NATIONAL DEVELOPMENT CO. vs.

CIR and NATIONAL TEXTILE WORKERS

UNION DIGEST

G.R. No. L-15422

FACTS: At the National Development Co., a government-owned and controlled corporation, there
were four shifts of work. One shift was from 8 a.m. to 4 p.m., while the three other shifts were from 6
a.m. to 2 p.m; then from 2 p.m. to 10 p.m. and, finally, from 10 p.m. to 6 a.m. In each shift, there was
a one-hour mealtime period, to wit: From (1) 11 a.m. to 12 noon for those working between 6 a.m.
and 2 p.m. and from (2) 7 p.m. to 8 p.m. for those working between 2 p.m. and 10 p.m.

(Petitioner does not want to pay for the 1 hour lunch time ) The records disclose that although there
was a one-hour mealtime, petitioner nevertheless credited the workers with eight hours of work for
each shift and paid them for the same number of hours. However, since 1953, whenever workers in
one shift were required to continue working until the next shift, petitioner instead of crediting them
with eight hours of overtime work, has been paying them for six hours only, petitioner that the two
hours corresponding to the mealtime periods should not be included in computing compensation.

CIR: Mealtime should be counted in the determination of overtime work

ISSUE: WON mealtime breaks should be considered working time

HELD: YES

The legal working day for any person employed by another shall be of not more than eight hours
daily.When the work is not continuous, the time during which the laborer is not working and can
leave his working place and can rest completely shall not be counted . (Sec. 1, Com. Act No. 444)

It will be noted that, under the law, the idle time that an employee may spend for resting and during
which he may leave the spot or place of work though not the premises of his employer, is not counted
as working time only where the work is broken or is not continuous.

In this case, the CIR’s finding that work in the petitioner company was continuous and did not
permit employees and laborers to rest completely is not without basis in evidence and following our
earlier rulings, shall not disturb the same.

The time cards show that the work was continuous and without interruption. There is also the
evidence adduced by the petitioner that the pertinent employees can freely leave their working place
nor rest completely. There is furthermore the aspect that during the period covered the computation
the work was on a 24-hour basis and previously stated divided into shifts. ( ang labo bakit “can freely
leave their working place nor rest completely” feeling ko typo yan sa scra or ganun talaga? )

From these facts, the CIR correctly concluded that work in petitioner company was continuous and
therefore the mealtime breaks should be counted as working time for purposes of overtime
compensation. TOPIC: Sale Of The Tickets Taxable As Income From Sources Within The
Philippines.

CIR VS. BRITISH OVERSEAS AIRWAYS CORPORATION and CTA

FACTS: BOAC is a British Government-owned corporation organized and existing under the laws of
the United Kingdom.It is engaged in the international airline business. It did not carry passengers or
cargo to or from the Philippines, although during the period covered by the assessments, it maintained
a general sales agent in the Philip. — Wamer Barnes and Company, Ltd., and later Qantas Airways
— which was responsible for selling BOAC tickets covering passengers and cargoes.

It is admitted that BOAC had no landing rights for traffic purposes in the Philippines, and
was not granted a Certificate of public convenience, except for a nine-month period, partly in 1961 and
partly in 1962, when it was granted a temporary landing permit .

Petitioner assessed BOAC for deficiency income taxes covering the years 1959 to 1963. BOAC
paid the assessment under protest.

CTA DECISION: The Tax Court held that the proceeds of sales of BOAC passage tickets in the
Philippines do not constitute BOAC income from Philippine sources "since no service of carriage of
passengers or freight was performed by BOAC within the Philippines" and, therefore, said income is
not subject to Philippine income tax.

RESPONDENT’S MAIN ARGUMENT: BOAC's service of transportation is performed outside the

Philippines, the income derived is from sources without the Philippines and, therefore, not taxable
under our income tax laws.

ISSUES: Whether the revenue derived by BOAC from sales of tickets in the Philippines for air
transportation, while having no landing rights here, constitute income of BOAC from Philippine
sources, and, accordingly, taxable.

HELD:YES. Sales of tickets in the Philippines is taxable.

