CTA Case No. 45 (Decision)

RLPU nLIC uF � Ttlb Pr1i LlPP iNES cvuli'1' vi" i'n..A Ji ...) ..)....1>L3 i.v1A1H~h. PrliLIPPiN~ Aih Ll~LS� INC. 1 C.T.A. CASE NO . 45 Petitioner , � - versus - COLLECTOR OF If\JTtRN1 1 R.:bV.GHUE , Respondent . X DE�1.� ON This is an a ppeal from a decision of the respondent Collector of Internal Reve nue denying the claim of the petitione r Philippine h i r Lines , Inc . for the (9fund of the sum of ~1 , 478 , 692 . 95 , allegedly representing to~al excess deposits made . by the .p_otitioner to cover the ~ ~x of 2% of its cross revenue for the period from July l , ~946 to December 31 , 1952 . Tho said amount was re - duced after submission of a stipulation of facts to I?l, 321 , 584.98 , "minus the tax correspondinz to the item of labor se.zreeated in the Additional Stipulation� of Facts and the items admitted by petitioner as taxable as con- tained in the Supplemental St ipulati on of Facts." The ex- cess deposits vwre due to �the faat �that petitioner computed the franchise tGx on its ,:ross r evenue at the rate of 5/o as provided in section 259 of the Nat i onal Interna l ~ovenue Code, instead of 2,..~ as provided in its franchises. In his amswe�r to the petition for review, the r espo n- dent denied the petitioner's ri._..ht to the refund of said amount of ~1 , 478 , 692.95 on the ;::round tnat upon examination of the books of petitioner there W5S found a deficiency franchis e tax a nd s urchar:;e in the amount of I?603 , 160. 70, and accord ingly, filed a counterclaim for said amount. The said counterclaim was reduced after submission of the sti - pulat ion of facts to ~594,758 . 66, "minus the tax corres- pondinG to the items under Schedules I and II admitted as not taxable . n The said counterclaim represents deficiency franchise tax, plus surchar~e, brou~ht about by the non- in cl us ion by petitioner of various i toms in its reports, which items, accordin.:_-: to r espondent , constitute p art of petitioner's taxable eross receipts or zross revenue. Respondent admits that tho rate of franchise tax pay- ab le by p e,titioner, during the period here in question, is only 27o as provided in i~cts Nos . 4271 and 4272 and not 57o as provided in section 259 of the Nat ional Internal Revenue Code , as amended , in view of the decision of the Supreme Court in Phi}-ippine Railvmy Co. v. Collector of Internal Revenue, G..tl. No. L-3559 , March 25, 1952. Tho issue , therefore , boils cown to the taxability of the various i terns considered by respondent as part of the gross receipts or gross revenue of petitioner . 24 . ~.

. �1 i.JE CI SI tJN - C. T .h. CASi ~0. 45 �� 2 The following arc the pertinent facts stipulated and submi ttcd by the parties : "I. That petitioner is a corporation duly or- gani zed and exist ing under the laws of the Philip- phinos, with its princ ipal office at M.R.S. Build- in8 , JVIanila; that 53 .6;o of its capital stock is owned by the National Development Company, a n in- strumentality of the Republic of the Philippines; and that respondent is tho duly appo int ed , c:ua li- fiod a nd the incumbent Collector of Int erna l Re - ve nu e , with principal office at Ivianil a , Phili ppines; "II . That petitioner at all times material to this petition was, and until now is, operating and maintaining a n air transport service for the tran~ portation of passcn~crs , mail and property by moans of aircraft , pursuant to tho provisions of Acts Nos. 4271 and 4272 , the fr a nchises originally granted ~o its predecessors - the Philippine Aerial Taxi Com- pany , Inc. and Iloilo-No~ros Air Express Company, Inc .- which franchises includin ~ all tho condi- tions , terms , restrictions, and ~limitat ions have since been duly transferred to petitioner by losislativ o authority under Cownonwoalth hct No. 643 and Ropublic ~ct No . 759, respectively , as fully a nd com~)lotoly a nd to the same exte nt as if the said fran chi se had bee n ori~inally . r:ra nt od to '-' .!)eti tioner � " IIl. That tho aforesaid francniscs ::r rant od to petitioner by Acts Nos . 4271 and 4272 provide for the p ayment of a pore .::mta.::;o tax of two per cent of its t:ross revenues , to[:ether with the tax on its real property in c onsid e r a tion of the fran - chises, and provide further that tho payment of said p ercenta... e and r eal :)ropcrt.y taxes 1 shall be in lieu of all taxes of a ny kind, nature or des - cription 1 ; "IV . Tha t since tne third quarte r of 1946 to December 31, 1952 , petitioner had been depositing quarterly certain amounts to cover its franchise taxes for the preceding quarters ; "V. That for the period from October l, 1946 to June 30 , 1947 , petitioner deposited the total sum of ~387,081.7 2 to cover the franchise t~xes th at may b e ' found due from the s a id .Petitioner on its Lross revenues a t the rate of 5% under section 259 of the National Interna l Revenue Code as amended , instead of a t the rate o.f 2:i~ under its franchis e in accordance with the dec ision subse- quently promul~at o d by the Supreme Court in the ' cas e e nt it led " Phi lip pine Railway Company v. Col- lector of Interna l Revenue, G.R . No. 1-3859; "VI. Tha t accordin_s to r es9ondent , pcti tioncr is s atisfied to a refund of its excess deposit of ~109,713.77 as franchis e taxes for the period from October l , 1946 to June 30, 1947, as indi cated in the computation of tho respondent , as follows : 25

.. ( , .. � DECISION C. T.A . CA3b 1~0. 45 3 4th Qua rt or , 1946 - - - - - - - - - - - - 124,315,690.48 1st Clu art or , 1947- - 7 - - - - - -- - -- - 4, 181,404.09 2nd ~u artor , 1947 - - - _i~ 37l , l34.65 - - - - --- Tot al Gross Rocoipts per -~13, 868 , 229 . 37 Government audit --- --- Loss Sales of motor fuels to omployoos at cost , p . 5) AuQ,it Repor:..t; hold not sub - j ect to franchise tax, per d ecisi on Philippine Lon~ Dista nc e Tel . C. Case - - - ~ - - - - ___ l4,733.0J. Gros s rovonuos por final government aud it 121],$53,h96 .36 Tax duo tho roon at 2/~ ..: - --- - 1? 277 , 059 .9 3 387 1 081.7 2 Loss amount de ositod - - - - - - - - - - 110, 011 .79 Amount over doDos i tod - - - - - -- - 12 2~1 Loss deficiency tax for previous period /Not amount ovordopos it od - - - - - - - - ~ 12 109,713.77 "VII. That accord ing to petitioner , it i s ontitl od to a r efund of tho sum of 12 244,563.13 as excess deposit , instead of tho sum of 12109,713 . 77 for tho said period from October 1 , 1946 to Juno 30 , 1947 , as indicated below : Total p;ross rovonuos , as per gove r nment audit ~13 , 868 ; 229.37 Loss : Sales of motor fuels to omp l oyoos at cost (p. 5 of Audit Roport - Ru linc o n Phil . Lon g Dist. Tel. Co . ) - - - - - - - - - ___14 , 733.0l Gr oss Revenues ocr final ~ ovornmont aud it 1213, 853 , 496 . 36 Loss : Rovonuos ~ ot sub ~ o ct to franchise t ax - IncominL-Int o rnational - 123 , 863 , 504.98 Out '"~'o im� - Intornational - Pas'~oncor Passes - 1 , 645' 318. 25 Intorna tiona 1 ( So c Exh i bit .n -of Gov ' t .c~udi t Report) 36 , 876 .00 Passenge r Passes - Domestic (Joe Dxh . ~of Gov ' t Audit Rono rt) 81 ' 889 .17 Premium on Cap it a l Stock (p . 5 of Aud it Report 1 ,050 , 166 . 67 Cos t of mate ri als & sun - Dlios sold and /or ' used for o thor Airlines , ot c. (p . 5 of Gov't Aud it 6 ,74 2~ Report - - - - - - - - - 64 , 712 .98 Tota l gross r ovo nu os subject to franchis e tax 12 7 , 111,02~ ~o Franchis e tax duo thereon - - - - - - - - -~ 142,220 .57 Plus deficiency tax for previous period - - - -- 29$ . 02 Total franchis e taxes - - - �- - - - - - - 12 142,518 .59 -.J.a:Z.~. 7 2 Lo ss amount deposit ed - --------- Tota l oxcoss deposit - - - - - - - - - - - - ( 12 244 .563.13 -26

D.c,CiT ION - .. . b .T .rl. C~~E No. 45 4 "VIII. That tho nature of tho various it ems cons- titutin� the discrepancy of ~6 , 742,468.05 is described in ara�raph XXI of this Stipulation of Facts ; "IX. That for tho period from July l , 1947 to Dec- ember 31 , 1948 , petitioner deposited the sum of ~556,884.84 to cover tho franchise t ~~ that may be found duo from the said petitioner at tho rate of 5~~ under section 259 of tho National Internal Revenue Code as amended , instead of tho rate of 2j~ under its fran- . chiso � in accordance with tho decisj,on subsequently promulsatod by tho Supreme Court in the case entitled "Philippine Railway Com)any v. Collector of Internal Revenue , G. R . No. L- 3859 ; "X. That according to respondent , tho potition~r is indebted to the �� ovornment in the sum of 12151 228 . 92 as deficiency franchise tax for the period from July l , 1947 to December 31 , 1948, but that in view of tho ovordoposit made by tho petitioner mentioned in para- graph VI hereof in the amount of 12109 , 713.77 , for tho period from October 1, 1946 to Juno 30 , 1947> there is due from the petitioner only tho sum of ~51 , 89 3 .9 4 as deficiency franch ise taxes and 25/a surcharge, as indicato d b claw : Total gross revenues p er :overirullont audit - - - - - - - - - - - - - - - 12 35 , 4 31 �9 45 . 36 Less : Sales of materie.ls and services to employees at cost hold not subject to fra nchise tax, per decision , Phil. Lone Dist. Tel. Co . case - - - - - - - 26 , 257.53 Gross revenue per final .-: ovornmont� a udit 1235 , 405 , 687.83 Tax duo tho re on a t 2;.o - - - - - - - - - - 708, 113.76 Less : nmount deposited ~556,884.84 Plus ovordoposit for Oct . l , 1946 to June 30, 1947 under ~ar . VI . 109,713~1 __ -2Q~9S.6l , hereof - - - - - - Amount of tax still duo - - - - - - - - - -~ 41,515.15 25;~ surcharge - 10 . 37$.79 - �- ----- --- Total franchise tax and surcha rt:;e still due - ---- =2L 89} .9~ XI . The.t accordint; to :� otitioner , it is entitled to tho refund of the sum of ~201,3 84 . 69 as excess do - posit of the franchise t:txcs for the oriod from July l , 1947 to December 31, 1948, as indicated in tho com- putation of tho petitioner , as follows : Total r:ross r evonues per co vernmcnt audit - J:?35, 431 , 9 45. 36 Loss : Cost of materials & services rendered to employees (Ruling ro hil . Lon~ Dist. Tel . Co.) - - - - - - - ____ 26 , 25~1 Gross revenues per final ~overnment aud it - ~35,405,687.83 Less : Revenues not subject to franchise tax : . Incoming - International - ~10 , 316,723.13 OutLoin3- International 5,457,328 . 84 27 . �

