Part 1
General Principles of Taxation
Case Title Summary
1 Paseo Realty and On April 16, 1990, petitioner filed its
Development Income Tax Return for the calendar
Corporation vs year 1989 declaring a gross income of
CA, GR No. P1,855,000.00, deductions of
119286, October P1,775,991.00, net income of
13, 2004 P79,009.00, an income tax due thereon
in the amount of P27,653.00, prior
year’s excess credit of P146,026.00, and
creditable taxes withheld in 1989 of
P54,104.00 or a total tax credit of
P200,130.00 and credit balance of
P172,477.00.
On November 14, 1991, petitioner filed
with respondent a claim for “the refund
of excess creditable withholding and
income taxes for the years 1989 and
1990 in the aggregate amount of
P147,036.15.”
On December 27, 1991 alleging that the
prescriptive period for refunds for 1989
would expire on December 30, 1991
and that it was necessary to interrupt
the prescriptive period, petitioner filed
with the respondent Court of Tax
Appeals a petition for review praying
Issue/s Ruling Notes/Remarks
Whether or not No.The confusion as to petitioner’s entitlement
the petitioner can to a refund could altogether have been avoided
claim the refund had it presented its tax return for 1990.
of its creditable
taxes withheld in The grant of a refund is founded on the
1989 as the same assumption that the tax return is valid, i.e., that
had been the facts stated therein are true and correct.
allegedly applied Without the tax return, it is error to grant a
against its 1990 refund since it would be virtually impossible to
tax due. determine whether the proper taxes have been
assessed and paid.
It is axiomatic that a claimant has the burden of
proof to establish the factual basis of his or her
claim for tax credit or refund. Tax refunds, like
tax exemptions, are construed strictly against the
taxpayer.
In case the corporation is entitled to a refund of
the excess estimated quarterly income taxes paid,
the refundable amount shown on its final
adjustment return may be credited against the
estimated quarterly income tax liabilities for the
taxable quarters of the succeeding year. The
carrying forward of any excess or overpaid
income tax for a given taxable year is limited to
the succeeding taxable year only.
1
for the refund of “P54,104.00
representing creditable taxes withheld
from income payments of petitioner for
the calendar year ending December 31,
1989.”
While a taxpayer is given the choice whether to
claim for refund or have its excess taxes applied
as tax credit for the succeeding taxable year, such
election is not final. Prior verification and
approval by the Commissioner of Internal
Revenue is required. The availment of the remedy
of tax credit is not absolute and mandatory. It
does not confer an absolute right on the taxpayer
to avail of the tax credit scheme if it so chooses.
Neither does it impose a duty on the part of the
government to sit back and allow an important
facet of tax collection to be at the sole control
and discretion of the taxpayer.
The amendment of Section 69 by what is now
Section 76 of Republic Act No. 8424 emphasizes
that it is imperative to indicate in the tax return
or the final adjustment return whether a tax
credit or refund is sought by making the
taxpayer’s choice irrevocable.
Taxation is a destructive power which interferes
with the personal and property rights of the
people and takes from them a portion of their
property for the support of the government. And
since taxes are what we pay for civilized society,
or are the lifeblood of the nation, the law frowns
against exemptions from taxation and statutes
granting tax exemptions are thus construed
strictissimi juris against the taxpayer and liberally
2
 in favor of the taxing authority. A claim of refund
or exemption from tax payments must be clearly
shown and be based on language in the law too
plain to be mistaken. Elsewise stated, taxation is
the rule, exemption therefrom is the exception.
2 Pelizloy Realty Pelizloy owns Palm Grove Resort, which 1. Whether or not The power to tax "is an attribute of sovereignty,"
Corporation vs is designed for recreation and which Section 59, Articleand as such, inheres in the State. Such, however,
Province of has facilities like swimming pools, a spa X of Provincial is not true for provinces, cities, municipalities and
Benguet, GR No. and function halls. Tax Ordinance barangays as they are not the sovereign; rather,
183137, April 10, No. 05-107, they are mere "territorial and political
2013 The Prov. Board of the Prov. of Benguet otherwise known subdivisions of the Republic of the Philippines".
approved Prov. Tax Ordinance No. 05- as the Benguet
107, otherwise known as the Benguet Revenue Code of A municipal corporation unlike a sovereign state
Revenue Code of 2005 ("Tax 2005, levies a is clothed with no inherent power of taxation.
Ordinance"). Section 59, Article X of the percentage tax. The charter or statute must plainly show an
Tax Ordinance levied a ten percent intent to confer that power or the municipality,
(10%) amusement tax on gross receipts 2. Whether or not cannot assume it. And the power when granted is
from admissions to "resorts, swimming provinces are to be construed in strictissimi juris. Any doubt or
pools, bath houses, hot springs and authorized to ambiguity arising out of the term used in granting
tourist spots." impose that power must be resolved against the
amusement taxes municipality. Inferences, implications, deductions
It was Pelizloy's position that the Tax on admission fees – all these – have no place in the interpretation of
Ordinance's imposition of a 10% to resorts, the taxing power of a municipal corporation.
amusement tax on gross receipts from swimming pools,
admission fees for resorts, swimming bath houses, hot Therefore, the power of a province to tax is
pools, bath houses, hot springs, and springs, and limited to the extent that such power is delegated
tourist spots is an ultra vires act on the tourist spots for to it either by the Constitution or by statute.
part of the Province of Benguet. Thus, it being Section 5, Article X of the 1987 Constitution is
filed an appeal/petition before the "amusement clear on this point.
Secretary of Justice on January 27, places" under the
2006. Local 1.Percentage Tax. Supreme Court defined

3
Government percentage tax as a "tax measured by a certain
Code. percentage of the gross selling price or gross
value in money of goods sold, bartered or
imported; or of the gross receipts or earnings
derived by any person engaged in the sale of
services." Also, Republic Act No. 8424, , in Section
125, Title V,lists amusement taxes as among the
(other) percentage taxes which are levied
regardless of whether or not a taxpayer is already
liable to pay value-added tax (VAT).

Amusement taxes are fixed at a certain

percentage of the gross receipts incurred by
certain specified establishments.

However, provinces are not barred from levying

amusement taxes even if amusement taxes are a
form of percentage taxes. Section 133 (i) of the
LGC prohibits the levy of percentage taxes
"except as otherwise provided" by the LGC.

2. No. Section 131 (c) of the LGC already provides

a clear definition of ‘amusement places’.

Indeed, theaters, cinemas, concert halls, circuses,

and boxing stadia are bound by a common
typifying characteristic in that they are all venues
primarily for the staging of spectacles or the
holding of public shows, exhibitions,
performances, and other events meant to be
viewed by an audience. Accordingly, ‘other places

4
of amusement’ must be interpreted in light of the
typifying characteristic of being venues "where
one seeks admission to entertain oneself by
seeing or viewing the show or performances" or
being venues primarily used to stage spectacles
or hold public shows, exhibitions, performances,
and other events meant to be viewed by an
audience.

Considering these, it is clear that resorts,

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

Thus, resorts, swimming pools, bath houses, hot

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

The second paragraph of Section 59, Article X of

the Tax Ordinance is not limited to resorts,

5

3 CIR vs Metro Star On November 8, 2001, Revenue District
Superama Inc., Officer issued a Preliminary 15-day
GR No. L-28896, Letter which stated that a post audit
February 17, review was held and it was ascertained
1988 that there was deficiency value-added
and withholding taxes due from
petitioner in the amount of P
292,874.16.
Petitioner received a Formal Letter of
Demand dated April 3, 2002.
Revenue District Office No. 67 sent a
copy of the Final Notice of Seizure.
Petitioner received from Revenue
District Office No. 67 a Warrant of
Distraint and/or Levy dated May 12,
2003 demanding payment of deficiency
value-added tax and withholding tax
payment in the amount of P292,874.16.
swimming pools, bath houses, hot springs, and
tourist spots but also covers admission fees for
boxing. As Section 140 of the LGC allows for the
imposition of amusement taxes on gross receipts
from admission fees to boxing stadia, Section 59,
Article X of the Tax Ordinance must be sustained
with respect to admission fees from boxing
stadia.
Whether or not Denied due process. The Supreme Court has
Metro Star was consistently held that while a mailed letter is
denied due deemed received by the addressee in the course
process. of mail, this is merely a disputable presumption
subject to controversion and a direct denial
thereof shifts the burden to the party favored by
the presumption to prove that the mailed letter
was indeed received by the addressee.
The facts to be proved to raise this presumption
are (a) that the letter was properly addressed
with postage prepaid, and (b) that it was mailed.
Once these facts are proved, the presumption is
that the letter was received by the addressee as
soon as it could have been transmitted to him in
the ordinary course of the mail. But if one of the
said facts fails to appear, the presumption does
not lie.
CIR failed to discharge its duty and present any
evidence to show that Metro Star indeed
received the PAN dated January 16, 2002.
6
Denying that it received a Preliminary
Assessment Notice (PAN) and claiming
that it was not accorded due process,
Metro Star filed a petition for review
with the CTA. The CIR insisting that
Metro Star received the PAN, dated
January 16, 2002, and that due process
was served nonetheless because the
latter received the Final Assessment
Notice (FAN).
Section 228 of the Tax Code clearly requires that
the taxpayer must first be informed that he is
liable for deficiency taxes through the sending of
a PAN. He must be informed of the facts and the
law upon which the assessment is made. The law
imposes a substantive, not merely a formal,
requirement. To proceed heedlessly with tax
collection without first establishing a valid
assessment is evidently violative of the cardinal
principle in administrative investigations – that
taxpayers should be able to present their case
and adduce supporting evidence.
The sending of a PAN to taxpayer to inform him
of the assessment made is but part of the "due
process requirement in the issuance of a
deficiency tax assessment," the absence of which
renders nugatory any assessment made by the
tax authorities. The use of the word "shall" in
subsection 3.1.2 describes the mandatory nature
of the service of a PAN.
Thus, for its failure to send the PAN stating the
facts and the law on which the assessment was
made as required by Section 228 of R.A. No. 8424,
the assessment made by the CIR is void.
Taxes are the lifeblood of the government and so
should be collected without unnecessary
hindrance.
7

4 Reyes vs Petitioners JBL Reyes et al. owned a
Almazor, GR No. parcel of land in Tondo which are
L-49839-46, April leased and occupied as dwelling units
26, 1991 by tenants who were paying monthly
rentals of not exceeding P300. Rental
Freezing Law was passed prohibiting for
one year from its effectivity, an
increase in monthly rentals of dwelling
units where rentals do not exceed
three hundred pesos (P300.00), so that
the Reyeses were precluded from
raising the rents and from ejecting the
tenants. In 1973, respondent City
Assessor of Manila re-classified and
reassessed the value of the subject
properties based on the schedule of
market values, which entailed an
increase in the corresponding tax rates
prompting petitioners to file a
Memorandum of Disagreement
averring that the reassessments made
It is said that taxes are what we pay for civilized
society. Without taxes, the government would be
paralyzed for the lack of the motive power to
activate and operate it.
It is a requirement in all democratic regimes that
it be exercised reasonably and in accordance with
the prescribed procedure.
Is the approach No. The power to tax "is an attribute of
on tax sovereignty". In fact, it is the strongest of all the
assessment used powers of government. But for all its plenitude
by the City the power to tax is not unconfined as there are
Assessor restrictions. Adversely effecting as it does
reasonable? property rights, both the due process and equal
protection clauses of the Constitution may
properly be invoked to invalidate in appropriate
cases a revenue measure. If it were otherwise,
there would be truth to the 1903 dictum of Chief
Justice Marshall that "the power to tax involves
the power to destroy." The web or unreality spun
from Marshall's famous dictum was brushed
away by one stroke of Mr. Justice Holmes pen,
thus: "The power to tax is not the power to
destroy while this Court sits. So it is in the
Philippines "
In the same vein, the due process clause may be
invoked where a taxing statute is so arbitrary that
it finds no support in the Constitution. An obvious
8
 were "excessive, unwarranted,
inequitable, confiscatory and
unconstitutional" considering that the
taxes imposed upon them greatly
exceeded the annual income derived
from their properties. They argued that
the income approach should have been
used in determining the land values
instead of the comparable sales
approach which the City Assessor
adopted.
5 Pepsi Cola Pepsi Cola has a bottling plant in
Bottling the Municipality of Tanauan, Leyte. In
Philippines September 1962, the
Company vs Municipality approved Ordinance No.
Municipality of 23 which levies and collects “from soft
Tanuan, GR No. drinks producers and manufacturers a
L-31156, tai of one-sixteenth (1/16) of a centavo
February 27, for every bottle of soft drink corked.” In
example is where it can be shown to amount to
confiscation of property. That would be a clear
abuse of power.
Verily, taxes are the lifeblood of the government
and so should be collected without unnecessary
hindrance. However, such collection should be
made in accordance with law as any arbitrariness
will negate the very reason for government itself
It is therefore necessary to reconcile the
apparently conflicting interests of the authorities
and the taxpayers so that the real purpose of
taxations, which is the promotion of the common
good, may be achieved (Commissioner of Internal
Revenue v. Algue Inc., et al., 158 SCRA 9 [1988]).
Consequently, it stands to reason that petitioners
who are burdened by the government by its
Rental Freezing Laws (then R.A. No. 6359 and P.D.
20) under the principle of social justice should not
now be penalized by the same government by the
imposition of excessive taxes petitioners can ill
afford and eventually result in the forfeiture of
their properties.
Whether or not No. It is a power that is purely legislative and
there is undue which the central legislative body cannot
delegation of delegate either to the executive or judicial
taxing powers. department of the government without infringing
Whether or not upon the theory of separation of powers. The
there is double exception, however, lies in the case of municipal
taxation. corporations, to which, said theory does not
apply. Legislative powers may be delegated to
9
 1976 December 1962, the Municipality also
approved Ordinance No. 27 which
levies and collects “on soft drinks
produced or manufactured within the
territorial jurisdiction of
this municipality a tax of one centavo
P0.01) on each gallon of volume
capacity.” Pepsi Cola assailed the
validity of the ordinances as it alleged
that they constitute double taxation in
two instances: a) double taxation
because Ordinance No. 27 covers the
same subject matter and impose
practically the same tax rate as with
Ordinance No. 23, b) double taxation
because the two ordinances impose
percentage or specific taxes.
Pepsi Cola also questions the
constitutionality of Republic Act 2264
which allows for the delegation of
taxing powers to local government
units; that allowing local governments
to tax companies like Pepsi Cola is
confiscatory and oppressive.
6 Tio vs Videogram The petitioner assails the validity of PD
Regulatory 1987 entitled an "Act creating the
Board, GR No. Videogram Regulatory Board," citing
75697, June 19, especially Section 10 thereof, which
1987 imposes a tax of 30% on the gross
receipts payable to the local
local governments in respect of matters of local
concern.
Under the New Constitution, local governments
are granted the autonomous authority to create
their own sources of revenue and to levy taxes.
Section 5, Article XI provides: "Each local
government unit shall have the power to create
its sources of revenue and to levy taxes, subject
to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of
Republic Act No. 2264 emanated from beyond
the sphere of the legislative power to enact and
vest in local governments the power of local
taxation.
The plenary nature of the taxing power thus
delegated, contrary to plaintiff-appellant's
pretense, would not suffice to invalidate the said
law as confiscatory and oppressive. In delegating
the authority, the State is not limited 6 the exact
measure of that which is exercised by itself.
Is PD 1987 a valid Yes. a tax does not cease to be valid merely
exercise of taxing because it regulates, discourages, or even
power of the definitely deters the activities taxed. 8 The power
state? to impose taxes is one so unlimited in force and
so searching in extent, that the courts scarcely
venture to declare that it is subject to any
10
 government. Petitioner contends that
aside from its being a rider and not
germane to the subject matter thereof,
and such imposition was being harsh,
confiscatory, oppressive and/or
unlawfully restraints trade in violation
of the due process clause of the
Constitution.
7 Planters Products Marcos issued Letter of Instruction
Inc. vs Fertiphil (LOI) 1465, imposing a capital recovery
Corp., GR No. component of Php10.00 per bag of
166006, March fertilizer. The levy was to continue until
14, 2008 adequate capital was raised to make
PPI financially viable. Fertiphil remitted
restrictions whatever, except such as rest in the
discretion of the authority which exercises it.
The levy of the 30% tax is for a public purpose. It
was imposed primarily to answer the need for
regulating the video industry, particularly because
of the rampant film piracy, the flagrant violation
of intellectual property rights, and the
proliferation of pornographic video tapes. And
while it was also an objective of the DECREE to
protect the movie industry, the tax remains a
valid imposition.
The public purpose of a tax may legally exist even
if the motive which impelled the legislature to
impose the tax was to favor one industry over
another.
It is inherent in the power to tax that a state be
free to select the subjects of taxation, and it has
been repeatedly held that "inequities which
result from a singling out of one particular class
for taxation or exemption infringe no
constitutional limitation". Taxation has been
made the implement of the state's police power.
WON the LOI is No.
constitutional.
The LOI is still unconstitutional even if enacted
under the police power; it did not promote public
interest. Taxes are exacted only for a public
purpose. The P10 levy is unconstitutional because
11
to the Fertilizer and Pesticide Authority
(FPA), which was then remitted the
depository bank of PPI. Fertiphil paid
P6,689,144 to FPA from 1985 to 1986.
After the 1986 Edsa Revolution, FPA
voluntarily stopped the imposition of
the P10 levy. Fertiphil demanded from
PPI a refund of the amount it remitted,
however PPI refused. Fertiphil filed a
complaint for collection and damages,
questioning the constitutionality of LOI
1465, claiming that it was unjust,
unreasonable, oppressive, invalid and
an unlawful imposition that amounted
to a denial of due process. PPI argues
that Fertiphil has no locus standi to
question the constitutionality of LOI
No. 1465 because it does not have a
"personal and substantial interest in
the case or will sustain direct injury as a
result of its enforcement." It asserts
that Fertiphil did not suffer any damage
from the imposition because "incidence
of the levy fell on the ultimate
consumer or the farmers themselves,
not on the seller fertilizer company.
it was not for a public purpose. The levy was
imposed to give undue benefit to PPI. An inherent
limitation on the power of taxation is public
purpose. Taxes are exacted only for a public
purpose. They cannot be used for purely
privatepurposes or for the exclusive benefit of
private persons. The reason for this is simple. The
power to tax exists for the general welfare;
hence, implicit in its power is the limitation that it
should be used only for a public purpose. It would
be a robbery for the State to tax its citizens and
use the funds generated for a private purpose. As
an old United States case bluntly put it: "To lay
with one hand, the power of the government on
the property of the citizen, and with the other to
bestow it upon favored individuals to aid private
enterprises and build up private fortunes, is
nonetheless a robbery because it is done under
the forms of law and is called taxation." The term
"public purpose" is not defined. It is an elastic
concept that can be hammered to fit modern
standards. Jurisprudence states that "public
purpose" should be given a broad interpretation.
It does not only pertain to those purposes which
are traditionally viewed as essentially
government functions, such as building roads and
delivery of basic services, but also includes those
purposes designed to promote social justice.
Thus, public money may now be used for the
relocation of illegal settlers, low-cost housing and
urban or agrarian reform.
12
 Police power and the power of taxation are
inherent powers of the State. These powers are
distinct and have different tests for validity.
Police power is the power of the State to enact
legislation that may interfere with personal
liberty or property in order to promote the
general welfare, while the power of taxation is
the power to levy taxes to be used for public
purpose. The main purpose of police power is the
regulation of a behavior or conduct, while
taxation is revenue generation. The "lawful
subjects" and "lawful means" tests are used to
determine the validity of a law enacted under the
police power. The power of taxation, on the other
hand, is circumscribed by inherent and
constitutional limitations. We agree with the RTC
that the imposition of the levy was an exercise by
the State of its taxation power. While it is true
that the power of taxation can be used as an
implement of police power,41 the primary
purpose of the levy is revenue generation. If the
purpose is primarily revenue, or if revenue is, at
least, one of the real and substantial purposes,
then the exaction is properly called a tax.

8 CIR vs Central Central Luzon Drug Corporation is a Whether or not The Petition is DENIED.
Luzon retailer of medicines and other the 20% discount
Corporation, GR pharmaceutical products. For the granted by Sec. 4(a) of the Senior Citizens Act provides:
No. 159647, April period January 1995 to December Central Luzon
15, 2005 1995, pursuant to the mandate of Drug to qualified Sec. 4. Privileges for the Senior Citizens. –

13
Section 4(a) of
Republic Act No. 7432, otherwise
known as the Senior Citizens Act, it
granted a twenty percent
(20%) discount on the sale of medicines
to qualified senior citizens amounting
to P219,778.00. It then deducted the
same amount from its gross income for
the taxable year 1995, pursuant to
Revenue Regulations No. 2-94
implementing the Senior Citizens Act,
which states that the discount given to
senior citizens shall be deducted by the
establishment from its gross sales for
value-added tax and other percentage
tax purposes. For the said taxable
period, Central Luzon Drug reported a
net loss of P20,963.00 in its corporate
income tax return, thus, it did not pay
income tax for 1995.
Subsequently, Central Luzon Drug filed
a claim for refund in the amount of
P150,193.00, claiming that according to
Sec. 4(a) of the Senior Citizens Act, the
amount of P219,778.00 should be
applied as a tax credit. The
Commissioner of Internal Revenue (CIR)
was not able to decide the claim on
time, hence, Central Luzon Drug filed a
Petition for Review with the Court of
senior citizens The senior citizens shall be entitled to the
pursuant to Sec. following:
4(a) of the Senior
Citizens Act may (a) the grant of twenty percent (20%)
be claimed as a discount from all establishments relative
tax credit or as a to utilization of transportations services,
deduction from hotels and similar lodging establishments,
gross sales in restaurants and recreation centers and
accordance with purchase of medicines anywhere in the
Sec. 2(1) of country: Provided, That private
Revenue establishments may claim the cost as tax
Regulations No. credit.
2-94
The above provision explicitly employed the term
“tax credit.” Nothing in the provision suggests for
it to mean a “deduction” from gross sales. Thus,
the 20% discount required by the law to be given
to senior citizens is a tax credit, not a deduction
from the gross sales of the establishment
concerned. As a corollary to this, the definition of
‘tax credit’ found in Sect. 2(1) of Revenue
Regulations No. 2-94 is erroneous as it refers to
tax credit as the amount representing the 20%
discount that “shall be deducted by the said
establishment from their gross sales for value
added tax and other percentage tax purposes.”
When the law says that the cost of the discount
may be claimed as a tax credit, it means that the
amount, when claimed, shall be treated as a
reduction from any tax liability. The law cannot
be amended by a mere regulation.
14
 Tax Appeals. The latter dismissed the
petition, declaring that even if the law
treats the 20% discount granted to
senior citizens as a tax credit, the same
cannot apply when there is no tax
liability or the amount of the tax credit
is greater than the tax due. In the latter
case, the tax credit will only be to the
extent of the tax liability. Also, no
refund can be granted as no tax was
erroneously, illegally and actually
collected.
Furthermore, the law does not state
that a refund can be claimed by the
establishment concerned as an
alternative to the tax credit.
Central Luzon Drug filed a Petition for
Review with the Court of Appeals. The
appellate court held that the 20%
discount given to senior citizens which
is treated as a tax credit is considered
just compensation and, as such, may be
carried over to the next taxable period
if there is no current tax liability.
9 Carlos Superdrug Petitioners are Whether or
Corporation vs domestic corporations and proprietors not RA 9257 is
DSWD, GR No. operating drugstores in the Philippines. constitutional
166494, June 29, Petitioners assail the
2007 constitutionality of Section 4(a) of RA
Finally, for purposes of clarity, Sec. 229 of the Tax
Code does not apply to cases that fall under Sec.
4 of the Senior Citizens Act because the former
provision governs exclusively all kinds of refund
or credit of internal revenue taxes that were
erroneously or illegally imposed and collected
pursuant to the Tax Code while the latter extends
the tax credit benefit to the private
establishments concerned even before tax
payments have been made. The tax credit that is
contemplated under the Senior Citizens Act is a
form of just compensation, not a remedy for
taxes that were erroneously or illegally assessed
and collected. In the same vein, prior payment of
any tax liability is not a precondition before a
taxable entity can benefit from the tax credit. The
credit may be availed of upon payment of the tax
due, if any. Where there is no tax liability or
where a private establishment reports a net loss
for the period, the tax credit can be availed of
and carried over to the next taxable year.
YES.
The law is a legitimate exercise of police power
which, similar to the power of eminent domain,
has general welfare for its object.
15
 9257, otherwise known as the
“Expanded Senior Citizens Act of 2003.”
Section 4(a) of RA 9257 grants twenty
percent (20%) discount as privileges for
the Senior Citizens. Petitioner contends
that said law is unconstitutional
because it constitutes deprivation of
private property.
10 Manila Memorial On April 23, 1992, RA 7432 was passed
Park, Inc. and La into law, granting senior citizens
Funeraria Paz- numerous privileges. Petitioners
Sucat, Inc vs emphasize that they are not
Secretary of questioning the 20% discount granted
DSWD and DOF, to senior citizens but are only assailing
GR No. 175356, the constitutionality of the tax
December 3, deduction scheme prescribed under RA
2013 9257 and the implementing rules and
regulations issued by the DSWD and
the DOF. Petitioners posit that the tax
deduction scheme contravenes Article
Accordingly, it has been described as “the most
essential, insistent and the least limitable of
powers, extending as it does to all the great
public needs.” It is the power vested in the
legislature by the constitution to make, ordain,
and establish all manner of wholesome and
reasonable laws, statutes, and ordinances, either
with penalties or without, not repugnant to the
constitution, as they shall judge to be for the
good and welfare of the commonwealth, and of
the subjects of the same.”
For this reason, when the conditions so demand
as determined by the legislature, property rights
must bow to the primacy of police power because
property rights, though sheltered by due process,
must yield to general welfare.
WHETHER No.
SECTION 4 OF
REPUBLIC ACT A fair reading of Carlos Superdrug Corporation52
NO. 9257 AND ITS would show that we categorically ruled therein
IMPLEMENTING that the 20% discount is a valid exercise of police
RULES AND power. Thus, even if the current law, through its
REGULATIONS, tax deduction scheme (which abandoned the tax
INSOFAR AS THEY credit scheme under the previous law), does not
PROVIDE THAT provide for a peso for peso reimbursement of the
THE TWENTY 20% discount given by private establishments, no
PERCENT (20%) constitutional infirmity obtains because, being a
DISCOUNT TO valid exercise of police power, payment of just
16
III, Section 9 of the Constitution, which
provides that: "[p]rivate property shall
not be taken for public use without just
compensation." In support of their
position, petitioners cite Central Luzon
Drug Corporation, where it was ruled
that the 20% discount privilege
constitutes taking of private property
for public use which requires the
payment of just compensation, and
Carlos Superdrug Corporation v.
Department of Social Welfare and
Development, where it was
acknowledged that the tax deduction
scheme does not meet the definition of
just compensation. They assert that
"[a]lthough both police power and the
power of eminent domain have the
general welfare for their object, there
are still traditional distinctions between
the two" and that "eminent domain
cannot be made less supreme than
police power."
Respondents, maintain that the tax
deduction scheme is a legitimate
exercise of the State’s police power.
SENIOR CITIZENS compensation is not warranted. In the exercise of
MAY BE CLAIMED police power (as distinguished from eminent
AS A TAX domain), although the regulation affects the right
DEDUCTION BY of ownership, none of the bundle of rights which
THE PRIVATE constitute ownership is appropriated for use by
ESTABLISHMENTS or for the benefit of the public.
, ARE INVALID
AND On the other hand, in the exercise of the power
UNCONSTITUTIO of eminent domain, property interests are
NAL. appropriated and applied to some public purpose
which necessitates the payment of just
compensation therefor. Normally, the title to and
possession of the property are transferred to the
expropriating authority. Examples include the
acquisition of lands for the construction of public
highways as well as agricultural lands acquired by
the government under the agrarian reform law
for redistribution to qualified farmer
beneficiaries. We now look at the nature and
effects of the 20% discount to determine if it
constitutes an exercise of police power or
eminent domain. The 20% discount is intended to
improve the welfare of senior citizens who, at
their age, are less likely to be gainfully employed,
more prone to illnesses and other disabilities,
and, thus, in need of subsidy in purchasing basic
commodities. It may not be amiss to mention also
that the discount serves to honor senior citizens
who presumably spent the productive years of
their lives on contributing to the development
and progress of the nation. As to its nature and
17
effects, the 20% discount is a regulation affecting
the ability of private establishments to price their
products and services relative to a special class of
individuals, senior citizens, for which the
Constitution affords preferential concern.76In
turn, this affects the amount of profits or
income/gross sales that a private establishment
can derive from senior citizens. In other words,
the subject regulation affects the pricing, and,
hence, the profitability of a private
establishment. However, it does not purport to
appropriate or burden specific properties, used in
the operation or conduct of the business of
private establishments, for the use or benefit of
the public, or senior citizens for that matter, but
merely regulates the pricing of goods and services
relative to, and the amount of profits or
income/gross sales that such private
establishments may derive from, senior citizens.
The 20% discount may be properly viewed as
belonging to the category of price regulatory
measures which affect the profitability of
establishments subjected thereto. On its face,
therefore, the subject regulation is a police power
measure. We find that there are at least two
conceivable bases to sustain the subject
regulation’s validity absent clear and convincing
proof that it is unreasonable, oppressive or
confiscatory. Congress may have legitimately
concluded that business establishments have the
capacity to absorb a decrease in profits or

