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CASE TITLE SUMMARY ISSUE/S RULING NOTES

1 Paseo Realty and On April 16, 1990, petitioner filed its Income Tax Whether or not No.The confusion as to petitioners entitlement to a refund could
Development Return for the calendar year 1989 declaring a gross the petitioner can altogether have been avoided had it presented its tax return for 1990.
Corporation income of P1,855,000.00, deductions of claim the refund
P1,775,991.00, net income of P79,009.00, an of its creditable
vs income tax due thereon in the amount of taxes withheld in The grant of a refund is founded on the assumption that the tax return
P27,653.00, prior years excess credit of 1989 as the same is valid, i.e., that the facts stated therein are true and correct.
CA P146,026.00, and creditable taxes withheld in 1989 had been
of P54,104.00 or a total tax credit of P200,130.00 allegedly applied Without the tax return, it is error to grant a refund since it would be
and credit balance of P172,477.00. against its 1990 virtually impossible to determine whether the proper taxes have been
GR No.119286 tax due. assessed and paid.

October 13, 2004


On November 14, 1991, petitioner filed with
respondent a claim for the refund of excess It is axiomatic that a claimant has the burden of proof to establish the
creditable withholding and income taxes for the factual basis of his or her claim for tax credit or refund.
years 1989 and 1990 in the aggregate amount of Tax refunds, like tax exemptions, are construed strictly against the
P147,036.15. taxpayer.

On December 27, 1991 alleging that the prescriptive In case the corporation is entitled to a refund of the excess estimated
period for refunds for 1989 would expire on quarterly income taxes paid, the refundable amount shown on its final
December 30, 1991 and that it was necessary to adjustment return may be credited against the estimated quarterly
interrupt the prescriptive period, petitioner filed income tax liabilities for the taxable quarters of the succeeding year.
with the respondent Court of Tax Appeals a petition
for review praying for the refund of P54,104.00 The carrying forward of any excess or overpaid income tax for a given
representing creditable taxes withheld from income taxable year is limited to the succeeding taxable year only.
payments of petitioner for the calendar year ending
December 31, 1989.
While a taxpayer is given the choice whether to claim for refund or
have its excess taxes applied as tax credit for the succeeding taxable
year, such election is not final.
Prior verification and approval by the Commissioner of Internal
Revenue is required.
The availment of the remedy of tax credit is not absolute and
mandatory.
It does not confer an absolute right on the taxpayer to avail of the tax
credit scheme if it so chooses.
Neither does it impose a duty on the part of the government to sit
back and allow an important facet of tax collection to be at the sole
control and discretion of the taxpayer.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
The amendment of Section 69 by what is now Section 76 of Republic
Act No.
8424 emphasizes that it is imperative to indicate in the tax return or
the final adjustment return whether a tax credit or refund is sought by
making the taxpayers choice irrevocable.

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
strictissimi juris against 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.

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2 Pelizloy Realty Pelizloy owns Palm Grove Resort, which is designed 1. The power to tax "is an attribute of sovereignty," and as such, inheres
Corporation for recreation and which has facilities like swimming in the State.
Whether or not
pools, a spa and function halls.
vs Section 59, Article Such, however, is not true for provinces, cities, municipalities and
X of Provincial Tax barangays as they are not the sovereign; rather, they are mere
Province of Ordinance No. "territorial and political subdivisions of the Republic of the
The Prov.
Benguet Philippines".
05-107, otherwise
Board of the Prov.
known as the
of Benguet approved Prov. Benguet Revenue
GR No. 183137 A municipal corporation unlike a sovereign state is clothed with no
Code of 2005,
Tax Ordinance No. inherent power of taxation.
April 10, 2013 levies a
05-107, otherwise known as the Benguet Revenue percentage tax. The charter or statute must plainly show an intent to confer that
Code of 2005 ("Tax Ordinance"). power or the municipality, cannot assume it.

Section 59, Article X of the Tax Ordinance levied a And the power when granted is to be construed in strictissimi juris.
2.
ten percent (10%) amusement tax on gross receipts
Any doubt or ambiguity arising out of the term used in granting that
from admissions to "resorts, swimming pools, bath Whether or not
power must be resolved against the municipality.
houses, hot springs and tourist spots." provinces are
authorized to Inferences, implications, deductions all these have no place in the
impose interpretation of the taxing power of a municipal corporation.
It was Pelizloy's position that the Tax Ordinance's amusement taxes
imposition of a 10% amusement tax on gross on admission fees
receipts from admission fees for resorts, swimming to resorts, Therefore, the power of a province to tax is limited to the extent that
pools, bath houses, hot springs, and tourist spots is swimming pools, such power is delegated to it either by the Constitution or by statute.
an ultra vires act on the part of the Province of bath houses, hot
springs, and Section 5, Article X of the 1987 Constitution is clear on this point.
Benguet. Thus, it filed an appeal/petition before the
Secretary of Justice on January 27, 2006. tourist spots for
being
"amusement 1.Percentage Tax.
places" under the Supreme Court defined percentage tax as a "tax measured by a certain
Local Government percentage of the gross selling price or gross value in money of goods
Code. sold, bartered or imported; or of the gross receipts or earnings derived
by any person engaged in the sale of services." Also, Republic Act No.
8424, , in Section 125, Title V,lists amusement taxes as among the
(other) percentage taxes which are levied regardless of whether or not
a taxpayer is already liable to pay value-added tax (VAT).

Amusement taxes are fixed at a certain percentage of the gross


receipts incurred by certain specified establishments.

However, provinces are not barred from levying amusement taxes


even if amusement taxes are a form of percentage taxes.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
Section 133 (i) of the LGC prohibits the levy of percentage taxes
"except as otherwise provided" by the LGC.

2.
No.
Section 131 (c) of the LGC already provides a clear definition of
amusement places.

Indeed, theaters, cinemas, concert halls, circuses, and boxing stadia


are bound by a common typifying characteristic in that they are all
venues primarily for the staging of spectacles or the holding of public
shows, exhibitions, performances, and other events meant to be
viewed by an audience.
Accordingly, other places of amusement must be interpreted in light
of the typifying characteristic of being venues "where one seeks
admission to entertain oneself by seeing or viewing the show or
performances" or being venues primarily used to stage spectacles or
hold public shows, exhibitions, performances, and other events meant
to be viewed by an audience.

Considering these, it is clear that resorts, swimming pools, bath


houses, hot springs and tourist spots cannot be considered venues
primarily "where one seeks admission to entertain oneself by seeing
or viewing the show or performances".
While it is true that they may be venues where people are visually
engaged, they are not primarily venues for their proprietors or
operators to actively display, stage or present shows and/or
performances.

Thus, resorts, swimming pools, bath houses, hot springs and tourist
spots do not belong to the same category or class as theaters,
cinemas, concert halls, circuses, and boxing stadia.
It follows that they cannot be considered as among the other places
of amusement contemplated by Section 140 of the LGC and which
may properly be subject to amusement taxes.

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The second paragraph of Section 59, Article X of the Tax Ordinance is
not limited to resorts, swimming pools, bath houses, hot springs, and
tourist spots but also covers admission fees for boxing.
As Section 140 of the LGC allows for the imposition of amusement
taxes on gross receipts from admission fees to boxing stadia, Section
59, Article X of the Tax Ordinance must be sustained with respect to
admission fees from boxing stadia.

3 CIR On November 8, 2001, Revenue District Officer Whether or not Denied due process.
issued a Preliminary 15-day Letter which stated that Metro Star was
vs The Supreme Court has consistently held that while a mailed letter is
a post audit review was held and it was ascertained denied due
deemed received by the addressee in the course of mail, this is merely
that there was deficiency value-added and process.
Metro Star a disputable presumption subject to controversion and a direct denial
withholding taxes due from petitioner in the
Superama Inc. thereof shifts the burden to the party favored by the presumption to
amount of P 292,874.16.
prove that the mailed letter was indeed received by the addressee.

GR No. L-28896 Petitioner received a Formal Letter of Demand


The facts to be proved to raise this presumption are (a) that the letter
February 17, 1988 dated April 3, 2002.
was properly addressed with postage prepaid, and (b) that it was
mailed.
Revenue District Office No. Once these facts are proved, the presumption is that the letter was
received by the addressee as soon as it could have been transmitted
67 sent a copy of the Final Notice of Seizure.
to him in the ordinary course of the mail.
But if one of the said facts fails to appear, the presumption does not
Petitioner received from Revenue District Office No. lie.

67 a Warrant of Distraint and/or Levy dated May 12,


2003 demanding payment of deficiency value-
CIR failed to discharge its duty and present any evidence to show that
added tax and withholding tax payment in the
Metro Star indeed received the PAN dated January 16, 2002.
amount of P292,874.16.

Section 228 of the Tax Code clearly requires that the taxpayer must
Denying that it received a Preliminary Assessment
first be informed that he is liable for deficiency taxes through the
Notice (PAN) and claiming that it was not accorded
sending of a PAN.
due process, Metro Star filed a petition for review
with the CTA. He must be informed of the facts and the law upon which the
assessment is made.
The CIR insisting that Metro Star received the PAN,
dated January 16, 2002, and that due process was The law imposes a substantive, not merely a formal, requirement.
served nonetheless because the latter received the
To proceed heedlessly with tax collection without first establishing a
Final Assessment Notice (FAN).
valid assessment is evidently violative of the cardinal principle in
administrative investigations that taxpayers should be able to
present their case and adduce supporting evidence.

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The sending of a PAN to taxpayer to inform him of the assessment


made is but part of the "due process requirement in the issuance of a
deficiency tax assessment," the absence of which renders nugatory
any assessment made by the tax authorities.
The use of the word "shall" in subsection 3.1.2 describes the
mandatory nature of the service of a PAN.

Thus, for its failure to send the PAN stating the facts and the law on
which the assessment was made as required by Section 228 of R.A.
No.
8424, the assessment made by the CIR is void.

Taxes are the lifeblood of the government and so should be collected


without unnecessary hindrance.

It is said that taxes are what we pay for civilized society.


Without taxes, the government would be paralyzed for the lack of the
motive power to activate and operate it.

It is a requirement in all democratic regimes that it be exercised


reasonably and in accordance with the prescribed procedure.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

4 Reyes Petitioners JBL Reyes et al. Is the approach on No.


tax assessment
vs owned a parcel of land in Tondo which are leased The power to tax "is an attribute of sovereignty".
used by the City
and occupied as dwelling units by tenants who were
Assessor In fact, it is the strongest of all the powers of government.
Almazor paying monthly rentals of not exceeding P300.
reasonable?
But for all its plenitude the power to tax is not unconfined as there are
Rental Freezing Law was passed prohibiting for one
restrictions.
year from its effectivity, an increase in monthly
GR No. L-49839-46
rentals of dwelling units where rentals do not Adversely effecting as it does property rights, both the due process
April 26, 1991 exceed three hundred pesos (P300.00), so that the and equal protection clauses of the Constitution may properly be
Reyeses were precluded from raising the rents and invoked to invalidate in appropriate cases a revenue measure.
from ejecting the tenants.
If it were otherwise, there would be truth to the 1903 dictum of Chief
In 1973, respondent City Assessor of Manila re- Justice Marshall that "the power to tax involves the power to destroy."
classified and reassessed the value of the subject The web or unreality spun from Marshall's famous dictum was
properties based on the schedule of market values, brushed away by one stroke of Mr.
which entailed an increase in the corresponding tax
rates prompting petitioners to file a Memorandum Justice Holmes pen, thus: "The power to tax is not the power to
of Disagreement averring that the reassessments destroy while this Court sits.
made were "excessive, unwarranted, inequitable, So it is in the Philippines "
confiscatory and unconstitutional" considering that
the taxes imposed upon them greatly exceeded the
annual income derived from their properties. In the same vein, the due process clause may be invoked where a
They argued that the income approach should have taxing statute is so arbitrary that it finds no support in the
been used in determining the land values instead of Constitution.
the comparable sales approach which the City An obvious example is where it can be shown to amount to
Assessor adopted. confiscation of property.
That would be a clear abuse of power.

Verily, taxes are the lifeblood of the government and so should be


collected without unnecessary hindrance.
However, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself It
is therefore necessary to reconcile the apparently conflicting interests
of the authorities and the taxpayers so that the real purpose of
taxations, which is the promotion of the common good, may be
achieved (Commissioner of Internal Revenue v.
Algue Inc., et al., 158 SCRA 9 [1988]).
Consequently, it stands to reason that petitioners who are burdened
by the government by its Rental Freezing Laws (then R.A.
No.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
6359 and P.D.
20) under the principle of social justice should not now be penalized
by the same government by the imposition of excessive taxes
petitioners can ill afford and eventually result in the forfeiture of their
properties.

5 Pepsi Cola Pepsi Cola has a bottling plant in the Municipality of Whether or not No.
Bottling Tanauan, Leyte. there is undue
It is a power that is purely legislative and which the central legislative
Philippines delegation of
In September 1962, the Municipality approved body cannot delegate either to the executive or judicial department
taxing powers.
Company Ordinance No. of the government without infringing upon the theory of separation
Whether or not of powers.
vs 23 which levies and collects from soft drinks
there is double
producers and manufacturers a tai of one-sixteenth The exception, however, lies in the case of municipal corporations, to
Municipality of taxation.
(1/16) of a centavo for every bottle of soft drink which, said theory does not apply.
Tanuan corked. In December 1962, the Municipality also
Legislative powers may be delegated to local governments in respect
approved Ordinance No.
of matters of local concern.
27 which levies and collects on soft drinks
GR No. L-31156
produced or manufactured within the territorial
February 27, 1976 jurisdiction of this municipality a tax of one centavo Under the New Constitution, local governments are granted the
P0.01) on each gallon of volume capacity. Pepsi autonomous authority to create their own sources of revenue and to
Cola assailed the validity of the ordinances as it levy taxes.
alleged that they constitute double taxation in two
instances: a) double taxation because Ordinance Section 5, Article XI provides: "Each local government unit shall have
No. the power to create its sources of revenue and to levy taxes, subject
to such limitations as may be provided by law." Withal, it cannot be
27 covers the same subject matter and impose said that Section 2 of Republic Act No.
practically the same tax rate as with Ordinance No.
2264 emanated from beyond the sphere of the legislative power to
23, b) double taxation because the two ordinances enact and vest in local governments the power of local taxation.
impose percentage or specific taxes.
Pepsi Cola also questions the constitutionality of
Republic Act 2264 which allows for the delegation The plenary nature of the taxing power thus delegated, contrary to
of taxing powers to local government units; that plaintiff-appellant's pretense, would not suffice to invalidate the said
allowing local governments to tax companies like law as confiscatory and oppressive.
Pepsi Cola is confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact
measure of that which is exercised by itself.

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6 Tio The petitioner assails the validity of PD 1987 Is PD 1987 a valid Yes.
entitled an "Act creating the Videogram Regulatory exercise of taxing
vs A tax does not cease to be valid merely because it regulates,
Board," citing especially Section 10 thereof, which power of the
discourages, or even definitely deters the activities taxed.
imposes a tax of 30% on the gross receipts payable state?
Videogram
to the local government. 8 The power to impose taxes is one so unlimited in force and so
Regulatory
searching in extent, that the courts scarcely venture to declare that it
Board Petitioner contends that aside from its being a rider
is subject to any restrictions whatever, except such as rest in the
and not germane to the subject matter thereof, and
discretion of the authority which exercises it.
such imposition was being harsh, confiscatory,
GR No. 75697 oppressive and/or unlawfully restraints trade in
violation of the due process clause of the
June 19, 1987 Constitution. The levy of the 30% tax is for a public purpose.
It was imposed primarily to answer the need for regulating the video
industry, particularly because of the rampant film piracy, the flagrant
violation of intellectual property rights, and the proliferation of
pornographic video tapes.
And while it was also an objective of the DECREE to protect the movie
industry, the tax remains a valid imposition.

The public purpose of a tax may legally exist even if the motive which
impelled the legislature to impose the tax was to favor one industry
over another.
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 state's police power.

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7 Planters Marcos issued Letter of Instruction (LOI) 1465, WON the LOI is No.
Products Inc. imposing a capital recovery component of Php10.00 constitutional.
per bag of fertilizer.
vs The LOI is still unconstitutional even if enacted under the police
The levy was to continue until adequate capital was
power; it did not promote public interest.
Fertiphil Corp. raised to make PPI financially viable.
Taxes are exacted only for a public purpose.
Fertiphil remitted to the Fertilizer and Pesticide
Authority (FPA), which was then remitted the The P10 levy is unconstitutional because it was not for a public
GR No. 166006 depository bank of PPI. purpose.
March 14, 2008 Fertiphil paid P6,689,144 to FPA from 1985 to 1986. The levy was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose.
After the 1986 Edsa Revolution, FPA voluntarily Taxes are exacted only for a public purpose.
stopped the imposition of the P10 levy.
They cannot be used for purely privatepurposes or for the exclusive
Fertiphil demanded from PPI a refund of the benefit of private persons.
amount it remitted, however PPI refused.
The reason for this is simple.
Fertiphil filed a complaint for collection and
damages, questioning the constitutionality of LOI The power to tax exists for the general welfare; hence, implicit in its
1465, claiming that it was unjust, unreasonable, power is the limitation that it should be used only for a public purpose.
oppressive, invalid and an unlawful imposition that It would be a robbery for the State to tax its citizens and use the funds
amounted to a denial of due process. generated for a private purpose.
PPI argues that Fertiphil has no locus standi to As an old United States case bluntly put it: "To lay with one hand, the
question the constitutionality of LOI No. power of the government on the property of the citizen, and with the
1465 because it does not have a "personal and other to bestow it upon favored individuals to aid private enterprises
substantial interest in the case or will sustain direct and build up private fortunes, is nonetheless a robbery because it is
injury as a result of its enforcement." It asserts that done under the forms of law and is called taxation." The term "public
Fertiphil did not suffer any damage from the purpose" is not defined.
imposition because "incidence of the levy fell on the It is an elastic concept that can be hammered to fit modern standards.
ultimate consumer or the farmers themselves, not
on the seller fertilizer company. Jurisprudence states that "public purpose" should be given a broad
interpretation.
It does not only pertain to those purposes which are traditionally
viewed as essentially government functions, such as building roads
and delivery of basic services, but also includes those purposes
designed to promote social justice.
Thus, public money may now be used for the relocation of illegal
settlers, low-cost housing and urban or agrarian reform.

Police power and the power of taxation are inherent powers of the
State.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
These powers are distinct and have different tests for validity.
Police power is the power of the State to enact legislation that may
interfere with personal liberty or property in order to promote the
general welfare, while the power of taxation is the power to levy taxes
to be used for public purpose.
The main purpose of police power is the regulation of a behavior or
conduct, while taxation is revenue generation.
The "lawful subjects" and "lawful means" tests are used to determine
the validity of a law enacted under the police power.
The power of taxation, on the other hand, is circumscribed by inherent
and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise
by the State of its taxation power.
While it is true that the power of taxation can be used as an implement
of police power,41 the primary purpose of the levy is revenue
generation.
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.

8 CIR Central Luzon Drug Corporation is a retailer of Whether or not The Petition is DENIED.
medicines and other pharmaceutical products. the 20% discount
vs granted by Central
For the period January 1995 to December 1995,
Luzon Drug to Sec.
Central Luzon pursuant to the mandate of Section 4(a) of
qualified senior
Corporation citizens pursuant 4(a) of the Senior Citizens Act provides:
Republic Act No.
to Sec.
7432, otherwise known as the Senior Citizens Act, it
GR No. 159647 granted a twenty percent 4(a) of the Senior Sec.
Citizens Act may
April 15, 2005 (20%) discount on the sale of medicines to qualified be claimed as a 4.
senior citizens amounting to P219,778.00. tax credit or as a Privileges for the Senior Citizens.
It then deducted the same amount from its gross deduction from
income for the taxable year 1995, pursuant to gross sales in The senior citizens shall be entitled to the following:
accordance with
Revenue Regulations No. Sec.
2-94 implementing the Senior Citizens Act, which (a) the grant of twenty percent (20%) discount from all
2(1) of Revenue establishments relative to utilization of transportations
states that the discount given to senior citizens shall Regulations No.
be deducted by the establishment from its gross services, hotels and similar lodging establishments,
2-94 restaurants and recreation centers and purchase of

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
sales for value-added tax and other percentage tax medicines anywhere in the country: Provided, That private
purposes. establishments may claim the cost as tax credit.
For the said taxable period, Central Luzon Drug
reported a net loss of P20,963.00 in its corporate
The above provision explicitly employed the term tax credit.
income tax return, thus, it did not pay income tax
Nothing in the provision suggests for it to mean a deduction from
for 1995.
gross sales.
Thus, the 20% discount required by the law to be given to senior
Subsequently, Central Luzon Drug filed a claim for citizens is a tax credit, not a deduction from the gross sales of the
refund in the amount of P150,193.00, claiming that establishment concerned.
according to Sec.
As a corollary to this, the definition of tax credit found in Sect.
4(a) of the Senior Citizens Act, the amount of
2(1) of Revenue Regulations No.
P219,778.00 should be applied as a tax credit.
2-94 is erroneous as it refers to tax credit as the amount representing
The Commissioner of Internal Revenue (CIR) was
the 20% discount that shall be deducted by the said establishment
not able to decide the claim on time, hence, Central
from their gross sales for value added tax and other percentage tax
Luzon Drug filed a Petition for Review with the Court
purposes. When the law says that the cost of the discount may be
of Tax Appeals.
claimed as a tax credit, it means that the amount, when claimed, shall
The latter dismissed the petition, declaring that be treated as a reduction from any tax liability.
even if the law treats the 20% discount granted to
The law cannot be amended by a mere regulation.
senior citizens as a tax credit, the same cannot apply
when there is no tax liability or the amount of the
tax credit is greater than the tax due.
Finally, for purposes of clarity, Sec.
In the latter case, the tax credit will only be to the
extent of the tax liability. 229 of the Tax Code does not apply to cases that fall under Sec.

Also, no refund can be granted as no tax was 4 of the Senior Citizens Act because the former provision governs
erroneously, illegally and actually collected. exclusively all kinds of refund or credit of internal revenue taxes that
were erroneously or illegally imposed and collected pursuant to the
Tax Code while the latter extends the tax credit benefit to the private
establishments concerned even before tax payments have been
Furthermore, the law does not state that a refund
made.
can be claimed by the establishment concerned as
an alternative to the tax credit. The tax credit that is contemplated under the Senior Citizens Act is a
form of just compensation, not a remedy for taxes that were
erroneously or illegally assessed and collected.
Central Luzon Drug filed a Petition for Review with
In the same vein, prior payment of any tax liability is not a
the Court of Appeals.
precondition before a taxable entity can benefit from the tax credit.
The appellate court held that the 20% discount
The credit may be availed of upon payment of the tax due, if any.
given to senior citizens which is treated as a tax
credit is considered just compensation and, as such, Where there is no tax liability or where a private establishment
may be carried over to the next taxable period if reports a net loss for the period, the tax credit can be availed of and
there is no current tax liability. carried over to the next taxable year.

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9 Carlos Superdrug Petitioners are domestic corporations and Whether or not YES.
Corporation proprietors operating drugstores in the Philippines. RA 9257 is
constitutional
vs Petitioners assail the constitutionality of Section
The law is a legitimate exercise of police power which, similar to the
4(a) of RA 9257, otherwise known as the Expanded
power of eminent domain, has general welfare for its object.
DSWD Senior Citizens Act of 2003. Section 4(a) of RA 9257
grants twenty percent (20%) discount as privileges
for the Senior Citizens.
Accordingly, it has been described as the most essential, insistent and
GR No. 166494 Petitioner contends that said law is unconstitutional the least limitable of powers, extending as it does to all the great
June 29, 2007 because it constitutes deprivation of private public needs. It is the power vested in the legislature by the
property. constitution to make, ordain, and establish all manner of wholesome
and reasonable laws, statutes, and ordinances, either with penalties
or without, not repugnant to the constitution, as they shall judge to
be for the good and welfare of the commonwealth, and of the subjects
of the same.

For this reason, when the conditions so demand as determined by the


legislature, property rights must bow to the primacy of police power
because property rights, though sheltered by due process, must yield
to general welfare.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

10 Manila Memorial On April 23, 1992, RA 7432 was passed into law, WHETHER No.
Park, Inc. and La granting senior citizens numerous privileges. SECTION 4 OF
Funeraria Paz- REPUBLIC ACT NO.
Petitioners emphasize that they are not questioning
Sucat, Inc A fair reading of Carlos Superdrug Corporation52 would show that we
the 20% discount granted to senior citizens but are 9257 AND ITS
categorically ruled therein that the 20% discount is a valid exercise of
only assailing the constitutionality of the tax IMPLEMENTING
vs deduction scheme prescribed under RA 9257 and RULES AND
police power.

Secretary of the implementing rules and regulations issued by REGULATIONS, Thus, even if the current law, through its tax deduction scheme (which
DSWD and DOF the DSWD and the DOF. INSOFAR AS THEY abandoned the tax credit scheme under the previous law), does not
PROVIDE THAT provide for a peso for peso reimbursement of the 20% discount given
Petitioners posit that the tax deduction scheme
THE TWENTY by private establishments, no constitutional infirmity obtains because,
contravenes Article III, Section 9 of the Constitution,
PERCENT (20%) being a valid exercise of police power, payment of just compensation
GR No. 175356 which provides that: "[p]rivate property shall not be
DISCOUNT TO is not warranted.
taken for public use without just compensation." In
December 3, 2013 SENIOR CITIZENS
support of their position, petitioners cite Central In the exercise of police power (as distinguished from eminent
MAY BE CLAIMED
Luzon Drug Corporation, where it was ruled that the domain), although the regulation affects the right of ownership, none
AS A TAX
20% discount privilege constitutes taking of private of the bundle of rights which constitute ownership is appropriated for
DEDUCTION BY
property for public use which requires the payment use by or for the benefit of the public.
THE PRIVATE
of just compensation, and Carlos Superdrug
ESTABLISHMENTS,
Corporation v.
ARE INVALID AND
Department of Social Welfare and Development, UNCONSTITUTION On the other hand, in the exercise of the power of eminent domain,
where it was acknowledged that the tax deduction AL. property interests are appropriated and applied to some public
scheme does not meet the definition of just purpose which necessitates the payment of just compensation
compensation. therefor.

