North American Oil Consolidated vs.
Burnet CIR vs Javier
Doctrine: Income is taxable during the year a taxpayer is entitled to
the income and receives it.
FACTS:
 Petitioner operated an oil company under US land.
 A receiver was appointed to operate the property, or supervise
its operations, and to hold the net income.
 The receiver paid the income received for 1916 to the petitioner
in 1917.
 The income earned from the property in 1916 had been entered
on the books of the company as its income. It had not been
included in its original return of income for 1916; but it was
included in an amended return for that year which was filed in
1918Upon auditing the company's income and profits tax
returns for 1917, the Commissioner of Internal Revenue
determined a deficiency.
 Commissioner prayed that the deficiency already claimed
should be increased so as to include a tax on the amount paid
by the receiver to the company in 1917.
 The Board of Tax Appeals held that the profits were taxable to
the receiver as income of 1916.
 The Circuit Court of Appeals held that the profits were taxable
to the company as income of 1917.
Contention of Petitioner:
The petitioner contends that they should have been reported by the
receiver for taxation in 1916; that, if not returnable by him, they
should have been returned by the company for 1916, because they
constitute income of the company accrued in that year, and that, if
not taxable as income of the company for 1916, they were taxable
to it as income for 1922, since the litigation was not finally terminated
in its favor until 1922.
ISSUE: The question for decision is whether the sum of $171,979.22,
received by the North American Oil Consolidated in 1917, was
taxable to it as income of that year?
RULING:
 The income earned in 1916 and impounded by the receiver in
that year was not taxable to the him, because he was the
receiver of only a part of the properties operated by the
company. Under the Revenue Act of 1916, receivers who "are
operating the property or business of corporations" were
obliged to make returns "of net income as and for such
corporations," and "any income tax due" was to be "assessed
and collected in the same manner as if assessed directly
against the organizations of whose businesses or properties they
have custody and control."
 The net profits were not taxable to the company as income of
1916. For the company was not required in 1916 to report as
income an amount which it might never receive. There was no
constructive receipt of the profits by the company in that year,
because at no time during the year was there a right in the
company to demand that the receiver pay over the money.
 Throughout 1916, it was uncertain who would be declared
entitled to the profits. It was not until 1917, when the district court
entered a final decree vacating the receivership and dismissing
the bill, that the company became entitled to receive the
money. Nor is it material, for the purposes of this case, whether
the company's return was filed on the cash receipts and
disbursements basis, or on the accrual basis. In neither event
was it taxable in 1916 on account of income which it had not
yet received and which it might never receive.
 The net profits earned by the property in 1916 were not income
of the year 1922 -- the year in which the litigation with the
government was finally terminated. They became income of
the company in 1917, when it first became entitled to them and
when it actually received them. If a taxpayer receives earnings
under a claim of right and without restriction as to its disposition,
he has received income which he is required to return, even
though it may still be claimed that he is not entitled to retain the
money, and even though he may still be adjudged liable to
restore its equivalent.
Fraud is never imputed and the courts never sustain findings of fraud
upon circumstances which, at most, create only suspicion and the
mere understatement of a tax is not itself proof of fraud for the
purpose of tax evasion.
The fraud contemplated by law is actual and not constructive. It
must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give
up some legal right. Negligence, whether slight or gross, is not
equivalent to the fraud with intent to evade the tax contemplated
by law. It must amount to intentional wrong-doing with the sole
object of avoiding the tax. It necessarily follows that a mere mistake
cannot be considered as fraudulent intent, and if both petitioner
and respondent Commissioner of Internal Revenue committed
mistakes in making entries in the returns and in the assessment,
respectively, under the inventory method of determining tax liability,
it would be unfair to treat the mistakes of the petitioner as tainted
with fraud and those of the respondent as made in good faith.
Petitioner: Commissioner of Internal Revenue
Respondent: Melchor Javier, Jr.
Third person (Mortgagor, Assignor): if available
Applicable Articles:
Under the then Section 72 of the Tax Code (now Section 248 of the
1988 National Internal Revenue Code), a taxpayer who files a false
return is liable to pay the fraud penalty of 50% of the tax due from
him or of the deficiency tax in case payment has been made on the
basis of the return filed before the discovery of the falsity or fraud.
Facts:
1. Jun 03, 1977 Victoria Javier (Wife of Respondent), received
almost 1M USD , in error, from her sister through
some banks in the US. The amount of remittance
should have been 1k USD.
2. Jun 29, 1977 Mellon Bank filed a case against Javier claiming
the remittance was in made error and
demanded the return of the excess fund.
3. Nov 05, 1977 Fiscal also filed estafa case againstJavier
claiming that Javier misappropriated, misapplied
and converted to his own use the fund he should
have held in trust.
4. Mar 15, 1978 Javier filed income tax return showing net income
of 48k. In the footnotes of the return, he indicated
"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."
5. Dec 15, 1980 Javier was assessed to pay deficiency assessment
of 1.6k and 9.3M for years 1976 and 1977
respectively. He asked the BIR to defer the
assessment for 1977 until the case filed against
him has been decided.
6. Nov 11, 1981 The CIR responded that "the amount of Mellon
Bank's erroneous remittance which you were
able to dispose, is definitely taxable." The CIR
imposed 50% fraud penalty against Javier.
Type of Case Filed: Appeal of tax assessment
Ruling of Lower Courts: Reversal of CIR decision. Acts by Javier does
not constitute fraud.
Contention of CIR/OSG.
 The record clearly shows that private respondent is self-
convinced, and so acted, that he is the beneficial owner,
and of which reason is liable to tax. (Winidraw nya un
pera,in span of 11 days, kasi akala nya kanya)
Contention of Javier
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  The case has been dubbed million-dollar-case. It is obvious
that the BIR will want to make an assessment.
 It is a case of first impression. Similar cases in the US would
have decided that the mistaken remittance is not taxable.
Further, non-disclosure of mistaken remittance does not
constitute fraud.
 In the estafa case, he was being alleged to have used the
money for his own benefit. If he paid the deficiency tax
using the mistaken, he would be found quilty of estafa for
having to use the fund for his own benefit.
Issue:
Whether there is fraud involved (and consequently, Javier to be
held liable for fraud penalty) – NO.
Ruling:
We are persuaded considerably by the private
respondent's contention that there is no fraud in the filing of the return
and agree fully with the Court of Tax Appeals'interpretation of
Javier's notation on his income tax return filed on March 15, 1978
thus: "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."
. . . The fraud contemplated by law is actual and not
constructive. It must be intentional fraud, consisting of deception
willfully and deliberately done or resorted to in order to induce
another to give up some legal right. Negligence, whether slight or
gross, is not equivalent to the fraud with intent to evade the tax
contemplated by law. It must amount to intentional wrong-doing
with the sole object of avoiding the tax. It necessarily follows that a
mere mistake cannot be considered as fraudulent intent, and if both
petitioner and respondent Commissioner of Internal Revenue
committed mistakes in making entries in the returns and in the
assessment, respectively, under the inventory method of
determining tax liability, it would be unfair to treat the mistakes of the
petitioner as tainted with fraud and those of the respondent as
made in good faith.
Fraud is never imputed and the courts never sustain findings
of fraud upon circumstances which, at most, create only suspicion
and the mere understatement of a tax is not itself proof of fraud for
the purpose of tax evasion
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
petitioner's zealousness to collect taxes from the unearned windfall
to Javier is highly commendable.1âwphi1 Unfortunately, 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." As ruled by respondent Court
of Tax Appeals, the 50% surcharge imposed as fraud penalty by the
petitioner against the private respondent in the deficiency
assessment should be deleted.
BULL v. UNITED STATES
Ponente: Mr. Justice ROBERTS
Doctrine:
 Moneys received by a deceased partner's estate as his
share of profits earned by the firm before he died, are
taxable as his income and also are to be included as part
of his estate in computing the federal estate tax.
 Where the articles of a personal service partnership having
no invested capital provide that, in the event of a partner's
death, the survivors, if his representative does not object,
shall be at liberty to continue the business for a year, the
estate in that case to share the profits or losses as the
deceased partner would if living, the profits coming to the
estate from such continuation of the business are not to be
regarded as the fruits of a sale of any interest of the
deceased to the survivors, but are income of the estate,
taxable as such; they are no part of the corpus of the
estate left by the decedent upon which the federal estate
tax is to be computed
Facts:
Archibald H. Bull died February 13, 1920. He had been a
member of a partnership engaged in the business of ship-brokers.
The agreement of association provided that in the event a partner
died the survivors should continue the business for one year
subsequent to his death, and his estate should 'receive the same
interests, or participate in the losses to the same extent,' as the
deceased partner would, if living, 'based on the usual method of
ascertaining what the said profits or losses would be . ... Or the estate
of the deceased partner shall have the option of withdrawing his
interest from the firm within thirty days after the probate of will ... and
all adjustments of profits or losses shall be made as of the date of
such withdrawal.'
The estate's representative did not exercise the option to
withdraw in thirty days, and the business was conducted until
December 31, 1920, as contemplated by the agreement.
Bull's share of profits from January 1, 1920, to the date of his
death, February 13, 1920, was $24,124.20; he had no other
accumulated profits and no interest in any tangible property
belonging to the firm. Profits accruing to the estate for the period
from the decedent's death to the end of 1920 were $212,718.79;
$200,117.90 being paid during the year, and $12, 601.70 during the
first two months of 1921.
April 14, 1921, plaintiff filed an income tax return for the
period February 13, 1920, to December 31, 1920, for the estate of the
decedent, which return did not include, as income, the amount of
$200,117.09 received as the share of the profits earned by the
partnership during the period for which the return was filed.
'Thereafter, in July, 1925, the Commissionerdetermined that
the sum of $200,117.09 received in 1920 should have been returned
by the executor as income to the estate for the period February 13
to December 31, 1920, and notified plaintiff of a deficiency in
income tax due from the estate for that period of $261,212.65, which
was due in part to the inclusion of that amount as taxable income
and in part to adjustments not here in controversy. No deduction
was allowed by the Commissioner from the amount of $ 200,117.09
on account of the value of the decedent's interest in the partnership
at his death.
The executor appealed to the Board of Tax Appeals from
the deficiency of income tax so determined. The Board sustained
the Commissioner's action in including the item of $200,117.99
without any reduction on account of the value of the decedent's
interest in the partnership at the date of death,2 and determined a
deficiency of $55,166. 49, which, with interest of $7,510.95, was paid
April 14, 1928.
The executor filed a claim for refund of this amount, setting
forth that the $200,117.99, by reason of which the additional tax was
assessed and paid, was corpus; that it was so originally determined
by the Commissioner and the estate tax assessed thereon was paid
by the executor, and that the subsequent assessment of an income
tax against the estate for the receipt of the same sum was erroneous.
The claim was rejected May 8, 1929.
The Court of claims held that the item was income and properly so
taxed.
Contentions of BULL:
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(1) for the principal sum of $62,677.44, the amount paid April 14, 1928,
as a deficiency of income tax unlawfully assessed and collected; or
(2) for the sum of $47,643.44 on the theory that, if the sum of
$200,117.99 was income for the year 1920 and taxable as such, the
United States should have credited against the income tax
attributable to the receipt of this sum the overpayment of estate tax
resulting from including the amount in the taxable estate -- $34,035,
with interest thereon.
Issue:Whether or not Bull may recover the tax paid - NO
Ruling:
That the taxpayer was entitled to recoup from the amount
of the income tax the amount of the unlawful estate tax by suit for
the difference in the Court of Claims, although suit to recover the
unlawful tax independently had become barred. We concur in the
view of the Court of Claims that the amount received from the
partnership as profits earned prior to Bull's death was income earned
by him in his lifetime and taxable to him as such, and that it was also
corpus of his estate and as such to be included in his gross estate for
computation of estate tax. We also agree that the sums paid his
estate as profits earned after his death were not corpus, but income
received by his executor, and to be reckoned in computing income
tax for the years 1920 and 1921. Where the effect of the contract is
that the deceased partner's estate shall leave his interest in the
business and the surviving partners shall acquire it by payments to
the estate, the transaction is a sale, and payments made to the
estate are for the account of the survivors. It results that the surviving
partners are taxable upon firm profits, and the estate is not. Here,
however, the survivors have purchased nothing belonging to the
decedent, who had made no investment in the business and owned
no tangible property connected with it. The portion of the profits
paid his estate was therefore income, and not corpus, and this is so
whether we consider the executor a member of the old firm for the
remainder of the year, or hold that the estate became a partner in
a new association formed upon the decedent's demise.
The Government wrongfully collected and retained an
estate tax on moneys earned for and paid to an estate in
partnership transactions after the decedent's death, and which
were not part of the corpus of the estate and were properly taxable
only as income of the estate. Before the time allowed for claiming
reimbursement had elapsed, the Government proceeded to assess
and collect an income tax on the identical moneys.
Since the firm was a personal service concern and no
tangible property was involved in its transactions, if it had not been
for the terms of the agreement, no accounting would have ever
been made upon Bull's death for anything other than his share of
profits accrued to the date of his death -- $24,124.20 -- and this would
have been the only amount to be included in his estate in
connection with his membership in the firm. As respects the status
after death, the form of the stipulation is significant. The declaration
is that the surviving partners "are to be at liberty" to continue the
business for a year, in the same relation with the deceased partner's
estate as if it were in fact the decedent himself still alive and a
member of the firm. His personal representative is given a veto which
will prevent the continuance of the firm's business. The purpose may
well have been to protect the goodwill of the enterprise in the
interest of the survivors, and to afford them a reasonable time in
which to arrange for their future activities. But no sale of the
decedent's interest or share in the goodwill can be spelled out.
Indeed, the government strenuously asserted, in supporting the
treatment of the payments to the estate as income, that the estate
sold nothing to the surviving partners, and we agree. An analogous
situation would be presented if Bull had not died, but the partnership
had terminated by limitation on February 13, 1920, and the
agreement had provided that, if Bull's partners so desired, the
relation should continue for another year. It could not successfully be
contended that, in such case, Bull's share of profit for the additional
year was capital.
In a proceeding for the collection of estate tax, the United
States through a palpable mistake, took more than it was entitled to.
Retention of the money was against morality and conscience. But
claim for refund or credit was not presented, or action instituted for
restitution, within the period fixed by the statute of limitations. If
nothing further had occurred, congressional action would have
been the sole avenue of redress.
We are of opinion that the petitioner was entitled to have
credited against the deficiency of income tax the amount of his
overpayment of estate tax with interest, and that he should have
been given judgment accordingly.
COLLECTOR vs UST
Petitioner/s : Collector of Internal Revenue
Respondent/s : University of Santo Tomas
Ponente: Montemayor, J
DOCTRINE: The doctrine of equitable recoupment means that when
a refund of a tax illegally or erroneously collected or overpaid by a
taxpayer is barred by the statute of limitations and a tax is being
presently assessed against said taxpayer, SAID PRESENT TAX MAY BE
RECOUPED OR SET-OFF AGAINST THE TAX, the refund of which has
been barred. However, such doctrine is not binding in this country,
and the Court refused to introduce the same in this jurisdiction by
virtue of this decision.
FACTS :
 During the period from January 1, 1948-June 30, 1950, UST paid
on its gross receipts derived from its printing and binding jobs for
the public and the different departments of the University, the
aggregate amount of Php13,590.03, representing the 2% tax on
its gross receipts during the period in question
 On October 17,1950, UST requested in writing from the
respondent the refund of the sum of Php 8,293.31, on account
of the following:
*The amount of Php 359,972.45 paid by the other
departments tothe UST Press was for the purposes of
accounting only and does notlegally constitute gross
receipts subject to the percentage tax
*The printing and binding of the annuals THOMASIAN and
VERITAS fall under the exception provided for in Section 191
in relation to Section 183(a) of the Tax Code
CONTENTION OF CIR :
UST’s claim for refund in the sum of Php 8,293.31 (representing
business printer’s percentage tax pursuant to Section 191 of the Tax
Code, in relation to Section 183(a)) is denied; also, the amount of
Php 2,452.04, representing deficiency percentage tax and
surcharge on the undeclared receipts derived from the printing and
binding of the subject annuals, is hereby assessed and demanded
from UST; also, petitioner is ordered to pay Php 100 as compromise
penalty
DECISION OF CTA: Modified the decision of the CIR
 UST’s claim for refund to the extent of Php 5, 842.27 is DENIED,
the same being BARRED BY PRESCRIPTION
 The deficiency tax assessment of Php 2, 451.04 for percentage
taxes and surcharges is RECOGNIZED, but the amount is
DEEMED PAID, BY WAY OF RECOUPMENT, to the extent of the
amount of Php 2, 451.04 which UST erroneously paid for the
period from January 1948 to June 1950. Respondent is thus
ordered to desist from further collecting said deficiency
assessment
ISSUE: Whether the CTA erred in applying the doctrine of equitable
recoupment?YES
RULING + RATIO:
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 YES. THE COURT HELD THAT THE CTA ERRED IN APPLYING THE
DOCTRINE OF EQUITABLE RECOUPMENT IN ITS DECISION.
 The doctrine of equitable recoupment means that when a
refund of a tax illegally or erroneously collected or overpaid by
a taxpayer is barred by the statute of limitations and a tax is
being presently assessed against said taxpayer, SAID PRESENT
TAX MAY BE RECOUPED OR SET-OFF AGAINST THE TAX, the refund
of which has been barred.
 For instance, where the Government has failed to collect a tax
within the period of limitation and said collection is already
barred, and the taxpayer has to its credit a tax illegally or
erroneously collected or overpaid, whose refund is not yet
barred, the Government need not make refund of all the tax
illegally or erroneously collected, BUT IT MAY SET OFF AGAINST
ITTHE TAX WHOSE COLLECTION IS BARRED BY THE STATURE OF
LIMITATIONS.
 However said doctrine is not allowed in this country.If allowed,
both the collecting agency and the taxpayer might be
tempted to delay and neglect the pursuit of their respective
claims which the period prescribed by law
 A collector may be tempted to make illegal assessments and
collections, and the taxpayer would be helpless because
however illegal and unauthorized the assessment may be, the
Collector can always enforce the same by levy and distraint,.
 As regards the taxpayer, he may also be tempted to delay and
neglect the filing of the corresponding suit for refund of a tax
illegally or erroneously collected, trusting that he can always
recover or be credited with the same or part thereof by refusing
to pay a valid tax assessed against him and compelling the
Government to set-off the same against a tax payment he
could no longer recover.
 CTA, in applying such doctrine, reasoned that the same serves
as a cushion to the harsh and iniquitous effects of the statute of
limitations (prescriptive period), because it would be oppressive
to leave the taxpayer without any remedy to set off taxes
erroneously collected, which are barred by prescription.
 The SC held that prescription may be rigorous and at times may
be a little harsh, but certainly there could be no oppression,
much less iniquity WHERE THE SAME LAW IS APPLIED EQUALLY TO
THE GOVERNMENT AND THE TAXPAYER
 On the contrary, that statute of limitations has a salutary and
wholesome effect because under the same, the tax collecting
agency of the Government, and the taxpayer would be alert
and vigilant, and would be constrained to make assessment
and collection, and demand the refund of taxes illegally or
erroneously collected, respectively, ON TIME.
CONCLUSION: Petition DENIED
CIR vs. BOAC
COMMISSIONER OF INTERNAL REVENUE, petitioner
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
PONENTE: Melencio-Herrera
DOCTRINE:
The test of taxability is the "source"; and the source of an
income is that activity . . . which produced the income.
APPLICABLE LAWS: Section 42 of the NIRC on Income from Sources
in the Philippines
FACTS :
 Petitioner Commissioner of Internal Revenue (CIR) seeks a
review on Certiorari of the joint Decision of the Court of Tax
Appeals (CTA) dated 26 January 1983 in CTA Case Nos. 2373
and 2561, which set aside CIR's assessment of deficiency
income taxes against respondent British Overseas Airways
Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to
1970-71.
 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 and is a
member-signatory of the Interline Air Transport Association
(IATA).
 As such, it operates air transportation service and sells
transportation tickets over the routes of the other airline
members.
 During the periods covered by the disputed assessments, 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 — Warner Barnes and Company, Ltd., and later
Qantas Airways — which was responsible for selling BOAC
tickets covering passengers and cargoes.
 In G.R. No. 65773 (CTA Case No. 2373, the First Case) it is
alleged that:
o On 7 May 1968, CIR assessed BOAC the amount of
P2,498,358.56 for deficiency income taxes covering the
years 1959 to 1963. This was protested by BOAC.
Subsequent investigation resulted in the issuance of a
new assessment, for the years 1959 to 1967 in the amount
of P858,307.79, which BOAC paid under protest.
o On 7 October 1970, BOAC filed a claim for refund of the
amount of P858,307.79, which claim was denied by the
CIR on 16 February 1972. But before said denial, BOAC
had already filed a petition for review with the Tax Court
on 27 January 1972, assailing the assessment and
praying for the refund of the amount paid.
 In G.R. No. 65774 (CTA Case No. 2561, the Second Case) it is
alleged that:
o On November 17, 1971, BOAC was assessed deficiency
income taxes, interests, and penalty for the fiscal years
1968/1969 to 1970-1971 in the aggregate amount of
P549,327.43, and the additional amounts of P1,000.00 and
P1,800.00 as compromise penalties for violation of Section
46 (requiring the filing of corporation returns) penalized
under Section 74 of the National Internal Revenue
Code (NIRC).
o On November 25, 1971, BOAC requested that the
assessment be countermanded and set aside, however,
the CIR not only denied the BOAC request for refund in the
First Case but also re-issued in the Second Case the
deficiency income tax assessment for P534,132.08 for the
years 1969 to 1970-71 plus P1,000.00 as compromise
penalty under Section 74 of the Tax Code.
o BOAC's request for reconsideration was denied by the CIR
on 24 August 1973. This prompted BOAC to file the Second
Case before the Tax Court praying that it be absolved of
liability for deficiency income tax for the years 1969 to 1971.
RULING OF THE CTA:
 The CTA reversed the ruling of the CIR.
 The Tax Court held that the proceeds of sales of BOAC passage
tickets in the Philippines by Warner Barnes and Company, Ltd.,
and later by Qantas Airways, during the period in question, do
not constitute BOAC income from Philippine sources "since no
service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not
subject to Philippine income tax.
 The CTA position was that income from transportation is income
from services so that the place where services are rendered
determines the source.
 Thus, the CTA ordered the CIR to credit BOAC with the sum of
P858,307.79, and to cancel the deficiency income tax
4
 assessments against BOAC in the amount of P534,132.08 for the
fiscal years 1968-69 to 1970-71.
