G.R. No.

148187

April 16, 2008

1c2 The cash and propert* shall not thereafter 7e withdrawn fro( the !to. #ino " -J;CT until ter(ination of this A+enc*. 1d2 The 0A#AG; !5 account shall not accrue interest. !ince it is the desire of the " 9#C9"A: to e)tend to the 0A#AG; ! the 7enefit of su7se=uent appreciation of propert*, upon a pro?ected ter(ination of this A+enc*, the ratio which the 0A#AG; !5 account has to the owner5s account will 7e deter(ined, and the correspondin+ proportion of the entire assets of the !T-. #9#- 09#;, e)cludin+ the clai(s, shall 7e transferred to the 0A#AG; !, e)cept that such transferred assets shall not include (ine develop(ent, roads, 7uildin+s, and si(ilar propert* which will 7e valueless, or of sli+ht value, to the 0A#AG; !. The 0A#AG; ! can, on the other hand, re=uire at their option that propert* ori+inall* transferred 7* the( to the !to. #ino " -J;CT 7e re-transferred to the(. @ntil such assets are transferred to the 0A#AG; !, this A+enc* shall re(ain su7sistin+. )))) 12. The co(pensation of the 0A#AG; shall 7e fift* per cent 1'0A2 of the net profit of the !to. #ino " -J;CT 7efore inco(e ta). 9t is understood that the 0A#AG; ! shall pa* inco(e ta) on their co(pensation, while the " 9#C9"A: shall pa* inco(e ta) on the net profit of the !to. #ino " -J;CT after deduction therefro( of the 0A#AG; !5 co(pensation. )))) 1.. The " 9#C9"A: has current pecuniar* o7li+ation in favor of the 0A#AG; ! and, in the future, (a* incur other o7li+ations in favor of the 0A#AG; !. This "ower of Attorne* has 7een e)ecuted as securit* for the pa*(ent and satisfaction of all such o7li+ations of the " 9#C9"A: in favor of the 0A#AG; ! and as a (eans to fulfill the sa(e. Therefore, this A+enc* shall 7e irrevoca7le while an* o7li+ation of the " 9#C9"A: in favor of the 0A#AG; ! is outstandin+, inclusive of the 0A#AG; !5 account. After all o7li+ations of the " 9#C9"A: in favor of the 0A#AG; ! have 7een paid and satisfied in full, this A+enc* shall 7e revoca7le 7* the " 9#C9"A: upon 3.-(onth notice to the 0A#AG; !. 1/. #otwithstandin+ an* a+ree(ent or understandin+ 7etween the " 9#C9"A: and the 0A#AG; ! to the contrar*, the 0A#AG; ! (a* withdraw fro( this A+enc* 7* +ivin+ .-(onth notice to the " 9#C9"A:. The 0A#AG; ! shall not in an* (anner 7e held lia7le to the " 9#C9"A: 7* reason alone of such withdrawal. "ara+raph '1d2 hereof shall 7e operative in case of the 0A#AG; !5 withdrawal. ) ) ) )' 9n the course of (ana+in+ and operatin+ the pro?ect, "hile) 0inin+ (ade advances of cash and propert* in accordance with para+raph ' of the a+ree(ent. Bowever, the (ine suffered continuin+ losses over the *ears which resulted to petitioner5s withdrawal as (ana+er of the (ine on Januar* 2&, 1%&2 and in the eventual cessation of (ine operations on Ce7ruar* 20, 1%&2..

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL RE EN!E, respondent. "ECISION #NARES$SANTIAGO, J.% This is a petition for review on certiorari of the June 30, 2000 Decision 1 of the Court of Appeals in CA-G. . !" #o. $%3&', which affir(ed the Decision2 of the Court of Ta) Appeals in C.T.A. Case #o. '200. Also assailed is the April 3, 2001 esolution3 den*in+ the (otion for reconsideration. The facts of the case are as follows, -n April 1., 1%/1, petitioner "hile) 0inin+ Corporation 1"hile) 0inin+2, entered into an a+ree(ent$ with 3a+uio Gold 0inin+ Co(pan* 143a+uio Gold42 for the for(er to (ana+e and operate the latter5s (inin+ clai(, 6nown as the !to. #ino (ine, located in Ato6 and Tu7la*, 3en+uet "rovince. The parties5 a+ree(ent was deno(inated as 4"ower of Attorne*4 and provided for the followin+ ter(s, $. 8ithin three 132 *ears fro( date thereof, the " 9#C9"A: 13a+uio Gold2 shall (a6e availa7le to the 0A#AG; ! 1"hile) 0inin+2 up to ;:;<;# 09::9-# ";!-! 1"11,000,000.002, in such a(ounts as fro( ti(e to ti(e (a* 7e re=uired 7* the 0A#AG; ! within the said 3-*ear period, for use in the 0A#AG;0;#T of the !T-. #9#- 09#;. The said ;:;<;# 09::9-# ";!-! 1"11,000,000.002 shall 7e dee(ed, for internal audit purposes, as the owner5s account in the !to. #ino " -J;CT. An* part of an* inco(e of the " 9#C9"A: fro( the !T-. #9#- 09#;, which is left with the !to. #ino " -J;CT, shall 7e added to such owner5s account. '. 8henever the 0A#AG; ! shall dee( it necessar* and convenient in connection with the 0A#AG;0;#T of the !T-. #9#- 09#;, the* (a* transfer their own funds or propert* to the !to. #ino " -J;CT, in accordance with the followin+ arran+e(ents, 1a2 The properties shall 7e appraised and, to+ether with the cash, shall 7e carried 7* the !to. #ino " -J;CT as a special fund to 7e 6nown as the 0A#AG; !5 account. 172 The total of the 0A#AG; !5 account shall not e)ceed "11,000,000.00, e)cept with prior approval of the " 9#C9"A:> provided, however, that if the co(pensation of the 0A#AG; ! as herein provided cannot 7e paid in cash fro( the !to. #ino " -J;CT, the a(ount not so paid in cash shall 7e added to the 0A#AG; !5 account.

Thereafter, on !epte(7er 2/, 1%&2, the parties e)ecuted a 4Co(pro(ise with Dation in "a*(ent4/ wherein 3a+uio Gold ad(itted an inde7tedness to petitioner in the a(ount of "1/%,3%$,000.00 and a+reed to pa* the sa(e in three se+(ents 7* first assi+nin+ 3a+uio Gold5s tan+i7le assets to petitioner, transferrin+ to the latter 3a+uio Gold5s e=uita7le title in its "hilodrill assets and finall* settlin+ the re(ainin+ lia7ilit* throu+h properties that 3a+uio Gold (a* ac=uire in the future. -n Dece(7er 31, 1%&2, the parties e)ecuted an 4A(end(ent to Co(pro(ise with Dation in "a*(ent4& where the parties deter(ined that 3a+uio Gold5s inde7tedness to petitioner actuall* a(ounted to "2'%,13/,2$'.00, which su( included lia7ilities of 3a+uio Gold to other creditors that petitioner had assu(ed as +uarantor. These lia7ilities pertained to lon+-ter( loans a(ountin+ to @!D11,000,000.00 contracted 7* 3a+uio Gold fro( the 3an6 of A(erica #T E !A and Citi7an6 #.A. This ti(e, 3a+uio Gold undertoo6 to pa* petitioner in two se+(ents 7* first assi+nin+ its tan+i7le assets for "12/,&3&,0'1.00 and then transferrin+ its e=uita7le title in its "hilodrill assets for "1.,302,$2..00. The parties then ascertained that 3a+uio Gold had a re(ainin+ outstandin+ inde7tedness to petitioner in the a(ount of "11$,%%.,/.&.00. !u7se=uentl*, petitioner wrote off in its 1%&2 7oo6s of account the re(ainin+ outstandin+ inde7tedness of 3a+uio Gold 7* char+in+ "112,13.,000.00 to allowances and reserves that were set up in 1%&1 and "2,&.0,/.&.00 to the 1%&2 operations. 9n its 1%&2 annual inco(e ta) return, petitioner deducted fro( its +ross inco(e the a(ount of "112,13.,000.00 as 4loss on settle(ent of receiva7les fro( 3a+uio Gold a+ainst reserves and allowances.4% Bowever, the 3ureau of 9nternal evenue 139 2 disallowed the a(ount as deduction for 7ad de7t and assessed petitioner a deficienc* inco(e ta) of ".2,&11,1.1.3%. "etitioner protested 7efore the 39 ar+uin+ that the deduction (ust 7e allowed since all re=uisites for a 7ad de7t deduction were satisfied, to wit, 1a2 there was a valid and e)istin+ de7t> 172 the de7t was ascertained to 7e worthless> and 1c2 it was char+ed off within the ta)a7le *ear when it was deter(ined to 7e worthless. "etitioner e(phasiFed that the de7t arose out of a valid (ana+e(ent contract it entered into with 3a+uio Gold. The 7ad de7t deduction represented advances (ade 7* petitioner which, pursuant to the (ana+e(ent contract, for(ed part of 3a+uio Gold5s 4pecuniar* o7li+ations4 to petitioner. 9t also included pa*(ents (ade 7* petitioner as +uarantor of 3a+uio Gold5s lon+-ter( loans which le+all* entitled petitioner to 7e su7ro+ated to the ri+hts of the ori+inal creditor. "etitioner also asserted that due to 3a+uio Gold5s irreversi7le losses, it 7eca(e evident that it would not 7e a7le to recover the advances and pa*(ents it had (ade in 7ehalf of 3a+uio Gold. Cor a de7t to 7e considered worthless, petitioner clai(ed that it was neither re=uired to institute a ?udicial action for collection a+ainst the de7tor nor to sell or dispose of collateral assets in satisfaction of the de7t. 9t is enou+h that a ta)pa*er e)erted dili+ent efforts to enforce collection and e)hausted all reasona7le (eans to collect. -n -cto7er 2&, 1%%$, the 39 denied petitioner5s protest for lac6 of le+al and factual 7asis. 9t held that the alle+ed de7t was not ascertained to 7e worthless since 3a+uio Gold re(ained e)istin+ and had not filed a petition for 7an6ruptc*> and that the deduction did not consist of a valid and su7sistin+ de7t considerin+ that, under the (ana+e(ent contract, petitioner was to 7e paid fift* percent 1'0A2 of the pro?ect5s net profit. 10

"etitioner appealed 7efore the Court of Ta) Appeals 1CTA2 which rendered ?ud+(ent, as follows, 8B; ;C- ;, in view of the fore+oin+, the instant "etition for eview is here7* D;#9;D for lac6 of (erit. The assess(ent in =uestion, viF, CA!-1-&2-&&-0030./ for deficienc* inco(e ta) in the a(ount of ".2,&11,1.1.3% is here7* ACC9 0;D. ACC- D9#G:G, petitioner "hile) 0inin+ Corporation is here7* - D; ;D to "AG respondent Co((issioner of 9nternal evenue the a(ount of ".2,&11,1.1.3%, plus, 20A delin=uenc* interest due co(puted fro( Ce7ruar* 10, 1%%', which is the date after the 20-da* +race period +iven 7* the respondent within which petitioner has to pa* the deficienc* a(ount ) ) ) up to actual date of pa*(ent. !- - D; ;D.11 The CTA re?ected petitioner5s assertion that the advances it (ade for the !to. #ino (ine were in the nature of a loan. 9t instead characteriFed the advances as petitioner5s invest(ent in a partnership with 3a+uio Gold for the develop(ent and e)ploitation of the !to. #ino (ine. The CTA held that the 4"ower of Attorne*4 e)ecuted 7* petitioner and 3a+uio Gold was actuall* a partnership a+ree(ent. !ince the advanced a(ount partoo6 of the nature of an invest(ent, it could not 7e deducted as a 7ad de7t fro( petitioner5s +ross inco(e. The CTA li6ewise held that the a(ount paid 7* petitioner for the lon+-ter( loan o7li+ations of 3a+uio Gold could not 7e allowed as a 7ad de7t deduction. At the ti(e the pa*(ents were (ade, 3a+uio Gold was not in default since its loans were not *et due and de(anda7le. 8hat petitioner did was to pre-pa* the loans as evidenced 7* the notice sent 7* 3an6 of A(erica showin+ that it was (erel* de(andin+ pa*(ent of the install(ent and interests due. 0oreover, Citi7an6 i(posed and collected a 4pre-ter(ination penalt*4 for the pre-pa*(ent. The Court of Appeals affir(ed the decision of the CTA. 12 Bence, upon denial of its (otion for reconsideration,13 petitioner too6 this recourse under ule $' of the ules of Court, alle+in+ that, 9. The Court of Appeals erred in construin+ that the advances (ade 7* "hile) in the (ana+e(ent of the !to. #ino 0ine pursuant to the "ower of Attorne* partoo6 of the nature of an invest(ent rather than a loan. 99. The Court of Appeals erred in rulin+ that the '0A-'0A sharin+ in the net profits of the !to. #ino 0ine indicates that "hile) is a partner of 3a+uio Gold in the develop(ent of the !to. #ino 0ine notwithstandin+ the clear a7sence of an* intent on the part of "hile) and 3a+uio Gold to for( a partnership. 999.

The Court of Appeals erred in rel*in+ onl* on the "ower of Attorne* and in co(pletel* disre+ardin+ the Co(pro(ise A+ree(ent and the A(ended Co(pro(ise A+ree(ent when it construed the nature of the advances (ade 7* "hile). 9<. The Court of Appeals erred in refusin+ to delve upon the issue of the propriet* of the 7ad de7ts write-off.1$ "etitioner insists that in deter(inin+ the nature of its 7usiness relationship with 3a+uio Gold, we should not onl* rel* on the 4"ower of Attorne*4, 7ut also on the su7se=uent 4Co(pro(ise with Dation in "a*(ent4 and 4A(ended Co(pro(ise with Dation in "a*(ent4 that the parties e)ecuted in 1%&2. These docu(ents, alle+edl* evinced the parties5 intent to treat the advances and pa*(ents as a loan and esta7lish a creditor-de7tor relationship 7etween the(. The petition lac6s (erit. The lower courts correctl* held that the 4"ower of Attorne*4 is the instru(ent that is (aterial in deter(inin+ the true nature of the 7usiness relationship 7etween petitioner and 3a+uio Gold. 3efore resort (a* 7e had to the two co(pro(ise a+ree(ents, the parties5 contractual intent (ust first 7e discovered fro( the e)pressed lan+ua+e of the pri(ar* contract under which the parties5 7usiness relations were founded. 9t should 7e noted that the co(pro(ise a+ree(ents were (ere collateral docu(ents e)ecuted 7* the parties pursuant to the ter(ination of their 7usiness relationship created under the 4"ower of Attorne*4. -n the other hand, it is the latter which esta7lished the ?uridical relation of the parties and defined the para(eters of their dealin+s with one another. The e)ecution of the two co(pro(ise a+ree(ents can hardl* 7e considered as a su7se=uent or conte(poraneous act that is reflective of the parties5 true intent. The co(pro(ise a+ree(ents were e)ecuted eleven *ears after the 4"ower of Attorne*4 and (erel* laid out a plan or procedure 7* which petitioner could recover the advances and pa*(ents it (ade under the 4"ower of Attorne*4. The parties entered into the co(pro(ise a+ree(ents as a conse=uence of the dissolution of their 7usiness relationship. 9t did not define that relationship or indicate its real character. An e)a(ination of the 4"ower of Attorne*4 reveals that a partnership or ?oint venture was indeed intended 7* the parties. @nder a contract of partnership, two or (ore persons 7ind the(selves to contri7ute (one*, propert*, or industr* to a co((on fund, with the intention of dividin+ the profits a(on+ the(selves.1' 8hile a corporation, li6e petitioner, cannot +enerall* enter into a contract of partnership unless authoriFed 7* law or its charter, it has 7een held that it (a* enter into a ?oint venture which is a6in to a particular partnership, The le+al concept of a ?oint venture is of co((on law ori+in. 9t has no precise le+al definition, 7ut it has 7een +enerall* understood to (ean an or+aniFation for(ed for so(e te(porar* purpose. ) ) ) 9t is in fact hardl* distin+uisha7le fro( the partnership, since their ele(ents are si(ilar H co((unit* of interest in the 7usiness, sharin+ of profits and losses, and a (utual ri+ht of control. ) ) ) The (ain distinction cited 7* (ost opinions in co((on law ?urisdictions is that the partnership conte(plates a +eneral 7usiness with so(e de+ree of continuit*, while the ?oint venture is for(ed for

the e)ecution of a sin+le transaction, and is thus of a te(porar* nature. ) ) ) This o7servation is not entirel* accurate in this ?urisdiction, since under the Civil Code, a partnership (a* 7e particular or universal, and a particular partnership (a* have for its o7?ect a specific underta6in+. ) ) ) 9t would see( therefore that under "hilippine law, a ?oint venture is a for( of partnership and should 7e +overned 7* the law of partnerships. The !upre(e Court has however reco+niFed a distinction 7etween these two 7usiness for(s, and has held that althou+h a corporation cannot enter into a partnership contract, it (a* however en+a+e in a ?oint venture with others. ) ) ) 1Citations o(itted2 1. "erusal of the a+ree(ent deno(inated as the 4"ower of Attorne*4 indicates that the parties had intended to create a partnership and esta7lish a co((on fund for the purpose. The* also had a ?oint interest in the profits of the 7usiness as shown 7* a '0-'0 sharin+ in the inco(e of the (ine. @nder the 4"ower of Attorne*4, petitioner and 3a+uio Gold undertoo6 to contri7ute (one*, propert* and industr* to the co((on fund 6nown as the !to. #iIo (ine. 1/ 9n this re+ard, we note that there is a su7stantive e=uivalence in the respective contri7utions of the parties to the develop(ent and operation of the (ine. "ursuant to para+raphs $ and ' of the a+ree(ent, petitioner and 3a+uio Gold were to contri7ute e=uall* to the ?oint venture assets under their respective accounts. 3a+uio Gold would contri7ute P11M under its owner5s account plus an* of its inco(e that is left in the pro?ect, in addition to its &'()&l *i+i+, 'l&i*. 0eanwhile, petitioner5s contri7ution would consist of its -.p-r(i/- in the (ana+e(ent and operation of (ines, as well as the (ana+er5s account which is co(prised of P11M in funds and propert* and petitioner5s 0'o*p-+/&(io+0 as (ana+er that cannot 7e paid in cash. Bowever, petitioner asserts that it could not have entered into a partnership a+ree(ent with 3a+uio Gold 7ecause it did not 47ind4 itself to contri7ute (one* or propert* to the pro?ect> that under para+raph ' of the a+ree(ent, it was onl* optional for petitioner to transfer funds or propert* to the !to. #iIo pro?ect 41w2henever the 0A#AG; ! shall dee( it necessar* and convenient in connection with the 0A#AG;0;#T of the !T-. #9J- 09#;.4 1& The wordin+ of the parties5 a+ree(ent as to petitioner5s contri7ution to the co((on fund does not detract fro( the fact that petitioner transferred its funds and propert* to the pro?ect as specified in para+raph ', thus renderin+ effective the other stipulations of the contract, particularl* para+raph '1c2 which prohi7its petitioner fro( withdrawin+ the advances until ter(ination of the parties5 7usiness relations. As can 7e seen, petitioner 7eca(e 7ound 7* its contri7utions once the transfers were (ade. The contri7utions ac=uired an o7li+ator* nature as soon as petitioner had chosen to e)ercise its option under para+raph '. There is no (erit to petitioner5s clai( that the prohi7ition in para+raph '1c2 a+ainst withdrawal of advances should not 7e ta6en as an indication that it had entered into a partnership with 3a+uio Gold> that the stipulation onl* showed that what the parties entered into was actuall* a contract of a+enc* coupled with an interest which is not revoca7le at will and not a partnership. 9n an a+enc* coupled with interest, it is the &,-+'1 that cannot 7e revo6ed or withdrawn 21 (3pri+'ip&l due to an interest of a third part* that depends upon it, or the (utual interest of 7oth principal and a+ent.1% 9n this case, the non-revocation or non-withdrawal under para+raph '1c2 applies to the &45&+'-/ (ade 7* petitioner who is supposedl* the &,-+( and not the principal under the contract. Thus, it cannot 7e inferred fro( the stipulation that the parties5 relation under the a+ree(ent is one of a+enc* coupled with an interest and not a partnership.

#either can para+raph 1. of the a+ree(ent 7e ta6en as an indication that the relationship of the parties was one of a+enc* and not a partnership. Althou+h the said provision states that 4this A+enc* shall 7e irrevoca7le while an* o7li+ation of the " 9#C9"A: in favor of the 0A#AG; ! is outstandin+, inclusive of the 0A#AG; !5 account,4 it does not necessaril* follow that the parties entered into an a+enc* contract coupled with an interest that cannot 7e withdrawn 7* 3a+uio Gold. 9t should 7e stressed that the (ain o7?ect of the 4"ower of Attorne*4 was not to confer a power in favor of petitioner to contract with third persons on 7ehalf of 3a+uio Gold 7ut to create a 7usiness relationship 7etween petitioner and 3a+uio Gold, in which the for(er was to (ana+e and operate the latter5s (ine throu+h the parties5 (utual contri7ution of (aterial resources and industr*. The essence of an a+enc*, even one that is coupled with interest, is the a+ent5s a7ilit* to represent his principal and 7rin+ a7out 7usiness relations 7etween the latter and third persons. 20 8here representation for and in 7ehalf of the principal is (erel* incidental or necessar* for the proper dischar+e of one5s para(ount underta6in+ under a contract, the latter (a* not necessaril* 7e a contract of a+enc*, 7ut so(e other a+ree(ent dependin+ on the ulti(ate underta6in+ of the parties.21 9n this case, the totalit* of the circu(stances and the stipulations in the parties5 a+ree(ent indu7ita7l* lead to the conclusion that a partnership was for(ed 7etween petitioner and 3a+uio Gold. Cirst, it does not appear that 3a+uio Gold was unconditionall* o7li+ated to return the advances (ade 7* petitioner under the a+ree(ent. "ara+raph ' 1d2 thereof provides that upon ter(ination of the parties5 7usiness relations, 4the ratio which the 0A#AG; 5! account has to the owner5s account will 7e deter(ined, and the correspondin+ proportion of the entire assets of the !T-. #9#- 09#;, e)cludin+ the clai(s4 shall 7e transferred to petitioner. 22 As pointed out 7* the Court of Ta) Appeals, petitioner was (erel* entitled to a proportionate return of the (ine5s assets upon dissolution of the parties5 7usiness relations. There was nothin+ in the a+ree(ent that would re=uire 3a+uio Gold to (a6e pa*(ents of the advances to petitioner as would 7e reco+niFed as an ite( of o7li+ation or 4accounts pa*a7le4 for 3a+uio Gold. Thus, the ta) court correctl* concluded that the a+ree(ent provided for a distri7ution of assets of the !to. #iIo (ine upon ter(ination, a provision that is (ore consistent with a partnership than a creditor-de7tor relationship. 9t should 7e pointed out that in a contract of loan, a person who receives a loan or (one* or an* fun+i7le thin+ ac=uires ownership thereof and is 2o)+4 to pa* the creditor an e=ual a(ount of the sa(e 6ind and =ualit*. 23 9n this case, however, there was no stipulation for 3a+uio Gold to actuall* repa* petitioner the cash and propert* that it had advanced, 7ut onl* the return of an a(ount pe++ed at a ratio which the (ana+er5s account had to the owner5s account. 9n this connection, we find no contractual 7asis for the e)ecution of the two co(pro(ise a+ree(ents in which 3a+uio Gold reco+niFed a de7t in favor of petitioner, which supposedl* arose fro( the ter(ination of their 7usiness relations over the !to. #ino (ine. The 4"ower of Attorne*4 clearl* provides that petitioner would onl* 7e entitled to the return of a proportionate share of the (ine assets to 7e co(puted at a ratio that the (ana+er5s account had to the owner5s account. ;)cept to provide a 7asis for clai(in+ the advances as a 7ad de7t deduction, there is no reason for 3a+uio Gold to hold itself lia7le to petitioner under the co(pro(ise a+ree(ents, for an* a(ount over and a7ove the proportion a+reed upon in the 4"ower of Attorne*4.

#e)t, the ta) court correctl* o7served that it was unli6el* for a 7usiness corporation to lend hundreds of (illions of pesos to another corporation with neither securit*, or collateral, nor a specific deed evidencin+ the ter(s and conditions of such loans. The parties also did not provide a specific (aturit* date for the advances to 7eco(e due and de(anda7le, and the (anner of pa*(ent was unclear. All these point to the inevita7le conclusion that the advances were not loans 7ut capital contri7utions to a partnership. The stron+est indication that petitioner was a partner in the !to #iIo (ine is the fact that it would receive '0A of the net profits as 4co(pensation4 under para+raph 12 of the a+ree(ent. The entiret* of the parties5 contractual stipulations si(pl* leads to no other conclusion than that petitioner5s 4co(pensation4 is actuall* its share in the inco(e of the ?oint venture. Article 1/.% 1$2 of the Civil Code e)plicitl* provides that the 4receipt 7* a person of a share in the profits of a 7usiness is prima facie evidence that he is a partner in the 7usiness.4 "etitioner asserts, however, that no such inference can 7e drawn a+ainst it since its share in the profits of the !to #iIo pro?ect was in the nature of co(pensation or 4wa+es of an e(plo*ee4, under the e)ception provided in Article 1/.% 1$2 172.2$ -n this score, the ta) court correctl* noted that petitioner was not an e(plo*ee of 3a+uio Gold who will 7e paid 4wa+es4 pursuant to an e(plo*er-e(plo*ee relationship. To 7e+in with, petitioner was the (ana+er of the pro?ect and had put su7stantial su(s into the venture in order to ensure its via7ilit* and profita7ilit*. 3* pe++in+ its co(pensation to profits, petitioner also stood not to 7e re(unerated in case the (ine had no inco(e. 9t is hard to 7elieve that petitioner would ta6e the ris6 of not 7ein+ paid at all for its services, if it were trul* ?ust an ordinar* e(plo*ee. Conse=uentl*, we find that petitioner5s 4co(pensation4 under para+raph 12 of the a+ree(ent actuall* constitutes its share in the net profits of the partnership. 9ndeed, petitioner would not 7e entitled to an e=ual share in the inco(e of the (ine if it were ?ust an e(plo*ee of 3a+uio Gold. 2' 9t is not surprisin+ that petitioner was to receive a '0A share in the net profits, considerin+ that the 4"ower of Attorne*4 also provided for an al(ost e=ual contri7ution of the parties to the !t. #ino (ine. The 4co(pensation4 a+reed upon onl* serves to reinforce the notion that the parties5 relations were indeed of partners and not e(plo*er-e(plo*ee. All told, the lower courts did not err in treatin+ petitioner5s advances as invest(ents in a partnership 6nown as the !to. #ino (ine. The advances were not 4de7ts4 of 3a+uio Gold to petitioner inas(uch as the latter was under no unconditional o7li+ation to return the sa(e to the for(er under the 4"ower of Attorne*4. As for the a(ounts that petitioner paid as +uarantor to 3a+uio Gold5s creditors, we find no reason to depart fro( the ta) court5s factual findin+ that 3a+uio Gold5s de7ts were not *et due and de(anda7le at the ti(e that petitioner paid the sa(e. <eril*, petitioner pre-paid 3a+uio Gold5s outstandin+ loans to its 7an6 creditors and this conclusion is supported 7* the evidence on record.2. 9n su(, petitioner cannot clai( the advances as a 7ad de7t deduction fro( its +ross inco(e. Deductions for inco(e ta) purposes parta6e of the nature of ta) e)e(ptions and are strictl* construed a+ainst the ta)pa*er, who (ust prove 7* convincin+ evidence that he is entitled to the deduction clai(ed.2/ 9n this case, petitioner failed to su7stantiate its assertion that the advances were su7sistin+ de7ts of 3a+uio Gold that could 7e deducted fro( its +ross inco(e. Conse=uentl*, it could not clai( the advances as a valid 7ad de7t deduction.

6HEREFORE, the petition is "ENIE". The decision of the Court of Appeals in CA-G. . !" #o. $%3&' dated June 30, 2000, which affir(ed the decision of the Court of Ta) Appeals in C.T.A. Case #o. '200 is AFFIRME". "etitioner "hile) 0inin+ Corporation is OR"ERE" (o PA# the deficienc* ta) on its 1%&2 inco(e in the a(ount of ".2,&11,1.1.31, with 20A delin=uenc* interest co(puted fro( Ce7ruar* 10, 1%%', which is the due date +iven for the pa*(ent of the deficienc* inco(e ta), up to the actual date of pa*(ent. G.R. No. L$27288 9)l1 28, 1868

COMMISSIONER OF INTERNAL RE EN!E, petitioner, vs. ITOGON$S!#OC MINES, INC., &+4 THE CO!RT OF TAX APPEALS, respondents. Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney Oscar S. de Castro for petitioner. Ramon O. Reynoso, Jr. and Melchor R. Flores for respondents. FERNAN"O, J.: The =uestion presented for deter(ination in this petition for the review of a decision of the Court of Ta) Appeals, one that is of first i(pression, would not have arisen had respondent 9to+on-!u*oc 0ines, 9nc., the ta)pa*er involved, dul* paid in full its lia7ilit* accordin+ to its inco(e ta) return for the fiscal *ear 1%.0-.1. 9nstead, it deducted ri+ht awa* the a(ount represented 7* clai( for refund filed ei+ht 1&2 (onths 7ac6, for the previous *earKs inco(e ta), for which it was not lia7le at all, so it alle+ed, as it suffered a loss instead, a clai( su7se=uentl* favora7l* acted on 7* petitioner Co((issioner of 9nternal evenue 7ut after the date of such pa*(ent of the 1%.0-1%.1 ta). Accordin+l*, an interest in the a(ount of "1,'12.&3 was char+ed 7* petitioner Co((issioner of 9nternal evenue on the su( withheld on the +round that no deduction on such refund should 7e allowed 7efore its approval. 8hen the (atter was ta6en up 7efore the Court of Ta) Appeals, the a7ove assess(ent representin+ interest was set aside in the decision of !epte(7er 30, 1%.'. That is the decision now an appeal 7* petitioner Co((issioner of 9nternal evenue. 8e sustain the Court of Ta) Appeals. espondent 9to+on-!u*oc 0ines, 9nc., a (inin+ corporation dul* or+aniFed and e)istin+ in accordance with the laws of the "hilippines, filed on Januar* 13, 1%.1, its inco(e ta) return for the fiscal *ear 1%'%-1%.0. 9t declared a ta)a7le inco(e of "11$,3.&.0$ and a ta) due thereon a(ountin+ to "2.,310.$1, for which it paid on the sa(e da*, the a(ount of "13,1''.20 as the first install(ent of the inco(e ta) due. -n 0a* 1/, 1%.1, petitioner filed an a(ended inco(e ta) return, reportin+ therein a net loss of "331,/0/.33. 9t thus sou+ht a refund fro( the Co((issioner of 9nternal evenue, now the petitioner. 1 !ph"1.#$t -n Ce7ruar* 1$, 1%.2, respondent 9to+on-!u*oc 0ines, 9nc. filed its inco(e ta) return for the fiscal *ear 1%.0-1%.1, settin+ forth its inco(e ta) lia7ilit* to the tune of "%/,3$'.00, 7ut deductin+ the a(ount of "13,1''.20 representin+ alle+ed ta) credit for overpa*(ent of the precedin+ fiscal *ear 1%'%-1%.0. 0n Dece(7er 1&, 1%.2, petitioner Co((issioner of 9nternal evenue assessed a+ainst the respondent the a(ount of "1,'12.&3 as 1A (onthl* interest on the aforesaid a(ount of "13,1''.20 fro( Januar* 1., 1%.2 to Dece(7er 31, 1%.2. The 7asis for such an assess(ent was the a7sence of le+al ri+ht to deduct said a(ount 7efore the refund or ta) credit thereof was approved 7* petitioner Co((issioner of 9nternal evenue. 1

!uch an assess(ent was contested 7* respondent 7efore the Court of Ta) Appeals. As alread* noted, it prevailed. The decision of !epte(7er 30, 1%.', now on appeal, e)plains wh*. Thus, 4 espondent assessed a+ainst the petitioner the a(ount of "1,'12.&3 as 1A (onthl* interest on the su( of "13,1''.20 fro( Januar* 1., 1%.2 to Dece(7er 31, 1%.2 on the +round that petitioner had no le+al ri+ht to deduct the said a(ount fro( its inco(e ta) lia7ilit* for the fiscal *ear 1%.0-1%.1 until the refund or ta) credit thereof has 7een approved 7* respondent. As aforestated, petitioner paid the a(ount of "13,1''.20 as first install(ent on its reported inco(e ta) lia7ilit* for the fiscal *ear 1%'%-1%.0. 3ut, it turned out that instead of derivin+ a net +ain, it sustained a net loss durin+ the said fiscal *ear. Accordin+l*, it filed an a(ended inco(e ta) return and a clai( for the refund of the su( of "13,1''.20, which su( it su7se=uentl*, deducted fro( its inco(e ta) lia7ilit* for the succeedin+ fiscal *ear 1%.0-1%.1. The overpa*(ent for the fiscal *ear 1%'%-1%.0 and the deduction of the overpaid a(ount fro( its 1%.0-1%.1 ta) lia7ilit* are not denied 7* respondent. 9n this circu(stance, we find it unfair and un?ust for the Co((issioner to e)act an interest on the said su( of "13,1''.20, which, after all, was paid to and received 7* the +overn(ent even 7efore the incidence of the ta) in =uestion.4 2 That is the =uestion 7efore us in this petition for review 7* the Co((issioner of 9nternal evenue. Be ar+ues that the Court of Ta) Appeals should not have a7solved respondent corporation 4fro( lia7ilit* to pa* the su( of "1,'12.&3 as 1A (onthl* interest for delin=uenc* in the pa*(ent of inco(e ta) for the fiscal *ear 1%.0-1%.1.4 3 As noted at the outset, we find such contention far fro( persuasive. 9t could not 7e error for the Court of Ta) Appeals, considerin+ the ad(itted fact of overpa*(ent, entitlin+ respondent to refund, to hold that petitioner should not repose an interest on the aforesaid su( of "13,1''.20 4which after all was paid to and received 7* the +overn(ent even 7efore the incidence of the ta) in =uestion.4 9t would 7e, accordin+ to the Court of Ta) Appeals, 4unfair and un?ust4 to do so. 8e a+ree 7ut we +o farther. The i(position of such an interest 7* petitioner is not supported 7* law. The #ational 9nternal evenue Code provides that interest upon the a(ount deter(ined as a deficienc* shall 7e assessed and shall 7e paid upon notice and de(and fro( the Co((issioner of 9nternal evenue at the specified. $ 9t is (ade clear, however, in an earlier provision found in the sa(e section that if in an* precedin+ *ear, the ta)pa*er was entitled to a refund of an* a(ount due as ta), such a(ount, if not *et refunded, (a* 7e deducted fro( the ta) to 7e paid. ' There is no =uestion respondent was entitled to a refund. 9nstead of waitin+ for the su( involved to 7e delivered to it, it deducted the said a(ount fro( the ta) that it had to pa*. That it had a ri+ht to do accordin+ to the law. 9t is true a dou7t could have arisen due to the fact that as of the ti(e such a deduction was (ade, the Co((issioner of 9nternal evenue had not as *et approved such a refund. 9t is an ad(itted fact thou+h that respondent was clearl* entitled to it, and petitioner did not alle+e otherwise. #or could he do so. @nder all the circu(stances disclosed therefore, the applica7ilit* of the le+al provision allowin+ such a deduction fro( the a(ount of the ta) to 7e paid cannot 7e disputed. This conclusion is in accordance with the principle announced in Castro %. Collector of &nternal Re%en'e. . 8hile the case is not directl* in point, it *ields an i(plication that (a6es even (ore for(ida7le the case for respondent ta)pa*er. As there held, the i(position of the (onthl* interest was considered as not constitutin+ a penalt* 47ut a ?ust co(pensation to the state for the dela* in pa*in+ the ta), and for the conco(itant use 7* the ta)pa*er of funds that ri+htfull* should 7e in the +overn(entKs hands ....4

8hat is therefore sou+ht to 7e avoided is for the ta)pa*er to (a6e use of funds that should have 7een paid to the +overn(ent. Bere, in view of the overpa*(ent for the fiscal *ear 1%'%1%.0, the su( of "13,1''.20 had alread* for(ed part of the pu7lic funds. 9t cannot 7e said, therefore, that respondent ta)pa*er was +uilt* of an* dela* ena7lin+ it to utiliFe a su( of (one* that should have 7een in the +overn(ent treasur*. Bow then, as a (atter of pure law, even if we la* to one side the de(ands of fairness and ?ustice, which to the Court of Ta) Appeals see( to 7e upper(ost, can its decision 7e overturnedL Accordin+l*, we find no valid +round for this appeal. 8B; ;C- ;, the decision of !epte(7er 30, 1%.' of the Court of Ta) Appeals is affir(ed. 8ithout pronounce(ent as to costs.1 !ph"1.#$t G.R. No/. 106848$70 "-'-*2-r 1, 1887

7orrowin+s " $',//1,&$%.00 MMMMMMM 3'A Transaction ta) due thereon 1.,020,1$/.00 Add, 2'A surchar+e $,00',03../' MMMMMM T o t a l " 20,02',1&3./' Add,

PAPER IN"!STRIES CORPORATION OF THE PHILIPPINES :PICOP;, petitioner, vs. CO!RT OF APPEALS, COMMISSIONER OF INTERNAL RE EN!E &+4 CO!RT OF TAX APPEALS, respondents. G.R. No/. 106884$87 "-'-*2-r 1, 1887 COMMISSIONER INTERNAL RE EN!E, petitioner, vs. PAPER IN"!STRIES CORPORATION OF THE PHILIPPINES, THE CO!RT OF APPEALS &+4 THE CO!RT OF TAX APPEALS, respondents.

1$A int. fr. 1-20-/& to /-31-&0 " /,0%3,302.'/ 20A int, fr. &-1-&0 to 3-31-&3 10,./','23.'&

FELICIANO, J.: The "aper 9ndustries Corporation of the "hilippines 14"icop42, which is petitioner in G. . #os. 10.%$%-'0 and private respondent in G. . #os. 10.%&$-&', is a "hilippine corporation re+istered with the 3oard of 9nvest(ents 143-942 as a preferred pioneer enterprise with respect to its inte+rated pulp and paper (ill, and as a preferred non(pioneer enterprise with respect to its inte+rated pl*wood and veneer (ills. -n 21 April 1%&3, "icop received fro( the Co((issioner of 9nternal evenue 14C9 42 two 122 letters of assess(ent and de(and 7oth dated 31 0arch 1%&3, 1a2 one for deficienc* transaction ta) and for docu(entar* and science sta(p ta)> and 172 the other for deficienc* inco(e ta) for 1%//, for an a++re+ate a(ount of P)),*+,,-...//. These assess(ents were co(puted as follows, 0ransaction 0a1 9nterest pa*(ents on (one* (ar6et

MMMMMM 1/,/.&,&2..1' MMMMMM " 3/,/%$,00%.%0 2oc'mentary and Science Stamps 0a1 Total face value of de7entures "100,000,000.00 Docu(entar* !ta(ps Ta) Due

1"0.30 ) "100,000.000 2 1 "200 2 " 1'0,000.00 !cience !ta(ps Ta) Due 1"0.30 ) "100,000,000 2 1 "200 2 " 1'0,000.00 MMMMMM T o t a l " 300,000.00 Add, Co(pro(ise for non-affi)ture 300.00 MMMMMM 300,300.00 MMMMMM T-TA: A0-@#T D@; A#D C-::;CT93:; " 3&,0%$,30%.%0 NNNNNNNNNNN 2eficiency &ncome 0a1 for 13** #et inco(e per return " 2'&,1...00 Add, @nallowa7le deductions 12 Disallowed deductions availed of under .A. #o. '1&. " $$,332,%&0.00 22 CapitaliFed interest e)penses on funds

used for ac=uisition of (achiner* E other e=uip(ent $2,&$0,131.00 32 @ne)plained financial +uarantee e)pense 1,23/,$21.00 $2 @nderstate(ent of sales 2,3%1,.$$.00 '2 -verstate(ent of cost of sales .0$,01&.00 MMMMMM "%1,$0.,1%$.00 #et inco(e per investi+ation "%1,..$,3.0.00 9nco(e ta) due thereon 3$,/3$,''%.00 :ess, Ta) alread* assessed per return &0,3'&.00 MMMMMM Deficienc* "3$,.'$,201.00 Add, 1$A int. fr. $-1'-/& to /-31-&1 " 11,12&,'03.'. 20A int. fr. &-1-&0 to

$-1'-&1 $,&&.,2$2.3$ MMMMMM "1.,01$,/$'.%0 MMMMMM T-TA: A0-@#T D@; A#D C-::;CT93:; " '0,..&,%$..%0 NNNNNNNNNNN -n 2. April 1%&3, "icop protested the assess(ent of deficienc* transaction ta) and docu(entar* and science sta(p ta)es. "icop also protested on 21 0a* 1%&3 the deficienc* inco(e ta) assess(ent for 1%//. These protests were not for(all* acted upon 7* respondent C9 . -n 2. !epte(7er 1%&$, the C9 issued a warrant of distraint on personal propert* and a warrant of lev* on real propert* a+ainst "icop, to enforce collection of the contested assess(ents> in effect, the C9 denied "icopKs protests. Thereupon, "icop went 7efore the Court of Ta) Appeals 14CTA42 appealin+ the assess(ents. After trial, the CTA rendered a decision dated 1' Au+ust 1%&%, (odif*in+ the findin+s of the C9 and holdin+ "icop lia7le for the reduced a++re+ate a(ount of "20,133,/.2.33, which was ite(iFed in the dispositive portion of the decision as follows, 3'A Transaction Ta) " 1.,020,113.20 Docu(entar* E !cience !ta(p Ta) 300,300.00 Deficienc* 9nco(e Ta) Due 3,&13,3$%.33 MMMMMM T-TA: A0-@#T D@; A#D "AGA3:; " 20,133,/.2.'3 2 NNNNNNNNNNN "icop and the C9 7oth went to the !upre(e Court on separate "etitions for eview of the a7ove decision of the CTA. 9n two 122 esolutions dated / Ce7ruar* 1%%0 and 1% Ce7ruar* 1%%0, respectivel*, the Court referred the two 122 "etitions to the Court of Appeals. The Court of Appeals consolidated the two 122 cases and rendered a decision, dated 31 Au+ust 1%%2, which further reduced the lia7ilit* of "icop to ".,33&,3'$./0. The dispositive portion of the Court of Appeals decision reads as follows,
1

8B; ;C- ;, the appeal of the Co((issioner of 9nternal evenue is denied for lac6 of (erit. The ?ud+(ent a+ainst "9C-" is (odified, as follows, 1. "9C-" is declared lia7le for the 3'A transaction ta) in the a(ount of "3,'/&,'$3.'1> 2. "9C-" is a7solved fro( the pa*(ent of docu(entar* and science sta(p ta) of "300,000.00 and the co(pro(ise penalt* of "300.00> 3. "9C-" shall pa* 20A interest per ann'm on the deficienc* inco(e ta) of "1,$&1,'/%.1', for a period of three 132 *ears fro( 21 0a* 1%&3, or in the total a(ount of "&&&,%$/.$%, and a surchar+e of 10A on the latter a(ount, or "&&,%&$./'. #o pronounce(ent as to costs. !- - D; ;D. "icop and the C9 once (ore filed separate "etitions for eview 7efore the !upre(e Court. These cases were consolidated and, on 23 Au+ust 1%%3, the Court resolved to +ive due course to 7oth "etitions in G. . #os. 10.%$%-'0 and 10.%&$-&' and re=uired the parties to file their 0e(oranda. "icop now (aintains that it is not lia7le at all to pa* an* of the assess(ents or an* part thereof. 9t assails the propriet* of the thirt*-five percent 13'A2 deficienc* transaction ta) which the Court of Appeals held due fro( it in the a(ount of "3,'/&,'$3.'1. "icop also =uestions the i(position 7* the Court of Appeals of the deficienc* inco(e ta) of "1,$&1,'/%.1', resultin+ fro( disallowance of certain clai(ed financial +uarantee e)penses and clai(ed *ear-end ad?ust(ents of sales and cost of sales fi+ures 7* "icopKs e)ternal auditors. < The C9 , upon the other hand, insists that the Court of Appeals erred in findin+ "icop not lia7le for surchar+e and interest on unpaid transaction ta) and for docu(entar* and science sta(p ta)es and in allowin+ "icop to clai( as deducti7le e)penses, 1a2 the net operatin+ losses of another corporation 1i.e., ustan "ulp and "aper 0ills, 9nc.2> and 172 interest pa*(ents on loans for the purchase of (achiner* and e=uip(ent. The C9 also clai(s that "icop should 7e held lia7le for interest at fourteen percent 11$A2 per ann'm fro( 1' April 1%/& for three 132 *ears, and interest at twent* percent 120A2 per ann'm for a (a)i(u( of three 132 *ears> and for a surchar+e of ten percent 110A2, on "icopKs deficienc* inco(e ta). Cinall*, the C9 contends that "icop is lia7le for the corporate develop(ent ta) e=uivalent to five percent 1'A2 of its correct 1%// net inco(e.

