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GENERAL PRINCIPLES

BASIS OF TAXATION Lifeblood Doctrine CIR vs. Pineda, September 15, 1967, 21 SCRA 105
Facts: Manuel Pineda, the eldest son of the decedent who was made to pay the full amount of the income tax liabilities assessed against the estate. He questioned the assessment on the ground that as an heir his liability for the unpaid tax due the estate is only up to the extent of and in proportion to the share he received therefrom. Q. Can the Government require Manuel Pineda to pay the full amount of the taxes assessed? A. Yes, the Government can require Manuel Pineda to pay the full amount of the taxes assessed. The remedy (tax lien) is the very avenue the Government took in this case to collect the tax. The BIR should be given in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblood of the government and their prompt and certain availability is an imperious need.

CIR vs. CTA, July 21, 1994, 234 SCRA 348


Facts: A petition for review of the decision of the BIR denying tax refund of Citytrust was filed with the CTA. It was submitted for decision based solely on the pleadings and evidence submitted by Citytrust. CIR was denied its day in Court because of its inability to present evidence by reason of the failure of its Tax Credit/Refund Division to transmit records of the case to the Solicitor General. The CTA rendered its decision ordering BIR to grant a refund to Citytrust, CA affirmed. Q. Is the neglect, omission, error or mistake committed by the officers or agents of the State binding upon the Government? A. No, it is a long and firmly settled rule of law that the Government is not bound by the errors committed by its agents. In the performance of its government functions, the State cannot be estopped by the neglect of its agents and officers. Although the Government may generally be estopped through the affirmative acts of public officers acting within their authority, their neglect or omission of public duties as exemplified in this case will not and should not produce that effect. Nowhere is the aforestated rule more true than in the field of taxation. It is axiomatic that the Government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. The errors of certain administrative officers should never be allowed to jeopardize the Governments financial position, especially in the case at bar where the amount involves millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy.

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Marcos II vs. CA, June 5, 1997, 273 SCRA 47


Facts: Marcos II assailed the decision of the CA declaring the deficiency income tax assessments and estate tax assessments upon the estate and properties of his late father final despite the pendency of the probate proceedings of the will of the late President. On the other hand, the BIR argued that the States authority to collect internal revenue taxes is paramount. Q. Can the BIR collect estate taxes without the approval of a probate court? A. Yes, the approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. The enforcement of tax laws and the collection of taxes are of paramount importance for the sustenance of government. Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the reason for the government itself. It is, therefore, necessary to reconcile the apparent conflicting interests of the authorities and the taxpayer so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

YMCA vs. CIR, 298 SCRA 83


Facts: YMCA, a welfare, educational, and charitable non-profit corporation, leased its facilities to small shop owners, restaurants, and canteen operators, and collected parking space. YMCA contends that its rental income is not subject to income tax. Q. Is the contention of YMCA tenable? A. No, since taxes are the lifeblood of the nation, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. The claimed exemption must expressly be granted in a language too clear to be mistaken

THEORIES ON TAXATION
Necessity Theory Philippine Guaranty Co., Inc. vs. CIR, 13 SCRA 780, (1965)
Facts: Petitioner Philippine Guaranty Co., Inc. (PGCI) entered into reinsurance contracts with foreign insurance companies not doing business in the Philippines and thereby agreed to cede to the foreign insurers a portion of the premiums. In accordance with the aforesaid contracts, the petitioner excluded in its gross income premiums ceded to the foreign reinsurers. Based on the foregoing, the CIR assessed taxes from PGCI. The Petitioner protested claiming that the premiums ceded to foreign reinsurance companies are not subject to withholding tax for they are not income from sources within the Phil. Q. Is the contention of petitioner correct? A. No, considering that the reinsurance premiums in question were afforded protection by the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance premiums and reinsurers
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should share the burden of maintaining the State. The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to preserve the States sovereignty and means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the States territory, and facilities and protection which a government is supposed to provide.

Benefits-Protection Relationship

Theory

or

Doctrine

of

Symbiotic

CIR vs. Algue, L-28896, February 17, 1988


Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing authorities, every person who is able to must contribute his share in the, running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

LIABILITIES INVOLVED
Taxes are personal to the taxpayer. Sunio vs. NLRC, L-57767, January 31, 1984
Facts: Petitioner was impleaded in the Complaint in his capacity as General Manager of petitioner corporation. There appears to be no evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was within the scope of his authority and was a corporate act. Q. Can a corporations tax delinquency be enforced against its stockholders? A. No, a corporations tax delinquency cannot, for instance, be enforced against its stockholders because not only would this run counter to the principle that taxes are personal, but it would run counter to the principle that taxes are personal, but it would also not be in accord with the rule that a corporation is vested by law with a personality that is separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related.

When stockholders may be held liable for unpaid taxes of the corporation (Doctrine of Piercing the Corporate Veil) Tan vs. Commissioner, L-15778, April 23, 1962
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Facts: The Central Syndicate, a corporation organized under the laws of the Phil., sent a letter to the Collector of Internal Revenue advising the latter that it purchased from Dee Hong Lue the entire stock of surplus properties and that it assumed Lue's obligation to pay the 3-1/2% sales tax on said surplus goods, it was remitting the sum of P43,750.00 in his behalf as deposit to answer for the payment of said sales tax with the understanding that it would later be adjusted after the determination of the exact consideration of the sale. The syndicate again wrote the Collector requesting a refund due to the adjustment and reduction of the purchase price. However, the Collector denied the claim for refund. The Collector filed a motion requiring the syndicate to file a bond to guarantee the payment of the tax assessed against it which motion was denied by the CTA on the ground that cannot be legally done it appearing that the syndicate is already a non-existing entity due to the expiration of its corporate existence, the case was dismissed. From this order the syndicate appealed to the SC wherein it intimated that the appeal should not be dismissed because it could be substituted by its successors-in-interest. Q. The Central Syndicate having already been dissolved because of the expiration of its corporate existence, can the sales tax in question be enforced against its successors-in-interest who are the present petitioners? A. Yes, the creditor of a dissolved corporation may follow its assets once they passed into the hands of the stockholders. The dissolution of a corporation does not extinguish the debts due or owing to it. A creditor of a dissolved corporation may follow its assets, as in the nature of a trust fund, into the hands of its stockholders. An indebtedness of a corporation to the federal government for income and excess profit taxes is not extinguished by the dissolution of the corporation. And it has been stated, with reference to the effect of dissolution upon taxes due from a corporation, "that the hands of the government cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from the corporation, and to collect them from persons, who by reason of transactions with the corporation, hold property against which the tax can be enforced and that the legal death of the corporation no more prevents such action than would the physical death of an individual prevent the government from assessing taxes against him and collecting them from his administrator, who holds the property which the decedent had formerly possessed." Hence, petitioners could be held personally liable for the taxes in question as successors-in-interest of the defunct corporation.

Liabilities of a taxpayer Republic vs. Patanao, L-22356, July 21, 1967


Facts: A complaint was filed against Patanao, who was the holder of an ordinary timber license and as such was engaged in the business of producing logs and lumber for sale during the years 1951-1955. He failed to file income tax returns for 1953 and 1954, and although he filed income tax returns for 1951, 1952 and 1955, the same were false and fraudulent because he did not report substantial income earned by him from his business. An examination was conducted by the BIR it was ascertained that there are deficiency; income taxes and additional residence taxes for the aforesaid years, due from defendant. Notwithstanding repeated demands the defendant refused, failed and neglected to pay said taxes. Defendant moved to dismiss the complaint on the ground that the action is barred by prior judgment, defendant having been acquitted in criminal cases Nos. 2089 and 2090 of the same

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court, which were prosecutions for failure to file income tax returns and for nonpayment of income taxes. Q. Is the contention of the defendant tenable? A. No, the acquittal in the said criminal cases cannot operate to discharge defendant from the duty of paying the taxes which the law requires to be paid, since that duty is imposed by statute prior to and independently of any attempts by the taxpayer to evade payment. Said obligation is not a consequence of the felonious acts charged in the criminal proceeding nor is it a mere civil liability arising from crime that could be wiped out by the judicial declaration of nonexistence of the criminal acts charged. Under the Penal Code the civil liability is incurred by reason of the offender's criminal act. The situation under the income tax law is the exact opposite. Civil liability to pay taxes arises from the fact, for instance, that one has engaged himself in business, and not because of any criminal act committed by him. The criminal liability arises upon failure of the debtor to satisfy his civil obligation.

ASPECTS, PROCESSES, PHASES OF TAXATION


Levy/ Imposition Tolentino, et al. vs Secretary of Finance, August 25, 1984,235 SCRA 630
Facts: Petitioners assail the constitutionality of RA 7716 imposing Value Added Tax (VAT) on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of gross selling price or gross value in money of good or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. RA 7716 seeks to widen the tax base on existing VAT system and enhance its administration by amending the NIRC. The contention of petitioners is that in enacting the VAT law, Congress violated the Constitution because RA 7716 did not originate exclusively in the House of Representatives, because it is in fact the result of the consolidation of two distinct bills, one from the House of Representatives and the other from the Senate. Q. Is contention of the petitioners correct? A. The power of the Senate to propose amendments must be understood to be full, plenary and complete "as on other Bills." Thus, because revenue bills are required to originate exclusively in the House of Representatives, the Senate cannot enact revenue measures of its own without such bills. After a revenue bill is passed and sent over to it by the House, however, the Senate certainly can pass its own version on the same subject matter. This follows from the coequality of the two chambers of Congress. The power of the Senate to propose or concur with amendments is apparently without restriction. It would seem that by virtue of this power, the Senate can practically re-write a bill required to come from the House and leave only a trace of the original bill. For example, a general revenue bill passed by the lower house of the United States Congress contained provisions for the imposition of an inheritance tax. This was changed by the Senate into a corporation tax, the amending authority of the
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Senate was declared by the United States Supreme Court to be sufficiently broad to enable it to make the alteration. [Flint v. Stone Tracy Company. 220 U.S. 107, 55 L. ed. 389]

SCOPE OF THE LEGISLATIVE POWER TO TAX


Discretion as to purposes for which taxes shall be levied. Walter Lutz vs J. Antonio Araneta, L-7859, December 22, 1955, 98 Phil 148
Facts: Lutz assailed the constitutionality of Section 2 and 3, C.A. 567, which provided for an increase of the existing tax on the manufacture of sugar, alleging such tax as unconstitutional and void for not being levied for a public purpose but for the aid and support of the sugar industry exclusively. Q. Is the tax law increasing the existing tax on the manufacture of sugar valid? A. Yes, the protection and promotion of the sugar industry is a matter of public concern; the legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness. If objective and methods alike are constitutionally valid, there is no reason why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the States police power.

Discretion as to subjects of taxation. Gomez vs. Palomar, L-23645, October 29, 1968, 25 SCRA 827
Facts: Petitioner questions the validity of the statute, claiming that R.A. No, 1635, otherwise known as the Anti-TB Stamp Law, charging extra five centavo charge for the use of semi-postal stamp violative of the equal protection clause of the Constitution because it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the population and that even among postal patrons the statute discriminatorily grants exemptions. Q. Does RA 1635 unconstitutional? violates the equal protection clause and therefore

A. No, the legislature has the inherent power to select the subjects of taxation and to grant exemptions. This power has aptly been described as "of wide range and flexibility." Indeed, it is said that in the field of taxation, more than in other areas, the legislature possesses the greatest freedom in classification. In the case of the anti-TB stamp, undoubtedly, the single most important and influential consideration that led the legislature to select mail users as subjects of the tax is the relative ease and convenience of collecting the tax through the post offices. The small amount of five centavo does not justify the great expense and inconvenience of collecting through the regular means of collection. The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit to a taxpayer as a return for what he pays,
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then it is sufficient answer to say that the only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes.

Punsalan vs. The Municipal Board of the City of Manila, 95 Phil 46


Facts: Ordinance No. 3398 of the City of Manila imposes a municipal occupation tax on persons exercising various professions in the city and penalizes non-payment of the tax. In raising the hue and cry of "class legislation", the burden of plaintiffs' complaint is not that the professions to which they respectively belong have been singled out for the imposition of this municipal occupation tax; their complaint is that while the law has authorized the City of Manila to impose the said tax, it has withheld that authority from other chartered cities, not to mention municipalities. Q. Is it within the jurisdiction of the courts to determine what entities should be empowered to impose occupation tax? A. No, it is not for the courts to judge what particular cities or municipalities should be empowered to impose occupation taxes in addition to those imposed by the National Government. That matter is peculiarly within the domain of the political departments and the courts would do well not to encroach upon it.

Judicial Review of Taxation Sison, Jr. vs. Ancheta, July 25, 1984, 130 SCRA 652
Facts: The National Internal Revenue Code was amended by BP 135, effectively broadening the rates of tax on individual income taxes. Petitioner brought a taxpayers suit alleging that the amendatory provision was arbitrary amounting to class legislation, oppressive and capricious in character. He concludes that both the equal protection and due process clauses had been transgressed, as well as the rule requiring uniformity in taxation. In response thereto, the Solicitor General stated in his answer that BP 135 is a valid exercise of the States power to tax. Q. Who among the contenders is correct? A. Finding in favor of the respondents contention, the SC held that, being an attribute of sovereignty, the power to tax is the strongest of all the powers of government. So powerful that Chief Justice Marshall once said that the power to tax involves the power to destroy. However, the power to tax is restricted by the equal protection and due process clauses of the Constitution. Hence, Justice Frankfurter could rightfully concluded: The web of unreality spun from Marshalls famous dictum was brushed away by one stroke of Mr. Justice Holmess pen stating that The power to tax is not the power to destroy while this court sits. So it is in the Philippines. The Constitution as the fundamental law overrides any legislative or executive act that runs counter to it. In any case, therefore, where it can be demonstrated that the challenged statutory provision fails to abide by its command, then the court must declare and adjudge it null.

City of Baguio vs. De Leon, 25 SCRA 938


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Facts: A lower court decision upholding the validity of an ordinance of the City of Baguio imposing a license fee on any person, firm, entity or corporation doing business in the City of Baguio is assailed by De Leon. He was held liable as a real estate dealer and was obligated to pay under such ordinance an annual fee. In addition, there has been a firm insistence by appellant of the lack of jurisdiction of the City Court of Baguio, where the suit originated due to the fact that the issue of constitutionality was raised. Q. Does the City Court of Baguio have jurisdiction to decide on the constitutionality of the ordinance? A. Yes, since the City Court is possessed of judicial power and it is likewise axiomatic that the judicial power embraces the ascertainment of facts and the application of the law, the Constitution as the highest law superseding any statute or ordinance in conflict therewith, it cannot be said that a City Court is bereft of competence to proceed on the matter. While it remains undoubted that such a power to pass on the validity of an ordinance alleged to infringe certain constitutional rights of a litigant exists, still it should be exercised with due care and circumspection, considering not only the presumption of validity but also the relatively modest rank of a city court in the judicial hierarchy.

PURPOSES OF TAXATION
Primary Purpose, To raise revenue Bagatsing, et al. vs Ramirez, 74 SCRA 306
Facts: An Ordinance regulating the operation of public markets and prescribing for the rental of stalls was assailed in that the subject ordinance is not a "tax ordinance" because the imposition of rentals, permit fees, tolls and other few is not strictly a taxing power but a revenue-raising function, so that the procedure for publication under the Local Tax Code finds no application. Q. Is the contention of the petitioners correct? A. No, the raising of revenues is the principal object of taxation. Under Section 5, Article XI of the New Constitution, "Each local government unit shall have the power to create its own sources of revenue and to levy taxes, subject to such provisions as may be provided by law. And one of those sources of revenue is what the Local Tax Code points to in particular: "Local governments may collect fan or rentals for the occupancy or use of public markets and premises * * *." They can provide for and regulate market stands, stalls and privileges, and, also, the sale, lease or occupancy thereof. They can license, or permit the use of, lease, sell or otherwise dispose of stands, stalls or marketing privileges.

SECONDARY OR NON-REVENUE PURPOSES


Power to tax as an instrument to implement the power of eminent domain Commissioner vs. Central Luzon Drug, 456 SCRA 414
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Facts: Central Luzon Drug (CLD) is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products. It operated 6 drugstores under the name and style Mercury Drug. CLD granted 20% sales discount to senior citizens pursuant to RA 7432 and its Implementing Rules. CLD filed with petitioner a claim for tax refund/credit in the amount allegedly arising from the 20% sales discount. CIR was ordered to issue a tax credit certificate in favor of CLD. Q. Can taxation be used as an implement for the exercise of the power of eminent domain? A. Yes, the taxation power can also be used as an implement for the exercise of the power of eminent domain. Tax measures are but enforced contributions exacted on pain of penal sanctions and clearly imposed for a public purpose. In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. The 20% discount given to senior citizens on pharmacy products was considered a property, in the form of a supposed profit, taken from the drugstore and used for public use, by means of giving it directly to individual senior citizen. Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use.

Regulatory Measure Tio vs Videogram Regulatory Board, 151 SCRA 208


Facts: P.D. 1987 was promulgated creating the Videogram Regulatory Board with broad powers to regulate and supervise the videogram industry. In addition, the said law imposes a thirty percent (30%) tax on the sale, lease or disposition of videograms. Petitioner attacks on the constitutionality of the Decree on the ground that the tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in violation of the due process clause of the Constitution. Q. Is the decree unconstitutional? A. No, the levy of a 30% tax is for a public purpose. It was imposed primarily for answering the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic videotapes, and therefore valid. While the direct beneficiary of the said decree is the movie industry, the citizens are held to be its indirect beneficiaries.

Manila Race Horse Trainers Association vs De La Fuente, 88 Phil 60


Facts: The Manila Race Horses Trainers Association, Inc alleged that they are owners of boarding stables for race horses question the constitutionality of the Ordinance enacted by the City of Manila as being discriminatory for it only taxed boarding stables for race horses to the exclusion of boarding stables for horses dedicated to other purposes. Q. Is there an arbitrary classification?
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A. None, from the viewpoint of economics and public policy the taxing of boarding stables for race horses to the exclusion of boarding stables for horses dedicated to other purposes is not indefensible. Race horses are devoted to gambling if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision.

Walter Lutz vs J. Antonio Araneta, L-7859, December 22, 1955, 98 Phil 148
Facts: Lutz assailed the constitutionality of Section 2 and 3, C.A. 567, which provided for an increase of the existing tax on the manufacture of sugar, alleging such tax as unconstitutional and void for not being levied for a public purpose but for the aid and support of the sugar industry exclusively. Q. Is the tax law increasing the existing tax on the manufacture of sugar valid? A. Yes, the protection and promotion of the sugar industry is a matter of public concern; the legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness. If objective and methods alike are constitutionally valid, there is no reason why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the States police power.

Roxas, et al. vs CTA, L-25043, April 26, 1968, 23 SCRA 276


Facts: Petitioners are brothers who inherited from their grandparents parcels of agricultural lands, a residential house and lot, and shares of stocks in various corporations. For the management of the aforesaid properties, the brothers formed a partnership which they named Roxas y Compania. Sometime later, the brothers agreed to sell the above-mentioned agricultural lands to the Government for the benefit of the farmers who tilled the said lands. However, since the Government was unable to fully pay for the lands in question, a ten (10)-year amortization plan was conceptualized. Out of the net gain from the said sale, the Roxas brothers only paid fifty percent (50%) thereof as income tax from capital gains. Q. Were Roxas brothers and Roxas y Compania real estate dealers, hence are liable to pay 100% of the net gain as income tax? A. The act of subdividing a farm land and selling them to the farmer- occupants on installment in response to the Governments policy to allocate land to the landless is not subject to real estate dealers tax. The business activity of the landowner in selling the land involves an isolated transaction with its peculiar circumstances and not to be considered as an act of a dealer even though there were hundreds of vendees. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and confidence in the Government, this power must be used justly and not treacherously. It does not conform to our sense of justice in the

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instant case for the Government to persuade, the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call.

EXTENT OF THE TAXING POWER


Tio vs Videogram Regulatory Board, 151 SCRA 208
Facts: P.D. 1987 was promulgated creating the Videogram Regulatory Board with broad powers to regulate and supervise the videogram industry. In addition, the said law imposes a thirty percent (30%) tax on the sale, lease or disposition of videograms. Petitioner attacks on the constitutionality of the Decree on the ground that the tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in violation of the due process clause of the Constitution. Q. Is the decree unconstitutional? A. No, it is beyond serious question that a tax does not cease to be valid merely because it regulates, discourages or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it.

PRINCIPLES OF SOUND TAX SYSTEM:


Fiscal Adequacy That the sources of revenues must be adequate to meet government expenditures Chavez vs. Ongpin, 186 SCRA 331
Facts: Frank Chavez, as taxpayer, and intervenor Realty Owners Association of the Philippines, Inc. (ROAP), alleges that E.O.73 providing for the collection of Real Property taxes as provided for under Section 21 of the P.D.464 (Real Property Tax Code) is unconstitutional because it accelerated the application of the general revision of assessments to January 1, 1987 thereby increasing in real property taxes by 100% to 400% on improvements, and up to 100% on land which would necessarily lead to an increase in real property taxes amounting to confiscation of property. Additionally, P.D.464 is unconstitutional insofar as it imposes an additional 1% tax on all property owners to raise funds for education, as real property tax is admittedly a local tax for local governments. Q. Is the contention of the petitioner and intervenor correct? A. No, to continue collecting real property taxes based on valuations arrived at several years ago, in disregard of the increases in the value of real properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources of revenues must be adequate to meet government expenditures and their variations.

Administrative Feasibility
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Kapatiran ng mga Naglilingkod sa Pamahalaan vs. Tan, June 30, 1988, 163 SCRA 371
Facts: This case has been consolidated because of the similarity of the main issues involved therein which seek to nullify E.O. 273 which amended certain sections of the NIRC and adopted VAT. Petitioners contend that VAT is unconstitutional for being oppressive, discriminatory, regressive and violates the equal protection and due process clause of the Constitution. Q. Is VAT unconstitutional? A. No, VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with aggregate gross annual sales of articles and/or services, exceeding P200,000.00, to his purchase of goods and services, unless exempt. VAT is principally aimed to rationalize the system of taxing goods and services; simplify tax administration; and make the tax system more equitable, to enable the country to attain economic recovery.

Taxes are not subject to set-off. Francia vs. IAC, June 28 1988, 62 SCRA 753
Facts: Petitioner claims that his tax delinquency has been set-off or extinguished by legal compensation. He claims that the Government of the Philippines owes him a certain sum of money when a portion of his land was expropriated. Q. Can taxes be set-off? A. No, there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of lawsuit against the government. A claim for taxes is not such debt, demand, contract or judgment as is allowed to be set-off under the statutes of set off. Neither are they a proper subject of recoupment since they do not arise out of the contract of the transaction sued on. XXX Taxes are not in the nature of contracts between the parties but grow out of duty to, and are the positive acts of, the government the making and enforcing of which does not require the personal consent of the individual taxpayer.

EXCEPTIONS Republic vs. Ericta, 172 SCRA 623, 1989


Facts: The taxes sought to be collected by the Republic from Sampaguita were still unpaid, its tender of the certificates of indebtedness in question not constituting payment. Hence, it ought to be sentenced to pay the taxes. Even assuming the contrary, legal compensation as a mode of extinguishing an obligation to pay taxes was nonetheless unavailing against the government. Q. Can there be a legal compensation in this case?

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A. Yes, Sampaguita was entitled to a judgment against the Republic for the payment of the face value of the certificate, the same having already been presented and surrendered within the said period of ten (10) years to the Treasurer of the Philippines (through the Municipal Treasurer of Bocaue.) In effect, while judgment shall be rendered in favor of the Republic against Sampaguita for unpaid taxes, judgment ought at the same time to issue for Sampaguita commanding payment to it by Republic of the same sum representing the face value of the certificate of indebtedness assigned to it and for recovery of which it had specifically prayed in its counterclaim.

CIR vs. Esso Standard, 172 SCRA 364, 1989


The overpaid income tax of 1959 was considered as a tax credit against the deficiency income tax of 1960. The obligation to return the money mistakenly paid arises from the moment the payment is made, and not from the time that the payee admits the obligation to reimburse. The obligation of the payee to reimburse an amount paid to him results from the mistake, not from the payees confession of the mistake or recognition of the obligation to reimburse.

INHERENT LIMITATIONS ON THE POWER TO TAX


Public Purpose Walter Lutz vs. J. Antonio Araneta, L-7859, December 22, 1955, 98 Phil 148
Facts: Lutz assailed the constitutionality of Section 2 and 3, C.A. 567, which provided for an increase of the existing tax on the manufacture of sugar, alleging such tax as unconstitutional and void for not being levied for a public purpose but for the aid and support of the sugar industry exclusively. Q. Is the tax law increasing the existing tax on the manufacture of sugar valid? A. Yes, the protection and promotion of the sugar industry is a matter of public concern; the legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness. If objective and methods alike are constitutionally valid, there is no reason why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the States police power.

Tio vs. Videogram Regulatory Board, 151 SCRA 208


Facts: P.D. 1987 was promulgated creating the Videogram Regulatory Board with broad powers to regulate and supervise the videogram industry. In addition, the said law imposes a thirty percent (30%) tax on the sale, lease or disposition of videograms. Petitioner attacks on the constitutionality of the Decree on the ground that the tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in violation of the due process clause of the Constitution. Q. Is the decree unconstitutional?

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A. No, the levy of a 30% tax is for a public purpose. It was imposed primarily for answering the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic videotapes, and therefore valid. While the direct beneficiary of the said decree is the movie industry, the citizens are held to be its indirect beneficiaries.

