CIR v.

PINEDA

FACTS: Atanasio Pineda died, survived by his

wife, Felicisima Bagtas, and 15 children, the
eldest of whom is Atty. Manuel Pineda. Estate
proceedings were had in Court so that the
estate was divided among and awarded to the
heirs. Atty Pineda's share amounted to about
P2,500.00. After the estate proceedings were
closed, the BIR investigated the income tax
liability of the estate for the years 1945, 1946,
1947 and 1948 and it found that the
corresponding income tax returns were not
filed. Thereupon, the representative of the
Collector of Internal Revenue filed said returns
for the estate issued an assessment and
charged the full amount to the inheritance due
to Atty. Pineda who argued that he is liable only
to extent of his proportional share in the
inheritance.

All told, the Government has two ways of

collecting the tax in question. One, by going
after all the heirs and collecting from each one
of them the amount of the tax proportionate to
the inheritance received; and second, is by
subjecting said property of the estate which is
in the hands of an heir or transferee to the
payment of the tax due. This second remedy is
the very avenue the Government took in this
case to collect the tax. The Bureau of Internal
Revenue should be given, in instances like the
case at bar, the necessary discretion to avail
itself of the most expeditious way to collect the
tax as may be envisioned in the particular
provision of the Tax Code above quoted,
because taxes are the lifeblood of government
and their prompt and certain availability is an
imperious need.

VERA v. FERNANDEZ
ISSUE: Can BIR collect the full amount of estate
taxes from an heir's inheritance.

HELD: Yes. The Government can require Atty.

Pineda to pay the full amount of the taxes
assessed.
The reason is that the Government has a lien on
the P2,500.00 received by him from the estate
as his share in the inheritance, for unpaid
income taxes for which said estate is liable. By
virtue of such lien, the Government has the
right to subject the property in Pineda's
possession to satisfy the income tax
assessment. After such payment, Pineda will
have a right of contribution from his co-heirs, to
achieve an adjustment of the proper share of
each heir in the distributable estate.

FACTS: The BIR filed on July 29, 1969 a motion

for allowance of claim and for payment of taxes
representing the estate's tax deficiencies in
1963 to 1964 in the intestate proceedings of
Luis Tongoy. The administrator opposed arguing
that the claim was already barred by the statute
of limitation, Section 2 and Section 5 of Rule 86
of the Rules of Court which provides that all
claims for money against the decedent, arising
from contracts, express or implied, whether the
same be due, not due, or contingent, all claims
for funeral expenses and expenses for the last
sickness of the decedent, and judgment for
money against the decedent, must be filed
within the time limited in the notice; otherwise
they are barred forever.

ISSUE: Does the statute of non-claims of the

Rules of Court bar the claim of the government
for unpaid taxes?

HELD: No. The reason for the more liberal

treatment of claims for taxes against a
decedent's estate in the form of exception from
the application of the statute of non-claims, is
not hard to find. Taxes are the lifeblood of the
Government and their prompt and certain
availability are imperious need. (CIR vs. Pineda,
21 SCRA 105). Upon taxation depends the
Government ability to serve the people for
whose benefit taxes are collected. To safeguard
such interest, neglect or omission of
government officials entrusted with the
collection of taxes should not be allowed to
bring harm or detriment to the people, in the
same manner as private persons may be made
to suffer individually on account of his own
negligence, the presumption being that they
take good care of their personal affairs. This
should not hold true to government officials
with respect to matters not of their own
personal concern. This is the philosophy behind
the government's exception, as a general rule,
from the operation of the principle of estoppel.

CIR v. CTA 234 SCRA 348

FACTS:A petition for review of the decision of
the BIR denying the tax refund of Citytrust
wasfiled with the CTA. It was submitted for
decision based solely on the pleadings and
evidencesubmitted by Citytrust. CIR could not
present any evidence by reason of the repeated
failureof the Tax Credit/Refund Division of the
BIR to transmit the records of the case, as well
asthe investigation report thereon, to the
Solicitor General. The CTA rendered its

decisionordering BIR to grant a refund to

Citytrust in the amount of P13,314,506.14. The
CAaffirmed the judgment of the CTA.
Issue:WhetherornotCitytrustisentit
ledtoarefund.
HELD:It is a long and firmly settled rule of law
that the government is not bound by the
errorscommitted by its agents. In the
performance of its government functions, the
State cannot be estopped by the neglect of its
agents and officers. Although the government
maygenerally be estopped through affirmative
acts of public officers acting within their
authority, their neglect or omission of public
duties as exemplified in this case will notand
should not produce that effect. Nowhere is the
aforestated rule more true than in thefield of
taxation. It is axiomatic that the government
cannot and must be estopped particularly in
matters involving taxes. Taxes are the lifeblood
of the nation through whichthe government
agencies continue to operate and with which
the State effects its functionsfor the welfare of
its constituents. The errors of certain
administrative officers should never be allowed
to jeopardize the government's financial
position, especially in the case at bar where the
amount involves millions of pesos the collection
whereof, if justified, stands to be prejudiced just
because of bureaucratic lethargy.Judgment of
the CA is SET ASIDE and the case is REMANDED
to the CTA for further proceedings and
appropriate action.

COMMISSIONER v. ALGUE, INC.

FACTS: Private respondent corporation Algue,

Inc. filed its income tax returns for 1958 and
1959 showing deductions, for promotional fees
paid, from their gross income, thus lowering

their taxable income. The BIR assessed Algue

based on such deductions contending that the
claimed deduction is disallowed because it was
not an ordinary, reasonable and necessary
expense.

still be stopped in his tracks if the taxpayer can

demonstrate, as it has here, that the law has
not been observed.

LUTZ v. ARANETA
ISSUE: Should an uncommon business expense
be disallowed as a proper deduction in
computation of income taxes, corollary to the
doctrine that taxes are the lifeblood of the
government?

HELD: No. Private respondent has proved that

the payment of the fees was necessary and
reasonable in the light of the efforts exerted by
the payees in inducing investors and prominent
businessmen to venture in an xperimental
enterprise and involve themselves in a new
business requiring millions of pesos. This was
no mean feat and should be, as it was,
sufficiently recompensed.
It is well-settled that taxes are the lifeblood of
the government and so should be collected
without unnecessary hindrance On the other
hand, such collection should be made in
accordance with law as any arbitrariness will
negate the very reason for government itself. It
is therefore necessary to reconcile the
apparently conflicting interests of the
authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of
the common good, may be achieved.
But even as we concede the inevitability and
indispensability of taxation, it is a requirement
in all democratic regimes that it be exercised
reasonably and in accordance with the
prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts
will then come to his succor. For all the
awesome power of the tax collector, he may

FACTS: Plaintiff Walter Lutz, in his capacity as

judicial administrator of the intestate estate of
Antionio Ledesma, sought to recover from the
CIR the sum of P14,666.40 paid by the estate as
taxes, under section 3 of the CA 567 or the
Sugar Adjustment Act thereby assailing its
constitutionality, for it provided for an increase
of the existing tax on the manufacture of sugar,
alleging that such enactment is not being levied
for a public purpose but solely and exclusively
for the aid and support of the sugar industry
thus making it void and unconstitutional. The
sugar industry situation at the time of the
enactment was in an imminent threat of loss
and needed to be stabilized by imposition of
emergency measures.

