1.
CIR vs CA FACTS:
FACTS:
Don Andres, a citizen and resident of the United States, formed a corporation
“ANSCOR” with 1M capitalization divided into 10,000 shares at par value of
100/share. ANCOR is wholly owned and controlled by the family of Dan Andres,
who are all non-resident aliens. Dona Carmen requested a ruling from the U.S
internal revenue, inquiring if an exchange of common with preferred shares may
be considered as a tax avoidance.
Issue: Whether ANSCOR’S redemption of stocks from its stockholder as well as
the exchange of common with preferred shares can be considered as essential
equivalent to the distribution of taxable dividend.
HELD:
Stock Dividends: Wherein stock dividends once issued form part of the capital
and thus subject to income tax. A stock dividend representing the transfer of
surplus to capital account shall be subject to tax. Stock dividends issued by the
corporation are considered as unrealized gain and cannot be subjected to
income tax until that gain has been realized. Before realization, stock dividends
are nothing but representation of an interest in the corporate properties.
Exception:
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.
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2. MADRIGAL VS RAFFERTY
The essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in relation to such fund
through a period of time is called income. Capital is wealth, while income is the
service of wealth.
• Vicente Madrigal and Susana Paterno were legally married prior to Januray 1,
1914. The marriage was contracted under the provisions of law concerning
conjugal partnership
• On 1915, Madrigal filed a declaration of his net income for year 1914, the sum
of P296,302.73
• Vicente Madrigal was contending that the said declared income does not
represent his income for the year 1914 as it was the income of his conjugal
partnership with Paterno. He said that in computing for his additional income
tax, the amount declared should be divided by 2.
ISSUE: Whether or not the income reported by Madrigal on 1915 should be
divided into 2 in computing for the additional income tax.
HELD:
No! The point of view of the CIR is that the Income Tax Law, as the name implies,
taxes upon income and not upon capital and property.
• The essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in relation to such fund
through a period of time is called income. Capital is wealth, while income is the
service of wealth.
• As Paterno has no estate and income, actually and legally vested in her and
entirely distinct from her husband’s property, the income cannot properly be
considered the separate income of the wife for the purposes of the additional
tax.
• To recapitulate, Vicente wants to half his declared income in computing for his
tax since he is arguing that he has a conjugal partnership with his wife. However,
the court ruled that the one that should be taxed is the income which is the flow
of the capital, thus it should not be divided into 2.
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3. TAN VS DEL ROSARIO
FACTS:
Petitioner contends that the title of house bill no. 34314 or RA 7496 is a
misnomer or at least deficient for being merely entitled, “Simplified net income
taxation scheme for the self-employed and professionals engaged in the practice
of their profession. Petitioner intimates that RA 7496 desecrates the
constitutional requirement that taxation shall be uniform and equitable in that
the law would now attempt to tax single proprietorships and professionals
differently from the manner it imposes tax on corporations and partnerships.
ISSUE: Whether RA 7496 is valid.
HELD:
Yes, there is no distinction in income tax between a person who practices his
profession alone or individually and one who does it through partnership with
others in the exercise of a common profession. A professional partnership, here
the partners themselves not the partnership are liable for the payment of
income tax in their individual capacity computed on their respective shares and
profits.
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4. ALEXANDER HOWDEN VS CIR
FACTS:
The commonwealth insurance co, a domestic corporation entered into
reinsurance contracts with British insurance companies engaged in trade or
business in the Philippines, whereby the former agreed to cede to the portion of
the premiums on insurances in fire, marine and other risks it has underwritten
in the Philippines. Alexander Howden and Co, also a British corporation not
engaged in business in this country, represented the aforesaid British insurance
companies.
Issue: Whether reinsurance premiums in question came from sources within
the Philippines?
HELD:
Yes, in the first place, the reinsured, the liabilities insured and the risks
originally underwritten by Commonwealth Insurance, upon which the
reinsurance premiums and indemnity were based, were all situated in the
Philippines. Secondly, the reinsurance contracts were perfected in the
Philippines, for Common wealth signed in Manila. An income may be earned by
a corporation in the Philippines although such corporation conducts all its
business abroad.
Income refers to the flow of wealth, such flow in the instant case, proceeded
from the Philippines. Such income enjoyed the protection of the Philippine
government.
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5. COMMISSIONER OF INTERNAL REVENUE VS BRITISH OVERSEA
AIRWAYS CORP.
FACTS:
BOAC is a British government owned corporation organized and
existing under the laws of the United Kingdom it is engaged in the international
airline business and is a member-signatory of the Interline Air Transport. As
such it operates air transportation service and sells transportation tickets over
the routs of the other airline members. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic
purposes in the Philippines, except for the nine-month period when it was
granted a temporary landing permit. The petitioner commissioner of revenue
assessed BOAC the amount of 2 million for deficiency income taxes covering the
nine-years.
ISSUE: Whether BOAC should pay for the amount.
HELD:
In order for a foreign corporation may be regarded as doing business
within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent
and no one of temporary character. BOAC, during the periods made
covered by the subjects was engaged in selling tickets, breaking down
the whole trip, receiving fare from the whole trip and allocating to the
various airline companies. There is no doubt that BOAC was engaged in
business in the Philippines.
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6. CIR VS. BAIER-NICKEL
GR NO. 153793 (AUGUST 29, 2006)
FACTS:
The facts show that respondent Juliane Baier-Nickel, a non-resident German
citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in
"[m]anufacturing, marketing on wholesale only, buying or otherwise acquiring,
holding, importing and exporting, selling and disposing embroidered textile
products." Through JUBANITEX’s General Manager, Marina Q. Guzman, the
corporation appointed and engaged the services of respondent as commission
agent. It was agreed that respondent will receive 10% sales commission on all
sales actually concluded and collected through her efforts.
In 1995, respondent received the amount of P1,707,772.64, representing her
sales commission income from which JUBANITEX withheld the corresponding
10% withholding tax amounting to P170,777.26, and remitted the same to the
Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her
1995 income tax return reporting a taxable income of P1,707,772.64 and a tax
due of P170,777.26.
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26
alleged to have been mistakenly withheld and remitted by JUBANITEX to the
BIR. Respondent contended that her sales commission income is not taxable in
the Philippines because the same was a compensation for her services rendered
in Germany and therefore considered as income from sources outside the
Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA
contending that no action was taken by the BIR on her claim for refund. On June
28, 2000, the CTA rendered a decision denying her claim. It held that the
commissions received by respondent were actually her remuneration in the
performance of her duties as President of JUBANITEX and not as a mere sales
agent thereof. The income derived by respondent is therefore an income taxable
in the Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the
CTA, holding that respondent received the commissions as sales agent of
JUBANITEX and not as President thereof. And since the "source" of income
means the activity or service that produce the income, the sales commission
received by respondent is not taxable in the Philippines because it arose from
the marketing activities performed by respondent in Germany. Petitioner filed a
motion for reconsideration but was denied.
Petitioner maintains that the income earned by respondent is taxable in the
Philippines because the source thereof is JUBANITEX, a domestic corporation
located in the City of Makati. It thus implied that source of income means the
physical source where the income came from. It further argued that since
respondent is the President of JUBANITEX, any remuneration she received from
said corporation should be construed as payment of her overall managerial
services to the company and should not be interpreted as a compensation for a
distinct and separate service as a sales commission agent.
Respondent, on the other hand, claims that the income she received was
payment for her marketing services. She contended that income of nonresident
aliens like her is subject to tax only if the source of the income is within the
Philippines. Source, according to respondent is the situs of the activity which
produced the income. And since the source of her income were her marketing
activities in Germany, the income she derived from said activities is not subject
to Philippine income taxation.
ISSUE:
Whether or not respondent’s sales commission income is taxable in the
Philippines.
RULING: YES.
The Court reiterates the rule that "source of income" relates to the property,
activity or service that produced the income. With respect to rendition of labor
or personal service, as in the instant case, it is the place where the labor or
service was performed that determines the source of the income. There is
therefore no merit in petitioner’s interpretation which equates source of income
in labor or personal service with the residence of the payor or the place of
payment of the income.
The settled rule is that tax refunds are in the nature of tax exemptions and are to
be construed strictissimi juris against the taxpayer. To those therefore, who
claim a refund rest the burden of proving that the transaction subjected to tax is
actually exempt from taxation.
In sum, we find that the faxed documents presented by respondent did not
constitute substantial evidence, or that relevant evidence that a reasonable
mind might accept as adequate to support the conclusion that it was in Germany
where she performed the income producing service which gave rise to the
reported monthly sales in the months of March and May to September of 1995.
She thus failed to discharge the burden of proving that her income was from
sources outside the Philippines and exempt from the application of our income
tax law. Hence, the claim for tax refund should be denied.
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7. CIR VS ISABELA CULTURAL CORP.
GR NO. 172231 (FEBRUARY 12, 2007)
FACTS:
Isabela Cultural Corp.(ICC for brevity) , a domestic corporation received from
BIR assessment notice no. FAS-1-86-90000680 (680 for brevity) for deficiency
income tax in the amount of PhP 333,196.86 and assessment notice no. FAS-1-
86-90-000681 (681 for brevity) for deficiency expanded withholding tax in the
amount of PhP 4,897.79, inclusive of surcharge and interest both for the taxable
year 1986. The deficiency income tax of PhP 333,196 arose from BIR
disallowance of ICC claimed expenses deductions for professional and security
services billed to and paid by ICC in 1986.
The deficiency expanded withholding tax of PhP4,897.79 was allegedly due to
the failure of ICC to withhold 1% expanded withholding tax on its claimed
PhP244,890 deduction for security services.
Court of Tax Appeal and Court of Appeal affirmed that the professional services
were rendered to ICC in 1984 and 1985, the cost of the service was not yet
determinable at that time, hence, it could be considered as deductible expenses
only in 1986 when ICC received the billing statement for said service. It further
ruled that ICC did not state its interest income from the promissory notes of
Realty Investment and that ICC properly withheld the remitted taxes on the
payment for security services for the taxable year 1986.