Pascual vs. Secretary of Public Works, December 29, 1960, 110 Phil 331
Facts: Petitioner was the Provincial Governor of Rizal at the time of the institution of this petition. During his term, R.A. 920 was enacted, appropriating P85,000 for the construction of projected feeder roads. Said feeder roads were, at the time of the passage of said act, private property, since they were located in a subdivision owned by Sen. Jose C. Zulueta. Months after the enactment of the law, Sen. Zulueta executed a deed of donation over the property in question in favor of the Government. The deed contained a condition that the property donated would be used exclusively by the donee for street purposes and none other, otherwise the said property would revert to the donor. Q. May the legislature validly appropriate public funds for a private purpose? A. No, the law appropriating public funds for the construction of feeder roads on land belonging to a private person is not valid, and donation to the government of the said land made over five (5) months after the approval and effectivity of the Act for the purpose of giving a semblance of legality to the appropriation does not cure the basic defect. The rule is that if the public advantage or benefit is merely incidental in the promotion of a particular enterprise, such defect shall render the law invalid. On the other hand, if what is incidental is the promotion of a private enterprise, the tax law shall be deemed for a public purpose.

Territoriality Wells Fargo Bank and Union Trust vs. Collector, 70 Phil. 235
Facts: Birdie Lillian Eye, died at Los Angeles, California, the place of her alleged last residence and domicile. Among the properties she left was her one-half conjugal share in 70,000 shares of stock in the Benguet Consolidated Mining Company. She left a will which was duly admitted to probate in California where her estate was administered and settled. Wells Fargo Bank & Union Trust Company, was duly appointed trustee of the trust created by the said will. The Federal and State of California's inheritance taxes due on said shares have been duly paid. Respondent sought to subject anew the aforesaid shares of stock to the Philippine inheritance tax, to which petitioner objected contending that as to intangibles, like shares of stock, their situs is in the domicile of the owner thereof, and, therefore, their transmission by death necessarily takes place under his domiciliary laws. Q. Are the questioned shares of stocks subject to the Philippine Inheritance Tax? A. Yes, inheritance tax is not a tax on property, but upon transmission by inheritance. Originally, the settled law is that intangibles have only the domicile of
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the decedent at the time of his death as the situs for the purpose of inheritance tax (mobilia sequuntur personam). However, such doctrine has been decried as a mere "fiction of law having its origin in considerations of general convenience and public policy, and cannot be applied to limit or control the right of the state to tax property within its jurisdiction," and must "yield to established fact of legal ownership, actual presence and control elsewhere, and cannot be applied if to do so would result in inescapable and patent injustice." In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation being domiciled therein. And besides, the certificates of stock have remained in this country up to the time when the deceased died in California. And that one Syrena McKee, secretary of the Benguet Consolidated Mining Company, has the legal title to the certificates of stock held in trust for the true owner thereof. In other words, the owner residing in California has extended here her activities with respect to her intangibles so as to avail herself of the protection and benefit of the Philippine laws.

Taxing Power of LGUs MCIAA v. Marcos, 261 SCRA 667 (1996)


Facts: Petitioner MCIAA was mandated to principally undertake the economical, efficient and effective control, management and supervision of the Mactan International Airport in the Province of Cebu and the Lahug Airport in Cebu City. MCIAA enjoyed the privilege of exemption from payment of realty taxes in accordance with Section 14 of its Charter. However, the Office of the Treasurer of the City of Cebu, demanded payment for realty taxes on several parcels of land belonging to the petitioner located in Cebu. Petitioner objected claiming in its favor the said tax exemption and also asserted that it is an instrumentality of the government performing governmental functions, citing Section 133 of the Local Government Code of 1991 which puts limitations on the taxing powers of local government units. Respondent City argued that the MCIAA is a governmentcontrolled corporation whose tax exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the Local Government Code. Q. Is petitioner liable to pay real property taxes? A. Yes, MCIAA can no longer invoke the general rule in Section 133 - that the taxing power of LGUs cannot extend to the levy of (a) taxes, fees or charges of any kind on the National Government, its agencies or instrumentalities, and LGUs. The last paragraph of Section 234 of the Local Government Code unequivocally withdrew exemptions from payment of real property taxes granted to natural or juridical persons, including GOCCs, except as provided in the said section, and MCIAA is undoubtedly a GOCC. Thus, it necessarily follows that its exemption from payment of such tax as granted in Section 14 of its Charter has been withdrawn. Any claim to the contrary can only be justified if MCIAA can take refuge under any of the exceptions provided in Section 234, but not under Section 133 as it asserts, since the said section is now qualified by Sections 232 and 234. The power to tax is primarily vested in the Congress however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation but pursuant to direct authority conferred by Section 5, Article X of 1987 Constitution subject to guidelines and limitations which Congress may provide which must be consistent with the basic policy of local autonomy.
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Exemption from Taxation of Government Standard Oil Company of New York vs. Posadas, February 26, 1931, 55 Phil 715
Facts: Plaintiff,a foreign corporation duly authorized to do business in the Philippines,sold to the US Army fuel and asphalts well as to the US Navy fuel oil. Said sales were for the use of the said products by the US Army and Navy in the Philippines. CIR imposed taxes on the said merchandise. Plaintiff paid the assessed tax under protest alleging that said transactions are not subject to sales tax based on the principle that a state is prohibited from taxing the instrumentalities of the Federal Government. Q. Is the contention of plaintiff correct? A. Yes, the assessment and collection by the Philippine Government of the tax on sales of merchandise made in the Philippines to the US Army and US Navy is illegal. Sales made in the Philippines to the US Army and US Navy are made to instrumentalities of the US Government, and therefore are not subject to tax by the Philippine Government.

National Development 5,1992, 215 SCRA 382

Co.

vs.

Cebu

City,

November

Facts: National Development Company (NDC) is authorized to engage in commercial, industrial, mining, agricultural, and other enterprises necessary or contributory to economic development or important to public interest. The President issued Proclamation No. 430, reserving Block No. 4, Reclamation Area No. 4 of Cebu City, consisting of 4,599 sq. m. for warehousing purposes. Subsequently, a warehouse with a floor area of 1,940 sq. m. was constructed thereon. Cebu City assessed and collected from NDC real estate taxes on the land and the warehouse thereon. The NDC claims that both the land and the warehouse belonged to the Republic and therefore exempt from taxation. Q. Is the public land reserved by the President for warehousing purposes in favor of a government-owned or controlled corporation (GOCC) as well as the warehouse thereon exempt from tax? A. With regard to the land, the answer is in the affirmative, the Republic, like any individual, may form a corporation with personality and existence distinct from its own. The separate personality allows a GOCC to hold and possess properties in its own name and thus permit greater independence and flexibility in its operations. It may therefore be stated that the tax exemption of property owned by the Republic refers to properties owned by the Government and by its agencies which do not have separate and distinct personalities (unincorporated entities). What appears to have been ceded to NDC is merely the administration of the property while the government retains ownership of what has been declared reserved for warehousing purposes. The subject reserved public land remains tax exempt. However, the exemption of public property from taxation does not extend to improvements on the public lands made by preemptioners, homesteaders and other
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claimants or occupants. The warehouse constructed on the reserved land by NDC should properly be assessed real estate tax as such improvement does not appear to belong to the Republic.

CONSTITUTIONAL LIMITATIONS ON THE POWER TO TAX


Due Process of Law Reyes vs. Almanzor, 196 SCRA 322 (1991)
Facts: Petitioners are owners of a parcel of land which are leased and occupied as dwelling. The tenants were paying monthly rentals not exceeding P300.00. Later, the RA 6359 Rental Freezing Law was enacted. Consequently, petitioners were precluded from raising their rental fee. After a re-classification and re-assessment was made by the City Assessor, the realty tax on said land was increased. Petitioners question the used of comparable sales approach rather than income approach, citing violation of the due process clause. Q. Is the used of comparable sales approach results to an unjust, excessive and confiscatory assessment? A. Yes, the use of the comparable sales approach result to the fact that the taxes exceed the sum total of the yearly income or rental paid by the dweller. The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to confiscation of property that would be a clear abuse of power.

Equal Protection of the Law Ormoc Sugar Industry vs. City Treasurer of Ormoc City, 22 SCRA 603, 1968
Facts: The City Council of Ormoc enacted Ordinance No.4, Series of 1964 taxing the production and exportation of only centrifugal sugar. At the time of the enactment, plaintiff Ormoc Sugar Co. was the only sugar central in Ormoc. Petitioner alleged that said Ordinance is unconstitutional for being violative of the equal protection clause. Q. Is the Ordinance valid? A. No, equal protection clause applies only to persons or things identically situated and does not bar a reasonable classification of the subject of legislation. A classification is reasonable where: (1) It is based on substantial distinction which makes real difference; (2) These are germane to the purpose of the law; (3) The classification applies not only to present conditions but also to future conditions which are substantially identical to those of the present; (4) It applies only to those who belong to the same class. A perusal of the requisites instantly show that the questioned ordinance does not meet them, for it taxes only centrifugal sugar produced and exported by Ormoc
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Sugar Company, Inc. and none other. At the time of the taxing ordinances enactment, Ormoc Sugar Company, it is true, was the only sugar central in the City of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any substantially established sugar central, of the same class as plaintiff, from the coverage of the tax.

Mayor Antonio J. Villegas vs. Hiu Chiong Tsao Pao Ho, 86 SCRA 270
Facts: The City of Manila enacted an Ordinance prohibiting aliens from being employed or to engage or participate in any position or occupation or business, whether permanent, temporary or casual without first securing an employment permit from the Mayor of Manila. Private respondent questioned the Constitutionality of the Ordinance as being violative of the equal protection clause. Petitioners, however, claim that it is an exercise of the police power as it is a regulatory measure by nature. Q. Is the Ordinance unconstitutional? A. Yes, the P50.00 fee is unreasonable because it fails to consider valid substantial differences in situation among individual aliens who are required to pay it. The Constitution does not prohibit classification but it is imperative that the classification should be based on real and substantial differences having a reasonable relation to the subject of the particular legislation. The fee is collected from every employed alien, whether he is casual or permanent, part-time or fulltime, whether he is a lowly employee or a highly-paid executive. The ordinance does not lay down any criterion or standard to guide the Major in the exercise of his discretion.

Uniformity of Taxation Reyes vs. Almanzor, 196 SCRA 322


Facts: Petitioners are owners of a parcel of land which are leased and occupied as dwelling. The tenants were paying monthly rentals not exceeding P300.00. Later, the RA 6359 Rental Freezing Law was enacted. Consequently, petitioners were precluded from raising their rental fee. After a re-classification and re-assessment was made by the City Assessor, the realty tax on said land was increased. Petitioners question the method used in the assessment of properties. Q. Is the law invalid as it violates the rule on uniformity and equality in taxation? A. No, the taxing power may make a reasonable and natural classification for purposes of taxation but it must not be discriminatory. The law operates equally and uniformly on all persons under the same circumstances.

Association of Custom Brokers, Inc. vs. City of Manila, 93 Phil, 107


Facts: Petitioners question the validity of a City Ordinance which provides for the collection of a tax against motor vehicles operating within the City of Manila. The petitioners claim that the Ordinance is violative of the rule on uniformity of taxation.
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Q. Does the Ordinance violates the rule on uniformity? A. Yes, the Ordinance infringes the rule of uniformity. The said ordinance infringes also the rule of uniformity of taxation ordained by our Constitution. It exacts the tax upon all motor vehicles operating within the City of Manila. It does not distinguish between a motor vehicle for hire and one which is purely for private use. Neither does it distinguish between a motor vehicle registered in the City of Manila and one registered in another place but occasionally comes to Manila and uses its streets and public highways. There is no pretense that the ordinance equally applies to motor vehicles which come to Manila for a temporary stay or for short errands, and it cannot be denied that they contribute in no small degree to the deterioration of the streets and public highways. As they are benefited by their use they should also be made to share the corresponding burden. This is an inequality which is found in the ordinance in question and which renders it offensive to the Constitution.

Non-Delegation of the Power to Tax ABAKADA vs. ERMITA, G.R. No. 168056. October 18, 2005
Facts: Petitioners contends that R.A. No. 9337's stand-by authority to the Executive to increase the VAT rate, especially on account of the recommendatory power granted to the Secretary of Finance, constitutes undue delegation of legislative power. They submit that the recommendatory power given to the Secretary of Finance in regard to the occurrence of either of two events using the Gross Domestic Product (GDP) as a benchmark necessarily and inherently required extended analysis and evaluation is an act of policy making. Q. Does the recommendatory power of the Secretary of Finance constitute undue delegation? A. No, there is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible. Congress did not delegate the power to tax but the mere implementation of the law. The intent and will to increase the VAT rate to 12% came from Congress and the task of the President is to simply execute the legislative policy. That Congress chose to use the GDP as a benchmark to determine economic growth is not within the province of the Court to inquire into, its task being to interpret the law. The Court held that in making recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. He is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect. The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is present.

Taxation and the Freedom of the Press Tolentino vs. Secretary of Finance, August 25, 1994, 235 SCRA 630
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Facts: RA 7716 was enacted to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code (NIRC). One of the petitioners is Philippine Press Institute (PPI),a non-profit organization of newspaper publishers. Petitioner claims violations of their rights under Sections 4 of the Bill of Rights as a result of the enactment of the VAT Law. The PPI questions the law insofar as it has withdrawn the exemption previously granted to the press under Section 103 (f) f the NIRC. Although the exemption was subsequently restored by administrative regulation with respect to the circulation of income of newspapers, PPI presses its claim because of the possibility that the exemption may still be removed by mere revocation of the regulation of the Secretary of Finance. Q. Is RA 7716 unconstitutional for it violates the freedom of the press? A. No, even with due recognition of its high estate and its importance in a democratic society, however the press is not immune from general regulation by the State. It has been held that the publisher of a newspaper has no immunity from the application of general laws. He has no special privilege to invade the rights and liberty of others. He must answer for libel. He may be punished for contempt of court. Like others, he must pay equitable and nondiscriminatory taxes on his business.

Bills to Originate from the House of Representatives Tolentino vs. Secretary of Finance, August 25, 1994, 235 SCRA 630
Facts: Petitioners assail the constitutionality of RA 7716 imposing Value Added Tax (VAT) on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of gross selling price or gross value in money of good or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. RA 7716 seeks to widen the tax base on existing VAT system and enhance its administration by amending the NIRC. The contention of petitioners is that in enacting the VAT law, Congress violated the Constitution because RA 7716 did not originate exclusively in the House of Representatives, because it is in fact the result of the consolidation of two distinct bills, one from the House of Representatives and the other from the Senate. Q. Is contention of the petitioners correct? A. No, it is not the law but the revenue bill which is required by the Constitution to originate exclusively in the House of Representatives. A bill originating in the House of Representatives may undergo extensive changes in the Senate that may result in the rewriting of the whole. To insist that the revenue statute and not only the bill must substantially be the same as the House bill will be to violate the Senates power to concur and propose amendments.

Tax Exemption of Properties Used Charitable, and Educational Purposes

for

Religious,

Herrera vs. Quezon City Board of Assessment Appeals (QCBAA), September 30, 1961, 3 SCRA 186
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Facts: St. Catherines Hospital was established for charitable and humanitarian purposes. It had a total capacity of 32 beds, 20 of which are for charity patients and the remaining 12 are for pay patients. It likewise operates as a school for midwifery. It used to enjoy exemption from real property tax but was later reclassified as taxable. Q. Are the lot, building and other improvements used by St. Catherines Hospital exempt from real property tax? A. Yes, within the purview of constitutional exemption from taxation, St. Catherine Hospital is therefore, a charitable institution and the fact that it admits pay-patients does not bar it from claiming that is devoted exclusively to benevolent purposes, it being admitted that the income derived from pay-patients is devoted to the improvement of charity ward, which represents almost 2/3 of the bed capacity of the hospital, aside from charity out-patients who come only for consultation. Moreover, the exemption in favor of the property used exclusively for charitable or educational purposes is not limited to property actually indispensable therefore but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as, in the case of hospitals, a school for training nurses, a nurses home, property used to provide housing facilities for interns, resident doctors, superintendents and other members of the hospital staff and recreational facilities for student nurses, interns and residents, such as athletic field including a firm used for the inmates of the institution.

Abra Valley College vs. Aquino, 162 SCRA 106, 1988


Facts: Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and Exchange Commission failed to pay its real estate taxes and penalties as a result thereof a Notice of Seizure and Notice of Sale of the lot and building was served against the petitioner. The school was assessed for taxes because it was not exclusively used for educational purposes. The Director of the Abra Valley College, together with his family, occupies the second floor of the school building as their residence. The ground floor of said building was leased to various commercial establishments. Q. Are the parts of the school building used as residence and leased to commercial establishments tax-exempt? A. I qualify; the test for exemption from taxation is the use of the property for purposes mentioned in the Constitution. However, the exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. The use of the second floor of the main building in the case at bar for residential purposes of the Director and his family may find justification under the concept of incidental use, which is complimentary to the main or primary purpose educational. While the use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence therefore not tax exempt. The lease of the ground floor to the Northern Marketing Corporation cannot by any stretch of imagination be considered incidental to the purpose of education.

Lung Center of the Philippines vs. Quezon City and Constantino P. Rosas,G.R. No. 144104, June 29, 2004
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Facts: The petitioner Lung Center of the Philippines is a non-stock and non-profit entity. It is the registered owner of a 121,463 sq.m. parcel of land located at Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. Petitioner accepts paying and nonpaying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government. Both the land and the hospital building of the petitioner were assessed for real property taxes by the City Assessor of Quezon City. Petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the 1987 Constitution. Q. Are the real properties of the petitioner exempt from real property taxes? A. Those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed by the Government or any political subdivision or instrumentality thereof with respect to equipment purchases made by, or for the Lung Center. It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges for its real properties as well as the building constructed thereon. The tax exemption under Section 28(3), Article VI covers property taxes only. What is exempted is not the institution itself but lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes. Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.

DOUBLE TAXATION
CIR vs. SC Johnson and Son, Inc., June 25, 1999, 309 SCRA 102
Facts: SC Johnson and Son, Inc., is a domestic corporation organized and operating under the Philippine laws, entered into an agreement with SC Johnson and Son, USA, a non-resident foreign corporation based in the USA pursuant to which respondent was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, USA. For the use of trademark and technology respondent was obliged to pay SC Johnson and Son, USA royalties and subjected the same to 25% withholding tax on royalty payments. Respondent
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claim for refund of overpaid withholding tax on royalties and submit that the royalties paid to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause. The CIR however, did not act on the claim for refund. Q. Is SC Johnson and Son, Inc. entitled to the most favored nation tax rate of 10% on royalties? A. No, since the RP-US Tax Treaty does not give a matching credit of 20% for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, respondent cannot be deemed entitled to the 10% rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. The purpose of the most favored nation clause is to grant to the contracting parties treatment not less favorable than that which has been or may be granted to the most favored among other countries. The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case, royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Articles 13 of the RP-US Tax Treaty and Article 12(2) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patents, and technology. The entitlement of the 10% rate by US firms despite the absence of matching credit (20% for royalties) would derogate from the design behind the most favored nation clause to grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. On International Juridical Double Taxation -The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. The purpose of these international agreements is to reconcile the national fiscal legislation of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. Methods to Eliminate Double Taxation -In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited.
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The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief - the exemption method and the credit method. In the exemption method, the income or capital which is taxable at the state of source or situs is exempted at the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayers remaining income or capital. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital, whereas the credit method focuses upon the tax.

Villanueva vs. Iloilo, 26 SCRA 578, 1968


Facts: Upon the passage of the Local Autonomy Act RA 2264, the City of Iloilo Board passed an Ordinance imposing municipal license tax on persons engaged in the business of operating tenement houses. Pursuant to the said Ordinance, the City of Iloilo collected from Villanueva several amounts for the years 1960 to 1964. Plaintiff-appellees, as owners of tenement houses, question the constitutionality of the ordinance. They contend that they are doubly taxed because they are paying both the real estate tax and the tenement tax imposed by the ordinance in question. Q. Does the ordinance constitute double taxation? A. No, the contention that plaintiff-appellees are double-taxed because they are paying real estate taxes and the tenement tax imposed by the ordinance in question is devoid of merit. It is a well-settled rule that a license tax may be levied upon a business or occupation although the land or property used in connection therewith is subject to property tax. The State may collect an ad valorem tax on property used in a calling, and at the same time impose a license tax on that calling, the imposition of the latter kind of tax being in no sense a double tax. In order to constitute double taxation in the objectionable or prohibited sense - the same property must be taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subject matter; for the same purpose; by the same State, Government or taxing authority; within the same jurisdiction or taxing district; during the same taxing period; the same kind or character of tax. It has been shown that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the same taxing authority, are not of the same kind or character. At all events, there is no constitutional prohibition against double taxation in the Philippines.

TAX EVASION
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CIR vs. Benigno Toda Jr., GR 147188, Sept. 14, 2004, 438 SCRA 290
Facts: The BIR sent an assessment notice and demand letter to the Cibeles Insurance Corporation (CIC) for deficiency income tax for the year 1989 arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles Building in Makati City. Prior to the transaction, the CIC authorized Benigno Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands. Toda purportedly sold the property for P100 million to Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public. For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million. Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million. Three and a half years later Toda died. The new CIC asked for a reconsideration asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989. The BIR then proceeded against the estate of Toda. The administrator of the estate of Toda paid the deficiency taxes under protest. However, this protest was denied by the CIR stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%. Q. Is the scheme perpetuated by Toda a case of tax evasion or tax avoidance? Ruling: It is a tax evasion scheme. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being evil, in bad faith, willfull, or deliberate and not accidental; and (3) a course of action or failure of action which is unlawful. The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning (one way of tax avoidance). Such scheme is tainted with fraud. Fraud in its general sense is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another. Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax.

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Ungab vs. Cusi, May 30, 1980, 97 SCRA 877


Facts: Upon examination of petitioners income tax return, it was discovered that he failed to report his income derived from the sales of banana saplings. Convinced that petitioner filed a fraudulent return, the BIR examiner recommended the filing of a criminal prosecution for tax evasion. Petitioner filed a motion to quash the information, alleging that the trial court has no jurisdiction to take cognizance of the criminal case in view of his pending protest against the assessment made on him. Q. Is the resolution of the protest of the assessment necessary before the filing of a criminal case? A. No, an assessment of a deficiency tax is not necessary to precede a criminal prosecution for willful attempt to defeat and evade income tax. The contention of the petitioner is without merit. There is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. The crime is complete when the violator has, as in this case, knowingly and willfully filed a fraudulent return with the intent to evade and defeat a part or all of the tax.

CIR vs. Pascor Realty Development Corporation, 309 SCRA 402, 1999
Facts: Under authority by the CIR, revenue officers examined herein respondents accounting books and discovered deficiency taxes for two (2) fiscal years. The CIR, based on the reports made by the revenue officers, executed an affidavit and filed a criminal complaint for tax evasion. Respondents Rogelio Dio and Virginia Dio, officers of the corporation, assails the action of the CIR by stating that a deficiency tax assessment should have been first filed by the CIR, rather than instituting a criminal complaint at once. Q. Is an assessment necessary before a criminal charge can be filed? A. No, assessment is not a condition precedent to the filing of criminal charges for tax evasion. Section 222 of NIRC provides that in cases where a false or fraudulent return was submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. CIR has discretion in such tax evasion cases, whether to file a criminal case against the taxpayer or to do both. It must be stressed that a criminal complaint is instituted not to demand payment but to penalize the taxpayer for violation of the Tax Code.

TAXPAYERS SUIT Gonzales vs. Marcos, 65 SCRA 624, 1975


Facts: Through EO No. 30, the President created a trust for the benefit of the Filipino People under the name and style of the Cultural Center of the Philippines. The trust was to undertake the construction of a national theater and music hall to awaken the nations consciousness or cultural heritage and to promote, preserve and enhance the same. Pursuant thereto, CCPs Board of Trustees received foreign donations and financial commitments. Petitioner however, claims that in issuing EO No. 30, there was an encroachment by the President on the legislatives prerogative
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to enact laws. The trial court dismissed the petition on the ground that Gonzales did not have the personality to question the issuance of EO No. 30 since the funds administered by the CCP came from donations, without a single centavo raised by taxation. Q. Does the petitioner have the personality to question the validity of EO No. 30 based on a taxpayers suit? A. No, Gonzales did not meet the requisite burden to warrant the reversal of the trial courts decision. It was pointed out therein that one valid reason why such an outcome was unavoidable was that the funds administered by the Center came from donations and contributions and not from taxation. Accordingly, there was the absence of the pecuniary requisite or monetary interest. The stand of the lower court finds support in judicial precedents. This is not to retreat from the liberal approach followed in the earlier case of Pascual vs. Secretary of Public Works, foreshadowed by People vs. Vera, where the doctrine was exhaustively discussed. It is only to clarify that the Petitioner, judged by orthodox legal learning, has not satisfied an element for a taxpayers suit.

INCOME TAXATION
Global System vs. Schedular System Tan vs Del Rosario Jr., 237 SCRA 324, 1994
Facts: The Simplified Net Income Taxation Scheme (SNITS) was promulgated imposing a tax on taxable net income from all sources, other than income from salaries, of every individual whether a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession herein. Petitioners challenge said law for violating the constitutional requirement of uniformity in taxation in that the law would now attempt to tax single proprietorship and professionals differently from the manner that it imposes tax on corporations and partnerships. Q. Is the law invalid for it runs counter to the constitutional rule that taxation shall be uniform and equitable? A. No, uniformity in taxation merely requires that all subjects or objects of taxation similarly situated be treated alike in both privileges and liabilities. Uniformity does not forbid classification as long as 1) The standards that are used therefore are substantial and not arbitrary; 2) The categorization is germane to achieve the legislative purpose; 3) The law applies all things being equal, to both present and future conditions, and 4) The classification applies equally well to all those belonging to the same class. What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment on the taxable corporations. We certainly do not view this classification to be arbitrary and inappropriate.