ISSUE: Is CA 567 constitutional, despite its

being allegedly violative of the equal protection
clause, the purpose of which is not for the
benefit of the general public but for the
rehabilitation only of the sugar industry?

HELD: Yes. The protection and promotion of the

sugar industry is a matter of public concern, it
follows that the Legislature may determine
within reasonable bounds what is necessary for
its protection and expedient for its promotion.
Here, the legislative discretion must be allowed
to fully play, subject only to the test of
reasonableness; and it is not contended that
the means provided in the law bear no relation

to the objective pursued or are oppressive in

character. If objective and methods are alike
constitutionally valid, no reason is seen why the
state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be
made the implement of the state's police power.

TIO vs. VRB

"The public purpose of a tax may legally exist

even if the motive which impelled the
legislature to impose the tax was to favor one
industry over another."

FACTS: The petitioner assails the validity of PD

1987 entitled an "Act creating the Videogram
Regulatory Board," citing especially Section 10
thereof, which imposes a tax of 30% on the
gross receipts payable to the local government.
Petitioner contends that aside from its being a
rider and not germane to the subject matter
thereof, and such imposition was being harsh,
confiscatory, oppressive and/or unlawfully
restraints trade in violation of the due process
clause of the Constitution.

ISSUE: Is PD 1987 a valid exercise of taxing

power of the state?

HELD: Yes. It is beyond serious question that a

tax does not cease to be valid merely because
it regulates, discourages, or even definitely
deters the activities taxed. The power to impose
taxes is one so unlimited in force and so
searching in extent, that the courts scarcely
venture to declare that it is subject to any
restrictions whatever, except such as those rest

in the discretion of the authority which

exercises it. In imposing a tax, the legislature
acts upon its constituents. This is, in general, a
sufficient security against erroneous and
oppressive taxation.
The levy of the 30% tax is for a public
purpose. It was imposed primarily to answer the
need for regulating the video industry,
particularly because of the rampant film piracy,
the flagrant violation of intellectual property
rights, and the proliferation of pornographic
video tapes. And while it was also an objective
of the DECREE to protect the movie industry,
the tax remains a valid imposition.
The public purpose of a tax may legally exist
even if the motive which impelled the
legislature to impose the tax was to favor one
industry over another.

GOMEZ v. PALOMAR

FACTS: Petitioner Benjamin Gomez mailed a

letter at the post office in San Fernando,
Pampanga. It did not bear the special anti-TB
stamp required by the RA 1635. It was returned
to the petitioner. Petitioner now assails the
constitutionality of the statute claiming that RA
1635 otherwise known as the Anti-TB Stamp law
is violative of the equal protection clause
because it constitutes mail users into a class for
the purpose of the tax while leaving untaxed
the rest of the population and that even among
postal patrons the statute discriminatorily
grants exemptions. The law in question requires
an additional 5 centavo stamp for every mail
being posted, and no mail shall be delivered
unless bearing the said stamp.

ISSUE: Is the Anti-TB Stamp Law

unconstitutional, for being allegedly violative of
the equal protection clause?

HELD: No. It is settled that the legislature has

the inherent power to select the subjects of
taxation and to grant exemptions. This power
has aptly been described as "of wide range and
flexibility." Indeed, it is said that in the field of
taxation, more than in other areas, the
legislature possesses the greatest freedom in
classification. The reason for this is that
traditionally, classification has been a device for
fitting tax programs to local needs and usages
in order to achieve an equitable distribution of
the tax burden.
The classification of mail users is based on the
ability to pay, the enjoyment of a privilege and
on administrative convenience. Tax exemptions
have never been thought of as raising revenues
under the equal protection clause.
PEPSI-COLA BOTTLING CO. OF THE PHILS., INC.
vs. CITY OF BUTUAN

"The classification made in the exercise of

power to tax, to be valid, must be reasonable ."

FACTS: Plaintiff-appellant Pepsi-Cola sought to

recover the sums paid by it under protest, to
the City of Butuan, and collected by the latter,
pursuant to its Municipal Ordinance No. 110
which plaintiff assails as null and void because
it partakes of the nature of an import tax,
amounts to double taxation, highly unjust and
discriminatory, excessive, oppressive and
confiscatory, and constitutes an invlaid
delegation of the power to tax. The ordinance
imposes taxes for every case of softdrinks,

liquors and other carbonated beverages,

regardless of the volume of sales, shipped to
the agents and/or consignees by outside
dealers or any person or company having its
actual business outside the City.

ISSUE: Does the tax ordinance violate the

uniformity requirement of taxation?

HELD: Yes. The tax levied is discriminatory. Even

if the burden in question were regarded as a tax
on the sale of said beverages, it would still be
invalid, as discriminatory, and hence, violative
of the uniformity required by the Constitution
and the law therefor, since only sales by
"agents or consignees" of outside dealers would
be subject to the tax. Sales by local dealers, not
acting for or on behalf of other merchants,
regardless of the volume of their sales, and
even if the same exceeded those made by said
agents or consignees of producers or merchants
established outside the City of Butuan, would
be exempt from the disputed tax.
It is true that the uniformity essential to the
valid exercise of the power of taxation does not
require identity or equality under all
circumstances, or negate the authority to
classify the objects of taxation. The
classification made in the exercise of this
authority, to be valid, must, however, be
reasonable and this requirement is not deemed
satisfied unless: (1) it is based upon substantial
distinctions which make real differences; (2)
these are germane to the purpose of the
legislation or ordinance; (3) the classification
applies, not only to present conditions, but,
also, to future conditions substantially identical
to those of the present; and (4) the
classification applies equally to all those who
belong to the same class.

PASCUAL vs. SECRETARY OF PUBLIC WORKS

"A law appropriating the public revenue is

invalid if the public advantage or benefit,
derived from such expenditure, is merely
incidental in the promotion of a particular
enterprise."

FACTS: Governor Wenceslao Pascual of Rizal

instituted this action for declaratory relief, with
injunction, upon the ground that RA No. 920,
which apropriates funds for public works
particularly for the construction and
improvement of Pasig feeder road terminals.
Some of the feeder roads, however, as alleged
and as contained in the tracings attached to the
petition, were nothing but projected and
planned subdivision roads, not yet constructed
within the Antonio Subdivision, belonging to
private respondent Zulueta, situated at Pasig,
Rizal; and which projected feeder roads do not
connect any government property or any
important premises to the main highway. The
respondents' contention is that there is public
purpose because people living in the
subdivision will directly be benefitted from the
construction of the roads, and the government
also gains from the donation of the land
supposed to be occupied by the streets, made
by its owner to the government.