They assert that "[a]lthough both police power and Normally, the title to and possession of the property are transferred
the power of eminent domain have the general to the expropriating authority.
welfare for their object, there are still traditional Examples include the acquisition of lands for the construction of
distinctions between the two" and that "eminent public highways as well as agricultural lands acquired by the
domain cannot be made less supreme than police government under the agrarian reform law for redistribution to
power." qualified farmer beneficiaries.
We now look at the nature and effects of the 20% discount to
Respondents, maintain that the tax deduction determine if it constitutes an exercise of police power or eminent
scheme is a legitimate exercise of the States police domain.
power. The 20% discount is intended to improve the welfare of senior citizens
who, at their age, are less likely to be gainfully employed, more prone
to illnesses and other disabilities, and, thus, in need of subsidy in
purchasing basic commodities.
It may not be amiss to mention also that the discount serves to honor
senior citizens who presumably spent the productive years of their
lives on contributing to the development and progress of the nation.
As to its nature and effects, the 20% discount is a regulation affecting
the ability of private establishments to price their products and
services relative to a special class of individuals, senior citizens, for

PART 1 | GENERAL PRINCIPLES OF TAXATION | 14


CASE TITLE SUMMARY ISSUE/S RULING NOTES
which the Constitution affords preferential concern.76In turn, this
affects the amount of profits or income/gross sales that a private
establishment can derive from senior citizens.
In other words, the subject regulation affects the pricing, and, hence,
the profitability of a private establishment.
However, it does not purport to appropriate or burden specific
properties, used in the operation or conduct of the business of private
establishments, for the use or benefit of the public, or senior citizens
for that matter, but merely regulates the pricing of goods and services
relative to, and the amount of profits or income/gross sales that such
private establishments may derive from, senior citizens.
The 20% discount may be properly viewed as belonging to the
category of price regulatory measures which affect the profitability of
establishments subjected thereto.
On its face, therefore, the subject regulation is a police power
measure.
We find that there are at least two conceivable bases to sustain the
subject regulations validity absent clear and convincing proof that it
is unreasonable, oppressive or confiscatory.
Congress may have legitimately concluded that business
establishments have the capacity to absorb a decrease in profits or
income/gross sales due to the 20% discount without substantially
affecting the reasonable rate of return on their investments
considering (1) not all customers of a business establishment are
senior citizens and (2) the level of its profit margins on goods and
services offered to the general public.
Concurrently, Congress may have, likewise, legitimately concluded
that the establishments, which will be required to extend the 20%
discount, have the capacity to revise their pricing strategy so that
whatever reduction in profits or income/gross sales that they may
sustain because of sales to senior citizens, can be recouped through
higher mark-ups or from other products not subject of discounts.
As a result, the discounts resulting from sales to senior citizens will not
be confiscatory or unduly oppressive.
In sum, we sustain our ruling in Carlos Superdrug Corporation88 that
the 20% senior citizen discount and tax deduction scheme are valid
exercises of police power of the State absent a clear showing that it is
arbitrary, oppressive or confiscatory.

PART 1 | GENERAL PRINCIPLES OF TAXATION | 15


CASE TITLE SUMMARY ISSUE/S RULING NOTES

1 Pascual A law was enacted in 1953 containing a provision for Is the No.
the construction, reconstruction, repair, extension appropriation
vs The appropriation of amount for the construction on a land owned by
and improvement of Pasig feeder road terminals valid?
private individual is invalid imposition since it results in the promotion
within Antonio Subdivision owned by Senator Jose
Secretary of of private enterprise; it benefits the property of a particular
C.
Public Works, et. individual.
al. Zulueta.
The provision that the land thereafter be donated to the government
Zulueta donated said parcels of land to the does not cure this defect.
Government 5 months after the enactment of the
G.R. No. L-10405. The rule is that if the public advantage or benefit is merely incidental
law, on the condition that if the Government
in the promotion of a particular enterprise, such defect shall render
violates such condition the lands would revert to
the law invalid.
Zulueta.
On the other hand, if what is incidental is the promotion of a private
The provincial governor of Rizal, Wenceslao Pascual,
enterprise, the tax law shall be deemed for public purpose.
questioned the validity of the donation and the
Constitutionality of the particular provision, it being
an appropriation not for a public purpose.

2 Lutz The Sugar Adjustment Act was passed which Whether or not The Sugar Adjustment Act was regulatory and primarily an exercise of
provided, among others, for an increase of the the tax imposed is police power.
vs existing tax on the manufacture of sugar and levy on constitutional.
Sugar Industrys promotion, protection and advancement greatly
owners or persons in control of lands devoted to the
Araneta, et. al. redound to the general welfare.
cultivation of sugar cane and ceded to others for a
consideration on lease or otherwise. Hence, it was competent for legislature to find that the general
welfare demanded for the stabilization of the sugar industry.
G.R. No. L-7859,
November 22, All collections made shall accrue to a special fund
1955. named SUGAR ADJUSTMENT AND STABILIZATION It is inherent in the power to tax that a state be free to select the
FUND. This whole law was enacted with a subjects of taxation, and it has been repeatedly held that inequalities
declaration of emergency due to the imminent which result from the singling out of one particular class for taxation
imposition of export taxes upon sugar as provided or exemption infringe no constitutional limitation.
under the Tydings-Mcduffie Act.

The funds raised under the Act should be exclusively spent in aid of
Lutz, the judicial administrator of the estate of one the sugar industry, since it is that very enterprise that is being
Antonio Ledesma, which was taxed by the protected.
Commissioner on Internal Revenue, questioned the
constitutionality of said act contending that it is for It may be that other industries are also in need of similar protection;
the aid and support of the sugar industry but the legislature is not required by the Constitution to adhere to a
exclusively, which is not for a public purpose. policy of all or none.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

3 Caltex On February 2, 1989, the Commission on Audit Whether or not YES, OPSF are for non-revenue purposes and is in the nature of taxes.
(COA) sent a letter to Caltex requesting the latter to OPSF
vs remit its tax contributions amounting to contributions are
P335,037,649 to Oil Price Stabilization Fund (OPSF) for non-revenue The Supreme Court found no merit in petitioner's contention that the
Commission on
pursuant to Section 8 of P.D. No.1956. purposes of the OPSF contributions are not for a public purpose because they go to a
Audit government and it special fund of the government.
Another letter was sent to the petitioner, stating
is still in the form
that the total amount of its unremitted tax was Taxation is no longer envisioned as a measure merely to raise revenue
of taxation.
G.R. No. 92585 P1,287,668,820.00 from 1986-1988 as verified by to support the existence of the government; taxes may be levied with
the Office of Energy Affairs (OEA). a regulatory purpose to provide means for the rehabilitation and
May 8, 1992. stabilization of a threatened industry which is affected with public
interest as to be within the police power of the state.
Denying such request, Caltex answered to COAs
There can be no doubt that the oil industry is greatly imbued with
letters asking OEA for early release of
public interest as it vitally affects the general welfare.
reimbursement certificates from OPSF.
Any unregulated increase in oil prices could hurt the lives of a majority
COA denied petitioners request but instead asked
of the people and cause economic crisis of untold proportions.
Caltex to remit its collection.
It would have a chain reaction in terms of, among others, demands
As a reply, Caltex gave a proposal for its payment
for wage increases and upward spiralling of the cost of basic
based on PD 1956, as amended by E.O 137;
commodities.
Department of Finance Circular No.
The stabilization then of oil prices is of prime concern which the state,
1-87; the New Civil Code as to compensation; and
via its police power, may properly address.
the Revised Administrative Code.
Also, P.D.
COA accepted the proposal except those matters
involving offsetting the remittances and No.
reimbursements.
1956, as amended by E.O.
No.
Pursuant to such agreement, COA informed OEA as
to Caltexs remittances amounting to P1, 137, explicitly provides that the source of OPSF is taxation.
505,668,906 to OPSF and allowing OEA to reimburse No amount of semantical juggleries could dim this fact.
Caltex the amount of P1, 959,182,612.
Caltex, however, disagreed with such arrangement.
Caltex thereby insisted that its remittances and
reimbursements must be offset. But COA
disregarded such contention holding as a basis the
case of Francia vs.
IAC and Fernandez, arguing that OPSF is not in the
form of taxation, therefore not for revenue
purposes.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 17


CASE TITLE SUMMARY ISSUE/S RULING NOTES

4 Lozada Petitioner Lozada claims that he is a taxpayer and a Whether or not As taxpayers, petitioners may not file the instant petition, for
bonafide elector of Cebu City and a transient voter petitioners lack nowhere therein is it alleged that tax money is being illegally spent.
vs of Quezon City, Metro Manila, who desires to run standing to file the
The act complained of is the inaction of the COMELEC to call a special
for the position in the Batasan Pambansa; while instant petition for
Commission on election, as is allegedly its ministerial duty under the constitutional
petitioner Romeo B. they are not the
Elections provision above cited, and therefore, involves no expenditure of
proper parties to
Igot alleges that, as a taxpayer, he has standing to public funds.
institute the
petition by mandamus the calling of a special
action. It is only when an act complained of, which may include a legislative
G.R. No. L-59068 election as mandated by the 1973 Constitution.
enactment or statute, involves the illegal expenditure of public money
January 27, 1983. As reason for their petition, petitioners allege that that the so-called taxpayer suit may be allowed.
they are "...
What the case at bar seeks is one that entails expenditure of public
deeply concerned about their duties as citizens and funds which may be illegal because it would be spent for a purpose
desirous to uphold the constitutional mandate and that of calling a special election which, as will be shown, has no
rule of law ...; that they have filed the instant authority either in the Constitution or a statute.
petition on their own and in behalf of all other
Filipinos since the subject matters are of profound
and general interest. As voters, neither have petitioners the requisite interest or
personality to qualify them to maintain and prosecute the present
petition.
The respondent COMELEC, represented by counsel,
The unchallenged rule is that the person who impugns the validity of
opposes the petition alleging, substantially, that 1)
a statute must have a personal and substantial interest in the case
petitioners lack standing to file the instant petition
such that he has sustained, or will sustain, direct injury as a result of
for they are not the proper parties to institute the
its enforcement.
action; 2) this Court has no jurisdiction to entertain
this petition; and 3) Section 5(2), Article VIII of the In the case before Us, the alleged inaction of the COMELEC to call a
1973 Constitution does not apply to the Interim special election to fill-up the existing vacancies in the Batasan
Batasan Pambansa. Pambansa, standing alone, would adversely affect only the
generalized interest of all citizens.
Petitioners' standing to sue may not be predicated upon an interest
of the kind alleged here, which is held in common by all members of
the public because of the necessarily abstract nature of the injury
supposedly shared by all citizens.
Concrete injury, whether actual or threatened, is that indispensable
element of a dispute which serves in part to cast it in a form
traditionally capable of judicial resolution.
When the asserted harm is a "generalized grievance" shared in
substantially equal measure by all or a large class of citizens, that
harm alone normally does not warrant exercise of jurisdiction.
As adverted to earlier, petitioners have not demonstrated any
permissible personal stake, for petitioner Lozadas interest as an
alleged candidate and as a voter are not sufficient to confer standing.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 18


CASE TITLE SUMMARY ISSUE/S RULING NOTES
Petitioner Lozada does not only fail to inform the Court of the region
he wants to be a candidate but makes indiscriminate demand that
special election be called throughout the country.

5 National The President issued Proclamation no. Whether or not While it might be stated that the Republic owns NDC, it does not
Development the properties of necessarily follow that the properties owned by NDC are also owned
430 reserving Block no.
Company NDC, namely the by the Republic.
4, Reclamation Area no. land and
vs warehouse, are
4 for warehousing purposes under the tax-exempt. Tax exemption of property owned by the Republic refers to properties
Cebu City, et. al. administration of the National Warehousing
owned by the Government and by its agencies which do not have
Corporation (NWC), which was later on dissolved
separate and distinct personalities (unincorporated entities).
and was taken over by the National Development
G.R. No. 51593 Company (NDC). Once government ownership is determined, the nature of the use of
the property, whether proprietary or for sovereign purposes, is
November 5, 1992. Cebu assessed and collected real estate taxes on the
immaterial.
land and warehouse where NDC paid under protest,
claiming that the land and warehouse were owned What appears to be ceded to NWC is merely the administration of the
by the Republic and therefore, exempt from property while the Government retains ownership of what has been
taxation. declared reserved for warehousing purposes under Proclamation no.
430.

When a land is reserved, the land remains the absolute property of


the government.
The latter does not part with its title by reserving them, but simply
gives notice that it desires them for a certain purpose.
As its title remains with the Republic, the reserved land is clearly
covered by the tax exemption.

The reserved land is tax-exempt but the warehouse constructed on


such reserved land should be assessed real estate tax as such
improvement does not belong to the Republic.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 19


CASE TITLE SUMMARY ISSUE/S RULING NOTES

6 Arturo M. Herein various petitioners seek to declare RA 7166 Whether or not RA No, there is no justification for passing upon the claims that the law
Tolentino, as unconstitutional as it seeks to widen the tax base 7166 violates the also violates the rule that taxation must be progressive and that it
of the existing VAT system and enhance its principle of denies petitioners' right to due process and that equal protection of
vs administration by amending the National Internal progressive system the laws.
Revenue Code. of taxation.
The Secretary of The reason for this different treatment has been cogently stated by
Finance and The The value-added tax (VAT) is levied on the sale, an eminent authority on constitutional law thus: "When freedom of
Commissioner of barter or exchange of goods and properties as well the mind is imperiled by law, it is freedom that commands a
Internal Revenue as on the sale or exchange of services. momentum of respect; when property is imperiled it is the
lawmakers' judgment that commands respect.
It is equivalent to 10% of the gross selling price or
gross value in money of goods or properties sold, This dual standard may not precisely reverse the presumption of
G.R. No. 115455 bartered or exchanged or of the gross receipts from constitutionality in civil liberties cases, but obviously it does set up a
the sale or exchange of services. hierarchy of values within the due process clause."
August 25, 1994.

CREBA asserts that R.A. Petitioners contend that as a result of the uniform 10% VAT, the tax
on consumption goods of those who are in the higher-income bracket,
No.
which before were taxed at a rate higher than 10%, has been reduced,
7716 (1) impairs the obligations of contracts, (2) while basic commodities, which before were taxed at rates ranging
classifies transactions as covered or exempt without from 3% to 5%, are now taxed at a higher rate.
reasonable basis and (3) violates the rule that taxes
should be uniform and equitable and that Congress
shall "evolve a progressive system of taxation." Just as vigorously as it is asserted that the law is regressive, the
opposite claim is pressed by respondents that in fact it distributes the
tax burden to as many goods and services as possible particularly to
With respect to the first contention, it is claimed those which are within the reach of higher-income groups, even as
that the application of the tax to existing contracts the law exempts basic goods and services.
of the sale of real property by installment or on
It is thus equitable.
deferred payment basis would result in substantial
increases in the monthly amortizations to be paid The goods and properties subject to the VAT are those used or
because of the 10% VAT. consumed by higher-income groups.
The additional amount, it is pointed out, is These include real properties held primarily for sale to customers or
something that the buyer did not anticipate at the held for lease in the ordinary course of business, the right or privilege
time he entered into the contract. to use industrial, commercial or scientific equipment, hotels,
restaurants and similar places, tourist buses, and the like.
On the other hand, small business establishments, with annual gross
It is next pointed out that while Section 4 of R.A.
sales of less than P500,000, are exempted.
No.
This, according to respondents, removes from the coverage of the law
7716 exempts such transactions as the sale of some 30,000 business establishments.
agricultural products, food items, petroleum, and
On the other hand, an occasional paper of the Center for Research
medical and veterinary services, it grants no
and Communication cities a NEDA study that the VAT has minimal
exemption on the sale of real property which is
impact on inflation and income distribution and that while additional
equally essential.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 20


CASE TITLE SUMMARY ISSUE/S RULING NOTES
The sale of real property for socialized and low-cost expenditure for the lowest income class is only P301 or 1.49% a year,
housing is exempted from the tax, but CREBA claims that for a family earning P500,000 a year or more is P8,340 or 2.2%.
that real estate transactions of "the less poor," i.e.,
the middle class, who are equally homeless, should
likewise be exempted. Lacking empirical data on which to base any conclusion regarding
these arguments, any discussion whether the VAT is regressive in the
sense that it will hit the "poor" and middle-income group in society
Finally, it is contended, for the reasons already harder than it will the "rich," is largely an academic exercise.
noted, that R.A.
On the other hand, the CUP's contention that Congress' withdrawal
No. of exemption of producers cooperatives, marketing cooperatives, and
service cooperatives, while maintaining that granted to electric
7716 also violates Art.
cooperatives, not only goes against the constitutional policy to
VI, Section 28(1) which provides that "The rule of promote cooperatives as instruments of social justice (Art.
taxation shall be uniform and equitable.
XII, 15) but also denies such cooperatives the equal protection of
The Congress shall evolve a progressive system of the law is actually a policy argument.
taxation."
The legislature is not required to adhere to a policy of "all or none" in
choosing the subject of taxation.

Nor is the contention of the Chamber of Real Estate and Builders


Association (CREBA), petitioner in G.R.
115754, that the VAT will reduce the mark up of its members by as
much as 85% to 90% any more concrete.
It is a mere allegation.
On the other hand, the claim of the Philippine Press Institute,
petitioner in G.R.
No.
115544, that the VAT will drive some of its members out of circulation
because their profits from advertisements will not be enough to pay
for their tax liability, while purporting to be based on the financial
statements of the newspapers in question, still falls short of the
establishment of facts by evidence so necessary for adjudicating the
question whether the tax is oppressive and confiscatory.

Indeed, regressivity is not a negative standard for courts to enforce.


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

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 21


CASE TITLE SUMMARY ISSUE/S RULING NOTES
enhancement of human dignity and the reduction of social, economic
and political inequalities (Art.
XIII, 1), or for the promotion of the right to "quality education" (Art.
XIV, 1).
These provisions are put in the Constitution as moral incentives to
legislation, not as judicially enforceable rights.

7 Herrera In 1952, the Director of the Bureau of Hospitals Whether St. The admission of pay-patients does not detract from the charitable
authorized Jose V. character of a hospital, if all its funds are devoted exclusively to the
vs Catherines
maintenance of the institution as a public charity.
Herrera and Ester Ochangco Herrera to establish Hospital is exempt
Quezon City and operate the St. from realty tax. The exemption in favor of property used exclusively for charitable or
Board educational purpose is not limited to property actually indispensable
Catherines Hospital.
Assessment therefore, but extends to facilities which are incidental to and
Appeals In 1953, the Herreras sent a letter to the Quezon reasonably necessary for the accomplishment of said purpose, such
City Assessor requesting exemption from payment as in the case of hospitals -- a school for training nurses; a nurses
of real estate tax on the hospital, stating that the home; property used to provide housing facilities for interns, resident
same was established for charitable and doctors, superintendents and other members of the hospital staff;
G.R. No. L-1527
humanitarian purposes and not for commercial and recreational facilities for student nurses, interns and residents.
gain.
Within the purview of the Constitution, St.
The exemption wasgranted effective years 1953 to
Catherines Hospital is a charitable institution exempt from taxation.
1955.

In 1955, however, theAssessor reclassified the


properties fromexempt to taxable effective
1956, as it was ascertained that out 32 beds in the
hospital, 12 of which aref or pay-patients.
A school of midwifery is also operated within the
premises of the hospital.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 22


CASE TITLE SUMMARY ISSUE/S RULING NOTES

8 Philippine Lung Lung Center of the Philippines is a non-stock and Is the Lung Center The Lung Center of the Philippines is a charitable institution.
Center non-profit entity established by virtue of PD No. of the Philippines
To determine whether an enterprise is a charitable institution or not,
a charitable
vs 1823. the elements which should be considered include the statute creating
institution within
the enterprise, its corporate purposes, its constitution and by-laws,
It is the registered owner of the land on which the the context of the
Quezon City the methods of administration, the nature of the actual work
Lung Center of the Philippines Hospital is erected. Constitution, and
performed, that character of the services rendered, the indefiniteness
therefore, exempt
A big space in the ground floor of the hospital is of the beneficiaries and the use and occupation of the properties.
from real property
G.R. No. 144104. being leased to private parties, for canteen and tax? However, under the Constitution, in order to be entitled to exemption
small store spaces, and to medical or professional
from real property tax, there must be clear and unequivocal proof
practitioners who use the same as their private
that (1) it is a charitable institution and (2)its real properties are
clinics.
ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.
Also, a big portion on the right side of the hospital is
While portions of the hospital are used for treatment of patients and
being leased for commercial purposes to a private
the dispensation of medical services to them, whether paying or non-
enterprise known as the Elliptical Orchids and
paying, other portions thereof are being leased to private individuals
Garden Center.
and enterprises.
When the City Assessor of Quezon City assessed
Exclusive is defined as possessed and enjoyed to the exclusion of
both its land and hospital building for real property
others, debarred from participation or enjoyment.
taxes, the Lung Center of the Philippines filed a
claim for exemption on its averment that it is a If real property is used for one or more commercial purposes, it is not
charitable institution with a minimum of 60% of its exclusively used for the exempted purposes but is subject to taxation.
hospital beds exclusively used for charity patients
and that the major thrust of its hospital operation is
to serve charity patients.
The claim for exemption was denied, prompting a
petition for the reversal of the resolution of the City
Assessor with the Local Board of Assessment
Appeals of Quezon City, which denied the same.
On appeal, the Central Board of Assessment
Appeals of Quezon City affirmed the local boards
decision, finding that Lung Center of the Philippines
is not a charitable institution and that its properties
were not actually, directly and exclusively used for
charitable purposes.
Hence, the present petition for review with
averments that the Lung Center of the Philippines is
a charitable institution under Section 28(3), Article
VI of the Constitution, notwithstanding that it
accepts paying patients and rents out portions of
the hospital building to private individuals and
enterprises.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 23


CASE TITLE SUMMARY ISSUE/S RULING NOTES

9 Abra Valley Abra Valley, an educational corporation and The proper Constitutional provision Section 22, paragraph 3, Article VI, of the
College, Inc. institution of higher learning duly incorporated with interpretation of then 1935 Philippine Constitution, expressly grants exemption from
the SEC was assessed with payment of real estate the phrase used realty taxes for "Cemeteries, churches and parsonages or convents
vs. tax for their schools lot and building. exclusively for appurtenant thereto, and all lands, buildings, and improvements used
educational exclusively for religious, charitable or educational purposes.
Aquino Abra Valley failed to pay so a notice of seizure of the
purposes.
property was made. The phrase "exclusively used for educational purposes" was clarified
in the cases of Herrera vs.
The school is offering primary, high school, college
G.R. No. L-39086 courses and has a population of more than 1000 Quezon City Board of assessment Appeals, where such means not
June 15, 1988. students. limited to property actually indispensable' therefor but extends to
facilities which are incidental to and reasonably necessary for the
The elementary students are housed in a two-storey
accomplishment of said purposes, such as in the case of hospitals, "a
building across the street, while the highschool and
school for training nurses, a nurses' home, property use to provide
college students are housed in the main building.
housing facilities for interns, resident doctors, superintendents, and
The director with his family is in the second floor of other members of the hospital staff, and recreational facilities for
the main building. student nurses, interns, and residents'.
Also, the ground floor of the college building is used The test of exemption from taxation is the use of the property for
and rented by a commercial establishment, the purposes mentioned in the Constitution.
Northern Marketing Corporation.
It must be stressed however, that while this Court allows a more
Abra Valleys contention is that the primary use of liberal and non-restrictive interpretation of the phrase "exclusively
the lot and building for educational purposes and used for educational purposes", reasonable emphasis has always
not the incidental use thereof determines been made that exemption extends to facilities which are incidental
exemption from property taxes under Sec22 Art6 to and reasonably necessary for the accomplishment of the main
1935Consitution. purposes.

Thus the assessment of tax for the real property tax Otherwise stated, the use of the school building or lot for commercial
by respond is without basis. purposes is neither contemplated by law, nor by jurisprudence.
Thus, while the use of the second floor of the main building in the case
at bar for residential purposes of the Director and his family, may find
justification under the concept of incidental use, which is
complimentary to the main or primary purposeeducational, the
lease of the first floor thereof to the Northern Marketing Corporation
cannot by any stretch of the imagination be considered incidental to
the purpose of education.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 24


CASE TITLE SUMMARY ISSUE/S RULING NOTES

10 City Assessor of Respondent Association of Benevola de Cebu, Inc. Whether or not Yes.
Cebu City the medical arts
is a non-stock, non-profit organization and is the The CHH Medical Arts Center (CHHMAC) is an integral part of CHH.
center built by
vs owner of Chong Hua Hospital (CHH) in Cebu City.
Chong Hua It is definitely incidental to and reasonably necessary for the
In the late 1990s, respondent constructed the CHH Hospital to house operations of Chong Hua Hospital.
Association of
Medical Arts Center (CHHMAC). its doctors a
Benevola de separate
Cebu commercial It is undisputed that the doctors and medical specialists holding clinics
Petitioner City Assessor of Cebu City assessed the establishment or in CHHMAC are those duly accredited by CHH, that is, they are
CHHMAC building as commercial at the an appurtenant to consultants of the hospital and the ones who can treat CHHs patients
G.R. No. 152904 assessment level of 35% for commercial buildings, the hospital. confined in it.
June 8, 2007 and not at the 10% special assessment currently
This fact alone takes away CHHMAC from being categorized as
imposed for CHH and its other separate buildings
commercial since a tertiary hospital like CHH is required by law to
the CHHs Dietary and Records Departments.
have a pool of physicians who comprises the required medical
He further ascertained that it is not a part of the departments in various medical fields.
CHH building but a separate building which is
actually used as commercial clinic/room spaces for
renting out to physicians and, thus, classified as The fact that the physicians are holding office in a separate building
commercial. does not take away the essence and nature of their services vis--vis
the over-all operation of the hospital and the benefits to the hospitals
On the other hand, respondent contended that
patients.
CHHMAC building is actually, directly, and
exclusively part of CHH and should have a special Their transfer to a more spacious and, perhaps, convenient place and
assessment level of 10% as provided under City Tax location for the benefit of the hospitals patients does not remove
Ordinance LXX. them from being an integral part of the overall operation of the
hospital.
Respondent asserted that the CHHMAC building is
similarly situated as the buildings of CHH, housing
its Dietary and Records Departments, are
completely separate from the main CHH building Respondents charge of rentals for the offices and clinics its accredited
and are imposed the 10% special assessment level. physicians occupy cannot be equated to a commercial venture, which
is mainly for profit.
In fine, respondent argued that the CHHMAC,
though not actually indispensable, is nonetheless
incidental and reasonably necessary to CHHs First, CHHMAC is only for its consultants or accredited doctors and
operations. medical specialists.
Second, the charging of rentals is a practical necessity: (1) to recoup
the investment cost of the building, (2) to cover the rentals for the lot
CHHMAC is built on, and (3) to maintain the CHHMAC building and its
facilities.
Third, as correctly pointed out by respondent, it pays the proper taxes
for its rental income.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 25


CASE TITLE SUMMARY ISSUE/S RULING NOTES
And, fourth, if there is indeed any net income from the lease income
of CHHMAC, such does not inure to any private or individual person
as it will be used for respondents other charitable projects.

