involved therein are export products, invisibles, receipts of
1. CONWI vs CTA, 213 SCRA 83, August 31, 1992 foreign exchange, foreign exchange payments, new
FACTS: Petitioners were Filipino citizens who were
employees of P&G Phils. During 1970 to 1971, they were
assigned to other subsidiaries of P&G outside RP, thus,
were paid in US dollars as compensation for services in
their foreign assignments. It is claimed that they earned
and spent their money exclusively abroad, and that
they did not remit money back into the Philippines
during the time they were outside of the country earning in
dollars.
So when they filed their income tax returns (ITR) for 1970,
they computed the tax due by applying the dollar-to-peso
conversation on the basis of the floating rate ordained
under BIR Ruling No. 70-27 (rates under Revenue
Memorandum Circulars Nos. 7-71 and 41-71) dated May
14, 1970. The same conversion rate was used for their
1971 ITR. However, on February 8, 1973, the petitioners
filed with CIR an amended ITR for 1970 & 1971 which
used par value of the peso as prescribed in RA 265,
Sec.48 in relation to CA 699, Sec.6 for converting their
dollar income into pesos for purposes of computing and
paying the corresponding income tax due from them. The
amended ITR resulted into alleged
overpayments/refund and/or tax credit. Therefore, the
petitioners claimed for refund from CIR.
CTA: the proper conversion rate for the purpose of
reporting and paying the Philippine income tax on the
dollar earnings of petitioners are the rates prescribed
under RMC Nos. 7-71 and 41-71. Claim for refund denied.
ISSUE: WON the petitioners are entitled to refund (What
exchange rate should be used to determine the peso
equivalent of the foreign earnings of petitioners for income
tax purposes)
HELD: NO. The RMC circulars applied to them.
Definition of Income: an amount of money coming to a
person or corporation within a specified time, whether as
payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its
equivalent. Income can also be thought of as a flow of the
fruits of one's labor.
Definition of foreign exchange transactions (petitioners
claim that their dollar earnings were not foreign
exchange transactions): a transaction in foreign
exchange, foreign exchange being "the conversion of an
amount of money or currency of one country into an
equivalent amount of money or currency of another."
There was no conversion (petitioners earned dollars, also
spent dollars during their stay abroad) so no foreign
exchange transaction.
On what should be the basis for conversion: RMCs 7-
71 and 41-71
CB Circular No. 289: shows that the subject matters
foreign borrowing and investments nothing by way of
income tax payments.
Thus, petitioners are in error by concluding that since C.B.
Circular No. 289 does not apply to them, the par value of
the peso should be the guiding rate used for income tax
purposes.
RMCs 7-71 and 41-71: issued to prescribe a uniform rate
of exchange from US dollars to Philippine pesos for
INTERNAL REVENUE TAX PURPOSES for the years
1970 and 1971, respectively. Said revenue circulars were
a valid exercise of the authority given to the Secretary of
Finance by the Legislature which enacted the Internal
Revenue Code. And these are presumed to be a valid
interpretation of said code until revoked by the Secretary
of Finance himself. Petitioners, who were arguing that
there were no remittances and acceptances of their
salaries and wages in US dollars into RP, they are
exempt from the coverage of the RMCs, are NOT
EXEMPT from the RMCs as they are citizens of the
Philippines, and their income, within or without, and in
these cases wholly without, are subject to income tax.
Sec. 21, NIRC, as amended,does not brook any
exemption.
2. COMMISSIONER OF INTERNAL REVENUE VS
BRITISH OVERSEAS AIRWAYS CORPORATION AND
COURT OF TAX APPEALS, GR L-65773-73, April 30,
1987
Facts: BOAC is a 100% British Government owned
corporation organized and existing under the laws of the
United Kingdom It is engaged in the international airline
business. During the periods covered by the disputed
assessments for deficiency income taxes, it is admitted
that BOAC had no landing rights for traffic purposes in
the Philippines, and was not granted a Certificate of
public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB),
except for a nine month period, partly in 1961 and partly in
1962, when it was granted a temporary landing permit by
the CAB. Consequently, it did not carry passengers
and/or cargo to or from the Philippines, although during
the period covered by the assessments, it maintained a
general sales agent in the Philippines — Wamer Barnes
and Company, Ltd., and later Qantas Airways — which
was responsible for selling BOAC tickets covering
passengers and cargoes.
BOAC paid under protest and filed a claim for refund
which was denied by the CIR. CTA however reversed.
Thus this petition.
Issue: Whether or not the revenue derived by private
respondent British Overseas Airways Corporation (BOAC)
from sales of tickets in the Philippines for air
transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and,
accordingly, taxable.

Ruling: BOAC ordered to pay taxes, CLAIM FOR
REFUND DENIED.
RATIO: BOAC, during the periods covered by the subject
assessments, maintained a general sales agent in the
Philippines, That general sales agent, from 1959 to 1971,
"was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips — each
trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and
(4) consequently allocating to the various airline
companies on the basis of their participation in the
services rendered through the mode of interline settlement
as prescribed by Article VI of the Resolution No. 850 of the
IATA Agreement." Those activities were in exercise of the
functions which are normally incident to, and are in
progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the
regular sale of tickets, its main activity, is the very lifeblood
of the airline business, the generation of sales being the
paramount objective. There should be no doubt then
that BOAC was "engaged in" business in the
Philippines through a local agent during the period
covered by the assessments. Accordingly, it is a
resident foreign corporation subject to tax upon its
total net income received in the preceding taxable
year from all sources within the Philippines.
The source of an income is the property, activity or service
that produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient
that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income.
The tickets exchanged hands here and payments for fares
were also made here in Philippine currency. The site of
the source of payments is the Philippines. The flow of
wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection,
the flow of wealth should share the burden of supporting
the government.
True, Section 37(a) of the Tax Code, which enumerates
items of gross income from sources within the Philippines,
namely: (1) interest, (21) dividends, (3) service, (4) rentals
and royalties, (5) sale of real property, and (6) sale of
personal property, does not mention income from the sale
of tickets for international transportation. However, that
does not render it less an income from sources within the
Philippines. Section 37, by its language, does not intend
the enumeration to be exclusive. It merely directs that the
types of income listed therein be treated as income from
sources within the Philippines. A cursory reading of the
section will show that it does not state that it is an all
inclusive enumeration, and that no other kind of income
may be so considered. "
BOAC, however, would impress upon this Court that
income derived from transportation is income for
services, with the result that the place where the
services are rendered determines the 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 Tax Court upholds that
stand in the joint Decision under review.
The absence of flight operations to and from the
Philippines is not determinative of the source of income or
the site 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 in
these cases were sold in the Philippines and the revenue
therefrom was derived from an activity regularly pursued
within the Philippine business. 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.
3. JAVIER VS CA, 199 SCRA
FACTS: Victoria, the wife of respondent Melchor Javier,
received from Prudential the amount of $999,973.70,
remitted by her sister through a bank in US, Mellon Bank.
Mellon Bank claims that its remittance was a clerical
error and should have been US$1,000.00 only, and
praying that the excess be returned. Respondent was
charged for estafa. On Mar 15, 1978, respondent filed his
Income Tax Return for 1977 showing a gross income of
P53,053.38 and a net income of P48,053.88 and stating in
the footnote of the return that "Taxpayer was recipient of
some money received from abroad which he
presumed to be a gift but turned out to be an error and
is now subject of litigation”. Respondent received a
letter from acting CIR together with income assessment
notices for the years 1976 and 1977, demanding that
petitioner (private respondent herein) pay on or before
December 15, 1980 the amount of P1,615.96 and
P9,287,297.51 as deficiency assessments for the years
1976 and 1977 respectively. Respondent wrote a letter
BIR that he was paying the deficiency for 1976 but
denying the undeclared income for 1977 and requested
that the assessment for 1977 be made to await final
court decision on the case filed against him for filing
an allegedly fraudulent return. CIR replied that the
erroneous remittance is still taxable and imposed a
50%fraud penalty. Respondent filed an appeal in CTA.
CTA held that there is no fraud.
ISSUE: WON respondent is liable for 50% fraud penalty.
RULING: "Taxpayer was the recipient of some money
from abroad which he presumed to be a gift but turned out
to be an error and is now subject of litigation that it was an
"error or mistake of fact or law" not constituting fraud, that
such notation was practically an invitation for investigation
and that Javier had literally "laid his cards on the table." In
the case at bar, there was no actual and intentional fraud
through willful and deliberate misleading of the
government agency concerned, the Bureau of Internal
Revenue, headed by the herein petitioner. The
government was not induced to give up some legal right
and place itself at a disadvantage so as to prevent its
lawful agents from proper assessment of tax liabilities
because Javier did not conceal anything. Error or mistake
of law is not fraud. The imposition of the fraud penalty in
this case is not justified by the extant facts. Javier may be
guilty of swindling charges, perhaps even for greed by
spending most of the money he received, but the records
lack a clear showing of fraud committed because he did
not conceal the fact that he had received an amount of
money although it was a "subject of litigation."
4. Commissioner of Internal Revenue vs W.E.
Lednicky and Maria Lednicky
GR Nos. L-18262 and L-21434, 1964
FACTS: Spouses are both American citizens residing in
the Philippines and have derived all their income from
Philippine sources for taxable years in question. On
March, 1957, filed their ITR for 1956, reporting gross
income of P1,017,287.65 and a net income of P
733,809.44. On March 1959, file an amended claimed for
the deduction of P 205,939.24 paid in 1956 to the United
States government as federal income tax of 1956.
ISSUE: WON a citizen of the United States residing in the
Philippines, who derives wholly from sources within the
Philippines, may deduct his gross income from the income
taxes he has paid to the United States government for the
said taxable year.
RULING: The decision of the CTA is reversed. The
disallowance of the refunds claimed by the respondents is
AFFIRMED.
RATIO: An alien resident who derives income wholly from
sources within the Philippines may not deduct from gross
income the income taxes he paid to his home country for
the taxable year. The right to deduct foreign income taxes
paid given only where alternative right to tax credit
exists.
Section 30 of the NIRC, Gross Income “Par. C (3): Credits
against tax per taxes of foreign countries.
If the taxpayer signifies in his return his desire to have the
benefits of this paragraph, the tax imposed by this shall be
credited with: Paragraph (B), Alien resident of the
Philippines; and, Paragraph C (4), Limitation on credit.”
