Rlpu Nlic Uf· Ttlb P R1i Llpp Ines Cvuli'1' VI" I'N..a Ji......... 1>L3 I.V1A1H~H. Prlilippin~ Aih LL~Ls» Inc. 1 vs. Collector of If\JTTRN1 1 R.:BV.GHUE

DECISION -

C

. T .~ . CASE No . 45 5 Passenger Pass es -

International

12398 , 356 . 80 (p . 3 of Audit Report ) Passon -or P asse~ ­ Domestic ( p . 2 of

AuditRoport)

.

.

. .. 241 , 695 . 12 Cost of materials & Services rendered to PAF per contract (Exh .

A, Sch. l. p . 2 of Audit Report) . .

.

Cost of materials & Servic es render ed to other Airlines, etc .

(Exh . A, Sch . l , p. 2 Audit Report ..... .

Cost of motor fuels sold to CAA, etc.

(Exh . A, Sch .

l~ p. 2 of Audit RoportJ ..

Premium on capital stock ( p. S . Audit Ftc port) - domestic . . . . .

,- 266 ,103 . 25 1 , 395 . 46 724 , 736 . 42 Earned Surplus , as detailed in Sch.l . p . 3) _ l.J4 , 965 . 3.8_ l2l.7, 630 , 6_~Jhze_ Gross revenues subject to franch i se tax 1217,775, 007 .5i 2~o Franchise tax duo thereon -. .

Loss : Amount deposited ..

. ..

. .

Total Excess Deposi t ..

.

. 12

• ( J2

355 , 500 .15

556 I 8$Lt • 84

201! 384 .• 69 ) _"XII. Tnat tho na turo of tho total dis cropancios of li117, 630 ,680 . 28 is described in para;;raph X:~I of this Sti- pulation of Facts ;

"XIII. That for tho pQriod from January l , 1949 to December 31, 1950 , poti tionor doposi ted tho sum of li1780 , 6~5 .68 to cover tho franchise tax that may be , found ~uo from tho said p etitioner at tho rate of 5% undor Jsocti on 259 of tho Nat ional Internal Revenue Code , as amended , instead of tho rate of 2% under its f ran- chis e in a ccordanc'o with tho decision s ubsoq_uontly pr o- mul.::;atod by tho Supremo Court in tho c ase e ntitle d 'Ph i lippine Railway Company v . Collector of Interna l Rovonuo, G . R. No . 1 - 3859 ''XIV . That accordin.::; to respondent, tho petitioner is still ind ebted to tho Government in tho sum of li1422 ,896.64 as allo~od deficiency franchise taxes and 251~ sur charges for tho p oriod from January l , 1949 to December 31 , 1950 , as indic ated in tho computation of tho respondent as follows :

Gross revenues as per original government audit . . . . .

. 1256 , 130, 629 .05 Loss ; Rental of aircraft for domestic usc for uso in international ser- vice subsequently hold not subject to tax ........ Pl05 , 244 .99 28 ‘DECISION - C.T.a. CASE No. 45 Cost of matcrials & Services to employees at cost held not subject to franchise tax, per deci- sion Phil. Long Distance Telephone Co., case... B.77,134,54 B182,479.53 Gross revenues per final government audit ...... 6. + %855,948,149.52 Tax due thereon at 24 .....4.. 1,118,962 .99 Less amount deposited ........ 7806 Amount still due .. 4.1.5... . 8 396,317031 25% surcharge . a - ae e 8h, 579, 33 Total deficiency franchise tax and surcharge . .. .. «+ + + + « RB’ 422,896.64 XV. That according to petitioner, it is entitled to the refund of the sum of B 283,535.82 as excess de- posit of the franchise taxes for the period from Jan. uary 1, 1949 to December 31; 1950, as indicated in the computation of the petitioner, as follows:

Gross revenues as per original government audit ....... . . . P56,130,629.05

Less:

Rental of aircrafts for domestic use for use in international service subsequently held not subject to tax... . .P105, 344.99 Cost of materials & services rendrred to employees (Ruling on Phil. Long Dist.

Toh Codd ss ss s woe cE | (C2 7O 8S Gross revenues per final government audit . ee ee we ew ew + B55, 948 1L9.52 Less: Revenues not subject to franchise tax- Incoming-International - P19, 392;414.02 Out going-International - 10,043,430.05

Passenger Passes-

International (p.4 of Audit Report) ..... 962,413.73

Passenger Passes-

Domestic (p. 2 of Audit Report), ... >» 304,065.39 Premium on capital.stock (p. 4 of Audit Report) . 25,073.50 Cost of materials ser- vices rendered to other airlines, etc. (Sch. 2. p.

1& 2 of Audit Report) . . 103,448.90 Cost.of materials & services rendered to PaF per contract (Sch.2,p.1 & 2 of Audit

Report) a

256,604.87 29 sa!

'·

DECISION -

C.T . h . CASE No. 45 7 Earned surplus as lis ted i n att a ched Schedule II (Sch . 2 p. l ~ 2 of h.ud i t Report) . . . . . .

~ 1L 205. SLJ, li2.ll.J29,2 ,6 56. 3Q Gross r evenues subject to franchise tax li224, 855,493.22 2/o Franchis e t ax thereon . .

Less : .-unount deposited . . . .

Ex cess amount deposited • • ( 12 497 ' 109 .86 780, 645 . 68

28 3 I ~ 3 ~ 0$2)

"~VI. That the nature of the various ite ms ~onsti ­ tu ting the dis crcpancy of i23l , 09 2, 6 56 . 30 i s des cribe'd in paragraph 1.XI of this Stipulation of Fa cts; nxvri . That for the period from J anuary l , 1951 to Dec ember 31, 195 2, petitioner deposited the sum of ~1 , 382 , 7 6 7 . 28 to cover the franchise tax that may bq found due from the said petitioner at the rate of 5~~o under s ection 259 of the National Int ernal Revenue Code , as ame nd ed , instead of the rate of 2% under its franchi se in a ccorda nc e with the decision subsequently promulgated by the Supreme Court in the cas e entitled 'Philippine Railway Co . v Collector of I nternal Revenue~ G. R . No. L- 38 59 ', and that of this amount , t he sum of 1-'138, 000 .00 was subs equently refunded by the r es ponde nt , t hereby leaving onl y the sum of ~1 , 244 , 767 . 28 as net deposit fo r sai d period .

nxvi ii. That .a ccording to r espondent , the pet i tioner is sti ll indebte d to the Government in the amount of ~120 , 0 38 . 68 as d efici ency franchise taxes and s urcha rt;es for the period from January l , 1951 to De cember 31, 1952, as indicated in th8 computati on of the respondent a s follows :

Gross revenues as per original government audit .. . . ... . .. ... ¥67 , 164 , 599 . 41 Less : Cost of motor fuels, materi als & services rendered to employees , held not subject to franchise tax per decision i n ~hiliDDine Long Distance Tel ephone c;: case . . . 126 , 668 .58 Gross r e venues as pe~ final covern - ment audit . ........... ... ........ i?67, 039 , 910 . 83 Tax due thereon at 2% .. .. . . ... . .. . Less : h.mount deposited . ... .. ... . . . Amount still due .............. . . . . 25;lo surch arge .. o • ••• • •• • •• • •••••• j,? l , 340, 798 . 22 l , 2LJ.LJ,, 767.26 ~ 96, 030. 94 24, 007 .74 Total tax and surcharge ......... .. ~ 120' 0 38 . 68 "XIX . That according to petitioner , it is entitled to the refund of the sum of l:270l,i:n5.ll as excess de- posit of the franchise taxes for the period from

Jan-

uary l , 1951 to December 31, 1952 , as indicated in the computation of the petitioner , as f ollows :

DECISION.

C.T.a. CASE No. 45 Gross revenue per government NS eae ee oe 264,164, 599.41 Less: Cost of motor fuels, ma- terials & services rendered to employees (Ruling of rhil.

‘Long Distance Telephono Co. ) wee) oo bh, 688.58 Gross revenues per final sovern- INS @UddE . oak w ds we wee 267,039 ,910.83 Less: Revenues not subject ‘to.

franchise tax-

Incoming-Inter-

national ........ 226,990,961.33 Out go ing-Int er- MSL ONAL. 06 wid wee 12, 243,999.32 % rassenger Passes- Ent ernational (p.6 of Audit Report wae ee in Sch. 3, 3 & 4 of audit pee 33,960.20 rassenger vrasses- Domestic (p. 2 of

Audit Report -

VOUBS ELS coe wears oo ens 178 , 264.53 rremium on capital stock (Sch. 2, p. 1 of audit Report) -..6.45 10.00 Cost of materials & services rendered to other airlines, etc.

(Sch. 1, p. 1 of audit Roport) ....... 216,370.71 Cost of materials & services rendered to PAF per contract (Sch.

lp. 1. of audit Report ) 227, 022.24 Barned surplus (Sch. 2, p. 1 of Awit x RaPOPE) viwssaisaa see __1,713.61 239,892,302, 5h Gross revenues subject to franchise Er 7ecyn fincnevc\8) voaieepymee 227,147, 608.29 2% Franchise ‘tax due thereon ....... ie 542,952.17 Less: amount deposited ......eeeeee Pe Excess amount of deposit ...........(# 701,815.11) KX. That the nature of the various items consti- \ tuting the discrepancy of 239,892, 302.54 is described ' in paragraph XXI of this Stipulation of Factt;

WHXI. That the nature of the various items cons- tituting the discrepancy specified in paragraphs VII, XI, XV, and XIX hereof is described as follows:

ix The revenues from international service are “divided into two parts, namely, Qgutcoing, meaning gross re- venues derived by rAL as passenger fares amd freight and other revenues for flight from Manila to foreign * a 2 3 1 • . .

D:E.CISION- C.T .n. CaSE No. 45 9 count~ i cs, and i..n.Q.QIDi:p.z., mcanin.e; eross revenues d erive d by /.~;.L in its foreign stations outside the Philippine s as passcne er f ares and freiGht and other r evenues for flight from a foreign country to another foreign coun- try or from a fore i gn country to Mani la . Included in the incoming arc tnc follovJin.c; i terns which have no classificat ion whether incomins or out~oing int e rna- tional r e venues : .

Earned surolus :

( a ) 2nd qr ., i 947 to 4th qr. , ,1948- -- - ~77 , 529.13 lst qro , 1949 to 4th qr . , 1950 .. ...... 323 , 343 .74 -lst q r ., 1951 to 4th qr ., 1952 . . .. . o . • LJ:;wll1.:.15.l Total . .... ................ -~391 , 026 .12 ·

(b) Non-operating revenues by years : 194 7 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

D

0 0 0 0 0 0 0 0 0 0 0 0 0 4 2 0 46 1948 ··· ···•oooo••········ ······•••• 0 77,799.62

1949 ····· ··· · ········· ···· · ·Q·······

762 . 18 1950 . .... • o .. 00 ••••••••••• • ••••••• • • 317 , 934.19 19 51 .. ...... ... ...... . ....... .. ... 0 l} 26 2 ' 3 46 . 3 2 19 5 2 . . . . . . . 0 • • • • " • • • • • • • • • • • • • • • • • • 5 9 , 3 04 . 0 5 - Total . .............. .... ~2 , 213 , 188 . g2 Fore ign a ir lines callin.e: in the :i.)hilippincs pay franchise taxes for their out going revenues only.