Petitioner contend that since ICC is using the accrual method of accounting, the
expenses for the professional services that accrued in 1984 and 9185 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.
ISSUE (1): WON CA is correct in sustaining the deduction of the expenses for
professionals and security services form ICC gross income?
HELD: NO
Revenue Audit Memorandum Order No.1-2000 provides that under the accrual
method of accounting, expenses not being claimed as deductions by a tax payer
in the current year when they are incurred cannot be claimed as deductions
from the income for the succeeding year.
ISSUE (2): WON CA correctly held that ICC did not understate its interest
income from the promissory notes of Realty Investment, Inc; that ICC withheld
the required 1% withholding tax from the deduction for security services.
HELD:
Sustaining the finding of the CTA and CA that no such understatement exist and
that only simple interest computation and not a compounded one should have
been applied by the BIR. There is no indeed no stipulation between the latter
and ICC on the application of compound interest.
Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary,
interest due should not further earn interest.
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8. HOSPITAL DE SAN JUAN DE DIOS VS. CIR
GR NO. L-31305 (MAY 10, 1990)
FACTS:
Petitioner is engaged in both taxable and non-taxable operations. The income
derived from the operations of the hospital and the nursing school are exempt
from income tax while the rest of petitioner’s income are subject thereto. Its
taxable or non-operating income consists of rentals, interests and dividends
received from its properties and investments. In the computation of its taxable
income for the years 1952 to 1955, petitioner allowed all its taxable income to
share in the allocation of administrative expenses. Respondent, Commissioner
of Internal Revenue disallowed, however, the interests and dividends from
sharing in the allocation of administrative expense on the ground that the
expenses incurred in the administration or management of petitioner’s
investments are not allowable business expenses inasmuch as they were not
incurred in ‘carrying on any trade or business’ within the contemplation of
Section 30 (a) (1) of the Revenue Code. Consequently, petitioner was assessed
deficiency income taxes for the years in question
The petitioner protested against the assessment and requested the
Commissioner to cancel and withdraw it. After reviewing the assessment, the
Commissioner advised petitioner that the deficiency income tax assessment
against it was reduced to only P16,852.41. Still the petitioner, through its
auditors, insisted on the cancellation of the revised assessment. The request
was, however, denied.
Petitioner sought a review of the assessment by the CTA, which upheld the
Commissioner holding that the expenses incurred by the petitioner for handling
its funds or income consisting solely of dividends and interests, were not
expenses incurred in “carrying on any trade or business,” hence, not deductible
as business or administrative expenses.
Petitioner filed a motion for reconsideration of the CTA decision. When its
motion was denied, it filed this petition for review.
ISSUE:
Whether or not the dividends and interests are expenses incurred in carrying on
any trade or business, hence, deductible as business expense under Section 30
(A) (I) of the Revenue Code.
RULING:
The Supreme Court ruled in the negative. The CTA found that petitioner
failed to establish by competent proof that its receipt of interests and dividends
constituted the carrying on of a trade or business so as to warrant the
deductibility of the expenses incurred in their realization. Petitioner could have
easily required any of its responsible officials to testify on this regard but it
failed to do so. Under these circumstances and coupled with the fact that the
interests and dividends here in question are merely incidental income to
petitioner’s main activity, which is the operation of its hospital and nursing
schools, the conclusion becomes inevitable that petitioner’s activities never go
beyond that of a passive investor, which under existing jurisprudence do not
come within the purview of carrying on any “trade or business”.
That factual finding is binding on this Court. And, as the principle of allocating
expenses is grounded on the premise that the taxable income was derived from
carrying on a trade or business, as distinguished from mere receipt of interests
and dividends from one’s investments, the CTA correctly ruled that said income
should not share in the allocation of administrative expenses.
Hospital de San Juan De Dios, Inc., according to its Articles of Incorporation, was
established for purposes “Which are benevolent, charitable and religious, and
not for financial gain”. It is not carrying on a trade or business for the word
“business” in its ordinary and common use means “human efforts which have
for their end living or reward; it is not commonly used as descriptive of
charitable, religious, educational or social agencies” or “any particular
occupation or employment habitually engaged in especially for livelihood or
gain” or “activities where profit is the purpose or livelihood is the motive.”
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9. ESSO STANDARD EASTERN VS. CIR
GR NOS. L-28508-9 (JULY 7, 1989)
For an item to be deductible as a business expense, the expense must be ordinary
and necessary; it must be paid or incurred within the taxable year; and it must be
paid or incurred in carrying on a trade or business. In addition, the taxpayer must
substantially prove by evidence or records the deductions claimed under law,
otherwise, the same will be disallowed.
FACTS:
ESSO deducted from its gross income for 1959, as part of its ordinary and
necessary business expenses, the amount it had spent for drilling and
exploration of its petroleum concessions. The Commissioner disallowed the
claim on the ground that the expenses should be capitalized and might be
written off as a loss only when a “dry hole” should result. Hence, ESSO filed an
amended return where it asked for the refund of P323,270 by reason of its
abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary
and necessary expenses in the same return amount representing margin fees it
had paid to the Central Bank on its profit remittances to its New York Office.
ISSUE:
Whether the margin fees may be considered ordinary and necessary expenses
when paid.
HELD:
For an item to be deductible as a business expense, the expense must be
ordinary and necessary; it must be paid or incurred within the taxable year; and
it must be paid or incurred in carrying on a trade or business. In addition, the
taxpayer must substantially prove by evidence or records the deductions
claimed under law, otherwise, the same will be disallowed. There has been no
attempt to define “ordinary and necessary” with precision. However, as guiding
principle in the proper adjudication of conflicting claims, an expenses is
considered necessary where the expenditure is appropriate and helpful in the
development of the taxpayer’s business. It is ordinary when it connotes a
payment which is normal in relation to the business of the taxpayer and the
surrounding circumstances. Assuming that the expenditure is ordinary and
necessary in the operation of the taxpayer’s business; the expenditure, to be an
allowable deduction as a business expense, must be determined from the nature
of the expenditure itself, and on the extent and permanency of the work
accomplished by the expenditure. Herein, ESSO has not shown that the
remittance to the head office of part of its profits was made in furtherance of its
own trade or business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a showing that they
are illegal or ultra vires; which is erroneous. Claims for deductions are a matter
of legislative grace and do not turn on mere equitable considerations.
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10. AGUINALDO INDUSTRIES VS. CIR
GR NO. L-29790 (FEBRUARY 25, 1982)
FACTS:
Aguinaldo Industries Corp. is engaged in the manufacture of fishing nets, a tax-
exempt industry, and the manufacture of furniture. For accounting purposes,
each division is provided with separate books of accounts. Previously, Aguinaldo
Industries acquired a parcel of land in Muntinglupa,Rizal, as site of the fishing
net factory. This transaction was entered in the books of the Fish Nets Division
of the Company.
Later, Aguinaldo Industries, it sold the said property, the profit from this sale
which was entered in the books of the Fish Nets Division as miscellaneous
income to distinguish it from its tax-exempt income. Petitioner filed two
separate income tax returns and after investigation of these returns, the
examiners of the BIR found that the Fish Nets Division deducted from its gross
income P61,187.48 as additional remuneration paid to the officers of Aguinaldo
Industries. The examiner recommended the disallowance of the deduction. It
appears from the books that such deduction was claimed as part of the selling
expenses of the land in Muntinglupa. Aguinaldo Industries insists that said
amount should be allowed as deduction because it was paid to its officers as
allowance or bonus pursuant to Section 3 of its by-laws.
ISSUE:
Whether the bonus given to the officers of Aguinaldo upon the sale of its
Muntinglupa land is an ordinary and necessary business expense deductible for
income tax purposes?
RULING:
No. In general, only those ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for personal services actually rendered can be claimed as
a deductible. The bonus given to the officers of the Aguinaldo Industries as their
share of the profit realized from the sale of the land cannot be deemed a
deductible expense for tax purposes, even if the aforesaid sale could be
considered as a transact ion for Carrying on the trade or business of the
Aguinaldo Industries and the grant of the bonus to the corporate officers
pursuant to Aguinaldo Industries’ by -laws could, as an intra-corporate matter,
be sustained.
Evidence show that the sale was effected through a broker who was paid by
Aguinaldo Industries a commission for his services. On the other hand, there is
absolutely no evidence of any service actually rendered by Aguinaldo Industries’
officers which could be the basis of a grant to them of a bonus out of the profit
derived from the sale. This being so, the payment of a bonus to them out of the
gain realized from the sale cannot be considered as a selling expense; nor can it
be deemed reasonable and necessary so as to make it deductible for tax
purposes. Thus, the extraordinary and unusual amounts paid by Aguinaldo to
these directors in the guise and form of compensation for their supposed
services as such, without any relation to the measure of their actual services,
cannot be regarded as ordinary and necessary expenses within the meaning of
the law.
Whenever a controversy arises on the deductibility, for purposes of income tax,
of certain items for alleged compensation of officers of the taxpayer, two (2)
questions become material, namely: (a)Have personal services been actually
rendered by said officers? (b) In the affirmative case, what is the reasonable
allowance therefor.
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11. BASILAN ESTATES, INC. vs. CIR and THE COURT OF TAX APPEALS
G.R. No. L-22492, September 5, 1967
FACTS:
Basilan Estates, Inc. claimed deductions for the depreciation of its
assets up to 1949 on the basis of their acquisition cost. As of January 1, 1950 it
changed the depreciable value of said assets by increasing it to conform with the
increase in cost for their replacement. Accordingly, from 1950 to 1953 it
deducted from gross income the value of depreciation computed on the
reappraised value. In 1953, the year involved in this case, taxpayer claimed the
following depreciation deduction: Reappraised assets of P47,342.53 and new
assets consisting of hospital building and equipment of 3,910.45 with a total
depreciation of P51,252.98
Upon investigation and examination of taxpayer's books and papers, the
Commissioner of Internal Revenue found that the reappraised assets
depreciated in 1953 were the same ones upon which depreciation was claimed
in 1952. And for the year 1952, the Commissioner had already determined, with
taxpayer's concurrence, the depreciation allowable on said assets to be
P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer.
