Case-Digests Tax

TAXATION I - CASE DIGESTS
First Semester, SY 2011-2012
Case Digests
in
Taxation Law
Submitted By:
Antonio, Evangeline B.
Caoayan, Billy Bryan
Dumaguing, Karina Mara
Esguerra, Manilyn
Vinluan, Veronica
Topic: Power to destroy vis--vis Power to Build
SISON vs. ANCHETA
G.R. No. L-59431
July 25, 1984
_Saint Louis University School of Law_

FACTS:
The challenged posed is a suit for declaratory relief or prohibition on the validity of
Section 1 of Batas PambansaBlg. 135. The assailed provision further amends Sec. 21 of the
NIRC of 1977, which provides for the rate tax on residents or citizens on (a) taxable
compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d)
interests from bank deposits and yield or any other monetary benefit from deposit substitutes
and from trust fund and similar arrangements, (e) dividends and share from individual partner
in the net profits of taxable partnership, (f) adjusted gross income.
Sison, as taxpayer, alleged that its provision (Section 1) unduly discriminated against him
by the imposition of higher rates upon his income as a professional, that it amounts to class
legislation, and that it transgresses against the equal protection and due process clauses of the
Constitution as well as the rule requiring uniformity in taxation.
ISSUE:
Whether BP 135 violates the due process and equal protection clauses, and the rule on
uniformity in taxation?
RULING:
There is a need for proof of such persuasive character as would lead to a conclusion that
there was a violation of the due process and equal protection clauses. Absent such showing, the
presumption of validity must prevail. Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate. The taxing power
has the authority to make reasonable and natural classifications for purposes of taxation. Where
the differentiation conforms to the practical dictates of justice and equity, similar to the
standards of equal protection, it is not discriminatory within the meaning of the clause and is
therefore uniform. Taxpayers may be classified into different categories, such as recipients of
compensation income as against professionals. Recipients of compensation income are not
entitled to make deductions for income tax purposes as there is no practically no overhead
expense, while professionals and businessmen have no uniform costs or expenses necessary to
produce their income. There is ample justification to adopt the gross system of income taxation
to compensation income, while continuing the system of net income taxation as regards
professional and business income.
Topic: Power to destroy vis--vis Power to Build

PHILIPPINE HEALTH CARE PROVIDERS VS. CIR
G.R. NO. 167330
SEPTEMBER 18, 2009
FACTS:
Philippine Health Care Providers, Inc. is a domestic corporation whose primary purpose is
"[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care of the sick and disabled persons
enrolled in the health care plan and to provide for the administrative, legal, and financial
responsibilities of the organization." Individuals enrolled in its health care programs pay an

annual membership fee and are entitled to various preventive, diagnostic and curative medical
services provided by its duly licensed physicians, specialists and other professional technical
staff participating in the group practice health delivery system at a hospital or clinic owned,
operated or accredited by it.
January 27, 2000: Commissioner of Internal Revenue (CIR) sent petitioner a formal demand
letter and the corresponding assessment notices demanding the payment of deficiency taxes,
including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of
P224,702,641.18.
ISSUE:
1. W/N the Philippine Health Care Providers, Inc (HMO) was engaged in the business of
insurance during the pertinent taxable years
HELD:
NO
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what
constitutes "doing an insurance business" or "transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation
and not as merely incidental to any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the meaning of this
Code;
d) doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this Code.
No profit is derived from the making of insurance contracts, agreements or transactions or

that no separate or direct consideration is received therefore, shall not be deemed conclusive to
show that the making thereof does not constitute the doing or transacting of an insurance
business

Topic: Importance of Taxation & the Lifeblood Doctrine

COMMISSIONER vs. ALGUE
G.R. no. L-28890
February 17, 1988
FACTS:
The Philippine Sugar Estate Development Company (PSEDC) appointed Algue Inc. as its
agent, authorizing it to sell its land, factories, and oil manufacturing process. The Vegetable Oil
Investment Corporation (VOICP) purchased PSEDC properties. For the sale, Algue received a
commission of P125,000 and it was from this commission that it paid Guevara, et. al. organizers
of the VOICP, P75,000 in promotional fees. In 1965, Algue received an assessment from the
Commissioner of Internal Revenue in the amount of P83,183.85 as delinquency income tax for
years 1958amd 1959. Algue filed a protest or request for reconsideration which was not acted
upon by the Bureau of Internal Revenue(BIR). The counsel for Algue had to accept the warrant
of distrait and levy. Algue, however, filed a petition for review with the Court of Tax Appeals.
ISSUE:
Whether the assessment was reasonable?
RULING:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. Every person who is able to pay must contribute his share in the running of the
government. The Government, for his part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that is an arbitrary method of exaction by those in the seat of power.

Tax collection, however, should be made in accordance with law as any arbitrariness will
negate the very reason for government itself. For all the awesome power of the tax collector, he
may still be stopped in his tracks if the taxpayer can demonstrate that the law has not been
observed. Herein, the claimed deduction (pursuant to Section 30 [a] [1] of the Tax Code and
Section 70 [1] of Revenue Regulation 2: as to compensation for personal services) had been
legitimately by Algue Inc. It has further proven that the payment of fees was reasonable and
necessary in light of the efforts exerted by the payees in inducing investors (in VOICP) to
involve themselves in an experimental enterprise or a business requiring millions of pesos. The
assessment was not reasonable.
Topic: Importance of Taxation & the Lifeblood Doctrine

NAPOCOR vs. CITY OF CABANATUAN
G.R. No. 149110, April 9, 2003
Facts:
NPC, a GOCC, created under CA 120 as amended, selling electric power, was assessed by
the City of Cabanatuan for franchise tax pursuant to sec. 37 of Ordinance No. 165-92. NPC
refused to pay the tax assessment on the grounds that the City of Cabanatuan has no authority
to impose tax on government entities and also that it is exempted as a non-profitorganization.
For its part, the City government alleged that NPCs exemption from local taxes has been
repealed by sec. 193 of RA 7160.
Issue:
Whether NPC is liable to pay an annual franchise tax to the City government
Held:
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.
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.
NPC fulfills both requisites. 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
NationalGovernment. 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 petitioner's 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 petitioner's 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."
It is worth mentioning that section 192 of the LGC empowers the LGUs, through
ordinances duly approved, to grant tax exemptions, initiatives or reliefs.77 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 governmentclearly 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,
"theoriginal reasons for the withdrawal of tax exemption privileges granted to governmentowned 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
forgovernment entities to share in the requirements of development, fiscal or otherwise,
by paying taxes or other charges due from them.

Topic: Objectives of Taxation: Regulation

PHILIPPINE AIRLINES vs. EDU
G.R. No. L- 41383
August 15, 1988
FACTS:
PAL is a corporation organized and existing under the laws of the Philippines and engaged
in the air transportation business under a legislative franchise, Act No. 42739, as amended by
Republic Act Nos. 25) and 269.1 Under its franchise, PAL is exempt from the payment of taxes.
On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has,
since 1956, not been paying motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation
requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's motor
vehicles unless the amounts imposed under Republic Act 4136 were paid. The appellant thus
paid, under protest, the amount of P19, 529.75 as registration fees of its motor vehicles.
PAL demanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97
Phil. 212 [1951]) where it was held that motor vehicle registration fees are in reality taxes from
the payment of which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle
registration fees are regulatory exceptional and not revenue measures and, therefore, do not
come within the exemption granted to PAL under its franchise. Hence, PAL filed the complaint
against Land Transportation Commission after paying under protest.
ISSUE:
Whether or not motor vehicle registration is considered tax?
RULING:
Yes, motor vehicle registration fees are now considered revenue or tax measures. This
case reversed the doctrine in the Philippine Rabbit Bus Lines to the effect that registration fees
are regulatory exactions and not revenues. Revised Motor Vehicle Law itself now regards those
fees as taxes, for it provides that "no other taxes or fees than those prescribed in this Act shall
be imposed," thus implying that the charges therein imposedthough called feesare of the
category of taxes. The provision is contained in section 70, of subsection (b), of the law, as
amended by section 17 of Republic Act 587, which reads:
Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for the
registration or operation or on the ownership of any motor vehicle, or for the exercise of the
profession of chauffeur, by any municipal corporation, the provisions of any city charter to the
contrary notwithstanding: Provided, however, That any provincial board, city or municipal
council or board, or other competent authority may exact and collect such reasonable and
equitable toll fees for the use of such bridges and ferries, within their respective jurisdiction, as
may be authorized and approved by the Secretary of Public Works and Communications, and
also for the use of such public roads, as may be authorized by the President of the Philippines
upon the recommendation of the Secretary of Public Works and Communications, but in none of

these cases, shall any toll fee." be charged or collected until and unless the approved schedule
of tolls shall have been posted levied, in a conspicuous place at such toll station.
Fees may be properly regarded as taxes even though they also serve as an instrument of
regulation. It is possible for an exaction to be both tax and regulation. License fees are charges
looked to as a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S.
506) This is true, for example, of automobile license fees. In such case, the fees may properly
be regarded as taxes even though they also serve as an instrument of regulation. If the purpose
is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the
exaction is properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on
Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.)
These exactions are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801,
4811, 4851, and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on tobacco and
alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on
Taxation, 2nd Edition, 591-593).
Indeed, taxation may be made the implement of the state's police power. If the purpose is
primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle registration fees.
The conclusions become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the
Calalang case. The same provision appears as Section 591-593) in the Land Transportation
code. It is patent there from that the legislators had in mind a regulatory tax as the law refers to
the imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee."
Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax,
Section 591-593) speaks of "taxes." or fees ... for the registration or operation or on the
ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the
intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents,
speak of an "additional" tax," where the law could have referred to an original tax and not one
in addition to the tax already imposed on the registration, operation, or ownership of a motor
vehicle under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a
regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136
also speaks of other "fees," such as the special permit fees for certain types of motor vehicles
(Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be
understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are
not mentioned by Sec. 591-593 of the Code as taxes like the motor vehicle registration fee and
chauffers' license fee. Such fees are to go into the expenditures of the Land Transportation
Commission.
It is quite apparent that vehicle registration fees were originally simple exceptional intended
only for rigidly purposes in the exercise of the State's police powers. Over the years, however,
as vehicular traffic exploded in number and motor vehicles became absolute necessities without
which modem life as we know it would stand still, Congress found the registration of vehicles a
very convenient way of raising much needed revenues. A registration payment as fees, their
nature has become that of "taxes."
In pursuant to the Land Transportation and Traffic Code, taxes can be intended for
additional revenues of government even if one fifth or less of the amount collected is set aside
for the operating expenses of the agency administering the program.

Topic: Objectives of Taxation: Regulation

TIO vs. VIDEOGRAM REGULATORY BOARD
151 S
208
FACTS:
Petitioner, on his own behalf and purportedly on behalf of other videogram operators
adversely affected, assailed the constitutionality of Presidential Decree No. 1987 entitled An
Act Creating the Videogram Regulatory Board with broad powers to regulate and supervise the
videogram industry.
Petitioner questioned the constitutionality of the decree on the grounds that: (a) Section
10 thereof, which imposes a tax of 30% on the gross receipts payable to the local government is
a rider and the same is not germane to the subject matter thereof; (b) the tax imposed is harsh,
confiscatory, oppressive and/or in unlawful restraint to trade in violation of the due process
clause
of
the
Constitution;
(c)
there
is
undue
delegation
of
power.
ISSUE:
Whether
or
not
the
assailed
Decree
RULING:
is
unconstitutional?
TAXATION I - CASE DIGESTS 10

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 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.
On the other hand, the levy of the 30% tax is for 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 the other.
It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that inequities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation. Taxation has been made the
implement of the states police power.
With regard to the issue that the Decree contains an undue delegation of legislative
power, there is really no delegation of the power to legislate but merely a conferment functions
of authority or discretion as to its execution, enforcement, and implementation.
It is important to note that only congressional power or competence, not the wisdom of
the action taken, maybe the basis for declaring a statute invalid. The principle of separation of
powers has in the main wisely allocated the respective authority to each department and
confined its jurisdiction to such a sphere. The attack on the validity of the challenged provision
likewise insofar as there may be objections, even if valid and cogent on its wisdom cannot be
sustained.

Topic: Concept of Allowable Deductions: Deduction vs. Tax Credit

COMMISSIONER OF INTERNAL REVENUE vs.
CENTRAL LUZON DRUG CORPORATION
G.R. No. 159647
April 15, 2005
FACTS:
Respondent is a domestic corporation primarily engaged in retailing of medicines and
other pharmaceutical products. Respondent granted twenty (20%) percent sales discount to
qualified senior citizens on their purchases of medicines pursuant to Republic Act No. 7432 and
its Implementing Rules and Regulations. For the said period, the amount allegedly representing
the 20% sales discount granted by respondent to qualified senior citizens totaled P904,769.00.
On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996
declaring therein that it incurred net losses from its operations.
On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the
amount of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to
qualified senior citizens in compliance with R.A. 7432. Unable to obtain affirmative response
from petitioner, respondent elevated its claim to the Court of Tax Appeals. The CTA, in its
assailed resolution, ordered herein petitioner to issue a Tax Credit Certificate in favor of
respondent. On appeal, the CA affirmed in toto the Resolution of the Court of Tax Appeals.
ISSUE:
Whether respondent, despite incurring a net loss, may still claim the 20 percent sales
discount as a tax credit?
RULING:
Such credit can be claimed, even though an establishment operates at a loss.
Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability
before the tax credit can be applied. Without that liability, any tax credit application will be
useless. There will be no reason for deducting the latter when there is, to begin with, no
existing obligation to the government. However, as will be presented shortly, the existence of a

tax credit or its grant by law is not the same as the availment or use of such credit. While the
grant is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due from, a business
establishment, there will obviously be no tax liability against which any tax credit can be
applied. For the establishment to choose the immediate availment of a tax credit will be
premature and impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432,
Congress has granted without conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing ventures, since there
is no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet
callow stroke of an administrative pen, simply because no reduction of taxes can instantly be
effected. By its nature, the tax credit may still be deducted from a future, not a present, tax
liability, without which it does not have any use. In the meantime, it need not move. But it
breathes.

Topic: Inherent Limitations: Public Purpose

PASCUAL vs. SECRETARY OF PUBLIC WORKS
110 SCRA
331
FACTS:
Petitioner WenceslaoPascual, as Provincial Governor of Rizal, instituted this action for
declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled "An Act
Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section 1-C (a)
thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair, extension
and improvement" of Pasig feeder road terminals. The time of the passage and approval of said
Act, the aforementioned feeder roads were "nothing but projected and planned subdivision
roads, not yet constructed, . . . within the Antonio Subdivision . . . situated at . . . Pasig, Rizal",
which projected feeder roads "do not connect any government property or any important
premises to the main highway"; that the aforementioned Antonio Subdivision (as well as the
lands on which said feeder roads were to be construed) were private properties of respondent
Jose C. Zulueta, who, at the time of the passage and approval of said Act, was a member of the
Senate of the Philippines.
Respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering to
donate said projected feeder roads to the municipality of Pasig, Rizal; the offer was accepted by
the council, subject to the condition "that the donor would submit a plan of the said roads and
agree to change the names of two of them"; that no deed of donation in favor of the
municipality of Pasig was, however, executed.
ISSUE:
Whether or not the contested item of Republic Act No. 920 be declared null and void.
Whether or not the alleged deed of donation of the feeder roads in question be "declared
unconstitutional and, therefor, illegal?
RULING:
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 rule is set forth in Corpus JurisSecundum in the following language: In accordance
with the rule that the taxing power must be exercised for public purposes only, discussed supra
sec. 14, money raised by taxation can be expended only for public purposes and not for the
advantage of private individuals. Generally, under the express or implied provisions of the
constitution, public funds may be used only for public purpose. The right of the legislature to
appropriate funds is correlative with its right to tax, and, under constitutional provisions against
taxation except for public purposes and prohibiting the collection of a tax for one purpose and

the devotion thereof to another purpose, no appropriation of state funds can be made for other
than for a public purpose.
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.
The validity of a statute depends upon the powers of Congress at the time of its passage
or approval, not upon events occurring, or acts performed, subsequently thereto, unless the
latter consists of an amendment of the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation for
the projected feeder roads in question, the legality thereof depended upon whether said roads
were public or private property when the bill, which, latter on, became Republic Act 920, was
passed by Congress, or, when said bill was approved by the President and the disbursement of
said sum became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the
land on which the projected feeder roads were to be constructed belonged then to respondent
Zulueta, the result is that said appropriation sought a private purpose, and hence, was null and
void. The donation to the Government, over five (5) months after the approval and effectivity of
said Act, made, according to the petition, for the purpose of giving a "semblance of legality", or
legalizing, the appropriation in question, did not cure its aforementioned basic defect.
Consequently, a judicial nullification of said donation need not precede the declaration of
unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to
exceptions. For instance, the creditors of a party to an illegal contract may, under the conditions
set forth in Article 1177 of said Code, exercise the rights and actions of the latter, except only
those which are inherent in his person, including therefore, his right to the annulment of said
contract, even though such creditors are not affected by the same, except indirectly, in the
manner indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be contested only by one who will
sustain a direct injury in consequence of its enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws providing for the disbursement of public funds,
upon the theory that "the expenditure of public funds by an officer of the State for the purpose
of administering an unconstitutional act constitutes a misapplication of such funds," which may
be enjoined at the request of a taxpayer.Although there are some decisions to the contrary, the
prevailing view in the United States is stated in the American Jurisprudence as follows:
In the determination of the degree of interest essential to give the requisite standing to
attack the constitutionality of a statute, the general rule is that not only persons individually
affected, but also taxpayers, have sufficient interest in preventing the illegal expenditure of
moneys raised by taxation and may therefore question the constitutionality of statutes requiring
expenditure of public moneys.
Hence, it is our considered opinion that the circumstances surrounding this case
sufficiently justify petitioners action in contesting the appropriation and donation in question;
that this action should not have been dismissed by the lower court; and that the writ of
preliminary injunction should have been maintained.

Topic: Inherent Limitation: Public Purpose

LUTZ vs. ARANETA
G.R. No. L-7859 December 22, 1955
FACTS:
Promulgated in 1940, the law in question opens (section 1) with a declaration of
emergency, due to the threat to our industry by the imminent imposition of export taxes upon
sugar as provided in the Tydings-McDuffie Act, and the "eventual loss of its preferential position
in the United States market"; wherefore, the national policy was expressed "to obtain a
readjustment of the benefits derived from the sugar industry by the component elements
thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality of the loss of
its preferential position in the United States market and the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactures; while section
3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and
ceded to others for a consideration, on lease or otherwise.

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of
Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of
P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop years 19481949 and 1949-1950; alleging that such tax is unconstitutional and void, being levied for the aid
and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose
for which a tax may be constitutionally levied. The action having been dismissed by the Court of
First Instance, the plaintiffs appealed the case directly to this Court
ISSUE:
Whether or not taxes imposed by Commonwealth Act No. 567, otherwise known as the
Sugar Adjustment Act is legal?
RULING:
As the protection and promotion of the sugar industry is a matter of public concern the
Legislature may determine within reasonable bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative must be allowed full play, subject only to the
test of reasonableness; and it is not contended that the means provided in section 6 of
Commonwealth Act No. 567 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.
It is inherent in the power to tax that a state be free to select the subjects of taxation, and
it has been repeatedly held that "inequalities which result from a singling out of one particular
class for taxation or exemption infringe no constitutional limitation

Topic: Inherent Limitations: Public Purpose

GOMEZ vs. PALOMAR
G.R. No. L-23645
October 29, 1968
FACTS:
On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the post office
in San Fernando, Pampanga. Because this letter, addressed to a certain Agustin Aquino of 1014
Dagohoy Street, Singalong, Manila did not bear the special anti-TB stamp required by the
statute, it was returned to the petitioner.
In view of this development, the petitioner brought suit for declaratory relief in the Court
of First Instance of Pampanga, to test the constitutionality of the statute, as well as the
implementing administrative orders issued, contending that it violates the equal protection
clause of the Constitution as well as the rule of uniformity and equality of taxation.
The lower court declared the statute and the orders unconstitutional.
This appeal puts in issue the constitutionality of Republic Act 1635,as amended by
Republic Act 2631,2 which provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall order
for the period from August nineteen to September thirty every year the printing and issue of
semi-postal stamps of different denominations with face value showing the regular postage
charge plus the additional amount of five centavos for the said purpose, and during the said
period, no mail matter shall be accepted in the mails unless it bears such semi-postal stamps:
Provided, That no such additional charge of five centavos shall be imposed on newspapers. The
additional proceeds realized from the sale of the semi-postal stamps shall constitute a special
fund and be deposited with the National Treasury to be expended by the Philippine Tuberculosis
Society in carrying out its noble work to prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter issued four
(4) administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958),
and 10 (July 15, 1960). All these administrative orders were issued with the approval of the
respondent Secretary of Public Works and Communications.
ISSUE:

Whether or not RA 1635 as amended by RA 2631 and the four Administrative orders
violates the equal protection clause of the Constitution as well as the rule of uniformity and
equality of taxation?
RULING:
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 is based on considerations of administrative convenience. For it is now a
settled principle of law that consideration of practical administrative convenience and cost in
the administration of tax laws afford adequate ground for imposing a tax on a well recognized
and defined class. In the case of the anti-TB stamps, undoubtedly, the single most important
and influential consideration that led the legislature to select mail users as subjects of the tax is
the relative ease and convenience of collecting the tax through the post offices. The small
amount of five centavos does not justify the great expense and inconvenience of collecting
through the regular means of collection. On the other hand, by placing the duty of collection on
postal authorities the tax was made almost self-enforcing, with as little cost and as little
inconvenience as possible.
The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient answer
to say that the only benefit to which the taxpayer is constitutionally entitled is that derived from
his enjoyment of the privileges of living in an organized society, established and safeguarded by
the devotion of taxes to public purposes. Any other view would preclude the levying of taxes
except as they are used to compensate for the burden on those who pay them and would
involve the abandonment of the most fundamental principle of government that it exists
primarily to provide for the common good.
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat
rate rather than a graduated tax. A tax need not be measured by the weight of the mail or the
extent of the service rendered. We have said that considerations of administrative convenience
and cost afford an adequate ground for classification. The same considerations may induce the
legislature to impose a flat tax which in effect is a charge for the transaction, operating equally
on all persons within the class regardless of the amount involved.

Topic: Inherent Limitations: Inherently Legislative

PEPSI-COLA vs. MUNICIPALITY OF TANAUAN
G.R No. L-31156
February 27, 1976
FACTS:
Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a complaint for the
court to declare Section 2 of Republic Act No. 2264 otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances
Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void.
The parties entered into a Stipulation of Facts, the material portions of which state that,
first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the
production tax rates imposed therein are practically the same, and second, that the acting
Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the PepsiCola Bottling Plant in said municipality, sought to enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of 1962. Municipal Ordinance No. 23, of Tanauan,
Leyte, levies and collects "from soft drinks producers and manufacturers a tai of one-sixteenth
(1/16) of a centavo for every bottle of soft drink corked." For the purpose of computing the
taxes due, the person, firm, company or corporation producing soft drinks shall submit to the
Municipal Treasurer a monthly report, of the total number of bottles produced and corked during
the month.
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal
production tax.'
ISSUE:
Whether or not the Municipal Ordinances are valid?
RULING:
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's
pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited to the exact measure of that which is exercised
by itself. When it is said that the taxing power may be delegated to municipalities and the like,
it is meant that there may be delegated such measure of power to impose and collect taxes as
the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects
which for reasons of public policy the State has not deemed wise to tax for more general
purposes.
Due process is usually violated where the tax imposed is for a private as distinguished
from a public purpose; a tax is imposed on property outside the State, i.e., extraterritorial
taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a
tax does not violate the due process clause, as applied to a particular taxpayer, although the
purpose of the tax will result in an injury rather than a benefit to such taxpayer. Due process
does not require that the property subject to the tax or the amount of tax to be raised should be
determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the
manner in which it shall be apportioned are generally not necessary to due process of law.

Topic: Inherent Limitations: Coverage, Object, Nature, Extent, Situs

PEPSI-COLA vs. CITY OF BUTUAN
G.R No. L-22814
August 28, 1968
FACTS:
Pepsis warehouse in the City of Butuan serves as a storage for its products the "PepsiCola" soft drinks for sale to customers in the City of Butuan and all the municipalities in the
Province of Agusan. These "Pepsi-Cola Cola" soft drinks are bottled in Cebu City and shipped to
the Butuan City warehouse of plaintiff for distribution and sale in the City of Butuan and all
municipalities of Agusan. .

On August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was
subsequently amended by Ordinance No. 122. That Ordinance No. 110 as amended, imposes a
tax on any person, association, etc., of P0.10 per case of 24 bottles of Pepsi-Cola and the
plaintiff paid under protest the amount of P4,926.63 from August 16 to December 31, 1960 and
the amount of P9,250.40 from January 1 to July 30, 1961.
The plaintiff then filed the foregoing complaint for the recovery of the total amount of
P14,177.03 paid under protest and those that if may later on pay until the termination of this
case on the ground that Ordinance No. 110 as amended of the City of Butuan is illegal, that the
tax imposed is excessive and that it is unconstitutional.
ISSUE:
Whether or not Ordinance No. 122 is unconstitutional?
RULING:
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 all those who belong to the same class.
These conditions are not fully met by the ordinance in question. Indeed, if its purpose was
merely to levy a burden upon the sale of soft drinks or carbonated beverages, there is no
reason why sales thereof by sealers other than agents or consignees of producers or merchants
established outside the City of Butuan should be exempt from the tax.
Topic: Tax Exemption of the Government

LIGHT RAIL TRANSIT AUTHORITY vs. CENTRAL BOARD OF ASSESSMENT
GR NO. 127316 October 12, 2000
FACTS:
The LRTA is a government-owned and controlled corporation created and organized under
Executive Order No. 603, dated July 12, 1980 primarily responsible for the construction,
operation, maintenance and/or lease of light rail transit system in the Philippines, giving due
regard to the reasonable requirements of the public transportation of the country'. By reason of
Executive Order 603, LRTA acquired real properties constructed structural improvements, such
as buildings, carriageways, passenger terminal stations, and installed various kinds of
machinery and equipment and facilities for the purpose of its operations;
For an effective maintenance, operation and management, it entered into a Contract of
Management with the Meralco Transit Organization in which the latter undertook to manage,
operate and maintain the Light Rail Transit System owned by the LRTA subject to the specific
stipulations contained in said agreement, including payments of a management fee and real

property taxes.That it commenced its operations in 1984, and that sometime that year,
Respondent-Appellee City Assessor of Manila assessed the real properties of petitioner,
consisting of lands, buildings, carriageways and passenger terminal stations, machinery and
equipment which he considered real property under the Real Property Tax Code, to commence
with the year 1985;That petitioner paid its real property taxes on all its real property holdings,
except the carriageways and passenger terminal stations including the land where it is
constructed on the ground that the same are not real properties under the Real Property Tax
Code, and if the same are real property, these are for public use/purpose, therefore, exempt
from realty taxation, which claim was denied by the Respondent-Appellee City Assessor of
Manila; and Petitioner, aggrieved by the action of the Respondent-Appellee City Assessor, filed
an appeal with the Local Board of Assessment Appeals of Manila. Appellee, herein, after due
hearing, in its resolution dated June 26, 1992, denied petitioner's appeal, and declared that
carriageways and passenger terminal stations are improvements, therefore, are real property
under the Code, and not exempt from the payment of real property tax.
ISSUE:
Whether or not petitioner is exempt from payment of real property taxes?
RULING:
In any event, there is another legal justification for upholding the assailed CA Decision.
Under the Real Property Tax Code, real property "owned by the Republic of the Philippines or
any of its political subdivisions and any government-owned or controlled corporation so exempt
by its charter, provided, however, that this exemption shall not apply to real property of the
abovenamed entities the beneficial use of which has been granted, for consideration or
otherwise, to a taxable person."
Executive Order No. 603, the charter of petitioner, does not provide for any real estate tax
exemption in its favor. Its exemption is limited to direct and indirect taxes, duties or fees in
connection with the importation of equipment not locally available, as the following provision
shows:
"ARTICLE 4
TAX AND DUTY EXEMPTIONS
Sec. 8.Equipment, Machineries, Spare Parts and Other Accessories and Materials. - The
importation of equipment, machineries, spare parts, accessories and other materials, including
supplies and services, used directly in the operations of the Light Rails Transit System, not
obtainable locally on favorable terms, out of any funds of the authority including, as stated in
Section 7 above, proceeds from foreign loans credits or indebtedness, shall likewise be
exempted from all direct and indirect taxes, customs duties, fees, imposts, tariff duties,
compensating taxes, wharfage fees and other charges and restrictions, the provisions of
existing laws to the contrary notwithstanding."
Even granting that the national government indeed owns the carriageways and terminal
stations, the exemption would not apply because their beneficial use has been granted to
petitioner, a taxable entity.
Taxation is the rule and exemption is the exception. Any claim for tax exemption is strictly
construed against the claimant. LRTA has not shown its eligibility for exemption; hence, it is
subject to the tax.


