Commissioner of Internal Revenue vs. Algue Inc.

GR No. L-28896 | Feb. 17, 1988

Facts:
Algue Inc. is a domestic corp engaged in engineering, construction and other allied activities
On Jan. 14, 1965, the corp received a letter from the CIR regarding its delinquency income taxes from 1958-
1959, amtg to P83,183.85
A letter of protest or reconsideration was filed by Algue Inc on Jan 18
On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its counsel, Atty. Guevara, who
refused to receive it on the ground of the pending protest
Since the protest was not found on the records, a file copy from the corp was produced and given to BIR Agent
Reyes, who deferred service of the warrant
On April 7, Atty. Guevara was informed that the BIR was not taking any action on the protest and it was only
then that he accepted the warrant of distraint and levy earlier sought to be served
On April 23, Algue filed a petition for review of the decision of the CIR with the Court of Tax Appeals
CIR contentions:
- the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or
necessary business expense
- payments are fictitious because most of the payees are members of the same family in control of Algue and that
there is not enough substantiation of such payments
CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered in the form of promotional
fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation
of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development
Company.

Issue: W/N the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by Algue
as legitimate business expenses in its income tax returns

Ruling:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance, made in
accordance with law.
RA 1125: the appeal may be made within thirty days after receipt of the decision or ruling challenged
During the intervening period, the warrant was premature and could therefore not be served.
Originally, CIR claimed that the 75K promotional fees to be personal holding company income, but later on
conformed to the decision of CTA
There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns
and paid the corresponding taxes thereon. CTA also found, after examining the evidence, that no distribution of
dividends was involved
CIR suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction
Algue Inc. was a family corporation where strict business procedures were not applied and immediate issuance
of receipts was not required. at the end of the year, when the books were to be closed, each payee made an
accounting of all of the fees received by him or her, to make up the total of P75,000.00. This arrangement was
understandable in view of the close relationship among the persons in the family corporation
The amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar
Estate Development Co. to Algue Inc. was P125K. After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This
was a reasonable proportion, considering that it was the payees who did practically everything, from the formation
of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties.
Sec. 30 of the Tax Code: allowed deductions in the net income – Expenses - All the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable
allowance for salaries or other compensation for personal services actually rendered xxx
the burden is on the taxpayer to prove the validity of the claimed deduction
In this case, Algue Inc. has proved that the payment of the fees was necessary and reasonable in the light of
the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of pesos.
Taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard
earned income to the taxing authorities, every person who is able to must contribute his share in the running of
the government. The government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values
 Taxation must be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his succor

Algue Inc.’s appeal from the decision of the CIR was filed on time with the CTA in accordance with Rep. Act
No. 1125. And we also find that the claimed deduction by Algue Inc. was permitted under the Internal Revenue
Code and should therefore not have been disallowed by the CIR

Brief Fact Summary. The state of Maryland enacted a tax that would force the United States Bank in Maryland
to pay taxes to the state. McCulloch, a cashier for the Baltimore, Maryland Bank, was sued for not complying
with the Maryland state tax.

Synopsis of Rule of Law. Congress may enact laws that are necessary and proper to carry out their enumerated
powers. The United States Constitution (Constitution) is the supreme law of the land and state laws cannot
interfere with federal laws enacted within the scope of the Constitution.

Facts. Congress chartered the Second Bank of the United States. Branches were established in many states,
including one in Baltimore, Maryland. In response, the Maryland legislature adopted an Act imposing a tax on
all banks in the state not chartered by the state legislature. James McCulloch, a cashier for the Baltimore branch
of the United States Bank, was sued for violating this Act. McCulloch admitted he was not complying with the
Maryland law. McCulloch lost in the Baltimore County Court and that court’s decision was affirmed by the
Maryland Court of Appeals. The case was then taken by writ of error to the United States Supreme Court
(Supreme Court).

Issue. Does Congress have the authority to establish a Bank of the United States under the Constitution?

Held. Yes. Judgment reversed.

Counsel for the state of Maryland claimed that because the Constitution was enacted by the independent states,
it should be exercised in subordination to the states. However, the states ratified the Constitution by a two-thirds
vote of their citizens, not by a decision of the state legislature. Therefore, although limited in its powers, the
Constitution is supreme over the laws of the states.
There is no enumerated power within the Constitution allowing for the creation of a bank. But, Congress is
granted the power of making “all laws which shall be necessary and proper for carrying into execution the
foregoing powers.” The Supreme Court determines through Constitutional construction that “necessary” is not a
limitation, but rather applies to any means with a legitimate end within the scope of the Constitution.
Because the Constitution is supreme over state laws, the states cannot apply taxes, which would in effect destroy
federal legislative law. Therefore, Maryland’s state tax on the United States Bank is unconstitutional.

Discussion. This Supreme Court decision establishes the Constitution as the supreme law of the land, taking
precedent over any state law incongruent with it.

Roxas vs. CTA

GR No. L-25043 | April 26, 1968

Facts:
Don Pedro Roxas and Dona Carmen Ayala, both Spanish, transmitted to their grandchildren by hereditary
succession the following properties:
a. Agricultural lands with a total area of 19,000 hectares in Nasugbu, Batangas
- Tenants who have been tilling the lands expressed their desire to purchase from Roxas y Cia, the parcels which
they actually occupied
- The govt, in line with the constitutional mandate to acquire big landed estates and apportion them among
landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings
- The brothers agreed to sell 13,500 hec to the govt for P2.079Mn, plus 300K survey and subdivision expenses
- Unfortunately, the govt did not have funds
- A special arrangement was made with the Rehabilitation Finance Corporation to advance to Roxas y Cia the
amount of P1.5Mn as loan
- Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment,
and contracted with the RFC to pay its loan from the proceeds of the yearly amortizations paid by the farmers
- In 1953 and 1955, Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
P29,500.71. 50% of said net gain was reported for income tax purposes as gain on the sale of capital asset held
for more than one year pursuant to Sec. 34 of the Tax Code

b. Residential house and lot at Wright St., Malate, Manila

- After the marriage of Antonio and Eduardo, Jose lived in the house where he paid rentals of 8K/year to Roxas
y Cia

c. Shares of stocks in different corporations

To manage the properties, Antonio Roxas, Eduardo Roxas and Jose Roxas, the children, formed a partnership
called Roxas y Compania
On 1958, CIR demanded from Roxas y Cia the payment of real estate dealer's tax for 1952 amtg to P150.00
plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers of securities plus P10.00
compromise penalty for late payment.
- Basis: house rentals received from Jose, pursuant to Art. 194 of the Tax Code stating that an owner of a real
estate who derives a yearly rental income therefrom in the amount of P3,000.00 or more is considered a real
estate dealer and is liable to pay the corresponding fixed tax
The Commissioner further assessed deficiency income taxes against the brothers for 1953 and 1955, resulting
from the inclusion as income of Roxas y Cia of the unreported 50% of the net profits derived from the sale of the
Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various business
expenses and contributions claimed by Roxas y Cia and the Roxas brothers
The brothers protested the assessment but was denied, thus appealing to the CTA
CTA decision: sustained the assessment except the demand for the payment of the fixed tax on dealer of
securities and the disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas
de Jesus' Retiro de Manresa

Issue: Should Roxas y Cia be considered a real estate dealer because it engaged in the business of selling real
estate

Ruling: NO, being an isolated transaction

Real estate dealer: any person engaged in the business of buying, selling, exchanging, leasing or renting
property on his own account as principal and holding himself out as a full or part-time dealer in real estate or as
an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand
pesos or more a year:
Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving rentals of at
least P3,000.00 a year, does not provide any qualification as to the persons paying the rentals
The fact that there were hundreds of vendees and them being paid for their respective holdings in installment
for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the
10-year amortization period
the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in
consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate
lands to the landless
It was the duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell
its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. But due
to the lack of funds, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly
to the farmers in the same way and under the same terms as would have been the case had the Government done
it itself
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly
Therefore, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to
Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale
thereof is capital gain, taxable only to the extent of 50%

As to the deductions
a. P40 tickets to a banquet given in honor of Sergio Osmena and P28 San Miguel beer given as gifts to various
persons – representation expenses
Representation expenses: deductible from gross income as expenditures incurred in carrying on a trade or
business
In this case, the evidence does not show such link between the expenses and the business of Roxas y Cia
b. Contributions to the Pasay police and fire department and other police departments as Christmas funds
Contributions to the Christmas funds are not deductible for the reason that the Christmas funds were not spent
for public purposes but as Christmas gifts to the families of the members of said entities
Under Section 39(h), a contribution to a government entity is deductible when used exclusively for public
purposes
As to the contribution to the Manila Police trust fund, such is an allowable deduction for said trust fund belongs
to the Manila Police, a government entity, intended to be used exclusively for its public functions.
c. Contributions to the Philippines Herald's fund for Manila's neediest families
The contributions were not made to the Philippines Herald but to a group of civic spirited citizens organized
by the Philippines Herald solely for charitable purposes
There is no question that the members of this group of citizens do not receive profits, for all the funds they
raised were for Manila's neediest families. Such a group of citizens may be classified as an association organized
exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code
d. Contribution to Our Lady of Fatima chapel at the FEU
University gives dividends to its stockholders
Located within the premises of the university, the chapel in question has not been shown to belong to the
Catholic Church or any religious organization
The contributions belongs to the Far Eastern University, contributions to which are not deductible under
Section 30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its
stockholders

No deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955 they
are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively

PASEO REALTY AND DEVELOPMENT CORP. vs. CA

(G.R. No. 119286; 13 October 2004)

Facts:

Petitioner filed a its Income Tax Return (ITR) for the calendar year 1989. He later filed with respondent CTA
for a refund of excess creditable taxes withholding (CTW) and income taxes for the years 1989 and 1990 in the
aggregate amount of 147, 036.15.

Respondent Commissioner (CIR) filed an Answer stating some defenses. The Court rendered decision in favor
of the petitioner. However, CIR filed a Motion for Reconsideration (MFR) alleging that the amount sought to be
refunded “has already been included in the 172, 447 which the petitioner applied as tax credit for the succeeding
taxable year 1990.

Upon the respondent Court (RC) dismissed the petition, the petitioner filed MFR which was denied by the RC.
Thus, petitioner filed a petition for Review before the CA. The appellate court held that petitioner is not entitled
to a refund because it appears that the latter did not specify the amount to be refunded and the amount to be
applied as tax credit to the succeeding taxable year, but only marked an “X” to the box indicating “to be applied
as tax credit to the succeeding taxable year” when the latter filed its income tax return for the year 1989.

The Office of the Solicitor General (OSG) filed a Comment that the claimed refund was to be applied against its
tax liability for 1990.

Petitioner filed a Reply that the issue is not whether the 54,104 was included as tax credit to be applied against
its 1990 income tax liability but whether the same amount was actually applied as tax credit for 1990.

The OSG filed a Rejoinder that petitioner’s 1989 tax return shows that the latter included 1988 excess credit
which had already been segregated for refund and specified that the full amount of Php 172, 479.00 be
considered as its tax credit for 1990. The OSG further contended that the remaining tax credit for 1989 should
be the excess credit to be applied against its 1990 tax liability. Hence, petitioner ask for a refund of its CTW in
1989 because it had been applied against its 1990 tax due.

Issue:

Whether or not the petitioner should be refunded.

Ruling:

No. The grant of refund is founded on the assumption that the tax return is valid. Without the tax return, it is
error to grant a refund since it would be impossible to determine whether the proper taxes have been assessed
and paid.

In this case, petitioner did not present evidence to prove that its claimed refund had already been automatically
credited against its 1990 tax liability. The burden of proof to establish the factual basis of claim for tax credit or
refund lies on the claimant. Tax refunds are construed strictly against the taxpayer.

Under the provision, the taxpayer is allowed three (3) options if the sum of its quarterly tax payments made
during the taxable year is not equal to the total tax due for that year:

 pay the balance of the tax still due;

 carry-over the excess credit; or
 be credited or refunded the amount period.

 CIR and Commissioner of Customs vs. Botelho Shipping Corp. & General Shipping Co., Inc.
 G.R. Nos. L-21633-34 June 29, 1967

 FACTS: Reparations Commission of the Philippines sold to Botelho the vessel "M/S Maria Rosello" for
the amount of P6,798,888.88. The former likewise sold to General Shipping the vessel "M/S General
Lim" at the price of P6,951,666.66. Upon arrival at the port of Manila, the Bureau of Customs placed the
same under custody and refused to give due course [to applications for registration], unless the
aforementioned sums of P483,433 and P494,824 be paid as compensating tax. The buyers subsequently
filed with the CTA their respective petitions for review. Pending the case, Republic Act No. 3079
amended Republic Act No. 1789 — the Original Reparations Act, under which the aforementioned
contracts with the Buyers had been executed — by exempting buyers of reparations goods acquired from
the Commission, from liability for the compensating tax.

 Invoking [section 20 of the RA 3079], the Buyers applied, for the renovation of their utilizations contracts
with the Commission, which granted the application, and, then, filed with the Tax Court, their
supplemental petitions for review. The CTA ruled in favor of the buyers.

 [On appeal, the CIR and COC maintain that such proviso should not be applied retroactively], upon the
ground that a tax exemption must be clear and explicit; that there is no express provision for the
retroactivity of the exemption, established by Republic Act No. 3079, from the compensating tax; that
the favorable provisions, which are referred to in section 20 thereof, cannot include the exemption from
compensating tax; and, that Congress could not have intended any retroactive exemption, considering
that the result thereof would be prejudicial to the Government.

 ISSUE: Whether or not the tax exemption can be applied retroactively

 HELD: YES. The inherent weakness of the last ground becomes manifest when we consider that, if true,
there could be no tax exemption of any kind whatsoever, even if Congress should wish to create one,
 because every such exemption implies a waiver of the right to collect what otherwise would be due to
the Government, and, in this sense, is prejudicial thereto. It may not be amiss to add that no tax exemption
— like any other legal exemption or exception — is given without any reason therefor. In much the same
way as other statutory commands, its avowed purpose is some public benefit or interest, which the law-
making body considers sufficient to offset the monetary loss entitled in the grant of the exemption.
Indeed, section 20 of Republic Act No. 3079 exacts a valuable consideration for the retroactivity of its
favorable provisions, namely, the voluntary assumption, by the end-user who bought reparations goods
prior to June 17, 1961 of "all the new obligations provided for in" said Act.

 Furthermore, Section 14 of the Law on Reparations, as amended, exempts from the compensating tax,
not particular persons, but persons belonging to a particular class. Indeed, appellants do not assail the
constitutionality of said section 14, insofar as it grants exemptions to end-users who, after the approval
of Republic Act No. 3079, on June 17, 1961, purchased reparations goods procured by the Commission.
From the viewpoint of Constitutional Law, especially the equal protection clause, there is no difference
between the grant of exemption to said end-users, and the extension of the grant to those whose contracts
of purchase and sale mere made before said date, under Republic Act No. 1789.


Tan v Del Rosario, Jr., 237 SCRA 324 (1994)

1. Two consolidated cases assail the validity of RA 7496 or the Simplified Net Income Taxation Scheme
("SNIT"), which amended certain provisions of the NIRC, as well as the Rules and Regulations promulgated by
public respondents pursuant to said law.

2. Petitioners posit that RA 7496 is unconstitutional as it allegedly violates the following provisions of the
Constitution:

-Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject which shall be
expressed in the title thereof.

- Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.

- Article III, Section 1 — No person shall be deprived of . . . property without due process of law, nor shall any
person be denied the equal protection of the laws.

3. Petitioners contended that public respondents exceeded their rule-making authority in applying SNIT to
general professional partnerships. Petitioner contends that the title of HB 34314, progenitor of RA 7496, is
deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and
Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289) when the full text of the
title actually reads,

'An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals
Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue
Code,' as amended. Petitioners also contend it violated due process.