The source of an income is the property, activity or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. The absence of flight operations to and from the
Philippines is not determinative of the source of income or the site of income taxation.

In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income:

1. The tickets exchanged hands and payments for fares were also made in Philippine currency.
2. The site of the source of payments is the Philippines.
3. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the
protection accorded by the Philippine government.
4. In consideration of such protection, the flow of wealth should share the burden of supporting
the government.

The definition of gross income under section 32 of tax code is broad and comprehensive to
include proceeds from sales of transport documents.

NOTE: Pursuant to Presidential Decree No. 69, international carriers are now taxed of 2-½ per cent
on their cross Philippine billings.

COMMISSIONER OF INTERNAL REVENUE vs. MARUBENI CORPORATION

FACTS:

Marubeni is a foreign corporation organized and existing under the laws of Japan. It is duly
registered to engage in such business in the Philippines and maintains a branch office in Manila.

Commissioner of Internal Revenue issued a letter of authority to examine the books of accounts
of the Manila branch office of respondent corporation. In the course of the examination, petitioner
found respondent to have undeclared income from two (2) contracts in the Philippines, both of which
were completed in 1984. One of the contracts was with the National Development Company (NDC).
The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos). Petitioner’s
revenue examiners recommended an assessment for deficiency income, branch profit remittance,
contractor’s and commercial broker’s taxes. Respondent questioned this assessment. Respondent
corporation received a letter from petitioner assessing respondent several deficiency taxes.

Petitioner found that the NDC and Philphos contracts were made on a “turn-key” basis and that
the gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece of
work and since the projects called for the construction and installation of facilities in the Philippines,
the entire income therefrom constituted income from Philippine sources, hence, subject to internal
revenue taxes. The assessment letter further stated that the same was petitioner’s final decision and
that if respondent disagreed with it, respondent may file an appeal with the Court of Tax Appeals
within thirty (30) days from receipt of the assessment.

Respondent filed two (2) petitions for review with the CTA. The first petition, CTA Case No.
4109, questioned the deficiency income, branch profit remittance and contractor’s tax assessments in
petitioner’s assessment letter. The second, CTA Case No. 4110, questioned the deficiency commercial
broker’s assessment in the same letter.
 Earlier, Executive Order (E.O.) No. 41, declaring a one-time amnesty covering unpaid income
taxes for the years 1981 to 1985 was issued. In accordance with the terms of E.O. No. 41, respondent
filed its tax amnesty return. The return was received by the BIR and respondent paid the amount of
P2,891,273.00 equivalent to ten percent (10%) of its net worth increase between 1981 and 1986. The
period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986
by E.O. No. 54 dated November 4, 1986.

The scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.) No. 64. In
addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64
included estate and donor’s taxes under Title III and the tax on business under Chapter II, Title V of
the National Internal Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further
provided that the immunities and privileges under E.O. No. 41 were extended to the foregoing tax
liabilities, and the period within which the taxpayer could avail of the amnesty was extended to
December 15, 1986. Those taxpayers who already filed their amnesty return under E.O. No. 41, as
amended, could avail themselves of the benefits, immunities and privileges under the new E.O. by
filing an amended return and paying an additional 5% on the increase in net worth to cover business,
estate and donor’s tax liabilities.

The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated
December 17, 1986. Respondent filed a supplemental tax amnesty return and paid a further amount
equivalent to five percent (5%) of the increase of its net worth between 1981 and 1986.

The CTA rendered a decision in CTA Case No. 4109. The tax court found that respondent had
properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject
of said case as deemed cancelled and withdrawn.

ISSUES:

(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax Appeals
which ruled that herein respondent’s deficiency tax liabilities were extinguished upon respondent’s
availment of tax amnesty under Executive Orders Nos. 41 and 64. - no

(2) Whether or not respondent is liable to pay the income, branch profit remittance, and contractor’s
taxes assessed by petitioner – no (The services not rendered in the Philippines are not subject to the
tax)

HELD:

The main controversy in this case lies in the interpretation of the exception to the amnesty
coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein— income tax, branch
profit remittance tax and contractor’s tax. These taxes are covered by the amnesties granted by E.O.
Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from availing of the said
amnesties because the latter falls under the exception in Section 4 (b) of E.O. No. 41.

