Gabucan vs. Manta

[G.R. No. L-51546; January 28, 1980]

TOPIC:  Effect of failure to attach stamp to taxable document, instrument or paper.

DOCTRINE:

A taxable instrument, document or paper which does not bear the stamp shall not be recorded, nor shall it or any copy thereof or any record of transfer of the same be admitted or used in evidence in any court. The non-admissibility of the document, which does not bear the requisite documentary stamp, subsists only "until the requisite stamp or stamps shall have been affixed thereto and cancelled." (Sec. 201 NIRC)

FACTS:

The CFI dismissed the probate proceedings for the will of the late Rogaciano Gabucan. The proceeding was dismissed because the requisite documentary stamp was not affixed to the notarial acknowledgment in the will and, hence, according to the CFI, it was not admissible in evidence, citing section 238 of the Tax Code, now section 201 NIRC 1997.

ISSUE: Whether or not the proceeding should be dismissed because the will was not duly stamped.

HELD:

No. The CFI dismissed the case and even the motion for reconsideration wherein petitioner was already manifesting that he had already attached the stamp to the original of the will. The CFI erred in declaring that, because no documentary stamp was affixed to the will, there was "no will and testament to probate" and, consequently, the alleged "action must of necessity be dismissed". Instead, the court should have allowed the petitioner to tender the stamp in order to correct the deficiency. The non-admissibility of the document, which does not bear the requisite documentary stamp, subsists only "until the requisite stamp or stamps shall have been affixed thereto and cancelled."

TUASON vs. LINGAD

[July 31, 1974; G.R. No. L-24248]

CASTRO, J

TOPIC: Ordinary gain, capital asset, NIRC Sec. 39 A (1)

DOCTRINE:

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

In the case at bar, Taxpayer operated a substantial rental business of several properties, not only those subject in this case, such that the Taxpayer had to a real estate dealer's tax. Taxpayer's sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets.

FACTS:

The mother of Taxpayer (Petitioner Antonio Tuason) owned a 7 hectare parcel of land located in the City of Manila. She subdivided the land into twenty-nine (29) lots. Possession of the land was eventually inherited by Taxpayer in 1948.

Taxpayer instructed his attorney-in-fact to sell the lots. Twenty-eight (28) out of the twenty-nine parcels were all sold easily. The attorney-in-fact was not able to sell the twenty-ninth lot (hereinafter Lot 29) immediately because it was located at a low elevation.

In 1952, Lot 29 was filled, subdivided and gravel roads were constructed. The small lots were then sold over the years on a uniform 10-year annual amortization basis. The attorney-in-fact, did not employ any broker nor did he put up advertisements in the matter of the sale thereof.

In 1953 and 1954 the Taxpayer reported his income from the sale of the small lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. The CIR upheld Taxpayer's treatment of this tax.

In his 1957 tax return the Taxpayer as before treated his income from the sale of the small lots (P119,072.18) as capital gains. This treatment was initially approved by the CIR, but by 1963, the CIR reversed itself and considered the Taxpayer's profits from the sales of the lots as ordinary gainsc

The CIR assesed a deficiency of P31,095.36 from the Taxpayer.

Contention of Taxpayer: As he was engaged in the business of leasing the lots he inherited from his mother as well other real properties, his subsequent sales of the mentioned lots cannot be recognized as sales of capital assets but of “real property used in trade or business of the taxpayer.”

ISSUE/S:

Whether or not the properties in question which the Taxpayer had inherited and subsequently sold in small lots to other persons should be regarded as capital assets.

HELD:

No. It is Ordinary Income

As thus defined by law, CAPITAL ASSETS include all properties of a taxpayer whether or not connected with his trade or business, except:

1. stock in trade or other property included in the taxpayer's inventory;
2. property primarily for sale to customers in the ordinary course of his trade or business;
3. property used in the trade or business of the taxpayer and subject to depreciation allowance; and
4. real property used in trade or business.

If the taxpayer sells or exchanges any of the properties above, any gain or loss relative thereto is an ordinary gain or an ordinary loss; the loss or gain from the sale or exchange of all other properties of the taxpayer is a capital gain or a capital loss.

Under Section 34(b)(2) of the old Tax Code, if a gain is realized by a taxpayer (other than a corporation) from the sale or exchange of capital assets held for more than 12 months, only 50% of the net capital gain shall be taken into account in computing the net income.

The Tax Code's provisions on so-called long-term capital gains constitutes a statute of partial exemption. In view of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, it is the taxpayer's burden to bring himself clearly and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will be resolved against him.

In the case at bar, after a thoroughgoing study of all the circumstances, this Court is of the view and so holds that Petitioner-Taxpayer's thesis is bereft of merit. Under the circumstances, Taxpayer's sales of the several lots forming part of his rental business cannot be characterized as other than sales of non-capital assets. the sales concluded on installment basis of the subdivided lots do not deserve a different characterization for tax purposes.