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With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Where a tax measure becomes so unconscionable and unjust as to amount of confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. Schedular System -- employed where the income tax treatment varies and made to depend on the kind or category of taxable income of the taxpayer. Global System -- tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer.

Judicial Definition Fisher vs. Trinidad, 43 Phil 973


Facts: Frederick C. Fisher, was a stockholder in the Philippine American Drug Company. Said corporation declared a stock dividend and that a proportionate share of stock dividend was issued to the plaintiff-appellant. Trinidad, being the then Commissioner of Internal Revenue, demanded payment of income tax on the aforesaid dividends. Fisher protested the assessment made against him and claimed that the stock dividends in question are not income but are capital and are, therefore, not subject to tax. Q. Are stock dividends income? A. No, stock dividends are not income and are therefore not taxable as such. A stock dividend, when declared, is merely a certificate of stock which evidences the interest of the stockholder in the increased capital of the corporation. A declaration of stock dividend by a corporation involves no disbursement to the stockholder of accumulated earnings, and the corporation parts with nothing to its stockholder. The property represented by a stock dividend is still that of the corporation and not of the stockholder. The stockholder has received nothing but a representation of an interest in the property of the corporation and, as a matter of fact, he may never receive anything, depending upon the final outcome of the business of the corporation. While income is the gain derived from capital, from labor, from both capital and labor, including the gain derived from the sale or exchange of capital assets.

Conwi vs. CTA, August 31, 1992, 213 SCRA 83


Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor.

Sources of Income CIR vs. British Overseas Airways Corporation (BOAC), April 30, 1987,149 SCRA 395
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Facts: BOAC is engaged in the international airline business. It had no landing rights in the Philippines, and was not granted a Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month temporary landing permit. It did not carry passengers or cargo to or from the Philippines, although it maintained a general sales agent the Philippines-Warner Barnes and Company, Ltd. (Qantas Airways), which was responsible for selling BOAC tickets covering passengers and cargoes. The CIR issued an assessment against BOAC for deficiency income taxes, interests, and compromise penalties because the sale of the ticket does not constitute income in the Philippines because no carriage of person or cargo was made by BOAC therein. Q. Is the selling of tickets by BOAC without landing rights in the Philippines constitute income derived therein and therefore subject to income tax? A. Yes, for the source of income to be derived in the Philippines, it is sufficient that the income is derived from the activity in the Philippines. The source of an income is the property, activity or service that produced the income. The sale of the tickets is the activity that produces the income. The situs or the source of the payment is in the Philippines. The flow of wealth proceeded form and occurred within the Philippine territory enjoying the protection accorded by the Philippine Government. The absence of flight operations is not determinative of the source of income or the situs of income taxation. The test of taxability is the source. Hence, the absence of flight operations cannot alter the fact that tickets were sold in the Philippines and the revenue derived therefrom were derived from a business activity regularly pursued in the Philippines.

Functions of Income Tax Madrigal vs. Rafferty, 38 Phil 414


The aim has been to mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay. To carry out this idea, public considerations have demanded an exemption roughly equivalent to the minimum of subsistence. With these exceptions, the Income Tax Law is supposed to reach the earnings of the entire non-governmental property of the country.

Partnership Theory CIR vs. Lednicky, July 31, 1964 11 SCRA 603
Facts: The Lednicky spouses are resident aliens deriving all their income from Philippine sources. After filing their income tax returns for the years 1955, 1956 and 1957, they paid the corresponding taxes thereon. Thereafter, the spouses filed an amended income tax return claiming therein deductions for foreign income taxes paid to the U.S. Government and they requested the refund of the allegedly overpaid taxes. The spouses stress that if they are not allowed to deduct the income taxes they ate required to the US Government in their return for Philippine income tax, they would be subjected to double taxation. Q. Is the contention of the spouses correct? A. No, double taxation becomes obnoxious only when the taxpayer is taxed twice for the benefit of the same governmental entity. In the present case, while the
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spouses would have to pay two taxes on the same income, the Philippine Government only receives the proceeds of one tax. As between the Phil., where the income was earned and where the taxpayer is domiciled, and the US, where the income was not earned and where the taxpayer did not reside, it is undisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Phil. xxx the right of a government to tax income emanates from its partnership in the production of income, by providing the protection, resources, incentives, and proper climate for such production xxx.

Requisites for Income to be Taxable: 1. There must be gain or profit, whether in cash or its equivalent. 2. The gain must be realized. 3. The gain must not be excluded by law or treaty from taxation.

Fernandez Hermanos, Inc. vs. Commissioner, September 30, 1960, 29 SCRA 553
Facts: Petitioner, is a domestic corporation organized for the principal purpose of engaging in business as an investment company. The CIR questions the Tax Court's allowance of the taxpayer's writing off as worthless securities in its 1950 return the sum of P8,050.00 representing the cost of shares of stock of Mati Lumber Co. acquired by the taxpayer on January 1, 1948, on the ground that the worthlessness of said stock in the year 1950 had not been clearly established. The Commissioner contends that although the said Company was no longer in operation in 1950, it still had its sawmill and equipment which must be of considerable value. The Court, however, found that "the company ceased operations in 1949 when its Manager and owner died. When the company ceased to operate, it had no assets, in other words, completely insolvent. This information as to the insolvency of the Company reached (the taxpayer) in 1950," when properly claimed the loss as a deduction in its 1950 tax return, pursuant to Section 30(d) (4) (b) or Section 30 (e) (3) of the National Internal Revenue Code. Q. Is the worthlessness of the said stock had been clearly established? A. Yes, there was adequate basis for the writing off of the stock as worthless securities. Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment, which were still existing, and that such proceeds would later be distributed to its stockholders such as the taxpayer, the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received.

Constructive Receipt Limpan Investment Corp. vs. Commisioner, 17 SCRA 703


Facts: Petitioner, a domestic corporation duly registered is engaged in the business of leasing real properties. Limpan duly filed its 1956 and 1957 income tax returns however the examiners of BIR conducted investigation of petitioners income tax returns and they discovered and ascertained that petitioner had under declared its rental income during said taxable years and had claimed excessive depreciation of its buildings. CIR demands the payment of deficiency income tax. Petitioner denied having received or collected the said unreported rental income explaining that part of said amount was not declared because its president did not turn the same over
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to petitioner in said year but did so only in 1959 and that a certain tenant deposited in court his rentals over which the corporation had no actual or constructive control. Q. Is the contention of the petitioner sufficient to justify the non-declaration of rental income? A. No, the withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non- declaration of said income in 1957, since the deposit was resorted to due to the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to have constructively received such rentals in 1957. The payment by the sub- tenant in 1957 should have been reported as rental income in said year, since it is income just the same regardless of its source.

EXCLUSIONS FROM GROSS INCOME


Proceeds of Life Insurance El Oriente vs. Posadas, 56 Phil 147
Facts: El Oriente is a domestic corporation duly organized and existing under Phil. laws. Plaintiff, in order to protect itself against the loss that it might suffer by reason of the death of its manager, A. Velhagen, who had had more than thirty-five (35) years of experience in the manufacture of cigars in the Philippines, and whose death would be a serious loss to the plaintiff, procured from the Manufacturers Life Insurance Co., an insurance policy on the life of the said manager and designated itself as the sole beneficiary. Plaintiff paid for the insurance premiums and charged the same as expenses of its business and deducted the same from its gross income which Posadas, the duly appointed, qualified and acting Collector of Internal Revenue allowed. Upon the death of Velhagen, plaintiff received all the proceeds of the life insurance policy which Posadas assessed and levied as income tax. Plaintiff paid under protest claiming exemption. Q. Are the proceeds of the life insurance policy taxable? A. No, the proceeds of insurance taken by a corporation on the life of an important official to indemnify it against loss in case of his death, are not taxable as income under the Philippine Income Tax Law. The indefiniteness of the local law is emphasized.

Retirement Benefits Re: Request of Atty. Bernardo Zialcita, October 18, 1990, 190 SCRA 851
Facts: Bernardo Zalcita, a retired employee of the Supreme Court filed a request with the SC for the refund of the amount of P59,502.33 which was deducted from his terminal leave pay as withholding tax. The Court said that the terminal leave pay of Atty. Zialcita, which he received by virtue of his compulsory retirement, can never be considered as part of his salary subject to income tax. Hence, Atty. Zialcitas request was granted.
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Q. Is terminal leave pay subject to income tax? A. No, the commutation of leave credits is commonly known as terminal leave pay. The same is applied for by an employee who retires or resigns or is separated from service through no fault of his own. Since terminal leave pay is applied for by an officer or employee who has already severed his connection with his employer and who is no longer working, it necessarily follows that the terminal leave pay or its cash equivalent is no longer compensation for services rendered. Therefore, it cannot be received by the said employee as salary. Upon his compulsory retirement, he is entitled to the commutation of his accumulated leave credits to its monetary value. It is a cause beyond the control of the said official or employee. Thus, it is one of those excluded from gross income and is therefore not subject to tax.

Miscellaneous items Commissioner vs. Mitbushi Metal Corporation, 181 SCRA 214
Facts: Atlas Consolidated Mining and Development Corporation (Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi), a Japanese corporation licensed to engage in business in the Phil., for purposes of the projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, US currency, for the installation of a new concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from Japan. Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for purposes of its obligation under said contract. Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter. A claim for tax credit was filed by Atlas. Q. Is the loan tax exempt? A. No, under Section 29 (b) (7) (A), excludes from gross income: "(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or regional financing institutions established by governments." The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper concentrates. Meanwhile, the contract between Eximbank and Mitsubishi is entirely different. It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the
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exemption so claimed, which onus petitioners have failed to discharge. Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A) of the Tax code, are entitled to exemption and which should indispensably be the party in interest in this case.

INDIVIDUAL INCOME TAXATION


Tax Exempt Compensation Income Collector vs. Henderson, February 28, 1961, 1 SCRA 649 Convenience of the Employer Rule
Facts: Arthur, is the president of the American International Underwriters for the Phil. Inc, a domestic corporation engaged in insurance business. Spouses Arthur and Marie Henderson filed with the BIR returns of annual net income for the years 1948 to 1952. The spouses received from the BIR, assessment notice and paid the amount assessed. The BIR reassessed the taxpayers income after investigation. In the foregoing assessment, the BIR included the taxpayer-husbands allowances for rental, residential, subsistence, water, and bonus paid to him. The taxpayer asked for reconsideration with the Collector but was denied. Q. Are the allowances given by his employer formed part of the taxable income? A. Although the quarters they occupied exceeded their personal needs, the exigencies of husband-taxpayer's high executive position demanded and compelled them to live in more spawning and pretentious quarters like the ones they had occupied. They had to entertain and put up house-guests in their apartments. This is the reason why the husband-taxpayer's employer-corporation had to grant him allowance for rental and utilities in addition to his annual basic salary to take care of those extra expenses for rental and utilities in excess of their personal needs. The fact that the taxpayers had to live or did not have to live in the apartment's chosen by the husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in question redounded to their personal benefit or was retained by them. Their bills for rental and utilities were paid directly by the employer-corporation to the creditors. Nevertheless, the taxpayers are entitled only to a ratable value of the allowances in question. Only the reasonable amount they would spent for house rental and utilities such as light, water, telephone, etc., should be subject to tax. The excess should be considered as expenses of the corporation.

Allowable Deductions from Gross Compensation Income:


Personal Exemptions Madrigal vs. Rafferty, August 7, 1918, 38 Phil 414
Facts: Vicente Madrigal is married to Susana Paterno. He filed a tax return with the Collector of Internal Revenue, herein appellee, for his income tax for the year 1914. Thereafter, he claims that the amount reflected in the return does not represent his income alone but that of the conjugal partnership of the spouses. He proposes that the aforementioned net income be divided equally into two parts for the payment of the proper tax. His claim having been denied, appellant pays the tax under protest.
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Q. Should the income tax be divided between the spouses? A. Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husband's property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000, specifically granted by the law.

BUSINESS/ TRADE/ PROFESSIONAL INCOME


GR: Stock dividends are not taxable.

Commissioner vs. CA, January 20, 1999, 301 SCRA 152


Facts: Don Andres Soriano, a citizen and resident of the US, formed the corporation A. Soriano Y Sia, predecessor of ANSCOR. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. ANSCOR declared stock dividends. In 1964, Don Andres died one-half of his shareholdings were transferred to his wife, Dona Carmen, as her conjugal share and the other half formed part of his estate. Dona Carmen requested a ruling from the US Internal Revenue Service, inquiring if an exchange of common with preferred shares may be considered as tax avoidance scheme. The IRS opined that the exchange is only recapitalization scheme and not tax avoidance scheme. The BIR examiners after examining ANSCOR books of account and records issued a report proposing that ANSCOR be assessed for deficiency withholding tax. Petitioner contends that the redemption of stocks and exchange of common with preferred shares can be considered as essentially equivalent to the distribution of taxable dividend, making the proceeds thereof taxable. Q. Is the contention of petitioner correct? A. No, stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but an enrichment through increase in value of capital investment. In a loose sense, stock dividends issued by the corporation are considered unrealized gain, and cannot be subjected to tax until that gain has been realized.

EXCPS: Cancellation or redemption of shares of stock

Commissioner vs. CA, January 20, 1999, 301 SCRA 152


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However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of stock shall be considered as taxable income to the extent it represents a distribution of earning or profits. The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use as a device for the actual distribution of cash dividends.

Recipient is other than shareholder. Stock dividend is taxable to usufructuary.

Bachrach vs Siefert, 87 Phil (wala po kme makitang ganitong ruling sa mismong case or maybe we got the wrong case. paki check nalang po, tnx.)
Under the Massachusetts rule, a stock dividend is considered part of the capital and belongs to the remainderman; while under the Pennsylvania rule, all earnings of a corporation, when declared as dividends in whatever form, made during the lifetime of the usufructuary, belong to the latter. xxx The Pennsylvania rule is more in accord with our statutory laws than the Massachusetts rule. Under section 16 of our Corporation Law, no corporation may make or declare from its business. Any dividend, therefore, whether cash or stock, represent surplus profits. Article 471 of the Civil Code provides that the usufructuary shall be entitled to receive all the natural, industrial, and civil fruits of the property in the usufruct. The stock dividend in question in this case is a civil fruit of the original investment. The shares of stock issued in payment of said dividend may be sold independently of the original shares just as the offspring of a domestic animal may be sold independently of its mother. Thus, being a civil fruit, said stock dividend maybe taxable to the usufructuary.

Dividends declared in the guise of treasury stock dividend to avoid the effects of income taxation Commissioner vs. Manning, August 6, 1975, 66 SCRA 14
Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. They are therefore issued shares, but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporations as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation though it still represent a paid - for interest in the property of the corporation. Where the manifest intention of the parties to the trust agreement was, in sum and substance, to treat the shares of a deceased stockholder as absolutely outstanding shares of said stockholder's estate until they were fully paid. The declaration of said shares as treasury stock dividend was a complete nullity and plainly violative of public policy.

CORPORATION INCOME TAXATION:


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Unregistered or Registered Partnership Evangelista vs. Collector of Internal Revenue, October 15, 1957,102 Phil 140
Facts: Petitioners borrowed a sum of money from their father which amount together with their personal monies was used by them for the purpose of buying real properties. The real properties they bought were rented or leased to various tenants. The respondent demanded the payment of income tax on corporations, real estate dealers tax, and corporation residence tax. However, petitioners seek to reversed the letter of demand and be absolved from the payment of the taxes in question. Q. Are petitioners subject to tax on corporations? A. Yes, "Corporations" strictly speaking are distinct and different from "partnership". When our Internal Revenue Code includes "partnership" among the entities subject to the tax on "corporations", it must be allude to organizations which are not necessarily "partnership" in the technical sense of the term. Section 24 of the Internal Revenue Code exempts from the tax imposed upon corporations "duly registered general partnership", which constitute precisely one of the most typical forms of partnership in this jurisdiction. As defined in section 84 (b) of the Internal Revenue Code "the term corporation includes partnership, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standards form, or conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for the purposes of the tax on corporations.

Rosales vs. Rallos, September 24, 1903, 2 Phil 509


An agreement between two persons to operate a cockpit, by which one is to contribute his services and the other to provide the capital, the profits to be divided between them, constitutes a partnership.

Oa, et al vs Commissioner, May 25, 1972, 45 SCRA 74


Facts: Julia Buales died leaving as heirs her surviving spouse, Lorenzo Oa and her five children. A settlement of the estate was instituted in the CFI. The project partition was approved by the Court however, there was no attempt made to divide the properties listed. Instead, the properties remained under the management of Lorenzo who used said properties by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. From said investments and properties petitioners derived such income as profits. Respondent decided that petitioners formed an unregistered partnership and therefore subject to corporate income tax. Petitioners protested the assessment and asked for reconsideration alleging that they are co-owners of the properties inherited and the profits derived from the transactions. Q. Are petitioners subject to corporate income tax? A. Yes, as a rule, co-ownership is tax exempt. The co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the income derived therefrom are used as
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common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in the proper partition either duly executed in an extra-judicial settlement or approved by the court in the corresponding estate or intestate proceeding. If after such partition, each heir allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed and therefore subject to corporate income tax.

Pascual and Dragon vs. Commissioner, 166 SCRA 560


Facts: Pascual and Dragon bought 2 parcels of land from Bernardino and 3 from Roque. Thereafter, the first two were sold to Meirenir Development Corporation and 3 to Reyes and Samson. They divided the profits between the two (2) of them. The Commissioner contended that the petitioners formed an unregistered partnership or joint venture taxable as a corporation under the Code and its income is subject to the NIRC. Q. Is there an unregistered partnership formed? A. There was no partnership formed. The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. (see Article 1769, NCC). In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present.

Obillos, Sr. vs. Commissioner, October 29, 1985,139 SCRA 436


Facts: On 2 March 1973, Joe Obillos Sr. transferred his rights under contract with Ortigas Co. to his 4 children to enable them to build residences on the lots. TCTs were issued. Instead of building houses, a year, the Obillos children sold them to Walled City Securities Corporation and Olga Cruz Canda. Petitioner required the children to pay corporate income tax under the theory that they formed an unregistered partnership or joint venture. Q. Are the petitioners liable for corporate income tax? A. No, Obillos children are co-owners, it is an isolated act which shows no intention to from a partnership. To regard the Obillos children as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. It appears that they decided to sell it after they found it expensive to build houses. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state.

Joint Accounts or Joint Ventures formed for profits


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Collector vs. Batangas Co., 54 OG 6724 Joint Emergency Operation


Facts: Batangas Transportation and Laguna Bus were registered and operating separately. They were placed under one sole management called the "Joint Emergency Operation" whereby the joint management operates the business affairs of the two companies as though they constitute a single entity thereby obtaining substantial economy and profit in operation. The theory of the Collector is that the Joint Emergency Operation was a corporation distinct from the two respondent companies, as defined in section 84 (b), and so liable to income tax under section 24, both of the National Internal Revenue Code. Q. Is the contention of the Collector correct? A. Yes, the Joint Emergency Operation is a corporation within the meaning of section 84 (b) of the Internal Revenue Code, and consequently, it is taxable under section 24 of the same code. It cannot possibly be true and correct to say that at the end of each year, the gross receipts and income and the gross expenses of two companies are exactly the same for purposes of the payment of income tax.

Joint Stock Companies Brocki vs. American Express Company, CA Michigan, 279F 2d 785
Joint Stock Companies are generally classified as a partnership possessing some character of the characteristics of a corporation. They appear to be like corporations to the extent that they have capital stock but when capital is divided or made transferable even without the consent of the co-partner, they partake of the nature of partnership.

Major Groups of Corporation for Income Tax Purposes 1. Domestic Corporations 2. Resident Foreign Corporations 3. Non-Resident Foreign Corporations

Far East International Import-Export Corp vs. Nankai Kogyo Co., November 30, 1962, 6 SCRA 725
Facts: Petitioner is a corporation organized under Phil. laws, entered into a Contract of Sale of Steel scrap with Nankai, a foreign corporation organized under Japanese laws. The buyer signed in Japan and the seller in Manila. Upon the perfection of the contract Nankai opened a Letter of Credit with China Banking Corporation. Four days before the expiration of petitioners export license 3 boats sent by respondent arrived in the Phillippines. Upon the expiration of the license, scrap steel was loaded however the loading was stopped. Far East seeks for the extension of license which was refused by then Pres. Garcia. A complaint was filed by Far East for specific performance directed against Nankai and the shipping company to issue and deliver to petitioner the complete set of Bill of Lading for metric tons of scrap delivered to defendant and a writ of preliminary mandatory injunction against China Bank. Nankai filed a motion to dismiss the complaint and the dissolve the injunction on the ground of lack of jurisdiction over the defendant and over the subject matter.
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Academics Committee Chairman: Gilberth D. Balderama Taxation Law Committee Chairperson: Katrina C. Dapula Tax Law Committee Vice-Chairman: Regina S. Salonga Members: AizaB. Aricayos and Jenifer M. Gabrillo

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Q. Does the Philippine court have jurisdiction over the case? A. Yes, Nankai was doing business in the Phil. this was corroborated by the testimony of Nabuo Yoshida, one of the appellant's officers, revealed the defendant's desire to continue engaging in business here, after receiving the shipment of the scrap iron under consideration, making the Philippines a base thereof. Transacting arrangements. business means continuity of commercial dealing and

The rule that the doing of a single act does not constitute business within the meaning of statutes prescribing the conditions to be complied with by foreign corporations must be qualified to this extent, that a single act may bring the corporation within the purview of the statute where it is, an act of the ordinary business of the corporation. In such a case, the single act or transaction is not merely incidental or casual, but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the state, and to make the state a basis of operations for the conduct of a part of the corporation's ordinary business.

N.V. Reederij Amsterdam vs. Commissioner, June 23,1988, 162 SCRA 487
Facts: Petitioner is a foreign corporation not authorized or licensed to do business in the Phil. It does not have a branch office in the Phil. and it made only two calls in Phil. ports to unload cargoes for foreign destination. In these two instances, Royal International Ocean Lines acted as husbanding agent for a fee or commission on said vessels. No income tax appears to have been paid by petitioner on the freight receipts. Defendant made an assessment as a non-resident foreign corporation not engaged in trade or business. Petitioner filed a petition praying for the cancellation of the subject assessment. Q. Is petitioner a non-resident foreign corporation not engaged in trade or business? A. Yes, the corporation is considered as a non-resident foreign corporation. In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. Casual activity as in this case, does not amount to engaging in trade or business in the Phillipines.

Branch Profit Remittance Tax Commissioner vs. Marubeni, 177 SCRA 500
Facts: Marubeni Corporation, is a foreign corporation duly organized and existing under the laws of Japan and duly licensed to engage in business under Philippine laws. Atlantic Gulf and Pacific Co. of Manila (AG&P) declared and paid cash dividends to petitioner and withheld the corresponding final dividend tax thereon. Subsequently, Marubeni claimed for the refund or issuance of a tax credit representing profit tax remittance erroneously paid on the dividends remitted by AG&P. Marubeni contends that it is a resident foreign corporation subject only to the 10% intercorporate final tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 1977.
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Q. Is the contention of Marubeni correct? A. No, the dividend income remitted to Marubeni Corporation of Japan arising from its equity investments in Atlantic, Gulf and Pacific Company of Manila is considered separate and distinct income from the branch office in the Philippines. There can be no other logical conclusion that the investment was made for purposes peculiarly germane to the conduct of the corporate affairs to Marubeni, Japan, but certainly not of the branch in the Philippines.

Tax Sparing Credit Rule CIR vs. Wander Philippines Inc., 160 SCRA 573
Facts: Wander Inc. is a domestic corporation owned by Glaro S.A. Ltd., - a service corporation not engaged in trade or business in the Philippines. Wander remits dividends to its parent company out of which Wander withholds 35% and pays the same to the BIR. Wander filed a claim for refund, contending that it is liable only for 15% withholding tax and not 35% as provided in the Tax Code. Q. Is Wander entitled to the preferential rate of 15% withholding tax on the dividends it remitted to Glaro? A. Yes, under the Tax Code, dividends received from a domestic corporation liable to tax, the tax rate shall be 15% of the dividends remitted, subject to the condition that the country in which the non-resident corporation shall allow a credit against the tax due from the non-resident corporation taxes deemed to be paid in the Philippines equivalent to 20% which represents the difference between the regular tax of 35% on corporations and 15% tax on dividends. In the instant case, Switzerland did not impose any tax on dividends received by Glaro. Such fact, however, should be considered as a full satisfaction of the given conditions. To deny Wander to withhold the 15% tax would run counter to the very spirit and intent of said law.

Subsidiary corporation (withholding agent) file an action for refund Commissioner vs. Procter, 204 SCRA 377
Facts: Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&GUSA"). P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for refund or tax credit. Q. May a subsidiary corporation (withholding agent) file an action for refund? A. Yes, P& G(USA) is properly regarded as a taxpayer within the meaning of Section 309, NIRC [now Section 22 (N)] and therefore, authorized to file refund. Withholding agent is technically considered as taxpayer. It is also an agent of the taxpayer in reporting such income. If the withholding agent is also an agent of the beneficial owner, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted where the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective
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control of such parent-stockholder. It seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

ALLOWABLE DEDUCTIONS FROM GROSS INCOME:


Atlas Consolidated Mining vs. Commissioner, January 27, 1981, 102 SCRA 246
Facts: Atlas is a corporation engaged in the mining industry registered under the laws of the Phil. The Commissioner assessed against Atlas deficiency income taxes for the years 1957 and 1958. It is the contention of Atlas that the amount paid in 1958 as annual public relations expenses is a deductible expense from gross income under Section 30 (a) (1) of the NIRC. Atlas claimed that it was paid for services of a public relations firm, P.K Macker & Co., a reputable public relations consultant in New York City, U.S.A., hence, an ordinary and necessary business expense in order to compete with other corporations also interested in the investment market in the US. It is the stand of Atlas that information given out to the public in general and to the stockholder in particular by the P.K MacKer & Co. concerning the operation of the Atlas was aimed at creating a favorable image and goodwill to gain or maintain their patronage. Q. Can Atlas claim the amount paid for the services of a public relations firm as deduction? A. The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (1) of the NIRC which allows a deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." An item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language.