11 Commissioner of Private Respondent YMCA is a non-stock, non-profit Whether or not Yes.


Internal Revenue institution, which conducts various programs and the income
Income of whatever kind and character of non-stock non-profit
activities that are beneficial to the public, especially derived from
vs organizations from any of their properties, real or personal, or from
the young people, pursuant to its religious, rentals of real
any of their activities conducted for profit, regardless of the
educational and charitable objectives. property owned
YMCA disposition made of such income, shall be subject to the tax imposed
by YMCA subject
under the NIRC.
to income tax
YMCA earned income from leasing out a portion of
G.R. No. 124043 its premises to small shop owners, like restaurants
Rental income derived by a tax-exempt organization from the lease of
October 14, 1998. and canteen operators, and from parking fees
its properties, real or personal, is not exempt from income taxation,
collected from non-members.
even if such income is exclusively used for the accomplishment of its
Petitioner issued an assessment to private objectives.
respondent for deficiency taxes.
Private respondent formally protested the
Because taxes are the lifeblood of the nation, the Court has always
assessment.
applied the doctrine of strict in interpretation in construing tax
In reply, the CIR denied the claims of YMCA. exemptions (Commissioner of Internal Revenue v.
Court of Appeals, 271 SCRA 605, 613, April 18, 1997).
Furthermore, a claim of statutory exemption from taxation should be
manifest and unmistakable from the language of the law on which it
is based.
Thus, the claimed exemption must expressly be granted in a statute
stated in a language too clear to be mistaken (Davao Gulf Lumber
Corporation v.
Commissioner of Internal Revenue and Court of Appeals, G.R.
No.
117359, p.
15 July 23, 1998).

Verba legis non est recedendum.


The law does not make a distinction.
The rental income is taxable regardless of whence such income is
derived and how it is used or disposed of.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 26


CASE TITLE SUMMARY ISSUE/S RULING NOTES
Where the law does not distinguish, neither should we.

Private respondent also invokes Article XIV, Section 4, par.


3 of the Constitution, claiming that it is a non-stock, non-profit
educational institution whose revenues and assets are used actually,
directly and exclusively for educational purposes so it is exempt from
taxes on its properties and income. This is without merit since the
exemption provided lies on the payment of property tax, and not on
the income tax on the rentals of its property.
The bare allegation alone that one is a non-stock, non-profit
educational institution is insufficient to justify its exemption from the
payment of income tax.

For the YMCA to be granted the exemption it claims under the above
provision, it must prove with substantial evidence that (1) it falls
under the classification non-stock, non-profit educational institution;
and (2) the income it seeks to be exempted from taxation is used
actually, directly, and exclusively for educational purposes.
Unfortunately for respondent, the Court noted that not a scintilla of
evidence was submitted to prove that it met the said requisites.

The Court appreciates the nobility of respondents cause.


However, the Courts power and function are limited merely to
applying the law fairly and objectively.
It cannot change the law or bend it to suit its sympathies and
appreciations.
Otherwise, it would be overspilling its role and invading the realm of
legislation.
The Court regrets that, given its limited constitutional authority, it
cannot rule on the wisdom or propriety of legislation.
That prerogative belongs to the political departments of government.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 27


CASE TITLE SUMMARY ISSUE/S RULING NOTES

12 Chamber of Real Petitioner Chamber of Real Estate and Builders (1) Is the : (1) Yes.
Estate and Associations, Inc. imposition of MCIT
The imposition of the MCIT is constitutional.
Builders constitutional? (2)
(CREBA), an association of real estate developers
Is the imposition An income tax is arbitrary and confiscatory if it taxes capital, because
Associations Inc. and builders in the Philippines, questioned the
of CWT on income it is income, and not capital, which is subject to income tax.
validity of Section 27(E) of the Tax Code which
vs from sales of real
imposes the minimum corporate income tax (MCIT) However, MCIT is imposed on gross income which is computed by
properties
Romulo, et. al. on corporations. deducting from gross sales the capital spent by a corporation in the
classified as
ordinary assets sale of its goods, i.e., the cost of goods and other direct expenses from
constitutional? gross sales.
G.R. No. 160756 Under the Tax Code, a corporation can become
Clearly, the capital is not being taxed.
subject to the MCIT at the rate of 2% of gross
March 9, 2010. income, beginning on the 4th taxable year
immediately following the year in which it
commenced its business operations, when such Various safeguards were incorporated into the law imposing MCIT.
MCIT is greater than the normal corporate income
tax.
Firstly, recognizing the birth pangs of businesses and the reality of the
If the regular income tax is higher than the MCIT, the need to recoup initial major capital expenditures, the MCIT is imposed
corporation does not pay the MCIT. only on the 4th taxable year immediately following the year in which
the corporation commenced its operations.

CREBA argued, among others, that the use of gross


income as MCIT base amounts to a confiscation of Secondly, the law allows the carry-forward of any excess of the MCIT
capital because gross income, unlike net income, is paid over the normal income tax which shall be credited against the
not realized gain. normal income tax for the three immediately succeeding years.

CREBA also sought to invalidate the provisions of RR Thirdly, since certain businesses may be incurring genuine repeated
No. losses, the law authorizes the Secretary of Finance to suspend the
2-98, as amended, otherwise known as the imposition of MCIT if a corporation suffers losses due to prolonged
Consolidated Withholding Tax Regulations, which labor dispute, force majeure and legitimate business reverses.
prescribe the rules and procedures for the
collection of CWT on sales of real properties
classified as ordinary assets, on the grounds that (2) Yes.
these regulations: Despite the imposition of CWT on GSP or FMV, the income tax base
for sales of real property classified as ordinary assets remains as the
entitys net taxable income as provided in the Tax Code, i.e., gross
Use gross selling price (GSP) or fair market income less allowable costs and deductions.
value (FMV) as basis for determining
The seller shall file its income tax return and credit the taxes withheld
the income tax on the sale of real estate classified by the withholding agent-buyer against its tax due.
as ordinary assets, instead of the entitys net taxable
income as provided for under the Tax Code; If the tax due is greater than the tax withheld, then the taxpayer shall
pay the difference.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 28


CASE TITLE SUMMARY ISSUE/S RULING NOTES
Mandate the collection of income tax on a If, on the other hand, the tax due is less than the tax withheld, the
per transaction basis, contrary to the Tax taxpayer will be entitled to a refund or tax credit.
Code provision which imposes income tax
on net income at the end of the taxable
period; The use of the GSP or FMV as basis to determine the CWT is for
purposes of practicality and convenience.
Go against the due process clause
because the government collects income The knowledge of the withholding agent-buyer is limited to the
tax even when the net income has not yet particular transaction in which he is a party.
been determined; gain is never assured by
mere receipt of the selling price; and Hence, his basis can only be the GSP or FMV which figures are
reasonably known to him.
Contravene the equal protection clause
because the CWT is being charged upon
real estate enterprises, but not on other Also, the collection of income tax via the CWT on a per transaction
business enterprises, more particularly, basis, i.e., upon consummation of the sale, is not contrary to the Tax
those in the manufacturing sector, which Code which calls for the payment of the net income at the end of the
do business similar to that of a real estate taxable period.
enterprise.
The taxes withheld are in the nature of advance tax payments by a
taxpayer in order to cancel its possible future tax obligation.
They are installments on the annual tax which may be due at the end
of the taxable year.
The withholding agent-buyers act of collecting the tax at the time of
the transaction, by withholding the tax due from the income payable,
is the very essence of the withholding tax method of tax collection.

On the alleged violation of the equal protection clause, the taxing


power has the authority to make reasonable classifications for
purposes of taxation.
Inequalities which result from singling out a particular class for
taxation, or exemption, infringe no constitutional limitation.
The real estate industry is, by itself, a class and can be validly treated
differently from other business enterprises.

What distinguishes the real estate business from other manufacturing


enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the
number of transactions involved.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 29


CASE TITLE SUMMARY ISSUE/S RULING NOTES
The income from the sale of a real property is bigger and its frequency
of transaction limited, making it less cumbersome for the parties to
comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every
month involving both minimal and substantial amounts.

13 People Cayat was a native of Baguio, Benguet, Mountain Whether or not No.
Province. the said Act is
vs As early as 1551, the Spanish Government had assumed a solicitous
violative of the
He was accused for violating Act No. attitude toward these inhabitants.
equal protection
Cayat
1639 which declared unlawful for any native of the clause of the It had been regarded by the Spanish Government as a sacred "duty to
Philippine islands who is a member of a non- constitution. conscience and humanity" to civilize these less fortunate people living
Christian Tribe to have in his possession, drink any "in the obscurity of ignorance" and to accord them the "the moral and
G.R. No. L-45987
beer, wine or intoxicating liquors of any kind, other material advantages" of community life and the "protection and
than the so-called native wines and liquors which vigilance afforded them by the same laws." Constant and active effort
the members of the tribes have been accustomed. had been exercised to prevent barbarous practices and introduce
civilized customs.
It was alleged that Cayat had received, acquired and
had in his possession and control, one bottle of gin Guaranty of the equal protection of the laws is not equal protection
which is an intoxicating liquor other than the so- of the laws is not violated by a legislation based on reasonable
called native wines and liquors which the member classification.
of such tribe have been accustomed to.
And the classification, to be reasonable, (1) must rest on substantial
Cayat was found guilty of such. distinctions; (2) must be germane to the purposes of the law; (3) must
not be limited to existing conditions only; and (4) must apply equally
Accused challenged the constitutionality of the Act.
to all members of the same class.
One of the grounds was that the said act is
Act No.
discriminatory and denies the equal protection
laws. 1639 satisfies these requirements.
The classification rests on real and substantial, not merely imaginary
or whimsical, distinctions.
It is based upon the degree of civilization and culture.
"The term 'non-Christian tribes' refers, not to religious belief, but, in
a way, to the geographical area, and, more directly, to natives of the
Philippine Islands of a low grade of civilization, usually living in tribal
relationship apart from settled communities."

This distinction is unquestionably reasonable, for the Act was


intended to meet the peculiar conditions existing in the non-Christian
tribes.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 30


CASE TITLE SUMMARY ISSUE/S RULING NOTES
That it is germane to the purposes of law cannot be doubted.
It is designed to insure peace and order among the non-Christian
tribes since past experiences show that free use of highlight
intoxicating liquors by them had resulted in lawlessness and crimes.
The law is not limited in its application to conditions existing at the
time of its enactment.
It is intended to apply for all times as long as those conditions exist.
Legislature understood that the civilization of a people is a slow
process and that hand in hand with it must go measures of protection
and security.
Finally, that the Act applies equally to all members of the class.

14 Ormoc Sugar In 1964, Ormoc City passed a bill which read: There Whether or not The SC held in favor of Ormoc Sugar.
Company shall be paid to the City Treasurer on any and all constitutional
It ruled that the equal protection clause applies only to persons or
productions of centrifugal sugar milled at the Ormoc limits on the
vs things identically situated and does not bar a reasonable classification
Sugar Company Incorporated, in Ormoc City a power of taxation,
of the subject of legislation, and a classification is reasonable where
municipal tax equivalent to one per centum (1%) specifically the
Conejos, et. al. (1) it is based on substantial distinctions which make real differences;
per export sale to the United States of America and equal protection
(2) these are germane to the purpose of the law; (3) the classification
other foreign countries. Though referred to as a clause and rule of
applies not only to present conditions but also to future conditions
production tax, the imposition actually amounts uniformity of
G.R. No. L-23794 which are substantially identical to those of the present; (4) the
to a tax on the export of centrifugal sugar produced taxation, were
classification applies only to those who belong to the same class.
February 17, 1968 at Ormoc Sugar Company, Inc. infringed.
For production of sugar alone is not taxable; the
only time the tax applies is when the sugar Though Ormoc Sugar Company Inc.
produced is exported.
is the only sugar central in the city of Ormoc at the time, the
Ormoc Sugar paid the tax (P7,087.50) in protest classification, to be reasonable, should be in terms applicable to
averring that the same is violative of Sec 2287 of the future conditions as well.
Revised Administrative Code which provides: It
shall not be in the power of the municipal council to Said ordinance shoouldnt be singular and exclusive as to exclude any
impose a tax in any form whatever, upon goods and subsequently established sugar central, of the same class as plaintiff,
merchandise carried into the municipality, or out of for coverage of the tax.
the same, and any attempt to impose an import or
export tax upon such goods in the guise of an
unreasonable charge for wharfage, use of bridges or
otherwise, shall be void. And that the ordinance is
violative to equal protection as it singled out Ormoc
Sugar As being liable for such tax impost for no
other sugar mill is found in the city.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 31


CASE TITLE SUMMARY ISSUE/S RULING NOTES

15 Tiu Congress, with the approval of the President, Whether the No.
passed into law RA 7227 entitled "An Act provisions of
vs The Court found real and substantive distinctions between the
Accelerating the Conversion of Military Executive Order
circumstances obtaining inside and those outside the Subic Naval
Reservations Into Other Productive Uses, Creating No.
Court of Appeals Base, thereby justifying a valid and reasonable classification.
the Bases Conversion and Development Authority
97-A confining the
for this Purpose, Providing Funds Therefor and for The fundamental right of equal protection of the laws is not absolute,
application of R.A.
Other Purposes." Section 12 thereof created the but is subject to reasonable classification.
G.R. No. 127410 Subic Special Economic Zone and granted there to 7227 within the
special privileges. If the groupings are characterized by substantial distinctions that
January 20, 1999 secured area and
make real differences, one class may be treated and regulated
excluding the
President Ramos issued Executive Order No. differently from another.
residents of the
97, clarifying the application of the tax and duty zone outside of The classification must also be germane to the purpose of the law and
incentives. the secured area is must apply to all those belonging to the same class.
discriminatory or
The President issued Executive Order No. Classification, to be valid, must (1) rest on substantial distinctions, (2)
not owing to a
violation of the be germane to the purpose of the law, (3) not be limited to existing
97-A, specifying the area within which the tax-and-
equal protection conditions only, and (4) apply equally to all members of the same
duty-free privilege was operative.
clause. class.
The Supreme Court believed it was reasonable for the President to
Petitioners challenged the constitutionality of EO have delimited the application of some incentives to the confines of
97-A for allegedly being violative of their right to the former Subic military base.
equal protection of the laws.
This was due to the limitation of tax incentives to
RA 7227 aims primarily to accelerate the conversion of military
Subic and not to the entire area of Olongapo.
reservations into productive uses.
The case was referred to the Court of Appeals.
This was really limited to the military bases as the law's intent
The appellate court concluded that such being the provides.
case, petitioners could not claim that EO 97-A is
Moreover, the law tasked the BCDA to specifically develop the areas
unconstitutional, while at the same time
the bases occupied.
maintaining the validity of RA 7227.

Even more important, at this time the business activities outside the
Respondent Court held that "there is no substantial
"secured area" are not likely to have any impact in achieving the
difference between the provisions of EO 97-A and
purpose of the law, which is to turn the former military base to
Section 12 of RA 7227.
productive use for the benefit of the Philippine economy.
In both, the 'Secured Area' is precise and well-
Hence, there was no reasonable basis to extend the tax incentives in
defined as '.
RA 7227.

the lands occupied by the Subic Naval Base and its


It is well-settled that the equal-protection guarantee does not require
contiguous extensions as embraced, covered and
territorial uniformity of laws.
defined by the 1947 Military Bases Agreement

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 32


CASE TITLE SUMMARY ISSUE/S RULING NOTES
between the Philippines and the United States of As long as there are actual and material differences between
America, as amended . territories, there is no violation of the constitutional clause.

PART 2 | INHERENT AND CONSTITUTIONAL LIMITATIONS | 33


CASE TITLE SUMMARY ISSUE/S RULING NOTES

1 VICENTE M and P were legally married prior to January 1, What is the The Income Tax Law of the United States in force in the Philippine
MADRIGAL and 1914. meaning of Islands has selected income as the test of faculty in taxation.
his wife, SUSANA income?
The marriage was contracted under the The aim has been to mitigate the evils arising from the inequalities
PATERNO, provisions concerning conjugal partnerships. of wealth by a progressive scheme of taxation, which places the
burden on those best able to pay.
vs The claim is submitted that the income shown on
the form presented for 1914 was in fact the To carry out this idea, public considerations have demanded an
JAMES J. income of the conjugal partnership existing exemption roughly equivalent to the minimum of subsistence.
RAFFERTY between M and P, and that in computing and
With these exceptions, the Income Tax Law is supposed to reach the
assessing the additional income tax, the income
earnings of the entire non-governmental property of the country.
declared by M should be divided into two equal
38 Phil 415 parts, one-half to be considered the income of M
and the other half the income of P.
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.
Capital is wealth, while income is the service of wealth.
"The fact is that property is a tree, income is the fruit; labor is a tree,
income the fruit; capital is a tree, income the fruit." (Waring vs.
City of Savannah [1878], 60 Ga., 93.)

Income means profits or gains.

2 FREDERICK C. Philippine American Drug Company was a Are the "stock A dividend is defined as a corporate profit set aside, declared, and
FISHER corporation duly organized and existing under the dividends" in the ordered by the directors to be paid to the stockholders on demand
laws of the Philippine Islands, doing business in the present case or at a fixed time.
vs City of Manila; that he appellant was a stockholder "income" and
Until the dividend is declared, the corporate profits belong to the
in said corporation; that said corporation, as result taxable as such
WENCESLAO corporation and not to the stockholders, and are liable for the
of the business for that year, declared a "stock under the
TRINIDAD, payment of the debts of the corporation.
dividend"; that the proportionate share of said provisions of
Collector of stock divided of the appellant was P24,800; that section 25 of Act
Internal Revenue the stock dividend for that amount was issued to No. 2833?
the appellant; that thereafter, in the month of When a cash dividend is declared and paid to the stock holders, such
March, 1920, the appellant, upon demand of the cash dividend is declared and paid to the stockholder, such cash
appellee, paid under protest, and voluntarily, unto becomes the absolute property of the stockholder and cannot be
48 Phil 415
the appellee the sum of P889.91 as income tax on reached by the creditors of the corporation in the absence of fraud.
said stock dividend. A stock dividend, however, still being the property of the
For the recovery of that sum (P889.91) the present corporation, and not of the stockholder, it may be reached by an
action was instituted. execution against the corporation, and sold as a part of the property
of the corporation.

PART 3 | INCOME TAXATION | 34


CASE TITLE SUMMARY ISSUE/S RULING NOTES
Until the dividend is declared and paid, the corporate profits still
belong to the corporation, not to the stockholders, and are liable for
corporate indebtedness.
The rule is well established that cash dividends, whether large or
small, are regarded as "income" and all stock dividends, as capital
or assets.

The stockholder who receives a stock dividend has received


nothing but a representation of this increased interest in the
capital of the corporation.
There has been no separation or segregation of his interest.
All the property or capital of the corporation still belongs to
the corporation.

3 CONWI The dollar earnings of petitioners are the fruits of Are the Income may be defined as an amount of money coming to a person or
their labors in the foreign subsidiaries of Procter & petitioners corporation within a specified time, whether as payment for services,
vs Gamble. income earned interest or profit from investment.
outside the
CTA It was a definite amount of money which came to Unless otherwise specified, it means cash or its equivalent.
Philippines
them within a specified period of time of two years
exempt from Income can also be thought of as a flow of the fruits of one's labor.
as payment for their services.
income tax? Does
213 SCRA 83 the Sec. of Finance
Petitioners argue that since there were no
remittances and acceptances of their salaries and possess the power Petitioners forget that they are citizens of the Philippines,
wages in US dollars into the Philippines, they are to promulgate the and their income, within or without, and in these cases
exempt from the coverage of RMC 7-71,41-71. circulars in wholly without, are subject to income tax.
question?
The fact still remains that "taxes are the lifeblood of the
government" and one of the duties of a Filipino citizen is to
pay his income tax.

PART 3 | INCOME TAXATION | 35


CASE TITLE SUMMARY ISSUE/S RULING NOTES

4 CIR BOAC, A RESIDENT FOREIGN CORPORATION, Did such "flow of The source of an income is the property, activity or service that
impress on the Court that income derived from wealth" come produced the income.
vs transportation is income for services, with the from "sources
For the source of income to be considered as coming from the
result that the place where the services are within the
BOAC Philippines, it is sufficient that the income is derived from activity
rendered determines the source; and since BOAC's Philippines"?
within the Philippines.
service of transportation is performed outside the
Philippines, the income derived is from sources In BOAC's case, the sale of tickets in the Philippines is the activity that
149 SCRA 395 without the Philippines and, therefore, not taxable produces the income.
under our income tax laws.
The tickets exchanged hands here and payments for fares were also
made here in Philippine currency.
The situs of the source of payments is the Philippines.
The flow of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine
government.
In consideration of such protection, the flow of wealth should share
the burden of supporting the government.

The absence of flight operations to and from the Philippines is not


determinative of the source of income or the situs of income taxation.
Admittedly, BOAC was an off-line international airline at the time
pertinent to this case.
The test of taxability is the "source"; and the source of an income is
that activity .
.
which produced the income.
Unquestionably, the passage documentations (e.g.
transportation ticket, ordinary ticket) in these cases were sold in the
Philippines and the revenue therefrom was derived from a business
activity regularly pursued within the Philippines.
And even if the BOAC tickets sold covered the "transport of passengers
and cargo to and from foreign cities", it cannot alter the fact that
income from the sale of tickets was derived from the Philippines.
The word "source" conveys one essential idea, that of origin, and the
origin of the income herein is the Philippines.

PART 3 | INCOME TAXATION | 36


CASE TITLE SUMMARY ISSUE/S RULING NOTES

5 Commission of Respondent Filinvest Development Corporation 1. Whether 1. No.


Internal Revenue (FDC) is a holding company which is the owner of the CIRs powers 2. The CIR's powers does not include the power to impute
(CIR) 80% of the outstanding shares of respondent include the power "theoretical interests" to the controlled taxpayer's transactions.
Filinvest Alabang, Inc. to impute
vs theoretical The term gross income means all income from whatever source
(FAI), and 67.42% of the outstanding shares of
interests on the derived.
Filinvest Filinvest Land, Inc.
advances FDC While the phrase "from whatever source derived" There must be
Development (FLI). extended to its proof of the actual or probable receipt or realization of the item
Corporation (FDC) affiliates in 1996 of gross income sought to be distributed, apportioned or
and 1997 allocated by the CIR.
On 29 November 1996, FDC and FAI entered into a considering that,
G.R. Nos. Deed of Exchange with FLI whereby the former for said purpose, There was no evidence of actual or possible realization showing
both transferred in favor of the latter parcels of FDC resorted to that the advances FDC extended to its affiliates had resulted to
163653 and 167689 interest-bearing the interests subsequently assessed by the CIR.
land appraised at P4,306,777,000.00.
fund borrowings
463,094,301 shares of stock of FLI were issued to from commercial More so, pursuant to Article 1956 of the Civil Code of the
FDC and FAI in exchange for said parcels which banks and that Philippines, no interest shall be due unless it has been expressly
were intended to facilitate development of since considerable stipulated in writing.
medium-rise residential and commercial buildings. interest expenses Taxes, being burdens, are not to be presumed beyond what the
were deducted by applicable statute expressly and clearly declares.
FDC when said Accordingly, the general rule of requiring adherence to the letter
FDC also extended advances in favor of its funds were in construing statutes applies with peculiar strictness to tax laws
affiliates, namely, FAI, FLI, Davao Sugar Central borrowed, the CIR and the provisions of a taxing act are not to be extended by
Corporation (DSCC) and Filinvest Capital, Inc. theorizes that implication.
(FCI). interest income
should likewise be
Duly evidenced by instructional letters as well as declared when the
cash and Journal vouchers, said cash advances same funds were
amounted to P2,557,213,942.60 in 1996 and sourced for the 3. No.
P3,360,889,677.48 in 1997. advances FDC 4. Section 34 (c) (2) of the 1993 NIRC pertinently provides the
extended to its exception that no gain or loss shall be recognized if property is
affiliates. transferred to a corporation by a person in exchange for shares
of stock in such corporation of which as a result of such exchange
2. Whether said person, alone or together with others, not exceeding four
the exchange of persons, gains control of said corporation; Provided, That stocks
shares of stock for issued for services shall not be considered as issued in return of
property among property.
FDC, FAI and FLI
met all the
requirements for As even admitted in the 14 February 2001 Stipulation of Facts
the non- submitted by the parties, the requisites for the non-recognition
recognition of of gain or loss are as follows:
taxable gain under
Section 34(C)(2)(c)
of the NIRC. (a) the transferee is a corporation;

PART 3 | INCOME TAXATION | 37


CASE TITLE SUMMARY ISSUE/S RULING NOTES
3. (b) the transferee exchanges its shares of stock for
property/ies of the transferor;
(c) the transfer is made by a person, acting alone or together
with others, not exceeding four persons; and,
(d) as a result of the exchange the transferor, alone or
together with others, not exceeding four, gains control
of the transferee.