An alien resident not entitled to tax credit for foreign
income taxes paid when his income is derived wholly
from sources within the Philippines.
Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same
governmental entity. In the present case, although the
taxpayer would have to pay two taxes on the same
income but the Philippine government only receives
the proceeds of one tax, there is no obnoxious double
taxation.
5. CIR VS ISABEL CULTURAL CORP GR 172231,
2/12/07
FACTS: On February 23, 1990, ICC, a domestic
corporation, received from the BIR Assessment Notice for
deficiency income tax in the amount of P333,196.86, and
Assessment Notice for deficiency expanded withholding
tax in the amount of P4,897.79 both for the taxable year
1986. The CTA rendered a decision canceling and setting
aside the assessment notices issued against ICC.
Petitioner filed a petition for review with the Court of
Appeals, which affirmed the CTA decision.
ISSUE: The issue for resolution is whether the Court of
Appeals correctly: (1) sustained the deduction of the
expenses for professional services from ICC’s gross
income. (NO)
RULING: NO. WHEREFORE, the petition is PARTIALLY
GRANTED. The September 30, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED
with the MODIFICATION that Assessment Notice No.
FAS-1-86-90-000680, which disallowed the expense
deduction of Isabela Cultural Corporation for professional
and security services, is declared valid only insofar as the
expenses for the professional fees of SGV & Co. and of
the law firm, Bengzon Zarraga Narciso Cudala Pecson
Azcuna & Bengson, are concerned.
RATIO: The requisites for the deductibility of ordinary and
necessary trade, business, or professional expenses, like
expenses paid for legal and auditing services, are: (a) the
expense must be ordinary and necessary; (b) it must
have been paid or incurred during the taxable year; (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 requisite that it must have been paid or incurred
during the taxable year is further qualified by Section 45 of
the National Internal Revenue Code (NIRC) which states
that: "[t]he deduction provided for in this Title shall be
taken for the taxable year in which ‘paid or accrued’ or
‘paid or incurred’, dependent upon the method of
accounting upon the basis of which the net income is
computed x x x". In the instant case, the accounting
method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides
that under the accrual method of accounting, expenses
not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as
deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain
expenses and other allowable deductions for the
current year but failed to do so cannot deduct the
same for the next year.
The accrual 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.
However, the test does not demand that the amount of
income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to
compute the amount with reasonable accuracy. The all-
events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is
satisfied where a computation may be unknown, but is
not as much as unknowable, within the taxable year.
Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate
amount.
Accrual method of accounting presents largely a question
of fact; such that the taxpayer bears the burden of proof
of establishing the accrual of an item of income or
deduction. Since a deduction for income tax purposes
partakes of the nature of a tax exemption, then it must
also be strictly construed.
The expenses for professional fees consist of
expenses for legal and auditing services. 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 as well as the compensation for
its legal services. The failure to determine the exact
amount of the expense during the taxable year when they
could have been claimed as deductions cannot thus be
attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the exercise of due
diligence could have inquired into the amount of their
obligation to the firm, especially so that it is using the
accrual method of accounting. For another, it could have
reasonably determined the amount of legal and retainer
fees owing to its familiarity with the rates charged by their
long time legal consultant. Whether ICC exercised
reasonable diligence to inquire about the amount of its
liability, or whether it does or does not possess the
information necessary to compute the amount of said
liability with reasonable accuracy, are questions of fact
which ICC never established.
In the same vein, the professional fees of SGV & Co. for
auditing the financial statements of ICC for the year 1985
cannot be validly claimed as expense deductions in 1986.
This is so because ICC failed to present evidence showing
that even with only "reasonable accuracy," as the standard
to ascertain its liability to SGV & Co. in the year 1985, it
cannot determine the professional fees which said
company would charge for its services.
6. FERNANDEZ VS CIR, 29 SCRA 553
Facts: Four cases involve two decisions of the Court of
Tax Appeals determining the taxpayer's income tax liability
for the years 1950 to 1954 and for the year 1957. Both the
taxpayer and the Commissioner of Internal Revenue, as
petitioner and respondent in the cases a quo respectively,
appealed from the Tax Court's decisions, insofar as their
respective contentions on particular tax items were therein
resolved against them. Since the issues raised are
interrelated, the Court resolves the four appeals in this
joint decision.
The taxpayer, Fernandez Hermanos, Inc., is a domestic
corporation organized for the principal purpose of
engaging in business as an " investment company " with
main office at Manila. Upon verification of the taxpayer's
income tax returns for the period in question, the
Commissioner of Internal Revenue assessed against the
taxpayer the sums of P13,414.00, P119,613.00,
P11,698.00, P6,887.00 and P14,451.00 as alleged
deficiency income taxes for the year s 1950, 1951, 1952,
1953 and 1954, respectively. Said assessments were the
result of alleged discrepancies found upon the
examination and verification of the taxpayer's income tax
returns for the said years, summarized by the Tax Court in
its decision of June 10, 1963 in CTA Case No. 787.
Issues:
1. The correctness of the Tax Court's rulings with respect
to the disputed items of disallowances
2. Whether or not the government's right to collect the
deficiency income taxes in question has already
prescribed. (This is the important issue)
Ruling: Judgment of Court of Tax Appeals is modified.
Ratio:
Issue 1:
1. Re allowances/disallowances of losses.
a. Allowance of losses in Mati Lumber Co. (1950). - The
Commissioner of Internal Revenue questions the Tax
Court's allowance of the taxpayer's writing off as worthless
securities in its 1950 return the sum of P8,050.00
representing the cost of shares of stock of Mati Lumber
Co. acquired by the taxpayer on January 1, 1948, on the
ground that the worthlessness of said stock in the year
1950 had not been clearly established. The Court,
however, found that "the company ceased operations in
1949 when its Manager and owner, a certain Mr.
Rocamora, left for Spain ,where he subsequently died.
When the company ceased to operate, it had no assets, in
other words, completely insolvent. This information as to
the insolvency of the Company — reached (the taxpayer)
in 1950," when it properly claimed the loss as a deduction
in its 1950 tax return, pursuant to Section 30(d) (4) (b) or
Section 30 (e) (3) of the National Internal Revenue Code.
b. Disallowance of losses in or bad debts of Palawan
Manganese Mines, Inc. - It will be noted that in giving
advances to Palawan Manganese Mine Inc., petitioner did
not expect to be repaid. It is true that some testimonial
evidence was presented to show that there was some
agreement that the advances would be repaid, but no
documentary evidence was presented to this effect. The
memorandum agreement signed by the parties appears to
be very clear that the consideration for the advances
made by petitioner was 15% of the net profits of Palawan
Manganese Mines, Inc. In other words, if there were no
earnings or profits, there was no obligation to repay those
advances. It has been held that the voluntary advances
made without expectation of repayment do not result
in deductible losses.
c. Disallowance of losses in Balamban Coal Mines (1950
and 1951). - The Court sustains the Tax Court's
disallowance of the sums of P8,989.76 and P27,732.66
spent by the taxpayer for the operation of its Balamban
coal mines in Cebu in 1950 and 1951, respectively, and
claimed as losses in the taxpayer's returns for said years.
The Tax Court correctly held that the losses "are
deductible in 1952, when the mines were abandoned, and
not in 1950 and 1951, when they were still in operation.
(d) and (e) Allowance of losses in Hacienda Dalupiri (1950
to 1954) and Hacienda Samal (19511952). - From the
evidence, we are convinced that the Hacienda Dalupiri
was operated by petitioner for business and not pleasure.
It was mainly a cattle farm, although a few race horses
were also raised. It does not appear that the farm was
used by petitioner for entertainment, social activities, or
other nonbusiness purposes. Therefore, it is entitled to
deduct expenses and losses in connection with the
operation of said farm.
2. Disallowance of excessive depreciation of buildings
(19501954). – Taxpayer has no adequate proof of the
correctness of the taxpayer's claim that the depreciable
assets or buildings in question had a useful life only of 10
years so as to justify its 10% depreciation per annum
claim, such finding being supported by the record.
3. Taxable increase in net worth (19501951) - The
principle underlying the taxability of an increase in the net
worth of a taxpayer rests on the theory that such an
increase in net worth, if unreported and not explained by
the taxpayer, comes from income derived from a taxable
source. In this case, the increase in the net worth of
petitioner for 1950 to the extent of P30,050.00 was not the
result of the receipt by it of taxable income. It was merely
the outcome of the correction of an error in the entry in its
books relating to its indebtedness to the Manila Insurance
Company.
4. Gain realized from sale of real property (1950). - As
found by the Tax Court, the evidence shows that this
property was acquired in 1926 for P11,852.74, and was
sold in 1950 for P60,000.00, apparently, resulting in a gain
of P48,147.26. The taxpayer reported in its return a gain of
P37,000.00, or a discrepancy of P11,147.26. It was
sufficiently proved from the taxpayer's books that after
acquiring the property, the taxpayer had made
improvements totalling P11,147.26, accounting for the
apparent discrepancy in the reported gain. In other words,
this figure added to the original acquisition cost of
P11,852.74 results in a total cost of P23,000.00, and the
gain derived from the sale of the property for P60,000.00
was correctly reported by the taxpayer at P37,000.00.
Issue 2: This Court has consistently held that "a judicial
action for the collection of a tax is begun by the filing
of a complaint with the proper court of first instance,
or where the assessment is appealed to the Court of
Tax Appeals, by filing an answer to the taxpayer's
petition for review wherein payment of the tax is
prayed for." This is but logical for where the taxpayer
avails of the right to appeal the tax assessment to the
Court of Tax Appeals, the said Court is vested with the
authority to pronounce judgment as to the taxpayer's
liability to the exclusion of any other court. In the present
case, regardless of whether the assessments were made
on February 24 and 27, 1956, as claimed by the
Commissioner, or on December 27, 1955 as claimed by
the taxpayer, the government's right to collect the taxes
due has clearly not prescribed, as the taxpayer's appeal or
petition for review was filed with the Tax Court on May 4,
1960, with the Commissioner filing on May 20, 1960 his
Answer with a prayer for payment of the taxes due, long
before the expiration of the fiveyear period to effect
collection by judicial action counted from the date of
assessment.
