Lladoc vs Commisioner of Internal Revenue (1965)

Facts:

In 1957, the MB Estate Inc. of Bacolod City donated P10,000 in cash to the parish priest of Victorias,
Negros Occidental; the amount spent for the construction of a new Catholic Church in the locality, as
intended. In1958, MB Estate filed the donors gift tax return. In 1960, the Commissioner issued an
assessment for donees gift tax against the parish. The priest lodged a protest to the assessment and
requested the withdrawal thereof.

Issue:

Whether the Catholic Parish is tax exempt.

Held:

The phrase exempt from taxation should not be interpreted to mean exemption from all kinds of
taxes. The exemption is only from the payment of taxes assessed on such properties as property
taxes as contradistinguished from excise taxes. A donees gift tax is not a property tax but an excise
tax imposed on the transfer of property by way of gift inter vivos. It does not rest upon general
ownership, but an excise upon the use made of the properties, upon the exercise of the privilege of
receiving the properties. The imposition of such excise tax on property used for religious purpose
does not constitute an impairment of the Constitution.

The tax exemption of the parish, thus, does not extend to excise taxes.

MANUEL G. ABELLO, JOSE C. CONCEPCION, TEODORO D. REGALA, AVELINO V. CRUZ v.

COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS. G.R. No. 120721.
February 23, 2005

FACTS:
During the 1987 national elections, petitioners, who are partners in the ACCRA law firm, contributed
P882,661.31 each to the campaign funds of Senator Edgardo Angara, then running for the Senate.
The BIR then assessed each of the petitioners P263,032.66 for their contributions. Petitioners
questioned the assessment claiming that political or electoral contributions are not considered gifts
under NIRC therefore, not liable for donors tax. The claim for exemption was denied by the
Commissioner.

The BIR denied their motion. They then filed a petition with the CTA, which was granted.

On appeal, the CA again held in favour of the BIR.

ISSUE: Whether the contributions are liable for donor's tax.

RULING:

Yes. The NIRC does not define transfer of property by gift. However, the Civil Code, by reference,
considers such as donations. The present case falls squarely within the definition of a donation. There
was intent to do an act of liberality or animus donandi was present since each of the petitioners gave
their contributions without any consideration.

Taken together with the Civil Code definition of donation, Section 91 of the NIRC is clear and
unambiguous, thereby leaving no room for construction.

Petitioners contribution of money without any material consideration evinces animus donandi. The fact
that their purpose for donating was to aid in the election of the donee does not negate the presence of
donative intent.

Petitioners raise the fact that since 1939 when the first Tax Code was enacted, up to 1988 the BIR
never attempted to subject political contributions to donors tax.
This Court holds that the BIR is not precluded from making a new interpretation of the law, especially
when the old interpretation was flawed. It is a well-entrenched rule that

"erroneous application and enforcement of the law by public officers do not block subsequent correct
application of the statute" (PLDT v. Collector of Internal Revenue, 90 Phil. 676), "and that the
Government is never estopped by mistake or error on the part of its agents" (Pineda v. Court of First
Instance of Tayabas, 52 Phil. 803, 807; Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711,
724).

PhilAm LIFE vs. Secretary of Finance, G.R. No. 210987, Case Digest

Philam Life sold its shares in Philam Care Health Systems to STI Investments Inc., the highest
bidder. After the sale was completed, Philam life applied for a tax clearance and was informed by BIR
that there is a need to secure a BIR Ruling due to a potential donors tax liability on the sold shares.

ISSUE on DONORS TAX:

W/N the sales of shares sold for less than an adequate consideration be subject to donors tax?

PETITIONERS CONTENTION:

The transaction cannot attract donors tax liability since there was no donative intent and, ergo, no
taxable donation, citing BIR Ruling [DA-(DT-065) 715-09] dated November 27, 2009; that the shares
were sold at their actual fair market value and at arms length; that as long as the transaction
conducted is at arms lengthsuch that a bona fide business arrangement of the dealings is done in
the ordinary course of businessa sale for less than an adequate consideration is not subject to
donors tax; and that donors tax does not apply to sale of shares sold in an open bidding process.