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. YES.
RULING + RATIO:
The Court Ruled in the Affirmative.
The Tax Code defines "gross income" thus:
"'Gross income' includes gains, profits, and
income derived from salaries, wages or
compensation for personal service of whatever
kind and in whatever form paid, or from
profession, vocations, trades, business,
commerce, sales, or dealings in property,
whether real or personal, growing out of the
ownership or use of or interest in such property;
also from interests, rents, dividends, securities, or
the transactions of any business carried on for
gain or profit or gains, profits, and income
derived from any source whatever.”
"The words 'income from any source whatever' disclose a
legislative policy to include all income not expressly exempted within
the class of taxable income under our laws." Income means "cash
received or its equivalent"; it is the amount of money coming to a
person within a specific time . . .; it means something distinct from
principal or capital. For, while capital is a fund, income is a flow. As
used in our income tax law, "income" refers to the flow of wealth.
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 situs of the source
of payments is the Philippines. The flow of wealth proceeded from,
and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting
the government.
A transportation ticket is not a mere piece of paper. When
issued by a common carrier, it constitutes the contract between the
ticket-holder and the carrier. It gives rise to the obligation of the
purchaser of the ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger upon the terms
and conditions set forth thereon. The ordinary ticket issued to
members of the travelling public in general embraces within its terms
all the elements to constitute it a valid contract, binding upon the
parties entering into the relationship.
True, Section 37(a) of the Tax Code, which enumerates
items of gross income from sources within the Philippines, namely: (1)
interest, (2) 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.
The absence of flight operations to and from the Philippines
is not determinative of the source of income or the situs of income
taxation. Admittedly, BOAC was an off-line international airline at the
time pertinent to this case. The test of taxability is the "source"; and
the source of an income is that activity . . . which produced the
income. Unquestionably, the passage documentations in these
cases were sold in the Philippines and the revenue therefrom was
derived from a business activity regularly pursued within the
Philippines. And even if the BOAC tickets sold covered the "transport
of passengers and cargo to and from foreign cities", it cannot alter
the fact that income from the sale of tickets was derived from the
Philippines. The word "source" conveys one essential idea, that of
origin, and the origin of the income herein is the Philippines.
Also, Presidential Decree No. 69 ensures that international
airlines are taxed on their income from Philippine sources.
Lastly, the Court found that the case is not barred by res
judicata by the previous ruling in a case in Jal v. CIR. The ruling by
the Tax Court in that case was to the effect that the mere sale of
tickets, unaccompanied by the physical act of carriage of
transportation, does not render the taxpayer therein subject to the
common carrier's tax. As elucidated by the Tax Court, however, the
common carrier's tax is an excise tax, being a tax on the activity of
transporting, conveying or removing passengers and cargo from
one place to another. It purports to tax the business of
transportation. Being an excise tax, the same can be levied by the
State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject
matter of the case under consideration is income tax, a direct tax
on the income of persons and other entities "of whatever kind and in
whatever form derived from any source." Since the two cases treat
of a different subject matter, the decision in one cannot be res
judicata to the other.
Additional Notes:
Under Section 20 of the 1977 Tax Code:
"(h) the term 'resident foreign corporation'
applies to a foreign corporation engaged in
trade or business within the Philippines or
having an office or place of business therein.
"(i) The term 'non-resident foreign corporation'
applies to a foreign corporation not engaged
in trade or business within the Philippines and
not having any office or place of business
therein.”
The Court opined that BOAC is a resident foreign
corporation. There is no specific criterion as to what constitutes
"doing" or "engaging in" or "transacting" business. Each case must be
judged in the light of its peculiar environmental circumstances. The
term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works
or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and
object of the business organization. "In order that a foreign
corporation may be regarded as doing business within a State, there
must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of
a temporary character.”
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.” 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
5
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.
"Sec. 24. Rates of tax on corporations. — . . .
"(b) Tax on foreign corporations. — . . .
"(2) Resident corporations. — A corporation
organized, authorized, or existing under the
laws of any foreign country, except a foreign
life insurance company, engaged in trade or
business within the Philippines, shall be taxable
as provided in subsection (a) of this section
upon the total net income received in the
preceding taxable year from all sources within
the Philippines.
NDC v CIR
Petitioners: National Development Company
Respondents: Commissioner of Internal Revenue
DOCTRINES:
• With regard to then Sec. 37 (a) (1) of the Tax Code on
interest derived from sources within the Philippines: The residence of
the obligor who pays the interest rather than the physical location of
the securities, bonds or notes or the place of payment, is the
determining factor of the source of interest income.
• Generally, the law frowns upon exemption from taxation;
hence, an exempting provision should be construed strictissimi juris.
• “In case of doubt, a withholding agent may always protect
himself by withholding the tax due, and promptly causing a query to
be addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is not
subject to withholding. In case the Commissioner of Internal Revenue
decides that the income paid to an individual is not subject to
withholding, the withholding agent may thereupon remit the
amount of tax withheld. — Strict observance of said steps is required
of a withholding agent before he could be released from liability.”
APPLICABLE LAWS:
Section 37 (1) of the Tax Code then:Income from sources within the
Philippines.
(a) Gross income from sources within the Philippines. — The
following items of gross income shall be treated as gross
income from sources within the Philippines:
(1) Interest. — Interest derived from sources within
the Philippines, and interest on bonds, notes, or
other interest-bearing obligations of residents,
corporate or otherwise;
FACTS:
 National Development Company (“NDC”) entered into
contracts in Tokyo with several Japanese shipbuilding
companies for the construction of twelve (12) ocean-going
vessels. The purchase price was to come from the proceeds of
bonds issued by the Central Bank (14 promissory notes).
 NDC remitted to the shipbuilders in Tokyo the total amount of
US$4,066,580.70 as interest on the balance of the purchase
price. No tax was withheld.
 The Commissioner then held the NDC liable on such tax.
RULING OF THE COURT OF TAX APPEALS:
• Sustained the BIR— served on the NDC a warrant of
distraint and levy to enforce collection of the claimed amount less a
slight reduction representing the compromise penalty..
CONTENTIONS OF NDC:
• argues that the Japanese shipbuilders were not subject to
tax under the above provision because all the related activities —
the signing of the contract, the construction of the vessels, the
payment of the stipulated price, and their deliver to NDC — were
done in Tokyo.
• suggested that the NDC is merely an administrator of the
funds of the RP.
• suggested that the RP could not collect taxes on interest
remitted because of the undertaking signed by the Secretary of
Finance in each promissory notes.
ISSUE: Is NDC liable for such amount? YES.
RULING + RATIO:
 The Japanese shipbuilders were liable to tax on the interest
remitted to them under [then] Section 37 of the Tax Code. The
law does not speak of activity but of “source,” which in this case
is NDC— a domestic and resident corporation with principal
offices in Manila.
 The interest remitted to the Japanese shipbuilders in Japan on
the unpaid balance of the purchase price of vessels acquired
by NDC is interest derived from sources within the Philippines
subject to income tax under the then Section 24(b)(1) of the
National Internal Revenue Code.
 The tax was due on the interests earned by the Japanese
shipbuilders. It was the income of these companies and not the
RP that was subject to the tac the NDC did not withhold. In
effect, the imposition of the deficiency taxes on the NDC is a
penalty for its failure to withhold the same from the Japanese
shipbuilders as imposed by then Section 53(c) of the Tax Code.
CIR v. LEDNICKY
Petitioner: Commissioner of Internal Revenues
Respondents: V.E. Lednicky and Maria Valero Lednicky
DOCTRINES:
 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.
 An alien resident's right to deduct from gross income the income
taxes he paid to a foreign government is given only as an
alternative to his right to claim a tax credit for such foreign
income taxes; so that unless he has a right to claim such tax
credit if he chooses, he is precluded from said deduction.
 An alien resident is 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.
APPLICABLE LAWS:
Section 30 (C-1) of the Philippine Internal Revenue Code
SEC. 30. Deduction from gross income. — In computing net income
there shall be allowed as deductions —
xxxxx
(c) Taxes:
(1) In general. — Taxes paid or accrued within the taxable year,
except —
6
 (A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes imposed by
the authority of any foreign country; but this deduction shall
be allowed in the case of a taxpayer who does not signify in
his return his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credit for foreign
countries); x x x x x
(3) Credits against tax for 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 Title
shall be credited with — x x x x x
(B) Alien resident of the Philippines. — In the case of
an alien resident of the Philippines, the amount of any
such taxes paid or accrued during the taxable year
to any foreign country, if the foreign country of which
such alien resident is a citizen or subject, in imposing
such taxes, allows a similar credit to citizens of the
Philippines residing in such country;
(4) Limitation on credit. — The amount of the credit taken
under this section shall be subject to each of the following
limitations:
(A) The amount of the credit in respect to the tax paid
or accrued to any country shall not exceed the same
proportion of the tax against which such credit is
taken, which the taxpayer's net income from sources
within such country taxable under this Title bears to his
entire net income for the same taxable year; and
(B) The total amount of the credit shall not exceed the
same proportion of the tax against which such credit
is taken, which the taxpayer's net income from
sources without the Philippines taxable under this Title
bears to his entire net income for the same taxable
year.
(C) Estate, inheritance and gift taxes; and
(D) Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed. (Emphasis
supplied)
FACTS:
 Respondents V. E. Lednicky and Maria Valero Lednicky are
husband and wife, both American citizens residing in the
Philippines, and have derived all their income from Philippine
sources for the taxable years in question.
G. R. No. L-18286
 In compliance with local law, respondents filed their income tax
return for 1956, reporting therein a gross income of P1,017,287. 65
and a net income of P733,809.44 on which the amount of
P317,395.4 was assessed after deducting P4,805.59 as
withholding tax.
 Pursuant to petitioner's assessment notice, respondents paid the
total amount of P326,247.41, inclusive of the withheld taxes.
 Thereafter, respondents filed an amended income tax return for
1956. The amendment consists in a claimed deduction of
P205,939.24 paid in 1956 to the United States government as
federal income tax for 1956. Simultaneously with the filing of the
amended return, respondents requested the refund of
P112,437.90.
 When petitioner failed to answer the claim for refund,
respondents filed their petition with the Tax Court.
G. R. No. L-18169
 Respondents-spouses filed their domestic income tax return for
1955, reporting a gross income of P1,771,124.63 and a net
income of P1,052,550.67.
 They filed an amended income tax return; the amendment upon
the original being a lesser net income of P1,012,554.51 and on
the basis of this amended return, they paid P570,252.00 inclusive
of withholding taxes.
 After audit, petitioner determined a deficiency of P16,116.00
which amount respondents paid.
 Back in 1955, however, respondents filed with the U.S. Internal
Revenue Agent in Manila their federal income tax return for the
years 1947, 1951, 1952, 1953, and 1954 on income from Philippine
sources on a cash basis.
 Payment of these federal income taxes, including penalties and
delinquency interest in the amount of P264,588.82, were made in
1955 to the U.S. Director of Internal Revenue (Baltimore,
Maryland) through the National City Bank of New York (Manila
Branch).
 Exchange and bank charges in remitting payment totaled
P4,143.91.
 Respondents amended their Philippine income tax return for
1955 to include the necessary deductions and therewith filed a
claim for refund of the sum of P166,384.00, which was later
reduced to P150,269.00, as alleged overpaid income tax for
1955.
G.R. No. 21434
 Respondents filed their income tax return for 1957 and paid a
total sum of P196,799.65.
 In 1959, they filed an amended return for 1957, claiming
deduction of P190,755.80, representing taxes paid to the U.S.
Government on income derived wholly from Philippine sources.
 Respondents seek refund of P90 520.75 as overpayment.
RULING OF THE TAX COURT:
 Tax Court – decided for respondents in all the aforementioned
cases
o Respondent spouses did not "signify" in their income tax
return a desire to avail themselves of the benefits of 30 (c)
(1) (B).
ISSUE: Whether a citizen of the United States residing in the
Philippines, who derives income wholly from sources within the
Republic of the Philippines, may deduct from his gross income the
income taxes he has paid to the United States government for the
taxable year. – NO.
RULING + RATIO:
The Construction and wording of Section 30 (c) (1) (B) of the Internal
Revenue Act shows the law's intent that the right to deduct income
taxes paid to foreign government from the taxpayer's gross income
is given only as an alternative or substitute to his right to claim a tax
credit for such foreign income taxes under section 30 (c) (3) and (4);
so that unless the alien resident has a right to claim such tax credit if
he so chooses, he is precluded from deducting the foreign income
taxes from his gross income.
In prescribing that such deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire to have to any
extent the benefits of paragraph (3) (relating to credits for taxes paid
to foreign countries), the statute assumes that the taxpayer in
question also may signify his desire to claim a tax credit and waive
the deduction; otherwise, the foreign taxes would always be
deductible, and their mention in the list of non-deductible items in
Section 30(c) might as well have been omitted, or at least expressly
limited to taxes on income from sources outside the Philippine
Islands.
The purpose of the law is to prevent the taxpayer from claiming
twice the benefits of his payment of foreign taxes, by deduction from
gross income (subs. c-1) and by tax credit (subs. c-3). This danger of
double credit certainly cannot exist if the taxpayer cannot claim
benefit under either of these headings at his option, so that he must
be entitled to a tax credit (respondent admittedly are not so entitled
because all their income is derived from Philippine sources), or the
option to deduct from gross income disappears altogether.
Much stress is laid on the thesis that if respondent taxpayers are not
allowed to deduct the income taxes they are required to pay to the
government of the United States in their return for Philippine income
tax, they would be subjected to double taxation. What respondents
7
fail to observe is that double taxation becomes obnoxious only
where the taxpayer is taxed twice for the benefit of the same
governmental entity.
In this case, while the taxpayers would have to pay two taxes on the
same income, the Philippine government only receives the
proceeds of one tax. As between the Philippines, where the income
was earned and where the taxpayer is domiciled, and the United
States, where that income was not earned and where the taxpayer
did not reside, it is indisputable that justice and equity demand that
the tax on the income should accrue to the benefit of the Philippines.
Any relief from the alleged double taxation should come from the
United States, and not from the Philippines, since the former's right to
burden the taxpayer is solely predicated on his citizenship, without
contributing to the production of the wealth that is being taxed.
Aside from not conforming to the fundamental doctrine of income
taxation that the right of a government to tax income emanates
from its partnership in the production of income, by providing the
protection, resources, incentive, and proper climate for such
production, the interpretation given by the respondents to the
revenue law provision in question operates, in its application, to
place a resident alien with only domestic sources of income in an
equal, if not in a better, position than one who has both domestic
and foreign sources of income, a situation which is manifestly unfair
and short of logic.
Finally, to allow an alien resident to deduct from his gross income
whatever taxes he pays to his own government amounts to
conferring on the latter the power to reduce the tax income of the
Philippine government simply by increasing the tax rates on the alien
resident. Every time the rate of taxation imposed upon an alien
resident is increased by his own government, his deduction from
Philippine taxes would correspondingly increase, and the proceeds
for the Philippines diminished, thereby subordinating our own taxes
to those levied by a foreign government. Such a result is
incompatible with the status of the Philippines as an independent
and sovereign state.
Decisions of the Court of Tax Appeals are reversed and the
disallowance of the refunds claimed by respondents is affirmed.
Madrigal v. Rafferty GR12287, August 7,
Petitioner/s : VICENTE MADRIGAL and his wife, SUSANA PATERNO
Respondent/s : JAMES J. RAFFERTY, Collector of Internal Revenue,
and VENANCIO CONCEPCION, Deputy Collector of Internal Revenue
FACTS :
 Vicente Madrigal and Susana Paterno were legally married and
have conjugal partnership.
 Madrigal filed his total net income for the year is P296,302.73.
 Subsequently, Madrigal submitted the claim that the said total
net income of year 1914 did not represent his income for the
year 1914, but was in fact the income of the conjugal
partnership existing between himself and his wife, and the
computing and assessing the additional income tax provided
by the Act of Congress of Oct. 3, 1913, the income declared by
Madrigal and the other half of Paterno.
 Madrigal and Paterno brought action against Collector of
Internal Revenue and the Deputy Collector of Internal Revenue
for the recovery of the sum P3,786.08.
 The burden of the complaint was that if the income tax for the
year 1914 had been correctly and lawfully computed there
would have been due payable by each of the plaintiff the sum
of P2,921.09, which taken together amount of P5842.18 instead
of P9,668.21.
ISSUE: WON the additional income tax should be divided into equal
parts because of the conjugal partnership existing between them?
RULING + RATIO:
Income as contrasted with capital or property is to be the test. The
essential difference between capital and income is that capital is a
fund; income is a flow. A fund of property existing at an instant of
time is called capital. A flow of services rendered by that capital by
the payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time is
called an income. Capital is wealth, while income is the service of
wealth. (See Fisher, "The Nature of Capital and Income.") The
Supreme Court of Georgia expresses the thought in the following
figurative language: "The fact is that property is a tree, income is the
fruit; labor is a tree, income the fruit; capital is a tree, income the
fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on
income is not a tax on property. "Income," as here used, can be
defined as "profits or gains." (London County Council vs. Attorney-
General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49
Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax,
second edition [1915], Chapter IV; Black on Income Taxes, second
edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549;
and Towne vs. Eisner, decided by the United States Supreme Court,
January 7, 1918.)
A regulation of the United States Treasury Department relative to
returns by the husband and wife not living apart, contains the
following:
The husband, as the head and legal
representative of the household and general
custodian of its income, should make and render
the return of the aggregate income of himself
and wife, and for the purpose of levying the
income tax it is assumed that he can ascertain
the total amount of said income. If a wife has a
separate estate managed by herself as her own
separate property, and receives an income of
more than $3,000, she may make return of her
own income, and if the husband has other net
income, making the aggregate of both incomes
more than $4,000, the wife's return should be
attached to the return of her husband, or his
income should be included in her return, in order
that a deduction of $4,000 may be made from
the aggregate of both incomes. The tax in such
case, however, will be imposed only upon so
much of the aggregate income of both shall
exceed $4,000. If either husband or wife
separately has an income equal to or in excess of
$3,000, a return of annual net income is required
under the law, and such return must include the
income of both, and in such case the return must
be made even though the combined income of
both be less than $4,000. If the aggregate net
income of both exceeds $4,000, an annual return
of their combined incomes must be made in the
manner stated, although neither one separately
has an income of $3,000 per annum. They are
jointly and separately liable for such return and for
the payment of the tax. The single or married
status of the person claiming the specific
exemption shall be determined as one of the time
of claiming such exemption which return is made,
otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in
force in the Philippine Islands, we turn for a moment to consider the
provisions of the Civil Code dealing with the conjugal partnership.
Recently in two elaborate decisions in which a long line of Spanish
authorities were cited, this court in speaking of the conjugal
partnership, decided that "prior to the liquidation the interest of the
wife and in case of her death, of her heirs, is an interest inchoate, a
mere expectancy, which constitutes neither a legal nor an equitable
estate, and does not ripen into title until there appears that there are
assets in the community as a result of the liquidation and settlement."
8
(Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and
Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in
the property of her husband Vicente Madrigal during the life of the
conjugal partnership. She has an interest in the ultimate property
rights and in the ultimate ownership of property acquired as income
after such income has become capital. Susana Paterno has no
absolute right to one-half the income of the conjugal partnership.
Not being seized of a separate estate, Susana Paterno cannot make
a separate return in order to receive the benefit of the exemption
which would arise by reason of the additional tax. As she has no
estate and income, actually and legally vested in her and entirely
distinct from her husband's property, the income cannot properly be
considered the separate income of the wife for the purposes of the
additional tax. Moreover, the Income Tax Law does not look on the
spouses as individual partners in an ordinary partnership. The
husband and wife are only entitled to the exemption of P8,000
specifically granted by the law. The higher schedules of the
additional tax directed at the incomes of the wealthy may not be
partially defeated by reliance on provisions in our Civil Code dealing
with the conjugal partnership and having no application to the
Income Tax Law. The aims and purposes of the Income Tax Law must
be given effect.
In connection with the decision above quoted, it is well to recall a
few basic ideas. The Income Tax Law was drafted by the Congress
of the United States and has been by the Congress extended to the
Philippine Islands. Being thus a law of American origin and being
peculiarly intricate in its provisions, the authoritative decision of the
official who is charged with enforcing it has peculiar force for the
Philippines. It has come to be a well-settled rule that great weight
should be given to the construction placed upon a revenue law,
whose meaning is doubtful, by the department charged with its
execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S.,
338; In re Allen [1903], 2 Phil., 630; Government of the Philippine
Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of
Nueva Segovia [1915], 32 Phil., 634.) We conclude that the judgment
should be as it is hereby affirmed with costs against appellants. So
ordered.
CIR v Isabela Cultural Corp
Petitioner: Commissioner of Internal Revenue
Respondent: Isabela Cultural Corporation
Ponente:YNARES-SANTIAGO, J.
DOCTRINE: 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.
LAW APPLICABLE: Section 45 of the NIRC:"[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"
FACTS:
 On February 23, 1990, ICC, a domestic corporation, received
from the BIR:
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax
in the amount of P333,196.86
Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges
and interestboth for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR’s disallowance of ICC’s claimed expense deductions for
professional and security services billed to and paid by ICC in 1986,
to wit:
(a) Expenses for the auditing services of SGV & Co., for the year
ending December 31, 1985;