... < DEC ISION - C . T .~ . CASE No . 45 5 Passenger Pass es - International (p . 3 of Audit Report ) 12398 , 356 . 80 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 266 ,103 . 25 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 .. 1 , 395 . 46 Premium on capital stock ( p. S . Audit Ftc port) - domestic . . . . . ,- 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 Franchis e tax duo thereon -. . . 12 355 , 500 .15 Loss : Amount deposited .. . . . . . 556 I 8$Lt �84 Total Excess Depos i t . . . � (J2 201! 384.�69 ) _"XII. Tnat tho na turo of tho total dis cropancio s 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 e titioner at tho rate of 5% undor Jsocti on 259 of tho Nat ional Inte rnal Revenue Code , as amended , instead of tho rat e of 2% under it s f ran- chis e in a ccord anc'o with tho decision s ubsoq_uontly p r o - mul.::;atod by tho Supremo Court in tho c ase e ntitle d 'Ph i lippine Railway Company v . Collector of Int erna 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 . rl. ChSE No . 45 6 Cost of materials & I2 77 , 134.54 ~1!19..:-5...3. Sorvicos to omployoos at cost hold not subject to franchise tax, por dec i- sion Phil. Lone Distance Tolophono Co. , caso . . Gross rovonuos por final ~55,948 , 149.52 80vornmont audit Tax duo thereon at 2% . . . . . 1,118 ,9 62.99 780, 64 5. 68 Loss amount dopositod . . . . . . . � 12 338,317.31 Amount still duo . . .... .. 84 . 579. 33 251~ sur chargo . . . . . . Total dof icioncy franchise tax I2 4 22 ' 89 6 .64 and surcharge . . . XV . That according to potitionor, it is ontitlod to tho rofund of tho sum of 12283 , 535.82 as oxc oss do- posit of tho franchise taxes for tho poriod from Jan . uary l , 1949 to Do combor 31; 1950, as ind i cated in tho computation of tho p oti tion0r , as follows : Gross rovonuos as por ori~inal go vornmont audit. . . . . . . . . P56,130,629 . 05 Los s : Re ntal of a ircr afts for domestic uso for uso in int ernational sorvi co subsoquontly hold not subject to tax .. . . . 12105,344.99 Cost of materials & sorvi cos rondnrod to omployoos (Ruling on Phil . Lone Dist. To l. Co . ) . . . . 27, 134 � 54 1$ 2 1 479 . .21 Gross rovonuos por final govo rnmont a ud it . . . . . . . . . . . . . . 1?5 5 , 9 4$ , 149 � 5 2 Loss : Rovonuos not subj oct to franchise tax- Incominp;-Intornational - 1219 , 392 , 414 . 02 Outgoing- International - 10 , 043 , 430 . 05 Passongor Passes- Int ernat ional (p . 4 of Audit Roport) . . . 962 ,413.73 Pass ongor Passes- Domestic (p. 2 of Audit Report). . . 304 , 065 . 39 Premium on capital stock 25 , 073 . 50 (p. 4 of ~udit Report) . Cost of materials & sor- vicos rondorod to othor air li no s : o t c . ( Sch . 2 . p . l & 2 of Audit Roport) . . 103 , 44$ .90 Cost of materials & sorvicos rond orod to P h.F D or contract ( Sch . 2,p . l & 2 of hudit Report) . .. .A � � � � 256 , 604 . 87 29 -

'� DE CISION - C.T . h . CASE No. 45 7 Earned surplus as lis ted 1L 205. SLJ, li2.ll.J29,2 , 6 56. 3Q i n att a ched Schedule II (Sch . 2 p. l ~ 2 of h.ud i t Repo rt) . . . . . . ~ Gross r ev e nues subject to franchise tax li224 , 855,493.22 2/o Franchis e t a x thereon . . 497 ' 109 .86 780, 645 . 68 Less : .-unount deposited . . . . Ex cess amount deposited � � (12 28 3 I ~ 3 ~ 0$2) "~VI. That the nature of the various it e 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 em ber 31 , 1 95 2, petitioner deposited th e sum of ~1 , 382 , 7 6 7 . 28 to cov e r the franchise tax that may bq found due from the sa id petitioner at the rate of 5~~o under s e ction 259 of the Natio nal Int ernal Rev enue Code , as ame nd ed , instead of the rate of 2% under its franch i se in a ccorda nc e with the decision subsequently promulgated by the Supreme Court in the cas e entitled 'Philippine Railwa y Co . v Collecto r 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 he reby leaving onl y the sum of ~1 , 244 , 767 . 28 as n et deposit fo r sai d period . nxvi ii. That .a ccording to r e spondent , the pet i tioner is sti ll indebte d to the Government in the amount of ~120 , 0 38 . 68 as d efici e ncy 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 aud it .. . . ... . .. ... �67 , 164 , 599 . 41 Les s : Cost of motor fuels, mate ri a ls & services rendered to employees , held not subject to franchise c; : tax per decision i n ~hiliDDine Long Distance Tel ephone case . . . 126 , 668 .58 Gross r e venues as pe~ final cover n - ment audit . . . . . . . . . . . . ... ... ..... i?67 , 039 , 910 . 83 Tax due thereon at 2% .. .. . . ... . .. . j,? l , 340, 798 . 22 Less : h.mount deposited . ... .. ... . . . l , 2LJ.LJ,, 767.26 Amount still due .............. . . . . ~ 96 , 030 . 94 25 ;lo surch a rge . . o � ��� � �� � �� � � � � � � � 24, 007 .74 Total tax a nd surcharge ......... .. ~ 120' 0 38 . 68 "XIX . That accord ing 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 indicat e d in the computation of the petitioner , as f ollows :

DECI S I ON- C . T . ~ . CriSE No . 45 Gro ss revenue per government aud it ...... . . .. ...... . ... . .... . ;.64 ) 164 , 599 . 41 Loss : Cost of motor fuels , ma- terials & services rendered to employees (Ruling of l hil. � Long Distance Telephone Co . ) Gross revenues per final ~ovorn - mo nt a ud it . . . . . . . . . . . . . . . . . . . , . -;}.67 , 039 , 910 . 83 Loss : Revenues not subject to fran chi so tax- Incominr/ - Intor - C> ~26 ~ 990 , 961 . 33 national . .. ... . . Out go ing- Int or - ~ national. . . . . . . . . l 2 ) 243 ' 999 0 32 fasson ~ or Pas s os - na l Int ern~ tio (p . 6 of l�udi t Report plus items in Sch . 3 , p . 2 ~ 3 $ 4 of .aud'it Report ) 33 ,960.20 -r-,assonsor i. ) assos - Domostic (p . 2 of Audit Rc ort - Domestic . .. .. .. . .. . . . 178 , 264 . 53 fromi urn on capital stock (Sch. 2 , p . l of .huditRoport) . . ..... 10 . 00 Cost of materials & services rendered to other airlines , etc . ( Sch . l , p . l of Audit Report) . �. . . .. 216 , 370.71 Cost of materials & sorvi cos rendered to ..)AF per contract ( Sch. l p . l . of nudit ftoport)227 , 022 . 24 Earned surplus (Sc h . 2 D. l of .r.ud i t 1 , 713 ...Q.l ~J.2...Il92 , 302 . 54 Report ) �. . . ... ,..... . Gross revenues subject to franchise tax ... . . .. . . . . .. . . . . ... ... . . . . :.227 ,1 4 7, 608 . 29 2~ Franchise tax duo thereon . .. ... . ~ 542 , 952. 17 Loss : ...mount deposited . .... ... ... . ..2.~ 2 44, 76 7 . 2$ Excess amount of deposit . ......... . (~ 1 �1 )8 15 . 11) "XX . That tho nature of tho various i toms const i- tu t~ ng tho discrepancy of ~39 , 892,302.54 is descri bed in paragraph XXI of thi s Stipulation of Facts i i~XI. That tho nature of tho various items cons - tituting tho discrepancy specified in para~raphs VII, XI , XV , and XIX hereof is described as fol-lows : l . Gro~ revon.uos from international sory~_. Tho re venues from international service arc divided i nto two parts, namely, .Q.Ut""oin~, moaning gross re - ve nues derived by ?hL as passoncer fares and froi~ht and other revenues f<;>r fli.e;ht from Manila to forc i _gn �)