The issues which we (ust here address (a* 7e sorted out and +rouped in the followin+ (anner, 9. 8hether "icop is lia7le for, 112 the thirt*-five percent 13'A2 transaction ta)> 122 interest and surchar+e on unpaid transaction ta)> and 132 docu(entar* and science sta(p ta)es> 99. 8hether "icop is entitled to deductions a+ainst inco(e of, 112 interest pa*(ents on loans for the purchase of (achiner* and e=uip(ent> 122 net operatin+ losses incurred 7* the ustan "ulp and "aper 0ills, 9nc.> and 132 certain clai(ed financial +uarantee e)penses> and 999. 112 8hether "icop had understated its sales and overstated its cost of sales for 1%//> and 122 8hether "icop is lia7le for the corporate develop(ent ta) of five percent 1'A2 of its net inco(e for 1%//. 8e will consider these issues in the fore+oin+ se=uence. 9. 112 4hether Picop is lia5le for the thirty(fi%e percent 6,.78 transaction ta1. 8ith the authoriFation of the !ecurities and ;)chan+e Co((ission, "icop issued co((ercial paper consistin+ of seriall* nu(7ered pro(issor* notes with the total face value of "22%,&.$,000.00 and a (aturit* period of one 112 *ear, i.e., fro( 2$ Dece(7er 1%// to 23 Dece(7er 1%/&. These pro(issor* notes were purchased 7* various co((ercial 7an6s and financial institutions. -n these pro(issor* notes, "icop paid interest in the a++re+ate a(ount of "$',//1,&$%.00. 9n respect of these interest pa*(ents, the C9 re=uired "icop to pa* the thirt*five percent 13'A2 transaction ta).

The C9 7ased this assess(ent on "residential Decree #o. 11'$ dated 3 June 1%//, which reads in part as follows, !ec. 1. The #ational 9nternal evenue Code, as a(ended, is here7* further a(ended 7* addin+ a new section thereto to read as follows, !ec. 1%'-C. Ta) on certain interest. M There shall 7e levied, assessed, collected and paid on ever* co((ercial paper issued in the pri(ar* (ar6et as principal instru(ent, a transaction ta) e=uivalent to thirt*-five percent 13'A2 7ased on the +ross a(ount of interest thereto as defined hereunder, which shall 7e paid 7* the 7orrowerOissuer, "rovided, however, that in the case of a lon+-ter( co((ercial paper whose (aturit* e)ceeds (ore than one *ear, the 7orrower shall pa* the ta) 7ased on the a(ount of interest correspondin+ to one *ear, and thereafter shall pa* the ta) upon accrual or actual pa*(ent 1whichever is earlier2 of the unta)ed portion of the interest which corresponds to a period not e)ceedin+ one *ear. The transaction ta) i(posed in this section shall 7e a final ta1 to 5e paid 5y the 5orro!er and shall 7e allowed as a deducti7le ite( for purposes of co(putin+ the 7orrowerKs ta)a7le inco(e. Cor purposes of this ta) M 1a2 4Co((ercial paper4 shall 7e defined as an instru(ent evidencin+ inde7tedness of an* person or entit*, includin+ 7an6s and non-7an6s perfor(in+ =uasi-7an6in+ functions, which is issued, endorsed, sold, transferred or in an* (anner conve*ed to another person or entit*, either with or without recourse and irrespective of (aturit*. Principally, commercial papers are promissory notes andOor si(ilar instru(ents iss'ed in the primary mar9et and shall not include repurchase a+ree(ents, certificates of assi+n(ents, certificates of participations, and such other de7t instru(ents issued in the secondar* (ar6et. 172 The ter( 4interest4 shall (ean the difference 7etween what the principal 7orrower received and the a(ount it paid upon (aturit* of the co((ercial paper which shall, in no case, 7e lower than the interest rate prevailin+ at the ti(e of the issuance or renewal of the co((ercial paper. 9nterest shall 7e dee(ed s*non*(ous with discount and shall include all fees, co((issions, pre(iu(s and other pa*(ents which for( inte+ral parts of the char+es i(posed as a conse=uence of the use of (one*. 9n all cases, where no interest rate is stated or if the rate stated is lower than the prevailin+ interest rate at the ti(e of the issuance or renewal of co((ercial paper, the Co((issioner of 9nternal evenue, upon consultation with the 0onetar* 3oard of the Central 3an6 of the "hilippines, shall ad?ust the interest rate in accordance herewith, and assess the ta) on the 7asis thereof.

0he ta1 herein i(posed shall 5e remitted 5y the 5orro!er to the Commissioner of &nternal Re%en'e or his Collection A:ent in the (unicipalit* where such 7orrower has its principal place of 7usiness within five 1'2 wor6in+ da*s fro( the issuance of the co((ercial paper. 9n the case of lon+ ter( co((ercial paper, the ta) upon the unta)ed portion of the interest which corresponds to a period not e)ceedin+ one *ear shall 7e paid upon accrual pa*(ent, whichever is earlier. 1;(phasis supplied2 3oth the CTA and the Court of Appeals sustained the assess(ent of transaction ta). 9n the instant "etition, "icop reiterates its clai( that it is e)e(pt fro( the pa*(ent of the transaction ta) 7* virtue of its ta) e)e(ption under .A. #o. '1&., as a(ended, 6nown as the 9nvest(ent 9ncentives Act, which in the for( it e)isted in 1%//-1%/&, read in relevant part as follows, !ec. &. &ncenti%es to a Pioneer ;nterprise. 9n addition to the incentives provided in the precedin+ section, pioneer enterprises shall 7e +ranted the followin+ incentive 7enefits, 1a2 0a1 ;1emption. ;)e(ption fro( all ta)es under the #ational 9nternal evenue Code, e)cept inco(e ta), fro( the date the area of invest(ent is included in the 9nvest(ent "riorities "lan to the followin+ e)tent, 112 -ne hundred per cent 1100A2 for the first five *ears> 122 !event*-five per cent 1/'A2 for the si)th throu+h the ei+hth *ears> 132 Cift* per cent 1'0A2 for the ninth and tenth *ears> 1$2 Twent* per cent 120A2 for the eleventh and twelfth *ears> and 1'2 Ten per cent 110A2 for the thirteenth throu+h the fifteenth *ear. ))) ))) ))) 4 8e a+ree with the CTA and the Court of Appeals that "icopKs ta) e)e(ption under .A. #o. '1&., as a(ended, does not include e)e(ption fro( the thirt*-five percent 13'A2 transaction ta). 9n the first place, the thirt*-five percent 13'A2 transaction ta) 7 is an inco(e ta), that is, it is a ta) on the interest inco(e of the lenders or creditors. 9n 4estern Minolco Corporation %. Commissioner of &nternal Re%en'e, 6 the petitioner corporation 7orrowed funds fro( several financial institutions fro( June 1%// to -cto7er 1%// and paid the correspondin+ thirt*-five 13'A2 transaction ta) thereon in the a(ount of "1,31/,&01.03, pursuant to !ection 210 172 of the 1%// Ta) Code. 8estern 0inolco applied for refund of that a(ount alle+in+ it was e)e(pt fro( the thirt*-five 13'A2 transaction ta) 7* reason of !ection /%-A of C.A. #o. 13/, as a(ended, which +ranted new (ines and old (ines resu(in+ operation 4five 1'2 *ears co(plete ta) e)e(ptions, e)cept inco(e ta), fro( the ti(e of its actual 5onafide orders for e=uip(ent for co((ercial production.4 9n den*in+ the clai( for refund, this Court held,

The petitionerKs contentions deserve scant consideration. 0he ,.7 transaction ta1 is imposed on interest income from commercial papers iss'ed in the primary money mar9et. Bein: a ta1 on interest, it is a ta1 on income. As correctl* ruled 7* the respondent Court of Ta) Appeals, Accordin+l*, we need not and do not thin6 it necessar* to discuss further the nature of the transaction ta) (ore than to sa* that the incipient sche(e in the issuance of :etter of 9nstructions #o. 3$0 on #ove(7er 2$, 1%/' 1-.G. Dec. 1', 1%/'2, i.e., to achieve operational si(plicit* and effective ad(inistration in capturin+ the interest-inco(e 4windfall4 fro( (one* (ar6et operations as a new source of revenue, has lost none of its ani(atin+ principle in parturition of a(endator* "residential Decree #o. 11'$, now !ection 210 172 of the Ta) Code. 0he ta1 th's imposed is act'ally a ta1 on interest earnin:s of the lenders or placers !ho are act'ally the ta1payers in !hose income is imposed. Thus 4the 7orrower withholds the ta) of 3'A fro( the interest he would have to pa* the lender so that he 17orrower2 can pa* the 3'A of the interest to the Govern(ent.4 1Citation o(itted2 . . . . !uffice it to state that the 7road consensus of fiscal and (onetar* authorities is that 4even if no(inall*, the 7orrower is (ade to pa* the ta), actuall*, the ta) is on the interest earnin+ of the i((ediate and all prior lendersOplacers of the (one*. . . .4 1Rollo, pp. 3.-3/2 0he ,.7 transaction ta1 is an income ta1 on interest earnin:s to the lenders or placers. 0he latter are act'ally the ta1payers. Therefore, the ta) cannot 7e a ta) i(posed upon the petitioner. 9n other words, the petitioner !ho 5orro!ed f'nds from se%eral financial instit'tions 5y iss'in: commercial papers merely !ithheld the ,.7 transaction ta1 5efore payin: to the financial instit'tions the interests earned 5y them and later remitted the same to the respondent Commissioner of &nternal Re%en'e. The ta) could have 7een collected 7* a different procedure 7ut the statute chose this (ethod. 8hatever collectin+ procedure is adopted does not chan+e the nature of the ta). ))) ))) ))) 7 1;(phasis supplied2 0uch the sa(e issue was passed upon in Marind'<'e Minin: &nd'strial Corporation %. Commissioner of &nternal Re%en'e 8 and resolved in the sa(e wa*,

9t is ver* o7vious that the transaction ta), !hich is a ta1 on interest deri%ed from commercial paper iss'ed in the money mar9et, is not a ta) conte(plated in the a7ove-=uoted le+al provisions. The petitioner ad(its that it is su7?ect to inco(e ta). 9ts ta) e)e(ption should 7e strictl* construed. 8e hold that petitionerKs clai( for refund was ?ustifia7l* denied. 0he transaction ta1, altho':h nominally cate:ori=ed as a 5'siness ta1, is in reality a !ithholdin: ta1 as positivel* stated in :-9 #o. 3$0. The petitioner could have shifted the ta) to the lenders or recipients of the interest. 9t did not choose to do so. 9t cannot 7e heard now to co(plain a7out the ta). :-9 #o. 3$0 is an e)traneous or e)trinsic aid to the construction of section 210 172. ))) ))) ))) 8 1;(phasis supplied2 9t is thus clear that the transaction ta) is an income ta) and as such, in an* event, falls outside the scope of the ta) e)e(ption +ranted to re+istered pioneer enterprises 7* !ection & of .A. #o. '1&., as a(ended. "icop was the withholdin+ a+ent, o7li+ed to withhold thirt*-five percent 13'A2 of the interest pa*a7le to its lenders and to re(it the a(ounts so withheld to the 3ureau of 9nternal evenue 1439 42. As a withholdin+ a+ent, "icop is (ade personally lia5le for the thirt*five percent 13'A2 transaction ta) 10 and if it did not actuall* withhold thirt*-five percent 13'A2 of the interest (onies it had paid to its lenders, "icop had onl* itself to 7la(e. "icop clai(s that it had relied on a rulin+, dated . -cto7er 1%//, issued 7* the C9 , which held that "icop was not lia7le for the thirt*-five 13'A2 transaction ta) in respect of de7enture 7onds issued 7* "icop. "rior to the issuance of the pro(issor* notes involved in the instant case, "icop had also issued de7enture 7onds "100,000,000.00 in a++re+ate face value. The (ana+in+ underwriter of this de7enture 7ond issue, 3anco( Develop(ent Corporation, re=uested a for(al rulin+ fro( the 3ureau of 9nternal evenue on the lia7ilit* of "icop for the thirt*-five percent 13'A2 transaction ta) in respect of such 7onds. The rulin+ rendered 7* the then Actin+ Co((issioner of 9nternal evenue, ;fren 9. "lana, stated in relevant part, 9t is represented that "9C-" will 7e offerin+ to the pu7lic pri(ar* 7onds in the a++re+ate principal su( of one hundred (illion pesos 1"100,000,000.002> that the 7onds will 7e issued as de7entures in deno(inations of one thousand pesos 1"1,000.002 or (ultiples, to mat're in ten 61/8 years at 1$A interest per ann'm pa*a7le se(i-annuall*> that the 5onds are con%erti5le into common stoc9 of the iss'er at the option of the 7ond holder at an a+reed conversion price> that the iss'e !ill 5e co%ered 5y a 40r'st &ndent're4 with a dul* authoriFed trust corporation as re=uired 7* the !ecurities and ;)chan+e Co((ission, which trustee will act for and in 7ehalf of the de7enture 7ond holders as 7eneficiaries> that once issued, the 5onds cannot 5e preterminated 5y the holder and cannot 5e redeemed 5y the iss'er 'ntil after ei:ht 6)8 years from date of iss'e> that the de7enture 7onds will 7e s'5ordinated to present and f't're de5ts of P&COP> and that said 7onds are intended to 7e listed in the stoc6 e)chan+es, which will place the( alon+side listed e=uit* issues.

9n repl*, 9 have the honor to infor( *ou that althou+h the 7onds hereina7ove descri7ed are co((ercial papers which will 7e issued in the pri(ar* (ar6et, however, it is clear from the a5o%estated facts that said 5onds !ill not 5e iss'ed as money mar9et instr'ments. !uch 7ein+ the case, and considerin+ that the purposes of "residential Decree #o. 11'$, as can 7e +leaned fro( :etter of 9nstruction #o. 3$0, dated #ove(7er 21, 1%/', are 1a2 to re+ulate (one* (ar6et transactions and 172 to ensure the collection of the ta) on interest derived fro( (one* (ar6et transactions 7* i(posin+ a withholdin+ ta) thereon, said 5onds do not come !ithin the p'r%ie! of the 4commercial papers4 intended to 5e s'5>ected to the ,.7 transaction ta1 prescri5ed in Presidential 2ecree ?o. 11.@, as i(ple(ented 7* evenue e+ulations #o. /-//. 1!ee !ection 2 of said e+ulation2 Accordin+l*, P&COP is not s'5>ect to ,.7 transaction ta1 on its iss'es of the aforesaid 5onds. Bowever, those investin+ in said 7onds should 7e (ade aware of the fact that the transaction ta) is not 7ein+ i(posed on the issuer of said 7onds 7* printin+ or sta(pin+ thereon, in 7old letters, the followin+ state(ent, 49!!@; #-T !@3J;CT T- T A#!ACT9-# TAP @#D; ".D. 11'$. 3-#DB-:D; !B-@:D D;C:A ; 9#T; ;!T ;A #9#G C- 9#C-0; TAP.4 11 1;(phases supplied2 9n the a7ove =uoted rulin+, the C9 7asicall* held that "icopKs de7enture 7onds did not constitute 4co((ercial papers4 within the (eanin+ of ".D. #o. 11'$, and that, as such, those 7onds were not su7?ect to the thirt*-five percent 13'A2 transaction ta) i(posed 7* ".D. #o. 11'$. The a7ove rulin+, however, is not applica7le in respect of the pro(issor* notes which are the su7?ect (atter of the instant case. 9t (ust 7e noted that the de7enture 7onds which were the su7?ect (atter of Co((issioner "lanaKs rulin+ were lon+-ter( 7onds (aturin+ in ten 1102 *ears and which could not 7e pre-ter(inated and could not 7e redee(ed 7* "icop until after ei+ht 1&2 *ears fro( date of issue> the 7onds were (oreover su7ordinated to present and future de7ts of "icop and converti7le into co((on stoc6 of "icop at the option of the 7ondholder. 9n contrast, the pro(issor* notes involved in the instant case are short-ter( instru(ents 7earin+ a one-*ear (aturit* period. These pro(issor* notes constitute the ver* archt*pe of (one* (ar6et instru(ents. Cor (one* (ar6et instru(ents are precisel*, 7* custo( and usa+e of the financial (ar6ets, short(term instru(ents with a tenor of one 112 *ear or less. 12 Assu(in+, therefore, 1without passin+ upon2 the correctness of the . -cto7er 1%// 39 rulin+, "icopKs short-ter( pro(issor* notes (ust 7e distin+uished, and treated differentl*, fro( "icopKs lon+-ter( de7enture 7onds. 8e conclude that "icop was properl* held lia7le for the thirt*-five percent 13'A2 transaction ta) due in respect of interest pa*(ents on its (one* (ar6et 7orrowin+s. At the sa(e ti(e, we a+ree with the Court of Appeals that the transaction ta) (a* 7e levied onl* in respect of the interest earnin+s of "icopKs (one* (ar6et lenders accruin+ after ".D. #o. 11'$ went into effect, and not in respect of all the 1%// interest earnin+s of such lenders. The Court of Appeals pointed out that, "9C-", however contends that even if the ta) has to 7e paid, it should 7e i(posed onl* for the interests earned after 20 !epte(7er 1%// when "D 11'$ creatin+ the ta) 7eca(e effective. 8e find (erit in this contention. &t appears that the ta1 !as le%ied on interest earnin:s from Jan'ary to

Octo5er, 13**. Bowever, as found 7* the lower court, "D 11'$ was pu7lished in the -fficial GaFette onl* on ' !epte(7er 1%//, and 5ecame effecti%e only fifteen 61.8 days after the p'5lication, or on -/ Septem5er 13**, no other effectivit* date havin+ 7een provided 7* the "D. 3ased on the 8or6sheet prepared 7* the Co((issionerKs office, the interests earned from -/ Septem5er to Octo5er 13** !as P1/,--@,@1/./,. 0hirty(fi%e 6,.78 per cent of this is P,,.*),.@,..1 !hich is all P&COP sho'ld pay as transaction ta1. 1< 1;(phasis supplied2 ".D. #o. 11'$ is not, in other words, to 7e +iven retroactive effect 7* i(posin+ the thirt*-five percent 13'A2 transaction ta) in respect of interest earnin+s which accrued 7efore the effectivit* date of ".D. #o. 11'$, there 7ein+ nothin+ in the statute to su++est that the le+islative authorit* intended to 7rin+ a7out such retroactive i(position of the ta). 122 4hether Picop is lia5le for interest and s'rchar:e on 'npaid transaction ta1. 8ith respect to the transaction ta) due, the C9 pra*s that "icop 7e held lia7le for a twent*-five percent 12'A2 surchar+e and for interest at the rate of fourteen percent 11$A2 per ann'm fro( the date prescri7ed for its pa*(ent. 9n so pra*in+, the C9 relies upon !ection 10 of evenue e+ulation /-// dated 3 June 1%//, 14 issued 7* the !ecretar* of Cinance. This !ection reads, !ec. 10. Penalties. M 8here the a(ount shown 7* the ta)pa*er to 7e due on its return or part of such pa*(ent is not paid on or 7efore the date prescri7ed for its pa*(ent, the amo'nt of the ta1 shall 5e increased 5y t!enty(fi%e 6-.78 per cent'm, the incre(ent to 7e a part of the ta1 and the entire amo'nt shall 5e s'5>ect to interest at the rate of fo'rteen 61@78 per cent'm per ann'm fro( the date prescri7ed for its pa*(ent. 9n the case of !illf'l ne:lect to file the ret'rn within the period prescri7ed herein or in case a false or fra'd'lent ret'rn is willfull* (ade, there shall 7e added to the ta) or to the deficienc* ta) in case an* pa*(ent has 7een (ade on the 7asis of such return 7efore the discover* of the falsit* or fraud, a s'rchar:e of fifty 6./78 per cent'm of its amo'nt. The a(ount so added to an* ta) shall 7e collected at the sa(e ti(e and in the sa(e (anner and as part of the ta) unless the ta) has 7een paid 7efore the discover* of the falsit* or fraud, in which case the a(ount so added shall 7e collected in the sa(e (anner as the ta). 9n addition to the a7ove administrati%e penalties, the criminal and ci%il penalties as provided for under !ection 33/ of the Ta) Code of 1%// shall 7e i(posed for violation of an* provision of "residential Decree #o. 11'$. 17 1;(phases supplied2 The 1%// Ta) Code itself, in !ection 32. in relation to !ection $ of the sa(e Code, invo6ed 7* the !ecretar* of Cinance in issuin+ evenue e+ulation /-//, set out, in co(prehensive ter(s, the rule-(a6in+ authorit* of the !ecretar* of Cinance,

!ec. 32.. A'thority of Secretary of Finance to Prom'l:ate R'les and Re:'lations. M The !ecretar* of Cinance, upon reco((endation of the Co((issioner of 9nternal evenue, shall pro(ul+ate all needf'l r'les and re:'lations for the effecti%e enforcement of the provisions of this Code. 1;(phasis supplied2 !ection $ of the sa(e Code contains a list of su7?ects or areas to 7e dealt with 7* the !ecretar* of Cinance throu+h the (ediu( of an e)ercise of his =uasi-le+islative or rule(a6in+ authorit*. This list, however, while it purports to 7e open-ended, does not include the i(position of ad(inistrative or civil penalties such as the pa*(ent of a(ounts additional to the ta) due. Thus, in order that it (a* 7e held to 7e le+all* effective in respect of "icop in the present case, !ection 10 of evenue e+ulation /// (ust e(7od* or rest upon so(e provision in the Ta) Code itself which i(poses surchar+e and penalt* interest for failure to (a6e a transaction ta) pa*(ent when due. ".D. #o. 11'$ did not itself i(pose, nor did it e)pressl* authoriFe the i(position of, a surchar+e and penalt* interest in case of failure to pa* the thirt*-five percent 13'A2 transaction ta) when due. #either did !ection 210 172 of the 1%// Ta) Code which re-enacted !ection 1%'-C inserted into the Ta) Code 7* ".D. #o. 11'$. The C9 , 7oth in its petition 7efore the Court of Appeals and its "etition in the instant case, points to !ection '1 1e2 of the 1%// Ta) Code as its source of authorit* for assessin+ a surchar+e and penalt* interest in respect of the thirt*-five percent 13'A2 transaction ta) due fro( "icop. This !ection needs to 7e =uoted in e1tenso, !ec. '1. Payment and Assessment of &ncome 0a1. M 1c2 2efinition of deficiency. M As used in this Chapter in respect of a ta1 imposed 5y this 0itle, the ter( 4deficienc*4 (eans, 112 The a(ount 7* which the ta1 imposed 5y this 0itle e)ceeds the a(ount shown as the ta) 7* the ta)pa*er upon his return> 7ut the a(ount so shown on the return shall first 7e increased 7* the a(ounts previousl* assessed 1or collected without assess(ent2 as a deficienc*, and decreased 7* the a(ount previousl* a7ated, credited, returned, or otherwise in respect of such ta)> . . . ))) ))) ))) 1e2 Additions to the ta1 in case of non(payment. M 112 0a1 sho!n on the ret'rn. M 8here the a(ount deter(ined 7* the ta)pa*er as the ta1 imposed 5y this 0itle or an* install(ent thereof, or an* part of such a(ount or install(ent is not paid on or 7efore the date prescri7ed for its pa*(ent, there shall 7e collected as a part of the ta), interest upon such unpaid a(ount at the rate of fourteen per cent'm per ann'm fro( the date prescri7ed for its pa*(ent until it is paid, Pro%ided, That the (a)i(u( a(ount that (a* 7e collected as interest on deficienc* shall in no case e)ceed the a(ount correspondin+ to a period of three *ears, the present provisions re+ardin+ prescription to the contrar* notwithstandin+.

122 2eficiency. M 4here a deficiency, or an* interest assessed in connection therewith under para+raph 1d2 of this section, or any addition to the ta1es pro%ided for in Section se%enty(t!o of this Code is not paid in full within thirt* da*s fro( the date of notice and de(and fro( the Co((issioner of 9nternal evenue, there shall 7e collected upon the unpaid a(ount as part of the ta), interest at the rate of fourteen per cent'm per ann'm fro( the date of such notice and de(and until it is paid, Pro%ided, That the (a)i(u( a(ount that (a* 7e collected as interest on deficienc* shall in no case e)ceed the a(ount correspondin+ to a period of three *ears, the present provisions re+ardin+ prescription to the contrar* notwithstandin+. 132 S'rchar:e. M 9f an* a(ount of ta) included in the notice and de(and fro( the Co((issioner of 9nternal evenue is not paid in full within thirt* da*s after such notice and de(and, there shall 7e collected in addition to the interest prescri7ed herein and in para+raph 1d2 a7ove and as part of the ta) a surchar+e of five per cent'm of the a(ount of ta) unpaid. 1;(phases supplied2 !ection /2 of the 1%// Ta) Code referred to in !ection '1 1e2 122 a7ove, provides,

the ta)es in respect of which !ection '1 1e2 authoriFed the i(position of surchar+e and interest and !ection /2 the i(position of a fraud surchar+e. 9t is not without reluctance that we reach the a7ove conclusion on the 7asis of what (a* well have 7een an inadvertent error in le+islative drafts(anship, a t*pe of error co((on enou+h durin+ the period of 0artial :aw in our countr*. #evertheless, we are co(pelled to adopt this conclusion. 8e consider that the authorit* to i(pose what the present Ta) Code calls 1in !ection 2$&2 ci%il penalties consistin+ of additions to the ta) due, (ust 7e e)pressl* +iven in the ena7lin+ statute, in lan+ua+e too clear to 7e (ista6en. The +rant of that authorit* is not li+htl* to 7e assu(ed to have 7een (ade to ad(inistrative officials, even to one as hi+hl* placed as the !ecretar* of Cinance. The state of the present law tends to reinforce our conclusion that !ection '1 1c2 and 1e2 of the 1%// Ta) Code did not authoriFe the i(position of a surchar+e and penalt* interest for failure to pa* the thirt*-five percent 13'A2 transaction ta) i(posed under !ection 210 172 of the sa(e Code. The correspondin+ provision in the c'rrent Ta) Code ver* clearl* e(7races failure to pay all ta1es imposed in the 0a1 Code, without an* re+ard to the Title of the Code where provisions i(posin+ particular ta)es are te)tuall* located. !ection 2$/ 1a2 of the #9 C, as a(ended, reads, Title P

!ec. /2. S'rchar:es for fail're to render ret'rns and for renderin: false and fra'd'lent ret'rns. M 9n case of willful ne+lect to file the ret'rn or list re<'ired 5y this 0itle within the ti(e prescri7ed 7* law, or in case a false or fraudulent return or list is wilfull* (ade, the Co((issioner of 9nternal evenue shall add to the ta) or to the deficienc* ta), in case an* pa*(ent has 7een (ade on the 7asis of such return 7efore the discover* of the falsit* or fraud, as s'rchar:e of fifty per cent'm of the amo'nt of s'ch ta1 or deficiency ta1. 9n case of an* failure to (a6e and file a return or list within the ti(e prescri7ed 7* law or 7* the Co((issioner or other 9nternal evenue -fficer, not d'e to !illf'l ne:lect, the Co((issioner of 9nternal evenue shall add to the ta) t!enty(fi%e per cent'm of its amo'nt, e)cept that, when a return is voluntaril* and without notice fro( the Co((issioner or other officer filed after such ti(e, and it is shown that the failure to file it was due to a reasona7le cause, no such addition shall 7e (ade to the ta). The a(ount so added to an* ta) shall 7e collected at the sa(e ti(e, in the sa(e (anner and as part of the ta) unless the ta) has 7een paid 7efore the discover* of the ne+lect, falsit*, or fraud, in which case the a(ount so added shall 7e collected in the sa(e (anner as the ta). 1;(phases supplied2 9t will 7e seen that !ection '1 1c2 112 and 1e2 112 and 132, of the 1%// Ta) Code, authoriFe the i(position of surchar+e and interest onl* in respect of a 4 ta1 imposed 5y this 0itle,4 that is to sa*, 0itle && on 4&ncome 0a1.4 9t will also 7e seen that !ection /2 of the 1%// Ta) Code i(poses a surchar+e onl* in case of failure to file a return or list 4 re<'ired 5y this 0itle,4 that is, 0itle && on 4&ncome 0a1.4 The thirt*-five percent 13'A2 transaction ta) is, however, i(posed in the 1%// Ta) Code 7* Section -1/ 658 thereof !hich Section is em5raced in 0itle A on 40a1es on B'siness4 of that Code. Thus, while the thirt*-five percent 13'A2 transaction ta) is in truth a ta1 imposed on interest income earned 7* lenders or creditors purchasin+ co((ercial paper on the (one* (ar6et, the relevant provisions, i.e., !ection 210 172, were not inserted in Title 99 of the 1%// Ta) Code. The end result is that the thirt*-five percent 13'A2 transaction ta) is not one of

Stat'tory Offenses and Penalties Chapter 9 Additions to the 0a1 !ec. 2$/. General Pro%isions. M 1a2 The additions to the ta) or deficienc* ta) prescri7ed in this Chapter shall apply to all ta1es, fees and char:es imposed in this Code. The a(ount so added to the ta) shall 7e collected at the sa(e ti(e, in the sa(e (anner and as part of the ta). . . . !ec. 2$&. Ci%il Penalties. M 1a2 There shall 7e i(posed, in addition to the ta1 re<'ired to 5e paid, penalty e<'i%alent to t!enty(fi%e percent 6-.78 of the amo'nt d'e, in the followin+ cases, ))) ))) ))) 132 failure to pa* the ta) within the ti(e prescri7ed for its pa*(ent> or ))) ))) ))) 1c2 the penalties i(posed hereunder shall for( part of the ta) and the entire a(ount shall 7e su7?ect to the interest prescri7ed in !ection 2$%.

!ec. 2$%. &nterest. M 1a2 &n General. M There shall 7e assessed and collected on any 'npaid amo'nt of ta1, interest at the rate of t!enty percent 6-/78 per ann'm or s'ch hi:her rate as may 5e prescri5ed 5y re:'lations, fro( the date prescri7ed for pa*(ent until the a(ount is full* paid. . . . 1;(phases supplied2 9n other words, !ection 2$/ 1a2 of the current #9 C supplies what did not e)ist 7ac6 in 1%// when "icopKs lia7ilit* for the thirt*-five percent 13'A2 transaction ta) 7eca(e fi)ed. 8e do not 7elieve we can fill that le+islative lac'na 7* ?udicial fiat. There is nothin+ to su++est that !ection 2$/ 1a2 of the present Ta) Code, which was inserted in 1%&', was intended to 7e +iven retroactive application 7* the le+islative authorit*. 16 132 4hether Picop is Bia5le for 2oc'mentary and Science Stamp 0a1es. As noted earlier, "icop issued so(eti(e in 1%// lon+-ter( su7ordinated converti7le de7enture 7onds with an a++re+ate face value of "100,000,000.00. "icop stated, and this was not disputed 7* the C9 , that the proceeds of the de7enture 7onds were in fact utiliFed to finance the 3-9re+istered operations of "icop. The C9 assessed docu(entar* and science sta(p ta)es, a(ountin+ to "300,000.00, on the issuance of "icopKs de7enture 7onds. 9t is clai(ed 7* "icop that its ta) e)e(ption M 4e)e(ption fro( all ta)es under the #ational 9nternal evenue Code, e)cept inco(e ta)4 on a declinin+ 7asis over a certain period of ti(e M includes e)e(ption fro( the docu(entar* and science sta(p ta)es i(posed under the #9 C. The C9 , upon the other hand, stresses that the ta) e)e(ption under the 9nvest(ent 9ncentives Act (a* 7e +ranted or reco+niFed onl* to the e)tent that the clai(ant "icop was en+a+ed in re+istered operations, i.e., operations for(in+ part of its inte+rated pulp and paper pro?ect. 17 The 7orrowin+ of funds fro( the pu7lic, in the su7(ission of the C9 , was not an activit* included in "icopKs re+istered operations. The CTA adopted the view of the C9 and held that 4the issuance of converti7le de7enture 7onds QwasR not s*non*(ous QwithR the (anufacturQin+R operations of an inte+rated pulp and paper (ill.4 18 The Court of Appeals too6 a less ri+id view of the a(7it of the ta) e)e(ption +ranted to re+istered pioneer enterprises. !aid the Court of Appeals, . . . "9C-"Ks e)planation that the de7enture 7onds were issued to finance its re+istered operation is lo+ical and is unre7utted. 8e are aware that ta) e)e(ptions (ust 7e applied strictl* a+ainst the 7eneficiar* in order to deter their a7use. &t !o'ld indeed 5e alto:ether a different matter if there is a sho!in: that the iss'ance of the de5ent're 5onds had no 5earin: !hatsoe%er on the re:istered operations P&COP and that the* were iss'ed in connection !ith a totally different 5'siness 'nderta9in: of P&COP other than its re:istered operation. There is, however, a dearth of evidence in this re+ard. 9t cannot 7e denied that "9C-" needed funds for its operations. -ne of the (eans it used to raise said funds was to issue de7enture 7onds. Since the money raised there5y !as to 5e 'sed in its re:istered operation, P&COP sho'ld en>oy the incenti%es :ranted to it 7* .A. '1&., one of which is the e)e(ption fro( pa*(ent of all ta)es under the #ational 9nternal evenue Code, e)cept inco(e ta)es, other!ise the p'rpose of the incenti%es !o'ld 5e

defeated. 2oc'mentary and science stamp ta1es on de5ent're 5onds are certainly not income ta1es. 18 1;(phasis supplied2 Ta) e)e(ptions are, to 7e sure, to 7e 4strictl* construed,4 that is, the* are not to 7e e)tended 7e*ond the ordinar* and reasona7le intend(ent of the lan+ua+e actuall* used 7* the le+islative authorit* in +rantin+ the e)e(ption. The issuance of de7enture 7onds is certainl* conceptuall* distinct fro( pulpin+ and paper (anufacturin+ operations. 3ut no one contends that issuance of 7onds was a principal or re+ular 7usiness activit* of "icop> onl* 7an6s or other financial institutions are in the re+ular 7usiness of raisin+ (one* 7* issuin+ 7onds or other instru(ents to the +eneral pu7lic. 8e consider that the actual dedication of the proceeds of the 7onds to the carr*in+ out of "icopKs re+istered operations constituted a sufficient ne)us with such re+istered operations so as to e)e(pt "icop fro( sta(p ta)es ordinaril* i(posed upon or in connection with issuance of such 7onds. 8e a+ree, therefore, with the Court of Appeals on this (atter that the CTA and the C9 had erred in re?ectin+ "icopKs clai( for e)e(ption fro( sta(p ta)es. 9t re(ains onl* to note that after co((ence(ent of the present liti+ation 7efore the CTA, the 39 too6 the position that the ta) e)e(ption +ranted 7* .A. #o. '1&., as a(ended, does include e)e(ption fro( docu(entar* sta(p ta)es on transactions entered into 7* 3-9-re+istered enterprises. 39 ulin+ #o. 0&&, dated 2& April 1%&%, for instance, held that a re+istered preferred pioneer enterprise en+a+ed in the (anufacture of inte+rated circuits, (a+netic heads, printed circuit 7oards, etc., is e)e(pt fro( the pa*(ent of docu(entar* sta(p ta)es. The Co((issioner said, Gou now re=uest a rulin+ that as a preferred pioneer enterprise, *ou are e)e(pt fro( the pa*(ent of Docu(entar* !ta(p Ta) 1D!T2. 9n repl*, please 7e infor(ed that *our re=uest is here7* +ranted. "ursuant to !ection $. 1a2 of "residential Decree #o. 1/&%, pioneer enterprises re+istered with the 3-9 are e)e(pt fro( all ta)es under the #ational 9nternal evenue Code, e)cept fro( all ta)es under the #ational 9nternal evenue Code, e)cept inco(e ta), fro( the date the area of invest(ent is included in the 9nvest(ent "riorities "lan to the followin+ e)tent, ))) ))) ))) Accordin+l*, yo'r company is e1empt from the payment of doc'mentary stamp ta1 to the e1tent of the percenta:e aforestated on transactions connected !ith the re:istered 5'siness acti%ity. 139 ulin+ #o. 111-&12 Bowever, if said transactions conducted 7* *ou re=uire the e)ecution of a ta)a7le docu(ent with other parties, said parties who are not e)e(pt shall 7e the one directl* lia7le for the ta). 1!ec. 1/3, Ta) Code, as a(ended> 39 ulin+ #o. 23.-&/2 9n other words, said parties shall 7e lia7le to the sa(e percenta+e correspondin+ to *our ta) e)e(ption. 1;(phasis supplied2 !i(ilarl*, in 39 ulin+ #o. 013, dated . Ce7ruar* 1%&%, the Co((issioner held that a re+istered pioneer enterprise producin+ pol*ester fila(ent *arn was entitled to e)e(ption 4fro( the docu(entar* sta(p ta) on QitsR sale of real propert* in 0a6ati up to Dece(7er 31, 1%&%.4 9t appears clear to the Court that the C9 , ad(inistrativel* at

least, no lon+er insists on the position it ori+inall* too6 in the instant case 7efore the CTA. 99 112 4hether Picop is entitled to ded'ct a:ainst c'rrent income interest payments on loans for the p'rchase of machinery and e<'ipment. 9n 1%.%, 1%/2 and 1%//, "icop o7tained loans fro( forei+n creditors in order to finance the purchase of (achiner* and e=uip(ent needed for its operations. 9n its 1%// 9nco(e Ta) eturn, "icop clai(ed interest pa*(ents (ade in 1%//, a(ountin+ to "$2,&$0,131.00, on these loans as a deduction fro( its 1%// +ross inco(e. The C9 disallowed this deduction upon the +round that, 7ecause the loans had 7een incurred for the purchase of (achiner* and e=uip(ent, the interest pa*(ents on those loans should have 7een capitaliFed instead and clai(ed as a depreciation deduction ta6in+ into account the ad?usted 7asis of the (achiner* and e=uip(ent 1ori+inal ac=uisition cost plus interest char+es2 over the useful life of such assets. 3oth the CTA and the Court of Appeals sustained the position of "icop and held that the interest deduction clai(ed 7* "icop was proper and allowa7le. 9n the instant "etition, the C9 insists on its ori+inal position. 8e 7e+in 7* notin+ that interest pa*(ents on loans incurred 7* a ta)pa*er 1whether 3-9re+istered or not2 are allowed 7* the #9 C as deductions a+ainst the ta)pa*erKs +ross inco(e. !ection 30 of the 1%// Ta) Code provided as follows, !ec. 30. 2ed'ction from Gross &ncome. M The followin+ (a* 7e deducted fro( +ross inco(e, 1a2 ;1penses, ))) ))) ))) 172 &nterest, 112 &n :eneral. M The a(ount of interest paid within the ta)a7le *ear on inde5tedness, e)cept on inde7tedness incurred or continued to purchase or carr* o7li+ations the interest upon which is e)e(pt fro( ta)ation as inco(e under this Title, . . . 1;(phasis supplied2 Thus, the +eneral rule is that interest e)penses are deducti7le a+ainst +ross inco(e and this certainl* includes interest paid under loans incurred in connection with the

carr*in+ on of the 7usiness of the ta)pa*er. 20 9n the instant case, the C9 does not dispute that the interest pa*(ents were (ade 7* "icop on loans inc'rred in connection !ith the carryin: on of the re:istered operations of Picop, i.e., the financin+ of the purchase of (achiner* and e=uip(ent actuall* used in the re+istered operations of "icop. #either does the C9 den* that such interest pa*(ents were le:ally d'e and demanda5le under the ter(s of such loans, and in fact paid 7* "icop durin+ the ta) *ear 1%//. The C9 has 7een una7le to point to an* provision of the 1%// Ta) Code or an* other !tatute that re=uires the disallowance of the interest pa*(ents (ade 7* "icop. The C9 invo6es !ection /% of evenue e+ulations #o. 2 as a(ended which reads as follows, !ec. /%. &nterest on Capital. M &nterest calculated for cost-6eepin+ or other purposes on account of capital or surplus invested in the 7usiness, !hich does not represent a char:e arisin: 'nder an interest(5earin: o5li:ation, is not allowa7le deduction fro( +ross inco(e. 1;(phases supplied2 8e read the a7ove provision of evenue e+ulations #o. 2 as referrin+ to so called 4theoretical interest,4 that is to sa*, interest 4 calc'lated4 or co(puted 1and not inc'rred or paid2 for the purpose of deter(inin+ the 4opportunit* cost4 of investin+ funds in a +iven 7usiness. !uch 4theoretical4 or i(puted interest does not arise fro( a le+all* de(anda7le interest-7earin+ o7li+ation incurred 7* the ta)pa*er who however wishes to find out, e.:., whether he would have 7een 7etter off 7* lendin+ out his funds and earnin+ interest rather than investin+ such funds in his 7usiness. -ne thin+ that !ection /% =uoted a7ove (a6es clear is that interest which does constitute a char+e arisin+ under an interest-7earin+ o7li+ation is an allowa7le deduction fro( +ross inco(e. 9t is clai(ed 7* the C9 that !ection /% of evenue e+ulations #o. 2 was 4patterned after4 para+raph 1.2..-1 172, entitled 4Ta)es and Carr*in+ Char+es Char+ea7le to Capital Account and Treated as Capital 9te(s4 of the @.!. 9nco(e Ta) e+ulations, which para+raph reads as follows, 132 0a1es and Carryin: Char:es. M The ite(s thus char+ea7le to capital accounts are M 1112 9n the case of real propert*, whether i(proved or uni(proved and whether productive or nonproductive. 1a2 9nterest on a loan 17ut not theoretical interest of a ta)pa*er usin+ his own funds2. 21 The truncated e)cerpt of the @.!. 9nco(e Ta) e+ulations =uoted 7* the C9 needs to 7e related to the relevant provisions of the @.!. 9nternal evenue Code, which provisions deal with the +eneral topic of ad?usted 7asis for deter(inin+ allowa7le +ain or loss on sales or e)chan+es of propert* and allowa7le depreciation and depletion of capital assets of the ta)pa*er, Present R'le. The 9nternal evenue Code, and the e+ulations pro(ul+ated thereunder provide that 4?o ded'ction shall 5e allo!ed for amo'nts paid or accrued for such ta)es and carryin: char:es as, under re+ulations prescri7ed