MACTAN CEBU INTERNATIONAL AIRPORT vs. MARCOS
G.R. No. 120082
September 11, 1996
FACTS:
MCIAA was created by virtue of Republic Act 6958. Since the time of its creation, MCIAA
enjoyed the privilege of exemption from payment of realty taxes in accordance with Section 14
of its Charter. However on 11 October 1994, the Office of the Treasurer of Cebu, demanded for
the payment of realty taxes on several parcels of land belonging to the petitioner. Petitioner
objected to such demand for payment as baseless and unjustified. It also asserted that it is an
instrumentality of the government performing a governmental functions, which puts limitations
on the taxing powers of local government units. It nonetheless stands in the same footing as an
agency or instrumentality of the national government by the very nature of its powers and
functions. The City refused to cancel and set aside petitioners realty tax account, insisting that
the MCIAA is a government controlled corporation whose tax exemption privilege has been
withdrawn by virtue of Sections 193 and 234 of the Local Government Code, and not an
instrumentality of the government but merely a government owned corporation performing
proprietary functions. MCIAA paid its tax account under protest when City is about to issue a
warrant of levy against the MCIAAs properties.
On 29 December 1994, MCIAA filed a Petition of Declaratory Relief with the Cebu Regional
Trial Court contending that the taxing power of local government units do not extend to the levy
of taxes or fees on an instrumentality of the national government. It contends that by the
nature of its powers and functions, it has the footing of an agency or instrumentality of the
national government; which claim the City rejects. On 22 March 1995, the trial court dismissed
the petition, citing that close reading of the LGC provides the express cancellation and
withdrawal of tax exemptions of Government Owned and Controlled Corporations. MCIAAs
motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the
petitioner filed the instant petition.
ISSUE:
Whether the MCIAA is exempted from realty taxes?

RULING:
Tax statutes are construed strictly against the government and liberally in favor of the
taxpayer. But since taxes are paid for civilized society, or are the lifeblood of the nation, the law
frowns against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimijuris against the taxpayer and liberally in favor of the taxing authority. A
claim of exemption from tax payments must be clearly shown and based on language in the law
too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the
exception. However, if the grantee of the exemption is a political subdivision or instrumentality,
the rigid rule of construction does not apply because the practical effect of the exemption is
merely to reduce the amount of money that has to be handled by the government in the course
of its operations. Further, since taxation is the rule and exemption therefrom the exception, the
exemption may be withdrawn at the pleasure of the taxing authority. The only exception to this
rule is where the exemption was granted to private parties based on material consideration of a
mutual nature, which then becomes contractual and is thus covered by the non-impairment
clause of the Constitution.
MCIAA is a taxable person under its Charter (RA 6958), and was only exempted from the
payment of real property taxes. The grant of the privilege only in respect of this tax is
conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except
real property tax. Since Republic Act 7160 or the Local Government Code expressly provides
that All general and special laws, acts, city charters, decrees, executive orders, proclamations
and administrative regulations, or part of parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified accordingly. With that repealing clause
in the LGC, the tax exemption provided for in RA 6958 had been expressly repealed by the
provisions of the LGC. Therefore, MCIAA has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.


MANILA INTERNATIONAL AIRPORT AUTHORIT vs. CITY OF PARAAQUE
G.R. No. 155650
July 20, 2006
FACTS:
Petitioner Manila International Airport Authority operates the Ninoy Aquino International
Airport Complex in Paraaque City under Executive Order No. 903, issued on 21 July 1983 by
then President Ferdinand E. Marcos. As operator of the international airport, MIAA administers
the land, improvements and equipment within the NAIA Complex, including the runways and
buildings.
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued
Opinion No. 061. The OGCC opined that the Local Government Code of 1991 withdrew the
exemption from real estate tax granted to MIAA under Section 21 of the MIAA Charter.
On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy
and warrants of levy on the Airport Lands and Buildings threatened to sell at public auction the
Airport Lands and Buildings should MIAA fail to pay the real estate tax delinquency.
On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition
and also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section
234 of the Local Government Code because the Airport Lands and Buildings are owned by the
Republic. To justify the exemption, MIAA invokes the principle that the government cannot tax
itself. MIAA points out that the reason for tax exemption of public property is that its taxation
would not inure to any public advantage, since in such a case the tax debtor is also the tax
creditor.
ISSUE:
Whether the Airport Lands and Buildings of MIAA are exempt from real estate tax under
existing laws?
RULING:
MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local
governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of
the National Government and thus exempt from local taxation. Second, the real properties of
MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. MIAA is a government instrumentality vested with
corporate powers to perform efficiently its governmental functions. MIAA is like any other
government instrumentality, the only difference is that MIAA is vested with corporate powers.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the national
government instrumentality.
There is also no reason for local governments to tax national government
instrumentalities for rendering essential public services to inhabitants of local governments. The
only exception is when the legislature clearly intended to tax government instrumentalities for

the delivery of essential public services for sound and compelling policy considerations. There
must be express language in the law empowering local governments to tax national
government instrumentalities. Any doubt whether such power exists is resolved against local
governments.
The Airport Lands and Buildings are devoted to public use because they are used by the
public for international and domestic travel and transportation. The fact that the MIAA collects
terminal fees and other charges from the public does not remove the character of the Airport
Lands and Buildings as properties for public use. The operation by the government of a tollway
does not change the character of the road as one for public use. Someone must pay for the
maintenance of the road, either the public indirectly through the taxes they pay the
government, or only those among the public who actually use the road through the toll fees
they pay upon using the road. The tollway system is even a more efficient and equitable
manner of taxing the public for the maintenance of public roads.

MIAAvs.COURT OF APPEALS, CITY OF PARAAQUE
G.R. No. 155650
July 20, 2006
Facts:
On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy
and warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Paraaque
threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the
real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061. On 9
August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The OGCC

pointed out that Section 206 of the Local Government Code requires persons exempt from real
estate tax to show proof of exemption. MIAA also points out that Section 21 of the MIAA Charter
specifically exempts MIAA from the payment of real estate tax. MIAA insists that it is also
exempt from real estate tax under Section 234 of the Local Government Code because the
Airport Lands and Buildings are owned by the Republic. To justify the exemption, MIAA invokes
the principle that the government cannot tax itself. MIAA points out that the reason for tax
exemption of public property is that its taxation would not inure to any public advantage, since
in such a case the tax debtor is also the tax creditor. Respondents invoke Section 193 of the
Local Government Code, which expressly withdrew the tax exemption privileges of
"government-owned and-controlled corporations" upon the effectivity of the Local
Government Code. Respondents also argue that a basic rule of statutory construction is that the
express mention of one person, thing, or act excludes all others. An international airport is not
among the exceptions mentioned in Section 193 of the Local Government Code. Thus,
respondents assert that MIAA cannot claim that the Airport Lands and Buildings are exempt
from real estate tax.
Issue:
Whether the Airport Lands and Buildings of MIAA are exempt from real estate tax under existing
laws. If so exempt, then the real estate tax assessments issued by the City of Paraaque, and
all proceedings taken pursuant to such assessments, are void. In such event, the other issues
raised in this petition become moot.
Ruling:
We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by
local governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of the
National Government and thus exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt from real estate tax.
1. MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled corporation, is not
exempt from real estate tax. Respondents claim that the deletion of the phrase "any
government-owned or controlled so exempt by its charter" in Section 234(e) of the Local
Government Code withdrew the real estate tax exemption of government-owned or controlled
corporations. The deleted phrase appeared in Section 40(a) of the 1974 Real Property Tax Code
enumerating the entities exempt from real estate tax.
2. Airport Lands and Buildings of MIAA are Owned by the Republic
a. Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and therefore
owned by the State or the Republic of the Philippines.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State,"
are owned by the State. The term "ports" includes seaports and airports. The MIAA
Airport Lands and Buildings constitute a "port" constructed by the State. Under Article 420 of
the Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus
owned by the State or the Republic of the Philippines.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to
public use, are properties of public dominion and thus owned by the State or the Republic of the
Philippines. Article 420 specifically mentions "ports x xx constructed by the State," which
includes public airports and seaports, as properties of public dominion and owned by the
Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever
that the Airport Lands and Buildings are expressly exempt from real estate tax under Section
234(a) of the Local Government Code. This Court has also repeatedly ruled that properties of
public dominion are not subject to execution or foreclosure sale.
Topic: Constitutional Limitations: Due Process Clause

CREBA vs. THE SECRETARY OF AGRARIAN REFORM
G.R. No. 183409
June 18, 2010
Facts:
The Secretary of Agrarian Reform issued "Omnibus Rules and Procedures Governing
Conversion of Agricultural Lands to Non-Agricultural Uses," which consolidated all existing
implementing guidelines related to land use conversion. The aforesaid rules embraced all
private agricultural lands regardless of tenurial arrangement and commodity produced, and all
untitled agricultural lands and agricultural lands reclassified by Local Government Units (LGUs)
into non-agricultural uses after 15 June 1988. Subsequently, on 30 March 1999, the Secretary of
Agrarian Reform issued DAR AO No. 01-99, entitled "Revised Rules and Regulations on the
Conversion of Agricultural Lands to Non-agricultural Uses," amending and updating the previous
rules on land use conversion. Its coverage includes the following agricultural lands, to wit: (1)
those to be converted to residential, commercial, industrial, institutional and other nonagricultural purposes; (2) those to be devoted to another type of agricultural activity such as
livestock, poultry, and fishpond the effect of which is to exempt the land from the
Comprehensive Agrarian Reform Program (CARP) coverage; (3) those to be converted to nonagricultural use other than that previously authorized; and (4) those reclassified to residential,
commercial, industrial, or other non-agricultural uses on or after the effectivity of Republic Act

No. 66575 on 15 June 1988 pursuant to Section 206 of Republic Act No. 71607 and other
pertinent laws and regulations, and are to be converted to such uses.
To address the unabated conversion of prime agricultural lands for real estate
development, the Secretary of Agrarian Reform further issued Memorandum No. 88 on 15 April
2008, which temporarily suspended the processing and approval of all land use conversion
applications. By reason thereof, petitioner claims that there is an actual slow down of housing
projects, which, in turn, aggravated the housing shortage, unemployment and illegal squatting
problems to the substantial prejudice not only of the petitioner and its members but more so of
the whole nation.
Issues:
1. WHETHER [DAR AO NO. 01-02, AS AMENDED] VIOLATE[S] THE DUE PROCESS AND EQUAL
PROTECTION CLAUSE[S] OF THE CONSTITUTION.
2. WHETHER MEMORANDUM NO. 88 IS A VALID EXERCISE OF POLICE POWER.9
Ruling:
The petition was dismissed. The authority of the Secretary of Agrarian Reform to include
"lands not reclassified as residential, commercial, industrial or other non-agricultural uses
before 15 June 1988" in the definition of agricultural lands finds basis in jurisprudence. In Ros v.
Department of Agrarian Reform,39 this Court has enunciated that after the passage of Republic
Act No. 6657, agricultural lands, though reclassified, have to go through the process of
conversion, jurisdiction over which is vested in the DAR. However, agricultural lands, which are
already reclassified before the effectivity of Republic Act No. 6657 which is 15 June 1988, are
exempted from conversion.40 It bears stressing that the said date of effectivity of Republic Act
No. 6657 served as the cut-off period for automatic reclassifications or rezoning of agricultural
lands that no longer require any DAR conversion clearance or authority. 41 It necessarily follows
that any reclassification made thereafter can be the subject of DARs conversion authority.
Having recognized the DARs conversion authority over lands reclassified after 15 June 1988, it
can no longer be argued that the Secretary of Agrarian Reform was wrongfully given the
authority and power to include "lands not reclassified as residential, commercial, industrial or
other non-agricultural uses before 15 June 1988" in the definition of agricultural lands. Such
inclusion does not unduly expand or enlarge the definition of agricultural lands; instead, it made
clear what are the lands that can be the subject of DARs conversion authority, thus, serving the
very purpose of the land use conversion provisions of Republic Act No. 6657.It is clear from the
aforesaid distinction between reclassification and conversion that agricultural lands though
reclassified to residential, commercial, industrial or other non-agricultural uses must still
undergo the process of conversion before they can be used for the purpose to which they are
intended.
The petitioners argument that DAR Memorandum No. 88 is unconstitutional, as it
suspends the land use conversion without any basis, stands on hollow ground.

It bears emphasis that said Memorandum No. 88 was issued upon the instruction of the
President in order to address the unabated conversion of prime agricultural lands for real estate
development because of the worsening rice shortage in the country at that time. Such measure
was made in order to ensure that there are enough agricultural lands in which rice cultivation
and production may be carried into. The issuance of said Memorandum No. 88 was made
pursuant to the general welfare of the public, thus, it cannot be argued that it was made
without any basis.

COCA-COLA BOTTLERS PHILIPPINES, INC. vs. CA and MS. LYDIA GERONIMO
G.R. No. 110295 October 18, 1993
FACTS:
Private respondent was the proprietress of Kindergarten Wonderland Canteen in Dagupan City.
In August 1989, some parents of the students complained to her that the Coke and Sprite soft
drinks sold by her contained fiber-like matter and other foreign substances. She brought the
said bottles for examination to DOH and it was found out that the soft drinks are adulterated.
As a result, her per day sales of soft drinks severely plummeted that she had to close her shop
on 12 December 1989 for losses. She demanded damages from petitioner before the RTC which
dismissed the same on motion by petitioner based on the ground of Prescription. On appeal, the
CA annulled the orders of the RTC.
ISSUE:
WON the action for damages by the proprietress against the soft drinks manufacturer should be
treated as one for breach of implied warranty under article 1561 of the CC which prescribes
after six months from delivery of the thing sold.
RULING:
Petition Denied.
The SC agrees with the CAs conclusion that the cause of action in the case at bar is found on
quasi-delict under Article 1146 of the CC which prescribes in four years and not on breach of

warranty under article 1562 of the same code. This is supported by the allegations in the
complaint which makes reference to the reckless and negligent manufacture of "adulterated
food items intended to be sold for public consumption."

VILLEGAS vs. HIU CHIONG TSAI PAO HO
G.R No. L-29646
November 10, 1978
FACTS:
On 22 February 1968, Ordinance 6537 was passed by the Municipal Board of Manila and
signed by Manila Mayor Antonio J. Villegas on March 27, 1968. Ordinance 6537, entitled An
ordinance making it unlawful for any person not a citizen of the Philippines to be employed in
any place of employment or to be engaged in any kind of trade, business or occupation within
the City of Manila without first securing an employment permit from the mayor of Manila; and
for other purposes. Law prohibits aliens from employment and trade in the City of Manila
without the requisite mayors permit). Exceptions to law are persons employed in the diplomatic
or consular missions of foreign countries, or in the technical assistance programs of both the
Philippine Government and any foreign government, and those working in their respective
households, and members of religious orders or congregations, sect or denomination, who are
not paid monetarily or in kind. Permit fee is P50. Penalty is imprisonment of 3 to 6 months or
fine of P100-200, or both.
On 4 May 1968, HiuChiong Tsai Pao Ho, who was employed in Manila, filed a petition, with
the CFI Manila (Civil Case 72797), praying for (1) the issuance of the writ of preliminary
injunction and restraining order to stop the implementation of the ordinance, and (2) judgment
to declare the ordinance null and void.
On 24 May 1968, Judge Francisco Arca (CFI Manila, Branch I) issued the writ of preliminary
injunction and on 17 September 1968, the Judge rendered a decision declaring the ordinance
null and void, and the preliminary injunction is made permanent. Mayor Villegas filed a petition
for certiorari to review the decision of the CFI.
ISSUES:
1. Whether or not there is a violation of due process and equal protection clauses?
2. Whether or not there was an illegal delegation of legislative powers?
3. Whether or not there is a violation of the principle of Uniformity of Taxation?
RULING:
1. Due process and equal protection clauses
The ordinance is arbitrary, oppressive and unreasonable, being applied only to aliens who
are thus, deprived of their rights to life, liberty and property and therefore, violates the due
process and equal protection clauses of the Constitution. Requiring a person, before he can be
employed, to get a permit from the City Mayor of Manila, who may withhold or refuse it at will is
tantamount to denying him the basic right of the people in the Philippines to engage in a means

of livelihood. Once an alien is admitted by the State within its territory, he cannot be deprived
of life without due process of law, including the means of livelihood. The shelter of protection
under the due process and equal protection clause is given to all persons, both aliens and
citizens.
2. Police Power, illegal delegation of legislative powers
The ordinance does not lay down any criterion or standard to guide the Mayor in the
exercise of his discretion, thus conferring upon the mayor arbitrary and unrestricted powers.
The ordinance does not provide a standard to guide or limit the mayors action, expresses no
purpose to be attained by requiring a permit, and enumerates no conditions for its grant or
refusal.
3. Uniformity of Taxation, discriminatory and violative
The ordinances purpose is clearly to raise money under the guise of regulation by
exacting P50 from aliens who have been cleared for employment. The amount is unreasonable
and excessive because it fails to consider differences in situation among aliens required to pay
it, i.e. being casual, permanent, full-time, part-time, rank-an-file or executive.

CITY OF BAGUIO vs. DE LEON
Gr. No. 24756
October 31, 1968

FACTS:
In this appeal, a lower court decision upholding the validity of an ordinance 1 of the City
of Baguio imposing a license fee on any person, firm, entity or corporation doing business in the
City of Baguio is assailed by defendant-appellant Fortunato de Leon. He was held liable as a real
estate dealer with a property therein worth more than P10,000, but not in excess of P50,000,
and therefore obligated to pay under such ordinance the P50 annual fee. That is the principal
question. In addition, there has been a firm and unyielding insistence by defendant-appellant of
the lack of jurisdiction of the City Court of Baguio, where the suit originated, a complaint having
been filed against him by the City Attorney of Baguio for his failure to pay the amount of P300
as license fee covering the period from the first quarter of 1958 to the fourth quarter of 1962,
allegedly, in spite of repeated demands. Nor was defendant-appellant agreeable to such a suit
being instituted by the City Treasurer without the consent of the Mayor, which for him was
indispensable. The lower court was of a different mind.
It declared the above ordinance as amended, valid and subsisting, and held defendantappellant liable for the fees therein prescribed as a real estate dealer. Hence, this appeal.
Assume the validity of such ordinance, and there would be no question about the liability of
defendant-appellant for the above license fee, it being shown in the partial stipulation of facts,
that he was "engaged in the rental of his property in Baguio" deriving income therefrom during
the period covered by the first quarter of 1958 to the fourth quarter of 1962.
ISSUE:
Whether or not the ordinance is valid?
RULING:
The challenged ordinance cannot be considered ultra vires as there is more than ample
statutory authority for the enactment thereof. Nonetheless, its validity on constitutional grounds
is challenged because of the allegation that it imposed double taxation, which is repugnant to
the due process clause, and that it violated the requirement of uniformity. We do not view the
matter thus.
As to why double taxation is not violative of due process, Justice Holmes made clear in
this language: "The objection to the taxation as double may be laid down or one side. . . . The
14th Amendment [the due process clause] no more forbids double taxation than it does
doubling the amount of a tax, short of confiscation or proceedings unconstitutional on other
grounds." With that decision rendered at a time when American sovereignty in the Philippines
was recognized, it possesses more than just a persuasive effect. To some, it delivered the coup
de grace to the bogey of double taxation as a constitutional bar to the exercise of the taxing
power. It would seem though that in the United States, as with us, its ghost, as noted by an
eminent critic, still stalks the juridical stage. In a 1947 decision, however, 9 we quoted with
approval this excerpt from a leading American decision: 10 "Where, as here, Congress has
clearly expressed its intention, the statute must be sustained even though double taxation
results."
At any rate, it has been expressly affirmed by us that such an "argument against double
taxation may not be invoked where one tax is imposed by the state and the other is imposed by
the city . . ., it being widely recognized that there is nothing inherently obnoxious in the
requirement that license fees or taxes be exacted with respect to the same occupation, calling
or activity by both the state and the political subdivisions thereof. The above would clearly
indicate how lacking in merit is this argument based on double taxation.

Now, as to the claim that there was a violation of the rule of uniformity established by the
Constitution. According to the challenged ordinance, a real estate dealer who leases property
worth P50,000 or above must pay an annual fee of P100. If the property is worth P10,000 but
not over P50,000, then he pays P50 and P24 if the value is less than P10,000. On its face,
therefore, the above ordinance cannot be assailed as violative of the constitutional requirement
of uniformity. A tax is considered uniform when it operates with the same force and effect in
every place where the subject may be found."
It is thus apparent from the above that in much the same way that the plea of double
taxation is unavailing, the allegation that there was a violation of the principle of uniformity is
inherently lacking in persuasiveness. There is no need to pass upon the other allegations to
assail the validity of the above ordinance, it being maintained that the license fees therein
imposed "is excessive, unreasonable and oppressive" and that there is a failure to observe the
mandate of equal protection. A reading of the ordinance will readily disclose their inherent lack
of plausibility.

SISON vs. ANCHETA
G.R. No. L-59431
July 25, 1984
FACTS:

ISSUE:
RULING:

COMMISSIONER OF INTERNAL REVENUE vs. CA & FORTUNE TOBACCO CORP.
G.R. No. 119322
June 4, 1996
FACTS:
A task force was created on June 1, 1993 to investigate tax liabilities of manufacturers
engaged in tax evasion schemes. On July 1, 1993, the CIR issued Rev. Memo Circ. No. 37-93
which reclassified certain cigarette brands manufactured by private respondent Fortune Tobacco
Corp. (Fortune) as foreign brands subject to a higher tax rate. On August 3, 1993, Fortune
questioned the validity of said reclassification as being violative of the right to due process and
equal protection of laws. The CTA, on September 8, 1993 resolved that said reclassification was
of doubtful legality and enjoined its enforcement.
In the meantime, on August 3, 1993, Fortune was assessed deficiency income, ad
valorem and VAT for 1992 with payment due within 30 days from receipt. On September 12,
1993, private respondent moved for reconsideration of said assessment. Meanwhile on
September 7, 1993, the Commissioner filed a complaint with the DOJ against private
respondent Fortune, its corporate officers and 9 other corporations and their respective
corporate officers for alleged fraudulent tax evasion for non-payment of the correct income, ad
valorem and VAT for 1992. The complaint was referred to the DOJ Task Force on revenue cases
which found sufficient basis to further investigate the charges against Fortune.

A subpoena was issued on September 8, 1993 directing private respondent to submit

their counter-affidavits. But it filed a verified motion to dismiss or alternatively, a motion to
suspend but was denied and thus treated as their counter-affidavit. All motions filed thereafter
were denied.
On January 4, 1994, private respondents filed a petition for certiorari and prohibition with
prayer for preliminary injunction praying the CIRs complaint and prosecutors orders be
dismissed/set aside or alternatively, that the preliminary investigation be suspended pending
determination by CIR of Fortunes motion for reconsideration/reinvestigation of the August 13,
1993 assessment of taxes due.
The trial court granted the petition for a writ of preliminary injunction to enjoin the
preliminary investigation on the complaint for tax evasion pending before the DOJ, ruling that
the tax liability of private respondents first be settled before any complaint for fraudulent tax
evasion can be initiated.
ISSUE:
Whether or not the basis of private respondents tax liability should first be settled before
any complaint for fraudulent tax evasion can be initiated?
RULING:
Fraud cannot be presumed.
If there was fraud on willful attempt to evade payment of ad valorem taxes by private
respondent through the manipulation of the registered wholesale price of the cigarettes, it must
have been with the connivance of cooperation of certain BIR officials and employees who
supervised and monitored Fortunes production activities to see to it that the correct taxes were
paid. But there is no allegation, much less evidence, of BIR personnels malfeasance at the very
least, there is the presumption that BIR personnel performed their duties in the regular course
in ensuring that the correct taxes were paid by Fortune.
Before the tax liabilities of Fortune are finally determined, it cannot be correctly asserted
that private respondents have willfully attempted to evade or defeat any tax under Secs. 254
and 256, 1997 NIRC. The fact that a tax is due must first be proved.