7. LIMPIAN INVESTMENT CORP VS COM 17 SCRA 703
FACTS: Petitioner is engage in leasing properties.
Spouses Lim own and control 99% of its total paid-up
capital. Petitioner corporation duly filed its 1956 and 1957
income tax returns, reporting therein net incomes of
P3,287.81 and P11,098.36, respectively. Sometime in
1958 and 1959, the examiners of BIR discovered and
ascertained that petitioner had underdeclared its
rental incomes by P20,199.00 and P81,690.00 during
and had claimed excessive depreciation of its
buildings. On the basis of these findings, respondent CIR
issued its letter-assessment and demand for payment of
deficiency income tax and surcharge against petitioner.
Petitioner requested CIR to reconsider the above
assessment but the latter denied said request and
reiterated its original assessment. Hence, the corporation
filed its petition for review before the Tax Appeals court,
questioning the correctness and validity of the assessment
of CIR.
The corporation’s sole witness, Solis, admitted to some
undeclared rents in 1956 and 1957, and that some
balances were not collected by the corporation in 1956
because the lessees refused to recognize and pay rent
to the new owners and that the corp’s president
Isabelo Lim collected some rent and reported it in his
personal income statement, but did not turn over the
rent to the corporation. Petitioners also assert that the
portions of these underdeclared rents are yet to be
collected by the previous owners and turned over or
received by the corporation.
In addition,a certain tenant (Go Tong) deposited in court
his rentals (P10,800.00), and thus, the corporation had no
actual or constructive control and which were withdrawn
only in 1958. And that a sub-tenant paid P4,200.00 which
ought not be declared as rental income in 1957. Tax Court
upheld respondent Commissioner's assessment and
demand for deficiency income tax.
ISSUE: WON BIR was correct in its assessment
RULING: Yes. Petitioner having admitted, through its own
witness that it had undeclared unreported rental contrary
to its original claim to the revenue authorities, it was
incumbent upon it to establish the remainder of its
pretensions by clear and convincing evidence, that in
the case is lacking. With respect to the balance, which
petitioner denied having unreported in the disputed tax
returns, the excuse that Isabelo and his mother retained
ownership of the lands and only later transferred or
disposed of the ownership of the buildings existing thereon
to petitioner corporation, is not only unusual but
uncorroborated by the alleged transferors, or by any
document or unbiased evidence.
The withdrawal in 1958 of the deposits in court pertaining
to the 1957 rental income is no sufficient justification for
the non-declaration of said income in 1957, since the
deposit was resorted to due to the refusal of petitioner to
accept the same, and was not the fault of its tenants;
hence, petitioner is deemed to have constructively
received such rentals in 1957. The payment by the sub-
tenant in 1957 should have been reported as rental
income in said year, since it is income just the same
regardless of its source.
On the third assigned error, suffice it to state that this
Court has already held that "depreciation is a question of
fact and is not measured by theoretical yardstick, but
should be determined by a consideration of actual facts",
and the findings of the Tax Court in this respect should not
be disturbed when not shown to be arbitrary or in abuse of
discretion
8. EL ORIENTE VS POSADAS 56 PHIL 147
Facts: Plaintiff El Oriente is a domestic corporation duly
organized and existing under and by virtue of the laws of
the Philippine Islands. In order to protect itself against the
loss that it might suffer by reason of the death of its
manager, A. Velhagen, who had had more than thirty-
five (35) years of experience in the manufacture of
cigars in the Philippine Islands, and whose death would
be a serious loss to the plaintiff, procured from the
Manufacturers Life Insurance Co., of Toronto, Canada,
thru its local agent E.E. Elser, an insurance policy on the
life of the said A. Velhagen for the sum of $50,000, United
States currency. Plaintiff designated itself to be the
sole beneficiary of the life insurance policy, paid from
its funds all the insurance premiums due thereon,
charged as expenses of its business all the said
premiums and deducted the same from its gross
incomes as reported in its annual income tax returns,
which deductions were allowed by the defendant upon
a showing made by the plaintiff that such premiums
were legitimate expenses of its (plaintiff's) business.
Upon the death of said A. Velhagen in the year 1929, the
plaintiff received all the proceeds of the said life insurance
policy.
The defendant Collector of Internal Revenue assessed
and levied the sum of P3,148.74 as income tax on the
proceeds of the insurance policy mentioned in the
preceding paragraph, which tax the plaintiff paid under
instant protest on July 2, 1930.
Petitioner filed a complaint with regard to payment under
protest. But, the lower court ruled in favor CIR.
Issue: Whether the proceeds of insurance taken by a
corporation on the life of an important official to indemnify
it against loss in case of his death, are taxable as income
under the Philippine Income Tax Law
Ruling: No, insurance proceeds are not taxable.
Ratio: What the plaintiff received was in the nature of an
indemnity for the loss which it actually suffered
because of the death of its manager.
To quote the exact words in the cited case of Chief Justice
Taft delivering the opinion of the court:
It is earnestly pressed upon us that proceeds of life
insurance paid on the death of the insured are in fact
capital, and cannot be taxed as income under the
Sixteenth Amendment. Eisner vs. Macomber, 252 U.S.,
189, 207; Merchants' Loan & Trust Co. vs. Smietanka, 255
U.S., 509, 518. We are not required to meet this question.
It is enough to sustain our construction of the act to say
that proceeds of a life insurance policy paid on the death
of the insured are not usually classed as income.
. . . Life insurance in such a case is like that of fire and
marine insurance, — a contract of indemnity. Central Nat.
Bank vs. Hume, 128 U.S., 195. The benefit to be gained
by death has no periodicity. It is a substitution of money
value for something permanently lost, either in a house, a
ship, or a life. Assuming, without deciding, that Congress
could call the proceeds of such indemnity income, and
validly tax it as such, we think that, in view of the popular
conception of the life insurance as resulting in a single
addition of a total sum to the resources of the beneficiary,
and not in a periodical return, such a purpose on its part
should be express, as it certainly is not here.
Considering, therefore, the purport of the stipulated facts,
considering the uncertainty of Philippine law, and
considering the lack of express legislative intention to
tax the proceeds of life insurance policies paid to
corporate beneficiaries, particularly when in the
exemption in favor of individual beneficiaries in the
chapter on this subject, the clause is inserted "exempt
from the provisions of this law," we deem it
reasonable to hold the proceeds of the life insurance
policy in question as representing an indemnity and
not taxable income. The foregoing pronouncement will
result in the judgment being reversed and in another
judgment being rendered in favor of the plaintiff and
against the defendant for the sum of P3,148.74. So
ordered, without costs in either instance.
9. RE: REQUEST OF ATTY. BERNARDO ZIALCITA
FOR RECONSIDERATION OF THE ACTION OF THE
FINANCIAL AND BUDGET OFFICE
A.M. No. 90-6-015-SC October 18, 1990
FACTS:
Atty. Bernardo Zialcita retired from the Judiciary and
claimed the deducted amounts he was entitled to
(specifically the Terminal Leave Pay) on occasion of his
retirement.
On August 23, 1990
The Supreme Court made a Resolution regarding the
retired lawyer’s request. The Resolution stated that his
terminal leave pay is not part of his salary but rather a
part of the phrase "other similar benefits received by
retiring employees and workers", within the meaning
of Section 1 of PD No. 220, ergo, not subject to
income tax. This is further supported by Sec. 3 of PD No.
985 particularly Sec. 3 (a) which makes it clear that the
actual service is the period of time for which pay has been
received, excluding the period covered by terminal leave.
September 18, 1990
The Commissioner of Internal Revenue filed a Motion for
Reconsideration against the Resolution.
ISSUE:
W/N Terminal Leave Pay (TLP) is taxable
RULING: NO, TLP is NOT taxable.
The Supreme Court DENIED the CIR’s motion citing the
following reasons (in Roman Numerals):
I.
Atty. Zialcita opted to retire under the provisions of
Republic Act 660, which is incorporated in Commonwealth
Act No. 186. Section 12 (c) of C.A. 186 states:
… Officials and employees retired under this Act shall be
entitled to the commutation of the unused vacation leave
and sick leave…
Section 28 (c) of the same Act, in turn, provides:
(c) Except as herein otherwise provided, the
Government Service Insurance System, all benefits
granted under this Act, and all its forms and
documents required of the members shall be exempt
from all types of taxes, documentary stamps, duties
and contributions, fiscal or municipal, direct or
indirect,established or to be established; …
Applying the two aforesaid provisions, it can be concluded
that the amount received by Atty. Zialcita as a result of the
conversion of these unused leaves into cash is exempt
from income tax.
II.
The commutation of leave credits is commonly known
as terminal leave. Terminal leave is applied for by an
officer or employee who retires, resigns or is
separated from the service through no fault of his/her
own. Since terminal leave is applied for by an officer or
employee who has already severed his connection with
his employer and who is no longer working, then it
follows that the terminal leave pay, which is the cash
value of his accumulated leave credits, is no longer
compensation for services rendered. It cannot be
viewed as salary, thus, cannot be subject to income
tax.
III.
E.O. No. 1077, Section 1, provides:
Any officer or employee of the government who retires or
voluntarily resigns or is separated from the service through
no fault of his own and whose leave benefits are not
covered by special law, shall be entitled to the
commutation of all the accumulated vacation and/or sick
leaves to his credit (TLP),
Meanwhile, Section 28(b) 7(b) of the National Internal
Revenue Code (NIRC) states:
Sec. 28 (b) — Exclusions from gross income. — The
following items shall not be included in gross income
and shall be exempt from taxation under this title:
(7) Retirement benefits, pensions, gratuities, etc.
(b) Any amount received by an official or employee or by
his heirs from the employer as a consequence of
separation of such official or employee from the service of
the employer due to death, sickness or other physical
disability or for any cause beyond the control of the said
official or employee.
In the case of Atty. Zialcita, he rendered government
service from March 13, 1962 up to February 15, 1990. The
next day, or on February 16, 1990, he reached the
compulsory retirement age of 65 years. Upon his
compulsory retirement, he is entitled to the commutation of
his accumulated leave credits to its money value.
Compulsory retirement may be considered as a
“cause beyond the control of the said official or
employee“. Consequently, the amount that he
received by way of commutation of his accumulated
leave credits as a result of his compulsory retirement,
or his terminal leave pay, falls within the enumerated
exclusions from gross income and is therefore not
subject to tax.