7* the !ecretar* or his dele+ate, are char+ea7le to capital account with respect to propert*, if the ta1payer elects, in accordance with such re+ulations, to treat s'ch ta)es or char:es as so char:ea5le.4 At the sa(e ti(e, under the ad?ust(ent of 7asis provisions which have ?ust 7een discussed, it is provided that ad?ust(ent shall 7e (ade for all 4e)penditures, receipts, losses, or other ite(s4 properl* char+ea7le to a capital account, thus includin+ ta)es and carr*in+ char+es> however, an e1ception e1ists, in !hich e%ent s'ch ad>'stment to the capital acco'nt is not made, !ith respect to ta1es and carryin: char:es !hich the ta1payer has not elected to capitali=e 5't for !hich a ded'ction instead has 5een ta9en . 22 1;(phasis supplied2 The 4carr*in+ char+es4 which (a* 7e capitaliFed under the a7ove =uoted provisions of the @.!. 9nternal evenue Code include, as the C9 has pointed out, interest on a loan 417ut not theoretical interest of a ta)pa*er usin+ his own funds2.4 8hat the C9 failed to point out is that s'ch 4carryin: char:es4 may, at the election of the ta)pa*er, either 5e 6a8 capitali=ed in which case the cost 7asis of the capital assets, e.+., (achiner* and e=uip(ent, will 7e ad?usted 7* addin+ the a(ount of such interest pa*(ents or alternativel*, 7e 658 ded'cted from :ross income of the ta)pa*er. !hould the ta)pa*er elect to deduct the interest pa*(ents a+ainst its +ross inco(e, the ta)pa*er cannot at the same time capitaliFe the interest pa*(ents. 9n other words, the ta)pa*er is not entitled to 5oth the ded'ction from :ross income and the ad>'sted 6increased8 5asis for deter(inin+ +ain or loss and the allowa7le depreciation char+e. The @.!. 9nternal evenue Code does not prohi5it the ded'ction of interest on a loan o7tained for purchasin+ (achiner* and e=uip(ent a+ainst +ross inco(e, 'nless the ta)pa*er has also or pre%io'sly capitali=ed the same interest payments and there7* ad?usted the cost 7asis of such assets. 8e have alread* noted that our 1%// #9 C does not prohi7it the deduction of interest on a loan incurred for ac=uirin+ (achiner* and e=uip(ent. #either does our 1%// #9 C co(pel the capitaliFation of interest pa*(ents on such a loan. The 1%// Ta) Code is si(pl* silent on a ta)pa*erKs ri+ht to elect one or the other ta) treat(ent of such interest pa*(ents. Accordin+l*, the +eneral rule that interest pa*(ents on a le+all* de(anda7le loan are deducti7le fro( +ross inco(e (ust 7e applied. The C9 ar+ues finall* that to allow "icop to deduct its interest pa*(ents a+ainst its +ross inco(e would 7e to encoura+e fraudulent clai(s to dou7le deductions fro( +ross inco(e, QtRo allow a deduction of incidental e)penseOcost incurred in the purchase of fi)ed asset in the *ear it was incurred would in%ite ta1 e%asion throu+h fra'd'lent application of do'5le ded'ctions from :ross income. 2< 1;(phases supplied2 The Court is not persuaded. !o far as the records of the instant cases show, "icop has not clai(ed to 7e entitled to dou7le deduction of its 1%// interest pa*(ents. The C9 has neither alle+ed nor proved that "icop had previousl* ad?usted its cost 7asis for the (achiner* and e=uip(ent purchased with the loan proceeds 7* capitaliFin+ the interest pa*(ents here involved. The Court will not assu(e that the C9 would 7e una7le or unwillin+ to disallow 4a dou7le deduction4 should "icop, havin+ deducted its interest

cost fro( its +ross inco(e, also atte(pt su7se=uentl* to ad?ust upward the cost 7asis of the (achiner* and e=uip(ent purchased and clai(, e.+., increased deductions for depreciation. 8e conclude that the CTA and the Court of Appeals did not err in allowin+ the deductions of "icopKs 1%// interest pa*(ents on its loans for capital e=uip(ent a+ainst its +ross inco(e for 1%//. 122 4hether Picop is entitled to ded'ct a:ainst c'rrent income net operatin: losses inc'rred 5y R'stan P'lp and Paper Mills, &nc. -n 1& Januar* 1%//, "icop entered into a (er+er a+ree(ent with the ustan "ulp and "aper 0ills, 9nc. 14 ""042 and ustan 0anufacturin+ Corporation 14 0C42. @nder this a+ree(ent, the ri+hts, properties, privile+es, powers and franchises of ""0 and 0C were to 7e transferred, assi+ned and conve*ed to "icop as the survivin+ corporation. The entire su7scri7ed and outstandin+ capital stoc6 of ""0 and 0C would 7e e)chan+ed for 2,&%1,$/. full* paid up Class 4A4 co((on stoc6 of "icop 1with a par value of "10.002 and 1$%,&$& shares of preferred stoc6 of "icop 1with a par value of "10.002, to 7e issued 7* "icop, the result 7ein+ that "icop would wholl* own 7oth ""0 and 0C while the stoc6holders of ""0 and 0C would ?oin the ran6s of "icopKs shareholders. 9n addition, "icop paid off the o7li+ations of ""0 to the Develop(ent 3an6 of the "hilippines 14D3"42 in the a(ount of ".&,2$0,3$0.00, 7* issuin+ .,&2$,03$ shares of preferred stoc6 1with a par value of "10.002 to the D3". The (er+er a+ree(ent was approved in 1%// 7* the creditors and stoc6holders of "icop, ""0 and 0C and 7* the !ecurities and ;)chan+e Co((ission. Thereupon, on 30 #ove(7er 1%//, apparentl* the effective date of (er+er, ""0 and 0C were dissolved. The 3oard of 9nvest(ents approved the (er+er a+ree(ent on 12 Januar* 1%/&. 9t appears that ""0 and 0C were, li6e "icop, 3-9-re+istered co(panies. 9((ediatel* 7efore (er+er effective date, ""0 had over precedin+ *ears accu(ulated losses in the total a(ount of "&1,1'%,%0$.00. 9n its 1%// 9nco(e Ta) eturn, "icop clai(ed "$$,1%.,10..00 of ""0Ks accu(ulated losses as a deduction a+ainst "icopKs 1%// +ross inco(e. 24 @pon the other hand, even 7efore the effective date of (er+er, on 30 Au+ust 1%//, "icop sold all the outstandin+ shares of 0C stoc6 to !an 0i+uel Corporation for the su( of "3&,%00,000.00, and reported a +ain of "%,2%$,&$%.00 fro( this transaction. 27 9n clai(in+ such deduction, "icop relies on section / 1c2 of .A. #o. '1&. which provides as follows, !ec. /. &ncenti%es to Re:istered ;nterprise. M A re+istered enterprise, to the e1tent en:a:ed in a preferred area of in%estment, shall 7e +ranted the followin+ incentive 7enefits, ))) ))) )))

1c2 ?et Operatin: Boss Carry(o%er. M A net operatin: loss inc'rred in any of the first ten years of operations may 5e carried o%er as a ded'ction from ta1a5le income for the si1 years immediately follo!in: the year of s'ch loss . The entire a(ount of the loss shall 7e carried over to the first of the si) ta)a7le *ears followin+ the loss, and an* portion of such loss which e)ceeds the ta)a7le inco(e of such first *ear shall 7e deducted in li6e (anner fro( the ta)a7le inco(e of the ne)t re(ainin+ five *ears. 0he net operatin: loss shall 5e comp'ted in accordance !ith the pro%isions of the ?ational &nternal Re%en'e Code, any pro%ision of this Act to the contrary not!ithstandin: , e)cept that inco(e not ta)a7le either in whole or in part under this or other laws shall 7e included in +ross inco(e. 1;(phasis supplied2 "icop had secured a letter-opinion fro( the 3-9 dated 21 Ce7ruar* 1%// M that is, after the date of the a+ree(ent of (er+er 7ut 7efore the (er+er 7eca(e effective M relatin+ to the deducti7ilit* of the previous losses of ""0 under !ection / 1c2 of .A. #o. '1&. as a(ended. The pertinent portions of this 3-9 opinion, si+ned 7* 3-9 Governor Cesar :anuFa, read as follows, 22 P&COP !ill not 5e allo!ed to carry o%er the losses of R'stan prior to the le:al dissol'tion of the latter 5eca'se at that time the t!o 6-8 companies still had separate le:al personalities> 32 After 3-9 approval of the (er+er, "9C-" can no lon+er appl* for the re+istration of the re+istered capacit* of ustan 7ecause with the approved (er+er, such re+istered capacit* of ustan transferred to "9C-" will have the sa(e re+istration date as that of ustan. 9n this case, the pre%io's losses of R'stan may 5e carried o%er 5y P&COP, 5eca'se !ith the mer:er, P&COP ass'mes all the ri:hts and o5li:ations of R'stan s'5>ect, ho!e%er, to the period prescri5ed for carryin: o%er of s'ch losses. 26 1;(phasis supplied2 Curiousl* enou+h, "icop did not also see6 a rulin+ on this (atter, clearl* a (atter of ta) law, fro( the 3ureau of 9nternal evenue. "icop chose to rel* solel* on the 3-9 letter-opinion. The C9 disallowed all the deductions clai(ed on the 7asis of ""0Ks losses, apparentl* on two 122 +rounds. Cirstl*, the previous losses were incurred 7* 4another ta1payer,4 ""0, and not 7* "icop in connection with "icopKs own re+istered operations. The C9 too6 the view that "icop, ""0 and 0C were (er+ed into one 112 corporate personalit* onl* on 12 Januar* 1%/&, upon approval of the (er+er a+ree(ent 7* the 3-9. Thus, durin+ the ta)a7le *ear 1%//, "icop on the one hand and ""0 and 0C on the other, still had their separate ?uridical personalities. !econdl*, the C9 alle+ed that these losses had 7een incurred 7* ""0 4fro( the 7orrowin+ of funds4 and not fro( carr*in+ out of ""0Ks re+istered operations. 8e focus on the first +round.
27

espondent further averred that the incentives +ranted under !ection / of .A. #o. '1&. shall 7e availa7le onl* to the e)tent in which the* are en+a+ed in re+istered operations, citin: !ection 1 of ule 9P of the 3asic ules and e+ulations to 9(ple(ent the 9ntent and "rovisions of the 9nvest(ent 9ncentives Act, .A. #o. '1&.. 4e disa:ree !ith respondent. 0he p'rpose of the mer:er !as to rationali=e the container 5oard ind'stry and not to ta9e ad%anta:e of the net losses inc'rred 5y RPPM& prior to the stoc9 s!ap. Thus, when stoc6 of a corporation is purchased in order to ta6e advanta+e of the corporationKs net operatin+ loss incurred in *ears prior to the purchase, the corporation thereafter enterin+ into a trade or 7usiness different fro( that in which it was previousl* en+a+ed, the net operatin: loss carry(o%er may 5e entirely lost. Q9 C 11%'$2, !ec. 3&21a2, <ol. ', 0ertens, :aw of Cederal 9nco(e Ta)ation, Chap. 2%.11a, p. 103R. 28 Curther(ore, once the 3-9 approved the (er+er a+ree(ent, the re+istered capacit* of ustan shall 7e transferred to "9C-", and the previous losses of ustan (a* 7e carried over 7* "9C-" 7* operation of law. Q3-9 rulin+ dated Ce7ruar* 21, 1%// 1;)h. J-12R 9t is clear therefro(, that the deduction availed of under !ection /1c2 of .A. #o. '1&. was onl* proper.4 1pp. 3&-$3, Rollo of !" #o. 200/02 28 1;(phasis supplied2 9n respect of the a7ove underscored portion of the CTA decision, we (ust note that the CTA in fact overloo6ed the state(ent (ade 7* petitionerKs counsel 7efore the CTA that, Amon: the attractions of the mer:er to Picop !as the acc'm'lated net operatin: loss carry(o%er of RMC that it mi:ht possi5ly 'se to relie%e it 6Picop8 from its income ta1es, 'nder Section * 6c8 of R.A. .1)+. !aid section provides, ))) ))) ))) 4ith this 5enefit in mind, "icop addressed three 132 =uestions to the 3-9 in a letter dated #ove(7er 2', 1%/.. The 3-9 replied on Ce7ruar* 21, 1%// directl* answerin+ the three 132 =ueries. <0 1;(phasis supplied2 The siFe of ""0Ks accu(ulated losses as of the date of the (er+er M (ore than "&1,000,000.00 M (ust have constituted a powerful attraction indeed for "icop. The Court of Appeals followed the result reached 7* the CTA. The Court of Appeals, (uch li6e the CTA, concluded that since ""0 was dissolved on 30 #ove(7er 1%//, its accu(ulated losses were appropriatel* carried over 7* "icop in the latterKs 1%// 9nco(e Ta) eturn 47ecause 7* that ti(e ""09 and "icop were no lon+er separate and different ta)pa*ers.4 <1 After prolon+ed consideration and anal*sis of this (atter, the Court is una7le to a+ree with the CTA and Court of Appeals on the deducti7ilit* of ""0Ks accu(ulated losses a+ainst "icopKs 1%// +ross inco(e.

The CTA upheld the deduction clai(ed 7* "icop> its reasonin+, however, is less than cr*stal clear, especiall* in respect of its view of what the @.!. ta) law was on this (atter. 9n an* event, the CTA apparentl* fell 7ac6 on the 3-9 opinion of 21 Ce7ruar* 1%// referred to a7ove. The CTA said,

9t is i(portant to note at the outset that in our ?urisdiction, the ordinar* rule M that is, the rule applica7le in respect of corporations not re+istered with the 3-9 as a preferred pioneer enterprise M is that net operatin: losses cannot 5e carried o%er. @nder our Ta) Code, 7oth in 1%// and at present, losses (a* 7e deducted fro( +ross inco(e onl* if such losses were actuall* sustained in the sa(e *ear that the* are deducted or char+ed off. !ection 30 of the 1%// Ta) Code provides, !ec. 30. 2ed'ctions from Gross &ncome. M 9n co(putin+ net inco(e, there shall 7e allowed as deduction M ))) ))) ))) 1d2 Bosses, 112 By &ndi%id'als. M 9n the case of an individual, losses act'ally s'stained d'rin: the ta1a5le year and not co(pensated for 7* an insurance or otherwise M 1A2 9f incurred in trade or 7usiness> ))) ))) ))) 122 By Corporations. M 9n a case of a corporation, all losses act'ally s'stained and char:ed off !ithin the ta1a5le year and not co(pensated for 7* insurance or otherwise. 132 By ?on(resident Aliens or Forei:n Corporations. M 9n the case of a nonresident alien individual or a forei+n corporation, the losses deducti7le are those act'ally s'stained d'rin: the year incurred in 7usiness or trade conducted !ithin the Philippines, . . . <2 1;(phasis supplied2 !ection /. of the "hilippine 9nco(e Ta) e+ulations 1 evenue e+ulation #o. 2, as a(ended2 is even (ore e)plicit and detailed, !ec. /.. 4hen char:es are ded'cti5le. M ;ach *earKs return, so far as practica7le, 7oth as to +ross inco(e and deductions therefro( should 7e co(plete in itself, and ta)pa*ers are e)pected to (a6e ever* reasona7le effort to ascertain the facts necessar* to (a6e a correct return. 0he e1penses, lia7ilities, or deficit of one year cannot 5e 'sed to red'ce the income of a s'5se<'ent year. A ta)pa*er has the ri+ht to deduct all authoriFed allowances and it follows that if he does not !ithin any year ded'ct certain of his e1penses, losses, interests, ta)es, or other char+es, he can not ded'ct them from the income of the ne1t or any s'cceedin: year. . . . ))) ))) )))

. . . . 9f su7se=uent to its occurrence, however, a ta)pa*er first ascertains the a(ount of a loss sustained durin+ a prior ta)a7le *ear !hich has not 5een ded'cted from :ross income, he (a* render an amended ret'rn for s'ch precedin: ta1a5le year includin+ such a(ount of loss in the deduction fro( +ross inco(e and (a* in proper cases file a claim for ref'nd of the e1cess paid 5y reason of the fail're to ded'ct s'ch loss in the ori:inal ret'rn . A loss fro( theft or e(7eFFle(ent occurrin+ in one *ear and discovered in another is ordinaril* deducti7le for the *ear in which sustained. 1;(phases supplied2 9t is thus clear that under our law, and outside the special real( of 3-9-re+istered enterprises, there is no such thin+ as a carr*-over of net operatin+ loss. To the contrar*, losses m'st 5e ded'cted a+ainst current inco(e in the ta1a5le year !hen s'ch losses !ere inc'rred. 0oreover, such losses (a* 7e char+ed off only a:ainst income earned in the same ta1a5le year !hen the losses !ere inc'rred. Thus it is that .A. #o. '1&. introduced the carr*-over of net operatin+ losses as a %ery special incenti%e to 7e +ranted onl* to re+istered pioneer enterprises and onl* with respect to their re+istered operations. The statutor* purpose here (a* 7e seen to 7e the encoura+e(ent of the esta7lish(ent and continued operation of pioneer industries 7* allowin+ the re+istered enterprise to accu(ulate its operatin+ losses which (a* 7e e)pected durin+ the earl* *ears of the enterprise and to per(it the enterprise to offset such losses a+ainst inco(e earned 7* it in later *ears after successful esta7lish(ent and re+ular operations. To pro(ote its econo(ic develop(ent +oals, the epu7lic fore+oes or defers ta)in+ the inco(e of the pioneer enterprise until after that enterprise has recovered or offset its earlier losses. 8e consider that the statutor* purpose can 7e served onl* if the accu(ulated operatin+ losses are carried over and char+ed off a+ainst inco(e su7se=uentl* earned and accu(ulated 5y the same enterprise en:a:ed in the same re:istered operations. 9n the instant case, to allow the deduction clai(ed 7* "icop would 7e to per(it one corporation or enterprise, "icop, to 7enefit fro( the operatin+ losses accu(ulated 7* another corporation or enterprise, ""0. ""0 far fro( 7enefitin+ fro( the ta) incentive +ranted 7* the 3-9 statute, in fact +ave up the stru++le and went out of e)istence and its for(er stoc6holders ?oined the (uch lar+er +roup of "icopKs stoc6holders. To +rant "icopKs clai(ed deduction would 7e to per(it "icop to shelter its otherwise ta)a7le inco(e 1an o7?ective which "icop had fro( the ver* 7e+innin+2 which had not 7een earned 7* the re+istered enterprise which had suffered the accu(ulated losses. 9n effect, to +rant "icopKs clai(ed deduction would 7e to per(it "icop to purchase a ta) deduction and ""0 to peddle its accu(ulated operatin+ losses. @nder the CTA and Court of Appeals decisions, "icop would 7enefit 7* i((uniFin+ "$$,1%.,10..00 of its inco(e fro( ta)ation thereof althou+h "icop had not run the ris6s and incurred the losses which had 7een encountered and suffered 7* ""0. Conversel*, the inco(e that would 7e shielded fro( ta)ation is not inco(e that was, after (uch effort, eventuall* +enerated 7* the sa(e re+istered operations which earlier had sustained losses. 8e consider and so hold that there is nothin+ in !ection / 1c2 of .A. #o. '1&. which either re=uires or per(its such a result. 9ndeed, that result (a6es non-sense of the le+islative purpose which (a* 7e seen clearl* to 7e pro?ected 7* !ection / 1c2, .A. #o. '1&.. The CTA and the Court of Appeals allowed the offsettin+ of ""0Ks accu(ulated operatin+ losses a+ainst "icopKs 1%// +ross inco(e, 7asicall* 7ecause towards the end of the ta)a7le *ear 1%//, upon the arrival of the effective date of (er+er, onl* one 112 corporation, "icop, re(ained. The losses suffered 7* ""0Ks re+istered operations and the +ross inco(e +enerated 7* "icopKs

own re+istered operations now ca(e under one and the sa(e corporate roof. 8e consider that this circu(stance relates (uch (ore to for( than to su7stance. 8e do not 7elieve that that sin+le purel* technical factor is enou+h to authoriFe and ?ustif* the deduction clai(ed 7* "icop. "icopKs clai( for deduction is not onl* 7ereft of statutor* 7asis> it does violence to the le+islative intent which ani(ates the ta) incentive +ranted 7* !ection / 1c2 of .A. #o. '1&.. 9n +rantin+ the e)traordinar* privile+e and incentive of a net operatin+ loss carr*-over to 3-9-re+istered pioneer enterprises, the le+islature could not have intended to re=uire the epu7lic to fore+o ta) revenues in order to 7enefit a corporation which had run no ris6s and suffered no losses, 7ut had (erel* purchased anotherKs losses. 3oth the CTA and the Court of Appeals appeared (uch i(pressed not onl* with corporate technicalities 7ut also with the @.!. ta) law on this (atter. 9t should suffice, however, si(pl* to note that in @.!. ta) law, the availa7ilit* to co(panies +enerall* of operatin+ loss carr*-overs and of operatin+ loss carr*-7ac6s is e1pressly pro%ided and re:'lated in :reat detail 5y stat'te. << 9n our ?urisdiction, save for !ection / 1c2 of .A. #o. '1&., no statute reco+niFes or per(its loss carr*-overs and loss carr*-7ac6s. 9ndeed, as alread* noted, our ta) law e)pressl* re?ects the ver* notion of loss carr*-overs and carr*-7ac6s. 8e conclude that the deduction clai(ed 7* "icop in the a(ount of "$$,1%.,10..00 in its 1%// 9nco(e Ta) eturn (ust 7e disallowed. 132 4hether Picop is entitled to ded'ct a:ainst c'rrent income certain claimed financial :'arantee e1penses. 9n its 9nco(e Ta) eturn for 1%//, "icop also clai(ed a deduction in the a(ount of "1,23/,$21.00 as financial +uarantee e)penses. This deduction is said to relate to chattel and real estate (ort+a+es re=uired fro( "icop 7* the "hilippine #ational 3an6 14"#342 and D3" as +uarantors of loans incurred 7* "icop fro( forei+n creditors. Accordin+ to "icop, the clai(ed deduction represents re+istration fees and other e)penses incidental to re+istration of (ort+a+es in favor of D3" and "#3. 9n support of this clai(ed deduction, "icop alle+edl* showed its own vouchers to 39 ;)a(iners to prove dis7urse(ents to the e+ister of Deeds of Tanda+, !uri+ao del !ur, of particular a(ounts. 9n the proceedin+s 7efore the CTA, however, "icop did not su7(it in evidence such vouchers and instead presented one of its e(plo*ees to testif* that the a(ount clai(ed had 7een dis7ursed for the re+istration of chattel and real estate (ort+a+es. The C9 disallowed this clai(ed deduction upon the +round of insufficienc* of evidence. This disallowance was sustained 7* the CTA and the Court of Appeals. The CTA said, ?o records are a%aila5le to s'pport the a5o%ementioned e1penses . The vouchers (erel* showed that the a(ounts were paid to the e+ister of Deeds and si(pl* cash account. 4itho't the s'pportin: papers s'ch as the in%oices or official receipts of the Re:ister of 2eeds, these %o'chers standin: alone cannot pro%e that the payments made !ere for the accr'ed e1penses in <'estion. 0he 5est e%idence of payment is the official receipts iss'ed 5y the

Re:ister of 2eeds. The testi(on* of petitionerKs witness that the official receipts and cash vouchers were shown to the 3ureau of 9nternal evenue will not suffice if no records could 7e presented in court for proper (ar6in+ and identification. <4 ;(phasis supplied2 The Court of Appeals added, The (ere testi(on* of a witness for "9C-" and the cash vouchers do not suffice to esta7lish its clai( that re+istration fees were paid to the e+ister of Deeds for the re+istration of real estate and chattel (ort+a+es in favor of Develop(ent 3an6 of the "hilippines and the "hilippine #ational 3an6 as +uarantors of "9C-"Ks loans. The witness could ver* well have 7een (erel* repeatin+ what he was instructed to sa* re+ardless of the truth, while the cash vouchers, which we do not find on file, are not said to provide the necessar* details re+ardin+ the nature and purpose of the e)penses reflected therein. P&COP sho'ld ha%e presented, thro':h the :'arantors, its o!nerCs copy of the re:istered titles !ith the lien inscri5ed thereon as !ell as an official receipt from the Re:ister of 2eeds e%idencin: payment of the re:istration fee. <7 1;(phasis supplied2 8e (ust support the CTA and the Court of Appeals in their fore+oin+ rulin+s. A ta)pa*er has the 7urden of provin+ entitle(ent to a clai(ed deduction. <6 9n the instant case, even "icopKs own vouchers were not su7(itted in evidence and the 39 ;)a(iners denied that such vouchers and other docu(ents had 7een e)hi7ited to the(. 0oreover, cash vouchers can onl* confir( the fact of dis7urse(ent 7ut not necessaril* the purpose thereof. <7 The 7est evidence that "icop should have presented to support its clai(ed deduction were the invoices and official receipts issued 7* the e+ister of Deeds. "icop not onl* failed to present such docu(ents> it also failed to e)plain the loss thereof, assu(in+ the* had e)isted 7efore. <8 @nder the 7est evidence rule, <8 therefore, the testi(on* of "icopKs e(plo*ee was inad(issi7le and was in an* case entitled to ver* little, if an*, credence. 8e consider that entitle(ent to "icopKs clai(ed deduction of "1,23/,$21.00 was not ade=uatel* shown and that such deduction (ust 7e disallowed. 999 112 4hether Picop had 'nderstated its sales and o%erstated its cost of sales for 13**. 9n its assess(ent for deficienc* inco(e ta) for 1%//, the C9 clai(ed that "icop had understated its sales 7* "2,3%1,.$$.00 and, upon the other hand, overstated its cost of sales 7* ".0$,01&.00. Thereupon, the C9 added 7ac6 7oth su(s to "icopKs net inco(e fi+ure per its own return. The 1%// 9nco(e Ta) eturn of "icop set forth the followin+ fi+ures, !ales 1per "icopKs 9nco(e Ta) eturn2,

"aper " '3/,.'.,/1%.00 Ti(7er " 2.3,1'&,132.00 MMMMMMM Total !ales " &00,&1$,&'1.00 NNNNNNNNNNNN @pon the other hand, "icopKs 3oo6s of Accounts reflected hi+her sales fi+ures, !ales 1per "icopKs 3oo6s of Accounts2, "aper " '3/,.'.,/1%.00 Ti(7er " 2.','$%,//..00 MMMMMMM Total !ales " &03,20.,$%'.00 NNNNNNNNNNNN The a7ove fi+ures thus show a discrepanc* 7etween the sales fi+ures reflected in "icopKs 3oo6s of Accounts and the sales fi+ures reported in its 1%// 9nco(e Ta) eturn, a(ountin+ to, "2,3%1,.$$.00. The C9 also contended that "icopKs cost of sales set out in its 1%// 9nco(e Ta) eturn, when co(pared with the cost fi+ures in its 3oo6s of Accounts, was overstated, Cost of !ales 1per 9nco(e Ta) eturn2 ".0/,2$.,0&$.00 Cost of !ales 1per 3oo6s of Accounts2 ".0.,.$2,0...00 MMMMMMM Discrepanc* " .0$,01&.00 NNNNNNNNNNNN "icop did not den* the e)istence of the a7ove noted discrepancies. 9n the proceedin+s 7efore the CTA, "icop presented one of its officials to e)plain the fore+oin+ discrepancies. That e)planation is perhaps 7est presented in "icopKs own words as set forth in its 0e(orandu( 7efore this Court,

. . . that the ad?ust(ent discussed in the testi(on* of the witness, represent the 7est and (ost o7?ective (ethod of deter(inin+ in pesos the a(ount of the correct and actual e)port sales durin+ the *ear. 9t was this correct and actual e)port sales and costs of sales that were reflected in the inco(e ta) return and in the audited financial state(ents. These corrections did not result in realiFation of inco(e and should not +ive rise to an* deficienc* ta). ))) ))) ))) 8hat are the facts of this case on this (atterL 8h* were ad?ust(ents necessar* at the *ear-endL 3ecause of "9C-"Ks procedure of recordin+ its e)port sales 1rec6oned in @.!. dollars2 on the 7asis of a fi)ed rate, da* to da* and (onth to (onth, re+ardless of the actual e)chan+e rate and without waitin+ when the actual proceeds are received. 9n other words, "9C-" recorded its e)port sales at a pre-deter(ined fi)ed e)chan+e rate. That pre-deter(ined rate was decided upon at the 7e+innin+ of the *ear and continued to 7e used throu+hout the *ear. At the end of the *ear, the e)ternal auditors (ade an e)a(ination. 9n that e)a(ination, the auditors deter(ined with accurac* the actual dollar proceeds of the e)port sales received. 8hat e)chan+e rate was used 7* the auditors to convert these actual dollar proceeds into "hilippine pesosL The* used the avera+e of the differences 7etween 1a2 the recorded fi)ed e)chan+e rate and 172 the e)chan+e rate at the ti(e the proceeds were actuall* received. 9t was this rate at ti(e of receipt of the proceeds that deter(ined the a(ount of pesos credited 7* the Central 3an6 1throu+h the a+ent 7an6s2 in favor of "9C-". These accu(ulated differences were avera+ed 7* the e)ternal auditors and this was what was used at the *ear-end for inco(e ta) and other +overn(ent-report purposes. 1T.s.n., -ct. 1/O&', pp. 20-2'2 40 The a7ove e)planation, unfortunatel*, at least to the (ind of the Court, raises (ore =uestions than it resolves. Cirstl*, the e)planation assu(es that all of "icopKs sales were e)port sales for which @.!. dollars 1or other forei+n e)chan+e2 were received. 9t also assu(es that the e)penses su((ed up as 4cost of sales4 were all dollar e)penses and that no peso e)penses had 7een incurred. "icopKs e)planation further assu(es that a su7stantial part of "icopKs dollar proceeds for its e)port sales were not actuall* surrendered to the do(estic 7an6in+ s*ste( and seasona7l* converted into pesos> had all such dollar proceeds 7een converted into pesos, then the peso fi+ures could have 7een si(pl* added up to reflect the actual peso value of "icopKs e)port sales. "icop offered no evidence in respect of these assu(ptions, no e)planation wh* and how a 4predeter(ined fi)ed e)chan+e rate4 was chosen at the 7e+innin+ of the *ear and (aintained throu+hout. "erhaps (ore i(portantl*, "icop was una7le to e)plain wh* its 3oo6s of Accounts did not pic6 up the sa(e ad?ust(ents that "icopKs ;)ternal Auditors were alle+ed to have (ade for purposes of "icopKs 9nco(e Ta) eturn. "icop atte(pted to e)plain awa* the failure of its 3oo6s of Accounts to reflect the sa(e ad?ust(ents 1no correctin+ entries, apparentl*2 si(pl* 7* =uotin+ a passa+e fro( a case where this Court refused to ascri7e (uch pro7ative value to the 3oo6s of Accounts of a corporate ta)pa*er in a ta) case. 41 8hat appears to have eluded "icop, however, is that its 3oo6s of Accounts, which are 6ept 7* its own e(plo*ees and are prepared under its control and supervision, reflect what (a* 7e dee(ed to 7e ad(issions a+ainst interest

in the instant case. Cor "icopKs 3oo6s of Accounts precisel* show hi:her sales fi+ures and lo!er cost of sales fi+ures than "icopKs 9nco(e Ta) eturn. 9t is insisted 7* "icop that its AuditorsK ad?ust(ents si(pl* present the 47est and (ost o7?ective4 (ethod of reflectin+ in pesos the 4correct and AC0DAB e)port sales4 42 and that the ad?ust(ents or 4corrections4 4did not result in realiFation of QadditionalR inco(e and should not +ive rise to an* deficienc* ta).4 The correctness of this contention is not self-evident. !o far as the record of this case shows, "icop did not su7(it in evidence the a++re+ate a(ount of its @.!. dollar proceeds of its e)port sales> neither did it show the "hilippine pesos it had actuall* received or 7een credited for such @.!. dollar proceeds. 9t is clear to this Court that the testi(onial evidence su7(itted 7* "icop fell far short of de(onstratin+ the correctness of its e)planation. @pon the other hand, the C9 has (ade out at least a prima facie case that "icop had understated its sales and overstated its cost of sales as set out in its 9nco(e Ta) eturn. Cor the C9 has a ri+ht to assu(e that "icopKs 3oo6s of Accounts spea6 the truth in this case since, as alread* noted, the* e(7od* what (ust appear to 7e ad(issions a+ainst "icopKs own interest. Accordin+l*, we (ust affir( the findin+s of the Court of Appeals and the CTA. 122 4hether Picop is lia5le for the corporate de%elopment ta1 of fi%e percent 6.78 of its income for 13**. The five percent 1'A2 corporate develop(ent ta) is an additional corporate inco(e ta) i(posed in !ection 2$ 1e2 of the 1%// Ta) Code which reads in relevant part as follows, 1e2 Corporate de%elopment ta1. M 9n addition to the ta) i(posed in su7section 1a2 of this section, an additional ta) in an a(ount e=uivalent to ' per cent of the sa(e ta)a7le net inco(e shall 7e paid 7* a do(estic or a resident forei+n corporation> Pro%ided, That this additional ta) shall 7e i(posed onl* if the net inco(e e)ceeds 10 per cent of the net worth, in case of a do(estic corporation, or net assets in the "hilippines in case of a resident forei+n corporation, . . . . The additional corporate inco(e ta) i(posed in this su7section shall 7e collected and paid at the sa(e ti(e and in the sa(e (anner as the ta) i(posed in su7section 1a2 of this section. !ince this five percent 1'A2 corporate develop(ent ta) is an income ta), "icop is not e)e(pted fro( it under the provisions of !ection & 1a2 of .A. #o. '1&.. Cor purposes of deter(inin+ whether the net inco(e of a corporation e)ceeds ten percent 110A2 of its net worth, the ter( 4net worth4 (eans the stoc6holdersK e=uit* represented 7* the e)cess of the total assets over lia7ilities as reflected in the corporationKs 7alance sheet provided such 7alance sheet has 7een prepared in accordance with +enerall* accepted accountin+ principles e(plo*ed in 6eepin+ the 7oo6s of the corporation. 4<

The ad?usted net inco(e of "icop for 1%//, as will 7e seen 7elow, is "$&,.&/,3''.00. 9ts net worth fi+ure or total stoc6holdersK e=uit* as reflected in its Audited Cinancial !tate(ents for 1%// is "$.$,/$%,'2&.00. !ince its ad?usted net inco(e for 1%// thus e)ceeded ten percent 110A2 of its net worth, "icop (ust 7e held lia7le for the five percent 1'A2 corporate develop(ent ta) in the a(ount of "2,$3$,3././'. ecapitulatin+, we hold, 112 "icop is lia7le for the thirt*-five percent 13'A2 transaction ta) in the a(ount of "3,'/&,'$3.'1. 122 "icop is not lia7le for interest and surchar+e on unpaid transaction ta). 132 "icop is e)e(pt fro( pa*(ent of docu(entar* and science sta(p ta)es in the a(ount of "300,000.00 and the co(pro(ise penalt* of "300.00. 1$2 "icop is entitled to its clai(ed deduction of "$2,&$0,131.00 for interest pa*(ents on loans for, a(on+ other thin+s, the purchase of (achiner* and e=uip(ent. 1'2 "icopKs clai(ed deduction in the a(ount of "$$,1%.,10..00 for the operatin+ losses previousl* incurred 7* ""0, is disallowed for lac6 of (erit. 1.2 "icopKs clai(ed deduction for certain financial +uarantee e)penses in the a(ount "1,23/,$21.00 is disallowed for failure ade=uatel* to prove such e)penses. 1/2 "icop has understated its sales 7* "2,3%1,.$$.00 and overstated its cost of sales 7* ".0$,01&.00, for 1%//. 1&2 "icop is lia7le for the corporate develop(ent ta) of five percent 1'A2 of its ad?usted net inco(e for 1%// in the a(ount of "2,$3$,3././'. Considerin+ conclusions nos. $, ', ., / and &, the Court is co(pelled to hold "icop lia7le for deficienc* inco(e ta) for the *ear 1%// co(puted as follows, 2eficiency &ncome 0a1 #et 9nco(e "er eturn " 2'&,1...00 Add, @nallowa7le Deductions 112 Deduction of net operatin+ losses incurred 7* ""0 " $$,1%.,10..00

122 @ne)plained financial +uarantee e)penses " 1,23/,$21.00 132 @nderstate(ent of !ales " 2,3%1,.$$.00 1$2 -verstate(ent of Cost of !ales " .0$,01&.00 MMMMMM Total " $&,$2%,1&%.00 MMMMMM #et 9nco(e as Ad?usted " $&,.&/,3''.00 NNNNNNNNNNN 9nco(e Ta) Due Thereon 44 " 1/,030,'/$.00 :ess, Ta) Alread* Assessed per eturn &0,3'&.00 MMMMMM Deficienc* 9nco(e Ta) " 1.,'.0,21..00 Add, Cive percent 1'A2 Corporate Develop(ent Ta) " 2,$3$,3./.00 Total Deficienc* 9nco(e Ta) " 1&,%%$,'&3.00 NNNNNNNNNNN Add, Cive percent 1'A2 surchar+e 47 " %$%,/2%.1' MMMMMM

Total Deficienc* 9nco(e Ta) with surchar+e " 1%,%$$,312.1' Add, Courteen percent 11$A2 interest fro( 1' April 1%/& to 1$ April 1%&1 46 " &,3/.,.10.&0 Courteen percent 11$A2 interest fro( 21 April 1%&3 to 20 April 1%&. 47 " 11,&%$,/&/.00 MMMMMM Total Deficienc* 9nco(e Ta) Due and "a*a7le " $0,21',/0%.00 NNNNNNNNNNN 8B; ;C- ;, for all the fore+oin+, the Decision of the Court of Appeals is here7* 0-D9C9;D and "icop is here7* - D; ;D to pa* the C9 the a++re+ate a(ount of "$3,/%$,2'2.'1 ite(iFed as follows, 112 Thirt*-five percent 13'A2 transaction ta) " 3,'/&,'$3.'1 122 Total Deficienc* 9nco(e Ta) Due $0,21',/0%.00 MMMMMMM A++re+ate A(ount Due and "a*a7le " $3,/%$,2'2.'1 NNNNNNNNNNNN

#o pronounce(ent as to costs. G.R. No. 127708 9)l1 18, 2000

CHINA =AN>ING CORPORATION, petitioner, vs. CO!RT OF APPEALS, COMMISSIONER OF INTERNAL RE EN!E &+4 CO!RT OF TAX APPEALS, respondents. D;C9!9-# IT!G, J.: The Co((issioner of 9nternal evenue denied the deduction fro( +ross inco(e of 4securities 7eco(in+ worthless4 clai(ed 7* China 3an6in+ Corporation 14C3C42. The Co((issioner5s disallowance was sustained 7* the Court of Ta) Appeals 14CTA42. 8hen the rulin+ was appealed to the Court of Appeals 14CA42, the appellate court upheld the CTA. The case is now 7efore us on a "etition for eview on Certiorari. !o(eti(e in 1%&0, petitioner China 3an6in+ Corporation (ade a '3A e=uit* invest(ent in the Cirst C3C Capital 1Asia2 :td., a Bon+6on+ su7sidiar* en+a+ed in financin+ and invest(ent with 4deposit-ta6in+4 function. The invest(ent a(ounted to "1.,22/,&'1.&0, consistin+ of 10.,000 shares with a par <alue of "100 per share. 9n the course of the re+ular e)a(ination of the financial 7oo6s and invest(ent portfolios of petitioner conducted 7* Ban:9o Sentral in 1%&., it was shown that Cirst C3C Capital 1Asia2, :td., has 7eco(e insolvent. 8ith the approval of Ban:9o Sentral, petitioner wrote-off as 7ein+ worthless its invest(ent in Cirst C3C Capital 1Asia2, :td., in its 1%&/ 9nco(e Ta) eturn and treated it as a 7ad de7t or as an ordinar* loss deducti7le fro( its +ross inco(e. espondent Co((issioner of internal evenue disallowed the deduction and assessed petitioner for inco(e ta) deficienc* in the a(ount of "&,'33,32&.0$, inclusive of surchar+e, interest and co(pro(ise penalt*. The disallowance of the deduction was (ade on the +round that the invest(ent should not 7e classified as 7ein+ 4worthless4 and that, althou+h the Bon+6on+ 3an6in+ Co((issioner had revo6ed the license of Cirst C3C Capital as a 4deposit-tapin+4 co(pan*, the latter could still e)ercise, however, its financin+ and invest(ent activities. Assu(in+ that the securities had indeed 7eco(e worthless, respondent Co((issioner of 9nternal evenue held the view that the* should then 7e classified as 4capital loss,4 and not as a 7ad de7t e)pense there 7ein+ no inde7tedness to spea6 of 7etween petitioner and its su7sidiar*. "etitioner contested the rulin+ of respondent Co((issioner 7efore the CTA. The ta) court sustained the Co((issioner, holdin+ that the securities had not indeed 7eco(e worthless and ordered petitioner to pa* its deficienc* inco(e ta) for 1%&/ of "&,'33,32&.0$ plus 20A interest per annu( until full* paid. 8hen the decision was appealed to the Court of Appeals, the latter upheld the CTA. 9n its instant petition for review on certiorari, petitioner 7an6 assails the CA decision. The petition (ust fail.