Business Expenses, Requisites for Deductibility;


1. The expense must be ordinary and necessary. Atlas Consolidated Mining vs. Commissioner, January 27, 1981, 102 SCRA 246
Facts: Atlas is a corporation engaged in the mining industry registered under the laws of the Phil. The Commissioner assessed against Atlas deficiency income taxes for the years 1957 and 1958. It is the contention of Atlas that the amount paid in 1958 as annual public relations expenses is a deductible expense from gross income under Section 30 (a) (1) of the NIRC. Atlas claimed that it was paid for services of a public relations firm, P.K Macker & Co., a reputable public relations consultant in New York City, U.S.A., hence, an ordinary and necessary business expense in order to compete with other corporations also interested in the investment market in the United States. It is the stand of Atlas that information given out to the public in general and to the stockholder in particular by the P.K
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MacKer & Co. concerning the operation of the Atlas was aimed at creating a favorable image and goodwill to gain or maintain their patronage. Q. Is the expenses paid for the services rendered by a public relations is an allowable deduction as business expense under Section 30 (a) (1) of the NIRC? A. There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in making the determination. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure. The expenditure paid by Atlas for services carrying on the selling campaign in an effort to sell Atlas' additional capital stock is not an ordinary expense. Reason: Capital expenditures (such as recapitalization and reorganization expenses, the cost of obtaining stock subscription, promotion expenses and commission or fees paid for the sale of stock organization) are not deductible. Ordinarily, an expense will be considered "necessary" where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is "ordinary" when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term "ordinary" does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or nonrecurring to the particular taxpayer affected.

Visayan Cebu Terminal Co. vs. Collector, CTA Case No. 28, June 29, 1957
A business expense is necessary where it is appropriate and helpful in the development of the taxpayers business. It is intended to realize a profit or to minimize a loss.

2. The expenses must be incurred in trade or business carried on by the taxpayer. Collector vs. Philippine Education Co., GR No. l-8505, May 30, 1953
Facts: Education Co., Inc. lost all its pre-war books of accounts and records, with the exception of a copy of the trial balance sheet of November 30, 1941. It claimed the sum of P13,045.48 as a deduction under section 30 of the NIRC. Q. Are the expenses deductible? A. Yes, the fees paid by the taxpayer to recover its lost assets occasioned by the war and to rehabilitate its business are a business connected expense. To carry on

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its business, the taxpayer not only must have sufficient assets but must preserve the same and recover any that should be lost.

Hospital de San Juan De Dios vs. Commissioner, GR No. 311305, May 10, 1990
Facts: Hospital de San Juan de Dios is engaged in both taxable and non-taxable operations. In the computation of its taxable income for the years 1952 to 1955, Hospital de San Juan de Dios allowed all its taxable income to share in the allocation of administrative expenses. The Commissioner disallowed, however, the interests and dividends from sharing in the allocation of administrative expenses. Q. Are the expenses business expense and therefore deductible? A. No, the interests and dividends in question are merely incidental income to petitioner's main activity, which is the operation of its hospital and nursing schools. Mere holding of investments cannot be considered engaging in business so that the expenses in managing the investments are not considered ordinary and necessary in the pursuit of a trade or business. Hence, it is not deductible as business or administrative expenses.

ESSO Standard Eastern Inc. vs. Commissioner, GR No. L285080, July 7, 1989, 175 SCRA 158
Facts: ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum conscessions. The Commissioner disallowed the claim on the ground that the expenses should be capitalized and might be written off as a loss only when a dry hole should result. Hence, ESSO filed an amended return where it asked for the refund of P323,270 by reason of its abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary and necessary expenses in the same return amount representing margin fees it had paid to the Central Bank on its profit remittances to its New York Office. Q. Can the margin fees be considered ordinary and necessary expenses when paid? A. The fees were paid not in the production of income, but in the disposition of said income after it had already been earned. Hence, it is an expense properly attributable to the head office and not in the carrying on of its trade or business in the Philippines. ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires.

3. The expenses must be substantiated by proof. Atlas Consolidated Mining vs. Commissioner, January 27, 1981, 102 SCRA 246
Facts: Atlas contends that the conclusion of the CTA in holding that the expense of P25,523.14 representing the amount paid for the services of the public relations was incurred for acquisition of additional capital is not supported by the evidence.

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Q. Who has the burden of proof? A. The burden of proof that the expenses incurred are ordinary and necessary is on the taxpayer and does not rest upon the Government. To avail of the claimed deduction under Section 30(a) (1) of the National Internal Revenue Code, it is incumbent upon the taxpayer to adduce substantial evidence to establish a reasonably proximate relation petition between the expenses to the ordinary conduct of the business of the taxpayer. A logical link or nexus between the expense and the taxpayer's business must be established by the taxpayer.

However: Basilan Estates September 5, 1967 vs. Commissioner, GR No. L-22494,

Facts: A Phil. corporation engaged in the coconut industry, Basilan Estates, Inc., filed its income tax returns for 1953 and paid the same. The Commissioner of Internal Revenue, per examiners' report assessed that petitioner has a deficiency income tax for 1953 and 25% surtax on unreasonably accumulated profits as of 1953 pursuant to Section 25 of the Tax Code. Petitioner contends that there is an error in disallowing claimed deductions. However, these were disallowed on the ground that the nature of these expenses could not be satisfactorily explained nor could the same be supported by appropriate papers. Q. Can the expenses be allowed as deductions even if they are not substantiated by proof? A. Yes, even if there are no records or receipts available, the oral testimony (CPA) not contradicted by the government is sufficient. The petitioner further argues that when the Bureau of Internal Revenue decided to investigate, petitioner had no more obligation to keep the same since five years had lapsed from the time these expenses were incurred (Sec. 337 of the Tax Code).

4. The expenses must be reasonable. Commissioner vs. Algue, 158 SCRA 11


Facts: Algue, Inc. is a domestic corporation engaged in engineering, construction and other allied activities. Philippine Sugar Estate Development Company (PSEDC) appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing processes. Pursuant to said authority and through the joint efforts of the officers of Algue, private respondent formed the Vegetable Oil Investment Corporation, inducing other persons to invest in it. This new corporation later purchased the PSEDC properties. For this sale, Algue received as an agent a commission of P125,000 and it was from this commission that the P75,000 promotional fees were paid to the officers of Algue. Private respondent, through counsel, received a letter of assessment from petitioner for delinquency income taxes for the years 1958 and 1959 in the total amount of P83,183.85. Algue filed a letter protest which was stamp-received on the same day in the office of the petitioner. The denial of the protest filed by Algue included the disallowance of its claimed deduction of the P75,000 promotional fees earlier mentioned. The Commissioner ratiocinated that said fees were properly disallowed since it was not an ordinary, reasonable or necessary business expense.
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Q. Is the promotional expense reasonable? A. Yes, the promotional expense paid by Phil. Sugar Estate Development Co. to Algue Inc. amounting to P125,000.00 was reasonable & not excessive. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise (Vegetable Oil Investment Corp.) and involve themselves in a new business requiring millions of pesos.

5. Paid or incurred during the taxable year 6. Expenses must not be against public policy, public moral or law. Nava vs. Collector, CTA No. 568, September 25, 1961
Entertainment expenses incurred by an officer of a corporation to entertain certain government officials to discuss transactions/dealing at Manila Hotel are against public policy.

7. If subject to withholding tax, proof of payment to BIR must be shown.

BUSINESS EXPENSES
Factors or Tests to Determine Whether Compensation Paid for Services Rendered is Deductible or Not: Alhambra vs. Collector, 105, 106 Phil 355
An ostensible salary may be in part payment for property Partnership sells out to a corporation; the former partners agreeing to continue in the service of the corporation. The salaries are not merely for services but payment for the transfer of their business. (Sec. 70, Rev. Reg. No. 2)

Reyes vs. CTA, CTA No. 4, September 30, 1957


The form or method of fixing compensation is not decisive as to deductibility. Contingent compensation may be deductible as long as it is not influenced by any consideration other than securing fair and advantageous terms.

Kuenzle and Strife Inc. vs. Collector, 106 Phil 355


As a general rule, bonuses to employees made in good faith and as additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. Bonuses are deductible under the following conditions:
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1. Paid in good faith as additional compensation for services rendered; 2. It must be for personal services actually rendered; and 3. Reasonable amount. To hold otherwise would open the gate to rampant tax evasion.

C.M. Hoskins and Co. vs. Commissioner, GR No. l-24059, November 28, 1969
In determining whether the particular salary or compensation payment is reasonable, the situation must be considered as a whole. There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors, one of them being the amount and quality of the services performed with relation to the business.

THE

OTHER TESTS SUGGESTED ARE:

a.) b.) c.) d.) e.) f.) g.) h.) and i.)

payment must be 'made in good faith; the character of the taxpayer's business; the volume and amount of its net earnings; its locality; the type and extent of the services rendered; the salary policy of the corporation; the size of the particular business; the employees' qualifications and contributions to the business venture; general economic conditions.

The right to fix compensation may be conceded, but for income tax purposes the employer cannot legally claim such bonuses as deductible expenses unless they are shown to be reasonable. To hold otherwise would open the gate of rampant tax evasion.

Aguinaldo Industries Corp vs. Commissioner, GR No. l29790, February 25, 1982
Facts: Petitioner is a domestic corporation engaged in two lines of business, namely: (a) the manufacture of fishing nets, a tax-exempt industry, and (b) the manufacture of furniture, its business of manufacturing fishing nets is handled by its Fish Nets Division, while the manufacture of Furniture is operated by its Furniture Division. For accounting purposes, each division is provided with separate books of accounts as required by the Department of Finance. Previously, petitioner acquired a parcel of land in Muntinglupa, Rizal, as site of the fishing net factory. This transaction was entered in the books of the Fish Nets Division of the Company. Later, when another parcel of land in Marikina Heights was found supposedly more suitable for the needs of petitioner, it sold the Muntinglupa property, petitioner derived profit from this sale which was entered in the books of the Fish Nets Division as miscellaneous income to distinguish it from its tax-exempt income. For the year 1957, petitioner filed two separate income tax returns one for its Fish Nets Division and another for its Furniture Division. After investigation of these returns, the examiners of the Bureau of Internal Revenue found that the Fish Nets Division deducted from its gross income for that year the amount of P61,187.48 as additional remuneration paid to the officers of petitioner.

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Q. Is the bonus given to the officers of the petitioner upon the sale of its Muntinglupa land is an ordinary and necessary business expense deductible for income tax purposes? A. No, bonuses granted to corporate officers for the successful sale of a piece of land effected through a broker no services rendered not deductible as reasonable and necessary expenses. There is absolutely no evidence of any service actually rendered by Aguinaldo Industries officers which could be the basis of a grant to them of a bonus out of the profit derived from the sale. This being so, the payment of a bonus to them of the gain realized from the sale cannot be considered as a selling expense; nor can it be deemed reasonable and necessary so as to make it deductible for tax purposes.

Incidental or ordinary repairs Villegas vs. Commissioner, CTA Case October 7, 1963
Expenses for the maintenance and repair of fishponds are deductible. keeps the fishponds in an ordinary efficient operating condition. It

Extraordinary Repairs Dirscoll vs. Commissioner, 1477 [2d] 493)


Expenses necessitated by radical changes in design made construction are not deductible. This is a part of the cost of the project. during

However: Buckland vs. US, DC Com May 9, 1946


Expenses of repairs to walls and roof of a building to prevent leakage are deductible.

INTEREST EXPENSES
There must be indebtedness Sambrano vs. CTA, GR No. L-8652, March 30, 1957
Although taxes already due have not, strictly speaking, the same concept as debts, they are, however, obligations that may be considered as such. The term "debt" is properly used in a comprehensive sense as embracing not merely money due by contract, but whatever one is bound to render to another, either for contract or the requirements of the law. Where statutes impose a personal liability for a tax, the tax becomes, at least in a broad sense, a debt. A tax is a debt for which a creditor's bill may be brought in a proper case. Some American authorities hold that, especially for remedial purposes, Federal taxes are debts.

Commissioner of Internal Revenue vs. Palanca, October 29, 1966,18 SCRA 496
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Facts: Before Don Carlos Palanca Sr. died, he donated in favor of his son 12,500 shares of stock in La Tondea, Inc. Palanca was assessed gift tax, surcharge and interest which he paid. In March 1956, Palanca filed his income tax return for the year 1955 claiming a deduction for interest. In November 1956, he filed an amended return, claiming an additional deduction representing interest paid on the donee's gift tax based on the provisions of Section 30(b) (1) of the Tax Code authorizing the deduction from gross income of interest paid within the taxable year on indebtedness. Meanwhile, the BIR considered the transfer of 12,500 shares of stock as Palancas inheritance so he was assessed estate and inheritance tax. Palanca claim a deduction representing interest on the estate and inheritance taxes on the shares of stock. Q. Is the amount paid by Palanca for interest on his delinquent estate and inheritance tax deductible from the gross income for that year under section 30(b) (1) of the NIRC? A. Yes. While taxes and debt are distinguishable legal concepts on account of their nature, the distinction becomes inconsequential in this case. The term debt is properly used in a comprehensive sense as embracing not merely money due by contract, but whatever one is bound to render to another, either for contract or the requirements of the law. The term indebtedness as used in the Tax Code of the United States has been defined as the unconditional and legally enforceable obligation for the payment of money. Within the meaning of that definition it is apparent that a tax may be considered an indebtedness. Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax, and the same was paid within the year it is sought to he deducted.

Commissioner vs. Prieto, GR No. L-13912, September 30, 1960


For interest to be deductible, it must be shown that there is indebtedness, that there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It is here conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax, and the same was paid within the year it is sought to be deducted. The term "indebtedness" as used in our Tax Code has been defined as an unconditional and legally enforceable obligation for the payment of money. Within the meaning of that definition, it is apparent that a tax may be considered indebtedness. A tax is a debt for which a creditor's bill may be brought in a proper case. It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible from her gross income.

Non-deductible Interest Expenses

PICOP vs. CA, 250 SCRA 434


Theoretical interest is that interest "calculated" or computed (and not incurred or paid) for the purpose of determining the "opportunity cost" of investing funds in a given business. Such "theorefical" or imputed interest does not arise from a legally demandable interest-bearing obligation incurred by the taxpayer, who
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however wishes to find out e.g., whether he would have been better off by lending out his funds and earning interest rather than investing such funds in his business. One thing that Section 79 quoted above makes clear is that interest which does constitute a charge arising under an interest-bearing obligation is an allowable deduction from gross income.

LOSSES
Requisites for Deductibility of Losses: 1. Taxpayer must prove that the loss was suffered by him. Marcelo Stell Corp. vs. Collector, GR No L-12401, October 31, 1960 putol
Facts: The petitioner is a corporation duly organized under Phil. laws. It is engaged in three (3) industrial activities, namely, (1) manufacture of wire fence, (2) manufacture of nails, and (3) manufacture of steel bars, rods and other allied steel products. enjoined the benefits of the tax exemption under Republic Act No. 35.Petitioner filed amended income tax returns for two taxable years, showing that bit suffered a net loss for the said years. The said losses were arrived at by consolidating the gross income and expenses and/or deductions of the petitioner in all its business activities. Petitioner filed a claim for refund but no action was taken by the respondent. Q. May petitioner be allowed to deduct from the profits realized from its taxable business activities, the losses sustained by its tax except industries? A. No, the purpose of Republic Act No. 35 is to encourage the establishment or exploitation of new and necessary industries to promote the economic growth of the country. It is a form of subsidy granted by the Government to courageous entrepreneurs staking their capital in an unknown venture. Usually loss is incurred rather than profit made. However, the privilege of tax exemption is confined only to new and necessary industries. It did not intend to grant the tax exemption benefit to an entrepreneur engaged at the same time in a taxable or non-exempt industry and a new and necessary industry, by allowing him to deduct his gains or profits derived from the operation of the first from the losses incurred in the operation of the second. The fact that the petitioner is a corporation organized with a single capital that answers for all its financial obligations including those incurred in the tax exempt industries is of no moment. The intent of the law is to treat taxable or nonexempt industries as separate and distinct from new and necessary industries which are tax- exempt for purposes of taxation.

2. Loss must have been sustained during the taxable year. Commissioner vs. Asturias Sugar Central Inc., GR No. L15013, August 31, 1961
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Facts: Respondent is a corporation duly organized under the laws of the Phil. Since its organization, respondent has been engaged in the manufacture of sugar from sugar cane in its. On or about April 18, 1942, respondent was burned by the retreating USAFFE under its scorch earth policy and/or to resist enemy attack. The Central was totally destroyed and was reconstructed only on or about 1947 it then filed on February 26, 1948, with the Philippine War Damage Commission a claim for damages sustained on its properties during the war which was approved. Payment was received in the year 1950. The petitioner in its income tax return for 1950, it claimed a deduction as war losses. Upon proper verification petitioner disallowed all deductions for war losses and consequently, notices of deficiency income tax assessments were issued against the respondent. Respondent paid thereafter filed a claim for refund. Q. Were the war losses in question properly deductible in 1942, when the losses were actually sustained, or in 1950 and 1951? A. The war losses are properly deductible in 1950 and 1951 when the claim for indemnity was properly determined. Section 30(d) (2) of the Revenue Code allows the deduction from the gross income of a corporation of "all losses actually sustained and charged off within the taxable year and not compensated for by insurance or otherwise.' If property is not insured against loss, 'the amount of the loss must be reduced by the amount of any insurance or other compensation received, and by the salvaged value, if any, of the property'; and the amount not so compensated for by insurance is deductible in the year the claim for indemnity is finally determined, since it is required that losses, to be deductible, must be evidenced by closed and completed transactions.

3. Loss evidenced transaction.

by

closed

and

completed

4. Loss not compensated by insurance or otherwise. Commissioner vs. Asturias Sugar Central Inc., GR No. L15013, August 31, 1961
It is urged that "insurance" is a contract, which did not exist under the aforementioned section 5g of the War Damage Corporation Act. Although "insurance" is generally, a contract, nothing in its nature bars an insurance by operation of law. Indeed, said section 5g particularly, subdivision (b) thereof, providing for compensation "by the War Damage Corporation without requiring a contract of insurance or the payment of premiums or other charge . . . as if a policy . . . was in fact in force at the time of" the "loss or damage" in question-leaves no room for doubt about the intent of Congress of the United States to establish, between the War Damage Corporation and the owner of the property lost or damaged, a relation identical to that existing between the insurer and the insured under a contract of insurance. At any rate, the juridical relation thus created is such as to clearly fall within the purview of the term "insurance or otherwise" used in sections 30 and 94 of our Tax Code.

Cu Unjieng Sons Inc. vs. BTA, GR No. L-6296, September 29, 1956
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The announcement of the Federal Loan Agency of the United States with the of the approval of the President of the US, of the creation of the War Insurance Corporation (later War Damage Corporation) by the Rehabilitation Finance Corporation to provide protection against losses resulting from enemy attack which might be sustained by owners of property in continental US and consequently, the approval of the Philippine Rehabilitation Act of 1946, did not constitute in 1945 a compensation "otherwise" than by insurance, and did not authorize petitioner here in to postpone, to another year, its claim for deduction arising from the war losses in question. The words or 'otherwise' in law, when used as a general phrase following an enumeration of particulars, are commonly interpreted in a restricted sense, as referring to such other matters as are kindred to the classes before mentioned, receiving an ejusdem generis interpretation At any rate, there has 'never been any case in which the words "or otherwise", in the 'income tax law, have been held to include the hope, or even the moral certainty, that a proposed legislation authorizing payment of an indemnity, not due, either under the general Principles of law, or under any particular statutewould eventually be approved. The indemnity provided for in the Philippine Rehabilitation Act of 1946 was purely an obligation voluntarily assumed solely for moral considerations, and did not exist as a legal obligation prior to the approval of said Act. Consequently, petitioner is now estopped from maintaining that said war losses were "compensated for by insurance or otherwise".

BAD DEBTS
Debts must be worthlessness. charged off within the year of

Collector vs. Goodrich International Rubber Co., 21 SCRA 1336, 1314


Facts: The Collector of Internal Revenue assessed Goodrich International Rubber Co. the sums of P14,128.00 and P8,439.00 as deficiency income taxes for 1951 and 1952. Herein respondent Goodrich claimed deductions for said assessed taxes consisting of bad debts and as representation expenses. The Collector disallowed the deductions claimed by Goodrich, while on appeal, the Court of Tax Appeals allowed said claims. Q. May the deductions claimed by Goodrich for bad debts and as representation expenses be allowed? A. No, the claim for deduction of the debts should be rejected. Goodrich has not established either that the debts are actually worthless or that it had reasonable grounds to believe them to be so in 1951. Our statute permits the deduction of debts "actually ascertained to be worthless within the taxable year," obviously to prevent arbitrary action by the taxpayer, to unduly avoid tax liability.

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The requirement of ascertainment of worthlessness requires proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be worthless, in the year for which the deduction is sought; and (2) that, in so doing, he acted in good faith.

Philippine Refining Co. vs. CA, 256 SCRA 667


Facts: PRC was assessed by the CIR to pay deficiency tax for 1985. The assessment was protested by PRC on the basis of alleged erroneous disallowance of bad debts. At the CTA, PRC presented only the testimony of its financial accountant to explain and prove the worthlessness of the debts claimed as bad debts. Q. Does PRC sufficiently proved its claim for deductions by reason of the alleged bad debts? A. No, for debts to be considered as worthless and thereby qualify as bad debts, making them deductible, the taxpayer should show that: 1. There is a subsisting and valid debt; 2. The debt must be actually ascertained to be worthless and uncollectible during the taxable year; 3. The debt must be charged off during the taxable year; 4. The debt must arise from the business or trade of the taxpayer. Additionally, the taxpayer must also show that it is uncollectible even in the future. Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court. Said accounts have not satisfied the requirements of the 'worthlessness of a debt.' Mere testimony of the Financial Accountant of the Petitioner explaining the worthlessness of said debts is seen by this Court as nothing more than a selfserving exercise which lacks probative value. There was no iota of documentary evidence to give support to the testimony of an employee of the Petitioner. Mere allegations cannot prove the worthlessness of such debts in 1985. The claim for deduction of these thirteen (13) debts should be rejected.

DEPRECIATION
Definition Basilan Estates Inc. September 5, 1967 vs. Commissioner, 21 SCRA 17,

Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. It is entitled to see that from earnings the value of the property invested is kept unimpaired, so that at the end of any given term of years, the original investment remains as it was in the beginning. It is not only the right of a company to make such a provision, but it is its duty to its bond and stockholders,
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and, in the case of a public service corporation, at least, its plain duty to the public.3 Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets free from income tax.

Necessity of Depreciation Allowance Basilan Estates Inc. September 5, 1967 vs. Commissioner, 21 SCRA 17,

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law. Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the undertying reason for the allowance of a deduction for depreciation. Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of P10,500.49 has no justification in the law.

TAX REMEDIES OF THE GOVERNMENT


A. ASSESSMENT AND COLLECTION CIR vs PASCOR, 309 SCRA 402
Facts: Under authority by the CIR, revenue officers examined Pascors accounting books and discovered deficiency taxes for two fiscal years. The CIR, based on the reports made by the revenue officers, executed an affidavit and filed a criminal complaint for tax evasion. Respondents Rogelio Dio and Virginia Dio, officers of the corporation, assails the action of the CIR by stating that a deficiency tax assessment should have been first filed by the CIR, rather than instituting a criminal complaint at once. Q. What is an assessment? Is it a condition precedent before the institution of a criminal complaint? A. An assessment contains not only a computation of tax liabilities but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by taxpayers. NO, an assessment is not necessary before a criminal complaint can be had. The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the tax-payer. The taxpayer is then given a chance to submit
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position papers and documents to prove that the assessment is unwarranted. If the CIR is unsatisfied, an assessment signed by him is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through the long and winding process described above. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the CIR has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the NIRC. Sec. 222 of the Tax Code specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Sec. 205 of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. The CIR has discretion on whether to issue an assessment or to file a criminal case against the taxpayer or to do both. To reiterate, said Sec. 222 states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment.

Presumption of Regularity CIR vs CA and Atlas Consolidated Mining and Devt Corp., GR No. 104151
Assessments are prima facie presumed correct and made in good faith. It is the taxpayer and not the Bureau of Internal Revenue who has the duty of proving otherwise. It is an elementary rule that in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. All presumptions are in favor of tax assessments. Verily, failure to present proof of error in the assessment will justify judicial affirmance of said assessment.