5. The Solicitor General espouses the position taken by public respondents.

6. The Court has given due course to both petitions.

ISSUE: Whether or not the tax law is unconstitutional for violating due process
NO. The due process clause may correctly be invoked only when there is a clear contravention of inherent or
constitutional limitations in the exercise of the tax power. No such transgression is so evident in herein case.

1. Uniformity of taxation, like the concept of equal protection, merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not violate
classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the
categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both
present and future conditions, and (4) the classification applies equally well to all those belonging to the same
class.

2. What is apparent from the amendatory law is the legislative intent to increasingly shift the income tax system
towards the schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the
present global treatment on taxable corporations. The Court does not view this classification to be arbitrary and
inappropriate.

ISSUE 2: Whether or not public respondents exceeded their authority in promulgating the RR

No. There is no evident intention of the law, either before or after the amendatory legislation, to place in an
unequal footing or in significant variance the income tax treatment of professionals who practice their respective
professions individually and of those who do it through a general professional partnership.

Mactan Cebu International Airport Authority v. Marcos 261 SCRA 667 (1996)

Oct

23

Facts:

Petitioner Mactan Cebu International Airport Authority was created by virtue of R.A. 6958, mandated to
principally undertake the economical, efficient, and effective control, management, and supervision of the
Mactan International Airport and Lahug Airport, and such other airports as may be established in Cebu.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of realty
taxes in accordance with Section 14 of its charter. However, on October 11, 1994, Mr. Eustaquio B. Cesa,
Officer in Charge, Office of the Treasurer of the City of Cebu, demanded payment from realty taxes in the total
amount of P2229078.79. Petitioner objected to such demand for payment as baseless and unjustified claiming in
its favor the afore cited Section 14 of R.A. 6958. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing Section 133 of the Local Government Code of 1991.

Section 133. Common limitations on the Taxing Powers of Local Government Units.

The exercise of the taxing powers of the provinces, cities, barangays, municipalities shall not extend to the levi
of the following:
xxx Taxes, fees or charges of any kind in the National Government, its agencies and instrumentalities, and
LGU’s. xxx

Respondent City refused to cancel and set aside petitioner’s realty tax account, insisting that the MCIAA is a
government-controlled corporation whose tax exemption privilege has been withdrawn by virtue of Sections 193
and 234 of Local Government Code that took effect on January 1, 1992.

Issue:

Whether or not the petitioner is a “taxable person”

Rulings:

Taxation is the rule and exemption is the exception. MCIAA’s exemption from payment of taxes is withdrawn
by virtue of Sections 193 and 234 of Local Government Code. Statutes granting tax exemptions shall be strictly
construed against the taxpayer and liberally construed in favor of the taxing authority.

The petitioner cannot claim that it was never a “taxable person” under its Charter. It was only exempted from
the payment of realty taxes. The grant of the privilege only in respect of this tax is conclusive proof of the
legislative intent to make it a taxable person subject to all taxes, except real property tax.

PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. vs. MUNICIPALITY OF TANAUAN

69 SCRA 460
GR No. L-31156, February 27, 1976

"Legislative power to create political corporations for purposes of local self-government carries with it the power
to confer on such local governmental agencies the power to tax.

FACTS: Plaintiff-appellant Pepsi-Cola commenced a complaint with preliminary injunction to declare Section 2
of Republic Act No. 2264, otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation
of taxing authority as well as to declare Ordinances Nos. 23 and 27 denominated as "municipal production tax"
of the Municipality of Tanauan, Leyte, null and void. Ordinance 23 levies and collects from soft drinks producers
and manufacturers a tax of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked, and Ordinance
27 levies and collects on soft drinks produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. Aside
from the undue delegation of authority, appellant contends that it allows double taxation, and that the subject
ordinances are void for they impose percentage or specific tax.

ISSUE: Are the contentions of the appellant tenable?

HELD: No. On the issue of undue delegation of taxing power, it is settled that the power of taxation is an essential
and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without
being expressly conferred by the people. It is a power that is purely legislative and which the central legislative
body cannot delegate either to the executive or judicial department of the government without infringing upon the
theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which, said
theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local
concern. By necessary implication, the legislative power to create political corporations for purposes of local self-
government carries with it the power to confer on such local governmental agencies the power to tax.
Also, there is no validity to the assertion that the delegated authority can be declared unconstitutional on the
theory of double taxation. It must be observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be exercised. The reason is that the State has exclusively
reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law, so that double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit
of the same governmental entity or by the same jurisdiction for the same purpose, but not in a case where one tax
is imposed by the State and the other by the city or municipality.
On the last issue raised, the ordinances do not partake of the nature of a percentage tax on sales, or other taxes
in any form based thereon. The tax is levied on the produce (whether sold or not) and not on the sales. The volume
capacity of the taxpayer's production of soft drinks is considered solely for purposes of determining the tax rate
on the products, but there is not set ratio between the volume of sales and the amount of the tax.

Philippine Petroleum Corporation vs Municipality of Pililla Rizal

198 SCRA 82 [GR No. 90776 June 3, 1991]

Facts: Philippine Petroleum Corporation is a business enterprise engaged in the manufacture of lubricated oil
base stocks which is a petroleum product, with its refinery plant situated at Malaya, Pilillia Rizal, conducting its
business activities within the territorial jurisdiction of municipality of Pilillia, Rizal and is in continuous operation
up to the present. PPC owns and maintains an oil refinery including 49 storage tanks for its petroleum products in
Malaya, Pililla, Rizal. Under section 142 of NIRC of 1939, manufactured oils and other fuels are subject to specific
tax. Respondent municipality of Pilillia, Rizal through municipal council resolution no. 25-s-1974 enacted
municipal tax ordinance no. 1-s-1974 otherwise known as “The Pililla Tax Code Of 1974” on June 14, 1974
which took effect on July 1, 1974. Sections 9 and 10 of the said ordinance imposed a tax on business, except for
those which fixed taxes are provided in the local tax code on manufacturers, importers, or producers of any article
of commerce of whatever kind or nature, including brewers, distiller, rectifiers, repackers and compounders of
liquors distilled spirits and/or wines in accordance with the schedule found in the local tax code, as well as mayor’s
permit sanitary inspection fee and storage permit fee for flammable, combustible or explosive substances, while
section 139 of the disputed ordinance imposed surcharges and interests on unpaid taxes, fees or charges. Enforcing
the provisions of the above mentioned ordinance, the respondent filed a complaint on April 4, 1986 docketed as
civil case no. 057-T against PPC for the collection of the business tax from 1979 to 1986; storage permit fees from
1975 to 1986; mayor’s permit fee and sanitary permit inspection fees from 1975 to 1984. PPC, however, have
already paid the last named fees starting 1985.

Issue: Whether or not the Municipality may validly impose taxes on petitioner’s business.

Held: No. While section 2 of PD 436 prohibits the imposition of local taxes on petroleum products, said decree
did not amend sections 19 and 19 (a) of PD 231 as amended by PD 426, wherein the municipality is granted the
right to levy taxes on business of manufacturers, importers, producers of any article of commerce of whatever
kind or nature. A tax on business is distinct from a tax on the article itself. Thus, if the imposition of tax on
business of manufacturers, etc. in petroleum products contravenes a declared national policy, it should have been
expressly stated in PD No. 436.

The exercise by local governments of the power to tax is ordained by the present constitution. To allow the
continuous effectivity of the prohibition set forth in PC no. 26-73 would be tantamount to restricting their power
to tax by mere administrative issuances. Under section 5, article X of the 1987 constitution, only guidelines and
limitations that may be established by congress can define and limit such power of local governments.

The storage permit fee being imposed by Pilillia’s tax ordinance is a fee for the installation and keeping in storage
of any flammable, combustible or explosive substances. In as much as said storage makes use of tanks owned not
by the Municipality of Pilillia but by petitioner PPC, same is obviously not a charge for any service rendered by
the municipality as what is envisioned in section 37 of the same code.

EXECUTIVE SECRETARY vs. SOUTHWING HEAVY INDUSTRIES,INC.,

G.R. No. 164171 February 20, 2006

FACTS:
The instant consolidated petitions seek to annul and set aside the Decisions of the Regional Trial Court
of Olongapo City and Decision of the Court of Appeals which declared Article 2, Section 3.1 of Executive Order
No. 156 (EO 156) unconstitutional. Said executive issuance prohibits the importation into the country, inclusive
of the Special Economic and Freeport Zone or the Subic Bay Freeport (SBF or Freeport), of used motor vehicles,
subject to a few exceptions.

The undisputed facts show that on December 12, 2002, President Gloria Macapagal-Arroyo, through
Executive Secretary Alberto G. Romulo, issued EO 156, entitled “PROVIDING FOR A COMPREHENSIVE
INDUSTRIAL POLICY AND DIRECTIONS FOR THE MOTOR VEHICLE DEVELOPMENT PROGRAM
AND ITS IMPLEMENTING GUIDELINES.” The challenged provision states:

The issuance of EO 156 spawned three separate actions for declaratory relief before Branch 72 of
the Regional Trial Court of Olongapo City, all seeking the declaration of the unconstitutionality of Article 2,
Section 3.1 of said executive order. The cases were filed by herein respondent entities, who or whose members,
are classified as Subic Bay Freeport Enterprises and engaged in the business of, among others, importing and/or
trading used motor vehicles.

G.R. No. 164171: On January 16, 2004, respondents Southwing Heavy Industries, Inc., (SOUTHWING)
United Auctioneers, Inc. (UNITED AUCTIONEERS), and Microvan, Inc. (MICROVAN), instituted a
declaratory relief case docketed as Civil Case No. 20-0-04, against the Executive Secretary, Secretary of
Transportation and Communication, Commissioner of Customs, Assistant Secretary and Head of the Land
Transportation Office, Subic Bay Metropolitan Authority (SBMA), Collector of Customs for the Port at
Subic Bay Freeport Zone, and the Chief of the Land Transportation Office at Subic Bay Freeport Zone.
SOUTHWING, UNITED AUCTIONEERS and MICROVAN prayed that judgment be rendered (1) declaring
Article 2, Section 3.1 of EO 156 unconstitutional and illegal; (2) directing the Secretary of Finance, Commissioner
of Customs, Collector of Customs and the Chairman of the SBMA to allow the importation of used motor vehicles;
(2) ordering the Land Transportation Office and its subordinates inside the Subic Special Economic Zone to
process the registration of the imported used motor vehicles; and (3) in general, to allow the unimpeded entry and
importation of used motor vehicles subject only to the payment of the required customs duties.

G.R. No. 164172: On January 20, 2004, respondent Subic Integrated Macro Ventures Corporation
(MACRO VENTURES) filed with the same trial court, a similar action for declaratory relief docketed as Civil
Case No. 22-0-04, with the same prayer and against the same parties as those in Civil Case No. 20-0-04. In this
case, the trial court likewise rendered a summary judgment on May 24, 2004, holding that Article 2, Section 3.1
of EO 156, is repugnant to the constitution. Elevated to this Court via a petition for review on certiorari, Civil
Case No. 22-0-04 was docketed as G.R. No. 164172.

G.R. No. 168741. On January 22, 2003, respondent Motor Vehicle Importers Association of Subic Bay
Freeport, Inc. (ASSOCIATION), filed another action for declaratory relief with essentially the same prayer as
those in Civil Case No. 22-0-04 and Civil Case No. 20-0-04, against the Executive Secretary, Secretary of Finance,
Chief of the Land Transportation Office, Commissioner of Customs, Collector of Customs at SBMA and the
Chairman of SBMA. This was docketed as Civil Case No. 30-0-2003, before the same trial court.

ISSUE:

Whether Article 2, Section 3.1 of Executive Order No. 156 (EO 156) unconstitutional.

HELD:

The Court finds that Article 2, Section 3.1 of EO 156 is void insofar as it is made applicable to the
presently secured fenced-in former Subic Naval Base area as stated in Section 1.1 of EO 97-A. Pursuant to
the separability clause of EO 156, Section 3.1 is declared valid insofar as it applies to the customs territory or the
Philippine territory outside the presently secured fenced-in former Subic Naval Base area as stated in Section 1.1
of EO 97-A. Hence, used motor vehicles that come into the Philippine territory via the secured fenced-in
former Subic Naval Base area may be stored, used or traded therein, or exported out of the Philippine territory,
but they cannot be imported into the Philippine territory outside of the secured fenced-in former Subic Naval Base
area.

Facts: The Municipal Board of City of Butuan passed Oridinance No 640 on 21 April 1969, “penalizing any
person , group of persons , entity or engeged in the business of selling admission tickets to any movie… to
require children between 7-12 years of age to pay full payment for ticket should only be charged one half.”
Petitioners Carlos Balacuit , et al as managers of theaters assailed the validity and constitutionality of the said
ordinance. The court adjudged in favour of the respondents hence the petition for review. Petitioners contend
that it violates due process clause of the Constitution for being oppressive , unfair , unjust, confiscatory and an
undue restraint of trade.
Issue: Whether or not Ordinance 640 – prohibiting selling of theatre admission tickets to children 7-12 y/o at
full price is constitutional or not?
Decision: Decision reversed. Ordinance 640 declared unconstitutional. For the assailed ordinance be held
constitutional it must pass the test of police power. To invoke the exercise the police power, it must be for the
interest of the public without interfering with private rights and adoptive means must be reasonably necessary
for the accomplishment of the purpose and not unduly oppressive upon individuals.
While it is true that a business may be regulated, it is equally true that such regulation must be within the bounds
of reason, that is, the regulatory ordinance must be reasonable, and its provisions cannot be oppressive
amounting to an arbitrary interference with the business or calling subject of regulation. The right of the owner
to fix a price at which his property shall be sold or used is an inherent attribute of the property itself and, as
such, within the protection of the due process clause. Hence, the proprietors of a theater have a right to manage
their property in their own way, to fix what prices of admission they think most for their own advantage, and
that any person who did not approve could stay away.

PHILIPPINE AIRLINES, INC. v. EDU

G.R. No. L- 41383, August 15, 1988

FACTS:

The Philippine Airlines (PAL) is a corporation engaged in the air transportation business under a legislative
franchise, Act No. 42739. Under its franchise, PAL is exempt from the payment of taxes.

Sometime in 1971, however, Land Transportation Commissioner Romeo F. Elevate (Elevate) issued a
regulation pursuant to Section 8, Republic Act 4136, otherwise known as the Land and Transportation and
Traffic Code, requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, Elevate refused to register PAL's motor vehicles unless the amounts imposed under
Republic Act 4136 were paid. PAL thus paid, under protest, registration fees of its motor vehicles. After paying
under protest, PAL through counsel, wrote a letter dated May 19,1971, to Land Transportation Commissioner
Romeo Edu (Edu) demanding a refund of the amounts paid. Edu denied the request for refund. Hence, PAL filed
a complaint against Edu and National Treasurer Ubaldo Carbonell (Carbonell).

The trial court dismissed PAL's complaint. PAL appealed to the Court of Appeals which in turn certified the
case to the Supreme Court.

ISSUE:

Whether or not motor vehicle registration fees are considered as taxes.

RULING:
Yes. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then
the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The motor vehicle
registration fees are actually taxes intended for additional revenues of the government even if one fifth or less of
the amount collected is set aside for the operating expenses of the agency administering the program.