(b) Expenses for the legal services [inclusive of retainer fees] of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson for the years 1984 and 1985.
(c) Expense for security services of El Tigre Security & Investigation
Agency for the months of April and May 1986.
(2) The alleged understatement of ICC’s interest income on the three
promissory notes due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of
interest and surcharge) was allegedly due to the failure of ICC to
withhold 1% expanded withholding tax on its claimed P244,890.00
deduction for security services.
 On March 23, 1990, ICC sought a reconsideration of the subject
assessments.
 On February 9, 1995 it received a final notice before seizure
demanding payment of the amounts stated in the said notices.
 Hence, it brought the case to the CTA
 CTA held that the petition is premature because the final notice
of assessment cannot be considered as a final decision
appealable to the tax court.
 CA reversed holding that a demand letter of the BIR reiterating
the payment of deficiency tax, amounts to a final decision on
the protested assessment and may therefore be questioned
before the CTA.
 SC: sustained CA’s decision on July 1, 2001, in G.R. No. 135210.
 The case was thus remanded to the CTA for further
proceedings.
CTA: (on remanded case) February 26, 2003:
 Canceled and set aside the assessment notices issued
against ICC.
 The claimed deductions for professional and security
services were properly claimed by ICC in 1986 because it
was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these
professional services were rendered to ICC in 1984 or 1985,
it could not declare the same as deduction for the said
years as the amount thereof could not be determined at
that time.
 ICC did not understate its interest income on the subject
promissory notes. It found that it was the BIR which made
an overstatement of said income when it compounded
the interest income receivable by ICC from the promissory
notes of Realty Investment, Inc., despite the absence of a
stipulation in the contract providing for a compounded
interest; nor of a circumstance, like delay in payment or
breach of contract, that would justify the application of
compounded interest.
 ICC in fact withheld 1% expanded withholding tax on its
claimed deduction for security services as shown by the
various payment orders and confirmation receipts it
presented as evidence.
COURT OF APPEALS: affirmed the CTA decision
 Although the professional services (legal and auditing
services) were rendered to ICC in 1984 and 1985, the cost
of the services was not yet determinable at that time,
hence, it could be considered as deductible expenses only
in 1986 when ICC received the billing statements for said
services. It further ruled that ICC did not understate its
interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and
remitted taxes on the payments for security services for the
taxable year 1986.
PETITIONER’S CONTENTION:
1. Since ICC is using the accrual method of accounting, the
expenses for the professional services that accrued in 1984
and 1985, should have been declared as deductions from
income during the said years and the failure of ICC to do
so bars it from claiming said expenses as deduction for the
taxable year 1986.
9
 2. As to the alleged deficiency interest income and failure to
withhold expanded withholding tax assessment, petitioner
invoked the presumption that the assessment notices
issued by the BIR are valid.
ISSUE: Whether the Court of Appeals correctly:
(1) Sustained the deduction of the expenses for professional
and security services from ICC’s gross income-YES butonly
for Security Services
(2) Held that ICC did not understate its interest income from
the promissory notes of Realty Investment, Inc; and that
ICC withheld the required 1% withholding tax from the
deductions for security services.-YES
RULING+ 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 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".
Accounting methods for tax purposes comprise a set of rules for
determining when and how to report income and deductions. 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 method relies upon the taxpayer’s right to receive
amounts or its obligation to pay them, in opposition to actual receipt
or payment, which characterizes the cash method of accounting.
The accrual of income and expense is permitted when the all-events
test has been met. This test requires: (1) fixing of a right to income or
liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income or liability be fixed,
and the amount of such income or liability be determined with
reasonable accuracy. However, the test does not demand that the
amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute
the amount with reasonable accuracy. The all-events test is satisfied
where computation remains uncertain, if its basis is unchangeable.
IN THIS CASE:
A. As for EXPENSES FOR LEGAL SERVICES pertain to the 1984
and 1985 legal and retainer fees of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengso and for
reimbursement of the expenses of said firm in connection
with ICC’s tax problems for the year 1984.
SC: The firm has been ICC’s counsel since the 1960’s. 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.
As to when the firm’s performance of its services in connection with
the 1984 tax problems were completed, or 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. It simply relied on the
defense of delayed billing by the firm and the company, which
under the circumstances, is not sufficient to exempt it from being
charged with knowledge of the reasonable amount of the expenses
for legal and auditing services.
B. In the same veinr, 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.
SC: ICC failed to discharge the burden of proving that the claimed
expense deductions for the professional services were allowable
deductions for the taxable year 1986. Hence, per Revenue Audit
Memorandum Order No. 1-2000, they cannot be validly deducted
from its gross income for the said year and were therefore properly
disallowed by the BIR.
C. As to the EXPENSES FOR SECURITY SERVICES, the records
show that these expenses were incurred by ICC in 198620
and could therefore be properly claimed as deductions for
the said year.
SC: Anent the purported understatement of interest income from the
promissory notes of Realty Investment, Inc., no such understatement
exists and that only simple interest computation and not a
compounded one should have been applied by the BIR. There is
indeed no stipulation between the latter and ICC on the application
of compounded interest. Under Article 1959 of the Civil Code, unless
there is a stipulation to the contrary, interest due should not further
earn interest.
ICC truly withheld the required withholding tax from its claimed
deductions for security services and remitted the same to the BIR is
supported by payment order and confirmation receipts. Hence, the
Assessment Notice for deficiency expanded withholding tax was
properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of
P333,196.86 for deficiency income tax should be cancelled and set
aside but only insofar as the claimed deductions of ICC for security
services. The Court of Appeal’s cancellation of Assessment Notice
No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency
expanded withholding tax, is sustained.
DISPOSITION: PARTIALLY GRANTED. The case is remanded to the BIR
for the computation of Isabela Cultural Corporation’s liability under
Assessment Notice No. FAS-1-86-90-000680.
Obillos, Jr. v. CIR
Petitioners: Jose P. Obillos, Jr., Sarah P. Obillos, Romeo P. Obillos
and Remedios P. Obillos, brothers and sisters
10
Respondents: Commissioner of Internal Revenue and Court of Tax
Appeals
Doctrine: Where the father sold his rights over two parcels of land to
his four children so they can build their residence, but the latter after
one (1) year sold them and paid the capital gains, they should not
be treated to have formed an unregistered partnership and taxed
corporate income tax on the sale and dividend income tax on their
shares of the profit’s from the sale.
Case: PETITION to review the judgment of the CTA.
This case is about the income tax liability of four brothers and sisters
who sold two parcels of land which they had acquired from their
father.
AQUINO, J.:
FACTS:
 When Jose Obillos, Sr. completed the payment to Oritgas & Co.,
Ltd. for the 2 lots in Greenhill, San Juan, Rizal, Jose Sr. transferred
his rights over such lots to his 4 children (petitioners) to enable
them to build their residences. Presumably, the Torrens titles
issued to them would show that they were co-owners of the 2
lots.
 After having held the lots for more than a year, the petitioners
resold the lots to the Walled City Securities Corporation and
Olga Cruz Canda. They derived from the sale a total profit of
P134,341.88 or P33,584 for each of them. They treated the profit
as a capital gain and paid an income tax on one-half thereof
or on P16,792.
 In April, 1980, or one day before the expiration of the 5-year
prescriptive period, CIR required the petitioners to pay
corporate income tax on the total profit (P134,336) in addition
to individual income tax on their shares thereof. CIR assessed:
 P37,018 as corporate income tax;
 P18,509 as 50% fraud surcharge; and
 P15,547.56 as 42% accumulated interest, or a total of
P71,074.56.
Also CIR also considered:
 the share of the profits of each petitioner in the sum of
P33,584 as a "distributive dividend" taxable in full (not a
mere capital gain of which 1⁄2 is taxable) and
 required them to pay deficiency income taxes
aggregating P56,707.20 including the 50% fraud
surcharge and the accumulated interest.
 Thus, the petitioners are being held liable for deficiency income
taxes and penalties totaling P127,781.76 on their profit of
P134,336, in addition to the tax on capital gains already paid by
them.
 CIR acted on the theory that the petitioners had formed an
unregistered partnershipor joint venture within the meaning of
Sec. 24(a) and 84(b) of the Tax Code.
 CTAaffirmed CIR’s.
ISSUE:Whether the petitioners are considered an unregistered
partnership/joint venture, which qualifies them to be taxed for
corporate income tax. – NO.
RULING:
No creation of partnership as it would result to oppressive taxation
 We hold that it is error to consider the petitioners as having
formed a partnership under Art. 1767 of the Civil Code simply
because they allegedly contributed P178,708.12 to buy the two
lots, resold the same and divided the profit among themselves.
 To regard the petitioners as having formed a taxable
unregistered partnership would result in oppressive taxation and
confirm the dictum that the power to tax involves the power to
destroy. That eventuality should be obviated.
 As testified by Jose Jr., they had no such intention. They were
co-owners pure and simple.
 To consider them as partners would obliterate the distinction
between a coownership and a partnership. The petitioners were
not engaged in any joint venture by reason of that isolated
transaction.
 Their original purpose was to divide the lots for residential
purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of construction,
then they had no choice but to resell the same to dissolve the
co-ownership. The division of the profit was merely incidental to
the dissolution of the co-ownership which was in the nature of
things a temporary state. It had to be terminated sooner or later.
 Article 1769(3) of the Civil Code provides that "the sharing of
gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived".
There must be an unmistakable intention to form a partnership
or joint venture.
 In the instant case, what the Commissioner should have
investigated was whether the father donated the two lots to the
petitioners and whether he paid the donor's tax (See Art. 1448,
Civil Code), We are not prejudging this matter. It might have
already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside.
The assessments are cancelled. No costs.
The Case is distinguishable from the cases where the parties
engaged in joint ventures for profit.
 Oña vs. CIR, where after an extrajudicial settlement the coheirs
used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that
they were taxable as an unregistered partnership;
 It is likewise different from Reyes vs. CIR, where father and son
purchased a lot and building, entrusted the administration of
the building to an administrator and divided equally the net
income; and from
 Evangelista vs. CIR, where the three Evangelista sisters bought
four pieces of real property which they leased to various tenants
and derived rentals therefrom. Clearly, the petitioners in these
two cases had formed an unregistered partnership.
Pascual and Dragon vs. Commissioner
Doctrine:
“ Petitioner shared in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed of the tax amnesty
thereby. Under the circumstances, they cannot be considered to
have formed an unregistered partnership which is thereby liable for
corporate income tax, as the respondent commissioner proposes."
Petitioner: MARIANO P. PASCUAL and RENATO P. DRAGON
Respondent: THE COMMISSIONER OF INTERNAL REVENUE and COURT
OF TAX APPEALS
Ponente: J. GANCAYCO
Facts:
1. On June 22, 1965, petitioners bought two (2) parcels of land
from Santiago Bernardino, et al. and on May 28, 1966, they
bought another three (3) parcels of land from Juan Roque.
2. The first two parcels of land were sold by petitioners in 1968 to
Marenir Development Corporation, while the three parcels of
land were sold by petitioners to Erlinda Reyes and Maria
Samson on March 19,1970.
3. Petitioners realized a net profit in the sale made in 1968 in the
amount of P165,224.70, while they realized a net profit of
P60,000.00 in the sale made in 1970. The corresponding capital
gains taxes were paid by petitioners in 1973 and 1974 by
availing of the tax amnesties granted in the said years.
4. However, in a letter dated March 31, 1979 of then Acting BIR
Commissioner Efren I. Plana, petitioners were assessed and
required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and
1970.
Contention of Pascual et al
11
1. Protested the said assessment in a letter of June 26, 1979 asserting
that they had availed of tax amnesties way back in 1974.
Contention of CIR
1. That in the years 1968 and 1970, petitioners as co-owners in the
real estate transactions formed an unregistered partnership or
joint venture taxable as a corporation under Section 20(b) and
its income was subject to the taxes prescribed under Section 24,
both of the National Internal Revenue Code 1 that the
unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them
which is subject to individual income tax
2. That the availment of tax amnesty under P.D. No. 23, as
amended, by petitioners relieved petitioners of their individual
income tax liabilities but did not relieve them from the tax liability
of the unregistered partnership. Hence, the petitioners were
required to pay the deficiency income tax assessed.
Issue/Arguement:
1. Whether or not Pascual et al formed an unregistered
partnership subject to corporate income tax, and that the
burden of offering evidence in opposition thereto rests upon
the them. - NO
2. Whether in making a finding, solely on the basis of isolated
sale transactions, that an unregistered partnership existed
thus ignoring the requirements laid down by law that would
warrant the presumption/conclusion that a partnership
exists. - NO
3. whether instant case is similar to the evangelista case and
therefore should be decided alongside the evangelista
case. - NO
4. Whether or not tax amnesty did not relieve the Pascual et al
from payment of other taxes for the period covered by such
amnesty. - NO
Ruling:
a. Basis of the Ruling:
Sec. 24. Rate of the tax on corporations.—There shall be levied,
assessed, collected, and paid annually upon the total net
income received in the preceding taxable year from all
sources by every corporation organized in, or existing under
the laws of the Philippines, no matter how created or
organized but not including duly registered general co-
partnerships (companies collectives), a tax upon such income
equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no
matter how created or organized, joint-stock companies, joint
accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-
partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
Pursuant to this article, the essential elements of a partnership
are two, namely: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties.
b. Application of the law:
In the present case, there is no evidence that petitioners
entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide
the profits among themselves. Respondent commissioner and/
or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased
certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where
petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of
the common fund or even the properties acquired by them.
The character of habituality peculiar to business transactions
engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land
in 1965. They did not sell the same nor make any improvements
thereon. In 1966, they bought another three (3) parcels of land
from one seller. It was only 1968 when they sold the two (2)
parcels of land after which they did not make any additional
or new purchase. The remaining three (3) parcels were sold by
them in 1970. The transactions were isolated. The character of
habituality peculiar to business transactions for the purpose of
gain was not present.
In Evangelista, the properties were leased out to tenants for
several years. The business was under the management of one
of the partners. Such condition existed for over fifteen (15)
years. None of the circumstances are present in the case at
bar. The co-ownership started only in 1965 and ended in 1970.
It is evident that an isolated transaction whereby two or more
persons contribute funds to buy certain real estate for profit in
the absence of other circumstances showing a contrary
intention cannot be considered a partnership.
Persons who contribute property or funds for a common
enterprise and agree to share the gross returns of that
enterprise in proportion to their contribution, but who severally
retain the title to their respective contribution, are not thereby
rendered partners. They have no common stock or capital,
and no community of interest as principal proprietors in the
business itself which the proceeds derived. (Elements of the
Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p.
74.)
A joint purchase of land, by two, does not constitute a co-
partnership in respect thereto; nor does an agreement to
share the profits and losses on the sale of land create a
partnership; the parties are only tenants in common. (Clark vs.
Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
The sharing of returns does not in itself establish a partnership
whether or not the persons sharing therein have a joint or
common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership
between the petitioners. There is no adequate basis to support
the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they
purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in
the gross profits as co- owners and paid their capital gains
taxes on their net profits and availed of the tax amnesty
thereby. Under the circumstances, they cannot be considered
to have formed an unregistered partnership which is thereby
liable for corporate income tax, as the respondent
commissioner proposes.
And even assuming for the sake of argument that such
unregistered partnership appears to have been formed, since
there is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said
deficiency corporate income tax, then petitioners can be held
individually liable as partners for this unpaid obligation of the
partnership. However, as petitioners have availed of the
benefits of tax amnesty as individual taxpayers in these
transactions, they are thereby relieved of any further tax
liability arising therefrom.
12
 Disposition: WHEREFROM, the petition is hereby GRANTED and
the decision of the respondent Court of Tax Appeals of March
30, 1987 is hereby REVERSED and SET ASIDE and another
decision is hereby rendered relieving petitioners of the
corporate income tax liability in this case, without
pronouncement as to costs.
REYES v. CIR
Petitioner: FLORENCIO REYES and ANGEL REYES
Respondent (s): COMMISSIONER OF INTERNAL REVENUE and HON.
COURT OF TAX APPEALS
DOCTRINE: For purposes of the tax on corporations, the National
Internal Revenue Code includes partnerships, with the exception
only of duly registered general co-partnerships. And since under
section 84(b) of the Revenue Code, the term corporation includes
partnerships no matter how created or organized, this qualifying
expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms or in conformity with the
usual requirements of the law on partnerships.
LAW(S) APPLICABLE: Section 84 (b) of the NIRC
FACTS:
The Reyeses, father and son, purchased a lot and building, known as
the Gibbs Building for P835,000.00, of which they paid the sum of
P375,000.00, leaving a balance of P460,000.00, representing the
mortgage obligation of the vendors with the China Banking
Corporation, which mortgage obligations were assumed by the
vendees (the Reyeses).
At the time of the purchase, the building was leased to various
tenants, whose rights under the lease contracts with the original
owners, the Reyeses, agreed to respect.
The administration of the building was entrusted to an administrator
who collected the rents; kept its books and records and rendered
statements of accounts to the owners; negotiated leases; made
necessary repairs and disbursed payments, whenever necessary,
after approval by the owners; and performed such other functions
necessary for the conservation and preservation of the building.
They divided equally the income of operation and maintenance.
The gross income from rentals of the building amounted to about
P90,000.00 annually."
The Reyeses were assessed by the CIR the sum of P46,647.00 as
income tax, surcharge and compromise for the years 1951 to 1954,
an assessment subsequently reduced to P37,528.00.
This assessment sought to be reconsidered unsuccessfully was the
subject of an appeal to CTA
Thereafter, another assessment was made against petitioners, this
time for back income taxes plus surcharge and compromise in the
total sum of P25,973.75, covering the years 1955 and 1956.
There being a failure on their part to have such assessments
reconsidered, the matter was likewise taken to the CTA
In its joint decision, the tax liability for the years 1951 to 1954 was
reduced to P37,128.00 and for the years 1955 and 1956, to P20,619.00
as income tax due "from the partnership formed" by petitioners.
The reduction was due to the elimination of surcharge, the failure to
file the income tax return being accepted as due to petitioners
honest belief that no such liability was incurred as well as the
compromise penalties for such failure to file
A reconsideration of the aforesaid decision was sought and denied
the CTA
Ruling of the Lower Court (CTA):
The Court of Tax Appeals applying the appropriate provisions of the
National Internal Revenue Code, the first of which imposes an
income tax on corporations "organized in, or existing under the laws
of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships, ...," a term, which
according to the second provision cited, includes partnerships "no
matter how created or organized, ...," and applying the leading
case of Evangelista v. Collector of Internal Revenue, sustained the
action of respondent Commissioner of Internal Revenue, but
reduced the tax liability of petitioners, as previously noted.
Contention of the Petitioners (Angel and Feliciano Reyes):
They maintain the view that the Evangelista ruling does not apply.
They allege that the reliance by CTA was unwarranted and the
decision should be set aside. If their interpretation of the
authoritative doctrine therein set forth commands assent, then
clearly what respondent Court of Tax Appeals did fails to find shelter
in the law. That is the crux of the matter. A perusal of the Evangelista
decision is therefore unavoidable.
ISSUE: Whether petitioners are subject to the tax on corporations
provided for in section 24 of the National Internal Revenue Code -
RULING: For purposes of the tax on corporations, the National
Internal Revenue Code includes partnerships, with the exception
only of duly registered general co-partnerships.
When petitioners purchased the lot and building and stepped into
the shoes of the vendor as a lessor, petitioners are not only co-owners
but partners. And since under section 84(b) of the Revenue Code,
the term corporation includes partnerships no matter how created
or organized, this qualifying expression clearly indicates that a joint
venture need not be undertaken in any of the standard forms or in
conformity with the usual requirements of the law on partnerships.
Pursuant to the same section 84(b), the term 'corporation' includes
among others, joint accounts (cuentas en participacion) and
associations, none of which has a legal personality of its own
independent of that of its members. The lawmaker could not have
regarded personality as a condition precedent to the existence of
partnerships referred to therein.
In the Evangelista case the following circumstances were found to
exist: a common fund created purposely, the investment of the
same not merely in one transaction but in a series of transactions,
the lots not being devoted to residential purposes or to other
personal purposes, the properties being under the management of
one person with full power to lease, collect rents, issue receipts, bring
suits—and that all these conditions existed for over 10 years. In the
case at bar, petitioners could claim that this was only one
transaction, that: their intention was to house in that building
acquired by them the respective enterprises and to effect a division
in 10 years. But while the purchase was made in 1950, as late as 1965,
or almost 15 years later, there was no allegation of such division and
the facts show that the building continued to be leased by other
parties with petitioners dividing equally the income after deducting
operational expenses. Differences of such slight significance do not
call for a different ruling, they do not suffice to preclude the
applicability of the Evangelista decision.
As a matter of principle, it is not advisable for the appellate Court to
set aside the conclusion reached by an agency such as the Court
of Tax Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has
been an abuse or improvident exercise of its authority.
Evangelista, et al. vs. Coll. of Int. Rev., et al.
Petitioner/s : EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and
FRANCISCA EVANGELISTA
Respondent/s : THE COLLECTOR OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS
DOCTRINE: Corporations" strictly speaking are distinct and different
from "partnerships." When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on
"corporations", it must allude to organizations which are not
necessarily "partnerships" in the technical sense of the term. 