The clai( of petitioner that the shares of stoc6 in =uestion have 7eco(e worthless is 7ased on a "rofit and :oss Account for the Gear-;nd 31 Dece(7er 1%&/, and the reco((endation of Ban:9o Sentral that the e=uit* invest(ent 7e written-off due to the insolvenc* of the su7sidiar*. 8hile the (atter (a* not 7e indu7ita7le 1considerin+ that certain classes of intan+i7les, li6e franchises and +oodwill, are not alwa*s +iven correspondin+ values in financial state(ents 1 , there (a* reall* 7e no need, however, to +o of len+th into this issue since, even to assu(e the worthlessness of the shares, the deducti7ilit* thereof would still 7e nil in this particular case. At all events, the Court is not prepared to hold that 7oth the ta) court and the appellate court are utterl* devoid of su7stantial 7asis for their own factual findin+s. !u7?ect to certain e)ceptions, such as the co(pensation inco(e of individuals and passive inco(e su7?ect to final ta), as well as inco(e of non-resident aliens and forei+n corporations not en+a+ed in trade or 7usiness in the "hilippines, the ta) on inco(e is i(posed on the net inco(e allowin+ certain specified deductions fro( +ross inco(e to 7e clai(ed 7* the ta)pa*er. A(on+ the deducti7le ite(s allowed 7* the #ational 9nternal evenue Code 14#9 C42 are 2&4 4-2(/ and lo//-/.2 An e=uit* invest(ent is a '&pi(&l, not ordinar*, &//-( of the investor the sale or e)chan+e of which results in either a capital +ain or a capital loss. The +ain or the loss is or4i+&r1 ?3-+ the propert* sold or e)chan+ed is +o( a capital asset.3 A capital asset is defined ne+ativel* in !ection 33112 of the #9 C> %i=E 112 Capital assets. - The ter( Kcapital assetsK (eans propert* held 7* the ta)pa*er 1whether or not connected with his trade or 7usiness2, 7ut does not include stoc6 in trade of the ta)pa*er or other propert* of a 6ind which would properl* 7e included in the inventor* of the ta)pa*er if on hand at the close of the ta)a7le *ear, or propert* held 7* the ta)pa*er pri(aril* for sale to custo(ers in the ordinar* course of his trade or 7usiness, or propert* used in the trade or 7usiness, of a character which is su7?ect to the allowance for depreciation provided in su7section 1f2 of section twent*-nine> or real propert* used in the trade or 7usiness of the ta)pa*er.4 Thus, shares of stoc6> li6e the other securities defined in !ection 201t2 $ of the #9 C, would 7e or4i+&r1 &//-(/ onl* to a 4-&l-r i+ /-')ri(i-/ or & p-r/o+ -+,&,-4 i+ (3- p)r'3&/- &+4 /&lo@, or &+ &'(i5- (r&4-r :@or 3i/ o?+ &''o)+(; i+, /-')ri(i-/. !ection 201u2 of the #9 C defines a dealer in securities thus, 41u2 The ter( Kdealer in securitiesK (eans a (erchant of stoc6s or securities, whether an individual, partnership or corporation, with an esta7lished place of 7usiness, re+ularl* en+a+ed in the purchase of securities and their resale to custo(ers> that is, one who as a (erchant 7u*s securities and sells the( to custo(ers with a view to the +ains and profits that (a* 7e derived therefro(.4 9n the hands, however, of another who holds the shares of stoc6 7* wa* of an invest(ent, the shares to hi( would 7e '&pi(&l &//-(/. 8hen the /3&r-/ 3-l4 21 /)'3 i+5-/(or 2-'o*?or(3l-//, (3- lo// i/ 4--*-4 (o 2- & lo// @ro* (3- /&l- or -.'3&+,- o@ '&pi(&l &//-(/ . !ection 2%1d21$2132 of the #9 C states, 4132 !ecurities 7eco(in+ worthless. - 9f securities as defined in !ection 20 7eco(e worthless durin+ the ta)4 *ear and are capital assets, the loss resultin+ therefro( shall, for the purposes of

his Title, 7e considered as a loss fro( the sale or e)chan+e, on the last da* of such ta)a7le *ear, of capital assets.4 The a7ove provision conve*s that the loss sustained 7* the holder of the securities, which are capital assets 1to hi(2, is to 7e treated as a '&pi(&l lo// &/ i@ i+')rr-4 @ro* & /&l- or -.'3&+,(r&+/&'(io+. A capital +ain or a capital loss nor(all* re=uires the concurrence of two conditions for it to result, 112 There is a sale or e)chan+e> and 122 the thin+ sold or e)chan+ed is a capital asset. 8hen securities 7eco(e worthless, there is strictl* no sale or e)chan+e 7ut the law dee(s the loss an*wa* to 7e 4a loss fro( the sale or e)chan+e of capital assets.4 ' A si(ilar 6ind of treat(ent is +iven, 7* the #9 C on the retire(ent of certificates of inde7tedness with interest coupons or in re+istered for(, short sales and options to 7u* or sell propert* where no sale or e)chan+e strictl* e)ists.. 9n these cases, the #9 C dispenses, in effect, with the standard re=uire(ent of a sale or e)chan+e for the application of the capital +ain and loss provisions of the code. C&pi(&l lo//-/ &r- &llo?-4 (o 2- 4-4)'(-4 o+l1 (o (3- -.(-+( o@ '&pi(&l ,&i+/, i.-., ,&i+/ 4-ri5-4 @ro* (3- /&l- or -.'3&+,- o@ '&pi(&l &//-(/, &+4 +o( @ro* &+1 o(3-r i+'o*- o@ (3(&.p&1-r. 9n the case at 7ar, Cirst C3C Capital 1Asia2, :td., the investee corporation, is a su7sidiar* corporation of petitioner 7an6 whose shares in said investee corporation are not intended for purchase or sale 7ut as an invest(ent. @n=uestiona7l* then, an* loss therefro( would 7e a capital loss, not an ordinar* loss, to the investor. !ection 2%1d21$21A2, of the #9 C e)presses, 41A2 :i(itations. - :osses fro( sales or e)chan+es of capital assets shall 7e allowed onl* to the e)tent provided in !ection 33.4 The pertinent provisions of !ection 33 of the #9 C referred to in the aforesaid !ection 2%1d21$2 1A2, read, 4!ection 33. Capital +ains and losses. 4) ) ) ))) )))

credit nor(all* dealt with in the usual lendin+ operations of a financial institution. ;=uit* holdin+s cannot co(e close to 7ein+, within the purview of 4 -5i4-+'- o@ i+4-2(-4+-//4 under the second sentence of the afore=uoted para+raph. <eril*, it is for a li6e thesis that the loss of petitioner 7an6 in its -A)i(1 i+ 5-/(*-+( i+ (3- Ho+,Bo+, /)2/i4i&r1 cannot also 7e deducti7le as a 7ad de7t. The shares of stoc6 in =uestion do not constitute a loan e)tended 7* it to its su7sidiar* 1Cirst C3C Capital2 or a de7t su7?ect to o7li+ator* repa*(ent 7* the latter, essential ele(ents to constitute a 7ad de7t, 7ut a lon+ ter( invest(ent (ade 7* C3C. -ne other ite(. !ection 3$1c2112 of the #9 C , states that the entire a(ount of the +ain or loss upon the sale or e)chan+e of propert*, as the case may 7e, shall 7e r-'o,+iC-4. The co(plete te)t reads, 4!;CT9-# 3$. Deter(ination of a(ount of and reco+nition of +ain or loss.41a2 Co(putation of +ain or loss. - The +ain fro( the sale or other disposition of propert* shall 7e the e)cess of the a(ount realiFed therefro( over the 7asis or ad?usted 7asis for deter(inin+ +ain and the loss shall 7e the e)cess of the 7asis or ad?usted 7asis for deter(inin+ loss over the a(ount realiFed. The a(ount realiFed fro( the sale or other disposition of propert* shall 7e to su( of (one* received plus the fair (ar6et value of the propert* 1other than (one*2 received. 1As a(ended 7* ;.-. #o. 3/2 4172 3asis for deter(inin+ +ain or loss fro( sale or disposition of propert*. - The 7asis of propert* shall 7e - 112 The cost thereof in cases of propert* ac=uired on or 7efore 0arch 1, 1%13, if such propert* was ac=uired 7* purchase> or 4122 The fair (ar6et price or value as of the date of ac=uisition if the sa(e was ac=uired 7* inheritance> or 4132 9f the propert* was ac=uired 7* +ift the 7asis shall 7e the sa(e as if it would 7e in the hands of the donor or the last precedin+ owner 7* who( it was not ac=uired 7* +ift, e)cept that if such 7asis is +reater than the fair (ar6et value of the propert* at the ti(e of the +ift, then for the purpose of deter(inin+ loss the 7asis shall 7e such fair (ar6et value> or 41$2 9f the propert*, other than capital asset referred to in !ection 21 1e2, was ac=uired for less than an ade=uate consideration in (one* or (one*s worth, the 7asis of such propert* is 1i2 the a(ount paid 7* the transferee for the propert* or 1ii2 the transferorKs ad?usted 7asis at the ti(e of the transfer whichever is +reater. 41'2 The 7asis as defined in para+raph 1c2 1'2 of this section if the propert* was ac=uired in a transaction where +ain or loss is not reco+niFed under para+raph 1c2 122 of this section. 1As a(ended 7* ;.-. #o. 3/2 41c2 ;)chan+e of propert*.

41c2 :i(itation on capital losses. - Lo//-/ @ro* /&l-/ or -.'3&+,- o@ '&pi(&l &//-(/ /3&ll 2&llo?-4 o+l1 (o (3- -.(-+( o@ (3- ,&i+/ @ro* /)'3 /&l-/ or -.'3&+,-/. 9f a 7an6 or trust co(pan* incorporated under the laws of the "hilippines, a su7stantial part of whose 7usiness is the receipt of deposits, sells an* 7ond, de7enture, note, or certificate or o(3-r -5i4-+'- o@ i+4-2(-4+-// issued 7* an* corporation 1includin+ one issued 7* a +overn(ent or political su7division thereof2, ?i(3 i+(-r-/( 'o)po+/ or i+ r-,i/(-r-4 @or*, an* loss resultin+ fro( such sale shall not 7e su7?ect to the fore+oin+ li(itation an shall not 7e included in deter(inin+ the applica7ilit* of such li(itation to other losses.4 The e)clusionar* clause found in the fore+oin+ te)t of the law does not include all for(s of securities 7ut specificall* covers onl* 2o+4/, 4-2-+()r-/, +o(-/, '-r(i@i'&(-/ or o(3-r -5i4-+'o@ i+4-2(-4+-//, ?i(3 i+(-r-/( 'o)po+/ or i+ r-,i/(-r-4 @or*, which are the instru(ents of

4112 General rule.- ;)cept as herein provided, upon the sale or e)chan+e of propert*, the entire a(ount of the +ain or loss, as the case (a* 7e, shall 7e reco+niFed. 4122 ;)ception. - #o +ain or loss shall 7e reco+niFed if in pursuance of a plan of (er+er or consolidation 1a2 a corporation which is a part* to a (er+er or consolidation e)chan+es propert* solel* for stoc6 in a corporation which is, a part* to the (er+er or consolidation, 172 a shareholder e)chan+es stoc6 in a corporation which is a part* to the (er+er or consolidation solel* for the stoc6 in another corporation also a part* to the (er+er or consolidation, or 1c2 a securit* holder of a corporation which is a part* to the (er+er or consolidation e)chan+es his securities in such corporation solel* for stoc6 or securities in another corporation, a part* to the (er+er or consolidation. 4#o +ain or loss shall also 7e reco+niFed if propert* is transferred to a corporation 7* a person in e)chan+e for stoc6 in such corporation of which as a result of such e)chan+e said person, alone or to+ether with others, not e)ceedin+ four persons, +ains control of said corporation, "rovided, That stoc6s issued for services shall not 7e considered as issued in return of propert*.4 The a7ove law should 7e ta6en within conte)t on the +eneral su7?ect of the deter(ination, and reco+nition of +ain or loss> it is not preclusive of, let alone renders co(pletel* inconse=uential, the (ore specific provisions of the code. Thus, pursuant, to the sa(e section of the law, no such reco+nition shall 7e (ade if the sale or e)chan+e is (ade in pursuance of a plan of corporate (er+er or consolidation or, if as a result of an e)chan+e of propert* for stoc6s, the e)chan+er, alone or to+ether with others not e)ceedin+ four, +ains control of the corporation. / Then, too, how the resultin+ +ain (i+ht 7e ta)ed, or whether or not the loss would 7e deducti7le and how, are (atters properl* dealt with elsewhere in various other sections of the #9 C. & At all events, it (a* not 7e a(iss to once a+ain stress that the 7asic rule is still that an* '&pi(&l lo// '&+ 24-4)'(-4 o+l1 @ro* '&pi(&l ,&i+/ under !ection 331c2 of the #9 C. 9n su( 1a2 The e=uit* invest(ent in shares of stoc6 held 7* C3C of appro)i(atel* '3A in its Bon+6on+ su7sidiar*, the Cirst C3C Capital 1Asia2, :td., is not an inde7tedness, and it is a '&pi(&l, not an ordinar*, &//-(.%1F!phi1 172 Assu(in+ that the e=uit* invest(ent of C3C has indeed 7eco(e 4worthless,4 the loss /)/(&i+-4 i/ & '&pi(&l, not an ordinar*, lo//.10 1c2 The capital loss sustained 7* C3C can onl* 7e deducted fro( capital +ains if an* derived 7* it durin+ the sa(e ta)a7le *ear that the securities have 7eco(e 4worthless.411 6HEREFORE, the "etition is D;#9;D. The decision of the Court of Appeals disallowin+ the clai(ed deduction of "1.,22/,&'1.&0 is ACC9 0;D. G.R. No. 102867 F-2r)&r1 10, 2000

=I=IANO . =ADAS, 9R., petitioner, vs. CO!RT OF APPEALS, AE!ILINO T. LARIN, RO"OLFO T!AFON AN" PROCOPIO TALON, respondents. E!IS!M=ING, J.: Cor review is the Decision of the Court of Appeals in CA-C. . C< #o. 1/2'1 pro(ul+ated on #ove(7er 2%, 1%%1. 9t affir(ed in toto the ?ud+(ent of the e+ional Trial Court 1 TC2, 3ranch 3%, 0anila, in Civil Case #o. &2-1210/. !aid ?ud+(ent disposed as follows, C- A:: TB; C- ;G-9#G C-#!9D; AT9-#!, this Court here7* renders ?ud+(ent D9!09!!9#G the co(plaint a+ainst all the defendants and orderin+ plaintiff Qherein petitionerR to pa* defendant :arin the a(ount of "200,000.00 1Two Bundred Thousand "esos2 as actual and co(pensator* da(a+es> "200,000.00 as (oral da(a+es> and "'0,000.00 as e)e(plar* da(a+es and attorne*s fees of "100,000.00. 1 The facts, which we find supported 7* the records, have 7een su((ariFed 7* the Court of Appeals as follows, -n Ce7ruar* 20, 1%/., petitioner, 3i7iano <. 3aIas Jr. sold to A*ala 9nvest(ent Corporation 1AGA:A2, 12&,2.' s=uare (eters of land located at 3a*anan, 0untinlupa, for two (illion, three hundred ei+ht thousand, seven hundred sevent* 1"2,30&,//0.002 pesos. The Deed of !ale provided that upon the si+nin+ of the contract AGA:A shall pa* four hundred si)t*-one thousand, seven hundred fift*-four 1"$.1,/'$.002 pesos. The 7alance of one (illion, ei+ht hundred fort*-seven thousand and si)teen 1"1,&$/,01..002 pesos was to 7e paid in four e=ual consecutive annual install(ents, with twelve 112A2 percent interest per ann'm on the outstandin+ 7alance. AGA:A issued one pro(issor* note coverin+ four e=ual annual install(ents. ;ach periodic pa*(ent of "$.1,/'$.00 pesos shall 7e pa*a7le startin+ on Ce7ruar* 20, 1%//, and ever* *ear thereafter, or until Ce7ruar* 20, 1%&0. The sa(e da*, petitioner discounted the pro(issor* note with AGA:A, for its face value of "1,&$/,01..00, evidenced 7* a Deed of Assi+n(ent si+ned 7* the petitioner and AGA:A. AGA:A issued nine 1%2 chec6s to petitioner, all dated Ce7ruar* 20, 1%/., drawn a+ainst 3an6 of the "hilippine 9slands with the unifor( a(ount of two hundred five thousand, two hundred twent*-four 1"20',22$.002 pesos. 9n his 1%/. 9nco(e Ta) eturn, petitioner reported the "$.1,/'$ initial pa*(ent as inco(e fro( disposition of capital asset.2

!ellin+ "rice of :and :ess 9nitial "a*(ent @nrealiFed Gain

"2,30&,//0.00 $.1,/'$.00 "1,&$/,01..00

3

1%/. Declaration of 9nco(e on Disposition of Capital Asset su7?ect to Ta),

9nitial "a*(ent :ess, Cost of land and other incidental ;)penses 9nco(e 9nco(e su7?ect to ta) 1"3&',20.. 10 ) '0A2

"$.1,/'$.00 1 /.,'$/.%02 "3&',20..10 "1%2,.03..'

3ulletin Toda* entitled, 43-face "1-0 ta) evasion raps.4 All news ite(s (entioned petitionerKs false inco(e ta) return concernin+ the sale of land to AGA:A. -n Jul* 2, 1%&1, petitioner filed an A(nest* Ta) eturn under ".D. 1/$0 and paid the a(ount of fort*-one thousand, seven hundred twent*-nine pesos and ei+ht*-one centavos 1"$1,/2%.&12. -n #ove(7er 2, 1%&1, petitioner a+ain filed an A(nest* Ta) eturn under ".D. 1&$0 and paid an additional a(ount of one thousand, five hundred twent*-five pesos and si)t*-two centavos 1"1,'2'..22. 9n 7oth, petitioner did not reco+niFe that his sale of land to AGA:A was on cash 7asis. eactin+ to the co(plaint for ta) evasion and the news reports, petitioner filed with the TC of 0anila an action. for da(a+es a+ainst respondents :arin, TuaFon and Talon for e)tortion and (alicious pu7lication of the 39 Ks ta) audit report. Be clai(ed that the filin+ of cri(inal co(plaints a+ainst hi( for violation of ta) laws were i(proper 7ecause he had alread* availed of two ta) a(nest* decrees, "residential Decree #os. 1/$0 and 1&$0. The trial court decided in favor of the respondents and awarded :arin da(a+es, as alread* stated. "etitioner seasona7l* appealed to the Court of Appeals. 9n its decision of #ove(7er 2%, 1%%1, the respondent court affir(ed the trial courtKs decision, thus, The findin+ of the co'rt a <'o that plaintiff-appellantKs actions a+ainst defendantappellee :arin were unwarranted and 7aseless and as a result thereof, defendantappellee :arin was su7?ected to unnecessar* an)iet* and hu(iliation is therefore supported 7* the evidence on record.1F!phi1.nGt Defendant-appellee :arin acted onl* in pursuance of the authorit* +ranted to hi(. 9n fact, the cri(inal char+es filed a+ainst hi( in the Tanod7a*an and in the Cit* CiscalKs -ffice were all dis(issed. 8B; ;C- ;, the appealed ?ud+(ent is here7* ACC9 0;D in toto./ Bence this petition, wherein petitioner raises 7efore us the followin+ =ueries, 9. 8B;TB; TB; C-@ T -C A"";A:! ; ;D 9# 9T! 9#T; " ;TAT9-# -C "; T9#;#T TAP :A8!, TB@! 9T CA9:;D T- A"" ;C9AT; TB; C- ;CT#;!! A#D ACC@ ACG -C ";T9T9-#; K! ;T@ # -C TB; 9#C-0; D; 9<;D C -0 TB; !A:; -C TB; :A#D T- AGA:A. 99. 8B;TB; TB; ;!"-#D;#T C-@ T ; ;D 9# #-T C9#D9#G TBAT TB; ; 8A! A# A::;G;D ATT;0"T T- ;PT- T Q0-#;G C -0R ";T9T9-#; 3G " 9<AT; ;!"-#D;#T!. 999. 8B;TB; TB; ;!"-#D;#T C-@ T ; ;D 9# 9T! 9#T; " ;TAT9-# -C " ;!9D;#T9A: D;C ;; #-!. 1/$0 A#D 1&$0, A0-#G -TB; !, ";T9T9-#; K! 900@#9TG C -0 C 909#A: " -!;C@T9-#. 9<. 8B;TB; TB; ;!"-#D;#T C-@ T ; ;D 9# 9T! 9#T; " ;TAT9-# -C 8;::-;!TA3:9!B;D D-CT 9#;! -C TB9! B-#- A3:; C-@ T A!

9n the succeedin+ *ears, until 1%/%, petitioner reported a unifor( inco(e of two hundred thirt* thousand, ei+ht hundred sevent*-seven 1"230,&//.002 pesos$ as +ain fro( sale of capital asset. 9n his 1%&0 inco(e ta) a(nest* return, petitioner also reported the sa(e a(ount of "230,&//.00 as the realiFed +ain on disposition of capital asset for the *ear. -n April 11, 1%/&, then evenue Director 0auro Cala+uio authoriFed ta) e)a(iners, odolfo TuaFon and "rocopio Talon to e)a(ine the 7oo6s and records of petitioner for the *ear 1%/.. The* discovered that petitioner had no outstandin+ receiva7le fro( the 1%/. land sale to AGA:A and concluded that the sale was cash and the entire profit should have 7een ta)a7le in 1%/. since the inco(e was wholl* derived in 1%/.. TuaFon and Talon filed their audit report and declared a discrepanc* of two (illion, ninet*-five thousand, nine hundred fifteen 1"2,0%',%1'.002 pesos in petitionerKs 1%/. net inco(e. The* reco((ended deficienc* ta) assess(ent for two (illion, four hundred sevent*-three thousand, si) hundred sevent*-three 1"2,$/3,./3.002 pesos. 0eanti(e, A=uilino :arin succeeded Cala+uio as e+ional Director of 0anila e+ion 9<-A. After reviewin+ the e)a(inersK report, :arin directed the revision of the audit report, with instruction to consider the land as capital asset. The ta) due was onl* fift* 1'0A2 percent of the total +ain fro( sale of the propert* held 7* the ta)pa*er 7e*ond twelve (onths pursuant to !ection 3$' of the 1%// #ational 9nternal evenue Code 1#9 C2. The deficienc* ta) assess(ent was reduced to nine hundred thirt* si) thousand, five hundred ninet*-ei+ht pesos and fift* centavos 1"%3.,'%&.'02, inclusive of surchar+es and penalties for the *ear 1%/.. -n June 2/, 1%&0, respondent :arin sent a letter to petitioner infor(in+ of the inco(e ta) deficienc* that (ust 7e settled hi( i((ediatel*. -n !epte(7er 2., 1%&0, petitioner ac6nowled+ed receipt of the letter 7ut insisted that the sale of his land to AGA:A was on install(ent. -n June &, 1%&1, the (atter was endorsed to the Actin+ Chief of the :e+al 3ranch of the #ational -ffice of the 39 . The Chief of the Ta) Craud @nit reco((ended the prosecution of a cri(inal case for conspirin+ to file false and fraudulent returns, in violation of !ection '1 of the Ta) Code a+ainst petitioner and his accountants, Andres ". Ale?andre and Conrado 3aIas. -n June 1/, 1%&1, :arin filed a cri(inal co(plaint for ta) evasion a+ainst the petitioner. -n Jul* 1, 1%&1, news ite(s appeared in the now defunct ;venin+ ;)press with the headline, 439 Char+es ealtor4 and another in the defunct ;venin+ "ost with a news ite(, 439 raps ealtor, 2 accountants.4 Another news ite( also appeared in the Jul* 2, 1%&1, issue of the

;GA D! TB; A8A D -C ACT@A:, 0- A: A#D ;P;0":A G DA0AG;! 9# CA<- -C ;!"-#D;#T :A 9#. 9n essence, petitioner as6s the Court to resolve seriatim the followin+ issues, 1. 8hether respondent court erred in rulin+ that there was no e)tortion atte(pt 7* 39 officials> 2. 8hether respondent court erred in holdin+ that ".D. 1/$0 and 1&$0 +rantin+ ta) a(nesties did not +rant i((unit* fro( ta) suits> 3. 8hether respondent court erred in findin+ that petitionerKs inco(e fro( the sale of land in 1%/. should 7e declared as a cash transaction in his ta) return for the sa(e *ear 17ecause the 7u*er discounted the pro(issor* note issued to the seller on future install(ent pa*(ents of the sale, on the sa(e da* of the sale2> $. 8hether respondent court erred and co((itted +rave a7use of discretion in awardin+ da(a+es to respondent :arin. The first issue, on whether the Court of Appeals erred in findin+ that there was no e)tortion, involves a deter(ination of fact. The Court of Appeals o7served, The onl* evidence to esta7lish the alle+ed e)tortion atte(pt 7* defendants-appellees is the plaintiff-appellantKs self servin+ declarations. As found 7* the court a <'o, 4said atte(pt was 6nown to plaintiff-appellantKs son-inlaw and counsel on record, *et, said counsel did not ta6e the witness stand to corro7orate the testi(on* of plaintiff.4& As repeatedl* held, findin+s of fact 7* the Court of Appeals especiall* if the* affir( factual findin+s of the trial court will not 7e distur7ed 7* this Court, unless these findin+s are not supported 7* evidence.% !i(ilarl*, neither should we distur7 a findin+ of the trial court and appellate court that an alle+ation is not supported 7* evidence on record. Thus, we a+ree with the conclusion of respondent court that herein private respondents, on the 7asis of evidence, could not 7e held lia7le for e)tortion. -n the second issue of whether ".D. #os. 1/$0 and 1&$0 which +ranted ta) a(nesties also +ranted i((unit* fro( cri(inal prosecution a+ainst ta) offenses, the pertinent sections of these laws state, ".D. #o. 1/$0. C-#D-#9#G ";#A:T9;! C- C; TA9# <9-:AT9-#! -C TB; 9#C-0; TAP :A8 @"-# <-:@#TA G D9!C:-!@ ; -C @#D;C:A ;D 9#C-0; C- 9#C-0; TAP "@ "-!;! A#D ;S@9 9#G "; 9-D9C !@309!!9-# -C #;T 8- TB !TAT;0;#T. ))) ))) )))

!ec. 1. Aol'ntary 2isclos're of Correct 0a1a5le &ncome. M An* individual who, for an* or all of the ta)a7le *ears 1%/$ to 1%/%, had failed to file a return is here7*, allowed to file a return for each of the aforesaid ta)a7le *ears and accuratel* declare therein the true and correct inco(e, deductions and e)e(ptions and pa* the inco(e ta) due per return. :i6ewise, an* individual who filed a false or fraudulent return for an* ta)a7le *ear in the period (entioned a7ove (a* a(end his return and pa* the correct a(ount of ta) due after deductin+ the ta)es alread* paid, if an*, in the ori+inal declaration. 1e(phasis ours2 ))) ))) )))

!ec. '. &mm'nity from Penalties. M An* individual who voluntaril* files a return under this Decree and pa*s the inco(e ta) due thereon shall 7e i((une fro( the penalties, civil or cri(inal, under the #ational 9nternal evenue Code arisin+ fro( failure to pa* the correct inco(e ta) with respect to the ta)a7le *ears fro( which an a(ended return was filed or for which an ori+inal return was filed in cases where no return has 7een filed for an* of the ta)a7le *ears 1%/$ to 1%/%, Pro%ided, ho!e%er, That these i((unities shall not appl* in cases where the a(ount of net ta)a7le inco(e declared under this Decree is understated to the e)tent of 2'A or (ore of the correct net ta)a7le inco(e. 1e(phasis ours2 ".D. #-. 1&$0 M G A#T9#G A TAP A0#;!TG -# @#TAP;D 9#C-0; A#DO- 8;A:TB ;A #;D - ACS@9 ;D D@ 9#G TB; TAPA3:; G;A ! 1%/$ T- 1%&0 A#D ;S@9 9#G TB; C9:9#G -C TB; !TAT;0;#T -C A!!;T!, :9A39:9T9;!, A#D #;T 8- TB. !ec. 1. Co%era:e. M 9n case of voluntar* disclosure of previousl* unta)ed inco(e andOor wealth such as earnin+s, receipts, +ifts, 7e=uests or an* other ac=uisition fro( an* source whatsoever, realiFed here or a7road, 7* an* individual ta)pa*er, which are ta)a7le under the #ational 9nternal evenue Code, as a(ended, the assess(ent and collection of all internal revenue ta)es, includin+ the incre(ents or penalties on account of non-pa*(ent, as well as all civil, cri(inal or ad(inistrative lia7ilities arisin+ fro( or incident thereto under the #ational 9nternal evenue Code, are here7* condoned provided that the individual ta)pa*er shall pa*. 1e(phasis ours2 . . . !ec. 2. Conditions for &mm'nity. M The i((unit* +ranted under !ection one of this Decree shall appl* onl* under the followin+ conditions, a2 !uch previousl* unta)ed inco(e andOor wealth (ust have 7een earned or realiFed in an* of the *ears 1%/$ to 1%&0> 72 The ta)pa*er (ust file an a(nest* return on or 7efore #ove(7er 30, 1%&1, and full* pa* the ta) due thereon> c2 The a(nest* ta) paid 7* the ta)pa*er under this Decree shall not 7e less than "1,000.00 per ta)a7le *ear> and d2 The ta)pa*er (ust file a state(ent of assets, lia7ilities and net worth as of Dece(7er 31, 1%&0, as re=uired under !ection . hereof. 1e(phasis ours2

9t will 7e recalled that petitioner entered into a deed of sale purportedl* on install(ent. -n the sa(e da*, he discounted the pro(issor* note coverin+ the future install(ents. The discountin+ see(s =uestiona7le 7ecause ordinaril*, when a 7ill is discounted, the lender 1 e.:. 7an6s, financial institution2 char+es or deducts a certain percenta+e fro( the principal value as its co(pensation. Bere, the discountin+ was done 7* the 7u*er. -n Jul* 2, 1%&1, two wee6s after the filin+ of the ta) evasion co(plaint a+ainst hi( 7* respondent :arin on June 1/, 1%&1, petitioner availed of the ta) a(nest* under ".D. #o. 1/$0. Bis a(ended ta) return for the *ears 1%/$ - 1%/% was filed with the 39 office of <alenFuela, 3ulacan, instead of 0anila where the petitionerKs principal office was located. Be a+ain availed of the ta) a(nest* under ".D. #o. 1&$0. Bis disclosure, however, did not include the inco(e fro( his sale of land to AGA:A on cash 7asis. 9nstead he insisted that such sale was on install(ent. Be did not a(end his inco(e ta) return. Be did not pa* the ta) which was considera7l* increased 7* the inco(e derived fro( the discountin+. Be did not (eet the twin re=uire(ents of ".D. 1/$0 and 1&$0, declaration of his unta)ed inco(e and full pa*(ent of ta) due thereon. Clearl*, the petitioner is not entitled to the 7enefits of ".D. #os. 1/$0 and 1&$0. The (ere filin+ of ta) a(nest* return under ".D. 1/$0 and 1&$0 does not ipso facto shield hi( fro( i((unit* a+ainst prosecution. Ta) a(nest* is a +eneral pardon to ta)pa*ers who want to start a clean ta) slate. 9t also +ives the +overn(ent a chance to collect uncollected ta) fro( ta) evaders without havin+ to +o throu+h the tedious process of a ta) case. To avail of a ta) a(nest* +ranted 7* the +overn(ent, and to 7e i((une fro( suit on its delin=uencies, the ta) pa*er (ust have voluntaril* disclosed his previousl* unta)ed inco(e and (ust have paid the correspondin+ ta) on such previousl* unta)ed inco(e. 10 9t also 7ears notin+ that a ta) a(nest*, (uch li6e a ta) e)e(ption, is never favored nor presu(ed in law and if +ranted 7* statute, the ter(s of the a(nest* li6e that of a ta) e)e(ption (ust 7e construed strictl* a+ainst the ta)pa*er and li7erall* in favor of the ta)in+ authorit*. 11 Bence, on this (atter, it is our view that petitionerKs clai( of i((unit* fro( prosecution under the shield of availin+ ta) a(nest* is untena7le. -n the third issue, petitioner asserts that his sale of the land to AGA:A was not on cash 7asis 7ut on install(ent as clearl* specified in the Deed of !ale which states, That for and in consideration of the su( of T8- 09::9-# TB ;; B@#D ;D ;9GBT TB-@!A#D !;<;# B@#D ;D !;<;#TG 1"2,30&,//0.002 ";!-! "hilippine Currenc*, to 7e paid as follows, 1. "$.1,/'$.00, upon the si+nin+ of the Deed of !ale> and, 2. The 7alance of "1,&$/,01..00, to 7e paid in four 1$2 e=ual, consecutive, annual install(ents with interest thereon at the rate of twelve percent 112A2 per ann'm, 7e+innin+ on Ce7ruar* 20, 1%/., said install(ents to 7e evidenced 7* four 1$2 ne+otia7le pro(issor* notes.12 "etitioner resorts to !ection $3 of the #9 C and !ec. 1/' of evenue e+ulation #o. 2 to support his clai(. !ec. $3 of the 1%// #9 C states, 9nstall(ent 7asis. M 1a2 Dealers in personal propert*. M . . .

172 Sales of realty and cas'al sales of personalty M 9n the case 112 of a casual sale or other casual disposition of personal propert* 1other than propert* of a 6ind which would properl* 7e included in the inventor* of the ta)pa*er if on hand at the close of the ta)a7le *ear2, for a price e)ceedin+ one thousand pesos, or 122 of a sale or other disposition of real propert* if in either case the initial pa*(ents do not e)ceed twent*five percent'm of the sellin+ price, the inco(e (a*, under re+ulations prescri7ed 7* the 0inister of Cinance, 7e returned on the 7asis and in the (anner a7ove prescri7ed in this section. As used in this section the ter( 4initial pa*(ent4 (eans the pa*(ents received in cash or propert* other than evidences of inde7tedness of the purchaser durin+ the ta)a7le period in which the sale or other disposition is (ade. . . . 1e(phasis ours2 evenue e+ulation #o. 2, !ection 1/' provides, Sale of real property in%ol%in: deferred payments. M @nder section $3 deferredpa*(ent sales of real propert* include 112 a+ree(ents of purchase and sale which conte(plate that a conve*ance is not to 7e (ade at the outset, 7ut onl* after all or a su7stantial portion of the sellin+ price has 7een paid, and 172 sales in which there is an i((ediate transfer of title, the vendor 7ein+ protected 7* a (ort+a+e or other lien as to deferred pa*(ents. !uch sales either under 1a2 or 172, fall into two classes when considered with respect to the ter(s of sale, as follows, 112 !ales of propert* on the install(ent plan, that is, sales in which the pa*(ents received in cash or propert* other than evidences of inde7tedness of the purchaser durin+ the ta)a7le *ear in which the sale is (ade do not e)ceed 2' per cent of the sellin+ price> 122 Deferred-pa*(ent sales not on the install(ent plan, that is sales in which the pa*(ents received in cash or propert* other than evidences of inde7tedness of the purchaser durin+ the ta)a7le *ear in which the sale is (ade e)ceed 2' per cent of the sellin+ price> 9n the sale of (ort+a+ed propert* the a(ount of the (ort+a+e, whether the propert* is (erel* ta6en su7?ect to the (ort+a+e or whether the (ort+a+e is assu(ed 7* the purchaser, shall 7e included as a part of the 4sellin+ price4 7ut the a(ount of the (ort+a+e, to the e)tent it does not e)ceed the 7asis to the vendor of the propert* sold, shall not 7e considered as a part of the 4initial pa*(ents4 or of the 4total contract price,4 as those ter(s are used in section $3 of the Code, in sections 1/$ and 1/. of these re+ulations, and in this section. The ter( 4initial pa*(ents4 does not include a(ounts received 7* the vendor in the *ear of sale fro( the disposition to a third person of notes +iven 7* the vendee as part of the purchase price which are due and pa*a7le in su7se=uent *ears. Co((issions and other sellin+ e)penses paid or incurred 7* the vendor are not to 7e deducted or ta6en into account in deter(inin+ the a(ount of the 4initial pa*(ents,4 the 4total contract price,4 or the 4sellin+ price.4 The ter( 4initial pa*(ents4 conte(plates at least one other pa*(ent in addition to the initial pa*(ent. 9f the entire purchase price is to 7e paid in a lu(p su( in a later *ear, there 7ein+ no pa*(ent durin+ the *ear, the inco(e (a* not 7e returned on the install(ent 7asis. 9nco(e (a* not 7e returned on the install(ent 7asis where no pa*(ent in cash or propert*, other than evidences of inde7tedness of the purchaser, is received durin+

the first *ear, the purchaser havin+ pro(ised to (a6e two or (ore pa*(ents, in later *ears. "etitioner asserts that !ec. $3 allows hi( to return as inco(e in the ta)a7le *ears involved, the respective install(ents as provided 7* the deed of sale 7etween hi( and AGA:A. Conse=uentl*, he reli+iousl* reported his *earl* inco(e fro( sale of capital asset, su7?ect to ta), as follows, Gear 1%// 1'0A of "$.1,/'$2 "230,&//.00 1%/& 1%/% 1%&0 230,&//.00 230,&//.00 230,&//.00

Althou+h the proceed of a discounted pro(issor* note is not considered part of the initial pa*(ent, it is still ta)a7le inco(e for the *ear it was converted into cash. The su7se=uent pa*(ents or li=uidation of certificates of inde7tedness is reported usin+ the install(ent (ethod in co(putin+ the proportionate inco(e1. to 7e returned, durin+ the respective *ear it was realiFed. #on-dealer sales of real or personal propert* (a* 7e reported as inco(e under the install(ent (ethod provided that the o7li+ation is still outstandin+ at the close of that *ear. 9f the seller disposes the entire install(ent o7li+ation 7* discountin+ the 7ill or the pro(issor* note, he necessaril* (ust report the 7alance of the inco(e fro( the discountin+ not onl* inco(e fro( the initial install(ent pa*(ent. 8here an install(ent o7li+ation is discounted at a 7an6 or finance co(pan*, a ta)a7le disposition results, even if the seller +uarantees its pa*(ent, continues to collect on the install(ent o7li+ation, or handles repossession of (erchandise in case of default. 1/ This rule prevails in the @nited !tates.1& !ince our inco(e ta) laws are of A(erican ori+in, 1% interpretations 7* A(erican courts an our parallel ta) laws have persuasive effect on the interpretation of these laws.20 Thus, 7* analo+*, all the (ore would a ta)a7le disposition result when the discountin+ of the pro(issor* note is done 7* the seller hi(self. Clearl*, the inde7tedness of the 7u*er is dischar+ed, while the seller ac=uires (one* for the settle(ent of his receiva7les. :o+icall* then, the inco(e should 7e reported at the ti(e of the actual +ain. Cor inco(e ta) purposes, inco(e is an actual +ain or an actual increase of wealth. 21 Althou+h the proceeds of a discounted pro(issor* note is not considered initial pa*(ent, still it (ust 7e included as ta)a7le inco(e on the *ear it was converted to cash. 8hen petitioner had the pro(issor* notes coverin+ the succeedin+ install(ent pa*(ents of the land issued 7* AGA:A, discounted 7* AGA:A itself, on the sa(e da* of the sale, he lost entitle(ent to report the sale as a sale on install(ent since, a ta)a7le disposition resulted and petitioner was re=uired 7* law to report in his returns the inco(e derived fro( the discountin+. 8hat petitioner did is tanta(ount to an atte(pt to circu(vent the rule on pa*(ent of inco(e ta)es +ained fro( the sale of the land to AGA:A for the *ear 1%/.. :astl*, petitioner =uestions the da(a+es awarded to respondent :arin. An* person who see6s to 7e awarded actual or co(pensator* da(a+es due to acts of another has the 7urden of provin+ said da(a+es as well as the a(ount thereof. 22 :arin sa*s the e)tortion cases filed a+ainst hi( ha(pered his i((ediate pro(otion, caused hi( stron+ an)iet* and social hu(iliation. The trial court awarded hi( two hundred thousand 1"200,000,002 pesos as actual da(a+es. Bowever, the appellate court stated that, despite pendenc* of this case, :arin was +iven a pro(otion at the 39 . !aid respondent court, 8e find nothin+ on record, aside fro( defendant-appellee :arinKs state(ents 1T!#, pp. .-/, 11 Dece(7er 1%&'2, to show that he suffered loss of seniorit* that alle+edl* 7arred his pro(otion. 9n fact, he was pro(oted to his present position despite the pendenc* of the instant case 1T!#, pp. 3'-3%, 0$ #ove(7er 1%&'2.23 0oreover, the records of the case contain no state(ent whatsoever of the a(ount of the actual da(a+es sustained 7* the respondents. Actual da(a+es cannot 7e allowed unless supported 7* evidence on the record.2$ The court cannot rel* on speculation, con?ectures or +uesswor6 as to the fact and a(ount of da(a+es.2' To ?ustif* a +rant of actual or co(pensator* da(a+es, it is necessar* to prove with a reasona7le de+ree of certaint*, the actual a(ount of loss. 2. !ince we have no 7asis with which to assess, with certaint*, the actual or co(pensator* da(a+es counterclai(ed 7* respondent :arin, the award of such da(a+es should 7e deleted.