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:

“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty herein
granted:

b) Those with income tax cases already filed in Court as of the effectivity hereof;

Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA
Case No. 4109 had already been filed and was pending before the Court of Tax Appeals. Respondent
therefore fell under the exception in Section 4 (b) of E.O. No. 41.

Petitioner’s claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers “with income tax cases already
filed in court as of the effectivity hereof.” The point of reference is the date of effectivity of E.O. No. 41
(AUGUST 22, 1986). The filing of income tax cases in court must have been made before and as of the
date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b) there
must have been no income tax cases filed in court against him when E.O. No. 41 took effect. This is
regardless of when the taxpayer filed for income tax amnesty, provided of course he files it on or before
the deadline for filing. When E.O. No. 41 became effective, CTA Case No. 4109 had not yet been filed
in court.
 In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer
to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates
prospectively. There is nothing in E.O. No. 64 that provides that it should retroact to the date of
effectivity of E.O. No. 41, the original issuance. Executive Order No. 64 is a substantive amendment
of E.O. No. 41.

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law. A tax amnesty, much like a tax exemption, is never favored
nor presumed in law. If granted, the terms of the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing authority.

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore
be construed strictly against the taxpayer. The term “income tax cases” should be read as to refer to
estate and donor’s taxes and taxes on business while the word “hereof,” to E.O. No. 64. Since Executive
Order No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are
concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17,
1986. Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time respondent
filed its supplementary tax amnesty return on December 15, 1986, respondent already fell under the
exception.

On situs of taxation

Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the
deficiency tax because the income from the projects came from the “Offshore Portion” as opposed to
“Onshore Portion”. It claims all materials and equipment in the contract under the “Offshore Portion”
were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to
Philippine taxes.

Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In
the contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos
Portion and financed either by OECF or by supplier’s credit. The Japanese Yen Portion I corresponds
to the Foreign Offshore Portion, while Japanese Yen Portion II and the Philippine Pesos Portion
correspond to the Philippine Onshore Portion. Marubeni has already paid the Onshore Portion, a fact
that CIR does not deny.

CIR argues that since the two agreements are turn-key, they call for the supply of both materials and
services to the client, they are contracts for a piece of work and are indivisible. The situs of the two
projects is in the Philippines, and the materials provided and services rendered were all done and
completed within the territorial jurisdiction of the Philippines. Accordingly, respondent’s entire
receipts from the contracts, including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials should be subjected to
contractor’s tax (a tax on the exercise of a privilege of selling services or labor rather than a sale on
products).

Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the
Philippines because some of them were completed in Japan (and in fact subcontracted) in accordance
with the provisions of the contracts. All services for the design, fabrication, engineering and
manufacture of the materials and equipment under Japanese Yen Portion I were made and completed
in Japan. These services were rendered outside Philippines’ taxing jurisdiction and are therefore not
subject to contractor’s tax. Petition denied.
COMMISSIONER OF INTERNAL REVENUE vs JULIANE BAIER-NICKEL, as
represented by Marina Q. Guzman (Attorney-in-fact)

Facts: Respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of

JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketing on wholesale only,
buying or otherwise acquiring, holding, importing and exporting, selling and disposing embroidered
textile products." Through JUBANITEX’s General Manager, Marina Q. Guzman, the corporation
appointed and engaged the services of respondent as commission agent. It was agreed that respondent
will receive 10% sales commission on all sales actually concluded and collected through her efforts.

On October 17, 1997, respondent filed her 1995 income tax return reporting a taxable income
of P1,707,772.64 and a tax due of P170,777.26. Then on April 14, 1998, respondent filed a claim to
refund the amount of P170,777.26 alleged to have been mistakenly withheld and remitted by
JUBANITEX to the BIR. Respondent contended that her sales commission income is not taxable in
the Philippines because the same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the Philippines.