2. ?L..Q.ffi.ilJ..UL.Q~sJ2it£L_sto~ - In the c ourse of the va rious increases of its capital stock, i)AL had sold additional stock to its stockholders. of r ecords only at ov e r and_abo vc par. The excess over par, called premium which .L'.1:1.L received from its s-cockholdcrs of records only for its stock i s c onsi dered by respondent as formine part of its gross r evenues a nd subject to the franchise tax . . i?ctitioncr , however, belie ves that tnc excess or premium on capita l stock represents capital transaction or con- tribution by tho s '..:,o ckholdcrs to the corpor ation a nd cre- dite d to capital and not to earned surplus account and not "Bubjc ct to f ranchise tax .

3. ~) a§~§. .- .hS a consequence of bcinp; a GO Vern- ment - con trolled corpcrati on , pas scnccr pas scs arc iss ued b -_r ~~ ... 1 to YOv crnmcnt offici als and other a ir- line offici als · by"virtue of which holders of passes a r c allow ed to boo l~ p assar;c free of char:::;c including th eir ba.e;gagc, subject to availabi lity of s pac e . Respondent holds that the money value of the pas- senger passes forms part of the sross r e ve nues of the ~nL subject to the franch i se tax. ?ctitioncr , how- ever , be licvcs that inasmuch a s 1'J ... L rc cci vcd nothine; from these passes, no tax should be imposed th er eon . -4. Earnccl..s.,yr:.p .... ~...,_d..omo ~.:J:J....c... - This i t ern repre - sents various credits to the sur Dlus account listed in Schedule 1, Sch edule II, a nd Schedule III, all at - t ached to this Stipulation and made intc;:ral parts hereof, dcscribin.e; the nature of tho items consti- tuting the earn ed surplus and which arc t he subject 32 ..

/ ' ' :U..:.CJ:SlOlJ - c.r .a. c~s~ &J . 45 10 o f controv er sy . The p etitioner bcliovos that tho it ems listed in Schedules I, II and III do not form part of tho eross r ocoi pts or ~ross revenues of tho petition er subj e ct to franchise tax while the respon- dent , on tho other hand , believes that thoy a rc sub- j ect to said tax . Somo -of the i tems liste d in Sche - dules I , II and I II aro more adj ustine entri es which do not affe ct tho income a ccounts , Wi1ilo tho r est of t ho items such as F~hTl's valuat i on rosorve for plano P .I . C- 4 , 1•1I11.T Ctil & Ca li not surplus abso rbed by PAL , and the i tom of ~16 , 350 . 00 which is tho es timated cost of tho_ Sa~r Shop Equi pment a t Guiuan transferred from F1AT 1 in 1946, aro not taxable . 5 . .QQ. s:t Q f m at.oili,L'L..aD~Lfi ... QI:.Y;i c c s o - Th os o i toms consist of tho following :

(a ) Materi a l s anq soxyicc~ fyrnishod Pl-\F ,_- Undor tho maintoriance and Overhaul COntra ct botwoon the PilL and tho Phi.lip pino .·1.ir Forces , a ·copy of which is attached , marked Exhibit "1-..n, a nd made an in to~~al part of thi s Stipulation , tho ?AF r eimburses th o ~AL for the cost of. matcrials used and labor in- volved in thc _ropairs , 'plus lC/~ and 25% thoroof, ros - poctivoly . PAL declares the total amount rec e ived at premium of lOfo and 20% on the materials and labor , rospoctivoly. Respondent , how ov or, believes that both the cost of matori.als and labor plus tho l Olo and 207~ should be s upj oct to tho franchise tax o

(b) ~~- of matert~l~ld soLYices furnish~ Qthcr airline~ ~- PAL also repa irs tho p l anes of oth er airlines . ?rtL declares the c r os s profit on the labor and on the materials furni shed . Respon- de nt , however , bolioves that with r e spect to r epairs to other a irlines , both the cost of tho labor and material s plus the profit should b r subject to tho fr a nchise tax .

( c) 1via teri ,q ls_ anQ_[;lQULi.S.illl fu~h o d Cl-\A. - PhL sometimes sells to tho Civil hcronautics ~dmi ­ nistration motor fuel at cost. ?rtL dods not doclar o tho amount recoivod from the CAA bocauso a ccordin.:; to P11.L , it derives no sross revenues from the salo of such motor fuel . Respondent, however , believes that with r espec t to such motor fuels , tho total amount received from tho Ch. '• by the P11.L should b o doclarod for franchi se tax purposes . u For convoni onco, Schedules Nos. 1, II a nd III, attached to the a bove ~uoted St i pulat i on of Facts by tho part i es , aro as follows~ nscrt.r.;l.JU .LE I EaRN~D 0Uh?LUS (Domestic )

Reversion of •-Ccounts Pay-

able to Surplus par. JV- 9- 4, Sa n Miguel Brewery, L-~.ugust, 1946 ......... ..... ...... 121,429 .30 3 3 ,.,

DECISION -

C.T.a. Case No. LS dis A. Soriano y Cia., July 1946 for rental of house - £616,607 Nos. 1, 3 and & at Cuneta ... EF 2,045.97 Service rendered by Supply

and Procurement Section

from May to April, 1947, per adjustment entry # 30, SVL cee ape ss hv ue seo. FL, , 000.00 Medical Services rendered to MLAiCI from October to nae 1947 per ie ment # 294 JV-10-14. 375.00 & 375.00 Issued bx i in Sept. “1946 “ to MIAiCI o l- Cater tile Read Grader (Cost). ... ons Pi, , 000.00 1l- Callion Road ‘Roller OS ee eur es 3,500.09 7,500.00 istimated Cost of Samar shop Equipment at Guiuan transferred from FlLaTI in 1946 per adj. # 7 JV-12~-108 16, 350.00 Uncasned checks which were re- verted back to the credit of the PAL account with the Hong- kong and Shanghai Banking Corp- oration per JV-48-3-68 as fol- lows ;

PAYER CHECK NO. AMOUNT 5S. Fabregas F-01774 .00 Sto. Tomas Univ. F-08474 40.00 H. B. Andrews F-48228 193.33 B. Racaza F-67421 150.00 Dr.J.S. Sta Cruz F-79542 38.00 R. ©. Bils F-88320 39.42 Felix Boncan F-52h xcmentied ite 490.97 Reversion of Accrued Salaries & wages unclaimed per JV-48-4-53 as follows:

A.L. Espinosa R29.85 Db. Villaluna 25 .00 N. Rojales 12.50 F, Samaniego 12.50 M. Bassinger 120.80 C. Dhindion 47.20 R. Schultz 29.05 276.91 FRATI's valuation Reserve for plane P.l. C-4 which was sold in, Decem- ber 1947. The reserve was not taken up when said plane was dropped from the books per JV 4&- hol, JV 12-169 and d¥ 26-and 37 <..wea Wt 6a WN pale’ 29,166.64 MIAICI's Net Surplus i to June bas, 1948 absorbed by PaL wed 41,989 .56 34 age

DECISION -

C.T.A. Cad NO. 45 12 Earned Surplus re-acquisition of CALI properties for which Pal paid 37727 shares of capital stock per list aL tathed to JV-12-101 wucucavcccenes © v0 tad ohegel dd an Oe ie Se RP ee P134, 765.38

May 31

June 30

July 31

Sept. 30

Vets 31

Nov. 30 Nov. 30 Dec. 31 Feb. 28 "SCHEDULE II

EARNED SURPLUS (Domestic)

From 1949 to 1950

PaRTICULARS

J3-42 To take up cancellation of various checks drawn against H. S. B. C (nob CRsHOE)) oie sewn ses J6-42CI To reverse entry made

per JV 43-1-73 in

connection with In- voice 6283 which was already paid in Oct.

1947 per G/R 12230

C/R 414 Refund of freight / NCB, C/R ne gels Se J9-heh To record cancellation of various checks .......

J10-420 Taking up S.F. Invoice # 99 dated July 5, 1947 which was paid by Soriano y Cia ph OG sw sbi Gre be we To charge the account of Phil. Senate for Invoice #16331 dated August 31, 1948 311-428 J11-424 To adjust amount charged

to A/C 1241 by JV 49-1-42

J12-68 To write off "out of Date" checks, shown as outstanding per

PaL's Bank Reconcil-

Liation ....eseeeee $ oa wwe To record cancellation of checks

J 2-13

AMOUNT

P 349.66 R1,673.48 5.00 60.50 65.50 200 . 00 186.38 2,285.73 “-

DECISION ~

C.T.a. CASE NO. 45 13 March 31 J3-42 To eliminate credit of

Manila Engineer's Dis-~

trict account for unused FaaTl ticket No. 12914-4/25/h7 ...

Bot Akl hy / Dae i enga g hese y's RP 5,203.84

WSCHEDULE III

DOMESTIC EARNED SURPLUS

195]. - 1952 e JV-12-76-51 ‘to write off and/or cancel the following - liabilities:

Evening NewS ...cecewceees: # 30.00 New Society Bakery ..s..66% 15.80 Balcoff & Pobledor ........ 150.00 Carmelo & Bauerman ...... _ 320.00 Uy Tit & Cosvssscceeswen ses 22.60 FOUL BPS sa oad. Ve Vews wale 11.00 GOoUSOE G@ SOnNS Woon st in diac POT elias sy ness | ep eur In order to clarify ambiguous items contained in Sechedules I, II and III of the Stipulation of Facts and other items appearing in the aforesaid 5ti- pulation-of Facts, the parties were required to cla- rify those items and to submit evidence relative thereto. A supplemental stipulation of facts was thereafter submitted dated November 11, 1955, which is reproduced below en toto:

"T 2 DviTiONaL sTirULaTiON ReGaRDING SCHR DULS 1. aTTACHHD TO THh

* GINAL SfirvlallON OF FaCTS Dal ED

“After a consideration of further particulars on the following items, both parties admit that these are not taxable:

Reversion of Accounts

Payable to Surplus per

JV-9-4, San Miguel Bre- wery, August, EGMWD wswnda » Fl, 429.30 A. Soriano y cia. July 1946 for rental of houses Nos. 1.5 &4 at Cuneta ... 616,07 P 2,045.97 Issued by ral in Sept.

1946 to MIaICI of:

l-Caterpillar Road’ Grader (Cost) ...... 2B 4,000.00

1-Callion Road

Roller( Cost) a rates > md 50400 7, 500000 Dr..CISimJ c . r . ~ .

cd~~ No. 45 14 Estimated cost of Samar

Shop Equipment at Guiuan

transferred from F:C,.d.T.t in 1946 or adj . # 7 JV 12- 108 . .. .. . . . .. ... ........... .... ... 1216,350.00 Reversion of .ccruod Sa l aries & wages unclaimed por JV- 48-4-53:

.h . L . Espinosa D. Villaluna N. Rojalcs F . Samani c a- o '-' M. Ba ss in .. ~or C. Chindian R. Schultz i2 29 .85 25 . 00

12. 50 12.50 120 . 50 47 .21 __1.9-:ill_ Medical services rend er ed to MIAT CI from Oct . to J an. 1947 or adjust- mont# 29 , JV- 10-14 ... ........ . ... . .. ___J75.00 T 0 T h L .. .... · ~26 , 547 . 88 "Tho parties a ls,o ULpon further consid ora- tion of its nature airoo that the item of ~29,166.64 c aptionod~ 'Va luation Reserve' is taxable .

