REV. FR. CASIMIRO LLADOC v.

CIR and CTA

(14 SCRA 202)Date: June 16, 1965

Facts:
In 1957, the M.B. Estate, Inc. in Bacolod City donated P10,000 in case to Rev. Fr. Crispin Ruiz, the then parish priest
of Victorias, Negros Occidental and the predecessor of Rev. Fr. Casimiro Lladoc, for the construction of a new
Catholic Church. The total amount was actually spent for the purpose intended. On March 1958, M.B. Estate filed a
donors gift tax return. Subsequently, on April 1960, the CIR issued an assessment for donees gift tax in the amount
of P1,370 including surcharges, interest of 1% monthly from May 1958 to June 1960 and the compromise for the late
filing of the return against the Catholic Parish of Victorias, Negros Occidental of which Lladoc was a priest. Lladoc
protested and moved to reconsider but it was denied. He then appealed to the CTA, in his petition for review, he
claimed that at the time of the donation, he was not the parish priest, thus, he is not liable. Moreover, he asserted that
the assessment of the gift tax, even against the Roman Catholic Church, would not be valid, for such would-be a clear
violation of the Constitution. The CTA ruled in favor of the CIR. Hence, the present petition.

Issue:
WON donees gift tax should be paid

Held:
Yes.

Ratio:
Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation cemeteries, churches and
parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious
purposes. The exemption is only from the payment of taxes assessed on such properties enumerated, as property taxes,
as contra distinguished from excise taxes. In the present case, what the Collector assessed was a donee's gift tax;
the assessment was not on the properties themselves. It did not rest upon general ownership; it was an excise upon the
use made of the properties, upon the exercise of the privilege of receiving the properties. Manifestly, gift tax is not
within the exempting provisions of the section just mentioned. A gift tax is not a property tax, but an excise tax
imposed on the transfer of property by way of gift inter vivos, the imposition of which on property used exclusively
for religious purposes, does not constitute an impairment of the Constitution. As well observed by the learned
respondent Court, the phrase "exempt from taxation," as employed in the Constitution should not be interpreted to
mean exemption from all kinds of taxes. And there being no clear, positive or express grant of such privilege by law,
in favor of Lladoc, the exemption herein must be denied.

However, the Court noted the merit of Lladocs claim, and held as liable the Head of Deocese for being the real party
in interest instead of Lladoc who was held to be not personally liable; the former manifested that it was submitting
himself to the jurisdiction and orders of the Court and he presented Lladocs brief, by reference, as his own and for all
purposes.
 Abra Valley College v. Aquino (162 SCRA 106 [1988])

FACTS:
Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities
and Exchange Commission in 1948, filed a complaint to annul and declare void the Notice of Seizure and the Notice
of Sale of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and penalties amounting
to P5,140.31. Said Notice of Seizure by respondents Municipal Treasurer and Provincial Treasurer, defendants
below, was issued for the satisfaction of the said taxes thereon. The parties entered into a stipulation of facts adopted
and embodied by the trial court in its questioned decision. The trial court ruled for the government, holding that the
second floor of the building is being used by the director for residential purposes and that the ground floor used and
rented by Northern Marketing Corporation, a commercial establishment, and thus the property is not being used
exclusively for educational purposes. Instead of perfecting an appeal, petitioner availed of the instant petition for
review on certiorari with prayer for preliminary injunction before the Supreme Court, by filing said petition on 17
August 1974.

ISSUE:
Whether or not the lot and building are used exclusively for educational purposes.

HELD:
Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, expressly grants exemption from realty
taxes for cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable or educational purposes.

Reasonable emphasis has always been made that the exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main purposes. The use of the school building or lot for
commercial purposes is neither contemplated by law, nor by jurisprudence. In the case at bar, the lease of the first floor
of the building to the Northern Marketing Corporation cannot by any stretch of the imagination be considered
incidental to the purpose of education. The test of exemption from taxation is the use of the property for purposes
mentioned in the Constitution. The decision of the CFI Abra (Branch I) is affirmed subject to the modification that half
of the assessed tax be returned to the petitioner. The modification is derived from the fact that the ground floor is being
used for commercial purposes (leased) and the second floor being used as incidental to education (residence of the
director).
 BISHOP OF NUEVA SEGOVIA vs. PROVINCIAL BOARD OF ILOCOS
G.R. No. L-27588 December 31, 1927

FACTS:
The Roman Catholic Apostolic Church is the owner of a parcel of land in San Nicolas, locos Norte. On the south side
is a part of the Church yard, the convent and an adjacent lost used for a vegetable garden in which there is a stable and
a well for the use of the convent. In the center is the remainder of the churchyard and the Church. On the north side is
an old cemetery with its two walls still standing, and a portion where formerly stood a tower.
The provincial board assessed land tax on lots comprising the north and south side, which the church paid under
protest. It filed suit to recover the amount.

ISSUE:
Whether or not the lots are covered by the Churchs tax exemption.

HELD:
The exemption in favor of the convent in the payment of land tax refers to the home of the priest who presides over the
church and who has to take care of himself in order to discharge his duties. The exemption includes not only the land
actually occupied by the Church but also the adjacent ground destined to the ordinary incidental uses
of mama vegetable garden, thus, which belongs to a convent, where its use is limited to the necessity of the priest,
comes under the exemption. Further, land used as a lodging house by the people who participate in religious festivities,
which constitutes an incidental use in religious functions, likewise comes within the exemption. It cannot be taxed
according to its former use, i.e. a cemetery.
 LUNG CENTER OF THE PHILIPPINES VS QUEZON CITY
G.R. No. 144104, June 29, 2004 [Constitutional Law - Article VI: Legislative Department; Taxation ]

FACTS:
Petitioner is a non-stock, non-profit entity established by virtue of PD No. 1823, seeks exemption from real property
taxes when the City Assessor issued Tax Declarations for the land and the hospital building. Petitioner predicted on its
claim that it is a charitable institution. The request was denied, and a petition hereafter filed before the Local Board of
Assessment Appeals of Quezon City (QC-LBAA) for reversal of the resolution of the City Assessor. Petitioner alleged
that as a charitable institution, is exempted from real property taxes under Sec 28(3) Art VI of the Constitution. QC-
LBAA dismissed the petition and the decision was likewise affirmed on appeal by the Central Board of Assessment
Appeals of Quezon City. The Court of Appeals affirmed the judgment of the CBAA.

ISSUE:
1. Whether or not petitioner is a charitable institution within the context of PD 1823 and the 1973 and 1987
Constitution and Section 234(b) of RA 7160.

2. Whether or not petitioner is exempted from real property taxes.

RULING:
1. Yes. The Court hold that the petitioner is a charitable institution within the context of the 1973 and 1987
Constitution. Under PD 1823, the petitioner is a non-profit and non-stock corporation which, subject to the provisions
of the decree, is to be administered by the Office of the President with the Ministry of Health and the Ministry of
Human Settlements. The purpose for which it was created was to render medical services to the public in general
including those who are poor and also the rich, and become a subject of charity. Under PD 1823, petitioner is entitled
to receive donations, even if the gift or donation is in the form of subsidies granted by the government.

2. Partly No. Under PD 1823, the lung center does not enjoy any property tax exemption privileges for its real
properties as well as the building constructed thereon.