LUTZ vs ARANETA

FACTS:

Appelant in this case Walter Lutz in his capacity as the Judicial Administrator of the intestate of the deceased
Antonio Jayme Ledesma, seeks to recover from the Collector of the Internal Revenue the total sum of fourteen
thousand six hundred sixty six and forty cents (P 14, 666.40) paid by the estate as taxes, under section 3 of
Commonwealth Act No. 567, also known as the Sugar Adjustment Act, for the crop years 1948-1949 and 1949-
1950. Commonwealth Act. 567 Section 2 provides for an increase of the existing tax on the manufacture of
sugar on a graduated basis, on each picul of sugar manufacturer; while section 3 levies on the owners or persons
in control of the land devoted tot he cultivation of sugarcane and ceded to others for consideration, on lease or
otherwise - "a tax equivalent to the difference between the money value of the rental or consideration collected
and the amount representing 12 per centum of the assessed value of such land. It was alleged that such tax is
unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in
plaintiff's opinion is not a public purpose for which a tax may be constitutionally levied. The action was
dismissed by the CFI thus the plaintiff appealed directly to the Supreme Court.

ISSUE:

Whether or not the tax imposition in the Commonwealth Act No. 567 are unconstitutional.

RULING:

Yes, the Supreme Court held that the fact that sugar production is one of the greatest industry of our nation,
sugar occupying a leading position among its export products; that it gives employment to thousands of laborers
in the fields and factories; that it is a great source of the state's wealth, is one of the important source of foreign
exchange needed by our government and is thus pivotal in the plans of a regime committed to a policy of
currency stability. Its promotion, protection and advancement, therefore redounds greatly to the general welfare.
Hence it was competent for the legislature to find that the general welfare demanded that the sugar industry be
stabilized in turn; and in the wide field of its police power, the law-making body could provide that the
distribution of benefits therefrom be readjusted among its components to enable it to resist the added strain of
the increase in taxes that it had to sustain.

The subject tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of
the threatened sugar industry. In other words, the act is primarily a valid exercise of police power.

Republic v Mambulao Lumber Company, et al GR No L-17725, February 28, 1962

FACTS:
Mambulao Lumber Company paid the Government a total of P 9,127.50 as reforestation charges for the years
1947 to
1956. It is the company’s contention that said sum of 9,127.50, not having been used in the reforestation of the
area covered by its license, the same is refundable to it or may be applied in compensation of P 4,802.37 due
from it as forest charges.
Court of First Instance of Manila ordered the company to pay the government the sum of P 4,802.37 with 6%
interest thereon from date of the filing of the complaint until fully paid, plus costs. Thus, the present appeal.

ISSUE: Whether the set-off or compensation is proper

RULING:
No. There is nothing in the law which requires that the amount collected as reforestation charges should be used
exclusively for the reforestation of the area covered by the license of a licensee or concessionaire, and that if not
so used, the same shall be refunded to him.
The conclusion seems to be that the amount paid by a licensee as reforestation charges is in the nature of a tax
which forms part of the Forestation Fund, payable by him irrespective of whether the area covered by his license
is reforested or not.
Said fund, as the law expressly provides, shall be expended in carrying out the purposes provided for
thereunder, namely, the reforestation or afforestation, among others, of denuded areas needing reforestation or
afforestation.
The weight of authority is to the effect that internal revenue taxes, such as the forest charges in question is not
subject to set-off or compensation. Taxes are not in the nature of contracts between the parties but grow out of a
duty to, and are positive acts of the government, to the making and enforcing of which, the personal consent of
the individual taxpayers is not required.
With respect to the forest charges which the company has paid to the government, they are in the coffers of the
government as tax collected, and the government does not owe anything. It is crystal clear that the Republic of
the Philippines and the Mambulao Lumber Company are not creditors and debtors of each other, because
compensation refers to mutual debts.

Domingo v. Garlitos, 8 SCRA 443

FACTS:
In Domingo vs. Moscoso (106 PHIL 1138), the Supreme Court declared as final and executory the order of the
Court of First Instance of Leyte for the payment of estate and inheritance taxes, charges and penalties amounting
to P40,058.55 by the Estate of the late Walter Scott Price. The petition for execution filed by the fiscal, however,
was denied by the lower court. The Court held that the execution is unjustified as the Government itself is indebted
to the Estate for 262,200; and ordered the amount of inheritance taxes be deducted from the Government’s
indebtedness to the Estate.

ISSUE:
Whether a tax and a debt may be compensated.

HELD:
The court having jurisdiction of the Estate had found that the claim of the Estate against the Government has been
recognized and an amount of P262,200 has already been appropriated by a corresponding law (RA 2700). Under
the circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services
rendered have already become overdue and demandable as well as fully liquidated. Compensation, therefore, takes
place by operation of law, in accordance with Article 1279 and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount.

TOLENTINO vs SEC OF FINANCE

FArturo Tolentino et al are questioning the constitutionality of RA 7716 otherwise known as the Expanded Value
Added Tax (EVAT) Law. Tolentino averred that this revenue bill did not exclusively originate from the House of
Representatives as required by Section 24, Article 6 of the Constitution. Even though RA 7716 originated as HB
11197 and that it passed the 3 readings in the HoR, the same did not complete the 3 readings in Senate for after
the 1st reading it was referred to the Senate Ways & Means Committee thereafter Senate passed its own version
known as Senate Bill 1630. Tolentino averred that what Senate could have done is amend HB 11197 by striking
out its text and substituting it with the text of SB 1630 in that way “the bill remains a House Bill and the Senate
version just becomes the text (only the text) of the HB”. (It’s ironic however to note that Tolentino and co-
petitioner Raul Roco even signed the said Senate Bill.)
ISSUE: Whether or not the EVAT law is procedurally infirm.
HELD: No. By a 9-6 vote, the Supreme Court rejected the challenge, holding that such consolidation was
consistent with the power of the Senate to propose or concur with amendments to the version originated in the
HoR. What the Constitution simply means, according to the 9 justices, is that the initiative must come from the
HoR. Note also that there were several instances before where Senate passed its own version rather than having
the HoR version as far as revenue and other such bills are concerned. This practice of amendment by substitution
has always been accepted. The proposition of Tolentino concerns a mere matter of form. There is no showing that
it would make a significant difference if Senate were to adopt his over what has been done.

ABAKADA GURO vs EXEC SEC

Petitioners ABAKADA GURO Party List challenged the constitutionality of R.A. No. 9337 particularly
Sections 4, 5 and 6, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code
(NIRC). These questioned provisions contain a uniform proviso authorizing the President, upon
recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any
of the following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
(1 ½%).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive
authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution. They
further argue that VAT is a tax levied on the sale or exchange of goods and services and cannot be included
within the purview of tariffs under the exemption delegation since this refers to customs duties, tolls or tribute
payable upon merchandise to the government and usually imposed on imported/exported goods. They also said
that the President has powers to cause, influence or create the conditions provided by law to bring about the
conditions precedent. Moreover, they allege that no guiding standards are made by law as to how the Secretary
of Finance will make the recommendation. They claim, nonetheless, that any recommendation of the Secretary
of Finance can easily be brushed aside by the President since the former is a mere alter ego of the latter, such
that, ultimately, it is the President who decides whether to impose the increased tax rate or not.

Issues:

1. Whether or not R.A. No. 9337 has violated the provisions in Article VI, Section 24, and Article VI, Section
26 (2) of the Constitution.
2. Whether or not there was an undue delegation of legislative power in violation of Article VI Sec 28 Par 1
and 2 of the Constitution.
3. Whether or not there was a violation of the due process and equal protection under Article III Sec. 1 of the
Constitution.

Discussions:
1. Basing from the ruling of Tolentino case, it is not the law, but the revenue bill which is required by the
Constitution to “originate exclusively” in the House of Representatives, but Senate has the power not only
to propose amendments, but also to propose its own version even with respect to bills which are required by
the Constitution to originate in the House. the Constitution simply means is that the initiative for filing
revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of local
application must come from the House of Representatives on the theory that, elected as they are from the
districts, the members of the House can be expected to be more sensitive to the local needs and problems.
On the other hand, the senators, who are elected at large, are expected to approach the same problems from
the national perspective. Both views are thereby made to bear on the enactment of such laws.
2. In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire
whether the statute was complete in all its terms and provisions when it left the hands of the legislature so
that nothing was left to the judgment of any other appointee or delegate of the legislature.
3. The equal protection clause under the Constitution means that “no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same
place and in like circumstances.”

Rulings:

1. R.A. No. 9337 has not violated the provisions. The revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its constitutional power to introduce amendments to the
House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes,
percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain
any prohibition or limitation on the extent of the amendments that may be introduced by the Senate to the
House revenue bill.
2. There is no undue delegation of legislative power but only of the discretion as to the execution of a law.
This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power
when it describes what job must be done, who must do it, and what is the scope of his authority; in our
complex economy that is frequently the only way in which the legislative process can go forward.
3. Supreme Court held no decision on this matter. The power of the State to make reasonable and natural
classifications for the purposes of taxation has long been established. Whether it relates to the subject of
taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment,
valuation and collection, the State’s power is entitled to presumption of validity. As a rule, the judiciary
will not interfere with such power absent a clear showing of unreasonableness, discrimination, or
arbitrariness.

CIR vs CA CENTRAL VEGETABLE

Petitioner Central Vegetable Oil Manufacturing Co., Inc. ( CENVOCO ) is a manufacturer of edible and
coconut/coprameal cake and such other coconut related oil subject to the miller's tax of 3%. Petitioner also
manufactures lard, detergent and laundry soap subject to the sales tax of 10%.
In 1986, petitioner purchased a specified number of containers and packaging materials for its edible oil from its
suppliers and paid the sales tax due thereon.

After an investigation conducted by respondent's Revenue Examiner, Assessment Notice was issued against
petitioner for deficiency miller's tax in the total amount of P1,575,514.70

CENVOCO requesting for reconsideration of the above deficiency miller's tax assessments, contending that the
final provision of Section 168 of the Tax Code does not apply to sales tax paid on containers and packaging
materials, hence, the amount paid therefor should have been credited against the miller's tax assessed against it -
that since packaging materials are not used in the milling process then, the sales taxes paid thereon should be
allowed as a credit against the miller's tax due because they do not fall within the scope of the prohibition.

Respondent wrote CENVOCO regarding its position stating that since the law specifically does not allow taxes
paid on the raw materials or supplies used in the milling process as a credit against the miller's tax due, with
more reason should the sales taxes paid on materials not used in the milling process be allowed as a credit
against the miller's tax due. There is no provision of law which allows such a credit-to-be made.

CENVOCO filed a petition for review with the Court of Tax Appeals, which came out with a decision in favor
of CENVOCO. Appealed to the Court of Appeals, the said decision was affirmed.

Issue:
1. Whether or not a reversal of the ruling is violative of the rule on non-retroactivity of rulings of tax officials?

2. Whether or not the sales tax paid by CENVOCO when it purchased containers for its milled products can be
credited against the deficiency miller's tax.

Held:
1. NO. According to petitioner, to hold, as what the Court of Appeals did, that a reversal of the aforesaid ruling
would be violative of the rule on non-retroactivity of rulings of tax officials when prejudicial to the taxpayer
(Section 278 of the old Tax Code) would, in effect, create a perpetual exemption in favor of CENVOCO
although there may be subsequent changes in circumstances warranting a reversal.

In the case, well-entrenched principle that the government is never estopped from collecting taxes because of
mistakes or errors on the part of its agents, but this rule admits of exceptions in the interest of justice and
fairplay. Moreso is there no error in allowing the sales taxes paid by CENVOCO on the containers and packages
of its milled products, to be credited against the deficiency miller's tax due thereon, for a proper application of
the law.

2. NO. The sales, miller's and excise taxes paid on all other materials (except on raw materials used in the
milling process), such as the sales taxes paid on containers and packaging materials of the milled products under
consideration, may be credited against the miller's tax due therefor. Containers and packaging materials are
certainly not raw materials. Cans and tetrapaks are not used in the manufacture of Cenvoco's finished products
which are coconut, edible oil or coprameal cake. Such finished products are packed in cans and tetrapaks.

*Decision of the CA affirmed.

Luzon Stevedoring Corp v Court of Tax Appeals GR No L-30232, July 29, 1988

FACTS:
Luzon Stevedoring Corp imported various engine parts and other equipment for tugboat repair and maintenance
in 1961 and 1962. It paid the assessed compensation tax under protest. Unable to secure a tax refund from the
Commissioner for the amount of P33,442.13, it filed a petition for review with the Court of Tax Appeals. The
CTA denied the petition as well as the motion for reconsideration filed thereafter. Hence, this petition.

ISSUE:
Is the Corporation exempt from compensation tax?

RULING:
No. As the power of taxation is a high prerogative of sovereignty, the relinquishment of such is never presumed
and any reduction or diminution thereof with respect to its mode or its rate, must be strictly construed, and the
same must be couched in clear and unmistakable terms in order that it may be applied. The corporation’s
tugboats do not fall under the categories of passenger or cargo vessels to avail of the exemption from
compensation tax in Section 190 of the Tax Code. It may be further noted that the amendment of Section 190 of
Republic Act of 3176 was intended to provide incentives and inducements to bolster the shipping industry and
not in the business of stevedoring, in which the corporation is engaged in.

Thus, Luzon Stevedoring Corp is not exempt from compensation tax under Section 190, and is thus not entitled
to refund.

CIR v Gotamco
GR No L-31092, February 27, 1987

FACTS:
The World Health Organization (WHO) decided to construct a building to house its offices, as well as the other
United
Nations Offices in Manila. Inviting bids for the construction of the building, the WHO informed the bidders of
its tax exemptions. The contract was awarded to John Gotamco and sons. The Commissioner opined that a 3%
contractor’s tax should be due from the contractor. The WHO issued a certification that Gotamco should be
exempted, but the Commissioner insisted on the tax. Raised in the Court of Tax Appeals, the Court ruled in
favor of Gotamco.

ISSUE:
Is Gotamco liable for the tax?

RULING:
No. Direct taxes are those that are demanded from the very person who, it is intended or desired, should pay
them; while indirect taxes are those that are demanded in the first instance from one person in the expectation
and intention that he can shift the burden to someone else.

Herein, the contractor’s tax is payable by the contractor but it is the owner of the building that shoulders the
burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation.
Such tax is an “indirect tax” on the organization, as the payment thereof or its inclusion in the bid price would
have meant an increase in the construction cost of the building.

Hence, WHO’s exemption from “indirect taxes” implies that Gotamco is exempt from contractor’s tax.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA
UNIVERSITY, respondents.

FACTS:
Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality
separate and distinct from that of private respondent. The IPC is a Philippine unit engaged in social science studies
of Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international
organizations, private foundations and government agencies.

On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a demand letter
dated June 3, 1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor's tax,
and an assessment dated June 27, 1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the
fiscal year ended March 31, 1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest
and subsequently filed with the latter a memorandum contesting the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency income tax but
modifying the assessment for deficiency contractor's tax by increasing the amount due to P193,475.55.
Unsatisfied, private respondent requested for a reconsideration or reinvestigation of the modified assessment. At
the same time, it filed in the respondent court a petition for review of the said letter-decision of the petitioner.
ISSUE: In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit
or branch — the Institute of Philippine Culture — performing the work of an independent contractor and, thus,
subject to the three percent contractor's tax levied by then Section 205 of the National Internal Revenue Code?

HELD:

The petition is unmeritorious.

The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:

Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of
three per centum of the gross receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors, except persons, associations and corporations
under contract for embroidery and apparel for export, as well as their agents and contractors, and except
gross receipts of or from a pioneer industry registered with the Board of Investments under the provisions
of Republic Act No. 5186;
xxx xxx xxx
The term "independent contractors" include persons (juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental faculties of such
contractors or their employees.

The term "independent contractor" shall not include regional or area headquarters established in the
Philippines by multinational corporations, including their alien executives, and which headquarters do
not earn or derive income from the Philippines and which act as supervisory, communications and
coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region.

