#3 TAXREV Section 27(A).
Section 27(A).4 If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT.
INCOME TAX APPLICABLE TO CORPORATIONS
1 G.R. No. 160756 March 9, 2010 CHAMBER OF REAL ESTATE AND BUILDERS'
ASSOCIATIONS, INC. vs. THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO
In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders’
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 84242 and
the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said
provision and those involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former
Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then
Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations
and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98.
Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there
is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection
of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of
ordinary assets and capital assets and second, respondent Secretary of Finance has no authority to collect
CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties
classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due
process clause because, like the MCIT, the government collects income tax even when the net income has
not yet been determined. They contravene the equal protection clause as well because the CWT is being
levied upon real estate enterprises but not on other business enterprises, more particularly those in the
manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as
ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of
2% of its gross income when such MCIT is greater than the normal corporate income tax imposed under
Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal
income tax for the three immediately succeeding taxable years. Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of
the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal
income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, the necessary rules and regulations that shall define the terms and conditions
under which he may suspend the imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection
(E) hereof, the term ‘gross income’ shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.
For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales
returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and specialists directly rendering the service and
(B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment
used and cost of supplies: Provided, however, that in the case of banks, "cost of services" shall include
interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The
pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations. –
1
(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby
imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the
taxable year in which such corporation commenced its business operations. The MCIT shall be imposed
whenever such corporation has zero or negative taxable income or whenever the amount of minimum
corporate income tax is greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed
under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.
xxx xxx xxx
(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal income tax as
computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against
the normal income tax for the three (3) immediately succeeding taxable years.
xxx xxx xxx
Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR,
promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of
taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of
real property, other than capital assets, by persons residing in the Philippines and habitually engaged in the
real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of. – Real property, other than capital assets, sold by an individual, corporation,
estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate
business in accordance with the following schedule –
xxx xxx xxx
Gross selling price shall mean the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange, as determined in the Income Tax
Regulations shall be used.
Where the consideration or part thereof is payable on installment, no withholding tax is required to be
made on the periodic installment payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on
the last installment or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be
deducted and withheld by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross
selling price/total amount of consideration or the fair market value determined in accordance with Section
6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real
property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance with
the following schedule:
xxx xxx xxx
Gross selling price shall remain the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange shall be considered as the
consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall
apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not
exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment
plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the
tax based on the gross selling price or fair market value of the property, whichever is higher, on the first
installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT]
due on the sale, transfer or exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that
such transfers and conveyances have been reported and the taxes thereof have been duly paid: 7
Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable expanded
withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining
whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT,
among others. The pertinent portions thereof state:
2
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived
from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to
applicable taxes imposed under the Code, depending on whether the subject properties are classified as
capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or
current fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher,
and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as
the case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations. –
xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are located in
the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended,
and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the Code,
whichever is applicable.
xxx xxx xxx
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question before
the court must be ripe for adjudication; (3) the person challenging the validity of the act must have
standing to do so; (4) the question of constitutionality must have been raised at the earliest opportunity and
(5) the issue of constitutionality must be the very lis mota of the case.9
Respondents aver that the first three requisites are absent in this case. According to them, there is no actual
case calling for the exercise of judicial power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by
the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that
its members have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner
has raised concerns in mere abstract and hypothetical form without any actual, specific and concrete
instances cited that the assailed law and revenue regulations have actually and adversely affected it.
Lacking empirical data on which to base any conclusion, any discussion on the constitutionality of the
MCIT or CWT on sales of real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract
issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does not
really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims
which is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or
dispute.11 On the other hand, a question is considered ripe for adjudication when the act being challenged
has a direct adverse effect on the individual challenging it. 12
Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut down their
operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As
we stated in Didipio Earth-Savers’ Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to
have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation
of the Constitution and/or the law is enough to awaken judicial duty. 14
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such
question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners
did not allege that [it] itself is in the real estate business. It did not allege any material interest or any
wrong that it may suffer from the enforcement of [the assailed provisions]. 15
Legal standing or locus standi is a party’s personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. 16 In Holy Spirit
Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing because its
members stood to be injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the
individual members of petitioner association are residents of the NGC. As such they are covered and stand
to be either benefited or injured by the enforcement of the IRR, particularly as regards the selection
process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may
assail those provisions in the IRR which it believes to be unfavorable to the rights of its members. xxx
Certainly, petitioner and its members have sustained direct injury arising from the enforcement of the IRR
in that they have been disqualified and eliminated from the selection process. 18
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing when paramount public interest is
involved.19 The questioned MCIT and CWT affect not only petitioners but practically all domestic
corporate taxpayers in our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance of this petition. 20
Concept and Rationale of the MCIT
3
The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation
system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing
the true income of corporations.21 It was devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more difficult to control and enforce. It is a means
to ensure that everyone will make some minimum contribution to the support of the public sector. The
congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting
constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first time a new concept called the
[MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for
administrative convenience. … This will go a long way in ensuring that corporations will pay their just
share in supporting our public life and our economic advancement. 22
Domestic corporations owe their corporate existence and their privilege to do business to the government.
They also benefit from the efforts of the government to improve the financial market and to ensure a
favorable business climate. It is therefore fair for the government to require them to make a reasonable
contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report
minimal or negative net income resulting in minimal or zero income taxes year in and year out, through
under-declaration of income or over-deduction of expenses otherwise called tax shelters.23
Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the
[MCIT]. Because from experience too, you have corporations which have been losing year in and year out
and paid no tax. So, if the corporation has been losing for the past five years to ten years, then that
corporation has no business to be in business. It is dead. Why continue if you are losing year in and year
out? So, we have this provision to avoid this type of tax shelters, Your Honor. 24
The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements and
its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed
in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it
prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was
lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into
the law:
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately
following the year in which the corporation commenced its operations. 25 This grace period allows a new
business to stabilize first and make its ventures viable before it is subjected to the MCIT. 26
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax
which shall be credited against the normal income tax for the three immediately succeeding years.27
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary
of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor
dispute, force majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries
already had their own system of minimum corporate income taxation. Our lawmakers noted that most
developing countries, particularly Latin American and Asian countries, have the same form of safeguards
as we do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent (0.5%) of
gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course
the different countries have different basis for that minimum income tax.
The other thing you’ll notice is the preponderance of Latin American countries that employed this method.
Okay, those are additional Latin American countries.29
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their
own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of
law. It explains that gross income as defined under said provision only considers the cost of goods sold
and other direct expenses; other major expenditures, such as administrative and interest expenses which
are equally necessary to produce gross income, were not taken into account.31 Thus, pegging the tax base
of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital because gross
income, unlike net income, is not "realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure.
The exercise of taxing power derives its source from the very existence of the State whose social contract
with its citizens obliges it to promote public interest and the common good. 33
Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this
means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs (place) of taxation.36 It has the authority to prescribe a certain
tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other
words, the legislature wields the power to define what tax shall be imposed, why it should be imposed,
how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be
imposed.
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature
no limits, so that the principal check against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay it. 37 Nevertheless, it is circumscribed
by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption
of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life,
liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due
process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure 39 when it
4
amounts to a confiscation of property.40 But in the same case, we also explained that we will not strike
down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer.41 There must be a factual foundation to such an unconstitutional
taint.42 This merely adheres to the authoritative doctrine that, where the due process clause is invoked,
considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such
persuasive character.43
Petitioner is correct in saying that income is distinct from capital.44 Income means all the wealth which
flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one
distinct point in time while income denotes a flow of wealth during a definite period of time. 45 Income is
gain derived and severed from capital.46 For income to be taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In
other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on
capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation
in the sale of its goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the
capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income
tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of
net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base
the corporation’s gross income.
Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible
items and at the same time reducing the applicable tax rate. 49
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in
many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of
taxation.50
The United States has a similar alternative minimum tax (AMT) system which is generally characterized
by a lower tax rate but a broader tax base.51 Since our income tax laws are of American origin,
interpretations by American courts of our parallel tax laws have persuasive effect on the interpretation of
these laws.52 Although our MCIT is not exactly the same as the AMT, the policy behind them and the
procedure of their implementation are comparable. On the question of the AMT’s constitutionality, the
United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a
minimum amount of taxes was a legitimate governmental end to which the AMT bore a reasonable
relation.55
American courts have also emphasized that Congress has the power to condition, limit or deny deductions
from gross income in order to arrive at the net that it chooses to tax.56 This is because deductions are a
matter of legislative grace.57
Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of
the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members
nor does it present empirical data to show that the implementation of the MCIT resulted in the
confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary
and confiscatory. The Court cannot strike down a law as unconstitutional simply because of its
yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely affects property
rights.59 The party alleging the law’s unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT
is being imposed and collected even when there is actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations. —
(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax due
from such corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation incurs
a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to
an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on gross
income notwithstanding the amount of the net income. But the law also states that the MCIT is to be paid
only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT would
be less than the net income of the corporation which posts a zero or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including income taxes) are
collected.61 Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into
three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at
source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT) and
maintains that the revenue regulations on the collection of CWT on sale of real estate categorized as
ordinary assets are unconstitutional.
5
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends
that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were
promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"62 because they ignore such distinctions. Petitioner’s conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value (FMV)
of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary
assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents
cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and
payment of taxes on income from the sale of capital and ordinary assets.
Petitioner’s arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property
Considered as Ordinary Assets
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the
Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business’
income tax from net income to GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
possible tax obligation. 69 They are installments on the annual tax which may be due at the end of the
taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets
remains to be the entity’s net income imposed under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions.
The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the taxable
year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real
property classified as ordinary assets remains to be the net taxable income:

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
Section 4. – Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
necessary rules and regulations for the effective enforcement of the provisions of the law. Such authority
derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be
is subject to the limitation that the rules and regulations must not override, but must remain consistent and
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
in harmony with, the law they seek to apply and implement.64 It is well-settled that an administrative
classified as capital assets or ordinary assets;
agency cannot amend an act of Congress.65

xxx xxx xxx

We have long recognized that the method of withholding tax at source is a procedure of collecting income
tax which is sanctioned by our tax laws.66 The withholding tax system was devised for three primary
reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens
second, to ensure the collection of income tax which can otherwise be lost or substantially reduced engaged in trade or business in the Philippines;
through failure to file the corresponding returns and third, to improve the government’s cash flow.67 This
results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and
xxx xxx xxx
reduction of governmental effort to collect taxes through more complicated means and remedies. 68

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the
Respondent Secretary has the authority to require the withholding of a tax on items of income payable to
[CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV]
any person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B)
as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently,
of RA 8424 which provides:
to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may
be, based on net taxable income.
SEC. 57. Withholding of Tax at Source. –
xxx xxx xxx
xxx xxx xxx
c. In the case of domestic corporations.
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
The sale of land and/or building classified as ordinary asset and other real property (other than land and/or
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
building treated as capital asset), regardless of the classification thereof, all of which are located in the
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against
Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
the income tax liability of the taxpayer for the taxable year.
consequently, to theordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the same
The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) Code, whichever is applicable. (Emphasis supplied)
to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is
imposed on the income payable and the tax is creditable against the income tax liability of the taxpayer for
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes
the taxable year.
withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax

6
withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax
withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its
net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax
does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the end of
the taxable year. Instead, said withholding agent’s knowledge and privity are limited only to the particular
transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as these are the
only factors reasonably known or knowable by him in connection with the performance of his duties as a
withholding agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized
as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6%
on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final
tax is also withheld at source.72
The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary
assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are
distinguished as follows:
As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on
the sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove
petitioner’s contention that ordinary assets are being lumped together with, and treated similarly as, capital
assets in contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to
the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of
income tax involving ordinary assets.75
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same
way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT.
The withholding agent/buyer’s act of collecting the tax at the time of the transaction by withholding the
tax due from the income payable is the essence of the withholding tax method of tax collection.
No Rule that Only Passive
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It
follows that Section 57(B) on CWT should also be limited to passive income:
SEC. 57. Withholding of Tax at Source. —
(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E);
27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33;
and 282 of this Code on specified items of income shall be withheld by payor-corporation
and/or person and paid in the same manner and subject to the same conditions as provided in
Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not
more than thirty-two percent (32%) thereof, which shall be credited against the income tax
liability of the taxpayer for the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates
these as passive income. The BIR defines passive income by stating what it is not:
…if the income is generated in the active pursuit and performance of the corporation’s primary purposes,
the same is not passive income…76
It is income generated by the taxpayer’s assets. These assets can be in the form of real properties that
return rental income, shares of stock in a corporation that earn dividends or interest income received from
savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to
natural or juridical persons, residing in the Philippines." There is no requirement that this income be
passive income. If that were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to
CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses any
income other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A)
and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has
been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its functions. 77 Similarly,
considering that the law uses the general term "income," the Secretary and CIR may specify the kinds of
income the rules will apply to based on what is feasible. In addition, administrative rules and regulations
ordinarily deserve to be given weight and respect by the courts78 in view of the rule-making authority
given to those who formulate them and their specific expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business, gain is
never assured by mere receipt of the selling price. As a result, the government is collecting tax from net
income not yet gained or earned.
7
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end
of the taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes
withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the
constitutional guarantee of due process. More importantly, the due process requirement applies to the
power to tax.79 The CWT does not impose new taxes nor does it increase taxes. 80 It relates entirely to the
method and time of payment.
Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers
have to wait years and may even resort to litigation before they are granted a refund. 81 This argument is
misleading. The practical problems encountered in claiming a tax refund do not affect the constitutionality
and validity of the CWT as a method of collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay
labor wages, materials, cost of money and other expenses which can then save the entity from having to
obtain loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the
trade which add to the burden of the realty industry: huge investments and borrowings; long gestation
period; sudden and unpredictable interest rate surges; continually spiraling development/construction
costs; heavy taxes and prohibitive "up-front" regulatory fees from at least 20 government agencies. 82
Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s
complaints are essentially matters of policy best addressed to the executive and legislative branches of the
government. Besides, the CWT is applied only on the amounts actually received or receivable by the real
estate entity. Sales on installment are taxed on a per-installment basis.83 Petitioner’s desire to utilize for its
operational and capital expenses money earmarked for the payment of taxes may be a practical business
option but it is not a fundamental right which can be demanded from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT
is being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not
much different from that of a real estate enterprise. Like a manufacturing concern, a real estate business is
involved in a continuous process of production and it incurs costs and expenditures on a regular basis. The
only difference is that "goods" produced by the real estate business are house and lot units. 84
Again, we disagree.
The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same
place and in like circumstances."85 Stated differently, all persons belonging to the same class shall be
taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation
based on a reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions;
(2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply
equally to all members of the same class.86
The taxing power has the authority to make reasonable classifications for purposes of
taxation.87 Inequalities which result from a singling out of one particular class for taxation, or exemption,
infringe no constitutional limitation.88 The real estate industry is, by itself, a class and can be validly
treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to
realize that what distinguishes the real estate business from other manufacturing enterprises, for purposes
of the imposition of the CWT, is not their production processes but the prices of their goods sold and the
number of transactions involved. The income from the sale of a real property is bigger and its frequency of
transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several
thousand customers every month involving both minimal and substantial amounts. To require the
customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions with
their tens or hundreds of suppliers may result in an inefficient and unmanageable system of taxation and
may well defeat the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not
similarly subjected to the CWT.89 As already discussed, the Secretary may adopt any reasonable method to
carry out its functions.90 Under Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate. The
sales of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are
also subject to CWT for their transactions with said 5,000 corporations. 91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not
effect the regisration of any document transferring real property unless a certification is issued by the CIR
that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except
to rely on its contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this
provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in
accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source. –
(E) Registration with Register of Deeds. - No registration of any document transferring real property
shall be effected by the Register of Deeds unless the [CIR] or his duly authorized representative has
certified that such transfer has been reported, and the capital gains or [CWT], if any, has been paid:
xxxx any violation of this provision by the Register of Deeds shall be subject to the penalties imposed
under Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to
understand is the income tax."92 When a party questions the constitutionality of an income tax measure, it
has to contend not only with Einstein’s observation but also with the vast and well-established
jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner has miserably
failed to discharge its burden of convincing the Court that the imposition of MCIT and CWT is
unconstitutional. WHEREFORE, the petition is hereby DISMISSED.
2 G.R. No. 168118 August 28, 2006 THE MANILA BANKING CORPORATION vs.
COMMISSIONER OF INTERNAL REVENUE
Before us is a Petition for Review on Certiorari 1 assailing the Decision 2 of the Court of Appeals dated
May 11, 2005 in CA-G.R. SP No. 77177, entitled "The Manila Banking Corporation, petitioner, versus
Commissioner of Internal Revenue, respondent."
8
The Manila Banking Corporation, petitioner, was incorporated in 1961 and since then had engaged in the
commercial banking industry until 1987. On May 22, 1987, the Monetary Board of the Bangko Sentral ng
Pilipinas(BSP) issued Resolution No. 505, pursuant to Section 29 of Republic Act (R.A.) No. 265 (the
Central Bank Act), 3prohibiting petitioner from engaging in business by reason of insolvency. Thus,
petitioner ceased operations that year and its assets and liabilities were placed under the charge of a
government-appointed receiver.
the same cannot yet be invoked. Nevertheless, it is the position of this Office that the counting of the
fourth taxable year, insofar as TMBC is concerned, begins in the year 1999 when TMBC reopened such
that it will be only subject to MCIT beginning the year 2002.
Pursuant to the above Ruling, petitioner filed with the BIR a claim for refund of the sum
of P33,816,164.00 erroneously paid as minimum corporate income tax for taxable year 1999.

Meanwhile, R.A. No. 8424, 4 otherwise known as the Comprehensive Tax Reform Act of 1997, became
Due to the inaction of the BIR on its claim, petitioner filed with the Court of Tax Appeals (CTA) a
effective on January 1, 1998. One of the changes introduced by this law is the imposition of the minimum
petition for review.
corporate income tax on domestic and resident foreign corporations. Implementing this law is Revenue
Regulations No. 9-98 stating that the law allows a four (4) year period from the time the corporations were
registered with the Bureau of Internal Revenue (BIR) during which the minimum corporate income tax On April 21, 2003, the CTA denied the petition, finding that petitioner’s payment of the amount
should not be imposed. of P33,816,164.00 corresponding to its minimum corporate income tax for taxable year 1999 is in order.
The CTA held that petitioner is not entitled to the four (4)-year grace period because it is not a new
corporation. It has continued to be the same corporation, registered with the Securities and Exchange
On June 23, 1999, after 12 years since petitioner stopped its business operations, the BSP authorized it to
Commission (SEC) and the BIR, despite being placed under receivership, thus:
operate as a thrift bank. The following year, specifically on April 7, 2000, it filed with the BIR its annual
corporate income tax return and paid P33,816,164.00 for taxable year 1999.
Moreover, it must be emphasized that when herein petitioner was placed under receivership, there was
merely an interruption of its business operations. However, its corporate existence was never affected. The
Prior to the filing of its income tax return, or on December 28, 1999, petitioner sent a letter to the BIR
general rule is that the appointment of the receiver does not terminate the charter or work a dissolution of
requesting a ruling on whether it is entitled to the four (4)-year grace period reckoned from 1999. In other
the corporation, even though the receivership is a permanent one. In other words, the corporation
words, petitioner’s position is that since it resumed operations in 1999, it will pay its minimum corporate
continues to exist as a legal entity, clothed with its franchises (65 Am. Jur. 2d, pp. 973-974). Petitioner, for
income tax only after four (4) years thereafter.
all intents and purposes, remained to be the same corporation, registered with the SEC and with the BIR.
While it may continue to perform its corporate functions, all its properties and assets were under the
On February 22, 2001, the BIR issued BIR Ruling No. 007-2001 5 stating that petitioner is entitled to the control and custody of a receiver, and its dealings with the public is somehow limited, if not momentarily
four (4)-year grace period. Since it reopened in 1999, the minimum corporate income tax may be imposed suspended. x x x
"not earlier than 2002, i.e. the fourth taxable year beginning 1999." The relevant portions of the BIR
Ruling state:
On June 11, 2003, petitioner filed with the Court of Appeals a petition for review. On May 11, 2005, the
appellate court rendered a Decision affirming the assailed judgment of the CTA.
In reply, we hereby confirm that the law and regulations allow new corporations as well as existing
corporations a leeway or adjustment period of four years counted from the year of commencement of
Thus, this petition for review on certiorari.
business operations (reckoned at the time of registration by the corporation with the BIR) during which the
MCIT (minimum corporate income tax) does not apply. If new corporations, as well as existing
corporations such as those registered with the BIR in 1994 or earlier, are granted a 4-year grace period, we The main issue for our resolution is whether petitioner is entitled to a refund of its minimum corporate
see no reason why TMBC, a corporation that has ceased business activities due to involuntary closure for income tax paid to the BIR for taxable year 1999.
more than a decade and is now only starting again to place its business back in order, may not be given the
same opportunity. It should be stressed that although TMBC had been registered with the BIR before
Petitioner contends that the Court of Tax Appeals erred in holding that it is not entitled to the four (4)-year
1994, yet it did not have any business from 1987 to June 1999 due to its involuntary closure. This Office is
grace period provided by law suspending the payment of its minimum corporate income tax since it is not
therefore of an opinion, that for purposes of justice, equity and consistent with the intent of the law,
a newly created corporation, having been registered as early as 1961.
TMBC's reopening last July 1999 is akin to the commencement of business operations of a new
corporation, in consideration of which the law allows a 4-year period during which MCIT is not to be
applied. Hence, MCIT may be imposed upon TMBC not earlier than 2002, i.e., the fourth taxable year For his part, the Commissioner of Internal Revenue (CIR), respondent, maintains that pursuant to R.A.
beginning 1999 which is the year when TMBC reopened. No. 8424, petitioner should pay its minimum corporate income tax beginning January 1, 1998 as it did not
close its business operations in 1987 but merely suspended the same. Even if placed under receivership, its
corporate existence was never affected. Thus, it falls under the category of an existing corporation
Likewise, we find merit in your position that for having just come out of receivership proceedings, which
recommencing its banking business operations.
not only resulted in substantial losses but actually brought about a complete cessation of all businesses,
TMBC may be qualified to ask for suspension of the MCIT. The law provides that the Secretary of
Finance, upon the recommendation of the Commissioner, may suspend the imposition of the MCIT on any Section 27(E) of the Tax Code provides:
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses. [NIRC, Sec. 27(E)(3)] Revenue Regulations 9-98 defines the term
"legitimate business reverses" to include substantial losses sustained due to fire, robbery, theft or Sec. 27. Rates of Income Tax on Domestic Corporations. – x x x
embezzlement, or for other economic reasons as determined by the Secretary of Finance. Cessation of
business activities as a result of being placed under involuntary receivership may be one such economic (E) Minimum Corporate Income Tax on Domestic Corporations. -
reason. But to be a basis for the recognition of the suspension of MCIT, such a situation should be
properly defined and included in the regulations, which this Office intends to do. Pending such inclusion,
9
(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%) of the gross income as of
the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum corporate income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the
normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited
against the normal income tax for the three (3) immediately succeeding taxable years.
xxx
Upon the other hand, Revenue Regulation No. 9-98 specifies the period when a corporation becomes
subject to the minimum corporate income tax, thus:
(5) Specific Rules for Determining the Period When a Corporation Becomes Subject to the MCIT
(minimum corporate income tax) -
For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in
which the domestic corporation registered with the Bureau of Internal Revenue (BIR).
Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning
January 1, 1998.
xxx
The intent of Congress relative to the minimum corporate income tax is to grant a four (4)-year suspension
of tax payment to newly formed corporations. Corporations still starting their business operations have to
stabilize their venture in order to obtain a stronghold in the industry. It does not come as a surprise then
when many companies reported losses in their initial years of operations. The following are excerpts from
the Senate deliberations:
Senator Romulo: x x x Let me go now to the minimum corporate income tax, which is on page 45 of the
Journal, which is to minimize tax evasion on those corporations which have been declaring losses year in
and year out. Here, the tax rate is three-fourths, three quarter of a percent or .75% applied to corporations
that do not report any taxable income on the fourth year of their business operation. Therefore, those that
do not report income on the first, second and third year are not included here.
Senator Enrile: We assume that this is the period of stabilization of new company that is starting in
business.
Senator Romulo: That is right.
Thus, in order to allow new corporations to grow and develop at the initial stages of their operations, the
lawmaking body saw the need to provide a grace period of four years from their registration before they
pay their minimum corporate income tax.
Significantly, on February 23, 1995, Congress enacted R.A. No. 7906, otherwise known as the "Thrift
Banks Act of 1995." It took effect on March 18, 1995. This law provides for the regulation of the
organization and operations of thrift banks. Under Section 3, thrift banks include savings and mortgage
banks, private development banks, and stock savings and loans associations organized under existing laws.
On June 15, 1999, the BIR issued Revenue Regulation No. 4-95 implementing certain provisions of the
said R.A. No. 7906. Section 6 provides:
Sec. 6. Period of exemption. – All thrift banks created and organized under the provisions of the Act shall
be exempt from the payment of all taxes, fees, and charges of whatever nature and description, except the
corporate income tax imposed under Title II of the NIRC and as specified in Section 2(A) of these
regulations, for a period of five (5) years from the date of commencement of operations; while for thrift
banks which are already existing and operating as of the date of effectivity of the Act (March 18, 1995),
the tax exemption shall be for a period of five (5) years reckoned from the date of such effectivity.
For purposes of these regulations, "date of commencement of operations" shall be understood to mean the
date when the thrift bank was registered with the Securities and Exchange Commission or the date when
the Certificate of Authority to Operate was issued by the Monetary Board of the Bangko Sentral ng
Pilipinas, whichever comes later.
xxx
As mentioned earlier, petitioner bank was registered with the BIR in 1961. However, in 1987, it was found
insolvent by the Monetary Board of the BSP and was placed under receivership. After twelve (12) years,
or on June 23, 1999, the BSP issued to it a Certificate of Authority to Operate as a thrift bank. Earlier, or
on January 21, 1999, it registered with the BIR. Then it filed with the SEC its Articles of Incorporation
which was approved on June 22, 1999.
It is clear from the above-quoted provision of Revenue Regulations No. 4-95 that the date of
commencement of operations of a thrift bank is the date it was registered with the SEC or the date
when the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP,
whichever comes later.
Let it be stressed that Revenue Regulations No. 9-98, implementing R.A. No. 8424 imposing the
minimum corporate income tax on corporations, provides that for purposes of this tax, the date when
business operations commence is the year in which the domestic corporation registered with the BIR.
However, under Revenue Regulations No. 4-95, the date of commencement of operations of thrift banks,
such as herein petitioner, is the date the particular thrift bank was registered with the SEC or the date when
the Certificate of Authority to Operate was issued to it by the Monetary Board of the BSP, whichever
comes later.
Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to petitioner,
being a thrift bank. It is, therefore, entitled to a grace period of four (4) years counted from June 23, 1999
when it was authorized by the BSP to operate as a thrift bank. Consequently, it should only pay its
minimum corporate income tax after four (4) years from 1999.
WHEREFORE, we GRANT the petition. The assailed Decision of the Court of Appeals in CA-G.R. SP
No. 77177 is hereby REVERSED. Respondent Commissioner of Internal Revenue is directed to refund to
petitioner bank the sum of P33,816,164.00 prematurely paid as minimum corporate income tax.
3. G.R. No. 103092 July 21, 1994 BANK OF AMERICA NT & SA vs. HONORABLE COURT OF
APPEALS, AND THE COMMISSIONER OF INTERNAL REVENUE
10
Section 24(b) (2) (ii) of the National Internal Revenue Code, in the language it was worded in 1982 (the
taxable period relevant to the case at bench), provided, in part, thusly:
Sec. 24. Rates of tax on corporations. . . .
(b) Tax on foreign corporations. . . .
(2) (ii) Tax on branch profit and remittances. —
Any profit remitted abroad by a branch to its head office shall be subject to a tax of
fifteen per cent (15%) . . . ."
Petitioner Bank of America NT & SA argues that the 15% branch profit remittance tax on the basis of the
above provision should be assessed on the amount actually remitted abroad, which is to say that the 15%
profit remittance tax itself should not form part of the tax base. Respondent Commissioner of Internal
Revenue, contending otherwise, holds the position that, in computing the 15% remittance tax, the tax
should be inclusive of the sum deemed remitted.
The statement of facts made by the Court of Tax Appeals, later adopted by the Court of Appeals, and not
in any serious dispute by the parties, can be quoted thusly:
Petitioner is a foreign corporation duly licensed to engage in business in the
Philippines with Philippine branch office at BA Lepanto Bldg., Paseo de Roxas,
Makati, Metro Manila. On July 20, 1982 it paid 15% branch profit remittance tax in
the amount of P7,538,460.72 on profit from its regular banking unit operations and
P445,790.25 on profit from its foreign currency deposit unit operations or a total of
P7,984,250.97. The tax was based on net profits after income tax without deducting
the amount corresponding to the 15% tax.
Petitioner filed a claim for refund with the Bureau of Internal Revenue of that
portion of the payment which corresponds to the 15% branch profit remittance tax,
on the ground that the tax should have been computed on the basis of profits
actually remitted, which is P45,244,088.85, and not on the amount before profit
remittance tax, which is P53,228,339.82. Subsequently, without awaiting
respondent's decision, petitioner filed a petition for review on June 14, 1984 with
this Honorable Court for the recovery of the amount of P1,041,424.03 computed as
follows:
Net Profits After Profit Tax Due Alleged
Income Tax But Remittance Alleged by Overpayment
Before Profit Tax Paid Petitioner Item 1-2
Remittance Tax _________ _________ ___________
A. Regular Banking
Unit Operations
(P50,256,404.82)
1. Computation of BIR
15% x P50,256,404.82 - P7,538,460.72
2. Computation of
Petitioner
- P50,256,404.82 x 15% P6,555,183.24 — P983,277.48
1.15
B. Foreign Currency
Deposit Unit
Operations
(P2,971,935)
1. Computation of BIR
15% x - P2,971,935.00 P445,790.25
2. Computation of
Petitioner
- P2,971,935.00 x 15% P387,643.70 P58,146.55
T O T A L. . P7,984,250.97 P6,942,286.94 P1,041,424.02"1
The Court of Tax Appeals upheld petitioner bank in its claim for refund. The Commissioner of Internal
Revenue filed a timely appeal to the Supreme Court (docketed G.R. No. 76512) which referred it to the
Court of Appeals following this Court's pronouncement in Development Bank of the Philippines vs. Court
of Appeals, et al. (180 SCRA 609). On 19 September 1990, the Court of Appeals set aside the decision of
the Court of Tax Appeals. Explaining its reversal of the tax court's decision, the appellate court said:
The Court of Tax Appeals sought to deduce legislative intent vis-a-vis the aforesaid
law through an analysis of the wordings thereof, which to their minds reveal an
intent to mitigate at least the harshness of successive taxation. The use of the
word remitted may well be understood as referring to that part of the said total
branch profits which would be sent to the head office as distinguished from the total
profits of the branch (not all of which need be sent or would be ordered remitted
abroad). If the legislature indeed had wanted to mitigate the harshness of successive
taxation, it would have been simpler to just lower the rates without in effect
requiring the relatively novel and complicated way of computing the tax, as
envisioned by the herein private respondent. The same result would have been
achieved.2
Hence, these petitions for review in G.R. No. 103092 and G.R.
No. 103106 (filed separately due to inadvertence) by the law firms of "Agcaoili and Associates" and of
"Sycip, Salazar, Hernandez and Gatmaitan" in representation of petitioner bank.
We agree with the Court of Appeals that not much reliance can be made on our decision in Burroughs
Limited vs. Commission of Internal Revenue (142 SCRA 324), for there we ruled against the
Commissioner mainly on the basis of what the Court so then perceived as his position in a 21 January
1980 ruling the reversal of which, by his subsequent ruling of 17 March 1982, could not apply
retroactively against Burroughs in conformity with Section 327 (now Section 246, re: non-retroactivity of
rulings) of the National Internal Revenue Code. Hence, we held:
Petitioner's aforesaid contention is without merit. What is applicable in the case at
bar is still the Revenue Ruling of January 21, 1980 because private respondent
Burroughs Limited paid the branch profit remittance tax in question on March 14,
1979. Memorandum Circular
11
 No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light of Dividends received by an individual who is a citizen or
Section 327 of the National Internal Revenue Code which resident of the Philippines from a domestic corporation, shall
provides — be subject to a final tax at the rate of fifteen (15%) per cent
on the total amount thereof, which shall be collected and
paid as provided in Sections 53 and 54 of this
Sec. 327. Non-retroactivity of rulings. Any revocation,
Code. (Emphasis supplied; Sec. 21, Tax Code)
modification, or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or any
of the rulings or circulars promulgated by the Commissioner Interest from Philippine Currency bank deposits and yield
shall not be given retroactive application if the revocation, from deposit substitutes whether received by citizens of the
modification, or reversal will be prejudicial to the taxpayer Philippines or by resident alien individuals, shall be subject
except in the following cases (a) where the taxpayer to a final tax as follows: (a) 15% of the interest or savings
deliberately misstates or omits material facts from his return deposits, and (b) 20% of the interest on time deposits and
or in any document required of him by the Bureau of Internal yield from deposits substitutes, which shall be collected and
Revenue; (b) where the facts subsequently gathered by the paid as provided in Sections 53 and 54 of this Code: . . .
Bureau of Internal Revenue are materially different from the (Emphasis supplied; Sec. 21, Tax Code applicable.)
facts on which the ruling is based, or (c) where the taxpayer
acted in bad faith. (ABS-CBN Broadcasting Corp. v. CTA,
And on rental payments payable by the lessee to the lessor (at 5%), also cited by
108 SCRA 151-152)
respondent, Section 1, paragraph (C), of Revenue Regulations No. 13-78,
November 1, 1978, provides that:
The prejudice that would result to private respondent Burroughs Limited by a
retroactive application of Memorandum Circular No. 8-82 is beyond question for it
Section 1. Income payments subject to withholding tax and
would be deprived of the substantial amount of P172,058.90. And, insofar as the
rates prescribed therein. — Except as therein otherwise
enumerated exceptions are concerned, admittedly, Burroughs Limited does not fall
provided, there shall be withheld a creditable income tax at
under any of them.
the rates herein specified for each class of payee from the
following items of income payments to persons residing in
The Court of Tax Appeals itself commented similarly when it observed thusly in its decision: the Philippines.

In finding the Commissioner's contention without merit, this Court however ruled xxx xxx xxx
against the applicability of Revenue Memorandum Circular No. 8-82 dated March
17, 1982 to the Burroughs Limited case because the taxpayer paid the branch profit
(C) Rentals — When the gross rental or the payment
remittance tax involved therein on March 14, 1979 in accordance with the ruling of
required to be made as a condition to the continued use or
the Commissioner of Internal Revenue dated January 21, 1980. In view of Section
possession of property, whether real or personal, to which the
327 of the then in force National Internal Revenue Code, Revenue Memorandum
payor or obligor has not taken or is not taking title or in
Circular No. 8-82 dated March 17, 1982 cannot be given retroactive effect because
which he has no equity, exceeds five hundred pesos
any revocation or modification of any ruling or circular of the Bureau of Internal
(P500.00) per contract or payment whichever is greater —
Revenue should not be given retroactive application if such revocation or
five per centum (5%).
modification will, subject to certain exceptions not pertinent thereto, prejudice
taxpayers.3
Note that the basis of the 5% withholding tax, as expressly and unambiguously
provided therein, is on the gross rental. Revenue Regulations No. 13-78 was
The Solicitor General correctly points out that almost invariably in an ad valorem tax, the tax paid or
promulgated pursuant to Section 53(f) of the then in force National Internal
withheld is not deducted from the tax base. Such impositions as the ordinary income tax, estate and gift
Revenue Code which authorized the Minister of Finance, upon recommendation of
taxes, and the value added tax are generally computed in like manner. In these cases, however, it is so
the Commissioner of Internal Revenue, to require the withholding of income tax on
because the law, in defining the tax base and in providing for tax withholding, clearly spells it out to be
the same items of income payable to persons (natural or judicial) residing in the
such. As so well expounded by the Tax Court —
Philippines by the persons making such payments at the rate of not less than 2 1/2%
but not more than 35% which are to be credited against the income tax liability of
. . . In all the situations . . . where the mechanism of withholding of taxes at source the taxpayer for the taxable year.
operates to ensure collection of the tax, and which respondent claims the base on
which the tax is computed is the amount to be paid or remitted, the law applicable
On the other hand, there is absolutely nothing in Section 24(b) (2) (ii), supra, which
expressly, specifically and unequivocally mandates that the tax is on the total
indicates that the 15% tax on branch profit remittance is on the total amount of
amount thereof which shall be collected and paid as provided in Sections 53 and 54
profit to be remitted abroad which shall be collected and paid in accordance with
of the Tax Code. Thus:
the tax withholding device provided in Sections 53 and 54 of the Tax Code. The
statute employs "Any profit remitted abroad by a branch to its head office shall be
subject to a tax of fifteen per cent (15%)" — without more. Nowhere is there said of

12
 "base on the total amount actually applied for by the branch with the Central Bank
of the Philippines as profit to be remitted abroad, which shall be collected and paid
as provided in Sections 53 and 54 of this Code." Where the law does not qualify
that the tax is imposed and collected at source based on profit to be remitted abroad,
that qualification should not be read into the law. It is a basic rule of statutory
construction that there is no safer nor better canon of interpretation than that when
the language of the law is clear and unambiguous, it should be applied as written.
And to our mind, the term "any profit remitted abroad" can only mean such profit as
is "forwarded, sent, or transmitted abroad" as the word "remitted" is commonly and
popularly accepted and understood. To say therefore that the tax on branch profit
remittance is imposed and collected at source and necessarily the tax base should be
the amount actually applied for the branch with the Central Bank as profit to be
remitted abroad is to ignore the unmistakable meaning of plain words.4
In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is
absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the
amount sent abroad, and the law (then in force) calls for nothing further. The taxpayer is a single entity,
and it should be understandable if, such as in this case, it is the local branch of the corporation, using its
own local funds, which remits the tax to the Philippine Government.
The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations
maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic
corporations where at least a majority of all the latter's shares of stock are owned by such foreign
corporations. Prior to the amendatory provisions of the Revenue Code, local branches were made to pay
only the usual corporate income tax of 25%-35% on net income (now a uniform 35%) applicable to
resident foreign corporations (foreign corporations doing business in the Philippines). While Philippine
subsidiaries of foreign corporations were subject to the same rate of 25%-35% (now also a uniform 35%)
on their net income, dividend payments, however, were additionally subjected to a 15% (withholding) tax
(reduced conditionally from 35%). In order to avert what would otherwise appear to be an unequal tax
treatment on such subsidiaries vis-a-vis local branch offices, a 20%, later reduced to 15%, profit
remittance tax was imposed on local branches on their remittances of profits abroad. But this is where the
tax pari-passu ends between domestic branches and subsidiaries of foreign corporations.
The Solicitor General suggests that the analogy should extend to the ordinary application of the
withholding tax system and so with the rule on constructive remittance concept as well. It is difficult to
accept the proposition. In the operation of the withholding tax system, the payee is the taxpayer, the
person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the
government for the collection of the tax in order to ensure its payment. Obviously, the amount thereby
used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. Since the
payee, not the payor, is the real taxpayer, the rule on constructive remittance (or receipt) can be easily
rationalized, if not indeed, made clearly manifest. It is hardly the case, however, in the imposition of the
15% remittance tax where there is but one taxpayer using its own domestic funds in the payment of the
tax. To say that there is constructive remittance even of such funds would be stretching far too much that
imaginary rule. Sound logic does not defy but must concede to facts.
We hold, accordingly, that the written claim for refund of the excess tax payment filed, within the two-
year prescriptive period, with the Court of Tax Appeals has been lawfully made.
WHEREFORE, the decision of the Court of Appeals appealed from is REVERSED and SET ASIDE, and
that of the Court of Tax Appeals is REINSTATED.
4. G.R. No. 108067 January 20, 2000 CYANAMID PHILIPPINES, INC. vs. THE COURT OF
APPEALS, THE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE
Petitioner disputes the decision1 of the Court of Appeals which affirmed the decision2 of the Court of Tax
Appeals, ordering petitioner to pay respondent Commissioner of Internal Revenue the amount of three
million, seven hundred seventy-four thousand, eight hundred sixty seven pesos and fifty centavos
(P3,774,867.50) as 25% surtax on improper accumulation of profits for 1981, plus 10% surcharge and
20% annual interest from January 30, 1985 to January 30, 1987, under Sec. 25 of the National Internal
Revenue Code.1âwphi1.nêt
The Court of Tax Appeals made the following factual findings:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly owned
subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an
importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of
deficiency income tax of one hundred nineteen thousand eight hundred seventeen (P119,817.00) pesos for
taxable year 1981, as follows:
On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax Assessment of
P3,774,867.50; (2) 1981 Deficiency Income Assessment of P119,817.00; and 1981 Deficiency Percentage
Assessment of P8,846.72.4 Petitioner, through its external accountant, Sycip, Gorres, Velayo & Co.,
claimed, among others, that the surtax for the undue accumulation of earnings was not proper because the
said profits were retained to increase petitioner's working capital and it would be used for reasonable
business needs of the company. Petitioner contended that it availed of the tax amnesty under Executive
Order No. 41, hence enjoyed amnesty from civil and criminal prosecution granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the cancellation of the
assessment notices and rendered its resolution, as follows:
It appears that your client availed of Executive Order No. 41 under File No. 32A-F-000455-
41B as certified and confirmed by our Tax Amnesty Implementation Office on October 6,
1987.
In reply thereto, I have the honor to inform you that the availment of the tax amnesty under
Executive Order No. 41, as amended is sufficient basis, in appropriate cases, for the
cancellation of the assessment issued after August 21, 1986. (Revenue Memorandum Order
No. 4-87) Said availment does not, therefore, result in cancellation of assessments issued
before August 21, 1986. as in the instant case. In other words, the assessments in this case
issued on January 30, 1985 despite your client's availment of the tax amnesty under Executive
Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your client to pay this Office the
aforementioned deficiency income tax and surtax on undue accumulation of surplus in the
respective amounts of P119,817.00 and P3,774,867.50 inclusive of interest thereon for the year
1981, within thirty (30) days from receipt hereof, otherwise this office will be constrained to
enforce collection thereof thru summary remedies prescribed by law.
This constitutes the final decision of this Office on this matter. 5
Petitioner appealed to the Court of Tax Appeals. During the pendency of the case, however, both parties
agreed to compromise the 1981 deficiency income tax assessment of P119,817.00. Petitioner paid a
13
reduced amount — twenty-six thousand, five hundred seventy-seven pesos (P26,577.00) — as Equally clear and specific are the provisions of E.O. 41 particularly with respect to its
compromise settlement. However, the surtax on improperly accumulated profits remained unresolved. effectivity and coverage . . .

Petitioner claimed that CIR's assessment representing the 25% surtax on its accumulated earnings for the . . . Said availment does not result in cancellation of assessments issued before August 21, 1986
year 1981 had no legal basis for the following reasons: (a) petitioner accumulated its earnings and profits as petitioner seeks to do in the case at bar. Therefore, the assessments in this case, issued on
for reasonable business requirements to meet working capital needs and retirement of indebtedness; (b) January 30, 1985 despite petitioner's availment of the tax amnesty under E.O. 41 as amended,
petitioner is a wholly owned subsidiary of American Cyanamid Company, a corporation organized under still subsist.
the laws of the State of Maine, in the United States of America, whose shares of stock are listed and traded
in New York Stock Exchange. This being the case, no individual shareholder income taxes by petitioner's
xxx xxx xxx
accumulation of earnings and profits, instead of distribution of the same.

WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay respondent

In denying the petition, the Court of Tax Appeals made the following pronouncements:
Commissioner of Internal Revenue the sum of P3,774,867.50 representing 25% surtax on
improper accumulation of profits for 1981, plus 10% surcharge and 20% annual interest from
Petitioner contends that it did not declare dividends for the year 1981 in order to use the January 30, 1985 to January 30, 1987.6
accumulated earnings as working capital reserve to meet its "reasonable business needs". The
law permits a stock corporation to set aside a portion of its retained earnings for specified
Petitioner appealed the Court of Tax Appeal's decision to the Court of Appeals. Affirming the CTA
purposes (citing Section 43, paragraph 2 of the Corporation Code of the Philippines). In the
decision, the appellate court said:
case at bar, however, petitioner's purpose for accumulating its earnings does not fall within the
ambit of any of these specified purposes.
In reviewing the instant petition and the arguments raised herein, We find no compelling
reason to reverse the findings of the respondent Court. The respondent Court's decision is
More compelling is the finding that there was no need for petitioner to set aside a portion of its
supported by evidence, such as petitioner corporation's financial statement and balance sheets
retained earnings as working capital reserve as it claims since it had considerable liquid funds.
(p. 127, BIR Records). On the other hand the petitioner corporation could only come up with
A thorough review of petitioner's financial statement (particularly the Balance Sheet, p. 127,
an alternative formula lifted from a decision rendered by a foreign court (Bardahl Mfg. Corp.
BIR Records) reveals that the corporation had considerable liquid funds consisting of cash
vs. Commissioner, 24 T.C.M. [CCH] 1030). Applying said formula to its particular financial
accounts receivable, inventory and even its sales for the period is adequate to meet the normal
position, the petitioner corporation attempts to justify its accumulated surplus earnings. To Our
needs of the business. This can be determined by computing the current asset to liability ratio
mind, the petitioner corporation's alternative formula cannot overturn the persuasive findings
of the company:
and conclusion of the respondent Court based, as it is, on the applicable laws and
jurisprudence, as well as standards in the computation of taxes and penalties practiced in this
current ratio = current assets/ current liabilities jurisdiction.

= P 47,052,535.00 / P21,275,544.00 WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED and the
decision of the Court of Tax Appeals dated August 6, 1992 in C.T.A. Case No. 4250 is
AFFIRMED in toto.7
= 2.21: 1
========
Hence, petitioner now comes before us and assigns as sole issue:
The significance of this ratio is to serve as a primary test of a company's solvency to meet
current obligations from current assets as a going concern or a measure of adequacy of working WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE PETITIONER
capital. IS LIABLE FOR THE ACCUMULATED EARNINGS TAX FOR THE YEAR 1981.8

xxx xxx xxx Sec. 259 of the old National Internal Revenue Code of 1977 states:

We further reject petitioner's argument that "the accumulated earnings tax does not apply to a Sec. 25. Additional tax on corporation improperly accumulating profits or surplus —
publicly-held corporation" citing American jurisprudence to support its position. The reference
finds no application in the case at bar because under Section 25 of the NIRC as amended by
(a) Imposition of tax. — If any corporation is formed or availed of for the purpose of
Section 5 of P.D. No. 1379 [1739] (dated September 17, 1980), the exceptions to the
preventing the imposition of the tax upon its shareholders or members or the shareholders or
accumulated earnings tax are expressly enumerated, to wit: Bank, non-bank financial
members of another corporation, through the medium of permitting its gains and profits to
intermediaries, corporations organized primarily, and authorized by the Central Bank of the
accumulate instead of being divided or distributed, there is levied and assessed against such
Philippines to hold shares of stock of banks, insurance companies, or personal holding
corporation, for each taxable year, a tax equal to twenty-five per-centum of the undistributed
companies, whether domestic or foreign. The law on the matter is clear and specific. Hence,
portion of its accumulated profits or surplus which shall be in addition to the tax imposed by
there is no need to resort to applicable cases decided by the American Federal Courts for
section twenty-four, and shall be computed, collected and paid in the same manner and subject
guidance and enlightenment as to whether the provision of Section 25 of the NIRC should
to the same provisions of law, including penalties, as that tax.
apply to petitioner.
14
 (b) Prima facie evidence. — The fact that any corporation is mere holding company shall
be prima facieevidence of a purpose to avoid the tax upon its shareholders or members. Similar
presumption will lie in the case of an investment company where at any time during the taxable
year more than fifty per centum in value of its outstanding stock is owned, directly or
indirectly, by one person.
(c) Evidence determinative of purpose. — The fact that the earnings or profits of a corporation
are permitted to accumulate beyond the reasonable needs of the business shall be determinative
of the purpose to avoid the tax upon its shareholders or members unless the corporation, by
clear preponderance of evidence, shall prove the contrary.
(d) Exception. — The provisions of this sections shall not apply to banks, non-bank financial
intermediaries, corporation organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance companies, whether domestic or
foreign.
The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do
not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders.
The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations
to distribute earnings so that the said earnings by shareholders could, in turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner stresses that the accumulated earnings tax
does not apply to Cyanamid, a wholly owned subsidiary of a publicly owned company. 10 Specifically,
petitioner cites Golconda Mining Corp. vs. Commissioner, 507 F.2d 594, whereby the U.S. Ninth Circuit
Court of Appeals had taken the position that the accumulated earnings tax could only apply to a closely
held corporation.
A review of American taxation history on accumulated earnings tax will show that the application of the
accumulated earnings tax to publicly held corporations has been problematic. Initially, the Tax Court and
the Court of Claims held that the accumulated earnings tax applies to publicly held corporations. Then, the
Ninth Circuit Court of Appeals ruled in Golconda that the accumulated earnings tax could only apply to
closely held corporations. Despite Golconda, the Internal Revenue Service asserted that the tax could be
imposed on widely held corporations including those not controlled by a few shareholders or groups of
shareholders. The Service indicated it would not follow the Ninth Circuit regarding publicly held
corporations.11 In 1984, American legislation nullified the Ninth Circuit's Golconda ruling and made it
clear that the accumulated earnings tax is not limited to closely held corporations. 12 Clearly, Golconda is
no longer a reliable precedent.
The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations organized primarily and authorized by the
Central Bank of the Philippines to hold shares of stocks of banks. Petitioner does not fall among those
exempt classes. Besides, the rule on enumeration is that the express mention of one person, thing, act, or
consequence is construed to exclude all others.13 Laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.14 Taxation is the
rule and exemption is the exception.15 The burden of proof rests upon the party claiming exemption to
prove that it is, in fact, covered by the exemption so claimed, 16 a burden which petitioner here has failed to
discharge.
Another point raised by the petitioner in objecting to the assessment, is that increase of working capital by
a corporation justifies accumulating income. Petitioner asserts that respondent court erred in concluding
that Cyanamid need not infuse additional working capital reserve because it had considerable liquid funds
based on the 2.21:1 ratio of current assets to current liabilities. Petitioner relies on the so-called "Bardahl"
formula, which allowed retention, as working capital reserve, sufficient amounts of liquid assets to carry
the company through one operating cycle. The "Bardahl"17 formula was developed to measure corporate
liquidity. The formula requires an examination of whether the taxpayer has sufficient liquid assets to pay
all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate
the business during one operating cycle. Operating cycle is the period of time it takes to convert cash into
raw materials, raw materials into inventory, and inventory into sales, including the time it takes to collect
payment for the
sales.18
Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as working
capital. As of 1981, its liquid asset was only P25,776,991.00. Thus, petitioner asserts that Cyanamid had a
working capital deficit of P7,986,633.00.19 Therefore, the P9,540,926.00 accumulated income as of 1981
may be validly accumulated to increase the petitioner's working capital for the succeeding year.
We note, however, that the companies where the "Bardahl" formula was applied, had operating cycles
much shorter than that of petitioner. In Atlas Tool Co., Inc, vs. CIR,20 the company's operating cycle was
only 3.33 months or 27.75% of the year. In Cataphote Corp. of Mississippi vs. United States,21 the
corporation's operating cycle was only 56.87 days, or 15.58% of the year. In the case of Cyanamid, the
operating cycle was 288.35 days, or 78.55% of a year, reflecting that petitioner will need sufficient liquid
funds, of at least three quarters of the year, to cover the operating costs of the business. There are
variations in the application of the "Bardahl" formula, such as average operating cycle or peak operating
cycle. In times when there is no recurrence of a business cycle, the working capital needs cannot be
predicted with accuracy. As stressed by American authorities, although the "Bardahl" formula is well-
established and routinely applied by the courts, it is not a precise rule. It is used only for administrative
convenience.22 Petitioner's application of the "Bardahl" formula merely creates a false illusion of
exactitude.
Other formulas are also used, e.g. the ratio of current assets to current liabilities and the adoption of the
industry standard.23 The ratio of current assets to current liabilities is used to determine the sufficiency of
working capital. Ideally, the working capital should equal the current liabilities and there must be 2 units
of current assets for every unit of current liability, hence the so-called "2 to 1" rule.24
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current liabilities.
That current ratio of Cyanamid, therefore, projects adequacy in working capital. Said working capital was
expected to increase further when more funds were generated from the succeeding year's sales. Available
income covered expenses or indebtedness for that year, and there appeared no reason to expect an
impending "working capital deficit" which could have necessitated an increase in working capital, as
rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,25 we held that:
. . . [T]here is no need to have such a large amount at the beginning of the following year
because during the year, current assets are converted into cash and with the income realized
from the business as the year goes, these expenses may well be taken care of. [citation
omitted]. Thus, it is erroneous to say that the taxpayer is entitled to retain enough liquid net
assets in amounts approximately equal to current operating needs for the year to cover "cost of
goods sold and operating expenses:" for "it excludes proper consideration of funds generated
by the collection of notes receivable as trade accounts during the course of the year." 26
If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or
profits to accumulate, and the taxpayer contested such a determination, the burden of proving the
determination wrong, together with the corresponding burden of first going forward with evidence, is on
15
the taxpayer. This applies even if the corporation is not a mere holding or investment company and does
not have an unreasonable accumulation of earnings or profits.27

In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax upon
shareholders, it must be shown that the controlling intention of the taxpayer is manifest at the time of
accumulation, not intentions declared subsequently, which are mere afterthoughts. 28 Furthermore, the
accumulated profits must be used within a reasonable time after the close of the taxable year. In the instant
case, petitioner did not establish, by clear and convincing evidence, that such accumulation of profit was
for the immediate needs of the business.

In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,29 we ruled:

To determine the "reasonable needs" of the business in order to justify an accumulation of

earnings, the Courts of the United States have invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the business" to mean the immediate needs of the
business, and it was generally held that if the corporation did not prove an immediate need for
the accumulation of the earnings and profits, the accumulation was not for the reasonable needs
of the business, and the penalty tax would apply. (Mertens. Law of Federal Income Taxation,
Vol. 7, Chapter 39, p, 103).30

In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio
between current assets to current liabilities. The working capital needs of a business depend upon nature
of the business, its credit policies, the amount of inventories, the rate of the turnover, the amount of
accounts receivable, the collection rate, the availability of credit to the business, and similar factors.
Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court with the required
definiteness envisioned by the statute. We agree with the tax court that the burden of proof to establish
that the profits accumulated were not beyond the reasonable needs of the company, remained on the
taxpayer. This Court will not set aside lightly the conclusion reached by the Court of Tax Appeals which,
by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise
of authority.31 Unless rebutted, all presumptions generally are indulged in favor of the correctness of the
CIR's assessment against the taxpayer. With petitioner's failure to prove the CIR incorrect, clearly and
conclusively, this Court is constrained to uphold the correctness of tax court's ruling as affirmed by the
Court of Appeals.

WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals, sustaining that
of the Court of Tax Appeals, is hereby AFFIRMED. Costs against petitioner.1âwphi1.nêt

5. Iconic Beverages (PDF)

6. G.R. No. 198756 January 13, 2015 BANCO DE ORO vs.

REPUBLIC OF THE PHILIPPINES

Factual background

By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) "with the
assistance of its financial advisors, Rizal Commercial Banking Corp. ("RCBC"), RCBC Capital Corp.
("RCBC Capital"), CAPEX Finance and Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc.
(SEED),"5 requested an approval from the Department of Finance for the issuance by the Bureau of

16
Treasury of 10-year zerocoupon Treasury Certificates (T-notes).6 The T-notes would initially be purchased
by a special purpose vehicle on behalf of CODE-NGO, repackaged and sold at a premium to investors as
the PEACe Bonds.7 The net proceeds from the sale of the Bonds"will be used to endow a permanent fund
(Hanapbuhay® Fund) to finance meritorious activities and projects of accredited non-government
organizations (NGOs) throughout the country."8
Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-
coupon bonds were also presented by banks and financial institutions, such as First Metro Investment
Corporation (proposal dated March 1, 2001),9 International Exchange Bank (proposal dated July 27,
2000),10 Security Bank Corporation and SB Capital Investment Corporation (proposal dated July 25,
2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25, 1999).12 "[B]oth the proposals
of First Metro Investment Corp. and ATR-Kim Eng Fixed Income indicate that the interest income or
discount earned on the proposed zerocoupon bonds would be subject to the prevailing withholding tax." 13
A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a deep
discount), with the face value repaid at the time of maturity. 14 It does not make periodic interest payments,
or have socalled "coupons," hence the term zero-coupon bond.15 However, the discount to face value
constitutes the return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters dated May 10, 15, and
25, 2001, issued BIR Ruling No. 020-200117 on the tax treatment of the proposed PEACe Bonds. BIR
Ruling No. 020-2001, signed by then Commissioner ofInternal Revenue René G. Bañez confirmed that the
PEACe Bonds would not be classified as deposit substitutes and would not be subject to the corresponding
withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from twenty (20)
or more individuals or corporate lenders at any one time. In the light of your representation that the
PEACe Bonds will be issued only to one entity, i.e., Code NGO, the same shall not be considered as
"deposit substitutes" falling within the purview of the above definition. Hence, the withholding tax on
deposit substitutes will not apply.18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated
in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120 dated September
29, 2001 (collectively, the 2001 Rulings). In sum, these rulings pronounced that to be able to determine
whether the financial assets, i.e., debt instruments and securities are deposit substitutes, the "20 or more
individual or corporate lenders" rule must apply. Moreover, the determination of the phrase "at any one
time" for purposes of determining the "20 or more lenders" is to be determined at the time of the original
issuance. Such being the case, the PEACe Bonds were not to be treated as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former
Treasurer Edeza) questioned the propriety of issuing the bonds directly to a special purpose vehicle
considering that the latter was not a Government Securities Eligible Dealer (GSED). 22 Former Treasurer
Edeza recommended that the issuance of the Bonds "be done through the ADAPS" 23 and that CODE-NGO
"should get a GSED to bid in [sic] its behalf."24
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds25 (Public Offering)
dated October 9, 2001, the Bureau of Treasury announced that "₱30.0B worth of 10-year Zero[-] Coupon
Bonds [would] be auctioned on October 16, 2001[.]"26 The notice stated that the Bonds "shall be issued to
not morethan 19 buyers/lenders hence, the necessity of a manual auction for this maiden issue." 27 It also
required the GSEDs to submit their bids not later than 12 noon on auction date and to disclose in their bid
submissions the names of the institutions bidding through them to ensure strict compliance with the 19
lender limit.28 Lastly, it stated that "the issue being limitedto 19 lenders and while taxable shall not be
subject to the 20% final withholding [tax]."29
On October 12, 2001, the Bureau of Treasury released a memo30 on the "Formula for the Zero-Coupon
Bond." The memo stated inpart that the formula (in determining the purchase price and settlement amount)
"is only applicable to the zeroes that are not subject to the 20% final withholding due to the 19
buyer/lender limit."31
A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the "Auction
Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001" (Auction
Guidelines).32 The Auction Guidelines reiterated that the Bonds to be auctioned are "[n]ot subject to 20%
withholding tax as the issue will be limited to a maximum of 19 lenders in the primary market (pursuant to
BIR Revenue Regulation No. 020 2001)."33The Auction Guidelines, for the first time, also stated that the
Bonds are "[e]ligible as liquidity reserves (pursuant to MB Resolution No. 1545 dated 27 September
2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds.35 Also
on the same date, the Bureau of Treasury issued another memorandum36 quoting excerpts of the ruling
issued by the Bureau of Internal Revenue concerning the Bonds’ exemption from 20% final withholding
tax and the opinion of the Monetary Board on reserve eligibility. 37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very wide, from as low
as 12.248% to as high as 18.000%.39 Nonetheless, the Bureau of Treasury accepted the auction
results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder
having tendered the lowest bids.42 Accordingly, on October 18, 2001, the Bureau of Treasury issued ₱35
billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately ₱10.17
billion,43 resulting in a discount of approximately ₱24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement 44 with CODE-NGO,
whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the
PEACe Bonds.45RCBC Capital agreed to underwrite46 on a firm basis the offering, distribution and sale of
the 35 billion Bonds at the price of ₱11,995,513,716.51.47 In Section 7(r) of the underwriting agreement,
CODE-NGO represented that "[a]ll income derived from the Bonds, inclusive of premium on redemption
and gains on the trading of the same, are exempt from all forms of taxation as confirmed by Bureau of
Internal Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001, respectively." 48
RCBC Capital sold the Government Bonds in the secondary market for an issue price of
₱11,995,513,716.51. Petitioners purchased the PEACe Bonds on different dates. 49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the
Government Bonds and directing the BTr to withhold said final tax at the maturity thereof, [allegedly
without] consultation with Petitioners as bond holders, and without conducting any hearing." 50
"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance
on the proper tax treatment of the discount or interest income derived from the Government Bonds." 51 The
Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling
No. 007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR
Ruling No. 008-0554 dated July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on
interest income from deposit substitutes. It is now settled that all treasury bonds (including PEACe
17
Bonds), regardless of the number of purchasers/lenders at the time of origination/issuance are considered On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-
deposit substitutes. In the case of zero-coupon bonds, the discount (i.e. difference between face value and intervention with comment on the petitionin-intervention of RCBC and RCBC Capital).67 The motion was
purchase price/discounted value of the bond) is treated as interest income of the purchaser/holder. Thus, granted by this court on November 22, 2011.68
the Php 24.3 interest income should have been properly subject to the 20% Final Tax as provided in
Section 27(D)(1) of the Tax Code of 1997. . . .
On December 1, 2011, public respondents filed their compliance. 69 They explained that: 1) "the
implementation of [BIR Ruling No. 370-2011], which has already been performed on October 18, 2011
.... with the withholding of the 20% final withholding tax on the face value of the PEACe bonds, is already
fait accompli . . . when the Resolution and TRO were served to and received by respondents BTr and
National Treasurer [on October 19, 2011]";70 and 2) the withheld amount has ipso facto become public
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able tocollect the final
funds and cannot be disbursed or released to petitioners without congressional
tax on the discount/interest income realized by RCBC as a result of the 2001 Rulings. Subsequently, the
appropriation.71 Respondents further aver that"[i]nasmuch as the . . . TRO has already become moot . . .
issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies and supersedes the 2001
the condition attached to it, i.e., ‘that the 20% final withholding tax on interest income therefrom shall be
Rulings by stating that the [1997] Tax Code is clear that the "term public means borrowing from twenty
withheld by the banks and placed in escrow . . .’has also been rendered moot[.]"72
(20) or more individual or corporate lenders at any one time." The word "any" plainly indicates that the
period contemplated is the entire term of the bond, and not merely the point of origination or issuance. . . .
Thus, by taking the PEACe bonds out of the ambit of deposits [sic] substitutes and exempting it from the On December 6, 2011, this court noted respondents' compliance.73
20% Final Tax, an exemption in favour of the PEACe Bonds was created when no such exemption is
found in the law.55
On February 22, 2012, respondents filed their consolidated comment 74 on the petitions-in-intervention
filed by RCBC and RCBC Capital and On November 27, 2012, petitioners filed their "Manifestation with
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the Philippine Urgent Reiterative Motion (To Direct Respondents to Comply with the Temporary Restraining Order)." 75
Dealing System Holdings Corporation and Subsidiaries ("PDS Group"). The Memo provides that in view
of the pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the Government
On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative motion (to
Bonds, no transferof the same shall be allowed to be recorded in the Registry of Scripless Securities
direct respondents to comply with the temporary restraining order); and (b) required respondents to
("ROSS") from 12 October 2011 until the redemption payment date on 18 October 2011. Thus, the
comment thereon.76
bondholders of record appearing on the ROSS as of 18 October 2011, which include the Petitioners, shall
be treated by the BTr asthe beneficial owners of such securities for the relevant [tax] payments to be
imposed thereon."56 Respondents’ comment77 was filed on April 15,2013, and petitioners filed their reply78 on June 5, 2013.