COMMISSIONER OF INTERNAL REVENUE vs. LHUILLIER PAWNSHOP, INC..
G.R. No. 150947
July 15, 2003
FACTS:
CIR Jose U. Ong issued Revenue Memorandum Order No. 15-91 imposing a 5% lending
investors tax on pawnshops; thus:
A restudy of P.D. [No.] 114 shows that the principal activity of pawnshops is lending
money at interest and incidentally accepting a "pawn" of personal property delivered by the
pawner to the pawnee as security for the loan. Clearly, this makes pawnshop business akin to
lending investors business activity which is broad enough to encompass the business of lending
money at interest by any person whether natural or juridical. Such being the case, pawnshops
shall be subject to the 5% lending investors tax based on their gross income pursuant to
Section 116 of the Tax Code, as amended.
This RMO was clarified by Revenue Memorandum Circular No. 43-91. Since pawnshops are
considered as lending investors, they also become subject to documentary stamp taxes
prescribed in Title VII of the Tax Code. BIR Ruling No. 325-88 is hereby revoked.
Pursuant to these issuances, the BIR issued Assessment Notice No. 81-PT-13-94-97-9-118
against Lhuillier demanding payment of deficiency percentage tax in the sum of P3,360,335.11
for 1994 inclusive of interest and surcharges. Lhuillier filed an administrative protest with the
Office of the Revenue Regional Director contending that (1) neither the Tax Code nor the VAT
Law expressly imposes 5% percentage tax on the gross income of pawnshops; (2) pawnshops
are different from lending investors, which are subject to the 5% percentage tax under the
specific provision of the Tax Code; (3) RMO No. 15-91 is not implementing any provision of the
Internal Revenue laws but is a new and additional tax measure on pawnshops, which only
Congress could enact; (4) RMO No. 15-91 impliedly amends the Tax Code and is therefore
taxation by implication, which is proscribed by law; and (5) RMO No. 15-91 is a "class
legislation" because it singles out pawnshops among other lending and financial operations.
Lhuillier, on the other hand, maintains that before and after the amendment of the Tax
Code by E.O. No. 273, which took effect on 1 January 1988, pawnshops and lending investors
were subjected to different tax treatments. Pawnshops were required to pay an annual fixed tax
of only P1,000, while lending investors were subject to a 5% percentage tax on their gross
income in addition to their fixed annual taxes. Accordingly, during the period from April 1982 up

to December 1990, the CIR consistently ruled that a pawnshop is not a lending investor and
should not therefore be required to pay percentage tax on its gross income.
ISSUE:
Are pawnshops considered "lending investors" for the purpose of the imposition of the
lending investors tax?
RULING:
RMO No. 15-91 and RMC No. 43-91 were issued in accordance with the power of the CIR
to make rulings and opinions in connection with the implementation of internal revenue laws,
which was bestowed by then Section 245 of the NIRC of 1977, as amended by E.O. No. 273. 6
Such power of the CIR cannot be controverted. However, the CIR cannot, in the exercise of such
power, issue administrative rulings or circulars not consistent with the law sought to be applied.
Indeed, administrative issuances must not override, supplant or modify the law, but must
remain consistent with the law they intend to carry out. Only Congress can repeal or amend the
law.
While it is true that pawnshops are engaged in the business of lending money, they are
not considered "lending investors" for the purpose of imposing the 5% percentage taxes. The
definition of lending investors found in Section 157 (u) of the NIRC of 1986 is not found in the
NIRC of 1977, as amended by E.O. No. 273, where Section 116 invoked by the CIR is found.
However, both the NIRC of 1986 and the NIRC of 1977 dealt with pawnshops and lending
investors differently. Verily then, it was the intent of Congress to deal with both subjects
differently. Hence, we must likewise interpret the statute to conform with such legislative intent.
Further, if pawnshops were covered within the term lending investor, there would have
been no need to introduce such amendment to include owners of pawnshops. At any rate, such
proposed amendment was not adopted. Instead, the approved bill which became R.A. No.
7716repealed Section 116 of NIRC of 1977, as amended, which was the basis of RMO No. 15-91
and RMC No. 43-91. Since Section 116 of the NIRC of 1977, which breathed life on the
questioned administrative issuances, had already been repealed, RMO 15-91 and RMC 43-91,
which depended upon it, are deemed automatically repealed. Hence, even granting that
pawnshops are included within the term lending investors, the assessment from 27 May 1994
onward would have no leg to stand on. Adding to the invalidity of the RMC No. 43-91 and RMO
No. 15-91 is the absence of publication. While the rule-making authority of the CIR is not
doubted, like any other government agency, the CIR may not disregard legal requirements or
applicable principles in the exercise of quasi-legislative powers.
A legislative rule is in the nature of subordinate legislation, designed to implement a
primary legislation by providing the details thereof. An interpretative rule, on the other hand, is
designed to provide guidelines to the law which the administrative agency is in charge of
enforcing. When an administrative rule is merely interpretative in nature, its applicability needs
nothing further than its bare issuance, for it gives no real consequence more than what the law
itself has already prescribed. When, on the other hand, the administrative rule goes beyond
merely providing for the means that can facilitate or render least cumbersome the
implementation of the law but substantially increases the burden of those governed, it
behooves the agency to accord at least to those directly affected a chance to be heard, and
thereafter to be duly informed, before that new issuance is given the force and effect of law.
RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as implementing rules or
corrective measures revoking in the process the previous rulings of past Commissioners.
Specifically, they would have been amendatory provisions applicable to pawnshops. Without
these disputed CIR issuances, pawnshops would not be liable to pay the 5% percentage tax,

considering that they were not specifically included in Section 116 of the NIRC of 1977, as
amended. In so doing, the CIR did not simply interpret the law. The due observance of the
requirements of notice, hearing, and publication should not have been ignored.
Topic: Constitutional Limitations: Equal Protection Clause

ABAKADA Guro Party List vs. Ermita
G.R. No. 168056 September 1, 2005
FACTS:

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a
petition for prohibition on May 27, 2005 questioning the constitutionality of Sections 4, 5 and 6
of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal
Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5
imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of
services and use or lease of properties. These questioned provisions contain a uniform proviso
authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT
rate to 12%, effective January 1, 2006, after specified conditions have been satisfied.
Petitioners argue that the law is unconstitutional.
ISSUES:
1. Whether or not there is a violation of Article VI, Section 24 of the Constitution.
2. Whether or not there is undue delegation of legislative power in violation of Article VI
Sec 28(2) of the Constitution.
3. Whether or not there is a violation of the due process and equal protection under
Article III Sec. 1 of the Constitution.
HELD:
1. Since there is no question that the revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its constitutional power to introduce
amendments to the House bill when it included provisions in Senate Bill No. 1950 amending
corporate income taxes, percentage, and excise and franchise taxes.
2. There is no undue delegation of legislative power but only of the discretion as to the
execution of a law. This is constitutionally permissible. Congress does not abdicate its functions
or unduly delegate power when it describes what job must be done, who must do it, and what is
the scope of his authority; in our complex economy that is frequently the only way in which the
legislative process can go forward.
3. The power of the State to make reasonable and natural classifications for the purposes
of taxation has long been established. Whether it relates to the subject of taxation, the kind of
property, the rates to be levied, or the amounts to be raised, the methods of assessment,
valuation and collection, the States power is entitled to presumption of validity. As a rule, the
judiciary will not interfere with such power absent a clear showing of unreasonableness,
discrimination, or arbitrariness.


ASSOCIATION OF CUSTOMS BROKERS, INC. vs. THE MUNICIPAL BOARD
93PHIL107
FACTS:
The disputed ordinance was passed by the Municipal Board of the City of Manila under the
authority conferred by section 18 (p) of Republic Act No. 409. Said section confers upon the
municipal board the power "to tax motor and other vehicles operating within the City of Manila
the provisions of any existing law to the contrary notwithstanding." It is contended that this
power is broad enough to confer upon the City of Manila the power to enact an ordinance
imposing a property tax on motor vehicles operating within the city limits. The Association of
Customs Brokers, Inc., which is composed of all brokers and public service operators of motor
vehicles in the City of Manila, and G. Manlapit, Inc., a member of said association, also a public
service operator of trucks in said City, challenge the validity of ordinance on the ground that (1)
while it levies a so-called property tax it is in reality a license tax which is beyond the power of
the Municipal Board of the City of Manila; (2) said ordinance offends against the rule of
uniformity of taxation; and (3) it constitutes double taxation. The respondents, represented by
the city fiscal, contend on their part that the challenged ordinance imposes a property tax
which is within the power of the City of Manila to impose under its Revised Charter [Section 18
(p) of Republic Act No. 409], and that the tax in question does not violate the rule of uniformity
of taxation, nor does it constitute double taxation.
ISSUE:
Whether or not the ordinance violates the rule on uniformity?
RULING:
While as a rule an ad valorem tax is a property tax, and this rule is supported by some
authorities, the rule should not be taken in its absolute sense if the nature and purpose of the
tax as gathered from the context show that it is in effect an excise or a license tax. Thus, it has
been held that "If a tax is in its nature an excise, it does not become a property tax because it is
proportioned in amount to the value of the property used in connection with the occupation,
privilege or act which is taxed. Every excise necessarily must finally fall upon and be paid by
property and so may be indirectly a tax upon property; but if it is really imposed upon the
performance of an act, enjoyment of a privilege, or the engaging in an occupation, it will be
considered an excise." It has also been held that "The character of a tax as a property tax or a
license or occupation tax must be determined by its incidents, and from the natural and legal
effect of the language employed in the act or ordinance, and not by the name by which it is
described, or by the mode adopted in fixing its amount. If it is clearly a property tax, it will be so
regarded, even though nominally and in form it is a license or occupation tax; and, on the other
hand, if the tax is levied upon persons on account of their business, it will be construed as a
license or occupation tax, even though it is graduated according to the property used in such
business, or on the gross receipts of the business." The ordinance in question falls under the
foregoing rules. While it refers to property tax and it is fixed ad valorem yet we cannot reject
the idea that it is merely levied on motor vehicles operating within the City of Manila with the
main purpose of raising funds to be expended exclusively for the repair, maintenance and
improvement of the streets and bridges in said city. This is precisely what the Motor VehicleLaw
intends to prevent, for the reason that, under said Act, municipal corporations already
participate in the distribution of the proceeds that are raised for the same purpose of repairing,

maintaining and improving bridges and public highways. This prohibition is intended to prevent
duplication in the imposition of fees for the same purpose. It is for this reason that we believe
that the ordinance in question merely imposes a license fee although under the cloak of an ad
valorem tax to circumvent the prohibition above adverted to.
It is also our opinion that the ordinance infringes the rule of uniformity of taxation
ordained by our Constitution. Note that the ordinance exacts the tax upon all motor vehicles
operating within the City of Manila. It does not distinguish between a motor vehicle for hire and
one which is purely for private use. Neither does it distinguish between a motor vehicle
registered in the City of Manila and one registered in another place but occasionally comes to
Manila and uses its streets and public highways. The distinction is important if we note that the
ordinance intends to burden with the tax only those registered in the City of Manila as may be
inferred from the word "operating" used therein. The word "operating" denotes a connotation
which is akin to a registration, for under the Motor Vehicle Law no motor vehicle can be
operated without previous payment of the registration fees. There is no pretense that the
ordinance equally applies to motor vehicles who come to Manila for a temporary stay or for
short errands, and it cannot be denied that they contribute in no small degree to the
deterioration of the streets and public highways. The fact that they are benefited by their use
they should also be made to share the corresponding burden. And yet such is not the case. This
is an inequality which we find in the ordinance, and which renders it offensive to the
Constitution.

SHELL vs. VAO
G.R. No. L-6093 February 24, 1954
FACTS:
The municipal council of Cordova, Cebu adopted Ordinance 10 (1946) imposing an annual
tax of P150 on occupation or the exercise of the privilege of installation manager; Ordinance 9
(1947) imposing an annual tax of P40 for local deposits in drums of combustible and
inflammable materials and an annual tax of P200 for tin can factories; and Ordinance 11 (1948)
imposing an annual tax of P150 on tin can factories having a maximum annual output capacity
of 30,000 tin cans. Shell Co., a foreign corporation, filed suit for the refund of the taxes paid by
it, on the ground that the ordinances imposing such taxes are ultra vires.

ISSUE:
Whether Ordinance 10 is discriminatory and hostile because there is no other person in
the locality who exercise such designation or occupation.
RULING:
NO.
The mere fact that there is no other person in the locality who exercises such a
designation or calling does not make the ordinance discriminatory and hostile, inasmuch as it
is and will be applicable to any person or firm who exercises such calling or occupation named
or designated as installation manager.
Even if an installation manager is a salaried employee, still his employment is an
occupation, and one occupation or line of business does not become exempt by being
conducted with some other occupation or business for which such taxes have been paid and the
occupation tax must be paid by each individual in a calling subject thereto.

KAPATIRAN vs. TAN
G.R No. 109289 June 30, 1988
FACTS:
4 petitions, which have been consolidated because of the similarity of the main issues
involved therein, seek to nullify Executive Order No. 273, issued by the President of the
Philippines on 25 July 1987, to take effect on 1 January 1988, and which amended certain
sections of the National Internal Revenue Code and adopted the value-added tax for being

unconstitutional in that its enactment is not alledgedly within the powers of the President; that
the VAT is oppressive, discriminatory, regressive, and violates the due process and equal
protection clauses and other provisions of the 1987 Constitution.
The Solicitor General prays for the dismissal of the petitions on the ground that the
petitioners have failed to show justification for the exercise of its judicial powers, viz. (1) the
existence of an appropriate case; (2) an interest, personal and substantial, of the party raising
the constitutional questions; (3) the constitutional question should be raised at the earliest
opportunity; and (4) the question of constitutionality is directly and necessarily involved in a
justiciable controversy and its resolution is essential to the protection of the rights of the
parties. According to the Solicitor General, only the third requisite that the constitutional
question should be raised at the earliest opportunity has been complied with. He also
questions the legal standing of the petitioners who, he contends, are merely asking for an
advisory opinion from the Court, there being no justiciable controversy for resolution.
Objections to taxpayers' suit for lack of sufficient personality standing, or interest are,
however, in the main procedural matters. Considering the importance to the public of the cases
at bar, and in keeping with the Court's duty, under the 1987 Constitution, to determine whether
or not the other branches of government have kept themselves within the limits of the
Constitution and the laws and that they have not abused the discretion given to them, the Court
has brushed aside technicalities of procedure and has taken cognizance of these petitions.
ISSUE:
Whether or not E.O. 273 violated the equal protection clause?
RULING:
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the
public, which are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services
by persons engage in business with an aggregate gross annual sales exceeding P200,000.00.
Small corner sari-sari stores are consequently exempt from its application. Likewise exempt
from the tax are sales of farm and marine products, spared as they are from the incidence of
the VAT, are expected to be relatively lower and within the reach of the general public.
The Court likewise finds no merit in the contention of the petitioner Integrated Customs
Brokers Association of the Philippines that EO 273, more particularly the new Sec. 103 (r) of the
National Internal Revenue Code, unduly discriminates against customs brokers.
The phrase "except customs brokers" is not meant to discriminate against customs brokers. It
was inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes
the services of customs brokers subject to the payment of the VAT and to distinguish customs
brokers from other professionals who are subject to the payment of an occupation tax under the
Local Tax Code.
With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a
potential conflict between the two sections, (Secs. 102 and 103), insofar as customs brokers are
concerned, is averted.
At any rate, the distinction of the customs brokers from the other professionals who are
subject to occupation tax under the Local Tax Code is based upon material differences, in that
the activities of customs brokers partake more of a business, rather than a profession and were
thus subjected to the percentage tax under Sec. 174 of the National Internal Revenue Code
prior to its amendment by EO 273. EO 273 abolished the percentage tax and replaced it with
the VAT. If the petitioner Association did not protest the classification of customs brokers then,
the Court sees no reason why it should protest now.

In any event, if petitioners seriously believe that the adoption and continued application
of the VAT are prejudicial to the general welfare or the interests of the majority of the people,
they should seek recourse and relief from the political branches of the government. The Court,
following the time-honored doctrine of separation of powers, cannot substitute its judgment for
that of the President as to the wisdom, justice and advisability of the adoption of the VAT. The
Court can only look into and determine whether or not EO 273 was enacted and made effective
as law, in the manner required by, and consistent with, the Constitution, and to make sure that
it was not issued in grave abuse of discretion amounting to lack or excess of jurisdiction; and, in
this regard, the Court finds no reason to impede its application or continued implementation.
Constitutional Limitations: Equal Protection Clause

TAN vs. DELROSARIO
G.R. No. 109289
October 3, 1994
FACTS:
A special civil actions for prohibition challenge the constitutionality of Republic Act No.
7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending
certain
provisions
of
the
National
Internal
Revenue
Code
and,
in
Petitioners claim to be taxpayers adversely affected by the continued implementation of the
amendatory legislation.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement
that taxation "shall be uniform and equitable" in that the law would now attempt to tax single
proprietorships and professionals differently from the manner it imposes the tax on corporations
and partnerships.
ISSUE:
Whether Republic Act No. 7496 is unconstitutional?
RULING:
The due process clause may correctly be invoked only when there is a clear contravention
of inherent or constitutional limitations in the exercise of the tax power. No such transgression is
so evident to us.
The Court, first of all, should like to correct the apparent misconception that general
professional partnerships are subject to the payment of income tax or that there is a difference
in the tax treatment between individuals engaged in business or in the practice of their
respective professions and partners in general professional partnerships. The fact of the matter
is that a general professional partnership, unlike an ordinary business partnership (which is
treated as a corporation for income tax purposes and so subject to the corporate income tax), is

not itself an income taxpayer. The income tax is imposed not on the professional partnership,
which is tax exempt, but on the partners themselves in their individual capacity computed on
their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been
amended at all by Republic Act 7496, is explicit:
Sec. 23.Tax liability of members of general professional partnerships. (a) Persons
exercising a common profession in general partnership shall be liable for income tax only in
their individual capacity, and the share in the net profits of the general professional partnership
to which any taxable partner would be entitled whether distributed or otherwise, shall be
returned for taxation and the tax paid in accordance with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership, each partner
(1) Shall take into account separately his distributive share of the partnership's income, gain,
loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive
share of the gross income undiminished by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person who
practices his profession alone or individually and one who does it through partnership (whether
registered or not) with others in the exercise of a common profession. Indeed, outside of the
gross compensation income tax and the final tax on passive investment income, under the
present income tax system all individuals deriving income from any source whatsoever are
treated in almost invariably the same manner and under a common set of rules.


TIO vs. VIDEOGRAM REGULATORY BOARD
151 S
208
FACTS:
Petitioner, on his own behalf and purportedly on behalf of other videogram operators
adversely affected, assailed the constitutionality of Presidential Decree No. 1987 entitled An
Act Creating the Videogram Regulatory Board with broad powers to regulate and supervise the
videogram industry.
Petitioner questioned the constitutionality of the decree on the grounds that: (a) Section
10 thereof, which imposes a tax of 30% on the gross receipts payable to the local government is
a rider and the same is not germane to the subject matter thereof; (b) the tax imposed is harsh,
confiscatory, oppressive and/or in unlawful restraint to trade in violation of the due process
clause
of
the
Constitution;
(c)
there
is
undue
delegation
of
power.
ISSUE:
Whether
or
not
the
assailed
Decree
is
unconstitutional?
RULING:
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 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.
On the other hand, the levy of the 30% tax is for 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 the other.
It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that inequities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation. Taxation has been made the
implement of the states police power.
With regard to the issue that the Decree contains an undue delegation of legislative
power, there is really no delegation of the power to legislate but merely a conferment functions
of authority or discretion as to its execution, enforcement, and implementation.

It is important to note that only congressional power or competence, not the wisdom of
the action taken, maybe the basis for declaring a statute invalid. The principle of separation of
powers has in the main wisely allocated the respective authority to each department and
confined its jurisdiction to such a sphere. The attack on the validity of the challenged provision
likewise insofar as there may be objections, even if valid and cogent on its wisdom cannot be
sustained.

ORMOC SUGAR COMPANY vs. TREASURER OF ORMOCCITY
G.R. No. L-23794
February 17, 1968
FACTS:
On 29 January 1964, the Municipal Board of Ormoc City passed Ordinance 4, Series of
1964, imposing on any and all productions of centrifugal sugar milled at the Ormoc Sugar

Company, Inc., in OrmocCity a municipal tax equivalent to one per centum (1%) per export sale
to the United States of America and other foreign countries. Payments for said tax were made,
under protest, by Ormoc Sugar Company, Inc. on 20 March 1964 for P7,087.50 and on 20 April
1964 for P5,000.00, or a total of P12,087.50.
On 1 June 1964, the company filed before the CFI Leyte, with service of a copy upon the
Solicitor General, a complaint against the City of Ormoc as well as its Treasurer, Municipal Board
and Mayor (Hon. Esteban C. Conejos), alleging that the ordinance is unconstitutional for being
violative of the equal protection clause (Sec. 1[1], Art. III, Constitution) and the rule of
uniformity of taxation (Sec. 22[1], Art.VI, Constitution), aside from being an export tax forbidden
under Section 2287 of the Revised Administrative Code. It further alleged that the tax is neither
a production nor a license tax which Ormoc City under Section 15-kk of its charter and under
Section 2 of RA 2264, otherwise known as the Local Autonomy Act, is authorized to impose; and
that the tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of
RA 2264 because the tax is on both the sale and export of sugar. After pre-trial and submission
of the case on memoranda, the CFI, on 6 August 1964, rendered a decision that upheld the
constitutionality of the ordinance and declared the taxing power of chartered city broadened by
the Local Autonomy Act to include all other forms of taxes, licenses or fees not excluded in its
charter. Appeal therefrom was directly taken to the Supreme Court.
ISSUE:
Whether or not the ordinance is violative of the equal protection of laws?
RULING:
The Constitution in the bill of rights provides: . . . nor shall any person be denied the
equal protection of the laws. (Sec. 1[1], Art. 111) In Felwa v. Salas, the Court ruled that the
equal protection clause applies only to persons or things identically situated and does not bar a
reasonable classification of the subject of legislation, and a classification is reasonable where
(1) it is based on substantial distinctions which make real differences; (2) these are germane to
the purpose of the law; (3) the classification applies not only to present conditions but also to
future conditions which are substantially identical to those of the present; (4) the classification
applies only to those who belong to the same class.
Classification reasonable should in terms applicable to future conditions as well
The Ordinance taxes only centrifugal sugar produced and exported by the Ormoc Sugar
Company Inc. and none other. At the time of the taxing ordinances enactment, Ormoc Sugar
Company, it is true, was the only sugar central in the city of Ormoc. Still, the classification, to be
reasonable, should be in terms applicable to future conditions as well. The taxing ordinance
should not be singular and exclusive as to exclude any subsequently established sugar central,
of the same class as the Central, from the coverage of the tax. As it is now, even if later a
similar company is set up, it cannot be subject to the tax because the ordinance expressly
points only to Ormoc Sugar Company as the entity to be levied upon.
Interest on refund not due as collection was not arbitrary; Ordinance constitutional until
declared otherwiseOrmoc Sugar Company, however, is not entitled to interest on the refund
because the taxes were not arbitrarily collected (Collector of Internal Revenue v. Binalbagan). At
the time of collection, the ordinance provided a sufficient basis to preclude arbitrariness, the
same being then presumed constitutional until declared otherwise.


PHILIPPINE RURAL ELECTRIC COOPERATIVES ASSOCIATION, INC., vs. SECRETARY OF
DEPARTMENT OF INTERIOR AND LOCAL GOVERNMENT
GR. No. 143076 June 10, 2003
FACTS:
On May 23, 2003, a class suit was filed by petitioners in their own behalf and in behalf of
other electric cooperatives organized and existing under PD 269 which are members of
petitioner Philippine Rural Electric Cooperatives Association, Inc. The other petitioners, electric
cooperatives of Agusandel Norte, Iloilo 1, and Isabela 1 are non-stock, non-profit electric
cooperatives organized and existing under PD 269, as amended, and registered with the
National Electrification Administration.
Under Sec. 39 of PD 269 electric cooperatives shall be exempt from the payment of all
National Government, local government, and municipal taxes and fee, including franchise, fling
recordation, license or permit fees or taxes and any fees, charges, or costs involved in any court
or administrative proceedings in which it may be party. From 1971to 1978, in order to finance
the electrification projects envisioned by PD 269, as amended, the Philippine Government,
acting through the National Economic council and the NEA, entered into six loan agreements
with the government of the United States of America, through the United States Agency for
International Development with electric cooperatives as beneficiaries. The loan agreements
contain similarly worded provisions on the tax application of the loan and any property or
commodity acquired through the proceeds of the loan.

Petitioners allege that with the passage of the Local Government Code their tax
exemptions have been validly withdrawn. Particularly, petitioners assail the validity of Sec. 193
and 234 of the said code. Sec. 193 provides for the withdrawal of tax exemption privileges
granted to all persons, whether natural or juridical, except cooperatives duly registered under
RA 6938, while Sec. 234 exempts the same cooperatives from payment of real property tax.
ISSUE:
Does the Local Government Code violate the equal protection clause since the provisions
unduly discriminate against petitioners who are duly registered cooperatives under PD 269, as
amended, and no under RA 6938 or the Cooperatives Code of the Philippines?
RULING:
No. The guaranty of the equal protection clause is not violated by a law based on a
reasonable classification. Classification, to be reasonable must (a) rest on substantial
classifications; (b) germane to the purpose of the law; (c) not limited to the existing conditions
only; and (d) apply equally to all members of the same class. We hold that there is reasonable
classification under the Local Government Code to justify the different tax treatment between
electric cooperatives covered by PD 269 and electric cooperatives under RA 6938.
First, substantial distinctions exist between cooperatives under PD 269 and those under
RA 6938. In the former, the government is the one that funds those so-called electric
cooperatives, while in the latter, the members make equitable contribution as source of funds.
Second, the classification of tax-exempt entities in the Local Government Code is
germane to the purpose of the law. The Constitutional mandate that every local government
unit shall enjoy local autonomy, does not mean that the exercise of the power by the local
governments is beyond the regulation of Congress. Sec. 193 of the LGC is indicative of the
legislative intent to vet broad taxing powers upon the local government units and to limit
exemptions from local taxation to entities specifically provided therein. Finally, Sec. 193 and
234 of the LGC permit reasonable classification as these exemptions are not limited to existing
conditions and apply equally to all members of the same class.
It is ingrained in jurisprudence that the constitutional prohibition on the impairment of the
obligations of contracts does not prohibit every change in existing laws. To fall within the
prohibition, the change must not only impair the obligation of the existing contract, but the
impairment must be substantial. Moreover, to constitute impairment, the law must affect a
change in the rights of the parties with reference to each other and not with respect to nonparties.
The quoted provision under the loan agreement does not purport to grant any tax
exemption in favor of any party to the contract, including the beneficiaries thereof. The
provisions simply shift the tax burden, if any, on the transactions under the loan agreements to
the borrower and/or beneficiary of the loan. Thus, the withdrawal by the Local Government

Code under Sec. 193 and 234 of the tax exemptions previously enjoyed by petitioners does not
impair the obligation of the borrower, the lender or the beneficiary under the loan agreements
as, in fact, no tax exemption is granted therein.

SANTOS vs. PEOPLE PF THE PHILIPPINES
G.R. 173176
August 26, 2008
FACTS:
On 19 May 2005, then Bureau of Internal Revenue Commissioner Guillermo L. Parayno, Jr.
wrote to the Department of Justice Secretary Raul M. Gonzales a letter regarding the possible
filing of criminal charges against petitioner. Allegedly petitioner, in her Annual Income Tax
Return for taxable year 2002 filed with the BIR, declared an income of P8,033,332.70 derived
from her talent fees solely from ABS-CBN. Initial documents gathered from the BIR offices and
those given by petitioner's accountant and third parties, however, confirmed that petitioner
received in 2002 income in the amount of at least P14,796,234.70, not only from ABS-CBN, but
also from other sources, such as movies and product endorsements. The estimated tax liability
arising from petitioner's under declaration amounted to P1,718,925.52, including incremental
penalties; the non-declaration by petitioner of an amount equivalent to at least 84.18% of the
income declared in her return was considered a substantial under declaration of income, which
constituted prima facie evidence of false or fraudulent return under Section 248(B) of the NIRC,
as amended.
ISSUE:
Whether a resolution of a CTA division denying a motion to quash is a proper subject of an
appeal to the CTA EN BANC under sec. 11 of RA 9282 amending sec 18 of RA 1125?
RULING:
The court ruled in the negative.
Section 18 of Republic Act No. 1125, as amended by Republic Act No. 9282, provides; No
civil proceedings involving matters arising under the National Internal Revenue Code, the Tariff
and Customs Code or the Local Government Code shall be maintained, except as herein
provided, until and unless an appeal has been previously filed with the CTA and disposed of in
accordance with the provisions of this Act.
A party adversely affected by a resolution of a Division of the CTA on a motion for
reconsideration or new trial, may file a petition for review with the CTA en banc.

