TAX Week 1 Cases

1.

Income v Capital: Madrigal v Rafferty (BUENAVENTURA)

DOCTRINE: Income as contrasted with capital or property is to be the test. The

essential difference between capital and income is that capital is a fund; income is
a flow. A fund of property existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such fund through a period of
time is called an income. Capital is wealth, while income is the service of wealth.
FACTS: Vicente Madrigal and Susana Paterno were legally married prior to January
1, 1914. The marriage was contracted under the provisions of law concerning
conjugal partnerships (sociedad de gananciales). On February 25, 1915, Vicente
Madrigal filed sworn declaration on the prescribed form with the Collector of
Internal Revenue, showing, as his total net income for the year 1914, the sum of
P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73
did not represent his income for the year 1914, but was in fact the income of the
conjugal partnership existing between himself and his wife Susana Paterno, and
that in computing and assessing the additional income tax provided by the Act of
Congress of October 3, 1913, the income declared by Vicente Madrigal should be
divided into two equal parts, one-half to be considered the income of Vicente
Madrigal and the other half of Susana Paterno.
After payment under protest, and after the protest of Madrigal had been decided
adversely by the Collector of Internal Revenue, action was begun by Vicente
Madrigal and his wife Susana Paterno in the Court of First Instance of the city of
Manila against Collector of Internal Revenue and the Deputy Collector of Internal
Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully
and illegally collected by the defendants from the plaintiff, Vicente Madrigal, under
the provisions of the Act of Congress known as the Income Tax Law. The burden of
the complaint was that if the income tax for the year 1914 had been correctly and
lawfully computed there would have been due payable by each of the plaintiffs the
sum of P2,921.09, which taken together amounts of a total of P5,842.18 instead of
P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente
Madrigal, with the result that plaintiff Madrigal has paid as income tax for the year
1914, P3,786.08, in excess of the sum lawfully due and payable.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided
into 2 in computing for the additional income tax because of the conjugal
partnership.
HELD: NO. The counter contentions of appellees are that the taxes imposed by the
Income Tax Law are as the name implies taxes upon income tax and not upon
capital and property; that the fact that Madrigal was a married man, and his
marriage contracted under the provisions governing the conjugal partnership, has
no bearing on income considered as income, and that the distinction must be
drawn between the ordinary form of commercial partnership and the conjugal
partnership of spouses resulting from the relation of marriage. The Supreme Court
ruled against the Madrigals.
To recapitulate, Madrigal wants to divide into half his declared income in
computing for his tax since he is arguing that he has a conjugal partnership with his
wife. However, the court ruled that the one that should be taxed is the income
which is the flow of the capital, thus it should not be divided into 2.
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of
her husband Vicente Madrigal during the life of the conjugal partnership. She has
an interest in the ultimate property rights and in the ultimate ownership of
property acquired as income after such income has become capital. Susana
Paterno has no absolute right to one-half the income of the conjugal partnership.
Not being seized of a separate estate, Susana Paterno cannot make a separate
return in order to receive the benefit of the exemption which would arise by
reason of the additional tax. As she has no estate and income, actually and legally
vested in her and entirely distinct from her husband's property, the income cannot
properly be considered the separate income of the wife for the purposes of the
additional tax. Moreover, the Income Tax Law does not look on the spouses as
individual partners in an ordinary partnership. The husband and wife are only
entitled to the exemption of P8,000 specifically granted by the law. The higher
schedules of the additional tax directed at the incomes of the wealthy may not be
partially defeated by reliance on provisions in our Civil Code dealing with the
conjugal partnership and having no application to the Income Tax Law. The aims
and purposes of the Income Tax Law must be given effect.

2.

Income from Whatever Source: CIR v Filinvest (DORIA)

DOCTRINE:

Gross income all income from whatever source derived, including, but
not limited to the following items: compensation for services, including
fees, commissions, and similar items; gross income derived from
business; gains derived from dealings in property;" interest; rents;
royalties; dividends; annuities; prizes and winnings; pensions; and
partners distributive share of the gross income of general professional
partnership.
CIR's powers of distribution, apportionment or allocation of gross income
and deductions under Section 43 of the 1993 NIRC does not include the
power to impute "theoretical interests".
Requisites for the non-recognition of gain or loss under Section 34 (c) (2)
of the 1993 NIRC:
(a) the transferee is a corporation;

(b) the transferee exchanges its shares of stock for property/ies of the
transferor;
(c) the transfer is made by a person, acting alone or together with others,
not exceeding four persons; and,

(d) as a result of the exchange the transferor, alone or together with

others, not exceeding four, gains control of the transferee.
FACTS:

A holding company is the owner of 80% of the outstanding shares of

Filinvest Alabang, Inc. (FAI) and Filinvest Development Corporation (FDC).
It also owns 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI).
1996: FDC and FAI entered into a Deed of Exchange with FLI (important
for the 1st issue)

FDC & FAI transferred in favor of FLI parcels of land

FLI issued shares of stock to FDC & FAI in exchange for said
parcels
As a result of the exchange, FDC and FAI collectively gained control over
FLI

FLI requested a ruling from the BIR to the effect that no gain or loss
should be recognized in the transfer of real properties
BIR ruled that the exchange is among those contemplated in
Sec. 34 (c) (2) of the old NIRC
1996-1997: FDC extended advances in favor of its affiliates, including FAI
& FLI evidenced by instructional letters and cash & journal vouchers
(important for the 2nd issue)
BIR sent both FDC and FAI formal letters of demand
FDC: to pay deficiency income tax on the taxable gain
supposedly realized from the Deed of Exchange & interest
income tax from the advances it extended to its affiliates
FAI: to pay deficiency income tax on the taxable gain
supposedly realized from the Deed of Exchange
FDC & FAI filed their requests for reconsideration/protest ground:
assessed taxes were bereft of factual and legal basis
CIR failed to resolve within 180 days (prescribed by Sec. 228, NIRC) FDC
& FAI filed a petition with the CTA
CTA: no taxable gain should have been assessed from the Deed
of Exchange; the assessed deficiency interest income tax on the
advances made by FDC was proper
Both FDC and CIR appealed to the CA
FDCs contention: the cash advances were interest-free in the
absence of the express stipulation on interest required by Art.
1956 of the Civil Code; CIRs authority under Sec. 43 of the NIRC
does not include the power to impute imaginary interest
CIRs contention: CTA erred in cancelling the deficiency income
tax assessments
CA: As to FDC granted; As to CIR - denied
CIR appealed to the SC

ISSUES:
1.
2.

WON the purported gain realized by FDC & FAI from the Deed of
Exchange can be subjected to income tax? NO
WON the advances FDC granted to its affiliates can be subjected to
interest income tax? NO

RULING:

1. CIR's insistence on the imposition of deficiency income taxes from the Deed of
Exchange executed between FDC, FAI and FLI is without merit.

Section 34 (c) (2) of the 1993 NIRC provides: Sec. 34. Determination of
amount of and recognition of gain or loss. (c) Exception No gain or
loss shall also be recognized if property is transferred to a corporation by
a person in exchange for shares of stock in such corporation of which as a
result of such exchange said person, alone or together with others, not
exceeding four persons, gains control of said corporation; Provided, That
stocks issued for services shall not be considered as issued in return of
property.
As even admitted in the Stipulation of Facts submitted by the parties, the requisites
for the non-recognition of gain or loss under the foregoing provision are as follows:
(a) the transferee is a corporation; (b) the transferee exchanges its shares of stock
for property/ies of the transferor; (c) the transfer is made by a person, acting alone
or together with others, not exceeding four persons; and, (d) as a result of the
exchange the transferor, alone or together with others, not exceeding four, gains
control of the transferee.

Acting on the request filed by FLI, the BIR had, in fact, acknowledged the
concurrence of the foregoing requisites in the Deed of Exchange by
issuing its ruling.
With the BIR's reiteration of said ruling upon the request for clarification
filed by FLI, there is also no dispute that said transferee and transferors
subsequently complied with the requirements provided for the nonrecognition of gain or loss from the exchange of property for tax, as
provided under Section 34 (c) (2) of the 1993 NIRC.

2. FDC and its affiliates come within the purview of Section 43 of the 1993 NIRC.

Aside from owning significant portions of the shares of stock of FLI, FAI,
DSCC and FCI, the fact that FDC extended substantial sums of money as
cash advances to its said affiliates for the purpose of providing them
financial assistance for their operational and capital expenditures
indicate that the situation sought to be addressed by the subject
provision exists.

Section 43 of the 1993 NIRC: "(i)n any case of two or more organizations,
trades or businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or indirectly by
the same interests, the Commissioner of Internal Revenue is authorized to
distribute, apportion or allocate gross income or deductions between or
among such organization, trade or business, if he determines that such
distribution, apportionment or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any such organization,
trade or business."
However, we find that the CIR's powers of distribution, apportionment or
allocation of gross income and deductions under Section 43 of the 1993 NIRC and
Section 179 of Revenue Regulation No. 2 does not include the power to impute
"theoretical interests".

Pursuant to Section 28 of the NIRC, the term "gross income" is

understood to mean all income from whatever source derived, including,
but not limited to the following items: compensation for services,
including fees, commissions, and similar items; gross income derived
from business; gains derived from dealings in property;" interest; rents;
royalties; dividends; annuities; prizes and winnings; pensions; and
partners distributive share of the gross income of general professional
partnership. While it has been held that the phrase "from whatever
source derived" indicates a legislative policy to include all income not
expressly exempted within the class of taxable income under our laws,
the term "income" has been variously interpreted to mean "cash received
or its equivalent", "the amount of money coming to a person within a
specific time" or "something distinct from principal or capital." Otherwise
stated, there must be proof of the actual or, at the very least, probable
receipt or realization by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or allocated by the CIR.
Our perusal of the record yielded no evidence of actual or possible showing that
the advances FDC extended to its affiliates had resulted to the interests
subsequently assessed by the CIR.
3.