� .. D:E.CISION - C .T .n. Ca SE No. 45 9 count~ i cs, and i..n.Q.QIDi:p.z., mcan in.e; eros s revenues d e rive d by /.~;.L in its for eign stations outside the Philip pin e 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 wh ic h have no classific at ion whether incomins or out~oing int e rn a - tion al r e venues : . ( a ) Earned surolus : 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 Tota l . .... . . . . . . . . . . . . . . . . -~391 , 026 .12 � ( b) Non -o perating revenues by years : 194 7 0 00 00 00 00 00 000 0 0 0 0 D0 0 0 0 0 0 0 00 0 0 0 0 4 2 0 46 1948 ��� ����oooo���������� ���������� 0 77,799.62 1949 ����� ��� � ��������� � ��� � �Q������� 762 . 18 1950 . . . . . � o . . 317 , 934.19 00 � � � � � � � � � � � � � � � � � � � � � 19 51 .. ...... ... ...... . ....... .. ... 0 l} 26 2 ' 346 . 3 2 195 2 . . . . . . . 0 � � � � " � � � � � � � � � � � � � � � � � � 59 , 304 . 0 5- Total . . . . . . . . . . . . . . . .... ~2 , 213 , 188 . g2 For e 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 p ar, ca lled premium which .L'.1:1.L received from its s-co ckholdc rs of records only for its stock i s c ons i dered by respondent as formine part of its gross r evenues a nd subject to the franchise tax . .i?c tition cr , however, belie ves that tnc exc ess or pre mium on capita l stock represents capital transaction or con- tribution by tho s '..:,o ckholdcrs to the corpo r at ion 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 Ver n- 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 e ir ba.e;gagc, subject to availabi lity of s pace . Respondent holds that the money value of the pas- seng er p asses forms part of the sross r e ve nues of the ~nL subject to the franch i se tax. ?ctitioncr , how- ever , be li cvcs that inasmuch a s 1' J..L rc cci v cd 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 - s ents various credits to the sur Dlus ac c ount 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 subje ct 32 ..

'' :U..:.CJ:SlOlJ - c.r .a . c~s~ &J . 45 10 o f con trov er sy . Th e p etitioner bcliovos that tho it em s listed in Schedules I, II and III do no t form part of tho e ross r oco i pts or ~ross revenues of tho petition er subj e ct to franchise tax wh ile 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 , Wi1 ilo tho r est of t ho items such as F~hTl's v aluat i on ros o rve for plano P . I . C- 4 , 1�1I11.T Ctil & Ca li not surp lus 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 transferre d from F1AT 1 in 1946, aro not taxable . 5 . .QQ. s:t Qf mat.oili,L'L..aD~Lfi..Q. I:.Y;i c c s o - Th os o i toms consist of tho following : ( a ) Mater i a l s anq soxyicc~ fyrnish od Pl-\F ,_- Undor tho maintoriance and Overhaul COntra ct botwoo n the PilL and tho Phi.lip pin o .�1.i r Forces , a � copy of which is attached , marked Exhibit "1-..n, a nd made an in to~~al pa rt of thi s Stipulation , tho ?A F r e imburses th o ~AL for the cost of. matcrials used and labor in- volved in thc _ropairs , 'plus lC/~ and 2 5% thoroof, ros - p octivoly . PAL declares the total amount rec e ived at premium of lOfo and 20% on the ma terials and labor , rospoctivoly. Respondent , how ov or, believes that both the cost of matori.als and labor plus tho l Olo a nd 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 a nes 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 sp ect 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 fra 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 rec o ivod from the CAA bocaus o a ccordin.:; to P11.L , it derives no sross rev e nues 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, Sc hedules 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~ nsc rt.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 ,.,

DECI~ION C.T . h . Caso No . 45 ll . A. Soriano y Cia., July 1946 for rental of house Nos. l , 3 and 4 at Cunota .... �__Ql6,67 ~ 2 , 045 .97 Sorvico rondorod b Su ply 37S . OO 4 375. 00 and Procurement Section from May to April , 1947 , _g4 , 000.00 _J..5. 00.:i2Q or ad justment o nt ry # 30 , vJ - 10 - 14 . . . . . . . . . 0 � 0 � � ��� � Medical Sorvic os rondor od to HlA i CI from Octo bor to January, 19~7 por adjust- mont k 29~ JV-10 - 14 .. .. . . . . Issued by .t'AL in Sopt. 1946 to l1IIii...LCI of : 1- Caterp illar Road Grader ( Cost ) . . . . . . . . . . . . . . . .. 1- Gallion Road Roller (C ost) ... ... . .... ..... � Estimated Cost of .;)amar J hop Equipment 16, 350 .00 at Guiuan transferred from FLAT I in 1946 por adj . # 7 J Y,- 12 - 108 ..�.... . .. . Unc asilo d chocks which \Joro r o- vortod back to tho cr ed it of tho PAL account with the Hong- kanE and Shangha i Bankin~ Corp- oration por JV-48- 3- 68 as fol - lows : PAYER -FC.-H-0�-c1K7-74H-O. AMOUNT S. Fabrogas _gEf:O() Sto. Tomas Uni v. F- 08474 40.00 H. B. J:.ndrows F - 48 228 193.3.3 150.00 B. Racaza F- 67421 .38.00 Dr.J .S. Sta Cruz F-79542 .39 . 4 2 R. C. Ril s F- 88320 5 .00 Felix .Boncan F- 524 490.97 Rovorsion of Accru ed Salar i es & wa0os unclaimed por JV-48-4-53 as follows : � A. .w . Espino sa 1229 . 85 276.91 25 . 00 D. Villaluna N. Eo j a los 1~ . 50 F . Samaniego 12 .50 M. Bassin;;or 120 .80 C. l.Jhi ndi on 47 . 20 R. Schultz 29 . 05 FE.h.TI ' s va luation Rosorvo for plano 29 J 166 .6 4 ? . l . C-4 which was sold in Docom- bor 194 7. Tho rosorvo v-1as not taken up when said plano was dropped from tho books por JV 48-4- 51 , JV 12- 169 and J V 28 and .3 7 ..... .... . ..... ..... . MIAICI ' s Not Surplus up to Juno 30 , 1948 absorbed by PJ.iL ... .. .... .. �. 34

01CISION C.T.h . Cn~E NO. 45 12 Ea rned Surplus re-acquisition of CALI properties for which PhL paid 37727 shares of capital stock per list attached to JV - 12- 101 .......... .. .. .. .. ~~32.12Q~ T 0 T ~ L .. ... .. ... . ..... ~134 ) 765.38 "SCHEDULE II .b.-..li.l\JI::;D SUri?LUS ( Domosti c) From 19k2_to 1950 D.iiT:b -FO-L-IO- ? 1JiT ICUL.t1JiS .1211:9.. lVIay 31 J3-42 To tako up cancellation Juno 30 of various chocks :1.2 349 . 66 ~1 1 673.48 dr awn aeainst H. S. B . C (not cashed ) ...... .... . . ,� J6-42CI To rovorso entry made por JV 43 - 1- 7 3 in conncc ti on with In- voico 6283 which was already paid in Oct. 1947 por G/R 12?30 July 31 C/R 414 Refund of freight by 5 .00 NCB , C/R 45566 . . . . . . . � . � Sopt . 30 J9 - 424 To record cancellation 60 .5 0 of various chocks . . . . . . . Oct . 31 Jl0 - 420 Taking up S . F . Invoice 65 .50 H 99 dated July 5, 1947 which was pa id by Soriano y Cia . . . . . . . . . . . . . . . . Nov . 30 311 - 428 To chareo tho account 200 . 00 Nov. 30 J 11- 421-l. of ?hil. Sonata for �89 Invoice #16331 date d .t. ugust 31 1 1948 ......... To adjust amount charged t o 1,I c 1 241 by J v 49 - 1- 4 2 Doc. 31 J 12-68 To wri to off " out of Date" c'hccks , shown 486. 38 as outstandin", por ?~L 's Bank Roconcil- liation � . . . . . . . . . . . . . . . . J..9.5.Q Feb. 28 J 2- 43 To record cancellation of chocks .. .. �.. .. . � .. � . 2, 285.73 35

.' DECISiuN C. T . h . CaSE NO. 45 13 March 31 J3 - 42 To oliminato crodit of Manila Enginoor ' s Dis- trict account for unusod F~hTI tickot No . 1291~-4/25/47 .. . TOTi4..L ....... . .. . "SCHEDULE III DOMESTIC E11.RNED SUR?LUS 19 51 - 1952 JV- 12-76-51 � to write off and/or cancol tho following lia bi litios : Evonine News .. ... ... . .... . ~ 30. 00 Now Soc i oty Bakory .. ..... . 1 5. 80 150 . 00 Balcoff & ?oblodor .. . ... . . 320 .00 22.60 Carma lo & Ba uorman .' ... ... . Uy Tit & C'o .... . ..... . .... . 11 .00 Paul Bros . .. ..... ...... .. . 1 , 164.25 Go Soc & Sons .. ..... ..... . �r o T h 1 . . . ~ ... . !21 ) 713 .65 In ord or to clarify amb ieuous itoms containe d in So chodulos I , II and III of tho St ip ulat i on of Facts e.nd other i toms appoarin.:; in tho aforesaid Sti- pul ation � of Facts , tho parties wore roquirod to cla - rify those i toms and to submit ovidon co r olativo theroto . i>. supplemental stipulation of facts wa s thoroaftor subm i tted dated Novombo r 11 , 1955 , whi ch is reproduced bolow un_tQtQ: oln:_ ni .hLDITION.n.L ;:,TI.?ULnTION R.t:G1-~.RDING SCHEDU lli I i-.TT JJ.CtJED TO TBE GIN. ~ L STMI?.nU. YL_ratTIONr9 OsFs FACTS �-D�h'r-.t::;-D --- � 11hftor a consid eration of furthor particulars on tho following it oms , both pa rtios admit that thoso aro not taxablo : Rov:orsion of Accounts Payablo to Surplus por JV-9- 4, Sa n Mi guel Bro - wory , ..u._:.ust , 1946 ... .. .. . . !21 , 429 .30 h. Sorianoy Ci a . , July 1946 for rontal of housos 616 .67 ~ 2, 045 . 97 Nos. l . S & 4 at Cunota Issu ed by ?AL in Sopt. ~ 4 , 000 . 00 7,500.00 1946 to Mil>IC I of : _J.._5.Q.Q..:..P O 1-Catorpillar Road ' Grador (Cost) ...... _, 1- Call ion Road Rollo r(Cost) . .. . . . . 36

