El Oriente v. Posadas - Taxability of Insurance Proceeds 56 PHIL 147 (1931)

El Oriente v.
Posadas - Taxability of Insurance Proceeds

56 PHIL 147 (1931)
Facts:
> El Oriente in order to protect itself against the loss that it might suffer by
reason of the death of its manager, A. Velhagen, who had had more than
thirty-five (35) years of experience in the manufacture of cigars in the
Philippines, procured from the Manufacturers Life Insurance Co., of Toronto,
Canada, thru its local agent E. E. Elser, an insurance policy on the life of the
said A. Velhagen for the sum of $50,000, United States currency
designating itself as the beneficiary.
> El Oriente paid for the premiums due thereon and charged as expenses
of its business all the said premiums and deducted the same from its gross
incomes as reported in its annual income tax returns, which deductions
were allowed upon a showing that such premiums were legitimate
expenses of its business.
> Upon the death of A. Velhagen in 1929, the El Oriente received all the
proceeds of the said life insurance policy, together with the interests and
the dividends accruing thereon, aggregating P104,957.88
> CIR assessed El Oriente for deficiency taxes because El Oriente did not
include as income the proceeds received from the insurance.
Issue:
Whether or not the proceeds of insurance taken by a corporation on the life

of an important official to indemnify it against loss in case of his death, are
taxable as income under the Philippine Income Tax Law
Held:
NOT TAXABLE.
In Chapter I of the Tax Code, is to be found section 4 which provides that,

"The following incomes shall be exempt from the provisions of this law: (a)
The proceeds of life insurance policies paid to beneficiaries upon the death
of the insured . . ." Section 10, as amended, in Chapter II On Corporations,
provides that, "There shall be levied, assessed, collected, and paid annually
upon the total net income received in the preceding calendar year from all
sources by every corporation . . .a tax of three per centum upon such
income . . ." Section 11 in the same chapter, provides the exemptions
under the law, but neither here nor in any other section is reference made
to the provisions of section 4 in Chapter I.
Under the view we take of the case, it is sufficient for our purposes to direct
attention to the anomalous and vague condition of the law. It is certain that
the proceeds of life insurance policies paid to individual beneficiaries upon
the death of the insured are exempt. It is not so certain that the proceeds of
life insurance policies paid to corporate beneficiaries upon the death of the
insured are likewise exempt. But at least, it may be said that the law is
indefinite in phraseology and does not permit us unequivocally to hold that
the proceeds of life insurance policies received by corporations constitute
income which is taxable
It will be recalled that El Oriente, took out the insurance on the life of its
manager, who had had more than thirty-five years' experience in the
manufacture of cigars in the Philippines, to protect itself against the loss it
might suffer by reason of the death of its manager. We do not believe that
this fact signifies that when the plaintiff received P104,957.88 from the
insurance on the life of its manager, it thereby realized a net profit in this
amount. It is true that the Income Tax Law, in exempting individual
beneficiaries, speaks of the proceeds of life insurance policies as income,
but this is a very slight indication of legislative intention. In reality, what the
plaintiff received was in the nature of an indemnity for the loss which it
actually suffered because of the death of its manager.
CIR vs. CA , G.R. No. 95022 207 Scra 487
Petitioner, seeks a reversal of the Decision of respondent CA, dated Aug. 27, 1990, in
CA-G.R. SP No. 20426, entitled "Commissioner of Internal Revenue vs. GCL
Retirement Plan, represented by its Trustee-Director and the Court of Tax Appeals,"
which affirmed the Decision of the latter Court, dated 15 December 1986, in Case No.
3888, ordering a refund, in the sum of P11,302.19, to the GCL Retirement Plan
representing the withholding tax on income from money market placements and
purchase of treasury bills, imposed pursuant to Presidential Decree No. 1959.
There is no dispute with respect to the facts. Private Respondent, GCL Retirement
Plan (GCL, for brevity) is an employees' trust maintained by the employer, GCL Inc., to
provide retirement, pension, disability and death benefits to its employees. The Plan as
submitted was approved and qualified as exempt from income tax by Petitioner
Commissioner of Internal Revenue in accordance with Rep. Act No. 4917.
Club which was paid by his employer for his account and 3) travelling
allowance of his wife
ISSUE: Are schools retained earnings tax-exempt?

RULING:
Yes. GCL Plan was qualified as exempt from income tax by the CIR in accordance with
Rep. Act. 4917. The tax-exemption privilege of employees' trusts, as distinguished
from any other kind of property held in trust, springs from Section 56(b) (now 53[b])
of the Tax Code, The tax imposed by this Title shall not apply to employee's trust
which forms part of a pension, stock bonus or profit-sharing plan of an employer for
the benefit of some or all of his employees . . . And rightly so, by virtue of the raison
de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans
normally provide economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or disability. It
provides security against certain hazards to which members of the Plan may be
exposed. It is an independent and additional source of protection for the working
group. What is more, it is established for their exclusive benefit and for no other
purpose.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension
trust. Otherwise, taxation of those earnings would result in a diminution accumulated
income and reduce whatever the trust beneficiaries would receive out of the trust fund.
This would run afoul of the very intendment of the law. There can be no denying either
that the final withholding tax is collected from income in respect of which employees'
trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The application of the
withholdings system to interest on bank deposits or yield from deposit substitutes is
essentially to maximize and expedite the collection of income taxes by requiring its
payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status
from income, we see no logic in withholding a certain percentage of that income which
it is not supposed to pay in the first place.
1) as to allowances for rental and utilities, Arthur did not receive money for
the allowances. Instead, the apartment is furnished and paid for by his
employer-corporation (the mother company of American International), for
the employer corporations purposes. The spouses had no choice but to live
in the expensive apartment, since the company used it to entertain guests,
to accommodate officials, and to entertain customers. According to
taxpayers, only P 4,800 per year is the reasonable amount that the spouses
would be spending on rental if they were not required to live in those
apartments. Thus, it is the amount they deem is subject to tax. The excess
is to be treated as expense of the company.
COLLECTOR V. HENDERSON
FACTS:
Sps. Arthur Henderson and Marie Henderson filed their annual income tax
with the BIR. Arthur is president of American International Underwriters for
the Philippines, Inc., which is a domestic corporation engaged in the
business of general non-life insurance, and represents a group of American
insurance companies engaged in the business of general non-life insurance.
The BIR demanded payment for alleged deficiency taxes. In their
computation, the BIR included as part of taxable income: 1) Arthurs
allowances for rental, residential expenses, subsistence, water, electricity
and telephone expenses 2) entrance fee to the Marikina Gun and Country
The taxpayers justifications are as follows:
2) The entrance fee should not be considered income since it is an expense