On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the Bureau of Internal Issues
Revenue issued BIR Ruling No. DA 378-201157 clarifying that the final withholding tax due on the
discount or interest earned on the PEACe Bonds should "be imposed and withheld not only on
The main issues to be resolved are:
RCBC/CODE NGO but also [on] ‘all subsequent holders of the Bonds.’"58

I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with ur gent
withholding tax under the 1997 National Internal Revenue Code. Related to this question is the
application for a temporary restraining order and/or writ of preliminary injunction) 59 before this court.
interpretation of the phrase "borrowing from twenty (20) or more individual or corporate
lenders at any one time" under Section 22(Y) of the 1997 National Internal Revenue Code,
On October 18, 2011, this court issued a temporary restraining order (TRO)60 "enjoining the particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the
implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that secondary market; and
the 20% final withholding tax on interest income there from shall be withheld by the petitioner banks and
placed in escrow pending resolution of [the] petition." 61
II. If the PEACe Bonds are considered "deposit substitutes," whether the government or the
Bureau of Internal Revenue is estopped from imposing and/or collecting the 20% final
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit withholding tax from the face value of these Bonds
petition-in-intervention62 dated October 27, 2011, which was granted by this court on November 15,
2011.63
a. Will the imposition of the 20% final withholding tax violate the non-impairment
clause of the Constitution?
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte Motion to
Direct Respondents to Comply with the TRO."64 They alleged that on the same day that the temporary
b. Will it constitute a deprivation of property without due process of law?
restraining order was issued, the Bureau of Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the amounts corresponding to the 20% final
withholding tax on interest income, and that the Bureau of Treasury refused to release the amounts c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-
corresponding to the 20% final withholding tax.65On November 15, 2011, this court directed respondents retroactivity of rulings?
to: "(1) SHOW CAUSE why they failed to comply with the October 18, 2011 resolution; and (2)
COMPLY with the Court’s resolution in order that petitioners may place the corresponding funds in
escrow pending resolution of the petition."66
18
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr, the Government is
obligated . . . to pay the face value amount of Ph₱35 Billion upon maturity without any deduction
whatsoever."79 They add that "the Government cannot impair the efficacy of the [Bonds] by arbitrarily,
oppressively and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere eleven
(11) days before maturity and after several, consistent categorical declarations that such bonds are exempt
from the 20% FWT, without violating due process"80 and the constitutional principle on non-impairment
of contracts.81 Petitioners aver that at the time they purchased the Bonds, they had the right to expect that
they would receive the full face value of the Bonds upon maturity, in view of the 2001 BIR
Rulings.82 "[R]egardless of whether or not the 2001 BIR Rulings are correct, the fact remains that [they]
relied [on] good faith thereon."83
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section
22(Y) of the 1997 National Internal Revenue Code because there was only one lender (RCBC) to whom
the Bureau of Treasury issued the Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings
"erroneously interpreted that the number of investors that participate in the ‘secondary market’ is the
determining factor in reckoning the existence or non-existence of twenty (20) or more individual or
corporate lenders."85 Furthermore, they contend that the Bureau of Internal Revenue unduly expanded the
definition of deposit substitutes under Section 22 of the 1997 National Internal Revenue Code in
concluding that "the mere issuance of government debt instruments and securities is deemed as falling
within the coverage of ‘deposit substitutes[.]’"86 Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to an
unauthorized act of administrative legislation[.]"87
Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt from
income tax.88 They insist that "[t]hey are not lenders whose income is considered as ‘interest income or
yield’ subject to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal Revenue
Code]"89 because they "acquired the Government Bonds in the secondary or tertiary market." 90
Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that
the collection of the final tax was barred by prescription. 91 They point out that under Section 7 of DOF
Department Order No. 141-95,92 the final withholding tax "should have been withheld at the time of their
issuance[.]"93 Also, under Section 203 of the 1997 National Internal Revenue Code, "internal
revenuetaxes, such as the final tax, [should] be assessed within three (3) years after the last day prescribed
by law for the filing of the return."94
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice
to them was in violation of their property rights,95 their constitutional right to due process96 as well as
Section 246 of the 1997 National Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it
would also have "an adverse effect of colossal magnitude on the investors, both localand foreign, the
Philippine capital market, and most importantly, the country’s standing in the international commercial
community."98 Petitioners explained that "unless enjoined, the government’s threatened refusal to pay the
full value of the Government Bonds will negatively impact on the image of the country in terms of
protection for property rights (including financial assets), degree of legal protection for lender’s rights, and
strength of investor protection."99 They cited the country’s ranking in the World Economic Forum: 75th in
the world in its 2011–2012 Global Competitiveness Index, 111th out of 142 countries worldwide and 2nd
to the last among ASEAN countries in terms of Strength of Investor Protection, and 105th worldwide and
last among ASEAN countries in terms of Property Rights Index and Legal Rights Index.100 It would also
allegedly "send a reverberating message to the whole world that there is no certainty, predictability, and
stability of financial transactions in the capital markets[.]" 101 "[T]he integrity of Government-issued bonds
and notes will be greatly shattered and the credit of the Philippine Government will suffer"102 if the sudden
turnaround of the government will be allowed,103 and it will reinforce "investors’ perception that the level
of regulatory risk for contracts entered into by the Philippine Government is high," 104 thus resulting in
higher interestrate for government-issued debt instruments and lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal
Revenue "gravely and seriously abused her discretion in the exercise of her rule-making power"106 when
she issued the assailed 2011 BIR Ruling which ruled that "all treasury bonds are ‘deposit substitutes’
regardless of the number of lenders, in clear disregard of the requirement of twenty (20)or more lenders
mandated under the NIRC."107 They argue that "[b]y her blanket and arbitrary classification of treasury
bonds as deposit substitutes, respondent CIR not only amended and expanded the NIRC, but effectively
imposed a new tax on privately-placed treasury bonds."108Petitioners-intervenors RCBC and RCBC
Capital further argue that the 2011 BIR Ruling will cause substantial impairment of their vested
rights109 under the Bonds since the ruling imposes new conditions by "subjecting the PEACe Bonds to the
twenty percent (20%) final withholding tax notwithstanding the fact that the terms and conditions thereof
as previously represented by the Government, through respondents BTr and BIR, expressly state that it is
not subject to final withholding tax upon their maturity."110 They added that "[t]he exemption from the
twenty percent (20%) final withholding tax [was] the primary inducement and principal consideration for
[their] participat[ion] in the auction and underwriting of the PEACe Bonds." 111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent
Commissioner of Internal Revenue violated their rights to due process when she arbitrarily issued the
2011 BIR Ruling without prior notice and hearing, and the oppressive timing of such ruling deprived them
of the opportunity to challenge the same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and
RCBC Capital claim that respondents Bureau of Treasury and CODE-NGO should be held liable "as
[these] parties explicitly represented . . . that the said bonds are exempt from the final withholding tax." 113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of the [2011
assailed BIR Ruling and BIR Ruling No. DA 378-2011] will have pernicious effects on the integrity of
existing securities, which is contrary to the State policies of stabilizing the financial system and of
developing capital markets."114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are
"invalid because they contravene Section 22(Y) of the 1997 [NIRC] when the said rulings disregarded the
applicability of the ‘20 or more lender’ rule to government debt instruments"[;] 115 (b) "when [it] sold the
PEACe Bonds in the secondary market instead of holding them until maturity, [it] derived . . . long-term
trading gain[s], not interest income, which [are] exempt . . . under Section 32(B)(7)(g) of the 1997
NIRC"[;]116 (c) "the tax exemption privilege relating to the issuance of the PEACe Bonds . . . partakes of a
contractual commitment granted by the Government in exchange for a valid and material consideration
[i.e., the issue price paid and savings in borrowing cost derived by the Government,] thus protected by the
non-impairment clause of the 1987 Constitution"[;] 117 and (d) the 2004, 2005, and 2011 BIR Rulings "did
not validly revoke the 2001 BIR Rulings since no notice of revocation was issued to [it], RCBC and
[RCBC Capital] and petitioners[-bondholders], nor was there any BIR administrative guidance issued and
published[.]"118CODE-NGO additionally argues that impleading it in a Rule 65 petition was improper
because: (a) it involves determination of a factual question; 119 and (b) it is premature and states no cause of
action as it amounts to an anticipatory third-party claim.120
Arguments of respondents
Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling violates the
doctrines of exhaustion of administrative remedies and hierarchy ofcourts, resulting in a lack of cause of
action that justifies the dismissal of the petition.121 According to them, "the jurisdiction to review the
rulings of the [Commissioner of Internal Revenue], after the aggrieved party exhausted the administrative
19
remedies, pertains to the Court of Tax Appeals."122 They point out that "a case similar to the present
Petition was [in fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351 [and]
entitled, ‘Rizal Commercial Banking Corporation and RCBC Capital Corporation vs. Commissioner of
Internal Revenue, et al.’"123
Respondents further take issue on the timeliness of the filing of the petition and petitions-in-
intervention.124 They argue that under the guise of mainly assailing the 2011 BIR Ruling, petitioners are
indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited, and the
petition insofar as it seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant to
Rule 65, Section 4.125
Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading
gain but interest income subject to income tax.126 They explain that "[w]ith the payment of the Ph₱35
Billion proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of money equivalent to
about Ph₱24.8 Billion as payment for interest. Such interest is clearly an income of the Petitioners
considering that the same is a flow of wealth and not merely a return of capital – the capital initially
invested in the Bonds being approximately Ph₱10.2 Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute
an impairment of the obligations of contract, respondents aver that: "The BTr has no power to
contractually grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be
considered a material term of the Bonds"[;] 128 "[t]here has been no change in the laws governing the
taxability of interest income from deposit substitutes and said laws are read into every contract"[;] 129 "[t]he
assailed BIR Rulings merely interpret the term "deposit substitute" in accordance with the letter and spirit
of the Tax Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default by the Government
as the latter performed its obligations to the bondholders in full"[;] 131 and "[i]f there was a breach of
contract or a misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the succeeding
purchasers of the PEACe Bonds."132
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably
prejudice petitioners.142 "[W]ith or without the 2011 BIR Ruling, Petitioners would be liable topay a 20%
final withholding tax just the same because the PEACe Bonds in their possession are legally in the nature
of deposit substitutes subject to a 20% final withholding tax under the NIRC." 143 Section 7 of DOF
Department Order No. 141-95 also provides that incomederived from Treasury bonds is subject to the
20% final withholding tax.144 "[W]hile revenue regulations as a general rule have no retroactive effect, if
the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation shall
have retroactive operation as to affect past transactions, because a wrong construction of the law cannot
give rise to a vested right that can be invoked by a taxpayer."145
Finally, respondents submit that "there are a number of variables and factors affecting a capital
market."146 "[C]apital market itself is inherently unstable."147 Thus, "[p]etitioners’ argument that the 20%
final withholding tax . . . will wreak havoc on the financial stability of the country is a mere supposition
that is not a justiciable issue."148
On the prayer for the temporary restraining order, respondents argue that this order "could no longer be
implemented [because] the acts sought to be enjoined are already fait accompli." 149 They add that "to
disburse the funds withheld to the Petitioners at this time would violate Section 29[,] Article VI of the
Constitution prohibiting ‘money being paid out of the Treasury except in pursuance of an appropriation
made by law[.]’"150 "The remedy of petitioners is to claim a tax refund under Section 204(c) of the Tax
Code should their position be upheld by the Honorable Court." 151
Respondents also argue that "the implementation of the TRO would violate Section 218 of the Tax Code
in relation to Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act No. 9282)
which prohibits courts, except the Court of Tax Appeals, from issuing injunctions to restrain the collection
of any national internal revenue tax imposed by the Tax Code."152
Summary of arguments

Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the PEACe
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue
Bonds does not amount to a deprivation of property without due process of law." 133 Their imposition of the
that:
20% final withholding tax is not arbitrary because they were only performing a duty imposed by
law;134 "[t]he 2011 BIR Ruling is aninterpretative rule which merely interprets the meaning of deposit
substitutes [and upheld] the earlier construction given to the termby the 2004 and 2005 BIR 1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal
Rulings."135 Hence, respondents argue that "there was no need to observe the requirements of notice, Revenue Code when it declared that all government debt instruments are deposit substitutes
hearing, and publication[.]"136 regardless of the 20-lender rule; and

Nonetheless, respondents add that "there is every reason to believe that Petitioners — all major financial 2. The 2011 BIR Ruling cannot be applied retroactively because:
institutions equipped with both internal and external accounting and compliance departments as wellas
access to both internal and external legal counsel; actively involved in industry organizations such as the
Bankers Association of the Philippines and the Capital Market Development Council; all actively taking a) It will violate the contract clause;
part in the regular and special debt issuances of the BTr and indeed regularly proposing products for issue
by BTr — had actual notice of the 2004 and 2005 BIR Rulings."137 Allegedly, "the sudden and drastic ● It constitutes a unilateral amendment of a material term (tax exempt status) in the
drop — including virtually zero trading for extended periods of six months to almost a year — in the Bonds, represented by the government as an inducement and important
trading volume of the PEACe Bonds after the release of BIR Ruling No. 007-04 on July 16, 2004 tend to consideration for the purchase of the Bonds;
indicate that market participants, including the Petitioners herein, were aware of the ruling and its
consequences for the PEACe Bonds."138
b) It constitutes deprivation ofproperty without due process because there was no
prior notice to bondholders and hearing and publication;
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of
Internal Revenue’s rule-making power;139 that it and the 2004 and 2005 BIR Rulings did not unduly
expand the definition of deposit substitutes by creating an unwarranted exception to the requirement of c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue
having 20 or more lenders/purchasers;140 and the word "any" in Section 22(Y) of the National Internal Code;
Revenue Code plainly indicates that the period contemplated is the entire term of the bond and not merely
the point of origination or issuance.141
20
 d) It violates the constitutional provision on supporting activities of non-
government organizations and development of the capital market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the
challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner
of Internal Revenue’s power to interpret the provisions of the 1997 National Internal Revenue
Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and confirms the interpretations
contained in previously issued BIR Ruling Nos. 007-2004, DA-491-04,and 008-05, which have
already effectively abandoned or revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings
especially when the latter’s rulings are not in harmony with the law; and
d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give
rise to a vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the
ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax they allege
to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of courts.
Court’s ruling
Procedural Issues
Non-exhaustion of
administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the
Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for, [then] special
civil actions are generally not entertained."153 The remedy within the administrative machinery must be
resorted to first and pursued to its appropriate conclusion before the court’s judicial power can be
sought.154
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon
by the peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence, it is
disregarded (1) when there is a violation of due process, (2) when the issue involved is purely a legal
question,155 (3) when the administrative action is patently illegal amounting to lack or excess of
jurisdiction,(4) when there is estoppel on the part of the administrative agency concerned,(5) when there is
irreparable injury, (6) when the respondent is a department secretary whose acts as an alter ego of the
President bears the implied and assumed approval of the latter, (7) when to require exhaustion of
administrative remedies would be unreasonable, (8) when it would amount to a nullification of a claim, (9)
when the subject matter is a private land in land case proceedings, (10) when the rule does not provide a
plain, speedy and adequate remedy, (11) when there are circumstances indicating the urgency of judicial
intervention.156 (Emphasis supplied, citations omitted)
The exceptions under (2) and (11)are present in this case. The question involved is purely legal, namely:
(a) the interpretation of the 20-lender rule in the definition of the terms public and deposit substitutes
under the 1997 National Internal Revenue Code; and (b) whether the imposition of the 20% final
withholding tax on the PEACe Bonds upon maturity violates the constitutional provisions on non-
impairment of contracts and due process. Judicial intervention is likewise urgent with the impending
maturity of the PEACe Bonds on October 18, 2011.
The rule on exhaustion of administrative remedies also finds no application when the exhaustion will
result in an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile
exercise because it was upon the request of the Secretary of Finance that the 2011 BIR Ruling was issued
by the Bureau of Internal Revenue. It appears that the Secretary of Finance adopted the Commissioner of
Internal Revenue’s opinions as his own.158 This position was in fact confirmed in the letter 159 dated
October 10, 2011 where he ordered the Bureau of Treasury to withhold the amount corresponding to the
20% final withholding tax on the interest or discounts allegedly due from the bondholders on the strength
of the 2011 BIR Ruling. Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal
Revenue pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-
2011 were issued in connection with the implementation of the 1997 National Internal Revenue Code on
the taxability of the interest income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act
No. 9282,160 such rulings of the Commissioner of Internal Revenue are appealable to that court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under
the National Internal Revenue or other laws administered by the Bureau of Internal Revenue;
....
21
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a
decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central
Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty
(30) days after the receipt of such decision or rulingor after the expiration of the period fixed by law for
action as referred toin Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising
under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code
shall be maintained, except as herein provided, until and unless an appeal has been previously filed with
the CTA and disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized the
jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be
stressed that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the
Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner
implementing the Tax Code on the taxability of pawnshops.. . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code,
which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The Secretary of
Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations
for the effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a
rate of sales tax under certain category enumerated in Section 163 and 165 of this Code shall be without
prejudice to the power of the Commissioner of Internal Revenue to make rulings or opinions in connection
with the implementation of the provisionsof internal revenue laws, including ruling on the classification of
articles of sales and similar purposes." (Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but
merely an attempt to nullify General Circular No. V-148, which does not adjudicate or settle any
controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the
collection of taxes and license fees to adhere strictly to the interpretation given by the defendant tothe
statutory provisions abovementioned, as set forth in the Circular. The same incorporates, therefore, a
decision of the Collector of Internal Revenue (now Commissioner of Internal Revenue) on the manner of
enforcement of the said statute, the administration of which is entrusted by law to the Bureau of Internal
Revenue. As such, it comes within the purview of Republic Act No. 1125, Section 7 of which provides
that the Court of Tax Appeals ‘shall exercise exclusive appellate jurisdiction to review by appeal . . .
decisions of the Collector of Internal Revenue in . . . matters arising under the National Internal Revenue
Code or other law or part of the law administered by the Bureau of Internal Revenue.’"163
In exceptional cases, however, this court entertained direct recourse to it when "dictated by public welfare
and the advancement of public policy, or demanded by the broader interest of justice, or the orders
complained of were found to be patent nullities, or the appeal was considered as clearly an inappropriate
remedy."164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of
Interior and Local Government,165 this court noted that the petition for prohibition was filed directly before
it "in disregard of the rule on hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction
over the . . . petition and decide the same on its merits in viewof the significant constitutional issues raised
by the parties dealing with the tax treatment of cooperatives under existing laws and in the interest of
speedy justice and prompt disposition of the matter."166
Here, the nature and importance of the issues raised167 to the investment and banking industry with regard
to a definitive declaration of whether government debt instruments are deposit substitutes under existing
laws, and the novelty thereof, constitute exceptional and compelling circumstances to justify resort to this
court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial
instrument or product that may be issued and traded in the market. Due to the changing positions of the
Bureau of Internal Revenue on this issue, there isa need for a final ruling from this court to stabilize the
expectations in the financial market.
Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts
had been rendered moot by this court’s issuance of the temporary restraining order enjoining the
implementation of the 2011 BIR Ruling. The temporary restraining order effectively recognized the
urgency and necessity of direct resort to this court.
Substantive issues
Tax treatment of deposit
substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a final
withholdingtax at the rate of 20% is imposed on interest on any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements. These
provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
22
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest fromany currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; . . . Provided,
further, That interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be
exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the
certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed
on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in
the 1977 National Internal Revenue Code through Presidential Decree No. 1739 168 issued in 1980. Later,
Presidential Decree No. 1959, effective on October 15, 1984, formally added the definition of deposit
substitutes, viz:
(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public, other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own
account, for the purpose of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer.These promissory notes, repurchase agreements,
certificates of assignment or participation and similar instrument with recourse as may be authorized by
the Central Bank of the Philippines, for banks and non-bank financial intermediaries or by the Securities
and Exchange Commission of the Philippines for commercial, industrial, finance companies and either
non-financial companies: Provided, however, that only debt instruments issued for inter-bank call loans to
cover deficiency in reserves against deposit liabilities including those between or among banks and quasi-
banks shall not be considered as deposit substitute debt instruments. (Emphasis supplied)

Less than three (3) years - 20%. (Emphasis supplied)

Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the
same definition and specifically identified the following borrowings as "deposit substitutes":
SEC. 27. Rates of Income Tax on Domestic Corporations. -
SECTION 2. Definitions of Terms. . . .
....
(h) "Deposit substitutes" shall mean –
(D) Rates of Tax on Certain Passive Incomes. -
....
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is
(a) All interbank borrowings by or among banks and non-bank financial institutions authorized
hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary
to engage in quasi-banking functions evidenced by deposit substitutes instruments, except
benefit from deposit substitutes and from trust funds and similar arrangements received by domestic
interbank call loans to cover deficiency in reserves against deposit liabilities as evidenced by
corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest
interbank loan advice or repayment transfer tickets.
income derived by a domestic corporation from a depository bank under the expanded foreign currency
deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income. (Emphasis supplied) (b) All borrowings of the national and local government and its instrumentalities including the
Central Bank of the Philippines, evidenced by debt instruments denoted as treasury bonds,
bills, notes, certificates of indebtedness and similar instruments.
SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -
....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds
and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties
derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty
percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign
corporation from a depository bank under the expanded foreign currency deposit system shall be subject to
a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis
supplied)
(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment
companies, trust companies, including the trust department of banks and investment houses,
evidenced by deposit substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with
the addition of the qualifying phrase for public – borrowing from 20 or more individual or corporate
lenders at any one time. Under Section 22(Y), deposit substitute is defined thus: SEC. 22. Definitions-
When used in this Title:
....
(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public(the
term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time)
other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the
borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations,
or financing their own needs or the needs of their agent or dealer. These instruments may include, but need
not be limited to, bankers’ acceptances, promissory notes, repurchase agreements, including reverse

23
repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation and similar instruments with recourse:
Provided, however, That debt instruments issued for interbank call loans with maturity of not more than
five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among
banks and quasi-banks, shall not be considered as deposit substitute debt instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to mean "twenty
(20) or more individual or corporate lenders at any one time." Hence, the number of lenders is
determinative of whether a debt instrument should be considered a deposit substitute and consequently
subject to the 20% final withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued the
Government Bonds."169 On the other hand, respondents theorize that the word "any" "indicates that the
period contemplated is the entire term of the bond and not merely the point of origination or
issuance[,]"170 such that if the debt instruments "were subsequently sold in secondary markets and so on,
insuch a way that twenty (20) or more buyers eventually own the instruments, then it becomes indubitable
that funds would be obtained from the "public" as defined in Section 22(Y) of the NIRC." 171 Indeed, in the
context of the financial market, the words "at any one time" create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the surplus units (households and
business firms that have savings or excess funds) flow to the deficit units (mainly business firms and
government that need funds to finance their operations or growth). They bring suppliers and users of funds
together and provide the means by which the lenders transform their funds into financial assets, and the
borrowers receive these funds now considered as their financial liabilities. The transfer of funds is
represented by a security, such as stocks and bonds. Fund suppliers earn a return on their investment; the
return is necessary to ensure that funds are supplied to the financial markets.172
same time"[;]182 and (b) "both lender and borrower must frequently incur substantial information costs
simply to find each other."183
In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby
reducing information costs.184 A Broker185 is "an individual or financial institution who provides
information concerning possible purchases and sales of securities. Either a buyer or a seller of securities
may contact a broker, whose job is simply to bring buyers and sellers together." 186 A dealer187 "also serves
as a middleman between buyers and sellers, but the dealer actually acquires the seller’s securities in the
hope of selling them at a later time at a more favorable price."188 Frequently, "a dealer will split up a large
issue of primary securities into smaller units affordable by . . . buyers . . . and thereby expand the flow of
savings into investment."189 In semi direct financing, "[t]he ultimate lender still winds up holding the
borrower’s securities, and therefore the lender must be willing to accept the risk, liquidity, and maturity
characteristics of the borrower’s [debt security]. There still must be a fundamental coincidence of wants
and needs between [lenders and borrowers] for semidirect financial transactions to take place."190
"The limitations of both direct and semidirect finance stimulated the development of indirect financial
transactions, carried out with the help of financial intermediaries" 191 or financial institutions, like banks,
investment banks, finance companies, insurance companies, and mutual funds.192 Financial intermediaries
accept funds from surplus units and channel the funds to deficit units. 193 "Depository institutions [such as
banks] accept deposits from surplus units and provide credit to deficit units through loans and purchase of
[debt] securities."194 Nondepository institutions, like mutual funds, issue securities of their own (usually in
smaller and affordable denominations) to surplus units and at the same time purchase debt securities of
deficit units.195 "By pooling the resources of[small savers, a financial intermediary] can service the credit
needs of large firms simultaneously."196
The financial market, therefore, is an agglomeration of financial transactions in securities performed by
market participants that works to transfer the funds from the surplus units (or investors/lenders) to those
who need them (deficit units or borrowers).
Meaning of "at any one time"

Thus, from the point of view of the financial market, the phrase "at any one time" for purposes of
"The financial markets that facilitate the transfer of debt securities are commonly classified by the
determining the "20 or more lenders" would mean every transaction executed in the primary or secondary
maturity of the securities[,]"173 namely: (1) the money market, which facilitates the flow of short-term
market in connection with the purchase or sale of securities.
funds (with maturities of one year or less); and (2) the capital market, which facilitates the flow of long-
term funds (with maturities of more than one year). 174
For example, where the financial assets involved are government securities like bonds, the reckoning of
"20 or more lenders/investors" is made at any transaction in connection with the purchase or sale of the
Whether referring to money marketsecurities or capital market securities, transactions occur either in the
Government Bonds, such as:
primary market or in the secondary market.175 "Primary markets facilitate the issuance of new securities.
Secondary markets facilitate the trading of existing securities, which allows for a change in the ownership
of the securities."176 The transactions in primary markets exist between issuers and investors, while 1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
secondary market transactions exist among investors. 177
2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;
"Over time, the system of financial markets has evolved from simple to more complex ways of carrying
out financial transactions."178 Still, all systems perform one basic function: the quick mobilization of
3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary
money from the lenders/investors to the borrowers.179
market usually through a broker or dealer; or

Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect
4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to
finance.180
individual or corporate lenders in the secondary market.

With direct financing, the "borrower and lender meet each other and exchange funds in returnfor financial
When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or
assets"181(e.g., purchasing bonds directly from the company issuing them). This method provides certain
morelenders/investors, there is deemed to be a public borrowing and the bonds at that point intime are
limitations such as: (a) "both borrower and lender must desire to exchange the same amount of funds at the
24
deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding tax
on the imputed interest income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the
1997 National Internal Revenue Code are subject to the regular income tax.
The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross Income,
Section 32(A) of the 1997 National Internal Revenue Code discloses a legislative policy to include all
income not expressly exempted as within the class of taxable income under our laws.
"The definition of gross income isbroad enough to include all passive incomes subject to specific tax rates
or final taxes."197 Hence, interest income from deposit substitutes are necessarily part of taxable income.
"However, since these passive incomes are already subject to different rates and taxed finally at source,
they are no longer included in the computation of gross income, which determines taxable
income."198 "Stated otherwise . . . if there were no withholding tax system in place in this country, this 20
percent portion of the ‘passive’ income of [creditors/lenders] would actually be paid to the
[creditors/lenders] and then remitted by them to the government in payment of their income tax." 199
This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo,200 explained the
rationale behind the withholding tax system:
The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax liability; second, to ensure the collection of income
tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns[;]
and third, to improve the government’s cash flow. This results in administrative savings, prompt and
efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect
taxes through more complicated means and remedies.201 (Citations omitted)
"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."202
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller
isrequired to withhold the 20% final income tax on the imputed interest income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the "gains" contemplated under Section
32(B)(7)(g)203 of the 1997 National Internal Revenue Code, which exempts gains derived from trading,
redemption, or retirement of long-term securities from ordinary income tax.
The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for
the use of money. Gains from sale or exchange or retirement of bonds orother certificate of indebtedness
fall within the general category of "gainsderived from dealings in property" under Section 32(A)(3), while
interest from bonds or other certificate of indebtedness falls within the category of "interests" under
Section 32(A)(4).204 The use of the term "gains from sale" in Section 32(B)(7)(g) shows the intent of
Congress not toinclude interest as referred under Sections 24, 25, 27, and 28 in the exemption. 205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the
bonds before their maturity date, which is the difference between the selling price of the bonds in the
secondary market and the price at which the bonds were purchased by the seller; and (2) gain realized by
the last holder of the bonds when the bonds are redeemed at maturity, which is the difference between the
proceeds from the retirement of the bonds and the price atwhich such last holder acquired the bonds. For
discounted instruments,like the zero-coupon bonds, the trading gain shall be the excess of the selling price
over the book value or accreted value (original issue price plus accumulated discount from the time of
purchase up to the time of sale) of the instruments.206
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is not
consistent with law.207 Its interpretation of "at any one time" to mean at the point of origination alone is
unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR
Rulings) that "all treasury bonds . . . regardlessof the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes." 208 Being the subject of this petition, it is, thus,
declared void because it completely disregarded the 20 or more lender rule added by Congress in the 1997
National Internal Revenue Code. It also created a distinction for government debt instruments as against
those issued by private corporations when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent provisions
must be read together, endeavoring to make every part effective, harmonious, and sensible. 209 That
construction which will leave every word operative will be favored over one that leaves some word,
clause, or sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing
the 1997 National Internal Revenue Code is an authoritative construction ofgreat weight, but the principle
is not absolute and may be overcome by strong reasons to the contrary. If through a misapprehension of
law an officer has issued an erroneous interpretation, the error must be corrected when the true
construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the
nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting Commissioner of
Internal Revenue because it was contrary to the express provision of Section 230 of the 1977 National
Internal Revenue Codeand, hence, "[cannot] be given weight for to do so would, in effect, amend the
statute."212 Thus:
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period
of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret
the law; rather it legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense
of more specific and less general interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by
the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless,
such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts
will not countenance administrative issuances that override, instead of remaining consistent and in
harmony with, the law they seek to apply and implement.213(Citations omitted)
25
This court further held that "[a] memorandum-circular of a bureau head could not operate to vest a Bonds — all at the time of origination or issuance. At this point, however, we do not know as to how
taxpayer with a shield against judicial action [because] there are no vested rights to speak of respecting a many investors the PEACe Bonds were sold to by RCBC Capital.
wrong construction of the law by the administrative officials and such wrong interpretation could not
place the Government in estoppel to correct or overrule the same." 214 In Commissioner of Internal
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed
Revenue v. Michel J. Lhuillier Pawnshop, Inc.,215 this court nullified Revenue Memorandum Order
deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and
(RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending investor's tax on pawnshops.216 It
RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the interest
was held that "the [Commissioner] cannot, in the exercise of [its interpretative] power, issue
or discount from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on the
administrative rulings or circulars not consistent with the law sought to be applied. Indeed, administrative
corresponding interest from the PEACe Bonds would likewise be required of any lender/investor had the
issuances must not override, supplant or modify the law, but must remain consistent with the law they
latter turnedaround and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more
intend to carry out. Only Congress can repeal or amend the law." 217
lenders or investors.

In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, 218 this court
We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income
stated that the Commissioner of Internal Revenue is not bound by the ruling of his predecessors, 219 but, to
received by individuals from longterm deposits or investments with a holding period of not less than five
the contrary, the overruling of decisions is inherent in the interpretation of laws:
(5) years is exempt from the final tax.

[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the
Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper
delegated authority of the administrative agency; (ii) whether itis reasonable; and (iii) whether it was
procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders
issued pursuant to proper procedure. But the court is not free to substitute its judgment as to the
and for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from RCBC
desirability or wisdom of the rule for the legislative body, by its delegation of administrative judgment,
Capital/CODE-NGO, orany lender or investor if such be the case, as the withholding agents.
has committed those questions to administrative judgments and not to judicial judgments. In the case of an
interpretative rule, the inquiry is not into the validity but into the correctness or propriety of the rule. As a
matter of power a court, when confronted with an interpretative rule, is free to (i) give the force of law to The collection of tax is not
the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give some intermediate degree barred by prescription
of authoritative weight to the interpretative rule.
The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to
In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering assess and collect internal revenue taxes is extended to 10 years in cases of (1) fraudulent returns; (2) false
copra as an "agricultural food product" within the meaning of § 103(b) of the NIRC. As the Solicitor returns with intent to evade tax; and (3) failureto file a return, to be computed from the time of discovery
General contends, "copra per se is not food, that is, it is not intended for human consumption. Simply of the falsity, fraud, or omission. Section 203 states:
stated, nobody eats copra for food." That previous Commissioners considered it so, is not reason for
holding that the present interpretation is wrong. The Commissioner of Internal Revenue is not bound by
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222,
the ruling of his predecessors. To the contrary, the overruling of decisions is inherent in the interpretation
internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the
of laws.220 (Emphasis supplied, citations omitted)
filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return is filed beyond the
Tax treatment of income period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For
derived from the PEACe Bonds purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day. (Emphasis supplied)
The transactions executed for the sale of the PEACe Bonds are:
....
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at
10.2 billion; and SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.

2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the
PEACe Bonds to undisclosed investors at ₱11.996 billion.
It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the PEACe
Bonds were issued at the time of origination. However, a reading of the underwriting agreement 221 and
RCBC term sheet222reveals that the settlement dates for the sale and distribution by RCBC Capital (as
underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of
approximately ₱11.996 would fall on the same day, October 18, 2001, when the PEACe Bonds were
supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire ₱10.2 billion borrowing received
by the Bureau of Treasury in exchange for the ₱35 billion worth of PEACe Bonds was sourced directly
from the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax
may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment,
at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more
lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax from RCBC
Capital/CODE-NGO within 10 years after the discovery of the omission.

26
In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and
petitioners-intervenors.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon the parties affected." 224 Moreover,
service may be made personally or by mail.225 And, "[p]ersonal service is complete upon actual delivery
[of the order.]"226This court’s temporary restraining order was received only on October 19, 2011, or a day
after the PEACe Bonds had matured and the 20% final withholding tax on the interest income from the
same was withheld.
Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized
mode of service of pleadings, court orders, or processes. Moreover, the news reports227 cited by petitioners
were posted minutes before the close of office hours or late in the evening of October 18, 2011, and they
did not givethe exact contents of the temporary restraining order.
"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that
suchinjunction or order was served on him personally or that he had notice of the issuance or making of
such injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by withholding
the tax due"229 and return the amount of the tax withheld should it be finally determined that the income
paid is not subject to withholding.230 Hence, respondent Bureau of Treasury was justified in withholding
the amount corresponding to the 20% final withholding tax from the proceeds of the PEACe Bonds, as it
received this court’s temporary restraining order only on October 19, 2011, or the day after this tax had
been withheld.
Respondents’ retention of the
amounts withheld is a defiance
of the temporary restraining
order
Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to the 20%
final withholding tax in order that it may be placed in escrow as directed by this court constitutes a
defiance of this court’s temporary restraining order. 231
The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli. For an
act to be considered fait accompli, the act must have already been fully accomplished and
consummated.232 It must be irreversible, e.g., demolition of properties,233 service of the penalty of
imprisonment,234 and hearings on cases.235 When the act sought to be enjoined has not yet been fully
satisfied, and/or is still continuing in nature,236 the defense of fait accomplicannot prosper.
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes
both the withholding and remittance of the 20% final withholding tax to the Bureau of Internal Revenue.
Even though the Bureau of Treasury had already withheld the 20% final withholding tax237 when it
received the temporary restraining order, it had yet to remit the monies it withheld to the Bureau of
Internal Revenue, a remittance which was due only on November 10, 2011. 238 The act enjoined by the
temporary restraining order had not yet been fully satisfied and was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national
government agencies such as the Bureau of Treasury the procedure for the remittance of all taxes it
withheld to the Bureau of Internal Revenue, a national agency shall file before the Bureau of Internal
Revenue a Tax Remittance Advice (TRA) supported by withholding tax returns on or before the 10th day
of the following month after the said taxes had been withheld. 240 The Bureau of Internal Revenue shall
transmit an original copy of the TRA to the Bureau of Treasury,241which shall be the basis for recording
the remittance of the tax collection.242 The Bureau of Internal Revenue will then record the amount of
taxes reflected in the TRA as tax collection in the Journal ofTax Remittance by government agencies
based on its copies of the TRA.243 Respondents did not submit any withholding tax return or TRA to
provethat the 20% final withholding tax was indeed remitted by the Bureau of Treasury to the Bureau of
Internal Revenue on October 18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244 dated October 18, 2011
submitted to this court shows:
The foregoing journal entry, however, does not prove that the amount of ₱4,966,207,796.41, representing
the 20% final withholding tax on the PEACe Bonds, was disbursed by it and remitted to the Bureau of
Internal Revenue on October 18, 2011. The entries merely show that the monies corresponding to 20%
final withholding tax was set aside for remittance to the Bureau of Internal Revenue.
We recall the November 15, 2011 resolution issued by this court directing respondents to "show cause
why they failed to comply with the [TRO]; and [to] comply with the [TRO] in order that petitioners may
place the corresponding funds in escrow pending resolution of the petition."245 The 20% final withholding
tax was effectively placed in custodia legiswhen this court ordered the deposit of the amount in escrow.
The Bureau of Treasury could still release the money withheld to petitioners for the latter to place in
escrow pursuant to this court’s directive. There was no legal obstacle to the release of the 20% final
withholding tax to petitioners. Congressional appropriation is not required for the servicing of public debts
in view of the automatic appropriations clause embodied in Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums,
government service insurance, and other similar fixed expenditures, (b) principal and interest on public
debt, (c) national government guarantees of obligations which are drawn upon, are automatically
appropriated: provided, that no obligations shall be incurred or payments made from funds thus
automatically appropriated except as issued in the form of regular budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise
appropriated, such amounts as may be necessary to effect payments on foreign or domestic loans, or
foreign or domestic loans whereon creditors make a call on the direct and indirect guarantee of the
Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to government-owned or
controlled corporations and/or government financial institutions;
b. government-owned or controlled corporations and/or government financial institutions the
proceeds of which were relent to public or private institutions;
c. government-owned or controlled corporations and/or financial institutions and guaranteed by
the Republic of the Philippines;
27
 d. other public or private institutions and guaranteed by government owned or controlled
corporations and/or government financial institutions.
The amount of ₱35 billion that includes the monies corresponding to 20% final withholding tax is a
lawfuland valid obligation of the Republic under the Government Bonds. Since said obligation represents
a public debt, the release of the monies requires no legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of
Government Bonds may be lawfully taken from the continuing appropriation out of any monies in the
National Treasury and is not required to be the subject of another appropriation legislation: SEC. 2. The
Secretary of Finance shall cause to be paid out of any moneys in the National Treasury not otherwise
appropriated, or from any sinking funds provided for the purpose by law, any interest falling due, or
accruing, on any portion of the public debt authorized by law. He shall also cause to be paid out of any
such money, or from any such sinking funds the principal amount of any obligations which have matured,
or which have been called for redemption or for which redemption has been demanded in accordance with
terms prescribed by him prior to date of issue. . . In the case of interest-bearing obligations, he shall pay
not less than their face value; in the case of obligations issued at a discount he shall pay the face value at
maturity; or if redeemed prior to maturity, such portion of the face value as is prescribed by the terms and
conditions under which such obligations were originally issued. There are hereby appropriated as a
continuing appropriation out of any moneys in the National Treasury not otherwise appropriated, such
sums as may be necessary from time to time to carry out the provisions of this section. The Secretary of
Finance shall transmit to Congress during the first month of each regular session a detailed statement of all
expenditures made under this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds
shall be made through the National Treasury’s account with the Bangko Sentral ng Pilipinas, to wit:
Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains a Demand Deposit
Account with the Bangko Sentral ng Pilipinas to which all proceeds from the sale of Treasury Bills and
Bonds under R.A. No. 245, as amended, shall be credited and all payments for redemption of Treasury
Bills and Bonds shall be charged.1âwphi1
Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing,
this court has held:
Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of
its own judgment and wisdom formulates an appropriation act precisely following the process established
by the Constitution, which specifies that no money may be paid from the Treasury except in accordance
with an appropriation made by law.
Debt service is not included inthe General Appropriation Act, since authorization therefor already exists
under RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the light of this subsisting
authorization as embodied in said Republic Acts and PD for debt service, Congress does not concern itself
with details for implementation by the Executive, butlargely with annual levels and approval thereof upon
due deliberations as part of the whole obligation program for the year. Upon such approval, Congress has
spoken and cannot be said to havedelegated its wisdom to the Executive, on whose part lies the
implementation or execution of the legislative wisdom. 246 (Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court,
which remained in full force and effect, until set aside, vacated, or modified. Its conduct finds no
justification and is reprehensible.247
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos.
370-2011 and DA 378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount
corresponding to the 20% final withholding tax despite this court's directive in the temporary restraining
order and in the resolution dated November 15, 2011 to deliver the amounts to the banks to be placed in
escrow pending resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and pay to the bondholders
the amount corresponding-to the 20% final withholding tax that it withheld on October 18, 2011.
7. G.R. No. 163653 July 19, 2011 COMMISSIONER OF INTERNAL REVENUE vs. FILINVEST
DEVELOPMENT CORPORATION
The Facts
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent
Filinvest Development Corporation (FDC) is a holding company which also owned 67.42% of the
outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed
of Exchange with FLI whereby the former both transferred in favor of the latter parcels of land appraised
at ₱4,306,777,000.00. In exchange for said parcels which were intended to facilitate development of
medium-rise residential and commercial buildings, 463,094,301 shares of stock of FLI were issued to
FDC and FAI.3 As a result of the exchange, FLI’s ownership structure was changed to the extent reflected
in the following tabular précis, viz.:
On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect that
no gain or loss should be recognized in the aforesaid transfer of real properties. Acting on the request, the
BIR issued Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is among those
contemplated under Section 34 (c) (2) of the old National Internal Revenue Code (NIRC) 4 which provides
that "(n)o gain or loss shall be recognized if property is transferred to a corporation by a person in
exchange for a stock in such corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four (4) persons, gains control of said corporation."5 With the BIR’s
reiteration of the foregoing ruling upon the 10 February 1997 request for clarification filed by FLI, 6 the
latter, together with FDC and FAI, complied with all the requirements imposed in the ruling. 7
On various dates during the years 1996 and 1997, in the meantime, FDC also extended advances in favor
of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest Capital, Inc.
(FCI).8 Duly evidenced by instructional letters as well as cash and journal vouchers, said cash advances
amounted to ₱2,557,213,942.60 in 19969 and ₱3,360,889,677.48 in 1997.10 On 15 November 1996, FDC
also entered into a Shareholders’ Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a
Singapore-based joint venture company called Filinvest Asia Corporation (FAC), tasked to develop and
manage FDC’s 50% ownership of its PBCom Office Tower Project (the Project). With their equity
participation in FAC respectively pegged at 60% and 40% in the Shareholders’ Agreement, FDC
subscribed to ₱500.7 million worth of shares in said joint venture company to RHPL’s subscription worth
₱433.8 million. Having paid its subscription by executing a Deed of Assignment transferring to FAC a
portion of its rights and interest in the Project worth ₱500.7 million, FDC eventually reported a net loss of
₱190,695,061.00 in its Annual Income Tax Return for the taxable year 1996. 11
On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and
documentary stamp taxes, plus interests and compromise penalties, 12 covered by the following Assessment
Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in the sum
of ₱150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-00020-2000 for deficiency
documentary stamp taxes in the sum of ₱10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-
28
00019-2000 for deficiency income taxes in the sum of ₱5,716,927.03 for 1997; and (d) Assessment Notice cancelled the rest of deficiency income and documentary stamp taxes assessed against FDC and FAI for
No. SP-DST-97-00021-2000 for deficiency documentary stamp taxes in the sum of ₱5,796,699.40 for the years 1996 and 1997,25 thus:
1997.13 The foregoing deficiency taxes were assessed on the taxable gain supposedly realized by FDC
from the Deed of Exchange it executed with FAI and FLI, on the dilution resulting from the Shareholders’
WHEREFORE, in view of all the foregoing, the court finds the instant petition partly meritorious.
Agreement FDC executed with RHPL as well as the "arm’s-length" interest rate and documentary stamp
Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency income tax on FDC for
taxes imposable on the advances FDC extended to its affiliates.14
taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and SP-DST-97-00021-2000
imposing deficiency documentary stamp tax on FDC for taxable years 1996 and 1997, respectively and
On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for deficiency Assessment Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on FAI for the taxable
income taxes in the sum of ₱1,477,494,638.23 for the year 1997.15 Covered by Assessment Notice No. SP- year 1997 are hereby CANCELLED and SET ASIDE. However, [FDC] is hereby ORDERED to PAY the
INC-97-0027-2000,16 said deficiency tax was also assessed on the taxable gain purportedly realized by FAI amount of ₱5,691,972.03 as deficiency income tax for taxable year 1997. In addition, petitioner is also
from the Deed of Exchange it executed with FDC and FLI.17 On 26 January 2000 or within the ORDERED to PAY 20% delinquency interest computed from February 16, 2000 until full payment
reglementary period of thirty (30) days from notice of the assessment, both FDC and FAI filed their thereof pursuant to Section 249 (c) (3) of the Tax Code.26
respective requests for reconsideration/protest, on the ground that the deficiency income and documentary
stamp taxes assessed by the BIR were bereft of factual and legal basis. 18Having submitted the relevant
Finding that the collective increase of the equity participation of FDC and FAI in FLI rendered the gain
supporting documents pursuant to the 31 January 2000 directive from the BIR Appellate Division, FDC
derived from the exchange tax-free, the CTA also ruled that the increase in the value of FDC's shares in
and FAI filed on 11 September 2000 a letter requesting an early resolution of their request for
FAC did not result in economic advantage in the absence of actual sale or conversion thereof. While
reconsideration/protest on the ground that the 180 days prescribed for the resolution thereof under Section
likewise finding that the documents evidencing the cash advances FDC extended to its affiliates cannot be
228 of the NIRC was going to expire on 20 September 2000.19
considered as loan agreements that are subject to documentary stamp tax, the CTA enunciated, however,
that the CIR was justified in assessing undeclared interests on the same cash advances pursuant to his
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their request for authority under Section 43 of the NIRC in order to forestall tax evasion. For persuasive effect, the CTA
reconsideration/protest within the aforesaid period, FDC and FAI filed on 17 October 2000 a petition for referred to the equivalent provision in the Internal Revenue Code of the United States (IRC-US), i.e., Sec.
review with the Court of Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed before 482, as implemented by Section 1.482-2 of 1965-1969 Regulations of the Law of Federal Income
said court as CTA Case No. 6182, the petition alleged, among other matters, that as previously opined in Taxation.27
BIR Ruling No. S-34-046-97, no taxable gain should have been assessed from the subject Deed of
Exchange since FDC and FAI collectively gained further control of FLI as a consequence of the exchange;
Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for review docketed
that correlative to the CIR's lack of authority to impute theoretical interests on the cash advances FDC
before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997 Rules of Civil Procedure. Calling
extended in favor of its affiliates, the rule is settled that interests cannot be demanded in the absence of a
attention to the fact that the cash advances it extended to its affiliates were interest-free in the absence of
stipulation to the effect; that not being promissory notes or certificates of obligations, the instructional
the express stipulation on interest required under Article 1956 of the Civil Code, FDC questioned the
letters as well as the cash and journal vouchers evidencing said cash advances were not subject to
imposition of an arm's-length interest rate thereon on the ground, among others, that the CIR's authority
documentary stamp taxes; and, that no income tax may be imposed on the prospective gain from the
under Section 43 of the NIRC: (a) does not include the power to impute imaginary interest on said
supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC both prayed that
transactions; (b) is directed only against controlled taxpayers and not against mother or holding
the subject assessments for deficiency income and documentary stamp taxes for the years 1996 and 1997
corporations; and, (c) can only be invoked in cases of understatement of taxable net income or evident tax
be cancelled and annulled.20
evasion.28 Upholding FDC's position, the CA's then Special Fifth Division rendered the herein assailed
decision dated 16 December 2003,29 the decretal portion of which states:
On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in question should
not be considered tax free since, with the resultant diminution of its shares in FLI, FDC did not gain
WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed Decision
further control of said corporation. Likewise calling attention to the fact that the cash advances FDC
dated September 10, 2002 rendered by the Court of Tax Appeals in CTA Case No. 6182 directing
extended to its affiliates were interest free despite the interest bearing loans it obtained from banking
petitioner Filinvest Development Corporation to pay the amount of ₱5,691,972.03 representing deficiency
institutions, the CIR invoked Section 43 of the old NIRC which, as implemented by Revenue Regulations
income tax on allegedly undeclared interest income for the taxable year 1997, plus 20% delinquency
No. 2, Section 179 (b) and (c), gave him "the power to allocate, distribute or apportion income or
interest computed from February 16, 2000 until full payment thereof is REVERSED and SET ASIDE and,
deductions between or among such organizations, trades or business in order to prevent evasion of taxes."
a new one entered annulling Assessment Notice No. SP-INC-97-00019-2000 imposing deficiency income
The CIR justified the imposition of documentary stamp taxes on the instructional letters as well as cash
tax on petitioner for taxable year 1997. No pronouncement as to costs. 30
and journal vouchers for said cash advances on the strength of Section 180 of the NIRC and Revenue
Regulations No. 9-94 which provide that loan transactions are subject to said tax irrespective of whether
or not they are evidenced by a formal agreement or by mere office memo. The CIR also argued that FDC With the denial of its partial motion for reconsideration of the same 11 December 2002 resolution issued
realized taxable gain arising from the dilution of its shares in FAC as a result of its Shareholders' by the CTA,31 the CIR also filed the petition for review docketed before the CA as CA-G.R. No. 74510. In
Agreement with RHPL.21 essence, the CIR argued that the CTA reversibly erred in cancelling the assessment notices: (a) for
deficiency income taxes on the exchange of property between FDC, FAI and FLI; (b) for deficiency
documentary stamp taxes on the documents evidencing FDC's cash advances to its affiliates; and (c) for
At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and Issues22 which was
deficiency income tax on the gain FDC purportedly realized from the increase of the value of its
admitted in the 16 February 2001 resolution issued by the CTA. With the further admission of the Formal
shareholdings in FAC.32 The foregoing petition was, however, denied due course and dismissed for lack of
Offer of Documentary Evidence subsequently filed by FDC and FAI23 and the conclusion of the testimony
merit in the herein assailed decision dated 26 January 200533 rendered by the CA's then Fourteenth
of Susana Macabelda anent the cash advances FDC extended in favor of its affiliates, 24 the CTA went on
Division, upon the following findings and conclusions, to wit:
to render the Decision dated 10 September 2002 which, with the exception of the deficiency income tax on
the interest income FDC supposedly realized from the advances it extended in favor of its affiliates,

29
 1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29 November 1996
Deed of Exchange resulted in the combined control by FDC and FAI of more than 51% of the
outstanding shares of FLI, hence, no taxable gain can be recognized from the transaction under
Section 34 (c) (2) of the old NIRC;
2. The instructional letters as well as the cash and journal vouchers evidencing the advances
FDC extended to its affiliates are not subject to documentary stamp taxes pursuant to BIR
Ruling No. 116-98, dated 30 July 1998, since they do not partake the nature of loan
agreements;
3. Although BIR Ruling No. 116-98 had been subsequently modified by BIR Ruling No. 108-
99, dated 15 July 1999, to the effect that documentary stamp taxes are imposable on inter-
office memos evidencing cash advances similar to those extended by FDC, said latter ruling
cannot be given retroactive application if to do so would be prejudicial to the taxpayer;
4. FDC's alleged gain from the increase of its shareholdings in FAC as a consequence of the
Shareholders' Agreement it executed with RHPL cannot be considered taxable income since,
until actually converted thru sale or disposition of said shares, they merely represent unrealized
increase in capital.34
Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's petitions for review
on certiorari assailing the 16 December 2003 decision in CA-G.R. No. 72992 and the 26 January 2005
decision in CA-G.R. SP No. 74510 were consolidated pursuant to the 1 March 2006 resolution issued by
this Court’s Third Division.
The Issues
In G.R. No. 163653, the CIR urges the grant of its petition on the following ground:
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE COURT OF TAX
APPEALS AND IN HOLDING THAT THE ADVANCES EXTENDED BY RESPONDENT TO ITS
AFFILIATES ARE NOT SUBJECT TO INCOME TAX.35
In G.R. No. 167689, on the other hand, petitioner proffers the following issues for resolution:
I (1) The term "organization" includes any kind, whether it be a sole proprietorship, a
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF
DISCRETION IN HOLDING THAT THE EXCHANGE OF SHARES OF STOCK FOR
PROPERTY AMONG FILINVEST DEVELOPMENT CORPORATION (FDC), FILINVEST
ALABANG, INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED (FLI)
MET ALL THE REQUIREMENTS FOR THE NON-RECOGNITION OF TAXABLE GAIN
UNDER SECTION 34 (c) (2) OF THE OLD NATIONAL INTERNAL REVENUE CODE
(NIRC) (NOW SECTION 40 (C) (2) (c) OF THE NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN
HOLDING THAT THE LETTERS OF INSTRUCTION OR CASH VOUCHERS
EXTENDED BY FDC TO ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS
SUBJECT TO DOCUMENTARY STAMP TAXES UNDER SECTION 180 OF THE NIRC.
III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
GAIN ON DILUTION AS A RESULT OF THE INCREASE IN THE VALUE OF FDC’S
SHAREHOLDINGS IN FAC IS NOT TAXABLE.36
The Court’s Ruling
While the petition in G.R. No. 163653 is bereft of merit, we find the CIR’s petition in G.R. No. 167689
impressed with partial merit.
In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTA’s finding that theoretical
interests can be imputed on the advances FDC extended to its affiliates in 1996 and 1997 considering that,
for said purpose, FDC resorted to interest-bearing fund borrowings from commercial banks. Since
considerable interest expenses were deducted by FDC when said funds were borrowed, the CIR theorizes
that interest income should likewise be declared when the same funds were sourced for the advances FDC
extended to its affiliates. Invoking Section 43 of the 1993 NIRC in relation to Section 179(b) of Revenue
Regulation No. 2, the CIR maintains that it is vested with the power to allocate, distribute or apportion
income or deductions between or among controlled organizations, trades or businesses even in the absence
of fraud, since said power is intended "to prevent evasion of taxes or clearly to reflect the income of any
such organizations, trades or businesses." In addition, the CIR asseverates that the CA should have
accorded weight and respect to the findings of the CTA which, as the specialized court dedicated to the
study and consideration of tax matters, can take judicial notice of US income tax laws and regulations. 37
Admittedly, Section 43 of the 1993 NIRC38 provides that, "(i)n any case of two or more organizations,
trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned
or controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue is
authorized to distribute, apportion or allocate gross income or deductions between or among such
organization, trade or business, if he determines that such distribution, apportionment or allocation is
necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization,
trade or business." In amplification of the equivalent provision39 under Commonwealth Act No.
466,40 Sec. 179(b) of Revenue Regulation No. 2 states as follows:
Determination of the taxable net income of controlled taxpayer. – (A) DEFINITIONS. – When used in this
section –
partnership, a trust, an estate, or a corporation or association, irrespective of the
place where organized, where operated, or where its trade or business is conducted,
and regardless of whether domestic or foreign, whether exempt or taxable, or
whether affiliated or not.
(2) The terms "trade" or "business" include any trade or business activity of any
kind, regardless of whether or where organized, whether owned individually or
otherwise, and regardless of the place where carried on.
(3) The term "controlled" includes any kind of control, direct or indirect, whether
legally enforceable, and however exercisable or exercised. It is the reality of the
control which is decisive, not its form or mode of exercise. A presumption of
control arises if income or deductions have been arbitrarily shifted.
30
 (4) The term "controlled taxpayer" means any one of two or more organizations, be seen that the CIR's power to distribute, apportion or allocate gross income or deductions between or
trades, or businesses owned or controlled directly or indirectly by the same among controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s
interests. under scrutiny. For as long as the controlled taxpayer's taxable income is not reflective of that which it
would have realized had it been dealing at arm's length with an uncontrolled taxpayer, the CIR can make
the necessary rectifications in order to prevent evasion of taxes.
(5) The term "group" and "group of controlled taxpayers" means the organizations,
trades or businesses owned or controlled by the same interests.
Despite the broad parameters provided, however, we find that the CIR's powers of distribution,
apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and
(6) The term "true net income" means, in the case of a controlled taxpayer, the net
Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical interests" to
income (or as the case may be, any item or element affecting net income) which
the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC, 42 after all, the term "gross
would have resulted to the controlled taxpayer, had it in the conduct of its affairs
income" is understood to mean all income from whatever source derived, including, but not limited to the
(or, as the case may be, any item or element affecting net income) which would
following items: compensation for services, including fees, commissions, and similar items; gross income
have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the
derived from business; gains derived from dealings in property;" interest; rents; royalties; dividends;
case may be, in the particular contract, transaction, arrangement or other act) dealt
annuities; prizes and winnings; pensions; and partner’s distributive share of the gross income of general
with the other members or members of the group at arm’s length. It does not mean
professional partnership.43 While it has been held that the phrase "from whatever source derived" indicates
the income, the deductions, or the item or element of either, resulting to the
a legislative policy to include all income not expressly exempted within the class of taxable income under
controlled taxpayer by reason of the particular contract, transaction, or arrangement,
our laws, the term "income" has been variously interpreted to mean "cash received or its equivalent", "the
the controlled taxpayer, or the interest controlling it, chose to make (even though
amount of money coming to a person within a specific time" or "something distinct from principal or
such contract, transaction, or arrangement be legally binding upon the parties
capital."44 Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or
thereto).
realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or
allocated by the CIR.
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a
controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to
Our circumspect perusal of the record yielded no evidence of actual or possible showing that the advances
the standard of an uncontrolled taxpayer, the true net income from the property and business of
FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For all its
a controlled taxpayer. The interests controlling a group of controlled taxpayer are assumed to
harping upon the supposed fact that FDC had resorted to borrowings from commercial banks, the CIR had
have complete power to cause each controlled taxpayer so to conduct its affairs that its
adduced no concrete proof that said funds were, indeed, the source of the advances the former provided its
transactions and accounting records truly reflect the net income from the property and business
affiliates. While admitting that FDC obtained interest-bearing loans from commercial banks,45 Susan
of each of the controlled taxpayers. If, however, this has not been done and the taxable net
Macabelda - FDC's Funds Management Department Manager who was the sole witness presented before
income are thereby understated, the statute contemplates that the Commissioner of Internal
the CTA - clarified that the subject advances were sourced from the corporation's rights offering in 1995
Revenue shall intervene, and, by making such distributions, apportionments, or allocations as
as well as the sale of its investment in Bonifacio Land in 1997. 46 More significantly, said witness testified
he may deem necessary of gross income or deductions, or of any item or element affecting net
that said advances: (a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their
income, between or among the controlled taxpayers constituting the group, shall determine the
operational and capital expenditures; and, (b) were all temporarily in nature since they were repaid within
true net income of each controlled taxpayer. The standard to be applied in every case is that of
the duration of one week to three months and were evidenced by mere journal entries, cash vouchers and
an uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its
instructional letters."47
provisions at will, nor does it grant any right to compel the Commissioner of Internal Revenue
to apply its provisions.
Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC had
deducted substantial interest expense from its gross income, there would still be no factual basis for the
(C) APPLICATION – Transactions between controlled taxpayer and another will be subjected
imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon.
to special scrutiny to ascertain whether the common control is being used to reduce, avoid or
More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no
escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner of
interest shall be due unless it has been expressly stipulated in writing. Considering that taxes, being
Internal Revenue is not restricted to the case of improper accounting, to the case of a
burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares, 48 the
fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or
rule is likewise settled that tax statutes must be construed strictly against the government and liberally in
avoid tax by shifting or distorting income or deductions. The authority to determine true net
favor of the taxpayer.49 Accordingly, the general rule of requiring adherence to the letter in construing
income extends to any case in which either by inadvertence or design the taxable net income in
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended
whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in
by implication.50 While it is true that taxes are the lifeblood of the government, it has been held that their
the conduct of his affairs been an uncontrolled taxpayer dealing at arm’s length with another
assessment and collection should be in accordance with law as any arbitrariness will negate the very
uncontrolled taxpayer.41
reason for government itself.51

As may be gleaned from the definitions of the terms "controlled" and "controlled taxpayer" under
In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the imposition of deficiency
paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDC and its affiliates come
income taxes on the transfer FDC and FAI effected in exchange for the shares of stock of FLI. With
within the purview of Section 43 of the 1993 NIRC. Aside from owning significant portions of the shares
respect to the Deed of Exchange executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993
of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of money as cash
NIRC pertinently provides as follows:
advances to its said affiliates for the purpose of providing them financial assistance for their operational
and capital expenditures seemingly indicate that the situation sought to be addressed by the subject
provision exists. From the tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also Sec. 34. Determination of amount of and recognition of gain or loss.-

31
xxxx the position taken by the BIR is to the effect that "the law would apply even when the exchangor already
has control of the corporation at the time of the exchange."60 This was confirmed when, apprised in FLI's
request for clarification about the change of percentage of ownership of its outstanding capital stock, the
(c) Exception – x x x x
BIR opined as follows:

No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange
Please be informed that regardless of the foregoing, the transferors, Filinvest Development Corp. and
for shares of stock in such corporation of which as a result of such exchange said person, alone or together
Filinvest Alabang, Inc. still gained control of Filinvest Land, Inc. The term 'control' shall mean ownership
with others, not exceeding four persons, gains control of said corporation; Provided, That stocks issued for
of stocks in a corporation by possessing at least 51% of the total voting power of all classes of stocks
services shall not be considered as issued in return of property.
entitled to vote. Control is determined by the amount of stocks received, i.e., total subscribed, whether for
property or for services by the transferor or transferors. In determining the 51% stock ownership, only
As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties,52 the requisites for those persons who transferred property for stocks in the same transaction may be counted up to the
the non-recognition of gain or loss under the foregoing provision are as follows: (a) the transferee is a maximum of five (BIR Ruling No. 547-93 dated December 29, 1993.61
corporation; (b) the transferee exchanges its shares of stock for property/ies of the transferor; (c) the
transfer is made by a person, acting alone or together with others, not exceeding four persons; and, (d) as a
At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is more
result of the exchange the transferor, alone or together with others, not exceeding four, gains control of the
apparent than real. As the uncontested owner of 80% of the outstanding shares of FAI, it cannot be
transferee.53 Acting on the 13 January 1997 request filed by FLI, the BIR had, in fact, acknowledged the
gainsaid that FDC ideally controls the same percentage of the 420,877,000 shares issued to its said co-
concurrence of the foregoing requisites in the Deed of Exchange the former executed with FDC and FAI
transferor which, by itself, represents 7.968% of the outstanding shares of FLI. Considered alongside
by issuing BIR Ruling No. S-34-046-97.54 With the BIR's reiteration of said ruling upon the request for
FDC's 61.03% control of FLI as a consequence of the 29 November 1996 Deed of Transfer, said 7.968%
clarification filed by FLI,55 there is also no dispute that said transferee and transferors subsequently
add up to an aggregate of 68.998% of said transferee corporation's outstanding shares of stock which is
complied with the requirements provided for the non-recognition of gain or loss from the exchange of
evidently still greater than the 67.42% FDC initially held prior to the exchange. This much was admitted
property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC. 56
by the parties in the 14 February 2001 Stipulation of Facts, Documents and Issues they submitted to the
CTA.62 Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital stock adds up
Then as now, the CIR argues that taxable gain should be recognized for the exchange considering that to a total of 70.99%, it stands to reason that neither of said transferors can be held liable for deficiency
FDC's controlling interest in FLI was actually decreased as a result thereof. For said purpose, the CIR calls income taxes the CIR assessed on the supposed gain which resulted from the subject transfer.
attention to the fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's
3,763,535,000 outstanding capital stock. Upon the issuance of 443,094,000 additional FLI shares as a
On the other hand, insofar as documentary stamp taxes on loan agreements and promissory notes are
consequence of the exchange and with only 42,217,000 thereof accruing in favor of FDC for a total of
concerned, Section 180 of the NIRC provides follows:
2,579,575,000 shares, said corporation’s controlling interest was supposedly reduced to 61%.03 when
reckoned from the transferee's aggregate 4,226,629,000 outstanding shares. Without owning a share from
FLI's initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of 420,877,000 FLI Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and
shares as a result of the exchange purportedly resulted in its control of only 9.96% of said transferee securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest
corporation's 4,226,629,000 outstanding shares. On the principle that the transaction did not qualify as a and others not payable on sight or demand. – On all loan agreements signed abroad wherein the object of
tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable gain in the the contract is located or used in the Philippines; bill of exchange (between points within the Philippines),
sum of ₱263,386,921.00 should be recognized on the part of FDC and in the sum of ₱3,088,711,367.00 on drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of
the part of FAI.57 deposits drawing interest, or orders for the payment of any sum of money otherwise than at sight or on
demand, or on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for
circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of
The paucity of merit in the CIR's position is, however, evident from the categorical language of Section 34
Thirty centavos (₱0.30) on each two hundred pesos, or fractional part thereof, of the face value of any
(c) (2) of the 1993 NIRC which provides that gain or loss will not be recognized in case the exchange of
such agreement, bill of exchange, draft, certificate of deposit or note: Provided, That only one
property for stocks results in the control of the transferee by the transferor, alone or with other transferors
documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure
not exceeding four persons. Rather than isolating the same as proposed by the CIR, FDC's 2,579,575,000
such loan, whichever will yield a higher tax: Provided however, That loan agreements or promissory notes
shares or 61.03% control of FLI's 4,226,629,000 outstanding shares should, therefore, be appreciated in
the aggregate of which does not exceed Two hundred fifty thousand pesos (₱250,000.00) executed by an
combination with the 420,877,000 new shares issued to FAI which represents 9.96% control of said
individual for his purchase on installment for his personal use or that of his family and not for business,
transferee corporation. Together FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000 shares
resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the
(9.96%) clearly add up to 3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares. Since the term
payment of documentary stamp tax provided under this Section.
"control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty-one percent of
the total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993
NIRC, the exchange of property for stocks between FDC FAI and FLI clearly qualify as a tax-free When read in conjunction with Section 173 of the 1993 NIRC,63 the foregoing provision concededly
transaction under paragraph 34 (c) (2) of the same provision. applies to "(a)ll loan agreements, whether made or signed in the Philippines, or abroad when the obligation
or right arises from Philippine sources or the property or object of the contract is located or used in the
Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations No. 9-94 provide as
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme Court Justice
follows:
Jose Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and Jurisprudence, opined that
said provision could be inapplicable if control is already vested in the exchangor prior to
exchange.58 Aside from the fact that that the 10 September 2002 Decision in CTA Case No. 6182 Section 3. Definition of Terms. – For purposes of these Regulations, the following term shall mean:
upholding the tax-exempt status of the exchange between FDC, FAI and FLI was penned by no less than
Justice Acosta himself,59 FDC and FAI significantly point out that said authors have acknowledged that
32
(b) 'Loan agreement' – refers to a contract in writing where one of the parties delivers to another money or
other consumable thing, upon the condition that the same amount of the same kind and quality shall be
paid. The term shall include credit facilities, which may be evidenced by credit memo, advice or drawings.
The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section 195, both of the Tax Code,
as amended, generally refer to distinct and separate instruments. A loan agreement shall be taxed under
Section 180, while a deed of mortgage shall be taxed under Section 195."
"Section 6. Stamp on all Loan Agreements. – All loan agreements whether made or signed in the
Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object
of the contract is located in the Philippines shall be subject to the documentary stamp tax of thirty
centavos (₱0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such
agreements, pursuant to Section 180 in relation to Section 173 of the Tax Code.
In cases where no formal agreements or promissory notes have been executed to cover credit facilities, the
documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may
be evidenced by credit/debit memo, advice or drawings by any form of check or withdrawal slip, under
Section 180 of the Tax Code.
Applying the aforesaid provisions to the case at bench, we find that the instructional letters as well as the
journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997
qualified as loan agreements upon which documentary stamp taxes may be imposed. In keeping with the
caveat attendant to every BIR Ruling to the effect that it is valid only if the facts claimed by the taxpayer
are correct, we find that the CA reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998
which, strictly speaking, could be invoked only by ASB Development Corporation, the taxpayer who
sought the same. In said ruling, the CIR opined that documents like those evidencing the advances FDC
extended to its affiliates are not subject to documentary stamp tax, to wit:
On the matter of whether or not the inter-office memo covering the advances granted by an affiliate
company is subject to documentary stamp tax, it is informed that nothing in Regulations No. 26
(Documentary Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that the same is subject
to documentary stamp tax. Such being the case, said inter-office memo evidencing the lendings or
borrowings which is neither a form of promissory note nor a certificate of indebtedness issued by the
corporation-affiliate or a certificate of obligation, which are, more or less, categorized as 'securities', is not
subject to documentary stamp tax imposed under Section 180, 174 and 175 of the Tax Code of 1997,
respectively. Rather, the inter-office memo is being prepared for accounting purposes only in order to
avoid the co-mingling of funds of the corporate affiliates.1avvphi1
In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling No.
108-99 dated 15 July 1999, which opined that inter-office memos evidencing lendings or borrowings
extended by a corporation to its affiliates are akin to promissory notes, hence, subject to documentary
stamp taxes.64 In brushing aside the foregoing argument, however, the CA applied Section 246 of the 1993
NIRC65 from which proceeds the settled principle that rulings, circulars, rules and regulations promulgated
by the BIR have no retroactive application if to so apply them would be prejudicial to the
taxpayers.66 Admittedly, this rule does not apply: (a) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b)
where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the
facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. 67 Not being the taxpayer
who, in the first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing
principle on non-retroactivity of BIR rulings.
Viewed in the light of the foregoing considerations, we find that both the CTA and the CA erred in
invalidating the assessments issued by the CIR for the deficiency documentary stamp taxes due on the
instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its
affiliates in 1996 and 1997. In Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly
assessed the sum of ₱6,400,693.62 for documentary stamp tax, ₱3,999,793.44 in interests and ₱25,000.00
as compromise penalty, for a total of ₱10,425,487.06. Alongside the sum of ₱4,050,599.62 for
documentary stamp tax, the CIR similarly assessed ₱1,721,099.78 in interests and ₱25,000.00 as
compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a total of ₱5,796,699.40. The
imposition of deficiency interest is justified under Sec. 249 (a) and (b) of the NIRC which authorizes the
assessment of the same "at the rate of twenty percent (20%), or such higher rate as may be prescribed by
regulations", from the date prescribed for the payment of the unpaid amount of tax until full
payment.68 The imposition of the compromise penalty is, in turn, warranted under Sec. 25069 of the NIRC
which prescribes the imposition thereof "in case of each failure to file an information or return, statement
or list, or keep any record or supply any information required" on the date prescribed therefor.
To our mind, no reversible error can, finally, be imputed against both the CTA and the CA for invalidating
the Assessment Notice issued by the CIR for the deficiency income taxes FDC is supposed to have
incurred as a consequence of the dilution of its shares in FAC. Anent FDC’s Shareholders’ Agreement
with RHPL, the record shows that the parties were in agreement about the following factual antecedents
narrated in the 14 February 2001 Stipulation of Facts, Documents and Issues they submitted before the
CTA,70 viz.:
"1.11. On November 15, 1996, FDC entered into a Shareholders’ Agreement (‘SA’) with Reco
Herrera Pte. Ltd. (‘RHPL’) for the formation of a joint venture company named Filinvest Asia
Corporation (‘FAC’) which is based in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7,
Answer).
1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked to develop and
manage the 50% ownership interest of FDC in its PBCom Office Tower Project (‘Project’)
with the Philippine Bank of Communications (par. 6.12, Petition; par. 7, Answer).
1.13. Pursuant to the SA between FDC and RHPL, the equity participation of FDC and RHPL
in FAC was 60% and 40% respectively.
1.14. In accordance with the terms of the SA, FDC subscribed to ₱500.7 million worth of
shares of stock representing a 60% equity participation in FAC. In turn, RHPL subscribed to
₱433.8 million worth of shares of stock of FAC representing a 40% equity participation in
FAC.
1.15. In payment of its subscription in FAC, FDC executed a Deed of Assignment transferring
to FAC a portion of FDC’s right and interests in the Project to the extent of ₱500.7 million.
1.16. FDC reported a net loss of ₱190,695,061.00 in its Annual Income Tax Return for the
taxable year 1996."71
Alongside the principle that tax revenues are not intended to be liberally construed, 72 the rule is settled that
the findings and conclusions of the CTA are accorded great respect and are generally upheld by this Court,
unless there is a clear showing of a reversible error or an improvident exercise of authority. 73 Absent
showing of such error here, we find no strong and cogent reasons to depart from said rule with respect to
the CTA's finding that no deficiency income tax can be assessed on the gain on the supposed dilution
and/or increase in the value of FDC's shareholdings in FAC which the CIR, at any rate, failed to establish.
Bearing in mind the meaning of "gross income" as above discussed, it cannot be gainsaid, even then, that a
mere increase or appreciation in the value of said shares cannot be considered income for taxation
purposes. Since "a mere advance in the value of the property of a person or corporation in no sense
constitute the ‘income’ specified in the revenue law," it has been held in the early case of Fisher vs.
33
Trinidad,74 that it "constitutes and can be treated merely as an increase of capital." Hence, the CIR has no
factual and legal basis in assessing income tax on the increase in the value of FDC's shareholdings in FAC
until the same is actually sold at a profit.
WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No. 163653 is
DENIED for lack of merit and the CA’s 16 December 2003 Decision in G.R. No. 72992 is AFFIRMED in
toto. The CIR’s petition in G.R. No. 167689 is PARTIALLY GRANTED and the CA’s 26 January 2005
Decision in CA-G.R. SP No. 74510 is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 issued for
deficiency documentary stamp taxes due on the instructional letters as well as journal and cash vouchers
evidencing the advances FDC extended to its affiliates are declared valid.
The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-00019-2000 and SP-
INC-97-0027-2000 issued for deficiency income assessed on (a) the "arms-length" interest from said
advances; (b) the gain from FDC’s Deed of Exchange with FAI and FLI; and (c) income from the dilution
resulting from FDC’s Shareholders’ Agreement with RHPL is, however, upheld.
8. [G.R. No. L-28398. August 6, 1975.] COMMISSIONER OF INTERNAL REVENUEv. JOHN L.
MANNING, W.D. McDONALD, E.E. SIMMONS and THE COURT OF TAX APPEALS
This is a petition for review of the decision of the Court of Tax Appeals, in CTA case 1626, which set
aside the income tax assessments issued by the Commissioner of Internal Revenue against John L.
Manning, W.D. McDonald and E.E. Simmons (hereinafter referred to as the respondents), for alleged
undeclared stock dividends received in 1958 from the Manila Trading and Supply Co. (hereinafter referred
to as the MANTRASCO) valued at P7,973,660.
In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common
shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three
respondents.
On February 29, 1952, in view of Reese’s desire that upon his death MANTRASCO and its two
subsidiaries, MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under the
management of the respondents, a trust agreement on his and the respondents’ interests in MANTRASCO
was executed by and among Reese (therein referred to as OWNER), MANTRASCO (therein referred to as
COMPANY), the law firm of Ross, Selph, Carrascoso and Janda (therein referred to as TRUSTEES), and
the respondents (therein referred to as MANAGERS).
The trust agreement pertinently provides as follows:jgc:chanrobles.com.ph
"1. Upon the execution of this agreement the OWNER shall deposit with the TRUSTEES, duly endorsed
and ready for transfer Twenty-Four Thousand Seven Hundred (24,700) shares of the capital stock of the
COMPANY, these shares being all shares of the capital stock of the COMPANIES belonging to him . . .
"2. Upon the execution of this Agreement the MANAGERS shall deposit with the TRUSTEES, duly
endorsed and ready for transfer, all shares of the capital stock of the COMPANIES belonging to any of
them.
"3. (a) The OWNER and the MANAGERS, and each of them, agree that if any of them shall at any time
during the life of this trust acquire any additional shares of stock of any of the COMPANIES, or of any
successor company, or any shares in substitution, exchange or replacement of the shares subject to this
agreement, they shall forthwith endorse and deposit such shares with the TRUSTEES hereunder and such
additional or other shares shall become subject to this agreement; shares deposited by the OWNER and
shares received by the TRUSTEES as stock dividends on, or in substitution, exchange or replacement of,
such shares so deposited under this agreement being MANAGERS’ SHARES.
"(b) All shares deposited under paragraphs 1, 2 and 3(a) hereof shall, during the life of the OWNER,
remain in the name of and shall be voted by the respective parties making the deposit ...
"4. (a) Upon the death of the OWNER and the receipt by the TRUSTEES of the initial payment from the
company purchasing the OWNER’S SHARES, the TRUSTEES shall cause the OWNER’S SHARES to be
transferred into the name of such company and such company shall thereupon transfer such shares into the
name of the TRUSTEES and the TRUSTEES shall hold such shares until payment for all such shares shall
have been made by the company as provided in this agreement.
x x x
"(c) The TRUSTEES shall vote all stock standing in their name or the name of their nominees at all
meetings and shall be in all respects entitled to all the rights as owners of said shares, subject, however, to
the provisions of this agreement of trust.
"(d) Any and all dividends paid on said shares after the death of the OWNER shall be subject to the
provisions of this agreement.
x x x
"5. (b) It is expressly agreed and understood, however, that the declaration of dividends and amount of
earnings transferred to surplus shall be subject to the approval of the TRUSTEES and the TRUSTEES
shall participate to such extent in the affairs of the COMPANIES as they deem necessary to insure the
carrying out of this agreement and the discharge of the obligations of the COMPANIES and each of them
and of the MANAGERS hereunder.
"(c) The TRUSTEES shall designate one or more directors of each of the COMPANIES as they shall
consider advisable and corresponding shares shall be transferred to such directors to qualify them to act.
x x x
"8. (a) Upon the death of the OWNER, the COMPANIES or any one or more of them shall purchase the
OWNER’S SHARES; it being the intent that any of the COMPANIES shall purchase all or a
proportionate part of the OWNER’S SHARES . . .
"(b) The purchase price of such shares shall be the book value of such share computed in United States
dollars . . .
x x x
"(d) All dividends paid on stock that had been OWNER’S SHARES, from the time of the transfer of such
shares by one or more of the COMPANIES to the TRUSTEES as provided in Article 4 until payment in
full for such OWNER’S SHARES shall have been made by each of the COMPANIES which shall have
purchased the same, shall be credited as payments on account of the purchase price of such shares and
shall be a prepayment on account of the next due installment or installments of such purchase price.
x x x
"12. The TRUSTEES may from time to time increase or decrease the unpaid balance of the purchase price
of the shares being purchased by any COMPANY or COMPANIES should they in their exclusive
34
discretion determine that such increase or decrease would be necessary to carry out the intention of the
parties that the Estate and heirs of the OWNER shall receive the fair value of the shares deposited in Trust
as such value existed at the date of the death of the OWNER. . .
"13. Should the said COMPANIES or any of them be unable or unwilling to comply with their obligations
hereunder when due, the TRUSTEES may terminate this agreement and dispose of all the shares of stock
deposited hereunder, whether or not payment shall have been made for part of such stock, applying the
proceeds of such sale or disposition to the unpaid balance of the purchase price:jgc:chanrobles.com.ph
"(a) If, upon any such sale or disposition of the stock, the TRUSTEES shall receive an amount in excess of
the unpaid balance of the purchase price agreed to be paid by the COMPANIES for the OWNER’S
SHARES such excess, after deducting all expenses, charges and taxes, shall be paid to the then
MANAGERS.
x x x Bureau of Internal Revenue. The examination disclosed that (a) as of December 31, 1958 the 24,700
"17. Until the delivery to him of the shares purchased by him, no MANAGER, shall sell, assign,
mortgage, pledge, transfer or in anywise encumber or hypothecate such shares or his interest in this
agreement.
x x x stock dividends was in effect a distribution of the "asset or property of the corporation as may be gleaned
"19. After the death of the OWNER and during the period of this trust the COMPANIES shall pay no
dividends except as may be authorized by the TRUSTEES. Dividends on MANAGER’S SHARES shall,
so long as they shall not be in default under this agreement, be paid over by the TRUSTEES to the
MANAGERS. Dividends on OWNER’S SHARES shall be applied in liquidation of the COMPANIES’
liabilities hereunder as provided in Article 8(d).
x x x On October 30, 1967 the CTA rendered judgment absolving the respondents from any liability for
"26. The TRUSTEES may, after the death of the OWNER and during the life of this trust, vote any and all
shares held in trust, at any general and special meeting of stockholders for all purposes, including but not
limited to wholly or partially liquidating or reducing the capital of any COMPANY or COMPANIES,
authorizing the sale of any or all assets, and election of directors . . .
x x x their respective positions. These are:chanrob1es virtual 1aw library
"28. The COMPANIES and each of them undertake and agree by proper corporate act to reduce their
capitalization, sell or encumber their assets, amend their articles of incorporation, reorganize, liquidate,
dissolve and do all other things the TRUSTEES in their discretion determine to be necessary to enable
them to comply with their obligations hereunder and the TRUSTEES are hereby irrevocably authorized to
vote all shares of the COMPANIES and each of them at any general or special meeting for the
accomplishment of such purposes. . . ."cralaw virtua1aw library
On October 19, 1954 Reese died. The projected transfer of his shares in the name of MANTRASCO could
not, however, be immediately effected for lack of sufficient funds to cover initial payment on the shares.
On February 2, 1955, after MANTRASCO made a partial payment of Reese’s shares, the certificate for
the 24,700 shares in Reese’s name was cancelled and a new certificate was issued in the name of
MANTRASCO. On the same date, and in the meantime that Reese’s interest had not been fully paid, the
new certificate was endorsed to the law firm of Ross, Selph, Carrascoso and Janda, as trustees for and in
behalf of MANTRASCO.
On December 22, 1958, at a special meeting of MANTRASCO stockholders, the following resolution was
passed:jgc:chanrobles.com.ph
"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account of the
company as a stock dividend to be distributed to shareholders of record at the close of business on
December 22, 1958, in accordance with the action of the Board of Directors at its meeting on December
19, 1958 which action is hereby approved and confirmed."cralaw virtua1aw library
On November 25, 1963 the entire purchase price of Reese’s interest in MANTRASCO was finally paid in
full by the latter, On May 4, 1964 the trust agreement was terminated and the trustees delivered to
MANTRASCO all the shares which they were holding in trust.
Meanwhile, on September 14, 1962, an examination of MANTRASCO’s books was ordered by the
shares declared as dividends had been proportionately distributed to the respondents, representing a total
book value or acquisition cost of P7,973,660; (b) the respondents failed to declare the said stock dividends
as part of their taxable income for the year 1958; and (c) from 1956 to 1961 the following amounts were
paid by MANTRASCO to Reese’s estate by virtue of the trust agreement, to wit:chanrob1es virtual 1aw
library
On the basis of their examination, the BIR examiners concluded that the distribution of Reese’s shares as
from the payment of cash for the redemption of said stock and distributing the same as stock dividend."
On April 14, 1965 the Commissioner of Internal Revenue issued notices of assessment for deficiency
income taxes to the respondents for the year 1958, as follows:chanrob1es virtual 1aw library
The respondents unsuccessfully challenged the foregoing assessments and, failing to secure a favorable
reconsideration, appealed to the Court of Tax Appeals.
receiving the questioned stock dividends on the ground that their respective one-third interest in
MANTRASCO remained the same before and after the declaration of stock dividends and only the
number of shares held by each of them had changed.
Hence, the present recourse.
All the parties rely upon the same provisions of the Tax Code and internal revenue regulations to bolster
A. National Internal Revenue Code
"SEC. 83. Distribution of dividends or assets by corporations — (a) Definition of Dividends — The term
‘dividends’ when used in this Title means any distribution made by a corporation to its shareholders out of
its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its
shareholders, whether in money or in other property.
"Where a corporation distributes all of its assets in complete liquidation or dissolution the gain realized or
loss sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss,
as the case may be.
"(b) Stock dividend. — A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax. 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 the stock shall be considered as taxable income to the extent that it represents a distribution
35
of earnings or profits accumulated after March first, nineteen hundred and thirteen."cralaw virtua1aw
library
B. B.I.R. Regulations
"SEC. 251. Dividends paid in property. — Dividends paid in securities or other property (other than its
own stock), in which the earnings of the corporation have been invested, are income to the recipients to
the amount of the full market value of such property when receivable by individual stockholders . . .
"SEC. 252. Stock dividend. — A stock dividend which represents the transfer of surplus to capital account
is not subject to income tax. However, a dividend in stock may constitute taxable income to the recipients
thereof notwithstanding the fact that the officers or directors of the corporation (as defined in section 84)
choose to call such distribution as a stock dividend. The distinction between a stock dividend which does
not, and one which does, constitute income taxable to the shareholders is the distinction between a stock
dividend which works no change in the corporate entity, the same interest in the same corporation being
represented after the distribution by more shares of precisely the same character, and a stock dividend
where there either has been change of corporate identity or a change in the nature of the shares issued as
dividends whereby the proportional interest of the shareholder after the distribution is essentially different
from the former interest. A stock dividend constitutes income if it gives the shareholder an interest
different from that which his former stockholdings represented. A stock dividend does not constitute
income if the new shares confer no different rights or interests than did the old — the new certificate plus
the old representing the same proportionate interest in the net assets of the corporation as did the
old."cralaw virtua1aw library
The parties differ, however, on the taxability of the "treasury" stock dividends received by the
respondents.
The respondents anchor their argument on the same basis as the Court of Tax Appeals; whereas the
Commissioner maintains that the full value (P7,973,660) of the shares redeemed from Reese by
MANTRASCO which were subsequently distributed to the respondents as stock dividends in 1958 should
be taxed as income of the respondents for that year, the said distribution being in effect a distribution of
cash. The respondents’ interests in MANTRASCO, he further argues, were only .4% prior to the
declaration of the stock dividends in 1958, but rose to 33 1/3% each after the said declaration.
In submitting their respective contentions, it is the assumption of both parties that the 24,700 shares
declared as stock dividends were treasury shares. We are however convinced, after a careful study of the
trust agreement, that the said shares were not, on December 22, 1958 or at anytime before or after that
date, treasury shares. The reasons are quite plain.
Although authorities may differ on the exact legal and accounting status of so-called "treasury shares," 1
they are more or less in agreement that treasury shares are stocks issued and fully paid for and re-acquired
by the corporation either by purchase, donation, forfeiture or other means. 2 Treasury shares are therefore
issued shares, but being in the treasury they do not have the status of outstanding shares. 3 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, 4 nor in the meetings of the
corporation 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, 5 though it still
represents a paid-for interest in the property of the corporation. 6 The foregoing essential features of a
treasury stock are lacking in the questioned shares. Thus,
(a) under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock standing in
their names at all meetings and to exercise all rights "as owners of said shares" — this authority is
reiterated in paragraphs 26 and 28 of the trust agreement;
(b) under paragraph 4(d), "Any and all dividends paid on said shares after the death of the OWNER shall
be subject to the provisions of this agreement;"
(c) under paragraph 5(b), the amount of retained earnings to be declared as dividends was made subject to
the approval of the trustees of the 24,700 shares;
(d) under paragraph 5(c), the choice of corporate directors was delegated exclusively to the trustees who
were also given the authority to transfer qualifying shares to such directors; and
(e) under paragraph 19, MANTRASCO and its two subsidiaries were expressly prohibited from paying
"dividends except as may be authorized by the TRUSTEES;" in the same paragraph mention was also
made of "dividends on OWNER’S SHARES" which shall be applied to the liquidation of the liabilities of
the three companies for the price of Reese’s shares.
The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700
shares of Reese as absolutely outstanding shares of Reese’s estate until they were fully paid. Such being
the true nature of the 24,700 shares, their declaration as treasury stock dividend in 1958 was a complete
nullity and plainly violative of public policy. A stock dividend, being one payable in capital stock, cannot
be declared out of outstanding corporate stock, but only from retained earnings: 7
Of pointed relevance is this useful discussion of the nature of a stock dividend: 8
"‘A stock dividend always involves a transfer of surplus (or profit) to capital stock.’ Graham and Katz,
Accounting in Law Practice, 2d ed. 1938, No. 70. As the court said in United States v. Siegel, 8 Cir., 1931,
52 F 2d 63, 65, 78 ALR 672: ‘A stock dividend is a conversion of surplus or undivided profits into capital
stock, which is distributed to stockholders in lieu of a cash dividend.’ Congress itself has defined the term
‘dividend’ in No. 115(a) of the Act as meaning any distribution made by a corporation to its shareholders,
whether in money or in other property, out of its earnings or profits. In Eisner v. Macomber, 1920, 252 US
189, 40 S Ct 189, 64 L Ed 521, 9 ALR 1570, both the prevailing and the dissenting opinions recognized
that within the meaning of the revenue acts the essence of a stock dividend was the segregation out of
surplus account of a definite portion of the corporate earnings as part of the permanent capital resources of
the corporation by the device of capitalizing the same, and the issuance to the stockholders of additional
shares of stock representing the profits so capitalized."cralaw virtua1aw library
The declaration by the respondents and Reese’s trustees of MANTRASCO’s alleged treasury stock
dividends in favor of the former, brings, however, into clear focus the ultimate purpose which the parties
to the trust instrument aimed to realize: to make the respondents the sole owners of Reese’s interest in
MANTRASCO by utilizing the periodic earnings of that company and its subsidiaries to directly subsidize
their purchase of the said interests, and by making it appear outwardly, through the formal declaration of
non-existent stock dividends in the treasury, that they have not received any income from those firms
when, in fact, by that declaration they secured to themselves the means to turn around as full owners of
Reese’s shares. In other words, the respondents, using the trust instrument as a convenient technical
device, bestowed unto themselves the full worth and value of Reese’s corporate holdings with the use of
the very earnings of the companies. Such package device, obviously not designed to carry out the usual
stock dividend purpose of corporate expansion reinvestment, e.g. the acquisition of additional facilities
and other capital budget items, but exclusively for expanding the capital base of the respondents in
MANTRASCO, cannot be allowed to deflect the respondents’ responsibilities toward our income tax
laws. The conclusion is thus ineluctable that whenever the companies involved herein parted with a
portion of their earnings "to buy" the corporate holdings of Reese, they were in ultimate effect and result
making a distribution of such earnings to the respondents. All these amounts are consequently subject to
income tax as being, in truth and in fact, a flow of cash benefits to the respondents.
We are of the opinion, however, that the Commissioner erred in assessing the respondents the total
acquisition cost (P7,973,660) of the alleged treasury stock dividends in one lump sum. The record shows
that the earnings of MANTRASCO over a period of years were used to gradually wipe out the holdings
therein of Reese. Consequently, those earnings, which we hold, under the facts disclosed in the case at bar,
as in effect having been distributed to the respondents, should be taxed for each of the corresponding years
when payments were made to Reese’s estate on account of his 24,700 shares. With regard to payments
made with MANTRASCO earnings in 1958 and the years before, while indeed those earnings were
36
utilized in those years to gradually pay off the value of Reese’s holdings in MANTRASCO, there is no
evidence from which it can be inferred that prior to the passage of the stockholders’ resolution of
December 22, 1958 the contributed equity of each of the respondents rose correspondingly. It was only by
virtue of the authority contained in the said resolution that the respondents actually, albeit illegally,
appropriated and partitioned among themselves the stockholders’ equity representing Reese’s interests in
MANTRASCO. As those payments accrued in favor of the respondents in 1958 they are and should be
liable, for income tax purposes, to the extent of the aggregate amount paid, from 1955 to 1958, by
MANTRASCO to buy off Reese’s shares.
The fact that the resolution authorizing the distribution of the said earnings is null and void is of no
moment. Under the National Internal Revenue Code, income tax is assessed on income received from any
property, activity or service that produces income. 9 The Tax Code stands as an indifferent, neutral party
on the matter of where the income comes from. 10
Subject to the foregoing qualifications, we find the action taken by the Commissioner in all other respects
— that is, the assessment of a fraud penalty and imposition of interest charges pursuant to the provisions
of the Tax Code — to be in accordance with law.
ACCORDINGLY, the judgment of the Court of Tax Appeals absolving the respondents from any
deficiency income tax liability is set aside, and this case is hereby remanded to the Court of Tax Appeals
for further proceedings. More specifically, the Court of Tax Appeals shall recompute the income tax
liabilities of the respondents in accordance with this decision and with the Tax Code, and thereafter
pronounce and enter judgment accordingly. No costs.
9. [G.R. No. 108576. January 20, 1999] COMMISSIONER OF INTERNAL REVENUEvs. THE COURT
OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP.
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of
Appeals (CA)[1] which affirmed the ruling of the Court of Tax Appeals (CTA) [2] that private respondent A.
Soriano Corporations (hereinafter ANSCOR) redemption and exchange of the stocks of its foreign
stockholders cannot be considered as essentially equivalent to a distribution of taxable dividends under
Section 83(b) of the 1939 Internal Revenue Act[3]
The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the
corporation A. Soriano Y Cia, predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into
10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family
of Don Andres, who are all non-resident aliens.[4] In 1937, Don Andres subscribed to 4,963 shares of the
5,000 shares originally issued.[5]
On September 12, 1945, ANSCORs authorized capital stock was increased to P2,500,000.00 divided
into 25,000 common shares with the same par value. Of the additional 15,000 shares, only 10,000 was issued
which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their
pre-emptive rights to subscribe to the new issues.[6] This increased his subscription to 14,963 common
shares.[7] A month later,[8] Don Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr.,
as their initial investments in ANSCOR.[9] Both sons are foreigners.[10]
By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between
1949 and December 20, 1963.[11] On December 30, 1964 Don Andres died. As of that date, the records
revealed that he has a total shareholdings of 185,154 shares[12] - 50,495 of which are original issues and the
balance of 134,659 shares as stock dividend declarations.[13]Correspondingly, one-half of that shareholdings
or 92,577[14] shares were transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other half
formed part of his estate.[15]
A day after Don Andres died, ANSCOR increased its capital stock to P20M[16] and in 1966 further
increased it to P30M.[17] In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares
were respectively received by the Don Andres estate[18] and Doa Carmen from ANSCOR. Hence, increasing
their accumulated shareholdings to 138,867 and 138,864[19] common shares each.[20]
On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue
Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a tax
avoidance scheme[21] under Section 367 of the 1954 U.S. Revenue Act.[22] By January 2, 1968, ANSCOR
reclassified its existing 300,000 common shares into 150,000 common and 150,000 preferred shares. [23]
In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization
scheme and not tax avoidance.[24] Consequently,[25] on March 31, 1968 Doa Carmen exchanged her whole
138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres
in turn, exchanged 11,140 of its common shares for the remaining 11,140 preferred shares, thus reducing its
(the estate) common shares to 127,727.[26]
On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from
the Don Andres estate. By November 1968, the Board further increased ANSCORs capital stock to P75M
divided into 150,000 preferred shares and 600,000 common shares.[27] About a year later, ANSCOR again
redeemed 80,000 common shares from the Don Andres estate, [28] further reducing the latters common
shareholdings to 19,727. As stated in the board Resolutions, ANSCORs business purpose for both
redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the companys
foreign exchange remittances in case cash dividends are declared. [29]
In 1973, after examining ANSCORs books of account and records, Revenue examiners issued a
report proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections
53 and 54 of the 1939 Revenue Code,[30] for the year 1968 and the second quarter of 1969 based on the
transactions of exchange and redemption of stocks. [31] The Bureau of Internal Revenue (BIR) made the
corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty under
Presidential Decree (P.D.) 23[32] which were amended by P.D.s 67 and 157.[33] However, petitioner ruled
that the invoked decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue
Act under which ANSCOR was assessed.[34] ANSCORs subsequent protest on the assessments was denied
in 1983 by petitioner.[35]
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on
the redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioners ruling, after
finding sufficient evidence to overcome the prima facie correctness of the questioned assessments.[36] In a
petition for review, the CA, as mentioned, affirmed the ruling of the CTA.[37]Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue
Act[38] which provides:
Sec. 83. Distribution of dividends or assets by corporations.
(b) Stock dividends A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax. 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 the stock shall be considered as taxable income to the extent it represents a distribution of
earnings or profits accumulated after March first, nineteen hundred and thirteen. (Italics supplied).
Specifically, the issue is whether ANSCORs redemption of stocks from its stockholder as well as
the exchange of common with preferred shares can be considered as essentially equivalent to the distribution
of taxable dividend, making the proceeds thereof taxable under the provisions of the above-quoted law.
Petitioner contends that the exchange transaction is tantamount to cancellation under Section 83(b)
making the proceeds thereof taxable. It also argues that the said Section applies to stock dividends which is
the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that under the net effect test, the estate
37
of Don Andres gained from the redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-
at-source arising from the two transactions, pursuant to Section 53 and 54 of the 1939 Revenue Act. [39]
ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate
or from Doa Carmen based on the two transactions, because the same were done for legitimate business
purposes which are (a) to reduce its foreign exchange remittances in the event the company would declare
cash dividends,[40] and to (b) subsequently filipinized ownership of ANSCOR, as allegedly envisioned by
Don Andres.[41] It likewise invoked the amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances
of each case.[42] The findings of facts of a special court (CTA) exercising particular expertise on the subject
of tax, generally binds this Court,[43] considering that it is substantially similar to the findings of the CA
which is the final arbiter of questions of facts.[44] The issue in this case does not only deal with facts but
whether the law applies to a particular set of facts. Moreover, this Court is not necessarily bound by the
lower courts conclusions of law drawn from such facts. [45]
AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 [46] provides:
I. In all cases of voluntary disclosures of previously untaxed income and/or wealth such as
earnings, receipts, gifts, bequests or any other acquisitions from any source whatsoever which
are taxable under the National Internal Revenue Code, as amended, realized here or abroad by
any taxpayer, natural or juridical; the collection of all internal revenue taxes including the
increments or penalties or account of non-payment as well as all civil, criminal or
administrative liabilities arising from or incident to such disclosures under the National Internal
Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised
Administrative Code, the Civil Service laws and regulations, laws and regulations on
Immigration and Deportation, or any other applicable law or proclamation, are hereby
condoned and, in lieu thereof, a tax of ten (10%) per centum on such previously untaxed
income or wealth is hereby imposed, subject to the following conditions: (conditions
omitted) [Emphasis supplied].
The decree condones the collection of all internal revenue taxes including the increments or penalties or
account of non-payment as well as all civil, criminal or administrative liabilities arising from or incident to
(voluntary) disclosures under the NIRC of previously untaxed income and/or wealth realized here or abroad
by any taxpayer, natural or juridical.
May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An
income taxpayer covers all persons who derive taxable income.[47] ANSCOR was assessed by petitioner for
deficiency withholding tax under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its
capacity as a withholding agent and not in its personality as a taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity
acting no more than an agent of the government for the collection of the tax[48] in order to ensure its
payments;[49] the payer is the taxpayer he is the person subject to tax impose by law; [50] and the payee is the
taxing authority.[51] In other words, the withholding agent is merely a tax collector, not a taxpayer. Under
the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability
is direct and independent from the taxpayer,[52] because the income tax is still impose on and due from the
latter. The agent is not liable for the tax as no wealth flowed into him he earned no income. The Tax Code
only makes the agent personally liable for the tax[53] (c) 1939 Tax Code, as amended by R.A. No. 2343
which provides in part that xxx Every such person is made personally liable for such tax xxx.53 arising from
the breach of its legal duty to withhold as distinguish from its duty to pay tax since:
the governments cause of action against the withholding agent is not for the collection of
income tax, but for the enforcement of the withholding provision of Section 53 of the Tax
Code, compliance with which is imposed on the withholding agent and not upon the
taxpayer.[54]
Not being a taxpayer, a withholding agent, like ANSCOR in this transaction, is not protected by the amnesty
under the decree.
Codal provisions on withholding tax are mandatory and must be complied with by the withholding
agent.[55] The taxpayer should not answer for the non-performance by the withholding agent of its legal
duty to withhold unless there is collusion or bad faith. The former could not be deemed to have evaded the
tax had the withholding agent performed its duty. This could be the situation for which the amnesty decree
was intended. Thus, to curtail tax evasion and give tax evaders a chance to reform,[56] it was deemed
administratively feasible to grant tax amnesty in certain instances. In addition, a tax amnesty, much like a
tax exemption, is never favored nor presumed in law and if granted by a statute, 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.[57] The rule on strictissimi juris equally applies.[58] So that, any doubt in the application of
an amnesty law/decree should be resolved in favor of the taxing authority.
Furthermore, ANSCORs claim of amnesty cannot prosper. The implementing rules of P.D. 370 which
expanded amnesty on previously untaxed income under P.D. 23 is very explicit, to wit:
Section 4. Cases not covered by amnesty. The following cases are not covered by the amnesty subject of
these regulations:
xxx xxx xxx
(2) Tax liabilities with or without assessments, on withholding tax at source provided under Sections 53
and 54 of the National Internal Revenue Code, as amended;[59]
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of law,
it is not covered by the amnesty.
Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue Code of
1928.[60] It laid down the general rule known as the proportionate test[61] wherein stock dividends once issued
form part of the capital and, thus, subject to income tax.[62] Specifically, the general rule states that:
A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light.
Under the US Revenue Code, this provision originally referred to stock dividends only, without any
exception. Stock dividends, strictly speaking, represent capital and do not constitute income to its
recipient.[63] So that the mere issuance thereof is not yet subject to income tax[64] as they are nothing but an
enrichment through increase in value of capital investment. [65] As capital, the stock dividends postpone the
realization of profits because the fund represented by the new stock has been transferred from surplus to
capital and no longer available for actual distribution. [66] Income in tax law is an amount of money coming
to a person within a specified time, whether as payment for services, interest, or profit from investment. [67] It
means cash or its equivalent.[68] It is gain derived and severed from capital,[69] from labor or from both
combined[70] - so that to tax a stock dividend would be to tax a capital increase rather than the income. [71] In
a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be
subjected to income tax until that gain has been realized. Before the realization, stock dividends are nothing
but a representation of an interest in the corporate properties. [72] As capital, it is not yet subject to income
tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas income is
profit or gain or the flow of wealth.[73] The determining factor for the imposition of income tax is whether
any gain or profit was derived from a transaction.[74]
38
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 the stock shall be considered as taxable income to the extent it represents a distribution of
earnings or profits accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied).
In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber[75] (that pro
rata stock dividends are not taxable income), the exempting clause above quoted was added because
corporations found a loophole in the original provision. They resorted to devious means to circumvent the
law and evade the tax. Corporate earnings would be distributed under the guise of its initial capitalization
by declaring the stock dividends previously issued and later redeem said dividends by paying cash to the
stockholder. This process of issuance-redemption amounts to a distribution of taxable cash dividends
which was just delayed so as to escape the tax. It becomes a convenient technical strategy to avoid the
effects of taxation.
Thus, to plug the loophole the exempting clause was added. It provides that the redemption or cancellation
of stock dividends, depending on the time and manner it was made is essentially equivalent to a
distribution of taxable dividends, making the proceeds thereof taxable income to the extent it represents
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 of as a device for the actual
distribution of cash dividends, which is taxable.[76] Thus,
the provision had the obvious purpose of preventing a corporation from avoiding dividend tax
treatment by distributing earnings to its shareholders in two transactions a pro rata stock
dividend followed by a pro rata redemption that would have the same economic consequences
as a simple dividend.[77]
Although redemption and cancellation are generally considered capital transactions, as such, they are not
subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from
such transactions.[78] Simply put, depending on the circumstances, the proceeds of redemption of stock
dividends are essentially distribution of cash dividends, which when paid becomes the absolute property of
the stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of
choice[79] Having realized gain from that redemption, the income earner cannot escape income tax. [80]
As qualified by the phrase such time and in such manner, the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of stock
dividends.[81] So that, whether the amount distributed in the redemption should be treated as the equivalent
of a taxable dividend is a question of fact,[82] which is determinable on the basis of the particular facts of the
transaction in question.[83] No decisive test can be used to determine the application of the exemption under
Section 83(b) The use of the words such manner and essentially equivalent negative any idea that a weighted
formula can resolve a crucial issue Should the distribution be treated as taxable dividend. [84] On this aspect,
American courts developed certain recognized criteria, which includes the following:[85]
1) the presence or absence of real business purpose,
2) the amount of earnings and profits available for the declaration of a regular dividend and the
corporations past record with respect to the declaration of dividends,
3) the effect of the distribution as compared with the declaration of regular dividend,
4) the lapse of time between issuance and redemption,[86]
5) the presence of a substantial surplus[87] and a generous supply of cash which invites suspicion
as does a meager policy in relation both to current earnings and accumulated surplus. [88]
For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or
cancellation; (b) the transaction involves stock dividends and (c) the time and manner of the transaction
makes it essentially equivalent to a distribution of taxable dividends. Of these, the most important is the
third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock [89] in
exchange for property, whether or not the acquired stock is cancelled, retired or held in the
treasury.[90] Essentially, the corporation gets back some of its stock, distributes cash or property to the
shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends
previously issued is used as a veil for the constructive distribution of cash dividends. In the instant case,
there is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000
and 80,000 common shares). But where did the shares redeemed come from? If its source is the original
capital subscriptions upon establishment of the corporation or from initial capital investment in an existing
enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b)
under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed
shares are from stock dividend declarations other than as initial capital investment, the proceeds of the
redemption is additional wealth, for it is not merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable
dividends. Here, it is undisputed that at the time of the last redemption, the original commonshares owned
by the estate were only 25,247.5.[91] This means that from the total of 108,000 shares redeemed from the
estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends. Besides, in
the absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate property,
in whole or in part, is made out of corporate profits, [92] such as stock dividends. The capital cannot be
distributed in the form of redemption of stock dividends without violating the trust fund doctrine wherein
the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment
of the corporate creditors.[93] Once capital, it is always capital.[94] That doctrine was intended for the
protection of corporate creditors.[95]
With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier.
The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine
taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the
redemption. The time element is a factor to show a device to evade tax and the scheme of cancelling or
redeeming the same shares is a method usually adopted to accomplish the end sought.[96] Was this
transaction used as a continuing plan, device or artifice to evade payment of tax? It is necessary to determine
the net effect of the transaction between the shareholder-income taxpayer and the acquiring (redeeming)
corporation.[97] The net effect test is not evidence or testimony to be considered; it is rather an inference to
be drawn or a conclusion to be reached.[98] It is also important to know whether the issuance of stock
dividends was dictated by legitimate business reasons, the presence of which might negate a tax evasion
plan.[99]
The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not
related, for the redemption to be considered a legitimate tax scheme. [100] Redemption cannot be used as a
cloak to distribute corporate earnings.[101] Otherwise, the apparent intention to avoid tax becomes doubtful
as the intention to evade becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose is a mere devise which put on the form of a
corporate reorganization as a disguise for concealing its real character, and the sole object and
accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or
any part of a business, but to transfer a parcel of corporate shares to a stockholder.[102]
Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if
the redeemed shares were issued with bona fide business purpose,[103] which is judged after each and every
step of the transaction have been considered and the whole transaction does not amount to a tax evasion
scheme.
ANSCOR invoked two reasons to justify the redemptions (1) the alleged filipinization program and
(2) the reduction of foreign exchange remittances in case cash dividends are declared. The Court is not
concerned with the wisdom of these purposes but on their relevance to the whole transaction which can be
inferred from the outcome thereof. Again, it is the net effect rather than the motives and plans of the taxpayer
or his corporation[104] that is the fundamental guide in administering Sec. 83(b). This tax provision is aimed
39
at the result.[105] It also applies even if at the time of the issuance of the stock dividend, there was no intention
to redeem it as a means of distributing profit or avoiding tax on dividends. [106] The existence of legitimate
business purposes in support of the redemption of stock dividends is immaterial in income taxation. It has
no relevance in determining dividend equivalence. [107] Such purposes may be material only upon
the issuance of the stock dividends. The test of taxability under the exempting clause, when it provides such
time and manner as would make the redemption essentially equivalent to the distribution of a taxable
dividend, is whether the redemption resulted into a flow of wealth. If no wealth is realized from the
redemption, there may not be a dividend equivalence treatment. In the metaphor of Eisner v. Macomber,
income is not deemed realize until the fruit has fallen or been plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be gain or profit, (2) that the
gain or profit is realized or received, actually or constructively,[108] and (3) it is not exempted by law or treaty
from income tax. Any business purpose as to why or how the income was earned by the taxpayer is not a
requirement. Income tax is assessed on income received from any property, activity or service that produces
the income because the Tax Code stands as an indifferent neutral party on the matter of where income comes
from.[109]
As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income
was realized through the redemption of stock dividends. The redemption converts into money the stock
dividends which become a realized profit or gain and consequently, the stockholders separate
property.[110] Profits derived from the capital invested cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of
any business purpose for the redemption. Otherwise, to rule that the said proceeds are exempt from income
tax when the redemption is supported by legitimate business reasons would defeat the very purpose of
imposing tax on income. Such argument would open the door for income earners not to pay tax so long as
the person from whom the income was derived has legitimate business reasons. In other words, the payment
of tax under the exempting clause of Section 83(b) would be made to depend not on the income of the
taxpayer but on the business purposes of a third party (the corporation herein) from whom the income was
earned. This is absurd, illogical and impractical considering that the Bureau of Internal Revenue (BIR)
would be pestered with instances in determining the legitimacy of business reasons that every income earner
may interposed. It is not administratively feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that the redeemed shares are the
equivalent of dividend only if the shares were not issued for genuine business purposes[111]or the redeemed
shares have been issued by a corporation bona fide[112] bears no relevance in determining the non-taxability
of the proceeds of redemption. ANSCOR, relying heavily and applying said cases, argued that so long as
the redemption is supported by valid corporate purposes the proceeds are not subject to tax. [113] The adoption
by the courts below [114] of such argument is misleading if not misplaced. A review of the cited American
cases shows that the presence or absence of genuine business purposes may be material with respect to
the issuance or declaration of stock dividends but not on its subsequent redemption. The issuance and the
redemption of stocks are two different transactions. Although the existence of legitimate corporate purposes
may justify a corporations acquisition of its own shares under Section 41 of the Corporation Code, [115] such
purposes cannot excuse the stockholder from the effects of taxation arising from the redemption. If the
issuance of stock dividends is part of a tax evasion plan and thus, without legitimate business reasons the
redemption becomes suspicious which may call for the application of the exempting clause. The substance
of the whole transaction, not its form, usually controls the tax consequences. [116]
The two purposes invoked by ANSCOR under the facts of this case are no excuse for its tax liability.
First, the alleged filipinization plan cannot be considered legitimate as it was not implemented until the BIR
started making assessments on the proceeds of the redemption. Such corporate plan was not stated in nor
supported by any Board Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being
a separate entity, the corporation can act only through its Board of Directors. [117] The Board Resolutions
authorizing the redemptions state only one purpose reduction of foreign exchange remittances in case cash
dividends are declared. Not even this purpose can be given credence. Records show that despite the
existence of enormous corporate profits no cash dividend was ever declared by ANSCOR from 1945 until
the BIR started making assessments in the early 1970s. Although a corporation under certain exceptions,
has the prerogative when to issue dividends, yet when no cash dividends was issued for about three decades,
this circumstance negates the legitimacy of ANSCORs alleged purposes. Moreover, to issue stock dividends
is to increase the shareholdings of ANSCORs foreign stockholders contrary to its filipinization plan. This
would also increase rather than reduce their need for foreign exchange remittances in case of cash dividend
declaration, considering that ANSCOR is a family corporation where the majority shares at the time of
redemptions were held by Don Andres foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid
excuse for the imposition of tax. Otherwise, the taxpayers liability to pay income tax would be made to
depend upon a third person who did not earn the income being taxed. Furthermore, even if the said purposes
support the redemption and justify the issuance of stock dividends, the same has no bearing whatsoever on
the imposition of the tax herein assessed because the proceeds of the redemption are deemed taxable
dividends since it was shown that income was generated therefrom.
Thirdly, ANSCOR argued that to treat as taxable dividend the proceeds of the redeemed stock
dividends would be to impose on such stock an undisclosed lien and would be extremely unfair to
intervening purchasers, i.e. those who buys the stock dividends after their issuance. [118] Such argument,
however, bears no relevance in this case as no intervening buyer is involved. And even if there is an
intervening buyer, it is necessary to look into the factual milieu of the case if income was realized from the
transaction. Again, we reiterate that the dividend equivalence test depends on such time and manner of the
transaction and its net effect. The undisclosed lien[119] may be unfair to a subsequent stock buyer who has
no capital interest in the company. But the unfairness may not be true to an original subscriber like Don
Andres, who holds stock dividends as gains from his investments. The subsequent buyer who buys stock
dividends is investing capital. It just so happen that what he bought is stock dividends. The effect of its
(stock dividends) redemption from that subsequent buyer is merely to return his capital subscription, which
is income if redeemed from the original subscriber.
After considering the manner and the circumstances by which the issuance and redemption of stock
dividends were made, there is no other conclusion but that the proceeds thereof are essentially considered
equivalent to a distribution of taxable dividends. As taxable dividend under Section 83(b), it is part of the
entire income subject to tax under Section 22 in relation to Section 21 [120] of the 1939 Code. Moreover,
under Section 29(a) of said Code, dividends are included in gross income. As income, it is subject to income
tax which is required to be withheld at source. The 1997 Tax Code may have altered the situation but it does
not change this disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES[121]
Exchange is an act of taking or giving one thing for another[122] involving reciprocal transfer[123] and
is generally considered as a taxable transaction. The exchange of common stocks with preferred stocks, or
preferred for common or a combination of either for both, may not produce a recognized gain or loss, so
long as the provisions of Section 83(b) is not applicable. This is true in a trade between two (2) persons as
well as a trade between a stockholder and a corporation. In general, this trade must be parts of merger,
transfer to controlled corporation, corporate acquisitions or corporate reorganizations. No taxable gain or
loss may be recognized on exchange of property, stock or securities related to reorganizations. [124]
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into
common and preferred, and that parts of the common shares of the Don Andres estate and all of Doa
Carmens shares were exchanged for the whole 150, 000 preferred shares. Thereafter, both the Don Andres
estate and Doa Carmen remained as corporate subscribers except that their subscriptions now include
preferred shares. There was no change in their proportional interest after the exchange. There was no cash
flow. Both stocks had the same par value. Under the facts herein, any difference in their market value would
be immaterial at the time of exchange because no income is yet realized it was a mere corporate paper
transaction. It would have been different, if the exchange transaction resulted into a flow of wealth, in which
case income tax may be imposed.[125]
Reclassification of shares does not always bring any substantial alteration in the subscribers
proportional interest. But the exchange is different there would be a shifting of the balance of stock features,
like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor
exchange per se, yields realize income for tax purposes. A common stock represents the residual ownership
interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary
40
rights or privileges and entitles the shareholder to a pro rata division of profits.[126] Preferred stocks are considered branch profits subject to the 15% profit remittance tax imposed under Section 24 (b) (2) of the
those which entitle the shareholder to some priority on dividends and asset distribution. [127] National Internal Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.

Both shares are part of the corporations capital stock. Both stockholders are no different from
ordinary investors who take on the same investment risks. Preferred and common shareholders participate
in the same venture, willing to share in the profits and losses of the enterprise. [128] Moreover, under the
doctrine of equality of shares all stocks issued by the corporation are presumed equal with the same
privileges and liabilities, provided that the Articles of Incorporation is silent on such differences.[129] In this
case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a
modification of the subscribers rights and privileges - which is not a flow of wealth for tax purposes. The
issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when there
is still maintenance of proprietary interest. [130]
WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that
ANSCORs redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a
distribution of taxable dividends for which it is LIABLE for the withholding tax-at-source. The decision is
AFFIRMED in all other respects.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted
abroad by a branch office to its head office which are effectively connected with its
trade or business in the Philippines are subject to the 15% profit remittance tax. To
be effectively connected it is not necessary that the income be derived from the
actual operation of taxpayer-corporation's trade or business; it is sufficient that the
income arises from the business activity in which the corporation is engaged. For
example, if a resident foreign corporation is engaged in the buying and selling of
machineries in the Philippines and invests in some shares of stock on which
dividends are subsequently received, the dividends thus earned are not considered
'effectively connected' with its trade or business in this country. (Revenue
Memorandum Circular No. 55-80).

10. G.R. No. 76573 September 14, 1989 MARUBENI CORPORATION vs. COMMISSIONER OF
In the instant case, the dividends received by Marubeni from AG&P are not income
INTERNAL REVENUE AND COURT OF TAX APPEALS
arising from the business activity in which Marubeni is engaged. Accordingly, said
dividends if remitted abroad are not considered branch profits for purposes of the
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and existing 15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as
under the laws of Japan and duly licensed to engage in business under Philippine laws with branch office amended . . . 6
at the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal of the decision of
the Court of Tax Appeals 1dated February 12, 1986 denying its claim for refund or tax credit in the amount
Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal Revenue
of P229,424.40 representing alleged overpayment of branch profit remittance tax withheld from dividends
on September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of P229,424.40
by Atlantic Gulf and Pacific Co. of Manila (AG&P).
"representing profit tax remittance erroneously paid on the dividends remitted by Atlantic Gulf and Pacific
Co. of Manila (AG&P) on April 20 and August 4, 1981 to ... head office in Tokyo. 7
The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P of
Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to
On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for
petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon.
refund/credit of P229,424.40 on the following grounds:
Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as cash
dividends to petitioner and withheld the corresponding 10% final dividend tax thereon. 2
While it is true that said dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a Philippine Branch of
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of the
Marubeni Corporation of Japan; and neither is it subject to the 10% intercorporate
10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also of the
dividend tax, the recipient of the dividends, being a non-resident stockholder,
withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding
nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10
tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder Marubeni Corporation
(2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and
of Japan, the 10% final intercorporate dividend tax and the 15% branch profit remittance tax paid thereon,
Japan.
is shown below:

Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan

The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the
is subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate
first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981 under
dividend tax and 15 % as profit remittance tax totals (sic) 25 %, the amount
Central Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the 15% branch
refundable offsets the liability, hence, nothing is left to be refunded. 8
profit remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau of Internal Revenue
by AG&P on August 4, 1981 under Central Bank Confirmation Receipt No. 7905930. 4
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the
Commissioner of Internal Revenue in its assailed judgment of February 12, 1986. 9
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit
remittance on cash dividends declared and remitted to petitioner at its head office in Tokyo in the total
amount of P229,424.40 on April 20 and August 4, 1981. 5 In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:

In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and Whatever the dialectics employed, no amount of sophistry can ignore the fact that
Company, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends petitioner the dividends in question are income taxable to the Marubeni Corporation of Tokyo,
received from AG&P are effectively connected with its conduct or business in the Philippines as to be Japan. The said dividends were distributions made by the Atlantic, Gulf and Pacific
41
 Company of Manila to its shareholder out of its profits on the investments of the (2) However, such dividends may also be taxed in the Contracting State of which
Marubeni Corporation of Japan, a non-resident foreign corporation. The the company paying the dividends is a resident, and according to the laws of that
investments in the Atlantic Gulf & Pacific Company of the Marubeni Corporation Contracting State, but if the recipient is the beneficial owner of the dividends the
of Japan were directly made by it and the dividends on the investments were tax so charged shall not exceed;
likewise directly remitted to and received by the Marubeni Corporation of Japan.
Petitioner Marubeni Corporation Philippine Branch has no participation or
(a) . . .
intervention, directly or indirectly, in the investments and in the receipt of the
dividends. And it appears that the funds invested in the Atlantic Gulf & Pacific
Company did not come out of the funds infused by the Marubeni Corporation of (b) 25 per cent of the gross amount of the dividends in all other cases.
Japan to the Marubeni Corporation Philippine Branch. As a matter of fact, the
Central Bank of the Philippines, in authorizing the remittance of the foreign
Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources is
exchange equivalent of (sic) the dividends in question, treated the Marubeni
therefore the determination of whether it is a resident or a non-resident foreign corporation under
Corporation of Japan as a non-resident stockholder of the Atlantic Gulf & Pacific
Philippine laws.
Company based on the supporting documents submitted to it.

Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business" within the
Subject to certain exceptions not pertinent hereto, income is taxable to the person
Philippines. Petitioner contends that precisely because it is engaged in business in the Philippines through
who earned it. Admittedly, the dividends under consideration were earned by the
its Philippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that
Marubeni Corporation of Japan, and hence, taxable to the said corporation. While it
since the Philippine branch and the Tokyo head office are one and the same entity, whoever made the
is true that the Marubeni Corporation Philippine Branch is duly licensed to engage
investment in AG&P, Manila does not matter at all. A single corporate entity cannot be both a resident and
in business under Philippine laws, such dividends are not the income of the
a non-resident corporation depending on the nature of the particular transaction involved. Accordingly,
Philippine Branch and are not taxable to the said Philippine branch. We see no
whether the dividends are paid directly to the head office or coursed through its local branch is of no
significance thereto in the identity concept or principal-agent relationship theory of
moment for after all, the head office and the office branch constitute but one corporate entity, the
petitioner because such dividends are the income of and taxable to the Japanese
Marubeni Corporation, which, under both Philippine tax and corporate laws, is a resident foreign
corporation in Japan and not to the Philippine branch. 10
corporation because it is transacting business in the Philippines.

Hence, the instant petition for review.

The Solicitor General has adequately refuted petitioner's arguments in this wise:

It is the argument of petitioner corporation that following the principal-agent relationship theory,
Marubeni Japan is likewise 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 which states:
Dividends received by a domestic or resident foreign corporation liable to tax under
this Code — (1) Shall be subject to a final tax of 10% on the total amount thereof,
which shall be collected and paid as provided in Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident foreign
corporation and not engaged in trade or business in the Philippines, is subject to tax on income earned
from Philippine sources at the rate of 35 % of its gross income under Section 24 (b) (1) of the same Code
which reads:
(b) Tax on foreign corporations — (1) Non-resident corporations. — A foreign
corporation not engaged in trade or business in the Philippines shall pay a tax equal
to thirty-five per cent of the gross income received during each taxable year from all
sources within the Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980
concluded between the Philippines and Japan. 11 Thus:
The general rule that a foreign corporation is the same juridical entity as its branch
office in the Philippines cannot apply here. This rule is based on the premise that
the business of the foreign corporation is conducted through its branch office,
following the principal agent relationship theory. It is understood that the branch
becomes its agent here. So that when the foreign corporation transacts business in
the Philippines independently of its branch, the principal-agent relationship is set
aside. The transaction becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the branch or the resident
foreign corporation.
Corollarily, if the business transaction is conducted through the branch office, the
latter becomes the taxpayer, and not the foreign corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head
office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There
can be no other logical conclusion considering the undisputed fact that the investment (totalling 283.260
shares including that of nominee) was made for purposes peculiarly germane to the conduct of the
corporate affairs of Marubeni Japan, but certainly not of the branch in the Philippines. It is thus clear that
petitioner, having made this independent investment attributable only to the head office, cannot now claim
the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the
lower tax rate of 10 %.

But while public respondents correctly concluded that the dividends in dispute were neither subject to the
Article 10 (1) Dividends paid by a company which is a resident of a Contracting
15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a non-resident
State to a resident of the other Contracting State may be taxed in that other
stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the
Contracting State.

42
taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to
Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each
tax has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the
tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted
abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of the
Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by Article
10 are the maximum rates as reflected in the phrase "shall not exceed." This means that any tax imposable
by the contracting state concerned should not exceed the 25 % limitation and that said rate would apply
only if the tax imposed by our laws exceeds the same. In other words, by reason of our bilateral
negotiations with Japan, we have agreed to have our right to tax limited to a certain extent to attain the
goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the
applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan
Treaty of 1980. Said section provides:
(b) Tax on foreign corporations. — (1) Non-resident corporations — ... (iii) On
dividends received from a domestic corporation liable to tax under this Chapter, the
tax shall be 15% of the dividends received, which shall be collected and paid as
provided in Section 53 (d) of this Code, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against
the tax due from the non-resident foreign corporation, taxes deemed to have been
paid in the Philippines equivalent to 20 % which represents the difference between
the regular tax (35 %) on corporations and the tax (15 %) on dividends as provided
in this Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign
corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines.
[Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax
credit of not less than 20 % of the dividends received. This 20 % represents the difference between the
regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid, and
the 15 % special rate on dividends received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be computed as follows:
It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident
stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum
ceiling of 25 % of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of Internal Revenue is laboring
under the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise
known as the Judiciary Reorganization Act of 1980. He alleges that the instant petition for review was not
perfected in accordance with Batas Pambansa Blg. 129 which provides that "the period of appeal from
final orders, resolutions, awards, judgments, or decisions of any court in all cases shall be fifteen (15) days
counted from the notice of the final order, resolution, award, judgment or decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which has
been created by virtue of a special law, Republic Act No. 1125. Respondent court is not among those
courts specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or
decision of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom. Otherwise,
said order, ruling, or decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim for
refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed a
motion for reconsideration which respondent court subsequently denied on November 17, 1986, and
notice of which was received by petitioner on November 26, 1986. Two days later, or on November 28,
1986, petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals and a petition for
review with the Supreme Court. 14 From the foregoing, it is evident that the instant appeal was perfected
well within the 30-day period provided under R.A. No. 1125, the whole 30-day period to appeal having
begun to run again from notice of the denial of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986
which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni
Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is ordered
to refund or grant as tax credit in favor of petitioner the amount of P144,452.40 representing overpayment
of taxes on dividends received. No costs.
11. G.R. No. 216130, August 03, 2016 COMMISSIONER OF INTERNAL
REVENUE v. GOODYEAR PHILIPPINES, INC.
The Facts
Respondent is a domestic corporation duly organized and existing under the laws of the Philippines, and
registered with the Bureau of Internal Revenue (BIR) as a large taxpayer with Taxpayer Identification
Number 000-409-561-000.6 On August 19, 2003, the authorized capital stock of respondent was increased
from P400,000,000.00 divided into 4,000,000 shares with a par value of P100.00 each, to
P1,731,863,000.00 divided into 4,000,000 common shares and 13,318,630 preferred shares with a par
value of P100.00 each. Consequently, all the preferred shares were solely and exclusively subscribed by
Goodyear Tire and Rubber Company (GTRC), which was a foreign company organized and existing
under the laws of the State of Ohio, United States of America (US) and is unregistered in the
Philippines.7chanrobleslaw
On May 30, 2008, the Board of Directors of respondent authorized the redemption of GTRC's 3,729,216
preferred shares on October 15, 2008 at the redemption price of P470,653,914.00, broken down as
follows: P372,921,600.00 representing the aggregate par value and P97,732,314.00, representing accrued
and unpaid dividends.8chanrobleslaw
On October 15, 2008, respondent filed an application for relief from double taxation before the
International Tax Affairs Division of the BIR to confirm that the redemption was not subject to Philippine
income tax, pursuant to the Republic of the Philippines (RP) - US Tax Treaty.9 This notwithstanding,
respondent still took the conservative approach, and thus, withheld and remitted the sum of
P14,659,847.10 to the BIR on November 3, 2008, representing fifteen percent (15%) FWT, computed
based on the difference of the redemption price and aggregate par value of the shares. 10chanrobleslaw
On October 21, 2010, respondent filed an administrative claim for refund or issuance of TCC,
representing 15% FWT in the sum of P14,659,847.10 before the BIR. Thereafter, or on November 3,
2010, it filed a judicial claim, by way of petition for review, before the CTA, docketed as C.T.A. Case No.
8188.11chanrobleslaw
43

For her part, petitioner maintained that respondent's claim must be denied, considering that: (a) it failed to
exhaust administrative remedies by prematurely filing its petition before the CTA; and (b) it failed to
submit complete supporting documents before the BIR. 12chanrobleslaw
The CTA Division Ruling
13
In a Decision dated March 25, 2013, the CTA Division granted the petition and thereby ordered
petitioner to refund or issue a TCC in the sum of P14,659,847.10 to respondent for being erroneously
withheld and remitted as FWT.14 Concerning the procedural issue, the CTA Division ruled that it was
appropriate for respondent to dispense with the administrative remedy before the BIR, considering that
court action should be instituted within two (2) years after the payment of the tax regardless of the
pendency of the administrative claim; otherwise, the taxpayer would be barred from recovering the
same.15chanrobleslaw
On the merits, the CTA Division found that the redemption of the 3,729,216 shares issued to GTRC –
which were then converted to treasury shares – was not subject to Philippine income tax. The CTA
Division elucidated that while the general rule is that the net capital gain obtained by a non-resident
foreign corporation, such as GTRC, in the redemption of shares would be subjected to tax rates of five
percent (5%) and ten percent (10%) under Section 28 (B) (5) (c) 16 of the National Internal Revenue Code,
as amended (Tax Code), the provisions, however, of the RP-US Tax Treaty would also apply in
determining the tax implications of the redemption of GTRC's preferred shares because it is a resident of
the US.17 It pointed out that under Article 1418 of the RP-US Tax Treaty, any gain derived by a US
resident (i.e., GTRC) from the alienation of its properties (i.e., the preferred shares), other than those
described in paragraph 1 thereof, shall only be taxable in the US. Nonetheless, the CTA Division remained
mindful of the Reservation Clause19 in the same treaty which provided that the gains derived by a US
resident from the disposition of shares in a domestic corporation may be taxed in the Philippines, provided
that the latter's assets principally20 consist of real property. After evaluating the Audited Financial
Statements (AFS) of respondent for the years 2007 and 2008, and noting that the value of its real
properties – i.e., property, plant, and equipment – comprise less than 50% of its total assets, the CTA
Division held that respondent's assets did not principally consist of real property and, hence, exempt from
capital gains tax under Section 28 (B) (5) (c) of the Tax Code. 21 chanrobleslaw
The CTA Division then determined whether the net capital gain derived by GTRC would be subjected to
15% FWT imposed on intercorporate dividends under Section 28 (B) (5) (b) 22 of the Tax Code. Citing the
RP-US Tax Treaty, the CTA Division noted that dividend income shall be determined by the law of the
state in which the distributing corporation is a resident,23 which in the Philippines' case, would be Section
73 (A)24 of the Tax Code, defining dividends for income tax purposes as distributions to shareholders
arising out of its earnings or profits. Accordingly, the CTA Division held that the net capital gain of
GTRC could not be regarded as "dividends," considering that it did not come from respondent's
unrestricted earnings or profits, as the records would show that it did not have any unrestricted earnings
from the years 2003-2009 to cover any dividend pay-outs.25cralawred Finally, the CTA Division explained
that there is only one instance in the Tax Code which treated the gains derived from redemptions or buy
back of shares as dividends, and this is found in Section 73 (B),26 which contemplated the issuance of
stock dividends. The CTA Division, however, dispelled the application of this provision, considering that
the shares which respondent redeemed were neither stock dividends nor were they redeemed using
unrestricted retained earnings. In sum, the CTA Division ruled that absent any law which specifically
treats the gain derived by GTRC as dividends, the same could not be subjected to 15% FWT under Section
28 (B) (5) (b).27chanrobleslaw
Dissatisfied, petitioner moved for reconsideration,28 which was, however, denied in a Resolution29 dated
June 26, 2013. Thereafter, she appealed30 to the CTA En Banc.
The CTA En Banc Ruling
In a Decision31 dated August 14, 2014, the CTA En Banc affirmed the findings of the CTA Division.
Echoing the ruling of the CTA Division, the CTA En Banc found that respondent was compelled to seek
judicial recourse after thirteen (13) days from filing its administrative claim so as not to forfeit its right to
appeal to the CTA. Anent the tax treatment of the redemption price paid by respondent to GTRC, the
CTA En Banc fully agreed with the disposition of the CTA Division, ruling that the net capital gain
received by GTRC was not subject to Philippine income tax. 32 Undaunted, petitioner filed a motion for
reconsideration,33 which was, however, denied in a Resolution34 dated January 5, 2015; hence, this
petition.
The Issues Before the Court
The issues raised by petitioner in this case are: (a) whether or not the judicial claim of respondent should
be dismissed for non-exhaustion of administrative remedies; and (b) whether or not the CTA En
Banccorrectly ruled that the gain derived by GTRC was not subject to 15% FWT on dividends.
The Court's Ruling
The petition is devoid of merit.
I.
At the onset, petitioner contends that by filing the administrative and judicial claims only 13 days apart,
respondent, in effect, pursued an empty remedy before the BIR, and thereby deprived the latter of the
opportunity to ascertain the validity of the claim. In this regard, petitioner maintained that the mere filing
of the administrative claim before the BIR did not outrightly satisfy the requirement of exhaustion of
administrative remedy.35chanrobleslaw
The contentions are untenable.
Section 229 of the Tax Code states that judicial claims for refund must be filed within two (2) years from
the date of payment of the tax or penalty, providing further that the same may not be maintained until a
claim for refund or credit has been duly filed with the Commissioner of Internal Revenue (CIR), viz.:
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit
or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment x x x. (Emphases and underscoring supplied)
Verily, the primary purpose of filing an administrative claim was to serve as a notice of warning to the
CIR that court action would follow unless the tax or penalty alleged to have been collected erroneously or
illegally is refunded. To clarify, Section 229 of the Tax Code – [then Section 306 of the old Tax Code] –
however does not mean that the taxpayer must await the final resolution of its administrative claim for
refund, since doing so would be tantamount to the taxpayer's forfeiture of its right to seek judicial recourse
should the two (2)-year prescriptive period expire without the appropriate judicial claim being filed.
In CBK Power Company, Ltd. v. CIR,36 the Court enunciated:
In the foregoing instances, attention must be drawn to the Court's ruling in P.J. Kiener Co., Ltd. v. David
(Kiener), wherein it was held that in no wise does the law, i.e., Section 306 of the old Tax Code (now,
Section 229 of the NIRC), imply that the Collector of Internal Revenue first act upon the taxpayer's
claim, and that the taxpayer shall not go to court before he is notified of the Collector's
action. In Kiener, the Court went on to say that the claim with the Collector of Internal Revenue was
intended primarily as a notice of warning that unless the tax or penalty alleged to have been
44
collected erroneously or illegally is refunded, court action will follow x x x. 37 (Emphases and
underscoring supplied)
In the case at bar, records show that both the administrative and judicial claims for refund of respondent
for its erroneous withholding and remittance of FWT were indubitably filed within the two-year
prescriptive period.38 Notably, Section 229 of the Tax Code, as worded, only required that an
administrative claim should first be filed. It bears stressing that respondent could not be faulted for
resorting to court action, considering that the prescriptive period stated therein was about to expire. Had
respondent awaited the action of petitioner knowing fully well that the prescriptive period was about to
lapse, it would have resultantly forfeited its right to seek a judicial review of its claim, thereby suffering
irreparable damage.
Thus, in view of the aforesaid circumstances, respondent correctly and timely sought judicial redress,
notwithstanding that its administrative and judicial claims were filed only 13 days apart.
II.
For another, petitioner asserts that the net capital gain derived by GTRC from the redemption of its
3,729,216 preferred shares should be subject to 15% FWT on dividends; She claims that while the
payment of the original subscription price could not be taxed as it represented a return of capital, the
additional amount, however, or the component of the redemption price representing the amount of
P97,732,314.00 should not be treated as a mere premium and part of the subscription price, but as
accumulated dividend in arrears, and, hence, subject to 15% FWT. 39chanrobleslaw
Again, the assertions are wrong.
The imposition of 15% FWT on intercorporate dividends received by a non-resident foreign corporation is
found in Section 28 (B) (5) (b) of the Tax Code which reads:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
xxxx
(B) Tax on Nonresident Foreign Corporation. –
xxxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. –
(b) Intercorporate Dividends. – A final withholding tax at the rate of fifteen percent (15%) is hereby
imposed on the amount of cash and/or property dividends received from a domestic corporation,
which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition
that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the
tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%), which represents the difference between the regular income tax of
thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as provided in this
subparagraph: Provided, That effective January 1, 2009, the credit against the tax due shall be equivalent
to fifteen percent (15%), which represents the difference between the regular income tax of thirty percent
(30%) and the fifteen percent (15%) tax on dividends;
xxxx (Emphasis and underscoring supplied)
It must be noted, however, that GTRC is a non-resident foreign corporation, specifically a resident of the
US. Thus, pursuant to the cardinal principle that treaties have the force and effect of law in this
jurisdiction,40 the RP-US Tax Treaty complementarily governs the tax implications of respondent's
transactions with GTRC.
Under Article 11 (5)41 of the RP-US Tax Treaty, the term "dividends" should be understood according to
the taxation law of the State in which the corporation making the distribution is a resident, which, in this
case, pertains to respondent, a resident of the Philippines. Accordingly, attention should be drawn to the
statutory definition of what constitutes "dividends," pursuant to Section 73 (A) 42 of the Tax Code which
provides that "[t]he term 'dividends' x x x means any distribution made by a corporation to its
shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other
property."
In light of the foregoing, the Court therefore holds that the redemption price representing the amount of
P97,732,314.00 received by GTRC could not be treated as accumulated dividends in arrears that could be
subjected to 15% FWT. Verily, respondent's AFS covering the years 2003 to 2009 show that it did not
have unrestricted retained earnings, and in fact, operated from a position of deficit. 43Thus, absent the
availability of unrestricted retained earnings, the board of directors of respondent had no power to
issue dividends.44 Consistent with Section 73 (A) of the Tax Code, this rule on dividend declaration
– i.e., that it is dependent upon the availability of unrestricted retained earnings – was further edified in
Section 43 of The Corporation Code of the Philippines45 which reads:
Section 43. Power to Declare Dividends. – The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose.
x x x x (Emphasis and underscoring supplied)
It is also worth mentioning that one of the primary features of an ordinary dividend is that the distribution
should be in the nature of a recurring return on stock46 which, however, does not obtain in this case. As
aptly pointed out by the CTA En Banc, the amount of P97,732,314.00 received by GTRC did not
represent a periodic distribution of dividend, but rather a payment by respondent for the redemption47 of
GTRC's 3,729,216 preferred shares. In Wise & Co., Inc. v. Meer:48
The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on
stock — in fact, they surrendered and relinquished their stock in return for said distributions, thus
ceasing to be stockholders of the Hongkong Company, which in turn ceased to exist in its own right as a
going concern during its more or less brief administration of the business as trustee for the Manila
Company, and finally disappeared even as such trustee.
"The distinction between a distribution in liquidation and an ordinary dividend is factual; the result in each
case depending on the particular circumstances of the case and the intent of the parties. If the
distribution is in the nature of a recurring return on stock it is an ordinary dividend. However, if
the corporation is really winding up its business or recapitalizing and narrowing its activities, the
distribution may properly be treated as in complete or partial liquidation and as payment by the
corporation to the stockholder for his stock. The corporation is, in the latter instances, wiping out all
parts of the stockholders' interest in the company * * * ." (Montgomery, Federal Income Tax Handbook
[1938-1939], 258 x x x)49 (Emphases and underscoring supplied)
All told, the amount of P97,732,314.00 received by GTRC from respondent for the redemption of its
3,729,216 preferred shares were not accumulated dividends in arrears. Contrary to petitioner's claims, it is
therefore not subject to 15% FWT on dividends in accordance with Section 28 (B) (5) (b) of the Tax Code.
WHEREFORE, the petition is DENIED. The Decision dated August 14, 2014 and the Resolution dated
January 5, 2015 of the Court of Tax Appeals En Banc in C.T.A. EB No. 1041 are hereby AFFIRMED.
12. G.R. No. L-68375 April 15, 1988 COMMISSIONER OF INTERNAL REVENUE vs. WANDER
PHILIPPINES, INC. AND THE COURT OF TAX APPEALS
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation
organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro for short), a
Swiss corporation not engaged in trade or business in the Philippines.
45
On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30, 1975 and
remitted to its parent company, Glaro dividends in the amount of P222,000.00, on which 35% withholding
tax thereof in the amount of P77,700.00 was withheld and paid to the Bureau of Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30,
1976 on the dividends it remitted to Glaro amounting to P355,200.00, on wich 35% tax in the amount of
P124,320.00 was withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund
and/or tax credit in the amount of P115,400.00, contending that it is liable only to 15% withholding tax in
accordance with Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos. 369 and 778,
and not on the basis of 35% which was withheld and paid to and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a
petition with respondent Court of Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of which
reads:
WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to
petitioner in the amount of P115,440.00 representing overpaid withholding tax on
dividends remitted by it to the Glaro S.A. Ltd. of Switzerland during the second
quarter of the years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a Resolution
dated August 13, 1984. Hence, the instant petition.
Petitioner raised two (2) assignment of errors, to wit:
I foreign country where Glaro is domiciled, grants to Glaro a tax credit against the tax due it, equivalent to
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE
COURT OF TAX APPEALS ERRED INHOLDING THAT THE HEREIN RESPONDENT WANDER
PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME
COUNTRY OF GLARO S.A. LTD. (THE PARENT COMPANY OF THE HEREIN RESPONDENT
WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS SWISS
INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20 PERCENTAGE-POINT
PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND TAX) SPARED OR WAIVED OR
OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE
PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is entitled to the preferential rate
of 15% withholding tax on dividends declared and remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper party to
claim the refund; and (2) Whether or not Switzerland allows as tax credit the "deemed paid" 20%
Philippine Tax on such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the remitter or payor of the
dividend income and a mere withholding agent for and in behalf of the Philippine Government, which
should be legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in this
Court. It was never raised at the administrative level, or at the Court of Tax Appeals. To allow a litigant to
assume a different posture when he comes before the court and challenge the position he had accepted at
the administrative level, would be to sanction a procedure whereby the Court—which is supposed to
review administrative determinations—would not review, but determine and decide for the first time, a
question not raised at the administrative forum. Thus, it is well settled that under the same underlying
principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the
lower court cannot be raised for the first time on appeal (Aguinaldo Industries Corporation vs.
Commissioner of Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA
725; Garcia vs. Court of Appeals, 102 SCRA 597; Matialonzo vs. Servidad, 107 SCRA 726,
In any event, 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 Section 53 (b) of
the Tax Code, cannot by any stretch of the imagination be considered as an abdication of its responsibility
to its mother company. Thus, this Court construing Section 53 (b) of the Internal Revenue Code held that
"the obligation imposed thereunder upon the withholding agent is compulsory." 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 (Commissioner of Internal Revenue vs.
Malayan Insurance Co., Inc., 21 SCRA 944). In fact, Wander may be assessed for deficiency withholding
tax at source, plus penalties consisting of surcharge and interest (Section 54, NLRC). Therefore, as the
Philippine counterpart, Wander is the proper entity who should for the refund or credit of overpaid
withholding tax on dividends paid or remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the
20%, or the difference between the regular 35% rate of the preferential 15% rate. The dispute in this issue
lies on the fact that Switzerland does not impose any income tax on dividends received by Swiss
corporation from corporations domiciled in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case, reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal
Revenue Code, as amended, is hereby further amended to read as follows:
(b) Tax on foreign corporations. — 1) Non-resident
corporation. A foreign corporation not engaged in trade or
business in the Philippines, including a foreign life insurance
company not engaged in the life insurance business in the
Philippines, shall pay a tax equal to 35% of the gross income
received during its taxable year from all sources within the
Philippines, as interest (except interest on foreign loans
which shall be subject to 15% tax), dividends, premiums,
annuities, compensations, remuneration for technical services
46
 or otherwise, emoluments or other fixed or determinable,
annual, periodical or casual gains, profits, and income, and
capital gains: ... Provided, still further That on dividends
received from a domestic corporation liable to tax under this
Chapter, the tax shall be 15% of the dividends received,
which shall be collected and paid as provided in Section 53
(d) of this Code, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall
allow a credit against the tax due from the non-resident
foreign corporation taxes deemed to have been paid in the
Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and
the tax (15%) dividends as provided in this section: ...
From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the tax
shall be 15% of the dividends received, subject to the condition that the country in which the non-resident
foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign
corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly,
Wander claims that full credit is granted and not merely credit equivalent to 20%. Petitioner, on the other
hand, avers the tax sparing credit is applicable only if the country of the parent corporation allows a
foreign tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent
twenty percentage point portion spared, waived or otherwise deemed as if paid in the Philippines; that
private respondent does not cite anywhere a Swiss law to the effect that in case where a foreign tax, such
as the Philippine 35% dividend tax, is spared waived or otherwise considered as if paid in whole or in part
by the foreign country, a Swiss foreign-tax credit would be allowed for the whole or for the part, as the
case may be, of the foreign tax so spared or waived or considered as if paid by the foreign country.
While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the
fact that Switzerland did not impose any tax or the dividends received by Glaro from the Philippines
should be considered as a full satisfaction of the given condition. For, as aptly stated by respondent Court,
to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree
No. 369, amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of
said law and definitely will adversely affect foreign corporations" interest here and discourage them from
investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of
the May 19, 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on the
dividends to be received by the said parent corporation in the Philippines, the condition imposed under the
above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."
Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency such
as the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study
and consideration of tax problems and has necessarily developed an expertise on the subject unless there
has been an abuse or improvident exercise of authority (Reyes vs. Commissioner of Internal Revenue, 24
SCRA 198, which is not present in the instant case. WHEREFORE, the petition filed is DISMISSED for
lack of merit.
13. G.R. No. L-66838 December 2, 1991 COMMISSIONER OF INTERNAL REVENUE vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT
OF TAX APPEALS
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private
respondent 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&G-USA"),
amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the thirty-
five percent (35%) withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue
a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that
pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NIRC"), 1 as amended by
Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only
fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a
petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No.
2883. On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to refund or
grant the tax credit in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA
and held that:chanrob1es virtual 1aw library
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax
credit here involved;chanrobles.com : virtual law library
(b) "there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the
US tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to twenty
percent (20%) which represents the difference between the regular tax of thirty-five percent (35%) on
corporations and the tax of fifteen percent (15%) on dividends;" and
(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends
received by its non-resident parent company in the US (P&G-USA) may be subject to the preferential tax
rate of 15% instead of 35%."cralaw virtua1aw library
These holdings were questioned in P&G-Phil.’s Motion for Reconsideration and we will deal with them
seriatim in this Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present
claim for refund or tax credit, which need to be examined. This question was raised for the first time on
appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the Commissioner of
Internal Revenue. The question was not raised by the Commissioner on the administrative level, and
neither was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise
valid claim for refund by raising this question of alleged incapacity for the first time on appeal before this
Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed
in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting such
refund or tax credit to its parent and sole stockholder. It is commonplace that in the absence of explicit
statutory provisions to the contrary, the government must follow the same rules of procedure which bind
private parties. It is, for instance, clear that the government is held to compliance with the Provisions of
Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such compliance,
save only in respect of the matter of filing fees from which the Republic of the Philippines is exempt by
the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be
allowed to raise for the first time on appeal questions which had not been litigated either in the lower court
47
or on the administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at the
administrative level, demanded that P&G-Phil. produce an express authorization from its parent
corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and
produce such authorization before filing the action in the instant case. The action here was commenced
just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as
well which, as will be seen below, also ultimately relate to fairness.cralawnad
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal
Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally
assessed or collected:jgc:chanrobles.com.ph
"SECTION 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be
maintained in any court for the recovery any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: . .
." (Emphasis supplied).
Section 309 (3) of the NIRC, in turn, provides:jgc:chanrobles.com.ph
"SECTION 309. Authority of Commissioner to Take Compromises and to Refund Taxes. — The
Commissioner may:chanrob1es virtual 1aw library
x x x implied authority from the very beginning. A sovereign government should act honorably and fairly at all
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties
shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund
within two (2) years after the payment of the tax or penalty." (As amended by P.D. No. 69) (Emphasis
supplied).
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer"
under Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring to "any
person subject to tax imposed by the Title [on Tax on Income]." 2 It thus becomes important to note that
under Section 53 (c) of the NIRC, the withholding agent who is required to deduct and withhold any tax"
is made "personally liable for such tax" and indeed is indemnified against any claims and demands which
the stockholder might wish to make in questioning the amount of payments effected by the withholding
agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable 3 for the correct amount of the tax that should be withheld from the dividend
remittances. The withholding agent i8, moreover, subject to and liable for deficiency assessments,
surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount
that should have been withheld under law.chanroblesvirtualawlibrary
A "person liable for tax" has been held to be a "person subject to tax" " and properly considered a
"taxpayer." 4 The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a
tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made liable
for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in
interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were
illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that
a withholding agent is in fact the agent both of the government and of the taxpayer, and that the
withholding agent is not an ordinary government agent:jgc:chanrobles.com.ph
"The law sets no condition for the personal liability of the withholding agent to attach. The reason is to
compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for
the collection of the tax as well as the payment thereof is concentrated upon the person over whom the
Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government
and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government’s
agent. In regard to the filing of the necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government
agent especially because under Section 53 (c) he is held personally liable for the tax he is duty bound to
withhold; whereas the Commissioner and his deputies are not made liable by law." 6 (Emphasis supplied).
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of
the dividends with respect to the filing of the necessary income tax return and with respect to actual
payment of the tax to the government, 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, as in the instant case, the withholding agent is the wholly owned subsidiary of
the parent-stockholder and therefore, at all times, under the effective control of such parent-stockholder. In
the circumstances of this case, 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.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some
written or telexed confirmation by P&G-USA of the subsidiary’s authority to claim the refund or tax credit
and to remit the proceeds of the refund, or to apply the tax credit to some Philippine tax obligation of,
P&G-USA, before actual payment of the refund or issuance of a tax credit certificate. What appears to be
vitiated by basic unfairness is petitioner’s position that, although P&G-Phil. is directly and personally
liable to the Government for the taxes and any deficiency assessments to be collected, the Government is
not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.’s
times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a
"taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for
refund and the suit to recover such claim.chanrobles lawlibrary : rednad
II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances by
P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of
Section 24 (b) (1) of the NIRC:jgc:chanrobles.com.ph
"(b) Tax on foreign corporations. —
(1) Non-resident corporation. — A foreign corporation not engaged in trade and business in the
Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during its taxable year from all
sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends received from
a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall
be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country
in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the
non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on corporations and the tax (15%) on
dividends as provided in this Section . . ."cralaw virtua1aw library
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident
corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of
domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for
48
"taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by
the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%)
dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid
in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit
for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20)
percentage points which represents the difference between the regular thirty-five percent (35%) dividend
tax rate and the preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed
paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable
the preferred dividend tax rate of fifteen percent (15%). In other words, our NIRC does not require that the
US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax
waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid"
tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the
US Internal Revenue Code ("Tax Code") are the following:jgc:chanrobles.com.ph
"SECTION 901 — Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart, the tax imposed by
this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts
provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed
to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed
at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax
imposed by this chapter for each taxable year. The credit shall not be allowed against the tax imposed by
section 531 (relating to the tax on accumulated earnings), against the additional tax imposed for the
taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating to
recoveries of foreign expropriation losses), or against the personal holding company tax imposed by
section 541.
(b) Amount allowed. — Subject to the applicable limitation of section 904, the following amounts shall be
allowed as the credit under subsection (a):chanrob1es virtual 1aw library
(a) Citizens and domestic corporations. — In the case of a citizen of the United States and of a domestic
corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the
taxable year to any foreign country or to any possession of the United States; andcralawnad
x x x taxes actually paid here by P&G-Phil., which are very real indeed.
SECTION 902. — Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a domestic
corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it
receives dividends in any taxable year shall —
x x x or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as
defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed country
corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits
taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of
the United States on or with respect to such accumulated profits, which the amount of such dividends
bears to the amount of such accumulated profits.
x x x
(c) Applicable Rules
(1) Accumulated profits defined. — For purposes of this section, the term ‘accumulated profits’ means
with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed
without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with
respect to such profits or income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of
the income, war profits, and excess profits taxes imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what year
or years such dividends were paid, treating dividends paid in the first 20 days of any year as having been
paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows
otherwise), and in other respects treating dividends as having been paid from the most recently
accumulated gains, profits, or earning . . ." (Emphasis supplied).
Close examination of the above quoted provisions of the US Tax Code 7 shows the following:chanrob1es
virtual 1aw library
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax
actually paid (i.e., withheld) from the dividend remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid" tax credit 8 for a
proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income
tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This
"deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in
fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as
dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it
came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business
operations in the Philippines through the medium of P&G-Phil. and here earning profits. What is, under
US law, deemed paid by P&G-USA are not "phantom taxes" but instead Philippine corporate income
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii)
the tax credit for the Philippine corporate income tax actually paid by P&G-Phil. but "deemed paid" by
P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA.
These tax credits are allowed because of the US congressional desire to avoid or reduce double taxation of
the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the reduced
necessary:chanrob1es virtual 1aw library
a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government
under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA;
and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the
49
amount of the dividend tax waived by the Philippine Government.chanrobles.com : virtual law library
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically
determined in the following manner:chanrob1es virtual 1aw library
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount
(a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA
is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section
902, Tax Code, may be computed arithmetically as follows:chanrob1es virtual 1aw library
Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil.
to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine
corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine
government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is
identical with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by
the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner
of Internal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which
stated:jgc:chanrobles.com.ph
"However, after a restudy of the decision in the American Chicle Company case and the Provisions of
Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your contention that our
computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax
‘deemed paid’ to the Philippine government for purposes of credit against the U.S. tax by the recipient of
dividends includes a portion of the amount of income tax paid by the corporation declaring the dividend in
addition to the tax withheld from the dividend remitted. In other words, the U.S. government will allow a
credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually
withheld, a portion of the income tax paid by the corporation declaring the dividend. Thus, if a Philippine
corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000
Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after
income tax, which is P75,000, will then be declared as dividend to the U.S. corporation at 15% tax, or
P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S. Internal Revenue
Code, U.S. corporation receiving the dividend can utilize as credit against its U.S. tax payable on said
dividends the amount of P30,000 composed of The tax ‘deemed paid’ or indirectly paid on the dividend
(2) The amount of 15% of P75,000 withheld = 11,250 P30,000
The amount of P18,750 deemed paid and to be credited against the US. tax on the dividends received by
the U.S. corporation from a Philippine subsidiary is clearly more than 20% requirement of Presidential
Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above example, amounts to
P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the
sense that the dividends to be remitted by your client to its parent company shall be subject to the
withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S.
Federal Tax Code, which are the bases of the ruling, are not revoked, amended and modified, the effect of
which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends
remitted by a foreign corporation to a U.S. corporation." (Italics supplied).
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods
Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates. In
other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was
pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in
Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which
Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United
States) and which, therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:jgc:chanrobles.com.ph
"SECTION 30. Deductions from Gross Income. — In computing net income, there shall be allowed as
deductions — . . .
(c) Taxes. — . . .
x x x
(3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his desire to
have the benefits of this paragraphs, the tax imposed by this Title shall be credited with . . .
(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of domestic
corporation the amount of net income, war profits or excess profits, taxes paid or accrued during the
taxable year to any foreign country." (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for
taxes actually paid by it to the US government — e.g., for taxes collected by the US government on
dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section
901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as
follows:jgc:chanrobles.com.ph
"(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic corporation which
owns a majority of the voting stock of a foreign corporation from which it receives dividends in any
taxable year shall be deemed to have paid the same proportion of any income, war profits, or excess-
profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the
accumulated profits of such foreign corporation from which such dividends were paid, which the amount
of such dividends bears to the amount of such accumulated profits: Provided, That the amount of tax
deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax
against which credit is taken which the amount of such dividends bears to the amount of the entire net
income of the domestic corporation in which such dividends are included. The term ‘accumulated profits’
when used in this subsection in reference to a foreign corporation, means the amount of its gains, profits,
or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect to
such profits or income; and the Commissioner of Internal Revenue shall have full power to determine
from the accumulated profits of what year or years such dividends were paid; treating dividends paid in
the first sixty days of any year as having been paid from the accumulated profits of the preceding year or
years (unless to his satisfaction shown otherwise), and in other respects treating dividends as having been
paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corporation,
the income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting
period of less than one year, the word ‘year’ as used in this subsection shall be construed to mean such
accounting period." (Emphasis supplied).
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent
50
corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a
Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed under our NIRC
to have paid a proportionate part of the US corporate income tax paid by its US subsidiary, although such
US tax was actually paid by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law
to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation
with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit
allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid"
tax credit granted in Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case
was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held
that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax
authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court from
questions of administrative implementation arising after the legal question has been answered. The basic
legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-
five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of whether or not P&G-
USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to
the administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit
shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent
(35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires,
in the case at bar, that the USA "shall allow a credit against the tax due from [P&G-USA for] taxes
deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue
regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by
the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate
becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax
credit; it is a provision which specifies when a particular (reduced) tax rate is legally
applicable.chanrobles.com : virtual law library
In the third place, the position originally taken by the Second Division results in a severe practical
problem of administrative circularity. The Second Division in effect held that the reduced dividend tax
rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required
minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit
cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which
means that the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11
It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the
tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu, 12 Hongkong, 13 Denmark, 14 etc.)
comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the fifteen percent
(15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced
dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a condition for the
applicability, as a matter of law, of a particular tax rate. Upon the other hand, upon the determination or
recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing
implementing regulations that would require P&G-Phil., or any Philippine corporation similarly situated,
to certify to the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US
tax authorities to P&G-USA or a US parent corporation for the taxable year involved. Since the US tax
laws can and do change, such implementing regulations could also provide that failure of P&G-Phil. to
submit such certification within a certain period of time, would result in the imposition of a deficiency
assessment for the twenty (20) percentage points differential. The task of this Court is to settle which tax
rate is applicable, considering the state of US law at a given time. We should leave details relating to
administrative implementation where they properly belong — with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason
alone, necessarily the correct reading of the statute. There are many tax statutes or provisions which are
designed, not to trigger off an instant surge of revenues, but rather to achieve longer-term and broader-
gauge fiscal and economic objectives. The task of our Court is to give effect to the legislative design and
objectives as they are written into the statute even if, as in the case at bar, some revenues have to be
foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five
percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369
which amended Section 24 (b) (1), NIRC, into its present form:jgc:chanrobles.com.ph
"WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing economy
foremost of which is the financing of economic development programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their
earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be
imposed on dividends received by non-resident foreign corporations in the same manner as the tax
imposed on interest on foreign loans;
x x x"
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in
the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends
remittable to the investor. The foreign investor, however, would not benefit from the reduction of the
Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e., second-
tier taxation) (the home country would simply have more "post-R.P. tax" income to subject to its own
taxing power) by allowing the investor additional tax credits which would be applicable against the tax
payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary
country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty
(20) percentage points of dividend tax foregone by the Philippines, in the assumption that a positive
incentive effect would thereby be felt by the investor.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the
US corporate income tax payable on the dividend remitted by P&G-Phil. The result, in fine, could be that
P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the dividends remitted
to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this should
encourage additional investment or re-investment in the Philippines by P&G-USA.chanrobles virtual
lawlibrary
3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on
Income," 15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a
maximum of twenty percent (20%) of the gross amount of dividends paid to US parent
corporations:jgc:chanrobles.com.ph
"ARTICLE 11. — Dividends
x x x
51