The property tax exemption under Sec. 28(3), Art. VI of the Constitution of the property taxes only. This provision was
implanted by Sec.243 (b) of RA 7160.which provides that in order to be entitled to the exemption, the lung center must
be able to prove that: it is a charitable institution and; its real properties are actually, directly and exclusively used for
charitable purpose. Accordingly, the portions occupied by the hospital used for its patients are exempt from real
property taxes while those leased to private entities are not exempt from such taxes.
 COMMISSIONER OF INTERNAL REVENUE v. YMCA
G.R. No. 124043 October 14, 1998

Doctrine:
Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is not exempt
from income taxation, even if such income is exclusively used for the accomplishment of its objectives.
A claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on
which it is based. Thus, it must expressly be granted in a statute stated in a language too clear to be mistaken. Verba
legis non est recedendum where the law does not distinguish, neither should we.
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. 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.
The Court cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it would be over
spilling its role and invading the realm of legislation. The Court, given its limited constitutional authority, cannot rule
on the wisdom or propriety of legislation. That prerogative belongs to the political departments of government.

Facts:
Private Respondent YMCA is a non-stock, non-profit institution, which conducts various programs and activities that
are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable objectives.
YMCA earned income from leasing out a portion of its premises to small shop owners, like restaurants and canteen
operators, and from parking fees collected from non-members. Petitioner issued an assessment to private respondent
for deficiency taxes. Private respondent formally protested the assessment. In reply, the CIR denied the claims of
YMCA.

Issue:
Whether or not the income derived from rentals of real property owned by YMCA subject to income tax

Held:
Yes. Income of whatever kind and character of non-stock non-profit organizations from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall
be subject to the tax imposed under the NIRC.

Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is not exempt
from income taxation, even if such income is exclusively used for the accomplishment of its objectives.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in interpretation in
construing tax 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. 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.
 Republic vs. Heirs of Cesar Jalandoni, GR No. 18384, 15 SCRA 51, September 20, 1965FACTS:

FACTS:
Isabel Ledesma died intestate leaving real properties and personal properties consisting of shares of stock in various
domestic corporations. She left as heirs her husband Bernardino Jalandoni and three children, namely, Cesar, Angeles
and Delfin. Cesar Jalandoni, one of the heirs, filed an estate and inheritance tax return. On the basis of this return, the
BIR made two separate partial assessments calling for the payment deficiency estate and inheritance taxes.The BIR
then demanded payment from the heirs while stating that the same was still "to be considered partial pending
investigation of the return."

These stated sums were unquestionably paid by the heirs. When the BIR conducted another investigation, it found: (1) that
the market value of the lands reported in the return filed by Cesar Jalandoni were UNDERDECLARED; (2) that seven lots in the
Talisay-Silay, Negros Occidental were OMITTED from the return; and (3) the shares of stock owned by the deceased in the
Victorias Milling Company, Hawaiian-Philippine Company and Central Azucarera de la Carlota were also
UNDERDECLARED. As such, the BIR required the heirs to pay the amounts of P 29,995.30 and P 49,842.05 as deficiency
estate and inheritance taxes. Defendant Bernardino Jalandoni wrote a letter to the Collector of Internal Revenue setting up
the defense of PRESCRIPTION. He argued that the required deficiency in the estate and inheritance taxes payment can no longer
be collected since MORE THAN FIVE YEARS had already elapsed from the filing of the return pursuant to Section 331 of the NIRC. As a
rejoinder, the Collector retorted claiming that such defense is not valid since the estate and inheritance tax return filed by them
contained OMISSIONS which amount to FRAUD INDICATIVE OF AN INTENTION TO EVADEPAYMENT of the proper tax due the
government. Hence, the Collector concluded that THE TAXES COULD STILL BEDEMANDED within ten years from the
discovery of the falsity or omission pursuant to Section 332(a) of said Code. When the lower court ordered the Collector to
verify the allegation that the seven lots in Negros Occidental were in fact included therein, the Collector designated
Examiner Genaro Butas to conduct the examination. In his report, Examiner Butas stated that of the seven lots that were
previously reported not included in the return, TWO WERE ACTUALLYDECLARED THEREIN, though he reaffirmed his
previous finding as regards the other five lots and the market value of the sugar lands and rice lands and the value of the
shares of stock in several domestic corporations. Nevertheless, the lower court found that that the return submitted by Cesar
Jalandoni is FALSE AND FRAUDULENT on the ground that the DIFFERENCES between the amounts appearing in the returns
filed and the undeclared properties of the estate of the deceased is a SUBSTANTIAL UNDERSTATEMENT OF THE TRUE
VALUE OF THE ESTATE. The lower court was not inclined to believe that the omission or understatements were due to mere
inadvertence, negligence, or honest statement of error, in fact, it believed that such circumstances are indicative of a willful
intent to defraud. Hence, it ordered the heirs to pay the Collector the sum of P 79,837.35 as estate and inheritance taxes. The
heirs appealed the case arguing that FRAUD CANNOT BE IMPUTED AGAINST THEM since there was NO EVIDENCE ON
RECORD SHOWINGTHAT SAID RETURN WAS FILED IN BAD FAITH.

ISSUE:
Was there an intention on the part of the heirs to evade payment of the proper tax?

DECISION:
NO.
The omission and under declaration of the properties was NOT DELIBERATE and DID NOT AMOUNT TOFRAUD
indicative of an intention to evade payment of the proper tax due the government. As regards to the claim of the Government
that the SEVEN LOTS were deliberately omitted from the tax returns filed by the representative of the heirs: It appears,
however, that three of the seven lots alleged to have been excluded were actually INCLUDED in the returns; that one lot was
not included because it BELONGED to one of the heirs; and that the three remaining lots were ALREADY DECLARED in
the return submitted by Bernardino Jalandoni as part of the conjugal property for purposes of income tax.

As regards to the claim of the Government that the MARKET VALUE OF THE SUGAR LANDS were under declared by the
representative of the heirs, as it did not tally with the valuation made by the Collector: Any mistake made in the valuation
made by the representative can only be considered as HONEST MISTAKE or one based on an EXCUSABLEINADVERTENCE,
since HE NOT AN EXPERT IN APPRAISING REAL ESTATE. It is certainly an ERROR TO IMPUTE FRAUDBASED ON AN
HONEST DIFFERENCE OF OPINION.

As regards to the claim of the Government that the VALUE OF THE SHARES OF STOCK did not tally with their book
value: The fact that the value of the shares of stock given in the returns did not tally with their book value appearing in
the corporate books is NOT IN ITSELF INDICATIVE OF FRAUD especially when said BOOK VALUE ONLY BECAME
KNOWNSEVERAL MONTHS AFTER THE DEATH OF THE DECEASED. Moreover, stock securities frequently fluctuate
in value and a MERE DIFFERENCE OF OPINION in relation thereto CANNOT SERVE AS PROPER BASIS for assessing
AN INTENTION TO DEFRAUD the government.
 Philippine Acetylene Co Inc v CI R and CTA

DOCTRINE:
The tax imposed on the manufacturer or producer is not a tax onthe purchaser.