Police Power
3.1.
LTO v Butuan (FRANCISCO)

Doctrine:

The power to regulate the operation of tricycles and to grant franchises

for the operation thereof is still subject to guidelines prescribed by the DOTC. In
compiance therewith, the DOTC issued Guidelines to Implement the Devolution of
LTFRBs Franchising Authority over Tricycles-For-Hire to LGU pursuant to the Local
Government Code.
LGU may adopt ordinances upon subjects covered by law or statute, such
ordinances should be in accordance with and not repugnant to the.
Facts:
Antecedent Issue: W/N the power of LTO to register, tricycles in particular, as well
as to issue licenses for the driving thereof, has devolved to LGUs.
RTC: (favored LGU - City of Butuan) that the authority to register
tricycles, franchise, the issuance of tricycle drivers' license, and the
collection of fees therefor had all been vested in the Local Government
Units. It decreed the issuance of a permanent writ of injunction against
LTO, prohibiting and enjoining LTO (a) registering tricycles and (b)
issuing licenses to drivers of tricycles.
CA: on appeal to it, sustained the trial court.
LTO filed an instant petition for review on certiorari to annul and set
aside the decision.
LGU asserts that one of the salient provisions introduced by the
Local Government Code is in the area of local taxation which
allows LGUs to collect registration fees or charges along with, in
its view, the corresponding issuance of all kinds of licenses or
permits for the driving of tricycles.
LGU cited Section 129 and 133 of LGC
"SEC. 129. Power to Create Sources of Revenue. - Each
local government unit shall exercise its power to
create its own sources of revenue and to levy taxes,
fees, and charges subject to the provisions herein,
consistent with the basic policy of local autonomy.
Such taxes, fees, and charges shall accrue exclusively
to the local government units."
"SEC. 133. Common Limitations on the Taxing Powers
of Local Government Units. - Unless otherwise
provided herein, the exercise of the taxing powers of

provinces, cities, municipalities, and barangays shall

not extend to the levy of the following:
"(I) Taxes, fees or charges for the registration of
motor vehicles and for the issuance of all
kinds of licenses or permits for the driving
thereof, except tricycles."
Relying on Section 129 and 133 of LGC, the
Sangguniang Panglungsod ("SP") of Butuan passed
SP Ordinance No.916-92 entitled "An Ordinance
Regulating the Operation of Tricycles-for-Hire,
providing mechanism for the issuance of Franchise,
Registration and Permit, and Imposing Penalties for
Violations thereof and for other Purposes." The
ordinance provided for, among other things, the
payment of franchise fees for the grant of the
franchise of tricycles-for-hire, fees for the
registration of the vehicle, and fees for the issuance
of a permit for the driving thereof.
LTO explains that one of the functions of the national
government that, indeed, has been transferred to
local government units is the franchising authority
over tricycles-for-hire of the LTFRB but not, it
asseverates, the authority of LTO to register all motor
vehicles and to issue to qualified persons of licenses
to drive such vehicles.

Issue:
W/N the registration of tricycles and issuance of drivers license thereof
was given to LGUs, hence the ordinance (SP Ordinance No.916-92) is a valid
exercise of police power.
Held:

No.
According to "Guidelines to Implement the Devolution of LTFRBs
Franchising Authority over Tricycles-For-Hire to Local Government units
pursuant to the Local Government Code, it was stated that the newly
delegated powers to LGU's pertain to the franchising and regulatory

powers exercised by the LTFRB and not to the functions of the LTO
relative to the registration of motor vehicles and issuance of licenses for
the driving thereof. Corollarily, the exercised of a police power must be
through a valid delegation. In this case the police power of registering
tricycles was not delegated to the LGUs, but remained in the LTO.
Clearly unaffected by the Local Government Code are the powers of LTO
under R.A. No.4136 requiring the registration of all kinds of motor
vehicles "used or operated on or upon any public highway" in the
country.
The Commissioner of Land Transportation and his deputies are
empowered at anytime to examine and inspect such motor vehicles to
determine whether said vehicles are registered, or are unsightly, unsafe,
improperly marked or equipped, or otherwise unfit to be operated on
because of possible excessive damage to highways, bridges and other
infrastructures. The LTO is additionally charged with being the central
repository and custodian of all records of all motor vehicles.
Adds the Court, the reliance made by respondents on the broad taxing
power of local government units, specifically under Section 133 of the
Local Government Code, is tangential.
Police power and taxation, along with eminent domain, are inherent
powers of sovereignty which the State might share with local government
units by delegation given under a constitutional or a statutory fiat. All
these inherent powers are for a public purpose and legislative in nature
but the similarities just about end there. The basic aim of police power is
public good and welfare. Taxation, in its case, focuses on the power of
government to raise revenue in order to support its existence and carry
out its legitimate objectives. Although correlative to each other in many
respects, the grant of one does not necessarily carry with it the grant of
the other. The two powers are, by tradition and jurisprudence, separate
and distinct powers, varying in their respective concepts, character,
scopes and limitations.
To construe the tax provisions of Section 133 (1) of the LGC indistinctively
would result in the repeal to that extent of LTO's regulatory power which
evidently has not been intended. If it were otherwise, the law could have
just said so in Section 447 and 458 of Book III of the Local Government
Code in the same manner that the specific devolution of LTFRB's power

on franchising of tricycles has been provided. Repeal by implication is not

favored.
The power over tricycles granted under Section 458(a)(3)(VI) of the Local
Government Code to LGUs is the power to regulate their operation and
to grant franchises for the operation thereof. The exclusionary clause
contained in the tax provisions of Section 133 (1) of the Local
Government Code must not be held to have had the effect of
withdrawing the express power of LTO to cause the registration of all
motor vehicles and the issuance of licenses for the driving thereof. These
functions of the LTO are essentially regulatory in nature, exercised
pursuant to the police power of the State, whose basic objectives are to
achieve road safety by insuring the road worthiness of these motor
vehicles and the competence of drivers prescribed by R. A. 4136. Not
insignificant is the rule that a statute must not be construed in isolation
but must be taken in harmony with the extant body of laws.
LGUs indubitably now have the power to regulate the operation of
tricycles-for-hire and to grant franchises for the operation thereof, and
not to issue registration.
Therefore, the ordinance being repugnant to a statute is void and ultra
vires.
SC: the assailed decision which enjoins the LTO from requiring
the due registration of tricycles and a license for the driving
thereof is REVERSED and SET ASIDE.
3.2.

Fee v Tax: Chevron v BCDA (GATCHALIAN)

FACTS:
The Board of Directors of Respondent Clark Development Corporation (CDC) issued
and approved Policy Guidelines with regard to the Movement of Petroleum Fuel to
and from the Clark Special Economic Zone (CSEZ) which provided or imposed fees
and charges including Royaltee Fees. The guidelines were implemented July 27,
2002.
On October 1, 2002 CDC sent a letter to Petitioner Chevron, a locator inside CSEZ
informing the latter that a royalty fee of P0.50 per liter shall be assessed on its
deliveries to Nanox Philippines effective August 1, 2002. A Statement of Account

was then sent to Chevron billing the royaltee fees for its fuel sales from Coastal to
Nanox Philippines from Aug 1-31 to Sept 1-31, 2002. Chevron paid under protest.
CDC again sent another letter to Chevron regarding its unsettled royalty fees
covering the period of Dec 2002 to July 2003. Chevron responded thru a letter
reiterating its continuing objection and requesting a refund of the amount it
previously paid under protest. Chevron also asked CDC to revoke the royaltee
which the latter denied.
Petitioner elevated its protest before Respondent BCDA arguing that the royalty
fees imposed had no reasonable relation to the probable expenses of regulation
and that the imposition on a per unit measurement of fuel sales was for a revenue
generating purpose, thus, akin to a "tax". BCDA denied the protest. CA as well
dismissed the appeal of Chevron for lack of merit.
Petitioner argues now that such imposition of royalty fees for revenue generating
purposes would amount to a tax, which the respondents have no power to impose.
Petitioner stresses that the royalty fee imposed by CDC is not regulatory in nature
but a revenue generating measure to increase its profits and to further enhance its
exclusive right to market and distribute fuel in CSEZ.
Respondent argues that the purpose of royaltee fee is regulatory in nature ans such
being its main purpose, the revenue (if any) is just an incidental product hence,
cannot be considered as tax. Also, it is contended that the regulation is a valid
exercise of police power.
ISSUE:
1.
YES
2.

WON the act of imposing Royaltee Fee is a valid exercise of police power?

If the purpose is primarily to regulate, >> then it is deemed a regulation

and an exercise of the police power of the state, even though
incidentally, revenue is generated.

In the case at bar, we hold that the subject royalty fee was imposed primarily for
regulatory purposes, and not for the generation of income or profits as petitioner
claims. The Policy Guidelines was issued, first and foremost, to ensure the safety,
security, and good condition of the petroleum fuel industry within the CSEZ. The
questioned royalty fees form part of the regulatory framework to ensure "free flow
or movement" of petroleum fuel to and from the CSEZ
In relation to the regulatory purpose of the imposed fees, this Court in Progressive
Development Corporation v. Quezon City, stated that "x x x the imposition
questioned must relate to an occupation or activity that so engages the public
interest in health, morals, safety and development as to require regulation for the
protection and promotion of such public interest; the imposition must also bear a
reasonable relation to the probable expenses of regulation, taking into account not
only the costs of direct regulation but also its incidental consequences as well."
In the case at bar, there can be no doubt that the oil industry is greatly imbued
with public interest as it vitally affects the general welfare. In addition, fuel is a
highly combustible product which, if left unchecked, poses a serious threat to life
and property. Also, the reasonable relation between the royalty fees imposed on a
"per liter" basis and the regulation sought to be attained is that the higher the
volume of fuel entering CSEZ, the greater the extent and frequency of supervision
and inspection required to ensure safety, security, and order within the Zone.
Respondents submit that increased administrative costs were triggered by security
risks that have recently emerged, such as terrorist strikes in airlines and
military/government facilities (in light of the 9/11 tragedy).

