of income tax rates on these different items
of income.

2. Schedular Tax System – where there are different tax
treatments of different types of income so that a separate tax
return is required to be filed for each type of income and the
tax is computed on a per return or per schedule basis.

3. Semi-Schedular or Semi-Global Tax System – where the tax
system is either (a) global (e.g. taxpayer with compensation
income not subject to final withholding tax or business or
professional income or mixed income – compensation and
business or professional income) or (b) schedular (e.g.
taxpayer with compensation, capital gains, passive income, or
other income subject to final withholding tax) or (c) both
global and schedular may be applied depending on the
nature of the income realized by the taxpayer during the year.

Q: How do you distinguish “schedular treatment from “global
treatment” as used in income taxation?

A: Under the schedular tax system, the various types of income (i.e.
compensation; business/professional income) are classified accordingly
and are accorded different tax treatments, in accordance with
schedules characterized by graduated tax rates. Since these types of
income are treated separately, the allowable deductions shall likewise
vary for each type of income.

On the other hand, under the global tax system, all income received by
the taxpayer are grouped together, without any distinction as to type or
nature of the income, and after deducting therefrom expenses and
other allowable deductions, are subjected to tax at a graduated or fixed

Q: To which system does the method of taxation under the
NIRC belong?

A: The current method of taxation under the NIRC belongs to semi-
schedular and semi-global tax system.

Q: What are the features of the Philippine Income Tax Law?

A: The features are as follows:

1. Income tax is a direct tax because the tax burden is borne by
the income recipient upon whom the tax is imposed.

2. Income tax is a progressive tax since the tax base increases as
the tax rate increases.

3. The Philippines has adopted the most comprehensive system
of imposing income tax by adopting the citizenship principle,
resident principle and the source principle.

4. The Philippines follows the semi-schedular or semi-global
system of income taxation.

Q: What are the criteria in imposing Income Tax in the

A: The criteria are:

1. Citizenship or nationality principle – A citizen of the
Philippines is subject to Philippine income tax (a) on his
worldwide income, if he resides in the Philippines (b) only on
his Philippine source income, if he qualifies as a non-resident
citizen where his foreign-source income shall be tax-exempt.

2. Residence or domicile principle – An alien is subject to
Philippine income tax because of his residence in the
Philippines. A resident alien is liable to pay Philippine income
tax only from his income from Philippine sources but is tax-
exempt from foreign-source income

3. Source of income principle – An alien is subject to Philippine
income tax because he derives income from sources within
the Philippines. Thus, a non-resident alien or non-resident
foreign corporation is liable to pay Philippine income tax on
income from sources within the Philippines.

Q: What are the types of Philippine Income Tax?

A: The types of Income tax under Title II of the NIRC are:

1. Graduated income tax on individuals
2. Normal corporate income tax on corporations

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3. Minimum corporate income tax on corporations
4. Special income tax on certain corporations (e.g. private

educational institutions, FCDUs, and international carriers)
5. Capital gains tax on sale or exchange of unlisted shares of

stock of a domestic corporation classified as a capital asset
6. Capital gains tax on sale or exchange of real property located

in the Philippines and classified as a capital asset
7. Final withholding tax on certain passive investment incomes
8. Fringe benefit tax
9. Branch profit remittance tax; and
10. Tax on improperly accumulated earnings.

Q: When is income taxable?

A: Income, gain or profit is subject to income tax when the following
conditions are present:

1. There is income, gain or profit
2. The income, gain or profit is received or realized during the

taxable year; and
3. The income, gain or profit is not exempt from income tax.


NOTE: It is advisable that you memorize or at the very least familiarize
yourself with the following terms as you will encounter these terms in
the succeeding provisions. Understanding tax requires knowing the
definitions of the technical terms.