"In connection with tho it em of ;;24, 000 . 00 capti oned as 'Service r ender ed by Supply and ?rocuromont Section from May to .. pril , 1947, por ndjusting Entry No . 30, JV-10- 14', part of ~4,375 . 00 , tho following sti pulations as to tho nature of those items ar o submitted by tho par- tics : Tho lvianila International Air Termina l Co ., Inc., otherwise known as l•lir..TCI was a subsidiary corporation of tho i?hilippine h.ir Lines , Inc ., whoso managem ent was handled by tho 1_) ii.L . In connoc ti on with such management , services wore rond~ ro d by tho_ ~upo~y a nd ?rocuromont Section of tho i~L to tho MlhTtl and such services were charged against tho lviihTCl.

"In connection with the 5th item of Schedule , I, amount of 12490.97 composed of 7 sub- -items , tho parti es agroo that those 7 sub- it ems roprosont claims aga inst tho ~=1 by various c~oditors which wore paid by PtiL by moans of chocks , tho numbers of vvhich a r o onumoratod in Schedule

I

but duo to tho f act that tho creditors did not cash tho s ~ id cho cks, they wore subsequently can- celled by l.J J~L and tho corresponding adjusting on- trios made in its books. Tho adjusti ng entries wore made in its books. Tho ad justing entri es wore made by crediting t he amounts of those chocks to ~AL ' s surplus accounts .

"With respect to tho item captioned as 'l>'IIii.TCl's' __ not surplus up to Jyno 30 , 1948 ab - s or bod by ' .r' J-~.L' tho parties hero by s tipula to as follows:

DEC I S ION

C.T . d .

Cn3~ NO . 45 15 "Tho Manila Int ernati onal .H.lr Terminal Co. 1 Inc ., otherwise __ known as ivli.b.TCI , was a subsidiary corporation of ?nL whi ch was engaged in tho busi- ness of operating tho Iv'Iakati .h.ir Field up to Juno 30, 1948 . When tho Manila Interna tional J..ir Ter- minal Co. , Inc. was opened, the lJiakati •-dr Field was abandoned and l•II.nTCI went out of business. On the safd date all the assets and liabilities of ~I.H.TCI wore taken over by ?.M.L , including its net surplus of ~41 , 977 . 56 l!lus another item of PJ.2 .00 as deposits on work orders 1 or a total of ~41, 9 89.56 , ·which is the i tom tho part i c s arc now dcscribine . A COi) Y of tho· balance shoot of l\1IATCI as of Juno 30, 1948 is attached hereto ~s Annex ' A' from which trw aforesaid items of · ~41 , 977 .5 6 and ~12. 00 , or a total of 1241·,989 .56 may bo soon marked with an asterisk . 11Thc [...Ovornmont audi tors considered this amount taxable , as tho book value of th·o not assets ta·kon over by tho pet itioner wore in cx- _coss ~y P41 ,9S9 . 56 over the price therefor , and lVIIATCl is, a distinct ~nd s oparato corporation . ?otitioncr claims that the said surplus is not taxa ble, as t his represents the accumulated not profit of its subsidia ry , which has already paid income tax thoroon.

"In connection with the item of 1232 ,770 . 3.3 captioned a s ' Earned surplus rc - aGquisition of CALI properties x x x ,' tho part i es hereby sti - pula to as follows :

" Tho Commorc ial ~-- ir Lines , Inc., othcrwis o known as C.H.LI, was a corpor ation formerly on,ea,gcd in tho int ernat ional a irlines business in the Phil- ippines. On Au~ust .31 , 1948 . all of the a ircraft , spare cn~inos , furniture: fi~_ uros and other equip- ment , and other assets of CnLI wore acquired by i.b.L for tho stated amount of ~1 , 052 , 9.3 1.80 . This amount was paid for in the following manner : ?.H.L acquired from C.b.LI tho following properties : 11 .hircraft (Type C-47) ...

JV- 48-8-57 ........•.. ~446 , 720 . 00 2 Air craft (Typ o C-64) ... .

JV 48-6- 57 ..... . .. .. -.

16,411.54 Additional cost to flyable aircraft JV 48- 12-101. .. .. .. .• 7,074.46 ~470 ,206.00 Spare c r10inos , furni t uro fixture , and other equipment . ... JV- 48 -12- 52 . . ... ...... . 12138 ) 240 .00 Spare parts (R & R itcms)JV 48-12-101 .... ~72,7.35.51 Materials & supplies JV 48-12-101 ........ . . 70,250.29 38 .,..

h.. 6 ete 16

Jolo Waiting Station

JV-48-12-101 ... 2c cece wae RF 500.00 Junk Files (sold to Maidamer) JV-48-12-101 ... 500.00 Junk Piles (sold to CaLI) JV=48-12-101 ....cec cece ee ~ 500,00 P582,725.80 Total value of acquired properties #1,052,931.80 . SS Se oe Above properties were paid in the following manner:

In cash ......0. niavaee Watacaks . B 250,000.00 In ®4L stock as follows:

69,669 shares at R10.00 per :

SS. ee eT 2696 ,690.00 69,669 shares at P1,00 premium ..... 69, 669.00 & ,669 shares at a total price of .

P11.00 per share ......eenccevees FE 766, 359.00 By application of MIaTCI Receiv- x able owing by Call ..........0005 32,770.33 By application of rabl‘Receivable owing by CaLI ...... ape Sieh e mi, ete Re EO P1, 052,921.26 Difference between value of acquired properties and pay- ments made as detailed above absorbed into our Account 7187 as income (non-operating) “ sunensevencsllhtdh bliss TOTAL .... 21,052,931.80 "The item the parties are now describing may be identified in the above statement as applica- tion of MIaTCI's receivables owing by Cail in the amount of #32,770.33. This amount represents re- ceivables of MiaTCI payable by CALI for the use of Makati Air Field during the time it was in operation. In view of the fact that the MiaTCI was a subsidiary of thd ral, these MlaTCI receiv- ables were included in the purchase price of all the property and equipment of CaLl acquired by fh, "The government auditors contend that this amount is taxable inasmuch as this amount per- tains to the MIATCL and not to the rab, so that the profit on the sale is computed as follows:

Total assets acquired by ral ..... #1, 052,931.30 Total payment, as listed above ..... .#1,052,921.26 Less MLaTCl receiv- BIOS sisdvivss ste a cneahinyh tie Se Net amount paid by ral. ,....... ++ 1,020,150.93 Total profit, per government AULIGFOrS. vaseswwses. wee: Tee . BR 32,780.87 Less profit declared ...... ke bases — Ts ‘ Additional profit to be declared . PB 39 - 32,770.33 elite es ee as wet ll ~ —— co ee + wt — a a c .

' ..

DBC IS ION-

17 non the other hand , ~) 11L contends that the sum of ~32 770 . JJ cannot be considered as profit by the ? ~L because as shown in the above-indicated statement , ~; ... 1 acquired from C11.i,I properties worth .i;il, 052 ,9Jl. 80 for the sum of ~1 , 032 , 921.26 , which amount includes the sum of )).32,770 . 33, or at a ais - count of t210 . 54 , and th at until .c'nL has disposed of these properties acquired from C1->.Li for an amount over and above the sum of ~1,052 , 921 . 26 , no profit can be considered as having been derived by ? 11.1 from this transacti on. In other words , there can be no profi t from a purchase tra nsaction by the purchaser until the latter has resold the property purchased . ~'~ II ... DDITI 0 1 ~ hL STit' Ului'I'ION R1GhRD- JNG SCri.~CJLJULL II..l-uTT11.Crl:2::L. TO- T rt1 OhiGINaL 3TI?UL.H.T1 ON OF F'uCT3 ih,. r~L Iv'IJ.,Y 19, 1955 .

' '~ith respect to Schedule II , the-parties after further study ha ve agreed thnt the following it ems a rc t axable :

D1-.rr 1::,

FOLIO

.l9Jr2.

July 31

C/R 414

Nov. 30 Jil - 42h Nov. JO Jll -428 Iviar • . Jl

JJ-42

l1RTICUL.b.RS -- R cfund of fro i[ht by.

l-'ICi

0 /R 45566

) •

I

To ad 4ust amount cha rged to n/G 2141 by JV 49 - l-42 ..

... ... 0 To char.::;c the account of .t?hil. bonate for In roi cc r,l633l dated 1-~.u ,· ust 31, 194 ~ . . ..

' -' To e liminate credi t of Ma nila Enrineer' s District ~ccount for unuse d Fcati Ticket' No. 12914- 4/25/47 . . . . . . . .

j2 5 . 00 . 89 200 .00 7 8 . 'ZQ__ T 0 T 1, L • . • • • • 12 28 4. 59 nThc part i es also a.:;rccd, considcr in.e; add i- tional data relati ve thereto , that the followine it ems arc not · taxable :

DnT:b

FOLIO

Oct. Jl Jl0 - 420 i.ar::t) .. c ul ar s Taking upS.~ . In- JJ.

voice tt99 dated July 5 , 1947 which was paid by Soriano y Cia ... o • •••••• • • • 40 .Amo unt . .

..

lJ.DCI .3.t.UN - C.T. A. ChSE NO . 45 18 Doc. 31 .rob. 28

Jl2- 68

To VJrito off ncut of data ' cnocks , shown as outst a nd- ing por ?AL 1 s Bank r e conciliati on .. .. .. . ~ 426 . 38

J2- 43

io r ocord cance lla- tion of chocks ..... . ¥2,285 .73 T CJ T h

L

...... . .... !22,8)7.61 nwi th rosp oct t 0 t ho f ollowing i t oms : 1949

May Jl

FOLIO

- ---

J 13- 42

P.hRTiCULn.RS ----·--- ' •, To t ako up can colla- " tion of various chocks drawn a~a ins t HS~C · (not c a~ho d) . . . . . . . .

.i:2 349 .66 Sopt 30 J9 - 42.-.

To r ocord cance llation of various chocks 60.50 tho part ios hor oby a,:-] OO t hat t hoso r oprosont tho \ tota l amount of cancollod chocks which woro aid by ~hL to various creditor s but which woro not actually cashed by tl10 corresponding payoos , and thorofor o adjustin~ ontrios woro mado dobi tint; Bank Account a nd crediting Surpl us. "Hith r os po ct to tho i t om of ;11, 673 . 48,· tho parties h oro by aeroo t hat t hi s r oprosonts tho amount of pass o n~o r far o from Oakl and to Manila which was actually r ocoivod by ?AL ho r o in Manila but orron - oously crodit od to Ea rnod Sur plus, Domestic , which should properly bo included in tho Ea rnod Surplus , Inc omin~ Intornati ons l. I f this Honorable Court wi ll fi~ally rul e t hat tho r ovonuo from incoming international s orvico will bo sub io ct to t ho frah- chiso tax , thon .this i t om should bo included in tho gross r ovonuo from i ncomin;: international sorvico. 11Il I. H.l.Jl.Jl .I' i UNrl. · oTI.dJLuTIJN Hf.G. B..tJI NG 3Cnt..l.JCL.c, Iii I

c. TT.hC~. TO T rill; - O.KIGli'J.nL S rl.2U.L.:d ' l 0l. OF F.'i.CTS g:1- f bii -lVl j-,_ '(]3-;-12SJ:-:- IIIJJi th r ospoct to Schodulo III att a ched to tho oril3inal Stipul ation of Fa cts, dat od May 19 , 1955 , tho artios hor oby sti pul a t e s t ha t a ll tho itoms onumor at od in sai d 0chodulo III r oo r os ont balances payable t o vario us credit ors r opros onting oxponsos for materia l s and sorvicos whi ch wor o written off to Surplus as t ho y wor o lone outsta ndinr, in tho books .