FACTS:
Philippine Acetylene Co Inc is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. During the period from June
2, 1953 to June 30, 1958, it made various sales of its products to the National Power Corporation, an agency of the Philippine
Government, and to the Voice of America an agency of the United States Government. The sales to the NPC amounted to P145,866.70, while
those to the VOA amounted toP1,683, on account of which the Commission of Internal Revenue assessed against, and demanded from
Philippine Acetylene Co Inc the payment of P12,910.60 as deficiency sales tax and surcharge, pursuant to Sec. 186 and Sec 183 of the NIRC
which involves the payment of percentage taxes. Sec. 186. Percentage tax on sales of other articles.There shall be levied, assessed and
collected once only on every original sale, ,intended to transfer ownership of, or title to, a tax equivalent to seven per centum of the gross
selling price or gross value in money of the articles so sold, bartered exchanged, or transferred, such tax to be paid by the manufacturer or
producer: . . . .Philippine Acetylenes contention: It has no liability for the payment of the taxon the ground that both NPC and VOA are
exempt from taxation. NPC enjoys a tax exemption by virtue of an act of Congress and the immunity would be impaired by the imposition of a
tax on sales made to it because while the tax is paid by the manufacturer or producer, the tax is ultimately shifted by the latter to the former. It
invokes in support of its position a 1954 opinion of the Sec of Justice which ruled that NPC is exempt from payment of all taxes
"whether direct or indirect." CIRs Contention: Denied Philippine Acetylenes reconsideration of the assessment. Philippine Acetylene is
liable for the tax on sales to both NPC and VOA, pursuant to the NIRC.

CTA: Denied. The tax on the sale of articles or goods in section 186 of the Code is a tax on the manufacturer and not on the buyer with the
result that Philippine Acetylene, the manufacturer or producer of oxygen and acetylene gases sold to NPC, cannot claim exemption from the
payment of sales tax simply because its buyer the NPC is exempt from the payment of all taxes. With respect to the sales made to the
VOA, the goods purchased by the American Government or its agencies from manufacturers or producers are exempt from the payment of the
sales tax under the agreement between the Government of the Philippines and that of the United States, provided the purchases are supported
by certificates of exemption, and since purchases amounting to only P558, out of a total of P1,683, were not covered by certificates of
exemption, only the sales in the sum of P558 were subject to the payment of tax. Accordingly, the assessment was revised and the liability was
reduced from P12,910.60, as assessed by the commission, to xxxxxxxxxxxx

ISSUE:
WON Philippine Acetylene is exempt from paying tax on sales it made to NPC and VOA because both are exempt from taxation.

DECISION:
No, Philippine Acetylene is not exempt. Decision of CTA is modified by ordering Philippine Acetylene to pay the CIR the amount of
P12,910.60 as sales tax and surcharge.

HELD:
The tax imposed by section 186 of the National Internal Revenue Code is a tax on the manufacturer or producer and not a tax on
the purchaser except probably in a very remote and inconsequential sense. Accordingly its levy onthe sales made to tax-exempt entities like the
NPC is permissible. The sales to the VOA are subject to the payment of percentage taxes under section 186 of the Code. Only sales made "for
exclusive use in the construction, maintenance, operation or defense of the bases," in a word, only sales to the quartermaster, are exempt under
article V from taxation. Sales of goods to any other party even if it be an agency of the United States, such as the VOA, or even to the
quartermaster but for a different purpose, are not free from the payment of the tax. Philippine Acetylene is thus liable for P12,910.xxxxxxxxxx

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax becomes a part of the price which the
purchaser must pay. It does not matter that an additional amount is billed as tax to the purchaser. The method of listing the price and the tax
separately and defining taxable gross receipts as the amount received less the amount of the tax added, merely avoids payment by the seller of a
tax on the amount of the tax. The effect is still the same, namely, that the purchaser does not pay the tax. He pays or may pay the seller more for
the goods because of the sellers obligation, but that is all and the amount added because of the tax is paid to get the goods and for nothing else.
(Philippine Acetylene Co. vs. Blaquera, GR L-13728, 1962). But the tax burden may not even be shifted tothe purchaser at all. A decision to
absorb the burden of the tax is largely a matter of economics. Then it can no longer be contended that a sales tax is atax on the purchaser.
 [G.R. No. 151135. July 2, 2004]
CONTEX CORPORATION, petitioner, vs. HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
For review is the Decision[1] dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823, which
reversed and set aside the decision[2] dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had
ordered the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to petitioner as erroneously
paid input value-added tax (VAT) or in the alternative, to issue a tax credit certificate for said amount. Petitioner also
assails the appellate courts Resolution,[3] dated December 19, 2001, denying the motion for reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments and
other hospital supplies for export. Petitioners place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly
registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the
provisions of Republic Act No. 7227.[4] As an SBMA-registered firm, petitioner is exempt from all local and national
internal revenue taxes except for the preferential tax provided for in Section 12 (c) [5] of Rep. Act No. 7227. Petitioner
also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of
Registration RDO Control No. 95-180-000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in the
conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the
purchased items, which led the petitioner to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997
and 1998, respectively.[6]
Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No.
7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue
district officer of BIR RDO No. 19, denied the first application letter, dated December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time directly
with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter sought a refund or
issuance of a tax credit certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the
period January 1, 1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the
Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner stressed that Section
112(A)[7] if read in relation to Section 106(A)(2)(a)[8] of the National Internal Revenue Code, as amended and Section
12(b)[9] and (c) of Rep. Act No. 7227 would show that it was not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for
refund are strictly construed against the taxpayer. Since petitioner failed to establish both its right to a tax refund or tax
credit and its compliance with the rules on tax refund as provided for in Sections 204[10] and 229[11] of the Tax Code, its
claim should be denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:

WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED. Respondent is
hereby ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner
the sum of P683,061.90, representing erroneously paid input VAT.

SO ORDERED.[12]

In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax
Code. The tax court stressed that these provisions apply only to those entities registered as VAT taxpayers whose sales
are zero-rated. Petitioner does not fall under this category, since it is a non-VAT taxpayer as evidenced by the
Certificate of Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of
the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of
supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and
Regulations of the Bases Conversion and Development Act of 1992, all that petitioner is required to pay as a SBFZ-
registered enterprise is a 5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred
by the two-year prescriptive period under Section 229 of the Tax Code.The tax court also limited the refund only to the
input VAT paid by the petitioner on the supplies and materials directly used by the petitioner in the manufacture of its
goods. It struck down all claims for input VAT paid on maintenance, office supplies, freight charges, and all materials
and supplies shipped or delivered to the petitioners Makati and Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the
Court of Appeals. Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was limited
only to direct taxes and not to indirect taxes such as the input component of the VAT. The Commissioner pointed out
that from its very nature, the value-added tax is a burden passed on by a VAT registered person to the end users; hence,
the direct liability for the tax lies with the suppliers and not Contex.
Finding merit in the CIRs arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. Contexs claim
for refund of erroneously paid taxes is DENIED accordingly.

SO ORDERED.[13]

In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of raw
materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules covers
only the VAT imposable under Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way
includes the value-added tax of the seller-exporter the burden of which was passed on to the importer as an additional costs
of the goods.[14] This was because the exemption granted by Rep. Act No. 7227 relates to the act of importation and Section
107[15] of the Tax Code specifically imposes the VAT on importations. The appellate court applied the principle that tax
exemptions are strictly construed against the taxpayer. The Court of Appeals pointed out that under the implementing rules
of Rep. Act No. 7227, the exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining
only to those for which they may be directly liable. It then stated that apparently, the legislative intent behind Rep. Act No.
7227 was to grant exemptions only to direct taxes, which SBFZ-registered enterprise may be liable for and only in
connection with their importation of raw materials, capital, and equipment as well as the sale of their goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied.
Hence, the instant petition raising as issues for our resolution the following:

A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES
PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER,
A SUBIC BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.