"etitioner sa*s that his ta) declarations are accepta7le (odes of pa*(ent under !ection 1/' of the evenue e+ulations 1 2 #o. 2. The ter( 4initial pa*(ent4, he ar+ues, does not include a(ounts received 7* the vendor which are part of the co(plete purchase price, still due and pa*a7le in su7se=uent *ears. Thus, the proceeds of the pro(issor* notes, not *et due which he discounted to AGA:A should not 7e included as inco(e realiFed in 1%/.. "etitioner states that the ori+inal a+ree(ent in the Deed of !ale should not 7e affected 7* the su7se=uent discountin+ of the 7ill. -n the other hand, respondents assert that ta)ation is a (atter of su7stance and not of for(. eturns are scrutiniFed to deter(ine if transactions are what the* are and not declared to evade ta)es. Considerin+ the pro+ressive nature of our inco(e ta)ation, when inco(e is spread over several install(ent pa*(ents throu+h the *ears, the ta)a7le inco(e +oes down and the ta) due correspondin+l* decreases. 8hen pa*(ent is in lu(p su( the ta) for the *ear proportionatel* increases. @lti(atel*, a declaration that a sale is on install(ent di(inishes +overn(ent ta)es for the *ear of initial install(ent as a+ainst a declaration of cash sale where ta)es to the +overn(ent is lar+er. As a +eneral rule, the whole profit accruin+ fro( a sale of propert* is ta)a7le as inco(e in the *ear the sale is (ade. 3ut, if not all of the sale price is received durin+ such *ear, and a statute provides that inco(e shall 7e ta)a7le in the *ear in which it is 4received,4 the profit fro( an install(ent sale is to 7e apportioned 7etween or a(on+ the *ears in which such install(ents are paid and received.13 !ec. $3 and !ec. 1/' sa*s that a(on+ the entities who (a* use the a7ove-(entioned install(ent (ethod is a seller of real propert* who disposes his propert* on install(ent, provided that the initial pa*(ent does not e)ceed 2'A of the sellin+ price. The* also state what (a* 7e re+arded as install(ent pa*(ent and what constitutes initial pa*(ent. 9nitial pa*(ent (eans the pa*(ent received in cash or propert* e)cludin+ evidences of inde7tedness due and pa*a7le in su7se=uent *ears, li6e pro(issor* notes or (ort+a+es, +iven of the purchaser durin+ the ta)a7le *ear of sale. 9nitial pa*(ent does not include a(ounts received 7* the vendor in the *ear of sale fro( the disposition to a third person of notes +iven 7* the vendee as part of the purchase price which are due and pa*a7le in su7se=uent *ears.1$ !uch disposition or discountin+ of receiva7le is (aterial onl* as to the co(putation of the initial pa*(ent. 9f the initial pa*(ent is within 2'A of total contract price, e)clusive of the proceeds of discounted notes, the sale =ualifies as an install(ent sale, otherwise it is a deferred sale.1'

0oral da(a+es (a* 7e recovered in cases involvin+ acts referred to in Article 21 2/ of the Civil Code.2& As a rule, a pu7lic official (a* not recover da(a+es for char+es of falsehood related to his official conduct unless he proves that the state(ent was (ade with actual (alice. 9n Ba5st, et. al. %s. ?ational &ntelli:ence Board, et. al., 132 !C A 31., 330 11%&$2, we reiterated the test for actual (alice as set forth in the land(ar6 A(erican case of ?e! Hor9 0imes %s. S'lli%an,2% which we have lon+ adopted, in defa(ation and li7el cases, %i=., . . . with 6nowled+e that it was false or with rec6less disre+ard of whether it was false or not. 8e appreciate petitionerKs clai( that he filed his 1%/. return in +ood faith and that he had honestl* 7elieved that the law allowed hi( to declare the sale of the land, in install(ent. 8e can further +rant that the pertinent ta) laws needed construction, as we have earlier done. That petitioner was offended 7* the headlines alludin+ to hi( as ta) evader is also full* understanda7le. All these, however, do not ?ustif* what a(ounted to a 7aseless prosecution of respondent :arin. "etitioner presented no evidence to prove :arin e)torted (one* fro( hi(. Be even ad(itted that he never (et nor tal6ed to respondent :arin. 8hen the ta) investi+ation a+ainst the petitioner started, :arin was not *et the e+ional Director of 39 e+ion 9<-A, 0anila. -n respondent :arinKs instruction, petitionerKs ta) assess(ent was considered one involvin+ a sale of capital asset, the inco(e fro( which was su7?ected to onl* fift* percent 1'0A2 assess(ent, thus reducin+ the ori+inal ta) assess(ent 7* half. These circu(stances (a* 7e ta6en to show that :arinKs involve(ent in e)tortion was not indu7ita7le. Get, petitioner went on to file the e)tortion cases a+ainst :arin in different fora. This is where actual (alice could attach on petitionerKs part. !i+nificantl*, the trial court did not err in dis(issin+ petitionerKs co(plaints, a rulin+ affir(ed 7* the Court of Appeals. Teepin+ all these in (ind, we are constrained to a+ree that there is sufficient 7asis for the award of (oral and e)e(plar* da(a+es in favor of respondent :arin. The appellate court 7elieved respondent :arin when he said he suffered an)iet* and hu(iliation 7ecause of the unfounded char+es a+ainst hi(. "etitionerKs actions a+ainst :arin were found 4unwarranted and 7aseless,4 and the cri(inal char+es filed a+ainst hi( in the Tanod7a*an and Cit* CiscalKs -ffice were all dis(issed.30 Bence, there is ade=uate support for respondent courtKs conclusion that (oral da(a+es have 7een proved. #ow, however, what would 7e a fair a(ount to 7e paid as co(pensation for (oral da(a+es also re=uires deter(ination. ;ach case (ust 7e +overned 7* its own peculiar circu(stances. 31 -n this score, 2el Rosario %s. Co'rt of Appeals,32 cites several cases where no actual da(a+es were ad?udicated, and where (oral and e)e(plar* da(a+es were reduced for 7ein+ 4too e)cessive,4 thus, 9n the case of P?B %. C.A., Q2'. !C A 30% 11%%.2R, this Court =uoted with approval the followin+ o7servation fro( RCP& %. Rodri:'e=, %i=, GG GG. #evertheless, we find the award of "100,000.00 as (oral da(a+es in favor of respondent odri+ueF e)cessive and unconsciona7le. 9n the case of Pr'denciado %. Alliance 0ransport System, &nc. 11$& !C A $$0 Q1%&/R2 we said, . . . Q9Rt is undisputed that the trial courts are +iven discretion to deter(ine the a(ount of (oral da(a+es 1Alcantara v. !urro, %3 "hil. $/22 and that the Court of Appeals can onl* (odif* or chan+e the a(ount awarded when the* are palpa7l* and scandalousl* e)cessive 4so as to

indicate that it was the result of passion, pre?udice or corruption on the part of the trial court4 1Gellada v. 8arner 3arnes E Co., 9nc., '/ -.G. Q$R /3$/, /3'&> !adie v. 3acharach 0otors Co., 9nc., '/ -.G. Q$R .3. and Adone v. 3acharach 0otor Co., 9nc., '/ -.G. .'.2. 3ut in (ore recent cases where the awards of (oral and e)e(plar* da(a+es are far too e)cessive co(pared to the actual loses sustained 7* the a++rieved part*, this Court ruled that the* should 7e reduced to (ore reasona7le a(ounts. . . . . 1;(phasis ours.2 9n other words, the (oral da(a+es awarded (ust 7e co((ensurate with the loss or in?ur* suffered. 9n the sa(e case 1"#3 v. CA2, this Court found the a(ount of e)e(plar* da(a+es re=uired to 7e paid 1"1,000,000,002 4too e)cessive4 and reduced it to an 4e=uita7le level4 1"2',000.002. 9t will 7e noted that in a7ove cases, the parties who were awarded (oral da(a+es were not pu7lic officials. Considerin+ that here, the award is in favor of a +overn(ent official in connection with his official function, it is with caution that we affir( +rantin+ (oral da(a+es, for it (i+ht open the flood+ates for +overn(ent officials counter-clai(in+ da(a+es in suits filed a+ainst the( in connection with their functions. 0oreover, we (ust 7e careful lest the a(ounts awarded (a6e citiFens hesitate to e)pose corruption in the +overn(ent, for fear of lawsuits fro( vindictive +overn(ent officials. Thus, confor(a7l* with our declaration that (oral da(a+es are not intended to enrich an*one,33 we here7* reduce the (oral da(a+es award in this case fro( two hundred thousand 1"200,000.002 pesos to sevent* five thousand 1"/',000.002 pesos, while the e)e(plar* da(a+e is set at "2',000.00 onl*. The law allows the award of attorne*Ks fees when e)e(plar* da(a+es are awarded, and when the part* to a suit was co(pelled to incur e)penses to protect his interest. 3$ Thou+h +overn(ent officers are usuall* represented 7* the !olicitor General in cases connected with the perfor(ance of official functions, considerin+ the nature of the char+es, herein respondent :arin was co(pelled to hire a private law*er for the conduct of his defense as well as the successful pursuit of his counterclai(s. 9n our view, +iven the circu(stances of this case, there is a(ple +round to award in his favor "'0,000,00 as reasona7le attorne*Ks fees. 8B; ;C- ;, the assailed decision of the Court of Appeals dated #ove(7er 2%, 1%%1, is here7* ACC9 0;D with 0-D9C9CAT9-# so that the award of actual da(a+es are deleted> and that petitioner is here7* - D; ;D to pa* to respondent :arin (oral da(a+es in the a(ount of "/',000.00, e)e(plar* da(a+es in the a(ount of "2',000.00, and attorne*Ks fees in the a(ount of "'0,000.00 onl*.1F!phi1.nGt #o pronounce(ent as to costs. G.R. No. 16<67< 9)l1 18, 2011

COMMISSIONER OF INTERNAL RE EN!E, "etitioner, vs. FILIN EST "E ELOPMENT CORPORATION, espondent. ) - - - - - - - - - - - - - - - - - - - - - - -)

G.R. No. 167688 COMMISSIONER OF INTERNAL RE EN!E, "etitioner, vs. FILIN EST "E ELOPMENT CORPORATION, espondent. D;C9!9-# PEREF, J.: Assailed in these twin petitions for review on certiorari filed pursuant to ule $' of the 1%%/ ules of Civil "rocedure are the decisions rendered 7* the Court of Appeals 1CA2 in the followin+ cases, 1a2 Decision dated 1. Dece(7er 2003 of the then !pecial Cifth Division in CAG. . !" #o. /2%%2>1 and, 172 Decision dated 2. Januar* 200' of the then Courteenth Division in CA-G. . !" #o. /$'10.2 The Cacts The owner of &0A of the outstandin+ shares of respondent Cilinvest Ala7an+, 9nc. 1CA92, respondent Cilinvest Develop(ent Corporation 1CDC2 is a holdin+ co(pan* which also owned ./.$2A of the outstandin+ shares of Cilinvest :and, 9nc. 1C:92. -n 2% #ove(7er 1%%., CDC and CA9 entered into a Deed of ;)chan+e with C:9 where7* the for(er 7oth transferred in favor of the latter parcels of land appraised at "$,30.,///,000.00. 9n e)chan+e for said parcels which were intended to facilitate develop(ent of (ediu(-rise residential and co((ercial 7uildin+s, $.3,0%$,301 shares of stoc6 of C:9 were issued to CDC and CA9.3 As a result of the e)chan+e, C:95s ownership structure was chan+ed to the e)tent reflected in the followin+ ta7ular prUcis, viF., #u(7er of Additional !hares 9ssued

upon the 10 Ce7ruar* 1%%/ re=uest for clarification filed 7* C:9, . the latter, to+ether with CDC and CA9, co(plied with all the re=uire(ents i(posed in the rulin+. / -n various dates durin+ the *ears 1%%. and 1%%/, in the (eanti(e, CDC also e)tended advances in favor of its affiliates, na(el*, CA9, C:9, Davao !u+ar Central Corporation 1D!CC2 and Cilinvest Capital, 9nc. 1CC92.& Dul* evidenced 7* instructional letters as well as cash and ?ournal vouchers, said cash advances a(ounted to "2,''/,213,%$2..0 in 1%%.% and "3,3.0,&&%,.//.$& in 1%%/.10 -n 1' #ove(7er 1%%., CDC also entered into a !hareholders5 A+ree(ent with eco Berrera "T; :td. 1 B":2 for the for(ation of a !in+apore-7ased ?oint venture co(pan* called Cilinvest Asia Corporation 1CAC2, tas6ed to develop and (ana+e CDC5s '0A ownership of its "3Co( -ffice Tower "ro?ect 1the "ro?ect2. 8ith their e=uit* participation in CAC respectivel* pe++ed at .0A and $0A in the !hareholders5 A+ree(ent, CDC su7scri7ed to "'00./ (illion worth of shares in said ?oint venture co(pan* to B":5s su7scription worth "$33.& (illion. Bavin+ paid its su7scription 7* e)ecutin+ a Deed of Assi+n(ent transferrin+ to CAC a portion of its ri+hts and interest in the "ro?ect worth "'00./ (illion, CDC eventuall* reported a net loss of "1%0,.%',0.1.00 in its Annual 9nco(e Ta) eturn for the ta)a7le *ear 1%%.. 11 -n 3 Januar* 2000, CDC received fro( the 39 a Cor(al #otice of De(and to pa* deficienc* inco(e and docu(entar* sta(p ta)es, plus interests and co(pro(ise penalties, 12 covered 7* the followin+ Assess(ent #otices, viF., 1a2 Assess(ent #otice #o. !"-9#C-%.-0001&-2000 for deficienc* inco(e ta)es in the su( of "1'0,0/$,0...2/ for 1%%.> 172 Assess(ent #otice #o. !"D!T-%.-00020-2000 for deficienc* docu(entar* sta(p ta)es in the su( of "10,$2',$&/.0. for 1%%.> 1c2 Assess(ent #otice #o. !"-9#C-%/-0001%-2000 for deficienc* inco(e ta)es in the su( of "',/1.,%2/.03 for 1%%/> and 1d2 Assess(ent #otice #o. !"-D!T-%/-00021-2000 for deficienc* docu(entar* sta(p ta)es in the su( of "',/%.,.%%.$0 for 1%%/.13 The fore+oin+ deficienc* ta)es were assessed on the ta)a7le +ain supposedl* realiFed 7* CDC fro( the Deed of ;)chan+e it e)ecuted with CA9 and C:9, on the dilution resultin+ fro( the !hareholders5 A+ree(ent CDC e)ecuted with B": as well as the 4ar(5s-len+th4 interest rate and docu(entar* sta(p ta)es i(posa7le on the advances CDC e)tended to its affiliates. 1$

-n 3 Januar* 2000, CA9 si(ilarl* received fro( the 39 a Cor(al :etter of De(and for #u(7er and "ercenta+e of !hares inco(e ta)es in the su( of "1,$//,$%$,.3&.23 for the *ear 1%%/.1' Covered 7* Beld After deficienc* the ;)chan+e Assess(ent #otice #o. !"-9#C-%/-002/-2000,1. said deficienc* ta) was also assessed on the ta)a7le +ain purportedl* realiFed 7* CA9 fro( the Deed of ;)chan+e it e)ecuted with CDC and CDC 2,'3/,3'&,000 ./.$2A $2,21/,000 2,'/%,'/',000 C:9.1/ -n 2. Januar* 2000 or within the re+le(entar* period of thirt* 1302 da*s fro( notice of the assess(ent, 7oth CDC and CA9 filed their respective re=uests for reconsiderationOprotest, on CA9 0 0 $20,&//,000 $20,&//,000 the +round that the deficienc* inco(e and docu(entar* sta(p ta)es assessed 7* the 39 were -TB; ! 1,22.,1//,000 32.'&A 0 1,22.,1//,000 7ereft of factual and le+al 7asis.1& Bavin+ su7(itted the relevant supportin+ docu(ents pursuant to the 31 Januar* 2000 directive fro( the 39 Appellate Division, CDC and CA9 filed on 11 3,/.3,'3',000 100A $.3,0%$,301 $,22.,.2%,000 !epte(7er 2000 a letter re=uestin+ an earl* resolution of their re=uest for reconsiderationOprotest on the +round that the 1&0 da*s prescri7ed for the resolution thereof under !ection 22& of the #9 C was +oin+ to e)pire on 20 !epte(7er 2000.1% -n 13 Januar* 1%%/, C:9 re=uested a rulin+ fro( the 3ureau of 9nternal evenue 139 2 to the effect that no +ain or loss should 7e reco+niFed in the aforesaid transfer of real properties. Actin+ 9n view of the failure of petitioner Co((issioner of 9nternal evenue 1C9 2 to resolve their on the re=uest, the 39 issued ulin+ #o. !-3$-0$.-%/ dated 3 Ce7ruar* 1%%/, findin+ that the re=uest for reconsiderationOprotest within the aforesaid period, CDC and CA9 filed on 1/ -cto7er e)chan+e is a(on+ those conte(plated under !ection 3$ 1c2 122 of the old #ational 9nternal 2000 a petition for review with the Court of Ta) Appeals 1CTA2 pursuant to !ection 22& of the evenue Code 1#9 C2$ which provides that 41n2o +ain or loss shall 7e reco+niFed if propert* is 1%%/ #9 C. Doc6eted 7efore said court as CTA Case #o. .1&2, the petition alle+ed, a(on+ transferred to a corporation 7* a person in e)chan+e for a stoc6 in such corporation of which as a other (atters, that as previousl* opined in 39 ulin+ #o. !-3$-0$.-%/, no ta)a7le +ain should result of such e)chan+e said person, alone or to+ether with others, not e)ceedin+ four 1$2 have 7een assessed fro( the su7?ect Deed of ;)chan+e since CDC and CA9 collectivel* +ained persons, +ains control of said corporation.4' 8ith the 39 5s reiteration of the fore+oin+ rulin+ further control of C:9 as a conse=uence of the e)chan+e> that correlative to the C9 Ks lac6 of !toc6holder #u(7er and "ercenta+e of !hares Beld "rior to the ;)chan+e

authorit* to i(pute theoretical interests on the cash advances CDC e)tended in favor of its affiliates, the rule is settled that interests cannot 7e de(anded in the a7sence of a stipulation to the effect> that not 7ein+ pro(issor* notes or certificates of o7li+ations, the instructional letters as well as the cash and ?ournal vouchers evidencin+ said cash advances were not su7?ect to docu(entar* sta(p ta)es> and, that no inco(e ta) (a* 7e i(posed on the prospective +ain fro( the supposed appreciation of CDCKs shareholdin+s in CAC. As a conse=uence, CDC and CAC 7oth pra*ed that the su7?ect assess(ents for deficienc* inco(e and docu(entar* sta(p ta)es for the *ears 1%%. and 1%%/ 7e cancelled and annulled. 20 -n $ Dece(7er 2000, the C9 filed its answer, clai(in+ that the transfer of propert* in =uestion should not 7e considered ta) free since, with the resultant di(inution of its shares in C:9, CDC did not +ain further control of said corporation. :i6ewise callin+ attention to the fact that the cash advances CDC e)tended to its affiliates were interest free despite the interest 7earin+ loans it o7tained fro( 7an6in+ institutions, the C9 invo6ed !ection $3 of the old #9 C which, as i(ple(ented 7* evenue e+ulations #o. 2, !ection 1/% 172 and 1c2, +ave hi( 4the power to allocate, distri7ute or apportion inco(e or deductions 7etween or a(on+ such or+aniFations, trades or 7usiness in order to prevent evasion of ta)es.4 The C9 ?ustified the i(position of docu(entar* sta(p ta)es on the instructional letters as well as cash and ?ournal vouchers for said cash advances on the stren+th of !ection 1&0 of the #9 C and evenue e+ulations #o. %-%$ which provide that loan transactions are su7?ect to said ta) irrespective of whether or not the* are evidenced 7* a for(al a+ree(ent or 7* (ere office (e(o. The C9 also ar+ued that CDC realiFed ta)a7le +ain arisin+ fro( the dilution of its shares in CAC as a result of its !hareholdersK A+ree(ent with B":.21 At the pre-trial conference, the parties filed a !tipulation of Cacts, Docu(ents and 9ssues 22 which was ad(itted in the 1. Ce7ruar* 2001 resolution issued 7* the CTA. 8ith the further ad(ission of the Cor(al -ffer of Docu(entar* ;vidence su7se=uentl* filed 7* CDC and CA9 23 and the conclusion of the testi(on* of !usana 0aca7elda anent the cash advances CDC e)tended in favor of its affiliates,2$ the CTA went on to render the Decision dated 10 !epte(7er 2002 which, with the e)ception of the deficienc* inco(e ta) on the interest inco(e CDC supposedl* realiFed fro( the advances it e)tended in favor of its affiliates, cancelled the rest of deficienc* inco(e and docu(entar* sta(p ta)es assessed a+ainst CDC and CA9 for the *ears 1%%. and 1%%/, 2' thus, 8B; ;C- ;, in view of all the fore+oin+, the court finds the instant petition partl* (eritorious. Accordin+l*, Assess(ent #otice #o. !"-9#C-%.-0001&-2000 i(posin+ deficienc* inco(e ta) on CDC for ta)a7le *ear 1%%., Assess(ent #otice #o. !"-D!T-%.-00020-2000 and !"-D!T-%/-00021-2000 i(posin+ deficienc* docu(entar* sta(p ta) on CDC for ta)a7le *ears 1%%. and 1%%/, respectivel* and Assess(ent #otice #o. !"-9#C-%/-002/-2000 i(posin+ deficienc* inco(e ta) on CA9 for the ta)a7le *ear 1%%/ are here7* CA#C;::;D and !;T A!9D;. Bowever, QCDCR is here7* - D; ;D to "AG the a(ount of "',.%1,%/2.03 as deficienc* inco(e ta) for ta)a7le *ear 1%%/. 9n addition, petitioner is also - D; ;D to "AG 20A delin=uenc* interest co(puted fro( Ce7ruar* 1., 2000 until full pa*(ent thereof pursuant to !ection 2$% 1c2 132 of the Ta) Code.2. Cindin+ that the collective increase of the e=uit* participation of CDC and CA9 in C:9 rendered the +ain derived fro( the e)chan+e ta)-free, the CTA also ruled that the increase in the value of CDCKs shares in CAC did not result in econo(ic advanta+e in the a7sence of actual sale or conversion thereof. 8hile li6ewise findin+ that the docu(ents evidencin+ the cash advances CDC e)tended to its affiliates cannot 7e considered as loan a+ree(ents that are su7?ect to docu(entar* sta(p ta), the CTA enunciated, however, that the C9 was ?ustified in assessin+

undeclared interests on the sa(e cash advances pursuant to his authorit* under !ection $3 of the #9 C in order to forestall ta) evasion. Cor persuasive effect, the CTA referred to the e=uivalent provision in the 9nternal evenue Code of the @nited !tates 19 C-@!2, i.e., !ec. $&2, as i(ple(ented 7* !ection 1.$&2-2 of 1%.'-1%.% e+ulations of the :aw of Cederal 9nco(e Ta)ation.2/ Dissatisfied with the fore+oin+ decision, CDC filed on ' #ove(7er 2002 the petition for review doc6eted 7efore the CA as CA-G. . #o. /2%%2, pursuant to ule $3 of the 1%%/ ules of Civil "rocedure. Callin+ attention to the fact that the cash advances it e)tended to its affiliates were interest-free in the a7sence of the e)press stipulation on interest re=uired under Article 1%'. of the Civil Code, CDC =uestioned the i(position of an ar(Ks-len+th interest rate thereon on the +round, a(on+ others, that the C9 Ks authorit* under !ection $3 of the #9 C, 1a2 does not include the power to i(pute i(a+inar* interest on said transactions> 172 is directed onl* a+ainst controlled ta)pa*ers and not a+ainst (other or holdin+ corporations> and, 1c2 can onl* 7e invo6ed in cases of understate(ent of ta)a7le net inco(e or evident ta) evasion. 2& @pholdin+ CDCKs position, the CAKs then !pecial Cifth Division rendered the herein assailed decision dated 1. Dece(7er 2003,2% the decretal portion of which states, 8B; ;C- ;, pre(ises considered, the instant petition is here7* G A#T;D. The assailed Decision dated !epte(7er 10, 2002 rendered 7* the Court of Ta) Appeals in CTA Case #o. .1&2 directin+ petitioner Cilinvest Develop(ent Corporation to pa* the a(ount of "',.%1,%/2.03 representin+ deficienc* inco(e ta) on alle+edl* undeclared interest inco(e for the ta)a7le *ear 1%%/, plus 20A delin=uenc* interest co(puted fro( Ce7ruar* 1., 2000 until full pa*(ent thereof is ;<; !;D and !;T A!9D; and, a new one entered annullin+ Assess(ent #otice #o. !"-9#C-%/-0001%-2000 i(posin+ deficienc* inco(e ta) on petitioner for ta)a7le *ear 1%%/. #o pronounce(ent as to costs.30 8ith the denial of its partial (otion for reconsideration of the sa(e 11 Dece(7er 2002 resolution issued 7* the CTA,31 the C9 also filed the petition for review doc6eted 7efore the CA as CA-G. . #o. /$'10. 9n essence, the C9 ar+ued that the CTA reversi7l* erred in cancellin+ the assess(ent notices, 1a2 for deficienc* inco(e ta)es on the e)chan+e of propert* 7etween CDC, CA9 and C:9> 172 for deficienc* docu(entar* sta(p ta)es on the docu(ents evidencin+ CDCKs cash advances to its affiliates> and 1c2 for deficienc* inco(e ta) on the +ain CDC purportedl* realiFed fro( the increase of the value of its shareholdin+s in CAC. 32 The fore+oin+ petition was, however, denied due course and dis(issed for lac6 of (erit in the herein assailed decision dated 2. Januar* 200'33 rendered 7* the CAKs then Courteenth Division, upon the followin+ findin+s and conclusions, to wit, 1. As affir(ed in the 3 Ce7ruar* 1%%/ 39 ulin+ #o. !-3$-0$.-%/, the 2% #ove(7er 1%%. Deed of ;)chan+e resulted in the co(7ined control 7* CDC and CA9 of (ore than '1A of the outstandin+ shares of C:9, hence, no ta)a7le +ain can 7e reco+niFed fro( the transaction under !ection 3$ 1c2 122 of the old #9 C> 2. The instructional letters as well as the cash and ?ournal vouchers evidencin+ the advances CDC e)tended to its affiliates are not su7?ect to docu(entar* sta(p ta)es pursuant to 39 ulin+ #o. 11.-%&, dated 30 Jul* 1%%&, since the* do not parta6e the nature of loan a+ree(ents> 3. Althou+h 39 ulin+ #o. 11.-%& had 7een su7se=uentl* (odified 7* 39 ulin+ #o. 10&-%%, dated 1' Jul* 1%%%, to the effect that docu(entar* sta(p ta)es are

i(posa7le on inter-office (e(os evidencin+ cash advances si(ilar to those e)tended 7* CDC, said latter rulin+ cannot 7e +iven retroactive application if to do so would 7e pre?udicial to the ta)pa*er> $. CDCKs alle+ed +ain fro( the increase of its shareholdin+s in CAC as a conse=uence of the !hareholdersK A+ree(ent it e)ecuted with B": cannot 7e considered ta)a7le inco(e since, until actuall* converted thru sale or disposition of said shares, the* (erel* represent unrealiFed increase in capital. 3$ espectivel* doc6eted 7efore this Court as G. . #os. 1.3.'3 and 1./.&%, the C9 Ks petitions for review on certiorari assailin+ the 1. Dece(7er 2003 decision in CA-G. . #o. /2%%2 and the 2. Januar* 200' decision in CA-G. . !" #o. /$'10 were consolidated pursuant to the 1 0arch 200. resolution issued 7* this Court5s Third Division. The 9ssues 9n G. . #o. 1.3.'3, the C9 ur+es the +rant of its petition on the followin+ +round, TB; C-@ T -C A"";A:! ; ;D 9# ;<; !9#G TB; D;C9!9-# -C TB; C-@ T -C TAP A"";A:! A#D 9# B-:D9#G TBAT TB; AD<A#C;! ;PT;#D;D 3G ;!"-#D;#T T- 9T! ACC9:9AT;! A ; #-T !@3J;CT T- 9#C-0; TAP. 3' 9n G. . #o. 1./.&%, on the other hand, petitioner proffers the followin+ issues for resolution, 9 TB; B-#- A3:; C-@ T -C A"";A:! C-009TT;D G A<; A3@!; -C D9!C ;T9-# 9# B-:D9#G TBAT TB; ;PCBA#G; -C !BA ;! -C !T-CT C- " -"; TG A0-#G C9:9#<;!T D;<;:-"0;#T C- "- AT9-# 1CDC2, C9:9#<;!T A:A3A#G, 9#C- "- AT;D 1CA92 A#D C9:9#<;!T :A#D 9#C- "- AT;D 1C:92 0;T A:: TB; ;S@9 ;0;#T! C- TB; #-#;C-G#9T9-# -C TAPA3:; GA9# @#D; !;CT9-# 3$ 1c2 122 -C TB; -:D #AT9-#A: 9#T; #A: ;<;#@; C-D; 1#9 C2 1#-8 !;CT9-# $0 1C2 122 1c2 -C TB; #9 C. 99 TB; B-#- A3:; C-@ T -C A"";A:! C-009TT;D ;<; !93:; ; 9# B-:D9#G TBAT TB; :;TT; ! -C 9#!T @CT9-# - CA!B <-@CB; ! ;PT;#D;D 3G CDC T- 9T! ACC9:9AT;! A ; #-T D;;0;D :-A# AG ;;0;#T! !@3J;CT T- D-C@0;#TA G !TA0" TAP;! @#D; !;CT9-# 1&0 -C TB; #9 C. 999

TB; B-#- A3:; C-@ T -C A"";A:! G A<;:G ; ;D 9# B-:D9#G TBAT GA9# -# D9:@T9-# A! A ;!@:T -C TB; 9#C ;A!; 9# TB; <A:@; -C CDC5! !BA ;B-:D9#G! 9# CAC 9! #-T TAPA3:;.3. The Court5s ulin+ 8hile the petition in G. . #o. 1.3.'3 is 7ereft of (erit, we find the C9 5s petition in G. . #o. 1./.&% i(pressed with partial (erit. 9n G. . #o. 1.3.'3, the C9 ar+ues that the CA erred in reversin+ the CTA5s findin+ that theoretical interests can 7e i(puted on the advances CDC e)tended to its affiliates in 1%%. and 1%%/ considerin+ that, for said purpose, CDC resorted to interest-7earin+ fund 7orrowin+s fro( co((ercial 7an6s. !ince considera7le interest e)penses were deducted 7* CDC when said funds were 7orrowed, the C9 theoriFes that interest inco(e should li6ewise 7e declared when the sa(e funds were sourced for the advances CDC e)tended to its affiliates. 9nvo6in+ !ection $3 of the 1%%3 #9 C in relation to !ection 1/%172 of evenue e+ulation #o. 2, the C9 (aintains that it is vested with the power to allocate, distri7ute or apportion inco(e or deductions 7etween or a(on+ controlled or+aniFations, trades or 7usinesses even in the a7sence of fraud, since said power is intended 4to prevent evasion of ta)es or clearl* to reflect the inco(e of an* such or+aniFations, trades or 7usinesses.4 9n addition, the C9 asseverates that the CA should have accorded wei+ht and respect to the findin+s of the CTA which, as the specialiFed court dedicated to the stud* and consideration of ta) (atters, can ta6e ?udicial notice of @! inco(e ta) laws and re+ulations.3/ Ad(ittedl*, !ection $3 of the 1%%3 #9 C3& provides that, 41i2n an* case of two or (ore or+aniFations, trades or 7usinesses 1whether or not incorporated and whether or not or+aniFed in the "hilippines2 owned or controlled directl* or indirectl* 7* the sa(e interests, the Co((issioner of 9nternal evenue is authoriFed to distri7ute, apportion or allocate +ross inco(e or deductions 7etween or a(on+ such or+aniFation, trade or 7usiness, if he deter(ines that such distri7ution, apportion(ent or allocation is necessar* in order to prevent evasion of ta)es or clearl* to reflect the inco(e of an* such or+aniFation, trade or 7usiness.4 9n a(plification of the e=uivalent provision3% under Co((onwealth Act #o. $..,$0 !ec. 1/%172 of evenue e+ulation #o. 2 states as follows, Deter(ination of the ta)a7le net inco(e of controlled ta)pa*er. H 1A2 D;C9#9T9-#!. H 8hen used in this section H 112 The ter( 4or+aniFation4 includes an* 6ind, whether it 7e a sole proprietorship, a partnership, a trust, an estate, or a corporation or association, irrespective of the place where or+aniFed, where operated, or where its trade or 7usiness is conducted, and re+ardless of whether do(estic or forei+n, whether e)e(pt or ta)a7le, or whether affiliated or not. 122 The ter(s 4trade4 or 47usiness4 include an* trade or 7usiness activit* of an* 6ind, re+ardless of whether or where or+aniFed, whether owned individuall* or otherwise, and re+ardless of the place where carried on. 132 The ter( 4controlled4 includes an* 6ind of control, direct or indirect, whether le+all* enforcea7le, and however e)ercisa7le or e)ercised. 9t is the

realit* of the control which is decisive, not its for( or (ode of e)ercise. A presu(ption of control arises if inco(e or deductions have 7een ar7itraril* shifted. 1$2 The ter( 4controlled ta)pa*er4 (eans an* one of two or (ore or+aniFations, trades, or 7usinesses owned or controlled directl* or indirectl* 7* the sa(e interests. 1'2 The ter( 4+roup4 and 4+roup of controlled ta)pa*ers4 (eans the or+aniFations, trades or 7usinesses owned or controlled 7* the sa(e interests. 1.2 The ter( 4true net inco(e4 (eans, in the case of a controlled ta)pa*er, the net inco(e 1or as the case (a* 7e, an* ite( or ele(ent affectin+ net inco(e2 which would have resulted to the controlled ta)pa*er, had it in the conduct of its affairs 1or, as the case (a* 7e, an* ite( or ele(ent affectin+ net inco(e2 which would have resulted to the controlled ta)pa*er, had it in the conduct of its affairs 1or, as the case (a* 7e, in the particular contract, transaction, arran+e(ent or other act2 dealt with the other (e(7ers or (e(7ers of the +roup at ar(5s len+th. 9t does not (ean the inco(e, the deductions, or the ite( or ele(ent of either, resultin+ to the controlled ta)pa*er 7* reason of the particular contract, transaction, or arran+e(ent, the controlled ta)pa*er, or the interest controllin+ it, chose to (a6e 1even thou+h such contract, transaction, or arran+e(ent 7e le+all* 7indin+ upon the parties thereto2. 132 !C-"; A#D "@ "-!;. - The purpose of !ection $$ of the Ta) Code is to place a controlled ta)pa*er on a ta) parit* with an uncontrolled ta)pa*er, 7* deter(inin+, accordin+ to the standard of an uncontrolled ta)pa*er, the true net inco(e fro( the propert* and 7usiness of a controlled ta)pa*er. The interests controllin+ a +roup of controlled ta)pa*er are assu(ed to have co(plete power to cause each controlled ta)pa*er so to conduct its affairs that its transactions and accountin+ records trul* reflect the net inco(e fro( the propert* and 7usiness of each of the controlled ta)pa*ers. 9f, however, this has not 7een done and the ta)a7le net inco(e are there7* understated, the statute conte(plates that the Co((issioner of 9nternal evenue shall intervene, and, 7* (a6in+ such distri7utions, apportion(ents, or allocations as he (a* dee( necessar* of +ross inco(e or deductions, or of an* ite( or ele(ent affectin+ net inco(e, 7etween or a(on+ the controlled ta)pa*ers constitutin+ the +roup, shall deter(ine the true net inco(e of each controlled ta)pa*er. The standard to 7e applied in ever* case is that of an uncontrolled ta)pa*er. !ection $$ +rants no ri+ht to a controlled ta)pa*er to appl* its provisions at will, nor does it +rant an* ri+ht to co(pel the Co((issioner of 9nternal evenue to appl* its provisions. 1C2 A"":9CAT9-# H Transactions 7etween controlled ta)pa*er and another will 7e su7?ected to special scrutin* to ascertain whether the co((on control is 7ein+ used to reduce, avoid or escape ta)es. 9n deter(inin+ the true net inco(e of a controlled ta)pa*er, the Co((issioner of 9nternal evenue is not restricted to the case of i(proper accountin+, to the case of a fraudulent, colora7le, or sha( transaction, or to the case of a device desi+ned to reduce or avoid ta) 7* shiftin+ or distortin+ inco(e or deductions. The authorit* to deter(ine true net inco(e e)tends to an* case in which either 7* inadvertence or desi+n the ta)a7le net inco(e in whole or in part, of a

controlled ta)pa*er, is other than it would have 7een had the ta)pa*er in the conduct of his affairs 7een an uncontrolled ta)pa*er dealin+ at ar(5s len+th with another uncontrolled ta)pa*er.$1 As (a* 7e +leaned fro( the definitions of the ter(s 4controlled4 and 4controlled ta)pa*er4 under para+raphs 1a2 132 and 1$2 of the fore+oin+ provision, it would appear that CDC and its affiliates co(e within the purview of !ection $3 of the 1%%3 #9 C. Aside fro( ownin+ si+nificant portions of the shares of stoc6 of C:9, CA9, D!CC and CC9, the fact that CDC e)tended su7stantial su(s of (one* as cash advances to its said affiliates for the purpose of providin+ the( financial assistance for their operational and capital e)penditures see(in+l* indicate that the situation sou+ht to 7e addressed 7* the su7?ect provision e)ists. Cro( the tenor of para+raph 1c2 of !ection 1/% of evenue e+ulation #o. 2, it (a* also 7e seen that the C9 Ks power to distri7ute, apportion or allocate +ross inco(e or deductions 7etween or a(on+ controlled ta)pa*ers (a* 7e li6ewise e)ercised whether or not fraud inheres in the transactionOs under scrutin*. Cor as lon+ as the controlled ta)pa*erKs ta)a7le inco(e is not reflective of that which it would have realiFed had it 7een dealin+ at ar(Ks len+th with an uncontrolled ta)pa*er, the C9 can (a6e the necessar* rectifications in order to prevent evasion of ta)es. Despite the 7road para(eters provided, however, we find that the C9 Ks powers of distri7ution, apportion(ent or allocation of +ross inco(e and deductions under !ection $3 of the 1%%3 #9 C and !ection 1/% of evenue e+ulation #o. 2 does not include the power to i(pute 4theoretical interests4 to the controlled ta)pa*erKs transactions. "ursuant to !ection 2& of the 1%%3 #9 C, $2 after all, the ter( 4+ross inco(e4 is understood to (ean all inco(e fro( whatever source derived, includin+, 7ut not li(ited to the followin+ ite(s, co(pensation for services, includin+ fees, co((issions, and si(ilar ite(s> +ross inco(e derived fro( 7usiness> +ains derived fro( dealin+s in propert*>4 interest> rents> ro*alties> dividends> annuities> priFes and winnin+s> pensions> and partner5s distri7utive share of the +ross inco(e of +eneral professional partnership.$3 8hile it has 7een held that the phrase 4fro( whatever source derived4 indicates a le+islative polic* to include all inco(e not e)pressl* e)e(pted within the class of ta)a7le inco(e under our laws, the ter( 4inco(e4 has 7een variousl* interpreted to (ean 4cash received or its e=uivalent4, 4the a(ount of (one* co(in+ to a person within a specific ti(e4 or 4so(ethin+ distinct fro( principal or capital.4$$ -therwise stated, there (ust 7e proof of the actual or, at the ver* least, pro7a7le receipt or realiFation 7* the controlled ta)pa*er of the ite( of +ross inco(e sou+ht to 7e distri7uted, apportioned or allocated 7* the C9 . -ur circu(spect perusal of the record *ielded no evidence of actual or possi7le showin+ that the advances CDC e)tended to its affiliates had resulted to the interests su7se=uentl* assessed 7* the C9 . Cor all its harpin+ upon the supposed fact that CDC had resorted to 7orrowin+s fro( co((ercial 7an6s, the C9 had adduced no concrete proof that said funds were, indeed, the source of the advances the for(er provided its affiliates. 8hile ad(ittin+ that CDC o7tained interest-7earin+ loans fro( co((ercial 7an6s, $' !usan 0aca7elda - CDCKs Cunds 0ana+e(ent Depart(ent 0ana+er who was the sole witness presented 7efore the CTA - clarified that the su7?ect advances were sourced fro( the corporationKs ri+hts offerin+ in 1%%' as well as the sale of its invest(ent in 3onifacio :and in 1%%/.$. 0ore si+nificantl*, said witness testified that said advances, 1a2 were e)tended to +ive C:9, CA9, D!CC and CC9 financial assistance for their operational and capital e)penditures> and, 172 were all te(poraril* in nature since the* were repaid within the duration of one wee6 to three (onths and were evidenced 7* (ere ?ournal entries, cash vouchers and instructional letters.4$/