Person An individual, a trust, estate or corporation

Corporation Includes partnerships, no matter how created
or organized, joint-stock companies, joint
accounts, associations, 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
and other energy operations pursuant to an
operating agreement under a service contract
with the Government

General Professional

Partnerships formed by persons for the sole
purpose of exercising their common profession,
no part of the income of which is derived from
engaging in any trade or business

Domestic When applied to a corporation, means created
or organized in the Philippines or under its laws

Foreign When applied to a corporation, means a
corporation which is not domestic

Nonresident citizen The term means a citizen of the Philippines:
1. who establishes to the satisfaction

of the Commissioner the fact of his
physical presence abroad with
intention to reside therein

2. who leaves the Philippines during
the taxable year to reside abroad
either as an immigrant or for
employment on a permanent basis

3. 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.

4. who has been previously considered
a non-resident citizen and who

arrives in the Philippines at any time
during the taxable year to reside
permanently in the Philippines with
respect to his income derived from
sources abroad until date of his
arrival in the Philippines

Resident alien An individual whose residence is within the
Philippines and who is not a citizen thereof

Nonresident alien An individual whose residence is not within the
Philippines and who is not a citizen thereof

Resident foreign

A foreign corporation engaged in trade or
business within the Philippines

Nonresident foreign

A foreign corporation not engaged in trade or
business within the Philippines

Fiduciary A guardian, trustee, executor, administrator,
receiver, conservator or any person acting in
any fiduciary capacity for any person

Withholding agent Any person required to deduct and withhold tax
under the provisions of Section 57 (Withholding
of Tax at source)

Shares of stock Includes shares of stock of a corporation,
warrants and/or options to purchase shares of
stocks as well as units of participation in a
partnership (except general professional
partnerships), joint stock companies, joint
accounts, joint ventures taxable as
corporations, associations and recreation or
amusement clubs and mutual fund certificates

Shareholder Includes any holder of shares of stock and
others which are considered shares of stock
under this code (refer to definition of Shares of

Taxpayer Any person subject to tax

“Including” and

When used in a definition, it shall not be
deemed to exclude other things otherwise
within the meaning of the term

Taxable year Means the calendar year or the fiscal year
ending during such calendar year, upon the
basis of which the net income is computed

Fiscal year Means an accounting period of 12 months
ending on the last day of any month other than

“Paid or incurred”
and “paid or

Shall be construed according to the method of
accounting upon the basis of which net income
is computed

Trade or business Includes the performance of the functions of a
public office

Securities Means share of stock n a corporation and rights
to subscribe for or to receive such shares

Dealer in securities A merchant of stocks or securities, whether an
individual, partnership or corporation, with an
established place of business, regularly engaged
in the purchase of securities and the resale
thereof to customers

Bank Every banking institution as defined in RA 337
as amended by RA 8791 (General Banking Act of

Non-bank financial

A financial intermediary as defined in RA 337 as
amended by RA 8791 (General Banking Act of
2000) authorized by the BSP to perform quasi-
banking activities


Means borrowing funds from 20 or more
personal or corporate lenders at any one time,
through the issuance, endorsement, or

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Q: Is a GPP liable for income tax?

A: No. A GPP is not considered a taxable entity for income tax purposes.
Section 26 of the NIRC provides that persons engaging in business as
partners in a GPP shall be liable for income tax only in their separate and
individual capacities computed on their respective distributive shares of
the partnership profit.

Relevant cases:

G.R. NO. G.R. NO. L-25532, FEBRUARY 28, 1969

FACTS: A limited partnership, named "William J. Suter 'Morcoin' Co.,
Ltd.," was formed by herein respondent William J. Suter as the general
partner, and Julia Spirig and Gustav Carlson, as the limited partners. The
limited partnership was registered with the SEC. The firm engaged,
among other activities, in the importation, marketing, distribution and
operation of automatic phonographs, radios, television sets and
amusement machines, their parts and accessories. In 1948, Suter and
limited partner Spirig got married and thereafter, limited partner Carlson
sold his share in the partnership to Suter and his wife. The limited
partnership had been filing its income tax returns as a corporation,
without objection by the CIR until in 1959 when the CIR, in an
assessment, consolidated the income of the firm and the individual
incomes of the partners-spouses Suter and Spirig resulting in a
determination of a deficiency income tax against Suter. Suter protested
but was denied by the CIR. He appealed to the CTA reversed the CIR’s
assessment. Hence, this appeal by the CIR.

