Tax Case Doctrines

CAVEAT: TRAIN LAW NOT INCORPORATED. FIGURES & RATES HAVE CHANGED.


Case Doctrines

TAXATION LAW 1

Case Doctrines

Olive Cachapero

RAYTHEON PRODUCTION CORP v CIR

Tax law treats business good will not as future profits (which are fully taxable when recovered as damages), but as present capital—even though evidence of future profitability must be introduced to evaluate it. Thus, damages for its destruction are designed to compensate for the destruction of a capital asset—they are a "return" of this capital.

However, tax law does not exempt compensatory damages just because they are a return of capital—exemption applies only to the portion that recovers the cost basis of that capital; any excess damages serve to realize prior appreciation, and should be taxed as income.

EISNER v MACOMBER

A stock dividend shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. The essential and controlling fact is that the stockholder has received nothing out of the company's assets for his separate use and benefit.

GUTIERREZ v COLLECTOR

Acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being JUSTLY compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income and considered capital gains.

JAMES v U.S

Receipt of embezzled funds was included in the gross income of and was taxable to the embezzler, even though there was an obligation to return the funds to the rightful owner. If a taxpayer receives income, legally or illegally, without consensual recognition of obligation to repay, that income is automatically taxable. The term “gross income” has been held to encompass all “accessions of wealth, clearly realized and over which the taxpayers have complete dominion.” Thus, gross income includes those derived from both legal and illegal sources.

COMMISSIONER v GLENSHAW GLASS

Gross income includes gains or profits and income derived from any source whatsoever, including awards of punitive damages.

Ø  including money received as exemplary damages for fraud or as punitive damages of an antitrust recovery

N.V REEDRIT AMSTERDAM v COMMISSIONER

Whether NV Reederij “AMSTERDAM” not having any office or place of business in the Philippines, whose vessels called on the Philippine ports for the purpose of loading cargoes only twice in 1963 and 1964 - should be taxed as a foreign corporation not engaged in trade or business in the Philippines or as a foreign corporation engaged in the trade or business in the Philippines.

Ø  NV Reederij “AMSTERDAM” should be taxed as a foreign corporation, not engaged in the trade or business in the Philippines (NRFC). A casual business activity in the Philippines by a foreign corporation, as in the present case, does not amount to engaging in trade or business in the Philippines for income tax purposes. It is therefore taxable on income from all sources within the Philippines.

MARUBENI CORP v COMMISSIONER

·         When the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. (FC as the tp)

·         Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. (the FC’s Philippine branch as the tp)

MANILA WINE MERCHANTS INC v CIR

The provision discouraged  tax  avoidance  through  corporate  surplus  accumulation.  When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed.

“Immediacy Test” may be used to determine the “reasonable needs” of the business. To determine the “reasonable needs” of the business in order to justify an accumulation of earnings, the Courts of the United States had developed the Immediacy Test which construed the words reasonable needs of the business to mean the immediate needs of the business, and it was generally held that; if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply. Touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation.

25% surtax on undue accumulation of surplus

Section 25 of the Tax Code provides:

Sec. 25.                Additional tax on corporation improperly accumulating profits or surplus.—

(a)          Imposition of tax. — If any corporation, except banks, insurance companies, or personal holding companies, whether domestic or foreign, is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to 25% per centum of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by Sec. 24, and shall be computed, collected and paid in the same manner and subject to the same provisions of law, including penalties, as that tax.