Thereafter she filed a petition for review with the CTA contending that no action was taken
by the BIR on her claim for refund. The CTA rendered a decision denying her claim stating that the
income derived by respondent is therefore an income taxable in the Philippines because JUBANITEX
is a domestic corporation. On petition with the CA, the latter reversed the decision. Petitioner filed a
motion for reconsideration but was denied. Hence, this petition.

Issue: Whether or not respondent’s sales commission income is taxable in the Philippines.

Held: Yes. The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the
burden of proving that the transaction subjected to tax is actually exempt from taxation.

The appointment letter of respondent as agent of JUBANITEX stipulated that the activity or
the service which would entitle her to 10% commission income, are "sales actually concluded and
collected through [her] efforts." What she presented as evidence to prove that she performed income
producing activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing
instructions as to the sizes of, or designs and fabrics to be used in the finished products as well as
samples of sales orders purportedly relayed to her by clients. However, these documents do not show
whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the
very least, these pieces of evidence show that while respondent was in Germany, she sent
instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated
sales and whether these sales were truly concluded in Germany, respondent presented no such
evidence. Neither did she establish reasonable connection between the orders/instructions faxed and
the reported monthly sales purported to have transpired in Germany.

In sum, we find that the faxed documents presented by respondent did not constitute
substantial evidence, or that relevant evidence that a reasonable mind might accept as adequate to
support the conclusion that it was in Germany where she performed the income producing service
which gave rise to the reported monthly sales in the months of March and May to September of 1995.
She thus failed to discharge the burden of proving that her income was from sources outside the
Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund
should be denied.
MIGUEL J. OSSORIO PENSION FOUNDATION, INCORPORATED,
vs. COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE

Petitioner, a non-stock and non-profit corporation, was organized for the purpose of holding
title to and administering the employees’ trust or retirement funds established for the benefit of the
employees of Victorias Milling Company, Inc. (VMC). Petitioner, as trustee, claims that the income
earned by the Employees’ Trust Fund is tax exempt under Section 53(b) of the National Internal
Revenue Code (Tax Code).
On 25 March 1992, petitioner decided to invest part of the Employees’ Trust Fund to purchase
a lot in the Madrigal Business Park (MBP lot) in Alabang, Muntinlupa. Petitioner claims that
since it needed funds to pay the retirement and pension benefits of VMC employees and to reimburse
advances made by VMC, petitioner’s Board of Trustees authorized the sale of its share in the MBP lot.
On 26 March 1997, VMC negotiated the sale of the MBP lot with Metropolitan Bank and Trust
Company, Inc. (Metrobank). Metrobank, as withholding agent, paid the Bureau of Internal Revenue
(BIR) P6,125,625 as withholding tax on the sale of real property.
Petitioner claims that it is a co-owner of the MBP lot as trustee of the Employees’ Trust Fund,
based on the notarized Memorandum of Agreement presented before the appellate courts. Petitioner
further contends that there is no dispute that the Employees’ Trust Fund is exempt from income tax.
Since petitioner, as trustee, purchased 49.59% of the MBP lot using funds of the Employees’ Trust
Fund, petitioner asserts that the Employees’ Trust Fund's 49.59% share in the income tax paid (or
P3,037,697.40 rounded off to P3,037,500) should be refunded.
On 14 August 1997, the BIR, through its Revenue District Officer, wrote petitioner stating
that under Section 26 of the Tax Code, petitioner is not exempt from tax on its income from the sale of
real property. Since the BIR failed to act on petitioner’s claim for refund, petitioner elevated its claim
to the Commissioner of Internal Revenue (CIR) on 26 October 1998. The CIR did not act on petitioner’s
claim for refund. Hence, petitioner filed a petition for tax refund before the CTA. On 24 October 2000,
the CTA rendered a decision denying the petition.
On 22 November 2000, petitioner filed its Petition for Review before the Court of Appeals. On
20 May 2003, the CA rendered a decision denying the appeal. The CA also denied petitioner’s Motion
for Reconsideration. Hence this appeal.