CONCEPCIÓN, J.:
13

FACTS
Petitioners borrowed from their father which amount together with
their personal monies was used by them for the purpose of buying
real properties. 
 "corporation."
From February 2, 1943 to April 1944, Petitioners bought four parcels
of land from different persons.
That in a document dated August 16, 1945, they appointed their
brother Simeon Evangelista to 'manage their properties with full
power to lease; to collect and receive rents; to issue receipts
therefor; in default of such payment, to bring suits against the
defaulting tenant; to sign all letters, contracts, etc., for and in their
behalf, and to endorse and deposit all notes and checks for them; 

That after having bought the above-mentioned real properties, the
petitioners had the same rented or leased to various tenants.
That from the month of March 1945 up to and including December,
1945, the total amount collected as rents on their real properties was
P9,599.00 while the expenses amounted to P3,650.00 thereby leaving
them a net rental income of P5,948.33; That in 1946, they realized a
gross rental income in the sum of P24,786.30, out of which amount
was deducted the sum of P16,288.27 for expenses thereby leaving
them a net rental income of P7,498.13; That in 1948 they realized a
gross rental income of P17,453.00 out of the which amount was
deducted the sum of P4,837.65 as expenses, thereby leaving them a
net rental income of P12,615.35
On September 24, 1954, respondent Collector of Internal Revenue
demanded the payment of income tax on corporations, real estate
dealer's fixed tax and corporation residence tax for the years 1945-
1949
Said letter of demand and the corresponding assessments were
delivered to petitioners, whereupon they instituted the present case
in the Court of Tax Appeals, with a prayer that the decision of the
respondent contained in his letter of demand dated September 24,
1954 be reversed, and that they be absolved from the payment of
the taxes in question, with costs against the respondent.
Ruling of the CTA: Petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years 1945 to 1949,
inclusive, in accordance with the respondent's assessment for the
same in the total amount of P6,878.34.
ISSUE:
Whether petitioners are subject to the tax on corporations provided
for in section 24 of Commonwealth Act No. 466, otherwise known as
the National Internal Revenue Code, as well as to the residence tax
for corporations and the real estate dealers' fixed tax? - YES
RULING + RATIO:
Corporations" strictly speaking are distinct and different from
"partnerships." When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on "corporations",
it must allude to organizations which are not necessarily
"partnerships" in the technical sense of the term. 
 and LORENZO B. OÑA, JR.,
Section 24 of the Internal Revenue Codeexempts from the tax
imposed upon corporations "duly registered general partnerships",
which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. 
 as the inheritance or estate is not distributed or, at least, partitioned,
As defined in section 84 (b) of the Internal Revenue Code "the term
corporation includes partnerships, no matter how created or
organized,"This qualifying expression clearly indicates that a joint
venture need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of the tax
on corporations. 
 surviving spouse, Lorenzo T. Oña and her five children. In 1948,
Pursuant to Section 84 (b) of the Internal Revenue Code, the term
"corporation" includes, among others, "joint accounts (cuenta en
participación)" and "associations", none of which has a legal
personality of its own independent of that of its members. For 