18
income/gross sales due to the 20% discount
without substantially affecting the reasonable
rate of return on their investments considering
(1) not all customers of a business establishment
are senior citizens and (2) the level of its profit
margins on goods and services offered to the
general public. Concurrently, Congress may have,
likewise, legitimately concluded that the
establishments, which will be required to extend
the 20% discount, have the capacity to revise
their pricing strategy so that whatever reduction
in profits or income/gross sales that they may
sustain because of sales to senior citizens, can be
recouped through higher mark-ups or from other
products not subject of discounts. As a result, the
discounts resulting from sales to senior citizens
will not be confiscatory or unduly oppressive. In
sum, we sustain our ruling in Carlos Superdrug
Corporation88 that the 20% senior citizen
discount and tax deduction scheme are valid
exercises of police power of the State absent a
clear showing that it is arbitrary, oppressive or
confiscatory.

19

Inherent and Constitutional Limitations
Case Title Summary
1 Pascual vs. A law was enacted in 1953 containing a
Secretary of provision for the construction,
Public Works, et. reconstruction, repair, extension and
al., G.R. No. L- improvement of Pasig feeder road
10405. terminals within Antonio Subdivision
owned by Senator Jose C. Zulueta.
Zulueta “donated” said parcels of land
to the Government 5 months after the
enactment of the law, on the condition
that if the Government violates such
condition the lands would revert to
Zulueta. The provincial governor of
Rizal, Wenceslao Pascual, questioned
the validity of the donation and the
Constitutionality of the particular
provision, it being an appropriation not
for a public purpose.
2 Lutz vs. Araneta, The Sugar Adjustment Act was passed
et. al., G.R. No. L- which provided, among others, for an
7859, November increase of the existing tax on the
22, 1955. manufacture of sugar and levy on
owners or persons in control of lands
devoted to the cultivation of sugar cane
and ceded to others for a consideration
on lease or otherwise.
PART 2
Issue/s Ruling Notes/Remarks
Is the No. The appropriation of amount for the
appropriation construction on a land owned by private
valid? individual is invalid imposition since it results in
the promotion of private enterprise; it benefits
the property of a particular individual. The
provision that the land thereafter be donated to
the government does not cure this defect. The
rule is that if the public advantage or benefit is
merely incidental in the promotion of a particular
enterprise, such defect shall render the law
invalid. On the other hand, if what is incidental is
the promotion of a private enterprise, the tax
law shall be deemed “for public purpose”.
Whether or not The Sugar Adjustment Act was regulatory and
the tax imposed primarily an exercise of police power. Sugar
is constitutional. Industry’s promotion, protection and
advancement greatly redound to the general
welfare. Hence, it was competent for legislature
to find that the general welfare demanded for
the stabilization of the sugar industry.
It is inherent in the power to tax that a state be
20
 All collections made shall accrue to a
special fund named “SUGAR
ADJUSTMENT AND STABILIZATION
FUND.” This whole law was enacted
with a declaration of emergency due to
the imminent imposition of export taxes
upon sugar as provided under the
Tydings-Mcduffie Act.
Lutz, the judicial administrator of the
estate of one Antonio Ledesma, which
was taxed by the Commissioner on
Internal Revenue, questioned the
constitutionality of said act contending
that it is for the aid and support of the
sugar industry exclusively, which is not
for a public purpose.
3 Caltex vs. On February 2, 1989, the Commission
Commission on on Audit (COA) sent a letter to Caltex
Audit, G.R. No. requesting the latter to remit its tax
92585, May 8, contributions amounting to
1992. P335,037,649 to Oil Price Stabilization
Fund (OPSF) pursuant to Section 8 of
P.D. No. 1956. Another letter was sent
to the petitioner, stating that the total
amount of its unremitted tax was
P1,287,668,820.00 from 1986-1988 as
verified by the Office of Energy Affairs
(OEA).
free to select the subjects of taxation, and it has
been repeatedly held that “inequalities which
result from the singling out of one particular
class for taxation or exemption infringe no
constitutional limitation.”
The funds raised under the Act should be
exclusively spent in aid of the sugar industry,
since it is that very enterprise that is being
protected. It may be that other industries are
also in need of similar protection; but the
legislature is not required by the Constitution to
adhere to a policy of “all or none.”
Whether or not YES, OPSF are for non-revenue purposes and is in
OPSF the nature of taxes.
contributions are
for non-revenue The Supreme Court found no merit in
purposes of the petitioner's contention that the OPSF
government and contributions are not for a public purpose
it is still in the because they go to a special fund of the
form of taxation. government. Taxation is no longer envisioned as
a measure merely to raise revenue to support
the existence of the government; taxes may be
levied with a regulatory purpose to provide
means for the rehabilitation and stabilization of a
threatened industry which is affected with public
21
Denying such request, Caltex answered interest as to be within the police power of the
to COA’s letters asking OEA for early state. There can be no doubt that the oil industry
release of reimbursement certificates is greatly imbued with public interest as it vitally
from OPSF. COA denied petitioner’s affects the general welfare. Any unregulated
request but instead asked Caltex to increase in oil prices could hurt the lives of a
remit its collection. As a reply, Caltex majority of the people and cause economic crisis
gave a proposal for its payment based of untold proportions. It would have a chain
on PD 1956, as amended by E.O 137; reaction in terms of, among others, demands for
Department of Finance Circular No. 1- wage increases and upward spiralling of the cost
87; the New Civil Code as to of basic commodities. The stabilization then of
compensation; and the Revised oil prices is of prime concern which the state, via
Administrative Code. COA accepted the its police power, may properly address.
proposal except those matters involving Also, P.D. No. 1956, as amended by E.O. No. 137,
offsetting the remittances and explicitly provides that the source of OPSF is
reimbursements. taxation. No amount of semantical juggleries
could dim this fact.
Pursuant to such agreement, COA
informed OEA as to Caltex’s remittances
amounting to P1, 505,668,906 to OPSF
and allowing OEA to reimburse Caltex
the amount of P1, 959,182,612. Caltex,
however, disagreed with such
arrangement. Caltex thereby insisted
that its remittances and
reimbursements must be offset. But
COA disregarded such contention
holding as a basis the case of Francia vs.
IAC and Fernandez, arguing that OPSF is
not in the form of taxation, therefore
not for revenue purposes.

22
4 Lozada vs. Petitioner Lozada claims that he is a
Commission on taxpayer and a bonafide elector of Cebu
Elections, G.R. City and a transient voter of Quezon
No. L-59068, City, Metro Manila, who desires to run
January 27, 1983. for the position in the Batasan
Pambansa; while petitioner Romeo B.
Igot alleges that, as a taxpayer, he has
standing to petition by mandamus the
calling of a special election as mandated
by the 1973 Constitution. As reason for
their petition, petitioners allege that
they are "... deeply concerned about
their duties as citizens and desirous to
uphold the constitutional mandate and
rule of law ...; that they have filed the
instant petition on their own and in
behalf of all other Filipinos since the
subject matters are of profound and
general interest. "
The respondent COMELEC, represented
by counsel, opposes the petition
alleging, substantially, that 1)
petitioners lack standing to file the
instant petition for they are not the
proper parties to institute the action; 2)
this Court has no jurisdiction to
entertain this petition; and 3) Section
5(2), Article VIII of the 1973 Constitution
does not apply to the Interim Batasan
Pambansa.
Whether or not As taxpayers, petitioners may not file the instant
petitioners lack petition, for nowhere therein is it alleged that tax
standing to file money is being illegally spent. The act
the instant complained of is the inaction of the COMELEC to
petition for they call a special election, as is allegedly its
are not the ministerial duty under the constitutional
proper parties to provision above cited, and therefore, involves no
institute the expenditure of public funds. It is only when an
action. act complained of, which may include a
legislative enactment or statute, involves the
illegal expenditure of public money that the so-
called taxpayer suit may be allowed. What the
case at bar seeks is one that entails expenditure
of public funds which may be illegal because it
would be spent for a purpose that of calling a
special election which, as will be shown, has no
authority either in the Constitution or a statute.
As voters, neither have petitioners the requisite
interest or personality to qualify them to
maintain and prosecute the present petition. The
unchallenged rule is that the person who
impugns the validity of a statute must have a
personal and substantial interest in the case such
that he has sustained, or will sustain, direct
injury as a result of its enforcement. In the case
before Us, the alleged inaction of the COMELEC
to call a special election to fill-up the existing
vacancies in the Batasan Pambansa, standing
alone, would adversely affect only the
generalized interest of all citizens. Petitioners'
23

5 National The President issued Proclamation no.
Development 430 reserving Block no. 4, Reclamation
Company vs. Area no. 4 for warehousing purposes
Cebu City, et. al., under the administration of the
G.R. No. 51593, National Warehousing Corporation
November 5, (NWC), which was later on dissolved
1992. and was taken over by the National
Development Company (NDC). Cebu
assessed and collected real estate taxes
standing to sue may not be predicated upon an
interest of the kind alleged here, which is held in
common by all members of the public because of
the necessarily abstract nature of the injury
supposedly shared by all citizens. Concrete
injury, whether actual or threatened, is that
indispensable element of a dispute which serves
in part to cast it in a form traditionally capable of
judicial resolution. When the asserted harm is a
"generalized grievance" shared in substantially
equal measure by all or a large class of citizens,
that harm alone normally does not warrant
exercise of jurisdiction. As adverted to earlier,
petitioners have not demonstrated any
permissible personal stake, for petitioner
Lozada’s interest as an alleged candidate and as
a voter are not sufficient to confer standing.
Petitioner Lozada does not only fail to inform the
Court of the region he wants to be a candidate
but makes indiscriminate demand that special
election be called throughout the country.
Whether or not While it might be stated that the Republic owns
the properties of NDC, it does not necessarily follow that the
NDC, namely the properties owned by NDC are also owned by the
land and Republic.
warehouse, are
tax-exempt. Tax exemption of property owned by the
Republic refers to properties owned by the
Government and by its agencies which do not
have separate and distinct personalities
24
 on the land and warehouse where NDC
paid under protest, claiming that the
land and warehouse were owned by the
Republic and therefore, exempt from
taxation.
6 Arturo M. Herein various petitioners seek to
Tolentino, vs. declare RA 7166 as unconstitutional as
The Secretary of it seeks to widen the tax base of the
Finance and The existing VAT system and enhance its
Commissioner of administration by amending the
Internal National Internal Revenue Code. The
Revenue, G.R. value-added tax (VAT) is levied on the
No. 115455 sale, barter or exchange of goods and
(unincorporated entities). Once government
ownership is determined, the nature of the use
of the property, whether proprietary or for
sovereign purposes, is immaterial. What appears
to be ceded to NWC is merely the administration
of the property while the Government retains
ownership of what has been declared reserved
for warehousing purposes under Proclamation
no. 430.
When a land is reserved, the land remains the
absolute property of the government. The latter
does not part with its title by reserving them, but
simply gives notice that it desires them for a
certain purpose. As its title remains with the
Republic, the reserved land is clearly covered by
the tax exemption.
The reserved land is tax-exempt but the
warehouse constructed on such reserved land
should be assessed real estate tax as such
improvement does not belong to the Republic.
Whether or not No, there is no justification for passing upon the
RA 7166 violates claims that the law also violates the rule that
the principle of taxation must be progressive and that it denies
progressive petitioners' right to due process and that equal
system of protection of the laws. The reason for this
taxation. different treatment has been cogently stated by
an eminent authority on constitutional law thus:
"When freedom of the mind is imperiled by law,
25
August 25, 1994. properties as well as on the sale or
exchange of services. It is equivalent to
10% of the gross selling price or gross
value in money of goods or properties
sold, bartered or exchanged or of the
gross receipts from the sale or exchange
of services.
CREBA asserts that R.A. No. 7716 (1)
impairs the obligations of contracts, (2)
classifies transactions as covered or
exempt without reasonable basis and
(3) violates the rule that taxes should be
uniform and equitable and that
Congress shall "evolve a progressive
system of taxation."
With respect to the first contention, it is
claimed that the application of the tax
to existing contracts of the sale of real
property by installment or on deferred
payment basis would result in
substantial increases in the monthly
amortizations to be paid because of the
10% VAT. The additional amount, it is
pointed out, is something that the
buyer did not anticipate at the time he
entered into the contract.
It is next pointed out that while Section
4 of R.A. No. 7716 exempts such
it is freedom that commands a momentum of
respect; when property is imperiled it is the
lawmakers' judgment that commands respect.
This dual standard may not precisely reverse the
presumption of constitutionality in civil liberties
cases, but obviously it does set up a hierarchy of
values within the due process clause."
Petitioners contend that as a result of the
uniform 10% VAT, the tax on consumption goods
of those who are in the higher-income bracket,
which before were taxed at a rate higher than
10%, has been reduced, while basic
commodities, which before were taxed at rates
ranging from 3% to 5%, are now taxed at a higher
rate.
Just as vigorously as it is asserted that the law is
regressive, the opposite claim is pressed by
respondents that in fact it distributes the tax
burden to as many goods and services as
possible particularly to those which are within
the reach of higher-income groups, even as the
law exempts basic goods and services. It is thus
equitable. The goods and properties subject to
the VAT are those used or consumed by higher-
income groups. These include real properties
held primarily for sale to customers or held for
lease in the ordinary course of business, the right
or privilege to use industrial, commercial or
scientific equipment, hotels, restaurants and
26
transactions as the sale of agricultural
products, food items, petroleum, and
medical and veterinary services, it
grants no exemption on the sale of real
property which is equally essential. The
sale of real property for socialized and
low-cost housing is exempted from the
tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the
middle class, who are equally homeless,
should likewise be exempted.
Finally, it is contended, for the reasons
already noted, that R.A. No. 7716 also
violates Art. VI, Section 28(1) which
provides that "The rule of taxation shall
be uniform and equitable. The Congress
shall evolve a progressive system of
taxation."
similar places, tourist buses, and the like. On the
other hand, small business establishments, with
annual gross sales of less than P500,000, are
exempted. This, according to respondents,
removes from the coverage of the law some
30,000 business establishments. On the other
hand, an occasional paper of the Center for
Research and Communication cities a NEDA
study that the VAT has minimal impact on
inflation and income distribution and that while
additional expenditure for the lowest income
class is only P301 or 1.49% a year, that for a
family earning P500,000 a year or more is P8,340
or 2.2%.
Lacking empirical data on which to base any
conclusion regarding these arguments, any
discussion whether the VAT is regressive in the
sense that it will hit the "poor" and middle-
income group in society harder than it will the
"rich," is largely an academic exercise. On the
other hand, the CUP's contention that Congress'
withdrawal of exemption of producers
cooperatives, marketing cooperatives, and
service cooperatives, while maintaining that
granted to electric cooperatives, not only goes
against the constitutional policy to promote
cooperatives as instruments of social justice (Art.
XII, § 15) but also denies such cooperatives the
equal protection of the law is actually a policy
argument. The legislature is not required to
27
adhere to a policy of "all or none" in choosing
the subject of taxation.

Nor is the contention of the Chamber of Real

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

Indeed, regressivity is not a negative standard for

courts to enforce. What Congress is required by
the Constitution to do is to "evolve a progressive
system of taxation." This is a directive to
Congress, just like the directive to it to give
priority to the enactment of laws for the
enhancement of human dignity and the
reduction of social, economic and political
inequalities (Art. XIII, § 1), or for the promotion
of the right to "quality education" (Art. XIV, § 1).
These provisions are put in the Constitution as

28

7 Herrera vs. In 1952, the Director of the Bureau of
Quezon City Hospitals authorized Jose V. Herrera
Board and Ester Ochangco Herrera to establish
Assessment and operate the St. Catherine’s
Appeals, G.R. No. Hospital. In 1953, the Herreras sent a
L-1527 vs. letter to the Quezon City Assessor
Philippine Lung requesting exemption from payment of
Center vs. real estate tax on the hospital, stating
Quezon City, G.R. that the same was established for
No. 144104. charitable and humanitarian purposes
and not for commercial gain. The
exemption wasgranted effective
years 1953 to 1955.
In 1955, however, theAssessor reclassifi
ed the properties from“exempt” to
“taxable” effective 1956, as it was
ascertained that out 32 beds in the
hospital, 12 of which aref or pay-
patients. A school of midwifery is also
operated within the premises of the
hospital.
Lung Center of the Philippines is a non-
stock and non-profit entity established
by virtue of PD No. 1823. It is the
registered owner of the land on which
moral incentives to legislation, not as judicially
enforceable rights.
Whether St. The admission of pay-patients does not detract
Catherine’s from the charitable character of a hospital, if all
Hospital is its funds are devoted exclusively to the
exempt from maintenance of the institution as a public
realty tax. charity. The exemption in favor of property used
exclusively for charitable or educational purpose
is not limited to property actually indispensable
therefore, but extends to facilities which are
incidental to and reasonably necessary for the
accomplishment of said purpose, such as in the
case of hospitals -- a school for training nurses; a
nurses’ home; property used to provide housing
facilities for interns, resident doctors,
superintendents and other members of the
hospital staff; and recreational facilities for
student nurses, interns and residents. Within the
purview of the Constitution, St. Catherine’s
Hospital is a charitable institution exempt
from taxation.
Is the Lung The Lung Center of the Philippines is a charitable
Center of the institution. To determine whether an enterprise
Philippines a is a charitable institution or not, the elements
charitable which should be considered include the statute
29
the Lung Center of the Philippines
Hospital is erected. A big space in the
ground floor of the hospital is being
leased to private parties, for canteen
and small store spaces, and to medical
or professional practitioners who use
the same as their private clinics. Also, a
big portion on the right side of the
hospital is being leased for commercial
purposes to a private enterprise known
as the Elliptical Orchids and Garden
Center. When the City Assessor of
Quezon City assessed both its land and
hospital building for real property taxes,
the Lung Center of the Philippines filed
a claim for exemption on its averment
that it is a charitable institution with a
minimum of 60% of its hospital beds
exclusively used for charity patients and
that the major thrust of its hospital
operation is to serve charity patients.
The claim for exemption was denied,
prompting a petition for the reversal of
the resolution of the City Assessor with
the Local Board of Assessment Appeals
of Quezon City, which denied the same.
On appeal, the Central Board of
Assessment Appeals of Quezon City
affirmed the local board’s decision,
finding that Lung Center of the
Philippines is not a charitable institution
institution within creating the enterprise, its corporate purposes,
the context of the its constitution and by-laws, the methods of
Constitution, and administration, the nature of the actual work
therefore, performed, that character of the services
exempt from real rendered, the indefiniteness of the beneficiaries
property tax? and the use and occupation of the properties.
However, under the Constitution, in order to be
entitled to exemption from real property tax,
there must be clear and unequivocal proof that
(1) it is a charitable institution and (2)its real
properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY used for charitable purposes. While
portions of the hospital are used for treatment of
patients and the dispensation of medical services
to them, whether paying or non-paying, other
portions thereof are being leased to private
individuals and enterprises.
Exclusive is defined as possessed and enjoyed to
the exclusion of others, debarred from
participation or enjoyment. If real property is
used for one or more commercial purposes, it is
not exclusively used for the exempted purposes
but is subject to taxation.
30
 and that its properties were not
actually, directly and exclusively used
for charitable purposes. Hence, the
present petition for review with
averments that the Lung Center of the
Philippines is a charitable institution
under Section 28(3), Article VI of the
Constitution, notwithstanding that it
accepts paying patients and rents out
portions of the hospital building to
private individuals and enterprises.
8 Abra Valley Abra Valley, an educational corporation
College, Inc. vs. and institution of higher learning duly
Aquino, G.R. No. incorporated with the SEC was assessed
L-39086, June 15, with payment of real estate tax for their
1988. school’s lot and building. Abra Valley
failed to pay so a notice of seizure of
the property was made. The school is
offering primary, high school, college
courses and has a population of more
than 1000 students. The elementary
students are housed in a two-storey
building across the street, while the
highschool and college students are
housed in the main building. The
director with his family is in the second
floor of the main building. Also, the
ground floor of the college building is
used and rented by a commercial
establishment, the Northern Marketing
The proper Constitutional provision Section 22, paragraph 3,
interpretation of Article VI, of the then 1935 Philippine
the phrase “used Constitution, expressly grants exemption from
exclusively for realty taxes for "Cemeteries, churches and
educational parsonages or convents appurtenant thereto,
purposes. and all lands, buildings, and improvements used
exclusively for religious, charitable or educational
purposes. The phrase "exclusively used for
educational purposes" was clarified in the cases
of Herrera vs. Quezon City Board of assessment
Appeals, where such means not limited to
property actually indispensable' therefor but
extends to facilities which are incidental to and
reasonably necessary for the accomplishment of
said purposes, such as in the case of hospitals, "a
school for training nurses, a nurses' home,
property use to provide housing facilities for
interns, resident doctors, superintendents, and
other members of the hospital staff, and
31
 Corporation. Abra Valley’s contention is
that the primary use of the lot and
building for educational purposes and
not the incidental use thereof
determines exemption from property
taxes under Sec22 Art6
1935Consitution. Thus the assessment
of tax for the real property tax by
respond is without basis.
9 City Assessor of Respondent Association of Benevola de
Cebu City vs. Cebu, Inc. is a non-stock, non-profit
Association of organization and is the owner of Chong
Benevola de Hua Hospital (CHH) in Cebu City. In the
Cebu, G.R. No. late 1990’s, respondent constructed the
152904. June 8, CHH Medical Arts Center (CHHMAC).
recreational facilities for student nurses, interns,
and residents'. The test of exemption from
taxation is the use of the property for purposes
mentioned in the Constitution. It must be
stressed however, that while this Court allows a
more liberal and non-restrictive interpretation of
the phrase "exclusively used for educational
purposes", reasonable emphasis has always been
made that exemption extends to facilities which
are incidental to and reasonably necessary for
the accomplishment of the main purposes.
Otherwise stated, the use of the school building
or lot for commercial purposes is neither
contemplated by law, nor by jurisprudence.
Thus, while the use of the second floor of the
main building in the case at bar for residential
purposes of the Director and his family, may find
justification under the concept of incidental use,
which is complimentary to the main or primary
purpose—educational, the lease of the first floor
thereof to the Northern Marketing Corporation
cannot by any stretch of the imagination be
considered incidental to the purpose of
education.
Whether or not Yes. The CHH Medical Arts Center (CHHMAC) is
the medical arts an integral part of CHH. It is definitely incidental
center built by to and reasonably necessary for the operations
Chong Hua of Chong Hua Hospital.
Hospital to house
its doctors a It is undisputed that the doctors and medical
32
2007.
Petitioner City Assessor of Cebu City
assessed the CHHMAC building as
“commercial” at the assessment level of
35% for commercial buildings, and not
at the 10% special assessment currently
imposed for CHH and its other separate
buildings—the CHH’s Dietary and
Records Departments. He further
ascertained that it is not a part of the
CHH building but a separate building
which is actually used as commercial
clinic/room spaces for renting out to
physicians and, thus, classified as
“commercial.”
On the other hand, respondent
contended that CHHMAC building is
actually, directly, and exclusively part of
CHH and should have a special
assessment level of 10% as provided
under City Tax Ordinance LXX.
Respondent asserted that the CHHMAC
building is similarly situated as the
buildings of CHH, housing its Dietary
and Records Departments, are
completely separate from the main CHH
building and are imposed the 10%
special assessment level. In fine,
respondent argued that the CHHMAC,
though not actually indispensable, is
nonetheless incidental and reasonably
separate specialists holding clinics in CHHMAC are those
commercial duly accredited by CHH, that is, they are
establishment or consultants of the hospital and the ones who can
an appurtenant treat CHH’s patients confined in it. This fact
to the hospital. alone takes away CHHMAC from being
categorized as “commercial” since a tertiary
hospital like CHH is required by law to have a
pool of physicians who comprises the required
medical departments in various medical fields.
The fact that the physicians are holding office in
a separate building does not take away the
essence and nature of their services vis-à-vis the
over-all operation of the hospital and the
benefits to the hospital’s patients. Their transfer
to a more spacious and, perhaps, convenient
place and location for the benefit of the
hospital’s patients does not remove them from
being an integral part of the overall operation of
the hospital.
Respondent’s charge of rentals for the offices
and clinics its accredited physicians occupy
cannot be equated to a commercial venture,
which is mainly for profit.
First, CHHMAC is only for its consultants or
accredited doctors and medical specialists.
Second, the charging of rentals is a practical
necessity: (1) to recoup the investment cost of
the building, (2) to cover the rentals for the lot
33
 necessary to CHH’s operations.
10 Commissioner of Private Respondent YMCA is a non-
Internal Revenue stock, non-profit institution, which
vs. YMCA, G.R. conducts various programs and
No. 124043, activities that are beneficial to the
October 14, public, especially the young people,
1998. pursuant to its religious, educational
and charitable objectives.
YMCA earned income from leasing out a
portion of its premises to small shop
owners, like restaurants and canteen
operators, and from parking fees
collected from non-members. Petitioner
issued an assessment to private
respondent for deficiency taxes. Private
respondent formally protested the
assessment. In reply, the CIR denied the
claims of YMCA.
CHHMAC is built on, and (3) to maintain the
CHHMAC building and its facilities. Third, as
correctly pointed out by respondent, it pays the
proper taxes for its rental income. And, fourth, if
there is indeed any net income from the lease
income of CHHMAC, such does not inure to any
private or individual person as it will be used for
respondent’s other charitable projects.
Whether or not Yes. Income of whatever kind and character of
the income non-stock non-profit organizations from any of
derived from their properties, real or personal, or from any of
rentals of real their activities conducted for profit, regardless of
property owned the disposition made of such income, shall be
by YMCA subject subject to the tax imposed under the NIRC.
to income tax
Rental income derived by a tax-exempt
organization from the lease of its properties, real
or personal, is not exempt from income taxation,
even if such income is exclusively used for the
accomplishment of its objectives.
Because taxes are the lifeblood of the nation, the
Court has always applied the doctrine of strict in
interpretation in construing tax exemptions
(Commissioner of Internal Revenue v. Court of
Appeals, 271 SCRA 605, 613, April 18, 1997).
Furthermore, a claim of statutory exemption
from taxation should be manifest and
unmistakable from the language of the law on
which it is based. Thus, the claimed exemption
34
“must expressly be granted in a statute stated in
a language too clear to be mistaken” (Davao Gulf
Lumber Corporation v. Commissioner of Internal
Revenue and Court of Appeals, G.R. No. 117359,
p. 15 July 23, 1998).