ISSUE: Should incidental gains by the public be

considered "public purpose" for the purpose of
justifying an expenditure of the government?

HELD: No. It is a general rule that the legislature

is without power to appropriate public revenue
for anything but a public purpose. It is the

essential character of the direct object of the

expenditure which must determine its validity
as justifying a tax, and not the magnitude of the
interest to be affected nor the degree to which
the general advantage of the community, and
thus the public welfare, may be ultimately
benefited by their promotion. Incidental to the
public or to the state, which results from the
promotion of private interest and the prosperity
of private enterprises or business, does not
justify their aid by the use public money.
The test of the constitutionality of a statute
requiring the use of public funds is whether the
statute is designed to promote the public
interest, as opposed to the furtherance of the
advantage of individuals, although each
advantage to individuals might incidentally
serve the public.
Pepsi Cola Bottling Company vs Municipality of
Tanauan
Pepsi Cola has a bottling plant in the
Municipality of Tanauan, Leyte. In September
1962, the Municipality approved Ordinance No.
23 which levies and collects from soft drinks
producers and manufacturers a tai of onesixteenth (1/16) of a centavo for every bottle of
soft drink corked.

In December 1962, the Municipality also

approved Ordinance No. 27 which levies and
collects on soft drinks produced or
manufactured within the territorial jurisdiction
of this municipality a tax of one centavo P0.01)
on each gallon of volume capacity.

Pepsi Cola assailed the validity of the

ordinances as it alleged that they constitute
double taxation in two instances: a) double
taxation because Ordinance No. 27 covers the
same subject matter and impose practically the

same tax rate as with Ordinance No. 23, b)

double taxation because the two ordinances
impose percentage or specific taxes.

Pepsi Cola also questions the constitutionality of

Republic Act 2264 which allows for the
delegation of taxing powers to local
government units; that allowing local
governments to tax companies like Pepsi Cola is
confiscatory and oppressive.

The Municipality assailed the arguments

presented by Pepsi Cola. It argued, among
others, that only Ordinance No. 27 is being
enforced and that the latter law is an
amendment of Ordinance No. 23, hence there is
no double taxation.

ISSUE: Whether or not there is undue

delegation of taxing powers. Whether or not
there is double taxation.

Withal, it cannot be said that Section 2 of

Republic Act No. 2264 emanated from beyond
the sphere of the legislative power to enact and
vest in local governments the power of local
taxation.

There is no double taxation. The argument of

the Municipality is well taken. Further, Pepsi
Colas assertion that the delegation of taxing
power in itself constitutes double taxation
cannot be merited. It must be observed that the
delegating authority specifies the limitations
and enumerates the taxes over which local
taxation may not be exercised. The reason is
that the State has exclusively reserved the
same for its own prerogative. Moreover, double
taxation, in general, is not forbidden by our
fundamental law unlike in other jurisdictions.
Double taxation becomes obnoxious only where
the taxpayer is taxed twice for the benefit of
the same governmental entity or by the same
jurisdiction for the same purpose, but not in a
case where one tax is imposed by the State and
the other by the city or municipality.
CIR v. YMCA

HELD: No. There is no undue delegation. The

Constitution even allows such delegation.
Legislative powers may be delegated to local
governments in respect of matters of local
concern. By necessary implication, the
legislative power to create political corporations
for purposes of local self-government carries
with it the power to confer on such local
governmental agencies the power to tax. Under
the New Constitution, local governments are
granted the autonomous authority to create
their own sources of revenue and to levy taxes.
Section 5, Article XI provides: Each local
government unit shall have the power to create
its sources of revenue and to levy taxes, subject
to such limitations as may be provided by law.

FACTS: Private Respondent YMCA--a non-stock,

non-profit institution, which conducts various
programs beneficial to the public pursuant to its
religious, educational and charitable
objectives--leases out a portion of its premises
to small shop owners, like restaurants and
canteen operators, deriving substantial income
for such. Seeing this, the Commissioner of
Internal Revenue (CIR) issued an assessment to
private respondent for deficiency income tax,
deficiency expanded withholding taxes on
rentals and professional fees and deficiency
withholding tax on wages. YMCA opposed
arguing that its rental income is not subject to

tax, mainly because of the provisions of Section

27 of NIRC which provides that civic league or
organizations not organized for profit but
operate exclusively for promotion of social
welfare and those organized exclusively for
pleasure, recreation and other non-profitble
businesses shall not be taxed.

ISSUE: Is the contention of YMCA tenable?

HELD: No. Because taxes are the lifeblood of

the nation, the Court has always applied the
doctrine of strict in interpretation in construing
tax exemptions. Furthermore, a claim of
statutory exemption from taxation should be
manifest and unmistakable from the language
of the law on which it is based. Thus, the
claimed exemption "must expressly be granted
in a statute stated in a language too clear to be
mistaken."

ISSUE #1 (G.R. No. 109289): NO. The RA did not

violate any constitutional provision.
Petitioner: The said law violates the ff.
provisions of the 3 Constitutional provisions:
1.) Article VI, Section 26(1) Every bill passed
by the Congress shall embrace only one subject
which shall be expressed in the title thereof.
- The title of the bill "Simplified Net Income
Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of
their Profession" is a misnomer
Court:
- The full text title of the bill is An Act Adopting
the Simplified Net Income Taxation Scheme For

The Self-Employed and Professionals Engaged

In The Practice of Their Profession, Amending
Sections 21 and 29 of the National Internal
Revenue Code, as Amended
- Amended Sec. 21 of the National Internal
Revenue Code speaks of imposing tax on
taxable net income received from all sources of
self-employed/ practicing professionals while
Sec. 29 speaks of the allowed deductions from
gross income of the said group of people.
However, deductible items on income are now
more limited as compared to the law before the
said amendment.
- Petitioner contends that the law now impose
taxes on gross as opposed to net income.
- Court held that limiting the deductible items is
still within the purview of the concept of net
income. It is still income less the expenses and
then the remaining amount determines the tax
to be paid. The amendment just limited the
items that fall under the expenses.
- The objectives of the law on bill titles are: (a)
to prevent log-rolling legislation intended to
unite the members of the legislature who favor
any one of unrelated subjects in support of the
whole act, (b) to avoid surprises or even fraud
upon the legislature, and (c) to fairly apprise
the people, through such publications of its
proceedings as are usually made, of the
subjects of legislation. The above objectives of
the fundamental law appear to us to have been
sufficiently met.

2.) Petitioner contends that the law would now

attempt to tax single proprietorships and
professionals differently from the manner it
imposes the tax on corporations and
partnerships violating the ff. constitutional
provisions:

Article VI, Section 28(1) The rule of taxation

shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.