IV.
The terminal leave pay of Atty. Zialcita may likewise be
viewed as a “retirement gratuity received by
government officials and employees” which is also another
exclusion from gross income as provided for in Section
28(b), 7(f) of the NLRC. A gratuity is that paid to the
beneficiary for past services rendered purely out of
generosity of the giver or grantor. That which is given
to him after retirement is out of the Government’s
generosity and an appreciation for his having
continued working when he could very well have gone
on vacation. The commutation of accumulated leave
credits may thus be considered a retirement gratuity,
within the import of Section 28(b), 7(f) of the NLRC,
since it is given only upon retirement and in
consideration of the retiree’s meritorious services.
It is clear that the law expresses the government’s
appreciation for many years of service already rendered
and the clear intention to reward faithful and often
underpaid workers after the official relationship had been
terminated.
V.
Section 284 of the Revised Administrative Code grants 15
days’ vacation leave and 15 days sick leave for every year
of service to a government employee. Hence, even if the
government employee absents himself and exhausts
his leave credits, he is still deemed to have worked
and to have rendered services. His leave benefits are
already imputed in, and form part of, his salary which
in turn is subjected to withholding tax on income. He
is taxed on the entirety of his salaries without any
deductions for any leaves not utilized. It follows then
that the money values corresponding to these leave
benefits both the used and unused have already been
taxed during the year that they were earned. To tax
them again when the retiring employee receives their
money value as a form of government concern and
appreciation plainly constitutes an attempt to tax the
employee a second time. This is tantamount to double
taxation.
10. Commissioner of Internal Revenue vs Mistubishi
Metal Corporation
181 SCRA 214
FACTS: Atlas Consolidated Mining and Development
Corporation (Atlas) entered into a Loan and Sales
Contract with Mitsubishi Metal Corporation (Mitsubishi), a
Japanese corporation licensed to engage in business in
the Philippines, for purposes of the projected expansion of
the productive capacity of the former’s mines in Toledo,
Cebu. Under said contract, Mitsubishi agreed to extend a
loan to Atlas ‘in the amount of $20,000,000.00, United
States currency, for the installation of a new concentrator
for copper production. Atlas, in turn, undertook to sell to
Mitsubishi all the copper concentrates produced from said
machine for a period of fifteen (15) years. It was
contemplated that $9,000,000.00 of said loan was to be
used for the purchase of the concentrator machinery from
Japan.
To be able to extend the loan to Atlas, Mitsubishi entered
into another loan agreement with Export-Import Bank
(Eximbank), a financing institution owned, controlled, and
financed by the Japanese government. After making
interest payments to Mitsubishi, with the corresponding
15% tax thereon remitted to the Government of the
Philippines, Altas claimed for tax credit with the
Commissioner of Internal Revenue based on Section
29(b)(7) (A) of the National Internal Revenue Code,
stating that since Eximbank, and not Mitsubishi, is
where the money for the loan originated from
Eximbank, then it should be exempt from paying taxes
on its loan thereon.
ISSUE: WON the interest income from the loans extended
to Atlas by Mitsubishi is excluded from gross income
taxation.
HELD:
No. Mitsubishi secured the loan from Eximbank in its own
independent capacity as a private entity and not as a
conduit of Eximbank. Therefore, what the subject of the
15% withholding tax is not the interest income paid by
Mitsubishi to Eximbank, but the interest income
earned by Mitsubishi from the loan to Atlas. Thus, it
does not come within the ambit of Section 29(b)(7)(A), and
it is not exempt from the payment of taxes.
The loan and sales contract between Mitsubishi and Atlas
does not contain any direct or inferential reference to
Eximbank whatsoever. The agreement is strictly between
Mitsubishi as creditor in the contract of loan and Atlas as
the seller of the copper concentrates. From the categorical
language used in the document, one prestation was in
consideration of the other. The specific terms and the
reciprocal nature of their obligations make it implausible, if
not vacuous, to give credit to the cavalier assertion that
Mitsubishi was a mere agent in said transaction.
Findings of fact of the Court of Tax Appeals are entitled to
the highest respect and can only be disturbed on appeal if
they are not supported by substantial evidence or if there
is a showing of gross error or abuse on the part of the tax
court. Laws granting exemption from tax are construed
strictissimi juris against the taxpayer and liberally in favor
of the taxing power. Taxation is the rule and exemption is
the exception.
It is too settled a rule in this jurisdiction, as to dispense
with the need for citations, that laws granting exemption
from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The
burden of proof rests upon the party claiming exemption to
prove that it is in fact covered by the exemption so
claimed, which onus petitioners have failed to discharge.
Significantly, private respondents are not even among the
entities which, under Section 29 (b) (7) (A) of the tax code,
are entitled to exemption and which should indispensably
be the party in interest in this case.
11. CIR VS BPI, GR NO 147375, 6/6/06
Facts: Domestic corporate taxpayers, including banks, are
levied 20% final withholding tax on bank deposits under
Section 24(e)(1) in relation to Section 50(a) of Presidential
Decree No. 1158, otherwise known as the National
Internal Revenue Code of 1977 (Tax Code). Banks are
also liable for a tax on gross receipts derived from sources
within the Philippines under Section 119 (Pls. Refer to
codal)
As a domestic corporation, the interest earned by
respondent Bank of the Philippine Islands (BPI) from
deposits and similar arrangements are subjected to a final
withholding tax of 20%. Consequently, the interest
income it receives on amounts that it lends out are always
net of the 20% withheld tax. As a bank, BPI is furthermore
liable for a 5% gross receipts tax on all its income.
For the four (4) quarters of the year 1996, BPI computed
its 5% gross receipts tax payments by including in its tax
base the 20% final tax on interest income that had been
withheld and remitted directly to the Bureau of Internal
Revenue (BIR).
BPI wrote the BIR a letter dated 15 July 1998 citing the
CTA Decision in Asian Bank and requesting a refund of
alleged overpayment of taxes representing 5% gross
receipts taxes paid on the 20% final tax withheld at
source. Inaction by the BIR on this request prompted BPI
to file a Petition for Review against the Commissioner of
Internal Revenue (Commissioner) with the CTA on 19
January 1999. Conceding its claim for the first three
quarters of the year as having been barred by prescription,
BPI only claimed alleged overpaid taxes for the final
quarter of 1996. Following its own doctrine in Asian Bank,
the CTA rendered a Decision holding that the 20% final
tax withheld did not form part of the respondents taxable
gross receipts and that gross receipts taxes paid thereon
are refundable. However, it found that only
P13,843,455.62 in withheld final taxes were substantiated
by BPI; it awarded a refund of the 5% gross receipts tax
paid thereon in the amount of P692,172.78.On appeal, the
Court of Appeals promulgated a Decision affirming the
CTA
Issue: Whether the 20% final tax on a banks passive
income, withheld from the bank at source, still forms part
of the banks gross income for the purpose of computing its
gross receipts tax liability.
Held: Yes
Gross receipts refer to the total, as opposed to the net,
income. These are therefore the total receipts before any
deduction for the expenses of management. Webster new
International Dictionary, in fact, defined gross as whole or
entire.
The legislative intent to apply the term in its ordinary
meaning may also be surmised from a historical
perspective of the levy on gross receipts. From the time
the gross receipts tax on banks was first imposed in 1946
under R.A. No. 39 and throughout its successive
reenactments, the legislature has not established a
definition of the term gross receipts. Absent a statutory
definition of the term, the BIR had consistently applied it in
its ordinary meaning, i.e., without deduction
Furthermore, Section 119 (a) of the Tax Code expressly
includes interest income as part of the base income from
which the gross receipts tax on banks is computed. This
express inclusion of interest income in taxable gross
receipts creates a presumption that the entire amount of
the interest income, without any deduction, is subject to
the gross receipts tax
Section 7 of Revenue Regulations No. 17-84, which
superseded section 4(e) states, thus:
SECTION 7. Nature and Treatment of Interest on Deposits
and Yield on Deposit Substitutes.
(a) The interest earned on Philippine Currency bank
deposits and yield from deposit substitutes subjected to
the withholding taxes in accordance with these
regulations need not be included in the gross income in
computing the depositor's/investor's income tax liability in
accordance with the provision of Section 29(b), (c) and (d)
of the National Internal Revenue Code, as amended.
(b) Only interest paid or accrued on bank deposits, or yield
from deposit substitutes declared for purposes of imposing
the withholding taxes in accordance with these regulations
shall be allowed as interest expense deductible for
purposes of computing taxable net income of the payor
(c) If the recipient of the above-mentioned items of income
are financial institutions, the same shall be included as
part of the tax base upon which the gross receipt tax is
imposed. (Emphasis supplied.)
Section 4(e)imposes the gross receipts tax only on all
items of income actually received, as opposed to their
mere accrual, while Section 7 of Revenue Regulations No.
17-84 includes all interest income (whether actual or
accrued) in computing the gross receipts tax
Receipt of income may be actual or constructive. We have
held that the withholding process results in the taxpayers
constructive receipt of the income withheld, based on the
provisions of 531 and 532 of the civil code regarding
ownership and possession.
We clarify. Article 531 of the Civil Code clearly provides
that the acquisition of the right of possession is through
the proper acts and legal formalities established therefor.
The withholding process is one such act. There may not
be actual receipt of the income withheld; however, as
provided for in Article 532, possession by any person
without any power whatsoever shall be considered as
acquired when ratified by the person in whose name the
act of possession is executed.
Thus, BPI constructively received income by virtue of its
acquiescence to the extinguishment of its 20% final tax
liability when the withholding agents remitted BPIs income
to the government. Consequently, it received the amounts
corresponding to the 20% final tax and benefited
therefrom. BPI cannot be considered as a mere trustee; it
is the actual owner of the funds. As owner thereof, it was
BPIs tax obligation to the government that was
extinguished upon the withholding agents remittance of
the 20% final tax.