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 a ries & wages unclaimed por JV- 48 -4-53: .h . L . Espinos a i2 29 .85 25 . 00 D. Villaluna N. Rojalcs 12 . 50 F . Samani c a- o M. Ba ss in..~'o-'r 12.50 C. Chindian 120 . 50 R. Schultz 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 ende r ed by Supply and ?rocuromont Section from Ma y to ..pril , 1947 , por ndjustin g 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 Int ernational Air Te rmin a l Co ., Inc., otherwise known as l�lir..TCI was a subsidiary corporation of tho i?hilippine h.ir Lines , Inc ., whoso ma nagem ent was handled by tho 1_) ii.L . In conn oc ti on with such management , services wore rond~ ro d by tho_ ~upo~y a nd ?rocuromont Se ction of tho i~L to tho MlhTtl and such services were charged against tho lvi ihTCl. "In connection with the 5th item of Schedule , I, amount of 12490.97 composed of 7 sub - -it ems , tho parti es agro o tha t those 7 sub- it ems roprosont cla ims aga inst tho ~=1 by various c~oditors which wore paid by PtiL by moans of cho cks , tho numbers of vvhich a r o onumoratod in Schedule I but duo to tho f a ct 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 ad justi ng entries wore made in its books. Tho ad justing entr i 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 depos its on work orders 1 or a total of ~41, 9 89.56 , � which is the i tom tho part i s arc c now dcscribine . A COi) Y of tho � balance shoot of l\1IATCI as of Juno 30, 1948 is attache d hereto ~s Annex ' A' from which trw aforesaid items of � ~41 , 977 .5 6 a nd ~12. 00 , or a total of 1241�, 989 . 56 may bo soon marked with an aster isk . 11 Thc [...Ovornmont audi tors considered this amount taxable , as tho book value of th�o not assets ta�kon over by tho p et ition er wore in cx- _coss ~y P41 , 9S9 . 56 over the price therefor , and lVIIAT Cl is, a distinct ~nd s oparato corporation . ?otitioncr claims that the said surplus is not taxa ble, as t his represents the ac cumulated 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 a tion 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 acquir ed by i.b.L for tho state d amount of ~1 , 052 , 9.3 1.80 . This amount was paid for in the following mann er : ?.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 Add iti onal 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 .,..

.. LL C .L~.l Ul~ C. I' ��� � G .n~ J.Ji o. 45 16 J olo Waiting St at ion ~582,725 . 80 JV-48-12-10 1 .... �. ...... . 12 � 500.00 Junk files (sold to Maidamcr) JV-4 8-12-101 . .� 500 . 00 Junk il cs (sold to CnLI) JV-48-12-101 ............. __iQO . OO Total value of a cquir ed prope rti es ~1 , 052,931.80 = Above prope rtie s wor e pa id in tho following manner : In c ash . . . . . . . . . . . . . . . . . . . . . . . . . . . li2 2 50 , 000 . 00 In ?hL stock a s foll ows : 69 , 669 sha r e s a t ~10 . 0 0 pe r share . . .. ......... ~696, 690 . 00 69 , 669 sha res a t ~l . 00 p r c mi urn � . � � � 69 , 669.00 69 , 669 sha res a t a � total price of 1211 .00 per s ha r e ...��. � . .� ..�.�.. :;,2 '766 ) 359.00 By applica tion of lVIIATCI Re ce iv- ' able owine by c... LI .. ........... . . . 32 ,770 .33 By a pplica tio~ _o f 1) hL,� Rc ce ivablo _;_ 3,79l.:..2J owing by C.t1..Ll G ����� � � ��� � ������� ~ l) 0 52) 9 21 . 26 Diff e rence b e tween v a l ue of ---~.5...L..t __ acquir ed prop erti es a nd pay- i2l ) 0 52 )9 31. 80 ments ma de a s d e t ailed a bove absorbed into our .t-~.ccount 7187 as incom e (non-opor a tin: ) TOT.h L "The i te m tho par t i es a r c now dosc r ibine ma y be identif i e d in tho abovo s t a t ement as aoplic a - tion of 1vi iATCI 1 s r e ce ivab l es owing by CrtL! in tho amount of ~32 , 770 . 3 3 . Thi s a mount r epre sents re - ceivables of ML1.TCI payab le by CALI for tho us c of Makati h ir Fi eld d uring tho time it was in opera tion . In vie w of the f a ct t hat tho MihTCI wa s a subs i di ar y o f tho .h L , tho s e I~II.ti. TCI r e ceiv - abl es wor e included in the purc ha s e pric e of all th e prop erty a nd oquiprrD nt of C1-1.LI a c uir od by ?hL . . "Tho 7 0Vornme nt a udi t ors cont e nd tha t this amo unt i s t ax abl e ina smuch as this a mount p er - t a ins to tho l11IIh.TCI a nd not to tho Pn.L, so that th o pr ofit on tho sal e i s computed as follows : Tota l as s e t s a cquire d b y ~n.L .. . . . ~1 , 052,931 .3 0 Tot al payment, a s lis t e d a bov e . . . . . . ~ l,05 2 , 9 21 . 2 6 Less 1v1L-1.'J.' CI r oc oi v- ab l e s . . . . . . . . . . . . . 32 ,71Q...J.} Net a mount pa i d b y ~hL . . . . . . .. . .� _1.020 , 150.21_ Tot a l profit, p er gov e rnme nt a uditors .. . . . .. .. .. .. . .. . .. .. . ~ 32,780.87 Loss profit d ecla r e d . . . . . . . . . . . . . l0.54 hdditional profit to b e de cla r e d . ~ _ 32 ,770.33 39

. .c . ' DBC IS ION- 17 non the other hand , ~) 11L contends that the sum ~3?2~L7 of 70 . JJ cannot be considered a s profit by the be cau se as shown in the abo v e -indicat ed st atement , ~; ...1 acquired from C11.i,I properties worth .i;il , 052 , 9J l. 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 a t until .c'nL has disposed of these properties acquired from C1->.Li for an amount over and abov e 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 01 ~ hL S Tit' Ului'I'ION R1GhRD - ' JNG SCri.~CJLJULL II..l-uTT11.Crl:2::L. TO - Trt1 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 follow ing it ems a rc t a xable : D1-.rr 1::, FOLIO - - l1RTICUL.b.RS .l9Jr2. July 31 C/R 414 Rcfund of fro i[ht by. Nov. 30 Jil - 42h l-'ICi 0 /R 45566I j2 5 . 00 Nov. JO Jll -428 )� . 89 To ad 4ust amount 200 .00 cha rged to n/G 2141 by JV 49 - l-42 . . ... . . . 0 To char.::;c the account of .t?hil. bo nate for . ... In roi cc r,l633l dated 1-~.u ,� ust 31, 194 ~ ' -' Iviar � . Jl JJ-42 To e liminate credi t of Ma nila Enrinee r' s 78 . 'ZQ__ District ~ccount for unuse d Fcati Ticket' No. 12914- 4/25/47 . . . . . . . . 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 i.ar::t)..c ul a r s .Amo unt Oct. Jl Jl0 - 420 Taking upS.~ . In- voice tJJt.99 d a ted July 5 , 1947 which was paid by Soriano y Cia ... o � ������ � � � 40

... . lJ.DCI .3.t.UN - C. T . A. ChSE NO . 45 18 Doc. 31 Jl2- 68 To VJrito off ncut .rob. 28 J2- 43 of data ' cnocks , shown as o uts t a nd - ing p or ? AL 1 s Ba nk r e concilia ti on .. .. .. . ~ 426 . 38 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 : ' �, -FO-L-IO- -P.h-R-T-iC�-UL-n.R-S 1949 May Jl J 13 - 42 To t ako up ca n co ll a - " tion of various chocks dr a wn a~a ins t HS~C � (not c a~ho d) . . . . . . . . .i:2 349 .66 Sopt 30 J9 - 42.-. To r ocord cance ll a tion 60.50 of various chocks tho part ios h or oby a,:-] OO t hat t hos o r oprosont tho \ tota l amount of canc o ll od cho ck s which woro aid by ~hL to various cred ito r s but which wor o n ot actu a lly c a s he d by tl10 corre sponding p ayo os , and thorofor o adjustin~ o ntri os woro mado dobi tint; Bank Account a nd cre diting Surpl us. "Hith r os po ct to tho i t om of ;11 , 6 73 . 48,� tho partie s h oroby aeroo t hat t hi s r opros onts tho amount of pass o n~o r fa r o from Oak l and to Manil a which was actually r oc oiv od by ?AL ho r o in Manila but orron - oously crodit od to Ea rn od Sur p lus, Dome stic , which should prop erly bo incl uded in tho Ea rnod Surplus , Inc omin~ Int orn a ti ons l. I f this Honorable Court wi ll fi~ally rul e t ha t tho r ovonuo from incoming int ernational s orvico will b o sub io ct to t ho frah- chiso tax , thon . this i t om s hould bo included in tho gross r ovonuo fro m i n comin;: interna tiona l sorvico. 11Il I. H.l.J l.Jl .I' i UNrl. � oTI.dJLuTIJN Hf.G. B..tJ I NG 3C nt..l.JCL.c, Iii I c. TT .hC~. TO T rill; - O.K I G l i'J .ngL:1- S r lii.2-lUVl.jL-,_.':(d]'3l -0;l-. 1O2FSJF:.-':i.CT-S f b IIIJJi th r osp oct to Scho dulo III a tt a ched to tho oril3 ina l Stip ul a ti on o f Fa cts, dat od Ma y 19 , 1955 , tho a rtios hor o by sti pu l a t e s t ha t a ll tho itoms onum or at od in sai d 0ch odulo III r oo r os ont bal ances paya ble t o va rio us cre dit ors r opros onting oxponsos for mate ri a l s and s or vicos whi ch wor o writt e n off to Surplus a s t ho y wo r o lon e o utsta ndinr, in tho books . 41 ...