purposes of the tax on corporations, our National Internal Revenue
Code includes these partnerships.— with the exception only of duly
registered general partnerships—within the purview of the term
In the case at bar, Petitioners who are engaged in real estate
transactions for monetary gain and divide the same among
themselves, constitute a partnership, so far as the said Code is
concerned, and are subject to the income tax for corporation
The petitioners are subject also to the residence tax for corporations
As regards the residence tax for corporations, "Section 2 of
Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.—Every corporation, no matter how
created or organized, whether domestic or resident foreign,
engaged in or doing business in the Philippines shall pay an annual
residence tax of five pesos and an annual additional tax which, in
no case, shall exceed one thousand pesos, in accordance with the
following schedule.
The pertinent part of the provision of Section 2 of Commonwealth
Act No. 465 which says: "The term corporation as used in this Act
includes joint-stock company, partnership, joint account (cuentas
en participación), association or insurance company, no matter
how created or organized" is analogous to that of Sections 24 and
84 (b) of our National Internal Revenue Code, which was approved
the day immediately after the approval of said Commonwealth Act
No. 465. Apparently, the terms "corporation" and "Partnership" are
used in both statutes with substantially the same meaning.
Lastly, the records show that petitioners have habitually engaged in
leasing the properties above mentioned for a period of over twelve
years, and that the yearly gross rentals of said properties from 1945
to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the
tax provided in section 193 (q) of our National Internal Revenue
Code, for "real estate dealers," inasmuch as, pursuant to section 194
(s) thereof:
Real estate dealer' includes any person engaged in the business of
buying, selling, exchanging, leasing, or renting property or his own
account as principal and holding himself out as a full or part time
dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three
thousand pesos or more a year.
Dispositive Portion: Wherefore, the appealed decision of the Court
of Tax Appeals is hereby affirmed with costs against the petitioners
herein. It is so ordered
OÑA vs. CIR
Petitioner/s : LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely:
RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA
Respondent/s: THE COMMISSIONER OF INTERNAL REVENUE,
DOCTRINE: The income derived from inherited properties may be
considered as individual income of the respective heirs only so long
but the moment their respective known shares are used as part of
the common assets of the heirs to be used in making profits, it is but
proper that the income of such shares should be considered as the
part of the taxable income of an unregistered partnership.
FACTS :
 On March 23, 1944, Julia Buñales died, leaving as heirs her
Civil Case No. 4519 was instituted in the Court of First Instance of
Manila for the settlement of her estate. Later, Lorenzo T. Oña the
surviving spouse was appointed administrator of the estate of
said deceased.
14
 On April 14, 1949, the administrator submitted the project of
partition, which was approved by the Court on May 16, 1949.
 Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr.,
all surnamed Oña, were still minors when the project of partition
was approved, Lorenzo T. Oña, their father and administrator of
the estate, filed a petition for appointment as guardian of said
minors. On November 14, 1949, the Court appointed him
guardian of the persons and property of the aforenamed
minors.
 Although the project of partition was approved by the Court on
May 16, 1949, no attempt was made to divide the properties
therein listed. Instead, the properties remained under the
management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in
real properties and securities. As a result, petitioners' properties
and investments gradually increased from P105,450.00 in 1949
to P480,005.20 in 1956.
 From said investments and properties petitioners derived such
incomes as profits from installment sales of subdivided lots,
profits from sales of stocks, dividends, rentals and interests. Every
year, petitioners returned for income tax purposes their shares in
the net income derived from said properties and securities
and/or from transactions involving them. However, petitioners
did not actually receive their shares in the yearly income. The
income was always left in the hands of Lorenzo T. Oña who, as
heretofore pointed out, invested them in real properties and
securities.
 CIR assessed against the petitioners the amounts of P8,092.00
and P13,899.00 as corporate income taxes for 1955 and 1956,
respectively, on the basis that the petitioners formed an
unregistered partnership and therefore, subject to the
corporate income tax, pursuant to Section 24, in relation to
Section 84(b), of the Tax Code.
 Court of Tax Appeals held that petitioners have constituted an
unregistered partnership and are, therefore, subject to the
payment of the deficiency corporate income taxes assessed
against them by the CIR.
ISSUE: Whether petitioners should be considered as co-owners of the
properties inherited by them from the deceased Julia Buñales and
the profits derived from transactions involving the same, or, must
they be deemed to have formed an unregistered partnership
subject to tax under Sections 24 and 84(b) of the National Internal
Revenue Code - unregistered partnership
RULING + RATIO:
Instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949,
"the properties remained under the management of Lorenzo T. Oña
who used said properties in business by leasing or selling them and
investing the income derived therefrom and the proceed from the
sales thereof in real properties and securities," as a result of which
said properties and investments steadily increased yearly.
And all these became possible because, admittedly, petitioners
never actually received any share of the income or profits from
Lorenzo T. Oña and instead, they allowed him to continue using said
shares as part of the common fund for their ventures, even as they
paid the corresponding income taxes on the basis of their respective
shares of the profits of their common business as reported by the said
Lorenzo T. Oña.
From the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oña as a common
fund in undertaking several transactions or in business, with the
intention of deriving profit to be shared by them proportionally, such
act was tantamonut to actually contributing such incomes to a
common fund and, in effect, they thereby formed an unregistered
partnership within the purview of the above-mentioned provisions of
the Tax Code.
It is but logical that in cases of inheritance, there should be a period
when the heirs can be considered as co-owners rather than
unregistered co-partners within the contemplation of our corporate
tax laws aforementioned. Before the partition and distribution of the
estate of the deceased, all the income thereof does belong
commonly to all the heirs, obviously, without them becoming
thereby unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the inheritance is
actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the
partition, they might decide to continue holding said shares under
the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis.
Withal, if this were to be allowed, it would be the easiest thing for
heirs in any inheritance to circumvent and render meaningless
Sections 24 and 84(b) of the National Internal Revenue Code.
The co-ownership of inherited properties is automatically converted
into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are used as a
common fund with intent to produce profits for the heirs in proportion
to their respective shares in the inheritance as determined in a
project partition either duly executed in an extrajudicial settlement
or approved by the court in the corresponding testate or intestate
proceeding. The reason for this is simple. From the moment of such
partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to
manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such
partition, he allows his share to be held in common with his co-heirs
under a single management to be used with the intent of making
profit thereby in proportion to his share, there can be no doubt that,
even if no document or instrument were executed for the purpose,
for tax purposes, at least, an unregistered partnership is formed. This
is exactly what happened to petitioners in this case.
HENCE, the decision of CTA is AFFIRMED.
CIR vs. ST. LUKES
COMMISSIONER OF INTERNAL REVENUE, PETITIONER
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Doctrine:
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the government,
so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money
inures to the private benefit of the persons managing or operating
the institution.
Article Applicable: Discussion for Sec 27 (B), 30 (E) and 30 (G) of
NIRC
Fact: (guys mahaba ito kasi nagdiscuss ng meaning ng
charitable,non profit)
 St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized
as a non-stock and non-profit corporation. St. Luke’s accepts
both paying and non-paying patients. The BIR assessed St.
Luke’s deficiency taxes for 1998 comprised of deficiency
income tax, value-added tax, and withholding tax. The BIR
claimed that St. Luke’s should be liable for income tax at a
preferential rate of 10% as provided for by Section 27(B). Further,
the BIR claimed that St. Luke’s was actually operating for profit
in 1998 because only 13% of its revenues came from charitable
15
 purposes. Moreover, the hospital’s board of trustees, officers
and employees directly benefit from its profits and assets.
 On the other hand, St. Luke’s maintained that it is a non-stock
and non-profit institution for charitable and social welfare
purposes exempt from income tax under Section 30(E) and (G)
of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.
Contentions of the PETITIONER/PLAINTIFF St. Luke's contended that
the BIR should not consider its total revenues, because its free
services to patients was ₱218,187,498 or 65.20% of its 1998 operating
income (i.e., total revenues less operating expenses) of
₱334,642,615. St. Luke's also claimed that its income does not inure
to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution
for charitable and social welfare purposes under Section 30(E) and
(G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.
Issue: The sole issue is whether St. Luke's is liable for deficiency
income tax in 1998 under Section 27(B) of the NIRC, which imposes
a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.-NO
Ruling + Ratio:
St. Luke's claims tax exemption under Section 30(E) and (G) of
the NIRC. It contends that it is a charitable institution and an
organization promoting social welfare. The arguments of St. Luke's
focus on the wording of Section 30(E) exempting from income tax
non-stock, non-profit charitable institutions. St. Luke's asserts that the
legislative intent of introducing Section 27(B) was only to remove the
exemption for "proprietary non-profit" hospitals. The relevant
provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to
or inure to the benefit of any member, organizer, officer or
any specific person;
xxxx
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
(Emphasis supplied)
Section 27(B) of the NIRC imposes a 10% preferential tax rate
on the income of (1) proprietary non-profit educational institutions
and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit.
"Proprietary" means private, following the definition of a "proprietary
educational institution" as "any private school maintained and
administered by private individuals or groups" with a government
permit. "Non-profit" means no net income or asset accrues to or
benefits any member or specific person, with all the net income or
asset devoted to the institution's purposes and all its activities
conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In
Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 37 this
Court considered as non-profit a sports club organized for recreation
and entertainment of its stockholders and members. The club was
primarily funded by membership fees and dues. If it had profits, they
were used for overhead expenses and improving its golf course. The
club was non-profit because of its purpose and there was no
evidence that it was engaged in a profit-making enterprise.
The Court defined "charity" in Lung Center of the Philippines v.
Quezon City as "a gift, to be applied consistently with existing laws,
for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion,
by assisting them to establish themselves in life or [by] otherwise
lessening the burden of government." A non-profit club for the
benefit of its members fails this test. An organization may be
considered as non-profit if it does not distribute any part of its income
to stockholders or members. However, despite its being a tax exempt
institution, any income such institution earns from activities
conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30.
To be a charitable institution, however, an organization must
meet the substantive test of charity in Lung Center. The issue in Lung
Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction.
Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which
would otherwise fall on the shoulders of government. Thus, as a
matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private
entities already assume a part of the burden. This is the rationale for
the tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works
which would have been funded by appropriations from the Treasury.
The Court in Lung Center declared that the Lung Center of the
Philippines is a charitable institution for the purpose of exemption
from real property taxes.
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the government,
so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money
inures to the private benefit of the persons managing or operating
the institution.
For real property taxes, the incidental generation of income is
permissible because the test of exemption is the use of the property.
The Constitution provides that "[c]haritable institutions, churches and
personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation." 48 The test of exemption is
not strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the property in a
certain way, i.e. for a charitable purpose. Thus, the Court held that
the Lung Center of the Philippines did not lose its charitable
character when it used a portion of its lot for commercial purposes.
The effect of failing to meet the use requirement is simply to remove
from the tax exemption that portion of the property not devoted to
charity.
The Constitution exempts charitable institutions only from real
property taxes. In the NIRC, Congress decided to extend the
exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the
other hand, Section 28(3), Article VI of the Constitution does not
define a charitable institution, but requires that the institution
"actually, directly and exclusively" use the property for a charitable
purpose.
The operations of the charitable institution generally refer to its
regular activities. Section 30(E) of the NIRC requires that these
16
operations be exclusive to charity. There is also a specific
requirement that "no part of [the] net income or asset shall belong
to or inure to the benefit of any member, organizer, officer or any
specific person." The use of lands, buildings and improvements of the
institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock
and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only refers to
the organization of St. Luke's. Even if St. Luke's meets the test of
charity, a charitable institution is not ipso facto tax exempt. To be
exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property
"actually, directly and exclusively" for charitable purposes. To be
exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively"
for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies
the words "organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and
character of the foregoing organizations from
any of their properties, real or personal, or from
any of their activities conducted for profit
regardless of the disposition made of such
income, shall be subject to tax imposed under this
Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts "any" activity for profit, such
activity is not tax exempt even as its not-for-profit activities remain
tax exempt. This paragraph qualifies the requirements in Section
30(E) that the "[n]on-stock corporation or association [must be]
organized and operated exclusively for x x x charitable x x x purposes
x x x." It likewise qualifies the requirement in Section 30(G) that the
civic organization must be "operated exclusively" for the promotion
of social welfare.
In Lung Center, this Court declared:
"[e]xclusive" is defined as possessed and enjoyed to the
exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to
exclude; as enjoying a privilege exclusively." x x x The words
"dominant use" or "principal use" cannot be substituted for
the words "used exclusively" without doing violence to the
Constitution and the law. Solely is synonymous with
exclusively.
The Court finds that St. Luke's is a corporation that is not
"operated exclusively" for charitable or social welfare purposes
insofar as its revenues from paying patients are concerned. This ruling
is based not only on a strict interpretation of a provision granting tax
exemption, but also on the clear and plain text of Section 30(E) and
(G). Section 30(E) and (G) of the NIRC requires that an institution be
"operated exclusively" for charitable or social welfare purposes to be
completely exempt from income tax. An institution under Section
30(E) or (G) does not lose its tax exemption if it earns income from its
for-profit activities. Such income from for-profit activities, under the
last paragraph of Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at the preferential
10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the
State because an exempt institution is spared from sharing in the
expenses of government and yet benefits from them. Tax
exemptions for charitable institutions should therefore be limited to
institutions beneficial to the public and those which improve social
welfare. A profit-making entity should not be allowed to exploit this
subsidy to the detriment of the government and other taxpayers.
St. Luke's fails to meet the requirements under Section 30(E) and
(G) of the NIRC to be completely tax exempt from all its income.
However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to
its members and such profits are reinvested pursuant to its corporate
purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to
the preferential tax rate of 10% on its net income from its for-profit
activities.
St. Luke's is therefore liable for deficiency income tax in 1998
under Section 27(B) of the NIRC. However, St. Luke's has good
reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is "a corporation for purely charitable and
social welfare purposes" and thus exempt from income tax. In
Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the
Court said that "good faith and honest belief that one is not subject
to tax on the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient justification
to delete the imposition of surcharges and interest."
WHEREFORE, the petition of the Commissioner of Internal
Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision of the
Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED.
St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency
income tax in 1998 based on the 10% preferential income tax rate
under Section 27(B) of the National Internal Revenue Code.
However, it is not liable for surcharges and interest on such
deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution
of the Court of Tax Appeals are AFFIRMED.
North American Oil Consolidated vs. Burnet
Doctrine: Income is taxable during the year a taxpayer is entitled to
the income and receives it.
FACTS:
 Petitioner operated an oil company under US land.
 A receiver was appointed to operate the property, or supervise
its operations, and to hold the net income.
 The receiver paid the income received for 1916 to the petitioner
in 1917.
 The income earned from the property in 1916 had been entered
on the books of the company as its income. It had not been
included in its original return of income for 1916; but it was
included in an amended return for that year which was filed in
1918Upon auditing the company's income and profits tax
returns for 1917, the Commissioner of Internal Revenue
determined a deficiency.
 Commissioner prayed that the deficiency already claimed
should be increased so as to include a tax on the amount paid
by the receiver to the company in 1917.
 The Board of Tax Appeals held that the profits were taxable to
the receiver as income of 1916.
 The Circuit Court of Appeals held that the profits were taxable
to the company as income of 1917.
Contention of Petitioner:
The petitioner contends that they should have been reported by the
receiver for taxation in 1916; that, if not returnable by him, they
should have been returned by the company for 1916, because they
constitute income of the company accrued in that year, and that, if
not taxable as income of the company for 1916, they were taxable
to it as income for 1922, since the litigation was not finally terminated
in its favor until 1922.
ISSUE: The question for decision is whether the sum of $171,979.22,
received by the North American Oil Consolidated in 1917, was
taxable to it as income of that year?
RULING:
 The income earned in 1916 and impounded by the receiver in
that year was not taxable to the him, because he was the
receiver of only a part of the properties operated by the
17
 company. Under the Revenue Act of 1916, receivers who "are
operating the property or business of corporations" were
obliged to make returns "of net income as and for such
corporations," and "any income tax due" was to be "assessed
and collected in the same manner as if assessed directly
against the organizations of whose businesses or properties they
have custody and control."
 The net profits were not taxable to the company as income of
1916. For the company was not required in 1916 to report as
income an amount which it might never receive. There was no
constructive receipt of the profits by the company in that year,
because at no time during the year was there a right in the
company to demand that the receiver pay over the money.
 Throughout 1916, it was uncertain who would be declared
entitled to the profits. It was not until 1917, when the district court
entered a final decree vacating the receivership and dismissing
the bill, that the company became entitled to receive the
money. Nor is it material, for the purposes of this case, whether
the company's return was filed on the cash receipts and
disbursements basis, or on the accrual basis. In neither event
was it taxable in 1916 on account of income which it had not
yet received and which it might never receive.
 The net profits earned by the property in 1916 were not income
of the year 1922 -- the year in which the litigation with the
government was finally terminated. They became income of
the company in 1917, when it first became entitled to them and
when it actually received them. If a taxpayer receives earnings
under a claim of right and without restriction as to its disposition,
he has received income which he is required to return, even
though it may still be claimed that he is not entitled to retain the
money, and even though he may still be adjudged liable to
restore its equivalent.
CIR vs Javier
Fraud is never imputed and the courts never sustain findings of fraud
upon circumstances which, at most, create only suspicion and the
mere understatement of a tax is not itself proof of fraud for the
purpose of tax evasion.
The fraud contemplated by law is actual and not constructive. It
must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give
up some legal right. Negligence, whether slight or gross, is not
equivalent to the fraud with intent to evade the tax contemplated
by law. It must amount to intentional wrong-doing with the sole
object of avoiding the tax. It necessarily follows that a mere mistake
cannot be considered as fraudulent intent, and if both petitioner
and respondent Commissioner of Internal Revenue committed
mistakes in making entries in the returns and in the assessment,
respectively, under the inventory method of determining tax liability,
it would be unfair to treat the mistakes of the petitioner as tainted
with fraud and those of the respondent as made in good faith.
Petitioner: Commissioner of Internal Revenue
Respondent: Melchor Javier, Jr.
Third person (Mortgagor, Assignor): if available
Applicable Articles:
Under the then Section 72 of the Tax Code (now Section 248 of the
1988 National Internal Revenue Code), a taxpayer who files a false
return is liable to pay the fraud penalty of 50% of the tax due from
him or of the deficiency tax in case payment has been made on the
basis of the return filed before the discovery of the falsity or fraud.
Facts:
1. Jun 03, 1977 Victoria Javier (Wife of Respondent), received
almost 1M USD , in error, from her sister through
some banks in the US. The amount of remittance
should have been 1k USD.
2. Jun 29, 1977 Mellon Bank filed a case against Javier claiming
the remittance was in made error and
demanded the return of the excess fund.
3. Nov 05, 1977 Fiscal also filed estafa case againstJavier
claiming that Javier misappropriated, misapplied
and converted to his own use the fund he should
have held in trust.
4. Mar 15, 1978 Javier filed income tax return showing net income
of 48k. In the footnotes of the return, he indicated
"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."
5. Dec 15, 1980 Javier was assessed to pay deficiency assessment
of 1.6k and 9.3M for years 1976 and 1977
respectively. He asked the BIR to defer the
assessment for 1977 until the case filed against
him has been decided.
6. Nov 11, 1981 The CIR responded that "the amount of Mellon
Bank's erroneous remittance which you were
able to dispose, is definitely taxable." The CIR
imposed 50% fraud penalty against Javier.
Type of Case Filed: Appeal of tax assessment
Ruling of Lower Courts: Reversal of CIR decision. Acts by Javier does
not constitute fraud.
Contention of CIR/OSG.
 The record clearly shows that private respondent is self-
convinced, and so acted, that he is the beneficial owner,
and of which reason is liable to tax. (Winidraw nya un
pera,in span of 11 days, kasi akala nya kanya)
Contention of Javier
 The case has been dubbed million-dollar-case. It is obvious
that the BIR will want to make an assessment.
 It is a case of first impression. Similar cases in the US would
have decided that the mistaken remittance is not taxable.
Further, non-disclosure of mistaken remittance does not
constitute fraud.
 In the estafa case, he was being alleged to have used the
money for his own benefit. If he paid the deficiency tax
using the mistaken, he would be found quilty of estafa for
having to use the fund for his own benefit.
Issue:
Whether there is fraud involved (and consequently, Javier to be
held liable for fraud penalty) – NO.
Ruling:
We are persuaded considerably by the private
respondent's contention that there is no fraud in the filing of the return
and agree fully with the Court of Tax Appeals'interpretation of
Javier's notation on his income tax return filed on March 15, 1978
thus: "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."
. . . The fraud contemplated by law is actual and not
constructive. It must be intentional fraud, consisting of deception
willfully and deliberately done or resorted to in order to induce
another to give up some legal right. Negligence, whether slight or
gross, is not equivalent to the fraud with intent to evade the tax
contemplated by law. It must amount to intentional wrong-doing
with the sole object of avoiding the tax. It necessarily follows that a
mere mistake cannot be considered as fraudulent intent, and if both
petitioner and respondent Commissioner of Internal Revenue
committed mistakes in making entries in the returns and in the
assessment, respectively, under the inventory method of
determining tax liability, it would be unfair to treat the mistakes of the
18
petitioner as tainted with fraud and those of the respondent as
made in good faith.
Fraud is never imputed and the courts never sustain findings
of fraud upon circumstances which, at most, create only suspicion
and the mere understatement of a tax is not itself proof of fraud for
the purpose of tax evasion
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
petitioner's zealousness to collect taxes from the unearned windfall
to Javier is highly commendable.1âwphi1 Unfortunately, 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." As ruled by respondent Court
of Tax Appeals, the 50% surcharge imposed as fraud penalty by the
petitioner against the private respondent in the deficiency
assessment should be deleted.
BULL v. UNITED STATES
Ponente: Mr. Justice ROBERTS
Doctrine:
 Moneys received by a deceased partner's estate as his
share of profits earned by the firm before he died, are
taxable as his income and also are to be included as part
of his estate in computing the federal estate tax.
 Where the articles of a personal service partnership having
no invested capital provide that, in the event of a partner's
death, the survivors, if his representative does not object,
shall be at liberty to continue the business for a year, the
estate in that case to share the profits or losses as the
deceased partner would if living, the profits coming to the
estate from such continuation of the business are not to be
regarded as the fruits of a sale of any interest of the
deceased to the survivors, but are income of the estate,
taxable as such; they are no part of the corpus of the
estate left by the decedent upon which the federal estate
tax is to be computed
Facts:
Archibald H. Bull died February 13, 1920. He had been a
member of a partnership engaged in the business of ship-brokers.
The agreement of association provided that in the event a partner
died the survivors should continue the business for one year
subsequent to his death, and his estate should 'receive the same
interests, or participate in the losses to the same extent,' as the
deceased partner would, if living, 'based on the usual method of
ascertaining what the said profits or losses would be . ... Or the estate
of the deceased partner shall have the option of withdrawing his
interest from the firm within thirty days after the probate of will ... and
all adjustments of profits or losses shall be made as of the date of
such withdrawal.'
The estate's representative did not exercise the option to
withdraw in thirty days, and the business was conducted until
December 31, 1920, as contemplated by the agreement.
Bull's share of profits from January 1, 1920, to the date of his
death, February 13, 1920, was $24,124.20; he had no other
accumulated profits and no interest in any tangible property
belonging to the firm. Profits accruing to the estate for the period
from the decedent's death to the end of 1920 were $212,718.79;
$200,117.90 being paid during the year, and $12, 601.70 during the
first two months of 1921.
April 14, 1921, plaintiff filed an income tax return for the
period February 13, 1920, to December 31, 1920, for the estate of the
decedent, which return did not include, as income, the amount of
$200,117.09 received as the share of the profits earned by the
partnership during the period for which the return was filed.
'Thereafter, in July, 1925, the Commissionerdetermined that
the sum of $200,117.09 received in 1920 should have been returned
by the executor as income to the estate for the period February 13
to December 31, 1920, and notified plaintiff of a deficiency in
income tax due from the estate for that period of $261,212.65, which
was due in part to the inclusion of that amount as taxable income
and in part to adjustments not here in controversy. No deduction
was allowed by the Commissioner from the amount of $ 200,117.09
on account of the value of the decedent's interest in the partnership
at his death.
The executor appealed to the Board of Tax Appeals from
the deficiency of income tax so determined. The Board sustained
the Commissioner's action in including the item of $200,117.99
without any reduction on account of the value of the decedent's
interest in the partnership at the date of death,2 and determined a
deficiency of $55,166. 49, which, with interest of $7,510.95, was paid
April 14, 1928.
The executor filed a claim for refund of this amount, setting
forth that the $200,117.99, by reason of which the additional tax was
assessed and paid, was corpus; that it was so originally determined
by the Commissioner and the estate tax assessed thereon was paid
by the executor, and that the subsequent assessment of an income
tax against the estate for the receipt of the same sum was erroneous.
The claim was rejected May 8, 1929.
The Court of claims held that the item was income and properly so
taxed.
Contentions of BULL:
(1) for the principal sum of $62,677.44, the amount paid April 14, 1928,
as a deficiency of income tax unlawfully assessed and collected; or
(2) for the sum of $47,643.44 on the theory that, if the sum of
$200,117.99 was income for the year 1920 and taxable as such, the
United States should have credited against the income tax
attributable to the receipt of this sum the overpayment of estate tax
resulting from including the amount in the taxable estate -- $34,035,
with interest thereon.
Issue:Whether or not Bull may recover the tax paid - NO
Ruling:
That the taxpayer was entitled to recoup from the amount
of the income tax the amount of the unlawful estate tax by suit for
the difference in the Court of Claims, although suit to recover the
unlawful tax independently had become barred. We concur in the
view of the Court of Claims that the amount received from the
partnership as profits earned prior to Bull's death was income earned
by him in his lifetime and taxable to him as such, and that it was also
corpus of his estate and as such to be included in his gross estate for
computation of estate tax. We also agree that the sums paid his
estate as profits earned after his death were not corpus, but income
received by his executor, and to be reckoned in computing income
tax for the years 1920 and 1921. Where the effect of the contract is
that the deceased partner's estate shall leave his interest in the
business and the surviving partners shall acquire it by payments to
the estate, the transaction is a sale, and payments made to the
estate are for the account of the survivors. It results that the surviving
partners are taxable upon firm profits, and the estate is not. Here,
however, the survivors have purchased nothing belonging to the
decedent, who had made no investment in the business and owned
no tangible property connected with it. The portion of the profits
paid his estate was therefore income, and not corpus, and this is so
whether we consider the executor a member of the old firm for the
remainder of the year, or hold that the estate became a partner in
a new association formed upon the decedent's demise.
19
 The Government wrongfully collected and retained an
estate tax on moneys earned for and paid to an estate in
partnership transactions after the decedent's death, and which
were not part of the corpus of the estate and were properly taxable
only as income of the estate. Before the time allowed for claiming
reimbursement had elapsed, the Government proceeded to assess
and collect an income tax on the identical moneys.
Since the firm was a personal service concern and no
tangible property was involved in its transactions, if it had not been
for the terms of the agreement, no accounting would have ever
been made upon Bull's death for anything other than his share of
profits accrued to the date of his death -- $24,124.20 -- and this would
have been the only amount to be included in his estate in
connection with his membership in the firm. As respects the status
after death, the form of the stipulation is significant. The declaration
is that the surviving partners "are to be at liberty" to continue the
business for a year, in the same relation with the deceased partner's
estate as if it were in fact the decedent himself still alive and a
member of the firm. His personal representative is given a veto which
will prevent the continuance of the firm's business. The purpose may
well have been to protect the goodwill of the enterprise in the
interest of the survivors, and to afford them a reasonable time in
which to arrange for their future activities. But no sale of the
decedent's interest or share in the goodwill can be spelled out.
Indeed, the government strenuously asserted, in supporting the
treatment of the payments to the estate as income, that the estate
sold nothing to the surviving partners, and we agree. An analogous
situation would be presented if Bull had not died, but the partnership
had terminated by limitation on February 13, 1920, and the
agreement had provided that, if Bull's partners so desired, the
relation should continue for another year. It could not successfully be
contended that, in such case, Bull's share of profit for the additional
year was capital.
In a proceeding for the collection of estate tax, the United
States through a palpable mistake, took more than it was entitled to.
Retention of the money was against morality and conscience. But
claim for refund or credit was not presented, or action instituted for
restitution, within the period fixed by the statute of limitations. If
nothing further had occurred, congressional action would have
been the sole avenue of redress.
We are of opinion that the petitioner was entitled to have
credited against the deficiency of income tax the amount of his
overpayment of estate tax with interest, and that he should have
been given judgment accordingly.
COLLECTOR vs UST
Petitioner/s : Collector of Internal Revenue
Respondent/s : University of Santo Tomas
Ponente: Montemayor, J
DOCTRINE: The doctrine of equitable recoupment means that when
a refund of a tax illegally or erroneously collected or overpaid by a
taxpayer is barred by the statute of limitations and a tax is being
presently assessed against said taxpayer, SAID PRESENT TAX MAY BE
RECOUPED OR SET-OFF AGAINST THE TAX, the refund of which has
been barred. However, such doctrine is not binding in this country,
and the Court refused to introduce the same in this jurisdiction by
virtue of this decision.
FACTS :
 During the period from January 1, 1948-June 30, 1950, UST paid
on its gross receipts derived from its printing and binding jobs for
the public and the different departments of the University, the
aggregate amount of Php13,590.03, representing the 2% tax on
its gross receipts during the period in question
 On October 17,1950, UST requested in writing from the
respondent the refund of the sum of Php 8,293.31, on account
of the following:
*The amount of Php 359,972.45 paid by the other
departments tothe UST Press was for the purposes of
accounting only and does notlegally constitute gross
receipts subject to the percentage tax
*The printing and binding of the annuals THOMASIAN and
VERITAS fall under the exception provided for in Section 191
in relation to Section 183(a) of the Tax Code
CONTENTION OF CIR :
UST’s claim for refund in the sum of Php 8,293.31 (representing
business printer’s percentage tax pursuant to Section 191 of the Tax
Code, in relation to Section 183(a)) is denied; also, the amount of
Php 2,452.04, representing deficiency percentage tax and
surcharge on the undeclared receipts derived from the printing and
binding of the subject annuals, is hereby assessed and demanded
from UST; also, petitioner is ordered to pay Php 100 as compromise
penalty
DECISION OF CTA: Modified the decision of the CIR
 UST’s claim for refund to the extent of Php 5, 842.27 is DENIED,
the same being BARRED BY PRESCRIPTION
 The deficiency tax assessment of Php 2, 451.04 for percentage
taxes and surcharges is RECOGNIZED, but the amount is
DEEMED PAID, BY WAY OF RECOUPMENT, to the extent of the
amount of Php 2, 451.04 which UST erroneously paid for the
period from January 1948 to June 1950. Respondent is thus
ordered to desist from further collecting said deficiency
assessment
ISSUE: Whether the CTA erred in applying the doctrine of equitable
recoupment?YES
RULING + RATIO:
 YES. THE COURT HELD THAT THE CTA ERRED IN APPLYING THE
DOCTRINE OF EQUITABLE RECOUPMENT IN ITS DECISION.
 The doctrine of equitable recoupment means that when a
refund of a tax illegally or erroneously collected or overpaid by
a taxpayer is barred by the statute of limitations and a tax is
being presently assessed against said taxpayer, SAID PRESENT
TAX MAY BE RECOUPED OR SET-OFF AGAINST THE TAX, the refund
of which has been barred.
 For instance, where the Government has failed to collect a tax
within the period of limitation and said collection is already
barred, and the taxpayer has to its credit a tax illegally or
erroneously collected or overpaid, whose refund is not yet
barred, the Government need not make refund of all the tax
illegally or erroneously collected, BUT IT MAY SET OFF AGAINST
ITTHE TAX WHOSE COLLECTION IS BARRED BY THE STATURE OF
LIMITATIONS.
 However said doctrine is not allowed in this country.If allowed,
both the collecting agency and the taxpayer might be
tempted to delay and neglect the pursuit of their respective
claims which the period prescribed by law
 A collector may be tempted to make illegal assessments and
collections, and the taxpayer would be helpless because
however illegal and unauthorized the assessment may be, the
Collector can always enforce the same by levy and distraint,.
 As regards the taxpayer, he may also be tempted to delay and
neglect the filing of the corresponding suit for refund of a tax
illegally or erroneously collected, trusting that he can always
recover or be credited with the same or part thereof by refusing
to pay a valid tax assessed against him and compelling the
Government to set-off the same against a tax payment he
could no longer recover.
 CTA, in applying such doctrine, reasoned that the same serves
as a cushion to the harsh and iniquitous effects of the statute of
limitations (prescriptive period), because it would be oppressive
to leave the taxpayer without any remedy to set off taxes
erroneously collected, which are barred by prescription.
 The SC held that prescription may be rigorous and at times may
be a little harsh, but certainly there could be no oppression,
20
 much less iniquity WHERE THE SAME LAW IS APPLIED EQUALLY TO
THE GOVERNMENT AND THE TAXPAYER
 On the contrary, that statute of limitations has a salutary and
wholesome effect because under the same, the tax collecting
agency of the Government, and the taxpayer would be alert
and vigilant, and would be constrained to make assessment
and collection, and demand the refund of taxes illegally or
erroneously collected, respectively, ON TIME.
CONCLUSION: Petition DENIED
CIR vs. BOAC
COMMISSIONER OF INTERNAL REVENUE, petitioner
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
PONENTE: Melencio-Herrera
DOCTRINE:
The test of taxability is the "source"; and the source of an
income is that activity . . . which produced the income.
APPLICABLE LAWS: Section 42 of the NIRC on Income from Sources
in the Philippines
FACTS :
 Petitioner Commissioner of Internal Revenue (CIR) seeks a
review on Certiorari of the joint Decision of the Court of Tax
Appeals (CTA) dated 26 January 1983 in CTA Case Nos. 2373
and 2561, which set aside CIR's assessment of deficiency
income taxes against respondent British Overseas Airways
Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to
1970-71.
 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 and is a
member-signatory of the Interline Air Transport Association
(IATA).
 As such, it operates air transportation service and sells
transportation tickets over the routes of the other airline
members.
 During the periods covered by the disputed assessments, 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 — Warner Barnes and Company, Ltd., and later
Qantas Airways — which was responsible for selling BOAC
tickets covering passengers and cargoes.
 In G.R. No. 65773 (CTA Case No. 2373, the First Case) it is
alleged that:
o On 7 May 1968, CIR assessed BOAC the amount of
P2,498,358.56 for deficiency income taxes covering the
years 1959 to 1963. This was protested by BOAC.
Subsequent investigation resulted in the issuance of a
new assessment, for the years 1959 to 1967 in the amount
of P858,307.79, which BOAC paid under protest.
o On 7 October 1970, BOAC filed a claim for refund of the
amount of P858,307.79, which claim was denied by the
CIR on 16 February 1972. But before said denial, BOAC
had already filed a petition for review with the Tax Court
on 27 January 1972, assailing the assessment and
praying for the refund of the amount paid.
 In G.R. No. 65774 (CTA Case No. 2561, the Second Case) it is
alleged that:
o On November 17, 1971, BOAC was assessed deficiency
income taxes, interests, and penalty for the fiscal years
1968/1969 to 1970-1971 in the aggregate amount of
P549,327.43, and the additional amounts of P1,000.00 and
P1,800.00 as compromise penalties for violation of Section
46 (requiring the filing of corporation returns) penalized
under Section 74 of the National Internal Revenue
Code (NIRC).
o On November 25, 1971, BOAC requested that the
assessment be countermanded and set aside, however,
the CIR not only denied the BOAC request for refund in the
First Case but also re-issued in the Second Case the
deficiency income tax assessment for P534,132.08 for the
years 1969 to 1970-71 plus P1,000.00 as compromise
penalty under Section 74 of the Tax Code.
o BOAC's request for reconsideration was denied by the CIR
on 24 August 1973. This prompted BOAC to file the Second
Case before the Tax Court praying that it be absolved of
liability for deficiency income tax for the years 1969 to 1971.
RULING OF THE CTA:
 The CTA reversed the ruling of the CIR.
 The Tax Court held that the proceeds of sales of BOAC passage
tickets in the Philippines by Warner Barnes and Company, Ltd.,
and later by Qantas Airways, during the period in question, do
not constitute BOAC income from Philippine sources "since no
service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not
subject to Philippine income tax.
 The CTA position was that income from transportation is income
from services so that the place where services are rendered
determines the source.
 Thus, the CTA ordered the CIR to credit BOAC with the sum of
P858,307.79, and to cancel the deficiency income tax
assessments against BOAC in the amount of P534,132.08 for the
fiscal years 1968-69 to 1970-71.
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. YES.
RULING + RATIO:
The Court Ruled in the Affirmative.
The Tax Code defines "gross income" thus:
"'Gross income' includes gains, profits, and
income derived from salaries, wages or
compensation for personal service of whatever
kind and in whatever form paid, or from
profession, vocations, trades, business,
commerce, sales, or dealings in property,
whether real or personal, growing out of the
ownership or use of or interest in such property;
also from interests, rents, dividends, securities, or
the transactions of any business carried on for
gain or profit or gains, profits, and income
derived from any source whatever.”
"The words 'income from any source whatever' disclose a
legislative policy to include all income not expressly exempted within
the class of taxable income under our laws." Income means "cash
received or its equivalent"; it is the amount of money coming to a
person within a specific time . . .; it means something distinct from
principal or capital. For, while capital is a fund, income is a flow. As
used in our income tax law, "income" refers to the flow of wealth.
The source of an income is the property, activity or service
that produced the income. For the source of income to be
21
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 situs of the source
of payments is the Philippines. The flow of wealth proceeded from,
and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting
the government.
A transportation ticket is not a mere piece of paper. When
issued by a common carrier, it constitutes the contract between the
ticket-holder and the carrier. It gives rise to the obligation of the
purchaser of the ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger upon the terms
and conditions set forth thereon. The ordinary ticket issued to
members of the travelling public in general embraces within its terms
all the elements to constitute it a valid contract, binding upon the
parties entering into the relationship.
True, Section 37(a) of the Tax Code, which enumerates
items of gross income from sources within the Philippines, namely: (1)
interest, (2) 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.
The absence of flight operations to and from the Philippines
is not determinative of the source of income or the situs of income
taxation. Admittedly, BOAC was an off-line international airline at the
time pertinent to this case. The test of taxability is the "source"; and
the source of an income is that activity . . . which produced the
income. Unquestionably, the passage documentations in these
cases were sold in the Philippines and the revenue therefrom was
derived from a business activity regularly pursued within the
Philippines. And even if the BOAC tickets sold covered the "transport
of passengers and cargo to and from foreign cities", it cannot alter
the fact that income from the sale of tickets was derived from the
Philippines. The word "source" conveys one essential idea, that of
origin, and the origin of the income herein is the Philippines.
Also, Presidential Decree No. 69 ensures that international
airlines are taxed on their income from Philippine sources.
Lastly, the Court found that the case is not barred by res
judicata by the previous ruling in a case in Jal v. CIR. The ruling by
the Tax Court in that case was to the effect that the mere sale of
tickets, unaccompanied by the physical act of carriage of
transportation, does not render the taxpayer therein subject to the
common carrier's tax. As elucidated by the Tax Court, however, the
common carrier's tax is an excise tax, being a tax on the activity of
transporting, conveying or removing passengers and cargo from
one place to another. It purports to tax the business of
transportation. Being an excise tax, the same can be levied by the
State only when the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject
matter of the case under consideration is income tax, a direct tax
on the income of persons and other entities "of whatever kind and in
whatever form derived from any source." Since the two cases treat
of a different subject matter, the decision in one cannot be res
judicata to the other.
Additional Notes:
Under Section 20 of the 1977 Tax Code:
"(h) the term 'resident foreign corporation'
applies to a foreign corporation engaged in
trade or business within the Philippines or
having an office or place of business therein.
"(i) The term 'non-resident foreign corporation'
applies to a foreign corporation not engaged
in trade or business within the Philippines and
not having any office or place of business
therein.”
The Court opined that BOAC is a resident foreign
corporation. There is no specific criterion as to what constitutes
"doing" or "engaging in" or "transacting" business. Each case must be
judged in the light of its peculiar environmental circumstances. The
term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works
or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and
object of the business organization. "In order that a foreign
corporation may be regarded as doing business within a State, there
must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of
a temporary character.”
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.” 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.
"Sec. 24. Rates of tax on corporations. — . . .
"(b) Tax on foreign corporations. — . . .
"(2) Resident corporations. — A corporation
organized, authorized, or existing under the
laws of any foreign country, except a foreign
life insurance company, engaged in trade or
business within the Philippines, shall be taxable
as provided in subsection (a) of this section
upon the total net income received in the
preceding taxable year from all sources within
the Philippines.
NDC v CIR
Petitioners: National Development Company
Respondents: Commissioner of Internal Revenue
DOCTRINES:
• With regard to then Sec. 37 (a) (1) of the Tax Code on
interest derived from sources within the Philippines: The residence of
the obligor who pays the interest rather than the physical location of
the securities, bonds or notes or the place of payment, is the
determining factor of the source of interest income.
• Generally, the law frowns upon exemption from taxation;
hence, an exempting provision should be construed strictissimi juris.
22