Verba legis non est recedendum. The law does

not make a distinction. The rental income is
taxable regardless of whence such income is
derived and how it is used or disposed of. Where
the law does not distinguish, neither should we.

Private respondent also invokes Article XIV,

Section 4, par. 3 of the Constitution, claiming
that it “is a non-stock, non-profit educational
institution whose revenues and assets are used
actually, directly and exclusively for educational
purposes so it is exempt from taxes on its
properties and income.” This is without merit
since the exemption provided lies on the
payment of property tax, and not on the income
tax on the rentals of its property. The bare
allegation alone that one is a non-stock, non-
profit educational institution is insufficient to
justify its exemption from the payment of
income tax.

For the YMCA to be granted the exemption it

claims under the above provision, it must prove
with substantial evidence that (1) it falls under
the classification non-stock, non-profit

35
 educational institution; and (2) the income it
seeks to be exempted from taxation is used
actually, directly, and exclusively for educational
purposes. Unfortunately for respondent, the
Court noted that not a scintilla of evidence was
submitted to prove that it met the said
requisites.

The Court appreciates the nobility of

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

11 Chamber of Real Petitioner Chamber of Real Estate and (1) Is the : (1) Yes. The imposition of the MCIT is
Estate and Builders’ Associations, Inc. (CREBA), an imposition of constitutional. An income tax is arbitrary and
Builder’s association of real estate developers MCIT confiscatory if it taxes capital, because it is
Associations’ Inc. and builders in the Philippines, constitutional? income, and not capital, which is subject to
vs. Romulo, et. questioned the validity of Section 27(E) (2) Is the income tax. However, MCIT is imposed on gross
al., G.R. No. of the Tax Code which imposes the imposition of income which is computed by deducting from
160756, March 9, minimum corporate income tax (MCIT) CWT on income gross sales the capital spent by a corporation in
2010. on corporations. from sales of real the sale of its goods, i.e., the cost of goods and
properties other direct expenses from gross sales. Clearly,
Under the Tax Code, a corporation can classified as the capital is not being taxed.

36
become subject to the MCIT at the rate
of 2% of gross income, beginning on the
4th taxable year immediately following
the year in which it commenced its
business operations, when such MCIT is
greater than the normal corporate
income tax. If the regular income tax is
higher than the MCIT, the corporation
does not pay the MCIT.
CREBA argued, among others, that the
use of gross income as MCIT base
amounts to a confiscation of capital
because gross income, unlike net
income, is not realized gain.
CREBA also sought to invalidate the
provisions of RR No. 2-98, as amended,
otherwise known as the Consolidated
Withholding Tax Regulations, which
prescribe the rules and procedures for
the collection of CWT on sales of real
properties classified as ordinary assets,
on the grounds that these regulations:
 Use gross selling price (GSP) or
fair market value (FMV) as basis
for determining
the income tax on the sale of real estate
classified as ordinary assets, instead of
the entity’s net taxable income as
ordinary assets
constitutional? Various safeguards were incorporated into the
law imposing MCIT.
Firstly, recognizing the birth pangs of businesses
and the reality of the need to recoup initial major
capital expenditures, the MCIT is imposed only
on the 4th taxable year immediately following
the year in which the corporation commenced its
operations.
Secondly, the law allows the carry-forward of any
excess of the MCIT paid over the normal income
tax which shall be credited against the normal
income tax for the three immediately succeeding
years.
Thirdly, since certain businesses may be incurring
genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition
of MCIT if a corporation suffers losses due to
prolonged labor dispute, force majeure and
legitimate business reverses.
(2) Yes. Despite the imposition of CWT on GSP or
FMV, the income tax base for sales of real
property classified as ordinary assets remains as
the entity’s net taxable income as provided in
the Tax Code, i.e., gross income less allowable
costs and deductions. The seller shall file its
income tax return and credit the taxes withheld
37
provided for under the Tax Code;
 Mandate the collection of
income tax on a per transaction
basis, contrary to the Tax Code
provision which imposes income
tax on net income at the end of
the taxable period;
 Go against the due process
clause because the government
collects income tax even when
the net income has not yet been
determined; gain is never
assured by mere receipt of the
selling price; and
 Contravene the equal protection
clause because the CWT is being
charged upon real estate
enterprises, but not on other
business enterprises, more
particularly, those in the
manufacturing sector, which do
business similar to that of a real
estate enterprise.
by the withholding agent-buyer against its tax
due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is
less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit.
The use of the GSP or FMV as basis to determine
the CWT is for purposes of practicality and
convenience. The knowledge of the withholding
agent-buyer is limited to the particular
transaction in which he is a party. Hence, his
basis can only be the GSP or FMV which figures
are reasonably known to him.
Also, the collection of income tax via the CWT on
a per transaction basis, i.e., upon consummation
of the sale, is not contrary to the Tax Code which
calls for the payment of the net income at the
end of the taxable period. The taxes withheld are
in the nature of advance tax payments by a
taxpayer in order to cancel its possible future tax
obligation. They are installments on the annual
tax which may be due at the end of the taxable
year. The withholding agent-buyer’s act of
collecting the tax at the time of the transaction,
by withholding the tax due from the income
payable, is the very essence of the withholding
tax method of tax collection.
On the alleged violation of the equal protection
38

12 People vs. Cayat, Cayat was a native of Baguio, Benguet,
G.R. No. L-45987. Mountain Province. He was accused for
violating Act No. 1639 which declared
unlawful for any native of the Philippine
islands who is a member of a non-
Christian Tribe to have in his possession,
drink any beer, wine or intoxicating
clause, the taxing power has the authority to
make reasonable classifications for purposes of
taxation. Inequalities which result from singling
out a particular class for taxation, or exemption,
infringe no constitutional limitation. The real
estate industry is, by itself, a class and can be
validly treated differently from other business
enterprises.
What distinguishes the real estate business from
other manufacturing enterprises, for purposes of
the imposition of the CWT, is not their
production processes but the prices of their
goods sold and the number of transactions
involved. The income from the sale of a real
property is bigger and its frequency of
transaction limited, making it less cumbersome
for the parties to comply with the withholding
tax scheme. On the other hand, each
manufacturing enterprise may have tens of
thousands of transactions with several thousand
customers every month involving both minimal
and substantial amounts.
Whether or not No. As early as 1551, the Spanish Government
the said Act is had assumed a solicitous attitude toward these
violative of the inhabitants. It had been regarded by the Spanish
equal protection Government as a sacred "duty to conscience and
clause of the humanity" to civilize these less fortunate people
constitution. living "in the obscurity of ignorance" and to
accord them the "the moral and material
39
liquors of any kind, other than the so-
called native wines and liquors which
the members of the tribes have been
accustomed. It was alleged that Cayat
had received, acquired and had in his
possession and control, one bottle of
gin which is an intoxicating liquor other
than the so-called native wines and
liquors which the member of such tribe
have been accustomed to. Cayat was
found guilty of such. Accused
challenged the constitutionality of the
Act. One of the grounds was that the
said act is discriminatory and denies the
equal protection laws.
advantages" of community life and the
"protection and vigilance afforded them by the
same laws." Constant and active effort had been
exercised to prevent barbarous practices and
introduce civilized customs.
Guaranty of the equal protection of the laws is
not equal protection of the laws is not violated
by a legislation based on reasonable
classification. And the classification, to be
reasonable, (1) must rest on substantial
distinctions; (2) must be germane to the
purposes of the law; (3) must not be limited to
existing conditions only; and (4) must apply
equally to all members of the same class. Act No.
1639 satisfies these requirements.
The classification rests on real and substantial,
not merely imaginary or whimsical, distinctions.
It is based upon the degree of civilization and
culture. "The term 'non-Christian tribes' refers,
not to religious belief, but, in a way, to the
geographical area, and, more directly, to natives
of the Philippine Islands of a low grade of
civilization, usually living in tribal relationship
apart from settled communities."
This distinction is unquestionably reasonable, for
the Act was intended to meet the peculiar
conditions existing in the non-Christian tribes.
That it is germane to the purposes of law cannot
be doubted. It is designed to insure peace and
order among the non-Christian tribes since past
40

13
14 Ormoc Sugar In 1964, Ormoc City passed a bill which
Company vs. read: “There shall be paid to the City
Conejos, et. al., Treasurer on any and all productions of
G.R. No. L-23794, centrifugal sugar milled at the Ormoc
February 17, Sugar Company Incorporated, in Ormoc
1968. City a municipal tax equivalent to one
per centum (1%) per export sale to the
United States of America and other
foreign countries.” Though referred to
as a “production tax”, the imposition
actually amounts to a tax on the export
of centrifugal sugar produced at Ormoc
Sugar Company, Inc. For production of
sugar alone is not taxable; the only time
the tax applies is when the sugar
produced is exported. Ormoc Sugar paid
the tax (P7,087.50) in protest averring
experiences show that free use of highlight
intoxicating liquors by them had resulted in
lawlessness and crimes.
The law is not limited in its application to
conditions existing at the time of its enactment.
It is intended to apply for all times as long as
those conditions exist. Legislature understood
that the civilization of a people is a slow process
and that hand in hand with it must go measures
of protection and security.
Finally, that the Act applies equally to all
members of the class.
Whether or not The SC held in favor of Ormoc Sugar. It ruled that
constitutional the equal protection clause applies only to
limits on the persons or things identically situated and does
power of not bar a reasonable classification of the subject
taxation, of legislation, and a classification is reasonable
specifically the where (1) it is based on substantial distinctions
equal protection which make real differences; (2) these are
clause and rule of germane to the purpose of the law; (3) the
uniformity of classification applies not only to present
taxation, were conditions but also to future conditions which
infringed. are substantially identical to those of the
present; (4) the classification applies only to
those who belong to the same class.
Though Ormoc Sugar Company Inc. is the only
sugar central in the city of Ormoc at the time, the
classification, to be reasonable, should be in
41
 that the same is violative of Sec 2287 of
the Revised Administrative Code which
provides: “It shall not be in the power of
the municipal council to impose a tax in
any form whatever, upon goods and
merchandise carried into the
municipality, or out of the same, and
any attempt to impose an import or
export tax upon such goods in the guise
of an unreasonable charge for
wharfage, use of bridges or otherwise,
shall be void.” And that the ordinance is
violative to equal protection as it
singled out Ormoc Sugar As being liable
for such tax impost for no other sugar
mill is found in the city.
15 Tiu vs. Court of Congress, with the approval of the
Appeals, G.R. No. President, passed into law RA 7227
127410, January entitled "An Act Accelerating the
20, 1999. Conversion of Military Reservations Into
Other Productive Uses, Creating the
Bases Conversion and Development
Authority for this Purpose, Providing
Funds Therefor and for Other
Purposes." Section 12 thereof created
the Subic Special Economic Zone and
granted there to special privileges.
President Ramos issued Executive Order
No. 97, clarifying the application of the
tax and duty incentives. The President
terms applicable to future conditions as well.
Said ordinance shoouldn’t be singular and
exclusive as to exclude any subsequently
established sugar central, of the same class as
plaintiff, for coverage of the tax.
Whether the No. The Court found real and substantive
provisions of distinctions between the circumstances
Executive Order obtaining inside and those outside the Subic
No. 97-A Naval Base, thereby justifying a valid and
confining the reasonable classification. The fundamental right
application of of equal protection of the laws is not absolute,
R.A. 7227 within but is subject to reasonable classification. If the
the secured area groupings are characterized by substantial
and excluding the distinctions that make real differences, one class
residents of the may be treated and regulated differently from
zone outside of another. The classification must also be germane
the secured area to the purpose of the law and must apply to all
is discriminatory those belonging to the same class. Classification,
or not owing to a to be valid, must (1) rest on substantial
42
issued Executive Order No. 97-A,
specifying the area within which the
tax-and-duty-free privilege was
operative.
Petitioners challenged the
constitutionality of EO 97-A for allegedly
being violative of their right to equal
protection of the laws. This was due to
the limitation of tax incentives to Subic
and not to the entire area of Olongapo.
The case was referred to the Court of
Appeals.
The appellate court concluded that such
being the case, petitioners could not
claim that EO 97-A is unconstitutional,
while at the same time maintaining the
validity of RA 7227.
Respondent Court held that "there is no
substantial difference between the
provisions of EO 97-A and Section 12 of
RA 7227. In both, the 'Secured Area' is
precise and well-defined as '. . . the
lands occupied by the Subic Naval Base
and its contiguous extensions as
embraced, covered and defined by the
1947 Military Bases Agreement
between the Philippines and the United
States of America, as amended . . .'"
violation of the distinctions, (2) be germane to the purpose of
equal protection the law, (3) not be limited to existing conditions
clause. only, and (4) apply equally to all members of the
same class. The Supreme Court believed it was
reasonable for the President to have delimited
the application of some incentives to the
confines of the former Subic military base.
RA 7227 aims primarily to accelerate the
conversion of military reservations into
productive uses. This was really limited to the
military bases as the law's intent provides.
Moreover, the law tasked the BCDA to
specifically develop the areas the bases
occupied.
Even more important, at this time the business
activities outside the "secured area" are not
likely to have any impact in achieving the
purpose of the law, which is to turn the former
military base to productive use for the benefit of
the Philippine economy. Hence, there was no
reasonable basis to extend the tax incentives in
RA 7227.
It is well-settled that the equal-protection
guarantee does not require territorial uniformity
of laws. As long as there are actual and material
differences between territories, there is no
violation of the constitutional clause.
43

Case Title Summary
1 VICENTE M and P were legally married prior to
MADRIGAL and January 1, 1914. The marriage was
his wife, SUSANA contracted under the provisions
PATERNO, concerning conjugal partnerships. The
plaintiffs- claim is submitted that the income
appellants, vs. shown on the form presented for
JAMES J. 1914 was in fact the income of the
RAFFERTY conjugal partnership existing
between M and P, and that in
38 Phil 415 computing and assessing the
additional income tax, the income
declared by M should be divided into
two equal parts, one-half to be
considered the income of M and the
other half the income of P.
Part 3
Income Taxation
Issue/s Ruling Notes/Remarks
What is the The Income Tax Law of the United States in
meaning of force in the Philippine Islands has selected
income? income as the test of faculty in taxation. The
aim has been to mitigate the evils arising from
the inequalities of wealth by a progressive
scheme of taxation, which places the burden
on those best able to pay. To carry out this
idea, public considerations have demanded an
exemption roughly equivalent to the minimum
of subsistence. With these exceptions, the
Income Tax Law is supposed to reach the
earnings of the entire non-governmental
property of the country.
Income as contrasted with capital or property
is to be the test. The essential difference
between capital and income is that capital is a
fund; income is a flow. Capital is wealth, while
income is the service of wealth. "The fact is
that property is a tree, income is the fruit;
labor is a tree, income the fruit; capital is a
tree, income the fruit." (Waring vs. City of
Savannah [1878], 60 Ga., 93.)
44

2 FREDERIC Philippine American Drug Company was
K C. a corporation duly organized and
FISHER, existing under the laws of the
plaintiff- Philippine Islands, doing business in the
appellant, City of Manila; that he appellant was a
vs. stockholder in said corporation; that
WENCESL said corporation, as result of the
AO business for that year, declared a
TRINIDAD "stock dividend"; that the
, Collector proportionate share of said stock
of Internal divided of the appellant was P24,800;
Revenue, that the stock dividend for that amount
defendant was issued to the appellant; that
-appellee. thereafter, in the month of March,
1920, the appellant, upon demand of
48 Phil the appellee, paid under protest, and
415 voluntarily, unto the appellee the sum
of P889.91 as income tax on said stock
dividend. For the recovery of that sum
(P889.91) the present action was
instituted.
Income means profits or gains.
Are the A dividend is defined as a corporate profit set
"stock aside, declared, and ordered by the directors
dividends" to be paid to the stockholders on demand or
in the at a fixed time. Until the dividend is declared,
present the corporate profits belong to the
case corporation and not to the stockholders, and
"income" are liable for the payment of the debts of the
and taxable corporation.
as such
under the When a cash dividend is declared and paid to
provisions the stock holders, such cash dividend is
of section declared and paid to the stockholder, such
25 of Act cash becomes the absolute property of the
No. 2833? stockholder and cannot be reached by the
creditors of the corporation in the absence of
fraud. A stock dividend, however, still being
the property of the corporation, and not of
the stockholder, it may be reached by an
execution against the corporation, and sold as
a part of the property of the corporation. Until
the dividend is declared and paid, the
corporate profits still belong to the
corporation, not to the stockholders, and are
liable for corporate indebtedness. The rule is
well established that cash dividends, whether
large or small, are regarded as "income" and
all stock dividends, as capital or assets.
The stockholder who receives a stock
45

3 CONWI VS CTA The dollar earnings of petitioners are
the fruits of their labors in the foreign
213 SCRA 83 subsidiaries of Procter & Gamble. It was
a definite amount of money which
came to them within a specified period
of time of two years as payment for
their services. Petitioners argue that
since there were no remittances and
acceptances of their salaries and wages
in US dollars into the Philippines, they
are exempt from the coverage of RMC
7-71,41-71.
4 CIR vs BOAC BOAC, A RESIDENT FOREIGN
CORPORATION, impress on the Court
149 SCRA 395 that income derived from
transportation is income for services,
with the result that the place where the
services are rendered determines the
dividend has received nothing but a
representation of this increased interest
in the capital of the corporation. There
has been no separation or segregation of
his interest. All the property or capital of
the corporation still belongs to the
corporation.
Are the petitioners’ Income may be defined as an amount of money
income earned coming to a person or corporation within a
outside the specified time, whether as payment for services,
Philippines exempt interest or profit from investment. Unless
from income tax? otherwise specified, it means cash or its
Does the Sec. of equivalent. Income can also be thought of as a
Finance possess flow of the fruits of one's labor.
the power to
promulgate the Petitioners forget that they are citizens
circulars in of the Philippines, and their income,
question? within or without, and in these cases
wholly without, are subject to income
tax. The fact still remains that "taxes are
the lifeblood of the government" and
one of the duties of a Filipino citizen is to
pay his income tax.
Did such "flow of The source of an income is the property, activity
wealth" come from or service that produced the income. For the
"sources within the source of income to be considered as coming
Philippines"? 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
46
source; and since BOAC's service of
transportation is performed outside the
Philippines, the income derived is from
sources without the Philippines and,
therefore, not taxable under our
income tax laws.
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 situs of the source of
payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by
the Philippine government. In consideration of
such protection, the flow of wealth should share
the burden of supporting the government.
The absence of flight operations to and from the
Philippines is not determinative of the source of
income or the situs of income taxation.
Admittedly, BOAC was an off-line international
airline at the time pertinent to this case. The
test of taxability is the "source"; and the source
of an income is that activity . . . which produced
the income. Unquestionably, the passage
documentations (e.g. transportation ticket,
ordinary ticket) in these cases were sold in the
Philippines and the revenue therefrom was
derived from a business activity regularly
pursued within the Philippines. And even if the
BOAC tickets sold covered the "transport of
passengers and cargo to and from foreign
cities", it cannot alter the fact that income from
the sale of tickets was derived from the
Philippines. The word "source" conveys one
essential idea, that of origin, and the origin of
the income herein is the Philippines.
47
5 Commission of Respondent Filinvest Development 1. Whether the 1. No. The CIR's powers does not include the
Internal Revenue Corporation (FDC) is a holding company CIR’s powers power to impute "theoretical interests" to
(CIR) vs Filinvest which is the owner of 80% of the include the the controlled taxpayer's transactions.
Development outstanding shares of respondent power to
Corporation (FDC) Filinvest Alabang, Inc. (FAI), and 67.42% impute The term “gross income” means all income
of the outstanding shares of Filinvest theoretical from whatever source derived. While the
G. R. Nos. Land, Inc. (FLI). interests on the phrase "from whatever source derived"
163653 and advances FDC There must be proof of the actual or
167689 On 29 November 1996, FDC and FAI extended to its probable receipt or realization of the item of
entered into a Deed of Exchange with affiliates in gross income sought to be distributed,
FLI whereby the former both 1996 and 1997 apportioned or allocated by the CIR.
transferred in favor of the latter considering
parcels of land appraised at that, for said There was no evidence of actual or possible
P4,306,777,000.00. 463,094,301 purpose, FDC realization showing that the advances FDC
shares of stock of FLI were issued to resorted to extended to its affiliates had resulted to the
FDC and FAI in exchange for said interest- interests subsequently assessed by the CIR.
parcels which were intended to bearing fund
facilitate development of medium-rise borrowings More so, pursuant to Article 1956 of the Civil
residential and commercial buildings. from Code of the Philippines, no interest shall be
commercial due unless it has been expressly stipulated
FDC also extended advances in favor of banks and that in writing. Taxes, being burdens, are not to
its affiliates, namely, FAI, FLI, Davao since be presumed beyond what the applicable
Sugar Central Corporation (DSCC) and considerable statute expressly and clearly declares.
Filinvest Capital, Inc. (FCI). Duly interest Accordingly, the general rule of requiring
evidenced by instructional letters as expenses were adherence to the letter in construing
well as cash and Journal vouchers, said deducted by statutes applies with peculiar strictness to
cash advances amounted to FDC when said tax laws and the provisions of a taxing act
P2,557,213,942.60 in 1996 and funds were are not to be extended by implication.
P3,360,889,677.48 in 1997. borrowed, the
CIR theorizes

48
 that interest 2. No. Section 34 (c) (2) of the 1993 NIRC
income should pertinently provides the exception that no
likewise be gain or loss shall be recognized if property is
declared when transferred to a corporation by a person in
the same funds exchange for shares of stock in such
were sourced corporation of which as a result of such
for the exchange said person, alone or together
advances FDC with others, not exceeding four persons,
extended to its gains control of said corporation; Provided,
affiliates. That stocks issued for services shall not be
considered as issued in return of property.
2. Whether the
exchange of As even admitted in the 14 February 2001
shares of stock Stipulation of Facts submitted by the parties,
for property the requisites for the non-recognition of
among FDC, FAI gain or loss are as follows:
and FLI met all
the (a) the transferee is a corporation;
requirements (b) the transferee exchanges its shares of
for the non- stock for property/ies of the
recognition of transferor;
taxable gain (c) the transfer is made by a person,
under Section acting alone or together with others,
34(C)(2)(c) of not exceeding four persons; and,
the NIRC. (d) as a result of the exchange the
transferor, alone or together with
others, not exceeding four, gains
control of the transferee.