The term "gross receipts" means all amounts received by the prime or principal contractor as the total
contract price, undiminished by amount paid to the subcontractor, shall be excluded from the taxable
gross receipts of the subcontractor.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University
"falls within the definition" of an independent contractor and "is not one of those mentioned as excepted"; hence,
it is properly a subject of the three percent contractor's tax levied by the foregoing provision of law. 6 Petitioner
states that the "term 'independent contractor' is not specifically defined so as to delimit the scope thereof, so much
so that any person who . . . renders physical and mental service for a fee, is now indubitably considered an
independent contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo has the burden of proof to
show its exemption from the coverage of the law.

We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption
without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously
both illogical and impractical to determine who are exempted without first determining who are covered by the
aforesaid provision. The Commissioner should have determined first if private respondent was covered by Section
205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before
asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine
in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly,
expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended by implication." 8

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever
sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the
academic purposes of the university.

The records do not show that Ateneo's IPC in fact contracted to sell its research services for a fee. Funds
received by the Ateneo de Manila University are technically not a fee. They may however fall as gifts or
donations which are tax-exempt" as shown by private respondent's compliance with the requirement of Section
123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational
institution.

It is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of a fee
or price in exchange for the performance of a service or delivery of an object. Rather, the amounts are in the
nature of an endowment or donation given by IPC's benefactors solely for the purpose of sponsoring or funding
the research with no strings attached. As found by the two courts below, such sponsorships are subject to IPC's
terms and conditions. No proprietary or commercial research is done, and IPC retains the ownership of the
results of the research, including the absolute right to publish the same. The copyrights over the results of the
research are owned by Ateneo and, consequently, no portion thereof may be reproduced without its
permission. 15 The amounts given to IPC, therefore, may not be deemed, it bears stressing as fees or gross
receipts that can be subjected to the three percent contractor's tax.

In the case at bench, it is clear from the evidence on record that there was no sale either of objects or services
because, as adverted to earlier, there was no transfer of ownership over the research data obtained or the results
of research projects undertaken by the Institute of Philippine Culture.

Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of
maintaining Ateneo's university status and not in the course of an independent business of selling such research
with profit in mind.

The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of
P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it
was Ateneo de Manila University itself that had funded the research projects of the institute, and it was only
when Ateneo could no longer produce the needed funds that the institute sought funding from outside.

So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine Culture
when it undisputedly loses not an insignificant amount in the process? The plain and simple answer is that private
respondent is not a contractor selling its services for a fee but an academic institution conducting these researches
pursuant to its commitments to education and, ultimately, to public service. For the institute to have tenaciously
continued operating for so long despite its accumulation of significant losses, we can only agree with both the
Court of Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive for undertaking
the research
projects." 25

Misamis Oriental vs Cagayan Electric (1990)

February 15, 2013 markerwins Tax Law

Facts: Cagayan Electric Power and light Co, Inc. (CEPALCO) was granted a franchise in 1961 under RA 3247
to install, operate and maintain an electric light, heat and power system in Cagayan de Oro and its suburbs. In
1973, the Local Tax Code (PD 231) was promulgated, where Section 9 thereof providing for a franchise tax.
Pursuant thereto, the province of Misamis Oriental enacted Provincial Revenue Ordinance 19, whose Section 12
also provides for a franchise tax. The Provincial Treasurer demanded payment of the provincial franchise tax
from CEPALCO. CEPALCO paid under protest.

Issue: Whether CEPALCO is exempt from the provincial franchise tax.

Held: Local Tax Regulation 3-75 issued by the Secretary of Finance in 1976 made it clear that the franchise tax
provided in the Local Tax Code may only be imposed on companies with franchise that do not contain the
exempting clause, i.e. “in-lieu-of-all-taxes-proviso.” CEPALCO’s franchise i.e. RA 3247, 3571 and 6020
(Section 3 thereof), uniformly provides that “in consideration of the franchise and rights hereby granted, the
grantee shall pay a franchise tax equal to 3% of the gross earnings for electric current sold under the franchise,
of which 2% goes to the national Treasury and 1% goes into the treasury of the municipalities of Tagoloan,
Opol, Villanueva, Jasaan, and Cagayan de Oro, as the case may be: Provided, that the said franchise tax of 3%
of the gross earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges,
earnings, income, franchise and poles, wires, transformers, and insulators of the grantee from which taxes and
assessments the grantee is hereby expressly exempted.

CIR V ROH AUTO PRODUCTS

 EO No. 41 was promulgated declaring a one-time tax amnesty on unpaid income taxes, later amended to
include estate and donor's taxes and taxes on business, for the taxable years 1981 to 1985.
 Availing itself of the amnesty, respondent R.O.H. Auto Products Philippines, Inc., filed its Tax Amnesty
Return and Supplemental Tax Amnesty Return and paid the corresponding amnesty taxes due.
 Prior to this availment, petitioner assessed the latter deficiency income and business taxes for its fiscal
years of 1981 and 1982
 The taxpayer wrote back to state that since it had been able to avail itself of the tax amnesty, the
deficiency tax notice should forthwith be cancelled and withdrawn.
 The request was denied by the Commissioner on the ground that Revenue Memorandum Order,
implementing EO 41, had construed the amnesty coverage to include only assessments issued by the BIR
after the promulgation of the executive order on and not to assessments theretofore made.
 Respondent (herein petitioner Commissioner) failed to present any case or law which proves that an
assessment can withstand or negate the force and effects of a tax amnesty. This burden of proof on the
petitioner (herein respondent taxpayer) was created by the clear and express terms of the executive order's
intention — qualified availers of the amnesty may pay an amnesty tax in lieu of said unpaid taxes which
are forgiven (Section 2, Section 5, Executive Order No. 41, as amended). More specifically, the plain
provisions in the statute granting tax amnesty for unpaid taxes for the period January 1, 1981 to December
31, 1985 shifted the burden of proof on respondent to show how the issuance of an assessment before
the date of the promulgation of the executive order could have a reasonable relation with the objective
periods of the amnesty, so as to make petitioner still answerable for a tax liability which, through the
statute, should have been erased with the proper availment of the amnesty.
Additionally, the exceptions enumerated in Section 4 of Executive Order No. 41, as amended, do not indicate any
reference to an assessment or pending investigation aside from one arising from information furnished by an
informer. . . . Thus, we deem that the rule in Revenue Memorandum Order No. 4-87 promulgating that only
assessments issued after August 21, 1986 shall be abated by the amnesty is beyond the contemplation of Executive
Order No. 41, as amended. 2
On appeal by the Commissioner to the Court of Appeals, the decision of the tax court was affirmed. The appellate
court further observed:
In the instant case, examining carefully the words used in Executive Order No. 41, as amended, we find nothing
which justifies petitioner Commissioner's ground for denying respondent taxpayer's claim to the benefits of the
amnesty law. Section 4 of the subject law enumerates, in no uncertain terms, taxpayers who may not avail of the
amnesty granted,. . . .
Admittedly, respondent taxpayer does not fall under any of the . . . exceptions. The added exception urged by
petitioner Commissioner based on Revenue Memorandum Order No. 4-87, further restricting the scope of the
amnesty clearly amounts to an act of administrative legislation quite contrary to the mandate of the law which the
regulation ought to implement.
xxx xxx xxx
Lastly, by its very nature, a tax amnesty, being a general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes
of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it, and
in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing to reform a
chance to do so and thereby become a part of the new society with a clean slate. (Republic vs. Intermediate
Appellate Court. 196 SCRA 335, 340 [1991] citing Commissioner of Internal Revenue vs. Botelho Shipping
Corp., 20 SCRA 487) To follow [the restrictive application of Revenue Memorandum Order No. 4-87 pressed by
petitioner Commissioner would be to work against the raison d'etre of E.O. 41, as amended, i.e., to raise
government revenues by encouraging taxpayers to declare their untaxed income and pay the tax due thereon. (E.O.
41, first paragraph)] 3
In this petition for review, the Commissioner raises these related issues:
1. WHETHER OR NOT REVENUE MEMORANDUM ORDER NO. 4-87, PROMULGATED TO
IMPLEMENT E.O. NO. 41, IS VALID;
2. WHETHER OR NOT SAID DEFICIENCY ASSESSMENTS IN QUESTION WERE EXTINGUISHED BY
REASON OR PRIVATE RESPONDENT'S AVAILMENT OF EXECUTIVE ORDER NO. 41 AS AMENDED
BY EXECUTIVE ORDER NO. 64;
3. WHETHER OR NOT PRIVATE RESPONDENT HAS OVERCOME THE PRESUMPTION OF VALIDITY
OF ASSESSMENTS. 4
The authority of the Minister of Finance (now the Secretary of Finance), in conjunction with the Commissioner
of Internal Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal
revenue laws cannot be controverted. Neither can it be disputed that such rules and regulations, as well as
administrative opinions and rulings, ordinarily should deserve weight and respect by the courts. Much more
fundamental than either of the above, however, is that all such issuances must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement. Administrative rules and regulations
are intended to carry out, neither to supplant nor to modify, the law.
The real and only issue is whether or not the position taken by the Commissioner coincides with the meaning and
intent of executive Order No. 41.
We agree with both the court of Appeals and court of Tax Appeals that Executive Order No. 41 is quite explicit
and requires hardly anything beyond a simple application of its provisions. It reads:
Sec. 1. Scope of Amnesty. — A one-time tax amnesty covering unpaid income taxes for the years 1981 to 1985
is hereby declared.
Sec. 2. Conditions of the Amnesty. — A taxpayer who wishes to avail himself of the tax amnesty shall, on or
before October 31, 1986;
a) file a sworn statement declaring his net worth as of December 31, 1985;
b) file a certified true copy of his statement declaring his net worth as of December 31, 1980 on record with the
Bureau of Internal Revenue, or if no such record exists, file a statement of said net worth therewith, subject to
verification by the Bureau of Internal Revenue;
c) file a return and pay a tax equivalent to ten per cent (10%) of the increase in net worth from December 31, 1980
to December 31, 1985: Provided, That in no case shall the tax be less than P5,000.00 for individuals and
P10,000.00 for judicial persons.
Sec. 3. Computation of Net Worth. — In computing the net worths referred to in Section 2 hereof, the following
rules shall govern:
a) Non-cash assets shall be valued at acquisition cost.
b) Foreign currencies shall be valued at the rates of exchange prevailing as of the date of the net worth statement.
Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax already filed in court as of the effectivity filed
in court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue Code, as amended, insofar as
the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the effectivity hereof as a
result of information furnished under Section 316 of the National Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and Chapter Four
(Malversation of Public Funds and Property) of the Revised Penal Code, as amended.
xxx xxx xxx
Sec. 9. The Minister of finance, upon the recommendation of the Commissioner of Internal Revenue, shall
promulgate the necessary rules and regulations to implement this Executive Order.
xxx xxx xxx
Sec. 11. This Executive Order shall take effect immediately.
DONE in the City of Manila, this 22nd day of August in the year of Our Lord, nineteen hundred and eighty-six.
The period of the amnesty was later extended to 05 December 1986 from 31 October 1986 by Executive Order
No. 54, dated 04 November 1986, and, its coverage expanded, under Executive Order No. 64, dated 17 November
1986, to include estate and honors taxes and taxes on business.
If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax liabilities
already assessed (administratively) prior to 22 August 1986, the law could have simply so provided in its
exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the executive order has been designed
to be in the nature of a general grant of tax amnesty subject only to the cases specifically excepted by it.
It might not be amiss to recall that the taxable periods covered by the amnesty include the years immediately
preceding the 1986 revolution during which time there had been persistent calls, all too vivid to be easily forgotten,
for civil disobedience, most particularly in the payment of taxes, to the martial law regime. It should be
understandable then that those who ultimately took over the reigns of government following the successful
revolution would promptly provide for abroad, and not a confined, tax amnesty.
Relative to the two other issued raised by the Commissioner, we need only quote from Executive Order No. 41
itself; thus:
Sec. 6. Immunities and Privileges. — Upon full compliance with the conditions of the tax amnesty and the rules
and regulations issued pursuant to this Executive order, the taxpayer shall enjoy the following immunities and
privileges:
a) The taxpayer shall be relieved of any income tax liability on any untaxed income from January 1, 1981 to
December 31, 1985, including increments thereto and penalties on account of the non-payment of the said tax.
Civil, criminal or administrative liability arising from the non-payment of the said tax, which are actionable under
the National Internal Revenue Code, as amended, are likewise deemed extinguished.
b) The taxpayer's tax amnesty declaration shall not be admissible in evidence in all proceedings before
judicial, quasi-judicial or administrative bodies, in which he is a defendant or respondent, and the same shall not
be examined, inquired or looked into by any person, government official, bureau or office.
c) The books of account and other records of the taxpayer for the period from January 1, 1981 to December 31,
1985 shall not be examined for income tax purposes: Provided, That the Commissioner of Internal Revenue may
authorize in writing the examination of the said books of accounts and other records to verify the validity or
correctness of a claim for grant of any tax refund, tax credit (other than refund on credit of withheld taxes on
wages), tax incentives, and/or exemptions under existing laws.
There is no pretension that the tax amnesty returns and due payments made by the taxpayer did not conform with
the conditions expressed in the amnesty order.
WHEREFORE, the decision of the court of Appeals, sustaining that of the court of Tax Appeals, is hereby
AFFIRMED in toto. No costs.
SO ORDERED.

Maceda v Macaraig
GR No 88291, May 31, 1991

FACTS:
Commonwealth Act 120 created NAPOCOR as a public corporation to undertake the development of hydraulic
power and the production of power from other sources. RA 358 granted NAPOCOR tax and duty exemption
privileges. RA 6395 revised the charter of the NAPOCOR, tasking it to carry out the policy of the national
electrification and provided in detail NAPOCOR’s tax exceptions. PD 380 specified that NAPOCOR’s
exemption includes all taxes, etc. imposed “directly or indirectly.” PD 938 dated May 27, 1976 further amended
the aforesaid provision by integrating the tax exemption in general terms under one paragraph.

ISSUE:
Whether or not NPC has ceased to enjoy indirect tax and duty exemption with the enactment of PD 938 on May
27, 1976 which amended PD 380 issued on January 11, 1974

RULING:
No, it is still exempt.
NAPOCOR is a non-profit public corporation created for the general good and welfare, and wholly owned by
the government of the Republic of the Philippines. From the very beginning of the corporation’s existence,
NAPOCOR enjoyed preferential tax treatment “to enable the corporation to pay the indebtedness and
obligation” and effective implementation of the policy enunciated in Section 1 of RA 6395.

From the preamble of PD 938, it is evident that the provisions of PD 938 were not intended to be interpreted
liberally so as to enhance the tax exempt status of NAPOCOR.

It is recognized that the rule on strict interpretation does not apply in the case of exemptions in favor of
government political subdivision or instrumentality. In the case of property owned by the state or a city or other
public corporations, the express exception should not be construed with the same degree of strictness that
applies to exemptions contrary to the policy of the state, since as to such property “exception is the rule and
taxation the exception.”

Hydro Resources Contractors Corporation v CTA

Facts:
National Irrigation Administration (NIA) entered into an agreement with Hydro Resources for the construction
of the Magat River Multipurpose Project in Isabela. Under their contract, Hydro was allowed to procure new
construction equipment, the payment for which will be advanced by NIA. Hydro shall repay NIA the costs
incurred and the manner of repayment shall be through deductions from each monthly payment due to Hydro.
Hydro shall repay NIA the full value of the construction before the eventual transfer of ownership.

Upon transfer, Hydro was assessed an additional 3% ad valorem duty which it paid under protest. The Collector
of Customs then ordered for the refund of the ad valorem duty in the form of tax credit. This was then reversed
by the Deputy Minister of Finance.

Issue:

Whether or not the imposition of the 3% ad valorem tax on importations is valid.

Held:

No. EO 860 which was the basis for the imposition of the ad valorem duty took effect December 1982. The
importations were effected in 1978 and 1979 by NIA. It is a cardinal rule that laws shall have no retroactive
effect unless contrary is provided. EO 860 does not provide for its retroactivity. The Deputy Minister of Finance
even clarified that letters of credit opened prior to the effectivity of EO 860 are not subject to its provisions.