Hence, the Commissioner pegged the deductible depreciation for 1953 on the
same old assets at P36,842.04 and disallowed the excess thereof in the amount
of P10,500.49.
ISSUE:
Whether depreciation shall be determined on the acquisition cost or on the
reappraised value of the assets.
RULING:
Depreciation is the gradual diminution in the useful value of tangible
property resulting from wear and tear and normal obsolescense. The term is
also applied to amortization of the value of intangible assets, the use of which in
the trade or business is definitely limited in duration. Depreciation commences
with the acquisition of the property and its owner is not bound to see his
property gradually waste, without making provision out of earnings for its
replacement. It is entitled to see that from earnings the value of the property
invested is kept unimpaired, so that at the end of any given term of years, the
original investment remains as it was in the beginning. It is not only the right of
a company to make such a provision, but it is its duty to its bond and
stockholders, and, in the case of a public service corporation, at least, its plain
duty to the public.
.The income tax law does not authorize the depreciation of an
asset beyond its acquisition cost. Hence, a deduction over and above such cost
cannot be claimed and allowed. The reason is that deductions from gross
income are privileges, not matters of right. They are not created by implication
but upon clear expression in the law. Accordingly, the claim for depreciation
beyond P36,842.04 or in the amount of P10,500.49 has no justification in the
law.
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12. JAIME N. SORIANO, et al. vs. SECRETARY OF FINANCE AND THE
COMMISSIONER OF INTERNAL REVENUE
G.R. No. 184450, January 24, 2017
FACTS:
This case involved four (4) consolidated Petitions for Certiorari,
Prohibition and Mandamus seeking to nullify certain provisions of Revenue
Regulations (RR) No. 10-2008. The RR was issued by the Bureau of Internal
Revenue (BIR) on September 24, 2008 to implement the provisions of Republic
Act (RA) No. 9504. On June 17, 2008, RA No. 9504 was approved and signed into
law by President Arroyo. Its salient features included the increase of the basic
personal exemption to P50,000 for each individual, the increase of the
additional exemption for each dependent not exceeding four to P25,000, and the
grant to minimum wage earners (MWEs) exemption from payment of income
tax on their minimum wage, holiday pay, overtime pay, night shift differential
pay and hazard pay. RA No. 9504 took effect on July 6, 2008.
On September 24, 2008, the BIR issued RR No. 10-2008, dated July 8,
2008, implementing the provisions of RA No. 9504. Section 1 of the said RR
provided in part: “xxx Provided, further, that MWEs receiving 'other benefits'
exceeding the P30,000.00 limit shall be taxable on the excess benefits, as well as on
his salaries, wages and allowances, just like an employee receiving compensation
income beyond the SMW (statutory minimum wage).” Section 3 provided in part:
“xxx Provided, however, that an employee who receives/earns additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of
the allowable statutory amount of P30,000.00, taxable allowances and other
taxable income other than the SMW, holiday pay, overtime pay, hazard pay and
night shift differential pay shall not enjoy the privilege of being a MWE and,
therefore, his/her entire earnings are not exempt from income tax, and
consequently, from withholding tax.”
ISSUE:
Whether Sections 1 and 3 of RR No. 10-2008 are consistent with the
law in providing that an MWE who receives other benefits in excess of the
statutory limit of P30,000 ceases to be an MWE and is no longer entitled to the
MWE exemption provided by RA No. 9504.
RULING:
Workers who receive the statutory minimum wage as their basic
pay will remain MWEs and their receipt of other income during the year
does not disqualify them as MWEs. They remain MWEs entitled to
exemption as such, but the taxable income they may receive in excess of
the statutory minimum wage may be subject to appropriate taxes.
Sections 1 and 3 of RR No. l0-2008 added a requirement not found in the law by
effectively declaring that an MWE who receives other benefits in excess of the
statutory limit of P30,000 is no longer entitled to the MWE exemption provided
by RA No. 9504. Said sections are therefore null and void. The legislature
granted to the lowest paid employees additional income by no longer
demanding from them a contribution for the operations of government. This
was the essence of RA No. 9504 as a social legislation. The government, by way
of the tax exemption, sought to afford increased purchasing power to this sector
of the working class. Accordingly, workers who receive the SMW as their basic
pay remain MWEs and their receipt of other income during the year does not
disqualify them as MWEs. They remain MWEs entitled to exemption as such, but
the taxable income they may receive in excess of the statutory minimum wage
may be subject to appropriate taxes.
An administrative agency may not enlarge, alter or restrict a provision
of law; it cannot add to the requirements provided by law. The treatment of
bonuses and other benefits that an employee receives from the employer in
excess of the P30,000 is taxable. However, the treatment of this excess cannot
operate to disenfranchise the MWE from enjoying the exemption explicitly
granted by RA No. 9504.
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13. CIR vs. COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S
CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC.
G.R. No. 124043 October 14, 1998
FACTS:
Private Respondent YMCA is a non-stock, non-profit institution, which
conducts various programs and activities that are beneficial to the public,
especially the young people, pursuant to its religious, educational and charitable
objectives. In 1980, private respondent earned, among others, an income of
P676,829.80 from leasing out a portion of its premises to small shop owners,
like restaurants and canteen operators, and P44,259.00 from parking fees
collected from non-members. On July 2, 1984, the commissioner of internal
revenue (CIR) issued an assessment to private respondent, in the total amount
of P415,615.01 including surcharge and interest, for deficiency income tax,
deficiency expanded withholding taxes on rentals and professional fees and
deficiency withholding tax on wages. Private respondent formally protested the
assessment and, as a supplement to its basic protest, filed a letter dated October
8, 1985. In reply, the CIR denied the claims of YMCA.
ISSUE:
Whether the rental income of the YMCA from its real estate subject to
tax.
RULING:
Yes. In the instant case, the exemption claimed by the YMCA is
expressly disallowed by the very wording of the last paragraph of then Section
27 (Now Sec. 30) of the NIRC which mandates that the income of exempt
organizations (such as the YMCA) from any of their properties, real or personal,
be subject to the tax imposed by the same Code. Because the last paragraph of
said section unequivocally subjects to tax the rent income of the YMCA from its
real property, the Court is duty-bound to abide strictly by its literal meaning and
to refrain from resorting to any convoluted attempt at construction.
The last paragraph of Section 27, the YMCA argues, should be "subject
to the qualification that the income from the properties must arise from
activities 'conducted for profit' before it may be considered taxable." This
argument is erroneous. As previously stated, a reading of said paragraph
ineludibly shows that the income from any property of exempt organizations, as
well as that arising from any activity it conducts for profit, is taxable. The phrase
"any of their activities conducted for profit" does not qualify the word
"properties." This makes from the property of the organization taxable,
regardless of how that income is used — whether for profit or for lofty non-
profit purposes.
------
14. CIR vs. ST. LUKE’S MEDICAL CENTER, INC.
G.R. No. 203514, February 13, 2017
FACTS:
On December 14, 2007, St. Luke’s Medical Center, Inc. (SLMC) received
from the BIR Audit Results/Assessment Notice Nos. QA-07-0000965 and QA-07-
000097 assessing SLMC deficiency income tax under Section 27(B) of the Tax
Code in the aggregate amount of P135,737,301 for taxable years 2005 and 2006.
SLMC filed an administrative protest assailing the assessments. SLMC claimed
that as a nonstock, non-profit charitable and social welfare organization under
Section 30(E) and (G) of the 1997 NIRC, as amended, it is exempt from paying
income tax.
Meanwhile, on September 26, 2012, the Court rendered a Decision in
G.R. Nos. 195909 and 195960, entitled CIR v. St. Luke's Medical Center, Inc.,
finding SLMC not entitled to the tax exemption under Section 30(E) and (G) of
the NIRC of 1997 as it does not operate exclusively for charitable or social
welfare purposes insofar at its revenue from paying patients are concerned.
Accordingly, SLMC was ordered to pay the deficiency income tax based on the
10% preferential income tax rate under Section 27(B) of the National Internal
Revenue Code. SLMC argues that earning a profit by a charitable, benevolent
hospital or educational institution does not result in the withdrawal of its tax
exempt privilege. SLMC further claims that the income it derives from operating
a hospital is not income from activities conducted for profit.
ISSUE:
Whether SLMC’s profits from hospital operation is exempt from income
tax under Section 30 (E) and (G).
RULING:
The Court reaffirmed its ruling in G.R. Nos. 195909 and 195960
(Commissioner Internal Revenue v. St. Luke's Medical Center, Inc.). For an
institution to be completely exempt from income tax, Section 30(E) and (G) of
the 1997 NIRC requires said institution to operate exclusively for charitable or
social welfare purpose. But in case an exempt institution under Section 30(E) or
(G) of the said Code earns income from its “for-profit activities”, it will not lose
its tax exemption. However, its income from “for-profit activities” will be subject
to income tax at the preferential 10% rate pursuant to Section 27(B) thereof.
Following earlier cases, St. Luke's fails to meet the requirements under
Section 30(E) and (G) of the NIRC to be completely tax exempt from all its
income. However, it remains a proprietary nonprofit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its
members and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax
rate of 10% on its net income from its for-profit activities.