Article III, Section 1 No person shall be

deprived of . . . property without due process of
law, nor shall any person be denied the equal
protection of the laws.
Court:
- Uniformity in taxation means those that are
similarly situated are to be treated alike. There
is uniformity as long as: (1) the standards that
are used therefor are substantial and not
arbitrary, (2) the categorization is germane to
achieve the legislative purpose, (3) the law
applies, all things being equal, to both present
and future conditions, and (4) the classification
applies equally well to all those belonging to the
same class
- The court does not view the classification in
this instance as arbitrary or inappropriate.
Moreover, the legislature has the discretion to
determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs
(place) of taxation. The Court only intervenes
when there is a violation of the constitution,
which in this case there is none.
Tolentino vs. Secretary of Finance G.R. No.
115455, August 25, 1994

Facts: The value-added tax (VAT) is levied on

the sale, barter or exchange of goods and
properties as well as on the sale or exchange of
services. RA 7716 seeks to widen the tax base
of the existing VAT system and enhance its
administration by amending the National
Internal Revenue Code. There are various suits

challenging the constitutionality of RA 7716 on

various grounds.
One contention is that RA 7716 did not
originate exclusively in the House of
Representatives as required by Art. VI, Sec. 24
of the Constitution, because it is in fact the
result of the consolidation of 2 distinct bills, H.
No. 11197 and S. No. 1630. There is also a
contention that S. No. 1630 did not pass 3
readings as required by the Constitution.

Issue: Whether or not RA 7716 violates Art. VI,

Secs. 24 and 26(2) of the Constitution

Held: The argument that RA 7716 did not

originate exclusively in the House of
Representatives as required by Art. VI, Sec. 24
of the Constitution will not bear analysis. To
begin with, it is not the law but the revenue bill
which is required by the Constitution to
originate exclusively in the House of
Representatives. To insist that a revenue statute
and not only the bill which initiated the
legislative process culminating in the
enactment of the law must substantially be the
same as the House bill would be to deny the
Senates power not only to concur with
amendments but also to propose amendments.
Indeed, what the Constitution simply means is
that the initiative for filing revenue, tariff or tax
bills, bills authorizing an increase of the public
debt, private bills and bills of local application
must come from the House of Representatives
on the theory that, elected as they are from the
districts, the members of the House can be
expected to be more sensitive to the local
needs and problems. Nor does the Constitution
prohibit the filing in the Senate of a substitute
bill in anticipation of its receipt of the bill from
the House, so long as action by the Senate as a

body is withheld pending receipt of the House

bill.
The next argument of the petitioners was that
S. No. 1630 did not pass 3 readings on separate
days as required by the Constitution because
the second and third readings were done on the
same day. But this was because the President
had certified S. No. 1630 as urgent. The
presidential certification dispensed with the
requirement not only of printing but also that of
reading the bill on separate days. That upon the
certification of a bill by the President the
requirement of 3 readings on separate days and
of printing and distribution can be dispensed
with is supported by the weight of legislative
practice.

increase in the corresponding tax rates

prompting petitioners to file a Memorandum of
Disagreement averring
that the reassessments made were "excessive,
unwarranted, inequitable, confiscatory and
unconstitutional"
considering that the taxes imposed upon them
greatly exceeded the annual income derived
from their
properties. They argued that the income
approach should have been used in determining
the land values instead
of the comparable sales approach which the
City Assessor adopted.

REYES v. ALMANZOR

FACTS: Petitioners JBL Reyes et al. owned a

parcel of land in Tondo which are leased and
occupied as dwelling
units by tenants who were paying monthly
rentals of not exceeding P300. Sometimes in
1971 the Rental
Freezing Law was passed prohibiting for one
year from its effectivity, an increase in monthly
rentals of dwelling
units where rentals do not exceed three
hundred pesos (P300.00), so that the Reyeses
were precluded from
raising the rents and from ejecting the tenants.
In 1973, respondent City Assessor of Manila reclassified and
reassessed the value of the subject properties
based on the schedule of market values, which
entailed an

ISSUE: Is the approach on tax assessment used

by the City Assessor reasonable?

HELD: No. The taxing power has the authority to

make a reasonable and natural classification for
purposes of
taxation but the government's act must not be
prompted by a spirit of hostility, or at the very
least discrimination
that finds no support in reason. It suffices then
that the laws operate equally and uniformly on
all persons under
similar circumstances or that all persons must
be treated in the same manner, the conditions
not being different
both in the privileges conferred and the
liabilities imposed.
Consequently, it stands to reason that
petitioners who are burdened by the
government by its Rental Freezing

Laws (then R.A. No. 6359 and P.D. 20) under the
principle of social justice should not now be
penalized by the
same government by the imposition of
excessive taxes petitioners can ill afford and
eventually result in the
forfeiture of their properties.
Abra Valley College vs Aquino (G.R. No. L39086)
FACTS: Petitioner, an educational corporation
and institution of higher learning duly
incorporated with the Securities and Exchange
Commission in 1948, filed a complaint to annul
and declare void the Notice of Seizure and the
Notice of Sale of its lot and building located at
Bangued, Abra, for non-payment of real estate
taxes and penalties amounting to P5,140.31.
Said Notice of Seizure by respondents
Municipal Treasurer and Provincial Treasurer,
defendants below, was issued for the
satisfaction of the said taxes thereon.

The parties entered into a stipulation of facts

adopted and embodied by the trial court in its
questioned decision. The trial court ruled for the
government, holding that the second floor of
the building is being used by the director for
residential purposes and that the ground floor
used and rented by Northern Marketing
Corporation, a commercial establishment, and
thus the property is not being used exclusively
for educational purposes. Instead of perfecting
an appeal, petitioner availed of the instant
petition for review on certiorari with prayer for
preliminary injunction before the Supreme
Court, by filing said petition on 17 August 1974.

ISSUE: Whether or not the lot and building are

used exclusively for educational purposes.

HELD: Section 22, paragraph 3, Article VI, of the

then 1935 Philippine Constitution, expressly
grants exemption from realty taxes for
cemeteries, churches and parsonages or
convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively
for religious, charitable or educational
purposes. Reasonable emphasis has always
been made that the exemption extends to
facilities which are incidental to and reasonably
necessary for the accomplishment of the main
purposes. The use of the school building or lot
for commercial purposes is neither
contemplated by law, nor by jurisprudence. In
the case at bar, the lease of the first floor of the
building to the Northern Marketing Corporation
cannot by any stretch of the imagination be
considered incidental to the purpose of
education. The test of exemption from taxation
is the use of the property for purposes
mentioned in the Constitution.
The decision of the CFI Abra (Branch I) is
affirmed subject to the modification that half of
the assessed tax be returned to the petitioner.
The modification is derived from the fact that
the ground floor is being used for commercial
purposes (leased) and the second floor being
used as incidental to education (residence of
the director).
CIR v Court of Tax Appeals
FACTS:
Manila Golf & Country Club, Inc., a non-stock
corporation who maintains a golf course and
operates a clubhouse with a lounge, bar &
dining room exclusively for its members &
guests claims that they should have been
exempt from payment of privilege taxes were it

not for the last paragraph of Section 191-A of

RA No. 6110, otherwise known as "Omnibus Tax
Law".
By virtue of RA No. 6110, the CIR assessed the
Manila Golf and Country Club fixed taxes as
operators of golf links and restaurant, and also
percentage tax (caterer's tax) for its sale of
foods and fermented liquors/wines for the
period covering September 1969 to December
1970 in the amount of P32,504.96 in which the
club protested claiming the assessment to be
without basis because Section 42 was vetoed
by then President Marcos.
CIR denied the protestation of the club, who
maintain that Section 42 was not entirely
vetoed but merely the words "hotel, motels,
resthouses" on the ground that it might restrain
the development of hotels which is essential to
the tourism industry.