The provision speaks of resolutions that constitutes final disposition of the case. As a
General rule, the denial of a motion to quash is an interlocutory order which is not theproper
subject of an appeal or a petition for certiorari. There is no dispute that a court order denying a
motion to quash is interlocutory. The denial of the motion to quash means that the criminal
information remains pending with the court, which must proceed with the trial to determine
whether the accused is guilty of the crime charged therein. Equally settled is the rule that an
order denying a motion to quash, being interlocutory is not immediately appealable, nor can it
be the subject of a petition for certiorari. Such order may only be reviewed in the ordinary
course of law by an appeal from the judgment after trial.
Topic: Freedom of Religion: Free Exercise Clause

AMERICAN BIBLE SOCIETY vs. CITY OF MANILA
G.R. No. L-9637
April 30, 1957

FACTS:
Plaintiff's Philippine agency has been distributing and selling bibles and/or gospel portions
thereof throughout the Philippines and translating the same into several Philippine dialects. On
May 29 1953, the acting City Treasurer of the City of Manila informed plaintiff that it was
conducting the business of general merchandise since November, 1945, without providing itself
with the necessary Mayor's permit and municipal license, in violation of Ordinance No. 3000, as
amended, and Ordinances Nos. 2529, 3028 and 3364, and required plaintiff to secure, within
three days, the corresponding permit and license fees, together with compromise covering the
period from the 4th quarter of 1945 to the 2nd quarter of 1953, in the total sum of P5,821.45.
Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff
deposit and pays under protest the sum of P5, 891.45, if suit was to be taken in court regarding
the same. To avoid the closing of its business as well as further fines and penalties in the
premises on October 24, 1953, plaintiff paid to the defendant under protest the said permit and
license fees in the aforementioned amount, giving at the same time notice to the City Treasurer
that suit would be taken in court to question the legality of the ordinances under which, the said
fees were being collected which was done on the same date by filing the complaint that gave
rise to this action. In its complaint plaintiff prays that judgment be rendered declaring the said
Municipal Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal
and unconstitutional, and that the defendant be ordered to refund to the plaintiff the sum of P5,
891.45 paid under protest, together with legal interest thereon, and the costs, plaintiff further
praying for such other relief and remedy as the court may deem just equitable.
Defendant answered the complaint, maintaining in turn that said ordinances were
enacted by the Municipal Board of the City of Manila by virtue of the power granted to it by
section 2444, subsection (m-2) of the Revised Administrative Code, superseded on June 18,
1949, by section 18, subsection (1) of Republic Act No. 409, known as the Revised Charter of
the City of Manila.
ISSUE:
Whether or not the ordinances were unconstitutional and provide for religious censorship
and restrain the free exercise and enjoyment of its religious profession?
RULING:
Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines,
provides that: No law shall be made respecting an establishment of religion, or prohibiting the
free exercise thereof, and the free exercise and enjoyment of religious profession and worship,
without discrimination or preference, shall forever be allowed. No religion test shall be required
for the exercise of civil or political rights.
Article III, section 1, clause (7) of the Constitution of the Philippinesaforequoted,
guarantees the freedom of religious profession and worship. "Religion has been spoken of as a
profession of faith to an active power that binds and elevates man to its Creator".It has
reference to one's views of his relations to His Creator and to the obligations they impose of

reverence to His being and character, and obedience to His Will. The constitutional guaranty of
the free exercise and enjoyment of religious profession and worship carries with it the right to
disseminate religious information. Any restraints of such right can only be justified like other
restraints of freedom of expression on the grounds that there is a clear and present danger of
any substantive evil which the State has the right to prevent". In the case at bar the license fee
herein involved is imposed upon appellant for its distribution and sale of bibles and other
religious literature.
It may be true that in the case at bar the price asked for the bibles and other religious
pamphlets was in some instances a little bit higher than the actual cost of the same but this
cannot mean that appellant was engaged in the business or occupation of selling said
"merchandise" for profit. For this reason, we believe that the provisions of City of Manila
Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it would impair
its free exercise and enjoyment of its religious profession and worship as well as its rights of
dissemination of religious beliefs.
With respect to Ordinance No. 3000, as amended, which requires the Mayor's permit before any
person can engage in any of the businesses, trades or occupations enumerated therein, we do
not find that it imposes any charge upon the enjoyment of a right granted by the Constitution,
nor tax the exercise of religious practices.
It seems clear, therefore, that Ordinance No. 3000(mayors permit) cannot be considered
unconstitutional, even if applied to plaintiff Society. But as Ordinance No. 2529( license fee) of
the City of Manila, as amended, is not applicable to plaintiff-appellant and defendant-appellee is
powerless to license or tax the business of plaintiff Society involved herein for, as stated before,
it would impair plaintiff's right to the free exercise and enjoyment of its religious profession and
worship, as well as its rights of dissemination of religious beliefs, We find that Ordinance No.
3000, as amended is also inapplicable to said business, trade or occupation of the plaintiff.
Topic: Freedom of Religion: Free Exercise Clause

TOLENTINO vs. THE SECRETARY OF FINANCE
G.R. No. 115455
August 25, 1994
FACTS:
The valued-added tax is levied on the sale, barter or exchange of goods and properties as
well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or
gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts
from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the
existing VAT system and enhance its administration by amending the National Internal Revenue
Code.
ISSUES:
a. Whether or not the law violates the provision of the constitution regarding the freedom
of religion and its exercise thereof?

b. Whether or not the law violates the provisions of the constitution regarding the
Uniformity, Equitability and Progressivity of Taxation?
RULING:
a. Claims of Freedom of Thought and Religious Freedom
The case of American Bible Society v. City of Manila is cited by both the PBS and the PPI in
support of their contention that the law imposes censorship. There, this Court held that an
ordinance of the City of Manila, which imposed a license fee on those engaged in the business
of general merchandise, could not be applied to the appellant's sale of bibles and other religious
literature. This Court relied on Murdock v. Pennsylvania in which it was held that, as a license
fee is fixed in amount and unrelated to the receipts of the taxpayer, the license fee, when
applied to a religious sect, was actually being imposed as a condition for the exercise of the
sect's right under the Constitution. For that reason, it was held, the license fee "restrains in
advance those constitutional liberties of press and religion and inevitably tends to suppress
their exercise."
But, in this case, the fee in although a fixed amount (P1,000), is not imposed for the
exercise of a privilege but only for the purpose of defraying part of the cost of registration. The
registration requirement is a central feature of the VAT system. It is designed to provide a
record of tax credits because any person who is subject to the payment of the VAT pays an
input tax, even as he collects an output tax on sales made or services rendered. The
registration fee is thus a mere administrative fee, one not imposed on the exercise of a
privilege, much less a constitutional right.
For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that
it offends the free speech, press and freedom of religion guarantees of the Constitution to be
without merit. For the same reasons, we find the claim of the Philippine Educational Publishers
Association (PEPA) in G.R. No. 115931 that the increase in the price of books and other
educational materials as a result of the VAT would violate the constitutional mandate to the
government to give priority to education, science and technology (Art. II, sec. 17) to be
untenable.
b. Claims of Progressivity, Denial of Due Process, Equal Protection, and Impairment of Contracts
There is basis for passing upon claims that on its face the statute violates the guarantees
of freedom of speech, press and religion. The possible "chilling effect" which it may have on the
essential freedom of the mind and conscience and the need to assure that the channels of
communication are open and operating importunately demand the exercise of this Court's
power of review.
There is, however, no justification for passing upon the claims that the law also violates
the rule that taxation must be progressive and that it denies petitioners' right to due process
and the equal protection of the laws. The reason for this different treatment has been cogently
stated by an eminent authority on constitutional law thus: "When freedom of the mind is
imperiled by law, it is freedom that commands a moments of respect; when property is
imperiled it is the lawmakers' judgment that commands respect. This dual standard may not
precisely reverse the presumption of constitutionality in civil liberties cases, but obviously it
does set up a hierarchy of values within the due process clause."

What Congress is required by the Constitution to do is to "evolve a progressive system of

taxation." This is a directive to Congress, just like the directive to it to give priority to the
enactment of laws for the enhancement of human dignity and the reduction of social, economic
and political inequalities or for the promotion of the right to "quality education". These
provisions are put in the Constitution as moral incentives to legislation, not as judicially
enforceable rights.
To sum it all up, we hold that the procedural requirements of the Constitution have been
complied with by Congress in the enactment of the statute; that judicial inquiry whether the
formal requirements for the enactment of statutes - beyond those prescribed by the
Constitution - have been observed is precluded by the principle of separation of powers; that
the law does not abridge freedom of speech, expression or the press, nor interfere with the free
exercise of religion, nor deny to any of the parties the right to an education; and that, in view of
the absence of a factual foundation of record, claims that the law is regressive, oppressive and
confiscatory and that it violates vested rights protected under the Contract Clause are
prematurely raised and do not justify the grant of prospective relief by writ of prohibition.
Topic: Constitutional Limitations: Uniformity, Equitability, Progressivity of Taxation
CITY OF BAGUIO vs. DE LEON
Gr. No. 24756 October 31, 1968
FACTS:
In this appeal, a lower court decision upholding the validity of an ordinance 1 of the City
of Baguio imposing a license fee on any person, firm, entity or corporation doing business in the
City of Baguio is assailed by defendant-appellant Fortunato de Leon. He was held liable as a real
estate dealer with a property therein worth more than P10,000, but not in excess of P50,000,
and therefore obligated to pay under such ordinance the P50 annual fee. That is the principal
question. In addition, there has been a firm and unyielding insistence by defendant-appellant of
the lack of jurisdiction of the City Court of Baguio, where the suit originated, a complaint having
been filed against him by the City Attorney of Baguio for his failure to pay the amount of P300
as license fee covering the period from the first quarter of 1958 to the fourth quarter of 1962,
allegedly, in spite of repeated demands. Nor was defendant-appellant agreeable to such a suit
being instituted by the City Treasurer without the consent of the Mayor, which for him was
indispensable. The lower court was of a different mind.
It declared the above ordinance as amended, valid and subsisting, and held defendantappellant liable for the fees therein prescribed as a real estate dealer. Hence, this appeal.
Assume the validity of such ordinance, and there would be no question about the liability of
defendant-appellant for the above license fee, it being shown in the partial stipulation of facts,
that he was "engaged in the rental of his property in Baguio" deriving income therefrom during
the period covered by the first quarter of 1958 to the fourth quarter of 1962.
ISSUE:
Whether or not the ordinance is valid?
RULING:

The challenged ordinance cannot be considered ultra vires as there is more than ample
statutory authority for the enactment thereof. Nonetheless, its validity on constitutional grounds
is challenged because of the allegation that it imposed double taxation, which is repugnant to
the due process clause, and that it violated the requirement of uniformity. We do not view the
matter thus.
As to why double taxation is not violative of due process, Justice Holmes made clear in
this language: "The objection to the taxation as double may be laid down or one side. . . . The
14th Amendment [the due process clause] no more forbids double taxation than it does
doubling the amount of a tax, short of confiscation or proceedings unconstitutional on other
grounds." With that decision rendered at a time when American sovereignty in the Philippines
was recognized, it possesses more than just a persuasive effect. To some, it delivered the coup
de grace to the bogey of double taxation as a constitutional bar to the exercise of the taxing
power. It would seem though that in the United States, as with us, its ghost, as noted by an
eminent critic, still stalks the juridical stage. In a 1947 decision, however, 9 we quoted with
approval this excerpt from a leading American decision: 10 "Where, as here, Congress has
clearly expressed its intention, the statute must be sustained even though double taxation
results."
At any rate, it has been expressly affirmed by us that such an "argument against double
taxation may not be invoked where one tax is imposed by the state and the other is imposed by
the city . . ., it being widely recognized that there is nothing inherently obnoxious in the
requirement that license fees or taxes be exacted with respect to the same occupation, calling
or activity by both the state and the political subdivisions thereof. The above would clearly
indicate how lacking in merit is this argument based on double taxation.
Now, as to the claim that there was a violation of the rule of uniformity established by the
Constitution. According to the challenged ordinance, a real estate dealer who leases property
worth P50,000 or above must pay an annual fee of P100. If the property is worth P10,000 but
not over P50,000, then he pays P50 and P24 if the value is less than P10,000. On its face,
therefore, the above ordinance cannot be assailed as violative of the constitutional requirement
of uniformity. A tax is considered uniform when it operates with the same force and effect in
every place where the subject may be found."
It is thus apparent from the above that in much the same way that the plea of double
taxation is unavailing, the allegation that there was a violation of the principle of uniformity is
inherently lacking in persuasiveness. There is no need to pass upon the other allegations to
assail the validity of the above ordinance, it being maintained that the license fees therein
imposed "is excessive, unreasonable and oppressive" and that there is a failure to observe the
mandate of equal protection. A reading of the ordinance will readily disclose their inherent lack
of plausibility.

TOPIC:Prohibition against impairment of obligation of contracts

CASSANOVA vs. HORD
8 PHIL 125
FACTS:
On January 1897, the Spanish government granted to the Plaintiff certain mines in the
Province of Ambos, Camarines, of which mines the Plaintiff is now the owner. The said mines
were granted by virtue of the royal decree of the 14th of May, 1967 which provided among
others, that the grantee shall pay annually a fixed tax of 40 escudos and a further tax of 3% on
the gross earnings. Furthermore, the decree also provided that no other taxes than those
mentioned shall be imposed upon mining and metallurgical industries.
However, the defendant Collector of Internal Revenue, considered the questioned mining
concessions to fall within the provisions of Sec. 134 of the Internal Revenue Act which imposes
on all valid perfected mining concessions granted prior to April 11, 1899, an annual tax of P100
and an ad valorem tax equal to 3% of the actual market value of the gross output.
The defendant accordingly imposed upon these properties the tax mentioned and
thereafter the plaintiff paid under protest. The plaintiff brought this action against the
defendant to recover the sum paid under protest. Judgment was rendered in favor of the
defendant and from that judgment plaintiff appealed.
ISSUE:
Whether or not Sec. 134 of the Internal Revenue Act is valid.
HELD:
No. This is because it is violative of the provision of Sec. 5 of the Act of Congress of July 1,
1902, which provides that no law impairing the obligation of contracts shall be enacted. It
seems that the Deed covering this particular mining concessions constituted a contract
between the Spanish government and the Plaintiff, the obligation of which was impaired by the
enactment of Sec. 134 of the Internal Revenue Act, thereby infringing the provisions of said Act
of Congress. Therefore, the said provision of law is void.
Topic: Non-impairment Clause
CAGAYAN ELECTRIC POWER & LIGHT CO., INC. vs
COMMISSIONER OF INTERNAL REVENUE

G.R. No. L-60126
September 25, 1985
FACTS:
The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which
its payment of 3% tax on its gross earnings from the sale of electric current is "in lieu of all
taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and
poles, wires, transformers, and insulators of the grantee, from which taxes and assessments the
grantee is hereby expressly exempted"
On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by making
liable for income tax all corporate taxpayers not specifically exempt under paragraph (c) (1) of
said section and section 27 of the Tax Code notwithstanding the "provisions of existing special
or general laws to the contrary". Thus, franchise companies were subjected to income tax in
addition to franchise tax.
However, in petitioner's case, its franchise was amended by Republic Act No. 6020,
effective August 4, 1969, by authorizing the petitioner to furnish electricity to the municipalities
of Villanueva and Jasaan, Misamis Oriental in addition to Cagayan de Oro City and the
municipalities of Tagoloan and Opol. The amendment reenacted the tax exemption in its original
charter or neutralized the modification made by Republic Act No. 5431 more than a year before.
By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal
Revenue in a demand letter dated February 15, 1973 required the petitioner to pay deficiency
income taxes for 1968-to 1971. The petitioner contested the assessments. The Commissioner
cancelled the assessments for 1970 and 1971 but insisted on those for 1968 and 1969.
ISSUE:
Whether or not the imposing of the franchise tax is valid?
RULING:
We hold that Congress could impair petitioner's legislative franchise by making it liable for
income tax from which heretofore it was exempted by virtue of the exemption provided for in
section 3 of its franchise. The Constitution provides that a franchise is subject to amendment,
alteration or repeal by the Congress when the public interest so requires.
Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the
provisions of the Constitution and to the terms and conditions established in Act No. 3636
whose section 12 provides that the franchise is subject to amendment, alteration or repeal by
Congress.
Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income
tax all corporate taxpayers not expressly exempted therein and in section 27 of the Code, had
the effect of withdrawing petitioner's exemption from income tax.
The Tax Court acted correctly in holding that the exemption was restored by the
subsequent enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the said
tax exemption. Hence, the petitioner is liable only for the income tax for the period from January
1 to August 3, 1969 when its tax exemption was modified by Republic Act No. 5431.

It is relevant to note that franchise companies, like the Philippine Long Distance Telephone
Company, have been paying income tax in addition to the franchise tax.
However, it cannot be denied that the said 1969 assessment appears to be highly
controversial. The Commissioner at the outset was not certain as to petitioner's income tax
liability. It had reason not to pay income tax because of the tax exemption in its franchise.
For this reason, it should be liable only for tax proper and should not be held liable for the
surcharge and interest.
Topic: Constitutional Limitations: Non-impairment Clause

MERALCO vsPROVINCE OF LAGUNA
G.R. No. 131359
May 5, 1999
FACTS:
On various dates certain Municipalities of the Province of Laguna issued resolutions
granting franchise in favor of petitioner MERALCO for the supply of electric light heat and power
within their concerned areas. National Electrification Administration on January light and power
service in the Municipality of Calamba Laguna.
Pursuant to the Provisions of the LGC of 1991 the respondent province enacted Laguna
Provincial Ordinance no. 01-92 effective January 1 1993, proving:
sec. 2.09 Franchise Tax- there is hereby imposed a tax on businesses enjoying a franchise, at a
rate of 50% of 1% of the gross annual receipts which shall include both cash sales and sales on
account realized during the preceding calendar year within this province including the territorial
limits on any city located in the province.

On the basis of this ordinance respondent provincial Treasurer sent a demand letter to
MERALCO for its corresponding tax payment.
Under protest MERALCO paid the tax in the amount of 19 Million Pesos.
A claim for refund was thereafter sent by Meralco to Provincial Treasurer of Laguna
claiming that the franchise tax that it has paid and continued to pay to the National
Government pursuant to PD 551 already included franchise tax imposed by the Provincial Tax
Ordinance. MERALCO contended that the imposition of a franchise tax under Sec 2.09 of LPO
01-92 contravened the provisions of section 1 of PD 551.
ISSUE:
Whether the imposition of a franchise tax under sec 2.09 of LPO 01-92 is violative of the
non-impairment clause of the Constitution and sec 1 of PD 551?
RULING:
Under the now prevailing Constitution, where there is neither a grant nor a prohibition by
statute, the tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule is to safeguard the viability
and self-sufficiency of local government units by directly granting them general and broad tax
powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and
unconditional; the constitutional objective obviously is to ensure that, while the local
government units are being strengthened and made more autonomous,the legislature must still
see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions; (b) each local government unit will have its fair share of available
resources; (c) the resources of the national government will not be unduly disturbed; and (d)
local taxation will be fair, uniform, and just.
While the Court has, not too infrequently, referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the inducement for carrying on the
franchise, these exemptions, nevertheless, are far from being strictly contractual in nature.
Contractual tax exemptions, in the real sense of the term and where the non-impairment clause
of the Constitution can rightly be invoked, are those agreed to by the taxing authority in
contracts, such as those contained in government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting in its private capacity, sheds its
cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind
may not be revoked without impairing the obligations of contracts. These contractual tax
exemptions, however, are not to be confused with tax exemptions granted under franchises. A
franchise partakes the nature of a grant which is beyond the purview of the non-impairment
clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its
precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except under the condition that such privilege shall
be subject to amendment, alteration or repeal by Congress as and when the common good so
requires.


RADIO COMMUNICATIONS OF THE PHILIPPINES, INC. vs.
PROVINCIAL ASSESOR OF SOUTH COTABATO
G.R. No. 144486
April 13, 2005
FACTS:
In 1957, Republic Act No. 2036 granted RCPI a fifty-year franchise. Thereafter, the
municipal treasurer of Tupi, South Cotabato assessed RCPI real property taxes from 1981 to
1985. The municipal treasurer demanded that RCPI pay P166,810 as real property tax on its
radio station building in Barangay Kablon, as well as on its machinery shed, radio relay station
tower and its accessories, and generating sets, based on the following tax declarations.
RCPI protested the assessment before the Local Board of Assessment Appeals. RCPI
claimed that all its assessed properties are personal properties and thus exempt from the real
property tax. Assuming that the assessed properties are real property, they are still exempt
from real property taxes. Section 3 of Presidential Decree No. 464 states that to be taxable, the
machinery should be attached to the real estate and essential for manufacturing, commercial,
mining, industrial, or agricultural purposes. RCPI claimed that the assessed properties are not
used for manufacturing, commercial, mining, industrial, or agricultural purposes. Besides, the
assessed properties are attached to a building on a lot not owned by RCPI.
RCPI also pointed out that its franchise exempts RCPI from paying any and all taxes of
any kind, nature or description in exchange for its payment of tax equal to one and one-half per
cent on all gross receipts from the business conducted under its franchise. RCPI further
claimed that any deviation from its franchise would violate the non-impairment of contract
clause of the Constitution. Finally, RCPI stated that the value of the properties assessed has
depreciated since their acquisition in the 1960s.
ISSUE:

Whether or not the assessment of the Provincial assessor was violative of the nonimpairment clause?
RULING:
As found by the appellate court, RCPIs radio relay station tower, radio station building,
and machinery shed are real properties and are thus subject to the real property tax. Section
14 of RA 2036, as amended by RA 4054, states that in consideration of the franchise and rights
hereby granted and any provision of law to the contrary notwithstanding, the grantee shall pay
the same taxes as are now or may hereafter be required by law from other individuals,
copartnerships, private, public or quasi-public associations, corporations or joint stock
companies, on real estate, buildings and other personal property The clear language of Section
14 states that RCPI shall pay the real estate tax.
The in lieu of all taxes clause in Section 14 of RA 2036, as amended by RA 4054, cannot
exempt RCPI from the real estate tax because the same Section 14 expressly states thatRCPI
shall pay the same taxes x xxonreal estate, buildings x xx. The in lieu of all taxes clause in
the third sentence of Section 14 cannot negate the first sentence of the same Section 14, which
imposes the real estate tax on RCPI. The Court must give effect to both provisions of the same
Section 14. This means that the real estate tax is an exception to the in lieu of all taxes
clause.
Subsequent legislations have radically amended the in lieu of all taxes clause in
franchises of public utilities. As RCPI correctly observes, the Local Government Code of 1991
withdrew all the tax exemptions existing at the time of its passage including that of RCPIs
with respect to local taxes like the real property tax. Also, Republic Act No. 7716 abolished the
franchise tax on telecommunications companies effective 1 January 1996. To replace the
franchise tax, RA 7716 imposed a 10 percent value-added-tax on telecommunications
companies under Section 102 of the National Internal Revenue Code.


THE CITY GOVERNMENT OF QUEZON CITYvs BAYANTEL
G.R. No. 162015 March 6, 2006
FACTS:
Bayantel is a legislative franchise holder under Republic Act No. 3259to establish and
operate radio stations for domestic telecommunications, radiophone, broadcasting and
telecasting. On July 20, 1992, barely few months after the LGC took effect, Congress enacted
Rep. Act No. 7633, amending Bayantels original franchise.
It is undisputed that within the territorial boundary of Quezon City, Bayantel owned
several real properties on which it maintained various telecommunications facilities. In 1993,
the government of Quezon City, pursuant to the taxing power vested on local government units
by Section 5, Article X of the 1987 Constitution, infra, in relation to Section 232 of the LGC,
supra, enacted City Ordinance No. SP-91, S-93, otherwise known as the Quezon City Revenue
Code imposing, under Section 5 thereof, a real property tax on all real properties in Quezon
City, and, reiterating in its Section 6, the withdrawal of exemption from real property tax under
Section 234 of the LGC.
Conformably with the Citys Revenue Code, new tax declarations for Bayantels real
properties in Quezon City were issued by the City Assessor and were received by Bayantel on
August 13, 1998.
ISSUE:
Whether or not the Quezon City Revenue Code violated the non-impairment of contracts?
RULING:
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may
be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution.
Under the latter, the exercise of the power may be subject to such guidelines and limitations as
the Congress may provide which, however, must be consistent with the basic policy of local
autonomy.
Indeed, the grant of taxing powers to local government units under the Constitution and
the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant
to a declared national policy. The legal effect of the constitutional grant to local governments
simply means that in interpreting statutory provisions on municipal taxing powers, doubts must
be resolved in favor of municipal corporations.

As we see it, then, the issue in this case no longer dwells on whether Congress has the
power to exempt Bayantels properties from realty taxes by its enactment of Rep. Act No. 7633
which amended Bayantels original franchise. The more decisive question turns on whether
Congress actually did exempt Bayantels properties at all by virtue of Section 11 of Rep. Act No.
7633.
Admittedly, Rep. Act No. 7633 was enacted subsequent to the LGC. Perfectly aware that
the LGC has already withdrawn Bayantels former exemption from realty taxes, Congress opted
to pass Rep. Act No. 7633 using, under Section 11 thereof, exactly the same defining phrase
"exclusive of this franchise" which was the basis for Bayantels exemption from realty taxes
prior to the LGC. In plain language, Section 11 of Rep. Act No. 7633 states that "the grantee, its
successors or assigns shall be liable to pay the same taxes on their real estate, buildings and
personal property, exclusive of this franchise, as other persons or corporations are now or
hereafter may be required by law to pay." The Court views this subsequent piece of legislation
as an express and real intention on the part of Congress to once again remove from the LGCs
delegated taxing power, all of the franchisees (Bayantels) properties that are actually, directly
and exclusively used in the pursuit of its franchise.
Topic: Constitutional Limitations: Tax Exemption of traditional Exemptees

REV. FR. CASIMIRO LLADOC vs. COMMISSIONER OF INTERNAL
G.R. No. L-19201
June 16, 1965
FACTS:

Sometime in 1957, the M.B. Estate, Inc., of BacolodCity, donated P10,000.00 in cash to
Rev. Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of
herein petitioner, for the construction of a new Catholic Church in the locality. The total amount
was actually spent for the purpose intended.
On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date
of April 29, 1960, the respondent Commissioner of Internal Revenue issued an assessment for
donee's gift tax against the Catholic Parish of Victorias, Negros Occidental, of which petitioner
was the priest. The tax amounted to P1,370.00 including surcharges, interests of 1% monthly
from May 15, 1958 to June 15, 1960, and the compromise for the late filing of the return.
Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The
protest and the motion for reconsideration presented to the Commissioner of Internal Revenue
were denied. The petitioner appealed to the Court of Tax Appeals on November 2, 1960. In the
petition for review, the Rev. Fr. CasimiroLladoc claimed, among others, that at the time of the
donation, he was not the parish priest in Victorias; that there is no legal entity or juridical
person known as the "Catholic Parish Priest of Victorias," and, therefore, he should not be liable
for the donee's gift tax. It was also asserted that the assessment of the gift tax, even against
the Roman Catholic Church, would not be valid, for such would be a clear violation of the
provisions of the Constitution.
ISSUE:
Whether or not petitioner should be liable for the assessed donee's gift tax on the
P10,000.00 donated for the construction of the VictoriasParishChurch?
RULING:
The Constitution of the Philippines, exempts from taxation cemeteries, churches and
parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used
exclusively for religious purposes. The exemption is only from the payment of taxes assessed on
such properties enumerated, as property taxes, as contra distinguished from excise taxes.
In the present case, what the Collector assessed was a donee's gift tax; the assessment
was not on the properties themselves. It did not rest upon general ownership; it was an excise
upon the use made of the properties, upon the exercise of the privilege of receiving the
properties. A gift tax is not a property tax, but an excise tax imposed on the transfer of property
by way of gift inter vivos, the imposition of which on property used exclusively for religious
purposes, does not constitute an impairment of the Constitution. As well observed by the
learned respondent Court, the phrase "exempt from taxation," as employed in the Constitution
should not be interpreted to mean exemption from all kinds of taxes. And there being no clear,
positive or express grant of such privilege by law, in favor of petitioner, the exemption herein
must be denied.


Abra Valley College v. Aquino
GR L-39086 15 June 1988
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:
NO.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).
Herrera vs. The Quezon City Board Of Assessment Appeals
G.R. No. L-15270 September 30, 1961
FACTS:
Petitioners Jose and Ester Herrera were authorized by the Director of the Bureau of
Hospitals to establish and operate the St. Catherine's Hospital. In 1953, the petitioners sent a
letter to the Quezon City Assessor requesting exemption from payment of real estate tax on the
lot, building and other improvements comprising the hospital stating that the same was
established for charitable and humanitarian purposes and not for commercial gain which was
granted effective the years 1953 to 1955. Subsequently, however, in a letter dated August 10,
1955 the Quezon City Assessor notified the petitioners that the aforesaid properties were reclassified from exempt to "taxable" and thus assessed for real property taxes effective 1956.
The petitioners appealed the assessment to the Quezon City Board of Assessment Appeals,
which, affirmed the decision of the City Assessor. A motion for reconsideration thereof was
denied. From this decision, the petitioners instituted the instant appeal.
The building involved in this case is principally used as a hospital. From the evidence
presented by petitioners, it is made to appear that there are two kinds of charity patients (a)
those who come for consultation only ("out-charity patients"); and (b) those who remain in the
hospital for treatment ("lying-in-patients"). Petitioners also operate within the premises of the
hospital the "St. Catherine's School of Midwifery" which was granted government recognition by
the Secretary of Education. The students practice in the St. Catherine's Hospital, as well as in
the St. Mary's Hospital, which is also owned by the petitioners. A separate set of accounting
books is maintained by the school for midwifery distinct from that kept by the hospital.
However, the petitioners have refused to submit a separate statement of accounts of the
school.