------
15. AIR CANADA vs. CIR
G.R. No. 169507, January 11, 2016
FACTS:
Air Canada is a foreign corporation organized and existing under the
laws of Canada. It was granted an authority to operate as an offline carrier by
the Civil Aeronautics Board. As an off-line carrier, Air Canada does not have
flights originating from or coming to the Philippines and does not operate any
airplane in the Philippines. Air Canada engaged the services of Aerotel Ltd.,
Corp. (Aerotel) as its general sales agent in the Philippines. Aerotel sells Air
Canada’s passage documents in the Philippines. For the period ranging from the
third quarter of 2000 to the second quarter of 2002, Air Canada, through
Aerotel, filed quarterly and annual income tax returns and paid the income tax
on Gross Philippine Billings in the total amount of ₱5,185,676.77.
On November 28, 2002, Air Canada filed a written claim for refund of
alleged erroneously paid income taxes. It found basis from the revised definition
of Gross Philippine Billings under Section 28(A)(3)(a) of the Tax Code. To
prevent the running of the prescriptive period, Air Canada filed a Petition for
Review before the Court of Tax Appeals on November 29, 2002. On December
22, 2004, the Court of Tax Appeals First Division rendered its Decision denying
the Petition for Review and, hence, the claim for refund. Air Canada seasonably
filed a Motion for Reconsideration, but the Motion was denied. On May 9, 2005,
Air Canada appealed to the Court of Tax Appeals En Banc. In the Decision dated
August 26, 2005, the Court of Tax Appeals En Banc affirmed the findings of the
First Division. Hence, this Petition for Review.
ISSUE:
Whether Air Canada is subject to the 2½% tax on Gross Philippine
Billings pursuant to Section 28(A)(3) of the Tax Code.
RULING:
 An offline international air carrier selling passage tickets in the
Philippines, through a general sales agent, is a resident foreign corporation
doing business in the Philippines. As such, it is taxable under Section 28(A)(l),
and not Section 28(A)(3) of the Tax Code, subject to any applicable tax treaty to
which the Philippines is a signatory. Pursuant to Article 8 of the Republic of the
Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum tax
of 1 ½% of its gross revenues earned from the sale of its tickets in the
Philippines.
Petitioner is undoubtedly "doing business" or "engaged in trade or
business" in the Philippines. Aerotel performs acts or works or exercises
functions that are incidental and beneficial to the purpose of petitioner’s
business. The activities of Aerotel bring direct receipts or profits to petitioner.
There is nothing on record to show that Aerotel solicited orders alone and for its
own account and without interference from, let alone direction of, petitioner. On
the contrary, Aerotel cannot "enter into any contract on behalf of petitioner Air
Canada without the express written consent of the latter" and it must perform
its functions according to the standards required by petitioner. Through Aerotel,
petitioner is able to engage in an economic activity in the Philippines. Petitioner
is, therefore, a resident foreign corporation that is taxable on its income derived
from sources within the Philippines. International air carrier[s] maintaining
flights to and from the Philippines shall be taxed at the rate of 2½% of its Gross
Philippine Billings while international air carriers that do not have flights to and
from the Philippines but nonetheless earn income from other activities in the
country [like sale of airline tickets] will be taxed at the regular income tax rate.
However, the application of the regular tax rate under Section 28(A)(1)
of the Tax Code must consider the existence of an effective tax treaty between
the Philippines and the home country of the foreign air carrier. In this case,
there is a tax treaty that must be taken into consideration to determine the
proper tax rate. While petitioner is taxable as a resident foreign corporation
under Section 28(A)(1) of the Tax Code on its taxable income from sale of airline
tickets in the Philippines, it could only be taxed at a maximum of 1½% of gross
revenues, pursuant to Article VIII of the Republic of the Philippines Canada Tax
Treaty that applies to petitioner as a "foreign corporation organized and existing
under the laws of Canada.
------
16. CIR V GENERAL FOODS
G.R. No. 143672 April 24, 2003
FACTS:
Respondent corporation General Foods (Phils), which is engaged in the
manufacture of “Tang”, “Calumet” and “Kool-Aid”, filed its income tax return for
the fiscal year ending February 1985 and claimed as deduction, among other
business expenses, P9,461,246 for media advertising for “Tang”.
The Commissioner disallowed 50% of the deduction claimed and assessed
deficiency income taxes of P2,635,141.42 against General Foods, prompting the
latter to file an MR which was denied. General Foods later on filed a petition for
review at CA, which reversed and set aside an earlier decision by CTA dismissing
the company’s appeal.
ISSUE:
W/N the subject media advertising expense for “Tang” was ordinary and
necessary expense fully deductible under the NIRC
HELD:
No. Tax exemptions must be construed in stricissimi juris against the taxpayer
and liberally in favor of the taxing authority, and he who claims an exemption
must be able to justify his claim by the clearest grant of organic or statute law.
Deductions for income taxes partake of the nature of tax exemptions; hence, if
tax exemptions are strictly construed, then deductions must also be strictly
construed.
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.
While the subject advertising expense was paid or incurred within the
corresponding taxable year and was incurred in carrying on a trade or business,
hence necessary, the parties’ views conflict as to whether or not it was ordinary.
To be deductible, an advertising expense should not only be necessary but also
ordinary.
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.
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.
The Court finds 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.
The company’s media advertising expense for the promotion of a single product
is doubtlessly unreasonable considering it comprises almost one-half of the
company’s entire claim for marketing expenses for that year under review.
------
17. TUASON vs. LINGAD
[July 31, 1974; G.R. No. L-24248]
CASTRO, J
TOPIC: Ordinary gain, capital asset, NIRC Sec. 39 A (1)
DOCTRINE:
Captial Assets; definition: The term "capital assets" includes all the properties of a
taxpayer whether or not connected with his trade or business, except: (1) stock in
trade or other property included in the taxpayer's inventory; (2) property
primarily for sale to customers in the ordinary course of his trade or business; (3)
property used in the trade or business of the taxpayer and subject to depreciation
allowance; and (4) real property used in trade or business. If the taxpayer sells or
exchanges any of the properties above-enumerated, any gain or loss relative
thereto is an ordinary gain or an ordinary loss; the gain or loss from the sale or
exchange of all other properties of the taxpayer is a capital gain or a capital loss.
In the case at bar, Taxpayer operated a substantial rental business of several
properties, not only those subject in this case, such that the Taxpayer had to a real
estate dealer's tax. Taxpayer's sales of the several lots forming part of his rental
business cannot be characterized as other than sales of non-capital assets.
FACTS:
The mother of Taxpayer (Petitioner Antonio Tuason) owned a 7 hectare parcel
of land located in the City of Manila. She subdivided the land into twenty-nine
(29) lots. Possession of the land was eventually inherited by Taxpayer in 1948.
Taxpayer instructed his attorney-in-fact to sell the lots. Twenty-eight (28) out of
the twenty-nine parcels were all sold easily. The attorney-in-fact was not able to
sell the twenty-ninth lot (hereinafter Lot 29) immediately because it was located
at a low elevation.
In 1952, Lot 29 was filled, subdivided and gravel roads were constructed. The
small lots were then sold over the years on a uniform 10-year annual
amortization basis. The attorney-in-fact, did not employ any broker nor did he
put up advertisements in the matter of the sale thereof.
In 1953 and 1954 the Taxpayer reported his income from the sale of the small
lots (P102,050.79 and P103,468.56, respectively) as long-term capital gains. The
CIR upheld Taxpayer's treatment of this tax. In his 1957 tax return the Taxpayer
as before treated his income from the sale of the small lots (P119,072.18) as
capital gains. This treatment was initially approved by the CIR, but by 1963, the
CIR reversed itself and considered the Taxpayer's profits from the sales of the
lots as ordinary gainsc
The CIR assesed a deficiency of P31,095.36 from the Taxpayer. Contention of
Taxpayer: As he was engaged in the business of leasing the lots he inherited
from his mother as well other real properties, his subsequent sales of the
mentioned lots cannot be recognized as sales of capital assets but of “real
property used in trade or business of the taxpayer.”
ISSUE/S:
Whether or not the properties in question which the Taxpayer had inherited and
subsequently sold in small lots to other persons should be regarded as capital
assets.
HELD:
No. It is Ordinary Income. As thus defined by law, CAPITAL ASSETS include all
properties of a taxpayer whether or not connected with his trade or business,
except:
stock in trade or other property included in the taxpayer's inventory;
property primarily for sale to customers in the ordinary course of his trade or
business;
property used in the trade or business of the taxpayer and subject to
depreciation allowance; and
real property used in trade or business.
If the taxpayer sells or exchanges any of the properties above, any gain or loss
relative thereto is an ordinary gain or an ordinary loss; the loss or gain from the
sale or exchange of all other properties of the taxpayer is a capital gain or a
capital loss.
Under Section 34(b)(2) of the old Tax Code, if a gain is realized by a taxpayer
(other than a corporation) from the sale or exchange of capital assets held for
more than 12 months, only 50% of the net capital gain shall be taken into
account in computing the net income.
The Tax Code's provisions on so-called long-term capital gains constitutes a
statute of partial exemption. In view of the familiar and settled rule that tax
exemptions are construed in strictissimi juris against the taxpayer and liberally
in favor of the taxing authority, it is the taxpayer's burden to bring himself
clearly and squarely within the terms of a tax-exempting statutory provision,
otherwise, all fair doubts will be resolved against him.
In the case at bar, after a thoroughgoing study of all the circumstances, this
Court is of the view and so holds that Petitioner-Taxpayer's thesis is bereft of
merit. Under the circumstances, Taxpayer's sales of the several lots forming part
of his rental business cannot be characterized as other than sales of non-capital
assets. the sales concluded on installment basis of the subdivided lots do not
deserve a different characterization for tax purposes.
This Court finds no error in the holding that the income of the Taxpayer from
the sales of the lots in question should be considered as ordinary income.
------
18. CALASANZ v CIR
G.R. No. L-26284 October 8, 1986
DOCTRINE:
To determine whether it is in trade or business, the decision should be based on
circumstances. Land was improved after acceptance and subdivided and sold
incurring a large amount of receivables.