Follow-up Letter Reiterating Demand Considered Notice of Assessment

for

Payment

Republic vs CA and Nielson and Company, GR No. L-38540, April 30, 1987
Facts: In a demand letter dated July 16, 1955, CIR assessed Nielson & Co. Deficiency taxes for the years 1949-1952 totalling P14, 449.00. Petitioner reiterated its demand upon private respondent for payment of said amount, per letters dated 24 April 1956, 19 September 1956 and 9 February 1960. Private respondent did not contest the assessment in the Court of Tax Appeals. On the theory that the assessment had become final and executory, petitioner filed a complaint for collection of the said amount against private respondent with the CFI which ruled against the respondent. CA reversed the decision. Q. Can the demand letter dated July 16 can be considered an assessment?
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A. Since petitioner has not adduced proof that private respondent had in fact received the demand letter of 16 July 1955, it can not be assumed that private respondent received said letter. Records, however, show that petitioner wrote private respondent a follow-up letter dated 19 September 1956, reiterating its demand for the payment of taxes as originally demanded in petitioner's letter dated 16 July 1955. This follow-up letter is considered a notice of assessment in itself which was duly received by private respondent in accordance with its own admission.

B. REMEDIES FOR COLLECTION OF DELIQUENT TAXES


1. Distraint of personal property 2. Civil or criminal action 3. Compromise 4. Tax lien 5. Forfeiture 6. Civil penalties property and Levy upon real

DISTRAINT AND LEVY Central Cement Corporation vs Commissioner, CTA Case No. 4312, December 21, 1988
Distraint is a remedy whereby the collection of the tax is enforced on the goods, chattels, or effects of the taxpayer including other personal property of whatever character as well as stocks & other securities, debts, credits, bank accts, & interest in & rights to personal property. On the other hand, Levy refers to the seizure of real properties and interest in or rights to such properties for the satisfaction of taxes due from the delinquent taxpayer. Levy can be made before, simultaneously, o after the distraint of personal property. Both remedies are summary in nature & either may be pursued in the discretion of the authorities charged with the collection of tax independently, or simultaneously with civil & criminal action once the assessment becomes final and demandable.

CIR vs Vda. De Codinera, GR No. L-9675, September 28, 1957


Property levied upon by the order of a competent court may, with the consent thereof, be subsequently distrained, subject to the prior lien of the attachment creditor. The attachment merely deprives the Collector or his agents of the power to divest the Court of its jurisdiction over said property. It does not impair such rights as the Government may have for the collection of taxes. While the lien for taxes must be recognized & enforced, the orderly administration of justice requires this to be done by & under the sanction of the court.

Presbitero vs Fernandez, 7 SCRA 627


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Q. Are sugar quotas real (immovable) or personal properties? Should we adopt the definition of personal and real properties under the Civil Code in order to determine the requisites to be followed in levy or distraint proceedings? A. As an improvement attached to the land, by express provision of law (Section 9, Act 4166), though not physically so united, sugar quotas are inseparable therefrom, just like servitudes and other real rights over an immovable, and should be considered as immovable or real property under Article 416 (10) of the Civil Code. The fact that the Philippine Trade Act of 1946 allows transfers of sugar quotas does not militate against their immovability. There cannot be a sugar plantation owner without land to which the quota is attached; and there can exist no quota without there being first a corresponding plantation. Hence, a levy made by the sheriff upon a sugar quota is null and void if not in compliance with the procedure prescribed in Section 14, Rule 39, in relation with Section 7, Rule 59, of the Rules of Court, requiring "the filing with the registered of deeds of a copy of the orders together with a description of the property . . ." (By implication the procedure for levy, not distraint, must be followed)

Marcos II vs Court of Appeals, GR No. 120880, June 5, 1997


Facts: After the death of Ferdinand Marcos, the BIR issued deficiency estate taxes. Despite personal and constructive notice upon the estate, no protest was made by the heirs. Hence, BIR caused the collection by resorting to summary remedy of levy on real properties. Q. Is notice of levy upon the estate enough? A. Yes. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the estate of the decedent, and not necessarily, and exclusively, the heir of the decedent. Thus, it follows that the services of notices of levy in satisfaction of the tax delinquencies upon the heir is not required by law.

Necessity for specifying exact date of sale. Cabrera vs Provincial Treasurer of Tayabas, CA No. 502, January 29, 1946
Facts: The provincial treasurer of Tayabas issued a notice for the sale at public auction of real properties forfeited for tax delinquency on December 15, 1940 at 9am and everyday thereafter, at the same place and hour until all the properties have been sold to the highest bidder. Q. Was said notice sufficient to comply with jurisdictional requirements? A. NO. Under the law (Commonwealth Act No. 470, section 35), the provincial treasurer is enjoined to set forth in the notice, among other particulars, the date of the tax sale. This mandatory requirement was not satisfied in the present case, because the announcement that the sale would take place on December 15, 1940 and every day thereafter, is as general and indefinite as a notice for the sale "within this or next year" or "some time within the month of December." In order to enable a taxpayer to protect his rights, he should at least be apprised of the exact date of the proceeding by which he is to lose his property. xxx Under section 35 of Commonwealth Act No. 470, notice of the public sale must be given to the

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delinquent taxpayer. This has reference to the registered owner, liable to pay taxes, although the delinquent property remains assessed in the name of a former owner.

Invalidity of tax sales by reason of defects in the proceedings. Valencia vs Jimenez, GR No. 4406. October 23, 1908
Facts: An action to set aside a sale of real estate to defendant Jimenez for unpaid taxes and the transfer of interest therein by him to Fuster was brought before teh then CFI Mla on the ground theat the tax sale was invalid by reason of defects int eh proceedings to impose the tax. The most serious of these irregularities are the ff: 1. Error in the name of the owner in the assessment and 2. Defect in the description of the property Q. Is the assessment, consequently the sale of the property, valid? A. NO. There is no presumption of the regularity of any administrative proceeding which results in depriving a citizen or taxpayer of his property. Due process of law must be shown, and the burden of proving the regularity of all proceedings leading up to a tax sale is upon the purchaser at the sale. xxx In the levying of tax assesments and the keeping of the tax; rolls, it is a vital requisite that the property assessed be so clearly described that it may be easily identified by any person who at the time, or subsequently, may have an interest therein, as in the case of a purchaser at a tax sale. A mistake or confusion in the name of the owner of property is also a substantial error and will make a tax sale voidable. When one tax sale embraces two different taxes, a vital defect in either tax invalidates the sale, and a proximately clear description of the property in a later tax roll will not cure an erroneous description in an earlier one.

Effects of variance in the description of the property in the notice of sale and title. Velayo vs Ordoveza, et al.,102 Phil 395
Facts: After publication of the corresponding notice, the City Treasurer of Manila sold, at public auction, to Ricardo Velayo for the sum of P185.95, representing the amount due by way of unpaid real estate taxes, plus penalty and costs, on the property owned by the Ordovezas. When Fernando Ordoveza tried to pay the real estate tax thereon, he was advised of the sale. He was surprised to hear about it, for he had not received any previous notice thereof or read in the newspapers about the public auction to be held in connection therewith. It appears that the description in said deed of sale is different from the description appearing in Transfer Certificate of Title No. 79178, the property in question. Q. Is the sale of such property valid? A. NO. The owner of property registered under the Torrens System is justified in relying upon the description given in his certificate of title as the one officially identifying said property. The sale for non-payment of tax of the property with a description distinct and different from that which appears in its certificate of title

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can not be sanctioned without impairing the full faith and credence which the title is meant to command and, hence, affects the essence of the Torrens System.

CIVIL ACTION
Q. When is Civil Action resorted to? A. This is resorted to when a tax liability becomes collectible, that is, the assessment becomes final and unappealable, OR the decision of the Commissioner has become final, executory, and demandable. This occurs when: a. A tax is assessed and the taxpayer fails to file an administrative protest by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment. b. A protest against the assessment is filed by the taxpayer but the Commissioners decision denying in whole or in part the said protest, was not appealed to the CTA within 30 days from receipt of such decision.

Other instances when taxpayer must appeal to CA within 30 days: Republic vs Lim Tian Teng sons, Inc., GR No. 21731, March 31, 1966
Facts: Lim Tian Teng Sons & Co., Inc., is a domestic corporation engaged in the exportation of copra. CIR assessed a deficiency income tax of P10,074.00 and 50% surcharge thereon amounting to P5,037.00 and demanded payment thereof. Lim Tian Teng Sons & Co., Inc. requested reinvestigation of its 1952 income tax liability. The Collector of Internal Revenue did not reply; instead, he referred the case to the Solicitor General for collection by judicial action. As Lim Tian Teng Sons & Co., Inc. failed to file a waiver of the statute of limitations, the CIR instituted an action in the CFI of Cebu for the collection of deficiency income tax. Q. Is the decision of denial appealable to the CTA? A. YES. When the Commissioner did not reply to the taxpayers request for reconsideration & instead referred the case to the SolGen for judicial collection, this was indicative of his decision against reinvestigation. This is an instance where the Commissioners action is in effect a decision of denial which is appealable to the Court of Tax Appeals.

Yabes vs Flojo, 115 SCRA 278


Facts: Yabes received a demand letter from CIR which he protested and for which he requested for a reinvestigation with the BIR coupled with a request to hold in abeyance the appeal pending final decision. This request was denied. Consequently, Yabes filed a tax waiver extending the period of prescription. Spouses Yabes died pending said action. Q. Can the CFI lawfully acquire jurisdiction over a contested assessment made by the Commissioner of Internal Revenue against the deceased taxpayer Doroteo Yabes, which has not yet become final, executory and incontestable, and which assessment is being contested by petitioners in the Court of Tax Appeals, Case No. 2216, and still pending consideration?

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A. The filing of a civil action in court to collect a tax which was the subject of a pending protest in the BIR was a justifiable basis for the taxpayer to appeal to the Court of Tax Appeals & to move for the dismissal in the trial court of the Governments action to collect the tax under dispute. The respondent Court of First Instance of Cagayan can only acquire jurisdiction over this case filed against the heirs of the taxpayer if the assessment made by the Commissioner of Internal Revenue had become final and incontestable. If the contrary is established, as this Court holds it to be, considering the aforementioned conclusion of the Court of Tax Appeals on the finality and incontestability of the assessment made by the Commissioner is correct, then the Court of Tax Appeals has exclusive jurisdiction over this case.

Commissioner vs Lilia Yusay Gonzales, GR No. L-19495, November 24, 1966


Facts: Matias Yusay died intestate leaving two heirs. Intestate proceedings were instituted in the CFI. Jose Yusay as administrator, filed with BIR an estate and inheritance tax return. However, BIR found other properties not covered by said return, thus, it assessed deficiency taxes. No payment having been made, CIR filed a proof of claim for the estate and inheritance taxes due and a motion for its allowance with the settlement court in voting priority of lien pursuant to Section 315 of the Tax Code. Lilia Yusay filed an answer to the proof of claim alleging nonreceipt of the assessment. Lilia Yusay disputed the legality of the assessment claiming that the right to make the same had prescribed inasmuch as more than five years had elapsed since the filing of the estate and inheritance tax return. She therefore requested that the assessment be declared invalid and without force and effect. CIR requested the request for the reasons, namely, (1) that the right to assess the taxes in question has not been lost by prescription since the return which did not name the heirs cannot be considered a true and complete return sufficient to start the running of the period of limitations of five years under Section 331 of the Tax Code and pursuant to Section 332 of the same Code he has ten years within which to make the assessment counted from the discovery on September 24, 1953 of the identity of the heirs; and (2) that the estate's administrator waived the defense of prescription when he filed a surety bond to guarantee payment of the taxes in question and when he requested postponement of the payment of the taxes pending determination of who the heirs are by the settlement court. Q. Could the CTA take cognizance of an appeal despite the pendency of the "Proof of Claim" and "Motion for Allowance of Claim and for an Order of Payment of Taxes" filed by the CIR in Special Proceedings before the CFI? A. NO. Once an action for collection is filed with the regular court, the taxpayer can no longer assail the legality or validity of the assessment. An action involving a disputed assessment for internal revenue taxes falls within the exclusive appellate jurisdiction of the Court of Tax Appeals (Sec. 7(1), Rep. Act 1125). It is in that forum to the exclusion of the Court of First Instance where the taxpayer can ventilate his or her defense against the assessment.

Basa vs Republic, GR No. 45277, August 5, 1985


Facts: CIR assessed Basa of deficiency tases. Basa did not contest the assessments, thus, it became final and incontestable. CIR then sued Basa for the collection of the assessed tax. The trial court affirmed the CIR. Basa tried to contest the assessment before the CA.
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Q. Can a taxpayer contest an assessment before the CA without protesting before the CTA? A. NO. The prescription of the Governments right to assess is no longer available as a defense in a civil action for collection; the same should have been ventilated before the CTA.

Republic vs Ker and Co., GR No. L-21609, September 29, 1966


Facts: Ker and Co was assessed by the CIR of deficiency income taxes for 19471950. The CFI affirmed the assessment for 1948-1950 but dismissed the claim for 1947. RP filed an MR contending that the right of the CIR to collect the deficiency assessment for 1947 has not prescribed by a lapse of merely five years and three months, because the taxpayer's income tax return was fraudulent in which case prescription sets in ten years from the date of discovery of the fraud. Ker & Co., Ltd. also filed a motion for reconsideration maintaining that since the filing of its petition for review in the Court of Tax Appeals did not stop the running of the period of limitations, the right of the Commissioner of Internal Revenue to collect the tax in question has prescribed. It would be worth mentioning that since the assessment for deficiency income tax for 1947 has become final and executory, Ker & Co., Ltd. may not anymore raise defenses which go into the merits of the assessment, i.e., prescription of the Commissioner's right to assess the tax. In this case however, Ker & Co., Ltd. raised the defense of prescription in the proceedings below and the Republic of the Philippines, instead of questioning the right of the defendant to raise such defense, litigated on it and submitted the issue for resolution of the court. By its actuation, the Republic of the Philippines should be considered to have waived its right to object to the setting up of such defense. Q. Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court have the effect of legally preventing the Commissioner of Internal Revenue from instituting an action in the Court of First Instance for the collection of the tax? A. YES. When Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals contesting the legality of the assessments in question, until the termination of its appeal in the Supreme Court, the Commissioner of Internal Revenue was prevented, as recognized in this Court's ruling in Ledesma, et al. v. Court of Tax Appeals, from filing an ordinary action in the Court of First Instance to collect the tax. Besides, to do so would be to violate the judicial policy of avoiding multiplicity of suits and the rule on lis pendens. If We were to sustain the taxpayer's stand, We would be encouraging taxpayers to delay the payment of taxes in the hope of ultimately avoiding the same. Under the circumstances, the CIR was in effect prohibited from collecting the tax in question. This being so, the provisions of Section 333 of the Tax Code will apply.

Arches vs Bellosillo, 20 SCRA 33


Facts: CIR assessed Arches of deficiency taxes. This not having been disputed, the BIR filed suit for collection. Arches moved to dismiss the complaint on the ground

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that it did not expressly show the approval of the Revenue Commissioner, as required by Section 308 of the Tax Code. Q. Is the approval of the Revenue Commissioner jurisdictional? A. NO. The question of whether a suit should bear the approval of the Revenue Commissioner is not jurisdictional, but one relating to capacity to sue or affecting the cause of action only.

CRIMINAL ACTION Republic vs. Patanao, 20 SCRA 712


Facts: Patanao has been accused in two Criminal Cases for not filing his income tax returns and for non-payment of income taxes for the. In both cases, he was acquitted. Q. Does acquital in a criminal case for non-filing of tax return or non-payment of taxes operate as acquital of civil liability to pay taxes? A. NO. Under the Penal Code the civil liability is incurred by reason of the offender's criminal act. Stated differently, the criminal liability gives birth to the civil obligation such that generally, if one is not criminally liable under the Penal Code, he cannot become civilly liable thereunder. The situation under the income tax law is the exact opposite. Civil liability to pay taxes arises from the fact, for instance, that one has engaged himself in business, and not because of any criminal act committed by him. The criminal liability arises upon failure of the debtor to satisfy his civil obligation. The incongruity of the factual premises and foundation principles of the two cases is one of the reasons for not imposing civil indemnity on the criminal infractor of the income tax law. Another reason, of course, is found in the fact that while Section 73 of the National Internal Revenue Code has provided the imposition of the penalty of imprisonment or fine, or both, for refusal or neglect to pay income tax or to make a return thereof, it failed to provide the collection of said tax in criminal proceedings. Since the civil liability is not deemed included in the criminal action, acquittal of the taxpayer in the criminal proceeding does not necessarily entail exoneration from his liability to pay the taxes. The acquittal in a criminal case cannot operate to discharge defendant from the duty of paying the taxes which the law requires to be paid, since that duty is imposed by statute prior to and independently of any attempts by the taxpayer to evade payment. Said obligation is not a consequence of the felonious acts charged in the criminal proceeding nor is it a mere civil liability arising from a crime that could be wiped out by the judicial declaration of nonexistence of the criminal acts charged.

People vs Tierra, GR No. 17177-80, December 28, 1964


The subsequent satisfaction of a tax liability will not operate to extinguish the criminal liability.

People vs Balagtas, L-10210, July 29, 1959

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Subsidiary imprisonment for failure to pay the tax in case of insolvency cannot be imposed in criminal cases involving violations of the provisions of the Tax Code.

Ungab vs Cusi, GR No. L-41919-24, May 30, 1980


Facts: Six informations were filed with the CFI against Ungab for violation of the NIRC. Ungab filed a motion to quash on the ground that the trial court has no jurisdiction to take cognizance of the cases in view of his pending protest against the assessment made by the BIR examiner. Q. Does the protest against the assessment filed by the taxpayer deprive the CFI of jurisdiction to hear the case for violation of the NIRC? A. NO. A criminal complaint is instituted not to demand payment but to penalize the taxpayer for violation of the Tax Code. Ungabs contention that the filing of the informations were precipitate and premature since the Commissioner has not yet resolved his protests against the assessment of the Revenue District Officer is without merit. What is involved here is not the collection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal prosecution for violations of the NIRC which is within the cognizance of the CFI. While there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. Besides, it has been ruled that a petition for reconsideration of an assessment may affect the suspension of the prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action for violation of law.

COMPROMISE Chuy, et al vs Collector of Internal Revenue, CTA Case, July 16, 1958
A compromise is an agreement between 2 or more persons who amicably settle their differences on such terms as they can agree on to avoid a lawsuit. It very nature implies mutual agreement by the parties in regard to the thing to be compromised. An offer to compromise does not assume the category of a compromise until it is voluntarily accepted by the other party, and no obligation arises or is created by a simple offer or suggestion coming from one of the parties without the acceptance by the other.

Commissioner vs Abad, GR No. L-19627 June 27, 1968


Facts: Abad was found by the BIR guilty for violation of the NIRC provisions. CIR offered a compromise to which Abad did not acceed. Q. Can the BIR demand a compromise penalty from Abad in view of such refusal?

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A. NO, the BIR cannot. A compromise penalty is a certain amount of money which the taxpayer pays to compromise a tax violation. It is paid in lieu of criminal prosecution, and cannot be imposed in the absence of a showing that the taxpayer consented thereto. The payment of a compromise penalty cannot be demanded inasmuch as it was offered by the petitioner only by way of compromise and the compromise did not go through. A compromise implies agreement. If an offer of compromise is rejected by the taxpayer, as in this case, the Commissioner of Internal Revenue should file a criminal action if he believes that the taxpayer is criminally liable for violation of the tax law as the only way to enforce a penalty. A penalty can be imposed only on a finding of criminal liability.

People vs Desiderio, GR No. L-20805, November 29, 1965


Facts: Ignacio Desiderio was charged with illegal importation of cigarettes.He moved for the dismissal of the case alleging that his criminal liability had been extinguished by a compromise agreement with the Collector of Customs, in accordance with Section 2307 of the same Republic Act 1937. Q. Does settlement of the case under Section 2307 extinguish the criminal liability under Section 3601, both of Republic Act 1937, otherwise called the Tariff and Customs Code? A. NO. Section 2307 limits the effects of the aforesaid settlement to the liability that attaches to the property, or to the bond that replaces the property. It does not speak of the liability that falls on the person or offender. Clearly, therefore, the interpretation of the accused is not supported by the law. Moreover, Section 2307 of Republic Act 1937 falls under part 2 of Title VI of said Act, which is entitled "Administrative Proceedings". Settlement of the administrative proceedings does not, in the absence of express provision to that effect, amount to settlement of the criminal liability. Section 309 of said Code allows the Commissioner of Internal Revenue to compromise the civil as well as criminal cases arising thereunder. No similar provision exists, vis-a-vis the Collector or Commissioner of Customs, in regard to violation of the Tariff and Customs Code.

People vs Magdaluyo, GR No. L- 16235, April 20, 1961


Facts: Magdaluyo was found in possession of assorted imported items and was required to pay specific tax thereon. He refused arguing that he is the owner of them. Pending criminal prosecution, the CIR agreed to compromise the case, Magdaluyo agreeing to pay the tax and compromise penalty. The Pasay City Fiscal, upon being advised thereof, expressed his conformity to the agreement and considered the case as "closed and terminated. Upon full payment, however, the SolGen interposed an objection arguing that since the information charging defendant with the offense in question was filed prior to his full payment of the tax liability and compromise penalty, the CIR lost the authority to compromise the criminal aspect of the tax case. Q. Can the CIR compromise the criminal aspect of a tax case if the information was filed before the full payment of liability and compromise penalty? A. YES. The compromise agreement was complied with as it did not set date within which Magdaluyo should complete the payment. A compromise validly entered into between the Commissioner and the taxpayer prior to the institution of the
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corresponding criminal action arising out of a violation of the provisions of the Tax Code is a bar to such criminal action.

When violations of tax laws/cases may be compromised. Rovero vs Amparo, GR No. L-5482, May 5, 1952
Facts: Rovero was found guilty of illegal importation of jewelry. AFTER rendition of judgment, Bureau of Customs (BOC) created a committee to reappraise the confiscated jewelry and requested the modification of the judgment based on the reappraisal. Qs. Can the BOC reappraise confiscated items AFTER rendition of judgment? Can the RP enter into a compromise after judgment? A. NO for both queries. On the first query: The Commissioner of Customs may supervise and control the filing of pleadings, the conduct of the hearing, the presentation of evidence and even the taking of an appeal from the decision of the Court of First Instance, adverse to the Government, to the Supreme Court. But surely he cannot under the guise of supervision and control of judicial proceedings, modify or alter a final decision of a court, including an appellate court or stay execution of a final judgment in favor of the Government by receiving of said Government anything less than what the judgment calls for. On the second query: The contention that the parties to a case may enter into a compromise even a final judgment rendered by a court, may be correct as regards private parties who are the owners of the property subject-matter of the litigation. However, the Commissioner of Customs is not a private party and is not the owner of the money involved in the fine based on the original appraisal. He is a mere agent of the Government and acts as a trustee of the money or property in his hands or coming thereto by virtue of a favorable judgment. Unless expressly authorized by his principal or by law, he is not authorized to accept anything different from or anything less than what is adjudicated in favor of the Government.

TAX LIENS Hongkong and Shanghai Banking Corp. vs Rafferty, CIR 39 Phil. 145, November 15, 1918
Facts: Pujalte and Co. Was engaged in lumber business. In order to secure the payment of forest charges due the government, it executed bonds. Thus, the CIR permitted the company to remove the timber which was used to manufacture railroad ties. These railroad ties were however rejected byt he Manila Railroad Co. Meanwhile, Pujalte and Co. was not able to pay its debt to Hongkong and Shanghai Banking Co. Thus, prompting Pujalte and Co. To assign to HK & S a large quantity of railroad ties. The charges on the timber against Pujalte also not having been paid, the CIR caused delinquency proceedings to be commenced and had issued a distress warrant and later seized railroad ties including which had been assigned by Pujalte & Co. to the Hongkong & Shanghai Banking Corporation, without the latter receiving any notice of the tax. Q. Does the lien follow the property subject to the tax into the hands of a third party when at the time of transfer, no demand for payment had been made and when the purchaser had no notice of the existence of the lien?
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A. NO. A TAX LIEN in its modern acceptation is understood to denote a legal claim or charge on property, either real or personal, as security for the payment of some debt or obligation. Its meaning is more extensive than the jus retentionis (derecho de retencion) of the civil law. The tax lien does not establish itself upon property which has been transferred to innocent purchasers prior to demand. In order that the lien may follow the property into the hands of a third party, it is further essential that the latter should have notice, either actual or constructive. The reason is the benevolence of our Constitution which prohibits the taking of property without due process of law. In the case of real estate or special assessment taxation a man cannot get rid of his liability to a tax by buying without notice. (City of Seattle vs. Kelleher [1904], 195 U. S., 351.) The rule, however, is different where the vendee has no knowledge of the taxes on personality existing at the time, or had no means of knowing from the public records that such taxes had accrued.

Corazon Velos de Torres vs Collector, GR No. 48602, February 26, 1943; Republic vs Peralta, GR No. 56568, May 20, 1987
A tax lien created in favor of the government is superior to all other claims or preferences.

CIR vs NLRC, GR No. 74965, November 9, 1994


Q. When does a tax lien attach? A. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax income becomes due and payable.

FORFEITURE MARIA B. CASTRO vs. COLLECTOR OF INTERNAL REVENUE G.R. No. L-12174 April 26, 1962
Facts: Castro was assessed to be liable for war profits tax. There being no bidders, the properties first sold at a public auction were forfeited in favor of the Government. Consequently, another public auction of other properties was held in order to raise the deficiency. Castro contends that the sale and forfeiture to the government (due to lack of bidders) of her properties which had been levied upon by the CIR and advertised for sale constitutes a full discharge of petitioner's tax liabilities. Q. Does forfeiture of the taxpayer's distrained or levied property in favor of the Government, for lack of adequate bids, operate as full satisfaction of the total tax claims even beyond the value of the property forfeited? A. NO. The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected.

BPI vs Trinidad, 42 Phil 220

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In a seizure to enforce a tax lien, the residue of such proceeds over and above the tax sought to be realized, including expenses, is returned to the owner of the property.