BPI argues that to include the 20% final tax withheld in its
gross receipts tax base would be to tax twice its passive
income and would constitute double taxation. Granted
that interest income is being taxed twice, this, however,
does not amount to double taxation. There is no double
taxation if the law imposes two different taxes on the same
income, business or property. In Solidbank, we ruled, thus:
Double taxation means taxing the same property twice
when it should be taxed only once; that is, x x x taxing the
same person twice by the same jurisdiction for the same
thing. It is obnoxious when the taxpayer is taxed twice,
when it should be but once. Otherwise described as direct
duplicate taxation, the two taxes must be imposed on the
same subject matter, for the same purpose, by the same
taxing authority, within the same jurisdiction, during the
same taxing period; and they must be of the same kind or
character. First, the taxes herein are imposed on two
different subject matters. The subject matter of the FWT
[Final Withholding Tax] is the passive income generated in
the form of interest on deposits and yield on deposit
substitutes, while the subject matter of the GRT [Gross
Receipts Tax] is the privilege of engaging in the business
of banking.
A tax based on receipts is a tax on business rather than
on the property; hence, it is an excise rather than a
property tax. It is not an income tax, unlike the FWT. In
fact, we have already held that one can be taxed for
engaging in business and further taxed differently for the
income derived there from. Akin to our ruling in Velilla v.
Posadas,
these two taxes are entirely distinct and are assessed
under different provisions.
Second, although both taxes are national in scope
because they are imposed by the same taxing authority
the national government under the Tax code and operate
within the same Philippine jurisdiction for the same
purpose of raising revenues, the taxing periods they affect
are different. The FWT is deducted and withheld as soon
as the income is earned, and is paid after every calendar
quarter in which it is earned. On the other hand, the GRT
is neither deducted nor withheld, but is paid only after
every taxable quarter in which it is earned. Third, these
two taxes are of different kinds or characters. The FWT is
an income tax subject to withholding, while the GRT is a
percentage tax not subject to withholding.
In short, there is no double taxation, because there is no
taxing twice, by the same taxing authority, within the same
jurisdiction, for the same purpose, in different taxing
periods, some of the property in the territory. Subjecting
interest income to a 20% FWT and including it in the
computation of the 5% GRT is clearly not double taxation”
Clearly, therefore, despite the fact that that interest income
is taxed twice, there is no double taxation present in this
case.
An interpretation of the tax laws and relevant
jurisprudence shows that the tax on interest income of
banks withheld at source is included in the computation of
their gross receipts tax base.
12. OCEANIC WIRELESS NETWORK, INC VS CIR, GR
NO 148380 DEC 9 2005
Facts: Petitioner Oceanic Wireless Network, Inc.
challenges the authority of the Chief of the Accounts
Receivable and Billing Division of BIR National Office
to decide and/or act with finality on behalf of the CIR on
protests against disputed tax deficiency assessments. On
March 1988 petitioner received from the Bureau of Internal
Revenue (BIR) deficiency tax assessments for the taxable
year 1984 in the total amount of P8,644,998.71. Petitioner
filed its protest against the tax assessments and
requested a reconsideration or cancellation of the same in
a letter to the BIR Commissioner dated April 12, 1988.
Acting in behalf of the BIR Commissioner, then Chief of
BIR, reiterated the tax assessments while denying
petitioner’s request for reinvestigation in a letter dated
January 24, 1991. Upon petitioner’s failure to pay the
subject tax assessments within the prescribed period, the
Assistant Commissioner for Collection, acting for the
Commissioner of Internal Revenue, issued the
corresponding warrants of distraint and/or levy and
garnishment. On November 8, 1991, petitioner filed a
Petition for Review with the Court of Tax Appeals (CTA) to
contest the issuance of the warrants to enforce the
collection of the tax assessments. This was docketed as
CTA Case No. 4668.
The CTA dismissed the petition for lack of jurisdiction in a
decision dated September 16, 1994, declaring that said
petition was filed beyond the thirty (30)-day period
reckoned from the time when the demand letter of
January 24, 1991 by the Chief of the BIR Accounts
Receivable and Billing Division was presumably
received by petitioner.
Petitioner filed a Motion for Reconsideration arguing that
the demand letter of January 24, 1991 cannot be
considered as the final decision of the Commissioner of
Internal Revenue on its protest because the same was
signed by a mere subordinate and not by the
Commissioner himself.
Issue: Whether or not a demand letter for tax deficiency
assessments issued and signed by a subordinate officer
who was acting in behalf of the Commissioner of Internal
Revenue, is deemed final and executory and subject to an
appeal to the Court of Tax Appeals.
RULING: WHEREFORE, premises considered, the
Decision of the Court of Appeals dated October 31, 2000
and its Resolution dated May 3, 2001 in CA-G.R. SP No.
35581 are hereby AFFIRMED. The petition is accordingly
DENIED for lack of merit.
RATIO: Yes.
The general rule is that the Commissioner of Internal
Revenue may delegate any power vested upon him by law
to Division Chiefs or to officials of higher rank. He cannot,
however, delegate the four powers granted to him under
the National Internal Revenue Code (NIRC) enumerated in
Section 7.
As amended by Republic Act No. 8424, Section 7 of the
Code authorizes the BIR Commissioner to delegate the
powers vested in him under the pertinent provisions of the
Code to any subordinate official with the rank equivalent to
a division chief or higher.
Moreover, A request for reconsideration must be made
within thirty (30) days from the taxpayer’s receipt of the tax
deficiency assessment, otherwise, the decision becomes
final, unappealable and therefore, demandable. A tax
assessment that has become final, executory and
enforceable for failure of the taxpayer to assail the same
as provided in Section 228 can no longer be contested
Here, petitioner failed to avail of its right to bring the matter
before the Court of Tax Appeals within the reglementary
period upon the receipt of the demand letter reiterating the
assessed delinquent taxes and denying its request for
reconsideration which constituted the final determination
by the Bureau of Internal Revenue on petitioner’s protest.
Being a final disposition by said agency, the same would
have been a proper subject for appeal to the Court of Tax
Appeals.
The rule is that for the Court of Tax Appeals to acquire
jurisdiction, an assessment must first be disputed by the
taxpayer and ruled upon by the Commissioner of Internal
Revenue to warrant a decision from which a petition for
review may be taken to the Court of Tax Appeals. Where
an adverse ruling has been rendered by the
Commissioner of Internal Revenue with reference to a
disputed assessment or a claim for refund or credit, the
taxpayer may appeal the same within thirty (30) days after
receipt thereof.
13. CIR VS LEAL GR 113459, NOV 18 2002
Facts: Pursuant to Sec. 116 of the Tax Code which
imposes percentage tax on dealers in securities and
lending investors, the Commissioner of Internal Revenue
issued Memorandum Order (RMO) No. 15-91 dated March
11, 1991, imposing five percent (5%) lending investor’s tax
on pawnshops based on their gross income and requiring
all investigating units of the Bureau to investigate and
assess the lending investor’s tax due from them. The
issuance of RMO No. 15-91 was an offshoot of petitioner’s
evaluation that the nature of pawnshop business is akin to
that of lending investors.
Subsequently, petitioner issued Revenue Memorandum
Circular No. 43-91 dated May 27, 1992, subjecting the
pawn ticket to the documentary stamp tax as prescribed
in Title VII of the Tax Code.
Adversely affected by those revenue orders, herein
respondent Josefina Leal, owner and operator of Josefina
Pawnshop in San Mateo, Rizal, asked for a
reconsideration of both RMO No. 15-91 and RMC No. 43-
91 but the same was denied with finality by petitioner in
October 30, 1991.
Consequently, on March 18, 1992, respondent filed with
the RTC a petition for prohibition seeking to prohibit
petitioner from implementing the revenue orders.
Petitioner, through the Office of the Solicitor-General, filed
a motion to dismiss the petition on the ground that the
RTC has no jurisdiction to review the questioned revenue
orders and to enjoin their implementation. Petitioner
contends that the subject revenue orders were issued
pursuant to his power “to make rulings or opinions in
connection with the Implementation of the provisions
of internal revenue laws.” Thus, the case falls within the
exclusive appellate jurisdiction of the Court of Tax
Appeals, citing Sec. 7(1) of RA 1125.
The RTC issued an order denying the motion to dismiss
holding that the revenue orders are not assessments to
implement a Tax Code provision, but are “in effect new
taxes (against pawnshops) which are not provided for
under the Code,” and which only Congress is empowered
to impose. The Court of Appeals affirmed the order issued
by the RTC.
Issue: Whether or not the Court of Tax Appeals has
jurisdiction to review rulings of the Commissioner
implementing the Tax Code.
Held: The jurisdiction to review rulings of the
Commissioner pertains to the Court of Tax Appeals and
NOT to the RTC. The questioned RMO and RMC are
actually rulings or opinions of the Commissioner
implementing the Tax Code on the taxability of the
Pawnshops.
Under RA 1125, An Act Creating the Court of Tax
Appeals, such rulings of the Commissioner of Internal
Revenue are appealable to that court:
Sec. 7 Jurisdiction – The Court of Tax Appeals shall
exercise exclusive appellate jurisdiction to review by
appeal, as herein provided—
1. Decisions of the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under the National
Revenue Code or other laws or part of law administered
by the Bureau of Internal Revenue.
14. CIR VS BPI, GR NO 134062, April 17, 2007
FACTS:
CIR made tax assessments for respondent’s deficiency
percentage and documentary stamp taxes for the year
1986 in two notices dated October 28, 1988. Respondent
replied stating that it was not informed of such
assessments and there was no indication on whether to
pay or protest said assessments.
BPI’s reply failed to qualify as a protest to said
assessments because it stated that it shall inform the CIR
of the taxpayer’s decision on whether to pay or protest.
Respondent filed reconsideration but CIR denied such.
Then a petition for review was sent to CTA after the 30-
day reglementary period from the decision of the CIR
which led to its dismissal for lack of jurisdiction since the
subject assessments had become final and unappealable.
The CA, on appeal, reversed the tax court’s decision and
remanded the case to the CTA for a decision on the
merits. It ruled that the assessments were not valid for
they did not inform the taxpayer of the legal and factual
bases therefor – the assessments not having reasons for
deficiencies but only a mere computation.
ISSUE:
1) Whether or not respondent was properly informed of
the assessment made by the CIR?
2) Is BPI liable for the tax assessments?
HELD:
1) Yes. When the assessments were made pursuant
to the former Section 270, the only requirement was for
the CIR to "notify" or inform the taxpayer of his
"findings." Nothing in the old law required a written
statement to the taxpayer of the law and facts on which
the assessments were based. The Court cannot read into
the law what obviously was not intended by Congress.