SUMMARY: Ursula Calasanz inherited from her father an agricultural land.
Improvements were introduced to make such land saleable and later in it was
sold to the public at a profit. The Revenue examiner adjudged Ursula and her
spouse as engaged in business as real estate dealers and required them to pay
the real estate dealer’s tax. The activities of Calasanz are indistinguishable from
those invariably employed by one engaged in the business of selling real estate.
One strong factor is the business element of development which is very much in
evidence. They did not sell the land in the condition in which they acquired it.
Inherited land which an heir subdivides and makes improvements several times
higher than the original cost of the land is not a capital asset but an ordinary
asses. Thus, in the course of selling the subdivided lots, they engaged in the real
estate business and accordingly the gains from the sale of the lots are ordinary
income taxable in full.
Facts: Petitioner Ursula Calasanz inherited from her father de Torres an
agricultural land located in Rizal with an area of 1.6M sqm. In order to liquidate
her inheritance, Ursula Calasanz had the land surveyed and subdivided into lots.
Improvements, such as good roads, 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
the NIRC, and required them to pay the real estate dealer's tax and assessed a
deficiency income tax on profits derived from the sale of the lots based on the
rates for ordinary income.
Tax court upheld the finding of the CIR, hence, the present appeal.
ISSUES:
a. Whether or not petitioners are real estate dealers liable for real estate
dealer's fixed tax. YES
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. ORDINARY
INCOME
HELD:
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. 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. Although several factors or indices 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.
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.
In this case, the subject land is considered as an ordinary asset. Petitioners did
not sell the land in the condition in which they acquired it. While the land
was originally devoted to rice and fruit trees, 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 submitted together with
the tax return in question disclosed that a considerable amount was expanded
to cover the cost of improvements. 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.
Another distinctive feature of the real estate business discernible from the
records is the existence of contracts receivables, which stood at
P395,693.35. 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 for
sale to the public and that sales and collection commissions were paid out
during the period in question.
Petitioners argument that they are merely liquidating the land must also fail. In
Ehrman vs. Commissioner, 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.
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.
------
19. SMI-ED PHILIPPINES VS. CIR
G.R. NO. 175410
NOVERMBER 14, 2016
FACTS:
SMI-ED Philippines, a PEZA-registered corporation, constructed buildings and
purchased machineries and equipment after its registration; however, it failed to
commence operations. Its factory closed and later on sold its buildings and
some machineries and equipment. In November 2000, it was dissolved. In its
quarterly income tax return for year 2000, it subjected the entire gross sales of
its properties to 5% final tax on PEZA registered corporations and paid taxes
amounting to more than 44 million pesos. SMI-Ed then filed an administrative
claim for the refund of more than 44 million pesos with the BIR which did not
act on said claim. Hence, SMI-Ed filed a petition for review before the CTA which
denied the claim for refund and instead even subjected the sales of SMI-Ed’s
assets to 6% capital gains tax under Sec. 27(D)(5) of NIRC and Sec. 2 of Revenue
Regulations No. 8-98.
ISSUES:
WON SMI-Ed’s sale of properties is subject to capital gains tax
WON SMI-Ed Philippines is entitled to its claim for refund
WON the BIR can still assess SMI-Ed for deficiency capital gains taxes
HELD:
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.
SEC. 39. Capital Gains and Losses. -
(A) Definitions.- As used in this Title -
(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.
The properties involved in this case include petitioner’s buildings, equipment,
and machineries. Based on the definition of capital assets under Section 39 of
the National Internal Revenue Code of 1997, they are capital assets. 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. 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.
The Bureau of 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 Technology,
Inc.'s land and building.
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. 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 to doubt 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. Therefore, petitioner is
not liable for any income tax.
No. 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. The BIR 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.
------
20. GARRISON ET AL. VS. COURT OF APPEALS
[G.R. NOS. 44501-05. JULY 19, 1990.]

Doctrine: An alien actually present in the Philippines who is not a mere transient
or sojourner is a resident of the Philippines for purposes of income tax.
FACTS:
Petitioners, John Garrison, Frank Robertson, Robert Cathey, James Robertson,
Felicitas de Guzman and Edward McGurk (PETITIONERS) are US Citizens who
entered the country through the Philippine Immigration Act of 1940 and are
employed in the US Naval Base in Olongapo City. They earn no Philippine source
income and it is also their intention to return to the US as soon as their
employment has ended.
The BIR sent notices to Petitioners stating that they did not file their Income Tax
Returns (ITR) for 1969. The BIR claimed that they were resident aliens and
required them to file their returns.
Under then then Internal Revenue Code resident aliens may be taxed regardless
of whether the gross income was derived from Philippine sources.
Petitioners refused stating that they were not resident aliens but only special
temporary visitors. Hence, they were not required to file ITRs. They also claimed
exemption by virtue of the RP-US Military Bases Agreement.
Under Military Bases Agreement, a “national of the United States serving in or
employed in the Philippines in connection with construction, maintenance,
operation or defense of the bases and reside in the Philippines by reason only of
such employment” is only liable for tax on Philippine sources of income.
The Court of Appeals held that the Bases Agreement “speaks of exemption from
the payment of income tax, not from the filing of the income tax returns . . .”
ISSUE:
1. Whether or not Petitioners can be considered resident aliens.
2. Whether or not Petitioners are exempt from income tax under the RP-US
Military Bases Agreement.
3. Whether or not Petitioners must still file ITR notwithstanding the exemption.
HELD:
1. Yes.
Revenue Regulations No. 2 Section 5 provides: “An alien actually present in the
Philippines who is not a mere transient or sojourner is a resident of the
Philippines for purposes of income tax.” Whether or not an alian is a transient or
not is further determined by his: “intentions with regards to the length and
nature of his stay. A mere floating intention indefinite as to time, to return to
another country is not sufficient to constitute him as transient. If he lives in the
Philippines and has no definite intention as to his stay, he is a resident.” The
Section 5 further provides that if the alien is in the Philippines for a definite
purpose which by its nature may be promptly accomplished, he is considered a
transient. However, if an extended stay is necessary for him to accomplsh his
purpose, he is considered a resident, “though it may be his intention at all times
to return to his domicile abroad when the purpose for which he came has been
consummated or abandoned.”
2. Yes.
Notwithstanding the fact that the Petitioners are resident aliens who are
generally taxable, their class is nonetheless exempt from paying taxes on income
derived from their employment in the naval base by virtue of the RP-US Military
bases agreement. The Bases Agreement identifies the persons NOT “liable to pay
income tax in the Philippines except in regard to income derived from Philippine
sources or sources other than the US sources.” They are the persons in whom
concur the following requisites, to wit:
1) nationals of the United States serving in or employed in the Philippines;
2) their service or employment is "in connection with
construction,maintenance, operation or defense of the bases;
3) they reside in the Philippines by reason only of such employment; and
4) their income is derived exclusively from “U.S. Sources.”
3. Yes
Even though the petitioners are exempt from paying taxes from their
employment in the Naval Base, they must nevertheless file an ITR. The Supreme
Court held that the filing of an ITR and the payment of taxes are two distinct
obligations. While income derived from employment connected with the Naval
Base is exempt, income from Philippine Sources is not. The requirement of filing
an ITR is so that the BIR can determine whether or not the US National should
be taxed. “The duty rests on the U.S. nationals concerned to invoke and prima
facie establish their tax-exempt status. It cannot simply be presumed that they
earned no income from any other sources than their employment in the
American bases and are therefore totally exempt from income tax.”
------
21. COMMISSIONER OF INTERNAL REVENUE v GOODYEAR PHILIPPINES INC
GR 216130 AUGUST 3, 2016
FACTS:
In October 2008, Goodyear Phils filed an application for relief from double
taxation before the International Tax Affairs Division of the BIR to confirm that
the redemption of preferred shares on May 2008 was not subject to Philippine
income tax pursuant to the Philippine – US Tax Treaty. This notwithstanding
respondent withheld and remitted the sum representing 15% FWT.
In October 2010, respondent filed an administrative claim for refund or issuance
of TCC, representing 15% FWT before the BIR. CTA ordered the petitioner to
refund or issue TCC amounting to P 14,659,847.10 to respondent for being
erroneously withheld and remitted as FWT.
 ISSUE: WON judicial claim of respondent should be dismissed for non-
exhaustion of administrative remedies and WON CTA en banc correctly ruled
that the gain derived by GTRC was not subject to 15% FWT on dividends
RULING:
(1) Section 229 of the Tax Code states that judicial claims for refund must be filed
within 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 CIR. The primary purpose of filing the administrative claim
was to serve as a notice of warning to the CIR that the court action would follow
unless the tax or penalty alleged to have been collected erroneously or illegally
is refunded.
Respondent correctly and timely sought judicial redress, notwithstanding that
its administrative and judicial claims were filed only 13 days apart.
(1) Taxpayers with pending cases may avail themselves of the Tax Amnesty Program
(2) 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 states “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”.
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, the RP-US Tax Treaty complementarily governs the tax
implications of respondent's transactions with GTRC. The amount received by
GTRC from respondent for the redemption of its 3,729,216 preferred shares is
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.
------
22. ING BANK NV v COMMISSIONER OF INTERNAL REVENUE
GR 167679 JULY 22, 2015
FACTS:
The August 9, 2004 Decision of the CTA held ING Bank liable for deficiency
documentary stamp tax for taxable years 1996 and 1997 ₱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 November 12,
2004 Resolution denied ING Bank’s Motion for Reconsideration. ING Bank filed
a Manifestation and Motion 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. CTA En Banc
affirmed the August 9, 2004 Decision and the November 12, 2004 Resolution of
the CTA Second Division.