This Court finds no error in the holding that the income of the Taxpayer from the sales of the lots in question should be considered as ordinary income.

AFISCO INSURANCE CORP. et al. vs. COURT OF APPEALS

[G.R. No. 112675.  January 25, 1999]

DOCTRINE:

Unregistered Partnerships and associations are considered as corporations for tax purposes – Under the old internal revenue code, “A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized, xxx.” Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations.

Insurance pool in the case at bar is deemed a partnership or association taxable as a corporation – In the case at bar, petitioners-insurance companies formed 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 is considered a partnership or association which may be taxed as a ccorporation.

Double Taxation is not Present in the Case at Bar – Double taxation means “taxing the same person twice by the same jurisdiction for the same thing.” In the instant case, the insurance pool is a taxable entity distince 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 companies. There is no double taxation.

FACTS:

The petitioners are 41 non-life domestic insurance corporations. They issued risk insurance policies for machines. The petitioners in 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation.  The reinsurance treaties required petitioners to form a pool, which they complied with.

In 1976, the pool of machinery insurers submitted a financial statement and filed an “Information Return of Organization Exempt from Income Tax” for 1975. On the basis of this, the CIR assessed a deficiency of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively.

The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed their appeal.

The CA ruled in that the pool of machinery insurers was a partnership taxable as a corporation, and that the latter’s collection of premiums on behalf of its members, the ceding companies, was taxable income. 

ISSUE/S:

1. Whether or not the pool is taxable as a corporation.
2. Whether or not there is double taxation.

HELD:

1) Yes: Pool taxable as a corporation

Argument of Petitioner: The reinsurance policies were written by them “individually and separately,” and that their liability was limited to the extent of their allocated share in the original risks thus reinsured. Hence, the pool did not act or earn income as a reinsurer. Its role was limited to its principal function of “allocating and distributing the risk(s) arising from the original insurance among the signatories to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records, maintenance, collection and custody of funds, etc.”

Argument of SC: According to Section 24 of the NIRC of 1975:

“SEC. 24.  Rate of tax on corporations.  --  (a)  Tax on domestic corporations.  --  A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized, but not including duly registered general co-partnership (compañias colectivas), general professional partnerships, private educational institutions, and building and loan associations xxx.”

Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Interestingly, the NIRC’s inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997 Sec. 27 read together with Sec. 22 reads:

“SEC. 27.  Rates of Income Tax on Domestic Corporations.  -- 

(A)  In General.  --  Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) 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 xxx.”

“SEC. 22.  --  Definition.  --  When used in this Title:

xxx  xxx                                    xxx

(B)  The term ‘corporation’ shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships [or] 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 or consortium agreement under a service contract without the Government.  ‘General professional partnerships’ are 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.

Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart from their individual members.

Furthermore, 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 may be considered a partnership because it contains the following elements: (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) While, the pool itself is not a reinsurer and does not issue any policies; 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 pursuant to the agreement with Munich. Profit motive or business is, therefore, the primordial reason for the pool’s formation.

2) No: There is no double taxation.

Argument of Petitioner: Remittances of the pool to the ceding companies and Munich are not dividends subject to tax. Imposing a tax “would be tantamount to an illegal double taxation, as it would result in taxing the same premium income twice in the hands of the same taxpayer.” Furthermore, even if such remittances were treated as dividends, they would have been exempt under tSections 24 (b) (I) and 263 of the 1977 NIRC , as well as Article 7 of paragraph 1and Article 5 of paragraph 5 of the RP-West German Tax Treaty.

Argument of Supreme Court: Double taxation means “taxing the same person twice by the same jurisdiction for the same thing.” In the instant case, the insurance pool is a taxable entity distince 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 companies. There is no double taxation.

Tax exemption cannot be claimed by non-resident foreign insurance corporattion; tax exemption construed strictly against the taxpayer - Section 24 (b) (1) pertains to tax on foreign corporations; hence, it cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based solely on this provision of the Tax Code because the same subsection specifically taxes dividends, the type of remittances forwarded to it by the pool. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption claimed must be expressed in a language too plain to be mistaken.

Garrison et al. vs. Court of Appeals

[G.R. Nos. 44501-05. July 19, 1990.]

Doctrine: 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.

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 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:

1. Whether or not Petitioners can be considered resident aliens.

2. Whether or not Petitioners are exempt from income tax under the RP-US Military Bases Agreement.

3. Whether or not Petitioners must still file ITR notwithstanding the exemption.

Held:

1. 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 alian 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 accomplsh 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.”

2. 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.”

3. 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.”