ISSUE:
Whether or not the presidential veto referred to
the entire section or merely to the imposition of
20% tax on gross receipt of operators or
proprietors of restaurants, refreshment parlors,
bars and other eating places which are
maintained within the premises or compound of
a hotel, motel or resthouses.

meaning of Sec. 20(3), Article VI of the 1935

Constitution.
The Petition is granted. Sec. 191-A of RA 6110
is valid and enforceable, hence the Manila Golf
and Country Club, Inc is liable for the amount
assessed against it.
DAVAO GULF LUMBER CORP v. CIR
GR No. 117359, July 23, 1998
293 SCRA 77

FACTS: Republic Act No. 1435 entitles miners

and forest concessioners to the refund of 25%
of the specific taxes paid by the oil companies,
which were eventually passed on to the user-the petitioner in this case--in the purchase price
of the oil products. Petitioner filed before
respondent Commissioner of Internal Revenue
(CIR) a claim for refund in the amount
representing 25% of the specific taxes actually
paid on the above-mentioned fuels and oils that
were used by petitioner in its operations.
However petitioner asserts that equity and
justice demands that the refund should be
based on the increased rates of specific taxes
which it actually paid, as prescribed in Sections
153 and 156 of the NIRC. Public respondent, on
the other hand, contends that it should be
based on specific taxes deemed paid under
Sections 1 and 2 of RA 1435.

DECISION:
The presidential veto referred merely to the
inclusion of hotels, motels, and rest houses in
the 20% caterer's tax bracket but not to the
whole section. It was then agreed by the SC
with then Solicitor General Estelito Mendoza
and his associates that inclusion of hotels,
motels, and rest houses in the 20% caterer's
tax bracket are "items" in themselves within the

ISSUE: Should the petitioner be entitled under

Republic Act No. 1435 to the refund of 25% of
the amount of specific taxes it actually paid on
various refined and manufactured mineral oils
and other oil products, and not on the taxes
deemed paid and passed on to them, as endusers, by the oil companies?

HELD: No. According to an eminent authority on

taxation, "there is no tax exemption solely on
the ground of equity." Thus, the tax refund
should be based on the taxes deemed paid.
Because taxes are the lifeblood of the nation,
statutes that allow exemptions are construed
strictly against the grantee and liberally in favor
of the government. Otherwise stated, any
exemption from the payment of a tax must be
clearly stated in the language of the law; it
cannot be merely implied therefrom.

HELD: The par value of the certificates of stock

should be the basis for determining the amount
to be paid as documentary stamp tax. First, the
NIRC Sec. 224 provides that On every original
issue, whether on organization, reorganization
or for any lawful purpose, of certificates of stock
by any association, company or corporation,
there shall be collected a documentary stamp
tax of one peso and ten centavos on each two
hundred pesos, or fractional part thereof, of the
par value of such certificates

LINCOLN PHILIPPINE LIFE INSURANCE COMPANY,

INC. (now JARDINE-CMG LIFE INSURANCE CO.
INC.), petitioner, vs. COURT OF APPEALS and
COMMISSIONER OF INTERNAL REVENUE,
respondents.

There is no basis for considering stock

dividends as a distinct class from ordinary
shares of stock since under this provision only
certificates of stock are required to be
distinguished (into either one with par value or
one without) rather than the classes of shares
themselves.

FACTS:
Petitioner, now the Jardine-CMG Life Insurance
Company, Inc., is a domestic corporation
engaged in the life insurance business. It
issued shares of stock as stock dividends and
paid documentary stamp taxes on each
certificate on the basis of its par value. The CIR,
held Lincoln liable based on the book value of
the shares, and consequently, should be used
as basis for determining the amount of the
documentary stamp tax. Accordingly, the CIR
issued a deficiency documentary stamp tax
assessment. Lincoln appealed the
Commissioners ruling to the CTA, which held
that the amount of the documentary stamp tax
should be based on the par value stated on
each certificate of stock. In turn, CIR appealed
to the Court of Appeals which, reversed the
CTAs decision.
ISSUE: Whether in determining the amount to
be paid as documentary stamp tax, it is the par
value of the certificates of stock or the book
value of the shares which should be considered.

A stock certificate is merely evidence of a share

of stock and not the share itself. (Sec. 63,
Corporation Code). Stock dividends are in the
nature of shares of stock, the consideration for
which is the amount of unrestricted retained
earnings converted into equity in the
corporations books. There is, therefore, no
reason for determining the actual value of such
dividends for purposes of the documentary
stamp tax if the certificates representing them
indicate a par value.
Second. The documentary stamp tax here is
not levied upon the specific transaction which
gives rise to such original issuance but on the
privilege of issuing certificates of stock. A
documentary stamp tax is in the nature of an
excise tax. It is not imposed upon the business
transacted but is an excise upon the privilege,
opportunity or facility offered at exchanges for
the transaction of the business.

PEPSI-COLA BOTTLING CO. OF THE PHILS., INC.

vs. CITY OF BUTUAN

"The classification made in the exercise of

power to tax, to be valid, must be reasonable ."

FACTS: Plaintiff-appellant Pepsi-Cola sought to

recover the sums paid by it under protest, to
the City of Butuan, and collected by the latter,
pursuant to its Municipal Ordinance No. 110
which plaintiff assails as null and void because
it partakes of the nature of an import tax,
amounts to double taxation, highly unjust and
discriminatory, excessive, oppressive and
confiscatory, and constitutes an invlaid
delegation of the power to tax. The ordinance
imposes taxes for every case of softdrinks,
liquors and other carbonated beverages,
regardless of the volume of sales, shipped to
the agents and/or consignees by outside
dealers or any person or company having its
actual business outside the City.

ISSUE: Does the tax ordinance violate the

uniformity requirement of taxation?