In the case, the procurement of the equipment was not on a tax exempt basis as the import liabilities have been
secured to paid under a financial scheme. It is a matter of implementing a pre-existing agreement, hence, the
imported articles can only be subject to the rates of import duties prevailing at the time of entry or withdrawal
from the customs’ custody.

24. Central Azucarera Don Pedro –v– CIR and CTA

G.R. Nos. L-23236 and L-23254 May 31, 1967

FACTS: Central Azucarera Don Pedro, a domestic corporation with office at Nasugbu, Batangas, had been filing
its income tax returns on the "fiscal year" basis ending August 31, of every year.

[It had been assessed deficiency tax plus interest. It paid the deficiency tax but protested on the imposition of the
interest], claiming that the imposition of ½% monthly interest on its deficiency tax for the fiscal year 1954 to
1958, Pursuant to Section 51 (d) of the Revenue Code, as amended by Republic Act No. 2343, is illegal, because
the imposition of interest on efficiency income tax earned prior to the effectivity of the amendatory law (Rep. Act
2343) [on 1959] will be tantamount to giving it (Rep. Act No. 2343) retroactive application. [It further contends
that] the application of the amended provision (now Sec. 51-d of the Tax Code) to the cases at bar would run
counter to the constitutional restriction against the enactment of ex post facto laws.

ISSUE: Whether or not the imposition of the interest, is unconstitutional

HELD: NO – [the interest was correctly imposed]. It is to be noted that the collection of interest in these cases is
not penal in nature, thus —

the imposition of . . . interest is but a just compensation to the state for the delay in paying the tax, and for the
concomitant use by the taxpayer of funds that rightfully should be in the government's hands (U.S. vs. Goldstein,
189 F [2d] 752; Ross vs. U.S., 148 Fed. Supp. 330; U.S. vs. Joffray, 97 Fed. [2d] 488). The fact that the interest
charged is made proportionate to the period of delay constitutes the best evidence that such interest is not penal
but compensatory. (Castro vs. Collector of Internal Revenue, G.R. No. L-12174, Resolution on Motion for
Reconsideration, December 28, 1962)

and we had already held that —

The doctrine of unconstitutionality raised by appellant is based on the prohibition against ex post facto laws. But
this prohibition applies only to criminal or penal matters, and not to laws which concern civil matters or
proceedings generally, or which affect or regulate civil or private rights (Ex parte Garland, 18 Law Ed., 366; 16
C.J.S., 889-891). (Republic vs. Oasan Vda. de Fernandez, 99 Phil. 934, 937).
Finally, section 13 of the amendatory Republic Act No. 2343 refers only to the basic tax rates, which are made
applicable to income received in 1959 onward, but does not affect the interest due on deficiencies, which are left
to be governed by section 51 (d).

CIR v. Benguet Corp

G.R. Nos. 134587 and 134588; January 8, 2005

Facts: Benguet Corporation is a domestic corporation engaged in the exploration, development and operation of
mineral resources, and the sale or marketing thereof to various entities. It is a VAT registered enterprise.

The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of NIRC as
amended by E.O. 273 s. 1987 then in effect, any person who, in the course of trade or business, sells, barters or
exchanges goods, renders services, or engages in similar transactions and any person who imports goods is liable
for output VAT at rates of either 10% or 0% (zero-rated) depending on the classification of the transaction under
Sec. 100 of the NIRC.

In January of 1988, Benguet applied for and was granted by the BIR zero-rated status on its sale of gold to Central
Bank. On 28 August 1988 VAT Ruling No. 3788-88 was issued which declared that the sale of gold to Central
Bank is considered as export sale subject to zero-rate pursuant to
Section 100 of the Tax Code, as amended by EO 273.

Relying on its zero-rated status and the above issuances, Benguet sold gold to the Central Bank during the period
of 1 August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT incurred in relation to
the subject sales of gold. It then filed applications for tax refunds/credits
corresponding to input VAT.

However, such request was not granted due to BIR VAT Ruling No. 008-92 dated 23 January 1992 that was issued
subsequent to the consummation of the subject sales of gold to the Central Ban`k which provides that sales of
gold to the Central Bank shall not be considered as export sales and thus, shall be subject to 10% VAT. BIR VAT
Ruling No. 008-92 withdrew, modified, and superseded all inconsistent BIR issuances.
Both petitioner and Benguet agree that the retroactive application of VAT Ruling No. 008-92 is valid only if such
application would not be prejudicial to the Benguet pursuant Sec. 246 of the NIRC.

Issues: (1) WON Benguet’s sale of gold to the Central Bank during the
period when such was classified by BIR issuances as zerorated could be taxed validly at a 10% rate after the
consummation of the transactions involved; (2) WON there was prejudice to Benguet Corp due to the new BIR
VAT Ruling.

Held: (1) NO. At the time when the subject transactions were consummated, the prevailing BIR regulations relied
upon by Benguet ordained that gold sales to the Central Bank were zero-rated. Benguet should not be faulted for
relying on the BIRs interpretation of the said laws and regulations.

While it is true, as CIR alleges, that government is not estopped from collecting taxes which remain unpaid on
account of the errors or mistakes of its agents and/or officials and there could be no vested right arising from an
erroneous interpretation of law, these principles must give way to
exceptions based on and in keeping with the interest of justice and fair play. (then the Court cited the ABS-CBN
case).

(2) YES. The adverse effect is that Benguet Corp became the unexpected and unwilling debtor to the BIR of the
amount equivalent to the total VAT cost of its product, a liability it previously could have recovered from the BIR
in a zero-rated scenario or at least passed on to the Central Bank had it known it would have been taxed at a 10%
rate. Thus, it is clear that Benguet suffered economic prejudice when it consummated sales of gold to the Central
Bank were taken out of the zero-rated category. The change in the VAT rating of Benguet’s transactions with the
Central Bank resulted in the twin loss of its exemption from payment of output VAT and its opportunity to recover
input VAT, and at the same time subjected it to the 10% VAT sans the option to pass on this cost to the Central
Bank, with the total prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the
Central Bank.
Even assuming that the right to recover Benguets excess payment of income tax has not yet prescribed, this relief
would only address Benguet’s overpayment of income tax but not the other burdens discussed above. Verily, this
remedy is not a feasible option for Benguet because the very reason why it was issued a deficiency tax assessment
is that its input VAT
was not enough to offset its retroactive output VAT. Indeed, the burden of having to go through an unnecessary
and cumbersome refund process is prejudice enough.
Commissioner of Internal Revenue v Ayala Securities Corporation

Facts:

Ayala Securities Corp. (Ayala) failed to file returns of their accumulated surplus so Ayala was charged with
25% surtax by the Commissioner of internal Revenue. The CTA (Court of Tax Appeals) reversed the
Commissioner’s decision and held that the assessment made against Ayala was beyond the 5-yr prescriptive
period as provided in section 331 of the National Internal Revenue Code. Commissioner now files a motion for
reconsideration of this decision. Ayala invokes the defense of prescription against the right of the Commissioner
to assess the surtax.

Issue:

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

Held:

No. There is no such time limit on the right of the Commissioner to assess the 25% surtax since there is no
express statutory provision limiting such right or providing for its prescription. Hence, the collection of surtax is
imprescriptible. The underlying purpose of the surtax is to avoid a situation where the corporation unduly retains
its surplus earnings instead of declaring and paying dividends to its shareholders. SC reverses the ruling of the
CTA.

CIR v Tokyo Shipping Co. LTD. GR No L-68252, May 26, 1995

FACTS:

Tokyo Shipping filed a claim for refund from the BIR for erroneous prepayment of income and common
carrier’s taxes amounting to P107,142.75 since no receipt was realized from its charter agreement. BIR failed to
act promptly on the claim and thus it was elevated to the Court of Tax Appeals which decided in favor of the
refund. Hence, this petition for review on certiorari.

ISSUE:

Whether Tokyo Shipping is entitled to a refund or tax credit for the prepayment of taxes

RULING:

Yes. The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the “hen that lays the golden egg”. Fair deal is expected by taxpayers from
the BIR and the duty demands that BIR should refund without unreasonable delay the erroneous collection.

CIR vs Rufino ( Merger)

Facts:
Private respondents ( RUFINOS: Vicente, Remedios, Ernesto, El vira, Rafael) were majority stockholders of the
defunct Eastern Theatrical INC Co., a corporation organized in 1934 for a period of 25 years termination on Ja.
25, 1959. It had an original capital stock of P 500K which was increased in 1949 to P 2 million and was organized
to engage in the business of operating theaters, opera houses, places of amusement and other related business and
enterprises , more particularly the Lyric and Capitol Theaters in Manila. The president of the corportation ( OLD
Corporation ) during the year in question was Ernesto Rufino.

The same private respondents are also the majority and controlling stockholders of another corporation , the
Eastern Theatrical Co which was organized on Dec. 8, 1958, for a term of 50 years , with authorized capital
stock of P200K. The corporation is engaged in the same kind of business as the OLD corporation.

In a special meeting of stockholders of the OLD corporation in Dec. 1958, a resolution was passed authorizing
the OLD corporation to merge with NEW corporation by transferring its business, assets, good will and liabilities
to the latter, which in exchange would issue and distribute to shareholders of the OLD corporation one share for
each share held by them in said corporation. It was expressly declare that the merger of the OLD corp and NEW
corp was necessary to continue the exhibition of moving pictures at the Lyric and Capitol even after expiration of
the corporate existence of the OLD corp. , in view of its pending booking contracts, not to mention its collecting
bargaining agreements with its employees.

Pursuant to said resolution, a deed of assignment providing the conveyance and transfer of the OLD to the NEW
corp in exchange of the latter’s shares of stock to be distributed among the share holders on the basis of one stock
for each stockholder held in the OLD corp. Thereafter, the resolution was duly approved by the stockholders of
the NEW CORP in special meeting in 1959. The deed of assignment has retroactive effect on Jan. 1, 1959.

BIR examined later the series of transactions made by the private respondents. BIR averred that the merger was
not undertaken for a bonafide business purpose but merely to avoid liability for capital gains tax on the exchange
of the OLD for the new shares of stock . Accordingly, CIR imposed the deficiency assessments against the private
respondents. Private respondents requested for reconsideration but it was denied.

Petitioner further posited that the deed of assignment concluded was intended merely to evade the burden of
taxation, the petitioner pointed out that the NEW corp did not actually issue stocks in exchange of the properties
of the OLD corp. and that the exchange was only on the paper. Consequently, as there was no merger, the
automatic dissolution of the OLD corp on its expiry date resulted in its liquidation , for which the respondents are
now liable in taxes on their capital gains.

CTA: Reversed petitioner’s decision.

Issue: Whether the merger is valid?

Held: YES. There was a VALID merger although the actual transfer of the properties subject of the deed of
assignment was not made on the date of the merger. In the nature of things, this was not possible. It was necessary
for the OLD corp to surrender its net assets first to the NEW CORP before the latter could issue its own stock to
the shareholders of the OLD corp. because the NEW corp had to increase its capitalization for this purpose. The
required adoption of the resolution to this effect at the special meeting in 1959, the registration of such issuance
with the SEC and approval by the body. All these took place AFTER the date of the merger but they were deemed
part and parcel of and indispensable to the validity and enforceability of the deed of assignment. Thus, there was
no impediment to the exchange of of property for stock between the 2 coprorations being considered to have been
effected on the date of merger and that in fact , was the intention and the reason why the deed of assignment was
made retroactive on Ja. 1, 1959. Such retroaction provided in effect all transactions set forth in the merger
agreement shall be deemed to be taking place simultaneously on Jan 1, 1959, when the deed of assignment became
operative.

Additionally, there was no indication that the scheme adopted by private respondents was to evade tax burdens
because it is clear that the purpose of the merger was to continue the business of the OLD corp, whose corporate
life was about to expire, thru the NEW corp. to which all assets and obligations of the former had been transferred.
The NEW CORP continues to do so today after taking over the business of the OLD corp 27 years ago.

Delpher Trades Corp. V. IAC (1988) – Gutierrez, Jr., J.

Petitioners: Delpher Trades Corporation, and Delphin Pacheco
Respondents: Intermediate Appellate Court and Hydro Pipes Philippines, Inc.

Brief Facts: Delf and Pelagia Pacheco leased the lot they co-owned to CCII to which the siblings granted a right
of first refusal. CCII assigned its rights to Hydro Pipes. A deed of exchange was executed between the Pachecos
and Delpher Trades Corp. wherein the Pachecos conveyed the leased lot to Delpher in exchange for 2500 shares
of stock. Hydro Pipes filed a complaint for reconveyance for alleged violation of its right of first refusal.

Doctrine: After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock
directly from the corporation or from individual owners thereof.

FACTS:
1. Delfin Pacheco and his sister Pelagia Pacheco were the co-owners of a real estate in Polo (now Valenzuela).
2. They leased the property to Construction Components International Inc. (CCII), providing that during the
existence or after the term of this lease the lessor, should he decide to sell the property leased shall first offer
the same to the lessee and the latter has the priority to buy under similar conditions.
3. CCII assigned its rights and obligations under the contract of lease in favour of Hydro Pipes Philippines, Inc.
with the signed conformity and consent of the Pachecos. The contract and assignment of lease were annotated
at the back of the title.
4. A deed of exchange was executed between the Pachecos and defendant Delpher Trades Corporation whereby
the former conveyed to the latter the leased property together with another parcel of land also in Valenzuela
for 2500 shares of stock of Delpher (total value of P1.5M)
5. On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the
lease agreement, Hydro Pipes filed an amended complaint for reconveyance of the lot in its favour under
conditions similar to those whereby Delpher acquired the property from the Pachecos.
6. The CFI ruled in favour of Hydro Pipes. This was affirmed on appeal by the IAC.
7. Petitioners filed a petition for certiorari which was initially denied by the SC but upon MR, the SC gave it
due course.
8. Eduardo Neria, CPA and son-in-law of Pelagia testified that:
a. Delpher is a family corporation, organized by the children of Pelagia Pacheco and Benjamin
Hernandez, and Sps. Delfin and Pilar Pacheco, who owned in common the parcel of land leased to
Hydro Pipes in order to perpetuate their control over the property through the corporation and to
avoid taxes;
b. To accomplish this, two pieces of real estate, including the land leased to Hydro Pipes, were
transferred to the corporation;
c. The leased property was transferred to the corporation by virtue of a deed of exchange of property;
in exchange for these properties, Pelagia and Delfin acquired 2500 unissued no par value shares of
stock which are equivalent to a 55% majority in the corporation because the other owners only
owned 2000 shares
d. At the time of incorporation, he knew all about the contract of lease to Hydro Pipes. In the
petitioners’ MR, they refer to this scheme as “estate planning”
9. Petitioners contend that there was actually no transfer of ownership of the subject parcel of land since the
Pachecos remained in control of the property. The transfer of ownership, if anything, was merely in form, but
not in substance.
a. Petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation
and the co-owners should be deemed to be the same, there being identity of interest.
b. The Pachecos did not sell the property. There was no sale and they exchanged the land for shares of
stocks in their own corporation.
10. Respondents argue that Delpher is a corporate entity separate and distinct from the Pachecos. It cannot be
said that Delpher is the Pacheco’s alter ego or conduit.
a. That Delfin, having treated Delpher as such a separate and distinct corporate entity, is not a party
who may allege that this separate corporate existence should be disregarded.
 b. There was actual transfer of ownership interest over the leased property when the same was
transferred to Delpher in exchange for the latter’s shares of stock.

ISSUE: WON the Deed of Exchange executed by the Pachecos and Delpher was meant to be a contract of
sale, which prejudiced respondent’s right of first refusal. (NO)

RATIO: The Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to
invest their properties and change the nature of their ownership from unincorporated to incorporated form by
organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance
taxes.