6 BAIER-NICKEL This is actually a Minute Resolution dated February WON the sales The fact that recipient of commission income is President
17, 2003, where the SC sustained the ruling of the commission is and majority stockholder of the Philippine company does
vs Court of Appeals that Baier-Nickel is entitled to taxable in the not alter the source of income.
refund the sum withheld from her sales Philippines?
CIR There are only two ways by which the President and other
commission income for the year 1994
members of the Board can be granted compensation apart
from reasonable per diems: (1) when there is a provision in
GR 156305 the by-laws fixing their compensation; and (2) when the
stockholders agree to give it to them.
FEBRUARY 17, 2003
If none of these conditions are present, commission income
cannot be automatically attributed to petitioners position
in the company .

Commissions paid for marketing services rendered abroad


for a Philippine company is considered foreign-source
income.
The source of the income is the property, activity or service
that produced the income.
Place where services are rendered determine taxation.

PART 3 | INCOME TAXATION | 38


CASE TITLE SUMMARY ISSUE/S RULING NOTES

7 CIR Baier-Nickel is a non-resident alien (a German citizen) Is she entitled to a The important factor which determines the source of income of
and is the president of JUBANITEX, Inc., a domestic refund for the personal services is not the residence of the payor, or the place where
vs corporation engaged in manufacturing, marketing wrongly filed the contract for service is entered into, or the place of payment, but
on wholesale only, buying or otherwise acquiring, taxes? the place where the services were actually rendered.
BAIER-NICKEL
holding, importing and exporting, selling and
disposing embroidered textile products.
Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not
G.R. No. 153793 She was appointed as a commission agent by the
engaged in trade or business, are subject to the Philippine income
domestic corporation with a sales commission of 10%
August 29, 2006 taxation on their income received from all sources in the Philippines.
all sales actually concluded and collected through her
efforts.

The rule is that source of income relates to the property, activity or


service that produced the income.
In 1995, respondent received P1, 707, 772.
With respect to rendition of labor or personal service, as in the instant
64 as sales commission from w/c Jubanitex
case, it is the place where the labor or service was performed that
deducted the 10% withholding tax of P170, 777.26
determines the source of the income.
and remitted to BIR.
There is no merit in the interpretation which equates source of income
Respondent filed her income tax return but then
in labor or personal service with the residence of the payor or the
claimed a refund from BIR for the P170K, alleging
place of payment of the income.
this was mistakenly withheld by Jubanitex and that
her sales commission income was compensation
for services rendered in Germany not Philippines
and thus not taxable here. The decisive factual consideration here is not the capacity in which
Juliane Baier-Nickel received the income, but the sufficiency of
evidence to prove that the services she rendered were performed in
Germany to entitle her to tax exemption since she is a non-resident
German citizen.
The settled rule is that tax refunds are in the nature of tax exemptions
and are to be construed strictissimi juris against the taxpayer.
To those therefore, who claim a refund rest the burden of proving that
the transaction subjected to tax is actually exempt from taxation.

Juliane did not prove by substantial evidence, or that relevant


evidence that a reasonable mind might accept as adequate to support
the conclusion that it was in Germany where she performed the
income producing service.
She thus failed to discharge the burden of proving that her income was
from sources outside the Philippines and exempt from the application
of our income tax law.

PART 3 | INCOME TAXATION | 39


CASE TITLE SUMMARY ISSUE/S RULING NOTES

8 CIR Marubeni, a Japanese corporation, Whether Marubeni, however, was able to sufficiently prove in trial
engaged in general import and export Marubeni is that not all its work was performed in the Philippines
vs trading, financing and construction, is exempted from because some of them were completed in Japan (and in fact
duly registered in the Philippines with income tax by subcontracted) in accordance with the provisions of the
Marubeni Corp.
Manila branch office. invoking the situs contracts.
of taxation rule?
CIR examined the Manila branchs books All services for the design, fabrication, engineering and
GR 137377 of accounts for fiscal year ending March manufacture of the materials and equipment under
1985, and found that respondent had Japanese Yen Portion I were made and completed in Japan.
December 18, 2001 undeclared income from contracts with
These services were rendered outside Philippines taxing
NDC and Philphos for construction of a
jurisdiction and are therefore not subject to contractors tax.
wharf/port complex and ammonia
storage complex respectively.

On Aug 2, 1986, EO 41 declared a tax amnesty for


unpaid income taxes for 1981-85, and that
taxpayers who wished to avail this should on or
before Oct 31, 1986.
Marubeni filed its tax amnesty return on Oct 30,
1986.

On Nov 17, 1986, EO 64 expanded EO 41s scope to


include estate and donors taxes under Title 3 and
business tax under Chap 2, Title 5 of NIRC, extended
the period of availment to Dec 15, 1986 and stated
those who already availed amnesty under EO 41
should file an amended return to avail of the new
benefits.
Marubeni filed a supplemental tax amnesty return
on Dec 15, 1986.

PART 3 | INCOME TAXATION | 40


CASE TITLE SUMMARY ISSUE/S RULING NOTES

9 TUASON The mother of Antonio Tuason owned a 7 hectare Whether or not No.
parcel of land located in the City of Manila. the properties in
vs It is Ordinary Income
question should
She subdivided the land into twenty-nine (29) lots.
be regarded as
LINGAD
Possession of the land was eventually inherited by capital assets.
As thus defined by law, capital assets include all properties of a
Taxpayer in 1948.
taxpayer whether or not connected with his trade or business, EXCEPT:
G.R. No. L-24248.
July 31, 1974 Tuason instructed his attorney-in-fact to
1. stock in trade or other property included in the taxpayer's
sell the lots.
inventory;
Twenty-eight (28) out of the twenty-nine
2. property primarily for sale to customers in the ordinary
parcels were all sold.
course of his trade or business;
In 1953 and 1954 the Taxpayer reported
3. property uised in the trade or business of the taxpayer and
his income from the sale of the small lots
subject to depreciation allowance; and
(P102,050.79 and P103,468.56,
respectively) as long-term capital gains. 4. real property used in trade or business.
The CIR upheld Taxpayer's treatment of
this tax.
If the taxpayer sells or exchanges any of the properties above, any gain
or loss relative thereto is an ordinary gain or an ordinary loss; the loss
or gain from the sale or exchange of all other properties of the
In his 1957 tax return the Taxpayer as before
taxpayer is a capital gain or a capital loss.
treated his income from the sale of the small lots
(P119,072.18) as capital gains.
This treatment was initially approved by the CIR, Under Section 34(b)(2) of the old Tax Code, if a gain is realized by a
but by 1963, the CIR reversed itself and considered taxpayer (other than a corporation) from the sale or exchange of
the Taxpayer's profits from the sales of the lots as capital assets held for more than 12 months, only 50% of the net
ordinary gain. capital gain shall be taken into account in computing the net income.
The CIR assesed a deficiency of P31,095.36 from
the Taxpayer.

Tuason contends that he was engaged in the


business of leasing the lots he inherited from his
mother as well other real properties, his
subsequent sales of the mentioned lots cannot be
recognized as sales of capital assets but of real
property used in trade or business of the taxpayer.

PART 3 | INCOME TAXATION | 41


CASE TITLE SUMMARY ISSUE/S RULING NOTES

10 REPUBLIC Under the doctrine of constructive receipt, a WON there was The so-called personal accounts of Esteban de la Rama were not valid
taxpayer is deemed to have received income where constructive debts.
vs an amount owing to him is set off against his debt receipt of income?
Of the two items, the first was contested and proof was lacking to
by the creditor.
DELA RAMA, show its existence and validity.
Such doctrine, however, is applicable only where
The second was actually the debt of another person, Hijos de I.
the set off is made against a debt acknowledged by
G.R. No. L-21108. the taxpayer or the validity of which is not de la Rama, Inc.
otherwise questioned.
November 29, 1966 It was true that Esteban de la Rama was the principal stockholder of
Where the validity of the debt is contested by the said corporation, but as its personality was separate and distinct, its
taxpayer, the doctrine of constructive receipt is debts could not be charged to the deceased in the absence of proof of
inapplicable. a substitution of debtor.
With such findings, the Court concluded that inasmuch as the
dividends in question had not been received either actually or
The Commissioner sought to apply this doctrine to
constructively in 1950, no tax could be due thereon for said year.
dividends due and payable but not actually rceived.
When such d,ividends were declared in 1950, no
payment was actually made thereof to the The application of the dividends to the alleged personal accounts of
stockholder, Esteban de la Rama. the deceased did not constitute such constructive payment to the
estate or the heirs that could become the basis for a tax assessment
Instead, the 1950 dividends due him were credited
on the said dividends because, with respect to the first debt, there was
to or set-off against his personal accounts with the
no proof adduced to show its existence and validity; and with respect
corporation.
to the second debt, to which the dividends were partly applied, it was
De la Rama died without having actually collected composed of accounts due from an entity separate and distinct from
such dividends and the income tax returns filed in the deceased and whose debts could not be charged against the
behalf of his estate for 1950 did not include them. deceased even if the latter was the principal owner thereof, in the
absence of proof of substitution of debtor.
Subsequently, a deficiency assessment was issued
against the estate, based on the undeclared There being no basis for the assessment of the income tax, the
dividends, which according to the Commissioner assessment and the sending of the corresponding notices did not have
had been constructively received in 1950 when the any basis.
set-off against the personal debts of the deceased
The assessment and the notices did not therefore produce any legal
was made by the corporation.
effect that would warrant the collection of the tax.
Income is deemed constructively received where the
In behalf of the estate, however, it was contended taxpayer has an unqualified right to receive the same but by
that the doctrine of constructive receipt was his own choice the income is not reduced to possession.
inapplicable to the situation.
For the doctrine to apply, the set-off must be
against valid debts of the taxpayer.
But the so-called personal accounts of the late
Esteban de la Rama with the corporation were not
valid debts.

PART 3 | INCOME TAXATION | 42


CASE TITLE SUMMARY ISSUE/S RULING NOTES
At any rate, his liability for such debts was never
recognized, nor properly established.

11 COMMISSIONER Respondent is engaged in the business of WON respondent Sec.


OF INTERNAL processing, treating and refining petroleum for the as manufacturer
229 of the NIRC allows the recovery of taxes erroneously or illegally
REVENUE purpose of producing marketable products and the or producer of
collected.
subsequent sale thereof. petroleum
vs products is An "erroneous or illegal tax" is defined as one levied without statutory
Respondent filed a formal claim for refund or tax
exempt from the authority, or upon property not subject to taxation or by some officer
PILIPINAS SHELL representing excise taxes it allegedly paid on sales
payment of excise having no authority to levy the tax, or one which is some other similar
PETROLEUM and deliveries of gas and fuel oils to various
tax on such respect is illegal.
CORPORATION international carriers.
petroleum
products it sold to Respondent's locally manufactured petroleum products are clearly
international subject to excise tax under Sec.
G.R. No. 188497 carriers. 148.
April 25, 2012 Hence, its claim for tax refund may not be predicated on Sec.
229 of the NIRC allowing a refund of erroneous or excess payment of
tax.
Respondent's claim is premised on what it determined as a tax
exemption "attaching to the goods themselves," which must be based
on a statute granting tax exemption, or "the result of legislative grace."
Such a claim is to be construed strictissimi juris against the taxpayer,
meaning that the claim cannot be made to rest on vague inference.
Where the rule of strict interpretation against the taxpayer is
applicable as the claim for refund partakes of the nature of an
exemption, the claimant must show that he clearly falls under the
exempting statute.
The exemption from excise tax payment on petroleum products under
Sec.
135 (a) is conferred on international carriers who purchased the same
for their use or consumption outside the Philippines.
Sec.
135 (a) in relation to the other provisions on excise tax and from the
nature of indirect taxation, may only be construed as prohibiting the
manufacturers-sellers of petroleum products from passing on the tax
to international carriers by incorporating previously paid excise taxes
into the selling price.

PART 3 | INCOME TAXATION | 43


CASE TITLE SUMMARY ISSUE/S RULING NOTES
In other words, respondent cannot shift the tax burden to
international carriers who are allowed to purchase its petroleum
products without having to pay the added cost of the excise tax.

12 THE RENATO V. Petitioners Renato V. 1.Whether or not It is plain that the law imposes VAT on "all kinds of services" rendered
DIAZ the government is in the Philippines for a fee, including those specified in the list.
Diaz and Aurora Ma.
unlawfully
and The enumeration of affected services is not exclusive.
F. expanding VAT
coverage by By qualifying "services" with the words "all kinds,"
AURORA MA. F. Timbol (petitioners) filed this petition for including tollway
TIMBOL declaratory relief 1 assailing the validity of the operators and
impending imposition of value-added tax (VAT) by tollway
vs Section 108 subjects to VAT "all kinds of services" rendered for a fee
the Bureau of Internal Revenue (BIR) on the operations in the "regardless of whether or not the performance thereof calls for the
THE SECRETARY collections of tollway operators. terms "franchise exercise or use of the physical or mental faculties." This means that
OF FINANCE grantees" and "services" to be subject to VAT need not fall under the traditional
"sale of services" concept of services, the personal or professional kinds that require the
and under Section 108 use of human knowledge and skills.
THE of the Code; and
And not only do tollway operators come under the broad term "all
COMMISSIONER kinds of services," they also come under the specific class described in
OF INTERNAL Section 108 as "all other franchise grantees" who are subject to VAT,
2.Whether or not
REVENUE the imposition of "except those under Section 119 of this Code."
VAT on tollway
operators a)
G.R. No. 193007. amounts to a tax Fees paid by the public to tollway operators for use of the tollways,
on tax and not a are not taxes in any sense.
July 19, 2011
tax on services; b) A tax is imposed under the taxing power of the government principally
will impair the for the purpose of raising revenues to fund public expenditures.
tollway operators'
right to a Toll fees, on the other hand, are collected by private tollway operators
reasonable return as reimbursement for the costs and expenses incurred in the
of investment construction, maintenance and operation of the tollways, as well as to
under their TOAs; assure them a reasonable margin of income.
and c) is not Although toll fees are charged for the use of public facilities, therefore,
administratively they are not government exactions that can be properly treated as a
feasible and tax.
cannot be
implemented. Taxes may be imposed only by the government under its sovereign
authority, toll fees may be demanded by either the government or
private individuals or entities, as an attribute of ownership.

PART 3 | INCOME TAXATION | 44


CASE TITLE SUMMARY ISSUE/S RULING NOTES

13 PHILIPPINE PAGCOR was created pursuant to P.D. WON PAGCOR is Petitioner further contends that Section 1 (c) of R.A.
AMUSEMENT still exempt from
No. No.
AND GAMING corporate income
1067-A on January 1, 1977. tax and VAT with 9337 is null and void ab initio for violating the non-impairment clause
CORPORATION
the enactment of of the Constitution.
(PAGCOR) Simultaneous to its creation, P.D. R.A.
Petitioners contention lacks merit.
vs No. No.
The non-impairment clause is limited in application to laws that
THE BUREAU OF 1067-B was issued exempting PAGCOR from the 9337. derogate from prior acts or contracts by enlarging, abridging or in any
INTERNAL payment of any type of tax, except a franchise tax
manner changing the intention of the parties.
REVENUE (BIR), of five percent (5%) of the gross revenue.
Thereafter, on June 2, 1978, P.D.
represented
As regards franchises, Section 11, Article XII of the Constitution 31
herein by No.
provides that no franchise or right shall be granted except under the
HON. JOSE MARIO 1399 was issued expanding the scope of PAGCOR's condition that it shall be subject to amendment, alteration, or repeal
BUAG, in his exemption. by the Congress when the common good so requires.
official capacity as PAGCOR's tax exemption was removed in June Under Section 11, Article XII of the Constitution, PAGCOR's franchise
COMMISSIONER 1984 through P.D. is subjecto amendment, alteration or repeal by Congress such as the
OF INTERNAL amendment under Section 1 of R.A.
No.
REVENUE No.
1931, but it was later restored by Letter of
JOHN DOE and Instruction No. 9377.
JANE DOE, who
1430, which was issued in September 1984. Hence, the provision in Section 1 of R.A.
are persons acting
for, in behalf, or R.A. No.
under the 9337, amending Section 27 (c) of R.A.
No.
authority of
Respondent, 8424, National Internal Revenue Code of 1997, No.
public and private took effect.
8424 by withdrawing the exemption of PAGCOR from corporate
respondents. Section 27 (c) of R.A. income tax, which may affect any benefits to PAGCOR's transactions
with private parties, is not violative of the non-impairment clause of
No. the Constitution.
G.R. No. 172087 8424 provides that government-owned and Petitioner is exempt from the payment of VAT, because PAGCOR's
controlled corporations (GOCCs) shall pay charter, P.D.
March 15, 2011
corporate income tax, except petitioner PAGCOR,
GSIS, SSS, PHIC and PCSO. No.

With the enactment of R.A. 1869, is a special law that grants petitioner exemption from taxes.

No. Moreover, the exemption of PAGCOR from VAT is supported by


Section 6 of R.A.
9337 on May 24, 2005, certain sections of the
National Internal Revenue Code of 1997 were No.
amended.
9337, which retained Section 108 (B) (3) of R.A.

PART 3 | INCOME TAXATION | 45


CASE TITLE SUMMARY ISSUE/S RULING NOTES
The particular amendment that is at issue in this No.
case is Section 1 of R.A.
8424.
No.
9337, which amended Section 27 (c) of the National
It is settled rule that in case of discrepancy between the basic law and
Internal Revenue Code of 1997 by excluding
a rule or regulation issued to implement said law, the basic law
PAGCOR from the enumeration of GOCCs that are
prevails, because the said rule or regulation cannot go beyond the
exempt from payment of corporate income tax.
terms and provisions of the basic law.

14 United Airlines International airline, petitioner United Airlines, Whether or not Petitioner was correct in averring that his claim to a refund cannot be
filed a claim for income tax refund. petitioner is subject to offsetting or, as it claimed the offsetting to be, a legal
vs entitled to a compensation under Sec.
Petitioner sought to be refunded the erroneously
refund?
Commissioner of collected income tax from in the amount of 28(A)(3)(a)
Internal Revenue P5,028,813.23 on passenger revenue from tickets
sold in the Philippines, the uplifts of which did not
originate in the Philippines. The Court have consistently ruled that there can be no off-setting [or
G.R. No. 178788 compensation] of taxes against the claims that the taxpayer may have
The airlines ceased operation originating form the
against the government.
Philippines since February 21, 1998.
A person cannot refuse to pay a tax on the ground that the government
owes him an amount equal to or greater than the tax being collected.
Court of Tax appeals ruled the petitioner is not
The collection of a tax cannot await the results of a lawsuit against the
entitled to a refund because under the NIRC,
government.
income tax on GPB also includes gross revenue
from carriage of cargoes from the Philippines. (Francia
And upon assessment by the CTA, it was found out vs
that petitioner deducted items from its cargo
revenues which should have entitled the Intermediate appellate court)
government to an amount of P 31.43 million, which
is obviously higher than the amount the petitioner
prayed to be refunded.
The grant of a refund is founded on the assumption that the tax return
is valid, that is, the facts stated therein are true and correct.
Petitioner argued that the petitioners supposed
underpayment cannot offset his claim to a refund The deficiency assessment, although not yet final, created a doubt as
as established by well-settled jurisprudence. to and constitutes a challenge against the truth and accuracy of the
facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.
(CIR vs CTA)

PART 3 | INCOME TAXATION | 46


CASE TITLE SUMMARY ISSUE/S RULING NOTES

15 Commissioner of Smart Communications, Inc. 1. Whether 1.


Internal Revenue or not Smart had
(Smart) entered into 3 agreements with Prism Smart, as withholding agent, may file the claim for refund.
the right to file
vs Transactive (Prism), a non-resident Malaysian
the claim for The person entitled to claim a tax refund is the taxpayer [Sections
corporation, under which Prism would provide
refund; 204(c) and 229 of the National Internal Revenue Code (NIRC)].
Smart programming and consultancy services for the
2. Whether
Communications, installation of the Service Download Manager (SDM However, in case the taxpayer does not file a claim for refund, the
Smarts payments
Inc. Agreement) and the Channel Manager (CM withholding agent may file the claim.
to Prism
Agreement), and for the installation and
constituted The CIR was incorrect in saying that this ruling applies only when the
implementation of Smart Money and Mobile
business profits withholding agent and the taxpayer are related parties, i.e., where the
Banking Service SIM Applications and Private Text
G.R. No. 179045-46 or royalties. withholding agent is a wholly owned subsidiary of the taxpayer.
Platform (SIM Application Agreement).
25 August 2010 Although such relation between the taxpayer and the withholding
Prism billed Smart US$547,822.45.
agent is a factor that increases the latters legal interest to file a claim
Thinking that the amount constituted royalties, for refund, there is nothing in the decision in said case to suggest that
Smart withheld from its payments to Prism the such relationship is required or that the lack of such relation deprives
amount of US$136,955.61 or P7,008,840.43, the withholding agent of the right to file a claim for refund.
representing the 25% royalty tax under the RP-
Malaysia Tax Treaty. Rather, what is clear in the decision is that a withholding agent has a
legal right to file a claim for refund for two reasons.
Within the 2-year period to claim a refund, Smart
filed an administrative claim with the Bureau of First, he is considered a taxpayer under the NIRC as he is personally
Internal Revenue (BIR) for the refund of the liable for the withholding tax as well as for deficiency assessments,
withheld amount (P7,008,840.43). surcharges, and penalties, should the amount of the tax withheld be
finally found to be less than the amount that should have been
Smart averred that its payments to Prism were not withheld under law.
royalties but business profits, as defined in the
RP-Malaysian Tax Treaty, which were not taxable Second, as an agent of the taxpayer, his authority to file the necessary
because Prism did not have a permanent income tax return and to remit the tax withheld to the government
establishment in the Philippines. impliedly includes the authority to file a claim for refund and to bring
an action for recovery of such claim.
The CIR countered that Smart, as a withholding
agent was not a party-in-interest to file the claim 2.
for refund, and even if it were the proper party, The payments for the CM and SIM Application Agreements constituted
there was no showing that the payments to Prism business profits which were not taxable under the RP-Malaysia Tax
constituted business profits. Treaty.
However, the payment for the SDM Agreement constituted taxable
royalty under the same treaty.
Under its agreements with Smart, Prism had intellectual property right
over the SDM program, but not over the CM and SIM Application
programs as the proprietary rights of these programs belonged to
Smart.
Thus, out of the payments made to Prism, only the payment for the
SDM program was a royalty subject to a 25% withholding tax; the
payments for the CM and SIM Application programs constituted

PART 3 | INCOME TAXATION | 47


CASE TITLE SUMMARY ISSUE/S RULING NOTES
Prisms non-taxable business profits. The BIR should, therefore,
refund the erroneously withheld royalty taxes for the payments
pertaining to the CM and SIM Application Agreements.
The BIR was ordered to issue a Tax Credit Certificate to Prism in the
amount of P3,989,456.43.

16 Miguel J. Ossorio Petitioner, a non-stock and non-profit corporation, Whether Petitioner is a corporation that was formed to administer
Pension was organized for the purpose of holding title to petitioner or the the Employees' Trust Fund.
Foundation, Inc. and administering the employees trust or Employees Trust
Petitioner invested P5,504,748.25 of the funds of the
retirement funds established for the benefit of the Fund is exempt
Employees' Trust Fund to purchase the MBP lot.
vs employees of Victorias Milling Company, Inc. from tax and thus
entitled to refund When the MBP lot was sold, the gross income of the
CA and CIR (VMC).
Employees Trust Fund from the sale of the MBP lot was P40,500,000.
Petitioner, as trustee, claims that the income
The 7.5% withholding tax of P3,037,500 and brokers
earned by the Employees Trust Fund is tax exempt
G.R. No. 162175 commission were deducted from the proceeds.
under Section 53(b) of the National Internal
Revenue Code (Tax Code).

It is evident that tax-exemption is likewise to be enjoyed by


the income of the pension trust.
Petitioner decided to invest part of the Employees
Trust Fund to purchase a lot in the Madrigal Otherwise, taxation of those earnings would result in a
Business Park (MBP lot) in Alabang, Muntinlupa. diminution of accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund.
Petitioner claims that since it needed funds to pay
the retirement and pension benefits of VMC This would run afoul of the very intendment of the law.
employees and to reimburse advances made by
VMC, petitioners Board of Trustees authorized the Indeed, the petitioner is correct in its adherence to the clear
sale of its share in the MBP lot. ruling laid by the Supreme Court way back in 1992 in the case of
Commissioner of Internal Revenue vs.
VMC negotiated the sale of the MBP lot with
Metropolitan Bank and Trust Company, Inc. The Honorable Court of Appeals, The Court of Tax Appeals
and GCL Retirement Plan, 207 SCRA 487 at page 496, supra, wherein it
(Metrobank). was succinctly held:
There can be no denying either that the final withholding tax
is collected from income in respect of which employees trusts are
Metrobank, as withholding agent, paid the Bureau
declared exempt (Sec.
of Internal Revenue (BIR) P6,125,625 as
withholding tax on the sale of real property. 56(b), now 53(b), Tax Code).
The application of the withholdings system to interest on
bank deposits or yield from deposit substitutes is essentially to
Petitioner claims that it is a co-owner of
maximize and expedite the collection of income taxes by requiring its
the MBP lot as trustee of the Employees Trust
payment at the source.
Fund, based on the notarized Memorandum of
Agreement presented before the appellate courts.

PART 3 | INCOME TAXATION | 48


CASE TITLE SUMMARY ISSUE/S RULING NOTES
Petitioner further contends that there is If an employees trust like the GCL enjoys a tax-exempt
no dispute that the Employees Trust Fund is status from income, we see no logic in withholding a certain
exempt from income tax. percentage of that income which it is not supposed to pay in the first
place.
Since petitioner, as trustee, purchased
49.59% of the MBP lot using funds of the
Employees Trust Fund, petitioner asserts that the
Similarly, the income of the trust funds involved herein is
Employees Trust Fund's 49.59% share in the
exempt from the payment of final withholding taxes.
income tax paid or P3,037,697.40 should be
refunded. 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 of P3,037,500 which was erroneously paid in the sale of
the MBP lot.