of his employer, and membership therein is merely incidental to his duties
of increasing and sustaining the business of his employer.
3) His wife merely accompanied him to New York on a business trip as his
secretary, and at the employer-corporations request, for the wife to look at
details of the plans of a building that his employer intended to construct.
Such must not be considered taxable income.
The Collector of Internal Revenue merely allowed the entrance fee as

nontaxable. The rent expense and travel expenses were still held to be
taxable. The Court of Tax Appeals ruled in favor of the taxpayers, that such
expenses must not be considered part of taxable income. Letters of the
wife while in New York concerning the proposed building were presented as
evidence.
ISSUE: Whether or not the rental allowances and travel allowances
furnished and given by the employer-corporation are part of taxable
income?
HELD: NO. Such claims are substantially supported by evidence.
These claims are therefore NOT part of taxable income. No part of the
allowances in question redounded to their personal benefit, nor were such
amounts retained by them. These bills were paid directly by the employercorporation to the creditors. The rental expenses and subsistence
allowances are to be considered not subject to income tax. Arthurs high
executive position and social standing, demanded and compelled the

couple to live in a more spacious and expensive quarters. Such subsistence
allowance was a SEPARATE account from the account for salaries and
wages of employees. The company did not charge rentals as deductible
from the salaries of the employees. These expenses are COMPANY
EXPENSES, not income by employees which are subject to tax.
COLLECTOR V. HENDERSON- Rental and Travel Allowance are not Part of

Taxable Income
CIR vs. CA , G.R. No. 95022 207 Scra 487
Petitioner, seeks a reversal of the Decision of respondent CA, dated Aug. 27, 1990, in
CA-G.R. SP No. 20426, entitled "Commissioner of Internal Revenue vs. GCL
Retirement Plan, represented by its Trustee-Director and the Court of Tax Appeals,"
which affirmed the Decision of the latter Court, dated 15 December 1986, in Case No.
3888, ordering a refund, in the sum of P11,302.19, to the GCL Retirement Plan
representing the withholding tax on income from money market placements and
purchase of treasury bills, imposed pursuant to Presidential Decree No. 1959.
There is no dispute with respect to the facts. Private Respondent, GCL Retirement
Plan (GCL, for brevity) is an employees' trust maintained by the employer, GCL Inc., to
provide retirement, pension, disability and death benefits to its employees. The Plan as
submitted was approved and qualified as exempt from income tax by Petitioner
Commissioner of Internal Revenue in accordance with Rep. Act No. 4917.
ISSUE: Are schools retained earnings tax-exempt?
RULING:
Yes. GCL Plan was qualified as exempt from income tax by the CIR in accordance with
Rep. Act. 4917. The tax-exemption privilege of employees' trusts, as distinguished
from any other kind of property held in trust, springs from Section 56(b) (now 53[b])
of the Tax Code, The tax imposed by this Title shall not apply to employee's trust
which forms part of a pension, stock bonus or profit-sharing plan of an employer for
the benefit of some or all of his employees . . . And rightly so, by virtue of the raison
de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans
normally provide economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or disability. It
provides security against certain hazards to which members of the Plan may be
exposed. It is an independent and additional source of protection for the working
group. What is more, it is established for their exclusive benefit and for no other
purpose.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension
trust. Otherwise, taxation of those earnings would result in a diminution accumulated
income and reduce whatever the trust beneficiaries would receive out of the trust fund.
This would run afoul of the very intendment of the law. There can be no denying either
that the final withholding tax is collected from income in respect of which employees'
trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The application of the
withholdings system to interest on bank deposits or yield from deposit substitutes is
essentially to maximize and expedite the collection of income taxes by requiring its
payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status
from income, we see no logic in withholding a certain percentage of that income which
it is not supposed to pay in the first place.
GR 96016 NODIGEST

El Oriente v. Posadas - Taxability of Insurance Proceeds 56 PHIL 147 (1931)

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El Oriente v. Posadas - Taxability of Insurance Proceeds 56 PHIL 147 (1931)

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El Oriente v.

Posadas - Taxability of Insurance Proceeds

Whether or not the proceeds of insurance taken by a corporation on the life

In Chapter I of the Tax Code, is to be found section 4 which provides that,

ISSUE: Are schools retained earnings tax-exempt?

The taxpayers justifications are as follows:

2) The entrance fee should not be considered income since it is an expense

The Collector of Internal Revenue merely allowed the entrance fee as

executive position and social standing, demanded and compelled the

COLLECTOR V. HENDERSON- Rental and Travel Allowance are not Part of

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