ISSUE:
Whether or not the said properties are used exclusively for charitable or educational
purposes which are exempt from real property tax
HELD:
YES.
The Court of Tax Appeals decided the issue in the negative, upon the ground that the St.
Catherine's Hospital has a pay ward for ... pay-patients, who are charged for the use of the
private rooms, operating room, laboratory room, delivery room, etc., like other hospitals
operated for profit and that petitioners and their family occupy a portion of the building for their
residence.
It should be noted, however, that, according to the very statement of facts made in the
decision appealed from, of the thirty-two (32) beds in the hospital, twenty (20) are for charitypatients; that the income realized from pay-patients is spent for improvement of the charity
wards; and that petitioners, Dr. Ester Ochangco Herrera, as directress of said hospital, does not
receive any salary, although its resident physician gets a monthly salary of P170.00. It is well
settled, in this connection, that the admission of pay-patients does not detract from the
charitable character of a hospital, if all its funds are devoted exclusively to the maintenance of
the institution as a public charity. In other words, where rendering charity is its primary object,
and the funds derived from payments made by patients able to pay are devoted to the
benevolent purposes of the institution, the mere fact that a profit has been made will not
deprive the hospital of its benevolent character.
Moreover, the exemption in favor of property used exclusively for charitable or
educational purposes is not limited to property actually indispensable therefor but extends to
facilities which are incidental to and reasonably necessary for the accomplishment of said
purposes, such as, in the case of hospitals, a school for training nurses, a nurses' home,
property use to provide housing facilities for interns, resident doctors, superintendents, and
other members of the hospital staff, and recreational facilities for student nurses, interns and
residents.
Within the purview of the Constitutional exemption from taxation, the St. Catherine's
Hospital is, therefore, a charitable institution, and the fact that it admits pay-patients does not
bar it from claiming that it is devoted exclusively to benevolent purposes, it being admitted that
the income derived from pay-patients is devoted to the improvement of the charity wards,
which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside from "outcharity patients" who come only for consultation.


Bishop of Nueva Segovia vs. Provincial Board of Ilocos Norte
GR 27588, 31 December 1927
FACTS:
The Roman Catholic Apostolic Church is the owner of a parcel of land in San Nicolas, Ilocos
Norte. On the south side is a part of the Church yard, the convent and an adjacent lost used for
a vegetable garden in which there is a stable and a well for the use of the convent. In the center
is the remainder of the churchyard and the Church. On the north side is an old cemetery with its
two walls still standing, and a portion where formerly stood a tower. The provincial board
assessed land tax on lots comprising the north and south side, which the church paid under
protest. The plaintiff filed this action for the recovery of the sum paid by to the defendants by
way of land tax, alleging that the collection of this tax is illegal.
The lower court absolved the defendants from the complaint in regard to the lot adjoining
convent and declared that the tax collected on the lot, which formerly was the cemetery and on
the portion where the lower stood, was illegal. Both parties appealed from this judgment.
ISSUE:
Whether or not the subject lots are exempted from taxation.
HELD:
YES.
The exemption in favor of the convent in the payment of land tax refers to the home of
the priest who presides over the church and who has to take care of himself in order to
discharge his duties. The exemption includes not only the land actually occupied by the Church
but also the adjacent ground destined to the ordinary incidental uses of man. A vegetable
garden, thus, which belongs to a convent, where its use is limited to the necessity of the priest,
comes under the exemption. Further, land used as a lodging house by the people who
participate in religious festivities, which constitutes an incidental use in religious functions,
likewise comes within the exemption. It cannot be taxed according to its former use, i.e. a
cemetery.
The judgment appealed from is reversed in all it parts and it is held that both lots are
exempt from land tax and the defendants are ordered to refund to plaintiff whatever was paid
as such tax, without any special pronouncement as to costs.

LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY

G.R. No. 144104 June 29, 2004
FACTS:
The petitioner, a non-stock and non-profit entity is the registered owner of a parcel of land
where erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the
Philippines. A big space at the ground floor is being leased to private parties, for canteen and
small store spaces, and to medical or professional practitioners who use the same as their
private clinics for their patients whom they charge for their professional services. Almost onehalf of the entire area on the left side of the building along Quezon Avenue is vacant and idle,
while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is
being leased for commercial purposes to a private enterprise known as the Elliptical Orchids
and Garden Center.
On June 7, 1993, both the land and the hospital building of the petitioner were assessed
for real property taxes in the amount of P4, 554,860 by the City Assessor of Quezon City but the
former filed a Claim for Exemption from real property taxes with the City Assessor, predicated
on its claim that it is a charitable institution.
ISSUE:
Whether or not the petitioners real properties are exempted from realty tax exemptions.
HELD:
Even if the petitioner is a charitable institution, those portions of its real property that are
leased to private entities are not exempt from real property taxes as these are not actually,
directly and exclusively used for charitable purposes. What is meant by actual, direct and
exclusive use of the property for charitable purposes is the direct and immediate and actual
application of the property itself to the purposes for which the charitable institution is
organized.
Hence, a claim for exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken. Under Section 2 of Presidential Decree No. 1823,
the petitioner does not enjoy any property tax exemption privileges for its real properties as
well as the building constructed thereon. If the intentions were otherwise, the same should have
been among the enumeration of tax exempt privileges under Section 2. Accordingly, the
portions occupied by the hospital used for its patients are exempt from real property taxes while
those leased to private entities are not exempt from such taxes.
Topic: Constitutional Limitations: Tax Exemption of Non-stock non-profit Educational
Institutions
Commissioner of Internal Revenue v. Court of Appeals and YMCA
G.R.No.L-124043 October 14, 1998
FACTS:

Private Respondent YMCA is a non-stock, non-profit institution, which conducts various

programs and activities that are beneficial to the public, especially the young people, pursuant
to its religious, educational and charitable objectives. In 1980, private respondent earned,
among others, an income of P676, 829.80 from leasing out a portion of its premises to small
shop owners, like restaurants and canteen operators, and P44,259.00 from parking fees
collected from non-members. On July 2, 1984, the Commissioner of Internal Revenue (CIR)
issued an assessment to private respondent, in the total amount of P415,615.01 including
surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes on
rentals and professional fees and deficiency withholding tax on wages. Private respondent
formally protested the assessment and, as a supplement to its basic protest, filed a letter dated
October 8, 1985. In reply, the CIR denied the claims of YMCA. Contesting the denial of its
protest, the YMCA filed a petition for review at the Court of Tax Appeals on March 14, 1989. In
due
course,
the
CTA
issued
this
ruling
in
favor
of
the
YMCA.
ISSUE:
Whether or not the YMCA is exempted from rental income derived from the lease of its
properties
RULING:
NO.Petitioner argues that while the income received by the organizations enumerated in
Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in
respect to income received by them as such," the exemption does not apply to income derived
"xxx from any of their properties, real or personal, or from any of their activities conducted for
profit, regardless of the disposition made of such income xxx".
The Court agrees with the commissioner. In the instant case, the exemption claimed by
the YMCA is expressly disallowed by the very wording of the last paragraph of then Section 27
of the NIRC which mandates that the income of exempt organizations (such as the YMCA) from
any of their properties, real or personal, be subject to the tax imposed by the same Code.
Topic: Constitutional Limitations: Origin of Revenue, Appropriation and Tarriff Bills
ABAKADA Guro Party List vs. Ermita
G.R. No. 168056 September 1, 2005
FACTS:
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a
petition for prohibition on May 27, 2005 questioning the constitutionality of Sections 4, 5 and 6
of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal
Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5
imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of
services and use or lease of properties. These questioned provisions contain a uniform proviso
authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT
rate to 12%, effective January 1, 2006, after specified conditions have been satisfied.
Petitioners argue that the law is unconstitutional.

ISSUES:
Whether or not there is a violation of Article VI, Section 24 of the Constitution.
Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2)
of the Constitution.
RULING:
1. Since there is no question that the revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its constitutional power to introduce
amendments to the House bill when it included provisions in Senate Bill No. 1950 amending
corporate income taxes, percentage, and excise and franchise taxes.
2. There is no undue delegation of legislative power but only of the discretion as to the
execution of a law. This is constitutionally permissible. Congress does not abdicate its functions
or unduly delegate power when it describes what job must be done, who must do it, and what is
the scope of his authority; in our complex economy that is frequently the only way in which the
legislative process can go forward.
3. The power of the State to make reasonable and natural classifications for the purposes
of taxation has long been established. Whether it relates to the subject of taxation, the kind of
property, the rates to be levied, or the amounts to be raised, the methods of assessment,
valuation and collection, the States power is entitled to presumption of validity. As a rule, the
judiciary will not interfere with such power absent a clear showing of unreasonableness,
discrimination, or arbitrariness.
Topic: Forms of Escape from Taxation

REPUBLIC OF THE PHILIPPINES vs. HEIRS OF CESAR JALANDONI, ET AL.
G.R. No. L-18384 September 20, 1965
FACTS:
Isabel Ledesma died intestate leaving real properties situated in the provinces of Negros
Occidental and Rizal and in the cities of Manila and Baguio, and personal properties consisting
of shares of stock in various domestic corporations. She left as heirs her husband Bernardino
and three children, namely, Cesar, Angeles and Delfin.
Cesar, one of the heirs, filed an estate and inheritance tax return and this return also
shows that no testamentary or intestate proceedings were instituted. On the basis of this
return the Bureau of Internal Revenue made an assessment as estate and inheritance taxes,
respectively, stating therein that the assessment was "to be considered partial pending
investigation of the return." These sums were paid by Cesar. After a preliminary investigation
was made of the properties reported in the abovementioned return, a second assessment was
made by the Bureau of Internal Revenue as deficiency estate and inheritance taxes,
respectively, for which reason a demand was made on Bernardino stating therein that the same
was still "to be considered partial pending further investigation of the return," which amounts
were paid by Bernardino. The third assessment was made against the estate wherein the heirs

were required to pay the amounts of P29,995.30 and P49,842.05 as deficiency estate and
inheritance taxes, respectively, including accrued interests, with the warning that failure on
their part to pay the same would subject them to the payment of surcharge, interest, and
penalty for late payment of the tax.
ISSUE:
Whether or not the heirs of the deceased have committed any act indicative of an
intention to evade the payment of the inheritance or estate taxes due the government
HELD:
Record shows that the three lots alleged to have been excluded in the return were already
declared in the earlier return submitted by Bernardino Jalandoni as part of his property and his
wife for purposes of income tax, there is reason to believe that their omission from the return
submitted by Cesar Jalandoni was merely due to an honest mistake or inadvertence as properly
explained by appellants. We can hardly dispute this conclusion as it would be stretching too
much the imagination if we would find that, because of such inadvertence, which appears to be
inconsequential, the heirs of the deceased deliberately omitted from the return the three lots
with the only purpose of defrauding the government after declaring therein as asset of the
estate property worth P1,324,555.80.
The same thing may be said with regard to the alleged undervaluation of certain sugar
and rice lands reported by Cesar Jalandoni for the same can at most be considered as the result
of an honest difference of opinion and not necessarily an intention to commit fraud.
Finally, SC finds it unreasonable to impute with regard to the appraisal made by
appellants of the shares of stock of the deceased simply because Cesar Jalandoni placed in his
return an aggregate market value instead of mentioning the book value declared by said
corporations in the returns filed by them with the Bureau of Internal Revenue. The fact that the
value given in the returns did not tally with the book value appearing in the corporate books is
not in itself indicative of fraud especially when it is taken into consideration the circumstance
that said book value only became known several months after the death of the deceased.
Moreover, it is a known fact that stock securities frequently fluctuate in value and a mere
difference of opinion in relation thereto cannot serve as proper basis for assessing an intention
to defraud the government.
Having reached the conclusion that the heirs of the deceased have not committed any act
indicative of an intention to evade the payment of the inheritance or estate taxes due the
government, as evidenced by their willingness in the past to pay all the taxes properly assessed
against them, it is evident that the instant claim of appellee has already prescribed under
Section 331 of the National Internal Revenue Code. And with this conclusion, a discussion of the
other errors assigned by appellants would seem to be unnecessary.


YUTIVO SONS HARDWARE COMPANY vs. COURT OF TAX APPEALS
G.R. No. L-13203 January 28, 1961
FACTS:
Petitioner was engaged, prior to the last world war, in the importation and sale of
hardware supplies and equipment. After the liberation, it resumed its business and bought a
number of cars and trucks from General Motors Overseas, an American corporation licensed to
do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185
and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only
once on original sales, Yutivo paid no further sales tax on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (SM) was organized to engage in the business of
selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 divided
into 10,000 shares with a par value of P100 each. After the incorporation of SM and until the
withdrawal of GM from the Philippines in the middle of 1947, the cars and tracks purchased by
Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas
and Mindanao.
When General Motors Overseas Corporation (GM) decided to withdraw from the
Philippines in the middle of 1947, the U.S. manufacturer of GM cars and trucks appointed Yutivo
as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of
selling exclusively to Southern Motors, Inc. (SM). In the same way that GM used to pay sales
taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis
of its selling price to SM, and since such sales tax, as already stated, is collected only once on
original sales, SM paid no sales tax on its sales to the public.
The Collector of Internal Revenue made an assessment upon Yutivo and demanded from
the latter P1,804,769.85 as deficiency sales tax plus surcharge. The assessment was disputed
by the petitioner.
ISSUES:
1. Whether or not fraud is present.
2. Whether or not imposition of 5% fraud surcharge is correct.

3. Whether or not sales tax already paid by Yutivo should first be deducted from the
selling price of SM in computing the sales tax due on each vehicle
HELD:
1. NO.
The Court inclined to rule that the Court of Tax Appeals was not justified in finding that SM
was organized for no other purpose than to defraud the Government of its lawful revenues. In
the first place, this corporation was organized in June, 1946 when it could not have caused
Yutivo any tax savings. The sales tax liability of Yutivo did not arise until July 1, 1947 when it
became the importer and simply continued its practice of selling to SM. The decision, therefore,
of the Tax Court that SM was organized purposely as a tax evasion device runs counter to the
fact that there was no tax to evade. In the second place, SM was organized and it operated,
under circumstance that belied any intention to evade sales taxes. The transactions between
Yutivo and SM, however, have always been in the open, embodied in private and public
documents, constantly subject to inspection by the tax authorities. In the third place, sections
184 to 186 of the said Code provides that the sales tax shall be collected "once only on every
original sale, barter, exchange . . , to be paid by the manufacturer, producer or importer." In this
connection, it should be stated that a taxpayer has the legal right to decrease the amount of
what otherwise would be his taxes or altogether avoid them by means which the law permits.
2. NO.
The Court found merit in petitioner's contention that the Court of Tax Appeals erred in the
imposition of the 5% fraud surcharge because no element of fraud is present. Pursuant to
Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the
deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales
made by SM are in substance by Yutivo this does not necessarily establish fraud nor the willful
filing of a false or fraudulent return.
3. NO
The Court likewise found that the Tax Court erred in computing the alleged deficiency
sales tax on the selling price of SM without previously deducting therefrom the sales tax due
thereon. The sales tax provisions impose a tax on original sales measured by "gross selling
price" or "gross value in money". These terms, as interpreted by the respondent Collector, do
not include the amount of the sales tax, if invoiced separately. This is the exact amount which,
according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of
the surcharges.


COMMISSIONER OF INTERNAL REVENUE vs. NORTON and HARRISON COMPANY
.G.R. No. L-17618
August 31, 1964
FACTS:
Under date of July 27, 1948. Norton and Jackbilt entered into an agreement whereby
Norton was made the sole and exclusive distributor of concrete blocks manufactured by Jackbilt.
Pursuant to this agreement, whenever an order for concrete blocks was received by the Norton
& Harrison Co. from a customer, the order was transmitted to Jackbilt which delivered the
merchandise direct to the customer. Payment for the goods is, however, made to Norton, which
in turn pays Jackbilt the amount charged the customer less a certain amount, as its
compensation or profit. In the case of the sale of 420 pieces of concrete blocks to the American
Builders on April 1, 1952, the purchaser paid to Norton the sum of P189.00 the purchase price.
Out of this amount Norton paid Jackbilt P168.00, the difference obviously being its
compensation. As per records of Jackbilt, the transaction was considered a sale to Norton. It was
under this procedure that the sale of concrete blocks manufactured by Jackbilt was conducted
until May 1, 1953, when the agency agreement was terminated and a management agreement
between the parties was entered into. The management agreement provided that Norton would
sell concrete blocks for Jackbilt, for a fixed monthly fee of P2,000.00, which was later increased
to P5,000.00.
The Commissioner of Internal Revenue, after conducting an investigation, assessed the
respondent Norton & Harrison for deficiency sales tax and surcharges in the amount of
P32,662.90, making as basis thereof the sales of Norton to the Public. In other words, the
Commissioner considered the sale of Norton to the public as the original saleand not the
transaction from Jackbilt.
ISSUE:
Whether the basis of the computation of the deficiency sales tax should be the sale of the
blocks to the public and not to Norton.
HELD:
If the income of Norton should be considered separate from the income of Jackbilt, then
each would declare such earning separately for income tax purposes and thus pay lesser
income tax. The combined taxable Norton-Jackbilt income would subject Norton to a higher tax.
Based upon the 1954-1955 income tax return of Norton and Jackbilt , and assuming that both of
them are operating on the same fiscal basis and their returns are accurate, we would have the
following result: Jackbilt declared a taxable net income of P161,202.31 in which the income tax
due was computed at P37,137.00; whereas Norton declared as taxable, a net income of
P120,101.59, on which the income tax due was computed at P25,628.00. The total of these
liabilities is P50,764.84. On the other hand, if the net taxable earnings of both corporations are
combined, during the same taxable year, the tax due on their total which is P281,303.90 would

be P70,764.00. So that, even on the question of income tax alone, it would be to the
advantages of Norton that the corporations should be regarded as separate entities.

PHILIPPINE ACETYLENE CO., INC. vs. CIR and COURT OF TAX APPEALS
G.R. No. L-19707August 17, 1967
FACTS:
The petitioner is a corporation engaged in the manufacture and sale of oxygen and
acetylene gases. It made various sales of its products to the National Power Corporation and to
the Voice of America an agency of the United States Government. The sales to the NPC
amounted to P145, 866.70, while those to the VOA amounted to P1,683, on account of which
the respondent Commission of Internal Revenue assessed against, and demanded from, the

petitioner the payment of P12,910.60 as deficiency sales tax and surcharge, pursuant to the
Sec.186 of the National Internal Revenue Code.
The petitioner denied liability for the payment of the tax on the ground that both the NPC
and the VOA are exempt from taxation.
ISSUE:
Whether or not petitioner is exempt from paying tax on sales it made to the:
1) NPC
2) VOA
HELD:
1) NO.
SC holds that the tax imposed by section 186 of the National Internal Revenue Code is a
tax on the manufacturer or producer and not a tax on the purchaser except probably in a very
remote and inconsequential sense. Accordingly its levy on the sales made to tax-exempt
entities like the NPC is permissible.
2) NO.
Only sales made "for exclusive use in the construction, maintenance, operation or
defense of the bases," in a word, only sales to the quartermaster, are exempt under Article V
from taxation. Sales of goods to any other party even if it be an agency of the United States,
such as the VOA, or even to the quartermaster but for a different purpose, are not free from the
payment of the tax.

Commissioner vs. American Rubber
GR L-19667, 29 November 1966
FACTS:
American Rubber Company sold its rubber products locally and as prescribed by the
Commissioners regulation, the company declared the same for tax purposes in which the
Commissioner accordingly assessed. The company paid under protest the corresponding sales
taxes thereon, claiming exemption under Section 188 (b) of the Tax Code, and subsequently
claimed refund. With the Commissioner refusing to do so, the case was brought before the
Court of Tax Appeals, which upheld the Commissioners stand that the company is not entitled
to recover the sales tax that had been separately billed to its customers, and paid by the latter.
ISSUE:

Whether the company can recover the sales tax paid.

HELD:
NO.
The sales tax is by law imposed directly, not on the thing sold, but on the act (sale) of the
manufacturer, producer, or importer, who is exclusively made liable for its timely payment.
Where the tax money paid by the company came from is really no concern of the Government,
but solely a matter between the company and its customers. Once recovered, the company
must hold the refunded taxes in trust for the individual purchasers who advanced payment
thereof, and whose names must appear in company records. Herein, the company sales
between 24 August 1956 (approval of RA 1612) to 22 June 1957 (when RA 1856 restored the
exemption of agricultural products whether in their original form or not) were properly taxed.
Such amount corresponding to the period is not recoverable.

COMMISSIONER OF INTERNAL REVENUE vs. JOHN GOTAMCO & SONS, INC. and
THE COURT OF TAX
APPEALS
G.R. No. No. L-31092 February 27, 1987
FACTS:
The World Health Organization (WHO for short) is an international organization which has
a regional office in Manila. An agreement was entered into between the Republic of the
Philippines and the said Organization on July 22, 1951. Section 11 of that Agreement provides,
inter alia, that "the Organization, its assets, income and other properties shall be: (a) exempt
from all direct and indirect taxes. The WHO decided to construct a building to house its own
offices, as well as the other United Nations offices stationed in Manila. A bidding was held for
the building construction. The WHO informed the bidders that the building to be constructed
belonged to an international organization exempted from the payment of all fees, licenses, and
taxes, and that therefore their bids "must take this into account and should not include items
for such taxes, licenses and other payments to Government agencies." Thereafter, the
construction contract was awarded to John Gotamco& Sons, Inc. (Gotamco for short).
Subsequently, the Commissioner of Internal Revenue sent a letter of demand to Gotamco
demanding payment of for the 3% contractor's tax plus surcharges on the gross receipts it

received from the WHO in the construction of the latter's building. WHO. The WHO issued a
certification that the bid of John Gotamco&Sons, should be exempted from any taxes in
connection with the construction of the World Health Organization office building because such
can be considered as an indirect tax to WHO. However, The Commissioner of Internal Revenue
contends that the 3% contractor's tax is not a direct nor an indirect tax on the WHO, but a tax
that is primarily due from the contractor, and thus not covered by the tax exemption
agreement.
ISSUE:
Whether or not the said 3% contractors tax imposed upon petitioner is covered by the
direct and indirect tax exemption granted to WHO by the government.
HELD:
YES.
The 3% contractors tax imposed upon petitioner is covered by the direct and indirect
tax exemption granted to WHO. Hence, petitioner cannot be held liable for such contractors
tax. The Supreme Court explained that direct taxes are those that are demanded from the very
person who, it is intended or desired, should pay them; while indirect taxes are those that are
demanded in the first instance from one person in the expectation and intention that he can
shift the burden to someone else. While it is true that the contractor's tax is payable by the
contractor, However in the last analysis it is the owner of the building that shoulders the burden
of the tax because the same is shifted by the contractor to the owner as a matter of selfpreservation. Thus, it is an indirect tax against the WHO because, although it is payable by the
petitioner, the latter can shift its burden on the WHO. It is the WHO that will pay the tax
indirectly through the contractor and it certainly cannot be said that 'this tax has no bearing
upon the World Health Organization. Accordingly, finding no reversible error committed by the
respondent Court of Tax Appeals, the Supreme Court affirmed the appealed decision.


MACEDA vs. MACARAIG, JR., et al.
G.R. No. No. 88291 May 31, 1991 and G.R. No. No. 88291 June 8, 1993
FACTS:
Commonwealth Act No. 120 created the NPC as a public corporation to undertake the
development of hydraulic power and the production of power from other sources. Several laws
were enacted granting NPC tax and duty exemption privileges such as taxes, duties, fees,
imposts, charges and restrictions of the Republic of the Philippines, its provinces, cities and
municipalities "directly or indirectly," on all petroleum products used by NPC in its operation.
However P.D. No. 1931 withdrew all tax exemption privileges granted in favour of governmentowned or controlled corporations including their subsidiaries but empowered the President
and/or the then Minister of Finance, upon recommendation of the FIRB to restore, partially or
totally, the exemption withdrawn. BIR ruled that the exemption privilege enjoyed by NPC under
said section covers only taxes for which it is directly liable and not on taxes which are only
shifted to it.
In 1986, BIR Commissioner Tan, Jr. states that all deliveries of petroleum products to NPC
are tax exempt, regardless of the period of delivery. Thereafter, the FIRB issued several
Resolutions in different occasions restoring the tax and duty exemption privileges of NPC
indefinite period due to the restoration of the tax exemption privileges of NPC, NPC applied with
the BIR for a "refund of Specific Taxes paid on petroleum products. On August 6, 1987, the
Secretary of Justice, Opinion opined that "the power conferred upon Fiscal Incentives Review
Board constitute undue delegation of legislative power and, therefore, unconstitutional.
However, respondents Finance Secretary and the Executive Secretary declared that "NPC under
the provisions of its Revised Charter retains its exemption from duties and taxes imposed on the
petroleum products purchased locally and used for the generation of electricity. Thereafter
investigations were made for the refund of the tax payments of the NPC which includes Millions
of pesos Tax refund. Petitioner, as member of the Philippine Senate introduced as Resolution
Directing the Senate Blue Ribbon Committee, In Aid of Legislation, to conduct a Formal and
Extensive Inquiry into the Reported Massive Tax Manipulations and Evasions by Oil Companies,
particularly Caltex (Phils.) Inc., Pilipinas Shell and Petrophil, Which Were Made Possible By Their
Availing of the Non-Existing Exemption of National Power Corporation (NPC) from Indirect Taxes,

Resulting Recently in Their Obtaining A Tax Refund Totalling P1.55 Billion From the Department
of Finance.
ISSUE:
Whether or not respondent NPC is legally entitled to the questioned tax and duty refunds.
HELD:
YES.
In G.R. No. No. 88291 the Supreme Court ruled in favour of exempting NPC to the said
taxes. Also in G.R. No. No. 88291 the Supreme Court ruled in favour of respondents. NPC under
the provisions of its Revised Charter retains its exemption from duties and taxes imposed on the
petroleum products purchased locally and used for the generation of electricity. Presidential
Decree No. 938 amended the tax exemption of NPC by simplifying the same law in general
terms. It succinctly exempts NPC from "all forms of taxes, duties, fees, imposts, as well as costs
and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings." the NPC electric power rates did not carry the taxes and duties
paid on the fuel oil it used. The point is that while these levies were in fact paid to the
government, no part thereof was recovered from the sale of electricity produced. As a
consequence, as of our most recent information, some P1.55 B in claims represents amounts for
which the oil suppliers and NPC are "out-of-pocket. There would have to be specific order to the
Bureaus concerned for the resumption of the processing of these claims.

COMMISSIONER OF INTERNAL REVENUE vs. PLDT

G.R. No. 140230December 15, 2005
FACTS:
PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and
maintain a telecommunications system throughout the Philippines.For equipment, machineries
and spare parts it imported for its business on different dates from October 1, 1992 to May 31,
1994, PLDT paid the BIR the amount of P164,510,953.00, broken down as follows: (a)
compensating tax of P126,713,037.00; advance sales tax of P12,460,219.00 and other internal
revenue taxes of P25,337,697.00. For similar importations made between March 1994 to May
31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT).
PLDT filed on December 2, 1994 a claimfor tax credit/refund of the VAT, compensating
taxes, advance sales taxes and other taxes it had been paying in connection with its
importation of various equipment, machineries and spare parts needed for its operations. With
its claim not having been acted upon by the BIR, PLDT filed with the CTA a petition for review
therein seeking a refund of, or the issuance of a tax credit certificate in, the amount of
P280,552,286.00, representing compensating taxes, advance sales taxes, VAT and other
internal revenue taxes alleged to have been erroneously paid on its importations from October
1992 to May 1994.
The CTA granted the PLDTs petition. The CA dismissed the BIRs petition, thereby
effectively affirming the CTAs judgment.
ISSUE:
Whether or not respondent is exempt from the payment of VAT, compensating taxes,
advance sales taxes and other BIR taxes on its importations by virtue of the provision in its
franchise that the 3% franchise tax on its gross receipts shall be in lieu of all taxes on its
franchise or earnings thereof.
HELD:
NO.

There can be no serious argument that PLDT, vis--vis its payment of internal revenue
taxes on its importations in question, is effectively claiming exemption from taxes not falling
under the category of direct taxes. The claim covers VAT, advance sales tax and compensating
tax. It bears to stress that the liability for the payment of the indirect taxes lies only with the
seller of the goods or services, not in the buyer thereof. Thus, one cannot invoke ones
exemption privilege to avoid the passing on or the shifting of the VAT to him by the
manufacturers/suppliers of the goods he purchased. Hence, it is important to determine if the
tax exemption granted to a taxpayer specifically includes the indirect tax which is shifted to him
as part of the purchase price, otherwise it is presumed that the tax exemption embraces only
those taxes for which the buyer is directly liable.
As may be noted, the clause in lieu of all taxes in Section 12 of RA 7082 is immediately
followed by the limiting or qualifying clause on this franchise or earnings thereof, suggesting
that the exemption is limited to taxes imposed directly on PLDT since taxes pertaining to
PLDTs franchise or earnings are its direct liability. Accordingly, indirect taxes, not being taxes
on PLDTs franchise or earnings, are outside the purview of the in lieu provision.
All told, the Court fails to see how Section 12 of RA 7082 operates as granting PLDT
blanket exemption from payment of indirect taxes, which, in the ultimate analysis, are not taxes
on its franchise or earnings. PLDT has not shown its eligibility for the desired exemption.