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that
Contracting State by a resident of the other Contracting State shall not exceed —
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of
the paying corporation’s taxable year which precedes the date of payment of the dividend and during the
whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of
the paying corporation was owned by the recipient corporation."cralaw virtua1aw library
x x x"
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United States that
it "shall allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax]
credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary]
— ." 16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax
Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to
reduce the regular dividend tax rate of thirty-five percent (35%). Since, however, the treaty rate of twenty
percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage
points which compliance of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC,
makes available in respect of dividends from a Philippine subsidiary.
The facts have been stipulated in writing, as quoted verbatim in the decision of the trial court thus:
We conclude that private respondent P&G-Phil. is entitled to the tax refund or tax credit which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent’s Motion for
Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the Second Division of the Court
promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the
Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review
for lack of merit. No pronouncement as to costs.
14. G.R. No. 48231 June 30, 1947 WISE & CO., INC., ET AL. vs. BIBIANO L. MEER, Collector of
Internal Revenue
This is an appeal by Wise & Co., Inc. and its co-plaintiff from the judgment of the Court of First Instance
of Manila in civil case No. 56200 of said court, absolving the defendant Collector of Internal Revenue
from the complaint without costs. The complaint was for recovery of certain amounts therein specified,
which had been paid by said plaintiffs under written protest to said defendant, who had previously
assessed said amounts against the respective plaintiffs by way of deficiency income taxes for the year
1937, as detailed under paragraph 6 of defendant's special defense (Record of Appeal, pp. 7-10).
Appellants made eight assignments of error, to wit:
The trial court erred in finding:
I. That the Manila Wine Merchants, Ltd., a Hongkong corporation, was in liquidation
beginning June 1, 1937, and that all dividends declared and paid thereafter were distributions
of all its assets in complete liquidation.
II. That all distributions made by the Hongkong corporation after June 1, 1937, were subject to
both normal tax and surtax.
III. That income received by one corporation from another was taxable under the Income Tax
Law, and that Wise & Co., Inc., was taxable on the distribution of its share of the same net
profits on which the Hongkong Company had already paid Philippine tax, despite the clear
provisions of section 10 of the Income Tax Law then in effect.
IV. That the non-resident individual stockholder appellants were subject to both normal and
additional tax on the distributions received despite the clear provisions of section 5 (b) of the
Income Tax Law then in effect.
V. That section 25 (a) of the Income Tax Law makes distributions in liquidation of a foreign
corporation, dissolution proceedings of which were conducted in a foreign country, taxable
income to a non-resident individual stockholder.
VI. That section 199 of the Income Tax regulations, providing that in a distribution by a
corporation in complete liquidation of its assets the gain realized by a stockholder, whether
individual or corporate, is taxable as a dividend, is ineffective.
VII. That the deficiency assessment was properly collected.
VIII. That the refunds claimed by plaintiffs were not in order, and in rendering judgment
absolving the Collector of Internal Revenue from making such refunds.
I
That the allegations of paragraphs I and II of the complaint are true and correct.
II
That during the year 1937, plaintiffs, except Mr. E.M.G. Strickland (who, as husband of the
plaintiff Mrs. E.M.G. Strickland, is only a nominal party herein), were stockholders of Manila
Wine Merchants, Ltd., a foreign corporation duly authorized to do business in the Philippines.
III
That on May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd., (hereinafter
referred to as the Hongkong Company), recommended to the stockholders of the company that
they adopt the resolutions necessary to enable the company to sell its business and assets to
Manila Wine Merchants, Inc., a Philippine corporation formed on May 27, 1937, (hereinafter
referred to as the Manila Company), for the sum of P400,000 Philippine currency; that this sale
was duly authorized by the stockholders of the Hongkong Company at a meeting held on July
22, 1937; that the contract of sale between the two companies was executed on the same date, a
copy of the contract being attached hereto as Schedule "A"; and that the final resolutions
completing the said sale and transferring the business and assets of the Hongkong Company to
the Manila Company were adopted on August 3, 1937, on which date the Manila Company
were adopted on August 3, 1937, on which date the Manila Company paid the Hongkong
company the P400,000 purchase price.
IV
52
That pursuant to a resolution by its Board of Directors purporting to declare a dividend, the
Hongkong Company made a distribution from its earnings for the year 1937 to its stockholders,
plaintiffs receiving the following:
That the Hongkong Company has paid Philippine income tax on the entire earnings from which
the said distributions were paid.
V XI
That after deducting the said dividend of June 8, 1937, the surplus of the Hongkong Company
resulting from the active conduct of its business was P74,182.12. That as a result of the sale of
its business and assets to the Manila Company, the surplus of the Hongkong Company was
increased to a total of P270,116.59.
That pursuant to resolutions of its Board of Directors, and of its shareholders, purporting to
declare dividends, copies of which are attached hereto as Schedules "B" and "B-1", the
Hongkong Company distributed this surplus to its stockholders, plaintiffs receiving the
following sums on the following dates:
That Philippine income tax had been paid by the Hongkong Company on the said surplus from
which the said distributions were made.
VI
That on August 19, 1937, at a special general meeting of the shareholders of the Hongkong
Company, the stockholders by proper resolution directed that the company be voluntarily
liquidated and its capital distributed among the stockholders; that the stockholders at such
meeting appointed a liquidator duly paid off the remaining debts of the Hongkong Company
and distributed its capital among the stockholders including plaintiffs; that the liquidator duly
filed his accounting on January 12, 1938, and in accordance with the provisions of Hongkong
Law, the Hongkong Company was duly dissolved at the expiration of three moths from that
date.
VII
That plaintiffs duly filed Philippine income tax returns. That defendant subsequently made the
following deficiency assessments against plaintiffs:
VIII
That said plaintiffs duly paid the said amounts demanded by defendant under written protest,
which was overruled in due course; that the plaintiffs have since July 1, 1939 requested from
defendant a refund of the said amounts which defendant has refused and still refuses to refund.
IX
That this stipulation is equally the work of both parties and shall be fairly interpreted to give
effect to their intention that this case shall be decided solely upon points of law.
X
The parties incorporate the Corporation Law and Companies Act of Hongkong and the
applicable decisions made thereunder, into this stipulation by reference, and either party may at
any stage in the proceedings in this case cite applicable sections of the law and the authorities
decided thereunder as though the same had been duly proved in evidence.
That the parties hereto reserve the right to submit other and further evidence at the trial of this
case. (Record on Appeal, pp. 19-26.)
1. The first assignment of error. — Appellants maintain that the amounts received by them and on which
the taxes in question were assessed and collected were ordinary dividends; while upon the other hand,
appellee contends that they were liquidating dividends. If the first proposition is correct, this assignment
would be well-taken, otherwise, the decision of the court upon the point must be upheld.
It appears that on May 27, 1937, the Board of Directors of the Manila Wine Merchants, Ltd. (hereafter
called the Hongkong Co.), recommended to the stockholders of said company "that the Company should
be wound up voluntarily by the members and the business sold as a going concern to a new company
incorporated under the laws of the Philippine Islands under the style of "The Manila Wine Merchants,
Inc." (Annex A defendant's answer, Record on Appeal, p. 12), and that they adopt the resolutions
necessary to enable the company to sell its business and assets to said new company (hereafter called the
Manila Company), organized on that same date, for the price of P400,000, Philippine currency; that the
sale was duly authorized by the stockholders of the Hongkong Co. at a meeting held on July 22, 1937; and
that the contract of sale between the two companies was executed on the same day, as appears from the
copy of the contract, Schedule A of the Stipulation of Facts (par. III, Stipulation of Facts, Record on
Appeal, pp. 19-20). It will be noted that the Board of Directors of the Hongkong Co., in recommending
the sale, specifically mentioned "a new Company incorporated under the laws of the Philippine Islands
under the style of "The Manila Wine Merchants, Inc." as the purchaser, which fact shows that at the time
of the recommendation the Manila Company had already been formed, although on the very same day;
and this and the further fact that it was really the latter corporation that became the purchaser should
clearly point to the conclusion that the Manila Company was organized for the express purpose of
succeeding the Hongkong Co. The stipulated facts would admit of no saner interpretation.
While it is true that the contract of sale was signed on July 22, 1937, it contains in its paragraph 4 of the
express provision that the transfer "will take effect as on and from the first day of June, One thousand nine
hundred and thirty-seven, and until completion thereof, the Company shall stand possessed of the property
hereby agreed to be transferred and shall carry on its business in trust for the Corporation" (Schedule A of
Stipulation of Facts, Record on Appeal, p. 15). "The Company" was the Hongkong Company and "the
Corporation" was the Manila Company. For "the Company" to carry on business in trust for the
"Corporation," it was necessary for the latter to be the owner of the business. It is plain that the parties
considered the sale as made as on and from June 1, 1937 — for the purposes of said sale and transfer, both
parties agreed that the deed of July 22, 1937, was to retroact to the first day of the preceding month.
The cited provision could not have served any other purpose than to consider the sale as made as of June
1, 1937. If it had not been for this purpose, if the intention had been that the sale was to be effective upon
the date of the written contract or subsequently, said provision would certainly never have been written,
for how could the transfer or sale take effect as of June 1, 1937, if it were to be considered as made at
a later date?
The first distribution made after June 1, 1937, of what plaintiffs call ordinary dividends but what
defendant denominates liquidating dividends was declared and paid on June 8, 1937 (Stipulation,
53
Paragraph IV, Record on Appeal, p. 20). It will be recalled that the recommendation of the Board of
Directors of the Hongkong Company, at their meeting on May 27, 1937, was first of all "that the company
should be wound up voluntarily by the members"(Record on Appeal, p.12), and in pursuance of that
purpose, it was further recommended that the Company's business be sold as a going concern to the
Manila Company (ibid). Complying with the Companies Ordinance 1932 for companies registered in
Hongkong for the voluntary winding up by members, a Declaration of Solvency was drawn up duly signed
before the British Consul-General in Manila by the same directors, and said declaration was returned to
Hongkong for filing with the Registrar of Companies (ibid.) Both recommendations were in due course
approved and ratified. The later execution of the formal deed of sale and the successive distributions of the
amounts in question among the stockholders of the Hongkong Company were obviously other steps in its
complete liquidation. And they leave no room for doubt in the mind of the court that said distributions
were not in the ordinary course of business and with intent to maintain the corporation as a going concern
— in which case they would have been distributions of ordinary dividends — but after the liquidation of
the business had been decided upon, which makes them payments for the surrender and relinquishment of
the stockholders' interest in the corporation, or so-called liquidating dividends.
More than with the distribution of June 8, 1937, is this true with those declared on July 22, 1937, and paid
on August 4 and October 28, 1937, respectively (Stipulation of Facts, par. 5, Record on Appeal, p. 21).
The distributions thus declared on July 22, 1937, and paid on August 4 and October 28, 1937, were from
the surplus of the Hongkong Company resulting from the active conduct of its business and amounting to
P74,182.12, which surplus was augmented to a total of P270,116.59 as a result of the sale of its business
and assets to the Manila Company (ibid.). In both Schedules B and B-1 of the Stipulation of Facts (Record
on appeal, pp. 16-18), being minutes of directors' meetings of the Hongkong Co., where authorization and
instruction were given to declare and pay in the form of "dividends" to the shareholders the amounts in
question, it was specifically provided that the surplus to be so distributed be that resulting after providing
for return of capital and necessary or various expenses, as shown in the balance sheet prepared as of June
1, 1937, and in the reconstructed balance sheet of the same date presented by the company's auditors, it
having been resolved in Schedule B-1 that "any balance remaining to be distributed when final liquidator's
account has been rendered and paid" (Record on Appeal, p. 18; emphasis supplied). It thus becomes more
evident that those distributions were to be made in the course or as a result of the Hongkong Company's
liquidation and that said liquidation was to be complete and final. And although the various resolutions
above-mentioned speak of distributions of dividends when referring to those already alluded to, "a
distribution does not necessarily become a dividend by reason of the fact that it is called a dividend by the
distributing corporation." (Holmes Federal Taxes, 6th edition, 774.)
The ordinary connotation of liquidating dividend involves the distribution of assets by a
corporation to its stockholders upon dissolution. (Klein, Federal Income Taxation, 253-254.)
But it is contended by plaintiffs that as of August 4, 1937, the Hongkong Company "had taken no steps
toward dissolution or liquidation and still retained on hand liquid assets in excess of its capitalization."
They also assert that it was only on August 19, 1937, that said company took the first corporate steps
toward liquidation (Appellant's Brief, pp. 9-10). The fact, however, is that since July 22, 1937, when the
formal deed of sale of all the properties, assets, and business of the Hongkong Company to the Manila
Company was made, it was expressly stipulated that the sale or transfer shall take effect as of June 1,
1937. As already indicated, the transfer of what was sold, like the sale itself, was, by the mutual agreement
of the parties, considered as made on and from that date, and that, if thereafter and until final completion
of the transfer, the Hongkong Company continued to run the business, it did so in trust for the new owner,
the Manila Company. In the case of Canal-Commercial T. & S. Bk. vs. Comm'r (63 Fed. [2d], 619, 620) it
was held that:
. . . The determining element therefore is whether the distribution was in the ordinary course of
business and with intent to maintain the corporation as a going concern, or after deciding to
quit with intent to liquidate the business. Proceedings actually begun to dissolve the
corporation or formal action taken to liquidate it are but evidentiary and not
indispensable. Tootle vs. Commissioner (C.C.A. 58 F. [2d, 576.) The fact that the distribution
is wholly from surplus and not from capital, and therefore lawful as a dividend is only
evidence. In Hellmich vs. Hellman, and Tootle vs. Commissioner, supra, the distribution was
wholly from profits yet held to be one in liquidation . . . (Emphasis Supplied.)
In the case at bar, when in the deed of July 22, 1937, by authority of its stockholders, the Hongkong
Company thru its authorized representative declared and agreed that the aforesaid sale and transfer shall
take effect as of June 1, 1937, and distribution from its assets to those same stockholders made after June
1, 1937, altho before July 22, 1937, must have been considered by them as liquidating dividends; for how
could they consistently deem all the business and assets of the corporation sold as of June 1, 1937, and
still say that said corporation, as a going concern, distributed ordinary dividends to them thereafter?
In Holmby Corporation vs. Comm'r (83 Fed. [2d], 548-550), the court said:
. . . the fact that the distributions were called "dividends" and were made, in part, from earnings
and profits, and that some of them were made before liquidation or dissolution proceedings
were commenced, is not controlling. . . . The determining element is whether the distributions
were in the ordinary course of business and with intent to maintain the corporation as a going
concern, or after deciding to quit and with intent to liquidate the business . . .. (Emphasis
supplied.)
The directors or representatives of the Hongkong Company or the Manila Company, or both, could of
course not convert into ordinary dividends what in law and in reality were not such. As aptly stated by
Chief Justice Shaw in Comm. vs. Hunt (38 Am. Dec., 354-355),
The law is not to be hoodwinked by colorable pretenses. It looks at truth and reality through
whatever disguise they may assume.
The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on stock —
in fact, they surrendered and relinquished their stock in return for said distributions, thus ceasing to be
stockholders of the Hongkong Company, which in turn ceased to exist in its own right as a going concern
during its more or less brief administration of the business as trustee for the Manila Company, and finally
disappeared even as such trustee.
The distinction between a distribution in liquidation and an ordinary dividend is factual; the
result in each case depending on the particular circumstances of the case and the intent of the
parties. If the distribution is in the nature of a recurring return on stock it is an ordinary
dividend. However, if the corporation is really winding up its business or recapitalizing and
narrowing its activities, the distribution may properly be treated as in complete or partial
liquidation and as payment by the corporation to the stockholder for his stock. The corporation
is, in the latter instances, wiping out all parts of the stockholders' interest in the company . . ..
(Montgomery, Federal Income Tax Handbook [1938-1939], 258; emphasis supplied.)
It is our considered opinion that we are not dealing here with "the legal right of a taxpayer to decrease the
amount of what otherwise will be his taxes, or altogether avoid them, by means which the law permits"
(St. Louis Union Co. vs.U.S., 82 Fed. [2d], 61), but with a situation where we have to apply in favor of the
government the principle that the "liability for taxes cannot be evaded by a transaction constituting a
colorable subterfuge" (61 C.J., 173), it being clear that the distributions under consideration were not
ordinary dividends and were taxable in the manner, form and amounts decreed by the court below.
2. The second assignment of error. — In disposing of the first assignment of error, we held that the
distributions in the instant case were not ordinary dividends but payments for surrendered or relinquished
stock in a corporation in complete liquidation, sometimes called liquidating dividends. The question is
54
whether such amounts were taxable income. The Income Tax Law, Act No. 2833 section 25 (a), as
amended by section 4 of Act. No. 3761, inter aliastipulated:
Where a corporation, partnership, association, joint-account, or insurance company distributes
all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the
stockholder, whether individual or corporation, is a taxable income or a deductible loss as the
case may be. (Emphasis supplied.)
Partial source of the foregoing provision was section 201 (c) of the U.S. Revenue Act of 1918, approved
February 24, 1919, providing:
Amounts distributed in the liquidation of a corporation shall be treated as payments in
exchange for the stock or share, and any gain or profit realized thereby shall be taxed to the
distributee as other gains or profits.
It is a familiar rule of statutory construction that the judicial construction attached to the sources of
statutes adopted in a jurisdiction are of authoritative value in the interpretation of such local laws. The
Supreme Court of the United States has had occasion to construe certain pertinent parts of the Federal
Revenue Act above-mentioned on February 20, 1928, when it decided the case of Hellmich vs. Hellman
(276 U.S., 233; 72 Law. ed., 544). The case involved the recovery of additional income taxes assessed
against the plaintiffs under protest. And its determination hinged around the construction of parts of said
act after which those of our own law now under discussion were patterned. Justice Sanford said:
The question here is whether the gains realized by stockholders from the amounts distributed in
the liquidation of the assets of a dissolved corporation, out of its earnings or profits
accumulated since February 28, 1913, were taxable to them as other "gains or profits", or
whether the amounts so distributed were "dividends" exempt from the normal tax.
Section 201 (a) of the act defined the term "dividend" as "any distribution made by a
corporation . . . to its shareholders . . . whether in cash or in other property .. out of its earnings
or profits accumulated since February 28, 1913 . . .." Section 201 (c) provided that "amounts
distributed in the liquidation of a corporation shall be treated as payments in exchange for
stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other
gains or profits."
Our law at the time of the transactions in question, in providing that where a corporation, etc. distributes
all its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder is
a taxable income or a deductible loss as the case may be, in effect treated such distributions as payments in
exchange for the stock or share. Thus, in making the deficiency assessments under consideration, the
Collector, among other items, made proper deduction of the "value of shares" or "cost of shares" in the
case of each individual plaintiff, assessing the tax only on the resulting "profit realized" (Stipulation, par.
VII, Record on Appeal, pp. 22-25); and of course in case the value or cost of the shares should exceed the
distribution received by the stockholder, the resulting difference will be treated as a "deductible loss."
In the same case the Supreme Court of the United States made the following quotation, which is here
relevant, from Treasury Regulations 45, article 1548:
. . . So-called liquidation or dissolution dividends are not dividends within the meaning of the
statute, and amounts so distributed, whether or not including any surplus earned since February
28, 1913, are to be regarded as payments for the stock of the dissolved corporation. Any excess
so received over the cost of his stock to the stockholder, or over its fair market value as of
March 1, 1913, if acquired prior thereto, is a taxable profit. A distribution in liquidation of the
assets and business of a corporation, which is a return to the stockholders of the value of his
stock upon a surrender of his interest in the corporation, is distinguishable from a dividend paid
by a going corporation out of current earnings or accumulated surplus when declared by the
directors in their discretion, which is in the nature of a recurrent return upon the stock. (72
Law. ed., 546.)
The Income Tax Law of the Philippines in force at the time defined the term "dividend" in section 25 (a),
as amended, as "any distribution made by a corporation . . . out of its earnings or profits accumulated since
March 1, 1913, and payable to its shareholders whether in cash or other property." This definition is
substantially the same as that given to the same term by the U.S. Revenue Act of 1918 quoted by Justice
Sanford in the passage above inserted.
Plaintiffs contend that defendant's position would result in double taxation. A similar contention has been
adversely disposed of against the taxpayer in the Hellmich case in these words:
The gains realized by the stockholders from the distribution of the assets in liquidation were
subject to the normal tax in like manner as if they had sold their stock to third persons. The
objection that this results in double taxation of the accumulated earnings and profits is no more
available in the one case than it would have been in the other. See Merchants' Loan & T.
Co. vs. Smietanki, 255 U.S., 509; 65 Law. ed., 751; 15 A.L.R., 1305; 41 Sup. Ct. Rep., 386;
Goodrich vs. Edwards, 255 U.S. 527; 65 Law. ed., 758; 41 Sup. Ct. Rep., 390. When, as here,
Congress clearly expressed its intention, the statute must be sustained even though double
taxation results. See Patton vs. Brady , 184 U.S., 608; 46 Law ed., 713; 22 Sup. Ct. Rep., 493;
Cream of Wheat Co. vs. Grand Forks County, 253 U.S., 325, 330; 64 Law. ed., 931, 934; 40
Sup. Ct. Rep., 558. (Hellmich vs. Hellman, supra; 72 Law. ed., 547.)
It should be borne in mind that plaintiffs received the distributions in question in exchange for the
surrender and relinquishment by them of their stock in the Hongkong Company which was dissolved and
in process of complete liquidation. That money in the hands of the corporation formed a part of its income
and was properly taxable to it under the then existing Income Tax Law. When the corporation was
dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it
paid the sums in question to them in exchange, a transaction took place, which was no different in its
essence from a sale of the same stock to a third party who paid therefor. In either case the shareholder who
received the consideration for the stock earned that much money as income of his own, which again was
properly taxable to him under the same Income Tax Law. In the case of the sale to a third person, it is not
perceived how the objection of double taxation could have been successfully raised. Neither can we
conceive how it could be available where, as in this case, the stock was transferred back to the dissolved
corporation.
3. The third assignment of error. — In view of what has been said in our consideration of the second
assignment of error, the third can be briefly disposed of. Having held that the distributions involved herein
were not ordinary dividends but payments for stock surrendered and relinquished by the shareholders to
the dissolved corporation, or so-called liquidating dividends, we have the road clear to declaring that
under section 25 (a) of the former Income Tax Law, as amended, said distributions were taxable alike to
Wise and Co., Inc. and to the other plaintiffs. We hold that both the proviso of section 10 (a) of said
Income Tax Law and section 198 of Regulations No. 81 refer to ordinary dividends, not to distributions
made in complete liquidation or dissolution of a corporation which result in the realization of a gain as
specifically contemplated in section 25 (a) of the same law, as amended, which as aforesaid expressly
provides for the taxability of such gain as income, whether the stockholder happens to be an individual or
a corporation. By analogy, we can cite the following additional passages from the Hellmich case:
The controlling question is whether the amounts distributed to the stockholders out of the
earnings and profits accumulated by the corporation since February 28, 1913, were to be
treated under section 201 (a) as "dividends," which were exempt from the normal tax; or under
55
 section 201 (c) as payments made by the corporation in exchange for its stock, which were including those from whose proceeds the distributions in question were made, the major part of which
taxable "as other gains or profits. consisted in the purchase price of the business, had been earned and acquired in the Philippines. From
aught that appears in the record it is clear that said distributions were income "from Philippine sources."
It is true that if section 201 (a) stood alone its broad definition of the term "dividend" would apparently
include distributions made to stockholders in the liquidation of a corporation — although this term, as 6. The sixth assignment of error. — Section 199 of Regulations No. 81, deleting immaterial parts, reads:
generally understood and used, refers to the recurrent return upon stock paid to stockholders by a going
corporation in the ordinary course of business, which does not reduce their stockholdings and leaves them
SEC. 199. Distributions in liquidation. — In all cases where a corporation . . . distributes all of
in a position to enjoy future returns upon the same stock. (See Lynch vs. Hornby, 247 U.S., 339, 344-346;
its property or assets in complete liquidation or dissolution, the gain realized from the
and Langstaff vs. Lucas [D. C.], 9 Fed. [2d], 691, 694.)
transaction by the stockholder . . . is taxable as a dividend to the extent that it is paid out of
earnings or profits of the corporation . . .. If the amount received by the stockholder in
However, when section 201 (a) and section 201 (c) are read together, under the long- liquidation is less than the cost or other basis of the stock, a deductible loss is sustained.
established rule that the intention of the lawmakers is to be deduced from a view of every
material part of the statute (Kohlsaat vs.Murphy, 96 U.S., 153, 159; 24 Law. ed., 846), we think
This regulation would seem to support the contention that the distributions in question, at least those
it clear that the general definition of a dividend in section 201 (a) was not intended to apply to
proceeding from sources other than the earnings or profits of the dissolved corporation, were not taxable.
distributions made to stockholders in the liquidation of a corporation, but that it was intended
Placing the above-quoted section of Regulations No. 81 side by side with section 25 (a) of the amended
that such distributions should be governed by section 201 (c), which, dealing specifically with
Income Tax Law then in force, we notice that while the regulation limits the taxability of the gain realized
such liquidation, provided that the amounts distributed should "be treated as payments in
by the stockholder "to the extent that it is paid out of earnings or profits of the corporation, "section 25 (a)
exchange for stock," and that any gain realized thereby should be taxed to the stockholders "as
of the law, far from so limiting its taxability, provides that the gain thus realized, is a "taxable income" —
other gains or profits." This brings the two sections into entire harmony and gives to each its
under the law so long as a gain is realized, it will be taxable income whether the distribution comes from
natural meaning and due effect. . . . (Hellmich vs. Hellman, supra; emphasis supplied.)
the earnings or profits of the corporation or from the sale of all of its assets in general, so long as the
distribution is made "in complete liquidation or dissolution". The regulation makes the gain taxable as a
4. The fourth assignment of error. — Under this assignment it is contended by the non-resident individual dividend, while the law makes it a taxable income. An inevitable conflict between the two provisions
stockholder appellants that they were not subject to the normal tax as regards the distributions received by seems to exist, and in such a case, of course, the law prevails.
them and involved in the instant case. They "reported these distributions as dividends from profits on
which Philippine income tax had been paid . . .." (Appellants' brief, p. 21.) They assert that the
Treasury Department cannot impose or exempt from income taxes, and regulations purporting
distributions were subject only to the additional tax; whereas the Collector contends that they were subject
to exempt from taxation income specifically taxes would be void.
to both the normal and the additional tax. After what has been said above, it hardly needs stating that the
manner and form of reporting these distributions employed by said appellants could not, under the Law,
change their real nature as payments for surrendered stock, or so-called liquidating dividends, provided for xxx xxx xxx
in section 25 (a) of the then Income Tax Law. Such distributions under the law were subject to both the
normal and the additional tax provided for.
Any erroneous interpretation of revenue act by regulation of Treasury Department would not
estop government from asserting tax on income, though taxpayer had been misled by such
. . . Loosely speaking, the distribution to the stockholders of a corporation's assets, upon interpretation, and by it induced to expose property to taxation. (Langstaff vs. Lucas, 9 Fed.
liquidation, might be termed a dividend; but this is not what is generally meant and understood [2d], 691.)
by that word. As generally understood and used, a dividend is a return upon the stock of its
stockholders, paid to them by a going corporation without reducing their stockholdings, leaving
7 and 8. The seventh and eight assignments of error. — In view of what has been said above, these two
them in a position to enjoy future returns upon the same stock . . .. In other words, it is earnings
assignments need no separate treatment.
paid to him by the corporation upon his invested capital therein, without wiping out his capital.
On the other hand, when a solvent corporation dissolves and liquidates, it distributes to its
stockholders not only any earnings it may have on hand, but it also pays to them their invested For the foregoing consideration, the judgment appealed from will be affirmed with the costs of both
capital, namely, the amount which they had paid in for their stocks, thus wiping out their instances against the appellants. So ordered.
interest in the company . . .. (Langstaff vs. Lucas, 9 Fed. [2d], 691, 694.)
15. Jardine Davies V. CIR (PDF)
5. The fifth assignment of error. — This assignment is made in behalf of those appellants who were non-
resident alien individuals, and for them it is in effect said that if the distributions received by them were to
be considered as a sale of their stock to the Hongkong Company, the profit realized by them does not
constitute income from Philippine sources and is not subject to Philippine taxes, "since all steps in the
carrying out of this so-called sale took place outside the Philippines." (Appellants' brief, p. 26.) We do not
think this contention is tenable under the facts and circumstances of record. The Hongkong Company was
at the time of the sale of its business in the Philippines, and the Manila Company was a domestic
corporation domiciled and doing business also in the Philippines. Schedule A of the Stipulation of Facts
(Record on Appeal, p. 13) declares, among other things, that the Hongkong Company was incorporated
for the purpose of carrying on in the Philippine Islands the business of wine, beer, and spirit merchants
and the other objects set out in its memorandum of association. Hence, its earnings, profits, and assets,

56
16. G.R. No. 175410 November 12, 2014 SMI-ED PHILIPPINES TECHNOLOGY, INC. vs.
COMMISSIONER OF INTERNAL REVENUE

In an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may determine
whether there are taxes that should have been paid in lieu of the taxes paid. Determining the proper
category of tax that should have been paid is not an assessment. It is incidental to determining whether
there should be a refund.

A Philippine Economic Zone Authority (PEZA)-registered corporation that has never commenced
operations may not avail the tax incentives and preferential rates given to PEZA-registered enterprises.
Such corporation is subject to ordinary tax rates under the National Internal Revenue Code of 1997.

This is a petition for review1 on certiorari of the November 3, 2006 Court of Tax Appeals En Banc
decision.2 It affirmed the Court of Tax Appeals Second Division’s decision3 and resolution4 denying
petitioner SMI-Ed Philippines Technology, Inc.’s (SMI-Ed Philippines) claim for tax refund.5

SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the business of

manufacturing ultra high-density microprocessor unit package."6

After its registration on June 29, 1998, SMI-Ed Philippines constructed buildings and purchased
machineries and equipment.7 As of December 31, 1999, the total cost of the properties amounted to
₱3,150,925,917.00.8

SMI-Ed Philippines "failed to commence operations."9 Its factory was temporarily closed, effective
October 15, 1999. On August 1, 2000, it sold its buildings and some of its installed machineries and
equipment to Ibiden Philippines, Inc., another PEZA-registered enterprise, for ¥2,100,000,000.00
(₱893,550,000.00). SMI-Ed Philippines was dissolved on November 30, 2000.10

In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the entire gross sales of
itsproperties to 5% final tax on PEZA registered corporations. SMI-Ed Philippines paid taxes amounting
to ₱44,677,500.00.11

57
On February 2, 2001, after requesting the cancellation of its PEZA registration and amending its articles of
incorporation to shorten its corporate term, SMI-Ed Philippines filed an administrative claim for the
refund of ₱44,677,500.00 with the Bureauof Internal Revenue (BIR). SMIEd Philippines alleged that the
amountwas erroneously paid. It also indicated the refundable amount in its final income tax return filed on
March 1, 2001. It also alleged that it incurred a net loss of ₱2,233,464,538.00.12
The BIR did not act on SMI-Ed Philippines’ claim, which prompted the latter to file a petition for
reviewbefore the Court of Tax Appeals on September 9, 2002.13
The Court of Tax Appeals Second Division denied SMI-Ed Philippines’ claim for refund in the decision
dated December 29, 2004.14
The Court of Tax Appeals Second Division found that SMI-Ed Philippines’ administrative claim for
refund and the petition for review with the Court of Tax Appeals were filed within the two-year
prescriptive period.15 However, fiscal incentives given to PEZA-registered enterprises may be availed only
by PEZA-registered enterprises that had already commenced operations. 16 Since SMI-Ed Philippines had
not commenced operations, it was not entitled to the incentives of either the income tax holiday or the 5%
preferential tax rate.17 Payment of the 5% preferential tax amounting to ₱44,677,500.00 was erroneous.18
After finding that SMI-Ed Philippines sold properties that were capital assets under Section 39(A)(1) of
the National Internal Revenue Code of 1997, the Court of Tax Appeals Second Division subjected the sale
of SMIEd Philippines’ assets to 6% capital gains tax under Section 27(D)(5) of the same Code and Section
2 of Revenue Regulations No. 8-98.19 It was found liable for capital gains tax amounting to
₱53,613,000.00.20 Therefore, SMIEd Philippines must still pay the balance of ₱8,935,500.00 as deficiency
tax,21 "which respondent should perhaps look into."22 The dispositive portion of the Court of Tax Appeals
Second Division’s decision reads:
WHEREFORE, premises considered, the instant petition is hereby DENIED.
SO ORDERED.23
The Court of Tax Appeals denied SMI-Ed Philippines’ motion for reconsideration in its June 15, 2005
resolution.24
On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court of Tax Appeals En
Banc.25 It argued that the Court of Tax Appeals Second Division erroneously assessed the 6% capital gains
tax on the sale of SMI-Ed Philippines’ equipment, machineries, and buildings. 26 It also argued that the
Court of Tax Appeals Second Division cannot make an assessment at the first instance. 27 Even if the Court
of Tax Appeals Second Division has such power, the period to make an assessment had already
prescribed.28
In the decision promulgated on November 3, 2006, the Court of Tax Appeals En Banc dismissed SMI-Ed
Philippines’ petition and affirmed the Court of Tax Appeals Second Division’s decision and
resolution.29 The dispositive portion of the Court of Tax Appeals En Banc’s decision reads:
WHEREFORE, finding no reversible error to reverse the assailed Decision promulgated on December 29,
2004 and the Resolution dated June 15, 2005, the instant petition for review is hereby DISMISSED.
Accordingly, the assailed Decision and Resolution are hereby AFFIRMED. SO ORDERED. 30
SMI-Ed Philippines filed a petition for review before this court on December 27, 2006, 31 praying for the
grant of its claim for refund and the reversal of the Court of Tax Appeals En Banc’s decision. 32
SMI-Ed Philippines assigned the following errors:
A. The honorable CTA En Banc grievously erred and acted beyond its jurisdiction when it
assessed for deficiency tax in the first instance.
B. Even assuming that the honorable CTA En Banc has the right to make an assessment against
the petitioner-appellant, it grievously erred in finding that the machineries and equipment sold
by the petitioner-appellant is subject to the six percent (6%) capital gains tax under Section
27(D)(5) of the Tax Code.33
Petitioner argued that the Court of Tax Appeals has no jurisdiction to make an assessment since its
jurisdiction, with respect to the decisions of respondent, is merely appellate. 34 Moreover, the power to
make assessment had already prescribed under Section 203 of the National Internal Revenue Code of 1997
since the return for the erroneous payment was filed on September 13, 2000. This is more than three (3)
years from the last day prescribed by law for the filing of the return. 35
Petitioner also argued that the Court of Tax Appeals En Banc erroneously subjected petitioner’s
machineries to 6% capital gains tax.36 Section 27(D)(5) of the National Internal Revenue Code of 1997 is
clear that the 6% capital gains tax on domestic corporations applies only on the sale of lands and buildings
and not tomachineries and equipment.37 Since ¥1,700,000,000.00 of the ¥2,100,000,000.00 constituted the
consideration for the sale of petitioner’s machineries, only ¥400,000,000.00 or ₱170,200,000.00 should be
subjected to the 6% capital gains tax.38 Petitioner should be liable only for ₱10,212,000.00.39 It should be
entitled to a refund of ₱34,464,500.00 after deducting ₱10,212,000.00 from the erroneously paid final tax
of ₱44,677,500.00.40
In its comment, respondent argued that the Court of Tax Appeals’ determination of petitioner’s liability
for capital gains tax was not an assessment. Such determination was necessary to settle the question
regarding the tax consequence of the sale of the properties.41 This is clearly within the Court of Tax
Appeals’ jurisdiction under Section 7 of Republic Act No. 9282. 42 Respondent also argued that "petitioner
failed to justify its claim for refund."43
The petition is meritorious.
I
Jurisdiction of the Court of Tax Appeals
The term "assessment" refers to the determination of amounts due from a person obligated to make
payments. In the context of national internal revenue collection, it refers the determination of the taxes due
from a taxpayer under the National Internal Revenue Code of 1997.
The power and duty to assess national internal revenue taxes are lodged with the BIR. 44 Section 2 of the
National Internal Revenue Code of 1997 provides:
SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of Internal Revenue shall be
under the supervision and control of the Department of Finance and its powers and duties shall
comprehend the assessment and collection ofall national internal revenue taxes, fees, and charges, and the
enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. The
Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code
or other laws. (Emphasis supplied) The BIR is not mandated to make an assessment relative to every
58
return filed with it. Tax returns filed with the BIR enjoy the presumption that these are in accordance with
the law.45 Tax returns are also presumed correct since these are filed under the penalty of
perjury.46 Generally, however, the BIR assesses taxes when it appears, after a return had been filed, that the
taxes paid were incorrect,47 false,48 or fraudulent.49 The BIR also assesses taxes when taxes are due but no
return is filed.50 Thus:
SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements for Tax
Administration and Enforcement.–
(A) Examination of Returns and Determination of Tax Due. - After a return has been filed as required
under the provisions of this Code, the Commissioner or his duly authorized representative may authorize
the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however; That
failure to file a return shall not prevent the Commissioner from authorizing the examination of any
taxpayer.The tax or any deficiency tax so assessed shall be paid upon notice and demand from the
Commissioner or from his duly authorized representative.
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax
may be assessed, or a preceeding in court for the collection of such tax may be filed without assessment, at
any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for the collection thereof. (Emphasis supplied)
The Court of Tax Appeals has no powerto make an assessment at the first instance. On matters such as tax
collection, tax refund, and others related to the national internal revenue taxes, the Court of Tax Appeals’
jurisdiction is appellate in nature.
Section 7(a)(1) and Section 7(a)(2) of Republic Act No. 1125, 51 as amended by Republic Act No.
9282,52 provide that the Court of Tax Appeals reviews decisions and inactions of the Commissioner of
Internal Revenue in disputed assessments and claims for tax refunds. Thus: SEC. 7. Jurisdiction.- The
CTA shall exercise:
a. Exclusive appellate jurisdiction toreview by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws administered by the Bureau
of Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific
period of action, in which case the inaction shall be deemed a denial[.] (Emphasis supplied)
Based on these provisions, the following must be present for the Court of Tax Appeals to have
jurisdiction over a case involving the BIR’s decisions or inactions:
a) A case involving any of the following:
i. Disputed assessments;
ii. Refunds of internal revenue taxes, fees, or other charges, penalties in
relation thereto; and
iii. Other matters arising under the National Internal Revenue Code of
1997.
b) Commissioner of Internal Revenue’s decision or inaction in a case submitted to
him or her
Thus, the BIR first has to make an assessment of the taxpayer’s liabilities. When the BIR makes the
assessment, the taxpayer is allowed to dispute that assessment before the BIR. If the BIR issues a decision
that is unfavorable to the taxpayer or if the BIR fails to act on a dispute brought by the taxpayer, the BIR’s
decision or inaction may be brought on appeal to the Court of Tax Appeals. The Court of Tax Appeals
then acquires jurisdiction over the case.
When the BIR’s unfavorable decision is brought on appeal to the Court of Tax Appeals, the Court of Tax
Appeals reviews the correctness of the BIR’s assessment and decision. In reviewing the BIR’s assessment
and decision, the Court of Tax Appeals had to make its own determination of the taxpayer’s tax liabilities.
The Court of Tax Appeals may not make such determination before the BIR makes its assessment and
before a dispute involving such assessment is brought to the Court of Tax Appeals on appeal.
The Court of Tax Appeals’ jurisdiction is not limited to cases when the BIR makes an assessment or a
decision unfavorable to the taxpayer. Because Republic Act No. 112553 also vests the Court of Tax
Appeals with jurisdiction over the BIR’s inaction on a taxpayer’s refund claim, there may be instances
when the Court of Tax Appeals has to take cognizance of cases that have nothing to do with the BIR’s
assessments or decisions. When the BIR fails to act on a claim for refund of voluntarily but mistakenly
paid taxes, for example, there is no decision or assessment involved.
Taxes are generally self-assessed. They are initially computed and voluntarily paid by the taxpayer. The
government does not have to demand it. If the tax payments are correct, the BIR need not make an
assessment.
The self-assessing and voluntarily paying taxpayer, however, may later find that he or she has erroneously
paid taxes. Erroneously paid taxes may come in the form of amounts thatshould not have been paid. Thus,
a taxpayer may find that he or she has paid more than the amount that should have been paid under the
law. Erroneously paid taxes may also come in the form of tax payments for the wrong category of tax.
Thus, a taxpayer may find that he or she has paid a certain kindof tax that he or she is not subject to.
In these instances, the taxpayer may ask for a refund. If the BIR fails to act on the request for refund, the
taxpayer may bring the matter to the Court of Tax Appeals.
From the taxpayer’s self-assessment and tax payment up to his or her request for refund and the BIR’s
inaction,the BIR’s participation is limited to the receipt of the taxpayer’s payment. The BIR does not make
an assessment; the BIR issues no decision; and there is no dispute yet involved. Since there is no BIR
assessment yet, the Court of Tax Appeals may not determine the amount of taxes due from the taxpayer.
There is also no decision yet to review. However, there was inaction on the part of the BIR. That inaction
is within the Court of Tax Appeals’ jurisdiction.
59
In other words, the Court of Tax Appeals may acquire jurisdiction over cases even if they do not involve
BIR assessments or decisions.
In this case, the Court of Tax Appeals’ jurisdiction was acquired because petitioner brought the case on
appeal before the Court of Tax Appeals after the BIR had failed to act on petitioner’s claim for refund of
erroneously paid taxes. The Court of Tax Appeals did not acquire jurisdiction as a result of a disputed
assessment of a BIR decision.
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or
other taxes at the first instance. The Court of Tax Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioner’s
transactions are subject to capital gains tax, however, the Court of Tax Appeals was not making an
assessment. It was merely determining the proper category of tax that petitioner should have paid, in view
of its claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-
registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental matter
necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund. 54
The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes that are due
from petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct.55 If
the tax return filed was not proper, the correctness of the amount paid and, therefore, the claim for refund
become questionable. In that case, the court must determine if a taxpayer claiming refund of erroneously
paid taxes is more properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, 56 South African Airways claimed for
refund of its erroneously paid 2½% taxes on its gross Philippine billings. This court did not immediately
grant South African’s claim for refund. This is because although this court found that South African
Airways was not subject to the 2½% tax on its gross Philippine billings, this court also found that it was
subject to 32% tax on its taxable income.57
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that the quarterly
tax return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the refund being
claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed not liable for the 5%
final tax and, instead, liable for taxes other than the 5% final tax. As in South African Airways,
petitioner’s request for refund can neither be granted nor denied outright without such determination. 58
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the
taxpayer’s liability should be computed and deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a case involving solely
the issue of the taxpayer’s entitlement to refund. The question of tax deficiencyis distinct and unrelated to
the question of petitioner’s entitlement to refund. Tax deficiencies should be subject to assessment
procedures and the rules of prescription. The court cannot be expected to perform the BIR’s duties
whenever it fails to do so either through neglect or oversight. Neither can court processes be used as a tool
to circumvent laws protecting the rights of taxpayers.
II
Petitioner’s entitlement to benefits given to PEZA-registered enterprises
Petitioner is not entitled to benefits given to PEZA-registered enterprises, including the 5% preferential
tax rate under Republic Act No. 7916 or the Special Economic Zone Act of 1995. This is because it never
began its operation.
Essentially, the purpose of Republic Act No. 7916 is to promote development and encourage investments
and business activities that will generate employment. 59 Giving fiscal incentives to businesses is one of the
means devised to achieve this purpose. It comes with the expectation that persons who will avail these
incentives will contribute to the purpose’s achievement. Hence, to avail the fiscal incentives under
Republic Act No. 7916, the law did not say that mere PEZA registration is sufficient.
Republic Act No. 7916 or The Special Economic Zone Act of 1995 provides:
SEC. 23. Fiscal Incentives.— Business establishments operating within the ECOZONES shall be entitled
to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export
Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise
known as the Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as inputs shall enjoy the same benefits
provided for in the Export Development Act of 1994.
SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. — Any provision of existing
laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed
on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of
the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted tothe
national government. This five percent (5%) shall be shared and distributed as follows:
a. Three percent (3%) to the national government;
b. One percent (1%) to the localgovernment units affected by the declaration of the ECOZONE
inproportion to their population, land area, and equal sharing factors; and
c. One percent (1%) for the establishment of a development fund to be utilized for the
development of municipalities outside and contiguous to each ECOZONE: Provided, however,
That the respective share of the affected local government units shall be determined on the
basis of the following formula:
1. Population - fifty percent (50%);
2. Land area - twenty-five percent (25%); and
3. Equal sharing - twenty-five percent (25%). (Emphasis supplied)
Based on these provisions, the fiscal incentives and the 5% preferential tax rate are available only to
businesses operating within the Ecozone.60 A business is considered in operation when it starts entering
into commercial transactions that are not merely incidental to but are related to the purposes of the
business. It is similar to the definition of "doing business," as applied in actions involvingthe right of
foreign corporations to maintain court actions. In Mentholatum Co. Inc., et al. v. Mangaliman, et al., 61 this
court said that the terms "doing" or "engaging in" or "transacting" business":
60
. . . impl[y] a continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization. 62 Petitioner never started its
operations since its registration on June 29, 199863 because of the Asian financial crisis.64 Petitioner
admitted this.65 Therefore, it cannot avail the incentives provided under Republic Act No. 7916. It is not
entitled to the preferential tax rate of 5% on gross income in lieu of all taxes. Because petitioner is not
entitled to a preferential rate, it is subject to ordinary tax rates under the National Internal Revenue Code
of 1997.
III
Imposition of capital gains tax
The Court of Tax Appeals found that petitioner’s sale of its properties is subject to capital gains tax.
Respondent insists that since petitioner’s machineries and equipment are classified as capital assets, their
sales should be subject to capital gains tax. Respondent is mistaken.
In Commissioner of Internal Revenue v. Fortune Tobacco Corporation, 66 this court said:
The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words
for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by
implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt,
such statutes are to be construed most strongly against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the
plain meaning of the tax laws.67 (Citations omitted)

Capital gains of individuals and corporations from the sale of real properties are taxed differently.
For petitioner’s properties to be subjected to capital gains tax, the properties must form part ofpetitioner’s
Individuals are taxed on capital gains from sale of all real properties located in the Philippines and
capital assets.
classified as capital assets. Thus:

Section 39(A)(1) of the National Internal Revenue Code of 1997 defines "capital assets":
SEC. 24. Income Tax Rates.

SEC. 39. Capital Gains and Losses. -

....

(A) Definitions.- As used in this Title -

(D) Capital Gains from Sale of Real Property. –

(1) Capital Assets.- the term ‘capital assets’ means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other property
of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade orbusiness, or property used in the trade or business, of a character which is subject to the allowance
for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the
taxpayer. (Emphasis supplied) Thus, "capital assets" refers to taxpayer’s property that is NOT any of the
following:
1. Stock in trade;
2. Property that should be included inthe taxpayer’s inventory at the close of the taxable year;
3. Property held for sale in the ordinary course of the taxpayer’s business;
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as determined in accordance with Section 6(E) of this
Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the
sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales, by individuals, including estates and
trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to
the government or any of its political subdivisions or agencies or to government-owned or controlled
corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the
taxpayer.68 (Emphasis supplied)
For corporations, the National Internal Revenue Code of 1997 treats the sale of land and buildings, and the
sale of machineries and equipment, differently. Domestic corporations are imposed a 6% capital gains tax
only on the presumed gain realized from the sale of lands and/or buildings. The National Internal Revenue
Code of 1997 does not impose the 6% capital gains tax on the gains realized from the sale of machineries
and equipment. Section 27(D)(5) of the National Internal Revenue Code of 1997 provides:

4. Depreciable property used in the trade or business; and

SEC. 27. Rates of Income tax on Domestic Corporations. -

5. Real property used in the trade or business. ....

The properties involved in this case include petitioner’s buildings, equipment, and machineries. They are (D) Rates of Tax on Certain Passive Incomes. -
not among the exclusions enumerated in Section 39(A)(1) of the National Internal Revenue Code of 1997.
None of the properties were used in petitioner’s trade or ordinary course of business because petitioner
never commenced operations. They were not part of the inventory. None of themwere stocks in trade. ....
Based on the definition of capital assets under Section 39 of the National Internal Revenue Code of 1997,
they are capital assets.

61
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax
of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or
disposition of lands and/or buildings which are not actually used in the business of a corporation and are
treated as capital assets, based on the gross selling price of fair market value as determined in accordance
with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings. (Emphasis supplied)
Therefore, only the presumed gain from the sale of petitioner’s land and/or building may be subjected to
the 6% capital gains tax. The income from the sale of petitioner’s machineries and equipment is subject to
the provisions on normal corporate income tax.
To determine, therefore, if petitioner is entitled to refund, the amount of capital gains tax for the sold land
and/or building of petitioner and the amount of corporate income tax for the sale of petitioner’s
machineries and equipment should be deducted from the total final tax paid. Petitioner indicated, however,
in its March 1, 2001 income tax return for the 11-month period ending on November 30, 2000 that it
suffered a net loss of ₱2,233,464,538.00.69 This declaration was made under the pain of perjury. Section
267 of the National Internal Revenue Code of 1997 provides:
SEC. 267. Declaration under Penalties of Perjury. - Any declaration, return and other statement required
under this Code, shall, in lieu of an oath, contain a written statement that they are made under the penalties
of perjury. Any person who willfully files a declaration, return or statement containing information which
is not true and correct as to every material matter shall, upon conviction, be subject to the penalties
prescribed for perjury under the Revised Penal Code. Moreover, Rule 131, Section 3(ff) of the Rules of
Court provides for the presumption that the law has been obeyed unless contradicted or overcome by other
evidence, thus:
SEC. 3. Disputable presumptions.— The following presumptions are satisfactory if uncontradicted, but
may be contradicted and overcome by other evidence:
....
(ff) That the law has been obeyed;
The BIR did not make a deficiency assessment for this declaration. Neither did the BIR dispute this
statement in its pleadings filed before this court. There is, therefore, no reason todoubt the truth that
petitioner indeed suffered a net loss in 2000.
Since petitioner had not started its operations, it was also not subject to the minimum corporate income tax
of 2% on gross income.70 Therefore, petitioner is not liable for any income tax.
IV
Prescription
Section 203 of the National Internal Revenue Code of 1997 provides that as a general rule, the BIR has
three (3) years from the last day prescribed by law for the filing of a return to make an assessment. If the
return is filed beyond the last day prescribed by law for filing, the three-year period shall run from the
actual date of filing. Thus:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222,
internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the
filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return is filed beyond the
period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day.
This court said that the prescriptive period to make an assessment of internal revenue taxes is provided
"primarily to safeguard the interests of taxpayers from unreasonable investigation." 71 This court explained
in Commissioner of Internal Revenue v. FMF Development Corporation72 the reason behind the
provisions on prescriptive periods for tax assessments: Accordingly, the government must assess internal
revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of
the assurance that it will no longer be subjected to further investigation for taxes after the expiration of
reasonable period of time.73
Rules derogating taxpayers’ right against prolonged and unscrupulous investigations are strictly construed
against the government.74
[T]he law on prescription should beinterpreted in a way conducive to bringing about the beneficent
purpose of affording protection to the taxpayer within the contemplation of the Commission which
recommended the approval of the law. To the Government, its tax officers are obliged to act promptlyin
the making of assessment so that taxpayers, after the lapse of the period of prescription, would have a
feeling of security against unscrupulous tax agents who will always try to find an excuse to inspect the
books of taxpayers, not to determine the latter’s real liability, but to take advantage of a possible
opportunity to harass even law-abiding businessmen. Without such legal defense, taxpayers would be
open season to harassment by unscrupulous tax agents.75
Moreover, in Commissioner of Internal Revenue v. BF Goodrich Phils.:76
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 on
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[.]
....
. . . . Such instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers,
considering that the prescriptive period was precisely intended to give them peace of mind. 77 (Citation
omitted)
The BIR had three years from the filing of petitioner’s final tax return in 2000 to assess petitioner’s taxes.
Nothing stopped the BIR from making the correct assessment. The elevation of the refund claim with the
Court of Tax Appeals was not a bar against the BIR’s exercise of its assessment powers.
The BIR, however, did not initiate any assessment for deficiency capital gains tax. 78 Since more than a
decade have lapsed from the filing of petitioner's return, the BIR can no longer assess petitioner for
deficiency capital gains taxes, if petitioner is later found to have capital gains tax liabilities in excess of
the amount claimed for refund.
The Court of Tax Appeals should not be expected to perform the BIR's duties of assessing and collecting
taxes whenever the BIR, through neglect or oversight, fails to do so within the prescriptive period allowed
by law.
62
WHEREFORE, the Court of Tax Appeals' November 3, 2006 decision is SET ASIDE. The Bureau of Issues
Internal Revenue is ordered to refund petitioner SMI-Ed Philippines Technology, Inc. the amount of 5%
final tax paid to the BIR, less the 6% capital gains tax on the sale of petitioner SMI-Ed Philippines
In the present Petition, the Republic raises the following issues for the Court's resolution: first, whether the
Technology, Inc. 's land and building. In view of the lapse of the prescriptive period for assessment, any
RTC correctly denied the Republic's Motion for Partial Reconsideration for having been filed out of
capital gains tax accrued from the sale of its land and building that is in excess of the 5% final tax paid to
time; 18 and second, whether the capital gains tax on the transfer of the expropriated property can be
the Bureau of Internal Revenue may no longer be recovered from petitioner SMI-Ed Philippines
considered as consequential damages that may be awarded to respondents. 19
Technology, Inc.

The Court's Ruling

17. G.R. No. 205428 REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT OF
PUBLIC WORKS AND HIGHWAYS (DPWH) vs SPOUSES SENANDO F. SALVADOR and
JOSEFINA R. SALVADOR The Petition is impressed with merit.

Respondents are the registered owners of a parcel of land with a total land area of 229 square meters, "Section 3, Rule 13 of the Rules of Court provides that if a pleading is filed by registered mail, x x x the
located in Kaingin Street, Barangay Parada, Valenzuela City, and covered by Transfer Certificate of Title date of mailing shall be considered as the date of filing. It does not matter when the court actually receives
No.V-77660. 3 the mailed pleading."20

On November 9, 2011, the Republic, represented by the Department of - Public Works and Highways
(DPWH), filed a verified Complaint 4 before the RTC
for the expropriation of 83 square meters of said parcel of land (subject property), as well as the
improvements thereon, for the construction of the C-5 Northern Link Road Project Phase 2 (Segment 9)
from the North Luzon Expressway (NLEX) to McArthur Highway. 5
In this case, the records show that the Republic filed its Motion for Partial Reconsideration before the
RTC via registered mail on September 28, 2012.21 Although the trial cou1treceived the Republic's motion
only on October 5, 2012,22 it should have considered the pleading to have been filed on September 28,
2012, the date of its mailing, which is clearly within the reglementary period of 15 days to file said
motion, 23 counted from September 13, 2012, or the date of the Republic's receipt of the assailed
Decision.24

Given these circumstances, we hold that the RTC erred in denying the Republic's Motion for Partial
On February 10, 2012, respondents received two checks from the DPWH representing 100% of the zonal
Reconsideration for having been filed out of time.1âwphi1
value of the subject property and the cost of the one-storey semi-concrete residential house erected on the
property amounting to ₱l61,850.00 6 and ₱523,449.22,7 respectively. 8 The RTC thereafter issued the
corresponding Writ of Possession in favor of the Republic. 9 We likewise rule that the RTC committed a serious error when it directed the Republic to pay respondents
consequential damages equivalent to the value of the capital gains tax and other taxes necessary for the
transfer of the subject property.
On the same day, respondents signified in open court that they recognized the purpose for which their
property is being expropriated and interposed no objection thereto. 10 They also manifested that they have
already received the total sum of ₱685,349.22 from the DPWH and are therefore no longer intending to "Just compensation [is defined as] the full and fair equivalent of the property sought to be expropriated.x x
claim any just compensation. 11 x The measure is not the taker's gain but the owner's loss. [The compensation, to be just,] must be fair not
only to the owner but also to the taker."25
Ruling of the Regional Trial Court
In order to determine just compensation, the trial court should first ascertain the market value of the
property by considering the cost of acquisition, the current value of like properties, its actual or potential
In its Decision12 dated August 23, 2012, the RTC rendered judgment in favor of the Republic
uses, and in the particular case of lands, their size, shape, location, and the tax declarations thereon. 26 if as
condemning t1Je subject property for the purpose of implementing the construction of the C-5 Northern
a result of the expropriation, the remaining lot suffers from an impairment or decrease in value,
Link Road Project Phase 2 (Segment 9) from NLEX to McArthur Highway, Valenzuela City. 13
consequential damages may be awarded by the trial court, provided that the consequential benefits which
may arise from the expropriation do not exceed said damages suffered by the owner of the property. 27
The RTC likewise directed the Republic to pay respondents consequential damages equivalent to the value
of the capital gains tax and other taxes necessary for the transfer of the subject property in the Republic's
While it is true that "the determination of the amount of just compensation is within the court's discretion,
name. 14
it should not be done arbitrarily or capriciously. [Rather,] it must [always] be based on all established
rules, upon correct legal principles and competent evidence." 28 The court cannot base its judgment on
The Republic moved for partial reconsideration, 15 specifically on the issue relating to the payment of the mere speculations and surmises. 29
capital gains tax, but the RTC denied the motion in its Order16 dated January 10, 2013 for having been
belatedly filed. The RTC also found no justifiable basis to reconsider its award of Consequential damages
In the present case, the RTC deemed it "fair and just that x x x whatever is the value of the capital gains
in favor of respondents, as the payment of capital gains tax and other transfer taxes is but a consequence of
tax and all other taxes necessary for the transfer of the subject property to the [Republic] are but
the expropriation proceedings.17
consequential damages that should be paid by the latter."30 The RTC further explained in its assailed Order
that said award in favor of respondents is but equitable, just, and fair, viz.:
As a result, the Republic filed the present Petition for Review on Certiorari assailing the RTC's August
23, 2012 Decision and January 10, 2013 Order.

63
As aptly pointed out by [respondents], they were merely forced by circumstances to be dispossessed of
[the] subject property owing to the exercise of the State of its sovereign power to expropriate. The
payment of capital gains tax and other transfer taxes is a consequence of the expropriation proceedings. It
is in the sense of equity, justness and fairness, and as upheld by the Supreme Court in the case of Capitol
Subdivision, Inc. vs. Province of Negros Occidental, G.R. No. L-16257, January 31, 1963 that the assailed
consequential damages was awarded by the court. 31

This is clearly an error. It is settled that the transfer of property through expropriation proceedings is a sale
or· exchange within the meaning of Sections 24(D) and 56(A) (3) of the National Internal Revenue Code,
and profit from the transaction constitutes capital gain. 32 Since capital gains tax is a tax on passive
income, it is the seller, or respondents in this case, who are liable to shoulder the tax. 33

In fact, the Bureau of Internal Revenue (BIR), in BIR Ruling No. 476-2013 dated December 18, 2013, has
constituted the DPWH as a withholding agent tasked to withhold the 6% final withholding tax in the
expropriation of real property for infrastructure projects. 11ms, as far as the government is concerned, the #4 TAXREV
capital gains tax in expropriation proceedings remains a liability of the seller, as it is a tax on the seller's
gain from the sale of real property. 34 EXCLUSIONS FROM GROSS INCOME

1.O’Gilvie v. US 519 US 79 (1996)

Besides, as previously explained, consequential damages are only awarded if as a result of the
expropriation, the remaining property of the owner suffersfrom an impairment or decrease in value. 35 In
2. G.R. No. 162775 October 27, 2006 INTERCONTINENTAL BROADCASTING CORPORATION
this case, no evidence was submitted to prove any impairment or decrease in value of the subject property
(IBC), represented by ATTY. RENATOQ. BELLO, in his capacity as CEO and President
as a result of the expropriation. More significantly, given that the payment of capital gains tax on the
vs. NOEMI B. AMARILLA, CORSINI R. LAGAHIT, ANATOLIO G. OTADOY, and CANDIDO
transfer· of the subject property has no effect on the increase or decrease in value of the remaining
C. QUIÑONES, JR.
property, it can hardly be considered as consequential damages that may be awarded to respondents.

Before us is a Petition for Review on Certiorari filed by petitioner Intercontinental Broadcasting

WHEREFORE, we GRANT the Petition for Review on Certiorari. The Decision dated August 23, 2012
Corporation (IBC) assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 72414, which in
and the Order dated January 10, 2013 of the Regional Trial Court, Branch 270, Valenzuela City, in Civil
turn affirmed the Decision2 of the National Labor Relations Commission (NLRC) in NLRC Case No. V-
Case No. 175-V-11, are hereby MODIFIED, in that the award of consequential damages is DELETED. In
000660-2000.
addition, spouses Senando F. Salvador and Josefina R. Salvador are hereby ORDERED to pay for the
capital gains tax due on the transfer of the expropriated property.
On various dates, petitioner employed the following persons at its Cebu station: Candido C. Quiñones, Jr.;
on February 1, 1975;3 Corsini R. Lagahit, as Studio Technician, also on February 1, 1975;4 Anatolio G.
Otadoy, as Collector, on April 1, 1975;5 and Noemi Amarilla, as Traffic Clerk, on July 1, 1975.6 On
March 1, 1986, the government sequestered the station, including its properties, funds and other assets,
and took over its management and operations from its owner, Roberto Benedicto. 7 However, in December
1986, the government and Benedicto entered into a temporary agreement under which the latter would
retain its management and operation. On November 3, 1990, the Presidential Commission on Good
Government (PCGG) and Benedicto executed a Compromise Agreement, 8 where Benedicto transferred
and assigned all his rights, shares and interests in petitioner station to the government. The PCGG
submitted the Agreement to the Sandiganbayan in Civil Case No. 0034 entitled "Republic of the
Philippines v. Roberto S. Benedicto, et al."9

In the meantime, the four (4) employees retired from the company and received, on staggered basis, their
retirement benefits under the 1993 Collective Bargaining Agreement (CBA) between petitioner and the
bargaining unit of its employees.

In the meantime, a P1,500.00 salary increase was given to all employees of the company, current and
retired, effective July 1994. However, when the four retirees demanded theirs, petitioner refused and
instead informed them via a letter that their differentials would be used to offset the tax due on their
retirement benefits in accordance with the National Internal Revenue Code (NIRC). Amarilla was
informed that the P71,480.00 of the amount due to her would be used to offset her tax liability
of P340,641.42.10 Otadoy was also informed in a letter dated July 5, 1999, that his salary differential
of P170,250.61 would be used to pay his tax liability which amounted to P127,987.57. Since no tax
liability was withheld from his retirement benefits, he even owed the company P17,727.26 after the
64
offsetting. Quiñones was informed that he should have retired compulsorily in 1992 at age 55 as provided On February 14, 2000, the Labor Arbiter rendered judgment in favor of the retirees. The fallo of the
in the CBA, and that since he was already 58 when he retired, he was no longer entitled to receive salary decision reads:
increases from 1992 to 1995. Consequently, he was overpaid by P137,932.22 for the "extension" of his
employment from 1992 to 1995, which amount he was obliged to return to the company. In any event, his
WHEREFORE, premises considered, judgment is hereby rendered ordering the respondent
claim for salary differentials had expired pursuant to Article 291 of the Labor Code of the
Intercontinental Broadcasting Corporation (IBC TV-13 Cebu) to pay the complainants Noemi
Philippines.11 Lagahit’s claim for salary differential of P73,165.23 was rejected by petitioner in a letter
Amarilla and Corsini Lagahit as follows:
dated July 6, 1999, on the ground that he had a tax liability of P396,619.03; since the amount would be
used as partial payment for his tax liability, he still owed the company P323,453.80.12

1. Noemi E. Amarilla - P26,423.00

The four (4) retirees filed separate complaints13 against IBC TV-13 Cebu and Station Manager Louella F.
Cabañero for unfair labor practice and non-payment of backwages before the NLRC, Regional Arbitration
Branch VII. As all of the complainants had the same causes of action, their complaints were docketed as 2. Corsino R. Lagahit - P26,423.00
NLRC RAB-VII Case No. 10-1625-99.
Total - P52,846.00
The complainants averred that their retirement benefits are exempt from income tax under Article 32 of
the NIRC. Sections 28 and 72 of the NIRC, which petitioner relied upon in withholding their differentials,
do not apply to them since these provisions deal with the applicable income tax rates on foreign The claim of complainants Anatolio Otadoy and Candido Quiñones and the case against
corporations and suits to recover taxes based on false or fraudulent returns. They pointed out that, under respondent Louella F. Cabañero are dismissed for lack of merit.
Article VIII of the CBA, only those employees who reached the age of 60 were considered retired, and
those under 60 had the option to retire, like Quiñones and Otadoy who retired at ages 58 and 51,
respectively. They prayed that they be paid their salary differentials, as follows: SO ORDERED.17

The Labor Arbiter ruled that the claims of Quiñones and Otadoy had prescribed. The retirement benefits
Otadoy P 170,250.61 of complainants Lagahit and Amarilla, on the other hand, were exempt from income tax under Section
Quiñones P 170,250.61 28(b) of the NIRC. However, the differentials due to the two complainants were computed three years
Lagahit P 73,165.23 backwards due to the law on prescription.
Amarilla P 71,480.0014
Petitioner appealed the decision of the Labor Arbiter to the NLRC, arguing that the retirement benefits of
Amarilla and Lagahit are not tax exempt. It insisted that the Labor Arbiter erred in declaring as unlawful
For its part, petitioner averred that under Section 21 of the NIRC, the retirement benefits received by the act of withholding the employees’ salary differentials as payment for the latter’s tax liabilities.
employees from their employers constitute taxable income. While retirement benefits are exempt from
taxes under Section 28(b) of said Code, the law requires that such benefits received should be in accord
with a reasonable retirement plan duly registered with the Bureau of Internal Revenue (BIR) after Otadoy and Quiñones no longer appealed the decision.
compliance with the requirements therein enumerated. Since its retirement plan in the 1993 CBA was not
approved by the BIR, complainants were liable for income tax on their retirement benefits. Petitioner
On May 21, 2002, the NLRC rendered its decision dismissing the appeal and affirming that of the Labor
claimed that it was mandated to withhold the income tax due from the retirement benefits of said
Arbiter. The fallo of the decision reads:
complainants. It was not estopped from correcting the mistakes of its former officers. Under the law,
complainants are obliged to return what had been mistakenly delivered to them. 15
WHEREFORE, the Decision of the Labor Arbiter dated February 14, 2000 is hereby
AFFIRMED. Respondents’ appeal is dismissed for lack of merit.
In reply, complainants averred that the claims for the retirement salary differentials of Quiñones and
Otadoy had not prescribed because the said CBA was implemented only in 1997. They pointed out that
they filed their claims with petitioner on April 3, 1999. They maintained that they availed of the optional SO ORDERED.18
retirement because of petitioner’s inducement that there would be no tax deductions. Petitioner IBC did
not commit any mistake in not withholding the taxes due on their retirement benefits as shown by the fact
The NLRC held that the benefits of the retirement plan under the CBAs between petitioner and its union
that the PCCG, the Commission on Audit (COA) and the Bureau of Internal Revenue (BIR) did not even
members were subject to tax as the scheme was not approved by the BIR. However, it had also been the
require them to explain such mistake. They pointed out that petitioner paid their retirement benefits on a
practice of petitioner to give retiring employees their retirement pay without tax deductions and there was
staggered basis, and nonetheless failed to deduct any amount as taxes. 16
no justifiable reason for the respondent to deviate from such practice. The NLRC concluded that petitioner
was deemed to have assumed the tax liabilities of the complainants on their retirement benefits, hence, had
Petitioner countered that the retirement benefits received by the complainants were based on the CBA no right to deduct taxes from their salary differentials. The NLRC thus ratiocinated:
between it and its bargaining units. Under Sections 72 and 73 of the NIRC, it is obliged to deduct and
withhold taxes determined in accordance with the rules and regulations to be prepared by the Secretary of
The sole concern of the law is that tax shall be imposed on retirement benefits. The employer
Finance. It was its duty to withhold the taxes on complainants’ retirement benefits, otherwise, it would be
assuming the payment of tax on behalf of the retiring employee to make the retirement
held civilly and criminally liable under Sections 251, 254 and 255 of the NIRC.
attractive, does not contravene the tax law, because it is not contrary to the law or public