ISSUE: (1) Whether or not the partnership was dissolved after the
marriage of Suter and Spirig and the subsequent sale to them by the
remaining partner, Carlson, of his participation in the partnership? (2)
Whether or not the corporate personality of the William J. Suter
"Morcoin" Co., Ltd. should be disregarded for income tax purposes,
considering that respondent Suter and his wife actually formed a single
taxable unit?

HELD: (1) NO. A husband and a wife may not enter into a contract
of general copartnership, because under the Civil Code, which applies in
the absence of express provision in the Code of Commerce, persons
prohibited from making donations to each other are prohibited from
entering into universal partnerships. It follows that the marriage of
partners necessarily brings about the dissolution of a pre-existing
partnership. The CIR failed to observe that William J. Suter "Morcoin"
Co., Ltd. was not a universal partnership, but a particular one.
A universal partnership requires either that the object of the association
be all the present property of the partners, as contributed by them to the
common fund, or else "all that the partners may acquire by their industry
or work during the existence of the partnership". William J. Suter
"Morcoin" Co., Ltd. was not such a universal partnership, since the
contributions of the partners were fixed sums of money. The subsequent
marriage of the partners does not operate to dissolve it, as such
marriage is not one of the causes provided for that purpose either by
the Spanish Civil Code or the Code of Commerce.

(2) NO. The capital contributions of partners Suter and Spirig were
separately owned and contributed by them before their marriage; and
after they were joined in wedlock, such contributions remained their
respective separate property. Thus, the individual interest of each
consort in in the limited partnership did not become common property
of both after their marriage in 1948. The partnership has a juridical
personality of its own, distinct and separate from that of its partners. The
limited partnership's separate individuality makes it impossible to equate
its income with that of the component members. As the limited

partnership under consideration is taxable on its income, to require
that income to be included in the individual tax return of respondent
Suter is to overstretch the letter and intent of the law. In fact, it would
even conflict with the Code: for the Commissioner's stand results in
equal treatment, tax wise, of a general copartnership (compañia
colectiva) and a limited partnership, when the code plainly
differentiates the two. Thus, the code taxes the latter on its income,
but not the former, because it is in the case of compañias
colectivas that the members, and not the firm, are taxable in their
individual capacities for any dividend or share of the profit derived
from the duly registered general partnership. The difference in tax rates
between the income of the limited partnership being consolidated with,
and when split from the income of the spouses, is not a justification for
requiring consolidation; the revenue code, as it presently stands, does
not authorize it, and even bars it by requiring the limited partnership to
pay tax on its own income.

As to CIR’s argument that the income of the limited partnership is
constructively the income of the spouses and forms part of the conjugal
partnership of gains, the conjugal partnership of gains is not a taxable
unit. What is taxable is the "income of both spouses” in their individual
capacities. Though the amount of income (income of the conjugal
partnership vis-a-vis the joint income of husband and wife) may be the
same for a given taxable year, their consequences would be different, as
their contributions in the business partnership are not the same.

G.R. NO. 76573, SEPTEMBER 14, 1989

FACTS: Tan Guan and Sia Lin, Chinese nationals, organized and registered
the Philippine Surplus Company, a general partnership. For the same
year the partners and the partnership filed separate income tax returns.
The partnership paid no income tax. A registered general partnership is
exempt from income tax

although it is required to file income tax


Profits, whether or not distributed, are considered income of

the partners. Acting upon a confidential report that the Philippine
Surplus Company posted in its book fictitious expenses for the purpose
of avoiding taxes, the Bureau of Internal Revenue investigated in 1954
the books and papers of said partnership disallowed certain expense
deduction for being fictitious. The BIR investigators discovered that the
expenses were not supported by receipts; that the names of the payees
in the aforesaid entries were erased; and that the said payees did not
report the sums in question in their income tax returns for 1948. Hence,
the BIR assessed deficiency income tax against Tan Guan. Tan Guan
appealed to the CTA which affirmed the assessment of the CIR. Tan
Guan’s MR was denied by the CTA. Hence, this appeal.