SILKAIR (SINGAPORE) PTE, LTD. vs.COMMISSIONER OF INTERNAL REVENUE
G.R. No. 173594
February 6, 2008
FACTS:
Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under the laws of
Singapore which has a Philippine representative office, is an online international air carrier
operating the Singapore-Cebu-Davao-Singapore, Singapore-Davao-Cebu-Singapore, and
Singapore-Cebu-Singapore routes. On December 19, 2001, Silkair filed with the Bureau of
Internal Revenue (BIR) a written application for the refund of P4,567,450.79 excise taxes it
claimed to have paid on its purchases of jet fuel from Petron Corporation from January to June
2000.

As the BIR had not yet acted on the application as of December 26, 2001, Silkair filed a
Petition for Reviewbefore the CTA. By Decision of May 27, 2005, the CTA denied Silkairs petition
on the ground that as the excise tax was imposed on Petron Corporation as the manufacturer of
petroleum products, any claim for refund should be filed by the latter; and where the burden of
tax is shifted to the purchaser, the amount passed on to it is no longer a tax but becomes an
added cost of the goods purchased.
ISSUE:
Whether or not petitioner is the proper party to claim for refund or tax credit
HELD:
NO.
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 of 1997 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.
The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the
Air Transport Agreement between RP and Singapore cannot, without a clear showing of
legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions
must be construed in strictissimijuris against the taxpayer and liberally in favor of the taxing
authority, and if an exemption is found to exist, it must not be enlarged by construction.


CONTEX CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE
G.R. No. 151135 July 2, 2004
FACTS:
Petitioner is a duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic
Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227. As an SBMAregistered firm, petitioner is exempt from all local and national internal revenue taxes except for
the preferential tax provided for in Section 12 (c) of Rep. Act No. 7227. Petitioner also registered
with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and
materials necessary in the conduct of its manufacturing business. The suppliers of these goods
shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner to pay
input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.
Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant
to Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it
paid, which were denied. Unfazed by the denial, it filed another application for tax refund/credit.
When no response was forthcoming from the BIR Regional Director, petitioner then elevated the
matter to the Court of Tax Appeals, which granted the petitioner a partial refund. The Court of
Appeals reversed the decision of the CTA.
ISSUE:

Whether or not petitioner is entitled to a tax credit or tax refund of the VAT paid on its
purchases of supplies and raw materials for the years 1997 and 1998.
HELD:
NO.
While it is true that the petitioner should not have been liable for the VAT inadvertently
passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the
petitioner is not the proper party to claim such VAT refund. Since the transaction is deemed a
zero-rated sale, petitioners supplier may claim an Input VAT credit with no corresponding
Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.
It may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT
taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax
credit on VAT (input tax) previously paid. In fine, even if assuming that exemption from the
burden of VAT on petitioners purchases did exist, petitioner is still not entitled to any tax credit
or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer. Rather, it is
the petitioners suppliers who are the proper parties to claim the tax credit and accordingly
refund the petitioner of the VAT erroneously passed on to the latter.

COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES)

G.R. No. 153866. February 11, 2005
FACTS:
Respondent is registered with the Philippine Export Zone Authority (PEZA) and has been
issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to
engage in the manufacture of recording components primarily used in computers for export.
Such registration was made on 6 June 1997. It is also a VAT-registered entity and VAT returns for
the period 1 April 1998 to 30 June 1999 have been filed. An administrative claim for refund of
VAT input taxes in the amount of P28,369,226.38 with supporting documents was filed on 4
October 1999. No final action has been received by respondent from petitioner on its claim for
VAT refund.
The Court of Tax Appeals rendered a decision granting the claim for refund. The CA
affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input VAT paid on capital goods purchased for the
period covering April 1, 1998 to June 30, 1999.
ISSUE:
Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in
the amount of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods
purchased for the period April 1, 1998 to June 30, 1999.
HELD:
YES.
No doubt, as a PEZA-registered enterprise within a special economic zone, respondent is
entitled to the fiscal incentives and benefits provided for in either PD 66 or EO 226. It shall,

moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos.
(RA) 7227 and 7844.
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
treatment. It is not subject to internal revenue laws and regulations and is even entitled to tax
credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is
exempt. Although the transactions involving such tax are not exempt, petitioner as a VATregistered person, however, is entitled to their credits.
To summarize, special laws expressly grant preferential tax treatment to business
establishments registered and operating within an ecozone, which by law is considered as a
separate customs territory. As such, respondent is exempt from all internal revenue taxes,
including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday
regime, instead of the 5 percent preferential tax regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can no longer be questioned. Its sales
transactions intended for export may not be exempt, but like its purchase transactions, they are
zero-rated. No prior application for the effective zero rating of its transactions is necessary.
Being VAT-registered and having satisfactorily complied with all the requisites for claiming a tax
refund of or credit for the input VAT paid on capital goods purchased, respondent is entitled to
such VAT refund or credit.

COMMISSIONER OF INTERNAL REVENUE vs. THE ESTATE OF BENIGNO P. TODA, JR

G.R. No. 147188 September 14, 2004
FACTS:
CIC 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 and subsequently sold the property
for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to
Royal Match Inc. (RMI) for P200 million. The BIR sent an assessment noticeand demand letter to
the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22. The new
CIC asked for a reconsideration, asserting that the assessment should be directed against the
old CIC, and not against the new CIC, which is owned by an entirely different set of
stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC
free from all tax liabilities for the fiscal years 1987-1989.
The CTA held that the Commissioner failed to prove that CIC committed fraud to deprive
the government of the taxes due it. The Court of Appeals affirmed the decision of the CTA,
reasoning that the CTA, being more advantageously situated and having the necessary
expertise in matters of taxation, is "better situated to determine the correctness, propriety, and
legality of the income tax assessments assailed by the Toda Estate."
ISSUE:
Whether or not respondent committed fraud with intent to evade the tax on the sale of
the properties of Cibeles Insurance Corporation.
HELD:
YES.
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.
Here, 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.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The
5% individual capital gains tax provided for in Section 34 (h) of the NIRC of 1986 35 (now 6%
under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment
for the deficiency income tax issued by the BIR must be upheld.

JOHN HAY vs. LIM
G.R. No. 119775. October 24, 2003
FACTS:
On March 13, 1992, Republic Act No. 7227, otherwise known as the "Bases Conversion
and Development Act of 1992," was enacted with the declared policy of accelerating "the sound
and balanced conversion into alternative productive uses of the Clark and Subic military
reservations and their extensions" -including the John Hay Station. To this end, R.A. No. 7227
created public respondent BCDA,the Subic SEZ and the Subic Bay Metropolitan Authority. On
July 5, 1994, then President Ramos, on the request of the SangguniangPanlungsod of Baguio
City, issued Proclamation No. 420 establishing the John Hay SEZ. On April 25, 1995, petitioners

filed their Petition for prohibition, mandamus and declaratory relief assailing (1) the
constitutionality of Proclamation No. 420 and (2) the legality of the Memorandum of Agreement
and Joint Venture Agreement previously entered into between public respondent BCDA and
private respondents Tuntex (B.V.I.) Co., Ltd. (TUNTEX) and AsiaworldInternationale Group, Inc.
(ASIAWORLD).
ISSUE:
Whether or not John Hay Special Economic Zone enjoys exemption for taxes as well as
other financial incentives granted to the Subic Special Economic Zone.
HELD:
It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was
granted by Congress with tax exemption, investment incentives and the like. There is no
express extension of the aforesaid benefits to other SEZs still to be createdat the time via
presidential proclamation.
While the grant of economic incentives may be essential to the creation and success of SEZs,
free trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained. The
incentives under R.A. No. 7227 are exclusiveonly to the Subic SEZ, hence, the extension of the
same to the John Hay SEZ finds no support therein. More importantly, the nature of most of the
assailed privileges is one of tax exemption. It is the legislature, unless limited by a provision of
the state constitution that has full power to exempt any person or corporation or class of
property from taxation, its power to exempt being as broad as its power to tax.
The challenged grant of tax exemption would circumvent the Constitutions imposition
that a law granting any tax exemption must have the concurrence of a majority of all the
members of Congress.
Topic: Administrative Issuance by the BIR
Commissioner of Internal Revenue vs. Courts of Tax Appeal, et al
G.R. No. 115349 April 18, 1997
FACTS:
Ateneo de Manila is an educational institution with auxiliary units and branches all over
the Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has no
legal personality separate and distinct from that of private respondent. The IPC is a Philippine
unit engaged in social science studies of Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international organizations, private foundations and
government agencies.
On July 8, 1983, private respondent received from petitioner Commissioner of Internal
Revenue a demand letter dated June 3, 1983, assessing private respondent the sum of
P174,043.97 for alleged deficiency contractor's tax the value of which was later on, upon
private respondents request for reinvestigation, reduced to P46,516.41.
Unsatisfied, Private respondent filed in the Court of Tax Appeals a petition for review of
the said letter-decision of the petitioner which rendered a decision in its favour and ordered the
tax assessment cancelled.

ISSUE:
Whether or not Ateneo de Manila University, through its auxiliary unit or branch the
Institute of Philippine Culture is performing the work of an independent contractor and, thus,
subject to the three percent contractor's tax levied by then Section 205 of the National Internal
Revenue Code
HELD:
NO. The Supreme Court held that Ateneo de Manila University is not subject to the
contractors tax. It explained that to fall under its coverage, Section 205 of the National Internal
Revenue Code requires that the independent contractor be engaged in the business of selling
its services. The Court, however, found no evidence that Ateneo's Institute of Philippine Culture
ever sold its services for a fee to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university.
Moreover, the Court of Tax Appeals accurately and correctly declared that the funds
received by the Ateneo de Manila University are technically not a fee. They may however fall as
gifts or donations which are tax-exempt" as shown by private respondent's compliance with the
requirement of Section 123 of the National Internal Revenue Code providing for the exemption
of such gifts to an educational institution.
Topic: Constitutional Limitations: Origin of Revenue, Appropriation and Tarriff Bills
ABAKADA GURO PARTY LIST vs. ERMITA
G.R. No. 168056, July 5, 2005
FACTS:
Motions for Reconsideration filed by petitioners, ABAKADA Guro party List Officer and et
al., insist that the bicameral conference committee should not even have acted on the no passon provisions since there is no disagreement between House Bill Nos. 3705 and 3555 on the
one hand, and Senate Bill No. 1950 on the other, with regard to the no pass-on provision for the
sale of service for power generation because both the Senate and the House were in agreement
that the VAT burden for the sale of such service shall not be passed on to the end-consumer. As
to the no pass-on provision for sale of petroleum products, petitioners argue that the fact that
the presence of such a no pass-on provision in the House version and the absence thereof in the
Senate Bill means there is no conflict because a House provision cannot be in conflict with
something that does not exist.
Escudero, et. al., also contend that Republic Act No. 9337 grossly violates the
constitutional imperative on exclusive origination of revenue bills under Section 24 of Article VI
of the Constitution when the Senate introduced amendments not connected with VAT.
Petitioners Escudero, et al., also reiterate that R.A. No. 9337s stand- by authority to the
Executive to increase the VAT rate, especially on account of the recommendatory power
granted to the Secretary of Finance, constitutes undue delegation of legislative power. They
submit that the recommendatory power given to the Secretary of Finance in regard to the
occurrence of either of two events using the Gross Domestic Product (GDP) as a benchmark
necessarily and inherently required extended analysis and evaluation, as well as policy making.
Petitioners also reiterate their argument that the input tax is a property or a property
right. Petitioners also contend that even if the right to credit the input VAT is merely a statutory

privilege, it has already evolved into a vested right that the State cannot remove.
ISSUE:
Whether
or
not
the R.A.
No.
9337
or
the
Vat
Reform
Act
is
constitutional?
RULING:
The Court is not persuaded. Article VI, Section 24 of the Constitution provides that All
appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
The Court reiterates that in making his recommendation to the President on the existence
of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the
President or even her subordinate. He is acting as the agent of the legislative department, to
determine and declare the event upon which its expressed will is to take effect. The Secretary of
Finance becomes the means or tool by which legislative policy is determined and implemented,
considering that he possesses all the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is to gather and collate statistical
data and other pertinent information and verify if any of the two conditions laid out by Congress
is present.
In the same breath, the Court reiterates its finding that it is not a property or a property
right, and a VAT-registered persons entitlement to the creditable input tax is a mere statutory
privilege. As the Court stated in its Decision, the right to credit the input tax is a mere creation
of law. More importantly, the assailed provisions of R.A. No. 9337 already involve legislative
policy and wisdom. So long as there is a public end for which R.A. No. 9337 was passed, the
means through which such end shall be accomplished is for the legislature to choose so long as
it
is
within
constitutional
bounds.

Topic: Sources of Tax Laws: Administrative Issuance by the BIR

PHILIPPINE BANK OF COMMERCE vs.
COMMISSIONER OF IINTERNAL REVENUE
GR 112024
January 28, 1999
FACTS:
Petitioner, PB COM, a commercial banking corporation filed its quarterly income tax
returns for the first and second quarters of 1985, reported profits, and paid the total income tax
of P5,016,954.00 by applying PBComs tax credit memos for P3,401,701.00 and P1,615,253.00,
respectively. Subsequently, however, PBCom suffered net loss of P25,317,228.00, thereby
showing no income tax liability in its Annual Income Tax Returns for the year-ended December
31, 1985. For the succeeding year, ending December 31, 1986, the petitioner likewise reported
a net loss of P14,129,602.00, and thus declared no tax payable for the year.
However during these two years, PBCom earned rental income from leased properties.
The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in
1985 and P234,077.69 in 1986. On August 7, 1987, petitioner requested the Commissioner of
Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the
overpayment of taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld
by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner
instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA).
The petition was docketed as CTA Case No. 4309 entitled: Philippine Bank of Communications
vs. Commissioner of Internal Revenue. The CTA decided in favor of the BIR on the ground that
the Petition was filed out of time as the same was filed beyond the two-year reglementary
period. A motion for Reconsideration was denied and the appeal to Court of Appeals was
likewise denied. Thus, this appeal to Supreme Court.
ISSUES:
a. Whether or not Revenue Regulations No. 7-85 which alters the reglementary period
from two years to ten years is valid.
b. Whether or not the petition for tax refund had already prescribed.
RULING:

a.
The Court held that the Revenue Regulations 7-85 altering the 2-year prescriptive period
imposed by law to 10-year prescriptive period is invalid. It ruled that administrative issuances
are merely interpretations and not expansions of the provisions of law, thus, in case of
inconsistency, the law prevails over them., furthermore administrative agencies have no
legislative power.
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977
NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress. It bears repeating that Revenue memorandumcirculars are considered administrative rulings which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a
statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the
courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found
to be erroneous. Thus, courts will not countenance administrative issuances that override,
instead of remaining consistent and in harmony with, the law they seek to apply and
implement.
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes
or errors of its officials or agents. As pointed out by the respondent courts, the nullification of
RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of 1977 NIRC, for being contrary to the
express provision of a statute. Hence, his interpretation could not be given weight for to do so
would, in effect, amend the statute.
b.
With regard to the second issue the court ruled that by implication of the above, claim for
refund had already prescribed. Since the petition had been filed beyond the prescriptive period,
the same has already prescribed. The fact that the final adjusted return show an excess tax
credit does not automatically entitle taxpayer claim for refund without any express intent.
Thus the petition was denied.
Topic: Sources of Tax Laws: Tax Treaties

COMMISSIONER OF INTERNAL REVENUE VS.

PROCTER & GAMBLE PHILIPPINES

GR L-66838
15 April 1988
FACTS:
Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA
(PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and
business therein. PMC-USA is the sole shareholder of PMC Philippines and is entitled to receive
income from PMC Philippines in the form of dividends, if not rents or royalties. For the taxable
years 1974 and 1975, PMC Philippines filed its income tax return and also declared dividends in
favor of PMC-USA. In 1977, PMC Philippines, invoking the tax-sparing provision of Section 24 (b)
as the withholding agent of the Philippine Government with respect to dividend taxes paid by
PMC-USA, filed a claim for the refund of 20 percentage point portion of the 35 percentage whole
tax paid with the Commissioner of Internal Revenue.
ISSUE:
Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared
and remitted to its parent corporation?
RULING:
The issue raised is one made for the first time before the Supreme Court. Under the same
underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues
not raised in the lower court cannot be generally raised for the first time on appeal.
Nonetheless, it is axiomatic that the state can never be allowed to jeopardize the governments
financial position. The submission of the Commissioner that PMC Philippines is but a withholding
agent of the government and therefore cannot claim reimbursement of alleged overpaid taxes,
is completely meritorious. The real party in interest is PMC-USA, which should prove that it is
entitled under the US Tax Code to a US Foreign Tax Credit equivalent to at least 20 percentage
points spared or waived as otherwise considered or deemed paid by the Government. Herein,
the claimant failed to show or justify the tax return of the disputed 15% as it failed to show the
actual amount credited by the US Government against the income tax due from PMC-USA on
the dividends received from PMC Philippines; to present the income tax return of PMC-USA for
1975 when the dividends were received; and to submit duly authenticated document showing
that the US government credited the 20% tax deemed paid in the Philippines.
Topic: Sources of Tax Laws: Tax Treaties

COMMISSIONER OF IINTERNAL REVENUE vs. SC JOHNSON & SON INC.
G.R. No. 147188
June 25, 1999

FACTS:
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 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.
The Commissioner did not act on said claim for refund. Private respondent SC Johnson &
Son, Inc. 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.
On May 7, 1996, the CTA rendered its decision in favor of SC Johnson 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 which rendered the decision subject of
this appeal on November 7, 1996 finding no merit in the petition and affirming in toto the CTA
ruling.
ISSUE:
Whether
or
not
tax
refunds
are
considered
as
tax
exemptions?
RULING:
It bears stress that tax refunds are in the nature of tax exemptions. As such they are
registered as in derogation of sovereign authority and to be construed strictissimijuris against
the person or entity claiming the 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. 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 Treaty is paid under similar circumstances as the tax on royalties under the RP-West
Germany Tax Treaty.

Topic: The Concept of Income

CONWI vs. COMMISSIONER OF INTERNAL REVENUE
213SCRA483
FACTS:
Petitioners are Filipino citizens and employees of Procter and Gamble Philippines with an
office located at Ayala Ave. Makati. The corporation is a subsidiary of P&G based at Ohio USA.
For the year 1970 and 1971, petitioners were assigned outside the Phil with their compensation
paid in US dollars. When they filed their income tax returns for the year 1970, theyve
computed the tax by applying the dollar-to-peso conversion based on the floating rate provided
by the BIR. However, on 1973, they filed an amended tax return using the par value of the peso
provided by Sec.40 of RA 265. They claim for a refund due to overpayment.
Petitioners argued that since the dollar earnings does not fall within the classification of
foreign exchange transaction; there occurred no actual inward remittances therefore NOT
included in Central Bank Circular No. 289. CB no. 289 provides for specific instances when the

par value of the peso shall not be the conversion rate. Therefore, they can base their conversion
using the par value of the peso.
The Commissioner of the BIR denied the claim of petitioners stating that the basis must
be the prevailing free market rate of exchange and not the par value. CB No. 289 speaks of
receipts for export products, receipts of sale of foreign exchange and investment but not
income tax. The CTA also held that petitioners dollar earnings are receipts derived from foreign
exchange transactions.
ISSUES:
a.
Whether or not petitioners dollar earnings are receipts derived from foreign exchange
transactions?
b.
Whether or not the proper rate of conversion is the prevailing free market rate of
exchange?
c.
Whether or not petitioners are exempt to pay tax for such income since there were no
remittance/ acceptance of their salaries in UD Dollars into the Philippines?
RULING:
a.
No. Income may be defined as an amount of money coming to a person or corporation
within a specified time, whether as payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its equivalent. Income can also be though of as
flow of the fruits of one's labor. Petitioners are correct in claiming that their dollar earnings are
not receipts derived from foreign exchange transactions. For a foreign exchange transaction is
simply that-foreign exchange being the conversion of an amount of money of one country into
an equivalent amount of money of another country. When petitioners were assigned to the
foreign subsidiaries of P&G, they were earning in their assigned nations currency and were also
spending in said currency. There was no conversion from one currency to another.
b.
Yes. Central Bank Circular no. 289 does not contemplate income tax payments. It shows
that the subject matter involved therein are exports products, invisibles, receipts of foreign
exchange, foreign exchange payments, new foreign borrowing and investments-nothing by way
of income tax .Petitioners erred in concluding that CB Circ No. 289 does not apply to them.
Therefore, the conversion should be the prevailing free market rate of exchange.
c.
No. Even if there was no remittance and acceptance of their salaries and wages in US
Dollars into the Philippines, they are still bound to pay the tax. Petitioners forgot that they are
citizens of the Philippines, and their income, within or without, and in this case wholly without or
outside the Philippines, are subject to income tax. The petitions were denied for lack of merit.

Topic: Concept of Income: Income vs. Capital

MADRIGAL vs. RAFFERTY
G.R. No. 12287 August 7, 1918
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 . On
February 25, 1915, Madrigal filed a 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 amount 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, 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
Madrigal and the other half the income 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 Madrigal and his wife in the Court of First Instance of Manila against the
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 assessed and collected by
the defendants from the plaintiff, 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 and payable by each of the
plaintiffs the sum of P2,921.09, which taken together amounts to 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.
The dispute between the plaintiffs and the defendants concerned the additional tax
provided for in the Income Tax Law. The trial court in an exhausted decision found in favor of
defendants, without costs.

ISSUE:
Whether or not the additional income tax should be divided into two equal part because
of the conjugal partnership existing between the spouses?
RULING:
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 income. Capital is wealth, while income is the service of
wealth.
The husband, as the head and legal representative of the household and general
custodian of its income, should make and render the return of the aggregate income of himself
and wife, and for the purpose of levying the income tax it is assumed that he can ascertain the
total amount of said income. They are jointly and separately liable for such return and for the
payment of the tax. The single or married status of the person claiming the specific exemption
shall be determined as of the time of claiming such exemption if such claim be made within the
year for which return is made, otherwise the status at the close of the year.
With these general observations relative to the Income Tax Law in force in the Philippine
Islands, we turn for a moment to consider the provisions of the Civil Code dealing with the
conjugal partnership. Recently in two elaborate decisions in which a long line of Spanish
authorities were cited, this court, in speaking of the conjugal partnership, decided that "prior to
the liquidation, the interest of the wife, and in case of her death, of her heirs, is an interest
inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and
does not ripen into title until there appears that there are assets in the community as a result of
the liquidation and settlement.
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

Topic: Philippine Income Tax System: Schedular System vs. Global System
SISON vs. ANCHETA
G.R. No. L-59431
July 25, 1984
FACTS:
ISSUE:
RULING:
Topic: Source of Income: Services

COMMISSIONER OF INTERNAL REVENUE vs. MARUBENI CORP.
G.R. No. 137377
December 18, 2001

FACTS:
Respondent Marubeni Corporation is a foreign corporation organized and existing under
the laws of Japan. It is engaged in general import and export trading, financing and the
construction business. It is duly registered to engage in such business in the Philippines and
maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter
of authority to examine the books of accounts of the Manila branch office of respondent
corporation for the fiscal year ending March 1985. In the course of the examination, petitioner
found respondent to have undeclared income from two (2) contracts in the Philippines, both of
which were completed in 1984. One of the contracts was with the National Development
Company (NDC) in connection with the construction and installation of a wharf/port complex at
the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The
other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
construction of an ammonia storage complex also at the Leyte Industrial Development Estate.
On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency
income, branch profit remittance, contractor's and commercial broker's taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.
ISSUE:
Whether or not the CIR need to assess and collect the tax despite the tax amnesty availed
of by the respondent?
RULING:
The main controversy in this case lies in the interpretation of the exception to the
amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein
income tax, branch profit remittance tax and contractor's tax. These taxes are covered by the
amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is
disqualified from availing of the said amnesties because the latter falls under the exception in
Section 4 (b) of E.O. No. 41.
A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If
granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly
against the taxpayer and liberally in favor of the taxing authority. For the right of taxation is
inherent in government. The State cannot strip itself of the most essential power of taxation by
doubtful words. He who claims an exemption (or an amnesty) from the common burden must
justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon
a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be
resolved in
favor of the state.

Topic: Source of Income: Interest Income

NATIONAL DEVELOPMENT COMPANY vs.
G.R. No. L-53961
June 30, 1987
FACTS:
The National Development Company entered into contracts in Tokyo with several
Japanese shipbuilding companies for the construction of twelve ocean-going vessels. The
purchase price was to come from the proceeds of bonds issued by the Central Bank. Initial
payments were made in cash and through irrevocable letters of credit. Fourteen promissory
notes were signed for the balance by the NDC and, as required by the shipbuilders, guaranteed
by the Republic of the Philippines. Pursuant thereto, the remaining payments and the interests
thereon were remitted in due time by the NDC to Tokyo. The vessels were eventually completed

and delivered to the NDC in Tokyo. The NDC remitted to the shipbuilders in Tokyo the total
amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax was
withheld. The Commissioner then held the NDC liable on such tax in the total sum of
P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the NDC a
warrant of distraint and levy to enforce collection of the claimed amount. The NDC went to the
Court of Tax Appeals. The BIR was sustained by the CTA except for a slight reduction of the tax
deficiency in the sum of P900.00, representing the compromise penalty.
ISSUE:
Whether or not NDC is liable on tax?
RULING:
There is no basis for saying that the interest payments were obligations of the Republic of
the Philippines and that the promissory notes of the NDC were government securities exempt
from taxation under Section 29(b)of the Tax Code. The law invoked by the petitioner as
authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on this matter. C.A.
No. 182 as amended by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does
not exempt from taxes the interests on such securities.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes
on the interest remitted because of the undertaking signed by the Secretary of Finance in each
of the promissory notes that:
Upon authority of the President of the Republic of the Philippines, the undersigned, for
value received, hereby absolutely and unconditionally guarantee, on behalf of the Republic of
the Philippines, the due and punctual payment of both principal and interest of the above note.
There is nothing in the above undertaking exempting the interests from taxes. Petitioner
has not established a clear waiver therein of the right to tax interests. Tax exemptions cannot
be merely implied but must be categorically and unmistakably expressed. Any doubt concerning
this question must be resolved in favor of the taxing power. Nowhere in the said undertaking
does the court find any inhibition against the collection of the disputed taxes. In fact, such
undertaking was made by the government in consonance with and certainly not against the
following provisions of the Tax Code.
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the
obligations of the NDC but without diminution of its taxing power under existing laws. In
suggesting that the NDC is merely an administrator of the funds of the Republic of the
Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As such, it
is governed in its proprietary activities not only by its charter but also by the Corporation Code
and other pertinent laws. The petitioner also forgets that it is not the NDC that is being taxed.
The tax was due on the interests earned by the Japanese shipbuilders. It was the income of
these companies and not the Republic of the Philippines that was subject to the tax the NDC did
not withhold. In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty
for its failure to withhold the same from the Japanese shipbuilders.