65
 policy, morals and good customs. It is significant to note that respondent did not refute the
complainants’ allegations in their Position Papers, to wit:
"Complainants Amarilla and Lagahit availed themselves of the offer of the
respondent company when they were induced and were made to believe that
respondent company’s employees who avail of such early retirement can avail of
that exemption on their retirement benefits. Were it not for the offer of no tax
liability, complainants would not have availed of such optional or early retirement."
It is worthy to note that the retirement benefits of the complainants did not suffer any tax
deductions when they were given at the first instance. It is only after they claimed the salary
differentials when the respondent withheld the backwages for the payment of tax liabilities.
"From the facts it can be shown that the disbursement of retirement benefits of the
complainants were made on staggered basis, three (3) and four (4) times. So, if the
company, as it claimed, is really vent on deducting the alleged taxes due the
complainants, they have three or four opportunities to do so."
The respondent’s history reveals that it was paying retirement pays to its retiring employees
without tax deductions as a matter of practice. There is no justifiable reason for the respondent
to deviate from that practice now. It is deemed to have assumed the tax liabilities of the
complainants.19
Aggrieved, petitioner elevated the decision before the CA on the following grounds:
1. THE HONORABLE NLRC GRAVELY ABUSED ITS DISCRETION TANTAMOUNT
TO LACK OF JURISDICTION WHEN IT RULED THAT WHILE PETITIONER MAY NOT
HAVE A RETIREMENT PLAN WHOSE BENEFITS THEREFROM ARE EXEMPTED
FROM TAXES UNDER SECTION 28 OF THE NIRC, BY VIRTUE OF ITS PREVIOUS
PRACTICE THAT IT ASSUMED THE PAYMENT OF TAX LIABILITES, IT IS DEEMED
TO HAVE ANSWERED FOR THE TAX LIABILITES OF THE COMPLAINANTS, WHICH
ULTIMATE CONSEQUENCE, IF NOT RECTIFIED, SHALL CAUSE IRREPARABLE
DAMAGE AND INJURY TO THE PETITIONER CORPORATION.
2. THE HONORABLE NLRC GRAVELY ABUSED ITS DISCRETION TANTAMOUNT
TO LACK OR EXCESS OF JURISDICTION IN AFFIRMING THE DECISION RENDERED
BY THE LABOR ARBITER ON FEBRUARY 14, 2000 WHICH GRANTED RETIREMENT
DIFFERENTIAL TO RESPONDENTS AMARILLA AND LAGAHIT AS THESE ARE
CONTRARY TO THE FACTS AND RETIREMENT LAWS PARTICULARLY THE
PROVISIONS EMBODIED IN SECTIONS 21, 27, 28 OF THE NATIONAL INTERNAL
REVENUE CODE AND R.A. 7641 IMPLEMENTING ARTICLE 287 OF THE LABOR
CODE AS WELL AS SECTION 6 OF THE IMPLEMENTING RULES OF RA 7641.
3. CONSEQUENT TO NLRC’S RULING GRANTING RETIREMENT DIFFERENTIAL TO
RESPONDENTS AMARILLA AND LAGAHIT, THE HONORABLE NLRC GRAVELY
ABUSED ITS DISCRETION TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION
IN HOLDING THAT PETITIONER’S ACT OF WITHHOLDING COMPLAINANTS’
BACKWAGES AS PAYMENT OF THEIR TAX LIABILITIES IS ILLEGAL. 20
On December 3, 2003, the CA rendered judgment dismissing the petition for lack of merit.
The appellate court declared that the salary differentials of the respondents are part of their
taxable gross income, considering that the CBA was not approved, much less submitted to the
BIR. However, petitioner could not withhold the corresponding tax liabilities of respondents
due to the then existing CBA, providing that such retirement benefits would not be subjected to
any tax deduction, and that any such taxes would be for its account. The appellate court relied
on the allegations of respondents in their Position Paper before the Labor Arbiter which
petitioner failed to refute.
Petitioner filed a motion for reconsideration, which the appellate court denied. Hence, the
present petition, where petitioner avers that:
WITH ALL DUE RESPECT, THE COURT OF APPEALS COMMITTED REVERSIBLE
ERROR WHEN IT RULED THAT SINCE IT HAS BEEN THE PURPORTED PRACTICE
OF PETITIONER IBC-13 NOT TO WITHHOLD TAXES DUE ON THE SALARY
DIFFERENTIAL AND THE RETIREMENT BENEFITS, PETITIONER IBC-13
NECESSARILY ASSUMED PAYMENT OF THE TAXES AND COULD NOT
THEREFORE WITHHOLD THE SAME NOTWITHSTANDING THE SUBSEQUENT
DISCOVERY THAT THE FAILURE TO WITHHOLD THE TAXES WAS DONE DUE TO
THE OMISSION, MISTAKE, FRAUD OR IRREGULARITY COMMITTED BY PREVIOUS
MANAGEMENT.
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS GLOSSED OVER
THE FACT AND COMMITTED REVERSIBLE ERROR WHEN IT AFFIRMED THE
DECISION OF THE NATIONAL LABOR RELATIONS COMMISSION DATED MAY 21,
2002 WHICH ORDERED PETITIONER IBC-13 TO PAY RETIREMENT DIFFERENTIAL
TO RESPONDENTS AMARILLA AND LAGAHIT AS THESE ARE CONTRARY TO THE
FACTS AND RETIREMENT LAWS PARTICULARLY THE PROVISIONS EMBODIED IN
SECTIONS 21, 27, 28 OF THE NATIONAL INTERNAL REVENUE CODE (AS
AMENDED BY PRESIDENTIAL DECREE NO. 1994)21
Petitioner insists that respondents are liable for taxes on their retirement benefits because the retirement
plan under the CBA was not approved by the BIR. It insisted that it failed to comply with the requisites of
Section 32 of the NIRC and Rule II, Section 6 of the Rules Implementing the New Retirement Law which
provides that retirement pay shall be tax exempt upon compliance with the requirements under Section
2(b) of Revenue Regulation No. 12-86 dated August 1, 1986.
Petitioner maintains that respondents failed to present any document as proof that petitioner bound and
obliged itself to pay the withholding taxes on their retirement benefits. In fact, the Labor Arbiter did not
make any finding that petitioner had obliged itself to pay the withholding taxes on respondents’ retirement
benefits. The NLRC’s reliance on the statements in its Position Paper that it undertook to pay for
respondents’ withholding taxes is misplaced.
While petitioner admits that its "previous directors" had paid the withholding taxes on the retirement
benefits of respondents, it explains that this practice was stopped when the new management took over.
The new management could not be expected to enforce and follow through the illegal policy of the old
management which is adverse to the interests of the petitioner; hence, the decisions of the NLRC and the
CA affirming such undertaking should be reversed. It points out that it is a government corporation, and as
such, its officials and employees may be held liable for violation of Section 3(a) of Republic Act Nos.
3019, and 6713.22 Moreover, its officers and employees are mandated to preserve the company’s assets,
and may, likewise be held liable for failure to do so under Section 31 of the Corporation Code.
66
The issues are (1) whether the retirement benefits of respondents are part of their gross income; and (2)
whether petitioner is estopped from reneging on its agreement with respondent to pay for the taxes on said
retirement benefits.
We agree with petitioner’s contention that, under the CBA, it is not obliged to pay for the taxes on the
respondents’ retirement benefits. We have carefully reviewed the CBA and find no provision where
petitioner obliged itself to pay the taxes on the retirement benefits of its employees.
We also agree with petitioner’s contention that, under the NIRC, the retirement benefits of respondents are
part of their gross income subject to taxes. Section 28 (b) (7) (A) of the NIRC of 1986 23 provides:
Sec. 28. Gross Income. –
xxxx
(b) Exclusions from gross income. - The following items shall not be included in gross income
and shall be exempt from taxation under this Title:
xxxx
(7) Retirement benefits, pensions, gratuities, etc. - (A) Retirement benefits received by officials
and employees of private firms whether individuals or corporate, in accordance with a
reasonable private benefit plan maintained by the employer: Provided, That the retiring official
or employee has been in the service of the same employer for at least ten (10) years and is not
less than fifty years of age at the time of his retirement: Provided, further, That the benefits
granted under this subparagraph shall be availed of by an official or employee only once. For
purposes of this subsection, the term "reasonable private benefit plan" means a pension,
gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some
or all of his officials or employees, where contributions are made by such employer for
officials or employees, or both, for the purpose of distributing to such officials and employees
the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan
that at no time shall any part of the corpus or income of the fund be used for, or be diverted to,
any purpose other than for the exclusive benefit of the said official and employees.
Revenue Regulation No. 12-86, the implementing rules of the foregoing provisions, provides:
(b) Pensions, retirements and separation pay. – Pensions, retirement and separation pay
constitute compensation subject to withholding tax, except the following:
(1) Retirement benefit received by official and employees of private firms under a reasonable
private benefit plan maintained by the employer, if the following requirements are met:
(i) The retirement plan must be approved by the Bureau of Internal Revenue;
(ii) The retiring official or employees must have been in the service of the same
employer for at least ten (10) years and is not less than fifty (50) years of age at the
time of retirement; and
(iii) The retiring official or employee shall not have previously availed of the
privilege under the retirement benefit plan of the same or another employer.
Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is burdened to prove
the concurrence of the following elements: (1) a reasonable private benefit plan is maintained by the
employer; (2) the retiring official or employee has been in the service of the same employer for at least 10
years; (3) the retiring official or employee is not less than 50 years of age at the time of his retirement; and
(4) the benefit had been availed of only once.
Article VIII of the 1993 CBA provides for two kinds of retirement plans - compulsory and optional. Thus:
ARTICLE VIII
RETIREMENT
Section 1: Compulsory Retirement – Any employee who has reached the age of Fifty Five (55) years shall
be retired from the COMPANY and shall be paid a retirement pay in accordance with the following
schedule:
A supervisor who reached the age of Fifty (50) may at his/her option retire with the same retirement
benefits provided above.
Section 2: Optional Retirement – Any covered employee, regardless of age, who has rendered at least five
(5) years of service to the COMPANY may voluntarily retire and the COMPANY agrees to pay Long
Service Pay to said covered employee in accordance with the following schedule:
Section 3: Fraction of a Year – In computing the retirement under Section 1 and 2 of this Article, a
fraction of at least six (6) months shall be considered as one whole year. Moreover, the COMPANY may
exercise the option of extending the employment of an employee.
Section 4: Severance of Employment Due to Illness – When a supervisor suffers from disease and/or
permanent disability and her/his continued employment is prohibited by law or prejudicial to her/his
health of the health of his co-employees, the COMPANY shall not terminate the employment of the
subject supervisor unless there is a certification by a competent public health authority that the disease is
of such a nature or at such stage that it can not be cured within a period of six (6) months even with proper
medical treatment. The supervisor may be separated upon payment by the COMPANY of separation pay
pursuant to law, unless the supervisor falls within the purview of either Sections 1 or 2 hereof. In which
case, the retirement benefits indicated therein shall apply, whichever is higher.
Section 5: Loyalty Recognition – The COMPANY shall recognize the services of the supervisor/director
who have reached the following number of years upon retirement by granting him/her a plaque of
appreciation and any lasting gift:
10 years but below 15 years – (P 3,000.00) worth
15 years but below 20 years – (P 7,000.00) worth
20 years and more – (P10,000.00) worth
Respondents were qualified to retire optionally from their employment with petitioner. However, there is
no evidence on record that the 1993 CBA had been approved or was ever presented to the BIR; hence, the
retirement benefits of respondents are taxable.
67
Under Section 80 of the NIRC, petitioner, as employer, was obliged to withhold the taxes on said benefits
and remit the same to the BIR.
Section 80. Liability for Tax. –
(A) Employer. – The employer shall be liable for the withholding and remittance of the correct
amount of tax required to be deducted and withheld under this Chapter. If the employer fails to
withhold and remit the correct amount of tax as required to be withheld under the provision of
this Chapter, such tax shall be collected from the employer together with the penalties or
additions to the tax otherwise applicable in respect to such failure to withhold and remit.
However, we agree with respondents’ contention that petitioner did not withhold the taxes due on their
retirement benefits because it had obliged itself to pay the taxes due thereon. This was done to induce
respondents to agree to avail of the optional retirement scheme. Thus, in its petition in this case, petitioner
averred that:
While it may indeed be conceded that the previous dispensation of petitioner IBC-13 footed the
bill for the withholding taxes, upon discovery by the new management, this was stopped
altogether as this was grossly prejudicial to the interest of the petitioner IBC-13. The policy of
withholding the taxes due on the differentials as a remedial measure was a matter of sound
business judgment and dictates of good governance aimed at protecting the interests of the
government. Necessarily, the newly-appointed board and officers of the petitioner, who learned
about this grossly disadvantageous mistake committed by the former management of petitioner
IBC-13 cannot be expected to just follow suit blindly. An illegal act simply cannot give rise to
an obligation. Accordingly, the new officers were correct in not honoring this highly suspect
practice and it is now their duty to rectify this anomalous occurrence, otherwise, they become
remiss in the performance of their sworn responsibilities.
It need not be stressed that as board members and officers of the acquired asset of the
government, they are committed to preserve the assets thereof. Their concomitant obligations
spring not only from their fiduciary responsibility as corporate officers but as well as public
officers.24
Respondents received their retirement benefits from the petitioner in three staggered installments without
any tax deduction for the simple reason that petitioner had remitted the same to the BIR with the use of its
own funds conformably with its agreement with the retirees. It was only when respondents demanded the
payment of their salary differentials that petitioner alleged, for the first time, that it had failed to present
the 1993 CBA to the BIR for approval, rendering such retirement benefits not exempt from taxes;
consequently, they were obliged to refund to it the amounts it had remitted to the BIR in payment of their
taxes. Petitioner used this "failure" as an afterthought, as an excuse for its refusal to remit to the
respondents their salary differentials. Patently, petitioner is estopped from doing so. It cannot renege on its
commitment to pay the taxes on respondents’ retirement benefits on the pretext that the "new
management" had found the policy disadvantageous.
It must be stressed that the parties are free to enter into any contract stipulation provided it is not illegal or
contrary to public morals. When such agreement freely and voluntarily entered into turns out to be
advantageous to a party, the courts cannot "rescue" the other party without violating the constitutional
right to contract. Courts are not authorized to extricate the parties from the consequences of their acts.
Thus, the fact that the contract stipulations of the parties may turn out to be financially disadvantageous to
them will not relieve them of their obligation under the agreement.25
An agreement to pay the taxes on the retirement benefits as an incentive to prospective retirees and for
them to avail of the optional retirement scheme is not contrary to law or to public morals. Petitioner had
agreed to shoulder such taxes to entice them to voluntarily retire early, on its belief that this would prove
advantageous to it. Respondents agreed and relied on the commitment of petitioner. For petitioner to
renege on its contract with respondents simply because its new management had found the same
disadvantageous would amount to a breach of contract. There is even no evidence that any "new
management" was ever installed by petitioner after respondents’ retirement; nor is there evidence that the
Board of Directors of petitioner resolved to renege on its contract with respondents and demand the
reimbursement for the amounts remitted by it to the BIR.
The well-entrenched rule is that estoppel may arise from a making of a promise if it was intended that the
promise should be relied upon and, in fact, was relied upon, and if a refusal to sanction the perpetration of
fraud would result to injustice. The mere omission by the promisor to do whatever he promises to do is
sufficient forbearance to give rise to a promissory estoppel. 26
Petitioner cannot hide behind the fact that, under the compromise agreement between the PCGG and
Benedicto, the latter had assigned and conveyed to the Republic of the Philippines his shares, interests and
rights in petitioner. Respondents retired only after the Court affirmed the validity of the Compromise
Agreement27 and the execution by petitioner and the union of their 1993 CBA while Civil Case No. 0034
was still pending in the Sandiganbayan. There is no showing that before respondents demanded the
payment of their salary differentials, petitioner had rejected its commitment to shoulder the taxes on
respondents’ retirement benefits and sought its nullification before the court; nor is there any showing that
petitioner’s "new management" filed any criminal or administrative charges against the former
officers/board of directors comprising the "old management" relative to the payment of the taxes on
respondents’ retirement benefits. IN VIEW OF ALL THE FOREGOING, the petition is DENIED for
lack of merit. The Decision of the Court of Appeals in CA-G.R. SP No. 72414 is AFFIRMED. Costs
against the petitioner.
3. G.R. No. 96016 October 17, 1991 COMMISSIONER OF INTERNAL REVENUE vs. THE
COURT OF APPEALS and EFREN P. CASTANEDA
The issue to be resolved in this petition for review on certiorari is whether or not terminal leave pay
received by a government official or employee on the occasion of his compulsory retirement from the
government service is subject to withholding (income) tax.
We resolve the issue in the negative.
Private respondent Efren P. Castaneda retired from the government service as Revenue Attache in the
Philippine Embassy in London, England, on 10 December 1982 under the provisions of Section 12 (c) of
Commonwealth Act 186, as amended. Upon retirement, he received, among other benefits, terminal leave
pay from which petitioner Commissioner of Internal Revenue withheld P12,557.13 allegedly representing
income tax thereon.
Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13, contending that the
cash equivalent of his terminal leave is exempt from income tax. To comply with the two-year prescriptive
period within which claims for refund may be filed, Castaneda filed on 16 July 1984 with the Court of Tax
Appeals a Petition for Review, seeking the refund of income tax withheld from his terminal leave pay.
The Court of Tax Appeals found for private respondent Castaneda and ordered the Commissioner of
Internal Revenue to refund Castaneda the sum of P12,557.13 withheld as income tax. (,Annex "C",
petition).
68
Petitioner appealed the above-mentioned Court of Tax Appeals decision to this Court, which was docketed
as G.R. No. 80320. In turn, we referred the case to the Court of Appeals for resolution. The case was
docketed in the Court of Appeals as CA-G.R. SP No. 20482.
On 26 September 1990, the Court of Appeals dismissed the petition for review and affirmed the decision
of the Court of Tax Appeals. Hence, the present recourse by the Commissioner of Internal Revenue.
The Solicitor General, acting on behalf of the Commissioner of Internal Revenue, contends that the
terminal leave pay is income derived from employer-employee relationship, citing in support of his stand
Section 28 of the National Internal Revenue Code; that as part of the compensation for services rendered,
terminal leave pay is actually part of gross income of the recipient. Thus —
. . . It (terminal leave pay) cannot be viewed as salary for purposes which would reduce it. . . .
there can thus be no "commutation of salary" when a government retiree applies for terminal
leave because he is not receiving it as salary. What he applies for is a "commutation of leave
credits." It is an accumulation of credits intended for old age or separation from service. . . .
The Court has already ruled that the terminal leave pay received by a government official or employee is
not subject to withholding (income) tax. In the recent case of Jesus N. Borromeo vs. The Hon. Civil
Service Commission, et al.,G.R. No. 96032, 31 July 1991, the Court explained the rationale behind the
employee's entitlement to an exemption from withholding (income) tax on his terminal leave pay as
follows:
. . . commutation of leave credits, more commonly known as terminal leave, is applied for by
an officer or employee who retires, resigns or is separated from the service through no fault of
his own. (Manual on Leave Administration Course for Effectiveness published by the Civil
Service Commission, pages 16-17). In the exercise of sound personnel policy, the Government
encourages unused leaves to be accumulated. The Government recognizes that for most public
servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest
egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are
given not only at the same time but also for the same policy considerations governing
retirement benefits.
In fine, not being part of the gross salary or income of a government official or employee but a retirement
benefit, terminal leave pay is not subject to income tax.ACCORDINGLY, the petition for review is hereby
DENIED.
4. A.M. No. 90-6-015-SC October 18, 1990 RE: REQUEST OF ATTY. BERNARDO ZIALCITA
FOR RECONSIDERATION OF THE ACTION OF THE FINANCIAL AND BUDGET OFFICE
On August 23, 1990, a resolution of the Court En Banc was issued regarding the amounts claimed by Atty.
Bernardo F. Zialcita on the occasion of his retirement. The resolution states, among others:
The terminal leave pay of Atty. Zialcita received by virtue of his compulsory
retirement can never be considered a part of his salary subject to the payment of
income tax but falls under the phrase "other similar benefits received by retiring
employees and workers", within the meaning of Section 1 of PD No. 220 and is thus
exempt from the payment of income tax. That the money value of his accrued leave
credits is not a part of his salary is further buttressed by Sec. 3 of PD No. 985,
otherwise known as The "Budgetary Reform Decree on Compensation and Position
Classification of 1976" particularly Sec. 3 (a) thereof, which makes it clear that
the actual service is the period of time for which pay has been received, excluding
the period covered by terminal leave.
The dispositive portion provides:
Accordingly, the Court Resolved to (1) ORDER the Fiscal Management and Budget
Office to REFUND Atty. Zialcita the amount of P59,502.33 which was deducted
from his terminal leave pay as withholding tax; and (2) DECLARE that henceforth
no withholding tax shall be deducted by any Office of this Courtfrom the terminal
leave pay benefits of all retirees similarly situated including those who have already
retired and from whose retirement benefits such withholding taxes were deducted.
Sarmiento, J., is on leave.
On September 18, 1990, the Commissioner of Internal Revenue, as intervenor-movant and through the
Solicitor General, filed a motion for clarification and/or reconsideration with this Court.
After careful deliberation, the Court resolved to deny the motion for reconsideration and hereby holds that
the money value of the accumulated leave credits of Atty. Bernardo Zialcita are not taxable for the
following reasons:
1) Atty. Zialcita opted to retire under the provisions of Republic Act 660, which is incorporated in
Commonwealth Act No. 186. Section 12(c) of CA 186 states:
... Officials and employees retired under this Act shall be entitled to the
commutation of the unused vacation leave and sick leave, based on the highest rate
received, which they may have to their credit at the time of retirement.
Section 28(c) of the same Act, in turn, provides:
(c) Except as herein otherwise provided, the Government Service Insurance
System, all benefits granted under this Act, and all its forms and documents
required of the members shall be exempt from all types of taxes, documentary
stamps, duties and contributions, fiscal or municipal, direct or indirect, established
or to be established; ... (Emphasis supplied)
Applying the two aforesaid provisions, it can be concluded that the amount received by Atty.
Zialcita as a result of the conversion of these unused leaves into cash is exempt from income
tax.
2) The commutation of leave credits is commonly known as terminal leave. (Manual on Leave
Administration Course for Effectiveness, published by the Civil Service Commission, p. 17) Terminal
leave is applied for by an officer or employee who retires, resigns or is separated from the service through
no fault of his own. (supra, p. 16) Since terminal leave is applied for by an officer or employee who has
already severed his connection with his employer and who is no longer working, then it follows that the
terminal leave pay, which is the cash value of his accumulated leave credits, is no longer compensation for
services rendered. It can not be viewed as salary.
3) Executive Order No. 1077, Section 1, provides:
Any officer or employee of the government who retires or voluntarily resigns or is
separated from the service through no fault of his own and whose leave benefits are
69
 not covered by special law, shag be entitled to the commutation of all the
accumulated vacation and/or sick leaves to his credit, exclusive of Saturdays,
Sundays and holidays, without litigation as to the number of days of vacation and
sick leaves that he may accumulate. (Emphasis supplied)
Meanwhile, Section 28(b) 7(b) of the National Internal Revenue Code (NIRC) states:
Sec. 28 (b) — Exclusions from gross income. — The following items shall not be
included in gross income and shall be exempt from taxation under this title:
xxx xxx xxx
(7) Retirement benefits, pensions, gratuities, etc.
xxx xxx xxx
(b) Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee from the
service of the employer due to death, sickness or other physical disability or for any
cause beyond the control of the said official or employee. (Emphasis supplied)
In the case of Atty. Zialcita, he rendered government service from March 13, 1962 up to February 15,
1990. The next day, or on February 16, 1990, he reached the compulsory retirement age of 65 years. Upon
his compulsory retirement, he is entitled to the commutation of his accumulated leave credits to its money
value. Within the purview of the above-mentioned provisions of the NLRC, compulsory retirement may
be considered as a "cause beyond the control of the said official or employee". Consequently, the amount
that he received by way of commutation of his accumulated leave credits as a result of his compulsory
retirement, or his terminal leave pay, fags within the enumerated exclusions from gross income and is
therefore not subject to tax.
4. The terminal leave pay of Atty. Zialcita may likewise be viewed as a "retirement gratuity received by
government officials and employees" which is also another exclusion from gross income as provided for
in Section 28(b), 7(f) of the NLRC. A gratuity is that paid to the beneficiary for past services rendered
purely out of generosity of the giver or grantor. (Peralta v. Auditor General, 100 Phil. 1051 [1957]) It is a
mere bounty given by the government in consideration or in recognition of meritorious services and
springs from the appreciation and graciousness of the government. (Pirovano v. De la Rama Steamship
Co., 96 Phil. 335, 357 [1954]) When a government employee chooses to go to work rather than absent
himself and consume his leave credits, there is no doubt that the government is thereby benefited by the
employee's uninterrupted and continuous service. It is in cognizance of this fact that laws were passed
entitling retiring government employees, among others, to the commutation of their accumulated leave
credits. That which is given to him after retirement is out of the Government's generosity and an
appreciation for his having continued working when he could very well have gone on vacation. Section
286 of Revised Administrative Code, as amended by RA 1081, provides that "whenever any officer,
employee or laborer of the Government of the Philippines shall voluntarily resign or be separated from the
service through no fault of his own, he shall be entitled to the commutation of all accumulated vacation
and/or sick leave to his credit: ..." (Emphasis supplied) Executive Order No. 1077, mentioned above, later
amended Section 286 by removing the limitation on the number of leave days that may be accumulated
and explicitly allowing retiring government employees to commute their accumulated leaves. The
commutation of accumulated leave credits may thus be considered a retirement gratuity, within the import
of Section 28(b), 7(f) of the NLRC, since it is given only upon retirement and in consideration of the
retiree's meritorious services.
It is clear that the law expresses the government's appreciation for many years of service already rendered
and the clear intention to reward faithful and often underpaid workers after the official relationship had
been terminated.
5) Section 284 of the Revised Administrative Code grants to a government employee 15 days vacation
leave and 15 days sick leave for every year of service. Hence, even if the government employee absents
himself and exhausts his leave credits, he is still deemed to have worked and to have rendered services.
His leave benefits are already imputed in, and form part of, his salary which in turn is subjected to
withholding tax on income. He is taxed on the entirety of his salaries without any deductions for any
leaves not utilized. It follows then that the money values corresponding to these leave benefits both the
used and unused have already been taxed during the year that they were earned. To tax them again when
the retiring employee receives their money value as a form of government concern and appreciation
plainly constitutes an attempt to tax the employee a second time. This is tantamount to double taxation.
The Commissioner of Internal Revenue seeks, in the alternative, to be clarified with respect to the
following:
a. the applicability of the August 23, 1990 Resolution to other government officials and employees; and
b. to those who have already retired and from whose retirement benefits withholding taxes have been
deducted, whether or not the deducted taxes are refundable even without a written request for refund from
the taxpayer-retiree.
The case of Atty. Bernardo Zialcita (entitled Administrative Matter No. 90-6-015-SC) is merely an
administrative matter involving an employee of this Court who applied for retirement benefits and who
questioned the deductions on the benefits given to him. Hence, our resolution applies only to employees of
the Judiciary. If we extend the effects of the aforementioned resolution to all other government employees,
in the absence of an actual case and controversy, we would in principle be rendering an advisory opinion.
We cannot foresee at this time and for all cases all factors bearing upon the rights of government workers
of varying categories from diverse offices. The authorities concerned will have to determine and rule on
each case as it arises. "Similarly situated" is a most ambiguous and undefined term whose application
cannot be fixed in advance.
With respect to the need for a written request for refund, we rule that Atty. Zialcita need no longer file a
formal request for refund since the August 23, 1990 Resolution, which principally deals with his case,
already binds the intervenor-movant Commissioner of Internal Revenue. However, with respect to other
retirees allegedly similarly situated and from whom withholding taxes on terminal leave pay have been
deducted, we rule that these retirees should file a written request for refund within two years from the date
of promulgation of this resolution. Fiscal considerations do not allow that this matter be left hanging for an
indefinite period while retirees make up their minds as to whether or hot they are entitled to refunds.
The Chief of the Finance Division of this Court likewise seeks clarification with respect to the
applicability of our August 23, 1990 Resolution to the following employees of this Court:
a) those who avail of optional retirement; and
b) those who resign or are separated from the service through no fault of their own.
The two groups mentioned above are also entitled to terminal leave pay in accordance with Section 286 of
the Revised Administrative Code, as amended by RA 1081. In the light of our ruling that to tax terminal
leave pay would result in the taxation of benefits given after and as direct consequences of retirement and
would, in effect, constitute double taxation, we rule that this resolution also applies to those who avail of
70
optional retirement and to those who resign or are separated from the service through no fault of their
own.
The Court understands the urgent need of Government to tap all possible sources of revenue because of its
heavy expenditures and the failure of actual income to cover all disbursements. However, the solution is
not the levying of taxes on benefits and gratuities which by law are not supposed to be taxed. The remedy
is to either amend the retirement law subject, of course, to constitutional constraints or to institute vastly
improved and effective tax collection efforts.
All salaried workers and wage earners, whether in the public or the private sector, are taxed to the last
centavo of their incomes throughout the entirety of their working lives. The same cannot be said of factory
workers, leaders of industry, merchants, self-employed professionals, movie stars, fishing magnates, bus
and jeepney operators, vice lords, theatre owners, and real estate lessors, to name only a few. A middle or
lower echelon employee who retires after thirty or forty years of service helplessly sees his retirement
pensions or benefits unavoidably and rapidly decrease in value in only a few years even as his cost of
living, age, health, and other personal circumstances call for increased expenditures. We fail to see the
logic in viewing with eager eyes for purposes of tax revenues the fruits of a working lifetime of labor
simply because fixed salaries and retirement benefits are so visible and so convenient to levy upon.
Retirees who are most deserving of compassion and who can least carry the multifarious burdens of
Government should not be so readily encumbered on a strained interpretation of the law.
WHEREFORE, the Court Resolved to (1) DENY with FINALITY the motion for reconsideration of the
intervenor-movant and the Solicitor General; and (2) DECLARE (a) that the August 23, 1990 Resolution
on A.M. No. 90-6-015-SC specifically applies only to employees and officers of the Judiciary who retire,
resign or are separated through no fault of their own; and (b) that retirees and former employees of the
Judiciary; except Atty. Zialcita, from whose terminal leave pay withholding taxes have been deducted,
must file a written claim for refund with the Commissioner of Internal Revenue within two years from the
date of promulgation of this resolution.
5. G.R. No. L-54908 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND
DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents.
G.R. No. 80041 January 22, 1990 COMMISSIONER OF INTERNAL REVENUE vs. MITSUBISHI
METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and the COURT OF TAX APPEALS
These cases, involving the same issue being contested by the same parties and having originated from the
same factual antecedents generating the claims for tax credit of private respondents, the same were
consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi,
for brevity), a Japanese corporation licensed to engage in business in the Philippines, 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, United States 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. 1
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. Its loan application was approved on May 26,
1970 in the sum of ¥4,320,000,000.00, at about the same time as the approval of its loan for
¥2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent to
$20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the Bureau
of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the
condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing
copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by
September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the
latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the
amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the
National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the
Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later noted
by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver
and disclaimer of its interest in the claim for tax credit in favor of Atlas. 4
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a
petition for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was
grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution
owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank, if it
may be so called, is the basis for private repondents' claim for exemption from paying the tax on the
interest payments on the loan as earlier stated. It was further claimed that the interest payments on the loan
from the consortium of Japanese banks were likewise exempt because said loan supposedly came from or
were financed by Eximbank. The provision of the National Internal Revenue Code relied upon is Section
29 (b) (7) (A), 6 which 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.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later
reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was
still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that
on November 16, 1976, the said division recommended to petitioner the approval of private respondent's
claim. However, before action could be taken thereon, respondent court scheduled the case for hearing on
September 30, 1977, during which trial private respondents presented their evidence while petitioner
submitted his case on the basis of the records of the Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in
favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the
material averments of private respondents when he supposedly prayed "for judgment on the pleadings
without off-spring proof as to the truth of his allegations." 8 Furthermore, the court declared that all papers
and documents pertaining to the loan of ¥4,320,000,000.00 obtained by Mitsubishi from Eximbank show
that this was the same amount given to Atlas. It also observed that the money for the loans from the
consortium of private Japanese banks in the sum of ¥2,880,000,000.00 "originated" from Eximbank. From
these, respondent court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting
as a mere "arranger or conduit through which the loans flowed from the creditor Export-Import Bank of
Japan to the debtor Atlas Consolidated Mining & Development Corporation." 9
71
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to
this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the
amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld
and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the
same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed
as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private
respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered
judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for
reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated September
7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with respondent court and a
petition for review was filed with this Court on December 19, 1987. Said later case is now before us as
G.R. No. 80041 and is consolidated with G.R. No. 54908.
The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas
by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code
and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or not
Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose
investments in the Philippines on loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner
should be deemed to have admitted the allegations of the private respondents when it submitted the case
on the basis of the pleadings and records of the bureau. There is nothing to indicate such admission on the
part of petitioner nor can we accept respondent court's pronouncement that petitioner did not offer to prove
the truth of its allegations. The records of the Bureau of Internal Revenue relevant to the case were duly
submitted and admitted as petitioner's supporting evidence. Additionally, a hearing was conducted, with
presentation of evidence, and the findings of respondent court were based not only on the pleadings but on
the evidence adduced by the parties. There could, therefore, not have been a judgment on the pleadings,
with the theorized admissions imputed to petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest
respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is
a showing of gross error or abuse on the part of the tax court. 11 Thus, ordinarily, we could give due
consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling
circumstances obtaining and proven in these cases, however, warrant a departure from said general rule
since we are convinced that there is a misapprehension of facts on the part of the tax court to the extent
that its conclusions are speculative in nature.
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. From the categorical language used in
the document, one prestation was in consideration of the other. The specific terms and the reciprocal
nature of their obligations make it implausible, if not vacuous to give credit to the cavalier assertion that
Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi
stated in its loan application with the former was that the amount being procured would be used as a loan
to and in consideration for importing copper concentrates from Atlas. 12 Such an innocuous statement of
purpose could not have been intended for, nor could it legally constitute, a contract of agency. If that had
been the purpose as respondent court believes, said corporations would have specifically so stated,
especially considering their experience and expertise in financial transactions, not to speak of the amount
involved and its purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the
following arguments of petitioner:
The nature of the above contract shows that the same is not just a simple contract of loan. It is
not a mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS
and MITSUBISHI where the latter shall provide the funds in the installation of a new
concentrator at the former's Toledo mines in Cebu, while ATLAS in consideration of which,
shall sell to MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be
produced by the installed concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified
term was the consideration of the granting of the amount of $20 million to ATLAS.
MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds. Hence, it had to
secure a loan or loans from other sources. And from what sources, it is immaterial as far as
ATLAS in concerned. In this case, MITSUBISHI obtained the $20 million from the
EXIMBANK, of Japan and the consortium of Japanese banks financed through the
EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a
private entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK of
Japan. While the loans were secured by MITSUBISHI primarily "as a loan to and in
consideration for importing copper concentrates from ATLAS," the fact remains that it was a
loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and
separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter
contract, it is not EXIMBANK, that was intended to be benefited. It is MITSUBISHI which
stood to profit. Besides, the Loan and Sales Contract cannot be any clearer. The only
signatories to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be
inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any entity,
private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when
a contract of loan is completed, the money ceases to be the property of the former owner and
becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of
Japan, said amount ceased to be the property of the bank and became the property of
MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of
ATLAS, the former being the owner of the $20 million upon completion of its loan contract
with EXIMBANK of Japan.
The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different
from the interest income paid by MITSUBISHI to EXIMBANK, of Japan. What was the
72
 subject of the 15% withholding tax is not the interest income paid by MITSUBISHI to
EXIMBANK, but the interest income earned by MITSUBISHI from the loan to ATLAS. . . . 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does
not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other
considerations aliunde. The application for the loan was approved on May 20, 1970, or more than a month
after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the
contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for
importing copper concentrates from Atlas, but all that this proves is the justification for the loan as
represented by Mitsubishi, a standard banking practice for evaluating the prospects of due repayment.
There is nothing wrong with such stipulation as the parties in a contract are free to agree on such lawful
terms and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain person
or to a certain purpose is not unusual, especially in the case of Eximbank which, aside from protecting its
financial exposure, must see to it that the same are in line with the provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from
making loans except to Japanese individuals and corporations. We are not impressed. Not only is there a
failure to establish such submission by adequate evidence but it posits the unfair and unexplained
imputation that, for reasons subject only of surmise, said financing institution would deliberately
circumvent its own charter to accommodate an alien borrower through a manipulated subterfuge, but with
it as a principal and the real obligee.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the
truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit.
Furthermore, the remittance of the interest payments may also be logically viewed as an arrangement in
paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and
Mitsubishi as to the manner or procedure for the payment of the latter's obligation is their own concern. It
should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum,
while Mitsubishis contract with Atlas merely states that the "interest on the amount of the loan shall be the
actual cost beginning from and including other dates of releases against loan." 14
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 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.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due
to diminution of much needed funds. Nor can we close this discussion without taking cognizance of
petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this
case on the nebulous representation that the funds involved in the loans are those of a foreign government,
scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise,
the mere expedient of having a Philippine corporation enter into a contract for loans or other domestic
securities with private foreign entities, which in turn will negotiate independently with their governments,
could be availed of to take advantage of the tax exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April
18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.
6. G.R. No. 177387 November 9, 2016 COMMISSIONER OF INTERNAL REVENUE vs. SECRET
ARY OF JUSTICE, and PHILIPPINE AMUSEMENT AND GAMING CORPORATION
Antecedents
Respondent Philippine Amusement and Gaming Corporation (PAGCOR) has operated under a legislative
franchise granted by Presidential Decree No. 1869 (P.O. No. 1869), its Charter, 4 whose Section 13(2)
provides that:
(2) Income and other Taxes - (a) Franchise Holder:
No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever
nature, whether National or Local, shall he assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any way to the earnings of the
Corporation, except a Franchise Tax of five percent (S(X1) of the gross revenue or earnings derived
by the Corporation from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments
of any kind, nature or description, levied, established or collected by any municipal, provincial or national
government authority. (bold emphasis supplied)
Notwithstanding the aforesaid 5% franchise tax imposed, the Bureau of Internal Revenue (BIR) issued
several assessments against PAGCOR for alleged deficiency value-added tax (VAT), final withholding tax
on fringe benefits, and expanded withholding tax, as follows:
On December 18, 2002, PAGCOR filed a letter-protest with the BIR against Assessment Notice No. 33-
1996/1997 /1998 and Assessment Notice No. 33-99.8
On March 31, 2003, PAGCOR filed a letter-protest against Assessment Notice No. 33-2000, in which it
reiterated the asse1iions made in its December 18, 2002 letter-protest.9
In reply to both letters-protest, the BIR requested PAGCOR to submit additional documents to enable the
conduct of the reinvestigation.10
The CIR did not act on PAGCOR’s letter-protest against Assessment Notice No. 33-1996/1997 /1998 and
Assessment Notice No. 33-99 within the 180-day period from the latter's submission of additional
documents.11Hence, PAGCOR filed an appeal with the Secretary of Justice on January 5, 2004 relative to
Assessment Notice No. 33-1996/1997 /1998 and Assessment Notice No. 33-99. 12
Meanwhile, in response to PAGCOR’s letter-protest dated March 31, 2003, BIR Regional Director
Teodorica Arcega issued a letter dated December 15, 2003 reiterating the assessment for deficiency VAT
for taxable year 2000,13 stating thusly:
In a memorandum to the Regional Director dated December 15, 2003 the Chief Legal Division, this
Region, confirmed the taxability of PAGCOR under Section 108(A) of the 1997 Tax Code, as amended,
effective Jan. 1, 1996 (VAT Review Committee Ruling No. 041-2001 ).
In view of the confirmation of the Legal Division we hereby reiterate the assessments forwarded to your
office under Final Assessment No. 33-2000 dated March 18, 2003 amounting to ₱2,097,426,943.00.
73
However, the BIR only recomputed the deficiency final withholding tax on fringe benefits and expanded
withholding tax, and reduced the assessments to ₱l2,212, 199.85 and ₱6,959,525. l0, respectively.14
PAGCOR elevated its protest against Assessment Notice No. 33-2000 to the CIR, but the 180-day period
prescribed by law also lapsed without any action on the part of the CIR.15 Consequently, on August 4,
2004, PAGCOR brought another appeal to the Secretary of Justice covering Assessment Notice No. 33-
2000.16
The Secretary of Justice consolidated PAGCOR's two appeals.
After the parties traded pleadings, the Secretary of Justice summoned them to a preliminary conference to
discuss, inter alia, any possible settlement or compromise.17 When no amicable settlement was reached,
the consolidated appeals were considered submitted for resolution.18
On December 22, 2006, Secretary of Justice Raul M. Gonzales rendered the first assailed resolution
declaring PAGCOR exempt from the payment of all taxes except the 5% franchise tax provided in its
Charter.19
On March 12, 2007, Secretary Gonzales issued the second assailed resolution denying the CIR's motion
for reconsideration.20
Hence, this special civil action for certiorari.
Issues
The grounds for the petition for certiorari are as follows:
I
RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS
JURISDICTION AND GRAVELY ABUSED HIS DISCRETION IN ASSUMING JURISDICTION
OVER THE PETITION ON DISPUTED TAX ASSESSMENTS FILED BY RESPONDENT PAGCOR.
II
RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS
JURISDICTION AND GRAVELY ABUSED HIS DISCRETION IN HOLDING THAT R.A. NO. 7716
(VAT LAW) DID NOT REPEAL P.D. NO. 1869 (CHARTER OF PAGCOR); HENCE, PAGCOR HAS
NOT BECOME LIABLE FOR THE PAYMENT OF THE 10% VAT IN LIEU OF THE 5%
FRANCHISE TAX.
III
RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS
JURISDICTION AND GRAVELY ABUSED HIS DISCRETION IN ABSOLVING PAGCOR OF ITS
DUTY AND RESPONSIBILITY AS WITHHOLDING AGENT TO WITHHOLD AND REMIT
FRINGE BENEFITS TAX, FINAL WITHHOLDING TAX AND EXPANDED WITHHOLDING TAX.21
Otherwise put, the issues to be resolved are: (1) whether or not the Secretary of Justice has jurisdiction to
review the disputed assessments; (2) whether or not PAGCOR is liable for the payment of VAT; and (3)
whether or not P AGCOR is liable for the payment of withholding taxes.
Ruling
The petition for certiorari is partly granted.
1.
The Secretary of Justice has no jurisdiction to
review the disputed assessments
The petitioner contends that it is the Court of Tax Appeals (CTA), not the Secretary of Justice, that has the
exclusive appellate jurisdiction in this case, pursuant to Section 7(1) of Republic Act No. 1125 (R.A. No.
1125), which grants the CTA the exclusive appellate jurisdiction to review, among others, the decisions of
the Commissioner of Internal Revenue "in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under
the National Internal Revenue Code (NIRC) or other law or part of law administered by the Bureau of
Internal Revenue."
PAGCOR counters, however, that it is the Secretary of Justice who should adjudicate the dispute by virtue
of Chapter 14 of the Revised Administrative Code of 1987, which provides:
CHAPTER 14. CONTROVERSIES AMONG GOVERNMENT OFFICES AND CORPORATIONS.
SEC. 66. How settled. - All disputes/claims and controversies, solely between or among the departments,
bureaus, offices, agencies and instrumentalities of the National Government, including government-owned
and controlled corporations, such as those arising from the interpretation and application of statues,
contracts or agreements shall be administratively settled or adjudicated in the manner provided for in this
Chapter. This Chapter shall, however, not apply to disputes involving the Congress, the Supreme Court,
the Constitutional Commission and local governments.
SEC. 67. Disputes Involving Questions of Law. - All cases involving only questions of law shall be
submitted to and settled or adjudicated by the Secretary of Justice as Attorney-General of the National
Government and as ex-officio legal adviser of all government-owned or controlled corporations. His
ruling or decision thereon shall be conclusive and binding on all the parties concerned.
SEC. 68. Disputes Involving Questions of Fact and Law. – Cases involving mixed questions of law and of
fact or only factual issues shall be submitted to and settled or adjudicated by:
(1) The Solicitor General, if the dispute, claim or controversy involves only departments, bureaus, offices
and other agencies of the National Government as well as government-owned or controlled corporations
or entities of whom he is the principal law officer or general counsel; and
(2) The Secretary of Justice, in all other cases not falling under paragraph (1).
Although acknowledging the validity of the petitioner's contention, the Secretary of Justice still resolved
the disputed assessments on the basis that the prevailing doctrine at the time of the filing of the petitions in
74
the Department of Justice (DOJ) on January 5, 2004 was that enunciated in Development Bank of the the law was originally passed, the reversal of the interpretation cannot be given retroactive effect to the
Philippines v. Court of Appeals,22 whereby the Court ruled that: prejudice of parties who may have relied on the first interpretation. 28

x x x (T)here is an "irreconcilable repugnancy x x between Section 7(2) of R.A. NO. 1125 and P.D. No.
242," and hence, that the latter enactment (P.O. No. 242), being the latest expression of the legislative will,
should prevail over the earlier.
Later on, the Court reversed itself in Philippine National Oil Company v. Court of Appeals,23 and held as
follows:
Following the rule on statutory construction involving a general and a special law previously discussed,
then P.O. No. 242 should not affect R.A. No. 1125. R.A. No. 1125, specifically Section 7 thereof on the
jurisdiction of the CTA, constitutes an exception to P.O. No. 242. Disputes, claims and controversies,
falling under Section 7 of R.A. No. 1125, even though solely among government offices, agencies, and
instrumentalities, including government-owned and controlled corporations, remain in the exclusive
appellate jurisdiction of the CTA. Such a construction resolves the alleged inconsistency or conflict
between the two statutes, x x x.
Despite the shift in the construction of P.D. No. 242 in relation to R.A. No. 1125, the Secretary of Justice
still resolved PAGCOR's petitions on the merits, stating that:
The Court now undertakes to settle the controversy because of the urgent need to promptly decide it. We
cannot lose sight of the fact that PAGCOR is among the most prolific income-generating institutions that
contribute immensely to the country's developing economy. Any controversy involving PAGCOR should
be resolved expeditiously considering the underlying public interest in the matter at hand. To dismiss the
petitions in order to have PAGCOR bring a similar petition in the CTA would not serve the interest of
justice.29 On previous occasions, the Court has overruled the defense of jurisdiction in the interest of
public welfare and for the advancement of public policy whenever, as in this case, an extraordinary
situation existed.30
2.
PAGCOR is exempt from payment of VAT
The CIR insists that under VAT Ruling No. 04-96 (dated May 14, 1996), VAT Ruling No. 030-99 (dated
March 18, 1999), and VAT Ruling No. 067-01 (dated October 8, 2001), R.A. No. 771631 has expressly
repealed, amended, or withdrawn the 5% franchise tax provision in PAGCOR's Charter; hence, PAGCOR
was liable for the 10% VAT.32

While this ruling (DBP) has been superseded by the ruling in Philippine National Oil Company vs. CA, in The relevant provisions of R.A. No. 7716 on which the insistence has been anchored are the following:
view of the prospective application of the PNOC ruling, we (the DOJ) are of the view that this Office can
continue to assume jurisdiction over this case which was filed and has been pending with this Office since
SEC. 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to
January 5, 2004 and rule on the merits of the case.24
read as follows:

We disagree with the action of the Secretary of Justice.

"SEC. l 02. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. -
There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts
25
PAGCOR filed its appeals in the DOI on January 5, 2004 and August 4, 2004. Philippine National Oil derived from the sale or exchange of services, including the use or lease of properties.
Company v. Court of Appeals was promulgated on April 26, 2006. The Secretary of Justice resolved the
petitions on December 22, 2006. Under the circumstances, the Secretary of Justice had ample opportunity
"The phrase 'sale or exchange of services' means the performance of all kinds of service in the Philippines
to abide by the prevailing rule and should have referred the case to the CTA because judicial decisions
for others for a fee, remuneration or consideration, including x x x service of franchise grantees of
applying or interpreting the law formed part of the legal system of the country, 26 and are for that reason to
telephone and telegraph, radio and television broadcasting and all other franchise grantees except those
be held in obedience by all, including the Secretary of Justice and his Department. Upon becoming aware
under Section 117 of this Code; x x x"
of the new proper construction of P.D. No. 242 in relation to R.A. No. 1125 pronounced in Philippine
National Oil Company v. Court of Appeals, therefore, the Secretary of Justice should have desisted from
dealing with the petitions, and referred them to the CTA, instead of insisting on exercising jurisdiction SEC. 12. Section 117 of the National Internal revenue Code, as amended, is hereby further amended
thereon. Therein lay the grave abuse of discretion amounting to lack or excess of jurisdiction on the part of further to read as follows:
the Secretary of Justice, for he thereby acted arbitrarily and capriciously in ignoring the pronouncement
in Philippine National Oil Company v. Court of Appeals. Indeed, the doctrine of stare decisis required him
"SEC.117. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding,
to adhere to the ruling of the Court, which by tradition and conformably with our system of judicial
there shall be levied, assessed and collected in respect to all franchises on electric, gas and water utilities a
administration speaks the last word on what the law is, and stands as the final arbiter of any justiciable
tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the
controversy. In other words, there is only one Supreme Court from whose decisions all other courts and
franchise. x x x"
everyone else should take their bearings.27

Nonetheless, the Secretary of Justice should not be taken to task for initially entertaining the petitions
considering that the prevailing interpretation of the law on jurisdiction at the time of their filing was that
he had jurisdiction. Neither should PAGCOR to blame in bringing its appeal to the DOJ on January 5,
2004 and August 4, 2004 because the prevailing rule then was the interpretation in Development Bank of
the Philippines v. Court of Appeals. The emergence of the later ruling was beyond PAGCOR's control.
Accordingly, the lapse of the period within which to appeal the disputed assessments to the CTA could not
be taken against P AGCOR. While a judicial interpretation becomes a part of the law as of the date that
SEC. 20. Repealing Clauses. - The provisions of any special law relative to the rate of franchise taxes are
hereby expressly repealed.x x x
The CIR argues that PAGCOR' s gambling operations are embraced under the phrase sale or exchange of
services, including the use or lease of properties; that such operations are not among those expressly
exempted from the 10% VAT under Section 3 of R.A. No. 7716; and that the legislative purpose to
withdraw PAGCOR's 5% franchise tax was manifested by the language used in Section 20 of R.A.
No.7716.
75
The CIR' s arguments lack merit.
Firstly, a basic rule in statutory construction is that a special law cannot be repealed or modified by a
subsequently enacted general law in the absence of any express provision in the latter law to that effect. A
special law must be interpreted to constitute an exception to the general law in the absence of special
circumstances warranting a contrary conclusion.33 R.A. No. 7716, a general law, did not provide for the
express repeal of PAGCOR's Charter, which is a special law; hence, the general repealing clause under
Section 20 of R.A. No. 7716 must pertain only to franchises of electric, gas, and water utilities, while the
term other franchises in Section 102 of the NIRC should refer only to transport, communications and
utilities, exclusive of PAGCOR's casino operations.
Secondly, R.A. No. 7716 indicates that Congress has not intended to repeal PAGCOR's privilege to enjoy
the 5% franchise tax in lieu of all other taxes. A contrary construction would be unwarranted and myopic
nitpicking. In this regard, we should follow the following apt reminder uttered in Fort Bonifacio
Development Corporation v. Commissioner of Internal Revenue: 34
A law must not be read in truncated parts: its provisions must be read in relation to the whole law. It is the
cardinal rule in statutory construction that a statute’s clauses and phrases must not be taken as detached
and isolated expressions but the whole and every part thereof must be considered in fixing the meaning of
any of its parts in order to produce a harmonious whole. Every part of the statute must be interpreted with
reference to the context, i.e., that every part of the statute must be considered together with other parts of
the statute and kept subservient to the general intent of the whole enactment.
In constructing a statute courts have to take the thought conveyed by the statute as a whole: construe the
constituent parts together; ascertain the legislative intent from the whole act; consider each and every
provision thereof in the light of the general purpose of the statute; and endeavor to make every part
effective, harmonious and sensible.
Although Section 3 of R.A. No. 7716 imposes 10% VAT on the sale or exchange of services, including
the use or lease of properties, the provision also considers transactions that are subject to 0% VAT. 35 On
the other hand, Section 4 of R.A. No. 7716 enumerates the transactions exempt from VAT, viz.:
SEC. 4. Section 103 of the National Internal Revenue Code, as amended, is hereby further amended to
read as follows:
"SEC.103. Exempt transactions. - The following shall he exempt from the value-added tax:
xxxx
"(q) Transactions which are exempt under special laws, except those granted under Presidential Decree
Nos. 66, 529, 972, 1491, and 1590, and nonelectric cooperatives under republic Act No. 6938, or
international agreements to which the Philippines is a signatory;
x x x x" (bold emphasis supplied.)
Anent the effect of R.A. No. 7716 on franchises, the Court has observed in Tolentino v. The Secretary of
Finance36that:
Among the provisions of the NIRC amended is §103, which originally read:
§103. Exempt transactions.-The following shall be exempt from the value-added tax:
....
(q) Transactions which are exempt under special laws or international agreements to which the Philippines
is a signatory.
Among the transactions exempted from the VAT were those of PAL because it was exempted under its
franchise (P.D. No. 1590) from the payment of all "other taxes ... now or in the near future," in
consideration of the payment by it either of the corporate income tax or a franchise tax of 2%.
As a result of its amendment by Republic Act No. 7716, §103 of the NIRC now provides:
§103. Exempt transactions.-The following shall be exempt from the value-added tax:
……..
(q) Transactions which are exempt under special laws, except those granted under Presidential Decree
Nos. 66, 529, 972, 1491, 1590 .....
The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is concerned.
xxxx
x x x Republic Act No. 7716 expressly amends PAL's franchise (P.D. No. 1590) by specifically excepting
from the grant of exemptions from the VAT PAL's exemption under P.D. No. 1590. This is within the
power of Congress to do under Art. XII, § 11 of the Constitution, which provides that the grant of a
franchise for the operation of a public utility is subject to amendment, alteration or repeal by Congress
when the common good so requires.37
Unlike the case of PAL, however, R.A. No. 7716 does not specifically exclude PAGCOR's exemption
under P.D. No. 1869 from the grant of exemptions from VAT; hence, the petitioner's contention that R.A.
No. 7716 expressly amended PAGCOR's franchise has no leg to stand on.
Moreover, PAGCOR's exemption from VAT, whether under R.A. No. 7716 or its amendments, has been
settled in Philippine Amusement and Gaming Corporation (PAGCOR) v. The Bureau of Internal
Revenue,38 whereby the Court, citing Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation,39 has declared:
Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a
special law that grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which
retained Section 108 (B) (3) of R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further
amended to read as follows:
76
SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or
lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines
by VAT-registered persons shall be subject to zero percent (0%) rate;
xxxx
(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to
zero percent (0%) rate;
xxxx
As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No.
8424 by imposing VAT on other services not previously covered, it did not amend the portion of Section
108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and
extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation. x
x x The Court ruled that PAGCOR and Acesite were both exempt from paying VAT, thus:
xxxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating P AGCOR, grants the latter an exemption from the
payment of taxes. Section 13 of P.O. 1869 pertinently provides:
Sec. 13. Exemptions.
xxxx
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as
well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way
to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by any municipal,
provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted under the
franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges,
fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or
individual(s) with whom the Corporation or operator has any contractual relationship in connection with
the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.
Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to
indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes arc direct or indirect. We arc one with the CA ruling that PAGCOR is
also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.O. 1869], the term "Corporation" or operator refers to
PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect
taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons
or entities contracting with PAGCOR in casino operations. Although, differently worded, the
provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting
tax exempt status to persons dealing with PAGCOR in casino operations. The unmistakable
conclusion is that PAGCOR is not liable for the ₱30, 152,892.02 VAT and neither is Acesitc as the latter
is effectively subject to zero percent rate under Sec. 108 B (3 ), R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entitles or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the
instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services
subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with P
AGCOR in casino operations, it is exempting P AGCOR from being liable to indirect taxes.
The manner of charging VAT docs not make PAGCOR liable to said tax.
It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or
leased, in which case it is computed as 1/11 of such value, or charged as an additional 10% to the value.
Verily, the seller or lessor has the option to follow either way in charging its clients and customer. In the
instant case, Acesite followed the latter method, that is, charging an additional 10% of the gross sales and
rentals. Be that as it may, the use of either method, and in particular, the first method, does not denigrate
the fact that PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Aeesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not
liable for the payment of it as it is exempt in this particular transaction by operation of law to pay the
indirect tax. Such exemption falls within the fo1mer Section 102 (b) (3) of the 1977 Tax Code, as
amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:
Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied,
assessed and collected, a value-added tax equivalent to 10% of gross receipts derived by any person
engaged in the sale of services x x x; Provided, that the following services performed in the Philippines by
VAT registered persons shall be subject to 0%.
77
 xxxx
(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
(0%) rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.O. 1869 and the extension of such
exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from
the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax
exemption of the World Health Organization (WHO) upon an international agreement was upheld. We
held in said case that the exemption of contractee WHO should be implemented to mean that the entity or
person exempt is the contractor itself who constructed the building owned by contractee WHO, and such
does not violate the rule that tax exemptions are personal because the manifest intention of the agreement
is to exempt the contractor so that no contractor's tax may be shifted to the contractee WHO. Thus, the
proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in
casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to
PAGCOR.
Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner
of Internal Revenue v. Acesite (Philippines)Hotel Corporation was Section 102 (b) of the 1977 Tax Code,
as amended, which section was retained as Section 108 (B) (3) in R.A. No. 8424, it is still applicable to
this case, since the provision relied upon has been retained in R.A. No. 9337. 40
Clearly, the assessments for deficiency VAT issued against PAGCOR should be cancelled for lack of legal
basis.
The Court also deems it warranted to cancel the assessments for deficiency withholding VAT pertaining to
the payments made by PAGCOR to its catering service contractor.
In two separate letters dated December 12, 200341 and December 15, 2003,42 the BIR conceded that the
unmonetized meal allowances of PAGCOR's employees were not subject to fringe benefits tax (FBT).
However, the BIR held PAGCOR liable for expanded withholding VAT for the payments made to its
catering service contractor who provided the meals for its employees. Accordingly, the BIR assessed
PAGCOR with deficiency withholding VAT for taxable year 1999 in the amount of ₱4,077 ,667.40,
inclusive of interest and compromise penalty; and for taxable year 2000 in the amount of ₱l2,212, 199.85,
exclusive of interest and penalties.
The payments made by PAGCOR to its catering service contractor are subject to zero-rated (0%) VAT in
accordance with Section 13(2) of P.D. No. 1869 in relation to Section 3 of R.A. No. 7716, viz.:
SEC. 13. Exemptions.-
(1) x x x
(2) (a) x x x
(b) Others: The exemption herein granted for earnings derived from the operations conducted under the
franchise, specifically from the payment of any tax, income or otherwise, as well as any form of charges,
fees, or levies, shall inure to the benefit and extend to corporation(s), association(s), agency(ies), or
individual(s) with whom the Corporation or operator has any contractual relationship in connection with
the operations of casino(s) authorized to be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.
xxxx
SEC. 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to
read as follows:
"SEC.102. Value-added tax on sale of service and use or lease of properties. - x x x
"(b) Transaction subject to zero-rate. - The following services performed in the Philippines by Vat-
registered persons shall be subject to 0%:
"x x xx
"(3) Services rendered to persons or entities whose exemptions under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
rate.
As such, the catering service contractor, who is presumably a VAT-registered person, shall impose a zero
rate (0%) output tax on its sale or lease of goods, services or properties to PAGCOR. Consequently, no
withholding tax is due on such transaction.
3.
PAGCOR is liable for the payment of withholding taxes
Through the letters dated December 12, 200343 and December 15, 2003,44 the BIRrecomputed the
assessments for deficiency final withholding taxes on fringe benefits under Assessment No. 33-99 and
Assessment No. 33-2000, respectively, as follows:
The amount of the assessment for deficiency expanded withholding tax under Assessment No. 33-99
remained at ₱3,790,916,809.16.
We now resolve the validity of the foregoing assessments.1âwphi1
a. Final Withholding Tax on
Fringe Benefits
The recomputed assessment for deficiency final withholding taxes related to the car plan granted to
PAGCOR's employees and for its payment of membership dues and fees.
Under Section 33 of the NIRC, FBT is imposed as:
A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective
January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed
on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and
file employees as defined herein) by the employer, whether an individual or a corporation (unless the
78
fringe benefit is required by the nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein
imposed is payable by the employer which tax shall be paid in the same manner as provided for under
Section 57 (A) of this Code.
FBT is treated as a final income tax on the employee that shall be withheld and paid by the employer on a
calendar quarterly basis.45 As such, PAGCOR is a mere withholding agent inasmuch as the FBT is
imposed on PAGCOR's employees who receive the fringe benefit. PAGCOR's liability as a withholding
agent is not covered by the tax exemptions under its Charter.
The car plan extended by PAGCOR to its qualified officers is evidently considered a fringe benefit 46 as
defined under Section 33 of the NIRC. To avoid the imposition of the FBT on the benefit received by the
employee, and, consequently, to avoid the withholding of the payment thereof by the employer, PAGCOR
must sufficiently establish that the fringe benefit is required by the nature of, or is necessary to the trade,
business or profession of the employer, or when the fringe benefit is for the convenience or advantage of
the employer.
PAGCOR asserted that the car plan was granted "not only because it was necessary to the nature of the
trade of PAGCOR but it was also granted for its convenience." 47 The records are lacking in proof as to
whether such benefit granted to PAGCOR's officers were, in fact, necessary for PAGCOR's business or
for its convenience and advantage. Accordingly, PAGCOR should have withheld the FBT from the
officers who have availed themselves of the benefits of the car plan and remitted the same to the BIR.
As for the payment of the membership dues and fees, the Court finds that this is not considered a fringe
benefit that is subject to FBT and which holds PAGCOR liable for final withholding tax. According to
PAGCOR, the membership dues and fees are:
57. x x x expenses borne by [respondent] to cover various memberships in social, athletic clubs and
similar organizations. x x x
58. Respondent's nature of business is casino operations and it derives business from its customers who
play at the casinos. In furtherance of its business, PAGCOR usually attends its VIP customers, amenities
such as playing rights to golf clubs. The membership of PAGCOR to these golf clubs and other
organizations are intended to benefit respondent's customers and not its employees. Aside from this, the
membership is under the name of PAGCOR, and as such, cannot be considered as fringe benefits because
it is the customers and not the employees of PAGCOR who benefit from such memberships.48
Considering that the payments of membership dues and fees are not borne by PAGCOR for its employees,
they cannot be considered as fringe benefits which are subject to FBT under Section 33 of the NIRC.
Hence, PAGCOR is not liable to withhold FBT from its employees.
b. Expanded Withholding Tax
The BIR assessed PAGCOR with deficiency expanded withholding tax for the year 1999 under
Assessment No. 33-99 amounting to ₱3,790,916,809.16, inclusive of surcharge and interest, which was
computed as follows:49
Later, BIR issued a letter dated December 12, 2003 showing therein a recomputation of the assessment, to
wit:50
PAGCOR submits that the BIR erroneously assessed it for thedeficiency expanded withholding taxes,
explaining thusly:
44. The computation made by the revenue officers for the year 1999 for expanded withholding taxes
against respondent arc also not correct because it included payments amounting to ₱682,120,262 which
should not be subjected to withholding tax;
45. Of the said amount, ₱194,999,366 cover importations or various items for the sole and exclusive use
of the casinos x x x:
xxxx
46. The breakdown of respondent's payments which were assessed expanded withholding tax by the BIR
but which should not have been made subject thereto arc as follows:
a) Taxable Compensation Income amounting to ₱7l,6ll,563.60, representing salaries of contractuals and
casuals, clerical and messengerial and other services, cost of COA services and unclaimed salaries and
other benefits recognized as income but subsequently claimed (attached as Annexes "10" to "18" and
made integral parts hereof);
b) Prizes and other promo items amounting to ₱16,185,936.61 which were already subjected to 20% final
withholding tax. Pursuant to Revenue Regulations 2-98, prizes and promo items shall be subject only to
20% final tax (attached as Annexes "19" to "51" and made integral parts hereof);
c) Reimbursements amounting to ₱18,246,090.35 which were paid directly by agents/employees as over
the counter purchases subsequently liquidated/reimbursed by PAGCOR pursuant to BIR rulings 129-92
and 345-88;
d) Taxes amounting to ₱6,679,807.53, the amount of which should not be subjected to expanded
withholding tax for obvious reasons;
e) Security Deposit amounting to ₱3,450,000.00 which was written off after the Regional Trial Court,
Branch 226 of Quezon City through Presiding Judge, Leah S. Domingo-Regala, rendered a decision based
on a compromise agreement in Civil Case No. 097-31299 entitled 'Felina Rodriguez-Luna, et al vs.
Philippine Amusement and Gaming Corporation" (attached as Annex "52" and made an integral part
hereof);51
PAGCOR' s submission is partly meritorious. The Court finds that PAGCOR is not liable for deficiency
expanded withholding tax on its payment for: (1) audit services rendered by the Commission on Audit
(COA), amounting to ₱4,243,977.96,52 and (2) prizes and other promo items amounting to
₱16,185,936.61.53
PAGCOR's payment to the COA for its audit services is exempted from withholding tax pursuant to Sec.
2.57.5 (A) of Revenue Regulation (RR) 2-98, which states:
SEC. 2.57.5. Exemption from Withholding Tax –The withholding of creditable withholding tax
prescribed in these Regulations shall not apply to income payments made to the following:
(A) National government and its instrumentalities, including provincial, city or municipal governments;
79
On the other hand, the prizes and other promo items amounting to ₱16,185,936.61 were already subjected
to the 20% final withholding tax54 pursuant to Section 24(B)(l) of the NIRC.55 To impose another tax on
these items would amount to obnoxious or prohibited double taxation because the taxpayer would be taxed
twice by the same jurisdiction for the same purpose. 56
Hence, except for the foregoing, the Court upholds the validity of the assessment against PAGCOR for
deficiency expanded withholding tax.
We explain.
Other than the ₱4,243,977.96 payments made to COA, the remainder of the ₱71,61 l,563.60 compensation
income that PAGCOR paid for the services of its contractual, casual, clerical and messengerial employees
are clearly subject to expanded withholding tax by virtue of Section 79 (A) of the NIRC which reads:
Sec. 79 Income Tax Collected at Source.-
(A) Requirement of Withholding. - Every employer making payment of wages shall deduct and withhold
upon such wages a tax determined in accordance with the rules and regulations to be prescribed by
the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no
withholding of a tax shall be required where the total compensation income of an individual does not
exceed the statutory minimum wage, or Five thousand pesos (₱5,000) per month, whichever is higher.
In addition, Section 2.57.3(C) of RR 2-98 states that:
SEC. 2.57.3 Persons Required to Deduct and Withhold. - The following persons are hereby constituted as
withholding agents for purposes of the creditable tax required to be withheld on income payments
enumerated in Section 2.57.2:
xxxx
(c) All government offices including government-owned or controlled corporations, as well as provincial,
city and municipal governments.
As for the rest of the assessment for deficiency expanded withholding tax arising from PAGCOR's (1)
reimbursement for over-the-counter purchases by its agents amounting to ₱18,246,090.34; (2) tax
payments of ₱6,679,807.53; (3) security deposit totalling ₱3,450,000.00; and (4) importations w01ih
₱194,999,366.00, the Court observes that PAGCOR did not present sufficient and convincing proof to
establish its non-liability.
With regard to the reimbursement for over-the-counter purchases by its agents, PAGCOR merely relied on
BIR Ruling Nos. 129-92 and 345-88 to support its claim that it should not be liable to withhold taxes on
these payments without submitting any proof to show that there were really actual payments made. 57 There
is also nothing in the records to show that the amount of ₱6,679,807.53 really represented PAGCOR's tax
payments,58 or that the amount of ₱194,999,366.00 were, in fact, paid for PAGCOR's importations of
various items in furtherance of its business.
Even the ₱3,450,000.00 security deposit that it claims to have been written-off based on the compromise
agreement in Civil Case No. 097-31299 was not sufficiently proved to be tax exempt. The only document
presented by PAGCOR to support its contention was a copy of the trial court's decision in the civil case.
However, nowhere in the decision mentioned the security deposit.
It is settled that all presumptions are in favor of the correctness of tax assessments.1âwphi1 The good faith
of the tax assessors and the validity of their actions are thus presumed. They will be presumed to have
taken into consideration all the facts to which their attention was called.59 Hence, it is incumbent upon the
taxpayer to credibly show that the assessment was erroneous in order to relieve himself from the liability it
imposes. PAGCOR failed in this regard. Hence, except for the assessment for deficiency expanded
withholding taxes pertaining to the payments made to the COA for its audit services and for the prizes and
other promo items, the Court upholds the BIR's assessment for deficiency expanded withholding taxes.
WHEREFORE, the Court PARTIALLY GRANTS the petition for certiorari; ANNULS and SETS
ASIDE the Resolutions dated December 22, 2006 and March 12, 2007 of the Secretary of Justice in OSJ
Case No. 2004-1FOR LACK OF JURISDICTION; DECLARES that Republic Act No. 7716 did not
repeal Section 13(2) of Presidential Decree 1869, and, ACCORDINGLY, the PHILIPPINE
AMUSEMENT AND GAMING CORPORATION is EXEMPT from value-added tax.
The Court FURTHER RESOLVES to:
(1) CANCEL Assessment No. 33-1996/1997 /1998 dated November 14, 2002, which
assessed PHILIPPINE AMUSEMENT AND GAMING CORPORATION for deficiency value-added
tax;
(2) CANCEL Assessment No. 33-99 dated November 25, 2002, insofar as it assessed PHILIPPINE
AMUSEMENT AND GAMING CORPORATION for deficiency -
(a) value-added tax;
(b) expanded withholding value-added tax on payments made by PHILIPPINE
AMUSEMENT AND GAMING CORPORATION to its catering service contractor;
(c) final withholding tax on fringe benefits relating to the membership fees and dues paid
by PHILIPPINE AMUSEMENT AND GAMING CORPORATION for the benefit of its
clients and customers; and
(d) expanded withholding tax on compensation income paid by PHILIPPINE AMUSEMENT
AND GAMING CORPORATION to the Commission on Audit for its audit services, and
expanded withholding tax on the prizes and other promo items, which were already subjected
to the 20% final withholding tax;
(3) CANCEL Assessment No. 33-2000 dated March 18, 2003, insofar as it assessed PHILIPPINE
AMUSEMENT AND GAMING CORPORATION for deficiency –
(a) value-added tax;
(b)expanded withholding value-added tax on payments made by PHILIPPINE
AMUSEMENT AND GAMING CORPORATION to its catering service contractor; and
(c) final withholding tax on fringe benefits relating to the membership fees and dues paid
by PHILIPPINE AMUSEMENT AND GAMING CORPORATION for the benefit of its
clients and customers;
80
Respondent PHILIPPINE AMUSEMENT AND GAMING CORPORATION is DIRECTED TO
PAY to the Bureau of Internal Revenue:
(l) its deficiency final withholding tax on fringe benefits arising from the car plan it granted to its qualified
officers and employees under Assessment No. 33-99 and Assessment No. 33-2000; and
(2) its deficiency expanded withholding tax under Assessment No. 33-99, except on compensation income
paid to the Commission on Audit for its audit services and on prizes and other promo items.
Upon receipt of respondent PHILIPPINE AMUSEMENT AND GAMING COH.PORA TIO N's
payment for the foregoing tax deficiencies, the Bureau of Internal Revenue is DIRECTED TO
WITHHOLD 5% thereof and TO REMIT the same to the Office of the Solicitor General pursuant to
Section 11(1) 60 of Republic Act No. 9417 (An Act to Strengthen the Office of the Solicitor General, by
Expanding and Streamlining its Bureaucracy, Upgrading Employee Skills and Augmenting Benefits, and
Appropriating Funds Therefor and for Other Purposes).
7. G.R. No. 172231 February 12, 2007 COMMISSIONER OF INTERNAL REVENUE vs. ISABELA
CULTURAL CORPORATION
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of the Court
of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the Court of Tax
Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment Notices for
deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue (BIR)
against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86,
and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount
of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and security
services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending
December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and
1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for
the months of April and May 1986.6
(2) The alleged understatement of ICC’s interest income on the three promissory notes due
from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was allegedly
due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00 deduction
for security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995,
however, it received a final notice before seizure demanding payment of the amounts stated in the said
notices. Hence, it brought the case to the CTA which held that the petition is premature because the final
notice of assessment cannot be considered as a final decision appealable to the tax court. This was
reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the payment of
deficiency tax, amounts to a final decision on the protested assessment and may therefore be questioned
before the CTA. This conclusion was sustained by this Court on July 1, 2001, in G.R. No. 135210.8 The
case was thus remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment notices
issued against ICC. It held that the claimed deductions for professional and security services were properly
claimed by ICC in 1986 because it was only in the said year when the bills demanding payment were sent
to ICC. Hence, even if some of these professional services were rendered to ICC in 1984 or 1985, it could
not declare the same as deduction for the said years as the amount thereof could not be determined at that
time.
The CTA also held that ICC did not understate its interest income on the subject promissory notes. It
found that it was the BIR which made an overstatement of said income when it compounded the interest
income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the absence of a
stipulation in the contract providing for a compounded interest; nor of a circumstance, like delay in
payment or breach of contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction
for security services as shown by the various payment orders and confirmation receipts it presented as
evidence. The dispositive portion of the CTA’s Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency
income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest,
both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were rendered to
ICC in 1984 and 1985, the cost of the services was not yet determinable at that time, hence, it could be
considered as deductible expenses only in 1986 when ICC received the billing statements for said services.
It further ruled that ICC did not understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted taxes on the payments for security services
for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that
since ICC is using the accrual method of accounting, the expenses for the professional services that
accrued in 1984 and 1985, should have been declared as deductions from income during the said years and
the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986. As
to the alleged deficiency interest income and failure to withhold expanded withholding tax assessment,
petitioner invoked the presumption that the assessment notices issued by the BIR are valid.
81
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the
expenses for professional and security services from ICC’s gross income; and (2) held that ICC did not
understate its interest income from the promissory notes of Realty Investment, Inc; and that ICC withheld
the required 1% withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses,
like expenses paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b)
it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in
carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other
pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is further qualified by Section
45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this
Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon
the method of accounting upon the basis of which the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions.12 In the instant case, the accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot
be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to
deduct certain expenses and other allowable deductions for the current year but failed to do so cannot
deduct the same for the next year.13
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of
income accrue where the right to receive them become fixed, where there is created an enforceable
liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to
indeterminacy merely of time of payment.14
For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income
and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the availability of the reasonable accurate determination of such income
or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the amount of
income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary
to compute the amount with reasonable accuracy. The all-events test is satisfied where computation
remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown,
but is not as much as unknowable, within the taxable year. The amount of liability does not have to be
determined exactly; it must be determined with "reasonable accuracy." Accordingly, the term
"reasonable accuracy" implies something less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably
be expected to have known, at the closing of its books for the taxable year.[16] Accrual method of
accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction. 17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an exemption
must be able to justify the same by the clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon vague implications. And since a deduction for income
tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing services.
The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of
said firm in connection with ICC’s tax problems for the year 1984. As testified by the Treasurer of ICC,
the firm has been its counsel since the 1960’s.19 From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for its legal services. The failure to determine the exact
amount of the expense during the taxable year when they could have been claimed as deductions cannot
thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise
of due diligence could have inquired into the amount of their obligation to the firm, especially so that it is
using the accrual method of accounting. For another, it could have reasonably determined the amount of
legal and retainer fees owing to its familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the
burden of establishing the accrual of an expense or income. However, ICC failed to discharge this burden.
As to when the firm’s performance of its services in connection with the 1984 tax problems were
completed, or whether ICC exercised reasonable diligence to inquire about the amount of its liability, or
whether it does or does not possess the information necessary to compute the amount of said liability
with reasonable accuracy, are questions of fact which ICC never established. It simply relied on the
defense of delayed billing by the firm and the company, which under the circumstances, is not sufficient to
exempt it from being charged with knowledge of the reasonable amount of the expenses for legal and
auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the
year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed to
present evidence showing that even with only "reasonable accuracy," as the standard to ascertain its
liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said company
would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit
Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the said year
and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred by ICC in
198620 and could therefore be properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes of Realty Investment,
Inc., we sustain the findings of the CTA and the Court of Appeals that no such understatement exists and
that only simple interest computation and not a compounded one should have been applied by the BIR.
There is indeed no stipulation between the latter and ICC on the application of compounded
interest.21 Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due
should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the BIR is
82
supported by payment order and confirmation receipts.22 Hence, the Assessment Notice for deficiency
expanded withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency income
tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for security
services. Said Assessment is valid as to the BIR’s disallowance of ICC’s expenses for professional
services. The Court of Appeal’s cancellation of Assessment Notice No. FAS-1-86-90-000681 in the
amount of P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court
of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment Notice
No. FAS-1-86-90-000680, which disallowed the expense deduction of Isabela Cultural Corporation for
professional and security services, is declared valid only insofar as the expenses for the professional fees
of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, are
concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability under
Assessment Notice No. FAS-1-86-90-000680.
8. G.R. No. 143672 April 24, 2003 COMMISSIONER OF INTERNAL REVENUE vs. GENERAL
FOODS (PHILS.), INC.
Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution1 of the Court of
Appeals reversing the decision2 of the Court of Tax Appeals which in turn denied the protest filed by
respondent General Foods (Phils.), Inc., regarding the assessment made against the latter for deficiency
taxes.
The records reveal that, on June 14, 1985, respondent corporation, which is engaged in the manufacture of
beverages such as "Tang," "Calumet" and "Kool-Aid," filed its income tax return for the fiscal year ending
February 28, 1985. In said tax return, respondent corporation claimed as deduction, among other business
expenses, the amount of P9,461,246 for media advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by
respondent corporation. Consequently, respondent corporation was assessed deficiency income taxes in
the amount of P2,635, 141.42. The latter filed a motion for reconsideration but the same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the appeal was
dismissed:
With such a gargantuan expense for the advertisement of a singular product, which even
excludes "other advertising and promotions" expenses, we are not prepared to accept that such
amount is reasonable "to stimulate the current sale of merchandise" regardless of Petitioner’s
explanation that such expense "does not connote unreasonableness considering the grave
economic situation taking place after the Aquino assassination characterized by capital fight,
strong deterioration of the purchasing power of the Philippine peso and the slacking demand
for consumer products" (Petitioner’s Memorandum, CTA Records, p. 273). We are not
convinced with such an explanation. The staggering expense led us to believe that such
expenditure was incurred "to create or maintain some form of good will for the taxpayer’s trade
or business or for the industry or profession of which the taxpayer is a member." The term
"good will" can hardly be said to have any precise signification; it is generally used to denote
the benefit arising from connection and reputation (Words and Phrases, Vol. 18, p. 556
citing Douhart vs. Loagan, 86 III. App. 294). As held in the case of Welch vs. Helvering,
efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses
related thereto are not business expenses but capital expenditures. (Atlas Mining and
Development Corp. vs. Commissioner of Internal Revenue, supra). For sure such expenditure
was meant not only to generate present sales but more for future and prospective benefits.
Hence, "abnormally large expenditures for advertising are usually to be spread over the period
of years during which the benefits of the expenditures are received" (Mertens, supra, citing
Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from, we hereby
RESOLVE to DISMISS the instant petition for lack of merit and ORDER the Petitioner to pay
the respondent Commissioner the assessed amount of P2,635,141.42 representing its deficiency
income tax liability for the fiscal year ended February 28, 1985."3
Aggrieved, respondent corporation filed a petition for review at the Court of Appeals which rendered a
decision reversing and setting aside the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it claimed as a deduction is
excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby
GRANTED. Accordingly, the Decision, dated 8 February 1994 of respondent Court of Tax
Appeals is REVERSED and SET ASIDE and the letter, dated 31 May 1988 of respondent
Commissioner of Internal Revenue is CANCELLED.
SO ORDERED.4
Thus, the instant petition, wherein the Commissioner presents for the Court’s consideration a lone issue:
whether or not the subject media advertising expense for "Tang" incurred by respondent corporation was
an ordinary and necessary expense fully deductible under the National Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority;5 and he who claims an exemption must be able to
justify his claim by the clearest grant of organic or statute law. An exemption from the common burden
cannot be permitted to exist upon vague implications. 6
Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are
strictly construed, then deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the media advertising expense for
"Tang" paid or incurred by respondent corporation for the fiscal year ending February 28, 1985 "necessary
and ordinary," hence, fully deductible under the NIRC? Or was it a capital expenditure, paid in order to
create "goodwill and reputation" for respondent corporation and/or its products, which should have been
amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional expenses.-
83
 (a) In general.- There shall be allowed as deduction from gross income all ordinary
and necessary expenses paid or incurred during the taxable year in carrying on, or
which are directly attributable to, the development, management, operation and/or
conduct of the trade, business or exercise of a profession.
Simply put, to be deductible from gross income, the subject advertising expense must comply with the
following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business
of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.7
The parties are in agreement that the subject advertising expense was paid or incurred within the
corresponding taxable year and was incurred in carrying on a trade or business. Hence, it was necessary.
However, their views conflict as to whether or not it was ordinary. To be deductible, an advertising
expense should not only be necessary but also ordinary. These two requirements must be met.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it
failed the two conditions set by U.S. jurisprudence: first, "reasonableness" of the amount incurred and
second, the amount incurred must not be a capital outlay to create "goodwill" for the product and/or
private respondent’s business. Otherwise, the expense must be considered a capital expenditure to be
spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising
expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number of
factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the
volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer
and the general economic conditions. It is the interplay of these, among other factors and properly
weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang" alone was almost one-
half of its total claim for "marketing expenses." Aside from that, respondent-corporation also claimed
P2,678,328 as "other advertising and promotions expense" and another P1,548,614, for consumer
promotion.
Furthermore, the subject P9,461,246 media advertising expense for "Tang" was almost double the amount
of respondent corporation’s P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately large. Therefore,
even if it is necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a)
(1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use
of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The
second type involves expenditures incurred, in whole or in part, to create or maintain some form of
goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a
member. If the expenditures are for the advertising of the first kind, then, except as to the question of the
reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the second kind, then normally they should be spread out
over a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the second kind. Not
only was the amount staggering; the respondent corporation itself also admitted, in its letter protest 8 to the
Commissioner of Internal Revenue’s assessment, that the subject media expense was incurred in order to
protect respondent corporation’s brand franchise, a critical point during the period under review.
The protection of brand franchise is analogous to the maintenance of goodwill or title to one’s property.
This is a capital expenditure which should be spread out over a reasonable period of time.9
Respondent corporation’s venture to protect its brand franchise was tantamount to efforts to establish a
reputation. This was akin to the acquisition of capital assets and therefore expenses related thereto were
not to be considered as business expenses but as capital expenditures.10
True, it is the taxpayer’s prerogative to determine the amount of advertising expenses it will incur and
where to apply them.11 Said prerogative, however, is subject to certain considerations. The first relates to
the extent to which the expenditures are actually capital outlays; this necessitates an inquiry into the nature
or purpose of such expenditures.12 The second, which must be applied in harmony with the first, relates to
whether the expenditures are ordinary and necessary. Concomitantly, for an expense to be considered
ordinary, it must be reasonable in amount. The Court of Tax Appeals ruled that respondent corporation
failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation incurred the subject advertising expense
in order to protect its brand franchise. We consider this as a capital outlay since it created goodwill for its
business and/or product. The P9,461,246 media advertising expense for the promotion of a single product,
almost one-half of petitioner corporation’s entire claim for marketing expenses for that year under review,
inclusive of other advertising and promotion expenses of P2,678,328 and P1,548,614 for consumer
promotion, is doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect the conclusions of quasi-judicial
agencies such as the Court of Tax Appeals, a highly specialized body specifically created for the purpose
of reviewing tax cases. The CTA, by the nature of its functions, is dedicated exclusively to the study and
consideration of tax problems. It has necessarily developed an expertise on the subject. We extend due
consideration to its opinion unless there is an abuse or improvident exercise of authority.13 Since there is
none in the case at bar, the Court adheres to the findings of the CTA.
Accordingly, we find that the Court of Appeals committed reversible error when it declared the subject
media advertising expense to be deductible as an ordinary and necessary expense on the ground that "it
has not been established that the item being claimed as deduction is excessive." It is not incumbent upon
the taxing authority to prove that the amount of items being claimed is unreasonable. The burden of proof
to establish the validity of claimed deductions is on the taxpayer. 14 In the present case, that burden was not
discharged satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decision of the
Court of Appeals is hereby REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of the Tax
Code, respondent General Foods (Phils.), Inc. is hereby ordered to pay its deficiency income tax in the
amount of P2,635,141.42, plus 25% surcharge for late payment and 20% annual interest computed from
August 25, 1989, the date of the denial of its protest, until the same is fully paid.
9. G.R. No. L-26911 January 27, 1981 ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE
These are two (2) petitions for review from the decision of the Court of Tax Appeals of October 25, 1966
in CTA Case No. 1312 entitled "Atlas Consolidated Mining and Development Corporation vs.
84
Commissioner of Internal Revenue." One (L-26911) was filed by the Atlas Consolidated Mining &
Development Corporation, and in the other L-26924), the Commissioner of Internal Revenue is the
petitioner.
This tax case (CTA No. 1312) arose from the 1957 and 1958 deficiency income tax assessments made by
the Commissioner of Internal Revenue, hereinafter referred to as Commissioner, where the Atlas
Consolidated Mining and Development Corporation, hereinafter referred to as Atlas, was assessed
P546,295.16 for 1957 and P215,493.96 for 1958 deficiency income taxes.
Atlas is a corporation engaged in the mining industry registered under the laws of the Philippines. On
August 20, 1962, the Commissioner assessed against Atlas the sum of P546,295.16 and P215,493.96 or a
total of P761,789.12 as deficiency income taxes for the years 1957 and 1958. For the year 1957, it was the
opinion of the Commissioner that Atlas is not entitled to exemption from the income tax under Section 4
of Republic Act 909 1 because same covers only gold mines, the provision of which reads:
New mines, and old mines which resume operation, when certified to as such by the
Secretary of Agriculture and Natural Resources upon the recommendation of the
Director of Mines, shall be exempt from the payment of income tax during the first
three (3) years of actual commercial production. Provided that, any such mine
and/or mines making a complete return of its capital investment at any time within
the said period, shall pay income tax from that year.
For the year 1958, the assessment of deficiency income tax of P761,789.12 covers the disallowance of
items claimed by Atlas as deductible from gross income.
On October 9, 1962, Atlas protested the assessment asking for its reconsideration and
cancellation. 2 Acting on the protest, the Commissioner conducted a reinvestigation of the case.
On October 25, 1962, the Secretary of Finance ruled that the exemption provided in Republic Act 909
embraces all new mines and old mines whether gold or other minerals. 3 Accordingly, the Commissioner
recomputed Atlas deficiency income tax liabilities in the light of the ruling of the Secretary of Finance. On
June 9, 1964, the Commissioner issued a revised assessment entirely eliminating the assessment of
P546,295.16 for the year 1957. The assessment for 1958 was reduced from P215,493.96 to P39,646.82
from which Atlas appealed to the Court of Tax Appeals, assailing the disallowance of the following items
claimed as deductible from its gross income for 1958:
After hearing, the Court of Tax Appeals rendered a decision on October 25, 1966 allowing the above
mentioned disallowed items, except the items denominated by Atlas as stockholders relation service fee
and suit expenses. 4Pertinent portions of the decision of the Court of Tax Appeals read as follows:
From the Court of Tax Appeals' decision of October 25, 1966, both parties appealed to this Court by way
of two (2) separate petitions for review docketed as G. R. No. L-26911 (Atlas, petitioner) and G. R. No. L-
29924 (Commissioner, petitioner).
G. R. No. L-26911—Atlas appealed only that portion of the Court of Tax Appeals' decision disallowing
the deduction from gross income of the so-called stockholders relation service fee amounting to
P25,523.14, making a lone assignment of error that —
THE COURT OF TAX APPEALS ERRED IN ITS CONCLUSION THAT THE
EXPENSE IN THE AMOUNT OF P25,523.14 PAID BY PETITIONER IN 1958
AS ANNUAL PUBLIC RELATIONS EXPENSES WAS INCURRED FOR
ACQUISITION OF ADDITIONAL CAPITAL, THE SAME NOT BEING
SUPPORTED BY THE EVIDENCE.
It is the contention of Atlas that the amount of P25,523.14 paid in 1958 as annual public relations
expenses is a deductible expense from gross income under Section 30 (a) (1) of the National Internal
Revenue Code. 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. 5 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.
The decisive question, therefore, in this particular appeal taken by Atlas to this Court is whether or not the
expenses paid for the services rendered by a public relations firm P.K MacKer & Co. labelled as
stockholders relation service fee is an allowable deduction as business expense under Section 30 (a) (1) of
the National Internal Revenue Code.
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 National Internal Revenue
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.
We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a
business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary,
(2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying in a
trade or business. 6 In addition, not only must the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not
justify its deduction. 7
While it is true that there is a number of decisions in the United States delving on the interpretation of the
terms "ordinary and necessary" as used in the federal tax laws, no adequate or satisfactory definition of
those terms is possible. Similarly, this Court has never attempted to define with precision the terms
"ordinary and necessary." There are however, certain guiding principles worthy of serious consideration in
the proper adjudication of conflicting claims. Ordinarily, an expense will be considered "necessary" where
the expenditure is appropriate and helpful in the development of the taxpayer's business. 8 It is "ordinary"
when it connotes a payment which is normal in relation to the business of the taxpayer and the
surrounding circumstances. 9 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 non-
recurring to the particular taxpayer affected. 10
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. 11 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. 12
85
It appears that on December 27, 1957, Atlas increased its capital stock from P15,000,000 to
P18,325,000. 13 It was claimed by Atlas that its shares of stock worth P3,325,000 were sold in the United
States because of the services rendered by the public relations firm, P. K. Macker & Company. The Court
of Tax Appeals ruled that the information about Atlas given out and played up in the mass communication
media resulted in full subscription of the additional shares issued by Atlas; consequently, the questioned
item, stockholders relation service fee, was in effect spent for the acquisition of additional capital, ergo, a
capital expenditure.
We sustain the ruling of the tax court that the expenditure of P25,523.14 paid to P.K. Macker & Co. as
compensation for services carrying on the selling campaign in an effort to sell Atlas' additional capital
stock of P3,325,000 is not an ordinary expense in line with the decision of U.S. Board of Tax Appeals in
the case of Harrisburg Hospital Inc. vs. Commissioner of Internal Revenue. 14 Accordingly, as found by
the Court of Tax Appeals, the said expense is not deductible from Atlas gross income in 1958 because
expenses relating to recapitalization and reorganization of the corporation (Missouri-Kansas Pipe Line vs.
Commissioner of Internal Revenue, 148 F. (2d), 460; Skenandos Rayon Corp. vs. Commissioner of
Internal Revenue, 122 F. (2d) 268, Cert. denied 314 U.S. 6961), the cost of obtaining stock subscription
(Simons Co., 8 BTA 631), promotion expenses (Beneficial Industrial Loan Corp. vs. Handy, 92 F. (2d)
74), and commission or fees paid for the sale of stock reorganization (Protective Finance Corp., 23 BTA
308) are capital expenditures.
That the expense in question was incurred to create a favorable image of the corporation in order to gain
or maintain the public's and its stockholders' patronage, does not make it deductible as business expense.
As held in the case of Welch vs. Helvering, 15 efforts to establish reputation are akin to acquisition of
capital assets and, therefore, expenses related thereto are not business expense but capital expenditures.
We do not agree with the contention of Atlas that the conclusion of the Court of Tax Appeals in holding
that the expense of P25,523.14 was incurred for acquisition of additional capital is not supported by the
evidence. The burden of proof that the expenses incurred are ordinary and necessary is on the
taxpayer 16 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.
G. R. No. L-26924-In his petition for review, the Commissioner of Internal Revenue assigned as errors the
following:
I
THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION
FROM GROSS INCOME OF THE SO- CALLED TRANSFER AGENT'S FEES
ALLEGEDLY PAID BY RESPONDENT;
II
THE COURT OF TAX APPEALS ERRED IN ALLOWING THE DEDUCTION
FROM GROSS INCOME OF LISTING EXPENSES ALLEGEDLY INCURRED
BY RESPONDENT;
III
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE AMOUNT
OF P60,000 REPRESENTED BY RESPONDENT AS "PROVISION FOR
CONTINGENCIES" WAS ADDED BACK BY RESPONDENT TO ITS GROSS
INCOME IN COMPUTING THE INCOME TAX DUE FROM IT FOR 1958;
IV
THE COURT OF TAX APPEALS ERRED IN DISALLOWING ONLY THE
AMOUNT OF P6,666.65 AS SUIT EXPENSES, THE CORRECT AMOUNT
THAT SHOULD HAVE BEEN DISALLOWED BEING P17,499.98.
It is well to note that only in the Court of Tax Appeals did the Commissioner raise for the first time (in his
memorandum) the question of whether or not the business expenses deducted from Atlas gross income in
1958 may be allowed in the absence of proof of payments. 17 Before this Court, the Commissioner
reiterated the same as ground against deductibility when he claimed that the Court of Tax Appeals erred in
allowing the deduction of transfer agent's fee and stock listing fee from gross income in the absence of
proof of payment thereof.
The Commissioner contended that under Section 30 (a) (1) of the National Internal Revenue Code, it is a
requirement for an expense to be deductible from gross income that it must have been "paid or incurred
during the year" for which it is claimed; that in the absence of convincing and satisfactory evidence of
payment, the deduction from gross income for the year 1958 income tax return cannot be sustained; and
that the best evidence to prove payment, if at all any has been made, would be the vouchers or receipts
issued therefor which ATLAS failed to present.
Atlas admitted that it failed to adduce evidence of payment of the deduction claimed in its 1958 income
tax return, but explains the failure with the allegation that the Commissioner did not raise that question of
fact in his pleadings, or even in the report of the investigating examiner and/or letters of demand and
assessment notices of ATLAS which gave rise to its appeal to the Court of Tax Appeal. 18 It was
emphasized by Atlas that it went to trial and finally submitted this case for decision on the assumption that
inasmuch as the fact of payment was never raised as a vital issue by the Commissioner in his answer to the
petition for review in the Court of Tax Appeal, the issues is limited only to pure question of law—whether
or not the expenses deducted by petitioner from its gross income for 1958 are sanctioned by Section 30 (a)
(1) of the National Internal Revenue Code.
On this issue of whether or not the Commissioner can raise the fact of payment for the first time on appeal
in its memorandum in the Court of Tax Appeal, we fully agree with the ruling of the tax court that the
Commissioner on appeal cannot be allowed to adopt a theory distinct and different from that he has
previously pursued, as shown by the BIR records and the answer to the amended petition for review. 19 As
this Court said in the case of Commissioner of Customs vs. Valencia 20 such change in the nature of the
case may not be made on appeal, specially when the purpose of the latter is to seek a review of the action
taken by an administrative body, forming part of a coordinate branch of the Government, such as the
Executive department. In the case at bar, the Court of Tax Appeal found that the fact of payment of the
claimed deduction from gross income was never controverted by the Commissioner even during the initial
stages of routinary administrative scrutiny conducted by BIR examiners. 21Specifically, in his answer to
the amended petition for review in the Court of Tax Appeal, the Commissioner did not deny the fact of
payment, merely contesting the legitimacy of the deduction on the ground that same was not ordinary and
necessary business expenses. 22
As consistently ruled by this Court, the findings of facts by the Court of Tax Appeal will not be reviewed
in the absence of showing of gross error or abuse. 23 We, therefore, hold that it was too late for the
Commissioner to raise the issue of fact of payment for the first time in his memorandum in the Court of
Tax Appeals and in this instant appeal to the Supreme Court. If raised earlier, the matter ought to have
86
been seriously delved into by the Court of Tax Appeals. On this ground, we are of the opinion that under
all the attendant circumstances of the case, substantial justice would be served if the Commissioner be
held as precluded from now attempting to raise an issue to disallow deduction of the item in question at
this stage. Failure to assert a question within a reasonable time warrants a presumption that the party
entitled to assert it either has abandoned or declined to assert it.
On the second assignment of error, aside from alleging lack of proof of payment of the expense deducted,
the Commissioner contended that such expense should be disallowed for not being ordinary and necessary
and not incurred in trade or business, as required under Section 30 (a) (1) of the National Internal Revenue
Code. He asserted that said fees were therefore incurred not for the production of income but for the
acquisition petition of capital in view of the definition that an expense is deemed to be incurred in trade or
business if it was incurred for the production of income, or in the expectation of producing income for the
business. In support of his contention, the Commissioner cited the ruling in Dome Mines, Ltd vs.
Commisioner of Internal Revenue 24 involving the same issue as in the case at bar where the U.S. Board of
Tax Appeal ruled that expenses for listing capital stock in the stock exchange are not ordinary and
necessary expenses incurred in carrying on the taxpayer's business which was gold mining and selling,
which business is strikingly similar to Atlas.
On the other hand, the Court of Tax Appeal relied on the ruling in the case of Chesapeake Corporation of
Virginia vs. Commissioner of Internal Revenue 25 where the Tax Court allowed the deduction of stock
exchange fee in dispute, which is an annually recurring cost for the annual maintenance of the listing.
We find the Chesapeake decision controlling with the facts and circumstances of the instant case. In Dome
Mines, Ltd case the stock listing fee was disallowed as a deduction not only because the expenditure did
not meet the statutory test but also because the same was paid only once, and the benefit acquired thereby
continued indefinitely, whereas, in the Chesapeake Corporation case, fee paid to the stock exchange was
annual and recurring. In the instant case, we deal with the stock listing fee paid annually to a stock
exchange for the privilege of having its stock listed. It must be noted that the Court of Tax Appeal rejected
the Dome Mines case because it involves a payment made only once, hence, it was held therein that the
single payment made to the stock exchange was a capital expenditure, as distinguished from the instant
case, where payments were made annually. For this reason, we hold that said listing fee is an ordinary and
necessary business expense
disallowance of P13,333.30. The Commissioner, however, reduced this amount of P6,666.65 which latter
amount was affirmed by the respondent Court of Tax Appeals on appeal.
There is no question that, as held by the Court of Tax Ap- peals, the litigation expenses under
consideration were incurred in defense of Atlas title to its mining properties. In line with the decision of
the U.S. Tax Court in the case of Safety Tube Corp. vs. Commissioner of Internal Revenue, 28 it is well
settled that litigation expenses incurred in defense or protection of title are capital in nature and not
deductible. Likewise, it was ruled by the U.S. Tax Court that expenditures in defense of title of property
constitute a part of the cost of the property, and are not deductible as expense. 29
Surprisingly, however, the investigating revenue examiner recommended a partial disallowance of
P13,333.30 instead of the entire amount of P23,333.30, which, upon review, was further reduced by the
Commissioner of Internal Revenue. Whether it was due to mistake, negligence or omission of the officials
concerned, the arithmetical error committed herein should not prejudice the Government. This Court will
pass upon this particular question since there is a clear error committed by officials concerned in the
computation of the deductible amount. As held in the case of Vera vs. Fernandez, 30 this Court
emphatically said that taxes are the lifeblood of the Government and their prompt and certain availability
are imperious need. Upon taxation depends the Government's ability to serve the people for whose benefit
taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with
the collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner
as private persons may be made to suffer individually on account of his own negligence, the presumption
being that they take good care of their personal affair. This should not hold true to government officials
with respect to matters not of their own personal concern. This is the philosophy behind the government's
exception, as a general rule, from the operation of the principle of estoppel. 31
WHEREFORE, judgment appealed from is hereby affirmed with modification that the amount of
P17,499.98 (3/4 of P23,333.00) representing suit expenses be disallowed as deduction instead of
P6,666.65 only. With this amount as part of the net income, the corresponding income tax shall be paid
thereon, with interest of 6% per annum from June 20, 1959 to June 20,1962.
10. G.R. No. 173373 July 29, 2013 H. TAMBUNTING PAWNSHOP, INC. vs.COMMISSIONER OF
INTERNAL REVENUE