B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO
A TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW
MATERIALS FOR THE YEARS 1997 AND 1998.[16]

Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of
Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser; and (2)
the entitlement of the petitioner to a tax refund on its purchases of supplies and raw materials for 1997 and 1998.
On the first issue, petitioner argues that the appellate courts restrictive interpretation of petitioners VAT
exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis. It
contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local and national
taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our
attention to regulations issued by both the SBMA and BIR clearly and categorically providing that the tax exemption
provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT on purchases of supplies and materials.
 The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions,
such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-registered business may be
directly liable. Hence, SBFZ locators are not relieved from the indirect taxes that may be shifted to them by a VAT-
registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods,
properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the
buyer, transferee or lessee.[17] Unlike a direct tax, such as the income tax, which primarily taxes an individuals ability
to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services,
or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the
tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is
transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to
the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is
shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.[18]Stated differently, a
seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not
necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or
services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.[19]
Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the
transaction can have preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or lease of
properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously
paid.[20] This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange
of the goods or properties).

The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers
because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt
goods/properties or services which are exempt from VAT is not entitled to any input tax on such purchase despite the
issuance of a VAT invoice or receipt.[21]

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax burden
is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.[22]

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only
removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the
exempt firms business or non-retail customers. It is for this reason that a sharp distinction must be made between zero-
rating and exemption in designating a value-added tax.[23]
Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of supplies and raw materials
is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and local
internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.[24]
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the
respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration[25] issued by the
BIR. As such, it is exempt from VAT on all its sales and importations of goods and services.
Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw materials is incongruous
with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously
passed on to it by its suppliers.
 While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its
supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such
VAT refund.
Section 4.100-2 of BIRs Revenue Regulations 7-95, as amended, or the Consolidated Value-Added Tax
Regulations provide:

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.

The following sales by VAT-registered persons shall be subject to 0%:

(a) Export Sales

Export Sales shall mean
...

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as
the Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise
known as the Bases Conversion and Development Act of 1992.

...

(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered and
accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority
(CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian
Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which the Philippines is a
signatory effectively subject such sales to zero-rate.

Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input VAT credit with no
corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.
On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer and
thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously
paid. In fine, even if we are to assume that exemption from the burden of VAT on petitioners purchases did exist, petitioner
is still not entitled to any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.
Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and accordingly refund the
petitioner of the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that petitioners
VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a seller and hence, it cannot
claim any refund or exemption for any input VAT it paid, if any, on its purchases of raw materials and supplies.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of
Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
 Commissioner of Internal Revenue v. Seagate Technology
G.R. No. 153866. February 11, 2005

FACTS:
Respondent is a resident foreign corporation duly registered with the Securities and Exchange Commission to do
business in the Philippines and is registered with the Philippine Export Zone Authority (PEZA). The respondent is
Value Added Tax-registered entity and filed for the VAT returns. An administrative claim for refund of VAT input
taxes in the amount of P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04 VAT input taxes
subject of this Petition for Review), was filed on 4 October 1999 and no final action has been received by the
respondent from the petitioner on the claim for VAT refund. Hence, petitioner is sued in his official capacity. The Tax
Court rendered a decision granting the claim for refund and CTA affirmed the decision. Hence, the present petition for
certiorari.

ISSUE:
Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount of
P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April 1, 1998
to June 30, 1999

HELD:
The Petition is unmeritorious. As a PEZA-registered enterprise within a special economic zone, respondent is entitled
to the fiscal incentives and benefit provided for in either PD 66 or EO 226. It shall, moreover, enjoy all privileges,
benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844. Respondent as an entity is
exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming
from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but
the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the
VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. The
exemption is both express and pervasive, among other reasons, since RA 7916 states that no taxes, local and national,
shall be imposed on business establishments operating within the ecozone. Even though the VAT is not imposed on
the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity -- a
patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating
within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid
prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly.
Special laws expressly grant preferential tax treatment to business establishments registered and operating within an
ecozone, which by law is considered as a separate customs territory. As such, respondent is exempt from all internal
revenue taxes, including the VAT, and regulations pertaining thereto. Thus, the petition is denied and the decision of
lower courts affirmed.
 Estate of Benigno Toda Jr.
G.R. No. 147188. September 14, 2004

FACTS:

March 2, 1989: Cibeles Insurance Corp. (CIC) authorized Benigno P. Toda Jr., President and Owner of 99.991% of
outstanding capital stock, to sell the Cibeles Building and 2 parcels of land which he sold to Rafael A. Altonaga on
August 30, 1987 for P 100M who then sold it on the same day to Royal Match Inc. for P 200M.
CIC included gains from sale of real property of P 75,728.021 in its annual income tax return while Altonaga paid
a 5% capital gains tax of P 10M
July 12, 1990: Toda sold his shares to Le Hun T. Choa for P 12.5M evidenced by a deed of ale of shares of stock
which provides that the buyer is free from all income tax liabilities for 1987, 1988 and 1989.
Toda Jr. died 3 years later.
March 29, 1994: BIR sent an assessment notice and demand letter to CIC for deficiency of income tax of P 79,099,
999.22
January 27, 1995: BIR sent the same to the estate of Toda Jr.
Estate filed a protest which was dismissed - fraudulent sale to evade the 35% corporate income tax for the
additional gain of P 100M and that there is in fact only 1 sale.
Since it is falsity or fraud, the prescription period is 10 years from the discovery of the falsity or fraud as
prescribed under Sec. 223 (a) of the NIRC
CTA: No proof of fraudulent transaction so the applicable period is 3 years after the last day prescribed by law for
filing the return
CA: affirmed
CIR appealed
ISSUE: W/N there is falsity or fraud resulting to tax evasion rather than tax avoidance so the period for assessment has
not prescribed.

HELD: YES. Estate shall be liable since NOT yet prescribed.

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. ax
avoidance is the tax saving device within the means sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors:
(1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-
payment of tax when it is shown that a tax is due
(2) an accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not
accidental; and
(3) a course of action or failure of action which is unlawful.
All are present in this case. The trial balance showed that RMI debited P 40M as "other-inv. Cibeles Building" that
indicates RMI Paid CIC (NOT Altonaga)
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the
damage to another, or by which an undue and unconscionable advantage is taken of another.
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially
that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not
the 35% corporate income tax.
Generally, a sale of or exchange of assets will have an income tax incidence only when it is consummated but such
tax incidence depends upon the substance of the transaction rather them mere formalities.
 Conwi, et.al. vs. CTA and CIR

Facts: Petitioners are employees of Procter and Gamble (Philippine Manufacturing Corporation, subsidiary of Procter
& Gamble, a foreign corporation).During the years 1970 and 1971, petitioners were assigned to other subsidiaries of
Procter & Gamble outside the Philippines, for which petitioners were paid US dollars as compensation.

Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-to-peso conversion based on
the floating rate under BIR Ruling No. 70-027. In 1973, petitioners filed amened ITRs for 1970 and 1971, this time
using the par value of the peso as basis. This resulted in the alleged overpayments, refund and/or tax credit, for which
claims for refund were filed.

CTA held that the proper conversion rate for the purpose of reporting and paying the Philippine income tax on the
dollar earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. The
refund claims were denied.

Issues:
(1) Whether or not petitioners' dollar earnings are receipts derived from foreign exchange transactions; NO.

(2) Whether or not the proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing free
market rate of exchange and not the par value of the peso; YES.

Held: For the proper resolution of income tax cases, income may be defined as an amount of money coming to a
person or corporation within a specified time, whether as payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its equivalent. Income can also be though of as flow of the fruits of
one's labor.

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange transaction is simply that a transaction in foreign exchange, foreign
exchange being "the conversion of an amount of money or currency of one country into an equivalent amount of
money or currency of another." When petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they
were earning in their assigned nation's currency and were ALSO spending in said currency. There was no conversion,
therefore, from one currency to another.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a
definite amount of money which came to them within a specified period of time of two years as payment for their
services.