That would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the
assessments contain a computation of tax liabilities, the
amount the taxpayer was to pay and a demand for
payment within a prescribed period. From all the foregoing
discussions, We can now conclude that BPI was indeed
aware of the nature and basis of the assessments, and
was given all the opportunity to contest the same but
ignored it despite the notice conspicuously written on the
assessments which states that "this ASSESSMENT
becomes final and unappealable if not protested within 30
days after receipt." Counsel resorted to dilatory tactics and
dangerously played with time.
2) Yes. Under the law, the taxpayer shall be informed in
writing of the law and the facts on which the assessment is
made, otherwise the assessment is void. From the
foregoing testimony, the examiners themselves went to
BPI and talked to them about the issues. BPI was indeed
aware of the nature and basis of the assessments and
was given all the opportunity to contest the same but
ignored it despite the notice conspicuously written on the
assessments. Considering that such notices were valid
assessments, the state will be deprived, considering the
amount of money, of the taxes validly due it. Taxes are
lifeblood of the government, for without taxes, the
government can neither exist nor endure.
15. CIR vs CITYTRUST, GR NO 150812, August 22,
2006
Facts: On May 28, 1991, the CTA ordered the CIR to
grant Citytrust a refund in the amount of P13,314,506.14
representing Citytrusts overpaid income taxes for 1984
and 1985. The CIR filed a motion for reconsideration (MR)
on the ground that the Certificate of Tax Withheld was
inconclusive evidence of payment and remittance of tax
to the Bureau of Internal Revenue. In its supplemental
MR, the CIR alleged an additional ground: that Citytrust
had outstanding deficiency income and business tax
liabilities of P4,509,293.71 for 1984, thus, the claim for
refund was not in order. The tax court denied both
motions.
The case was elevated to the CA in CA-G.R. SP No.
26839 but the appellate court affirmed the CTAs ruling. On
petition for review on certiorari the SC, however, we ruled
that there was an apparent contradiction between the
claim for refund and the deficiency assessments against
Citytrust, and that the government could not be held in
estoppel due to the negligence of its officials or
employees, specially in cases involving taxes. For that
reason, the case was remanded to the CTA for further
reception of evidence.
The tax court thereafter conducted the necessary
proceedings. One of the exhibits presented and offered in
the hearing was the cancellation of some assessments
Except for a pending issue in another CTA proceeding,
Citytrust considered all its deficiency tax liabilities for 1984
fully settled, hence, it prayed that it be granted a refund.
The CIR interposed his objection, however, alleging that
Citytrust still had unpaid deficiency income, business and
withholding taxes for the year 1985. Due to these
deficiency assessments, the CIR insisted that Citytrust
was not entitled to any tax refund.
CTA set aside the CIRs objections and granted the refund
on the following grounds
First, [respondents position] violates the order of the
Supreme Court in directing [the CTA] to conduct
further proceedings for the reception of petitioners
evidence, and the disposition of the present case.
Although the Supreme Court did not specifically mention
what kind of petitioners evidence should be entertained,
[the CTA] is of the opinion that the evidence should pertain
only to the 1984 assessments which were the only
assessments raised as a defense on appeal to the Court
of Appeals and the Supreme Court. The assessments
embodied in Exhibit 5 of respondent were never raised on
appeal to the higher [c]ourts. Hence, evidence related to
said assessments should not be allowed as this will lead
to endless litigation.
Second, [the CTA] has no jurisdiction to try an
assessment case which was never appealed to it.With
due respect to the Supreme Courts decision, it is [the
CTAs] firm stand that in hearing a refund case, the CTA
cannot hear in the same case an assessment dispute
even if the parties involved are the same parties.xxx xxx
xxx. (

CIR contends that respondent is not entitled to the refund
of P13,314,506.14 as alleged overpaid income taxes for
1984 and 1985. The CIR claims that the CA erred in not
holding that payment by Citytrust of its deficiency income
tax was an admission of its tax liability and, therefore, a
bar to its entitlement to a refund of income tax for the
same taxable year.
Issue: WON CA erred in granting the tax refund
Held: The CTA complied with the Courts order to conduct
further proceedings for the reception of the CIRs evidence
in CTA Case No. 4099. In the course thereof, Citytrust
paid the assessed deficiencies to remove all
administrative impediments to its claim for refund. But the
CIR considered this payment as an admission of a tax
liability which was inconsistent with Citytrusts claim for
refund.
There is indeed a contradiction between a claim for refund
and the assessment of deficiency tax. The CA pointed out
that the case was remanded to the CTA for the reception
of additional evidence precisely to resolve the apparent
contradiction. Because of the CTAs recognized expertise
in taxation, its findings are not ordinarily subject to review
specially where there is no showing of grave error or
abuse on its part.
This Court will not set aside lightly the conclusion reached
by the Court of Tax Appeals which, by the very nature of
its function, is dedicated exclusively to the consideration of
tax problems and has necessarily developed an expertise
on the subject, unless there has been an abuse or
improvident exercise of authority.
16. CIR vs BF Goodrich and CA, GR NO 104171
February 24, 1999
FACTS:
Private respondent BF Goodrich Philippines Inc. was an
American corporation prior to July 3, 1974. As a
condition for approving the manufacture of tires and
other rubber products, private respondent was required
by the Central Bank to develop a rubber plantation. In
compliance therewith, private respondent bought from the
government certain parcels of land in Tumajubong
Basilan, in 1961 under the Public Land Act and the Parity
Amendment to the 1935 constitution, and there developed
a rubber plantation.
On August 2, 1973, the Justice Secretary rendered an
opinion that ownership rights of Americans over Public
agricultural lands, including the right to dispose or sell their
real estate, would be lost upon expiration on July 3, 1974
of the Parity Amendment. Thus, private respondent sold
its Basilan land holding to Siltown Realty Phil. Inc.,
(Siltown) for P500,000 on January 21, 1974. Under the
terms of the sale, Siltown would lease the property to
private respondent for 25 years with an extension of 25
years at the option of private respondent.
Private respondent books of accounts were examined by
BIR for purposes of determining its tax liability for 1974.
This examination resulted in the April 23, 1975
assessment of private respondent for deficiency income
tax which it duly paid. Siltown’s books of accounts were
also examined, and on the basis thereof, on October 10,
1980, the Collector of Internal Revenue assessed
deficiency donor’s tax of P1,020,850 in relation to said
sale of the Basilan landholdings.
Private respondent contested this assessment on
November 24, 1980. Another assessment dated March 16,
1981, increasing the amount demanded for the alleged
deficiency donor’s tax, surcharge, interest and
compromise penalty and was received by private
respondent on April 9, 1981. On appeal, CTA upheld the
assessment. On review, CA reversed the decision of the
court finding that the assessment was made beyond the 5-
year prescriptive period in Section 331 of the Tax Code.
ISSUE:
1. Whether or not petitioners right to assess herein
deficiency donors tax has indeed prescribed as ruled by
public respondent Court of Appeals
(Prescription is the crucial issue in the resolution of this
case.)
RULING:
WHEREFORE, the Petition for Review is DENIED and the
assailed Decision of the Court of Appeals is AFFIRMED.
No costs.
RATIO: The petition has no merit.
Main Issue: Prescription
In the present case, the Court of Appeals ruled not on the
truth or falsity of the facts found by the CTA, but on the
latter’s application of the law on prescription.
Applying then Sec. 331, NIRC (now Sec. 203, 1997 NIRC
which provides a 3-year prescriptive period for making
assessments), it is clean that the October 16, 1980 and
March 16, 1981 assessments were issued by the BIR
beyond the 5-year statute of limitations. The court
thoroughly studied the records of this case and found no
basis to disregard the 5-year period of prescription,
expressly set under Sec. 331 of the Tax Code, the law
then in force.
For the purpose of safeguarding taxpayers from any
unreasonable examination, investigation or assessment,
our tax law provides a statute of limitations in the
collection of taxes. Thus, the law or prescription, being a
remedial measure, should be liberally construed in order
to afford such protection. As a corollary, the exceptions to
the law on prescription should perforce be strictly
construed.
For the purpose of safeguarding taxpayers from any
unreasonable examination, investigation or assessment,
our tax law provides a statute of limitations in the
collection of taxes. Thus, the law on prescription, being a
remedial measure, should be liberally construed in order
to afford such protection. As a corollary, the exceptions to
the law on prescription should perforce be strictly
construed.
Section 15 of the NIRC, on the other hand, provides that
[w]hen a report required by law as a basis for the
assessment of any national internal revenue tax shall not
be forthcoming within the time fixed by law or regulation,
or when there is reason to believe that any such report is
false, incomplete, or erroneous, the Commissioner of
Internal Revenue shall assess the proper tax on the best
evidence obtainable. Clearly, Section 15 does not provide
an exception to the statute of limitations on the issuance of
an assessment, by allowing the initial assessment to be
made on the basis of the best evidence available. Having
made its initial assessment in the manner prescribed, the
commissioner could not have been authorized to issue,
beyond the five-year prescriptive period, the second and
the third assessments under consideration before us.
17. Philippine Home Assurance Corp. vs CA, 361 Phil
368
Facts: Petitioners are the Philippine Home Assurance
Corporation (PHAC), the Philippine American Accident
Insurance Company (PAAIC), the Philippine American
General Insurance Company (PAGIC), and the American
International Underwriters (Phils.), Inc. (AIUPI), which are
domestic corporations engaged in the insurance business.
From January to June 1986, they paid under protest the
total amount of P10,456,067.83 as documentary stamp
taxes on various life and non-life insurance policies issued
by them. On August 4, 1987, petitioners filed separate
claims for refund from the Bureau of Internal Revenue.
They alleged that the premiums on the insurance policies
issued by them had not been paid thus, in accordance
with §77 of the Insurance Code, no documentary stamp
taxes were due on the policies.
As the Bureau of Internal Revenue failed to act on their
claims], the petitioners appealed on December 29, 1987 to
the Court of Tax Appeals. In its decision, dated April 26,
1993, the Tax Court denied petitioners' claims. It held:
. . . . the documentary stamp must be affixed to the
insurance policy, which is a contract in itself, between the
insurer and the insured, whereby for an agreed premium,
the former undertakes to compensate the latter for the loss
of a specific subject by reason of specific perils, on the
date it is issued even if no premium has been paid. The
payment or non-payment of the premium by the insured is
immaterial since a documentary stamp tax is in the
nature of an excise tax upon a facility used in the
transaction of a business which is separate and
distinct from the business itself. Such being the case, .