On the third assignment of error, the Commissioner con- tended that the Court of Tax Appeal erred when
H. Tambunting Pawnshop, Inc. (petitioner), a domestic corporation duly licensed and authorized to engage
it held that the amount of P60,000 as "provisions for contingencies" was in effect added back to Atlas
in the pawnshop business, appeals the adverse decision promulgated on April 24, 2006, 1 whereby the
income.
Court of Tax Appeals En Bane (CTA En Bane) affirmed the decision of the CTA First Division ordering it
to pay deficiency income taxes in the amount of ₱4,536,687.15 for taxable yaar 1997, plus 20%
On this issue, this Court has consistently ruled in several cases adverted to earlier, that in the absence of delinquency interest computed from August 29, 2000 until full payment, but cancelling the compromise
grave abuse of discretion or error on the part of the tax court its findings of facts may not be disturbed by penalties for lack of basis.
the Supreme Court. 26 It is not within the province of this Court to resolve whether or not the P60,000
representing "provision for contingencies" was in fact added to or deducted from the taxable income. As
On June 26, 2000, the Bureau of Internal Revenue (BIR), through then Acting Regional Director Lucien
ruled by the Court of Tax Appeals, the said amount was in effect added to Atlas taxable income. 27 The
E. Sayuno of Revenue Region No. 6 in Manila, issued assessment notices and demand letters, all
same being factual in nature and supported by substantial evidence, such findings should not be disturbed
numbered 32-1-97, assessing Tambunting for deficiency percentage tax, income tax and compromise
in this appeal.
penalties for taxable year 1997,2as follows:

Finally, in its fourth assignment of error, the Commissioner contended that the CTA erred in disallowing
On July 26, 2000, Tambunting instituted an administrative protest against the assessment notices and
only the amount of P6,666.65 as suit expenses instead of P17,499.98.
demand letters with the Commissioner of Internal Revenue. 3

It appears that petitioner deducted from its 1958 gross income the amount of P23,333.30 as attorney's fees
On February 21, 2001, Tambunting brought a petition for review in the CTA, pursuant to Section 228 of
and litigation expenses in the defense of title to the Toledo Mining properties purchased by Atlas from
the National Internal Revenue Code of 1997,4 citing the inaction of the Commissioner of Internal Revenue
Mindanao Lode Mines Inc. in Civil Case No. 30566 of the Court of First Instance of Manila for annulment
on its protest within the 180-day period prescribed by law.
of the sale of said mining properties. On the ground that the litigation expense was a capital expenditure
under Section 121 of the Revenue Regulation No. 2, the investigating revenue examiner recommended the

87
On October 8, 2004, the CTA First Division rendered a decision, the pertinent portion of which is
hereunder quoted, to wit:
In view of all the foregoing verification, petitioner’s allowable deductions are summarized below:
Apparently, petitioner is still liable for deficiency income tax in the reduced amount of ₱4,536,687.15,
computed as follows:
WHEREFORE, petitioner is ORDERED to PAY the respondent the amount of ₱4,536,687.15 representing
deficiency income tax for the year 1997, plus 20% delinquency interest computed from August 29, 2000
until full payment thereof pursuant to Section 249 (C) of the National Internal Revenue Code. However,
the compromise penalties in the sum of ₱49,000.00 is hereby CANCELLED for lack of legal basis.
SO ORDERED.5
After its motion for reconsideration was denied for lack of merit on February 18, 2005,6 Tambunting filed
a petition for review in the CTA En Banc, arguing that the First Division erred in disallowing its
deductions on the ground that it had not substantiated them by sufficient evidence.
On April 24, 2006, the CTA En Banc denied Tambunting’s petition for review, 7 disposing:
WHEREFORE, the Court en banc finds no reversible error to warrant the reversal of the assailed Decision
and Resolution promulgated on October 8, 2004 and February 11, 2005, respectively, the instant Petition
for Review is hereby DISMISSED. Accordingly, the aforesaid Decision and Resolution are hereby
AFFIRMED in toto.
SO ORDERED.
On June 29, 2006, the CTA En Banc also denied Tambunting’s motion for reconsideration for its lack of
merit.8
Issues
Hence, this appeal by petition for review on certiorari.
Tambunting argues that the CTA should have allowed its deductions because it had been able to point out
the provisions of law authorizing the deductions; that it proved its entitlement to the deductions through all
the documentary and testimonial evidence presented in court; 9 that the provisions of Section 34 (A)(1)(b)
of the 1997 National Internal Revenue Code, governing the types of evidence to prove a claim for
deduction of expenses, were applicable because the law took effect during the pendency of the case in the
CTA;10 that the CTA had allowed deductions for ordinary and necessary expenses on the basis of cash
vouchers issued by the taxpayer or certifications issued by the payees evidencing receipt of interest on
loans as well as agreements relating to the imposition of interest; 11 that it had thus shown beyond doubt
that it had incurred the losses in its auction sales; 12 and that it substantially complied with the requirements
of Revenue Regulations No. 12-77 on the deductibility of its losses.13
On December 5, 2006, the Commissioner of Internal Revenue filed a comment, 14 stating that the
conclusions of the CTA were entitled to respect,15 due to its being a highly specialized body specifically
created for the purpose of reviewing tax cases;16 and that the petition involved factual and evidentiary
matters not reviewable by the Court in an appeal by certiorari. 17
On March 22, 2007, Tambunting reiterated its arguments in its reply.18
Ruling
The petition has no merit.
At the outset, the Court agrees with the CTA En Banc that because this case involved assessments relating
to transactions incurred by Tambunting prior to the effectivity of Republic Act No. 8424 (National
Internal Revenue Code of 1997, or NIRC of 1997), the provisions governing the propriety of the
deductions was Presidential Decree 1158 (NIRC of 1977). In that regard, the pertinent provisions of
Section 29 (d) (2) & (3)of the NIRC of 1977 state:
xxxx
(2) By corporation. — In the case of a corporation, all losses actually sustained and charged off
within the taxable year and not compensated for by insurance or otherwise.
(3) Proof of loss. — In the case of a non-resident alien individual or foreign corporation, the
losses deductible are those actually sustained during the year incurred in business or trade
conducted within the Philippines, and losses actually sustained during the year in transactions
entered into for profit in the Philippines although not connected with their business or trade, when such
losses are not compensated for by insurance or otherwise. The Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, is hereby authorized to promulgate rules and
regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a
declaration of loss sustained from casualty or from robbery, theft, or embezzlement during the taxable
year: Provided, That the time to be so prescribed in the regulations shall not be less than 30 days nor more
than 90 days from the date of the occurrence of the casualty or robbery, theft, or embezzlement giving rise
to the loss.
The CTA En Banc ruled thusly:
To prove the loss on auction sale, petitioner submitted in evidence its "Rematado" and "Subasta" books
and the "Schedule of Losses on Auction Sale". The "Rematado" book contained a record of items
foreclosed by the pawnshop while the "Subasta" book contained a record of the auction sale of pawned
items foreclosed.
However, as elucidated by the petitioner, the gain or loss on auction sale represents the difference between
the capital (the amount loaned to the pawnee, the unpaid interest and other expenses incurred in
connection with such loan) and the price for which the pawned articles were sold, as reflected in the
"Subasta" Book. Furthermore, it explained that the amounts appearing in the "Rematado" book do not
reflect the total capital of petitioner as it merely reflected the amounts loaned to the pawnee. Likewise, the
amounts appearing in the "Subasta" book, are not representative of the amount of sale made during the
"subastas" since not all articles are eventually sold and disposed of by petitioner.
Petitioner submits that based on the evidence presented, it was able to show beyond doubt that it incurred
the amount of losses on auction sale claimed as deduction from its gross income for the taxable year 1997.
And that the documents/records submitted in evidence as well as the facts contained therein were neither
contested nor controverted by the respondent, hence, admitted.
xxxx
88
In this case, petitioner's reliance on the entries made in the "Subasta" book were not sufficient to
substantiate the claimed deduction of loss on auction sale. As admitted by the petitioner, the contents in
the "Rematado" and "Subasta" books do not reflect the true amounts of the total capital and the auction
sale, respectively. Be that as it may, petitioner still failed to adduce evidence to substantiate the other
expenses alleged to have been incurred in connection with the sale of pawned items.
As correctly held by the Court's Division in the assailed decision, and We quote:
x x x The remaining evidence is neither conclusive to sustain its claim of loss on auction sale in the
aggregate amount of ₱4,915,967.50. While it appears that the basis of respondent is not strong, petitioner,
nevertheless, should not rely on the weakness of such evidence but on the strength of its own documents.
The facts essential for the proper disposition of the said controversy were available to the petitioner.
Petitioner should have endeavored to make the facts clear to this court. Sad to say, it failed to dispute the
same with clear and convincing proof. x x x19
We affirm the aforequoted ruling of the CTA En Banc.
The rule that tax deductions, being in the nature of tax exemptions, are to be construed in strictissimi juris
against the taxpayer is well settled.20 Corollary to this rule is the principle 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. 21 An item of
expenditure, therefore, must fall squarely within the language of the law in order to be deductible.22 A
mere averment that the taxpayer has incurred a loss does not automatically warrant a deduction from its
gross income.
As the CTA En Banc held, Tambunting did not properly prove that it had incurred losses. The subasta
books it presented were not the proper evidence of such losses from the auctions because they did not
reflect the true amounts of the proceeds of the auctions due to certain items having been left unsold after
the auctions. The rematado books did not also prove the amounts of capital because the figures reflected
therein were only the amounts given to the pawnees. It is interesting to note, too, that the amounts
received by the pawnees were not the actual values of the pawned articles but were only fractions of the
real values.
As to business expenses, Section 29 (a) (1) (A) of the NIRC of 1977 provides:
(a) Expenses. — (1) Business expenses.— (A) In general. — All ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered; traveling expenses while away
from home in the pursuit of a trade, profession or business, rentals or other payments required to be made
as a condition to the continued use or possession, for the purpose of the trade, profession or business, of
property to which the taxpayer has not taken or is not taking title or in which he has no equity.
The requisites for the deductibility of ordinary and necessary trade or business expenses, like those paid
for security and janitorial services, management and professional fees, and rental expenses, are that: (a)
the expenses must be ordinary and necessary; (b) they must have been paid or incurred during the taxable
year; (c) they must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d)
they must be supported by receipts, records or other pertinent papers.23
In denying Tambunting’s claim for deduction of its security and janitorial expenses, management and
professional fees, and its rental expenses, the CTA En Banc explained:
Contrary to petitioner’s contention, the security/janitorial expenses paid to Pathfinder Investigation were
not duly substantiated. The certification issued by Mr. Balisado was not the proper document required by
law to substantiate its expenses. Petitioner should have presented the official receipts or invoices to prove
its claim as provided for under Section 238 of the National Internal Revenue Code of 1977, as amended, to
wit:
"SEC. 238. Issuance of receipts or sales or commercial invoices. — All persons subject to an internal
revenue tax shall for each sale or transfer of merchandise or for services rendered valued at ₱25.00 or
more, issue receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of
transaction, quantity, unit cost and description of merchandise or nature of service; Provided, That in the
case of sales, receipts or transfers in the amount of ₱100.00 or more, or, regardless of amount, where the
sale or transfer is made by persons subject to value-added tax to other persons also subject to value-added
tax; or, where the receipts is issued to cover payment made as rentals, commissions, compensation or fees,
receipts or invoices shall be issued which shall show the name, business style, if any, and address of the
purchaser, customer, or client. The original of each receipt or invoice shall be issued to the purchases,
customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the same in his place of business for a period of 3 years from the close
of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and
preserved by the issuer, also in his place of business, for a like period.
With regard to the misclassified items of expenses, petitioner's statements were self-serving, likewise it
failed to substantiate its allegations by clear and convincing evidence as provided under the foregoing
provision of law.
Bearing in mind the principle in taxation that deductions from gross income partake the nature of tax
exemptions which are construed in strictissimi juris against the taxpayer, the Court en banc is not inclined
to believe the self-serving statements of petitioner regarding the misclassified items of office supplies,
advertising and rent expenses.
Among the expenses allegedly incurred, courts may consider only those supported by credible evidence
and which appear to have been genuinely incurred in connection with the trade or business of the
taxpayer.24
xxxx
As previously discussed, the proper substantiation requirement for an expense to be allowed is the official
receipt or invoice. While the rental payments were subjected to the applicable expanded withholding
taxes, such returns are not the documents required by law to substantiate the rental expense. Petitioner
should have submitted official receipts to support its claim.
Moreover, the issue on the submission of cash vouchers as evidence to prove expenses incurred has been
addressed by this Court in the assailed Resolution, to wit:
"The trend then was to allow deductions based on cash vouchers which are signed by the payees. It bears
to note that the cases cited by petitioner are pronouncements by this Court in 1980, 1982 and 1989.
However, latest jurisprudence has deviated from such interpretation of the law. Thus, this Court held in
the case of Pilmico-Mauri Foods Corporation vs. Commissioner of Internal Revenue C.T.A. Case No.
6151, December 15, 2004;
[P]etitioner’s contention that the NIRC of 1977 did not impose substantiation requirements on deductions
from gross income is bereft of merit. Section 238 of the 1977 Tax Code [now Section 237] provides:
89
 xxxx
From the foregoing provision of law, a person who is subject to an internal revenue tax shall issue
receipts, sales or commercial invoices, prepared at least in duplicate. The provision likewise imposed a
responsibility upon the purchaser to keep and preserve the original copy of the invoice or receipt for a
period of three years from the close of the taxable year in which the invoice or receipt was issued. The
rationale behind the latter requirement is the duty of the taxpayer to keep adequate records of each and
every transaction entered into in the conduct of its business. So that when their books of accounts are
subjected to a tax audit examination, all entries therein could be shown as adequately supported and
proven as legitimate business transactions. Hence, petitioner’s claim that the NIRC of 1977 did not require
substantiation requirements is erroneous."
In order that the cash vouchers may be given probative value, these must be validated with official
receipts.25
xxxx
Petitioner’s management and professional fees were disallowed as these were supported merely by cash
vouchers, which the Court’s Division correctly found to have little probative value. 26
Again, we affirm the foregoing holding of the CTA En Banc for the reasons therein stated. To reiterate,
deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed
against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction
claimed.27 Tambunting did not discharge its burden of substantiating its claim for deductions due to the
inadequacy of its documentary support of its claim. Its reliance on withholding tax returns, cash vouchers,
lessor’s certifications, and the contracts of lease was futile because such documents had scant probative
value. As the CTA En Banc succinctly put it, the law required Tambunting to support its claim for
deductions with the corresponding official receipts issued by the service providers concerned.
Regarding proof of loss due to fire, the text of Section 29(d) (2) & (3) of P.D. 1158 (NIRC of 1977) then
in effect, is clear enough, to wit:
(2) By corporation. — In the case of a corporation, all losses actually sustained and charged off
within the taxable year and not compensated for by insurance or otherwise.
(3) Proof of loss. — In the case of a non-resident alien individual or foreign corporation, the
losses deductible are those actually sustained during the year incurred in business or trade
conducted within the Philippines, and losses actually sustained during the year in transactions
entered into for profit in the Philippines although not connected with their business or trade,
when such losses are not compensated for by insurance or otherwise. The Secretary of Finance,
upon recommendation of the Commissioner of Internal Revenue, is hereby authorized to
promulgate rules and regulations prescribing, among other things, the time and manner by
which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery,
theft, or embezzlement during the taxable year: Provided, That the time to be so prescribed in
the regulations shall not be less than 30 days nor more than 90 days from the date of the
occurrence of the casualty or robbery, theft, or embezzlement giving rise to the loss.
The implementing rules for deductible losses are found in Revenue Regulations No. 12-77, as follows:
SECTION 1. Nature of deductible losses.— Any loss arising from fires, storms or other casualty, and from
robbery, theft or embezzlement, is allowable as a deduction under Section 30 (d) for the taxable year in
which the loss is sustained. The term "casualty" is the complete or partial destruction of property resulting
from an identifiable event of a sudden, unexpected, or unusual nature. It denotes accident, some sudden
invasion by hostile agency, and excludes progressive deterioration through steadily operating cause.
Generally, theft is the criminal appropriation of another’s property for the use of the taker. Embezzlement
is the fraudulent appropriation of another's property by a person to whom it has been entrusted or into
whose hands it has lawfully come.
SECTION 2. Requirements of substantiation. — The taxpayer bears the burden of proving and
substantiating his claim for deduction for losses allowed under Section 30 (d) and should comply with the
following substantiation requirements:
(a) A declaration of loss which must be filed with the Commissioner of Internal Revenue or his
deputies within a certain period prescribed in these regulations after the occurrence of the
casualty, robbery, theft or embezzlement.
(b) Proof of the elements of the loss claimed, such as the actual nature and occurrence of the
event and amount of the loss.
SECTION 3. Declaration of loss. — Within forty-five days after the date of the occurrence of casualty or
robbery, theft or embezzlement, a taxpayer who sustained loss therefrom and who intends to claim the loss
as a deduction for the taxable year in which the loss was sustained shall file a sworn declaration of loss
with the nearest Revenue District Officer. The sworn declaration of loss shall contain, among other things,
the following information:
(a) The nature of the event giving rise to the loss and the time of its occurrence;
(b) A description of the damaged property and its location;
(c) The items needed to compute the loss such as cost or other basis of the property;
depreciation allowed or allowable if any; value of property before and after the event; cost of
repair;
(d) Amount of insurance or other compensation received or receivable.
Evidence to support these items should be furnished, if available. Examples are purchase contracts and
deeds, receipted bills for improvements, and pictures and competent appraisals of the property before and
after the casualty.
SECTION 4. Proof of loss.— (a) In general. — The declaration of loss, being one of the essential
requirements of substantiation of a claim for a loss deduction, is subject to verification and does not
constitute sufficient proof of the loss that will justify its deductibility for income tax purposes. Therefore,
the mere filing of a declaration of loss does not automatically entitle the taxpayer to deduct the alleged
loss from gross income. The failure, however, to submit the said declaration of loss within the period
prescribed in these regulations will result in the disallowance of the casualty loss claimed in the taxpayer's
income tax return. The taxpayer should therefore file a declaration of loss and should be prepared to
support and substantiate the information reported in the said declaration with evidence which he should
gather immediately or as soon as possible after the occurrence of the casualty or event causing the loss.
xxxx
(b) Casualty loss. — Photographs of the property as it existed before it was damaged will be helpful in
showing the condition and value of the property prior to the casualty. Photographs taken after the casualty
90
which show the extent of damage will be helpful in establishing the condition and value of the property
after it was damaged. Photographs showing the condition and value of the property after it was repaired,
restored or replaced may also be helpful.
Furthermore, since the valuation of the property is of extreme importance in determining the amount of
loss sustained, the taxpayer should be prepared to come forward with documentary proofs, such as
cancelled checks, vouchers, receipts and other evidence of cost.
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 be declared. The only
question to be determined, as stated by the parties, is whether or not such interest was paid upon an
indebtedness within the contemplation of section 30 (b) (1) of the Tax Code, the pertinent part of which
reads:

SEC. 30 Deductions from gross income. — In computing net income there shall be allowed as
The foregoing evidence should be kept by the taxpayer as part of his tax records and be made available to
deductions —
a revenue examiner, upon audit of his income tax return and the declaration of loss.

xxx xxx xxx

(c) Robbery, theft or embezzlement losses. - To support the deduction for losses arising from robbery,
theft or embezzlement, the taxpayer must prove by credible. evidence all the elements of the loss, the
amount of the loss, and the proper year of the deduction. The taxpayer bears the burden of proof, and no (b) Interest:
deduction will be allowed unless he shows the property was stolen, rather than misplaced or lost. A mere
disappearance of property is not enough, nor is a mere error or shortage in accounts.
(1) In general. — The amount of interest paid within the taxable year on indebtedness, except
on indebtedness incurred or continued to purchase or carry obligations the interest upon which
Failure to report theft or robbery to the police may be a factor against the taxpayer. On the other hand, a is exempt from taxation as income under this Title.
mere report of alleged theft or robbery to the police authorities is not a conclusive proof of the loss arising
therefrom. (Bold underscoring supplied for emphasis)
The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as in
the above-quoted section has been defined as an unconditional and legally enforceable obligation for the
In the context of the foregoing rules, the CT A En Bane aptly rejected Tam bunting's claim for deductions payment of money.1awphîl.nèt(Federal Taxes Vol. 2, p. 13,019, Prentice-Hall, Inc.; Merten's Law of
due to losses from fire and theft. The documents it had submitted to support the claim, namely: (a) the Federal Income Taxation, Vol. 4, p. 542.) Within the meaning of that definition, it is apparent that a tax
certification from the Bureau of Fire Protection in Malolos; (b) the certification from the Police Station in may be considered an indebtedness. As stated by this Court in the case of Santiago Sambrano vs. Court of
Malolos; (c) the accounting entry for the losses; and (d) the list of properties lost, were not enough. What Tax Appeals and Collector of Internal Revenue (101 Phil., 1; 53 Off. Gaz., 4839) —
were required were for Tambunting to submit the sworn declaration of loss mandated by Revenue
Regulations 12-77. Its failure to do so was prejudicial to the claim because the sworn declaration of loss
Although taxes already due have not, strictly speaking, the same concept as debts, they are,
was necessary to forewarn the BIR that it had suffered a loss whose extent it would be claiming as a
however, obligations that may be considered as such.
deduction of its tax liability, and thus enable the BIR to conduct its own investigation of the incident
leading to the loss. Indeed, the documents Tambunting submitted to the BIR could not serve the purpose
of their submission without the sworn declaration of loss. 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
requirement of the law. (Camben vs.Fink Coule and Coke Co. 61 LRA 584)
11. G.R. No. L-13912 September 30, 1960 THE COMMISSIONER OF INTERNAL REVENUE vs.
CONSUELO L. VDA. DE PRIETO
Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a
debt. (Idem).
This is an appeal from a decision of the Court of tax Appeals reversing the decision of the Commissioner
of Internal Revenue which held herein respondent Consuelo L. Vda. de Prieto liable for the payment of the
sum of P21,410.38 as deficiency income tax, plus penalties and monthly interest. A tax is a debt for which a creditor's bill may be brought in a proper case. (State vs. Georgia
Co., 19 LRA 485).
The case was submitted for decision in the court below upon a stipulation of facts, which for brevity is
summarized as follows: On December 4, 1945, the respondent conveyed by way of gifts to her four It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible
children, namely, Antonio, Benito, Carmen and Mauro, all surnamed Prieto, real property with a total from her gross income under section 30(b) of the Tax Code above quoted.
assessed value of P892,497.50. After the filing of the gift tax returns on or about February 1, 1954, the
petitioner Commissioner of Internal Revenue appraised the real property donated for gift tax purposes at
P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift tax, interest and compromises The above conclusion finds support in the established jurisprudence in the United States after whose laws
our Income Tax Law has been patterned. Thus, under sec. 23(b) of the Internal Revenue Code of 1939, as
due thereon. Of the total sum of P117,706.50 paid by respondent on April 29, 1954, the sum of
amended 1 , which contains similarly worded provisions as sec. 30(b) of our Tax Code, the uniform ruling
P55,978.65 represents the total interest on account of deliquency. This sum of P55,978.65 was claimed as
is that interest on taxes is interest on indebtedness and is deductible. (U.S. vs. Jaffray, 306 U.S. 276. See
deduction, among others, by respondent in her 1954 income tax return. Petitioner, however, disallowed the
also Lustig vs. U.S., 138 F. Supp. 870; Commissioner of Internal Revenue vs. Bryer, 151 F. 2d 267, 34
claim and as a consequence of such disallowance assessed respondent for 1954 the total sum of
AFTR 151; Penrose vs. U.S. 18 F. Supp. 413, 18 AFTR 1289; Max Thomas Davis, et
P21,410.38 as deficiency income tax due on the aforesaid P55,978.65, including interest up to March 31,
al. vs. Commissioner of Internal Revenue, 46 U.S. Boared of Tax Appeals Reports, p. 663, citing
1957, surcharge and compromise for the late payment.
U.S. vs. Jaffray, 6 Tax Court of United States Reports, p. 255; Armour vs. Commissioner of Internal
Revenue, 6 Tax Court of the United States Reports, p. 359; The Koppers Coal Co. vs. Commissioner of

91
Internal Revenue, 7 Tax Court of United States Reports, p. 1209; Toy vs. Commissioner of Internal
Revenue; Lucas vs. Comm., 34 U.S. Board of Tax Appeals Reports, 877; Evens and Howard Fire Brick
Co. vs. Commissioner of Internal Revenue, 3 Tax Court of United States Reports, p. 62). The rule applies
even though the tax is nondeductible. (Federal Taxes, Vol. 2, Prentice Hall, sec. 163, 13,022; see also
Merten's Law of Federal Income Taxation, Vol. 5, pp. 23-24.)
To sustain the proposition that the interest payment in question is not deductible for the purpose of
computing respondent's net income, petitioner relies heavily on section 80 of Revenue Regulation No. 2
(known as Income Tax Regulation) promulgated by the Department of Finance, which provides that "the
word `taxes' means taxes proper and no deductions should be allowed for amounts representing interest,
surcharge, or penalties incident to delinquency." The court below, however, held section 80 as
inapplicable to the instant case because while it implements sections 30(c) of the Tax Code governing
deduction of taxes, the respondent taxpayer seeks to come under section 30(b) of the same Code providing
for deduction of interest on indebtedness. We find the lower court's ruling to be correct. Contrary to
petitioner's belief, the portion of section 80 of Revenue Regulation No. 2 under consideration has been
part and parcel of the development to the law on deduction of taxes in the United States. (See Capital
Bldg. and Loan Assn. vs. Comm., 23 BTA 848. Thus, Mertens in his treatise says: "Penalties are to be
distinguished from taxes and they are not deductible under the heading of taxs." . . . Interest on state taxes
is not deductible as taxes." (Vol. 5, Law on Federal Income Taxation, pp. 22-23, sec. 27.06, citing cases.)
This notwithstanding, courts in that jurisdiction, however, have invariably held that interest on deficiency
taxes are deductible, not as taxes, but as interest. (U.S. vs. Jaffray, et al., supra; see also Mertens, sec.
26.09, Vol. 4, p. 552, and cases cited therein.) Section 80 of Revenue Regulation No. 2, therefore, merely
incorporated the established application of the tax deduction statute in the United States, where deduction
of "taxes" has always been limited to taxes proper and has never included interest on delinquent taxes,
penalties and surcharges.
To give to the quoted portion of section 80 of our Income Tax Regulations the meaning that the petitioner
gives it would run counter to the provision of section 30(b) of the Tax Code and the construction given to
it by courts in the United States. Such effect would thus make the regulation invalid for a "regulation
which operates to create a rule out of harmony with the statute, is a mere nullity." (Lynch vs. Tilden
Produce Co., 265 U.S. 315; Miller vs. U.S., 294 U.S. 435.) As already stated, section 80 implements only
section 30(c) of the Tax Code, or the provision allowing deduction of taxes, while herein respondent seeks
to be allowed deduction under section 30(b), which provides for deduction of interest on indebtedness.
In conclusion, we are of the opinion and so hold that although interest payment for delinquent taxes is not
deductible as tax under Section 30(c) of the Tax Code and section 80 of the Income Tax Regulations, the
taxpayer is not precluded thereby from claiming said interest payment as deduction under section 30(b) of
the same Code.
12. G.R. Nos. 106949-50 December 1, 1995 PAPER INDUSTRIES CORPORATION OF THE
PHILIPPINES vs. COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and
COURT OF TAX APPEALS
The Paper Industries Corporation of the Philippines ("Picop"), which is petitioner in G.R. Nos. 106949-50
and private respondent in G.R. Nos. 106984-85, is a Philippine corporation registered with the Board of
Investments ("BOI") as a preferred pioneer enterprise with respect to its integrated pulp and paper mill,
and as a preferred non-pioneerenterprise with respect to its integrated plywood and veneer mills.
On 21 April 1983, Picop received from the Commissioner of Internal Revenue ("CIR") two (2) letters of
assessment and demand both dated 31 March 1983: (a) one for deficiency transaction tax and for
documentary and science stamp tax; and (b) the other for deficiency income tax for 1977, for an aggregate
amount of P88,763,255.00. These assessments were computed as follows: TOTAL AMOUNT DUE AND
COLLECTIBLE P 50,668,946.90
On 26 April 1983, Picop protested the assessment of deficiency transaction tax and documentary and
science stamp taxes. Picop also protested on 21 May 1983 the deficiency income tax assessment for 1977.
These protests were not formally acted upon by respondent CIR. On 26 September 1984, the CIR issued a
warrant of distraint on personal property and a warrant of levy on real property against Picop, to enforce
collection of the contested assessments; in effect, the CIR denied Picop's protests.
Thereupon, Picop went before the Court of Tax Appeals ("CTA") appealing the assessments. After trial,
the CTA rendered a decision dated 15 August 1989, modifying the findings of the CIR and holding Picop
liable for the reduced aggregate amount of P20,133,762.33, which was itemized in the dispositive portion
of the decision as follows: TOTAL AMOUNT DUE AND PAYABLE P 20,133,762.53 2
Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision
of the CTA. In two (2) Resolutions dated 7 February 1990 and 19 February 1990, respectively, the Court
referred the two (2) Petitions to the Court of Appeals. The Court of Appeals consolidated the two (2) cases
and rendered a decision, dated 31 August 1992, which further reduced the liability of Picop to
P6,338,354.70. The dispositive portion of the Court of Appeals decision reads as follows:
WHEREFORE, the appeal of the Commissioner of Internal Revenue is denied for
lack of merit. The judgment against PICOP is modified, as follows:
1. PICOP is declared liable for the 35% transaction tax in the amount of
P3,578,543.51;
2. PICOP is absolved from the payment of documentary and science stamp tax of
P300,000.00 and the compromise penalty of P300.00;
3. PICOP shall pay 20% interest per annum on the deficiency income tax of
P1,481,579.15, for a period of three (3) years from 21 May 1983, or in the total
amount of P888,947.49, and a surcharge of 10% on the latter amount, or
P88,984.75.
No pronouncement as to costs.
SO ORDERED.
Picop and the CIR once more filed separate Petitions for Review before the Supreme Court. These cases
were consolidated and, on 23 August 1993, the Court resolved to give due course to both Petitions in G.R.
Nos. 106949-50 and 106984-85 and required the parties to file their Memoranda.
Picop now maintains that it is not liable at all to pay any of the assessments or any part thereof. It assails
the propriety of the thirty-five percent (35%) deficiency transaction tax which the Court of Appeals held
due from it in the amount of P3,578,543.51. Picop also questions the imposition by the Court of Appeals
of the deficiency income tax of P1,481,579.15, resulting from disallowance of certain claimed financial
guarantee expenses and claimed year-end adjustments of sales and cost of sales figures by Picop's external
auditors. 3
The CIR, upon the other hand, insists that the Court of Appeals erred in finding Picop not liable for
surcharge and interest on unpaid transaction tax and for documentary and science stamp taxes and in
allowing Picop to claim as deductible expenses:
92
 (a) the net operating losses of another corporation (i.e., Rustan Pulp and Paper With the authorization of the Securities and Exchange Commission, Picop issued commercial paper
Mills, Inc.); and consisting of serially numbered promissory notes with the total face value of P229,864,000.00 and a
maturity period of one (1) year, i.e., from 24 December 1977 to 23 December 1978. These promissory
notes were purchased by various commercial banks and financial institutions. On these promissory notes,
(b) interest payments on loans for the purchase of machinery and equipment.
Picop paid interest in the aggregate amount of P45,771,849.00. In respect of these interest payments, the
CIR required Picop to pay the thirty-five percent (35%) transaction tax.
The CIR also claims that Picop should be held liable for interest at fourteen percent (14%) per
annum from 15 April 1978 for three (3) years, and interest at twenty percent (20%) per
The CIR based this assessment on Presidential Decree No. 1154 dated 3 June 1977, which reads in part as
annum for a maximum of three (3) years; and for a surcharge of ten percent (10%), on Picop's
follows:
deficiency income tax. Finally, the CIR contends that Picop is liable for the corporate
development tax equivalent to five percent (5%) of its correct 1977 net income.
Sec. 1. The National Internal Revenue Code, as amended, is hereby further
amended by adding a new section thereto to read as follows:
The issues which we must here address may be sorted out and grouped in the following manner:

Sec. 195-C. Tax on certain interest. — There shall be levied, assessed, collected and
I. Whether Picop is liable for:
paid on every commercial paper issued in the primary market as principal
instrument, a transaction tax equivalent to thirty-five percent (35%) based on the
(1) the thirty-five percent (35%) transaction tax; gross amount of interest thereto as defined hereunder, which shall be paid by the
borrower/issuer: Provided, however, that in the case of a long-term commercial
paper whose maturity exceeds more than one year, the borrower shall pay the tax
(2) interest and surcharge on unpaid transaction tax; and based on the amount of interest corresponding to one year, and thereafter shall pay
the tax upon accrual or actual payment (whichever is earlier) of the untaxed portion
(3) documentary and science stamp taxes; of the interest which corresponds to a period not exceeding one year.

II. Whether Picop is entitled to deductions against income of: The transaction tax imposed in this section shall be a final tax to be paid by the
borrower and shall be allowed as a deductible item for purposes of computing the
borrower's taxable income.
(1) interest payments on loans for the
purchase of machinery and equipment;
For purposes of this tax —
(2) net operating losses incurred by the
Rustan Pulp and Paper Mills, Inc.; and (a) "Commercial paper" shall be defined as an instrument evidencing indebtedness
of any person or entity, including banks and non-banks performing quasi-banking
functions, which is issued, endorsed, sold, transferred or in any manner conveyed to
(3) certain claimed financial guarantee expenses; and another person or entity, either with or without recourse and irrespective of
maturity. Principally, commercial papers are promissory notes and/or similar
III. (1) Whether Picop had understated its sales and instruments issued in the primary market and shall not include repurchase
overstated its cost of sales for 1977; and agreements, certificates of assignments, certificates of participations, and such other
debt instruments issued in the secondary market.
(2) Whether Picop is liable for the
corporate development tax of five (b) The term "interest" shall mean the difference between what the principal
percent (5%) of its net income for borrower received and the amount it paid upon maturity of the commercial paper
1977. which shall, in no case, be lower than the interest rate prevailing at the time of the
issuance or renewal of the commercial paper. Interest shall be deemed synonymous
with discount and shall include all fees, commissions, premiums and other
We will consider these issues in the foregoing sequence. payments which form integral parts of the charges imposed as a consequence of the
use of money.
I.
In all cases, where no interest rate is stated or if the rate stated is lower than the
(1) Whether Picop is liable prevailing interest rate at the time of the issuance or renewal of commercial paper,
for the thirty-five percent the Commissioner of Internal Revenue, upon consultation with the Monetary Board
(35%) transaction tax. of the Central Bank of the Philippines, shall adjust the interest rate in accordance
herewith, and assess the tax on the basis thereof.

93
 The tax herein imposed shall be remitted by the borrower to the Commissioner of
Internal Revenue or his Collection Agent in the municipality where such borrower
has its principal place of business within five (5) working days from the issuance of
the commercial paper. In the case of long term commercial paper, the tax upon the
untaxed portion of the interest which corresponds to a period not exceeding one
year shall be paid upon accrual payment, whichever is earlier. (Emphasis supplied)
Both the CTA and the Court of Appeals sustained the assessment of transaction tax.
In the instant Petition, Picop reiterates its claim that it is exempt from the payment of the transaction tax
by virtue of its tax exemption under R.A. No. 5186, as amended, known as the Investment Incentives Act,
which in the form it existed in 1977-1978, read in relevant part as follows:
Sec. 8. Incentives to a Pioneer Enterprise. In addition to the incentives provided in
the preceding section, pioneer enterprises shall be granted the following incentive
benefits:
(a) Tax Exemption. Exemption from all taxes under the National Internal Revenue
Code, except income tax, from the date the area of investment is included in the
Investment Priorities Plan to the following extent:
(1) One hundred per cent (100%) for the first five years;
(2) Seventy-five per cent (75%) for the sixth through the eighth years;
(3) Fifty per cent (50%) for the ninth and tenth years;
(4) Twenty per cent (20%) for the eleventh and twelfth years; and
(5) Ten per cent (10%) for the thirteenth through the fifteenth year.
4
xxx xxx xxx
Much the same issue was passed upon in Marinduque Mining Industrial Corporation
v. Commissioner of Internal Revenue 8 and resolved in the same way:
We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.A. No. 5186, as
amended, does not include exemption from the thirty-five percent (35%) transaction tax. In the first place,
the thirty-five percent (35%) transaction tax 5 is an income tax, that is, it is a tax on the interest income of
the lenders or creditors. In Western Minolco Corporation v. Commissioner of Internal Revenue, 6 the
petitioner corporation borrowed funds from several financial institutions from June 1977 to October 1977
and paid the corresponding thirty-five (35%) transaction tax thereon in the amount of P1,317,801.03,
pursuant to Section 210 (b) of the 1977 Tax Code. Western Minolco applied for refund of that amount
alleging it was exempt from the thirty-five (35%) transaction tax by reason of Section 79-A of C.A. No.
137, as amended, which granted new mines and old mines resuming operation "five (5) years complete tax
exemptions, except income tax, from the time of its actual bonafide orders for equipment for commercial
production." In denying the claim for refund, this Court held:
The petitioner's contentions deserve scant consideration. The 35% transaction tax is
imposed on interest income from commercial papers issued in the primary money
market. Being a tax on interest, it is a tax on income.
As correctly ruled by the respondent Court of Tax Appeals:
Accordingly, we need not and do not think it necessary to
discuss further the nature of the transaction tax more than to
say that the incipient scheme in the issuance of Letter of
Instructions No. 340 on November 24, 1975 (O.G. Dec. 15,
1975), i.e., to achieve operational simplicity and effective
administration in capturing the interest-income "windfall"
from money market operations as a new source of revenue,
has lost none of its animating principle in parturition of
amendatory Presidential Decree No. 1154, now Section 210
(b) of the Tax Code. The tax thus imposed is actually a tax on
interest earnings of the lenders or placers who are actually
the taxpayers in whose income is imposed. Thus "the
borrower withholds the tax of 35% from the interest he would
have to pay the lender so that he (borrower) can pay the 35%
of the interest to the Government." (Citation omitted) . . . .
Suffice it to state that the broad consensus of fiscal and
monetary authorities is that "even if nominally, the borrower
is made to pay the tax, actually, the tax is on the interest
earning of the immediate and all prior lenders/placers of the
money. . . ." (Rollo, pp. 36-37)
The 35% transaction tax is an income tax on interest earnings to the lenders or
placers. The latter are actually the taxpayers. Therefore, the tax cannot be a tax
imposed upon the petitioner. In other words, the petitioner who borrowed funds
from several financial institutions by issuing commercial papers merely withheld
the 35% transaction tax before paying to the financial institutions the interests
earned by them and later remitted the same to the respondent Commissioner of
Internal Revenue. The tax could have been collected by a different procedure but
the statute chose this method. Whatever collecting procedure is adopted does not
change the nature of the tax.
xxx xxx xxx 7
(Emphasis supplied)
It is very obvious that the transaction tax, which is a tax on interest derived from
commercial paper issued in the money market, is not a tax contemplated in the
above-quoted legal provisions. The petitioner admits that it is subject to income tax.
Its tax exemption should be strictly construed.
We hold that petitioner's claim for refund was justifiably denied. The transaction
tax, although nominally categorized as a business tax, is in reality a withholding
tax as positively stated in LOI No. 340. The petitioner could have shifted the tax to
the lenders or recipients of the interest. It did not choose to do so. It cannot be heard
now to complain about the tax. LOI No. 340 is an extraneous or extrinsic aid to the
construction of section 210 (b).
xxx xxx xxx 9
(Emphasis supplied)
94
It is thus clear that the transaction tax is an income tax and as such, in any event, falls outside the scope of The above ruling, however, is not applicable in respect of the promissory notes which are the subject
the tax exemption granted to registered pioneer enterprises by Section 8 of R.A. No. 5186, as amended. matter of the instant case. It must be noted that the debenture bonds which were the subject matter of
Picop was the withholding agent, obliged to withhold thirty-five percent (35%) of the interest payable to Commissioner Plana's ruling were long-term bonds maturing in ten (10) years and which could not be pre-
its lenders and to remit the amounts so withheld to the Bureau of Internal Revenue ("BIR"). As a terminated and could not be redeemed by Picop until after eight (8) years from date of issue; the bonds
withholding agent, Picop is made personally liable for the thirty-five percent (35%) transaction were moreover subordinated to present and future debts of Picop and convertible into common stock of
tax 10 and if it did not actually withhold thirty-five percent (35%) of the interest monies it had paid to its Picop at the option of the bondholder. In contrast, the promissory notes involved in the instant case are
lenders, Picop had only itself to blame. short-term instruments bearing a one-year maturity period. These promissory notes constitute the very
archtype of money market instruments. For money market instruments are precisely, by custom and usage
of the financial markets, short-term instruments with a tenor of one (1) year or less. 12 Assuming,
Picop claims that it had relied on a ruling, dated 6 October 1977, issued by the CIR, which held that Picop
therefore, (without passing upon) the correctness of the 6 October 1977 BIR ruling, Picop's short-term
was not liable for the thirty-five (35%) transaction tax in respect of debenture bonds issued by Picop. Prior
promissory notes must be distinguished, and treated differently, from Picop's long-term debenture bonds.
to the issuance of the promissory notes involved in the instant case, Picop had also issued debenture bonds
P100,000,000.00 in aggregate face value. The managing underwriter of this debenture bond issue, Bancom
Development Corporation, requested a formal ruling from the Bureau of Internal Revenue on the liability We conclude that Picop was properly held liable for the thirty-five percent (35%) transaction tax due in
of Picop for the thirty-five percent (35%) transaction tax in respect of such bonds. The ruling rendered by respect of interest payments on its money market borrowings.
the then Acting Commissioner of Internal Revenue, Efren I. Plana, stated in relevant part:
At the same time, we agree with the Court of Appeals that the transaction tax may be levied only in
It is represented that PICOP will be offering to the public primary bonds in the respect of the interest earnings of Picop's money market lenders accruing after P.D. No. 1154 went into
aggregate principal sum of one hundred million pesos (P100,000,000.00); that the effect, and not in respect of all the 1977 interest earnings of such lenders. The Court of Appeals pointed
bonds will be issued as debentures in denominations of one thousand pesos out that:
(P1,000.00) or multiples, to mature in ten (10) years at 14% interest per
annum payable semi-annually; that the bonds are convertible into common stock of
PICOP, however contends that even if the tax has to be paid, it should be imposed
the issuer at the option of the bond holder at an agreed conversion price; that the
only for the interests earned after 20 September 1977 when PD 1154 creating the
issue will be covered by a "Trust Indenture" with a duly authorized trust corporation
tax became effective. We find merit in this contention. It appears that the tax was
as required by the Securities and Exchange Commission, which trustee will act for
levied on interest earnings from January to October, 1977. However, as found by
and in behalf of the debenture bond holders as beneficiaries; that once issued, the
the lower court, PD 1154 was published in the Official Gazette only on 5 September
bonds cannot be preterminated by the holder and cannot be redeemed by the issuer
1977, and became effective only fifteen (15) days after the publication, or on 20
until after eight (8) years from date of issue; that the debenture bonds will
September 1977, no other effectivity date having been provided by the PD. Based
be subordinated to present and future debts of PICOP; and that said bonds are
on the Worksheet prepared by the Commissioner's office, the interests earned from
intended to be listed in the stock exchanges, which will place them alongside listed
20 September to October 1977 was P10,224,410.03. Thirty-five (35%) per cent of
equity issues.
this is P3,578,543.51 which is all PICOP should pay as transaction
tax. 13 (Emphasis supplied)
In reply, I have the honor to inform you that although the bonds hereinabove
described are commercial papers which will be issued in the primary market,
P.D. No. 1154 is not, in other words, to be given retroactive effect by imposing the thirty-five percent
however, it is clear from the abovestated facts that said bonds will not be issued as
(35%) transaction tax in respect of interest earnings which accrued before the effectivity date of P.D. No.
money market instruments. Such being the case, and considering that the purposes
1154, there being nothing in the statute to suggest that the legislative authority intended to bring about
of Presidential Decree No. 1154, as can be gleaned from Letter of Instruction No.
such retroactive imposition of the tax.
340, dated November 21, 1975, are (a) to regulate money market transactions and
(b) to ensure the collection of the tax on interest derived from money market
transactions by imposing a withholding tax thereon, said bonds do not come within (2) Whether Picop is liable
the purview of the "commercial papers" intended to be subjected to the 35% for interest and surcharge
transaction tax prescribed in Presidential Decree No. 1154, as implemented by on unpaid transaction tax.
Revenue Regulations No. 7-77. (See Section 2 of said Regulation)
Accordingly, PICOP is not subject to 35% transaction tax on its issues of the
aforesaid bonds. However, those investing in said bonds should be made aware of With respect to the transaction tax due, the CIR prays that Picop be held liable for a twenty-five percent
(25%) surcharge and for interest at the rate of fourteen percent (14%) per annum from the date prescribed
the fact that the transaction tax is not being imposed on the issuer of said bonds by
for its payment. In so praying, the CIR relies upon Section 10 of Revenue Regulation 7-77 dated 3 June
printing or stamping thereon, in bold letters, the following statement: "ISSUER
1977, 14 issued by the Secretary of Finance. This Section reads:
NOT SUBJECT TO TRANSACTION TAX UNDER P.D. 1154. BONDHOLDER
SHOULD DECLARE INTEREST EARNING FOR INCOME TAX." 11 (Emphases
supplied) Sec. 10. Penalties. — Where the amount shown by the taxpayer to be due on its
return or part of such payment is not paid on or before the date prescribed for its
payment, the amount of the tax shall be increased by twenty-five (25%) per centum,
In the above quoted ruling, the CIR basically held that Picop's debenture bonds did not constitute
the increment to be a part of the tax and the entire amount shall be subject to
"commercial papers" within the meaning of P.D. No. 1154, and that, as such, those bonds were not subject
interest at the rate of fourteen (14%) per centum per annum from the date
to the thirty-five percent (35%) transaction tax imposed by P.D. No. 1154.
prescribed for its payment.

95
 In the case of willful neglect to file the return within the period prescribed herein or
in case a false or fraudulent return is willfully made, there shall be added to the tax
or to the deficiency tax in case any payment has been made on the basis of such
return before the discovery of the falsity or fraud, a surcharge of fifty (50%) per
centum of its amount. The amount so added to any tax shall be collected at the same
time and in the same manner and as part of the tax unless the tax has been paid
before the discovery of the falsity or fraud, in which case the amount so added shall
be collected in the same manner as the tax.
In addition to the above administrative penalties, the criminal and civil penalties as
provided for under Section 337 of the Tax Code of 1977 shall be imposed for
violation of any provision of Presidential Decree No. 1154. 15 (Emphases supplied)
The 1977 Tax Code itself, in Section 326 in relation to Section 4 of the same Code, invoked by
the Secretary of Finance in issuing Revenue Regulation 7-77, set out, in comprehensive terms,
the rule-making authority of the Secretary of Finance:
Sec. 326. Authority of Secretary of Finance to Promulgate Rules and Regulations.
— The Secretary of Finance, upon recommendation of the Commissioner of
Internal Revenue, shall promulgate all needful rules and regulations for the
effective enforcement of the provisions of this Code. (Emphasis supplied)
Section 4 of the same Code contains a list of subjects or areas to be dealt with by the Secretary
of Finance through the medium of an exercise of his quasi-legislative or rule-making authority.
This list, however, while it purports to be open-ended, does not include the imposition of
administrative or civil penalties such as the payment of amounts additional to the tax due.
Thus, in order that it may be held to be legally effective in respect of Picop in the present case,
Section 10 of Revenue Regulation 7-77 must embody or rest upon some provision in the Tax
Code itself which imposes surcharge and penalty interest for failure to make a transaction tax
payment when due.
P.D. No. 1154 did not itself impose, nor did it expressly authorize the imposition of, a surcharge and
penalty interest in case of failure to pay the thirty-five percent (35%) transaction tax when due. Neither did
Section 210 (b) of the 1977 Tax Code which re-enacted Section 195-C inserted into the Tax Code by P.D.
No. 1154.
The CIR, both in its petition before the Court of Appeals and its Petition in the instant case, points to
Section 51 (e) of the 1977 Tax Code as its source of authority for assessing a surcharge and penalty
interest in respect of the thirty-five percent (35%) transaction tax due from Picop. This Section needs to be
quoted in extenso:
Sec. 51. Payment and Assessment of Income Tax. —
(c) Definition of deficiency. — As used in this Chapter in respect of a tax imposed
by this Title, the term "deficiency" means:
(1) The amount by which the tax imposed by this Title exceeds the amount shown as
the tax by the taxpayer upon his return; but the amount so shown on the return shall
first be increased by the amounts previously assessed (or collected without
assessment) as a deficiency, and decreased by the amount previously abated,
credited, returned, or otherwise in respect of such tax; . . .
xxx xxx xxx
(e) Additions to the tax in case of non-payment. —
(1) Tax shown on the return. — Where the amount determined by the taxpayer
as the tax imposed by this Title or any installment thereof, or any part of such
amount or installment is not paid on or before the date prescribed for its payment,
there shall be collected as a part of the tax, interest upon such unpaid amount at the
rate of fourteen per centum per annum from the date prescribed for its payment
until it is paid: Provided, That the maximum amount that may be collected as
interest on deficiency shall in no case exceed the amount corresponding to a period
of three years, the present provisions regarding prescription to the contrary
notwithstanding.
(2) Deficiency. — Where a deficiency, or any interest assessed in connection
therewith under paragraph (d) of this section, or any addition to the taxes provided
for in Section seventy-two of this Code is not paid in full within thirty days from the
date of notice and demand from the Commissioner of Internal Revenue, there shall
be collected upon the unpaid amount as part of the tax, interest at the rate of
fourteen per centum per annum from the date of such notice and demand until it is
paid: Provided, That the maximum amount that may be collected as interest on
deficiency shall in no case exceed the amount corresponding to a period of three
years, the present provisions regarding prescription to the contrary notwithstanding.
(3) Surcharge. — If any amount of tax included in the notice and demand from the
Commissioner of Internal Revenue is not paid in full within thirty days after such
notice and demand, there shall be collected in addition to the interest prescribed
herein and in paragraph (d) above and as part of the tax a surcharge of five per
centum of the amount of tax unpaid. (Emphases supplied)
Section 72 of the 1977 Tax Code referred to in Section 51 (e) (2) above, provides:
Sec. 72. Surcharges for failure to render returns and for rendering false and
fraudulent returns. — In case of willful neglect to file the return or list required by
this Title within the time prescribed by law, or in case a false or fraudulent return or
list is wilfully made, the Commissioner of Internal Revenue shall add to the tax or
to the deficiency tax, in case any payment has been made on the basis of such return
before the discovery of the falsity or fraud, as surcharge of fifty per centum of the
amount of such tax or deficiency tax. In case of any failure to make and file a return
or list within the time prescribed by law or by the Commissioner or other Internal
Revenue Officer, not due to willful neglect, the Commissioner of Internal Revenue
shall add to the tax twenty-five per centum of its amount, except that, when a return
is voluntarily and without notice from the Commissioner or other officer filed after
such time, and it is shown that the failure to file it was due to a reasonable cause, no
such addition shall be made to the tax. The amount so added to any tax shall be
collected at the same time, in the same manner and as part of the tax unless the tax
has been paid before the discovery of the neglect, falsity, or fraud, in which case the
amount so added shall be collected in the same manner as the tax. (Emphases
supplied)
It will be seen that Section 51 (c) (1) and (e) (1) and (3), of the 1977 Tax Code, authorize the imposition of
surcharge and interest only in respect of a "tax imposed by this Title," that is to say, Title II on "Income
Tax." It will also be seen that Section 72 of the 1977 Tax Code imposes a surcharge only in case of failure
96
to file a return or list "required by this Title," that is, Title II on "Income Tax." The thirty-five percent
(35%) transaction tax is, however, imposed in the 1977 Tax Code by Section 210 (b) thereof which
Section is embraced in Title V on "Taxes on Business" of that Code. Thus, while the thirty-five percent
(35%) transaction tax is in truth a tax imposed on interest income earned by lenders or creditors
purchasing commercial paper on the money market, the relevant provisions, i.e., Section 210 (b),
were not inserted in Title II of the 1977 Tax Code. The end result is that the thirty-five percent (35%)
transaction tax is not one of the taxes in respect of which Section 51 (e) authorized the imposition of
surcharge and interest and Section 72 the imposition of a fraud surcharge.
It is not without reluctance that we reach the above conclusion on the basis of what may well have been an
inadvertent error in legislative draftsmanship, a type of error common enough during the period of Martial
Law in our country. Nevertheless, we are compelled to adopt this conclusion. We consider that the
authority to impose what the present Tax Code calls (in Section 248) civil penalties consisting of additions
to the tax due, must be expressly given in the enabling statute, in language too clear to be mistaken. The
grant of that authority is not lightly to be assumed to have been made to administrative officials, even to
one as highly placed as the Secretary of Finance.
The state of the present law tends to reinforce our conclusion that Section 51 (c) and (e) of the 1977 Tax
Code did not authorize the imposition of a surcharge and penalty interest for failure to pay the thirty-five
percent (35%) transaction tax imposed under Section 210 (b) of the same Code. The corresponding
provision in the current Tax Code very clearly embraces failure to pay all taxes imposed in the Tax
Code, without any regard to the Title of the Code where provisions imposing particular taxes are textually
located. Section 247 (a) of the NIRC, as amended, reads:
Title X
Statutory Offenses and Penalties
Chapter I
Additions to the Tax
Sec. 247. General Provisions. — (a) The additions to the tax or deficiency tax
prescribed in this Chapter shall apply to all taxes, fees and charges imposed in this
Code. The amount so added to the tax shall be collected at the same time, in the
same manner and as part of the tax. . . .
Sec. 248. Civil Penalties. — (a) There shall be imposed, in addition to the tax
required to be paid, penalty equivalent to twenty-five percent (25%) of the amount
due, in the following cases:
xxx xxx xxx
(3) failure to pay the tax within the time prescribed for its
payment; or
xxx xxx xxx
(c) the penalties imposed hereunder shall form part of the tax and the entire amount
shall be subject to the interest prescribed in Section 249.
Sec. 249. Interest. — (a) In General. — There shall be assessed and collected on
any unpaid amount of tax, interest at the rate of twenty percent (20%) per
annum or such higher rate as may be prescribed by regulations, from the date
prescribed for payment until the amount is fully paid. . . . (Emphases supplied)
In other words, Section 247 (a) of the current NIRC supplies what did not exist back in 1977
when Picop's liability for the thirty-five percent (35%) transaction tax became fixed. We do not
believe we can fill that legislative lacuna by judicial fiat. There is nothing to suggest that
Section 247 (a) of the present Tax Code, which was inserted in 1985, was intended to be given
retroactive application by the legislative authority. 16
(3) Whether Picop is Liable
for Documentary and
Science Stamp Taxes.
As noted earlier, Picop issued sometime in 1977 long-term subordinated convertible debenture bonds with
an aggregate face value of P100,000,000.00. Picop stated, and this was not disputed by the CIR, that the
proceeds of the debenture bonds were in fact utilized to finance the BOI-registered operations of Picop.
The CIR assessed documentary and science stamp taxes, amounting to P300,000.00, on the issuance of
Picop's debenture bonds. It is claimed by Picop that its tax exemption — "exemption from all taxes under
the National Internal Revenue Code, except income tax" on a declining basis over a certain period of time
— includes exemption from the documentary and science stamp taxes imposed under the NIRC.
The CIR, upon the other hand, stresses that the tax exemption under the Investment Incentives Act may be
granted or recognized only to the extent that the claimant Picop was engaged in registered operations, i.e.,
operations forming part of its integrated pulp and paper project. 17 The borrowing of funds from the public,
in the submission of the CIR, was not an activity included in Picop's registered operations. The CTA
adopted the view of the CIR and held that "the issuance of convertible debenture bonds [was] not
synonymous [with] the manufactur[ing] operations of an integrated pulp and paper mill." 18
The Court of Appeals took a less rigid view of the ambit of the tax exemption granted to registered
pioneer enterprises. Said the Court of Appeals:
. . . PICOP's explanation that the debenture bonds were issued to finance its
registered operation is logical and is unrebutted. We are aware that tax exemptions
must be applied strictly against the beneficiary in order to deter their abuse. It would
indeed be altogether a different matter if there is a showing that the issuance of the
debenture bonds had no bearing whatsoever on the registered operations
PICOP and that they were issued in connection with a totally different business
undertaking of PICOP other than its registered operation. There is, however, a
dearth of evidence in this regard. It cannot be denied that PICOP needed funds for
its operations. One of the means it used to raise said funds was to issue debenture
bonds. Since the money raised thereby was to be used in its registered operation,
PICOP should enjoy the incentives granted to it by R.A. 5186, one of which is the
exemption from payment of all taxes under the National Internal Revenue Code,
except income taxes, otherwise the purpose of the incentives would be defeated.
Documentary and science stamp taxes on debenture bonds are certainly not income
taxes. 19 (Emphasis supplied)
Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to be extended beyond the
ordinary and reasonable intendment of the language actually used by the legislative authority in granting
the exemption. The issuance of debenture bonds is certainly conceptually distinct from pulping and paper
manufacturing operations. But no one contends that issuance of bonds was a principal or regular business
97
activity of Picop; only banks or other financial institutions are in the regular business of raising money by payments made in 1977, amounting to P42,840,131.00, on these loans as a deduction from its 1977 gross
issuing bonds or other instruments to the general public. We consider that the actual dedication of the income.
proceeds of the bonds to the carrying out of Picop's registered operations constituted a sufficient nexus
with such registered operations so as to exempt Picop from stamp taxes ordinarily imposed upon or in
The CIR disallowed this deduction upon the ground that, because the loans had been incurred for the
connection with issuance of such bonds. We agree, therefore, with the Court of Appeals on this matter that
purchase of machinery and equipment, the interest payments on those loans should have been capitalized
the CTA and the CIR had erred in rejecting Picop's claim for exemption from stamp taxes.
instead and claimed as a depreciation deduction taking into account the adjusted basis of the machinery
and equipment (original acquisition cost plus interest charges) over the useful life of such assets.
It remains only to note that after commencement of the present litigation before the CTA, the BIR took the
position that the tax exemption granted by R.A. No. 5186, as amended, does include exemption from
Both the CTA and the Court of Appeals sustained the position of Picop and held that the interest deduction
documentary stamp taxes on transactions entered into by BOI-registered enterprises. BIR Ruling No. 088,
claimed by Picop was proper and allowable. In the instant Petition, the CIR insists on its original position.
dated 28 April 1989, for instance, held that a registered preferred pioneer enterprise engaged in the
manufacture of integrated circuits, magnetic heads, printed circuit boards, etc., is exempt from the
payment of documentary stamp taxes. The Commissioner said: We begin by noting that interest payments on loans incurred by a taxpayer (whether BOI-registered or not)
are allowed by the NIRC as deductions against the taxpayer's gross income. Section 30 of the 1977 Tax
Code provided as follows:
You now request a ruling that as a preferred pioneer enterprise, you are exempt
from the payment of Documentary Stamp Tax (DST).
Sec. 30. Deduction from Gross Income. — The following may be deducted from
gross income:
In reply, please be informed that your request is hereby granted. Pursuant to Section
46 (a) of Presidential Decree No. 1789, pioneer enterprises registered with the BOI
are exempt from all taxes under the National Internal Revenue Code, except from (a) Expenses:
all taxes under the National Internal Revenue Code, except income tax, from the
date the area of investment is included in the Investment Priorities Plan to the
xxx xxx xxx
following extent:

(b) Interest:
xxx xxx xxx

(1) In general. — The amount of interest paid within the

Accordingly, your company is exempt from the payment of documentary stamp tax
taxable year on indebtedness, except on indebtedness
to the extent of the percentage aforestated on transactions connected with the
incurred or continued to purchase or carry obligations the
registered business activity. (BIR Ruling No. 111-81) However, if said transactions
interest upon which is exempt from taxation as income under
conducted by you require the execution of a taxable document with other parties,
this Title: . . . (Emphasis supplied)
said parties who are not exempt shall be the one directly liable for the tax. (Sec.
173, Tax Code, as amended; BIR Ruling No. 236-87) In other words, said parties
shall be liable to the same percentage corresponding to your tax exemption. Thus, the general rule is that interest expenses are deductible against gross income and this
(Emphasis supplied) certainly includes interest paid under loans incurred in connection with the carrying on of the
business of the taxpayer. 20 In the instant case, the CIR does not dispute that the interest
payments were made by Picop on loans incurred in connection with the carrying on of the
Similarly, in BIR Ruling No. 013, dated 6 February 1989, the Commissioner held that a
registered operations of Picop, i.e., the financing of the purchase of machinery and equipment
registered pioneer enterprise producing polyester filament yarn was entitled to exemption
actually used in the registered operations of Picop. Neither does the CIR deny that such interest
"from the documentary stamp tax on [its] sale of real property in Makati up to December 31,
payments were legally due and demandable under the terms of such loans, and in fact paid by
1989." It appears clear to the Court that the CIR, administratively at least, no longer insists on
the position it originally took in the instant case before the CTA. Picop during the tax year 1977.