ISSUE: Whether the right of the CIR to assess the deficiency tax has
prescribed? (2) Should the deduction claimed by Philippine Surplus Co. as
a business expense be allowed?

HELD: (1) YES. If the income tax return was false and fraudulent, the
CIR’s right has not prescribed. If not, the assessment issued is void
because of prescription. Here, the ITR was false or fraudulent as
Philippine Surplus Co. claimed deductions of fictitious expenses for the
purpose of avoiding the declaration of profits which eventually would be
taxable as income of Tan Guan and Sia Lin, and that the names of the
payees in the corresponding entries of the expenses involved in the
books of accounts were erased. The returns being false or fraudulent,
the CIR has not lost his right to issue the assessment. With respect to
Tan Guan’s contention that he should be given the same treatment as Sia
Lin, who was absolved by the CIR, suffice it to say that the Government is
not bound by the errors committed by its agents.

(2) NO. The only reason why said deduction was disallowed is because

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Semester AY 2010-2011

the expenses were fictitious or non-existent. Said conclusion was
prompted by the absence of supporting receipts in the voucher covering
the expenses and by the failure of the recipients thereof to declare them
in their income tax returns


Note: The corresponding changes introduced by RA 9337 (Amending the
NIRC of 1997) have already been integrated in the discussions below on
corporate income tax. All provisions and rates mentioned here are
updated as of March 1, 2009.

Q: What is a corporation under the NIRC?

A: A corporation includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts, associations, or
insurance companies but does not include:

a. general professional partnerships
b. joint venture or consortium formed for the purpose of

undertaking construction projects or engaging in petroleum
and other energy operations pursuant to an operating
agreement under a service contract with the Government.

It classified into domestic and foreign.

Q: How do you distinguish a domestic corporation from a
foreign corporation?

A: The Philippines adopts the “law of incorporation test” under which a
corporation is considered as a domestic corporation if it is organized or
created in accordance with or under the laws of the Philippines and it is
foreign if it is organized or created under the laws of a foreign country.

A domestic corporation is taxable on all income derived from sources
within and without the Philippines while a foreign corporation is taxable
only on income derived from sources within the Philippines.

A foreign corporation is further classified into resident foreign
corporation and nonresident foreign corporation.

Q: What is the difference between a resident foreign
corporation and non-resident foreign corporation?

A: A Resident foreign corporation is foreign corporation engaged in
trade or business within the Philippines. “Resident” here is used to
describe a corporation organized under the laws of a foreign country
which does business in the Philippines and it not being used in its
ordinary sense that the foreign corporation acquires residence in the
Philippines. A good example of a resident foreign corporation is the
Philippine branch of a foreign corporation. For income tax purposes, only
the income of the Philippine branch from sources within the Philippines
is subject to income tax while the income of the Philippine branch and
the foreign head office arising from foreign sources are exempt.

On the other hand, a nonresident foreign corporation is a foreign
corporation not engaged in trade or business within the Philippines. The
term “non-resident” here means not engaged in trade or business in the
Philippines. Except as provided in the NIRC, gross income from sources
within the Philippines paid to a non-resident foreign corporation shall be
subject to income tax that must be withheld by the Philippine payor of
the income and remitted to the BIR.

Q: What are two types of resident foreign corporations?

A: The two types are:

1. those exempt from income tax because they are not engaged
in trade or business in the Philippines (e.g. regional or area

2. those subject to income tax at
a. 10% preferential tax rate
b. 30% regular corporate income tax or 2% minimum

corporate income tax whichever is higher (e.g.
Philippine branches of foreign corporations engaged in
trade and business in the Philippines; regional operating
headquarters of MNCs)

Note: Now, let us go to the tax rates and computations on income taxes
on corporations. First, let us start with the flat rate rates.