.. '' DECISION- C. T .n.. G.cu::>J:!J 1~ 0 . 4 5 19 ni v. ro.~ .UDIT IOt .-tL ~ r I.2 l.J L z-~.T ION '�viTh h .w 3i'bCT Tn.r:, IT .ul�b UHDlc.R T.-i.L (; .n.1) T iON COST OF lJI.tiT.:.h .ii-. LS .1-1.l~ .u :TI:RV.lCr.,S FlfrlNIS ti~D 1'0 i'1.,.L .n1~lJ COJT O i' .u~T.r:,R i.n LS~D- St.Rvi C.c..� _F uRr lSn..::..lJ uT.i.bR hiR.LI 1llis . "Tho parti es fur t h e r s tipulate tha t t ho follow - in g a r o tho sogr oea t ion of t ho value of l a bor from t ho v a lue of ma t e ri als i n co nn e ct i on with .tho above- ca pti on ed i t ems ) fo r tho four p er i od s invo lv ed in this cas e . SUl,1�1n RY OF BH.12a-.KDOVJN OF l~IH TER ii~LS nND su L) rLI.w S SOLL niJD SER VIC:t;; S RBNDER.wD �FR 01~ OCT OBER l 19 46 to D~CEM.d~R 31 , 1952 .�a l o s to Pl~L Oth or S a J o~ To t a l Cost of ma to ri als and sup pli os sold a nd l or us e d f or other ' a ir- � lines , etc . (p . 5 of Gov't ~. udit Ro port) J:2 54 , 71 2 . 98 ,. ~y 1 J l9 42....1& D.oc . l 3 , .19M Cost of mat eria ls and services r en- dered to P.hL � or contract ( Exh .�� Sch. l p . 2 of 226 , 10 3 . 25 ~1 20 , 5 00 . 8 5 ~14 5 , 50 3 . 40 Audit Report) Cost of ma t e ri a ls 1289 ' 375 . 88 a nd services r en - dered t o othe r airlines , otc. (Exh . A, Sch . I, p . 2 hudi t Rop ort )89 , 375. 8 8 Cost of motor fue l s 1, 395 . 46 1 , 395.46 sold t o C1-ut, et c . (Exh. A. Sch. l p 2 n. udit Report) .l9Ls9 a nd J.2.5.Q Cost of ma t e ri al s a nd s orvi cos r e nd or od to oth er a irlines, otc . ( Sc . h , pp 1 & 2 10 , 601.64 92 , 847.16 Au di t Report ~1 0 3 ~ 44 } ~ 9~ 42

,. DbG IS iON C. 1, ..-. . C.~-.Sb NO . 45 20 Cost of ma t ori a1s 94 , 921 .13 161, 683 . 74 and sorvi cos ron- dorod to PnF por contract o { Sch . 2 , pp . 1 & 2 of Aqdit Roport) 12256 , 604 . 87 l9.5.l....e.n d . - l l i z Cost of materia 1s and sorvic os r on- dorod to othor a ir - 1inos , o tc .{ Sch . 1 p .' 1 of il.ud it Roport E216 , 370 .71 70 , 791 . 76 145 , 57 8 . 95 Cost of matorials and sorvicos ron- dora d to P.rtF por contract . (Sch . 1 p. 1 0f d i u .l;l. t Roport) 227 , 89 2 . 84 1 09 , 6 37. 82 11 ] , 385.52 -------- TOT1tLS ~1 , 22 5 ) 094. 89 };2395, 949 . 76~570 , 1 6 1 . 9l~lq l 6?3 � 74~248L2~8 From tho foro..::;oin.e; S tipulation and Supplomont St i- pulation of Fa cts , tho controversy has b oo n narrowod dow n to tho follow i n� pri ncip al i t oms , name ly : ~osumo of D i~p utod I toms of Gross Roco i nts l . Incominc Gross r oc oipts - International . . . . ... . ... ... .. . . . . . . !260 ) 563 , 603.46 2.0utE;oing Gross r oco ipts - Int orna tional . .... . . .. . ... ~ . o � � � � �� 29 ) 390 ) 076 . 46 3.?a ss ongo rs' Passos - a . I nt or na ti ona 1 . . . . . . . . . . . . . . . . . . . 1,431 , 606 . 73 b . Dornc stic . . . . . . . . . . .. ... . �. .. .. . Ill. 205 )914 . 21 4 . ?romium on Ca pita l stock . ..... . .. .. . 1 , 799 , 986. 59 5 . Cost of matorials sold to i?��F a nd othor a i r l i n es o � ��� ���� �� � �� 0 � � 817 , 087 .9 3 6 .Cost of motor fuols sold to CAA . . . . . ~ , 395.46 ? . Cost of servic os rondorod to ?hF and othor a irli nos ...... .......... . 406 J 5 51.5 0 8 .Ea r nod surplus i toms , ?or Scho~ dulos I , II a nd III : a . Sorvic os rondorod by Supply & procuromont Se cti on f r om May to April , 1947 , por ad - j ustment o ntry #3 0 , JV- 10 - 14 .. . . . b . Uncas~od cho cks wh i ch woro rovortod back to tho credit of tho ?AL a ccount with tho Hongkong & Shanghai )anking Corporat i on por JV- 48-68 . . . . . .. .. � 490 .97 c .Cancollation of various chocks drawn aga inst . Hongkon~ Shanghai Banking Corp .. . ... .. ... . ..... . . . . . . 349 .66 d . Cancellati on of v arious chocks J 9- 42A - .. . .. . .. . .. . . . . .. .. Ill 0 It � � � per 43 60 . 50

( DbCISION C. f.a . CASE NO. 45 21 o . MIATCI 1 s Not Surplus up to Juno 32 ,770.33 30 , 194$ absorbed by iAL . .. ........ . ' f. Ea r ned Surplus re - acquisition of CALI properties for which 1,113 .61 ~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 Interna l Revenue 12/JO per JC - 42CI � o � o��o�� ���� ���� � � � ��o� ' � � �� h . Cane ell at ion and -writing off of 1 ia bi 1it i os as listed or ~V 12- 76 - 51 ............ . T0Th1 . ..�.. . ~ 95 , 299 , 270 .45 Tho pet itione r maintains that tho items listed above do not form pe.rt of the "Gross Revenue " or "Gross Rc cc i p tsn 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 a ir. It operates under and by virtue of two franchises granted by tho fo r mer i' hilippinc LeGislature under Acts Nos . 4271 an~ 4272 , originall y granted to its pro codes sors - ti1o ~) hi lip pi ne Aeria l To st Company , I nc . and tho Iloilo Air Exp ress Company , Inc.- which franchises wore acquired by the heroin petitioner and duly sancti6ncd by legislative authot ity 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 duri ng tho l a st fifteen years of tho lifo of this fran- cniso a tax of two per cent of such gross revenue . Such tax shall be duo� a nd 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 quarte r. 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 apr roval 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~~ und er 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 not ed that under Section 13 of Acts Nos. 4271 and 4272 c titioncr .�is required to pay a franch is e tax on the ~-ross J::.Q.Y..CJ:.l.U,Q derived from the operation o f 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 Gener a l) and insula r trc as urcr (N a tional Trcas - urcr) , a copy of such accounts c~uartcrly.Scction 14 de - fines the term 11 r.;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 a ppearing in franchises ,:;ra nted 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 reasonabl e. pcrccmta~~c of the e;x.illiLQ.iirll~ of the grantee s. (The J?hilip;?ine Lon.:; Distance T el epho ne Co. v. No. L-3222, Jan. the Colle ctor of Intcr1 Ja l Revenu e 118Gro.Rss. J.cco rdin .e;2.y, the terms revenue " a nd 21 , 1952) "~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 c a rr,in,:s 11 � The q ucs ti on pre scnted for our consid erati on is whether or not the various ' itc ms in controvcrsv arc oart of the taxable 11 r- ross rcve - h e r e~ 1 11 C""ross rcceiov t.s 11 o�r n,- ross carniniJ'Sn of'-" oetitione r. nuc ' ) 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 d er 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 inh erent limitation that the s tato can not tax a nythine; beyond its territorial j uri sdiction. Stated othe r wis 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 it s jurisdiction without violating tho due roc css cl ause 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 a x 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 b e f o und within tho state. If an inc ome is tax~d , tho recipi e nt thereof must have 2 domi cil e within the state or tho property or business out of wh i ch the income issu e s 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." (M anila Gas Cor oration v . Colle ctor 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 pre de cess ors , 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 o r tho orrca~in~ in an occupation . ( 51 .< -.m. J ur . 6l. J Being thus a n e x c is e tax , tho same can be l e vied by tho state only when the a cts , ori v i l oPOS or businesses arc dono o r o~ orformcd within t ho jur'isdi cti on of the i:'hili pp in cs . 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 oc cupat 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 i s - performed or the occupation is onzae;od in . state may constitutionally tax the performance of a certa in c:~ct vJithin its l imits, a nd 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 pe r fo r med 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 e xcise 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 11 i n lieu of a ll other t a xes". 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 exc is 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 a tions imposed upon a ll burdens in character of taxes , VJhatcvor the ir denom ina- 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 air cr aft , tnc 2~o commutation tax is to be deemed im noscd as a substitute for all 0thor taxes that may be levied or assessed upon the ctitio nor. However ~ the 2)o commut at 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 col lect taxes must be considered in r ola- ti on to the aforesaid doctrine limi tinr:r the oo'wc r 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 alte r 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 liroport y 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 excis e 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 int ernational 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 denom inated as "International ~ross r oc oipts - Incomin;_n . This amo unt is tho total eross rece ipts during tho period in quest ion for th o transport ation o f passon~ers a nd froi_sht from fo reign countri es to tho ?h ili pp inos . Thoro can be no doubt that in regard to the ~ross r e ce ipts for tho transportat i on of nasson ~o rs a nd froir-ht in foroi~n countries tho transac- r tions wore oxclu siv~ly for o i2n . ~Consoquontly , s aid ~ross rece ipts c an not be roached by taxRtion in tho ihilip - pinos. Tho transportation of pa sson.::;o rs a nd fr e ir;ht or lgln - atL'1e in s orne foroi.e;n � countri e s with tho i'hilippinos a s dosti~,tion presents a mora difficult problem , a port i on of tho services rendered bv petitioner to its customers boin~ a ctuall y rondorod in. tho ihili pinos when its pla nes land on i'hilippino soil. 'vJo have studied t ho matter carefully ,and found soma a ssistanc e from tho adm inistrative rulines and interpreta - tions of tho Bureau of Int erna l Rovonuo on tho taxab ility of tho r:ro ss r e c eipts of common ca rri e rs in t,onoral. 2.g__c - \d_on 192 of tho Ne.t ional" Int ernal Rovonuo Coda imp ose s a or cant ago tax of 21~ of the gross receipts of comm on car- riers and transportation contra ctors , wheth er ongagod in domestic or for o i ~ n trade . In tho c ase of c omm on c arriers ongaeod in internationa l trade , tho Bureau o f Int erna l Ro - vonuo has rul ed that receipts derived f~om incomin�:; freight and passon.e:or service arc not subj e ct to said t ax, a nd that only receipts from outsoing froicht and pass on~o r service a r c t ax able. "Receipts derived by Foroi .3n steamship com - pa ni cs onr:aeod in business in tho ?hilippinos from out~oins fr o i&ht and passoncor service arc subject to tho porc ont azo t ax imposed in Se ction 192 of tho Nati ona l Inte rnal Rov onuo Coda. Now - over, receipts derived from incomin~ froir;ht and passoncor service aro not subj ec t to tho perc en- tage tax imposed in tho s a id section of tho Tax Code. In b oth cases , it is immateri a l wh ethe r oaymo nt 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.r ana s, Commentaries and Jurisprudence on Business and Occupation Taxes , 2d Ed ., p . 277) . It is obvious that tho c ross r ocoiots derived by com- mon carr i e rs ons:�ac-od in int or'r;.ationa l trade arc derived from transaction' �"s u l)artly witnin and partly �without tho ~hilippin o s. This is truo as r o0ards both out_so inc 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 port ion actually earned for services r ende red in tho ?hilip pinos from that portionvlarnod for services rendered outsido 1 Tho same is true w th resp ect to tho s ross receip ts 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 tr a de derived from o u t .a...:.. o i n '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 app ly 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 eceip ts 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 - internat ion al tT of pot it ionar in tho c:tmount of i260 , 56 3,b03 .46 a rc not taxable, whi la tho outso ing gross receipts in tho amount of ~29 , 390,076.46 arc sub j ect to tho franchise tax. Wo now proceed to the disputed items ragardin_::: ;:as- sonzar i?as sos . ~.s a consequence of boint:: a covornmont - controlla d 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 pass a:Jo froo of charr;o includ inr; their baEc:aso, subject to availability of space . (i)a r. 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 a irlines 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 . a s a paying passan..:;or and any excess ba::::sa~:a a rc 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 ad verted to, Section 13 of both Acts Nos. 4271 and 4272 , require petitioner to pay tho fr a 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 ac count 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 ov onuo n a nd ttr:ross receipts " shou ld b o intorprotod to moan tho samo as tt,sross ear nings " . 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 h avo o arnod his salary but may not ha vo col - l ected it , or may bo unable to c ollect it from an insolvent omployor. A person ca nnot demand payment of his unpaid salary unless he has oarnod it. This would show that to collect is differe nt 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. "T hcroforo , 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 Dis tance Tolopho n o Co . v . Tho Col - lector of Int crna 1 Rovcnuo , supra.) For purposes of tho franchise tax , thorofare , tho ?; ross r c vonu o 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 unc ollected or writTn off or carried in its books . Applyin~ tho forocoin3 criterion to tho c ase at bar, it will r ead ily 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 etiti oner 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 p asses whon thoy wo ro issue d . hnd as allcr,cd by tho petitioner , tho mon e y value of tho froc passes novor appoarod in its books as . accounts rocoivablo. Honco~ tho money value of tho passes iss ued by tho p et ition 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 e d in t ho books . J,s such it can not be considered a s nr; r oss ro co ip ts 11 , n.:::;ro ss rcvonuo n or 11r:ross c a rnine;s " of p ot i tionor from whatever an~lc tho ~uostion is vi,owod .J Moreover: as stated a bove in tho Stipulation of Facts , passongor passes a rc i s0uod by tho petition er 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 Ci vil Aeronautics hct , Republ ic Act No . 776 , th o p e titi 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 expe ctation 50