 The Deed of Exchange of property cannot be a considered a contract of sale since there was no transfer of
actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their
ownership from one form to another.
 There is nothing wrong or objectionable about the estate planning scheme resorted to by the Pachecos. “The
legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them,
by means which the law permits, cannot be doubted.”
 After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock
directly from the corporation or from individual owners thereof.
o In exchange of their properties, the Pachecos acquired 2500 original unissued no par value shares of
stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the
corporation by subscription.
 A no-par value share does not purport to represent any stated proportionate interest in the capital stock
measured by value, but only an aliquot part of the whole number of such share issuing corporation. The holder
of no-par shares may see from the certificate itself that he is an aliquot sharer in the assets of the corporation.
But this character of proportionate interest is not hidden beneath a false appearance of a given sum in money,
as in the case of par value shares. The capital stock of a corporation issuing only no-par value shares is not
set forth by a stated amount of money, but instead is expressed to be divided into a stated number of shares,
such as 1000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of
the corporation, no matter what value they may have to the extent of 100/1000, or 1/10. Thus, by removing
the par value of shares, the attention of persons interested in the financial condition of a corporation is focused
upon the value of assets and the amount of its debts.
 There was no attempt to state the true or current market value of the real estate. Land valued at P300.00 per
square meter was turned over to the family’s corporation for only P14.00 a square meter.

DISPOSITIVE: Petition granted.

Estate of Benigno Toda Jr.

G.R. No. 147188. September 14, 2004
DAVIDE, JR., C.J.

Lessons Applicable: Tax evasion v. Tax avoidance

Laws Applicable:

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.

PHILEX MINING CORP. v. CIR

GR No. 125704, August 28, 1998

294 SCRA 687

FACTS: Petitioner Philex Mining Corp. assails the decision of the Court of Appeals affirming the Court of Tax

Appeals decision ordering it to pay the amount of P110.7 M as excise tax liability for the period from the 2nd

quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from 1994 until fully paid pursuant to

Sections 248 and 249 of the Tax Code of 1977. Philex protested the demand for payment of the tax liabilities

stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in

the amount of P120 M plus interest. Therefore these claims for tax credit/refund should be applied against the

tax liabilities.
ISSUE: Can there be an off-setting between the tax liabilities vis-a-vis claims of tax refund of the petitioner?

HELD: No. Philex's claim is an outright disregard of the basic principle in tax law that taxes are the lifeblood of
the

government and so should be collected without unnecessary hindrance. Evidently, to countenance Philex's

whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law
or in

jurisprudence.

To be sure, Philex cannot be allowed to refuse the payment of its tax liabilities on the ground that it has a

pending tax claim for refund or credit against the government which has not yet been granted.Taxes cannot be

subject to compensation for the simple reason that the government and the taxpayer are not creditors and

debtors of each other. There is a material distinction between a tax and debt. Debts are due to the Government

in its corporate capacity, while taxes are due to the Government in its sovereign capacity. xxx There can be no

off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot

refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax

being collected. The collection of a tax cannot await the results of a lawsuit against the government.

Commissioner For Internal Revenue V. St Luke’s Medical Center Inc.

Decision Date: September 26, 2012

Link: Case Summary Document
Citation: G.R. No. 195909 [2012] Supreme Court of The Philippines, Carpio, Leonardo-De Castro, Brion,
Perez, Perlas-Bernabe JJ

Summary:

St Luke’s Medical Center Inc. (St Luke’s) is a nonprofit hospital in Manila. On 16 December 2002, the Bureau
of Internal Revenue (BIR) assessed St Luke’s deficiency taxes amounting to ₱76,063,116.06 for 1998,
comprising deficiency income tax, value-added tax, withholding tax on compensation and expanded
withholding tax. The BIR reduced the amount to ₱63,935,351.57 during trial in the First Division of the Court
of Tax Appeals (CTA).

This was a review on certiorari under Rule 45 of the Rules of Court of the Decision of 19 November 2010 of the
CTA and its Resolution of 1 March 2011 in CTA Case No. 6746. The Supreme Court resolved this case on a
pure question of law, which involved the interpretation of sub-section 27(B) and its interaction with sub-sections
30(E) and (G) of the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary nonprofit hospitals.

St Luke’s stated purposes were:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and
scientific hospital which shall give curative, rehabilitative and spiritual care to the sick, diseased and disabled
persons; provided that purely medical and surgical services shall be performed by duly licensed physicians and
surgeons who may be freely and individually contracted by patients;
(b) To provide a career of health science education and provide medical services to the community through
organized clinics in such specialties as the facilities and resources of the corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as well as provide
facilities for scientific and medical researches which, in the opinion of the Board of Trustees, may be justified
by the facilities, personnel, funds, or other requirements that are available;

(d) To cooperate with organized medical societies, agencies of both government and private sector; establish
rules and regulations consistent with the highest professional ethics.

The BIR had argued before the CTA that section 27(B) of the NIRC, which imposes a 10% preferential tax rate
on the income of proprietary nonprofit hospitals, should be applicable to St Luke’s. According to the BIR,
section 27(B), introduced in 1997, ‘is a new provision intended to amend the exemption on non-profit hospitals
that were previously categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax
Code…’. It is a specific provision which prevails over the general exemption on income tax granted under sub-
sections 30(E) and (G) for non-stock, non-profit charitable institutions and civic organisations promoting social
welfare. The BIR contended that St Luke’s was not really operating for charitable purposes, but was for profit,
on the basis that only 13% of its revenues came from its charitable purposes.

St Luke’s took the position that the BIR should not consider its total revenues, because its free services to
patients amounted to ₱218,187,498 or 65.20% of its 1998 operating income (i.e. total revenues less operating
expenses) of ₱334,642,615. St Luke’s also claimed that its income did not inure to the benefit of any individual,
and that its making a profit did not affect its status as exempt from taxation under sub-sections 30(E) and (G) of
the NIRC.

The CTA had held that section 27(B) did not apply to St Luke’s. It was exempt from taxation on income derived
from all services to patients, whether paying or non-paying. Thus, the sole issue before the Supreme Court was
whether that decision was correct, i.e. whether section 27(B) did or did not apply. If it did, then St Luke’s would
have to pay the 10% reduced tax rate on the income of proprietary nonprofit hospitals. The Court held that:

Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be
construed together without the removal of such tax exemption. The effect of the introduction of Section 27(B) is
to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions
and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate
under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation
to Section 27(A)(1). Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications
for hospitals are that they must be proprietary and non-profit. ‘Proprietary’ means private… ‘Non-profit’ means
no net income or asset accrues to or benefits any member or specific person, with all the net income or asset
devoted to the institution’s purposes and all its activities conducted not for profit. ‘Non-profit’ does not
necessarily mean ‘charitable’.’

The Court said that charitable institutions were not automatically granted tax exemptions. Tax exemptions are
given by the Congress under specific laws (except for exemption from real property taxation which was given
by the Constitution of the Philippines). Section 30(E) of the NIRC defines a charitable institution as:

(1) a non-stock corporation or association;

(2) organised exclusively for charitable purposes;

(3) operated exclusively for charitable purposes; and

(4) with no part of its net income or assets belonging to or inuring to the benefit of any member, organiser,
officer or any specific person.

There was no doubt that St Luke’s was organised as a non-stock, non-profit charitable institution. However, this
did not automatically exempt it from paying taxes. The last paragraph of section 30 of the NIRC stated that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing 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 tax imposed under this
Code. (emphasis added)

Therefore, the Court said that ‘if a tax exempt charitable institution conducts ‘any’ activity for profit, such
activity is not tax exempt even if its not-for profit activities remain tax exempt’. The Court added that:

The Court cannot expand the meaning of the words ‘operated exclusively’ without violating the NIRC. Services
to paying patients are activities conducted for profit. They cannot be considered any other way. There is a
‘purpose to make profit over and above the cost’ of services. The ₱1.73 billion total revenues from paying
patients is not even incidental to St. Luke’s charity expenditure of ₱218,187,498 for non-paying patients.
(emphasis in original)

The Court therefore held that St Luke’s was not operated exclusively for charitable or social welfare purposes. It
received income from paying patients. This income was subject to 10% taxation under section 27(B) of the
NIRC. As the Court held:

St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt
from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as
long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its
corporate purposes. St. Luke’s, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10%
on its net income from its for-profit activities.

Thus, St Luke’s was liable for tax at the rate of 10% in the 1998 year under section 27(B) of the NIRC. It was
held not liable for surcharges or interest on the amount of tax owing.

Brief Fact Summary. Petitioner operated oil drilling on a parcel of land that belonged to the United States. The
U.S. filed suit to oust Petitioner and the oil operation went into receivership. There was income earned for a year
it was in receivership and the income was paid to Petitioner the following year.

Synopsis of Rule of Law. Income is taxable during the year a taxpayer is entitled to the income and receives it.

acts. Petitioner operated a section of oil land that belonged to the United States. The U.S. filed suit to remove
possession from Petitioner. A receiver was appointed to operate the property and hold the net income. Income
was earned and held by the receiver for the 1916 tax year. The receiver paid that income to Petitioner in 1917
after the receivership was dissolve. Petitioner included this amount as income for 1916. The Circuit Court of
Appeals held that the income was taxable to Petitioner for the year 1917.

Issue. Is the amount received by Petitioner taxable as income during the year received?

Held. Justice Brandeis issued the opinion for the Supreme Court of the United States in holding that the income
is taxable for the 1917 tax year when it was received.
Discussion. The Supreme Court notes that what is relevant is when Petitioner had the right to receive the income
and when it was actually received. Here, the amount became income of the company the year it was entitled to
receive the income. It could not have been income during 1916 when Petitioner had not yet received the income
and it was uncertain whether they ever would receive the income.

COMMISSIONER vs JAVIER

FACTS:
• 1977: Victoria Javier, wife of Javier-respondent, received $999k from Prudential Bank remitted
by her sister Dolores through Mellon Bank in US.
• Around 3 weeks after, Mellon Bank filed a complaint with CFI Rizal against Javier claiming that
its remittance of $1M was a clerical error and should have been $1k only and praying that the
excess be returned on the ground that the Javiers are just trustees of an implied trust for the
benefit of Mellon Bank.
• CFI charged Javier with estafa alleging that they misappropriated and converted it to their own
personal use.
• A year after, Javier filed his Income Tax Return for 1977 and stating in the footnote that “the
taxpayer was recipient of some money received abroad which he presumed to be a gift but
turned out to be an error and is now subject of litigation”
• The Commissioner of Internal Revenue wrote a letter to Javier demanding him to pay taxes for
the deficiency, due to the remittance.
• Javier replied to the Commissioner and said that he will pay the deficiency but denied that he
had any undeclared income for 1977 and requested that the assessment of 1977 be made to
await final court decision on the case filed against him for filing an allegedly fraudulent return.
• Commissioner replied that “the amount of Mellon Bank’s erroneous remittance which you were
able to dispose is definitely taxable” and the Commissioner imposed a 50% fraud penalty on
Javier.

ISSUE: Whether or not Javier is liable for the 50%

penalty.

HELD: No.
• The court held that there was no actual and intentional fraud through willful and deliberate
misleading of the BIR in the case. Javier even noted that “the taxpayer was recipient of some
money received abroad which he presumed to be a gift but turned out to be an error and is now
subject of litigation”
• (the ff are not expressly written in the case, in fact the doctrine I just found it elsewhere but this
is relevant to the topic rather than the issue in the case)
o Claim of right doctrine- a taxable gain is conditioned upon the presence of a claim of right to
the alleged gain and the absence of a definite and unconditional obligation to return or repay.
o In this case, the remittance was not a taxable gain, since it is still under litigation and there is a
chance that Javier might have the obligation to return it. It will only become taxable once the
case has been settled because by then whatever amount that will be rewarded, Javier has a
claim of right over it.
 BULL v. UNITED STATES, (1935)
No. 649
Argued: April 9, 1935 Decided: April 29, 1935
[295 U.S. 247, 248] Messrs. Loring M. Black, Jr., and David A. Buckley, Jr., both of Washington,
D.C., for petitioner.

[295 U.S. 247, 250] The Attorney General and Mr. James W. Morris, of Washington, D.C., for the
United States. [295 U.S. 247, 251]

Mr. Justice ROBERTS delivered the opinion of the Court.

Archibald H. Bull died February 13, 1920. He had been a member of a partnership engaged in the
business of ship-brokers. The agreement of association provided that in the event a partner died the
survivors should continue the business for one year subsequent to his death, and his estate should
'receive the same interests, or participate in the losses to the same extent,' as the deceased partner
would, if living, 'based on the usual method of ascertaining what the said profits or losses would be . ...
Or the estate of the deceased partner shall have the option of withdrawing his interest from the firm
within thirty days after the probate of will ... and all adjustments of profits or losses shall be made as
of the date of such withdrawal.' The estate's representative did not exercise the option to withdraw in
thirty days, and the business was conducted until December 31, 1920, as contemplated by the
agreement.

The enterprise required no capital and none was ever invested by the partners. Bull's share of profits
from January 1, 1920, to the date of his death, February 13, 1920, was $24,124.20; he had no other
accumulated profits [295 U.S. 247, 252] and no interest in any tangible property belonging to the
firm. Profits accruing to the estate for the period from the decedent's death to the end of 1920 were
$212,718.79; $200,117.90 being paid during the year, and $12, 601.70 during the first two months of
1921

The Court of Claims found:

'When filing an estate tax return, the executor included the decedent's interest in the partnership at a
value of $24,124.20, which represented the decedent's share of the earnings accrued to the date of
death, whereas the Commissioner, in 1921, valued such interest at $235,202. 99, and subjected such
increased value to the payment of an estate tax, which was paid in June and August, 1921. The
lastmentioned amount was made up of the amount of $24,124.20 plus the amount of $212,718.79,
hereinbefore mentioned. The estate tax on this increased amount was $41, 517.45.1

'April 14, 1921, plaintiff filed an income tax return for the period February 13, 1920, to December 31,
1920, for the estate of the decedent, which return did not include, as income, the amount of
$200,117.09 received as the share of the profits earned by the partnership during the period for which
the return was filed. The estate employed the cash receipts and disbursement method of accounting.

'Thereafter, in July, 1925, the Commissioner determined that the sum of $200,117.09 received in 1920
should have been returned by the executor as income to the estate for the period February 13 to
December 31, 1920, and notified plaintiff of a deficiency in income tax due from the estate for that
period of $261,212.65, which was due in part to the inclusion of that amount as taxable income and in
part to adjustments not here in contro- [295 U.S. 247, 253] versy. No deduction was allowed by the
Commissioner from the amount of $ 200,117.09 on account of the value of the decedent's interest in
the partnership at his death.' 6 F.Supp. 141, 142.