Q: What is the regular corporate income tax (RCIT)?

A: Section 27(A)(1) and Section 28(A)(1) of the NIRC provide that, except
as otherwise provided for in the Code, the rates of RCIT on taxable
income from worldwide sources of a domestic corporation or from
sources within the Philippines of a foreign corporation during the
taxable year are as follows:

1. 35% effective November 1, 2005
2. 30% effective January 1, 2009.

In case of corporations adopting the fiscal year accounting period, the
taxable income shall be computed without regard to the specific date
when specific sales, purchases, and other transactions occur. Their
income and expenses for the fiscal year shall be deemed earned and
spent equally for each month of the period. The reduced corporate
income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates within the
fiscal year by the taxable income of the corporation for the period
divided by twelve. To illustrate:

If a corporation is under the fiscal accounting period (April 2008 to
March 2009, how shall the Income tax due for fiscal year 2008 be

On the other hand, as provided in Section 28(B)(1), the rate of RCIT on
the gross income from all sources within the Philippines for a non-
residence foreign corporation during the taxable year are as follows:

1. 35% effective November 1, 2005
2. 30% effective January 1, 2009.

Q: What is meant by “taxable income” which is subject to RCIT?

A: As defined in Section 31, taxable income means the pertinent items
of gross income specified in the Code, less the deductions and/or
personal and additional exemptions, if any authorized for such types of
income by the Code or other special laws. For corporations, taxable
income would mean net income. Net income and taxable income is used
interchangeably when it comes to corporations.

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Section 28(A)(3)(a) of the NIRC))

GR NO. L-66653, JUNE 19, 1986

FACTS: Burroughs Limited is a foreign corporation authorized to engage
in trade or business in the Philippines through a branch office located at
Makati. Sometime in 1979, said branch office applied with the Central
Bank for authority to remit to its parent company abroad, branch profit.
It paid the 15% branch profit remittance tax. Claiming that the 15% profit
remittance tax should have been computed on the basis of the amount
actually remitted and not on the amount before profit remittance tax,
Burroughs filed a written claim for the refund or tax credit representing
alleged overpaid branch profit remittance tax. Thereafter Burroughs filed
with the CTA a petition for review for the recovery of the amount. CTA
ordered the CIR to grant a tax credit in favour of Burroughs Limited.

ISSUE: Whether the tax base upon which the 15% branch profit
remittance tax shall be imposed is the amount applied for remittance on
the profit actually remitted and not the amount before profit remittance

HELD: Yes. Section 24(b)(2)(ii) (Now Section 28(A)(5) states that “Any
profit remitted abroad by a branch to its head office shall be subject to a
tax of fifteen per cent (15 %).” In a BIR Ruling dated 1980, the CIR held
that the provision should mean that "the tax base upon which the 15%
branch profit remittance tax ... shall be imposed...(is) the profit actually
remitted abroad and not on the total branch profits out of which the
remittance is to be made. " Applying therefore, the aforequoted ruling,
the claim of Burrough that it made an overpayment is valid.

GR NO. L-28398, AUGUST 6, 1975

FACTS: Manila Trading and Supply Co. (MANTRASCO) had an authorized
capital stock of P2.5 million divided into 25,000 common shares: 24,700
were owned by Reese and the rest at 100 shares each by the
Respondents. Reese entered into a trust agreement whereby it is stated
that upon Reese’s death, the company would purchase back all of its
shares. Reese died. MANTRASCO repurchased the 24,700 shares.
Thereafter, a resolution was passed authorizing that the 24,700 shares
be declared as stock dividends to be distributed to the stockholders. The
BIR ordered an examination of MANTRASCO’s books and discovered that
the 24,700 shares declared as dividends were not disclosed by
respondents as part of their taxable income for the year 1958. Hence,
the CIR issued notices of assessment for deficiency income taxes to
respondents. Respondents protested but the CIR denied. Respondents
appealed to the CTA. The CTA ruled in their favor. Hence, this petition by
the CIR

ISSUE: Whether the respondents are liable for deficiency income taxes
on the stock dividends?