US vs Suria, 20 Phil 163]


In a seizure under forfeiture, all the proceeds of the sale of the thing forfeited are turned over to the Collector of Internal Revenue.

STATUTE OF LIMITATIONS Arches vs. Bellosillo, 20 SCRA 32


The defense of prescription is not jurisdictional and must be raised seasonably, otherwise it is deemed waived.

A. Assessment of the Tax Liability a.)3 years Commissioner vs. Pheonix Assurance Co. Ltd., 14 SCRA 52)
Facts: Phoenix Assurance Co., Ltd. filed its income tax return for 1952 on April 1, 1953. It amended said return on August 30, 1955 reporting a tax liability of P2,502 00. On July 24, 1958, after examination of the amended return, the Commissioner of Internal Revenue assessed deficiency income tax in the sum of P5,667.00. The CTA ruled that the right of the CIR was barred by prescription. The CIR insists that his right to issue the assessment has not prescribed inasmuch as the same was availed of before the 5-year period provided for in Section 331 of the Tax Code expired, August 30, 1955, the date when the amended return was filed. Q. When is the reckoning date of the 5-year prescriptive period to issue an assessment? A. The changes and alterations embodied in the amended income tax return were substantial. The period of limitation of the right to issue the same should be counted from the filing of the amended income tax return.

b.)

10 years

Basilan Estates vs. Commissioner, 21 SCRA 17


Facts: Basilan Estates claims that it never received notice of assessment of the deficiency or if it did, it received the notice beyond the five-year prescriptive period. Q. When is assessment deemed made for the purpose of counting the 5year presciptive period? A. The assessment is deemed made when notice to this effect is released, mailed or sent by the Collector to the taxpayer. As long as the notice is released within the

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prescriptive period, it is not required that the same be received by the taxpayer within the prescriptive period.

Republic vs. Marsman Dev. Co., GRN L-18986, April 27, 1972
It was incumbent upon appellants to show that such a return had been submitted. In order that the filing of a return may serve as the starting point of the period for the making of an assessment, the return must be as substantially complete as to include the needed details on which the full assessment may be made.

Taligman Lumber Co. vs. Collector, 4 SCRA 842


Since prescription is one of the affirmative defenses set up by petitioner herein, it was incumbent upon the latter to prove that it had submitted said returns, and that, having failed to do so, the conclusion must be that no such returns had been filed and that the Government had 10 years within which to make the corresponding assessments, as it did in this case.

Butuan Sawmill, Inc. vs. CTA, 16 SCRA 277


The 10 year prescriptive period will still apply even if what was filed was a wrong return. This is true even if the information embodied in the wrong return could enable the BIR to assess the tax liability of the taxpayer.

Demand Letter issued by the Bureau of Forestry not an assessment Mambulao Lumber Co. vs. Republic of the Phil, GRN L37061, September 5, 1984
Facts: Mambulao Lumber Company paid the Government a total of P9,127.50 as reforestation charges. Having found liable for an aggregate amount of P4,802.37 for forest charges, it contended that since the Republic (Government) has not made use of the reforestation charges for reforesting the denuded area of the land covered by the companys license, the Republic should refund said amount or, if it cannot be refunded, at least the company should be compensated with what it owed the Republic for reforestation charges. Q. May taxes be subject of set-off or compensation? A. NO. Internal revenue taxes, such as forest charges, cannot be the subject of setoff or compensation. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the State or municipality to one who is liable to the State or municipality for taxes. Neither are they subject of recoupment since they do not arise out of the contract or transaction sued on. Taxes are not in the nature of contracts between the parties but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of individual taxpayers is not required.

B. Collection of the Tax


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a.)5 years b.) 10 years

Clara Diluangco vs. Commissioner, 4 SCRA 263


Q. When does the running of the period of limitation commence? A. All that is required to start the running of the period of limitation therein prescribed is to distraint or levy, or institute a proceeding in court, within 5 years after the assessment of the tax. A judicial action for the collection of a tax is begun by the filing of a complaint with the proper court, or where the assessment is appealed to the CTA, by filing an answer to the taxpayer's petition for review wherein payment of the tax is prayed for. The summary remedy of distraint and levy is begun by the issuance of a warrant of distraint and levy. The right of the CIR to collect by summary method has the effect of stopping the running of prescription once a warrant of distraint and levy is issued.

Filing of answer to taxpayers petition considered as institution of judicial action.

for

review

Fernandez Hermanos, Inc. vs. Commissioner, GRN L-21551, L-21557, September 30, 1969
Facts: Upon verification of the taxpayers income tax returns, the CIR assessed the taxpayer deficiency income taxes. Said assessment was assailed before the CTA and was eventually elevated before the SC. The taxpayer contended that prescription has set in for failure of the Commissioner to file a complaint for collection against it in an appropriate civil action. Q. Does the filing of an answer to taxpayers petition for review stay the prescriptive period? A. YES. A judicial action for the collection of a tax is begun by the filing of a complaint with the proper court of first instance, OR where the assessment is appealed to the Court of Tax Appeals, by filing an answer to the taxpayer's petition for review wherein payment of the tax is prayed for.

Where the tax obligation is secured by a bond, the prescriptive period for the action for the forfeiture of the bond is governed by the Civil Code Guagua Electric Co., Inc. vs. Commissioner, 19 SCRA 790
Facts: Guagua Electric Light Plant Co. is a grantee of municipal franchises by the municipal councils of Guagua and Sexmoan, Pampanga. It filed a claim for refund for overpayment of franchise tax as provided by its franchises which was denied by the Commissioner on the ground that the right to refund has prescribed. Later however, due to the holding in Hoa Hin Co. vs. David, the Commissioner assessed against the company deficiency franchise tax subject to a 25% surcharge,

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and thereby including the amount previously allowed by the Commissioner to be refunded. Q. Should tax refunded erroneously be imposed against the company, or has the right to recover prescribed? A. NO, it should not be imposed against the company. The demand on the taxpayer to pay the sum of P16,593.87 is in effecct an assessment of deficiency franchise tax. The right to assess, thus, and to collect is governed by Section 331 of the Tax Code rather than by Article 1145 of the Civil Code, as a special law prevails over a general law. Guagua Electric is absolved from the payment of the amount erroneously refunded.

Fraudulent or False Return Aznar vs. Commissioner, 58 SCRA 519


Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision which segregates the situations into three different classes, namely "falsity," "fraud" and "omission." That there is a difference between "false return" and "fraudulent return" cannot be denied. A false return implies deviation from the truth, whether intentional or not. A fraudulent return implies intentional or deceitful entry with intent to evade the taxes due. The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding the tax.

What constitutes fraud CIR vs. Ayala Securities Corporation, GRN L-29485, March 31, 1976
Q. What constitutes fraud? A. Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in the court below. The finding of the trial court as to its existence and non-existence is final and cannot be reviewed here unless clearly shown to be erroneous. Fraud is never lightly to be presumed because it is a serious charge.

Gomez vs. Domingo, CTA case No. 1168, February 16, 1964
Mere understatement of the income in itself does not constitute fraud.

Tan Guan vs. CTA, GRN L-23676, April 27, 1967


Facts: Tan Guan and Sia Lin is a partnership. The BIR investigated the books and papers of the said partnership posted fictitious expenses for the purpose of avoiding taxes. The BIR investigators disallowed the deductions because there was substantial and intentional overstatement of deductions. The expenses were fictitious or non-existent. Said conclusion was prompted by the absence of
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supporting receipts in the voucher recovering the expenses and by the failure of the recipients thereof to declare them in their income tax returns. Q. Can the expenses be claimed as a deduction by the partnership considering such findings? A. NO. The Commissioners finding on the facts constituting fraud, proven, and found established by the Court of Tax Appeals, was not rebutted by the taxpayer. Tan Guan did not present any evidence to disprove the findings that the expenses are fictitious; considering that the investigation on Tan Guans liability was made prior to the expiration of the 5-year period to preserve and keep receipts as set fgorth in Section 337 of the Tax Code. As the determination of the Commissioner is presumed correct, it behooves the taxpayers to rebut such presumption. For failure to overcome the burden, Tan Guan or the company cannot claim the expenses as deduction from gross income.

C. Criminal Liability SUSPENSION OF PRESCRIPTIVE PERIODS Republic vs. Felix Acebedo, GRN L-204207, March 29, 1968
The delay in collection could not be attributed to the defendant at all. His requests had been unheeded until then, and there was nothing to impede enforcement of the tax liability by any of the means provided by law. More than 5 years had elapsed since the assessment in question was made, and hence, prescription had already set in, making subsequent events in connection with the said assessment entirely immaterial. The written waiver of the statute signed by the defendant could no longer revive the 'right of action, for under the law such waiver must be executed within the original 5-year period within which suit could be commenced.

However: Sinforoso Alca vs. CTA and Commissioner, GRN L-24624, November 27, 1968
The right to avail of the defense of prescription is waivable. Alca's waiver was of the period of prescription beginning January 20, 1956. It is not just an extension of the period of limitation, but a renunciation of her right to invoke the defense of prescription which was then already available to her. There is nothing unlawful nor immoral about this kind of waiver. The defense of prescription is waivable.

Commissioner vs. Wyeth Suaco Laboratories, Inc., 202 SCRA 125


The prescriptive period provided by law to make a collection by distraint or levy or by a proceeding in court is interrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment. The period starts to run again when said request is denied.

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Prescription: Collection

Suspension of the Statutory Period for

Republic vs. Hizon, 320 SCRA 574


Section 229 (now 228) of the Tax Code mandates that a request for reconsideration must be made within 30 days from the taxpayers receipt of the tax deficiency assessment, otherwise the assessment becomes final, unappealable and therefore demandable.

TAX REMEDIES OF THE TAXPAYER:


1. PROTEST AGAINST ASSESSMENT St. Stephens Association vs Collector of Internal Revenue, GR No. L-11238, August 21, 1958
Where a taxpayer questions an assessment and asks the Collector to reconsider or cancel the same because he (the taxpayer) believes he is not liable therefore, the assessment becomes a "disputed assessment" that the Collector must decide, and the taxpayer can appeal to the Court of Tax Appeals only upon receipt of the decision of the Collector on the disputed assessment, in accordance with par. (1) of section 7, Republic Act No. 1125, conferring appellate jurisdiction upon the Court of Tax Appeals to review decisions of the Collector of Internal Revenue in cases involving disputed assessment.

Dayrit vs Cruz, 165 SCRA 571


Facts: Petitioners are the heirs of the deceased spouses Marta and Toribio Teodoro who died intestate. The heirs separately filed estate and inheritance tax returns for the estates of the spouses with the BIR. The BIR issued deficiency estate and inheritance tax assessments the Estates of Dona Marta and Don Toribio. The heirs asked for reconsideration as the assessment was allegedly contrary to law and not supported by sufficient evidence. In a tax return Dayrit declared an additional amount of P3,655,595.78 as part of the estates of the Teodoro spouses. The BIR issued tax payment acceptance orders, as the heirs and estate have paid a total of P285,046.88. In 1974, the Commissioner filed a motion for allowance of claim against the estates, and for an order of payment of taxes before the trial court, praying that Dayrit be ordered to pay the BIR the sum of P6,470,391.91 plus surcharges and interest. Dayrit filed oppositions contending that the taxes have been settled according to the provisions of PD 23, as amended by PD 67. Q. Was the assessment final, executory, and demandable? A. YES. The act of the Commissioner, in filing an action for allowance of the claim for estate and inheritance taxes, may be construed as a denial of the taxpayers request for reconsideration. From the date of receipt of the copy of the Commissioners letter for collection of taxes, the taxpayers must contest and dispute the same, and upon denial thereof, they have a period of 30 days to appeal the case to the Court of Tax Appeals. Tax assessment made by tax examiners are
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presumed correct and made in good faith. A taxpayer has to prove otherwise. Failure of the taxpayers to appeal to the Court of Tax Appeals in due time made the assessments final, executory and demandable. Such failure to file a position paper may be construed as abandonment of the petitioners' request for reconsideration. The court notes that it took the respondent Commissioner a period of more than one (1) year and five (5) months before finally instituting the action for collection. Under the circumstances of the case, the act of the Commissioner in filing an action for allowance of the claim for estate and inheritance taxes, may be considered as an outright denial of petitioners' request for reconsideration. The taxpayers remedy is to appeal to the CTA within 30 days from the date he is notified. The petitioners, however failed to avail of this remedy.

CIR vs Algue, GR No. L-28896, February 17, 1988


Facts: Algue received a letter of assessment from CIR for delinquency income taxes. Algue filed a letter protest which was stamp-received on the same day in the office of the petitioner. Later, a warrant of distraint and levy was presented to Algue through its counsel, who refused to accept because of a pending protest. Since the said protest could not be found in the dockets, Algues counsel produced his copy and furnished the agent with a photostatic copy. The warrant was deferred. However, the protest was denied. Algue filed a petition for review of the decision of the Commissioner with the CTA.

Q. Was the petition for review of the decision of the Commissioner seasonably filed
with the CTA? A. YES. As a rule, the warrant of distraint and levy is "proof of the finality of the assessment" and "renders hopeless a request for reconsideration," being "tantamount to an outright denial thereof and makes the said request deemed rejected." Exception: If the protest filed was not pro forma and was based on strong legal considerations. In this case, the proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued. The protest was not pro forma and it thus had the effect of suspending reglementary period which started on the date the assessment was received. The period started running again only when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Algues letter-protest of the assessment could not be found in the petitioners office. Hence, the reglamentary period was suspended when Algue filed its protest against the assessment and the period began to run again when Algue was informed of the denial of its protest.

Advertising Associates, Inc. vs CA, 133 SCRA 766


Facts: Advertising Associates contends that it is a media company, not an advertising company. It paid sales taxes, realty dealer's tax and 3% contractor's tax for repairing electric signs. The billboards and electric signs manufactured by it are either sold or leased. The CIR subjected to 3% contractor's tax its rental income from billboards and electric signs. Advertising Associates contested the assessments but the Commissioner reiterated the assessments.

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The taxpayer requested the cancellation of the assessments in its letters of September 13 and November 21. 1974. In 1978, the Commissioner issued two warrants of distraint, directing the collection enforcement division to levy on the taxpayer's personal properties as would be sufficient to satisfy the deficiency taxes. The Acting Commissioner wrote a letter dated May 23, 1979 in answer to the requests of the taxpayer for the cancellation of the assessments and the withdrawal of the warrants of distraint. He closed his demand letter with this paragraph: "This constitutes our final decision on the matter. If you are not agreeable, you may appeal to the Court of Tax Appeals within 30 days from receipt of this letter." The reviewable decision of the BIR is the letter it issued. The said letter embodies the Commissioner's final decision within the meaning of Section 7 of Republic Act No. 1125. The Commissioner said so. He even directed the taxpayer to appeal it to the Tax Court. The directive is in consonance with this Court's dictum that the Commissioner should always indicate to the taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment. That procedure is demanded by the pressing need for fair play, regularity and orderliness in administrative action.

Collector of Internal Revenue vs Batangas Trans co., GR No. L-9692, Jaunary 6, 1958
The CIR, after appeal from his decision to the CTA has been perfected, and after the Tax Court has acquired jurisdiction over the appeal, but before the answer is filed with the court, may still modify his assessment, subject of the appeal, by increasing the same. If the Collector of internal Revenue is not allowed to amend his assessment before the Court of Tax Appeals, and since he may make a subsequent reassessment to collect additional sums within the same subject of his original assessment, provided it is done within the prescriptive period, that would lead to multiplicity of suit which the law does not encourage.

Meralco Securities Corporation vs Savellano, 117 SCRA 805


Facts: In 1967, the late Juan G. Maniago submitted to the Commissioner confidential denunciation against the Meralco Securities Corp. for tax evasion for not having paid income tax on 25% of the dividends it received from the Manila Electric Co. for years 1962 to 1966. The Commissioner caused the investigation of the denunciation and found that no deficiency corporate tax was due from Meralco Securities. Maniago was informed of the findings. The Secretary of Finance sustained the Commissioners action. Maniago filed a petition for mandamus against the Commissioner so as to compel it to impose the alleged deficiency tax assessment against Meralco Securities and to award him the corresponding informers award. Q. Can the Commissioner be compelled to impose the alleged deficiency tax assessment? A. NO. Mandamus only lies to enforce the performance of a ministerial act or duty and not to control the performance of discretionary power. Mandamus may not be made against the Commissioner to compel him to impose a tax assessment not found by him to be due or proper, for that would be tantamount to a usurpation of executive functions. Purely administrative and discretionary functions may not be interfered with by the Courts. The discretionary power vested in the proper executive official, in the absence of arbitrariness or grave abuse so as to go beyonf the statutory authority, is not subject tot he contrary judgment or control of others.

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The question of whether or not to impose a deficiency tax assessment on Meralco Securities Corporation undoubtedly comes within the purview of the words "disputed assessments" or of "other matters arising under the National Internal Revenue Code ", hence, falling within the jurisdiction of the Court of Tax Appeals and not of the Court of First Instance. The Court of Tax Appeals has exclusive appellate jurisdiction to review, on appeal, any decision of the Collector of Internal Revenue in cases involving disputed assessments and other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue. Moreover, since the office of the Commissioner of Internal Revenue is charged with the administration of revenue laws, which is the primary responsibility of the executive branch of the government, mandamus may not lie against the Commissioner to compel him to impose a tax assessment not found by him to be due or proper for that would be tantamount to a usurpation of executive functions.

What may be the subject of a judicial review is the decision of the Commissioner on the protest against assessment, not the assessment itself. Commissioner vs Villa, GR No. L-23998, January 2, 1968
Facts: Leonardo Villa and his wife were assessed deficiency taxes by the BIR. However, without contesting the said assessment, Villa filed on May 4, 1961 a petition for review with the CTA. Q. Is an uncontested assessment a decision within the purview of RA 1125 thus reviewable by the CTA? A. NO. The term decision has been interpreted to mean the decisions of the CIR on the protest of the taxpayer against the assessments and does not signify the assessment itself. Thus, where a taxpayer questions an assessment and asks the CIR to reconsider or cancel the same because he believes he is not liable therefore, the CIR must decide and the taxpayer can appeal to the CTA only upon receipt of the decision of the disputed assessment. Since in the instant case the taxpayer appealed from the assessment of the Commissioner of Internal Revenue without previously contesting the same, the appeal was premature and the Court of Tax Appeals had no jurisdiction to entertain said appeal. For, as stated, the jurisdiction of the Tax Court is to review by appeal decisions of the Commissioner of Internal Revenue on disputed assessments. The Tax Court is a court of special jurisdiction. As such, it can take cognizance only of such matters as are clearly within its jurisdiction.

Best-Obtainable Evidence Rule Commissioner of Internal Revenue vs. Hantex Trading Co., Inc. (March 31, 2005)
FACTS: Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence and Investigation Bureau, received confidential information that the respondent had imported synthetic resin amounting to P115,599,018.00 but only declared P45,538,694.57. According to the informer, based on photocopies of 77 Consumption Entries furnished by another informer, the 1987 importations of the respondent were understated in its accounting records. An audit investigation
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was conducted and the respondents president refused to cooperate since he contended that save for the current investigation, they have always cooperated in the previous investigations before. Payment was demanded from the respondent but it protested the assessment. The matter was elevated to the CTA and it ruled in favor of the CIR, but was later on reversed by the CTA. Q. Is an assessment based on the machine copies of the Consumption Entries competent evidence? A. NO, The photocopies of the consumption entries is incompetent. The best evidence envisaged in Sec. 16 of the 1977 NIRC, as amended, includes the corporate and accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales. The general rule is that administrative agencies such as the BIR are no bound by the technical rules of evidence. The best evidence obtainable under Sec. 16 of the 1977 NIRC, as amended, does not include mere photocopies of records/documents. The rule s that in the absence of the accounting records of a taxpayer, his tax liability may be determined by estimation; Rule does not apply where the estimation is arrived at arbitrarily and capriciously.

2. CLAIM FOR REFUND There must be a written claim for refund filed by the taxpayer with the Commissioner. Commissioner of Internal Revenue vs. Central Luzon Drug Corporation (April 15, 2005)
FACTS: Respondent is engaged in retailing medicines and pharmaceutical products and from January to December 1996, it granted 20% sales discount to qualified senior citizens on their purchases of medicines pursuant to RA 7432, which totaled to P904, 769. For the taxable year 1996, the corporation incurred a net loss. The respondent then filed a claim for tax refund/credit from the petitioner but was unable to get an affirmative response. Q. Can a taxpayer validly claim a tax refund/credit despite a net loss? A. YES. The tax credit allowed under RA 7432 to establishments as a result of granting senior citizens 20% discount on their purchase of medicines from private establishments may be claimed by such establishments even though they are operating at a loss. Under RA 7432, Congress has granted without conditions a tax credit benefit to all covered establishments. Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability that calls for its application by its nature, the tax credit may still be deducted from a future, not a present, tax liability, without which it does not have any use .Also, the discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. As a result of the 20% discount imposed by RA 7432, an establishment becomes entitled to a just compensation, and this term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also to the promptness of its release.

Atlas Consolidated Mining and Development Corp. vs. Commissioner of Internal Revenue (March 16, 2007)
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FACTS: Petitioner presented to respondent Commissioner of Internal Revenue applications for refund or tax credit of excess input taxes for the second, third and fourth quarters of 1992 in the following amounts: P24,031,673 for the second quarter, P16,597,709.17 for the third quarter and P29,839,894.82 for the last. Petitioner attributed these claims to its sales of gold to the Central Bank, copper concentrates to Philippine Associated Smelting and Refining Corporation (PASAR) and pyrite to Philippine Phosphates, Inc. (Philphos) on the theory that these were zero-rated transactions resulting in refundable or creditable input taxes under Section 106(b) of the Tax Code of 1986. Due to the inaction of the CIR, the petitioner brought its claim to the CTA but it was subsequently denied. Q. Can the taxpayer validly claim tax refund/credit? A. NO. It has always been the rule that those seeking tax refunds or credits bear the burden of proving the factual bases of their claims and of showing, by words too plain to be mistaken, that the legislature intended to entitle them to such claims. The rule, in this case, required petitioner to (1) show that its sales qualified for zerorating under the laws then in force and (2) present sufficient evidence that those sales resulted in excess input taxes. There is no dispute that respondent had approved petitioners applications for the zero-rating of its sales to the Central Bank, PASAR and Philphos prior to the transactions from which these claims arose. However, it was also incumbent on petitioner to submit sufficient evidence to justify the grant of refund or tax credit. It was here that petitioner fell short. The CTA and the CA both found that petitioner failed to comply with the evidentiary requirements for claims for tax credits or refunds set forth in Section 2(c) of Revenue Regulations 3-88 and in CTA Circular 1-95, as amended by CTA Circular 10-97.

Cebu Portland Cement Co. vs Collector, 25 SCRA 789


Facts: By virtue of a decision of the Court of Tax Appeals, modified by the Supreme Court, the Commissioner was ordered to refund overpayments of ad valorem taxes on cement produced and sold by the company after October 1957. The company moved for a writ of execution, which was opposed by the Commissioner on the ground that the company had an outstanding sales tax liability to which the judgment debt had already been credited. The Court of Tax Appeals held that the alleged sales tax liability was still being questioned and therefore cannot be set-off against the refund. Q. May the assessment of sales tax liability may be enforced, i.e. to set off against the refund, pending contest? A. YES. The argument, that the assessment cannot as yet be enforced because it is still being contested, lost sight of the urgency of the need to collect taxes as the life blood of the government. If the payment of taxes could be postponed by simply questioning their validity, the machinery of the state would grind to a halt and all government functions would be paralyzed. To require the Commissioner to actually refund to the company the amount of the judgment debt which he will later have the right to distrait for payment of its sales tax liability, is an idle ritual.

Commissioner vs Wander Philippines, Inc., GR No. L-68375, April 15, 1988


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Facts: Wander Inc. is a domestic corporation owned by Glaro S.A. Ltd., - a service corporation not engaged in trade or business in the Philippines. Wander remits dividends to its parent company out of which Wander withholds 35% and pays the same to the BIR. Wander filed a claim for refund, contending that it is liable only for 15% withholding tax and not 35% as provided in the Tax Code. Q. Is Wander entitled to the preferential rate of 15% withholding tax on the dividends it remitted to Glaro? A. YES. Under the Tax Code, dividends received from a domestic corporation liable to tax, the tax rate shall be 15% of the dividends remitted, subject to the condition that the country in which the non-resident corporation shall allow a credit against the tax due from the non-resident corporation taxes deemed to be paid in the Philippines equivalent to 20% which represents the difference between the regular tax of 35% on corporations and 15% tax on dividends. In the instant case, Switzerland did not impose any tax on dividends received by Glaro. Such fact, however, should be considered as a full satisfaction of the given conditions. To deny Wander to withhold the 15% tax would run counter to the very spirit and intent of said law. The submission of petitioner that Wander is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged overpaid taxes, is untenable. It will be recalled, that said corporation is first and foremost a wholly owned subsidiary of Glaro. The fact that it became a withholding agent of the government which was not by choice but by compulsion under Tax Code, cannot by any stretch of the imagination be considered as an abdication of its responsibility to its mother company. It is a device to insure the collection by the Philippine Government of taxes on incomes, derived from sources in the Philippines, by aliens who are outside the taxing jurisdiction of this Court. In fact, Wander may be assessed for deficiency withholding tax at source, plus penalties consisting of surcharge and interest. Therefore, as the Philippine counterpart, Wander is the proper entity who should claim for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro.