WON the Royaltee fee is regulatory in nature? YES

4.

HELD:
In distinguishing tax and regulation as a form of police power, the determining
factor is the purpose of the implemented measure.
If the purpose is primarily to raise revenue >> then it will be deemed a
tax even though the measure results in some form of regulation.

Purpose of Taxation
4.1.
Revenue Raising: Citibank v CA (HAUTEA)

CITIBANK is a foreign corporation doing business in the Philippines. In 1979 and

1980, its tenants withheld and paid to the Bureau of Internal Revenue the following
taxes on a quarterly basis on rents due to Citibank... For 1979 = P270, 160.56 & For
1980 = P298,829.29.

On April 15, 1980, Citibank filed its corporate income tax returns for the year ended
December 31, 1979, showing a net loss of P74,854,916.00 and its tax credits
totalled P6,257,780.00, even without including the amounts withheld on rental
income under the Expanded Withholding Tax System, the same not having been
utilized or applied for the reason that the years operation resulted in a loss. The
taxes thus withheld by the tenants from rentals paid to Citibank in 1979 were not
included as tax credits although a rental income amounting to P7,796,811.00 was
included in its income declared for the year ended December 31, 1979.
For the year ended December 31, 1980, Citibanks corporate income tax returns
filed on April 15, 1981, showed a net loss of P77,071,790.00 for income tax
purposes. Its available tax credit (refundable) at the end of 1980 amounting to
P11,532,855.00 was not utilized or applied. The said available tax credits did not
include the amounts withheld by Citibanks tenants from rental payments in 1980
but the rental payments for that year were declared as part of its gross income
included in its annual income tax returns
Citibank submitted its claim for refund of the aforesaid amounts of P270,160.56
and P298,829, respectively, or a total of P568,989.85
Court of Tax Appeals adjudged Citibanks entitlement to the tax refund sought for,
representing the 5% tax withheld and paid on Citibanks rental income for 1979 and
1980
Not satisfied, the Commissioner appealed to the Court of Appeals. In due course,
Respondent Court issued the assailed Decision and Resolution, ruling that the five
percent tax withheld by tenants from the rental income of Citibank for the years
1979 and 1980 was in accordance with Section 1(c) of the Expanded Withholding
Tax Regulations (BIR Revenue Regulation No. 13-78, as amended) and did not
involve illegally or erroneously collected taxes.
Issues & Held:
1. For creditable withholding tax to be refundable, when should the illegality or
error in its assessment or collection be reckoned: at the time of withholding or at
the end of the taxable year?

END OF TAXABLE YEAR. Taxes remitted partially on a periodic or quarterly basis

should be credited or refunded to the taxpayer on the basis of the taxpayers final
adjusted returns, not on such periodic or quarterly basis. Like the corporate
quarterly income tax, creditable withholding taxes are subject to adjustment upon
determination of the correct income tax liability after the filing of the corporate
income tax return, as at the end of the taxable year
payments of quarterly income taxes (per Section 68, NIRC) should be considered
mere installments on the annual tax due.
Consequently, the taxes withheld during the course of the taxable year, while
collected legally under the aforesaid revenue regulation, became untenable and
took on the nature of erroneously collected taxes at the end of the taxable year.
Under the present tax code, the types of income subject to withholding tax in
Section 53, now Section 50, is simplified into three categories: (a) withholding of
final tax on certain incomes; (b) withholding of creditable tax at source; and (c) tax
free covenant bonds.
Accordingly, the withheld amounts equivalent to five percent of the gross rental
are remitted to the BIR and are considered creditable withholding taxes under
Section 53-f, i.e., creditable against income tax liability for that year
ike the corporate quarterly income tax, creditable withholding taxes are subject to
adjustment upon determination of the correct income tax liability after the filing of
the corporate income tax return, as at the end of the taxable year.
Note: Regarding Revenue Raising
The withholding tax system was devised for two main reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; and
second, to ensure the collection of the income tax which could otherwise be lost or
substantially reduced through failure to file the corresponding returns. To these, a
third reason may be added: to improve the governments cash flow.
Under Section 53 a-f of the tax code which was in effect at the time this case
ripened, withholding of tax at source was mandated in cases of: (a) tax free
covenant bonds, (b) payments of interest, dividends, rents, royalties, salaries,
wages, premiums, annuities, compensations, remunerations, emoluments, or other

fixed or determinable annual, periodical, or casual gains, profits and income, and
capital gains of non-resident aliens and foreign corporations; (c) dividends from a
domestic corporation and royalties received by resident individuals and
corporation; (d) certain dividends; (e) interest on bank deposit; and (f) other items
of income payable to resident individuals or corporations. Section 53-f was
amended by Presidential Decree No. 1351, delegating to the Secretary of Finance
the power to require the withholding of a tax

"exclusively" is defined, "in a manner to exclude; as enjoying a privilege

exclusively." If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to taxation. The words
"dominant use" or "principal use" cannot be substituted for the words "used
exclusively" without doing violence to the Constitutions and the law. Solely is
synonymous with exclusively.

2. Who has the burden of proving whether he is entitled to a refund?

Petitioner: AUF (Angeles University Foundation) - educational institution which

converted into a non-stock, non-profit education foundation under RA No. 6055
Respondent: City Building Officials

THE CLAIMANT. Tax refunds, like tax exemptions, are construed strictly against the
taxpayer. A refund claimant is required to prove the inclusion of the income
payments which were the basis of the withholding taxes and the fact of
withholding. However, detailed proof of the truthfulness of each and every item in
the income tax return is not required. That function is lodged in the commissioner
of internal revenue by the NIRC which requires the commissioner to assess internal
revenue taxes within three years after the last day prescribed by law for the filing
of the return.
WHEREFORE, the assailed Decision is hereby REVERSED and the decision of the
Court of Tax Appeals is REINSTATED (Citibanks entitlement to the tax refund
sought for, representing the 5% tax withheld and paid on Citibanks rental income
for 1979 and 1980)
Non revenue/ special or regulatory: Angeles University v City of Angeles (LESAVA)
4.2.
Doctrine:
Non-stock, non-profit education foundations under RA No. 6055 are not exempted
from building permit fees.
In order to be entitled to the exemption from real estate tax, the petitioner is
burdened to prove, by clear and unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY
used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to
the exclusion of others; debarred from participation or enjoyment; and

Facts:
AUF filed with the Office of the City Building Official an application for a
building permit for the construction of an 11-storey building of the AUF
Medical Center in its main campus.
Office of the City Building Official (CBO), issued a building permit fee
assessment and an order of payment was also issued by the City Planning and
Development Office, Zoning Administration unit requiring AUF to pay
locational clearance fee.
AUF is claiming it is exempted from payment of building permit and locational
clearance fees citing legal opinions rendered by the DOJ. It also reminded
respondents that they previously issued building permits acknowledging such
exemption.
Respondents still refused to issue the building permits for the construction of
the AUF Medical Center.
AUF paid in protest and respondents released the corresponding permits
(Building permit, wiring permit, electrical permit, and sanitary building permit)
AUF formally requested for refund of the fees
City treasurer denied claim for refund.

AUF filed complaint.

Respondents asserted that petitioner cannot claim exemption because its
structures are not those mentioned in Sec. 209 of the National Building Code
as exempted from the building permit fee. They also argue that RA No. 6055
should be deemed repealed on the basis of Sec. 2104 of the National Building
Code.

Petitioner counters that the building permit is being collected under Art. 244 o
the Implementing Rules and Regulations of the Local Government Code.

TC: rendered judgment in favor of petitioner

CA: reversed TCs decision. It held that although petitioner is a tax-free entity, it is
not exempted from paying regulatory fees.
building permit cannot be considered as the other charges mentioned
in RA No. 6055 which refers to impositions in the nature of tax, import
duties, assessments, and other collection for revenue purposes, following
the ejusdem generic rule.
Issue: WON petitioner should be exempted for payment of building permit fees
and other fees as well as payment for real property tax.
Held: NO on both accounts.
A. On the Fees:
Sec. 8 of RA No. 6055 exempts a foundation from the payment of all taxes, import
duties, assessments, and other charges imposed by the Government on all income
derived from or property, real or personal, used exclusively for the educational
activities of the Foundation.
the "other charges" mentioned in Sec. 8 of R.A. No. 6055 is qualified by the words
"imposed by the Government on all x x x property used exclusively for the
educational activities of the foundation." Building permit fees are not impositions
on property but on the activity subject of government regulation.
That a building permit fee is a regulatory imposition is highlighted by the fact that
in processing an application for a building permit, the Building Official shall see to it
that the applicant satisfies and conforms with approved standard requirements on
zoning and land use, lines and grades, structural design, sanitary and sewerage,
environmental health, electrical and mechanical safety as well as with other rules
and regulations implementing the National Building Code.24 Thus, ancillary permits
such as electrical permit, sanitary permit and zoning clearance must also be
secured and the corresponding fees paid before a building permit may be issued.
And as can be gleaned from the implementing rules and regulations of the National
Building Code, clearances from various government authorities exercising and

enforcing regulatory functions affecting buildings/structures, like local government

units, may be further required before a building permit may be issued.
Since building permit fees are not charges on property, they are not impositions
from which petitioner is exempt.
Note: charges are different from fees.
Charges- refer to pecuniary liability, as rents, and fees against persons or property;
broadly defined as the "price of, or rate for, something
Fees- A fee is generally imposed to cover the cost of regulation as activity or
privilege and is essentially derived from the exercise of police power; on the other
hand, impositions for services rendered by the local government units or for
conveniences furnished, are referred to as "service charges".; pertains to a "charge
fixed by law for services of public officers or for use of a privilege under control of
government."
Furthermore, Petitioners reliance on Sec. 193 of the Local Government Code of
1991 is misplaced.
SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government-owned
or controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis
supplied.)
Considering that exemption from payment of regulatory fees was not among those
"incentives" granted to petitioner under R.A. No. 6055, there is no such incentive
that is retained under the Local Government Code of 1991.
B. On the Real Estate Tax: Petitioner failed to discharge its burden to prove that its
real property is actually, directly and exclusively used for educational purposes.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real properties

are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.