• “In case of doubt, a withholding agent may always protect
himself by withholding the tax due, and promptly causing a query to
be addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is not
subject to withholding. In case the Commissioner of Internal Revenue
decides that the income paid to an individual is not subject to
withholding, the withholding agent may thereupon remit the
amount of tax withheld. — Strict observance of said steps is required
of a withholding agent before he could be released from liability.”
APPLICABLE LAWS:
Section 37 (1) of the Tax Code then:Income from sources within the
Philippines.
(a) Gross income from sources within the Philippines. — The
following items of gross income shall be treated as gross
income from sources within the Philippines:
(1) Interest. — Interest derived from sources within
the Philippines, and interest on bonds, notes, or
other interest-bearing obligations of residents,
corporate or otherwise;
FACTS:
 National Development Company (“NDC”) entered into
contracts in Tokyo with several Japanese shipbuilding
companies for the construction of twelve (12) ocean-going
vessels. The purchase price was to come from the proceeds of
bonds issued by the Central Bank (14 promissory notes).
 NDC remitted to the shipbuilders in Tokyo the total amount of
US$4,066,580.70 as interest on the balance of the purchase
price. No tax was withheld.
 The Commissioner then held the NDC liable on such tax.
RULING OF THE COURT OF TAX APPEALS:
• Sustained the BIR— served on the NDC a warrant of
distraint and levy to enforce collection of the claimed amount less a
slight reduction representing the compromise penalty..
CONTENTIONS OF NDC:
• argues that the Japanese shipbuilders were not subject to
tax under the above provision because all the related activities —
the signing of the contract, the construction of the vessels, the
payment of the stipulated price, and their deliver to NDC — were
done in Tokyo.
• suggested that the NDC is merely an administrator of the
funds of the RP.
• suggested that the RP could not collect taxes on interest
remitted because of the undertaking signed by the Secretary of
Finance in each promissory notes.
ISSUE: Is NDC liable for such amount? YES.
RULING + RATIO:
 The Japanese shipbuilders were liable to tax on the interest
remitted to them under [then] Section 37 of the Tax Code. The
law does not speak of activity but of “source,” which in this case
is NDC— a domestic and resident corporation with principal
offices in Manila.
 The interest remitted to the Japanese shipbuilders in Japan on
the unpaid balance of the purchase price of vessels acquired
by NDC is interest derived from sources within the Philippines
subject to income tax under the then Section 24(b)(1) of the
National Internal Revenue Code.
 The tax was due on the interests earned by the Japanese
shipbuilders. It was the income of these companies and not the
RP that was subject to the tac the NDC did not withhold. In
effect, the imposition of the deficiency taxes on the NDC is a
penalty for its failure to withhold the same from the Japanese
shipbuilders as imposed by then Section 53(c) of the Tax Code.
CIR v. LEDNICKY
Petitioner: Commissioner of Internal Revenues
Respondents: V.E. Lednicky and Maria Valero Lednicky
DOCTRINES:
 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.
 An alien resident's right to deduct from gross income the income
taxes he paid to a foreign government is given only as an
alternative to his right to claim a tax credit for such foreign
income taxes; so that unless he has a right to claim such tax
credit if he chooses, he is precluded from said deduction.
 An alien resident is 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.
APPLICABLE LAWS:
Section 30 (C-1) of the Philippine Internal Revenue Code
SEC. 30. Deduction from gross income. — In computing net income
there shall be allowed as deductions —
xxxxx
(c) Taxes:
(1) In general. — Taxes paid or accrued within the taxable year,
except —
(A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes imposed by
the authority of any foreign country; but this deduction shall
be allowed in the case of a taxpayer who does not signify in
his return his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credit for foreign
countries); x x x x x
(3) Credits against tax for 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 Title
shall be credited with — x x x x x
(B) Alien resident of the Philippines. — In the case of
an alien resident of the Philippines, the amount of any
such taxes paid or accrued during the taxable year
to any foreign country, if the foreign country of which
such alien resident is a citizen or subject, in imposing
such taxes, allows a similar credit to citizens of the
Philippines residing in such country;
(4) Limitation on credit. — The amount of the credit taken
under this section shall be subject to each of the following
limitations:
(A) The amount of the credit in respect to the tax paid
or accrued to any country shall not exceed the same
proportion of the tax against which such credit is
taken, which the taxpayer's net income from sources
within such country taxable under this Title bears to his
entire net income for the same taxable year; and
(B) The total amount of the credit shall not exceed the
same proportion of the tax against which such credit
is taken, which the taxpayer's net income from
sources without the Philippines taxable under this Title
bears to his entire net income for the same taxable
year.
(C) Estate, inheritance and gift taxes; and
(D) Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed. (Emphasis
supplied)
23

FACTS:
 Respondents V. E. Lednicky and Maria Valero Lednicky are
husband and wife, both American citizens residing in the
Philippines, and have derived all their income from Philippine
sources for the taxable years in question.
G. R. No. L-18286
 In compliance with local law, respondents filed their income tax
return for 1956, reporting therein a gross income of P1,017,287. 65
and a net income of P733,809.44 on which the amount of
P317,395.4 was assessed after deducting P4,805.59 as
withholding tax.
 Pursuant to petitioner's assessment notice, respondents paid the
total amount of P326,247.41, inclusive of the withheld taxes.
 Thereafter, respondents filed an amended income tax return for
1956. The amendment consists in a claimed deduction of
P205,939.24 paid in 1956 to the United States government as
federal income tax for 1956. Simultaneously with the filing of the
amended return, respondents requested the refund of
P112,437.90.
 When petitioner failed to answer the claim for refund,
respondents filed their petition with the Tax Court.
G. R. No. L-18169
 Respondents-spouses filed their domestic income tax return for
1955, reporting a gross income of P1,771,124.63 and a net
income of P1,052,550.67.
 They filed an amended income tax return; the amendment upon
the original being a lesser net income of P1,012,554.51 and on
the basis of this amended return, they paid P570,252.00 inclusive
of withholding taxes.
 After audit, petitioner determined a deficiency of P16,116.00
which amount respondents paid.
 Back in 1955, however, respondents filed with the U.S. Internal
Revenue Agent in Manila their federal income tax return for the
years 1947, 1951, 1952, 1953, and 1954 on income from Philippine
sources on a cash basis.
 Payment of these federal income taxes, including penalties and
delinquency interest in the amount of P264,588.82, were made in
1955 to the U.S. Director of Internal Revenue (Baltimore,
Maryland) through the National City Bank of New York (Manila
Branch).
 Exchange and bank charges in remitting payment totaled
P4,143.91.
 Respondents amended their Philippine income tax return for
1955 to include the necessary deductions and therewith filed a
claim for refund of the sum of P166,384.00, which was later
reduced to P150,269.00, as alleged overpaid income tax for
1955.
G.R. No. 21434
 Respondents filed their income tax return for 1957 and paid a
total sum of P196,799.65.
 In 1959, they filed an amended return for 1957, claiming
deduction of P190,755.80, representing taxes paid to the U.S.
Government on income derived wholly from Philippine sources.
 Respondents seek refund of P90 520.75 as overpayment.
RULING OF THE TAX COURT:
 Tax Court – decided for respondents in all the aforementioned
cases
o Respondent spouses did not "signify" in their income tax
return a desire to avail themselves of the benefits of 30 (c)
(1) (B).
ISSUE: Whether a citizen of the United States residing in the
Philippines, who derives income wholly from sources within the
Republic of the Philippines, may deduct from his gross income the
income taxes he has paid to the United States government for the
taxable year. – NO.
RULING + RATIO:
The Construction and wording of Section 30 (c) (1) (B) of the Internal
Revenue Act shows the law's intent that the right to deduct income
taxes paid to foreign government from the taxpayer's gross income
is given only as an alternative or substitute to his right to claim a tax
credit for such foreign income taxes under section 30 (c) (3) and (4);
so that unless the alien resident has a right to claim such tax credit if
he so chooses, he is precluded from deducting the foreign income
taxes from his gross income.
In prescribing that such deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire to have to any
extent the benefits of paragraph (3) (relating to credits for taxes paid
to foreign countries), the statute assumes that the taxpayer in
question also may signify his desire to claim a tax credit and waive
the deduction; otherwise, the foreign taxes would always be
deductible, and their mention in the list of non-deductible items in
Section 30(c) might as well have been omitted, or at least expressly
limited to taxes on income from sources outside the Philippine
Islands.
The purpose of the law is to prevent the taxpayer from claiming
twice the benefits of his payment of foreign taxes, by deduction from
gross income (subs. c-1) and by tax credit (subs. c-3). This danger of
double credit certainly cannot exist if the taxpayer cannot claim
benefit under either of these headings at his option, so that he must
be entitled to a tax credit (respondent admittedly are not so entitled
because all their income is derived from Philippine sources), or the
option to deduct from gross income disappears altogether.
Much stress is laid on the thesis that if respondent taxpayers are not
allowed to deduct the income taxes they are required to pay to the
government of the United States in their return for Philippine income
tax, they would be subjected to double taxation. What respondents
fail to observe is that double taxation becomes obnoxious only
where the taxpayer is taxed twice for the benefit of the same
governmental entity.
In this case, while the taxpayers would have to pay two taxes on the
same income, the Philippine government only receives the
proceeds of one tax. As between the Philippines, where the income
was earned and where the taxpayer is domiciled, and the United
States, where that income was not earned and where the taxpayer
did not reside, it is indisputable that justice and equity demand that
the tax on the income should accrue to the benefit of the Philippines.
Any relief from the alleged double taxation should come from the
United States, and not from the Philippines, since the former's right to
burden the taxpayer is solely predicated on his citizenship, without
contributing to the production of the wealth that is being taxed.
Aside from not conforming to the fundamental doctrine of income
taxation that the right of a government to tax income emanates
from its partnership in the production of income, by providing the
protection, resources, incentive, and proper climate for such
production, the interpretation given by the respondents to the
revenue law provision in question operates, in its application, to
place a resident alien with only domestic sources of income in an
equal, if not in a better, position than one who has both domestic
and foreign sources of income, a situation which is manifestly unfair
and short of logic.
Finally, to allow an alien resident to deduct from his gross income
whatever taxes he pays to his own government amounts to
conferring on the latter the power to reduce the tax income of the
Philippine government simply by increasing the tax rates on the alien
resident. Every time the rate of taxation imposed upon an alien
resident is increased by his own government, his deduction from
Philippine taxes would correspondingly increase, and the proceeds
for the Philippines diminished, thereby subordinating our own taxes
to those levied by a foreign government. Such a result is
incompatible with the status of the Philippines as an independent
and sovereign state.
24