The CIR has been unable to point to any provision of the 1977 Tax Code or any other Statute that requires
II
the disallowance of the interest payments made by Picop. The CIR invokes Section 79 of Revenue
Regulations No. 2 as amended which reads as follows:
(1) Whether Picop is entitled
to deduct against current
Sec. 79. Interest on Capital. — Interest calculated for cost-keeping or other
income interest payments
purposes on account of capital or surplus invested in the business, which does not
on loans for the purchase
represent a charge arising under an interest-bearing obligation, is not allowable
of machinery and equipment.
deduction from gross income. (Emphases supplied)

In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in order to finance the purchase of
We read the above provision of Revenue Regulations No. 2 as referring to so called
machinery and equipment needed for its operations. In its 1977 Income Tax Return, Picop claimed interest
"theoretical interest," that is to say, interest "calculated" or computed (and
not incurred or paid) for the purpose of determining the "opportunity cost" of investing funds
98
 in a given business. Such "theoretical" or imputed interest does not arise from a legally
demandable interest-bearing obligation incurred by the taxpayer who 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.
It is claimed by the CIR that Section 79 of Revenue Regulations No. 2 was "patterned after" paragraph
1.266-1 (b), entitled "Taxes and Carrying Charges Chargeable to Capital Account and Treated as Capital
Items" of the U.S. Income Tax Regulations, which paragraph reads as follows:
(B) Taxes and Carrying Charges. — The items thus chargeable to capital accounts
are —
(11) In the case of real property, whether improved or unimproved and whether
productive or nonproductive.
(a) Interest on a loan (but not theoretical interest of a taxpayer using his own
funds). 21
The truncated excerpt of the U.S. Income Tax Regulations quoted by the CIR needs to be related to the
relevant provisions of the U.S. Internal Revenue Code, which provisions deal with the general topic of
adjusted basis for determining allowable gain or loss on sales or exchanges of property and allowable
depreciation and depletion of capital assets of the taxpayer:
Present Rule. The Internal Revenue Code, and the Regulations promulgated
thereunder provide that "No deduction shall be allowed for amounts paid or
accrued for such taxes and carrying charges as, under regulations prescribed by the
Secretary or his delegate, are chargeable to capital account with respect to
property, if the taxpayer elects, in accordance with such regulations, to treat
such taxes or charges as so chargeable."
At the same time, under the adjustment of basis provisions which have just been
discussed, it is provided that adjustment shall be made for all "expenditures,
receipts, losses, or other items" properly chargeable to a capital account, thus
including taxes and carrying charges; however, an exception exists, in which event
such adjustment to the capital account is not made, with respect to taxes and
carrying charges which the taxpayer has not elected to capitalize but for which a
deduction instead has been taken. 22 (Emphasis supplied)
The "carrying charges" which may be capitalized under the above quoted provisions of the
U.S. Internal Revenue Code include, as the CIR has pointed out, interest on a loan "(but not
theoretical interest of a taxpayer using his own funds)." What the CIR failed to point out is
that such "carrying charges" may, at the election of the taxpayer, either be (a) capitalized in
which case the cost basis of the capital assets, e.g., machinery and equipment, will be adjusted
by adding the amount of such interest payments or alternatively, be (b) deducted from gross
income of the taxpayer. Should the taxpayer elect to deduct the interest payments against its
gross income, the taxpayer cannot at the same time capitalize the interest payments. In other
words, the taxpayer is not entitled to both the deduction from gross income and the adjusted
(increased) basis for determining gain or loss and the allowable depreciation charge. The U.S.
Internal Revenue Code does not prohibit the deduction of interest on a loan obtained for
purchasing machinery and equipment against gross income, unless the taxpayer has also or
previously capitalized the same interest payments and thereby adjusted the cost basis of such
assets.
We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred
for acquiring machinery and equipment. Neither does our 1977 NIRC compel the capitalization of interest
payments on such a loan. The 1977 Tax Code is simply silent on a taxpayer's right to elect one or the other
tax treatment of such interest payments. Accordingly, the general rule that interest payments on a legally
demandable loan are deductible from gross income must be applied.
The CIR argues finally that to allow Picop to deduct its interest payments against its gross income would
be to encourage fraudulent claims to double deductions from gross income:
[t]o allow a deduction of incidental expense/cost incurred in the purchase of fixed
asset in the year it was incurred would invite tax evasion through fraudulent
application of double deductions from gross income. 23 (Emphases supplied)
The Court is not persuaded. So far as the records of the instant cases show, Picop has not
claimed to be entitled to double deduction of its 1977 interest payments. The CIR has neither
alleged nor proved that Picop had previously adjusted its cost basis for the machinery and
equipment purchased with the loan proceeds by capitalizing the interest payments here
involved. The Court will not assume that the CIR would be unable or unwilling to disallow "a
double deduction" should Picop, having deducted its interest cost from its gross income, also
attempt subsequently to adjust upward the cost basis of the machinery and equipment
purchased and claim, e.g., increased deductions for depreciation.
We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picop's 1977
interest payments on its loans for capital equipment against its gross income for 1977.
(2) Whether Picop is entitled
to deduct against current
income net operating losses
incurred by Rustan Pulp
and Paper Mills, Inc.
On 18 January 1977, Picop entered into a merger agreement with the Rustan Pulp and Paper Mills, Inc.
("RPPM") and Rustan Manufacturing Corporation ("RMC"). Under this agreement, the rights, properties,
privileges, powers and franchises of RPPM and RMC were to be transferred, assigned and conveyed to
Picop as the surviving corporation. The entire subscribed and outstanding capital stock of RPPM and
RMC would be exchanged for 2,891,476 fully paid up Class "A" common stock of Picop (with a par value
of P10.00) and 149,848 shares of preferred stock of Picop (with a par value of P10.00), to be issued by
Picop, the result being that Picop would wholly own both RPPM and RMC while the stockholders of
RPPM and RMC would join the ranks of Picop's shareholders. In addition, Picop paid off the obligations
of RPPM to the Development Bank of the Philippines ("DBP") in the amount of P68,240,340.00, by
issuing 6,824,034 shares of preferred stock (with a par value of P10.00) to the DBP. The merger
agreement was approved in 1977 by the creditors and stockholders of Picop, RPPM and RMC and by the
Securities and Exchange Commission. Thereupon, on 30 November 1977, apparently the effective date of
merger, RPPM and RMC were dissolved. The Board of Investments approved the merger agreement on 12
January 1978.
It appears that RPPM and RMC were, like Picop, BOI-registered companies. Immediately before merger
effective date, RPPM had over preceding years accumulated losses in the total amount of P81,159,904.00.
In its 1977 Income Tax Return, Picop claimed P44,196,106.00 of RPPM's accumulated losses as a
deduction against Picop's 1977 gross income. 24
99
Upon the other hand, even before the effective date of merger, on 30 August 1977, Picop sold all the
outstanding shares of RMC stock to San Miguel Corporation for the sum of P38,900,000.00, and reported
a gain of P9,294,849.00 from this transaction. 25
In claiming such deduction, Picop relies on section 7 (c) of R.A. No. 5186 which provides as follows:
Sec. 7. Incentives to Registered Enterprise. — A registered enterprise, to the extent
engaged in a preferred area of investment, shall be granted the following incentive
benefits:
xxx xxx xxx
been incurred by RPPM "from the borrowing of funds" and not from carrying out of RPPM's registered
operations. We focus on the first ground. 27
The CTA upheld the deduction claimed by Picop; its reasoning, however, is less than crystal clear,
especially in respect of its view of what the U.S. tax law was on this matter. In any event, the CTA
apparently fell back on the BOI opinion of 21 February 1977 referred to above. The CTA said:
Respondent further averred that the incentives granted under Section 7 of R.A. No.
5186 shall be available only to the extent in which they are engaged in registered
operations, citing Section 1 of Rule IX of the Basic Rules and Regulations to
Implement the Intent and Provisions of the Investment Incentives Act, R.A. No.
5186.

(c) Net Operating Loss Carry-over. — A net operating loss incurred in any of the
We disagree with respondent. The purpose of the merger was to rationalize the
first ten years of operations may be carried over as a deduction from taxable
container board industry and not to take advantage of the net losses incurred by
income for the six years immediately following the year of such loss. The entire
RPPMI prior to the stock swap. Thus, when stock of a corporation is purchased in
amount of the loss shall be carried over to the first of the six taxable years following
order to take advantage of the corporation's net operating loss incurred in years
the loss, and any portion of such loss which exceeds the taxable income of such first
prior to the purchase, the corporation thereafter entering into a trade or business
year shall be deducted in like manner from the taxable income of the next remaining
different from that in which it was previously engaged, the net operating loss carry-
five years. The net operating loss shall be computed in accordance with the
over may be entirely lost. [IRC (1954), Sec. 382(a), Vol. 5, Mertens, Law of Federal
provisions of the National Internal Revenue Code, any provision of this Act to the
Income Taxation, Chap. 29.11a, p. 103]. 28 Furthermore, once the BOI approved the
contrary notwithstanding, except that income not taxable either in whole or in part
merger agreement, the registered capacity of Rustan shall be transferred to PICOP,
under this or other laws shall be included in gross income. (Emphasis supplied)
and the previous losses of Rustan may be carried over by PICOP by operation of
law. [BOI ruling dated February 21, 1977 (Exh. J-1)] It is clear therefrom, that the
Picop had secured a letter-opinion from the BOI dated 21 February 1977 — that is, after the deduction availed of under Section 7(c) of R.A. No. 5186 was only proper." (pp. 38-
date of the agreement of merger but before the merger became effective — relating to the 43, Rollo of SP No. 20070) 29 (Emphasis supplied)
deductibility of the previous losses of RPPM under Section 7 (c) of R.A. No. 5186 as amended.
The pertinent portions of this BOI opinion, signed by BOI Governor Cesar Lanuza, read as
In respect of the above underscored portion of the CTA decision, we must note that the CTA in
follows:
fact overlooked the statement made by petitioner's counsel before the CTA that:

2) PICOP will not be allowed to carry over the losses of Rustan prior to the legal
Among the attractions of the merger to Picop was the accumulated net operating
dissolution of the latter because at that time the two (2) companies still had
loss carry-over of RMC that it might possibly use to relieve it (Picop) from its
separate legal personalities;
income taxes, under Section 7 (c) of R.A.5186. Said section provides:

3) After BOI approval of the merger, PICOP can no longer apply for the registration
xxx xxx xxx
of the registered capacity of Rustan because with the approved merger, such
registered capacity of Rustan transferred to PICOP will have the same registration
date as that of Rustan. In this case, the previous losses of Rustan may be carried With this benefit in mind, Picop addressed three (3) questions to the BOI in a letter
over by PICOP, because with the merger, PICOP assumes all the rights and dated November 25, 1976. The BOI replied on February 21, 1977 directly
obligations of Rustan subject, however, to the period prescribed for carrying over answering the three (3) queries. 30 (Emphasis supplied)
of such
losses. 26 (Emphasis supplied)
The size of RPPM's accumulated losses as of the date of the merger — more than
P81,000,000.00 — must have constituted a powerful attraction indeed for Picop.
Curiously enough, Picop did not also seek a ruling on this matter, clearly a matter of tax law,
from the Bureau of Internal Revenue. Picop chose to rely solely on the BOI letter-opinion.
The Court of Appeals followed the result reached by the CTA. The Court of Appeals, much like the CTA,
concluded that since RPPM was dissolved on 30 November 1977, its accumulated losses were
The CIR disallowed all the deductions claimed on the basis of RPPM's losses, apparently on two (2) appropriately carried over by Picop in the latter's 1977 Income Tax Return "because by that time RPPMI
grounds. Firstly, the previous losses were incurred by "another taxpayer," RPPM, and not by Picop in and Picop were no longer separate and different taxpayers." 31
connection with Picop's own registered operations. The CIR took the view that Picop, RPPM and RMC
were merged into one (1) corporate personality only on 12 January 1978, upon approval of the merger
After prolonged consideration and analysis of this matter, the Court is unable to agree with the CTA and
agreement by the BOI. Thus, during the taxable year 1977, Picop on the one hand and RPPM and RMC on
Court of Appeals on the deductibility of RPPM's accumulated losses against Picop's 1977 gross income.
the other, still had their separate juridical personalities. Secondly, the CIR alleged that these losses had

100
It is important to note at the outset that in our jurisdiction, the ordinary rule — that is, the rule applicable
in respect of corporations not registered with the BOI as a preferred pioneer enterprise — is that net
operating losses cannot be carried over. Under our Tax Code, both in 1977 and at present, losses may be
deducted from gross income only if such losses were actually sustained in the same year that they are
deducted or charged off. Section 30 of the 1977 Tax Code provides:
Sec. 30. Deductions from Gross Income. — In computing net income, there shall be
allowed as deduction —
xxx xxx xxx
(d) Losses:
(1) By Individuals. — In the case of an individual, losses actually sustained during
the taxable year and not compensated for by an insurance or otherwise —
(A) If incurred in trade or business;
xxx xxx xxx
(2) By Corporations. — In a case of a corporation, all losses actually sustained and
charged off within the taxable year and not compensated for by insurance or
otherwise.
(3) By Non-resident Aliens or Foreign Corporations. — In the case of a non-
resident alien individual or a foreign corporation, the losses deductible are
those actually sustained during the year incurred in business or trade
conducted within the Philippines, . . . 32 (Emphasis supplied)
Section 76 of the Philippine Income Tax Regulations (Revenue Regulation No. 2, as amended)
is even more explicit and detailed:
Sec. 76. When charges are deductible. — Each year's return, so far as practicable,
both as to gross income and deductions therefrom should be complete in itself, and
taxpayers are expected to make every reasonable effort to ascertain the facts
necessary to make a correct return. The expenses, liabilities, or deficit of one year
cannot be used to reduce the income of a subsequent year. A taxpayer has the right
to deduct all authorized allowances and it follows that if he does not within any year
deduct certain of his expenses, losses, interests, taxes, or other charges,
he can not deduct them from the income of the next or any succeeding year. . . .
xxx xxx xxx
. . . . If subsequent to its occurrence, however, a taxpayer first ascertains the amount
of a loss sustained during a prior taxable year which has not been deducted from
gross income, he may render an amended return for such preceding taxable
year including such amount of loss in the deduction from gross income and may in
proper cases file a claim for refund of the excess paid by reason of the failure to
deduct such loss in the original return. A loss from theft or embezzlement occurring
in one year and discovered in another is ordinarily deductible for the year in which
sustained. (Emphases supplied)
It is thus clear that under our law, and outside the special realm of BOI-registered enterprises,
there is no such thing as a carry-over of net operating loss. To the contrary, losses must be
deducted against current income in the taxable year when such losses were incurred.
Moreover, such losses may be charged off only against income earned in the same taxable year
when the losses were incurred.
Thus it is that R.A. No. 5186 introduced the carry-over of net operating losses as a very special
incentive to be granted only to registered pioneer enterprises and only with respect to their registered
operations. The statutory purpose here may be seen to be the encouragement of the establishment and
continued operation of pioneer industries by allowing the registered enterprise to accumulate its operating
losses which may be expected during the early years of the enterprise and to permit the enterprise to offset
such losses against income earned by it in later years after successful establishment and regular operations.
To promote its economic development goals, the Republic foregoes or defers taxing the income of the
pioneer enterprise until after that enterprise has recovered or offset its earlier losses. We consider that the
statutory purpose can be served only if the accumulated operating losses are carried over and charged off
against income subsequently earned and accumulated by the same enterprise engaged in the same
registered operations.
In the instant case, to allow the deduction claimed by Picop would be to permit one corporation or
enterprise, Picop, to benefit from the operating losses accumulated by another corporation or enterprise,
RPPM. RPPM far from benefiting from the tax incentive granted by the BOI statute, in fact gave up the
struggle and went out of existence and its former stockholders joined the much larger group of Picop's
stockholders. To grant Picop's claimed deduction would be to permit Picop to shelter its otherwise taxable
income (an objective which Picop had from the very beginning) which had not been earned by the
registered enterprise which had suffered the accumulated losses. In effect, to grant Picop's claimed
deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated
operating losses. Under the CTA and Court of Appeals decisions, Picop would benefit by immunizing
P44,196,106.00 of its income from taxation thereof although Picop had not run the risks and incurred the
losses which had been encountered and suffered by RPPM. Conversely, the income that would be shielded
from taxation is not income that was, after much effort, eventually generated by the same registered
operations which earlier had sustained losses. We consider and so hold that there is nothing in Section 7
(c) of R.A. No. 5186 which either requires or permits such a result. Indeed, that result makes non-sense of
the legislative purpose which may be seen clearly to be projected by Section 7 (c), R.A. No. 5186.
The CTA and the Court of Appeals allowed the offsetting of RPPM's accumulated operating losses against
Picop's 1977 gross income, basically because towards the end of the taxable year 1977, upon the arrival of
the effective date of merger, only one (1) corporation, Picop, remained. The losses suffered by RPPM's
registered operations and the gross income generated by Picop's own registered operations now came
under one and the same corporate roof. We consider that this circumstance relates much more to form than
to substance. We do not believe that that single purely technical factor is enough to authorize and justify
the deduction claimed by Picop. Picop's claim for deduction is not only bereft of statutory basis; it does
violence to the legislative intent which animates the tax incentive granted by Section 7 (c) of R.A. No.
5186. In granting the extraordinary privilege and incentive of a net operating loss carry-over to BOI-
registered pioneer enterprises, the legislature could not have intended to require the Republic to forego tax
revenues in order to benefit a corporation which had run no risks and suffered no losses, but had merely
purchased another's losses.
Both the CTA and the Court of Appeals appeared much impressed not only with corporate technicalities
but also with the U.S. tax law on this matter. It should suffice, however, simply to note that in U.S. tax
law, the availability to companies generally of operating loss carry-overs and of operating loss carry-backs
is expressly provided and regulated in great detail by statute. 33 In our jurisdiction, save for Section 7 (c)
of R.A. No. 5186, no statute recognizes or permits loss carry-overs and loss carry-backs. Indeed, as
already noted, our tax law expressly rejects the very notion of loss carry-overs and carry-backs.
101
We conclude that the deduction claimed by Picop in the amount of P44,196,106.00 in its 1977 Income Tax
Return must be disallowed.
(3) Whether Picop is entitled
to deduct against current
income certain claimed
financial guarantee expenses.
In its Income Tax Return for 1977, Picop also claimed a deduction in the amount of P1,237,421.00 as
financial guarantee expenses.
This deduction is said to relate to chattel and real estate mortgages required from Picop by the Philippine
National Bank ("PNB") and DBP as guarantors of loans incurred by Picop from foreign creditors.
According to Picop, the claimed deduction represents registration fees and other expenses incidental to
registration of mortgages in favor of DBP and PNB.
In support of this claimed deduction, Picop allegedly showed its own vouchers to BIR Examiners to prove
disbursements to the Register of Deeds of Tandag, Surigao del Sur, of particular amounts. In the
proceedings before the CTA, however, Picop did not submit in evidence such vouchers and instead
presented one of its employees to testify that the amount claimed had been disbursed for the registration of
chattel and real estate mortgages.
The CIR disallowed this claimed deduction upon the ground of insufficiency of evidence. This
disallowance was sustained by the CTA and the Court of Appeals. The CTA said:
No records are available to support the abovementioned expenses. The vouchers
merely showed that the amounts were paid to the Register of Deeds and simply cash
account. Without the supporting papers such as the invoices or official receipts of
the Register of Deeds, these vouchers standing alone cannot prove that the
payments made were for the accrued expenses in question. The best evidence of
payment is the official receipts issued by the Register of Deeds. The testimony of
petitioner's witness that the official receipts and cash vouchers were shown to the
Bureau of Internal Revenue will not suffice if no records could be presented in court
for proper marking and identification. 34 Emphasis supplied)
The Court of Appeals added:
The mere testimony of a witness for PICOP and the cash vouchers do not suffice to
establish its claim that registration fees were paid to the Register of Deeds for the
registration of real estate and chattel mortgages in favor of Development Bank of
the Philippines and the Philippine National Bank as guarantors of PICOP's loans.
The witness could very well have been merely repeating what he was instructed to
say regardless of the truth, while the cash vouchers, which we do not find on file,
are not said to provide the necessary details regarding the nature and purpose of the
expenses reflected therein. PICOP should have presented, through the guarantors,
its owner's copy of the registered titles with the lien inscribed thereon as well as an
official receipt from the Register of Deeds evidencing payment of the registration
fee. 35 (Emphasis supplied)
We must support the CTA and the Court of Appeals in their foregoing rulings. A taxpayer has the burden
of proving entitlement to a claimed deduction. 36 In the instant case, even Picop's own vouchers were not
submitted in evidence and the BIR Examiners denied that such vouchers and other documents had been
exhibited to them. Moreover, cash vouchers can only confirm the fact of disbursement but not necessarily
the purpose thereof. 37 The best evidence that Picop should have presented to support its claimed
deduction were the invoices and official receipts issued by the Register of Deeds. Picop not only failed to
present such documents; it also failed to explain the loss thereof, assuming they had existed
before. 38 Under the best evidence rule, 39 therefore, the testimony of Picop's employee was inadmissible
and was in any case entitled to very little, if any, credence.
We consider that entitlement to Picop's claimed deduction of P1,237,421.00 was not adequately shown
and that such deduction must be disallowed.
III
(1) Whether Picop had understated
its sales and overstated its
cost of sales for 1977.
In its assessment for deficiency income tax for 1977, the CIR claimed that Picop had understated its sales
by P2,391,644.00 and, upon the other hand, overstated its cost of sales by P604,018.00. Thereupon, the
CIR added back both sums to Picop's net income figure per its own return.
The 1977 Income Tax Return of Picop set forth the following figures: Sales P 803,206,495.00
The above figures thus show a discrepancy between the sales figures reflected in Picop's Books
of Accounts and the sales figures reported in its 1977 Income Tax Return, amounting to:
P2,391,644.00.
The CIR also contended that Picop's cost of sales set out in its 1977 Income Tax Return, when compared
with the cost figures in its Books of Accounts, was overstated:
Cost of Sales
(per Income Tax Return) P607,246,084.00
Cost of Sales
(per Books of Accounts) P606,642,066.00
———————
Discrepancy P 604,018.00
============
Picop did not deny the existence of the above noted discrepancies. In the proceedings before the CTA,
Picop presented one of its officials to explain the foregoing discrepancies. That explanation is perhaps best
presented in Picop's own words as set forth in its Memorandum before this Court:
. . . that the adjustment discussed in the testimony of the witness, represent the best
and most objective method of determining in pesos the amount of the correct and
actual export sales during the year. It was this correct and actual export sales and
costs of sales that were reflected in the income tax return and in the audited
financial statements. These corrections did not result in realization of income and
should not give rise to any deficiency tax.
102
 xxx xxx xxx Picop's Books of Accounts speak the truth in this case since, as already noted, they embody what must
appear to be admissions against Picop's own interest.
What are the facts of this case on this matter? Why were adjustments necessary at
the year-end? Accordingly, we must affirm the findings of the Court of Appeals and the CTA.

Because of PICOP's procedure of recording its export sales (reckoned in U.S. (2) Whether Picop is liable for
dollars) on the basis of a fixed rate, day to day and month to month, regardless of the corporate development
the actual exchange rate and without waiting when the actual proceeds are received. tax of five percent (5%)
In other words, PICOP recorded its export sales at a pre-determined fixed exchange of its income for 1977.
rate. That pre-determined rate was decided upon at the beginning of the year and
continued to be used throughout the year.
The five percent (5%) corporate development tax is an additional corporate income tax imposed in Section
24 (e) of the 1977 Tax Code which reads in relevant part as follows:
At the end of the year, the external auditors made an examination. In that
examination, the auditors determined with accuracy the actual dollar proceeds of the
(e) Corporate development tax. — In addition to the tax imposed in subsection (a)
export sales received. What exchange rate was used by the auditors to convert these
of this section, an additional tax in an amount equivalent to 5 per cent of the same
actual dollar proceeds into Philippine pesos? They used the average of the
taxable net income shall be paid by a domestic or a resident foreign
differences between (a) the recorded fixed exchange rate and (b) the exchange rate
corporation; Provided, That this additional tax shall be imposed only if the net
at the time the proceeds were actually received. It was this rate at time of receipt of
income exceeds 10 per cent of the net worth, in case of a domestic corporation, or
the proceeds that determined the amount of pesos credited by the Central Bank
net assets in the Philippines in case of a resident foreign corporation: . . . .
(through the agent banks) in favor of PICOP. These accumulated differences were
averaged by the external auditors and this was what was used at the year-end for
income tax and other government-report purposes. (T.s.n., Oct. 17/85, pp. 20-25) 40 The additional corporate income tax imposed in this subsection shall be collected
and paid at the same time and in the same manner as the tax imposed in subsection
(a) of this section.
The above explanation, unfortunately, at least to the mind of the Court, raises more questions than it
resolves. Firstly, the explanation assumes that all of Picop's sales were export sales for which U.S. dollars
(or other foreign exchange) were received. It also assumes that the expenses summed up as "cost of sales" Since this five percent (5%) corporate development tax is an income tax, Picop is not exempted
were all dollar expenses and that no peso expenses had been incurred. Picop's explanation further assumes from it under the provisions of Section 8 (a) of R.A. No. 5186.
that a substantial part of Picop's dollar proceeds for its export sales were not actually surrendered to the
domestic banking system and seasonably converted into pesos; had all such dollar proceeds been
For purposes of determining whether the net income of a corporation exceeds ten percent (10%) of its net
converted into pesos, then the peso figures could have been simply added up to reflect the actual peso
worth, the term "net worth" means the stockholders' equity represented by the excess of the total assets
value of Picop's export sales. Picop offered no evidence in respect of these assumptions, no explanation
over liabilities as reflected in the corporation's balance sheet provided such balance sheet has been
why and how a "pre-determined fixed exchange rate" was chosen at the beginning of the year and
prepared in accordance with generally accepted accounting principles employed in keeping the books of
maintained throughout. Perhaps more importantly, Picop was unable to explain why its Books of Accounts
the corporation. 43
did not pick up the same adjustments that Picop's External Auditors were alleged to have made for
purposes of Picop's Income Tax Return. Picop attempted to explain away the failure of its Books of
Accounts to reflect the same adjustments (no correcting entries, apparently) simply by quoting a passage The adjusted net income of Picop for 1977, as will be seen below, is P48,687,355.00. Its net worth figure
from a case where this Court refused to ascribe much probative value to the Books of Accounts of a or total stockholders' equity as reflected in its Audited Financial Statements for 1977 is P464,749,528.00.
corporate taxpayer in a tax case. 41 What appears to have eluded Picop, however, is that its Books of Since its adjusted net income for 1977 thus exceeded ten percent (10%) of its net worth, Picop must be
Accounts, which are kept by its own employees and are prepared under its control and supervision, reflect held liable for the five percent (5%) corporate development tax in the amount of P2,434,367.75.
what may be deemed to be admissions against interest in the instant case. For Picop's Books of Accounts
precisely show higher sales figures and lower cost of sales figures than Picop's Income Tax Return.
Recapitulating, we hold:

It is insisted by Picop that its Auditors' adjustments simply present the "best and most objective" method
of reflecting in pesos the "correct and ACTUAL export sales" 42 and that the adjustments or "corrections" (1) Picop is liable for the thirty-five percent (35%) transaction tax in the amount of P3,578,543.51.
"did not result in realization of [additional] income and should not give rise to any deficiency tax." The
correctness of this contention is not self-evident. So far as the record of this case shows, Picop did not (2) Picop is not liable for interest and surcharge on unpaid transaction tax.
submit in evidence the aggregate amount of its U.S. dollar proceeds of its export sales; neither did it show
the Philippine pesos it had actually received or been credited for such U.S. dollar proceeds. It is clear to
this Court that the testimonial evidence submitted by Picop fell far short of demonstrating the correctness (3) Picop is exempt from payment of documentary and science stamp taxes in the amount of P300,000.00
of its explanation. and the compromise penalty of P300.00.

Upon the other hand, the CIR has made out at least a prima facie case that Picop had understated its sales (4) Picop is entitled to its claimed deduction of P42,840,131.00 for interest payments on loans for, among
and overstated its cost of sales as set out in its Income Tax Return. For the CIR has a right to assume that other things, the purchase of machinery and equipment.

103
(5) Picop's claimed deduction in the amount of P44,196,106.00 for the operating losses previously Net Income per investigation P197,502,568.00
incurred by RPPM, is disallowed for lack of merit. Add: Disallowances
Bad Debts P 713,070.93
Interest Expense P 2,666,545.49
(6) Picop's claimed deduction for certain financial guarantee expenses in the amount P1,237,421.00 is
—————— ——————
disallowed for failure adequately to prove such expenses.
P3,379,616.00

(7) Picop has understated its sales by P2,391,644.00 and overstated its cost of sales by P604,018.00, for
Net Taxable Income 200,882,184.00
1977.

Tax Due Thereon 70,298,764.00

(8) Picop is liable for the corporate development tax of five percent (5%) of its adjusted net income for
Less: Tax Paid 69,115,899.00
1977 in the amount of P2,434,367.75.
Deficiency Income Tax 1,182,865.00
Add: 20% Interest (60% max.) 709,719.00
Considering conclusions nos. 4, 5, 6, 7 and 8, the Court is compelled to hold Picop liable for deficiency ——————
income tax for the year 1977 computed as follows: Aggregate Amount Due and Payable P 43,794,252.51
No pronouncement as to costs.
Total Amount Due and Collectible P1,892,584.002

13. SKY INTERNET V. CIR (PDF)

The assessment was timely protested by petitioner on April 26, 1989, on the ground that it was based on
the erroneous disallowances of "bad debts" and "interest expense" although the same are both allowable
and legal deductions. Respondent Commissioner, however, issued a warrant of garnishment against the
deposits of petitioner at a branch of City Trust Bank, in Makati, Metro Manila, which action the latter
considered as a denial of its protest.

Petitioner accordingly filed a petition for review with the Court of Tax Appeals (CTA) on the same
assignment of error, that is, that the "bad debts" and "interest expense" are legal and allowable deductions.
In its decision3 of February 3, 1993 in C.T.A. Case No. 4408, the CTA modified the findings of the
Commissioner by reducing the deficiency income tax assessment to P237,381.26, with surcharge and
interest incident to delinquency. In said decision, the Tax Court reversed and set aside the Commissioner's
disallowance of the interest expense of P2,666,545.19 but maintained the disallowance of the supposed
bad debts of thirteen (13) debtors in the total sum of P395,324.27.

Petitioner then elevated the case to respondent Court of Appeals which, as earlier stated, denied due
course to the petition for review and dismissed the same on August 24, 1994 in CA-G.R. SP No.
31190,4 on the following ratiocination:

We agree with respondent Court of Tax Appeals:

Out of the sixteen (16) accounts alleged as bad debts, We

find that only three (3) accounts have met the requirements of
the worthlessness of the accounts, hence were properly
written off as: bad debts, namely:

14. G.R. No. 118794 May 8, 1996 PHILIPPINE REFINING COMPANY (now known as
"UNILEVER PHILIPPINES [PRC], INC.") vs. COURT OF APPEALS, COURT OF TAX
APPEALS, and THE COMMISSIONER OF INTERNAL REVENUE
Petitioner Philippine Refining Company (PRC) was assessed by respondent Commissioner of Internal
Revenue (Commissioner) to pay a deficiency tax for the year 1985 in the amount of P1,892,584.00,
computed as follows:
Deficiency Income Tax
We find that 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 self-
serving exercise which lacks probative value. There was no iota of documentary
evidence (e.g., collection letters sent, report from investigating fieldmen, letter of
referral to their legal department, police report/affidavit that the owners were
bankrupt due to fire that engulfed their stores or that the owner has been murdered.
etc.), to give support to the testimony of an employee of the Petitioner. Mere
allegations cannot prove the worthlessness of such debts in 1985. Hence, the claim
for deduction of these thirteen (13) debts should be rejected. 5

104
1. This pronouncement of respondent Court of Appeals relied on the ruling of this Court
in Collector vs. Goodrich International Rubber Co.,6 which established the rule in determining the
"worthlessness of a debt." In said case, we held that 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 valid and
subsisting 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; and (4) the debt must arise from the
business or trade of the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer
must also show that it is indeed 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.
On the foregoing considerations, respondent Court of Appeals held that petitioner did not satisfy the
requirements of "worthlessness of a debt" as to the thirteen (13) accounts disallowed as deductions.
It appears that the only evidentiary support given by PRC for its aforesaid claimed deductions was the
explanation or justification posited by its financial adviser or accountant, Guia D. Masagana. Her
allegations were not supported by any documentary evidence, hence both the Court of Appeals and the
CTA ruled that said contentions per secannot prove that the debts were indeed uncollectible and can be
considered as bad debts as to make them deductible. That both lower courts are correct is shown by
petitioner's own submission and the discussion thereof which we have taken time and patience to cull from
the antecedent proceedings in this case, albeit bordering on factual settings.
The accounts of Remoblas Store in the amount of P11,961.00 and CM Variety Store in the amount of
P10,895.82 are uncollectible, according to petitioner, since the stores were burned in November, 1984 and
in early 1985, respectively, and there are no assets belonging to the debtors that can be garnished by
PRC.7 However, PRC failed to show any documentary evidence for said allegations. Not a single
document was offered to show that the stores were burned, even just a police report or an affidavit
attesting to such loss by fire. In fact, petitioner did not send even a single demand letter to the owners of
said stores.
The account of Tomas Store in the amount of P16,842.79 is uncollectible, claims petitioner PRC, since the
owner thereof was murdered and left no visible assets which could satisfy the debt. Withal, just like the
accounts of the two other stores just mentioned, petitioner again failed to present proof of the efforts
exerted to collect the debt, other than the aforestated asseverations of its financial adviser.
The accounts of Aboitiz Shipping Corporation and J. Ruiz Trucking in the amounts of P89,483.40 and
P69,640.34, respectively, both of which allegedly arose from the hijacking of their cargo and for which
they were given 30% rebates by PRC, are claimed to be uncollectible. Again, petitioner failed to present
an iota of proof, not even a copy of the supposed policy regulation of PRC that it gives rebates to clients in
case of loss arising from fortuitous events or force majeure, which rebates it now passes off as
uncollectible debts.
As to the account of P13,550.00 representing the balance collectible from Renato Alejandro, a former
employee who failed to pay the judgment against him, it is petitioner's theory that the same can no longer
be collected since his whereabouts are unknown and he has no known property which can be garnished or
levied upon. Once again, petitioner failed to prove the existence of the said case against that debtor or to
submit any documentation to show that Alejandro was indeed bound to pay any judgment obligation.
The amount of P13,772.00 corresponding to the debt of Lucito Sta. Maria is allegedly due to the loss of
his stocks through robbery and the account is uncollectible due to his insolvency. Petitioner likewise failed
to submit documentary evidence, not even the written reports of the alleged investigation conducted by its
agents as testified to by its aforenamed financial adviser.
Regarding the accounts of C. Itoh in the amount of P19,272.22, Crocklaan B.V. in the sum of P77,690.00,
and Craig, Mostyn Pty. Ltd. with a balance of P23,738.00, petitioner contends that these debtors being
foreign corporations, it can sue them only in their country of incorporation; and since this will entail
expenses more than the amounts of the debts to be collected, petitioner did not file any collection suit but
opted to write them off as bad debts. Petitioner was unable to show proof of its efforts to collect the debts,
even by a single demand letter therefor. While it is not required to file suit, it is at least expected by the
law to produce reasonable proof that the debts are uncollectible although diligent efforts were exerted to
collect the same.
The account of Enriched Food Corporation in the amount of P24,158.00 remains unpaid, although
petitioner claims that it sent several letters. This is not sufficient to sustain its position. even if true, but
even smacks of insouciance on its part. On top of that, it was unable to show a single copy of the alleged
demand letters sent to the said corporation or any of its corporate officers.
With regard to the account of AFPCES for unpaid supplies in the amount of P13,833.62, petitioner asserts
that since the debtor is an agency of the government, PRC did not file a collection suit therefor. Yet, the
mere fact that AFPCES is a government agency does not preclude PRC from filing suit since said agency,
while discharging proprietary functions, does not enjoy immunity from suit. Such pretension of petitioner
cannot pass judicial muster.
No explanation is offered by petitioner as to why the unpaid account of U' Ren Mart Enterprise in the
amount of P10,487.08 was written off as a bad debt. However, the decision of the CTA includes this
debtor in its findings on the lack of documentary evidence to justify the deductions claimed, since the
worthlessness of the debts involved are sought to be established by the mere self-serving testimony of its
financial consultant.
The contentions of PRC that nobody is in a better position to determine when an obligation becomes a bad
debt than the creditor itself, and that its judgment should not be substituted by that of respondent court as
it is PRC which has the facilities in ascertaining the collectibility or uncollectibility of these debts, are
presumptuous and uncalled for. The Court of Tax Appeals is a highly specialized body specifically created
for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the
issue of whether or not the debt is deductible through the evidence presented before it. 8
Because of this recognized expertise, the findings of the CTA will not ordinarily be reviewed absent a
showing of gross error or abuse on its part.9 The findings of fact of the CTA are binding on this Court and
in the absence of strong reasons for this Court to delve into facts, only questions of law are open for
determination. 10 Were it not, therefore, due to the desire of this Court to satisfy petitioner's calls for
clarification and to use this case as a vehicle for exemplification, this appeal could very well have been
summarily dismissed.
The Court vehemently rejects the absurd thesis of petitioner that despite the supervening delay in the tax
payment, nothing is lost on the part of the Government because in the event that these debts are collected,
the same will be returned as taxes to it in the year of the recovery. This is an irresponsible statement which
deliberately ignores the fact that while the Government may eventually recover revenues under that
hypothesis, the delay caused by the non-payment of taxes under such a contingency will obviously have a
disastrous effect on the revenue collections necessary for governmental operations during the period
concerned.
2. We need not tarry at length on the second issue raised by petitioner. It argues that the imposition of the
25% surcharge and the 20% delinquency interest due to delay in its payment of the tax assessed is
105
improper and unwarranted, considering that the assessment of the Commissioner was modified by the
CTA and the decision of said court has not yet become final and executory.
Regarding the 25% surcharge penalty, Section 248 of the Tax Code provides:
Sec. 248. Civil Penalties. — (a) There shall be imposed, in addition to the tax
required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount
due, in the following cases:
xxx xxx xxx
(3) Failure to pay the tax within the time prescribed for its payment.
With respect to the penalty of 20% interest, the relevant provision is found in Section 249 of the same
Code, as follows:
Sec. 249. Interest. — (a) In general. — There shall be assessed and collected on any
unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or
such higher rate as may be prescribed by regulations, from the date prescribed for
payment until the amount is fully paid.
xxx xxx xxx
(c) Delinquency interest. — In case of failure pay:
(1) The amount of the tax due on any return required to be
filed, or
(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon, on the due date appearing
in the notice and demand of the Commissioner,
there shall be assessed and collected, on the unpaid amount, interest at the rate
prescribed in paragraph (a) hereof until the amount is fully paid, which interest shall
form part of the tax. (emphasis supplied)
xxx xxx xxx
As correctly pointed out by the Solicitor General, the deficiency tax assessment in this case, which was the
subject of the demand letter of respondent Commissioner dated April 11,1989, should have been paid
within thirty (30) days from receipt thereof. By reason of petitioner's default thereon, the delinquency
penalties of 25% surcharge and interest of 20% accrued from April 11, 1989. The fact that petitioner
appealed the assessment to the CTA and that the same was modified does not relieve petitioner of the
penalties incident to delinquency. The reduced amount of P237,381.25 is but a part of the original
assessment of P1,892,584.00.
Our attention has also been called to two of our previous rulings and these we set out here for the benefit
of petitioner and whosoever may be minded to take the same stance it has adopted in this case. Tax laws
imposing penalties for delinquencies, so we have long held, are intended to hasten tax payments by
punishing evasions or neglect of duty in respect thereof. If penalties could be condoned for flimsy reasons,
the law imposing penalties for delinquencies would be rendered nugatory, and the maintenance of the
Government and its multifarious activities will be adversely affected. 11
We have likewise explained that it is mandatory to collect penalty and interest at the stated rate in case of
delinquency. The intention of the law is to discourage delay in the payment of taxes due the Government
and, in this sense, the penalty and interest are not penal but compensatory for the concomitant use of the
funds by the taxpayer beyond the date when he is supposed to have paid them to the
Government. 12 Unquestionably, petitioner chose to turn a deaf ear to these injunctions.
ACCORDINGLY, the petition at bar is DENIED and the judgment of respondent Court of Appeals is
hereby AFFIRMED, with treble costs against petitioner.
15. G.R. No. L-21551 September 30, 1969 FERNANDEZ HERMANOS, INC.vs. COMMISSIONER
OF INTERNAL REVENUE and COURT OF TAX APPEALS
These four appears involve two decisions of the Court of Tax Appeals determining the taxpayer's income
tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of
Internal Revenue, as petitioner and respondent in the cases a quo respectively, appealed from the Tax
Court's decisions, insofar as their respective contentions on particular tax items were therein resolved
against them. Since the issues raised are interrelated, the Court resolves the four appeals in this joint
decision.
Cases L-21551 and L-21557
The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the principal purpose of
engaging in business as an "investment company" with main office at Manila. Upon verification of the
taxpayer's income tax returns for the period in question, the Commissioner of Internal Revenue assessed
against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as
alleged deficiency income taxes for the years 1950, 1951, 1952, 1953 and 1954, respectively. Said
assessments were the result of alleged discrepancies found upon the examination and verification of the
taxpayer's income tax returns for the said years, summarized by the Tax Court in its decision of June 10,
1963 in CTA Case No. 787, as follows:
The Tax Court sustained the Commissioner's disallowances of Item 1, sub-items (b) and (e)
and Item 2 of the above summary, but overruled the Commissioner's disallowances of all the
remaining items. It therefore modified the deficiency assessments accordingly, found the total
deficiency income taxes due from the taxpayer for the years under review to amount to
P123,436.00 instead of P166,063.00 as originally assessed by the Commissioner, and rendered
the following judgment:
WHEREFORE, the decision appealed from is hereby modified, and petitioner is ordered to pay
the sum of P123,436.00 within 30 days from the date this decision becomes final. If the said
amount, or any part thereof, is not paid within said period, there shall be added to the unpaid
amount as surcharge of 5%, plus interest as provided in Section 51 of the National Internal
Revenue Code, as amended. With costs against petitioner. (Pp. 75, 76, Taxpayer's Brief as
appellant)
Both parties have appealed from the respective adverse rulings against them in the Tax Court's decision.
Two main issues are raised by the parties: first, the correctness of the Tax Court's rulings with respect to
the disputed items of disallowances enumerated in the Tax Court's summary reproduced above, and
106
second, whether or not the government's right to collect the deficiency income taxes in question has
already prescribed.
On the first issue, we will discuss the disputed items of disallowances seriatim.
1. Re allowances/disallowances of losses.
(a) Allowance of losses in Mati Lumber Co. (1950). — The Commissioner of Internal Revenue 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, a certain Mr. Rocamora,
left for Spain ,where he subsequently died. When the company eased 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 it 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. 2
We find no reason to disturb this finding of the Tax Court. 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 as claimed by the Commissioner, 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.
(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). — The taxpayer
appeals from the Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the sum of
P353,134.25, which it had advanced or loaned to Palawan Manganese Mines, Inc. The Tax Court's
findings on this item follow:
Sometime in 1945, Palawan Manganese Mines, Inc., the controlling stockholders of which are
also the controlling stockholders of petitioner corporation, requested financial help from
petitioner to enable it to resume it mining operations in Coron, Palawan. The request for
financial assistance was readily and unanimously approved by the Board of Directors of
petitioner, and thereafter a memorandum agreement was executed on August 12, 1945,
embodying the terms and conditions under which the financial assistance was to be extended,
the pertinent provisions of which are as follows:
"WHEREAS, the FIRST PARTY, by virtue of its resolution adopted on August 10,
1945, has agreed to extend to the SECOND PARTY the requested financial help by
way of accommodation advances and for this purpose has authorized its President,
Mr. Ramon J. Fernandez to cause the release of funds to the SECOND PARTY.
"WHEREAS, to compensate the FIRST PARTY for the advances that it has agreed
to extend to the SECOND PARTY, the latter has agreed to pay to the former fifteen
per centum (15%) of its net profits.
"NOW THEREFORE, for and in consideration of the above premises, the parties
hereto have agreed and covenanted that in consideration of the financial help to be
extended by the FIRST PARTY to the SECOND PARTY to enable the latter to
resume its mining operations in Coron, Palawan, the SECOND PARTY has agreed
and undertaken as it hereby agrees and undertakes to pay to the FIRST PARTY
fifteen per centum (15%) of its net profits." (Exh. H-2)
Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese Mines, Inc. yearly
advances starting from 1945, which advances amounted to P587,308.07 by the end of 1951. Despite these
advances and the resumption of operations by Palawan Manganese Mines, Inc., it continued to suffer
losses. By 1951, petitioner became convinced that those advances could no longer be recovered. While it
continued to give advances, it decided to write off as worthless the sum of P353,134.25. This amount "was
arrived at on the basis of the total of advances made from 1945 to 1949 in the sum of P438,981.39, from
which amount the sum of P85,647.14 had to be deducted, the latter sum representing its pre-war assets.
(t.s.n., pp. 136-139, Id)." (Page 4, Memorandum for Petitioner.) Petitioner decided to maintain the
advances given in 1950 and 1951 in the hope that it might be able to recover the same, as in fact it
continued to give advances up to 1952. From these facts, and as admitted by petitioner itself, Palawan
Manganese Mines, Inc., was still in operation when the advances corresponding to the years 1945 to 1949
were written off the books of petitioner. Under the circumstances, was the sum of P353,134.25 properly
claimed by petitioner as deduction in its income tax return for 1951, either as losses or bad debts?
It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner did not expect to be
repaid. It is true that some testimonial evidence was presented to show that there was some agreement that
the advances would be repaid, but no documentary evidence was presented to this effect. The
memorandum agreement signed by the parties appears to be very clear that the consideration for the
advances made by petitioner was 15% of the net profits of Palawan Manganese Mines, Inc. In other
words, if there were no earnings or profits, there was no obligation to repay those advances. It has been
held that the voluntary advances made without expectation of repayment do not result in deductible losses.
1955 PH Fed. Taxes, Par. 13, 329, citing W. F. Young, Inc. v. Comm., 120 F 2d. 159, 27 AFTR 395;
George B. Markle, 17 TC. 1593.
Is the said amount deductible as a bad debt? As already stated, petitioner gave advances to Palawan
Manganese Mines, Inc., without expectation of repayment. Petitioner could not sue for recovery under the
memorandum agreement because the obligation of Palawan Manganese Mines, Inc. was to pay petitioner
15% of its net profits, not the advances. No bad debt could arise where there is no valid and subsisting
debt.
Again, assuming that in this case there was a valid and subsisting debt and that the debtor was incapable of
paying the debt in 1951, when petitioner wrote off the advances and deducted the amount in its return for
said year, yet the debt is not deductible in 1951 as a worthless debt. It appears that the debtor was still in
operation in 1951 and 1952, as petitioner continued to give advances in those years. It has been held that if
the debtor corporation, although losing money or insolvent, was still operating at the end of the taxable
year, the debt is not considered worthless and therefore not deductible. 3
The Tax Court's disallowance of the write-off was proper. The Solicitor General has rightly pointed out
that the taxpayer has taken an "ambiguous position " and "has not definitely taken a stand on whether the
amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt." 4 We
sustain the government's position that the advances made by the taxpayer to its 100% subsidiary, Palawan
Manganese Mines, Inc. amounting to P587,308,07 as of 1951 were investments and not loans. 5 The
evidence on record shows that the board of directors of the two companies since August, 1945, were
identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of P100,000.00
entered in the taxpayer's balance sheet as its investment in its subsidiary company. 6 This fact explains the
liberality with which the taxpayer made such large advances to the subsidiary, despite the latter's
admittedly poor financial condition.
The taxpayer's contention that its advances were loans to its subsidiary as against the Tax Court's finding
that under their memorandum agreement, the taxpayer did not expect to be repaid, since if the subsidiary
had no earnings, there was no obligation to repay those advances, becomes immaterial, in the light of our
107
resolution of the question. The Tax Court correctly held that the subsidiary company was still in operation Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations,
in 1951 and 1952 and the taxpayer continued to give it advances in those years, and, therefore, the alleged authorizes farmers to determine their gross income on the basis of inventories. Said regulations
debt or investment could not properly be considered worthless and deductible in 1951, as claimed by the provide:
taxpayer. Furthermore, neither under Section 30 (d) (2) of our Tax Code providing for deduction by
corporations of losses actually sustained and charged off during the taxable year nor under Section 30 (e)
"If gross income is ascertained by inventories, no deduction can be made for
(1) thereof providing for deduction of bad debts actually ascertained to be worthless and charged off
livestock or products lost during the year, whether purchased for resale, produced
within the taxable year, can there be a partial writing off of a loss or bad debt, as was sought to be done
on the farm, as such losses will be reflected in the inventory by reducing the amount
here by the taxpayer. For such losses or bad debts must be ascertained to be so and written off during the
of livestock or products on hand at the close of the year."
taxable year, are therefore deductible in full or not at all, in the absence of any express provision in the
Tax Code authorizing partial deductions.
Evidently, petitioner determined its income or losses in the operation of said farm on the basis
of inventories. We quote from the memorandum of counsel for petitioner:
The Tax Court held that the taxpayer's loss of its investment in its subsidiary could not be deducted for the
year 1951, as the subsidiary was still in operation in 1951 and 1952. The taxpayer, on the other hand,
claims that its advances were irretrievably lost because of the staggering losses suffered by its subsidiary "The Taxpayer deducted from its income tax returns for the years from 1950 to
in 1951 and that its advances after 1949 were "only limited to the purpose of salvaging whatever ore was 1954 inclusive, the corresponding yearly losses sustained in the operation of
already available, and for the purpose of paying the wages of the laborers who needed help." 7 The Hacienda Dalupiri, which losses represent the excess of its yearly expenditures over
correctness of the Tax Court's ruling in sustaining the disallowance of the write-off in 1951 of the the receipts; that is, the losses represent the difference between the sales of livestock
taxpayer's claimed losses is borne out by subsequent events shown in Cases L-24972 and L-24978 and the actual cash disbursements or expenses." (Pages 21-22, Memorandum for
involving the taxpayer's 1957 income tax liability. (Infra, paragraph 6.) It will there be seen that by 1956, Petitioner.)
the obligation of the taxpayer's subsidiary to it had been reduced from P587,398.97 in 1951 to
P442,885.23 in 1956, and that it was only on January 1, 1956 that the subsidiary decided to cease
As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses
operations. 8
in its operation, which losses were determined by means of inventories authorized under
Section 100 of Revenue Regulations No. 2, it was error for respondent to have disallowed the
(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). — The Court sustains the Tax deduction of said losses. The same is true with respect to loss sustained in the operation of the
Court's disallowance of the sums of P8,989.76 and P27,732.66 spent by the taxpayer for the operation of Hacienda Samal for the years 1951 and 1952. 10
its Balamban coal mines in Cebu in 1950 and 1951, respectively, and claimed as losses in the taxpayer's
returns for said years. The Tax Court correctly held that the losses "are deductible in 1952, when the mines
The Commissioner questions that the losses sustained by the taxpayer were properly based on the
were abandoned, and not in 1950 and 1951, when they were still in operation." 9 The taxpayer's claim that
inventory method of accounting. He concedes, however, "that the regulations referred to does not specify
these expeditions should be allowed as losses for the corresponding years that they were incurred, because
how the inventories are to be made. The Tax Court, however, felt satisfied with the evidence presented by
it made no sales of coal during said years, since the promised road or outlet through which the coal could
the taxpayer ... which merely consisted of an alleged physical count of the number of the livestock in
be transported from the mines to the provincial road was not constructed, cannot be sustained. Some
Hacienda Dalupiri for the years involved." 11 The Tax Court was satisfied with the method adopted by the
definite event must fix the time when the loss is sustained, and here it was the event of actual
taxpayer as a farmer breeding livestock, reporting on the basis of receipts and disbursements. We find no
abandonment of the mines in 1952. The Tax Court held that the losses, totalling P36,722.42 were properly
Compelling reason to disturb its findings.
deductible in 1952, but the appealed judgment does not show that the taxpayer was credited therefor in the
determination of its tax liability for said year. This additional deduction of P36,722.42 from the taxpayer's
taxable income in 1952 would result in the elimination of the deficiency tax liability for said year in the 2. Disallowance of excessive depreciation of buildings (1950-1954). — During the years 1950 to 1954, the
sum of P3,600.00 as determined by the Tax Court in the appealed judgment. taxpayer claimed a depreciation allowance for its buildings at the annual rate of 10%. The Commissioner
claimed that the reasonable depreciation rate is only 3% per annum, and, hence, disallowed as excessive
(d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952). the amount claimed as depreciation allowance in excess of 3% annually. We sustain the Tax Court's
finding that the taxpayer did not submit adequate proof of the correctness of the taxpayer's claim that the
— The Tax Court overruled the Commissioner's disallowance of these items of losses thus:
depreciable assets or buildings in question had a useful life only of 10 years so as to justify its 10%
depreciation per annum claim, such finding being supported by the record. The taxpayer's contention that
Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P17,418.95 in it has many zero or one-peso assets, 12 representing very old and fully depreciated assets serves but to
1950, P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953, and P42,938.56 in 1954. support the Commissioner's position that a 10% annual depreciation rate was excessive.
These deductions were disallowed by respondent on the ground that the farm was operated
solely for pleasure or as a hobby and not for profit. This conclusion is based on the fact that the
3. Taxable increase in net worth (1950-1951). — The Tax Court set aside the Commissioner's treatment as
farm was operated continuously at a loss.1awphîl.nèt
taxable income of certain increases in the taxpayer's net worth. It found that:

From the evidence, we are convinced that the Hacienda Dalupiri was operated by petitioner for
For the year 1950, respondent determined that petitioner had an increase in net worth in the
business and not pleasure. It was mainly a cattle farm, although a few race horses were also
sum of P30,050.00, and for the year 1951, the sum of P1,382.85. These amounts were treated
raised. It does not appear that the farm was used by petitioner for entertainment, social
by respondent as taxable income of petitioner for said years.
activities, or other non-business purposes. Therefore, it is entitled to deduct expenses and
losses in connection with the operation of said farm. (See 1955 PH Fed. Taxes, Par. 13, 63,
citing G.C.M. 21103, CB 1939-1, p.164) It appears that petitioner had an account with the Manila Insurance Company, the records
bearing on which were lost. When its records were reconstituted the amount of P349,800.00

108
 was set up as its liability to the Manila Insurance Company. It was discovered later that the
correct liability was only 319,750.00, or a difference of P30,050.00, so that the records were
adjusted so as to show the correct liability. The correction or adjustment was made in 1950.
Respondent contends that the reduction of petitioner's liability to Manila Insurance Company
resulted in the increase of petitioner's net worth to the extent of P30,050.00 which is taxable.
This is erroneous. The principle underlying the taxability of an increase in the net worth of a
taxpayer rests on the theory that such an increase in net worth, if unreported and not explained
by the taxpayer, comes from income derived from a taxable source. (See Perez v. Araneta,
G.R. No. L-9193, May 29, 1957; Coll. vs. Reyes, G.R. Nos. L- 11534 & L-11558, Nov. 25,
1958.) In this case, the increase in the net worth of petitioner for 1950 to the extent of
P30,050.00 was not the result of the receipt by it of taxable income. It was merely the outcome
of the correction of an error in the entry in its books relating to its indebtedness to the Manila
Insurance Company. The Income Tax Law imposes a tax on income; it does not tax any or
every increase in net worth whether or not derived from income. Surely, the said sum of
P30,050.00 was not income to petitioner, and it was error for respondent to assess a deficiency
income tax on said amount.
The same holds true in the case of the alleged increase in net worth of petitioner for the year 1951 in the
sum of P1,382.85. It appears that certain items (all amounting to P1,382.85) remained in petitioner's books
as outstanding liabilities of trade creditors. These accounts were discovered in 1951 as having been paid in
prior years, so that the necessary adjustments were made to correct the errors. If there was an increase in
net worth of the petitioner, the increase in net worth was not the result of receipt by petitioner of taxable
income." 13 The Commissioner advances no valid grounds in his brief for contesting the Tax Court's
findings. Certainly, these increases in the taxpayer's net worth were not taxable increases in net worth, as
they were not the result of the receipt by it of unreported or unexplained taxable income, but were shown
to be merely the result of the correction of errors in its entries in its books relating to its indebtednesses to
certain creditors, which had been erroneously overstated or listed as outstanding when they had in fact
been duly paid. The Tax Court's action must be affirmed.
4. Gain realized from sale of real property (1950). — We likewise sustain as being in accordance with the
evidence the Tax Court's reversal of the Commissioner's assessment on all alleged unreported gain in the
sum of P11,147.26 in the sale of a certain real property of the taxpayer in 1950. As found by the Tax
Court, the evidence shows that this property was acquired in 1926 for P11,852.74, and was sold in 1950
for P60,000.00, apparently, resulting in a gain of P48,147.26. 14 The taxpayer reported in its return a gain
of P37,000.00, or a discrepancy of P11,147.26. 15 It was sufficiently proved from the taxpayer's books that
after acquiring the property, the taxpayer had made improvements totalling P11,147.26, 16 accounting for
the apparent discrepancy in the reported gain. In other words, this figure added to the original acquisition
cost of P11,852.74 results in a total cost of P23,000.00, and the gain derived from the sale of the property
for P60,000.00 was correctly reported by the taxpayer at P37,000.00.
On the second issue of prescription, the taxpayer's contention that the Commissioner's action to recover its
tax liability should be deemed to have prescribed for failure on the part of the Commissioner to file a
complaint for collection against it in an appropriate civil action, as contradistinguished from the answer
filed by the Commissioner to its petition for review of the questioned assessments in the case a quo has
long been rejected by this Court. This Court has consistently held that "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." 17 This is but logical for where the taxpayer avails of the
right to appeal the tax assessment to the Court of Tax Appeals, the said Court is vested with the authority
to pronounce judgment as to the taxpayer's liability to the exclusion of any other court. In the present case,
regardless of whether the assessments were made on February 24 and 27, 1956, as claimed by the
Commissioner, or on December 27, 1955 as claimed by the taxpayer, the government's right to collect the
taxes due has clearly not prescribed, as the taxpayer's appeal or petition for review was filed with the Tax
Court on May 4, 1960, with the Commissioner filing on May 20, 1960 his Answer with a prayer for
payment of the taxes due, long before the expiration of the five-year period to effect collection by judicial
action counted from the date of assessment.
Cases L-24972 and L-24978
These cases refer to the taxpayer's income tax liability for the year 1957. Upon examination of its
corresponding income tax return, the Commissioner assessed it for deficiency income tax in the amount of
P38,918.76, computed as follows:
The Tax Court overruled the Commissioner's disallowance of the taxpayer's losses in the operation of its
Hacienda Dalupiri in the sum of P89,547.33 but sustained the disallowance of the sum of P48,481.62,
which allegedly represented 1/5 of the cost of the "contractual right" over the mines of its subsidiary,
Palawan Manganese Mines, Inc. which the taxpayer had acquired. It found the taxpayer liable for
deficiency income tax for the year 1957 in the amount of P9,696.00, instead of P32,982.00 as originally
assessed, and rendered the following judgment:
WHEREFORE, the assessment appealed from is hereby modified. Petitioner is hereby ordered
to pay to respondent the amount of P9,696.00 as deficiency income tax for the year 1957, plus
the corresponding interest provided in Section 51 of the Revenue Code. If the deficiency tax is
not paid in full within thirty (30) days from the date this decision becomes final and executory,
petitioner shall pay a surcharge of five per cent (5%) of the unpaid amount, plus interest at the
rate of one per cent (1%) a month, computed from the date this decision becomes final until
paid, provided that the maximum amount that may be collected as interest shall not exceed the
amount corresponding to a period of three (3) years. Without pronouncement as to costs. 19
Both parties again appealed from the respective adverse rulings against them in the Tax Court's decision.
5. Allowance of losses in Hacienda Dalupiri (1957). — The Tax Court cited its previous decision
overruling the Commissioner's disallowance of losses suffered by the taxpayer in the operation of its
Hacienda Dalupiri, since it was convinced that the hacienda was operated for business and not for
pleasure. And in this appeal, the Commissioner cites his arguments in his appellant's brief in Case No. L-
21557. The Tax Court, in setting aside the Commissioner's principal objections, which were directed to the
accounting method used by the taxpayer found that:
It is true that petitioner followed the cash basis method of reporting income and expenses in the
operation of the Hacienda Dalupiri and used the accrual method with respect to its mine
operations. This method of accounting, otherwise known as the hybrid method, followed by
petitioner is not without justification.
... A taxpayer may not, ordinarily, combine the cash and accrual bases. The 1954
Code provisions permit, however, the use of a hybrid method of accounting,
combining a cash and accrual method, under circumstances and requirements to be
set out in Regulations to be issued. Also, if a taxpayer is engaged in more than one
trade or business he may use a different method of accounting for each trade or
business. And a taxpayer may report income from a business on accrual basis and
his personal income on the cash basis.' (See Mertens, Law of Federal Income
Taxation, Zimet & Stanley Revision, Vol. 2, Sec. 12.08, p. 26.) 20
The Tax Court, having satisfied itself with the adequacy of the taxpayer's accounting method
and procedure as properly reflecting the taxpayer's income or losses, and the Commissioner
having failed to show the contrary, we reiterate our ruling [supra, paragraph 1 (d) and (e)] that
we find no compelling reason to disturb its findings.
109
6. Disallowance of amortization of alleged "contractual rights." — The reasons for sustaining this
disallowance are thus given by the Tax Court:
It appears that the Palawan Manganese Mines, Inc., during a special meeting of its Board of
Directors on January 19, 1956, approved a resolution, the pertinent portions of which read as
follows:
"RESOLVED, as it is hereby resolved, that the corporation's current assets
composed of ores, fuel, and oil, materials and supplies, spare parts and canteen
supplies appearing in the inventory and balance sheet of the Corporation as of
December 31, 1955, with an aggregate value of P97,636.98, contractual rights for
the operation of various mining claims in Palawan with a value of P100,000.00, its
title on various mining claims in Palawan with a value of P142,408.10 or a total
value of P340,045.02 be, as they are hereby ceded and transferred to Fernandez
Hermanos, Inc., as partial settlement of the indebtedness of the corporation to said
Fernandez Hermanos Inc. in the amount of P442,895.23." (Exh. E, p. 17, CTA rec.)
On March 29, 1956, petitioner's corporation accepted the above offer of transfer, thus:
"WHEREAS, the Palawan Manganese Mines, Inc., due to its yearly substantial
losses has decided to cease operation on January 1, 1956 and in order to satisfy at
least a part of its indebtedness to the Corporation, it has proposed to transfer its
current assets in the amount of NINETY SEVEN THOUSAND SIX HUNDRED
THIRTY SIX PESOS & 98/100 (P97,636.98) as per its balance sheet as of
December 31, 1955, its contractual rights valued at ONE HUNDRED THOUSAND
PESOS (P100,000.00) and its title over various mining claims valued at ONE
HUNDRED FORTY TWO THOUSAND FOUR HUNDRED EIGHT PESOS &
10/100 (P142,408.10) or a total evaluation of THREE HUNDRED FORTY
THOUSAND FORTY FIVE PESOS & 08/100 (P340,045.08) which shall be
applied in partial settlement of its obligation to the Corporation in the amount of
FOUR HUNDRED FORTY TWO THOUSAND EIGHT HUNDRED EIGHTY
FIVE PESOS & 23/100 (P442,885.23)," (Exh. E-1, p. 18, CTA rec.)
Petitioner determined the cost of the mines at P242,408.10 by adding the value of the
contractual rights (P100,000.00) and the value of its mining claims (P142,408.10). Respondent
disallowed the deduction on the following grounds: (1) that the Palawan Manganese Mines,
Inc. could not transfer P242,408.10 worth of assets to petitioner because the balance sheet of
the said corporation for 1955 shows that it had only current as worth P97,636.96; and (2) that
the alleged amortization of "contractual rights" is not allowed by the Revenue Code.
The law in point is Section 30(g) (1) (B) of the Revenue Code, before its amendment by
Republic Act No. 2698, which provided in part:
"(g) Depletion of oil and gas wells and mines.:
"(1) In general. — ... (B) in the case of mines, a reasonable allowance for depletion
thereof not to exceed the market value in the mine of the product thereof, which has
been mined and sold during the year for which the return and computation are
made. The allowances shall be made under rules and regulations to be prescribed by
the Secretary of Finance: Provided, That when the allowances shall equal the
capital invested, ... no further allowance shall be made."
Assuming, arguendo, that the Palawan Manganese Mines, Inc. had assets worth P242,408.10
which it actually transferred to the petitioner in 1956, the latter cannot just deduct one-fifth
(1/5) of said amount from its gross income for the year 1957 because such deduction in the
form of depletion charge was not sanctioned by Section 30(g) (1) (B) of the Revenue Code, as
above-quoted.
xxx xxx xxx
The sole basis of petitioner in claiming the amount of P48,481.62 as a deduction was the
memorandum of its mining engineer (Exh. 1, pp. 31-32, CTA rec.), who stated that the ore
reserves of the Busuange Mines (Mines transferred by the Palawan Manganese Mines, Inc. to
the petitioner) would be exhausted in five (5) years, hence, the claim for P48,481.62 or one-
fifth (1/5) of the alleged cost of the mines corresponding to the year 1957 and every year
thereafter for a period of 5 years. The said memorandum merely showed the estimated ore
reserves of the mines and it probable selling price. No evidence whatsoever was presented to
show the produced mine and for how much they were sold during the year for which the return
and computation were made. This is necessary in order to determine the amount of depletion
that can be legally deducted from petitioner's gross income. The method employed by
petitioner in making an outright deduction of 1/5 of the cost of the mines is not authorized
under Section 30(g) (1) (B) of the Revenue Code. Respondent's disallowance of the alleged
"contractual rights" amounting to P48,481.62 must therefore be sustained. 21
The taxpayer insists in this appeal that it could use as a method for depletion under the pertinent provision
of the Tax Code its "capital investment," representing the alleged value of its contractual rights and titles
to mining claims in the sum of P242,408.10 and thus deduct outright one-fifth (1/5) of this "capital
investment" every year. regardless of whether it had actually mined the product and sold the products. The
very authorities cited in its brief give the correct concept of depletion charges that they "allow for the
exhaustion of the capital value of the deposits by production"; thus, "as the cost of the raw materials must
be deducted from the gross income before the net income can be determined, so the estimated cost of the
reserve used up is allowed." 22 The alleged "capital investment" method invoked by the taxpayer is not a
method of depletion, but the Tax Code provision, prior to its amendment by Section 1, of Republic Act
No. 2698, which took effect on June 18, 1960, expressly provided that "when the allowances shall equal
the capital invested ... no further allowances shall be made;" in other words, the "capital investment" was
but the limitation of the amount of depletion that could be claimed. The outright deduction by the taxpayer
of 1/5 of the cost of the mines, as if it were a "straight line" rate of depreciation, was correctly held by the
Tax Court not to be authorized by the Tax Code.
ACCORDINGLY, the judgment of the Court of Tax Appeals, subject of the appeals in Cases Nos. L-
21551 and L-21557, as modified by the crediting of the losses of P36,722.42 disallowed in 1951 and 1952
to the taxpayer for the year 1953 as directed in paragraph 1 (c) of this decision, is hereby affirmed. The
judgment of the Court of Tax Appeals appealed from in Cases Nos. L-24972 and L-24978 is affirmed in
toto. No costs. So ordered.
16. G.R. No. L-26284 October 8, 1986 TOMAS CALASANZ, ET AL. vs. THE COMMISSIONER
OF INTERNAL REVENUE and the COURT OF TAX APPEALS
Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of Tax Appeals in
CTA No. 1275 dated June 7, 1966, holding them liable for the payment of P3,561.24 as deficiency income
tax and interest for the calendar year 1957 and P150.00 as real estate dealer's fixed tax.
Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in
Cainta, Rizal, containing a total area of 1,678,000 square meters. In order to liquidate her inheritance,
Ursula Calasanz had the land surveyed and subdivided into lots. Improvements, such as good roads,
110
concrete gutters, drainage and lighting system, were introduced to make the lots saleable. Soon after, the
lots were sold to the public at a profit.
In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March 31,
1958, petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and
reported fifty per centum thereof or P15,530.03 as taxable capital gains.
Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged in
business as real estate dealers, as defined in Section 194 [s] 1 of the National Internal Revenue Code,
required them to pay the real estate dealer's tax 2 and assessed a deficiency income tax on profits derived
from the sale of the lots based on the rates for ordinary income.
On September 29, 1962, petitioners received from respondent Commissioner of Internal Revenue:
a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate
dealer's fixed tax of P150.00 and P10.00 compromise penalty for late payment; and
b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income tax
on ordinary gain of P3,018.00 plus interest of P 543.24.
On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for review contesting the
aforementioned assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that portion of the
assessment regarding the compromise penalty of P10.00 for the reason that in this jurisdiction, the same
cannot be collected in the absence of a valid and binding compromise agreement.
Hence, the present appeal.
The issues for consideration are:
a. Whether or not petitioners are real estate dealers liable for real estate dealer's
fixed tax; and
b. Whether the gains realized from the sale of the lots are taxable in full as ordinary
income or capital gains taxable at capital gain rates.
The issues are closely interrelated and will be taken jointly.
Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits from the sale of the
lots under Section 34 [b] [2] 3 of the Tax Code.
The theory advanced by the petitioners is that inherited land is a capital asset within the meaning of
Section 34[a] [1] of the Tax Code and that an heir who liquidated his inheritance cannot be said to have
engaged in the real estate business and may not be denied the preferential tax treatment given to gains
from sale of capital assets, merely because he disposed of it in the only possible and advantageous way.
Petitioners averred that the tract of land subject of the controversy was sold because of their intention to
effect a liquidation. They claimed that it was parcelled out into smaller lots because its size proved
difficult, if not impossible, of disposition in one single transaction. They pointed out that once subdivided,
certainly, the lots cannot be sold in one isolated transaction. Petitioners, however, admitted that roads and
other improvements were introduced to facilitate its sale. 4
On the other hand, respondent Commissioner maintained that the imposition of the taxes in question is in
accordance with law since petitioners are deemed to be in the real estate business for having been involved
in a series of real estate transactions pursued for profit. Respondent argued that property acquired by
inheritance may be converted from an investment property to a business property if, as in the present case,
it was subdivided, improved, and subsequently sold and the number, continuity and frequency of the sales
were such as to constitute "doing business." Respondent likewise contended that inherited property is by
itself neutral and the fact that the ultimate purpose is to liquidate is of no moment for the important inquiry
is what the taxpayer did with the property. Respondent concluded that since the lots are ordinary assets,
the profits realized therefrom are ordinary gains, hence taxable in full.
We agree with the respondent.
The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets.
Section 34[a] [1] of the National Internal Revenue Code broadly defines capital assets as follows:
[1] Capital assets.-The term 'capital assets' means property held by the taxpayer
[whether or not connected with his trade or business], but does not include, stock in
trade of the taxpayer or other property of a kind which would properly be included,
in the inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business, or property used in the trade or business of a character
which is subject to the allowance for depreciation provided in subsection [f] of
section thirty; or real property used in the trade or business of the taxpayer.
The statutory definition of capital assets is negative in nature. 5 If the asset is not among the exceptions, it
is a capital asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, any
gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the
kind of asset involved in the transaction.
However, there is no rigid rule or fixed formula by which it can be determined with finality whether
property sold by a taxpayer was held primarily for sale to customers in the ordinary course of his trade or
business or whether it was sold as a capital asset. 6 Although several factors or indices 7 have been
recognized as helpful guides in making a determination, none of these is decisive; neither is the presence
nor the absence of these factors conclusive. Each case must in the last analysis rest upon its own peculiar
facts and circumstances. 8
Also a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a
combination of the factors indubitably tend to show that the activity was in furtherance of or in the course
of the taxpayer's trade or business. Thus, a sale of inherited real property usually gives capital gain or loss
even though the property has to be subdivided or improved or both to make it salable. However, if the
inherited property is substantially improved or very actively sold or both it may be treated as held
primarily for sale to customers in the ordinary course of the heir's business. 9
Upon an examination of the facts on record, We are convinced that the activities of petitioners are
indistinguishable from those invariably employed by one engaged in the business of selling real estate.
One strong factor against petitioners' contention is the business element of development which is very
much in evidence. Petitioners did not sell the land in the condition in which they acquired it. While the
111
land was originally devoted to rice and fruit trees, 10 it was subdivided into small lots and in the process
converted into a residential subdivision and given the name Don Mariano Subdivision. Extensive
improvements like the laying out of streets, construction of concrete gutters and installation of lighting
system and drainage facilities, among others, were undertaken to enhance the value of the lots and make
them more attractive to prospective buyers. The audited financial statements 11 submitted together with the
tax return in question disclosed that a considerable amount was expended to cover the cost of
improvements. As a matter of fact, the estimated improvements of the lots sold reached P170,028.60
whereas the cost of the land is only P 4,742.66. There is authority that a property ceases to be a capital
asset if the amount expended to improve it is double its original cost, for the extensive improvement
indicates that the seller held the property primarily for sale to customers in the ordinary course of his
business. 12
Another distinctive feature of the real estate business discernible from the records is the existence of
contracts receivables, which stood at P395,693.35 as of the year ended December 31, 1957. The sizable
amount of receivables in comparison with the sales volume of P446,407.00 during the same period
signifies that the lots were sold on installment basis and suggests the number, continuity and frequency of
the sales. Also of significance is the circumstance that the lots were advertised 13 for sale to the public and
that sales and collection commissions were paid out during the period in question.
Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation.
In Ehrman vs. Commissioner,14 the American court in clear and categorical terms rejected the liquidation
test in determining whether or not a taxpayer is carrying on a trade or business The court observed that the
fact that property is sold for purposes of liquidation does not foreclose a determination that a "trade or
business" is being conducted by the seller. The court enunciated further:
We fail to see that the reasons behind a person's entering into a business-whether it
is to make money or whether it is to liquidate-should be determinative of the
question of whether or not the gains resulting from the sales are ordinary gains or
capital gains. The sole question is-were the taxpayers in the business of subdividing
real estate? If they were, then it seems indisputable that the property sold falls
within the exception in the definition of capital assets . . . that is, that it constituted
'property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business.
Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated on the matter in this wise:
One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The
sale may be conducted in the most advantageous manner to the seller and he will
not lose the benefits of the capital gain provision of the statute unless he enters the
real estate business and carries on the sale in the manner in which such a business is
ordinarily conducted. In that event, the liquidation constitutes a business and a sale
in the ordinary course of such a business and the preferred tax status is lost.
In view of the foregoing, We hold that in the course of selling the subdivided lots, petitioners engaged in
the real estate business and accordingly, the gains from the sale of the lots are ordinary income taxable in
full. WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.
17. G.R. No. 125508 July 19, 2000 CHINA BANKING CORPORATION vs. COURT OF APPEALS,
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS
The Commissioner of Internal Revenue denied the deduction from gross income of "securities becoming
worthless" claimed by China Banking Corporation ("CBC"). The Commissioner’s disallowance was
sustained by the Court of Tax Appeals ("CTA"). When the ruling was appealed to the Court of Appeals
("CA"), the appellate court upheld the CTA. The case is now before us on a Petition for Review
on Certiorari.
Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the First CBC
Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with "deposit-taking"
function. The investment amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of
P100 per share.
In the course of the regular examination of the financial books and investment portfolios of petitioner
conducted by Bangko Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd., has become
insolvent. With the approval of Bangko Sentral, petitioner wrote-off as being worthless its investment in
First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary
loss deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and assessed petitioner for
income tax deficiency in the amount of P8,533,328.04, inclusive of surcharge, interest and compromise
penalty. The disallowance of the deduction was made on the ground that the investment should not be
classified as being "worthless" and that, although the Hongkong Banking Commissioner had revoked the
license of First CBC Capital as a "deposit-taping" company, the latter could still exercise, however, its
financing and investment activities. Assuming that the securities had indeed become worthless, respondent
Commissioner of Internal Revenue held the view that they should then be classified as "capital loss," and
not as a bad debt expense there being no indebtedness to speak of between petitioner and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court sustained the
Commissioner, holding that the securities had not indeed become worthless and ordered petitioner to pay
its deficiency income tax for 1987 of P8,533,328.04 plus 20% interest per annum until fully paid. When
the decision was appealed to the Court of Appeals, the latter upheld the CTA. In its instant petition for
review on certiorari, petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have become worthless is based on a Profit and
Loss Account for the Year-End 31 December 1987, and the recommendation of Bangko Sentral that the
equity investment be written-off due to the insolvency of the subsidiary. While the matter may not be
indubitable (considering that certain classes of intangibles, like franchises and goodwill, are not always
given corresponding values in financial statements1 , there may really be no need, however, to go of length
into this issue since, even to assume the worthlessness of the shares, the deductibility thereof would still
be nil in this particular case. At all events, the Court is not prepared to hold that both the tax court and the
appellate court are utterly devoid of substantial basis for their own factual findings.
Subject to certain exceptions, such as the compensation income of individuals and passive income subject
to final tax, as well as income of non-resident aliens and foreign corporations not engaged in trade or
business in the Philippines, the tax on income is imposed on the net income allowing certain specified
deductions from gross income to be claimed by the taxpayer. Among the deductible items allowed by the
National Internal Revenue Code ("NIRC") are bad debts and losses.2
An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results
in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or
exchanged is not a capital asset.3 A capital asset is defined negatively in Section 33(1) of the NIRC; viz:
112
(1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not "Section 33. Capital gains and losses. -
connected with his trade or business), but does not include stock in trade of the taxpayer or other property
of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the
"x x x xxx xxx
taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business, or property used in the trade or business, of a character which is subject to the allowance
for depreciation provided in subsection (f) of section twenty-nine; or real property used in the trade or "(c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall be allowed only
business of the taxpayer." to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under
the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including
Thus, shares of stock; like the other securities defined in Section 20(t) 4 of the NIRC, would be ordinary
one issued by a government or political subdivision thereof), with interest coupons or in registered
assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active
form, any loss resulting from such sale shall not be subject to the foregoing limitation an shall not be
trader (for his own account) in, securities. Section 20(u) of the NIRC defines a dealer in securities thus:
included in determining the applicability of such limitation to other losses."