. . the subsequent cancellation of an insurance policy will
not exempt the issuer from the corresponding
documentary stamp tax. And thus, no refund can be
allowed of the documentary stamp tax paid on an
insurance policy which for some reason or another has
been cancelled or for that matter, the premium was
unpaid.
On appeal, the CA affirmed CTA and held:
...The law taxes the document because of the
transaction so that the tax becomes due and payable at
the time the transaction is had or accomplished, in this
case, at the time of the issuance of the document.
This is the reason that the documentary stamp tax will not
be refunded upon the subsequent cancellation of the
insurance policy. Likewise, when a policy already issued
becomes ineffective because of the non-payment of the
first premium, the documentary stamp tax cannot be
refunded whether or not the policy has, in fact,
become effective, since the privilege subject of the tax
has already been realized.
Issue: Whether Petitoners are entitled to refund
Held: No. In general, documentary stamp taxes are
levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or
termination of specific legal relationships through the
execution of specific instruments. Examples of such
privileges, the exercise of which, as effected through the
issuance of particular documents, are subject to the
payment of documentary stamp taxes are leases of lands,
mortgages, pledges, and trusts, and conveyances of real
property.
Documentary stamp taxes are thus levied on the exercise
of these privileges through the execution of specific
instruments, independently of the legal status of the
transactions giving rise thereto. The documentary stamp
taxes must be paid upon the issuance of the said
instruments, without regard to whether the contracts which
gave rise to them are rescissible, void, voidable, or
unenforceable. As the Supreme Court of the United
States held in Du Pont v. United States:
The tax is not upon the business transacted but is an
excise upon the privilege, opportunity, or facility offered at
exchanges for the transaction of the business. It is an
excise upon the facilities used in the transaction of the
business separate and apart from the business itself. In
this view it is immaterial whether the transfer of the
account constituted a sale.
This case has been cited in several of this Court's
decisions.
It is thus settled that the life and non-life insurance
policies in question are subject to documentary stamp
taxes pursuant to §183 and §184 of the National Internal
Revenue Code by their mere issuance, and the fact that
the policies have not become effective for non-payment of
the corresponding premiums as required by §77 of the
Insurance Code cannot affect petitioners' liability for
payment of documentary stamp taxes. Their claim for
refund was correctly denied.
18. Republic of the Philippines vs Peralta, GR NO L-
56568, May 20, 1987
In the voluntary insolvency proceedings commenced in
May 1977 by private respondent Quality Tobacco
Corporation (the "Insolvent"), the following claims of
creditors were filed:
1. P2,806,729.92, by the USTC Association of Employees
and workers UnionPTGWO USTC as separation pay for
their members.
2. P53,805.05 by the Federacion de la Industria
Tabaquera y Otros Trabajadores de Filipinas ("FOITAF),
as separation pay for their members,
3. P1,085,188.22 by the Bureau of Internal Revenue for
tobacco inspection fees
4. P276,161.00 by the Bureau of Customs for customs
duties and taxes payable on various importations by the
Insolvent.
The trial court held that the claims of USTC and FOITAF
(the "Unions") for separation pay in final awards of the
National Labor Relations Commission were to be
preferred over the claims of the Bureau of Customs and
the Bureau of Internal Revenue.
The trial court, in so ruling, relied primarily upon Article
110 of the Labor Code which reads thus:
Article 110. Worker preference in case of bankruptcy — In
the event of bankruptcy or liquidation of an employer's
business, his workers shall enjoy first preference as
regards wages due them for services rendered during the
period prior to the bankruptcy or liquidation, any provision
of law to the contrary notwithstanding. Union paid wages
shall be paid in full before other creditors may establish
any claim to a share in the assets of the employer.
Issue: W/N Worker’s lien is to be preferred over taxes?
Ratio: Article 110 must be read in relation to the provisions
of the Civil Code concerning the classification,
concurrence and preference of credits. Those provisions
may be seen to classify credits against a particular
insolvent into three general categories, namely: (a) special
preferred credits listed in Articles 2241 and 2242,
 (b)
ordinary preferred credits listed in Article 2244; and
 (c)
common credits under Article 2245.
Turning first to special preferred credits under Articles
2241 and 2242, it should be noted at once that these
credits constitute liens or encumbrances on the specific
movable or immovable property to which they relate.
Article 2243 makes clear that these credits "shall be
considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions
governing insolvency." It should be emphasized in this
connection that "duties, taxes and fees due [on specific
movable property of the insolvent] to the State or any
subdivision thereof" (Article 2241 [1]) and "taxes due upon
the [insolvent's] land or building (2242 [1])"stand first in
preference in respect of the particular movable or
immovable property to which the tax liens have attached.
Article 2243 is quite explicit: "[T]axes mentioned in number
1, Article 2241 and number 1, Article 2242 shall first be
satisfied. "
What is more, these other (nontax) credits, although
constituting liens attaching to particular property, are not
preferred one over another inter se. Provided tax liens
shall have been satisfied, nontax liens or special preferred
credits which subsist in respect of specific movable or
immovable property are to be treated on an equal basis
and to be satisfied concurrently and proportionately. Put
succintly, Articles 2241 and 2242 jointly with Articles 2246
to 2249 establish a twotier order of preference. The first
tier includes only taxes, duties and fees due on
specific movable or immovable property. All other
special preferred credits stand on the same second
tier to be satisfied, pari passu and pro rata, out of any
residual value of the specific property to which such
other credits relate.
Credits which are specially preferred because they
constitute liens (tax or nontax) in turn, take
precedence over ordinary preferred credits so far as
concerns the property to which the liens have
attached. The specially preferred credits must be
discharged first out of the proceeds of the property to
which they relate, before ordinary preferred creditors may
lay claim to any part of such proceeds.
If the value of the specific property involved is greater than
the sum total of the tax liens and other specially preferred
credits, the residual value will form part of the "free
property" of the insolvent — i.e., property not impressed
with liens by operation of Articles 2241 and 2242. If, on the
other hand, the value of the specific movable or
immovable is less than the aggregate of the tax liens and
other specially preferred credits, the unsatisfied balance
of the tax liens and other such credits are to the
treated as ordinary credits under Article 2244 and to
be paid in the order of preference there set up
In contrast with Articles 2241 and 2242, Article 2244
creates no liens on determinate property which follow
such property. What Article 2244 creates are simply
rights in favor of certain creditors to have the cash
and other assets of the insolvent applied in a certain
sequence or order of priority.
Only in respect of the insolvent's "free property" is an
order of priority established by Article 2244. In this
sequence, certain taxes and assessments also figure but
these do not have the same kind of overriding preference
that Articles 2241 No. 1 and 2242 No. I create for taxes
which constituted liens on the taxpayer's property.
A. Claim of the Bureau of Customs for Unpaid Customs
Duties and Taxes
Under Section 1204 of the Tariff and Customs Code, the
liability of an importer for duties, taxes and fees and other
charges attaching on importation constitute a personal
debt due from the importer to the government which can
be discharged only by payment in full of all duties, taxes,
fees and other charges legally accruing It also
constitutes a lien upon the articles imported which
may be enforced while such articles are in the custody
or subject to the control of the government.
Clearly, the claim of the Bureau of Customs for unpaid
customs duties and taxes enjoys the status of a specially
preferred credit under Article 2241, No. 1, of the Civil
Code. only in respect of the articles importation of
which by the Insolvent resulted in the assessment of
the unpaid taxes and duties, and which are still in the
custody or subject to the control of the Bureau of
Customs. The goods imported on one occasion are not
subject to a lien for customs duties and taxes assessed
upon other importations though also effected by the
Insolvent. Customs duties and taxes which remain
unsatisfied after levy upon the imported articles on which
such duties and taxes are due, would have to be paid out
of the Insolvent's "free property" in accordance with the
order of preference embodied in Article 2244 of the Civil
Code. Such unsatisfied customs duties and taxes would
fall within Article 2244, No. 9, of the Civil Code and hence
would be ninth in priority.
B. Claims of the Bureau of Internal Revenue for Tabacco
Inspection Fees
Tobacco inspection fees are collected both for purposes of
regulation and control and for purposes of revenue
generation: half of the said fees accrues to the Tobacco
Inspection Fund created by Section 12 of Act No. 2613, as
amended by Act No. 3179, while the other half accrues to
the Cultural Center of the Philippines. Tobacco inspection
fees, in other words, are imposed both as a regulatory
measure and as a revenueraising measure. In
Commissioner of Internal Revenue us. Guerrero, et al this
Court held, through Mr. Chief Justice Concepcion, that the
term "tax" is used in Section 315 of the old Tax Code: x x
x As used in Title IX of said Code, the term 'tax'
includes 'any national internal revenue tax, fee or
charge imposed by the Code. It follows that the claim
of the Bureau of Internal Revenue for unpaid tobacco
inspection fees constitutes a claim for unpaid internal
revenue taxes which gives rise to a tax lien upon all
the properties and assets, movable and immovable, of
the Insolvent as taxpayer. Clearly, under Articles 2241
No. 1, 2242 No. 1, and 22462249 of the Civil Code, this
tax claim must be given preference over any other claim of
any other creditor, in respect of any and all properties of
the Insolvent.
C. Claims of the Unions for Separation Pay of Their
Members
Article 110 of the Labor Code does not purport to create a
lien in favor of workers or employees for unpaid wages
either upon all of the properties or upon any particular
property owned by their employer. Claims for unpaid
wages do not therefore fall at all within the category of
specially preferred claims established under Articles
2241 and 2242 of the Civil Code, except to the extent
that such claims for unpaid wages are already
covered by Article 2241, number 6. "claims for laborers'
wages, on the goods manufactured or the work done;" or
by Article 2242, number 3: "claims of laborers and other
workers engaged in the construction, reconstruction or
repair of buildings, canals and other works, upon said
buildings, canals or other works." To the extent that claims
for unpaid wages fall outside the scope of Article 2241,
number 6 and 2242, number 3, they would come within
the ambit of the category of ordinary preferred credits
under Article 2244.