;ven if we were, therefore, to accord precipitate credulit* to the C9 Ks 7are assertion that CDC had deducted su7stantial interest e)pense fro( its +ross inco(e, there would still 7e no factual 7asis for the i(putation of theoretical interests on the su7?ect advances and assess deficienc* inco(e ta)es thereon. 0ore so, when it is 7orne in (ind that, pursuant to Article 1%'. of the Civil Code of the "hilippines, no interest shall 7e due unless it has 7een e)pressl* stipulated in writin+. Considerin+ that ta)es, 7ein+ 7urdens, are not to 7e presu(ed 7e*ond what the applica7le statute e)pressl* and clearl* declares, $& the rule is li6ewise settled that ta) statutes (ust 7e construed strictl* a+ainst the +overn(ent and li7erall* in favor of the ta)pa*er. $% Accordin+l*, the +eneral rule of re=uirin+ adherence to the letter in construin+ statutes applies with peculiar strictness to ta) laws and the provisions of a ta)in+ act are not to 7e e)tended 7* i(plication.'0 8hile it is true that ta)es are the life7lood of the +overn(ent, it has 7een held that their assess(ent and collection should 7e in accordance with law as an* ar7itrariness will ne+ate the ver* reason for +overn(ent itself.'1 9n G. . #o. 1./.&%, we also find a dearth of (erit in the C9 Ks insistence on the i(position of deficienc* inco(e ta)es on the transfer CDC and CA9 effected in e)chan+e for the shares of stoc6 of C:9. 8ith respect to the Deed of ;)chan+e e)ecuted 7etween CDC, CA9 and C:9, !ection 3$ 1c2 122 of the 1%%3 #9 C pertinentl* provides as follows, !ec. 3$. Deter(ination of a(ount of and reco+nition of +ain or loss.)))) 1c2 ;)ception H ) ) ) ) #o +ain or loss shall also 7e reco+niFed if propert* is transferred to a corporation 7* a person in e)chan+e for shares of stoc6 in such corporation of which as a result of such e)chan+e said person, alone or to+ether with others, not e)ceedin+ four persons, +ains control of said corporation> "rovided, That stoc6s issued for services shall not 7e considered as issued in return of propert*. As even ad(itted in the 1$ Ce7ruar* 2001 !tipulation of Cacts su7(itted 7* the parties, '2 the re=uisites for the non-reco+nition of +ain or loss under the fore+oin+ provision are as follows, 1a2 the transferee is a corporation> 172 the transferee e)chan+es its shares of stoc6 for propert*Oies of the transferor> 1c2 the transfer is (ade 7* a person, actin+ alone or to+ether with others, not e)ceedin+ four persons> and, 1d2 as a result of the e)chan+e the transferor, alone or to+ether with others, not e)ceedin+ four, +ains control of the transferee. '3 Actin+ on the 13 Januar* 1%%/ re=uest filed 7* C:9, the 39 had, in fact, ac6nowled+ed the concurrence of the fore+oin+ re=uisites in the Deed of ;)chan+e the for(er e)ecuted with CDC and CA9 7* issuin+ 39 ulin+ #o. !-3$-0$.-%/.'$ 8ith the 39 Ks reiteration of said rulin+ upon the re=uest for clarification filed 7* C:9,'' there is also no dispute that said transferee and transferors su7se=uentl* co(plied with the re=uire(ents provided for the non-reco+nition of +ain or loss fro( the e)chan+e of propert* for ta), as provided under !ection 3$ 1c2 122 of the 1%%3 #9 C. '. Then as now, the C9 ar+ues that ta)a7le +ain should 7e reco+niFed for the e)chan+e considerin+ that CDCKs controllin+ interest in C:9 was actuall* decreased as a result thereof. Cor said purpose, the C9 calls attention to the fact that, prior to the e)chan+e, CDC owned 2,'3/,3'&,000 or ./.$2A of C:9Ks 3,/.3,'3',000 outstandin+ capital stoc6. @pon the issuance of $$3,0%$,000 additional C:9 shares as a conse=uence of the e)chan+e and with onl* $2,21/,000

thereof accruin+ in favor of CDC for a total of 2,'/%,'/',000 shares, said corporation5s controllin+ interest was supposedl* reduced to .1A.03 when rec6oned fro( the transfereeKs a++re+ate $,22.,.2%,000 outstandin+ shares. 8ithout ownin+ a share fro( C:9Ks initial 3,/.3,'3',000 outstandin+ shares, on the other hand, CA9Ks ac=uisition of $20,&//,000 C:9 shares as a result of the e)chan+e purportedl* resulted in its control of onl* %.%.A of said transferee corporationKs $,22.,.2%,000 outstandin+ shares. -n the principle that the transaction did not =ualif* as a ta)-free e)chan+e under !ection 3$ 1c2 122 of the 1%%3 #9 C, the C9 asseverates that ta)a7le +ain in the su( of "2.3,3&.,%21.00 should 7e reco+niFed on the part of CDC and in the su( of "3,0&&,/11,3./.00 on the part of CA9.'/ The paucit* of (erit in the C9 Ks position is, however, evident fro( the cate+orical lan+ua+e of !ection 3$ 1c2 122 of the 1%%3 #9 C which provides that +ain or loss will not 7e reco+niFed in case the e)chan+e of propert* for stoc6s results in the control of the transferee 7* the transferor, alone or with other transferors not e)ceedin+ four persons. ather than isolatin+ the sa(e as proposed 7* the C9 , CDCKs 2,'/%,'/',000 shares or .1.03A control of C:9Ks $,22.,.2%,000 outstandin+ shares should, therefore, 7e appreciated in co(7ination with the $20,&//,000 new shares issued to CA9 which represents %.%.A control of said transferee corporation. To+ether CDCKs 2,'/%,'/',000 shares 1.1.03A2 and CA9Ks $20,&//,000 shares 1%.%.A2 clearl* add up to 3,000,$'2,000 shares or /0.%%A of C:9Ks $,22.,.2%,000 shares. !ince the ter( 4control4 is clearl* defined as 4ownership of stoc6s in a corporation possessin+ at least fift*-one percent of the total votin+ power of classes of stoc6s entitled to one vote4 under !ection 3$ 1c2 1.2 QcR of the 1%%3 #9 C, the e)chan+e of propert* for stoc6s 7etween CDC CA9 and C:9 clearl* =ualif* as a ta)-free transaction under para+raph 3$ 1c2 122 of the sa(e provision. A+ainst the clear tenor of !ection 3$1c2 122 of the 1%%3 #9 C, the C9 cites then !upre(e Court Justice Jose <itu+ and CTA Justice ;rnesto D. Acosta who, in their 7oo6 Ta) :aw and Jurisprudence, opined that said provision could 7e inapplica7le if control is alread* vested in the e)chan+or prior to e)chan+e.'& Aside fro( the fact that that the 10 !epte(7er 2002 Decision in CTA Case #o. .1&2 upholdin+ the ta)-e)e(pt status of the e)chan+e 7etween CDC, CA9 and C:9 was penned 7* no less than Justice Acosta hi(self, '% CDC and CA9 si+nificantl* point out that said authors have ac6nowled+ed that the position ta6en 7* the 39 is to the effect that 4the law would appl* even when the e)chan+or alread* has control of the corporation at the ti(e of the e)chan+e.4.0 This was confir(ed when, apprised in C:9Ks re=uest for clarification a7out the chan+e of percenta+e of ownership of its outstandin+ capital stoc6, the 39 opined as follows, "lease 7e infor(ed that re+ardless of the fore+oin+, the transferors, Cilinvest Develop(ent Corp. and Cilinvest Ala7an+, 9nc. still +ained control of Cilinvest :and, 9nc. The ter( KcontrolK shall (ean ownership of stoc6s in a corporation 7* possessin+ at least '1A of the total votin+ power of all classes of stoc6s entitled to vote. Control is deter(ined 7* the a(ount of stoc6s received, i.e., total su7scri7ed, whether for propert* or for services 7* the transferor or transferors. 9n deter(inin+ the '1A stoc6 ownership, onl* those persons who transferred propert* for stoc6s in the sa(e transaction (a* 7e counted up to the (a)i(u( of five 139 ulin+ #o. '$/-%3 dated Dece(7er 2%, 1%%3..1 At an* rate, it also appears that the supposed reduction of CDCKs shares in C:9 posited 7* the C9 is (ore apparent than real. As the uncontested owner of &0A of the outstandin+ shares of CA9, it cannot 7e +ainsaid that CDC ideall* controls the sa(e percenta+e of the $20,&//,000 shares issued to its said co-transferor which, 7* itself, represents /.%.&A of the outstandin+ shares of C:9. Considered alon+side CDCKs .1.03A control of C:9 as a conse=uence of the 2% #ove(7er 1%%. Deed of Transfer, said /.%.&A add up to an a++re+ate of .&.%%&A of said

transferee corporationKs outstandin+ shares of stoc6 which is evidentl* still +reater than the ./.$2A CDC initiall* held prior to the e)chan+e. This (uch was ad(itted 7* the parties in the 1$ Ce7ruar* 2001 !tipulation of Cacts, Docu(ents and 9ssues the* su7(itted to the CTA. .2 9nas(uch as the co(7ined ownership of CDC and CA9 of C:9Ks outstandin+ capital stoc6 adds up to a total of /0.%%A, it stands to reason that neither of said transferors can 7e held lia7le for deficienc* inco(e ta)es the C9 assessed on the supposed +ain which resulted fro( the su7?ect transfer. -n the other hand, insofar as docu(entar* sta(p ta)es on loan a+ree(ents and pro(issor* notes are concerned, !ection 1&0 of the #9 C provides follows, !ec. 1&0. !ta(p ta) on all loan a+ree(ents, pro(issor* notes, 7ills of e)chan+e, drafts, instru(ents and securities issued 7* the +overn(ent or an* of its instru(entalities, certificates of deposit 7earin+ interest and others not pa*a7le on si+ht or de(and. H -n all loan a+ree(ents si+ned a7road wherein the o7?ect of the contract is located or used in the "hilippines> 7ill of e)chan+e 17etween points within the "hilippines2, drafts, instru(ents and securities issued 7* the Govern(ent or an* of its instru(entalities or certificates of deposits drawin+ interest, or orders for the pa*(ent of an* su( of (one* otherwise than at si+ht or on de(and, or on all pro(issor* notes, whether ne+otia7le or non-ne+otia7le, e)cept 7an6 notes issued for circulation, and on each renewal of an* such note, there shall 7e collected a docu(entar* sta(p ta) of Thirt* centavos 1"0.302 on each two hundred pesos, or fractional part thereof, of the face value of an* such a+ree(ent, 7ill of e)chan+e, draft, certificate of deposit or note, "rovided, That onl* one docu(entar* sta(p ta) shall 7e i(posed on either loan a+ree(ent, or pro(issor* notes issued to secure such loan, whichever will *ield a hi+her ta), "rovided however, That loan a+ree(ents or pro(issor* notes the a++re+ate of which does not e)ceed Two hundred fift* thousand pesos 1"2'0,000.002 e)ecuted 7* an individual for his purchase on install(ent for his personal use or that of his fa(il* and not for 7usiness, resale, 7arter or hire of a house, lot, (otor vehicle, appliance or furniture shall 7e e)e(pt fro( the pa*(ent of docu(entar* sta(p ta) provided under this !ection. 8hen read in con?unction with !ection 1/3 of the 1%%3 #9 C, .3 the fore+oin+ provision concededl* applies to 41a2ll loan a+ree(ents, whether (ade or si+ned in the "hilippines, or a7road when the o7li+ation or ri+ht arises fro( "hilippine sources or the propert* or o7?ect of the contract is located or used in the "hilippines.4 Correlativel*, !ection 3 172 and !ection . of evenue e+ulations #o. %-%$ provide as follows, !ection 3. Definition of Ter(s. H Cor purposes of these e+ulations, the followin+ ter( shall (ean, 172 K:oan a+ree(entK H refers to a contract in writin+ where one of the parties delivers to another (one* or other consu(a7le thin+, upon the condition that the sa(e a(ount of the sa(e 6ind and =ualit* shall 7e paid. The ter( shall include credit facilities, which (a* 7e evidenced 7* credit (e(o, advice or drawin+s. The ter(s K:oan A+ree(ent4 under !ection 1&0 and 40ort+a+eK under !ection 1%', 7oth of the Ta) Code, as a(ended, +enerall* refer to distinct and separate instru(ents. A loan a+ree(ent shall 7e ta)ed under !ection 1&0, while a deed of (ort+a+e shall 7e ta)ed under !ection 1%'.4

4!ection .. !ta(p on all :oan A+ree(ents. H All loan a+ree(ents whether (ade or si+ned in the "hilippines, or a7road when the o7li+ation or ri+ht arises fro( "hilippine sources or the propert* or o7?ect of the contract is located in the "hilippines shall 7e su7?ect to the docu(entar* sta(p ta) of thirt* centavos 1"0.302 on each two hundred pesos, or fractional part thereof, of the face value of an* such a+ree(ents, pursuant to !ection 1&0 in relation to !ection 1/3 of the Ta) Code. 9n cases where no for(al a+ree(ents or pro(issor* notes have 7een e)ecuted to cover credit facilities, the docu(entar* sta(p ta) shall 7e 7ased on the a(ount of drawin+s or avail(ent of the facilities, which (a* 7e evidenced 7* creditOde7it (e(o, advice or drawin+s 7* an* for( of chec6 or withdrawal slip, under !ection 1&0 of the Ta) Code. Appl*in+ the aforesaid provisions to the case at 7ench, we find that the instructional letters as well as the ?ournal and cash vouchers evidencin+ the advances CDC e)tended to its affiliates in 1%%. and 1%%/ =ualified as loan a+ree(ents upon which docu(entar* sta(p ta)es (a* 7e i(posed. 9n 6eepin+ with the caveat attendant to ever* 39 ulin+ to the effect that it is valid onl* if the facts clai(ed 7* the ta)pa*er are correct, we find that the CA reversi7l* erred in utiliFin+ 39 ulin+ #o. 11.-%&, dated 30 Jul* 1%%& which, strictl* spea6in+, could 7e invo6ed onl* 7* A!3 Develop(ent Corporation, the ta)pa*er who sou+ht the sa(e. 9n said rulin+, the C9 opined that docu(ents li6e those evidencin+ the advances CDC e)tended to its affiliates are not su7?ect to docu(entar* sta(p ta), to wit, -n the (atter of whether or not the inter-office (e(o coverin+ the advances +ranted 7* an affiliate co(pan* is su7?ect to docu(entar* sta(p ta), it is infor(ed that nothin+ in e+ulations #o. 2. 1Docu(entar* !ta(p Ta) e+ulations2 and evenue e+ulations #o. %-%$ states that the sa(e is su7?ect to docu(entar* sta(p ta). !uch 7ein+ the case, said inter-office (e(o evidencin+ the lendin+s or 7orrowin+s which is neither a for( of pro(issor* note nor a certificate of inde7tedness issued 7* the corporation-affiliate or a certificate of o7li+ation, which are, (ore or less, cate+oriFed as KsecuritiesK, is not su7?ect to docu(entar* sta(p ta) i(posed under !ection 1&0, 1/$ and 1/' of the Ta) Code of 1%%/, respectivel*. ather, the inter-office (e(o is 7ein+ prepared for accountin+ purposes onl* in order to avoid the co-(in+lin+ of funds of the corporate affiliates.1a%%phi1 9n its appeal 7efore the CA, the C9 ar+ued that the fore+oin+ rulin+ was later (odified in 39 ulin+ #o. 10&-%% dated 1' Jul* 1%%%, which opined that inter-office (e(os evidencin+ lendin+s or 7orrowin+s e)tended 7* a corporation to its affiliates are a6in to pro(issor* notes, hence, su7?ect to docu(entar* sta(p ta)es..$ 9n 7rushin+ aside the fore+oin+ ar+u(ent, however, the CA applied !ection 2$. of the 1%%3 #9 C.' fro( which proceeds the settled principle that rulin+s, circulars, rules and re+ulations pro(ul+ated 7* the 39 have no retroactive application if to so appl* the( would 7e pre?udicial to the ta)pa*ers. .. Ad(ittedl*, this rule does not appl*, 1a2 where the ta)pa*er deli7eratel* (isstates or o(its (aterial facts fro( his return or in an* docu(ent re=uired of hi( 7* the 3ureau of 9nternal evenue> 172 where the facts su7se=uentl* +athered 7* the 3ureau of 9nternal evenue are (ateriall* different fro( the facts on which the rulin+ is 7ased> or 1c2 where the ta)pa*er acted in 7ad faith. ./ #ot 7ein+ the ta)pa*er who, in the first instance, sou+ht a rulin+ fro( the C9 , however, CDC cannot invo6e the fore+oin+ principle on non-retroactivit* of 39 rulin+s. <iewed in the li+ht of the fore+oin+ considerations, we find that 7oth the CTA and the CA erred in invalidatin+ the assess(ents issued 7* the C9 for the deficienc* docu(entar* sta(p ta)es due on the instructional letters as well as the ?ournal and cash vouchers evidencin+ the advances

CDC e)tended to its affiliates in 1%%. and 1%%/. 9n Assess(ent #otice #o. !"-D!T-%.-000202000, the C9 correctl* assessed the su( of ".,$00,.%3..2 for docu(entar* sta(p ta), "3,%%%,/%3.$$ in interests and "2',000.00 as co(pro(ise penalt*, for a total of "10,$2',$&/.0.. Alon+side the su( of "$,0'0,'%%..2 for docu(entar* sta(p ta), the C9 si(ilarl* assessed "1,/21,0%%./& in interests and "2',000.00 as co(pro(ise penalt* in Assess(ent #otice #o. !"D!T-%/-00021-2000 or a total of "',/%.,.%%.$0. The i(position of deficienc* interest is ?ustified under !ec. 2$% 1a2 and 172 of the #9 C which authoriFes the assess(ent of the sa(e 4at the rate of twent* percent 120A2, or such hi+her rate as (a* 7e prescri7ed 7* re+ulations4, fro( the date prescri7ed for the pa*(ent of the unpaid a(ount of ta) until full pa*(ent. .& The i(position of the co(pro(ise penalt* is, in turn, warranted under !ec. 2'0 .% of the #9 C which prescri7es the i(position thereof 4in case of each failure to file an infor(ation or return, state(ent or list, or 6eep an* record or suppl* an* infor(ation re=uired4 on the date prescri7ed therefor. To our (ind, no reversi7le error can, finall*, 7e i(puted a+ainst 7oth the CTA and the CA for invalidatin+ the Assess(ent #otice issued 7* the C9 for the deficienc* inco(e ta)es CDC is supposed to have incurred as a conse=uence of the dilution of its shares in CAC. Anent CDC5s !hareholders5 A+ree(ent with B":, the record shows that the parties were in a+ree(ent a7out the followin+ factual antecedents narrated in the 1$ Ce7ruar* 2001 !tipulation of Cacts, Docu(ents and 9ssues the* su7(itted 7efore the CTA, /0 viF., 41.11. -n #ove(7er 1', 1%%., CDC entered into a !hareholders5 A+ree(ent 1V!A52 with eco Berrera "te. :td. 1V B":52 for the for(ation of a ?oint venture co(pan* na(ed Cilinvest Asia Corporation 1VCAC52 which is 7ased in !in+apore 1pars. 1.01 and ..11, "etition, pars. 1 and /, Answer2. 1.12. CAC, the ?oint venture co(pan* for(ed 7* CDC and B":, is tas6ed to develop and (ana+e the '0A ownership interest of CDC in its "3Co( -ffice Tower "ro?ect 1V"ro?ect52 with the "hilippine 3an6 of Co((unications 1par. ..12, "etition> par. /, Answer2. 1.13. "ursuant to the !A 7etween CDC and B":, the e=uit* participation of CDC and B": in CAC was .0A and $0A respectivel*. 1.1$. 9n accordance with the ter(s of the !A, CDC su7scri7ed to "'00./ (illion worth of shares of stoc6 representin+ a .0A e=uit* participation in CAC. 9n turn, B": su7scri7ed to "$33.& (illion worth of shares of stoc6 of CAC representin+ a $0A e=uit* participation in CAC. 1.1'. 9n pa*(ent of its su7scription in CAC, CDC e)ecuted a Deed of Assi+n(ent transferrin+ to CAC a portion of CDC5s ri+ht and interests in the "ro?ect to the e)tent of "'00./ (illion. 1.1.. CDC reported a net loss of "1%0,.%',0.1.00 in its Annual 9nco(e Ta) eturn for the ta)a7le *ear 1%%..4/1 Alon+side the principle that ta) revenues are not intended to 7e li7erall* construed, /2 the rule is settled that the findin+s and conclusions of the CTA are accorded +reat respect and are +enerall* upheld 7* this Court, unless there is a clear showin+ of a reversi7le error or an i(provident

e)ercise of authorit*./3 A7sent showin+ of such error here, we find no stron+ and co+ent reasons to depart fro( said rule with respect to the CTAKs findin+ that no deficienc* inco(e ta) can 7e assessed on the +ain on the supposed dilution andOor increase in the value of CDCKs shareholdin+s in CAC which the C9 , at an* rate, failed to esta7lish. 3earin+ in (ind the (eanin+ of 4+ross inco(e4 as a7ove discussed, it cannot 7e +ainsaid, even then, that a (ere increase or appreciation in the value of said shares cannot 7e considered inco(e for ta)ation purposes. !ince 4a (ere advance in the value of the propert* of a person or corporation in no sense constitute the Vinco(e5 specified in the revenue law,4 it has 7een held in the earl* case of Cisher vs. Trinidad,/$ that it 4constitutes and can 7e treated (erel* as an increase of capital.4 Bence, the C9 has no factual and le+al 7asis in assessin+ inco(e ta) on the increase in the value of CDCKs shareholdin+s in CAC until the sa(e is actuall* sold at a profit. 8B; ;C- ;, pre(ises considered, the C9 Ks petition for review on certiorari in G. . #o. 1.3.'3 is D;#9;D for lac6 of (erit and the CA5s 1. Dece(7er 2003 Decision in G. . #o. /2%%2 is ACC9 0;D in toto. The C9 5s petition in G. . #o. 1./.&% is "A T9A::G G A#T;D and the CA5s 2. Januar* 200' Decision in CA-G. . !" #o. /$'10 is 0-D9C9;D. Accordin+l*, Assess(ent #otices #os. !"-D!T-%.-00020-2000 and !"-D!T-%/-00021-2000 issued for deficienc* docu(entar* sta(p ta)es due on the instructional letters as well as ?ournal and cash vouchers evidencin+ the advances CDC e)tended to its affiliates are declared valid. The cancellation of Assess(ent #otices #os. !"-9#C-%.-0001&-2000, !"-9#C-%/-0001%-2000 and !"-9#C-%/-002/-2000 issued for deficienc* inco(e assessed on 1a2 the 4ar(s-len+th4 interest fro( said advances> 172 the +ain fro( CDC5s Deed of ;)chan+e with CA9 and C:9> and 1c2 inco(e fro( the dilution resultin+ fro( CDC5s !hareholders5 A+ree(ent with B": is, however, upheld. G.R. No. 178881 No5-*2-r 16, 2006

CARMELINO F. PANSACOLA, "etitioner, vs. COMMISSIONER OF INTERNAL RE EN!E, espondent. D;C9!9-# E!IS!M=ING, J.: Cor review on certiorari is the Decision1 dated June ', 2003 of the Court of Appeals in CA-G. . !.". #o. .0$/'. The appellate court denied petitioner5s avail(ent of the increased a(ounts of personal and additional e)e(ptions under epu7lic Act #o. &$2$, the #ational 9nternal evenue Code of 1%%/2 1#9 C2, which too6 effect on Januar* 1, 1%%&. Also assailed is the appellate court5s esolution3 dated !epte(7er 11, 2003, den*in+ the (otion for reconsideration. The facts are undisputed. -n April 13, 1%%&, petitioner Car(elino C. "ansacola filed his inco(e ta) return for the ta)a7le *ear 1%%/ that reflected an overpa*(ent of "',%'0. 9n it he clai(ed the increased a(ounts of personal and additional e)e(ptions under !ection 3'$ of the #9 C, althou+h his certificate of

inco(e ta) withheld on co(pensation indicated the lesser allowed a(ounts ' on these e)e(ptions. Be clai(ed a refund of "',%'0 with the 3ureau of 9nternal evenue, which was denied. :ater, the Court of Ta) Appeals also denied his clai( 7ecause accordin+ to the ta) court, 4it would 7e a7surd for the law to allow the deduction fro( a ta)pa*er5s +ross inco(e earned on a certain *ear of e)e(ptions availin+ on a different ta)a7le *earW4 . "etitioner sou+ht reconsideration, 7ut the sa(e was denied./ -n appeal, the Court of Appeals denied his petition for lac6 of (erit. The appellate court ruled that Dmali %. ;stanislao,& relied upon 7* petitioner, was inapplica7le to his case. 9t further ruled that the #9 C too6 effect on Januar* 1, 1%%&, thus the increased e)e(ptions were effective onl* to cover ta)a7le *ear 1%%& and cannot 7e applied retroactivel*. "etitioner, 7efore us, raises a sin+le issue, WQ8Rhether or not the increased personal and additional e)e(ptions under Qthe #9 CR can 7e availed of 7* the QpRetitioner for purposes of co(putin+ his inco(e ta) lia7ilit* for the ta)a7le *ear 1%%/ and thus 7e entitled to the refund.% !i(pl* stated, the issue is, Could the e)e(ptions under !ection 3' of the #9 C, which too6 effect on Januar* 1, 1%%&, 7e availed of for the ta)a7le *ear 1%%/L "etitioner ar+ues that the personal and additional e)e(ptions are of a fi)ed character 7ased on !ection 3' 1A2 and 132 of the #9 C10 and as ruled 7* this Court in Dmali, these personal and additional e)e(ptions are fi)ed a(ounts to which an individual ta)pa*er is entitled. Be contends that unli6e other allowa7le deductions, the availa7ilit* of these e)e(ptions does not depend on the ta)pa*er5s profession, trade or 7usiness for a particular ta)a7le period. el*in+ a+ain in Dmali, petitioner alle+es that the Court of Appeals erred in rulin+ that the increased e)e(ptions were (eant to 7e applied 7e+innin+ ta)a7le *ear 1%%& and were to 7e reflected in the ta)pa*ers5 returns to 7e filed on or 7efore April 1', 1%%%. "etitioner reasons that such rulin+ would postpone the availa7ilit* of the increased e)e(ptions and literall* defer the effectivit* of the #9 C to Januar* 1, 1%%%. "etitioner insists that the increased e)e(ptions were alread* availa7le on April 1', 1%%&, the deadline for filin+ inco(e ta) returns for ta)a7le *ear 1%%/, 7ecause the #9 C was alread* effective. espondent, throu+h the -ffice of the !olicitor General, counters that the increased e)e(ptions were not *et availa7le for ta)a7le *ear 1%%/ 7ecause all provisions of the #9 C too6 effect on Januar* 1, 1%%& onl*> that the fi)ed character of personal and additional e)e(ptions does not necessaril* (ean that these were not ti(e 7ound> and petitioner5s proposition was contrar* to !ection 3' 1C211 of the #9 C. 9t further stated that petitioner5s e)e(ptions were deter(ined as of Dece(7er 31, 1%%/ and the effectivit* of the #9 C durin+ the period of Januar* 1 to April 1', 1%%& did not affect his ta) lia7ilities within the ta)a7le *ear 1%%/> and the inclusive period fro( Januar* 1 to April 1', 1%%&, the filin+ dates and deadline for ad(inistrative purposes, was outside of the ta)a7le *ear 1%%/. espondent also (aintains that Dmali is not applica7le to this case. "refatoril*, personal and additional e)e(ptions under !ection 3' of the #9 C are fi)ed a(ounts to which certain individual ta)pa*ers 1citiFens, resident aliens2 12 are entitled. "ersonal e)e(ptions are the theoretical personal, livin+ and fa(il* e)penses of an individual allowed to 7e deducted fro( the +ross or net inco(e of an individual ta)pa*er. These are ar7itrar* a(ounts

which have 7een calculated 7* our law(a6ers to 7e rou+hl* e=uivalent to the (ini(u( of su7sistence,13 ta6in+ into account the personal status and additional =ualified dependents of the ta)pa*er. The* are fi)ed a(ounts in the sense that the a(ounts have 7een predeter(ined 7* our law(a6ers as provided under !ection 3' 1A2 and 132. @nless and until our law(a6ers (a6e new ad?ust(ents on these personal e)e(ptions, the a(ounts allowed to 7e deducted 7* a ta)pa*er are fi)ed as predeter(ined 7* Con+ress. A careful scrutin* of the provisions1$ of the #9 C specificall* shows that !ection /% 1D21' provides that the personal and additional e)e(ptions shall 7e deter(ined in accordance with the (ain provisions in Title 99 of the #9 C. 9ts (ain provisions pertain to !ection 3' 1A2 and 132 which state, !;C. 3'. Allo?&+'- o@ P-r/o+&l E.-*p(io+ @or I+4i5i4)&l T&.p&1-r. $ 1A2 9n General.-Cor purposes of deter(inin+ the ta) provided in !ection 2$1A2 of this Title, 1. there shall 7e allowed a 7asic personal e)e(ption as follows, )))) Cor each (arried individual H P<2,000 )))) 132 Additional ;)e(ption for Dependents.HThere shall 7e allowed an additional e)e(ption of ;i+ht thousand pesos 1P8,0002 for each dependent not e)ceedin+ four 1$2. 1;(phasis ours.2 !ection 3' 1A2 and 132 allow the 7asic personal and additional e)e(ptions as deductions fro( +ross or net inco(e, as the case (a*7e, to arrive at the correct ta)a7le inco(e of certain individual ta)pa*ers. !ection 2$ 1A2 112 1a2 i(posed inco(e ta) on a resident citiFen5s ta)a7le inco(e derived for each ta)a7le *ear. 9t provides as follows, !;C. 2$. Income Tax Rates. H 6A8 Rates of &ncome 0a1 on &ndi%id'al Citi=en I :1; A+ i+'o*- (&. i/ 3-r-21 i*po/-4% 1a2 -n the ta)a7le inco(e defined in !ection 31 of this Code, other than inco(e su7?ect to ta) under !u7sections 132,1/ 1C2,1& and 1D21% of this !ection, derived for each ta)a7le *ear fro( all sources within and without the "hilippines 7* ever* individual citiFen of the "hilippines residin+ therein> 1;(phasis ours.2 !ection 31 defines 4ta)a7le inco(e4 as the pertinent ite(s of +ross inco(e specified in the #9 C, less the deductions andOor personal and additional e)e(ptions, if an*, authoriFed for such t*pes of inco(e 7* the #9 C or other special laws. As defined in !ection 22 1"2, 20 4ta)a7le *ear4 (eans the calendar *ear, upon the 7asis of which the net inco(e is co(puted under Title 99 of the #9 C. !ection $321 also supports the rule that the ta)a7le inco(e of an individual shall 7e

co(puted on the 7asis of the calendar *ear. 9n addition, !ection $' 22 provides that the deductions provided for under Title 99 of the #9 C shall 7e ta6en for the (&.&2l- 1-&r in which the* are 4paid or accrued4 or 4paid or incurred.4 0oreover, !ection /% 1B223 re=uires the e(plo*er to deter(ine, on or 7efore the end of the calendar *ear 7ut prior to the pa*(ent of the co(pensation for the last pa*roll period, the ta) due fro( each e(plo*ee5s ta)a7le co(pensation inco(e for the entire ta)a7le *ear in accordance with !ection 2$ 1A2. This is for the purpose of either withholdin+ fro( the e(plo*ee5s Dece(7er salar*, or refundin+ to hi( not later than Januar* 2' of the succeedin+ *ear, the difference 7etween the ta) due and the ta) withheld. Therefore, as provided in !ection 2$ 1A2 112 1a2 in relation to !ections 31 and 22 1"2 and !ections $3, $' and /% 1B2 of the #9 C, the inco(e su7?ect to inco(e ta) is the ta)pa*er5s inco(e as derived and co(puted durin+ the calendar *ear, his ta)a7le *ear. Clearl* fro( the a7ove=uoted provisions, what the law should consider for the purpose of deter(inin+ the ta) due fro( an individual ta)pa*er is his status and =ualified dependents at the 'lo/- o@ (3- (&.&2l- 1-&r and not at the ti(e the return is filed and the ta) due thereon is paid. #ow co(es !ection 3' 1C2 of the #9 C which provides, !ec. 3'. Allo!ance of Personal ;1emption for &ndi%id'al 0a1payer. H )))) 1C2 Chan:e of Stat's. H 9f the ta)pa*er (arries or should have additional dependent1s2 as defined a7ove durin+ the ta)a7le *ear, the ta)pa*er (a* clai( the correspondin+ additional e)e(ption, as the case (a* 7e, in full for such *ear. 9f the ta)pa*er dies durin+ the ta)a7le *ear, his estate (a* still clai( the personal and additional e)e(ptions for hi(self and his dependent1s2 as if he died at the close of such *ear. 9f the spouse or an* of the dependents dies or if an* of such dependents (arries, 7eco(es twent*-one 1212 *ears old or 7eco(es +ainfull* e(plo*ed durin+ the ta)a7le *ear, the ta)pa*er (a* still clai( the sa(e e)e(ptions as if the spouse or an* of the dependents died, or as if such dependents (arried, 7eca(e twent*-one 1212 *ears old or 7eca(e +ainfull* e(plo*ed at the close of such *ear. ;(phasis (ust 7e (ade that !ection 3' 1C2 of the #9 C allows a ta)pa*er to still clai( the correspondin+ full a(ount of e)e(ption for a ta)a7le *ear, e.:. if he (arries> have additional dependents> he, his spouse, or an* of his dependents die> and if an* of his dependents (arr*, turn 21 *ears old> or 7eco(e +ainfull* e(plo*ed. 9t is as if the chan+es in his or his dependents5 status too6 place at the close of the ta)a7le *ear. Conse=uentl*, his correct ta)a7le inco(e and his correspondin+ allowa7le deductions e.:. personal and additional deductions, if an*, had alread* 7een deter(ined as of the end of the calendar *ear.

9n the case of petitioner, the availa7ilit* of the afore(entioned deductions if he is thus entitled, would 7e reflected on his ta) return filed on or 7efore the 1'th da* of April 1%%% as (andated 7* !ection '1 1C2 112.2$ !ince the #9 C too6 effect on Januar* 1, 1%%&, the increased a(ounts of personal and additional e)e(ptions under !ection 3', can onl* 7e allowed as deductions fro( the individual ta)pa*er5s +ross or net inco(e, as the case (a*7e, for the ta)a7le *ear 1%%& to 7e filed in 1%%%. The #9 C (ade no reference that the personal and additional e)e(ptions shall appl* on inco(e earned 7efore Januar* 1, 1%%&. Thus, petitioner5s reliance in Dmali is (isplaced. 9n Dmali, we noted that despite 7ein+ +iven authorit* 7* !ection 2% 112 1$2 2' of the #ational 9nternal evenue Code of 1%// to ad?ust these e)e(ptions, no ad?ust(ents were (ade to cover 1%&%. #ote that ep. Act #o. /1./ is entitled 4An Act Ad>'stin: the Basic Personal and Additional ;1emptions Allo!a5le to &ndi%id'als for &ncome 0a1 P'rposes to the Po%erty 0hreshold Be%el, Amendin: for the P'rpose Section -3, Para:raph 6B8, &tems 618 and 6-8 6A8, of the ?ational &nternal Re%en'e Code, As Amended, and For Other P'rposes .4 Thus, we said in Dmali, that the ad?ust(ent provided 7* ep. Act #o. /1./ effective 1%%2, should consider the povert* threshold level in 1%%1, the ti(e it was enacted. And we o7served therein that since the e)e(ptions would especiall* 7enefit lower and (iddle-inco(e ta)pa*ers, the e)e(ption should 7e (ade to cover the past *ear 1%%1. To such an e)tent, ep. Act #o. /1./ was a social le+islation intended to re(ed* the non-ad?ust(ent in 1%&%. And as cited in Dmali, this le+islative intent is also clear in the records of the Bouse of epresentatives5 Journal. This is not so in the case at 7ar. There is nothin+ in the #9 C that e)presses an* such intent. The polic* declarations in its enact(ent do not indicate it was a social le+islation that ad?usted personal and additional e)e(ptions accordin+ to the povert* threshold level nor is there an* indication that its application should retroact. At the ti(e petitioner filed his 1%%/ return and paid the ta) due thereon in April 1%%&, the increased a(ounts of personal and additional e)e(ptions in !ection 3' were not *et availa7le. 9t has not *et accrued as of Dece(7er 31, 1%%/, the last da* of his ta)a7le *ear. "etitioner5s ta)a7le inco(e covers his inco(e for the calendar *ear 1%%/. The law cannot 7e +iven retroactive effect. 9t is esta7lished that ta) laws are prospective in application, unless it is e)pressl* provided to appl* retroactivel*. 2. 9n the #9 C, we note, there is no specific (ention that the increased a(ounts of personal and additional e)e(ptions under !ection 3' shall 7e +iven retroactive effect. Confor(a7l* too, personal and additional e)e(ptions are considered as deductions fro( +ross inco(e. Deductions for inco(e ta) purposes parta6e of the nature of ta) e)e(ptions, hence strictl* construed 2/ a+ainst the ta)pa*er2& and cannot 7e allowed unless +ranted in the (ost e)plicit and cate+orical lan+ua+e 2% too plain to 7e (ista6en.30 The* cannot 7e e)tended 7* (ere i(plication or inference. 31 And, where a provision of law spea6s cate+oricall*, the need for interpretation is o7viated, no plausi7le pretense 7ein+ entertained to ?ustif* non-co(pliance. All that has to 7e done is to appl* it in ever* case that falls within its ter(s.32 Accordin+l*, the Court of Appeals and the Court of Ta) Appeals were correct in den*in+ petitioner5s clai( for refund.1F!phi1 6HEREFORE, the petition is "ENIE" for lac6 of (erit. The Decision dated June ', 2003 and the esolution dated !epte(7er 11, 2003 of the Court of Appeals in CA-G. . !.". #o. .0$/' are here7* AFFIRME". G.R. No. L$18<42 M&1 27, 1872

LORENFO T. ODA &+4 HEIRS OF 9!LIA =!DALES, +&*-l1% RO"OLFO =. ODA, MARIANO =. ODA, L!F =. ODA, IRGINIA =. ODA &+4 LORENFO =. ODA, 9R., petitioners, vs. THE COMMISSIONER OF INTERNAL RE EN!E, respondent. Orlando Aelasco for petitioners. Office of the Solicitor General Art'ro A. Alafri=, Assistant Solicitor General Felicisimo R. Rosete, and Special Attorney P'rificacion Dreta for respondent.

"hilippine Trust Co(pan* in the a(ount of "/2,1/3.00 1t.s.n., p. 2$> ;)hi7it 3, pp. 31-3$ 39 rec.2. The pro?ect of partition also shows that the estate shares e=uall* with :orenFo T. -Ia, the ad(inistrator thereof, in the o7li+ation of "%$,%/3.00, consistin+ of loans contracted 7* the latter with the approval of the Court 1see p. 3 of ;)hi7it T> or see p. /$, 39 rec.2. Althou+h the pro?ect of partition was approved 7* the Court on 0a* 1., 1%$%, no atte(pt was (ade to divide the properties therein listed. 9nstead, the properties re(ained under the (ana+e(ent of :orenFo T. -Ia who used said properties in 7usiness 7* leasin+ or sellin+ the( and investin+ the inco(e derived therefro( and the proceeds fro( the sales thereof in real properties and securities. As a result, petitionersK properties and invest(ents +raduall* increased fro( "10',$'0.00 in 1%$% to "$&0,00'.20 in 1%'. as can 7e +leaned fro( the followin+ *ear-end 7alances, 9nvest(ent Account M "2$,.'/..' '1,301.31 ./,%2/.'2 .1,2'&.2/ .3,.23.3/ 100,/&..00 1/',02&..& "&/,&.0.00 12&,'.../2 120,3$%.2& &/,0.'.2& &$,%2'..& %%,001.20 120,2$%./& 13',/1$..& :and Account "1/,'%0.00 %.,0/..2. 110,.0'.11 1'2,./$.3% 1.1,$.3.&3 1./,%.2.0$ 1.%,2.2.'2 1.%,2.2.'2 3uildin+ Account

=ARRE"O, J.:p "etition for review of the decision of the Court of Ta) Appeals in CTA Case #o. .1/, si(ilarl* entitled as a7ove, holdin+ that petitioners have constituted an unre+istered partnership and are, therefore, su7?ect to the pa*(ent of the deficienc* corporate inco(e ta)es assessed a+ainst the( Gear 7* respondent Co((issioner of 9nternal evenue for the *ears 1%'' and 1%'. in the total su( of "21,&%1.00, plus 'A surchar+e and 1A (onthl* interest fro( Dece(7er 1', 1%'&, su7?ect to the provisions of !ection '1 1e2 122 of the 9nternal evenue Code, as a(ended 7* !ection & of epu7lic Act #o. 23$3 and the costs of the suit, 1 as well as the resolution of said court den*in+ petitionersK (otion for reconsideration of said decision. The facts are stated in the decision of the Ta) Court as follows, Julia 3uIales died on 0arch 23, 1%$$, leavin+ as heirs her survivin+ spouse, :orenFo T. -Ia and her five children. 9n 1%$&, Civil Case #o. $'1% was instituted in the Court of Cirst 9nstance of 0anila for the settle(ent of her estate. :ater, :orenFo T. -Ia the survivin+ spouse was appointed ad(inistrator of the estate of said deceased 1;)hi7it 3, pp. 3$-$1, 39 rec.2. -n April 1$, 1%$%, the ad(inistrator su7(itted the pro?ect of partition, which was approved 7* the Court on 0a* 1., 1%$% 1!ee ;)hi7it T2. 3ecause three of the heirs, na(el* :uF, <ir+inia and :orenFo, Jr., all surna(ed -Ia, were still (inors when the pro?ect of partition was approved, :orenFo T. -Ia, their father and ad(inistrator of the estate, filed a petition in Civil Case #o. %.3/ of the Court of Cirst 9nstance of 0anila for appoint(ent as +uardian of said (inors. -n #ove(7er 1$, 1%$%, the Court appointed hi( +uardian of the persons and propert* of the aforena(ed (inors 1!ee p. 3, 39 rec.2. The pro?ect of partition 1;)hi7it T> see also pp. //-/0, 39 rec.2 shows that the heirs have undivided one-half 11O22 interest in ten parcels of land with a total assessed value of "&/,&.0.00, si) houses with a total assessed value of "1/,'%0.00 and an undeter(ined a(ount to 7e collected fro( the 8ar Da(a+e Co((ission. :ater, the* received fro( said Co((ission the a(ount of "'0,000.00, (ore or less. This a(ount was not divided a(on+ the( 7ut was used in the reha7ilitation of properties owned 7* the( in co((on 1t.s.n., p. $.2. -f the ten parcels of land afore(entioned, two were ac=uired after the death of the decedent with (one* 7orrowed fro( the

1!ee ;)hi7its 3 E T t.s.n., pp. 22, 2'-2., $0, '0, 102-10$2 Cro( said invest(ents and properties petitioners derived such inco(es as profits fro( install(ent sales of su7divided lots, profits fro( sales of stoc6s, dividends, rentals and interests 1see p. 3 of ;)hi7it 3> p. 32, 39 rec.> t.s.n., pp. 3/-3&2. The said inco(es are recorded in the 7oo6s of account 6ept 7* :orenFo T. -Ia where the correspondin+ shares of the petitioners in the net inco(e for the *ear are also 6nown. ;ver* *ear, petitioners returned for inco(e ta) purposes their shares in the net inco(e derived fro( said properties and securities andOor fro( transactions involvin+ the( 1;)hi7it 3, s'pra> t.s.n., pp. 2'-2.2. Bowever, petitioners did not actuall* receive their shares in the *earl* inco(e. 1t.s.n., pp. 2'-2., $0, %&, 1002. The inco(e was

alwa*s left in the hands of :orenFo T. -Ia who, as heretofore pointed out, invested the( in real properties and securities. 1!ee ;)hi7it 3, t.s.n., pp. '0, 102-10$2. -n the 7asis of the fore+oin+ facts, respondent 1Co((issioner of 9nternal evenue2 decided that petitioners for(ed an unre+istered partnership and therefore, su7?ect to the corporate inco(e ta), pursuant to !ection 2$, in relation to !ection &$172, of the Ta) Code. Accordin+l*, he assessed a+ainst the petitioners the a(ounts of "&,0%2.00 and "13,&%%.00 as corporate inco(e ta)es for 1%'' and 1%'., respectivel*. 1!ee ;)hi7it ', a(ended 7* ;)hi7it 1/, pp. '0 and &., 39 rec.2. "etitioners protested a+ainst the assess(ent and as6ed for reconsideration of the rulin+ of respondent that the* have for(ed an unre+istered partnership. Cindin+ no (erit in petitionersK re=uest, respondent denied it 1!ee ;)hi7it 1/, p. &., 39 rec.2. 1!ee pp. 1-$, 0e(orandu( for espondent, June 12, 1%.12. The ori+inal assess(ent was as follows, 13..