And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338
thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively enforce its
provisions pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71 were issued to prescribed a
uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the
years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority given to the Secretary
of Finance by the Legislature which enacted the Internal Revenue Code. And these are presumed to be a valid
interpretation of said code until revoked by the Secretary of Finance himself.

Petitioners are citizens of the Philippines, and their income, within or without, and in these cases wholly without, are
subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

DENIED FOR LACK OF MERIT.

 MADRIGAL VS. RAFFERTY- Difference Between Capital and Income

The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from
it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income.
Capital is wealth, while income is the service of wealth.

FACTS:
Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The marriage was contracted
under the provisions of law concerning conjugal partnership

On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73

Vicente Madrigal was contending that the said declared income does not represent his income for the year 1914 as it
was the income of his conjugal partnership with Paterno. He said that in computing for his additional income tax, the
amount declared should be divided by 2.

The revenue officer was not satisfied with Madrigals explanation and ultimately, the United States Commissioner of
Internal Revenue decided against the claim of Madrigal.

Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 alleged to have been wrongfully
and illegally assessed and collected by the CIR.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in computing for the
additional income tax.

HELD:
No! The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon income and not upon
capital and property.

The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called
income. Capital is wealth, while income is the service of wealth.

As Paterno has no estate and income, actually and legally vested in her and entirely distinct from her husbands
property, the income cannot properly be considered the separate income of the wife for the purposes of the additional
tax.

To recapitulate, Vicente wants to half his declared income in computing for his tax since he is arguing that he has a
conjugal partnership with his wife. However, the court ruled that the one that should be taxed is the income which is
the flow of the capital, thus it should not be divided into 2.
 CIR vs. MARUBENI

GR No. 137377| J. Puno

Facts:
CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985 deficiency income,
branch profit remittance and contractors taxes from Marubeni Corp after finding the latter to have properly availed of
the tax amnesty under EO 41 & 64, as amended.

Marubeni, a Japanese corporation, engaged in general import and export trading, financing and construction, is duly
registered in the Philippines with Manila branch office. CIR examined the Manila branchs books of accounts for fiscal
year ending March 1985, and found that respondent had undeclared income from contracts with NDC and Philphos for
construction of a wharf/port complex and ammonia storage complex respectively.

On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes. CIR claims that the
income respondent derived were income from Philippine sources, hence subject to internal revenue taxes. On Sept
1986, respondent filed 2 petitions for review with CTA: the first, questioned the deficiency income, branch profit
remittance and contractors tax assessments and second questioned the deficiency commercial brokers assessment.

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.
CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes. CA affirmed
on appeal.

Issue:
W/N Marubeni is exempted from paying tax

Held:
Yes.
1. On date of effectivity
CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in Sec 4b of EO 41:

Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty herein granted: xxx b) Those
with income tax cases already filed in Court as of the effectivity hereof;
Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a case had already been
filed and was pending before the CTA and Marubeni therefore fell under the exception. However, the point of
reference is the date of effectivity of EO 41 and that the filing of income tax cases must have been made before and as
of its effectivity.

EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA on Sept 26, 1986.
When EO 41 became effective, the case had not yet been filed. Marubeni does not fall in the exception and is thus, not
disqualified from availing of the amnesty under EO 41 for taxes on income and branch profit remittance.

The difficulty herein is with respect to the contractors tax assessment (business tax) and respondents availment of the
amnesty under EO 64, which expanded EO 41s coverage. When EO 64 took effect on Nov 17, 1986, it did not provide
for exceptions to the coverage of the amnesty for business, estate and donors taxes. Instead, Section 8 said EO
provided that:

Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with this
amendatory Executive Order shall remain in full force and effect.
Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of effectivity. The general rule
is that an amendatory act operates prospectively. It may not be given a retroactive effect unless it is so provided
expressly or by necessary implication and no vested right or obligations of contract are thereby impaired.

2. On situs of taxation
Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the deficiency tax
because the income from the projects came from the Offshore Portion as opposed to Onshore Portion. It claims all
materials and equipment in the contract under the Offshore Portion were manufactured and completed in
Japan, not in the Philippines, and are therefore not subject to Philippine taxes.
(BG: Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In the
contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos Portion and
financed either by OECF or by suppliers credit. The Japanese Yen Portion I corresponds to the Foreign Offshore
Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore Portion.
Marubeni has already paid the Onshore Portion, a fact that CIR does not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of both materials and services to the
client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and
the materials provided and services rendered were all done and completed within the territorial jurisdiction of the
Philippines. Accordingly, respondents entire receipts from the contracts, including its receipts from the Offshore
Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials should
be subjected to contractors tax (a tax on the exercise of a privilege of selling services or labor rather than a sale on
products).
Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines
because some of them were completed in Japan (and in fact subcontracted) in accordance with the provisions of the
contracts. All services for the design, fabrication, engineering and manufacture of the materials and equipment under
Japanese Yen Portion I were made and completed in Japan. These services were rendered outside Philippines
taxing jurisdiction and are therefore not subject to contractors tax.Petition denied.
 G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous. We have carefully
studied it and find it is not; on the contrary, it is supported by law and doctrine. So finding, we affirm.

Reduced to simplest terms, the background facts are as follows.

The national Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for
the construction of twelve ocean-going vessels. 1 The purchase price was to come from the proceeds of bonds issued by
the Central Bank. 2 Initial payments were made in cash and through irrevocable letters of credit. 3Fourteen promissory
notes were signed for the balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of the
Philippines. 4 Pursuant thereto, the remaining payments and the interests thereon were remitted in due time by the NDC
to Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo. 5

The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the
purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of
P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and levy
to enforce collection of the claimed amount. 6 The NDC went to the Court of Tax Appeals.

The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00,
representing the compromise penalty. 7 The NDC then came to this Court in a petition for certiorari.

The petition must fail for the following reasons.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code, thus:

SEC. 37. Income from sources within the Philippines. (a) Gross income from sources within the Philippines.
The following items of gross income shall be treated as gross income from sources within the Philippines:
(1) Interest. Interest derived from sources within the Philippines, and interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or otherwise;

xxx xxx xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision because all the
related activities the signing of the contract, the construction of the vessels, the payment of the stipulated price, and
their delivery to the NDC were done in Tokyo. 8 The law, however, does not speak of activity but of "source,"
which in this case is the NDC. This is a domestic and resident corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right to levy and collect income tax on interest
received by foreign corporations not engaged in trade or business within the Philippines is not planted upon the
condition that 'the activity or labor and the sale from which the (interest) income flowed had its situs' in the
Philippines. The law specifies: 'Interest derived from sources within the Philippines, and interest on bonds, notes, or
other interest-bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or activity' of
non-resident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who
pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the
determining factor of the source of interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128, citing
A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412;
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the obligor is a
 resident of the Philippines the interest payment paid by him can have no other source than within the Philippines. The
interest is paid not by the bond, note or other interest-bearing obligations, but by the obligor. (See mertens, Id., Vol.
8, p. 124.)

Here in the case at bar, petitioner National Development Company, a corporation duly organized and existing
under the laws of the Republic of the Philippines, with address and principal office at Calle Pureza, Sta. Mesa,
Manila, Philippines unconditionally promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory
notes for each vessel, the balance of the contract price of the twelve (12) ocean-going vessels purchased and acquired
by it from the Japanese corporations, including the interest on the principal sum at the rate of five per cent (5%) per
annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.) And
pursuant to the terms and conditions of these promisory notes, which are duly signed by its Vice Chairman and
General Manager, petitioner remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and 1962 the
sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid balance of the purchase
price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.)