Issue: whether petitioner or the Employees’ Trust Fund is exempt from tax and thus entitled to
refund
Held Yes
Petitioner is a corporation that was formed to administer the Employees' Trust Fund.
Petitioner invested P5,504,748.25 of the funds of the Employees' Trust Fund to purchase the MBP lot.
When the MBP lot was sold, the gross income of the Employees’ Trust Fund from the sale of the MBP
lot was P40,500,000. The 7.5% withholding tax of P3,037,500 and broker’s commission were deducted
from the proceeds.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in a diminution of accumulated income and reduce
whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very
intendment of the law.
Indeed, the petitioner is correct in its adherence to the clear ruling laid by the Supreme Court
way back in 1992 in the case of Commissioner of Internal Revenue vs. The Honorable Court of Appeals,
The Court of Tax Appeals and GCL Retirement Plan, 207 SCRA 487 at page 496 , supra, wherein it
was succinctly held:
There can be no denying either that the final withholding tax is collected from income in
respect of which employees’ trusts are declared exempt (Sec. 56(b), now 53(b), Tax Code). The
application of the withholdings system to interest on bank deposits or yield from deposit substitutes
is essentially to maximize and expedite the collection of income taxes by requiring its payment at the
source. If an employees’ trust like the GCL enjoys a tax-exempt status from income, we see no logic in
withholding a certain percentage of that income which it is not supposed to pay in the first place.
Similarly, the income of the trust funds involved herein is exempt from the payment of final
withholding taxes.Since petitioner has proven that the income from the sale of the MBP lot came from
an investment by the Employees' Trust Fund, petitioner, as trustee of the Employees’ Trust Fund, is
entitled to claim the tax refund of P3,037,500 which was erroneously paid in the sale of the MBP lot.
 COMMISSIONER OF INTERNAL REVENUE v. YMCA
G.R. No. 124043 October 14, 1998
Panganiban, J.

Doctrine:
– Rental income derived by a tax-exempt organization from the lease of its properties, real or
personal, is not exempt from income taxation, even if such income is exclusively used for the
accomplishment of its objectives.

– A claim of statutory exemption from taxation should be manifest and unmistakable from the
language of the law on which it is based. Thus, it must expressly be granted in a statute stated in a
language too clear to be mistaken. Verba legis non est recedendum — where the law does not
distinguish, neither should we.

– The bare allegation alone that one is a non-stock, non-profit educational institution is insufficient
to justify its exemption from the payment of income tax. It must prove with substantial evidence that
(1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it
seeks to be exempted from taxation is used actually, directly, and exclusively for educational
purposes.

– The Court cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it
would be overspilling its role and invading the realm of legislation. The Court, given its limited
constitutional authority, cannot rule on the wisdom or propriety of legislation. That prerogative
belongs to the political departments of government.

Facts:
Private Respondent YMCA is a non-stock, non-profit institution, which conducts various programs
and activities that are beneficial to the public, especially the young people, pursuant to its religious,
educational and charitable objectives.

YMCA earned income from leasing out a portion of its premises to small shop owners, like
restaurants and canteen operators, and from parking fees collected from non-members. Petitioner
issued an assessment to private respondent for deficiency taxes. Private respondent formally
protested the assessment. In reply, the CIR denied the claims of YMCA.

Issue:
Whether or not the income derived from rentals of real property owned by YMCA subject to income
tax

Held:
Yes. Income of whatever kind and character of non-stock non-profit organizations from any of their
properties, real or personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to the tax imposed under the NIRC.

Rental income derived by a tax-exempt organization from the lease of its properties, real or personal,
is not exempt from income taxation, even if such income is exclusively used for the accomplishment
of its objectives.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in
interpretation in construing tax exemptions (Commissioner of Internal Revenue v. Court of Appeals,
271 SCRA 605, 613, April 18, 1997). Furthermore, a claim of statutory exemption from taxation
should be manifest and unmistakable from the language of the law on which it is based. Thus, the
claimed exemption “must expressly be granted in a statute stated in a language too clear to be
mistaken” (Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and Court of
Appeals, G.R. No. 117359, p. 15 July 23, 1998).