"Exclusive" is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege exclusively." If real property is used for
one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. The words "dominant use" or "principal use"
cannot be substituted for the words "used exclusively" without doing violence to
the Constitutions and the law. Solely is synonymous with exclusively.
What is meant by actual, direct and exclusive use of the property for charitable
purposes: direct and immediate and actual application of the property itself to the
purposes for which the charitable institution is organized.
4.3.
Principles of Sound Tax System: BAT v Camacho (LIM)
BRITISH AMERICAN TOBACCO, v. JOSE ISIDRO N. CAMACHO (Motion for
Reconsideration of the 2008 case)
FACTS:
To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue
Regulations No. 1-97, 2 which classified the existing brands of cigarettes as those
duly registered or active brands prior to January 1, 1997. New brands, or those
registered after January 1, 1997 shall be initially assessed at their suggested retail
price until such time that the appropriate survey to determine their current net
retail price is conducted.
In June 2001 British American Tobacco introduced into the market Lucky Strike
Filter, Lucky Strike Lights and Lucky Strike Menthol Lights cigarettes, with a
suggested retail price of P9.90 per pack. 3 Pursuant to Sec. 145 (c) quoted above,
the Lucky Strike brands were initially assessed the excise tax at P8.96 per pack.
On February 17, 2003, Revenue Regulations No. 9-2003, amended Revenue
Regulations No. 1-97 by providing, among others, a periodic review every two years
or earlier of the current net retail price of new brands and variants thereof for the
purpose of establishing and updating their tax classification.

retail prices of new brands of cigarettes and alcohol products. Subsequently,

Revenue Regulations No. 22-2003 6 was issued on August 8, 2003 to implement the
revised tax classification of certain new brands introduced in the market after
January 1, 1997, based on the survey of their current net retail price.
The survey revealed that Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike
Menthol Lights, are sold at the current net retail price of P22.54, P22.61 and
P21.23, per pack, respectively. Respondent Commissioner of the Bureau of Internal
Revenue thus recommended the applicable tax rate of P13.44 per pack inasmuch
as Lucky Strike's average net retail price is above P10.00 per pack.
Thus filed before the Regional Trial Court (RTC) of Makati, Branch 61, a petition for
injunction with prayer for the issuance of a temporary restraining order (TRO)
and/or writ of preliminary injunction, docketed as Civil Case No. 03-1032. Said
petition sought to enjoin the implementation of Section 145 of the NIRC, Revenue
Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 62003 on the ground that they discriminate against new brands of cigarettes, in
violation of the equal protection and uniformity provisions of the Constitution. The
trial court rendered a decision upholding the constitutionality of Section 145 of the
NIRC, Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum
Order No. 6-2003
ISSUE: W/N the classification freeze provision violates the equal protection and
uniformity of taxation clauses of the Constitution.
HELD:
No. In the instant case, there is no question that the classification freeze provision
meets the geographical uniformity requirement because the assailed law applies to
all cigarette brands in the Philippines. And, for reasons already adverted to in our
August 20, 2008 Decision, the four-fold test has been met in the present case.
As held in the assailed Decision, the instant case neither involves a suspect
classification nor impinges on a fundamental right. Consequently, the rational basis
test was properly applied to gauge the constitutionality of the assailed law in the
face of an equal protection challenge.

Pursuant thereto, Revenue Memorandum Order No. 6-2003 5 was issued on March
11, 2003, prescribing the guidelines and procedures in establishing current net

10

It has been held that "in the areas of social and economic policy, a statutory
classification that neither proceeds along suspect lines nor infringes constitutional
rights must be upheld against equal protection challenge if there is any reasonably
conceivable state of facts that could provide a rational basis for the classification."
Under the rational basis test, it is sufficient that the legislative classification is
rationally related to achieving some legitimate State interest.
Petitioner's reliance on Ormoc Sugar Co. is misplaced. In said case, the
controverted municipal ordinance specifically named and taxed only the Ormoc
Sugar Company, and excluded any subsequently established sugar central from its
coverage. Thus, the ordinance was found unconstitutional on equal protection
grounds because its terms do not apply to future conditions as well.
This is not the case here. The classification freeze provision uniformly applies to all
cigarette brands whether existing or to be introduced in the market at some future
time. It does not purport to exempt any brand from its operation nor single out a
brand for the purpose of imposition of excise taxes.
5.

Lifeblood Theory: NPC v City of Cabanatuan (MORA)

Taxes are the lifeblood of the government, for without taxes, the government can
neither exists nor endure. A principal attribute of sovereignty, the exercise of taxing
power derives its source from the very existence of the state whose social contract
with its citizens obliges it to promote public interest and common good. The theory
behind the exercise of the power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting the general welfare and wellbeing of the people.
FACTS:
National Power Corporation (NAPOCOR) is a government owned and controlled
corporation created under Commonwealth Act No. 120, as amended. Petitioner
sells electric power to the residents of the City of Cabanatuan. Said City assessed
the petitioner a franchise tax that petitioner refused to pay.
Petitioner argues that respondent has no authority to impose tax on government
entities. It further contends that as a non-profit organization, it is exempted from
the payment of all forms of taxes, charges, duties or fees.

Thus, respondent filed a collection suit in the RTC of Cabanatuan City, demanding
the petitioner to pay the assessed tax due plus surcharge and monthly interest. The
respondent alleged that petitioners exemption from local taxes has been repealed
by Sec. 193 of the Local Government Code (RA 7160)
RTC - dismissed the case. It rules that tax exemption privileges granted to
petitioner subsists despite passage of RA 7160, a general law. RA 6395 which grants
the privilege is a special law. A general law cannot repeal a special law.
CA - reversed RTC ruling. the appellate court ruled as such, on the ground that SEc
193 in relation to Sec 137 of the LGC expressly repealed the exemptions granted to
the petitioner.
In the SC, the petitioner submits that the charter of NaPoCor, being a valid exercise
of police power, should prevail over the LGC. It alleges that the power of the local
government to impose franchise tax is subordinate to petitioners exemption from
taxation; police power being the most pervasive, least limitable and most
demanding of all powers, including the power of taxation.
ISSUE:
Whether NaPoCor is liable to pay annual franchise tax to the City of Cabanatuan?--YES
RULING:
Taxes are the lifeblood of the government, for without taxes, the government can
neither exists nor endure. A principal attribute of sovereignty, the exercise of
taxing power derives its source from the very existence of the state whose social
contract with its citizens obliges it to promote public interest and common good.
The theory behind the exercise of the power to tax emanates from necessity;
without taxes, government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope
of state activity, and taxation has become a tool to realize social justice and the
equitable distribution of wealth, economic progress and the protection of local
industries as well as public welfare and similar objectives. Taxation assumes even

11

greater significance with the ratification of the 1987 Constitution. Thenceforth, the
power to tax is no longer vested exclusively on Congress; local legislative bodies
are now given direct authority to levy taxes, fees and other charges pursuant to
Article X, section 5 of the 1987 Constitution, viz:
Section 5.- Each Local Government unit shall have the power to create its own
sources of revenue, to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees and charges shall accrue exclusively to the Local
Governments.
This paradigm shift results from the realization that genuine development can be
achieved only by strengthening local autonomy and promoting decentralization
of governance. For a long time, the countrys highly centralized government
structure has bred a culture of dependence among local government leaders upon
the national leadership. It has also dampened the spirit of initiative, innovation
and imaginative resilience in matters of local development on the part of local
government leaders. The only way to shatter this culture of dependence is to
give the LGUs a wider role in the delivery of basic services, and confer them
sufficient powers to generate their own sources for the purpose. To achieve this
goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a
local government code that will, consistent with the basic policy of local
autonomy, set the guidelines and limitations to this grant of taxing powers, viz:

Code of 1983. Despite these initiatives, however, the shackles of dependence on

the national government remained. Local government units were faced with the
same problems that hamper their capabilities to participate effectively in the
national development efforts, among which are: (a) inadequate tax base, (b) lack
of fiscal control over external sources of income, (c) limited authority to prioritize
and approve development projects, (d) heavy dependence on external sources of
income, and (e) limited supervisory control over personnel of national line
agencies. Considered as the most revolutionary piece of legislation on local
autonomy, the LGC effectively deals with the fiscal constraints faced by LGUs. It
widens the tax base of LGUs to include taxes which were prohibited by previous
laws such as the imposition of taxes on forest products, forest concessionaires,
mineral products, mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their needs and
capabilities. It does not prescribe graduated fixed rates but merely specifies the
minimum and maximum tax rates and leaves the determination of the actual
rates to the respective sanggunian.
One of the most significant provisions of the LGC is the removal of the blanket
exclusion of instrumentalities and agencies of the national government from the
coverage of local taxation. Although as a general rule, LGUs cannot impose taxes,
fees or charges of any kind on the National Government, its agencies and
instrumentalities, this rule now admits an exception, i.e., when specific
provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities, viz:

Section 3. The Congress shall enact a local government code which shall provide
for a more responsive and accountable local government structure instituted
through a system of decentralization with effective mechanisms of recall, initiative,
and referendum, allocate among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications, election,
appointment and removal, term, salaries, powers and functions and duties of local
officials, and all other matters relating to the organization and operation of the
local units.