6 BAIER- This is actually a Minute Resolution WON the sales The fact that recipient of commission

49
 NICKEL VS dated February 17, 2003, where the SC commission is income is President and majority
CIR sustained the ruling of the Court of taxable in the stockholder of the Philippine company
Appeals that Baier-Nickel is entitled to Philippines? does not alter the source of income.
GR refund the sum withheld from her sales There are only two ways by which the
156305 commission income for the year 1994 President and other members of the
FEBRUAR Board can be granted compensation
Y 17, 2003 apart from reasonable per diems: (1)
when there is a provision in the by-laws
fixing their compensation; and (2) when
the stockholders agree to give it to them.
If none of these conditions are present,
commission income cannot be
automatically attributed to petitioner’s
position in the company .

Commissions paid for marketing services

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

7 CIR VS Baier-Nickel is a non-resident alien (a Is she entitled to a The important factor which determines the
BAIER- German citizen) and is the president of refund for the source of income of personal services is not the
NICKEL JUBANITEX, Inc., a domestic wrongly filed residence of the payor, or the place where the
corporation engaged in manufacturing, taxes? contract for service is entered into, or the place
G. R. No. marketing on wholesale only, buying or of payment, but the place where the services
153793, otherwise acquiring, holding, importing were actually rendered.
August 29, and exporting, selling and disposing

50
2006 embroidered textile products. She was
appointed as a commission agent by the
domestic corporation with a sales
commission of 10% all sales actually
concluded and collected through her
efforts.
In 1995, respondent received P1, 707,
772. 64 as sales commission from w/c
Jubanitex deducted the 10%
withholding tax of P170, 777.26 and
remitted to BIR. Respondent filed her
income tax return but then claimed a
refund from BIR for the P170K, alleging
this was mistakenly withheld by
Jubanitex and that her sales
commission income was compensation
for services rendered in Germany not
Philippines and thus not taxable here.
Pursuant to Sec 25 of NIRC, non-resident aliens,
whether or not engaged in trade or business,
are subject to the Philippine income taxation on
their income received from all sources in the
Philippines.
The rule is that “source of income” relates to
the property, activity or service that produced
the income. With respect to rendition of labor
or personal service, as in the instant case, it is
the place where the labor or service was
performed that determines the source of the
income. There is no merit in the interpretation
which equates source of income in labor or
personal service with the residence of the payor
or the place of payment of the income.
The decisive factual consideration here is not
the capacity in which Juliane Baier-Nickel
received the income, but the sufficiency of
evidence to prove that the services she
rendered were performed in Germany to entitle
her to tax exemption since she is a non-resident
German citizen. The settled rule is that tax
refunds are in the nature of tax exemptions and
are to be construed strictissimi juris against the
taxpayer. To those therefore, who claim a
refund rest the burden of proving that the
transaction subjected to tax is actually exempt
from taxation.
51

8 CIR vs Marubeni, a Japanese
Marubeni corporation, engaged in general
Corp. import and export trading,
financing and construction, is
GR duly registered in the
137377 Philippines with Manila branch
December office. CIR examined the Manila
18, 2001 branch’s books of accounts for
fiscal year ending March 1985,
and found that respondent had
undeclared income from
contracts with NDC and
Philphos for construction of a
wharf/port complex and
ammonia storage complex
respectively.
On Aug 2, 1986, EO 41 declared a tax
amnesty for unpaid income taxes for
1981-85, and that taxpayers who
wished to avail this should on or before
Juliane did not prove by substantial evidence, or
that relevant evidence that a reasonable mind
might accept as adequate to support the
conclusion that it was in Germany where she
performed the income producing service. She
thus failed to discharge the burden of proving
that her income was from sources outside the
Philippines and exempt from the application of
our income tax law.
Whether Marubeni Marubeni, however, was able to
is exempted from sufficiently prove in trial that not all its
income tax by work was performed in the Philippines
invoking the situs because some of them were completed
of taxation rule? in Japan (and in fact subcontracted) in
accordance with the provisions of the
contracts. All services for the design,
fabrication, engineering and
manufacture of the materials and
equipment under Japanese Yen Portion I
were made and completed in Japan.
These services were rendered outside
Philippines’ taxing jurisdiction and are
therefore not subject to contractor’s tax.
52
 Oct 31, 1986. Marubeni filed its tax
amnesty return on Oct 30, 1986.

On Nov 17, 1986, EO 64 expanded EO

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

9 TUASON The mother of Antonio Tuason owned a
VS 7 hectare parcel of land located in the
LINGAD City of Manila. She subdivided the land
into twenty-nine (29) lots. Possession
G.R. No. of the land was eventually inherited by
L-24248. Taxpayer in 1948.
July 31,
1974 Tuason instructed his attorney-
in-fact to sell the lots. Twenty-
eight (28) out of the twenty-
nine parcels were all sold. In
1953 and 1954 the Taxpayer
reported his income from the
sale of the small lots
(P102,050.79 and P103,468.56,
respectively) as long-term
Whether or not the No. It is Ordinary Income
properties in
question should be As thus defined by law, capital assets include all
regarded as capital properties of a taxpayer whether or not
assets. connected with his trade or business, EXCEPT:
1. stock in trade or other property included
in the taxpayer's inventory;
2. property primarily for sale to customers
in the ordinary course of his trade or
business;
3. property uised in the trade or business of
the taxpayer and subject to
depreciation allowance; and
4. real property used in trade or business.

53
 capital gains. The CIR upheld
Taxpayer's treatment of this tax.
In his 1957 tax return the Taxpayer as
before treated his income from the sale
of the small lots (P119,072.18) as
capital gains. This treatment was
initially approved by the CIR, but by
1963, the CIR reversed itself and
considered the Taxpayer's profits from
the sales of the lots as ordinary gain.
The CIR assesed a deficiency of
P31,095.36 from the Taxpayer.
Tuason contends that he was engaged
in the business of leasing the lots he
inherited from his mother as well other
real properties, his subsequent sales of
the mentioned lots cannot be
recognized as sales of capital assets but
of “real property used in trade or
business of the taxpayer.”
10 REPUBLIC Under the doctrine of constructive
VS DELA receipt, a taxpayer is deemed to have
RAMA, received income where an amount
owing to him is set off against his debt
G.R. No. by the creditor. Such doctrine,
L-21108. however, is applicable only where the
Novembe set off is made against a debt
r 29, 1966 acknowledged by the taxpayer or the
If the taxpayer sells or exchanges any of the
properties above, any gain or loss relative
thereto is an ordinary gain or an ordinary loss;
the loss or gain from the sale or exchange of all
other properties of the taxpayer is a capital gain
or a capital loss.
Under Section 34(b)(2) of the old Tax Code, if a
gain is realized by a taxpayer (other than a
corporation) from the sale or exchange of
capital assets held for more than 12 months,
only 50% of the net capital gain shall be taken
into account in computing the net income.
WON there was The so-called personal accounts of Esteban de la
constructive Rama were not valid debts. Of the two items,
receipt of income? the first was contested and proof was lacking to
show its existence and validity. The second was
actually the debt of another person, Hijos de I.
de la Rama, Inc. It was true that Esteban de la
Rama was the principal stockholder of said
corporation, but as its personality was separate
54
validity of which is not otherwise
questioned. Where the validity of the
debt is contested by the taxpayer, the
doctrine of constructive receipt is
inapplicable.
The Commissioner sought to apply this
doctrine to dividends due and payable
but not actually rceived. When such
d,ividends were declared in 1950, no
payment was actually made thereof to
the stockholder, Esteban de la Rama.
Instead, the 1950 dividends due him
were credited to or set-off against his
personal accounts with the
corporation. De la Rama died without
having actually collected such dividends
and the income tax returns filed in
behalf of his estate for 1950 did not
include them. Subsequently, a
deficiency assessment was issued
against the estate, based on the
undeclared dividends, which according
to the Commissioner had been
constructively received in 1950 when
the set-off against the personal debts
of the deceased was made by the
corporation.
In behalf of the estate, however, it was
contended that the doctrine of
and distinct, its debts could not be charged to
the deceased in the absence of proof of a
substitution of debtor. With such findings, the
Court concluded that inasmuch as the dividends
in question had not been received either
actually or constructively in 1950, no tax could
be due thereon for said year.
The application of the dividends to the alleged
personal accounts of the deceased did not
constitute such constructive payment to the
estate or the heirs that could become the basis
for a tax assessment on the said dividends
because, with respect to the first debt, there
was no proof adduced to show its existence and
validity; and with respect to the second debt, to
which the dividends were partly applied, it was
composed of accounts due from an entity
separate and distinct from the deceased and
whose debts could not be charged against the
deceased even if the latter was the principal
owner thereof, in the absence of proof of
substitution of debtor. There being no basis for
the assessment of the income tax, the
assessment and the sending of the
corresponding notices did not have any basis.
The assessment and the notices did not
therefore produce any legal effect that would
warrant the collection of the tax.
Income is deemed constructively
received where the taxpayer has an
55
 constructive receipt was inapplicable to unqualified right to receive the same but
the situation. For the doctrine to apply, by his own choice the income is not
the set-off must be against valid debts reduced to possession.
of the taxpayer. But the so-called
personal accounts of the late Esteban
de la Rama with the corporation were
not valid debts. At any rate, his liability
for such debts was never recognized,
nor properly established.

11 COMMISS Respondent is engaged in the business WON respondent Sec. 229 of the NIRC allows the recovery of
IONER OF of processing, treating and refining as manufacturer or taxes erroneously or illegally collected. An
INTERNAL petroleum for the purpose of producing producer of "erroneous or illegal tax" is defined as one
REVENUE, marketable products and the petroleum levied without statutory authority, or upon
petitioner subsequent sale thereof. Respondent products is exempt property not subject to taxation or by some
, vs. filed a formal claim for refund or tax from the payment officer having no authority to levy the tax, or
PILIPINAS representing excise taxes it allegedly of excise tax on one which is some other similar respect is
SHELL paid on sales and deliveries of gas and such petroleum illegal.
PETROLEU fuel oils to various international products it sold to Respondent's locally manufactured petroleum
M carriers. international products are clearly subject to excise tax under
CORPORA carriers. Sec. 148. Hence, its claim for tax refund may not
TION, be predicated on Sec. 229 of the NIRC allowing a
responde refund of erroneous or excess payment of tax.
nt. Respondent's claim is premised on what it
determined as a tax exemption "attaching to the
G.R. No. goods themselves," which must be based on a
188497. statute granting tax exemption, or "the result of
April 25, legislative grace." Such a claim is to be
2012 construed strictissimi juris against the taxpayer,
meaning that the claim cannot be made to rest
on vague inference. Where the rule of strict

56
 interpretation against the taxpayer is applicable
as the claim for refund partakes of the nature of
an exemption, the claimant must show that he
clearly falls under the exempting statute.
The exemption from excise tax payment on
petroleum products under Sec. 135 (a) is
conferred on international carriers who
purchased the same for their use or
consumption outside the Philippines. Sec. 135
(a) in relation to the other provisions on excise
tax and from the nature of indirect taxation,
may only be construed as prohibiting the
manufacturers-sellers of petroleum products
from passing on the tax to international carriers
by incorporating previously paid excise taxes
into the selling price. In other words,
respondent cannot shift the tax burden to
international carriers who are allowed to
purchase its petroleum products without having
to pay the added cost of the excise tax.

12 THE RENATO V. Petitioners Renato V. Diaz and Aurora 1.Whether or not It is plain that the law imposes VAT on "all kinds
DIAZ and Ma. F. Timbol (petitioners) filed this the government is of services" rendered in the Philippines for a
AURORA MA. F. petition for declaratory relief 1 assailing unlawfully fee, including those specified in the list. The
TIMBOL, the validity of the impending expanding VAT enumeration of affected services is not
petitioners, vs. imposition of value-added tax (VAT) by coverage by exclusive. By qualifying "services" with the
THE SECRETARY the Bureau of Internal Revenue (BIR) on including tollway words "all kinds,"
OF FINANCE and the collections of tollway operators. operators and
THE tollway operations
Section 108 subjects to VAT "all kinds of
COMMISSIONER in the terms
services" rendered for a fee "regardless of
OF INTERNAL "franchise

57
REVENUE, grantees" and "sale whether or not the performance thereof calls
respondents. of services" under for the exercise or use of the physical or mental
Section 108 of the faculties." This means that "services" to be
Code; and subject to VAT need not fall under the
G.R. No. 193007.
traditional concept of services, the personal or
July 19, 2011
professional kinds that require the use of
2.Whether or not
human knowledge and skills.
the imposition of
VAT on tollway And not only do tollway operators come under
operators a) the broad term "all kinds of services," they also
amounts to a tax come under the specific class described in
on tax and not a Section 108 as "all other franchise grantees"
tax on services; b) who are subject to VAT, "except those under
will impair the Section 119 of this Code."
tollway operators'
right to a Fees paid by the public to tollway operators for
reasonable return use of the tollways, are not taxes in any sense. A
of investment tax is imposed under the taxing power of the
under their TOAs; government principally for the purpose of
and c) is not raising revenues to fund public expenditures.
administratively Toll fees, on the other hand, are collected by
feasible and cannot private tollway operators as reimbursement for
be implemented. the costs and expenses incurred in the
construction, maintenance and operation of the
tollways, as well as to assure them a reasonable
margin of income. Although toll fees are
charged for the use of public facilities,
therefore, they are not government exactions
that can be properly treated as a tax. Taxes may
be imposed only by the government under its
sovereign authority, toll fees may be demanded
by either the government or private individuals

58
 or entities, as an attribute of ownership.

13 PHILIPPINE PAGCOR was created pursuant to P.D. WON PAGCOR is Petitioner further contends that Section 1 (c) of
AMUSEMENT No. 1067-A on January 1, 1977. still exempt from R.A. No. 9337 is null and void ab initio for
AND GAMING Simultaneous to its creation, P.D. No. corporate income violating the non-impairment clause of the
CORPORATION 1067-B was issued exempting PAGCOR tax and VAT with Constitution. Petitioner’s contention lacks merit.
(PAGCOR), from the payment of any type of tax, the enactment of The non-impairment clause is limited in
petitioner, vs. except a franchise tax of five percent R.A. No. 9337. application to laws that derogate from prior acts
THE BUREAU OF (5%) of the gross revenue. Thereafter, or contracts by enlarging, abridging or in any
INTERNAL on June 2, 1978, P.D. No. 1399 was manner changing the intention of the parties.
REVENUE (BIR), issued expanding the scope of
represented PAGCOR's exemption. As regards franchises, Section 11, Article XII of
herein by HON. PAGCOR's tax exemption was removed the Constitution 31 provides that no franchise
JOSE MARIO in June 1984 through P.D. No. 1931, but or right shall be granted except under the
BUÑAG, in his it was later restored by Letter of condition that it shall be subject to amendment,
official capacity Instruction No. 1430, which was issued alteration, or repeal by the Congress when the
as in September 1984. common good so requires. Under Section 11,
COMMISSIONER R.A. No. 8424, National Internal Article XII of the Constitution, PAGCOR's
OF INTERNAL Revenue Code of 1997, took effect. franchise is subjecto amendment, alteration or
REVENUE, public Section 27 (c) of R.A. No. 8424 provides repeal by Congress such as the amendment
respondent, that government-owned and controlled under Section 1 of R.A. No. 9377. Hence, the
JOHN DOE and corporations (GOCCs) shall pay provision in Section 1 of R.A. No. 9337,
JANE DOE, who corporate income tax, except petitioner amending Section 27 (c) of R.A. No. 8424 by
are persons PAGCOR, GSIS, SSS, PHIC and PCSO. withdrawing the exemption of PAGCOR from
acting for, in corporate income tax, which may affect any
With the enactment of R.A. No. 9337
behalf, or under benefits to PAGCOR's transactions with private
on May 24, 2005, certain sections of
the authority of parties, is not violative of the non-impairment
the National Internal Revenue Code of
Respondent, clause of the Constitution.
1997 were amended. The particular
public and
amendment that is at issue in this case Petitioner is exempt from the payment of VAT,
private is Section 1 of R.A. No. 9337, which because PAGCOR's charter, P.D. No. 1869, is a
respondents.

59
 amended Section 27 (c) of the National
G.R. No. 172087. Internal Revenue Code of 1997 by
March 15, 2011 excluding PAGCOR from the
enumeration of GOCCs that are exempt
from payment of corporate income tax.
14 United Airlines International airline, petitioner United
vs. Commissioner Airlines, filed a claim for income tax
of Internal refund. Petitioner sought to be
Revenue refunded the erroneously collected
income tax from in the amount
G.R. No. 178788 of P5,028,813.23 on passenger revenue
from tickets sold in the Philippines, the
uplifts of which did not originate in the
Philippines. The airlines ceased
operation originating form the
Philippines since February 21, 1998.
Court of Tax appeals ruled the
petitioner is not entitled to a refund
because under the NIRC, income tax on
GPB also includes gross revenue from
special law that grants petitioner exemption
from taxes.
Moreover, the exemption of PAGCOR from VAT
is supported by Section 6 of R.A. No. 9337,
which retained Section 108 (B) (3) of R.A. No.
8424.
It is settled rule that in case of discrepancy
between the basic law and a rule or regulation
issued to implement said law, the basic law
prevails, because the said rule or regulation
cannot go beyond the terms and provisions of
the basic law.
Whether or not Petitioner was correct in averring that his claim to
petitioner is a refund cannot be subject to offsetting or, as it
entitled to a claimed the offsetting to be, a legal compensation
refund? under Sec. 28(A)(3)(a)
The Court have consistently ruled that there can
be no off-setting *or compensation”+ 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. (Francia vs Intermediate appellate
court)
60
 carriage of cargoes from the
Philippines. And upon assessment by
the CTA, it was found out that
petitioner deducted items from its
cargo revenues which should have
entitled the government to an amount
of P 31.43 million, which is obviously
higher than the amount the petitioner
prayed to be refunded.
Petitioner argued that the petitioner’s
supposed underpayment cannot offset
his claim to a refund as established by
well-settled jurisprudence.
15 Commissioner of Smart Communications, Inc. (Smart)
Internal Revenue entered into 3 agreements with Prism
vs. Smart Transactive (Prism), a non-resident
Communications, Malaysian corporation, under which
Inc. Prism would provide programming and
consultancy services for the installation
G.R. No. 179045- of the Service Download Manager
46; 25 August (SDM Agreement) and the Channel
2010 Manager (CM Agreement), and for the
installation and implementation of
Smart Money and Mobile Banking
Service SIM Applications and Private
Text Platform (SIM Application
Agreement). Prism billed Smart
US$547,822.45. Thinking that the
amount constituted royalties, Smart
The grant of a refund is founded on the
assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The
deficiency assessment, although not yet final,
created a doubt as to and constitutes a
challenge against the truth and accuracy of the
facts stated in said return which, by itself and
without unquestionable evidence, cannot be the
basis for the grant of the refund. (CIR vs CTA)
1. Whether or not 1. Smart, as withholding agent, may file the
Smart had the claim for refund.
right to file the
The person entitled to claim a tax refund is the
claim for taxpayer [Sections 204(c) and 229 of the
refund; National Internal Revenue Code (NIRC)].
However, in case the taxpayer does not file a
2. Whether claim for refund, the withholding agent may file
Smart’s the claim. The CIR was incorrect in saying that
payments to this ruling applies only when the withholding
Prism agent and the taxpayer are related parties, i.e.,
constituted where the withholding agent is a wholly owned
subsidiary of the taxpayer. Although such
“business
relation between the taxpayer and the
profits” or withholding agent is a factor that increases the
royalties. latter’s legal interest to file a claim for refund,
there is nothing in the decision in said case to
61
withheld from its payments to Prism
the amount of US$136,955.61 or
P7,008,840.43, representing the 25%
royalty tax under the RP-Malaysia Tax
Treaty.
Within the 2-year period to claim a
refund, Smart filed an administrative
claim with the Bureau of Internal
Revenue (BIR) for the refund of the
withheld amount (P7,008,840.43).
Smart averred that its payments to
Prism were not royalties but “business
profits,” as defined in the RP-Malaysian
Tax Treaty, which were not taxable
because Prism did not have a
permanent establishment in the
Philippines. The CIR countered that
Smart, as a withholding agent was not a
party-in-interest to file the claim for
refund, and even if it were the proper
party, there was no showing that the
payments to Prism constituted
“business profits.”
suggest that such relationship is required or that
the lack of such relation deprives the
withholding agent of the right to file a claim for
refund. Rather, what is clear in the decision is
that a withholding agent has a legal right to file
a claim for refund for two reasons. First, he is
considered a “taxpayer” under the NIRC as he is
personally liable for the withholding tax as well
as for deficiency assessments, surcharges, and
penalties, should the amount of the tax
withheld be finally found to be less than the
amount that should have been withheld under
law. Second, as an agent of the taxpayer, his
authority to file the necessary income tax return
and to remit the tax withheld to the
government impliedly includes the authority to
file a claim for refund and to bring an action for
recovery of such claim.
2. The payments for the CM and SIM Application
Agreements constituted “business profits”
which were not taxable under the RP-Malaysia
Tax Treaty. However, the payment for the SDM
Agreement constituted taxable “royalty” under
the same treaty.
Under its agreements with Smart, Prism had
intellectual property right over the SDM
program, but not over the CM and SIM
Application programs as the proprietary rights
of these programs belonged to Smart. Thus, out
of the payments made to Prism, only the
62