ISSUE: WON ING Bank may validly avail itself of the tax amnesty granted by RA
9480 and WON ING Bank is liable for deficiency withholding tax on accrued
bonuses for the taxable years 1996 and 1997
RULING:
under RA 9480. Neither the law nor the implementing rules state that a court
ruling that has not attained finality would 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 "tax cases subject of final and executory judgment by
the courts" are the ones excepted from the benefits of the law.
ING Bank is liable for the withholding tax on the bonuses since it claimed the
same as expenses in the year they were accrued. ING Bank 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. 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. Under the National
Internal Revenue Code, every form of compensation for personal services is
subject to income tax and, consequently, to withholding tax. Thus, "salaries,
wages, emoluments and honoraria, bonuses, allowances (such as transportation,
representation, entertainment, and the like), taxable fringe benefits, pensions
and retirement pay, and other income of a similar nature constitute
compensation income" that is taxable.
------
 23 COMMISSIONER OF INTERNAL REVENUE v PROCTER & GAMBLE
PHILIPPINE MANUFACTURING CORPORATION
GR L-66838 DECEMBER 2, 1991
FACTS:
For taxable year 1974 ending on June 30, 1974 and the taxable year 1975
ending on June 30, 1975, P&G-Phil declared dividends payable to its parent
company and sole stockholder, P&G-USA, amounting to P24,164,946.30, from
which dividends the amount of P8,457,731.21 representing 35% withholding
tax at source was deducted. P&G-Phil filed with CIR 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 as
amended by Presidential Decree No. 369, the applicable rate of withholding tax
on the dividends remitted was only 15% and not 35% of the dividends. P&G-
Phil filed with the CTA after receiving no response from CIR. CTA ordered the
CIR to refund or grant the tax credit in the amount of P4,832,989. On appeal by
CIR, CTA Second Division reversed the decision and held that P&G-USA was the
proper party to claim refund or tax credit involved; that there is nothing in the
provisions of 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 20% which represents the difference between
the regular tax of 35% on corporations and the tax of 15% on dividends ; and
that 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%."
ISSUE: WON P&G-Phil is proper party to claim refund or tax credit; WON the
reduced 15% dividend tax rate is applicable or the regular 35% rate
RULING:
(1) 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 for the correct
amount of the tax that should be withheld from the dividend remittances. A
"person liable for tax" has been held to be a "person subject to tax" and properly
considered a "taxpayer." If the withholding agent is also an agent of the
beneficial owner of the dividends with respect to filing of the necessary income
tax return and with respect to actual payment of tax to the government, such
authority may reasonably be held to include the authority to file claim for
refund and to bring action for recovery of claim. In the case, the withholding
agent is a wholly-owned subsidiary of the parent stock-holder and therefore, at
all times, under the effective control of the parent-stockholder. P&G-Phil is
properly regarded as a taxpayer within the meaning of Sec 309 of NIRC and
authorized to file the claim for refund and suit to recover such claim.
(2) 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 by allowing the investor additional tax credits which would be
applicable against the tax payable to such home country. 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.
------
24. CHAMBER OF REAL ESTATE AND BUILDERS’ ASSOCIATION INC v THE
HON. EXECUTIVE SECRETARY ALBERTO ROMULO ET AL
GR 160756 MARCH 9, 2010
FACTS:
Petitioner assails the validity of the imposition of MCIT on corporations and
CWT on sales of real property 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.
ISSUES: WON the imposition of MCIT on domestic corporations is
unconstitutional
RULING:
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. 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. Supreme Court
DISAGREES. 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 goods and other direct expenses from gross sales. 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. SC joins a number of other
courts in upholding the constitutionality of the US alternative minimum tax
system which is generally characterized by a lower tax rate but a broader tax
base. Although our MCIT is not exactly the same as the AMT, the policy behind
them and the procedure of their implementation are comparable. It is a rational
means of obtaining a broad-based tax, and therefore is constitutional. Petitioner
failed to support, by any factual or legal basis, its allegation that the MCIT is
arbitrary and confiscatory. The party alleging the law’s unconstitutionality has
the burden to demonstrate the supposed violations in understandable terms.
------
25. HON. KIM JACINTO-HENARES v ST. PAUL COLLEGE OF MAKATI
GR 215383 MARCH 8, 2017
FACTS:
Kim Jacinto-Henares, acting in her capacity as the CIR, issued RMO No. 20-2013.
St. Paul College of Makati filed Civil Action to Declare Unconstitutional RMO No.
20-2013 before RTC. SPCM alleges that RMO 20-2013 imposes as a prerequisite
to the enjoyment by non-stock, non-profit educational institutions of the
privilege of tax exemption under Sec. 4(3) of Article XIV of the Constitution both
a registration and approval requirement, i.e., that they submit an application for
tax exemption to the BIR subject to approval by CIR in the form of a Tax
Exemption Ruling (TER) which is valid for a period of 3 years and subject to
renewal. According to SPCM, RMO No. 20-2013 adds a prerequisite to the
requirement under Department of Finance Order No. 137-87 and makes failure
to file an annual information return a ground for a non-stock, nonprofit
educational institution to "automatically lose its income tax-exempt status."
ISSUE: WON the trial court correctly concluded that RMO 20-2013 imposes a
prerequisite before a nonstock, non-profit educational institution may avail of
the tax exemption under Sec 4 (3) Art XIV of the Constitution
RULING:
On July 25, 2016, the CIR issued RMO No. 44-2016 which amended RMO No. 20-
2013. The Order is being issued to exclude non-stock, non-profit educational
institutions from the coverage of Revenue Memorandum Order No. 20-2013, as
amended. With the issuance of RMO No. 44-2016, a supervening event has
transpired that rendered the petition moot and academic, and subject to denial.
------
26-27. CIR vs DE LA SALLE (consolidated case)
G.R. No. 198841 - DE LA SALLE UNIVERSITY INC v. COMMISSIONER OF
INTERNAL REVENUE G.R. No.
G.R. No. 196596 - COMMISSIONER OF INTERNAL REVENUE v. DE LA SALLE
UNIVERSITY, INC.
TOPIC: Exemption of non-stock, non-profit educational institutions
FACTS:
BIR issued to DLSU Letter of Authority (LOA) No. 2794 authorizing its revenue
officers to examine the latter's books of accounts and other accounting records
for all internal revenue taxes for the period Fiscal Year Ending 2003 and
Unverified Prior Years
May 19, 2004, BIR issued a Preliminary Assessment Notice (PAN) to DLSU.
August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the
following deficiency taxes: (1) income tax on rental earnings from
restaurants/canteens and bookstores operating within the campus; (2) value-
added tax (VAT) on business income; and (3) documentary stamp tax (DST) on
loans and lease contracts.
The BIR demanded the payment of P17,303,001.12, inclusive of surcharge,
interest and penalty for taxable years 2001, 2002 and 2003. • DLSU protested
the assessment. The Commissioner failed to act on the protest; thus, DLSU filed
petition for review with the CTA Division
 CTA Division and CTA En Banc: DST assessment on the loan transactions but
retained other deficiency taxes. CTA En Banc ruled the following:
Tax on rental income DLSU was able to prove that a portion of the assessed
rental income was used actually, directly and exclusively for educational
purposes; hence, exempt from tax. Rental income had indeed been used to pay
the loan it obtained to build the university's Physical Education - Sports
Complex. However, other unsubstantiated claim for exemption must be
subjected to income tax and VAT.
DST on loan and mortgage transactions Contrary to the Commissioner's
contention, DLSU proved its remittance of the DST due on its loan and mortgage
documents, evidenced by the stamp on the documents made by a DST
imprinting machine.
Admissibility of DLSU's supplemental evidence Supplemental pieces of
documentary evidence were admissible even if DLSU formally offered them
upon MR. Law creating the CTA provides that proceedings before it shall not be
governed strictly by the technical rules of evidence. (Affirmed by SC)
On the validity of the Letter of Authority LOA should cover only one taxable
period and that the practice of issuing a LOA covering audit of unverified prior
years is prohibited. If the audit includes more than one taxable period, the other
periods or years shall be specifically indicated in the LOA. In the present case,
the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. Hence, the assessments for deficiency income tax, VAT and DST for
taxable years 2001 and 2002 are void, but the assessment for taxable year 2003
is valid.
On the CTA Division's appreciation of the evidence The CTA En Banc affirmed
the CTA Division's appreciation of DLSU's evidence. It held that while DLSU
successfully proved that a portion of its rental income was transmitted and used
to pay the loan obtained to fund the construction of the Sports
Complex, the rental income from other sources were not shown to have been
actually, directly and exclusively used for educational purposes. (Affirmed by SC)
ISSUE #1: Whether DLSU's income and revenues proved to have been used
actually, directly and exclusively for educational purposes are exempt from
duties and taxes
HELD: Article XIV, Section 4 (3) of the Constitution refers to 2 kinds of
institutions; (1) non-stock, non-profit educational institutions and (2)
proprietary educational institutions. DLSU falls on the first category. The
difference is that The tax exemption granted to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and exclusive
use of their revenues and assets for educational purposes. While tax exemptions
may also be granted to proprietary educational institutions, these exemptions
may be subject to limitations imposed by Congress.
The tax exemption granted by the Constitution to non-stock, nonprofit
educational institutions, unlike the exemption that may be availed of by
proprietary educational institutions, is not subject to limitations imposed by
law.
Article XIV, Section 4 (3) does not require that the revenues and income must
have also been sourced from educational activities or activities related to the
purposes of an educational institution. The phrase all revenues is unqualified by
any reference to the source of revenues. Thus, so long as the revenues and
income are used actually, directly and exclusively for educational purposes, then
said revenues and income shall be exempt from taxes and duties.
Court laid down the requisites for availing the tax exemption under Article XIV,
Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock,
nonprofit educational institution; and (2) the income it seeks to be exempted
from taxation is used actually, directly and exclusively for educational purposes.
We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to
charitable institutions, churches, parsonages or convents, mosques, and non-
profit cemeteries), which exempts from tax only the assets, i.e., "all lands,
buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes...," Article XIV, Section 4 (3)
categorically states that "all revenues and assets... used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties."