"(u) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual,
partnership or corporation, with an established place of business, regularly engaged in the purchase of
securities and their resale to customers; that is, one who as a merchant buys securities and sells them to
customers with a view to the gains and profits that may be derived therefrom."
In the hands, however, of another who holds the shares of stock by way of an investment, the shares to
him would be capital assets. When the shares held by such investor become worthless, the loss is
deemed to be a loss from the sale or exchange of capital assets. Section 29(d)(4)(B) of the NIRC states:
"(B) Securities becoming worthless. - If securities as defined in Section 20 become worthless during the
tax" year and are capital assets, the loss resulting therefrom shall, for the purposes of his Title, be
considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets."
The exclusionary clause found in the foregoing text of the law does not include all forms of securities but
specifically covers only bonds, debentures, notes, certificates or other evidence of indebtedness, with
interest coupons or in registered form, which are the instruments of credit normally dealt with in the
usual lending operations of a financial institution. Equity holdings cannot come close to being, within the
purview of "evidence of indebtedness" under the second sentence of the aforequoted paragraph. Verily, it
is for a like thesis that the loss of petitioner bank in its equity in vestment in the Hongkong
subsidiary cannot also be deductible as a bad debt. The shares of stock in question do not constitute a loan
extended by it to its subsidiary (First CBC Capital) or a debt subject to obligatory repayment by the latter,
essential elements to constitute a bad debt, but a long term investment made by CBC.
One other item. Section 34(c)(1) of the NIRC , states that the entire amount of the gain or loss upon the
sale or exchange of property, as the case may be, shall be recognized. The complete text reads:

The above provision conveys that the loss sustained by the holder of the securities, which are capital assets "SECTION 34. Determination of amount of and recognition of gain or loss.-
(to him), is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital
gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There is a
"(a) Computation of gain or loss. - The gain from the sale or other disposition of property shall
sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless,
be the excess of the amount realized therefrom over the basis or adjusted basis for determining
there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale or
gain and the loss shall be the excess of the basis or adjusted basis for determining loss over the
exchange of capital assets."5 A similar kind of treatment is given, by the NIRC on the retirement of
amount realized. The amount realized from the sale or other disposition of property shall be to
certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or
sum of money received plus the fair market value of the property (other than money) received.
sell property where no sale or exchange strictly exists. 6 In these cases, the NIRC dispenses, in effect, with
(As amended by E.O. No. 37)
the standard requirement of a sale or exchange for the application of the capital gain and loss provisions of
the code.
"(b) Basis for determining gain or loss from sale or disposition of property. - The basis of
property shall be - (1) The cost thereof in cases of property acquired on or before March 1,
Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from
1913, if such property was acquired by purchase; or
the sale or exchange of capital assets, and not from any other income of the taxpayer.

In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary corporation of
petitioner bank whose shares in said investee corporation are not intended for purchase or sale but as an
investment. Unquestionably then, any loss therefrom would be a capital loss, not an ordinary loss, to the
investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed only to the extent
provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid Section 29(d)(4)(A), read:
"(2) The fair market price or value as of the date of acquisition if the same was
acquired by inheritance; or
"(3) If the property was acquired by gift the basis shall be the same as if it would be
in the hands of the donor or the last preceding owner by whom it was not acquired
by gift, except that if such basis is greater than the fair market value of the property
at the time of the gift, then for the purpose of determining loss the basis shall be
such fair market value; or
"(4) If the property, other than capital asset referred to in Section 21 (e), was
acquired for less than an adequate consideration in money or moneys worth, the
basis of such property is (i) the amount paid by the transferee for the property or (ii)
the transferor's adjusted basis at the time of the transfer whichever is greater.

113
 "(5) The basis as defined in paragraph (c) (5) of this section if the property was 18. G.R. No. 162175 June 28, 2010 MIGUEL J. OSSORIO PENSION FOUNDATION,
acquired in a transaction where gain or loss is not recognized under paragraph (c) INCORPORATED vs. COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE
(2) of this section. (As amended by E.O. No. 37)
The Case
"(c) Exchange of property.
The Miguel J. Ossorio Pension Foundation, Incorporated (petitioner or MJOPFI) filed this Petition for
"(1) General rule.- Except as herein provided, upon the sale or exchange of Certiorari1 with Prayer for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary
property, the entire amount of the gain or loss, as the case may be, shall be Injunction to reverse the Court of Appeals’ (CA) Decision2 dated 30 May 2003 in CA-G.R. SP No. 61829
recognized. as well as the Resolution3 dated 7 November 2003 denying the Motion for Reconsideration. In the assailed
decision, the CA affirmed the Court of Tax Appeals’ (CTA) Decision4 dated 24 October 2000. The CTA
denied petitioner’s claim for refund of withheld creditable tax of ₱3,037,500 arising from the sale of real
"(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of
property of which petitioner claims to be a co-owner as trustee of the employees’ trust or retirement funds.
merger or consolidation (a) a corporation which is a party to a merger or
consolidation exchanges property solely for stock in a corporation which is, a party
to the merger or consolidation, (b) a shareholder exchanges stock in a corporation The Facts
which is a party to the merger or consolidation solely for the stock in another
corporation also a party to the merger or consolidation, or (c) a security holder of a
Petitioner, a non-stock and non-profit corporation, was organized for the purpose of holding title to and
corporation which is a party to the merger or consolidation exchanges his securities
administering the employees’ trust or retirement funds (Employees’ Trust Fund) established for the benefit
in such corporation solely for stock or securities in another corporation, a party to
of the employees of Victorias Milling Company, Inc. (VMC).5 Petitioner, as trustee, claims that the
the merger or consolidation.
income earned by the Employees’ Trust Fund is tax exempt under Section 53(b) of the National Internal
Revenue Code (Tax Code).
"No gain or loss shall also be recognized if property is transferred to a corporation by a person in
exchange for stock in such corporation of which as a result of such exchange said person, alone or
Petitioner alleges that on 25 March 1992, petitioner decided to invest part of the Employees’ Trust Fund to
together with others, not exceeding four persons, gains control of said corporation: Provided, That stocks
purchase a lot6 in the Madrigal Business Park (MBP lot) in Alabang, Muntinlupa. Petitioner bought the
issued for services shall not be considered as issued in return of property."
MBP lot through VMC.7Petitioner alleges that its investment in the MBP lot came about upon the
invitation of VMC, which also purchased two lots. Petitioner claims that its share in the MBP lot is
The above law should be taken within context on the general subject of the determination, and recognition 49.59%. Petitioner’s investment manager, the Citytrust Banking Corporation (Citytrust), 8 in submitting its
of gain or loss; it is not preclusive of, let alone renders completely inconsequential, the more specific Portfolio Mix Analysis, regularly reported the Employees’ Trust Fund’s share in the MBP lot.9 The MBP
provisions of the code. Thus, pursuant, to the same section of the law, no such recognition shall be made if lot is covered by Transfer Certificate of Title No. 183907 (TCT 183907) with VMC as the registered
the sale or exchange is made in pursuance of a plan of corporate merger or consolidation or, if as a result owner.10
of an exchange of property for stocks, the exchanger, alone or together with others not exceeding four,
gains control of the corporation.7 Then, too, how the resulting gain might be taxed, or whether or not the
Petitioner claims that since it needed funds to pay the retirement and pension benefits of VMC employees
loss would be deductible and how, are matters properly dealt with elsewhere in various other sections of
and to reimburse advances made by VMC, petitioner’s Board of Trustees authorized the sale of its share in
the NIRC.8 At all events, it may not be amiss to once again stress that the basic rule is still that any capital
the MBP lot.11
loss can be deducted only from capital gains under Section 33(c) of the NIRC.

On 14 March 1997, VMC negotiated the sale of the MBP lot with Metropolitan Bank and Trust Company,
In sum -
Inc. (Metrobank) for ₱81,675,000, but the consummation of the sale was withheld.12 On 26 March 1997,
VMC eventually sold the MBP lot to Metrobank. VMC, through its Vice President Rolando Rodriguez
(a) The equity investment in shares of stock held by CBC of approximately 53% in its and Assistant Vice President Teodorico Escober, signed the Deed of Absolute Sale as the sole vendor.
Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is
a capital, not an ordinary, asset.9 1âwphi1
Metrobank, as withholding agent, paid the Bureau of Internal Revenue (BIR) ₱6,125,625 as withholding
tax on the sale of real property.
(b) Assuming that the equity investment of CBC has indeed become "worthless," the
loss sustained is a capital, not an ordinary, loss.10
Petitioner alleges that the parties who co-owned the MBP lot executed a notarized Memorandum of
Agreement as to the proceeds of the sale, the pertinent provisions of which state: 13
(c) The capital loss sustained by CBC can only be deducted from capital gains if any derived
by it during the same taxable year that the securities have become "worthless." 11
2. The said parcels of land are actually co-owned by the following:

WHEREFORE, the Petition is DENIED. The decision of the Court of Appeals disallowing the claimed
Block 4, Lot 1 Covered by TCT No. 183907
deduction of P16,227,851.80 is AFFIRMED.

3. Since Lot 1 has been sold for ₱81,675,000.00 (gross of 7.5% withholding tax and 3% broker’s
commission, MJOPFI’s share in the proceeds of the sale is ₱40,500,000.00 (gross of 7.5% withholding tax
114
and 3% broker’s commission. However, MJO Pension Fund is indebted to VMC representing pension
benefit advances paid to retirees amounting to ₱21,425,141.54, thereby leaving a balance of
₱14,822,358.46 in favor of MJOPFI. Check for said amount of ₱14,822,358.46 will therefore be issued to
MJOPFI as its share in the proceeds of the sale of Lot 1. The check corresponding to said amount will be
deposited with MJOPFI’s account with BPI Asset Management & Trust Group which will then be
invested by it in the usual course of its administration of MJOPFI funds.
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 asserts that
VMC has confirmed that petitioner, as trustee of the Employees’ Trust Fund, is VMC’s co-owner of the
MBP lot. Petitioner maintains that its ownership of the MBP lot is supported by the excerpts of the
minutes and the resolutions of petitioner’s Board Meetings. 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 ₱3,037,697.40 rounded off to ₱3,037,500) should be
refunded.14
Petitioner maintains that the tax exemption of the Employees’ Trust Fund rendered the payment of
₱3,037,500 as illegal or erroneous. On 5 May 1997, petitioner filed a claim for tax refund.15
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.
The BIR asked petitioner to submit documents to prove its co-ownership of the MBP lot and its exemption
from tax.16
On 2 September 1997, petitioner replied that the applicable provision granting its claim for tax exemption
is not Section 26 but Section 53(b) of the Tax Code. Petitioner claims that its co-ownership of the MBP lot
is evidenced by Board Resolution Nos. 92-34 and 96-46 and the memoranda of agreement among
petitioner, VMC and its subsidiaries.17
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.18
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.19
Aggrieved by the appellate court’s Decision, petitioner elevated the case before this Court.
The Ruling of the Court of Tax Appeals
The CTA held that under Section 53(b) 20 [now Section 60(b)] of the Tax Code, it is not petitioner that is
entitled to exemption from income tax but the income or earnings of the Employees’ Trust Fund. The
CTA stated that petitioner is not the pension trust itself but it is a separate and distinct entity whose
function is to administer the pension plan for some VMC employees. 21 The CTA, after evaluating the
evidence adduced by the parties, ruled that petitioner is not a party in interest.
To prove its co-ownership over the MBP lot, petitioner presented the following documents:
a. Secretary’s Certificate showing how the purchase and eventual sale of the MBP lot came
about.
b. Memoranda of Agreement showing various details:
i. That the MBP lot was co-owned by VMC and petitioner on a 50/50 basis;
ii. That VMC held the property in trust for North Legaspi Land Development
Corporation, North Negros Marketing Co., Inc., Victorias Insurance Factors
Corporation, Victorias Science and Technical Foundation, Inc. and Canetown
Development Corporation.
iii. That the previous agreement (ii) was cancelled and it showed that the MBP lot
was co-owned by petitioner, VMC and Victorias Insurance Factors Corporation
(VFC).22
The CTA ruled that these pieces of evidence are self-serving and cannot by themselves prove petitioner’s
co-ownership of the MBP lot when the TCT, the Deed of Absolute Sale, and the Monthly Remittance
Return of Income Taxes Withheld (Remittance Return) disclose otherwise. The CTA further ruled that
petitioner failed to present any evidence to prove that the money used to purchase the MBP lot came from
the Employees' Trust Fund.23
The CTA concluded that petitioner is estopped from claiming a tax exemption. The CTA pointed out that
VMC has led the government to believe that it is the sole owner of the MBP lot through its execution of
the Deeds of Absolute Sale both during the purchase and subsequent sale of the MBP lot and through the
registration of the MBP lot in VMC’s name. Consequently, the tax was also paid in VMC’s name alone.
The CTA stated that petitioner may not now claim a refund of a portion of the tax paid by the mere
expediency of presenting Secretary’s Certificates and memoranda of agreement in order to prove its
ownership. These documents are self-serving; hence, these documents merit very little weight.24
The Ruling of the Court of Appeals
The CA declared that the findings of the CTA involved three types of documentary evidence that
petitioner presented to prove its contention that it purchased 49.59% of the MBP lot with funds from the
Employees’ Trust Fund: (1) the memoranda of agreement executed by petitioner and other VMC
subsidiaries; (2) Secretary’s Certificates containing excerpts of the minutes of meetings conducted by the
respective boards of directors or trustees of VMC and petitioner; (3) Certified True Copies of the Portfolio
Mix Analysis issued by Citytrust regarding the investment of ₱5,504,748.25 in Madrigal Business Park I
for the years 1994 to 1997.25
The CA agreed with the CTA that these pieces of documentary evidence submitted by petitioner are
largely self-serving and can be contrived easily. The CA ruled that these documents failed to show that the
funds used to purchase the MBP lot came from the Employees’ Trust Fund. The CA explained, thus:
We are constrained to echo the findings of the Court of Tax Appeals in regard to the failure of the
petitioner to ensure that legal documents pertaining to its investments, e.g. title to the subject property,
were really in its name, considering its awareness of the resulting tax benefit that such foresight or
providence would produce; hence, genuine efforts towards that end should have been exerted, this
notwithstanding the alleged difficulty of procuring a title under the names of all the co-owners. Indeed, we
are unable to understand why petitioner would allow the title of the property to be placed solely in the
name of petitioner's alleged co-owner, i.e. the VMC, although it allegedly owned a much bigger (nearly
half), portion thereof. Withal, petitioner failed to ensure a "fix" so to speak, on its investment, and we are
115
not impressed by the documents which the petitioner presented, as the same apparently allowed "mobility"
of the subject real estate assets between or among the petitioner, the VMC and the latter's subsidiaries.
Given the fact that the subject parcel of land was registered and sold under the name solely of VMC, even
as payment of taxes was also made only under its name, we cannot but concur with the finding of the
Court of Tax Appeals that petitioner's claim for refund of withheld creditable tax is bereft of solid juridical
basis.26
The Issues
The issues presented are:
1. Whether petitioner or the Employees’ Trust Fund is estopped from claiming that the
Employees’ Trust Fund is the beneficial owner of 49.59% of the MBP lot and that VMC
merely held 49.59% of the MBP lot in trust for the Employees’ Trust Fund.
2. If petitioner or the Employees’ Trust Fund is not estopped, whether they have sufficiently
established that the Employees’ Trust Fund is the beneficial owner of 49.59% of the MBP lot,
and thus entitled to tax exemption for its share in the proceeds from the sale of the MBP lot.
The Ruling of the Court
We grant the petition.
The law expressly allows a co-owner (first co-owner) of a parcel of land to register his proportionate share
in the name of his co-owner (second co-owner) in whose name the entire land is registered. The second
co-owner serves as a legal trustee of the first co-owner insofar as the proportionate share of the first co-
owner is concerned. The first co-owner remains the owner of his proportionate share and not the second
co-owner in whose name the entire land is registered. Article 1452 of the Civil Code provides:
Art. 1452. If two or more persons agree to purchase a property and by common consent the legal title is
taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the
others in proportion to the interest of each. (Emphasis supplied)
For Article 1452 to apply, all that a co-owner needs to show is that there is "common consent" among the
purchasing co-owners to put the legal title to the purchased property in the name of one co-owner for the
benefit of all. Once this "common consent" is shown, "a trust is created by force of law." The BIR has no
option but to recognize such legal trust as well as the beneficial ownership of the real owners because the
trust is created by force of law. The fact that the title is registered solely in the name of one person is not
conclusive that he alone owns the property.
Thus, this case turns on whether petitioner can sufficiently establish that petitioner, as trustee of the
Employees’ Trust Fund, has a common agreement with VMC and VFC that petitioner, VMC and VFC
shall jointly purchase the MBP lot and put the title to the MBP lot in the name of VMC for the benefit
petitioner, VMC and VFC.
We rule that petitioner, as trustee of the Employees’ Trust Fund, has more than sufficiently established
that it has an agreement with VMC and VFC to purchase jointly the MBP lot and to register the MBP lot
solely in the name of VMC for the benefit of petitioner, VMC and VFC.
Factual findings of the CTA will be reviewed
when judgment is based on a misapprehension of facts.
Generally, the factual findings of the CTA, a special court exercising expertise on the subject of tax, are
regarded as final, binding and conclusive upon this Court, especially if these are substantially similar to
the findings of the CA which is normally the final arbiter of questions of fact. 27 However, there are
recognized exceptions to this rule,28 such as when the judgment is based on a misapprehension of facts.
Petitioner contends that the CA erred in evaluating the documents as self-serving instead of considering
them as truthful and genuine because they are public documents duly notarized by a Notary Public and
presumed to be regular unless the contrary appears. Petitioner explains that the CA erred in doubting the
authenticity and genuineness of the three memoranda of agreement presented as evidence. Petitioner
submits that there is nothing wrong in the execution of the three memoranda of agreement by the parties.
Petitioner points out that VMC authorized petitioner to administer its Employees’ Trust Fund which is
basically funded by donation from its founder, Miguel J. Ossorio, with his shares of stocks and share in
VMC's profits.29
Petitioner argues that the Citytrust report reflecting petitioner’s investment in the MBP lot is concrete
proof that money of the Employees’ Trust Funds was used to purchase the MBP lot. In fact, the CIR did
not dispute the authenticity and existence of this documentary evidence. Further, it would be unlikely for
Citytrust to issue a certified copy of the Portfolio Mix Analysis stating that petitioner invested in the MBP
lot if it were not true.30
Petitioner claims that substantial evidence is all that is required to prove petitioner’s co-ownership and all
the pieces of evidence have overwhelmingly proved that petitioner is a co-owner of the MBP lot to the
extent of 49.59% of the MBP lot. Petitioner explains:
Thus, how the parties became co-owners was shown by the excerpts of the minutes and the resolutions of
the Board of Trustees of the petitioner and those of VMC. All these documents showed that as far as
March 1992, petitioner already expressed intention to be co-owner of the said property. It then decided to
invest the retirement funds to buy the said property and culminated in it owning 49.59% thereof. When it
was sold to Metrobank, petitioner received its share in the proceeds from the sale thereof. The excerpts
and resolutions of the parties' respective Board of Directors were certified under oath by their respective
Corporate Secretaries at the time. The corporate certifications are accorded verity by law and accepted
as prima facie evidence of what took place in the board meetings because the corporate secretary is, for
the time being, the board itself.31
Petitioner, citing Article 1452 of the Civil Code, claims that even if VMC registered the land solely in its
name, it does not make VMC the absolute owner of the whole property or deprive petitioner of its rights as
a co-owner.32 Petitioner argues that under the Torrens system, the issuance of a TCT does not create or
vest a title and it has never been recognized as a mode of acquiring ownership. 33
The issues of whether petitioner or the Employees’ Trust Fund is estopped from claiming 49.59%
ownership in the MBP lot, whether the documents presented by petitioner are self-serving, and whether
petitioner has proven its exemption from tax, are all questions of fact which could only be resolved after
reviewing, examining and evaluating the probative value of the evidence presented. The CTA ruled that
the documents presented by petitioner cannot prove its co-ownership over the MBP lot especially that the
TCT, Deed of Absolute Sale and the Remittance Return disclosed that VMC is the sole owner and
taxpayer.
However, the appellate courts failed to consider the genuineness and due execution of the notarized
Memorandum of Agreement acknowledging petitioner’s ownership of the MBP lot which provides:
2. The said parcels of land are actually co-owned by the following:
116
Block 4, Lot 1 Covered by TCT No. 183907
Thus, there is a "common consent" or agreement among petitioner, VMC and VFC to co-own the MBP lot
in the proportion specified in the notarized Memorandum of Agreement.
In Cuizon v. Remoto,34 we held:
Documents acknowledged before notaries public are public documents and public documents are
admissible in evidence without necessity of preliminary proof as to their authenticity and due execution.
They have in their favor the presumption of regularity, and to contradict the same, there must be evidence
that is clear, convincing and more than merely preponderant.
The BIR failed to present any clear and convincing evidence to prove that the notarized Memorandum of
Agreement is fictitious or has no legal effect. Likewise, VMC, the registered owner, did not repudiate
petitioner’s share in the MBP lot. Further, Citytrust, a reputable banking institution, has prepared a
Portfolio Mix Analysis for the years 1994 to 1997 showing that petitioner invested ₱5,504,748.25 in the
MBP lot. Absent any proof that the Citytrust bank records have been tampered or falsified, and the BIR
has presented none, the Portfolio Mix Analysis should be given probative value.
The BIR argues that under the Torrens system, a third person dealing with registered property need not go
beyond the TCT and since the registered owner is VMC, petitioner is estopped from claiming ownership
of the MBP lot. This argument is grossly erroneous. The trustor-beneficiary is not estopped from proving
its ownership over the property held in trust by the trustee when the purpose is not to contest the
disposition or encumbrance of the property in favor of an innocent third-party purchaser for value. The
BIR, not being a buyer or claimant to any interest in the MBP lot, has not relied on the face of the title of
the MBP lot to acquire any interest in the lot. There is no basis for the BIR to claim that petitioner is
estopped from proving that it co-owns, as trustee of the Employees’ Trust Fund, the MBP lot. Article 1452
of the Civil Code recognizes the lawful ownership of the trustor-beneficiary over the property registered in
the name of the trustee. Certainly, the Torrens system was not established to foreclose a trustor or
beneficiary from proving its ownership of a property titled in the name of another person when the rights
of an innocent purchaser or lien-holder are not involved. More so, when such other person, as in the
present case, admits its being a mere trustee of the trustor or beneficiary.
The registration of a land under the Torrens system does not create or vest title, because registration is not
one of the modes of acquiring ownership. A TCT is merely an evidence of ownership over a particular
property and its issuance in favor of a particular person does not foreclose the possibility that the property
may be co-owned by persons not named in the certificate, or that it may be held in trust for another person
by the registered owner.35
No particular words are required for the creation of a trust, it being sufficient that a trust is clearly
intended.36 It is immaterial whether or not the trustor and the trustee know that the relationship which they
intend to create is called a trust, and whether or not the parties know the precise characteristic of the
relationship which is called a trust because what is important is whether the parties manifested an intention
to create the kind of relationship which in law is known as a trust. 37
The fact that the TCT, Deed of Absolute Sale and the Remittance Return were in VMC’s name does not
forestall the possibility that the property is owned by another entity because Article 1452 of the Civil
Code expressly authorizes a person to purchase a property with his own money and to take
conveyance in the name of another.
In Tigno v. Court of Appeals, the Court explained, thus:
An implied trust arises where a person purchases land with his own money and takes conveyance thereof
in the name of another. In such a case, the property is held on resulting trust in favor of the one furnishing
the consideration for the transfer, unless a different intention or understanding appears. The trust which
results under such circumstances does not arise from a contract or an agreement of the parties, but from
the facts and circumstances; that is to say, the trust results because of equity and it arises by implication or
operation of law. 38
In this case, the notarized Memorandum of Agreement and the certified true copies of the Portfolio Mix
Analysis prepared by Citytrust clearly prove that petitioner invested ₱5,504,748.25, using funds of the
Employees' Trust Fund, to purchase the MBP lot. Since the MBP lot was registered in VMC’s name
only, a resulting trust is created by operation of law. A resulting trust is based on the equitable doctrine
that valuable consideration and not legal title determines the equitable interest and is presumed to have
been contemplated by the parties.39 Based on this resulting trust, the Employees’ Trust Fund is considered
the beneficial co-owner of the MBP lot.
Petitioner has sufficiently proven that it had a "common consent" or agreement with VMC and VFC to
jointly purchase the MBP lot. The absence of petitioner’s name in the TCT does not prevent petitioner
from claiming before the BIR that the Employees’ Trust Fund is the beneficial owner of 49.59% of the
MBP lot and that VMC merely holds 49.59% of the MBP lot in trust, through petitioner, for the benefit of
the Employees’ Trust Fund.
The BIR has acknowledged that the owner of a land can validly place the title to the land in the name of
another person. In BIR Ruling [DA-(I-012) 190-09] dated 16 April 2009, a certain Amelia Segarra
purchased a parcel of land and registered it in the names of Armin Segarra and Amelito Segarra as trustees
on the condition that upon demand by Amelia Segarra, the trustees would transfer the land in favor of their
sister, Arleen May Segarra-Guevara. The BIR ruled that an implied trust is deemed created by law and the
transfer of the land to the beneficiary is not subject to capital gains tax or creditable withholding tax.
Income from Employees’ Trust Fund is Exempt from Income Tax
Petitioner claims that the Employees’ Trust Fund is exempt from the payment of income tax. Petitioner
further claims that as trustee, it acts for the Employees’ Trust Fund, and can file the claim for refund. As
trustee, petitioner considers itself as the entity that is entitled to file a claim for refund of taxes erroneously
paid in the sale of the MBP lot.40
The Office of the Solicitor General argues that the cardinal rule in taxation is that tax exemptions are
highly disfavored and whoever claims a tax exemption must justify his right by the clearest grant of law.
Tax exemption cannot arise by implication and any doubt whether the exemption exists is strictly
construed against the taxpayer.41Further, the findings of the CTA, which were affirmed by the CA, should
be given respect and weight in the absence of abuse or improvident exercise of authority. 421avvphi1
Section 53(b) and now Section 60(b) of the Tax Code provides:
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - x x x
(B) Exception. - The tax imposed by this Title shall not apply to employee’s trust which forms
part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or
all of his employees (1) if contributions are made to the trust by such employer, or employees,
or both for the purpose of distributing to such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is
117
 impossible, at any time prior to the satisfaction of all liabilities with respect to employees under The pension plan was thereafter submitted to the Bureau of Internal Revenue for registration and for a
the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used ruling as to whether its income or earnings are exempt from income tax pursuant to Rep. Act 4917, in
for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, relation to Sec. 56(b), now Sec. 54(b), of the Tax Code.
That any amount actually distributed to any employee or distributee shall be taxable to him in
the year in which so distributed to the extent that it exceeds the amount contributed by such
In a letter dated January 18, 1974 addressed to Victorias Milling Co., Inc., the Bureau of Internal Revenue
employee or distributee.
ruled that "the income of the trust fund of your retirement benefit plan is exempt from income tax,
pursuant to Rep. Act 4917 in relation to Section 56(b) of the Tax Code."
Petitioner’s Articles of Incorporation state the purpose for which the corporation was formed:
In accordance with petitioner’s Articles of Incorporation (Annex A), petitioner would "hold legal title to,
Primary Purpose control, invest and administer, in the manner provided, pursuant to applicable rules and conditions as
established, and in the interest and for the benefit of its beneficiaries and/or participants, the private
pension plan as established for certain employees of Victorias Milling Co., Inc. and other pension plans
To hold legal title to, control, invest and administer in the manner provided, pursuant to applicable rules
of Victorias Milling Co. affiliates and/or subsidiaries, the pension funds and assets, as well as the
and conditions as established, and in the interest and for the benefit of its beneficiaries and/or
accruals, additions and increments thereto, and such amounts as may be set aside or accumulated of
participants, the private pension plan as established for certain employees of Victorias Milling
said pension plans. Moreover, pursuant to the same Articles of Incorporations, petitioner is empowered
Company, Inc., and other pension plans of Victorias Milling Company affiliates and/or
to "settle, compromise or submit to arbitration, any claims, debts or damages due or owing to or from
subsidiaries, the pension funds and assets, as well as accruals, additions and increments thereto, and such
pension funds and assets and other funds and assets of the corporation, to commence or defend suits or
amounts as may be set aside or accumulated for the benefit of the participants of said pension plans; and in
legal proceedings and to represent said funds and assets in all suits or legal proceedings."
furtherance of the foregoing and as may be incidental thereto.43(Emphasis supplied)

Petitioner, through its investment manager, the City Trust Banking Corporation, has invested the
Petitioner is a corporation that was formed to administer the Employees' Trust Fund. Petitioner invested
funds of the employee trust in treasury bills, Central Bank bills, direct lending, etc. so as to generate
₱5,504,748.25 of the funds of the Employees' Trust Fund to purchase the MBP lot. When the MBP lot was
income or earnings for the benefit of the employees-beneficiaries of the pension plan. Prior to the
sold, the gross income of the Employees’ Trust Fund from the sale of the MBP lot was ₱40,500,000. The
effectivity of Presidential Decree No. 1959 on October 15, 1984, respondent did not subject said income
7.5% withholding tax of ₱3,037,500 and broker’s commission were deducted from the proceeds.
or earning of the employee trust to income tax because they were exempt from income tax pursuant to Sec.
In Commissioner of Internal Revenue v. Court of Appeals,44 the Court explained the rationale for the tax-
56(b), now Sec. 54(b) of the Tax Code and the BIR Ruling dated January 18, 1984 (Annex D). (Boldfacing
exemption privilege of income derived from employees’ trusts:
supplied; italicization in the original)

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise,
xxx
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. It asserted that the pension plan in question was previously submitted to the Bureau of Internal Revenue
for a ruling as to whether the income or earnings of the retirement funds of said plan are exempt from
income tax and in a letter dated January 18,1984, the Bureau ruled that the earnings of the trust funds
In Miguel J. Ossorio Pension Foundation, Inc. v. Commissioner of Internal Revenue,45 the CTA held that
of the pension plan are exempt from income tax under Sec. 56(b) of the Tax Code. (Emphasis
petitioner is entitled to a refund of withholding taxes paid on interest income from direct loans made by
supplied)
the Employees' Trust Fund since such interest income is exempt from tax. The CTA, in recognizing
petitioner’s entitlement for tax exemption, explained:
"A close review of the provisions of the plan and trust instrument disclose that in reality the corpus and
income of the trust fund are not at no time used for, or diverted to, any purpose other than for the
In or about 1968, Victorias Milling Co., Inc. established a retirement or pension plan for its employees and
exclusive benefit of the plan beneficiaries. This fact was likewise confirmed after verification of the plan
those of its subsidiary companies pursuant to a 22-page plan. Pursuant to said pension plan, Victorias
operations by the Revenue District No. 63 of the Revenue Region No. 14, Bacolod City. Section X also
Milling Co., Inc. makes a (sic) regular financial contributions to the employee trust for the purpose of
confirms this fact by providing that if any assets remain after satisfaction of the requirements of all the
distributing or paying to said employees, the earnings and principal of the funds accumulated by the trust
above clauses, such remaining assets will be applied for the benefits of all persons included in such classes
in accordance with said plan. Under the plan, it is imposable, at any time prior to the satisfaction of all
in proportion to the amounts allocated for their respective benefits pursuant to the foregoing priorities.
liabilities with respect to employees under the trust, for any part of the corpus or income to be used for, or
diverted to, purposes other than for the exclusive benefit of said employees. Moreover, upon the
termination of the plan, any remaining assets will be applied for the benefit of all employees and their "In view of all the foregoing, this Office is of the opinion, as it hereby holds, that the income of the trust
beneficiaries entitled thereto in proportion to the amount allocated for their respective benefits as provided fund of your retirement benefit plan is exempt from income tax pursuant to Republic Act 4917 in relation
in said plan. to Section 56(b) of the Tax Code. (Annex "D" of Petition)

The petitioner and Victorias Milling Co., Inc., on January 22, 1970, entered into a Memorandum of This CTA decision, which was affirmed by the CA in a decision dated 20 January 1993, became final and
Understanding, whereby they agreed that petitioner would administer the pension plan funds and assets, as executory on 3 August 1993.
assigned and transferred to it in trust, as well as all amounts that may from time to time be set aside by
Victorias Milling Co., Inc. "For the benefit of the Pension Plan, said administration is to be strictly
The tax-exempt character of petitioner’s Employees' Trust Fund is not at issue in this case. The tax-
adhered to pursuant to the rules and regulations of the Pension Plan and of the Articles of Incorporation
exempt character of the Employees' Trust Fund has long been settled. It is also settled that petitioner exists
and By Laws" of petitioner.
118
for the purpose of holding title to, and administering, the tax-exempt Employees’ Trust Fund established
for the benefit of VMC’s employees. As such, petitioner has the personality to claim tax refunds due the
Employees' Trust Fund.
In Citytrust Banking Corporation as Trustee and Investment Manager of Various Retirement Funds v.
Commissioner of Internal Revenue,46 the CTA granted Citytrust’s claim for refund on withholding taxes
paid on the investments made by Citytrust in behalf of the trust funds it manages, including
petitioner.47 Thus:
In resolving the second issue, we note that the same is not a case of first impression. 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:
xxx
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.
xxx
Similarly, the income of the trust funds involved herein is exempt from the payment of final withholding
taxes.
This CTA decision became final and executory when the CIR failed to file a Petition for Review within
the extension granted by the CA.
Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling exempting it from
the payment of withholding tax on the sale of the land by various BIR-approved trustees and tax-exempt
private employees' retirement benefit trust funds48 represented by Citytrust. The BIR ruled that the private
employees benefit trust funds, which included petitioner, have met the requirements of the law and the
regulations and therefore qualify as reasonable retirement benefit plans within the contemplation of
Republic Act No. 4917 (now Sec. 28(b)(7)(A), Tax Code). The income from the trust fund investments is
therefore exempt from the payment of income tax and consequently from the payment of the creditable
withholding tax on the sale of their real property.49
Thus, the documents issued and certified by Citytrust showing that money from the Employees’ Trust
Fund was invested in the MBP lot cannot simply be brushed aside by the BIR as self-serving, in the light
of previous cases holding that Citytrust was indeed handling the money of the Employees’ Trust Fund.
These documents, together with the notarized Memorandum of Agreement, clearly establish that
petitioner, on behalf of the Employees’ Trust Fund, indeed invested in the purchase of the MBP lot. Thus,
the Employees' Trust Fund owns 49.59% of the MBP lot.1avvphi1
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 ₱3,037,500 which was erroneously paid in the sale of the MBP lot.
Wherefore, we GRANT the petition and SET ASIDE the Decision of 30 May 2003 of the Court of
Appeals in CA-G.R. SP No. 61829. Respondent Commissioner of Internal Revenue is directed to refund
petitioner Miguel J. Ossorio Pension Foundation, Incorporated, as trustee of the Employees’ Trust Fund,
the amount of ₱3,037,500, representing income tax erroneously paid.
19. G.R. No. 167679 July 22, 2015 ING BANK N.V., engaged in banking operations in the
Philippines as ING BANK N.V. MANILA BRANCH vs.COMMISSIONER OF INTERNAL
REVENUE
Qualified taxpayers with pending tax cases may still avail themselves of the tax amnesty program under
Republic Act No. 9480,1 otherwise known as the 2007 Tax Amnesty Act. Thus, the provision in BIR
Revenue Memorandum Circular No. 19-2008 excepting "[i]ssues and cases which were ruled by any court
(even without finality) in favor of the BIR prior to amnesty availment of the taxpayer" from the benefits of
the law is illegal, invalid, and null and void.2The duty to withhold the tax on compensation arises upon its
accrual.
This is a Petition for Review3 appealing the April 5, 2005 Decision4 of the Court of Tax Appeals En Banc,
which in turn affirmed the August 9, 2004 Decision5 and November 12, 2004 Resolution6 of the Court of
Tax Appeals Second Division. The August 9, 2004 Decision held petitioner ING Bank, N.V. Manila
Branch (ING Bank) liable for (a) deficiency documentary stamp tax for the taxable years 1996 and 1997
in the total amount of ₱238,545,052.38 inclusive of surcharges; (b) deficiency onshore tax for the taxable
year 1996 in the total amount of ₱997,333.89 inclusive of surcharges and interest; and (c) deficiency
withholding tax on compensation for the taxable years 1996 and 1997 in the total amount of ₱564,542.67
inclusive of interest. The Resolution denied ING Bank’s Motion for Reconsideration.7
While this case was pending before this court, ING Bank filed a Manifestation and Motion8 stating that it
availed itself of the government’s tax amnesty program under Republic Act No. 9480 with respect to its
deficiency documentary stamp tax and deficiency onshore tax liabilities.9 What is at issue now is whether
ING Bank is entitled to the immunities and privileges under Republic Act No. 9480,and whether the
assessment for deficiency withholding tax on compensation is proper.
ING Bank, "the Philippine branch of Internationale Nederlanden Bank N.V., a foreign banking
corporation incorporated in the Netherlands[,] is duly authorized by the Bangko Sentral ng Pilipinas to
operate as a branch with full banking authority in the Philippines." 10
On January 3, 2000, ING Bank received a Final Assessment Notice11 dated December 3, 1999.12 The Final
Assessment Notice also contained the Details of Assessment13 and 13 Assessment Notices "issued by the
Enforcement Service of the Bureau of Internal Revenue through its Assistant Commissioner Percival T.
Salazar[.]"14The Final Assessment Notice covered the following deficiency tax assessments for taxable
years 1996 and 1997:15
On February 2, 2000, ING Bank "paid the deficiency assessments for [the] 1996 compromise penalty,
1997 deficiency documentary stamp tax and 1997 deficiency final tax in the respective amounts of
₱1,000.00, ₱1,000.00 and ₱75,013.25 [the original amount of ₱73,752.47 plus additional interest]."16 ING
Bank, however, "protested [on the same day] the remaining ten (10) deficiency tax assessments in the total
amount of ₱672,576,939.18."17
ING Bank filed a Petition for Review before the Court of Tax Appeals on October 26, 2000. This case was
docketed as C.T.A. Case No. 6187.18 The Petition was filed to seek "the cancellation and withdrawal of
the deficiency tax assessments for the years 1996 and 1997, including the alleged deficiency documentary
stamp tax on special savings accounts, deficiency onshore tax, and deficiency withholding tax on
compensation mentioned above."19
119
After trial, the Court of Tax Appeals Second Division rendered its Decision on August 9, 2004, with the
following disposition:
WHEREFORE, the assessments for 1996 and 1997 deficiency income tax, 1996 and 1997 deficiency
branch profit remittance tax and 1997 deficiency documentary stamp tax on IBCLs exceeding five days
are hereby CANCELLED and WITHDRAWN. However, the assessments for 1996 and 1997 deficiency
withholding tax on compensation, 1996 deficiency onshore tax and 1996 and 1997 deficiency
documentary stamp tax on special savings accounts are hereby UPHELD in the following amounts:
Accordingly, petitioner is ORDERED to PAY the respondent the aggregate amount of ₱240,106,928.94,
plus 20% delinquency interest per annum from February 3, 2000 until fully paid, pursuant to Section
249(C) of the National Internal Revenue Code of 1997.
SO ORDERED.20 (Emphasis in the original)
Both the Commissioner of Internal Revenue and ING Bank filed their respective Motions for
Reconsideration.21 Both Motions were denied through the Second Division’s Resolution dated November
12, 2004, as follows:
WHEREFORE, the respondent’s Motion for Partial Reconsideration and the petitioner’s Motion for
Reconsideration are hereby DENIED for lack of merit. The pronouncement reached in the assailed
decision is REITERATED.
SO ORDERED.22
On December 8, 2004, ING Bank filed its appeal before the Court of Tax Appeals En Banc. 23 The Court of
Tax Appeals En Banc denied due course to ING Bank’s Petition for Review and dismissed the same for
lack of merit in the Decision promulgated on April 5, 2005. 24
Hence, ING Bank filed its Petition for Review25 before this court. The Commissioner of Internal Revenue
filed its Comment26 on October 5, 2005 and ING Bank its Reply27 on December 14, 2005. Pursuant to this
court’s Resolution28 dated January 25, 2006, the Commissioner of Internal Revenue filed its Manifestation
and Motion29 on February 14, 2006, stating that it is adopting its Comment as its Memorandum, and ING
Bank filed its Memorandum30 on March 9, 2006.
On December 20, 2007, ING Bank filed a Manifestation and Motion31 informing this court that it had
availed itself of the tax amnesty authorized and granted under Republic Act No. 9480 covering "all
national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly
issued therefor, that have remained unpaid as of December 31, 2005[.]"32 ING Bank stated that it filed
before the Bureau of Internal Revenue its Notice of Availment of Tax Amnesty Under Republic Act No.
948033 on December 14, 2007, together with the following documents:
(1) Statement of Assets, Liabilities and Net Worth (SALN) as of December 31, 2005 (original
and amended declarations);34
(2) Tax Amnesty Return For Taxable Year 2005 and Prior Years (BIR Form No. 2116); 35 and
(3) Tax Amnesty Payment Form (Acceptance of Payment Form) for Taxable Year 2005 and
Prior Years (BIR Form No. 0617)36 showing payment of the amnesty tax in the amount of
₱500,000.00.
ING Bank prayed that this court issue a resolution taking note of its availment of the tax amnesty, and
confirming its entitlement to all the immunities and privileges under Section 6 of Republic Act No. 9480,
particularly with respect to the "payment of deficiency documentary stamp taxes on its special savings
accounts for the taxable years 1996 and 1997 and deficiency tax on onshore interest income derived under
the foreign currency deposit system for taxable year 1996[.]" 37
Pursuant to this court’s Resolution38 dated January 23, 2008, the Commissioner of Internal Revenue filed
its Comment39 and ING Bank, its Reply.40
Originally, ING Bank raised the following issues in its pleadings:
First, whether "[t]he Court of Tax Appeals En Banc erred in concluding that petitioner’s Special Saving
Accounts are subject to documentary stamp tax (DST) as certificates of deposit under Section 180 of the
1977 Tax Code";41
Second, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for deficiency
onshore tax considering that under the 1977 Tax Code and the pertinent revenue regulations, the
obligation to pay the ten percent (10%) final tax on onshore interest income rests on the payors-borrowers
and not on petitioner as payee-lender";42 and
Third, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for deficiency
withholding tax on compensation for the accrued bonuses in the taxable years 1996 and 1997 considering
that these were not distributed to petitioner’s officers and employees during those taxable years, hence,
were not yet subject to withholding tax."43
However, ING Bank availed itself of the tax amnesty under Republic Act No. 9480, with respect to its
liabilities for deficiency documentary stamp taxes on its special savings accounts for the taxable years
1996 and 1997 and deficiency tax on onshore interest income under the foreign currency deposit system
for taxable year 1996.
Consequently, the issues now for resolution are:
First, whether petitioner ING Bank may validly avail itself of the tax amnesty granted by Republic Act
No. 9480; and
Second, whether petitioner ING Bank is liable for deficiency withholding tax on accrued bonuses for the
taxable years 1996 and 1997.
Tax amnesty availment
Petitioner ING Bank asserts that it is "qualified to avail of the tax amnesty under Section 5 [of Republic
Act No. 9480] and . . . not disqualified under Section 8 [of the same law]." 44 Respondent Commissioner of
Internal Revenue, for its part, does not deny the authenticity of the documents submitted by petitioner ING
Bank or dispute the payment of the amnesty tax. However, respondent Commissioner of Internal Revenue
claims that petitioner ING Bank is not qualified to avail itself of the tax amnesty granted under Republic
Act No. 9480 because both the Court of Tax Appeals En Banc and Second Division ruled in its favor that
confirmed the liability of petitioner ING Bank for deficiency documentary stamp taxes, onshore taxes, and
withholding taxes.45
Respondent Commissioner of Internal Revenue asserts that BIR Revenue Memorandum Circular No. 19-
2008 specifically excludes "cases which were ruled by any court (even without finality) in favor of the
120
BIR prior to amnesty availment of the taxpayer" from the coverage of the tax amnesty under Republic Act In petitioner’s case, bonuses were determined during the year but were distributed in the succeeding year.
No. 9480.46 In any case, respondent Commissioner of Internal Revenue argues that petitioner ING Bank’s No withholding of income tax was effected but the bonuses were claimed as an expense for the year. . . .
availment of the tax amnesty is still subject to its evaluation,47 that it is "empowered to exercise [its] sound
discretion . . . in the implementation of a tax amnesty in favor of a taxpayer," 48 and "petitioner cannot
Since the bonuses were not subjected to withholding tax during the year they were claimed as an expense,
presume that its application . . . would be granted[.]"49Accordingly, respondent Commissioner of Internal
the same should be disallowed pursuant to the above-quoted law.64
Revenue prays that "petitioner [ING Bank’s] motion be denied for lack of merit." 50

Respondent Commissioner of Internal Revenue contends that petitioner ING Bank’s act of "claim[ing]
Petitioner ING Bank counters that BIR Revenue Memorandum Circular No. 19-2008 cannot override
[the] subject bonuses as deductible expenses in its taxable income although it has not yet withheld and
Republic Act No. 9480 and its Implementing Rules and Regulations, which only exclude from tax
remitted the [corresponding withholding] tax"65 to the Bureau of Internal Revenue contravened Section
amnesty "tax cases subject of final and [executory] judgment by the courts." 51 Petitioner ING Bank asserts
29(j) of the 1997 National Internal Revenue Code, as amended.66 Respondent Commissioner of Internal
that its full compliance with the conditions prescribed in Republic Act No. 9480 (the conditions being
Revenue claims that "subject bonuses should also be disallowed as deductible expenses of petitioner." 67
submission of the requisite documents and payment of the amnesty tax), which respondent Commissioner
of Internal Revenue does not dispute, confirms that it is "qualified to avail itself, and has actually availed
itself, of the tax amnesty."52 It argues that there is nothing in the law that gives respondent Commissioner I
of Internal Revenue the discretion to rescind or erase the legal effects of its tax amnesty availment. 53 Thus,
the issue is no longer about whether "[it] is entitled to avail itself of the tax amnesty[,]" 54 but rather
Taxpayers with pending tax cases may avail themselves of the tax amnesty program under Republic Act
whether the effects of its tax amnesty availment extend to the assessments of deficiency documentary
No. 9480.
stamp taxes on its special savings accounts for 1996 and 1997 and deficiency tax on onshore interest
income for 1996.55
In CS Garment, Inc. v. Commissioner of Internal Revenue,68 this court has "definitively declare[d] . . . the
exception ‘[i]ssues and cases which were ruled by any court (even without finality) in favor of the BIR
Petitioner ING Bank points out the Court of Tax Appeals’ ruling in Metropolitan Bank and Trust
prior to amnesty availment of the taxpayer’ under BIR [Revenue Memorandum Circular No.] 19-2008 [as]
Company v. Commissioner of Internal Revenue,56 to the effect that full compliance with the requirements
invalid, [for going] beyond the scope of the provisions of the 2007 Tax Amnesty Law." 69 Thus:
of the tax amnesty law extinguishes the tax deficiencies subject of the amnesty availment. 57 Thus, with its
availment of the tax amnesty and full compliance with all the conditions prescribed in the statute,
petitioner ING Bank asserts that it is entitled to all the immunities and privileges under Section 6 of [N]either the law nor the implementing rules state that a court ruling that has not attained finality would
Republic Act No. 9480.58 preclude the availment of the benefits of the Tax Amnesty Law. Both R.A. 9480 and DOF Order No. 29-
07 are quite precise in declaring that "[t]ax cases subject of final and executory judgment by the courts"
are the ones excepted from the benefits of the law. In fact, we have already pointed out the erroneous
Withholding tax on compensation
interpretation of the law in Philippine Banking Corporation (Now: Global Business Bank, Inc.) v.
Commissioner of Internal Revenue, viz:
Petitioner ING Bank claims that it is not liable for withholding taxes on bonuses accruing to its officers
and employees during taxable years 1996 and 1997.59 It maintains its position that the liability of the
The BIR’s inclusion of "issues and cases which were ruled by any court (even without finality) in favor of
employer to withhold the tax does not arise until such bonus is actually distributed. It cites Section 72 of
the BIR prior to amnesty availment of the taxpayer" as one of the exceptions in RMC 19-2008 is
the 1977 National Internal Revenue Code, which states that "[e]very employer making payment of wages
misplaced. RA 9480 is specifically clear that the exceptions to the tax amnesty program include "tax cases
shall deduct and withhold upon such wages a tax," and BIR Ruling No. 555-88 (November 23, 1988)
subject of final and executory judgment by the courts." The present case has not become final and
declaring that "[t]he withholding tax on the bonuses should be deducted upon the distribution of the same
executory when Metrobank availed of the tax amnesty program.70 (Emphasis in the original, citation
to the officers and employees[.]"60 Since the supposed bonuses were not distributed to the officers and
employees in 1996 and 1997 but were distributed in the succeeding year when the amounts of the bonuses omitted)
were finally determined, petitioner ING Bank asserts that its duty as employer to withhold the tax during
these taxable years did not arise.61 Moreover, in the fairly recent case of LG Electronics Philippines, Inc. v. Commissioner of Internal
Revenue,71 we confirmed that only cases that involve final and executory judgments are excluded from the
Petitioner ING Bank further argues that the Court of Tax Appeals’ discussion on Section 29(j) of the 1993 tax amnesty program as explicitly provided under Section 8 of Republic Act No. 9480. 72
National Internal Revenue Code and Section 3 of Revenue Regulations No. 8-90 is not applicable because
the issue in this case "is not whether the accrued bonuses should be allowed as deductions from Thus, petitioner ING Bank is not disqualified from availing itself of the tax amnesty under the law during
petitioner’s taxable income but, rather, whether the accrued bonuses are subject to withholding tax on the pendency of its appeal before this court.
compensation in the respective years of accrual[.]"62 Respondent Commissioner of Internal Revenue
counters that petitioner ING Bank’s application of BIR Ruling No. 555-88 is misplaced because as found
by the Second Division of the Court of Tax Appeals, the factual milieu is different: 63 II

In that ruling, bonuses are determined and distributed in the succeeding year "[A]fter [sic] the audit of
each company is completed (on or before April 15 of the succeeding year)". The withholding and
remittance of income taxes were also made in the year they were distributed to the employees. . . .
Petitioner ING Bank showed that it complied with the requirements set forth under Republic Act No.
9480. Respondent Commissioner of Internal Revenue never questioned or rebutted that petitioner ING
Bank fully complied with the requirements for tax amnesty under the law. Moreover, the contestability
period of one (1) year from the time of petitioner ING Bank’s availment of the tax amnesty law on
December 14, 2007 lapsed. Correspondingly, it is fully entitled to the immunities and privileges
mentioned under Section 6 of Republic Act No. 9480. This is clear from the following provisions:

121
SEC. 2. Availment of the Amnesty. - Any person, natural or juridical, who wishes to avail himself of the
tax amnesty authorized and granted under this Act shall file with the Bureau of Internal Revenue (BIR) a
notice and Tax Amnesty Return accompanied by a Statement of Assets, Liabilities and Networth (SALN)
as of December 31, 2005, in such form asmay be prescribed in the implementing rules and regulations
(IRR) of this Act, and pay the applicable amnesty tax within six months from the effectivity of the IRR.
....
SEC. 4. Presumption of Correctness of the SALN. - The SALN as of December 31, 2005 shall be
considered as true and correct except where the amount of declared networth is understated to the extent
of thirty percent (30%) or more as may be established in proceedings initiated by, or at the instance of,
parties other than the BIR or its agents: Provided, That such proceedings must be initiated within one year
following the date of the filing of the tax amnesty return and the SALN. Findings of or admission in
congressional hearings, other administrative agencies of government, and/or courts shall be admissible to
prove a thirty percent (30%) under-declaration. . . . .
SEC. 6. Immunities and Privileges. - Those who availed themselves of the tax amnesty under Section 5
hereof, and have fully complied with all its conditions shall be entitled to the following immunities and
privileges:
a. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and the
appurtenant civil, criminal or administrative penalties under the National Internal Revenue
Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years.
b. The taxpayer’s Tax Amnesty Returns and the SALN as of December 31, 2005 shall not be
admissible as evidence in all proceedings that pertain to taxable year 2005 and prior years,
insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-judicial or
administrative bodies in which he is a defendant or respondent, and except for the purpose of
ascertaining the networth beginning January 1, 2006, the same shall not be examined, inquired
or looked into by any person or government office. However, the taxpayer may use this as a
defense, whenever appropriate, in cases brought against him.
c. The books of accounts and other records of the taxpayer for the years covered by the tax
amnesty availed of shall not be examined: Provided, That the Commissioner of Internal
Revenue may authorize in writing the examination of the said books of accounts and other
records to verify the validity or correctness of a claim for any tax refund, tax credit (other than
refund or credit of taxes withheld on wages), tax incentives, and/or exemptions under existing
laws. (Emphasis supplied)
Contrary to respondent Commissioner of Internal Revenue’s stance, Republic Act No. 9480 confers no
discretion on respondent Commissioner of Internal Revenue. The provisions of the law are plain and
simple. Unlike the power to compromise or abate a taxpayer’s liability under Section 204 73 of the 1997
National Internal Revenue Code that is within the discretion of respondent Commissioner of Internal
Revenue,74 its authority under Republic Act No. 9480 is limited to determining whether (a) the taxpayer is
qualified to avail oneself of the tax amnesty; (b) all the requirements for availment under the law were
complied with; and (c) the correct amount of amnesty tax was paid within the period prescribed by law.
There is nothing in Republic Act No. 9480 which can be construed as authority for respondent
Commissioner of Internal Revenue to introduce exceptions and/or conditions to the coverage of the law
nor to disregard its provisions and substitute his own personal judgment.
Republic Act No. 9480 provides a general grant of tax amnesty subject only to the cases specifically
excepted by it. A tax amnesty "partakes of an absolute. . . waiver by the Government of its right to collect
what otherwise would be due it[.]"75 The effect of a qualified taxpayer’s submission of the required
documents and the payment of the prescribed amnesty tax was immunity from payment of all national
internal revenue taxes as well as all administrative, civil, and criminal liabilities founded upon or arising
from non-payment of national internal revenue taxes for taxable year 2005 and prior taxable years.76
Finally, the documentary stamp tax and onshore income tax are covered by the tax amnesty program under
Republic Act No. 9480 and its Implementing Rules and Regulations.77 Moreover, as to the deficiency tax
on onshore interest income, it is worthy to state that petitioner ING Bank was assessed by respondent
Commissioner of Internal Revenue, not as a withholding agent, but as one that was directly liable for the
tax on onshore interest income and failed to pay the same.
Considering petitioner ING Bank’s tax amnesty availment, there is no more issue regarding its liability for
deficiency documentary stamp taxes on its special savings accounts for 1996 and 1997 and deficiency tax
on onshore interest income for 1996, including surcharge and interest. III.
The Court of Tax Appeals En Banc affirmed the factual finding of the Second Division that accrued
bonuses were recorded in petitioner ING Bank’s books as expenses for taxable years 1996 and 1997,
although no withholding of tax was effected:
With the preceding defense notwithstanding, petitioner now maintained that the portion of the disallowed
bonuses in the amounts of ₱3,879,407.85 and ₱9,004,402.63 for the respective years 1996 and 1997, were
actually payments for reimbursements of representation, travel and entertainment expenses of its officers.
These expenses according to petitioner are not considered compensation of employees and likewise not
subject to withholding tax.
In order to prove that the discrepancy in the accrued bonuses represents reimbursement of expenses,
petitioner availed of the services of an independent CPA pursuant to CTA Circular No. 1-95, as amended.
As a consequence, Mr. Ruben Rubio was commissioned by the court to verify the accuracy of petitioner’s
position and to check its supporting documents.
In a report dated January 29, 2002, the commissioned independent CPA noted the following pertinent
findings: . . .
Based on the above report, only the expenses in the name of petitioner’s employee and those under its
name can be given credence. Therefore, the following expenses are valid expenses for income tax
purposes:
Consequently, petitioner is still liable for the amounts of ₱167,384.97 and ₱397,157.70 representing
deficiency withholding taxes on compensation for the respective years of 1996 and 1997, computed as
follows:
An expense, whether the same is paid or payable, "shall be allowed as a deduction only if it is shown that
the tax required to be deducted and withheld therefrom [was] paid to the Bureau of Internal Revenue[.]" 79
Section 29(j) of the 1977 National Internal Revenue Code80 (now Section 34(K) of the 1997 National
Internal Revenue Code) provides:
Section 29. Deductions from gross income. — In computing taxable income subject to tax under Sec.
21(a); 24(a), (b) and (c); and 25(a) (1), there shall be allowed as deductions the items specified in
paragraphs (a) to (i) of this section: . . . .
122
 ....
(a) Expenses. — (1) Business expenses. — (A) In general. — All ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered; travelling expenses while away
from home in the pursuit of a trade, profession or business, rentals or other payments required to be made
as a condition to the continued use or possession, for the purpose of the trade, profession or business, of
property to which the taxpayer has not taken or is not taking title or in which he has no equity.
on the income.89 For over withholding, the employee is refunded.90Therefore, absolute or exact accuracy
in the determination of the amount of the compensation income is not a prerequisite for the employer’s
withholding obligation to arise.
It is true that the law and implementing regulations require the employer to deduct and pay the income tax
on compensation paid to its employees, either actually or constructively.
Section 72 of the 1977 National Internal Revenue Code, as amended, 91 states:

....
SECTION 72. Income tax collected at source. — (a) Requirement of withholding. — Every employer
making payment of wages shall deduct and withhold upon such wages a tax determined in accordance
(j) Additional requirement for deductibility of certain payments. — Any amount paid or payable which is with regulations to be prepared and promulgated by the Minister of Finance. (Emphasis supplied)
otherwise deductible from, or taken into account in computing gross income for which depreciation or
amortization may be allowed under this section, shall be allowed as a deduction only if it is shown that the
Sections 7 and 14 of Revenue Regulations No. 6-82,92 as amended,93 relative to the withholding of tax on
tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in
compensation income, provide:
accordance with this section, Sections 5181 and 7482 of this Code. (Emphasis supplied)

Section 7. Requirement of withholding.— Every employer or any person who pays or controls the
Section 3 of Revenue Regulations No. 8-90 (now Section 2.58.5 of Revenue Regulations No. 2-98)
payment of compensation to an employee, whether resident citizen or alien, non-resident citizen, or
provides:
nonresident alien engaged in trade or business in the Philippines, must withhold from such compensation
paid, an amount computed in accordance with these regulations.
Section 3. Section 9 of Revenue Regulations No. 6-85 is hereby amended to read as follows:
I. Withholding of tax on compensation paid to resident employees. – (a)In general, every employer
Section 9. (a) Requirement for deductibility. Any income payment, which is otherwise deductible under making payment of compensation shall deduct and withhold from such compensation income for the
Sections 29 and 54 of the Tax Code, as amended, shall be allowed as a deduction from the payor’s gross entire calendar year, a tax determined in accordance with the prescribed new Withholding Tax Tables
income only if it is shown that the tax required to be withheld has been paid to the Bureau of Internal effective January 1, 1992 (ANNEX "A").
Revenue in accordance with Sections 50, 51, 72, and 74 also of the Tax Code.(Emphasis supplied)
....
Under the National Internal Revenue Code, every form of compensation for personal services is subject to
income tax and, consequently, to withholding tax. The term "compensation" means all remunerations paid
Section 14. Liability for the Tax.— The employer is required to collect the tax by deducting and
for services performed by an employee for his or her employer, whether paid in cash or in kind, unless
withholding the amount thereof from the employee’s compensation as when paid, either actually or
specifically excluded under Sections 32(B) 83 and 78(A)84 of the 1997 National Internal Revenue
constructively. An employer is required to deduct and withhold the tax notwithstanding that the
Code.85 The name designated to the remuneration for services is immaterial. Thus, "salaries, wages,
compensation is paid in something other than money (for example, compensation paid in stocks or bonds)
emoluments and honoraria, bonuses, allowances (such as transportation, representation, entertainment, and
and to pay the tax to the collecting officer. If compensation is paid in property other than money, the
the like), [taxable] fringe benefits[,] pensions and retirement pay, and other income of a similar nature
employer should make necessary arrangements to ensure that the amount of the tax required to be
constitute compensation income"86 that is taxable.
withheld is available for payment to the collecting officer.

Hence, petitioner ING Bank is liable for the withholding tax on the bonuses since it claimed the same as
expenses in the year they were accrued.
Petitioner ING Bank insists, however, that the bonus accruals in 1996 and 1997 were not yet subject to
withholding tax because these bonuses were actually distributed only in the succeeding years of their
accrual (i.e., in 1997 and 1998) when the amounts were finally determined.
Petitioner ING Bank’s contention is untenable.
Every person required to deduct and withhold the tax from the compensation of an employee is liable for
the payment of such tax whether or not collected from the employee. If, for example, the employer
deducts less than the correct amount of tax, or if he fails to deduct any part of the tax, he is nevertheless
liable for the correct amount of the tax. However, if the employer in violation of the provisions of Chapter
XI, Title II of the Tax Code fails to deduct and withhold and thereafter the employee pays the tax, it shall
no longer be collected from the employer. Such payment does not, however, operate to relieve the
employer from liability for penalties or additions to the tax for failure to deduct and withhold within the
time prescribed by law or regulations. The employer will not be relieved of his liability for payment of the
tax required to be withheld unless he can show that the tax has been paid by the employee.

The tax on compensation income is withheld at source under the creditable withholding tax system
The amount of any tax withheld/collected by the employer is a special fund in trust for the Government of
wherein the tax withheld is intended to equal or at least approximate the tax due of the payee on the said
the Philippines.
income. It was designed to enable (a) the individual taxpayer to meet his or her income tax liability on
compensation earned; and (b) the government to collect at source the appropriate taxes on
compensation.87 Taxes withheld are creditable in nature.88 Thus, the employee is still required to file an When the employer or other person required to deduct and withhold the tax under this Chapter XI, Title II
income tax return to report the income and/or pay the difference between the tax withheld and the tax due of the Tax Code has withheld and paid such tax to the Commissioner of Internal Revenue or to any

123
authorized collecting officer, then such employer or person shall be relieved of any liability to any person.
(Emphasis supplied)
Constructive payment of compensation is further defined in Revenue Regulations No. 6-82:
Section 25. Applicability; constructive receipt of compensation.
—....
Compensation is constructively paid within the meaning of these regulations when it is credited to the
account of or set apart for an employee so that it may be drawn upon by him at any time although not then
actually reduced to possession. To constitute payment in such a case, the compensation must be credited
or set apart for the employee without any substantial limitation or restriction as to the time or manner of
payment or condition upon which payment is to be made, and must be made available to him so that it
may be drawn upon at any time, and its payment brought within his control and disposition. (Emphasis
supplied)
On the other hand, it is also true that under Section 45 of the 1997 National Internal Revenue Code (then
Section 39 of the 1977 National Internal Revenue Code, as amended), deductions from gross income are
taken for the taxable year in which "paid or accrued" or "paid or incurred" is dependent upon the method
of accounting income and expenses adopted by the taxpayer.
In Commissioner of Internal Revenue v. Isabela Cultural Corporation,94 this court explained the accrual
method of accounting, as against the cash method:
Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions. . . .
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot
be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to
deduct certain expenses and other allowable deductions for the current year but failed to do so cannot
deduct the same for the next year.
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of
income accrue where the right to receive them become fixed, where there is created an enforceable
liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to
indeterminacy merely of time of payment.
For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income
and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the availability of the reasonable accurate determination of such income
or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy.1âwphi1 However, the test does not demand that the
amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may
be unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not
have to be determined exactly; it must be determined with "reasonable accuracy. "Accordingly, the term
"reasonable accuracy" implies something less than anex act or completely accurate amount. 95 (Emphasis
supplied, citations omitted)
Thus, if the taxpayer is on cash basis, he expense is deductible in the year it was paid, regardless of the
year it was incurred. If he is on the accrual method, he can deduct the expense upon accrual thereof. An
item that is reasonably ascertained as to amount and acknowledged to be due has "accrued"; actual
payment is not essential to constitute "expense."
Stated otherwise, an expense is accrued and deducted for tax purposes when (1) the obligation to pay is
already fixed; (2) the amount can be determined with reasonable accuracy; and (3) it is already knowable
or the taxpayer can reasonably be expected to have known at the closing of its books for the taxable year.
Section 29(j) of the 1977 National Internal Revenue Code96 (Section 34(K) of the 1997 National Internal
Revenue Code) expressly requires, as a condition for deductibility of an expense, that the tax required to
be withheld on the amount paid or payable is shown to have been remitted to the Bureau of Internal
Revenue by the taxpayer constituted as a withholding agent of the government.
The provision of Section 72 of the 1977 National Internal Revenue Code (Section 79 of the 1997 National
Internal Revenue Code) regarding withholding on wages must be read and construed in harmony with
Section 29(j) of the 1977 National Internal Revenue Code (Section 34(K) of the 1997 National Internal
Revenue Code) on deductions from gross income. This is in accordance with the rule on statutory
construction that an interpretation is to be sought which gives effect to the whole of the statute, such that
every part is made effective, harmonious, and sensible,97 if possible, and not defeated nor rendered
insignificant, meaningless, and nugatory.98 If we go by the theory of petitioner ING Bank, then the
condition imposed by Section 29(j) would have been rendered nugatory, or we would in effect have
created an exception to this mandatory requirement when there was none in the law.
Reading together the two provisions, we hold that the obligation of the payor/employer to deduct and
withhold the related withholding tax arises at the time the income was paid or accrued or recorded as an
expense in the payor’s/employer’s books, whichever comes first.
Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its books. Therefore, its
obligation to withhold the related withholding tax due from the deductions for accrued bonuses arose at
the time of accrual and not at the time of actual payment.
In Filipinas Synthetic Fiber Corporation v. Court of Appeals, 99 the issue was raised on "whether the
liability to withhold tax at source on income payments to non-resident foreign corporations arises upon
remittance of the amounts due to the foreign creditors or upon accrual thereof." 100 In resolving this issue,
this court considered the nature of the accounting method employed by the withholding agent, which was
the accrual method, wherein it was the right to receive income, and not the actual receipt, that determined
when to report the amount as part of the taxpayer’s gross income. 101 It upheld the lower court’s finding
that there was already a definite liability on the part of petitioner at the maturity of the loan
contracts.102 Moreover, petitioner already deducted as business expense the said amounts as interests due
to the foreign corporation.103 Consequently, the taxpayer could not claim that there was "no duty to
withhold and remit income taxes as yet because the loan contract was not yet due and
demandable."104 Petitioner, "[h]aving ‘written-off’ the amounts as business expense in its books, . . . had
taken advantage of the benefit provided in the law allowing for deductions from gross income." 105
Here, petitioner ING Bank already recognized a definite liability on its part considering that it had
deducted as business expense from its gross income the accrued bonuses due to its employees. Underlying
its accrual of the bonus expense was a reasonable expectation or probability that the bonus would be
124
achieved. In this sense, there was already a constructive payment for income tax purposes as these accrued
bonuses were already allotted or made available to its officers and employees.

We note petitioner ING Bank's earlier claim before the Court of Tax Appeals that the bonus accruals in
1996 and 1997 were disbursed in the following year of accrual, as reimbursements of representation,
travel, and entertainment expenses incurred by its employees. 106 This shows that the accrued bonuses in
the amounts of ₱400,075.0l (1996) and Pl,034,119.43 (1997) on which deficiency withholding taxes of
Pl67,384.97 (1996) and ₱397,157.70 (1997) were imposed, respectively, were already set apart or made
available to petitioner ING Bank's officers and employees. To avoid any tax issue, petitioner ING Bank
should likewise have recognized the withholding tax liabilities associated with the bonuses at the time of
accrual.

WHEREFORE, the Petition is PARTLY GRANTED. The assessments with respect to petitioner ING
Bank's liabilities for deficiency documentary stamp taxes on its special savings accounts for the taxable
years 1996 and 1997 and deficiency tax on onshore interest income under the foreign currency deposit
system for taxable year 1996 are hereby SET ASIDE solely in view of petitioner ING Bank's availment of
the tax amnesty program under Republic Act No. 9480. The April 5, 2005 Decision of the Court of Tax
Appeals En Banc, which affirmed the August 9, 2004 Decision and November 12, 2004 Resolution of the
Court of Tax Appeals Second Division holding petitioner ING Bank liable for deficiency withholding tax
on compensation for the taxable years 1996 and 1997 in the total amount of ₱564,542.67 inclusive of
interest, is AFFIRMED.

125