41 ...

DECISION ~ S|

C.T.a. Cad NO. 45 iy ADDITIONaL oflPuLaTION win kage eCT

TO Tho Ifa UnDoR Tan Garli0N COST

OF Malahinlo niu SDRVLCES FURNIoHED 10 fh aND COST OF via oRIALO AND SERViceS FURNISHay OlanR nihLLNbS, "IV.

"The parties further stipulate that the follow- ing are the segregation of the value of labor from the value of materials in commection with the above- captioned items, for the four periods involved in this case.

SUMMARY OF BRSAKDOWN OF MaTERIALS |

aND SU?PLIiS SOLD 4ND SERVICES RENDERED FROM OCTOBER 1, 1946 to DECEMBER 31, 1952 Sales to Pib. Other Sales iuna-atgu7

LZ

Cost of materials and supplies sold and/or used for other air- lines, etc. (p. .

5 of Gov't audit Report) 2 54,712.98 duly 1, 19u7 to Cost of materials and services ren- dered to Pal per contract (Exh. a Sch. 1 p. 2 of Audit Report) 226,103.25 B120,500.85 2145,503.40 Cost of materials and services ren- dered to other airlines, etc.

(Exh. A, Sch. I, p- 2 Audit Report)89,375 .88 R89 , 375.88 Cost of motor fuels Sold to Casa, etc.

(Exh. A. Sch. 1 p2“udit Report) 1,395.46 1,395.46 194,90 and 1950 Cost of materials and services rendered to other airlines etc. (Sc.A,pp 1 & 2 Audit Report 2103 ,443..90 10,601.64 92,847.16 42 ° is -_ a . * ‘DECISION - 20 Cost of materials and services ren- dered to Pak per contract.(Sch.

=e, pow £& 2 of Audit Report) 2256,604.87 94,921.13 161,683.74 195l_and_1952 Cost of materials and services ren- dered to other air- lines, etc.(Sch. 1 » lof Audit eport 2216 370.71 70,791.76 145,578.95 7 Cost of materials and services ren- dered to PAF per contract.(Sch. 1 p- 1 of audit :

Report ) 227,892.84 109,637.82 117, 385.52 TOTALS #1, 225,094.89 P395 ,949.76F570,161.91P10 O82 TAPAS ae a From the foregoing Stipulation and Supplement Sti- pulation of Facts, the controversy has been narrowed down to the following principal items, namely:

Resyme of Lisputed Items of aMiOUNT DISPUTED Gross Receipts , l.Incoming Gross receipts - RALOIMATIGMAL Vie nd 6 we ae els os by Ha We R60 , 563,603.46 2.Qutgoing Gross receipts - et SND ol eer Pe pCa rn 29 , 390,076.46 3.Passengers' Passes - S,° TNGer nati Orel wees bes wows ee ome 1,431, 606.73 Ga DOMCRELS <2 oem a pier ue aee pana a *205, 914. 21 4.Premium on Capital stock ............ 1,799, O86. 59 5.Cost of materials sold to raF Ome “QEMer SAF IENGe + 64044 tus ee otwwws 617, 087 .93 6.Cost of motor Fuels sold to CAA ..... 1,395.46 7.Cost of services rendered to PAF and othioY Giyv timed (3 eees vs dibwis essa 1,08 $5850 8 .Earned rere items, Per Sche- dules I L and iii:

a. Services rendered by Supply & procurement Section from May to April, 1947, per ad- justment entry #30, JV-10-14 ..... 4,000.00 b.Uncasbed checks which were reverted back to the credit of the PAL account with the Hongkong & Shanghai ar? Fats .

Corporation per JV-48- 68 nebweweme 490.97 e.Cancellation of various checks drawn against .Hongkong Shanghai Berane DOS... iin weam chip hn es de vee 349 .66

d. Cancellation of various checks DOr Joel Zh vncniwen sas eee ee Le 60.50 (

DbCISION

C. f.a . CASE NO. 45 21 o . MIATCI 1 s Not Surplus up to Juno 30 , 194$ absorbed by iAL . .. ........ .

f. Ea rned Surplus re - acquisition of CALI properties for which ~AL paid 37 , 727 shares of capital stock per list at- tached to J8 - 12- 101 .. ........ .

g . To reverse entry made per JV 48- 1- 73 in connection with In- voice 6285 whid1 was already caid in Oct. 1947 per Collector

of Internal Revenue 12/JO per

JC- 42CI

• o • o••o•• •••• •••• • • • ••o•' • • ••

h. Cane ell at ion and -writing off of 1 ia bi 1 it i o s as 32,770.33 ' listed or ~V 12- 76 - 51 ............ .

1,113 .61

T0Th1

. ..•.. . ~ 95 , 299 , 270 .45 Tho petitioner maintains that tho items listed above do not form pe.rt of the "Gross Revenue " or "Gross Rc cc i ptsn which arc te.xablo under its franchises , whereas the res - pondent contends that the amounts involved arc part of petitioner's taxable 11gross rccoiptsn or 11gross r ovonuo 11 • Tho petitioner is on~a3od in the transportation of passon0ors and car~o by air. It operates under and by virtue of two franchises granted by tho fo r mer i' hilippinc LeGislature under Acts Nos . 4271 an~ 4272 , originally granted to its pro codes sors - ti1o ~) hi lip pi ne Aerial To st Company , I nc . and tho Iloilo Air Express Company , Inc.- which franchises wore acquired by the heroin petitioner and duly sancti6ncd by legislative authotity under Com- monwealth .hct No . 643 and Ro~ublic Act No. 759, rospoc - tivoly . Section 13 of both Acts Nos . 4271 and 4272 , which arc identical , r oad as follows : Soc . 13 In consideration of tho fran- chise and rie;hts hereby gra nted , the e;rc::mtoo shall pay to tho Ins ul ar Government dur ing tho first ton years of tho lifo of this fran- chis e a tax of one Dill' cent of tho ~ross r e- venue derived by th; erantoe from i~s opera - tion under this franchise; and during tho l ast fifteen years of tho lifo of this fran- cniso a tax of two per cent of such gross revenue . Such tax shall be duo· and payab le quarterly and shall be in lieu of all taxes , of any kind , nature or coscription, levied established or_colloctod by any municipal , provincial or lnsul ar authority. Tho gran- too s ha 11 pay tho tax on its rea l prop orty in conformity with existing law.

And Section 14 of both Acts , which arc also identical , provide - SEc . 14. Tho ~rantoo shall kooD a n a c- count of tho gross~rocoipts of tho business transacted by it and shall furnish to tho Insular Auditor and tho In~ul ar Treasurer a 44 • .. . ' ·DEC..~...0ION - c :r . .!L C.t. 0.b 1\J o . 4 5 22 copy of such account quarterly, during the month next follmving the close of the quarter. For the purpose of a uditing accounts so ren- dered to the Insular Auditor and treasurer , all the books and a ccount s of the grantee , and duplicates thereof , shall be kept in the ?hilippincs, and shall be subject to the ins- pection of the Insular huditor or his a uthor- iz ed representatives . Th e audit and aprroval of such accounts by the Bureau of Audits shall be final and conclusive evidence as to the amount of said sross receipts , except that the grantee sha.ll have the ri:.:;ht to a ppeal to the courts of the ?hiliD J)incs and the Supreme Court of the United State~~ under the terms a.nd laws of the Philippines a~d the 11.ct of the United '. States Conr:rcss of I-'Iarch twenty- fourth , nine- teen hundred and thirty-four.

"Th e words " 1 gro$s receipts' arc herein defined as the total receipts obtained by the grantee from its separation Mndor this franchise. It will be noted that under Section 13 of Acts Nos. 4271 and 4272 c titioncr .·is required to pay a franchise tax on the ~-ross J::.Q.Y..CJ:.l.U,Q derived from the operation of its franchisc , whilc under Section 14 it is required to keep an a cc ount of t!1c c.r:o.lL~- -;c,cQ.Qipts of the business transacted by it arid to furnish to the insular auditor (Auditor General) and insula r trc as urcr (National Trcas - urcr) , a copy of such accounts c~uartcrly.Scction 14 de- fines the term 11r.;ross receipts 1 ~ as mcanirrg "the total rccci pts obtained by the grantee from its oper ation under this franchise on The Supreme Co urt has ruled that the te r m ngross rcccipts 11 appearing in franchises ,:;ranted by the ~hilip)in c Lc~islatu rc under the authority of Sec~ tion 74 of the PhlJ.io o~nc Bill of 1002 a nd Section 2S of the Jones Lavv should. be interpreted to mean the same as "eross carnines") because sai~ organi c acts required that all franchis es , privilc:cs or concessions zranted by the Philippine l czislaturc shall provide for the payment of a reasonable. pcrccmta~~c of the e;x.illiLQ.iirll~ of the grantee s. (The J?hilip;?ine Lon.:; Distance Tel ephone Co. v. the Collector of Intcr1Jal Revenue 1 G.R. No. L-3222, Jan. 21 , 1952) J.ccordin.e;2.y, the terms 18ross revenue " a nd "~ross re co ipts n ap~ear ing in ucctions 13 and 14 of hcts Nos . 4271 a nd 427 2 should be interpreted to mean the same as ';ero ss carr,in,:s 11 • The q ucs ti on pre scnted for our considerati on is whether or not the various 'itcms here in controvcrsv arc oart of the taxable 11r- ross rcve- ~ 1 v • '-" nuc' 11 C""ross rcceiot.s 11 or n,-ross carniniJ'Sn of oetitioner. ) L • .l • , _ ) "-" J.

We shnll first ' consider the following items : 1.

Incomin~ Gross Receipts , I nternational ... o. o •••• !260 , 543 , 693 .45 2 . Out:~oin,s Gros8 Receipts;

International ... . .......

29 , 390 ,076 .46 'Total . ........ ~-S9 , 953 , 679 . 92 These two items refer to the gross receipts or gross 45 ...

' .. . '

D:DCI3ION -

C.T .h . CASE NO . 45 23 r evenue of petitioner der ived from the operation o f its in ternationa l lines .

It is a general rule that althou~h the taxing power ma y be bro ad , it is sub j ect to an inherent limitation that the s ta to can not tax a nythine; beyond its territorial j uri sdiction. Stated othe rwis e , this means that the state can levy a tax only upon persons , property, income or acts or business that arc within its territorial limits and bar s it from collcctins a tax on subjects or objects outs i de of thcs c lim i ts.