September 5, 1925, the executor appealed to the Board of Tax Appeals from the deficiency of income
tax so determined. The Board sustained the Commissioner's action in including the item of
$200,117.99 without any reduction on account of the value of the decedent's interest in the
partnership at the date of death,2 and determined a deficiency of $55,166. 49, which, with interest of
$7,510.95, was paid April 14, 1928.
July 11, 1928, the executor filed a claim for refund of this amount, setting forth that the $200,117.99,
by reason of which the additional tax was assessed and paid, was corpus; that it was so originally
determined by the Commissioner and the estate tax assessed thereon was paid by the executor; and
that the subsequent assessment of an income tax against the estate for the receipt of the same sum
was erroneous. The claim was rejected May 8, 1929. September 16, 1930, the executor brought suit in
the Court of Claims, and in his petition, after setting forth the facts as he alleged them to be, prayed
judgment in the alternative: (1) For the principal sum of $62,677.44, the amount paid April 14, 1928,
as a deficiency of income tax unlawfully assessed and collected; or (2) for the sum of $47,643.44 on
the theory that if the sum of $200,117.99 was income for the year 1920 and taxable as such, the United
States should have credited against the income tax attributable to the receipt of this sum the
overpayment of estate tax resulting from including the amount in the taxable estate-$34,035,3 with
interest thereon. [295 U.S. 247, 254] The Court of Claims held that the item was income and properly
so taxed. With respect to the alternative relief sought, it said: 'We cannot consider whether the
Commissioner correctly included the total amount received from the business in the net estate of the
decedent subject to estate tax for the reason that the suit was not timely instituted.' Judgment went
for the United States. 4 Because of the novelty and importance of the question presented we granted
certiorari. 5

1. We concur in the view of the Court of Claims that the amount received from the partnership as
profits earned prior to Bull's death was income earned by him in his lifetime and taxable to him as
such; and that it was also corpus of his estate and as such to be included in his gross estate for
computation of estate tax. We also agree that the sums paid his estate as profits earned after his death
were not corpus but income received by his executor, and to be reckoned in computing income tax for
the years 1920 and 1921. Where the effect of the contract is that the deceased partner's estate shall
leave his interest in the business and the surviving partners shall acquire it by payments to the estate,
the transaction is a sale, and payments made to the estate are for the account of the survivors. It
results that the surviving partners are taxable upon firm profits and the estate is not. 6 Here, however,
the survivors have purchased nothing belonging to the decedent, who had made no investment in the
business and owned no tangible property connected with it. The portion of the profits paid his estate
was therefore income and not corpus; and this is so whether we consider the executor a member of the
old firm for the remainder [295 U.S. 247, 255] of the year, or hold that the estate became a partner in
a new association formed upon the decedent's demise.

2. A serious and difficult issue is raised by the claim that the same receipt has been made the basis of
both income and estate tax, although the item cannot in the circumstances be both income and
corpus; and that the alternative prayer of the petition required the court to render a judgment which
would redress the illegality and injustice resulting from the erroneous inclusion of the sum in the
gross estate for estate tax. The respondent presents two arguments in opposition, one addressed to the
merits and the other to the bar of the statute of limitations.

On the merits it is insisted that the government was entitled to both estate tax and income tax in
virtue of the right conferred on the estate by the partnership agreement and the fruits of it. The
position is that, as the contract gave Bull a valuable right which passed to his estate at his death, the
Commissioner correctly included it for estate tax. And the propriety of treating the share of profits
paid to the estate as income is said to be equally clear. The same sum of money in different aspects
may be the basis of both forms of tax. An example is found in this estate. The decedent's share of
profits accrued to the date of his death was $24,124. 20. This was income to him in his lifetime and his
executor was bound to return it as such. But the sum was paid to the executor by the surviving
partners, and thus became an asset of the estate; accordingly, the petitioner returned that amount as
part of the gross estate for computation of estate tax and the Commissioner properly treated it as
such.

We are told that, since the right to profits is distinct from the profits actually collected, we cannot now
say more than that perhaps the Commissioner put too high a value on the contract right when he
valued it as equal to the amount [295 U.S. 247, 256] of profits received-$212,718.99. This error, if
error it was, the government says is now beyond correction.

While, as we have said, the same sum may in different aspects be used for the computation of both an
income and an estate tax, this fact will not here serve to justify the Commissioner's rulings. They were
inconsistent. The identical money-not a right to receive the amount, on the one hand, and actual
receipt resulting from that right on the other- was the basis of two assessments. The double taxation
involved in this inconsistent treatment of that sum of money is made clear by the lower court's finding
we have quoted. The Commissioner assessed estate tax on the total obtained by adding $24,124.20,
the decedent's share of profits earned prior to his death, and $212,718.79, the estate's share of profits
earned thereafter. He treated the two items as of like quality, considered them both as capital or
corpus; and viewed neither as the measure of value of a right passing from the decedent at death. No
other conclusion may be drawn from the finding of the Court of Claims.

In the light of the facts it would not have been permissible to place a value of $212,718.99 or any other
value on the mere right of continuance of the partnership relation inuring to Bull's estate. Had he
lived, his share of profits would have been income. By the terms of the agreement his estate was to
sustain precisely the same status quoad the firm as he had, in respect of profits and losses. Since the
partners contributed no capital and owned no tangible property connected with the business, there is
no justification for characterizing the right of a living partner to his share of earnings as part of his
capital; and if the right was not capital to him, it could not be such to his estate. Let us suppose Bull
had, while living, assigned his interest in the firm, with his partners' consent, to a third person for a
valuable consideration, and in making return of income had valued or capitalized the right to profits
which [295 U.S. 247, 257] he had thus sold, had deducted such valuation from the consideration
received, and returned the difference only as gain. We think the Commissioner would rightly have
insisted that the entire amount received was income.

Since the firm was a personal service concern and no tangible property was involved in its
transactions, if it had not been for the terms of the agreement, no accounting would have ever been
made upon Bull's death for anything other than his share of profits accrued to the date of his death-
$24,124.20-and this would have been the only amount to be included in his estate in connection with
his membership in the firm. As respects the status after death, the form of the stipulation is
significant. The declaration is that the surviving partners 'are to be at liberty' to continue the business
for a year, in the same relation with the deceased partner's estate as if it were in fact the decedent
himself still alive and a member of the firm. His personal representative is given a veto which will
prevent the continuance of the firm's business. The purpose may well have been to protect the good
will of the enterprise in the interest of the survivors and to afford them a reasonable time in which to
arrange for their future activities. But no sale of the decedent's interest or share in the good will can be
spelled out. Indeed the government strenuously asserted, in supporting the treatment of the payments
to the estate as income, that the estate sold nothing to the surviving partners; and we agree. An
analogous situation would be presented if Bull had not died, but the partnership had terminated by
limitation on February 13, 1920, and the agreement had provided that, if Bull's partners so desired,
the relation should continue for another year. It could not successfully be contended that, in such case,
Bull's share of profit for the additional year was capital.

We think there was no estate tax due in respect of the $212,718.79 paid to the executor as profits for
the period subsequent to the decedent's death. [295 U.S. 247, 258] The government's second point is
that if the use of profits accruing to the estate in computing estate tax was wrong, the statute of
limitations bars correction of the error in the present action. So the Court of Claims thought. We hold
otherwise.

The petitioner included in his estate tax return, as the value of Bull's interest in the partnership, only
$24,124.20, the profit accrued prior to his death. The Commissioner added $212,718.79, the sum
received as profits after Bull's death, and determined the total represented the value of the interest.
The petitioner acquiesced and paid the tax assessed in full in August, 1921. He had no reason to
assume the Commissioner would adjudge the $212,718.79 income and taxable as such. Nor was this
done until July, 1925. The petitioner thereupon asserted, as we think correctly, that the item could not
be both corpus and income of the estate. The Commissioner apparently held a contrary view. The
petitioner appealed to the Board of Tax Appeals from the proposed deficiency of income tax. His
appeal was dismissed April 9, 1928. It was then too late to file a claim for refund of overpayment of
estate tax due to the error of inclusion in the estate of its share of firm profits. 7Inability to obtain a
refund or credit, or to sue the United States, did not, however, alter the fact that if the government
should insist on payment of the full deficiency of income tax, it would be in possession of some
$41,000 in excess of the sum to which it was justly entitled. Payment was demanded. The petitioner
paid April 14, 1928, and on June 11, 1928, presented a claim for refund, in which he still insisted the
amount in question was corpus, had been so determined and estate tax paid on that basis, and should
not be classified for taxation as income. The claim was rejected May 8, 1929, and the present action
instituted September 16, 1930. [295 U.S. 247, 259] The fact that the petitioner relied on the
Commissioner's assessment for estate tax, and believed the inconsistent claim of deficiency of income
tax was of no force, cannot avail to toll the statute of limitations, which forbade the bringing of any
action in 1930 for refund of the estate tax payments made in 1921. As the income tax was properly
collected, suit for the recovery of any part of the amount paid on that account was futile. Upon what
theory, then, may the petitioner obtain redress in the present action for the unlawful retention of the
money of the estate? Before an answer can be given the system of enforcing the government's claims
for taxes must be considered in its relation to the problem.

A tax is an exaction by the sovereign, and necessarily the sovereign has an enforceable claim against
every one within the taxable class for the amount lawfully due from him. The statute prescribes the
rule of taxation. Some machinery must be provided for applying the rule to the facts in each taxpayer's
case, in order to ascertain the amount due. The chosen instrumentality for the purpose is an
administrative agency whose action is called an assessment. The assessment may be a valuation of
property subject to taxation, which valuation is to be multiplied by the statutory rate to ascertain the
amount of tax. Or it may include the calculation and fix the amount of tax payable, and assessments of
federal estate and income taxes are of this type. Once the tax is assessed, the taxpayer will owe the
sovereign the amount when the date fixed by law for payment arrives. Default in meeting the
obligation calls for some procedure whereby payment can be enforced. The statute might remit the
government to an action at law wherein the taxpayer could offer such defense as he had. A judgment
against him might be collected by the levy of an execution. But taxes are the lifeblood of government,
and their prompt and certain availability an imperious need. Time out of mind, therefore, the
sovereign has resorted to more drastic [295 U.S. 247, 260] means of collection. The assessment is
given the force of a judgment, and if the amount assessed is not paid when due, administrative
officials may seize the debtor's property to satisfy the debt.

In recognition of the fact that erroneous determinations and assessments will inevitably occur, the
statutes, in a spirit of fairness, invariably afford the taxpayer an opportunity at some stage to have
mistakes rectified. Often an administrative hearing is afforded before the assessment becomes final;
or administrative machinery is provided whereby an erroneous collection may be refunded; in some
instances both administrative relief and redress by an action against the sovereign in one of its courts
are permitted methods of restitution of excessive or illegal exaction. Thus, the usual procedure for the
recovery of debts is reversed in the field of taxation. Payment precedes defense, and the burden of
proof, normally on the claimant, is shifted to the taxpayer. The assessment supersedes the pleading,
proof, and judgment necessary in an action at law, and has the force of such a judgment. The ordinary
defendant stands in judgment only after a hearing. The taxpayer often is afforded his hearing after
judgment and after payment, and his only redress for unjust administrative action is the right to claim
restitution. But these reversals of the normal process of collecting a claim cannot obscure the fact that
after all what is being accomplished is the recovery of a just debt owed the sovereign. If that which the
sovereign retains was unjustly taken in violation of its own statute, the withholding is wrongful.
Restitution is owed the taxpayer. Nevertheless he may be without a remedy. But we think this is not
true here.

In a proceeding for the collection of estate tax, the United States through a palpable mistake took
more than it was entitled to. Retention of the money was against morality and conscience. But claim
for refund or credit[295 U.S. 247, 261] was not presented or action instituted for restitution within
the period fixed by the statute of limitations. If nothing further had occurred, congressional action
would have been the sole avenue of redress.

In July, 1925, the government brought a new proceeding arising out of the same transaction involved
in the earlier proceeding. This time however, its claim was for income tax. The taxpayer opposed
payment in full, by demanding recoupment of the amount mistakenly collected as estate tax and
wrongfully retained. Had the government instituted an action at law, the defense would have been
good. The United States, we have held, cannot, as against the claim of an innocent party, hold his
money which has gone into its treasury by means of the fraud of their agent. United States v. State
Bank, 96 U.S. 30 . While here the money was taken through mistake without any element of fraud, the
unjust retention is immoral and amounts in law to a fraud on the taxpayer's rights. What was said in
the State Bank Case applies with equal force to this situation. 'An action will lie whenever the
defendant has received money which is the property of the plaintiff, and which the defendant is
obliged by natural justice and equity to refund. The form of the indebtedness or the mode in which it
was incurred is immaterial. ... In these cases (cited in the opinion), and many others that might be
cited, the rules of law applicable to individuals were applied to the United States' 96 U.S. (pages 35,
36).8 A claim for recovery of money so held may not only be the subject of a suit in the Court of
Claims, as shown by the authority referred to, but may be used by way of recoupment and credit in an
action by the United States arising out of the same transaction. United States v. Macdaniel, 7 Pet. 1, 16,
17; United States v. Ringgold, 8 Pet. 150, 163, 164. In the [295 U.S. 247, 262] latter case this language
was used: 'No direct suit can be maintained against the United States; but when an action is brought
by the United States, to recover money in the hands of a party, who has a legal claim against them, it
would be a very rigid principle, to deny to him the right of setting up such claim in a court of justice,
and turn him round to an application to congress. If the right of the party is fixed by the existing law,
there can be no necessity for an application to congress, except for the purpose of remedy. And no
such necessity can exist, when this right can properly be set up by way of defence, to a suit by the
United States.' 9 If the claim for income tax deficiency had been the subject of a suit, any counter
demand for recoupment of the overpayment of estate tax could have been asserted by way of defense
and credit obtained, notwithstanding the statute of limitations had barred an independent suit against
the government therefor. This is because recoupment is in the nature of a defense arising out of some
feature of the transaction upon which the plaintiff's action is grounded. Such a defense is never barred
by the statute of limitations so long as the main action itself is timely. 10

The circumstance that both claims, the one for estate tax and the other for income tax, were
prosecuted to judgment and execution in summary form does not obscure the fact that in substance
the proceedings were actions to collect debts alleged to be due the United States. It is [295 U.S. 247,
263] immaterial that in the second case, owing to the summary nature of the remedy, the taxpayer
was required to pay the tax and afterwards seek refundment. This procedural requirement does not
obliterate his substantial right to rely on his cross-demand for credit of the amount which, if the
United States had sued him for income tax, he could have recouped against his liability on that score.

To the objection that the sovereign is not liable to respond to the petitioner the answer is that it has
given him a right of credit or refund, which, though he could not assert it in an action brought by him
in 1930, had accrued and was available to him, since it was actionable and not barred in 1925 when
the government proceeded against him for the collection of income tax.

The pleading was sufficient to put in issue the right to recoupment. The Court of Claims is not bound
by any special rules of pleading;11 all that is required is that the petition shall contain a plain and
concise statement of the facts relied on and give the United States reasonable notice of the matters it is
called upon to meet. 12 And a prayer for alternative relief, based upon the facts set out in the petition,
may be the basis of the judgment rendered. 13

We are of opinion that the petitioner was entitled to have credited against the deficiency of income tax
the amount of his overpayment of estate tax with interest, and that he should have been given
judgment accordingly. The judgment must be reversed, and the cause remanded for further
proceedings in conformity with this opinion.

COMMISSIONER vs. BOAC

149 SCRA 395
GR No. L-65773-74 April 30, 1987

"The source of an income is the property, activity or service that produced the income. For such source
to be considered as coming from the Philippines, it is sufficient that the income is derived from activity
within the Philippines."

FACTS: Petitioner CIR seeks a review of the CTA's decision setting aside petitioner's assessment of
deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the
fiscal years 1959 to 1971. BOAC is a 100% British Government-owned corporation organized and
existing under the laws of the United Kingdom, and is engaged in the international airline business.
During the periods covered by the disputed assessments, it is admitted that BOAC had no landing
rights for traffic purposes in the Philippines. Consequently, it did not carry passengers and/or cargo
to or from the Philippines, although during the period covered by the assessments, it maintained a
general sales agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas Airways
— which was responsible for selling BOAC tickets covering passengers and cargoes. The CTA sided
with BOAC citing that the proceeds of sales of BOAC tickets do not constitute BOAC income from
Philippine sources since no service of carriage of passengers or freight was performed by BOAC within
the Philippines and, therefore, said income is not subject to Philippine income tax. The CTA position
was that income from transportation is income from services so that the place where services are
rendered determines the source.

ISSUE: Are the revenues derived by BOAC from sales of ticket for air transportation, while having no
landing rights here, constitute income of BOAC from Philippine sources, and accordingly, taxable?