CIR DENYING THE REQUEST:

Through BIR Ruling No. 015-12, as determined by the Commissioner, the selling price of the shares
thus sold was lower than their book value based on the financial statements of Philam Care as of the
end of 2008. The Commissioner held donors tax became imposable on the price difference pursuant
to Sec. 100 of the National Internal Revenue Code (NIRC):

SEC.100. Transfer for Less Than Adequate and full Consideration. - Where property, other than real
property referred to in Section 24(D), is transferred for less than an adequate and full consideration in
money or moneys worth, then the amount by which the fair market value of the property exceeded
the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a
gift, and shall be included in computing the amount of gifts made during the calendar year.

RULING:

The price difference is subject to donors tax.

Petitioners substantive arguments are unavailing. The absence of donative intent, if that be the case,
does not exempt the sales of stock transaction from donors tax since Sec. 100 of the NIRC
categorically states that the amount by which the fair market value of the property exceeded the value
of the consideration shall be deemed a gift. Thus, even if there is no actual donation, the difference in
price is considered a donation by fiction of law.

Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the
parameters for determining the fair market value of a sale of stocks. Such issuance was made
pursuant to the Commissioners power to interpret tax laws and to promulgate rules and regulations
for their implementation.

Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, was being
applied retroactively in contravention to Sec. 246 of the NIRC.26 Instead, it merely called for the strict
application of Sec. 100, which was already in force the moment the NIRC was enacted.

ISSUE on TAX REMEDIES:

The issue that now arises is thiswhere does one seek immediate recourse from the adverse ruling
of the Secretary of Finance in its exercise of its power of review under Sec. 4?

Petitioner essentially questions the CIRs ruling that Petitioners sale of shares is a taxable donation
under Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC, Sec. 7 (C.2.2) and RMC 25-11 is
merely questioned incidentally since it was used by the CIR as bases for its unfavourable opinion.
Clearly, the Petition involves an issue on the taxability of the transaction rather than a direct attack on
the constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and RMC 25-11. Thus, the instant Petition
properly pertains to the CTA under Sec. 7 of RA 9282.

As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers are now at
a quandary on what mode of appeal should be taken, to which court or agency it should be filed, and
which case law should be followed.

CIR V B.F. GOODRICH PHIL., INC., ET AL GR No. 104171, February 24, 1999

Facts:

Private respondent BF Goodrich Philippines Inc. was an American corporation prior to July 3, 1974.
As a condition for approving the manufacture of tires and other rubber products, private respondent
was required by the Central Bank to develop a rubber plantation. In compliance therewith, private
respondent bought from the government certain parcels of land in Tumajubong Basilan, in 1961 under
the Public Land Act and the Parity Amendment to the 1935 constitution, and there developed a rubber
plantation.

On August 2, 1973, the Justice Secretary rendered an opinion that ownership rights of Americans over
Public agricultural lands, including the right to dispose or sell their real estate, would be lost
uponexpiration on July 3, 1974 of the Parity Amendment. Thus, private respondent sold its Basilan
land holding to Siltown Realty Phil. Inc., (Siltown) for P500,000 on January 21, 1974. Under the terms
of the sale, Siltown would lease the property to private respondent for 25 years with an extension of
25 years at the option of private respondent.

Private respondent books of accounts were examined by BIR for purposes of determining its tax
liability for 1974. This examination resulted in the April 23, 1975 assessment of private respondent for
deficiency income tax which it duly paid. Siltowns books of accounts were also examined, and on the
basis thereof, on October 10, 1980, the Collector of Internal Revenue assessed deficiency donors tax
of P1,020,850 in relation to said sale of the Basilan landholdings.

Private respondent contested this assessment on November 24, 1980. Another

assessment datedMarch 16, 1981, increasing the amount demanded for the alleged deficiency
donors tax, surcharge, interest and compromise penalty and was received by private respondent on
April 9, 1981. On appeal, CTA upheld the assessment. On review, CA reversed the decision of
the court finding that the assessment was made beyond the 5-year prescriptive period in Section 331
of the Tax Code.

Issue:

Whether or not petitioners right to assess has prescribed.

Held:

Applying then Sec. 331, NIRC (now Sec. 203, 1997 NIRC which provides a 3-year prescriptive period
for making assessments), it is clean that the October 16, 1980 and March 16, 1981 assessmentswere
issued by the BIR beyond the 5-year statute of limitations. The court thoroughly studied the records of
this case and found no basis to disregard the 5-year period of prescription, expressly set under Sec.
331 of the Tax Code, the law then in force.

For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or
assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law or
prescription, being a remedial measure, should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law on prescription should perforce be strictly
construed.