"No state may tax anything not within its jurisdiction without violating tho due roc css clause of t he Constitution . The taxing povwr. of a state docs not extend beyond its terr i - · tori nl limits, but within such limits it may t ax persons , pr operty , income or business. If an inte rest in property is t axed , the situs of ci thor trw I·;ropcrty or interest must be f ound within tho state. If an inc ome is tax~d , tho recipi ent thereof must have 2 domi cile within the state or tho property or business out of wh i ch the income issues must be situated with- in tho state so that' the income may b e said to ha vc a s it us tho rc in." (Manila Gas Cor oration v . Collector of Int erna l Revenue , 62 ~hil.S95 ). In eoine over tho provi s ions of the franchises granted to poti tioncr or i ts prede cessors , we note that under Section 13 of tho franchises , th o t ax therein im - posed is lev i ed upon the pcti tion cr n in consi deration of the franchise and rights 17 ,o;r a nt cd to pcti tioncr. Thi s tax a ppears t o us to be an excis e tax. It is a charco i mposed upon the petitioner f or the performance of an act the enjoyment of a privilcsc or tho orrca~in~ in an occupation. ( 51 .< -.m. J ur . 6l. J Being thus a n e xcis e tax , tho same can be l evied by tho state only when the a cts , ori v i l oPOS or businesses arc dono o r oorformcd within t ho jur'isdi cti on of the i:'hilippincs . ~ n~ll~rJ.;:;.o._t. axilli .- Tnc power to levy a n excis e tax upon tno .J:-.'0 rforma ncc of an a ct or the c n .. ~at:in:: in a n occupat ion docs not depend upon tho domicile of the p ersons sub j e ct to tno excise tax, nor upon t he hy - sical location of tho property used in con- nectio n wit h tho act or o ccupati on taxed , but depends upon the placo in vmich the a ct is- performed or the occupation is onzae;od in . state may constitutionally tax the performance of a certa in c:~ct vJithin its l imits, and may enforce p ayment of the tax even when tho act is pe rformed by nonresi dents of the stat o with resp ect to property which has n e ver been withi n i ts bound crie s provided tho act which is aubjo ct to t110 t r.tx is per fo rmed wi thin the state . Its power to impose a tax on transact i ons within the state is not affe ct ed by the f act' that tho exaction o f the tax is contin.:;ont upon events occurrine outside tho state .

~ state may not , however , l ay a privilcec or excise t ax upon the 46 :

·'

DBCI010N

C. i' ,. •• C.n.S.D ... ~ o . 45 24 exercise or onjo mont of a ri~;ht or privilo;;o in another state derived from the laws of thRt state and thoro in exercised and cnjo~rod. It cannot constitutionally impose an exc is e upon the performance of an act outside the limits of tho r.ovcrnmcntal unit by which the excise tax is levied.

~~ state cannot levy an occupa - tion tax upon a person or corporation afte r ho or it has ceased to carry on the business taxed within the state; tho carryine out of contracts previously made is not onea.c;in"; in business . n (51 :.m. Jur . pp . 460~ soc. 445J.

Of course it is to be noted that under the law herein involved , tho 2;s tax levied upon potitionor-:is supposed to be one 11i n lieu of a ll other t axes". 1-. pro - visi on of law im os in ~-r a tax "in l i eu of all taxes of any kind~ nature or descr i ption IT has boon .:_:cmcrally con- sidered as a commutation tax , that i s , it is a combina - tion of two or more taxes as an excis e or franchise tax. payment of which would :~ ivc rise to a privilo,sc exemption from all other taxes . (1 2 C.J. 216) . However , it must be admitted that .as a commutation tax, it docs ·not cause to be subject to tho eonaral limit ations imposed upon all burdens in character of taxes , VJhatcvor the ir denomina- tion may- be . Since the tax i mposed by So cti on lJ is a t ax upon tho cross receipts of the petitioner derived from tho operation of franchises ,:>;ranted to it by the loe;is - l at ivc body to establish ~ operate and maintain an air trans~ort service for tho transport ~ tion of passcnccrs ~ mail and roporty by aircraft , tnc 2~o commutation tax is to be deemed imnoscd as a substitute for all 0thor taxes that may be levied or assessed upon the ctitionor. However ~ the 2)o commutat ion tax c an be a substi tuto only of taxes that the ?hilippincs could validly impose and colle ct from tho petitioner. The tax so imposed can not be made to r oach tho subjects or objects of taxation which the _l)hil- ippincs can not validly tax . The tax involved herein bcin~ a substitute or commutation of all taxes which arc or may bo legally exa ct ed ) tho ri:-::ht of tho .r' hilip· inc Government to collect taxes must be considered in r ola- ti on to the aforesaid doctrine limi tinr:r the oo'wcr of a •.J • state to collect taxes to subjects or objects within its jurisdiction. It follows ti1at tho Philippine Government lacks tho authority to levy a tax upon tho business trans - acti ons or acts dono by petitioner outside its territorial limits . Tho fact tna t the pot iti oncr is a domestic corp- oration C:.ocs not alter tho situation. Consequently , any attempt on tho part of respondent to collect a franchise tax upon tra ns act ions do no outside of t~o ihili pinos would be void and wantin.::; in auth<br ity ~ as it would ctnms - ti tuto a deprivation of tho liroporty of the taxpayer without due process of law~ liavinr.; roached tne conclusion that the franchise tax imposed by i1cts Nos . 4271 and 4272 in the nature of an excise t E.X and that no excise tax may be levied , imposed or collect ed on ~ross receipts or earnings derived from transactions made or effected beyond tho territori a l limits of tho Philip in cs , lot us now consider whether tho eross receipts or oarnin8s derived by petitioner from its :' 47 -

DECISION

c.r .h. ChS~ ~0 . 45 25 international lines were tho r esult of transactions mado or affected within or without the taxing jurisdiction of the ~hili o oinos. The first itom in the amount of ~60,563, 60] . 46 , relates to tho Eross receipts denominated as "International ~ross r ocoipts - Incomin;_n . This amount is tho total eross receipts during tho period in quest ion for th o transport ation of passon~ers and froi_sht from foreign countries to tho ?hilippinos . Thoro can be no doubt that in regard to the ~ross r ece ipts for tho transportati on of nasson ~o rs and froir-ht in foroi~n countries tho transac- r tions wore oxclusiv~ly for o i2n . ~Consoquontly , s aid ~ross rece ipts c an not be roached by taxRtion in tho ihilip- pinos. Tho transportation of passon . .::;ors and freir;ht orlgln - atL'1e in s orne foroi.e;n · countries with tho i'hilippinos a s dosti~,tion presents a mora difficult problem , a porti on of tho services rendered bv petitioner to its customers boin~ a ctually rondorod in. tho ihili pinos when its planes land on i'hilippino soil.

'vJo have studied t ho matter carefully ,and found soma assistanc e from tho administrative rulines and interpreta - tions of tho Bureau of Int erna l Rovonuo on tho taxability of tho r:ro ss r ec eipts of common carri ers in t,onoral. 2.g__c - \d_on 192 of tho Ne.t ional" Int ernal Rovonuo Coda impose s a or cant ago tax of 21~ of the gross receipts of common car- riers and transportation contractors , wheth er ongagod in domestic or for o i ~ n trade . In tho case of common carriers ongaeod in internationa l trade , tho Bureau of Int erna l Ro- vonuo has rul ed that receipts derived f~om incomin£:; freight and passon.e:or service arc not subje ct to said t ax, and that only receipts from outsoing froicht and pass on~o r service a rc t ax able.

"Receipts derived by Foroi .3n steamship com- pani cs onr:aeod in business in tho ?hilippinos from out~oins froi&ht and passoncor service arc subject to tho porc ontazo t ax imposed in Section 192 of tho Nati ona l Internal Rovonuo Coda. Now- over, receipts derived from incomin~ froir;ht and passoncor service aro not subj ec t to tho percen- tage tax imposed in tho s aid section of tho Tax Code. In b oth cases , it is immaterial wh ethe r oaymont of tho froi;-ht or oassa.P:o is made hero or a broad. (Rulin_:, 'B.I.R:140.02 dated Oct . 5 , l950.)n (.n.ranas, Commentaries and Jurisprudence on Business and Occupation Taxes , 2d Ed ., p . 277) . It is obvious that tho cross r ocoiots derived by com- mon carri e rs ons:·ac-od in int or'r;.ationa l trade arc derived ' ·" u from transactions l)artly witnin and partly ·without tho ~hilippin o s. This is truo as r o0ards both out_soinc and in t omine passon:or and frei~ht service . Groat difficulty v;rould b e encountered if tho .sross rece i pts from inc oming servic e wore to bo apportioned by s osraeating tho portion actually earned for services r ende red in tho ?hilippinos from that portionvlarnod for services rendered outsido 1 Tho same is true w th respect to tho s ross receipts from outeoine traffic. To facilitate tho determination of tho taxable from tho non-taxable cross rocoi ts , tho Bureau of Internal Revenue has ruled that only tho 2ross receipts of conmon carriers onear.od in int ernati ona l trade derived from out a:oin'r service arc doomed earned from ......

........

48 .., ' ' D.--C iJ IO ~ - C. T . .t-~ . C.h3!J NO . 45 26 transactions within tho i?hilip~;inos, while tho cross re- ceipts earned from incomin:::; service arc considered derived from transacti ons without tho :hilip~inos. In short, tho oricih of tho business, or tho place of om~ark~t i on ; an~ not tho place of completion of tho faro or fro1:::;ht sorv1co, determines tho situs of tho transaction . Tnis to us is a sound rule and is advanta~oous from tho point of view of both tho Government and t~o taxnavors concerned. If tho Bureau of Internal Ravanuo has ~o~n fit to apply this rule to ccmmon carriers an~a~ad in international trade

L J

\ ..)

under Sacti on 192 of tho Ravanuo Coda, wo find no justi- fication for tho applicat ion of a different rule to car- riers oporatin2 under franchises ~ranted by tho ?hilippino Lot: isla turo or by Con::::ross. If it is cons idarod ilJ,.oe;al under Section 192 of tho Rovanuo Code to tax tho eross rece ipts of common carriers derived from incoming inter- national service, on tho ~round that they ara ·darivad from transactions outside tho i'hilippinas, certainly tho taxa - tion of similar ~ros s receipts cannot bo justified on tho ,::;round that such ,_,ross r eceipts aro .oarnod by common car- riers oporatinP: under franchises. V>horo tho la -ilaturo or Co:rl[;rass la'cks power to levy or impose a ta:X, tho im - position or collection tno.raof may not 'bo justified under tho suiso of a franchise tax.~ We arc , therefore , of tho o inion that tho "incoming EJ'OSS roc oi ots - international tT of pot it ionar in tho c:tmount of i260 , 56 3, b03 .46 a rc not taxable, whi la tho out so ing gross receipts in tho amount of ~29 , 390,076.46 arc subj ect to tho franchise tax.

Wo now proceed to the disputed items ragardin_::: ;:as- sonzar i?assos . ~.s a consequence of boint:: a covornmont - controllad corporation, passen~ar passes arc issued by tho petitioner to ~o v ornmant officials and other a irline officials by virtue of which holders of passes a ro allowed to b·ok passa:Jo froo of charr;o includ inr; their baEc:aso, subject to availability of space . (i)ar. XXI, subpar . 3, Stipulation of Facts.) In addition, passes a rc issued to employees of tho petitioner as well as those issued under raL~lations of tho Interna tiona l Air Transport hssociation tho latter being an organization to which tho majority of internati onal airlines of tlla world a rc members. ?asses arc issued not onl' in connection with its forai~n ser- vice but also in connection vJith its domest ic so'j;vice , and it a pears th2t tho holders thereof arc required to waive all claims for da~acas ae;a inst tho · petitioner in case of a ny mishap . Furthermore , ?ass-holders arc entitled only to free transportation of bar:£ago to tho same extent . as a paying passan..:;or and any excess ba::::sa~:a arc subject to tho usual froic:ht cha rges. Tho respondent maintains that tho r:tone)' value of a ll those passes co.nsti tutas part of tho .:::;ross rev enue or !JOSS <r!'ocoipts of tho petitioner subject to the franc hi so tax.