PART 3 | INCOME TAXATION | 49


CASE TITLE SUMMARY ISSUE/S RULING NOTES

1 Officemetro In 2006, respondent CIR ordered the examination of WON petitioner is For the EWT, the Court agrees with petitioner that condominium dues
Philippines, Inc. petitioners books for tax year 2005. liable for the billed to the company are not subject to EWT.
deficiency
vs After such examination, it issued a deficiency The BIR has held a number of times that association/condominium
assessments and
assessment for expanded withholding tax (EWT), dues, membership fees, and other assessment/charges collected from
if it is, are they
Commissioner of final withholding of VAT (FWVAT), final withholding its members are not included in the corporations gross income as
entirely correct.
Internal Revenue tax (FWT) and a compromise penalty. these are held in trust and used for administrative purposes for the
common benefit of the members.
Thus they are not subject to income tax and withholding tax.
CTA Case No. 8382 The current petition for review was thus filed by
petitioner questioning the assessments.
June 3, 2014
Respondent contends that petitioner failed to prove Petitioner failed to prove that the services in question were performed
with documentary evidence that the Service by its non-resident foreign corporation counterpart.
Agreement with Regus Centres Pty.
Thus, it is liable for the deficiency assessment since it failed to prove
Ltd and petitioner is for services performed outside exemption from coverage.
the Philippines.

The CTA only partially modified the assessment of the BIR.

2 CIR Shell sold petroleum products to international Whether a No! Excise tax -
carriers who are excise tax exempt. manufacturer or taxes
vs producer of applicable to
On such sale, the taxing authority imposed excise
petroleum (Erroneous or illegal tax- levied without statutory authority or upon certain specific
Pilipinas Shell taxes.
products is property not subject to tax) goods or
Petroleum
exempt for articles
Corporation payment of excise manufactured
tax on such Shell's locally manufactured petroleum products are subject to excise or produced in
products if sold to tax in Sec. the philippines
G.R. No. 188497 international for domestic
carriers? 148 nirc. sales or
February 19, 2104
Thus, no tax refund to speak of coz no erroneous or excess pamyment. consumption
or any
disposition and
Excise tax attaches to petroleum products sold to international to things
carriers. imported into
philippines;
imposed in
addition to
Thus, the excise tax imposed on manufacturers cannot invoke excise
VaT; indirect
tax exemption granted to its buyers who are international carriers.
tax ( subject to
tax exemptions
generated by
law to buyers)

PART 4 | CORPORATE INCOME TAXATION | 50


CASE TITLE SUMMARY ISSUE/S RULING NOTES
~ international air carriers, tax exempt - chicago convention; this
exemption on allow international carriers to purchase petroleum
Excise tax must
products without excise tax as component of price fixed be seller.
be paid upon
withdrawal
from the place
of production

3 Deutsche Bank- In accordance with Section 28 (A) (5) of the National Whether or not No.
AG Manila Internal Revenue Code (NIRC) of 1997, petitioner the failure to
The denial of the availment of tax relief for the failure of a taxpayer to
Branch withheld and remitted to respondent on 21 October strictly comply
apply within the prescribed period under the administrative issuance
2003 the amount of PHP67,688,553.51, with RMO No.
would impair the value of the tax treaty.
vs representing fifteen percent (15%) branch profit
1-2000 will
remittance tax (BPRT) on its regular banking unit At most, the application for a tax treaty relief from the BIR should
CIR deprive persons
(RBU) net income remitted to Deutsche Bank merely operate to confirm the entitlement of the taxpayer to the
or corporations of
Germany (DB Germany) for 2002 and prior taxable relief.
the benefit of a
years.
G.R. No. 188550 tax treaty. "A state that has contracted valid international obligations is bound to
Believing that it made an overpayment of the BPRT, make in its legislations those modifications that may be necessary to
August 19, 2013 petitioner filed with the BIR Large Taxpayers ensure the fulfillment of the obligations undertaken." 20 Thus, laws
Assessment and Investigation Division on 4 October and issuances must ensure that the reliefs granted under tax treaties
2005 an administrative claim for refund or issuance are accorded to the parties entitled thereto.
of its tax credit certificate in the total amount of
PHP22,562,851.17. The obligation to comply with a tax treaty must take precedence over
the objective of RMO No.
On the same date, petitioner requested from the
International Tax Affairs Division (ITAD) a 1-2000.|||It is significant to emphasize that petitioner applied
confirmation of its entitlement to the preferential though belatedly for a tax treaty relief, in substantial compliance
tax rate of 10% under the RP-Germany Tax Treaty. with RMO No.

Alleging the inaction of the BIR on its administrative 1-2000.


claim, petitioner filed a Petition for Review with the Clearly, there is no reason to deprive petitioner of the benefit of a
CTA on 18 October 2005. preferential tax rate of 10% BPRT in accordance with the RP-Germany
Petitioner reiterated its claim for the refund or Tax Treaty.
issuance of its tax credit certificate for the amount
of PHP22,562,851.17 representing the alleged
excess BPRT paid on branch profits remittance to DB
Germany.

PART 4 | CORPORATE INCOME TAXATION | 51


CASE TITLE SUMMARY ISSUE/S RULING NOTES

4 CIR General Foods (Phils), which is engaged in the WON the subject No.
manufacture of Tang, Calumet and Kool-Aid, media advertising
vs Tax exemptions must be construed in stricissimi juris against the
filed its income tax return for the fiscal year ending expense for
taxpayer and liberally in favor of the taxing authority, and he who
February 1985 and claimed as deduction, among Tang was
General Foods claims an exemption must be able to justify his claim by the clearest
other business expenses, P9,461,246 for media ordinary and
(Phils.), Inc. grant of organic or statute law.
advertising for Tang. necessary
expense fully
deductible under
G.R. No. 143672 the NIRC To be deductible from gross income, the subject advertising expense
The Commissioner disallowed 50% of the deduction
must comply with the following requisites: (a) the expense must be
April 24, 2003 claimed and assessed deficiency income taxes of
ordinary and necessary; (b) it must have been paid or incurred during
P2,635,141.42 against General Foods, prompting
the taxable year; (c) it must have been paid or incurred in carrying on
the latter to file an MR which was denied.
the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.
General Foods later on filed a petition for review at
CA, which reversed and set aside an earlier decision
The Court finds the subject expense for the advertisement of a single
by CTA dismissing the companys appeal.
product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary
expense deductible under then Section 29 (a) (1) (A) of the NIRC.

Advertising is generally of two kinds: (1) advertising to stimulate the


current sale of merchandise or use of services and (2) advertising
designed to stimulate the future sale of merchandise or use of
services.
The second type involves expenditures incurred, in whole or in part, to
create or maintain some form of goodwill for the taxpayers trade or
business or for the industry or profession of which the taxpayer is a
member.
If the expenditures are for the advertising of the first kind, then, except
as to the question of the reasonableness of amount, there is no doubt
such expenditures are deductible as business expenses.
If, however, the expenditures are for advertising of the second kind,
then normally they should be spread out over a reasonable period of
time.

The companys media advertising expense for the promotion of a


single product is doubtlessly unreasonable considering it comprises
almost one-half of the companys entire claim for marketing expenses
for that year under review.

PART 4 | CORPORATE INCOME TAXATION | 52


CASE TITLE SUMMARY ISSUE/S RULING NOTES
Petition granted, judgment reversed and set aside.

5 The Late Lino The late Lino Gutierrez was primarily engaed in the 1. 1.
Gutierrez by business of leasing real property for which he paid
WON the Yes, provided such expenses meet the requirements.
Andrea C. vda. real estate broker's privilege tax.
taxpayer's
De Gutierrez et. The said claims for deduction are proper and allowable if such
Subsequently, the Commissioner of Internal aforementioned
expenses are: a) ordinary and necessary, b) paid or incurred within the
al. Revenue assessed Gutierrez a deficiency income tax claims for
taxable year and c) paid or incurred in carrying on a trade or business.
amounting to P11,841.00 which was caused by the deduction are
vs disallowance of the deductions from gross income proper and
Collector of representing depreciation expenses allegedly allowable.
incurred by Gutierrez in carrying on his business and Of those enumerated, what were considered as deductible are the
Internal Revenue following:
the addition to gross income of receipts which he
did not report in his income tax returns. 2.
G.R. No. I-19537 In sum, the disallowed business expenses consisted WON real 1) The cost of furniture given by the taxpayer as commission in
of: properties used in furtherance of a business transaction and the expenses incurred in
May 20, 1965
the trade or attending the National Convention of Filipino Businessmen, luncheon
business of the meeting and cruise to Corregidor of the Homeowners' Association.
1. Transportation expenses incurred to attend taxpayer are
the funeral of his friends considered as According to the Supreme Court, commissions given in consideration
ordinary assets. for bringing about a profitable transaction are part of the cost of the
2. Procurement and installation of an iron door business transaction and are deductible.
3. Cost of furniture given by the taxpayer in
furtherance of a business transaction
2) Membership and activities in connection with the real estate trade
4. Membership fees in organizations established were solely to enhance his business.
by those engaged in the real estate trade
Hence, the expenses incurred thereunder are deductible as ordinary
5. Car expenses, salary of his driver and car and necessary business expenses.
depreciation
6. Repairing taxpayers rental apartments
3) Only of the car expenses, salary of his driver and car depreciation
7. Litigation expenses are allowed as deduction since according to the evidence, the
8. Depreciation of Gutierrez residence taxpayer's car was utilized both for personal and business needs.

9. Fines and penalties for late payment of taxes


10. Alms given to in indigent family and a donation 4) The expenses used to repair the taxpayer's rental apartments are
consisting of officers jewels and aprons to deductible as necessary expenditures for the maintenance of the
Biak-na-Bato Lodge No. taxpayer's business as they did not increase the value of such
apartments or prolong their life.
11. 7
They merely kept the apartments in an ordinary operating condition.

PART 4 | CORPORATE INCOME TAXATION | 53


CASE TITLE SUMMARY ISSUE/S RULING NOTES
5).
Litigation expenses which were defrayed by Gutierrez to collect
apartment rentals and to eject delinquent tenants are considered as
ordinary and necessary expenses in pursuing his business.
It is routinary and necessary for one in the leasing business to collect
rentals and to eject tenants who refuse to pay their accounts.Hence,
Lino Gutirriez and/or his heirs are ordered to pay the total sum of
P11,929.00 as deficiency income tax for years 1951-1954 plus the
statutory penalties in case of deliquency.

2.
Yes.
Before Section 34 was amended by RA 82 in 1947, it considered the
real property used in the trade or business of taxpayer as capital asset.
However, with the passage of RA 82, Congress classified such real
properties as ordinary assets.
This has the effect of withdrawing the gain or loss from the sale or
exchange of real property used in the trade or business of the taxpayer
from the operation of the capital gains and losses provisions.
As such, it is logical that the gain or loss from the sale or exchange of
such real propeties be treated as ordinary income or loss.

PART 4 | CORPORATE INCOME TAXATION | 54


CASE TITLE SUMMARY ISSUE/S RULING NOTES

6 Commissioner of Isabela Cultural Corporation (ICC), a domestic Whether or not No.


Internal Revenue corporation received an assessment notice for the expenses for
One of the requisites for the deductibility of ordinary and necessary
deficiency income tax and expanded withholding professional and
vs expenses is that it must have been paid or incurred during the taxable
tax from BIR. security services
year.
are deductible.
Isabela Cultural It arose from the disallowance of ICCs claimed
This requisite is dependent on the method of accounting of the
Corporation expense for professional and security services paid
taxpayer.
by ICC; as well as the alleged understatement of
interest income on the three promissory notes due In the case at bar, ICC is using theaccrual method of accounting.
G.R. No. 172231 from Realty Investment Inc.
Hence, under this method, an expense is recognized when it is
February 12, 2007 The deficiency expanded withholding tax was incurred.
allegedly due to the failure of ICC to withhold 1% e-
withholding tax on its claimed deduction for Under a Revenue Audit Memorandum, when the method of
security services. accounting is accrual, expenses not being claimed as deductions by a
taxpayer in the current year when they are incurred cannot be claimed
in the succeeding year.
ICC sought a reconsideration of the assessments.
Having received a final notice of assessment, it The accrual of income and expense is permitted when the all-events
brought the case to CTA, which held that it is test has been met. This test requires:
unappealable, since the final notice is not a decision.
1) fixing of a right to income or liability to pay; and
CTAs ruling was reversed by CA, which was
sustained by SC, and case was remanded to CTA. 2) the availability of the reasonable accurate determination
of such income or liability.
CTA rendered a decision in favor of ICC.
It ruled that the deductions for professional and
security services were properly claimed, it said that The test does not demand that the amount of income or liability be
even if services were rendered in 1984 or 1985, the known absolutely, only that a taxpayer has at its disposal the
amount is not yet determined at that time. information necessary to compute the amount with reasonable
accuracy.
Hence it is a proper deduction in 1986.

From the nature of the claimed deductions and the span of time during
which the firm was retained, ICC can be expected to have reasonably
known the retainer fees charged by the firm.
They cannot give as an excuse the delayed billing, since it could have
inquired into the amount of their obligation and reasonably determine
the amount.

PART 4 | CORPORATE INCOME TAXATION | 55


CASE TITLE SUMMARY ISSUE/S RULING NOTES

7 H. Tambunting This case stemmed from a pre-assessment issued by Whether the Petitioner contends that it is the document evidencing a pledge of
Pawnshop, Inc. CIR against Tambunting for among others, a petitioner, personal property which is subject to the DST.
deficiency documentary stamp tax of P 50, apawnshop, is
vs Petitioner further contends that the DST is imposed on the documents
910.Thereafter, the CIR issued an assessment notice subject to dst
issued, not the transactions so had or accomplished.
with the corresponding demand letters for the based on itspawn
Commissioner of payment of the DST and the corresponding tickets It insists that the document to be taxed under the transaction
Internal Revenue compromise penalty for taxable year 1997. contemplated should be the pledge agreement, if any is issued, not
the pawn ticket.

G.R. No. 173373 On the other hand, commissioner contented that a documentary
Tambunting filed its written protest to the
stamp tax shall be collected on every pledge of personal property as a
July 29, 2013 assessment notice alleging that it was not subject to
security for the fulfillment of the contract of loan.
documentary stamp tax under Section 195 of the
National Internal Revenue Code (NIRC) because Since the transactions in a pawnshop business partake of the nature
documentary stamp taxes were applicable only to of pledge transactions, then pawn transactions evidenced by pawn
pledge contracts, and the pawnshop business did tickets, are subject to documentary stamp taxes.
not involve contracts of pledge.
Petitioners contention is devoid of merit.

Tambunting filed a petition for review when the


protest it filed with the CIR was not acted upon. True, the pawn ticket is neither a security nor a printed evidence of
indebtedness.
But, precisely being a receipt for a pawn, it documents the pledge.
The court rendered a decision stating that petitioner
is not subject to DST. A pledge is a real contract, hence, it is necessary in order to constitute
the contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common agreement.

Consequently, the issuance of the pawn ticket by the pawnshop means


that the thing pledged has already been placed in its possession and
that the pledge has been constituted.-

Section 195 of the National Internal Revenue Code (NIRC) imposes a


DST

One very mortgage or pledge of lands, estate, or property, real or


personal, heritable or movable, whatsoever, where the same shall
be made as a security for the payment of any definite and certain
sum of money lent

PART 4 | CORPORATE INCOME TAXATION | 56


CASE TITLE SUMMARY ISSUE/S RULING NOTES
All pledges are subject to DST, unless there is a law exempting them in
clear
and categorical language.

The law imposes DST on documents issued in respect of the specified


transactions, such as pledge, and not only on papers evidencing
indebtedness.
Therefore, a pawn ticket, being issued in respect of a pledge
transaction, is subject to documentary stamp tax.

8 Plaridel Surety Petitioner PSIC as surety and Constancio San Jose, Whether the NO.
and Insurance as principal solidarily executed a performance bond entire P44,490.00
Loss is deductible only in the taxable year it actually happens or is
Company in the penal sum of P30,600.00 in favor of the P. paid by it was or
sustained.
was not a
L.
vs deductible loss. However, if it is compensable by insurance or otherwise, deduction for
Galang Machinery Co., Inc. the loss suffered is postponed to a subsequent year, which, to be
Commissioner of precise, is that year in which it appears that no compensation at all can
Internal Revenue Petitioner likewise required Jose and one Ramon
be had, or that there is a remaining or net loss, i.e., no full
Cuervo to execute an indemnity agreement
compensation.
obligating themselves, solidarily, to indemnify
G.R. No. L-21520 petitioner for whatever liability it may incur by The rule is that loss deduction will be denied if there is a measurable
reason of said performance bond. right to compensation for the loss, with ultimate collection reasonably
December 11, 1967 clear.
San Jose failed to perform its obligation of delivering
logs to Galang Machinery, the latter sued on the So where there is reasonable ground for reimbursement, the taxpayer
performance bond. must seek his redress and may not secure a loss deduction until he
establishes that no recovery may be had.
On October 1, 1952, the Court of First Instance
adjudged Jose and petitioner liable; it also directed In other words, as the Tax Court put it, the taxpayer (petitioner) must
Jose and Cuervo to reimburse petitioner for exhaust his remedies first to recover or reduce his loss.
whatever amount it would pay to Galang
It is on record that petitioner had not exhausted its remedies,
Machinery.
especially against Ramon Cuervo who was solidarily liable with San
CA affirmed. Jose for reimbursement to it.
The same was affirmed by the SC with slight Thus, it was too premature for petitioner to claim a loss deduction.
modification of the award on damages.
But assuming that there was no reasonable expectation of recovery,
still no loss deduction can be had.
On February 19 and March 20, 1957, petitioner Sec.
effected payment in favor of Machinery in the total
30 (d) (2) of the Tax Code(old tax code) requires a charge-off as one of
sum of P44,490.00 pursuant to the final decision.
the conditions for loss deduction:

PART 4 | CORPORATE INCOME TAXATION | 57


CASE TITLE SUMMARY ISSUE/S RULING NOTES
In its income tax return for the year 1957, petitioner In the case of a corporation, all losses actually sustained and
claimed the said amount of P44,490.00 as charged-off within the taxable year and not compensated
deductible loss from its gross income and, for by insurance or otherwise.
accordingly, paid the amount of P136.00 as its
(Emphasis supplied)
income tax for 1957.

Petitioner, who had the burden of proof failed to adduce evidence that
The Commissioner of Revenue disallowed the
there was a charge-off in connection with the P44,490.00or
claimed deduction of P44,490.00 and assessed
P30,600.00 which it paid to Galang Machinery.
against petitioner the sum of P8,898.00, plus
interest, as deficiency income tax for the year 1957.
Petitioner filed its protest which was denied.
Whereupon, appeal was taken to the Court,
petitioner insisting that the P44,490.00 which it paid
to Machinery was a deductible loss.

The Tax Court dismissed the appeal, ruling that


petitioner was duly compensated for otherwise
than by insurance thru the mortgages in its favor
executed by Jose and Cuervo and it had not yet
exhausted all its available remedies, especially as
against Cuervo, to minimize its loss.
When its motion to reconsider was denied,
petitioner elevated the present appeal.

PART 4 | CORPORATE INCOME TAXATION | 58


CASE TITLE SUMMARY ISSUE/S RULING NOTES

9 Philippine Philippine Refining Company (PRC) was assessed by WON the CA was YES.
Refining respondent Commissioner of Internal Revenue to correct in
Company pay a deficiency tax for the year 1985. affirming the CTA
decision in In determining the "worthlessness of a debt" and thereby qualify as
The assessment was timely protested by PRC, on the
vs disallowing PRCs "bad debts" making them deductible, the taxpayer should show that:
ground that it was based on the erroneous
claim of
CA, CTA, and CIR disallowances of "bad debts" on several accounts (1) there is a valid and subsisting debt;
deduction as bad
although the same are both allowable and legal
debts of several (2) the debt must be actually ascertained to be worthless and
deductions.
accounts uncollectible during the taxable year;
G.R. No. 118794
(3) the debt must be charged off during the taxable year; and
May 8, 1996
(4) the debt must arise from the business or trade of the taxpayer.

Additionally, before a debt can be considered worthless, the taxpayer


must also show that it is indeed uncollectible even in the future.

Furthermore, there are steps outlined to be undertaken by the


taxpayer to prove that he exerted diligent efforts to collect the debts,
viz: (1) sending of statement of accounts; (2) sending of collection
letters; (3) giving the account to a lawyer for collection; and (4) filing a
collection case in court.

In this case, the only evidentiary support given by PRC for its aforesaid
claimed deductions was the explanation or justification posited by its
financial adviser or accountant.
Her allegations were not supported by any documentary evidence,
hence, both the Court of Appeals and the CTA ruled that said
contentions per se cannot prove that the debts were indeed
uncollectible and can be considered as bad debts as to make them
deductible.

PART 4 | CORPORATE INCOME TAXATION | 59


CASE TITLE SUMMARY ISSUE/S RULING NOTES

10 China Banking China Banking Corporation (CBC) made an equity Whether or not NO. At all events, it
Corporation investment in First CBC Capital (Asia) Ltd., a the equity may not be
Hongkong subsidiary engaged in financing and investment made amiss to once
vs investment with deposit-taking function. in First CBC An equity investment is a capital, not ordinary, asset of the investor again stress
Capital, after the sale or exchange of which results in either a capital gain or a capital that the basic
CA, CIR and CTA In the course of the regular examination of the
becoming loss. rule is still that
financial books and investment portfolios of CBC by
worthless, be any capital loss
Bangko Sentral, it was shown that First CBC Capital
deducted from can be
G.R. No. 125508 (Asia), Ltd., has become insolvent.
gross income. A capital gain or a capital loss normally requires the concurrence of deducted only
July 19, 2000 With the approval of Bangko Sentral, CBC write-off two conditions for it to result: from capital
as being worthless its investment in First CBC Capital gains under
(Asia), Ltd. Section 33(c) of
(1) There is a sale or exchange; and the NIRC.
and treated it as a bad debt or as an ordinary loss
deductible from its gross income. (2) the thing sold or exchanged is a capital asset.
However, the Commissioner of Internal Revenue When securities become worthless, there is strictly no sale or
(CIR) disallowed the deduction and assessed exchange but the law deems the loss anyway to be "a loss from the
petitioner for income tax deficiency. sale or exchange of capital assets. In these cases, the NIRC dispenses,
In assuming that the securities had indeed become in effect, with the standard requirement of a sale or exchange for the
worthless, CIR held the view that they should then application of the capital gain and loss provisions of the code.
be classified as "capital loss," and not as a bad debt
expense there being no indebtedness to speak of
between petitioner and its subsidiary. 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.

Section 29(d)(4)(A), of the NIRC expresses:

"(A) Limitations.
- Losses from sales or exchanges of capital assets shall be allowed only
to the extent provided in Section 33."

The pertinent provisions of Section 33 of the NIRC referred to in the


aforesaid Section 29(d)(4)(A), read:

"Section 33.
Capital gains and losses.

PART 4 | CORPORATE INCOME TAXATION | 60


CASE TITLE SUMMARY ISSUE/S RULING NOTES

x x x (c) Limitation on capital losses.


- Losses from sales or exchange of capital assets shall be allowed only
to the extent of the gains from such sales or exchanges.

In sum -

(a) The equity investment in shares of stock held by CBC in its


Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an
indebtedness, and it is a capital, not an ordinary, asset.
(b) Assuming that the equity investment of CBC has indeed become
"worthless," the loss sustained is a capital, not an ordinary, loss.[

(c) 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."

11 Commissioner of RA No. May the 20% Yes.


Internal Revenue sales discount be
7432, otherwise known as An Act to Maximize the Revenue Regulations No.
claimed as a tax
vs Contribution of Senior Citizens to Nation Building,
credit, instead of 2-94 is null and void for failing to conform to the law it sought to
Grant Benefits and Special Privileges and For Other
a deduction from implement.
Bicolandia Drug Purposes, granted senior citizens the privilege of
gross income or
Corporation obtaining a 20% discount from all establishments Revenue Regulations No.
gross sales?
relative to the use of transportation services, hotels
and similar lodging establishments, restaurants, 2-94 is still subordinate to RA No.

G.R. No. 148083 recreation centers and purchase of medicines 7432, and in cases of conflict, the implementing rule will not prevail
anywhere in the country. over the law it seeks to implement.
July 21, 2006
The law provided that private establishments giving
discount to senior citizens may claim the cost astax
credit. But even as this particular case is decided in this manner, it must be
noted that the concerns of petitioner have been addressed.
In compliance with the law, BIR issued Revenue
Regulations No. RA No.

2-94 defining tax credit as the amount representing 7432 has been amended by RA No.
the 20% discountwhich discount shall be 9257, the Expanded Senior Citizens Act of 2003. In this, the term tax
deducted by said establishments from their gross credit is no longer used.Under its IRR, Revenue Regulations No.

PART 4 | CORPORATE INCOME TAXATION | 61


CASE TITLE SUMMARY ISSUE/S RULING NOTES
income for tax purposes and from their gross sales 4-2006, only the actual amount of the discount granted not exceeding
for VAT or other percentage tax purposes. 20% of the gross selling price can be deducted from the gross income,
net of VAT, if applicable, for income tax purposes, and from gross sales
or receipts for VAT or other percentage taxes. Under the new law,
Respondent, a corporation engaged in the business there is no tax credit to speak of, only deductions.
of retailing pharmaceutical products under the
business style of Mercury Drug, granted the 20%
sales discount to qualified senior citizens purchasing As it was RA No.
their medicines, treating this discount as deduction
7432 in force at the time this case arose, this law controls the result in
from its gross income.
this particular case, for which reason respondent is entitled to its claim
Respondent filed its 1995 Corporate Annual Income of tax credit.
Tax Return declaring a net loss position with nil
income tax liability.
Respondent filed a claim for tax refund or credit
with BIR because its net losses for the year 1995
prevented it from benefitting from the treatment of
sales discount as a deduction from gross sales
during the taxable year.
It alleged that petitioner erred in treating the 20%
sales discount given to senior citizens as deductions
from gross income for tax purposes rather than as a
tax credit.Petitioner argues that the tax credit is in
the nature of a tax refund and should be treated as
a return for tax payments erroneously or excessively
assessed against a taxpayer, in line with Sec.
204 (c) of NIRC.
Petitioner claims that there should first be
payment of the tax before tax credit can be
claimed.
To do otherwisewould result in RA No.
7432 impliedly repealing Sec.
204 (c) of NIRC.