16 Miguel J. Ossorio Petitioner, a non-stock and non-profit
Pension corporation, was organized for the
Foundation, Inc. purpose of holding title to and
vs. CA and CIR administering the employees’ trust or
retirement funds established for the
G.R. No. 162175 benefit of the employees of Victorias
Milling Company, Inc. (VMC).
Petitioner, as trustee, claims that the
income earned by the Employees’ Trust
Fund is tax exempt under Section 53(b)
of the National Internal Revenue Code
(Tax Code).
Petitioner decided to invest part of the
Employees’ Trust Fund to purchase a
lot in the Madrigal Business Park (MBP
lot) in Alabang, Muntinlupa. Petitioner
claims that since it needed funds to pay
the retirement and pension benefits of
VMC employees and to reimburse
payment for the SDM program was a royalty
subject to a 25% withholding tax; the payments
for the CM and SIM Application programs
constituted Prism’s non-taxable “business
profits.” The BIR should, therefore, refund the
erroneously withheld royalty taxes for the
payments pertaining to the CM and SIM
Application Agreements. The BIR was ordered to
issue a Tax Credit Certificate to Prism in the
amount of P3,989,456.43.
Whether petitioner Petitioner is a corporation that was
or the Employees’ formed to administer the Employees' Trust
Trust Fund is Fund. Petitioner invested P5,504,748.25 of the
exempt from tax funds of the Employees' Trust Fund to purchase
and thus entitled the MBP lot. When the MBP lot was sold, the
to refund gross income of the Employees’ Trust Fund from
the sale of the MBP lot was P40,500,000. The
7.5% withholding tax of P3,037,500 and broker’s
commission were deducted from the proceeds.
It is evident that tax-exemption is
likewise to be enjoyed by the income of the
pension trust. Otherwise, taxation of those
earnings would result in a diminution of
accumulated income and reduce whatever the
trust beneficiaries would receive out of the trust
fund. This would run afoul of the very
intendment of the law. Indeed, the petitioner is
correct in its adherence to the clear ruling laid
by the Supreme Court way back in 1992 in the
63
advances made by VMC, petitioner’s
Board of Trustees authorized the sale
of its share in the MBP lot. VMC
negotiated the sale of the MBP lot with
Metropolitan Bank and Trust Company,
Inc. (Metrobank).
Metrobank, as withholding agent, paid
the Bureau of Internal Revenue (BIR)
P6,125,625 as withholding tax on the
sale of real property.
Petitioner claims that it is a co-
owner of the MBP lot as trustee of the
Employees’ Trust Fund, based on the
notarized Memorandum of Agreement
presented before the appellate courts.
Petitioner further contends that there
is no dispute that the Employees’ Trust
Fund is exempt from income tax. Since
petitioner, as trustee, purchased
49.59% of the MBP lot using funds of
the Employees’ Trust Fund, petitioner
asserts that the Employees’ Trust
Fund's 49.59% share in the income tax
paid or P3,037,697.40 should be
refunded.
case of Commissioner of Internal Revenue vs.
The Honorable Court of Appeals, The Court of
Tax Appeals and GCL Retirement Plan, 207 SCRA
487 at page 496, supra, wherein it was
succinctly held:
There can be no denying either that the
final withholding tax is collected from income in
respect of which employees’ trusts are declared
exempt (Sec. 56(b), now 53(b), Tax Code). The
application of the withholdings system to
interest on bank deposits or yield from deposit
substitutes is essentially to maximize and
expedite the collection of income taxes by
requiring its payment at the source. If an
employees’ trust like the GCL enjoys a tax-
exempt status from income, we see no logic in
withholding a certain percentage of that income
which it is not supposed to pay in the first place.
Similarly, the income of the trust funds
involved herein is exempt from the payment of
final withholding taxes. Since petitioner has
proven that the income from the sale of the
MBP lot came from an investment by the
Employees' Trust Fund, petitioner, as trustee of
the Employees’ Trust Fund, is entitled to claim
the tax refund of P3,037,500 which was
erroneously paid in the sale of the MBP lot.
64
 PART 4
Corporate Income Taxation

Case Title Summary Issue/s Ruling Notes/Remarks

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

2 CIR Shell sold petroleum products to Whether a No! Excise tax - taxes
vs international carriers who are excise manufacturer or applicable to
Pilipinas Shell tax exempt. On such sale, the taxing producer of (Erroneous or illegal tax- levied without statutory certain specific
Petroleum authority imposed excise taxes. petroleum products authority or upon property not subject to tax) goods or articles
Corporation is exempt for manufactured or
G.R. No. 188497, payment of excise Shell's locally manufactured petroleum products produced in the
February 19, tax on such products are subject to excise tax in Sec. 148 nirc. Thus, no philippines for

65
 2104 if sold to tax refund to speak of coz no erroneous or excess domestic sales or
international pamyment. consumption or any
carriers? disposition and to
Excise tax attaches to petroleum products sold to things imported
international carriers. into philippines;
imposed in addition
Thus, the excise tax imposed on manufacturers to VaT; indirect tax
cannot invoke excise tax exemption granted to its ( subject to tax
buyers who are international carriers. exemptions
generated by law to
~ international air carriers, tax exempt - chicago buyers)
convention; this exemption on allow international
carriers to purchase petroleum products without Excise tax must be
excise tax as component of price fixed be seller. paid upon
withdrawal from
the place of
production
3 Deutsche Bank- In accordance with Section 28 (A) (5) Whether or not the No. The denial of the availment of tax relief for the
AG Manila of the National Internal Revenue failure to strictly failure of a taxpayer to apply within the prescribed
Branch Code (NIRC) of 1997, petitioner comply with RMO period under the administrative issuance would
vs withheld and remitted to No. 1-2000 will impair the value of the tax treaty. At most, the
CIR respondent on 21 October 2003 the deprive persons or application for a tax treaty relief from the BIR
G.R. No. 188550, amount of PHP67,688,553.51, corporations of the should merely operate to confirm the entitlement
August 19, 2013 representing fifteen percent (15%) benefit of a tax of the taxpayer to the relief. "A state that has
branch profit remittance tax (BPRT) treaty. contracted valid international obligations is bound
on its regular banking unit (RBU) net to make in its legislations those modifications that
income remitted to Deutsche Bank may be necessary to ensure the fulfillment of the
Germany (DB Germany) for 2002 obligations undertaken." 20 Thus, laws and
and prior taxable years. Believing issuances must ensure that the reliefs granted
that it made an overpayment of the under tax treaties are accorded to the parties
BPRT, petitioner filed with the BIR entitled thereto. The obligation to comply with a

66
 Large Taxpayers Assessment and tax treaty must take precedence over the objective
Investigation Division on 4 October of RMO No. 1-2000.|||It is significant to emphasize
2005 an administrative claim for that petitioner applied — though belatedly — for a
refund or issuance of its tax credit tax treaty relief, in substantial compliance with
certificate in the total amount of RMO No. 1-2000. Clearly, there is no reason to
PHP22,562,851.17. On the same deprive petitioner of the benefit of a preferential
date, petitioner requested from the tax rate of 10% BPRT in accordance with the RP-
International Tax Affairs Division Germany Tax Treaty.
(ITAD) a confirmation of its
entitlement to the preferential tax
rate of 10% under the RP-Germany
Tax Treaty. Alleging the inaction of
the BIR on its administrative claim,
petitioner filed a Petition for Review
with the CTA on 18 October 2005.
Petitioner reiterated its claim for the
refund or issuance of its tax credit
certificate for the amount of
PHP22,562,851.17 representing the
alleged excess BPRT paid on branch
profits remittance to DB Germany.

4 CIR General Foods (Phils), which is
vs engaged in the manufacture of
General Foods “Tang”, “Calumet” and “Kool-Aid”,
(Phils.), Inc. filed its income tax return for the
G.R. No. 143672, fiscal year ending February 1985 and
April 24, 2003 claimed as deduction, among other
business expenses, P9,461,246 for
media advertising for “Tang”.
WON the subject No. Tax exemptions must be construed in
media advertising stricissimi juris against the taxpayer and liberally in
expense for “Tang” favor of the taxing authority, and he who claims an
was ordinary and exemption must be able to justify his claim by the
necessary expense clearest grant of organic or statute law.
fully deductible
under the NIRC To be deductible from gross income, the subject
advertising expense must comply with the
following requisites: (a) the expense must be

67
The Commissioner disallowed 50%
of the deduction claimed and
assessed deficiency income taxes of
P2,635,141.42 against General
Foods, prompting the latter to file an
MR which was denied.
General Foods later on filed a
petition for review at CA, which
reversed and set aside an earlier
decision by CTA dismissing the
company’s appeal.
ordinary and necessary; (b) it must have been paid
or incurred during the taxable year; (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.
The Court finds the subject expense for the
advertisement of a single product to be
inordinately large. Therefore, even if it is
necessary, it cannot be considered an ordinary
expense deductible under then Section 29 (a) (1)
(A) of the NIRC.
Advertising is generally of two kinds: (1) advertising
to stimulate the current sale of merchandise or use
of services and (2) advertising designed to
stimulate the future sale of merchandise or use of
services. The second type involves expenditures
incurred, in whole or in part, to create or maintain
some form of goodwill for the taxpayer’s trade or
business or for the industry or profession of which
the taxpayer is a member. If the expenditures are
for the advertising of the first kind, then, except as
to the question of the reasonableness of amount,
there is no doubt such expenditures are deductible
as business expenses. If, however, the
expenditures are for advertising of the second
kind, then normally they should be spread out over
a reasonable period of time.
68

5 The Late Lino The late Lino Gutierrez was primarily
Gutierrez by engaed in the business of leasing
Andrea C. vda. real property for which he paid real
De Gutierrez et. estate broker's privilege tax.
al. Subsequently, the Commissioner of
vs Internal Revenue assessed Gutierrez
Collector of a deficiency income tax amounting
Internal Revenue to P11,841.00 which was caused by
G.R. No. I-19537, the disallowance of the deductions
May 20, 1965 from gross income representing
depreciation expenses allegedly
incurred by Gutierrez in carrying on
his business and the addition to
gross income of receipts which he
did not report in his income tax
returns. In sum, the disallowed
business expenses consisted of:
1. Transportation expenses
incurred to attend the funeral of
his friends
2. Procurement and installation of
an iron door
3. Cost of furniture given by the
The company’s media advertising expense for the
promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-
half of the company’s entire claim for marketing
expenses for that year under review. Petition
granted, judgment reversed and set aside.
1. WON the 1. Yes, provided such expenses meet the
taxpayer's requirements. The said claims for deduction are
aforementioned proper and allowable if such expenses are: a)
claims for deduction ordinary and necessary, b) paid or incurred within
are proper and the taxable year and c) paid or incurred in carrying
allowable. on a trade or business.
2. WON real Of those enumerated, what were considered as
properties used in deductible are the following:
the trade or
business of the 1) The cost of furniture given by the taxpayer as
taxpayer are commission in furtherance of a business
considered as transaction and the expenses incurred in attending
ordinary assets. the National Convention of Filipino Businessmen,
luncheon meeting and cruise to Corregidor of the
Homeowners' Association. According to the
Supreme Court, commissions given in
consideration for bringing about a profitable
transaction are part of the cost of the business
transaction and are deductible.

2) Membership and activities in connection with
the real estate trade were solely to enhance his
business. Hence, the expenses incurred thereunder
69
 taxpayer in furtherance of a
business transaction
4. Membership fees in
organizations established by
those engaged in the real estate
trade
5. Car expenses, salary of his driver
and car depreciation
6. Repairing taxpayer’s rental
apartments
7. Litigation expenses
8. Depreciation of Gutierrez’
residence
9. Fines and penalties for late
payment of taxes
10. Alms given to in indigent family
and a donation consisting of
officer’s jewels and aprons to
Biak-na-Bato Lodge No. 7
are deductible as ordinary and necessary business
expenses.
3) Only ½ of the car expenses, salary of his driver
and car depreciation are allowed as deduction
since according to the evidence, the taxpayer's car
was utilized both for personal and business needs.
4) The expenses used to repair the taxpayer's
rental apartments are deductible as necessary
expenditures for the maintenance of the taxpayer's
business as they did not increase the value of such
apartments or prolong their life. They merely kept
the apartments in an ordinary operating condition.
5). Litigation expenses which were defrayed by
Gutierrez to collect apartment rentals and to eject
delinquent tenants are considered as ordinary and
necessary expenses in pursuing his business. It is
routinary and necessary for one in the leasing
business to collect rentals and to eject tenants who
refuse to pay their accounts.

Hence, Lino
Gutirriez and/or his heirs are ordered to pay the
total sum of P11,929.00 as deficiency income tax
for years 1951-1954 plus the statutory penalties in
case of deliquency.
2. Yes. Before Section 34 was amended by RA 82 in
1947, it considered the real property used in the
trade or business of taxpayer as capital asset.
However, with the passage of RA 82, Congress
70

6 Commissioner of Isabela Cultural Corporation (ICC), a
Internal Revenue domestic corporation received
vs an assessment notice for deficiency
Isabela Cultural income tax and
Corporation expanded withholding tax from BIR.
G.R. No. 172231, It arose from the disallowance of
February 12, ICC’s claimed expense for
2007 professional and security services
paid by ICC; as well as the alleged
understatement of interest income
on the three promissory notes due
from Realty Investment Inc. The
deficiency expanded withholding tax
was allegedly due to the failure of
ICC to withhold 1% e-withholding tax
on its claimed deduction for security
services.
ICC sought a reconsideration of
the assessments. Having received a
final notice of assessment, it brought
the case to CTA, which held that it is
classified such real properties as ordinary assets.
This has the effect of withdrawing the gain or loss
from the sale or exchange of real property used in
the trade or business of the taxpayer from the
operation of the capital gains and losses provisions.
As such, it is logical that the gain or loss from the
sale or exchange of such real propeties be treated
as ordinary income or loss.
Whether or not the No. One of the requisites for the deductibility of
expenses for ordinary and necessary expenses is that it must
professional and have been paid or incurred during the taxable year.
security services are This requisite is dependent on the method of
deductible. accounting of the taxpayer. In the case at bar, ICC
is using theaccrual method of accounting. Hence,
under this method, an expense is recognized when
it is incurred. Under a Revenue Audit
Memorandum, when the method of accounting is
accrual, expenses not being claimed as deductions
by a taxpayer in the current year when they are
incurred cannot be claimed in the succeeding year.
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.
71
 unappealable, since the final notice
is not a decision. CTA’s ruling was
reversed by CA, which was sustained
by SC, and case was remanded to
CTA. CTA rendered a decision in
favor of ICC. It ruled that the
deductions for professional and
security services were properly
claimed, it said that even if services
were rendered in 1984 or 1985, the
amount is not yet determined at
that time. Hence it is a proper
deduction in 1986.
7 H. Tambunting This case stemmed from a pre-
Pawnshop, Inc. assessment issued by CIR against
vs Tambunting for among others, a
Commissioner of deficiency documentary stamp tax
Internal Revenue of P 50, 910.Thereafter, the CIR
G.R. No. 173373, issued an assessment notice with
July 29, 2013 the corresponding demand letters
for the payment of the DST and the
corresponding compromise penalty
for taxable year 1997.
Tambunting filed its written protest
to the assessment notice alleging
that it was not subject to
documentary stamp tax
under Section 195 of the National
Internal Revenue Code (NIRC)
The test does not demand that the amount of
income or liability be known absolutely, only that a
taxpayer has at its disposal the information
necessary to compute the amount with reasonable
accuracy.
From the nature of the claimed deductions and the
span of time during which the firm was retained,
ICC can be expected to have reasonably known the
retainer fees charged by the firm. They cannot give
as an excuse the delayed billing, since it could have
inquired into the amount of their obligation and
reasonably determine the amount.
WHETHER THE Petitioner contends that it is the document
PETITIONER, evidencing a pledge of personal property which is
APAWNSHOP, IS subject to the DST. Petitioner further contends that
SUBJECT TO DST the DST is imposed on the documents issued, not
BASED ON ITSPAWN the “transactions so had or accomplished.”
TICKETS It insists that the document to be taxed under the
transaction contemplated should be the pledge
agreement, if any is issued, not the pawn ticket.
On the other hand, commissioner contented that a
documentary stamp tax shall be collected on every
pledge of personal property as a security for the
fulfillment of the contract of loan. Since the
transactions in a pawnshop business partake of the
nature of pledge transactions, then pawn
transactions evidenced by pawn tickets, are subject
to documentary stamp taxes.
72
because documentary stamp taxes
were applicable only to pledge
contracts, and the pawnshop
business did not involve contracts of
pledge.
Tambunting filed a petition for
review when the protest it filed with
the CIR was not acted upon.
The court rendered
a decision stating that petitioner is
not subject to DST.
Petitioner’s contention is devoid of merit.
True, the pawn ticket is neither a security nor a
printed evidence of
indebtedness. But, precisely being a receipt for a
pawn, it documents the
pledge. A pledge is a real contract, hence, it is
necessary in order to constitute the contract of
pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by
common agreement.
Consequently, the issuance of the pawn ticket by
the pawnshop means that the thing pledged has
already been placed in its possession and that the
pledge has been constituted.-
Section 195 of the National Internal Revenue Code
(NIRC) imposes a DST
One very mortgage or pledge of lands, estate, or
property, real or personal, heritable or movable,
whatsoever, where the same shall be made as a
security for the payment of any definite and
certain sum of money lent
All pledges are subject to DST, unless there is a law
exempting them in clear
and categorical language.…
The law imposes DST on documents issued in
73

8 Plaridel Surety Petitioner PSIC as surety and
and Insurance Constancio San Jose, as principal
Company solidarily executed a performance
vs bond in the penal sum of P30,600.00
Commissioner of in favor of the P. L. Galang
Internal Revenue Machinery Co., Inc. Petitioner
G.R. No. L-21520, likewise required Jose and one
December 11, Ramon Cuervo to execute an
1967 indemnity agreement obligating
themselves, solidarily, to indemnify
petitioner for whatever liability it
may incur by reason of said
performance bond. San Jose failed
to perform its obligation of
delivering logs to Galang Machinery,
the latter sued on the performance
bond. On October 1, 1952, the Court
of First Instance adjudged Jose and
petitioner liable; it also directed Jose
and Cuervo to reimburse petitioner
for whatever amount it would pay to
Galang Machinery. CA affirmed. The
same was affirmed by the SC with
slight modification of the award on
damages.
respect of the specified transactions, such as
pledge, and not only on papers evidencing
indebtedness. Therefore, a pawn ticket, being
issued in respect of a pledge transaction, is subject
to documentary stamp tax.
Whether the entire NO. Loss is deductible only in the taxable year it
P44,490.00 paid by it actually happens or is sustained. However, if it is
was or was not a compensable by insurance or otherwise, deduction
deductible loss. for the loss suffered is postponed to a subsequent
year, which, to be precise, is that year in which it
appears that no compensation at all can be had, or
that there is a remaining or net loss, i.e., no full
compensation. The rule is that loss deduction will
be denied if there is a measurable right to
compensation for the loss, with ultimate collection
reasonably clear. So where there is reasonable
ground for reimbursement, the taxpayer must seek
his redress and may not secure a loss deduction
until he establishes that no recovery may be had.
In other words, as the Tax Court put it, the
taxpayer (petitioner) must exhaust his remedies
first to recover or reduce his loss. It is on record
that petitioner had not exhausted its remedies,
especially against Ramon Cuervo who was
solidarily liable with San Jose for reimbursement to
it. Thus, it was too premature for petitioner to
claim a loss deduction. But assuming that there
was no reasonable expectation of recovery, still no
loss deduction can be had. Sec. 30 (d) (2) of the Tax
Code(old tax code) requires a charge-off as one of
74

On February 19 and March 20, 1957,
petitioner effected payment in favor
of Machinery in the total sum of
P44,490.00 pursuant to the final
decision. In its income tax return for
the year 1957, petitioner claimed
the said amount of P44,490.00 as
deductible loss from its gross
income and, accordingly, paid the
amount of P136.00 as its income tax
for 1957.
the conditions for loss deduction:
In the case of a corporation, all losses
actually sustained and charged-off within
the taxable year and not compensated for
by insurance or otherwise. (Emphasis
supplied)
Petitioner, who had the burden of proof failed to
adduce evidence that there was a charge-off in
connection with the P44,490.00—or P30,600.00 —
which it paid to Galang Machinery.

The Commissioner of Revenue

disallowed the claimed deduction of
P44,490.00 and assessed against
petitioner the sum of P8,898.00,
plus interest, as deficiency income
tax for the year 1957. Petitioner filed
its protest which was denied.
Whereupon, appeal was taken to
the Court, petitioner insisting that
the P44,490.00 which it paid to
Machinery was a deductible loss.

The Tax Court dismissed the appeal,

ruling that petitioner was duly
compensated for otherwise than by
insurance — thru the mortgages in
its favor executed by Jose and
Cuervo — and it had not yet

75
 exhausted all its available remedies,
especially as against Cuervo, to
minimize its loss. When its motion to
reconsider was denied, petitioner
elevated the present appeal.
9 Philippine Philippine Refining Company (PRC) WON the CA was YES.
Refining was assessed by respondent correct in affirming
Company vs Commissioner of Internal Revenue the CTA decision in In determining the "worthlessness of a debt" and
CA, CTA, and CIR to pay a deficiency tax for the year disallowing PRC’s thereby qualify as "bad debts" making them
G.R. No. 118794, 1985. The assessment was timely claim of deduction deductible, the taxpayer should show that:
May 8, 1996 protested by PRC, on the ground as bad debts of (1) there is a valid and subsisting debt;
that it was based on the erroneous several accounts (2) the debt must be actually ascertained to be
disallowances of "bad debts" on worthless and uncollectible during the taxable
several accounts although the same year;
are both allowable and legal (3) the debt must be charged off during the taxable
deductions. year; and
(4) the debt must arise from the business or trade
of the taxpayer.

Additionally, before a debt can be considered

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

Furthermore, there are steps outlined to be

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

76

10 China Banking China Banking Corporation (CBC)
Corporation made an equity investment in First
vs CBC Capital (Asia) Ltd., a Hongkong
CA, CIR and CTA subsidiary engaged in financing and
G.R. No. 125508, investment with “deposit-taking”
July 19, 2000 function. In the course of the regular
examination of the financial books
and investment portfolios of CBC by
Bangko Sentral, it was shown that
First CBC Capital (Asia), Ltd., has
become insolvent. With the approval
of Bangko Sentral, CBC write-off as
being worthless its investment in
First CBC Capital (Asia), Ltd. and
treated it as a bad debt or as an
ordinary loss deductible from its
gross income. However, the
Commissioner of Internal Revenue
(CIR) disallowed the deduction and
assessed petitioner for income tax
deficiency. In assuming that the
In this case, the only evidentiary support given by
PRC for its aforesaid claimed deductions was the
explanation or justification posited by its financial
adviser or accountant. Her allegations were not
supported by any documentary evidence, hence,
both the Court of Appeals and the CTA ruled that
said contentions per se cannot prove that the debts
were indeed uncollectible and can be considered
as bad debts as to make them deductible.
Whether or not the NO. At all events, it may
equity investment not be amiss to
made in First CBC An equity investment is a capital, not once again stress
Capital, after ordinary, asset of the investor the sale or exchange that the basic rule
becoming worthless, of which results in either a capital gain or a capital is still that
be deducted from loss. any capital loss can
gross income. be deducted only
A capital gain or a capital loss normally requires the from capital
concurrence of two conditions for it to result: gains under Section
33(c) of the NIRC.
(1) There is a sale or exchange; and
(2) the thing sold or exchanged is a capital asset.
When securities become worthless, there is strictly
no sale or exchange but the law deems the loss
anyway to be "a loss from the sale or exchange of
capital assets.” In these cases, the NIRC dispenses,
in effect, with the standard requirement of a sale
or exchange for the application of the capital gain
and loss provisions of the code.
77
securities had indeed become
worthless, CIR held the view that
they should then be classified as
"capital loss," and not as a bad debt
expense there being no
indebtedness to speak of between
petitioner and its subsidiary.
Capital losses are allowed to be deducted only to
the extent of capital gains, i.e., gains derived from
the sale or exchange of capital assets, and not
from any other income of the taxpayer.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges
of capital assets shall be allowed only to the extent
provided in Section 33."
The pertinent provisions of Section 33 of the NIRC
referred to in the aforesaid Section 29(d)(4)(A),
read:
"Section 33. Capital gains and losses. –
“x x x (c) Limitation on capital losses. - Losses
from sales or exchange of capital assets shall be
allowed only to the extent of the gains from such
sales or exchanges.
In sum -
(a) The equity investment in shares of stock held by
CBC in its Hongkong subsidiary, the First CBC
Capital (Asia), Ltd., is not an indebtedness, and it is
a capital, not an ordinary, asset.
(b) Assuming that the equity investment of CBC has
indeed become "worthless," the loss sustained is a
78

11 Commissioner of RA No. 7432, otherwise known as
Internal Revenue “An Act to Maximize the
vs Contribution of Senior Citizens to
Bicolandia Drug Nation Building, Grant Benefits and
Corporation Special Privileges and For Other
G.R. No. 148083, Purposes,” granted senior citizens
July 21, 2006 the privilege of obtaining a 20%
discount from all establishments
relative to the use of transportation
services, hotels and similar lodging
establishments, restaurants,
recreation centers and purchase of
medicines anywhere in the country.
The law provided that private
establishments giving discount to
senior citizens may claim the cost
astax credit. In compliance with the
law, BIR issued Revenue Regulations
No. 2-94 defining tax credit as the
amount representing the 20%
discount…which discount shall be
deducted by said establishments
from their gross income for tax
purposes and from their gross sales
capital, not an ordinary, loss.[
(c) The capital loss sustained by CBC can only be
deducted from capital gains if any derived by it
during the same taxable year that the securities
have become "worthless."
May the 20% sales Yes. Revenue Regulations No. 2-94 is null and void
discount be claimed for failing to conform to the law it sought to
as a tax credit, implement. Revenue Regulations No. 2-94 is still
instead of a subordinate to RA No. 7432, and in cases of
deduction from conflict, the implementing rule will not prevail over
gross income or the law it seeks to implement.
gross sales?
But even as this particular case is decided in this
manner, it must be noted that the concerns of
petitioner have been addressed. RA No. 7432 has
been amended by RA No. 9257, the “Expanded
Senior Citizens Act of 2003.” In this, the term tax
credit is no longer used.Under its IRR, Revenue
Regulations No. 4-2006, “only the actual amount of
the discount granted not exceeding 20% of the
gross selling price can be deducted from the gross
income, net of VAT, if applicable, for income tax
purposes, and from gross sales or receipts for VAT
or other percentage taxes.” Under the new law,
there is no tax credit to speak of, only deductions.
As it was RA No. 7432 in force at the time this case
arose, this law controls the result in this particular
case, for which reason respondent is entitled to its
79
for VAT or other percentage tax claim of tax credit.
purposes.