As a lready adverted to, Section 13 of both Acts Nos. 4271 and 4272 , require petitioner to pay tho fra nchise tax on its t,ross royonuc dorived from its operation undor tho franchisos , while Secti on 14 of tho same Acts roquira tho potitionor to koop an account of tho ~~~~~~~ of tho business transacted by it , furnishing tho Insular Auditor and tho Insular Troasur or with a copy o f such 49 ; .

DECISION

C. T . A. CASE NO . 45 27 a cc ount . Th o t e rms "r:ross r ovonuo n a nd ttr:ross receipts " should bo intorprotod to moan tho samo as tt,sross earnings " . 11Th o acts of tho Logislaturo e;ranting tho fr anchis e should bo construed so as not to con- travene or violate tho orsanic a cts above men- tioned , for other wise said lozi slativo acts would bo null and void or unconstitutional . Tho or0anic acts usc tho word ' earnings ' . A person may havo o arnod his salary but may not ha vo col - l ected it , or may bo unable to collect it from an insolvent omployor. A person cannot demand payment of his unpaid salary unless he has oarnod it. This would show that to collect is different fr om to oarn . Consequently, tho uncollected ·, ' 2ross receipts' which should bo construed as moanin,s tho samo thing as 'gross oarninr;s ' shoul d bo subject to tho franchise tax.

"Thcroforo , tho amounts above menti oned duo from customers which aro uncollected or written off or carried in tho books arc subject to tho fr anchi se tax in thc ,.amount of ?.3 ,066.57 ." (Phil- ippine Lone Distance Tolophono Co . v . Tho Col- lector of Int crna 1 Rovcnuo , supra.) For purposes of tho franchise tax , thorofare , tho ?;ross r c vonuo of tho potitionor is rcprcsontod by its gross carninp;s from its patron s in cxchan;:o for tho servi ce s rond;~d , includinr, amounts duo which aro uncollected or writTn off or carried in its books .

Applyin~ tho forocoin3 criterion to tho c ase at bar, it will r eadily be noted that tho money value of tho froo passes was never earned by tho petitioner . From tho t imo tho pass es woro issued , it was already definitely under- stood that no amount can bo and will over bo roccivod by th o p etitioner from tho holders thereof . Thoro was novor any i nt ention , hopo or expectation that tho petiti oner · would o vo r collect tho money value of tho passes whon thoy woro issue d . hnd as allcr,cd by tho petitioner , tho money value of tho froc passes novor appoarod in its books as . accounts rocoivablo. Honco~ tho money value of tho passes iss ued by tho petition er to ~ovorn~ont officials and its employees is never duo from customers . Neither ma- thoy be considered as accounts uncollected or written off or carri ed in t ho books . J,s such it can not be considered a s n r;r oss ro co ipts 11 , n.:::;ro ss rcvonuo n or 11r:ross c arnine;s " of poti tionor from whatever an~lc tho ~uostion is viowod .J , Moreover: as stated above in tho Stipulation of Facts , passongor passes a rc i s0uod by tho petitioner t o ~ov o rnmont officials and other airline officials as a consoquonco of bo i nc; a r:ovornmont-controllcd corporat i on . Under tho pro- visions of the Civil Aeronautics hct , Republ ic Act No . 776 , tho p etiti oner is oxprossly allovvod t;o ,:::rant froo passe s to cert ain persons, including its officers , age nts and omployocs an::i their irrJnod iatc families~ as well as to mom - bors of Congre ss (Section 42 (d) , (J), Republic Act No. 776) . Pass es mi8ht therefore be cons i dered as issued in accordance with said provision of lav-1 with no expectation 50 ... . '.

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l.J:t. C L::J I u N - C. T • .n • C.n St. N 0 • 4 5 28 of any consideration for the r eturn of services rendered. While it is t r ue that tho said Republic h.ct No. 776 was approved only on June 20, 1952, it scorns moro i n conso- nanc e with tho purpose and spirit of Acts Nos . 4271 and 4272 to consider the Passes i ·3s uod boforo this date as purely incidenta l to its bo in3 a [OVcrnmcnt-controllcd corpor ation and the only domestic· airline company cn,ca,:::cd in for eign operations which , for mana~c ri al purposes, were reasonab ly necessary for its successful mana,:.cmcnt . llorc- ovor , since tho issua nc e of the passes wcro mado upon com- pliance with rc:ulations of tho Int ernati ona l ~ ir Transport hSSoci ation , which aro observed by tho majority of the i nternatio nal airlines of tho world , we believe that such practice in tho commercial world should bo rec o0niz6d, there boint: no showins that tho same is contrary to law. (Art. 2 , Spanish Co do of Commerce; Art. 6, Spanish Civil Codo ; hrts . 9-12, New Civil Codc.J .nt a ny ratc , ~passes are s;rant cd sub j c ct to 11s pac o .n. va ilabi li ty 11 , a nd thoro bo in8 n o loss of revenue to tho petiti oner and no increase in opcratinr; expense , there is likewise no loss in the franchise tax to the Government .

Of course , it is to be understood that the exemption of passes whould be limited to those issued in a ccordance with ::>ro scribed rulo s a nd aro not intondod as a means for cvadinE~ payment of l awful taxes. In tho caso of peti- tioner , it appears that passes arc issued in accordance with law and tho rules promul.:atcd a nd approved by a board , the majority of which is roprosontod by tho Government i tself. Neither doos it a ppear that tho power to issue passes has boon abused, nor has any pass been issued which is intenC.od to evade payment of the franchise tax . vvo find .no losal basis, therefore, for holdine petitioner li e.blc to tho franchise tax on tho estimated money value of passes issued by it d urin~ tho period in question . Goin~ now to the question of the taxability of pre - miums on capital stock in tho sum o f ~1,799,9~6.59, this amount was derived by tho petiti oner from tho various in- crease of its capital stock which the petiti oner sold t o tho stockholders· of record at Ei price above par va lue. The respondent contends that the 2mount received by the cti- tionor in excess of _:-Jar and called "premiums" , should be consid ered as part of tho ,::ross revenues subject to the franchise tax. On tho other hand , petitioner maintains that such excess represents capital tra nsactions or a ro in tho character of c ontribution by tho stockholders of tho corporati on, and havin.c; b oon croditod t o capital and not to the earned surplus account , tho same should not be subject to tho franchise t ax. (Par. 21, sub-par. 2, Sti- puJti on of Facts . )

Under Qur inc ome tax law as implemented by Revenue Ro.:.:.;ulations No. 2 (39 O. G. 325), the r eceipt by a corpo- rati on of shares subscribed does not ~~ivo rise to any taxable .:ain oven if t-ho rico bo in excess of the par ')f sta to d value. rhus, und or S cc ti (m 55 of Revenue Rer;u- lations No . 2, it is provided ·that whether tho acquisition or disposit i on by a corpo rati on o f its shares eivos riso t o taxable cain or deductible loss depends upon tho real nature of the transacti )n,- Tho receipt of tho subscription ,.

51 - .. . ' ..

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l..fE. C1 SION - C • T • t-• • C r~ S:b N 0 • 4 5 29 pric e upo n tho oricinal issue of its capi t a l stock would 3i vc r i se to neither ~a in ~o r l oss , whether tho price a t tho time of issue be in excess or loss than tho par or stated value of such capital stock .

This rule is a lmost i dcnti ca l with tho feder al rc ~ ulati ·)ns on income tax under a s i mi l ar l aw in tho United States (Soc . 29- 22(a) - 15 , Reg . No. 111; Soc. 39- 22(a) - 15 Roe. 116) . hs a matter of fa ct , i t i s our belief that a :ain or a l oss can not as yet ari se from a more sale of tho shares , in tho e.bscncc of a basis upon which a eain would be derived . If, f or income tax pur poses , tho recei pt by a corporati on of premium on tho subs cripti on or issue price over tho par value of its own capi t a l stock docs not constitute a taxable ea in , it fol - l ows that tho r e ceipt by tho petiti oner of premi um on its capita l stock docs not constitute any ~ross carnine or re - venue upon which tho franchise t ax may be assessed. 11Wc arc s atisfied tha t tnc entire pr oceeds of sales by a corporati 0n .Jf its own st~ck , oven when sold for m oro than par vc:tluc ' aro part 0 f . i ts ori_r:;inal assets or ca _ital stock, and thoro - foro cannot be iJrofits earned throu~Th tho c on- duct of its busincsq .. Tho phrase 'ca·Jita l stock ', as used in section 309 of tnc Civil Code, moans ' not tho sha res of which tho nominal capital i s com oscd , but tho actual capital ; i . e ., as sets , with which tho cor )orati ·:m cc:rrics on its corp- orate business.' Schults v. Boulevard Gardens Land s Co ., 164 Cal. 464, 469 , 129 ?. 582 , 44 L . R.~ ., N.S. , 156 , ~nn . Cas . 1914 B, 1013 . Tho solo purpose of selli ng stock is t o a cquire assets with which t o carry on tha t busincs~ . This is equally true whethe r tho stock be sold at par , or below ?ar , or above par. Tho capita l stock re - ferred to in sai d section 309'is tho actual pro7 party of the corporati on contributed by tho sha re - holders . ' Tapscott v. Mexican Color ado , etc ., Co . , 153 Cal . 664, 96 ? . 271; Escclsior , etc . ' Co . v . Pierce , 90 Cal . 131 , 140 , 27 ? . 44. It is , in brief , tho 'capital ' ofthc corporati on ." (Merchants & Insurers ' Report Co. v . Schroeder , 39 Cal . hpp . 226, 178 ?· 540.)

"""11 arrrcc that 'Jrcmi urn recci ved on tho issue of c a~it al stock with ' ar value is not a f orm o.f income , althou,"';h lc,:-:ally viewed a s e. section of surplus. Similarly tho excess of amount paid in one i ssue of no - par shares over tho stated value is never reco("nizablc as income ." ( !Jato~ j .accounta nt s ' Hanu book-; Third .Edition ,,