HELD: Dividends means any distribution made by a corporation to its
shareholders out of its earnings or profits. Stock dividends which
represent transfer of surplus to capital account is not subject to income
tax. But if a corporation redeems stock issued so as to make a
distribution, this is essentially equivalent to the distribution of a
taxable dividend the amount so distributed in the redemption
considered as taxable income.

The distinctions between a stock dividend which does not and one which

does constitute taxable income to the shareholders is that a stock
dividend constitutes income if its gives the shareholder an interest
different from that which his former stockholdings represented. On the
other hand, it does constitute income if the new shares confer no
different rights or interests than did the old shares. Therefore,
whenever the companies involved parted with a portion of their earnings
to bnuy the corporate holdings of Reese, they were making a distribution
of such earnings to respondents. These amounts are thus subject to
income tax as a flow of cash benefits to respondents. Hence,
respondents are liable for deficiency income taxes.

GR NO. L-19865, JULY 31, 1965

FACTS: Enrico Pirovano is the father of herein petitioners. In early 1941,
De la Rama Steamship Co. insured the life of Enrico, its President and
General Manager. During the Japanese Occupation, Enrico died. De la
Rama issued a Resolution granting P400,000 to the hiers of Pirovano
converted into 4,000 shares of stock. This was modified thereafter.
Instead, the company would renounce its title to the proceeds of the
insurance in favor of the heirs. Mrs. Estefania Pirovano, in behalf of heir
children executed a public document formally accepting the donation
and the Board of Directors took official notice of this acceptance. Two
years thereafter, the majority stockholders revoked said donation. De La
Rama was ordered by the SC in a case (remember Pirovano vs. De La
Rama Steamship!) to pay. The CIR assessed the amount as donees’ gift
tax inclusive of surcharges, interests and other penalties. The heirs
contested the assessment and imposition of the donees’ gift taxes and
donor’s gift tax and also made a claim for refund of the said collected
taxes. The claims were denied by the CIR. CTA affirmed. Hence, this
petition. Petitioners contend that that the proceeds of the insurance was
made not for an insufficient or inadequate consideration but rather it a
was made for a full and adequate compensation for the valuable services
rendered by the late Enrico Pirovano to the De la Rama Steamship Co.;
hence, the donation does not constitute a taxable gift under the
provisions of the then Section 108 of the National Internal Revenue

ISSUE: Whether the donation constitute a taxable gift?

HELD: Yes. As provided in Article 619 of the Code of 1889 (identical with
Article 726 of the present Civil Code of the Philippines), “when a person
gives to another thing…on account of the latter’s merits or of the
services rendered by him to the donor, provided they do not consisted a
demandable debt,…, there is also a donation… “There is nothing on
record to show that when the late Pirovano rendered services as
President and General Manager of the De la Rama Steamship Co. he was
not fully compensated for such services. The fact that his services
contributed in a large measure to the success of the company did not
give rise to a recoverable debt, and the conveyances made by the
company to his heirs remain a gift or donation. Also, whether
remuneratory or simple, the conveyance remained a gift, taxable under
the Code.

But then appellants contend, the entire property or right donated should
not be considered as a gift for taxation purposes; only that portion of the
value of the property or right transferred, if any, which is in excess of the
value of the services rendered should be considered as a taxable gift.
But, as we have seen, Pirovano's successful activities as officer of the De
la Rama Steamship Co. cannot be deemed such consideration for the gift
to his heirs, since the services were rendered long before the Company
ceded the value of the life policies to said heirs. What is more, the actual
consideration for the cession of the policies, as previously shown, was
the Company's gratitude to Pirovano; so that under the Code there is no

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consideration the value of which can be deducted from that of the
property transferred as a gift. Like "love and affection," gratitude has no
economic value and is not "consideration" in the sense that the word is
used in this section of the Tax Code.