PART 4 | CORPORATE INCOME TAXATION | 62


CASE TITLE SUMMARY ISSUE/S RULING NOTES

12 Kuenzle & Petitioner filed its income tax return for the years 1. 1.
Streiff, Inc. 1950, 1951 and 1952 and petitioner deducted from
WoN bonuses are It would appear that all ordinary and necessary expenses paid or
its gross income certain items representing salaries,
vs deductible incurred in carrying on a trade or business, including a reasonable
directors' fees and bonuses of its non-resident
allowance for salaries or other compensation for personal services
president and vice-president; bonuses of its
The Collector of actually rendered, may be allowed as deductions in computing the
resident officers and employees; and interests on
Internal Revenue 2. taxable income during the year.
earned but unpaid salaries and bonuses of its
officers and employees. WoN interests are It likewise appears that the amount of interests paid within the taxable
deductible year on any indebtedness may also be deducted from the gross
G.R. Nos. The income tax computed in accordance with these
income.
returns was duly paid by petitioner.
L-12010 and Here it is admitted that the bonuses paid to the officers and employees
L-12113 of petitioner, whether resident or non-resident, were paid to them as
The CIR, after disallowing the deductions of the additional compensation for personal services actually rendered and
October 20, 1959 items representing director's fees, salaries and as such can be considered as ordinary and necessary expenses
bonuses of petitioner's non-resident president and incurred in the business within the meaning of the law, the only
vice-president; the bonus participation of certain question in dispute being how much of said bonuses may be
resident officers and employees; and the interests considered reasonable in order that it may be allowed as deduction.
on earned but unpaid salaries and bonuses,
respondent assessed and demanded from
petitioner the payment of deficiency income taxes It is a general rule that "Bonuses to employees made in good faith and
in the sums of P26,370.00, P53,865.00 and as additional compensation for the services actually rendered by the
P44,112.00 for the years 1950, 1951 and 1952, employees are deductible, provided such payments, when added to
respectively. the stipulated salaries, do not exceed a reasonable compensation for
the services rendered.
However the respondent modified the same by
allowing as deductible all items comprising The condition precedents to the deduction of bonuses to employees
directors' fees and salaries of the non-resident are: (1) the payment of the bonuses is in fact compensation; (2) it must
president and vice-president, but disallowing the be for personal services actually rendered; and (3) the bonuses, when
bonuses insofar as they exceed the salaries of the added to the salaries, are reasonable when measured by the amount
recipients, as well as the interests on earned but and quality of the services performed with relation to the business of
unpaid salaries and bonuses. the particular taxpayer."

There is no dispute that these items accrued on unclaimed salaries and


bonus participation of shareholders and employees.
Under the law, in order that interest may be deductible, it must be
paid "on indebtedness" (Section 30, (b)(1) of the National Internal
Revenue Code).
It is therefore imperative to show that there is an existing
indebtedness which may be subjected to the payment of interest.
Here the items involved are unclaimed salaries and bonus
participation which in our opinion cannot constitute indebtedness
within the meaning of the law

PART 4 | CORPORATE INCOME TAXATION | 63


CASE TITLE SUMMARY ISSUE/S RULING NOTES

13 Paper Industries In 1969, 1972 and 1977, Picop obtained loans from - Whether or not - SC started by noting that interest payments on loans incurred by a
Corporation of foreign creditors in order to finance the purchase of PICOP is entitled taxpayer (whether BOI-registered or not) are allowed by the NIRC as
the Philippines machinery and equipment needed for its to deductions deductions against the taxpayer's gross income.
operations. against income
(PICOP) In the instant case, the CIR does not dispute that the interest payments
interest payments
In its 1977 Income Tax Return, Picop claimed were made by Picop on loans incurred in connection with the carrying
vs on loans for the
interest payments made in 1977, amounting to on of the registered operations of Picop neither does the CIR deny that
purchase of
CA, CIR, and CTA P42,840,131.00, on these loans as a deduction from such interest payments were legally due and demandable under the
machinery and
its 1977 gross income. terms of such loans, and in fact paid by Picop during the tax year 1977.
equipment.
The CIR disallowed this deduction upon the ground
G.R. Nos. 106949- that, because the loans had been incurred for the
50 The CIR has been unable to point to any provision of the 1977 Tax Code
purchase of machinery and equipment, the interest - Whether or not
or any other statute that requires the disallowance of the interest
payments on those loans should have been PICOP may claim
December 1, 1995 payments made by Picop .
capitalized instead and claimed as a depreciation RPPMs net
deduction taking into account the adjusted basis of operating loss as a The CIR invokes Section 79 of Revenue Regulations No.
the machinery and equipment (original acquisition deduction against
cost plus interest charges) over the useful life of its 1977 gross 2 but the SC ruled that said provision is to be construed as referring to
such assets. income. the so called "theoretical interest," that is to say, interest "calculated"
or computed (and not incurred or paid) for the purpose of determining
Both the CTA and the Court of Appeals sustained the the "opportunity cost" of investing funds in a given business.
position of Picop and held that the interest
deduction claimed by Picop was proper and We have already noted that our 1977 NIRC does not prohibit the
allowable. deduction of interest on a loan incurred for acquiring machinery and
equipment.
In the instant Petition, the CIR insists on its original
position. Neither does our 1977 NIRC compel the capitalization of interest
payments on such a loan.
The 1977 Tax Code is simply silent on a taxpayer's right to elect one or
On the other hand, on 18 January 1977, Picop the other tax treatment of such interest payments.
entered into a merger agreement with the Rustan
Pulp and Paper Mills, Inc. Accordingly, the general rule that interest payments on a legally
demandable loan are deductible from gross income must be applied.
("RPPM") and Rustan Manufacturing Corporation
("RMC").
Under this agreement, the rights, properties, The CIR argues finally that to allow Picop to deduct its interest
privileges, powers and franchises of RPPM and RMC payments against its gross income would be to encourage fraudulent
were to be transferred, assigned and conveyed to claims to double deductions from gross income.
Picop as the surviving corporation. The Court is not persuaded.
Immediately before merger effective date, RPPM So far as the records of the instant cases show, Picop has not claimed
had over preceding years accumulated losses in the to be entitled to double deduction of its 1977 interest payments.
total amount of P81,159,904.00.
The CIR has neither alleged nor proved that Picop had previously
adjusted its cost basis for the machinery and equipment purchased

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
In its 1977 Income Tax Return, Picop claimed with the loan proceeds by capitalizing the interest payments here
P44,196,106.00 of RPPM's accumulated losses as a involved.
deduction against Picop's 1977 gross income.
The Court will not assume that the CIR would be unable or unwilling to
The CIR disallowed all the deductions claimed on the disallow "a double deduction" should Picop, having deducted its
basis that RPPM's losses were incurred by "another interest cost from its gross income, also attempt subsequently to
taxpayer," RPPM, and not by Picop in connection adjust upward the cost basis of the machinery and equipment
with Picop's own registered operations. purchased and claim, e.g., increased deductions for depreciation.
The CIR took the view that Picop, RPPM and RMC
were merged into one (1) corporate personality
- The CTA and the Court of Appeals allowed the offsetting of RPPM's
only on 12 January 1978, upon approval of the
accumulated operating losses against Picop's 1977 gross income,
merger agreement by the BOI.
basically because towards the end of the taxable year 1977, upon the
arrival of the effective date of merger, only one (1) corporation, Picop,
remained.
The losses suffered by RPPM's registered operations and the gross
income generated by Picop's own registered operations now came
under one and the same corporate roof.
We consider that this circumstance relates much more to form than to
substance.
We do not believe that that single purely technical factor is enough to
authorize and justify the deduction claimed by Picop.
Picop's claim for deduction is not only bereft of statutory basis; it does
violence to the legislative intent which animates the tax incentive
granted by Section 7 (c) of R.A.
No.
5186.
In granting the extraordinary privilege and incentive of a net operating
loss carry-over to BOI-registered pioneer enterprises, the legislature
could not have intended to require the Republic to forego tax revenues
in order to benefit a corporation which had run no risks and suffered
no losses, but had merely purchased another's losses.
We conclude that the deduction claimed by Picop in the amount of
P44,196,106.00 in its 1977 Income Tax Return must be disallowed.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

14 Hospital de San In a letter dated January 15, 1959, the WON the The Court of Tax Appeals found that the interests and dividends
Juan de Dios, Inc. Commissioner of Internal Revenue assessed and expenses incurred received by the petitioner "were merely incidental income to
demanded from the petitioner, Hospital De San by the petitioner petitioner's main activity, which is the operation of its hospital and
vs Juan De Dios, Inc., payment of P51,462 as deficiency for handling its nursing schools the conclusion is inevitable that petitioner's activities
income taxes for 1952 to 1955. funds or income never went beyond that of a passive investor, which under existing
Commissioner of consisting solely jurisprudence do not come within the purview of carrying on any
Internal Revenue The petitioner protested against the assessment
of dividends and 'trade or business'.
and requested the Commissioner to cancel and
interests, were
withdraw it. The fact that petitioner was assessed a real estate dealer's fixed tax of
not expenses
G.R. No. L-31305 P640 on its rental income does not alter its status as a charitable, non-
After reviewing, Commissioner advised petitioner incurred in
stock, non-profit corporation.
May 10, 1990 that the deficiency income tax assessment against it "carrying on any
was reduced to only P16,852.41 but the petitioner trade or Finding no reversible error in the decision of the CTA, the same is
thru its auditors insisted to have the revised business," hence, affirmed in toto.
assessment cancelled but the same was denied. not deductible as
business or
Petitioner sought a review of the assessment by the administrative
Court of Tax Appeals. expenses.
The CTA found out that petitioner failed to establish
by competent proof that its receipt of interests and
dividends constituted the carrying on of a "trade or
business" so as to warrant the deductibility of the
expenses incurred in their realization.
No evidence whatsoever was presented by
petitioner to show how it handled its investment,
the manner it bought, sold and reinvested its
securities, how it made decisions, and whether it
consulted brokers, investment or statistical
services.
Neither is there any showing of the extent of its
activities in stocks or bonds, and participation, if
any, direct or indirect, in the management of the
corporations where it made investments.
In effect, there is total absence of any indication of
a business-like management or operation of its
interests and dividends.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

15 Commissioner of The case involves Mercury Drugs (Central Luzon WON the 20% The discount is treated as a tax credit thus entitling Central Luzon to
Internal Revenue Drug Corporation) claim for tax refund arising from senior citizens the tax refund.
an alleged erroneous interpretation of the Senior sales discount
vs This case covers the taxable year 1997 and is governed by the old law,
Citizens Act. should be treated
RA 7432 which expressly allowed private establishment to claim the
as a tax credit to
Central Luzon While complying with RR 2-94 in computing its amount of discounts they grant to senior citizens as tax credit and not
be deducted from
Drug Corporation income tax liability for taxable year 1997, merely as a reduction to the gross income or gross sales.
the income tax
respondent filed such return under protest because
due or as a mere In this case taxation was considered to be an implement for the
of its allegation that RR 2-94, which provides that
deduction from exercise of the power of imminent domain wherein the tax credit is
G.R. No. 159610 the sales discount should be treated as a deduction
gross income or deemed to be the just compensation for private property taken by the
from the gross income or sales, is without force and
June 12, 2008 gross sales. State for public purpose (the reduction of income due to the grant of
effect for being inconsistent with RA 7432 which
the senior citizen discount).
provides for a tax credit treatment for the senior
citizens discount. However, with the effectivity of RA 9257 on 21 March 2004, there is
now a new tax treatment for senior citizens discount granted by all
covered establishments.
This discount should be considered as a deductible expense from gross
income and no longer as tax credit.

16 Commissioner of Involves a Petition for Review on Certiorari seeking WON PAL is Petition is denied for the provisions in PD 1590, a special law prevails
Internal Revenue to reverse and set aside the Decision and Resolution required to pay over RA 8424 (NIRC) as regards respondents exemption from the
of the Court of Tax Appeals (CTA) En Bane which MCIT under the MCIT.
vs affirmed the cancellation and withdrawal of income tax
Assessment Notice and Formal Letter of Demand for provision of the
Philippine
the payment by the respondent Philippine Airlines, NIRC of 1997(RA Discussion on the SC RULING
Airlines (PAL) Inc. 8424), as
amended, despite
(respondent), of deficiency Minimum Corporate
the fact that the The NIRC of 1997, as amended, provides as regards MCIT that a
G.R. 179259 Income Tax (MCIT) in the amount of
charter (PD 1590) domestic corporation must pay whichever is the higher of: (1) the
P326,778,723.35, covering the fiscal year ending 31
September 25, creating it income tax under Section 27(A) of the NIRC of 1997,as amended,
March 2000.
2013 provided only two computed by applying the tax rate therein to the taxable income of
options for its the corporation; or (2) the MCIT under Section 27(E), also of the same
liability to pay Code, equivalent to 2% of the gross income of the corporation.
For the fiscal year that ended 31 March 2000, taxes- (a)
respondent filed its Tentative Corporate Income Tax Payment of basic The Court would like to underscore that although this may be the
Return, reflecting a creditable tax withheld for the corporate income general rule in determining the income tax due from a domestic
fourth quarter amounting to P524,957.00, and a tax based on the corporation under the provisions of the NIRC of 1997, as amended,
zero taxable income for said year. its annual net such rule can only be applied to respondent only as to the extent
taxable income or allowed by the provisions of its franchise.
Hence, respondent filed on 16 July 2001 a written
claim for refund before the petitioner. (b) the related 2%
franchise tax
As a consequence thereof, respondent received a based on gross Relevant thereto, PD 1590, during the lifetime of the franchise of
Letter of Authority from the Bureau of Internal revenue, respondent, its taxation shall be strictly governed by two fundamental
Revenue (BIR) Large Taxpayers Service authorizing whichever is rules, to wit: (1) respondent shall pay the Government either the basic

PART 4 | CORPORATE INCOME TAXATION | 67


CASE TITLE SUMMARY ISSUE/S RULING NOTES
the revenue officers named therein to examine lower; further, corporate income tax or franchise tax, whichever is lower; and (2) the
respondents books of accounts and other under PD 1590, tax paid by respondent, under either of these alternatives, shall be in
accounting records for the purpose of evaluating MCIT is presumed lieu of all other taxes, duties, royalties, registration, license, and other
respondents "Claim for Refund on Creditable to belong to the fees and charges, except only real property tax.
Withholding Tax Income Tax" covering the fiscal category of "other
Any excess of the total quarterly payments over the actual annual
year ending 31 March 2000. taxes" for which
franchise of income tax due as shown in the final or adjustment
respondent is not
franchise or income-tax return shall either be refunded to the grantee
liable.
or credited against the grantees quarterly franchise or income-tax
On 11 August 2003, respondent received from the
liability for the succeeding taxable year or years at the option of the
same revenue officers a computation of their initial
grantee.
deficiency MCIT assessment in the amount of
P537,477,867.64.
Consequently, respondent received on 20October Accordingly, the respondent cannot be subjected to MCIT for the
2003 a Preliminary Assessment Notice and Details following reasons:
of Assessment issued by the Large Taxpayers Service
dated 22 September 2003, assessing respondent
deficiency MCIT including interest, in the aggregate 1. Section 13(a) of [PD] 1590 refers to "basic corporate income tax,
amount of P315,566,368.68. as stipulated in Section 27(A) of the NIRC of 1997.
A written protest to said preliminary assessment 2. There is nothing in Section 13(a) of [PD] 1590 to support the
was filed by respondent on 3 November 2003. contention of the CIR that PAL is subject to the entire Title II of
the NIRC of 1997, entitled "Tax on Income."
Thereafter, on 16 December 2003, respondent
received a Formal Letter of Demand and Details of
Assessment dated 1 December 2003 from the Large
Taxpayers Service demanding the payment of the 3. Section 13(a) of Presidential Decree No.
total amount of P326,778,723.35, inclusive of 4. 1590 further provides that the basic corporate income tax of PAL
interest, as contained in Assessment Notice No. shall be based on its annual net taxable income.
INC-FY-99-2000-000085. 5. In comparison, the 2% MCIT under Section 27 (E) of the NIRC of
1997 shall be based on the gross income of the domestic
corporation.
In response thereto, respondent filed its formal
written protest on 13 January 2004 reiterating the 6. The Court notes that gross income, as the basis for MCIT, is given
following defenses:(1) that it is exempt from, or is a special definition under Section 27(E) (4) of the NIRC of 1997,
not subject to, the 2% MCIT by virtue of its charter, different from the general one under Section 34 of the same
Presidential Decree No. Code.

(PD) 1590;3 and (2) that the three-year period 7. There is an apparent distinction under the NIRC of 1997 between
allowed by law for the BIR to assess deficiency taxable income, which is the basis for basic corporate income tax
internal revenue taxes for the taxable year ending under Section 27(A); and gross income, which is the basis for the
31 March 2000 had already lapsed on 15July 2003. MCIT under Section 27(E).
8. The two terms have their respective technical meanings, and
cannot be used interchangeably.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
A Petition for Review before the Second Division of 9. Even if the basic corporate income tax and the MCIT are both
the CTA, after no response was received by the income taxes under Section 27 of the NIRC of 1997, and one is
respondent from its protest. paid in place of the other, the two are distinct and separate
taxes.The Court herein treats MCIT in much the same way.
10. Although both are income taxes, the MCIT is different from the
The Ruling of the CTA Second Division
basic corporate income tax, not just in the rates, but also in the
bases for their computation.

In a Decision, the CTA Second Division granted 11. Not being covered by Section 13(a) of [PD] 1590,which makes PAL
respondents petition and accordingly ordered for liable only for basic corporate income tax, then MCIT is included
the cancellation and withdrawal of Assessment in "all other taxes" from which PAL is exempted.
Notice and Formal Letter of Demand for the
payment of deficiency MCIT in the amount of
P326,778,723.35, covering the fiscal year ending 31 12. The evident intent of Section 13 of [PD] 1520 (sic) is to extend to
March 2000, issued against respondent. PAL tax concessions not ordinarily available to other domestic
corporations.
13. Section 13 of [PD] 1520 (sic) is not unusual.
The CTA Second Division denied petitioners Motion
for Reconsideration for lack of merit. 14. A public utility is granted special tax treatment (including tax
exceptions/exemptions) under its franchise, as an inducement for
Aggrieved, petitioner appealed to the CTA En Banc.
the acceptance of the franchise and the rendition of public
service by the said public utility.

The Ruling of the CTA En Banc 15. In this case, in addition to being a public utility providing air-
transport service, PAL is also the official flag carrier of the
country.
The CTA En Banc affirmed both the aforesaid
Decision and Resolution rendered by the CTA
Second Division in CTA Case No. 16. The CIR posits that PAL may not invoke in the instant case the "in
lieu of all other taxes" clause in Section 13 of [PD] No.
7029,ruling that under Section 13 of PD 1590,
respondent, as consideration for the franchise, is 17. 1520 (sic),if it did not pay anything at all as basic corporate
indeed granted the privilege to choose between two income tax or franchise tax.
options in the payment of its tax liability to the
18. As a result, PAL should be made liable for "other taxes" such as
government.
MCIT.
19. This line of reasoning has been dubbed as the Substitution
Theory, and this is not the first time the CIR raised the same.
20. The Court already rejected the Substitution Theory in
Commissioner of Internal Revenue v.
21. Philippine Airlines, Inc.
22. It is not the fact of tax payment that exempts it, but the exercise
of its option.

PART 4 | CORPORATE INCOME TAXATION | 69


CASE TITLE SUMMARY ISSUE/S RULING NOTES
23. The fallacy of the CIRs argument is evident from the fact that the
payment of a measly sum of one peso would suffice to exempt
PAL from other taxes, whereas a zero liability arising from its
losses would not.
24. There is no substantial distinction between a zero tax and a one-
peso tax liability.
25. Based on the same ratiocination, the Court finds the Substitution
Theory unacceptable in the present Petition.

26. PD 1590 explicitly allows PAL, in computing its basic corporate


income tax, to carry over as deduction any net loss incurred in
any year, up to five years following the year of such loss.
27. Therefore, [PD] 1590 does not only consider the possibility that,
at the end of a taxable period, PAL shall end up with zero annual
net taxable income (when its deductions exactly equal its gross
income), as what happened in the case at bar, but also the
likelihood that PAL shall incur net loss (when its deductions
exceed its gross income).
28. If PAL is subjected to MCIT, the provision in [PD] 1590 on net loss
carry-over will be rendered nugatory.

Consequently, the insistence of the CIR to subject PAL to MCIT cannot


be done without contravening [PD] 1520 (sic).

Between [PD] 1520 (sic), on one hand, which is a special law


specifically governing the franchise of PAL, issued on 11 June 1978;and
the NIRC of 1997, on the other, which is a general law on national
internal revenue taxes, that took effect on 1 January 1998, the former
prevails.
The rule is that on a specific matter, the special law shall prevail over
the general law, which shall be resorted to only to supply deficiencies
in the former.
In addition, where there are two statutes, the earlier special and the
later general the terms of the general broad enough to include the
matter provided for in the special the fact that one is special and the
other is general creates a presumption that the special is to be
considered as remaining an exception to the general, one as a general
law of the land, the other as the law of a particular case.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
It is a canon of statutory construction that a later statute, general in
its terms and not expressly repealing a prior special statute, will
ordinarily not affect the special provisions of such earlier statute.
The MCIT was a new tax introduced by Republic Act No.8424.
Under the doctrine of strict interpretation, the burden is upon the CIR
to primarily prove that the new MCIT provisions of the NIRC of 1997,
clearly, expressly, and unambiguously extend and apply to PAL,
despite the latters existing tax exemption.
To do this, the CIR must convince the Court that the MCIT is a basic
corporate income tax, and is not covered by the "in lieu of all other
taxes" clause of [PD] 1590.
Since the CIR failed in this regard, the Court is left with no choice but
to consider the MCIT as one of "all other taxes," from which PAL is
exempt under the explicit provisions of its charter.

Based on the foregoing pronouncements, it is clear that respondent is


exempt from the MCIT imposed under Section 27(E) of the NIRC of
1997,as amended.
Thus, respondent cannot be held liable for the assessed deficiency
MCIT of P326,778,723.35 for fiscal year ending 31 March 2000.
More importantly, as to petitioners contention that respondent needs
to actually pay a certain amount as basic corporate income tax or
franchise tax before it can enjoy the tax exemption granted to it since
it should retain the responsibility of paying its share of the tax burden,
this Court has categorically ruled in the above-cited cases that it is not
the fact of tax payment that exempts it, but the exercise of its option..

Notably, in another case involving the same parties,26 the Court


further expressed that a strict interpretation of the word "pay" in
Section 13of PD 1590 would effectively render nugatory the other
rights categorically conferred upon the respondent by its franchise.
Hence, there being no qualification to the exercise of its options under
Section 13, then respondent is free to choose basic corporate income
tax, even if it would have zero liability for the same in light of its net
loss position for the taxable year.

By way of, reiteration, although it appears that respondent is not


completely exempt from all forms of taxes under PD 1590 considering

PART 4 | CORPORATE INCOME TAXATION | 71


CASE TITLE SUMMARY ISSUE/S RULING NOTES
that Section 13 thereof requires it to pay, either the lower amount of
the basic corporate income tax or franchise tax (which are both direct
taxes), at its option, mere exercise of such option already relieves
respondent of liability for all other taxes and/or duties, whether direct
or indirect taxes.
This is an expression of the same thought in Our ruling that, to repeat,
it is not the fact of tax payment that exempts it, but the exercise of its
option.

17 Maria Carla The heirs of Pirovano received a donation from De WON the heirs YES. Remuneratory
Pirovano La Rama Steamship Co., of which Pirovano was the are liable for donation is still
NCC Art.
former president whose life the company had donees tax subject to both
vs insured. despite an SC 726. donors and
decision that the donees tax.
Commissioner of The heirs contended that since the SC in a related When a person gives to another a thing ...
donation was
Internal Revenue case had declared the donation a remuneratory
remuneratory on account of the latter's merits or of the services rendered by him to
donation and not a simple donation, it was not
subject to donees tax. the donor, provided they do not constitute a demandable debt, ...,
there is also a donation..
G.R. No. L-19865
July 31, 1965

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

18 Carmelino F. On April 13, 1998, petitioner Carmelino F. Could the No.


Pansacola exemptions under
Pansacola filed his income tax return for the taxable NIRC provides that the income subject to income tax is the taxpayers
Section 35 of the
vs year 1997 that reflected an overpayment of P5,950. income as derived and computed during the calendar year, his
NIRC, which took
taxable year.
In it he claimed the increased amounts of personal effect on January
Commissioner of
and additional exemptions under Section 35 of the 1, 1998, be What the law should consider for the purpose of determining the tax
Internal Revenue NIRC, although his certificate of income tax withheld availed of for the due from an individual taxpayer is his status and qualified dependents
on compensation indicated the lesser allowed taxable year at the close of the taxable year and not at the time the return is filed
amounts on these exemptions. 1997? and the tax due thereon is paid.
G.R. 159991
November 16,
2006 At the time petitioner filed his 1997 return and paid the tax due
thereon in April 1998, the increased amounts of personal and
additional exemptions in Section 35 were not yet available.
It has not yet accrued as of December 31, 1997, the last day of his
taxable year.
Petitioners taxable income covers his income for the calendar year
1997.
The law cannot be given retroactive effect.
It is established that tax laws are prospective in application, unless it
is expressly provided to apply retroactively.
Conformably too, personal and additional exemptions are considered
as deductions from gross income.
Deductions for income tax purposes partake of the nature of tax
exemptions, hence strictly construed against the taxpayer and cannot
be allowed unless granted in the most explicit and categorical
language too plain to be mistaken.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

19 C.M. Hoskins & Petitioner-appellant, a domestic corporation WON the No.


Co., Inc. engaged in the development and management of supervision and
With respect to the collection fees, the services rendered by Hoskins
subdivisions, sale of subdivision lots and collection collection fees
vs in collecting the amounts due on the sales of lots on the installment
of installments due for a fee which the real estate received by a real
plan are incidental to its brokerage service in selling the lots.
owners pay as compensation for each of the estate broker are
Commissioner of services rendered, failed to pay the real estate deductible from If the broker's commissions on the cash sales of lots are subject to the
Internal Revenue broker's tax on its income derived from the its gross brokerage percentage tax, its commissions on installment sales should
supervision and collection fees. compensation likewise be taxable.