HELD: Yes. The tax levied is discriminatory. Even

if the burden in question were regarded as a tax
on the sale of said beverages, it would still be
invalid, as discriminatory, and hence, violative
of the uniformity required by the Constitution
and the law therefor, since only sales by
"agents or consignees" of outside dealers would
be subject to the tax. Sales by local dealers, not
acting for or on behalf of other merchants,
regardless of the volume of their sales, and
even if the same exceeded those made by said
agents or consignees of producers or merchants

established outside the City of Butuan, would

be exempt from the disputed tax.
It is true that the uniformity essential to the
valid exercise of the power of taxation does not
require identity or equality under all
circumstances, or negate the authority to
classify the objects of taxation. The
classification made in the exercise of this
authority, to be valid, must, however, be
reasonable and this requirement is not deemed
satisfied unless: (1) it is based upon substantial
distinctions which make real differences; (2)
these are germane to the purpose of the
legislation or ordinance; (3) the classification
applies, not only to present conditions, but,
also, to future conditions substantially identical
to those of the present; and (4) the
classification applies equally to all those who
belong to the same class.
Commissioner of Internal Revenue v Ayala
Securities Corporation
Facts:
Ayala Securities Corp. (Ayala) failed to file
returns of their accumulated surplus so Ayala
was charged with 25% surtax by the
Commissioner of internal Revenue. The CTA
(Court of Tax Appeals) reversed the
Commissioners decision and held that the
assessment made against Ayala was beyond
the 5-yr prescriptive period as provided in
section 331 of the National Internal Revenue
Code. Commissioner now files a motion for
reconsideration of this decision. Ayala invokes
the defense of prescription against the right of
the Commissioner to assess the surtax.

Issue:
Whether or not the right to assess and collect
the 25% surtax has prescribed after five years.

Held:
No. There is no such time limit on the right of
the Commissioner to assess the 25% surtax
since there is no express statutory provision
limiting such right or providing for its
prescription. Hence, the collection of surtax is
imprescriptible. The underlying purpose of the
surtax is to avoid a situation where the
corporation unduly retains its surplus earnings
instead of declaring and paying dividends to its
shareholders. SC reverses the ruling of the CTA.
CIR VS SC JOHNSON & SON, INCS AND CA [G.R.
No. 127105. June 25, 1999]
Respondent, JOHNSON AND SON, INC a
domestic corporation organized and operating
under the Philippine laws, entered into a license
agreement with SC Johnson and Son, United
States of America (USA), a non-resident foreign
corporation based in the U.S.A. pursuant to
which the [respondent] was granted the right to
use the trademark, patents and technology
owned by the latter 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, U. S. A.
The said License Agreement was duly registered
with the Technology Transfer Board of the
Bureau of Patents, Trade Marks and Technology
Transfer under Certificate of Registration No.
8064 . For the use of the trademark or
technology, SC JOHNSON AND SON, INC 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 1993.00
On October 29, 1993, SC JOHNSON AND SON,
USA filed with the International Tax Affairs

Division (ITAD) of the BIR a claim for refund of

overpaid withholding tax on royalties arguing
that, since the agreement was approved by the
Technology Transfer Board, the preferential tax
rate of 10% should apply to the respondent.
Respondent submits that royalties paid 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 CTA ruled against CIR and ordered that a
tax credit be issued in favor of SC Johnson and
Son, Inc. Unpleased with the decision, the CIR
filed an appeal to the CA which subsequently
affirmed in toto the decision of the CTA. Hence,
an appeal on certiorari was filed to the SC.

THE MAIN ISSUE:

WON SC JOHNSON AND SON,USA IS ENTITLED

TO THE MOST FAVORED NATION TAX RATE OF
10% ON ROYALTIES AS PROVIDED IN THE RP-US
TAX TREATY IN RELATION TO THE RP-WEST
GERMANY TAX TREATY.

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 RPUS 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
RPGermany Tax Treaty. The RP-US and the RPWest 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.

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.

What is the most favored nation clause?

The purpose of a most favored nation clause is

to grant to the contracting party treatment not
less favorable than that which has been or may
be granted to the most favored among other
countries. It is intended to establish the
principle of equality of international treatment
by providing that the citizens or subjects of the
contracting nations may enjoy the privileges
accorded by either party to those of the most
favored nation. The essence of the principle is
to allow the taxpayer in one state to avail of
more liberal provisions granted in another tax
treaty to which the country of residence of such
taxpayer is also a party provided that the
subject matter of taxation, in this case royalty
income, is the same as that in the tax treaty
under which the taxpayer is liable.

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 RPWest Germany Tax Treaty, private 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.

TAXATION RELATED TOPICS:

What is the purpose of a tax treaty?

The purpose of these international agreements

is to reconcile the national fiscal legislations of
the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two
different jurisdictions.

What is international double taxation and the

rationale for doing away with it?

International juridical double taxation is defined

as the imposition of comparable taxes in two or
more states on the same taxpayer in respect of
the same subject matter and for identical
periods; The apparent rationale for doing away
with double taxation is 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.

When is there double taxation?

The goal of double taxation conventions would
be thwarted if such treaties did not provide for
effective measures to minimize, if not
completely eliminate, the tax burden laid upon
the income or capital of the investor. Thus, if
the rates of tax are lowered by the state of
source, in this case, by the Philippines, there
should be a concomitant commitment on the
part of the state of residence to grant some
form of tax relief, whether this be in the form of
a tax credit or exemption. Otherwise, the tax
which could have been collected by the
Philippine government will simply be collected
by another state, defeating the object of the tax
treaty since the tax burden imposed upon the
investorwould remain unrelieved. If the state of
residence does not grant some form of tax relief
to the investor, no benefit would redound to the
Philippines, i.e., increased investment resulting
from a favorable tax regime, should it impose a
lower tax rate on the royalty earnings of the
investor, and it would be better to impose the
regular rate rather than lose much-needed
revenues to another country.

Double taxation usually takes place when a

person is resident of a contracting state and
derives income from, or owns capital in, the
other contracting state and both states impose
tax on that income or capital.

What are the methods of eliminating double

taxation?

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.

 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.

What are the methods of relief under the

second method?

In negotiating tax treaties, the underlying

rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the
expectation that the tax given up for this
particular investment is not taxed by the other
country.

What are tax refunds?

Tax refunds are in the nature of tax exemptions,

and as such they are regarded as in derogation
of sovereign authority and to be construed
strictissimi juris against the person or entity
claiming the exemption.

There are two methods of reliefthe

exemption method and the credit method.
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
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.

What is the rationale of reducing tax rates in

negotiating tax treaties?

Who has the burden of proof in tax exemption?

The burden of proof is upon him who claims the

exemption in his favor and he must be able to
justify his claim by the clearest grant of organic
or statute law.

Engracio Francia was the owner of a 328 square

meter land in Pasay City. In October 1977, a
portion of his land (125 square meter) was
expropriated by the government for P4,116.00.
The expropriation was made to give way to the
expansion of a nearby road.

It also appears that Francia failed to pay his real

estate taxes since 1963 amounting to
P2,400.00. So in December 1977, the remaining
203 square meters of his land was sold at a

public auction (after due notice was given him).

The highest bidder was a certain Ho Fernandez
who paid the purchase price of P2,400.00
(which was lesser than the price of the portion
of his land that was expropriated).