The claim for refund must be filed within two (2) years from date of payment of the tax or penalty regardless of any supervening event. Gibbs vs Collector of Internal Revenue, GR No. L-13453, February 29, 1960
Facts: After the denial of their petition by the BIR, Petitioners paid the deficiency income tax and demanded a refund therefrom. Petitioners filed a petition for review of the refund which was denied by the respondent court holding that it had no jurisdiction for being filed beyond the 30-day reglamentary period. Q. Was the petition seasonably filed? A. NO. A taxpayer who has paid the tax whether under protest or not, and who is claiming a refund of the same, must comply with the requirements of both section 306 o0f the NIRC and section 11 of RA 1125; (1) that is, he must file a claim for refund with the CIR within 2 years from the date of his payment of the tax as required by Sec. 306 of the NIRC and (2) appeal to the CTA within 30 days from receipt of the CIRs ruling or decision denying his claim for refund, as required by Sec. 11 of RA 1125. If however, the Collector takes time in deciding the claim and
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the period of 2 years is about to end, the suit or proceeding must be started with the CTA before the end of the 2-year period without awaiting the Decision of the Collector. This is so because the positive requirement of Sec. 306 and the doctrine that delay of the Collector in rendering decision does not extend the peremptory period fixed by the statute. In the case of taxpayer who has not yet paid the tax and who is protesting the assessment made by the CIR, he must file an appeal with the CTA within 30 days from his receipt of the Collectors Assessment as required by Sec. 11 of RA 1125. Otherwise, his failure to comply with said statutory requirement would bar his appeal and deprive the CTA of its jurisdiction to entertain or determine the same. Sec. 7, in relation to Sec. 11 of RA 1125 gives the CTA exclusive appellate jurisdiction to review by appeal decisions of the CIR involving disputed assessments or refunds of internal revenue taxes, provided the case is filed within 30 days after the receipt of such decision or ruling. Petitioners received the notice of denial on November 14, 1956, they filed the petition more than 10 months thereafter on September 27, 1957. The CTA will no longer entertain such petition for being filed way beyond the 30-day reglamentary period.

Computation of two-year period. Collector of Internal Revenue vs Prieto, GR No. L-11976, August 29, 1961
Q. When the tax is paid in installments, when should the prescriptive period of two years provided in section 306 of the Revenue Code be counted from? A. The 2-yr period should be counted from the date of the final payment. This rule proceeds from the theory that, in contemplation of tax laws, there is no payment until the whole or entire tax liability is completely paid. Thus, a payment of a part or portion thereof, can not operate to start the commencement of the statute of limitations. In this regard the word "tax", or words "the tax" in statutory provions comparable to section 306 of our Revenue Code have been uniformly held to refer to the entire tax and not a portion thereof and the vocables "payment of tax" within statutes requiring refund claim, refer to the date when all the tax was paid, not when a portion was paid.

Gibbs vs Commissioner of Internal Revenue, GR No. L17406, November 29, 1965


Payment is a mode of extinguishing obligations (Art. 1231, Civil Code) and it means not only the delivery of money but also the performance, in any other manner, of an obligation (Art. 1231). A taxpayer, resident or nonresident, does so not really to deposit an amount to the Commissioner of Internal Revenue, but, in truth, to perform and extinguish his tax obligation for the year concerned. In other words, he is paying his tax liabilities for that year. Consequently, a taxpayer whose income is withheld at source will be deemed to have paid his tax liability when the same falls due at the end of the tax year. It is from this latter date then, or when the tax liability falls due, that the two-year prescriptive period under Section 306 (now part of Section 230) of the Revenue Code starts to run with respect to payments effected through the withholding tax system.

ACCRA Investment Corporation vs CA, 204 SCRA 957


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Facts: On April 15, 1982, the petitioner corporation filed with the Bureau of Internal Revenue its annual corporate income tax return for the calendar year ending December 31, 1981 reporting a net loss. In the said return, the petitioner corporation declared as creditable all taxes withheld at source by various withholding agents which were paid and remitted by the latter to the Bureau of Internal Revenue from February to December 1981. On December 29, 1983, the petitioner corporation filed a claim for refund inasmuch as it had no tax liability against which to credit the amounts withheld. Pending action of respondent CIR on its claim for refund, Petitioner filed a petition for review with the CTA asking for the refund of the amounts withheld as overpaid income taxes. The CTA dismissed the action after finding that the two-year period within which the petitioners claim for refund should have been filed had already prescribed pursuant to the Tax Code. Q. Is CTA correct? A. NO, CTA is not correct. There are two alternative reckoning dates: (1) the end of the tax year; and (2) when the tax liability falls due. The corporation's withholding agents had paid the corresponding taxes withheld at source to the Bureau of Internal Revenue from February to December 1981. In having applied the first alternative date-"the end of the tax year" in order to determine whether or not the petitioner corporation's claim for refund had been seasonably filed, the respondent appellate court failed to appreciate properly the attending circumstances of this case. The petitioner corporation is not claiming a refund of overpaid withholding taxes, per se. It is asking for the recovery of the sum of P82,751.91.00, the refundable or creditable amount determined upon the petitioner corporation's filing of the its final adjustment tax return on or before 15 April 1982 when its tax liability for the year 1981 fell due. The petitioner corporation's taxable year is on a calendar year basis, hence, with respect to the 1981 taxable year, ACCRAIN had until 15 April 1982 within which to file its final adjustment return. The petitioner corporation duly complied with this requirement on the basis of the corporate income tax return which ACCRAIN filed on 15 April 1982. Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch as the respondent Commissioner by his own rules and regulations mandates that the corporate taxpayer opting to ask for a refund must show in its final adjustment return the income it received from all sources and the amount of withholding taxes remitted by its withholding agents to the Bureau of Internal Revenue. The petitioner corporation filed its final adjustment return for its 1981 taxable year on April 15,1982. The two-year prescriptive period within which to claim a refund commences to run, at the earliest, on the date of the filing of the adjusted final tax return. Hence, the petitioner corporation had until April 15, 1984 within which to file its claim for refund.

CIR vs TMX Sales Inc., GR No. 83736, January 15, 1992


Facts: TMX Sales, Inc filed its quarterly income tax return for the first quarter of 1981. However, during the subsequent quarters, TMX sales suffered losses so that when it filed its income tax return, it declared a gross income of P 904,122.00 and total deductions of P 7,060,647.00. Thereafter, TMX Sales filed a claim for refund with the appellate division of the BIR. This claim was not acted upon by the CIR. TMX Sales filed a petition for review with the CTA. The CIR, in his answer, alleged

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that the amount in question can no longer be refunded considering that more than two years had already elapsed. The CTA ruled in favor of TMX Sales. Q. When does the 2-year period to claim a refund of erroneously collected tax provided for in Sec. 230 commence to run? Is it from the date the quarterly income tax was paid or from the date of filing the adjusted return? A. The most reasonable and logical application of the law would be to compute the 2-year prescriptive period at the time of filing the Final Adjustment Return or the Annual Income Tax Return, when it can be finally ascertained if the taxpayer has still to pay additional income tax or if he is entitled to a refund of overpaid income tax. It is the Final Adjustment Return where the figures of the gross receipts and deductions have been audited and adjusted, that is truly reflective of the results of the operations of a business enterprise. Thus, it is only when the Adjustments Return covering the whole year is filed that the taxpayer would know whether a tax is still due or a refund can be claimed based on the adjusted and audited figures. Therefore, the filing of quarterly income tax returns required in sec.75, NIRC and implemented per BIR Form 1702-Q and payment of quarterly income tax should only be considered were installments of the annual tax due. These quarterly tax payments which are computed on the cumulative figures of gross receipts and deductions on order to arrive at a net taxable income, should be treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal year. TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since the two-year prescriptive period should be counted from the filing of the Adjustment Return on April 15,1982, TMX Sales, Inc. is not yet barred by prescription.

BPI vs CIR, GR No. 144653, August 28, 2001


Facts: Family Bank and Trust Co had a refundable of P2,320,138.34, representing that year's tax credit of P174,065.77 and the previous year's excess credit of P2,146,072.57. FBTC's successor-in-interest, BPI, claimed this amount as tax refund, but CIR refunded only the amount of P2,146,072.57, leaving a balance of P174,065.77. Accordingly, BIR filed a petition for review in the CTA seeking the refund of the aforesaid amount. However, CTA dismissed BIR's petition for review and denied its claim for refund on the ground that the claim had already prescribed. CA affirmed CTA decision. Q. In case of dissolution of a corporation, when does the two-year period of prescription under Sec. 292 of the Tax Code start to run? A. In case of the dissolution of a corporation, the period of prescription should be reckoned from the date of filing of the return required by 78 of the Tax Code which state Every corporation shall, within thirty days after the adoption by the corporation of a resolution or plan for the dissolution of the corporation x x x ,render a correct return to the Commission of Internal Revenue, x x x . After it ceased operations, the taxable year of FBTC was shortened to six months. The situation of FBTC is precisely what was contemplated under 78 of the Tax Code. It thus became necessary for FBTC to file its income tax return within 30 days after approval by the SEC of its plan or resolution of dissolution. Indeed, it would be absurd for FBTC to wait until the fifteenth day of April, or almost 10 months after it ceased its operations, before filing its income tax return.

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Academics Committee Chairman: Gilberth D. Balderama Taxation Law Committee Chairperson: Katrina C. Dapula Tax Law Committee Vice-Chairman: Regina S. Salonga Members: AizaB. Aricayos and Jenifer M. Gabrillo

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Bank of the Philippines Islands vs. Commissioner of Internal Revenue (Oct. 17, 2005)
FACTS: BPI, on two separate occasions, sold United States (US) $500,000.00 to the Central Bank of the Philippines for the total sales amount of US$1,000,000.00. On 10 October 1989, the Bureau of Internal Revenue issued Assessment No. FAS-5-8589-002054, finding petitioner BPI liable for deficiency Documentary Stamp Tax on its afore-mentioned sales of foreign bills of exchange to the Central Bank. Petitioner BPI received the Assessment, together with the attached Assessment Notice, on 20 October 1989 and protested such on Nov. 16, 1989. BPI did not receive any immediate reply to its protest letter. However, on 15 October 1992, the BIR issued a Warrant of Distraint and/or Levy, against petitioner BPI for the assessed deficiency DST for taxable year 1985, in the amount of P27,720.00. It served the Warrant on petitioner BPI only on 23 October 1992. Then again, BPI did not hear from the BIR until 11 September 1997, when its counsel received a letter, dated 13 August 1997, signed by then BIR Commissioner Liwayway Vinzons-Chato, denying its request for reconsideration. BPI then elevated the case to the CTA which ruled that the BIR can still collect the said tax since its right to collect has not yet prescribed, which was likewise affirmed by the Court of Appeals. Q. Has the right of BIR to collect from BPI the alleged deficiency DST prescribed? A. YES. The statute of limitations on collection may only be interrupted or suspended by a valid waiver executed in accordance with paragraph (d) of Section 223 of the Tax Code of 1977, as amended, and the existence of the circumstances enumerated in Section 224 of the same Code, which include a request for reinvestigation granted by the BIR Commissioner. Even when the request for reconsideration or reinvestigation is not accompanied by a valid waiver or there is no request for reinvestigation that had been granted by the BIR Commissioner, the taxpayer may still be held in estoppel and be prevented from setting up the defense of prescription of the statute of limitations on collection when, by his own repeated requests or positive acts, the Government had been, for good reasons, persuaded to postpone collection to make the taxpayer feel that the demand is not unreasonable or that no harassment or injustice is meant by the Government, as laid down by this Court in the case of CIR vs. Suyoc Consolidated Mining Co. Applying the given rules to the present Petition, this Court finds that: (a) The statute of limitations for collection of the deficiency DST in Assessment No. FAS-5-85-89-002054, issued against petitioner BPI, had already expired; and (b) None of the conditions and requirements for exception from the statute of limitations on collection exists herein: Petitioner BPI did not execute any waiver of the prescriptive period on collection as mandated by paragraph (d) of Section 223 of the Tax Code of 1977, as amended; the protest filed by petitioner BPI was a request for reconsideration, not a request for reinvestigation that was granted by respondent BIR Commissioner which could have suspended the prescriptive period for collection under Section 224 of the Tax Code of 1977, as amended; and, petitioner BPI, other than filing a request for reconsideration of Assessment No. FAS-5-85-89-002054, did not make repeated requests or performed positive acts that could have persuaded the respondent BIR Commissioner to delay collection, and that would have prevented or estopped petitioner BPI from setting up the defense of prescription against collection of the tax assessed, as required in the Suyoc case.

VALUE-ADDED TAX
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Academics Committee Chairman: Gilberth D. Balderama Taxation Law Committee Chairperson: Katrina C. Dapula Tax Law Committee Vice-Chairman: Regina S. Salonga Members: AizaB. Aricayos and Jenifer M. Gabrillo

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Commissioner of Internal Corporation (Feb. 16, 2005)

Revenue

vs.

Cebu

Toyo

FACTS: The respondent is an export enterprise and is a subsidiary of a foreign corporation duly registered with the Philippine Economic Zone Authority pursuant to PD 66 and is also registered with the BIR as a VAT taxpayer. Respondent sells 80% of its products to its mother corporation, and the rest are sold to various enterprises doing business in the Mactan Export Processing Zone. Inasmuch as both sales are considered export sales subject to Value-Added Tax (VAT) at 0% rate under Section 106(A)(2)(a)of the National Internal Revenue Code, as amended, respondent filed its quarterly VAT returns from April 1, 1996 to December 31, 1997 showing a total input VAT of P4,462,412.63. Respondent filed an application for tax credit/refund of VAT paid for the period April 1, 1996 to December 31, 1997 amounting to P4,439,827.21 representing excess VAT input payments. The CIR belies the claim for refund of the respondent. Q. Is the grant of a refund in the amount of P2,158,714.46 representing unutilized input VAT on goods and services for the period April 1, 1996 to December 31, 1997 to the respondent is proper? A. YES, the respondents claim should be granted. Under the fiscal incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act No. 7916, the respondent had two options with respect to its tax burden. It could avail of an income tax holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a number of years but not from other internal revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under P.D. No. 66 and pay only the preferential tax rate of 5% under Rep. Act No. 7916. Respondent availed of the income tax holiday for four (4) years starting from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where respondent specified that it was availing of the tax relief under E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt transactions. Taxable transactions are those transactions which are subject to value-added tax either at the rate of ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit for the value-added tax paid on purchases and leases of goods, properties or services. An exemption means that the sale of goods, properties or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. A VAT-registered purchaser of goods, properties or services that are VAT exempt, is not entitled to any input tax on such purchases despite the issuance of a VAT invoice or receipt. Under the system, a zero rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax, but the input tax on his purchase of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund.

Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc. (Aug. 9, 2005)
FACTS: Respondent Toshiba is a domestic corporation duly registered with the Philippine Economic Zone Authority as an ECOZONE Export Enterprise and is also registered in the BIR as a VAT taxpayer. Respondent Toshiba filed its VAT returns for the 1st and 2nd quarters of 1996, reporting input VAT in the amount of P13,118,542.00 and P5,128,761.94, respectively, or a total of P18,247,303.94. It alleged that the said input VAT was from its purchases of capital goods and services
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which remained unutilized since it had not yet engaged in any business activity or transaction for which it may be liable for any output VAT. Consequently, Toshiba filed applications for tax credit/refund of its unutilized input VAT for 01 January to 31 March 1996 in the amount of P14,176,601.28, and for 01 April to 30 June 1996 in the amount of P5,161,820.79, for a total of P19,338,422.07. Q. Is Toshiba entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services? A. An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%). Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended, under which the EPZA evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as amended. This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign territory. The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered enterprise shall be considered an export sale and subject to zero percent (0%) VAT was clearly established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said date, however, whether or not a PEZAregistered enterprise was VAT-exempt depended on the type of fiscal incentives availed of by the said enterprise.

COMMISSIONER OF INTERNAL REVENUE vs. SEAGATE TECHNOLOGY (PHILIPPINES) [G.R. No. 153866, February 11, 2005]
Facts: SEAGATE is a resident foreign corporation duly registered with the SEC to do business in the Philippines. It is also registered with the PEZA to engage in the manufacture of recording components primarily used in computers for export. SEAGATE is a VAT-registered entity. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting documents was filed with Revenue District Office in Cebu. The administrative claim for refund was not acted upon by the petitioner prompting the respondent to elevate the case to the CTA. The CIR contended that since taxes are presumed to have been collected in accordance with laws and regulations, the respondent has the burden of proof that the taxes sought to be refunded were erroneously or illegally collected. Unfortunately, the respondent failed to do so. Q. Is respondent entitled to the refund or issuance of Tax Credit Certificate representing alleged unutilized input VAT paid on capital goods purchased?
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A. Yes. No doubt, as a PEZA-registered enterprise within a special economic zone, respondent is entitled to the fiscal incentives and benefits provided for in either PD 66 or EO 226 which would not subject respondent to internal revenue laws and regulations for raw materials, supplies, articles, etc or would be entitled to income tax holiday; additional deduction for labor expense, etc. It shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. 7227 (Duty-free importation) and 7844 (Tax Credits). Thus, respondent enjoys preferential tax treatment. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-registered person, however, is entitled to their credits. Zero-rated transactions differ from effectively zero-rated transactions as to their source. Zero-rated transactions generally refer to the export sale of goods and supply of services. Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory. In both instances, the transactions are not exempt transactions and the seller of such transactions charges no output tax, but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. In both instances of zero rating, there is total relief for the purchaser from the burden of the tax. But in an exemption there is only partial relief, because the purchaser is not allowed any tax refund of or credit for input taxes paid. VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services. If a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this principle to the case at bar, the purchase transactions entered into by respondent are not VAT-exempt. Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory. This means that in such zone is created the legal fiction of foreign territory. Under the crossborder principle of the VAT system being enforced by the BIR, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory -- except specifically declared areas -- to an ecozone.

CONTEX CORPORATION vs. HON. COMMISSIONER INTERNAL REVENUE [G.R. No. 151135, July 2, 2004]

OF

Facts: Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments and other hospital supplies for export. It is duly registered with the Subic Bay Metropolitan Authority (SBMA) As an SBMAregistered firm, petitioner is exempt from all local and national internal revenue taxes except for the preferential tax provided for in Section 12 (c) of Rep. Act No. 7227. Petitioner also registered with the BIR as a non-VAT taxpayer. Petitioner purchased various supplies and materials necessary in the conduct of its
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manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in the total amount of P1,108,307.72. Petitioner then filed two applications for tax refund or tax credit of the VAT it paid. When no response was forthcoming, petitioner then elevated the matter to the CTA. The BIR contended that since petitioner failed to establish both its right to a tax refund or tax credit and its compliance with the rules on tax refund as provided for in Sections 204 and 229 of the Tax Code, its claim should be denied. Q. Does the VAT exemption embodied in Rep. Act No. 7227 apply to petitioner as a purchaser. Is Petitioner entitled to the tax refund on its purchases of supplies and raw materials? A. No. A VAT exemption means that the sale of goods or properties and/or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the goods or properties). The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT invoice or receipt. On the other hand, Zero-rated Sales are sales by VAT-registered persons which are subject to 0% rate, meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations. The petitioners claim to VAT exemption in the instant case for its purchases of supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95. Petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration issued by the BIR. As such, it is exempt from VAT on all its sales and importations of goods and services. Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw materials is incongruous with its claim that it is VAT-Exempt, for only VATRegistered entities can claim Input VAT Credit/Refund. While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund. Since the transaction is deemed a zero-rated sale because the sale was in favor of an ecozone firm, petitioners supplier may claim an Input VAT credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner. 2. No. The petitioner is registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In fine, even if we are to assume that exemption from the burden of VAT on petitioners purchases did exist, petitioner is still not entitled to any tax
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credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.

TARIFF AND CUSTOMS CODE Maribel B. Jardeleza vs. People of the Philippines (Feb. 6, 2006)
FACTS: The Information charging Jardeleza with violating the TCC was filed before the RTC of Pasay City on October 23, 1997 averred that on February 28, 1997 the accused brought 20.1 kilograms of assorted gold jewelry with an estimated value of P7,562,231.50. Such was effected by hiding said jewelry inside a hanger bag and, by not declaring it in the Customs Declaration form and, by verbally denying that she is carrying said items by answering no when asked by Bureau of Customs if she has anything to declare prior to the actual inspection of her luggage. The accused denied the allegations against her. Q. Is the accused guilty of smuggling the jewelries? A. YES. A person arriving in the Philippines with baggages containing dutiable articles is bound to declare the same in all respects. Adequate reporting of dutiable merchandise being brought into the country is absolutely necessary to the enforcement of customs laws, and failure to comply with those requisites is as condemnable as failure to pay customs fees. Any administrative penalty imposed on the person arriving in the Philippines with undeclared dutiable articles is separate from and independent of criminal liability for smuggling under Sec. 3601 of the Tariffs and Customs Code and for violation of other provisions in the TCC. Section 3601 of the TCC was designed to supplement the existing provisions of the TCC against the means leading up to smuggling, which might render it beneficial by a substantive and criminal statement separately providing for the punishment of smuggling. Smuggling is committed by any person who: (1) fraudulently imports or brings into the Philippines any article contrary to law; (2) assists in so doing any article contrary to law; or (3) receives, conceals, buys, sells or in any manner facilitate the transportation, concealment or sale of such goods after importation, knowing the same to have been imported contrary to law. The phrase contrary to law in Sec. 3601 qualifies the phrases imports or brings into the Philippines and assists in so doing, and not the word article. The word law includes regulations having the force and effect of law, meaning substantive or legislative type rules as opposed to general statements of policy or rules of agency, organization, procedures or positions.

Southern Cross Cement Corporation vs. Cement Manufacturers Association of the Philippines (465 SCRA 532)
FACTS: On May 22, 2001, DTI accepted an application from Philcemcor, alleging that the importation of gray Portland cement in increased quantities has caused declines in domestic production, capacity utilization, market share, sales and employment, as well as caused depressed local prices. Philcemcor sought the imposition at first of provisional, then later, definitive safeguard measures on the import of cement pursuant to the SMA. After investigation, it was determined that critical circumstances existed justifying the imposition of provisional measures. Subsequently, the Tariff Commission received a request from the DTI for a formal investigation to determine whether to impose a definitive safeguard measure and it
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found that there is no need to establish definitive safeguard measure since the elements of serious injury and imminent threat of serious injury has not been established. The DTI Secretary disagreed with the findings of the Commission and requested for an opinion from the DOJ. But the DOJ Secretary opined that Sec. 13 of the SMA precluded a review by the DTI Secretary of the Tariff Commissions negative finding, or finding that a definitive safeguard measure should not be imposed. Philcemcor then sought to set aside the finding of the DTI in the CA which was opposed by Southern Cross, alleging that it was the CTA which has jurisdiction over the case. The appellate court ruled that it had jurisdiction over the petition for certiorari since it alleged grave abuse of discretion. It also refused to annul the findings of the Tariff Commission. Lastly, it held that the DTI Secretary is not bound by the findings of the Tariff Commission since such findings are merely recommendatory and they fall within the ambit of the Secretarys discretionary review. Before the finality of the decision of the CA, the DTI Secretary issued a new decision , ruling this time that since there was no longer any legal impediment to his deciding Philcemcors application, he imposed a definitive safeguard measure on the importation of gray Portland cement. Q. Did the CA acquire jurisdiction over Philcemcors petition? Are the factual findings of the Tariff Commission on the existence or non existence conditions warranting the imposition of general safeguard measures binding upon the DTI Secretary? A. The Court does not doubt that the Court of Appeals certiorari powers extend to correcting grave abuse of discretion on the part of an officer exercising judicial or quasi-judicial functions. However, the special civil action for certiorari is available only when there is no plain, speedy and adequate remedy in the ordinary course of law. Southern Cross relies on this limitation, stressing that Sec. 29 of the SMA, is a plain, speedy and adequate remedy in the ordinary course of law which Philcemcor did not avail of. Under Sec. 29, to wit: Any interested party who is adversely affected by the ruling of the Secretary in connection with the imposition of a safeguard measure may file with the CTA, a petition for review of such ruling within 30 days from receipt thereof. Sec. 29 of the SMA is worded in such a way that it places under the CTAs judicial review of all rulings of the DTI Secretary, which are connected with the imposition of safeguard measure. This is sound and proper in light of the specialized jurisdiction of the CTA in tax matters. Considering that the Tariff Commission is an instrumentality of the government, its actions are not beyond the pale of certiorari jurisdiction. Both the Tariff Commission and the DTI Secretary may be regarded as agents of Congress within their limited respective spheres, as ordained in the Safeguard Measures Act, in the implementation of the said law which significantly draws its strength from the plenary legislative power of taxation- indeed, even the president may be considered as an agent of Congress for the purpose of imposing safeguard measures. When Congress tasks the President or his/her alter egos to impose safeguard measures under the delineated conditions, the President or the alter egos may be properly deemed as agents of Congress to perform an act that inherently belongs as a matter of right to the legislature. The positive final determination by the Tariff Commission operates as an indispensable requisite to the imposition of the safeguard measure. Congress in enacting the SMA and prescribing the roles to be played therein by the Tariff Commission and the DTI Secretary did not envision that the President, or his/her alter ego, could exercise supervisory powers over the Tariff Commission- the Tariff Commission does not fall under the administrative supervision of the DTI.