G.R. L-24059 Consequently, the Commissioner of Internal As to the supervision fees for the development and management of
Revenue demanded the payment of the percentage the subdivisions, which fees were paid out of the proceeds of the sales
November 28, tax plus surcharge, contending that said income is of the subdivision lots, they, too, are subject to the real estate broker's
1969 subject to the real estate broker's percentage tax. percentage tax.
On the other hand, petitioner-appellant claimed
that the supervision and collection fees do not form
part of its taxable gross compensation. The development, management and supervision services were
necessary to bring about the sales of the lots and were inseparably
linked thereto.
Hence, there is basis for holding that the operation of subdivisions is
really incidental to the main business of the broker, which is the sale
of the lots on commission.

20 Jose Ledesma For the year 1916, Jose Ledesma (plaintiff) made his Whether or not Plaintiff did not contended that said sum was gifts or bonuses but
declaration for the purpose of paying his income the said sum, were fixed compensations agreed upon, depending upon the value of
vs tax. together with the services of said employees and the importance of the business in
their fixed which they were engaged.
The Collector of In the said declaration, he claimed several
salaries,
Internal Revenue exceptions and one of which is the amount of A corporation or person engaged in a commercial enterprise has a
constituted
and P135,229.10 which he claims should be deducted right to fix the compensation of his employees, and said
reasonable
from his income for the reason that it had been paid compensation shall be considered as part of the expenses in the
the Provincial compensation for
to his employees as compensation for their services. conduct and management of the business.
their services.
Treasurer of
The said exemption was not allowed by the Such expenses should be taken into consideration in ascertaining the
Occidental
Provincial Treasurer and Collector of Internal amount to be paid as income tax.
Negros Revenue (defendants).
By computing such expenses, the net income may be correctly
Hence, the plaintiff paid under protest the income ascertained.
G.R. No. L-15014 tax upon the full amount of his income without the
In the present case, there is not a word of proof in the record which
deductions claimed.
October 2, 1920 disproves the declaration of the plaintiff that the said sum was paid
He then filed a complaint alleging that the persons to the persons mentioned in the complaint as compensation for their
to whom he had paid the said sum are his services.
employees in his business and as such receive a
Said sum, according to proof, did not constitute gifts or bonuses.
certain percentage of his annual gain; and that
percentage is fixed and determined; and is based Hence, the lower court was fully justified in allowing the deduction of
upon the extent of the powers and responsibilities the said sum from the gross income of the plaintiff.

PART 4 | CORPORATE INCOME TAXATION | 74


CASE TITLE SUMMARY ISSUE/S RULING NOTES
of each of them in the management and However, plaintiff cannot claim interest upon the sum to be returned
administration of his business. by the defendants as Section 1579 of Act No.
In the answer to the complaint, the Attorney- 2711 expressly provides that actions like the present interest shall
General, on behalf of the defendants, alleged that not be collected.
the sums paid to said employees were in the nature
The courts are, therefore, without authority to allow interest upon the
of bonuses or distribution of profit, and were not
sum recovered in actions like the present.
expenses of the business.
The Court of First Instance rendered a decision
directing and ordering to pay to the plaintiff the
amount that latter paid in excess.
The said court is of the opinion that such percentage
does not constitute bonus but fixed and agreed
permanent compensation in addition to the
stipulated salaries and is reasonable, taking into
consideration the services rendered by said
employees and the importance of the business in
which such services were and are being rendered.
The defendants, through the Attorney-General,
contends that the lower court erred in holding that
said sum paid by plaintiff to his employees, together
with their fixed salaries, constituted reasonable
compensation for their services.
Hence this petition.

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21 Esso Standard petitioner ESSO deducted from its gross income for WON the margin margin fees are not expenses in connection with the production or
Eastern, Inc. 1959, as part of its ordinary and necessary business fees paid by earning of petitioner's incomes in the Philippines.
expenses, the amount it had spent for drilling and petitioner on its
vs They were expenses incurred in the disposition of said incomes;
exploration of its petroleum concessions. profit remittance
expenses for the remittance of funds after they have already been
to its Head Office
Commissioner of This claim was disallowed by the respondent earned by petitioner's branch in the Philippines for the disposal of its
in New York are
Internal Revenue Commissioner of Internal Revenue on the ground Head Office in New York which is already another distinct and separate
deductible
that the expenses should be capitalized and might income taxpayer.
be written off as a loss only when a "dry hole"
it can never be said therefore that the margin fees were appropriate
G.R. No. L-28508-9 should result.
and helpful in the development of petitioner's business in the
July 7, 1989 ESSO then filed an amended return where it asked Philippines exclusively or were incurred for purposes proper to the
for the refund by reason of its abandonment as dry conduct of the affairs of petitioner's branch in the Philippines
holes of several of its oil wells. exclusively or for the purpose of realizing a profit or of minimizing a
loss in the Philippines exclusively.
Also it claimed as ordinary and necessary expenses
in the same return the amount representing margin the margin fees were incurred for purposes proper to the conduct of
fees it had paid to the Central Bank on its profit the corporate affairs of ESSO in New York, but certainly not in the
remittances to its New York head office. Philippines.

CR assessed ESSO a deficiency income tax for the WHEREFORE, the decision of the Court of Tax Appeals denying the
year 1960. petitioner's claims for refund of P102,246.00 for 1959 and
P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.
The deficiency arose from the disallowance of the
margin fees paid by ESSO to the Central Bank on its SO ORDERED.
profit remittances to its New York head office.

CIR also denied the claims of ESSO for refund of the


overpayment of its 1959 and 1960 income taxes,
holding that the margin fees paid to the Central
Bank could not be considered taxes or allowed as
deductible business expenses.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

22 Visayan Cebu The appellant, Visayan Cebu Terminal Co. The only issue INCOME TAXES; DETERMINATION OF REPRESENTATION EXPENSE.
Termnial Co., Inc. raised in this
Inc., is a corporation organized for the purpose of The Court of Tax Appeals, in the instant case, had been patently fair
appeal relates to
vs handling arrastre operations in the port of Cebu. and reasonable, if not liberal, in allowing appellant to deduct a certain
the deductibility
amount as representation expenses on the basis of its gross income,
It was awarded the contract for the said arrastre of the sum of
Collector of net income and representation expenses during the prior years,
operations by the Bureau of Customs. P75,855.88 as
Internal Revenue although there was absolutely no concrete evidence of the sums
representation
actually spent for purposes of representation.
expenses.
On March 1, 1952, appellant filed its income tax The explanation to the effect that the supporting papers of some of
G.R. L-12798, return for 1951 reporting a gross income of the expenses had been destroyed when the house of appellant's
May 30, 1960 P420,633.40 and claimed deductions amounting to treasurer was burned, it not satisfactory, for appellant's records were
P379,036.95, leaving a net income of P41,596.45 on supposed to be kept in its offices, not in the residence of one of its
which it paid income tax in the sum of P8,319.29. officers.

The sum of P379,036.95 claimed as deductions "Representation .


consisted of various items, the said sums of
.
P2,375.00, P75,855.88 and P6,300.00, representing
said salaries, representation expenses and .
miscellaneous expenses, respectively, or a total of
expenses fall under the category of business expenses which" are
P84,530.88, were disallowed by the Collector of
allowable deductions from gross income if they meet the conditions
Internal Revenue, thus giving rise to a deficiency
prescribed by law", particularly section 30(a) (1) of the National
assessment of P18,991.00.
Internal Revenue Code; that, to be deductible, said business expenses
must be:
Upon request for reconsideration, the Collector 1. "ordinary and necessary expenses paid or incurred in
modified the deficiency income tax assessment by carrying on any trade or business";
allowing the deduction from appellant's gross
2. that those expenses "must also, meet the further test of
income of the salary of Juan Eugenio Lo in the sum
reasonableness in amount", this test being "inherent in the
of P1,875.00 and miscellaneous expenses
phase 'ordinary and necessary'";
amounting to P532.00, at the same time
maintaining the disallowance of the full amount of
P75,855.88 as representation expenses.
some of the representation expenses claimed by appellant had been
evidenced by vouchers or chits, but others were reimbursed "without
presentation of supporting papers; that the aforementioned vouchers
Appellant has agreed to the disallowance of the sum
or chits were allegedly "destroyed when the house of Buenaventura
P500.00 representing the salaries of Felix Go Chan
M.
and Teotimo Tiu Tiam at P250.00 each, and the sum
of P5,768.00, representing miscellaneous expenses. Veloso, treasurer of appellant, where the records were kept was
burned"; that, accordingly, "it is not possible to determine the actual
amount covered by supporting papers and the amount without
supporting papers"; that the court should, therefore, "determine from
all available data the amount properly deductible as representation
expenses"; that "during the period of four (4) years from 1949 to 1952,
appellant had gross income, net profits and claimed representation

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
expenses and that "from the above figures, we may infer that the sum
of P10,000 may be considered reasonably necessary for entertainment
expenses of appellant in 1951, it having claimed a little over the
amount in 1950, when its gross income was more than its gross income
in 1951 and 1952", and because "it allegedly spent for entertainment
purposes in 1948 the sum of P500.00 only." Hence, the lower court
modified the assessment of the taxes due from appellant herein the
manner set forth in the beginning of this decision.Appellant, maintains
that said court had acted arbitrarily in considering the representation
expenses in 1950, not those incurred in 1949 and 1952, in fixing the
amount deductible in 1951.

This pretense is clearly untenable.


It appears:

(a) that part of the alleged representation expenses had never had any
supporting paper;

(b) that the vouchers and chits covering other representation


expenses had been allegedly destroyed;

(c) that there is no documentary evidence on record of any of the


representation expenses in question;

(d) that no testimonial evidence has been introduced on any specific


item of said alleged expenses;

(e) that there is no more than oral proof to the effect that payments
had been made to appellant's officers for representation expenses
allegedly made by the latter and about the general nature of such
alleged expenses;

(f) that the gross income in 1950 exceeded the gross income in 1951
and 1952, and

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
(g) that the representation expenses in 1948 amounted to P500 only.

Under these circumstances, the lower court was fully justified in


concluding that the representation expenses in 1951 should be slightly
less than those incurred in 1950.
Upon the other hand, appellant has not even tried to show why its
representation expenses in 1951 should be deemed bigger than the
amount allowed by the lower court.
In fact, the latter had been patently fair and reasonable, if not rather
liberal, in allowing appellant to deduct P10,000.00 as representation
expenses for 1951, there being absolutely no concrete evidence of the
sums then actually spent for purposes of representation.
It may not be amiss to note that the explanation to the effect that the
supporting paper of some of those expenses had been destroyed
when the house of the treasurer was burned, can hardly be regarded
as satisfactory, for appellant's records are supposed to be kept in its
offices, not in the residence of one of its officers.

23 Commissioner of Sometime in July, 1950, the late Don Carlos Palanca, Whether or not Yes.
Internal Revenue Sr. deductibility of
In a more recent case, Commissioner of Internal Revenue vs.
"interest on
vs donated in favor of his son, Carlos Palanca, Sr.,
indebtedness" Prieto, we explicitly announced that while the distinction between
shares of stock in La Tondea, Inc.
from a person's "taxes" and "debts" was recognized in this jurisdiction, the variance in
Carlos Palanca,
amounting to 12,500 shares. income tax under their legal conception does not extend to the interests paid on them,
Jr. section 30(b)(1) at least insofar as Section 30(b) (1) of the National Internal Revenue
For failure to file a return on the donation within the extends to Code is concerned.
statutory period, Carlos Palanca, Jr was assessed the "interest on
G.R. No. L-16626 sums of P97,691.23, P24,442.81 and P47,868.70 as taxes." Under the law, for interest to be deductible, it must be shown that
gift tax, 25% surcharge and interest, respectively, or there be an indebtedness, that there should be interest upon it, and
October 29, 1966 a total of P170,002.74, which he paid on June 22, that what is claimed as an interest deduction should have been paid
1955. or accrued within the year.
The year after, Palanca filed with the Bureau of It is here conceded that the interest paid by respondent was in
Internal Revenue his income tax return for the consequence of the late payment of his estate and inheritance, and
calendar year 1955, claiming, among others, a the same was paid within the year it is sought to be deducted.
deduction for interest amounting to P9,706.45 and
The only question to be determined, as stated by the parties, is
reporting a taxable income of P65,982.12.
whether or not such interest was paid upon an indebtedness within
On the basis of this return, he was assessed the sum the contemplation of Section (30) (b) (1) of the Tax Code, the pertinent
of P21,052.91. part of which reads:
Subsequently, Palanca Jr.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
filed an amended return for the calendar year 1955, Sec.
claiming therein an additional deduction in the
30.
amount of P47,868.70 representing interest paid on
the donee's gift tax, thereby reporting a taxable net Deductions from gross income.
income of P18,113.42 and a tax due thereon in the
sum of P3,167.00. In computing net income there shall be allowed as
deductions
The claim for deduction was based on the provisions
of Section 30(b)(1) of the Tax Code, which xxx xxx xxx
authorizes the deduction from gross income of 'Interest:
interest paid within the taxable year on
indebtedness. '(1) In general.

BIR denied the claim for refund. The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or
Morever, BIR considered the transfer of shares of continued to purchase or carry obligations the interest upon
stocks to be a transfer in contemplation of death, so which is exempt from taxation as income under this Title.
Palanca Jr was assessed a sum of P191,591.62 as
estate and inheritance taxes.
On August 12, 1958, Palanca, Jr. The term "indebtedness" as used in the Tax Code of the United States
containing similar provisions as in the above-quoted section has been
once more filed an amended income tax return for defined as the unconditional and legally enforceable obligation for the
the calendar year 1955, claiming, in addition to the payment of money.
interest deduction of P9,076.45 appearing in his
original return, a deduction in the amount of Within the meaning of that definition it is apparent that a tax may be
P60,581.80, representing interest on the estate and considered an indebtedness.
inheritance taxes on the 12,500 shares of stock, It follows that the interest paid by herein respondent for the late
thereby reporting a net taxable income for 1955 in payment of his estate and inheritance tax is deductible from his gross
the amount of P5,400.32 and an income tax due income under Section 30(b) of the Tax Code.
thereon in the sum of P428.00.
Attached to this amended return was a letter of the
petitioner, dated August 11, 1958, wherein he
requested the refund of P20,624.01 which is the
difference between the amounts of P21,052.01 he
paid as income tax under his original return and of
P428.00.
CIR denies his claim for refund.
On appeal, the Court of Tax Appeals, finding that the
amount paid by Palanca for interest on his
delinquent estate and inheritance tax is deductible
from the gross income for that year under section
30(b)(1) of the Revenue Code, ordered the CIR to
refund to the Palanca, Jr.

PART 4 | CORPORATE INCOME TAXATION | 80


CASE TITLE SUMMARY ISSUE/S RULING NOTES
the amount of P20,624.01 representing alleged
overpayment of income taxes for the calendar year
1955.

Hence, the CIR appeals.


The CIR argues that a tax is not an indebtedness.
He adopts the view that debts are due to the
government in its corporate capacity, while taxes
are due to the government in its sovereign capacity.

24 Philex Mining Philex Mining entered into an agreement with WON there is a No.
Corporation Baguio Gold for the former to manage and operate bad debt for
There is no bad debt in this case.
the latters mining claim known as Sto. Philex Mining to
vs treat it as a What the parties actually entered into was a partnership wherein each
Nino mine.
deduction of them was bound to contribute.
Commissioner of
Philex Mining made advancements; however, the
Internal Revenue mine still suffered losses which led to Philex
It is unlikely for a corporation to lend millions of pesos to another
corporation without any collateral or security; there was no stipulation
Minings withdrawal as manager of the mine.
for Baguio Gold to actually repay Philex Mining.
G.R. No. 148187 The parties entered into a compromise with dation
in payment where the assets of Baguio Gold were to
April 16, 2008 be transferred to Philex Mining. The inevitable conclusion is that the advances were not loans but
capital contributions to a partnership.
They can also be called investments.
In its annual income tax return, Philex Mining
deducted from its gross income the amount
representing a loss on settlement of receivables
from Baguio Gold. In sum, Philex Mining cannot claim the advances as bad debt
deduction.
Philex Mining failed to substantiate its assertion that the advances
BIR disallowed the deduction as bad debt and were subsisting debts that could be deducted from its gross income.
assessed Philex Mining a deficiency income tax.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

25 Fernandez A joint decision involving four appeals, this case Cases L-21551 and Cases L-21551 and L-21557
Hermanos, Inc. deals with Fernandez Hermanos Inc., a domestic L-21557
corporation engaging in business as an investment
vs company that was assessed by the Commissioner I. Losses
of Internal Revenue for deficiency income taxes for I.
CIR and CTA 1. For Makati Lumber Co.
the years 1950 to 1954 and for 1957 due to alleged
discrepancies found upon its income tax returns. WON Tax court
-There was an adequate basis for the writing off of the stock
erred in its ruling
as worthless securities for Makati Lumber ceased operations
G.R. No. L-21551 with respect to
and became insolvent.
items of
September 30, Cases L-21551 and L-21557
disallowances
1969
2. Bad debts of Palawan Manganese Mines, Inc.
The items subject to discussion in these two cases
II. Advances made by Fernandez Hermanos Inc to its 100%
are:
subsidiary ( Palawan Manganese) as a form of financial help
WON
a.) Losses, without expectation of repayment were investments and
governments
not loans.
b.) Excessive depreciation of Houses, right to collect the
deficiency income No bad debt could arise where there is no valid and
c.) Taxable increase in net worth and
taxes in question subsisting debt.
d.) Gain realized from sale of real property. has already
It could not be properly considered worthless and
Prescribed. deductible.
The Tax Court sustained Commissioners Furthermore, neither under the Tax Code specifically Sec.
disallowance of the Losses (i.e.
Cases L-24972 and 30 (d) (2) & (e) (1) can there be a partial writing off of a loss
assailed bad debts of Palawan Manganese Mines, L-24978 or bad debt for such are deductible in full or not at all.
Co) and Excessive depreciation but overruled the
3. Balamban Coal Mines
Commissioners disallowances for items in relation
to taxable net worth, gain realized from real WON Tax court - Losses are deductible in 1952 when the mines are
property and losses in connection to Mati Lumber erred in its ruling abandoned since some definite event must fix time when
Co., Balamban Coal Mines, and Hacienda Dalupiri. with respect to loss is sustained i.e.
items of
disallowances - actual abandonment, and not in 1950 & 1951 when they
were still in operation.
Cases L-24972 and L-24978
4. Hacienda Dalupiri & Samal
- It is operated as a business and therefore, entitled to deduct
These cases refer to the taxpayers income tax
expenses and losses based on the inventory method of
liability for the year 1957.
accounting.
The taxpayer insists in this appeal that it could use
II. Depreciation of building
as a method for depletion under the pertinent
provision of the Tax Code its "capital investment" - The taxpayer did not submit any adequate proof so as to
representing the alleged value of its contractual justify its 10% depreciation per annum claim and thus, would
rights and titles to mining claims in the sum of be considered excessive.
P242,408.10 and thus deduct outright one-fifth
(1/5) of this "Capital investment" ever year,

PART 4 | CORPORATE INCOME TAXATION | 82


CASE TITLE SUMMARY ISSUE/S RULING NOTES
regardless of whether it had actually mined the III. Taxable increase in net worth
product and sold the products.
- Increase in net worth are not taxable if they are shown not
The Tax court overruled the Commissioners to be the result of unreported income but to be the result of
disallowance of the taxpayers losses in the the correction of errors in the taxpayers entries in the books
operation of its Hacienda Dalupiri but sustained relating to indebtedness to certain creditors, erroneously
disallowance of 1/5 cost of the contractual right listed although already paid.
over mines of its subsidiary- Palawan Mines.
IV. Prescription
- The governments right to collect taxes due has not
prescribed as taxpayers appeal was file with the Tax Court
long before the expiration of the 5-year period.

Cases L-24972 and L-24978


Losses- The hybrid method used by the petitioner is with justification
for if a tax payer is engaged in more than one trade or business, he
may use a different method of accounting for each trade.
He may report income from a business on accrual basis and personal
income on the cash basis.

The alleged "capital investment" method invoked by the taxpayer is


not a method of depletion, but the Tax Code provision, prior to its
amendment by Section 1 of Republic Act No.
2698, which took effect on June 18, 1960, expressly provided that
"when the allowances shall equal capital invested .

no further allowances shall be made;" in other words, the "capital


investment" was but the limitation of the amount of depletion that
could be claimed.
The outright deduction by the taxpayer of 1/5 of the cost of the mines,
as if it were a "straight line" rate of depreciations was correctly held
by the Tax Court not to be authorized by the Tax Code.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

26 Consolidated The BIR and Consolidated Mines got into a long and 1. 1. 1.
Mines, Inc. complicated court case over how to properly
WON the No. Rate of Mine
compute the companys net income.
vs company was Depletion
The company was consistent in using accrual method.
using a hybrid
CTA and CIR method of The issue was a misunderstanding by the BIR of the terminology used
The Consolidated Mines, Inc.
accounting rather by the company. 2.
(aka. than accrual.
Amount of
G.R. Nos. 2.
Company), a domestic corporation engaged in Depreciation
Here we distinguish between (1) the method of accounting used by the
L-18843 and L- mining, filed its income tax returns for 1951, 1952, Expense
The proper Company in determining its net income for tax purposes; and (2) the
18844 1953 and 1956.
amount of mine method of computation agreed upon between the Company and
August 29, 1974 In 1957, BIR investigated the income tax returns depletion expense Benguet in determining the amount of compensation that was to be
filed by the Company because it claimed the refund paid by the former to the latter.
3.
of the sum of P107,472.00 representing alleged
The parties, being free to do so, had contracted that in the method of
overpayments of income taxes for the year 1951. The amount of
computing compensation the basis were "cash receipts" and "cash
depreciation
payments." Once determined in accordance with the stipulated bases
expense.
and procedure, then the amount due Benguet for each month accrued
BIR found that (A) for the years 1951 to 1954 (1) the
4. at the end of that month, whether the Company had made payment
Company had not accrued as an expense the share
or not (see par.
in the company profits of Benguet Consolidated Disallowance of
Mines as operator of the Company's mines, payments made XIV of the agreement).
although for income tax purposes the Company had as expenses.
To make the Company deduct as an expense one-half of the "Accounts
reported income and expenses on the accrual basis;
Receivable" would, in effect, be equivalent to giving Benguet a right
(2) depletion and depreciation expenses had been
which it did not have under the contract, and to substitute for the
overcharged; and (3) the claims for audit and legal
parties' choice a mode of computation of compensation not
fees and miscellaneous expenses for 1953 and 1954
contemplated by them.
had not been properly substantiated; and that (B)
for the year 1956 (1) the Company had overstated Since Benguet had no right to one-half of the "Accounts Receivable,"
its claim for depletion; and (2) certain claims for the Company was correct in not accruing said one-half as a deduction.
miscellaneous expenses were not duly supported by
evidence. The Company was not using a hybrid method of accounting, but was
consistent in its use of the accrual method of accounting.

Tax Court rendered judgment ordering the


Company to pay the amounts of P107,846.56, 2.
P134,033.01 and P71,392.82 as deficiency income The company failed to properly substantiate its mine development
taxes for the years 1953, 1954 and 1956, costs, so very little depletion expense was allowed
respectively and nullified the assessments for 1951
and 1952 because of prescription.
3.

Upon motion, Tax Court further reduced the You cannot ascribe depreciation from incomplete constructions,
deficiency income tax liabilities of the Company to because being incomplete; they havent even begun to be used yet.

PART 4 | CORPORATE INCOME TAXATION | 84


CASE TITLE SUMMARY ISSUE/S RULING NOTES
P79,812.93, P51,528.24 and P71,382.82 for the 4.
years 1953, 1954 and 1956, respectively.
You are supposed to prove payments with receipts from the payees,
internal company vouchers and testimony only prove that such
expenses were incurred, not that they are legally deductible.
Both the Company and CIR appealed questioning
the method of computing the income.
The Company used the accrual method of
accounting in computing its income.
One of its expenses is the amount paid to Benguet
as mine operator, which amount is computed as
50% of "net income." The Company deducts as an
expense 50% of cash receipts minus disbursements,
but does not deduct at the end of each calendar
year what the Commissioner alleges is "50% of the
share of Benguet" in the "accounts receivable."
However, it deducts Benguet's 50% if and when the
"accounts receivable" are actually paid.
It would seem, therefore, that the Company has
been deducting a portion of this expense (Benguet's
share as mine operator) on the "cash & carry" basis.

PART 4 | CORPORATE INCOME TAXATION | 85


CASE TITLE SUMMARY ISSUE/S RULING NOTES

27 Antonio Roxas, Don Pedro Roxas and Dona Carmen Ayala, Spanish (1) Is the gain (1) NO.
Eduardo Roxas, subjects, transmitted to their grandchildren by derived from the
and hereditary succession the following properties: sale of the
Nasugbu farm In fine, Roxas y Cia.
Roxas Y CIA lands an ordinary
gain, hence 100% cannot be considered a real estate dealer for the sale in question.
(1) Agricultural lands with a total area of 19,000
vs hectares, situated in the municipality of Nasugbu, taxable? Hence, pursuant to Section 34 of the Tax Code the lands sold to the
CTA and CIR Batangas province; farmers are capital assets, and the gain derived from the sale thereof
is capital gain, taxable only to the extent of 50%.
(2) Are the
(2) A residential house and lot located at Wright St., deductions for
G.R. NO. L-25043
Malate, Manila; and business expenses It should be borne in mind that the sale of the Nasugbu farm lands to
April 26, 1968 and contributions the very farmers who tilled them for generations was not only in
deductible? consonance with, but more in obedience to the request and pursuant
(3) Shares of stocks in different corporations. to the policy of our Government to allocate lands to the landless.