Later, Francia filed a complaint to annul the

auction sale on the ground that the selling price
was grossly inadequate. He further argued that
his land should have never been auctioned
because the P2,400.00 he owed the
government in taxes should have been set-off
by the debt the government owed him (legal
compensation). He alleged that he was not paid
by the government for the expropriated portion
of his land because though he knew that the
payment therefor was deposited in the
Philippine National Bank, he never withdrew it.

ISSUE: Whether or not the tax owed by Francia

should be set-off by the debt owed him by the
government.

HELD: No. As a rule, set-off of taxes is not

allowed. There is no legal basis for the
contention. By legal compensation, obligations
of persons, who in their own right are
reciprocally debtors and creditors of each other,
are extinguished (Art. 1278, Civil Code). This is
not applicable in taxes. There can be no offsetting of taxes against the claims that the
taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground
that the government owes him an amount equal
to or greater than the tax being collected. The
collection of a tax cannot await the results of a
lawsuit against the government.

The Supreme Court emphasized: A claim for

taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the
statutes of set-off, which are construed
uniformly, in the light of public policy, to
exclude the remedy in an action or any
indebtedness of the state or municipality to one
who is liable to the state or municipality for
taxes. Neither are they a proper subject of
recoupment since they do not arise out of the
contract or transaction sued on.

Further, the government already Francia. All he

has to do was to withdraw the money. Had he
done that, he could have paid his tax
obligations even before the auction sale or
could have exercised his right to redeem
which he did not do.

Anent the issue that the selling price of

P2,400.00 was grossly inadequate, the same is
not tenable. The Supreme Court said: alleged
gross inadequacy of price is not material when
the law gives the owner the right to redeem as
when a sale is made at public auction, upon the
theory that the lesser the price, the easier it is
for the owner to effect redemption. If mere
inadequacy of price is held to be a valid
objection to a sale for taxes, the collection of
taxes in this manner would be greatly
embarrassed, if not rendered altogether
impracticable. Where land is sold for taxes, the
inadequacy of the price given is not a valid
objection to the sale. This rule arises from
necessity, for, if a fair price for the land were
essential to the sale, it would be useless to offer
the property. Indeed, it is notorious that the
prices habitually paid by purchasers at tax sales
are grossly out of proportion to the value of the
land.

Domingo v. Garlitos
Facts:
1. In Melecio Domingo v. Judge Moscoso SC
declared as final and executor the order of
payment by the estate of Walter Scott Price of
estate & inheritance taxes, charges,
andpenalties @P40K.
2. Petition for execution of this judgment was
sought Atty Benedicto submitted:
a. Note by the then Pres. Carlos Garcia directing
the Dir. Of Lands to pay Mrs. Price
(administratix of Walter Prices estate)
@P369,140
b. RA 2700, page 765: appropriating P262,200
for payment to Mrs. Price.
3. CFI: Petition DENIED, execution is not
justifiable since the Govt is indebted to the
estate. The payment of the claim of CIR
deferred until the Govt has paid this debt.
Hence this petition to Set Aside the above
order.
Issue: w/n the set-off/deferment of the claim of
CIR is proper.
Held:
It is proper. Compensation/set-off of taxes may
happen by operation of law when bothdebts are
due and demandable.
1. The ordinary procedure to settle claims
before an estate is not a petition for
execution,but by presenting a claim before the
probate court.
a. Aldamiz vs. Judge of CFI Mindoro- Execution
may issue only where the devisees, legatees or
heirs have entered into possession of their
respective portions in the estate prior to
settlement and payment of the debts and

expenses of administration and it is later

ascertained that there are such debts and
expenses to be paid, in which case "the court
having jurisdiction of the estate may, by order
for that purpose, after hearing, settle the
amount of their several liabilities, and order
how much and in what manner each person
shall contribute, and may issue execution if
circumstances require" (Rule 89, section 6; see
also Rule 74, Section 4; Emphasis supplied.)
b. Legal basis is the fact that the properties
belonging to the state are under custodia legis,
which continues until said properties have been
distributed among the heirs.
2. Court having jurisdiction also found that the
claim of the estate has been recognized by the
govt and has already appropriated the
corresponding amount.
3. Claim of the Govt for inheritance taxes
against the estate is due and demandable. The
claim of the estate against the Govt is also
due, demandable and is fully liquidated.
Compensation, therefore, takes place by
operation of law, in accordance with the
provisions of Articles 1279 and 1290 of the Civil
Code, and both debts are extinguished to the
concurrent amount.
CALTEX PHILIPPINES, INC., petitioner,vs.THE
HONORABLE COMMISSION ON AUDIT,
Topic: (1) tax vs. ordinary debt, (2)
purpose/objective of taxation: non-revenue /
special / regulatory
DOCTRINE:
A taxpayer may not offset taxes due from the
claims that he may have againstthe
government.
QUICK FACTS : Caltex Philippines questions the
decisions of COA fordisallowing the offsetting of

its claims for reimbursement with its due

OPSFremittance
FACTS:
The Oil Price Stabilization Fund (OPSF) was
created under Sec. 8, PD 1956, as amended by
EO 137 for the purpose of minimizing frequent
price changes brought about by exchange rate
adjustments. It will be used to reimburse the oil
companies for cost increase and possible cost
under recovery incurred due to reduction of
domestic prices. COA sent a letter to Caltex
directing the latter to remit to the OPSF its
collection. Caltex requested COA for an early
release of its reimbursement certificates which
the latter denied. COA disallowed recover of
financing charges, inventory losses and sales to
marcopper and atlas but allowed the recovery
of product sale or those arising from export
sales.
Petitioners Contention: Department of Finance
issued Circular No. 4-88 allowing
reimbursement. Denial of claim for
reimbursement would be inequitable. NCC
(compensation)and Sec. 21, Book V, Title I-B of
the Revised Administrative Code (Retention of
Money for Satisfaction of Indebtedness to
Government) allows offsetting. Amounts due do
not arise as a result of taxation since PD 1956
did not create a source of taxation, it instead
established a special fund. This lack of public
purpose behind OPSF exactions distinguishes it
from tax.
Respondents Contention: Based on Francia v.
IAC
theres no offsetting of taxes against the claims
that a taxpayer may have against the
government, as taxes do not arise from
contracts or depend upon the will of the
taxpayer, but are imposed by law.
ISSUE: WON Caltex is entitled to offsetting

DECISION: NO.

COA AFFIRMED

HELD:
It is settled that a taxpayer may not offset taxes
due from the claims that he may have against
the government. Taxes cannot be subject of
compensation because the government and
taxpayer are not mutually creditors and debtors
of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is
allowed to be set-off.
Technically, the oil companies merely act as
agents for the Government in the latters
collection since the taxes are, in reality, passed
unto the end-users the consuming public.
Their primary obligation is to account for and
remit the taxes collection to the administrator
of the OPSF.
There is not merit in Caltexs contention that
the OPSF contributions are not for a public
purpose because they go to a special fund of
the government. Taxation is no longer
envisioned as a measure merely to raise
revenue to support the existence of the
government; taxes may be levied with a
regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened
industry which is affected with public interest as
to be within the police power of the State.
The oil industry is greatly imbued with public
interest as it vitally affects the general welfare.
PD 1956, as amended by EO No. 137
explicitly provides that the source of OPSF is
taxation.
Republic vs. Mambulao Lumber

FACTS:

Mambulao Lumber Company paid the

Government a total of P9,127.50 as
reforestation charges. Having found liable for an
aggregate amount of P4,802.37 for forest
charges, it contended that since the Republic
(Government) has not made use of the
reforestation charges for reforesting the
denuded area of the land covered by the
companys license, the Republic should refund
said amount or, if it cannot be refunded, at
least the company should be compensated with
what it owed the Republic for reforestation
charges.