Decisions of the Court of Tax Appeals are reversed and the
disallowance of the refunds claimed by respondents is affirmed.
Madrigal v. Rafferty GR12287, August 7,
Petitioner/s : VICENTE MADRIGAL and his wife, SUSANA PATERNO
Respondent/s : JAMES J. RAFFERTY, Collector of Internal Revenue,
and VENANCIO CONCEPCION, Deputy Collector of Internal Revenue
FACTS :
 Vicente Madrigal and Susana Paterno were legally married and
have conjugal partnership.
 Madrigal filed his total net income for the year is P296,302.73.
 Subsequently, Madrigal submitted the claim that the said total
net income of year 1914 did not represent his income for the
year 1914, but was in fact the income of the conjugal
partnership existing between himself and his wife, and the
computing and assessing the additional income tax provided
by the Act of Congress of Oct. 3, 1913, the income declared by
Madrigal and the other half of Paterno.
 Madrigal and Paterno brought action against Collector of
Internal Revenue and the Deputy Collector of Internal Revenue
for the recovery of the sum P3,786.08.
 The burden of the complaint was that if the income tax for the
year 1914 had been correctly and lawfully computed there
would have been due payable by each of the plaintiff the sum
of P2,921.09, which taken together amount of P5842.18 instead
of P9,668.21.
ISSUE: WON the additional income tax should be divided into equal
parts because of the conjugal partnership existing between them?
RULING + RATIO:
Income as contrasted with capital or property is to be the test. The
essential difference between capital and income is that capital is a
fund; income is a flow. A fund of property existing at an instant of
time is called capital. A flow of services rendered by that capital by
the payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time is
called an income. Capital is wealth, while income is the service of
wealth. (See Fisher, "The Nature of Capital and Income.") The
Supreme Court of Georgia expresses the thought in the following
figurative language: "The fact is that property is a tree, income is the
fruit; labor is a tree, income the fruit; capital is a tree, income the
fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on
income is not a tax on property. "Income," as here used, can be
defined as "profits or gains." (London County Council vs. Attorney-
General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49
Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax,
second edition [1915], Chapter IV; Black on Income Taxes, second
edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136 U.S., 549;
and Towne vs. Eisner, decided by the United States Supreme Court,
January 7, 1918.)
A regulation of the United States Treasury Department relative to
returns by the husband and wife not living apart, contains the
following:
The husband, as the head and legal
representative of the household and general
custodian of its income, should make and render
the return of the aggregate income of himself
and wife, and for the purpose of levying the
income tax it is assumed that he can ascertain
the total amount of said income. If a wife has a
separate estate managed by herself as her own
separate property, and receives an income of
more than $3,000, she may make return of her
own income, and if the husband has other net
income, making the aggregate of both incomes
more than $4,000, the wife's return should be
attached to the return of her husband, or his
income should be included in her return, in order
that a deduction of $4,000 may be made from
the aggregate of both incomes. The tax in such
case, however, will be imposed only upon so
much of the aggregate income of both shall
exceed $4,000. If either husband or wife
separately has an income equal to or in excess of
$3,000, a return of annual net income is required
under the law, and such return must include the
income of both, and in such case the return must
be made even though the combined income of
both be less than $4,000. If the aggregate net
income of both exceeds $4,000, an annual return
of their combined incomes must be made in the
manner stated, although neither one separately
has an income of $3,000 per annum. They are
jointly and separately liable for such return and for
the payment of the tax. The single or married
status of the person claiming the specific
exemption shall be determined as one of the time
of claiming such exemption which return is made,
otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in
force in the Philippine Islands, we turn for a moment to consider the
provisions of the Civil Code dealing with the conjugal partnership.
Recently in two elaborate decisions in which a long line of Spanish
authorities were cited, this court in speaking of the conjugal
partnership, decided that "prior to the liquidation the interest of the
wife and in case of her death, of her heirs, is an interest inchoate, a
mere expectancy, which constitutes neither a legal nor an equitable
estate, and does not ripen into title until there appears that there are
assets in the community as a result of the liquidation and settlement."
(Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel and
Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in
the property of her husband Vicente Madrigal during the life of the
conjugal partnership. She has an interest in the ultimate property
rights and in the ultimate ownership of property acquired as income
after such income has become capital. Susana Paterno has no
absolute right to one-half the income of the conjugal partnership.
Not being seized of a separate estate, Susana Paterno cannot make
a separate return in order to receive the benefit of the exemption
which would arise by reason of the additional tax. As she has no
estate and income, actually and legally vested in her and entirely
distinct from her husband's property, the income cannot properly be
considered the separate income of the wife for the purposes of the
additional tax. Moreover, the Income Tax Law does not look on the
spouses as individual partners in an ordinary partnership. The
husband and wife are only entitled to the exemption of P8,000
specifically granted by the law. The higher schedules of the
additional tax directed at the incomes of the wealthy may not be
partially defeated by reliance on provisions in our Civil Code dealing
with the conjugal partnership and having no application to the
Income Tax Law. The aims and purposes of the Income Tax Law must
be given effect.
In connection with the decision above quoted, it is well to recall a
few basic ideas. The Income Tax Law was drafted by the Congress
of the United States and has been by the Congress extended to the
Philippine Islands. Being thus a law of American origin and being
peculiarly intricate in its provisions, the authoritative decision of the
official who is charged with enforcing it has peculiar force for the
Philippines. It has come to be a well-settled rule that great weight
should be given to the construction placed upon a revenue law,
whose meaning is doubtful, by the department charged with its
execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S.,
338; In re Allen [1903], 2 Phil., 630; Government of the Philippine
Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of
Nueva Segovia [1915], 32 Phil., 634.) We conclude that the judgment
25
should be as it is hereby affirmed with costs against appellants. So
ordered.
CIR v Isabela Cultural Corp
Petitioner: Commissioner of Internal Revenue
Respondent: Isabela Cultural Corporation
Ponente:YNARES-SANTIAGO, J.
DOCTRINE: 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.
LAW APPLICABLE: Section 45 of the NIRC:"[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"
FACTS:
 On February 23, 1990, ICC, a domestic corporation, received
from the BIR:
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax
in the amount of P333,196.86
Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges
and interestboth for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR’s disallowance of ICC’s claimed expense deductions for
professional and security services billed to and paid by ICC in 1986,
to wit:
(a) Expenses for the auditing services of SGV & Co., for the year
ending December 31, 1985;
(b) Expenses for the legal services [inclusive of retainer fees] of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson for the years 1984 and 1985.
(c) Expense for security services of El Tigre Security & Investigation
Agency for the months of April and May 1986.
(2) The alleged understatement of ICC’s interest income on the three
promissory notes due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of
interest and surcharge) was allegedly due to the failure of ICC to
withhold 1% expanded withholding tax on its claimed P244,890.00
deduction for security services.
 On March 23, 1990, ICC sought a reconsideration of the subject
assessments.
 On February 9, 1995 it received a final notice before seizure
demanding payment of the amounts stated in the said notices.
 Hence, it brought the case to the CTA
 CTA held that the petition is premature because the final notice
of assessment cannot be considered as a final decision
appealable to the tax court.
 CA reversed holding that a demand letter of the BIR reiterating
the payment of deficiency tax, amounts to a final decision on
the protested assessment and may therefore be questioned
before the CTA.
 SC: sustained CA’s decision on July 1, 2001, in G.R. No. 135210.
 The case was thus remanded to the CTA for further
proceedings.
CTA: (on remanded case) February 26, 2003:
 Canceled and set aside the assessment notices issued
against ICC.
 The claimed deductions for professional and security
services were properly claimed by ICC in 1986 because it
was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these
professional services were rendered to ICC in 1984 or 1985,
it could not declare the same as deduction for the said
years as the amount thereof could not be determined at
that time.
 ICC did not understate its interest income on the subject
promissory notes. It found that it was the BIR which made
an overstatement of said income when it compounded
the interest income receivable by ICC from the promissory
notes of Realty Investment, Inc., despite the absence of a
stipulation in the contract providing for a compounded
interest; nor of a circumstance, like delay in payment or
breach of contract, that would justify the application of
compounded interest.
 ICC in fact withheld 1% expanded withholding tax on its
claimed deduction for security services as shown by the
various payment orders and confirmation receipts it
presented as evidence.
COURT OF APPEALS: affirmed the CTA decision
 Although the professional services (legal and auditing
services) were rendered to ICC in 1984 and 1985, the cost
of the services was not yet determinable at that time,
hence, it could be considered as deductible expenses only
in 1986 when ICC received the billing statements for said
services. It further ruled that ICC did not understate its
interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and
remitted taxes on the payments for security services for the
taxable year 1986.
PETITIONER’S CONTENTION:
3. Since ICC is using the accrual method of accounting, the
expenses for the professional services that accrued in 1984
and 1985, should have been declared as deductions from
income during the said years and the failure of ICC to do
so bars it from claiming said expenses as deduction for the
taxable year 1986.
4. As to the alleged deficiency interest income and failure to
withhold expanded withholding tax assessment, petitioner
invoked the presumption that the assessment notices
issued by the BIR are valid.
ISSUE: Whether the Court of Appeals correctly:
(3) Sustained the deduction of the expenses for professional
and security services from ICC’s gross income-YES butonly
for Security Services
(4) Held that ICC did not understate its interest income from
the promissory notes of Realty Investment, Inc; and that
ICC withheld the required 1% withholding tax from the
deductions for security services.-YES
RULING+ 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 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".
Accounting methods for tax purposes comprise a set of rules for
determining when and how to report income and deductions. 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
26
and other allowable deductions for the current year but failed to do
so cannot deduct the same for the next year.
The accrual method relies upon the taxpayer’s right to receive
amounts or its obligation to pay them, in opposition to actual receipt
or payment, which characterizes the cash method of accounting.
The accrual of income and expense is permitted when the all-events
test has been met. This test requires: (1) fixing of a right to income or
liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income or liability be fixed,
and the amount of such income or liability be determined with
reasonable accuracy. However, the test does not demand that the
amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute
the amount with reasonable accuracy. The all-events test is satisfied
where computation remains uncertain, if its basis is unchangeable.
IN THIS CASE:
D. As for EXPENSES FOR LEGAL SERVICES pertain to the 1984
and 1985 legal and retainer fees of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengso and for
reimbursement of the expenses of said firm in connection
with ICC’s tax problems for the year 1984.
SC: The firm has been ICC’s counsel since the 1960’s. 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.
As to when the firm’s performance of its services in connection with
the 1984 tax problems were completed, or 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. It simply relied on the
defense of delayed billing by the firm and the company, which
under the circumstances, is not sufficient to exempt it from being
charged with knowledge of the reasonable amount of the expenses
for legal and auditing services.
E. In the same veinr, 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.
SC: ICC failed to discharge the burden of proving that the claimed
expense deductions for the professional services were allowable
deductions for the taxable year 1986. Hence, per Revenue Audit
Memorandum Order No. 1-2000, they cannot be validly deducted
from its gross income for the said year and were therefore properly
disallowed by the BIR.
F. As to the EXPENSES FOR SECURITY SERVICES, the records
show that these expenses were incurred by ICC in 198620
and could therefore be properly claimed as deductions for
the said year.
SC: Anent the purported understatement of interest income from the
promissory notes of Realty Investment, Inc., no such understatement
exists and that only simple interest computation and not a
compounded one should have been applied by the BIR. There is
indeed no stipulation between the latter and ICC on the application
of compounded interest. Under Article 1959 of the Civil Code, unless
there is a stipulation to the contrary, interest due should not further
earn interest.
ICC truly withheld the required withholding tax from its claimed
deductions for security services and remitted the same to the BIR is
supported by payment order and confirmation receipts. Hence, the
Assessment Notice for deficiency expanded withholding tax was
properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of
P333,196.86 for deficiency income tax should be cancelled and set
aside but only insofar as the claimed deductions of ICC for security
services. The Court of Appeal’s cancellation of Assessment Notice
No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency
expanded withholding tax, is sustained.
DISPOSITION: PARTIALLY GRANTED. The case is remanded to the BIR
for the computation of Isabela Cultural Corporation’s liability under
Assessment Notice No. FAS-1-86-90-000680.
Obillos, Jr. v. CIR
Petitioners: Jose P. Obillos, Jr., Sarah P. Obillos, Romeo P. Obillos
and Remedios P. Obillos, brothers and sisters
Respondents: Commissioner of Internal Revenue and Court of Tax
Appeals
Doctrine: Where the father sold his rights over two parcels of land to
his four children so they can build their residence, but the latter after
one (1) year sold them and paid the capital gains, they should not
be treated to have formed an unregistered partnership and taxed
corporate income tax on the sale and dividend income tax on their
shares of the profit’s from the sale.
Case: PETITION to review the judgment of the CTA.
This case is about the income tax liability of four brothers and sisters
who sold two parcels of land which they had acquired from their
father.
AQUINO, J.:
FACTS:
 When Jose Obillos, Sr. completed the payment to Oritgas & Co.,
Ltd. for the 2 lots in Greenhill, San Juan, Rizal, Jose Sr. transferred
his rights over such lots to his 4 children (petitioners) to enable
them to build their residences. Presumably, the Torrens titles
issued to them would show that they were co-owners of the 2
lots.
 After having held the lots for more than a year, the petitioners
resold the lots to the Walled City Securities Corporation and
Olga Cruz Canda. They derived from the sale a total profit of
P134,341.88 or P33,584 for each of them. They treated the profit
as a capital gain and paid an income tax on one-half thereof
or on P16,792.
 In April, 1980, or one day before the expiration of the 5-year
prescriptive period, CIR required the petitioners to pay
corporate income tax on the total profit (P134,336) in addition
to individual income tax on their shares thereof. CIR assessed:
 P37,018 as corporate income tax;
 P18,509 as 50% fraud surcharge; and
 P15,547.56 as 42% accumulated interest, or a total of
P71,074.56.
Also CIR also considered:
27
  the share of the profits of each petitioner in the sum of
P33,584 as a "distributive dividend" taxable in full (not a
mere capital gain of which 1⁄2 is taxable) and
 required them to pay deficiency income taxes
aggregating P56,707.20 including the 50% fraud
surcharge and the accumulated interest.
 Thus, the petitioners are being held liable for deficiency income
taxes and penalties totaling P127,781.76 on their profit of
P134,336, in addition to the tax on capital gains already paid by
them.
 CIR acted on the theory that the petitioners had formed an
unregistered partnershipor joint venture within the meaning of
Sec. 24(a) and 84(b) of the Tax Code.
 CTAaffirmed CIR’s.
ISSUE:Whether the petitioners are considered an unregistered
partnership/joint venture, which qualifies them to be taxed for
corporate income tax. – NO.
RULING:
No creation of partnership as it would result to oppressive taxation
 We hold that it is error to consider the petitioners as having
formed a partnership under Art. 1767 of the Civil Code simply
because they allegedly contributed P178,708.12 to buy the two
lots, resold the same and divided the profit among themselves.
 To regard the petitioners as having formed a taxable
unregistered partnership would result in oppressive taxation and
confirm the dictum that the power to tax involves the power to
destroy. That eventuality should be obviated.
 As testified by Jose Jr., they had no such intention. They were
co-owners pure and simple.
 To consider them as partners would obliterate the distinction
between a coownership and a partnership. The petitioners were
not engaged in any joint venture by reason of that isolated
transaction.
 Their original purpose was to divide the lots for residential
purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of construction,
then they had no choice but to resell the same to dissolve the
co-ownership. The division of the profit was merely incidental to
the dissolution of the co-ownership which was in the nature of
things a temporary state. It had to be terminated sooner or later.
 Article 1769(3) of the Civil Code provides that "the sharing of
gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived".
There must be an unmistakable intention to form a partnership
or joint venture.
 In the instant case, what the Commissioner should have
investigated was whether the father donated the two lots to the
petitioners and whether he paid the donor's tax (See Art. 1448,
Civil Code), We are not prejudging this matter. It might have
already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside.
The assessments are cancelled. No costs.
The Case is distinguishable from the cases where the parties
engaged in joint ventures for profit.
 Oña vs. CIR, where after an extrajudicial settlement the coheirs
used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that
they were taxable as an unregistered partnership;
 It is likewise different from Reyes vs. CIR, where father and son
purchased a lot and building, entrusted the administration of
the building to an administrator and divided equally the net
income; and from
 Evangelista vs. CIR, where the three Evangelista sisters bought
four pieces of real property which they leased to various tenants
and derived rentals therefrom. Clearly, the petitioners in these
two cases had formed an unregistered partnership.
Pascual and Dragon vs. Commissioner
Doctrine:
“ Petitioner shared in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed of the tax amnesty
thereby. Under the circumstances, they cannot be considered to
have formed an unregistered partnership which is thereby liable for
corporate income tax, as the respondent commissioner proposes."
Petitioner: MARIANO P. PASCUAL and RENATO P. DRAGON
Respondent: THE COMMISSIONER OF INTERNAL REVENUE and COURT
OF TAX APPEALS
Ponente: J. GANCAYCO
Facts:
5. On June 22, 1965, petitioners bought two (2) parcels of land
from Santiago Bernardino, et al. and on May 28, 1966, they
bought another three (3) parcels of land from Juan Roque.
6. The first two parcels of land were sold by petitioners in 1968 to
Marenir Development Corporation, while the three parcels of
land were sold by petitioners to Erlinda Reyes and Maria
Samson on March 19,1970.
7. Petitioners realized a net profit in the sale made in 1968 in the
amount of P165,224.70, while they realized a net profit of
P60,000.00 in the sale made in 1970. The corresponding capital
gains taxes were paid by petitioners in 1973 and 1974 by
availing of the tax amnesties granted in the said years.
8. However, in a letter dated March 31, 1979 of then Acting BIR
Commissioner Efren I. Plana, petitioners were assessed and
required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and
1970.
Contention of Pascual et al
1. Protested the said assessment in a letter of June 26, 1979 asserting
that they had availed of tax amnesties way back in 1974.
Contention of CIR
1. That in the years 1968 and 1970, petitioners as co-owners in the
real estate transactions formed an unregistered partnership or
joint venture taxable as a corporation under Section 20(b) and
its income was subject to the taxes prescribed under Section 24,
both of the National Internal Revenue Code 1 that the
unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them
which is subject to individual income tax
2. That the availment of tax amnesty under P.D. No. 23, as
amended, by petitioners relieved petitioners of their individual
income tax liabilities but did not relieve them from the tax liability
of the unregistered partnership. Hence, the petitioners were
required to pay the deficiency income tax assessed.
Issue/Arguement:
5. Whether or not Pascual et al formed an unregistered
partnership subject to corporate income tax, and that the
burden of offering evidence in opposition thereto rests upon
the them. - NO
6. Whether in making a finding, solely on the basis of isolated
sale transactions, that an unregistered partnership existed
thus ignoring the requirements laid down by law that would
warrant the presumption/conclusion that a partnership
exists. - NO
7. whether instant case is similar to the evangelista case and
therefore should be decided alongside the evangelista
case. - NO
8. Whether or not tax amnesty did not relieve the Pascual et al
from payment of other taxes for the period covered by such
amnesty. - NO
Ruling:
c. Basis of the Ruling:
Sec. 24. Rate of the tax on corporations.—There shall be levied,
assessed, collected, and paid annually upon the total net
income received in the preceding taxable year from all
28
 sources by every corporation organized in, or existing under
the laws of the Philippines, no matter how created or
organized but not including duly registered general co-
partnerships (companies collectives), a tax upon such income
equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no
matter how created or organized, joint-stock companies, joint
accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-
partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
Pursuant to this article, the essential elements of a partnership
are two, namely: (a) an agreement to contribute money,
property or industry to a common fund; and (b) intent to divide
the profits among the contracting parties.
d. Application of the law:
In the present case, there is no evidence that petitioners
entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide
the profits among themselves. Respondent commissioner and/
or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased
certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where
petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of
the common fund or even the properties acquired by them.
The character of habituality peculiar to business transactions
engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land
in 1965. They did not sell the same nor make any improvements
thereon. In 1966, they bought another three (3) parcels of land
from one seller. It was only 1968 when they sold the two (2)
parcels of land after which they did not make any additional
or new purchase. The remaining three (3) parcels were sold by
them in 1970. The transactions were isolated. The character of
habituality peculiar to business transactions for the purpose of
gain was not present.
In Evangelista, the properties were leased out to tenants for
several years. The business was under the management of one
of the partners. Such condition existed for over fifteen (15)
years. None of the circumstances are present in the case at
bar. The co-ownership started only in 1965 and ended in 1970.
It is evident that an isolated transaction whereby two or more
persons contribute funds to buy certain real estate for profit in
the absence of other circumstances showing a contrary
intention cannot be considered a partnership.
Persons who contribute property or funds for a common
enterprise and agree to share the gross returns of that
enterprise in proportion to their contribution, but who severally
retain the title to their respective contribution, are not thereby
rendered partners. They have no common stock or capital,
and no community of interest as principal proprietors in the
business itself which the proceeds derived. (Elements of the
Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p.
74.)
A joint purchase of land, by two, does not constitute a co-
partnership in respect thereto; nor does an agreement to
share the profits and losses on the sale of land create a
partnership; the parties are only tenants in common. (Clark vs.
Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
The sharing of returns does not in itself establish a partnership
whether or not the persons sharing therein have a joint or
common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership
between the petitioners. There is no adequate basis to support
the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they
purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in
the gross profits as co- owners and paid their capital gains
taxes on their net profits and availed of the tax amnesty
thereby. Under the circumstances, they cannot be considered
to have formed an unregistered partnership which is thereby
liable for corporate income tax, as the respondent
commissioner proposes.
And even assuming for the sake of argument that such
unregistered partnership appears to have been formed, since
there is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said
deficiency corporate income tax, then petitioners can be held
individually liable as partners for this unpaid obligation of the
partnership. However, as petitioners have availed of the
benefits of tax amnesty as individual taxpayers in these
transactions, they are thereby relieved of any further tax
liability arising therefrom.
Disposition: WHEREFROM, the petition is hereby GRANTED and
the decision of the respondent Court of Tax Appeals of March
30, 1987 is hereby REVERSED and SET ASIDE and another
decision is hereby rendered relieving petitioners of the
corporate income tax liability in this case, without
pronouncement as to costs.
REYES v. CIR
Petitioner: FLORENCIO REYES and ANGEL REYES
Respondent (s): COMMISSIONER OF INTERNAL REVENUE and HON.
COURT OF TAX APPEALS
DOCTRINE: For purposes of the tax on corporations, the National
Internal Revenue Code includes partnerships, with the exception
only of duly registered general co-partnerships. And since under
section 84(b) of the Revenue Code, the term corporation includes
partnerships no matter how created or organized, this qualifying
expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms or in conformity with the
usual requirements of the law on partnerships.
LAW(S) APPLICABLE: Section 84 (b) of the NIRC
FACTS:
The Reyeses, father and son, purchased a lot and building, known as
the Gibbs Building for P835,000.00, of which they paid the sum of
P375,000.00, leaving a balance of P460,000.00, representing the
mortgage obligation of the vendors with the China Banking
Corporation, which mortgage obligations were assumed by the
vendees (the Reyeses).
At the time of the purchase, the building was leased to various
tenants, whose rights under the lease contracts with the original
owners, the Reyeses, agreed to respect.
The administration of the building was entrusted to an administrator
who collected the rents; kept its books and records and rendered
statements of accounts to the owners; negotiated leases; made
necessary repairs and disbursed payments, whenever necessary,
after approval by the owners; and performed such other functions
necessary for the conservation and preservation of the building.
29
They divided equally the income of operation and maintenance.
The gross income from rentals of the building amounted to about
P90,000.00 annually."
The Reyeses were assessed by the CIR the sum of P46,647.00 as
income tax, surcharge and compromise for the years 1951 to 1954,
an assessment subsequently reduced to P37,528.00.
This assessment sought to be reconsidered unsuccessfully was the
subject of an appeal to CTA
Thereafter, another assessment was made against petitioners, this
time for back income taxes plus surcharge and compromise in the
total sum of P25,973.75, covering the years 1955 and 1956.
There being a failure on their part to have such assessments
reconsidered, the matter was likewise taken to the CTA
In its joint decision, the tax liability for the years 1951 to 1954 was
reduced to P37,128.00 and for the years 1955 and 1956, to P20,619.00
as income tax due "from the partnership formed" by petitioners.
The reduction was due to the elimination of surcharge, the failure to
file the income tax return being accepted as due to petitioners
honest belief that no such liability was incurred as well as the
compromise penalties for such failure to file
A reconsideration of the aforesaid decision was sought and denied
the CTA
Ruling of the Lower Court (CTA):
The Court of Tax Appeals applying the appropriate provisions of the
National Internal Revenue Code, the first of which imposes an
income tax on corporations "organized in, or existing under the laws
of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships, ...," a term, which
according to the second provision cited, includes partnerships "no
matter how created or organized, ...," and applying the leading
case of Evangelista v. Collector of Internal Revenue, sustained the
action of respondent Commissioner of Internal Revenue, but
reduced the tax liability of petitioners, as previously noted.
Contention of the Petitioners (Angel and Feliciano Reyes):
They maintain the view that the Evangelista ruling does not apply.
They allege that the reliance by CTA was unwarranted and the
decision should be set aside. If their interpretation of the
authoritative doctrine therein set forth commands assent, then
clearly what respondent Court of Tax Appeals did fails to find shelter
in the law. That is the crux of the matter. A perusal of the Evangelista
decision is therefore unavoidable.
ISSUE: Whether petitioners are subject to the tax on corporations
provided for in section 24 of the National Internal Revenue Code -
RULING: For purposes of the tax on corporations, the National
Internal Revenue Code includes partnerships, with the exception
only of duly registered general co-partnerships.
When petitioners purchased the lot and building and stepped into
the shoes of the vendor as a lessor, petitioners are not only co-owners
but partners. And since under section 84(b) of the Revenue Code,
the term corporation includes partnerships no matter how created
or organized, this qualifying expression clearly indicates that a joint
venture need not be undertaken in any of the standard forms or in
conformity with the usual requirements of the law on partnerships.
Pursuant to the same section 84(b), the term 'corporation' includes
among others, joint accounts (cuentas en participacion) and
associations, none of which has a legal personality of its own
independent of that of its members. The lawmaker could not have
regarded personality as a condition precedent to the existence of
partnerships referred to therein.
In the Evangelista case the following circumstances were found to
exist: a common fund created purposely, the investment of the
same not merely in one transaction but in a series of transactions,
the lots not being devoted to residential purposes or to other
personal purposes, the properties being under the management of
one person with full power to lease, collect rents, issue receipts, bring
suits—and that all these conditions existed for over 10 years. In the
case at bar, petitioners could claim that this was only one
transaction, that: their intention was to house in that building
acquired by them the respective enterprises and to effect a division
in 10 years. But while the purchase was made in 1950, as late as 1965,
or almost 15 years later, there was no allegation of such division and
the facts show that the building continued to be leased by other
parties with petitioners dividing equally the income after deducting
operational expenses. Differences of such slight significance do not
call for a different ruling, they do not suffice to preclude the
applicability of the Evangelista decision.
As a matter of principle, it is not advisable for the appellate Court to
set aside the conclusion reached by an agency such as the Court
of Tax Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has
been an abuse or improvident exercise of its authority.
Evangelista, et al. vs. Coll. of Int. Rev., et al.
Petitioner/s : EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and
FRANCISCA EVANGELISTA
Respondent/s : THE COLLECTOR OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS
DOCTRINE: Corporations" strictly speaking are distinct and different
from "partnerships." When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on
"corporations", it must allude to organizations which are not
necessarily "partnerships" in the technical sense of the term. 