p. 168 . Moreover , it has b oon :=cncrally a ccepted that no 3a i n may be derived from tho ini t i al transaction of corp- orati Jns on tho issuance of its share s .)f stock . Tho money -'J r £lro party obta ined by tho coriJOration upon tho or ::;c:tni zation thereof or 1.qon a.ddi tional or subsequent issues of shares if e. fund r aised to provide f or capita l f or purposes of its Jpcra.ti on 2.s well a s a fund to act as a security for tho payment of tho corporate creditors . Thi s fund or capital stock is usually carried in tho books 52 L~ G i.:::i ll.)l~ - C.'i' , n, Ln.J.w _.,tj , 45 30 of t h e c or poration as a liability and the amount derive d from r a i sine such capital a nd n ot subject t o distribut i on as dividend or ?rof i ts. I n corporate law and practice , i t is t he rule that only ;,..;hen the c orpor2.tion deri vos sain in the course of its transactions or from its ope rations may the Board of Direct ors lawfully divide such .c;a ins and decl are them payable to tho st o ckh o l ~o rs by way of divi - de nd s . ~s a corro l a ry , the amount rccoivcd as capital and f or minr; part of the c apit al sto ck is in nJ way dccmc~ t o b e profits derived from the operation o f the corporat1 on , hence the same should be treat ed a s ~art of the c a)ital stock . (Par. 3 , Section 16, ~ct 1459 , Corporation Law ; Soc Kahl , Co rl)'Jrato Dividends (1941 Ed.) p . 70- 73) .•. The next point o f controvc rs y refers t o i terns 5, 6 , and 7 enumerated above , c onsistins of the cost of materials furni shed the ?hiliLJino uir Force , ,)thor airlines a nd the Civil .-,.cro nautics '"dministrati Jn in connecti on with an a:.:,rocmcnt f .Jr tho r c ~ )ctir ,Jf tno pla nes and ·) thor forms of servic es rendered by the Phil i p)inc a i r Li nes . Unde r t he ir a·•-reomcnt , the i.)hil io~)ino ,:,ir Force. Civil "-~.eronaut i cs Ad - mi ni strati on and oth~r a irline s undertook t o ')F{y peti tione r f or tnc c.Jst o f l abo r e. nd raatcrials in the rep air of their planes. However , it ;,vas a ls o ~13ro cd between thorn that the pet i t i onor heroin vwul d sup:Jly the mate rials , spare ~Ja rts and sup)lics whenever tho s ame C')uld n ot be •JrJvidod by tho said rhi l i l))inc 11 ir Fore o , Jthcr air l i ne or tho Civi l i•Oronautics .hdministra ti )D . The [)oti ti oncr , accordin:: t o the a:.:;rcomont ch2r ?_cd tho c Jst of r c p a i~s , labor , mainte - nance or ather fJrms of char:os plus 20% of such actual cost and whore materials have been nr ovidcd by tho pet i - tioner , the petitioner wa s entitled to recover tho actual cost of such materi a ls with a 10'-;o -oromium there on . The pet i t i oner returned f or franchise t e,xcs only tho 2~~ and l(ijo pr or.1i ums on tho a ctual cost of matcri2.ls a ncl l abor , respectively . However , r espondent contends th at the a mount sub j c ct t ') the fr anchise t ax includes not onl v the s Ri d 1-0~b and 20i; premium but the cost of the materi a ls a nd l abor as well . The petitioner havin.r: ·admittod in its memorand um that the fra nchi s e tax should be colle cted with rcsooct t o t he c os t of labor plus 207; premium the r e on , tho quest i on has therefore boon narr O'\II]Cd clown t o who the r or n ot the a ctual cost o f materi als , S?arc ~arts a nd supplies furnished by the petitioner arc t axable . Unuo r the second '!Jar a ''Ta h of Sect i on 13 , i.cts Nos . 4271 and 4272 , the c;ros~ rece i pts s ub- ject t o t ax has boon defined as "the total rece i pts obta ine d b.y the £~:rantoc fr om its O)or ati on 11 of the fran chi so . Si nce ti10 amo.unt r cc ci vcd by tho rwti ti r)Dor for rcndcrine ser- vices and/or providi nc materials f or the rep air and main- t en ance rendered by it for the benefit of the ihi lippinc 1.ir Force , Civil 1.oron2tutics ildministr-:::ttion a nd other air- li ne s fell wi thi n tho purview o f tho broad concept of ",o;ross receipts 11 a s defined , we believe 2nd hold that such rece i pts in itd _cntiroty arc subject to tho payme nt of sai d franchise t ax .l v..c fifld no r ea s on t o do~JE'trt from the lone- cont i nued int or pre ta tion placed up on the mea ninr.; of ",e:r oss recc i ptsn o r ""'r os s carninc;s 11 , in the c a se of ·) ~)or a tors of repai r shops , a s t o include t ho c ost of labor or tho cost of labor a nd matori El.ls if both a rc furnishcd . J I tem 8 con s i sts of miscellaneous disputed items con- t a ined in S ch od ulos _I r- JI Emd III. The f ir st of those ,.

53 '. ' ' '

D~Cl3 ION -

C. T.h . CnSb NJ. 45 31 i tems (I tem No . 1 - a) involves an adjustment entry in pe - tit i oner's r e cords coverinrr a crc r'it to Earned Sur-r1lus i n the sum of ~4 , 000 . 00 rep r~sentinc; services rendered by the Sup)ly and Procurement Section · ·)f the ?hili,:J,:Jine Hir Lines. Thi s amount represents servic es rendered by the petiti)ner to the Hp.nila Internati onal .~~r,nTcrminal C o m_:J~ny, Inc. (here i nafter referred t ·) as IJI111.1CI) by the Surplus and ?ro curement Section of tho former , and f or such services the value thereof vJas cha r P'Cd the ltll1.TCI. Tho l-1IhTCI was ._;

t hen a subsidiary corp or 9-ti on of :; cti tioner a nd likewise manaecd by it . Tho 1•IIHTCI was then engaged in tho mai n- tena nce o f the Mak ~ ti a irport, but duo to t he closure of such airport , it became necessary t o likewise disso,lve the cor:por ation . Tho l:;cti ti:mcr cla ims tha t the d isputed i tem in vo 1 vas solely b oo kkce ;:>ine: entri es and is n ot tho re f ore )art 0f the :.ross re co i pts of t i1c ~')ct i ti oncr subj oct to t ax . Th o services rendered by tho h erein petitioner f or the l'IInTCI were ';erf or mcd in the ·or din :tr v course of busi- nes~ .

nlth o ~ :h the NihfCI was admitt ed ly· a subsi ·iary corp or n.t i on o f petiti oner , that is , it was practically wh olly owned by the l atter , ne ve rtheless , the two cor p- orati ons were separate and di stinct jurid ical entities . Hence , tho c om:)ens at i on for services r endered by tho pe - titi on er therein i n the course 'Jf i ts business a rc taxable as vJithin the urvicw ,)fits fr ~1 nchises, irres pective o f whether the services were perf ormed for a r elat ed or totally inde pendent cor)oration·.

Horcovcr , althr_;u ·h n :, a ct ua l cnsh ~a yf!1Cnt was made o r transfer of fun ds effect ed between the parties , we believe a nG. t10ld tha t the c.;.mounts· enter ed in the books of . ctiti oncr as comp_gnsation f or its services t ·) l111I.L.TCI wo r e int e nded to be collected. If thoro was no int enti on t o collect , we sec no reafu •) or justificat i o n for tho entries in tho b ooks . The f a c tha t s a i d amounts ha ve rC I(ta i nod uncol1ccted doc s no t mi it ate a o·a inst their taxabili tv . On a n a na l o··ous point , o ur Sup;;omc Court h a s hol d that ::.mounts due' ·from cust omers which a rc or ha ve rcnained unc ollected or have boon wri tt on off from the books of a ccounts o f the __ t axpayer arc nevertheless sub j e ct tl) tho franchise ta:x..J (Phili n::>i n c Lo n ~ Dista nce Tclc 0honc C om~any v . Collector of ;;:c rna l ~.cvCnuc , .s.u;a:a 0 ) ' 0 The next c; r ou~J o f i toms (It em 8- b , c, a nd d) in con- t r ovcrsv c onsists o f several chocks in sooar a to totals o f ~490.97 : ~349 . 66 and ~60.30 , whi ch ha ve remained uncashed and ha vo be on reverted t o the 3ur"Jl us ... cc ount ·. Those chocks wore drawn by tho peti t i on~r a :~ a inst tho Hon,e,ko nt:- Shan:;ha i Bankin.s Cor; or ation in :>nymont o f cla ims of various credit ors but which wore never cashed b y the respective payees .

C o ns e~u on t ly , the petiti oner c ancelled thos e chocks a nd tr ansferr ed the ':l.m') unts c overed hereby t o tho Earned Surplus ... cc ounts . Thos e amounts wor e d isbursed by the pe - titi oner i n pa mont f ·Jr cx~onso items . rho f a ct that these cl a ims h ave bee n r ev erted t 'J Sur plus would not a ff oct the .5I"oss r e ce i pts subject to the franchi se tP,X because they merely r epresent a reduction o f tho ox ens os when tho same wore incurred . hs mere e xpe ns e c, ccounts , tncy d'o not for m part o f tho ,-;ross receipts. Instead , they a rc part of the deductions from tho Gross Income of notiti onc r in .Jrdcr to arri ve at its not income . ~.ny s a vint:· of !JCtitioner' s ex- pen ses would solely bc __ <3_ reduction of vJhat :)otitionor incurs 54 ..

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lJLCl.::3ION - C. T . .n. . Cn8E ~0. 45 33 The next item (Item 8- f) represents the sum of ~32 779_ . 33 , consistin.=; o f earned surplus -re - acqui sition of Cn.L..L properties . The Commercia l Hirlincs , Inc. herein referred to as c •. LI , was a corporat i0n f ormerly e!1f;a,:-~ed in the int ernational air· transportati0n in the ?hili ,;J- ;>in cs . On .~-~u.<::ust 31, 1948, all of its assets with a stated amount of ];2.1, 052 ,9 31.08 were c::t cquired by petitioner, and the payment thereof was ma de in e11arcs of stock of pctitiJncr and by thc __ appli_9ati::m by the pctiti::mcr o f rc - cei vablcs owed by C.n.Ll t o lVl..L.n.l CI in the afo res aid sum of ~32 , 770.33. This MIATCI receiva bles had been rcvi~usly transferred to potiti cmor after tho absorption of MIATCI , Th c p oti ti on or c onto nds that t .he a p~) lie ati J n () f said a c- c ounts receivable to tno :Jurch asc price of C.n.LI proper- tics constituted a mere bo o kkcc_::)in~ entry a nd , thcrcforo , is not t axable , where as tho r espondent c:mtonds that tho am Junt c onsti tutos r) r ofit on tho 'Jart of tho nctitionor wnon tho s arne w B.S A.p ::_)licd t o tho pur ch as c pri'"co and that subj oct to tnc franchise tax.

Fr om tho busines s and a cc ountin .rr viewpoint, it is rcco~nizcd that n o pr)fit is realized by the purchaser f .; r hnvint; acquired pr opCJ;,tics at a price l owo_r: than its stated purchase ~ rico. The applic ati on of tho MIATCI acc ounts rocoi vu.blc n Jw he l d by petitioner t 0 the pur- chase price o f the C.n.LI ) ro~c rtios had tho effect o f merely rcducin~ th~ a~o unt that was ~ a i d f o~ tho assets acquired from the CALl (Finney u.nd 1viillcr , Principles of Accountin:3, Intermediate , Fourth Editi on , 53. r. 420). Tho mere f a ct that tho --)otiti onor hu.d chosen t o r eflect tho b oo k va lue of tho ass ets as then a ppearing in Ca li's bo oks in :Jotiti onor's books of accounts and tho c orros- pondin~ amount of ~32 , 770.33 as sur~lus, docs not moan tha t a :)r ofit has boon obta ined by tho ;?Otitioncr. This situati on is analo,:_,Dus to a cg,so where a n o rdinary per- son a cquires a piece o f ~ r op crty a t det erminate price sa y 121, 000 . 00 a nd then subsequently refl ects in his books o f acc ounts a pric e hi~hor tha n his ~urchas o price say 121, 200.00 by crodit in.c; the d ifference of g200 .00 to a s 0ocial a cc ount. Such s~oc i al a ccount would in f a ct be ~ mere npa:Jor r r ofi til as in the ca!n· o f tho earned surplus account established by the po itionor f ·Jr the heroin d isput ed amount o f !232 ,770 .33 " .. mo r e a cc ounting entry docs not creat e J r ofit on tho part of tho peti - ti oner nor d ocs i t make a n earninr U'J On which a .rrr oss receipt t ax may be loc ally im o s o~ . No form of inc ome has boon received by tho petiti one r f r om tho a cquisition of properties, thoro boinc no oxchancc resulting thoro - fr om .!