Section 133. Common Limitations on the Taxing Powers of the Local Government
Units.- Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:
xxx
(o) Taxes, fees, or charges of any kind on the National Government, its agencies
and instrumentalities, and local government units. (emphasis supplied)

To recall, prior to the enactment of the Rep. Act No. 7160, also known as the
Local Government Code of 1991 (LGC), various measures have been enacted to
promote local autonomy. These include the Barrio Charter of 1959, the Local
Autonomy Act of 1959,the Decentralization Act of 1967 and the Local Government

In view of the afore-quoted provision of the LGC, the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation relied upon by the petitioner to
support its claim no longer applies. To emphasize, the Basco case was decided prior
to the effectivity of the LGC, when no law empowering the local government units

12

to tax instrumentalities of the National Government was in effect. However, as this

Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs.
Marcos, nothing prevents Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions may be subject to
tax. In enacting the LGC, Congress exercised its prerogative to tax instrumentalities
and agencies of government as it sees fit.
In the case at bar, section 151 in relation to section 137 of the LGC clearly
authorizes the respondent city government to impose on the petitioner the
franchise tax in question.
In its general signification, a franchise is a privilege conferred by government
authority, which does not belong to citizens of the country generally as a matter of
common right. In its specific sense, a franchise may refer to a general or primary
franchise, or to a special or secondary franchise. The former relates to the right to
exist as a corporation, by virtue of duly approved articles of incorporation, or a
charter pursuant to a special law creating the corporation. The right under a
primary or general franchise is vested in the individuals who compose the
corporation and not in the corporation itself. On the other hand, the latter refers to
the right or privileges conferred upon an existing corporation such as the right to
use the streets of a municipality to lay pipes of tracks, erect poles or string wires.
The rights under a secondary or special franchise are vested in the corporation and
may ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or secondary franchises
as are charged with a public use.
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the
sense of a secondary or special franchise. This is to avoid any confusion when the
word franchise is used in the context of taxation. As commonly used, a franchise
tax is a tax on the privilege of transacting business in the state and exercising
corporate franchises granted by the state. It is not levied on the corporation
simply for existing as a corporation, upon its property or its income, but on its
exercise of the rights or privileges granted to it by the government. Hence, a
corporation need not pay franchise tax from the time it ceased to do business and
exercise its franchise. It is within this context that the phrase tax on businesses
enjoying a franchise in section 137 of the LGC should be interpreted and
understood. Verily, to determine whether the petitioner is covered by the franchise

tax in question, the following requisites should concur: (1) that petitioner has a
franchise in the sense of a secondary or special franchise; and (2) that it is
exercising its rights or privileges under this franchise within the territory of the
respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by
Rep. Act No. 7395, constitutes petitioners primary and secondary franchises. It
serves as the petitioners charter, defining its composition, capitalization, the
appointment and the specific duties of its corporate officers, and its corporate life
span. Petitioner also fulfills the second requisite. It is operating within the
respondent city governments territorial jurisdiction pursuant to the powers
granted to it by Commonwealth Act No. 120, as amended. From its operations in
the City of Cabanatuan, petitioner realized a gross income of P107,814,187.96 in
1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the
franchise tax in question.
To stress, a franchise tax is imposed based not on the ownership but on the
exercise by the corporation of a privilege to do business. The taxable entity is the
corporation which exercises the franchise, and not the individual stockholders. By
virtue of its charter, petitioner was created as a separate and distinct entity from
the National Government. It can sue and be sued under its own name, and can
exercise all the powers of a corporation under the Corporation Code
We also do not find merit in the petitioners contention that its tax exemptions
under its charter subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions
must be shown to exist clearly and categorically, and supported by clear legal
provisions. In the case at bar, the petitioners sole refuge is section 13 of Rep. Act
No. 6395 exempting from, among others, all income taxes, franchise taxes and
realty taxes to be paid to the National Government, its provinces, cities,
municipalities and other government agencies and instrumentalities. However,
section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax
privileges previously enjoyed by private and public corporations. Contrary to the
contention of petitioner, section 193 of the LGC is an express, albeit general, repeal
of all statutes granting tax exemptions from local taxes. It reads:

13

Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (emphases supplied)
It is a basic precept of statutory construction that the express mention of one
person, thing, act, or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius. Not being a local water district, a
cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital
or educational institution, petitioner clearly does not belong to the exception. It is
therefore incumbent upon the petitioner to point to some provisions of the LGC
that expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that
the LGUs can impose franchise tax notwithstanding any exemption granted by any
law or other special law. This particular provision of the LGC does not admit any
exception. In City Government of San Pablo, Laguna v. Reyes, MERALCOs
exemption from the payment of franchise taxes was brought as an issue before this
Court.
It is worth mentioning that section 192 of the LGC empowers the LGUs, through
ordinances duly approved, to grant tax exemptions, initiatives or reliefs. But in
enacting section 37 of Ordinance No. 165-92 which imposes an annual franchise
tax notwithstanding any exemption granted by law or other special law, the
respondent city government clearly did not intend to exempt the petitioner from
the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of the local government units
for the delivery of basic services essential to the promotion of the general
welfare and the enhancement of peace, progress, and prosperity of the people.
As this Court observed in the Mactan case, the original reasons for the
withdrawal of tax exemption privileges granted to government-owned or
controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax treatment

of similarly situated enterprises. With the added burden of devolution, it is even

more imperative for government entities to share in the requirements of
development, fiscal or otherwise, by paying taxes or other charges due from
them.
CA decision affirmed.
6.

Jurisdiction over subject

6.1.
Prospectivity of Tax Laws: CIR v Filipinas (SUPAPO)

DOCTRINE:
TAX LAWS; REAL ESTATE DEALERS TAX; IMPOSITION OF HIGHER RATE OF TAXES
AFTER THE TAXPAYER HAS PAID THE TAX UNDER THE OLD RATE. On January 4,
1956, respondent, in accordance with the single rate then prescribed under Section
182 of the National Internal Revenue Code, paid its real estate dealers fixed annual
tax for the year 1956. Subsequently, said Section 182 of the Code was amended by
Republic Act No. 1612 which imposes new and higher rates of real estate dealers
tax. section 21 thereof provides that the Act "shall take effect upon its approval" on
August 24, 1956. Held: Since the respondent has paid the annual tax then
prescribed for the year 1956, to require it to pay the additional tax provided in
Republic Act 1612 would result in the imposition upon respondent of a tax burden
to which it was not liable before the enactment of said amendatory act, thus
rendering its operation retroactive rather than prospective, which cannot be done,
as it would contravene Section 21 of said Act as well as the established rule
regarding the prospectivity of operation of statutes.
FACTS:
1. In this case, Filipinas Compania de Seguros, an insurance and real estate
dealer, made an early payment (January 4) for its real estate dealers fixed
annual tax for the year 1956 worth P150.00 (old rate).
2. In the same year, a tax law (RA1612 amending Sections 172 and 182 NIRC) was
passed which changes the real estate dealers tax rate from uniform fixed
annual rate to a graduated rate thereby increasing the tax imposed.
3. Accordingly, said Act "shall take effect upon its approval" on August 24, 1956.
4. Based on the assessment of the BIR using the graduated rate, the tax payable
of Filipinas for the year should have been P500.00.

14

5.
6.

As such, the CIR demanded from Filipinas an additional P350.00 for the latters
real estate dealers tax for the year 1956.
Filipinas contended that it already paid its due prior to the effectivity of
RA1612; and that it should not have a retroactive effect as RA1856 (which was
subsequently passed by congress) amended the effectivity date of RA1612 to
January 1, 1597.

CA: Ordered CIR to desist from collecting the additional assessment.

ISSUE: Whether the new tax law should be applied prospectively.
(In other words, in computing for the real estate dealers tax for the year 1956,
what rate should be applied: old rate or new rate? -- Old rate!)

contravene the aforecited Section 21 of Republic Act No. 1612 as well as the
established rule regarding the prospectivity of operation of statutes.
The view that Congress did intend to impose said increased rates of real estate
dealers annual tax prospectively and not retroactively, finds some affirmation in
Republic Act No. 1856, approved on June 22, 1957, which fixed the effective date
of said new rates under Republic Act No. 1612 by inserting the following proviso in
Section 182 of the National Internal Revenue Code: "Provided, further, That any
amount collected in excess of the rates in effect prior to January one, nineteen
hundred and fifty- seven, shall be refunded or credited to the taxpayer concerned
subject to the provisions of section three hundred and nine of this Code."e

HELD: It should be applied PROSPECTIVELY.