Verba legis non est recedendum. The law does not make a distinction. The rental income is taxable
regardless of whence such income is derived and how it is used or disposed of. Where the law does
not distinguish, neither should we.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Constitution, claiming that it “is
a non-stock, non-profit educational institution whose revenues and assets are used actually, directly
and exclusively for educational purposes so it is exempt from taxes on its properties and income.”
This is without merit since the exemption provided lies on the payment of property tax, and not on
the income tax on the rentals of its property. The bare allegation alone that one is a non-stock, non-
profit educational institution is insufficient to justify its exemption from the payment of income tax.

For the YMCA to be granted the exemption it claims under the above provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and
exclusively for educational purposes. Unfortunately for respondent, the Court noted that not a
scintilla of evidence was submitted to prove that it met the said requisites.

The Court appreciates the nobility of respondent’s cause. However, the Court’s power and function
are limited merely to applying the law fairly and objectively. It cannot change the law or bend it to
suit its sympathies and appreciations. Otherwise, it would be overspilling its role and invading the
realm of legislation. The Court regrets that, given its limited constitutional authority, it cannot rule
on the wisdom or propriety of legislation. That prerogative belongs to the political departments of
government.

Comm. Of Internal Revenue vs. St. Luke’s Medical Center, Inc.

(G.R. No. 195909-195960; Sept. 26, 2012)

Facts: St. Luke’s (respondent) is a hospital organized as a non-stock and non-profit organization.
Sometime in 2002, BIR assessed St. Luke’s deficiency taxes amounting to P76M for 1998 which was
subsequently reduced to P63M during trial in the CTA. St. Luke’s protested and filed an
administrative protest with BIR but was not acted by the latter within the 180 period thus reaching
to the CTA.

According to BIR, Section 27B of the NIRC imposing a 10% preferential tax rate applies to St.
Luke’s. Its reason is that it amends the exemption on non-profit hospitals and which prevails over the
exemption on income tax granted under Section 30 (E and G) for non-stock, nonprofit charitable
institution and civic organizations promoting social welfare. It further claimed that St. Luke’s was
actually operating for profit because only 13% came from charitable purposes and that it had a total
revenue of P1.73B from patient services in 1998.

Meanwhile, St. Luke’s contended that its operating income only totaled P334 M (less the
operating expenses) and out of that P218M (65%) made up its free services and further claimed that
its income does not inure to the benefit of anyone. Furthermore, it argued that it falls under the
exception provided under Sec. 30 (E) and (G) of NIRC and making of profit per se does not destroy its
tax exemption.

CTA En Banc ruled in favor of St. Luke’s exemption under Sec. 30 and reiterated its earlier
fiding in another case identifying St. Luke’s as a charitable institution. CTA adopted the test in
Hospital de San Juan de Dios, Inc. v. Pasay City, which states that "a charitable institution does not
lose its charitable character and its consequent exemption from taxation merely because recipients of
its benefits who are able to pay are required to do so, where funds derived in this manner are devoted
to the charitable purposes of the institution . . . ." (The generation of income from paying patients does
not per se destroy the charitable nature of St. Luke's.)

Issue: WON St. Luke’s is liable for deficiency income tax under Sec. 27 (B) of the NIRC which imposes
a 10% preferential rate.

Held: Petition partly granted. YES, St. Luke’s is liable under Sec. 27 (B) of the NIRC.

Under Sec. 30 (E) of the NIRC provides that a charitable institution must be: (1) non-stock corporation
or association; (2)ORGANIZED EXCLUSIVELY for charitable purposes; (3) OPERATED
EXCLUSIVELY for charitable purposes; (4) No part of its net income or asset shall inure to the benefit
of any member , officer or any person. Under the last paragraph of Sec. 30 of the NIRC if a tax exempt
charitable institution conducts "any" activity for profit, such activity is NOT TAX EXEMPT even as
its not-for-profit activities remain tax exempt. It simply means that even if a charitable institution
organized and operated exclusively for charitable purposes is nevertheless allowed to engage in
“activities conducted for profit” without losing its tax exempt status for its no-for-profit activities.
However, as a consequence "income of whatever kind and character" of a charitable institution "from
any of its activities conducted for profit, regardless of the disposition made of such income, shall be
subject to tax." (Sec. 30, last par.). Therefore, services rendered to paying patients are activities
conducted for profit and thus taxable under Sec. 27 (B) of the NIRC.