(Note: In other words, the whole proceed of the insurance is taxable
income given that “gratitude” cannot be deducted for taxation

GR NO. L-12954 AND L-13049, FEBRUARY 28, 1961

FACTS: The spouses Arthur Henderson and Marie B. Henderson filed with
the BIR returns of annual net income for the years 1948 to 1952. In due
time the Henderson received from the BIR assessment notices and paid
the amounts assessed. In 1953, after investigation and verification, the
BIR reassessed the taxpayers' income for the years 1948 to 1952 and
demanded payment of the deficiency taxes. In the foregoing
assessments, the BIR considered as part of their taxable income the
taxpayer-husband's allowances for rental, residential expenses,
subsistence, water, electricity and telephone; bonus paid to him;
withholding tax and entrance fee to the Marikinagun and Country Bluc
paid by his employer for his account; and travelling allowance of his wife.
Henderson asked for reconsideration of the assessment. BIR denied and
hence, taxpayers filed in the CTA a petition to review the decision of the
CIR. The CTA held that the ratable value to him of the quarters furnished
constitutes part of taxable income, that since the taxpayers did not
receive any benefit from the travelling expense allowance as the trip was
a business one, the same could not be considered income, and even if it
was considered as such, it is not subject to tax as it was deductible as
travel expense. The CTA ordered the CIR to refund the taxpayers. Hence,
this petition.

ISSUE: Whether the allowances for rental of the apartment furnished by
the husband-taxpayer's employer-corporation, including utilities such as
light, water, telephone, etc. and the allowance for travel expenses given
by his employer-corporation to his wife in 1952 part of taxable income?

HELD: "Gross income" includes gains, profits, and income derived from
salaries, wages, or compensation for personal service of whatever kind
and in whatever form paid, or from professions, vocations, trades,
businesses, commerce, sales, or dealings in property, whether real or
personal, growing out of the ownership or use of or interest in such
property; also from interest, rents dividend, securities, or the transaction
of any business carried on for gain or profit, or gains, profits, and income
derived from any source whatever.

The evidence substantially supports the findings of the Court of Tax
Appeals. The quarters, therefore, exceeded their personal needs. But the
exigencies of the husband-taxpayer's high executive position, not to
mention social standing, demanded and compelled them to live in a
more spacious and pretentious quarters like the ones they had occupied.
Although entertaining and putting up houseguests and guests of the
husband-taxpayer's employer-corporation were not his predominant
occupation as president, yet he and his wife had to entertain and put up
houseguests in their apartments. That is why his employer-corporation
had to grant him allowances for rental and utilities in addition to his
annual basic salary to take care of those extra expenses for rental and
utilities in excess of their personal needs. Hence, the fact that the
taxpayers had to live or did not have to live in the apartments chosen by
the husband-taxpayer's employer-corporation is of no moment, for no
part of the allowances in question redounded to their personal benefit or
was retained by them. Nevertheless, as correctly held by the Court of Tax
Appeals, the taxpayers are entitled only to a ratable value of the

allowances in question, and only the amount of P4,800 annually, the
reasonable amount they would have spent for house rental and utilities
such as light, water, telephone, etc., should be the amount subject to
tax, and the excess considered as expenses of the corporation. Likewise,
the findings of the CTA that the wife-taxpayer had to make the trip to
New York at the behest of her husband's employer-corporation to help in
drawing up the plans and specifications of a proposed building, is also
supported by the evidence. No part of the allowance for travelling
expenses redounded to the benefit of the taxpayers. Neither was a part
thereof retained by them. The fact that she had herself operated on for
tumors while in New York was but incidental to her stay there and she
must have merely taken advantage of her presence in that city to
undergo the operation. Hence, the CIR is ordered to refund the

(Note: What is the taxable income here? Gross income! The Court held
basically upheld the CTA in (1) only the ratable value of the allowances
for housing shall form part of the income as the apartment is used for his
business functions as well and (2) the trip allowances does not form part
of income as they are for business purposes.

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