A statute should be considered as prospective in its operation whether it enacts,
amends or repeals a tax, unless the language of the statute clearly demands or
expresses that it shall have a retroactive effect. The rule applies with greater force
to the case at bar, considering that Republic Act No. 1612, which imposes the new
and higher rates of real estate dealers annual fixed tax, expressly provides in
Section 21 thereof that said Act "shall take effect upon its approval" on August 24,
1956.
The instant case involves the fixed annual real estate dealers tax for 1956. There is
no dispute that before the enactment of Republic Act No. 1612 on August 24, 1956,
the uniform fixed annual real estate dealers tax was P150.00 for all owners of
rental properties receiving an aggregate amount of P3,000.00 or more a year in the
form of rentals 2 and that "the yearly fixed taxes are due on the first of January of
each year" unless tendered in semi-annual or quarterly installments. 3 Since the
petitioner indisputably paid in full on January 4, 1956, the total annual tax then
prescribed for the year 1956, to require it to pay an additional sum of P350.00 to
complete the P500.00 provided in Republic Act No. 1612 which became effective
by its very terms only on August 24, 1956, would, in the language of the Court of
Tax Appeals, result in the imposition upon respondent of a tax burden to which it
was not liable before the enactment of said amendatory act, thus rendering its
operation retroactive rather than prospective, which cannot be done, as it would

6.2.
Imprescriptibility: Lim v CA (BUENAVENTURA)
(Guys, sorry ang haba. Material din kasi yung dates)
FACTS: Petitioner spouses Emilio E. Lim, Sr. and Antonia Sun Lim were engaged in
the dealership of various household appliances They filed income tax returns for
the years 1958 and 1959.
On October 5, 1959, a raid was conducted at their business address by the National
Bureau of Investigation. Another rraid was made on petitioners' premises at 111
12th Street, Quezon City. Seized from the Lim couple were business and accounting
records which served as bases for an investigation undertaken by the Bureau of
Internal Revenue (BIR).
On September 30, 1964 Senior Revenue Examiner Raphael S. Daet submitted a
memorandum with the findings that the income tax returns filed by petitioners for
the years 1958 and 1959 were false or fraudulent. Daet recommended that an
assessment of P835,127.00 be made against the petitioners.
Accordingly, on April 7, 1965, then Acting Commissioner of the BIR, Benjamin M.
Tabios informed petitioners that there was due from them the amount of
P922,913.04 as deficiency income taxes for 1958 and 1959, giving them until May
7, 1965 to pay the amount.

15

On April 10, 1965, petitioner Emilio E. Lim, Sr., requested for a reinvestigation. The
BIR expressed willingness to grant such request but on condition that within ten
days from notice, Lim would accomplish a waiver of defense of prescription under
the Statute of Limitations and that one half of the deficiency income tax would be
deposited with the BIR and the other half secured by a surety bond. If within the
ten-day period the BIR did not hear from petitioners, then it would be presumed
that the request for reinvestigation had been abandoned.
Petitioner Emilio E. Lim, Sr. refused to comply with the above conditions and
reiterated his request for another investigation.
On January 31, 1967, the BIR Commissioner informed petitioners that their
deficiency income tax liabilities for 1958 and 1959 had been assessed at
P934,000.54 including interest and compromise penalty for late payment.
Petitioners were given until March 7, 1967 to submit their objections with the
admonition that if they failed to do so, it would be assumed that they were
agreeable to the assessment and a formal demand would issue.
On March 15, 1967, petitioners wrote the BIR to protest the latest assessment and
repeated their request for a reinvestigation.
On October 10, 1967, the BIR rendered a final decision holding that there was no
cause for reversal of the assessment against the Lim couple. Petitioners were
required to pay deficiency income taxes for 1958 and 1959 amounting to
P1,237,190.55 inclusive of interest, surcharges and compromise penalty for late
payment. The final notice and demand for payment was served on petitioners
through their daughter-in-law on July 3, 1968.
Still, no payment was forthcoming from the delinquent taxpayers. Accordingly on
September 1, 1969, the matter was referred by the BIR to the Manila Fiscal's Office
for investigation and prosecution. On June 23, 1970, four (4) separate criminal
informations were filed against petitioners for violation of Sections 45 and 51 in
relation to Section 73 of the National Internal Revenue Code. TC found the spouses
guilty as charged.

ISSUE:

A.
WON the prescriptive period in Criminal Cases Nos. 1788 and 1789
commenced to run only from July 3, 1968, the date of the final assessment;
B. WON the offenses charged in Criminal Case Nos. 1790 and 1791 prescribed in
ten (10) years, instead of five (5) years;
HELD:
Indubitably, petitioners had filed false and fraudulent income tax returns for the
years 1958 and 1959 by nondisclosure of sales in the aggregate amount of
P2,197,742.92, thereby depriving the Government in the amount of P1,237,190.55,
representing deficiency income taxes inclusive of interest, surcharges and
compromise penalty for late payment. Considering that this occurred in the late
1950's, the defraudation was on a massive scale.
ON ISSUE A: YES. Relative to Criminal Cases Nos. 1788 and 1789 which involved
petitioners' refusal to pay the deficiency income taxes due, again both parties are
in accord that by their nature, the violations as charged could only be committed
after service of notice and demand for payment of the deficiency taxes upon the
taxpayers. Petitioners maintain that the five-year period of limitation under Section
354 should be reckoned from April 7, 1965, the date of the original assessment
while the Government insists that it should be counted from July 3, 1968 when
the final notice and demand was served on petitioners' daughter-in-law. SC rules
for the GOVERNMENT.
Section 51 (b) of the Tax Code provides:
(b)
Assessment and payment of deficiency tax. After the return is filed,
the Commissioner of internal Revenue shall examine it and assess the correct
amount of the tax. The tax or deficiency in tax so discovered shall be paid upon
notice and demand from the Commissioner of Internal Revenue.
Inasmuch as the final notice and demand for payment of the deficiency taxes was
served on petitioners on July 3, 1968, it was only then that the cause of action on
the part of the BIR accrued. This is so because prior to the receipt of the letterassessment, no violation has yet been committed by the taxpayers. The offense
was committed only after receipt was coupled with the wilful refusal to pay the
taxes due within the alloted period. The two criminal informations, having been

16

filed on June 23, 1970, are well-within the five-year prescriptive period and are
not time-barred.
ON ISSUE B: FIVE YEARS. With regard to Criminal Cases Nos. 1790 and 1791 which
dealt with petitioners' filing of fraudulent consolidated income tax returns with
intent to evade the assessment decreed by law, petitioners contend that the said
crimes have likewise prescribed. They advance the view that the five-year period
should be counted from the date of discovery of the alleged fraud which, at the
latest, should have been October 15, 1964, the date stated by the Appellate Court
in its resolution of April 4, 1978 as the date the fraudulent nature of the returns
was unearthed.
On behalf of the Government, the Solicitor General counters that the crime of filing
false returns can be considered "discovered" only after the manner of commission,
and the nature and extent of the fraud have been definitely ascertained. It was
only on October 10, 1967 when the BIR rendered its final decision holding that
there was no ground for the reversal of the assessment and therefore required the
petitioners to pay P1,237,190.55 in deficiency taxes that the tax infractions were
discovered.

6.3.

DOCTRINE:

IN SUM:
Criminal Cases Nos. 1788-1789 and 1790-1791, having been instituted by the
Government on June 23, 1970, are not time-barred pursuant to Section 354 of the
National Internal Revenue Code.

There is no constitutional prohibition against double taxation in the

Philippines. It is something not favored, but is permissible, provided some
other constitutional requirement is not violated, such as the requirement
that taxes must be uniform.
A license tax may be levied upon a business or occupation although the
land or property used in connection therewith is subject to property tax.

FACTS:

Not only that. The Solicitor General stresses that Section 354 speaks not only of
discovery of the fraud but also institution of judicial proceedings. Note the
conjunctive word "and" between the phrases "the discovery thereof" and "the
institution of judicial proceedings for its investigation and proceedings." In other
words, in addition to the fact of discovery, there must be a judicial proceeding for
the investigation and punishment of the tax offense before the five-year limiting
period begins to run. It was on September 1, 1969 that the offenses subject of
Criminal Cases Nos. 1790 and 1791 were indorsed to the Fiscal's Office for
preliminary investigation. Inasmuch as a preliminary investigation is a proceeding
for investigation and punishment of a crime, it was only on September 1, 1969
that the prescriptive period commenced.

Double Tax
6.3.1.
Constitutionality of Double Taxation: Villanueva v
City of Iloilo (DORIA)

September 30, 1946: municipal board of Iloilo City enacted Ordinance 86,
imposing license tax fees on tenement houses (casa de vecindad).
The SC declared the ordinance ultra vires, "it not appearing that
the power to tax owners of tenement houses is one among
those clearly and expressly granted to the City of Iloilo by its
Charter."
On January 15, 1960, the City enacted Ordinance 11, series of 1960, An
Ordinance Imposing Municipal License Tax on Persons Engaged in the
Business of Operating Tenement Houses.
The municipal board believed that with the passage of R.A.
2264 (Local Autonomy Act), it had acquired the authority or
power to enact an ordinance similar to that previously declared
as ultra vires.
By virtue of Ordinance 11, the City collected taxes from spouses Eusebio
Villanueva and Remedios Villanueva and the other owners of tenement
houses in Iloilo City.
Note: Eusebio Villanueva has been paying real estate taxes on
his property.
The Villanuevas and the other appellees filed with the CFI a complaint
against the City of Iloilo, praying that Ordinance 11 be declared invalid for
being beyond the powers of the Municipal Council of the City of Iloilo to
enact, and unconstitutional for being violative of the rule as to uniformity
of taxation.

17

The CFI declared the ordinance illegal on the grounds that (a) "Republic
Act 2264 does not empower cities to impose apartment taxes," (b) the
same is "oppressive and unreasonable," for the reason that it penalizes
owners of tenement houses who fail to pay the tax, (c) it constitutes not
only double taxation, but treble at that and (d) it violates the rule of
uniformity of taxation.
Reason for the ruling on double taxation: "buildings pay real
estate taxes and also income taxes as provided for in Sec. 182
(A) (3) (s) of the NIRC, besides the tenement tax under the said
ordinance."