9. TB; C-@ T -C TAP A"";A:! ; ;D 9# B-:D9#G TBAT TB; ";T9T9-#; ! C- 0;D A# @# ;G9!T; ;D "A T#; !B9"> 99. TB; C-@ T -C TAP A"";A:! ; ;D 9# #-T B-:D9#G TBAT TB; ";T9T9-#; ! 8; ; C---8#; ! -C TB; " -"; T9;! 9#B; 9T;D A#D 1TB;2 " -C9T! D; 9<;D C -0 T A#!ACT9-#! TB; ;C -0 1sic2> 999. TB; C-@ T -C TAP A"";A:! ; ;D 9# B-:D9#G TBAT ";T9T9-#; ! 8; ; :9A3:; C- C- "- AT; 9#C-0; TAP;! C- 1%'' A#D 1%'. A! A# @# ;G9!T; ;D "A T#; !B9"> 9<.

#et inco(e as per investi+ation ................ "$0,20%.&% 9nco(e ta) due thereon ............................... &,0$2.00 2'A surchar+e .............................................. 2,010.'0 Co(pro(ise for non-filin+ .......................... '0.00 Total ............................................................... "10,102.'0 13.+ #et inco(e as per investi+ation ................ ".%,2$'.23 9nco(e ta) due thereon ............................... 13,&$%.00 2'A surchar+e .............................................. 3,$.2.2' Co(pro(ise for non-filin+ .......................... '0.00 Total ............................................................... "1/,3.1.2' 1!ee ;)hi7it 13, pa+e '0, 39 records2 @pon further consideration of the case, the 2'A surchar+e was eli(inated in line with the rulin+ of the !upre(e Court in Collector %. Batan:as 0ransportation Co., G. . #o. :-%.%2, Jan. ., 1%'&, so that the =uestioned assess(ent refers solel* to the inco(e ta) proper for the *ears 1%'' and 1%'. and the 4Co(pro(ise for non-filin+,4 the latter ite( o7viousl* referrin+ to the co(pro(ise in lieu of the cri(inal lia7ilit* for failure of petitioners to file the corporate inco(e ta) returns for said *ears. 1!ee ;)h. 1/, pa+e &., 39 records2. 1"p. 1-3, Anne) C to "etition2 "etitioners have assi+ned the followin+ as alle+ed errors of the Ta) Court, <. -# TB; A!!@0"T9-# TBAT TB; ; 8A! A# @# ;G9!T; ;D "A T#; !B9", TB; C-@ T -C TAP A"";A:! ; ;D 9# #-T D;D@CT9#G TB; <A 9-@! A0-@#T! "A9D 3G TB; ";T9T9-#; ! A! 9#D9<9D@A: 9#C-0; TAP -# TB;9 ;!";CT9<; !BA ;! -C TB; " -C9T! ACC @9#G C -0 TB; " -"; T9;! -8#;D 9# C-00-#, C -0 TB; D;C9C9;#CG TAP -C TB; @# ;G9!T; ;D "A T#; !B9". 9n other words, petitioners pose for our resolution the followin+ =uestions, 112 @nder the facts found 7* the Court of Ta) Appeals, should petitioners 7e considered as co-owners of the properties inherited 7* the( fro( the deceased Julia 3uIales and the profits derived fro( transactions involvin+ the sa(e, or, (ust the* 7e dee(ed to have for(ed an unre+istered partnership su7?ect to ta) under !ections 2$ and &$172 of the #ational 9nternal evenue CodeL 122 Assu(in+ the* have for(ed an unre+istered partnership, should this not 7e onl* in the sense that the* invested as a co((on fund the profits earned 7* the properties owned 7* the( in co((on and the loans +ranted to the( upon the securit* of the said properties, with the result that as far as their respective shares in the inheritance are concerned, the total inco(e thereof should 7e considered as that of co-owners and not of the unre+istered partnershipL And 132 -# TB; A!!@0"T9-# TBAT TB; ";T9T9-#; ! C-#!T9T@T;D A# @# ;G9!T; ;D "A T#; !B9", TB; C-@ T -C TAP A"";A:! ; ;D 9# #-T B-:D9#G TBAT TB; ";T9T9-#; ! 8; ; A# @# ;G9!T; ;D "A T#; !B9" T- TB; ;PT;#T -#:G TBAT TB;G 9#<;!T;D TB; " -C9T! C -0 TB; " -"; T9;! -8#;D 9# C-00-# A#D TB; :-A#! ;C;9<;D @!9#G TB; 9#B; 9T;D " -"; T9;! A! C-::AT; A:!>

assu(in+ a+ain that the* are ta)a7le as an unre+istered partnership, should not the various a(ounts alread* paid 7* the( for the sa(e *ears 1%'' and 1%'. as individual inco(e ta)es on their respective shares of the profits accruin+ fro( the properties the* owned in co((on 7e deducted fro( the deficienc* corporate ta)es, herein involved, assessed a+ainst such unre+istered partnership 7* the respondent Co((issionerL "onderin+ on these =uestions, the first thin+ that has struc6 the Court is that whereas petitionersK predecessor in interest died wa* 7ac6 on 0arch 23, 1%$$ and the pro?ect of partition of her estate was ?udiciall* approved as earl* as 0a* 1., 1%$%, and presu(a7l* petitioners have 7een holdin+ their respective shares in their inheritance since those dates ad(ittedl* under the ad(inistration or (ana+e(ent of the head of the fa(il*, the widower and father :orenFo T. -Ia, the assess(ent in =uestion refers to the later *ears 1%'' and 1%'.. 8e 7elieve this point to 7e i(portant 7ecause, apparentl*, at the start, or in the *ears 1%$$ to 1%'$, the respondent Co((issioner of 9nternal evenue did treat petitioners as co-owners, not lia7le to corporate ta), and it was onl* fro( 1%'' that he considered the( as havin+ for(ed an unre+istered partnership. At least, there is nothin+ in the record indicatin+ that an earlier assess(ent had alread* 7een (ade. !uch 7ein+ the case, and 8e see no reason how it could 7e otherwise, it is easil* understanda7le wh* petitionersK position that the* are co-owners and not unre+istered copartners, for the purposes of the i(pu+ned assess(ent, cannot 7e upheld. Truth to tell, petitioners should find co(fort in the fact that the* were not si(ilarl* assessed earlier 7* the 3ureau of 9nternal evenue. The Ta) Court found that instead of actuall* distri7utin+ the estate of the deceased a(on+ the(selves pursuant to the pro?ect of partition approved in 1%$%, 4the properties re(ained under the (ana+e(ent of :orenFo T. -Ia who used said properties in 7usiness 7* leasin+ or sellin+ the( and investin+ the inco(e derived therefro( and the proceed fro( the sales thereof in real properties and securities,4 as a result of which said properties and invest(ents steadil* increased *earl* fro( "&/,&.0.00 in 4land account4 and "1/,'%0.00 in 47uildin+ account4 in 1%$% to "1/',02&..& in 4invest(ent account,4 "13'./1$..& in 4land account4 and "1.%,2.2.'2 in 47uildin+ account4 in 1%'.. And all these 7eca(e possi7le 7ecause, ad(ittedl*, petitioners never actuall* received an* share of the inco(e or profits fro( :orenFo T. -Ia and instead, the* allowed hi( to continue usin+ said shares as part of the co((on fund for their ventures, even as the* paid the correspondin+ inco(e ta)es on the 7asis of their respective shares of the profits of their co((on 7usiness as reported 7* the said :orenFo T. -Ia. 9t is thus incontroverti7le that petitioners did not, contrar* to their contention, (erel* li(it the(selves to holdin+ the properties inherited 7* the(. 9ndeed, it is ad(itted that durin+ the (aterial *ears herein involved, so(e of the said properties were sold at considera7le profit, and that with said profit, petitioners en+a+ed, thru :orenFo T. -Ia, in the purchase and sale of corporate securities. 9t is li6ewise ad(itted that all the profits fro( these ventures were divided a(on+ petitioners proportionatel* in accordance with their respective shares in the inheritance. 9n these circu(stances, it is -ur considered view that fro( the (o(ent petitioners allowed not onl* the inco(es fro( their respective shares of the inheritance 7ut even the inherited properties the(selves to 7e used 7* :orenFo T. -Ia as a co((on fund in underta6in+ several transactions or in 7usiness, with the intention of derivin+ profit to 7e shared 7* the( proportionall*, such act was tanta(onut to actuall* contri7utin+ such inco(es to a co((on fund and, in effect, the* there7* for(ed an unre+istered partnership within the purview of the a7ove-(entioned provisions of the Ta) Code.

9t is 7ut lo+ical that in cases of inheritance, there should 7e a period when the heirs can 7e considered as co-owners rather than unre+istered co-partners within the conte(plation of our corporate ta) laws afore(entioned. 3efore the partition and distri7ution of the estate of the deceased, all the inco(e thereof does 7elon+ co((onl* to all the heirs, o7viousl*, without the( 7eco(in+ there7* unre+istered co-partners, 7ut it does not necessaril* follow that such status as co-owners continues until the inheritance is actuall* and ph*sicall* distri7uted a(on+ the heirs, for it is easil* conceiva7le that after 6nowin+ their respective shares in the partition, the* (i+ht decide to continue holdin+ said shares under the co((on (ana+e(ent of the ad(inistrator or e)ecutor or of an*one chosen 7* the( and en+a+e in 7usiness on that 7asis. 8ithal, if this were to 7e allowed, it would 7e the easiest thin+ for heirs in an* inheritance to circu(vent and render (eanin+less !ections 2$ and &$172 of the #ational 9nternal evenue Code. 9t is true that in ;%an:elista %s. Collector, 102 "hil. 1$0, it was stated, a(on+ the reasons for holdin+ the appellants therein to 7e unre+istered co-partners for ta) purposes, that their co((on fund 4was not so(ethin+ the* found alread* in e)istence4 and that 4it was not a propert* inherited 7* the( pro indi%iso,4 7ut it is certainl* far fetched to ar+ue therefro(, as petitioners are doin+ here, that er:o, in all instances where an inheritance is not actuall* divided, there can 7e no unre+istered co-partnership. As alread* indicated, for ta) purposes, the co-ownership of inherited properties is auto(aticall* converted into an unre+istered partnership the (o(ent the said co((on properties andOor the inco(es derived therefro( are used as a co((on fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as deter(ined in a pro?ect partition either dul* e)ecuted in an e)tra?udicial settle(ent or approved 7* the court in the correspondin+ testate or intestate proceedin+. The reason for this is si(ple. Cro( the (o(ent of such partition, the heirs are entitled alread* to their respective definite shares of the estate and the inco(es thereof, for each of the( to (ana+e and dispose of as e)clusivel* his own without the intervention of the other heirs, and, accordin+l* he 7eco(es lia7le individuall* for all ta)es in connection therewith. 9f after such partition, he allows his share to 7e held in co((on with his co-heirs under a sin+le (ana+e(ent to 7e used with the intent of (a6in+ profit there7* in proportion to his share, there can 7e no dou7t that, even if no docu(ent or instru(ent were e)ecuted for the purpose, for ta) purposes, at least, an unre+istered partnership is for(ed. This is e)actl* what happened to petitioners in this case. 9n this connection, petitionersK reliance on Article 1/.%, para+raph 132, of the Civil Code, providin+ that, 4The sharin+ of +ross returns does not of itself esta7lish a partnership, whether or not the persons sharin+ the( have a ?oint or co((on ri+ht or interest in an* propert* fro( which the returns are derived,4 and, for that (atter, on an* other provision of said code on partnerships is unavailin+. 9n ;%an:elista, s'pra, this Court clearl* differentiated the concept of partnerships under the Civil Code fro( that of unre+istered partnerships which are considered as 4corporations4 under !ections 2$ and &$172 of the #ational 9nternal evenue Code. 0r. Justice o7erto Concepcion, now Chief Justice, elucidated on this point thus, To 7e+in with, the ta) in =uestion is one i(posed upon 4corporations4, which, strictl* spea6in+, are distinct and different fro( 4partnerships4. 8hen our 9nternal evenue Code includes 4partnerships4 a(on+ the entities su7?ect to the ta) on 4corporations4, said Code (ust allude, therefore, to or+aniFations which are not necessarily 4partnerships4, in the technical sense of the ter(. Thus, for instance, section 2$ of said Code e1empts fro( the afore(entioned ta) 4dul* re+istered +eneral partnerships,4 which constitute precisel* one of the (ost t*pical for(s of partnerships in this ?urisdiction. :i6ewise, as defined in section &$172 of said Code, 4the ter( corporation includes partnerships, no matter ho! created or or:ani=ed.4 This =ualif*in+

e)pression clearl* indicates that a ?oint venture need not 7e underta6en in an* of the standard for(s, or in confir(it* with the usual re=uire(ents of the law on partnerships, in order that one could 7e dee(ed constituted for purposes of the ta) on corporation. A+ain, pursuant to said section &$172,the ter( 4corporation4 includes, a(on+ others, 4?oint accounts,1 c'entas en participacion24 and 4associations4, none of which has a le+al personalit* of its own, independent of that of its (e(7ers. Accordin+l*, the law(a6er could not have re+arded that personalit* as a condition essential to the e)istence of the partnerships therein referred to. 9n fact, as a7ove stated, 4dul* re+istered +eneral co-partnerships4 M which are possessed of the afore(entioned personalit* M have 7een e)pressl* e)cluded 7* law 1sections 2$ and &$Q7R2 fro( the connotation of the ter( 4corporation.4 .... ))) ))) ))) !i(ilarl*, the A(erican :aw ... provides its o!n concept of a partnership. @nder the ter( 4partnership4 it includes not onl* a partnership as 6nown in co((on law 7ut, as well, a s*ndicate, +roup, pool, >oint %ent're, or other 'nincorporated or:ani=ation !hich carries on any 5'siness, financial operation, or %ent're, and which is not, within the (eanin+ of the Code, a trust, estate, or a corporation. ... . 1/A 0ertenKs :aw of Cederal 9nco(e Ta)ation, p. /&%> e(phasis ours.2 The ter( 4partnership4 includes a s*ndicate, +roup, pool, >oint %ent're or other 'nincorporated or:ani=ation, thro':h or 5y means of !hich any 5'siness, financial operation, or %ent're is carried on. ... . 1& 0ertenKs :aw of Cederal 9nco(e Ta)ation, p. '.2 #ote .3> e(phasis ours.2 Cor purposes of the ta) on corporations, o'r ?ational &nternal Re%en'e Code incl'des these partnerships M with the e)ception onl* of dul* re+istered +eneral copartnerships M !ithin the p'r%ie! of the term Jcorporation.J 9t is, therefore, clear to our (ind that petitioners herein constitute a partnership, insofar as said Code is concerned, and are su7?ect to the inco(e ta) for corporations. 8e reiterated this view, thru 0r. Justice Cernando, in Reyes %s. Commissioner of &nternal Re%en'e, G. . #os. :-2$020-21, Jul* 2%, 1%.&, 2$ !C A 1%&, wherein the Court ruled a+ainst a theor* of co-ownership pursued 7* appellants therein. As re+ards the second =uestion raised 7* petitioners a7out the se+re+ation, for the purposes of the corporate ta)es in =uestion, of their inherited properties fro( those ac=uired 7* the( su7se=uentl*, 8e consider as ?ustified the followin+ ratiocination of the Ta) Court in den*in+ their (otion for reconsideration,

9n connection with the second +round, it is alle+ed that, if there was an unre+istered partnership, the holdin+ should 7e li(ited to the 7usiness en+a+ed in apart fro( the properties inherited 7* petitioners. 9n other words, the ta)a7le inco(e of the partnership should 7e li(ited to the inco(e derived fro( the ac=uisition and sale of real properties and corporate securities and should not include the inco(e derived fro( the inherited properties. 9t is ad(itted that the inherited properties and the inco(e derived therefro( were used in the 7usiness of 7u*in+ and sellin+ other real properties and corporate securities. Accordin+l*, the partnership inco(e (ust include not onl* the inco(e derived fro( the purchase and sale of other properties 7ut also the inco(e of the inherited properties. 3esides, as alread* o7served earlier, the inco(e derived fro( inherited properties (a* 7e considered as individual inco(e of the respective heirs onl* so lon+ as the inheritance or estate is not distri7uted or, at least, partitioned, 7ut the (o(ent their respective 6nown shares are used as part of the co((on assets of the heirs to 7e used in (a6in+ profits, it is 7ut proper that the inco(e of such shares should 7e considered as the part of the ta)a7le inco(e of an unre+istered partnership. This, 8e hold, is the clear intent of the law. :i6ewise, the third =uestion of petitioners appears to have 7een ade=uatel* resolved 7* the Ta) Court in the afore(entioned resolution den*in+ petitionersK (otion for reconsideration of the decision of said court. "ertinentl*, the court ruled this wise, 9n support of the third +round, counsel for petitioners alle+es, ;ven if we were to *ield to the decision of this Bonora7le Court that the herein petitioners have for(ed an unre+istered partnership and, therefore, have to 7e ta)ed as such, it (i+ht 7e recalled that the petitioners in their individual inco(e ta) returns reported their shares of the profits of the unre+istered partnership. 8e thin6 it onl* fair and e=uita7le that the various a(ounts paid 7* the individual petitioners as inco(e ta) on their respective shares of the unre+istered partnership should 7e deducted fro( the deficienc* inco(e ta) found 7* this Bonora7le Court a+ainst the unre+istered partnership. 1pa+e /, 0e(orandu( for the "etitioner in !upport of Their 0otion for econsideration, -ct. 2&, 1%.1.2 9n other words, it is the position of petitioners that the ta)a7le inco(e of the partnership (ust 7e reduced 7* the a(ounts of inco(e ta) paid 7* each petitioner on his share of partnership profits. This is not correct> rather, it should 7e the other wa* around. The partnership profits distri7uta7le to the partners 1petitioners herein2 should 7e reduced 7* the a(ounts of inco(e ta) assessed a+ainst the partnership. Conse=uentl*, each of the petitioners in his individual capacit* overpaid his inco(e ta) for the *ears in =uestion, 7ut the inco(e ta) due fro( the partnership has 7een correctl* assessed. !ince the individual inco(e ta) lia7ilities of petitioners are not in issue in this proceedin+, it is not proper for the Court to pass upon the sa(e.

"etitioners insist that it was error for the Ta) Court to so rule that whatever e)cess the* (i+ht have paid as individual inco(e ta) cannot 7e credited as part pa*(ent of the ta)es herein in =uestion. 9t is ar+ued that to sanction the view of the Ta) Court is to o7li+e petitioners to pa* dou7le inco(e ta) on the sa(e inco(e, and, worse, considerin+ the ti(e that has lapsed since the* paid their individual inco(e ta)es, the* (a* alread* 7e 7arred 7* prescription fro( recoverin+ their overpa*(ents in a separate action. 8e do not a+ree. As 8e see it, the case of petitioners as re+ards the point under discussion is si(pl* that of a ta)pa*er who has paid the wron+ ta), assu(in+ that the failure to pa* the corporate ta)es in =uestion was not deli7erate. -f course, such ta)pa*er has the ri+ht to 7e rei(7ursed what he has erroneousl* paid, 7ut the law is ver* clear that the clai( and action for such rei(7urse(ent are su7?ect to the 7ar of prescription. And since the period for the recover* of the e)cess inco(e ta)es in the case of herein petitioners has alread* lapsed, it would not see( ri+ht to virtuall* disre+ard prescription (erel* upon the +round that the reason for the dela* is precisel* 7ecause the ta)pa*ers failed to (a6e the proper return and pa*(ent of the corporate ta)es le+all* due fro( the(. 9n principle, it is 7ut proper not to allow an* rela)ation of the ta) laws in favor of persons who are not e)actl* a7ove suspicion in their conduct vis-a-vis their ta) o7li+ation to the !tate. 9# <9;8 -C A:: TB; C- ;G-9#G, the ?ud+(ent of the Court of Ta) Appeals appealed fro( is affir( with costs a+ainst petitioners. G.R. No. 781<< O'(o2-r 18, 1888 MARIANO P. PASC!AL &+4 RENATO P. "RAGON, petitioners, vs. THE COMMISSIONER OF INTERNAL RE EN!E &+4 CO!RT OF TAX APPEALS, respondents. 2e la C'esta, 2e las Alas and Callanta Ba! Offices for petitioners. 0he Solicitor General for respondents

Bowever, in a letter dated 0arch 31, 1%/% of then Actin+ 39 Co((issioner ;fren 9. "lana, petitioners were assessed and re=uired to pa* a total a(ount of "10/,101./0 as alle+ed deficienc* corporate inco(e ta)es for the *ears 1%.& and 1%/0. "etitioners protested the said assess(ent in a letter of June 2., 1%/% assertin+ that the* had availed of ta) a(nesties wa* 7ac6 in 1%/$. 9n a repl* of Au+ust 22, 1%/%, respondent Co((issioner infor(ed petitioners that in the *ears 1%.& and 1%/0, petitioners as co-owners in the real estate transactions for(ed an unre+istered partnership or ?oint venture ta)a7le as a corporation under !ection 20172 and its inco(e was su7?ect to the ta)es prescri7ed under !ection 2$, 7oth of the #ational 9nternal evenue Code 1 that the unre+istered partnership was su7?ect to corporate inco(e ta) as distin+uished fro( profits derived fro( the partnership 7* the( which is su7?ect to individual inco(e ta)> and that the avail(ent of ta) a(nest* under ".D. #o. 23, as a(ended, 7* petitioners relieved petitioners of their individual inco(e ta) lia7ilities 7ut did not relieve the( fro( the ta) lia7ilit* of the unre+istered partnership. Bence, the petitioners were re=uired to pa* the deficienc* inco(e ta) assessed. "etitioners filed a petition for review with the respondent Court of Ta) Appeals doc6eted as CTA Case #o. 30$'. 9n due course, the respondent court 7* a (a?orit* decision of 0arch 30, 1%&/, 2 affir(ed the decision and action ta6en 7* respondent co((issioner with costs a+ainst petitioners. 9t ruled that on the 7asis of the principle enunciated in ;%an:elista < an unre+istered partnership was in fact for(ed 7* petitioners which li6e a corporation was su7?ect to corporate inco(e ta) distinct fro( that i(posed on the partners. 9n a separate dissentin+ opinion, Associate Jud+e Constante oa=uin stated that considerin+ the circu(stances of this case, althou+h there (i+ht in fact 7e a co-ownership 7etween the petitioners, there was no ade=uate 7asis for the conclusion that the* there7* for(ed an unre+istered partnership which (ade 4he( lia7le for corporate inco(e ta) under the Ta) Code. Bence, this petition wherein petitioners invo6e as 7asis thereof the followin+ alle+ed errors of the respondent court, A. 9# B-:D9#G A! " ;!@0"T9<;:G C- ;CT TB; D;T; 09#AT9-# -C TB; ;!"-#D;#T C-009!!9-#; , T- TB; ;CC;CT TBAT ";T9T9-#; ! C- 0;D A# @# ;G9!T; ;D "A T#; !B9" !@3J;CT T- C- "- AT; 9#C-0; TAP, A#D TBAT TB; 3@ D;# -C -CC; 9#G ;<9D;#C; 9# -""-!9T9-# TB; ;T- ;!T! @"-# TB; ";T9T9-#; !. 3. 9# 0AT9#G A C9#D9#G, !-:;:G -# TB; 3A!9! -C 9!-:AT;D !A:; T A#!ACT9-#!, TBAT A# @# ;G9!T; ;D "A T#; !B9" ;P9!T;D TB@! 9G#- 9#G TB; ;S@9 ;0;#T! :A9D D-8# 3G :A8 TBAT 8-@:D 8A A#T TB; " ;!@0"T9-#OC-#C:@!9-# TBAT A "A T#; !B9" ;P9!T!.

GANCA#CO, J.: The distinction 7etween co-ownership and an unre+istered partnership or ?oint venture for inco(e ta) purposes is the issue in this petition. -n June 22, 1%.', petitioners 7ou+ht two 122 parcels of land fro( !antia+o 3ernardino, et al. and on 0a* 2&, 1%.., the* 7ou+ht another three 132 parcels of land fro( Juan o=ue. The first two parcels of land were sold 7* petitioners in 1%.& to0arenir Develop(ent Corporation, while the three parcels of land were sold 7* petitioners to ;rlinda e*es and 0aria !a(son on 0arch 1%,1%/0. "etitioners realiFed a net profit in the sale (ade in 1%.& in the a(ount of "1.',22$./0, while the* realiFed a net profit of ".0,000.00 in the sale (ade in 1%/0. The correspondin+ capital +ains ta)es were paid 7* petitioners in 1%/3 and 1%/$ 7* availin+ of the ta) a(nesties +ranted in the said *ears.

C. 9# C9#D9#G TBAT TB; 9#!TA#T CA!; 9! !909:A T- TB; ;<A#G;:9!TA CA!; A#D TB; ;C- ; !B-@:D 3; D;C9D;D A:-#G!9D; TB; ;<A#G;:9!TA CA!;. D. 9# @:9#G TBAT TB; TAP A0#;!TG D9D #-T ;:9;<; TB; ";T9T9-#; ! C -0 "AG0;#T -C -TB; TAP;! C- TB; "; 9-D C-<; ;D 3G !@CB A0#;!TG. 1pp. 12-13, ollo.2 The petition is (eritorious. The 7asis of the su7?ect decision of the respondent court is the rulin+ of this Court in ;%an:elista. 4 9n the said case, petitioners 7orrowed a su( of (one* fro( their father which to+ether with their own personal funds the* used in 7u*in+ several real properties. The* appointed their 7rother to (ana+e their properties with full power to lease, collect, rent, issue receipts, etc. The* had the real properties rented or leased to various tenants for several *ears and the* +ained net profits fro( the rental inco(e. Thus, the Collector of 9nternal evenue de(anded the pa*(ent of inco(e ta) on a corporation, a(on+ others, fro( the(. 9n resolvin+ the issue, this Court held as follows, The issue in this case is whether petitioners are su7?ect to the ta) on corporations provided for in section 2$ of Co((onwealth Act #o. $.., otherwise 6nown as the #ational 9nternal evenue Code, as well as to the residence ta) for corporations and the real estate dealersK fi)ed ta). 8ith respect to the ta) on corporations, the issue hin+es on the (eanin+ of the ter(s corporation and partnership as used in sections 2$ and &$ of said Code, the pertinent parts of which read, !ec. 2$. Rate of the ta1 on corporations.MThere shall 7e levied, assessed, collected, and paid annuall* upon the total net inco(e received in the precedin+ ta)a7le *ear fro( all sources 7* ever* corporation or+aniFed in, or e)istin+ under the laws of the "hilippines, no (atter how created or or+aniFed 7ut not includin+ dul* re+istered +eneral co-partnerships 1co(panies collectives2, a ta) upon such inco(e e=ual to the su( of the followin+, ... !ec. &$172. The ter( 4corporation4 includes partnerships, no (atter how created or or+aniFed, ?oint-stoc6 co(panies, ?oint accounts 1cuentas en participation2, associations or insurance co(panies, 7ut does not include dul* re+istered +eneral co-partnerships 1co(panies colectivas2. Article 1/./ of the Civil Code of the "hilippines provides, 3* the contract of partnership two or (ore persons 7ind the(selves to contri7ute (one*, propert*, or industr* to a co((on fund, with the intention of dividin+ the profits a(on+ the(selves.

"ursuant to this article, the essential elements of a partnership are t!o, namelyE 6a8 an a:reement to contri5'te money, property or ind'stry to a common f'ndK and 658 intent to di%ide the profits amon: the contractin: parties. The first ele(ent is undou7tedl* present in the case at 7ar, for, ad(ittedl*, petitioners have a+reed to, and did, contri7ute (one* and propert* to a co((on fund. Lence, the iss'e narro!s do!n to their intent in actin: as they did. @pon consideration of all the facts and circu(stances surroundin+ the case, !e are f'lly satisfied that their p'rpose !as to en:a:e in real estate transactions for monetary :ain and then di%ide the same amon: themsel%es, 7ecause, 1. Said common f'nd !as not somethin: they fo'nd already in e1istence . 9t was not a propert* inherited 7* the( pro indiviso. The* created it p'rposely. 8hat is (ore the* ?ointl* 7orrowed a su7stantial portion thereof in order to esta7lish said co((on fund. 2. The* in%ested the same, not merely in one transaction, 5't in a series of transactions. -n Ce7ruar* 2, 1%$3, the* 7ou+ht a lot for "100,000.00. -n April 3, 1%$$, the* purchased 21 lots for "1&,000.00. This was soon followed, on April 23, 1%$$, 7* the ac=uisition of another real estate for "10&,&2'.00. Cive 1'2 da*s later 1April 2&, 1%$$2, the* +ot a fourth lot for "23/,23$.1$. 0he n'm5er of lots 6-@8 ac<'ired and transcations 'nderta9en, as !ell as the 5rief interre:n'm 5et!een each, partic'larly the last three p'rchases, is stron:ly indicati%e of a pattern or common desi:n that !as not limited to the conser%ation and preser%ation of the aforementioned common f'nd or e%en of the property ac<'ired 5y petitioners in Fe5r'ary, 13@,. &n other !ords, one cannot 5't percei%e a character of ha5it'ality pec'liar to 5'siness transactions en:a:ed in for p'rposes of :ain. 3. 0he aforesaid lots !ere not de%oted to residential p'rposes or to other personal 'ses, of petitioners herein. The properties were leased separatel* to several persons, who, fro( 1%$' to 1%$& inclusive, paid the total su( of "/0,0.&.30 7* wa* of rentals. !ee(in+l*, the lots are still 7ein+ so let, for petitioners do not even su++est that there has 7een an* chan+e in the utiliFation thereof. $. !ince Au+ust, 1%$', the properties ha%e 5een 'nder the mana:ement of one person, na(el*, !i(eon ;van+elists, with full power to lease, to collect rents, to issue receipts, to 7rin+ suits, to si+n letters and contracts, and to indorse and deposit notes and chec6s. 0h's, the affairs relati%e to said properties ha%e 5een handled as if the same 5elon:ed to a corporation or 5'siness enterprise operated for profit. '. 0he fore:oin: conditions ha%e e1isted for more than ten 61/8 years, or, to 7e e)act, over fifteen 11'2 *ears, since the first propert* was ac=uired, and over twelve 1122 *ears, since !i(eon ;van+elists 7eca(e the (ana+er. .. "etitioners have not testified or introduced an* evidence, either on their purpose in creatin+ the set up alread* adverted to, or on the causes for its continued e)istence. The* did not even tr* to offer an e)planation therefor.

Althou+h, ta6en sin+l*, the* (i+ht not suffice to esta7lish the intent necessar* to constitute a partnership, the collecti%e effect of these circ'mstances is s'ch as to lea%e no room for do'5t on the e1istence of said intent in petitioners herein. Only one or t!o of the aforementioned circ'mstances !ere present in the cases cited 5y petitioners herein, and, hence, those cases are not in point. 7 9n the present case, there is no evidence that petitioners entered into an a+ree(ent to contri7ute (one*, propert* or industr* to a co((on fund, and that the* intended to divide the profits a(on+ the(selves. espondent co((issioner andO or his representative ?ust assu(ed these conditions to 7e present on the 7asis of the fact that petitioners purchased certain parcels of land and 7eca(e co-owners thereof. 9n ;van+elists, there !as a series of transactions !here petitioners p'rchased t!enty(fo'r 6-@8 lots showin+ that the purpose was not li(ited to the conservation or preservation of the co((on fund or even the properties ac=uired 7* the(. 0he character of ha5it'ality pec'liar to 5'siness transactions en:a:ed in for the p'rpose of :ain !as present. 9n the instant case, petitioners 7ou+ht two 122 parcels of land in 1%.'. The* did not sell the sa(e nor (a6e an* i(prove(ents thereon. 9n 1%.., the* 7ou+ht another three 132 parcels of land fro( one seller. 9t was onl* 1%.& when the* sold the two 122 parcels of land after which the* did not (a6e an* additional or new purchase. The re(ainin+ three 132 parcels were sold 7* the( in 1%/0. The transactions were isolated. The character of ha7itualit* peculiar to 7usiness transactions for the purpose of +ain was not present. 9n ;%an:elista, the properties were leased out to tenants for several *ears. The 7usiness was under the (ana+e(ent of one of the partners. !uch condition e)isted for over fifteen 11'2 *ears. #one of the circu(stances are present in the case at 7ar. The co-ownership started onl* in 1%.' and ended in 1%/0. Thus, in the concurrin+ opinion of 0r. Justice An+elo 3autista in ;%an:elista he said, 9 wish however to (a6e the followin+ o7servation Article 1/.% of the new Civil Code la*s down the rule for deter(inin+ when a transaction should 7e dee(ed a partnership or a co-ownership. !aid article para+raphs 2 and 3, provides> 122 Co-ownership or co-possession does not itself esta7lish a partnership, whether such co-owners or co-possessors do or do not share an* profits (ade 7* the use of the propert*> 132 The sharin+ of +ross returns does not of itself esta7lish a partnership, whether or not the persons sharin+ the( have a ?oint or co((on ri+ht or interest in an* propert* fro( which the returns are derived> From the a5o%e it appears that the fact that those !ho a:ree to form a co( o!nership share or do not share any profits made 5y the 'se of the property held in common does not con%ert their %ent're into a partnership. Or the sharin: of the :ross ret'rns does not of itself esta5lish a partnership !hether

or not the persons sharin: therein ha%e a >oint or common ri:ht or interest in the property. 0his only means that, aside from the circ'mstance of profit, the presence of other elements constit'tin: partnership is necessary, s'ch as the clear intent to form a partnership, the e1istence of a >'ridical personality different from that of the indi%id'al partners, and the freedom to transfer or assi:n any interest in the property 5y one !ith the consent of the others 1"adilla, Civil Code of the "hilippines Annotated, <ol. 9, 1%'3 ed., pp. .3'.3.2 &t is e%ident that an isolated transaction !here5y t!o or more persons contri5'te f'nds to 5'y certain real estate for profit in the a5sence of other circ'mstances sho!in: a contrary intention cannot 5e considered a partnership. "ersons who contri7ute propert* or funds for a co((on enterprise and a+ree to share the +ross returns of that enterprise in proportion to their contri7ution, 7ut who severall* retain the title to their respective contri7ution, are not there7* rendered partners. The* have no co((on stoc6 or capital, and no co((unit* of interest as principal proprietors in the 7usiness itself which the proceeds derived. 1;le(ents of the :aw of "artnership 7* Clord D. 0eche( 2nd ;d., section &3, p. /$.2 A ?oint purchase of land, 7* two, does not constitute a co-partnership in respect thereto> nor does an a+ree(ent to share the profits and losses on the sale of land create a partnership> the parties are onl* tenants in co((on. 1Clar6 vs. !idewa*, 1$2 @.!. .&2,12 Ct. 32/, 3' :. ;d., 11'/.2 8here plaintiff, his 7rother, and another a+reed to 7eco(e owners of a sin+le tract of realt*, holdin+ as tenants in co((on, and to divide the profits of disposin+ of it, the 7rother and the other not 7ein+ entitled to share in plaintiffs co((ission, no partnership e)isted as 7etween the three parties, whatever their relation (a* have 7een as to third parties. 10a+ee vs. 0a+ee 123 #.;. ./3, 233 0ass. 3$1.2 &n order to constit'te a partnership inter sese there m'st 5eE 6a8 An intent to form the sameK 658 :enerally participatin: in 5oth profits and lossesK 6c8 and s'ch a comm'nity of interest, as far as third persons are concerned as ena5les each party to ma9e contract, mana:e the 5'siness, and dispose of the !hole property.(M'nicipal Pa%in: Co. %s. Lerrin: 1./ P. 1/+*, ./ &&& @*/.8 The co((on ownership of propert* does not itself create a partnership 7etween the owners, thou+h the* (a* use it for the purpose of (a6in+ +ains> and the* (a*, without 7eco(in+ partners, a+ree a(on+ the(selves as to the (ana+e(ent, and use of such propert* and the application of the proceeds therefro(. 1!purloc6 vs. 8ilson, 1$2 !.8. 3.3,1.0 #o. App. 1$.2 6 The sharin+ of returns does not in itself esta7lish a partnership whether or not the persons sharin+ therein have a ?oint or co((on ri+ht or interest in the propert*. There (ust 7e a clear intent to

for( a partnership, the e)istence of a ?uridical personalit* different fro( the individual partners, and the freedo( of each part* to transfer or assi+n the whole propert*. 9n the present case, there is clear evidence of co-ownership 7etween the petitioners. There is no ade=uate 7asis to support the proposition that the* there7* for(ed an unre+istered partnership. The two isolated transactions where7* the* purchased properties and sold the sa(e a few *ears thereafter did not there7* (a6e the( partners. The* shared in the +ross profits as co- owners and paid their capital +ains ta)es on their net profits and availed of the ta) a(nest* there7*. @nder the circu(stances, the* cannot 7e considered to have for(ed an unre+istered partnership which is there7* lia7le for corporate inco(e ta), as the respondent co((issioner proposes. And even assu(in+ for the sa6e of ar+u(ent that such unre+istered partnership appears to have 7een for(ed, since there is no such e)istin+ unre+istered partnership with a distinct personalit* nor with assets that can 7e held lia7le for said deficienc* corporate inco(e ta), then petitioners can 7e held individuall* lia7le as partners for this unpaid o7li+ation of the partnership p. 7 Bowever, as petitioners have availed of the 7enefits of ta) a(nest* as individual ta)pa*ers in these transactions, the* are there7* relieved of an* further ta) lia7ilit* arisin+ therefro(. 8B; ;C -0, the petition is here7* G A#T;D and the decision of the respondent Court of Ta) Appeals of 0arch 30, 1%&/ is here7* ;<; !;D and !;T A!9D; and another decision is here7* rendered relievin+ petitioners of the corporate inco(e ta) lia7ilit* in this case, without pronounce(ent as to costs. !- - D; ;D. G.R. No. 112677 9&+)&r1 27, 1888

CORPORATIONI TA=ACALERA INS!RANCE CO., INC. L &ll &//-//-4 &/ 0POOL OF MACHINER# INS!RERS, petitioner, vs. CO!RT OF APPEALS, CO!RT OF TAX APPEALS &+4 COMISSIONER OF INTERNAL RE EN!E, respondent.