(3) Is Roxas y Cia. It was the bounden duty of the Government to pay the agreed
compensation after it had persuaded Roxas y Cia.
To manage the above-mentioned properties, said liable for the
children, namely, Antonio Roxas, Eduardo Roxas payment of the to sell its haciendas, and to subsequently subdivide them among the
and Jose Roxas, formed a partnership called Roxas y fixed tax on real farmers at very reasonable terms and prices.
Compania. estate dealers? However, the Government could not comply with its duty for lack of
funds.
Agricultural Land Obligingly, Roxas y Cia.
shouldered the Government's burden, went out of its way and sold
lands directly to the farmers in the same way and under the same
In consonance with the constitutional mandate to
terms as would have been the case had the Government done it itself.
acquire big landed estates and apportion them
among landless tenants-farmers, the government
persuaded the Roxas brothers to part with their
(2) Tickets to a banquet in honor of Sergio Osmena and San Miguel
landholdings.
Beer given to various persons NOT DEDUCTIBLE

It turned out however that the Government did not


Representation expenses are deductible from gross income as
have funds to cover the purchase price, and so a
expenditures incurred in carrying on a trade or business under
special arrangement was made for the
Section 30(a) of the Tax Code provided the taxpayer proves that
Rehabilitation Finance Corporation to advance to
they are reasonable in amount, ordinary and necessary, and
Roxas y Cia.
incurred in connection with his business.
the amount of P1,500,000.00 as loan.
In the case at bar, the evidence does not show such link between
Collateral for such loan were the lands proposed to the expenses and the business of Roxas y Cia.
be sold to the farmers.
Under the arrangement, Roxas y Cia.

PART 4 | CORPORATE INCOME TAXATION | 86


CASE TITLE SUMMARY ISSUE/S RULING NOTES
allowed the farmers to buy the lands for the same The contributions to the Christmas funds of the Pasay City Police,
price but by installment, and contracted with the Pasay City Firemen and Baguio City Police NOT DEDUCTIBLE
Rehabilitation Finance Corporation to pay its loan
from the proceeds of the yearly amortizations paid
by the farmers. for the reason that the Christmas funds were not spent for public
purposes but as Christmas gifts to the families of the members of
said entities.
In 1953 and 1955 Roxas y Cia.
Under Section 39(h), a contribution to a government entity is
derived from said installment payments a net gain deductible when used exclusively for public purposes.
of P42,480.83 and P29,500.71.
Fifty percent of said net gain was reported for
The contribution to the Manila Police trust fund-DEDUCTIBLE
income tax purposes as gain on the sale of capital
asset held for more than one year pursuant to
Section 34 of the Tax Code.
is an allowable deduction for said trust fund belongs to the
Manila Police, a government entity, intended to be used
exclusively for its public functions.
Residential House

The contributions to the Philippines Herald's fund for Manila's


During their bachelor days the Roxas brothers lived
neediest families- DEDUCTIBLE
in the residential house at Wright St., Malate,
Manila, which they inherited from their
grandparents.
It should be noted however that the contributions were not made
After Antonio and Eduardo got married, they to the Philippines Herald but to a group of civic spirited citizens
resided somewhere else leaving only Jose in the old organized by the Philippines Herald solely for charitable
house. purposes.
In fairness to his brothers, Jose paid to Roxas y Cia. There is no question that the members of this group of citizens
do not receive profits, for all the funds they raised were for
rentals for the house in the sum of P8,000.00 a year.
Manila's neediest families.
Such a group of citizens may be classified as an association
Assessments organized exclusively for charitable purposes mentioned in
Section 30(h) of the Tax Code.

On June 17, 1958, the Commissioner of Internal


Revenue demanded from Roxas y Cia the payment The contribution to Our Lady of Fatima chapel at the Far Eastern
of real estate dealer's tax for 1952 in the amount of University- NOT DEDUCTIBLE
P150.00 plus P10.00 compromise penalty for late
payment, and P150.00 tax for dealers of securities
for 1952 plus P10.00 compromise penalty for late said university gives dividends to its stockholders.
payment.

PART 4 | CORPORATE INCOME TAXATION | 87


CASE TITLE SUMMARY ISSUE/S RULING NOTES
The assessment for real estate dealer's tax was (3) YES.
based on the fact that Roxas y Cia.
received house rentals from Jose Roxas in the
Section 194 of the Tax Code, in considering as real estate dealers
amount of P8,000.00.
owners of real estate receiving rentals of at least P3,000.00 a
year, does not provide any qualification as to the persons paying
the rentals.
The Commissioner of Internal Revenue justified his
demand for the fixed tax on dealers of securities The law, which states:
against Roxas y Cia., on the fact that said
partnership made profits from the purchase and
sale of securities. .
.
In the same assessment, the Commissioner .
assessed deficiency income taxes against the Roxas
Brothers for the years 1953 and 1955. "Real estate dealer" includes any person engaged in the business
of buying, selling, exchanging, leasing or renting property on 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
The deficiency income taxes resulted from the
properties rented or offered to rent for an aggregate amount of
inclusion as income of Roxas y Cia.
three thousand pesos or more a year: .
of the unreported 50% of the net profits for 1953
.
and 1955 derived from the sale of the Nasugbu farm
lands to the tenants, and the disallowance of .
deductions from gross income of various business
expenses and contributions claimed by Roxas y Cia.
and the Roxas brothers. is too clear and explicit to admit construction.

For the reason that Roxas y Cia. The findings of the Court of Tax Appeals or, this point is sustained.

subdivided its Nasugbu farm lands and sold them to


the farmers on installment, the Commissioner WHEREFORE, the decision appealed from is modified.
considered the partnership as engaged in the
business of real estate, hence, 100% of the profits Roxas y Cia.
derived therefrom was taxed. is hereby ordered to pay the sum of P150.00 as real estate dealer's
fixed tax for 1952.

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28 Eufemia The petitioners sought for the reversal of the WON petitioners YES.
Evangelista et. decision of the Court of Tax Appeals which held have established
Petitioners have agreed to contribute and did contribute money to a
al. them liable for income tax, real estate dealers tax a partnership and
common fund for the purpose of engaging in real estate transactions
and residence tax for the real properties (parcels of are subject to tax
for monetary gain and divide the same among themselves because of
vs land) they bought within February 1943 to April on corporations
the following observations, among others: (1) Said common fund was
1994 from different persons, whose management under Section 24
The Collector of not something they found already in existence; (2)They invested the
of said properties was charged to their brother of the NIRC
Internal Revenue same, not merely in one transaction, but in a series of transactions; (3)
Simeon, and which were subsequently rented out to
and the CTA The aforesaid lots were not devoted to residential purposes, or to
various tenants from the year 1945-1949.
other personal uses, of petitioners herein.
Petitioners submit that they are mere co-owners of
the properties, not co-partners because some of the
G.R. No. L-9996
characteristics of partnership are not present, Petitioners argument that their being mere co-owners did not create
October 15, 1957 therefore, no legal entity with a personality a separate legal entity was rejected because, according to the Court,
separate from that of the members exists, and thus the tax in question is one imposed upon "corporations", which, strictly
they are excluded from the coverage of Section 24 speaking, are distinct and different from "partnerships".
of the National Internal Revenue Code of the
Philippines. When the NIRC includes "partnerships" among the entities subject to
the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the
technical sense of the term.
The qualifying expression found in Section 24 and 84(b) 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.
Accordingly, the lawmaker could not have regarded that personality
as a condition essential to the existence of the partnerships therein
referred to.

For purposes of the tax on corporations, NIRC includes these


partnerships - with the exception only of duly registered general co
partnerships - within the purview of the term "corporation." It is,
therefore, clear that petitioners herein constitute a partnership,
insofar as said Code is concerned and are subject to the income tax for
corporations.

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29 Alexander The Commonwealth Insurance Co., a domestic 1. 1.


Howden and Co., corporation, entered into reinsurance contracts
Whether or not Yes.
Ltd., H.G. with 32 British insurance companies not engaged in
the portions of
trade or business in the Philippines, whereby the Section 24 of the National Internal Revenue Code subjects to tax a non-
Chester and premiums earned
former agreed to cede to them a portion of the resident foreign corporation's income from sources within the
Others, et. al. premiums on insurances on fire, marine and other
from insurances
Philippines.
locally
vs risks it has underwritten in the Philippines.
underwritten by a
Commissioner of Alexander Howden & Co., Ltd., also a British domestic
corporation not engaged in business in this country, corporation, The reinsurance premiums remitted to appellants by virtue of the
Internal Revenue reinsurance contracts, accordingly, had for their source the
represented the aforesaid British insurance ceded to and
companies. received by non- undertaking to indemnify Commonwealth Insurance Co.
resident foreign against liability.
G.R. L-19392, April The reinsurance contracts were prepared and
reinsurance
14, 1965 signed by the foreign reinsurers in England and sent Said undertaking is the activity that produced the reinsurance
companies, thru a
to Manila where Commonwealth Insurance Co. premiums, and the same took place in the Philippines.
non-resident
signed them. foreign insurance In the first place, the reinsured, the liabilities insured and the risks
broker, pursuant originally underwritten by Commonwealth Insurance Co., upon which
to reinsurance the reinsurance premiums and indemnity were based, were all
Pursuant to the aforesaid contracts, contracts signed situated in the Philippines.
Commonwealth Insurance Co., in 1951, remitted by the reinsurers
P798,297.47 to Alexander Howden & Co., Ltd., as abroad but signed Secondly, contrary to appellants' view, the reinsurance contracts were
reinsurance premiums. by the domestic perfected in the Philippines, for Commonwealth Insurance Co.
corporation in the signed them last in Manila.
In behalf of Alexander Howden & Co., Ltd., Philippines,
Commonwealth Insurance Co. subject to income And, thirdly, the parties to the reinsurance contracts in question
filed in April 1952 an income tax return declaring the tax or not. evidently intended Philippine law to govern.
sum of P798,297.47, with accrued interest thereon
in the amount of P4,985.77, as Alexander Howden
& Co., Ltd.'s gross income for calendar year 1951. 2. Yes.

It also paid the Bureau of Internal Revenue If subject thereto, Section 53 subjects to withholding tax various specified income,
P66,112.00 income tax thereon. whether or not among them, "premiums", the generic connotation of each and every
they are subject word or phrase composing the enumeration in Subsection (b) thereof
to withholding tax is income.
On May 12, 1954, within the two-year period under Section 54
Perforce, the word "premiums", which is neither qualified nor defined
provided for by law, Alexander Howden & Co., Ltd. in relation to
by the law itself, should mean income and should include all premiums
Section 53 of the
filed with the Bureau of Internal Revenue a claim for constituting income, whether they be insurance or reinsurance
Tax Code.
refund of the P66,112.00, later reduced to premiums.
P65,115.00, because Alexander Howden & Co., Ltd.
agreed to the payment of P977.00 as income tax on Assuming that reinsurance premiums are not within the word
the P4,985.77 accrued interest. "premiums" in Section 53, still they may be classified as determinable
But the said claim was denied. and periodical income under the same provision of law.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
Reinsurance premiums, therefore, are determinable and periodical
income: determinable, because they can be calculated accurately on
the basis of the reinsurance contracts; periodical, inasmuch as they
were earned and remitted from time to time.

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30 Marubeni The dividends received by Marubeni Corporation 1. 1.


Corporation from Atlantic Gulf and Pacific Co.
Whether or not NO.
vs are not income arising from the business activity in the dividends
Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits
which Marubeni Corporation (head office) is Marubeni
remitted abroad by a branch office to its head office which are
CIR and CTA engaged. Corporation
effectively connected with its trade or business in the Philippines are
received from
Accordingly, said dividends if remitted abroad are subject to the 15% profit remittance tax.
Atlantic Gulf and
not considered branch profits subject to Branch
G.R. No. 76573 Pacific Co. The dividends received by Marubeni Corporation from Atlantic Gulf
Profit Remittance Tax.
and Pacific Co.
September 14, are effectively
1989 connected with its are not income arising from the business activity in which Marubeni
Take Note: In this case, Marubeni Japan (head conduct or Corporation is engaged.
office) was the investor of AG andP Co. business in the
Philippines as to Accordingly, said dividends if remitted abroad are not considered
Manila, not the branch office of Marubeni in Manila. be considered branch profits for purposes of the 15% profit remittance tax imposed
branch profits by Section 24(b)(2) of the Tax Code, as amended.
subject to 15%
Marubeni Corporation is a Japanese corporation profit remittance
licensed to engage in business in the Philippines. tax imposed 2.
When the profits on Marubenis investments in under Section Marubeni Corporation is a non-resident foreign corporation, with
Atlantic Gulf and Pacific Co. 24(b)(2) of the respect to the transaction.
National Internal
of Manila were declared, a 10% final dividend tax Revenue Code. Marubeni Corporations head office in Japan is a separate and distinct
was withheld from it, and another 15% profit income taxpayer from the branch in the Philippines.
remittance tax based on the remittable amount
The investment on Atlantic Gulf and Pacific Co.
after the final 10% withholding tax were paid to the 2.
Bureau of Internal Revenue. was made for purposes peculiarly germane to the conduct of the
Whether corporate affairs of Marubeni Corporation in Japan, but certainly not
Marubeni Corp. Marubeni of the branch in the Philippines.
now claims for a refund or tax credit for the amount Corporation is a
which it has allegedly overpaid the BIR. resident or non-
resident foreign
corporation.

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31 Chamber of Real Chamber of Real Estate and Builders Associations, Whether or not No, Under RR 2-98, the tax base of the income tax from the sale of real
Estate and Inc. the imposition of property classified as ordinary assets remains to be the entitys net
Builders CWT on income income imposed under Section 24 (resident individuals) or Section 27
is questioning the constitutionality of Section 27 (E)
from sales of real (domestic corporations) in relation to Section 31 of RA 8424, i.e.
Associations, Inc. of Republic Act (RA) 8424 and the revenue
properties
regulations (RRs) issued by the Bureau of Internal gross income less allowable deductions.
vs classified as
Revenue (BIR) to implement said provision and
ordinary assets The CWT is to be deducted from the net income tax payable by the
The Hon. those involving creditable withholding taxes.
under RRs 2-98, 6- taxpayer at the end of the taxable year.
Executive 2001 and 7-2003,
Secretary is Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax
Petitioner also seeks to nullify Sections 2.57.2(J) (as unconstitutional. base for the sale of real property classified as ordinary assets remains
Alberto Romulo,
amended by RR 6-2001) and 2.58.2 of RR 2-98, and to be the net taxable income.
the Hon. Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which
Acting Secretary prescribe the rules and procedures for the
of Finance collection of creditable withholding tax (CWT) on Final withholding Tax (FWT) is imposed on the sale of capital assets.
the sale of real properties categorized as ordinary
Juanita D. On the other hand, CWT is imposed on the sale of ordinary assets.
assets.
Amatong, and
Petitioner contends that these revenue regulations The inherent and substantial differences between FWT and CWT
the Hon. CIR
are contrary to law for two reasons: first, they disprove petitioners contention that ordinary assets are being lumped
Guillermo together with, and treated similarly as, capital assets in contravention
Parayno, Jr. ignore the different treatment by RA 8424 of
ordinary assets and capital assets and second, of the pertinent provisions of RA 8424.
respondent Secretary of Finance has no authority to
collect CWT, much less, to base the CWT on the
G.R. No. 160756 The fact that the tax is withheld at source does not automatically mean
gross selling price or fair market value of the real
March 9, 2010 properties classified as ordinary assets. that it is treated exactly the same way as capital gains.
As aforementioned, the mechanics of the FWT are distinct from those
of the CWT.
The withholding agent/buyers act of collecting the tax at the time of
the transaction by withholding the tax due from the income payable is
the essence of the withholding tax method of tax collection.

PART 4 | CORPORATE INCOME TAXATION | 93


CASE TITLE SUMMARY ISSUE/S RULING NOTES

32 Commissioner of On two occasions, Wander filed its withholding tax Whether or not YES.
Internal Revenue return and remitted to its parent company (Glaro Wander is
Section 24 (b) (1) of the Tax Code as amended provides that the
S.A. entitled to the
vs dividends received from a domestic corporation liable to tax shall be
preferential rate
Ltd, a Swiss Corporation not engaged in trade or 15% of the dividends received, subject to the condition that the
of 15%
Wander business in the Philippines) dividends on which 35% country in which the non-resident foreign corporation is domiciled
withholding tax
Philippines, Inc. withholding tax was withheld and paid to the BIR. shall allow a credit against the tax due from the non-resident foreign
on dividends
corporation taxes deemed to have been paid in the Philippines
and the Court of Later, Wander filed a claim for refund and/or tax declared and
equivalent to 20% which represents the difference between the
credit contending that it is liable only to 15% remitted to its
Tax Appeals regular tax (35%) in corporations and the tax (15%) dividends.
withholding tax in accordance with Section 24 (b) (1) parent
of the Tax Code as amended by PD 369 and 778. corporation,
Glaro.
G.R. No. L-68375 In this case, Switzerland did not impose any tax on the dividends
received by Glaro from the Philippines.
April 15, 1988
It follows then that the condition imposed under the above-
mentioned section is satisfied.
Hence, Wander is entitled to 15% withholding tax rate and the BIR
should make a refund and/or tax credit.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES

33 Cyanamid Petitioner, Cyanamid Philippines, Inc., a corporation WHETHER THE Sec.


Philippines, Inc. organized under Philippine laws, is a wholly owned RESPONDENT
259 of the old National Internal Revenue Code of 1977.
subsidiary of American Cyanamid Co. COURT ERRED IN
vs HOLDING THAT The provision discouraged tax avoidance through corporate surplus
based in Maine, USA.
THE PETITIONER accumulation.
CA, CTA, and CIR
It is engaged in the manufacture of pharmaceutical IS LIABLE FOR THE
ACCUMULATED When corporations do not declare dividends, income taxes are not
products and chemicals, a wholesaler of imported
EARNINGS TAX paid on the undeclared dividends received by the shareholders.
finished goods, and an importer/indentor.
G.R. No. 108067 FOR THE YEAR The tax on improper accumulation of surplus is essentially a penalty
January 20, 2000 1981.8 tax designed to compel corporations to distribute earnings so that the
On February 7, 1985, the CIR sent an assessment said earnings by shareholders could, in turn, be taxed.
letter to petitioner and demanded the payment of
deficiency income tax of one hundred nineteen
thousand eight hundred seventeen (P119,817.00) Relying on decisions of the American Federal Courts, petitioner
pesos for taxable year 1981. stresses that the accumulated earnings tax does not apply to
Cyanamid, a wholly owned subsidiary of a publicly owned company.10
Specifically, petitioner citesGolconda Mining Corp.
On March 4, 1985, petitioner protested the
vs.
assessments particularly, (1) the 25% Surtax
Assessment of P3,774,867.50; (2) 1981 Deficiency Commissioner, 507 F.2d 594, whereby the U.S.
Income Assessment of P119,817.00; and 1981
Deficiency Percentage Assessment of P8,846.72.4 Ninth Circuit Court of Appeals had taken the position that the
Petitioner, through its external accountant, Sycip, accumulated earnings tax could only apply to a closely held
Gorres, Velayo & Co., claimed, among others, that corporation.
the surtax for the undue accumulation of earnings
was not proper because the said profits were
retained to increase petitioner's working capital and The amendatory provision of Section 25 of the 1977 NIRC, which was
it would be used for reasonable business needs of PD 1739, enumerated the corporations exempt from the imposition of
the company. improperly accumulated tax: (a) banks; (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations
Petitioner contended that it availed of the tax organized primarily and authorized by the Central Bank of the
amnesty under Executive Order No. Philippines to hold shares of stocks of banks.
41, hence enjoyed amnesty from civil and criminal Petitioner does not fall among those exempt classes.
prosecution granted by the law.
Besides, the rule on enumeration is that the express mention of one
person, thing, act, or consequence is construed to exclude all others.13
On October 20, 1987, the CIR in a letter addressed Laws granting exemption from tax are construed strictissimi juris
to SGV & Co., refused to allow the cancellation of against the taxpayer and liberally in favor of the taxing power.14
the assessment notices and rendered its resolution. Taxation is the rule and exemption is the exception.15 The burden of
proof rests upon the party claiming exemption to prove that it is, in
fact, covered by the exemption so claimed,16 a burden which
petitioner here has failed to discharge.
Petitioner appealed to the Court of Tax Appeals.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
During the pendency of the case, however, both Another point raised by the petitioner in objecting to the assessment,
parties agreed to compromise the 1981 deficiency is that increase of working capital by a corporation justifies
income tax assessment of P119,817.00. accumulating income.
Petitioner paid a reduced amount twenty-six Petitioner asserts that respondent court erred in concluding that
thousand, five hundred seventy-seven pesos Cyanamid need not infuse additional working capital reserve because
(P26,577.00) as compromise settlement. it had considerable liquid funds based on the 2.21:1 ratio of current
assets to current liabilities.
However, the surtax on improperly accumulated
profits remained unresolved. Petitioner relies on the so-called "Bardahl" formula, which allowed
retention, as working capital reserve, sufficient amounts of liquid
assets to carry the company through one operating cycle.
Petitioner claimed that CIR's assessment
The "Bardahl"17 formula was developed to measure corporate
representing the 25% surtax on its accumulated
liquidity.
earnings for the year 1981 had no legal basis for the
following reasons: (a) petitioner accumulated its The formula requires an examination of whether the taxpayer has
earnings and profits for reasonable business sufficient liquid assets to pay all of its current liabilities and any
requirements to meet working capital needs and extraordinary expensesreasonably anticipated, plus enough to
retirement of indebtedness; (b) petitioner is a operate the business during one operating cycle.
wholly owned subsidiary of American Cyanamid
Operating cycle is the period of time it takes to convert cash into raw
Company, a corporation organized under the laws
materials, raw materials into inventory, and inventory into sales,
of the State of Maine, in the United States of
including the time it takes to collect payment for the
America, whose shares of stock are listed and
traded in New York Stock Exchange. sales.18
This being the case, no individual shareholder
income taxes by petitioner's accumulation of
earnings and profits, instead of distribution of the Using this formula, petitioner contends, Cyanamid needed at least
same. P33,763,624.00 pesos as working capital.
As of 1981, its liquid asset was only P25,776,991.00.
Thus, petitioner asserts that Cyanamid had a working capital deficit of
P7,986,633.00.19 Therefore, the P9,540,926.00 accumulated income
as of 1981 may be validly accumulated to increase the petitioner's
working capital for the succeeding year.

We note, however, that the companies where the "Bardahl" formula


was applied, had operating cycles much shorter than that of
petitioner.
In Atlas Tool Co., Inc, vs.
CIR,20 the company's operating cycle was only 3.33 months or 27.75%
of the year.
In Cataphote Corp.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
of Mississippi vs.
United States,21 the corporation's operating cycle was only 56.87 days,
or 15.58% of the year.
In the case of Cyanamid, the operating cycle was 288.35 days, or
78.55% of a year, reflecting that petitioner will need sufficient liquid
funds, of at least three quarters of the year, to cover the operating
costs of the business.
There are variations in the application of the "Bardahl" formula, such
as average operating cycle or peak operating cycle.
In times when there is no recurrence of a business cycle, the working
capital needs cannot be predicted with accuracy.
As stressed by American authorities, although the "Bardahl" formula
is well-established and routinely applied by the courts, it is not a
precise rule.
It is used only for administrative convenience.22 Petitioner's
application of the "Bardahl" formula merely creates a false illusion of
exactitude.

Other formulas are also used, e.g.


the ratio of current assets to current liabilities and the adoption of the
industry standard.23 The ratio of current assets to current liabilities is
used to determine the sufficiency of working capital.
Ideally, the working capital should equal the current liabilities and
there must be 2 units of current assets for every unit of current
liability, hence the so-called "2 to 1" rule.24

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 year's 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.

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If the CIR determined that the corporation avoided the tax on


shareholders by permitting earnings or profits to accumulate, and the
taxpayer contested such a determination, the burden of proving the
determination wrong, together with the corresponding burden of first
going forward with evidence, is on the taxpayer.
This applies even if the corporation is not a mere holding or
investment company and does not have an unreasonable
accumulation of earnings or profits.27

In order to determine whether profits are accumulated for the


reasonable needs to avoid the surtax upon shareholders, it must be
shown that the controlling intention of the taxpayer is manifest at the
time of accumulation, not intentions declared subsequently, which are
mere afterthoughts.28 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.

In the present case, the Tax Court opted to determine the working
capital sufficiency by using the ratio between current assets to current
liabilities.
The working capital needs of a business depend upon nature of the
business, its credit policies, the amount of inventories, the rate of the
turnover, the amount of accounts receivable, the collection rate, the
availability of credit to the business, and similar factors.
Petitioner, by adhering to the "Bardahl" formula, failed to impress the
tax court with the required definiteness envisioned by the statute.
We agree with the tax court that the burden of proof to establish that
the profits accumulated were not beyond the reasonable needs of the
company, remained on the taxpayer.
This Court will not set aside lightly the conclusion reached by the Court
of Tax Appeals which, by the very nature of its function, is dedicated
exclusively to the consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse
or improvident exercise of authority.31 Unless rebutted, all
presumptions generally are indulged in favor of the correctness of the
CIR's assessment against the taxpayer.

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CASE TITLE SUMMARY ISSUE/S RULING NOTES
With petitioner's failure to prove the CIR incorrect, clearly and
conclusively, this Court is constrained to uphold the correctness of tax
court's ruling as affirmed by the Court of Appeals.

WHEREFORE, the instant petition is DENIED, and the decision of the


Court of Appeals, sustaining that of the Court of Tax Appeals, is hereby
AFFIRMED.
Costs against petitioner.
SO ORDERED.

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