ISSUE: WON Ordinance 11 imposes double taxation? NO

In order to constitute double taxation in the objectionable or prohibited

sense the same property must be taxed twice when it should be taxed
but once; both taxes must be imposed on the same property or subjectmatter, for the same purpose, by the same State, Government, or taxing
authority, within the same jurisdiction or taxing district, during the same
taxing period, and they must be the same kind or character of tax."
It has been shown that a real estate tax and the tenement tax
imposed by the ordinance, although imposed by the same
taxing authority, are not of the same kind or character.
At all events, there is no constitutional prohibition against double
taxation in the Philippines. It is something not favored, but is permissible,
provided some other constitutional requirement is not thereby violated,
such as the requirement that taxes must be uniform.

RATIO:

What the TC referred to as "income taxes" are the fixed taxes on business
and occupation provided for in Sec. 182, Title V, of the NIRC, by virtue of
which persons engaged in "leasing or renting property, whether on their
account as principals or as owners of rental property or properties," are
considered "real estate dealers" and are taxed according to the amount
of their annual income.
While it is true that the appellees are taxable under the aforesaid
provisions of the NIRC as real estate dealers, and still taxable under the
ordinance, the argument against double taxation may not be invoked.
The same tax may be imposed by the national government as
well as by the local government.
There is nothing inherently obnoxious in the exaction of license
fees or taxes with respect to the same occupation, calling or
activity by both the State and a political subdivision thereof.
It is a well-settled rule that a license tax may be levied upon a business or
occupation although the land or property used in connection therewith is
subject to property tax.
The State may collect an ad valorem tax on property used in a
calling, and at the same time impose a license tax on that
calling, the imposition of the latter kind of tax being in no sense
a double tax.

6.3.2.

Modes of eliminating double taxation: CIR v SC

Johnson (FRANCISCO)

Doctrine:
Double Taxation - is the imposition of comparable taxes in two or more states on
the same taxpayer in respect of the same subject matter and for identical period.
The purpose of doing away with double taxation: To encourage the free flow of
goods and services and the movement of capital technology and persons between
countries, conditions deemed vital in creating robust and dynamic economies.
Modes of eliminating double taxation:
1. First, it sets out the respective rights to tax of the state of source or situs and
of the state of residence with regard to certain classes of income or capital.
2. Second, for the elimination of double taxation applies whenever the state of
source is given a full or limited right to tax together with the state of
residence.
Facts:
S.C. Johnson and Son, PH (respondent), is a domestic corporation organized
and operating under the Philippine Laws, entered into a licensed agreement
with the SC Johnson and Son, USA, a non-resident foreign corporation based
in the USA pursuant to which the respondent was granted the right to use

18

the trademark, patents and technology owned by the later including the right
to manufacture, package and distribute the products covered by the
Agreement and secure assistance in management, marketing and production
from SC Johnson and Son USA.
For the use of trademark or technology, respondent was obliged to pay SC
Johnson and Son, USA royalties based on a percentage of net sales and
subjected the same to 25% withholding tax on royalty payments which
respondent paid for the period covering July 1992 to May 1993 in the total
amount of P1,603,443.00.
On October 29, 1993, respondent filed with the International Tax Affairs
Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on
royalties.
Arguing that, the antecedent facts attending respondents case fall
squarely within the same circumstances under which said MacGeorge
and Gillette rulings were issued. Since the agreement was approved by
the Technology Transfer Board, the preferential tax rate of 10% should
apply to the respondent. So, royalties paid by the respondent to SC
Johnson and Son, USA is only subject to 10% withholding tax pursuant
to the most-favored nation clause of the RP-US Tax Treaty in relation
to the RP-West Germany Tax Treaty. The Internal Tax Affairs Division
of the BIR ruled against SC Johnson and Son, Inc. and an appeal was
filed by the former to the Court of tax appeals.
The Commissioner did not act on said claim for refund.
Respondent then filed a petition for review before the CTA, to claim a refund
of the overpaid withholding tax on royalty payments from July 1992 to May
1993.
CTA: favored of SC Johnson, PH (respondent) and ordered the
CIR to issue a tax credit certificate in the amount of P163,266.00
representing overpaid withholding tax on royalty payments
beginning July 1992 to May 1993.
The CIR thus filed a petition for review with the CA
CA: affirmed in toto the CTA ruling.
CIR filed petition for review, raising that:

Issue: W/N respondent is entitled to the 10% rate under RP-Germany Tax Treaty
for the reason that there is no payment on taxes on royalities under similar
circumstances.

Held:
No.
The concessional tax rate of 10 percent provided for in the RP-Germany Tax
Treaty could not apply to taxes imposed upon royalties in the RP-US Tax
Treaty since the two taxes imposed under the two tax treaties are not paid
under similar circumstances, they are not containing similar provisions on
tax crediting.
The United States is the state of residence since the taxpayer, S. C. Johnson
and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of
residence and the state of source are both permitted to tax the royalties,
with a restraint on the tax that may be collected by the state of source.
Furthermore, the method employed to give relief from double taxation is the
allowance of a tax credit to citizens or residents of the United States against
the United States tax, but such amount shall not exceed the limitations
provided by United States law for the taxable year.
The Philippines may impose one of three rates- 25 percent of the gross
amount of the royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged
in preferred areas of activities; or the lowest rate of Philippine tax that may
be imposed on royalties of the same kind paid under similar circumstances to
a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most
favored nation clause, the Tax Treaty should apply only if the taxes imposed
upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are
paid under similar circumstances. This would mean that private respondent
must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of
the United States in respect of the taxes imposable upon royalties earned
from sources within the Philippines as those allowed to their German
counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar
provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra,
expressly allows crediting against German income and corporation tax of
20% of the gross amount of royalties paid under the law of the Philippines.
On the other hand, Article 23 of the RP-US Tax Treaty, which is the
counterpart provision with respect to relief for double taxation, does not
provide for similar crediting of 20% of the gross amount of royalties paid.

19

At the same time, the intention behind the adoption of the provision on
relief from double taxation in the two tax treaties in question should be
considered in light of the purpose behind the most favored nation clause.

ii.

The RP-US Tax Treaty does not give a matching tax credit of 20 percent for the
taxes paid to the Philippines on royalties as allowed under the RP-West Germany
Tax Treaty, respondent cannot be deemed entitled to the 10 percent rate granted
under the latter treaty for the reason that there is no payment of taxes on
royalties under similar circumstances.
Private respondent is claiming for a refund of the alleged overpayment of tax on
royalties; however, there is nothing on record to support a claim that the tax on
royalties under the RP-US Tax Treaty is paid under similar circumstances as the
tax on royalties under the RP-West Germany Tax Treaty.
SC: Instant petition is GRANTED. The decision of the CTA and CS are hereby SET
ASIDE.
Modes of eliminating double taxation:
1. First, it sets out the respective rights to tax of the state of source or situs and
of the state of residence with regard to certain classes of income or capital.
In some cases, an exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both states are given
the right to tax, although the amount of tax that may be imposed by the
state of source is limited.
2. The second method for the elimination of double taxation applies whenever
the state of source is given a full or limited right to tax together with the
state of residence. In this case, the treaties make it incumbent upon the state
of residence to allow relief in order to avoid double taxation. In this case, the
treaties make it incumbent upon the state of residence to allow relief in
order to avoid double taxation.
a. Methods of relief under the second mode of eliminating double
taxation
i.
Exemption method, the income or capital which is taxable in the
state of source or situs is exempted in the state of residence,
although in some instances it may be taken into account in

6.4.

determining the rate of tax applicable to the taxpayers

remaining income or capital.
Credit method, although the income or capital which is taxed in
the state of source is still taxable in the state of residence, the
tax paid in the former is credited against the tax levied in the
latter.
The basic difference between the two methods is that in
the exemption method, the focus is on the income or
capital itself, whereas the credit method focuses upon
the tax.
Escape from taxation
6.4.1.
Shifting of tax burden: Silkair v CIR (GATCHALIAN)

PARTIES:
Petitioner Silkair is an online international carrier organized under the laws of
Singapore and also the buyer of aviation jet fuel
Respondent CIR is impleaded in the case as the head of BIR
BIR - duly authorized to decide, approve, and grant refunds and/or tax credits
of erroneously paid or illegally collected internal revenue taxes
Petron Corporation seller of aviation jet fuel
FACTS:
Petitioner filed with the BIR an administrative claim for the refund of excise
taxes which it erronerously paid on its purchase of aviation jet fuel from
Petron.
The claim was based on a BIR Ruling stating that the petroleum
products Silkair purchased should not be subject of exise taxes under
Sec 135 of NIRC
BIR took no action. Silkair filed petition for review with CTA.
Invoked its exemption to pay excise taxes in accordance with Section
135 (b) of NIRC
Sec 135(b) of NIRC exempts from excise taxes the entities covered by
tax treaties, conventions and other international agreements;
provided that the country of said carrier or exempt entity likewise
exempts from similar taxes the petroleum products sold to Philippine
carriers or entities.

20

Silkair presented Art 4(2) of Air Transport Agreement between Phil

and Singapore as a support to Sec 135(b)
Although CTA found that Silkair was qualified for tax exemption under Sec
135(b), it ruled that it was NOT entitled to excise tax exemption for failure to
present proof tgat it was authorized to operate in the Phil during the period
material.
Elevated the case to CTA En Banc. It affirmed that decision of the CTA and
stated that SIlakair is not found to be the proper party to file the instant claim
for refund.