Petitioners above submission is specious (erroneous).

CTA, through its power of certiorari, to rule on the validity of a particular administrative rule or
regulation so long as it is within its appellate jurisdiction. Hence, it can now rule not only on the
propriety of an assessment or tax treatment of a certain transaction, but also on the validity of the
revenue regulation or revenue memorandum circular on which the said assessment is based.

Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA petition not only
contested the applicability of Sec. 100 of the NIRC over the sales transaction but likewise questioned
the validity of Sec. 7(c.2.2) of RR 06-08 and RMC 25-11 does not divest the CTA of its jurisdiction
over the controversy, contrary to petitioners arguments.

Commissioner vs. Procter & Gamble Philippines GR L-66838, 15 April 1988

Facts:

Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA
(PMCUSA), a non-resident foreign corporation in the Philippines, not engaged in trade and business
therein. PMCUSA is the sole shareholder of PMC Philippines and is entitled to receive income from
PMC Philippines in the form of dividends, if not rents or royalties. For the taxable years 1974 and
1975, PMC Philippines filed its income tax return and also declared dividends in favor of PMC-USA. In
1977, PMC Philippines, invoking the tax-sparing provision of Section 24 (b) as the withholding agent
of the Philippine Government with respect to dividend taxes paid by PMC-USA, filed a claim for the
refund of 20 percentage point portion of the 35 percentage whole tax paid with the Commissioner of
Internal Revenue.

Issue:

Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared and
remitted to its parent corporation.

Held:

The issue raised is one made for the first time before the Supreme Court. Under the same underlying
principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the
lower court cannot be generally raised for the first time on appeal. Nonetheless, it is axiomatic that the
state can never be allowed to jeopardize the governments financial position. The submission of the
Commissioner that PMC Philippines is but a withholding agent of the government and therefore
cannot claim reimbursement of alleged overpaid taxes, is completely meritorious. The real party in
interest is PMC-USA, which should prove that it is entitled under the US Tax Code to a US Foreign
Tax Credit equivalent to at least 20 percentage points spared or waived as otherwise considered or
deemed paid by the Government. Herein, the claimant failed to show or justify the tax return of the
disputed 15% as it failed to show the actual amount credited by the US Government against the
income tax due from PMC-USA on the dividends received from PMC Philippines; to present the
income tax return of PMC-USA for 1975 when the dividends were received; and to submit duly
authenticated document showing that the US government credited teh 20% tax deemed paid in the
Philippines.

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,

vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy
Collector of Internal Revenue, defendants-appellees.

Vicente Madrigal and Susana Paterno were legally married and have conjugal partnership.

Madrigal filed his total net income for the year is P296,302.73.

Subsequently, Madrigal submitted the claim that the said total net income of year 1914 did not
represent his income for the year 1914, but was in fact the income of the conjugal partnership existing
between himself and his wife, and the computing and assessing the additional income tax provided by
the Act of Congress of Oct. 3, 1913, the income declared by Madrigal and the other half of Paterno.

Madrigal and Paterno brought action against Collector of Internal Revenue and the Deputy Collector
of Internal Revenue for the recovery of the sum P3,786.08.

The burden of the complaint was that if the income tax for the year 1914 had been correctly and
lawfully computed there would have been due payable by each of the plaintiff the sum of P2,921.09,
which taken together amount of P5842.18 instead of P9,668.21.

Issue:

WON the additional income tax should be divided into equal parts because of the conjugal partnership
existing between them?

Held:

NO.

Paterno has an inchoate right in the property of her husband Madrigal during the lifetime of the
conjugal property. She has an interest in the ultimate ownership of property acquired as income of
the conjugal partnership. Not being seized of the separate estate, 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 or income, actually and legally vested in her and entirely distinct from her
husband property, the income cannot properly be considered the separate income of the wife for the
purpose of the additional tax. The income tax law does not look on the spouses as individual partners
in an ordinary partnership.

The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially
defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having
no application to the Income Tax Law.

Eisner v. Macomber

FACTS

-Mrs. Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a 50% stock dividend
and she received 1,100 additional shares, of which about $20,000 in par value represented earnings
accumulated by the companyrecapitalized rather than distributedsince the effective date of the
original tax law.
-Current statute expressly included stock dividends in income, and the government contended that
those certificates should be taxed as income to Mrs. Macomber as though the corporation had
distributed money to her.
-Mrs. Macomber sued Mr. Mark Eisner, the Collector of Internal Revenue, for a refund.