Respondent, a corporation engaged

in the business of retailing
pharmaceutical products under the
business style of “Mercury Drug,”
granted the 20% sales discount to
qualified senior citizens purchasing
their medicines, treating this
discount as deduction from its gross
income. Respondent filed its 1995
Corporate Annual Income Tax
Return declaring a net loss position
with nil income tax liability.
Respondent filed a claim for tax
refund or credit with BIR because its
net losses for the year 1995
prevented it from benefitting from
the treatment of sales discount as a
deduction from gross sales during
the taxable year. It alleged that
petitioner erred in treating the 20%
sales discount given to senior
citizens as deductions from gross
income for tax purposes rather than
as a tax credit.Petitioner argues that
the tax credit is in the nature of a tax
refund and should be treated as a
return for tax payments erroneously
or excessively assessed against a

80
 taxpayer, in line with Sec. 204 (c) of
NIRC. Petitioner claims that there
should first be payment of the tax
before tax credit can be claimed. To
do otherwisewould result in RA No.
7432 impliedly repealing Sec. 204 (c)
of NIRC.
12 Kuenzle & Streiff, Petitioner filed its income tax return
Inc. for the years 1950, 1951 and 1952
vs and petitioner deducted from
The Collector of its gross income certain items
Internal Revenue representing salaries, directors' fees
G.R. Nos. L-12010 and bonuses of its non-resident
and L-12113, president and vice-president;
October 20, 1959 bonuses of its resident officers and
employees; and interests on earned
but unpaid salaries and bonuses of
its officers and employees. The
income tax computed in accordance
with these returns was duly paid by
petitioner.
The CIR, after disallowing the
deductions of the items representing
director's fees, salaries and bonuses
of petitioner's non-resident
president and vice-president; the
bonus participation of certain
resident officers and employees; and
the interests on earned but unpaid
1. WoN bonuses are 1. It would appear that all ordinary and necessary
deductible expenses paid or incurred in carrying on a trade or
business, including a reasonable allowance for
2. WoN interests are salaries or other compensation for personal
deductible services actually rendered, may be allowed as
deductions in computing the taxable income during
the year. It likewise appears that the amount of
interests paid within the taxable year on any
indebtedness may also be deducted from the gross
income. Here it is admitted that the bonuses paid
to the officers and employees of petitioner,
whether resident or non-resident, were paid to
them as additional compensation for personal
services actually rendered and as such can be
considered as ordinary and necessary expenses
incurred in the business within the meaning of the
law, the only question in dispute being how much
of said bonuses may be considered reasonable in
order that it may be allowed as deduction.
It is a general rule that "Bonuses to employees
made in good faith and as additional compensation
for the services actually rendered by the
81
 salaries and bonuses, respondent employees are deductible, provided such
assessed and demanded from payments, when added to the stipulated salaries,
petitioner the payment of deficiency do not exceed a reasonable compensation for the
income taxes in the sums of services rendered. The condition precedents to the
P26,370.00, P53,865.00 and deduction of bonuses to employees are: (1) the
P44,112.00 for the years 1950, 1951 payment of the bonuses is in fact compensation;
and 1952, respectively. However the (2) it must be for personal services actually
respondent modified the same by rendered; and (3) the bonuses, when added to the
allowing as deductible all items salaries, are reasonable when measured by the
comprising directors' fees and amount and quality of the services performed with
salaries of the non-resident relation to the business of the particular taxpayer."
president and vice-president, but
disallowing the bonuses insofar as There is no dispute that these items accrued on
they exceed the salaries of the unclaimed salaries and bonus participation of
recipients, as well as the interests on shareholders and employees. Under the law, in
earned but unpaid salaries and order that interest may be deductible, it must be
bonuses. paid "on indebtedness" (Section 30, (b)(1) of the
National Internal Revenue Code). It is therefore
imperative to show that there is an existing
indebtedness which may be subjected to the
payment of interest. Here the items involved are
unclaimed salaries and bonus participation which
in our opinion cannot constitute indebtedness
within the meaning of the law

13 Paper Industries In 1969, 1972 and 1977, Picop - Whether or not - SC started by noting that interest payments on
Corporation of obtained loans from foreign PICOP is entitled to loans incurred by a taxpayer (whether BOI-
the Philippines creditors in order to finance the deductions against registered or not) are allowed by the NIRC as
(PICOP) purchase of machinery and income interest deductions against the taxpayer's gross income. In
vs equipment needed for its payments on loans the instant case, the CIR does not dispute that the
CA, CIR, and CTA operations. In its 1977 Income Tax for the purchase of interest payments were made by Picop on loans

82
G.R. Nos. Return, Picop claimed interest
106949-50, payments made in 1977, amounting
December 1, to P42,840,131.00, on these loans as
1995 a deduction from its 1977 gross
income. The CIR disallowed this
deduction upon the ground that,
because the loans had been incurred
for the purchase of machinery and
equipment, the interest payments
on those loans should have been
capitalized instead and claimed as a
depreciation deduction taking into
account the adjusted basis of the
machinery and equipment (original
acquisition cost plus interest
charges) over the useful life of such
assets. Both the CTA and the Court
of Appeals sustained the position of
Picop and held that the interest
deduction claimed by Picop was
proper and allowable. In the instant
Petition, the CIR insists on its original
position.
On the other hand, on 18 January
1977, Picop entered into a merger
agreement with the Rustan Pulp and
Paper Mills, Inc. ("RPPM") and
Rustan Manufacturing Corporation
("RMC"). Under this agreement, the
rights, properties, privileges, powers
machinery and incurred in connection with the carrying on of the
equipment. registered operations of Picop neither does the CIR
deny that such interest payments were legally due
- Whether or not and demandable under the terms of such loans,
PICOP may claim and in fact paid by Picop during the tax year 1977.
RPPM’s net
operating loss as a The CIR has been unable to point to any provision
deduction against its of the 1977 Tax Code or any other statute that
1977 gross income. requires the disallowance of the interest payments
made by Picop . The CIR invokes Section 79 of
Revenue Regulations No. 2 but the SC ruled that
said provision is to be construed as referring to the
so called "theoretical interest," that is to say,
interest "calculated" or computed (and not
incurred or paid) for the purpose of determining
the "opportunity cost" of investing funds in a given
business. We have already noted that our 1977
NIRC does not prohibit the deduction of interest on
a loan incurred for acquiring machinery and
equipment. Neither does our 1977 NIRC compel
the capitalization of interest payments on such a
loan. The 1977 Tax Code is simply silent on a
taxpayer's right to elect one or the other tax
treatment of such interest payments. Accordingly,
the general rule that interest payments on a legally
demandable loan are deductible from gross income
must be applied.
The CIR argues finally that to allow Picop to deduct
its interest payments against its gross income
would be to encourage fraudulent claims to double
83
and franchises of RPPM and RMC
were to be transferred, assigned and
conveyed to Picop as the surviving
corporation. Immediately before
merger effective date, RPPM had
over preceding years accumulated
losses in the total amount of
P81,159,904.00. In its 1977 Income
Tax Return, Picop claimed
P44,196,106.00 of RPPM's
accumulated losses as a deduction
against Picop's 1977 gross income.
The CIR disallowed all the
deductions claimed on the basis that
RPPM's losses were incurred by
"another taxpayer," RPPM, and not
by Picop in connection with Picop's
own registered operations. The CIR
took the view that Picop, RPPM and
RMC were merged into one (1)
corporate personality only on 12
January 1978, upon approval of the
merger agreement by the BOI.
deductions from gross income. The Court is not
persuaded. So far as the records of the instant
cases show, Picop has not claimed to be entitled to
double deduction of its 1977 interest payments.
The CIR has neither alleged nor proved that Picop
had previously adjusted its cost basis for the
machinery and equipment purchased with the loan
proceeds by capitalizing the interest payments
here involved. The Court will not assume that the
CIR would be unable or unwilling to disallow "a
double deduction" should Picop, having deducted
its interest cost from its gross income, also attempt
subsequently to adjust upward the cost basis of the
machinery and equipment purchased and claim,
e.g., increased deductions for depreciation.
- The CTA and the Court of Appeals allowed the
offsetting of RPPM's accumulated operating losses
against Picop's 1977 gross income, basically
because towards the end of the taxable year 1977,
upon the arrival of the effective date of merger,
only one (1) corporation, Picop, remained. The
losses suffered by RPPM's registered operations
and the gross income generated by Picop's own
registered operations now came under one and the
same corporate roof. We consider that this
circumstance relates much more to form than to
substance. We do not believe that that single
purely technical factor is enough to authorize and
justify the deduction claimed by Picop. Picop's
claim for deduction is not only bereft of statutory
84

14 Hospital de San In a letter dated January 15, 1959,
Juan de Dios, Inc. the Commissioner of Internal
vs Revenue assessed and demanded
Commissioner of from the petitioner, Hospital De San
Internal Revenue Juan De Dios, Inc., payment of
G.R. No. L-31305, P51,462 as deficiency income taxes
May 10, 1990 for 1952 to 1955. The petitioner
protested against the assessment
and requested the Commissioner to
cancel and withdraw it. After
reviewing, Commissioner advised
petitioner that the deficiency
income tax assessment against it
was reduced to only P16,852.41 but
the petitioner thru its auditors
insisted to have the revised
assessment cancelled but the same
basis; it does violence to the legislative intent
which animates the tax incentive granted by
Section 7 (c) of R.A. No. 5186. In granting the
extraordinary privilege and incentive of a net
operating loss carry-over to BOI-registered pioneer
enterprises, the legislature could not have
intended to require the Republic to forego tax
revenues in order to benefit a corporation which
had run no risks and suffered no losses, but had
merely purchased another's losses. We conclude
that the deduction claimed by Picop in the amount
of P44,196,106.00 in its 1977 Income Tax Return
must be disallowed.
WON the expenses The Court of Tax Appeals found that the interests
incurred by the and dividends received by the petitioner "were
petitioner for merely incidental income to petitioner's main
handling its funds or activity, which is the operation of its hospital and
income consisting nursing schools the conclusion is inevitable that
solely of dividends petitioner's activities never went beyond that of a
and interests, were passive investor, which under existing
not expenses jurisprudence do not come within the purview of
incurred in "carrying carrying on any 'trade or business'. The fact that
on any trade or petitioner was assessed a real estate dealer's fixed
business," hence, tax of P640 on its rental income does not alter its
not deductible as status as a charitable, non-stock, non-profit
business or corporation. Finding no reversible error in the
administrative decision of the CTA, the same is affirmed in toto.
expenses.
85
 was denied.
Petitioner sought a review of the
assessment by the Court of Tax
Appeals. The CTA found out that
petitioner failed to establish by
competent proof that its receipt of
interests and dividends constituted
the carrying on of a "trade or
business" so as to warrant the
deductibility of the expenses
incurred in their realization. No
evidence whatsoever was presented
by petitioner to show how it
handled its investment, the manner
it bought, sold and reinvested its
securities, how it made decisions,
and whether it consulted brokers,
investment or statistical services.
Neither is there any showing of the
extent of its activities in stocks or
bonds, and participation, if any,
direct or indirect, in the
management of the corporations
where it made investments. In
effect, there is total absence of any
indication of a business-like
management or operation of its
interests and dividends.

15 Commissioner of The case involves Mercury Drugs’ WON the 20% senior The discount is treated as a tax credit thus entitling
Internal Revenue (Central Luzon Drug Corporation) citizen’s sales Central Luzon to the tax refund. This case covers

86
 vs claim for tax refund arising from an
Central Luzon alleged erroneous interpretation of
Drug Corporation the Senior Citizens Act. While
G.R. No. 159610, complying with RR 2-94 in
June 12, 2008 computing its income tax liability for
taxable year 1997, respondent filed
such return under protest because
of its allegation that RR 2-94, which
provides that the sales discount
should be treated as a deduction
from the gross income or sales, is
without force and effect for being
inconsistent with RA 7432 which
provides for a tax credit treatment
for the senior citizens discount.
16 Commissioner of Involves a Petition for Review on
Internal Revenue Certiorari seeking to reverse and set
vs aside the Decision and Resolution of
Philippine the Court of Tax Appeals (CTA) En
Airlines (PAL) Bane which affirmed the
G.R. 179259, cancellation and withdrawal of
September 25, Assessment Notice and Formal
2013 Letter of Demand for the payment
by the respondent Philippine
Airlines, Inc. (respondent), of
deficiency Minimum Corporate
Income Tax (MCIT) in the amount of
P326,778,723.35, covering the fiscal
discount should be the taxable year 1997 and is governed by the old
treated as a tax law, RA 7432 which expressly allowed private
credit to be establishment to claim the amount of discounts
deducted from the they grant to senior citizens as tax credit and not
income tax due or as merely as a reduction to the gross income or gross
a mere deduction sales. In this case taxation was considered to be an
from gross income implement for the exercise of the power of
or gross sales. imminent domain wherein the tax credit is deemed
to be the just compensation for private property
taken by the State for public purpose (the
reduction of income due to the grant of the senior
citizen discount). However, with the effectivity of
RA 9257 on 21 March 2004, there is now a new tax
treatment for senior citizens’ discount granted by
all covered establishments. This discount should be
considered as a deductible expense from gross
income and no longer as tax credit.
WON PAL is required Petition is denied for the provisions in PD 1590, a
to pay MCIT under special law prevails over RA 8424 (NIRC) as
the income tax regards respondent’s exemption from the MCIT.
provision of the
NIRC of 1997(RA Discussion on the SC RULING
8424), as amended,
despite the fact that The NIRC of 1997, as amended, provides as
the charter (PD regards MCIT that a domestic corporation must
1590) creating it pay whichever is the higher of: (1) the income tax
provided only two under Section 27(A) of the NIRC of 1997,as
options for its amended, computed by applying the tax rate
liability to pay taxes- therein to the taxable income of the corporation;
(a) Payment of basic or (2) the MCIT under Section 27(E), also of the
87
year ending 31 March 2000.
For the fiscal year that ended 31
March 2000, respondent filed its
Tentative Corporate Income Tax
Return, reflecting a creditable tax
withheld for the fourth quarter
amounting to P524,957.00, and a
zero taxable income for said year.
Hence, respondent filed on 16 July
2001 a written claim for refund
before the petitioner. As a
consequence thereof, respondent
received a Letter of Authority from
the Bureau of Internal Revenue (BIR)
Large Taxpayers Service authorizing
the revenue officers named therein
to examine respondent’s books of
accounts and other accounting
records for the purpose of
evaluating respondent’s "Claim for
Refund on Creditable Withholding
Tax – Income Tax" covering the fiscal
year ending 31 March 2000.
On 11 August 2003, respondent
received from the same revenue
officers a computation of their initial
deficiency MCIT assessment in the
amount of P537,477,867.64.
Consequently, respondent received
corporate income same Code, equivalent to 2% of the gross income
tax based on the its of the corporation. The Court would like to
annual net taxable underscore that although this may be the general
income or (b) the rule in determining the income tax due from a
related 2% franchise domestic corporation under the provisions of the
tax based on gross NIRC of 1997, as amended, such rule can only be
revenue, whichever applied to respondent only as to the extent
is lower; further, allowed by the provisions of its franchise.
under PD 1590,
MCIT is presumed to Relevant thereto, PD 1590, during the lifetime of
belong to the the franchise of respondent, its taxation shall be
category of "other strictly governed by two fundamental rules, to wit:
taxes" for which (1) respondent shall pay the Government either
respondent is not the basic corporate income tax or franchise tax,
liable. whichever is lower; and (2) the tax paid by
respondent, under either of these alternatives,
shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges,
except only real property tax. Any excess of the
total quarterly payments over the actual annual
franchise of income tax due as shown in the final or
adjustment franchise or income-tax return shall
either be refunded to the grantee or credited
against the grantee’s quarterly franchise or
income-tax liability for the succeeding taxable year
or years at the option of the grantee.
Accordingly, the respondent cannot be subjected
to MCIT for the following reasons:
1. Section 13(a) of [PD] 1590 refers to "basic
88
on 20October 2003 a Preliminary
Assessment Notice and Details of
Assessment issued by the Large
Taxpayers Service dated 22
September 2003, assessing
respondent deficiency MCIT
including interest, in the aggregate
amount of P315,566,368.68. A
written protest to said preliminary
assessment was filed by respondent
on 3 November 2003. Thereafter, on
16 December 2003, respondent
received a Formal Letter of Demand
and Details of Assessment dated 1
December 2003 from the Large
Taxpayers Service demanding the
payment of the total amount of
P326,778,723.35, inclusive of
interest, as contained in Assessment
Notice No. INC-FY-99-2000-000085.
In response thereto, respondent
filed its formal written protest on 13
January 2004 reiterating the
following defenses:(1) that it is
exempt from, or is not subject to,
the 2% MCIT by virtue of its charter,
Presidential Decree No. (PD) 1590;3
and (2) that the three-year period
allowed by law for the BIR to assess
deficiency internal revenue taxes for
corporate income tax, as stipulated in Section
27(A) of the NIRC of 1997. There is nothing in
Section 13(a) of [PD] 1590 to support the
contention of the CIR that PAL is subject to the
entire Title II of the NIRC of 1997, entitled "Tax
on Income."
2. Section 13(a) of Presidential Decree No. 1590
further provides that the basic corporate
income tax of PAL shall be based on its annual
net taxable income. In comparison, the 2%
MCIT under Section 27 (E) of the NIRC of 1997
shall be based on the gross income of the
domestic corporation. The Court notes that
gross income, as the basis for MCIT, is given a
special definition under Section 27(E) (4) of the
NIRC of 1997, different from the general one
under Section 34 of the same Code. There is an
apparent distinction under the NIRC of 1997
between taxable income, which is the basis for
basic corporate income tax under Section
27(A); and gross income, which is the basis for
the MCIT under Section 27(E). The two terms
have their respective technical meanings, and
cannot be used interchangeably.
3. Even if the basic corporate income tax and the
MCIT are both income taxes under Section 27
of the NIRC of 1997, and one is paid in place of
the other, the two are distinct and separate
taxes.The Court herein treats MCIT in much the
89
the taxable year ending 31 March
2000 had already lapsed on 15July
2003.
A Petition for Review before the
Second Division of the CTA, after no
response was received by the
respondent from its protest.
The Ruling of the CTA Second
Division
In a Decision, the CTA Second
Division granted respondent’s
petition and accordingly ordered for
the cancellation and withdrawal of
Assessment Notice and Formal
Letter of Demand for the payment
of deficiency MCIT in the amount of
P326,778,723.35, covering the fiscal
year ending 31 March 2000, issued
against respondent.
The CTA Second Division denied
petitioner’s Motion for
Reconsideration for lack of merit.
Aggrieved, petitioner appealed to
the CTA En Banc.
The Ruling of the CTA En Banc
same way. Although both are income taxes, the
MCIT is different from the basic corporate
income tax, not just in the rates, but also in the
bases for their computation. Not being covered
by Section 13(a) of [PD] 1590,which makes PAL
liable only for basic corporate income tax, then
MCIT is included in "all other taxes" from which
PAL is exempted.
4. The evident intent of Section 13 of [PD] 1520
(sic) is to extend to PAL tax concessions not
ordinarily available to other domestic
corporations. Section 13 of [PD] 1520 (sic) is
not unusual. A public utility is granted special
tax treatment (including tax
exceptions/exemptions) under its franchise, as
an inducement for the acceptance of the
franchise and the rendition of public service by
the said public utility. In this case, in addition to
being a public utility providing air-transport
service, PAL is also the official flag carrier of the
country.
5. The CIR posits that PAL may not invoke in the
instant case the "in lieu of all other taxes"
clause in Section 13 of [PD] No. 1520 (sic),if it
did not pay anything at all as basic corporate
income tax or franchise tax. As a result, PAL
should be made liable for "other taxes" such as
MCIT. This line of reasoning has been dubbed
as the Substitution Theory, and this is not the
90
The CTA En Banc affirmed both the
aforesaid Decision and Resolution
rendered by the CTA Second Division
in CTA Case No. 7029,ruling that
under Section 13 of PD 1590,
respondent, as consideration for the
franchise, is indeed granted the
privilege to choose between two
options in the payment of its tax
liability to the government.
6. PD 1590 explicitly allows PAL, in computing its
Consequently, the insistence of the CIR to subject
first time the CIR raised the same. The Court
already rejected the Substitution Theory in
Commissioner of Internal Revenue v. Philippine
Airlines, Inc. It is not the fact of tax payment
that exempts it, but the exercise of its option.
The fallacy of the CIR’s argument is evident
from the fact that the payment of a measly sum
of one peso would suffice to exempt PAL from
other taxes, whereas a zero liability arising
from its losses would not. There is no
substantial distinction between a zero tax and a
one-peso tax liability. Based on the same
ratiocination, the Court finds the Substitution
Theory unacceptable in the present Petition.
basic corporate income tax, to carry over as
deduction any net loss incurred in any year, up
to five years following the year of such loss.
Therefore, [PD] 1590 does not only consider
the possibility that, at the end of a taxable
period, PAL shall end up with zero annual net
taxable income (when its deductions exactly
equal its gross income), as what happened in
the case at bar, but also the likelihood that PAL
shall incur net loss (when its deductions exceed
its gross income). If PAL is subjected to MCIT,
the provision in [PD] 1590 on net loss carry-
over will be rendered nugatory.
91
PAL to MCIT cannot be done without contravening
[PD] 1520 (sic).

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

special law specifically governing the franchise of
PAL, issued on 11 June 1978;and the NIRC of 1997,
on the other, which is a general law on national
internal revenue taxes, that took effect on 1
January 1998, the former prevails. The rule is that
on a specific matter, the special law shall prevail
over the general law, which shall be resorted to
only to supply deficiencies in the former. In
addition, where there are two statutes, the earlier
special and the later general – the terms of the
general broad enough to include the matter
provided for in the special – the fact that one is
special and the other is general creates a
presumption that the special is to be considered as
remaining an exception to the general, one as a
general law of the land, the other as the law of a
particular case. It is a canon of statutory
construction that a later statute, general in its
terms and not expressly repealing a prior special
statute, will ordinarily not affect the special
provisions of such earlier statute. The MCIT was a
new tax introduced by Republic Act No.8424.
Under the doctrine of strict interpretation, the
burden is upon the CIR to primarily prove that the
new MCIT provisions of the NIRC of 1997, clearly,
expressly, and unambiguously extend and apply to
PAL, despite the latter’s existing tax exemption. To

92
do this, the CIR must convince the Court that the
MCIT is a basic corporate income tax, and is not
covered by the "in lieu of all other taxes" clause of
[PD] 1590. Since the CIR failed in this regard, the
Court is left with no choice but to consider the
MCIT as one of "all other taxes," from which PAL is
exempt under the explicit provisions of its charter.

Based on the foregoing pronouncements, it is clear

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

Notably, in another case involving the same

parties,26 the Court further expressed that a strict
interpretation of the word "pay" in Section 13of PD
1590 would effectively render nugatory the other
rights categorically conferred upon the respondent
by its franchise. Hence, there being no qualification
to the exercise of its options under Section 13,

93
 then respondent is free to choose basic corporate
income tax, even if it would have zero liability for
the same in light of its net loss position for the
taxable year.

By way of, reiteration, although it appears that

respondent is not completely exempt from all
forms of taxes under PD 1590 considering that
Section 13 thereof requires it to pay, either the
lower amount of the basic corporate income tax or
franchise tax (which are both direct taxes), at its
option, mere exercise of such option already
relieves respondent of liability for all other taxes
and/or duties, whether direct or indirect taxes. This
is an expression of the same thought in Our ruling
that, to repeat, it is not the fact of tax payment
that exempts it, but the exercise of its option.