The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid the interest
under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly
organized and existing under the laws of the Philippines, it is a domestic corporation, resident of the Philippines.
(Sec. 84(c), National Internal Revenue Code.) The interest paid by petitioner, which is admittedly a resident of the
Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted to the Japanese
shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the vessels acquired by
petitioner is interest derived from sources within the Philippines subject to income tax under the then Section 24(b)(1)
of the National Internal Revenue Code. 9

There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the
promissory notes of the NDC were government securities exempt from taxation under Section 29(b)[4] of the Tax
Code, reading as follows:

SEC. 29. Gross Income. xxxx xxx xxx xxx

(b) Exclusion from gross income. The following items shall not be included in gross income and shall be
exempt from taxation under this Title:

xxx xxx xxx

(4) Interest on Government Securities. Interest upon the obligations of the Government of the Republic of
the Philippines or any political subdivision thereof, but in the case of such obligations issued after approval of this
Code, only to the extent provided in the act authorizing the issue thereof. (As amended by Section 6, R.A. No. 82;

The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on
this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does not
exempt from taxes the interests on such securities.

It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted
because of the undertaking signed by the Secretary of Finance in each of the promissory notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby
absolutely and unconditionally guarantee (sic), on behalf of the Republic of the Philippines, the due and
punctual payment of both principal and interest of the above note.10
There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear
waiver therein of the right to tax interests. Tax exemptions cannot be merely implied but must be categorically and
unmistakably expressed. 11 Any doubt concerning this question must be resolved in favor of the taxing power. 12

Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact, such
undertaking was made by the government in consonance with and certainly not against the following provisions of the
Tax Code:

Sec. 53(b). Nonresident aliens. All persons, corporations and general co-partnership (companies colectivas),
in whatever capacity acting, including lessees or mortgagors of real or personal capacity, executors, administrators,
receivers, conservators, fiduciaries, employers, and all officers and employees of the Government of the Philippines
having control, receipt, custody; disposal or payment of interest, dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or categorical gains,
profits and income of any nonresident alien individual, not engaged in trade or business within the Philippines and
not having any office or place of business therein, shall (except in the cases provided for in subsection (a) of this
section) deduct and withhold from such annual or periodical gains, profits and income a tax to twenty (now
30%) per centum thereof: ...

Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations subject to
taxation under this Title not engaged in trade or business within the Philippines and not having any office or place
of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items
as is provided in section fifty-three a tax equal to thirty (now 35%) per centum thereof, and such tax shall be
returned and paid in the same manner and subject to the same conditions as provided in that section:....

Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but
without diminution of its taxing power under existing laws.

In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner
closes its eyes to the nature of this entity as a corporation. As such, it is governed in its proprietary activities not only
by its charter but also by the Corporation Code and other pertinent laws.

The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the
Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to
the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same
from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus:

Section 53(c). Return and Payment. Every person required to deduct and withhold any tax under this
section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or
before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the
Government of the Philippines authorized to receive it. Every such person is made personally liable for such
tax, and is indemnified against the claims and demands of any person for the amount of any payments made in
accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)

In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals, 13 the Court
quoted with approval the following regulation of the BIR on the responsibilities of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly
causing a query to be addressed to the Commissioner of Internal Revenue for the determination whether or not
the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue
 decides that the income paid to an individual is not subject to withholding, the withholding agent may
thereupon remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations).

"Strict observance of said steps is required of a withholding agent before he could be released from liability," so said
Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon exemption from taxation; hence, an
exempting provision should be construed strictissimi juris." 14

The petitioner was remiss in the discharge of its obligation as the withholding agent of the government an so should be
held liable for its omission.

WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so ordered.
 COLLECTOR VS. HENDERSON- Rental and Travel Allowance are not Part of Taxable Income

Rental allowances and travel allowances by a company are not part of taxable income.

FACTS:
Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the BIR. Arthur is president of
American International Underwriters for the Philippines, Inc., which is a domestic corporation engaged in the business
of general non-life insurance, and represents a group of American insurance companies engaged in the business of
general non-life insurance.

The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR included as part of taxable
income: 1) Arthurs allowances for rental, residential expenses, subsistence, water, electricity and telephone expenses
2) entrance fee to the Marikina Gun and Country Club which was paid by his employer for his account and 3)
travelling allowance of his wife
The taxpayers justifications are as follows:
1) as to allowances for rental and utilities, Arthur did not receive money for the allowances. Instead, the apartment is
furnished and paid for by his employer-corporation (the mother company of American International), for the employer
corporations purposes. The spouses had no choice but to live in the expensive apartment, since the company used it to
entertain guests, to accommodate officials, and to entertain customers. According to taxpayers, only P 4,800 per year is
the reasonable amount that the spouses would be spending on rental if they were not required to live in those
apartments. Thus, it is the amount they deem is subject to tax. The excess is to be treated as expense of the company.
2) The entrance fee should not be considered income since it is an expense of his employer, and membership therein is
merely incidental to his duties of increasing and sustaining the business of his employer.

3) His wife merely accompanied him to New York on a business trip as his secretary, and at the employer-
corporations request, for the wife to look at details of the plans of a building that his employer intended to construct.
Such must not be considered taxable income.
The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent expense and travel
expenses were still held to be taxable. The Court of Tax Appeals ruled in favor of the taxpayers, that such expenses
must not be considered part of taxable income. Letters of the wife while in New York concerning the proposed
building were presented as evidence.

ISSUE: Whether or not the rental allowances and travel allowances furnished and given by the employer-corporation
are part of taxable income?

HELD: NO. Such claims are substantially supported by evidence.

These claims are therefore NOT part of taxable income. No part of the allowances in question redounded to their
personal benefit, nor were such amounts retained by them. These bills were paid directly by the employer-corporation
to the creditors. The rental expenses and subsistence allowances are to be considered not subject to income tax.
Arthurs high executive position and social standing, demanded and compelled the couple to live in a more spacious
and expensive quarters. Such subsistence allowance was a SEPARATE account from the account for salaries and
wages of employees. The company did not charge rentals as deductible from the salaries of the employees. These
expenses are COMPANY EXPENSES, not income by employees which are subject to tax.
 LIMPAN INVESTMENT VS. CIR- Actual vs Constructive Receipt

Limpan Investment Company deemed to have constructively received rental payments in 1957 when they were
deposited in court due to its refusal to receive them.

FACTS:
BIR assessed deficiency taxes on Limpan Corp, a company that leases real property, for under-declaring its rental
income for years 1956-57 by around P20K and P81K respectively.
Petitioner appeals on the ground that portions of these underdeclared rents are yet to be collected by the previous
owners and turned over or received by the corporation.
Petitioner cited that some rents were deposited with the court, such that the corporation does not have actual nor
constructive control over them.
The sole witness for the petitioner, Solis (Corporate Secretary- Treasurer) admitted to some undeclared rents in 1956
and1957, and that some balances were not collected by the corporation in 1956 because the lessees refused to recognize
and pay rent to the new owners and that the corps president Isabelo Lim collected some rent and reported it in his
personal income statement, but did not turn over the rent to the corporation.
He also cites lack of actual or constructive control over rents deposited with the court.