ISSUE

-Whether in legal or accounting terms the stock dividend was to be regarded as a taxable event.

HOLDING

-This stock dividend was not a realization of income by the taxpayer-shareholder for purposes of the
Sixteenth Amendment

RULES
-"We are clear that not only does a stock dividend really take nothing from the property of the
corporation and add nothing to that of the shareholder, but that the antecedent accumulation of profits
evidenced thereby, while indicating that the shareholder is richer because of an increase of his capital,
at the same time shows he has not realized or received any income in the transaction."
ANALYSIS
-In Towne v. Eisner, court stated that stock dividends were not income, as nothing of value was
received by Towne - the company was not worth any less than it was when the dividend was declared,
and the total value of Towne's stock had not changed.
-Although the Eisner v. Macomber Court acknowledged the power of the Federal Government to tax
income under the Sixteenth Amendment, the Court essentially said this did not give Congress the
power to tax as income anything other than income, i.e., that Congress did not have the power to re-
define the term income as it appeared in the Constitution:
-Throughout the argument of the Government, in a variety of forms, runs the fundamental error
already mentioned, a failure to appraise correctly the force of the term "income" as used in the
Sixteenth Amendment, or at least to give practical effect to it. Thus, the Government contends that the
tax "is levied on income derived from corporate earnings," when in truth the stockholder has "derived"
nothing except paper certificates which, so far as they have any effect, deny him [or "her" in this
case, Mrs. Macomber] present participation in such earnings. It [the government] contends that the
tax may be laid when earnings "are received by the stockholder," whereas [s]he has received none;
that the profits are "distributed by means of a stock dividend," although a stock dividend distributes no
profits; that under the Act of 1916 "the tax is on the stockholder's share in corporate earnings," when
in truth a stockholder has no such share, and receives none in a stock dividend; that "the profits are
segregated from his [her] former capital, and [s]he has a separate certificate representing his [her]
invested profits or gains," whereas there has been no segregation of profits, nor has [s]he any
separate certificate representing a personal gain, since the certificates, new and old, are alike in what
they representa capital interest in the entire concerns of the corporation.

CONCLUSION
The Court ordered that Macomber be refunded the tax she overpaid.

CIR v. Tours Specialist

Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the
taxpayer which do not belong to them and do not redound to the taxpayers benefit; and it is not
necessary that there must be a law or regulation which would exempt such monies or receipts within
the meaning of gross receipts under the Tax Code

Facts:

The Commissioner of Internal Revenue filed a petition to review on certiorari to the CTA decision
which ruled that the money entrusted to private respondent Tours Specialist (TS), earmarked and paid
for hotel room charges of tourists, travellers and/or foreign travel agencies do not form part of its gross
receipt subject to 3% independent contractors tax.

Tours Specialist derived income from its activities and services as a travel agency, which included
booking tourists in local hotels. To supply such service, TS and its counterpart tourist agencies abroad
have agreed to offer a package fee for the tourists (payment of hotel room accommodations, food and
other personal expenses). By arrangement, the foreign tour agency entrusts to TS the fund for hotel
room accommodation, which in turn paid by the latter to the local hotel when billed.

Despite this arrangement, CIR assessed private respondent for deficiency 3% contractors tax as
independent contractor including the entrusted hotel room charges in its gross receipts from services
for years 1974-1976 plus compromise penalty.

During cross-examination, TS General Manager stated that the payment through them is only an act
of accommodation on (its) part and the agent abroad instead of sending several telexes and saving
on bank charges they take the option to send the money to (TS) to be held in trust to be endorsed to
the hotel.

Nevertheless, CIR caused the issuance of a warrant of distraint and levy, and had TS bank deposits
garnished.

Issue:
W/N amounts received by a local tourist and travel agency included in a package fee from tourists or
foreign tour agencies, intended or earmarked for hotel accommodations form part of gross receipts
subject to 3% contractors tax

Held:

No. Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to
the taxpayer which do not belong to them and do not redound to the taxpayers benefit; and it is not
necessary that there must be a law or regulation which would exempt such monies or receipts within
the meaning of gross receipts under the Tax Code. Parenthetically, the room charges entrusted by the
foreign travel agencies to the private respondents do not form part of its gross receipts within the
definition of the Tax Code. The said receipts never belonged to the private respondent. The private
respondent never benefited from their payment to the local hotels. This arrangement was only to
accommodate the foreign travel agencies.