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

Notes:

1. TEST OF CHARITY - as a gift, to be applied consistently with existing laws, for the benefit of
an indefinite number of persons, either by bringing their minds and hearts under the influence
of education or religion, by assisting them to establish themselves in life or [by] otherwise
lessening the burden of government." (In other words, charitable institutions provide for free
goods and services to the public which would otherwise fall on the shoulders of government.)
2. Solely is synonymous with EXCLUSIVELY. (Lung center of the Phil.)
3. Proprietary- means private.
4. Non-profit- no net income accrues to the benefit of any person and with all its income devoted
to the institutions purpose and all its activities CONDUCTED NOT FOR PROFIT.

TRANSFER TAXES
CIR vs Campos Rueda (42 SCRA 238)

The Collector Of Internal Revenue vs Campos Rueda

42 SCRA 238 [GR No. L-13250 October 29, 1971]

Facts: This is an appeal interposed by herein respondent Antonio Campos Rueda as administrator of
the estate of the deceased Doña Maria de la Estrella Soriano Vda de Cedeira, from the decision of the
petitioner, collector of internal revenue, assessing against and demanding from the former the sum of
Php161,874.95 as deficiency estate and inheritance taxes, including interest therein and penalties, on
the transfer of intangible personal properties situated in the Philippines and belonging to said Maria
Cedeira. She is a spanish national, by reason of her marriage to a spanish citizen and was a resident
of Tangier, Morocco from 1931 up to her death on January 2, 1955. At the time of her demise, she left
among others, intangible personal properties in the Philippines. On September 29, 1955, respondent
filed a provisional estate and inheritance tax return on all the properties of Maria Cedeira. On the
same date, petitioner, pending investigation issued an assessment for estate and inheritance tax in
the respective amounts of Php111,592.48 and Php 157,791.48 or a total of Php369,383.96 which tax
liabilities were paid by respondent. On November 27, 1955, an amended return was filed wherein
intangible personal properties with the value of Php396,308.90 were claimed as exempt from taxes.
On November 23, 1955, petitioner issued another assessment for estate and inheritance taxes in the
amounts of Php 202,262.40 and Php267,402.84 respectively or a total of Php469,665.24. In a letter
dated January 11, 1956, respondent denied the request for the exemption on the ground that the law
of Tangier is not reciprocal with section 122 of the National Internal Revenue Code. Hence, respondent
demanded the payment of the sums of Php239,439.79 representing the deficiency estate and
inheritance taxes including ad valorem penalties, surcharges, interest and compromise penalties. In a
letter dated February 8, 1956, respondent requested for the reconsideration of the decision denying
the claim for the tax exemption. However, the same was denied. The denial was premise on the ground
that there was no reciprocity with Tangier, which was moreover a mere principality, not a foreign
country.

Issue: Whether or not the intangible personal properties of Maria Cedeira are exempt from estate and
inheritance tax.

Held: Yes. The controlling legal provision as noted is a proviso in section 122 of the NIRC. It reads
thus:

that no tax shall be collected under this title in respect of intangible personal properties

1. if the decedent at the time of his death was a resident of a foreign country which at
the time of his death did not impose a transfer tax or death tax of any character in
respect of intangible personal properties of the Philippines not residing in that
foreign country; or
2. if the laws of the foreign country of which the decedent was a resident at the time of
his death allow a similar exemption from transfer taxes or death taxes of every
 character in respect of intangible personal properties owned by citizens of the
Philippines not residing in that foreign country.

This court commit itself to the doctrine that even a tiny principality, hardly an international
personality in the sense did fall under the exempt category.

The expression “foreign country,” was used in the last proviso of section 122 of NIRC refers to a
government of that foreign power which although not an international person in the sense of
international law does not impose transfer or death upon intangible person properties of our citizens
not residing therein whose law allow a similar exemption from such taxes. It is therefore not necessary
that Tangier should have been recognized by our government in order to entitle the respondent to the
exemption benefits of the proviso of said section 122 of our tax code.