.. . '. . . l.J:t. CL::J I uN - C. T �.n � C.n St. N0 � 45 28 of any consid eration 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 o nly domestic� airline company cn,ca,:::cd in for e ign operations which , for mana~c ri al purposes, were reason ab 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 e rnati on a l ~ ir Transport hSSoci ation , which aro observed by tho majority of the i ntern atio nal airlines of tho world , we believe that such pra ctice 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 Comme rce; 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 11 s pac o .n. va il a bi 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 o n c apital 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 th o stockholders� of record at Ei price above par v a lue. The respondent contends that the 2mount received by the cti- tionor in excess of _:-Jar and called "pr emiums" , should be consid ered as part of tho ,::ross revenues subject to the franchise tax. On tho other hand , petitioner maintains that such ex c ess represents capital tra nsactio ns or a ro in tho character of c ontribution by tho stockholde rs 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 a x. ( 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 e ceipt by a corpo- rati on of shares subscribed does n ot ~~ivo rise to any taxable .:ain oven if t-ho rico bo in exc ess of the par ')f sta to d value. rhus, und or S cc ti (m 55 o f Revenue Rer;u - lations No . 2, it is provided �that whethe r tho acqu isition or d isposit 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 -

. . ' .. l..fE. C1 SION - �. C �T � t-� � Cr~ S:b N0 � 45 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 ~or 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 dcnt i ca l with tho fed e r 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 a ri se from a more sale of tho shares , in tho e.bscncc of a bas is upon which a eain would b e derived . If, f or inc ome tax pur poses , tho rece i pt by a co rporati on of premium o n tho subs cripti on o r issue price over tho par value of its own capi t a l stock docs not c onstitute a taxable e a in , it fol - l ows that tho r e ceipt by tho petiti oner of prem i um on its capita l stock docs not co nstitute any ~ross carnine or re - venue upon which tho fr a nchis e t ax may be assessed. 11Wc arc s a tisfied tha t tnc entire pr o ceeds of sales by a co rp orati 0n .J f its own st~ck , oven when sold for moro than par vc:tluc ' aro part 0 f . i ts ori_r:; in al assets or ca _ital stock , and thoro - foro cannot be iJrofits earned throu~Th tho c on- duct of its busincsq.. Tho phrase 'c a�J it a 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 c or )orati �:m cc:rrics on its c orp- 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 sto ck 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 , o r above par. Tho c a pita l stock re - ferred to in sai d section 309'is tho actual pro7 party of the corpo rati on c ontributed by tho sha re - ho lders . ' 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 . Schroede r , 39 Cal . hpp . 226, 178 ?� 540.) """11 arrrcc that 'Jrcmi urn recci ved o n tho issue of c a~it al stock with ' ar value is not a f orm o.f income , althou,"';h lc,:-: a lly viewed a s e. section of surplus. Similarly tho excess of amount paid in one i ss u e of no - par s hares over tho stated v a lue is never rec o("nizablc as income ." ( !Jato~ j .accounta nt s ' Hanu boo k-; Third .Edition ,, p. 168 . Moreover , it has b oon :=cnc r ally a cc epted that no 3a i n may be derived from tho ini t i a l transaction of corp- orati Jns on tho issuance of its share s .) f stock . Tho money -'J r �l r o party o bt a ined by tho coriJO ration upon tho or ::;c:tni zation thereof o r 1.qon a.dd i tional or subsequent issues o f shares if e. fund r a ised to pr ovide f or capit a l f or purposes of its Jpcra.ti on 2.s well a s a fund to act as a sec urity for tho payment of tho corporate creditors . Thi s fund or capital st ock is usually carried in tho books 52

L~ Gi.:::i ll.)l~ - C . 'i' , n, Ln.J.w _.,tj , 45 30 of t h e c or poration as a liability a nd the amount der ive d from r a i sine such capital a nd n ot subject t o distribut i on as d ividend or ?rof i ts. I n corporate law and practice , i t is t he rule th a t o nly ;,..;he n the c orpor2.tion deri vos sain in the course of its transactions or from its ope rations may the Bo a rd o f Direct ors lawfully divide such .c;a ins and decl are them paya ble to tho st o ckh o l ~o rs by way o f divi - de nd s . ~s a corro l a ry , the amount rcc o ivcd as c apital and f or minr; part of the c ap it a l sto ck is in nJ way dccmc~ t o b e profits derived fr om the operation o f the corpo rat 1 on , hence the same should be treat ed a s ~art o f the c a) ital sto c k . ( Par. 3 , Secti on 16, ~ct 1459 , Corporati on Law ; Soc Kahl , Co rl)'J rato 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 o f the co st o f ma te ri als furn i shed the ?hiliLJin o uir Force , ,)tho r airlines a nd the Civ il .-,.cro nautics '"dministra ti Jn in conn e cti 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 undert ook t o ')F{y peti tio ne r f o r tnc c .J st o f l abo r e. nd raatcrials in the rep a ir of the ir planes. However , it ;,vas a ls o ~13ro cd between thorn that the pet i t i onor heroin vwu l d sup:Jly the mat e 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 , J thcr air l i ne or tho Civ i l i�Oronautics .hdministra ti )D . The [)oti ti oncr , accordin:: t o the a:.:;rcomont ch 2r ?_cd tho c Jst of r c p a i~s , lab or , ma inte - nance or ather fJrms of char:os plus 20% of such actua l cost and whore materials have been nr ovidcd by tho pet i - tione r , the petitioner wa s entitled to rec o v er tho actual cost o f such materi a ls with a 10'-;o -o romium there on . The pet i t i oner returned f or fr an chise t e,xcs only tho 2~~ and l(ijo p r or.1 i ums on tho a ctua l cost of matcri2.ls a ncl l a bor , respectively . However , r espondent contends th at the a mount sub j c ct t ') the fr a nchise t ax includes n o t o nl v the s Ri d 1-0~b a nd 20i; premium but the cost of the mate ri a ls a nd l a b or 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 c tua l cost o f mater i a ls , S?arc ~arts a nd supplies furnished by the petitio ner arc t a x ab le . Unuo r the second '!Jar a ''Ta h of Sect i on 13 , i.cts Nos . 4271 a nd 4272 , the c;ros~ rece i pt s 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 a ti on 11 o f the fr a n chi so . Si nce ti10 amo.unt r cc ci vcd by tho rwti ti r)Do r for rcn dcrine ser- vic es and/or provid i nc materials f or the rep a ir 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 a ir- li ne s fell wi thi n tho purview o f tho broad co ncept of ",o;ross receipts 11 a s defined , we believe 2nd hold that su ch rece i pts in itd _c ntiro t y arc subjec t dot~oJE'ttrhto payme nt of sai d franc hise t x .l fifld no r ea son t o fr om the lone- a v..c 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 lab or a nd mato ri El. ls if both a rc furnishcd . J I tem 8 con s i sts of miscellaneous disputed items con- t a in ed in S ch od ulos _I r- JI Emd III. The f ir st o f those ,. 53