CIR v. Javier

FACTS:

In 1977, Victoria Javier received a $1 Million remittance in her bank account from her sister abroad,
Dolores Ventosa. Melchor Javier, Jr., the husband of Victoria immediately withdrew the said amount
and then appropriated it for himself.

Later, the Mellon Bank, a foreign bank in the U.S.A. filed a complaint against the Javiers for estafa.
Apparently, Ventosa only sent $1,000.00 to her sister Victoria but due to a clerical error in Mellon
Bank, what was sent was the $1 Million.

Meanwhile, Javier filed his income tax return. In his return, he place a footnote which states:

Taxpayer was recipient of some money received from abroad which he presumed to be a gift but
turned out to be an error and is now subject of litigation.

The Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability amounting to P4.8
Million. The CIR also imposed a 50% penalty against Javier as the CIR deemed Javiers return as
a fraudulent return.

ISSUE:

Whether or not Javier is liable to pay the 50% penalty.

HELD:

No. It is true that a fraudulent return shall cause the imposition of a 50% penalty upon a taxpayer filing
such fraudulent return. However, in this case, although Javier may be guilty of estafa due to
misappropriating money that does not belong to him, as far as his tax return is concerned, there can
be no fraud. There is no fraud in the filing of the return. Javiers notation on his income tax return can
be considered as a mere mistake of fact or law but not fraud. Such notation was practically an
invitation for investigation and that Javier had literally laid his cards on the table. The government
was never defrauded because by such notation, Javier opened himself for investigation.

It must be noted that the fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception wilfully and deliberately done or resorted to in order to induce
another to give up some legal right.

JAMES v. US

James embezzled $738k from his employer. He was caught.

In addition to criminal penalties for embezzlement, the IRS stepped in and claimed that the $738k
should be counted in James' gross income. James disagreed.
James argued that since a person is legally obligated to repay money that they steal, they've received
no income in the same way as a person receives no income from taking out a loan. So there should
be no tax liability.

The US Supreme Court found for the IRS.

The US Supreme Court found that found that there was a material difference in the intention of the
taxpayer to repay the money. So the money should be considered to be gross income, even though
there was an obligation to repay.

The Court noted that nothing in the 16th Amendment prevented taxing illegal income.

DOJ wanted to go after criminals (like Al Capone), and the powers of the IRS can go beyond the
powers of DOJ (e.g. IRS makes you file taxes, but DOJ can't ask you to file a list of your felonies). So
they wanted illegal income to count as income so the IRS could go after them.

In this case, James avoided prison for embezzlement, but he was eventually sentenced to three years
in prison for tax evasion.

Commissioner v. Glenshaw Glass Co.

Glenshaw won an antitrust lawsuit and received punitive damages. Separately, Goldman Theaters
won a different antitrust lawsuit and also received punitive damages.

In neither case was the money reported as gross income.

The IRS sued to collect taxes on the income.

The IRS argued that damage awards should be considered gross income.

Glenshaw and Goldman argued that the definition of gross income in 26 U.S.C. 22(a) (now 61(a))
didn't explicitly state that damage awards were gross income, so therefore they couldn't be included.

The US Supreme Court had previously ruled that "income is the return to labor, capital, or both
combined," and Glenshaw argued that there was no labor or capital involved in winning an antitrust
lawsuit. (in Eisner v. Macomber (252 U.S. 189 (1920)).

The US Tax Court found for Glenshaw and Goldman. The IRS appealed.

The Appellate Court affirmed in both cases. The IRS appealed.

The US Supreme Court reversed and found that the damage awards were gross income.

The US Supreme Court looked to the 16th Amendment and found there was no constitutional bar to
collecting taxes on damage awards.

The Court looked to the plain language of 22(a), and found that Congress intended to tax all gains
except those specifically exempted.

22(a) didn't explicitly state that damage awards were taxable, but it also didn't say that they weren't.

The definition of gross income in 22(a) included a clause that said, "...or gains or profits and income
derived from any source whatever." The Court interpreted that to mean that Congress wanted to use
the "full measure of its taxing power" and tax everything it possibly could.

The idea that everything is income unless otherwise indicated is a reversal of Eisner.