Vidal de Roces vs Posadas Jr

58 Phil 108 [GR No. L-34937 March 13, 1933]

Facts: On March 1o and 12, 1925, Esperanza Tuazon, by means of public documents, donated certain
parcel of lands situated in Manila to the plaintiffs herein who with their respective husbands accepted
them in the same public documents which were duly recorded in the registry of deeds. By virtue of
said donations, the plaintiffs took possession of the said lands, received the fruits thereof and obtained
the corresponding transfer certificate of title. On January 25, 1926, the donor died in the city of Manila
leaving the forced heir and her will which was admitted to probate, she bequeathed to each of the
donees the sum of Php5,000. After the estate had been distributed among the instituted legatees and
before the delivery of their respective shares, the appellee herein, as collector of internal revenue,
ruled that the appellant as donees and legatees should pay as inheritance taxes the sums of Php16,673
and Php13,951.45 respectively. At first, the appellants refused to pay the aforementioned taxes but,
at the insistence of the appellee in order not to delay the adjudication of the legacies, they agreed at
last to pay them under protest. Hence, plaintiff-appellants filed an action to recover the taxes paid
under protest.

Issue: Whether or not inheritance tax should be imposed on donations inter vivos.

Held: Yes. The tax collected by the appellee on the properties donated in 1925 really constitutes an
inheritance tax imposed on the transmission of said properties in contemplation or in consideration of
the donor’s death and under circumstance that the donees were later instituted as the former’s
legatees. For this reason, the law considers such transmission in the form of gifts inter vivos, as
advances on the inheritance and nothing therein violates any constitutional provision, in as much as
said legislation is within the power of the legislature.

Property subject to inheritance tax – the inheritance tax ordinarily applies to all property within the
power of the state to reach passing by will or the laws regulating intestate succession or by gifts inter
vivos in the manner designated by statute, whether such property be real or personal, tangible or
intangible, corporeal or incorporeal.

While a donee inter vivos, who after the predecessor’s death proved to be an heir, legatee or donee
mortis causa, would have to pay the tax, another donee inter vivos who did not prove to be an heir, a
legatee or a donee mortis causa of the predecessor, would be exempt from such tax.

It may be inferred from the allegations contained in par 2 and 7 thereof that said donations inter vivos
were made in consideration of the donor’s death. We refer to the allegations that such transmissions
were effected in the month of March 1925, that the donor died in January 1926, and that the donees
were instituted legatees in the donor’s will which was admitted in probate. It is from these allegations,
especially the last, that we infer a presumption juris tantum that said donations were made mortis
causa and, as such are subject to payment of inheritance tax.

Dizon vs Posadas Jr
57 Phil 465 [GR No. L-36770 November 4, 1932]
Facts: Don Felix Dizon died on April 21, 1928. Before his death, he made a gift inter vivos in favor of
the plaintiff Luis W. Dizon of all his property according to a deed of a gift of which includes all the
property of Don Felix Dizon. The plaintiff did not receive the property of any kind of Don Felix upon
the death of the latter. Don Luis is the legitimate and only son of Don Felix. The defendant, collector
of internal revenue assess an inheritance tax of Php2,808.73 which Don Luis paid under protest and
later filed an action to recover sum of money thus paid. Plaintiff alleged that the inheritance tax is
illegal because he received the property, which is the basis of the tax from his father before his death
by a deed of gift inter vivos which was duly accepted and registered before the death of his father.

Issue: Whether or not the gift inter vivos is subject to inheritance tax.

Held: Yes. Section 1540 of the administrative code plainly does not tax gifts per se but only when those
gifts are made to those who shall prove to be the heirs, devisees, legatees or donees mortis cause of the
donor.

In this case, the scanty facts before us may not warrant the inference that the conveyance,
acknowledged by the donor 5 days before his death and accepted by the donee one day before the
donor’s death, was fraudulently made for the purpose of evading the inheritance tax. But the facts, in
our opinion, do not warrant the inference that the transfer was an advancement upon the inheritance
which the donee as the sole and forced heir of the donor, would be entitled to receive upon the death
of the donor.