ISSUE:
Whether or not the BIR was correct in assessing deficiency taxes against Limpan Corp. for undeclared rental income

HELD:
Yes. Petitioner admitted that it indeed had undeclared income (although only a part and not the full amount assessed by
BIR). Thus, it has become incumbent upon them to prove their excuses by clear and convincing evidence, which it has
failed to do. When is there constructive receipt of rent? With regard to 1957 rents deposited with the court, and
withdrawn only in 1958, the court viewed the corporation as having constructively received said rents. The non-
collection was the petitioners fault since it refused to refused to accept the rent, and not due to nonpayment of lessees.
Hence, although the corporation did not actually receive the rent, it is deemed to have constructively received them.
 CIR vs. PHILIPPINE AIRLINES, INC. - Minimum Corporate Income Tax

FACTS:

PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have been liable for Minimum Corporate
Income Tax based on its gross income. However, PHILIPPINE AIRLINES, INC. did not pay the Minimum Corporate
Income Tax using as basis its franchise which exempts it from all other taxes upon payment of whichever is lower of
either (a) the basic corporate income tax based on the net taxable income or (b) a franchise tax of 2%.

ISSUE:
Is PAL liable for Minimum Corporate Income Tax?

HELD:
NO. PHILIPPINE AIRLINES, INC.s franchise clearly refers to "basic corporate income tax" which refers to the
general rate of 35% (now 30%). In addition, there is an apparent distinction under the Tax Code between taxable
income, which is the basis for basic corporate income tax under Sec. 27 (A) and gross income, which is the basis for
the Minimum Corporate Income Tax under Section 27 (E). The two terms have their respective technical meanings and
cannot be used interchangeably. Not being covered by the Charter which makes PAL liable only for basic corporate
income tax, then Minimum Corporate Income Tax is included in "all other taxes" from which PHILIPPINE
AIRLINES, INC. is exempted.

The CIR also can not point to the Substitution Theory which states that Respondent may not invoke the in lieu of all
other taxes provision if it did not pay anything at all as basic corporate income tax or franchise tax. The Court ruled
that it is not the fact tax payment that exempts Respondent but the exercise of its option. The Court even pointed out
the fallacy of the argument in that a measly sum of one peso would suffice to exempt PAL from other taxes while a
zero liability would not and said that there is really no substantial distinction between a zero tax and a one-peso tax
liability. Lastly, the Revenue Memorandum Circular stating the applicability of the MCIT to PAL does more than just
clarify a previous regulation and goes beyond mere internal administration and thus cannot be given effect without
previous notice or publication to those who will be affected thereby.
 CIR VS. ANSCOR- Income Subject to Tax - Passive Income - Dividends

GENERAL RULE: A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.

EXCEPTION: The redemption or cancellation of stock dividends, depending on the "time" and "manner" it was made,
is essentially equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable income" "to the
extent it represents profits".

FACTS: -- reversal of the decision of the CA

Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A. Soriano Y Cia",
predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at a par value of
P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all nonresident aliens.

In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued. In 1945, ANSCOR's authorized
capital stock was increased to P2,500,000.00 divided into 25,000 common shares with the same par value. Don Andres'
increased his subscription to 14,963 common shares. A month later, Don Andres transferred 1,250 shares each to his
two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. Both sons are foreigners.

From 1947-1963, ANSCOR declared stock dividends. On December 30, 1964 Don Andres died. As of that date, the
records revealed that he has a total shareholdings of 185,154 shares. Correspondingly, one-half of that shareholdings or
92,577 shares were transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other half formed part of
his estate.

A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to P30M.
Stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate and Doa
Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864 common shares
each.

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don Andres'
estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M. About a year later,
ANSCOR again redeemed 80,000 common shares from the Don Andres' estate. As stated in the Board Resolutions,
ANSCOR's business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order
to reduce the company's foreign exchange remittances in case cash dividends are declared.

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report proposing that
ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue
Code for the year 1968 and the second quarter of 1969 based on the transactions of exchange and redemption of stocks.

ISSUE:
Whether or not ANSCOR's redemption of stocks from its stockholder as well as the exchange of common with
preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend" making the
proceeds thereof taxable.
HELD:

YES. The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act 38 which
provides:

Sec. 83. Distribution of dividends or assets by corporations. (b) Stock dividends A stock dividend representing
the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock
issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in
whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution
of earnings or profits accumulated after March first, nineteen hundred and thirteen.

Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928. It laid down
the general rule known as the proportionate test wherein stock dividends once issued form part of the capital and, thus,
subject to income tax. Specifically, the general rule states that: A stock dividend representing the transfer of surplus to
capital account shall not be subject to tax.

Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere
issuance thereof is not yet subject to income tax as they are nothing but an "enrichment through increase in value of
capital investment."

The exception provides that the redemption or cancellation of stock dividends, depending on the "time" and "manner"
it was made, is essentially equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable
income" "to the extent it represents profits". The exception was designed to prevent the issuance and cancellation or
redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for the actual
distribution of cash dividends, which is taxable.

Simply put, depending on the circumstances, the proceeds of redemption of stock dividends are essentially
distribution of cash dividends, which when paid becomes the absolute property of the stockholder. Thereafter, the latter
becomes the exclusive owner thereof and can exercise the freedom of choice. Having realized gain from that
redemption, the income earner cannot escape income tax. For the exempting clause of Section, 83(b) to apply, it is
indispensable that: (a) there is redemption or cancellation; (b) the transaction involves stock dividends and (c) the "time
and manner" of the transaction makes it "essentially equivalent to a distribution of taxable dividends."

Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock 89 in exchange for
property, whether or not the acquired stock is cancelled, retired or held in the treasury. 90 Essentially, the corporation
gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in
business as before. In the case, ANSCOR redeemed shares twice. But where did the shares redeemed come from? If its
source is the original capital subscriptions upon establishment of the corporation or from initial capital investment in an
existing enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b)
under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares are
from stock dividend declarations other than as initial capital investment, the proceeds of the redemption is additional
wealth, for it is not merely a return of capital but a gain thereon.

It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. At the time
of the last redemption, the original common shares owned by the estate were only 25,247.5 91 This means that from
the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come
from stock dividends. In the absence of evidence to the contrary, the Tax Code presumes that every distribution of
corporate property, in whole or in part, is made out of corporate profits such as stock dividends. The capital cannot be
distributed in the form of redemption of stock dividends without violating the trust fund doctrine.

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time alone
that lapsed from the issuance to the redemption is not a sufficient indicator to determine taxability. It is a must to
consider the factual circumstances as to the manner of both the issuance and the redemption. The issuance of stock
dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered
a legitimate tax scheme. Redemption cannot be used as a cloak to distribute corporate earnings.

ANSCOR invoked two reasons to justify the redemptions (1) the alleged "filipinization" program and (2) the
reduction of foreign exchange remittances in case cash dividends are declared. The Court is not concerned with the
wisdom of these purposes but on their relevance to the whole transaction which can be inferred from the outcome
thereof. It is the "net effect rather than the motives and plans of the taxpayer or his corporation". The test of taxability
under the exempting clause, when it provides "such time and manner" as would make the redemption "essentially
equivalent to the distribution of a taxable dividend", is whether the redemption resulted into a flow of wealth. If no
wealth is realized from the redemption, there may not be a dividend equivalence treatment.

The test of taxability under the exempting clause of Section 83(b) is, whether income was realized through the
redemption of stock dividends. The redemption converts into money the stock dividends which become a realized
profit or gain and consequently, the stockholder's separate property. Profits derived from the capital invested cannot
escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income
taxation regardless of the existence of any business purpose for the redemption. Otherwise, to rule that the said
proceeds are exempt from income tax when the redemption is supported by legitimate business reasons would defeat
the very purpose of imposing tax on income.