PANGANI=AN, J.: "ursuant to 4reinsurance treaties,4 a nu(7er of local insurance fir(s for(ed the(selves into a 4pool4 in order to facilitate the handlin+ of 7usiness contracted with a nonresident forei+n insurance co(pan*. 0a* the 4clearin+ house4 or 4insurance pool4 so for(ed 7e dee(ed a partnership or an association that is ta)a7le as a corporation under the #ational 9nternal evenue Code 1#9 C2L !hould the poolKs re(ittances to the (e(7er co(panies and to the said forei+n fir( 7e ta)a7le as dividendsL @nder the facts of this case, has the +over(entKs ri+ht to assess and collect said ta) prescri7edL 0he Case These are the (ain =uestions raised in the "etition for eview on Certiorari 7efore us, assailin+ the -cto7er 11, 1%%3 Decision 1 of the Court of Appeals 2 in CA-G !" 2'%02, which dis(issed petitionersK appeal of the -cto7er 1%, 1%%2 Decision < of the Court of Ta) Appeals 4 1CTA2 which had previousl* sustained petitionersK lia7ilit* for deficienc* inco(e ta), interest and withholdin+ ta). The Court of Appeals ruled, 8B; ;C- ;, the petition is D9!09!!;D, with costs a+ainst petitioner 7

AFISCO INS!RANCE CORPORATIONI CCC INS!RANCE CORPORATIONI CHARTER INS!RANCE CO., INC.I CI=ELES INS!RANCE CORPORATIONI COMMON6EALTH INS!RANCE COMPAN#I CONSOLI"ATE" INS!RANCE CO., INC.I "E ELOPMENT INS!RANCE J S!RET# CORPORATION "OMESTIC INS!RANCE COMPAN# OF THE PHILIPPINEI EASTERN ASS!RANCE COMPAN# J S!RET# CORPI EMPIRE INS!RANCE COMPAN#I EE!ITA=LE INS!RANCE CORPORATIONI FE"ERAL INS!RANCE CORPORATION INC.I FG! INS!RANCE CORPORATIONI FI"ELIT# J S!RET# COMPAN# OF THE PHILS., INC.I FILIPINO MERCHANTSK INS!RANCE CO., INC.I GO ERNMENT SER ICE INS!RANCE S#STEMI MALA#AN INS!RANCE CO., INC.I MALA#AN F!RICH INS!RANCE CO.I INC.I MERCANTILE INS!RANCE CO., INC.I METROPOLITAN INS!RANCE COMPAN#I METRO$TAISHO INS!RANCE CORPORATIONI NE6 FEALAN" INS!RANCE CO., LT".I PAN$MALA#AN INS!RANCE CORPORATIONI PARAMO!NT INS!RANCE CORPORATIONI PEOPLEKS TRANS$EAST ASIA INS!RANCE CORPORATIONI PERLA COMPANIA "E SEG!ROS, INC.I PHILIPPINE =RITISH ASS!RANCE CO., INC.I PHILIPPINE FIRST INS!RANCE CO., INC.I PIONEER INS!RANCE J S!RET# CORP.I PIONEER INTERCONTINENTAL INS!RANCE CORPORATIONI PRO I"ENT INS!RANCE COMPAN# OF THE PHILIPPINESI P#RAMI" INS!RANCE CO., INC.I RELIANCE S!RET# J INS!RANCE COMPAN#I RIFAL S!RET# J INS!RANCE COMPAN#I SANPIRO INS!RANCE CORPORATIONI SEA=OAR"$EASTERN INS!RANCE CO., INC.I SOLI" G!ARANT#, INC.I SO!TH SEA S!RET# J INS!RANCE CO., INC.I STATE =ON"ING J INS!RANCE CO., INC.I S!MMA INS!RANCE

The petition also challen+es the #ove(7er 1', 1%%3 Court of Appeals 1CA2 esolution 6 den*in+ reconsideration. 0he Facts The antecedent facts, 7 as found 7* the Court of Appeals, are as follows, The petitioners are $1 non-life insurance corporations, or+aniFed and e)istin+ under the laws of the "hilippines. @pon issuance 7* the( of ;rection, 0achiner* 3rea6down, 3oiler ;)plosion and ContractorsK All is6 insurance policies, the petitioners on Au+ust 1, 1%.' entered into a Suota !hare einsurance Treat* and a !urplus einsurance Treat* with the 0unchener uc6versicherun+s-Gesselschaft 1hereafter called 0unich2, a non-resident forei+n insurance corporation. The reinsurance treaties re=uired petitioners to for( a QpRool. Accordin+l*, a pool co(posed of the petitioners was for(ed on the sa(e da*. -n April 1$, 1%/., the pool of (achiner* insurers su7(itted a financial state(ent and filed an 49nfor(ation eturn of -r+aniFation ;)e(pt fro( 9nco(e Ta)4 for the *ear endin+ in 1%/', on the 7asis of which it was

assessed 7* the Co((issioner of 9nternal evenue deficienc* corporate ta)es in the a(ount of "1,&$3,2/3..0, and withholdin+ ta)es in the a(ount of "1,/.&,/%%.3% and "&%,$3&..& on dividends paid to 0unich and to the petitioners, respectivel*. These assess(ents were protested 7* the petitioners throu+h its auditors !*cip, Gorres, <ela*o and Co. -n Januar* 2/, 1%&., the Co((issioner of 9nternal evenue denied the protest and ordered the petitioners, assessed as 4"ool of 0achiner* 9nsurers,4 to pa* deficienc* inco(e ta), interest, and with QhRoldin+ ta), ite(iFed as follows, #et inco(e per infor(ation return "3,/3/,3/0.00 NNNNNNNNNNN 9nco(e ta) due thereon "1,2%&,0&0.00 Add, 1$A 9nt. fr. $O1'O/. to $O1'O/% '$',1%3..0 MMMMMM T-TA: A0-@#T D@; E "1,&$3,2/3..0 C-::;CT93:; Dividend paid to 0unich einsurance Co(pan* "3,/2&,$12.00 MMMMMM 3'A withholdin+ ta) at source due thereon "1,30$,%$$.20 Add, 2'A surchar+e 32.,23..0' 1$A interest fro( 1O2'O/. to 1O2'O/% 13/,01%.1$ Co(pro(ise penalt*-

non-filin+ of return 300.00 late pa*(ent 300.00 MMMMMM T-TA: A0-@#T D@; E "1,/.&,/%%.3% C-::;CT93:; NNNNNNNNNNN Dividend paid to "ool 0e(7ers ".'',.3..00 NNNNNNNNNNN 10A withholdin+ ta) at source due thereon ".','.3..0 Add, 2'A surchar+e 1.,3%0.%0 1$A interest fro( 1O2'O/. to 1O2'O/% .,&&$.1& Co(pro(ise penalt*non-filin+ of return 300.00 late pa*(ent 300.00 MMMMMM T-TA: A0-@#T D@; E "&%,$3&..& C-::;CT93:; NNNNNNNNNNN 8 The CA ruled in the (ain that the pool of (achiner* insurers was a partnership ta)a7le as a corporation, and that the latterKs collection of pre(iu(s on 7ehalf of its (e(7ers, the cedin+ co(panies, was ta)a7le inco(e. 9t added that prescription did not 7ar the 3ureau of 9nternal evenue 139 2 fro( collectin+ the ta)es due, 7ecause 4the ta)pa*er cannot 7e located at the address +iven in the infor(ation return filed.4 Bence, this "etition for eview 7efore us. 8 0he &ss'es 3efore this Court, petitioners raise the followin+ issues,

1. 8hether or not the Clearin+ Bouse, actin+ as a (ere a+ent and perfor(in+ strictl* ad(inistrative functions, and which did not insure or assu(e an* ris6 in its own na(e, was a partnership or association su7?ect to ta) as a corporation> 2. 8hether or not the re(ittances to petitioners and 0@#9CB ; of their respective shares of reinsurance pre(iu(s, pertainin+ to their individual and separate contracts of reinsurance, were 4dividends4 su7?ect to ta)> and 3. 8hether or not the respondent Co((issionerKs ri+ht to assess the Clearin+ Bouse had alread* prescri7ed. 10 0he Co'rtCs R'lin: The petition is devoid of (erit. 8e sustain the rulin+ of the Court of Appeals that the pool is ta)a7le as a corporation, and that the +overn(entKs ri+ht to assess and collect the ta)es had not prescri7ed. First &ss'e, Pool 0a1a5le as a Corporation

which, 7* the nature of its functions, is dedicated e)clusivel* to the stud* and consideration of ta) pro7le(s and has necessaril* developed an e)pertise on the su7?ect, unless there has 7een an a7use or i(provident e)ercise of its authorit*. 20 This Court rules that the Court of Appeals, in affir(in+ the CTA which had previousl* sustained the internal revenue co((issioner, co((itted no reversi7le error. !ection 2$ of the #9 C, as worded in the *ear endin+ 1%/', provides, !ec. 2$. ate of ta) on corporations. M 1a2 0a1 on domestic corporations. M A ta) is here7* i(posed upon the ta)a7le net inco(e received durin+ each ta)a7le *ear fro( all sources 7* ever* corporation or+aniFed in, or e)istin+ under the laws of the "hilippines, no (atter how created or or+aniFed, 7ut not includin+ dul* re+istered +eneral co-partnership 1co(paIias colectivas2, +eneral professional partnerships, private educational institutions, and 7uildin+ and loan associations . . . . 9neludi7l*, the "hilippine le+islature included in the concept of corporations those entities that rese(7led the( such as unre+istered partnerships and associations. "arentheticall*, the #9 CKs inclusion of such entities in the ta) on corporations was (ade even clearer 7* the ta) efor( Act of 1%%/, 21 which a(ended the Ta) Code. "ertinent provisions of the new law read as follows, !ec. 2/. ates of 9nco(e Ta) on Do(estic Corporations. M

"etitioners contend that the Court of Appeals erred in findin+ that the pool of clearin+ house was an infor(al partnership, which was ta)a7le as a corporation under the #9 C. The* point out that the reinsurance policies were written 7* the( 4individuall* and separatel*,4 and that their lia7ilit* was li(ited to the e)tent of their allocated share in the ori+inal ris6 thus reinsured. 11 Bence, the pool did not act or earn inco(e as a reinsurer. 12 9ts role was li(ited to its principal function of 4allocatin+ and distri7utin+ the ris61s2 arisin+ fro( the ori+inal insurance a(on+ the si+natories to the treat* or the (e(7ers of the pool 7ased on their a7ilit* to a7sor7 the ris61s2 cededQ>R as well as the perfor(ance of incidental functions, such as records, (aintenance, collection and custod* of funds, etc.4 1< "etitioners 7elie the e)istence of a partnership in this case, 7ecause 112 the*, the reinsurers, did not share the sa(e ris6 or solidar* lia7ilit*, 14 122 there was no co((on fund> 17 132 the e)ecutive 7oard of the pool did not e)ercise control and (ana+e(ent of its funds, unli6e the 7oard of directors of a corporation> 16 and 1$2 the pool or clearin+ house 4was not and could not possi7l* have en+a+ed in the 7usiness of reinsurance fro( which it could have derived inco(e for itself.4
17

1A2 &n General. M ;)cept as otherwise provided in this Code, an inco(e ta) of thirt*-five percent 13'A2 is here7* i(posed upon the ta)a7le inco(e derived durin+ each ta)a7le *ear fro( all sources within and without the "hilippines 7* ever* corporation, as defined in !ection 22 132 of this Code, and ta)a7le under this Title as a corporation . . . . !ec. 22. M Definition. M 8hen used in this Title, ))) ))) ))) 132 The ter( 4corporation4 shall include partnerships, no (atter how created or or+aniFed, ?oint-stoc6 co(panies, ?oint accounts 1cuentas en participacion2, associations, or insurance co(panies, 7ut does not include +eneral professional partnerships QorR a ?oint venture or consortiu( for(ed for the purpose of underta6in+ construction pro?ects or en+a+in+ in petroleu(, coal, +eother(al and other ener+* operations pursuant to an operatin+ or consortiu( a+ree(ent under a service contract without the Govern(ent. 4General professional partnerships4 are partnerships for(ed 7* persons for the sole purpose of e)ercisin+ their co((on profession, no part of the inco(e of which is derived fro( en+a+in+ in an* trade or 7usiness. ))) ))) )))

The Court is not persuaded. The opinion or rulin+ of the Co((ission of 9nternal evenue, the a+enc* tas6ed with the enforce(ent of ta) law, is accorded (uch wei+ht and even finalit*, when there is no showin+. that it is patentl* wron+, 18 particularl* in this case where the findin+s and conclusions of the internal revenue co((issioner were su7se=uentl* affir(ed 7* the CTA, a specialiFed 7od* created for the e)clusive purpose of reviewin+ ta) cases, and the Court of Appeals. 18 9ndeed, Q9Rt has 7een the lon+ standin+ polic* and practice of this Court to respect the conclusions of =uasi-?udicial a+encies, such as the Court of Ta) Appeals

Thus, the Court in ;%an:elista %. Collector of &nternal Re%en'e 22 held that !ection 2$ covered these unre+istered partnerships and even associations or ?oint accounts, which had no le+al personalities apart fro( their individual (e(7ers. 2< The Court of Appeals astutel* applied ;%an:elista. 24 . . . Accordin+l*, a pool of individual real propert* owners dealin+ in real estate 7usiness was considered a corporation for purposes of the ta) in sec. 2$ of the Ta) Code in ;%an:elista %. Collector of &nternal Re%en'e, s'pra. The !upre(e Court said, The ter( 4partnership4 includes a s*ndicate, +roup, pool, ?oint venture or other unincorporated or+aniFation, throu+h or 7* (eans of which an* 7usiness, financial operation, or venture is carried on. GGG 1& 0ertenKs :aw of Cederal 9nco(e Ta)ation, p. '.2 #ote .32 Art. 1/./ of the Civil Code reco+niFes the creation of a contract of partnership when 4two or (ore persons 7ind the(selves to contri7ute (one*, propert*, or 9ndustr* to a co((on fund, with the intention of dividin+ the profits a(on+ the(selves.4 27 9ts re=uisites are, 4112 (utual contri7ution to a co((on stoc6, and 122 a ?oint interest in the profits.4 26 9n other words, a partnership is for(ed when persons contract 4to devote to a co((on purpose either (one*, propert*, or la7or with the intention of dividin+ the profits 7etween the(selves.4 27 0eanwhile, an association i(plies associates who enter into a 4?oint enterprise . . . for the transaction of 7usiness.4 28 9n the case 7efore us, the cedin+ co(panies entered into a "ool A+ree(ent or an association that would handle all the insurance 7usinesses covered under their =uota-share reinsurance treat* <1 and surplus reinsurance treat* <2 with 0unich. The followin+ un(ista6a7l* indicates a partnership or an association covered 7* !ection 2$ of the #9 C, 112 The pool has a co((on fund, consistin+ of (one* and other valua7les that are deposited in the na(e and credit of the pool. << This co((on fund pa*s for the ad(inistration and operation e)penses of the pool. 24 122 The pool functions throu+h an e)ecutive 7oard, which rese(7les the 7oard of directors of a corporation, co(posed of one representative for each of the cedin+ co(panies. <7 132 True, the pool itself is not a reinsurer and does not issue an* insurance polic*> however, its wor6 is indispensa7le, 7eneficial and econo(icall* useful to the 7usiness of the cedin+ co(panies and 0unich, 7ecause without it the* would not have received their pre(iu(s. The cedin+ co(panies share 4in the 7usiness ceded to the pool4 and in the 4e)penses4 accordin+ to a 4 ules of Distri7ution4 anne)ed to the "ool A+ree(ent. <6 "rofit (otive or 7usiness is, therefore, the pri(ordial reason for the poolKs for(ation. As aptl* found 7* the CTA, . . . The fact that the pool does not retain an* profit or inco(e does not o7literate an antecedent fact, that of the pool 7ein+ used in the transaction of 7usiness for profit. 9t is apparent, and petitioners ad(it, that their association or coaction was indispensa7le QtoR the transaction of the 7usiness, . . . 9f to+ether the* have conducted 7usiness, profit (ust have 7een the o7?ect as,
28 <0

indeed, profit was earned. Thou+h the profit was apportioned a(on+ the (e(7ers, this is onl* a (atter of conse=uence, as it i(plies that profit actuall* resulted. <7 The petitionersK reliance on Pasc'als %. Commissioner <8 is (isplaced, 7ecause the facts o7tainin+ therein are not on all fours with the present case. 9n Pasc'al, there was no unre+istered partnership, 7ut (erel* a co-ownership which too6 up onl* two isolated transactions. <8 The Court of Appeals did not err in appl*in+ ;%an:elista, which involved a partnership that en+a+ed in a series of transactions spannin+ (ore than ten *ears, as in the case 7efore us. Second &ss'e, PoolCs Remittances are 0a1a5le "etitioners further contend that the re(ittances of the pool to the cedin+ co(panies and 0unich are not dividends su7?ect to ta). The* insist that such re(ittances contravene !ections 2$ 172 192 and 2.3 of the 1%// #9 C and 4would 7e tanta(ount to an ille+al dou7le ta)ation as it would result in ta)in+ the sa(e ta)pa*er4 40 0oreover, petitioners ar+ue that since 0unich was not a si+nator* to the "ool A+ree(ent, the re(ittances it received fro( the pool cannot 7e dee(ed dividends. 41 The* add that even if such re(ittances were treated as dividends, the* would have 7een e)e(pt under the previousl* (entioned sections of the 1%// #9 C, 42 as well as Article / of para+raph 1 4< and Article ' of para+raph ' 44 of the "-8est Ger(an Ta) Treat*. 47 "etitioners are clutchin+ at straws. Dou7le ta)ation (eans ta)in+ the sa(e propert* twice when it should 7e ta)ed onl* once. That is, 4. . . ta)in+ the sa(e person twice 7* the sa(e ?urisdiction for the sa(e thin+4 46 9n the instant case, the pool is a ta)a7le entit* distinct fro( the individual corporate entities of the cedin+ co(panies. The ta) on its income is o7viousl* different fro( the ta) on the di%idends received 7* the said co(panies. Clearl*, there is no dou7le ta)ation here. The ta) e)e(ptions clai(ed 7* petitioners cannot 7e +ranted, since their entitle(ent thereto re(ains unproven and unsu7stantiated. 9t is a)io(atic in the law of ta)ation that ta)es are the life7lood of the nation. Bence, 4e)e(ptions therefro( are hi+hl* disfavored in law and he who clai(s ta) e)e(ption (ust 7e a7le to ?ustif* his clai( or ri+ht.4 47 "etitioners have failed to dischar+e this 7urden of proof. The sections of the 1%// #9 C which the* cite are inapplica7le, 7ecause these were not *et in effect when the inco(e was earned and when the su7?ect infor(ation return for the *ear endin+ 1%/' was filed. eferrin+, to the 1%/' version of the counterpart sections of the #9 C, the Court still cannot ?ustif* the e)e(ptions clai(ed. !ection 2'' provides that no ta) shall 4. . . 7e paid upon reinsurance 7* an* co(pan* that has alread* paid the ta) . . .4 This cannot 7e applied to the present case 7ecause, as previousl* discussed, the pool is a ta)a7le entit* distinct fro( the cedin+ co(panies> therefore, the latter cannot individuall* clai( the inco(e ta) paid 7* the for(er as their own. -n the other hand, !ection 2$ 172 112 48 pertains to ta) on forei+n corporations> hence, it cannot 7e clai(ed 7* the cedin+ co(panies which are do(estic corporations. #or can 0unich, a forei+n corporation, 7e +ranted e)e(ption 7ased solel* on this provision of the Ta) Code, 7ecause the sa(e su7section specificall* ta)es dividends, the t*pe of re(ittances forwarded to it 7* the pool. Althou+h not a si+nator* to the "ool A+ree(ent, 0unich is patentl* an associate of the cedin+

co(panies in the entit* for(ed, pursuant to their reinsurance treaties which re=uired the creation of said pool. @nder its pool arran+e(ent with the cedin+ co(panies> 0unich shared in their inco(e and loss. This is (anifest fro( a readin+ of Article 3 48 and 10 70 of the Suota-!hare einsurance treat* and Articles 3 71 and 10 72 of the !urplus einsurance Treat*. The fore+oin+ interpretation of !ection 2$ 172 112 is in line with the doctrine that a ta) e)e(ption (ust 7e construed strictissimi >'ris, and the statutor* e)e(ption clai(ed (ust 7e e)pressed in a lan+ua+e too plain to 7e (ista6en. 7< Cinall* the petitionersK clai( that 0unich is ta)-e)e(pt 7ased on the "- 8est Ger(an Ta) Treat* is li6ewise unpersuasive, 7ecause the internal revenue co((issioner assessed the pool for corporate ta)es on the 7asis of the infor(ation return it had su7(itted for the *ear endin+ 1%/', a ta)a7le *ear when said treat* was not *et in effect. 74 Althou+h petitioners o(itted in their pleadin+s the date of effectivit* of the treat*, the Court ta6es ?udicial notice that it too6 effect onl* later, on Dece(7er 1$, 1%&$. 77 0hird &ss'e, Prescription "etitioners also ar+ue that the +overn(entKs ri+ht to assess and collect the su7?ect ta) had prescri7ed. The* clai( that the su7?ect infor(ation return was filed 7* the pool on April 1$, 1%/.. -n the 7asis of this return, the 39 telephoned petitioners on #ove(7er 11, 1%&1, to +ive the( notice of its letter of assess(ent dated 0arch 2/, 1%&1. Thus, the petitioners contend that the five-*ear statute of li(itations then provided in the #9 C had alread* lapsed, and that the internal revenue co((issioner was alread* 7arred 7* prescription fro( (a6in+ an assess(ent. 76 8e cannot sustain the petitioners. The CA and the CTA cate+oricall* found that the prescriptive period was tolled under then !ection 333 of the #9 C, 77 7ecause 4the ta)pa*er cannot 7e located at the address +iven in the infor(ation return filed and for which reason there was dela* in sendin+ the assess(ent.4 78 9ndeed, whether the +overn(entKs ri+ht to collect and assess the ta) has prescri7ed involves facts which have 7een ruled upon 7* the lower courts. 9t is a)io(atic that in the a7sence of a clear showin+ of palpa7le error or +rave a7use of discretion, as in this case, this Court (ust not overturn the factual findin+s of the CA and the CTA. Curther(ore, petitioners ad(itted in their 0otion for econsideration 7efore the Court of Appeals that the pool chan+ed its address, for the* stated that the poolKs infor(ation return filed in 1%&0 indicated therein its 4present address.4 The Court finds that this falls short of the re=uire(ent of !ection 333 of the #9 C for the suspension of the prescriptive period. The law clearl* states that the said period will 7e suspended onl* 4if the ta)pa*er infor(s the Co((issioner of 9nternal evenue of an* chan+e in the address.4 8B; ;C- ;, the petition is D;#9;D. The esolution of the Court of Appeals dated -cto7er 11, 1%%3 and #ove(7er 1', 1%%3 are here7* ACC9 0;D. Cost a+ainst petitioners. 1F!phi1.nGt G. . #o. :-%%%. -cto7er 1', 1%'/

;@C;09A ;<A#G;:9!TA, 0A#@;:A ;<A#G;:9!TA, and C A#C9!CA ;<A#G;:9!TA, petitioners, vs. THE COLLECTOR OF INTERNAL RE EN!E &+4 THE CO!RT OF TAX APPEALS, respondents. Santia:o F. Alidio and An:el S. 2a9ila, Jr., for petitioner. Office of the Solicitor General Am5rosio Padilla, Assistant Solicitor General ;smeraldo Dmali and Solicitor Felicisimo R. Rosete for Respondents. CONCEPCION, J.% This is a petition filed 7* ;ufe(ia ;van+elista, 0anuela ;van+elista and Crancisca ;van+elista, for review of a decision of the Court of Ta) Appeals, the dispositive part of which reads, C- A:: TB; C- ;G-9#G, we hold that the petitioners are lia7le for the inco(e ta), real estate dealerKs ta) and the residence ta) for the *ears 1%$' to 1%$%, inclusive, in accordance with the respondentKs assess(ent for the sa(e in the total a(ount of ".,&/&.3$, which is here7* affir(ed and the petition for review filed 7* petitioner is here7* dis(issed with costs a+ainst petitioners. 9t appears fro( the stipulation su7(itted 7* the parties, 1. That the petitioners 7orrowed fro( their father the su( of "'%,1$00.00 which a(ount to+ether with their personal (onies was used 7* the( for the purpose of 7u*in+ real properties,. 2. That on Ce7ruar* 2, 1%$3, the* 7ou+ht fro( 0rs. Josefina Clorentino a lot with an area of 3,/13.$0 s=. (. includin+ i(prove(ents thereon fro( the su( of "100,000.00> this propert* has an assessed value of "'/,'1/.00 as of 1%$&> 3. That on April 3, 1%$$ the* purchased fro( 0rs. Josefa -ppus 21 parcels of land with an a++re+ate area of 3,/1&.$0 s=. (. includin+ i(prove(ents thereon for "130,000.00> this propert* has an assessed value of "&2,2''.00 as of 1%$&> $. That on April 2&, 1%$$ the* purchased fro( the 9nsular 9nvest(ents 9nc., a lot of $,3'3 s=. (. includin+ i(prove(ents thereon for "10&,&2'.00. This propert* has an assessed value of "$,%&3.00 as of 1%$&> '. That on April 2&, 1%$$ the* 7ou+ht for( 0rs. <alentina Afa7le a lot of &,3/1 s=. (. includin+ i(prove(ents thereon for "23/,23$.3$. This propert* has an assessed value of "'%,1$0.00 as of 1%$&> .. That in a docu(ent dated Au+ust 1., 1%$', the* appointed their 7rother !i(eon ;van+elista to K(ana+e their properties with full power to lease> to collect and receive rents> to issue receipts therefor> in default of such pa*(ent, to 7rin+ suits a+ainst the defaultin+ tenants> to si+n all letters, contracts, etc., for and in their 7ehalf, and to endorse and deposit all notes and chec6s for the(>

/. That after havin+ 7ou+ht the a7ove-(entioned real properties the petitioners had the sa(e rented or leases to various tenants> &. That fro( the (onth of 0arch, 1%$' up to an includin+ Dece(7er, 1%$', the total a(ount collected as rents on their real properties was "%,'%%.00 while the e)penses a(ounted to "3,.'0.00 there7* leavin+ the( a net rental inco(e of "',%$&.33> %. That on 1%$., the* realiFed a +ross rental inco(e of in the su( of "2$,/&..30, out of which a(ount was deducted in the su( of "1.,2&&.2/ for e)penses there7* leavin+ the( a net rental inco(e of "/,$%&.13> 10. That in 1%$&, the* realiFed a +ross rental inco(e of "1/,$'3.00 out of the which a(ount was deducted the su( of "$,&3/..' as e)penses, there7* leavin+ the( a net rental inco(e of "12,.1'.3'. 9t further appears that on !epte(7er 2$, 1%'$ respondent Collector of 9nternal evenue de(anded the pa*(ent of inco(e ta) on corporations, real estate dealerKs fi)ed ta) and corporation residence ta) for the *ears 1%$'-1%$%, co(puted, accordin+ to assess(ent (ade 7* said officer, as follows, 9#C-0; TAP;! 1%$' 1%$. 1%$/ 1%$& 1%$% Total includin+ surchar+e and co(pro(ise 1$.&$ 1,1$$./1 10.3$ 1,%12.30 1,'/'.%0 ".,1'/.0%

1%$. 1%$/ 1%$& 1%$% Total includin+ surchar+e T-TA: TAP;! D@;

3&./' 3&./' 3&./' 3&./' "1%3./' ".,&/&.3$.

!aid letter of de(and and correspondin+ assess(ents were delivered to petitioners on Dece(7er 3, 1%'$, whereupon the* instituted the present case in the Court of Ta) Appeals, with a pra*er that 4the decision of the respondent contained in his letter of de(and dated !epte(7er 2$, 1%'$4 7e reversed, and that the* 7e a7solved fro( the pa*(ent of the ta)es in =uestion, with costs a+ainst the respondent. After appropriate proceedin+s, the Court of Ta) Appeals the a7ove-(entioned decision for the respondent, and a petition for reconsideration and new trial havin+ 7een su7se=uentl* denied, the case is now 7efore @s for review at the instance of the petitioners. The issue in this case whether petitioners are su7?ect to the ta) on corporations provided for in section 2$ of Co((onwealth Act. #o. $.., otherwise 6nown as the #ational 9nternal evenue Code, as well as to the residence ta) for corporations and the real estate dealers fi)ed ta). 8ith respect to the ta) on corporations, the issue hin+es on the (eanin+ of the ter(s 4corporation4 and 4partnership,4 as used in section 2$ and &$ of said Code, the pertinent parts of which read, !;C. 2$. Rate of ta1 on corporations.MThere shall 7e levied, assessed, collected, and paid annuall* upon the total net inco(e received in the precedin+ ta)a7le *ear fro( all sources 7* ever* corporation or+aniFed in, or e)istin+ under the laws of the "hilippines, no (atter how created or or+aniFed 7ut not includin+ dul* re+istered +eneral co-partnerships 1compa#ias colecti%as2, a ta) upon such inco(e e=ual to the su( of the followin+, . . . !;C. &$ 172. The ter( KcorporationK includes partnerships, no (atter how created or or+aniFed, ?oint-stoc6 co(panies, ?oint accounts 1c'entas en participacion2, associations or insurance co(panies, 7ut does not include dul* re+istered +eneral copartnerships. 1compa#ias colecti%as2. Article 1/./ of the Civil Code of the "hilippines provides, 3* the contract of partnership two or (ore persons 7ind the(selves to contri7ute (one*, properl*, or industr* to a co((on fund, with the intention of dividin+ the profits a(on+ the(selves. "ursuant to the article, the essential ele(ents of a partnership are two, na(el*, 1a2 an a+ree(ent to contri7ute (one*, propert* or industr* to a co((on fund> and 172 intent to divide the profits

;A: ;!TAT; D;A:; K! C9P;D TAP 1%$. 1%$/ 1%$& 1%$% Total includin+ penalt* "3/.'0 1'0.00 1'0.00 1'0.00 "'2/.00

;!9D;#C; TAP;! -C C- "- AT9-# 1%$' "3&./'

a(on+ the contractin+ parties. The first ele(ent is undou7tedl* present in the case at 7ar, for, ad(ittedl*, petitioners have a+reed to, and did, contri7ute (one* and propert* to a co((on fund. Bence, the issue narrows down to their intent in actin+ as the* did. @pon consideration of all the facts and circu(stances surroundin+ the case, we are full* satisfied that their purpose was to en+a+e in real estate transactions for (onetar* +ain and then divide the sa(e a(on+ the(selves, 7ecause, 1. !aid co((on fund was not so(ethin+ the* found alread* in e)istence. 9t was not propert* inherited 7* the( pro indi%iso. The* created it purposel*. 8hat is (ore the* >ointly 5orro!ed a su7stantial portion thereof in order to esta7lish said co((on fund. 2. The* invested the sa(e, not (erel* not (erel* in one transaction, 7ut in a series of transactions. -n Ce7ruar* 2, 1%$3, the* 7ou+ht a lot for "100,000.00. -n April 3, 1%$$, the* purchased 21 lots for "1&,000.00. This was soon followed on April 23, 1%$$, 7* the ac=uisition of another real estate for "10&,&2'.00. Cive 1'2 da*s later 1April 2&, 1%$$2, the* +ot a fourth lot for "23/,23$.1$. The nu(7er of lots 12$2 ac=uired and transactions underta6en, as well as the 7rief interre+nu( 7etween each, particularl* the last three purchases, is stron+l* indicative of a pattern or co((on desi+n that was not li(ited to the conservation and preservation of the afore(entioned co((on fund or even of the propert* ac=uired 7* the petitioners in Ce7ruar*, 1%$3. 9n other words, one cannot 7ut perceive a character of ha7ituall* peculiar to 7usiness transactions en+a+ed in the purpose of +ain. 3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties were leased separatel* to several persons, who, fro( 1%$' to 1%$& inclusive, paid the total su( of "/0,0.&.30 7* wa* of rentals. !ee(in+l*, the lots are still 7ein+ so let, for petitioners do not even su++est that there has 7een an* chan+e in the utiliFation thereof. $. !ince Au+ust, 1%$', the properties have 7een under the (ana+e(ent of one person, na(el* !i(eon ;van+elista, with full power to lease, to collect rents, to issue receipts, to 7rin+ suits, to si+n letters and contracts, and to indorse and deposit notes and chec6s. Thus, the affairs relative to said properties have 7een handled as if the sa(e 7elon+ed to a corporation or 7usiness and enterprise operated for profit. '. The fore+oin+ conditions have e)isted for (ore than ten 1102 *ears, or, to 7e e)act, over fifteen 11'2 *ears, since the first propert* was ac=uired, and over twelve 1122 *ears, since !i(eon ;van+elista 7eca(e the (ana+er. .. "etitioners have not testified or introduced an* evidence, either on their purpose in creatin+ the set up alread* adverted to, or on the causes for its continued e)istence. The* did not even tr* to offer an e)planation therefor. Althou+h, ta6en sin+l*, the* (i+ht not suffice to esta7lish the intent necessar* to constitute a partnership, the collective effect of these circu(stances is such as to leave no roo( for dou7t on the e)istence of said intent in petitioners herein. -nl* one or two of the afore(entioned circu(stances were present in the cases cited 7* petitioners herein, and, hence, those cases are not in point.

"etitioners insist, however, that the* are (ere co-owners, not copartners, for, in conse=uence of the acts perfor(ed 7* the(, a le+al entit*, with a personalit* independent of that of its (e(7ers, did not co(e into e)istence, and so(e of the characteristics of partnerships are lac6in+ in the case at 7ar. This pretense was correctl* re?ected 7* the Court of Ta) Appeals. To 7e+in with, the ta) in =uestion is one i(posed upon 4corporations4, which, strictl* spea6in+, are distinct and different fro( 4partnerships4. 8hen our 9nternal evenue Code includes 4partnerships4 a(on+ the entities su7?ect to the ta) on 4corporations4, said Code (ust allude, therefore, to or+aniFations which are not necessaril* 4partnerships4, in the technical sense of the ter(. Thus, for instance, section 2$ of said Code e)e(pts fro( the afore(entioned ta) 4dul* re+istered +eneral partnerships which constitute precisel* one of the (ost t*pical for(s of partnerships in this ?urisdiction. :i6ewise, as defined in section &$172 of said Code, 4the ter( corporation includes partnerships, no matter ho! created or or:ani=ed.4 This =ualif*in+ e)pression clearl* indicates that a ?oint venture need not 7e underta6en in an* of the standard for(s, or in confor(it* with the usual re=uire(ents of the law on partnerships, in order that one could 7e dee(ed constituted for purposes of the ta) on corporations. A+ain, pursuant to said section &$172, the ter( 4corporation4 includes, a(on+ other, ?oint accounts, 1 c'entas en participation24 and 4associations,4 none of !hich has a le:al personality of its o!n, independent of that of its mem5ers. Accordin+l*, the law(a6er could not have re+arded that personalit* as a condition essential to the e)istence of the partnerships therein referred to. 9n fact, as a7ove stated, 4dul* re+istered +eneral copartnerships4 M !hich are possessed of the aforementioned personality M have 7een e)pressl* e)cluded 7* law 1sections 2$ and &$ Q7R fro( the connotation of the ter( 4corporation4 9t (a* not 7e a(iss to add that petitionersK alle+ation to the effect that their lia7ilit* in connection with the leasin+ of the lots a7ove referred to, under the (ana+e(ent of one person M even if true, on which we e)press no opinion M tends to increase the si(ilarit* 7etween the nature of their venture and that corporations, and is, therefore, an additional ar+u(ent in fa%or of the i(position of said ta) on corporations. @nder the 9nternal evenue :aws of the @nited !tates, 4corporations4 are ta)ed differentl* fro( 4partnerships4. 3* specific provisions of said laws, such 4corporations4 include 4associations, ?oint-stoc6 co(panies and insurance co(panies.4 Bowever, the ter( 4association4 is not used in the afore(entioned laws. . . . in an* narrow or technical sense. 9t includes an* or+aniFation, created for the transaction of desi+ned affairs, or the attain(ent of so(e o7?ect, which li6e a corporation, continues notwithstandin+ that its (e(7ers or participants chan+e, and the affairs of which, li6e corporate affairs, are conducted 7* a sin+le individual, a co((ittee, a 7oard, or so(e other +roup, actin+ in a representative capacit*. 9t is i((aterial whether such or+aniFation is created 7* an a+ree(ent, a declaration of trust, a statute, or otherwise. 9t includes a voluntar* association, a ?oint-stoc6 corporation or co(pan*, a K7usinessK trusts a K0assachusettsK trust, a Kco((on lawK trust, and Kinvest(entK trust 1whether of the fi)ed or the (ana+e(ent t*pe2, an interinsuarance e)chan+e operatin+ throu+h an attorne* in fact, a partnership association, and an* other t*pe of or+aniFation 17* whatever na(e 6nown2 which is not, within the (eanin+ of the Code, a trust or an estate, or a partnership. 1/A 0ertens :aw of Cederal 9nco(e Ta)ation, p. /&&> e(phasis supplied.2. !i(ilarl*, the A(erican :aw.

. . . provides its o!n concept of a partnership, under the ter( Kpartnership Kit includes not onl* a partnership as 6nown at co((on law 7ut, as well, a s*ndicate, +roup, pool, >oint %ent're or other 'nincorporated or:ani=ations !hich carries on any 5'siness financial operation, or %ent're, and which is not, within the (eanin+ of the Code, a trust, estate, or a corporation. . . 1/A 0ertenKs :aw of Cederal 9nco(e ta)ation, p. /&%> e(phasis supplied.2 The ter( KpartnershipK includes a s*ndicate, +roup, pool, >oint %ent're or other 'nincorporated or:ani=ation, thro':h or 5y means of !hich any 5'siness, financial operation, or %ent're is carried on, . . .. 1 & 0ertenKs :aw of Cederal 9nco(e Ta)ation, p. '.2 #ote .3> e(phasis supplied.2 . Cor purposes of the ta) on corporations, o'r ?ational &nternal Re%en'e Code, incl'des these partnerships M with the e)ception onl* of dul* re+istered +eneral copartnerships M !ithin the p'r%ie! of the term Jcorporation.J 9t is, therefore, clear to our (ind that petitioners herein constitute a partnership, insofar as said Code is concerned and are su7?ect to the inco(e ta) for corporations. As re+ards the residence of ta) for corporations, section 2 of Co((onwealth Act #o. $.' provides in part, ;ntities lia7le to residence ta).-;ver* corporation, no (atter how created or or+aniFed, whether do(estic or resident forei+n, en+a+ed in or doin+ 7usiness in the "hilippines shall pa* an annual residence ta) of five pesos and an annual additional ta) which in no case, shall e)ceed one thousand pesos, in accordance with the followin+ schedule, . . . The ter( KcorporationK as used in this Act includes ?oint-stoc6 co(pan*, partnership, ?oint account 1c'entas en participacion2, association or insurance co(pan*, no matter ho! created or or:ani=ed. 1e(phasis supplied.2 Considerin+ that the pertinent part of this provision is analo+ous to that of section 2$ and &$ 172 of our #ational 9nternal evenue Code 1co((onwealth Act #o. $..2, and that the latter was approved on June 1', 1%3%, the da* i((ediatel* after the approval of said Co((onwealth Act #o. $.' 1June 1$, 1%3%2, it is apparent that the ter(s 4corporation4 and 4partnership4 are used in 7oth statutes with su7stantiall* the sa(e (eanin+. Conse=uentl*, petitioners are su7?ect, also, to the residence ta) for corporations. :astl*, the records show that petitioners have ha7ituall* en+a+ed in leasin+ the properties a7ove (entioned for a period of over twelve *ears, and that the *earl* +ross rentals of said properties fro( June 1%$' to 1%$& ran+ed fro( "%,'%% to "1/,$'3. Thus, the* are su7?ect to the ta) provided in section 1%3 1=2 of our #ational 9nternal evenue Code, for 4real estate dealers,4 inas(uch as, pursuant to section 1%$ 1s2 thereof, K eal estate dealerK includes an* person en+a+ed in the 7usiness of 7u*in+, sellin+, e)chan+in+, leasin:, or rentin: property or his o!n acco'nt as principal and holdin+ hi(self out as a full or part ti(e dealer in real estate or as an owner of rental propert* or properties rented or offered to rent for an a++re+ate a(ount of three thousand pesos or (ore a *ear. . . 1e(phasis supplied.2

8herefore, the appealed decision of the Court of Ta) appeals is here7* affir(ed with costs a+ainst the petitioners herein. 9t is so ordered. Ben:=on, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.B., ;ndencia and Feli1, JJ., concur.

=A!TISTA ANGELO, 9., concurrin+, 9 a+ree with the opinion that petitioners have actuall* contri7uted (one* to a co((on fund with e)press purpose of en+a+in+ in real estate 7usiness for profit. The series of transactions which the* had underta6en attest to this. This appears in the followin+ portion of the decision, 2. The* invested the sa(e, not (erel* in one transaction, 7ut in a series of transactions. -n Ce7ruar* 2, 1%$3, the* 7ou+ht a lot for "100,000. -n April 3, 1%$$, the* purchase 21 lots for "1&,000. This was soon followed on April 23, 1%$$, 7* the ac=uisition of another real state for "10&,&2'. Cive 1'2 da*s later 1April 2&, 1%$$2, the* +ot a fourth lot for "23/,23$.1$. The nu(7er of lots 12$2 ac=uired and transactions underta6en, as well as the 7rief interre+nu( 7etween each, particularl* the last three purchases, is stron+l* indicative of a pattern or co((on desi+n that was not li(ited to the conservation and preservation of the afore(entioned co((on fund or even of the propert* ac=uired 7* the petitioner in Ce7ruar*, 1%$3, 9n other words, we cannot 7ut perceive a character of ha5it'ally peculiar to 5'siness transactions en+a+ed in for purposes of +ain. 9 wish however to (a6e to (a6e the followin+ o7servation, Article 1/.% of the new Civil Code la*s down the rule for deter(inin+ when a transaction should 7e dee(ed a partnership or a co-ownership. !aid article para+raphs 2 and 3, provides, 122 Co-ownership or co-possession does not of itself esta7lish a partnership, whether such co-owners or co-possessors do or do not share an* profits (ade 7* the use of the propert*> 132 The sharin+ of +ross returns does not of itself esta7lish partnership, whether or not the person sharin+ the( have a ?oint or co((on ri+ht or interest in an* propert* fro( which the returns are derived> Cro( the a7ove it appears that the fact that those who a+ree to for( a co-ownership shared or do not share an* profits (ade 7* the use of propert* held in co((on does not convert their venture into a partnership. -r the sharin+ of the +ross returns does not of itself esta7lish a partnership whether or not the persons sharin+ therein have a ?oint or co((on ri+ht or interest in the propert*. This onl* (eans that, aside fro( the circu(stance of profit, the presence of other ele(ents constitutin+ partnership is necessar*, such as the clear intent to for( a partnership, the e)istence of a ?udicial personalit* different fro( that of the individual partners, and the freedo( to transfer or assi+n an* interest in the propert* 7* one with the consent of the others 1"adilla, Civil Code of the "hilippines Annotated, <ol. 9, 1%'3 ed., pp. .3'- .3.2.

9t is evident that an isolated transaction where7* two or (ore persons contri7ute funds to 7u* certain real estate for profit in the a7sence of other circu(stances showin+ a contrar* intention cannot 7e considered a partnership. "ersons who contri7ute propert* or funds for a co((on enterprise and a+ree to share the +ross returns of that enterprise in proportion to their contri7ution, 7ut who severall* retain the title to their respective contri7ution, are not there7* rendered partners. The* have no co((on stoc6 or capital, and no co((unit* of interest as principal proprietors in the 7usiness itself which the proceeds derived. 1;le(ents of the law of "artnership 7* Clo*d . 0eche(, 2n ;d., section &3, p. /$.2 A ?oint venture purchase of land, 7* two, does not constitute a copartnership in respect thereto> nor does not a+ree(ent to share the profits and loses on the sale of land create a partnership> the parties are onl* tenants in co((on. 1Clar6 vs. !idewa*, 1$2 @.!. .&2, 12 ! Ct. 32/, 3' :. ;d., 11'/.2 8here plaintiff, his 7rother, and another a+reed to 7eco(e owners of a sin+le tract of realit*, holdin+ as tenants in co((on, and to divide the profits of disposin+ of it, the 7rother and the other not 7ein+ entitled to share in plaintiffKs co((issions, no partnership e)isted as 7etween the parties, whatever relation (a* have 7een as to third parties. 10a+ee vs. 0a+ee, 123 #. ;. ./.3, 233 0ass. 3$1.2 9n order to constitute a partnership inter sese there (ust 7e, 1a2 An intent to for( the sa(e> 172 +enerall* a participatin+ in 7oth profits and losses> 1c2 and such a co((unit* of interest, as far as third persons are concerned as ena7les each part* to (a6e contract, (ana+e the 7usiness, and dispose of the whole propert*. 10unicipal "avin+ Co. vs Berrin+, 1'0 ". 10./, '0 9ll. $/0.2 The co((on ownership of propert* does not itself create a partnership 7etween the owners, thou+h the* (a* use it for purpose of (a6in+ +ains> and the* (a*, without 7eco(in+ partners, a+ree a(on+ the(selves as to the (ana+e(ent and use of such propert* and the application of the proceeds therefro(. 1!purloc6 vs. 8ilson, 1$2 !. 8. 3.3, 1.0 #o. App. 1$.2 This is i(pliedl* reco+niFed in the followin+ portion of the decision, 4Althou+h, ta6en sin+l*, the* (i+ht not suffice to esta7lish the intent necessar* to constitute a partnership, the collective effect of these circu(stances 1referrin+ to the series of transactions2 such as to leave no roo( for dou7t on the e)istence of said intent in petitioners herein.4