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COMMISSIONER OF CUSTOMS vs. PHILIPPINE PHOSPHATE FERTILIZER CORPORATION [G.R. No. 144440, September 1, 2004]
Facts: Respondent Philippine Phosphate Fertilizer Corporation (Philphos) is a domestic corporation engaged in the manufacture and production of fertilizers for domestic and international distribution. It is registered with the Export Processing Zone Authority (EPZA), now known as the Philippine Export Zone Authority (PEZA). The manufacture of fertilizers required Philphos to purchase fuel and petroleum products for its machineries. These fuel supplies are considered indispensable by Philphos, as they are used to run the machines and equipment and in the transformation of raw materials into fertilizer. The Petron Corporation (Petron) was Philphos supplier, which imports the same and pays the corresponding customs duties to the Bureau of Customs; and, the ad valorem and specific taxes to the BIR. When the fuel and petroleum products are delivered at Philphoss manufacturing plant, Philphos is billed by Petron the corresponding customs duties imposed on these products. Effectively thus, Philphos reimburses Petron for the customs duties on the purchased fuels and petroleum products which are passed on by the Petron as part of the selling price. Under this arrangement, Philphos indirectly paid as customs duties, the amount of P20,149,473.77. Philphos sought the refund of customs duties it had paid on the ground that Philphos is entitled to tax incentives under Presidential Decree No. 66 (EPZA Law). The Bureau of Customs denied the claim for refund. Qs. Is Philphos entitled to refund? Has the claim for refund prescribed? A. 1. Yes. The enunciated policy of the EPZA Law is to encourage and promote foreign commerce as a means of making the Philippines a center of international trade; strengthening our export trade and foreign exchange position; hastening industrialization; reducing domestic unemployment; and accelerating the development of the country, by establishing export processing zones in strategic locations in the Philippines. The incentives offered to enterprises duly registered with the PEZA consist, among others, of tax exemptions. These benefits may, at first blush, place the government at a disadvantage as they preclude the collection of revenue. Still, the expectation is that the tax breaks ultimately redound to the benefit of the national economy, enticing as they do more enterprises to invest and do business within the zones; thus creating more employment opportunities and infusing more dynamism to the vibrant interplay of market forces. It is clear that Section 17(1) of EPZA Law considers such supplies exempt even if they are used indirectly, as they had been in this case. Since Section 17(1) treats these supplies for tax purposes as beyond the ambit of customs laws and regulations, the arguments of the Commissioner invoking the provisions of the Tariff and Customs Code must fail. Moreover, reading Sec. 18 with Sec. 17 of the EPZA Law would mean that the additional incentives under Section 18 which include allowance of net-operating loss carry-over, accelerated depreciation, exemption from export tax, foreign exchange assistance, financial assistance, exemptions for local taxes and licenses, deductions for labor training services, and deductions for organizational and preoperating expenses are to be enjoyed in conjunction with the incentives under Section 17. Section 17(1) is determinative of the fundamental question whether
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Academics Committee Chairman: Gilberth D. Balderama Taxation Law Committee Chairperson: Katrina C. Dapula Tax Law Committee Vice-Chairman: Regina S. Salonga Members: AizaB. Aricayos and Jenifer M. Gabrillo

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there is legal basis for the claim of exemption. On the other hand, Section 18(i) does not impose limitations on the exemptions granted in the preceding provisions, but would only affect, if at all, the modality by which the exemption takes form. The Tax Reform Act of 1997 authorizes either a refund or credit as a means of recovery of tax erroneously or illegally collected. Formally, a tax refund requires a physical return of the sum erroneously paid by the taxpayer, while a tax credit involves the application of the reimbursable amount against any sum that may be due and collectible from the taxpayer. On the practical side, the taxpayer to whom the tax is refunded would have the option, among others, to invest for profit the returned sum, an option not proximately available if the taxpayer chooses instead to receive a tax credit. 2. No. The EPZA Law itself is silent on the matter, and the prescriptive periods under the Tariff and Customs Code and other revenue laws are inapplicable, by specific mandate of Section 17(1) of the EPZA Law. Thus, the Civil Code provisions on solutio indebiti may find application. The Court has in the past sanctioned the application of the provisions on solutio indebiti in cases when taxes were collected thru error or mistake. Thus, the claim for refund must be commenced within six (6) years from date of payment pursuant to Article 1145(2) of the New Civil Code.

LOCAL TAXATION Radio Communications of the Philippines, Inc. Provincial Assessor of South Cotabato (April 13, 2005) vs.

FACTS: in 1957, RA 2036 granted RCPI a 50 year franchise and Sec. 14 of such mandate it to pay the taxes required by law on real estate, buildings and other personal property except radio equipment, machinery and spare parts needed in connection with its business. In consideration of the franchise, a tax equal to one and one-half per centum of all gross receipts from the business transacted under this franchise by the grantee shall be paid and such shall be in lieu of any tax collected by any authority. The municipal treasurer of Tupi, South Cotabato subsequently assessed RCPI real property tax on its radio station building, machinery shed, radio station tower and its accessories and generating sheds. RCPI protested such assessment. Q. Is RCPI liable to pay real property tax on the said properties? A. YES. RCPIs radio relay station tower, radio station building, and machinery shed are real properties and are thus subject to real property tax. The in lieu of all taxes clause in Section 14 of RA 2036, as amended by RA 4054, cannot exempt RCPI from the real estate tax because the same Section 14 expressly states that RCPI shall pay the same taxes x x x on real estate, buildings x x x. Subsequent legislations have radically amended the in lieu of all taxes clause in franchises of public utilities. The Local Government Code of 1991 withdrew all the tax exemptions existing at the time of its passage including that of RCPIs with respect to local taxes like the real property tax. Also, Republic Act No. 7716 (RA 7716) abolished the franchise tax on telecommunications companies effective 1 January 1996. To replace the franchise tax, RA 7716 imposed a 10 percent valueadded-tax on telecommunications companies under Section 102 of the National Internal Revenue Code. Lastly, it is an elementary rule in taxation that exemptions are strictly construed against the taxpayer and liberally in favor of the taxing authority. It is the taxpayers duty to justify the exemption by words too plain to be mistaken and too categorical to be misinterpreted.

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Academics Committee Chairman: Gilberth D. Balderama Taxation Law Committee Chairperson: Katrina C. Dapula Tax Law Committee Vice-Chairman: Regina S. Salonga Members: AizaB. Aricayos and Jenifer M. Gabrillo

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City of Davao vs. RTC, Branch XII, Davao City (Aug. 18, 2005)
FACTS: The GSIS Davao City Branch received a Notice of Public Auction scheduling the public bidding of GSIS properties located in Matina and Ulas, Davao City for non payment of realty taxes for the years 1992-1994 totalling P295,721.61. GSIS filed a Petition for Cetiorari, Prohibition, Mandamus and/or Declaratory Relief and further sought to enjoin the auction sale by praying for a restraining order in the RTC of Davao City. The said petition sought to determine whether the exemption of the GSIS from paying realty axes has been withdrawn by the Local Government Code. The said court subsequently ruled that notwithstanding, the enactment of the Local Government Code, the GSIS retained its exemption. Q. Is GSIS still exempt from paying real property tax? A.NO. The Court in ruling in the case of Mactan-Cebu International Airport Authority non-exempt from realty taxes, considered that Sec. 133 of the Local Government Code qualified the exemption of the National Government, its agencies and instrumentalities from local taxation with the phrase unless otherwise provided herein. Sec. 133 was not intended to be so absolute a prohibition on the power of LGUs to tax the National Government, its agencies and instrumentalities. The exemptions from real property taxes are enumerated in Sec. 234, which specifically states that only real properties owned by the Republic of the Philippines or any of its political subdivisions is exempted from payment of the tax. Clearly, instrumentalities or GOCCs do not fall within the exceptions under Sec. 234. The express withdrawal of all tax exemptions accorded to all persons natural or juridical, as stated in Sec. 133 of the Local Government Code applies, without impediment to the present case. The state is mandated to ensure local autonomy of local governments, and local governments are empowered to levy taxes, fees, charges that accrue exclusively to them, subject to congressional guidelines and limitations.

City Government of Quezon City Telecommunications Inc. (March 6, 2006)

vs.

Bayan

FACTS: Bayantel was assessed real property taxes for its properties located in the territorial jurisdiction of Quezon City. It opposed such claiming that its properties were exempted by virtue of Sec. 11 of its franchise which exempts it from paying such taxes. On the other hand, the said city anchors its actions on the provisions of the LGC which allows local governments to collect real property tax. Q. Is Bayantel liable to pay real property tax? A. While Sec. 14 of RA 3259, the original franchise of Bayantel, may be validly viewed as an implied delegation of power to tax, the delegation under that provision, as couched, is limited to impositions over properties of the franchisee which are not actually, directly and exclusively used in the pursuit of its franchise. The realty tax exemption enjoyed by Bayantel under its original franchise, but subsequently withdrawn by Sec. 234 of the Local Government Code, has been restored by Sec. 11 of RA 7633. The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by the local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Sec. 5 Art. X of the Constitution. The Supreme Court has upheld the power of Congress to grant exemptions over the power of local government units to impose taxes.

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Academics Committee Chairman: Gilberth D. Balderama Taxation Law Committee Chairperson: Katrina C. Dapula Tax Law Committee Vice-Chairman: Regina S. Salonga Members: AizaB. Aricayos and Jenifer M. Gabrillo

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REAL PROPERTY TAXATION MANILA INTERNATIONAL AIRPORT AUTHORITY vs. COURT OF APPEALS, CITY OF PARAAQUE, et al. [G.R. No. 155650, July 20, 2006]
Facts: Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International Airport (NAIA) Complex in Paraaque City under Executive Order No. 903, otherwise known as the Revised Charter of the Manila International Airport Authority (Charter). MIAA administers the land, improvements and equipment within the NAIA Complex. The MIAA Charter further provides that no portion of the land transferred to MIAA shall be disposed of through sale or any other mode unless specifically approved by the President of the Philippines. In 1997, the Office of the Government Corporate Counsel (OGCC) issued an opinion stating that the Local Government Code of 1991 withdrew the exemption from real estate tax granted to MIAA under Section 21 of the MIAA Charter. MIAA received Final Notices of Real Estate Tax Delinquency from the City of Paraaque for the taxable years 1992 to 2001. MIAA failed to pay these taxes since they allege that they are still exempt from taxes under Sec. 21 of its Charter. The City of Paraaque, through its City Treasurer, issued notices of levy and warrants of levy on the Airport Lands and Buildings. MIAA filed with the Court of Appeals an original petition for prohibition and injunction to restrain the City of Paraaque from imposing real estate tax on, levying against, and auctioning for public sale the Airport Lands and Buildings. Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax exemption privileges of government-owned andcontrolled corporations upon the effectivity of the Local Government Code. Also, it cited the ruling of the Court in Mactan International Airport v. Marcos (216 SCRA 667) where the Court held that the Local Government Code has withdrawn the exemption from real estate tax granted to international airports. Q. Are the Airport Lands and Buildings of MIAA exempt from real estate tax under existing laws? A. YES. First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax. 1. MIAA is Not a Government-Owned or Controlled Corporation Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a government-owned or controlled corporation as any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, -------------------------------------------------------------------UST - Golden Notes TEAM: BAR-OPS 91 of 124
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where applicable as in the case of stock corporations, to the extent of at least 51% of its capital stock. MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting shares. MIAA is also not a non-stock corporation because it has no members. Also, non-stock corporations cannot distribute any part of their income to their members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the National Treasury. This prevents MIAA from qualifying as a non-stock corporation. MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions. MIAA is like any other government instrumentality, the only difference is that MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the Administrative Code defines a government instrumentality as any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code, which recognizes the basic principle that local governments cannot tax the national government. Many government instrumentalities are vested with corporate powers but they do not become stock or non-stock corporations. These government instrumentalities are sometimes loosely called government corporate entities. However, they are not government-owned or controlled corporations in the strict sense as understood under the Administrative Code, which is the governing law defining the legal relationship and status of government entities. Section 133 of the Local Government Code starts with the saving clause unless otherwise provided in this Code. This means that unless the Local Government Code grants an express authorization, local governments have no power to tax the national government, its agencies and instrumentalities. Clearly, the rule is local governments have no power to tax the national government, its agencies and instrumentalities. As an exception to this rule, local governments may tax the national government, its agencies and instrumentalities only if the Local Government Code expressly so provides. The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the Code, which makes the national government subject to real estate tax when it gives the beneficial use of its real properties to a taxable entity. 2. Airport Lands and Buildings of MIAA are Owned by the Republic

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Properties of public dominion mentioned in Article 420 of the Civil Code, like roads, canals, rivers, torrents, ports and bridges constructed by the State, are owned by the State. The term ports includes seaports and airports. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus owned by the State or the Republic of the Philippines. The fact that the MIAA collects terminal fees and other charges from the public does not remove the character of the Airport Lands and Buildings as properties for public use. The operation by the government of a tollway does not change the character of the road as one for public use. Someone must pay for the maintenance of the road, either the public indirectly through the taxes they pay the government, or only those among the public who actually use the road through the toll fees they pay upon using the road. The tollway system is even a more efficient and equitable manner of taxing the public for the maintenance of public roads. Such fees are often termed users tax. b. Airport Lands and Buildings are Outside the Commerce of Man The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of public dominion. As properties of public dominion, the Airport Lands and Buildings are outside the commerce of man. Also, property of public dominion, being outside the commerce of man, cannot be the subject of an auction sale. Any encumbrance, levy on execution or auction sale of any property of public dominion is void for being contrary to public policy. Before MIAA can encumber the Airport Lands and Buildings, the President must first withdraw from public use the Airport Lands and Buildings. Thus, unless the Airport Lands and Buildings are withdrawn by law or presidential proclamation from public use, they are properties of public dominion, owned by the Republic and outside the commerce of man. c. MIAA is a Mere Trustee of the Republic MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48, Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to hold title to real properties owned by the Republic. Its status as a mere trustee of the Airport Lands and Buildings is clearer because even its executive head cannot sign the deed of conveyance on behalf of the Republic. Only the President of the Republic can sign such deed of conveyance. d. Transfer to MIAA was Meant to Implement a Reorganization The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings from the Bureau of Air Transportation of the Department of Transportation and Communications without the Republic receiving cash, promissory notes or even stock since MIAA is not a stock corporation. Such transfer was not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The purpose was merely to reorganize a division in the Bureau of Air Transportation into a separate and autonomous body. The Republic remains the beneficial owner of the Airport Lands and Buildings. MIAA itself is owned solely by the Republic. No party claims any ownership rights over MIAAs assets adverse to the Republic. e. Real Property Owned by the Republic is Not Taxable -------------------------------------------------------------------UST - Golden Notes TEAM: BAR-OPS 93 of 124
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Section 234(a) of the Local Government Code exempts from real estate tax any real property owned by the Republic of the Philippines. This exemption should be read in relation with Section 133(o) of the same Code, which prohibits local governments from imposing taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities. While Section 234(a) of the Local Government Code states that real property owned by the Republic loses its tax exemption only if the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person, MIAA, as a government instrumentality, is not a taxable person under Section 133(o) of the Local Government Code. Thus, even assuming that the Republic has granted to MIAA the beneficial use of the Airport Lands and Buildings, such fact does not make these real properties subject to real estate tax. However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use of such land area for a consideration to a taxable person and therefore such land area is subject to real estate tax. This was the ruling enunciated in the case of Lung Center of the Philippines vs. Quezon City (G.R. No. 144104. June 29, 2004)

LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY and CONSTANTINO P. ROSAS [G.R. No. 144104. June 29, 2004]
Facts: The petitioner Lung Center of the Philippines is a non-stock and nonprofit entity. It is the registered owner of a 121,463 square meter parcel of land located at Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. Petitioner accepts paying and nonpaying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government. Both the land and the hospital building of the petitioner were assessed for real property taxes (P4,554,860) by the City Assessor of Quezon City. Petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the 1987 Constitution. Q. Is petitioner a charitable institution within the context of PD1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160? Are the real properties of the petitioner exempt from real property taxes? -------------------------------------------------------------------UST - Golden Notes TEAM: BAR-OPS 94 of 124
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A. 1.) YES, petitioner is a charitable institution within the context of PD 1823 and RA 7160. To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties. The petitioner is a non-profit and non-stock corporation organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases. The medical services of the petitioner are to be rendered to the public in general in any and all walks of life including those who are poor and the needy without discrimination. After all, any person, the rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity. As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. Exemptions in favor of charitable institutions are based on the benefit conferred upon the public by them, and a consequent relief, to some extent, of the burden upon the state to care for and advance the interests of its citizens. The fact that paying patients are taken, the profits derived from attendance upon these patients being exclusively devoted to the maintenance of the charity, seems rather to enhance the usefulness of the institution to the poor. 2.) NO, those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes. The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed by the Government or any political subdivision or instrumentality thereof with respect to equipment purchases made by, or for the Lung Center. It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges for its real properties as well as the building constructed thereon. The tax exemption under Section 28(3), Article VI covers property taxes only. What is exempted is not the institution itself but lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes. Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for -------------------------------------------------------------------UST - Golden Notes TEAM: BAR-OPS 95 of 124
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which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.

MANILA ELECTRIC COMPANY vs. NELIA A. BARLIS, in her capacity as Officer-in-Charge/Acting Municipal Treasurer of Muntinlupa
[G.R. No. 114231, May 18, 2001] Facts: From 1968 to 1972 the Manila Electric Company (MERALCO) erected 4 power generating plants in Sucat, Muntinlupa. From 1975 to 1978 MERALCO paid the real property taxes on the said properties on the basis of their assessed value as stated in the tax declarations. In 1978, MERALCO sold all the power-generating plants including the landsite to the NAPOCOR. In 1985, the Offices of the Municipal Assessor and Municipal Treasurer of Muntinlupa discovered that MERALCO misdeclared and/or failed to declare for taxation purposes a number of real properties, consisting of several equipment and machineries, found in the said power plants. In 1986, the Municipal Treasurer of Muntinlupa issued several collection notices to MERALCO, ordering it to pay the deficiency in the real property taxes in the amount of P36,000,000.00 covering the machineries and equipment in the said power plants. MERALCO did not pay the tax assessed. Accordingly, after issuing the requisite certification of non-payment of real property taxes and complying with the additional requirement of public posting of the notice of delinquency, the Municipal Treasurer issued warrants of garnishment ordering the attachment of the bank deposits of MERALCO with the PCIB, METROBANK and the BPI to the extent of its unpaid real property taxes. MERALCO filed before the RTC of Makati a Petition for Prohibition. The Municipal Treasurer filed a Motion to Dismiss on the grounds of: (1) lack of jurisdiction since, under Sec. 64 of the Real Property Tax Code, courts are prohibited from entertaining any suit assailing the validity of a tax assessed until the taxpayer shall have paid, under protest, the tax; and (2) lack of cause of action by reason of MERALCOs failure to question the notice of assessment before the Local Board of Assessment Appeals. Qs. Does the trial court has jurisdiction over the questioned petition for prohibition? Is petitioner a taxpayer contemplated under Sec. 64 of the Real Property Tax Code? Were the 1986 notices equivalent to an assessment, thus subject to protest to the LBAA? Should payment of real property tax be made by proceeding against the real property itself or any personal property located therein, and not the separate personal property of petitioner, specifically its bank deposits? A. 1. None. The trial court has no jurisdiction to entertain a Petition for Prohibition absent petitioners payment, under protest, of the tax assessed as required by Sec. 64 of the RPTC. Payment of the tax assessed under protest, is a condition sine qua non before the trial court could assume jurisdiction over the petition. This rule is consistent with the doctrine that taxes are the lifeblood of the government.
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2. Yes. It is an accepted principle in taxation that taxes are paid by the person obliged to declare the same for taxation purposes. Under the Real Property Tax Code, the duty to declare the true value of real property for taxation purposes is imposed upon the owner, or administrator, or their duly authorized representatives. When these persons fail or refuse to make a declaration of the true value of their real property within the prescribed period, the provincial or city assessor shall declare the property in the name of the defaulting owner and assess the property for taxation. The notice of assessment and collection was directed to petitioner, not because it is still the present owner of the subject real property but because it is the defaulting owner thereof who has failed to make proper tax declaration and the proper tax payment thereon. 3. Yes. A notice of assessment should effectively inform the taxpayer of the value of a specific property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. From the tone and content of the notices, the 3 September 1986 notices sent by the Municipal Treasurer to MERALCO are the notices of assessment required by the law as it merely informed the petitioner that it has yet to pay the taxes in accordance with the reassessed values of the real property mentioned therein. However, the trial court is without authority to address the alleged irregularity in the issuance of the notices of assessment without prior tax payment, under protest, by petitioner. Thus, petitioner must have questioned the correctness of the assessments before the Local Board of Assessment Appeals (LBAA), and later, in the Central Board of Assessment Appeals (CBAA). 4. No. While real property tax constitutes a lien on the property subject to tax, the RPTC affords local government units three (3) concurrent and simultaneous remedies to enforce the Codes provisions, namely: (a) distraint of personal property, (b) sale of delinquent real property, and (c) collection of real property tax through ordinary court action. The remedy of levy can be pursued by putting up for sale the real property subject of tax, i.e., the delinquent property upon which the tax lien attaches, regardless of the present owner or possessor thereof. The remedy of distraint and levy of personal property meanwhile allows the taxing authority to subject any personal property of the taxpayer to execution, save certain exceptions as enumerated under Sec. 69 of the RPTC. Bank deposits are not among those exceptions.

MANILA ELECTRIC COMPANY vs. NELIA A. BARLIS, in her capacity as Officer-in-Charge/ Acting Municipal Treasurer of Muntinlupa[G.R. No. 114231, Jun 29, 2004]
Facts: A Motion for Reconsideration was filed by petitioner on the decision of the Court dated May 18, 2001. The petitioner argued that the notices issued by the Municipal Treasurer of Muntinlupa were not notices of assessment envisaged in Section 3 of P.D. No. 464 (RPTC). The petitioner pointed out that the said notices did not contain the assessors findings regarding the kind of
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real estate, area, unit value, market value, actual use and assessment level; and, in the case of the machinery attached to the land, the description of the machinery, date of operation, original cost, depreciation, market value and assessment level. Hence, the said notices could not be used as bases for filing an appeal to the Local Board of Assessment Appeals under Section 30 of the Real Property Tax Code, which clearly adverts to a written notice of assessment. Thus, the petitioner contended, it could not be required to avail of the prescribed administrative remedies in protesting an erroneous tax assessment under the said Code. The Court issued a Resolution denying with finality the petitioners motion for reconsideration. The Court, however, reversed its ruling that the notices sent by the respondent to the petitioner were notices of assessment. It categorically stated that the notices were, in fact, notices of collection. The foregoing notwithstanding, the Court ruled against a remand of the case to the trial court since the issue in the main case was one of jurisdiction and as such the Court ruled that the RTC has none. The petitioner then filed a Second Motion for Reconsideration. It contended that after the Court held in its February 1, 2002 Resolution that the September 3, 1986 and October 31, 1989 notices sent by the respondent to the petitioner were notices of collection, thus, justifying its conclusion that Section 614 of P.D. No. 464 was not applicable, the Court should have ordered the case remanded to the trial court for further proceedings considering that while the material findings in the instant case were reversed, the petitioners motion for reconsideration was altogether denied. The petitioner avers that it should not be prevented from moving for a rectification of this Courts inconsistent stance. Q. Should the Decision be set aside and the case remanded to the trial court for further proceedings, in view of the factual findings contained in the Courts February 1, 2002 Resolution? A. Yes. An assessment fixes and determines the tax liability of a taxpayer. It is a notice to the effect that the amount therein stated is due as tax and a demand for payment thereof. The assessor is mandated under Section 27 of the law to give written notice within thirty days of such assessment, to the person in whose name the property is declared. The notice should indicate the kind of property being assessed, its actual use and market value, the assessment level and the assessed value. In the Courts February 1, 2002 Resolution, it said that it is apparent why the foregoing cannot qualify as a notice of tax assessment. A notice of assessment as provided for in the RPTC should effectively inform the taxpayer of the value of a specific property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. The September 3, 1986 and October 31, 1989 notices do not contain the essential information that a notice of assessment must specify, namely, the value of a specific property or proportion thereof which is being taxed, nor does it state the discovery, listing, classification and appraisal of the property subject to taxation. In fact, the tenor of the notices bespeaks an -------------------------------------------------------------------UST - Golden Notes TEAM: BAR-OPS 98 of 124
Academics Committee Chairman: Gilberth D. Balderama Taxation Law Committee Chairperson: Katrina C. Dapula Tax Law Committee Vice-Chairman: Regina S. Salonga Members: AizaB. Aricayos and Jenifer M. Gabrillo

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ADVISER: JUSTICE JAPAR B. DIMAAMPAO

intention to collect unpaid taxes, thus the reminder to the taxpayer that the failure to pay the taxes shall authorize the government to auction off the properties subject to taxes or, in the words of the notice. Furthermore, even the Bureau of Local Government Finance (BLGF), upon whose recommendation former Municipal Treasurer Alon relied in the collection of back taxes against petitioner, deemed the September 3, 1986 notice as a "collection letter." Indeed, even the respondent admitted in his comment on the petition that respondent did not issue any notice of assessment because statutorily, he is not the proper officer obliged to do so. Under Chapter VIII, Sections 90 and 90-A of the RPTC, the functions related to the appraisal and assessment for tax purposes of real properties situated within a municipality pertains to the Municipal Deputy Assessor and for the municipalities within Metropolitan Manila, the same is lodged on the Municipal Assessor. The petitioner denied receiving copies of the Tax Declarations prepared by the respondent Municipal Assessor in 1985. In the face of the petitioners denial, the respondent was burdened to prove the service of the tax declarations on the petitioner. The record is bereft of evidence regarding this matter. The respondent even failed to append a copy of the said receipt in its motion to dismiss in the trial court.

UST - Golden Notes

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Academics Committee Chairman: Gilberth D. Balderama Taxation Law Committee Chairperson: Katrina C. Dapula Tax Law Committee Vice-Chairman: Regina S. Salonga Members: AizaB. Aricayos and Jenifer M. Gabrillo

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ADVISER: JUSTICE JAPAR B. DIMAAMPAO