Topic: Taxability of Compensation Income and the Application of Employers

Convenience Rule
HENDERSON vs. COMMISSIONER OF INTERNAL REVENUE
1SCRA649
FACTS:
The spouses Arthur Henderson and Marie B. Henderson filed with the Bureau of Internal
Revenue returns of annual net income for the years 1948 to 1952, inclusive. In due time the
taxpayers received from the Bureau of Internal Revenue assessment notices Nos. 15840-48,
25450-49, 15255-50, 25705-51 and 22527-52 and paid the amounts assessed. After
investigation and verification, the Bureau of Internal Revenue reassessed the taxpayers' income
for the years 1948 to 1952, and demanded payment of the deficiency taxes.
In the foregoing assessments, the Bureau of Internal Revenue considered as part of their
taxable income the taxpayer-husband's allowances for rental, residential expenses, subsistence,
water, electricity and telephone; bonus paid to him; withholding tax and entrance fee to the
Marikina Gun and Country Club paid by his employer for his account; and travelling allowance of
his wife. After hearing conducted by the Conference Staff of the Bureau of Internal Revenue the
Staff recommended to the Collector of Internal Revenue that the assessments made be
sustained except that the amount of P200 as entrance fee to the Marikina Gun and Country
Club paid for the husband-taxpayer's account by his employer in 1948 should not be considered
as part of the taxpayer's taxable income for that year.
The Collector of Internal Revenue denied the taxpayer's request for reconsideration,
except as regards the assessment of their income tax due for the year 1948, which was
modified and demanded payment of the deficiency taxes of P4,370.24 for 1948, P3,662.23 for
1949, P3,023 for 1950, P2,058 for 1951 and P4,108 for 1952, 5% surcharge and 1% monthly

interest thereon from 1 March 1954 to the date of payment and P80 as administrative penalty
for late payment, to the City Treasurer of Manila not later than 31 July 1955.
The Court rendered judgment holding "that the inherent nature of petitioner's
employment as president of the American International Underwriters of the Philippines, Inc.
does not require him to occupy the apartments supplied by his employer-corporation;" that,
however, only the amount of P4,800 annually, the ratable value to him of the quarters furnished
constitutes a part of taxable income; that since the taxpayers did not receive any benefit out of
the P3,247.40 travelling expense allowance granted in 1952 to the wife-taxpayers and that she
merely undertook the trip abroad at the behest of her husband's employer, the same could not
be considered as income; and that even if it were considered as such, still it could not be
subject to tax because it was deductible as travel expense; and ordering the Collector of
Internal Revenue to refund to the taxpayers the amount of P5,109.33 with interest from 27
February 1954, without pronouncement as to costs.
ISSUE:
Whether or not the taxpayers are entitled to a refund?
RULING:
The taxpayers' claim is supported by the evidence. The total amount of P3,249.32 "for
manager's residential expense" in 1948 should be treated as rentals for apartments and utilities
and should not form part of the ratable value subject to tax.
The computation made by the taxpayers is correct. Adding to the amount of P29,573.79,
their net income per return, the amounts of P6,500, the bonus received in 1948, and P4,800,
the taxable ratable value of the allowances, brings up their gross income to P40,873.79.
Deducting therefrom the amount of P2,500 for personal exemption, the amount of P38,373.79 is
the amount subject to income tax. The income tax due on this amount is P6,957.19 only.
Deducting the amount of income tax due, P6,957.19, from the amount already paid, P8,562.47,
the amount of P1,605.28 is the amount refundable to the taxpayers. Add this amount to
P569.33, P1,294.00, P354.00 and P2,164.00, refundable to the taxpayers for 1949, 1950, 1951
and 1952, and the total is P5,986.61. The Collector of Internal Revenue is ordered to refund to
the taxpayers the sum of P5,986.61, without pronouncement as to costs.

Topic: Interest Income from Bank Deposits and Deposit Substitute

COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS
G.R. No. 108576
January 20, 1999
FACTS:
In the 1930s, Don Andres Soriano, formed the corporation "A. Soriano Y Cia", predecessor
of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par
value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who
are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares
originally issued.
In 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into
25,000 common shares with the same par value of the additional 15,000 shares, only 10,000
was issued which were all subscribed by Don Andres, after the other stockholders waived in
favor of the former their pre-emptive rights to subscribe to the new issues. This increased his
subscription to 14,963 common shares.
A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966
further increased it to P30M.In the same year, stock dividends worth 46,290 and 46,287 shares
were respectively received by the Don Andres estate and Doa Carmen from ANSCOR. Hence,
increasing their accumulated shareholdings to 138,867 and 138,864 common shares each.
Doa Carmen requested a ruling from the United States Internal Revenue Service, inquiring if an
exchange of common with preferred shares may be considered as a tax avoidance scheme.
In1968, ANSCOR reclassified its existing 300,000 common shares into 150,000 common and
150,000 preferred shares. The IRS opined that the exchange is only a recapitalization scheme
and not tax avoidance. Consequently, Doa Carmen exchanged her whole 138,864 common
shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn,
exchanged 11,140 of its common shares, for the remaining 11,140 preferred shares, thus
reducing its (the estate) common shares to 127,727.
In 1973, after examining ANSCOR's books of account and records, Revenue examiners
issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source,
pursuant to Sections 53 and 54 of the 1939 Revenue Code,for the year 1968 and the second
quarter of 1969 based on the transactions of exchange 31 and redemption of stocks. The
Bureau of Internal Revenue (BIR) made the corresponding assessments despite the claim of
ANSCOR that it availed of the tax amnesty under Presidential Decree (P.D.) 23 which were
amended by P.D.'s 67 and 157.
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax
assessments on the redemptions and exchange of stocks.

ISSUE:
Whether ANSCOR's redemption of stocks from its stockholder as well as the exchange of
common with preferred shares can be considered as "essentially equivalent to the distribution
of taxable dividend" making the proceeds thereof taxable under the provisions of law?
RULING:
The test of taxability under the exempting clause of Section 83(b) is, whether income was
realized through the redemption of stock dividends. The redemption converts into money the
stock dividends which become a realized profit or gain and consequently, the stockholder's
separate property. Profits derived from the capital invested cannot escape income tax. As
realized income, the proceeds of the redeemed stock dividends can be reached by income
taxation regardless of the existence of any business purpose for the redemption. After
considering the manner and the circumstances by which the issuance and redemption of stock
dividends were made, there is no other conclusion but that the proceeds thereof are essentially
considered equivalent to a distribution of taxable dividends. As "taxable dividend" under
Section 83(b), it is part of the "entire income" subject to tax under Section 22 in relation to
Section 21 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are
included in "gross income". As income, it is subject to income tax which is required to be
withheld at source. The 1997 Tax Code may have altered the situation but it does not change
this disposition.
The reclassification by ANSCOR of its shares into common and preferred resulted to no
change in the proportional interest after the exchange. There was no cash flow. Both stocks had
the same par value. A common stock represents the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights
or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks are
those which entitle the shareholder to some priority on dividends and asset distribution. In this
case, the exchange of shares, without more, produces no realized income to the subscriber.
There is only a modification of the subscriber's rights and privileges which is not a flow of
wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber
disposes of his entire interest and not when there is still maintenance of proprietary interest.
Therefore, ANSCOR's redemption of 82,752.5 stock dividends is herein considered as
essentially equivalent to a distribution of taxable dividends for which it is liable for the
withholding tax-at-source.
Topic: Income from Installment Transactions
BANAS vs. COURT OF APPEALS
G.R. No. 102967
February 10, 2000
FACTS:
In the succeeding years, until 1979, petitioner reported a uniform income of two hundred
thirty thousand, eight hundred seventy-seven (P230,877.00) pesos as gain from sale of capital
asset. In his 1980 income tax amnesty return, petitioner also reported the same amount of
P230,877.00 as the realized gain on disposition of capital asset for the year.

On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners,
Rodolfo Tuazon and Procopio Talon to examine the books and records of petitioner for the year
1976. They discovered that petitioner had no outstanding receivable from the 1976 land sale to
AYALA and concluded that the sale was cash and the entire profit should have been taxable in
1976 since the income was wholly derived in 1976.
Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninetyfive thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They
recommended deficiency tax assessment for two million, four hundred seventy-three thousand,
six hundred seventy-three (P2,473,673.00) pesos.
ISSUE:
Whether respondent court erred in finding that petitioner's income from the sale of land in
1976 should be declared as a cash transaction in his tax return for the same year (because the
buyer discounted the promissory note issued to the seller on future installment payments of the
sale, on the same day of the sale)?
RULING:
As a general rule, the whole profit accruing from a sale of property is taxable as income in
the year the sale is made. But, if not all of the sale price is received during such year, and a
statute provides that income shall be taxable in the year in which it is "received," the profit from
an installment sale is to be apportioned between or among the years in which such installments
are paid and received.
Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned
installment method is a seller of real property who disposes his property on installment,
provided that the initial payment does not exceed 25% of the selling price. They also state what
may be regarded as installment payment and what constitutes initial payment. Initial payment
means the payment received in cash or property excluding evidences of indebtedness due and
payable in subsequent years, like promissory notes or mortgages, given of the purchaser during
the taxable year of sale. Initial payment does not include amounts received by the vendor in the
year of sale from the disposition to a third person of notes given by the vendee as part of the
purchase price which are due and payable in subsequent years. Such disposition or discounting
of receivable is material only as to the computation of the initial payment. If the initial payment
is within 25% of total contract price, exclusive of the proceeds of discounted notes, the sale
qualifies as an installment sale, otherwise it is a deferred sale.
Although the proceed of a discounted promissory note is not considered part of the initial
payment, it is still taxable income for the year it was converted into cash. The subsequent
payments or liquidation of certificates of indebtedness is reported using the installment method
in computing the proportionate income to be returned, during the respective year it was
realized. Non-dealer sales of real or personal property may be reported as income under the
installment method provided that the obligation is still outstanding at the close of that year. If
the seller disposes the entire installment obligation by discounting the bill or the promissory
note, he necessarily must report the balance of the income from the discounting not only
income from the initial installment payment.

Where an installment obligation is discounted at a bank or finance company, a taxable

disposition results, even if the seller guarantees its payment, continues to collect on the
installment obligation, or handles repossession of merchandise in case of default. This rule
prevails in the United States. Since our income tax laws are of American origin, interpretations
by American courts an our parallel tax laws have persuasive effect on the interpretation of
these laws. Thus, by analogy, all the more would a taxable disposition result when the
discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of
the buyer is discharged, while the seller acquires money for the settlement of his receivables.
Logically then, the income should be reported at the time of the actual gain. For income tax
purposes, income is an actual gain or an actual increase of wealth. Although the proceeds of a
discounted promissory note is not considered initial payment, still it must be included as
taxable income on the year it was converted to cash. When petitioner had the promissory notes
covering the succeeding installment payments of the land issued by AYALA, discounted by
AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on
installment since, a taxable disposition resulted and petitioner was required by law to report in
his returns the income derived from the discounting. What petitioner did is tantamount to an
attempt to circumvent the rule on payment of income taxes gained from the sale of the land to
AYALA for the year 1976.
Topic: Concept of Allowable Deductions: Deduction vs. Tax Credit

BICOLANDIA DRUG CORP. vs. COMMISSIONER OF INTERNAL REVENUE
G.R. No. 142299
June 22, 2006
FACTS:
Petitioner Bicolandia Drug Corporation is a domestic corporation principally engaged in
the retail of pharmaceutical products. Petitioner has a drugstore located in Naga City under the
name and business style of "Mercury Drug."
Pursuant to the provisions of R.A. No. 7432, entitled "An Act to Maximize the Contribution
of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and for Other
Purposes," also known as the "Senior Citizens Act," and Revenue Regulations No. 2-94,
petitioner granted to qualified senior citizens a 20% sales discount on their purchase of
medicines covering the period from July 19, 1993 to December 31, 1994.
When petitioner filed its corresponding corporate annual income tax returns for taxable
years 1993 and 1994, it claimed as a deduction from its gross income the respective amounts
of P80,330 and P515,000 representing the 20% sales discount it granted to senior citizens. On
March 28, 1995, however, alleging error in the computation and claiming that the
aforementioned 20% sales discount should have been treated as a tax credit pursuant to R.A.
No. 7432 instead of a deduction from gross income, petitioner filed a claim for refund or credit
of overpaid income tax for 1993 and 1994, amounting to P52,215 and P334,750, respectively.
ISSUE:
Whether or not the Senior Citizens Discount is deductible from Gross Income?

RULING:
Sec. 4.Privileges for the Senior citizens. The senior citizens shall be entitled to the
following:
.. the grant of twenty percent (20%) discount from all establishments relative to utilization
of transportation services, hotels and similar lodging establishments, restaurants and recreation
centers and purchase of medicines anywhere in the country: Provided, That private
establishments may claim the cost as tax credit.
The term "cost" in the above provision refers to the amount of the 20% discount extended
by a private establishment to senior citizens in their purchase of medicines. This amount shall
be applied as a tax credit, and may be deducted from the tax liability of the entity concerned. If
there is no current tax due or the establishment reports a net loss for the period, the credit may
be carried over to the succeeding taxable year. This is in line with the interpretation of this
Court in Commissioner of Internal Revenue v. Central Luzon Drug Corporation wherein it
affirmed that R.A. No. 7432 allows private establishments to claim as tax credit the amount of
discounts they grant to senior citizens.
The Court notes that petitioner, while praying for the reinstatement of the CTA Resolution,
dated December 7, 1998, directing the issuance of tax certificates in favor of petitioner for the
respective amounts of P45,574.63 and P135,906.48 representing overpaid income tax for 1993
and 1994, asks for the refund of the same.
In this regard, petitioners claim for refund must be denied. The law expressly provides
that the discount given to senior citizens may be claimed as a tax credit, and not a refund.
Thus, where the words of a statute are clear, plain and free from ambiguity, it must be given its
literal meaning and applied without attempted interpretation.

Topic: Itemized Deductions: Reasonableness Test

COMMISSIONER OF INTERNAL REVENUE v. GENERAL FOODS INC.
G.R. No. 143672
April 24, 2003
FACTS:
Respondent corporation, which is engaged in the manufacture of beverages such as
Tang, Calumet and Kool-Aid, filed its income tax return ON July 14, 1985 for the fiscal year
ending February 28, 1985. In said tax return, respondent corporation claimed as deduction,
among other business expenses, the amount of P9,461,246 for media advertising for Tang.
However, on May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction
claimed by respondent corporation. Consequently, respondent corporation was assessed
deficiency income taxes in the amount of P2,635, 141.42. The latter filed a motion for
reconsideration but the same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but
the appeal was dismissed for such exclusions from such a gargantuan expense for the
advertisement of a singular product is unreasonable. For sure such expenditure was meant not
only to generate present sales but more for future and prospective benefits.
Hence,
abnormally large expenditures for advertising are usually to be spread over the period of years
during which the benefits of the expenditures are received. Aggrieved, Respondent Corporation
filed a petition for review at the Court of Appeals which rendered a decision reversing and
setting aside the decision of the Court of Tax Appeals:
ISSUE:
Whether or not the subject media advertising expense for Tang incurred by respondent
corporation was an ordinary and necessary expense fully deductible under the NIRC?
RULING:
It is a governing principle in taxation that tax exemptions must be construed in
strictissimijuris against the taxpayer and liberally in favor of the taxing authority; and he who
claims an exemption must be able to justify his claim by the clearest grant of organic or statute
law. An exemption from the common burden cannot be permitted to exist upon vague
implications. Deductions for income tax purposes partake of the nature of tax exemptions;
hence, if tax exemptions are strictly construed, then deductions must also be strictly construed.
Supreme Court held that the P9, 461,246 claimed as media advertising expense for
Tang alone was almost one-half of its total claim for marketing expenses. It was almost

double the amount of respondent corporations P4, 640,636 general and administrative
expenses.
The Court of Appeals committed reversible error when it declared the subject media
advertising expense to be deductible as an ordinary and necessary expense on the ground that
it has not been established that the item being claimed as deduction is excessive. It is not
incumbent upon the taxing authority to prove that the amount of items being claimed is
unreasonable. The burden of proof to establish the validity of claimed deductions is on the
taxpayer. In the present case, that burden was not discharged satisfactorily.
Topic: Itemized Deductions: Reasonableness Test

C.M. HOSKIN vs. COMMISSIONER OF INTERNAL REVENUE
G.R No. L-24059
November 28, 1969
FACTS:

The petitioner company is engaged in the real estate business as brokers, managing
agents and administrators. It was founded by Mr. C.M. Hoskins who owned 996 shares out of its
1,000 shares. The other 4 shares were owned by other officers of the corporation. At the time
that this controversy arose, Hoskin was the President, Chairman of the Board of Directors,
stockholder and was also a salesman-broker of the company which entitled him to salaries and
bonuses including 50% of the supervision fees that was collected by the company from its
clients (amounting to Php99,977.91).
The CIR disallowed the deduction made by the petitioner in its income tax return of the
amount representing the supervision fees.
ISSUE:
Whether or not the supervision fees distributed by petitioner should be considered as
taxable earnings?
RULING:
The payment by the taxpayer to its controlling stockholder of 50% of its supervision fees
is not deductible ordinary and necessary expense and should be treated as distribution of
earnings and profits of the taxpayer. The amount was inordinately large. Bonus to employees
made in good faith and as additional compensation are deductible, PROVIDED, such payment,
when added to the stipulated salaries, do not exceed a reasonable compensation for the
services rendered. The conditions precedent to the deduction of bonuses are as follows: (a) the
payment of the bonuses is in fact compensation; (b) it must be for personal services actually
rendered; and (c) the bonuses, when added to the salaries, are reasonable.
Although theres no fixed test in determining what is reasonable, some tests used are as
follows: Amount and quality of the services performed; ii. Good faith; iii. Character of the
taxpayers business; iv. Volume and amount of its earnings; v. locality, type and extent of the
services rendered; vi. Salary policy; vii.Size of the business; viii.Employees qualifications and
contributions to the business; and ix.General economic condition. For income tax purposes, the
employer cannot legally such bonuses as deductible unless they are shown to be reasonable.
The question of allowing or disallowing as deductible expenses the amounts paid to
corporate officers by way of bonus is determined by the CIR exclusively for income tax
purposes. Although admittedly, it is the corporations discretion to fix the amounts to be paid to
its corporate officers, this right is NOT absolute. It cannot be used for the purpose of evading
payment of taxes. The corporation was practically of a sole proprietorship of Hoskin.
Hoskin had virtually absolute control of the company and as he has chosen to conduct his
business as a corporation, he has also bound himself with the corporate norms and obligations.
He is bound to pay income tax imposed on corporations and may not diminish his tax
liability by way of corporate resolutions authorizing payment of inordinately large commissions
and fees to its controlling stockholder.

Topic: Itemized Deductions: Substantiation Rule and Cohan Rule

GANCAYCO vs. COMMISSIONER OF INTERNAL REVENUE
1SCRA980
FACTS:
On May 10, 1950, Gancayco filed his income tax return for the year 1949. Two days later,
respondent Collector of Internal Revenue issued the corresponding notice advising him that his
income tax liability for that year amounted P9, 793.62, which he paid on May 15, 1950. A year
later, on May 14, 1951, respondent wrote the communication, notifying Gancayco, inter alia,
that, upon investigation, there was still due from him, a defficiency income tax for the year
1949, the sum of P29, 554.05. Gancayco sought a reconsideration, which was partly granted by
respondent, who in a letter dated April 8, 1953 informed petitioner that his income tax
defficiency for 1949 amounted to P16, 860.31. Gancayco urged reconsideration but no action
taken on this request, although he had sent several communications calling respondent's
attention thereto.
On April 15, 1956, respondent issued a warrant of distraint and levy against the properties
of Gancayco for the satisfaction of his deficiency income tax liability, and accordingly, the
municipal treasurer of Catanauan, Quezon issued on May 29, 1956, a notice of sale of said
property at public auction on June 19, 1956. Upon petition of Gancayco filed on June 16, 1956,

the Court of Tax Appeal issued a resolution ordering the cancellation of the sale and directing
that the same be readvertised at a future date, in accordance with the procedure established by
the National Internal Revenue Code.
Thereafter Gancayco received from the municipal treasurer of Catanauan, Quezon,
another notice of auction sale of his properties, to take place on August 29, 1956. On motion of
Gancayco, the Court of Tax Appeals, by resolution dated August 27, 1956, "cancelled" the
aforementioned sale and enjoined respondent and the municipal treasurer of Catanauan,
Quezon, from proceeding with the same. After appropriate proceedings, the Court of Tax
Appeals rendered, on November 14, 1957, the decision requiring him to pay P16,860.31, plus
surcharge and interest, by way of deficiency income tax for the year 1949.
ISSUE:
Whether or not Gancayco is entitled to a deduction from his taxable gross income?
RULING:
NO, deductions are expenses and losses incurred in connection with the realization of
gross income. Deductions are kinds of legislative grace and allowable by reason of specific
provisions and not presumed.
Under the SUBSTANTIATION DOCTRINE, all business expense deductions must be
substantiated with: a) receipts or adequate record; b) amount of expense; c) date qnd place of
expense; d) purpose of expense; and e) professional or business relationship expenses.
Referring to the item of P27,459, for farming expenses allegedly incurred by Gancayco,
there was no evidence has been presented as to the nature of the said "farming expenses"
other than the bare statement of petitioner that they were spent for the "development and
cultivation of (his) property". No specification has been made as to the actual amount spent for
purchase of tools, equipment or materials, or the amount spent for improvement. Respondent
claims that the entire amount was spent exclusively for clearing and developing the farm which
were necessary to place it in a productive state. It is not, therefore, an ordinary expense but a
capital expenditure. Accordingly, it is not deductible but it may be amortized, in accordance
with section 75 of Revenue Regulations No. 2, Section 31 of the Revenue Code which provides
that in computing net income, no deduction shall in any case be allowed in respect of any
amount paid out for new buildings or for permanent improvements, or betterments made to
increase the value of any property or estate.
In representation expense, it must be ordinary, reasonable and necessary; must be
directly connected or related to or in furtherance of the conduct of his trade, business or
exercise of profession; it must not be contrary to law, morals, public policy or public order; it
must not exceed the ceiling that must be prescribed by the Sec. of Finance and must be
supported by official receipts and adequate records. Gancayco's claim for representation
expenses aggregated P31, 753.97, of which P22, 820.52 was allowed, and P8, 933.45
disallowed. Such disallowance is justified by the record, for, apart from the absence of receipts,
invoices or vouchers of the expenditures in question, petitioner could not specify the items
constituting the same, or when or on whom or on what they were incurred. The case of Cohan v.
Commissioner, 39 F (2d) 540, cited by petitioner is not in point, because in that case there was
evidence on the amounts spent and the persons entertained and the necessity of entertaining

them, although there were no receipts and vouchers of the expenditures involved therein. Such
is not the case of petitioner herein.
Topic: Interests: Interest on Tax Delinquencies

COMMISSIONER OF INTERNAL REVENUE VS.ITOGON-SUYOC MINES, INC
G.R No. L-25299
JULY 29, 1969
FACTS:
Respondent corporation paid the mount of Php 13,155.20 as first installment on its
reported income tax liability for the fiscal year 1959-1960. But it turned out that instead of
deriving a net gain, it sustained a net loss during the said fiscal year. Accordingly, it filed an
amended income tax return and a claim for the refund of the sum of Php 13,155.20, which sum
it subsequently deducted from its income tax liability for the succeeding fiscal year 1960-1961.
However, petitioner charged respondent an interest in the amount of Php 1,512.83 on the
ground that no deduction on such refund should be allowed before its approval. Such
assessment representing interest was nevertheless set aside in the decision of the Court of Tax
Appeals.
ISSUE:
Whether or not respondent corporation should not be absolved from liability to pay the
sum of Php 1,512.83 for delinquency in the payment of income tax for the fiscal year 19601961?
RULING:
The imposition of interest on the sum of Php 1,512.83 by petitioner is not supported by
law. The National Internal Revenue Code provides that interest upon the amount determined as
a deficiency shall be assessed and shall be paid upon notice and demand from the
Commissioner of Internal Revenue at the rate therein specified. It is made clear however, in an
earlier provision found in the same section that if in any preceding year, the taxpayer was
entitled to a refund of any amount due as tax, such amount, if not yet refunded, may be
deducted from the tax to be paid.
Respondent was entitled to a refund. Instead of waiting for the sum involved to be
delivered to it, it deducted the said amount from the tax that it had to pay. That it had a right to
do according to the law.
What is sought to be avoided is for the taxpayer to make use of funds that should have
been paid to the government. Here, in view of the overpayment for the fiscal year 1959-1960,
the sum of Php 13,155.20 had already formed part of the public funds. It cannot be said
therefore, that respondent taxpayer was guilty of any delay enabling it to utilize a sum of
money
that
should
have
been
in
the
government
treasury.