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

18 Carmelino F. On April 13, 1998, petitioner Could the No. NIRC provides that the income subject to
Pansacola Carmelino F. Pansacola filed his exemptions under income tax is the taxpayer’s income as derived

94
 vs income tax return for the taxable
Commissioner of year 1997 that reflected an
Internal Revenue overpayment of P5,950. In it he
G.R. 159991, claimed the increased amounts of
November 16, personal and additional exemptions
2006 under Section 35 of the NIRC,
although his certificate of income
tax withheld on compensation
indicated the lesser allowed
amounts on these exemptions.
19 C.M. Hoskins & Petitioner-appellant, a domestic
Co., Inc. corporation engaged in the
vs development and management of
Commissioner of subdivisions, sale of subdivision lots
Section 35 of the and computed during the calendar year, his
NIRC, which took taxable year. What the law should consider for the
effect on January 1, purpose of determining the tax due from an
1998, be availed of individual taxpayer is his status and qualified
for the taxable year dependents at the close of the taxable year and
1997? not at the time the return is filed and the tax due
thereon is paid.
At the time petitioner filed his 1997 return and
paid the tax due thereon in April 1998, the
increased amounts of personal and additional
exemptions in Section 35 were not yet available. It
has not yet accrued as of December 31, 1997, the
last day of his taxable year. Petitioner’s taxable
income covers his income for the calendar year
1997. The law cannot be given retroactive effect.
It is established that tax laws are prospective in
application, unless it is expressly provided to apply
retroactively. Conformably too, personal and
additional exemptions are considered as
deductions from gross income. Deductions for
income tax purposes partake of the nature of tax
exemptions, hence strictly construed against the
taxpayer and cannot be allowed unless granted in
the most explicit and categorical language too plain
to be mistaken.
WON the No. With respect to the collection fees, the services
supervision and rendered by Hoskins in collecting the amounts due
collection fees on the sales of lots on the installment plan are
received by a real incidental to its brokerage service in selling the
95
 Internal Revenue and collection of installments due
G.R. L-24059 for a fee which the real estate
November 28, owners pay as compensation for
1969 each of the services rendered, failed
to pay the real estate broker's tax on
its income derived from the
supervision and collection fees.
Consequently, the Commissioner of
Internal Revenue demanded the
payment of the percentage tax plus
surcharge, contending that said
income is subject to the real estate
broker's percentage tax. On the
other hand, petitioner-appellant
claimed that the supervision and
collection fees do not form part of
its taxable gross compensation.
20 Jose Ledesma For the year 1916, Jose Ledesma
vs (plaintiff) made his declaration for
The Collector of the purpose of paying his income
Internal Revenue tax. In the said declaration, he
and the claimed several exceptions and one
Provincial of which is the amount of
Treasurer of P135,229.10 which he claims should
Occidental be deducted from his income for the
Negros reason that it had been paid to his
G.R. No. L-15014, employees as compensation for
October 2, 1920 their services. The said exemption
was not allowed by the Provincial
Treasurer and Collector of Internal
Revenue (defendants). Hence, the
estate broker are lots. If the broker's commissions on the cash sales
deductible from its of lots are subject to the brokerage percentage tax,
gross compensation its commissions on installment sales should
likewise be taxable. As to the supervision fees for
the development and management of the
subdivisions, which fees were paid out of the
proceeds of the sales of the subdivision lots, they,
too, are subject to the real estate broker's
percentage tax.
The development, management and supervision
services were necessary to bring about the sales of
the lots and were inseparably linked thereto.
Hence, there is basis for holding that the operation
of subdivisions is really incidental to the main
business of the broker, which is the sale of the lots
on commission.
Whether or not the Plaintiff did not contended that said sum was “gifts
said sum, together or bonuses” but were fixed compensations agreed
with their fixed upon, depending upon the value of the services of
salaries, constituted said employees and the importance of the business
reasonable in which they were engaged. A corporation or
compensation for person engaged in a commercial enterprise has a
their services. right to fix the compensation of his employees,
and said compensation shall be considered as part
of the expenses in the conduct and management
of the business. Such expenses should be taken
into consideration in ascertaining the amount to
be paid as income tax. By computing such
expenses, the net income may be correctly
ascertained. In the present case, there is not a
96
plaintiff paid under protest the word of proof in the record which disproves the
income tax upon the full amount of declaration of the plaintiff that the said sum was
his income without the deductions paid to the persons mentioned in the complaint
claimed. He then filed a complaint as compensation for their services. Said sum,
alleging that the persons to whom according to proof, did not constitute “gifts or
he had paid the said sum are his bonuses”. Hence, the lower court was fully
employees in his business and as justified in allowing the deduction of the said sum
such receive a certain percentage of from the gross income of the plaintiff. However,
his annual gain; and that percentage plaintiff cannot claim interest upon the sum to be
is fixed and determined; and is returned by the defendants as Section 1579 of Act
based upon the extent of the No. 2711 expressly provides that actions like the
powers and responsibilities of each present “interest” shall not be collected. The
of them in the management and courts are, therefore, without authority to allow
administration of his business. In the interest upon the sum recovered in actions like the
answer to the complaint, the present.
Attorney-General, on behalf of the
defendants, alleged that the sums
paid to said employees were in the
nature of bonuses or distribution of
profit, and were not expenses of the
business. The Court of First Instance
rendered a decision directing and
ordering to pay to the plaintiff the
amount that latter paid in excess.
The said court is of the opinion that
such percentage does not constitute
bonus but fixed and agreed
permanent compensation in
addition to the stipulated salaries
and is reasonable, taking into
consideration the services rendered

97
 by said employees and the
importance of the business in which
such services were and are being
rendered. The defendants, through
the Attorney-General, contends that
the lower court erred in holding that
said sum paid by plaintiff to his
employees, together with their fixed
salaries, constituted reasonable
compensation for their services.
Hence this petition.
21 Esso Standard petitioner ESSO deducted from its
Eastern, Inc. gross income for 1959, as part of its
vs ordinary and necessary business
Commissioner of expenses, the amount it had spent
Internal Revenue for drilling and exploration of its
G.R. Nos. L- petroleum concessions. This claim
28508-9, July 7, was disallowed by the respondent
1989 Commissioner of Internal Revenue
on the ground that the expenses
should be capitalized and might be
written off as a loss only when a "dry
hole" should result. ESSO then filed
an amended return where it asked
for the refund by reason of its
abandonment as dry holes of several
of its oil wells. Also it claimed as
ordinary and necessary expenses in
the same return the amount
representing margin fees it had paid
WON the margin margin fees are not expenses in connection with
fees paid by the production or earning of petitioner's incomes
petitioner on its in the Philippines. They were expenses incurred in
profit remittance to the disposition of said incomes; expenses for the
its Head Office in remittance of funds after they have already been
New York are earned by petitioner's branch in the Philippines for
deductible the disposal of its Head Office in New York which is
already another distinct and separate income
taxpayer. it can never be said therefore that the
margin fees were appropriate and helpful in the
development of petitioner's business in the
Philippines exclusively or were incurred for
purposes proper to the conduct of the affairs of
petitioner's branch in the Philippines exclusively or
for the purpose of realizing a profit or of
minimizing a loss in the Philippines exclusively.
the margin fees were incurred for purposes proper
to the conduct of the corporate affairs of ESSO in
New York, but certainly not in the Philippines.
98
 to the Central Bank on its profit
remittances to its New York head WHEREFORE, the decision of the Court of Tax
office. Appeals denying the petitioner's claims for refund
of P102,246.00 for 1959 and P434,234.92 for 1960,
CR assessed ESSO a deficiency is AFFIRMED, with costs against the petitioner.
income tax for the year 1960. The SO ORDERED.
deficiency arose from the
disallowance of the margin fees paid
by ESSO to the Central Bank on its
profit remittances to its New York
head office.

CIR also denied the claims of ESSO

for refund of the overpayment of its
1959 and 1960 income taxes,
holding that the margin fees paid to
the Central Bank could not be
considered taxes or allowed as
deductible business expenses.
22 Visayan Cebu The appellant, Visayan Cebu
Termnial Co., Inc. Terminal Co. Inc., is a corporation
vs organized for the purpose of
Collector of handling arrastre operations in the
Internal Revenue port of Cebu. It was awarded the
G.R. L-12798, contract for the said arrastre
May 30, 1960 operations by the Bureau of
Customs.
On March 1, 1952, appellant filed its
income tax return for 1951 reporting
a gross income of P420,633.40 and
The only issue raised INCOME TAXES; DETERMINATION OF
in this appeal relates REPRESENTATION EXPENSE. — The Court of Tax
to the deductibility Appeals, in the instant case, had been patently fair
of the sum of and reasonable, if not liberal, in allowing appellant
P75,855.88 as to deduct a certain amount as representation
representation expenses on the basis of its gross income, net
expenses. income and representation expenses during the
prior years, although there was absolutely no
concrete evidence of the sums actually spent for
purposes of representation. The explanation to the
effect that the supporting papers of some of the
expenses had been destroyed when the house of

99
claimed deductions amounting to
P379,036.95, leaving a net income of
P41,596.45 on which it paid income
tax in the sum of P8,319.29.
The sum of P379,036.95 claimed as
deductions consisted of various
items, the said sums of P2,375.00,
P75,855.88 and P6,300.00,
representing said salaries,
representation expenses and
miscellaneous expenses,
respectively, or a total of
P84,530.88, were disallowed by the
Collector of Internal Revenue, thus
giving rise to a deficiency
assessment of P18,991.00.
Upon request for reconsideration,
the Collector modified the deficiency
income tax assessment by allowing
the deduction from appellant's gross
income of the salary of Juan Eugenio
Lo in the sum of P1,875.00 and
miscellaneous expenses amounting
to P532.00, at the same time
maintaining the disallowance of the
full amount of P75,855.88 as
representation expenses.
Appellant has agreed to the
appellant's treasurer was burned, it not
satisfactory, for appellant's records were supposed
to be kept in its offices, not in the residence of one
of its officers.
"Representation . . . expenses fall under the
category of business expenses which" are
allowable deductions from gross income if they
meet the conditions prescribed by law",
particularly section 30(a) (1) of the National
Internal Revenue Code; that, to be deductible, said
business expenses must be:
1. "ordinary and necessary expenses paid or
incurred in carrying on any trade or
business";
2. that those expenses "must also, meet the
further test of reasonableness in amount",
this test being "inherent in the phase
'ordinary and necessary'";
some of the representation expenses claimed by
appellant had been evidenced by vouchers or chits,
but others were reimbursed "without presentation
of supporting papers; that the aforementioned
vouchers or chits were allegedly "destroyed when
the house of Buenaventura M. Veloso, treasurer of
appellant, where the records were kept was
burned"; that, accordingly, "it is not possible to
determine the actual amount covered by
supporting papers and the amount without
supporting papers"; that the court should,
100
disallowance of the sum P500.00
representing the salaries of Felix Go
Chan and Teotimo Tiu Tiam at
P250.00 each, and the sum of
P5,768.00, representing
miscellaneous expenses.
therefore, "determine from all available data the
amount properly deductible as representation
expenses"; that "during the period of four (4) years
from 1949 to 1952, appellant had gross income,
net profits and claimed representation expenses
and that "from the above figures, we may infer
that the sum of P10,000 may be considered
reasonably necessary for entertainment expenses
of appellant in 1951, it having claimed a little over
the amount in 1950, when its gross income was
more than its gross income in 1951 and 1952", and
because "it allegedly spent for entertainment
purposes in 1948 the sum of P500.00 only." Hence,
the lower court modified the assessment of the
taxes due from appellant herein the manner set
forth in the beginning of this decision.Appellant,
maintains that said court had acted arbitrarily in
considering the representation expenses in 1950,
not those incurred in 1949 and 1952, in fixing the
amount deductible in 1951.
This pretense is clearly untenable. It appears:
(a) that part of the alleged representation
expenses had never had any supporting paper;
(b) that the vouchers and chits covering other
representation expenses had been allegedly
destroyed;
(c) that there is no documentary evidence on
101
record of any of the representation expenses in
question;

(d) that no testimonial evidence has been

introduced on any specific item of said alleged
expenses;

(e) that there is no more than oral proof to the

effect that payments had been made to appellant's
officers for representation expenses allegedly
made by the latter and about the general nature of
such alleged expenses;

(f) that the gross income in 1950 exceeded the

gross income in 1951 and 1952, and

(g) that the representation expenses in 1948

amounted to P500 only.

Under these circumstances, the lower court was

fully justified in concluding that the representation
expenses in 1951 should be slightly less than those
incurred in 1950. Upon the other hand, appellant
has not even tried to show why its representation
expenses in 1951 should be deemed bigger than
the amount allowed by the lower court. In fact, the
latter had been patently fair and reasonable, if not
rather liberal, in allowing appellant to deduct
P10,000.00 as representation expenses for 1951,
there being absolutely no concrete evidence of the
sums then actually spent for purposes of

102

23 Commissioner of Sometime in July, 1950, the late Don
Internal Revenue Carlos Palanca, Sr. donated in favor
vs of his son, Carlos Palanca, Sr., shares
Carlos Palanca, of stock in La Tondeña, Inc.
Jr. amounting to 12,500 shares. For
G.R. No. L-16626, failure to file a return on the
October 29, 1966 donation within the statutory
period, Carlos Palanca, Jr was
assessed the sums of P97,691.23,
P24,442.81 and P47,868.70 as gift
tax, 25% surcharge and interest,
respectively, or a total of
P170,002.74, which he paid on June
22, 1955. The year after, Palanca
filed with the Bureau of Internal
Revenue his income tax return for
the calendar year 1955, claiming,
among others, a deduction for
interest amounting to P9,706.45 and
reporting a taxable income of
P65,982.12. On the basis of this
return, he was assessed the sum of
P21,052.91. Subsequently, Palanca
representation. It may not be amiss to note that
the explanation to the effect that the supporting
paper of some of those expenses had been
destroyed when the house of the treasurer was
burned, can hardly be regarded as satisfactory, for
appellant's records are supposed to be kept in its
offices, not in the residence of one of its officers.
Whether or not Yes. In a more recent case, Commissioner of
deductibility of Internal Revenue vs. Prieto, we explicitly
"interest on announced that while the distinction between
indebtedness" from "taxes" and "debts" was recognized in this
a person's income jurisdiction, the variance in their legal conception
tax under section does not extend to the interests paid on them, at
30(b)(1) extends to least insofar as Section 30(b) (1) of the National
"interest on taxes." Internal Revenue Code is concerned. Under the
law, for interest to be deductible, it must be shown
that there be an indebtedness, that there should
be interest upon it, and that what is claimed as an
interest deduction should have been paid or
accrued within the year. It is here conceded that
the interest paid by respondent was in
consequence of the late payment of his estate and
inheritance, and the same was paid within the year
it is sought to be deducted. The only question to be
determined, as stated by the parties, is whether or
not such interest was paid upon an indebtedness
within the contemplation of Section (30) (b) (1) of
the Tax Code, the pertinent part of which reads:
Sec. 30. Deductions from gross income. —
103
Jr. filed an amended return for the
calendar year 1955, claiming therein
an additional deduction in the
amount of P47,868.70 representing
interest paid on the donee's gift tax,
thereby reporting a taxable net
income of P18,113.42 and a tax due
thereon in the sum of P3,167.00.
The claim for deduction was based
on the provisions of Section 30(b)(1)
of the Tax Code, which authorizes
the deduction from gross income of
interest paid within the taxable year
on indebtedness. BIR denied the
claim for refund. Morever, BIR
considered the transfer of shares of
stocks to be a transfer in
contemplation of death, so Palanca
Jr was assessed a sum of
P191,591.62 as estate and
inheritance taxes. On August 12,
1958, Palanca, Jr. once more filed an
amended income tax return for the
calendar year 1955, claiming, in
addition to the interest deduction of
P9,076.45 appearing in his original
return, a deduction in the amount of
P60,581.80, representing interest on
the estate and inheritance taxes on
the 12,500 shares of stock, thereby
reporting a net taxable income for
In computing net income there shall be
allowed as deductions —
xxx xxx xxx
'Interest:
'(1) In general. — The amount of interest
paid within the taxable year on
indebtedness, except on indebtedness
incurred or continued to purchase or carry
obligations the interest upon which is
exempt from taxation as income under this
Title.
The term "indebtedness" as used in the Tax Code
of the United States containing similar provisions
as in the above-quoted section has been defined as
the unconditional and legally enforceable
obligation for the payment of money. Within the
meaning of that definition it is apparent that a tax
may be considered an indebtedness. It follows that
the interest paid by herein respondent for the late
payment of his estate and inheritance tax is
deductible from his gross income under Section
30(b) of the Tax Code.
104
1955 in the amount of P5,400.32
and an income tax due thereon in
the sum of P428.00. Attached to this
amended return was a letter of the
petitioner, dated August 11, 1958,
wherein he requested the refund of
P20,624.01 which is the difference
between the amounts of P21,052.01
he paid as income tax under his
original return and of P428.00. CIR
denies his claim for refund. On
appeal, the Court of Tax Appeals,
finding that the amount paid by
Palanca for interest on his
delinquent estate and inheritance
tax is deductible from the gross
income for that year under section
30(b)(1) of the Revenue Code,
ordered the CIR to refund to the
Palanca, Jr. the amount of
P20,624.01 representing alleged
overpayment of income taxes for
the calendar year 1955.

Hence, the CIR appeals. The CIR

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

105
 capacity.
24 Philex Mining Philex Mining entered into an
Corporation agreement with Baguio Gold for the
vs former to manage and operate the
Commissioner of latter’s mining claim known as Sto.
Internal Revenue Nino mine. Philex Mining made
G.R. No. 148187, advancements; however, the mine
April 16, 2008 still suffered losses which led to
Philex Mining’s withdrawal as
manager of the mine. The parties
entered into a compromise with
dation in payment where the assets
of Baguio Gold were to be
transferred to Philex Mining.
In its annual income tax return,
Philex Mining deducted from its
gross income the amount
representing a loss on settlement of
receivables from Baguio Gold.
BIR disallowed the deduction as bad
debt and assessed Philex Mining a
deficiency income tax.
25 Fernandez A joint decision involving four
Hermanos, Inc. appeals, this case deals with
vs Fernandez Hermanos Inc., a
CIR and CTA domestic corporation engaging in
G.R. No. L-21551, business as an “investment
WON there is a bad No. There is no bad debt in this case. What the
debt for Philex parties actually entered into was a partnership
Mining to treat it as wherein each of them was bound to contribute. It
a deduction is unlikely for a corporation to lend millions of
pesos to another corporation without any
collateral or security; there was no stipulation for
Baguio Gold to actually repay Philex Mining.
The inevitable conclusion is that the advances were
not loans but capital contributions to a
partnership. They can also be called investments.
In sum, Philex Mining cannot claim the advances as
bad debt deduction. Philex Mining failed to
substantiate its assertion that the advances were
subsisting debts that could be deducted from its
gross income.
Cases L-21551 and Cases L-21551 and L-21557
L-21557
I. Losses
I. WON Tax court 1. For Makati Lumber Co.
erred in its ruling -There was an adequate basis for the
106
September 30, company” that was assessed by the with respect to writing off of the stock as worthless
1969 Commissioner of Internal Revenue items of securities for Makati Lumber ceased
for deficiency income taxes for the disallowances operations and became insolvent.
years 1950 to 1954 and for 1957 due
to alleged discrepancies found upon II. WON 2. Bad debts of Palawan Manganese Mines, Inc.
its income tax returns. government’s right – Advances made by Fernandez Hermanos
to collect the Inc to its 100% subsidiary ( Palawan
Cases L-21551 and L-21557 deficiency income Manganese) as a form of financial help
taxes in question has without expectation of repayment were
The items subject to discussion in already investments and not loans. No bad debt
these two cases are: Prescribed. could arise where there is no valid and
a.) Losses, subsisting debt. It could not be properly
b.) Excessive depreciation of Houses, Cases L-24972 and considered worthless and deductible.
c.) Taxable increase in net worth and L-24978 Furthermore, neither under the Tax Code
d.) Gain realized from sale of real specifically Sec. 30 (d) (2) & (e) (1) can there
property. WON Tax court be a partial writing off of a loss or bad debt
erred in its ruling for such are deductible in full or not at all.
The Tax Court sustained with respect to 3. Balamban Coal Mines
Commissioner’s disallowance of the items of - Losses are deductible in 1952 when the
Losses (i.e. assailed bad debts of disallowances mines are abandoned since some definite
Palawan Manganese Mines, Co) and event must fix time when loss is sustained
Excessive depreciation but overruled i.e. actual abandonment, and not in 1950 &
the Commissioner’s disallowances 1951 when they were still in operation.
for items in relation to taxable net 4. Hacienda Dalupiri & Samal
worth, gain realized from real - It is operated as a business and therefore,
property and losses in connection to entitled to deduct expenses and losses
Mati Lumber Co., Balamban Coal based on the inventory method of
Mines, and Hacienda Dalupiri. accounting.

Cases L-24972 and L-24978 II. Depreciation of building

- The taxpayer did not submit any adequate

107
These cases refer to the taxpayer’s
income tax liability for the year
1957. The taxpayer insists in this
appeal that it could use as a method
for depletion under the pertinent
provision of the Tax Code its "capital
investment" representing the
alleged value of its contractual rights
and titles to mining claims in the
sum of P242,408.10 and thus deduct
outright one-fifth (1/5) of this
"Capital investment" ever year,
regardless of whether it had actually
mined the product and sold the
products. The Tax court overruled
the Commissioner’s disallowance of
the taxpayer’s losses in the
operation of its Hacienda Dalupiri
but sustained disallowance of 1/5
cost of the contractual right over
mines of its subsidiary- Palawan
Mines.
proof so as to justify its 10% depreciation
per annum claim and thus, would be
considered excessive.
III. Taxable increase in net worth
- Increase in net worth are not taxable if they
are shown not to be the result of
unreported income but to be the result of
the correction of errors in the taxpayer’s
entries in the books relating to
indebtedness to certain creditors,
erroneously listed although already paid.
IV. Prescription
- The government’s right to collect taxes due
has not prescribed as taxpayer’s appeal was
file with the Tax Court long before the
expiration of the 5-year period.
Cases L-24972 and L-24978
Losses- The hybrid method used by the petitioner
is with justification for if a tax payer is engaged in
more than one trade or business, he may use a
different method of accounting for each trade. He
may report income from a business on accrual
basis and personal income on the cash basis.
The alleged "capital investment" method invoked
by the taxpayer is not a method of depletion, but
the Tax Code provision, prior to its amendment by
108

26 Consolidated The BIR and Consolidated Mines got
Mines, Inc. into a long and complicated court
vs case over how to properly compute
CTA and CIR the company’s net income.
G.R. Nos. L-18843
and L-18844, The Consolidated Mines, Inc. (aka.
August 29, 1974 Company), a domestic corporation
engaged in mining, filed its income
tax returns for 1951, 1952, 1953 and
1956. In 1957, BIR investigated the
income tax returns filed by the
Company because it claimed the
refund of the sum of P107,472.00
representing alleged overpayments
of income taxes for the year 1951.
BIR found that (A) for the years 1951
to 1954 (1) the Company had not
accrued as an expense the share in
Section 1 of Republic Act No. 2698, which took
effect on June 18, 1960, expressly provided that
"when the allowances shall equal capital invested .
. . no further allowances shall be made;" in other
words, the "capital investment" was but the
limitation of the amount of depletion that could be
claimed. The outright deduction by the taxpayer of
1/5 of the cost of the mines, as if it were a "straight
line" rate of depreciations was correctly held by
the Tax Court not to be authorized by the Tax
Code.
1. WON the 1. No. The company was consistent in using accrual 1. Rate of Mine
company was using method. The issue was a misunderstanding by the Depletion
a “hybrid method” BIR of the terminology used by the company.
of accounting rather 2. Amount of
than accrual. Here we distinguish between (1) the method of Depreciation
2. The proper accounting used by the Company in determining its Expense
amount of mine net income for tax purposes; and (2) the method of
depletion expense computation agreed upon between the Company
3. The amount of and Benguet in determining the amount of
depreciation compensation that was to be paid by the former to
expense. the latter. The parties, being free to do so, had
4. Disallowance of contracted that in the method of computing
payments made as compensation the basis were "cash receipts" and
expenses. "cash payments." Once determined in accordance
with the stipulated bases and procedure, then the
amount due Benguet for each month accrued at
the end of that month, whether the Company had
made payment or not (see par. XIV of the
agreement). To make the Company deduct as an
109
the company profits of Benguet
Consolidated Mines as operator of
the Company's mines, although for
income tax purposes the Company
had reported income and expenses
on the accrual basis; (2) depletion
and depreciation expenses had been
overcharged; and (3) the claims for
audit and legal fees and
miscellaneous expenses for 1953
and 1954 had not been properly
substantiated; and that (B) for the
year 1956 (1) the Company had
overstated its claim for depletion;
and (2) certain claims for
miscellaneous expenses were not
duly supported by evidence.
Tax Court rendered judgment
ordering the Company to pay the
amounts of P107,846.56,
P134,033.01 and P71,392.82 as
deficiency income taxes for the
years 1953, 1954 and 1956,
respectively and nullified the
assessments for 1951 and 1952
because of prescription.
Upon motion, Tax Court further
reduced the deficiency income tax
liabilities of the Company to
expense one-half of the "Accounts Receivable"
would, in effect, be equivalent to giving Benguet a
right which it did not have under the contract, and
to substitute for the parties' choice a mode of
computation of compensation not contemplated
by them. Since Benguet had no right to one-half of
the "Accounts Receivable," the Company was
correct in not accruing said one-half as a
deduction. The Company was not using a hybrid
method of accounting, but was consistent in its use
of the accrual method of accounting.
2. The company failed to properly substantiate its
mine development costs, so very little depletion
expense was allowed
3. You cannot ascribe depreciation from
“incomplete constructions”, because being
incomplete; they haven’t even begun to be used
yet.
4. You are supposed to prove payments with
receipts from the payees, internal company
vouchers and testimony only prove that such
expenses were incurred, not that they are legally
deductible.
110
 P79,812.93, P51,528.24 and
P71,382.82 for the years 1953, 1954
and 1956, respectively.

Both the Company and CIR appealed

questioning the method of
computing the income.
The Company used the accrual
method of accounting in computing
its income. One of its expenses is the
amount paid to Benguet as mine
operator, which amount is
computed as 50% of "net income."
The Company deducts as an expense
50% of cash receipts minus
disbursements, but does not deduct
at the end of each calendar year
what the Commissioner alleges is
"50% of the share of Benguet" in the
"accounts receivable." However, it
deducts Benguet's 50% if and when
the "accounts receivable" are
actually paid. It would seem,
therefore, that the Company has
been deducting a portion of this
expense (Benguet's share as mine
operator) on the "cash & carry"
basis.