Tho next i tom (I tom No . 8- 9) re pres ents the sum o f ~1 , 673.48 und er Schedule II, covcrins the amount of ~as ­ soneor f ares from Oa kla nd t ·J Manila and actually paid to petitioner but which was credited to Earned Surplus , Domestic. Fo r o bvious r easo ns , this amount should be treated a s pr operly f a lline und er tho Inc omine Interna - ti ona l Gross He ccipts (or Earned Surplus , Intornat i onal). Since the amount involves r evenue derived by tho pet i - ti oner f or transportat i on from a f oroi:n country t o the ?hili ~p inos, the s ame is n ot tnxablo in a ccord ance with the rul e tna t the ~ ro ss r o c o i~ts derived fr om oper ations ~ 56 ..

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' 1 D.GC.LSION C.T .h .

C hS~ NO . 45 32 t o c arry on its tra~o or business and cannot be cJnsidored t o ha ve been received by it in tho c~nCuct of its businoss.J ~Tho next d isputed item ro~ros onts tho sum of ;4,939.58 which is tho not surDlus of ~I.nrCI which has boon carried over a s a rt of tho .:.. arnod Sur:1lus of tno pot iti onor upon th o liquidat i on o f hi.b.TC.L . r•S already adverted t o above , i>fl.t-J.TCI was a subsidiary of tho petitioner a nd tho pur chas e •)f tho shares o f stock of u.lHTCl by tho pet i tioner Phil- i~pino .-ir Lines is rop!'osentod i n it s books a s investments . Subs e quently, tho lJill.TCI was liqui dated a nd its asset s a nd liabili t i es a t book value wore 2bsorbod by_tho ~ot i tiono r includin; tho Earned Surplus .. ccounts of ul.t~.TCI in tho sum of i241 ,9S9 . 58 which tho petitioner had taken over . lfhis in effect c onstituted a realized income on tho part of tho peti tioner a risine from its investments in tho M ih~CI, In exchan_::o f or its investment o ri _c;inally made in 1v1Ih·r_ci , it receiv ed a ssets and a cquired all tho properties of MihTCI which was ove r a nd abo ve tho ca•1ital sto ck investments tho petiti oner had and such exc~s s consisted of the earned surolus o f kHr.TCI made U:J of tho a ccumulated Dr ofits of t no ·latter . Such SUr}llus' a cc ounts of tho subsi d i ary be - came actually inc ome to )Otitio ner as tho holdine company when tho tra nsfer was effected a nd is a na l o~ous or s i mil ar t o tho distribution of d ividends to tho stockh ·)l dors of t no _corporation, wnoroin tho d ivid ends or tho r ea lized pr o- f i ts arc treat ed ,:;.s inc ome on t.no Dart of the stockholders. Tho fact that tno petitioner ubsorbod tho earned sur~lus of l<ii.t-J.'.L'Cl made such surplus as :lotit i on?r' s own .J '~hero tho trans acti on is a true business mor~or , not only should tne earned sur pl us of tho survivine corporati on bo preserved in tact, but thoro should bo Rddod to it tho earned sur - plus of tllo absorvod cor?or :-1tion . In ::ono r a l , in a true mercer , all balance shoot i tems o f the a bs orved c or Dorati on arc added at str ai ~ ht book v al ue to th~ corros.Jo ndin~ bala nce sho~t it o1.1s r)f the sur vi v:i, n,:::

c~r~ or at i on. Thus tho troe.tmont i s ~ onorallv sjrnilar to a c ons .)l i- datod ba l a nc o ...... shoot of a na ront c Jr nor ati on a nd its subsidia ries. In most' ca ses , h o ~v ov o r , a diff erence in tho )ar or stated value of tho sha res o f stock o f the tw·) corl1Clr ations, or tho r at i on o f tho oxchD.n.-::o, will require a re - duction or i ncrease in tho coQbinod c a~ it a l sto ck a cc ount J f the survivjn~ corpor ati on and a corrosp ) ndin~ increase or reduct i on in its combined c D.pital sur1Jlus a ccount. But tho c ombined o:J.rnod surplus a cc ount will bo tho sum o f tho earned surnlus a ccounts of tho two c onsti tuont corpoi--at i on." (Fu,l d "Some .1.'ractical i .. s~octs of a Mo r.~o r 11 , 66 Harvard Law Rovi ow 1 Sept. 1947 , p . 1116. ) \Jh ilo the earned sur lus remained ?. nart o f 1JG:J.>.TCI no inc ome was as yet r oali zed by tho poti ti onor , but when such surplus was made a vu ilnb l o to tho pot it i on or , tho petitioner a ctuc:tlly derived an inc ome from i ts invest- mont in tho HihTCl, and such income is subj ect to tho fra nchise tax duo from tho llotitioner . :• 55

I

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D:t..CISION c .T ..... CAS.C:: l•lU . 45 34 or transacti ons outside the Phili~pincs arc beyond its ta~ jurisdiction .

The rcmainin c amount (Item 8-b) r cor cscnts can- cell ed checks in the sum of ~1 , 713.61 which were issued by the petitioner t o )ay for oblieat i ons to creditors f or materials and services r endered or :ivcn to the herein pe- titi one r. Since the items or che cks involved had not been cashed by the c orr c sp o ndin~ ~aycc or credit or , the sai d amount rcnrcscnts in e ffect a savinrr of expenses . Th i s- . am ount not h avin~ been a n item J f i~c omc or receipts, we believ e and hold that the s,qmq doc s not constitute part of the cross r ecei pts subject to the franchise t ax. ;J In resume , vJc a r c of the opini on tha t

(l) The £ r oss rccci ts or carnines of petitioner derived from out:oinc internati onal service a rc subject to the franc hise tax ·;rcscrib cd in b.cts Nos. 4271 and 4272 , while its e r o ss.r c cci~ts or earnines derived from incom in,s internati :Jnal service a r c not sub j ect t o sai 'd tax ;

( 2) .a?ass cs rq:;ularly issued by pctiti·Jner a rc not subj oct to the f ranchi so t t'l.X , no t EIXablc revenue Jr c arn- in ~s h a vin ~ boon derived therefrom bv ~c titi oncr,· ~ ...._;

.;

...

( 3) The receipt by petitioner of ~ rcmiums on its capital stock docs nJt c •:mstitutc gross carnines or revenue upon which th0 franchis e t ax mEiy be assessed; ( 4) The cross r 'c c c i~) ts or carninc::;s of pcti tione r f or the oper ation of a r epair shop , which include the cost of labor, or the cost of labor and materials if both a rc furnished , arc subj ect to the fra nchise t ax , the opcrat i on of t he r epair shop be in.:; incidental t o its main bus i ness; a nd (5J hll items carried under Earned Surplus b.c - counts, other than those which constitut e mere adjust - in,:: e ntri es of expense a ccount s and/or a ll non-income accounts , f or m part of the t axable : ~r o ss r ccci ;>ts Jr earnines of pet i tioner .

.

In line with t he f )rc,::oin_:: O)inion , we fin d that the t ot a l deposits made by pcti tioncr t o cover the fran- chis e t ax due fr om it under its franchises from July 1 , 1946 t o Decembe r 31, 1952 , exceed the total tax l c:.:;ally due by :.;2817 , 487 .71 , c om~;utcd as f ollows :

Gross Rc venues :t;er .._.ov- a rnmc nt a udit 0 c t o be r l, 1946 to December 31, 1952 ..... ...... •. . ............. . ... . ~172 , 595 , 403.19 Less : Items Rc c o~niz od as Non -Taxa blc :- Sales o f I<Iotor Fuels Employees ......... .. . . . i? 14,733 . 01

Sales of Iviatcrials &

services Rendered t o Em:;loyees •. . . . .. .... 228 , 080 . 65 ,, 57 »y -

- DECISION «

39 Rental of sircraft for Domestic use for use in International a el) ot $105, 344.99 3 R172, 247, 24h 5h iT

Less - Items in Sche-

dules I, 11 and uu ee admitted as

Non-Taxable per

Supplem ntal and

Additional Stipula-

Gaon of Facts:-

Reversion of accounts payable to Surplus, San Miguel Brewery ...... «ef 1,429.30 A. Soriano y Cia. July IAG Bental « dawesdos bee 616.67 Medical Services rendered to MIsTCL per adjustment oreo, ov Miclk Gauidacepeae 375.00

Road Roller and Road

Grader issued by Pal to MIsTCI Sept. 1946 ..... 7,500.00

Estimated Cost of Samar

Equipt, Guiuan, trans- ferred to FuaTl we. 16,500.00 Uncashed Check a/c. with Honzkon,,-Shanghai Bank reverted per JV 48-4-53 .oee. 276 91 S.F. Invoice # 99, dated July 5, 1947 paid by Ae Soriano y Cia J-10-423 ...... 65.50

Writins of "Out of Date"

checks, outstanding per vaL'S bank Reconciliation per J 12-68 ....... Vaakes 486.38

Cancellation of Checks |

PRET BSh3 vss cas eves + 2285273. 29,385 42 2172, 217,859.05 Less=. Item found as Non-

Taxable by Court:-

Incomine Gross Re-

ceipts International ....#60, 563,603.46 vrassenzer rasses- International ...s..e.e0. 1,431,606.73 Passenger rasses-~ DOGIETAC suswsne gwac ence ‘ 805,914.21 rremium on ot og UTIOR «pn Olen dp etuvne 1,799, 986.59 Uncashed checks. ro- verted to credit of PaL por JV 48-68 ....... ; 490.97 Barned Surplus reac- quisition of CaLl BrOPSP CIOS Newaseaes baw Be 32,770.33

DiCis ION -

36 Cancellation of various checks against NaC J- 5 ey | rr erin 349.66 Reversing Entry made per JV 48-1-73 re nvoice 6285 already paid per J 6-42 Cl ...... t, 673.48 Cancellation of various checks J Q=h21 sscenecens 60.50

Cancellation of Lia-

bilities JV 12-96-51 .... JW 1,213.6) 264,638, 160.5h AMOUNT TAdeBLe Lo. cee ee eee che ibe ceee F107 579,689.51 2% tax due on Taxable amount of P107,579,689.51 .ssseeeenee BR 2,151, 399502 Add - Deficiency tax for , prior period ...ceeecsreacercecenes _ eee 2 OZ AMOUNT OF Tak vevwese sie eeccotewe pcan ee 2 2,151,891.81 Less amounts Deposited by”taxpayer ..... 2209.,.379 «52

TOlaAL BACESS DnLOSIT - Subject to

Satori) jokey dy we AAW eeeP Suleeivesus @. 817 CBRE FOR TH FOREGOING CONSIVER«TIONS, the deduction of respondent appealed from is hereby modified, in accordance with the forezoing opinion, and he is hereby ordered to refund to petitioner the sum of #817,487.71 with costs against petitioner.

pO ORDERaD, Manila, Philippines, February 8, 1956.

SGD. ROMAN wi. UMaLI ROMAN M. UMALI associate Judge

Wi CONCUR :

SGD. MaRinNO Nasi

MaRLaNO NaBLo

Presiding Judge

SGD. saUGUSTO M. LUCI«aNO KUGUSTO M. LUCIANO associate Judze .

True copy/ni i" 59 @m |