CONCEPCIÓN, J.:
FACTS
Petitioners borrowed from their father which amount together with
their personal monies was used by them for the purpose of buying
real properties. 

From February 2, 1943 to April 1944, Petitioners bought four parcels
of land from different persons.
That in a document dated August 16, 1945, they appointed their
brother Simeon Evangelista to 'manage their properties with full
power to lease; to collect and receive rents; to issue receipts
therefor; in default of such payment, to bring suits against the
defaulting tenant; to sign all letters, contracts, etc., for and in their
behalf, and to endorse and deposit all notes and checks for them; 

That after having bought the above-mentioned real properties, the
petitioners had the same rented or leased to various tenants.
That from the month of March 1945 up to and including December,
1945, the total amount collected as rents on their real properties was
P9,599.00 while the expenses amounted to P3,650.00 thereby leaving
them a net rental income of P5,948.33; That in 1946, they realized a
gross rental income in the sum of P24,786.30, out of which amount
was deducted the sum of P16,288.27 for expenses thereby leaving
them a net rental income of P7,498.13; That in 1948 they realized a
gross rental income of P17,453.00 out of the which amount was
deducted the sum of P4,837.65 as expenses, thereby leaving them a
net rental income of P12,615.35
On September 24, 1954, respondent Collector of Internal Revenue
demanded the payment of income tax on corporations, real estate
dealer's fixed tax and corporation residence tax for the years 1945-
1949
Said letter of demand and the corresponding assessments were
delivered to petitioners, whereupon they instituted the present case
in the Court of Tax Appeals, with a prayer that the decision of the
respondent contained in his letter of demand dated September 24,
1954 be reversed, and that they be absolved from the payment of
the taxes in question, with costs against the respondent.
Ruling of the CTA: Petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years 1945 to 1949,
inclusive, in accordance with the respondent's assessment for the
30
same in the total amount of P6,878.34.
ISSUE:
Whether petitioners are subject to the tax on corporations provided
for in section 24 of Commonwealth Act No. 466, otherwise known as
the National Internal Revenue Code, as well as to the residence tax
for corporations and the real estate dealers' fixed tax? - YES
RULING + RATIO:
Corporations" strictly speaking are distinct and different from
"partnerships." When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on "corporations",
it must allude to organizations which are not necessarily
"partnerships" in the technical sense of the term. 
 and LORENZO B. OÑA, JR.,
Section 24 of the Internal Revenue Codeexempts from the tax
imposed upon corporations "duly registered general partnerships",
which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. 
 as the inheritance or estate is not distributed or, at least, partitioned,
As defined in section 84 (b) of the Internal Revenue Code "the term
corporation includes partnerships, no matter how created or
organized,"This qualifying expression clearly indicates that a joint
venture need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of the tax
on corporations. 
 surviving spouse, Lorenzo T. Oña and her five children. In 1948,
Pursuant to Section 84 (b) of the Internal Revenue Code, the term
"corporation" includes, among others, "joint accounts (cuenta en
participación)" and "associations", none of which has a legal
personality of its own independent of that of its members. For 
 
purposes of the tax on corporations, our National Internal Revenue
Code includes these partnerships.— with the exception only of duly
registered general partnerships—within the purview of the term
"corporation."
In the case at bar, Petitioners who are engaged in real estate
transactions for monetary gain and divide the same among
themselves, constitute a partnership, so far as the said Code is
concerned, and are subject to the income tax for corporation
The petitioners are subject also to the residence tax for corporations
As regards the residence tax for corporations, "Section 2 of
Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.—Every corporation, no matter how
created or organized, whether domestic or resident foreign,
engaged in or doing business in the Philippines shall pay an annual
residence tax of five pesos and an annual additional tax which, in
no case, shall exceed one thousand pesos, in accordance with the
following schedule.
The pertinent part of the provision of Section 2 of Commonwealth
Act No. 465 which says: "The term corporation as used in this Act
includes joint-stock company, partnership, joint account (cuentas
en participación), association or insurance company, no matter
how created or organized" is analogous to that of Sections 24 and
84 (b) of our National Internal Revenue Code, which was approved
the day immediately after the approval of said Commonwealth Act
No. 465. Apparently, the terms "corporation" and "Partnership" are
used in both statutes with substantially the same meaning.
Lastly, the records show that petitioners have habitually engaged in
leasing the properties above mentioned for a period of over twelve
years, and that the yearly gross rentals of said properties from 1945
to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the
tax provided in section 193 (q) of our National Internal Revenue
Code, for "real estate dealers," inasmuch as, pursuant to section 194
(s) thereof:
Real estate dealer' includes any person engaged in the business of
buying, selling, exchanging, leasing, or renting property or his own
account as principal and holding himself out as a full or part time
dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three
thousand pesos or more a year.
Dispositive Portion: Wherefore, the appealed decision of the Court
of Tax Appeals is hereby affirmed with costs against the petitioners
herein. It is so ordered
OÑA vs. CIR
Petitioner/s : LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely:
RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA
Respondent/s: THE COMMISSIONER OF INTERNAL REVENUE,
DOCTRINE: The income derived from inherited properties may be
considered as individual income of the respective heirs only so long
but the moment their respective known shares are used as part of
the common assets of the heirs to be used in making profits, it is but
proper that the income of such shares should be considered as the
part of the taxable income of an unregistered partnership.
FACTS :
 On March 23, 1944, Julia Buñales died, leaving as heirs her
Civil Case No. 4519 was instituted in the Court of First Instance of
Manila for the settlement of her estate. Later, Lorenzo T. Oña the
surviving spouse was appointed administrator of the estate of
said deceased.
On April 14, 1949, the administrator submitted the project of
partition, which was approved by the Court on May 16, 1949.
 Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr.,
all surnamed Oña, were still minors when the project of partition
was approved, Lorenzo T. Oña, their father and administrator of
the estate, filed a petition for appointment as guardian of said
minors. On November 14, 1949, the Court appointed him
guardian of the persons and property of the aforenamed
minors.
 Although the project of partition was approved by the Court on
May 16, 1949, no attempt was made to divide the properties
therein listed. Instead, the properties remained under the
management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in
real properties and securities. As a result, petitioners' properties
and investments gradually increased from P105,450.00 in 1949
to P480,005.20 in 1956.
 From said investments and properties petitioners derived such
incomes as profits from installment sales of subdivided lots,
profits from sales of stocks, dividends, rentals and interests. Every
year, petitioners returned for income tax purposes their shares in
the net income derived from said properties and securities
and/or from transactions involving them. However, petitioners
did not actually receive their shares in the yearly income. The
income was always left in the hands of Lorenzo T. Oña who, as
heretofore pointed out, invested them in real properties and
securities.
 CIR assessed against the petitioners the amounts of P8,092.00
and P13,899.00 as corporate income taxes for 1955 and 1956,
respectively, on the basis that the petitioners formed an
unregistered partnership and therefore, subject to the
corporate income tax, pursuant to Section 24, in relation to
Section 84(b), of the Tax Code.
 Court of Tax Appeals held that petitioners have constituted an
unregistered partnership and are, therefore, subject to the
payment of the deficiency corporate income taxes assessed
against them by the CIR.
31
ISSUE: Whether petitioners should be considered as co-owners of the
properties inherited by them from the deceased Julia Buñales and
the profits derived from transactions involving the same, or, must
they be deemed to have formed an unregistered partnership
subject to tax under Sections 24 and 84(b) of the National Internal
Revenue Code - unregistered partnership
RULING + RATIO:
Instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949,
"the properties remained under the management of Lorenzo T. Oña
who used said properties in business by leasing or selling them and
investing the income derived therefrom and the proceed from the
sales thereof in real properties and securities," as a result of which
said properties and investments steadily increased yearly.
And all these became possible because, admittedly, petitioners
never actually received any share of the income or profits from
Lorenzo T. Oña and instead, they allowed him to continue using said
shares as part of the common fund for their ventures, even as they
paid the corresponding income taxes on the basis of their respective
shares of the profits of their common business as reported by the said
Lorenzo T. Oña.
From the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oña as a common
fund in undertaking several transactions or in business, with the
intention of deriving profit to be shared by them proportionally, such
act was tantamonut to actually contributing such incomes to a
common fund and, in effect, they thereby formed an unregistered
partnership within the purview of the above-mentioned provisions of
the Tax Code.
It is but logical that in cases of inheritance, there should be a period
when the heirs can be considered as co-owners rather than
unregistered co-partners within the contemplation of our corporate
tax laws aforementioned. Before the partition and distribution of the
estate of the deceased, all the income thereof does belong
commonly to all the heirs, obviously, without them becoming
thereby unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the inheritance is
actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the
partition, they might decide to continue holding said shares under
the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis.
Withal, if this were to be allowed, it would be the easiest thing for
heirs in any inheritance to circumvent and render meaningless
Sections 24 and 84(b) of the National Internal Revenue Code.
The co-ownership of inherited properties is automatically converted
into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are used as a
common fund with intent to produce profits for the heirs in proportion
to their respective shares in the inheritance as determined in a
project partition either duly executed in an extrajudicial settlement
or approved by the court in the corresponding testate or intestate
proceeding. The reason for this is simple. From the moment of such
partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to
manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such
partition, he allows his share to be held in common with his co-heirs
under a single management to be used with the intent of making
profit thereby in proportion to his share, there can be no doubt that,
even if no document or instrument were executed for the purpose,
for tax purposes, at least, an unregistered partnership is formed. This
is exactly what happened to petitioners in this case.
HENCE, the decision of CTA is AFFIRMED.
CIR vs. ST. LUKES
COMMISSIONER OF INTERNAL REVENUE, PETITIONER
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Doctrine:
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the government,
so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money
inures to the private benefit of the persons managing or operating
the institution.
Article Applicable: Discussion for Sec 27 (B), 30 (E) and 30 (G) of
NIRC
Fact: (guys mahaba ito kasi nagdiscuss ng meaning ng
charitable,non profit)
 St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized
as a non-stock and non-profit corporation. St. Luke’s accepts
both paying and non-paying patients. The BIR assessed St.
Luke’s deficiency taxes for 1998 comprised of deficiency
income tax, value-added tax, and withholding tax. The BIR
claimed that St. Luke’s should be liable for income tax at a
preferential rate of 10% as provided for by Section 27(B). Further,
the BIR claimed that St. Luke’s was actually operating for profit
in 1998 because only 13% of its revenues came from charitable
purposes. Moreover, the hospital’s board of trustees, officers
and employees directly benefit from its profits and assets.
 On the other hand, St. Luke’s maintained that it is a non-stock
and non-profit institution for charitable and social welfare
purposes exempt from income tax under Section 30(E) and (G)
of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.
Contentions of the PETITIONER/PLAINTIFF St. Luke's contended that
the BIR should not consider its total revenues, because its free
services to patients was ₱218,187,498 or 65.20% of its 1998 operating
income (i.e., total revenues less operating expenses) of
₱334,642,615. St. Luke's also claimed that its income does not inure
to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution
for charitable and social welfare purposes under Section 30(E) and
(G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.
Issue: The sole issue is whether St. Luke's is liable for deficiency
income tax in 1998 under Section 27(B) of the NIRC, which imposes
a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.-NO
Ruling + Ratio:
St. Luke's claims tax exemption under Section 30(E) and (G) of
the NIRC. It contends that it is a charitable institution and an
organization promoting social welfare. The arguments of St. Luke's
focus on the wording of Section 30(E) exempting from income tax
non-stock, non-profit charitable institutions. St. Luke's asserts that the
legislative intent of introducing Section 27(B) was only to remove the
exemption for "proprietary non-profit" hospitals. The relevant
provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
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veterans, no part of its net income or asset shall belong to
or inure to the benefit of any member, organizer, officer or
any specific person;
xxxx
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
(Emphasis supplied)
Section 27(B) of the NIRC imposes a 10% preferential tax rate
on the income of (1) proprietary non-profit educational institutions
and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit.
"Proprietary" means private, following the definition of a "proprietary
educational institution" as "any private school maintained and
administered by private individuals or groups" with a government
permit. "Non-profit" means no net income or asset accrues to or
benefits any member or specific person, with all the net income or
asset devoted to the institution's purposes and all its activities
conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In
Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 37 this
Court considered as non-profit a sports club organized for recreation
and entertainment of its stockholders and members. The club was
primarily funded by membership fees and dues. If it had profits, they
were used for overhead expenses and improving its golf course. The
club was non-profit because of its purpose and there was no
evidence that it was engaged in a profit-making enterprise.
The Court defined "charity" in Lung Center of the Philippines v.
Quezon City as "a gift, to be applied consistently with existing laws,
for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion,
by assisting them to establish themselves in life or [by] otherwise
lessening the burden of government." A non-profit club for the
benefit of its members fails this test. An organization may be
considered as non-profit if it does not distribute any part of its income
to stockholders or members. However, despite its being a tax exempt
institution, any income such institution earns from activities
conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30.
To be a charitable institution, however, an organization must
meet the substantive test of charity in Lung Center. The issue in Lung
Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction.
Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which
would otherwise fall on the shoulders of government. Thus, as a
matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private
entities already assume a part of the burden. This is the rationale for
the tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works
which would have been funded by appropriations from the Treasury.
The Court in Lung Center declared that the Lung Center of the
Philippines is a charitable institution for the purpose of exemption
from real property taxes.
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the government,
so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money
inures to the private benefit of the persons managing or operating
the institution.
For real property taxes, the incidental generation of income is
permissible because the test of exemption is the use of the property.
The Constitution provides that "[c]haritable institutions, churches and
personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation." 48 The test of exemption is
not strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the property in a
certain way, i.e. for a charitable purpose. Thus, the Court held that
the Lung Center of the Philippines did not lose its charitable
character when it used a portion of its lot for commercial purposes.
The effect of failing to meet the use requirement is simply to remove
from the tax exemption that portion of the property not devoted to
charity.
The Constitution exempts charitable institutions only from real
property taxes. In the NIRC, Congress decided to extend the
exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the
other hand, Section 28(3), Article VI of the Constitution does not
define a charitable institution, but requires that the institution
"actually, directly and exclusively" use the property for a charitable
purpose.
The operations of the charitable institution generally refer to its
regular activities. Section 30(E) of the NIRC requires that these
operations be exclusive to charity. There is also a specific
requirement that "no part of [the] net income or asset shall belong
to or inure to the benefit of any member, organizer, officer or any
specific person." The use of lands, buildings and improvements of the
institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock
and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only refers to
the organization of St. Luke's. Even if St. Luke's meets the test of
charity, a charitable institution is not ipso facto tax exempt. To be
exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property
"actually, directly and exclusively" for charitable purposes. To be
exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively"
for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies
the words "organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and
character of the foregoing organizations from
any of their properties, real or personal, or from
any of their activities conducted for profit
regardless of the disposition made of such
income, shall be subject to tax imposed under this
Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts "any" activity for profit, such
activity is not tax exempt even as its not-for-profit activities remain
tax exempt. This paragraph qualifies the requirements in Section
30(E) that the "[n]on-stock corporation or association [must be]
organized and operated exclusively for x x x charitable x x x purposes
x x x." It likewise qualifies the requirement in Section 30(G) that the
civic organization must be "operated exclusively" for the promotion
of social welfare.
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In Lung Center, this Court declared:
"[e]xclusive" is defined as possessed and enjoyed to the
exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to
exclude; as enjoying a privilege exclusively." x x x The words
"dominant use" or "principal use" cannot be substituted for
the words "used exclusively" without doing violence to the
Constitution and the law. Solely is synonymous with
exclusively.

The Court finds that St. Luke's is a corporation that is not

"operated exclusively" for charitable or social welfare purposes
insofar as its revenues from paying patients are concerned. This ruling
is based not only on a strict interpretation of a provision granting tax
exemption, but also on the clear and plain text of Section 30(E) and
(G). Section 30(E) and (G) of the NIRC requires that an institution be
"operated exclusively" for charitable or social welfare purposes to be
completely exempt from income tax. An institution under Section
30(E) or (G) does not lose its tax exemption if it earns income from its
for-profit activities. Such income from for-profit activities, under the
last paragraph of Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at the preferential
10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the

State because an exempt institution is spared from sharing in the
expenses of government and yet benefits from them. Tax
exemptions for charitable institutions should therefore be limited to
institutions beneficial to the public and those which improve social
welfare. A profit-making entity should not be allowed to exploit this
subsidy to the detriment of the government and other taxpayers.

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

St. Luke's is therefore liable for deficiency income tax in 1998

under Section 27(B) of the NIRC. However, St. Luke's has good
reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is "a corporation for purely charitable and
social welfare purposes" and thus exempt from income tax. In
Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the
Court said that "good faith and honest belief that one is not subject
to tax on the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient justification
to delete the imposition of surcharges and interest."

WHEREFORE, the petition of the Commissioner of Internal

Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision of the
Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED.
St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency
income tax in 1998 based on the 10% preferential income tax rate
under Section 27(B) of the National Internal Revenue Code.
However, it is not liable for surcharges and interest on such
deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution
of the Court of Tax Appeals are AFFIRMED.

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