ISSUE #2: Whether the entire assessment should be voided because of the
defective LOA
HELD: The LOA issued to DLSU is not entirely void. The assessment for taxable
year 2003 is valid.
 A LOA is the authority given to the appropriate revenue officer to examine the
books of account and other accounting records of the taxpayer in order to
determine the taxpayer's correct internal revenue liabilities and for the purpose
of collecting the correct amount of tax, in accordance with Section 5 of the Tax
Code, which gives the CIR the power to obtain information, to
summon/examine, and take testimony of persons. The LOA commences the
audit process and informs the taxpayer that it is under audit for possible
deficiency tax assessment.
What this provision clearly prohibits is the practice of issuing LOAs covering
audit of unverified prior years. RMO 43-90 does not say that a LOA which
contains unverified prior years is void. It merely prescribes that if the audit
includes more than one taxable period, the other periods or years must be
specified.
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. The LOA does not strictly comply with RMO 43-90
because it includes unverified prior years. This does not mean, however, that the
entire LOA is void. As the CTA correctly held, the assessment for taxable year
2003 is valid because this taxable period is specified in the LOA. DLSU was fully
apprised that it was being audited for taxable year 2003. Corollarily, the
assessments for taxable years 2001 and 2002 are void for having been
unspecified on separate LOAs as required under RMO No. 43-90.
Wherefore, SC denied the petition of CIR and affirmed the ruling of CTA En
Banc.
------
28. JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L.
REYES, MARAH SHARYN M. DE CASTRO and CRIS P. TENORIO, Petitioners,
vs. SECRETARY OF FINANCE and the COMMISSIONER OF INTERNAL
REVENUE, Respondents.
G.R. No. 184450
FACTS:
On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate
Bill No. (S.B.) 2293. On 21 May 2008, former President Gloria M. Arroyo certified
the passage of the bill as urgent through a letter addressed to then Senate
President Manuel Villar. On the same day, the bill was passed on second reading
IN the Senate and, on 27 May 2008, on third reading. The following day, 28 May
2008, the Senate sent S.B. 2293 to the House of Representatives for the latter's
concurrence.
On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an
amendment to House Bill No. (H.B.) 3971. On 17 June 2008, R.A. 9504 entitled
"An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424,
as Amended, Otherwise Known as the National Internal Revenue Code of 1997,"
was approved and signed into law by President Arroyo. The following are the
salient features of the new law:
1. It increased the basic personal exemption from ₱20,000 for a single
individual, ₱25,000 for the head of the family, and ₱32,000 for a married
individual to P50,000 for each individual.
2. It increased the additional exemption for each dependent not exceeding four
from ₱8,000 to ₱25,000.
3. It raised the Optional Standard Deduction (OSD) for individual taxpayers from
10% of gross income to 40% of the gross receipts or gross sales.
4. It introduced the OSD to corporate taxpayers at no more than 40% of their
gross income.
5. It granted MWEs exemption from payment of income tax on their minimum
wage, holiday pay, overtime pay, night shift differential pay and hazard pay.
Section 9 of the law provides that it shall take effect 15 days following its
publication in the Official Gazette or in at least two newspapers of general
circulation. Accordingly, R.A. 9504 was published in the Manila Bulletin and
Malaya on 21 June 2008. On 6 July 2008, the end of the 15-day period, the law
took effect.
RR 10-2008
 On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008,
implementing the provisions of R.A. 9504. The relevant portions of the said RR
read as follows:
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to
read as follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income.
xxxx
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed
shall not be considered in determining the ₱30,000.00 ceiling of 'other benefits'
excluded from gross income under Section 32 (b) (7) (e) of the Code. Provided
that, the excess of the 'de minimis' benefits over their respective ceilings
prescribed by these regulations shall be considered as part of 'other benefits'
and the employee receiving it will be subject to tax only on the excess over the
₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits'
exceeding the ₱30,000.00 limit shall be taxable on the excess benefits, as well as
on his salaries, wages and allowances, just like an employee receiving
compensation income beyond the SMW.
(B) Exemptions from Withholding Tax on Compensation. - The following
income payments are exempted from the requirements of withholding tax on
compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being
paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage
and Productivity Board (RTWPB)/National Wages and Productivity Commission
(NWPC), applicable to the place where he/she is assigned.
Comment of the OSG
The Office of the Solicitor General (OSG) filed a Consolidated Comment and took
the position that the application of R.A. 9504 was intended to be prospective,
and not retroactive. This was supposedly the general rule under the rules of
statutory construction: law will only be applied retroactively if it clearly
provides for retroactivity, which is not provided in this instance.
Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008
providing for the prorated application of the personal and additional
exemptions for taxable year 2008 to begin only effective 6 July 2008 for being
contrary to Section 4 of Republic Act No. 9504.2
Petitioners argue that the prorated application of the personal and additional
exemptions under RR 10-2008 is not "the legislative intendment in this
jurisdiction."3 They stress that Congress has always maintained a policy of "full
taxable year treatment"4 as regards the application of tax exemption laws. They
allege further that R.A. 9504 did not provide for a prorated application of the
new set of personal and additional exemptions.
ISSUES:
Assailing the validity of RR 10-2008, all four Petitions raise common issues,
which may be distilled into three major ones:
First, whether the increased personal and additional exemptions provided by
R.A. 9504 should be applied to the entire taxable year 2008 or prorated,
considering that R.A. 9504 took effect only on 6 July 2008.
Second, whether an MWE is exempt for the entire taxable year 2008 or from 6
July 2008 only.
Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the law in
providing that an MWE who receives other benefits in excess of the statutory
limit of ₱30,000 19 is no longer entitled to the exemption provided by R.A. 9504.
II. Whether an MWE is exempt for the entire taxable year 2008 or from 6 July
2008 only
The MWE is exempt for the entire taxable year 2008.
As in the case of the adjusted personal and additional exemptions, the MWE
exemption should apply to the entire taxable year 2008, and not only from 6 July
2008 onwards. We see no reason why Umali cannot be made applicable to the
MWE exemption, which is undoubtedly a piece of social legislation. It was
intended to alleviate the plight of the working class, especially the low-income
earners. In concrete terms, the exemption translates to a ₱34 per day benefit, as
pointed out by Senator Escudero in his sponsorship speech.50
As it stands, the calendar year 2008 remained as one taxable year for an
individual taxpayer. Therefore, RR 10-2008 cannot declare the income earned
by a minimum wage earner from 1 January 2008 to 5 July 2008 to be taxable
and those earned by him for the rest of that year to be tax-exempt. To do so
would be to contradict the NIRC and jurisprudence, as taxable income would
then cease to be determined on a yearly basis.
III. Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in
declaring that an MWE who receives other benefits in excess of the statutory
limit of ₱30,000 is no longer entitled to the exemption provided by R.A. 9504, is
consistent with the law.
Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by
effectively declaring that an MWE who receives other benefits in excess of the
statutory limit of ₱30,000 is no longer entitled to the exemption provided by
R.A. 9504.
Nowhere in the above provisions of R.A. 9504 would one find the qualifications
prescribed by the assailed provisions of RR 10-2008. The provisions of the law
are clear and precise; they leave no room for interpretation - they do not
provide or require any other qualification as to who are MWEs.
To be exempt, one must be an MWE, a term that is clearly defined. Section
22(HH) says he/she must be one who is paid the statutory minimum wage if
he/she works in the private sector, or not more than the statutory minimum
wage in the non-agricultural sector where he/she is assigned, if he/she is a
government employee. Thus, one is either an MWE or he/she is not. Simply put,
MWE is the status acquired upon passing the litmus test - whether one receives
wages not exceeding the prescribed minimum wage.
------
29. ASSOCIATION OF NONPROFIT CLUBS, INC. (ANPC), herein represented
by its authorized representative, MS. FELICIDAD M. DEL ROSARIO vs BIR
FACTS:
On August 3, 2012, respondent the Bureau of Internal Revenue (BIR)
issued RMC No. 35-2012, entitled "Clarifying the Taxability of Clubs Organized
and Operated Exclusively for Pleasure, Recreation, and Other Non-Profit
Purposes," which was addressed to all revenue officials, employees, and others
concerned for their guidance regarding the income tax and Valued Added Tax
(VAT) liability of the said recreational clubs.
On the income tax component, RMC No. 35-2012 states that "clubs
which are organized and operated exclusively for pleasure, recreation, and other
non-profit purposes are subject to income tax under the National Internal
Revenue Code [(NIRC)] of 1997,18 1 as amended [(1997 NIRC)]."
The BIR justified the foregoing interpretation based on the following
reasons: According to the doctrine of casus omissus pro omisso habendus est, a
person, object, or thing omitted from an enumeration must be held to have been
omitted intentionally. The provision in the [ 1977 Tax Code] which granted
income tax exemption to such recreational clubs was omitted in the current list
of tax exempt corporations under [the 1997 NIRC], as amended. Hence, the
income of recreational clubs from whatever source, including but not limited to
membership fees, assessment dues, rental income, and service fees are subject
to income tax. Likewise, on the VAT component, RMC No. 35-2012 provides that
"the gross receipts of recreational clubs including but not limited to
membership fees, assessment dues, rental income, and service fees are subject
to VAT."
As basis, the BIR relied on Section 105, 12 Chapter I, Title IV of the 1997
NIRC, which states that even a nonstock, non-profit private organization or
government entity is liable to pay VAT on the sale of goods or services.
Consequently, ANPC submitted its position paper, requesting "the non-
application of RMC [No.] 35-2012 for income tax and VAT liability on
membership fees, association dues, and fees of similar nature collected by [the]
exclusive membership clubs from [their] members which are used to defray the
expenses of the said clubs." However, despite the lapse of two (2) years, the BIR
has not acted upon the request, and all the member clubs of ANPC were
subjected to income tax and VAT on all membership fees, assessment dues, and
service fees.