Applying Article 2241, number 6 to the instant case, the
claims of the Unions for separation pay of their members
constitute liens attaching to the processed leaf tobacco,
cigars and cigarettes and other products produced or
manufactured by the Insolvent, but not to other assets
owned by the Insolvent. And even in respect of such
tobacco and tobacco products produced by the
Insolvent, the claims of the Unions may be given
effect only after the Bureau of Internal Revenue's
claim for unpaid tobacco inspection fees shall have
been satisfied out of the products so manufactured by
the Insolvent.
Article 2242, number 3, also creates a lien or
encumbrance upon a building or other real property of the
Insolvent in favor of workmen who constructed or repaired
such building or other real property. Article 2242, number
3, does not however appear relevant in the instant case,
since the members of the Unions to whom separation pay
is due rendered services to the Insolvent not (so far as the
record of this case would show) in the construction or
repair of buildings or other real property, but rather, in the
regular course of the manufacturing operations of the
Insolvent. The Unions' claims do not therefore constitute a
lien or encumbrance upon any immovable property owned
by the Insolvent, but rather, as already indicated, upon the
Insolvent's existing inventory (if any of processed tobacco
and tobacco products.
Bearing in mind the overriding precedence given to taxes,
duties and fees by the Civil Code and the fact that the
Labor Code does not impress any lien on the property of
an employer, the use of the phrase "first preference" in
Article 110 indicates that what Article 110 intended to
modify is the order of preference found in Article
2244, which order relates, as we have seen, to
property of the Insolvent that is not burdened with the
liens or encumbrances created or recognized by
Articles 2241 and 2242. We have noted that Article 2244,
number 2, establishes second priority for claims for wages
for services rendered by employees or laborers of the
Insolvent "for one year preceding the commencement of
the proceedings in insolvency." Article 110 of the Labor
Code establishes "first preference" for services rendered
"during the period prior to the bankruptcy or liquidation, " a
period not limited to the year immediately prior to the
bankruptcy or liquidation. Thus, very substantial effect
may be given to the provisions of Article 110 without
grievously distorting the framework established in the Civil
Code by holding, as we so hold, that Article 110 of the
Labor Code has modified Article 2244 of the Civil Code in
two respects: (a) firstly, by removing the one year
limitation found in Article 2244, number 2; and (b)
secondly, by moving up claims for unpaid wages of
laborers or workers of the Insolvent from second priority to
first priority in the order of preference established I by
Article 2244.
RULING: Accordingly, and by way of recapitulating the
application of Civil Code and Labor Code provisions to the
facts herein, the trial court should inventory the
properties of the Insolvent so as to determine specifically:
(a) whether the assets of the Insolvent before the trial
court includes stocks of processed or manufactured
tobacco products; and (b) whether the Bureau of Customs
still has in its custody or control articles imported by the
Insolvent and subject to the lien of the government for
unpaid customs duties and taxes.
In respect of (a), if the Insolvent has inventories of
processed or manufactured tobacco products, such
inventories must be subjected firstly to the claim of the
Bureau of Internal Revenue for unpaid tobacco inspection
fees. The remaining value of such inventories after
satisfaction of such fees (or should such inspection fees
be satisfied out of other properties of the Insolvent) will be
subject to a lien in favor of the Unions by virtue of Article
2241, number 6. In case, upon the other hand, the
Insolvent no longer has any inventory of processed or
manufactured product, then the claim of the Unions for
separation pay would have to be satisfied out of the "free
property" of the Insolvent under Article 2244 of the Civil
Code. as modified by Article 110 of the Labor Code.
Turning to (b), should the Bureau of Customs no longer
have any importations by the Insolvent still within customs
custody or control, or should the importations still held by
the Bureau of Customs be or have become insufficient in
value for the purpose, customs duties and taxes remaining
unpaid would have only ninth priority by virtue of Article
2244, number 9. In respect therefore of the Insolvent's
"free property, " the claims of the Unions will enjoy first
priority under Article 2244 as modified and will be paid
ahead of the claims of the Bureau of Customs for any
customs duties and taxes still remaining unsatisfied.
19. Aurbach vs Sanitary Wares Manufacturing Corp.
180 SCRA 130
FACTS: These consolidated petitions seek the review of
the amended decision of the Court of Appeal. Saniwares
together with other Filipino investors, entered into an
agreement with American Standards Inc. (ASI), a foreign
corporation, whereby ASI and the Filipino investors agreed
to participate in the ownership of an enterprise which
would engage primarily in the business of manufacturing
in the Philippines and selling here and abroad vitreous
china and sanitary wares. They agreed that the business
operations shall be carried on by an incorporated
enterprise and that it shall be named "Sanitary Wares”. At
the request of ASI, the agreement contained provisions
designed to protect it as a minority group. Sec. 5 (a) of the
agreement provides that:
(a) The management of the Corporation shall be vested in
a Board of Directors, which shall consist of nine
individuals. As long as American-Standard shall own at
least 30% of the outstanding stock of the Corporation,
three of the nine directors shall be designated by
American-Standard, and the other six shall be designated
by the other stockholders of the Corporation.
Later, the 30% capital stock of ASI was increased to 40%.
Initially, the joint enterprise prospered but disagreement
ensued. During their annual stockholder’s meeting, Mar. 8,
1983, the ASI, nominated 3 persons while PH investors
nominated 6. However, additional 2 nominations were
made by Mr. Eduardo Ceniza. The chairman, Baldwin
Young ruled the last two nominations out of order on the
basis of section 5 (a) of the Agreement, the consistent
practice of the parties during the past annual stockholders'
meetings to nominate only nine persons as nominees for
the nine-member board of directors. Heated arguments
ensued. The representative of ASI moved to recess the
meeting however, a motion to adjourned was accepted by
the Chairman, Young. The meeting continued. On the
basis of the cumulative votes cast earlier in the meeting,
the ASI Group nominated its four nominees. These
incidents triggered the filing of separated petitions with the
SEC.
The first petition was for preliminary injunction by
Saniwares (the Lagdameo or Filipino group). The second
was for quo warranto and application for receivership by
ASI (the foreigners group). The petitions were
consolidated and tried jointly by a hearing officer who
rendered a decision upholding the election of the
Lagdameo Group and dismissing the quo warranto
petition. SEC en banc affirmed. The SEC decision led to
the filing of 2 separate appeals with IAC. IAC remand the
case to the SEC and ordered a new stockholder’s
meeting, under the supervision of the SEC. IAC amended
its decision and directed that in all subsequent elections
for directors of Saniwares, ASI cannot nominate more than
3 directors; that the Filipino stockholders shall not interfere
in ASI's choice of its 3 nominees; that, on the other hand,
the Filipino stockholders can nominate only 6 candidates
and in the event they cannot agree on the 6 nominees,
they shall vote only among themselves to determine who
the six (6) nominees will be, with cumulative voting to be
allowed but without interference from ASI. Petitioner
assails the decision of the IAC.
ISSUE: who were the duly elected directors of Saniwares
for the year 1983. To answer this question the following
factors should be determined: (1) the nature of the
business established by the parties whether it was a joint
venture or a corporation and (2) whether or not the ASI
Group may vote their additional 10% equity during
elections of Saniwares' board of directors.
RULING: WHEREFORE, the petitions in G.R. Nos. 75975-
76 and G.R. No. 75875 are DISMISSED and the petition in
G.R. No. 75951 is partly GRANTED. The amended
decision of the Court of Appeals is MODIFIED in that
Messrs. Wolfgang Aurbach John Griffin, David upon and embodied in the parties' Agreement to protect
Whittingham Emesto V. Lagdameo, Baldwin Young, Raul the interests arising from the minority status of the foreign
A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, investors.
and George F. Lee are declared as the duly elected
directors of Saniwares at the March 8,1983 annual
stockholders' meeting. In all other respects, the
questioned decision is AFFIRMED. Costs against the
petitioners in G.R. Nos. 75975-76 and G.R. No. 75875

RATIO: In the instant cases, our examination of important

provisions of the Agreement as well as the testimonial
evidence presented by the Lagdameo and Young Group
shows that the parties agreed to establish a joint venture
and not a corporation. The history of the organization of
Saniwares and the unusual arrangements which govern its
policy making body are all consistent with a joint venture
and not with an ordinary corporation. Section 5 (a) of the
agreement uses the word "designated" and not
"nominated" or "elected" in the selection of the nine
directors on a six to three ratio. Each group is assured of a
fixed number of directors in the board. Moreover, ASI in its
communications referred to the enterprise as joint venture.
Baldwin Young also testified that Section 16(c) of the
Agreement that "Nothing herein contained shall be
construed to constitute any of the parties hereto partners
or joint venturers in respect of any transaction hereunder"
was merely to obviate the possibility of the enterprise
being treated as partnership for tax purposes and liabilities
to third parties.

As in other joint venture companies, the extent of ASI's

participation in the management of the corporation is
spelled out in the Agreement. Section 5(a) hereof says
that three of the nine directors shall be designated by ASI
and the remaining six by the other stockholders, i.e., the
Filipino stockholders. This allocation of board seats is
obviously in consonance with the minority position of ASI.

The ASI Group and petitioner Salazar, now reiterate their

theory that the ASI Group has the right to vote their
additional equity pursuant to Section 24 of the Corporation
Code which gives the stockholders of a corporation the
right to cumulate their votes in electing directors. However,
as correctly ruled by the CA, ASI should not be allowed to
interfere in the voting within the Filipino group. Otherwise,
ASI would be able to designate more than the three
directors it is allowed to designate under the Agreement,
and may even be able to get a majority of the board seats,
a result which is clearly contrary to the contractual intent of
the parties. In this regard, petitioner Salazar's position is
that the Anti-Dummy Act allows the ASI group to elect
board directors in proportion to their share in the capital of
the entity. It is to be noted, however, that the same law
also limits the election of aliens as members of the board
of directors in proportion to their allowance participation of
said entity. In the instant case, the foreign Group ASI was
limited to designate three directors. This is the allowable
participation of the ASI Group. Hence, in future dealings,
this limitation of six to three board seats should always be
maintained as long as the joint venture agreement exists
considering that in limiting 3 board seats in the 9-man
board of directors there are provisions already agreed