ISSUE:
Whether taxes may be subject of set-off or
compensation.

HELD:
Internal revenue taxes, such as forest charges,
cannot be the subject of set-off or
compensation. A claim for taxes is not such a
debt, demand, contract or judgment as is
allowed to be set-off under the statutes of setoff, which are construed uniformly, in the light
of public policy, to exclude the remedy in an
action or any indebtedness of the State or
municipality to one who is liable to the State or
municipality for taxes. Neither are they subject
of recoupment since they do not arise out of the
contract or transaction sued on.

Taxes are not in the nature of contracts

between the parties but grow out of a duty to,
and are the positive acts of the government, to
the making and enforcing of which, the personal
consent of individual taxpayers is not required.

COMMISSIONER OF INTERNAL REVENUE,

petitioner, vs.NATIONAL LABOR RELATIONS
COMMISSION, et. al., respondents

G.R. No. 74965

November 9, 1994

FACTS:
Commissioner of Internal Revenue issued
warrants of distraint of personal property and
levy of real property of private respondent
Maritime Company of the Philippines for failure
to pay its tax liabilities. However, it appears
that four of the barges placed under
constructive distraint were levied upon
execution by respondent deputy sheriff of
Manila to satisfy a judgment for unpaid wages
and other benefits of employees of respondent
Maritime Company of the Philippines.

Petitioner asked the Labor Arbiter to annul the

sale but the same was denied. NLRC affirmed
LAs decision averring that taxes are absolutely
preferred claims only with respect to movable
or immovable properties on which they are due
and that since the taxes sought to be collected
in this case are not due on the barges in
question the governments claim cannot prevail
over the claims of employees of the Maritime
Company of the Philippines which, pursuant to
Art. 110 of the Labor Code, enjoy first
preference.

ISSUE:

WON the claims of the employees are given first

preference over the claim for unpaid internal
revenue taxes.

HELD:
No.
Under Articles 2241 No. 1, 2242 No. 1, and
2246-2249 of the Civil Code, this tax claim must
be given preference over any other claim of any
other creditor, in respect of any and all
properties of the insolvent.

Article 110 of the Labor Code does not purport

to create a lien in favor of workers or employees
for unpaid wages either upon all of the
properties or upon any particular property
owned by their employer.

Art. 110 of the Labor Code applies only in case

of bankruptcy or judicial liquidation of the
employer. This case does not involve the
liquidation of the employers business.
CIR vs. PASCOR
309 SCRA 402
GR No. 128315 June 29, 1999
"An assessment is not necessary before a
criminal charge can be filed."

FACTS: The BIR examined the books of account

of Pascor Realty and Devt Corp for years 1986,
1987 and 1988, from which a tax liability of
10.5 Million Pesos was found. Based on the
recommendations of the examiners, the CIR
filed an information with the DOJ for tax evasion

against the officers of Pascor. Upon receipt of

the subpoena, the latter filed an urgent request
for reconsideration/reinvestigation with the CIR,
which was immediately denied upon the ground
that no formal assessment has yet been issued
by the Commisioner. Pascor elevated the CIR's
decision to the CTA on a petition for review. The
CIR filed a Motion to Dismiss on the ground of
lack of jurisdiction of CTA as there was no
formal assessment made against the
respondents. The CTA dismissed the motion,
hence this petition.

ISSUE: Is a formal assessment necessary in the

filing of a criminal complaint?

HELD: No. Section 222 of the NIRC states that

an assessment is not necessary before a
criminal charge can be filed. This is the general
rule. Private respondents failed to show that
they are entitled to an exception. Moreover, the
criminal charge need only be supported by a
prima facie showing of failure to file a required
return. This fact need not be proven by an
assessment.
The issuance of an assessment must be
distinguished from the filing of a complaint.
Before an assessment is issued, there is, by
practice, a pre-assessment notice sent to the
taxpayer. The taxpayer is then given a chance
to submit position papers and documents to
prove that the assessment is unwarranted. If
the commissioner is unsatisfied, an assessment
signed by him or her is then sent to the
taxpayer informing the latter specifically and
clearly that an assessment has been made
against him or her. In contrast, the criminal
charge need not go through all these. The
criminal charge is filed directly with the DOJ.
Thereafter, the taxpayer is notified that a

criminal case had been filed against him, not

that the commissioner has issued an
assessment. It must be stressed that a criminal
complaint is instituted not to demand payment,
but to penalize the taxpayer for violation of the
Tax Code.

UNGAB vs. CUSI

97 SCRA 877
GR No. L-41919-24 May 30, 1980
"An assessment of a deficiency is not necessary
to a criminal prosecution for wilful attempt to
defeat and evade the income tax."

FACTS: The BIR filed six criminal charges

against Quirico Ungab, a banana saplings
producer, for allegedly evading payment of
taxes and other violations of the NIRC. Ungab,
subsequently filed a motion to quash on the
ground that (1) the information are null and
void for want of authority on the part of the
State Prosecutor to initiate and prosecute the
said cases; and (2)that the trial court has no
jurisdiction to take cognizance of the case in
view of his pending protest against the
assessment made by the BIR examiner. The trial
court denied the motion prompting the
petitioner to file a petition for certiorari and
prohibition with preliminary injunction and
restraining order to annul and set aside the
information filed.

ISSUE: Is the contention that the criminal

prosecution is premature since the CIR has not
yet resolved the protest against the tax
assessment tenable?

HELD: No. The contention is without merit. What

is involved here is not the collection of taxes
where the assessment of the Commissioner of
Internal Revenue may be reviewed by the Court
of Tax Appeals, but a criminal prosecution for
violations of the National Internal Revenue Code
which is within the cognizance of courts of first
instance. While there can be no civil action to
enforce collection before the assessment
procedures provided in the Code have been
followed, there is no requirement for the precise
computation and assessment of the tax before
there can be a criminal prosecution under the
Code.
An assessment of a deficiency is not
necessary to a criminal prosecution for wilful
attempt to defeat and evade the income tax. A
crime is complete when the violator has
knowingly and wilfully filed a fraudulent return
with intent to evade and defeat the tax. The
perpetration of the crime is grounded upon
knowledge on the part of the taxpayer that he
has made an inaccurate return, and the
government's failure to discover the error and
promptly to assess has no connections with the
commission of the crime.