Topic: Ordinary Assets vs. Capital Assets

CHINA BANKING CORPORATION vs. COURT OF APPEALS
G.R. No. 125508
July 19, 2000
FACTS:
Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment
in the First CBC Capital Ltd., a Hongkong subsidiary engaged in financing and investment with
"deposit-taking" function. The investment amounted to P16,227,851.80, consisting of 106,000
shares with a par Value of P100 per share.
In the course of the regular examination of the financial books and investment portfolios
of petitioner conducted by BangkoSentral in 1986, it was shown that First CBC Capital Ltd., has
become insolvent. With the approval of BangkoSentral, petitioner wrote-off as being worthless
its investment in First CBC Capital Ltd., in its 1987 Income Tax Return and treated it as a bad
debt or as an ordinary loss deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and assessed
petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive of surcharge,
interest and compromise penalty. The disallowance of the deduction was made on the ground
that the investment should not be classified as being "worthless" and that, although the
Hongkong Banking Commissioner had revoked the license of First CBC Capital as a "deposittaping" company, the latter could still exercise, however, its financing and investment activities.
Assuming that the securities had indeed become worthless, respondent Commissioner of
Internal Revenue held the view that they should then be classified as "capital loss," and not as a
bad debt expense there being no indebtedness to speak of between petitioner and its
subsidiary.
Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court
sustained the Commissioner, holding that the securities had not indeed become worthless and
ordered petitioner to pay its deficiency income tax for 1987 of P8,533,328.04 plus 20% interest
per annum until fully paid. When the decision was appealed to the Court of Appeals, the latter
upheld the CTA. In its instant petition for review on certiorari, petitioner bank assails the CA
decision.
ISSUE:
Whether or not an equity investment is a capital asset?
RULING:
An equity investment is a capital, not ordinary, asset of the investor the sale or exchange
of which results in either a capital gain or a capital loss. The gain or the loss is ordinary when
the property sold or exchanged is not a capital asset. A capital asset is defined negatively in
Section 33(1) of the NIRC; viz:
Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or
other property of a kind which would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property used in the trade or
business, of a character which is subject to the allowance for depreciation provided in

subsection (f) of section twenty-nine; or real property used in the trade or business of the
taxpayer.
A capital gain or a capital loss normally requires the concurrence of two conditions for it to
result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset.
When securities become worthless, there is strictly no sale or exchange but the law deems the
loss anyway to be "a loss from the sale or exchange of capital assets.A similar kind of
treatment is given, by the NIRC on the retirement of certificates of indebtedness with interest
coupons or in registered form, short sales and options to buy or sell property where no sale or
exchange strictly exists.[6] In these cases, the NIRC dispenses, in effect, with the standard
requirement of a sale or exchange for the application of the capital gain and loss provisions of
the code.
Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains
derived from the sale or exchange of capital assets, and not from any other income of the
taxpayer.
In the case at bar, First CBC Capital , Ltd., the investee corporation, is a subsidiary
corporation of petitioner bank whose shares in said investee corporation are not intended for
purchase or sale but as an investment. Unquestionably then, any loss therefrom would be a
capital loss, not an ordinary loss, to the investor.
To sum things up, the equity investment in shares of stock held by CBC of approximately
53% in its Hongkong subsidiary, the First CBC Capital, Ltd., is not an indebtedness, and it is a
capital, not an ordinary, asset. Assuming that the equity investment of CBC has indeed become
"worthless," the loss sustained is a capital, not an ordinary, loss. The capital loss sustained by
CBC can only be deducted from capital gains if any derived by it during the same taxable year
that the securities have become "worthless."
Topic: Installment Sales vs. Deferred Sales

BANAS vs. COURT OF APPEALS
G.R No. 102967 February 10, 2000
FACTS:
In the succeeding years, until 1979, petitioner reported a uniform income of two hundred
thirty thousand, eight hundred seventy-seven (P230,877.00) pesos as gain from sale of capital

asset. In his 1980 income tax amnesty return, petitioner also reported the same amount of
P230,877.00 as the realized gain on disposition of capital asset for the year.
On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners,
Rodolfo Tuazon and Procopio Talon to examine the books and records of petitioner for the year
1976. They discovered that petitioner had no outstanding receivable from the 1976 land sale to
AYALA and concluded that the sale was cash and the entire profit should have been taxable in
1976 since the income was wholly derived in 1976.
Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninetyfive thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They
recommended deficiency tax assessment for two million, four hundred seventy-three thousand,
six hundred seventy-three (P2,473,673.00) pesos.
ISSUE:
Whether respondent court erred in finding that petitioner's income from the sale of land in
1976 should be declared as a cash transaction in his tax return for the same year?
RULING:
As a general rule, the whole profit accruing from a sale of property is taxable as income in
the year the sale is made. But, if not all of the sale price is received during such year, and a
statute provides that income shall be taxable in the year in which it is "received," the profit from
an installment sale is to be apportioned between or among the years in which such installments
are paid and received.
Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned
installment method is a seller of real property who disposes his property on installment,
provided that the initial payment does not exceed 25% of the selling price. They also state what
may be regarded as installment payment and what constitutes initial payment. Initial payment
means the payment received in cash or property excluding evidences of indebtedness due and
payable in subsequent years, like promissory notes or mortgages, given of the purchaser during
the taxable year of sale. Initial payment does not include amounts received by the vendor in the
year of sale from the disposition to a third person of notes given by the vendee as part of the
purchase price which are due and payable in subsequent years. Such disposition or discounting
of receivable is material only as to the computation of the initial payment. If the initial payment
is within 25% of total contract price, exclusive of the proceeds of discounted notes, the sale
qualifies as an installment sale, otherwise it is a deferred sale.
Although the proceed of a discounted promissory note is not considered part of the initial
payment, it is still taxable income for the year it was converted into cash. The subsequent
payments or liquidation of certificates of indebtedness is reported using the installment method
in computing the proportionate income to be returned, during the respective year it was
realized.
Non-dealer sales of real or personal property may be reported as income under the
installment method provided that the obligation is still outstanding at the close of that year. If
the seller disposes the entire installment obligation by discounting the bill or the promissory
note, he necessarily must report the balance of the income from the discounting not only
income from the initial installment payment.
Where an installment obligation is discounted at a bank or finance company, a taxable
disposition results, even if the seller guarantees its payment, continues to collect on the
installment obligation, or handles repossession of merchandise in case of default. This rule
prevails in the United States. Since our income tax laws are of American origin, interpretations
by American courts an our parallel tax laws have persuasive effect on the interpretation of
these laws. Thus, by analogy, all the more would a taxable disposition result when the

discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of
the buyer is discharged, while the seller acquires money for the settlement of his receivables.
Logically then, the income should be reported at the time of the actual gain. For income tax
purposes, income is an actual gain or an actual increase of wealth. Although the proceeds of a
discounted promissory note is not considered initial payment, still it must be included as
taxable income on the year it was converted to cash. When petitioner had the promissory notes
covering the succeeding installment payments of the land issued by AYALA, discounted by
AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on
installment since, a taxable disposition resulted and petitioner was required by law to report in
his returns the income derived from the discounting. What petitioner did is tantamount to an
attempt to circumvent the rule on payment of income taxes gained from the sale of the land to
AYALA for the year 1976.
Topic: The Tests Applied to Partnership, Co-ownerships and Estates

AFISCO INSURANCE CORPORATION vs. COURT OF APPEALS
G.R. No. 112675
January 25, 1999
FACTS:
The petitioners are 41 non-life insurance corporations, organized and existing under the
laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler
Explosion and Contractors' All Risk insurance policies, the petitioners on August 1, 1965 entered
into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the
MunchenerRuckversicherungs-Gesselschaft , a non-resident foreign insurance corporation. The
reinsurance treaties required petitioners to form a pool. Accordingly, a pool composed of the
petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and
filed an "Information Return of Organization Exempt from Income Tax" for the year ending in
1975, on the basis of which it was assessed by the Commissioner of Internal Revenue deficiency
corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount of
P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively.
These assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo
and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and
ordered the petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax,
interest, and with holding tax.
ISSUE:

Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance,
were "dividends" subject to tax?
RULING:
YES.
In the instant case, the pool is a taxable entity distinct from the individual corporate
entities of the ceding companies. The tax on its income is obviously different from the tax on
the dividends received by the said companies. Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, "exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right." Petitioners have failed to
discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable,
because these were not yet in effect when the income was earned and when the subject
information return for the year ending 1975 was filed.
Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still
cannot justify the exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon
reinsurance by any company that has already paid the tax . . ." This cannot be applied to the
present case because, as previously discussed, the pool is a taxable entity distinct from the
ceding companies; therefore, the latter cannot individually claim the income tax paid by the
former as their own.
On the other hand, Section 24 (b) (1) pertains to tax on foreign corporations; hence, it
cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich,
a foreign corporation, be granted exemption based solely on this provision of the Tax Code,
because the same subsection specifically taxes dividends, the type of remittances forwarded to
it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate
of the ceding companies in the entity formed, pursuant to their reinsurance treaties which
required the creation of said pool.
Under its pool arrangement with the ceding companies; Munich shared in their income
and loss. This is manifest from a reading of Article 3 and 10 of the Quota-Share Reinsurance
treaty and Articles 3 and 10 of the Surplus Reinsurance Treaty. The foregoing interpretation of
Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed
strictissimijuris, and the statutory exemption claimed must be expressed in a language too plain
to be mistaken.
Finally the petitioners' claim that Munich is tax-exempt based on the RP- West German Tax
Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool
for corporate taxes on the basis of the information return it had submitted for the year ending
1975, a taxable year when said treaty was not yet in effect. 54 Although petitioners omitted in
their pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took
effect only later, on December 14, 1984.

Topic: The Tests Applied to Partnership, Co-ownerships and Estates

EVANGELISTA, vs. COMMISSIONER OF INTERNAL REVENUE
G.R. No. L-9996 October 15, 1957
FACTS:
Petitioners were engaged in realty business, renting and leasing properties they have
bought. On September 24, 1954 respondent Collector of Internal Revenue demanded the
payment of income tax on corporations, real estate dealer's fixed tax and corporation residence
tax for the years 1945-1949, Said letter of demand and corresponding assessments were
delivered to petitioners on December 3, 1954, whereupon they instituted the present case in
the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in his
letter of demand dated September 24, 1954" be reversed, and that they be absolved from the
payment of the taxes in question, with costs against the respondent.
ISSUE:
Whether petitioners are subject to the tax on corporations provided for in section 24 of
Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well
as to the residence tax for corporations and the real estate dealers fixed tax?
RULING:
Article 1767 of the Civil Code of the Philippines provides: By the contract of partnership
two or more persons bind themselves to contribute money, properly, or industry to a common
fund, with the intention of dividing the profits among themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties. The first element is undoubtedly present in the case
at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a
common fund. Hence, the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the case, the court is fully satisfied
that their purpose was to engage in real estate transactions for monetary gain and then divide
the same among themselves.
Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to leave no
room for doubt on the existence of said intent in petitioners herein. Only one or two of the
aforementioned circumstances were present in the cases cited by petitioners herein, and,
hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in
consequence of the acts performed by them, a legal entity, with a personality independent of

that of its members, did not come into existence, and some of the characteristics of
partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of
Tax Appeals.
Section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates
that a joint venture need not be undertaken in any of the standard forms, or in conformity with
the usual requirements of the law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the
term "corporation" includes, among other, joint accounts, and "associations," none of which has
a legal personality of its own, independent of that of its members. For purposes of the tax on
corporations, our National Internal Revenue Code, includes these partnerships with the
exception only of duly registered general copartnerships within the purview of the term
"corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership,
insofar as said Code is concerned and are subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465
provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized,
whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay
an annual residence tax of five pesos and an annual additional tax which in no case, shall
exceed one thousand pesos, in accordance with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint
account,association or insurance company, no matter how created or organized.
Considering that the pertinent part of this provision is analogous to that of section 24 and
84 (b) of our National Internal Revenue Code (commonwealth Act No. 466), and that the latter
was approved on June 15, 1939, the day immediately after the approval of said Commonwealth
Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and "partnership" are
used in both statutes with substantially the same meaning. Consequently, petitioners are
subject, also, to the residence tax for corporations. Lastly, the records show that petitioners
have habitually engaged in leasing the properties above mentioned for a period of over twelve
years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged from
P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National
Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to section 194 (s)
thereof: 'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding himself out
as a full or part time dealer in real estate or as an owner of rental property or properties rented
or offered to rent for an aggregate amount of three thousand pesos or more a year.
Topic: Rules applicable to Passive Income: Tax Sparing Rule
COMMISSIONER OF INTERNAL REVENUE vs.
PROCTER & GAMBLE PHILIPPINES
G.R. No. L-66838
April 15, 1988
FACTS:
Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA
(PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and
business therein. PMC-USA is the sole shareholder of PMC Philippines and is entitled to receive

income from PMC Philippines in the form of dividends, if not rents or royalties. For the taxable
years 1974 and 1975, PMC Philippines filed its income tax return and also declared dividends in
favor of PMC-USA. In 1977, PMC Philippines, invoking the tax-sparing provision of Section 24 (b)
as the withholding agent of the Philippine Government with respect to dividend taxes paid by
PMC-USA, filed a claim for the refund of 20 percentage point portion of the 35 percentage whole
tax paid with the Commissioner of Internal Revenue.
ISSUE:
Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared
and remitted to its parent corporation?
RULING:
The issue raised is one made for the first time before the Supreme Court. Under the same
underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues
not raised in the lower court cannot be generally raised for the first time on appeal.
Nonetheless, it is axiomatic that the state can never be allowed to jeopardize the governments
financial position. The submission of the Commissioner that PMC Philippines is but a withholding
agent of the government and therefore cannot claim reimbursement of alleged overpaid taxes,
is completely meritorious. The real party in interest is PMC-USA, which should prove that it is
entitled under the US Tax Code to a US Foreign Tax Credit equivalent to at least 20 percentage
points spared or waived as otherwise considered or deemed paid by the Government. Herein,
the claimant failed to show or justify the tax return of the disputed 15% as it failed to show the
actual amount credited by the US Government against the income tax due from PMC-USA on
the dividends received from PMC Philippines; to present the income tax return of PMC-USA for
1975 when the dividends were received; and to submit duly authenticated document showing
that the US government credited the 20% tax deemed paid in the Philippines.
Topic: Improperly Accumulated Earnings Tax

CYANAMID PHILIPPINES, INC. vs. COURT OF APPEALS
GR No. 108067 January 20, 2000
FACTS:
Petitioner is a domestic corporation and is a wholly owned subsidiary of American
Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods, and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the
payment of deficiency income tax for taxable year 1981.
Petitioner, through its external accountant, Sycip, Gorres, Velayo& Co., claimed, among
others, that the surtax(25%- 3.7M) for the undue accumulation of earnings was not proper
because the said profits were retained to increase petitioners working capital and it would be
used for reasonable business needs of the company. Petitioner contended that it availed of the
tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and criminal
prosecution granted by the law.

CIR refused to allow the cancellation of the assessment notices. It stated that the
amnesty applies only to assessments issued after August 21, 1986. In the instant case, the
assessment was issued on January 30, 1985.
Petitioner appealed to CTA. During the pendency of the case, however, both parties
agreed to compromise the 1981 deficiency income tax assessment. Petitioner paid a reduced
amount as compromise settlement. However, the surtax on improperly accumulated profits
remained unresolved.
Petitioner claimed that CIRs assessment representing the 25% surtax on its accumulated
earnings for the year 1981 had no legal basis for the following reasons: (a) petitioner
accumulated its earnings and profits for reasonable business requirements to meet working
capital needs and retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of
American Cyanamid Company, a corporation organized under the laws of the State of Maine,
USA, whose shares of stock are listed and traded in New York Stock Exchange. This being the
case, no individual shareholder of petitioner could have evaded or prevented the imposition of
individual income taxes by petitioners accumulation of earnings and profits, instead of
distribution of the same.
CTA denied the petition. CA affirmed CTA, hence the petition.
ISSUE:
Is the petitioner liable to the surtax on accumulated earnings?
RULING:
Yes. Section 25 of the old National Internal Revenue Code of 1977 states:
"Sec. 25. Additional tax on corporation improperly accumulating profits or surplus "(a) Imposition of tax. -- If any corporation is formed or availed of for the purpose of
preventing the imposition of the tax upon its shareholders or members or the shareholders or
members of another corporation, through the medium of permitting its gains and profits to
accumulate instead of being divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five per-centum of the undistributed
portion of its accumulated profits or surplus which shall be in addition to the tax imposed by
section twenty-four, and shall be computed, collected and paid in the same manner and subject
to the same provisions of law, including penalties, as that tax.
"(b) Prima facie evidence. -- The fact that any corporation is mere holding company shall
be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
Similar presumption will lie in the case of an investment company where at any time during the
taxable year more than fifty per centum in value of its outstanding stock is owned, directly or
indirectly, by one person.
"(c) Evidence determinative of purpose. -- The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon its shareholders or members unless the
corporation, by clear preponderance of evidence, shall prove the contrary.
"(d) Exception -- The provisions of this sections shall not apply to banks, non-bank
financial intermediaries, corporation organized primarily, and authorized by the Central Bank of
the Philippines to hold shares of stock of banks, insurance companies, whether domestic or
foreign.
The provision discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper accumulation of surplus is essentially a

penalty tax designed to compel corporations to distribute earnings so that the said earnings by
shareholders could, in turn, be taxed.
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its
current liabilities. That current ratio of Cyanamid, therefore, projects adequacy in working
capital. Said working capital was expected to increase further when more funds were generated
from the succeeding years sales. Available income covered expenses or indebtedness for that
year, and there appeared no reason to expect an impending working capital deficit which
could have necessitated an increase in working capital, as rationalized by petitioner.
In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon shareholders, it must be shown that the controlling intention
of the taxpayer is manifested at the time of accumulation, not intentions declared
subsequently, which are mere afterthoughts. Furthermore, the accumulated profits must be
used within a reasonable time after the close of the taxable year. In the instant case, petitioner
did not establish, by clear and convincing evidence, that such accumulation of profit was for the
immediate needs of the business.
Hence, the findings of CIR are sustained. Unless rebutted, all presumptions generally are
indulged in favor of the correctness of the CIRs assessment against the taxpayer.
Topic: Special Corporations: Gross Philippine Billings
BRITISH OVERSEAS AIRWAYS CORP. vs.
G.R. Nos. L-65773-74 April 30, 1987
FACTS:
BOAC is a 100% British Government-owned corporation organized and existing under the
laws of the United Kingdom. It is engaged in the international airline business and is a membersignatory of the Interline Air Transport Association. As such, it operates air transportation
service and sells transportation tickets over the routes of the other airline members. During the
periods covered by the disputed assessments, it is admitted that BOAC had no landing rights for
traffic purposes in the Philippines, and was not granted a Certificate of public convenience and
necessity to operate in the Philippines by the Civil Aeronautics Board, except for a nine-month
period, partly in 1961 and partly in 1962, when it was granted a temporary landing permit by
the CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines,
although during the period covered by the assessments, it maintained a general sales agent in
the Philippines ---- Warner Barnes and Company, Ltd., and later Qantas Airways ---- which was
responsible for selling BOAC tickets covering passengers and cargoes.
On 7 May 1968, petitioner Commissioner of Internal Revenue assessed BOAC the
aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to
1963.
This was protested by BOAC. Subsequent investigation resulted in the issuance of a new
assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79.
BOAC paid this new assessment under protest.
BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by
the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for
review with the Tax Court on 27 January 1972, assailing the assessment and praying for the
refund of the amount paid.
ISSUE:

Whether the British Overseas Airways Corporation, a foreign airline company which does
not maintain any flight operations to and from the Philippines, is liable for Philippine income
taxation in respect of "sales of air tickets" in the Philippines through a general sales agent,
relating to the carriage of passengers and cargo between two points both outside the
Philippines?
RULING:
A "resident foreign corporation" or a foreign corporation engaged in trade or business in
the Philippines or having an office or place of business in the Philippines is subject to Philippine
income taxation only in respect of income derived from sources within the Philippines. Section
24 (b) (2) of the National Internal Revenue Code as amended by Republic Act No. 2343,
approved 20 June 1959, as it existed up to 3 August 1969. Clearly, whether the foreign
corporate taxpayer is doing business in the Philippines and therefore a resident foreign
corporation, or not doing business in the Philippines and therefore a non-resident foreign
corporation, it is liable to income tax only to the extent that it derives income from sources
within the Philippines. The circumstance that a foreign corporation is resident in the Philippines
yields no inference that all or any part of its income is Philippine source income. Similarly, the
non-resident status of a foreign corporation does not imply that it has no Philippine source
income. Conversely, the receipt of Philippine source income creates no presumption that the
recipient foreign corporation is a resident of the Philippines. The critical issue, for present
purposes, is therefore whether or not BOAC is deriving income from sources within the
Philippines. For purposes of income taxation, it is well to bear in mind that the "source of
income" relates not to the physical sourcing of a flow of money or the physical situs of payment
but rather to the "property, activity or service which produced the income.
Income derived
from the purchase and sale of personal property shall be treated as derived entirely from the
country in which sold. The word 'sold' includes 'exchange.' The 'country' in which 'sold'
ordinarily means the place where the property is marketed. This Section does not apply to
income from the sale of personal property produced (in whole or in part) by the taxpayer within
and sold without the Philippines or produced (in whole or in part) by the taxpayer without and
sold within the Philippines. International carriers issuing for compensation passage
documentation in the Philippines for uplifts from any point in the world to any other point in the
world, are not charged any Philippine income tax on their Philippine billings (i.e., billings in
respect of passenger or cargo originating from the Philippines). Under this new approach,
international carriers who service ports or points in the Philippines are treated in exactly the
same way as international carriers not servicing any port or point in the Philippines. Thus, the
source of income rule applicable, as above discussed, to transportation or other services
rendered partly within and partly without the Philippines, or wholly without the Philippines, has
been set aside. In place of Philippine income taxation, the Tax Code now imposes this 21/2 per
cent tax computed on the basis of billings in respect of passengers and cargo originating from
the Philippines regardless of where embarkation and debarkation would be taking place. This 21/2 per cent tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax
on income. Thereby, the Government has done away with the difficulties attending the
allocation of income and related expenses, losses and deductions. Because taxes are the very
lifeblood of government, the resulting potential "loss" or "gain" in the amount of taxes
collectible by the state is sometimes, with varying degrees of consciousness, considered in
choosing from among competing possible characterizations under or interpretations of tax
statutes. It is hence perhaps useful to point out that the determination of the appropriate
characterization here ---- that of contracts of air carriage rather than sales of airline tickets ---entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the

Government takes in revenues generated by the 2-1/2 per cent tax on the gross Philippine
billings or receipts of international carriers.
Topic: Tax Returns and Other Administrative Requirements
PASEO REALTY AND DEVELOPMENT CORP. vs.
COURT OF APPEALS
G.R. No. 119286
October 13, 2004
FACTS:
Paseo Realty and Development Corporation, a domestic corporation engaged in the lease
of two parcels of land at Paseo de Roxas in Makati City.
On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989
declaring a gross income of P1,855,000.00, deductions of P1,775,991.00, net income of
P79,009.00, an income tax due thereon in the amount of P27,653.00, prior years excess credit
of P146,026.00, and creditable taxes withheld in 1989 of P54,104.00 or a total tax credit of
P200,130.00 and credit balance of P172,477.00.
In a resolution dated October 21, 1993 Respondent Court reconsidered its decision of July
29, 1993 and dismissed the petition for review, stating that it has overlooked the fact that the
petitioners 1989 Corporate Income Tax Return (Exh. A) indicated that the amount of
P54,104.00 subject of petitioners claim for refund has already been included as part and parcel
of the P172,477.00 which the petitioner automatically applied as tax credit for the succeeding
taxable year 1990.
Petitioner filed a Motion for Reconsideration which was denied by respondent Court on
March 10, 1994.
Petitioner filed a Petition for Review dated April 3, 1994with the Court of Appeals.
Resolving the twin issues of whether petitioner is entitled to a refund of P54,104.00
representing creditable taxes withheld in 1989 and whether petitioner applied such creditable
taxes withheld to its 1990 income tax liability, the appellate court held that petitioner is not
entitled to a refund because it had already elected to apply the total amount of P172,447.00,
which includes the P54,104.00 refund claimed, against its income tax liability for 1990. The
appellate court elucidated on the reason for its dismissal of petitioners claim for refund
ISSUE:
Whether or not the alleged excess taxes paid by a corporation during a taxable year
should be refunded or credited against its tax liabilities for the succeeding year?
RULING:
The petition must be denied.
As a matter of principle, it is not advisable for this Court to set aside the conclusion
reached by an agency such as the CTA which is, by the very nature of its functions, dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of its
authority.
This interdiction finds particular application in this case since the CTA, after careful
consideration of the merits of the Commissioner of Internal Revenues motion for
reconsideration, reconsidered its earlier decision which ordered the latter to refund the amount
of P54,104.00 to petitioner. Its resolution cannot be successfully assailed based, as it is, on the
pertinent laws as applied to the facts.

Petitioners 1989 tax return indicates an aggregate creditable tax of P172,477.00,

representing its 1988 excess credit of P146,026.00 and 1989 creditable tax of P54,104.00 less
tax due for 1989, which it elected to apply as tax credit for the succeeding taxable year. 19
According to petitioner, it successively utilized this amount when it obtained refunds in CTA
Case No. 4439 and CTA Case No. 4528 and applied its 1990 tax liability, leaving a balance of
P54,104.00, the amount subject of the instant claim for refund.
The confusion as to petitioners entitlement to a refund could altogether have been
avoided had it presented its tax return for 1990. Such return would have shown whether
petitioner actually applied its 1989 tax credit of P172,477.00, which includes the P54,104.00
creditable taxes withheld for 1989 subject of the instant claim for refund, against its 1990 tax
liability as it had elected in its 1989 return, or at least, whether petitioners tax credit of
P172,477.00 was applied to its approved refunds as it claims.
As clearly shown from the above-quoted provisions, in case the corporation is entitled to a
refund of the excess estimated quarterly income taxes paid, the refundable amount shown on
its final adjustment return may be credited against the estimated quarterly income tax liabilities
for the taxable quarters of the succeeding year. The carrying forward of any excess or overpaid
income tax for a given taxable year is limited to the succeeding taxable year only.
Taxation is a destructive power which interferes with the personal and property rights of
the people and takes from them a portion of their property for the support of the government.
And since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law
frowns against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimijurisagainst the taxpayer and liberally in favor of the taxing authority. A
claim of refund or exemption from tax payments must be clearly shown and be based on
language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption
therefrom is the exception.
Topic: Taxation of Income Trusts

MIGUEL J. OSSORIO PENSION FOUNDATION, INC vs. CA and CIR
G.R. No. 162175
June 28, 2010
FACTS:
The Miguel J. Ossorio Pension Foundation, Incorporated (petitioner or MJOPFI) filed this Petition
for Certiorari1with Prayer for the Issuance of a Temporary Restraining Order and/or Writ of
Preliminary Injunction to reverse the Court of Appeals (CA) Decision dated 30 May 2003 in CAG.R. SP No. 61829 as well as the Resolutiondated 7 November 2003 denying the Motion for

Reconsideration. In the assailed decision, the CA affirmed the Court of Tax Appeals (CTA)
Decisiondated 24 October 2000. The CTA denied petitioners claim for refund of withheld
creditable tax of P3,037,500 arising from the sale of real property of which petitioner claims to
be a co-owner as trustee of the employees trust or retirement funds.
ISSUE: 1. Whether petitioner or the Employees Trust Fund is estopped from claiming that the
Employees Trust Fund is the beneficial owner of 49.59% of the MBP lot and that VMC merely
held 49.59% of the MBP lot in trust for the Employees Trust Fund. 2. If petitioner or the
Employees Trust Fund is not estopped, whether they have sufficiently established that the
Employees Trust Fund is the beneficial owner of 49.59% of the MBP lot, and thus entitled to tax
exemption for its share in the proceeds from the sale of the MBP lot.
HELD:
We grant the petition.
The law expressly allows a co-owner (first co-owner) of a parcel of land to register his
proportionate share in the name of his co-owner (second co-owner) in whose name the entire
land is registered. The second co-owner serves as a legal trustee of the first co-owner insofar as
the proportionate share of the first co-owner is concerned. The first co-owner remains the owner
of his proportionate share and not the second co-owner in whose name the entire land is
registered. Thus, this case turns on whether petitioner can sufficiently establish that petitioner,
as trustee of the Employees Trust Fund, has a common agreement with VMC and VFC that
petitioner, VMC and VFC shall jointly purchase the MBP lot and put the title to the MBP lot in the
name of VMC for the benefit petitioner, VMC and VFC.
We rule that petitioner, as trustee of the Employees Trust Fund, has more than sufficiently
established that it has an agreement with VMC and VFC to purchase jointly the MBP lot and to
register the MBP lot solely in the name of VMC for the benefit of petitioner, VMC and VFC.
Documents acknowledged before notaries public are public documents and public documents
are admissible in evidence without necessity of preliminary proof as to their authenticity and
due execution. They have in their favor the presumption of regularity, and to contradict the
same, there must be evidence that is clear, convincing and more than merely preponderant.
The BIR failed to present any clear and convincing evidence to prove that the notarized
Memorandum of Agreement is fictitious or has no legal effect. Likewise, VMC, the registered
owner, did not repudiate petitioners share in the MBP lot. Further, City trust, a reputable
banking institution, has prepared a Portfolio Mix Analysis for the years 1994 to 1997 showing
that petitioner invested P5,504,748.25 in the MBP lot. Absent any proof that the Cityt rust bank
records have been tampered or falsified, and the BIR has presented none, the Portfolio Mix
Analysis should be given probative value.
The trustor-beneficiary is not estopped from proving its ownership over the property held in
trust by the trustee when the purpose is not to contest the disposition or encumbrance of the
property in favor of an innocent third-party purchaser for value. The BIR, not being a buyer or
claimant to any interest in the MBP lot, has not relied on the face of the title of the MBP lot to
acquire any interest in the lot. There is no basis for the BIR to claim that petitioner is estopped
from proving that it co-owns, as trustee of the Employees Trust Fund, the MBP lot. Article 1452
of the Civil The income from the trust fund investments is therefore exempt from the payment

of income tax and consequently from the payment of the creditable withholding tax on the sale
of their real property. Since petitioner has proven that the income from the sale of the MBP lot
came from an investment by the Employees' Trust Fund, petitioner, as trustee of the Employees
Trust Fund, is entitled to claim the tax refund ofP3,037,500 which was erroneously paid in the
sale of the MBP lot.
Respondent Commissioner of Internal Revenue is directed to refund petitioner Miguel J. Ossorio
Pension Foundation, Incorporated, as trustee of the Employees Trust Fund, the amount
of P3,037,500, representing income tax erroneously paid.

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TAXATION I - CASE DIGESTS

First Semester, SY 2011-2012

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS

Topic: Power to destroy vis--vis Power to Build

TAXATION I - CASE DIGESTS

No profit is derived from the making of insurance contracts, agreements or transactions or

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS

Topic: Importance of Taxation & the Lifeblood Doctrine

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS

Topic: Importance of Taxation & the Lifeblood Doctrine

TAXATION I - CASE DIGESTS

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS

Topic: Objectives of Taxation: Regulation

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS

Topic: Objectives of Taxation: Regulation

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 10

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 11

Topic: Concept of Allowable Deductions: Deduction vs. Tax Credit

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 12

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 13

Topic: Inherent Limitations: Public Purpose

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 14

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 15

Topic: Inherent Limitation: Public Purpose

TAXATION I - CASE DIGESTS 16

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 17

Topic: Inherent Limitations: Public Purpose

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 18

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 19

Topic: Inherent Limitations: Inherently Legislative

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 20

Topic: Inherent Limitations: Coverage, Object, Nature, Extent, Situs

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 21

Topic: Tax Exemption of the Government

TAXATION I - CASE DIGESTS 22

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 23

Topic: Tax Exemption of the Government

TAXATION I - CASE DIGESTS 24

_Saint Louis University School of Law_

TAXATION I - CASE DIGESTS 25

Topic: Tax Exemption of the Government

TAXATION I - CASE DIGESTS 26

Topic: Tax Exemption of the Government

TAXATION I - CASE DIGESTS 27

_Saint Louis University School of Law_