ISSUES:
1. WON Petron may shift the tax burden to Silkair? YES
2. WON Silkair is the proper party to claim for the refund/tax credit of
excise taxes? NO. Petron is the proper party, being that it is the statutory
taxpayer
3. WON excise tax is considered as an indirect tax? YES
HELD:
It is important to note that on two separate occasions, this Court has already put to
rest the issue of whether or not petitioner is the proper party to claim for the
refund or tax credit of excise taxes it allegedly paid on its aviation fuel purchases.
First Case: In Silkair (Singapore) Pte, Ltd. v. CIR involving the same parties and the
same cause of action but pertaining to different periods of taxation, we have
categorically held that Petron, not petitioner, is the proper party to question, or
seek a refund of, an indirect tax.
The proper party to question, or seek a refund of, an indirect tax is the
statutory taxpayer, the person on whom the tax is imposed by law and
who paid the same even if he shifts the burden thereof to another.
Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise
specifically allowed, the return shall be filed and the excise tax paid by
the manufacturer or producer before removal of domestic products from
place of production." Thus, Petron Corporation, NOT Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section
135 of the NIRC and Article 4(2) of the Air Transport Agreement between
RP and Singapore.

Even if Petron Corporation passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is NOT a tax but part of the price
which Silkair had to pay as a purchaser.
Second Case: The Court explained that an EXCISE TAX IS AN INDIRECT TAX where
the burden can be shifted or passed on to the consumer but the tax liability
remains with the manufacturer or seller. Thus, the manufacturer or seller has the
option of shifting or passing on the burden of the tax to the buyer. However,
where the burden of the tax is shifted, the amount passed on to the buyer is no
longer a tax but a part of the purchase price of the goods sold. Petron, as
manufacturer or producer, is the person liable for the payment of the excise tax as
shown in the Excise Tax Returns filed with the BIR. Stated otherwise, Petron is the
taxpayer that is primarily, directly and legally liable for the payment of the excise
taxes. However, since an excise tax is an indirect tax, Petron can transfer to its
customers the amount of the excise tax paid by treating it as part of the cost of the
goods and tacking it on the selling price.
Difference between DIRECT and INDIRECT taxes
1. Direct - taxes that are those exacted from the very person who, it is intended
or desired, should pay them; they are impositions for which a taxpayer is
directly liable on the transaction or business he is engaged in.
2. Indirect - taxes wherein the liability for the payment of the tax falls on one
person but the burden thereof can be shifted or passed on to another person,
such as when the tax is imposed upon goods before reaching the consumer
who ultimately pays for it. When the seller passes on the tax to his buyer, he,
in effect, shifts the tax burden, not the liability to pay it, to the purchaser as
part of the purchase price of goods sold or services rendered.
6.4.2.

Tax avoidance: CIR v Estate of Toda (HAUTEA)

FACTS:
Cebiles Insurance Corporation authorized Benigno P. Toda, Jr., President and owner
of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building
and the two parcels of land on which the building stands for an amount of not less
than P90 million.

21

Toda purportedly sold the property for P100 million to Rafael A. Altonaga.
However, Altonaga in turn, sold the same property on the same day to Royal Match
Inc. for P200 million. These two transactions were evidenced by Deeds of Absolute
Sale notarized on the same day by the same notary public.
For the sale of the property to Royal Dutch, Altonaga paid capital gains tax [6%] in
the amount of P10 million.
ISSUE:
Is this a case of tax evasion or tax avoidance? Tax Evasion
HELD:
Tax avoidance and tax evasion are the two most common ways used by taxpayers
in escaping from taxation. Tax avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the taxpayer in good faith and at
arms length. Tax evasion, on the other hand, is a scheme used outside of those
lawful means and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors: (1) the end to be achieved,
i.e., the payment of less than that known by the taxpayer to be legally due, or the
non-payment of tax when it is shown that a tax is due; (2) an accompanying state
of mind which is described as being evil, in bad faith, willfull,or deliberate
and not accidental; and (3) a course of action or failure of action which is unlawful.
All these factors are present in the instant case. It is significant to note that as
early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to
Altonaga, CIC received P40 million from RMI, and not from Altonaga. That P40
million was debited by RMI and reflected in its trial balance as other inv. Cibeles
Bldg. Also, another P40 million was debited and reflected in RMIs trial balance as
other inv. Cibeles Bldg. This would show that the real buyer of the properties
was RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close
business associate and one of the many trusted corporate executives of Toda. This
information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an
old timer in the company. But Mr. Prieto did not testify on this matter, hence, that

information remains to be hearsay and is thus inadmissible in evidence. It was not

verified either, since the letter-request for investigation of Altonaga was unserved,
Altonaga having left for the United States of America in January 1990.
Nevertheless, that Altonaga was a mere conduit finds support in the admission of
respondent Estate that the sale to him was part of the tax planning scheme of CIC.
That admission is borne by the records.
The scheme resorted to by CIC in making it appear that there were two sales of the
subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI
cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive,
including all acts, omissions, and concealment involving a breach of legal or
equitable duty, trust or confidence justly reposed, resulting in the damage to
another, or by which an undue and unconscionable advantage is taken of another.
It is obvious that the objective of the sale to Altonaga was to reduce the amount of
tax to be paid especially that the transfer from him to RMI would then subject the
income to only 5% individual capital gains tax, and not the 35% corporate income
tax. Altonagas sole purpose of acquiring and transferring title of the subject
properties on the same day was to create a tax shelter. Altonaga never controlled
the property and did not enjoy the normal benefits and burdens of ownership. The
sale to him was merely a tax ploy, a sham, and without business purpose and
economic substance. Doubtless, the execution of the two sales was calculated to
mislead the BIR with the end in view of reducing the consequent income tax
liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was
prompted more on the mitigation of tax liabilities than for legitimate business
purposes constitutes one of tax evasion.
Generally, a sale or exchange of assets will have an income tax incidence only when
it is consummated. The incidence of taxation depends upon the substance of a
transaction. The tax consequences arising from gains from a sale of property are
not finally to be determined solely by the means employed to transfer legal title.
Rather, the transaction must be viewed as a whole, and each step from the
commencement of negotiations to the consummation of the sale is relevant. A sale

22

by one person cannot be transformed for tax purposes into a sale by another by
using the latter as a conduit through which to pass title. To permit the true nature
of the transaction to be disguised by mere formalisms, which exist solely to alter
tax liabilities, would seriously impair the effective administration of the tax policies
of Congress.
To allow a taxpayer to deny tax liability on the ground that the sale was made
through another and distinct entity when it is proved that the latter was merely a
conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga
should be disregarded for income tax purposes. The two sale transactions should
be treated as a single direct sale by CIC to RMI.
6.4.3.

Tax evasion: CIR v Javier (VILLAFUERTE)

DOCTRINE:
Fraud is never imputed and the courts never sustain findings of fraud
upon circumstances which, at most, create only suspicion and the mere
understatement of a tax is not itself proof of fraud for the purpose of tax
evasion.
A "fraudulent return" is always an attempt to evade a tax, but a merely
"false return" may not be.
FACTS: In 1977, Victoria Javier received a $1 Million remittance in her bank account
from her sister abroad, Dolores Ventosa. Melchor Javier, Jr., the husband of
Victoria immediately withdrew the said amount and then appropriated it for
himself.
Later, the Mellon Bank, a foreign bank in the U.S.A. filed a complaint against the
Javiers for estafa. Apparently, Ventosa only sent $1,000.00 to her sister Victoria but
due to a clerical error in Mellon Bank, what was sent was the $1 Million.
Meanwhile, Javier filed his income tax return. In his return, he place a footnote
which states: Taxpayer was recipient of some money received from abroad which
he presumed to be a gift but turned out to be an error and is now subject of
litigation.

The Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability
amounting to P4.8 Million. The CIR also imposed a 50% penalty against Javier as the
CIR deemed Javiers return as a fraudulent return.
ISSUE: WON a taxpayer (Javier) who merely states as a footnote in his income tax
return that a sum of money that he erroneously received and already spent is the
subject of a pending litigation and there did not declare it as income is liable to pay
the 50% penalty for filing a fraudulent return.
HELD: No.
Supreme Court held that there is no fraud in the filing of the return. The notation,
"Taxpayer was the recipient of some money from abroad which he presumed to be
a gift but turned out to be an error and is now subject of litigation was an "error
or mistake of fact or law" not constituting fraud, that such notation was practically
an invitation for investigation and that Javier had literally "laid his cards on the
table."
The fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or
resorted to in order to induce another to give up some legal right. Negligence,
whether slight or gross, is not equivalent to the fraud with intent to evade the tax
contemplated by law. It must amount to intentional wrong-doing with the sole
object of avoiding the tax. It necessarily follows that a mere mistake cannot be
considered as fraudulent intent, and if both petitioner and respondent
Commissioner of Internal Revenue committed mistakes in making entries in the
returns and in the assessment, respectively, under the inventory method of
determining tax liability, it would be unfair to treat the mistakes of the petitioner
as tainted with fraud and those of the respondent as made in good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon
circumstances which, at most, create only suspicion and the mere understatement
of a tax is not itself proof of fraud for the purpose of tax evasion.
A "fraudulent return" is always an attempt to evade a tax, but a merely "false
return" may not be.

23

In the case at bar, there was no actual and intentional fraud through willful and
deliberate misleading of the government agency concerned, the Bureau of Internal
Revenue, headed by the herein petitioner. The government was not induced to
give up some legal right and place itself at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities because Javier did not conceal
anything. Error or mistake of law is not fraud. The petitioner's zealousness to
collect taxes from the unearned windfall to Javier is highly commendable.
Unfortunately, the imposition of the fraud penalty in this case is not justified by the
extant facts. Javier may be guilty of swindling charges, perhaps even for greed by
spending most of the money he received, but the records lack a clear showing of
fraud committed because he did not conceal the fact that he had received an
amount of money although it was a "subject of litigation." As ruled by respondent
Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner
against the private respondent in the deficiency assessment should be deleted.

24