'. '' ' D~Cl3 ION - C. T . h . CnSb NJ. 45 31 i tems (I tem No . 1 - a) invo lves an adjustment entry in pe - tit i oner's r e c ords c overinrr 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 Secti on o f tho former , and f or such services the v alue there of vJa s cha r .P_;'Cd the ltl l1.TCI. Th o l-1IhTCI was t hen a subsidiary co rp or 9-ti on of :; cti tioner a nd likew ise manaecd by it . Th o 1�IIHTCI was then engaged in tho mai n - tena nce o f the Mak ~ ti a irp ort, but d uo to t he closure of such airport , it became necess a ry t o likewise d iss o,lve the cor:por atio n . Tho l:;cti ti :mcr cla ims tha t the d isputed i tem in vo 1vas s olely b oo kkce ;:>ine: entri es and is n ot tho re f o re )art 0f the : .ross re co i pts of t i1c ~')ct i ti oncr sub j o ct to t ax . Th o services rendered by tho h e rein petitioner f or the l'IInTCI were ';erf or mcd in the �o r d in :tr v course o f busi - nes~ . nlth o ~ :h the NihfCI was adm itt ed ly� a subsi �iary co rp or n.t i on o f pe titi oner , that is , it was practically wh olly o wned by the l atter , ne ve rtheles s , the two cor p - orat i ons were separate and d i stinct jurid ic al entities . Hence , tho c om:)ens at i on for services r endered by tho pe - titi on er the rein i n the c ourse 'J f i ts b usin ess a rc taxable as vJithin the urvicw ,) f i t s fr ~1 nchises, irres pective o f whether the services we re perf ormed for a r ela t e d or totally inde pe ndent cor)ora tion�. Horcovcr , althr_;u �h n :, a ct ua l c nsh ~a yf!1Cnt was made o r transfer of fun ds e ffect ed between the parties , we believ e a nG. t10ld tha t the c.;.mou nts� ente r ed in the bo o ks o f . ctiti oncr as comp_gnsa tio n f or its services t �) l111I.L.TCI wo r e int e nded to be c ollected. If thoro was no int enti on t o c olle ct , we sec no reaf�)u o r justificat i o n for tho e ntri es in tho b oo ks . The f a c tha t s a i d amounts ha v e rC I(ta i nod unc o l1ccted doc s no t mi it ate a o�a inst their taxabili tv . On a n a na l o ��ous p oint , o ur Sup;;omc Court h a s ho l d that ::.mounts due' �from cust ome rs which a rc o r h a ve rcnained unc o lle cted or have boon wri tt on off fr o m the books of a cc ou nts o f th e __ ;;:c t a xpaye r arc nevertheless sub j e ct tl) tho fr a nchise ta:x..J ( Phil i n::> i n c Lo n ~ Dist a nc e Tclc 0honc C om~any v . Co llector rn a l ~.cvCnuc , .s.u;a:a 0 ) ' 0 of 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 h a v e remain e d uncashed and h a vo be on rev ert ed t o the 3ur"J l us ... cc ount �. Tho se chocks wore drawn by tho peti t i on~r a :~ a inst tho Ho n ,e,ko nt:- Shan:; ha i Bankin.s Cor; o r ation in :>n ymont o f cla ims of various credit ors but which wore ne v er c as h ed b y the resp ective pa yees . C o ns e~u on t ly , the petiti on e r c a ncelled thos e chocks a nd tr ansferr ed the ':l. m') unts c overed hereby t o tho Earned Surplus ... cc ounts . Thos e amo unts wor e d isburs ed by the pe - titi oner i n pa mo nt f �Jr cx~onso it ems . rho f a ct that these cl a ims h av e be e n r ev ert ed t 'J Sur plus woul d n ot a ff oct the .5I"oss r e ce i pts subject to the fran chi se tP,X because they merely r ep resent a reducti on o f tho ox e ns os when tho same wor e incurred . hs mere e xp e ns e c, cc o unts , tncy d'o n ot for m part o f tho ,-;ross receipts. Instead , they a rc pa rt o f the deducti o ns from tho Gross Inco me o f notiti onc r in .J rdcr to ar ri ve at its not income . ~.ny s a vint:� of !JCtitione r' s ex- pen ses would solely bc__ <3_ reduction o f vJhat :)otitionor incurs 54

.. ...' . lJLCl.::3ION - C. T ..n. . Cn8E ~0. 45 33 The next item (Item 8- f) repres e nts the sum o f ~32 779_ . 33 , consistin.=; o f earned surplus -re - acqu i sition of Cn.L..L properties . The Commercia l Hirlincs , Inc. herein referred to as c�. LI , was a corporat i0n f o rmerly e!1f;a,:-~ed in the int e rn ational air� transpo rtati0n 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 petitio ner , and the payment thereof was ma de in e11arcs of stock o f pctitiJncr and by thc __appli_9 at i::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 a id sum of ~32 , 770.33. This MIATCI receiva bles had been rcvi ~ usly transferred to pot iti cmor after tho absorption of MIATCI , Th c p oti ti on or c onto nds that t .he a p~) lie a ti J n () f said a c- c ounts receivable to tno :Jurch asc price of C.n.LI prope r- tics c onstituted a mere bo o kkcc_::)in~ entry a nd , thcrcforo , is not t axable , where as tho r espondent c:mtonds that tho am J unt c onsti tutos r) r o fit on tho 'Ja rt of tho nctitionor wnon tho s arne wB.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 view po int, it is rcco~nizcd that n o pr)fit is realized by the purchase r f .; r h nvin t; acquired p r opCJ;,tics at a price l owo_r: than its stated purchase ~ rico. The app lic ati on o f tho MIATCI acc o unts 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~ th o a ssets a c quired fro m the CALl (Finney u. nd 1vi ill cr , Principles of Accountin:3, Intermediate , Fo urth Edit i on , 53. r. 420). Tho mere f a ct th at th o --)o titi o nor hu.d chosen t o r ef lect tho b oo k v a lue of tho a ss e ts as then a ppearing in Ca li's bo oks in :Jo titi onor's books of accounts and tho c orros - pondin~ amount o f ~32 , 770.33 as sur~lus, docs n ot moan th a t a :)r ofit has boon obta ined by tho ;?Ot iti oncr. This situati o n is analo,:_,Dus to a cg,so where a n o rdin ary per- son a cquires a piece o f ~ r op crty a t det e rminate p rice sa y 121, 000 . 00 a nd then subsequently re fl e cts in his books o f ac c ounts a pric e hi~hor tha n his ~urchas o p rice say 121, 200.00 by crodit in.c; the d if ference o f g200 . 00 to a s 0ocial a cc ount. Such s~oc i al a ccount wou ld in f a ct be ~ mere npa:Jo r r r ofi til as in the ca!n� o f tho earned surplus account established by the po itio nor 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 on er n or d ocs i t make a n earn in r U'J On which a .rr r oss receipt t ax may be loc a lly im o s o~ . No form o f inc ome has boon received by tho pet iti o ne 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 e nts the sum o f ~1 , 673.48 und er Schedule II, co vcrin s the amo unt o f ~as soneor f a res fr om Oa kla nd t �J Manila and actually pa id to petiti o ner but which was credit ed to Earned Surplus , Domestic. Fo r o bvious r easo ns , this a mount sho uld be treated a s pr operly f a lline und e r tho Inc omine Interna - ti o na l Gross He cc ipts (or Earned Surplus , Intornat i o nal). Since the amount involves r evenue derived by tho pet i - ti oner f or transportat i on from a f oro i:n country t o the ?hili ~p inos, the s ame is n ot tnxablo in a cc o rd ance with the rul e tna t the ~ ro ss r o c o i~ts derived fr om ope r a tions ~ 56