ISSUE:
Whether or not the RTC erred in upholding in full the validity of RMC
No. 35-2012
 To recount, RMC No. 35-2012 is an interpretative rule issued by the BIR
to guide all revenue officials, employees, and others concerned in the
enforcement of income tax and VAT laws against clubs organized and operated
exclusively for pleasure, recreation, and other non-profit purposes
("recreational clubs" for brevity). As to its income tax component, RMC No. 35-
2012 provides the interpretation that since the old tax exemption previously
accorded under Section 21 (h),42 Chapter III, Title II of Presidential Decree No.
1158, otherwise known as the "National Internal Revenue Code of 1977"43
( 1977 Tax Code), to recreational clubs was deleted in the 1997 NIRC, then the
income of recreational clubs from whatever source, including but not limited to
membership fees, assessment dues, rental income, and service fees, is subject to
income tax. The interpretation is partly correct.
However, notwithstanding the correctness of the above-interpretation,
RMC No. 35-2012 erroneously foisted a sweeping interpretation that
membership fees and assessment dues are sources of income of recreational
clubs from which income tax liability may accrue, viz.:
The prov1s1on in the [1977 Tax Code] which granted income tax
exemption to such recreational clubs was omitted in the current list of tax
exempt corporations under the [1997 NIRC], as amended. Hence, the income of
recreational clubs from whatever source, including but not limited to
membership fees, assessment dues, rental income, and service fees [is) subject
to income tax.
The distinction between "capital" and "income" is well-settled in our
jurisprudence. As held in the early case of Madrigal v. Ra.fferty,47 "capital" has
been delineated as a "fund" or "wealth," as opposed to "income" being "the flow
of services rendered by capital" or the "service of wealth"
As correctly argued by ANPC, membership fees, assessment dues, and
other fees of similar nature only constitute contributions to and/or
replenishment of the funds for the maintenance and operations of the facilities
offered by recreational clubs to their exclusive members.51 They represent
funds "held in trust" by these clubs to defray their operating and general costs
and hence, only constitute infusion of capital.52
In fine. for as long as these membership fees, assessment dues, and the
like are treated as collections by recreational clubs from their members as an
inherent consequence of their membership, and are, by nature, iniended for the
maintenance, preservation, and upkeep of the clubs' general operations and
facilities, then these fees cannot be classified as "the income of recreational
clubs from whatever source" that are "subject to income tax."54 Instead, they
only form part of capital from which no income tax may' be collected or
imposed.
------
30. CIR, vs. AYALA SECURITIES CORPORATION and THE HONORABLE
COURT OF TAX APPEALS, respondents.
G.R. No. L-29485 November 21, 1980
FACTS: Ayala Securities Corporation failed to file returns of their r accumulated
surplus, so Ayala was charged with 25% surtax by the Commissioner of Internal
Revenue. The Court r of Tax Appeals reversed the decision and held that the
assessment made against Ayala was beyond the 5-year prescriptive period as
provided in section 331 of the NIRC. Commissioner now files a motion for
reconsideration of this decision. Ayala invokes the defense of prescription
against the right of the Commissioner to assess the surtax.
ISSUE: Whether or not the right to assess and collect the 25% surtax has
prescribed after 5 years.
HELD: No.
The Court, therefore, reconsiders its ruling in its decision under reconsideration
that the right to assess and collect the assessment in question had prescribed
after five years, and instead rules that there is no such time limit on the right of
the Commissioner of Internal Revenue to assess the 25% tax on unreasonably
accumulated surplus provided in section 25 of the Tax Code, since there is no
express statutory provision limiting such right or providing for its prescription.
The underlying purpose of the additional tax in question on a corporation's
improperly accumulated profits or surplus is as set forth in the text of section 25
of the Tax Code itself 1 to avoid the situation where a corporation unduly retains
its surplus instead of declaring and paving dividends to its shareholders or
members who would then have to pay the income tax due on such dividends
received by them. The record amply shows that respondent corporation is a
mere holding company of its shareholders through its mother company, a
registered co-partnership then set up by the individual shareholders belonging
to the same family and that the prima facie evidence and presumption set up by
the Tax Code, therefore applied without having been adequately rebutted by the
respondent corporation.
------
31. CYANAMID PHILIPPINES, INC., vs. THE COURT OF APPEALS, THE COURT
OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 108067 January 20, 2000
DOCTTRINE: The tax on improper accumulation off surplus is essentially a penalty
tax designed to compel corporations to distribute earnings so that the said
earnings by shareholders should, in turn, be taxed.
Laws granting exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power.
FACTS: Petitioner, Cyanamid Philippines, Inc., a corporation organized under
Philippine laws, is a wholly owned subsidiary of American Cyanamid Co. based
in Maine, USA. On February 7, 1985, the CIR sent an assessment letter to
petitioner and demanded the payment of deficiency income tax for taxable year
1981. 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, 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.
During the pendency of the case on appeal to the CTA, both parties agreed to
compromise the 1981 Deficiency Income Assessment and reduced the amount
as compromise settlement. Petitioner claimed that the assessment representing
the 25% surtax had no legal basis for the following reasonss: (a) petitioner
accumulated its earnings and profits for reasonable business requirements to
meet working capital needs and retirement of indebtedness; (b) petitioner is a
wholly owned subsidiary of American Cyanamid Company, a corporation
organized under 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
accumulation of earnings and profits, instead of distribution of the same. CTA
denied said petition.
ISSUE: Whether petitioner is liable for the accumulated earnings tax for the year
HELD: Yes. 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.
------
32. CIR, vs. COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S
CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC., respondents.
G.R. No. 124043 October 14, 1998
FACTS:
Private Respondent YMCA is a non-stock, non-profit institution, which conducts
various programs and activities that are beneficial to the public, especially the
young people, pursuant to its religious, educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80
from leasing out a portion of its premises to small shop owners, like restaurants
and canteen operators, and P44,259.00 from parking fees collected from non-
members.
CIR issued an assessment for Deficiency Income tax, deficiency expanded
withholding taxes on rentals and professional fees and deficiency withholding
tax on wages. Private respondent formally protested the assessment and, as a
supplement to its basic protest, filed a letter dated October 8, 1985. In reply, the
CIR denied the claims of YMCA, considering it was not engaged in the business
of operating or contracting parking lot as it is not only for member with stickers.
The rentals and parking fees were only enough to cover the costs of operation
and maintenance.
ISSUE: Whether or not the income derived from the rentals of real property
owned by YMCA (a welfare, educational and charitable non-profit corporation)
is subject to income tax.
HELD:
Yes. Because taxes are the lifeblood of the nation, the Court has always applied
the doctrine of strict in interpretation in construing tax
exemptions. 18 Furthermore, a claim of statutory exemption from taxation
should be manifest. and unmistakable from the language of the law on which it
is based. Thus, the claimed exemption "must expressly be granted in a statute
stated in a language too clear to be mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly disallowed
by the very wording of the last paragraph of then Section 27 of the NIRC which
mandates that the income of exempt organizations (such as the YMCA) from any
of their properties, real or personal, be subject to the tax imposed by the same
Code. Because the last paragraph of said section unequivocally subjects to tax
the rent income of the YMCA from its real property, 20 the Court is duty-bound to
abide strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction.
Private respondent also invokes Article XIV, Section 4, par. 3 of the
Character, 36 claiming that the YMCA "is a non-stock, non-profit educational
institution whose revenues and assets are used actually, directly and exclusively
for educational purposes so it is exempt from taxes on its properties and
income." 37 We reiterate that private respondent is exempt from the payment of
property tax, but not income tax on the rentals from its property.
------
33. DAVID G. NITAFAN, vs. CIR
G.R. No. 78780 July 23, 1987
The salary of the Chief Justice and of the Associate Justices of the
Supreme Court, and of judges of lower courts shall be fixed by law.
During their continuance in office, their salary shall not be decreased.
(Emphasis supplied).
it is plain that the Constitution authorizes Congress to pass a law fixing another
rate of compensation of Justices and Judges but such rate must be higher than
that which they are receiving at the time of enactment, or if lower, it would be
applicable only to those appointed after its approval. It would be a strained
construction to read into the provision an exemption from taxation in the light
of the discussion in the Constitutional Commission

FACTS:
Petitioners, the duly appointed and qualified Judges presiding over Branches 52,
19 and 53, respectively, of the Regional Trial Court, National Capital Judicial
Region, all with stations in Manila, seek to prohibit and/or perpetually enjoin
respondents, the Commissioner of Internal Revenue and the Financial Officer of
the Supreme Court, from making any deduction of withholding taxes from their
salaries.
In a nutshell, they submit that "any tax withheld from their emoluments or
compensation as judicial officers constitutes a decrease or diminution of their
salaries, contrary to the provision of Section 10, Article VIII of the 1987
Constitution mandating that "(d)uring their continuance in office, their salary
shall not be decreased," even as it is anathema to the Ideal of an independent
judiciary envisioned in and by said Constitution."

ISSUE: Whether or not the members of the Judiciary are exempt from
income taxes.

HELD: No.
The debates, interpellations and opinions expressed regarding the
constitutional provision in question until it was finally approved by the
Commission disclosed that the true intent of the framers of the 1987
Constitution, in adopting it, was to make the salaries of members of the
Judiciary taxable. The ascertainment of that intent is but in keeping with the
fundamental principle of constitutional construction that the intent of the
framers of the organic law and of the people adopting it should be given
effect.10 The primary task in constitutional construction is to ascertain and
thereafter assure the realization of the purpose of the framers and of the people
in the adoption of the Constitution. 11 it may also be safely assumed that the
people in ratifying the Constitution were guided mainly by the explanation
offered by the framers.12 1avvphi1
Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for
clarity, is again reproduced hereunder: