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Taxation Part 2, Digests

Taxation Part 2, Digests

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11/27/2012

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A.General PrinciplesCONCEPT, NATURE AND CHARACTERISTICS OF TAXATION AND TAXESCIR v. Cebu Portland Cement Co.
 The Court of Tax Appeals ordered the Commission of Internal Revenue(CIR) to refund to Cebu Portland Cement Co. about P350k+, w/crepresented overpayments of ad valorem taxes on cement producedand sold by it.
CIR opposed the ruling, claiming that it had a right to apply theoverpayment to another tax liability of Cebu Portland – sales tax on amanufactured product (the cement). CIR said that cement is amanufactured and NOT a mineral product and therefore NOT exemptfrom sales taxes. (mineral = exempt; manufactured = not exempt)
On the other hand, Cebu Portland said that it is exempt from sales taxunder the Tax Code because cement is a mineral product and NOT amanufactured product.
Court of Tax Appeals held that the alleged sales tax liability of CebuPortland was still being questioned and therefore could not be set-off against the refund.
A petition for review was filed by CIR.
I: W/n CIR must refund the overpayment of the ad valorem tax
R: NO. CIR has the right to apply the overpayment to Cebu Portland’ssales tax deficiency.
 The sales tax was properly imposed upon the company for the reasonthat cement has always been considered a manufactured product andNOT a mineral product. (CIR v Republic Cement)
o
Cement was never considered a mineral product w/in themeaning of the Tax Code, despite it being composed of 80%mineral, because cement is a PRODUCT of the manufacturingprocess.
o
Reliance cannot be made on Cebu Portland v CIR saying thatcement = mineral because this case has been overruled.
 
 The argument that the assessment cannot as yet be enforced becauseit is still being contested loses sight of the urgency of the need tocollect taxes as “the lifeblood of the government.”
If the payment of taxes could be postponed by simply questioning theirvalidity, the government would be paralyzed.
 Thus,
the Tax Code
 
provides that no court shall have authorityto grant an injunction or restrain the collection of taxes,
except 
when in the opinion of the Court of Tax Appeals, the collectionby the BIR or the Bureau of Customs may
 jeopardize the interest of the Government and/or the taxpayer
.
o
In such a case, the Court, at any stage of the proceeding maysuspend the collection and require the taxpayer to either:
1.
deposit the amount
claimed OR
2.
file a surety bond
for not more than double theamount with the Court.
 The exception does not apply in this case. In fact, there is all the morereason to enforce the rule given that even after crediting of the refundagainst the tax deficiency, a balance of more than P4 million was stilldue from the company.
 To require the Commissioner to actually refund to the company theamount of the judgment debt, which he will later have the right todistrain for payment of its sales tax liability is an idle ritual.
Commissioner of Internal Revenue v. Algue
 The Phil. Sugar Estate Development Company (PSEDC) appointedAlgue, Inc., a family corporation, as its agent, authorizing it to sell itsland, factories, and oil manufacturing process.
Pursuant to this authority, five members of the family corporationformed the Vegetable Oil Investment Corp. and induced other personsto invest in it.
 The newly formed corporation then purchased the PSEDC properties.For this sale, PSEDC gave Algue, Inc. a commission of P125,000.
From this amount, Algue Inc. paid the five family members P75,000 aspromotional fees.
Algue, Inc. declared this P75,000 as a deduction from its income tax asa legitimate business expense.
 The CIR questioned the deduction, claiming that it was not an ordinary,reasonable, or necessary expense and was merely an attempt to evadepayment of taxes.
I: W/n the P75,000 is tax-deductible as a legitimate business expenseof Algue, Inc.
R: Yes, the P75,000 promotional fee is tax-deductible.
Sec. 30 of the Tax Code provides that ordinary and necessaryexpenses incurred during the taxable year in carrying on any trade orbusiness, including a reasonable allowance for salaries or othercompensation for personal services actually rendered are tax-deductible.
However, the burden in proving the validity of a claimed deductionbelongs to the taxpayer. In this case, the burden has beensatisfactorily discharged by the taxpayer Algue, Inc.
Algue, Inc. was able to prove that the promotional fees were notfictitious and were in fact paid periodically to the five family members.Moreover, the amount of the promotional fees was reasonable,considering that the five payees actually performed a service for Algue,Inc. by making the sale of the properties of PSEDC possible.
As a result of this sale, Algue, Inc. earned a net commission of P50,000.
 Taxes are what we pay for civilized society. Without taxes, thegovernment would be paralyzed for lack of the motive power toactivate and operate it.
Hence, despite the natural reluctance to surrender part of one’s hard-earned income, every person who is able to must contribute his sharein running the government. The government, for its part, is expected torespond in the form of BENEFITS for general welfare. This
symbioticrelationship is the rationale of taxation
and should dispel theerroneous notion that it is an arbitrary exaction by those in the seat of power.
MONTERO - Tax 1 Digests | Y. Sanchez 2A 2012
1
 
However, it should also be exercised reasonably and in accordance
 
with the prescribed procedure
 
. If it is not, the taxpayer has a right tocomplain to the courts.
C.N. Hodges v. Municipal Board of Iloilo
 The Municipal Board of Iloilo enacted Ordinance No. 33 pursuant to theLocal Autonomy Act w/c:
o
required persons, firms, assocs and corps to pay a sales taxof 1/2 of 1% of the selling price of any motor vehicle AND
o
prohibited the registration of the sale of the motor vehicleunless the tax had been paid
Hodges, who was engaged in the buying and selling of second-handmotors, questioned the validity of the tax for having been enacted inexcess of authority.
I: W/n the tax is valid.
R: YES, the tax is valid.
 The Local Autonomy Act gives municipal boards the authority to enactordinances for the collection of taxes on any person engages in anyoccupation or business.
However, the LAA prohibits chartered cities, such as Iloilo fromimposing a tax on the registration of motor vehicles. Thus, the lowercourt ruled that to require payment of sales tax before registration istantamount to imposing a tax for the registration of motor vehicles.
HOWEVER, the SC disagreed with this, saying that the tax imposed wasmerely a coercive measure to make the enforcement of thecontemplated sales tax more effective.
 Taxes are imposed for the SUPPORT of the government in return forthe general advantage and protection which the government affords totaxpayers and their property.
 Taxes are the lifeblood of the government. The power to tax includesthe power to devise ways and means to accomplish tax collection inthe most effective manner. Otherwise, gov may falter / fail.
 Thus, the ordinance is a VALID exercise of the power of taxationgranted to Iloilo City by the LAA.
CLASSIFICATIONS AND DISTINCTIONSAssociation of Customs Brokers Inc. v. Municipal Board
 The Municipal Board of Manila passed an ordinance levying a propertytax on all motor vehicles operating within the City of Manila.
 The ordinance provided that the rate of the tax would be 1% advalorem per annum, and that the proceeds of the tax shall accrue tothe Streets and Bridges Funds of the City, w/c will be used for therepair, maintenance, and improvement of its streets and bridges.
 The Charter of Manila gives the municipal board the power to taxmotor vehicles, but this is limited by the Motor Vehicles Law, whichdisallows the imposition of fees on motor vehicles, EXCEPT propertytaxes imposed by a municipal corp.
 THUS, the law allows the City of Manila to impose a property tax onmotor vehicles operating within its limits.
However, the Association of Customs Brokers contended that theordinance is void because it actually imposes a license tax in the guiseof a property tax.
I: W/n ordinance is valid
R: No, it is void.
1) It imposes a license tax, which the municipal corporation may notimpose, although it is made to appear as a property tax/
As a rule, an ad valorem tax is a property tax. However, if the tax isreally imposed upon the performance of an act, enjoyment of aprivilege, or the engaging in an occupation, it will be considered anEXCISE, even if its amount is determined in proportion to the value of the property used in connection with the occupation, privilege, or actwhich is taxed.
In this case, the tax is fixed ad valorem. BUT, the purpose is to raisefunds for the repair, maintenance, and improvement of the streets andbridges in the city. Thus, it is actually a license fee under the guise of an ad valorem tax to circumvent the prohibition imposed by the MotorVehicles Law.
 The reason for the prohibition is that under the Motor Vehicles Law,municipal corporations already get proceeds for the purpose of repairing and maintaining their streets and bridges. The prohibitionaims at preventing a duplication in the imposition of fees for the samepurpose.
2) The ordinance infringes on the rule of uniformity of taxation becauseit exacts the tax upon ALL motor vehicles operating within the City of Manila, without distinguishing between those for hire and for privateuse, those registered in and those registered outside but occasionallycome to Manila.
 The ordinance imposes the tax only on those vehicles registered inManila, even if those vehicles which are registered outside the city butwhich use its streets also contribute equally to the deterioration of theroads and bridges.
Esso Standard Eastern Inc. v. CIR
ESSO deducted from its gross income for 1959, as part of its ordinaryand necessary business expenses, the amount it had spent for drillingand exploration of its petroleum concessions.
 The Commissioner on Internal Revenue (CIR) disallowed the claim onthe ground that the expenses should be capitalized and might bewritten off as a loss only when a “dry hole” should result.
Hence, ESSO filed an amended return where it asked for the refund of P323,270 by reason of its abandonment, as dry holes, of several of itsoil wells. It also claimed as ordinary and necessary expenses in thesame return amount representing margin fees it had paid to theCentral Bank on its profit remittances to its New York Office.
I: W/n the margin fees are taxes OR necessary expenses which aredeductible from its gross income
R: No, they are neither taxes nor necessary expenses.
MONTERO - Tax 1 Digests | Y. Sanchez 2A 2012
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1) Margin fees are NOT taxes because they are NOT imposed as arevenue measure but as a
 police
measure whose proceeds are appliedto strengthen the country’s international reserves. Thus, the fee wasimposed by the State in the exercise of its POLICE POWER and NOTtaxation power.
2) Neither are they necessary and ordinary business expenses.
An expense is considered NECESSARY where the expenditure is helpfulin the development of the taxpayer’s business.
It is ORDINARY when it connotes a payment which is normal in relationto the business of the taxpayer and the surrounding circumstances. The expenditure being ordinary and necessary is determined based onits nature – the extent and permanency of the work accomplished bythe expenditure.
In this case, ESSO was unable to show that the remittance to the headoffice of part of its profits was made in furtherance of its own trade orbusiness.
It merely presumed that all corporate expenses are necessary andappropriate in the absence of a showing that they are illegal or ultravires; which is erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations.
Progressive Development Corp. v. QC
 The City Council of QC passed an ordinance known as the Market Codeof QC, which imposed a 5% supervision fee on gross receipts on rentalsor lease of privately-owned market spaces in QC.
In case of failure of the owners of the market spaces to pay the tax forthree consecutive months, the City shall revoke the permit of theprivately-owned market to operate.
Progressive Development Corp, owner and operator of Farmer’sMarket, filed a petition for prohibition against QC on the ground thatthe tax imposed by the Market Code was in reality a tax on income,which the municipal corporation was prohibited by law to impose.
I: W/n the supervision fee is an income tax or a license fee.
R: It is a license fee.
A LICENSE FEE is imposed in the exercise of the police power primarilyfor purposes of regulation, while TAX is imposed under the taxingpower primarily for purposes of raising revenues.
If the generating of revenue is the primary purpose and regulation ismerely incidental, the imposition is a tax; but if regulation is theprimary purpose, the fact that incidentally, revenue is also obtaineddoes not make the imposition a tax.
 To be considered a license fee, the imposition must relate to anoccupation or activity that so engages the public interest in health,morals, safety, and development as to require regulation for theprotection and promotion of such public interest; the imposition mustalso bear a reasonable relation to the probable expenses of regulation,taking into account not only the costs of direct regulation but also itsincidental consequences.
In this case, the Farmers’ Market is a privately-owned marketestablished for the rendition of service to the general public. Itwarrants close supervision and control by the City for the protection of the health of the public by insuring the maintenance of sanitaryconditions, prevention of fraud upon the buying public, etc.
Since the purpose of the ordinance is primarily regulation and notrevenue generation, the tax is a license fee. The use of the grossamount of stall rentals as basis for determining the collectible amountof license tax does not, by itself, convert the license tax into aprohibited tax on income.
Such basis actually has a reasonable relationship to the probable costsof regulation and supervision of Progressive’s kind of business, sinceordinarily, the higher the amount of rentals, the higher the volume of items sold.
 The higher the volume of goods sold, the greater the extent andfrequency of supervision and inspection may be required in the interestof the buying public.
PAL v. Edu
Under a legislative franchise, Philippine Airlines is exempt from alltaxes except for the payment of 2% of its gross revenue to theNational Government.
On the strength of an opinion of the Secretary of Justice, PAL wasdetermined not to have been paying motor vehicle registration feessince 1956.
Eventually, the Land Transportation Commissioner required all taxexempt entities, including PAL, to pay motor vehicle registration fees.
PAL protested.
I: W/n PAL is exempt from the payment of motor vehicle registrationfees
R: YES, PAL is exempt.
 The motor vehicle registration fee is a tax, to which PAL is exempt.
 Taxes are for revenue, while fees are exactions for purposes of regulation and inspection. Thus, fees are limited in amount to what isnecessary to cover the cost of the services rendered in thatconnection.
It is the OBJECT of the charge, and NOT the name, that determineswhether a charge is a tax or a fee.
In this case, the money collected under the Motor Vehicle Law is notintended for the expenditures of the Motor Vehicle Office but for theconstruction and maintenance of public roads, streets and bridges.
 Thus, since the said fees are collected NOT for the regulating motorvehicles on public highways but for providing REVENUE for the gov inorder to construct public highways, they are TAXES, not merely fees.
PAL is exempt from paying such fees, except for the period between 27 June 1968 to 9 April 1979, where its tax exeption in the franchise wasrepealed.
Villegas v. Hiu Chiong Tsai Pao Ho
 The Municipal Board of Manila passed an ordinance prohibiting an alienfrom being employed or engaging in any position or occupation orbusiness enumerated therein, whether permanent, temporary, orcasual, without first securing an employment permit from the Mayorand paying the P50 permit fee.
MONTERO - Tax 1 Digests | Y. Sanchez 2A 2012
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