The issuance and the redemption of stocks are two different transactions. Although the existence of legitimate
corporate purposes may justify a corporation's acquisition of its own shares under Section 41 of the Corporation Code,
such purposes cannot excuse the stockholder from the effects of taxation arising from the redemption.

Even if the said purposes support the redemption and justify the issuance of stock dividends, the same has no bearing
whatsoever on the imposition of the tax herein assessed because the proceeds of the redemption are deemed taxable
dividends since it was shown that income was generated therefrom.

The proceeds thereof are essentially considered equivalent to a distribution of taxable dividends. As "taxable
dividend" under Section 83(b), it is part of the "entire income" subject to tax under Section 22 in relation to Section 21
120 of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are included in "gross income". As
income, it is subject to income tax which is required to be withheld at source.
 BIBIANO V. BAAS, JR. vs. COURT OF APPEALS, ET. AL.
G.R. No. 102967 February 10, 2000
Facts:

On February 20, 1976, Petitioner sold to AYALA a parcel of land for P2,308,770.00. Petitioner received an initial
payment amounting to P461,754.00 with the balance to be paid in four equal consecutive annual installments covered
by promissory note. The same day, petitioner discounted the promissory note with AYALA, for its face value.
AYALA issued nine (9) checks to petitioner, all dated February 20, 1976, with the uniform amount of P205,224.00.

In his 1976 Income Tax Return, petitioner reported only the initial payment as income from disposition of capital asset.
In the succeeding years, until 1979, petitioner reported a uniform income corresponding to the annual installment as
gain from sale of capital asset.

Later, the BIR Regional Director, through its tax examiners, discovered that petitioner had no outstanding receivable
from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should have been taxable
in 1976.

Petitioner was assessed deficiency tax with surcharges and penalties for the year 1976. A demand letter was then
issued for the settlement of the income tax deficiency. Petitioner failed to pay and insisted that the sale of his land to
AYALA was on installment.

On June 17, 1981, a criminal complaint for tax evasion was filed against petitioner.

On July 2, 1981, petitioner filed an Amnesty Tax Return under P. D. 1740. Likewise, on November 2, 1981,
petitioner again filed an Amnesty Tax Return under P.D. 1840. In both, petitioner did not recognize that his sale of
land to AYALA was on cash basis.

Petitioner maintains that the proceeds of the promissory notes, not yet due, which he discounted to AYALA should not
be included as income realized in 1976.

Petitioner states that the original agreement in the Deed of Sale should not be affected by the subsequent discounting of
the bill.

Issues:

1. Does the mere filing of tax amnesty return under P.D. 1740 and 1840 ipso facto shield a taxpayer from
immunity against prosecution?

2. Should petitioners income from the sale of land be declared as a cash transaction in his tax return
because the buyer discounted the promissory note, issued to the seller, on the same day of the sale?

Held: 1. No. The petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere filing
of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from immunity against prosecution. Tax
amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to
collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. To avail of a
tax amnesty granted by the government, and to be immune from suit on its delinquencies, the taxpayer must have
voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously
untaxed income.

PD 1740 and PD 1840 granted any individual, who voluntarily files a return under this Decree and
pays the income tax due thereon, immunity from the penalties, civil or criminal, under the NIRC. Petitioner is not
entitled to claim immunity from prosecution under the shield of availing tax amnesty. His disclosure in his tax
amnesty return did not include the income from his sale of land to AYALA on cash basis. Instead he insisted that such
sale was on installment. He did not amend his income tax return. He did not pay the tax which was considerably
increased by the income derived from the discounting. He did not meet the twin requirements of P.D. 1740 and 1840,
declaration of his untaxed income and full payment of tax due thereon.

It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in
law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against
the taxpayer and liberally in favor of the taxing authority.

2. Yes. The general rule is that the whole profit accruing from a sale of property is taxable as income in
the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income
shall be taxable in the year in which it is "received," the profit from an installment sale is to be apportioned between or
among the years in which such installments are paid and received.

In this case, although the proceeds of a discounted promissory note is not considered initial payment,
still it must be included as taxable income on the year it was converted to cash. When petitioner had the promissory
notes covering the succeeding installment payments of the land issued by AYALA, discounted by AYALA itself, on
the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition
resulted and petitioner was required by law to report in his returns the income derived from the discounting. What
petitioner did is tantamount to an attempt to circumvent the rule on payment of income taxes gained from the sale of
the land to AYALA for the year 1976. Missda
 Commissioner of Internal Revenue vs. Central Luzon Drug Corporation
GR No. 159647, April 15, 2005

Facts:
Respondent is a domestic corporation engaged in the retailing of medicines and other pharmaceutical products. In
1996 it operated six (6) drugstores under the business name and style Mercury Drug. From January to December
1996 respondent granted 20% sales discount to qualified senior citizens on their purchases of medicines pursuant to
RA 7432. For said period respondent granted a total of 904,769. On April 15, 1997, respondent filed its annual ITR
for taxable year 1996 declaring therein net losses. On Jan. 16, 1998 respondent filed with petitioner a claim for tax
refund/credit of 904,769.00 alledgedly arising from the 20% sales discount. Unable to obtain affirmative response
from petitioner, respondent elevated its claim to the CTA via Petition for Review. CTA dismissed the same but on MR,
CTA reversed its earlier ruling and ordered petitioner to issue a Tax Credit Certificate in favor of respondent citing
CAGR SP No. 60057 (May 31, 2001, Central Luzon Drug Corp. vs. CIR) citing that Sec.229 of RA 7432 deals
exclusively with illegally collected or erroneously paid taxes but that there are other situations which may warrant a tax
credit/refund. CA affirmed CTA decision reasoning that RA 7432 required neither a tax liability nor a payment of taxes
by private establishments prior to the availment of a tax credit. Moreover, such credit is not tantamount to an
unintended benefit from the law, but rather a just compensation for the taking of private property for public use.

ISSUE:
W/N respondent, despite incurring a net loss, may still claim the 20% sales discount as a tax credit.

RULING:
Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of obtaining a 20% discount on their
purchase of medicine from any private establishment in the country. The latter may then claim the cost of the discount
as a tax credit. Such credit can be claimed even if the establishment operates at a loss. A tax credit generally refers to
an amount that is subtracted directly from ones total tax liability. It is an allowance against the tax itself or a
deduction from what is owed by
a taxpayer to the government. A tax credit should be understood in relation to other tax concepts.

One of these is tax deduction which is subtraction from income for tax purposes, or an amount that is allowed by
law to reduce income prior to the application of the tax rate to compute the amount of tax which is due. In other
words, whereas a tax credit reduces the tax due, tax deduction reduces the income subject to tax in order to arrive at the
taxable income. Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before
the tax credit can be applied. Without that liability, any tax

Taxation Case credit application will be useless. There will be no reason for deducting the latter when there is, to
begin with, no existing obligation to the government. However, as will be presented shortly, the existence of a tax
credit or its grant by law is not the same as the availment or use of such credit. While the grant is mandatory, the
availment or use is not. If a net loss is reported by, and no other taxes are currently due from, a business establishment,
there will obviously be no tax liability against which any tax credit can be applied. For the establishment to choose the
immediate availment of a tax credit will bepremature and impracticable. Nevertheless, the irrefutable fact remains
that, under RA7432, Congress has granted without conditions a tax credit benefit to all covered establishments.
However, for the losing establishment to immediately apply such credit, where no tax is due, will be an improvident
usance.

In addition, while a tax liability is essential to the availment or use of any tax credit , prior tax payments are not. On
the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is
needed. The Tax Code is in fact repletewith provisions granting or allowing tax credits, even though no taxes have
been previously paid. Petition is denied.