HELD: Yes. The source of an income is the property, activity or service that produced the income. For
the source of income to be considered as coming from the Philippines, it is sufficient that the income
is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is
the activity that produces the income. The tickets exchanged hands here and payments for fares were
also made here in Philippine currency. The site of the source of payments is the Philippines. The flow
of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded
by the Philippine government. In consideration of such protection, the flow of wealth should share the
burden of supporting the government.

ational Development Company v CIR GR No L-53961, June 30, 1987

FACTS:

The National Development Company (NDC) entered into contracts in Tokyo with several Japanese shipbuilding
companies for the construction of 12 ocean-going vessels. Initial payments were made in cash and through
irrevocable letters of credit. When the vessels were completed and delivered to the NDC in Tokyo, the latter
remitted to the shipbuilders the 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. NDC went to CTA. BIR was sustained by CTA. BIR was sustained by CTA.
Hence, this petition for certiorari.

ISSUE:

Is NDC liable for the tax?

RULING:

Yes.

Although NDC is not the one taxed since it was the Japanese shipbuilders who were liable on the interest
remitted to them under Section 37 of the Tax Code, still, the imposition is valid.

The imposition of the deficiency taxes on NDC is a penalty for its failure to withhold the same from the
Japanese shipbuilders. Such liability is imposed by Section 53c of the Tax Code. NDC was remiss in the
discharge of its obligation as the withholding agent of the government and so should be liable for the omission.

Commissioner of Internal Revenue vs W.E. Lednicky and Maria Lednicky

GR Nos. L-18262 and L-21434, 1964

FACTS:
Spouses are both American citizens residing in the Philippines and have derived all their income from
Philippine sources for taxable years in question.

On March, 1957, filed their ITR for 1956, reporting gross income of P1,017,287.65 and a net income of P
733,809.44. On March 1959, file an amended claimed deduction of P 205,939.24 paid in 1956 to the United
States government as federal income tax of 1956.

ISSUE:

Whether a citizen of the United States residing in the Philippines, who derives wholly from sources within the
Philippines, may deduct his gross income from the income taxes he has paid to the United States government for
the said taxable year?

HELD:

An alien resident who derives income wholly from sources within the Philippines may not deduct from gross
income the income taxes he paid to his home country for the taxable year. The right to deduct foreign income
taxes paid given only where alternative right to tax credit exists.

Section 30 of the NIRC, Gross Income “Par. C (3): Credits against tax per taxes of foreign countries.

If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this
shall be credited with: Paragraph (B), Alien resident of the Philippines; and, Paragraph C (4), Limitation on
credit.”

An alien resident not entitled to tax credit for foreign income taxes paid when his income is derived wholly from
sources within the Philippines.

Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity. In the present case, although the taxpayer would have to pay two taxes on the same income
but the Philippine government only receives the proceeds of one tax, there is no obnoxious double taxation.

MADRIGAL vs RAFFERY

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 Madrigal’s 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
husband’s 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.

Lessons Applicable: Accrual method, burden of proof in accrual method, deductibility of ordinary
and necessary trade, business, or professional expenses, all events test

Laws Applicable:

FACTS:

 BIR disallowed Isabela Cultural Corp. deductible expenses for services which were rendered
in 1984 and 1985 but only billed, paid and claimed as a deduction on 1986.
 After CA sent its demand letters, Isabela protested.
 CTA found it proper to be claimed in 1986 and affirmed by CA
ISSUE: W/N Isabela who uses accrual method can claim on 1986 only

HELD: case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability
under Assessment Notice No. FAS-1-86-90-000680.

NO

 The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are:
 (a) the expense must be ordinary and necessary;
 (b) it must have been paid or incurred during the taxable year; - qualified by Section 45 of the
National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in
this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’,
dependent upon the method of accounting upon the basis of which the net income is
computed
 (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer;
and
 (d) it must be supported by receipts, records or other pertinent papers.
 Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year
when they are incurred cannot be claimed as deduction from income for the succeeding
year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable
deductions for the current year but failed to do so cannot deduct the same for the next year.
 The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to
pay them, in opposition to actual receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive them become fixed, where
there is created an enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of payment.
 The accrual of income and expense is permitted when the all-events test has been met. This
test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.
 The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not
demand that the amount of income or liability be known absolutely, only that a taxpayer has
at his disposal the information necessary to compute the amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but is not as much
as unknowable, within the taxable year. The amount of liability does not have to be
determined exactly; it must be determined with "reasonable accuracy." Accordingly, the term
"reasonable accuracy" implies something less than an exact or completely accurate amount.
 The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year.
 Accrual method of accounting presents largely a question of fact; such that the taxpayer
bears the burden of proof of establishing the accrual of an item of income or deduction.
 In the instant case, the expenses for professional fees consist of expenses for legal and
auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and
retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson,
and for reimbursement of the expenses of said firm in connection with ICC’s tax problems for
the year 1984. As testified by the Treasurer of ICC, the firm has been its counsel since the
1960’s. - failed to prove the burden
\-----------------------

Obillos v. CIR

G.R. No. L-68118 October 29, 1985 AQUINO, J.

petitioners JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.
OBILLOS, brothers and sisters

respondents COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS

summary The four children of Jose Obillos acquired two lots from the latter for residential purposes.
Subsequently, they sold these properties and split the profits amongst them. The CIR imposed several taxes on
top of the income tax already given claiming that the four children had formed an unregistered partnership or
joint venture. The court held that they did not create a partnership. One must look at the intention of the parties
in order to determine whether they indeed created a partnership.
facts of the case

• March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots located at
Greenhills, San Juan, Rizal.

o The next day he transferred his rights to his four children, the petitioners, to enable them to build their
residences.

o The company sold the two lots to petitioners for P178,708.12 on March 13

they were co-owners of the two lots.

• After more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga
Cruz Canda for the total sum of P313,050.

• They derived from the sale a total profit of P134,341.88 or P33,584 for each of them.

• They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

• In April, 1980, or one day before the expiration of the five-year prescriptive period, the CIR required
the four petitioners to pay corporate income tax on the total profit in addition to individual income tax on their
shares thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as
42% accumulated interest, or a total of P71,074.56.

o The CIR alleged that the four petitioners had formed an unregistered partnership or joint venture within
the meaning of sections 24(a) and 84(b) of the Tax Code

issue

WON the petioners had indeed formed an unregistered partnership, and therefore, liable for the extra taxes and
penalties imposed by the CIR. NO

ratio

o To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy.

o As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. The
petitioners were not engaged in any joint venture by reason of that isolated transaction.

o Their original purpose was to divide the lots for residential purposes. If later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they had no choice but
to resell the same to dissolve the co-ownership.

o The division of the profit was merely incidental to the dissolution of the co- ownership which was in
the nature of things a temporary state

o Article 1769(3) of the CC provides that:

o "the sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the returns are derived". There
must be an unmistakable intention to form a partnership or joint venture.*

o As held in the De Leon Case:

o All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own properties
which produce income should not automatically be considered partners of an unregistered

Pascual and Dragon v. CIR, G.R. No. 78133, October 18, 1988
25

MAR

[GANCAYCO, J.]

FACTS:

Petitioners bought two (2) parcels of land and a year after, they bought another three (3) parcels of land.
Petitioners subsequently sold the said lots in 1968 and 1970, and realized net profits. The corresponding capital
gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.
However, the Acting BIR Commissioner assessed and required Petitioners to pay a total amount of P107,101.70
as alleged deficiency corporate income taxes for the years 1968 and 1970. Petitioners protested the said
assessment asserting that they had availed of tax amnesties way back in 1974. In a reply, respondent
Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real estate
transactions formed an unregistered partnership or joint venture taxable as a corporation under Section 20(b) and
its income was subject to the taxes prescribed under Section 24, both of the National Internal Revenue Code that
the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the
partnership by them which is subject to individual income tax; and that the availment of tax amnesty under P.D.
No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities but did not
relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay
the deficiency income tax assessed.

ISSUE:

Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for the purposes of
income tax.

RULING:

The Petitioners are simply under the regime of co-ownership and not under unregistered partnership.

By the contract of partnership two or more persons bind themselves to contribute money, property, or industry
to a common fund, with the intention of dividing the profits among themselves (Art. 1767, Civil Code of the
Philippines). In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits among themselves.
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a
joint or common right or interest in the property. There must be a clear intent to form a partnership, the
existence of a juridical personality different from the individual partners, and the freedom of each party to
transfer or assign the whole property. Hence, there is no adequate basis to support the proposition that they
thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties
and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as
co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under
the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable
for corporate income tax, as the respondent commissioner proposes.

REYES v CIR
GR No. 163581, 27 January 2006

Facts: By virtue of a sworn affidavit for reward by one Abad, an investigation was conducted by BIR on the
estate of the deceased Maria Tancinco who died in 1993 leaving a residential lot and old house in Dasma.
Without submitting a preliminary finding report, an LOA was issued and received by Reyes, one of the heirs on
14 March 1997.

Then on 12 Feb 1998, a PAN was issued against the estate, and a FAN as well as demand letter was issued on
22 April 1998. For the assessment of P14.9M for estate tax of the estate of Maria Tancinco. On March 11,
1999, the heirs proposed a compromise settlement of P1,000,000.00.

During those dates, RA 8424 Tax Reform Act was already in effect. RA 8424 stated that the taxpayer must be
informed of both the law and facts on which the assessment was based.The notice required under the old law
was no longer sufficient under the new law. First, RA 8424 has already amended the provision of Section 229
on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIR’s findings was
changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment
would be made; otherwise, the assessment itself would be invalid.

Due to failure to pay tax on the deadline BIR notified on June 6, 2000 that the subject property would be sold at
public auction on August 8, 2000. Reyes filed a protest with the BIR. Hence the petition for review filed by
Reyes in CTA and a TRO to desist and refrain from proceeding with the auction sale of the subject property or
from issuing a warrant pending determination of the case and/or unless a contrary order is issued.

CIR filed a motion saying CTA has no jurisdiction since the assessment against the estate is already final and
executory; and (ii) that the petition was filed out of time

CTA – Ruled in favour of CIR ordering Reyes to pay the estate tax amounting to 19M. CTA ratiocinated that
there can only be a perfected and consummated compromise of the estate’s tax liability[,] if the NEB has
approved [Reyes’s] application for compromise in accordance with RR No. 6-2000, as implemented by RMO
No. 42-2000.

CA – Partly granted petition. SC – Affirmed, petition w/o merit.

ISSUE: WON whether the assessment against the estate is valid; and, second, whether the compromise entered
into is also valid.

HELD: No. Under the present provisions of the Tax Code and pursuant to elementary due process, taxpayers
must be informed in writing of the law and the facts upon which a tax assessment is based; otherwise, the
assessment is void. Being invalid, the assessment cannot in turn be used as a basis for the perfection of a tax
compromise. This was clear and mandatory under Section 228.

Reyes was not informed in writing of the law and the facts on which the assessment of estate taxes had been
made. She was merely notified of the findings by the CIR, who had simply relied upon the provisions of former
Section 22913 prior to its amendment by Republic Act (RA) No. 8424, otherwise known as the Tax Reform Act
of 1997.

To be simply informed in writing of the investigation being conducted and of the recommendation for the
assessment of the estate taxes due is nothing but a perfunctory discharge of the tax function of correctly
assessing a taxpayer. The act cannot be taken to mean that Reyes already knew the law and the facts on which
the assessment was based. It does not at all conform to the compulsory requirement under Section 228.
Moreover, the Letter of Authority received by respondent on March 14, 1997 was for the sheer purpose of
investigation and was not even the requisite notice under the law.

Validity of Compromise. It would be premature for this Court to declare that the compromise on the estate tax
liability has been perfected and consummated, considering the earlier determination that the assessment against
the estate was void. Nothing has been settled or finalized. Under Section 204(A) of the Tax Code, where the
basic tax involved exceeds one million pesos or the settlement offered is less than the prescribed minimum rates,
the compromise shall be subject to the approval of the NEB composed of the petitioner and four deputy
commissioners. Finally, as correctly held by the appellate court, this provision applies to all compromises,
whether government-initiated or not. Ubi lex non distinguit, nec nos distinguere debemos. Where the law does
not distinguish, we should not distinguish.

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA

EVANGELISTA, petitioners, 
 vs.
 THE COLLECTOR OF INTERNAL REVENUE
and THE COURT OF TAX APPEALS, respondents. G.R. No. L-9996, October 15,
1957

Facts: Petitioners borrowed sum of money from their father and together with their own personal
funds they used said money to buy several real properties. They then appointed their brother (Simeon)
as manager of the said real properties with powers and authority to sell, lease or rent out said
properties to third persons. They realized rental income from the said properties for the period 1945-
1949.

On September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income
tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-
1949. The letter of demand and corresponding assessments were delivered to petitioners on
December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals, with a
prayer that "the decision of the respondent contained in his letter of demand dated September 24,
1954" be reversed, and that they be absolved from the payment of the taxes in question. CTA denied
their petition and subsequent MR and New Trials were denied. Hence this petition.

Issue: Whether or not petitioners have formed a partnership and consequently, are subject to the tax
on corporations provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations and the real estate
dealers fixed tax.

Held: YES. The essential elements of a partnership are two, namely: (a) an agreement to contribute
money, property or industry to a common fund; and (b) intent to divide the profits among the
contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Upon
consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for monetary gain and then divide the same among
themselves, because of the following observations, among others: (1) Said common fund was not
something they found already in existence; (2) They invested the same, not merely in one transaction,
but in a series of transactions; (3) The aforesaid lots were not devoted to residential purposes, or to
other personal uses, of petitioners herein.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein.

For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute
a partnership, insofar as said Code is concerned and are subject to the income tax for corporations.

LORENZO OÑA V CIR

29

JAN

GR No. L -19342 | May 25, 1972 | J. Barredo

Facts:

Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and her five children. A civil case was
instituted for the settlement of her state, in which Oña was appointed administrator and later on the guardian of
the three heirs who were still minors when the project for partition was approved. This shows that the heirs have
undivided ½ interest in 10 parcels of land, 6 houses and money from the War Damage Commission.

Although the project of partition was approved by the Court, no attempt was made to divide the properties and
they remained under the management of Oña who used said properties in business by leasing or selling them
and investing the income derived therefrom and the proceeds from the sales thereof in real properties and
securities. As a result, petitioners’ properties and investments gradually increased. Petitioners returned for
income tax purposes their shares in the net income but they did not actually receive their shares because this left
with Oña who invested them.

Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore, subject to
the corporate income tax, particularly for years 1955 and 1956. Petitioners asked for reconsideration, which was
denied hence this petition for review from CTA’s decision.
Issue:

W/N there was a co-ownership or an unregistered partnership

W/N the petitioners are liable for the deficiency corporate income tax

Held:

Unregistered partnership. The Tax Court found that instead of actually distributing the estate of the deceased
among themselves pursuant to the project of partition, the heirs allowed their properties to remain under the
management of Oña and let him use their shares as part of the common fund for their ventures, even as they paid
corresponding income taxes on their respective shares.

Yes. For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the incomes derived therefrom are used as a
common fund with intent to produce profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved
by the court in the corresponding testate or intestate proceeding. The reason is simple. From the moment of such
partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof,
for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs,
and, accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single management to be used with the intent of
making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument
were executed, for the purpose, for tax purposes, at least, an unregistered partnership is formed.

For purposes of the tax on corporations, our National Internal Revenue Code includes these partnerships —

The term “partnership” includes a syndicate, group, pool, joint venture or other unincorporated organization,
through or by means of which any business, financial operation, or venture is carried on… (8 Merten’s Law of
Federal Income Taxation, p. 562 Note 63; emphasis ours.)

with the exception only of duly registered general copartnerships — within the purview of the term
“corporation.” It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said
Code is concerned, and are subject to the income tax for corporations. Judgment affirmed.