27 Antonio Roxas, Don Pedro Roxas and Dona Carmen (1) Is the gain (1) NO.
Eduardo Roxas, Ayala, Spanish subjects, transmitted derived from the

111
and Roxas Y CIA., to their grandchildren by hereditary
in their own succession the following properties:
respective behalf
and as judicial (1) Agricultural lands with a total
co-guardians of area of 19,000 hectares, situated in
Jose Roxas the municipality of Nasugbu,
vs Batangas province;
CTA and CIR
G.R. NO. L-25043, (2) A residential house and lot
April 26, 1968 located at Wright St., Malate,
Manila; and
(3) Shares of stocks in different
corporations.
To manage the above-mentioned
properties, said children, namely,
Antonio Roxas, Eduardo Roxas and
Jose Roxas, formed a partnership
called Roxas y Compania.
Agricultural Land
In consonance with the
constitutional mandate to acquire
big landed estates and apportion
them among landless tenants-
farmers, the government persuaded
the Roxas brothers to part with their
landholdings.
sale of the Nasugbu In fine, Roxas y Cia. cannot be considered a real
farm lands an estate dealer for the sale in question. Hence,
ordinary gain, hence pursuant to Section 34 of the Tax Code the lands
100% taxable? sold to the farmers are capital assets, and the gain
derived from the sale thereof is capital gain,
(2) Are the taxable only to the extent of 50%.
deductions for
business expenses It should be borne in mind that the sale of the
and contributions Nasugbu farm lands to the very farmers who tilled
deductible? them for generations was not only in consonance
with, but more in obedience to the request and
(3) Is Roxas y Cia. pursuant to the policy of our Government to
liable for the allocate lands to the landless. It was the bounden
payment of the fixed duty of the Government to pay the agreed
tax on real estate compensation after it had persuaded Roxas y Cia.
dealers? to sell its haciendas, and to subsequently subdivide
them among the farmers at very reasonable terms
and prices. However, the Government could not
comply with its duty for lack of funds. Obligingly,
Roxas y Cia. shouldered the Government's burden,
went out of its way and sold lands directly to the
farmers in the same way and under the same
terms as would have been the case had the
Government done it itself.
(2) Tickets to a banquet in honor of Sergio Osmena
and San Miguel Beer given to various persons –
NOT DEDUCTIBLE
 Representation expenses are deductible from
gross income as expenditures incurred in
112
It turned out however that the
Government did not have funds to
cover the purchase price, and so a
special arrangement was made for
the Rehabilitation Finance
Corporation to advance to Roxas y
Cia. the amount of P1,500,000.00 as
loan. Collateral for such loan were
the lands proposed to be sold to the
farmers. Under the arrangement,
Roxas y Cia. allowed the farmers to
buy the lands for the same price but
by installment, and contracted with
the Rehabilitation Finance
Corporation 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. Fifty percent 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 Section 34 of the
Tax Code.
Residential House
During their bachelor days the Roxas
carrying on a trade or business under Section
30(a) of the Tax Code provided the taxpayer
proves that they are reasonable in amount,
ordinary and necessary, and incurred in
connection with his business. In the case at bar,
the evidence does not show such link between
the expenses and the business of Roxas y Cia.
The contributions to the Christmas funds of the
Pasay City Police, Pasay City Firemen and
Baguio City Police – 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.
The contribution to the Manila Police trust
fund-DEDUCTIBLE
 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.
The contributions to the Philippines Herald's
fund for Manila's neediest families-
DEDUCTIBLE
113
brothers lived in the residential
house at Wright St., Malate, Manila,
which they inherited from their
grandparents. After Antonio and
Eduardo got married, they resided
somewhere else leaving only Jose in
the old house. In fairness to his
brothers, Jose paid to Roxas y Cia.
rentals for the house in the sum of
P8,000.00 a year.
Assessments
On June 17, 1958, the Commissioner
of Internal Revenue demanded from
Roxas y Cia the payment of real
estate dealer's tax for 1952 in the
amount of P150.00 plus P10.00
compromise penalty for late
payment, and P150.00 tax for
dealers of securities for 1952 plus
P10.00 compromise penalty for late
payment. The assessment for real
estate dealer's tax was based on the
fact that Roxas y Cia. received house
rentals from Jose Roxas in the
amount of P8,000.00.
The Commissioner of Internal
Revenue justified his demand for the
fixed tax on dealers of securities
 It should be noted however that 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.
The contribution to Our Lady of Fatima chapel
at the Far Eastern University- NOT DEDUCTIBLE
 said university gives dividends to its
stockholders.
(3) YES.
 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 law, which
states:
. . . "Real estate dealer" includes any person
engaged in the business of buying, selling,
exchanging, leasing or renting property on his
114
 against Roxas y Cia., on the fact that own account as principal and holding himself
said partnership made profits from out as a full or part-time dealer in real estate
the purchase and sale of securities. or as an owner of rental property or properties
rented or offered to rent for an aggregate
In the same assessment, the amount of three thousand pesos or more a
Commissioner assessed deficiency year: . . .
income taxes against the Roxas
Brothers for the years 1953 and is too clear and explicit to admit construction.
1955. The findings of the Court of Tax Appeals or, this
point is sustained.
The deficiency income taxes resulted
from the inclusion as income of WHEREFORE, the decision appealed from is
Roxas y Cia. of the unreported 50% modified. Roxas y Cia. is hereby ordered to pay the
of the net profits for 1953 and 1955 sum of P150.00 as real estate dealer's fixed tax for
derived from the sale of the 1952.
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. For the reason that
Roxas y Cia. subdivided its Nasugbu
farm lands and sold them to the
farmers on installment, the
Commissioner considered the
partnership as engaged in the
business of real estate, hence, 100%
of the profits derived therefrom was
taxed.

28 Eufemia The petitioners sought for the WON petitioners YES. Petitioners have agreed to contribute and did

115
Evangelista et. al. reversal of the decision of the Court
vs of Tax Appeals which held them
The Collector of liable for income tax, real estate
Internal Revenue dealer’s tax and residence tax for
and the CTA the real properties (parcels of land)
G.R. No. L-9996, they bought within February 1943 to
October 15, 1957 April 1994 from different persons,
whose management of said
properties was charged to their
brother Simeon, and which were
subsequently rented out to various
tenants from the year 1945-1949.
Petitioners submit that they are
mere co-owners of the properties,
not co-partners because some of the
characteristics of partnership are not
present, therefore, no legal entity
with a personality separate from
that of the members exists, and thus
they are excluded from the coverage
of Section 24 of the National Internal
Revenue Code of the Philippines.
have established a contribute money to a common fund for the
partnership and are purpose of engaging in real estate transactions for
subject to tax on monetary gain and divide the same among
corporations under themselves because of the following observations,
Section 24 of the among others: (1) Said common fund was not
NIRC 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.
Petitioners’ argument that their being mere co-
owners did not create a separate legal entity was
rejected because, according to the Court, the tax in
question is one imposed upon "corporations",
which, strictly speaking, are distinct and different
from "partnerships". When the NIRC includes
"partnerships" among the entities subject to the
tax on "corporations", said Code must allude,
therefore, to organizations which are not
necessarily "partnerships", in the technical sense of
the term. The qualifying expression found in
Section 24 and 84(b) clearly indicates that a joint
venture need not be undertaken in any of the
standard forms, or in conformity with the usual
requirements of the law on partnerships, in order
that one could be deemed constituted for
purposes of the tax on corporations. Accordingly,
the lawmaker could not have regarded that
personality as a condition essential to the existence
of the partnerships therein referred to.
116
 For purposes of the tax on corporations, NIRC
includes these partnerships - with the exception
only of duly registered general co partnerships -
within the purview of the term "corporation." It is,
therefore, clear that petitioners herein constitute a
partnership, insofar as said Code is concerned and
are subject to the income tax for corporations.

29 Alexander The Commonwealth Insurance Co., a 1. Whether or not 1. Yes. Section 24 of the National Internal Revenue
Howden and Co., domestic corporation, entered into the portions of Code subjects to tax a non-resident foreign
Ltd., H.G. Chester reinsurance contracts with 32 British premiums earned corporation's income from sources within the
and Others, et. insurance companies not engaged in from insurances Philippines.
al. trade or business in the Philippines, locally underwritten
vs whereby the former agreed to cede by a domestic The reinsurance premiums remitted to appellants
Commissioner of to them a portion of the premiums corporation, ceded by virtue of the reinsurance contracts, accordingly,
Internal Revenue on insurances on fire, marine and to and received by had for their source the undertaking to indemnify
G.R. L-19392, other risks it has underwritten in the non-resident foreign Commonwealth Insurance Co. against liability. Said
April 14, 1965 Philippines. Alexander Howden & reinsurance undertaking is the activity that produced the
Co., Ltd., also a British corporation companies, thru a reinsurance premiums, and the same took place in
not engaged in business in this non-resident foreign the Philippines. In the first place, the reinsured, the
country, represented the aforesaid insurance broker, liabilities insured and the risks originally
British insurance companies. The pursuant to underwritten by Commonwealth Insurance Co.,
reinsurance contracts were reinsurance upon which the reinsurance premiums and
prepared and signed by the foreign contracts signed by indemnity were based, were all situated in the
reinsurers in England and sent to the reinsurers Philippines. Secondly, contrary to appellants' view,
Manila where Commonwealth abroad but signed the reinsurance contracts were perfected in the
Insurance Co. signed them. by the domestic Philippines, for Commonwealth Insurance Co.
corporation in the signed them last in Manila. And, thirdly, the parties
Pursuant to the aforesaid contracts, Philippines, subject to the reinsurance contracts in question evidently
Commonwealth Insurance Co., in to income tax or not. intended Philippine law to govern.

117
 1951, remitted P798,297.47 to
Alexander Howden & Co., Ltd., as
reinsurance premiums. In behalf of
Alexander Howden & Co., Ltd.,
Commonwealth Insurance Co. filed
in April 1952 an income tax return
declaring the sum of P798,297.47,
with accrued interest thereon in the
amount of P4,985.77, as Alexander
Howden & Co., Ltd.'s gross income
for calendar year 1951. It also paid
the Bureau of Internal Revenue
P66,112.00 income tax thereon.
On May 12, 1954, within the two-
year period provided for by law,
Alexander Howden & Co., Ltd. filed
with the Bureau of Internal Revenue
a claim for refund of the P66,112.00,
later reduced to P65,115.00,
because Alexander Howden & Co.,
Ltd. agreed to the payment of
P977.00 as income tax on the
P4,985.77 accrued interest. But the
said claim was denied.
30 Marubeni The dividends received by Marubeni
Corporation Corporation from Atlantic Gulf and
vs Pacific Co. are not income arising
CIR and CTA from the business activity in which
G.R. No. 76573, Marubeni Corporation (head office)
September 14, is engaged. Accordingly, said
2. If subject thereto, Yes. Section 53 subjects to withholding tax various
whether or not they specified income, among them, "premiums", the
are subject to generic connotation of each and every word or
withholding tax phrase composing the enumeration in Subsection
under Section 54 in (b) thereof is income. Perforce, the word
relation to Section "premiums", which is neither qualified nor defined
53 of the Tax Code. by the law itself, should mean income and should
include all premiums constituting income, whether
they be insurance or reinsurance premiums.
Assuming that reinsurance premiums are not
within the word "premiums" in Section 53, still
they may be classified as determinable and
periodical income under the same provision of law.
Reinsurance premiums, therefore, are
determinable and periodical income: determinable,
because they can be calculated accurately on the
basis of the reinsurance contracts; periodical,
inasmuch as they were earned and remitted from
time to time.
1. Whether or not 1. NO. Pursuant to Section 24(b)(2) of the Tax
the dividends Code, as amended, only profits remitted abroad by
Marubeni a branch office to its head office which are
Corporation effectively connected with its trade or business in
received from the Philippines are subject to the 15% profit
Atlantic Gulf and remittance tax. The dividends received by
118
 1989 dividends if remitted abroad are not
considered branch profits subject to
Branch Profit Remittance Tax.
Take Note: In this case, Marubeni
Japan (head office) was the investor
of AG andP Co. Manila, not the
branch office of Marubeni in Manila.
Marubeni Corporation is a Japanese
corporation licensed to engage in
business in the Philippines. When
the profits on Marubeni’s
investments in Atlantic Gulf and
Pacific Co. of Manila were declared,
a 10% final dividend tax was
withheld from it, and another 15%
profit remittance tax based on the
remittable amount after the final
10% withholding tax were paid to
the Bureau of Internal Revenue.
Marubeni Corp. now claims for a
refund or tax credit for the amount
which it has allegedly overpaid the
BIR.
31 Chamber of Real Chamber of Real Estate and Builders’
Estate and Associations, Inc. is questioning the
Builders’ constitutionality of Section 27 (E) of
Associations, Inc. Republic Act (RA) 8424 and the
vs revenue regulations (RRs) issued by
Pacific Co. are Marubeni Corporation from Atlantic Gulf and
effectively Pacific Co. are not income arising from the business
connected with its activity in which Marubeni Corporation is engaged.
conduct or business Accordingly, said dividends if remitted abroad are
in the Philippines as not considered branch profits for purposes of the
to be considered 15% profit remittance tax imposed by Section
branch profits 24(b)(2) of the Tax Code, as amended.
subject to 15% profit
remittance tax 2. Marubeni Corporation is a non-resident foreign
imposed under corporation, with respect to the transaction.
Section 24(b)(2) of Marubeni Corporation’s head office in Japan is a
the National Internal separate and distinct income taxpayer from the
Revenue Code. branch in the Philippines. The investment on
Atlantic Gulf and Pacific Co. was made for purposes
2. Whether peculiarly germane to the conduct of the corporate
Marubeni affairs of Marubeni Corporation in Japan, but
Corporation is a certainly not of the branch in the Philippines.
resident or non-
resident foreign
corporation.
Whether or not the No, Under RR 2-98, the tax base of the income tax
imposition of CWT from the sale of real property classified as ordinary
on income from assets remains to be the entity’s net income
sales of real imposed under Section 24 (resident individuals) or
properties classified Section 27 (domestic corporations) in relation to
119
 The Hon. the Bureau of Internal Revenue (BIR)
Executive to implement said provision and
Secretary Alberto those involving creditable
Romulo, the Hon. withholding taxes.
Acting Secretary
of Finance Petitioner also seeks to nullify
Juanita D. Sections 2.57.2(J) (as amended by
Amatong, and RR 6-2001) and 2.58.2 of RR 2-98,
the Hon. CIR and Section 4(a)(ii) and (c)(ii) of RR
Guillermo 7-2003, all of which prescribe the
Parayno, Jr. rules and procedures for the
G.R. No. 160756, collection of creditable withholding
March 9, 2010 tax (CWT) on the sale of real
properties categorized as ordinary
assets. Petitioner contends that
these revenue regulations are
contrary to law for two
reasons: first, they ignore the
different treatment by RA 8424 of
ordinary assets and capital assets
and second, respondent Secretary of
Finance has no authority to collect
CWT, much less, to base the CWT on
the gross selling price or fair market
value of the real properties classified
as ordinary assets.
32 Commissioner of On two occasions, Wander filed its
Internal Revenue withholding tax return and remitted
as ordinary assets Section 31 of RA 8424, i.e. gross income less
under RRs 2-98, 6- allowable deductions. The CWT is to be deducted
2001 and 7-2003, is from the net income tax payable by the taxpayer at
unconstitutional. the end of the taxable year. Precisely, Section
4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax
base for the sale of real property classified as
ordinary assets remains to be the net taxable
income.
Final withholding Tax (FWT) is imposed on the sale
of capital assets. On the other hand, CWT is
imposed on the sale of ordinary assets. The
inherent and substantial differences between FWT
and CWT disprove petitioner’s contention that
ordinary assets are being lumped together with,
and treated similarly as, capital assets in
contravention of the pertinent provisions of RA
8424.
The fact that the tax is withheld at source does not
automatically mean that it is treated exactly the
same way as capital gains. As aforementioned, the
mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyer’s act of
collecting the tax at the time of the transaction by
withholding the tax due from the income payable is
the essence of the withholding tax method of tax
collection.
Whether or not YES. Section 24 (b) (1) of the Tax Code as amended
Wander is entitled provides that the dividends received from a
120
 vs to its parent company (Glaro S.A.
Wander Ltd, a Swiss Corporation not
Philippines, Inc. engaged in trade or business in the
and the Court of Philippines) dividends on which 35%
Tax Appeals withholding tax was withheld and
G.R. No. L-68375, paid to the BIR. Later, Wander filed a
April 15, 1988 claim for refund and/or tax credit
contending that it is liable only to
15% withholding tax in accordance
with Section 24 (b) (1) of the Tax
Code as amended by PD 369 and
778.
33 Cyanamid Petitioner, Cyanamid Philippines,
Philippines, Inc. Inc., a corporation organized under
vs Philippine laws, is a wholly owned
CA, CTA, and CIR subsidiary of American Cyanamid
G.R. No. 108067, Co. based in Maine, USA. It is
January 20, 2000 engaged in the manufacture of
pharmaceutical products and
chemicals, a wholesaler of imported
finished goods, and an
importer/indentor.
On February 7, 1985, the CIR sent an
assessment letter to petitioner and
to the preferential domestic corporation liable to tax shall be 15% of
rate of 15% the dividends received, subject to the condition
withholding tax on that the country in which the non-resident foreign
dividends declared corporation is domiciled shall allow a credit against
and remitted to its the tax due from the non-resident foreign
parent corporation, corporation taxes deemed to have been paid in the
Glaro. Philippines equivalent to 20% which represents the
difference between the regular tax (35%) in
corporations and the tax (15%) dividends.
In this case, Switzerland did not impose any tax on
the dividends received by Glaro from the
Philippines. It follows then that the condition
imposed under the above-mentioned section is
satisfied. Hence, Wander is entitled to 15%
withholding tax rate and the BIR should make a
refund and/or tax credit.
WHETHER THE Sec. 259 of the old National Internal Revenue Code
RESPONDENT of 1977. The provision discouraged tax avoidance
COURT ERRED IN through corporate surplus accumulation. When
HOLDING THAT THE corporations do not declare dividends, income
PETITIONER IS taxes are not paid on the undeclared dividends
LIABLE FOR THE received by the shareholders. The tax on improper
ACCUMULATED accumulation of surplus is essentially a penalty tax
EARNINGS TAX FOR designed to compel corporations to distribute
THE YEAR 1981.8 earnings so that the said earnings by shareholders
could, in turn, be taxed.
Relying on decisions of the American Federal
Courts, petitioner stresses that the accumulated
121
demanded the payment of
deficiency income tax of one
hundred nineteen thousand eight
hundred seventeen (P119,817.00)
pesos for taxable year 1981.
On March 4, 1985, petitioner
protested the assessments
particularly, (1) the 25% Surtax
Assessment of P3,774,867.50; (2)
1981 Deficiency Income Assessment
of P119,817.00; and 1981 Deficiency
Percentage Assessment of
P8,846.72.4 Petitioner, through its
external accountant, Sycip, Gorres,
Velayo & Co., claimed, among
others, that the surtax for the undue
accumulation of earnings was not
proper because the said profits were
retained to increase petitioner's
working capital and it would be used
for reasonable business needs of the
company. Petitioner contended that
it availed of the tax amnesty under
Executive Order No. 41, hence
enjoyed amnesty from civil and
criminal prosecution granted by the
law.
On October 20, 1987, the CIR in a
letter addressed to SGV & Co.,
earnings tax does not apply to Cyanamid, a wholly
owned subsidiary of a publicly owned
company.10 Specifically, petitioner citesGolconda
Mining Corp. vs. Commissioner, 507 F.2d 594,
whereby the U.S. Ninth Circuit Court of Appeals
had taken the position that the accumulated
earnings tax could only apply to a closely held
corporation.
The amendatory provision of Section 25 of the
1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of
improperly accumulated tax: (a) banks; (b) non-
bank financial intermediaries; (c) insurance
companies; and (d) corporations organized
primarily and authorized by the Central Bank of the
Philippines to hold shares of stocks of banks.
Petitioner does not fall among those exempt
classes. Besides, the rule on enumeration is that
the express mention of one person, thing, act, or
consequence is construed to exclude all
others.13 Laws granting exemption from tax are
construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power.14 Taxation is
the rule and exemption is the exception.15 The
burden of proof rests upon the party claiming
exemption to prove that it is, in fact, covered by
the exemption so claimed,16 a burden which
petitioner here has failed to discharge.
Another point raised by the petitioner in objecting
122
refused to allow the cancellation of
the assessment notices and
rendered its resolution.
Petitioner appealed to the Court of
Tax Appeals. During the pendency of
the case, however, both parties
agreed to compromise the 1981
deficiency income tax assessment of
P119,817.00. Petitioner paid a
reduced amount — twenty-six
thousand, five hundred seventy-
seven pesos (P26,577.00) — as
compromise settlement. However,
the surtax on improperly
accumulated profits remained
unresolved.
Petitioner claimed that CIR's
assessment representing the 25%
surtax on its accumulated earnings
for the year 1981 had no legal basis
for the following reasons: (a)
petitioner accumulated its earnings
and profits for reasonable business
requirements to meet working
capital needs and retirement of
indebtedness; (b) petitioner is a
wholly owned subsidiary of
American Cyanamid Company, a
corporation organized under the
to the assessment, is that increase of working
capital by a corporation justifies accumulating
income. Petitioner asserts that respondent court
erred in concluding that Cyanamid need not infuse
additional working capital reserve because it had
considerable liquid funds based on the 2.21:1 ratio
of current assets to current liabilities. Petitioner
relies on the so-called "Bardahl" formula, which
allowed retention, as working capital reserve,
sufficient amounts of liquid assets to carry the
company through one operating cycle. The
"Bardahl"17 formula was developed to measure
corporate liquidity. The formula requires an
examination of whether the taxpayer has sufficient
liquid assets to pay all of its current liabilities and
any extraordinary expensesreasonably anticipated,
plus enough to operate the business during one
operating cycle. Operating cycle is the period of
time it takes to convert cash into raw materials,
raw materials into inventory, and inventory into
sales, including the time it takes to collect payment
for the
sales.18
Using this formula, petitioner contends, Cyanamid
needed at least P33,763,624.00 pesos as working
capital. As of 1981, its liquid asset was only
P25,776,991.00. Thus, petitioner asserts that
Cyanamid had a working capital deficit of
P7,986,633.00.19 Therefore, the P9,540,926.00
accumulated income as of 1981 may be validly
123
laws of the State of Maine, in the
United States of America, whose
shares of stock are listed and traded
in New York Stock Exchange. This
being the case, no individual
shareholder income taxes by
petitioner's accumulation of
earnings and profits, instead of
distribution of the same.
accumulated to increase the petitioner's working
capital for the succeeding year.
We note, however, that the companies where the
"Bardahl" formula was applied, had operating
cycles much shorter than that of petitioner.
In Atlas Tool Co., Inc, vs. CIR,20 the company's
operating cycle was only 3.33 months or 27.75% of
the year. In Cataphote Corp. of Mississippi
vs. United States,21 the corporation's operating
cycle was only 56.87 days, or 15.58% of the year. In
the case of Cyanamid, the operating cycle was
288.35 days, or 78.55% of a year, reflecting that
petitioner will need sufficient liquid funds, of at
least three quarters of the year, to cover the
operating costs of the business. There are
variations in the application of the "Bardahl"
formula, such as average operating cycle or peak
operating cycle. In times when there is no
recurrence of a business cycle, the working capital
needs cannot be predicted with accuracy. As
stressed by American authorities, although the
"Bardahl" formula is well-established and routinely
applied by the courts, it is not a precise rule. It is
used only for administrative
convenience.22 Petitioner's application of the
"Bardahl" formula merely creates a false illusion of
exactitude.
Other formulas are also used, e.g. the ratio of
current assets to current liabilities and the
124
adoption of the industry standard.23 The ratio of
current assets to current liabilities is used to
determine the sufficiency of working capital.
Ideally, the working capital should equal the
current liabilities and there must be 2 units of
current assets for every unit of current liability,
hence the so-called "2 to 1" rule.24

As of 1981 the working capital of Cyanamid was

P25,776,991.00, or more than twice its current
liabilities. That current ratio of Cyanamid,
therefore, projects adequacy in working capital.
Said working capital was expected to increase
further when more funds were generated from the
succeeding year's sales. Available income covered
expenses or indebtedness for that year, and there
appeared no reason to expect an impending
"working capital deficit" which could have
necessitated an increase in working capital, as
rationalized by petitioner.

If the CIR determined that the corporation avoided

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

125
In order to determine whether profits are
accumulated for the reasonable needs to avoid the
surtax upon shareholders, it must be shown that
the controlling intention of the taxpayer is
manifest at the time of accumulation, not
intentions declared subsequently, which are mere
afterthoughts.28 Furthermore, the accumulated
profits must be used within a reasonable time after
the close of the taxable year. In the instant case,
petitioner did not establish, by clear and
convincing evidence, that such accumulation of
profit was for the immediate needs of the business.

In the present case, the Tax Court opted to

determine the working capital sufficiency by using
the ratio between current assets to current
liabilities. The working capital needs of a business
depend upon nature of the business, its credit
policies, the amount of inventories, the rate of the
turnover, the amount of accounts receivable, the
collection rate, the availability of credit to the
business, and similar factors. Petitioner, by
adhering to the "Bardahl" formula, failed to
impress the tax court with the required
definiteness envisioned by the statute. We agree
with the tax court that the burden of proof to
establish that the profits accumulated were not
beyond the reasonable needs of the company,
remained on the taxpayer. This Court will not set
aside lightly the conclusion reached by the Court of

126
Tax Appeals which, by the very nature of its
function, is dedicated exclusively to the
consideration of tax problems and has necessarily
developed an expertise on the subject, unless
there has been an abuse or improvident exercise of
authority.31 Unless rebutted, all presumptions
generally are indulged in favor of the correctness
of the CIR's assessment against the taxpayer. With
petitioner's failure to prove the CIR incorrect,
clearly and conclusively, this Court is constrained
to uphold the correctness of tax court's ruling as
affirmed by the Court of Appeals.

WHEREFORE, the instant petition is DENIED, and

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

127