.. -. Fj 'I '1 D.GC.LSIO N C.T . h . C hS~ NO . 45 32 t o c arry on its tra~o or business and cannot be cJnsidored t o h a 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 c a rried over a s a rt of tho .:.. arnod Sur:1lus o f tno pot iti o nor 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 subsidi ary o f tho petitioner a nd tho pur chas e �) f tho s hares o f stock of u.lHTCl by tho pet i tioner Phil- i~pino .-ir Lines is rop!'os entod i n it s book s a s investmen ts . Subs e qu entl y, tho lJill.TCI was liqui dated a nd its asset s a nd liab ili t i es a t b ook value wore 2bso rbod by_tho ~ot i tiono r includin; tho Ea rned 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 inc ome on tho part of tho peti tioner a risine from its inv estme nts in tho M ih~CI, In exchan_::o f or its investment o ri _c;ina lly made in 1v1Ih�r_ci , it receiv ed a ssets and a cquired al l tho properties o f MihTCI wh ich was o ve r a nd abo ve tho c a�1 ital sto ck inv estments tho p etiti oner h ad and such ex c~s s consisted of the ea rned surolus o f kHr.TCI made U:J o f tho a ccumulated Dr ofits of t no�l atter . Such SUr}llus' a cc ounts of tho subsi d i ary be - came actually inc ome to )Ot itio ner as tho holdine c ompany when tho tra nsfer was effected a nd is a na l o~ous or s i mil ar t o tho dist ribution o f d ividends to tho stockh �)l dors of t no _corporation , wnoroin tho d ivid ends o r tho r ea lized p r o - f i ts arc treat ed ,:;. s inc ome on t.no Dart of the stockholders. Tho fact that tno petitioner u bsorbod tho earned sur~lus o f l<ii.t-J.'.L'Cl made such surplus as :lotit i on?r' s own .J '~hero tho trans a cti on is a true business mor~or , not only sho uld tne earned sur p l us of tho survivine c o rp orati on bo p reserved in tact, but thoro should bo Rddod to it tho earned sur - plus of tllo a bso rv od cor?or :-1tion . In ::o no r a l , in a true mercer , a ll balance shoot i tems o f th e a bs orved c or Dorat i on arc added at str ai ~ ht book v a l 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.tmon t i s ~ onorallv sjrnilar to a c ons .)l i- datod ba l a nc o... shoot of a na ront c Jr no r ati on a nd its subsidi a ries. In most ' c a 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 ati ons, or tho r at i on o f tho oxchD.n.-::o, will require a re - ductio n o r i ncr ease in tho coQbinod c a~ it a l sto ck a cc ount J f the survivjn~ c orp or a ti on and a corrosp ) ndin~ increase o r reduct i o n in it s c omb in ed c D.pit al sur1J lus a cc ou nt. But tho c ombined o:J.rnod surplus a cc ou nt will bo tho sum o f tho earned surnlus a cco unts o f tho two c ons ti tuont co rpoi--at i on." ( Fu,l d "So me .1.'ractical i.. s~octs of a Mo r.~o r 11 , 66 Harvard Law Rovi ow 1 Sept. 1947 , p . 1116 . ) \Jh il o the earned sur lus remained ?. n art o f 1JG:J.>.TCI no inc ome was as yet r oali zed by tho pot i ti o nor , but when such surplus was made a vu ilnb l o to tho pot it i onor , tho petitioner a ctuc:tlly derived an inc om e 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 ~� D:t..CISION c .T ..... CAS.C:: l�lU . 45 34 or transacti ons o utside the Phili~pincs arc beyond its ta~ jurisdiction . The rcmainin c amount (It em 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 ite ms or che cks inv ol ved ha d not been cashed by the c orr c sp o ndin~ ~aycc or credit or , the sa i d amount rcnrcscnts in e ffect a savinrr of e xpenses . Th i s- . am ount n ot h avin~ been a n it em J f i~c omc or receipts, we ;J believ e and hold tha t the s,qmq doc s n ot constitute pa rt of the cro ss r e c e i pts subject to the franchise t a x. In resume , vJc a r c o f the opini on tha t (l) Th e � r oss rccci ts or carnines of pe titioner derived from o ut: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 pct iti �Jner a rc not subj oct to the f ranchi so t t'l.X , n o t EIXab lc revenue Jr c ar n- in ~ s h a vin ~ boon derived therefrom bv.; .~.. c titi oncr,� ~ ...._; ( 3) The receipt by pe titi oner o f ~ rcmiums on its capital stock docs nJt c �:mstitutc gross carnines or revenue upon which th0 franchis e t ax mEiy be asse ssed; ( 4) Th e cross r 'c c c i~) ts or carninc::;s o f pcti ti o ne r f or the oper ation o f a r epair shop , which include the cost of labo r, o r the cost of lab or and mate ri als if both a rc furnished , arc subj e ct to the fra nchise t ax , th e o pcr at i on o f t he r epair shop be in.:; incident a l t o its main bus i ness; a nd (5J hll it ems car ri ed under Earned Surplus b.c - counts, oth e r than tho se which c onstitut e mere adjust - in ,:: e ntri es o f expense a cc o unt s a nd/or a ll non-income accounts , f or m part o f the t axable :~ro ss r c c c i ;> ts J r earnines of pet i tioner . . In line with t he f )rc,::o in_:: O) inion , we fin d that the t ot a l deposits made by pct i tioncr t o cover the fran- chis e t ax due fr om it under its fr a nchis es from July 1 , 1946 t o Dec embe r 31 , 1952 , e xc eed the total tax l c:.:;ally d ue by :.;2817 , 4 87 . 71 , c om~;utcd a s f ollows : Gro ss Rc venues :t;e r ._. ov- a rnmc nt a udit 0 c t o be r l, 1946 to Decembe r 31 , 1952 ..... ...... �. . ............. . ... . ~172 , 595 , 403.19 Less : It em s Rc c o~niz od as Non - Taxa blc :- Sales o f I<Ioto r Fuels Employees ......... .. . . . i? 14,733 . 01 Sales of Iviatcrials & s ervices Rendered t o Em:;loyees �. . . . .. .... 228 , 080 . 65 ,, 57

.... �' ,\ . JJ:'C,CloiON - c . r.h . C.H.~~ ~o . 45 35 Rontal of hircraft ~ _ 148, 158 .6.5. f or Do mestic usc f or uso in Inter national ~ 17 2 ' 247 ' 244 �54 Sorvic os . ............. .. _,)2105 , 3Ld.~- . 99 Los s - I toms in Sche - dules I, II ar:d III admi tt od as Non -Taxab lo po r Sup pl orm ntal and ~dd iti onal Stipula - tion of FRets :- Rovors i on of a cc ounts pa yab le t o Surp lus , San Mi�::uol Browory ... . . .. ~ 1 , 429 . 30 ~. Sori ano y Ci a . July 1946 Rontal . . . . . . . . . . . . . . 616 .67 Med i cal Sorvicos r ondorod to lVIIhTCI per .lidjustmont 37 5 �00 tf 29 ' J v l () .. 14 .. . . . .. . . . . Road Rollor a nd Road Grad or iss uo d by r� .H.L t o ~IhTC I Sept . 1946 . .. . . 7, 500.00 Estimated Co st o f Samar Equipt , Guiuan trans - ferred t o F.r...tl.Ti . . . . . . . .. . 16 , 500 . 00 Unc ashod Chock a /c with Hon ~ ko n - Shan�ha i Bank ro v~rtod por ~V 48-4- 53 � . . . . 276.91 S.F. Inv oic e d 99 , datod July 5 ' 1947 raid by .. . Soriano y Ci a J -10- 423 . .... . 65.50 Writin ~ o f "Out of Da te" chocks',) outstandin.=: per J.?11.L' S bank Rocon ciliati 'Jn por J 12-6$ . .... . .. . . . . .. .. . 486.38 Ca nc ellation o f Chocks pe r J 2- 43 ... ....... . ..... . ~2 8 5.73 29 . 385 . h9 l-2172 , 217 , 859 .05 Loss - Itom found as Non - Ta xable by Court :- Inc omi nc Gross Ro - . c oi nts Intornati )n8 l . . .. J60 , 563 , 603 .46 .l;a ss on :ror !-' a sses - Int ernational .... . .. ... � 1,431, 606 .7 3 � asson:or ?asses - Domestic o ���� ���� ������ o 805 , 914.21 1:. r om ium on Ca!1i tal Stock . . . . .. o ��� ������� � � 1 , 799 , 986 . 59 Unca shod chocks ro - vort od to cr oc: it of .?.....L 00r J V 48- 68 ....... . 490 . 97 Earned Surplus roac- qu is it i on of C1o.LI l)rO!JCrti CS ���n���oo���� � 32 , 770 . 33 ,. 58

�. Dt,CIS ION - C . l' . n . Cn Sb NO . 45 36 Ca ncol lati �)n o f v a ri ou s a~.....& inst N~~ c ch ocks ~ J- 349 . 66 3- 42 .... .. .. ... .. ...... . . ;;2 1 , 67 3 .48 60 . 50 Rovorsin8 Entry made . J , 7J 1.6J 26U38, 1A9. s~ per JV 48 -1-7 3 ro Inv oic e 6285 a lready paid por J 6 - 42 Cl � . �.�. Cance l lati on of v a rious cho cks J 9 - 421 ...... .. . . Ca nc ellation o f Lia - bilities JV 12- 96-51 .. . . . .. �� � �� � �� � ��� � ��� � � � �� l2107 ,579 , 689.51 2% tax due on Taxable . ........ o. ~ 2 ,151 , 393 .79 amount of .ii2107 , 579 , 689 .51 Add - Defici e ncy Tax for - 298 Q2 � pri or pe ri od . .. . . . . . . . . . . . fiJ �� ��� ; � �� !2 2 , 151 ' 89 1 .8 1 .h..ui o�UN T 0 F 1' ...1. . .� ���. 0 � � � � � � � � � � � � � � � � � Less .-.mounts Depos i ted by,� taxpayer 0 0 �� � 2 .,.969 ,.11~ 'l'vl' .n.L G.:C.:C!:.JSS LJ.u ;)OJI'i' - Subj e ct to Ro fund . . . . . . . . . . . . . . . . . . . . . . . .. . . .i2 817,487.71 FOR T .H..L:.. FJRL,GO l NG Cui~SID:t.,R.h.TIONS , tho deduction o f res pondent appealed from is hereby mod i fied , in a cc or dance 'With the for eco ins op f nio n , a nd he is heroby o r d.orod t o r efu nd t o petiti oner the sum o f ~ 81 7,487.71 with c osts a~a in st otitiono r. '-' SO OR.LJ�RLEl , Man il a , 2h ilipp in os, Feb ru a ry 8 , 19 56. . VJ~ CONCUR : SGD . ROMitN 1�I. UMi-.LI R01vi.l,N ~�1. UM.h.LI SGlJ . J'iihRI..-.NO N..-.BL:t:: d s.. sociato Judr.o lvlrJi. I... NO ~r. BLG \ !=>res i din.e; J udEo , SGD � .M.U GUSTO Ivi . LUCI..-.NO hUGUSTO M. LUCihNO ��ss ociate Jud.::o True copy/ni !" 59 ..